The Polish real estate market as an area for developers

Prof. Magdalena Zalecznamzaleczna@uni.lodz.pl

Dr. Rafal Wolskirwolski@uni.lodz.pl

Agenda• The aim of the article• Hypothesis• Overview• Survey• Conclusion

The aim of the article

The Polish real estate market have coped with an economic slowdown quite well. The prices of

housing units decreased moderately, the construction sector did not suffer a collapse visible in other countries and the transaction number has been increasing lastly. The main supply-side actors

– developers – belong to very diverse group.

The aim of the article

Some of developers have good financial results and announce new projects, some confront problems with their economic conditions.

The aim of the article

The authors would like to analyze financial results of developers activity in relation to presented categories of these actors.

Hypothesis

Large companies listed on the stock market were able to cope with the slowdown, while small, unlisted, had serious problems.

OverviewThe supply of residential or commercial space is a risky business. This production of space should be undertaken on the basis of forecasts of highly uncertain prospects, forecast of market upswing and price behavior - not always rational.

Ball M. (2006), Markets and institutions in real estate and construction, Blackwell Publishing, Oxford.

Number of construction companies in Poland in years 2004-2013

Research

The authors conducted an analysis of the economic situation of enterprises taking into consideration performance of indicators such as:• profit / lost after tax• EBIT• ROA• EVA

MethodologyEVA is calculated using the formula:

EVA= NOPAT – Invested capital * WACC

where:• NOPAT – operating profit before interest and after tax,• Invested capital – capital invested by shareholders and

creditors,• WACC – weighted average cost of capital.

Methodology

After modification it gave the formula:

EVA = (Operating profit – Taxation) - (Equity * Cost of equity + Financial costs* Tax shield)

Data

The study used a database of companies collected as Eurostat NACE Rev. 2 - statistical classification of economic activities in the European Community with codes: 41 - Construction of buildings: 4110 - Development of building projects, 4120 - Construction of residential and non-residential buildings.

Data

There were three databases created:• 1240 of medium and small companies not

publically listed,• 19 large and very large companies, quoted on

the stock exchange,• 195 large d very large unlisted companies.

Data

The idea was to divide companies according to its size, and according to if it is listed, or unlisted on any stock exchange. There was no company, which was medium or small and was listed.

Data

The research period covered the years from 2004 to 2013. For each database separately were calculated median values further examined when the indicator concerned each individual. Source: Amadeus database, Eurostat database.

Median of profitability indicators in thousands PLN, years 2004 – 2013

PLN 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

EVASmall and medium sized, unlisted companies -41257,8 -59758 -50556,2 -77388,5 -85759,6 -69413,6 -44787,3 -41295,8 -36323,9 -29643,7

Very large and large, publically listed companies -1833909 -758534 -709286 -288126 -192329 -50080,3 -185382 -142248 -11113,6 -56364,3

Very large and large, unlisted companies -182265 -233758 -421088 -607507 -661427 -531017 -493449 -460021 -435825 -401562

EBITSmall and medium sized, unlisted companies 237 316 254 292 365 239,5 162 173 110 86

Very large and large, publically listed companies 17466 8143 5204 11199 20233 14345 20872 9701 2157 467

Very large and large, unlisted companies 1354 1641 2320 3200,5 4114 3448,5 2701 3259 2313 2650

Profit/Lost after tax

Small and medium sized, unlisted companies 262 364,5 254 275 339,5 214 166 138 104 76

Very large and large, publically listed companies 15919,5 8669 21552 9589 8907 14655 18988 10410 1678 425

Very large and large, unlisted companies 1276,5 1479 2256 3295,5 3762 3327,5 2859 2860 2137 2354

Percentage change on previous year of GDP and median of profitability indicators, years 2005-2013.

growth rate percentage change on previous year 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real GDP Poland 3,50% 6,20% 7,20% 3,90% 2,60% 3,70% 4,80% 1,80% 1,70%

EVASmall and medium sized, unlisted companies 2,71% 16,12% 55,26% 11,80% -30,04% -32,31% -26,66% -24,68% -24,03%

Very large and large, publically listed companies

226,00% 65,75%

333,82% -29,42% -10,53%

175,98% 3,45% -48,76% 53,67%

Very large and large, unlisted companies 20,43% 43,47% 54,84% 26,98% -22,13% -15,87% -18,54% -34,93% -10,89%

ROA using net income

Small and medium sized, unlisted companies 5,01% 6,46% 7,65% 7,71% 4,46% 2,78% 2,48% 2,01% 1,49%

Very large and large, publically listed companies 9,04% 8,68% 8,06% 5,93% 5,05% 6,02% 4,06% 1,55% 1,11%

Very large and large, unlisted companies 5,14% 6,53% 7,06% 8,74% 7,17% 5,14% 3,50% 2,93% 3,39%

EBITSmall and medium sized, unlisted companies -3,35% 6,17% 29,85% 3,73% -38,71% -38,80% -29,87% -38,20% -40,00%

Very large and large, publically listed companies

164,35%

203,79% 29,27% 18,47% -5,39% -13,99% -10,32% -40,14% -26,75%

Very large and large, unlisted companies 9,53% 30,54% 45,28% 16,71% -27,31% -17,08% -11,91% -22,04% -10,96%

Profit/Lost after tax

Small and medium sized, unlisted companies -1,85% 11,59% 31,48% 4,84% -43,46% -41,63% -36,64% -41,58% -32,36%

Very large and large, publically listed companies

237,03%

223,54% 49,23% -15,07% -22,49% -4,88% -10,57% -62,99% 4,22%

Very large and large, unlisted companies 2,76% 33,82% 48,20% 20,22% -27,17% -16,92% -19,05% -28,35% -7,56%

Median of growth of EVA, 1st year = 100, cumulative linear graph.

Results

The situation of construction companies reproduces in a certain sense the economic situation of the country. The slowdown in the growth of GDP was reflected in declines in profit.

Results• With this scheme breaks EVA, which was maintaining the

whole time at negative levels.• The situation seems to be improving. • The construction companies cannot create value for the

owners. At least the value understood in terms of Economic Value Added.

This observation is a valuable clue for investors, but also a warning to the boards.

Conclusion• The analysis did not support the research hypothesis. • The situation of all surveyed groups of companies

was relatively similar. • The formation of indicators over the years is taken

into consideration, not the absolute values of gain, or EVA.

• The companies just reacted to impulses coming from the market and the differences in the companies size were not important.

Thank you for your attention