The sector at the threshold of large investments in the time of turbulence on the construction materials market
On 7 October, as every year, an industry meeting was held among nearly 150 representatives of management boards of key contractors, developers, investors, building materials manufacturers, as well as organizations associated with the Polish construction market.
The main and natural aim was a multi-faceted discussion of the situation in the construction sector and numerous discussions about the prospects for the coming years. The event, which once again confirmed its opinion-forming nature, was an opportunity to receive first-hand the latest indicators and forecasts from PMR.
Forum participants identified costs and shortages of construction materials as the biggest challenge they will have to face in the coming year, at the same time confirming the good economic situation in the sector.
Find comprehensive information about the current state of the Polish construction sector in the PMR report:
Macroeconomic outlook and major industry challenges
The Forum began with a speech by Paweł Borys, President of the Management Board of the Polish Development Fund, in which he presented investment prospects for the whole economy. The next item on the agenda was a joint speech of Marek Zuber, Financial Markets Analyst, together with Dariusz Blocher, Member of the Budimex Supervisory Board, on the macroeconomic outlook of the Polish economy and construction industry.
In his lecture, Paweł Borys highlighted the rapid recovery of the construction industry, which, along with industry, was the fastest to recover from the outbreak of the pandemic. However, the good situation in the sector is disturbed by the growing prices of construction materials and problems with supply chains, which may cause delays in the timely completion of projects. However, these difficulties should subside after a few months at the turn of the year. According to the PFR President, the next two years will see very good prospects for public investments thanks to the EU perspective and the reconstruction plan, as well as the continuation of the boom in the housing market. Moreover, we are also facing a decade of massive investments in the energy sector. The PRF president forecasts 5% GDP growth in the coming years and an increase in private investment by 8-10% in 2022.
Marek Zuber, in his speech, drew attention to possible problems with the availability of employees, which are related to the demographic situation in the country – 200,000 emigrants did not return to Poland after the outbreak of the pandemic. Moreover, the aforementioned problems with the prices of construction materials will also be aggravated by the growing inflation. According to the speaker, it currently reaches 6%, and before the end of the year it will reach 7%. Next year, on the other hand, we may face even a double-digit inflation.
Dariusz Blocher, in turn, signaled that in 2022 production will increase, but in reality there will be less work, because “design and build” contracts will not yet have time to enter the implementation phase. While the prospects in the engineering construction sector are very good, the cubature segment, which accounts for approx. 50% of the construction and assembly production value, is not warming up at all – Poles’ housing needs are still unsatisfied as there is a shortage of land and the prices of materials and labor are rising. This, unfortunately, will cause a further increase in housing prices. According to a member of the Supervisory Board of Budimex, the biggest opportunities for the sector are EU funds (including the National Reconstruction Plan) and large infrastructure projects such as CPK, hydraulic engineering, high-speed railroads or energy transformation. There is also a big potential in PPP projects, but it is still untapped.
During last year’s edition of the Forum, according to a poll conducted among the guests of the event, the biggest challenge the industry had to face in the last year was filling the order books and the observed weakening of demand for construction services. Interestingly, only 1% of the poll participants indicated at that time that it was the rising costs of construction materials that would pose the biggest challenge for the construction industry, which is now becoming the industry’s biggest problem. This is confirmed by the results of this year’s survey, PMR data and opinions of Forum participants. Problems with rising prices of construction materials and their availability are currently the biggest barriers to construction companies’ current operations. Only slightly less severe, in the opinion of construction companies, are problems with the availability of workers, both skilled specialists and basic labor force.
Market Sentiment Index
Favorable assessments of the market situation on the demand side, however, make the overall assessment of the construction business climate positive. The current reading of PMR’s market sentiment index is optimistic – the level of 19.4 points is the best value of the index registered since 2018. A good construction boom translates into positive construction results. PMR analysts’ forecast assumes that the value of the construction market in 2021 will grow by around 2.2% in real terms.
Sector assessment by contractors
Piotr Kledzik (PORR), Sławomir Nowak (Mirbud), Leszek Gołąbiecki (Unibep) and Krzysztof Figat (Polimex Mostostal) took part in the first panel discussion devoted to forecasts and probable scenarios of the construction market development in the coming years.
From the perspective of the largest contractors, the situation in the construction market is very good. Many companies have record-breaking order portfolios, but, among other things, an imperfect education system causes a low supply of new specialised staff and the rising prices of construction materials increase uncertainty and implementation risk. Among the demands made by industry representatives, the most frequently repeated voice was the need to change the mechanisms of valorisation, so that it covers not only the railroad and road works – but all construction contracts and so that the valorisation is in line with market realities.
According to participants of the discussion, the coming year will be successful for the industry and more calm than the current one. Problems with construction materials and workforce will still persist, but the price growth dynamics will clearly slow down. Residential and warehouse construction will be the safest and surest directions of development, while companies specializing in one segment will find it a good solution to diversify their operations.
Building construction 2022 – will there be growth?
The panel discussion devoted to the building construction market featured: Marcin Hutyra (Skanska), Karol Zduńczyk (Doraco), Konrad Płochocki (PZFD), Łukasz Marcinkiewicz (Lafarge Polska) and Marcin Szczygieł (SIG).
Time of execution of building investments has considerably increased, on average from about 20 to 24 months. The reasons for this state of affairs should be seen primarily in the problems with the supply chain. China and the United States have sucked virtually all the wood out of the market. Currently, contractors are already signing contracts for the implementation of housing projects, where the cost of construction alone reaches PLN 6,000/m2 of floor space. Low availability of land also contributes to the general increase in prices, but this mainly concerns large cities. Previously, 60% of investments were made in the six largest cities – now the situation has reversed and the majority of such projects are being constructed outside the largest agglomerations. An opportunity to alleviate the industry’s problems is prefabrication, which significantly shortens the recently extended construction time. However, individual investors are still not willing to pay more if the return on the incurred additional costs exceeds seven years. Currently, the difference in the cost of constructing a building using the traditional system and the prefabricated system has significantly decreased, which may cause an increase in the popularity of this system in the coming years and an interesting direction of development.
Find comprehensive information about the current state of the Polish precast concrete market in the PMR report:
Another section of the Forum was a discussion between PMR ICT Sector Director Paweł Olszynka and Natalia Ziajska and Karol Sudnik from XPLUS on new technologies in construction – primarily the process of digital transformation understood as the use of cloud systems and infrastructure. According to the poll conducted among the participants of the event, such a process has already started in more than 73% of companies present at the event, which is a very good and surprising result. Currently, we have a very dynamic situation on the construction market and thanks to IT systems that analyze data from different areas of the company, it is possible to make key, strategic decisions much faster.
New sources of construction financing
In relation to the banking sector, the construction industry, according to Forum participants, currently has the biggest problem with obtaining bank guarantees (one third of responses in the online poll), as well as with obtaining insurance of receivables. Panel discussion devoted to the issue of financing construction investments was attended by: Janusz Władyczak (KUKE), Damian Kaźmierczak (PZPB), Ryszard Gburek (BOŚ), Piotr Bienias (Mota-Engil Central Europe) and Krzysztof Pietraszkiewicz – President of the Polish Bank Association.
Two major investment cycles are already behind us and the sector is at the threshold of the third one. The observed slowdown is mostly the result of the transition period between the EU prospects and not the aftermath of the pandemic, although it also influenced the situation on the market. In the railroad sector, the stoppage in announcing new tenders is a cause for concern, the investment situation in local governments is not good, and the crisis on the labour market is getting worse. When the planned large investments in the energy sector, railroad or road construction will start, the lack of employees will be an even greater problem, especially outside the largest cities. In Poland, the banking sector finances as much as 65-70% of the construction industry and the piling up of investments may also cause problems with financing. Therefore, it may not be possible to carry out large investment plans.
It is worth noting, that the day before the Forum, the Monetary Policy Council decided to raise the interest rates for the first time in 9 years from 0.1% to 0.5%. Such decision may have stabilizing influence on residential segment where sales of flats were motivated mostly by low rates.
Engineering construction – large scale investments, high level of risk
The last panel discussion devoted to engineering construction was attended by Tomasz Żuchowski (GDDKiA), Hubert Nowak (UZP), Artur Popko (Budimex), Jan Styliński (PZPB), Włodzimierz Mucha (PSE) and Mikołaj Wild, President of the Management Board of the Central Communication Port (Polish: Centralny Port Komunikacyjny, CPK).
During the event the President of CPK had the opportunity to present important information concerning the design and construction contracts of CPK for the construction industry in the coming years. The key point of his speech was the announcement of the framework proceeding for the design documentation for the rail investments that will be built as part of CPK. The proceedings will concern a total of 29 projects divided into 82 sections, which comprise almost 1,800 km of new railroad lines to be completed by the end of 2034. Tenders for the contract engineer and civil works will be issued in a similar manner.
The CPK plans aroused great interest among the Forum guests. Artur Popko, President of the Management Board of Budimex, appealed not to doubt the organizational and processing capacity of Polish companies, which, with proper coordination of works, can handle huge projects. This declaration was very enthusiastically received by the participants of the event.
There is currently a bit of a sine wave in public procurement. There is an ongoing struggle for contracts because contractors cannot be sure of adequate activity on the supply side. This is why it is so important for public investors to present their investment plans and implement them consistently. The e-Procurement Platform, which Hubert Nowak assures will be implemented according to schedule, will be helpful in this respect. According to Hubert Nowak, the Platform will contain full data on pending orders as early as July 2022.
However, proper signaling of investment plans is not the only solution that the industry expects. In 2020, public tenders worth a total of PLN 78bn were held in the construction industry, but only some of them (over PLN 14bn from GDDKiA and PLN 9bn from PKP PLK) will be subject to indexation. During the discussion, it was said that it is important for the whole amount to be subject to that mechanism, which would allow to spread the risk more evenly.
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Construction Business Unit Director