Rising building material prices force developers to change strategy

Ten post dostępny jest także w języku: polski

The construction sector is struggling with a lot of problems these days, especially due to the COVID-19 outbreak, which has resulted in fluctuating raw material costs and overall market volatility. The entire construction sector is currently experiencing a slight investment slump. Due to the increasing unpredictability of housing costs, developers are raising prices of apartments in projects already introduced to the market, often selling them only at an advanced stage of completion.

According to data from the Polskie Składy Budowlane Group, prices of construction materials in January-October 2021, compared to the same period of 2020, increased by 10.6 percent on average. A year ago, i.e. in January-September 2020, compared to the same period of 2019, the price increase was much lower and amounted to 1.4 percent. The unpredictability of the costs of finishing investments caused developers to raise reserves in their budgets for new projects, forcing a more cautious approach to setting the pricing policy for the units offered.

The National Bank of Poland (NBP) recently published information on housing prices and the situation in the residential and commercial real estate market in Poland in Q3 2021, pointing out that in Q3 2012, the cost of housing construction increased significantly, particularly for materials, but also for labor and land. This, together with a decline in the availability of developer products, led to significant increases in housing costs across the country.

It was noted that the scale of construction cost increases, which was difficult to predict, prompted developers to increase reserves in the budgets of already commenced projects, which forced a more cautious approach to shaping the pricing policy for units sold, i.e. primarily to increase apartment prices in newly launched projects. Due to the uncertainty as to the final costs of project development, some developers introduce additional apartments to their offer only when the project is already at an advanced stage of completion. The increase in project delivery prices increased the likelihood of unprofitable contracts signed earlier with overestimated budgets, weakening the financial position of investors and contractors, and exacerbating payment bottlenecks.

According to CSO statistics, in Q3 2021, 40,346 housing units for sale or rent were started, down 15% from the previous quarter and 5% from the same quarter in 2020. The number of housing units started in the period under review, although lower than the record number recorded in the previous quarter (47,552), was one of the highest among those documented by the CSO to date. Financial data from the largest developers confirmed the pattern of a slight decline in housing production – the value of projects under construction fell by 4% from the previous quarter and by 10% from Q3 2020. After losses in the first two quarters of 2021, the stock of housing units in completed buildings increased slightly in Q3 (to over 5% of the commitment structure), but remained at a relatively low level.

The number of building permits issued for apartments for sale or rent in Q3 2021. (48,108 units) declined from the previous three historically high quarters, but remained one of the highest prior to Q2 2020, which, given the perceived shortage of land, may indicate a declining potential for developers to add to their offerings.

The number of units delivered for sale or rent in Q3. The number of homes delivered for sale or lease in Q3 2012 (36,580) increased 21% y/y, but was down 5% y/y, showing that projects are being completed despite challenges for builders (delays in deliveries, lack of sufficient labor). The number of completed apartments is a result of the number of units whose construction started about two years ago. The vast majority of these units were sold during the construction phase and therefore did not impact the housing supply market during the period studied.