The construction industry proved to be an industry extremely resistant to COVID-19 in 2020. I am writing this article from the perspective of a Ukrainian who has been living in Poland since 2014, observing the construction boom there and benefiting from Polish infrastructural success. This country is building its road and rail infrastructure all of the time, as well as industrial and warehouse facilities. The development market currently remains stable due to low interest rates and the desire to preserve the value of money in real estate.
Warehouses and industrial construction
This has been the segment of construction to have experienced most growth of late. Changes in distribution are forcing the demand for warehouse space used by companies trading and servicing online sales as well as industrial processing plants which increase production and exports.
Poland’s road infrastructure will be developed in accordance with the new EU and Polish national budget, and this perspective will provide many new contracts for the construction industry. The General Directorate for National Roads and Motorways plans to announce tenders in 2021 for the construction of more than 660 km of new roads and the modernization of existing road networks, and wants to spend about PLN 20 billion on this (around EUR 4.5 billion). Many plans also apply to the EU budget for 2021-2027. Tenders for new EU plans are set to be successively announced. This segment promises to see a constant boom and lots of orders.
Investment in this area promises to be extremely rich. Experts estimate that in 2021 the construction and modernization of the Polish railway network is a cake to the value of about PLN 14 billion (EUR 3.2 billion) which will be distributed to construction companies, and it is expected that these outlays will be at such a high level for the next few years. The Polish government confirms the continuation of the project to build the Central Communication Port (airport, rail and road infrastructure), it will not be a large budget next year, however, until 2034, it is gradually planned to spend in excess of PLN 80 billion on this construction (EUR 18.1 billion).
In my view, this is one of the most damaged sectors, which still remains with quite a high range of price per square meter, probably due to long term contracts and warm interest on the part of global players to locate here their Business Process Outsourcing or Shared Service Centers to Poland.
Anyway, office space is definitely less popular now, and the main reason for this is the popularity of remote working (which has started to be real even for banking institutions like Citi Group, JP Morgan and other banking players). Measurements of higher work-from-home efficiency have led many corporations to permanently abandon office space. Increasingly popular short-term rental and office space sharing services do not meet demand for long-term rental of office space. Banks increased the estimated risks associated with investments in office space and, therefore, in 2020 experts spoke of a possible decline of 5-10%, though these are quite cautious forecasts.
Anticipating the development of suburban open shopping centers and the construction of discount stores. Expansion in 2021 will continue in towns and municipalities, including Dino supermarkets, building several hundred new stores annually. This format of the store is the most popular, and competitive chains do not locate stores in closed shopping malls and large formats (hypermarkets). Many smaller local chains have announced expansion plans to construct new stores and some even distribution centers. However, the development of online trading can change their investment strategies, especially taking into account the strong development of food delivery services that Frisco (online supermarket) now offers, and which other retailers like Biedronka (largest discounter shops chain in Poland), together with food delivery service Glovo, offer.
Hydro and energy
Hydro construction and energy. The estimated construction investments in ports, storage reservoirs, the Vistula Spit ditch and other expenditures in the hydro technical segment exceed the sum of PLN 30 billion (EUR 6.8 billion) in the next 10 years.
Changes in the energy sector aimed at closing the coal-fired energy sector and increasing the share of solar and wind energy are a large, though not yet precisely priced but noteworthy segment for construction companies. We can see, as proof of high interest in the solar market, the share price movements of Columbus Energy SA on the Warsaw Stock Exchange, which offers solar panels.
Moreover, companies in the energy sector have to expect requests related to:
- modernization and expansion of electricity and heating networks,
- construction and connection of new generating units to the grid,
- development of the transmission, distribution and storage system for natural gas, crude oil and liquid fuels,
- development of the renewable energy sector (including biomethane plants, photovoltaic power plants and wind farms).
Tourism, hotel and sanatorium industry
Unfortunately, we see the freezing of investment activities here. Construction works that began earlier are being closed with difficulty. The gravest doubts about the further direction of development relate to this industry.
In this sector, the market experiencing stabilization of housing prices per square meter. Remote work, the absence of students and the freezing of tourism in large cities have cut demand for long and short-term rentals. On the other hand, inflationary pressure and low interest rates encourage investment in housing, especially out of large urban cities. The certainty of values and the prospect of a return after the pandemic still speak for the attractiveness of housing. The temporary shortage of new investments caused by the first wave of the pandemic and the shortage of workers in Spring was made up for by a 35% increase in new housing construction permits in September 2020. Housing companies will not experience a shortage of orders in 2021 because their portfolios still contain a lot of work that has already been started and many developers are waiting for free terms of contractors for their projects.
Deliveries of building materials disrupted the schedule at many construction sites in 2020. The breach of the supply chain from China and the constantly high number of new and planned construction projects create a very attractive investment opportunity in the production of building and construction materials in Poland. Factories in Europe, including, for example in Ukraine, would be reliable and quick suppliers for the entire construction industry in Poland. An interesting alternative would also be to build factories with co-financing from EU funds in eastern Poland and supplying raw materials for production from Ukraine.
Workers are still a top priority for construction companies. Experts believe that there will be a shortfall of around 30,000 construction workers in 2021. Workers from Belarus are a boon, but the biggest number of construction workers is from Ukraine. Companies are looking for both qualified workers and apprentices, offering, in addition to attractive rates, ever improving social benefits and full formal and administrative services. In the fourth quarter of 2020, 725,000 foreigners were registered at ZUS (Social Insurance Institution), of whom 532,000 are Ukrainians. A constant shortage of employees should be expected despite the fact that the figure is 36,000 compared to September 2020. We can also see an increase in the number of employees registered in ZUS compared to 2019, which had 651,000 foreigners. Despite that, a further increase in wages should also be expected, in line with the rising cost of living and shortfall of building workers.
As one real estate expert in Europe, Craig Smith, Publisher at EuropaProperty.com, notes: “With the EU continuing to have funds available for infrastructure projects, Poland looks like it is a frontrunner for continuing and starting new projects over the next few years. Construction companies operating in Poland and focusing on industrial, warehousing, e-commerce and residential did well in 2020 and are looking at growth in the short and medium term and catching up with the new e-demand in Western Europe and local business”.
The short and medium-term prospects for the construction industry in Poland are very good. Investment trends are clearly supported by the government, the importance of which is growing clearly, especially compared to the weakening budgets of local governments. Local authorities are forced to maintain repairs and modernize their infrastructure and will spend in the range of PLN 30-40 billion on investments in 2021. The industry needs financing, which should now be cheaper. Demand for employees is not falling and their perceptible shortfall will accompany the industry in the coming years.
Polish companies also carry out construction projects abroad. The export of construction and assembly services has been growing continuously since 2010 (PLN 3 billion), and according to data from the Central Statistical Office exceeded PLN 6.8 billion in 2019. We should add to this employees, especially from the finishing industry, who are employed directly in companies (mainly in Germany). That gives room for Ukrainian finishing companies to come to Polish markets and become successful, as already proven existing examples.
Another request that is quite common for the Polish construction market is the lack of responsible subcontractors which, again, gives an opportunity for Ukrainian companies to have a soft start while initially adapting themselves to legal requirements, local construction rules and customer expectations.
The construction industry is certainly an important sector of the economy, accounting for over 10% of Poland’s GDP.
Investment in construction services and the manufacture of materials or design services are likely to be a very attractive form of earning and investing capital in the near future.
Besides, we should keep in mind the EU budget perspective for 2021-2027, which is only going to start this year, and taking an additional three years to settle payments, gives Poland good prospects for the next decade.
Andrii Romanchuk is a partner and head of the Warsaw office of EUCON Legal Group
Yullia Boichuk, a member of the board of Golden Tile Polska, a leading Ukrainian ceramic tile company on the Polish market, confirms that the construction market and the infrastructure market of Poland experienced certain difficulties in 2020. “Volatility from quarter to quarter in the real estate market, which depended on both the number of building permits issued and the physical ability of end buyers to obtain loans. Despite unprecedented measures, such as a reduction in the discount rate by the National Bank of Poland from 4.5% to almost 3% per annum, the effects of the pandemic will be felt in future periods. The ceramic tile market, as one of the construction segments, according to our preliminary estimates, fell by 15% in 2020 (from 91 million sq. m. to 77 million sq. m.), despite stable growth in recent years. However, through the construction and infrastructure industry conducting the correct policies, the ability of manufacturers to adapt quickly to new planning of production and distribution of their products as well as support from the state, our expectation is that the market will be able to recover to its precrisis level in 1-2 years”, she noted.