Financial markets have remained tense since Standard & Poor’s lowered the U.S. rating. During the past few days billions of dollars have vanished from the international stock exchanges, including the Warsaw Stock Exchange (WSE). Among domestic indices, the biggest decline refers to the WIGDevelopers index.
Chart 1. WIGDevelopers and WIG20 index changes, Jan.-Aug., 2011
Source: Inwestycje.pl
This can be the result of the outlook for the property development sector, which have recently been downgraded. Currently there are more new apartments offered on the largest housing markets than it was in 2007 and in early 2008 when Polish property market was booming. Present market situation, including changes in the “Family on its own” programme, can make real estate developers fight harder for clients, which will lead to the decrease in margin, while demand for new apartments can go down due to declining credit capacity. As for PLN loans, it is connected with a rise in interest rates, while in the case of loans in foreign currencies it relates to the native currency weakening against EUR and – most of all – against CHF (which is on its way to reach the level of PLN 4).
Table 1. Selected ratings of WSE-listed real estate developers
|
Real estate developers
|
Price/Book Value
July 5th, 2011
|
Price/Book Value
Aug. 11th, 2011
|
Price/Yield
July 5th, 2011
|
Price/Yield
Aug. 11th, 2011
|
|
Dom Development
|
1.5
|
0.9
|
71.9
|
42.8
|
|
Echo Investment
|
1.2
|
0.7
|
13.0
|
8.2
|
|
Gant
|
0.4
|
0.3
|
8.7
|
6.2
|
|
JW Construction
|
1.7
|
0.9
|
8.6
|
4.7
|
|
LC Corp
|
0.6
|
0.4
|
13.0
|
7.9
|
|
Polnord
|
0.6
|
0.3
|
12.5
|
6.9
|
Source: Emmerson Market Research Department based on gpwinfostrefa.pl
The question is, do all these indicators justify the current trend of repricing of shares. It should be mentioned however that some developers have decided to buy back shares, which should positively affect their share prices. What is more, the fact that developer’s securities continued to fall has influenced the current ratings, in some cases well below book value. That situation can be also caused by the investor’s aversion to the real estate development sector – connected to the property bubble popping in 2008 and losses incurred by dozen of WSE-listed companies. In such case, the above mentioned repricing can be seen as an overreaction, which can lead to the reversal of decline trend. Therefore, according to a Buy when there’s blood in the streets quote, one should ask himself „Are we there yet or is there more to come?”.