Jan Cienski in Warsaw -

With the words of a Polish central bank analyst about a forecasted fall of 15-20% in property prices still ringing in their ears, it was hard for even practised real estate professionals at a recent show in a Warsaw exhibition hall to put on a sunny disposition amid the current slump.

"We are getting a lot interest," said Joanna Otwinowska, a sales agent with Xtender SA, a company with one project in suburban Warsaw, as she watched potential buyers glance at her brochures before moving on to other booths. However, the large number of people shuffling through the show didn't fool Tomasz Jaczewski, the CEO of ETJ, a real estate developer. "The level of interest isn't leading to higher sales because people are scared," he said. "They're waiting for the prices to continue falling."

Real estate was the first part of the economy to feel the full force of the global crisis. The sector was in the midst of a cyclical downturn that began in 2007 when real estate prices stopped increasing after having risen rapidly to a point that they were no longer affordable by average Poles. That slowdown turned into a rout in September following the collapse of Lehman Brothers. Banks that had previously shovelled cash to borrowers, covering 100% or more of the value of a property, often in foreign currency, dramatically tightened up their lending requirements, leaving many potential buyers frozen out of the market.

In February, the real estate analyst at the Polish central bank, Jacek Laszek, said prices will fall by 15-20% and won't begin rising again until 2012 because of a glut of unsold homes and problems with bank financing. "Theoretically, there is room for an even bigger price fall," he told the state news agency PAP. "But we think that developers will act rationally and that a majority (have) diversified production and have the means to survive the slump."

Wojciech Ciurzynski, the chief executive of Polnord, one of those developers, complains that the market has essentially stopped because banks have essentially stopped lending. His company sold only five flats in January, a tenth of the level of a year earlier. "Even people who had signed preliminary agreements with banks have had banks back out of those agreements, I've never seen that before." Desperate to sell, Ciurzynski has slashed his margins from 30%. "Now we want only 10%, and in some cases we will take zero just to repay our credits."

Oversupply

Developers have also been battered by the large number of apartments bought by investors in recent years, which are now being sold back onto the market. In Nowy Wilanow, a new suburb in southern Warsaw, balcony after balcony displays banner "For Sale by Owner" signs, and those sales compete directly with Polnord's attempts to continue unloading newly built flats.

The numbers for the sector make for grim reading. The total of completed transactions dropped by about 90% in the first months of this year. Last year, about 163,000 new flats came onto the Polish market, a result of the building boom that hit full steam about two years ago when a lot of new entrants became developers, lured by the apparently easy profits. Kazimierz Kirejczyk, the head of Reas, a real estate analysis agency, estimated it would take about two years to get rid of the backlog at the currently anaemic level of sales. "The fourth quarter saw a collapse of the market," he said.

Laszek said that the supply of new homes will shrink for the next three-four years and may even lead to few new apartments being sold by around 2012, which should allow prices to rise again.

Some developers have reacted by switching their projects from apartments to offices, but that market is also showing signs of a dramatic slowdown. Others are offering to fully kit out their apartments, a novelty in Poland where developers had traditionally sold unfinished flats which buyers would then complete on their own. Still others are offering to help buyers obtain mortgages or offering to rent flats with an option to buy them later once the economy picks up again.

The retail sector is also showing strain, with new projects halted and completed ones running into difficulty as tenants face trouble in meeting their rent payments which are denominated in euros while their earnings are in fast-depreciating zlotys. "I'm a lot more bearish than I was just a couple of months ago," said Hadley Dean, managing partner at Colliers International Poland, the real estate firm.

However, the current troubles could be a boon for those companies that survive. With many new projects halted, and demand expected to return in a year or two, there is likely to be a shortage of new apartments, with a resulting price pop, when the economy emerges from the crisis. "This is going to be a very difficult year, but things will start to move again," said Ciurzynski.

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