Polish Central Bank Warns of Domestic Commercial Property Bubble

More example of what  I call as:  global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality

From Bloomberg: (bold mine)

Poland’s commercial property market faces “growing imbalances” as developers add new projects even as supply outstrips demand, the central bank said.

Commercial real-estate prices in the European Union’s biggest eastern economy continued to decline “slowly” in the third quarter, while the vacancy rate in rented office space has increased to almost 14 percent in Warsaw, the Polish central bank said in a report today.

“The office market has experienced a boom in space growth, which has led to a significant vacancy rate,” the bank said. Even so, “developers continue to build new offices.”

Poland, the only EU member to avoid recession after the global financial crisis in 2008, has attracted a flurry of real-estate investment in recent years. Warsaw trails only Paris, London and Moscow among European markets for new office development, Los Angeles-based consultancy CB Richard Ellis Inc. said in a report.

Office stock in Poland’s capital stands at 4.4 million square meters with more than 660,000 square meters under construction in the third quarter, CBRE said. The biggest projects include Warsaw Spire, developed by Belgium’s privately-held Ghelamco Group CVA, and Warsaw-listed Echo Investment SA’s Q22.

How this CRE boom has been funded has not been indicated in the above article, but my guess is that this has been channeled through the banking system. 

Poland’s economy nearly suffered a recession in 4Q 2012, so the Polish central bank implemented aggregate demand policies by aggressively slashing policy rates from 4.75% to 2.5%. This has boosted statistical GDP in 2013 but given that negative inflation rates has recently emerged (possibly reflecting on the slowdown of the property sector as well as a deceleration or even possibly an inflection point in GDP), the central bank cut official rate again in Sept 2014.

The banking sector’s balance sheet continues to expand especially over the past few months, and this seem to have been reflected on money supply growth.

Given the downturn in real estate demand as measured by property prices and an increase in vacancy rates, the typical reaction should have been to ease on the build up of supply.  But developers continue to intensely build. This may be due to hopes for a recovery and or that this may be about Ponzi finance dynamics.

For the latter, in order for leverage companies to have access to funds they would need to show financing companies that they are embarking on new projects from which the latter would fund. Developers get the money and payback interest rate charges and use the rest for the new project. Of course, developers hope that demand eventually picks up where they can unload existing inventories. Financers, on the other hand, would need to keep financing them otherwise any partial souring of loans can transform into wholesale default. This what constitutes as a debt trap.

I am not familiar with Poland so this is just a conjecture from what seems a divergence—slowing demand for real estate market, but booming loans and inventory accumulation. 

Well it’s not just a slowdown in the CRE market but also the housing market.

And here is the most interesting portion. Almost half of Poland’s home mortgage have been financed from foreign currency loans.

From the ever bullish despite all the risks, Global Property Guide:

The foreign currency-denominated proportion of housing loans (including Swiss franc loans) rose from 9% in 1999, to 50% in 2001, and remained at 47% at end-July 2014, according to Polish central bank, Narodowy Bank Polski.

However, foreign currency-denominated loans have been decreasing in recent months. In July 2014, foreign currency loans dropped 6.8% y-o-y, while Polish zloty loans increased by 15.9%.

The number of the total outstanding loans in July 2014 increased by 3.9% to 343,502. Of which, 180,849 (or 53%) were Polish zloty-denominated; and 162,653 (or 47%) were foreign currency-denominated.

Impaired loans rose 10.61% to 10,876 in July 2014 compared to a year earlier. Of which, 6,677 were Polish zloty-denominated (which increased by 3.2% y-o-y); and 4,198 were foreign currency-denominated (which increased by 24.9%).

Iceland’s crisis has been partly due to the banking system’s massive exposure to housing mortgages financed in foreign currency.

As of the moment, the Polish zloty has been weakening against the US dollar (since July 2014), has been rangebound with the euro  and the Swiss franc (since 2012; the franc is pegged to the euro at 1.2)

If impaired loans has already been rising in domestic currency terms, how much more if currency volatility gets magnified?

The alarm bell sounded off by the Polish central bank hardly represents a bullish sign but one of an environment of rising risks already being resonated by many other political agencies worldwide.