WOOD Flash – Dom Development/Echo Investment: strong 2021, apartments supply likely to remain tight – we maintain our positive view

Both Echo Investment and Dom Development sold a record number of apartments in 2021. The pressure on costs, and the impact of the rate hikes on affordability and demand are the key headwinds that we expect the sector to be facing in the next one-to-two years. That said, we are probably still in a peak-margin environment, as supply is not keeping up with demand, and prices are growing at least on a par with the input costs. The supply is likely to remain tight, driven by the limited availability of land and the prohibitively high prices of smaller plots, slower permitting, and – increasingly – developers building resi-for-rent units. We see Polish residential as affordable, relative to salaries, in the regional context. New apartments in Warsaw are selling for around EUR 2.7k per sqm, on average, and the rental yield is around 5%, or around 7% on development costs. We believe that both Echo and Dom are well-equipped to manage the rising construction costs, as they do not rely on general contractors, but can manage the process themselves. Both are also replenishing their land reserves and offerings successfully, something that most developers in Poland are struggling with currently. The rising rates may dent demand eventually. However, so far, demand is proving robust, as people are looking to protect their savings from inflation (and hoping for capital appreciation). We believe that, in the first part of the year, we could see demand driven by customers trying to lock-in deals before mortgage rates rise even further. From a P&L perspective, both 2021E and 2022E are likely to be very strong for both Dom and Echo, in our view, which should be reflected in the dividends, and there is a chance that we will see the strong earnings lasting into 2023E. We maintain our positive view on both Echo and Dom Development.