Building costs and credit tightening threaten profits.

Polish residential developer margins may decrease by 3-5 percentage points in 2008, according to internet finance consultant Open Finance's analyst, Emil Szweda.

"I expect developer margins to decrease by 3-5 percentage points this year," Emil Szweda told the Report. The main reason given for the decrease is increasing building costs, which analysts estimate to take up some 30% of total development costs.

While these increase, residential prices are at a relative standstill and developers are forced to add incentives to residential offers such as free parking spaces, fitted kitchens or free balcony space.

"This increases the costs of projects and affects margins negatively," DM PKO BP analyst Michal Sztabler wrote in a commentary. "A strategy, which is being used by some developers, centering on the sale of turnkey apartments, seems well placed but only in certain segments of the market, this being the market for apartments [...] of a higher standard."

High-end residential developers such as Von Der Heyden Group recognize that margins are likely to come under pressure, but remain optimistic as to continuing demand for luxury residential property.

"Margins of developers will unfortunately come under pressure for various reasons," Von Der Heyden Group Chairman Sven von der Heyden commented for the Report. "Mainly because of the cooling down of the market, however on a high level [luxury residential] we remain cautiously positive, also in light of our  successful progress in selling flats in our small Warsaw residential projects."

Von Der Heyden Group is currently nearing the completion of a luxury residential building in the center of Warsaw, which will contain eight luxury apartments of between 33 and 106 square meters.

While assuming that the decrease in developer margins will not be a significant one, Open Finance's Szweda noted that though rising construction costs are unlikely to affect larger market players, smaller developers may suffer due to the costs of financing.

When looking at developer margins, due to the variety of companies on the market, projects should be treated individually, but broadly speaking developer margins - which reached approximately 30-35% in 2007 - will fall to some 30% in 2008, DM PKO BP's Sztabler added.

Sven von der Heyden is in agreement that large developers, which have good liquidity, are likely to survive the tightening of credit conditions by banks, which is a result of the situation in the banking sector following the U.S. credit crunch.

"We should also not forget about tightening credit conditions imposed by banks, which [mean that] only good locations and the fittest developers survive," Sven von der Heyden commented. "This all together is certainly not the dreamland scenario for us real estate developers."

Residential prices in Warsaw reached PLN 8,847 per square meter (sqm) in January 2008, up 2% from December prices, and remained at the same level throughout February, according to internet property agency Rednet Property Group, cited by DM PKO BP in its report. Residential prices in the southern city of Krakow reached PLN 7,504 per sqm in November last year with little