How will Employee Capital Plans, the new Polish pension saving scheme, influence the capitalization and quotations at the Warsaw Stock Exchange?
Employee Capital Plans (PPK) will have a major influence on Polish capital market starting from late 2019. The scheme, modelled on similar plans in the UK, New Zealand, or Denmark, assumes that each employee will contribute minimum 2.0% of their gross salary, which will be matched by the contribution from the employer at min. 1.5% of the salary and the additional bonus payment from the state. While PPK is voluntary for employees, thanks to automatic enrolment, the government assumes high 75% participation from over 11 mln eligible employees. Starting from the age of 60, a member of PPK will be able to receive the accumulated savings in at least 120 monthly instalments, free of capital gain tax.
PPK will kick off in July 2019 with first inflow of capital on the Warsaw Stock Exchange expected in November 2019. The government assumes annual inflows at PLN 6bn (EUR 1.4bn) in the first twelve months and PLN 15bn (EUR 3.5bn) starting from the third year, o/w around half should be invested in equities, both local and international. Within ten years, PPK are likely to manage funds worth over EUR 50bn, of which around one third should be invested on the Warsaw Stock Exchange. This compares to the current MCAP of domestic companies listed on the WSE at c. EUR 135 bn.
Within the next ten years, PPK are likely to become the largest class of domestic institutional investors in Poland. PPK’s steady inflow of cash and their long-term investment horizon will undoubtedly provide significant support for quotations at the Warsaw Stock Exchange, offering also attractive capital raising opportunities for listed companies.
What is the outlook for the Warsaw Stock Exchange for 2019, compared to the stock exchange in Vienna and global capital markets?
The performance of the Warsaw Stock Exchange (WSE) in 2019 will obviously depend on global issues such as further rate hikes in the US, the end of quantitative easing in the Eurozone, and trade tensions between US and China. The biggest risk for European assets is related to politics in Italy. However, compared to global and European capital markets, 2019 may be a relatively better year for the WSE. First, the performance of the WSE in 2018 was weaker than most European markets, as the WSE suffered from both emerging market outflows and selling by local institutional investors. Second, we expect that outflows will turn into inflows around mid-2019, as both local and foreign investors will decide to enter the Polish stock market ahead of the upcoming purchases from the Employee Pension Funds.
What is the condition of Poland’s real estate markets?
WIG-Nieruchomości fell 10% YTD, compared with a 13% drop of WSE’s broad market index WIG. The decline can be partially attributed to weaker operating performance of residential developers. In 9M18 WSE-listed developers reported decrease of pre-sales by 9% YoY what was mainly caused by lower dwellings offer (slower pace of introducing new projects into offer, lower accessibility to general contractors). Given the potential further increase of construction costs and higher costs of land, also the profitability of residential developers might be under pressure in the coming quarters. On the other hand, the residential market is still supported by solid demand (low cost of mortgage loans, high purchasing power of polish client) and real-estate stocks are supported by very high dividend levels.
The outlook for the office segment is still relatively attractive while the retail segment is suffering from the introduction of Sunday trading restrictions. Combined with higher supply, we expect the retail rents to decline and yields to increase. In the office segment, due to higher leasing activity and lowering vacancy rates, especially in central locations in Warsaw, rental rates might increase in the coming quarters. However, the office space in Warsaw should significantly increase in 2020-2021, which should limit any further growth in office rents.