Written by Prof. Dr. Ali TUREL, EECFA Turkey
Turkish construction is in crisis in more fronts. High interest rates due to high inflation cloud the situation of construction players. As well as this, high negative real housing price changes with real construction costs being in positive numbers are creating adverse market conditions for housebuilders. Construction companies active in civil engineering have decreasing workloads due to the October 2018 presidential decree not to tender new projects except for priority ones and due to the reduced available central and local budgets for projects this year. The construction sector in Turkey is seeking ways to come out of this crunch.
How it all started
The colossal devaluation of the Turkish Lira, having started in November 2016, shook Turkey’s construction industry in August 2018. Even though construction costs and interest rates increased against the backdrop of rising exchange rates in 2017, there were exceptional historical peaks in construction and occupancy permits that year. The crisis hit in 2018 with construction permits in floor areas being almost half of the permits of 2017. Occupancy permits went up by 5% in floor areas though, due to the large backlogs of construction in almost every sector. Housing sales also climbed 5% and amounted to 1,409 million by end 2018.
Trends similar to 2018 in building construction and occupancy permits in floor areas continued in the first quarter of 2019 with a 37.7% shrinkage in construction permits and a 29.4% rise in occupancy permits. Annual rate of change in the Building Construction Cost Index decreased from 28.11% in January 2019 to 25.45% in May 2019. Since rates of change in Consumer Price Index were 20.35% and 18.71%, respectively, real rises in building construction cost in the same two months were a respective 6.4% and 5.7%.
Civil engineering projects have been battered by the presidential decree issued in October 2018 requiring all ministries not to tender new projects except for priority ones, on the one hand, and by the lower allocated budget for projects to central and local governments in 2019 than in the previous year, on the other. TUIK, the Turkish Statistical Institute, calculated a 10.9% drop in construction sector in the Gross Domestic Product (GDP) in the Chain Linked Volume Index in the first quarter of 2019 against the same period of 2018.
Feeling the pinch
Construction industry in Turkey is much concerned with the changes in housing prices and sales since about three quarters of building permits in Turkey are for house building. National average of the annual change in the Housing Price Index accounted for 3.60% in January 2019 and 1.57% in May 2019, implying that real annual changes in housing prices in these months were -13,9% and -14,4%, respectively. High negative real housing price changes when real construction costs are in positive numbers are unfavourable market conditions for housebuilders. Furthermore, decreasing housing sales, by 21.7% in the first 6 months of 2019 and 48.6% in June 2019 compared to the same time periods of 2018, create additional strains in the housing market.
Representatives of the housebuilding industry have recently suggested that in order to take their industry out of crisis, unsold housing, currently totalling between 800 thousand and 1 million dwelling units, should be bought by the State-Owned Assets Fund created by assembling assets of publicly owned banks and commercial institutions. This proposal appears not to be getting much public support, though.
Players in construction industry have been bemoaning high bank interest rates which are related to high inflation. Neither builders nor house buyers use much credit at high interest rates. In the first six months of 2019, mortgaged housing transactions slumped to 16.4% from 31.2% in the same period of 2018. The Central Bank of Turkey reduced its lending rate to 19.75% from 24% on 23 July 2019. During the following months banks are expected to reduce their credit interest rates as inflation also comes down to single-digit.
Ways out
Recovery in civil engineering projects workload may begin in 2021 with increasing public funds. Also, rapid developments in tourism sector may necessitate the expansion of the existing infrastructure and the prompt addition of new ones. The private sector may increase their involvement in energy production projects, particularly to produce electricity from renewable sources. The Turkish Government may choose to introduce and tender new projects to be realized within the scope of the Built-Operate-Transfer deals.
In addition, the reversal of the slump in the Turkish construction sector should be related to falling inflation, stability in exchange rates and turning the GDP rate of change to positive digits.