Serbian construction: one of the strongest growth cycles in recent history

Written by Dejan Krajinović, Beobuild Core D.O.O., EECFA Serbia

During the last six years, between 2015 and 2020, our forecasts closely followed the significant turnaround in Serbian construction, which rolled out into one of the strongest growth cycles in recent history. The powerful surge in construction outputs surpassed all initial expectations, and there are a number of converging factors behind its formidable result. The recovery after the recession gradually transformed itself into a fully-fledged construction boom, which more than doubled Serbia’s construction outputs, from EUR 2 billion in 2015 to EUR 4 billion in 2019. Even the pandemic in 2020 didn’t change the very positive outlooks, although it did cause a slowdown and negative consolidation of construction outputs by some 5% at constant prices. The expected growth should return in 2021 and all indicators are still on the side of our initial forecast.

How ‘good’ is EECFA’s Sample Report?
The 3 charts compare our 3 forecasts for total construction output at constant price as 2014=100 index. Forecast figures are dotted, factual figures are solid lines.

Three of our previous forecasts for total construction output in Serbia
(source: EECFA)

The chart on the left shows our first forecast for 2018. It was published in June 2016 and this is our sample report. (See the full PDF and the corresponding XLS file.) The factual 2018 figures were published in the 2nd half of 2019.

The chart in the middle is our forecast issued in Winter 2019, where the 2018 figure is therefore the final one. 2018 factual data are very close to what was foreseen in June 2016.

The chart on the right is our latest forecast, including the 2019 factual figures, which was published in the meantime. Although we were very optimistic for 2019, the final results turned out to be even better.

Reforms as a prelude

With political changes in 2013, Serbia embarked on a reform path that is slowly proving to be one of the main pillars behind its success story. The initiation of the ongoing cycle happened with the new permit laws implemented in 2015, but this was also followed by new and flexible labor laws, as well as a number of smaller legislations. The new permit laws and the introduction of e-permits made administrative processes very fast and transparent, where the World Bank ranked Serbia in the Top 10 most efficient permit systems in the world. These were critically important legal reforms, which laid ground for investments in practically all construction segments. The reforms started in deep austerity, with tough fiscal reforms including linear pay cuts, halt in state funding and the cancellation of all government programs affecting construction. At the time, it would be impossible to see all the implications we see today, particularly the speed of overall changes.

Tango of public and private

What came as a new strength for this cycle in 2017 was the removal of the austerity measures after the successful fiscal consolidation. Not only public debt was reduced, and budgetary deficits closed, but the Government funds are returning as one of the major contributors in construction. This is a key factor in infrastructure, but also in various public buildings and residential construction. With all weaknesses and possible risks involved, it was very easy to underestimate the scale of the recovery. While an amazing performance of civil engineering was largely expected, the results in the construction of buildings came as a pleasant surprise. Only between 2016 and 2020, the levels of output in building construction almost doubled. The total amount grew from EUR 900 million in 2016 to EUR 1.7 billion in 2020, with a strong contribution of residential, commercial and industrial sub-segments. The star performer is the residential segment that pushed us to make several upward revisions during the last 5 years, as permits consecutively broke all expectations.

Strong foundations

In 2020, the positive effects of the boom affected literally all construction segments, and the brewing activity continued even during the pandemic. Already in the second half of 2020, the situation stabilized, and investments were desperately waiting for a full normalization. Permit numbers recovered, land and home sales returned to pre-pandemic levels and none of the investors cancelled their construction start. The overall economy is a strong supporter of the property market and conditions have been improving year by year. Most foreign investments went into manufacturing, giving a strong foundation for a sustained economic growth in the coming period. During 2020, Serbia’s GDP fell only 1.5% compared with 2019, while exports and investments continued to grow. This means we can expect a strong rebound of the economy in 2021, where GDP is expected to grow between 5%-6%. Similar growth rates are expected in 2022, as well.

Multi-vector policies

By not being a member of the European Union, Serbia was unable to access EU development funds for stable financing of its transport and other civil infrastructure. For years, the regional infrastructure was neglected, until an old friend came to the rescue. In 2009 Serbia signed a strategic cooperation deal with China, which provided full financial and logistical support in infrastructure development. The first project started in 2011 and since then, projects Serbia contracted with China have been worth over EUR 10 billion, including motorways, high-speed railways, energy, and public utilities. The Sino-Serbian partnership has been growing by the years and beside preferential development funds, it now covers a wide cooperation in various interstate projects, from education to security. Chinese companies also invested several billion of euros in the Serbian industry, including mining, metallurgy, electric and home appliances, car parts, etc. We can expect this cooperation to deepen further in the coming years, with even larger-scale projects and investments on the horizon.

How much steam in this cycle?

This is not an ordinary construction cycle, at least not in its length, potency or context. Although, construction output levels were on their historical bottom when the cycle began, its size and distribution prove this is a farther-reaching process. Such a strong recovery in construction levels is indicating an economic shift, which could produce a sustained expansion in the coming years. It can be expected for Serbia to reposition itself as a leading regional economy, and construction outputs to continue breaking historical records. While some of the construction sub-segments will eventually mature and consolidate, the overall trend in total construction figures will maintain an upward direction for several more years. The huge and long-delayed civil-engineering projects will lead construction growth in the forecasts, but buildings shouldn’t fall too much behind. The basis for growth in the construction of buildings is also strong, but its trajectory will be less pronounced and more cyclical.

Ongoing expectations

Current forecasts are showing the cycle will continue until 2023, with a particularly strong performance of civil engineering. Major civil sub-segments will be roads and railways, but other transport infrastructure and energy will also likely break new records in the coming period. Building construction should decelerate its growth rates and even top this cycle in some segments, but the overall trend is to remain positive. We expect the residential segment to maintain its growth rates until 2023, while the non-residential one will probably consolidate in 2021 and return to growth in 2022. It is possible that this cycle can even surpass the current estimates in some scenarios. A lot of external factors can affect mid-term forecasts, so it still remains to be seen how it will all play out.

Housing stock and renewal ratio in Europe in the last decade: Turkey leading the way

Written by Bálint Parragi, ELTINGA-EECFA-BUILDECON

We have examined the relationship between the renewal ratio and the actual stock in Europe (across countries covered by EECFA and EUROCONSTRUCT) during the last decade (see figure below). The renewal ratio is the ratio of the newly built homes between 2011 and 2020 and the housing stock at the beginning of 2020.

EECFA covers the construction markets of Bulgaria, Croatia, Romania, Russia, Serbia, Slovenia, Turkey, and Ukraine. EUROCONSTRUCT covers the construction markets of Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, and the United Kingdom.

When analysing the data, we have found three different country groups:
(Click the heading named Group in the table above to rearrange the order)

  1. A heterogeneous group of countries with a building stock smaller than 10 million. There are some countries, mainly from Central-Eastern Europe and the Balkans with exceptionally low renewal ratios (lower than 5% during these ten years): Portugal, Bulgaria, Hungary, Slovenia, Croatia, and Serbia. Czechia and Romania also have renewal ratios very close to 5%. Except for Portugal, all countries in Western and Northern Europe within this first category have a higher renewal ratio: in Finland, Switzerland, and Austria, every tenth building was built during the last decade.
  2. This group consists of countries with a bigger building stock, but relatively low renewal ratios. Southern Europe (Italy and Spain), the United Kingdom, Germany, and Ukraine fall under this category. Only 3%-6% of their building stock was built during the 2010’s.
  3. This category comprises countries with the highest renewal ratios in the last ten years. Poland and France have similar building stock sizes to the ones in Ukraine and Germany, respectively, but their renewal ratio is significantly higher; around 11%. Poland is especially outstanding among the postsocialist countries with a bit more than 11% renewal ratios between 2011 and 2020, followed by Slovakia (8%). There are two absolute outliers; Turkey and Russia with the two highest renewal ratios: 28% and 15%, respectively, in 2011-2020. In Turkey, almost every third building is only just 10 years old or newer, and in Russia, it is every seventh. Russia has of course the largest building stock in Europe (almost 70 million buildings), but its great renewal ratio means that they built as many buildings in the last decade as there are in Romania in total. And Turkey built more buildings in the last ten years than Poland, Ukraine, Spain, the UK, and Italy combined.

Although in this piece renewal ratio is defined as newly built homes / building stock, it is always good to have in mind that not only new housing construction contributes to the renewal of the stock, but also renovation. In some countries, typically in Western Europe, its contribution to renewal is even higher than that of new construction. In our forecast reports you may find the development stories for both new and renovation types of works.