Written by Sergii Zapototskyi – UVECON, EECFA Ukraine
The full-scale war in Ukraine has been going on for more than a year and a half. People are dying, cities are being shelled. The real consequences are now difficult to calculate, but even available estimates are huge. And the construction market is facing rising construction costs, shortages of building material and skilled labour.
Documented damages
As of 1 September 2023, direct documented damage to Ukraine’s infrastructure due to the full-scale Russian invasion amounted to around USD 151.2 billion (at replacement cost):
- Housing losses remain the largest share of total direct damage (USD 55.9bln). In total, about 167,200 homes were destroyed or damaged (of which 147,800 private houses, 19,100 apartment buildings) mostly in Donetsk, Kyiv, Lugansk, Kharkov, Nikolaev, Chernigov, Kherson and Zaporozhye regions.
- Infrastructure and industry, as well as enterprises came second and third in terms of losses (USD 36.6bln and USD 11.4bln, respectively). 18 airports and civilian airfields, at least 344 bridges and bridge crossings, and more than 25,000 km of state and local highways and public roads have been damaged so far. And at least 426 large and medium-sized private and state-owned production facilities were damaged or destroyed because of the war.
- Education buildings are also hard hit (USD 10.1bln in damage). The number of damaged and destroyed educational facilities already exceeds 3,500 (more than 1,700 secondary, more than 1,000 preschool, and 586 higher education institutions). Most destroyed and damaged buildings are in Donetsk, Kharkov, Kherson, Nikolaev, Zaporozhye and Kyiv regions.
- Losses also continue to grow in healthcare buildings (USD 2.9bln). In total, 1,223 medical institutions were destroyed or damaged, including 384 hospitals and 352 outpatient clinics.
The construction market during the war
With the full-scale invasion, almost all developers suspended work and many of them in the residential and commercial sectors have not yet resumed it yet or some work at a minimum level. According to market analysts, out of 90% of sites that were supposed to resume construction after 24 February 2022, only 50% have done so now. At the same time, barely a third of companies have acceptable construction rates. Construction cost has already grown by 37% since the beginning of 2023, pushing up the average cost per square meter. The main factors behind the decline in construction were physical danger, a major increase in exchange rates and high inflation, which massively reduced the purchasing power of Ukrainians. Serious obstacles also arose with logistics, and due to the suspension of construction work and interruptions in supply, demand for metal structures collapsed. And after Russia destroyed two metallurgical giants, Azovstal and MMKI (Mariupol Metallurgical Plant), the market faced a shortage of rolled metal products. The destruction of some industrial enterprises added to the problems, and at end 2022, the market of metal structures in Ukraine sank by 55%-65%.
In October-December 2022, construction companies faced a new challenge: they had to adapt to power outage schedules or buy powerful generators to ensure uninterrupted construction. Most developers found it more practical to suspend construction, which also contributed to declining construction volumes. The most serious problem though in many regions were the massive rocket and artillery attacks. Thus, in 2022 the total area of completed housing was 7.1 million sqm, 38% less than in 2021 (11.4 million sqm). Last year, as per Ukrsat, the lion’s share of housing was put into operation in the western regions, mainly due to security (residents wanted to escape from the war).
Now the construction market is facing the following challenges:
- There is a decrease in demand and an increase in construction costs.
- Many building material plants were located in the east and many have been destroyed or suspended, thus domestic building material production has slumped.
- Main logistic corridors and ports are still not working and alternative routes are not yet able to fully cover the deficit. The expected return of the excise tax on fuel will lead to an even greater increase in logistic costs.
- Ukraine is facing a shortage of skilled labour. There are fewer quality graduates from Ukrainian universities, and students are leaving. Students studying abroad are in no hurry to return to a country at war, so they obtain jobs there. Also, many skilled specialists joined the armed forces, or retrained due to the drop in construction volumes, or went abroad.
When the war ends, a lot will have to be built and restored. Ukraine has lost more than 170 million sqm of housing and it is clear that the market will not be able to cope with such recovery volumes on its own. The level of demand will largely depend on the course of the war (damage caused), the expected liberation of Ukrainian territories, the volume and consistency of international financial assistance (mainly to cover the huge expenses of the state budget), and the general economic situation. And once the urban planning reform (to make the market transparent) is completed, business processes in development, primarily in financing housing construction, may significantly change. Also, in the primary housing market there may be a shift to quality, safety, energy efficiency and functionality. When the war ends, residential complexes and serviced apartments in the live-work-play format may become priority (built according to new ecological, energy-saving, and functional standards with a high degree of safety).
To obtain the EECFA Forecast Report Ukraine and to view a sample report, please visit eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Ukraine.