Press Release on EBI Construction Activity Report Hungary Q2 2023
Q2 brought an improvement over Q1 in the Activity-Start of EBI Construction Activity Report: between April and June construction works started in the value of HUF 754 billion in Hungary, a more than 30% increase over Q1. It was an expansion compared to H2 2022 as well. The rise against the previous quarter was visible even at constant price, although Activity-Start was still behind the quarterly figures of 2021 and H1 2022.
The value of started building constructions keeps registering a drop
In Q2, construction works started in building construction at an even lower value than in Q1, so Activity-Start has been decreasing for the third consecutive quarter. The value of started works was barely more than HUF 400 billion; it fell by 16% in Q2 over Q1. The lag is even bigger compared to the outstanding second quarters of 2021 and 2022. At constant price, the value of building construction works started in one quarter has not been this low since 2015.
The decrease at current price was typical for non-residential constructions. Multi-unit housing recorded a minimal improvement in Activity-Start, although the indicator here stayed very low. In non-residential, the total value of works started was nearly 20% lower in Q2 than in Q1. At constant price, it was in Q3 2016 when Activity-Start was lower than this value.
The biggest projects launched in Q2 this year were the Correctional Facility in Csenger, Inpark metalworking plant in Debrecen, Boysen electric car battery plant in Nyíregyháza, HelloParks Logistics Hall in Páty, the next building of Weerts Logistics Center, and several larger multi-unit residential projects.
EBI Construction Activity Report Hungary analyses the construction industry on a quarterly basis, including the volume of newly started construction works and the value of projects completed in each quarter in aggregate and by segment as well. It is prepared by Buildecon, Eltinga (creation of indicators and development of algorithms for aggregation) and iBuild (project research and project database). EBI Construction Activity Report Q2 2023 has been published and can be purchased at ebi@ibuild.info.
Civil Engineering Activity-Start sees a considerable expansion
The Q2 2023 Civil Engineering Activity-Start of EBI Construction Activity Report posted a more than 30% growth against the corresponding period a year earlier. And compared to Q3 and Q4 2022, as well as Q1 2023, the increase was exceptional. The last time Activity-Start in the segment was higher than this was in Q1 2022. In April-June 2023, the value was close to HUF 350 billion and the increase was noticeable even at constant price: in comparison with Q1 2023, the value of started construction works nearly quadrupled. But compared to previous years, this Activity-Start at constant price cannot be called an outlier.
Türkiye’s high inflation so far has continued to rise in the course of this year, given May’s election-fuelled wage increases and the state transfers to rebuild facilities in the aftermath of the February quakes. The new administration is exercising a conventional economic policy, but post-disaster reconstruction is estimated to cost EUR 100 billion and will require huge money allocations from the state this year and next.
Macroeconomic developments
Türkiye has seen a change in economic policy after the re-election of President Erdoğan on 28 May 2023. Mehmet Şimşek, the new Minister of Treasury and Finance, and Dr. Hafize Gaye Erkan, the new Governor of the Central Bank of Türkiye (CBT) adopted a return to conventional economic policies. The CBT stopped reducing the base rate, and in 3 successive months, it raised it from 8.5 base point level to 25. Bank interest rates for deposit accounts and credits grew, though they still have high real negative rates.
The Government’s lucrative policies in minimum wage and early retirement continued after the election with high pay rises for public sector employees. The enormously destructive earthquakes on 6 February 2023 in 11 provinces also raised the government’s financing obligations. These increases in money supply, coupled with the big rises in the exchange rate of foreign currencies against the Turkish Lira in 3 months after the election (36% in Euro) have led to an upward trend in the inflation rate. The yearly rise in the Consumer Price Index was 47.83%, monthly 9.49%, and in the Domestic Producer Price Index was 44.50% and 8.23%, respectively, at end July. The CBT revised its inflation forecast to about 59.5% by the end of 2023.
Building developments
The construction sector is responding to these macroeconomic developments differently in starts and completions. In Q2 2023, building construction permits rose by 43.83% quarterly and 25.6% yearly in total floor area, while completions declined by 16.6% quarterly and 28.6% yearly. House building had a similar trend in Q2 2023; construction permit-issued housing grew by 44.3% quarterly to 188,7 thousand and 43.8% yearly to 741,7 thousand dwelling units, whereas occupancy permits fell by 15.3% quarterly to 106,9 thousand and 16.6% yearly for 570,3 thousand dwelling units. The social housing project to produce about 253 thousand dwelling units by the Housing Development Administration (HDA) announced in Q4 2022 did not lead to that much increase in the start statistics.
Low-cost social housing (produced by the HDA and sold to households not owning a house with affordable mortgage loans) and a commercial housing project by a private developer under construction in Ankara. Photo by Prof. Ali Türel, EECFA Türkiye
Among building types other than housing, construction permits for hotels, offices and industrial buildings had a quarterly and yearly positive rate of change. Occupancy permits were negative, only hotel buildings’ quarterly change and industrial buildings’ yearly change saw positive trends.
Due to high real estate prices under the effect of negative real interest rates, there seems to be a tendency to start building development, but builders may be unsure about the marketing prospects and profitability of their projects as real incomes have been dropping owing to continued inflation since 2018.
Forecast for the Turkish construction market is available in the EECFA Forecast Report. EECFA conducts research on the construction markets of 8 Eastern-European countries. Orders and sample report: eecfa.com.
Housing prices, construction cost, housing transactions
This June Housing Price Index for new buildings went up by 95.8% yearly as the national average (it was 90% in Istanbul, 102.3% in Ankara and 99% in İzmir). Since residential construction costs rose by 51.8% in June 2023 like-for-like, it implies a 44-percentage point difference between housing price and construction cost. Such a great spread between housing prices and construction costs should indicate a housing deficit, augmented by the 4,9 million registered refugees mainly from Syria and many unregistered migrants from other countries. The fewer completions than starts (when the profit margin is high) can be explained by the affordability problem under inflationary conditions.
Housing transactions between January and July 2023 were 17.7% less than in the same 7 months of 2022. Mortgaged sales were 20.2% in January-July 2023, dropping by 28.2% like-for-like. Affordability for mortgage loan repayments significantly decreased when mortgage interest rates rose to 35%/year. State-owned banks provide mortgage loans at between 0.69-0.99% monthly rates to people who are not homeowners, but the total number of these loans did not greatly affect the share of mortgaged transactions.
Rebuilding earthquake-damaged buildings and infrastructure
The quakes this February in the southeast regions must be dealt with under the Law on Natural Disasters, which defines precautionary measures, government obligations for post-disaster recovery, mitigation activities and rebuilding damaged buildings. With the organizations established for this purpose, the Government has been undertaking activities in the earthquake-hit 11 provinces since the quakes occurred. The Law requires the reconstruction of collapsed and heavily damaged buildings, both housing and workplaces, with financial commitments by the Government. The money spent becomes an interest-free loan, and owners of rebuilt properties begin to repay 2 years after they move in and in 20 years. Because of prolonged high inflation, interest-free loans serve as an important real gain for those people.
As per Mehmet Özhaseki, the Minister of Environment, Urbanisation and Climate Change (the organization responsible for rebuilding collapsed and pulled down heavily damaged buildings), as of 7 July 2023 in 11 provinces 311 thousand buildings with 872 thousand independent units collapsed or were pulled down. The total number of urban and rural housing to be rebuilt is 680 thousand. They planned to rebuild 518 thousand dwelling units in urban settlements and 162 thousand housing in rural areas with stables. About 180 thousand dwelling units and 6 thousand workplaces are currently under construction. They expect to complete the construction of 319 thousand dwelling units within one year. They also offer financial assistance rather than building a home, comprised of a 500.000 TL (17.241 Euro at 19 TL/Euro exchange rate) grant and 500.000 TL interest-free credit to the eligible people for state support, to be repaid in 10 years. Similar offers are also made to all workplaces.
Tentative estimates for the reconstruction are EUR 100 billion. With the existing 253 thousand social housing under construction, there will be big financial requirements from the national budget for public projects this year and next. Demand for construction materials and qualified labour will be high if we add the construction of all types of commercial buildings to state housing projects.
Written by Tünde Tancsics and Dóra Barát – ELTINGA-EECFA Research
The European Commission’s 2023 Spring economic forecast for EECFA countries was showing some changes in outlook in comparison with Autumn 2022.Economic growth prospects improved in most countries in Spring 2023, excluding Serbia where growth expectations slightly fell against Autumn 2022. The EU and the Euro area growth prospects were outperformed in all countries surveyed – apart from Russia.
Projected economic growth in 2023-2024 was positive in all countries, although to varying degrees. It was over 3% in Türkiye and Romania (3.75% and 3.35%, respectively), but also above 2% in Serbia (2.45%) despite the downturn in expectations since Autumn 2022. GDP growth in other EECFA countries and Hungary (which is a Euroconstruct member) was projected to be between 1.5% and 2%, above both the EU and the Euro area averages of 1.35%. In Russia, growth forecast turned from negative to positive, but it was still close to zero: at just 0.2%.
Gross fixed capital formation data shows that growth projections for 2023-2024 were rather mixed, both in terms of direction and in the magnitude of change. Expected GFCF growth in Spring 2023 was by far the highest in Romania (7.5%), while in the Euroconstruct member Hungary, it was anticipated to decrease by 0.7%; a larger decline than the 0.2% contraction estimated in Autumn 2022. In Russia, a 0.4% growth was forecasted in Spring 2023, instead of the drop projected in Autumn 2022. In case of Türkiye, Slovenia, Croatia, and Bulgaria, expected GFCF growth was around 3%-4%. It doubled in Türkiye and quadrupled in Slovenia, while in Bulgaria it fell by less than half. In Serbia, GFCF prospects were similar to those of the EU and the Euro area, but slightly higher (1.7%).
In Slovenia, predicted construction growth rate almost doubled to close to 6% from Autumn 2022 to Spring 2023. For Romania and Croatia, projections were 6.55% and 3.05%, respectably. In Bulgaria and Hungary, the outlook significantly deteriorated. The same was true for the EU and the Euro area where expected GFCF into construction growth was barely above zero. Thus, the surveyed EU member countries outperformed the projected construction growth in both the EU and the Euro area. Hungary was the only exception where a decline was anticipated.
This above is the European Commission’s opinion. EECFA’s opinion, on Eastern European construction markets and forecast on submarket and segment level can be found in the latest EECFA reports. Sample report and order: eecfa.com. Türkiye and Croatia could be top performer, Romania, Russia and Serbia are foreseen to shrink.
Our approach is different from that of the Commission, as we provide forecast for each segment of construction. That is, we have a bottom-up approach, where forecast is computed separately for residential, office, retail, industrial buildings, roads, railways, utility etc. segments.
In Southeast Europe the forecast is mixed across the board. For this year, EECFA expects expansion in all but one of its five small countries’ construction markets (Romania). For next year, Serbia will also likely join by turning into negative territory, while in 2025 Croatia is forecasted to be the only country to register a drop, albeit a modest one.
In the Eastern European region of EECFA, construction forecast up to 2025 is positive for Türkiye and Ukraine, while in Russia it seems gloomy all the way. In Türkiye, the reconstruction after the February quakes is the key driver, while in Ukraine, a lot will depend on how fast and how soon the reconstruction of the damaged stock can be carried out. EECFA has attempted to make its first forecast for Ukrainian construction since the war began.
Construction up to 2025 in Southeast Europe
In Bulgaria, the new coalition government can mitigate the expected economic slowdown in 2023 by speeding the absorption of EU programs and the implementation of Bulgaria’s Recovery and Resilience Plan. Total construction output is estimated to achieve real growth in 2023. Factors in favor of this forecast are the strong tailwind in residential construction, a slight growth in non-residential and expectation for an improved performance in civil engineering.
Neither inflation nor population decline could stop Croatian construction output’s growth in 2022, and 2023 looks likely to follow suit. Figures for some Buildings sectors, e.g., Retail and wholesale and Residential, contain surprises. Performance of certain Civil engineering sectors was unexpectedly strong due to events that may be one-off or instead portend a trend.
High construction cost is a major factor behind the expected downturn in Romanian construction this year and next, but the market should recover by 2025. EU funding from the 2013-2020 programs has a spending deadline of 31 December 2023, and with the new 2021-2027 programs still in early phases of implementation, a gap is expected in output while the switch takes place. Also, 2024 is a quadruple election year for Romania (local, parliamentary, presidential, European parliament), bringing new challenges for construction as power transition can bring new priorities and strategies.
Serbia is feeling the consequences of the economic slowdown in the European Union, but so far it seems it will avoid recession in the short term. Construction outputs are also showing a mixed picture with building construction suffering contraction in volumes, while civil engineering will likely break new record highs in 2023. And even though there is a lot of uncertainty, the high level of investments is still maintaining positive economic growth and strong employment figures.
The Slovenian construction industry continues to exhibit resilience amidst a thriving economy. While challenges such as inflation and higher interest rates pose hurdles for the residential construction subsector, non-residential and civil engineering are benefiting from increased public investment. By capitalizing on these opportunities, the industry is well-positioned to contribute to the country’s ongoing economic growth and development.
Outlook in the Eastern European construction markets of EECFA
Last year the Russian economy showed relatively high resilience to the negative effects of sanctions. One growth point was construction that showed much better-than-expected dynamics. Russia’s ‘Turn to the East’ notion in the new external political-economic conditions requires intensive construction of infrastructure objects, which fueled growth in construction in 2022. Going forward, the market will likely show decline driven by negative trends in residential and some downturn in civil engineering on the back of a high base in 2022.
After the elections held on 14 and 28 May 2023 in Türkiye, the value of Lira has been falling, creating financing difficulties for contracted construction projects using imported materials. In Q1, the economy accelerated annually owing to strong domestic demand and low interest rates, while construction continued to regain senses. The two earthquakes in February in 11 provinces caused massive human casualties and damages to over 300 000 buildings and infrastructural facilities. As the Government must restore buildings and infrastructure, growth in construction will speed up in the years to come.
If hostilities end in 2023 and Ukraine’s territorial integrity is preserved, post-war reconstruction will cost several hundreds of billions of US dollars according to various recovery plans. About 3 million Ukrainians saw their homes destroyed and about a third of the infrastructure is damaged. The war caused widespread damage to the construction sector and full recovery is only expected after the war ends. Now there is a partial construction of destroyed or damaged residential, non-residential, and critical infrastructure facilities in relatively safe areas with the help of compensation programs at state and local levels and mortgage programs. A key challenge though is the acute shortage of building materials (glass, cement, asbestos, and gypsum, among others). Resumption in construction will improve the country’s post-war economy, provide jobs, increase the production of materials and open new enterprises.
The EECFA 2023 Summer Construction Forecast Reports up to 2025 have been released and can be purchased on eecfa.com where a sample report can also be viewed.
Press Release on EBI Construction Activity Report Hungary Q1 2023
Q1 2023 saw very low Activity-Start in the Hungarian construction industry with only HUF 374 billion worth of construction works started, according to the latest EBI Construction Activity Report. Such a low value of construction start within three months has not been seen since 2016. Compared to the outlier Q1 2022, Activity-Start fell by almost a quarter, but compared to the first three months of 2021, the drop was more than 40%. The value of started works seems particularly modest and the extent of falloff particularly large if we consider that the sector has recently experienced massive price changes. At constant prices, it was only in 2012 when a lower volume of construction works started during three months, and the drop against Q1 2021 already surpasses 60% at constant prices.
EBI Construction Activity Report Hungary analyses the construction industry on a quarterly basis, including the volume of newly started construction works and the value of projects completed in each quarter in aggregate and by segment as well. It is prepared by Buildecon, Eltinga (creation of indicators and development of algorithms for aggregation) and iBuild (project research and project database). EBI Construction Activity Report Q1 2023 has been published and can be purchased at ebi@ibuild.info.
Decline not sparing building construction work starts
The value of started building construction projects did not reach HUF 300 billion in the first three months of 2023. It has been one of the most modest quarters in recent years and last time Q2, Q3, and Q4 2020 registered construction starts of a similar value. The decrease in Activity-Start against the first quarters of 2021 and 2022 was 42%-48%. At constant prices, the drop is even more visible: such low numbers were last seen in the segment in 2013-2014.
Both residential and non-residential buildings recorded a decline in Activity-Start. In the former, the value of started construction works stayed below HUF 40 billion, while in the latter, Activity-Start was around HUF 260 billion. At constant prices, these numbers represented the 2014-2015 volumes.
Biggest building construction projects launched in Q1 2023 included several logistics centres like Robert Bosch Power Tool logistics centre in Miskolc, BMW logistics centre in Debrecen, Waberers centre in Ecser, or Blister-Labor-Telemedicina centre in Bicske. The construction of several factories and warehouses also started such as Schneider Electric’s Duna Smart Power System smart factory in Dunavecse, Phase 2 of the Mercedes-Benz body part production plant and Phase 2 of its assembly plant in Kecskemét; another phase of Nestlé Purina pet food production plant in Bük or Rheinmetail ammunition factory in Várpalota. Two large hotel construction projects also began: Sofitel Budapest Chain Bridge Hotel and Movenpick Palace Hotel Budapest.
Few civil engineering works began
Civil engineering Activity-Start continued to decrease after Q2, Q3 and Q4 2022. The total value of started civil engineering projects did not reach HUF 80 billion (the lowest value since 2016), and at constant prices the volume has never been so low in any quarter since 2012.
In road and railway construction, projects started in the value of only about HUF 20 billion, while non-road and non-railway constructions saw an Activity-Start of about HUF 60 billion, roughly the level of Q3-Q4 2021 and Q1 2022.
In Q1 2023 hardly any civil engineering project was among the largest ones. Major projects included the recultivation of the Oroszlány tailings site, the Budapest Freeport project, and the development of Hungaroring’s utility network.
Northern Great Plain ahead of Budapest
Looking at the last four quarters, the highest value of construction projects started in the Northern Great Plain region with a share of roughly 23%. Budapest saw the second highest value of construction starts, while Pest County came third. With this, around 37% of the national Activity-Start was realized in Central Hungary. About 40% of started construction works belonged to Eastern Hungary, while slightly more than 20% of the Activity-Start was connected to Western Hungary with 5% of Activity-Start in Southern Transdanubia.
Hardly any multi-unit housing project-start
The first three months of this year registered very few multi-unit housing project starts. The last time the value of Activity-Start was lower than the current one was in Q3 2020. Before that only the quarters of 2015 saw a similar amount. The drop is even more significant at constant prices: the Q1 2023 level recalls the 2014 volume. In the last quarter of last year several developers decided to launch a new phase of their projects because of which, despite unfavourable market conditions, Activity-Start increased compared to previous quarters. That is why it was expected that the following three months would not be the time for major construction starts. Yet, the two quarters together reported weak figures.
Written by Dr Aleš Pustovrh – Bogatin, EECFA Slovenia
Residential construction boom in Slovenia continues and is set to peak this year. Nevertheless, with increasing interest rates on mortgage loans, residential construction will be facing significantly lower demand in the second half of 2023.
Slovenia continued to see strong economic growth in 2022, up by 5.4%, beating the expectations at the start of the year. But this growth greatly slowed down in late 2022 and early 2023 as increasing interest rates and high inflation started to impact disposable income. This has not resulted in slower construction growth; both civil engineering and non-residential construction greatly expanded in 2022 in nominal terms. The level of construction activity in these two subsectors was still quite close to the 2015 average (even slightly below that average in non-residential construction). But most of the nominal growth was the result of higher inflation and thus, higher construction costs.
In residential construction, the situation is completely different. The level of residential construction was 3.3 times higher in 2021 than in 2015 in real terms (and 4 times higher in nominal terms). And in 2022 it was a staggering 5.35 times higher in real terms than in 2015 (7.8 times higher in nominal terms). At the beginning of 2023 it continued to grow by 46% annually, which is unsustainable.
Vurnikova hisa, Miklosiceva cesta, Ljubljana by Pavol Svantner unsplash.com
While demand for dwellings has likely exceeded demand in the post-COVID boom of 2021 and 2022, supply has been catching up lately and more and more dwellings have been completed. The total value of sold real estate in 2015 was estimated at EUR 1.8 billion, while in 2021 at EUR 2.8 billion[1]. Approximately 10000 dwellings are sold in Slovenia on average every year, with around 3000 in Ljubljana. At least that many are estimated to be currently under construction in Ljubljana alone. These will enter the market in 2023 and 2024, but potential customers for these dwellings are facing elevated interest rates on mortgage loans. As per recent calculations, monthly loan repayment for a EUR 200,000 loan in Slovenia has increased by EUR 400-500, making potential customers think twice before even applying for a loan. This is already evident in the real estate prices in Ljubljana that peaked in Q1 2022 and have not increased since[2], even though the overall inflation rate was almost 10% in 2022.
Forecast for the Slovenian construction market is available in the EECFA Forecast Report. EECFA conducts research on the construction markets of 8 Eastern-European countries. Orders and sample report: eecfa.com.
That means that skyrocketing housing construction in Slovenia, especially in its capital city, will be facing significantly lower demand than it was expected when construction started in 2021 and 2022. And even though residential construction growth rate is still very high, by most estimations, demand will considerably decline in the second half of 2023. If residential construction stays at the same level as in 2022, a lot will depend on public schemes for non-profit dwellings starting to contribute to total residential construction output. Private housing construction will most likely complete the projects that were started but will be reluctant to start new ones. In Q1 2023, 12% fewer building permits were issued for dwellings than a year ago[3].
Residential construction is set to reach its peak output in the first half of 2023. This will impact overall construction too, because this segment is more important than non-residential or civil engineering. It seems that residential construction boom in Slovenia will reach its peak in 2023, but the real question is how fast it will decrease in the future.
Written by Dejan Krajinović, Beobuild Core d.o.o., EECFA Serbia
High inflation and rising interest rates seem to have bitten in overall consumption. And although Serbia is likely to avoid recession in the short run, its real GDP growth is estimated to be a moderate 2%-4% this year and next with a downside risk being the looming recession in the EU. The rental housing market has been supported by the Russian and Ukrainian citizens settling down in Serbia, keeping rent rates high. Housing construction is still strong and although the volumes in building construction are already consolidating, big infrastructure projects could sustain civil engineering on all-high levels in mid-term.
Property market developments
Macroeconomic conditions in Serbia have been under significant stress for a while now, and continuously strong inflation has already produced a major drop in overall consumption. The real estate market was expected to start cooling down in 2022, but instead, there was another record year in both volume and the number of transactions. Unlike real estate markets in a number of European countries, where under the influence of interest rates there was a considerable slowdown and drop in prices, the level of real estate prices in Serbia recorded a strong growth during 2022. With lot of uncertainty on the horizon, home permits have already started pulling back in 2023, but this is still not visible in property prices. Demand stayed stronger than supply, and monetary policies of the ECB and the National Bank of Serbia have had little effect on the market so far.
Photo – Beobuild Core d.o.o.
During the last twelve months the National Bank of Serbia significantly tightened its monetary policy by increasing reference interest rates from 1.5% to 6%, as of April 2023. Since inflation in Serbia is in large part imported through energy and food costs, rising interest rates could start suffocating the economy, so the National Bank will have to consider diversifying its means of fighting the inflation. At the same time, Euro-indexed home loans also reached similar interest rate levels of around 6% in Q1 2023. While the total number of transactions grew in 2022, the share of mortgages decreased from 13% in 2021 to just 11% of all property transactions in 2022. Home market has a bit higher exposure to loans, making some 20% of all transactions supported by mortgages, but interest rate hikes barely affected overall numbers. During the Q1 2023 similar trends continued, where prices continued to grow and the scale of transactions only fell slightly in number, but not in value.
Beside strong tourism figures, there has been some 200.000 residence and working permits issued for citizens of Russia and Ukraine since the conflict started – an unexpected support for the home market and accommodation. In March 2023, 10.000 residence permits and 5.000 working permits were issued: a monthly record so far. The newly arrived have certainly been felt in the renting part of the market as monthly rents hit the roof during H2 2022. The situation stabilized during Q1 2023, but the small renting capacity will keep prices high for the time being. Those who decide to stay and build a life in Serbia will eventually enter the buyer market, and the majority is highly educated and employed.
Expectations in economy and construction
Although employment still stands strong in Serbia, as in many other European countries, it will inevitably feel the economic shift and face challenges in due course. Particularly if current international conditions and trading relations stay severe or even worsen in the coming period. So far, it seems that Serbia will most probably avoid recession in short term, but real GDP growth will relatively be weak, ranging between 2%-4% in 2023 and 2024. Employment continued to grow in 2022 and Q1 2023, so the situation is still stable, but new challenges could emerge in H2 2023 and later in 2024. The worsening economic situation and looming recession in the EU is the main risk for the Serbian economy, as the EU is an important source of investments and a prime export destination.
In order to mitigate the expected lower investment activity of the private sector, the Serbian government will certainly push for the realization of public investments. The ongoing campaign of large-scale infrastructure projects should continue in most civil engineering segments, including roads, railroads and utilities, so this should sustain civil construction on record levels in mid-term. The construction of buildings and its volume will be challenged far more, but the good news is that FDI inflow to real estate continues to be very strong in segments like industrial and storage, office or residential. The volumes in building construction are already consolidating, but the picture is still mixed in different segments. The residential market is still not showing weakness and construction activity here remains strong. Also, the Serbian market has very low vacancies in commercial and office segments as a healthy parameter and strong foundation in the current economic environment.
At the moment there are still significant risks related to the scenarios of a prolonged and escalating economic crisis, but there is still hope the worst can be avoided.
Forecast for the Serbian construction market is available in the EECFA Forecast Report. EECFA conducts research on the construction markets of 8 Eastern-European countries. For orders and sample report, go to eecfa.com.
Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatia members
The composition of Croatia’s construction output is changing. While the residential segment may soon experience a slowdown, health-related construction – public and private renovations and new builds alike – is seeing a considerable boom.
Photo by Hajnalka Hurta
Construction continues strong in Croatia. The country’s State Bureau of Statistics announced earlier this month that construction permits issued in January 2023 were up 19.1% in number and 40.5% in value compared to January 2022. While permitting in Croatia can vary significantly from month to month, these data certainly suggest that the sector remains vibrant. So do the Bureau’s statistics for 2022 construction volume versus that for 2021. According to the Bureau, the value of completed construction work carried out by business entities in Croatia with 20 or more employees increased by 12.9% in 2022 compared to 2021, while the value of new orders increased by 27.1%.
But while construction as a whole remains robust, a number of sectors are weakening as changes in the composition of construction volume continue. Where once the tide of construction activity raised all sector’s boats, airport and highway construction has now given way to rail on the civil engineering side. On the buildings side, construction of residences may at last be cooling down from its white-hot heat of the last few years. The Statistics Bureau’s recent announcement of a 9.8% decline between January 2022 and January 2023 in the number of apartments for which permit applications were submitted suggests this.
Current forecast for Croatia is available in the EECFA Construction Forecast Report. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries. For orders and sample report:eecfa.com
So, paradoxically, does the 20.2% rise in the average price of new apartments between 2021 and 2022. Inflation clearly accounts for a substantial part of this increase. And supply may have shifted to higher priced units. But it nonetheless appears that a significant increase in real prices for equivalent apartments has likely occurred. In this regard, the Governor of the Croatian National Bank recently pointed out that the volume of residential property sales is decreasing, something that he notes usually precedes a fall in prices. Tighter mortgage conditions and higher interest rates also likely played a role.
On the other hand, a type of construction is that is booming but not getting the attention that it deserves is construction of healthcare facilities. Both public and private facilities have been and are being built in unprecedented numbers. The subsector’s strength has come from both public and private projects and from both renovations and new builds. This despite a push, so far not highly successful, on the part of the Croatian government to, in the name of efficiency, consolidate a number of healthcare facilities that now exist in low population localities.
On the public side, significant construction has been ongoing for some time now. Among the larger projects have been the consolidation and expansion of the Rijeka Clinical Hospital Center, a multi-year, more-than-hundred-fifty-million euro project that is now in its third phase. This project includes the Hospital for Mother and Child, a new facility to consolidate gynecology, obstetrics and pediatric facilities previously housed in outdated facilities in two different towns. In Zagreb, projects completed or already underway include the total reconstruction of the city’s Clinic for Infectious Diseases and the renovation of the Zagreb Clinical Hospital Center’s Jordanovac, Rebro and Petrova facilities, the Sisters of Mercy Clinical Hospital Center, the Merkur Clinical Hospital and the Children’s Hospital. Elsewhere, a new, 100-million-euro General Hospital was built in Pula, and various smaller, regional facilities were upgraded, including in Bjelovar and Varazdin.
While a good deal of Croatia’s public medical facility construction has been completed, much still remains to be undertaken. In addition to further upgrades to current facilities nationwide and the possible construction of a National Children’s Hospital in Zagreb, considerable work remains to be done to repair the damage caused by the two earthquakes that struck Croatia in 2020, including significant reconstruction at Zagreb’s Faculty of Medicine. The government is also pushing health tourism, with a minimum of EUR 61 million to be invested in public and private projects in this field.
Private healthcare construction projects are also proliferating. Among those recently built are Akromion’s 10,000 m2 hospital for orthopedics and trauma and Sveta Katarina’s 4,000 m2 facility, both in Zagreb. A variety of other facilities are in the planning stages, although their exact characteristics, e.g., as to size and in some cases even nature, remain either confidential or as yet undecided. The government’s increased focus on and funding of healthcare tourism is likely to significantly increase activity in the healthcare subsector.
As the Croatian economy evolves, particularly as it responds to Croatia’s entry into the Schengen Area and the Eurozone, more changes in the composition of construction volume must be expected. As an example, it is claimed that already one in three Croatian residences is bought by a foreigner. And the country seems to at last be being discovered as a manufacturing location, with Jabil, a major US-based manufacturer, building a large facility in Osijek. The consequences of these changes for total volume are hard to predict, but are certain to occur.
Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania
This question is quite often asked both by those looking to buy a home and by those building homes. The former are hoping for prices to come down, while the latter are worried that prices will come down. Whereas a definitive answer cannot be given, Dr. Sebastian Sipos-Gug, EECFA’s researcher on Romania, has looked at several factors that might tip the balance of the residential market, one way or the other.
For a more in-depth analysis and forecast you can purchase the latest EECFA Romania Construction Forecast Report at www.eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Romania.
Where we are now
Despite a rocky start, real estate sales in 2022 were comparable to those of 2021 (+0.2%, source: ANCPI) and so, at least from this point of view, the market seems to be relatively stable, and could tip either way. In a regional view, the northern half of the country was more likely to see a drop in transactions, and Bucharest remains the most active market, with 1 in 5 real estate sales registered in Romania in 2022 taking place in the capital city.
Real estate sales in 2022 as a percentage of the 2021 volumes (Source: ANCPI)
Looking at the longer-term trends, the number of sales in 2022 were 29% higher than those of 2019, but still below the peaks of 2015 (-21%) and 2008 (-31%), and thus it would seem like we are approaching another turning point in the market cycle.
From a house price perspective, there are some signals that asking prices started to go down, however, as of Q3 2022, this didn’t translate in a decrease in official transaction prices. Instead, prices kept rising, albeit their growth rate has somewhat slowed down.
Quarterly indices of Inflation, Rent costs and House prices (Source: Eurostat)
Residential real estate as an investment vehicle
While no official data is available, anecdotally a significant share of newly built homes have been purchased as an investment asset, rather than to be lived in by the owner. Between 2015 and 2019 the increase in prices outperformed inflation and rent growth. Coupled with a low reference interest rate, which made loans cheap and made savings offer lower returns than inflation rate, many retail investors turned to real-estate, with residential being the most accessible market.
As inflation soared in 2022 (+13.8% yearly average), residential prices failed to follow. With inflation expected to remain high in 2023 and 2024 (+10.8% and +5.7%, according to the CNP forecasts, or +9.7% and +5.5% according to the EC forecast), the appeal of investing in residential properties would diminish, pushing down demand, transactions and prices and thus potentially leading to a negative feedback loop. Since real-estate has traditionally been held as an inflation hedge, prices would have to drop quite significantly to trigger this type of loop, a scenario that many feel unlikely at the moment.
Home affordability
Most home purchasers are looking for a place to live, and for them affordability is a very important factor. A useful estimation is that of comparing average prices to the average income, an indicator we looked at in previous blog posts (here, and here) as well. While in 2007 the average monthly wage could buy you 0.20sqm in an average sized two-room flat, this steadily grew to around 0.50sqm in 2020. However, it declined to 0.45sqm in 2022, making homes slightly less affordable for the average worker.
Home affordability – what useful area in an average two-room apartment would the average monthly wage buy you? (Source: own calculations based on data from NSI and imobiliare.ro)
To add to this, rising interest rates for mortgage loans make it even harder to buy a home. In 2022 there were 8 hikes to the National Bank’s reference interest rate, that climbed to 6.75% in December, up from 2% in January 2022. This translated into a near doubling (+82%) of interest rates for new housing loans, and they will remain high as long as the National Bank keeps reference rates up. As inflation subsides, cheaper loans might be on the horizon with a positive impact on demand for residential real-estate for both housing and investment purposes.
Press Release on EBI Construction Activity Report Hungary Q4 2022
The latest EBI Construction Activity Report has found that after the weak Q3 2022, Q4 2022 saw a slight nominal expansion in Activity-Start in Hungarian construction. Nonetheless, the value of started construction works was still very low; between October and December 2022 they totalled roughly HUF 650 billion.
This time, though, for better comparability, the analysts of EBI Construction Activity Report also looked at the development of Activity-Start in Q4 2022 at constant prices. This shows that Q4 witnessed a considerably lower construction value, a bit more than Q3 (the negative record in recent years). Yet, whole-year-figures were high thanks to the higher Activity-Start in the first two quarters of 2022 and projects entered construction on more than HUF 3600 billion. Although it was a new record at current prices, it did not approach the highest values of 2017 and 2018 at constant prices and was at the level of 2019 and 2021. Annual change compared to 2021 at current prices was about +21%, while at constant prices it meant a drop of 0.6%.
EBI Construction Activity Report Hungary analyses the construction industry on a quarterly basis, including the volume of newly started construction works and the value of projects completed in each quarter in aggregate and by segment as well. It is prepared by Buildecon, Eltinga (creation of indicators and development of algorithms for aggregation) and iBuild (project research and project database). The EBI Construction Activity Report Q4 2022 can be purchased at ebi@ibuild.info.
Expansion in value of started building construction works
The modest rise in Activity-Start at current prices was mostly coming from the expansion of building construction with the value of started construction works being HUF 500 billion in Q4 2022. Overall, the entire 2022 brought high numbers. Projects worth more than HUF 2000 billion entered implementation – the highest ever registered.
In Q4 the improvement over Q3 was evident in building construction even at constant prices. But the value of started works, except for 2020, was lower than the quarterly values of the past years. At constant prices, the Activity-Start indicator dropped during 2022 (-16.8%) and was roughly at the level of 2019. The better last three months were also typical for multi-unit housing and non-residential buildings, whether we look at current or constant prices.
In 2022, non-residential construction works were launched at a value of more than HUF 1800 billion, the highest amount so far. Thanks to the good first half of the year, even at constant prices, last year was considered a strong year: constant-price Activity Start of EBI Construction Activity Report was the third highest after 2018 and 2021.
Building construction projects launched in Q4 2022 included the CATL battery factory, the BMW plant, and the EcoPro BM electric battery cathode manufacturing plant in Debrecen. Construction also began on the CTP warehouses in Szigetszentmiklós, the University of Veterinary Medicine and the Siemens Energy M2B gas and steam turbine parts manufacturing plant in Budapest, as well as the logistics hall of HelloParks in Fót.
