What happens to Ukraine’s construction market amid the war?

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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.

Izyum, Kharkiv region, City Hospital. Photo by Sergii Zapototskyi

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.
Izyum, Kharkiv region, multi-storey buildings. Photo by Sergii Zapototskyi

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%.

Kupyansk, Kharkiv region, factory. Photo by Sergii Zapototskyi

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.

Bulgaria’s RRP revisited: slow progress, downsized and removed projects, concerns over timely implementation

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Written by Yasen Georgiev – EPI, EECFA Bulgaria

In our post about a year ago we wrote about the opportunities the RRF could bring to Bulgarian construction. After months of no updates, September and October this year brought news for the future prospects of Bulgaria’s Recovery and Resilience Plan (RRP). In late September 2023 Bulgaria’s government submitted a modified version of the RRP to the European Commission (EC), whereas in early October the country submitted in Brussels its second payment request worth €724mln.

Main government buildings Sofia, Bulgaria. Source: Jack Krier, unsplash.com

The modified version, which still needs to be approved by the EC, comes to meet the respective regulation on EU level that grants allocation for all member states are to be updated in June 2022 based on each country’s post-pandemic recovery performance. Since Bulgaria registered a comparatively better economic outcome in 2020 and 2021 than initially expected, the maximum grant allocation under the RRP was reduced by €580mln (from €6.27bln to €5.69bln).

In order to align the RRP with this downward revision, the government proposed a modification of the plan. It concerns 17 projects included in the original version of the plan, some of them extensive construction works.

Notable downsized projects are those linked to:

  • building national infrastructure for storage of electricity from renewables (decrease by around €400mln to €400mln); 
  • modernisation of hospital facilities (decrease by around €80.5mln to around €100mln);
  • improving the energy efficiency of the building stock (decrease by €43mln to €880mln);
  • modernisation of educational infrastructures: renovation of schools and kindergartens, construction of new ones as well as renovation of student residences (decrease by around €1mln to €290mln).

Three projects were completely dropped out of the updated RRP:

  • the construction of an intermodal transport terminal in Ruse (€23mln);
  • the digital transformation of the Bulgarian Post (€52mln;
  • digitalising of the management, control and efficient use of water (€58mln).

Simultaneously, funding has been revised upward for these projects:

  • the extension of Sofia’s third metro line (increase by around €11.5mln to €122.6mln)
  • construction and/or renovation of youth centres (increase by around €1mln to €33mln).

The second payment, which was initially due by the end of 2022, relates to 61 milestones and 5 targets. Projects under this payment are in such areas as energy-efficient street lighting, smart industry, renovation of buildings, digitalisation of the electricity transmission grid, renewable sources, electricity storage, and the digitalisation of railway transport, among others. Reforms within the scope of the second payment aim at the decarbonisation of the energy sector by boosting the uptake of renewable energy and energy efficiency improvements, providing support for sustainable urban transport, making public procurement more competitive, and many more.

Now the European Commission is assessing the request according to the respective regulation since payments are performance-based and contingent on project implementation and reforms outlined in the RRP.

Against this backdrop, there are growing concerns that Bulgaria is substantially lagging behind in making full use of resources available under the plan. The third payment request (€724mln) should have been submitted by the end of June 2023, which was not the case, since even as of mid-October only 6 out of 46 milestones and targets were implemented. A delay is expected with the submission of the fourth payment request (€612mln) that is due by the end of 2023. It includes commitments for meeting 41 milestones and targets, of which only one was implemented by mid-October.

These delays would not be worrying if the available funding was disbursed under the traditional multi-annual financial framework which allows for budget phasing and transfers between funding periods. However, in case of this funding instrument, all measures must be implemented within a very tight frame: the Regulation establishing the Recovery and Resilience Plans requires all milestones and targets within the national plans to be completed by August 2026.

The delay so far has mainly been due to the lack of working parliament and a political instability over a period of two years. Nowadays, under the condition of a functioning legislative body and a government, which has a supporting majority in it, it remains to be seen how Bulgaria will catch up in channelling these resources in its economy for the sake of the comprehensive and horizontal green and digital transition that all EU countries are currently facing.

Check out the forecast for Bulgaria’s construction sector up to 2025 in the EECFA Forecast Report. Orders and sample report: eecfa.com.

A hidden threat to the Russian housing market: demography

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Written by Andrey Vakulenko – MACON, EECFA Russia

Negative demographic trends in Russia are conditioning lower demand on the housing market in the coming decades. Due to the general population decline and aging, the number of most active home buyers will decline in the future. And this should – in the long term – lead to a reduced number of housing transactions.

Currently, the demographic situation in Russia is said to be extremely unfavourable. In July 2023, for example, only a little more than 110 thousand children were born, lower than in any July since 1945. This confirms that the country is experiencing a real ‘demographic hole’, and recovery is unlikely in the next decade.Population size and structure represent one of the main macro-drivers determining housing demand over a long period. Steady population growth leads to an increased number of individual households that over time begin to feel the need for own housing, so in virtually any housing market much demand is generated by young people purchasing their first home. The aging of the population, on the contrary, reduces demand for homes. Demographic factors are structural ones that operate long-term, over the horizon of decades, though. Now the market may show a rise in demand for housing, but if the long-term trend is negative, it will have a restraining effect and limit the potential for buyer activity. Often total population may grow or drop insignificantly, but its age structure can change significantly, determining the prospects for the residential real estate market.

Demographic trends in Russia yesterday, today and tomorrow

Russia’s population has undergone a steady downward trend in recent years. Over the past 30 years, the number of births almost every year has been way less than the number of deaths. The only exception was the period of 2012-2016 when the balance of indicators was minimally positive or near zero. In other years, there was a constant natural population decline. Record fertility rates during the USSR in the 80s have not been repeated to date: after a sharp drop in the 90s during numerous crises, the indicator recovered between 2001 and 2015, but another negative trend followed in 2015-2022 owing to the worsening macroeconomic climate and an almost constant decline in the real income of the population. And the pandemic broke the long-term trend of low population mortality, exacerbating the negative impact of decline in birth rates. Migration growth has also been insufficient in recent years and could not compensate for natural population decline, only slightly smoothing it out. Birth rates in each period determine the population size in a particular age group in the future, therefore, the current age structure of the Russian population is a consequence of past fluctuations in this indicator in different years.

In the future, the Russian population will likely decrease. As per the demographic forecast of the Federal State Statistics Service in Russia (Rosstat) and that of the UN Department of Economic and Social Affairs, population decline is estimated at 2%–5% until 2035. In addition, the age structure of the population will continue to shift towards the elderly. The graph on population structure by age always moves to the right: the rise in fertility in the 80s led to a higher population of people aged 35-49 now, the sharp decline in fertility in the 90s caused a fall in the population aged 20-30, and the recovery in the 2000s led to an increase in the number of under 20 age group. And with the current trend of decreasing birth rates, the elderly will surpass young age groups in the next decades.

What does demography have to do with the housing market?

As population in Russia is anticipated to decline slightly (2%-5% until 2035), this is unlikely to have a major impact on overall housing demand. But the lack of growth expectations is creating negative preconditions for the market in the long run. Also, the next decade should see a demographic shift in Russia: the share of 30-year-olds will plummet against the growth of older age groups. Such shifts directly affect the residential real estate market due to the different behaviour patterns of people of different ages in the housing market. According to a 2022 study by the Bank of Russia, Russians usually live in rentals until they are 30 and first home purchase is most often done after this age. This is also indirectly confirmed by the portrait of a typical mortgage borrower (DOM.RF study), whose average age at the end of 2022 was about 37.8 years. Mortgages in Russia are ‘aging’ under the influence of ongoing demographic changes, as seen in the dynamics of the average age of the borrower and the share of young people in the total number of borrowers.

In general, the main stages of human activity in the residential real estate market are as follows:

  • 20-29 years of age: rental housing. Until 20 young people live with their parents and then separate due to studying or working. Buying a home immediately is accessible to very few, so they rent flats.
  • 30-39 years of age: purchasing a first home. At this age, families are established, children are born. The first home is usually purchased to ensure comfortable living conditions.
  • 40-49 years of age: improving living conditions. After 40 people reach the peak of their career and financial well-being, enabling them to improve living conditions. This can either be an increase in space or change in the home (moving from a flat to a house).
  • 50-64 years of age: optimization of housing. Children grow up and live separately, pushing this age group to optimize housing (moving to a smaller home or to another city/region).
  • 65 years and older: transfer of housing by inheritance.

Considering the predicted age structure of the population, in the coming years Russia will see the largest and most active demand group (first home buyers/those aged 30-39) steadily decline. Population structure will be redistributed towards the age groups of 40 years and older who are considerably less active in the market. This will certainly be negative for housing demand. At the same time, negative trends will to some extent be smoothed out by the following demographic factors:

  • Expected increase – after a long decline – in the number of young people aged 20-29 in 2026-2035. They mainly focus on rentals, but demand for rentals will push them to be more active in home purchases mainly in large cities that are educational and economic centres.
  • The 2020-2021 census showed that the number of households consisting of one person is steadily increasing: their share is now about 42%, almost twice as high as in 2022 (22%). More single people will need more housing units, supporting housing demand.
  • Great need for new and high-quality housing. Residential volume per capita in Russia is about 28 sqm/1 person, way lower than in developed countries, and lower than the target values of state housing programs (min. 30 sqm/person). Low income, coupled with an often outdated and low-quality housing stock, creates need for more frequent improvement in housing conditions.

Having these in mind, the ‘aging’ housing market is not a disaster, it is rather a structural factor that we will need to adapt to. Nonetheless, the gradual contraction of the traditionally most active demand base and the overall downward trend in population will put pressure on the market. An additional challenge for housing developers will be to adapt the product to the needs of older buyers whose number will grow in the near future.

Residential forecast for Russia is available in the latest EECFA Forecast Report Russia. For orders and sample report, please visit eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Russia.

Rebuilding post-earthquake Türkiye

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Written by Prof. Ali Türel, EECFA Türkiye

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.

EECFA countries in the European Commission’s 2023 Macro Forecast

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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.

EECFA 2023 Summer Construction Forecast

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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.

Slovenian housing construction boom continues – but for how long?

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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.

[1] https://www.e-prostor.gov.si/fileadmin/Podrocja/Trg_vrednosti_nep/Trg_nepremicnin/Porocila_o_trgu_nepremicnin/2021/Letno_porocilo_za_leto_2021.pdf

[2] https://siol.net/posel-danes/novice/kolaps-trga-v-tem-delu-ljubljane-stanovanja-po-2-600-evrov-na-kvadrat-595442

[3] https://www.stat.si/StatWeb/News/Index/11005

April briefing on Serbia

Posted on by efalucskai

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.

Croatian construction output makeup changes: more hospitals, fewer flats?

Posted on by efalucskai

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.

Is the Romanian residential construction market cooling down?

Posted on by efalucskai

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.

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