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

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

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

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

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

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

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

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

Reforms as a prelude

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

Tango of public and private

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

Strong foundations

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

Multi-vector policies

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

How much steam in this cycle?

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

Ongoing expectations

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

Serbia C-19 situation in construction (status on 05 May 2020)

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

Physical restrictions

Since the introduction of the state of emergency and quarantine measures some seven weeks ago, there has been a visible negative effect in almost all spheres of the economy. Of course, some sectors have felt it more than others, particularly service sectors like transport and tourism suffered most of all. Some of the restrictions were partially relieved in late April and early May, but the state of emergency in Serbia was suspended on 6 May, so things should start returning to normalcy. It will take some time for the economy to recharge, but it is not expected for negative effects to extend beyond Q2 2020.

Construction works

In light of this, it could be said that the construction industry has been one of the less affected sectors, with only smaller decrease recorded in production volumes and logistical capacity. This was caused by the stringent movement restrictions during the quarantine, but luckily operations never halted and the expected damage should be minimal. Nevertheless, delays will be visible in the realization of some projects, as some construction sites relied on foreign workforce and encountered problems during this period.With the country borders closed, foreign workers were unable to travel and arrive on time, so this could be a factor affecting some of the deadlines.

We are planning to issue the new EECFA Serbia Construction Forecast Report on 29 June 2020. Sample report and order

Factors limiting the construction sector’s performance

The immediate effect of the restrictions was also felt in the residential subsector, where the quarantine interrupted the regular market flow, particularly on the demand side. Some price slashing was visible, but with strong market conditions this crisis won’t seriously affect its prospects. As a matter a fact, all internal driving forces are still booming, so this can only slightly dent its double-digit growth in 2020. In the retail segment almost all large pipeline projects are already underway, and with possible smaller delays in opening dates, outputs will likely remain strong this year. It seems tourism could suffer prolonged effects of COVID-19, since it’s expected for travel restrictions and special procedures to continue for few more weeks.

Booming construction outputs were also in large part supported by big infrastructure projects which will be one of the factors providing resilience. The largest infrastructure projects in most cases continued realization unabated, with special transport and separate accommodation for workers helping mitigate effects of the quarantine restrictions. So far, there are no requests by contractors for deadline extension on major projects, at least not the ones attributed to the COVID-19 situation. For projects being in realization for several years, one month of interruption is bearable and is often anticipated.

It is clear that the immediate effects on the construction industry and construction outputs in general will be limited. Maybe the future could hold more uncertainties since the affected service sector and parts of the real economy are yet to feel the full consequences of this disruption. The greatest dangers for Serbia are external factors, a possible drop in investments and capital flow, the extended crisis in major export markets or a bigger destabilization of the financial system. As it looks now, most European countries already started easing restrictions, and this could be the light at the end of tunnel. It is too early to celebrate, but it seems the worst is over, and a more elaborate assessment of the effects and consequences will be possible.           

Serbia’s office trailing on beaten path

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

office
Left: Business Garden; Top right: Sirius Business Center; Bottom right: Green Heart Source: Beobuild Core D.O.O.

Office has been struggling to sustain steady growth as its output performance surprisingly meandered in the previous period. Finally, investments are picking up, but will it be enough to improve market conditions?

Office construction

Although Serbia’s office segment has been enjoying positive developments during the ongoing expansion, its performance has been rather bumpy and below market expectations. The initial strong recovery of construction outputs in 2016 had a short breath and corrected back by a double-digit margin in the following year. This was not expected in any way since permit numbers continued surging unabated, while investment-wise all market conditions improved further.

Find out more about office construction in the EECFA Serbia Construction Forecast Report. Sample report

The sudden decrease in 2017 was largely caused by the delay in two major planned projects in Belgrade which had received their permits, but construction start did not follow as planned. With its small base and still recovering outputs, this was enough to produce a significant delay in new deliveries and sway outputs of the entire segment.

Serbia-office
Weak office stock growth during the last decade – Source: Beobuild Core D.O.O.

Unlike other regional centers, the Belgrade market is still underdeveloped and substantially behind in stock size owing to a delayed transition and the lack of institutional funds and developers from the EU that already invested in Central and Eastern Europe. Because the downturn of 2008 and 2009 reduced financing, most office projects have been developed in a pre-leased manner, thus keeping vacancy at a constant low and rents at a stable high. Consequentially, the costs of renting class A office in Belgrade can go 40% higher than its regional peers such as Zagreb or Sofia.

The construction of office buildings has again accelerated in 2018 and 2019, and the project pipeline is slowly entering realization, meaning that new deliveries should start increasing the modern stock by a significant rate in the coming period and vacancy could also temporarily increase. Having in mind the very propulsive take-up figures in the last three years, there is no fear of a prolonged vacancy at the moment. Belgrade is the largest market and there was only 10.000m2 of new stock delivered in 2018, making a tiny contribution to the total of 860.000m2.

On the other hand, several larger projects entered realization in the same period, so another GLA 120.000m2 is under construction in Belgrade and will enter the market in H2 2020. The gap between demand and supply is already very wide and although bigger projects entered construction, it will take time for new offices to become available. Furthermore, most new projects will be leased before or during construction, so, the effect, if any, on the rent costs should be very limited in this cycle. Pressures on the demand side are set to remain strong in mid-term, so more investments will be necessary if Belgrade is to keep its regional competitiveness.

Continue reading Serbia’s office trailing on beaten path

From gloom to boom: Serbia’s residential

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

Residential construction in Serbia is performing extremely well, and the long-awaited recovery is now well underway, with 2018 volumes again surpassing initial expectations. The situation on the market has been brewing for some time, with a strong investor confidence as well as very favorable financial conditions fueling expansion.

There has been a steady growth in construction activity for 4 years in a row now, but this trend has all the necessary conditions to sustain these levels and produce more growth in the coming years. Housing construction is flourishing, being already one of the best performing sectors in the overall building construction.

New projects are lining up, boosting permit numbers to record levels. Although it is expected for permits to hit the roof in 2020, the amount of permitted homes will certainly drive this growth cycle for several more years.

Top: Belgrade Waterfront/St.Regis Tower; Bottom left: Skyline complex; Bottom right: West65 tower – Source: : Beobuild Core D.O.O

Serbia’s residential market though is coming from a very low-end of its potential – hitting historical bottom after a long and very deep recession that ended in 2014. With such a small basis at the time, an upswing was expected in construction volumes, but the current strength and speed of the recovery seemed too optimistic.

Investment activity has accelerated, with the strong contribution of both domestic and foreign investors, creating a real boom in the construction of multi-unit buildings. Investors from around the world have already entered the market, particularly Belgrade’s starved luxurious segment and yielding high-end residential projects. The competition of large-scale projects by international and domestic investors is bringing a whole new level of market sophistication, with different services, features and amenities.

The most notable is the Belgrade Waterfront development, a large-scale re-urbanization of the banks of the Sava River in Central Belgrade, covering 80ha of prime construction land. This project is a joint venture of the Republic of Serbia and Abu Dhabi-based investment fund ‘Eagle Hills’, estimated to be worth more than EUR 3bln. Continue reading From gloom to boom: Serbia’s residential

Serbia’s retail – primed for take off

Serbia’s retail segment is enjoying a robust growth in the number of permitted buildings due to the permit reform introduced in 2015. With the first phase of the reform having commenced in 2015, and the second phase having been set out in 2016, the application procedure for permits has been made fully electronic in order to have full transparency. Consequently, not only did Serbia gain a better position in The World Bank’s 2016 Doing Business list, but is now seeing a new investment cycle of the construction of high-volume international-type shopping malls. The start of such several big-league projects should sustain this growth cycle and give a boost to construction volumes in the years to come.

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

Delta Planet, Ada Mall (top row), IPM center, BIG Fashion (middle row), BW Gallery (bottom) – Source: beobuild.rs

In an effort to improve investment climate, permit procedures in Serbia were marked as a one of the main regulatory obstacles to development, with a long line of inefficient procedures and corrupt instances suffocating the economy. Before the reform was introduced, in some cases, it took almost a year to acquire a building permit, even if all legal conditions were met. During 2015, the government presented a multi-phase reform, which would include a total overhaul of the procedures, resulting in far cheaper and much faster permit procedures. Its implementation started in late 2015 and so far, it has been a resounding success, with building permit applications now being processed in just a few days. Furthermore, the second phase of the reform implementation started in January 2016, with building permit applications now a fully electronic system in Serbia. With electronic and centralized applications, the reform aims to lower the number of instances and the possibility of corruption and hush money in the process. This significant regulatory reform helped Serbia swiftly boost its ranks in the World Bank’s ‘Doing Business’ list, and from 91st in 2015 it reached 47th position in 2016, making it one of the most improving economies of the world in 2016.

With some anticipation of investors, new permit procedures resulted in a strong spike of permit numbers across the board. Practically all construction segments have seen their share of growth, but with almost two years into implementation of the new permit laws, some construction sectors are leading the way. It seems that the retail segment forwards as main beneficiary in building construction, with a very potent investment cycle carrying almost 1 million permitted square meters in just over two years. Coming from a very low post-crisis level, this several-fold increase of permitted retail buildings created a real sector’s boom. The reasons behind such a strong reaction of investors lay in a very opportunistic market, open for development of big city malls and retail parks. It is worth Continue reading Serbia’s retail – primed for take off