Potential impact of the war in Ukraine on the Bulgarian construction market

Written by Yasen Georgiev, EPI, EECFA Bulgaria

Like elsewhere in the EECFA countries that are not directly impacted by the war in Ukraine, construction market in Bulgaria entered a period of an increasing unpredictability. What stands behind is an interplay between domestic and external factors.

The Bulgarian construction market entered 2022 with a mixed performance: booming residential construction, stagnating non-residential one and a rather heterogeneous civil engineering. Residential construction benefited from favourable financing conditions and fears for inflation that turned property investments into a safe haven. At the same time, non-residential construction was struggling to recover from the Covid-19 shock. Civil engineering was heavily impacted by the lack of clear future prospects and direction because of the political turmoil in 2021 with three rounds of parliamentary elections, and the absence of new EU funding (Bulgaria’s Recovery and Resilience Plan was approved by the European Commission in April 2022, while the EU’s Operational Programmes are still not finalized).

Sofia, Bulgaria. Source: pixabay.com

The war in Ukraine, however, increased the level of uncertainty throughout the entire construction market. Building material costs and shortage and/or equipment shortage were the fastest growing factors limiting the activity of construction enterprises in February-April 2022. Despite the slow pace, the number of clients with payment delays over the last months was also on the rise. As a result, the overall business climate in the construction sector started to deteriorate rapidly in April (Source: NSI, Business survey in construction).

Simultaneously, the headwind from the pre-war period in the residential segment continues. Compared to Q1 2021, permitted residential buildings increased by 20%, dwellings in them by 8%, and their total built-up area by 14%. However, signs of cooling are in sight: compared to the previous quarter, permitted residential buildings decreased by 3.1%, the number of dwellings in them by 23.4%, as well as their total built-up area by 17.1%. On quarterly basis, started residential buildings in Q1 2022 dropped by 4%, their total built-up area contracted by 10%, although dwellings in them went up by 5% (NSI, building permits issued for construction of new buildings).

Similar trends are to be seen elsewhere. In Q1 2022 permitted administrative buildings decreased both in number (by 45%), and in total built-up area (by 54%) compared to the previous quarter. Issued permits for construction of other types of buildings are less by 8%, and their total built-up area down by 28%. On an annual basis, there is a reduction of issued permits for construction of administrative buildings and their total area, respectively by 35% and 82%. Permits issued for construction of other buildings sank by 4%, as well as their total built-up area by 1.3%. Against the previous quarter, started administrative buildings and their total built-up area shrank by 21% and 51%, respectively. Started other types of buildings also decreased by 6%, as well as their total built-up area by 15%.

What becomes evident from the data above is that the construction market is most likely to keep a high level of volatility triggered by two opposing market forces:

  1. the need for investors to search for shelter from inflation and
  2. the necessity for developers to adjust to market conditions they are not used to (material shortages, constant upward changes in prices of materials and fuels, and labour costs).

In that puzzle, the situation in Ukraine will further affect the sector, surely not in a predictable way and most probably neither in a positive one. However, the government is yet to finally start investments within the Recovery and Resilience Facility in 2022, which, accompanied by unleashing the EU funding from other sources in the years to come, might secure a soft landing for the sector before its potential new take-off when the market regains momentum again.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Bulgaria. The current reports were issued in December 2021 and the next reports will be issued on 27 June 2022. For orders and sample report: eecfa.com

Destruction of the built environment and consequences of the war in Ukraine

Written by Sergii Zapototskyi – UVECON, EECFA Ukraine

On 24 February, 2022, Russia, with the support of Belarus, started an open military attack on Ukraine. Since the first days of the full-scale invasion of Ukraine, civilians, ambulances, orphanages, hospitals and residential areas have come under shelling and airstrikes; a deliberate massive violation of international humanitarian law. As per the UN Human Rights Office (OHCHR), between the outbreak of hostilities and 2 May, 6469 civilian casualties were recorded (3153 killed and 3316 injured) in Ukraine and the territories controlled by the partially recognized republics of Donbass. Deceased civilians included 226 children, while the wounded comprised 319 children. In Donetsk and Luhansk regions there were 3241 casualties (1,638 killed and 1,603 injured), including 484 casualties (99 killed and 385 injured) on the territory controlled by the self-proclaimed republics. OHCHR believes that civilian casualties are likely to be ‘considerably higher’, though, especially in Mariupol, Popasnaya, Izium and Borodianka where intense fighting has taken place and is continuing.

All photos were made by Sergii Zapototskyi

Refugee crisis

The invasion has caused a major migration crisis: according to the UN, as of 26 April, 5.32 million refugees left Ukraine, mostly to Poland (2.848 million), Romania (0.764 million), Russia 0.563 million), Hungary (0.476 million), Moldova (0.429 million), Slovakia (0.346 million), and Belarus (0.024 million). As of 21 March, roughly 6.5 million people became internally displaced, mostly women with children and elderly people. According to UNICEF, more than half of the children in Ukraine have become refugees. At present, according to opinion polls, 73% of refugees seek to return home, but if the war drags on, and the scale of destruction caused by the shelling of peaceful cities by Russian troops increases, the vast majority of migrants will simply have nowhere to return.

Economic damage

The 9 most affected regions account for 30% of Ukraine’s GDP. GDP contraction in 2022 is forecasted to range from 10% to 35%-40% (provided that the occupied territories do not increase, and the active phase will last for several months). These figures correspond to a reduction in electricity consumption of around 35% (published by DTEK, the largest private investor in the energy industry in Ukraine). The sources of at least 70% of Ukrainian GDP remain more or less intact. Total losses of the Ukrainian economy (direct and indirect) due to the war range from USD 564 billion to USD 600 billion. Direct documented damage to infrastructure is estimated at USD 88 billion. In the last week of April, direct losses to the Ukrainian economy due to destruction and damage to civilian and military infrastructure grew by USD 3.1 billion.


Destruction to infrastructure, industry, residential buildings

The destruction of the Russian invasion is wide-scale, hammering infrastructure, industry and residential areas. As of today, at least 23000km of roads and 32000sqm of housing stock have been destroyed or seized. The housing stock was especially badly damaged where there were active battles and shelling by aircraft and artillery continued:
i) In Mariupol (Donetsk region): according to local authorities, 90% of buildings were torn down.
ii) In Irpen (Kyiv region): 50% of buildings were destroyed.
iii) In the administrative divisions of Kyiv oblast: 1875 objects were damaged (546 completely destroyed, 1329 partially ruined).
iv) In Kyiv region: 28 multi-storey buildings, 441 private houses, 8 educational institutions, 4 healthcare institutions, 8 cultural institutions and 2 sports institutions were wrecked.
v) In Kharkiv: heavily shelled by Russian artillery, more than 1300 residential multi-storey buildings, 70 schools, 54 kindergartens, 16 hospitals were badly damaged.
vi) In Kyiv city: more than 100 buildings were damaged, including 6 schools and 14 kindergartens. The load-bearing structures were damaged in 6 residential buildings, which cannot be restored, so they will need to be dismantled. All other buildings have to be restored.

Within the total direct documented damage, the biggest losses to infrastructure are the costs of housing stock and the assets of companies. 40% of the total number of damaged, destroyed or seized residential buildings and enterprises are in Donetsk region, 23% in Kharkiv region, 12% in Chernihiv region and 8% in Kyiv region.

In total, 535 kindergartens, 866 institutions of secondary and higher education, 231 medical institutions, 173 factories and enterprises, at least 75 administrative buildings, 277 bridges and bridge crossings, 11 military airfields, 11 airports and 2 ports are damaged or destroyed in Ukraine. There is not a single hospital in Luhansk region with no damage and in places of active hostilities there are military doctors and the wounded and seriously ill are evacuated to safe places. Also, as of the end of April, at least 95 religious and 130 other cultural buildings were damaged, destroyed or seized: 47 religious buildings, 9 museums, 28 historical buildings, 3 theaters, 12 monuments, 3 libraries and more.

Right now, there is a necessity to find resources for specific projects for the restoration of housing stock. And the post-war restoration of Ukraine’s infrastructure and economy will depend, among other things, on the return of Ukrainians from abroad (workers, business development, industry, etc). One area is the planning and expansion of the housing stock in the western regions of Ukraine where there are at least 5 million internally displaced people as during the war people might integrate into a new place and some might not return to their regions of origin. After the end of hostilities, it is also necessary to rethink and restart life. The experience of war confirms that new houses will have to be built with a fortified underground parking (like they do in Israel), using energy-saving technologies, for example.
 
In the framework of the program to relocate enterprises, up to 1500 industries can be transferred to 9 western regions (currently about 121 enterprises have moved). Losses of industrial assets amount to USD 6.7 billion (about 100 industrial enterprises were damaged or destroyed). Metallurgy lost at least 30% of assets with the biggest losses registered by Azovstal and MMK Ilyich respectively (the second and third largest plants).

Damage to export and agriculture

Export of goods from Ukraine is limited as Russian troops blocked Ukrainian ports in the Azov and Black Seas. Road and rail infrastructure can also transport limited volumes of goods due to the mass evacuation of Ukrainians by railway and roadblocks. By sea, Ukraine transported 62% of the total dollar value of goods, while by rail 12% and by road 23%.
 
Agriculture is a direct victim of the Russian aggression with the fighting often taking place on Ukrainian fields/farms. About 13% of the territory of Ukraine is covered with landmines plotted by Russians. There is a risk of a protracted war in Kharkiv, Luhansk, Donetsk, Zaporozhye and Kherson regions whose share of wheat production is 23%, corn is 3%, barley is 21% and sunflower seeds is 20%.

Post-war recovery

The main prerequisite for the post-war economic recovery is for Ukraine to receive reliable security guarantees that hostilities will not resume on her territory. In the absence of this, private investment will be reduced to zero, economic activity will be stifled, and security costs will have to be relied on business, raising the cost of economic activity and undermining competitiveness.

Key goals of the post-war economic recovery should be: i) real estates and infrastructure destroyed or damaged in the war should be restored; ii) economic activity should resume swiftly; iii) refugees and internally displaced persons should return and be involved in economic processes; and iv) foundations for a sustainable economic growth should be established.

In the long run, rebuilding and restoring Ukraine will cost at least USD 600 billion, including not only the restoration of infrastructure, but also the development of a new economy and new European institutions. Options for funding might comprise the frozen assets of the Russian Federation and the European and American funds for the restoration of Ukrainian infrastructure. The EU plans to create a solidarity trust fund to finance the post-war reconstruction of Ukraine (similarly to the Covid-19 recovery fund) and finance investments and reforms in agreement with the government of Ukraine. It is not yet clear how much will be provided through grants or loans as the war in Ukraine still rages on, but the EU told ambassadors that the figure would reach hundreds of billions of euros within decades. The Ukrainian diplomacy should focus on obtaining the EU candidate status and then obtaining full membership; so the program of post-war reconstruction should be harmonized with the tasks of EU membership and ensure the inclusion of Ukraine in the European pre-accession training programs.

Potential impact of the war in Ukraine on the Serbian construction market

Written by Dejan Krajinović, Beobuild Core d.o.o., EECFA Serbia

Serbia’s construction market was booming when the economic and geopolitical situation changed, so the complicating circumstances in the world are stifling the potential growth and slowing down the ongoing recovery. Inflationary pressures have exploded with the start of the war in Ukraine and the effects of the current crisis are still unforeseeable.

Ada Bridge over the Sava River, Belgrade, Serbia. Photo by Beobuild, EECFA Serbia

Although Serbia is not directly involved in the economic war between the EU and Russia, spillover inflation in construction materials and energy will inevitably shake the construction market and its outlooks. At the moment, it is very hard to predict the developments as many political and economic decisions in the coming months will actually decide the exact scenario. Inflation has deep roots in EU monetary policies, and it started long before the war in Ukraine, so there is no simple and easy solution. What tools monetary and fiscal authorities will choose to combat inflation will be a crucial factor, but without trade normalization with Russia, any recovery is hard to imagine.

Worse than a high price is an unstable price, and the continuous increase in building material costs are already causing problems in contracting new projects. Construction companies are updating their contracts to allow flexibility in costs, particularly on projects with long deadlines. In 2021, construction costs rose 8.8% against 2020, with double-digit contribution of construction materials during the second half. This strong negative trend extended with even more steam in 2022, as global commodities reached record prices in decades. The rise in construction material prices reached 17% in Q1 2022, but this is hardly the end. Luckily, until now there has been no shortage of materials on the market, but the disruption in flow of oil and natural gas could halt production and create serious supply problems across Europe. In order to avoid any shocks, the Serbian government has put a cap on oil prices in retail and revises its levels weekly. Furthermore, state tax on gasoline has been lowered to mitigate the pressures.

So far, this crisis hasn’t had a significant impact on construction volumes, but this could be just too early to assess. Uncertainty has exploded, but it appears everyone is still waiting for the conclusion. There have been no project halts or cancellations, on contrary, both permits and volumes are still growing in most segments. The second half of the year will be painting a much clearer picture when all current developments take full effect.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Serbia. The current reports were issued on 6 December 2021 and the next reports will be issued on 27 June 2022. For orders and sample report: eecfa.com

Residential construction seems unrelenting as it entered its 8th year of consecutive growth in 2022. The segment is leading the construction of buildings and the outlook is generally positive. Prices were growing faster than costs, interest rates were at historic lows and demand seemed endless. This environment will certainly change, so residential construction will have to adjust as well. The fact that Serbia has a heated and growing economy is excluding any sharp decline in short term, but mid- and long-term prospects became much dimmer. Following the move of the US Federal Reserve, the Serbian National Bank also started tightening its loose monetary policy by increasing interest rates from 1% to 1.5% in Q1 2022. This is just the first step and further increases are inevitable, so financial conditions will largely change in the coming period, especially the mortgage market and the availability of home loans.

Non-residential construction in Serbia is also standing strong, with some segments cooling off after strong growth cycles. There were some delays during the pandemic, but the realization of planned and ongoing projects continued unabated in 2021. All major segments have been rising in volume, supported by both private and public investments. Still, the latest cycle was already peaking, so some consolidation was expected even without external shocks.

Civil engineering saw record levels in 2021, and we believe another record year is on the horizon in 2022. Key large-scale energy, road and railroad projects in Serbia are already contracted and well underway, so we expect this construction segment to remain a strong contributor in this or next year’s output. On the other hand, prices could affect future contracts and volumes if inflation and stagnation pair up.

Potential impact of the war in Ukraine on the Croatian construction market

Written by Michael Glazer, SEE Regional Advisors – EECFA Croatia

For Croatia, as for other EECFA countries, the Russian invasion of Ukraine has been both a supply shock and a demand shock. And many of the elements of these shocks are the same for Croatia as for other EECFA countries. On the supply side, energy costs are rising as are the costs of construction materials and of construction finance. Supply chains and labor markets have also been disrupted. On the demand side, inflation has cut into consumers’ real disposable income, consumer confidence has been shaken as a result and finance for real estate purchases has become more expensive.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Croatia. The current reports were issued in December 2021 and the next reports will be issued in June 2022. For orders and sample report: eecfa.com

Admittedly, these disruptions are to a significant extent a prolongation and exacerbation of existing trends. For a considerable time before the invasion, consumer and producer price levels were rising broadly, construction costs were going up faster than overall inflation and central banks were considering tightening monetary policy to get inflation under control. Bank lending criteria were also getting stricter and consumer confidence was declining. All of this had a negative effect on Croatia’s construction output, but the sector was booming, nonetheless.

That said, the invasion’s impact has by no means been just more of the same for Croatia, and indeed its specific effects may weaken certain of the country’s construction sectors, at least in the short term. One cause for concern is the sharp, invasion-caused rise in Croatian food and energy prices. These threaten to both significantly reduce consumer resources available for home purchases and to exacerbate potential homebuyers’ concerns for the future. They may also, by forcing large price rises that in turn diminish demand, reduce industrial output, at least to an extent.

Mrtvi kanal, Rijeka, Croatia. Photo by Danijel Durkovic on unsplash.com

Also, Croatia’s tourism industry, which contributes as much as 20% of its GDP and is a major driver of its hotel, residential and commercial construction, is extremely sensitive to geopolitical developments, especially those in Europe. For example, in late 2021 and very early 2022, Croatia benefited greatly from Russian vaccine tourism, as Russians sought vaccines other their domestic Sputnik, both because Sputnik wasn’t very good and because, for that reason, European Union countries wouldn’t accept it. Now, though, the invasion has shut off even the normal flow of Russian and Ukrainian tourists and will continue to do so for this summer and fall at the least.

The uncertainty that the invasion has created in the minds of potential EU visitors as to future energy costs, and so as to their disposable income, may also damage Croatia’s tourism season this year. Or benefit it if as a result of these uncertainties EU tourists opt for cheaper, closer to home, holidays. Either way, Croatian construction output will likely be significantly affected as hotels change their capital spending plans to adapt, builders of coastal dwellings respond to alterations in demand and Zagreb construction residential and office developers adjust their products and their output levels to reflect buyer interest.

One sector that the invasion has not had a significant effect on is civil engineering. Work on, for example, Croatia’s large rail projects continues as before. The same holds true for industrial construction and to a large extent warehousing and storage, the former because the invasion has not changed the medium-term supply/demand calculus for those building such projects, the latter because even if one of the main drivers for such projects, consumer Internet purchasing, is uncertain in the short term, it will clearly rise substantially in the near future.

In the medium term, Croatian civil engineering may actually benefit from an invasion-induced turn to sources other than Russia to satisfy the EU’s need for gas. Such a shift would likely mean that the storage capacity of Croatia’s Krk Island LNG terminal would be increased, and pipelines built to enable the terminal to furnish more gas to more countries.

Potential impact of the war in Ukraine on the Turkish construction market

Written by Prof. Ali Turel, Cankaya University, EECFA Turkey

Compared to neighbouring countries to Ukraine, Turkey has been relatively less affected by the human consequences of this war. The number of refugees coming from Ukraine, disclosed by the Minister of Interior of Turkey on 21 March, accounts for 58 thousand, a much smaller figure than the at least 5 million refugees from Syria, Iraq and Afghanistan who escaped from armed conflicts or wars in their countries and are still in Turkey.

The direct effects of the war in Ukraine on the construction output of Turkey may not be determined yet, because construction statistics are made available by the Turkish Institute of Statistics in 2-3 months from the end of the coverage period of statistics. Indirect effects, however, are mixed with macroeconomic problems that have been in place since November 2021; the most notable one being the falling exchange rate of the Turkish Lira against foreign currencies, leading to high inflation. The annual rate of inflation according to the Consumer Price Index was 19,89% at end October 2021 and grew to 48,69% by the end of January 2022 and further rose to 61,14% two months later. The yearly rate of change in Domestic Producer Price Index was already 46,31% at end October 2021, and with steeper rises, it went up to 93,53% and to 114,97% by the end of January and March 2022, respectively. Rises in petrol and natural gas prices in international markets connected to the war in Ukraine should be an important contributing factor to further increases in inflation.  

Cappadoccia, Turkey. Photo by Afdhallul Ziqri on unsplash.com

Construction cost is primarily affected by the rates of change in Domestic Producer Price Index in Turkey. The annual rate of change in the Construction Cost Index was 41,93% in October 2021 and rose sharply to 79,91% at the end of January 2022, which is the latest available statistic in construction cost. Housing Price Index had a similar trend to Construction Cost Index as the annual housing price growth was 77,4% in nominal, 21,2% in real prices by the end of January 2022. Since wage increases are indexed with the Consumer Price Index in Turkey, the 21,2% real rise in housing prices should be an indication of the lower affordability of housing.

Russia and Ukraine are important trade partners to Turkey. The value of trade with Russia increased by 25,3% and the one with Ukraine by 63,8% in February 2022 from the same month of 2021. The war could cause disruption in the movement of goods, particularly between Turkey and Ukraine. We will be able to know its effects when statistics on international trade are published for March and the following months of 2022.

EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries, including Turkey. The current reports were issued in December 2021 and the next reports will be issued in June 2022. For orders and sample report: eecfa.com

Potential impact of the war in Ukraine on the Romanian construction market

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

Construction in Romania is not directly impacted by the conflict in Ukraine, however, there are several issues that would be indirectly made worse by it: construction costs, interest rates and inflation.

Construction costs already grew at a fast rate in 2021 (+25% yearly average over 2020), and even more so in early 2022, with January seeing a 41% increase in costs compared to January 2021. In these circumstances, an increase in energy costs and base materials due to both import difficulties and increases in global prices would lead to even higher costs and discourage investment in new construction. The Romanian economy is not strongly connected to that of Russia, Ukraine or Belarus, with imports from all three countries totaling at less than 5% of all imports into Romania in 2019 and exports to them totaling less than 2.5% of all exports in 2019 (last year unaffected by the pandemic, source: NSI). However, there are some segments where trade intensity is much higher: energy and ores. In 2019, 37% of all mineral fuels and oils and 40% of ores came from one of the three countries. Thus, trade difficulties would negatively impact the availability of fuel and materials and, thus, the price of construction.

Brasov, Romania, 3 March, 2022. Photo by Traian Titilincu on unsplash.com

While construction costs impact supply, the other two issues (interest rates and inflation) work together to negatively impact demand. The National Bank of Romania increased the reference rates to 3%: the 5th raise since September 2021. This will have a knock-on effect on the costs of consumer and new mortgage loans, making them more expensive, at a time when the residential real estate prices are highest since 2008 with asking prices for apartments up 20% in March 2022, compared to the same month of 2021 (source: imobiliare.ro). Coupled with record levels of inflation, especially related to fuel, heating and food, this would make financing new home purchases exceedingly difficult, and will push demand down.

Although the non-residential construction market, thanks to the easing of restrictions, was on recovery track, all the previously mentioned factors would hinder recovery. Additionally, the subsector would also have some specific challenges such as global supply chain disruptions due to sanctions, rising energy and transport costs at a time when there is a moderate worker shortage and increased pressure from employees for more remote work options.

When it comes to civil engineering, demand for construction remains high, but the ability of the government to deliver on that demand will be hindered by reductions in the available budget for investment. Increased construction costs make public investment more difficult. The increasing current account deficit, the need for subsidies to counter the effects of inflation and energy costs on the most vulnerable citizens and increased defense spending (to 2.5% of GDP in 2023, from 2% in 2022) are all eroding the public funding available for construction of civil engineering projects. The saving grace of the segment will be the availability of EU funding, however even that will be made less effective by the increases in costs. 

Potential impact of the war in Ukraine on the Slovenian construction market

Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia

The impact assessment of the 2022 Russian invasion of Ukraine on the Slovenian construction market must take into account the current volatile situation associated with the pandemic. Even before the war in Ukraine started, building material manufacturers reduced their capacity, either due to logistics problems resulting from the global closure of countries, or due to declining demand. As the last wave of the pandemic ended, supply failed to keep up with increased demand and construction material prices began to rise. According to statistics, building material prices in Q3 2021 compared to Q3 2020 rose by a fifth. The implicit deflator of the value of construction put in place (which measures prices in construction) exceeded 14%, the highest in 20 years. Additionally, rising energy prices – electricity, gas and other fuels – contributed most to the overall construction cost increase. At end February 2022, annual inflation rate in Slovenia was 7%.

Bled, Slovenia. Photo by Florian van Duyn

Despite high inflation, construction output in Slovenia has increased. Following a gradual decline in construction activity in 2021, the value of construction works rose again in the beginning of 2022. Construction companies performed 5,8% less construction work in 2021, mainly due to a decrease in the number of projects in non-residential buildings. Yet, non-residential grew most among all construction subsectors in January 2022. High activity was also recorded in housing construction at the end of 2021 and in early 2022. Residential construction output remains high, but is still lagging behind demand for housing, resulting in a fast increase in prices for residential real estate. In nominal terms, prices at end 2021 were 26% higher than the 2008 average. In the housing market, the growth of residential real estate prices in the last quarter of 2021 accelerated further. Construction output has also increased in the civil engineering sector, backed by public investment. The state is investing in the construction of the second track to Port Koper, the third development axis in road connection, the modernization of railways, the renovation of state roads and cycle paths, the construction and renovation of the electricity network; and there are large investments in water supply infrastructure. The state is also planning to invest in healthcare. As 2022 is an election year, an increase in public expenditure was expected, but its growth has exceeded even the most optimistic expectations.

Construction activity in 2022 and beyond will be highly dependent on the development of events related to the war in Ukraine. The direct dependence of the Slovenian economy on the Russian and Ukrainian markets is relatively small, but this conflict can have a strong impact on inflation in Slovenia, the global financial markets, trust, and supply chain operations. The Russo-Ukrainian war will continue to raise commodity prices, too. Not only iron will rise in price, but also nickel and aluminium whose price has jumped to a new record. The prices of oil and natural gas are also rising, which will also raise the price of cement. Ukraine was a major exporter of clay to produce ceramic tiles, so we can expect that the price of tiles will hike due to the lack of clay and rising energy prices. Construction companies want to pass on such increases to public contracting authorities (built-in inflation), but they have only been partially successful so far. In the coming months, the measures taken by the Slovenian government will reduce energy prices, so it is projected that prices will no longer exceed the February level, but they will not decrease either. The rise in prices in construction is also affected by the lack of workers. There is still a large surplus of demand in the labour market over the supply of skilled workers in the industry.

How will Romania’s National Recovery and Resilience Plan impact the construction sector?

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

The Romanian construction is poised to grow in both 2022 and 2023. The main drivers of growth vary, including low interest rates and excess liquidity that boost the residential subsector or the use of EU 2014-2020 cohesion funds to help boost civil engineering.  At the same time, the pandemic and the responses to it negatively impact construction, mainly in terms of hotel and restaurant construction, but also when it comes to office buildings. The EU Recovery and Resilience Facility (RRF) is another potential source of funding that could help counter these negative effects and maintain Romania’s construction sector on a positive growth rate for the near future.

Detailed construction forecast up to 2023 for Romania is available in the latest EECFA Construction Forecast Report that can be purchased on eecfa.com.

What is the PNRR?

The National Recovery and Resilience Plan (PNRR) contains the projects and measures Romania aims to implement in order to benefit from the EU’s Recovery and Resiliency Facility (RRF). The RRF is a temporary instrument used as a means to mitigate some of the pandemic’s effects on the members’ economies and has a total funding budget of EUR 723.8bln (out of which EUR 29.2bln are available for Romania).

The RRF sets minimum targets for climate spending (37%) and digital spending (20%), which Romania has pledged to exceed (41% and 21%, respectively). Romania’s Recovery and Resilience Plan includes 171 measures (out of which 107 are investments) and has six pillars, mirroring those of the RRF.


How do the RRF and PNRR work?

Out of the total amount, Romania can receive EUR 14.2bln in grants and EUR 14.9bln in loans (this is 13.09% of 2019’s GDP). A pre-financing payment of 13% of each financing source has been granted to Romania, with the remainder of the loans and grants arriving in up to 10 installments, which are themselves conditioned on the achievement of the milestones agreed with the EU in the PNRR. These milestones include several legal, policy and administrative reforms, as well as the completion of investments on time. Thus, the amounts received could be delayed or even rejected if Romania fails to achieve its milestones and targets.

How will this impact the construction segments?

Residential construction

The PNRR has provisions for both new construction and renovation of dwellings. In terms of renovations, the plan has EUR 1bln allotted for improving the energy efficiency of around 4.3mln sqm of residential stock. To put this into context, in 2019, the entire residential renovation market in Romania totaled EUR 800mln (source: NSI). This measure has a deadline of June 2026, and the first step is for the Romanian Government to create a national support scheme (by March 2022) and the local authorities will award the actual contracts.

Regarding new construction, 4418 new units will be built for the housing of young people from vulnerable communities and 1104 new units for teachers and healthcare professionals in areas where access to these services is lacking, such as villages and small towns. The assignment of contracts will again be tasked to local authorities, according to a grant scheme built on national level. The program has a deadline of 2022 for the assignment of contracts and 2026 for the actual construction. The impact of this measure on the construction segment would be rather small, since, for comparison, in 2019 there were 67488 new residential units constructed across the country (source: NSI).

Non-residential construction

The PNRR should impact several types of non-residential construction, but mainly healthcare, education and public buildings.

In terms of healthcare, there are several investments planned:

  • Renovation of at least 3000 family doctors’ practices by the end of 2023.
  • 124 additional neonatal intensive care beds would be made available through the modernization/extension of 25 intensive care units, by the end of 2024
  • 30 outpatient care units would be built or renovated, also by 2024.
  • 200 community centers would be built or renovated by mid-2025.
  • And finally, by mid-2026, 25 new hospitals would be partially financed by the program with a focus on the energy efficiency of buildings. This would also cover the required medical equipment.

When it comes to education, there are also several projects planned, including:

  • 110 new childcare facilities (EUR 230mln),
  • 10 mixed integrated vocational campuses (EUR 338mln),
  • 300 000sqm of educational spaces to be renovated, another 46 400sqm built with a “green” focus and 3 200 electric school minibuses to be purchased (EUR 425mln),
  • construction and modernization of 19520 reading places, 6625 canteens and 19130 student housing places for universities (EUR 260mln),
  • Additionally, 75 000 classrooms and 10 000 labs would be re-equipped across the country (EUR 600mln).

The total budget of these investments in healthcare and education exceeds EUR 4bln if we include the equipment. For comparison, the total expenditure for the construction of healthcare, education and recreational buildings in 2019 was EUR 284mln (source: NSI) so the impact of the PNRR here could be rather large. The renovation of public buildings is also included in the plan with a target of 2.3mln sqm to be renovated with a focus on improving energy efficiency on a total budget of EUR 1170mln and another 1.3mln sqm for moderate renovation (EUR 575mln). For comparison, in 2019 the entire administrative building segment saw less than EUR 266mln invested in renovation (source: NSI), so here, again, PNRR could help grow the construction segment.

Civil engineering

PNRR targets several civil engineering segments as well, with a focus on public utilities, transportation and energy.

In terms of public utilities, the water network would be expanded with 1600km and sewers with 2900km until mid-2026 on EUR 800mln. For reference, in 2020, compared to the previous year, the networks increased with 1500km and 1898km, respectively, so this would in effect be comparable to the current yearly output in this segment. Another focal point is waste management with EUR 1239mln allotted for various investments in waste collection, monitoring and recycling. 

Sustainable transportation takes up more than 1/4 of the total PNRR budget, with an EUR 7.62mln allocation. This would include:

  • EUR 3.480bln for railroad infrastructure – 2426km of rail renewals, 315km of modernized rail and 110km of electrified rail. For reference, in 2019 the value of railroad construction was EUR 185mln (source: NSI).
  • EUR 3.095bln for the construction of 429km of motorways (equivalent to the amount of new motorways completed between 2012 and 2020). The program will finance several segments on the A1, A3, A7 and A8 Motorways. For comparison, in 2019, EUR 227mln were spent on motorway construction (source: NSI).
  • EUR 600mln for the metro networks in Bucharest (5.2km) and Cluj Napoca (7.5km).
  • EUR 620mln for green transport infrastructure – electric vehicle charging stations (52) and urban bicycle lanes (1091km).

When it comes to energy, the focus is of course on renewable and green initiatives:

  • EUR 460mln for 3000MW of new wind and solar plants and developing battery storage facilities (480MWh). For comparison, the net generating capacity for wind and solar power across Romania in 2021 was 4273MW (source: Transelectrica), so this program would significantly increase production capacities.
  • EUR 515mln for renewable gas transportation, green hydrogen production and energy storage using hydrogen (1870km distribution pipeline).
  • EUR 300mln for methane production for electrical and central heating (1300MW).
  • EUR 280mln for battery and photovoltaic panel production and recycling (2GW worth of batteries /year).

Conclusion

The PNRR’s impact would be maximized by reaching the appropriate milestones and targets on time, and by using this program together with other financing sources, like the national budget or other sources of EU funding.

Thus, if implemented fully, it could have a positive impact across the entire construction sector, from residential and non-residential renovation, to road, railroad and energy related construction.

Croatia’s economic recovery and construction boom: real or smoke and mirrors?

Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatia members

Croatia’s remarkable recovery from the brutal impact that the COVID-19 epidemic had on the country in 2020 is, like its construction boom, both real and smoke and mirrors, both temporary and long-term.

Photo by Tatjana Halapija

The country’s tourism sector, brought low by COVID-19 in 2020 (with commercial accommodation facilities recording a 64.2% reduction in arrivals and a 55.3% fall in overnights compared to 2019), has rebounded a mere year later to levels as strong as or even stronger than the 2019 banner year for the sector. August 2021 overnights, for example, achieved 93% of 2019 levels and fiscalized receipts (a proxy for revenues) were 21% higher than those of August 2019. This rebound is crucially important to Croatia, since, depending on how you measure it, the tourism sector accounts for 18% or more of the country’s economy.

Dubrovnik – Photo by Zoran Jelaca

First, though, the smoke and mirrors part: a large, but hard to determine, portion of the apparent tourism recovery is due to the government’s requiring that guests staying in Croatia be registered with governmental authorities. In fact, a registration requirement has existed for many years, but Croatian lessors of rooms for short-term occupancy, which constitute the majority of the country’s tourism beds, have long ignored it in order to evade taxes. The difference is that for COVID-19-related reasons the government is finally enforcing the requirement. The upshot has been that many more guests have been registered in the COVID-19 era than would have been previously.

The reality, though, is also encouraging. It is clear that significantly more tourists have visited Croatia this year than might have been expected given the fierceness of the epidemic both in Croatia and in the countries that are the typical sources of its guests, although the exact size of this increase is hard to discern through the distorting glass of official statistics. What is certain, though, is that the surprisingly large number of tourists who actually visited Croatia and the increase in the portion of them who were registered has both leveled the playing field for large hotel chains (which have always registered their guests more or less accurately) and provided badly needed windfall revenues for the government. Regarding the latter, the budget deficit for 2021 is anticipated by the Minister of Finance to be less than 3.8% of GDP despite extensive spending on COVID-19 and earthquake relief. He expects the deficit for 2022 to fall to 3.0% of GDP.

The upshot for the Croatian construction sector is likely to be quite positive. Hotel firms are likely to loosen the reins at least somewhat on their construction activities. While this will be to an extent offset by lower construction spending by small renters of vacation homes and rooms, they, too, will have earned more this year than they expected, even taking into account that unlike prior years they will have to pay taxes on their income. And the windfall tax revenues generated by their tax payments are an unalloyed benefit for the government which will use at least some of them to pay for the new construction required to compensate for the recent earthquakes.

Zagreb – Vlaska street – Source: licegrada.hr

Other factors are less positive, making the overall construction picture in Croatia hard to read. GDP growth for 2021 is now forecast by the Croatian Minister of Finance to be greater than 8%, also unexpectedly high as the continuing increase in the forecast number over the course of the year shows (e.g., the European Commission’s July 2021 forecast was for 5.4% GDP growth in 2021, itself an increase in the EC’s prior forecasts). So, immensely positive for the construction sector.

Construction forecast for Croatia is available in the EECFA Forecast Report that can be purchased on eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

That said, inflation is high (and possibly accelerating). The annualized change in the Harmonized Index of Consumer Prices was 3.5% in September (compared to 3.1% in August and 2.7% in July).

Construction costs (both supplies and labor) are nearing stratospheric levels. Regarding labor, Croatian construction firms are no longer importing workers only from Croatia’s neighbors in Southeast Europe or even from Central and Eastern Europe as a whole but are instead turning more and more to India, Nepal, the Philippines and other distant sources. This is not an option for many building supplies, of course, shortages of which are no longer just driving prices up but are now also slowing projects down. Demand and available resources differ greatly from construction sector to construction sector, so a wide variation in sectoral output is to be expected.

A number of other factors contribute to this variation, which we will analyze in detail in our upcoming Winter 2021 forecast report.

Zagreb – Photo by Ivana Nobilo

Rental housing: a potential growth spot in the Russian market

Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia

The residential rental market in Russia is now at the initial stage of development: professional* projects are just beginning to appear, and almost the whole supply is made up of private units in the unorganized* market. However, the active participation of the state and the expected set of measures to stimulate developers and support demand for rental housing should contribute to the active development of the segment: by 2030 at least 45 million sqm of rental houses are planned to be built. At the same time, the longer-term potential is estimated by market experts at the level of at least 20% of the total housing stock in Russia, with the current value of 6% (in absolute terms, about 520 million sqm). Even with the partial realization of the indicated potential, rental housing will certainly play a major part in the Russian construction market in the coming years.

*In this article, by ‘organized/formal/professional, we mean rental objects under professional management such as apart-hotels, rental houses with professional operators, co-living and so on, while by ‘unorganized/informal’ segment we mean individuals renting out their own apartments.

source: DOM.RF

Current rental market

Total rental supply in Russia is estimated at 240 billion sqm (DOM.RF) with about 97% rented by private individuals and most of them not being officially registered with no taxes paid. Yet, professional rental properties (apart-hotels, apartment buildings, co-living, etc.) throughout Russia total at about 60 units, with 45 located in Moscow and St. Petersburg. The segment, despite the current relatively low supply, is developing quite actively, though: over the past 3 years, the market increased 1.6 times in project number, and will likely continue to grow rapidly in mid-term since 31 new projects are under construction with 18.2 thousand dwellings (now the volume of supply in the market is about 10.4 thousand dwellings and about 3.3 thousand beds in co-living).

Plans for regulation

The active development of professional rental homes, the need to regulate the shadow rental market, as well as the current state policy to improve living conditions in Russia in general, have led to new legislative initiatives with three main goals: 1) creating conditions for the further development of the formal market; 2) tightening the regulation of the informal segment; 3) creating a large block of social rental housing on preferential terms for citizens with below-average wages who cannot afford to take out mortgage.

In August 2021, the Ministry of Construction proposed a number of amendments to the current state program dubbed ‘Provision of affordable and comfortable housing and utilities for citizens of the Russian Federation’. Although the planned changes have not yet been adopted and are being examined by anti-corruption experts, it is highly probable that they will come into force. The main measures of the state program for the rental segment are: 1) tax incentives, including building or creating 1buying out apartments (a separate section) in a building under construction and making it a rental object rental homes through collective investment mechanism, 2) tax deduction in the amount equal to rent payments, 3) building or creating rental homes through PPP schemes, 4) subsidizing rent and 5) the provision of land plots on preferential terms.

These measures will ensure the annual volume of rental housing construction of about 5 million sqm by 2030. The stages of implementation are as follows:

  • By end 2021: tax incentives, preferential terms for the provision of land and connection to engineering networks will be developed,
  • By 2024: a fully transparent and legal rental market must be created,
  • By 2030: 45 million sqm of rental housing built (between 2022 and 2030).

Social rental housing

The planned changes are to create the social rental housing segment mainly through the state-owned company DOM.RF, which is currently one of the main financial institutions for the development of the housing sector in Russia. They intend to provide preferential rent for people in need of better housing conditions and for citizens with below-average incomes who cannot afford to take out a mortgage loan to purchase own housing. It will subsidize up to 80% of the rental rate for these categories of citizens. In 2021–2024 about RUB 650 billion will be allocated for this purpose. It is planned to attract private investors and developers to implement social housing projects to build such facilities on preferential terms and are guaranteed to receive the required demand. The difference between the reduced preferential rate and the market rental value will be covered by the state budget, so developers’ lost profit will be compensated for. This should stimulate the construction of new rental homes and increase the attractiveness of the segment for developers previously not interested in such projects due to the long payback periods and the high level of market risks.

Whitening the segment

Another important area of ​​the regulation to contribute to the development of formal rental housing in professional projects is the measures to increase the transparency of the informal market. According to expert estimates, over 90% of housing in Russia is rented out by landlords not paying taxes. Even though the situation slightly improved after the law on the self-employed came into force which lowered the tax rate for renting out housing from 13% to 4% (under several conditions), but most of the market remains in the shadows. Authorities intend to resolve this issue through the introduction of measures in 2021-2024. As of September 2021, the real steps are still under discussion and specific decisions have not yet been made, but, in general, the following steps are planned:

  • a unified electronic system for all residential lease transactions with data from the register being transferred directly to the tax office,
  • a standard lease agreement to protect the rights of tenants,
  • a unified online register of owners renting out housing,
  • to regulate relations between tenants and landlords, a special state-owned company will be created as an intermediary between the parties,
  • penalties for failure to provide data on renting out residential property, and
  • a publicly available ‘blacklist’ of homeowners evading tax liability.

Although this will likely increase the security of rental transactions for tenants, the main difficulty of the transition to the new system will be that it is voluntary for homeowners to register, transfer their data and start paying taxes. Thus, it is planned to provide tax incentives for landlords complying with the new rules in good faith, and to develop additional support measures such as the possibility of introducing a system of guarantees on the part of an intermediary company against non-payments for landlords, as well as insurance against early termination of the contract unilaterally by the tenant, among others. It is also assumed that penalties will gradually be introduced with a long transition period.

Despite all the advantages, the regulation of the informal rental market will lead to increased rental charges: additional taxes and other costs that landlords will have when switching to the new system will be passed on to tenants. This will raise the competition of the informal market with formal rental properties that on average are significantly more expensive than renting homes from individuals, limiting demand for them.

Residential forecast for Russia is available in the latest EECFA Forecast Report Russia up to 2023. 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.

Fundamental factors determining the segment:

  • Insufficient level of living space and low availability of housing. At the moment, the former indicator is at the level of about 26 sqm/person, less than the values ​​in most European countries and less than the level of comfortable living conditions (30 sqm/person). The construction of at least 600 million sqm would be required, which, with the current volume of completion, would take at least 8 to 10 years. The level of affordability of own housing for the wide range of the population is low. According to the estimates of DOM.RF and the Ministry of Construction, mortgage loans – the key means to buy housing in Russia – are currently unaffordable for 35% of the population who needs to improve living conditions. Such families will not be able to take out a mortgage even with a zero loan rate as their income will be insufficient for monthly repayments. Housing rental is a potential solution, so social rental projects are of key importance.
  • Low level of development of the rental housing market. As of end 2020, only about 6% of the Russian population (about 8.8 million people or about 5.5 million families) lived in rental housing, while this figure in developed countries can reach 50%-60%. Even in the largest Russian cities with the most developed rental markets, the share of rental housing in the total stock does not exceed 10%, which can also be assessed very low.
  • High potential for development. DOM.RF (by far the biggest rental housing operator in Russia) estimates a realistic achievable share of rental housing in the total stock at about 20% long-term. With the current volume of the housing stock (about 3.9 billion sqm), this is potentially about 750 million sqm of rental housing, (about 240 million sqm already built and about 520 million sqm still to be built). The current version of the state program plans to build about 45 million sqm of rental housing until 2030. The market potential will surely not be exhausted in the coming years, making the overall prospects favorable for the segment in the long run.
  • Pandemic effects. The pandemic has had two main consequences. First, a sharp deterioration in the macroeconomic climate last year and a long-expected economic recovery after the recent shocks. Against the backdrop of falling real incomes, own housing has become even more inaccessible for many people, and for some, renting can become a permanent replacement. Second, although less significant to the rental market, the growing popularity of remote work and new sources of demand for rental housing. With many companies shifting to a fully or partially decentralized work format, employees have more opportunity to choose where to work. This raises the number of digital nomads, i.e. employees not tied to an office and having the opportunity to work from any Russian city. The number of transactions in the rental market in mid-term will to some extent grow due to this category. One of the trends in the rental housing is the workspitality format focusing on the needs of such nomads (separate work areas, co-working spaces, meeting rooms).
  • The absence of major growth in real incomes and the lack of macroeconomic prerequisites for this on the horizon. Real disposable income was in the negative between 2014 and 2017 (the decline varying from 0.5% to 4.5% per year), followed by a short period of positive correction (+0.1% in 2018 and +1% in 2019), and then by another decline at end 2020 (-3.5%). Thus, purchasing power has actually been declining for 7 years. At the same time, the Ministry of Economic Development forecasts a rather moderate dynamics of this indicator in 2021-2023: +1.6%-1.9% per year in a conservative scenario and +2.4%-3% per year in the baseline scenario. But even in the best case, by 2023 purchasing power will not return to the level of 2013, which should not contribute to more home purchases, but should grow demand for the rental market.
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    buying out apartments (a separate section) in a building under construction and making it a rental object