EECFA 2023 Summer Construction Forecast

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.

EECFA 2022 Winter Construction Forecast

EECFA’s 2022 Winter Construction Forecast Report was released on 5 December. Full reports can be purchased. Discounts and sample reports: info@eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Yet another downward revision characterizes the forecast for both regions. Southeast Europe could see shrinkage on the horizon. This, however, comes after a great period of construction in between 2016 and 2021, so the market is foreseen to come down from a peak level. In this respect, the 3% decline until 2024 is no drama, in EECFA’s view. The drama is in East Europe where the peak was reached in 2018 and the market was around 10% below that peak level even before the Ukraine war began. Since then, EECFA has paused issuing forecasts in Ukraine and a status report has been prepared. Without Ukraine, the region is expected to reach its bottom in 2023.

In Southeast Europe, almost all countries have been revised downward. Three out of them, however, could see expansion until 2024. The foreseen contraction in Romania and Serbia pulls down the region to negative. Romania is quite pessimistic; the market could shrink by almost 10% by 2024. Serbia is expected to witness a sizeable drop, too, before growth returns in 2024. As the region saw much construction in 2016-2021, the market will likely decline from the peak, making the 3% drop on the forecast horizon not-so-drastic.

Bulgaria:

  • Under the projected economic slowdown, construction will increasingly be affected by the ongoing political instability that is likely to undermine reforms within the Recovery and Resilience Plan, and delay implementation of the EU’s operational programmes.
  • Тotal construction output is estimated to have grown in 2022.
  • For 2023-2024 civil engineering is forecasted to increase at a more accelerated pace.

Croatia:

  • Residential construction output held up in 2022, impervious to war and disease. But it’s likely residential’s rapid growth will over time succumb to rising prices and a falling population.
  • Rail construction output will rise as more rail projects come online. Some new high-cost road projects may yet be undertaken for political reasons.
  • Energy prices will fuel building of oil/gas port facilities, pipelines and storage in 2022-2023, construction that the EU’s green-energy push may quench in favor of renewable energy and power grid projects.

Romania:

  • The Romanian construction market is set to shrink slightly in 2023 and 2024 as internal and external factors conspire to make building materials more costly. 
  • Inflation-induced lower purchasing power and growing mortgage interest rates are making loans more expensive, and few people can afford to buy a home in cash. 
  • On the one hand, Romania could benefit from the current global instability and attract more foreign investment to grow its economy. On the other, increased energy costs translate to higher operating and construction costs and discourage investment. 

Serbia:

  • The challenging economic situation will undoubtedly have negative effects on construction outputs. But how negative is the question of external factors and the coming events.
  • The domestic market is strong, with high public and foreign investments, as well as record employment. The highest economic risk comes from inflation and the expected recession in the EU.
  • The current economic slowdown could deepen the contraction in case of a prolonged crisis.

Slovenia:

  • Slovenia has experienced expansion in construction output on the back of the strong overall economic growth.
  • However, risks for the future include high inflation, large construction cost increases, and overheating economic growth. And increased interest rates will depress residential output in the future.
  • Supply chain constraints might jeopardize the completion of large civil engineering projects.

In East Europe, 2022 could be the 4th consecutive year of drop in Türkiye, and no quick recovery is foreseen on the horizon. We have turned somewhat optimistic in Russia, but only from 2024 on. Without Ukraine, the region will likely hit bottom in 2023. The region reached its peak in 2018 and just before the war in Ukraine started, the market was around 10% below this 2018 level. Owing to the war, Uvecon, the Ukrainian member institute of EECFA, has prepared a status report for the second time instead of the forecast report.

Russia:

  • Direct and indirect effects of sanctions hammered the construction market that declined faster in 2022 than previously expected.
  • Forced acceleration of projects in transport and energy, in response to export and import structure changes due to sanctions, will spur growth in civil engineering.
  • Many targeted programs and national projects will support the construction sector throughout the forecast horizon.

Türkiye:

  • The construction industry has been trying to deal with high inflation that has led to 120% yearly rise in construction cost and 189% increase in housing prices.
  • There has been some deficit between produced and needed home numbers since 2000, augmented by the influx of refugees from Syria and neighbouring countries (3,920 million registered; unknown unregistered).
  • The low-cost housing project of the government as of September is expected to stop the current slump in the construction sector.

Ukraine:

  • Prospects for construction depend on the existing situation on the market as a result of the destruction of residential, non-residential and engineering infrastructure, and the end of hostilities with the possible economic recovery.
  • Total area of damaged or destroyed housing is 74.1 million sqm (7.3% of the total area of Ukraine’s housing stock), a number which, unfortunately, grows every day. Restoring the housing stock will become a key issue for Ukraine after the war ends.
  • Energy infrastructure remains the top priority for recovery, as nearly 40% of the energy system has been destroyed.

How subsidized mortgages changed the Russian housing market

Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia

Housing construction remains one of the biggest segments of the Russian construction market, affecting both related industries and the overall macroeconomic situation, including GDP dynamics and labor market indicators. Because of the stagnating real income of the population over the past years, housing demand was stimulated by affordable mortgages. State programs that started back in 2018 targeted specific groups, but due to the pandemic in 2020 they became part of a comprehensive anti-crisis package to stimulate the economy, and unprecedented measures were launched to support construction. Thus, preferential mortgage became available to everyone. This excess demand caused record price increases in 2020-2021 and the rapid exhaustion of the positive effect of cheaper loans. As a result, housing has become even less affordable for buyers, and the market has become addicted to cheap mortgages whose issuance was supported exclusively by the state. Owing to the economic crisis caused by the events in early 2022, the central budget will experience a shortage of funds and spending on certain areas will be reduced. The mass subsidizing of mortgage rate is also likely to fall under sequestration, which may have negative consequences on the market in terms of demand.

Subsidized mortgage schemes then and now

Subsidized mortgage schemes to stimulate housing demand and support housing construction as a whole started in 2018. By then, the real income of the population had been declining for more than 3 years (from 2014 on). Subsidized mortgage rates (at the time about 10%) could stimulate demand and help those in need of buying a new home:

  • ‘Family Mortgage’: launched in 2018, it was the first program to reduce mortgage rates to 6% for families with children.
  • ‘Far Eastern Mortgage’: a targeted state program that started at end 2019 (a reduction to 2% for buying a home in the regions of the Far Eastern Federal District). Both programs are still in effect (with minor changes in conditions) and are valid until the end of 2023.
  • ‘Rural Mortgage’: a targeted mortgage scheme, though geographically limited, started in 2020 (this year it was announced to become indefinite) for citizens intending to buy or build an own house in settlements with a population of less than 30,000. Participants can take up a loan for a new home or for a used home. The goal is to increase the number of people living in rural areas.

All three programs apply only to borrowers meeting certain conditions. All of them supported demand and stimulated buyer activity. But:

  • The ‘Preferential Mortgage’ program (as part of anti-crisis measures to restore the economy at the onset of the pandemic in early 2020) had the biggest impact on the market. During this time quarantine restrictions caused a large-scale economic crisis and a major drop in the real income of the population, reducing the solvency of potential homebuyers and the number of transactions. It endangered housing construction, which is a critical segment for the economy. To aid the construction industry, the government implemented the scheme dubbed ‘Preferential Mortgage’. Unlike the other three schemes, it was available to everyone and citizens were able to take up a mortgage at 6.5%. Initially planned to be valid until November 2020, it was extended first until July 2021, and then until end 2022, but with tightened conditions: the maximum possible loan amount was greatly reduced, and the loan rate was raised to 7%. The events in early 2022 led to macroeconomic instability and a sharp increase in the key rate of the Central Bank. The rate under the Preferential Mortgage program also rose to 12%, although by June 2022 it was reduced to 7% again. It also became possible to combine soft loans with mortgages on market terms, which greatly increased the maximum loan amount.
  • The latest state program to support the mortgage market has been the so-called ‘IT mortgage’ introduced in May 2022 for the employees of IT companies. It has become part of the large-scale measures to promote the development of IT industry in Russia and stop the brain drain.

The impact of subsidized mortgages on the housing market

In 2018-2019 the volumes of the mortgage market stagnated: the number of issued loans dropped (-8% in 2019 against 2018) and there was a minimal positive correction in the total number of transactions in the primary market (+1% in 2019).

The targeted schemes launched in 2018 helped certain categories of citizens to solve housing problems but did not have a huge impact on the whole primary market of multi-unit housing. But everything changed in 2020 with the Preferential Mortgage program available to everyone without exception. At end H1 2020, the number of transactions in the primary multi-unit housing market was 37% less than in 2019 due to quarantine measures and the general economic downturn after the start of the pandemic. However, the Preferential Mortgage program launched in Q2 2020 contributed to a sharp increase in demand, and in H2 2020 the number of transactions was already 33% higher than in H2 2019. In general, according to the results of 12 months of 2020, transactions slightly decreased, but the effect of the program in the second half of the year almost made up for the decline at the beginning of the year.

Continue reading How subsidized mortgages changed the Russian housing market

EECFA 2022 Summer Construction Forecast – Military conflict edition

EECFA’s 2022 Summer Construction Forecast Report was released on 27 June. Full reports can be purchased. Discounts and sample reports: info@eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Our earlier optimism over the Southeast European region of EECFA has gone. The current forecast is foreshadowing almost no growth until 2023 and contraction in 2024. The main reason behind is the worsening climate for construction due to the consequences of the Russian invasion of Ukraine. In the Eastern European region, we have turned pessimistic. The market of Russia and Turkey together is projected to stay below its 2021 level until 2024. We haven’t been able to provide our standard forecast for Ukraine in this summer round, but a status report has been compiled. We will resume providing forecast as soon as construction-related data collection of Ukrstat returns to normal.

Link to the viz >>

Forecast for Romania, the largest Southeast European construction market, has been revised downward. Instead of expansion, shrinkage is our current scenario. Serbia, which was the fastest growing market in the past 7 years, has an even more pessimistic outlook than in the previous forecast round. In Bulgaria, a whole different trajectory of spending EU funds is the reason behind the revision. We are negative on Russia all the way over the horizon and in Turkey the start of the recovery is expected to be postponed for yet another year.

Bulgaria. Owing to several external and domestic factors, outlook for Bulgaria’s economy to grow faster in 2022 has been reduced. And this year the construction market has entered a period of increasing unpredictability and heterogeneous performance. Residential construction has benefited from favourable financing conditions, and residential property has been used as a hedge against inflation. However, this will not last forever. EECFA is not optimistic in non-residential construction, while civil engineering could expand over the forecast horizon. Total construction output is prognosticated to be in the black with low, but positive growth rates in 2022-2024.

Croatia. The picture for Croatia’s construction sector is mixed, both from sector to sector and within sectors. Sector-to-sector, the output growth rates of Croatian construction sectors are decoupling, as some come close to completing the post-transition catch-up growth phase, while others are not nearly so far along. Within sectors, the strength of crucial output drivers, e.g., tourism season results, construction cost inflation, interest rate evolution, is uncertain and very dependent on events and policymakers’ reactions to them. Overall, the picture looks bright now, especially for residential construction, but the fight against inflation or a serious new COVID-19 outbreak could darken it rapidly and considerably.

Romania. As the short-term effects of the pandemic dissipate, the economy faces new challenges such as inflation and global trade disruptions. GDP is set to grow by 2.9% in 2022, in real terms, down from the previous prediction, but by 2023 (+4.4%) and 2024 (+4.8%) growth could accelerate (source: the National Forecasting Commission). Construction showed signs of recovery, so total construction output is to nominally grow, but slightly decrease in real terms this year. Material and energy prices have battered infrastructure projects hardest as seeking extra financing can be lengthy and difficult. Threats to construction growth in this forecast horizon are evidently increased costs of materials and energy, counter-inflationary policies, and the instability caused by the neighbouring war to regional and global trade networks. Countering these are the positive outlook for wages, employment, investment, and the overall economy. The availability of EU programs for co-financing, including the Recovery and Resilience Facility, could also help certain construction segments.

Serbia. In these challenging times, it will be a real endeavour to keep the pace and level of construction activity, even for a heated and growing Serbian economy. Unfortunately, economic and political developments in Europe are threatening to forcefully subdue the growing cycle in construction and the economy as a whole. So far, the economy is showing a relative resilience and construction activity has only slightly decreased compared to its expected performance in 2022, while permits are still keeping the good tempo. Nevertheless, the risks are still there, and a prolonged instability could produce a much deeper downturn and longer recovery. The strong performance of civil engineering and residential will assist this year’s output levels, but prospects for the rest of this forecast period are still quite conditioned by external factors. The ongoing economic crisis in the EU could easily escalate and produce further adjustments for 2023 and 2024 figures.    

Slovenia. Construction output increased fast in 2021 as the pandemic subsided. With rapid economic growth following in 2022, total construction output will likely exceed EUR 4 billion for the first time since 2008. Real growth will be slower, though, as construction cost index has also increased with the fastest pace in a decade, up by more than 10% in 2021 and 2022. Future growth is projected to be slower, especially if interest rates grow faster than expected due to high inflation rates. Still, several large civil engineering as well as residential construction projects are set to continue and prevent construction output from decreasing. 

Russia. Last year, the Russian economy showed strong recovery, partly on the back of construction whose growth turned out to be much better than expected (6,8% instead of 3,2% that EECFA had previously forecasted). The reasons behind were the active completion of non-residential projects that had been frozen in 2020, high demand in the housing market that supported construction activity in residential, and considerable state funding for various infrastructure projects that accelerated growth in civil engineering. However, the special military operation in Ukraine that began in February this year has neutralized all positive trends in construction and has led to a sharp worsening in the macroeconomic situation. Unprecedented economic sanctions imposed on Russia will inevitably affect the construction sector whose output is predicted to be negative throughout the forecast horizon: -2,7% in 2022 and from -1% to -1,4% in 2022-2024.

Türkiye. The Turkish economy is facing an unprecedented devaluation in Lira and soaring inflation, hammering wage earners. Manufacturing sectors relying on imported inputs, agriculture, and construction in particular, face difficulties in financing production and selling to customers with lower real incomes. But industrial production and exports are not much hit by the weakened Lira. Since the beginning of 2022, housing shortage, high dwelling prices and rents have been an issue. In the last 21 years fewer homes were built than the need, and the around 3,8 million Syrian refugees and illegal migrants appear to contribute to housing shortage. Due to the roughly 2,8 million dwelling units under construction, housing starts in Q1 2022 may continue to fall by the end of the year. The small decline in housing completion, however, because of declining demand under current macroeconomic conditions, may turn into a positive rate of change under the effects of interest rate subsidies for mortgage loans. Total construction output in Türkiye in 2022 is estimated to contract, so it would be the fourth consecutive year of decline. Mild recovery is expected to begin from next year on.

Ukraine. Since February 2022, Ukraine has been at war with Russia. As of June 2022, the Russians destroyed up to 30% of Ukraine’s infrastructure, damaged 2% of overpasses and more than 23,000 km of roads in Ukraine. About 20% of Ukraine’s territory is being occupied. Russia blocked the seaports through which imported goods were delivered to Ukraine. Building material factories and warehouses mostly remained in the occupied territory and most developers have frozen their projects for an indefinite period. Despite this, some positive signs are beginning to appear in the construction market, mainly in residential where the market is gradually reviving, adapting to the military situation (especially in the relatively safe western region). Little by little, critical infrastructure is being restored (destroyed bridges, roads, electricity and gas supply, communication lines). Under these conditions of major uncertainty, and before the end of the war, predicting future developments in the construction market of Ukraine is impossible. Therefore, Uvecon, EECFA’s Ukrainian member institute in Kiev, prepared a brief Status Report this time instead of the usual Forecast Report.

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Source of data: EECFA Construction Forecast Report, 2022 Summer

Contact information: www.eecfa.com, info@eecfa.com

EECFA 2021 Winter Construction Forecast – 4th pandemic edition

EECFA’s 2021 Winter Construction Forecast Report was released on 6 December. Full reports can be purchased, and a sample report can be viewed here: www.eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

We are more optimistic for 2022 in the Southeast European region of EECFA than in the previous forecast round. The drop in 2023 is caused by Bulgaria; the awaited shrinkage is so sizeable there that expansion elsewhere in the region might not counterbalance it. Expansion in the East European region of EECFA is foreseen to be smaller both in 2022 and in 2023 than in the previous forecast round. Growth in Turkey was revised downward.

Link to this viz ->

The largest Southeast European construction market of EECFA, Romania, is expected to see only moderate growth on the horizon. Serbia, having recorded the biggest expansion of almost 100% in the 2014-2020 period, is foreseen to plateau in the upcoming years. In Eastern Europe, in Turkey we maintain to believe that the recovery could start, but we lowered our growth expectation compared to our previous forecast. After 2 years of no-growth, Russia’s construction market is foreseen to expand gradually until 2023.

Bulgaria. The Bulgarian economy is recovering more slowly than expected, and the likely growth rate is 3.8% in 2021. However, residential construction looks strong thanks to low interest rates on housing loans, making home purchase more affordable. Real estate is also the safest and easiest way for those wanting to invest to avoid negative deposit rates. The pandemic and its lasting follow-up effects played an additionally strong cooling effect on non-residential construction because of a surge in office and industrial construction earlier and with an emptying pipeline. Zero progress on big-league infrastructure projects will take its toll on growth in civil engineering construction in 2021, but it is set to catch up in 2022. Total construction output in Bulgaria is anticipated to grow by 6.5% in 2021 and 16.5% in 2022. The lack of preparation for the new programming period 2021-2027 and the National Recovery and Resilience Plan are to negatively affect total construction output which is expected to drop by 24.9% in 2023.

Croatia. Croatia’s tourism season surpassed all expectations, driving a 16.2 percentage point swing in the country’s GDP growth, from -8.1% in 2020 to +8.1% this year, and a one-notch jump in its Fitch rating, to BBB. The near-term future of Croatia’s construction sector now depends greatly on the evolution of the COVID-19 pandemic, particularly its effect on tourism. EU and international financial institution crisis-relief funding will, though, soften any blow that the disease delivers. The City of Zagreb’s budget crisis, bureaucratic delays in spending crisis-relief money and much higher construction costs are other negative factors that will affect the growth of construction output, which must be assessed not for the sector as a whole, but segment by segment (e.g., hotels vs. residential).

Romania. The economy is expected to return to pre-pandemic levels, in terms of GDP, by the end of 2021, after growing 7% in real terms. The European Commission forecasts Romania’s GDP growth rate to stay above the EU average in both 2022 (5.1%) and 2023 (5.2%), and, with the help of the Recovery and Resilience Facility (RRF), construction would have a positive ground to grow upon. Total construction output in 2021 is predicted to slightly decline (-0.3%), but to recover and grow in 2022 and 2023. Low interest rates and excess liquidity coalesce into an expanding residential subsector, while non-residential construction continues to be impeded by pandemic-related changes to work habits and various restrictions. On the back of the RRF and the 2014-2020 EU cohesion funds, and despite ongoing difficulties and delays in implementing projects, civil engineering construction continues to have a high potential for growth.

Serbia. After the restrictions in 2020, economic recovery came faster than expected and GDP growth is estimated to reach at least 7.3% in 2021. This strong rebound is supported by accelerated construction activity and increased capital investments, where a high single-digit expansion is projected in 2021 outputs. Construction output is fuelled by civil engineering projects, but also the robust residential and industrial related constructions. Furthermore, budgetary expenditures for investments are planned to reach record levels, with 7.5% of GDP dedicated for this purpose in 2022. All indicators are pointing towards more extensive growth and sustained construction activity at record levels in this forecast horizon.

Slovenia. The Slovenian economy has rebounded stronger than expected after the pandemic. One of the strongest economic growth accelerators was gross fixed capital investment, causing construction output to get back on feet. Total construction output is projected to exceed EUR 4bln sooner than previously predicted – already in 2022 – and reach EUR 4,3bln in 2023. Construction cost growth will probably slow down from a hike in 2021, resulting in a more stable construction environment without supply shocks. This will enable several big civil engineering projects to continue apace, but the main contributor to construction output will be new residential projects. Of course, our forecasts remain contingent on the condition that no further lockdowns hinder the overall economic activity.

Russia. The construction industry in Russia is going through the second year of the pandemic relatively successfully, and the previously expected stagnation in 2021 is likely to turn into a 3.2% growth by the end of the year. This unexpectedly good result was enabled by segments with traditionally active government participation: residential and civil engineering which were supported by large funds. The non-residential subsector also contributed to the growth of the construction market in 2021, mainly due to the massive completion of objects whose construction was previously postponed from 2020. But because all these factors are temporary, construction market growth in 2022 and 2023 will lessen and is prognosticated to post +1.9% and +1.2% per year, respectively, as a part of the potential for the positive dynamics was already exhausted in 2021.

Turkey. The Turkish economy started to regain senses from the pandemic blow in Q3 2020, which continued with high GDP growth in Q2 2021. Although Turkey removed most COVID-19 related restrictions on 1 June 2020 with the elevated number of vaccinations, now, like across Europe, the fourth wave of the pandemic has started (yet with relatively fewer new cases). The estimated economic growth rate by end 2021 is about 10%, but the primary concern in recent months has been high inflation caused by the national currency’s devaluation. Building starts expanded greatly, but completions registered a small drop in the first 9 months of 2021. The government requires interest rates (also for mortgages) to be kept at less than half of the rate of rise in building construction cost. Keeping real incomes positive during high inflation times is important for demand for commodities like housing and other real estates. Turkey’s total construction output is prognosticated to be positive in the forecast horizon with an average growth of 2.6% up to 2023.

Ukraine. For the construction sector in Ukraine, 2021 marks the year of completion of the construction regulation reform launched back in 2019. In mid-September, the newly created State Inspectorate for Architecture and Urban Planning began to work as a full-fledged new body with its own structure, powers, and new work principles. Ukraine’s construction market in H2 2021 has showed a good recovery in investment activity and the resumption of construction. The residential subsector remains the driver of the construction sector due to stable demand from the population. The main constraint in the development of the construction market in 2021 has been increased construction costs despite the active implementation of residential projects against the backdrop of the revival of mortgage lending, increased demand from the manufacturing sector, as well as high volumes of financing.

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.
Continue reading Rental housing: a potential growth spot in the Russian market
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    buying out apartments (a separate section) in a building under construction and making it a rental object

EECFA 2021 Summer Construction Forecast – 3rd Pandemic edition

EECFA’s 2021 Summer Construction Forecast Report up to 2023 was released on 28 June. Full reports can be ordered here. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Southeast Europe

In the first year of the pandemic the construction market of the SEE region as a whole remained in the positive, and further expansion is expected until 2023. The only exception is Bulgaria where a harsh transition is foreseen for 2023 when the 2014-2020 EU programming period ends financially. The massive growth experienced in the years before 2020 is not anticipated to return; around 3% growth is projected for 2021 and 2022, and a 3% drop for 2023. The countries with the largest cumulated growth on the forecast horizon are Croatia and Serbia.

Bulgaria. After a drop of 4.2% in 2020, the European Commission (EC) forecasts the economy to rebound by the end of 2021 and to grow by 3.5%. Positive economic outlook, combined with low interest rates on home loans, will result in more affordable homes. But increased savings and zero deposit rates raise speculative investments in residential, pushing home prices up. Non-residential construction was expected to decelerate even before the pandemic, but the Covid-19 crisis has accelerated this process. Civil engineering is backed by advancing EU fund absorption and by 2027 will be given new opportunities. After an estimated drop in total construction in 2020 by 1.3% in Bulgaria, 2021 and 2022 are expected to see a growth of 9.2% and 12%, respectively. But a considerable drop of 24% is prognosticated in construction output in 2023 due to the slow preparation for the next programming period and the National Recovery and Resilience Plan.

Croatia. We are significantly more optimistic about output growth in a number of Croatian construction sectors than in our last report. Assistance from the EU and international financial institutions blunted the edge of the three catastrophes that struck Croatia in 2020, the COVID-19 pandemic and the Zagreb and Sisak-Maslovina earthquakes. For most (but not all) sectors, it appears that the catastrophes will not greatly change the drivers of output growth over the medium to long term, although they will have some short-term consequences. The three-year hiatus until the next elections in Croatia and the recent election of a reformist mayor in Zagreb, Croatia’s economic powerhouse, provide openings for spurring Croatia’s economic growth and so construction output, but it is not clear that they will be utilized.

Romania. The economic impact of Covid-19 has been less than initially feared. Investment into construction grew strongly in 2020, preventing GDP from a larger drop, and we expect investment to continue in the following years thanks to the RRF. Recovery is also to be quicker than previously forecasted: the EC forecasts a GDP growth of 5.1% for 2022 and 4.9% for 2023. EECFA’s forecast for 2021 and 2022 in construction output is a small contraction (-0.7% and -0.2%) with growth returning in 2023 with 2.6%. Last year residential developers focused on finishing as many projects as possible as there were concerns of a potential market downturn. It didn’t happen, but the new supply to be delivered in the next years could push prices down under normal market conditions.

Serbia. In 2021 things are getting back to normal with the economy standing strong and having already surpassed pre-pandemic levels. Serbia’s economy was one of the least affected in Europe with GDP contracting just 1% last year, and an expected real growth of around 6.5% this year. Recovery is visible in almost all economic segments except for some service sectors still struggling to reach 2019 levels. Serbia’s weaker exposure to tourism and related services moderated losses during the pandemic, and investment stayed strong in both 2020 and 2021. In addition, the government increased public investments in infrastructure and civil engineering projects. Demand in Europe is also recovering, orders are growing again, and with tourism on the rise as well, there is a lot of reason for optimism in the coming period.

Slovenia. Construction industry and the economy in general was less disrupted by the pandemic than originally expected. While GDP decreased by 5.5% in 2020, it is expected to rebound strongly in 2021. Total construction output stayed at almost exactly the same level in 2020 as in 2019: EUR 3.4bln; and it is prognosticated to increase strongly in 2021 and 2022, and exceed EUR 4.1bln in 2023, for the first time since 2008. An interesting recent development though has been the rise in construction costs in 2021 resulting from high demand and supply disruptions owing to the pandemic and its economic aftermath. However, we estimate that this increase in construction cost will be temporary and will decelerate after 2022.

East Europe

The worst performer in 2020 in the Eastern region of EECFA was Turkey, but the downtrend here started well before the pandemic struck. As recovery is awaited to start this year in Turkey, the region as a whole could turn to positive in 2021. Expansion is our current scenario for the region with 9% cumulated real growth until 2023. The largest cumulated market growth on the horizon, thanks to the relatively low starting point, could happen in Turkey.

Russia. The economy is coping with the effects of the pandemic relatively well. GDP contraction last year turned out to be less serious than anticipated with one reason being the stability of the construction sector that showed high resilience to the crisis on the back of active government support for the entire industry, the implementation of many transport and energy projects, and measures to support demand for homes. Construction output shrank by 0.9% in 2020 (against the previously expected drop of about 5%-6%). In the short term, the decline is most likely to slow down to 0.3% in 2021 with a transition to active growth in 2022-2023 within 3.9%-3.4% per year, respectively. Optimism for the next two years stems from the expected recovery in housing construction and the continued infrastructure projects in civil engineering.

Turkey. The economy is showing a rebound after the pandemic. The recent months have seen positive rates of change in GDP, industrial production, value added of construction sector, building starts, and completions. However, a weak Turkish Lira against foreign currencies continues to cause inflationary problems to the economy. Producer prices, construction costs and mortgage interest rates have been increasing at rates close to the rise in exchange rates. The government may again adopt the policy of requiring the three state-owned banks to offer preferential mortgage loans. Total construction output in Turkey is estimated to have slumped by 6.9% last year, but this year growth might return averaging roughly +4% all the way through the forecast horizon.

Ukraine. Last year the construction market was marked by the impact of Covid-19 along with internal problems such as the reform of the State Architectural and Construction Inspection, primarily affecting housing construction. On a positive note, the president launched the Big Construction scheme in March 2020 to support construction industry, so we estimate the overall decline to be 2.2%. And although the recession has reduced the investment flow in construction this year, it has increased demand for some commercial segments such as logistics and co-working offices. As the Big Construction scheme will have sufficient funds for this year as well, it gives cause for optimism for now, and Ukraine’s construction market is forecasted to register growth across the board. 

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Source of data: EECFA Construction Forecast Report, 2021 Summer

Contact information: www.eecfa.com, info@eecfa.com

EECFA 2020 Winter Construction Forecast – 2nd Pandemic edition

The 2020 Winter EECFA Construction Forecast Report was released on 8 December. Full reports can be purchased, and a sample report can be viewed at www.eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Southeast Europe

Building construction markets of the Balkan EECFA countries as a whole have shown resistance during the pandemic so far. Nonetheless the region is foreseen to have yet another negative year in 2021, before expansion can return in 2022. As the current EU programming period is nearing its end, civil engineering is expected to be the driving force in the upcoming period, well outperforming building construction. The total construction market is projected to side move in 2021, and 2022 could bring a growth of around 4%. Based on its priorities, the NextGenerationEU recovery fund is also supportive for both building construction and the civil engineering sub-markets. Its specifics (for what and when) on country level are yet unknown, though.

Bulgaria. The expected economic recovery should bring the Bulgarian economy back to pre-crisis levels by end 2022 with both exports and consumption contributing positively. Having it in mind, the future of residential construction remains positive despite the economic uncertainty. In short term, purchasing power should be affected, but in general, demand for new housing projects in big cities should remain. Non-residential construction will also be held back by dropping demand for commercial and hotel projects, and the projected slow and uneven economic recovery. Civil engineering in the future should be driven by EU funding as well as by the national budget. After major growth in total construction output in 2019 (+19%), 2020 will likely see a drop of 4.9%. Approaching the end of the programming period in 2021 and 2022, total construction will likely increase by 4.4% and 5.2%, respectably, in real terms.

Croatia. The effects of COVID-19 and the Zagreb earthquake on the Croatian construction industry will vary greatly from sector to sector. Thanks to swift, massive EU financial assistance, some sectors will even benefit from the disasters. These sectors include civil engineering generally and especially those CE sectors in which projects can be implemented rapidly. For buildings sectors, results are mixed. Some were harshly battered and will take years to recover. Others barely felt the catastrophes’ consequences. With few exceptions, the trends that underlay buildings sectors’ growth before these events will remain the primary drivers of buildings output in the medium and long run. In the short term, disaster-relief spending will benefit some.

Romania. Pandemic impact on construction was felt less strongly in 2020 since ongoing projects were not halted and thus the market slightly grew (3.8%). With the entire economy taking a few years to recover after the 2020 crisis, total construction output in Romania should drop in 2021 (-2%) and start recovering in 2022 (+2.8%). The pandemic will water down the housing subsector next year as fewer-than-expected new projects began this year and the recession should also continue to reduce purchasing power. In non-residential, retail and hotel were battered most. Office construction is in hiatus due to lower demand for new construction with the expansion of work-at-home scheme and with businesses rethinking the use of traditional offices. The drop in international trade set back industrial construction, but as borders open and exports start picking up, recovery may come too. Civil engineering is the brightest spot with an estimated growth in government investment as 60% of the EU funding for infrastructure is still unspent from the 2014-2020 budget.

Serbia. The developments in 2020 are marked by the reoccurring pandemic and during the year, movement restrictions were introduced twice, having a very negative effect on all service sectors. Furthermore, it is now certain that pandemic effects are to extend into 2021 and the best-case scenario means the economy will take the entire 2021 to recover. With still large uncertainty looming for next year, the forecast still carries a lot “ifs” and the government spent over 10% of GDP for various stimulus measures aiming to mitigate the effects of the interruptions. While the recovery in the second half of 2020 was strong, the new restrictions in October and December again impacted developments and stopped the normalization. Luckily, the realization of big public infrastructure projects has been steady and growing, which has helped growth in construction outputs, and private investments are still not subsiding. Strong credit activity and market fundamentals are also supporting recovery, but lingering foreign demand and slow recovery in the service sectors continue to dim the prospects.

Slovenia. Construction industry was less disrupted by COVID-19 that some were fearing. Even though construction output is estimated to have dropped by 4.8% this year, it will likely rebound next year close to the 2019 level and should expand further in 2022 on the back of civil engineering where big projects are continuing apace. The Second Railway Track to Port Koper, the Third Axis Road construction and the Karavanke Tunnel expansion all continued in 2020 and were less disrupted by the lockdown than expected. Non-residential construction, on the other hand, will suffer from the lingering effects of the economic slowdown caused by the pandemic and the consequent lower investment in industrial and commercial segments. Similarly, residential construction is subdued for the time being due to the pandemic but may return to growth path towards the end of the forecast horizon based on historically low interest rates and good availability of credit financing.

East Europe

Dragged down by Turkey, the decline in buildings construction started in the Eastern region of EECFA as a whole well before the pandemic struck. And 2020 is also expected to see a negative year. From 2021 on recovery could start, but the level of 2018 is not projected to be reached on the forecast horizon. The civil engineering submarket of the region also contracted massively already in 2019 and further decline is our scenario for this year. From 2021 on this submarket could turn to positive and we are optimistic for 2022 as well. Total construction market of the Eastern region is forecast to grow by around 3% in each of the upcoming 2 years.

Russia. This year has seen several negative factors blasting construction industry in Russia, and the economy, such as falling oil prices, the devaluation of the rouble at the beginning of the year, and the pandemic with its related lockdown and restrictions. This caused a massive decline in real incomes, a deterioration in investment climate and a downturn in business activity. One way or the other almost all construction segments felt the pain and decline in total construction by end 2020 is to be 5.8%. It is better than our summer 2020 predictions, though; the government’s economic recovery plan turned out to be quite effective and allowed us to slightly improve our forecast. Return to growth in construction is possible already in 2021 (+0.3%), and by end 2022 a much more confident positive dynamics (+4.1%) is expected based on the likely recovery trends in all segments on the back of state support and the launch of big infrastructure projects.

Turkey. The economy was marred during the 3 months after COVID-19 appeared on 11 March in Turkey. Anti-COVID measures put in place caused massive declines in industrial production, including construction, and in GDP. Lifting most measures and introducing a subsidy offering soft loans by the three state-owned banks on 1 June 2020 served as an important stimulus for the economy and the construction sector. Together with a historical peak in housing transactions in July 2020, building starts began to grow, although there is a big backlog of construction in almost every sector. Rising inflation and construction costs owing to the depreciation of the Turkish Lira against foreign currencies would be the primary concern for the construction sector in 2021.

Ukraine. Construction this year showed a negative trend compared to last year. After a relative growth in Q1 2020, there was a significant dip in Q2, followed by a gradual recovery in Q3-Q4. Nominally, at end Q3 construction reached last year’s indicators in the volume of works performed, but with inflation considered, the drop is still 2%. In the same period last year, construction showed a rise of 23.5%. Key negative factors this year are the COVID-19 crisis and the reform of the State Architectural and Construction Inspectorate that started almost simultaneously with the lockdown in early spring. As a result of falling population incomes and complications in obtaining construction permit, the volume of housing construction slumped. Civil engineering fared well thanks to a state program and the redirection of part of the money from the Covid Fund into the subsector.

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Source of data: EECFA Construction Forecast Report, 2020 Winter

Russian Metropolitan Areas: Crisis Resilience in 2020

The economic turmoil of 2020 is hammering real estate and construction, but its degree is not the same across Russia. We saw this happening during the 2008 and 2014 crises, and we are watching it right now. Tracking the situation on the real estate markets of large Russian cities, we see that the dynamics of market indicators in crisis periods have always been different in various cities under the same external conditions, and different regional real estate markets react to macroeconomic shocks in different ways.

Written by Ilya Volodko and Andrey Vakulenko – MACON Realty Group, EECFA Russia

Moscow city – Source of picture

The 2020 crisis and regionality in Russia

While the past crises were mostly of macroeconomic nature, the crisis in 2020, in addition to the macro component such as falling oil prices and the ruble’s volatility, has a strong local component: different regimes and periods of lockdown measures due to the pandemic and the variety and unequal effectiveness of regional measures to support businesses and the population. Because of this, the current crisis affects local real estate markets even more asymmetrically.

One of the main influences on the degree of penetration of the crisis into the largest cities of Russia will be exerted by the structure of their economies because the degree of damage caused by lockdown and other measures to combat the pandemic on different sectors is mixed. To analyse these differences, we have used data from the Institute for Urban Economics Foundation on the structure of the economy of Russian cities and the volume of the Gross Urban Product (GUP).

To understand how strongly a metropolitan economy reacts to the crisis, MACON consultants have assigned a stability coefficient to each metropolitan economic sector (classification according to the Brookings Institution methodology), depending on its vulnerability, recovery rate and predicted consequences. Coefficient 1 means the greatest stability/no influence, 0 means the least stability/complete or partial temporary liquidation of the industry:

  • Local/non-market services. Stability coefficient 1. The most stable sector, including state and municipal services, education, health care, social support, culture and art, recreation, etc. Its volume is set to remain or increase due to additional indexation or one-time/permanent support measures.
  • Manufacturing. Stability coefficient 0.8. Despite a possible decline in output and employment, the sector is sufficiently stable as severe lockdown measures do not apply. Since these are large businesses, they receive the greatest support both directly (financially) and through government orders, tax incentives, subsidized interest rates and easier access to debt financing.
  • Utilities. Stability coefficient 0.8. They remain fundamentally resilient to the crisis. They are negatively affected by shrinkage in business activity, which is offset by the rise in consumption by individuals, many of whom still work remotely. Yet, the difference in tariffs for individuals and businesses is hurting earnings.
  • Commodities. Stability coefficient 0.7. It includes mining, agriculture, forestry, hunting and fishing. The impact is more significant, the dynamics of commodity prices has a negative trend. But given the large volume of employment, the traditional volatility in these markets, and the non-stop nature of many extractive industries, the sector is most likely to continue working and maintain basic employment in mid-term.
  • Construction. Stability coefficient 0.5. A major negative impact due to the industry’s high dependence on any macroeconomic fluctuations, as well as with the multiplier effect, due to which even a slight decrease in construction volumes causes great changes in related industries. But the nature of the industry guarantees a considerable degree of state support and hence stability.
  • Transportation. Stability coefficient 0.5. The sector contracted due to both direct factors during the lockdown (almost complete elimination of air traffic, reduction of railway transportation, prohibition of movement within cities, between municipalities and regions), and indirect factors during the lockdown (reduction of wholesale and retail trade turnover). Yet, the need to ensure commodity logistics preserves industry volumes at an acceptable level.
  • Business/Finance. Stability coefficient 0.4. One of the most vulnerable sectors of the metropolitan economy, including financial services, insurance, real estate and new technologies (science and technology). It is characterized by a great drop in business activity and a decrease in physical access to such services.
  • Trade and tourism. Stability coefficient 0.1. The segment of retail and wholesale trade, catering, hotel and conference services is the most affected in the current crisis due to the impossibility of carrying out such activities during the lockdown. It is aggravated by the low ability of the sector to recover fast, the simplicity of liquidation procedures, the lack of access to credit and inadequate state support.

Based on data on the structure of metropolitan economies, as well as the above estimates and stability coefficients, it is possible to compile a ranking of the largest Russian metropolitan areas in terms of the degree of resistance to the crisis, where the first place/highest value means a higher degree of stability.

The findings

The metropolitan areas of Perm, Chelyabinsk and Saratov demonstrate the greatest stability. In these cities, on average, more than 60% of the economy is accounted for by the 3 basic sectors: local/non-market services, manufacturing, utilities. These are either fully controlled by the state/municipality or have a major systemic/city-forming character allowing them to receive benefits that contribute to the preservation of employment and production.

The metropolitan areas of Moscow, St. Petersburg, Krasnodar and Yekaterinburg turned out to be the least resistant to the crisis. The share of the 3 basic sectors (local/non-market services, manufacturing, utilities), in contrast to the leaders, is much lower here: on average 45% versus 63%. However, the share of Business/Finance and Trade and tourism sectors, which are the most vulnerable in the current situation, is much higher (42% versus 23%). But while Moscow and St. Petersburg, due to broader financial opportunities, can offset these factors with active financial, tax and other support of the population and businesses, non-capital cities do not have such a resource.

We have found that the poorer the city, the more stable it is in the current crisis. The paradox is that Russian metropolitan areas that actively developed before the current crisis with a great deal of financial, business services, improved construction market and IT-technologies are in a much more difficult situation today than those with an economic structure from the pre-digital era and with industrial enterprises and non-market services.

For construction forecast on Russia, consult the latest EECFA Forecast Report Russia that can be purchased on eecfa.com

Construction and resilience

The different resilience to the crisis in various cities has a direct consequence on the segments of the construction market. Apart from the obviously severely affected office and retail, the most indicative is housing where demand reacts rather quickly to macroeconomic shocks and changes in the external environment. The number of housing transactions in Q2 2020 compared to Q1 2020 decreased in most Russian cities and regions owing to the dropping income of the population, the restrictions on movement, and the temporary impossibility of state registration of transactions. However, the most pronounced decline in demand was precisely in the cities with the least crisis-resistant economies which experienced a bigger increase in unemployment and a much bigger reduction in general business activity and a decrease in household income.

EECFA 2020 Summer Construction Forecast – Pandemic edition

The 2020 Summer EECFA Construction Forecast Report was released on 29 June. It can be purchased, and a sample report can be viewed at www.eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.

Southeast Europe

Construction in the ‘small countries’ of EECFA (Bulgaria, Croatia, Romania Serbia, Slovenia) will be bruised by the pandemic effects this year, causing a drop in construction outputs. The two exceptions are Croatia and Bulgaria where civil engineering could compensate for the losses in building construction. Already in 2021, we are likely to see positive growth rates in all 5 countries.

Bulgaria. Although there was no ban on construction works during the two-month state of emergency in Bulgaria, construction output growth will be hampered by the COVID-19 crisis. The economic uncertainty and rising unemployment are expected to hold back real income growth, which will mainly affect the property market. The growth driver in 2021 is set to be the completion of many large-scale office buildings, while industrial and warehousing construction is also to contribute positively. Output in civil engineering will be driven by road and public utility constructions where EU funds play a major role. The energy sector will also have a net positive impact because of the ongoing works of the Bulgarian part of ‘Turkstream’ in 2020 and 2021. Thus, total construction output in Bulgaria is to remain almost unchanged in 2020 (+0.3%) while in 2021 it is set to grow by 9.2%.

Croatia. COVID-19 and the Zagreb earthquake have dramatically weakened the short-term outlook for most building construction in Croatia. Civil engineering, though, will remain relatively unscathed. For buildings, COVID-19 has greatly affected both supply and demand for construction services, while the Zagreb earthquake has primarily influenced demand, in some subsectors in less than straightforward ways. Civil engineering as a whole remains strong despite the pandemic and the earthquake, but demand will vary considerably from subsector to subsector. Croatia’s July 5 elections will significantly influence the country’s policy responses to the problems it faces, but no matter who wins, the consequences of the two crises will affect the country’s construction sector for years to come.

Romania. All segments of the Romanian construction market have been impacted, in one way or another, by the pandemic and the measures taken to mitigate it. Like the rest of the EU, Romania is passing through a recession, with GDP and public consumption dropping significantly in 2020. Recovery is expected for 2021, but Romania’s bounce-back might be slower than the EU-average, since there is a lack of infrastructure and public funding availability. New residential construction is predicted to perform worse than previously expected in both 2020 and 2021 due to lower demand. The non-residential subsector is also forecasted to have a rough couple of years, with companies rethinking their office needs and retail consumption trends shifting. In addition to the recession, low efficiency in EU funding absorption is also holding back civil engineering. Overall, we predict construction activity in Romania to suffer a 2.1% decline in 2020, but to recover slightly in 2021, as the economy stabilizes.

Serbia. The beginning of the year was exceptionally strong for all subsectors, announcing another year of steaming outputs, but it was broken by the pandemic state of emergency and movement restrictions in April 2020. The fact that Serbia had a lockdown in the midst of an economic and construction recovery will make it one of the more resilient economies as fast recovery is expected. On the other hand, this extraordinary event will definitely affect the overall result in 2020, with still uncertain severity. After restrictions were cancelled, rebound followed on both residential and commercial markets. Home transactions had a stellar recovery in May, and the retail segment also reports pre-crisis turnovers in June. The good news is that none of the planned projects was cancelled, while several large land transactions in May 2020 announce investments will go forward. What scenario will play out still depends on the epilogue of this crisis and the eventual follow-up events during the course of this year.    

Slovenia. Construction industry in 2020 and 2021 will be characterized by the short-term disruption resulting from COVID-19, and a more favourable long-term demand for construction services. The former itself, due to a 3-month long lockdown, could potentially decrease construction works by more than 10% in 2020, but anti-crisis measures, including a boost to civil-engineering construction, will be supportive. The forecasted decline in construction output in 2020 is thus 5,5%. Several big projects that started shortly before the onset of the pandemic have resumed after the lockdown such as the construction of the Second Railway Track to Port Koper and the Third Axis Road. These and a major raise in public housing (mostly in Ljubljana) should lead to a total construction output rise of 2,6% in 2021. In such a scenario, construction output will not decrease below EUR 3 billion in either 2020 or 2021, and might even act as a stabilizer for the country’s overall economic activity in contrast to the financial crisis of 2008 when a depression in construction activity represented a drag on economic development for almost a full decade.

East Europe

The ‘big countries’ of EECFA (Russia, Turkey, Ukraine) are also set to be hammered by the pandemic effects this year. Worsened by the underlying economic problems in these countries, they will likely register far bigger slumps in their construction output in 2020 than the ‘small countries’ of EECFA. But growth could return next year in Turkey and Ukraine, whereas Russia could experience a slight decline still.

Russia. The volume of construction market in 2019 is expected to have exhibited a minimal negative correction (-0.2%) due to the high base in 2018, and the decline in civil engineering caused by the completion of many big-league projects. 2020 is to see a considerable drop in construction (-7.4%) owing to a set of negative factors that the economy is battered by: falling oil prices, nosediving ruble exchange rates, as well as the subsequent COVID-19 pandemic and the long-lasting lockdown. All this has led to an economic crisis that will be felt throughout 2020-2021 and is to cause a recession in all segments of the construction market, except for strategically important ones such as infrastructure, healthcare and agriculture-related constructions. In 2021, due to the expected recovery trends in some segments of non-residential and civil engineering construction, the rate of decline will likely be noticeably slower, but the general negative dynamics will likely continue and the construction market is predicted to post a decrease by another 0.5%.

Turkey. The economy was in the process of recovering in early 2020 but had to confront with the COVID-19 problem from mid-March on, after the first positive case was diagnosed. To deal with it, the Government had to allocate big sums of money, which inevitably reduced funds to be used for projects. Precautionary measures for the pandemic and the falling exchange rate of the Turkish Lira against the Euro (by 13,65% between January-June 2020) caused declines in demand for many goods and services, including real estate. Incentives such as mortgage loans by state-owned banks for home buyers under market interest rates and at 90% loan-to-value ratio have become very effective: granted loans reached about 101,000 in the first four weeks of June. Building construction permits registered a historical peak in 2017, but massive drops in the next two years, which continues with a mild fall in Q1 2020. Completions, however, did not decrease in the same way as starts until Q1 2020, mainly because there are big backlogs of construction in every segment, except for wholesale and retail trade buildings. For this reason, building occupancy permits are set to continue to remain higher than construction permits during the following years. Nonetheless, we foresee further market contraction this year. Recovery could start in 2021.

Ukraine. Over the past four years, construction market of Ukraine was on a recovery path, but the pandemic and the consequent economic crisis dramatically worsened construction trends and expectations in the country. Current indicators of the volume of capital investments and a drop in construction volumes suggest a slump in the construction market. Under such conditions, state support and bank lending would remain a reliable means for the construction market, but developers stopped borrowing during the lockdown, and bankers predict a great decrease in business lending. Future construction trends will largely depend on the dynamics of the economic recovery. The government’s economic recovery program contains no targeted measures to support the construction industry or mortgage lending, leaving builders alone in the fight against the crisis. Residential market is expected to shrink most in 2020 and each sub-sector is foreseen to come back in 2021.

Source of data: EECFA Construction Forecast Report, 2020 Summer