EECFA countries in the European Commission’s 2020 Macro Forecast

Before the 2020 Summer EECFA Construction Forecast Report was published, the European Commission released its forecast for the economic prospects for EECFA member countries. The main changes in prospects between Autumn 2019 and Spring 2020 have been collected in this article.

Written by Bálint Parragi, EECFA Research, ELTINGA

In Spring 2020, the global economy as a whole has been hard hit and shrunk due to the coronavirus pandemic, marking the end of many quarters and years of economic growth. According to data depicted on Chart 1, every country’s GDP growth decreased, but not to the same extent.

The countries having experienced high GDP growth (higher than 2.5% per annum) in Autumn 2019 are still growing, but very much less than before. Romania and Bulgaria have the highest absolute decrease with approximately a reduction of 3% and 2.5%, respectively. The economy of Serbia and Euroconstruct member Hungary slowed down too, but not as drastically as that of their eastern neighbours, so they have the highest GDP growth among these countries. Where growth was less and reduction was the same, the crisis created a stagnating or even shrinking economic status such as in the Euro Area, the EU and Turkey. The Russian economy even suffered a significant negative shock with a value of -0.7% per annum. All in all, EECFA countries still have a higher GDP growth than the others.

Looking at the gross fixed capital formation data (Chart 2), the situation is a bit different, but decreases are general. According to expected GFCF growth, Serbia lost little to its previous period value, ranking high above all other states. While Romania experienced a moderate drop, annual GFCF growth has nearly come to zero in Hungary, Croatia, Slovenia, the EU (the Eurozone as well) and Russia. The greatest falloffs are connected to Bulgaria and Turkey whose previous period value was by far the lowest and the only negative value among the examined countries.

Total construction growth has been revised downward everywhere, but while in Romania and Hungary it stayed positive (3-4%), it has come to zero in Slovenia and turned into negative value in Bulgaria, around -5% per annum. Construction’s share in total investment in the EECFA countries ranges from 57% (Slovenia) to 62% (Romania), with Hungary and Bulgaria in between (61% and 59% respectively).

For construction segment level forecast, please consult with our latest reports issued on 29 June that can be purchased on eecfa.com

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

Q1 2020 sees rush to complete ongoing projects in Romania

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

The first quarter of the year 2020, mostly starting with mid-February, was marked by ominous economic forecasts. Thus, some decline in construction activity was to be expected, and indeed newly started construction projects dropped to just over EUR 1.3bln in Q1 2020. This amounts to a 14% decrease compared to the equivalent period of 2019, according to the latest edition of the EBI Construction Activity Report for Romania.

At the same time, the amount spent on construction increased by 25%. Coupled with the record amount of completed construction works (nearly double that of the first quarters in each of the previous 5 years), lends us to the conclusion that investment was increased in order to rush and complete the (at the time) ongoing projects, before the anticipated negative economic impact of Covid-19 took place.

Covid-19 changes in reporting frequency

In light of the Covid-19 pandemic and the accompanying economic impact, the data visualization for EBI Construction Activity Report is currently updated on a monthly basis, rather than quarterly.

Renovation activity increases in building construction

Building constructions started for the first quarter of 2020 dropped by 3% over the same period of 2019. However, the amount of new building construction for Q1 2020 is actually higher than in the first quarters of 2014-2018, and thus this small drop is more due to the good performance in 2019 than a clear sign of decline for 2020.

Looking at renovation figures, however, we can notice a somewhat new trend: that of increased renovation activity. While new building construction can, and in some cases was, pushed back due to uncertainty regarding the economic conditions, renovation works are less prone to this effect since they are more urgent in nature. Furthermore, as government measures started to be implemented in March, individuals and businesses alike needed to make adjustments to their living and working conditions: spaces were converted to quarantine centres, offices and industry alike had to adapt to new conditions and started to ensure layouts that allow more social distancing, hospital wings were relocated and so on.

Civil engineering output exceeds expectations, but low activity starts caution about future

The first quarter of 2020 saw an estimated expenditure of EUR 804mln on civil engineering projects, exceeding any single quarter since data aggregation started in 2014. The high level of output achieved came with the completion of many ongoing works and comes with a significant caveat: the quarter was also markedly worse than the previous year in terms of Activity Starts, with a 38% drop over Q1 2019. The most notable drops in new projects were in the segments of road and public utilities. Both reportedly had quite an increase in output over the same period, and thus the focus here seemed to be completion, rather than starting new projects.

Regional disparities in new construction activity

Despite the national-level decline in new activity, a large level of regional disparity can be noticed. The Center, South and West regions are showing an actual increase in construction starts compared to Q1 2019 in several segments, moving against the overall trend of the country. This could be an indicator of the higher level of resilience of local construction markets and a higher investor confidence in local economies. These regions might also be tardier in their response to the anticipated crisis, but it’s something to keep an eye on in the future and more data will show how resilient they are.  

EBI Construction Activity Report

The EBI Construction Activity Report is a quarterly publication that relies on the project information database of iBuild and is prepared by Buildecon and Eltinga. It comprises an analysis of projects based upon several object types: multi-unit residential construction, non-residential (further split into 9 segments) and civil engineering (split into 8 segments). The report offers information about the number and value of projects started or completed, and an estimate of the total amount spent on each segment in that quarter. If you would like to receive a data visualization for the EBI Construction Activity Report free of charge, please write to us at the ebi@ibuild.info e-mail address.

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

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

Physical restrictions

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

Construction works

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

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

Factors limiting the construction sector’s performance

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

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

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

Romania C-19 situation in construction (status on 30 April 2020)

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

UPDATE ON 7 MAY 2020: from May 15 on a “state of alert” will take over the “state of emergency”. People will be allowed to move freely within localities without having to declare their destination, but only in groups no bigger than 3 people. Movement restrictions in towns under quarantine will remain in force.

Timeline

  • 26 February: the first confirmed case reported in Romania
  • 11 March: schools closed
  • 16 March: the Romanian president issued a state of emergency, granting the government enhanced emergency powers to cope with the pandemic. At the time Romania had 168 confirmed cases and no deaths.
  • 17 March: restaurants closed, and all public gatherings and events suspended
  • 21 March: shopping malls closed
  • 22 March: first death attributed to Covid-19 reported
  • On 24 March a state of lockdown was announced via military order and the population was restricted from moving freely outside of home, with several exceptions (work that cannot be done remotely, essential shopping, assisting the elderly, medical emergencies, walking pets, personal exercise in the proximity of the home, volunteering, agriculture). A proof for the valid reason for leaving home is required, with citizens asked to produce a personal statement prepared before leaving the home and/or to have a proof of employment. Elderly citizens (65+) were further restricted, being allowed to leave the home only for 2 hours per day (11:00-13:00). However, retailers were instructed to provide preferential service to them during this interval.
  • On 15th May, the State of Emergency is up for revision. However, even in the event of it being lifted, some restrictions are to remain in place, like the interdiction on festivals and large gatherings and the mandatory use of face masks in public spaces and on means of public transport.

Construction Works

  • While the lockdown significantly reduced the mobility of persons, it provided little restrictions in the range of work activities that could be done (dental work, non-emergency medical interventions, hospitality and in-house food service).
  • As of the writing of this article, there have only been a few major construction works delayed and, anecdotally, some projects are in fact moving faster than scheduled, such as bridge and road construction, taking advantage of reduced traffic. DIY works are also reported to be ongoing, with furloughed workers from other industries taking advantage of the time at home to engage in renovation works, with a noted increase in online sales of DIY retailers.

The new EECFA Romania Construction Forecast Report is planned to be issued on 29 June 2020. Sample report and order

Factors limiting the construction sector’s performance

The direct impact on the ongoing construction activity has been minimal since no restrictions were in place specifically targeting construction works. Recommendations regarding social distancing were given, but not mandated. Several indirect factors, however, were expected to limit the amount of construction activity:

  • Initial concerns over construction material availability have been raised. However, as of yet, no major shortages have been reported. Some manufacturers noticed a reduction in direct sales to individuals, however, B2B material sales have continued at comparable levels and online sales have increased.
  • Occasional worker shortages have been reported, as some workers have taken medical leave or used vacation days, especially in the early stages of the lockdown. Fortunately, no major shortages have been reported due to the infection.
  • At the same time, other companies have had to let employees go, with 37.750 work contracts in construction having been terminated from the start of the emergency period as of 29th April.
  • Lack of interest in investment is expected, especially in the hotel and restaurant segments, which will likely reduce demand in the current year. With slim changes of reopening for the summer season, tourism related construction is expected to be postponed.
  • Trends in office construction are also expected to change, with working from home on the rise and open office plans under scrutiny.
  • Lack of public funding could have a major negative impact on construction activity once the initial blow of the pandemic passes. Many county governments and city halls have used a large portion of their investment funds for measures aimed at reducing the spread of the virus, and thus there remains little for projects like infrastructure development or renovation. On national level, according to several governmental agencies, public deficit is set to reach 6.7-7.3% of GDP in 2020 and economic growth is to be stunted, with a decline of at least 1.9-4.7% of GDP.
  • Lack of private funding is also a major concern, with many companies losing significant resources and burning through their savings and credit lines.
  • At the same time, more than 1 million Romanians have had their work contracts suspended and 270 thousand lost their jobs since the state of emergency was instated (as of 29th April) and thus their spending power would have been significantly diminished.
  • Real estate transactions are showing signs of slowing down, with March 2020 seeing 4.6% fewer houses and 11.7% fewer apartments traded compared to the previous month. The market remained 8.5% more active than March 2019, however.

Anticovid measures in construction

There are no specific measures announced, as of the time of writing this article, aimed to supporting construction. However, there are some measures that could, indirectly, help:

  • The government is providing the resources to pay 75% of the initial wage for those with suspended contracts, helping public consumption remain afloat, with a positive impact on companies trying to retain qualified workers and maintain their cash-flow.
  • A RON 15bln program to support small and medium enterprises (“IMM Invest”) was launched on 28th April, providing state-backed loans for investment and working capital.
  • EUR 750mln have been allotted from EU funding for Romania for supporting small and medium enterprises, with a further EUR 300mln for assisting workers with suspended contracts.
  • The government’s economic recovery plan takes into account using infrastructure construction to boost the economy (which would increase the deficit even further). However, as of the writing of this article, no plan has been approved, and so the impact it would have cannot be assessed.
  • The government backing of mortgage loans for first time home owners is expected to continue into 2021, rebranded as “One family, one home” (Romanian: “O familie, o casa”), which should help counter some of the negative effects on the residential market. Its impact on the market diminished in 2019, with regular loans becoming almost as affordable, but it comprises a large portion of the segment nonetheless, since the programme covered 45% of all ongoing mortgage loans in March 2019.

Slovenia C-19 situation in construction (status on 26 April 2020)

Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia

The COVID-19 pandemic has reached the Slovenian construction industry in a good shape. New construction contracts strengthened in H2 2019, resulting in some of the fastest growth of construction in early 2020 in the whole EU. The activity continued into March 2020 even though the lockdown measures were already implemented.

However, a decline is expected as halting construction works are affecting the entire sector:

  • There are some disruptions in the supply of materials as some manufacturers have stopped production and others have reduced production.
  • Construction work is being done less intensively mainly because of measures to protect workers.
  • Some foreign contractors have problems mainly with the logistics of their workers on projects in Slovenia.

Yet, the construction industry has been relatively less affected than some other industries (like tourism) as most large projects continue even during the lockdown measures. The concern is the absence of real estate contracts as the risk of making long-term investment decisions has also increased.

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

Economic damage to construction segments will crucially depend on the duration of the crisis and the uncertainty it brings. According to some estimates, the short-term crisis is expected to result in a 5% drop in GDP. First indications that the return to normal operation of the Slovenian economy is near were the announcements that several lockdown measures were to be relaxed by the end of April 2020. Nevertheless, the actual fall of the economic activity will depend on the effectiveness of the state’s actions, where Slovenian politicians have promised one of the largest stimulus packages in the EU (estimated at more than 6% of its GDP) but they will have to be implemented in an effective way.

Ukraine C-19 situation in construction (status on 23 April 2020)

Written by Sergii Zapototskyi – UVECON, EECFA Ukraine

Physical restrictions

  • On 12 March, the Cabinet of Ministers officially quarantined the entire territory of Ukraine for three weeks due to COVID-19, with a number of restrictive measures, mainly for educational institutions and some on air traffic and border crossing at most checkpoints in Ukraine.
  • On April 6, in order to combat the spread of COVID-19, the government introduced additional restrictions prohibiting being in public places without a face mask, going out without identification documents, being outside in groups of more than two persons, visiting parks, squares, recreation areas (except for walking pets for one person), going out to sports grounds and playgrounds, visiting social security institutions and the like; catering, shopping and entertainment centres, fitness centres, and cultural institutions. The quarantine introduced by the government was to expire on April 24 but owing to the sharp increase recorded in the number of COVID-19 cases (especially after the Easter holidays) the quarantine has been extended until 11 May 2020.

Construction works

  • Even though there is no direct ban on construction, there are several restrictions. According to the recommendations of the Ministry of Health and WHO, as well as according to the orders of the Cabinet of Ministers, main restrictions refer to the recommended number of people per square meter of area at construction sites, and the requirement to provide workers with personal protective equipment and antiseptics. Traditionally, employees are instructed on these requirements.
  • Of course, not all construction work can be carried out in full with these significant quarantine restrictions, but developers try to meet the deadlines for delivering their projects.
  • There is a difficulty in the supply of building materials and the delivery of construction crews.

The new EECFA Ukraine Construction Forecast Report is planned to be issued on 29 June 2020. Sample report and order

Anticovid measures in construction

There are no direct measures to support the construction sector, but indirect protectionist measures include a moratorium on conducting tax audits, postponement of filing declarations, and the prohibition for commercial banks to raise interest rates under the loan agreements for the duration of the quarantine.

Factors limiting the construction sector’s performance

  • Construction has not yet been hit hard as it is a long-term business, but if the situation drags on until June, the market might stagnate.
  • The construction market in Ukraine faces two key challenges: 1) economic deterioration that derives from the inefficient management (and not from COVID-19) but is aggravating the already difficult economic situation associated with the virus; 2) the instability associated with a pandemic. As now no one can predict how long the quarantine will last, most participants in the real estate market are on standby. Investors do not spend, except for primary needs, until the situation becomes clear. In addition, there is the uncertainty of what will happen to the global economy which may continue to decline even after overcoming the pandemic.
  • As the active construction season usually begins in April, developers, to the extent of their financial resources and available materials, are trying to continue construction by isolating construction sites and taking security measures. This applies to both building residential and commercial real estate.
  • Companies interviewed by LIGA.net (leaders in the construction market such as Integral-Bud, Kievgorstroy, KAN Development, SAGA Development, Perfect Group, UDP) assure that they have enough finances to continue working at all facilities. However, this is not the case for medium and small construction companies. The latter need working capital and the possibility of obtaining preferential loans. If the pandemic drags on for a long time, this will hit housing construction in the first place because in Ukraine it is largely financed by buyers of future apartments. Residential complexes under construction that are queuing can freeze the construction of subsequent ones with only current ones being completed.
  • Commercial real estate is built as a long-term investment by developers and is based on longer-term financial models, making it less vulnerable to the temporary restrictive measures. But it is more dependent on global economic changes that affect the financial condition of investors. Also, much more imported materials are used in commercial real estates than in housing construction, so the restoration of production in Europe and the world will influence the continued construction of office and shopping centers in Ukraine. The appreciation of the US dollar has already led to an increase in the price of imported materials, and thus we should expect a price rise in domestic ones. Metal suppliers are already raising prices, for example. European building material producers are expected to increase prices after the end of quarantine measures in their countries. Construction companies need money to pay off their current obligations before starting to work again. Therefore, many developers in Ukraine are already looking for the possibility of borrowing at a subsidized 5%-7% interest rate for the entire construction period – 1.5-2 years.
  • Civil engineering had grandiose plans for the current year, but they are becoming increasingly unrealistic due to a significant lack of funds for financing.

Croatia C-19 situation in construction (status on 23 April 2020)

Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt) – EECFA Croatia

UPDATE ON 30 APRIL 2020: During the first phase of Croatia’s response to COVID-19, the country’s construction industry was not as tightly locked down as some others (e.g., the hospitality sector). While construction firms were not as free to operate as, say, grocery stores and food processing plants, projects of national significance, some projects considered important by municipalities and other sub-national governments and some private-sector projects continued to move forward. Construction companies were also called on to assist with the cleanup effort following the March 22 Zagreb earthquake. This provided some liquidity to the sector, or at least to those lucky firms involved in the projects on which work continued. Now that the Croatian government is lifting the strictest limitations on business, including those on construction work, construction activity is likely to increase considerably.

This, though, may be a double-edged sword. Social distancing is difficult to enforce on construction projects even with the best will in the world, and anecdotal evidence suggests that in many cases there is not even an effort to do so. For example, groups of workers have been seen traveling to and from construction sites seated close to one another in vehicles with enclosed cabins, and of course there are the frequent “supervisory meetings” where several workers gather to monitor the one working. If one or more construction workers causes an outbreak at some point, the sector as a whole could suffer real consequences.

Physical restrictions

On March 20, the Croatian government imposed stringent restrictions on movement and business activity in order to combat COVID-19.

  • They included prohibitions on travel outside one’s place of residence or across international borders unless for trips defined as necessary (e.g., to transport goods to stores that remained open or internationally), closure of educational institutions and nurseries, cultural and sports facilities, prohibition on the operation of all but essential businesses and limitations on the size of gatherings (initially no more than 5 people, ultimately no more than 2)
  • Work-from-home requirements were imposed
  • Public transport was suspended

Mid-April, the Croatian government permitted travel within counties, while on April 20 restrictions were extended to May 5 but their strictness was reduced.

On March 22, a 5.5 (Richter)/5.3 (MW)/VII (MMI) earthquake struck Zagreb.

  • It damaged 26,197 buildings of which 1,900 were rendered unusable. A number of hospitals, museums, churches, schools, government offices, historic buildings and other culturally important structures (including graves) were badly damaged
  • No specific regulatory measures were immediately promulgated other than that many sidewalks were closed due to the risk of debris falling from roofs and facades

Construction works

No strict ban was imposed specifically on construction, but the industry was restricted by the broad limitation, from which it was not excepted, to working from home.

  • That said, it appears that work continued on a number of construction projects, including those of the City of Zagreb and politically connected private firms and the Pelješac Bridge, either in violation of this limitation or pursuant to special exemptions
  • Also, after the Zagreb earthquake a number of firms with the appropriate equipment were permitted to clear debris and blow things up

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

Anticovid measures in construction

  • We are not aware of any construction-sector-focused anti-COVID-19 measures
  • Construction firms are benefiting, though, from general measures that the Croatian government took to limit the economic consequences of COVID-19
  • These measures include relief from taxes and governmental contributions (primarily payment deferrals for three months but some forgiveness), payroll support payments (minimum net wage of EUR533 for three months), loan payment moratoria (three to six months), debt enforcement moratoria (during the period of extraordinary measures), liquidity loans, sector-oriented loans (for the tourism and other export sectors) and credit lines for MSMEs in the tourism and hospitality sectors (although the minimum loan amount is EUR100k, which makes them ill-suited for micro and even small businesses)

Factors limiting the construction sector’s performance

  • There is no lack of construction materials, particularly in view of the fact that most building has ceased
  • Most tourism-related construction for the coming season has been completed, since that season is at hand
  • But other construction projects are not moving forward except for those considered essential. (“Essential” can have a variety of definitions, depending on the government responsible for defining the term. Some politically connected private projects are proceeding.)
  • Croatia’s heavy dependence on tourism, and the likelihood that tourism will not recover for years, means that construction, and the Croatian economy in general, will be very negatively affected for a significant period of time

Any other

Croatia’s handling of the COVID-19 crisis has been unexpectedly, indeed startlingly, good. It flattened the curve rapidly and has already achieved an R0 of less than 1. Much is due to the chance replacement of an ethically tainted Minister of Health by a highly competent appointee shortly before the crisis broke. But much is also due to the professionalism of Croatia’s public health services and medical personnel.

It remains to be seen if Croatia can continue its stellar performance. There are signs that segments of the populace are beginning to ignore social distancing measures. But the government seems alert to the possibility of R0 rising and willing to act rapidly to bring it down again.

It is clear, though, that Croatia’s quick and effective response to COVID-19 will lessen the severity of the economic effects of the crisis.

Croatia will be hit by a reduction in remittances from its citizens abroad. There may also be political consequences, since many Croatian ex pats are returning, and their political views may have been affected by their time abroad.

It is possible, but by no means certain, that the weaknesses in Croatia’s healthcare infrastructure, and possibly increased EU funding for healthcare infrastructure generally, will lead to significantly greater hospital and healthcare facility construction. That said, healthcare tourism, and so private healthcare construction is likely to be badly damaged long-term by COVID-19.

Construction in Zagreb, though, looks likely to increase dramatically in volume for years to come as reconstruction work of a minimum value of EUR6G will be needed.