Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia
Construction output in Slovenia decreased by two-thirds between 2008 and 2015 as the effects of the global financial crisis lingered and the Slovenian banking system needed restructuring. Early signs are showing that the pandemic will have much less impact and might even prove to be beneficial to the construction sector in 2021 and beyond.
In 2008, the Slovenian construction reached levels it had never reached before since the country became independent. According to EECFA’s research, its total construction output exceeded EUR 4,6 billion in that year, which as we know now, was unsustainable. Construction output decreased for the next 8 years and embarked on a low of EUR 2,2 billion in 2016 before rebounding to an estimated EUR 3,4 billion in 2020.
Then Covid-19 struck and the whole economy entered another crisis. With lockdown measures and restrictions to the physical movement of people, including workers, it was possible that construction would once again feel the burden of a general economic crisis that might force it into a full depression. In practical terms – how can construction workers construct new projects if they are not even allowed to work in groups on site?
After some initial confusion, it quickly emerged that Covid-19 will not have the same effect on the industry. Construction was able to continue its operations unhindered. Unlike in the Great Recession, banks have kept crediting new construction projects and at very low interest rates. Disposable income of the population has not decreased due to generous anti-crisis measures supplementing the lost income. And the government was willing to run large budget deficits as it was able to borrow at virtually zero cost on international bond markets. A part of these financing was invested in different construction projects, including in health building constructions.
Additionally, a fragile coalition of centre-left parties under Prime Minister Sarec fell apart in Spring 2020 and was replaced by centre-right coalition under the new Prime Minister Jansa. His agenda is also based on implementing some long-stalled construction projects, including the new high-voltage electricity distribution network connection with Hungary and the start of the construction of the new hydroelectric power plant near Mokrice. Some previous large construction projects have been continued or even accelerated, including the start of the construction of the so-called 3rd national road axis, as well as the planned expansion of the Slovenian railroad network that would capitalize on the ongoing construction of the new railroad connection toward Port Koper.
With these big-league construction projects and numerous smaller, privately funded ones, initial data on construction output in 2020 show that instead of decreasing, it might have actually slightly increased even during the health emergency and the accompanying economic recession. Additionally, with strong economic rebound predicted for the time after the emergency, potentially as soon as in the second half of 2021, construction output might grow further.
EECFA’s Winter 2020 forecast is envisioning for Slovenian construction a 0,3% real growth in 2021 and 1,7% in 2022, but with an upside potential.
Segment-level construction forecast is available in the EECFA Winter 2020 Construction Forecast Report Slovenia that can be purchased on eecfa.com
The new government has presented an ambitious long-term plan for civil-engineering, health and nursing home construction for the next few years (although it implementation will greatly depend on the results of the next election in 2022).
It will also have plenty of financing available from the comprehensive EU Recovery Plan. In Slovenia’s national recovery and resilience plan, the European Commission has confirmed access to EUR 5.2 billion for the 2021-2027 period. All in all, it is becoming clear that unlike in the previous crisis, access to funding for construction will not be a problem this time.
Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania
One year later.
In January 2020, the World Health Organization started issuing the first warning of a novel coronavirus emerging, and on 26 February the first case was confirmed in Romania. Measures taken to try and contain it led a state of emergency and a lockdown introduced on 16 March. One year later, we can look back at how the residential real estate market reacted to the pandemic and the economic crisis that accompanied it, and we can make an attempt to understand where the market might go next.
To start with, prices on the residential real estate market in Q1 2020 reached their highest value in the past decade and an unease started to permeate the market with flashbacks to the 2008 credit crunch and the massive drop in prices and transactions that followed. This made many developers rush to complete projects before the market collapse, a trend we described in a previous blog post.
Prices did indeed start to drop slightly by Q3 2020, but they remained at a level higher than that of the previous year and by the end of the year the early indicators pointed to a return to growth. This has been pointed out in other markets as well and seems to have impacted a large number of developed and developing economies. However, each country is different, and in the case of Romania, albeit some of the causes of this phenomenon are shared, the outcome and forecast might be different.
Residential forecast is available in the latest EECFA Construction Forecast Report Romania that can be purchased on eecfa.com
Everything is relative and so are prices.
One can wonder if these prices are too high, and if they might grow further or if we’re looking at a potential bubble that will burst in the near future. We previously addressed some of these questions in (yet) another blog post.
Since then, the main factors have changed in light of the pandemic, but it might still be useful to look at the same ratio between income and home prices that we analyzed then and bring it up to date. In 2007, the average net monthly income could buy you approximately 0.20sqm of an average located two-room apartment. By 2017, when we last ran this test, one could buy 0.46sqm with the average wage. For 2019 and 2020 alike, our estimates place this indicator at 0.50sqm and so home prices relative to income actually seemed to be relatively stable.
Why some prices were expected to fall and why they haven’t.
While in general there might be a plethora of reasons for residential prices to drop, in the case of the pandemic-related economic downturn we were initially looking at several factors, somewhat similar to those we saw in 2008, such as unemployment, lower income, higher mortgage default rates, stricter lending criteria, higher interest rates and/or a rush to sell off properties by underfunded developers. In the case of the pandemic, some of these did indeed happen:
Employment did indeed decline between March and November 2020, but only by 2%-3% compared to the same months of the previous year (source: NSI). This was largely due to the employment protection measures taken by the government, which provided incentives to furlough personnel rather than firing them.
Average income rose during the pandemic. Even in April and May, the months worse hit by the lockdown, net wages actually grew by 2% over the same months of 2019 (source: NSI). This was also maintained by the furlough scheme that provided payments of up to 75% of wages for the employees of companies affected by the pandemic.
Loans past due declined. By November 2020, the share of loans past due in total loans was 4.83%, down from 5.46% in November 2019 (source: NBR). Granted, this is still far from the 1.24% average we saw in 2008 but is well within the general descending trend of the previous three years. There was some government support in this segment as well, with the possibility of postponing loan repayments for those negatively impacted by the pandemic, and some banks also took their own measures in this direction.
Lending criteria and interest rates. Lending conditions remained relatively stable while interest rates for mortgage loans declined slightly by November 2020 over November 2019 (-0.5pp, source: NBR). This was partly due to the impact of the tax change in late 2018 that raised interest rates in 2019 over their trend and was later reversed.
Developers had a more secure line of financing. While during the previous recession in 2008 a lot of development was carried out through credit, by early 2020 many properties under construction were pre-sold, and down payments on these provided the necessary cashflow to continue building and even wait longer to find buyers in order to sell at a better price.
Furthermore, due to the reduced spending possibilities with the shutdown of non-essential travel, in-restaurant dining and entertainment venues, spending habits changed. Despite income slightly growing (on average), the saving rate went up and thus by end 2020 the population had a lot more money saved on their accounts, even if the term deposits didn’t go up as much. This high level of very liquid capital can be used to fund residential investments, be it renovation, construction or purchasing a new home.
Where the market is heading.
The longer-term trend of price increases on the residential market continues to be the most likely scenario as demand continues to outpace supply in many of the larger cities like Bucharest or Cluj Napoca. Some potential events would bring merit to a more pessimistic outlook:
Changes in employment and income might be ’ticking bombs’. As said, a lot of the market stability is due to government intervention in preventing mass unemployment and ensuring a minimum income. Once these braces come off, there are genuine concerns that the labor market might see a correction, which would have a negative impact on the residential real estate market. The risk of this is somewhat low, though, since a large portion of those furloughed have returned to work (with some notable exceptions in the hospitality industry), but a small correction could still happen.
Medium- and long-term changes in work trends. With the surge in remote work due to the pandemic measures, one can wonder if this would lead to more structural changes in the way people work in the future. If remote work becomes more common for a significant proportion of people, this will have a massive impact on the residential market. It would lower demand in large cities and increase it in metropolitan areas and smaller cities. This would be somewhat limited in the case of Romania, though, as the country still has relatively large economic segments being less prone to remote work such as manufacturing and construction.
We are already noticing some changes in home buyer preferences. After spending more time at home, either in lockdown or from working at home, home buyers now focus on larger homes, preferably with a yard or at least a large balcony.
Case in point: Cluj Napoca.
Taking Cluj Napoca as an example, the local real estate market is seeing massive demand increases as young people, mainly in the IT field, move to the city to study and take up work. They enjoy higher-than-average income and living in the city gives them proximity to various entertainment and services options, access to a booming labor market, entrepreneurship, and business opportunities. But they also have some major downsides: high rents and residential prices that chip away at their income, gridlocks, light and noise pollution and many other disadvantages of living in a city. With the advent of the work-at-home scheme, they might be more interested in relocating to homes in the neighboring rural area (even more so than they are now) and thus retain a higher share of their wages without the downside of commuting. This would put less pressure on the residential market in the city itself, and lead to lower rents and prices. The city thus becomes less interesting for developers and construction might slow down.
Despite the pandemic, home prices are seemingly growing. While this might seem strange at first, the actual impact of the current recession on home purchases is limited since the average individual still has their job with a similar or even higher income and is actually spending less of their income on goods and services and thus can afford to save for a down payment.
In the shorter run, the market shows some signs of overheating, but is far from brittle. If the pandemic recovery turns out to be lengthy and there are major changes in the way work is done, it could limit prices and drive them down temporarily. However, if you are holding out in buying a home waiting for prices to collapse, you might be in for a bit of a disappointment.
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.
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.
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.
Source of data: EECFA Construction Forecast Report, 2020 Winter
Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatian members
It’s at last becoming possible to assess the consequences for Croatia’s construction sector of the country’s July 2020 elections. Jockeying for governmental positions, COVID-19- and tourism-season-related priorities and other pressing matters prevented the new Croatian Democratic Union (HDZ) led government from moving on its larger agenda until recently. Now, though, the political picture, and the impact of the elections on Croatia’s construction sector, is getting clearer.
The July elections were particularly important to the Croatian construction sector for a number of reasons. They occurred mid-COVID-19-pandemic, when a change in government or even just a change in government policy would have had large consequences for Croatia’s fight against the disease and so for public- and private-sector finances and accordingly for the resources that would be available in the next few years for construction projects. This was especially true as the elections were called in the midst of Croatia’s tourism season, a critically sensitive time, as the survival of the country’s hospitality sector, which is responsible for much of Croatia’s building construction, was at stake, and relatively soon after the Zagreb earthquake, which caused on the order of EUR 12bln in damage to the city’s buildings and infrastructure that must be repaired.
Making the elections still more consequential, they seemed likely to decide the fates of several political parties and movements, some with significant influence on Croatia’s construction sector, as well as those of a few individually powerful politicians important to that sector. Finally, they also seemed likely to affect Croatia’s relationship with the new EU Commission and EU Parliament, relations determinative of the amount and nature of EU COVID-19- and earthquake-related aid that Croatia could secure.
So, how have things turned out? Regarding winners and loser, the center-right HDZ was by far the biggest winner (increasing by five the number of seats held by its coalition in the one hundred fifty-one seat parliament) and the center-left Social Democratic Party (SDP) the biggest loser (with its coalition’s seat count falling by ten). Far-right defectors from the HDZ did well as a new party (securing sixteen seats), but paradoxically lost power, since the HDZ’s strong performance made them irrelevant to the formation of an HDZ-led government.
The consequences of the HDZ victory are mostly positive for the construction sector. Importantly, there will be substantial continuity in the government’s construction policy. While by no means certain, it’s possible that a victory by the SDP and its coalition could have led to months of fractious conflict within the coalition, and indeed within the SDP itself, and put in power a party that after many years out of government might no longer have been familiar with how to rule.
As to the policies that the new government will adopt, further simplification of bureaucratic procedures relating to construction is likely, as is a continued emphasis on large infrastructure projects and COVID-19- and earthquake-damage amelioration measures. Crucially as to the latter, Andrej Plenković, Croatia’s prime minister both before and now again after the elections, has great pull with the European Commission, since he played a major role in brokering the selection of Ursula von der Leyen as the Commission’s president. (In fact, von der Leyen, while EC president, made a controversial video supporting Plenković’s candidacy, for which she later apologized.) For the same reason, he has similar influence with the European People’s Party, of which the HDZ is a member. These relationships have very likely already been reflected in the large sums that the EU proposes to allocate to Croatia for earthquake and COVID-19 relief. They probably also mean that the EU will be more flexible in how Croatia spends the money that it receives for these purposes. All good news for construction in Croatia and in particular for civil engineering projects.
Construction forecast for Croatia is available in the EECFA Forecast Report Croatia that can be purchased on eecfa.com
Also important to the construction sector is the dramatic decline of the Croatian People’s Party (HNS) as a national political force and the eclipse of its leaders. The HNS kept only one parliamentary seat and no ministries. The party’s formerly extensive influence on energy matters is now very much past tense, and its members are being gradually removed from positions of power in Croatian state-owned enterprises, a process likely to be accelerated by the arrest of the CEO of JANAF, Croatia’s gas pipeline company, who was formerly a HNS member is said to still be close to that party. The result is likely to be a better alignment of Croatia’s energy policy with its policies in other spheres. In particular, it will likely lead to a construction program for electrical-power facilities more in keeping with Croatia’s energy needs than with its government’s political makeup.
Other developments have been less positive. The HDZ has not followed through on some of its electioneering promises. One important one is that the number of Croatian sub-sovereign administrative divisions would be reduced from the present 428 municipalities (the smallest of which has 137 inhabitants), 128 cities and twenty counties to a more sensible number. The cost of maintaining so many governmental organizations is quite high, with, for example, a mayor, municipal secretary, administrator/bookkeeper, etc. required for each municipality and city not to mention the offices, office cleaners, doorkeepers, official automobiles and the like. that lead to even more expense. It appears, though, that the internal political cost of rationalizing Croatia’s local governments, which would be a painful task for a government of any political stripe, is too high for the current one, and so significant reductions in numbers and payrolls are unlikely. The rub here is not just that Croatia’s surfeit of local governments is expensive and leads to corruption. It’s also that reduction in their number and related reforms are high on the priority list of the EU. So a failure to follow through on the promised reforms could lead to friction in the release of EU funds, including construction-related money.
The new government has also scored some own goals with its post-earthquake and anti-COVID-19 policies. As to its response to the devastation that the earthquake wrought in and near Zagreb, promised relief has been slow in coming, and the legislation governing it was not well drafted. While matters are now being clarified, funding delays have caused real suffering for those whose residences and offices the earthquake rendered unsafe.
As to the COVID-19 pandemic, the prior HDZ government’s success in the spring in tamping down COVID-19 infections eroded dramatically in the summer and fall. Daily infections are now at record levels, likely a result of lax enforcement of preventive measures in the summer (to accommodate tourists and electioneering) and continued lack of enforcement into the fall (reflecting public resistance to inconvenience and a loss in confidence in the government figures leading Croatia’s COVID-19 response). The upshot may be a weaker tourism season in 2021 as travelers no longer see Croatia as safe. This would in turn hurt the hotel construction sector directly and, because tourism is such a large part of the Croatian economy, many others indirectly. A failure to get COVID-19 back under control could also have other, nearer-term economic consequences through mounting health-care costs (including those relating to the disease’s long-term consequences) and worker absences due to self-isolation and disease symptoms. The latter absences could be quite prolonged given COVID-19’s effects.
Budgetary problems, including those alluded to above, are another problem facing the new government, and only a few of them are of its own making. Income and value-added tax receipts are down dramatically. Combined with the pandemic support payments needed to prevent massive unemployment and company failures, these shortfalls have blown a large hole in Croatia’s budget that the government has covered by borrowing. Earthquake relief and further COVID-19 measures will exacerbate the budgetary problem, and borrowing more is not a viable solution. While Croatia has been promised substantial EU aid, indeed more on a per capita basis than most EU members, it’s still not clear when that aid will arrive or how fast the government can disburse it once received. Progress at the EU level in this matter has so far been slow, and the consequences could be severe for all Croatian construction sectors, including civil engineering, if it does not speed up soon.
All in all, the outcome of Croatia’s July elections is likely the best that the country’s construction sector could have hoped for. Policy continuity, experience in governing and good relations with the EU are essential to Croatia at the present time. By triggering reform and renewal in the SDP, the elections may even have laid the groundwork for a more competitive, and hence more responsive, political environment in Croatia, which would also likely be a positive not just for the country, but for the sector.
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
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 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.
How much the pandemic hit construction activity: short-term implications for the residential property market
Written by Dragomir Belchev, EPI – EECFA Bulgaria
Construction sector in Bulgaria, and building construction in particular, was not affected as hard as others by the COVID-19 crisis. Yet, limited economic activity during the 3-month long state of emergency (between March 13th and May 13th) resulted in a drop of the index of construction production during this period by 16.9% on average. In June building construction output was 4.3% lower as companies in the sector are returning to business as usual. But already started residential and non-residential projects are financially ensured and are expected to be completed on time. And the accumulated started projects during the last several years started to materialize and 3660 dwellings were completed in Q2 2020, which is 56% higher than in Q2 2019. On the other hand, the economic uncertainty temporarily cooled down investor thirst in residential projects. Permitted dwellings in Q2 2020 dropped by 29.9%, while in terms of started dwellings the decline was not so dramatic (-15.6%).
The full exposure of the Bulgarian residential construction to the COVID-19 crisis remains to be seen in the months to come. Unemployment rate reached 5.9% in Q2 2020, which is 1.8 p.p. more than at the end of 2019. In mid-term the loss of income will reflect in people’s intention for buying a home, which could have a cooling effect on investments in residential property.
Residential property market
During the state of emergency, activity on the residential property market was restricted due to hampered administrative services. Additionally, the uncertainty regarding the near future made buyers temporarily pull away from the market. As a result, the total number of home transactions in Bulgaria in Q2 2020 shrank by 27.8% over Q2 2019. In Sofia, which has the largest chunk of the market (around 15%), the decline was lower (-7.6%).
During this summer we saw buyers gradually returning to the market, but while they are expecting a more significant price reduction, sellers are still reluctant to make such sacrifice. The shortage of quality property in big cities still puts the market power in the hands of supply with price levels almost unchanged compared to the beginning of 2020. In short-term, demand for property is fostered by 3 main factors:
Despite increasing unemployment, there is no major loss of income of people willing to buy before the start of the COVID-19 crisis.
Interest rates on mortgages were stable in the last 5 months, and as of July 2020 the average interest rate reached 2.89%, nearing the historic low of 2.85%. During the state of emergency financial institutions started to be much stricter in requirements, taking into account the affected sectors of the economy. In general, banks have the needed liquidity to finance viable projects of both sides – construction entrepreneurs and families buying a home. According to the Bulgarian National Bank data, the total sum of granted loans remain stable except for a considerable negative change in May 2020 when new housing loans decreased by nearly 28% over May 2019.
Buying property as investment is popular among people with free money since deposit rates are close to zero. Such investments could record good profitability especially when made before the completion of the construction project.
One segment of residential property market is experiencing a noticeable upturn. Due to pandemic, people are seeking more freedom and fresh air, which is resulting in strong demand for family houses in the agglomeration of big cities or near to them (in radius of 30 km).
Construction forecast for Bulgaria, including residential forecast, is available in the latest EECFA Forecast Report Bulgaria that you may buy on eecfa.com
In the midst of the pandemic, Turkey’s housing transactions are booming. Here is the answer why.
Written by Prof. Ali TUREL, EECFA Turkey
The pandemic in Turkey
Covid-19 has caused various problems in the Turkish economy, like in many other countries. The Government had to introduce a series of precautionary measures from mid-March onwards. Schools, universities, and many commercial establishments were closed. Factories and most construction sites had to stop work or reduce the number of workers. Many people lost their jobs that had to be compensated by the Government through allocating large sums of money. Many establishments got into financial difficulty, and rescue plans had to be put into effect in the forms of providing loans and deferring tax and other payments to public institutions. Demand for many goods and services, including real estate, shrank under the Covid-19 pressures.
Industrial production slumped by 6.8% in March, 30.4% in April and 19.5% in May 2020 from the same months of 2019. Some recovery occurred only in June by a 17.6% rise from the previous month and a 0.1% growth from the same month of 2019. Building construction was also hit by Covid-19, as at the end of Q1, building construction permits in floor areas total were 11.4%, occupancy permits 41.1% down from Q1 2019. The number of completed dwelling units was 152 thousand with a 39.5% drop against Q1 2019.
Building construction industry also appears to enter the recovery process in Q2 with a 40.8% growth in the first 6 months of 2020 from the same 6 months of 2019. Completions, however, registered a 32.5% falloff in January-June 2020 compared to the same period in 2019, most likely because of the Covid-19 effects, although there are big backlogs of construction in almost every segment. The completed number of dwelling units with 269 thousand was about 70% of the 6-monthly rise in the number of households in Turkey.
In a bid to stimulate housing transactions, the Government introduced a measure in June 2020, according to which the loan-to-value ratio in residential mortgage loans was increased to 90%. The three state-owned banks were to offer mortgage loans under market interest rates and with a longer repayment period: 0.64%/month for new housing, 0.74%/month for used housing, both with a 15-year repayment period when the annual rate of increase in the Consumer Price Index was 12.62% in June 2020.
The stimulus measure greatly influenced the national housing market. The number of dwelling units sold in March-April 2020 came down to 42,8 thousand and 50,9 thousand, respectively. After the announcement, 190 thousand dwelling units were sold in June and 229,4 thousand in July, implying 209.7% and 124.3% rises from the same months of 2019, respectively. The number of transactions in July was the monthly historical peak, while in June the second monthly historical peak in Turkey.
In June and July 2020 together, 419.369 dwelling units were sold, 232.222 of which (55.4%) on mortgage loans. It is possible that not all applicants were able to use these credits. The ratio of mortgage financed housing to total housing sold was 12.5% in the same two months of 2019. Equity financing was still important with a 44.6% share (187.144 dwelling units) in June and July this year. It appears that people consider investing on housing as a hedge against inflation when all commercial banks offer negative real interest for deposit accounts.
It has been a much-discussed issue in the media whether offering mortgage loans by state-owned banks under market interest rates would contribute to the clearance of the unsold newly built housing stock. The total number of first sales in June and July 2020 together was 126.569, 30.2% of total sales. The relatively higher price of newly built housing than that of the existing housing stock could be a factor keeping first sales at a 30% level. A media outlet suggests that about 24% clearance of the stock occurred by first sales in June and July this year.
The policy of offering mortgage loans under market interest rates contributed to the big revival of housing demand that had greatly decreased due to Covid-19. Since an interest rate subsidy at that level would unlikely continue for a long time, it will be interesting to see how the housing market will return to its usual course in the following months.
Construction forecast for Turkey is available in the latest EECFA Forecast Report Turkey which can be purchased on eecfa.com
Of the 8 EECFA countries, the highest growth of permitted m2 of buildings in 2019 was recorded in Ukraine. Both the multi-unit residential segment and non-residential buildings witnessed much higher permitted floor area than a year ago; almost 40% and 60%, respectively.
In the meantime, Turkey experienced a further massive drop. After permit halved in 2018, it halved again in 2019.
On the Balkans, Croatia and Serbia have the highest growth with both countries having registered an around 15% expansion driven by the residential segment.
Some countries like Bulgaria and Slovenia recorded a shrinkage, but both countries’ permitted m2 of buildings in 2019 was beyond the 2015-2019 average.
Which sub-market would you like to see? Interactive graphs for 8 EECFA + 1 Euroconstruct countries:
A boom in residential construction is underway in Ljubljana, Slovenia, having a knock-on effect on real-estate prices in the whole country. It will still not be enough to change the trend of rising residential real estate prices and rents. To offset the unaffordable luxury apartments, there is a national policy to build public housing.
Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia
Residential boom in Ljubljana, Slovenia – but can people afford luxury apartments?
After almost a decade of the worst crisis in residential construction in the history of Slovenia, residential construction has turned the corner. Most of it is due to very ambitious plans for constructing new multi-dwelling units in the capital city of Ljubljana. Several smaller developments of luxury residential properties commenced in 2018 and 2019, but their prices are usually too high to impact the price level and availability of housing in the whole city. While a total of almost 1500 new residential units are in planning phase or under construction currently in Ljubljana, only 500 will be completed before the end of 2020 – and most of them will be prized in the luxury range of EUR 4500 – 6000 per square meter, and thus, inaccessible for the majority of the population.
Even so, demand is likely higher. Before the crisis, an average of 1500 units was sold annually in Ljubljana. With the much-improved economic situation in Slovenia, full employment and easily accessible credit, demand for apartments, in Ljubljana in particular, has very likely returned to that level. Reasonably priced apartments for young families are especially in short supply due to lack of new construction.
The latest EECFA Slovenia Construction Forecast Report with analysis and forecast on the housing market up to 2021 can be ordered on EECFA’s website
Public housing scheme – is it viable?
For that reason, both the local municipality and the national government decided to significantly increase the construction of public housing. They have started the construction of 672 new dwellings at the Novo Brdo neighbourhood that will be completed in 2 years. The National Housing Fund of the Republic of Slovenia, which is building 498 of them, has obtained a loan of EUR 50 million from the Council of Europe Development Bank (CEB) for the construction of more than 800 dwellings across Slovenia, most of them in the Novo Brdo development in the western part of Ljubljana. The local municipality of Ljubljana will construct another 174 dwellings. All of them will be available for rent with rental prices of EUR 6-8 per sqm. The size of the dwellings will be between 30 and 80 sqm. The total value of this construction investment will be EUR 56.8 million.
There are plans to add thousands more dwellings in the next few years – 10000 new dwellings available for rent to young families by 2025 according to the national housing policy. If the policy proves to be successful, it will increase the supply of dwellings in Ljubljana by almost 10%. This would certainly have a major effect on real estate prices in Ljubljana. As Ljubljana represents more than half of the residential market in Slovenia, it also acts as an anchor for residential prices and rents – so a higher supply and lower prices of dwellings in Ljubljana would lower demand for dwellings in the rest of Slovenia as well.
The 2019 Winter EECFA Construction Forecast Report is to be released on 9 December 2019. Our best offer includes the subscription for the two sets of next reports (2019 Winter and 2020 Summer). For pre-order and details, please write to email@example.com. To view our sample report, visit our website http://eecfa.com/