Croatia’s new government: Turning point or business as usual?

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

Near Senj, Croatia – Photo by Tatjana Halapija

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.

Zagreb upper town, Croatia, after the March 22 earthquake – Source: Cropix

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.

Split, Croatia – Photo by Tatjana Halapija

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.

Russian Metropolitan Areas: Crisis Resilience in 2020

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

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

Moscow city – Source of picture

The 2020 crisis and regionality in Russia

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

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

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

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

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

The findings

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

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

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

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

Construction and resilience

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

Will COVID-19 shake Bulgarian housing?

How much the pandemic hit construction activity: short-term implications for the residential property market

Written by Dragomir Belchev, EPI – EECFA Bulgaria

Construction activity

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

Turkey: Despite Covid-19 housing transactions historically peaking

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.

Stimulus measure

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

Q4 2019 Permit-completion results of EECFA countries

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:



Prepared by Janos Gaspar, Head of Research (EECFA, Buildecon)

Slovenian public housing scheme kicks off

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.

However, this might be impossible. The national housing policy Continue reading Slovenian public housing scheme kicks off

Construction statistics or constructing statistics?

Development of Russian construction statistics

Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia

Assessing the development of construction industry on national scale is practically impossible without high quality statistical data that allow us to draw conclusions on industry trends and create any forecast model. The quality of Russian official statistics and its reliability have increasingly been becoming the subject of public discussion and the work quality of statistical service has been questioned by independent experts and economists. To overcome the problems, at end 2018, a comprehensive plan was developed for the reform and modernization of the Russian Federal State Statistics Service (Rosstat).

Design by EECFA Central, source of original picture: nlomov-pnzreg-ru

In 2018 the Russian economy seemed to have registered the highest growth over the past 6 years. According to Rosstat, GDP grew from 1.6% in 2017 to 2.3% in 2018; the highest value since 2012 (+3.7%). Such pronounced growth came as a surprise since all official and unofficial forecasts were much less optimistic: an average of 1.5%-1.8%. To a large extent, the successes of the Russian economy in 2018 derived from artificial manipulations, i.e. Rosstat’s review of the growth rate of the construction sector in 2017-2018. The indicator of the volume of construction works completed over 12 months has drastically changed: 2018 was to amount to RUB 8.4 trillion, 5.3% higher, or RUB 422 billion higher (at current prices) than in 2017. It was astonishing as previously Rosstat estimated construction works for 11 months of 2018 to post a modest growth of 0.5%. The 2018 growth in construction was a record for the last 10 years: it was only in 2008 when the sector grew at a higher rate (by 12.8% per year). On the contrary, between 2014 and 2017, construction industry saw a steady decline, which, according to official statistical calculations, gave way to a rather sharp increase in 2018. The final contribution of the construction sector to Russian GDP in 2018 was 0.3pp, although in 2017 it was previously negative (-0.1 pp). Such drastic changes caused a wide discussion for the following reasons:

  • Weak argumentation for revising statistics. The Ministry of Economic Development and Rosstat recalculated construction data in late 2018 and early 2019 on grounds of clarifying previously submitted information by respondents at the end of the year. (This is due to the peculiarities of statistical accounting in construction in Russia: the peak of completions is at the very end of the year and then statistics are updated for a long time. Final data for the reporting year are published in spring and some figures may be adjusted retrospectively for a longer period). However, in this case, Rosstat adjusted the data by RUB 565bln, referring to only one project (Yamal LNG), which adds only RUB 241bln. The artificial increase in the indicator couldn’t be explained by only one project in one region, but Rosstat did not voice other official explanations.
  • Growth of indirect construction indicators. Volume of completed construction works posted a massive rise against the backdrop of a decline in many industries related to construction, for example, in the production and transportation of building materials. In 2018, rail transportation of building materials for the year decreased by 6.8%, cement transportation also fell by 6.5%, cement production shrank by 2%, brick production dropped by 4.8%, and the construction of metal structures saw a 1.5% slump. Thus, according to Rosstat, production and transportation of building materials dipped, while more construction works were carried out. An important indicator here is also growth in the volume of housing completion, the most capacious segment of the Russian construction industry, which at end 2018 showed a steady decline by more than 4% (and by 6% in the multi-unit segment).
  • Administrative reasons. In 2017, Rosstat, previously a fully independent agency under the Government, became subordinate to the Ministry of Economic Development. This created an internal conflict of interest since Rosstat data directly or indirectly indicate the effectiveness of the Ministry and the reliability of its forecasts.

EECFA’s Russia Construction Forecast Report with detailed analysis and forecast for the construction market of Russia can be ordered on http://eecfa.com/

Over the last year, official statistics was at the center of public discussion in the scientific community due to regular adjustments and revisions. And construction is not the only area of statistics affected by data manipulation, there are examples for other important macroeconomic indicators being revised:

  • At end December 2018, Rosstat significantly improved data on Russia’s GDP growth rate in 2015-2017. The new estimate showed that in 2016 the economy expanded by 0.3% despite the previous drop of 0.2%. GDP growth in 2017 also turned out to be adjusted, although less: +1.6% instead of +1.5%. Decline in 2015 was also less than originally indicated: -2.3% instead of -2.8% (the first estimate by Rosstat was -3.7%). The recalculation was associated with obtaining newly revised data.
  • In October 2018, public attention focused on published data on the real income of the population for January-June 2018, which, as per Rosstat, in the whole country rose by 2.4%. However, 6 out of 8 federal districts registered negative growth (from -1.6% to -0.4%), and the income growth of the population in the remaining 2 districts was +0.5% and +2.0%. The apparent contradiction in statistics was not explained in any way, and from early 2019, Rosstat switched to a new methodology for calculating population income and recalculated all data on this indicator from 2013. As a result, it turned out that in 2013-2018 real income decline was 8.3%, instead of 10.9% (previous estimate), and in 2018, the initial drop of 0.2% was replaced by a rise of 0.2%. Thus, growth rate of the real income indicator has been revised upward.
  • Rosstat’s recent upward revision of industrial production data for 2016–2018 also raised many questions. Instead of stagnation in the industry in recent years, new statistics began to show moderate growth. For example, at end 2017, Rosstat estimated growth in industry at +1.0%, but after the revision at the level of +2.1%. Similarly, data for 2016 were revised upward. It was an interesting coincidence that Rosstat was fully in line with the forecast of the Ministry of Economic Development published even before the final results of 2017 became known.

In 2019, Rosstat conducted a radical revision of macroeconomic statistics since 2014. The losses of the economy from the “sanction war” and the slump in world oil prices were exaggerated and the economic recession was slight and short-lived. According to newly recalculated data, there was neither a long economic downturn, nor a big recession in industry and construction, and 2015 was the only crisis year.

Large-scale revisions by Rosstat, the wide range of indicators that they affect, their upbeat nature (indicators are only revised upward) and the often insufficient or unconvincing argument behind raise doubts in all who use these data. Refinement of statistics and revision itself is a normal practice taking place in any country, any revision though should have a clear and understandable explanation, and if such adjustments frequently occur, the question of the quality of applied methodology for collecting and analyzing statistical data arises.

Periodic revisions of statistical data in construction and other sectors of the economy are not the only difficulties. There are weaknesses not only in the statistical office itself, but also in the whole system of collecting and publishing statistical information in Russia such as:

Continue reading Construction statistics or constructing statistics?

How Croatia’s government policies are impacting the country’s construction sector

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

Croatia will at the turn of the year assume the rotating presidency of the Council of the European Union. So now is an appropriate time to assess how the Croatian government’s policies affect the country’s construction sector.

Source: Depositphotos

The government’s preparations for the presidency don’t inspire confidence that its influence is a positive one: the remodeling of the main building for the presidency won’t be completed until December 22, leaving no room for (further) delays. And there are concerns that the “finished” building won’t in fact provide satisfactory facilities. Not to mention the project’s being at least 50% over budget.

On the other hand, the current government has substantially increased Croatia’s absorption rate for EU funds. At 78% it is now slightly higher than the EU average of 77% and significantly greater than the country’s below-EU-average 2018 rate of 52%. This improved performance has enabled Croatia to invest massive amounts in infrastructure. And while, bureaucratic delays have meant that end users have received only 25% of the amounts they contracted for, much less than the 33% EU average, there is a real likelihood of even more rapid EU funds absorption in Croatia.

First, use-it-or-lose-it rules governing these moneys mean that contracts relying on them must be entered into before year-end 2020. Second, and crucially, presidential and parliamentary elections are coming up next year, by January 20 in the case of the president and by December 23 in the case of the parliament. Parliamentary elections, though, could be triggered far earlier if any of the minority members of the current, fragile coalition withdraws its support.

Continue reading How Croatia’s government policies are impacting the country’s construction sector

Q2 2019 Permit-completion results of EECFA countries

As all Q2 figures are available, our visualizations with the 8 EECFA countries are updated.

In the Balkans, 4 out of five countries are peaking in housing permits. Especially Bulgaria, Romania and Serbia are at outstanding levels. In the meantime, Turkey has touched further lows in Q2; the quarterly permit figure is hardly higher than that of Ukraine.

Discover the full visualization at Tableau Public
Turkey: housing permit-completion, source: TUIK, EECFA

Full visualization:
1. Residential permit-completion (number of dwellings)

Ukraine and Romania are also close to their recent peaks in non-residential permits; the level of these in terms of sqm is not exceptional, though. Serbia has the big story in non-residential. Around 2.6 million sqm of permitted space (in the latest 4 quarters together) is huge, 2.5 times higher than back in 2008.

Full visualization:
2. Non-residential permit-completion (floor area and number of buildings)

Serbia: non-residential permit-completion, source: SORS, EECFA