Survival infrastructure

The postponement of projects across the real estate sector translates into a lack of work for construction firms. thankfully, there are still many road, airport, stadium and other civil engineering projects yet to be built

Emil Górecki

The asking prices for construction services in the whole Central and Eastern Europe region in the first half of 2008 grew by an average of around 8-9 pct. The main reasons for this were growing fuel, electricity and building materials costs, as well as the high prices of skilled workers. Despite this, construction firms did not have to worry about a lack of orders in this period, when there were plenty of commercial and residential projects up for grabs. Clearly, now we are in the midst of the credit crunch, the lack of finance for construction companies as well as for the entire sector has taken its toll on the number of ongoing projects. It seems that all the operators in the industry are playing wait-and-see to evaluate the impact the global crisis is going to have on this region’s economy before becoming active again. In the opinion of Iain Leyden, director of the King Sturge’s project management section and building consultancy: “The absence of financial liquidity on the market is now strangling the growth of the entire industry.”

Optimism, but is it really justified?

In early 2008 more than 60 pct of companies operating in Poland’s construction industry believed that the following 12 months were going be fine, to judge by a survey carried out by BMM Marketing Research. As many as 17 pct of the executives went even as far as believing that 2008 would be an excellent year. But was this simply madly optimistic? Another study, undertaken by Prof. Zofia Bolkowska, a construction industry analyst connected with Warsaw’s Higher School of Management and Law, shows that despite the substantial profitability of the sector last year, one in four construction companies are now in the red. In 2007, 11.3 pct of the more than 1,500 firms surveyed had gone into deficit. Between January and September 2007, as many as 23.4 pct of the 1,600 companies surveyed had not registered any profit, while 26 pct of companies complained that the most painful aspect is the lack of demand, and as many as 60 pct are troubled by the level of competition. Employment costs constitute a problem for 57 pct of the companies polled.

According to the ‘Construction Sector in 2008 Ukraine’ report published by the PMR research company for the January to October 2008 period, the total value of assembly and construction work carried out in Ukraine fell by 9.6 pct compared with the previous year, down to USD 10.5 bln. The sharpest drop was recorded in the ‘buildings and structures’ category (9.7 pct), with the value of assembly work and the preparation of land for construction falling by slightly less (respectively by 7.9 and 7.8 pct).

Fewer projects, less work

In Q2 2008, the credit crunch was seriously restricting access to finance for developers and investors looking to purchase completed properties. Prior to this, the residential sector had been proceeding at such a furious pace that it had seemed to be getting out of control. When things changed in the second half of the year, the sector almost came to a grinding halt.
But the retail sector seems fully able to keep its head above water. Consumption is growing, rents are rising, international retail chains are extending their reach, while the remaining locations for large-scale retail development in large cities are now getting scarce. And this is one of the reasons why developers are now thinking more in terms of medium-sized and smaller centres. But it is highly probable that in these areas too, as well as in the office sector, the lack of finance will also eventually make itself felt. And all this will mean less orders for builders.

Returning home, earning less

It is now becoming much easier to find skilled labour, as such workers are increasing returning to the region from those countries suffering most in the crisis, such as Ireland, Spain, France and the UK, where they were recently employed. This means reductions in the salaries of construction workers are also to be expected.

Building material prices have soared in the past two years due to strong demand and despite the improved performance of materials producers. However, much is currently being said about an expected fall in prices due to reduced energy and raw material prices and the slump in demand for construction services.

Sagging prices

If banks continue to curb their lending in the first quarter of 2009, the demand for construction services will continue to fall, which could mean that prices offered in tenders may drop by as much as 10 pct – or so claim the experts. Iain Leyden elaborates: “This will be the outcome, first and foremost, of the reduced profit margins demanded by contractors and subcontractors, who will be employing cheaper labour and using less expensive materials. All these efforts on the part of builders will be addressed to ensure continued activity on a slumping market.”

The growing significance of project management services throughout the whole CEE region is the direct result of the growth of the entire construction industry. This crisis period is sure to force developers into consulting with experts acquainted with the market, if they are going to have to outdo the competition in terms of the quality of their projects. In the opinion of Iain Leyden: “Clearly, we expect a downturn in growth in the new year, but – somewhat paradoxically – the impact of project management is much greater today than it ever has been, since it raises the value of projects in the eyes of potential purchasers, tenants or customers and this is regardless of whether a developer or investor has his own team of project managers or employs outside consultants.”

Football inspired hope

The Euro 2012 European football championships offer an opportunity to increase the rate of growth of the construction sectors in both Poland and Ukraine. Both countries will be constructing – or at least modernizing – the majority of the sports facilities and infrastructure needed for the tournament, most of which should get started during 2009. It is important to remember what happened in Portugal, which staged the event in 2004 
(i.e. in the wake of a crisis), when the championships accounted for a 0.8-0.9 pct increase in GNP. Iain Leyden of King Sturge has expressed the hope that the planned construction of stadiums, infrastructure and hotels for the championships will be a positive stimulus for growth in the year which lies ahead. But he adds that “this will require substantial efforts on the part of the government.”

Michał Szyk, a consultant for the Deloitte strategic consultancy group that drew up the