Hard times ahead 
for contractors

The inevitable slowing of Hungary’s real estate development market bodes no good for local builders, with many headed for bankruptcy. Already subdued by disappointing 2008 results after a major drop in public orders, the industry is pinning its hopes on this year, when a larger number of mostly EU-funded developments are expected to get underway

Gergo Racz

The latest figures released by Hungary’s Central Statistical Office (KSH) show that the output of the construction industry increased by 4.5 pct year-on-year in working-day adjusted terms in November 2008; however, the first 11 months of 2008 saw a 6.5 pct y-o-y slump in the sector’s overall performance. Considering current prices, Hungary’s construction output totalled HUF 194.5 bln in November and HUF 1,731 bln in the January-November period of 2008.

The volume of new orders in the first 11 months of 2008 also showed an annual drop of 12.7 pct, a result of a 35.9 pct year-on-year fall in new orders for construction work, and a 23.9 pct year-on-year increase in engineering contracts from a handful of road and railway construction contracts.

Although there are as yet no official figures detailing the performance of the building sector for the whole of 2008 (the official numbers for December and the yearly overview will be published by KSH in mid-February), in the midst of the general gloom there is also some hope. A study commissioned by MKB Bank has underlined the deteriorating expectations, revealing that after an output total of HUF 2,160 bln in 2006 and HUF 1,963 bln in 2007, last year definitely ended with an even worse result. However, a notable volume of orders was signed in 2007, and due to the nature of the construction business, 1.5 to 2.5 years has to elapse before the realization phase of a project gets into full gear – so these contracts should definitely have an invigorating effect on the sector in general this year.

Construction companies are also giving the Hungarian government cause for concern, since the sector directly generates app. 310,000 jobs, while indirectly, through supply chains, another 1.2 mln Hungarians rely on building projects for their livelihood.

Looming job losses

ÉVOSZ, the professional association of Hungarian construction companies, claims that the output of the industry has decreased by 27 pct over the course of the last two years, resulting in 30,000 registered construction workers being laid off. The organization believes that the negative effects of the global economic crisis will have reached their worst in August-September of this year, until then, further lay-offs are to be expected. “Those losing their jobs cannot even count on finding non-registered employment, since there are no orders,” László Koji, deputy chairman of ÉVOSZ told ‘Eurobuild CEE’.

As Sándor Vermesy, general director of construction company Strabag MML explains, the global crisis came as another heavy blow to an industry that was already in crisis. “The figures from last year were in themselves shocking, with a 10 pct shrinkage in turnover and a 30 pct slump in orders,” reveals Mr Vermesy. “Due to such conditions, signing new contracts was already more troublesome, requiring the optimization of operating costs as well as payroll expenses even before the full affects of the global downturn could be felt.”

According to Thierry Delvaux, head of real estate consultant Jones Lang LaSalle in Budapest, the construction sector is inevitably headed for consolidation, as the financially and professionally strong players take over their smaller, weaker counterparts. Mr Delvaux also believes that there is not much hope of avoiding this “culling” period, since the shortage of orders will necessitate the lowering of construction prices by such a degree that weaker companies will not be able to cope. “Without the state taking a bigger role in the matter, I expect another 20,000 people to be made redundant in the industry,” claims Mr Koji, noting that the output of the sector has reached a low last recorded in 2003.

Only the strong survive?

Even bigger companies are now being forced to make drastic changes. Early in December, Vegyépszer – one of the most established construction companies – announced that it is laying off 250 workers at the beginning of this year, representing 27 pct of its total workforce. The company said that following a revenue total of HUF 80 bln in 2008, the volume is set to drop to HUF 50 bln in 2009, which could only be compensated through redundancies and optimizing the standing structure of operations. However, asked by ‘Eurobuild CEE’ about the future outlook for the company, Vegyépszer declined to comment.

In Mr Vermesy’s view there is also a somewhat brighter side to the credit crunch. “A crisis always has a cleaning effect, and if that is to be so in the construction industry, then those companies that have the adequate professional and financial background might be able to prevail over the competition in the long run; but naturally, we too will have difficult times in the short term”.

Crisis strategies

Based on years of experience, in order to remain viable, construction companies must secure around 65 pct to 70 pct of their orders for the given year in the first few months. Mr Vermesy claims that Strabag MML has been able to meet this level for 2009, while adding that securing the remaining 30 pct appears more difficult now than in earlier years.

“As Strabag MML has a comfortable number of signed contracts, we are not planning any major redundancies – especially in comparison to our peers and other segments of the economy. Nonetheless, we are taking a critical look at all aspects of our operation and will make all the changes necessary to maximize efficiency.”

The measures affecting Strabag’s workforce are targeted at temporary, as well as full-time, staff. Naturally, retirees or employees with fixed-term labour contracts come first in this respect; but if necessary, changes will also be made affecting permanent employees, according to Mr Vermesy.

The lurking troubles for the construction sector are also making investors edgy. According to Gábor Futó, CEO of real estate development Futureal Holding, the company is keeping a close eye on the operations of its builders and has introduced a policy stipulating that its general contractor will not be paid until it has comprehensively settled all obligations towards its subcontractors. “We have a trained team of experts constantly standing by, who are ready to take over control of any of our ongoing projects should one of our partners become unable to perform their obligations,” reveals Mr Futó.

Integrated solution

Gábor Futó points out that Strabag, Futureal’s main building partner in realizing the