While Western Europe faces a slowdown, much of Central and Eastern Europe (CEE) is experiencing a boom across all sectors of construction activity. Steve Skinner looks at demand in the region and what the issues and expectations are for the future.
The Central and Eastern European region (CEE) is acknowledged as a current hotbed of construction activity, but what’s the scale of that activity? A double digit percentage growth in the construction output of an Eastern European country may well sound impressive, but the markets are relatively small.
Anna Gáspár, the managing director of Hungarian construction market research organsiation Buildecon said of the European economy, “The 15 Western European countries (Austria, Belgium, Denmark, Finland, France, Germany, Italy, Ireland, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK) in 2007 had a combined GDP of € 11,7 trillion, of which € 1,45 trillion was accountable to the construction industry.
“Take all of the other countries in Europe, including Russia and Turkey, and the combined GDP in 2007 was just over € 2,5 trillion with a construction output of € 258 billion.”
Clearly, since these figures were compiled there’s been a marked decline in activity in the West, but even a +100% growth in CEE construction would do little to plug the hole created by the credit crisis in the west. Take Russia and Turkey out of the equation and the East’s ability to compensate is diminished yet further.
Such an overall picture tells a story, but is it necessarily the complete story? Ms Gáspár, on examining individual aspects of the socio-economic trends in Europe, said that, “Workers are returning to Eastern Europe, and especially to Poland and Romania, due to growing living standards in the East and recessionary pressures in some western countries.”
According to Buildecon’s report for CE, in almost all CEE countries there are huge programs underway to upgrade the lacking infrastructure, particularly roads. Approximately 30% of the total construction output in CEE is being spent on infrastructure projects, and approximately 50% of that (€ 40 to 45 billion) is devoted to road construction.
Of this, the Czech Republic and Croatia account for 50% of the total CEE construction output. Construction and renovation of roads and railways take the lead in the Czech Republic while ambitious developments on the boarder transit A1, A2 and A5 motorways in Croatia represent the most significant investment.
“East-West infrastructure improvements are a key driver throughout the CEE region as the creation of a strengthened Asia-Europe transit position is demanded,” said Ms Gáspár. “This is particularly pertinent with the Euro 2012 football tournament being awarded to Poland and Ukraine.”
Euro 2012 kicks-in
Bartlomiej Sosna of PMR publications, a market research organisation dedicated to coverage of CEE, estimates that the total investment related to Euro 2012 in Poland and the Ukraine will be € 38 billion.
“Projects executed in Poland will account for approximately 60% of this, and as much as one third of the total costs of preparatory work will consist of road construction projects in Poland,” said Mr Sosna.
“In addition to the construction of segments of the western section of the A2 motorway and eastern sections of the A4 motorway, virtually the entire length of the A1 motorway and the S5 expressway linking Wroclaw, Poznan and Gdansk are yet to be constructed,” continued Mr Sosna.
In preparation for the tournament the PMR report ’organistaion of Euro 2012 in Poland will cost € 23 billion’ confirms that Poland is also set to modernise the main rail lines linking the host cities and construct a second line on the Warsaw underground. This rail modernisation will include the construction or renovation of over 12 rail stations and rail links between airports and city centres.
Mr Sosna also said expenditure on airport related projects in Poland for Euro 2012 will total € 800 million.”Construction projects will be carried out at exisitng airports in six cities and two new airports will be built in Modlin and Gdynia.”
For Poland and Ukraine, Euro 2012 represents a great deal more than just a prestigeous football tournament. Of far greater significance is that it provides the opportunity for the two countries to take a major step forwards and make up for decades of under-investment in transport infrastructure.
“2008 will be a decisive year in the preparations for Euro 2012,” said Mr Sosna. “For stadiums, roads, airports and railways to be ready for the event, it is crucial to prepare the designs for the relevant investment projects as soon as possible. Even a slight delay may lead to a failure to complete projects on time.”
Romania’s non-residential road
While Poland and Ukraine invest heavily in infrastructure in preparation for Euro 2012, Romania has already benefitted from several years of road modernisation and construction growth is now booming in the non-residential sector according the PMR publications.
“The industrial and warehouse market may be experiencing growth, but the whole non-residential sector is showing notable advances too,” said Ovidiu Oancia, Romanian analyst at PMR.
“The segment recorded a record growth rate in 2007, jumping from RON 20,6 billion (€ 5,8 billion) in 2006 to RON 33,3 billion (€ 10 billion) in 2007. Such a development means that the sector now accounts for a majority of Romania’s construction output, more than civil engineering and residential construction combined. Furthermore, this upward trend is expected to continue through to 2011, albeit at a slower rate of growth,” said Mr Oancia.
The volume of retail trade in Romania showed the highest growth in the EU between June 2007 and June 2008 at a rate of +23,3% according to Eurostat data. Similarly, industrial production grew by + 5,9% in the same period.
“As well as the construction of logistics buildings to serve the retail sector, the high growth rate in retail trade is also prompting retail chain operators and shopping centre developers to invest in Romania,” continued Mr Oancia.
“I don’t think it would be unreasonable to call 2008 the year of the shopping centre in Romania as the total leasable floor area is set to double this year alone,” continued Mr Oancia. “In 2007, the total floor area for retail across the whole country stood at 700000 m2, yet we estimate that by 2010 Bucharest alone will boast 800000 m2. Should all projects reach fruition, we estimate that Romania will soon have 1,8 million m2 of retail floor space.”
“Office space too is at a premium. Bucharest’s dominant position is slowly being overtaken by other populous Romanian cities as they increase their economic development. As in Bucharest, demand for office space is extremely high throughout the country as it far outstrips supply,” said Mr Oancia.
Maastrich and Hungary
Clearly, there is strong growth throughout CEE, although there are one or two exceptions. Anna Gáspár of Buildecon reports that, “Hungary saw serious falls in growth of as much as -20% during 2007, although the situation has improved slightly in the second half of 2008 to stand nearer -8%. Primarily attributable to delays in civil engineering projects caused by a Maastrich generated convergence program, expectations are that the delayed projects will come on-line in 2009.”
Ms Gáspár said, “The Hungarian economy showed signs of over-heating following positive investment since 2002. Wages and inflation were rising as was unemployment, so to satisfy Maastrich criteria relating to inflation, deficits and national debt an economic cooling was initiated to stabilise the economy. Residential construction has remained positive in Hungary through 2008, so once delays in civil engineering investment have been overcome, the situation should be healthier than current figures might suggest.”
GrowthDespite economic corrections in Hungary, growth is the predominant feature of CEE with PMR reporting growth of +30% in Romania, +18% in Poland and +10% in Slovakia, with the Czech Republic also positive.
Much of this growth is attributable to EU grants and subsidies in infrastructure development, although Slovenia is an exception having secured impressive levels of Public Private Partnership (PPP) investment.
“Slovenia has an excellent long term development plan that has enabled it to secure high levels of PPP investment, but this is perhaps because they have a more western attitude than any other Eastern European country,” said Ms Gáspár.
HurdlesWhile growth is impressive in much of the CEE region, there are still hurdles to be overcome. “The global liquidity crisis is affecting CEE as well as Western Europe as developers encounter problems sourcing finance for their projects,” said Bartlomiej Sosna of PMR. “Furthermore, the pace of preparation regarding EU funded infrastructure investments is often slow and all the time employment costs are rising. There is also a shortage of skilled workers throughout the region,” continued Mr Sosna.
Ms Gáspár cites a great disparity in both ideology and budgets on a country-by-country basis as an issue to be aware of. “The river Danube has a fantastic new bridge, but on one side it is fed by new motorways and on the other it is not yet properly linked to the old single lane roads. Any motorway is still years away.
“This type of situation is not unique within CEE and it severely impacts on EU infrastructure goals. Furthermore, the people of Eastern Europe are now making their voices heard. They are having their say in where and how developments are planned and this is slowing the process somewhat in comparison to pre-EU entry times.”
FutureClearly, as the region develops environmental issues and renewable energy will, as in Western Europe, have a greater bearing on development.
“I think the biggest breakthrough will be to decrease energy consumption, irrespective of what the source of that energy might be,” said Ms Gáspár. “The ideal outcome will be to convert the huge Eastern European residential stock into a less energy consumptive resource. This is the number one issue.
“Of the 154 million residential units in Eastern Europe, 70% is obsolete and of that some 80 million units are constructed from prefabricated large concrete panel blocks. As such, new housing completions to update stock are a real feature of the future.
“While Western Europe is witnessing a decline in new housing completions, a majority of CEE countries will see an ongoing rise in completions to the extent that the number of new home completions in CEE will actually surpass those in the 15 Western European countries in 2010.” Said Ms Gáspár.
Beyond the residential sector, both non-residential and infrastructure projects are forecast to maintain healthy growth. “Non-residential development will continue to move forwards in Poland, Hungary and Romania, while resort and touristic projects will continue to play a lead role in the development of Bulgaria and Croatia,” said Ms Gáspár.
“Regarding infrastructure projects, this is an area that still needs considerable development. Numerous road projects are being vigorously pursued throughout the region and this is set to continue for the foreseeable future.”