Strong 2008 for Romanian construction, tough year ahead

By Richard High21 April 2009

The value of construction in Romania increased by +34% nominally (+26% in real terms), to RON 83 billion (€ 22.5 billion) according to the latest report by research and consulting company PMR, "Construction sector in Romania 2009 - Development forecasts for 2009-2011".

The fastest growing segment was non-residential, which increased by +37%, said the report, thanks to "a very rapidly developing economy [that] needed mainly non-residential buildings, such as office space for services and industrial buildings."

However, the report suggested 2009 will be a difficult year for the country's construction sector, despite the € 20 billion of financial aid from the International Monetary Fund (IMF) and European Union (EU) that was meant to stabilise the "volatile local currency" and reduce the budget deficit.

Investor confidence in Romania is also expected to continue to decline, said the report, resulting in lower levels of Foreign Direct Investment (FDI). In addition, investments in fixed assets will also decrease, it added.

Construction output is therefore expected to decline sharply throughout 2009. This will also effect GDP growth, which was "greatly reliant" on the construction sector, said the report.

"The most affected year will be 2009, but the following few years may not see a major recovery if the international economic circumstances do not improve. The construction sector will, however, be supported by the spending of EU funds allocated for Romania, which will be directed mainly into infrastructure.", said Robert Obetkon, senior construction market analyst at PMR.

Non-residential construction is likely to be the most affected sector, said Mr Obetkon, mainly due to its overdependence on credit. There were many projects, particularly on the retail property market and the office market, which developers launched before even ensuring their financing.

This, in addition to the decrease in demand for these buildings, is why many projects have been postponed or even cancelled, added Mr Obetkon. Only those projects where work begun before Q4 2008 will be completed in 2009.

The number of retail and office buildings delivered this year will also be limited. The market for industrial buildings and warehouses, which are mainly owned by large multinational developers, is slightly better, said the report, considering that financing problems are "less frequent" and "demand has not decreased as dramatically".

Following two years of constant growth the residential property market started to contract in Q4 2008. This was mainly the result of banks being unwilling to grant mortgages, said Mr Obetkon.

"Developers are also facing financing difficulties and in 2009 only a few projects will be delivered, generally those which were either delayed from last year or are in an advanced construction state," said Mr Obetkon.

However, residential construction output is expected to witness only "a mild decrease", thanks to several governmental programmes for housing construction and individual housing construction, and the drop in the price of construction materials.

Civil engineering will continue to grow in 2009, said Mr Obetkon.

"As Romanian GDP will drop in 2009, the government will want to overcome its effects by increasing public spending, and infrastructure is a top destination for state-funded investments.", said Mr Obetkon.

"For that, the funding coming mainly from the EU has to be unblocked, by improving and simplifying procedures which have been dragging investments in infrastructure - particularly in the case of road construction, which accounts for roughly half of the civil engineering construction output.

"Additionally, civil engineering construction can benefit from the lower prices of construction materials compared to the past few years," he added.

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