Tough times continue in Ukraine

The construction industry in Ukraine is predicted to continue its downward progress of recent years, with a fall of 18% in 2014, having contracted by almost 12% last year.

Residential construction, however, is expected to continue to increase in 2014, regardless of the crisis in eastern Ukraine and its impact on the economy. It will rise at a more modest rate than in the first six months of the year, though.

A report by research company PMR called Construction Sector in Ukraine H2 2014 – Development Forecasts for 2015 to 2020 says that between 2008 and 2013, the Ukrainian construction industry expanded year-on-year in real terms only once, in 2011, when it boasted a double-figure increase.

This year, construction activity in Ukraine has been severely affected by the annexation of Crimea and Sevastopol by Russia, and the crisis in eastern Ukraine has thrown the economy even deeper into crisis.

The bleak macroeconomic climate, with a zero GDP growth rate recorded in 2013, forced the government and local administrations to rein in proposed spending on many civil engineering projects, given that Ukraine's national budget for 2013 was based on projected GDP growth of 3.4%.

In addition, PMR said that concerns about a possible devaluation of the national currency were keeping lending costs at levels which were difficult to afford, and a CPI (consumer price index) deflation figure was observed in Ukraine last year. It felt that these factors did not encourage property developers to speed up construction activity.

In 2014, the implementation of all ongoing and planned construction support programmes was cancelled or faced substantial reductions.

Devaluation

The political crisis has led to a 35% average devaluation of the national currency against the US Dollar and 33% against the Euro in the first eight months of 2014, a 7.7% CPI inflation figure during the period in question, and an expected GDP contraction of more than 6% this year – all of which have severely affected non-residential and civil engineering construction.

In 2013, civil engineering construction output is estimated to have contracted by 17.3%, if data for Sevastopol and Crimea is not taken into account. According to PMR, the lacklustre performance recorded in the last year is projected to be followed by a more severe decline in 2014, with a 21% reduction. It said this essentially reflected the lack of economic growth in the country and a reduction in spending on transport infrastructure development projects.

In 2014, UAH12.9 billion (€1.4 billion) was allocated from the state budget to the state governing body for roads in the country, Ukravtodor, with 75% of this to be used to honour bank loan payments and only UAH2.8 billion (€175 million) to be spent on road projects.

Furthermore, PMR reported that there were plans to rely on an additional UAH4.1 billion (€258 million) attracted through state-backed bond placements, and another UAH2.3 billion (€143 million) to be drawn from international financial institutions.

Overall, about UAH9.24 billion (€577 million) is to be spent on national road projects in Ukraine in 2014, accounting for about a quarter of the planned average annual allocation for the road development programme for 2013 to 2018.

Residential construction’s forecast increase for 2014, regardless of the crisis, is a bright spot, however. In the first half of 2014, the amount of newly-registered housing space stood at 4.1 million m² – 28.7% up on the figure achieved in the corresponding period a year earlier, with 53% more new space being completed in the first half of 2014 than during the first half of 2013.

According to PMR, in 2014 the amount of newly-registered residential space is expected to be about 10.3 million m², surpassing the performance achieved a year earlier by 3 to 4%.

It said the slowdown for the full year would largely reflect the crisis in the Donetsk and Luhansk Provinces and the consequences for the overall economy, which is likely to contract by more than 6%.