Building construction is a strategic sector for Europe. Apart from providing and maintaining buildings and infrastructure, on which the whole economy depends, the sector also accounts for the largest number of people employed in a single industry. After the accession of new members to the EU the overall number of people working in building construction increased by 3.5 million. According to experts the jobs of around 26 million people in these countries is related to the sector.
CONSTRUCTION IN THE EUROPEAN UNION
- Building construction investments: 1.196 bln euro
- 10,4 % of GDP
- 50,5 % of gross capital formation
- 2,7 mln companies, of which
95% are small and medium businesses with under 20 employees
93% have less than 10 employees
- 15,2 mln workers:
7,2 % of the overall labour force in Europe
30,4 % of industrial production employees
Table 1
| 2006 | measure | EU | Poland | Romania | Czech Republic | Hungary | Bulgaria | Slovakia |
| Population | Mln | 464 | 38.1 | 21.6 | 10.2 | 10.1 | 7.7 | 5.4 |
| GDP | Bln euro | 11.384 | 265.6 | 96.6 | 112.4 | 88.8 | 24.2 | 43.6 |
| GDP per capita | ЕС25 = 100 2005 | 100 | 50 | 34 | 74 | 63 | 33 | 57 |
| Construction | Bln euro | 1.191 | 26 | 8 | 10 | 9 | 3 | 4 |
| share of GDP | % | 10.5% | 9.8% | 8.3% | 8.9% | 10.1% | 12.4% | 9.2% |
Source: Data of the European Commission, FEIC
Since 1990 building construction in the EU went through two growth cycles: the first between 1993 and 1999, and the second between 2004 and 2006. Half of the countries in Western and Central Europe have registered the highest rate of growth for the last seven years, the regional peak, +3.7%, being reached in the second half of 2006. Euroconstruct notes that 2007 could be considered the beginning of a third cycle, since in most countries the growth rate is starting to slow down. The only exceptions from this in Western and Central Europe are Hungary, Poland and Great Britain.
There is a similar cyclic aspect to the real estate market, a trend reflected in the statistics for the number of newly built homes. Perhaps this index will be highest in 2007 after which a slowing down is most likely for all countries in the region.
2007 will also be favourable for industrial construction enterprises as well, for two main reasons. On the one hand, economic growth is a strong stimulus for raising corporate profits in the industry and trade spheres. On the other hand, the sector’s future development will depend on the competition of investments in real estate. The share of investments in real estate has been growing compared with other forms of investment. The common market of non-residential housing remained relatively stable between 2002 and 2005. in 2006 the annual growth was 2.4%, with expectations being highest for 2007, when growth is seen at an average 3.5%. Forecasts for 2008 and 2009 point to an average 3.0% growth. Annual growth rate of 4.0% is expected for infrastructure construction as well, with rather more optimistic forecasts for the Central and Eastern European countries. Here, the launch of large-scale infrastructural projects will lead to an annual growth of around 10%. Ireland is the only Western European country that can boast with such growth rates. Road and bridge construction will grow by an average 4.0% in Germany, Sweden, Spain and Austria, while in Italy, Belgium and Portugal the sector is expected to mark a drop. Of all infrastructural construction road-building will be the most dynamically developing segment in Europe, with an average annual growth of 4.4% between 2007 and 2009.
Compared with these data, construction growth in Central and Eastern Europe in 2006 looks rather respectable: Poland marked a 10.6% rise; Slovakia registered a rate of 8.8%; Romania reported 7.7%; and the Czech Republic and Bulgaria each marked a 6.1% increase.
Construction Production index (CSEE) Quarterly 2005 - 2007 (chart)
According to Eurostat data, in comparison with 2000, Bulgaria is the leader in Central and Eastern Europe (CEE) in terms of construction development growth, marking a triple increase by the end of the second quarter of 2007. The leader is followed by Romania, with a double increase, Slovakia with 1.6-fold rise; and Slovenia, registering a 1.5-fold increase. For the same period growth in Western Europe averaged less than 10%.
The main reason for the significantly higher growth in these countries is the equally increasing number of public procurement orders in the field of building construction. European structural funds (Table 2) are among the main factors for these high levels.
Size of structural funds 2007 - 2013, Bln euro (indicative) (table 2)
| GDP 2006 | % of GDP | ||
| Poland | 67.3 | 265.6 | 25.3% |
| Czech Republic | 26.7 | 112.4 | 23.8% |
| Hungary | 25.3 | 88.8 | 28.5% |
| Romania | 19.7 | 96.6 | 20.4% |
| Slovakia | 11.6 | 43.6 | 26.6% |
| Bulgaria | 6.8 | 24.2 | 28.1% |
| Total for the EU | 347.4 |
These conclusions were supported in an analysis of the Romanian Building Entrepreneurs’ Association. Around 85% of a total 800 tenders, organised monthly on a nationwide scale have been directed at infrastructural projects. Infrastructure development also influences housing construction and industrial construction development.
On the other hand, despite significant investments, expectations are that local developers will have difficulties handling the appetites for infrastructural projects of large foreign construction companies. Data of the Romanian Statistics Institute from July 2007 show that building construction activity in the country has marked a 25% growth year-on-year. This is a trend noted in all types of construction works; engineering construction rose 23%, administrative building construction went up 28%, and housing construction increased 29%. For the first half of this year the actual growth rate of GDP in Romania slowed down to 5.8%, compared with 7.4% a year earlier. Nevertheless, building construction, which is the main moving force of the Romanian economy, marked a 30% growth on the year!
The main reason for this growth is the renovation of the road network in the country, which has been set as a mid-term strategic priority. Because of this, similar to other countries in the region, road building accounts for the greatest share of the overall construction market in Romania. According to several estimates over two-thirds of the total length of roads (78,500 km) have yet to be upgraded, which amount to an average 330 km per each 1,000 km of the country’s territory.
The state of residential construction in Romania must also be significantly improved. As a result of mass privatisation and the introduction of subsidy programmes for housing construction and accommodation during the transition period, the levels of home ownership in the region are relatively high, around 80%. However, demand for new housing and upgrades of the existing homes is significant. According to PMR estimates in the next 20 years 80% of the existing housing will be outworn unless necessary renovations are carried out. According to the same agency, there are 370 homes per 1,000 people in Romania. In comparison, there are 3,7 million homes in Bulgaria, or 480 homes per 1,000 people, yet part of the available housing is not in use.
As of 2006, a total 38,000 residential blocks were built in Romania, compared with 13,000 in Bulgaria, but expectations are for new construction to reach 50,000 blocks per year, against 20,000 in Bulgaria, bearing in mind the number of registered building permits.
Building permits issued (table 3)
| Building permits issued | Q1 2007 | 2006/2005(%) | 2006 | 2005 | |
| Residential housing | Romania | 20248 | 17.6% | 51215 | 43542 |
| Bulgaria | 2442 | 23.1% | 9828 | 7981 | |
| Administrative buildings | Romania | 140 | -0.3% | 297 | 298 |
| Bulgaria | 104 | 23.4% | 433 | 351 | |
| Other types of buildings | Romania | 4017 | 7.8% | 11093 | 10287 |
| Bulgaria | 1503 | 14.7% | 6604 | 5758 | |
| Total | Romania | 24405 | 15.7% | 62605 | 54127 |
| Bulgaria | 4049 | 19.7% | 16865 | 14090 |
Despite all this, the registered growth rate would have been impossible with the current levels of free income, without the availability of flexible mortgage conditions and the growing demand. According to a Deutsche Bank estimate, the banking market in CEE will grow by an average 17% annually until 2011, with the highest level of credit growth in Romania, with an annual 27%. This will be a result of several factors. Firstly, the insufficient level of investments in housing construction and maintenance until 10 years ago. Secondly, a long-term important factor is the population’s migration to cities, which maintains a deficit on the market. Thirdly, the available housing space per person is still relatively small, around 16 sq m per capita, according to data of Housing Finance International. Also, the overwhelming trend among the population is for owning, and not renting their homes.
Legislative reforms (such as the voting of new mortgage laws, and the introduction of up-to-date housing registers), gave an additional push to mortgage financing in the region in the last few years. Low interest rates combined with a rising purchasing power of households accelerated the demand for funding instruments for the purchase or renovation of homes. And while in Croatia the share of mortgage financing is already exceeding that of the other Central European countries, the CEE countries only began applying this mechanism a few years ago. The ratio ‘mortgage to GDP’ is still low, which means, on the one hand, that mortgage markets are still in the initial stage of their development, and on the other, that their potential is enormous.
While in Central Europe this ration reaches double-digit values, in CEE, apart from Croatia, the value varies between 2% and 6%. The expansion of mortgages will be additionally supported by the rising quality of real estate, and its prices, as well as by the improving banking services in the region.
The rise in construction and engineering works in Romania, expected by analysts, is seen at least 15% in 2008 and 2009.
In July 2007 construction works in the country marked an increase of 25.1%, compared with July 2006, a trend noted in all types of construction works; engineering operations rose 22.7%, administrative building construction increased 27.9%, and housing construction rose 29%. The expected average rise for this year is 17%.
Optimistic forecasts have been confirmed by experts in related sectors. For instance, according to Interbiz Group, as a result of active housing construction works, the number of sales of water dispersion paints will rise by 70% (a double increase in value terms) during the next 4 years, compared with an average 10.4% annual increase in quantity terms, and a 13.8% rise in value terms until now. Forecasts of the local branch of Swedish metal sheet roofing producer Lindab metal sheet sales in 2007 will be between 30% and 50% higher than in 2006, when they totaled 54 mln euro. The local office of French LaFarge Cement expects a turnover of 280 mln euro in 2007, a 20% rise on the year.
The local subsidiary of Polish building construction chemicals producer Selena also reported a rise in sales revenue. The company’s forecast for 2007 is for a turnover of 6.3 mln euro, against 5.25 mln for 2006, after sales reached 2.6 mln euro in the first half of the year, a 41% increase year-on-year.
The situation in the other countries in the region is similar. In Bulgaria, for instance, company Terazid also marked a 41% rise in sales of coatings and stuccoes, ‘which have been used to plaster over 380,000 sq m of facades’, only in the first half of 2007. Euromarket Group also expects a sales increase for construction equipment, forecasting a growth rate of 30% to 50% in the demand for construction machines.
In 2006 building construction companies registered an increase in the volume of production to 9,191 mln levs, and the rise in terms of comparable prices in 4.5%, predominantly accounted for by infrastructural projects necessitated by the compliance with EU requirements, by the restructuring of production capacities and the development of the service sector.
In the period 2000 to 2006 the relative share of building construction output of private companies was significantly larger than that of state companies – in 2000 it totaled some 85%, and in 2006 it reached 98.3%. in money terms private companies’ construction output stood at 9.031 mln levs in 2006, a 5.6% rise compared with the previous year.
According to data from the Bulgarian National Statistics Institute in August 2007 the economic environment in the field of building construction remained favourable, in spite of a 2.2 percentage points decrease compared with the previous month, due mainly to the changed expectations of the sector for stabilisation of its current state, instead of improvement. The deficit of labour force and the uncertain economic environment are among the main factors affecting the sector’s work, according to managers of construction firms. At the same time, sale prices in building construction are reflecting serious inflation expectations.
In the period 2000-2006 in Bulgaria there was a trend towards increasing the share of building construction, as compared with engineering construction, which accounted for 67% of the total in 2000, and 60.2% in 2006. the factors determining this trend were the individual characteristics in the country’s economic development, and investors’ preferences. In 2006 the relative share of engineering construction also rose by 10 percentage points year-on-year, a result of the development of modern road and communications networks, as well as of the modernisation of existing, and the construction of new, production capacities.
With these growth rates the sector is inevitably exposed to certain risks and problems. The most serious among them is the lack of well-qualified labour force. This is partly a result of a larger number of people who have preferred to seek employment abroad, especially after the accession to the EU and the opening of the borders for qualified employees. The problem is especially sharp in Romania. In comparison with 2006, for example, job offers in the building construction sector there have risen by 30%, especially in the fields of housing renovation and maintenance.
Table 4
| Average number of full-time employees | Growth of average monthly salary | |||
| 2006 | 2005 | Y/Y Change (%) | 2006 / 2005 (%) | |
| Bulgaria | ||||
| Building construction | 144,017 | 135,155 | 7% | 11% |
| Total | 2,247,232 | 2,244,276 | 0% | 13% |
| share (%) | 6.4% | 6.0% | 6% | |
| Romania | ||||
| Building construction | 352,5 | 343,05 | 3% | 36% |
| Total | 4,575,000 | 4,536,530 | 1% | 49% |
| share (%) | 7.7% | 7.6% | 2% | |
| Croatia | ||||
| Building construction | 93,297 | 85,025 | 10% | 6% |
| Total | 1,124,697 | 1,095,465 | 3% | 5% |
| share (%) | 8.3% | 7.8% |
Croatia is the country with the largest relative share of people employed in building construction, compared with the overall employment in 2006; 8.3%, compared with 7.7% in Romania, and 6.41% in Bulgaria. At the same time, the number of people employed in construction in Croatia has gone up 9.73% in 2006 compared with the previous year, a result of the livening in the sector. Due to the shortage of labour force firms have been raising monthly salaries relatively quicker than the average for the country. Despite the serious shortage, however, this hasn’t been the situation in Bulgaria and Romania, although the rise in the latter has been by over 35% for a year. The number of employed in the construction sector in Romania rose by 3.0% for a year, while in Bulgaria the overall increase reached 6.6%. the main problem in the sector is the shortage not only of qualified labour force, but of construction workers in general.
In fact Bulgaria seems to be the only country where the ratio between the index for production growth and the index for salary growth has been under 1 (0.9), since 2005. in all other CEE countries, Romania, Slovakia, Slovenia, Hungary, and the Czech Republic, in the last two years the average growth rate of the gross monthly salary has been exceeding the growth in production for the building construction sector.
The largest margin in this ratio is in Romania, where salaries have risen sixfold since 2000, while production has only doubled. In Bulgaria, on the other hand, production has tripled, as have done the average salaries in the sector.
Gross wages and salaries - Construction - index (2000=100) - SA (chart)
The general trends for building construction development in CEE amount to an expansion of building activity and investments, and the transformation of the balkans into a place which is attractive for living, shopping and leisure. The inclusion of all countries in the region in the European transport corridors, trans-border cooperation, and the support from EU funds will nourish the development of the construction sector, and it will continue to register double-digit growth rates irrespective of a gradual slowing.
Another trend is for an increased interest in luxury housing construction, and construction of closed neighbourhoods; together with the development of the tourist sector there’s greater interest in hotels and cottage complexes construction; and, with the increased purchasing power of the population there is great interest in the construction of shopping malls and office buildings, guaranteeing fast return on investments.
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