Eastern promise: growth in Central and Eastern Europe

By Richard High27 February 2008

While growth in Western Europe's construction sector is forecast to slow down in the coming years, several Central and Eastern European countries look like posting double-digit growth. Richard High reports.

Following a bumper 2006, the latest construction report from economic forecasting group Euroconstruct, says growth in Europe's construction output is expected to slow over the next three years as the residential market cools.

The June report, The European Construction Market, which covers 19 of the region's largest construction markets, (Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, the Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland and the UK), said growth this year will slow to +2,4% (+3,7%, in 2006). This will continue in 2008 with a +1,8% increase, picking up slightly in 2009 with +2,0% growth.

However, the strongest overall growth in the market in 2007 is expected to be in Central & Eastern Europe (CEE), where the largest market, Poland, will lead the way with a +10,6% increase. This will help the region's construction market grow +7,6% this year, compared to +2,2% for Western Europe.

Consulting and market research company PMR's latest report on Poland. The construction sector in Poland – H1 2007. Development forecasts for 2006-2009, confirms this assessment. Szymon Jungiewicz, head construction market analyst, PMR, and author of the report, told CE, “While just a few years ago the majority of construction companies complained about slack demand and struggled through financial difficulties, Polish construction companies [are now] very positive about their order portfolios.”

Rapid Growth

One area helping bolster such positivity is airport construction. PMR said Poland's airports are experiencing rapid growth thanks to “the fastest increase in air traffic anywhere in the world”. However, Poland's airports, like its road and rail networks, ports and waterways, have suffered from under investment, inadequate supporting infrastructure and limited capacity. No surprise then the sector is expecting investments worth an estimated € 1,2 billion between 2007 and 2013.

According to PMR's construction analyst Bartlomiej Sosna, the government's strategy for developing a national network envisages the creation of several new airports, with priority given to the less developed regions of eastern Poland.

“As many as nine new airports may be established, with estimated investments of at least € 425 million within the next five years,” said Mr Sosna.

In addition to the new airports, existing airports, such as those in Krakow, Wroclaw, Warsaw, Katowice, Gdan's k and Rzeszow, also have major investment plans for 2007 to 2013, said Mr Sosna.

“We estimate existing airports' investment plans for the next seven years will necessitate expenditure of approximately € 775 million. Considering the investments planned on new airports, between 2007 and 2013 as much as € 1,2 billion will be spent on civil airports in Poland,” he added.

Elsewhere, PMR estimates total investment across Poland's civil engineering sector – roads, railways, airports – is expected to reach € 65 billion by 2010. Its report Civil engineering construction in Poland 2007 – Development forecasts for 2007-2010, said during the first six months of 2007 civil engineering expanded by +35% to € 3,1 billion and accounted for 48,1% of Poland's construction sector.

“The sector will experience a true boom in transport investments, necessitating record [levels of] capital expenditure. Outlays related to environmental protection – primarily sewage management and water protection – will also attract investment outlays not seen to date, with around 80% of the planned projects comprising work needed to comply with EU accession requirements,” said Mr Sosna.

Speaking in Warsaw recently, Wojciech Malusi, head of the country's National Chamber of Road Management (OIGD), said Poland is nearly € 9,5 billion short of the € 34 billion it needs to make the country's road network ready for the influx of football fans for the Euro 2012 football tournament. According to OIGD calculations, over the next five years it needs to build 960 km of highway, 2738 km of express lanes and nearly 4000 km of national roads to bring its road infrastructure up to date.

Elsewhere, the power sector, refineries, chemical plants and steel works will also need serious investment, said Mr Sosna. While many of these projects will require private capital, a “significant" number will require public money, “which means that some investments might be delayed or postponed”, he added.

There are other flies in the ointment too. Rising materials prices and a possible labour shortage could have a detrimental effect on the pace of investment and construction.

“Labour resources will be the key issue that might curtail the scale of growth,” said Mr Sosna. “The problem can be remedied, on the one hand, through greater investment outlays, and, on the other, by the increasingly more active foreign firms that are entering the Polish civil engineering sector.”

Development Prospects

Euroconstruct's The European Construction Market report predicts the total value of construction output this year will be € 1417 billion across the 19 countries it covers. Total construction output in the 'Big 5' countries – Spain, Germany, France, the UK and Italy – is expected to hit € 1020 billion this year – 72% of the European total.

While there is expected to be positive growth in all five this year, for the strongest growth, the report said the best prospects will be in the CEE. Besides Poland, Slovakia, the Czech Republic, Bulgaria and Romania are also expected to show good growth.

Following its accession to the European Union (EU) this year, Bulgaria has increasingly attracted the attention of foreign contractors, said PMR's head construction market analyst, Szymon Jungiewicz. While EU funds totalling nearly € 7 billion should also be finding their way into the country's coffers, all of which, said Mr Jungiewicz, “will positively affect the future growth of its construction market.”

In 2006 its construction market was worth € 4,6 billion, a rise of +15,4% on 2005. PMR's Construction sector in Bulgaria 2007 – development forecasts for 2007-2009 report said that with Bulgaria's economy surging ahead, construction is “one of the most rapidly expanding sectors”.

“The sector's development prospects are even more optimistic,” said Mr Jungiewicz. “In the current year, construction and assembly output is poised to climb by about +15%, and in 2008-2009 the growth rate will [rise] to +17%, mainly thanks to the expected launch of several major infrastructure projects anticipated for this period.”

Mr Jungiewicz said besides sustained growth in GDP and capital expenditure, including EU financial resources, the influx of foreign equipment manufacturers, materials suppliers and contractors, and a rapidly growing commercial property market are also helping boost the construction sector.

Growth in the commercial sector has been driven, he added, by international developers. “Low saturation of the commercial property market and a large target market are the two key factors underlying the expected increases in nonresidential construction,” he said.

PMR's report also said demand for warehouse space and logistics centres will outstrip supply in the coming years. While in the next 3 to 5 years retail construction is expected to increase by +330%; industrial construction by +300% and the office sector by +100%.

Likewise the civil engineering sector should also see huge growth. With the transport sector having been allocated € 2 billion of EU funds, road construction – as with other CEE countries – represents the biggest opportunity for materials suppliers, equipment manufacturers and contractors.

The sector has suffered from consistent poor maintenance and a lack of investment – PMR estimates over 60% of its 37300 km of roads need renovating.

Elsewhere, the residential sector also looks promising, with the country's poor housing stock the major driver to future growth. PMR said 13000 dwellings were completed in 2006 and the company expects this to rise to 20000 per year by 2010.

However, like Poland, there are problems on the horizon. Mr Jungiewicz said the “main risk factor" to continued growth is the “insufficient supply" of new manpower as “more and more" people emigrate to other EU states in search of better paid jobs.

Accession Benefits

Like Bulgaria, Romania is also benefiting from its accession to the EU. According to PMR's Construction Sector in Romania 2007 with forecasts for 2007-2009 report the country could receive about € 20 billion in the next few years.

In 2006, said Mr Jungiewicz, the value of Romania's construction market was about € 12 billion, up +18% on 2005. In 2007 PMR is predicting another rise, +15%, with a slight fall in 2008 and 2009.

Several factors should help boost the country's construction sector, said Mr Jungiewicz, including a “projected [and] sustained growth in the GDP and capital expenditure”, EU funds and increasing foreign direct investments, and the increased availability of building materials and equipment thanks to the arrival of major foreign companies. Large-scale investments and acquisitions are also expected, he added, while the commercial property market is also ripe for expansion.

However, like Poland and Bulgaria, there is a distinct lack of labour and experience in the implementation of large construction projects, specifically infrastructure.

Promising markets, however, include residential construction – PMR estimates the country needs 50000 units per year, while only 38000 were completed in 2006. In the non-residential sector, hypermarkets and shopping malls have “the best growth prospects.” Offices, warehouses and logistics centre “are about to experience a very successful season as well,” added Mr Jungiewicz.

Of the € 20 billion due from the EU, about € 4 billion has been earmarked for transport infrastructure. Current estimates suggest over 60% of the country's 78500 km long road network is in need of renovation. The government has “very ambitious plans" to build 1300 km of new motorways by 2013 and modernise and construct a further 2000 km of national roads.

Mr Jungiewicz told CE, “The majority of [these] large infrastructure projects will be implemented by large international consortia or construction enterprises, which will engage Romanian firms as local contractors.”

Outlook

While prospects for the CEE region would appear to be good it is worth bearing in mind that the market is, to a large extent, still in its infancy. The largest market, Poland has a total value of just € 30 billion, yet represents almost 50% of the whole market for the 10 countries – Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, Slovenia – that joined the EU on May 1, 2004.

Some countries have faltered. Hungary launched itself into the EU on a wave of infrastructure investment, only to find that by 2006, according to FIEC (the European Construction Industry Federation), state debt stood at 69% of GDP.

The shortage of labour and the increase in materials prices – mainly cement and steel – is also having an effect on whether CEE countries can deliver the infrastructure needed to take advantage of their geographical position at the cross roads of Europe.

So, while there are undoubted opportunities there are also undoubted risks.

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