Transcript Construction CEE Market

Opportunity Knocks: The
Benefits and Dangers of TurnKey Solutions for CEE Markets
Leonid Peisakhin, Exclusive Analysis Ltd.
Leaf Contractors Summit, Prague
March 24, 2006
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CEE Construction Market: General Trends
 Growth is expected over the next 1-2 years
 As costs increase in Hungary and the Czech Republic,
firms will start targeting further East e.g. Romania and
Bulgaria
 Russia’s construction market will dominate in CEE
 Non-residential real estate returns will decrease while
residential and civil engineering segments
will grow
 EU structural and cohesion funds injection
into infrastructure in Czech Republic,
Hungary & Poland will spur market growth
 Poland’s recent construction malaise will
reverse
 Major change likely on the Moscow market
CEE Construction Market: potential pitfalls
• Burdensome administrative practices are likely to persist
throughout 2006.
• Corruption will remain rampant across CEE, improving only
gradually.
• The involvement of organised crime in the construction
sector in Russia and Bulgaria will continue.
• The hope of rapid spending of EU regional funds in the
Czech Republic and Poland is misplaced: bureaucratic
inefficiency will get in the way of this.
Political risks of investing in Russia: general observations
• GDP growth (2005): 5.9%
• Construction market growth (2005): 10%
• Residential housing market is expanding rapidly (esp. cities
with more than 1 million inhabitants and Black Sea resort
areas)
• Expansion of residential housing is one of President Putin’s
national projects
• Mortgage provisions are being rapidly developed
• Sixty percent of all housing stock is dilapidated and in need
of renovation/replacement
Political risks of investing in Russia: general observations
BUT
• Burdensome regulations
• Widespread corruption and administrative incompetence
• Large construction firms are linked with municipal governments
• Supply of building materials is virtually monopolized
• Expropriation pressures and murders
• Regime change risks
• Terrorism risks
• Cargo/supply chain disruption risks
• How long will the boom continue?
Political risks of investing in Russia: the Moscow market
• Highly lucrative: property prices growing at 30-40%pa in
recent past
• Industrial areas are being earmarked for commercial and
residential development and some residential areas are
being re-planned
• Administrative procedures are due to be simplified in
2006-7
BUT
• Mayor Luzhkov controls the allocation of building permits
and indirectly controls a construction empire
• Supply of building materials is tightly controlled
• The problem of illegal workers
• MAJOR CHANGE LIKELY: Luzhkov is likely to leave the
mayoral post in 2006-7
Political risks of investing in Poland
• GDP growth (2005): 3.3%
• Construction market growth (2005): 7.4%
• Negative growth trends of the last several years are finally
expected to be reversed this year
• Poland ranks last in Europe in terms of the number of
apartments per 1,000 residents
• Demand for residential housing will also be driven by the
fear of VAT increase on apartment purchases to 22% in
2008
• Poland needs to undertake major civil engineering projects
to conform with EU legislation
Political risks of investing in Poland
BUT
• The country will be slow in making use of EU cohesion and
development funds
• Large scale corruption along with administrative
inefficiencies will likely persist
• Investment in engineering and infrastructure projects will
be hampered due to lack of local development plans
• Political risks associated with early parliamentary elections
• ON THE POSITIVE SIDE: the Government has talked about
comprehensive regional planning law, changes to PPPs, a
new construction act and maintenance of preferential VAT
rates beyond 2008
Political risks of investing in the Czech Republic:
• GDP growth (2005): 4.6%
• Construction market growth (2005): 4.2%
• Most developed construction market in the CEE,
particularly in non-residential property
• Large investment in infrastructure is expected (EU funds)
• Growth potential still present but limited
Political risks of investing in the Czech Republic:
BUT
• Large-scale corruption connected to awards of public
contracts and building permits
• Slow and inefficient administrative processes
• Malicious disruption of construction projects
• November 2006 elections
• ON THE POSITIVE SIDE: sound economic indicators
Political risks of investing in Hungary
• GDP growth (2005): 3.7%
• Hungary leads in terms of new housing in the CEE, yet
investment in construction expressed as percentage of
GDP is the lowest in CEE
• Civil engineering projects represent the next growth area
• Healthy development potential within the Golden Triangle
and in eastern Hungary
Political risks of investing in Hungary
BUT
• Administrative inefficiencies and corruption
• Cumbersome and slow legal system
• Likely tightening of development and rezoning regulations
overtime
• Economic indicators
• April 2006 elections
Political risks of investing in Romania
• GDP growth (2005): 5.2%
• Construction market growth (2005): app. 7.5%
• The boon of EU accession
• Demand for commercial space is growing rapidly as is that
for residential housing in the cities and for industrial space
along major motorways and in western Romania
• Romania has seen some mildly successful economic
reforms in 2004 and 2005
Political risks of investing in Romania
BUT
• Corruption and red tape persist
• Construction market is dominated by state-controlled
companies
• Negative economic indicators
• The outlook for regime stability
Political risks of investing in Bulgaria
• GDP growth (2005): 5.4%
• The boon of EU accession
• Expansion of the residential construction market due to
promotion of mortgage schemes
• Sizeable investment in infrastructure
• Sofia, the capital, and Black Sea resort areas are the
construction hot spots
Political risks of investing in Bulgaria
BUT
• Widespread corruption is a major problem
• Administrative processes extremely inefficient
• Organised crime involved in the construction industry
• Bureaucracy outside of the capital is extremely difficult to
deal with
• Economic indicators
• Political stability
Conclusions
• CEE states, and particularly Russia and Romania, present a
major opportunity
• We’ll likely be seeing a movement eastwards as the EU
expands and the cost of doing business in Central Europe
rises
• BUT CEE markets must be navigated with care
• Municipal and central governments usually work in tandem
with local firms
• Corruption levels are high across the CEE
• Red tape can be mind-boggling and permits take a long
time to secure
• Regional governments are usually more difficult to deal
with than authorities in the capital
• Foreign firms are best off operating through subsidiaries
registered in states where construction is undertaken
and/or in tandem with major local construction companies
Opportunity Knocks: The
Benefits and Dangers of TurnKey Solutions for CEE Markets
Leonid Peisakhin, Exclusive Analysis Ltd.
Leaf Contractors Summit, Prague
March 24, 2006