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CONSTRUCTION INDUSTRY DEPENDS ON GDP GROWTH AND ECONOMIC CONFIDENCE

Recovering, albeit slowly

By the end of 2009 it has become obvious that pundits who were talking about the golden days of the real estate business were referring to times past when there were available funds for developers to wrap up their ambitious projects or start new ones, as well as for purchasers to buy a new home, relocate into a better office building or add to their industrial properties.

By the end of 2009 it has become obvious that pundits who were talking about the golden days of the real estate business were referring to times past when there were available funds for developers to wrap up their ambitious projects or start new ones, as well as for purchasers to buy a new home, relocate into a better office building or add to their industrial properties.

After being hit by the tsunami-like wave of the global financial crisis and the downturn in the economy during the first half of 2009, the real estate market in mid October has started breathing, albeit slowly and somewhat shallowly.

Observers say that times when, for example, a residential project was sold out shortly after its final contours left the drawing board and the first shovel of dirt was dug are gone for the foreseeable future and now some banks are requiring over half of the apartments to be sold before they open their vaults and lend construction funds. With the banks still expecting firmer guarantees before lending, developers, real estate consultants and investors are mostly biding their time, claiming that the banks’ tight-fisted lending policies are far too restrictive and have put a stranglehold on the building process.

The key factor that will have the most important impact on the recovery of the Slovak real estate market in 2010, say prominent real estate experts, is definitely the cost and availability of sources of financing.

“At the moment this is killing most development and potentially some investment acquisitions,” Andrew Thompson, managing partner of global real estate consultancy firm Cushman & Wakefield, told The Slovak Spectator. “The banks need to grease the wheels and provide some loans to make real estate attractive.”

“Once the existing stock is about absorbed and demand is healthy again, the developers will start to be active once again and international investors will buy their products”, said Jörg Kreindl, managing director of CB Richard Ellis, a global consultancy firm.

“Of course the banks need to be back to normal by then – without financing there are no golden times,” Kreindl told The Slovak Spectator.

However, observers also stress that revival comes from a positive economic atmosphere, not just interest rates and other lending factors.

“The origin of the crisis was defaults on housing and lack of confidence in the market which created a tsunami across Europe as much of the debt had been purchased by European banks,” Laurie Farmer, director of consultancy firm Spiller Farmer, told The Slovak Spectator. “This, although partly affecting the owners of Slovak banks, was less intense here. So for the domestic market, confidence in the economic climate is more fundamental.”

According to Peter Nitschneider, associate director and head of Investment and Professional Services at King Sturge, Slovakia will see more construction trading next year. '

“Definitely, but at a different price level,” Nitschneider told The Slovak Spectator. “Investors need to first saturate the lucrative markets in countries such as the United Kingdom, Germany and France and then they will spread through the central and eastern European (CEE) region. The more eastern, the more time it will take.”

Slovakia’s performance as a small export-oriented economy will depend to a large degree on how quickly and how well the economies of the larger western European countries and the United States recover.

Thompson said that the financial and lending markets are already coming back in places like the United Kingdom. Reports also show that the financial markets in the United States are slowly recovering from the multiple shocks from the past two years.

Some of the previous predictions about forced sale of real estate in Slovakia on a mass scale at prices well below the market value appeared to be exaggerated, based on developments in October. For example, in the residential market many people who had delayed purchasing apartments or family houses while hoping that prices might sink lower are now starting to take another look in response to reports that a further dramatic fall in prices is unlikely to come.

But the actual purchase of real estate really comes down to the performance of the Slovak economy because every participant in the market has more confidence when the economy emanates the promise of growth rather than contraction.

“If tenants require space for expansion, developers become active and investors take confidence in the underlying sustainability of the markets,” Thompson said. “This should lead to employment growth – although next year it is expected that unemployment will peak at the same time that GDP growth reaches 2 to 3 percent, or 3.7 percent according to the IMF.”

Does the economy have any muscle?

Slovakia’s Finance Ministry as well as its central bank released revised prognostications in late September for how much the country’s gross domestic product is expected to contract for all of 2009. The ministry changed its previous estimate of a 6.2 percent contraction to a decline of only 5.7 percent while Slovakia’s National Bank (NBS) changed its last prediction to -5.6 percent rather than its earlier more optimistic drop of only -4.2 percent in GDP. Economists and market watchers consider these prognoses to now be realistic. The Finance Ministry released its revised predictions on September 23 and the central bank did so one day earlier.

In early September, Slovakia’s Statistics Office produced the most optimistic forecast, predicting that Slovakia’s economy would contract by only 3.5 percent over the course of 2009.

In late September Finance Minister Ján Počiatek suggested that preliminary numbers for the third quarter indicated some stabilisation in the economy and a gradual winding down of the crisis. What added some fuel to the optimism of the ministry were better indicators of economic sentiment in Slovakia and economic improvements in the eurozone countries.

The central bank painted its prediction in slightly darker colours due to the significant decline in the performance of Slovakia’s economy during the first half of 2009 when the global downturn reduced export orders for many domestic companies and stripped thousands of Slovaks of their jobs.

Currently the NBS is saying the Slovak economy has bottomed out and it might start to gradually show growth next year. The central bank raised its growth prediction for 2010 by 0.5 percentage points to 2.9-percent growth over the whole year, expecting that foreign demand, which had fallen sharply due to the crisis, would recover and again be the major driver of economic growth in Slovakia.

The contraction of the Slovak economy slowed slightly in the second quarter of 2009 compared to the first three months of the year. This brought some cheer to politicians in urgent need of good news on the state of economy, but market watchers remained cautious and counselled more patience.

GDP shrank by 5.6 percent in the first quarter of 2009, followed by a drop of 5.3 percent in real, constant-price terms in the second quarter, the Slovak Statistics Office recently announced in a statement confirming its flash estimate made in August.

Lower foreign and domestic demand was behind the decline in GDP, the office said. GDP amounting to €15.640 billion was generated in the second quarter, which at current prices was 6.5 percent less than the second quarter of 2008, the office said.

“We expect that the third quarter could again show signs of improvement,” said František Bernadič, general director of macroeconomic statistics at the Statistics Office, as quoted by TASR. “Next year, we may record some positive figure in terms of year-on-year change in GDP in constant prices.”

Bernadič also sees something of a revival in foreign demand but is not sure if that will be enough.

“The question is how the domestic picture will unfold,” he said, adding that the prospects are largely unknown since the level of state expenditures is critical.

Sentiments improve slightly

The mood among Slovak business leaders and consumers about the performance of the economy continued to improve at the end of the third quarter, at least as suggested by certain statistics. Slovakia’s Statistics Office’s index of economic sentiments increased by 1.8 points in September to 75.1 points, month-on-month due to a considerable increase in confidence reported by the services sector and also by consumers, the SITA newswire reported.

However, on an annual basis the economic confidence indicator in September remained 25.3 points below its long-term average and 21.3 points lower than the same month in 2008.

The economic sentiment indicator in the construction industry in September stood 31.5 points below its long-term average, at -52.5 points, which is ascribed to the falling demand for construction as well as a further expected decrease in employment in the construction sector over the next three months.

To be optimistic, people need jobs


Slovakia had 368,021 residents without jobs at the end of September, putting one statistical measure of the unemployment rate at 13.89 percent, the highest level in nearly five years. Current job vacancies numbered 7,251, meaning there were almost 51 jobseekers for each available vacancy, the National Labour Office announced on October 20.

Another way of calculating the unemployment rate in Slovakia is based on the number of jobseekers who are prepared to accept a job immediately. Using this criteria, there were 329,860 unemployed in September and the unemployment rate on this basis was 12.45 percent, up 0.4 percentage point when compared with August. During the last 12 months, the aggregate number of unemployed increased by almost 139,860.

The labour office expects that the unemployment rate will keep increasing through the end of the year. Earlier estimates of analysts suggested that unemployment would peak in Slovakia at the beginning of 2010 at around 14 percent.

The Statistics Office reported that in the January-August 2009 period an average of 184,600 persons worked in the construction industry.

Construction’s DECLINE SLOWS


The fall in the output of the construction sector over the first half of 2009 slowed to 0.2 percent in August, year-on-year. In July, construction production dropped by 5.7 percent after June’s 0.3 percent year-on-year decline, the Statistics Office reported.

Construction production over the entire first eight months of 2009 dropped by 7.4 percent to stand at €3.686 billion, SITA wrote.

New construction, including modernisation and renovation work, accounted for a volume of €2.917 billion over the eight-month period and dropped by 6.4 percent from the previous year. New construction made up 82.5 percent of the local construction production in these eight months, which was 0.7 percentage points higher than last year. Repair and reconstruction work recorded a volume of €596.8 million and dropped by 12.6 percent year-on-year and its proportional share of domestic production dropped by 1 percentage point to 16.9 percent. Construction activity by Slovak firms abroad also fell by 12.6 percent to €150.7 million.

More information about Slovak real estate market you can find in our Real Estate Guide.

Topic: Real Estate


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