Download 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
Uniquely Positioned to Improve Client Profitability
Privately owned
INDEPENDENT
Completely objective
analysis
Full visibility for
client
TRANSPARENT
Audit trail and
disclosure
compliance
Forecasting is all
we do
FOCUSSED
No distractions
•Substantial profit growth for all of our clients
•Profitable entry into new sectors
Early-Stage Risk Identification is Most Valuable
FINANCIAL OPPORTUNITY
RISK AVOIDANCE
RISK MANAGEMENT
CORPORATE
SECURITY
AUDIT
FRONTLINE
SECURITY
COMPANY
RISK
RISK
RISK
SELECTION ALLOCATION REDUCTION
RISK
DEFENCE
BAILING OUT
DURING
POST-LOSS
FLOODING
AGGREGATION
RISK IMPACT
MITIGATION
STAGE IN RISK CYCLE
POST-EVENT
RISK
RESPONSE
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