The construction market has great prospects and is waiting for optimal conditions to realize the pent-up demand. When will the situation in the sector improve and what is needed for this?
Impact of the sector on the world economy
Construction is crucial to the economy. A parallel can be drawn between the efficiency of the construction sector and the economic well-being of a country. In Europe, where the macroeconomic situation is mostly stable, the construction industry accounts for an average of 5-7% of the total GDP.
As for Ukraine, the share of construction in the domestic GDP grew from 2.3% in 2015, and in 2020-2021 – during the period of active spread of the coronavirus – it was at the level of 3.3-3.2%, respectively.
Adaptation to the current conditions gradually gained momentum in 2021 in Ukraine and the world. Despite the delay in delivery and the increase in the cost of this process (due to the increase in fuel prices), the volume of new construction increased and the production of building materials increased. Thus, according to the GlobalData consulting company, the dynamics of the development of the sphere in the world increased by 6% in 2021.
The consequences of the war were felt globally. Participants of the construction market in most countries of Europe and the USA, if not stopped, were forced to slow down their activities on current projects and limit the launch of new ones. Local ones were added to the main reasons — changes in logistics routes and rising energy costs. For example, for Poland it is a lack of construction workers and a lack of housing supply, as there are several million Ukrainian refugees in the country who need housing.
The war increased the cost of construction, which requires a large amount of energy at all stages: from the manufacture and transportation of construction products to the direct execution of works. In particular, the prices of raw materials and basic materials sent to Poland, Germany and other European countries from Ukrainian enterprises (as well as Russia) increased. For example, the shortage of steel led to an increase in the cost of certain types of steel at least four times in Finland. In general, this trend will continue until the end of the war.
Overall construction activity is forecast to improve in 2024, given economic stability.
Construction enterprises in new conditions
The factors caused by the war hit the domestic market of construction materials, significantly reducing its scale.
Today, the lion’s share of enterprises in Ukraine have a difficult situation with working capital and reserves that have been exhausted in a year.
Thus, at the beginning of the year, part of the construction enterprises reoriented themselves to help the Armed Forces, producing anti-tank hedgehogs, camouflage nets and transferring tons of sand to strengthen strategic structures.
In general, in the first half of 2022, a large percentage of enterprises were forced to suspend or limit production due to intense shelling, high gas prices, and low market demand. For example, the decline in the rate of production of clinker bricks in Ukraine is due to active hostilities in the Donetsk region, where the main deposits of refractory clays, which are raw materials for it, are located.
Some of the enterprises that produced raw materials and construction products for the Ukrainian and European markets were completely destroyed. In particular, we are talking about a plant for the production of mineral wool in Zhytomyr, construction mixtures in Donetsk region, metal structures and other construction materials in Mariupol, etc.
In the second half of 2022, the main challenge for the full-fledged operation of enterprises was the limits of electricity volumes due to damage to the energy infrastructure.
Therefore, raw materials and/or materials, which until recently were manufactured by Ukrainian manufacturers, have to (or will have to) be imported, which also affects the cost of construction. In general, during 2022, prices for building materials rose by an average of 60%, works — by 30%, and will continue to grow in accordance with the growth of the exchange rate and inflation.
Accordingly, this is one of the reasons why new construction projects do not start. Currently, according to the State Statistics Service, the area of housing commissioned in the first 9 months of 2022 was 4.825 million m2. For comparison: the indicator at the level of 4.797 million m2 was noted for the first half of 2021.
In addition, the volume of import/export of materials is limited, since the lion’s share of ports are not working, and land routes do not allow to increase the same scale of turnover.
What is needed to restore the market
This year, one of the positive changes in construction, which will contribute to the improvement of the situation on the market, is the resumption of the work of construction enterprises that stopped their processes due to a lack of electricity. The scenario in which the necessary amount of it will be returned to the producers is more than real. This is facilitated by the completion of the heating period, the gradual restoration of the system and effective air defense against repeated strikes on energy facilities.
The second is effective compensation programs for destroyed/damaged property at the state and local levels. Recently, a law was passed that defines the specifics and procedure of such compensations. As for local initiatives to restore housing, several such programs have begun to be implemented in the Kyiv region, but so far they are not enough to change the situation. However, in the long run, they could positively influence the dynamics of the construction market and stimulate it.
Also, to revive the sector, the government is introducing mortgages. If properly implemented, the opportunity to take housing at a low interest rate can have a positive effect on the market, since the money of the program participants will remain in Ukraine. In 2023, it is planned to issue up to 15,000 subsidized mortgages — this will make it possible to support the industry, and with it, the country’s economy.
The third is a transparent reconstruction program. According to various estimates, the number of Ukrainians whose homes were destroyed is about three million; about a third of the infrastructure is damaged. It is predicted that the state needs at least 350 billion dollars for the recovery process. For the successful implementation of such a program, the openness of all processes for both Ukrainians and international partners is important.
It is also necessary to remember the challenges, the solution of which is a prerequisite for the stable development of the field. First of all, we are talking about the shortage of construction materials, which were either imported from Russia (glass, as well as products made of cement, asbestos, gypsum, etc.), or the production of which was destroyed by Russia. For example, according to various data, in 2021 the share of glass imported from the Russian Federation and the Republic of Serbia was from 70 to 80%. Therefore, it is important to foresee the restoration of capacities, as well as the possibility of investments in new enterprises.
Another problem is hundreds of thousands of tons of construction waste, for which there is no longer enough space in landfills. So, according to the Ministry of Regions, as of 2021, their area was 9 hectares.
Today, in order to quickly solve the problem, new temporary garbage collection sites are being created. In particular, in the Kyiv region, there are already about 50 of them.
European experience shows successful results from the reuse of construction waste, which will be especially useful in the reconstruction of Ukraine. So, if earlier some of the sorted (harmless) residues were exported for processing in the Republic of Belarus, today the optimal option would be to establish such a process in Ukraine.
The restoration of construction will have a positive effect on the life of the population and improve the post-war economy of the country: it will provide jobs, contribute to the increase in the production of materials and the opening of new enterprises. So you need to be ready to rebuild, understand the challenges and start working on them in advance.
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