Transcript Construction Industry Economic Analysis

Armenia’s Construction Industry:
It’s Growth, Decline, and Future
A Presentation by
Alen Amirkhanian,
DCS, cjsc
AIPRG Annual Conference
July 7-8, 2009, Yerevan, Armenia
Armenia’s Construction Industry
Today’s Discussion
• Significance of construction in the Armenian economy
• The drivers of the construction industry
• Impact of the current economic crisis and possible
outcomes
• Competitiveness of the industry and thoughts on next
steps
Armenia’s Construction Industry
Thousand square meters
Avg. Annual Volume of Residential Construction
in Soviet and Post-Soviet Armenia
Notes: This chart primarily uses data reported in “Construction in the Republic of Armenia 1921-2000” prepared
by the National Statistical Service of Armenia. The data for 2001-2008 are from other NSS sources. Annual
production data becomes available from the mid-1960s.Prior decade averages are DCS estimates based on
available data. To better capture the impact of the economic crisis of the early 90’s, construction work up to 1992
is included in the 1980s estimates. There was a particularly sharp spike in construction activities up to1992,
presumably due to earthquake reconstruction. From 1993 on the volume of construction dropped precipitously.
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Thousand square meters
Annual Volume of Residential Construction
in Years 1966-2008
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
2008 Construction by Type
(total of AMD842 billion)
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Growing Share of Construction in the Armenian Economy
1.0
1.2
1.4
1.3
1.9
2.2
2.7
3.2
3.7
100%
GDP
(tril., current AMDs)
Public Admin
Education
Utilities
Financial Intermediation
Health, etc.
Real Estate, etc.
90%
80%
Share of GDP
Transport & Comm
70%
Manufacturing
60%
Trade, etc.
50%
40%
Agriculture
30%
20%
10%
10.2%
9.7%
12.5%
15.7%
2000
2001
2002
2003
15.6%
2004
23.7%
24.5%
26.9%
19.6%
2005
2006
2007
2008
Construction
0%
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Drivers of the Construction Industry
Real estate
market
Construction
Institutional &
donor spending
Government
spending
Armenia’s Construction Industry
Drivers of the Construction Industry
Real estate
market
Construction
SMALL
Institutional &
donor spending
SMALL
Government
spending
Armenia’s Construction Industry
Financing Sources of 2008 Construction in Armenia
Total 842 billion AMD
Current
AMD
(bln.)
% of
industry
total
“Hayastan”
Armenia Fund
0.99
0.1%
United Nations
resources
0.06
<0.1%
Armenian Apost.
Church resources
2.44
0.3%
Other humanitar.
resources
18.97
2.3%
Current
AMD
(bln.)
% of
industry
total
State budget
61.95
7.4%
Reserve fund
0.46
0.1%
Local community
resources
0.67
0.1%
World Bank loans
5.44
0.6%
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Public sector’s role in the current crisis
Public-sector spending in Armenia has been small and any increases will not replace the losses
from the private sector.
But increased government spending may have important symbolic and developmental value.
The Armenian government has taken the following steps in countering the decline in the sector:
a) Offered loan guarantees to large-scale builders with incomplete buildings
− Which is a positive gesture and may play a role in stabilizing the industry, but
− It could not reach the volume the private sector has generated
− It’s symbolic, psychological value will depend on how well it’s implemented (fund
controls and successful completion of projects, etc.)
b) Committed to New infrastructure projects
− New Nuclear Power Plant, Iran-Armenia Railway, Yerevan-Batumi Highway, Road
improvements, Physics Research Center
− While altogether the sum for these will be large, they are in various stages of
planning, and some may not “hit the ground” anytime soon
− When they all get going, the annual spending will not reach the massive scale of
private investment
a) Existing infrastructure projects?
Armenia’s Construction Industry
Drivers of the Construction Industry
Real estate
market
Construction
Institutional &
donor spending
Government
spending
Armenia’s Construction Industry
Price
decrease
Price
increase
Starting in 2001, real estate prices started a sharp incline
Source: Cadastre Committee of the
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Growth of Armenian Economy by Sector
~100k employees in 2007
Construction
Industry Annual Growth Rate
(2003-2008, adjusted to previous year prices)
31%
30.1%
92k
Financial Intermediation
27%
26.8%
Public
Admin
Health,
etc.
Transport and Comm.
GDP Annual Growth Rate (15.8%)
Real Estate, etc.
Trade,
etc.
Education
Manufacturing
& mining
Agriculture
Utilities
30%
Share of GDP(2008)
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Financing Sources of 2008 Construction in Armenia
Total 842 billion AMD
~600 billion AMD
Transfers
from friends
& relatives
Household
income
Commercial
Commercial
bank
loans
bank loans
~150 billion AMD
Investors
Org. income
or profits
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
2008 Commercial Banks Loans to Armenian Sectors
Loan stock
end of 2008
(mln. AMD)
Share of
total
Loan stock in
April 2009,
change
Consumer loans
174,512
28.2%
-12.5%
Trade (aka
Retail)
132,031
21.4%
5.2%
Private citizens’ ~600 bln AMD
Organizational ~150 bln AMD
Industry
85,858
13.9%
9.2%
Total ~750 bln AMD
Mortgage loans
83,621
13.5%
2.0%
Construction
39,481
6.4%
8.0%
Agriculture
36,467
5.9%
23.6%
Other
32,768
5.3%
2.4%
Service
22,857
3.7%
11.0%
Transport &
Comm
10,238
1.7%
2.0%
617,833
100.0%
1.6%
Sector
TOTAL
Construct.
loans
Commercial
Bank’s share of
Construction
financing
~40 bln AMD
5.3%
While commercial banks play a small role in the construction industry
(5.3% in 2008), …
… their lending to various industries may indirectly finance the
development of the construction industry (esp. material
suppliers/importers and mortgage lending)
Source: Central Bank of Armenia;
National Statistical Services, Republic
of Armenia; DCS analysis
Armenia’s Construction Industry
Price
decrease
Price
increase
In 2009, for the first time in 7 years we see prices fall
Q1 / Q1
-2%
Q1 / Q4
-6%
2009
 1st Quarter of 2009 has seen prices contract
 And they have continued to do so in the months of April and
May (a total of 17% in 2009, which in the first 5 months
wipes out the price increases of 2008)
2006
2007
2008
2009
Apr/ May/A
Mar
pr
1.7%
0.4%
3.1%
3.4%
2.8%
1.4%
-5.9% -4.7%
Source: Cadastre Committee of the
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Armenia’s construction slowdown lagged the global downturn …
• … Most likely due to poor integration with the global financial markets.
• Starting 4th Quarter of 2008, construction activity slowed down markedly.
• Contraction continued in early 2009, with months of April and May showing a
sharp decline to 30% of what it was in the same period last year.
Monthly Change in Construction Activity (compared to same period previous year)
2007
2009
2008
I
102
II
118
III
120
IV
123
I
123
II
102
III
101
IV
73
Will there also be a lag in recovery?
I
78
II
~30
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
When is the global construction market expected to recover?
•
The global construction market in 2009 will contract by 3.7%, the steepest in at least
20 years and the the first back-to-back annual declines in the last two decades.
•
Every region except Asia will see declines in construction spending, while Asian
growth—slated to be 2.6%—will be well below the double-digit increases seen in
recent years.
•
The bright spot is in fiscal-stimulus packages with infrastructure spending at their
core. While global residential and nonresidential spending will contract nearly 10%
and 5%, respectively, infrastructure spending will actually grow by more than 5% in
2009.
•
This will result in a slight recovery in 2010, with global construction spending
returning to its 2007 peak in 2011. Expansion is expected in 2012.
Source: HIS Global Insight
Armenia’s Construction Industry
Will there also be a lag in recovery?
• For the construction industry to pick up, real estate markets have to recover. As most of the
real estate market is governed by cash remittances and investments from Armenians abroad,
esp. Russia, it will take them time to decide to reinvest in Armenia after their economies
recover
• The experience of those who invested in the markets in the mid- to late 2000’s will matter.
There are currently more than 240 incomplete projects in the city of (cite source).
• Investor/consumer expectations are changing, which may make it more difficult to secure
construction funds upfront.
−
Most of the current construction was financed by advance payments from clients or
customers; most of these cash payments were made on trust, they were not real estate
transactions
−
But increasingly the buyers will be looking to have at least the construction started and
possibly even have the “vkayakan” (the property title) issued so that they can sign a
real-estate purchase contract (with all of its enforcement benefits)
−
But “vkayakans” cannot be issued until the rough construction is complete and the
“avartakan” (completion) certificate is issued.
−
SO INCREASE IN CONSTRUCTION FINANCING or LIMITED PARTNERSHIPS or ?
Armenia’s Construction Industry
Competitiveness of the Armenian construction industry
To analyze this let’s look at the core components of the industry in terms of
quality, cost, availability, and productivity
Critical Experts
Architects
& engineers
• OK quality
arch/engineers, cost no issue
• Complicated tax and accounting environment, but
Legal, tax, and accounting expertise
growing availability of experts
• Permitting
and land-titling practices nebulous
Regulatory
agencies
Core trades
General contractors
Earthwork
Roads & sidewalks
Concrete
Structural steel
Suppliers
Importers of
Raw materials suppliers: cement, sand, gravel, dirt,
supplies and
stone, brick, grout, plaster, etc.
equipment
• Raw materials monopolized
Manufactured materials suppliers: rebar, steel, pipes,
• Supplies and equipment mostly imported, very little local production,
Local miners of
cables, tiles, pavement blocks, hardwood flooring,
substantially adding to costs (most likely effect of high value of the dram)
supplies
adhesives, paint, glass, aluminium profiles, drywall,
and lack of stability required for mfg investments; see CPI slide
doors, windows,toilet bowls, sinks, furniture,
• Import of equipment and technology has been slow
appliances, etc.
Local
manufacturers
of supplies and
equipment
Equipment suppliers: tools, equipment, light
machinery, heavy machinery, parts and repairs
Masonry
Roofers
Carpentry
HVAC
Electrical
Plumbing
Doors & windows
Trade groups: Builders’ Association, Architects’
Association, etc.
Training institutes: Construction, civil and structural
engineering, and architecture faculties and institutes
Commercial, industrial,
warehousing, and
institutional
Ornamental Iron
Plasterers
Drywall
Wood flooring installers
Support institutions
Residential: single family,
multi-family, …
Tile setters
Stone fabricators
Painters
Cabinet makers
Glass and mirrors
Landscape
Civil: Roads, highways,
bridges, irrigation canals,
dams, airports, etc.
Armenia’s Construction Industry
First 5
months
Consumer Price Index
Construction Price Index
Jan-May/
Jan-May
2006
2007
2008
2009
Consumer
Price Index
99.3
104.5
108.9
102.5
Construction
Price Index
108.4
105.2
114.5
122.9
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Competitiveness of the Armenian construction industry
To analyze this let’s look at the core components of the industry in terms of
quality, cost, availability, and productivity
Critical Experts
Architects
& engineers
• OK quality
arch/engineers, cost no issue
• Complicated tax and accounting environment, but
Legal, tax, and accounting expertise
growing availability of experts
• Permitting
and land-titling practices nebulous
Regulatory
agencies
Suppliers
Importers of
Raw materials suppliers: cement, sand, gravel, dirt,
supplies and
stone, brick, grout, plaster, etc.
equipment
• Raw materials monopolized
Manufactured materials suppliers: rebar, steel, pipes,
• Supplies and equipment mostly imported, very little local production,
Local miners of
cables, tiles, pavement blocks, hardwood flooring,
substantially adding to costs (most likely effect of high value of the dram)
supplies
adhesives, paint, glass, aluminium profiles, drywall,
and lack of stability required for mfg investments; see CPI slide
doors, windows,toilet bowls, sinks, furniture,
• Import of equipment and technology has been slow
appliances, etc.
Local
manufacturers
of supplies and
equipment
Equipment suppliers: tools, equipment, light
machinery, heavy machinery, parts and repairs
Support institutions
Trade groups: Builders’ Association, Architects’
Association, etc.
• They are weak
Training institutes: Construction, civil and structural
engineering, and architecture faculties and institutes
Core trades
General contractors
•Earthwork
LABOR PRODUCTIVITY:
Each trade will have its
Roads
sidewalks
own &
story
but it is safe
Concrete
to say that labor
productivity
Structural
steelis low,
though it has improved
Masonry
over the past 6 years
(see Labor Productivity
Roofers
slide).
Carpentry
Residential: single family,
multi-family, …
•HVAC
LABOR COSTS: Increasing
but with people
Electrical
returning from Russia
Plumbing
with greater skills,
increased
competition
Doors
& windows
Commercial, industrial,
warehousing, and
institutional
Ornamental Iron
• MANAGEMENT KNOWPlasterers
HOW: Very poor
Drywall
• KNOWLEDGE OF BEST
Wood flooring installers
PRACTICES: Industry
Tile
setters disconnected
somewhat
fromfabricators
the world; most
Stone
connection is with
Painters
Russia, Iran, and the
Cabinet
UAE? makers
Glass and mirrors
Landscape
Civil: Roads, highways,
bridges, irrigation canals,
dams, airports, etc.
Armenia’s Construction Industry
Value Added per Employee = (VAx1y1 / Employeesx1y1)
Where:
“VA” or value added is amount of the industry’s contribution to the GDP,
“Employee” is the estimate provided by the NSS, ROA
“x1” is a given industry and
“y1” is a given year
Index
2007
Index
Construction
3,588,237
2.5
8,092,404
3.2
Real Estate, etc.
5,120,792
3.6
6,443,095
2.5
Financial Intermediation
5,131,885
3.6
5,298,598
2.1
Manufacturing & Mining
2,132,370
1.5
3,585,172
1.4
Transport & Comm
1,671,962
1.2
2,876,878
1.1
Utilities
2,572,623
1.8
2,797,660
1.1
919,419
0.6
2,685,943
1.1
Per Employee GDP
1,418,620
1.0
2,543,327
1.0
Average
Agriculture
1,237,427
0.9
1,275,147
0.5
Public Administration
467,571
0.3
1,077,681
0.4
Health, etc.
655,767
0.5
1,006,734
0.4
Education
317,339
0.2
765,733
0.3
Trade, etc.
Higher than avg.
2003
Lower
than avg.
In 2007, the construction industry
ranked the highest productivity, it
also showed the steepest growth
compared with 2003.
Let’s come up with a measure called “Value added per employee,”
which arguably is a measure of productivity:
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Competitiveness of the Armenian construction industry
To analyze this let’s look at the core components of the industry in terms of
quality, cost, availability, and productivity
Critical Experts
Architects
& engineers
• OK quality
arch/engineers, cost no issue
• Complicated tax and accounting environment, but
Legal, tax, and accounting expertise
growing availability of experts
• Permitting
and land-titling practices nebulous
Regulatory
agencies
Suppliers
Importers of
Raw materials suppliers: cement, sand, gravel, dirt,
supplies and
stone, brick, grout, plaster, etc.
equipment
• Raw materials monopolized
Manufactured materials suppliers: rebar, steel, pipes,
• Supplies and equipment mostly imported, very little local production,
Local miners of
cables, tiles, pavement blocks, hardwood flooring,
substantially adding to costs (most likely effect of high value of the dram)
supplies
adhesives, paint, glass, aluminium profiles, drywall,
and lack of stability required for mfg investments; see CPI slide
doors, windows,toilet bowls, sinks, furniture,
• Import of equipment and technology has been slow
appliances, etc.
Local
manufacturers
of supplies and
equipment
Equipment suppliers: tools, equipment, light
machinery, heavy machinery, parts and repairs
Support institutions
Trade groups: Builders’ Association, Architects’
Association, etc.
• They are weak
Training institutes: Construction, civil and structural
engineering, and architecture faculties and institutes
Core trades
General contractors
•Earthwork
LABOR PRODUCTIVITY:
Each trade will have its
Roads
sidewalks
own &
story
but it is safe
Concrete
to say that labor
productivity
Structural
steelis low,
though it has improved
Masonry
over the past 6 years
(see Labor Productivity
Roofers
slide).
Carpentry
Residential: single family,
multi-family, …
•HVAC
LABOR COSTS: Increasing
but with people
Electrical
returning from Russia
Plumbing
with greater skills,
increased
competition
Doors
& windows
Commercial, industrial,
warehousing, and
institutional
Ornamental Iron
• MANAGEMENT KNOWPlasterers
HOW: Very poor
Drywall
• KNOWLEDGE OF BEST
Wood flooring installers
PRACTICES: Industry
Tile
setters disconnected
somewhat
fromfabricators
the world; most
Stone
connection is with
Painters
Russia, Iran, and the
Cabinet
UAE? makers
Glass and mirrors
Landscape
Civil: Roads, highways,
bridges, irrigation canals,
dams, airports, etc.
Armenia’s Construction Industry
Concluding Thoughts
•
Risk of Arrested Development: With the economic downturn, there
is a risk that the improvements made may be lost; government
should be a demanding customer
•
Keep an eye on the future: exporting industry? And if so a growing
global trend is “green” construction; Armenia should adapt if it is
to go global
•
Invest in education and training, esp. in management and technical
skills
•
Construction financing: The banking sector is unlikely to become a
big player; direct investment or pre-sale will continue to be the
main source. Buyer/investor risk should be reduced.
•
Construction completion: continue to focus on incomplete projects,
they have a big psychological impact on future investors
Հինգշաբթի, 2009թ. հուլիսի 9-ին, ժամը 19:30
“Ակումբ” սրճարանում, Երևան, Թումանյան
40, (մուտքը ազատ է) The Role of Architects
Evening Encounters
Երեկոյան հադիպումներ
Ճարտարապետների և
քաղաքաշինարարների
դերը բնապահպանության
գործում
and
Urban Planners in
Environmental Protection
Thursday, July 9, 2009 at 7:30pm at THE
CLUB, 40 Tumanyan St., Yerevan (free
admission)
For more info:
www.cherchillblog.com
Extra Slides
Armenia’s Construction Industry
Employment Data Using Econometric Data
Ranking
Industry
2007
Employment
(thousands)
Annual Growth
Rate (20032007)
3
Agriculture, hunting, forestry, and
fishing
Trade, repair of motor vehicles,
household and personal goods;
Hotels and restaurants
Health and social work; Community,
social and personal services
4
Education
5
Manufacturing, mining, and quarrying
98.6
-4.3%
6
Construction
91.5
5.9%
7
Transport and communication
72.5
5.5%
8
Public Adminisration
70.1
-4.8%
9
Electricity, gas, and water supply
35.7
0.1%
10
Real Estate, renting, and business
activities
17.8
10.0%
11
Financial Intermediation
14.3
26.3%
1,188.5
1.4%
1
2
TOTAL EMPLOYMENT
433.8
9.7%
127.2
-8.7%
114.1
3.9%
110.5
-6.0%
Source: National Statistical Services,
Republic of Armenia; DCS analysis
Armenia’s Construction Industry
Share of construction companies, employees, & revenues by firm size
Very Small (5 or less emp.)
Small (6-25 emp.)
324
Medium (26-50 emp.)
313
BIG (51 & more emp.)
74
83
TOTAL
794
Source: National Statistical Services,
Republic of Armenia; DCS analysis