Building industry’s performance returns on upward path, after two years of double-digit decline

The performance of the building industry returned in the positive area in 2011, after two years of double-digit plunge

The construction works volume increased by 2.8% y/y last year, but remained however by 3.9% below the 2007 level, official statistics show. Nonetheless, the advance last year, partially explained by low-base comparison, is moderate and indicates a certain stabilisation of the market rather than resumption of steady, sustainable growth.

The still sluggish demand in 2011 came mostly from the non-residential segment and civil engineering works, as residential constructions remained overall frozen. The shopping centre supply added to the market in 2011 was similar to peak years 2007 and 2009, and considering the announced projects for 2012 it is likely that the non-residential segment will continue to drive the overall construction market upwards this year as well.


Romania’s construction sector recovers at faster pace than EU average


The performance of the construction sector followed the same upward pattern as in the EU27 countries, yet Romania’s construction output seems to have been recovering at a faster pace than the European average and is outstandingly above the other countries in the region, where the building sector recorded double-digit plunge last year.


Building materials segment stabilises in 2011


The building materials output last year was above the 2009-2010 level, thus paralleling the improving performance of the construction sector. The increase in production of construction materials in 2011 was propped by the 5% y/y advance of the cement market, while the brick segment continued on downward path for the third year in a row. The decline of the brick market is expected to ease this year, but prospects are not very optimistic, as residential building constructions show no clear signs of recovery. The number of permits issued for residential buildings dropped by 6.6% y/y in 2011 and further by 3.8% y/y in H1 2012, according to statistical data. The stabilisation of the building materials market in 2011 reflected in improving revenues of local producers, but the profitability of the sector continued to be hampered by hiking energy and raw materials prices. The construction materials retailers also felt the overall market stabilisation. The DIY chains resumed expansion in H1 this year, after having consolidated market positions and redefining strategies in 2011.


Infrastructure remains the segment with the highest growth potential


The infrastructure segment and road construction in particular remains the segment with the highest growth potential, given the current poor state of the road infrastructure. According to official statistics, nearly 42% of the roads were not asphalt-paved at the end of 2011 and of the roads paved, approximately half are outdated.


However, road infrastructure output was rather disappointing last year. The public roads company CNADNR announced the addition of only 55.4km of highways in 2011, namely 32.2km of Arad-Timisoara highway, 14.6km of the Medgidia-Constanta highway and 8.6km of Constanta ring-road. On the upside, works did progress and more constant and consistent deliveries are expected in 2012-2013.


Civil engineering works indeed surged by an impressive 18.1% y/y in H1 2012, while the overall construction works volume rose by 6.8% y/y during the period, according to official statistics. The infrastructure segment however relies on public funding and the encouraging performance in H1 will most likely be offset by the political developments and the authorities’ measures in the second half of the year.


The political turmoil in July-August virtually froze public investments. In addition to this, the government cut down significantly funds for infrastructure under the autumn budget adjustment, impacting upon works in large projects, such as motorways or the Bucharest underground sections. Earlier in May, the government had already decided to terminate the financing of the national infrastructure development plan PNDI as of mid-year. Furthermore, the European Commission discontinued in August intermediary payments under the sectoral programme POS-T, while awaiting the results of an investigation regarding the fund destination.


State arrears, scarce financing, increasing costs continue to be major drawback factors for companies


The revenues of the top construction companies showed some improvement in 2011 compared to the previous year, yet profitability in the sector continued to be affected by adverse market circumstances. Besides the sluggish demand, the companies continued to face obstacles such as scarce financing, state arrears and energy price unpredictability.


Prospects for 2012 are rather gloomy, as the building companies have also to deal with the strong depreciation of the local currency against EUR. The construction costs increased by 7.1% y/y in the first half of the year. The costs of building materials alone hiked by 12% y/y during the period.