Construction Industry Performance Could Halve

Source: portfolio.hu

By András Gergely

January 24, 2023, 10:00 AM

The performance of the construction industry is expected to drop dramatically this year, with large residential projects likely to be halted. While the situation of the largest domestic contractors is stable, smaller players are expected to collapse in the market. The positions of Hungarian companies are threatened not only by increased costs and halted investments but also by the strengthening of Turkish companies in the domestic market.

Efforts to reduce foreign raw material exposure and strengthen domestic construction material production, as well as government initiatives, are forward-looking, but the survival of key plants such as Dunaferr is also essential.

Portfolio interviewed Milán Palkovics, CEO of Épduferr Nyrt., about the challenges facing the construction industry, the emergence of Eastern competitors, and the opportunities to boost domestic construction material production.

Milán Palkovics, CEO of Épduferr Nyrt.

Photo: Ákos Stiller - Portfolio

According to the latest data from the Hungarian Central Statistical Office (KSH), the performance of the construction industry grew by 7% in November last year, with the performance of buildings being nearly 20% higher compared to the previous year. What characterized the construction industry in 2022?

Different figures can be interpreted in many ways, depending on the data being processed. It really matters whether we look at the total order stock, revenue, or the volume of constructed or contracted buildings. In the case of construction materials, there has been an average price increase of at least 20-22%. Since, as a rule of thumb, about half of a project’s total cost is for materials, the price increase of construction materials alone raises the overall project cost by at least 10%. And that’s without even considering factors like energy prices or wage increases. SO, EVEN IF THE SECTOR CAN REPORT SOME GROWTH NOMINALLY, TAKING THESE FACTORS INTO ACCOUNT, A DECREASE IS ACTUALLY EXPERIENCED. If we look at the volume of buildings, or the contracted or constructed square meters, kilometers, the overall picture is much more negative.

Which construction subsectors are expected to experience the largest decline this year, and which ones might have a more optimistic outlook?

If we look more closely at the industry, we can break it down into four main areas: major infrastructure developments, public institution developments, housing projects, and industrial real estate. The fate of the first two clearly depends on the state of the public finances and agreements on EU funding. If these are not in place, there will be a huge downturn, and we are already seeing that in this segment. The return on housing projects is greatly influenced by the mortgage market environment. Interest rates are so high today that fewer people can apply for loans, and in turn, only fewer or cheaper apartments can be sold. It is already evident that investment interest has stalled in this segment, and I expect that performance in housing projects could drop to half or even lower.

The development of various industrial real estate properties, logistics centers, and production halls – areas in which Épduferr is involved – is the only area where further growth is expected, and there are relatively optimistic prospects for the year. A multinational company is much more flexible in adapting to the changing environment month by month than the government is in a public procurement process. It is much more efficient to work with them in this regard. They also represent our main market.

The continuation of the interview and the full article can be read HERE.