The market investigation center of the Statistical Study and Economy of Knowledge Institute of the NRU “Higher School of Economics” has prepared information analysis on the conditions of the business climate in construction in the 2nd quarter of 2015 and businessmen’s expectations for the 3d quarter of 2015. We are publishing key conclusions of the research.
General assessment of construction conditions
Rosstat carried out a survey of more than 6,600 construction enterprises working in 82 RF regions (including 4,500 representatives of small business) in the 2nd quarter of 2015. The analysis of the inquiry’s results indicated further deterioration of the majority of operational indices characterizing the condition of the industry’s business climate. Compared with (the not very profitable) 1st quarter, the survey’s participants gave even more negative assessments of highlighted figures, including “construction services orders provision”, “the number of successfully concluded contracts”, “covered amount of installation and construction work (ICW)”, “the number of employees”, “own financial resources provision”, “investment activity assessment and the economic condition of construction organizations”, and “prospect expectations for the next quarter”.
According to Rosstat, monthly work volume rates were in the negative as compared with the corresponding period of 2014. The decrease has continued in 2015, specifically in April, when the construction work volume was 391.7 bln rubles, or 94.8% as compared with the previous year. The results of conjuncture research on the 2nd quarter show the industry decrease continuing, without accentuated symptoms of revival in the near future, with reference to the expectations of the heads of construction companies.
The only driver keeping the industry afloat is housing construction, where monthly growth rates in 2014 and at the beginning of 2015 stayed over 100%. However this ‘’engine” has started to back-pedal, thus in April, for the first time this year, builders put in operation less than 5m square meters of housing, while in January-March the monthly amount surpassed 6m square meters.
The reason is evident: constructors are to implement an existent backlog of housing construction, and this is rather problematic regarding the conditions of decreased effective demand from the population. Besides this, more households are changing their behavior in saving, putting off costly expenditures (flat purchases, capital repair, long-term goods purchases, etc.) until the situation ameliorates. Real incomes of the population are decreasing for the sixth month in succession, and actual earnings decreased by more than 13% in April, ie. 86.8% as compared with April of last year.
This is the lowest figure since 2009.
As far as positive results are concerned, heads of construction organizations have noted a price growth rate reduction, both for their own ICW and for machinery and construction materials being purchased. The authors of the report suspect that the peak of the inflation for construction expenses has passed. Finance stabilization and the gradual adaptation of contractors to the new prices and the ruble rate have brought positive results.
Because of the problems with the sharp reduction of effective demand on the part of the state budget, corporate / private sector and households, the heads of construction companies have to reduce the number of employees to optimize expenditure (see below for details). It doesn’t look like a collapse as of yet, but as far as the intensity of downsizing in construction is concerned, the situation in construction is worse than in the production sector.
Thus in the 2nd quarter almost 30% of the correspondents announced downsizing in their companies as compared with the 1st quarter of 2015. At the same time, 60% of organizations have retained the occupational levels of the previous quarter.
The result of the changes in the main characteristics of construction activity in the 2nd quarter of 2015 is that the main compound research index (the seasonally adjusted index of business confidence in construction) decreased by 10% as compared with the 1st quarter.
Construction material producers are less confident in their business
The reason for the index decrease is the significant deterioration of one of the components of the business confidence index — the evaluation of the construction company orders portfolio level. In spite of the prevailing negative assessments of the business climate at their enterprises by the heads of companies, only 17% reported on the unsatisfactory economic state of the firm. 9% acknowledged a favorable situation, and 74% think their economic condition satisfactory. Many top managers seem to have assimilated the idea of functioning in stagnation-recession mode into their companies and have learnt to take advantage of the situation, HSE experts suspect.
The June survey of 4,000 industrial enterprise CEOs showed that the worst assessment of the business climate conditions in all enlarged branches of the manufacturing industry is found in construction materials production. In particular, the main resulting compound indicator is the business confidence index in the sphere of construction materials production in May, 2015: -14% (the average in manufacturing industry was 7%). This is the worst result among all branches of industry, even worse than the persistent outsiders, ie. machine building and the textile industries. And the business confidence index is decreasing for the fifth month in succession.
A rather sharp deterioration of the business climate in construction materials production gives evidence of the depressing condition of construction itself.
Main internal problems of the industry
Investment attractiveness of the project is decreasing. It is more and more difficult to assess the cost of construction contracts in the current economic conditions. The Urban Development Code should be significantly reconsidered. To get a more adequate assessment of the construction and new technologies implementation cost, it is necessary to reconsider the obsolete statements of many construction standards and regulations (SNiPs). Both large construction objects’ budget efficiency and the feasibility of mega-projects for the country and the country’s citizens should be evaluated on a federal level, the research authors are sure.
Due to the high degree of industry monopolization, the presence of administrative barriers and the factor of corruption, state orders, especially those with large financing, turn out to be the prerogative of a definite list of contractors. Other construction organizations take part in the projects only as subcontractors.
Motivation of the companies’ top management for the initiatives to update production and innovate technologies has decreased. Many of them seem to have decided that they may refuse the updating of many additional labor-saving devices and will perform some operations manually at the expense of cheapening labour power, analysts state.
The construction complex was the last to enter the recession and seem to be the last to overcome it, and then with losses.
However, the authors of the investigation do justice to the Ministry of Construction, Housing and Utilities and the Ministry of Trade and Industry for their effort in looking for ways to solve the acute problems in construction.
These regulators have adopted and prepared for the adoption of a number of normative legal acts which are to ease the situation in the construction complex.
However, all these measures can only slow down the economic depression in the industry for a short period of time, the experts of HSE think.
The main reason for behavioural recession model in construction is the decrease of aggregate demand for services as a result of economic reduction on the whole, the fall of actual earnings of the population for six months, and industry credit barriers, as well as a high level of economic and geo-political uncertainty in the country. Besides this, it is necessary to remember that, due to its specific character, construction enters economic recession later than other basic industries, and is the last to overcome it, with great financial and economic losses (such as bankruptcy, integration and divestiture of organizations) and more serious downsizing than in other industries. So even if macro-economic and geopolitical amelioration started “tomorrow”, construction growth could be expected only at the end of 2016 or the beginning of 2017, experts think.
Order provision and production capability load level
Business confidence indices, calculated for contracting organizations with different numbers of employees, was in the negative, even lower than the previous quarter.
Thus, the number of CEOs having noted the increase in the number of contracts compared with the previous quarter has decreased from 17% to 13%. Two thirds (66%) stated that the number of contracts has not changed. Both large and small companies balance assessments were markedly negative (-5 and -15% correspondingly). At the same time, every sixth businessman (17%) complained about the lack of orders, most often in the Central Federal District (27%). And representatives of the construction business from the North-Caucasus Federal District mostly worried about rivalry from other construction companies (45%).
At the time of the survey, construction companies were provided with orders for 6 months on average. The largest group of companies (31%) had contracts for 1 to 3 months in their portfolio, 11% of companies for less than 1 month, and 8% for more than a year. Large companies had orders for longer terms than smaller ones (8 and 4 months respectively).
In the reported quarter, the average level of production capability load level was 65%. 5% of organizations had load levels of 30% or under, and 10% of companies more than 90%. The largest number (34%) of construction companies used 51-60% of their production capability. In large construction companies, the average load of capacity was higher than in the industry on the whole (69%).
Every tenth correspondent from large companies (9%) noted the lack of capacity for future orders, whereas among smaller companies it was every fifth businessman (21%).
The volume of employment in construction
The decrease in demand for construction work in the 2nd quarter of 2015 negatively influenced the condition of the industry market for labour power: not only the tendency towards a reduction the number of employees, but also its acceleration was noted as compared with the 1st quarter. Thus the number of companies dismissing personnel increased (28%), while the number of those expanding decreased (12%). Six out of ten CEOs of construction companies (60%) kept their personnel at the previous period’s level. The resulting balance of the businessmen’s assessment of the index change was -16%.
The current changes in staff composition influence the businessmen’s evaluation of the “lack of qualified workers” factor: there was a decrease in the third quarter. 18% of CEOs felt the deficit of professional staff in the current quarter.
According to the survey’s participants, the growth of prices for both construction materials and ICW has remained in the industry. It should be remarked that the growth rates have decreased. In the current quarter, 80%of construction business representatives mentioned the increased construction materials prices as compared with the previous quarter. More than half of businessmen (57%) claimed an increase in tariffs for their companies’ work.
Both large (84% and 63% respectively) and small (75% and 51% respectively) construction company CEOs announced a price raise in construction materials and ICW as compared with the previous quarter. The inquiry’s results in federal districts showed that most businessmen noting a growth in prices for construction materials and installation and construction work were located in the North-Caucasus Federal District (85 and 83% correspondingly).
Finance and economics
The decrease in demand for contract work in the 2nd quarter of 2015 shows a deterioration in the financial conditions of construction companies. The negative dynamics of finance resources provision in the industry have continued, and the rate of the index reduction has accelerated. As compared with the previous quarter, the number of companies in which finance resources increased has not changed (10%), and the number of those in which it has decreased has grown to 25%. Practically, two thirds of respondents (62%) answered that the provision of their companies with their own finances has stayed at the level of the previous quarter. The resulting balance of the index change assessment was -15%.
As far as positive results are concerned, the tendency towards profitability growth in the construction companies has continued in the industry, but it has slowed down. The number of businessmen having claimed the growth of profitability as compared with the previous quarter was 18%. 5% of CEOs reported a decrease of the index. 76% of the inquiry’s participants reported the same level of profitability in their business.
The situation with the construction companies’ provision of credit or borrowed finance has grown worse: the index change evaluation balance decreased to -11%.
Insufficient demand for production, low financial solvency of customers, and high credit rates in commercial banks did not add to the increase of investment activity of organizations. As compared with the previous quarter, the index change evaluation balance decreased to -9%. 22% of contractors do not deal with investment at all. Among construction companies with different number of employees, large companies are more active as far as investment is concerned (90%), and small organizations are less active (61%).
The restriction of finance resources is one of the main problems for many projects. Thus, almost every fourth businessman (24%) taking part in the inquiry complained about the lack of finance. About a third of participants (31%) complained about the customers’ lack of opportunity to pay their debts (obligations). The problem has been acute for the third quarter, and the urgency of the issue is growing.
At the time of the survey, the average provision of the industry with financing did not surpass 5 months. A third of enterprises (33%) were financed for a term of 1-3 months, 18% of companies for less than 1 month, and 6% for more than a year.
Source: information analysis product by Statistical Study and Economy of Knowledge Institute of the NRU “Higher School of Economics” “Construction business condition in the 2nd quarter of 2015”