Russian construction industry to grow about 2% in 2017

More information on this topic is presented in the PMR report:

Between 2012 and Q1 2017, the Russian construction industry observed a substantial slowdown. Construction output logged an 11% cumulative reduction between 2014 and 2016. Furthermore, in Q2 2017, the construction industry’s business confidence index was at the second lowest level seen since 2010.

Russian construction output contracted by 2.3% year on year in 2014, after the 0.1% expansion achieved a year before, and witnessed a 2.5% increase in 2012. In addition, the negative trend in the industry has worsened in the last few years, with a 4.8% year-on-year reduction in 2015 and a preliminary estimate of a 4.3% fall in 2016. An upward trend is expected to resume in 2017, supported, in part, by the solid outcome in Q2 2017 (+3.2% y-o-y), with the result for the first half of the year indicating a 0.2% year-on-year increase.

In recent years, the construction activity in Russia has been mainly driven by residential projects. The number of new homes commissioned in 2016 decreased by around 2.6% year on year to 1.16 million, the second most substantial annual housing listing result ever recorded in Russia. The total floor space of residences listed in official records in 2016 contracted by 6.2% to 79.7 million m², which is the third highest figure ever recorded in Russia.

However, the results for housing space registration in Russia in recent years must be assessed cautiously, as it consists to an important extent of dwellings completed in the respective years, along with many residential properties completed a long time ago but listed in official records recently in accordance with Federal Law No. 93-FZ of 30 June 2006, which is commonly described as a “dacha amnesty”. In part, this law was intended to legalise the construction of houses built without the requesting of a building permit. The “dacha amnesty” was planned to end on 1 March 2015, and the public rushed to benefit from it in early 2015 in particular. Meanwhile, the deadline has been moved until March 2018.

It is thought that in 2016 about 219,300 detached houses were listed in official records in Russia based on the “dacha amnesty” edict. In the same time, Rosstat revealed that the floor space of self-build homes registered throughout the country in 2016 totalled 31.7 million m². Considering the size of garden houses (so-called dacha), it is obvious that the “dacha amnesty” decree had a substantial contribution on the Rosstat data tracking housing completion in Russia in 2016.

Regardless of the dubious result on the floor space of self-build homes listed in 2015 and 2016, registration of residences other than self-build homes was still remarkable in 2015. That year, construction companies succeeded in placing on official records 5.1% more housing space than a year earlier, with more than 43% of the 2015 supply being activated in the last three months of the year. However, mostly because of the lack of economic growth in Russia in 2015 and 2016, reduced purchasing power of population and a sharp decline in new project starts since early 2015, last year construction companies succeeded in placing on official records 3.8% less housing space than in 2015, and the negative trend is expected to accelerate in 2017 when the total housing space activated by companies over the year will be very likely more than 10% short of the result recorded in 2016.

Nevertheless, growth is expected to return in the construction industry in Russia in 2017, although the year-on-year rebound is not expected to exceed 2%, mostly because of the following factors:

- Overall, by far the key reason for recovery in 2017 will be the very low base for comparison.

- More active construction work on long-distance gas pipeline, particularly of the Power of Siberia infrastructure.

- Construction of the Kerch Strait bridge and of access road and railway infrastructure.

- The preparations for the FIFA 2018 World Cup will be accelerated.

- The Russian construction industry is expected to perform better in 2017 than in 2016, in part as a result of the double-figure appreciation of the rouble in H1 2017, which has made imports of industrial equipment and technologies cheaper. In 2016, the rouble fell by about 9% against the dollar and the euro, whereas in 2017 it is expected to appreciate by 5-8%.

- Real wage growth is expected to resume positive trend in 2017, supported in part by a further reduction in inflation. Positive real wage growth, easing inflation and mounting potential for further cuts in interest rates on mortgages should increase home sales and the repair of existing housing stock.

- A further alleviation of inflation will continue to exert downward pressure on interest rates and revive lending to the corporate sector.An increase in railway construction activity in the Siberian and Far Eastern Federal Districts.

More information on this topic is presented in the PMR report:
Construction sector in Russia H2 2017. Market analysis and development forecasts for 2017-2022