Armenias Construction Industry: Its Growth, Decline, and Future A Presentation by Alen Amirkhanian,...

Armenia’s Construction Industry:It’s Growth, Decline, and Future

A Presentation by

Alen Amirkhanian,DCS, cjsc

AIPRG Annual ConferenceJuly 7-8, 2009, Yerevan, Armenia

• 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

Today’s Discussion

Armenia’s Construction Industry

Avg. Annual Volume of Residential Construction in Soviet and Post-Soviet Armenia

Source: National Statistical Services, Republic of Armenia; DCS analysis

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.


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ers


Annual Volume of Residential Construction in Years 1966-2008

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ers


2008 Construction by Type(total of AMD842 billion)



Growing Share of Construction in the Armenian Economy

1.0 3.73.22.72.21.91.31.41.2

Shar

e of

GD

P

GDP (tril., current AMDs)

Construction

Agriculture

Trade, etc.

Manufacturing

Transport & CommReal Estate, etc.Health, etc.Financial IntermediationUtilitiesEducationPublic Admin




Construction

Real estate market

Institutional & donor spending

Government spending

Drivers of the Construction Industry


Construction

Real estate market


Government spending

SMALL

SMALL


Financing Sources of 2008 Construction in Armenia

Total 842 billion AMD



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%

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%

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?


Public sector’s role in the current crisis


Construction

Real estate market


Government spending


Pri

ce

d

ec

rea

se

Source: Cadastre Committee of the Republic of Armenia; DCS analysis


Starting in 2001, real estate prices started a sharp incline

Agriculture

Trade, etc.

Health, etc.

Real Estate, etc.

Public Admin

Manufacturing & mining

Utilities

Indu

stry

Ann

ual G

row

th R

ate

(200

3-20

08, a

djus

ted

to p

revi

ous

year

pric

es)

Share of GDP(2008)

GDP Annual Growth Rate (15.8%)

Transport and Comm.

Education

Financial Intermediation

30%

27%26.8%

Construction

30.1%92k

31%

~100k employees in 2007


Growth of Armenian Economy by Sector


Financing Sources of 2008 Construction in Armenia

Total 842 billion AMD


~600 billion AMD ~150 billion AMD


Commercial bank loans

Transfers from friends & relatives

Household income Commercial

bank loansInvestors

Org. income or profits

2008 Commercial Banks Loans to Armenian Sectors

SectorLoan 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%

Industry 85,858 13.9% 9.2%

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%

TOTAL 617,833 100.0% 1.6%

Source: Central Bank of Armenia; National Statistical Services, Republic of Armenia; DCS analysis

Private citizens’ ~600 bln AMDOrganizational ~150 bln AMD

~750 bln AMDTotal

Construct. loans

~40 bln AMD

Commercial Bank’s share of

Construction financing

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)

Pri

ce

d

ec

rea

se

2009

-6%Q1 / Q4

-2%Q1 / Q1

Source: Cadastre Committee of the Republic of Armenia; DCS analysis


Apr/Mar

May/Apr

2006 1.7% 0.4%2007 3.1% 3.4%2008 2.8% 1.4%2009 -5.9% -4.7%

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)

In 2009, for the first time in 7 years we see prices fall


2007I

102II

118III

120IV

123

2008I

123II

102III

101IV73

2009I

78II

~30


• … 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.

Armenia’s construction slowdown lagged the global downturn …

Monthly Change in Construction Activity (compared to same period previous year)

Will there also be a lag in recovery?

• 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

When is the global construction market expected to recover?

• 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 ?


Will there also be a lag in recovery?

To analyze this let’s look at the core components of the industry in terms of quality, cost, availability, and productivity


Competitiveness of the Armenian construction industry

Residential: single family, multi-family, …

Commercial, industrial, warehousing, and institutional

Civil: Roads, highways, bridges, irrigation canals, dams, airports, etc.

Architects & engineers

Regulatory agencies

Legal, tax, and accounting expertise

Critical Experts

Raw materials suppliers: cement, sand, gravel, dirt, stone, brick, grout, plaster, etc.

Manufactured materials suppliers: rebar, steel, pipes, cables, tiles, pavement blocks, hardwood flooring, adhesives, paint, glass, aluminium profiles, drywall, doors, windows,toilet bowls, sinks, furniture, appliances, etc.

Equipment suppliers: tools, equipment, light machinery, heavy machinery, parts and repairs

Suppliers

Trade groups: Builders’ Association, Architects’ Association, etc.

Training institutes: Construction, civil and structural engineering, and architecture faculties and institutes

Support institutions

Concrete

Carpentry

General contractors

Ornamental Iron

Structural steel

Plumbing

Electrical

Roads & sidewalks

Earthwork

Masonry

Tile setters

Stone fabricators

Plasterers

Painters

Doors & windows

Landscape

Roofers

Wood flooring installers

Cabinet makersGlass and mirrors

Drywall

HVAC

Core trades

Importers of supplies and equipment

Local manufacturers of supplies and equipment

Local miners of supplies

• OK quality arch/engineers, cost no issue• Complicated tax and accounting environment, but

growing availability of experts• Permitting and land-titling practices nebulous

• Raw materials monopolized• Supplies and equipment mostly imported, very little local production,

substantially adding to costs (most likely effect of high value of the dram) and lack of stability required for mfg investments; see CPI slide

• Import of equipment and technology has been slow

Jan-May/Jan-May

Consumer Price Index

Construction Price Index

2006 99.3 108.4

2007 104.5 105.2

2008 108.9 114.5

2009 102.5 122.9



First 5 months

Consumer Price IndexConstruction Price Index








Regulatory agencies


Critical Experts




Suppliers




Concrete

Carpentry

General contractors

Ornamental Iron

Structural steel

Plumbing

Electrical

Roads & sidewalks

Earthwork

Masonry

Tile setters

Stone fabricators

Plasterers

Painters

Doors & windows

Landscape

Roofers



Drywall

HVAC

Core trades









• They are weak

• LABOR PRODUCTIVITY: Each trade will have its own story but it is safe to say that labor productivity is low, though it has improved over the past 6 years (see Labor Productivity slide).

• LABOR COSTS: Increasing but with people returning from Russia with greater skills, increased competition

• MANAGEMENT KNOW-HOW: Very poor

• KNOWLEDGE OF BEST PRACTICES: Industry somewhat disconnected from the world; most connection is with Russia, Iran, and the UAE?

2003 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

Trade, etc. 919,419 0.6 2,685,943 1.1

Per Employee GDP 1,418,620 1.0 2,543,327 1.0

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


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r th

an

a

vg

.

Average


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:

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








Regulatory agencies


Critical Experts




Suppliers




Concrete

Carpentry

General contractors

Ornamental Iron

Structural steel

Plumbing

Electrical

Roads & sidewalks

Earthwork

Masonry

Tile setters

Stone fabricators

Plasterers

Painters

Doors & windows

Landscape

Roofers



Drywall

HVAC

Core trades









• They are weak

• LABOR PRODUCTIVITY: Each trade will have its own story but it is safe to say that labor productivity is low, though it has improved over the past 6 years (see Labor Productivity slide).

• LABOR COSTS: Increasing but with people returning from Russia with greater skills, increased competition

• MANAGEMENT KNOW-HOW: Very poor

• KNOWLEDGE OF BEST PRACTICES: Industry somewhat disconnected from the world; most connection is with Russia, Iran, and the UAE?

• 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


Concluding Thoughts

The Role of Architects and Urban Planners in Environmental Protection Thursday, July 9, 2009 at 7:30pm at THE CLUB, 40 Tumanyan St., Yerevan (free admission)

Ճարտարապետների և քաղաքաշինարարների դերը բնապահպանության գործումՀինգշաբթի, 2009թ. հուլիսի 9-ին, ժամը 19:30 “Ակումբ” սրճարանում, Երևան, Թումանյան 40, (մուտքը ազատ է)

For more info: www.cherchillblog.com

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Extra Slides

Employment Data Using Econometric Data

Ranking Industry2007

Employment (thousands)

Annual Growth Rate (2003-

2007)

1 Agriculture, hunting, forestry, and fishing

433.8 9.7%

2Trade, repair of motor vehicles, household and personal goods; Hotels and restaurants

127.2 -8.7%

3 Health and social work; Community, social and personal services

114.1 3.9%

4 Education 110.5 -6.0%

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%

TOTAL EMPLOYMENT 1,188.5 1.4%Source: National Statistical Services, Republic of Armenia; DCS analysis


Share of construction companies, employees, & revenues by firm size


BIG (51 & more emp.)

Medium (26-50 emp.)

Small (6-25 emp.)

Very Small (5 or less emp.)

TOTAL 794

83

74

313

324


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Armenias Construction Industry: Its Growth, Decline, and Future A Presentation by Alen Amirkhanian,...

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