The impact of the business cycle on the construction

companies’ sector in selected states

Rafal WolskiMagdalena Zaleczna

Introduction

After the strong increase in economic activity, which in many countries was connected with the boom in the real estate market, the activity was rapidly reduced also within the broadly understood construction sector. This contributed to the slowdown of the growth rate or the economic downturn. Authors have undertaken the analysis of impact of business cycle on conditions of residential real estate markets and the construction sector in selected European states.

The research questions:

• Authors searched for an answer to the questions:– how much residential markets reacted for the

economic slowdown,– how much the construction sector and the enterprises

changed their activity in the recent years.

For the purpose of the analysis a database of over 99274 construction enterprises from the Czech Republic, Poland, Slovakia, Hungary, Ireland and Spain was created.

Business cycle and construction sector

• The economic revival and the boom in the real estate market in the years 2000-2008 were strictly related. In some countries the increased activity of the construction sector, significantly involved in the residential market, played an important role in those processes. These countries include: Ireland, Spain and Cyprus, and among the post-socialist states – the Baltic States and Croatia [SUN, MITRA, SIMONE 2013].

Business cycle and construction sector

• On the eve of the crisis, in 2007, according to Eurostat data, the construction sector of the EU states gave employment to 14.8 million employees (11.5% persons employed in non-financial sectors) and provided EUR 562 billion in value added (9.3% of total value added brought by non-financial sectors).

Business cycle and construction sector

• In 2010, the employment in the construction sector in the EU states amounted to 13.4 million (10% persons employed in non-financial sectors), and the value added generated by that sector amounted to EUR 496 billion (8.4% of the total value added generated by non-financial sectors).

Business cycle and construction sector

• The largest part of the sector, concerning construction of buildings, clearly felt the effects of the crisis – the comparison of the beginning of 2007 and 2010 indicates a drop in activity by 16.5%. The only country which did not show a decrease was Poland.

Share of the construction sector in the generation of GDP in selected countries (%). Source: own study based on data from the European

Construction Industry Federation

The construction sector structure in the analysed countries - a great majority of enterprises in this sector are small entities, employing up to 9

people

Czech Republic Poland Slovakia (data in thousands)

Hungary Ireland Spain (data in thousands)

Changes in the level of employment in construction in the years 2003-2012 (%).

Source: own study based on data from the European Construction Industry Federation

Value of construction output in the years 2003-2012 (EUR million).

Source: own study based on the Eurostat data.

New residential units in the years 2003-2012 and changes of prices in the housing market in the years 2003-2012 (%) in the Czech Republic and

Poland

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

-20

-10

0

10

20

30

40

change in nominal prices

change in real prices

total number of new residential units

including: new detached houses

including: new multi-residential houses

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

20000

40000

60000

80000

100000

120000

140000

160000

180000

-20

0

20

40

60

80

100

change in prices in secondary marketchange in prices in primary markettotal number of new residential unitsincluding: for sale or for rent

New residential units in the years 2003-2012 and changes of prices in the housing market in the years 2003-2012 (%) in Slovakia and Hungary

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

-25

-20

-15

-10

-5

0

5

10

15

change in price of residential unitstotal number of new residential unitsincluding: constructed by companies

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

-20

-10

0

10

20

30

40

50

60

70

80

change of average price of 1 sq. m. of a flatchange of average price of 1 sq. m. of a higher standard houseresidential units handed over for ocupation

New residential units in the years 2003-2012 and changes of prices in the housing market in the years 2003-2012 (%) in Ireland and Spain

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

100,000

200,000

300,000

400,000

500,000

600,000

700,000

-15

-10

-5

0

5

10

15

20

change of price of 1 sqmnumber of new houses nad flats in total

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

100002000030000400005000060000700008000090000

100000

-40

-30

-20

-10

0

10

20

change of price on the primary marketchange of price on the secondary housing marketnumber of new houses nad flats in totalnew flats

Data

• 99274 companies (5416 from Czech Republic, 7927 from Poland, 2798 from Slovakia, 15385 from Hungary, 7900 from Ireland and 91374 from Spain)

• Period: 2003 to 2012• Financial data are derived from the Amadeus database. Data on

GDP at market prices, denominated in euros, derived from the database Eusostatu

• Companies in the sector marked by Eurostat NACE Rev. 2 - statistical classification of economic activites in the European Community with codes: 4110 - Development of building projects, 4120 - Construction of residential and non-residential buildings.

The Pearson correlation between GDP and the subsequent selected balance sheet positions

Correlation coeficient, N=10

GDP at market prices, at current prices, millions of euro Total assets ROE using Net

income ROA using Net

income Czech Republic Pearson correlation ,701* ,730* -0,024

Significance (two-sided) 0,024 0,016 0,948 Poland Pearson correlation ,713* ,665* -0,496

Significance (two-sided) 0,021 0,036 0,145 Slovakia Pearson correlation ,680* ,707* -,828**

Significance (two-sided) 0,031 0,022 0,003 Hungary Pearson correlation 0,458 0,501 -,651*

Significance (two-sided) 0,183 0,14 0,042 Ireland Pearson correlation ,772** ,799** -0,452

Significance (two-sided) 0,009 0,006 0,19 Spain Pearson correlation ,862** ,835** -0,325

Significance (two-sided) 0,001 0,003 0,359 * Correlation is significant at level of 0.05 (two-sided).

** Correlation is significant at level of 0.01 (two-sided).

20032004

20052006

20072008

20092010

20112012

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Czech Republic

ROA using Net incomeReal GDP growth rate - volume percentage change on previous year

20032004

20052006

20072008

20092010

20112012

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Poland

ROA using Net incomeReal GDP growth rate - volume percentage change on previous year

20032004

20052006

20072008

20092010

20112012

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Hungary

ROA using Net incomeReal GDP growth rate - volume percentage change on previous year

20032004

20052006

20072008

20092010

20112012

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Slovakia

ROA using Net incomeReal GDP growth rate - volume percentage change on previous year

20032004

20052006

20072008

20092010

20112012

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Ireland

ROA using Net incomeReal GDP growth rate - volume percentage change on previous year

20032004

20052006

20072008

20092010

20112012

-5.00%-4.00%-3.00%-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%5.00%

Spain

ROA using Net incomeReal GDP growth rate - volume percentage change on previous year

Construction enterprises’ results

In general the profitability ratio like ROE or ROA stayed positively correlated with real GDP growth rate - volume percentage change on previous year. In all cases, except Hungary, the correlation was statistically significant. There is pone case which drew attention: Poland. Positive correlation with a GDP growth that is also positive means that companies noted slower development, but not recession. The results indicate a strong dependence of the sector from the whole economy. And almost all the countries surveyed, with the exception of Hungary.

Conclusions:

The residential markets activity changed in analysed post-socialist states in moderate way:

- the growth and decrease of new residentail units number was moderate

- the incease of prices was dynamic and the fall was not deepThe case of Ireland and Spain was different:

- the growth and decrease of new residentail units number was extremely high

- the change of prices was dynamic and the fall was high

Conclusions:• The construction sector analysed by the changes in

employment, number of construction enterprises and value of construction output indicates Poland as a country with the best situation in construction sector;• Ireland and Spain are countries having dramatically

decreasing construction sector activity;• the financial condition of enterprises in post-socialist

countries is quite good, but in Ireland and Spain the situation seemed to be quite dramatic.

Thank you for your attention