Apparent construction rebound could be just mirage

Photo by Aleksandr Abalikhin
The Russian construction sector has put two weak years behind it with a summer 2011 construction increase, but industry players say the sector remains in the doldrums.

­Rosstat says construction in July was up 17.6% year on year, it’s strongest for two years, and building on positive June statistics.  The growth was mainly due to a 119% increase in the volume of finished residential real estate worth 480 billion roubles, outperforming the traditional 4Q increase.  So far this year construction activity has grown 4.5% pushing activity nearly back to pre crisis levels.

But Vladimir Salnikov, from the Center of Macroeconomic analysis, says the apparent rebound in construction activity reflects accounting practices by developers, coupled with bureaucratic delays.

"Construction sector statistics are very volatile. Presumably, part of the first half financial results of construction companies have been allocated to July, which is leading to a misperception about actual industry performance. Ultimately, many projects were waiting for State standardization approval, after which they can be considered finished and appear on the balance of the developer with an actual volume of square meters being built.”  

Salnikov added that he is taking a more pessimistic look, with investment in construction remaining weak.

“We should take into consideration that over the last two months the volume of investment has remained remain low and the situation is not improving. We will see if it is a trend or not after the September quarter statistics. We haven’t yet repeated the results of first recovery wave, which happened in 4Q 2010 in terms of investment volumes."

Ivan Manaenko, macroeconomic analyst at Veles Capital, add that current market volatility could easily spill over into general economic performance and further undermine the construction sector.

“ We can not give a long term outlook for construction industry given that the current market volatility force investors to become less risk overt whereby the construction sectors depends heavily on investment, demand, creditability and creditworthiness given that the last parameter is one of the most considerable after lost of confidence and trust in developers.”

But Manaenko also noted that the June and July data to some extent reflected long mothballed projects coming back online, in a more heavily regulated and more transparent sector, but that a lasting rebound will depend on financing.

“Even with an unaided eye we can see that many earlier frozen construction projects returned to construction, mainly due to refinancing of the credits and growing demand for quality objects. Another important factor which became the main attraction for Western developers and Investment funds was strict regulation and obliged transparency of all institutions and companies working in construction.  Nevertheless, the actual growth of construction industry can be tracked through the out put volume of construction steel and metallurgy sector performance. The year on year growth in steel out put came to 30% in the 1H 2011. That is probably due to Olympic Games construction activity. I think, we are yet far from the pre crisis levels and until the developers improve relations with the banks and gain back trust the sector continues stagnation or mere recovery.”