Annual report to FIEC “Construction Industry in Bulgaria in 2015”
The construction industry in 2015 was characterized by favorable dynamics and a change in the growing negative trend established over the years. Statistical data for some indicators bear a positive sign and indicate the expected pace of recovery and rebuilding growth of the construction sector. In the recent years, the construction sector in Bulgaria accumulated loss of positions and according to preliminary statistics 2015 proved to be a turning point, marking a positive trend for the first time. The ranking by economic indicators in comparative aspect registers optimism and positive outlook for the industry. The illustrated growth is mainly based on completed EU projects in the area of road and water supply and sewage infrastructure. The construction industry in 2015, according to preliminary data, formed 4.7% of the total gross value added for the economy. For 2015, foreign direct investment in the construction sector showed a significant drop of 57.9% compared with 2014. Small-scale projects still remain in the focus of investors. For more than four years, investment activity in the construction industry had overall negative values in real terms. This trend continued in 2015. The expectations are that in 2016, the construction segment will increase on an ongoing basis the construction volume levels. In the future, the main priorities of the industry should be searching for and finding mechanisms for better absorption of EU funds as a major factor of growth rates in the construction industry at this stage. The public procurement notices in the construction sector in 2015 amounted to 2 896 of a value of EUR 2001 million. The trend is toward a registered decline in the number of procurement notices by 13.2% and a decrease in value by 14.0%. The contracts concluded as a result of public procurement tenders in the construction sector in 2015 are 2840 of a value of EUR 1 347 million, maintaining a downward trend in the number of contracts by 9.4 % and a continuing decrease in value by 11.3%. Registered construction companies in CPRB as of 7.03.2016 are 4595, of which 4550 are Bulgarian legal entities and 45 foreign companies. The deregistered companies in 2015 are 520. According to preliminary data of the statistical institution, in 2015 the production output of the construction sector is EUR 8 208 million with an increase by 7.4% on an annual basis. For the first time in many years the observed trend is towards an increase in levels. The building construction segment, which includes residential and non-residential construction registered a minor stir, forming a production output in the amount of EUR 4 084 million, or a slight decrease by 0.9% compared to 2014. The percentage in production output for the construction sector was 50.2% for civil engineering infrastructure to 49.8% for building construction. The civil engineering infrastructure segment forms production output of EUR 4 124 million, which is a positive result of 17.1% on an annual basis. The growth stems mainly from the completion of EU-funded projects in the area of road and water infrastructure. For several years the construction industry has redirected its focus and moved towards construction of infrastructure projects. The place of this segment is of particular importance for the development of the construction sector and of the economy as a whole. Based on estimate data, civil engineering infrastructure accounts for 50.2% in the total production output and is marking growth rates. Engineering construction depends entirely on the state budget and local structures as well as on funds granted by the EU. The positive trend in civil engineering is foreseen to stop by the end of 2015. The reason is the transition period of the EU to 2014-2020, and the reduction of EU funds allocated for civil engineering infrastructure. Forecasts for increasing power engineering construction in the coming years remain volatile due to the uncertain launches of nuclear energy projects. This negative state-of-the-art at this stage does not allow the segment to show its full potential. An indicative fact for the construction sector is the continuing trend towards significant decline in the costs for acquisition of fixed assets - by 61.0% for 2015 compared to 2014. Operating income for 2015 based on estimate data (the /actual data will be published on 15.08.2016). Housing construction The forecast analysis of preliminary data for 2015 shows that the share of housing construction in the total revenue in the sector accounts for only 12.6%, which is a significant drop of 32.4% compared to the pre-crisis period. Price falls of homes were registered, but buyers remain cautious. In general, the downward trend in housing construction persists, with signs for a slight increase in 2016. The indicators for housing construction in 2015, according to preliminary data, don’t give much courage and show minor signs of recovery from the crisis and revival of the segment. This trend is evident from the statistical data on started construction and residential buildings put into operation. Started construction of residential buildings in 2015 increased by 11.8% on an annual basis and the dwellings in them indicate a significant increase of 47.3%. Completed residential buildings that were put into operation in 2015 show a decrease of 5.5% and a decrease in the dwellings in them of 18.6%. The trend that is derived from the analysis is towards an increase in the total living area at started construction of residential buildings of 53.8% compared to 2014. Positive are the figures for an increase in construction in the second half of 2015, which gives hope for a positive forecast and grounds for dynamic changes in housing construction in 2016. Completed buildings are mostly made of reinforced concrete and represent 69.9% of the total number of residential buildings put into operation, while the share of brick buildings is 26.3% with registered upward trend. One of the key priorities set before the segment is improving energy efficiency in accordance with the "Europe 2020" strategy, under various co-funding schemes. In 2015, in housing construction in Bulgaria were launched projects aimed mainly at renovation and rehabilitation, optimization, modernization and energy- efficiency of the existing building stock. The total number of construction permits issued in 2015 shows an upward trend on an annual basis of 1.2% and an increase in the built-up area by 20.1%. Construction permits issued for residential buildings register a slight increase of 1.5% and an increase in the built-up area by 13.0%. According to estimate data, non-residential buildings construction will form 24.3% of the revenue in the construction sector. Summarizing the data for 2015 on non-residential building construction (office buildings, hotels and holiday villages), the trend observed is towards a minor increase in the levels of 0.8% compared to 2014. The analysis indicates that there are vacant space in completed office and commercial buildings. The non-residential sector expects to register positive growth rates during 2016, where the leading segment is industrial construction, and an increase of construction in the healthcare, education and agriculture sectors. Growth of 17-18% per annum, based on volumes and free capital to be invested mainly in hotels and holiday villages, as before the crisis period, is history. Currently there is a huge secondary supply of such sites for sale. In 2015, major projects were registered, but they are well-measured and have serious business plans. Risk investment projects are decreasing. Industrial construction and construction related to agribusiness occupy an important position in non-residential building construction in 2015 and this trend will persist in the future. The situation in the segment can be seen from the data on the permits issued in 2015. With regard to administrative buildings a decline of 16.0% is reported on an annual basis and a minor decrease in built-up area of 1.2%. Regarding construction permits issued for other buildings, the data for 2015 indicates an increase of 1.4% and an increase in built-up area of 29.7%. The started construction of administrative buildings in 2015 remains stalled with negative values of 4.3% compared to 2014. Most of the investors expect a favorable period in the market in order to unleash this segment. For the next year, the growth rates for office buildings will vary around 2.0% according to the estimations. In 2015, there was some stir in the real estate market trend, but the results achieved in the pre-crisis period could hardly be repeated. Employment in the construction sector The employed in the construction sector account for 5.3% of the total employment in the economy of the country, maintaining the same trend as in the previous year and an increase of 2.5%. The analysis shows a trend of aging of the workforce in the construction sector, and an outflow of the younger generation from the builder profession. The unemployed in the construction sector in 2015 account for 11.4% of the total number of unemployed in the country. In 2015, the newly registered unemployed in the construction sector marked a decrease, with a steady trend of 13.9% compared to 2014. The changes are mainly due to seasonal factors and an increase in EU-funded projects. The estimates of the Construction Chamber in Bulgaria for 2016 bring more optimism. After record low levels of construction volumes, the construction sector is set for a slow return to a positive rate in 2016. There are still obstacles, which need to be eliminated: • Still there are no factors for sufficiently secure environment enabling companies and related suppliers to show growth and positive development trends. • Lack of activity and good conditions for stimulating the investments. • There is indebtedness of the business to the banks as well as intercompany indebtedness. There are initiated projects where the banks had stopped the financing at some stage due to non-repayments on loans. • Intercompany deficit persists; there is no free cash. Indicative is the fact of a significant drop of nearly 62.0% on an annual basis in tangible fixed assets in 2015. • The banking crisis in 2014 in Bulgaria left significant impact and the signs could be seen in 2015. Many of the construction companies are still trapped in the banking crisis. The business remained on the market, but a serious economic revaluation of the business programs had to be made. What should be the priorities for the construction sector development the in the future: • Investment in "green economy". • More funds in the state budget for public investment - public procurement. • Development of small and medium businesses. • Creating conditions by the government for attracting foreign investment. • Progress in absorption of funds under EU-funded programs.