BRICKS & MORTAR: Brick makers as barometers

By bne IntelliNews June 30, 2008

Nicholas Watson in Sofia -

Has Poland's residential real estate market finally turned a corner? Are there really signs of a thaw in Estonia's frozen property market? To get to the truth of a matter, it's best to go to the source. So in keeping with this journalistic maxim, bne asked Wienerberger, the biggest maker of bricks in Central and Eastern Europe, a simple question: "how many bricks are you making?"

Brick makers like Wienerberger are pretty good barometers of the health of a residential property market. For one thing, bricks are, by nature, a local product, with a maximum "shelf life" of about 200 kilometres, so they can tell you a lot about a particular market. Secondly, the brick maker's business responds relatively quickly to underlying changes in the housing market, as the only buffer between it and the consumer is the (usually small) inventory of bricks held by the distributor and builder. Thirdly, given that bricks are needed right at the beginning of the construction process, this part of the business offers good visibility of the property market three to six months ahead.

Put very simply, Wienerberger's business is currently a tale of two buildings: one, the traditional Western building common to the US and the UK, is crumbling; the other, that found in the booming markets of CEE, is rising above the skyline. That's not to say, stresses Wolfgang Riethofer, CEO of Wienerberger, that all western brick markets are weak - Belgium and France are still strong - but that "the driver of profitability and growth is CEE, meaning particularly Russia, and this will continue."

Wienerberger's first-quarter figures showed a continuation of this trend that began in 2007 - troubled Western European markets (Germany and UK) and a weak US business being more than compensated for by a very strong CEE market - which resulted in revenues rising 13% on year. Breaking out the figures reveals that what the Austria firm calls the "Central-East Europe" segment put in an outstanding performance, with Ebitda increasing 53.5% on year to €60.7m coupled with a margin increase to 29.7% from 25.2% the year before. This compares with Ebitda from North America falling by 90% to €0.7m, while the "Central-West Europe" segment even turned into the red, with a negative Ebitda contribution of €1.2m.

For the rest of 2008, Wienerberger is sticking with its forecast that it will outpace industry growth despite the more difficult operating environment, which analysts say should translate into Ebitda growth of about 10%. Where's that growth coming from? Almost everywhere in CEE except, it seems, in Hungary, which is going though a painful period of economic reforms. "We have positive view of all the Eastern European markets, with the exception of Hungary, where there's uncertainty coming from a lack of confidence of people, and we could see a decrease this year," says Riethofer.

Building bocks

During 2008, Wienerberger is looking to invest more than €600m, which breaks down into €100m for maintenance capex; €400m for bolt-on projects (green-field projects, upgrades and smaller acquisitions in countries where its already present); and another €100m for strategic acquisitions. Over the medium term, Wienerberger plans to build 25 new brick plants by 2012 in CEE, notably Russia, Romania, Bulgaria, Poland, Ukraine and the Balkans.

Of that, eight new plants will be built in Russia alone. Wienerberger is very positive about Russia, despite the terrible underlying demographics (Russians take too many narcotics and are sexually promiscuous, which has resulted in deaths actually outnumbering births).

The firm's optimism is driven by two factors. First, the Russian government is looking to double the amount of space given over to housing between 2005 and 2010. The Soviet legacy of undersized apartments means that Russia's housing stock is around 21 square metres (sqm) per capita - lower than CEE peers such as Poland (23 sqm) let alone the average of 36 sqm found in Western European capitals. Roland Nash, head of research at Renaissance Capital, says that for Russians to enjoy the same average living space per person as a typical Moldovan, it would require the construction of the equivalent of two cities the size of Moscow. Wienerberger's Riethofer isn't sure this ambitious goal will actually be met, "but I'm sure you will a strong increase." Second, not only are there not enough houses for Russians, the houses that actually exist aren't very good. According to Jones Lang LaSalle, over two-thirds of Russia's housing stock is over 30 years old, and an astonishing 60% needs to be renovated.

Wienerberger is also expanding fast in Southeast Europe. A look at the new, fully-automated brick factory that extends over 10.7 hectares in Lukovit, Romania shows the level of optimism the firm has for this new EU market. A recent UniCredit Group survey on the housing market in emerging Europe found that some 25% of Romanians wanted to buy their own property, with 11% of that in the next three years. The factory at Lukovit will help that process by churning out enough bricks in just over two hours to build an average-sized family home.

Elsewhere in the region, the UniCredit survey found that some 24% of Croats wanted to buy their own property. And on June 18, Wienerberger announced it was expanding its activities in Croatia with the acquisition of a 25% stake in the brick producer IGM Ciglana, whose Petrinja brick plant is located roughly 50 kilometres south of Zagreb.

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