Rebuilding Hungary's construction sector

Rebuilding Hungary's construction sector
Hungary's construction sector has been in free fall thus far in 2016
By Blanka Zoldi in Budapest July 29, 2016

Hungarians built 3,420 new homes in the first half of 2016 – an 11% rise in annual terms, and the number of building permits issued in the first six months of the year more than doubled to 13,000, data from statistics office KSH showed on July 29.

The surge suggests the government’s recent measures aimed at supporting home building are starting to pay off, and could contribute to a wider revival in Hungary's depressed construction sector. A full recovery, however, won't happen until the pipeline of EU-funded projects starts flowing once more.

Growth in construction has been slowing since it hit a nine-year high in 2014. A slip to 3% in 2015 was disappointing, but the sector went into free fall early this year. A 26.6% plummet in output in May was the fifth month of huge annual decline in a row, reflecting a decrease in both building construction and civil engineering.

"I have been working in the industry for 25 years, but I had never experienced something like this,” Zsolt Indi, manager of G.G.Zs, a Budapest-based home construction company tells bne IntelliNews. However, he's not complaining about the sectoral slump, but extolling the effects of the government's efforts to boost residential construction. “People are queuing in front of our office. Business has never flourished this much,” he enthuses.

The government pushed through a bill earlier this year that lowered the value added tax on home building to 5% from 27% until 2019. Regulations have been  simplified and the bureaucratic processes behind the issue of building permits accelerated. A new housing subsidy programme, offers Hungarian couples grants and state-subsidized loans to the tune of HUF20mn (€64,000) towards a new home if they have, or pledge to have, three children or more within 10 years.

Given the average Hungarian wage is below €850, the high interest in the programme is not surprising. The populist Fidesz party is also likely to have calculated that the program will kick in nicely ahead of the 2018 elections.

“People are going crazy,” says Indi. “Our workload at least quadrupled in the past months. We might have to think about employing new workers” he adds, claiming his competitors are in a similar situation.

The momentum has not gone unnoticed on the housing market. Recent data from Eurostat show that Hungarian house prices are skyrocketing. Prices increased 15.2% y/y in the first quarter of 2016, which represents the biggest boom among EU member states in January-March.

Capital gains

Life is less rosy, however, for construction companies based outside the capital. “Budapest and the countryside are very different. The government subsidy program has literally no effect here,” says Janos Bodi, who has been running Integral Epito for almost 35 years in Szarvas, 170 km south east of Budapest. "Between 2005 and 2010 my company built around 200 homes in this town. Since then, we built none, because we would not be able to sell them.”

Data published by the Prime Minister’s Office show the regional inequalities in black and white. More than one third of all building permits in the first half of the year were issued in the capital, while many of the 19 counties of Hungary registered less than 100 permits in the past six months.

Still, the government scheme is clearly helping boost housing, and analysts suggest that should help buoy the wider construction sector's results as early as the autumn. While in May the overall contract portfolio of construction companies was down 10.5%, the volume of contracts in building construction increased 58% y/y.

Yet a boom in home building won't be enough. Building construction overall constituted just over 23% of the sector’s total output last year; the bulk of activity was carried out in civil engineering (35%) - which is involved mainly in public infrastructure projects - and specialized construction (41%), which includes activities such as site preparation and electrical and plumbing.

It is the drop in civil engineering that is doing the most damage, the fall driven by a sharp decline in EU funded projects. Like its regional peers, Hungary rushed to absorb as much financing from the EU's 2007-13 budgetary window as possible in 2015, as it sought to catch up in the final year for claims. Thanks in no small part to Budapest's poor track record in absorbing such financing, projects funded under the 2014-20 programme are largely yet to get up and running.

“EU-funded projects are simply vital for construction companies,” Bodi confirms, admiting that Integral is struggling. “In the past five years, 90-100% of our income came from EU-funded projects. This year, it’s zero. The company’s income will be halved compared to last year at best.”

There is hardly any private investment in the region, he points out, and competition is fierce for the few state projects that are still around. “Now we hope to win a tender for the construction of the court building of Szarvas. We are competing against 14 other bidders – this is how hungry the market is,” Bodi laments.

Analysts make no bones about the fact that a return of EU funds is crucial for any proper recovery. “The construction sector is slowly crawling out of the deep hole” Gergely Urmossy at Erste Bank wrote recently. “It will be a slow process, but it will be significantly boosted when the absorption of EU funds [speeds up].”

Hungary says it is pushing to accelerate the process of applying for funds under the new EU budgetary window, in order to soften the impact on the economy. The government is set to allow businesses that win EU-funded tenders receive 50-100% of the money in advance. The European Commission, however, is reported to oppose such a high level of forward payment.

"The government claims that to 2018 there will be so much EU-money coming in to the country that the construction sector will be hardly able to bear it,” says Bodi, adding he can only hope that turns out to be true. "I started this year with 96 workers, now I only have 81. If we don’t have EU-funded projects next year, I’ll have to let go the remaining 81 as well,” he warns.