Construction Industry. “Reanimation” Operation

The government’s efforts to revive the construction industry in Kazakhstan seem to begin to yield results. For example, recently launched housing construction program allowed to increase the inflow of investments into this sphere for 25 % in six months period. At the same time launched by MINT Program on development of the construction industry and manufacture of construction materials, according to independent experts, looks too optimistic.

It is a reminder that one of the main objectives of the Program of housing construction development for 2011–2014, approved by the Government March 31, 2011, is to create a full-fledged housing market, balanced by both in supply and demand, involvement investments into private sector, as well as promotion of public-private partnership. Special attention in the program is paid to developing of individual housing construction, engineering and communication infrastructure of housing development areas, as well as improving affordability of mortgage and the housing construction savings system for the population.

The program involves three main directions of state support in the construction industry: the use of the system of housing savings for selling the real estate, funding commercial banks to finance the construction, construction of engineering services. In general, from the national budget for these purposes will be allocated over 359 billion tenge ($ 2.46 billion). It is expected that the total volume of housing construction during the years of implementation of the program will be about 24.3 million m2.

Although the program has been started recently, some positive results have been already achieved. This is evidenced by the volume of investments into housing construction, which in January–June amounted 171.4 billion tenge ($ 1.17 billion), an increase over the same period of last year is 24.3%. The share of funds spent in housing construction accounted 9.2 % of the total investment into capital stock.

As the director of the consulting company Qncepto Oleg Alferov says, it is possible that annual investments in the sector for 2013–2014 can return to pre-crisis 490 billion tenge. And in this case, the forecasts of the developer of the program – The Agency of Construction, Housing and Utilities (ACHU) – can even be surpassed. Especially that NWF “Samruk-Kazyna” begins to target funding of banks for development projects. In his view, the plans to create an engineering infrastructure will play an important role and that give impetus to the construction of not only multiflats objects, but also of individual housing construction.

Already built

If we talk about amounts, in accordance with the program there are plans to build 6 million m2 of housing in Kazakhstan this year. According to ACHU information 2.7 million m2 have been put into operation in the first half of 2011, including 1.5 million m2 (or 56.7 % of the total) built at the population’s cost. The percentage of new housing to the annual plan was 44.3 %. It should be noted that in Astana, Almaty, West Kazakhstan, Mangistau, Kostanay and Pavlodar oblasts the volume of housing put into operation in the first half of 2011 did not reach last year’s level. But this figure has increased considerably in the South-Kazakhstan (1.8 times) and East Kazakhstan oblasts (1.6 times).

In total in January–June 2011 construction of 12,089 new buildings was completed, including 10,221 – of housing and 1,868 – of non-housing purposes. The volume of building and construction works (services) amounted to 711.4 billion tenge, or 1.7 % more than last year. During this period state enterprises and organizations put in commission 158.1 thousand m2 of housing, while private developers and the population have built 2.4 million m2. Thus, the share of state sector had only 5.9 % of the total housing construction. 21,228 apartments, including 10,116 individual dwellings, was put into operation totally in the country.

As noted by Mr. Alferov, at the moment the results shown by the industry are 1.2 % below last year’s volumes. However the investments in construction since the beginning of the year have grown, so there is an opportunity to execute the plan from the new state program. The more so it does not put too ambitious targets – the 400,000 m2 less than last year should be put into operation in 2011. In fact, the housing construction program aimed at retention of the pace of housing construction on the 2006 level. At the same time the annual growth target for the next four years is equivalent to only 50 thousand m2, which, experts believe, is a very conservative outlook.

Where will the government support go?

Analyzing the current situation in each of the three main directions of state support, it is worth noting that akimats in all regions of the country have already started the construction of housing through a system of housing savings. The new scheme is as follows. “The Housing Construction Savings Bank of Kazakhstan” creates a pool of its savers who want to buy flat or house at a certain price and comfort class, and city administration allocates land plots with the existing engineering infrastructure. In case of the construction and selling of housing through the local body The Housing Construction Bank send there applications for housing construction. Akimat on account of the loans from the national budget build it. After a house is put into operation an akimat concludes sales and purchase agreement with the depositors of the bank and The Housing Construction Bank transfers money of depositors to an akimat, which is due to repay its loan from the national budget.

In the first half of this year 7.993 billion tenge were directed from the national budget to local executive bodies for construction and housing selling through the system of housing savings, and akimats have already spent 4.968 billion tenge, or 62.2 %. In total in 2011–2013 48.8 billion tenge will be allocated from the budget for these purposes, including 28.8 billion tenge to implement pilot projects in 2011. In 2012 another 32 billion tenge will be allocated for the construction of housing under this scheme, which will provide next year commissioning 300,000 m2 of credit housing.

Involving the housing savings of people in financing the construction is quite understandable. Since the beginning of its work The Housing Construction Bank has already signed contracts with more than 188.3 thousand of its savers with total savings of more than 50.3 billion tenge. The largest share of contracts belongs to Almaty city (14.1 %), Astana (14.5 %), and also Aktobe (8.3 %) and East-Kazakhstan (7.9 %) regions. In January–June 2011 4,042 borrowers get housing, intermediate and advance housing credits of totaling $ 12.355 billion tenge.

The second direction of the program the government intends to fund the commercial banks to finance the construction of housing by private developers. To do this, specific deposits are to be set in banks for the construction period.

Conditions of participation for banks are the following: the funds should be directed for financing the construction of an economy class, with the ultimate selling price of housing, depending on the region and features of the project, should not exceed 170 thousand tenge per square meter, the terms of the loan for real estate developers – not more than five years, and the maximum rate on bank credit rate should be 12 % per annum.

In 2011, for this purpose 57 billion tenge has been already allocated, an additional 13 billion tenge will be allocated in 2012. As a result of this scheme, the government expects to commission 1.7 million m2 of commercial housing. Several second-tier banks – CenterCredit, BTA, Eurasian Bank – have already expressed their willingness to participate in projects and grant loans to developers under the terms of the government.

Stimulation the development of private housing also is not forgotten; especially in the pre-crisis period 58-60 % of the total input of housing was individual housing construction. In this case the government assumes the provision of housing development areas with engineering and communications infrastructure. In 2011 the earmarked transfers of 26.6 billion tenge were allocated from the national budget for these purposes, including 2.6 billion tenge for preliminary work concerning development of Koschi village (as satellite town of Astana) and 4 bn to prepare the infrastructure of four satellite towns of Almaty.

As of July 1, 2011 11.681 billion tenge were transferred from the national budget, 7.981 billion tenge from them or 68.3 % have been already assimilated. In total, during the first six months 185.8 km of utilities were built in Kazakhstan, including 86.5 km of power lines 2.5 km of heat supply, 33.1 km of water supply, sewerage 3.1 km, 50.4 km 10.2 km of gas pipelines and 10.2 km access roads.

Deficits and affordability

Running this new program seems to neutralize last year’s fears of ACHU Chairman Serik Nokin, who supposed this year the volume of housing construction in Kazakhstan can be significantly reduced. He also predicted that in this period real estate prices advance, triggered by an expected deficit of 1.5 million m2, is possible.

However, according to Qncepto company, at the moment there are no signs of deficiency in the housing market. There is every chance to retain the commissioning of housing on the current level, what will allow preventing the shortage of market supply.

Not bad proposal, but we shouldn’t forget about the affordability of housing for population, most of people can’t buy a house without mortgage. Thus, in I quarter of this year more than 90 % of transactions with residential real estate were made in cash and 10 % – with the help of credits. From now forth this proportion will vary proportionately to reduction of an interest rate of mortgage. And despite the fact that the population currently prefers to use the accumulated funds for buying property, banks seriously expect to increase their portfolio of mortgage credits by the end of this year, as they have been actively cutting interest rates for this type of lending.

According to Mr. Alferov, the terms of mortgage credits are becoming softer, although slightly. The volume of mortgages issued in the first half of the year exceeding last year’s figures by 65 %. Thus, the credit market for the purchase and housing construction rebounded to the level of early 2008. At this pace banks will be returning to the peak figures of mortgage lending is still very far away.

Plans for construction materials

It is clear that the demand for housing depends primarily on its price, which, in turn, depends on the prime cost of the building. Theoretically, this can be achieved by increasing the use of local materials in construction. For this purpose in September 2010 the government approved The program for the development of the construction industry and building materials in 2010–2014. Aims of the program look quite ambitious. In particular, till 2015 domestic demand should be satisfied by domestic construction materials by 80 %, including cement – 100 %, building ceramics – 88 %, construction fittings – 80 %, glass – 50 %, linoleum – 30 %. In addition, labor productivity in the industry should increase by 40 % and the gross value added – by 76 %.

Now Kazakhstan produces less than half of the materials used in construction. As noted by Oleg Alferov, for some types of building materials domestic producers were putting pressure on import for a long time. For example, he said that “we fix up ourselves with brick for two-thirds, plasterboard – three-quarters, concrete and concrete products – 100 %. On the other hand, more than 70 % of the roof and 90 % of timber are imported.” As a result, the share of domestic production in total volume of construction materials is yet lower than in previous years. And in the first half of 2011 it is 41.8 %.

The head of Qncepto thinks that the situation is difficult to be changed in one or two years. “The re-equipment of existing plants and building new ones are necessary. Dozens of them. Therefore, it is early to demand results from the program. However it is worth saying about forecasts of the industry. Targets for 2010 were overly optimistic. More properly, they were calculated incorrectly. It was assumed, for example, that the Kazakhstani share of construction materials on the market will be 63 %. In fact it is 44 %. Forecasts about the development of productivity to $63 thousand per person look even more doubtful. “In 2010 they had to rise more than twice. It is unclear how this was possible. Infact, growthhasnotexceeded 20 %,” – Mr. Alferov concludes.

Yulia Melnik
KAZAKHSTAN International Business Magazine №4, 2011