Construction sector

The construction industry suffered more than most areas of the Kazakh economy as a result of the global financial crisis which hit the country in 2008. Fortunately for builders, the government undertook several measures to support the industry, without which the consequences would have been more severe than the 5% reduction seen in 2009.

Construction companies were among the first to feel the swelling global liquidity squeeze in Kazakhstan. These companies were heavily dependent on bank credit to buy land and building materials, so when Kazakh banks, themselves heavily in debt, stopped giving loans and instead put pressure on builders to pay back their loans, many collapsed. Builders also raised cash outside the banking system by selling not-yet built apartments to fund current building projects, but many of those projects now also have ground to a halt.

Many companies in construction and other parts of the economy could not survive without bank credit. Small and medium-size businesses were particularly hit. Consumption dropped, and GDP growth is expected to decline from the average of 10 percent that was recorded for the past few years to 5 percent in 2008. Compounding the misery, the annual inflation rate reached 20.1 percent in August. [7]

6. http://www.globalrating.org/kz-market-overview.php

7. http://www.businessweek.com/globalbiz/content/nov2008/gb20081121_173740.htm

Until recently, the construction industry of the second largest member of the Commonwealth of Independent States had grown rapidly, by over 36% a year in 2000-2007. However, the financial turmoil on world markets which erupted mid-2007 has had a strong impact on the Kazakh construction market as its recent boom was largely financed with foreign loans. As a result of the crisis, business activity in the sector slowed and the value of construction works has dropped significantly.

As a result of rapid growth, the value of construction output in Kazakhstan expanded (in US dollar terms) by as much as sevenfold between 2000 and 2007; a similar increase was observed in residential construction. In 2007, the total value of construction works grew by 15.3% year-on-year to $7.8bn; concurrently, the gross value added (GVA) in construction increased (in real terms) by 16.4% to nearly $11.0bn.

Since 2000 the construction industry has managed to almost double the value of its contribution to Kazakhstan’s gross domestic product (GDP). At the beginning of the current decade, construction firms generated about 5% of the Kazakh GVA, and in 2007 their contribution grew to over 10%. This upward trend, however, reversed in the first quarter of 2008 as the industry’s share of the GDP dwindled to 5.6%.

In a regional breakdown, three Kazakh regions are clearly powering the construction industry: Almaty, the former capital; Astana, the new capital; and the oil-rich Atyrau Province. In 2007, their combined share as a proportion of total construction output was almost 60%.

The output of the residential construction segment, which constitutes some 87% of the total number of commissioned buildings and almost 80% of total completed space, has risen steadily through the current decade. Last year, 8.1 million m² of residential space was built in Kazakhstan, 30% more than in 2006. Oddly, in Kazakhstan individual home building is the dominant driver of residential construction, with individual investors completing twice as much residential space as construction companies. In the regions, the ratio is even more striking.

Last year, almost 7,200 non-residential buildings were completed in Kazakhstan, 50% more than in 2006. Among them were many shopping and office centres, especially in Almaty and Astana. However, only a few of the facilities conform to international standards; high-class establishments (with effective formats, a good selection of tenants, occupying at least 5,000 m², built and managed as one property) are recent newcomers to Kazakhstan.

The country is sandwiched between Europe and Asia which means significant prospects for growth of the transport industry and, thus, for development of logistics facilities throughout the republic; Kazakhstan could attract a considerable share of all cargo transit between China and Western Europe. Recently, the Kazakh hotel industry has also seen rapid growth; the total hotel room stock increased by 36% in 2007. The number of tourists attended to in the country’s temporary accommodations rose by 30% to 1.9 million. International hotel chains, such as Radisson SAS, InterContinental and Hyatt, have noticed the growth of the industry and have began to open hotels in the republic’s major cities.

Apart from the ongoing problems with liquidity, surveys carried out among the managers of Kazakh construction companies show other major factors which hamper business activity in the Kazakh construction industry. Expensive building materials were mentioned by half of the decision-makers who took part in the survey; four out of every ten managers indicated that a shortage of orders for construction works is one of the main barriers to doing business in the sector. One-third of the companies complained about fierce market competition. [5]

Since 2000 Kazakhstan’s expenditure on construction steadily increased until 2007 when it reached 9.8% of the GDP. Although the construction industry in Kazakhstan suffered because of the global economic crisis, it is assumed that Kazakhstan’s construction market will recover in 2012-2013.

Kazakhstan’s economy flattened out in comparison with the pre-recession years. The economy grew, on average, at 9-10% annually from 2000 through 2006. But during the worldwide recession, Kazakhstan’s construction sector suffered quite significantly.

During 2007-2010, construction of residential buildings declined. In order to boost residential construction the state adopted a Rental Housing program which is currently being implemented According to the program; all unfinished buildings will be completed by 2011-2012. Currently, the state plans to start a new program that will stabilize the supply of new residential construction. It plans to build approximately two million square meters of residential buildings in the next 3-4 years. This program will be operated by the National Welfare Fund Samruk Kazyna.

The global financial crisis damaged mostly residential construction industry in Kazakhstan. Residential construction became unprofitable because of people’s inability to repay their own debts. Decreased demand resulted in a decrease of construction companies. On the other hand, the volume of total construction has increased, mostly due to an increase in industrial construction.

Due to the fact that the construction industry was one of the most profitable before the financial crisis, the numbers of construction companies was quite significant. However, due to the low demand and inability of citizens to repay property debts during the crisis, the residential construction industry began to suffer. As a result, the number of construction companies decreased by more than 600 in 2009. The table below presents the number of officially registered construction companies since 2005.

Most construction companies (85%) operate with less than 50 employees. At the same time, companies with more than 250 workers amounted to approximately 3.5% of the industry including large construction companies such as Basis-A, Kuat, BI Group, Vek Corporation. The total number of employees in construction companies amounted to 250,000 people. [8]

8. http://www.pmrpublications.com/press-releases/106/global-liquidity-crisis-hits-the-kazakh-construction-industry