Real Estate Construction Market Report Q4 2012: Russia, Greece, Hungary & United Kingdom

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The Russia, Greece, Hungary & United Kingdom Real Estate report examines the commercial office, retail, industrial and construction segments throughout the country in the context of a construction market that has returned to growth.

Russia Real Estate Key Points

  •     Attention will shift away from protesters to policy trajectory under the new government. While, initially, a period of power consolidation may ensue, we believe that efforts to insulate the

economy from global oil price shocks and weaker demand will keep reforms high on the government’s agenda.

  •     A calming political environment and growing foreign investor interest in Russia will see the recent trend in large private-sector capital outflows gradually reverse over the coming quarters. In addition to higher oil prices and improving political stability, we view the domestic bond market liberalization as an important event, which will eventually attract significant foreign capital inflows.
  •     We forecast infrastructure and construction industry value growth of 4.6% and 3.0% respectively in 2012, with growth stemming from both resources-related infrastructure projects, as well as the broader transport sector. As preparations for the Sochi winter Olympics in 2014 and the FIFA World Cup in 2018 come to a head, they will also provide a short-term boost for the construction sectors. The privatization of state assets in transport and utilities is high on the agenda, with the aim to bring in fresh, and necessary, capital for infrastructure maintenance and improvements. However, we remain cautious on the prospects for commercially driven project finance as capital outflows remain high at a time when the global project finance market is in a trough.

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Greece Real Estate Key Points

  •     The pace of economic contraction in Greece could finally start to ease, which would be

supportive of our view that the depression will moderate in 2013. That is not to say, however,
that the depression is coming to an end. We still see another down year in 2013 and expect
growth to remain very subdued over the foreseeable future. Moreover, while we still believe that Greece leaving the euro zone is not a one way bet, we warn that should this scenario materialize, the economy would be facing a double-digit contraction as the banking system collapses and private sector wealth is destroyed.

  •     Ongoing economic pressures, investors’ caution and government austerity drive will act as the main impediments for recovery in the Greek construction industry. Our core scenario envisages a sixth consecutive year of contraction in the industry in 2012 and little prospects for a recovery until 2015. However, there a handful of infrastructure projects – mainly coming from EU

funding – that could offer some upside risks to our outlook.

Hungary Real Estate Key Points

  •     While the deteriorating external macroeconomic picture presents sizeable headwinds to

Hungary’s trade and investment dynamics, ongoing domestic concerns, specifically tight policy
and depressed economic confidence, will see to it that Hungary does not avoid recessionary
conditions this year. Given the financial pressures still facing Hungary, the severely weakened
domestic economy and the government’s high stock of debt, we still believe that an IMF/EU
financing deal will be reached before the end of the year. With progress towards the start of
official negotiations continuing steadily, we see a deal by early October as most likely, and this
will help to bolster financial market stability.

  •     Owing to a worse than expected real GDP growth reading in the first quarter of 2012, and a

continued deterioration in euro zone dynamics, we have been prompted to revise down our
growth forecast for 2012 to -1.2% from -0.5% previously.

United Kindom Real Estate Key Points

  •     The shock 0.7% contraction in UK real GDP in the second quarter caught most observers off guard. The subsequent revision to -0.5% did little to assuage fears that the economy is sinking. However, we still hold that the economy is treading water rather than heading into a deep and protracted recession, with the latest downturn being more of a soft patch within a longer cycle of stagnant and uneven growth.
  •     As expected, the UK’s construction sector is experiencing a double dip recession, with Q212 data illustrating a steep decline in year-on-year (y-o-y) terms. As the sector weakens, the government continues to announce a variety of measures to address the financing difficulties which are part of the problem. However, it remains to be seen how soon these plans will begin to take effect, and it is unlikely they will provide significant solace to 2012 growth levels. For that reason we have revised down our current year construction industry real growth forecast to -4%.

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Priyank Tiwari
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