Construction freezing, increase of construction materials’ prices, decreasing home sales, wage arrears: the construction business in Kazakhstan is experiencing these and other consequences of the emergency and quarantine introduction. According to the participants and experts of the construction market, the industry is in a very difficult situation, and it will not overcome it without state support.
Follow us on LinkedIn
Construction Under Quarantine
Since April 20, in Nur-Sultan and Almaty, the cities of Kazakhstan where the strictest measures have been introduced, construction and road construction companies, as well as large construction stores have resumed their work among others. The building and installation works were not restricted since the emergency introduction in the country on March 16 and the subsequent quarantine introduction in Almaty and Nur-Sultan on March 19.
However, in fact, the construction was frozen, due to restrictions on the people’s movement and goods’ import. Construction companies’ employees living in the suburbs of Almaty and Nur-Sultan simply could not get to the construction sites. They are about 40% of the total number of employees, according to the National Chamber of Entrepreneurs of the Republic of Kazakhstan “Atameken”.
Marketing specialist of the construction company “Akademiya Zhilya” (“Housing Academy” – Tr.) Mikhail Shmelev said that the situation had significantly affected their activities: many common processes are violated. For example, working crews from other regions (Taraz, Aktau, Uralsk and Shymkent) were deported from the capital.
“They are window makers, roofers, stone masons and others whose work has been pre-paid. We do not work on loan funds, only on sales and in instalments. Sales are on hold: people do not have the opportunity to visit the site, or to pay the instalment; our customers are not able to pay,” says Shmelev.
He also notes that companies are in line to buy materials in construction stores, but probably, the essential materials are primarily sold to essential construction sites.
Rasul Mustafin, Head of Business Development of BI Development Company, said that they have not been operating at full capacity since March 9. Construction works did not stop completely during the quarantine period in Almaty and Nur-Sultan in order to preserve jobs in the production chain and not to deprive people of the opportunity to provide for their families. However, the production rate has declined significantly.
“To some extent, the construction work and production of materials is complicated. Sometimes people cannot get to the construction site; there are problems with the delivery of materials. Due to the current restrictions, many enterprises are operating at not even 50% of their capacities. These factors negatively affect the construction industry,” says Mustafin.
The source noted that the company is making efforts to deliver the projects on time previously announced to customers. However, it is most likely that the deadlines will be extended. They do not refuse from new objects’ construction, but plans have already changed significantly: the schedule of the promotion and implementation of new projects has been revised.
“This is due to an increase in overhead costs during the forced downtime, weakening of the national currency, 30-40% of share of imported materials in the cost of projects implemented by the company and other factors. Of course, the profitability of our projects, which is already low, will decrease further; before this period, it was about 7-10% in average. It will be extremely difficult to keep the cost per square meter under current conditions. We, like the entire real estate market, will be forced to respond by adjusting its price,” Mustafin notes.
Everyone Is Affected
According to the Union of Builders of Kazakhstan, 97 out of 131 companies, which applied to their anti-crisis unit, suspended their activities due to the emergency and quarantine introduction. However, as Talgat Yergaliyev, Chairman of the Union of Builders, stated to CABAR.asia, it is incorrect to evaluate the situation by these figures: almost all constructions have stopped since the beginning of quarantine in Nur-Sultan and Almaty, and all of them suffer big losses.
“The main problem is that there are no sales, no development. There are people who want to buy real estate, but they cannot retrieve their money from banks due to restrictions on their activities and movement. Stores are closed, so the goods are not being sold. Construction has stopped, revenues are not generated, but the salaries have to be paid. The state calls on businesses not to dismiss employees, to save their jobs,” Yergaliyev noted.
According to him, monthly transactions for 45-50 billion tenge ($ 103.9-115.5 million) on purchase and sale of housing were made previously in Nur-Sultan and Almaty, but in March this volume decreased by an average of 25%. That is, the lost income of the construction companies of the two main cities of the country amounted to about 25 billion tenge ($ 57.7 million).
The arrears of wages in the industry enterprises across the country today have reached 75 billion tenge ($ 173.2 million). In addition, they suffer direct losses for the maintenance of the frozen construction sites: payments for security service, utility bills, maintenance services, etc. Each site, depending on the area, costs about 10-15 million tenge ($ 23-35 thousand) per month.
Given these costs, as well as the dismissal of employees during quarantine, it will be difficult to start the mechanisms, Yergaliyev said. Therefore, it is impossible to implement the construction plans on time; there will be a delay of two to three months at least. According to the Chairman of the Union, it is unlikely that anyone will start building new facilities in the current situation – it is too risky now.
Forecasts and the Price of Recovery
According to Yergaliyev, real estate prices will artificially decrease in the coming months, as construction companies will urgently need to fulfil obligations on salaries, loans, supplies, etc. However, then they will recover and increase. Losses during the emergency, a prices increase for building materials due to the weakening of tenge (according to the Union of Builders, the prices they increased by 15% in March compared to February), the likely further weakening of the national currency to 480-490 tenge for dollar: all this factors will increase the cost of each square meter.
In general, according to the Chairman of the Union, the market will begin recovering by the autumn of 2020, or even by the spring of 2021. However, this is the optimistic scenario. To recover from the collapse faster, the construction industry needs urgent financial support of 470 billion tenge ($ 1.085 billion). Yergaliyev explained that this amount is calculated based on the number of working private construction companies.
“Having allocated each company an average of one billion tenge ($ 2.3 million), the state could buy the housing under construction for this money. At 470 billion, approximately 33 thousand apartments with an area of 65 square meters could be purchased at a market value. Thus, many families could solve the housing problem, because today there are 535 thousand people in the country on the waiting lists. Providing them with apartments for rent or loans, the state would then return this money,” calculated Yergaliyev.
This would solve a number of issues: the started and frozen projects would be completed, the plans would be implemented, the people from the waiting list would receive apartments, the state would return the invested funds, the construction market would recover, and jobs would be saved.
Moreover, Yergaliyev is confident that the purchase of housing under construction by the state is the best possible and easiest way to recover the construction industry. If the state follows the path of applying expansionary measures of state support, such as deferring credit obligations, easing of the loans, taxes exemptions, providing subsidies, etc., all this together will cost about the same amount.
This is proposed in Union’s address to the President of Kazakhstan Kassym-Jomart Tokayev of April 27. Meanwhile, this is not the first appeal to the country’s officials with the requests to take anti-crisis measures of state support for the industry. However, the state does not react, states the head of the Union.
If the situation does not change, he predicts a number of negative consequences in the construction industry before the end of this year. They are: a decrease in production volumes by an average of 70%; a decrease in the share of construction in the GDP structure by 7% (from 9% in 2019 to 2% in 2020); a decrease in the volume of construction works with related turnover from 5.4 trillion tenge ($ 12.47 billion) to 2 trillion tenge ($ 4.6 billion). Already now, according to Yergaliyev, about 20% of the small and medium-sized construction companies are on the verge of bankruptcy.
Differences in the South
During the crisis, the Southern Kazakhstan is relatively stable. Construction work here, due to the favourable warm climate, continues almost all year round, and the coronavirus did not stop it. Spokeswoman for the akim of the Turkistan region, Mira Suleimenova, said that construction did not stop in the region.
“Everything is going according to plan for us and there will be no delays,” Suleimenova assured. “At the beginning of quarantine, there were some problems with the supply of building materials from Shymkent, but then they were resolved. In case of labour shortage, the regional authorities will help companies. Now, about four thousand people are working at construction of 35 housing and other facilities.”
Shymkent also declares the maintenance of the pace of construction. According to the akimat, works at all construction sites are ongoing: 252 high-rise buildings are currently under construction. Moreover, Galymzhan Utenbaev, deputy head of the Shymkent construction department, noted that it would be possible to construct even faster if there was enough labour force.
He admitted that the already existing staff shortages became more acute due to quarantine. Workers living in the neighbouring Turkistan region cannot get here due to the restrictions on entry into the city. In addition, some workers chose not to risk and left. Therefore, they plan to recruit Shymkent residents now. Now, the city’s construction sites require more than a thousand workers: cement masons, tilers, welders, assemblers, etc.
“There were no problems with the delivery of construction materials. The import has decreased, but there are enough stocks in the warehouses, enough of everything. Many materials, for example, concrete, cement, are produced in the city. The possible difficulties may arise at the construction-finishing phase. However, I assure you, all issues are being solved, and we are trying to do it quickly,” Utenbaev added.
Kairat Akenov, deputy director of the chamber of entrepreneurs of Shymkent, confirmed that the city’s construction business was least affected, and there were no complaints about problems in the construction sector at the regional operational unit.
“The decision of the chief state sanitary inspector of Shymkent did not restrict the construction activities, as well as the transportation of construction materials,” Akenov said. “Everyone works under the established procedures in compliance with sanitary and epidemiological requirements. The only problem was the registration of workers in the transport database, but it is common for all businesses.”
Meanwhile, according to Talgat Yergaliyev, construction sector in other regions of the country will face problems after Nur-Sultan and Almaty. This is only a matter of time: they introduced quarantine later, and in general, any processes there always occur later.
For Those in Share
According to a survey among entrepreneurs by the national chamber of entrepreneurs “Atameken”, 63% of industry representatives complained about the unstable financial situation.
“Sales decreased, the construction of a number of facilities was suspended. The projected losses only for the surveyed companies amount to more than 100 billion tenge ($ 230.9 million). More than 10% of employees (this is almost 70 thousand people across the industry), were sent on unpaid leaves,” the chamber states.
The national chamber of entrepreneurs also notes the growing number of refusals of stakeholders to fulfil their obligations under the concluded agreements. Alexander Belovich, Chairman of the committee for construction and housing and public utilities of the Presidium of the chamber, said in Atameken Business TV interview that the stakeholders themselves do not worry: the construction companies will complete the started projects and fulfil their obligations.
However, this applies only to those who work legally, that is, have the appropriate permission. In the absence of such a document, no one guarantees a successful outcome. As Belovich emphasized, this is a matter of caution and legal literacy of the buyers themselves, who must verify the presence of permits, as well as follow media’s lists of unreliable construction companies.
The chamber has been actively raising the problems of the construction sector since the early days of the emergency. They, as well as documentation and proposed support measures are accumulated on the organization’s website in the industry section. Their discussions with state authorities already produce some results. For example, a deferral of construction and installation work for the following months was granted, it was decided not to apply penalties and not to include unreliable suppliers in the register for late execution of contractual work due to emergency and quarantine.
Included in the List
The national chamber repeatedly insisted on the inclusion of the construction industry to the list of affected by emergency and quarantine sectors. However, at an online meeting of the committee for construction and housing and public utilities of the Presidium of the chamber on April 8, Minister of National Economy Ruslan Dalenov stated that the entire industry would not be supported: the state would only assist core strategic companies.
On April 24, at a meeting of the State Commission for economy modernization, he presented a draft register of strategically important companies, which included 361 large-scale enterprises, including over 200 from the construction sector. The publication in the social networks of these companies’ list fuelled a great discussion. Entrepreneurs and representatives of business associations were dissatisfied with the fact that large airlines, luxury car manufacturers, premium housing construction companies, and others were requesting the state support. The question arose about the criteria’s fairness for such a choice.
The comments by the adviser to the President of Kazakhstan on economic issues Olzhas Kudaibergenov on his Facebook page and the press release of the Ministry of Economy state that the list is tentative and will be further developed. Reportedly, after a detailed discussion with the business community and sectoral ministries, a preliminary register will be created and submitted for approval to the State Commission for Economy Modernization.
On April 27, the President of the Republic of Kazakhstan Kassym-Jomart Tokayev emphasized that companies that are really important for the country’s economy should be included in the register. Earlier, at a government teleconference, Prime Minister Askar Mamin said that construction industry is one of the main drivers of the economy. He considered the increase in the construction pace, providing the population with housing, maintaining existing and creating new jobs as the most important tasks of the government under the current conditions. He then ordered to ensure the commissioning of the housing goes according to plan.
During this year, it was planned to build 15 million square meters of housing in Kazakhstan, including 6 million of private housing, 2.2 million of apartment buildings under state programs and 6.8 million by commercial developers.
This article was prepared as part of the Giving Voice, Driving Change – from the Borderland to the Steppes Project.