Colliers Research Finds CEE-6 Construction Markets Overheating
The construction markets in the Czech Republic and across Central and Eastern Europe are broadly overheating, with office and industrial development at cycle highs and economic indicators pointing to a mild deterioration in construction new orders sentiment over the next six months, Colliers International, the leading global real estate services company, reveals in its latest research report, “CEE construction markets: The Icarus effect”.
As Mark Robinson, CEE Research Specialist, explains: “In Greek mythology, Icarus flew too near to the sun, melting the wax on his wings and he plunged into the sea. We believe this is a correct analogy for construction markets in CEE, currently. The economic sentiment indicator appears to have passed its recent peak in most of the CEE countries. And examining the top of the last cycle in 2007-08, we found that it was spikes in construction costs and prices that helped define the turn at the peak even before the 2008-09 Global Financial Crisis struck.”
Colliers International’s data shows the ratio of active construction to stock in the office segment in the capitals of the CEE-6 has doubled from the cyclical lows (seen around 2012-13), while the 10% level recorded in Prague is presently close to a cycle high. Data for active construction and stock in the industrial segment paints a similar picture to what is happening in Prague’s office market, showing all six CEE capital cities rising off lows of 0-2% in 2013 to reach 5-6% in Warsaw, Prague and Budapest in Q2 2018.
Backing Colliers International’s data are the EU’s ESI monthly data series: EU ESI total economy sentiment data released monthly across the CEE-6 appears to have good predictive power of the CEE-6 EU ESI construction new orders data series with a lead time of six months: every downturn of sentiment lasting more than three months since 2007 has predicted a softening of construction new orders sentiment six months later.
EU ESI total economy sentiment data show that overall economic optimism sentiment peaked in the CEE-6 in February 2018 – with the Czech Republic peaking slightly later in April 2018 – coinciding with the recent top in construction new orders sentiment in August 2018. The latter has since stayed close to that top, but Czech respondents in the overall economic survey have become progressively more pessimistic since April 2018. It is thus pointing to a mild deterioration in construction new orders sentiment in the next six months.
Supply side factors also appear to be defying gravity and point to problems ahead for the construction market in the Czech Republic and beyond. The shortage of labour is now the most important single constraint across the region, according to survey data. The Czech
Republic’s 2.2% jobless rate in October 2018 remains the lowest in the EU and as unemployment rates have compressed, there is an increasing reliance on immigration to fill the gaps on construction sites.
Tightness in the labour market is causing wages in the construction sector across the region to leap since 2015, according to Eurostat data. Wage inflation and labour shortages in 2006-07 were a harbinger of the construction market pullback in the aftermath of the 2008 Global Crisis in both the CEE-6 and the rest of the EU. The linkage between labour shortages, wage rises and a turndown in the construction cycle, if the conventional economics textbooks are to be believed, is that of strong demand pushing up the cost of labour. That higher cost of labour discourages the marginal developer from executing a project and so the current order book deteriorates. The peak of the current order book sentiment in the last cycle was in March 2008 in the Czech Republic.
“Today’s cycle does not look dissimilar to that 2007-08 period. The EU ESI construction labour force shortage sentiment level dwarfs that of 2008 in the CEE-6, as well as in the EU and Germany. The hubris of the cycle may have taken the flight of Icarus too close to the sun,” the report’s authors write.