March 31, 2015

The construction industry to see a 9 percent contraction in Volga Federal District in 2015

The construction industry to see a 9 percent contraction in Volga Federal District in 2015

As indicated by the results of PMR’s latest report, “Construction sector in Russia 2015 – Regional focus. Development forecasts for 2015-2020”, after 2014's 1.8 percent growth, Volga Federal District's construction industry is expected to be one of the country’s best performing districts in the near future. The increase will be largely fuelled by the preparation for the 2018 FIFA World Cup tournament.

Between 2011 and 2013 the Volga Federal District boasted the second highest average annual construction output growth rate among all federal districts in Russia, and also the second highest growth performance for the period 2009-2013. According to preliminary data, in 2014 the construction industry in the Volga FD expanded by 1.8 percent year on year. During the period in question, construction output contracted in 4 of the 14 administrative regions, with the most substantial decline being recorded in the Republic of Udmurtia (-9.5 percent).

However, the impact of this sharp decline on the district’s average performance has been marginal, as the Republic of Udmurtia accounts for only about 3 percent of construction output in the Volga FD every year. A more apparent cause is the 1.2 percent year-on-year reduction in the Republic of Bashkortostan, a region responsible for around 13 percent of the district’s output.

It is thought to have the most diversified industry among all federal districts. It is also thought to be the second most populous district, the second most prominent in terms of retail sales turnover, and the area with the second highest number of administrative regions. Unlike the Central FD, which dominates most of these categories, the Volga FD is not centred on one or two administrative regions. It is the country’s leading district in terms of the number of large cities, with at least 500,000 residents: has five of the fifteen cities in Russia which have more than 1 million people, and also seven of the twenty-one cities with 0.5-1 million residents.

The district’s construction output is largely accounted for by four administrative regions: the Republic of Tatarstan, the Republic of Bashkortostan, the Nizhny Novgorod Province and the Samara Province. Every year these four regions are responsible for 63-65 percent of construction output in the Volga FD, with the Republic of Tatarstan leading the field. Because the district’s construction industry is less consolidated in terms of regional distribution, the influence of individual business drivers in a particular administrative region may deviate substantially from the district’s average figure.

In recent years the positive trend in the district’s construction industry has been largely supported by the Samara Province, which has gradually increased its market share as a proportion of the district’s output from 12 percent in 2012 to 13.7 percent in 2014. At the same time, the share of the Republic of Tatarstan, which has the largest construction industry in the district, fell from over 28 percent in 2012 to around 23.5 percent in 2014. The reduction reflects flat rates of growth in both 2013 and 2014.

According to PMR, in the near future the civil engineering construction industry in the Volga Federal District will be driven by road and airport infrastructure development projects, and by construction projects in the primary area of the economy. Transport infrastructure construction projects will be dominated by projects involving the reconstruction of federal roads across the district, particularly those associated with the 2018 FIFA World Cup host cities in the Volga Federal District: i.e. Nizhny Novgorod, Kazan, Samara and Saransk. As for investment activity in heavy industry, it is dominated by projects deployed in the Republic of Tatarstan and the Republic of Bashkortostan, primarily associated with large-scale oil and gas development and with the refining and petrochemical industry.

Non-residential construction in the Volga Federal District has also solid near-term growth potential. In recent years, the subgroup has been driven primarily by industrial construction projects. Substantial support has been provided by the shopping centre construction subgroup, which has exhibited a more moderate upward trend, mainly as a result of the recent difficult investment environment. The office and warehouse construction subdivisions continued to struggle to gain momentum, as developers remained reluctant to commence new projects in the uncertain macroeconomic environment. In addition, more dynamic development on the commercial property market is being hindered by the enduring difficulties of the fund-raising climate.

According to PMR, in the short term the non-residential construction subgroup will grow mostly because of industrial and warehouse projects, along with hotel construction. Hotel construction activity will increase significantly in the Volga Federal District in the coming years, primarily in the three cities which will host the 2018 FIFA World Cup: Nizhny Novgorod, Samara, and Saransk. There is one more city in the district which will host the competition: this is Kazan, but its hotel room stock has already been increased as part of the preparations for the 2013 Summer Universiade, which it hosted in July.

As regards industrial facilities, these will be developed across the district, but most of these will include modernisation projects. The lion’s share of the development of warehouses will be activated in cities with at least 1 million people, with most of these expected to be developed in the Republic of Tatarstan, the Nizhny Novgorod Province, the Samara Province and the Republic of Bashkortostan, which are the most prominent contributors to the district’s retail sales, with a combined share of around 58 percent.

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