May 12, 2020
Does it make sense to build housing this year? Will people have the money to buy it? Will the construction business stay afloat?
Recently, the State Statistics Service released information showing that prices for primary housing in Ukraine are rising despite all the difficulties.
The first quarter of this year showed an increase of almost 9% compared to the same period in 2019. Market participants cannot help but be pleased with this.
At the same time, the construction output index for January-March this year fell by 5.5% compared to the same period in 2019.
There is an explanation for this decline. Since the quarantine restrictions were announced, some developers have stopped working. Fortunately, however, not all of them.
I am convinced that construction sites are something that must remain open and continue to operate. After all, the construction sector accounts for 3-4% of GDP each year.
It is the foundation on which the national economy rests. This is especially true in the current situation, when borders are closed for a long time.
A sharp decline in construction volumes (both capital and residential) will inevitably affect the performance of many sectors of the real economy, which will also decline.
We remember how this looks in practice from the crises of 2009 and 2014–2015. The negative consequences are already visible this year. For example, the production of machinery and equipment for builders fell by almost 9% in the first three months of this year compared to January-March 2019.
The production of building structures and metal products decreased by 27%, concrete and cement products by 17%, and bricks and tiles by 12.2%.
These figures speak for themselves, don't they?
To prevent the economy from going into a tailspin this year, every sector that acts as a multiplier (including construction) needs to quickly recover after the quarantine and maintain its momentum.
So, let's talk about construction. What exactly will need to be built after the quarantine, and for whom?
Housing is at the top of the list. Despite the crisis and uncertainty, there is and will continue to be demand for it. This year and for many decades to come. After all, it is not being satisfied, but only accumulating and spreading according to the principle of geometric progression.
Let me remind you: the acute unresolved housing issue is a historical problem that we inherited from the Soviet era.
And if, say, at the beginning of independence, one hypothetical urban family needed housing, now, three decades later, two generations need to live somewhere, and accordingly, 5-7 families that have grown out of that one are looking for a roof over their heads.
At the same time, the urban population has increased significantly over this period—if 30 years ago, 27% of all our fellow citizens lived in Ukrainian villages, now it is only about 16%. People continue to move to the city.
This means that in less than 30 years, demand has grown at least 5–7 times.
At the same time, activity in the construction market has not only failed to grow (compared to the Soviet period), but has fallen dramatically.
We are still building half as much as we did in 1990. In order to catch up with at least the Soviet pace, domestic builders will need at least another ten to fifteen years.
Meanwhile, another generation will change, and the hypothetical family we talked about will turn into 15 families who need somewhere to live.
But do buyers have the money? This is another fundamental question.
Let me give you a few examples.
Let me give you a few examples.
80 percent of all deals on our properties in “peacetime” are made with a delay until the end of the sale—that is, the first impression is that people don't have much money on hand.
But in reality, the essence is not only and not so much that buyers lack the funds to pay 100 percent immediately.
Ukrainians already know how to professionally manage their resources and allocate them rationally (some find it more profitable not to break their deposit, some are waiting for a successful counter-sale agreement, some are planning to buy a car, etc.). Illustration: if a developer offers competitive favorable terms (for example, a significant discount for 100% payment), the buyer is ready to come with the full amount.
I would add that a well-executed promotion by a builder increases sales volumes by an average of two times.
And in times of instability (economic or political), people are much more likely to try to pay the entire amount at once.
They withdraw funds from their bank accounts, cut back on other expenses, and focus on their main purchase.
So, in my opinion, there are enough arguments to answer the question of whether buyers have money.
Will they buy housing right now, and in which direction will the market go this year?
My own experience shows that yes, they will buy. Moreover, during a crisis, activity increases.
At first, in the first week or two, there is a shocking emptiness in the sales departments.
Then volumes grow rapidly and by the end of the year may even exceed the average annual forecasts by 20-30 percent. I am confident that a similar trend can be expected this year.
It will be more accurate to make precise calculations regarding the volume of primary housing that will be sold after the quarantine is lifted, but we will definitely not see a decline in sales in the 2020 annual figures.
At the same time, the market is undergoing a certain reform—those who cannot find the resources to restart after a two-month downtime or who do not have enough credit from investors will leave it.
The primary residential real estate sector is being reformatted once again, but it will remain within its usual limits, without catastrophic collapses or shocks. This is primarily due to stable consumer demand, as I mentioned earlier.
It is obvious that after two months of quarantine, the need for housing has not disappeared. Moreover, people who were forced to stay within four walls for such a long time have realized more than ever how important it is to have a roof over their heads – one that is more or less comfortable and secure.
Quarantine has reignited the cult of home ownership.
After the crisis, demand for new housing will focus on stable companies, which will intensify competition among buyers and only increase their interest.
Today, buyers of primary residential real estate can be divided into two basic categories: 70% are those who need to solve their housing problem. The rest are those who use housing as a savings tool and as a base for their own business.
Today, buyers of primary residential real estate can be divided into two basic categories: 70% are those who need to solve their housing issues. The rest are those who use housing as a savings tool and as a base for their own business.
People in the first category have the purchase of housing as one of their fundamental life goals.
They are very sensitive to the situation on the market, in the economy, etc. When a crisis hits, they become more active because they do not want to take risks (especially when the exchange rate begins to fluctuate sharply).
They try to achieve their postponed goal as quickly as possible. It is characteristic that deals during a crisis are concluded more efficiently and quickly.
The process of selecting a property, considering it, and making a decision is reduced to almost 1-2 days, whereas in “peaceful times” a client may hesitate and take months to reach an agreement.
Those who use square meters as a means of accumulation generally consider periods of crisis to be the most acceptable and wait for them.
They probably follow the well-known advice attributed to Rothschild: buy “when blood is flowing in the streets.”
It is logical — in such conditions, there is a chance to make the most successful purchase.
Therefore, I am convinced that the construction industry today has every opportunity not only to remain in the game itself, but also to support other sectors.
Provided that market participants integrate into the new system of formats dictated by reality in a timely manner and learn to apply its new opportunities positively.
For example, at the beginning of spring, no one could have imagined that it would be possible to hold business, government, or even international meetings, provide consultations, and conclude agreements without leaving home. As it turned out, it is possible. Just like buying an apartment online.
In particular, we recently sold one of our properties online using an electronic signature, and the buyer was located abroad.
You have to admit that not long ago, this would have seemed like science fiction.
Buying a home online is just one example of the new things we have gained from the crisis.
As it turns out, it is a fast, convenient, and secure option that opens up considerable prospects for our industry, allowing us to significantly reduce time and save human resources.
And there will be many more such discoveries, not only in the construction sector.
So I see no reason for pessimism.
President of RIEL Real Estate Corporation Rostislav Melnyk for Економічна Правда
