Global liquidity crisis hits the Kazakh construction industry

Until recently, the construction industry of the second largest member of the Commonwealth of Independent States had grown rapidly, by over 36% a year in 2000-2007. However, the financial turmoil on world markets which erupted mid-2007 has had a strong impact on the Kazakh construction market as its recent boom was largely financed with foreign loans. As a result of the crisis, business activity in the sector slowed and the value of construction works is expected to drop significantly. Nonetheless, in the medium-term a modest revival of the Kazakh construction industry is expected as the national economy struggles to overcome the consequences of the lower supply of money.

As a result of rapid growth, the value of construction output in Kazakhstan expanded (in US dollar terms) by as much as sevenfold between 2000 and 2007; a similar increase was observed in residential construction. In 2007, the total value of construction works grew by 15.3% year-on-year to $7.8bn; concurrently, the gross value added (GVA) in construction increased (in real terms) by 16.4% to nearly $11.0bn.

Since 2000 the construction industry has managed to almost double the value of its contribution to Kazakhstan’s gross domestic product (GDP). At the beginning of the current decade, construction firms generated about 5% of the Kazakh GVA, and in 2007 their contribution grew to over 10%. This upward trend, however, reversed in the first quarter of 2008 as the industry’s share of the GDP dwindled to 5.6%.

In a regional breakdown, three Kazakh regions are clearly powering the construction industry: Almaty, the former capital; Astana, the new capital; and the oil-rich Atyrau Province. In 2007, their combined share as a proportion of total construction output was almost 60%.

The output of the residential construction segment, which constitutes some 87% of the total number of commissioned buildings and almost 80% of total completed space, has risen steadily through the current decade. Last year, 8.1 million m² of residential space was built in Kazakhstan, 30% more than in 2006. Oddly, in Kazakhstan individual home building is the dominant driver of residential construction, with individual investors completing twice as much residential space as construction companies. In the regions, the ratio is even more striking.

Last year, almost 7,200 non-residential buildings were completed in Kazakhstan, 50% more than in 2006. Among them were many shopping and office centres, especially in Almaty and Astana. However, only a few of the facilities conform to international standards; high-class establishments (with effective formats, a good selection of tenants, occupying at least 5,000 m², built and managed as one property) are recent newcomers to Kazakhstan.

The country is sandwiched between Europe and Asia which means significant prospects for growth of the transport industry and, thus, for development of logistics facilities throughout the republic; Kazakhstan could attract a considerable share of all cargo transit between China and Western Europe. Recently, the Kazakh hotel industry has also seen rapid growth; the total hotel room stock increased by 36% in 2007. The number of tourists attended to in the country’s temporary accommodations rose by 30% to 1.9 million. International hotel chains, such as Radisson SAS, InterContinental and Hyatt, have noticed the growth of the industry and have began to open hotels in the republic’s major cities.

In turn, civil engineering works contribute significantly to Kazakhstan’s total construction output, with huge infrastructural projects carried out and planned by the government as well as private companies, mostly from the oil & gas sector. Many infrastructure development projects, some of them to be executed within the public-private partnership formula, have been included in the governmental transport strategy for 2006-2015. The strategy envisages total outlays of $30bn to develop roads, railways, airports and seaports.

Apart from the ongoing problems with liquidity, surveys carried out among the managers of Kazakh construction companies show other major factors which hamper business activity in the Kazakh construction industry. Expensive building materials were mentioned by half of the decision-makers who took part in the survey; four out of every ten managers indicated that a shortage of orders for construction works is one of the main barriers to doing business in the sector. One-third of the companies complained about fierce market competition.

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