REVIEW

The Foundations

Only the hardy survive in Kazakhstan’s harsh construction sector, with firms mainly from Almaty and Astana working to inject life back into the segment and lay the foundations for a sturdy future.

With the liberalization of the economy, a rapid flow of internal and external investment into Kazakhstan’s construction sector created a boom, which later translated into an oversupply of real estate assets. The construction sector was regarded as the symbol of the country’s economic growth—a locomotive for further progress—as it improved living standards while creating jobs and stimulating other sectors, especially in the construction materials segment.

By end-2008, the sector accounted for about 25% of the country’s GDP and employed roughly 500,000 people. Over the 2001-2008 period, housing stock in Kazakhstan increased from 241 million sqm to an estimated 267 million sqm. Over the 2003-2007 period alone 26.9 million sqm of new residential space was built, while outdated stock of 7.3 million sqm was demolished.

Over this boom period, the availability of cheap credit acted as the main driver of the sector in an environment where investment decisions were based on optimistic assumptions about continuously increasing real estate prices. By 2008, Kazakhstan’s banks had invested approximately $7 billion in various construction projects and lent close to $5 billion in mortgage loans. As a result, the construction sector was among the first to be hit by the liquidity crisis, as the heavily indebted Kazakhstani banks ceased giving loans and toughened payback schemes.

According to the Agency for Construction Housing and Utilities, over the 2003-2008 period the number of construction companies increased by 70% to more than 7,380. The record-high increase occurred mainly in Astana, with the number of companies increasing by 147%. Currently, of all the registered companies, about 40% are based in Almaty and Astana.

INDUSTRY SUPPORT

In the framework of its economic support plan announced in November 2008, the government allocated $3 billion to prop up the real estate market. This was the largest amount allocated for a single sector in the government’s anti-crisis agenda after the $4 billion provisioned for the financial sector. The anti-crisis program was geared toward completing unfinished construction projects, refinancing problematic mortgage loans, and decreasing the housing surplus in the market. Additionally, to coordinate the program, Samruk-Kazyna Real Estate Fund was established in 2009. In 2010, the fund commissioned 6.4 million sqm of residential space in the shared interest construction sector. Currently, the fund is helping to finish 12 shared-interest developments with 2,896 interest holders only in Almaty and Almaty Province.

The magnitude of the anti-crisis package shows the significance of the housing question in Kazakhstan, where housing stock per capita still remains at one-third of that in the UK and two-thirds of that in China, with 17.2 sqm per capita. This relatively low housing stock per capita is an asset for the construction sector, presenting opportunities for investors not only in big cities where the population increase rate is higher than the national average, but also in the relatively smaller cities that require the upgrading of housing quality.

THE NEW PROGRAM

As the sector remains vulnerable to external shocks, the government’s support program for the construction sector is expected to continue. Within 10 years about $3.6 billion is set to be used for the modernization of housing and utilities infrastructure. In February 2011 the government approved a program to support housing construction, which targets the construction of affordable housing, state support for second-tier banks to fund housing construction, and the construction of utility networks. Over the 2011-2012 period the government will allocate about $476 million for the construction of affordable housing and mortgage lending. Furthermore, in the same period about $272 million will be used for the construction of utility infrastructure. Furthermore, budget allocations for the financing of construction and leased housing will be continued under the program for the development of the construction industry and construction materials production between 2010 and 2014.

RECOVERY

Although the global economic downturn negatively impacted all segments, the recovery of the construction sector will be driven by the residential segment given the unmet demand for residential space. “There are many opportunities within the residential sector,” Matthew Bond, Managing Director of Capital Partners, told TBY. On the other hand, the construction of office space will most likely stay stagnant provided that the rate of office developments did not show any significant upward trend during the first quarter of 2011.

Despite increasing business activity in the market the recovery might take place at a slower pace than expected. Restoring confidence in the construction sector after the crisis remains one of the most difficult challenges. Kim Jin Sil, President of Woolim Kazakhstan, told TBY, “It is very difficult to conduct efficient marketing now, because almost all Kazakhstani clients have lost their confidence in construction companies.”

However, the resilience of construction firms over the period is indicative of a positive future. In 2011, 6 million sqm of residential space is expected to be built, about 500,000 sqm of which is state housing. Furthermore, CBRE notes that residential construction volumes in Kazakhstan between January and February 2011 increased by approximately 3.4% compared to the same period in the previous year. The Kazakhstan Statistics Agency reported that more than 60% of all residential space is commissioned in the cities of Astana and Almaty, and Almaty province.

CEMENT

Indications that the construction industry is beginning to pick up can be seen in the official statistics for the cement industry. Output over the crisis remained remarkably flat, with some 5.7 million tons produced in 2007 and 5.8 million tons in 2008. However, indications of a market slowdown were seen in 2009, when output slowed back to around the 2007 level. Numbers from 2010 show a healthy recovery, with output leaping to 6.7 million tons, while figures from 1H2011 show a further 14% rise in output to 3.43 million tons over the half-year period. Installed capacity in Kazakhstan is estimated to increase to 13 million tons by 2015, indicating significant room for export potential to those plants located near border areas. The cement industry is highly fragmented, a result of Kazakhstan’s wide geography, and cement producers rely on good transport and storage terminals to be able to distribute their products across the country. Foreign players, such as Italcementi, Viscat, Heidelberg, and Malaysian-owned Steppe Cement have also been active players in developing the market, and the heavy presence of foreign investment in the sector is indicative of its potential going forward.