Focus: Construction

A Place to Live

A Place to Live

May. 14, 2013

Iran's demographically young population has resulted in a deficit of 4 million residential units, sparking demand in the construction materials sector. This fact is considered to be the main driving force behind a rise in construction permits of 53% in Tehran between 2Q2011 and 1Q2012, corresponding to 1390 in the Iranian calendar. The sector, enjoying a period of boom following four years of stagnation, is also set to be hard at work over the coming years as the government attaches a $140 billion price tag to earthquake preparedness measures. A flurry of activity aimed at expanding and upgrading the country's petroleum infrastructure, valued at $110 billion, should also make the construction sector a key driver of economic and employment growth over the upcoming period.

Growth is also occurring in the country's construction materials segment. More than 10 million tons of natural stone are currently extracted annually, while cement production grew from 56 million tons to 66 million tons over 2011. Increases in steel prices are also making cement more attractive to constructors.

HOUSING

In response to strong demand for housing from the increasingly affluent Iranian youth segment, the construction sector spent 2011 plugging away at the gap. On average, 19,000 residential units were built per month over the course of the year, compared to 10,000 in 2010. The construction has mostly been focused on Tehran, the residential stock of which is expected to increase from 2.5 million units to 3 million units in the near future. Urban regeneration also played a key role in an impressive 2011, as 24% of total construction took place in neighborhoods that needed to undergo both a face lift and earthquake preparedness works. Approximately 45,000 residential units were also rebuilt, an increase of 86% compared to the previous year, according to Turquoise Partners. In total, $30 billion was invested in the real estate and construction sector over the course of 2011, accounting for one-third of new investments in the country, according to the Ministry of Housing and Urban Development. The private sector is also playing a larger role than it has in the past, increasing its investment by 40% year-on-year.

The government is currently backing plans to develop four new towns outside of Tehran in order to overcome the housing squeeze. One such town is being developed by TSI Group, which also seeks to turn the town into a leisure destination. The development has been designated an international leisure zone by the Iranian Cabinet of Ministers, and parliament has also granted the rights for a special economic zone, which is aimed at creating work for the residents of the new town. TSI Group's President, S.J. Mousavi, is also positive about Iran's investment potential, telling TBY that, “the return on investment here is higher than anywhere else."

INFRASTRUCTURE

Early in 2010, the government announced infrastructure projects worth $110 billion. Most of the projects are focused on renewing the oil refining industry, and include seven new refineries valued at $27 billion. The expansion of Iran's airports is also a big investment pull, with Iranian Airports Holding Company calling for over $1 billion in investment into the aviation sector, according to ECO Trade and Development Bank. The most significant plans involve boosting passenger capacity to 20 million a year. Other infrastructure projects providing impetus to the construction industry include plans to connect Qeshm Island, in the Persian Gulf, to the mainland, develop four new metro lines in Tehran, and build a rail link between Iran and Azerbaijan. Pournam is one company that is benefitting from the slew of infrastructure projects on offer. “Pournam is currently carrying out a construction project in the Kurdish region of Iraq, which will feature 80 kilometers of roads," Behzad Mehdipour, Managing Director of Pournam, told TBY, adding “we have two dam projects, three ongoing tunnel projects, and three irrigation and water channeling projects."

CEMENT & BUILDING MATERIALS

Iran currently produces approximately 66 million tons of cement annually. Ongoing wrangling over the removal of energy subsidies gave way to a postponement of the second phase of the program, in a move that was seen as positive for the cement industry due to its energy-intensive nature—energy constitutes 20% of the cost of production in the sector. Ongoing residential construction projects are also positive for cement producers, as are the infrastructure projects the government is plowing ahead with. A 50% price increase in steel is significantly improving the fortunes of cement producers, as concrete building frames become preferable over steel alternatives.

The largest producer of cement in Iran is Fars & Khuzestan Cement Company (FKCC), which operates 17 plants across the country and has a 55% market share. Consolidation seems to be the name of the game in the sector now, as Mohammad Reza Montazeri, Managing Director of FKCC, told TBY that “our goal is to increase our market share and right now we are in negotiations to purchase shares in a number of other producers, which would bring our market share up to about 60%." Discussing the rise in local cement consumption, Montazeri continued, “our strategy for now is to increase our exports so that we can adjust to changes in local cement consumption each year."

The country also has potential to grow in other building materials, such as natural stone. While 10 million tons are currently extracted each year from more than 500 quarries and processed by more than 3,300 stone-working plants, challenges remain to boost rates through modern technologies.

Foreign investors have also had luck in the country, including Knauf Iran, which is a major producer of gypsum and byproducts of gypsum, such as gypsum board. “The sector is booming," said Afshin Madani, Managing Director of Knauf Iran, concluding, “There is also huge demand for buildings, so many people are now investing in housing… It is a very safe investment."

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