As the construction sector plays a key role in the Croatian economy, accounting for approximately 5% of the total GDP, we decided to bring you an overview of how the sector is currently performing.
Looking back in the past, the Croatian construction sector has always played a crucial role as both the driver of GDP growth as well as the “enabler” of other economic activities (think about all the infrastructure projects, hotels and restaurants, offices which couldn’t have been created without a solid construction sector). The sector experienced its height before 2008’s financial crisis and has been slowly recovering ever since, only picking up its pace in the last couple of years.
Currently, the Croatian construction sector accounts for app. 5% of the Croatian GDP. This represents a recovery from the period following the financial crisis when it hoovered around 3.5-4% of the GDP. The recovery was steady from the period of 2015 onwards, peaking in 2020 before the start of the pandemic. Even though the slowdown in the economic activity should have influenced the construction sector as well, this has thus far not proven to be the case. First of all, the strong investment cycle initiated by the Croatian Govt. and partially funded by the EU has created a large number of projects for the construction companies, which usually take several years to complete. Secondly, the earthquakes that affected Croatia in 2020 also created an even larger incentive, but this time into reconstruction. The projects include both investments into residential, tourism-related as well as industrial real estate.
To better understand what is going on in the sector, we took a look at several key construction sector indicators. First of all, the volume of construction works indices, which show how much construction was done in a year compared to the year before.
Volume of construction works indices (2015 – 2021, YoY, %, 2015=100)
As can be seen from the graph above, the volume of construction has steadily been increasing YoY, both for buildings and civil engineering works. Even though this index increased by 3.3% YoY in total in 2016, if we look at its components, building construction grew by 8.7% YoY, while civil engineering remained below 100%. This trend continued, with 2019 being the year that civil engineering construction finally caught up with building construction. By 2021, the index increased by 9.3% YoY, with both building and civil engineering construction increasing by 9.9% and 8.4% YoY, respectively.
Value of completed construction works (2015 – 2021, HRK bn)
Even though this increase on a YoY basis seems kind of “flat”, looking at the value of these constructions tells a different story. In 2015, the total value of completed works amounted to HRK 13.4bn. In the period until 2021, this number has been steadily increasing, amounting to HRK 21.8bn in 2021. In total, the value grew at a compound annual growth rate (CAGR) of 8.4%.
Several other indicators should also be taken into account. First of all, the issued building permits. In 2015, this number amounted to 6,328, increasing to 10,553 in 2021. What this can show us is that with the higher number of issued permits, a lot more construction is to be done in the coming period, at least in the short term. The expected value of these works has also increased proportionally, growing from HRK 20.87bn in 2015 to over 31.9bn in 2021.
Building permits issued and the expected value of these works (2015 – 2021, HRK bn)
So, having all of this in mind, what are some of the drivers of this growth? First, we should look at the supply side of the equation. One of the main issues that the Croatian construction sector has faced in the last several years is the lack of workers, especially when a strong investment cycle starts and there are more projects to be done than there are construction companies available to do those projects. Getting new workers takes time and is in the short term fixed by importing foreign workers, while in the long term it can be stimulated by education. Also, wage pressures from neighboring countries like Germany and Austria are also making this more challenging, which combined leads to a workforce shortage, especially for new projects beyond current construction companies’ capacities. Secondly, rising material costs are also presenting a challenge, something that has been exacerbated in the last couple of years with inflationary pressures, supply chain disruptions, as well as the current war in Ukraine, which acts as a kind of “multiplier” for all of these issues. This point is evident if we look at building material producer prices provided below, seeing a steady increase in the last couple of years, but a huge surge by 2022, amounting to a 14% increase YoY in March.
Building material producer prices, (March 2015 – March 2022, %, 2015=100)
On the other hand, there has been a large demand for reconstruction efforts in the wake of the earthquakes, the building and maintenance of infrastructure, the construction of new tourism real estate, and finally, the construction of new residential buildings. The residential buildings’ construction is particularly interesting, as this method is not only used for its basic purpose, that is to provide a place to live, but also as a form of investment in Croatia. All of these factors combined, both on the supply and demand side, had an effect on the prices of new construction.
Average prices of newly sold apartments per m2 (EUR) (2015 – 2021)
As can be seen from the graph, in 2015, the average price per m2 sold was EUR 1,416. For Zagreb, this number was EUR 1,563, while for other settlements, this number amounted to EUR 1,274. This has been increasing steadily over the last couple of years, growing at a CAGR of 4.24% for the entire country, 3.7% for Zagreb, and 4.6% for other settlements. This would mean that by 2021, the average selling price per m2 in Croatia amounted to EUR 1,817, an increase of 28.3% since 2015, while in Zagreb this number amounted to EUR 1,973, an increase of 24.4%, and finally, in other settlements, it amounted to EUR 1,673, an increase of 30.1%.
All of these trends are expected to continue, especially in the short term, as rising input costs, labour costs, as well as strong demand for real estate continues. One other thing that could have a more significant impact on the construction sector as a whole in the coming period is the potential reduction in available EU funding, which could be caused by the current humanitarian crisis in Ukraine, combined with strong inflationary pressures across Europe that could reduce EU’s overall spending on investment projects.