Long one of the driving forces of Turkey’s economy, the construction industry appears to be slowing down, with questions surrounding project financing and interest rate hikes dampening the sector’s outlook.
Confidence index continues decline
In September, the Turkish Statistical Institute (TurkStat) reported that its confidence index for the construction sector declined for the sixth straight month, dropping 5.1% from August.
This was the sharpest fall among the three areas of the economy covered by the institute’s confidence surveys, with the retail industry remaining steady and the services sector decreasing by 3%. Significantly, the index value for both retail and services remain above 100, indicating an optimistic outlook, while the figure for construction slid further into the negative, dropping to 79.2.
Employment in the sector is correspondingly down. According to TurkStat’s latest data, the seasonal- and calendar-adjusted construction labour index fell by 1.9% in the second quarter of this year compared to the prior three months. It was also the fourth consecutive quarter of decline, with a year-on-year (y-o-y) drop of 5.9% since June 2012.
Property prices still strong
Though the data in the construction sector paint a grim picture, the residential property market remained strong as of mid-year, as evidenced by the 12.2% y-o-y price increases registered in the second quarter of 2013, according to figures issued in late September by international property consultancy Knight Frank. This sharp increase, the highest in Europe, suggests there is still an appetite for housing units, both as investment properties and for personal use, with demand pushing up prices at a time when borrowing costs are low.
Though the central bank has moved to push up interest rates from their record lows, with two hikes taking the reserve’s overnight lending rate to 7.75%, the cost of loans is still comparatively inexpensive, at least by Turkish standards. This has supported bank lending to both prospective home owners and construction companies, helping to sustain growth in the residential component of the market. The hunger for housing should continue to feed into the construction industry, though it could well taper off if interest rates increase again later this year.
Questions in infrastructure segment
Higher borrowing costs also could delay large-scale projects, such as Istanbul’s new $10bn international airport or large top-end residential developments. The government’s infrastructure investment plans are extensive, including a 7000-km high-speed rail network, nuclear power plants, a third bridge spanning Istanbul’s Bosphorus Strait and a canal to link the Black Sea and the Sea of Marmara.
While these projects would help drain away any excess capacity in the construction sector, they are dependent on the availability of funds. With the private sector expected to take the lead on most of these developments, any reduction in Turkey’s ability to tap into international capital would threaten to delay or derail some of these projects, and weaken the medium-term prospects for the construction industry.
It is not just the cost of credit that could be set to jump. Another recent TurkStat report showed that building costs were also rising, up by 3.5% in the past six months, well above the 0.5% increase for the last two quarters of 2012. While the consumer price index is rising more quickly, materials and production costs are climbing, and look set to top last year’s 5.4% increase.
Rising costs and falling confidence levels could well see the construction industry take a step back over the coming 12 months or so, especially if the rate of growth of the economy decelerates. A protracted slowdown would also see Turkey’s creditworthiness drop, putting at risk its ability to attract foreign banks and investors to buy into the government’s mega infrastructure developments, creating a further dent in the construction sector’s well-being.