The most growing segment of construction is the reconstruction of destroyed infrastructure
The construction sector has become one of the economic sectors most affected by Russia’s full-scale aggression against Ukraine. The volume of construction work performed in Ukraine in 2022 decreased by 65.1% compared to 2021, to UAH 113.8 billion. However, in January-June 2023, this figure increased by 18.4% compared to the same period in 2022, to UAH 53.2 billion. The growth of the construction sector in the first half of the year was driven by engineering structures, where the increase in construction work amounted to 34% y/y, and non-residential construction, which grew by 9.5% y/y. In this regard, the trends in the construction market and the changes that occurred during martial law.
According to the KSE Institute, the total direct losses from Russia’s military aggression as of June 2023 amounted to more than $150 billion. In particular, the largest losses were incurred in the housing stock ($56 billion), infrastructure ($37 billion), and industry ($12 billion). Over the two years of the full-scale invasion, about 15% of construction materials production capacity was destroyed. The largest losses were incurred in the production of rolled metal and dry gypsum mixtures.
Changes in demand
The structure of demand for new residential real estate in Ukraine has changed dramatically. The frontline regions experienced the largest drop in construction volumes – by almost 90%, the central part – a decrease of up to 70%, while in the west construction increased by 15%, due to the relocation of businesses and internally displaced persons, as well as the active development of resort real estate in the Carpathians.
The primary real estate market has shifted mainly to the west of Ukraine. Developers in other regions are mainly focused on completing projects launched before March 2022. Currently, most investors are hesitant to start new construction projects and are taking a wait-and-see attitude.
In the center, north, and east of Ukraine, demand for services to rebuild destroyed buildings and structures has increased. Businesses that have suffered property damage need to reconstruct buildings to resume operations.
The fastest-growing segment of construction is currently the rebuilding of infrastructure, primarily bridges and social facilities, using budgetary and donor funds.
In response to wartime threats, new segments of the construction market have emerged: structures to protect critical infrastructure and modular reinforced concrete shelters designed to protect people during air raids, artillery shelling, etc.
In 2022-2023, the cost of construction increased by 53%, which led to a similar increase in prices in the primary real estate market. The cost of construction will continue to rise, driven by objective processes, including increased demand and inflation.
Suppliers of construction materials that previously imported products from Russia and Belarus (glass, bitumen, rolled metal, cement, sandwich panels, etc.) were forced to switch to products from the EU and Turkiye.
The closure of Ukrainian ports made it impossible to import construction materials by sea (rolled metal, chemicals, finishing, etc.). Today, these materials are imported to Ukraine mainly through Romania, which has led to an increase in their cost.
At the end of 2023, complications arose with the import of raw materials and supplies due to the blocking of checkpoints on the border with Ukraine by Polish and Slovak carriers. This also led to an increase in prices and delivery times for imported construction materials. Due to the border blockade, the cost of logistics doubled, which led to a 5-10% increase in the price of imported construction materials.
Lack of personnel
During the full-scale invasion, the decline in the working-age population of Ukraine was approximately 35%. The mobilization and emigration of skilled professionals has led to a shortage of personnel in the construction industry, which is felt even amid a significant market decline. In the future, this may lead to an increase in wages, which will further increase the cost of construction, but still will not solve the problem of the shortage of qualified personnel.
Ukraine will need a large number of construction professionals during the reconstruction process, so we are likely to see labor migration of skilled workers from the EU and laborers from Asia in the future.
Preparation for reconstruction
Rapid construction technologies, which require a minimum number of workers, are becoming increasingly popular in reconstruction. For example, the construction of sandwich panel buildings requires a much smaller number of specialists than construction of artificial materials. Today, the market cost of prefabricated commercial buildings is UAH 18-22 thousand per square meter. The construction process itself takes an average of 6-9 months. When cottages are built using frameless sandwich panel technology, the turnkey price with utilities and interior decoration is UAH 20-40 thousand per square meter, and the construction period is only two weeks.
Currently, most Ukrainian investors are preparing for reconstruction and are actively calculating the cost of construction, but they are waiting for the end of hostilities to launch new projects. For their part, international financial institutions are planning to get involved in reconstruction and are gradually entering the Ukrainian market. The key criteria for financing post-war construction in Ukraine will be transparency and speed of project implementation, so international organizations are already beginning to establish partnerships with reliable Ukrainian builders. The priority is given to companies that work with European materials and technologies, which allows them to create modern, architecturally attractive, and energy-efficient buildings.