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Opportunity Knocks: The Benefits and Dangers of Turn-Key Solutions for CEE Markets. Leonid Peisakhin, Exclusive Analysis Ltd. Leaf Contractors Summit, Prague March 24, 2006. Uniquely Positioned to Improve Client Profitability. Full visibility for client. Forecasting is all we do. - PowerPoint PPT Presentation
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Opportunity Knocks: The Benefits and
Dangers of Turn-Key Solutions for CEE
Markets
Leonid Peisakhin, Exclusive Analysis Ltd.
Leaf Contractors Summit, Prague March 24, 2006
INDEPENDENT
Privately owned
Completely objective analysis
TRANSPARENT
Full visibility for
client
Audit trail and
disclosure compliance
FOCUSSED
Forecasting is all we do
No distractions
•Substantial profit growth for all of our clients
•Profitable entry into new sectors
Uniquely Positioned to Improve Client Profitability
RISK SELECTION
RISK ALLOCATION
RISK REDUCTION
RISK DEFENCE
RISK IMPACT MITIGATION
POST-EVENT RISK
RESPONSE
RISK AVOIDANCE RISK MANAGEMENT
STAGE IN RISK CYCLE
FIN
AN
CIA
L O
PPO
RTU
NIT
Y
CORPORATE
SECURITYAUDIT
FRONTLINESECURITYCOMPANY
POST-LOSSAGGREGATION
BAILING OUTDURING
FLOODING
Early-Stage Risk Identification is Most Valuable
CEE Construction Market: General Trends
Growth is expected over the next 1-2 years As costs increase in Hungary and the Czech
Republic, firms will start targeting further East e.g. Romania and Bulgaria
Russia’s construction market will dominate in CEE
Non-residential real estate returns will decrease while residential and civil engineering segments will grow
EU structural and cohesion funds injectioninto infrastructure in Czech Republic, Hungary & Poland will spur market growth
Poland’s recent construction malaise will reverse
Major change likely on the Moscow market
CEE Construction Market: potential pitfalls
• Burdensome administrative practices are likely to persist throughout 2006.
• Corruption will remain rampant across CEE, improving only gradually.
• The involvement of organised crime in the construction sector in Russia and Bulgaria will continue.
• The hope of rapid spending of EU regional funds in the Czech Republic and Poland is misplaced: bureaucratic inefficiency will get in the way of this.
Political risks of investing in Russia: general observations• GDP growth (2005): 5.9%
• Construction market growth (2005): 10%
• Residential housing market is expanding rapidly (esp. cities with more than 1 million inhabitants and Black Sea resort areas)
• Expansion of residential housing is one of President Putin’s national projects
• Mortgage provisions are being rapidly developed
• Sixty percent of all housing stock is dilapidated and in need of renovation/replacement
Political risks of investing in Russia: general observations
BUT• Burdensome regulations
• Widespread corruption and administrative incompetence
• Large construction firms are linked with municipal governments
• Supply of building materials is virtually monopolized
• Expropriation pressures and murders
• Regime change risks
• Terrorism risks
• Cargo/supply chain disruption risks
• How long will the boom continue?
Political risks of investing in Russia: the Moscow market• Highly lucrative: property prices growing at 30-
40%pa in recent past• Industrial areas are being earmarked for
commercial and residential development and some residential areas are being re-planned
• Administrative procedures are due to be simplified in 2006-7
BUT• Mayor Luzhkov controls the allocation of building
permits and indirectly controls a construction empire
• Supply of building materials is tightly controlled• The problem of illegal workers• MAJOR CHANGE LIKELY: Luzhkov is likely to leave
the mayoral post in 2006-7
Political risks of investing in Poland
• GDP growth (2005): 3.3%
• Construction market growth (2005): 7.4%
• Negative growth trends of the last several years are finally expected to be reversed this year
• Poland ranks last in Europe in terms of the number of apartments per 1,000 residents
• Demand for residential housing will also be driven by the fear of VAT increase on apartment purchases to 22% in 2008
• Poland needs to undertake major civil engineering projects to conform with EU legislation
Political risks of investing in Poland
BUT• The country will be slow in making use of EU
cohesion and development funds• Large scale corruption along with administrative
inefficiencies will likely persist• Investment in engineering and infrastructure
projects will be hampered due to lack of local development plans
• Political risks associated with early parliamentary elections
• ON THE POSITIVE SIDE: the Government has talked about comprehensive regional planning law, changes to PPPs, a new construction act and maintenance of preferential VAT rates beyond 2008
Political risks of investing in the Czech Republic:
• GDP growth (2005): 4.6%
• Construction market growth (2005): 4.2%
• Most developed construction market in the CEE, particularly in non-residential property
• Large investment in infrastructure is expected (EU funds)
• Growth potential still present but limited
Political risks of investing in the Czech Republic:BUT
• Large-scale corruption connected to awards of public contracts and building permits
• Slow and inefficient administrative processes
• Malicious disruption of construction projects
• November 2006 elections
• ON THE POSITIVE SIDE: sound economic indicators
Political risks of investing in Hungary
• GDP growth (2005): 3.7%
• Hungary leads in terms of new housing in the CEE, yet investment in construction expressed as percentage of GDP is the lowest in CEE
• Civil engineering projects represent the next growth area
• Healthy development potential within the Golden Triangle and in eastern Hungary
Political risks of investing in Hungary
BUT
• Administrative inefficiencies and corruption
• Cumbersome and slow legal system
• Likely tightening of development and rezoning regulations overtime
• Economic indicators
• April 2006 elections
Political risks of investing in Romania
• GDP growth (2005): 5.2%
• Construction market growth (2005): app. 7.5%
• The boon of EU accession
• Demand for commercial space is growing rapidly as is that for residential housing in the cities and for industrial space along major motorways and in western Romania
• Romania has seen some mildly successful economic reforms in 2004 and 2005
Political risks of investing in Romania
BUT
• Corruption and red tape persist
• Construction market is dominated by state-controlled companies
• Negative economic indicators
• The outlook for regime stability
Political risks of investing in Bulgaria
• GDP growth (2005): 5.4%
• The boon of EU accession
• Expansion of the residential construction market due to promotion of mortgage schemes
• Sizeable investment in infrastructure
• Sofia, the capital, and Black Sea resort areas are the construction hot spots
Political risks of investing in Bulgaria
BUT
• Widespread corruption is a major problem
• Administrative processes extremely inefficient
• Organised crime involved in the construction industry
• Bureaucracy outside of the capital is extremely difficult to deal with
• Economic indicators
• Political stability
Conclusions
• CEE states, and particularly Russia and Romania, present a major opportunity
• We’ll likely be seeing a movement eastwards as the EU expands and the cost of doing business in Central Europe rises
• BUT CEE markets must be navigated with care• Municipal and central governments usually work
in tandem with local firms• Corruption levels are high across the CEE• Red tape can be mind-boggling and permits take
a long time to secure• Regional governments are usually more difficult to
deal with than authorities in the capital• Foreign firms are best off operating through
subsidiaries registered in states where construction is undertaken and/or in tandem with major local construction companies
Opportunity Knocks: The Benefits and
Dangers of Turn-Key Solutions for CEE
Markets
Leonid Peisakhin, Exclusive Analysis Ltd.
Leaf Contractors Summit, Prague March 24, 2006