Budapest, 23 June 2023 - It is not only the Hungarian construction industry that is in difficulty. Falling demand, rising financing costs, and rising costs are global phenomena. In a survey by KPMG of the world's largest construction companies, half of the respondents said that some of their projects are not being completed when and for as much as they had previously estimated. The solutions to avoid this include risk analysis, better planning, the use of new technologies and increased efficiency.

"The future is changing faster than the present, so a sector that plans for the long term, such as the construction industry, needs to be more concerned than anyone else about what will be expected of the buildings they build in 10 to 20 years' time," said Pál Dános, associate partner in charge of KPMG's real estate advisory practice, at a press conference today.

Attila Tóth, founder and president of CÉH Planning, Developing and Consulting Inc., has a similar view. He says that, like the global economy as a whole, we are in the early stages of the emergence of a new order in the construction industry. Compliance trends have changed, digitalization, sustainability criteria and the evolution of technology have rewritten our vision of the future, as has the market and its requirements, but also the culture of the construction industry more broadly. "Accordingly, the construction industry needs a new vision and a new common strategy to guide the industry," he says.

The sector is still facing many uncertainties in the current situation. COVID, inflation and the effects of war have created a strong need to adapt, while ESG compliance and innovation are also rewriting the scenarios from time to time. "In response to KPMG's questions, half of the world's largest construction companies reported projects that were not completed on time or within the original budget plans," says Pál Dános.

The reasons are many and varied, but the industry is doing the right thing when it deals not with what it has no control over (e.g. energy prices, building material prices, falling demand, rising financing costs), but with what it does have. The KPMG Global Construction Survey shows that the industry is aware of this. Among the most important challenges facing the sector, most respondents (83 percent) identified the accuracy of development estimates, risk mitigation, rethinking contractual safeguards (78 percent), and the use of innovative technologies (72 percent), and 71 percent said it was not worth saving time on planning.

The importance of design is also underlined by the innovative developments that have been initiated and are planned. BIM (decision-support building information models) and PIMS (project management systems) are the most widely used and most likely to consume development resources, but the use of prefabricated structures is a new element in the innovation palette. "The latter could become a technology that better meets not only design requirements, but also the modularity needs of tenants and clients, which could also contribute significantly to reducing the sector's carbon footprint," said Pál Dános in his introduction to the discussion.

ESG in the construction industry

The construction sector is one of the brown, or high emitting, sectors. Therefore, there is an increased expectation on the actors in the sector to take big steps to reduce emissions, but it is not clear who will pay the extra costs. On the financing side, effective instruments (green bonds, more favorable loans) encourage investors to take ESG aspects into account, but buyers and tenants still only want to pay for what they can benefit from in terms of cost advantages (e.g. lower overheads). As Pál Dános puts it, companies use the benefits of such spending to enhance their reputation, but this rarely pays off, especially in a tough economic climate.

In the coming years, building reconstruction and change of function is a viable way to mainstream ESG considerations. "The biggest emissions are always generated by building new, especially when this involves demolishing the built environment. That is why one important way forward is to achieve a new condition that meets changing requirements well, or at least better, by preserving and converting existing buildings," said Pál Dános.

All participants in the panel discussion organized by KPMG agreed that the economic situation in Hungary is also working against the sector. Financing costs have risen significantly, the construction producer price index is around 24 percent, and demand is falling due to rising interest rates. The first quarter of 2023 saw the fewest number of project starts in the last 10 years, housing construction activity in 2023 is expected to fall back to 2016 levels, KPMG expects, and in 2022, 2,100 billion forints of government construction investments were postponed or cancelled, which is 30 percent of total annual construction output. These effects are already being felt by the sector, with production value down 10 percent in a year and the value of the contract portfolio 25-28 percent below the level of a year ago, despite rising prices.

"There is no question that there is a downturn, but more important is whether we are seeing the positive side of it," says Balázs Báthory, deputy CEO of Market Építő Zrt. According to him, we are facing a decade of renovations and redevelopments and brownfield investments, but at the same time this is an excellent opportunity for the sector's players to prepare for the challenges of the future. "With lower production volumes, there will be more time for the much talked about better and more accurate planning, increased efficiency and the introduction of new technologies, and this opportunity should be seized for future competitiveness," says Balázs Báthory.

The importance of renovations and refurbishments was also stressed by Mátyás Gereben, director of CPI Property Group, which owns a significant real estate portfolio. According to him, the office market is also moving in this direction. "In Scandinavia, new offices are no longer trendy, and cool companies are creating value by preserving something from the past and not building something new. These can be surprisingly expensive solutions, often more expensive than building new. Nevertheless, in the spirit of sustainability, tenants and operators should already be sending strong signals to designers and builders that operators are no longer renting concrete and rooms, but flexibility, community and thought." 

"We are already partly through a challenging period in many respects, and we can say that the challenges continue to strengthen us, but it is not a crisis, a sector at zero, but a turbulent period that can only be managed with composure. We must build on our internal knowledge, learn from everything, and draw conclusions. Thanks to the experience of the past 40 years, we have already 'hardened up' sufficiently and we must take the necessary further steps together," added Csaba Kelemen, CEO of KÉSZ Építő és Szerelő Zrt. "The next period will not be easy either, as a responsible company we have to pay attention to sustainability, innovation and digitalization, as well as education and the integration of young professionals as soon as possible. Recognition of the situation, flexibility and quick reaction are the secrets to successfully dealing with unexpected situations - as we did during COVID. Stronger synergy and cooperation between industry players, including government and regulators, is needed, and the right balance is essential for continuous consultation and to create the right conditions for delivery and project success, both on the client and contractor side", stressed Csaba Kelemen.

Website of KPMG Hungary:

KPMG Global Construction Survey:

Source: KPMG