Payments take 60-120 days on average and the payment behaviour has been rather bad over the past two years, with a high level of protracted payments.
- The demand situation in the Hungarian construction sector remains good, with 3.4% value added growth in 2017 and a 110% year-on-year increase of in orders received by the end of 2017.
- Profit margins of construction businesses are low, mainly due to substantial competition in the market and contracts being made at low price levels.While margins have increased in 2017 a decrease is expected in 2018 due to rising raw material prices and higher labour costs.
- Both gearing and dependence on bank financing are high in the Hungarian construction industry. Many smaller businesses are undercapitalized and require external financing, but only a small share of them are really creditworthy. Although banks have increased their willingness to provide loans since 2016, lending conditions remain tight. While interest rates of residential property loans have declined, banks still prefer office space projects to residential ones.
- Payments in the construction industry take 60-120 days on average and the payment behaviour has been rather bad over the past two years, with a high level of protracted payments. Non-payment notifications increased in 2017, and further increases are expected in 2018, as many small businesses show weak financials and struggle with low contractual prices and increasing labour costs.
- The number of insolvencies is very high compared to other Hungarian industries and many small companies active in the construction sector have a very short lifespan. Smaller players often lack the ability to make efficiency-enhancing investments necessary to survive in the market. It is expected that construction insolvencies will increase by 5%-10% in 2018.
- Despite the sector's positive performance in 2017 and turnover growth estimated at 10% in 2018 our underwriting approach remains generallyrestrictive, as many small and undercapitalized businesses are active in the market.
- In the residential construction segment property price inflation and increasing operating expenses pose a risk, while uncertainty about a potential VAT increase on housing construction (from 5% to 27% as of 2019)remains. However, we are less restrictive in the public construction segment. After a low level in 2016, public procurement tenders partly funded by the EU (road, railroad, civil engineering) have recently surged again.
