1. Armenias Construction Industry: Its Growth, Decline, and Future A Presentation by Alen Amirkhanian, DCS, cjsc AIPRG Annual Conference July 7-8, 2009, Yerevan, Armenia

2. Significance of construction in the Armenian economy The drivers of the construction industry Impact of the current economic crisis and possible outcomes Competitiveness of the industry and thoughts on next steps Todays Discussion Armenias Construction Industry

3. Avg. Annual Volume of Residential Construction in Soviet and Post-Soviet Armenia Source: National Statistical Services, Republic of Armenia; DCS analysis Notes: This chart primarily uses data reported in Construction in the Republic of Armenia 1921-2000 prepared by the National Statistical Service of Armenia. The data for 2001-2008 are from other NSS sources. Annual production data becomes available from the mid-1960s.Prior decade averages are DCS estimates based on available data. To better capture the impact of the economic crisis of the early 90s, construction work up to 1992 is included in the 1980s estimates. There was a particularly sharp spike in construction activities up to1992, presumably due to earthquake reconstruction. From 1993 on the volume of construction dropped precipitously. Armenias Construction Industry Thousand square meters

4. Source: National Statistical Services, Republic of Armenia; DCS analysis Annual Volume of Residential Construction in Years 1966-2008 Thousand square meters Armenias Construction Industry

5. 2008 Construction by Type (total of AMD842 billion) Armenias Construction Industry Source: National Statistical Services, Republic of Armenia; DCS analysis

6. Growing Share of Construction in the Armenian Economy 1.03.73.22.72.21.91.31.41.2 Share of GDP GDP (tril., current AMDs) Construction Agriculture Trade, etc. Manufacturing Transport & Comm Real Estate, etc. Health, etc. Financial Intermediation Utilities Education Public Admin Source: National Statistical Services, Republic of Armenia; DCS analysis Armenias Construction Industry

7. Construction Real estate market Institutional & donor spending Government spending Drivers of the Construction Industry

8. Armenias Construction Industry Construction Real estate market Institutional & donor spending Government spending SMALL Drivers of the Construction Industry

9. Financing Sources of 2008 Construction in Armenia Total 842 billion AMD Source: National Statistical Services, Republic of Armenia; DCS analysis Armenias Construction Industry Current AMD (bln.) % of industry total State budget61.957.4% Reserve fund0.460.1% Local community resources 0.670.1% World Bank loans5.440.6% Current AMD (bln.) % of industry total Hayastan Armenia Fund 0.990.1% United Nations resources 0.06<0.1% Armenian Apost. Church resources 2.440.3% Other humanitar. resources 18.972.3%

10. Public-sector spending in Armenia has been small and any increases will not replace the losses from the private sector. But increased government spending may have important symbolic and developmental value. The Armenian government has taken the following steps in countering the decline in the sector: a)Offered loan guarantees to large-scale builders with incomplete buildings Which is a positive gesture and may play a role in stabilizing the industry, but It could not reach the volume the private sector has generated Its symbolic, psychological value will depend on how well its implemented (fund controls and successful completion of projects, etc.) b)Committed to New infrastructure projects New Nuclear Power Plant, Iran-Armenia Railway, Yerevan-Batumi Highway, Road improvements, Physics Research Center While altogether the sum for these will be large, they are in various stages of planning, and some may not hit the ground anytime soon When they all get going, the annual spending will not reach the massive scale of private investment a)Existing infrastructure projects? Armenias Construction Industry Public sectors role in the current crisis

11. Armenias Construction Industry Construction Real estate market Institutional & donor spending Government spending Drivers of the Construction Industry

12. Price increase Pricedecrease Source: Cadastre Committee of the Republic of Armenia; DCS analysis Armenias Construction Industry Starting in 2001, real estate prices started a sharp incline

13. Agriculture Trade, etc. Health, etc. Real Estate, etc. Public Admin Manufacturing & mining Utilities Industry Annual Growth Rate (2003-2008, adjusted to previous year prices) Share of GDP(2008) GDP Annual Growth Rate (15.8%) Transport and Comm. Education Financial Intermediation 30% 27% 26.8% Construction 30.1% 92k 31% ~100k employees in 2007 Source: National Statistical Services, Republic of Armenia; DCS analysis Growth of Armenian Economy by Sector Armenias Construction Industry

14. Financing Sources of 2008 Construction in Armenia Total 842 billion AMD Source: National Statistical Services, Republic of Armenia; DCS analysis ~600 billion AMD ~150 billion AMD Armenias Construction Industry Commercial bank loans Transfers from friends & relatives Household income Commercial bank loans Investors Org. income or profits

15. 2008 Commercial Banks Loans to Armenian Sectors Sector Loan stock end of 2008 (mln. AMD) Share of total Loan stock in April 2009, change Consumer loans174,51228.2%-12.5% Trade (aka Retail) 132,03121.4%5.2% Industry85,85813.9%9.2% Mortgage loans83,62113.5%2.0% Construction39,4816.4%8.0% Agriculture36,4675.9%23.6% Other32,7685.3%2.4% Service22,8573.7%11.0% Transport & Comm 10,2381.7%2.0% TOTAL617,833100.0%1.6% Source: Central Bank of Armenia; National Statistical Services, Republic of Armenia; DCS analysis Private citizens~600 bln AMD Organizational~150 bln AMD ~750 bln AMDTotal Construct. loans ~40 bln AMD Commercial Banks share of Construction financing 5.3% While commercial banks play a small role in the construction industry (5.3% in 2008), … Armenias Construction Industry … their lending to various industries may indirectly finance the development of the construction industry (esp. material suppliers/importers and mortgage lending)

16. Price increase Pricedecrease 2009 -6%Q1 / Q4 -2%Q1 / Q1 Source: Cadastre Committee of the Republic of Armenia; DCS analysis Armenias Construction Industry Apr/ Mar May/A pr 20061.7%0.4% 20073.1%3.4% 20082.8%1.4% 2009-5.9%-4.7% 1 st Quarter of 2009 has seen prices contract And they have continued to do so in the months of April and May (a total of 17% in 2009, which in the first 5 months wipes out the price increases of 2008) In 2009, for the first time in 7 years we see prices fall

17. Source: National Statistical Services, Republic of Armenia; DCS analysis 2007 I 102 II 118 III 120 IV 123 2008 I 123 II 102 III 101 IV 73 2009 I 78 II ~30 Armenias Construction Industry … Most likely due to poor integration with the global financial markets. Starting 4 th Quarter of 2008, construction activity slowed down markedly. Contraction continued in early 2009, with months of April and May showing a sharp decline to 30% of what it was in the same period last year. Armenias construction slowdown lagged the global downturn … Monthly Change in Construction Activity (compared to same period previous year) Will there also be a lag in recovery?

18. The global construction market in 2009 will contract by 3.7%, the steepest in at least 20 years and the the first back-to-back annual declines in the last two decades. Every region except Asia will see declines in construction spending, while Asian growthslated to be 2.6%will be well below the double-digit increases seen in recent years. The bright spot is in fiscal-stimulus packages with infrastructure spending at their core. While global residential and nonresidential spending will contract nearly 10% and 5%, respectively, infrastructure spending will actually grow by more than 5% in 2009. This will result in a slight recovery in 2010, with global construction spending returning to its 2007 peak in 2011. Expansion is expected in 2012. Armenias Construction Industry Source: HIS Global Insight When is the global construction market expected to recover?

19. For the construction industry to pick up, real estate markets have to recover. As most of the real estate market is governed by cash remittances and investments from Armenians abroad, esp. Russia, it will take them time to decide to reinvest in Armenia after their economies recover The experience of those who invested in the markets in the mid- to late 2000s will matter. There are currently more than 240 incomplete projects in the city of (cite source). Investor/consumer expectations are changing, which may make it more difficult to secure construction funds upfront. Most of the current construction was financed by advance payments from clients or customers; most of these cash payments were made on trust, they were not real estate transactions But increasingly the buyers will be looking to have at least the construction started and possibly even have the vkayakan (the property title) issued so that they can sign a real-estate purchase contract (with all of its enforcement benefits) But vkayakans cannot be issued until the rough construction is complete and the avartakan (completion) certificate is issued. SO INCREASE IN CONSTRUCTION FINANCING or LIMITED PARTNERSHIPS or ? Armenias Construction Industry Will there also be a lag in recovery?

20. To analyze this lets look at the core components of the industry in terms of quality, cost, availability, and productivity Armenias Construction Industry Competitiveness of the Armenian construction industry Residential: single family, multi-family, … Commercial, industrial, warehousing, and institutional Civil: Roads, highways, bridges, irrigation canals, dams, airports, etc. Architects & engineers Regulatory agencies Legal, tax, and accounting expertise Critical Experts Raw materials suppliers: cement, sand, gravel, dirt, stone, brick, grout, plaster, etc. Manufactured materials suppliers: rebar, steel, pipes, cables, tiles, pavement blocks, hardwood flooring, adhesives, paint, glass, aluminium profiles, drywall, doors, windows,toilet bowls, sinks, furniture, appliances, etc. Equipment suppliers: tools, equipment, light machinery, heavy machinery, parts and repairs Suppliers Trade groups: Builders Association, Architects Association, etc. Training institutes: Construction, civil and structural engineering, and architecture faculties and institutes Support institutions Concrete Carpentry General contractors Ornamental Iron Structural steel Plumbing Electrical Roads & sidewalks Earthwork Masonry Tile setters Stone fabricators Plasterers Painters Doors & windows Landscape Roofers Wood flooring installers Cabinet makers Glass and mirrors Drywall HVAC Core trades Importers of supplies and equipment Local manufacturers of supplies and equipment Local miners of supplies OK quality arch/engineers, cost no issue Complicated tax and accounting environment, but growing availability of experts Permitting and land-titling practices nebulous Raw materials monopolized Supplies and equipment mostly imported, very little local production, substantially adding to costs (most likely effect of high value of the dram) and lack of stability required for mfg investments; see CPI slide Import of equipment and technology has been slow

21. Jan-May/ Jan-May Consumer Price Index Construction Price Index 200699.3108.4 2007104.5105.2 2008108.9114.5 2009102.5122.9 Armenias Construction Industry Source: National Statistical Services, Republic of Armenia; DCS analysis First 5 months Consumer Price Index Construction Price Index

22. To analyze this lets look at the core components of the industry in terms of quality, cost, availability, and productivity Armenias Construction Industry Competitiveness of the Armenian construction industry Residential: single family, multi-family, … Commercial, industrial, warehousing, and institutional Civil: Roads, highways, bridges, irrigation canals, dams, airports, etc. Architects & engineers Regulatory agencies Legal, tax, and accounting expertise Critical Experts Raw materials suppliers: cement, sand, gravel, dirt, stone, brick, grout, plaster, etc. Manufactured materials suppliers: rebar, steel, pipes, cables, tiles, pavement blocks, hardwood flooring, adhesives, paint, glass, aluminium profiles, drywall, doors, windows,toilet bowls, sinks, furniture, appliances, etc. Equipment suppliers: tools, equipment, light machinery, heavy machinery, parts and repairs Suppliers Trade groups: Builders Association, Architects Association, etc. Training institutes: Construction, civil and structural engineering, and architecture faculties and institutes Support institutions Concrete Carpentry General contractors Ornamental Iron Structural steel Plumbing Electrical Roads & sidewalks Earthwork Masonry Tile setters Stone fabricators Plasterers Painters Doors & windows Landscape Roofers Wood flooring installers Cabinet makers Glass and mirrors Drywall HVAC Core trades Importers of supplies and equipment Local manufacturers of supplies and equipment Local miners of supplies OK quality arch/engineers, cost no issue Complicated tax and accounting environment, but growing availability of experts Permitting and land-titling practices nebulous Raw materials monopolized Supplies and equipment mostly imported, very little local production, substantially adding to costs (most likely effect of high value of the dram) and lack of stability required for mfg investments; see CPI slide Import of equipment and technology has been slow They are weak LABOR PRODUCTIVITY: Each trade will have its own story but it is safe to say that labor productivity is low, though it has improved over the past 6 years (see Labor Productivity slide). LABOR COSTS: Increasing but with people returning from Russia with greater skills, increased competition MANAGEMENT KNOW- HOW: Very poor KNOWLEDGE OF BEST PRACTICES: Industry somewhat disconnected from the world; most connection is with Russia, Iran, and the UAE?

23. 2003Index2007Index Construction 3,588,2372.58,092,4043.2 Real Estate, etc. 5,120,7923.66,443,0952.5 Financial Intermediation 5,131,8853.65,298,5982.1 Manufacturing & Mining 2,132,3701.53,585,1721.4 Transport & Comm 1,671,9621.22,876,8781.1 Utilities 2,572,6231.82,797,6601.1 Trade, etc. 919,4190.62,685,9431.1 Per Employee GDP 1,418,6201.02,543,3271.0 Agriculture 1,237,4270.91,275,1470.5 Public Administration 467,5710.31,077,6810.4 Health, etc. 655,7670.51,006,7340.4 Education 317,3390.2765,7330.3 Source: National Statistical Services, Republic of Armenia; DCS analysis Lowerthan avg. Higher than avg. Average Armenias Construction Industry In 2007, the construction industry ranked the highest productivity, it also showed the steepest growth compared with 2003. Lets come up with a measure called Value added per employee, which arguably is a measure of productivity: Value Added per Employee = (VA x1y1 / Employees x1y1 ) Where: VA or value added is amount of the industrys contribution to the GDP, Employee is the estimate provided by the NSS, ROA x1 is a given industry and y1 is a given year

24. To analyze this lets look at the core components of the industry in terms of quality, cost, availability, and productivity Armenias Construction Industry Competitiveness of the Armenian construction industry Residential: single family, multi-family, … Commercial, industrial, warehousing, and institutional Civil: Roads, highways, bridges, irrigation canals, dams, airports, etc. Architects & engineers Regulatory agencies Legal, tax, and accounting expertise Critical Experts Raw materials suppliers: cement, sand, gravel, dirt, stone, brick, grout, plaster, etc. Manufactured materials suppliers: rebar, steel, pipes, cables, tiles, pavement blocks, hardwood flooring, adhesives, paint, glass, aluminium profiles, drywall, doors, windows,toilet bowls, sinks, furniture, appliances, etc. Equipment suppliers: tools, equipment, light machinery, heavy machinery, parts and repairs Suppliers Trade groups: Builders Association, Architects Association, etc. Training institutes: Construction, civil and structural engineering, and architecture faculties and institutes Support institutions Concrete Carpentry General contractors Ornamental Iron Structural steel Plumbing Electrical Roads & sidewalks Earthwork Masonry Tile setters Stone fabricators Plasterers Painters Doors & windows Landscape Roofers Wood flooring installers Cabinet makers Glass and mirrors Drywall HVAC Core trades Importers of supplies and equipment Local manufacturers of supplies and equipment Local miners of supplies OK quality arch/engineers, cost no issue Complicated tax and accounting environment, but growing availability of experts Permitting and land-titling practices nebulous Raw materials monopolized Supplies and equipment mostly imported, very little local production, substantially adding to costs (most likely effect of high value of the dram) and lack of stability required for mfg investments; see CPI slide Import of equipment and technology has been slow They are weak LABOR PRODUCTIVITY: Each trade will have its own story but it is safe to say that labor productivity is low, though it has improved over the past 6 years (see Labor Productivity slide). LABOR COSTS: Increasing but with people returning from Russia with greater skills, increased competition MANAGEMENT KNOW- HOW: Very poor KNOWLEDGE OF BEST PRACTICES: Industry somewhat disconnected from the world; most connection is with Russia, Iran, and the UAE?

25. Risk of Arrested Development: With the economic downturn, there is a risk that the improvements made may be lost; government should be a demanding customer Keep an eye on the future: exporting industry? And if so a growing global trend is green construction; Armenia should adapt if it is to go global Invest in education and training, esp. in management and technical skills Construction financing: The banking sector is unlikely to become a big player; direct investment or pre-sale will continue to be the main source. Buyer/investor risk should be reduced. Construction completion: continue to focus on incomplete projects, they have a big psychological impact on future investors Armenias Construction Industry Concluding Thoughts

26. The Role of Architects and Urban Planners in Environmental Protection Thursday, July 9, 2009 at 7:30pm at THE CLUB, 40 Tumanyan St., Yerevan (free admission) Ճարտարապետների և քաղաքաշինարարների դերը բնապահպանության գործում Հինգշաբթի, 2009 թ. հուլիսի 9- ին, ժամը 19:30 Ակումբ սրճարանում, Երևան, Թումանյան 40, ( մուտքը ազատ է ) For more info: www.cherchillblog.com Երեկոյան հադիպումներ Evening Encounters

27. Extra Slides

28. Employment Data Using Econometric Data RankingIndustry 2007 Employment (thousands) Annual Growth Rate (2003- 2007) 1 Agriculture, hunting, forestry, and fishing 433.89.7% 2 Trade, repair of motor vehicles, household and personal goods; Hotels and restaurants 127.2-8.7% 3 Health and social work; Community, social and personal services 114.13.9% 4 Education110.5-6.0% 5 Manufacturing, mining, and quarrying98.6-4.3% 6 Construction91.55.9% 7 Transport and communication72.55.5% 8 Public Adminisration70.1-4.8% 9 Electricity, gas, and water supply35.70.1% 10 Real Estate, renting, and business activities 17.810.0% 11 Financial Intermediation14.326.3% TOTAL EMPLOYMENT1,188.51.4% Source: National Statistical Services, Republic of Armenia; DCS analysis Armenias Construction Industry

29. Share of construction companies, employees, & revenues by firm size Source: National Statistical Services, Republic of Armenia; DCS analysis BIG (51 & more emp.) Medium (26-50 emp.) Small (6-25 emp.) Very Small (5 or less emp.) TOTAL 794 83 74 313 324 Armenias Construction Industry