Economist: The construction sector in Armenia has become risky for foreign investors

The Eurasian Economic Commission published the indicators of
the volume of construction work carried out in the EAEU countries in
January–May 2023. The average rate of growth in construction work within the
EAEU was 9.2%. In the given period of observation, the volume of construction
work in Armenia increased by 47.3%, compared to the previous year.

Economist Suren Parsyan has some reservations about the
mentioned indicators.

“According to official statistics, the construction
sector of Armenia showed a 16.7% increase in volumes in January–May 2023. The
EAEU  indicators are overly good, and I have no idea how they got
it,” Parsyan said.

According to him, the growth in construction work in Armenia
was mainly due to private companies.

“In other words, large construction projects,
particularly asphalting, construction of water pipes, lighting system
installation, etc., were carried out with state subsidy. We experienced growth
in the volumes of construction work in these two directions, namely
state-funded projects and private companies, operating in the real estate
sector,” Parsyan noted.

The economist notes that in Yerevan, permission is given to
build about 320 apartment buildings. Thus, plans are afoot to build 55,000
apartments.

“This is an unprecedentedly high index for Yerevan, which is
fraught with rather serious problems. In other words, the market demand for
apartments will fall, but at the moment so many apartments are still being
built,” Parsyan said.

Another important fact is that levels of foreign investment
in the Armenian construction sector continue to fall.

The economist notes that in 2023, the levels of foreign
investment in the Armenian construction sector fell by 60% compared to 2022.
This is because the construction sector in Armenia has become risky, even for
foreign investors.

The Armenian construction sector is mainly financed by the
banking system, as far as the private sector is concerned. Banks give loans both
to construction companies and to buyers. Thus, the growth in volumes of
construction work and the increase in real estate prices are in the interests
of the banking system. This economic bubble that is being blown, especially in
the past two years, may pop, thus leading to acute problems for our
economy,” Parsyan said.

It is noteworthy that last year, real estate prices largely
went up. However, since March 2023, the volume of apartment sales has decreased
by 10%. According to the economist, if the situation remains the same, we will
experience a sharp drop in prices in the real estate market. This, in turn, may
cause rather serious issues and pose major financial risks to construction
companies.

“In other words, many construction companies may go
bankrupt, and this can have a domino effect on the entire real estate market.
Although in the last two years we have had a double-digit growth rate, this
type of growth is fraught with problems. If we achieved this growth in the
construction sector due to the construction of large factories or due to
infrastructural projects like the construction of tunnels, reservoirs or water
pipes, we could say that this is the construction work that will promote
economic growth. We are not going to achieve economic growth in the future by
merely building apartments. This is short-term growth in the construction
sector,” the economist said.