Modernisation critical for Iran’s construction industry

“Whoever can help Iran modernise its construction sector will be in a good position to develop business in Iran.” said Dr Bijan Khajehpour, managing partner at Austrian based consultant Atieh International when I interviewed him for MEED’s “Opportunities Iran” insight report.

The report offers an extensive overview of the business needs across all key business sectors. My research focussed on construction and I was fortunate enough to talk to leading engineers and consultants who shared their view on the needs of the country. Below is a brief summary, but for the full report and for information on other important sectors follow the link to MEED.

Construction difficulties

Iran’s construction industry has had a challenging few years. Not only has the country, and the sector, come through a recession but economic pressures including the removal of energy subsidies and the effect of sanctions forced up the price of construction commodities and made materials and equipment more difficult to obtain. The property market, traditionally a key investment option for Iranians, was hit hard by the devaluation of the Riyal and a disastrous social housing programme which absorbed liquidity that would otherwise have financed other real estate investments.

Despite this construction’s contribution to GDP remained stable at around 9 per cent over the past five years contributing 863,908 billion Riyals in 1392 (2013/2014), equivalent to around $35bn. But in real terms the sector shrank along with national GDP. The World Bank reports that productivity in construction declined by 3.6 per cent in 2012 and 3.1 per cent in 2013 as imports of construction materials dropped and inward investment dwindled.

The sector then is ready for some good news and the lifting of sanctions which will bring increased revenues from unfrozen assets and increased oil production, has come at a welcome time. “Both in terms of transfer of technology and access to better financial solutions, the lifting of sanctions will be very good news for the construction sector,” said Dr Khajehpour, managing partner at Austrian based consultant Atieh International, who was talking to me ahead of sanctions being raised. His firm has been advising investors in Iran for over 20 years. “Once sanctions are lifted Iranian banks will have better access to international banks and funds, and can extend better and smarter facilities to constructors,” he says.

Government spending may dominate social infrastructure but in the real estate sector small private investors prevail and renewed activity is expected here too. “Now we are going to see a phase of new investment and higher demand for housing units because now the feeling is that sanctions will be lifted, construction materials will be more easily available and potentially a bit cheaper. There will be demand and a flow of both Iranian diaspora going back and international companies going to Iran.”

Housing shortage

Housing and residential development in particular has experienced a turbulent decade and today there remains a mismatch between supply and demand with an estimated shortage of 1.3 million residential units. In an effort to solve this the Ahmadinejad government created the Mehr social housing scheme. Launched in 2007 the aim was to bring 2 million homes to low income families over a five year period – a scheme so huge that private investors stepped away from the low income market. The model saw the government give land to developers and contractors to build on with finance provided by the state’s housing bank, Maskan Bank. Buyers had to raise 100 million Riyals as a deposit, the housing bank then paid the contractors to build the units. When completed the property and the debt were transferred over to the new owners who would pay back the loan and make a monthly rental payment to government for the 99 year land lease. “Initially citizens in need of social housing believed in it. Some families used all of their savings to participate. They really believed that the government would deliver but when news started coming in that they were not delivered on time or the quality was not good a lot of people stopped signing up,” says Khajehpour.

Financially the scheme encountered many issues. Bank Maskan relied on credit lines and other financing facilities from Iran’s Central Bank and this demand quickly accelerated from 50 trillion Riyals in 2008, which at the exchange rate of the time would have been around $5.1bn; to 150 trillion Riyals or around $14.5bn in 2010. This rose again to 450 trillion Riyals or $36.6bn by the end of 2012 by which time electricity subsidies had been removed significantly increasing construction costs (see chart). According to the IMF the housing bank was absorbing around 40 per cent of Iran’s base money.

Looking to the future Mehr can offer many lessons for the new schemes which must be built if local demand is to be met. “Mass production was a good idea and necessary,” says Mohammad Mehdi Banaei, a systems dynamics and public policy specialist at the Ifsahan University of Technology, who has written several papers on the scheme. “When you do something in a hurry it is possible that you don’t consider all aspects of it and Mehr was like that.”

Future opportunity

As the government grapples with the low income housing shortage investors are expected to turn to more lucrative markets such as high rise offices, hotels and hospitality related developments. International hotel chains are understood to be exploring major cities already.

Such developments could also see larger development firms enter the market, which has traditionally been dominated by smaller investors. Khajehpour says this is less to do with the size of development and more to do with new energy efficiency requirements. “Since energy and fuel subsidies were partially lifted, there is a focus on energy efficiency. There are hundreds of new regulations on what materials you have to use, what windows you have to use, what kind of energy efficiency standards have to be observed in larger cities. Urban construction projects have become too complex for the average small scale investor and that is why I see the necessity to move towards larger companies,” he says.

The requirements for buildings are covered in chapter 19 of the Iranian building code. “It has become mandatory in the past few years and it is anticipated to have a large effect on the energy consumption of the buildings in Iran,” says Nader Shokoufi, a structural engineer at Iran’s Tavon Consulting Engineers and a former chairman of the Young Managers Group of the Iranian Society of Consulting Engineers. He explains that many of Iran’s buildings lack proper insulation but rising energy prices and the new regulations mean a new focus on efficiency. Added to this are several government initiatives that are also stimulating activity. A clause in the annual budget allows the Ministry of Petroleum to invest in energy saving measures with a view to boosting exports. This year $2bn is expected to be invested. “Through this clause, the government insures the investment and promises to repay the investment by paying back the export price of the energy saved, so the facility that does an energy saving can get double savings, one through saving on the energy bill and one through getting back the money saved based on the export price of the energy,” explains Shokoufi. To verify the work the Ministry is looking for at least 500 measurement and verification companies to validate the work of the newly emerging energy saving companies (ESCOs). “A good market is opening up in this field,” says Shokoufi.

At the same time a new organisation for new energies is working on new forms of contract for renewable energy focussing on wind and solar. Further clauses to help investment in solar heating and PV panels are also being developed.

Such developments then are bringing new investors and companies to Iran. “You have completely new dynamics in energy efficiency and environmental solutions which is actually welcome news,” said Khajehpour.

Get the full MEED Insight Iran report here: “Opportunities Iran”

Transport infrastructure such as railway projects and airports are seeking investment for modernisation and expansion



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