Business Monitor International has forecasted construction industry growth forecast for Iran at 3.2% real growth in 2016 as it expects international sanctions to be lifted from the first half of 2016. This will result in the gradual return of private investment in the country, which will considerably benefit the infrastructure sector. The report indicates investment opportunities across all sectors but says railroad projects will attract considerable attention.
"The prospect of lifting sanctions on Iran has sparked considerable interest from investors around the world. However, for Iran to capitalize on that foreign interest, the domestic legal and financial frameworks will have to be in place on a timely manner," says the report.
BMI believes that the return of private investment to Iran's infrastructure sector will be gradual and the pace will be determined by how successful the initial round of tenders is.
Residential/Non-Residential Sectors
After years of underperformance in Iran's residential and non-residential building sector, BMI now expects growth to return to the sector from 2016 onwards, in line with the wider construction industry and the economy.
"We anticipate demand for offices, social and industrial infrastructure to increase, as well as affordable housing projects, given the country's large deficit in this segment," the report suggests.
Demand for housing stock has traditionally been a key driver for the construction sector in Iran, but during sanctions over the country's nuclear program the sector fell behind. In the years before (former president Mahmoud) Ahmadinejad, private capital supplied most of the funding for the housing sector as this used to be a profitable business.
However, external banking sanctions, the government's failure to deliver on housing programs, subsidy reforms that have made construction materials more expensive, depreciation of the rial, in addition to political and legal uncertainties led to a crisis in the housing market. As a result, there is a shortage of urban housing, affecting the middle class.
The interplay of elevated price pressures and a weak currency kept unemployment high in Iran in recent years. Iranians' purchasing power eroded steadily over the past several quarters, with inflation making it difficult to purchase basic goods.
"That said, we expect activity in the housing market to recover from 2016, on the back of government policy to support the sector and improving macroeconomic conditions - particularly unemployment - which will result once sanctions are lifted," the report adds.
In an effort to reduce the country's housing deficit, the government has made ambitious project announcements over the last five years. For instance, there are 800,000 units planned to be built in the villages. That said, so far the government has failed to deliver much of what it had promised while absorbing some of the private capital that would normally have gone into constructing new units.
The current administration led by President Hassan Rouhani has put a stop to the Mehr public housing plan, a move which will likely encourage private sector companies to step in and contribute to a gradual decline in housing costs.
BMI analysts believe that housing prices will remain relatively elevated over the coming quarters, largely a result of a lack of appropriate housing units. Although they are confident that the current administration will succeed in encouraging private sector companies to increase the offer of housing, contributing to a gradual decline in costs, the effects of such policies will be felt only after a few years.
Industrial Construction Gaining Steam
BMI says it has started to notice increasing activity in Iran's industrial construction sector. For instance, the government is reportedly planning to build eight condensate refineries in the South Pars region in Bushehr Province, as announced in June 2015.
According to the Oil Ministry, the private sector will be heavily involved in the implementation of this project. The refineries will have production capacity of 24,800 barrels per day (b/d) of liquefied gas, 148,000b/d of heavy naphtha, 128,000b/d of light naphtha, 149,600b/d of diesel and 29,600b/d of jet fuel.
Expanding its refining capacity is critical for the long-term growth of the country. Furthermore, the Steel Authority of India Limited (SAIL) plans to build a steel manufacturing plant in Bandar Abbas. The $1.62 billion project comprises construction of processing units, warehouses, production units, distribution units and related infrastructure. The project is scheduled to be completed in the first quarter of 2019.
This was followed the announcement that two China-based firms, Metallurgical Corporation of China and Zhongye Changtian International Engineering, reportedly secured a contract to build a $297 million pellet plant in the Iranian province of Yazd in February 2014.
Both firms will develop the plant under an engineering, procurement, construction and financing contract. Once complete, the plant will be capable of producing 5m tons of pellets annually. The plant is scheduled to start operating by July 2016.
