Weekly Glenigan Newsletter - 11 May 2010
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comment on major industry developments and news updates from the
past week. Click on the links to read the full story.
Construction under a coalition
Promotion: Free Infrastructure Journal
webcast: Post election PPPs - is the future looking
bright?
Featured
Region: East of England
Featured
Sector: Offices
Project News
Tenders
invited for five storey building
Applications to tender for university
works
Applications to tender for secondary
school
Funding
approved for Glasgow station
Costain awarded ECI contract
Applications to
tender for fire stations
Company News
TfL moots
£400m buyout of Tube Lines
Bovis sales up 11pc compared to 2009
Morgan Sindall
trading in line with order book
Costain to implement next stage of growth
strategy
Mears'
chairman increases pay by £350k
WSP reports signs of recovery in private
sector
How can we
help?
Construction under a coalition
Given that no party has an overall majority, the construction
industry, along with the rest of the country, is still in a period
of continued uncertainty as the politicians decide who should form
the next Government. At the time of writing, the Liberal Democrat
negotiations are continuing with both Labour and the
Conservatives.
Whilst some form of Conservative-led Government appears the most
likely outcome, the delivery of its policies will be subject to
negotiation through Parliament. Against this political background
public sector capital expenditure programmes are likely to be
regarded as a relatively easy target. Construction related areas,
from the schools building programme to Crossrail, will be
vulnerable to both explicit spending cuts and to cuts by stealth as
protracted ‘policy reviews’ push back planned spending.
In addition, changes in Government policy are set to block specific
areas of private sector investment. Given both Conservative and
Liberal Democrat opposition, BAA’s plans for a third runway at
Heathrow and the expansion of airport capacity in south east
England appear especially doubtful. In other areas, such as the
need for new nuclear generation capacity, the Liberal Democrats are
at odds with both the two main parties and progress is likely to be
slow at best.
The Conservative party has argued for effective action to cut
public spending and tackle the budget deficit in order to reassure
financial markets and nurture a private sector lead recovery. The
new Government will have to demonstrate to financial markets that
it will have the strength and longevity to deliver the promised
overall reduction in the budget deficit. Furthermore there is a
risk that continued political uncertainty could undermine consumer
and business confidence and hamper the pace of economic recovery.
There have already been tentative signs that the upturn in the
housing market faltered ahead of the general election, with the
number of mortgage approvals for house purchase sluggish during the
first four months of 2010. There is a risk that political
indecision could be replicated in the housing market, dampening the
anticipated recovery in new housing activity over next twelve
months.
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Featured region: East of England
Recent performance
Construction starts in the East of England have fallen sharply
over the last two years. The region had a year-on-year fall of 37%
in the value of underlying construction starts during the fourth
quarter of 2008, which dragged project starts 8% lower for the year
as a whole. The region would have endured a much shaper decline but
for a surge in civil engineering work during the final quarter.
Many sectors have experienced significant falls in both the
underlying value and number of projects starting on site, with
offices, private housing and retail among the hardest hit in the
region. The fall in private housing has been particularly damaging.
In 2006, the sector accounted for 35% of the value of underlying
construction starts in the East of England, by the first quarter of
last year it had fallen to 17%.
One bright spot for the East of England has been the start on site
of construction work to expand Felixstowe, the UK’s major container
port. Not only has the project provided a direct boost to civil
engineering activity in the region, but in the long term it should
also act as a catalyst for further investment in areas such as
warehousing, if the expansion is successful in delivering increased
trade through the port.
Project starts in the region were squeezed further over the course
of 2009. Starts remained weak during the first quarter of 2009,
running at half the level of the previous year. Project starts did
stabilise during the second quarter thanks to sharp increases in
education, health and social housing schemes. However, while the
social housing sector remained firm during the three months to
September, the education sector slipped back. Whilst the closing
months of the year saw a pickup in health projects, the value of
construction projects in the region during the fourth quarter
remained on a par with the poor performance seen a year ago.
Overall the value of underlying construction projects fell by 25%
during 2009 as a whole. A strong flow of community & amenity
projects, along with private housing, has meant that in the first
quarter of this year there was a 3% increase in the value of work
starting on site.
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Prospects
Private sector residential and non-residential work in the East
of England has fallen back sharply over the last year. Whilst there
was a pick-up in public sector health, education and social housing
projects during 2009, this proved insufficient to arrest the
overall decline in project stats during the year.
Furthermore a weak development pipeline points to projects starts
remaining under pressure near term. During the six months to June
2009, the underlying value of planning approvals was 22% down on a
year earlier, in large part due to sharp declines in retail,
infrastructure and utilities scheme approvals. However, approval
for two significant education projects during July helped to
counter the weak underlying trend, limiting the drop in the value
of planning approvals during 2009 as a whole to 16%. Unfortunately,
having secured planning approval, the lion’s share of the work
associated with these projects has been placed on hold.
Private housing construction has been especially hard hit by the
downturn in the housing market. According to Halifax, house prices
in the region were particularly overvalued in relation to average
earnings at the peak of the market. Whilst house prices have since
fallen sharply in the region, potentially improving affordability,
first time buyers remained scarce during 2009.
This, together with the problems in the wider economy and
constraints in accessing finance, means that it is taking time for
private housing construction to recover in the region.
Unsurprisingly, the value of underlying planning approvals for
private housing remains weak, falling by 45% during 2009. The poor
level of projects securing detailed planning approval is expected
to remain a constraint on private housing starts in the region.
Against this, housebuilders have a significant pool of shelved
schemes with planning approval that could be quickly brought on
stream as market conditions improve. Indeed the closing months of
2009 have already seen a sharp pick up in private housing starts,
albeit from an extremely low base, as housebuilders open up new
sites in anticipation of better market conditions.
Glenigan estimates that the value of underlying construction starts
will slip back further near term. However, the value of starts in
the region is expected to strengthen over the next two years as
confidence and liquidity gradually return to the housing market and
private sector investment activity improves. Indeed, the private
housing sector is so critical to construction activity in the
region that its forecast improvement is expected to bolster the
recovery in project starts during 2010 and 2011.
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Featured sector: Offices
Recent performance
Office construction was one of the fastest expanding areas of
construction activity over the three years to 2007 and a key driver
of industry growth, with office construction output rising by more
than 50% between 2004 and 2007.
However, the crisis in global financial markets and the subsequent
downturn in the UK economy have hit the sector especially hard as
developers have fretted over the implications for occupier demand,
and securing project funding has become more difficult and
expensive.
The Central London office market dominates the sector, with the
Capital typically accounting for 40% of new office projects. The
previous boom in new office projects was underpinned by rising
demand for office space, in part from a buoyant financial services
sector which, at its peak, had taken on an additional 210,000
people since 2004. CB Richard Ellis estimates that together
banking, finance and business services accounted for half of
central London office space taken up during the third quarter of
2007.
In contrast, retrenchment in the financial service sector over the
last 2 years has been a key factor contributing to a dramatic
weakening in the office property market. Knight Frank recorded a
40% decline in the take-up of office accommodation accompanied by a
125% rise in available floor space in central London over the two
years to the third quarter of 2009. Weaker demand from occupiers
has prompted a marked decline in rents, with CB Richard Ellis
reporting that average rental levels in the first quarter of 2009
were 25% down on a year earlier. Capital values have also suffered:
CB Richard Ellis estimates that in May 2009, capital values in the
UK office market were 45% off their June 2007 peak. The sharp falls
in capital values prompted major write-downs for landlords,
including Land Securities and British Land.
However CB Richard Ellis reports that the closing months of 2009
saw a pickup in commercial and industrial property markets,
including offices. In particular property investment activity has
strengthened, in part due to expenditure by overseas investors who
are also benefitting from Sterling weakness. In addition, CB
Richard Ellis estimate that 3.6m sq ft of central London office
space was leased during the fourth quarter of 2009, which is above
the long-term average and the highest level of quarterly take-up
since 2008. In addition, whilst rental returns remain weak, capital
values have strengthened. CB Richard Ellis reports, that capital
values rose 2.9% during December, although they remained 4.9% down
on a year earlier
The value of underlying construction starts has fallen sharply
across the UK. Project starts in the capital, which accounts for a
high proportion of underlying projects starts in the UK, fell 49%
during 2009, while the East of England, the East Midlands, the
South West, the West Midlands and Yorkshire & the Humber
suffered falls in excess of 50% Over the last two years London has
been more harshly impacted than the underlying data suggests as the
majority of schemes valued over £100 million are also in the
capital and these, too, have become scarce.
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Prospects
The office construction sector continues to be especially hard
hit by the economic downturn and the repercussions of the credit
crunch on the financial services sector. The ‘Shard of Glass’
aside, there are fewer major projects (that is, projects worth £100
million or more) in the pre-construction pipeline. More worryingly,
the value of underlying planning approvals has also fallen sharply
across the country over the last two years, with detailed planning
approvals in 2009 running at less than half the level seen in
2007.The sharp fall in underlying planning approvals has rapidly
translated into a lower level of underlying construction
starts.
Given the sharp rise in vacant floor space and falling rental
levels since 2007, developers and their financiers are
understandably nervous. Many of the proposed flagship schemes have
been either shelved or cancelled.
However as the recent trading statement from Land Securities
highlights, even in markets as turbulent as these, opportunities do
emerge. The company notes that whilst property values are still
declining, growing investor interest is now evident for both prime-
and mid-quality properties. As CB Richard Ellis has reported,
having fallen by around 45% from their peak, this rise in investor
interest is starting to lift depressed capital values. CB Richard
Ellis reports, that capital values rose 2.9% during December,
although they remained 4.9% down on a year earlier. Furthermore
Land Securities is planning to press ahead with two major West End
developments next year.
Furthermore, whilst the flow of new office projects remains
extremely weak, market conditions have moved off the low point
reached in the first half of 2009. The take-up of central London
office space improved considerably during the final six months of
2009 as occupier confidence strengthened, with the turnaround most
noticeable in the City. CB Richard Ellis estimate that 3.6m sq ft
of central London office space was leased during the fourth quarter
of 2009, which is above the long-term average and the highest level
of quarterly take-up since 2008.
Against this background of firmer demand for office accommodation,
the next two years will see a sharp fall in the volume of new floor
space coming onto the market. This is set to support capital and
rental growth as the supply of available floor space dwindles. This
in turn should encourage developers to bring forward new
developments. Whilst Glenigan expects the flow of new office
projects starting on site to remain weak during the first six
months of 2010, we anticipate project starts will gradually pick-up
from the second half of this year onwards.
Looking forward, we expect sector starts to rebound in 2010. Based
on projects currently in our database, we should see an uplift in
the value of underlying construction starts by 17% in 2010, with a
further 18% rise during 2011. However, such an upturn would still
leave the value of project starts some 48% adrift of 2007 levels.
Furthermore, if there is a renewed weakening in economic
conditions, the downside risks for the sector will increase.
Construction output, however, will lag behind the forecast
improvement in project starts. At 3%, the decline in sector output
was relatively modest during 2008. However, the absence of new
project starts became an increasing drag upon sector output last
year as work on site on existing schemes was completed. Furthermore
in the current market, developers of existing speculative schemes
are likely to defer fitting out until tenants are secured, further
depressing output. Output during 2009 was 50% down on a year
earlier. Further falls in output are anticipated for the coming
year as the value of projects reaching completion continues to
outpace the value of new schemes starting on site.
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Project News
Tenders invited for five storey building
Shoreditch Trust is currently inviting tenders for the
construction of a five storey building providing three flats and
three office units at 52 Whitmore Road in London. Tenders are due
to be returned on the 25th May 2010. Waugh Thistleton Architects
Ltd designed the £1 million scheme. Works are due to start on site
June 2010. Jerram Falkus Construction Ltd is a know bidder.
Project ID: 05429134
Applications to tender for university works
Aston University is currently inviting applications to tender
for the refurbishment works at it's main building at Aston Triangle
in Birmingham. The £3.8 million scheme includes phased
refurbishment to provide laboratories for the Chemical Engineering
and Applied Chemistry Departments (CEAC).The final date for the
receipt of requests to participate is 7th June 2010. Tenders are
expected to be invited mid July 2010 with work due to start on site
in November 2010 .
Project ID: 10106175
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Applications to tender for secondary school
Vale of Glamorgan Council is currently inviting applications to
tenders for the construction of a secondary comprehensive school, a
special education needs school and a special education respite
residential facility at St. Cyres Road in Penarth. The final date
for the receipt of requests to participate is 10th June 2010. The
£45 millions scheme has been designed by HLM Architects, with Davis
Langdon acting as the project managers.
Project ID: 08402846
Funding approved for Glasgow station
A joint initiative between Strathclyde Passenger Transport,
Transport Scotland, Glasgow City Council, Clyde Gateway and Network
Rail to redevelop Dalmarnock Station in Glasgow has received
funding from The European Regional Development for £2.8 million.
The total cost of the redevelopment is £8 million and construction
is expected to start in 2011.
Project ID: 10168652
Costain awarded ECI contract
The Highways Agency has appointed Costain on an Early Contract
Involvement basis to carry out the construction of a 5km new bypass
running from the A556 between the M6, Junction 19 roundabout near
Knutsford and the M56, Junction 7 near Bowdon View roundabout.
Jacobs UK Ltd are the consulting civil engineer on the £139 million
scheme and works are due to start on site October 2010.
Applications to tender for fire stations
West Yorkshire Fire & Rescue Authority is currently inviting
applications to tender for the construction of three new fire
stations at Redhill Drive in Airedale, The Grove in Normanton and
Stumprcorss Lane in Pontefract. The final date for the receipt of
requests to participate is June 11th 2010. Tenders are due to be
invited September 2010. Bradshaw Gass & Hope are the architects
and each fire station will be £2.5 million each. Works are expected
to start on site in January 2011.
Project ID: 08443306
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Company News
TfL moots £400m buyout of Tube Lines
London Underground is set to dissolve its Public Private
Partnership Tube upgrade agreement by buying out the shareholders
in contractor Tube Lines. According to The Times, Transport for
London will pay Bechtel and Amey as much as £400 million for their
stakes in the PPP contractor, which is responsible for upgrade
works on the Northern, Jubilee and Piccadilly lines. Both TfL and
Tube Lines - which are locked in a dispute over the cost of the
next period of upgrade works - told the newspaper they were still
exploring their options in light of the PPP Arbiter Chris Bolt's
most recent ruling. Last week London Underground was told by Mr
Bolt that it may have to de-scope the works to be carried out by
Tube Lines over the next seven-and-a-half years.
Having set the price of the work at £4.46 billion in March, Mr Bolt
deemed that LU is currently unable to afford it. It now has until
14 May to prove it can afford the work in full or it must de-scope
the programme of works, which is due to start in July, on the
Northern, Piccadilly and Jubilee lines. Mr Bolt was due to deliver
his final directions on the long running funding dispute between LU
and Tube Lines but has now deferred his decision until 30 June. Mr
Bolt set the final costs for tube upgrade contractor Tube Lines'
next control period at £4.46bn - £460m above London Underground's
estimate. The final determination was a £65m increase on his draft
costs published in December. The arbiter's final directions compare
with Tube Lines' most recent bid of £5.75bn and London
Underground's valuation of £4bn.
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Bovis sales up 11pc compared to 2009
Bovis said sales in 2010 to date are 11 per cent higher than
last year, with selling prices ahead of expectations, ahead of its
AGM today. Bovis chief executive David Ritchie said: "By 30 April
2010, the group held 1,208 total sales for 2010 legal completion.
This is an 11 per cent increase on the comparable 1,092 sales for
2009 legal completion held at the same point in 2009." Although
these sales have been booked, he did remain cautious and said that
profits in the second half of the year will be higher than in the
first half: "Given the anticipated build completion of the
reservations achieved to date, it is expected that the delivery of
legal completion volumes and hence profits will be more second half
weighted in 2010 than in 2009."
This weighting to the end of the year leaves some room for
potential disappointment as Mr Ritchie also said: "Looking ahead,
the Group expects trading to continue to be stable, although the
general election does create uncertainty, in particular as regards
the macro-economic backdrop." Bovis has spent more on land in the
last 7 months than it raised in a rights issue last September. This
is in line with the group's strategy as Mr Ritchie added: "The
Group is focusing on the acquisition of land which will both
support an increase in trading activity from a greater number of
sales outlets and improve its profit margins over time. "Progress
in the year to date has been encouraging, with 811 plots added to
the consented land bank across seven sites and terms agreed in
principle on a further 18 sites which will provide circa 2,500
plots. "The Group has already agreed land acquisition opportunities
well in excess of the £59 million raised in the share placing in
September 2009 to support land acquisition."
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Morgan Sindall trading in line with order book
Morgan Sindall said its fit out business is performing well and
the group order book is up £400 million since the start of the
year, the firm said ahead of its Annual General Meeting today. At
the firms AGM later today, executive chairman John Morgan is
expected to say: "The group has made a positive start to the year
and is trading in line with our expectations. "Fit-out continues to
see improved market conditions driven in particular by demand for
larger projects in the professional and financial services
sector.
The division's short term outlook has improved with the forward
order book increasing since the start of the year to a higher level
compared with this time last year. "Construction has made a good
start to the year. Consequently the order book has increased by
around a quarter since the start of the year giving us confidence
regarding the outlook for this year although the uncertainty around
the impact and timing of future public sector cuts in capital
spending remains." The infrastructure services business is seeing
lower revenue, as was expected, due to the transition from AMP4 to
AMP5.
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Costain to implement next stage of growth strategy
Costain said today it is implementing the next stage of its
Choosing Costain strategy which will see the firm expand its market
position across design and engineering, construction, and the
operations and maintenance spectrum. In a trading update covering
the period from 1 January 2010 to the current date Costain said it
had made a pleasing start to the year. Costain said its continues
to benefit from its focus on targeting blue chip customers whose
major spending plans are underpinned by strategic national
priorities, regulatory commitments or essential maintenance
requirements in chosen sectors. The group is now implementing the
next stage of its strategy Choosing Costain. This is designed to
enhance and broaden the spread of business and earnings profile
over the medium-term.
As a result of a number of significant new contract awards since
the beginning of the year, the group has maintained its order book
at the year-end level of £2.6 billion. In addition, it has
preferred bidder positions of over £600 million, ahead of the level
at the end of 2009. To date over £950 million of revenue has been
secured for 2010. There has been no material change in the
financial status of the group, which continues to have a strong
cash position of in excess of £100 million, and has no significant
borrowings. The trading update said: "With trading in line with our
expectations and an order book maintained at the record year-end
level, the board is pleased with the start to the current year.
"The economic environment remains challenging but, with a strong
operational business and a strategy for the ongoing development of
the group, the board remains confident that the outcome for 2010
will be in line with its expectations."
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Mears' chairman increases pay by £350k
Mears chairman Bob Holt saw his pay increase by £350,000 this
year as he earned £960,000 in basic salary and bonuses in 2009.
According to the social housing contractor's annual report,
published today, Mr Holt's basic salary in the year ending December
31 2009 was £450,000 and he also picked up a bonus of £495,000. In
2008, Mr Holt's total pay was £610,000. Chief operating officer
David Miles and finance director Andrew Smith both saw their saw
their earnings decrease in 2009.
Mr Miles earned £219,000 in 2009 compared to £262,000 in 2008
while Mr Smith's pay fell from £176,000 to £152,000. Mears' other
executive director Alan Long, promoted to the board in August 2009,
earned £153,000. The three are all in the running for the top job
at Mears, after Mr Holt indicated he would step down by the end of
this year. The group pushed its revenues up to £470m in 2009,
boosted by 26 per cent growth in its major social housing division,
which posted turnover of £355m. The surge in social housing offset
a fall in mechanical and electrical work, with Mears' M&E
division reporting a 30 per cent reduction in revenues to £54.8
million. Pre-tax profits for the group as a whole stood at £18.4
million, up from £16.6 million the previous year.
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WSP reports signs of recovery in private sector
WSP said today that there were early signs of increased activity
in the private sector but warned that the impending election was
creating economic uncertainty. In a trading statement the firm said
it was trading in line with the Board's expectations in markets
that are generally unchanged. It said business in the UK public
sector was trading steadily but the UK market in general remained
competitive with pricing pressures. It added that the impending
election was creating economic uncertainty. It said the firm's
substantial European operations in the public and regulated markets
have started the year well and, although pricing pressures are also
present, there continues to be a healthy flow of new projects with
signs that this will continue.
In the USA, where work is weighted to the private sector, the firm
is seeing a similar pattern to the UK. It said its businesses in
Asia and South Africa have started the year well, although
Australia has had a quieter start to the year with commercial
property not seeing the activity levels experienced in
infrastructure and natural resources. Its Middle East business is
now much reduced in size and whilst the region continues to present
project opportunities, trading remains difficult, it said. It said
it approached opportunities cautiously and continued to keep our
business under close review. Environment & Energy has seen a
pick up in activities related to transactional support and there
are also signs of its business penetrating the renewable energy
market. Debt remains at expected levels, it said. It is higher than
reported at the year-end reflecting the normal phasing of our
business cycle but is within its £150m committed credit line which
remains in place until 2013. It said the Board remained confident
that business is appropriately sized and positioned for current
market conditions. The firm also announced the appointment of Paul
Dollin as UK managing director.
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Promotion: Free Infrastructure Journal webcast: Post
election PPPs - is the future looking bright?
Join IJ's latest webcast and listen in while we investigate the
makeup of the UK PPP landscape in the wake of the General Election
and the procurement process from cradle to grave.
Leading figures from three Emap titles that track procurement of
PPP deals through planning, financing and construction, Glenigan,
Infrastructure Journal and Construction News respectively, will
look at the PPP market in the wake of the election and predict how
it will evolve.
Tune in to hear more about:
- how the market has evolved in recent years, including exclusive
data usually only available to Emap subscribers;
- the impact of the election and the expected market shift based on
the political makeup.
Moderator - Angus Melville, Editor, Infrastructure
Journal.
Speakers - Allan Wilèn, Economics Director,
Glenigan; Nick Edwards, Editor, Construction News.
Recorded live, we will be pleased to answer any questions you may
have.
Date: 18 May
Time: 11:00 BST
Duration: 40 minutes
For more information, please email info@ijonline.com or call +44(0)20
7938 3660
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Allan Wilén, economics director,
Glenigan
Allan joined Glenigan to head the development of the new market
intelligence service for Glenigan subscribers. Allan has over
twenty years of experience analysing and forecasting the UK
construction industry. He was previously Economics Director at the
Construction Products Association and responsible for all economic
aspects of the Association’s activities. This included briefing
members, the media and Government on the commercial implications
for the construction industry of the changing economic environment
and the delivery of the Government’s expenditure plans. Allan was
also responsible for developing the wide range of regular economic
reports published by the Association, including its Construction
Industry Forecasts, which provide members with timely and valuable
market intelligence.
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