Weekly Glenigan Newsletter - 6th July 2010
Welcome to Glenigan's weekly customer newsletter that brings you
comment on major industry developments and news updates from the
past week. Click on the links to read the full story.
Cancellation of
the BSF programme
Featured Region: West Midlands
Featured
Sector: Hotel & Leisure
Project News
Tenders returned for creation of
woodland area
Tenders invited for park redevelopment
Procurement process set to start on youth centre
Contractor sort for Manchester redevelopment
Government blocks £300m Ram Brewery redevelopment
Eric Wright scoops £140m Blackpool BSF
Company News
Consultant EC Harris to float on
stock exchange
Cyril Sweett reports 17pc decrease in revenue
Morgan Sindall order book tips £3.5bn
Amey buys WYG rail business
ISG trading resiliently on strengthening UK margin
URS wins battle to buy Scott Wilson
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Cancellation of the BSF
programme
Yesterday, the Minister for education, Michael
Gove, announced that the government was bringing an end to Building
Schools for the Future programme (BSF).
The cancellation of the BSF programme, worth
£55bn and described as ‘inflexible and needlessly complex’ by Mr
Gove, will mean the 715 schools around England and Wales will not
be built or refurbished.
There are projects, however, that have avoided
the chop. There are 706 schemes that have already opened, started
on site, or reached financial close. Of these projects, a large
proportion are projected to have been new builds (386), and 262
were to be remodelled or refurbished.
In contrast with those projects that have
already or are set to be completed, the majority of ventures that
were cancelled were projected to be refurbishment work. So while
the number of projects continuing and cancelled appears roughly
balanced, the value of the projects themselves will differ.
The move has been welcomed by educational
organisations familiar with the BSF programme. Sir Bruce
Liddington, Director General of E-Act said:
“The current BSF programme is very bureaucratic, slow and unwieldy
and I would welcome a review.”
From a construction point of view, however,
the news is another blow to the value of government funded
construction projects. After the June Budget, some suggested that
the BSF may have escaped heavy cuts. This was partly due to a lack
of detail provided in the Budget, and the Chancellor’s pledge that
capital spending would be protected from further cuts. Despite this
protection, the reductions to capital spending set out by Labour in
their March Budget still apply, and the Department for Education
has revealed it will have to find £156.5m worth of savings from its
capital budget.
Public funding and public private partnership
funding together accounted for 86% of all education projects from
January 2009 to May this year, according to Glenigan’s start on
site data. Education starts in turn accounted for almost 19% of all
project starts in the UK over the same period, so the risk to the
industry is clear to see.
However, cuts in public funds have long been
expected. Glenigan have said previously that sectors which rely
more on private finance should now start out-performing sectors
such as education, and this will go some way to compensate for the
drop in work.
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Featured region: West Midlands
Recent performance
Construction starts have fallen back across a number of key
sectors in the West Midlands over the last two years. The value of
underlying construction starts fell 7% in 2008, with an
exceptionally poor fourth quarter a third lower than a year
earlier. Project starts deteriorated further during 2009, falling
by 21% against the previous year. They have since recovered, and
registered a 28% increase over the three months to May.
The private housing, industrial and retail sectors have been
among the weakest performing sectors in the region. The value of
underlying private housing starts fell by 39% during 2008 and
dropped further last year. Industrial projects, a traditional
stalwart of construction in the West Midlands, performed well
during 2008, but subsequently plummeted 84% during 2009. The retail
sector turned down ahead of the credit crunch and has now endured
three years of decline that have halved the value of projects
starting on site. While retail starts remain scarce, the industrial
and private housing sectors have picked up in 2010 with the value
of new work increasing substantially over the first five months of
the year.
A moribund housing market and the decline in new private housing
projects had a knock-on effect on the social housing sector,
restricting access to Section 106 funding and frustrating efforts
to take forward mixed-tenure and part-ownership developments. As a
result, the flow of new social housing starts fell by 31% during
2008. The fall would have been more substantial, but for a number
of refurbishment projects for the existing housing stock and a £56
million student accommodation project for Aston University. A
flurry of social housing refurbishment has also help counter the
absence of new build projects during 2009, with the value of
project starts 32% up on a year earlier. Despite the recovery in
private housing, the flow of social housing work has remained poor
due to a lack of government funds.
The education sector was a growth area for much of 2008, with
the value of project starts rising during the first nine months of
the year as a number of BSF projects started on site. However, a
dearth of project starts during the final three months of the year
cut the increase in the value of project starts for the year to 1%.
Project starts were 30% up during 2009, thanks to a surge in new
orders during the closing months of the year. Construction starts
in the health sector, having fallen by 22% during 2008, bounced
back strongly during 2009. The value of underlying health project
starts during 2009 was 73% up on a year earlier, with started
schemes including the £19 million Malvern Community and the £16
million Moseley Hall hospitals.
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Prospects
Although conditions in the West Midlands construction industry
remain tough, prospects have brightened. The value of underlying
construction starts fell by 31% during the first nine months of
2009 on a year earlier, but as anticipated the region enjoyed a
partial recovery during the final quarter of the of the year.
However, whilst a recovery in project starts is anticipated for
2010, the weak level of project starts endured during 2008 and 2009
will continue to depress construction output in the region.
Industrial building has historically accounted for a significant
proportion of projects in the West Midlands, reflecting the
importance of manufacturing to the regional economy and the
region’s favoured status as a location for major distribution
facilities. During 2008, industrial projects accounted for 13% of
projects started, twice the UK average.
Fortunately, Industrial project starts have recovered this year
after key manufacturing industries in the region, such as motor
vehicle production, were hard hit by the economic downturn, with
many suspending production. Previously, faced with weak domestic
and overseas demand and surplus capacity, few manufacturers were
planning to invest in new industrial premises. In addition,
sluggish consumer spending curbed retailers’ appetite for large
distribution facilities, while the uncertain economic outlook and
the limited availability of debt finance will continue to restrict
the flow of new speculative developments. However, the outlook has
since improved, and the first five months of the year has seen
approvals more than double compare to the same period in 2009. This
should signal continued growth in project starts, which will be a
significant boost to the region.
The downturn in the West Midlands’ private housing sector had
also been dramatic, with the value of underlying project starts
during 2009 running at a third of the level seen during 2006. The
value of private housing projects securing planning approval has
also fallen sharply, halving in 2008 before falling by a further
19% last year. Nevertheless, the region’s exposure to the private
housing sector should help to brighten prospects as conditions in
the wider housing market gradually improve and developers
reactivate stalled projects. During the first three months of the
year, there were over double the amount of projects starting on
site compared to the same period in 2009.
The development pipeline for public sector related construction
activity has improved over the last year after a largely
disappointing performance during 2008. Social housing projects
securing detailed planning approval have strengthened in recent
months, while the value of work starting on site also rose by a
third last year. The value of underlying education securing
planning approval trebled during 2009, while the approval of health
projects rose by 33%.
Whilst the pickup in public sector approvals should help
stabilise new project starts near term, the timeline for approved
schemes starting on site as planned is likely to lengthen as 2010
progresses. In light of deterioration in government finances, such
projects will be vulnerable to review by the new Government.
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Featured sector: Hotel & Leisure
Recent performance
The troubles of high street retailers have been widely reported.
Yet, at least retail sales continue to grow, albeit weakly. Other
sectors more dependent upon discretionary consumer spending, such
as catering and hotels, have been hit by falling revenues over the
last eighteen months. Combined with the scarcity of bank finance,
this has squeezed the flow of restaurant and fast food projects
securing planning approval, especially since the start of last
year.
British consumers are curbing their borrowing and spending in
response to the deteriorating economic environment, rising
unemployment and weak earnings growth. Household consumption has
been weakening progressively over the last year and the volume of
household spending in the third quarter of 2009 was 3.2% down on a
year ago.
In particular, consumers’ spending on a wide range of
discretionary items, from nights out to gym memberships, has been
in the firing line.
Official statistics have recorded a marked deterioration in
trading conditions faced by the restaurant and fast food sector,
with sector turnover suffering an 8% fall during the first nine
months of 2009 against the corresponding period of 2008. Pub and
bar turnover fell 11% over the same period. The harsh trading
conditions are underlined by a recent British Beer & Pub
Association survey that found 52 pubs a week closed during the
first half of 2009, the fastest rate of closure since the survey
was introduced in 1990.
Against this economic background the value of new pubs,
restaurants and café projects has fallen sharply over the last
year. The flow of small scale refurbishment and fit-out work is
also being squeezed as the major chains have cut back their
expansion and refurbishment expenditure. However, price conscious
consumers have offered opportunities as well as problems for the
sector. In particular, fast food outlets have been relatively
resilient, benefiting from their young customer base and consumers
‘trading down’ to takeaways and nights-in.
In addition to more cautious UK consumers, hoteliers are
contending with the impact of falling domestic and international
demand. The number of overseas visitors to the UK during the twelve
months to February 2010 was 4% down on a year ago. Business travel
has been especially hard hit, falling 14% over the same period.
Unsurprisingly, after a strong rise in the value of hotel project
starts during 2006 and 2007, 2008 saw a sharp fall in new projects.
While the budget end of the market remains relatively strong, the
overall value of new hotel projects starting on site has weakened;
falling 18% during 2008 and by a third last year.
Recent consolidation in the private health club market is set to
continue, with companies under renewed pressure as hard-pressed
consumers cancel little-used gym memberships. While public sector
investment in new and renewed leisure centre facilities has helped
support industry activity, 2008 saw an overall drop in the value of
project starts.
Taking the hotel and leisure sector as a whole, the value of
underlying starts fell by 32% between 2007 and 2009.
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Prospects
Due to factors such as improving consumer spending, the sector
is forecast to benefit from a 34% rise in the value of underlying
project starts over 2010. The budget hotel chains may have
moderated their investment activity over the last year, but they
have not scaled back their stated ambitions for expansion as
economic conditions improve. Moreover, preparations for the London
Olympics continue to support the sector over the coming months
with, for instance, work now underway on the Velodrome.
Several other large projects should also help boost construction
starts during 2010. Obviously, the fallout from the economic
downturn will continue to create downside risks for the sector. As
with retail construction, the sector’s fortunes are closely aligned
to the household income growth and confidence. Weak earnings growth
and a higher tax burden, in particular higher VAT and excise
duties, will accordingly act as a brake on sector growth activity.
However, the pace of recovery in the global economy, business
travel and exchange rate movements will also have a significant
influence upon the pace of recovery in areas such as hotel
development. Furthermore the 2012 Olympics are expected to act as a
catalyst for private sector investment over the next two years.
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Project News
Tenders returned for creation of woodland
area
Manor Church of England School has had tenders
returned for the creation of a recreational sporting and woodland
area at Millfield Lane, Nether Poppleton in York. The £100k scheme
is expected to start on site mid August 2010.
ID: 10033331
Tenders invited for park redevelopment
Middlesbrough Borough Council is currently inviting tender for the
redevelopment to Stewart Park. Tenders for the £4.5 million scheme
are due to be returned 3rd August with woks starting on site
September 2010.
ID: 09038720
Procurement process set to start on youth
centre
On Side North West is expected to start the
procurement process for the construction of a new youth centre,
early July 2010. The £5 million scheme, which will be published in
the Official Journal of the European Union, has been designed by
Eric Wright Group Ltd and has Edmund Hutton Associates Ltd working
as the quantity surveyors. Works are expected to start on site in
November 2010.
ID: 10133344
Contractor sort for Manchester
redevelopment
Applications are currently being invited by the Argent Group for a
design and build contractor for the One St Peters Square
redevelopment in Manchester. This £60 million scheme comprises of
the redevelopment of Elisabeth House at 2 - 14 St Peters Square to
create a 14 storey building. The building will incorporate offices
on the upper floors, with cafe, restaurant and bar uses on the
ground floor. The project also includes car parking of
approximately 71 spaces. The final date for the receipt of requests
to participate is 14th September 2010 and it is expected that
tenders will be invited on 12th October 2010. The start on site
date has not yet been decided but the contract period will be 24
months.
ID: 08231238
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Government blocks £300m Ram Brewery
redevelopment
The government has refused planning permission for the £300 million
Minerva Ram Brewery redevelopment. The controversial plan to build
two giant towers has been scrapped after a month-long public
inquiry, which saw campaigners voice concerns about the impact the
Battersea scheme would have on the neighbouring community. The
scheme comprises of 1,036 apartments and 238,000 sq ft of retail,
restaurant and other commercial accommodation. Minerva chief
executive Salmaan Hasan said: "We are naturally disappointed by the
Secretary of State's decision and remain committed to our Ram
Brewery and Buckhold Road sites which represent a rare opportunity
to regenerate Wandsworth Town Centre. "However, the Secretary of
State has given a positive response to many aspects of the scheme
and given guidance as to what is likely to be acceptable. "We will
now consider the information and guidance in the Secretary of
State's response and review our options as we look to move the
scheme forward." The Health and Safety Executive also advised
Wandsworth Council against granting planning permission,
particularly for the two towers, due to their proximity to the
Wandsworth Gasholder station. HSE's Director of Hazardous
Installations Gordon MacDonald said: "The proposed development
site, which would have included 829 residential units, is very
close to the Wandsworth Gasholder station. In the event of a major
accident, it would have been difficult to evacuate people rapidly
from the upper levels of the proposed very tall tower
blocks."
ID: 06168641
Eric Wright scoops £140m Blackpool
BSF
Preston based contractor Eric Wright Group has
been selected over Morgan Sindall for the £140 million Blackpool
BSF scheme. The project, which is in Wave 5 of the £55m
government-funded programme, will cover all eight secondary schools
and three special schools in the borough. Most of the schools date
from the 1950s and will be remodelled, while two new education
facilities will be purpose built. The first school to be delivered
through the programme is scheduled to open in time for the
beginning of the new school term in September 2012. The plans also
include the country's first 'school studio', designed to deliver
vocational training to students in the 14-19 age group. Executive
Director for Children, Adults & Families Department David Lund
said: "This is a significant day for Blackpool. I wish to
congratulate the Eric Wright Group being appointed as selected
bidder for delivery of our BSF Programme. "The Eric Wright Group
and its partners have convinced us that it has the vision,
determination and capacity to work with us to rebuild and refurbish
all of our schools in a way that will make a significant difference
to teaching, learning and the future prosperity of Blackpool.
ID: 07193965
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Company News
Consultant EC Harris to float on stock
exchange
Partners at consultant EC Harris have agreed
to float the company on the stock exchange as part of an ambition
to expand the firm. It wants the firm to be valued at £650M. The
board said the firm needed to grow quickly to meet the needs of
clients. Clients are demanding better outcomes from improved
programme and asset performance, it said. These demands are
particularly strong in the areas of infrastructure development, oil
and gas and are on an international scale. As part of the strategy
to fund its growth, the firm's partners committed to plan for a
flotation in 2013. "Our industry is going through a systemic change
and the firms who take the right steps now will benefit when the
market returns," said chief executive Philip Youell. "We believe
that accelerating our growth plan is the right course of action for
our business and will strengthen our ability to provide a service
based on technical knowledge, commercialism and drive for outputs."
"The European value of collaboration in delivery is an important
dimension not always seen in the approach taken by large US
engineering based organisations," he added. "We aim to assemble the
capacity to bring a broad range and deep pool of knowledge to
programmes delivering better outputs."
Cyril Sweett reports 17pc decrease in
revenue
Cyril Sweett has announced a 17 per cent
decrease in revenue this year, but a strong order book and low
levels of net debt leave them in a strong position to capitalise on
emerging markets. The results for the year ending 31 March 2010
reveal an order book of £58 million, down from £74m in 2009.
Pre-tax profit was £2.1m, down from £2.2m in 2009. Earlier this
morning, the consultancy announced the signing of a tri-partite
alliance agreement with Widnell Limited and Japanese construction
consultants Meiho Facility Works Limited. Chief executive Dean
Websters said the agreement would give the group "access and
insight into the Japanese construction market - the third largest
construction market in the world." The agreement builds on the
previous alliance formed between Cyril Sweett and Widnell in March.
The Hong Kong based consultancy has 400 people in 9 offices in
China. Mr Websters, said: "I am pleased with the group¿s robust
performance, particularly against an extremely challenging market
backdrop. This reflects the success of our strategy to diversify
the portfolio internationally and across industry sectors, whilst
maintaining a prudent approach to operational costs. The business
has maintained its strong balance sheet and continues to operate
with little net debt. "Whilst we expect the market environment to
remain tough, we are confident that our exposure to both private
and public markets, coupled with our continued diversification,
places us in a strong position to maintain our market share in the
UK and to further strengthen our foothold in international
markets."
Morgan Sindall order book tips
£3.5bn
Morgan Sindall has seen its order book grow from £3.2 billion to
£3.5bn since the start of this year with the closure of BSF and PFI
schemes. The contractor secured Hull BSF and Tayside Mental Health
PFI during the first half of the year but concerns remain over the
extent of the public sector cuts. In a trading update for the six
months to 30 June, the firm said the fit-out division has benefited
from improved market conditions, driven in particular by demand for
larger project with revenue increasing by around 10 per cent in
comparison to the same period last year. The newly combined
construction and infrastructure division has converted its entire
£900 million of preferred bidder opportunities since January. The
company said the uplift in trading would offset the £2m net cost of
integrating the construction and civil engineering divisions.
Amey buys WYG rail business
Amey has beefed up its rail consulting business with the
acquisition of the national rail consultancy of WYG Engineering,
for an undisclosed fee. The former WYG Group subsidiary comes with
100 staff and a portfolio of existing contracts and professional
services frameworks. The deal means Amey's rail consulting arm has
grown from just 200 people in 2006 to almost 1,000 today. Amey
chief executive Mel Ewell said: "This strategic acquisition shows
that Amey is committed to achieving sustained growth across the
business with a real emphasis on the rail market. "We are pleased
to welcome these additional experts from WYG, who bring strong
partnerships with major rail customers as well as expertise and
knowledge of the rail market. We look forward to integrating their
capability into the business and further developing our rail
offering." WYG chief executive Paul Hamer said: "Amey has
identified a synergy between its business aspirations and our rail
profile and capabilities. Both Amey and WYG believe the opportunity
to integrate our rail team into the wider Amey business is best for
all parties including our respective clients."
ISG trading resiliently on strengthening UK
margin
ISG has said it is trading resiliently in line with expectations on
the back of a strong performance in UK construction. In a trading
update, the firm said its order book was resilient, at £740 million
compared with £822 million in the same period last year, and it
expected to finish the year with a strong balance sheet, including
£28 million cash. International markets remained sluggish for the
firm, but margins in UK construction were up, even though turnover
was slightly down. The firm said: "In London fit-out, we saw some
recovery in revenues but with a highly competitive market place
margins were under pressure. "Our retail business, through its
focus on financial and food retail, has maintained revenues in-line
with prior year, with margins improving in the second half of the
year. Our UK Construction business performed strongly due to
increased margins, despite lower revenues." Preliminary results
will be announced on 8 September 2010.
URS wins battle to buy Scott
Wilson
CH2M Hill has withdrawn its takeover bid for consultant Scott
Wilson after URS upped its own offer. URS has now offfered Scott
Wilson 290p per share, valuing the company at approximately £223M.
CH2M Hill had offered 245p per share, valuing the firm at £189M.
The Scott Wilson board has indicated it will recommend the revised
URS bid to its shareholders. Chairman Geoff French said the
increased URS offer was a 'compelling' proposition for
shareholders. Scott Wilson had previously recommended URS' first
offer, which would have seen it pay 210p per Scott Wilson share,
valuing the company at £161M. French had said that that offer was
also 'compelling'. CH2M Hill said it had noted the announcement of
a revised cash offer by URS Corporation and that it will no longer
proceed with its acquisition of Scott Wilson and has withdrawn its
offer. CH2M Hill, which is Scott Wilson's largest shareholder after
buying just under 10M shares on Monday, will follow Scott Wilson's
board's recommendation of backing URS' bid. CH2M Hill chairman and
chief executive Lee McIntire said his firm had pulled out because
the price was now too high. "CH2M HillL's long-term strategy is
focused on organic growth, based upon delivery and strong customer
service, and selective acquisitions to enhance our geographic and
market sector presence. While Scott Wilson is an excellent company
and an attractive cultural fit, it is not felt to be value
enhancing to us at the current valuation," he said. "We understand
the importance of certainty to all those impacted by the offer
process, in particular the employees and customers of Scott Wilson,
and have decided to make clear today that we will no longer proceed
with the acquisition of the company. We sincerely wish the
management and staff all the best in the future. We will follow the
Scott Wilson Board's recommendation in terms of our
shareholding."
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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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