Glenigan Insight
15th December 2009
Welcome to Glenigan's weekly customer newsletter that brings you comment on major industry developments and news updates from the past week.
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Conservative Challenge
Featured Region:
Scotland
Featured Sector:
Private Housing
Project News
Tenders invited for youth centre
Tenders back for school extension - Skipton
Tenders back for school extension - Sunderland
Contractors sought for in-patient unit
T Brown awarded energy centre contract
Black & Veatch awarded contract
Company News
Skanska bags £135m of work in US
Mouchel rejects "inadequate" takeover attempts from VT Group
Mears Group wins up to £200m of social housing and M&E contracts
Ray O'Rourke appointed to board of mining group Anglo American
Morgan Sindall to be relegated from the FTSE 250
Crossrail loss led to Balfour Beatty buy
As the dust settles on last week’s Pre-Budget report, the challenge facing the next Government is becoming clear. Regardless of which party assumes office, the lingering recession and the dire state of public finances will inevitably have severe consequences for the construction industry over the next Parliamentary term.
Over the last two years private sector construction projects have been especially hard hit by the recession as project finance has dried up and investors have become risk averse. In contrast the flow of government funded work has strengthened since April 2009 as promised funding has filtered through. However, the challenge of the next government will be to bring down the deficit whilst nurturing a fragile economic recovery.
The implications for the construction industry of a Conservative victory at the polls are becoming clearer. In particular, from the industry’s perspective the Conservatives’ preference for spending cuts over tax hikes, and their focus on devolving control to a more local level will potentially have a significant on future construction workload. The emphasis on curbing overall government expenditure, whilst prioritising ‘frontline’ public services is likely to come at the expense of capital investment.
Flagship sources of work for construction, such as Building Schools for the Future and Crossrail, are unlikely to be scrapped completely but will almost certainly be reappraised, altered and trimmed in order to find savings towards reducing the Budget deficit. However, it will be routine repair and maintenance contracts, typically funded from departments’ and local authorities’ current budgets, that will be especially vulnerable; such work competes directly with frontline services for resources and politically is easy to defer.
Whilst public funded work will be increasingly constrained, prospects are brighter elsewhere. The infrastructure and utilities sectors are likely to remain areas of significant activity. Furthermore, a timely reduction in the budget deficit could help limit future interest rate rises and support a private sector led economic recovery. This in turn should help lift those construction sectors, such as private housing and commercial development, that have been hardest hit by the recession over the last two years.
Building a Conservative Britain. This new report examines how a change of Government will impact the construction industry. It will help you ensure your business is best placed to handle the threats and respond to the opportunities a change of Government will present.
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Recent performance
The first nine months of 2009 have seen the value of underlying construction starts in the South East fall by 18% against a year ago. The value of starts was dragged down by the office, retail, civil engineering and the private and social housing sectors.
However, whilst the value of underlying infrastructure projects has been weak, several large road contracts have helped boost overall starts in the region. Key large contracts for the region include a £601 million road improvement near Dunstable, Bedfordshire and the £200 million Area 3 Managing Agent Contract.
Non-residential construction has been affected by the deteriorating economic conditions. CBRE recorded a 32% drop in the take-up of office space in the Thames Valley and around the M25 during 2008, while vacant floorspace edged up to 11.8% of accommodation by the end of the year. The weakening in demand for new accommodation, together with the rapid deterioration in investor sentiment, has impacted upon the flow of new office developments in the region.
The value of underlying office starts fell by 16% last year. The office sector has weakened severely in recent months, with the value of underlying project starts during the nine months to September 2009 44% down on a year ago. The start on site of several distribution warehouses boosted the value of industrial starts last year, but projects have dried up in recent months: The value of industrial projects starting on site during the first nine months of 2009 was 48% down on a year ago.
An increase in public sector related construction starts has partially offset the weakening in private work. The value of underlying education starts remained firm last year and was also up 8% year-on-year during the first nine months of 2009. Health projects were 78% higher last year and have remained relatively firm during the first nine months of this year.
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Prospects
The sharp fall in construction starts in the South East during the first nine months of 2009 is expected to continue into the closing months of this year, as activity reduces across a number of different sectors. During 2008, underlying planning approvals in the civil engineering sector were almost non-existent, having dropped in value, as a whole, by 68%. The industrial, offices and private housing sectors also had significant declines in the value of underlying planning approvals.
The flow of planning approvals continues to weaken, with the value of underlying projects securing approval during January to September 2009 23% down on a year ago. The private housing sector continues to lead the decline, with approvals running at a less than half of the level seen a year ago.
This has already translated to a sharp fall in the value of underlying projects starting on site during 2009. Based on projects being tracked by Glenigan, we anticipate a further weakening in project starts during the remaining months of this year, resulting in a 17% fall in the value of underlying project starts during the year as a whole. However, after a weak start to next year, a gradual, if fragile recovery in project starts is forecast for 2010 and 2011.
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Recent performance
On the back of increased investment in social housing, new housing volumes had started to climb in recent years. The 2007 Spending Review confirmed that social housing provision is set to remain a key Government priority area, with increased funds provided for new affordable and social homes, as well as improving the existing social housing stock.
The Government announced a commitment to increase the number of new social rented houses by 50% to 45,000 units per year over the three years to 2010/11, with a goal to reach 50,000 homes per year in the next spending review period. However, the commitment to accelerate new social housing provision was critically dependent upon an increase in private developer contributions, planning gain and efficiency gains, alongside an increase in government funding.
Over the last eighteen months, social housing programmes have been caught in the fallout from the slump in the housing market. As private sector housing developments have been mothballed, so has the promised affordable housing element in the schemes. In addition, new social housing projects are often part of a wider regeneration programme involving a significant private sector element. Many of these have ground to a halt as the credit crunch and falling capital values have undermined their commercial viability.
In addition, Government efforts to support private sector housebuilders by purchasing unsold properties for social housing may be diverting anticipated government funds away from construction in the sector.
Last autumn’s Pre-Budget Report provided additional financial support for the sector, with government funding rising by 21% during 2008/09 and a further 14% in the current financial year. Whilst these additional funds should help the new Homes and Communities Agency restart stalled schemes, the initial uptake was slow with a £400 million capital underspend during the last financial year.
Certainly, in advance of the launch of the new agency, Glenigan recorded a dramatic fall in project starts during the first quarter of 2009 which were running at half the level of a year earlier. The decline more than reversed a modest pick-up in project starts during the final quarter of last year, which had benefited from a number of estate refurbishment schemes for local authorities and housing associations. The contribution of these schemes to sector output, however, will be spread over a number of years.
However, project starts have improved since the commencement of the new financial year, suggesting that the HCA has started to deploy the additional funding promised in last autumn’s Pre-Budget Report. Indeed the recovery accelerated over the summer, with the value of underlying work starting on site during the three months to September 47% up on a year ago.
Regionally, Wales, Yorkshire and the Humber, and the North West of England saw the sharpest falls in the value of projects starting during 2008. In contrast, the East Midlands saw a doubling in the value of underlying project starts. London, which accounted for 28% of new social housing projects in the UK, also grew strongly in 2008. There has similarly been a sharp divergence in project starts across the country during the current year. The value of underlying projects starting in London and the South East suffered steep falls year-on-year during the first nine months, while Scotland, the East of England, the South West and the West Midlands all saw marked increases in project starts.
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Prospects
A fall in the value of social new housing projects in the pre-construction pipeline has been a constraint on the flow of new project starts during 2009. The value of project applications fell back slightly during 2008 and would have been substantially lower but for a £1 billion long-term plan to redevelop the Woodberry Down housing estate in Hackney, the first phase of which is now starting on site. Overall, applications during the three months to December were 48% down on a year earlier. The flow of projects securing detailed planning approval had progressively weakened during the year and was down 58% year-on-year during the three months to December.
Whilst approvals remain relatively weak, being 8% down during the first nine months of 2009 on a year ago, they are firmly off the lows seen during the final six months of last year. This relative improvement is now feeding through to project starts.
The flow of new build social housing projects entering the planning system has remained weak during 2009. The number of applications during the first nine months of the year was 26% down on a year earlier, despite a spike in applications during the summer months. Approvals are also weak, being 24% down during the first nine months of 2009 on a year ago.
Some local authorities and housing associations have begun to investigate purchasing newly built, unsold properties from private developers rather than committing to new social housing construction projects. The Government's rescue plan for the housing market is set to accelerate this process, with the announcement that existing funds will be brought forward and diverted to enable social landlords to purchase housebuilders' unsold stock. While this provides welcome relief to hard-pressed housebuilders, it restricts the funds available for social housing construction over the next three years.
Near term, the new social housing sector will continue to suffer from the fall-out of the private housing market as the flow of mixed-use developments and projects part-funded through section 106 agreements remains sparse. However, the recent pick up in starts suggests that additional funding promised in last autumn’s Pre-Budget Report has begun to unlock stalled projects. The additional funding is expected to sustain the pick-up in social housing starts near term, although the analysis of planned projects being tracked by Glenigan points to a temporary dip in project starts during the closing months of the year. Furthermore recent funding approval for the first wave of new council house building is set to see 2,000 new social sector homes starting on site by March 2010.
Nevertheless whilst we gauge that starts have recovered from their recent lows, they are forecast to remain 3% down on a year ago for 2009 as a whole. Looking ahead to 2010 and beyond, the sector is expected to come under growing pressure from a tightening in Government capital funding. This is forecast to prompt falls in the value of underling project starts over the next two years
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Project News
Contractors for swimming pool
Applications to tender are currently being invited for the construction of a swimming pool at Montrose Sports Centre for Angus Council. The structural engineer for the £10 million scheme is WA Fairhurst and Partners. Tenders are due to be invited July 2010.
Project ID:
08132270
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Contractors sought for railway
Transport Scotland is currently seeking contractors to tender for the Borders Railway Design Build Finance & Maintenance Contract. The value of the work is between £200 million and £230 million with a 396 month contract period. Work will involve the design, build, finance and maintenance (DBFM) of railway, seven stations and associated road infrastructure between Newcraighall in Midlothian to Tweedbank in the Scottish Borders. This will be procured by way of a DBFM Contract and the railway and station infrastructure will be integrated into Great Britain's national rail network. The DBFM Contract will include civil engineering, building works, permanent way, telecommunication & signalling systems, utility diversions and road works. Contractors should apply by 19th February 2010.
Project ID:
09383694
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Consultants sought for park
London Borough of Havering is currently seeking landscape architects to develop a master plan for the refurbishment of Raphael Park in Romford. Consultants should apply by 15th January 2010. The landscape architect will be appointed early 2010 and the council hope to submit a stage two application for funding in August 2010. Should this be successful the work could commence Spring 2011.
Project ID:
09383692
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Imperial War Museum masterplan up for grabs
The Imperial War Museum London (IWML) has launched a search for an architect to draw up a new spatial masterplan for its 19th century home, the former Royal Bethlem Hospital in Lambeth, London. The contract cost is estimated to be between £100,000 and £1.5 million, 'subject to whether the appointment is short term or for the duration of the project through to 2020.' According to a notice posted in the official journal of the European Union (OJEU), 'the consultancy is required to develop a spatial master plan for IWM London'.
The museum houses a collection of artefacts, documents and vehicles, including planes from the First and Second World Wars, such as a Sopwith Camel, Supermarine Spitfire and German jet Heinkel He 162. It is on the site of the Royal Bethlem Hospital, an asylum whose menacing reputation helped coined the term 'bedlam'. The asylum was designed by Sidney Smirke in 1815 and the IWML moved there in 1917 with extensions and modifications to it in 1966 and 1989. Among the former asylum's alumni is A W N Pugin, architect of the the Houses of Parliament. The Imperial War Museum has previously commissioned architects Daniel Libeskind and Norman Foster for its Imperial War Museum North and Imperial War Museum Duxford respectively. Interested parties should contact Simon Bourne at the IWM on 0207 416 5257. Tenders need to be delivered to the IWM by 2pm, on 17 March 2010.
Project ID:
09380298
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2012 Canoe Slalom Venue foundations completed
The foundations of the Olympic Delivery Authority's (ODA) world-class White Water Canoe Centre in Broxbourne have been completed on schedule, as newly released aerial images show. The White Water Canoe Centre in Broxbourne, Hertfordshire will host the canoe slalom events during the Olympic Games. After the Games, the venue will be owned, funded and operated by the Lee Valley Regional Park Authority as a sporting and leisure facility for canoeing and white-water rafting, as well as a major competition and training venue for elite events. The ODA started construction work started on the Broxbourne venue in July and around 50 people are now working on site. Recent heavy rain has presented challenging conditions on site but building work remains on track. The venue is due for completion ahead of 2012, delivering an early legacy of community use and training facilities for people of all abilities before the Games begin.
"The 160m long intermediate course and commercial white water rafting on the 300m Olympic course will ensure it is an inclusive facility for all ages and abilities, in addition to provide a training ground for the next generation of elite paddlers," said Lee Valley Regional Park Authority chief executive Shaun Dawson. During the Games, temporary seating will be installed around the venue for spectators. After the Games, the spectator seating will be removed, and the venue will be developed into the Broxbourne White Water Canoe Centre.
Project ID:
05361095
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Tenders invited for traffic calming
Royal Borough of Kensington & Chelsea is currently inviting tenders for £1.2 million traffic management schemes. Tenders are to be returned 20th January 2010 and the contractor to be appointed March 2010. Work will involve traffic management schemes and other highway and environmental schemes. The contract will commence on 1st April 2010 and run for a five-year period with a provision for three optional one year extensions that may be granted at the Council's discretion.
Project ID:
09215084
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Company News
Skanska bags £135m of work in US
Swedish contractor Skanska has won contracts for three building projects in the United States worth a total of $218 million (£134.6m). The company will build a 32-classroom, 25,000 sq m high school for Redmond School District, Beaverton, in Oregon. Completion of the $61.8m contract is expected in autumn 2012. Skanska has also won a $71.4m contract covering the continued expansion of the Good Samaritan Hospital in Puyallup - about 50 km south of Seattle, Washington -for MultiCare Health Systems. The final contract, worth $85m, covers the construction management of a large industrial facility in Arizona.
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Mouchel rejects "inadequate" takeover attempts from VT Group
Infrastructure consultant Mouchel has rejected two takeover attempts from support services firm VT Group. Mouchel said in a statement that the approaches to takeover the entire company were “wholly inadequate and at a level which substantially undervalues the company”. Mouchel said that it understands that VT Group remained interested in continuing its takeover attempt despite the rejections. The statement added: “The board has discussed these approaches with its advisors and has unanimously rejected them. “The board understands that VT Group plc remains interested in pursuing a transaction.” Last week, Mouchel said it remained on track to meet company expectations for the year to July 2010, despite concern about Dubai’s debt problems. Its order book has held steady at £2 billion. Shares in Mouchel closed on Friday at 190 pence, valuing the group at £213 million.
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Mears Group wins up to £200m of social housing and M&E contracts
Mears Group announced contract wins with an initial value of £113 million rising to £200m if it wins extensions. The wins take its total new work won in the nine months since it announced its preliminary results to more than £550 million - with a potential worth in excess of £650m. The group’s social housing division has been awarded new contracts amounting to £93m with a potential worth in excess of £180m. The biggest of these is a 10-year partnership with Crawley Borough Council in West Sussex to provide responsive repairs and voids services worth £30m.
Meanwhile Mears’ mechanical and electrical division has won contracts worth £20m. Some £13m of this relates to a contract to provide M&E infrastructure and fit out works on the Athletes’ Village for the 2012 London Olympic Games. Chairman Bob Holt said: “In spite of current speculation on public spending cuts, Mears continues to secure long-term partnerships with public sector clients who demand cost effective value for money services. “We continue to be highly selective throughout our tender process, which ensures that we commit to high levels of customer service, long term employment opportunities for our staff and partners, and operating margins at the very top end of the sectors in which we operate.”
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Ray O'Rourke appointed to board of mining group Anglo American
Laing O’Rourke chairman and chief executive Ray O’Rourke has been appointed to the board of mining group Anglo American as a non-executive director. Mr O’Rourke is the third non-executive director appointment at Anglo American since the mining group appointed a new chairman Sir John Parker on 1 August 2009. Anglo American is one of the world’s largest mining groups – it is a global leader in platinum group metals and diamonds, with significant interests in coal, base and ferrous metals, as well as an industrial minerals business.
Anglo American chairman Sir John Parker said: “I am delighted to welcome Ray O’Rourke to the Anglo American board. “Ray has a proven track record in delivering complex and large scale projects around the world, mobilising large numbers of people with great success and applying leading project management practices. “His entrepreneurial spirit and commitment to safety, engineering, innovation and the development of people will add considerable strength to our board.” Mr O’Rourke, 62, was born in Mayo in the Republic of Ireland.
He founded the O’Rourke Group in 1977, having begun his career at Kier and J Murphy & Sons. In 2001, the O’Rourke Group acquired John Laing, to form Laing O’Rourke, now Europe’s largest privately owned construction company, of which Ray O’Rourke is chairman and chief executive.
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Morgan Sindall to be relegated from the FTSE 250
Morgan Sindall will be relegated from the FTSE 250 later this month in the quarterly reshuffle of the UK's largest stock exchange listed firms. The UK's fourth largest contractor will be relegated on 21 December from the mid-tier index to the FTSE Small Cap index. organ Sindall's share price was 524.5 pence this morning giving the firm a market value of £226.3 million. But just four months ago on 9 September the company's share price was 33 per cent higher at 699.5 pence. Meanwhile in the only change to the FTSE 100 index of the top 100 companies by market capitalisation, temporary power firm Aggreko will replace Rentokil Initial. The changes take effect following a quarterly review of valuations by the index compiler FTSE.
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Crossrail loss led to Balfour Beatty buy
Contractor Balfour Beatty has revealed that losing out to Bechtel in the race for the Crossrail project delivery partner contract spurred it to buy US professional services group Parsons Brinckerhoff (PB). Balfour Beatty, through its Balfour Beatty Management division, bid for the £400M Crossrail role in joint venture with Parsons Brinckerhoff. But it lost out on the job in March (NCE 2 April). Seven months later Balfour Beatty announced the formal acquisition the consultant for which it paid £380M in October (NCE 29 October).
"What [Crossrail] spurred us to realise was that we can't always leverage the business as Balfour Beatty," said chief operating officer Andrew McNaughton. "Though we were a strong professional services business, we weren't what professional services people wanted on their CVs. "We had to look at another model. We were in joint venture with PB, so the next step was to buy them." McNaughton added that PB will open doors for Balfour Beatty in new markets around the world. Around half of Balfour Beatty's £10bn turnover is earned overseas, but the majority of that is earned in the United States. New markets in other countries are now the target, said McNaughton. "Parsons Brinckerhoff is a world class professional services business and it will lead us all into new markets," he said. "It is the entry point for new markets in the rest of the world. And from there we can finance, manage and maintain infrastructure, but not necessarily build it."
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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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