Glenigan Insight
8th 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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Repair and Maintenance work lifts construction output
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
Carillion sells £86.9m of PPP equity
Bellway buying up land after forecasting 10pc rise in sales
Taylor Wimpey chairman Norman Askew stands down
ISG order book drops 8pc due to fall in overseas orders
Carillion to lease back development
Galliford Try buys Cornish housebuilder for £200k
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Construction News Offer – Exclusive to Glenigan
At first glance the latest official figures from National Statistics offer some cheer for the battered construction industry, with a small 2% increase in output during the third quarter technically bringing the industry out of recession. However, the rise in output has been driven by higher repair and maintenance activity; public sector non-residential R&M work was especially strong, leaping 26% higher against the previous three months. An estimated 6% rise in private home improvement work is also surprising given the continued weakness of the housing market and consumer confidence.
Whilst the main source of growth has been in repair and maintenance activity, the figures also indicate that the rise Glenigan has seen in new government project starts since April is now feeding through to industry output. Unfortunately this improvement was insufficient to halt the overall decline in ‘new work’ which was 4% down on the previous three months due to the continued weakness of private sector new work.
Indeed, despite the overall improvement in construction output against the preceding quarter, industry workload is still 9% down on a year ago. Furthermore the current rise in repair and maintenance work may prove short-lived. In particular public sector repair and maintenance work will come under increased budgetary pressure over the next year and while Glenigan anticipates a pick-up in private sector project starts during 2010, this rise will take time to feed through to output.
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Recent performance
The construction industry began last year strongly in Scotland and several large projects helped carry momentum into the second half of the year for some sectors. Official statistics recorded a 2% rise in the value of Scottish construction output in 2008. However, output weakened during the final quarter and was 6% down on a year earlier, by which point the impact of the credit crunch had begun to be felt in many sectors. In particular the value of underlying construction starts contracted by a quarter last year, with the fourth quarter especially weak.
Civil engineering starts continue to bolster construction in Scotland. Whilst the value of underlying civil engineering project starts slipped back last year, a number of major projects helped to maintain momentum in the sector, with total project starts during 2008 more than doubling. Furthermore the current year has seen a subsequent rebound in the value of underlying project starts, which during January to September was 41% up on the level of a year ago. In addition, the start of works in April on the £320 million project to upgrade the M80 will help boost industry output over the next three years.
In contrast, private housing starts have suffered a dramatic reversal of fortunes since the third quarter of 2008. The value of underlying private housing starts during the nine months to September 2009 was 43% down on the level seen a year ago and is now at its lowest level in more than three years. The flow of social housing projects, however, has almost trebled since the start of the year, boosted by several sizable developments for housing associations.
Scotland’s non-residential sector has experienced mixed fortunes in recent months. The hotel & leisure and education sectors have performed strongly since the start of the year, countering the sharp falls endured in 2008. In contrast, the poor economic environment has continued to weigh heavily on the flow of new industrial buildings, office schemes and retail projects starting on site.
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Prospects
Scotland’s construction industry is set to experience increased volatility in the flow of new projects and a sharp divergence in sector fortunes. The value of underlying planning approvals fell by 23% year-on-year during the first half of 2009. We expect this to contribute to further declines in the value of underlying construction starts.
Economic recession and rising unemployment will continue to have a big impact on construction in the region. Private housing construction starts, which had been performing relatively well until the final quarter of last year, are expected to fall back further during the coming months. The sharp downturn facing the private housing sector will weigh on the prospects for rest of the construction industry in Scotland.
However, the utilities sector is set to buck the trend. During 2008, the value of underlying planning approvals rose by 16% on the previous year in this sector and remained firm during the first nine months of 2009. Scotland’s geographic position makes it particularly attractive for wind farm investment and a number of schemes are in the early planning stages. In addition, Scottish Water is also expected to continue with a strong investment programme. We expect prospects for the utilities sector to improve in the medium term.
In addition, near term, the Scottish construction industry should continue to benefit from a further strengthening in public sector investment in areas such as education and social housing as a result of the Scottish government’s decision to bringing forward capital funding from 2010-11. Accordingly, while market conditions remain tough, the underlying value of projects is forecast to rise by 15% over the year as a whole.
However, the decision to bring forward capital funding into the current financial year will increasingly constrain the flow of public sector projects over the course of 2010. In addition the value of underlying planning approvals, a leading indicator for construction activity, fell by 34% during 2008 and during the first nine months of this year was 23% down on a year ago. Against this background Glenigan now anticipates project starts to slip back by 9% during 2010 and to remain subdued during 2011.
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Recent performance
The private housing sector has seen a dramatic retrenchment of new project starts since the onset of the credit crunch. Some major housebuilders began to scale back new work as early as the start of 2008. As the year progressed, conditions in credit markets deteriorated further and growing numbers of new housing projects were placed on hold. The value of underlying construction starts began to fall sharply in May and the speed of the decline accelerated during the second half of the year. During the fourth quarter of 2008, the value of underlying construction starts was half that of a year earlier at £1.6 billion, while the sector suffered a 34% decline during the first nine months of 2009 against a year earlier.
Housing market conditions
The credit crunch has exerted a stranglehold upon the general housing market as homeowners’ and investors’ access to mortgage finance has dried up over the last year. During 2006 and 2007 housing market activity and high house prices had been supported by generous lending criteria and strong demand from buy-to-let investors.
Banks and other financial institutions have become extremely risk averse over the last eighteen months as they have sought to protect their damaged balance sheets and their potential exposure to falling house prices. Potential homeowners, including first time buyers, now have to provide substantial deposits in order to secure a mortgage commitment. The number of mortgage approvals for house purchases hit a low point during the fourth quarter of 2008 with approvals averaging just 30,000 per month, a 63% decline on a year earlier. Approvals have subsequently edged up steadily since February, although they remain weak by historic standards.
In addition the buy-to-let market has dried up, as specialist lenders have exited the market and as the prospect of potential price falls has deterred investors from adding to their portfolio. CML data shows that seven consecutive quarters of decline have left buy-to-let gross lending at very low levels. The number of gross mortgage advances to buy-to-let investors for house purchases during the second quarter of 2009 was 68% down on a year earlier. The decline is significant for housebuilders as newly built, two bedroom apartments have been the favoured product for buy-to-let investors.
While the dramatic cuts by the Bank of England in its base rate to 0.5% should help rebuild banks’ balance sheets and, in time, their willingness to lend, they have yet to significantly lift housing market activity. At 56,000, mortgage approvals in September are off the lows reached at the turn of the year, but remain exceptionally weak by historic standards.
The fall in market activity has been accompanied by sharply lower house prices. The Nationwide recorded a 15.9% fall in house prices during 2008, its largest ever annual decline (see chart below). Prices remain weak, but are stabilising. The Nationwide estimates that the firming in prices since May has pushed up house prices in October were 3.4% down on a year ago although they remain 13.4% off their peak in November 2007. Similarly, the Halifax index has recorded a recent stabilisation in prices, although average house prices in October were still 4.7% lower than a year ago. Whilst improving, access to mortgage finance remains a major problem for prospective house purchasers, especially first time buyers. However, the fall in house prices and concerns over a potential further weakening in prices during the coming year, combined with the more uncertain economic outlook, are also deterring prospective house purchasers.
Private new housing activity
Housebuilders have responded to rapid deterioration in the wider housing market, cutting back their work in progress and placing planned projects on hold. During January to September the value of project starts was 34% down on a year ago. The decline in the value of detailed planning approvals has been even more dramatic, with approvals running at half the level of a year ago during the first nine months of 2009.
The deterioration in new housing project starts is confirmed by a dramatic fall in the number of English private housing starts recorded by the Department of Communities and Local Government (DCLG), which during the first quarter of 2009 were at half the level of a year ago. Similarly, the National House-Building Council (NHBC) reports that the number of applications for private sector homes across the UK during three months to March 2009 was 71% down on a year earlier. The NHBC has subsequently recorded a pick-up in applications to start; applications totalled 4,994 units in July, twice the level seen in January but still a fraction of the monthly starts seen during 2007. The relative strength of the NHBC data compared to the Glenigan data on project starts indicates that housebuilders are focussing their efforts on building out existing sites, rather than starting new schemes.
This is underlined by the surge in private completions as housebuilders seek to capitalise upon the modest improvement in mortgage availability. Private completions averaged 7,200 properties a month during the May to July period, 50% above the number of new housing starts. Given the moribund conditions in the wider housing market, and in particular the reported lack of supply of second hand properties on the market, housebuilders are well placed to increase the market share of new house sales, especially among first time buyers frustrated with slow moving housing chains.
While the North of England, the Midlands and Wales endured the sharpest declines in planning approvals during 2008 as a whole, the downturn has now become more entrenched across the UK. In particular, London, which had previously fared relatively well, has now suffered a slump in new project starts. Project starts in the capital during the first seven months of 2009 were 52% down on a year earlier.
Private housing construction starts in Northern Ireland had been an exception to the current malaise. A general firming in project starts during the second half of the year was boosted by work starting on the £75 million Donegall Quay development. While underlying project starts have remained firm so far during 2009, detailed planning approvals have fallen back and the flow of new schemes is now set to fall over the coming months.
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Prospects
Conditions in the wider housing market are set to remain extremely difficult. Whilst mortgage approvals have risen since the start of the year, the recent stabilisation in house prices has been driven by a lack of second hand properties coming on to the market rather than a marked strengthening in demand and this has helped arrest the decline in house prices. Moreover, the deterioration in UK economic prospects and, in particular, rising unemployment and weak earnings growth, will continue to dampen purchaser confidence over the coming year.
Against this background, the outlook for the private housing sector remains bleak and we anticipate only a modest improvement in sector starts over the next 12 months. Housebuilders remain reluctant to bring forward new projects for development, despite the stabilisation in house prices recorded by the Nationwide and Halifax. The latest Glenigan data reveals that the flow of new private housing applications and approvals remains extremely weak as housebuilders use the modest improvement in market conditions to build out existing sites rather than bring new schemes forward for development.
Planning approvals during the first nine months of this year were running a half the level of year ago. Furthermore house builders are submitting few new schemes to the planning authorities; private planning applications during the third quarter were 38% down on a year ago, pointing to no early recovery in approvals during the closing months of 2009.
During the three months to September 2009, the value of underlying planning approvals for new build housing schemes was 9% down on a year earlier, while the value of applications fell 42% over the same period. The latest data demonstrates that housebuilders remain focused upon building out existing schemes and have a large pool of sites with planning approval upon which to draw as the market gradually improves.
Most of the major housebuilders have been raising additional capital over the summer, with Barratt among the latest to announce a rights issue in order to cut their borrowing and provide funds for discounted land purchases. However, whilst some housebuilders are now looking to add to their landbanks, the latest data suggests that there will be no rush to bring forward acquired sites for development.
The credit crunch and the depending UK recession are set to have a lasting impact on demand. Near term, Glenigan expects the value of underlying construction starts during the third quarter of 2009 will be down by a third on a year earlier. Moreover, based on the projects in our database, we believe the value of underlying starts will remain weak during the final quarter (see Table 5 and Chart 7). There are simply far fewer projects in the pre-construction pipeline, so even if credit market conditions.
Confidence in private housing construction is closely tied to UK house prices. Whilst the current stabilisation in house prices is helping developers to lift sales, the improvement is likely to prove temporary. The banks are maintaining tight lending conditions for new borrowers. Furthermore, although off recent lows, mortgage applications remain extremely weak. Accordingly, house prices are likely to come under renewed pressure during the closing months of 2009.
Private housing construction will continue to contract this year. Glenigan expects the value of underlying private housing starts to fall 38% in 2009. Nevertheless, the underlying potential demand for housing continues to grow due to population growth and changing housing needs. This should help support the modest recovery in private housing construction starts anticipated for 2010 as mortgage funding and market confidence gradually return.
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Project News
Tenders invited for youth centre
Tenders are currently being invited return date for the construction of a four-storey facility to house the Osmani Youth Centre at Vallance Road in London for London Borough of Tower Hamlets. The £3.5 million scheme has been designed by GHM Rock Townsend. Works are expected to commence March 2010.
Project ID:
09273711
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Tenders back for school extension
Tenders have now been returned for the construction of a new science laboratory and classroom conversion at Ermysteds Grammar School in Skipton. The £750k scheme has been designed by John R Wharton. Works are expected to commence March 2010.
Project ID:
06390416
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Tenders back for school extension
Tenders have now been returned for the construction of an extension to Saint Anthonys School at Thornhill Terrace in Sunderland for RC Diocese of Hexham & Newcastle. The £1 million scheme has been designed by GWK Chartered Architects. Work will commence during January 2010.
Project ID:
09354233
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Contractors sought for in-patient unit
Applications to tender are currently being invited for the construction of an in-patient unit for people with learning difficulties at Bankfield Court in Middlesborough. The £5.2 million scheme is for Tees & North East Yorkshire NHS Trust. Tenders are to be invited mid January 2010 and works are expected to commence during September 2010.
Project ID:
05087534
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T Brown awarded energy centre contract
London Borough of Wandsworth has appointed T Brown Ltd to carry out the £3.8 million new heating and hot water systems and energy centre project at the Doddington Estate in London. Work is to commence February 2010.
Project ID:
08386079
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Black & Veatch awarded contract
United Utilities has appointed Black & Veatch Ltd to carry out the design, procurement, construction and commissioning of an enhanced sludge treatment facility at Davyhulme Waste Water Treatment Works in Manchester. The £86 million contract is to commence early 2010.
Project ID:
08202500
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Company News
Carillion sells £86.9m of PPP equity
The contractor has sold 50 per cent of its 40 per cent interest in the New Accommodation, Cheltenham, project and 65 per cent of Carillion’s 50 per cent interest in the Allenby Connaught project - a Ministry of Defence accommodation scheme. At 31 December 2008, the combined value of these assets in Carillion’s balance sheet was £76.7 million and the total combined pre-tax profit attributable to them was £7.5 million in 2008. These disposals are in line with Carillion’s policy of recycling equity in its investments in Public Private Partnership projects and the proceeds will be used to reduce the company’s net borrowing. Following the receipt of the equity Carillion now expects to move to a net cash position by 31 December 2009.
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Bellway buying up land after forecasting 10pc rise in sales
Bellway has forecasted a 10 per cent rise in half year sales after reporting a 51 per cent rise in reservations for new homes over the last four months. Bellway's board said sales for the first six months ending 31 January 2010 will be 10 per cent ahead of the same period last year, and that an operating margin of 6 per cent to 7 per cent will be maintained. The forecast was made in a trading update for the four months to 30 November 2009 which said divisions are gradually increasing investment in new site openings and land opportunities. Bellway has spent £64 million in the first four months on land, predominantly in the south.
With £36 million of net cash at the end of November, Bellway said its land teams are actively looking to secure further opportunities at attractive margins. The trading update said the market in and around London is more robust than before, but the northern divisions are still experiencing testing conditions. But Bellway warned the market still required banks to stimulate the mortgage market further. The firm said: "Despite the Government's best efforts to stimulate the housing market through a variety of welcome initiatives, there remains a fundamental shortage of mortgage lending on acceptable terms to potential homebuyers. "Until this is resolved and the threat of unemployment recedes, consumer confidence in many parts of the country will remain, at best, fragile."
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Taylor Wimpey chairman Norman Askew stands down
Taylor Wimpey chairman Norman Askew has today confirmed he will stand down from the board before the end of next year. In a statement to the stock exchange, the company said it had now begun a process to recruit a successor. "A further announcement with regard to the appointment of a new chairman will be made in due course," the group said. Norman Askew was appointed chairman of Taylor Woodrow in July 2003 and was subsequently appointed as chairman of Taylor Wimpey following the merger with George Wimpey in July 2007.
He said: "We have come through unprecedented market conditions since the merger. It is important that as we enter 2010, we continue to proactively manage our business in what are still uncertain times. "I have notified the board of my decision to stand down as chairman by 31 December 2010 at the latest. This will give plenty of time for a rigorous process to be undertaken for the selection of my successor and it will ensure a smooth transition." The company also announced the appointment of Robert Rowley, a non-executive director of Liberty International, as independent non-executive director. Current independent non-executive director David Williams has announced he will leave the group next March to join the Mondi Group as joint chairman.
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ISG order book drops 8pc due to fall in overseas orders
ISG said that its order book is 8 per cent down on six months ago due to "some slippage" in its overseas order books. In a trading update ISG said its current order book totals £755 million compared with £822 million in June 2009. Around £500 million of the order book is for delivery in the current financial year to 30 June 2010, with £240 million for the next financial year. Chairman Roy Dantzic said: "In Western and Eastern Europe our blue chip international clients are recommencing their investment plans, albeit at a slower rate than previously anticipated.
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"Our key Asian markets should deliver organic growth on the back of strengthening economic activity. "As a result our overseas businesses have seen some slippage of their order books which will result in a heavier weighting of activity towards the second half of our current financial year. "We will continue to search out opportunities overseas in order to provide a wider and deeper offering to our international office and retail client base." The group's board said overall ISG is performing well and in line with management expectations.
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Mr Dantzic added: "Demand for our London fit out services is starting to recover. Allocations for the calendar year 2010 under the framework agreements with our food and banking retail customers are strong. "Our regional construction businesses will have a strong current year, but are likely to see reduced activity going into the next financial year. "ISG's balance sheet remains sound and we expect to finish the half year with cash balances in line with prior year. Whilst our markets remain highly competitive, there has been no change to our expectations and confidence for the full year."
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Carillion to lease back development
Leading construction company Carillion has entered into a contract to lease back part of its Castleford development in Sheffield after selling it. The firm will lease the 12802m² Office 2 building at The Square for 15 years, to house its National Support Centre, which is currently in Rotherham. John Platt, managing director of Carillion Facilities Management, said: "This new location will be a key element of the strategy for Carillion in the development of a centre of excellence for customer communication centres." Councillor Colin Ross, cabinet member for employment, enterprise and development at Sheffield City Council said: "The sale of the offices is a substantial investment in what are difficult market conditions. "The move reduces vacant office space and is part of what has been generally a good year for take up of space in contrast to most other cities. The move brings jobs to the city with potentially more to follow."
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Galliford Try buys Cornish housebuilder for £200k
Galliford Try has acquired Cornwall-based housebuilder Rosemullion Property Company, and its subsidiaries trading as Rosemullion Homes, for £200,000. The acquisition of the company will add nine sites to Galliford Try's existing business in the south west of England, comprising 24 units under development and a landbank of 132 units. In its last financial year to 31 December 2008, Rosemullion Homes turnover was £7.5 million. Galliford Try chief executive Greg Fitzgerald said: "Rosemullion Homes is an excellent example of an opportunity to acquire a quality local housebuilder in line with our strategy of growing our housebuilding business both in and adjacent to our existing areas of operation across the south of England". Earlier this year Galliford Try raised more than £100m through a rights issue to fund its target of building 4,000 homes a year by 2013 and elevating itself into the top five housebuilders. Rosemullion Homes secured the 'What House?' Housebuilder of the year award in 2008.
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Promotions
Leading Industry Body gives further credibility to eagerly awaited professional networking site
The Chartered Institute of Building (CIOB) is set to become the main and exclusive partner of the Construction Network (tCn).
Launching in early 2010, tCn will deliver the UK’s first fully interactive and professional online networking facility exclusively for those in property, construction and the built environment. Aimed at Professional Practices, Contractors, Sub-Contractors, Developers, Suppliers, Manufacturers and Clients, information will flow between individuals and organisations for the benefit of all like never before.
Michael Brown CIOB Deputy Chief Executive said, “We are delighted to be a part of this exciting venture. This technology really does allow us to engage our fragmented industry in a way that has never been possible before. The network will link users together and create a free exchange of information, with the potential to generate business opportunities as well.”
Glenigan are proud to be one of the first to recognise tCn's potential and will have a strong presence on the site.
Corporate subscriptions are still available and would encourage anyone that is interested to visit the preview site or email the team via info@tcn.uk.com.
Register your pre-launch interest or find further information at www.tcn.uk.com
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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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