Glenigan Insight 13th July 2009
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.
Economic recession and construction
Featured Region: Wales
Featured Sector: Social Housing
Project News
Tenders for design centre
Tenders back for reservoir
Poplar advertises £445m framework
John Sisk wins £43m Terminal 5 hotel job
Salford Media City tops-out
New designs for Sunderland's Wear bridge unveiled
Company News
Kier annual profits on target
Mears Group wins £200m Brighton council homes job
Beard Swindon wins place on £500m framework
Interserve secures 60pc of 2010 turnover target
Mitie wins £100m Santander deal after steady start to year
RMJM completes Glasgow NOAH scheme
The construction industry has been close to the epicentre of the UK recession. Official statistics show that the economy contracted more sharply during the first quarter of 2009 than initially estimated; falling by 2.4%, in large part due to a dramatic 6.9% decline in construction output. However, some recent economic indicators suggest that UK economic activity may now be stabilising. This has raised hopes that the squeeze on the construction industry may shortly ease.
Whilst the data does suggest that the pace of decline has slowed in recent months, it is, unfortunately, less clear whether this marks the bottom of the current downturn or is merely a brief respite from the economic storm.
Alongside construction, UK manufacturers have endured the sharpest falls in output, which during the first quarter was 13.1% down on a year ago. Preliminary data points to a subsequent improvement in manufacturing output during the second quarter. However, factory gate prices in June fell at their fastest annual rate for eight years, indicating that demand remains weak. Indeed the recent steadying in output may be more a pause in manufacturers’ own destocking than a stabilisation in demand.
Improvements in retail spending and mortgage lending have also raised hopes in some quarters for an early turnaround in UK economic prospects. Although weak by historic standard, the number of mortgage approvals has picked up modestly in recent months, suggesting the initial impact of the credit crunch may be easing. Leading housebuilders have also been reporting a steadying in their sales, although they report mortgage availability remains a particular problem for first time buyers.
However, whilst the initial impact of the credit crunch may be starting to ease, the financial crisis has exposed imbalances in the wider economy that will take time to adjust. Rising unemployment, falling house prices and weak earnings growth will continue to constrain the demand for construction services, both in the private housing sector and indirectly for commercial property.
The latest Glenigan Index recorded a welcome increase in public sector projects as promised additional Government funding has begun to filter through. This should help to steady the flow of new project starts during the second half of the year. However, current spending plans envisage sharp falls in capital expenditure by key Government departments from 2010/11. Accordingly, the forecast recovery in overall project starts for next year is critically dependent upon a pickup in private sector projects starts during 2010.
Back to top
Recent performance
After a 2% drop in project starts in 2007, last year saw a widespread decline in Welsh project starts across different construction sectors, with the value of underlying project starts (projects of less than £100 million) falling by 16%. Construction output also slumped during the second half of 2008, with official statistics recording a 12% fall in the value of output against a year earlier. Project starts have weakened further during the first five months of 2009, being 31% down on a year earlier.
Private sector activity has led to a decline in project starts. Office and hotel & leisure project starts during the first five months of 2009 were around 55% lower than the levels of 2008, while industrial project starts were running at half the level of a year ago. The flow of private housing projects has also slowed to a trickle: the value of fourth quarter project starts was running at a third of the level seen at the end of 2007, while starts during the first five months of 2009 were 69% down on a year ago.
Furthermore, the deterioration in the housing market and new private sector starts has constrained the flow of new social housing projects, many of which are part-funded through private developer contributions or shared ownership sales. As a result, the value of social housing projects starting on site would have fallen back sharply during 2008 but for a £50 million project in Newport funded by the Welsh Assembly, which started on site during the final quarter of the year. Social housing project starts during the five months to May were 8% down on a year earlier.
More encouragingly, strong contributions from the education and health sectors partially offset the impact of the private sector project starts. Education project starts rose by 69% last year, while health projects more than doubled, in large part due to the £63 million Cynon Valley Hospital project starting on site during November.
Civil engineering has also afforded a welcome lift over the last year. The utilities sector is providing several bright spots for Wales. Carron Energy’s £450 million gas-fired power plant should boost construction activity over the next two-and-a-half years, while several wind farms have also started on site in recent months. In addition, work started this January on a £75 million dual carriageway at Pontypridd which should contribute to infrastructure workload over the next three years, while recent months have seen work start on the £29 million A40 Penblewin to Slebech Park road improvements and a £15 million Wind Farm project.
Back to top
Prospects
Despite the recent pick up in education, health and civil engineering projects, the overall outlook for Welsh construction remains negative. Following a poor first half, Glenigan anticipates that the value of underlying construction starts will remain weak during the third quarter of 2009.
Private housing will bear the brunt of the decline in activity, following a dramatic decline in the value of underlying planning approvals. Approvals fell sharply during the fourth of 2008 and remained poor during the first four months of this year, being 77% down on a year earlier. The industrial, office, retail and hotel & leisure sectors are also expected to experience a significant contraction in underlying construction starts after suffering similar declines in the value of underlying planning approvals.
The only real bright spot for construction in Wales is the utilities sector. In addition to a recent jump in the value of underlying utilities projects securing planning approval, Glenigan’s project database is tracking a number of large renewable energy projects (that is, projects worth £100 million or more) in the early planning stages. Accordingly, the utilities sector is expected to remain a growth area over the next two years, as these projects progress to start on site. However, the rise in utilities projects will be insufficient to entirely offset the significant declines anticipated in other construction sectors.
The first nine months of 2009 will be very tough for construction in Wales, with the value of underlying construction starts predicted to fall by 19% this year. A modest improvement is anticipated from the final quarter of this year, leading to a rise in project starts during 2010.
Back to top
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 has been 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 do appear to have firmed since the commencement of the new financial year, with May seeing a year on year increase in the value of project starts, suggesting that the HCA has started to deploy the additional funding promised in last autumn’s Pre-Budget Report. 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 first five months of this year. The value of underlying projects starting in London and the South East fell more than 60% year-on-year, while Scotland, the South West, the West Midland and Yorkshire & the Humber all saw sharp increases in project starts.
Prospects
A fall in the value of social new housing projects in the pre-construction pipeline poses a potential 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 £1billion long-term plan to redevelop a housing estate in Hackney: 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.
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 will provide welcome relief to hard-pressed housebuilders, it will restrict 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 from the private housing market as the flow of mixed-use developments and projects part-funded through section 106 agreements remains sparse. However, the promised increases in Government funding should help progressively to lift the flow of project starts during the second half of the year. Whilst we expect project starts to recover from their recent lows, they are forecast to remain 15% down on a year ago for 2009 as a whole. A more substantial improvement in project starts is not anticipated until 2010.
Back to top
Project News
Tenders for design centre
Tenders are currently being invited for the construction of a design centre at Hawks Road on the Baltic Business Park in Gateshead for Terrace Hill Ltd. The £8 million scheme has been designed by Red Box Design and works will include new office space, conference areas, restaurants, gallery, coffee bar and design studios on ground and four upper levels. Works are expected to commence October 2009.
Project ID: 06035322
Back to top
Tenders back for reservoir
Essex & Suffolk Water Plc has now received bids for the £60 million Abberton Reservoir in Essex. Bidders included Carillion Plc, BAM Nuttall Ltd, Biwater Treatment Ltd, Sir Robert McAlpine Ltd, Birse Group Service, Costain Ltd, Laing O'Rourke Ltd and C A Blackwell Ltd. The project comprises the extension of Abberton Reservoir near Colchester. This would raise the water level and increase the capacity. Work is due to commence late 2009 and be completed mid 2013.
Project ID: 04280098
Back to top
Poplar advertises £445m framework
Poplar Housing and Regeneration Community Association is inviting tenders for a four year framework agreement worth £445 million to deliver its development and regeneration plans. It estimates that 90 per cent of the work to be carried out between 2009 and 2013 will be new build and 10 per cent will regeneration based projects. Between six and 12 firms will be invited to tender on 7 August. The deadline for pre-qualification questionnaires is 27 July. Poplar HARCA's properties span nine estates including Aberfeldy, Bow Bridge, Coventry Cross, Burdett, Devons, Lansbury, Lansbury West, Lincoln, and Leopold and Teviot.
Project ID: 09219668
Back to top
John Sisk wins £43m Terminal 5 hotel job
John Sisk & Son has been awarded a £43 million contract to build a hotel at Heathrow Airport's Terminal 5 for Hilton. Work will cover construction of the hotel, which will be branded as a core brand Hilton Hotel. Features of the new-build hotel include 350 bedrooms, conference facilities, gym and a swimming pool. It is located half a mile from M25 Junction 14 and Heathrow's Terminal 5. Sisk's western region director Les Nicholls said: "We have constructed a number of Hilton hotels previously, so we knew the level of detail expected. With our experience as engineers and hotel builders, the design was adapted to suit the challenges the site presented in order to produce a cost-effective, high quality end product." The project is due to run for 80 weeks.
Project ID: 08236693
Back to top
Salford Media City tops-out
A topping out ceremony has marked the completion of the highest point in the MediaCityUK complex which is soon to become home to the BBC in Manchester. The 19-storey tower block is now the highest part on phase one of the Salford Quays site - a development which will cost £500M. Assistant construction manager Kevin Gosney used a golden spanner to turn the final nut and bolt of the steelwork, marking the highest point of the 86.2m unfinished office block.
Five BBC departments relocated from London will be housed in the complex, which is hoped it will become a Northern hub for the creative and digital industries. Building work on the 36-acre site is set to be completed by 2011. Bryan Gray, chairman of Peel Media, said: "It is testament to the vision that Mark Thompson had when he decided to take the BBC from London and lift some of them to Manchester. "You can talk all you want about MediaCity but seeing is believing. "People do need to come here to see the scale and the fact we are building here in Salford Quays where people will work, play and be very creative."
Project ID: 04258734
Back to top
New designs for Sunderland's Wear bridge unveiled
Sunderland City Council has released new designs for its iconic Wear bridge ahead of public consultation. The designs and illustrations are unveiled to the public next week and follow Sunderland City Council's decision to further develop work on the landmark bridge designed by internationally renowned and local architect Stephen Spence.
The public will be invited to comment on the bridge plans and approach roads, which form the first stage of a major new road link from the A19 into central Sunderland, called the Sunderland Strategic Transport Corridor (SSTC). "Last year the council carried out a major consultation exercise and people said that having a striking design for a new Wear bridge was very important," said Phil Barrett, the council's Director of Development and Regeneration.
"There's now the opportunity, especially for those in Sunderland who live near to where the bridge would be built, to comment on these plans," added Barrett. Public comments will contribute to a design and access statement as part of a proposed planning application and sit alongside more technical information such as details on construction works and the impact on the local environment. Subject to final approvals, including a successful planning application, work could begin in 2012 and be completed in 2014.
Project ID: 91161074
Back to top
Company News
Kier annual profits on target
Kier Group has said it will deliver annual underlying pre-tax profits in line with expectations - despite challenging housing and property development markets. The firm revealed it finished its financial year on June 30 with a net cash balance of £90 million, compared with a balance of £82 million on December 31. Kier hailed a strong performance from its construction division, which has been boosted by public sector work, largely in the education and health sectors.
Recent contract wins include a £250 million joint venture contract for United Utilities, and a £27 million agreement to renew the roof at London’s King’s Cross rail station. Kier said the construction division has signed contracts, preferred bidder agreements and negotiated positions to cover 85 per cent of targeted revenue for 2010. The firm added that its partnership homes division has traded in line with expectations, selling 1,140 homes compared with 2,090 the previous year.
Building work is recommencing at a “number of developments” and new sites are being started at locations where demand has improved. In a trading update Kier said: “We remain cautious on the outlook for 2010 but we believe the difficult market conditions we have experienced over the last 12 months are beginning to ease”.
Back to top
Mears Group wins £200m Brighton council homes job
Social housing repair firm Mears has won a £200 million ten year contract with Brighton & Hove City Council. Mears will upgrade, repair and maintain the council’s 12,500 homes. Work is set to start in early 2010. The win takes the total amount for new contracts won by Mears this year to approaching £400 million. The new contract builds on Mears’ existing contract with Brighton & Hove which provides responsive and void repairs together with gas servicing and adds programmed, cyclical and further maintenance works to Brighton & Hove’s extensive portfolio of council houses.
Mears chief executive Bob Holt said: “Working together with Brighton & Hove we can deliver the tangible improvements into the community which are so important to the people that live there. “I believe this to be one of the largest contracts of its kind awarded in the UK ever and represents a significant move to a long term partnership for Brighton & Hove.”
Back to top
Beard Swindon wins place on £500m framework
Beard Swindon has won a place on a four-year framework in the South-west, covering all aspects of construction works procured by public organisations throughout Wiltshire, Somerset, Dorset, Avon, Devon Cornwall and Gloucester. Director Marc Bayley said: "For a construction company of Beard's size, winning a place on this framework is a real coup. There was stiff competition from major national contractors but our professional flexible procedures, coupled with a friendly approach, have contributed to help achieve this success." This latest win follows Beard's expanded operations to the Guildford area, It has trebled its pre-tax profits and grown sales by 30 per cent.
Back to top
Interserve secures 60pc of 2010 turnover target
Interserve has already secured 60 per cent of its targeted turnover for 2010, the firm revealed. In a trading update to the stock exchange this morning the firm said trading in the first half has continued in line with bosses expectations, delivering progress overall versus the prior year's operating performance. Interserve said it has good forward visibility, with 60 per cent of anticipated 2010 turnover included within a future workload that has shown further progress from the record £6.5 billion level reported at 31 December 2008.
During the first half of the year Interserve was boosted with significant business wins in key UK sectors such as custodial, education, health, local government and infrastructure. Interserve's Middle East operations won work across the region worth over £200 million to the group. Public and privatised sectors' contribution increased to approximately 75 per cent of 2009 first half turnover compared to 65 per cent a year earlier.
Strong cash generation has led to an improvement in the net debt position of the group since the publication of the results for the 12 months ended 31 December 2008, reflecting the focus on reducing capital expenditure and working capital, complemented by the cash realised from the PFI portfolio. The firm said: "Given the record future workload, balanced and complementary operations in long-term growth markets and the ability to explore and develop new markets, the board remains confident in the group's ability to maintain robust near-term performance and sustained long-term growth."
Back to top
Mitie wins £100m Santander deal after steady start to year
Mitie has won a £100 million contract with Spanish banking giant Santander as the firm reported a steady start to the year. Support services group Mitie has already secured 78 per cent of its expected total revenue for 2009, but the figure is slightly down on the 83 per cent secured this time last year. The three-year integrated facilities management contract win with Santander will cover Santander's entire UK corporate head office buildings portfolio of 33 sites in England, Scotland and Northern Ireland.
The firm's facilities management division is benefiting from a move by many firms to outsource in a bid to cut costs. But trading conditions in Mitie's property management and asset management remain challenging in areas including interior fit-out and new build housing related activities. A statement said: "Our high quality client base, strong order book and sales pipeline, good cash flow and robust financial position leave Mitie well placed to continue developing its business and take advantage of opportunities as they arise. "The board remains confident in Mitie's prospects for the future."
Back to top
RMJM completes Glasgow NOAH scheme
RMJM's redevelopment of Park House, a 1960s office building, into 51 homes has been completed. The scheme at 10 Park Circus Place in Glasgow for NOAH City Developments has reused the concrete frame of the existing office building. New elevations are clad in natural stonework below a zinc standing seam roof. The project also included the restoration of the adjoining listed church tower.
Back to top
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.
Back to top
Ask Glenigan…
Our dedicated customer services teams will ensure you receive the maximum benefit from Glenigan.com throughout your subscription. Whatever assistance you need with your subscription, we’re here to help.
Training and Implementation
Get the most from Glenigan.com with one-to-one or group training for every user.
Phone: 0871 226 2510
Fax: +44 (0)1202 423414
training@glenigan.emap.com
Available Monday-Friday 09.00-17.00
User Support
A dedicated team for everything from adding new users to changing your subscription criteria.
Phone: 0870 443 5373
Fax: +44 (0)1202 423414
usersupport@glenigan.emap.com
Available Monday- Friday 08.30 -17.00
IT Support
On going support for any questions you may have about using Glenigan.com throughout your subscription.
Phone: 0870 443 5373
Fax: +44 (0)1202 423414
usersupport@glenigan.emap.com
Available Monday-Friday 09.00-17.00
Information Hotline
Instant access to our researchers for the very latest project information, even when you are on the move.
Phone: 0870 442 7626
Fax: +44 (0)1202 417134
hotline@glenigan.emap.com
Available Monday-Friday 08.00-18.00
Back to top