Glenigan Insight
17th November 2009
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Private new housing activity
Featured Region:
North East
Featured Sector:
Infrastructure
Project News
Tenders back for Barking Park
Tenders back for school extension
Architect appointed for school redevelopment
Tenders invited for hospital extension
Tenders for bridge refurbishment
Framework contractors appointed
Company News
Persimmon in strong position to continue investment
Interserve trades well after focus on long-term contracts
Brookfield plans Scottish expansion
Keller order intake down 22pc in the first half
Rok to make relationship with unions 'a priority'
Turnover at North Midland Construction
Promotions
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Construction News Offer – Exclusive to Glenigan
The number of private housing approvals has fallen dramatically since the onset of the credit crunch. At 167 projects, the number of monthly approvals for new private housing schemes during 2008 and 2009 has been running at half the rate of the preceding four years. In addition on average 10% fewer houses and flats are covered by each approval. The drop in average project size has been driven by an absence of medium sized schemes winning approval. The number of applications for schemes of between 50 to 500 homes have fallen by 54% over the period, while the number of projects for schemes of less than 50 units dropped 45 per cent.
In contrast approvals for the largest schemes held up reasonably well, at least initially during 2008, and the average number of units covered by such applications actually rose slightly. The relative strength of such projects appears to reflect their long term strategic nature. Typically such projects will be built out over a number of years and accordingly the decision to press on with a planning application is less influenced by current market conditions. Unfortunately, the current year provides a less encouraging tale with only two schemes in excess of 500 homes securing detailed planning approval since January.
The flow of planning applications for new private housing developments remains extremely weak. The number of applications during the first nine months of this year was 54 per cent down on a year earlier. However there are some tentative signs that the flow of new applications may be starting to stabilise, at least in those parts of the country that were among those hardest hit initially by the downturn in the housing market.
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Recent performance
Projects starts in the North East have slumped since mid-2008 as the combined impacts of the credit crunch and the UK’s deteriorating economic prospects have taken their toll on the region. Project starts have remained weak during the first seven months of 2009, despite a surge in civil engineering projects, with the underlying value of project starts during the period 40% down on a year ago.
Private housing construction in the region has been severely affected by the credit crunch and there has been a dramatic collapse in private project starts. During 2008, the value of underlying private housing starts fell by a massive 44% against the previous year, while starts during the first eight months of 2009 were 40% down year-on-year.
One of the few bright spots for the region is the planned expansion to the port at Middlesbrough. Scheduled to start on site next year, the scheme appears to have already stimulated investment in the region. For instance, work recently started on site for a £57 million import centre in the city; this project provided a temporary boost to the value of underlying industrial construction starts for the North East in third quarter of 2008 on a year earlier. Unfortunately industrial project starts have subsequently fallen back sharply and were 89% down during the first eight months of 2009 on a year ago.
Other construction sectors have not fared well in recent months. The value of underlying construction starts in office and hotel & leisure sectors have remained exceptionally weak during the first eight months of 2009. A scarcity of health and education projects starts has also depressed the value of work starting on site in the region during January to August of 2009.
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Prospects
The North East has been one of the regions hardest hit by the credit crunch and the subsequent deterioration in private housing construction activity. Construction prospects are not expected to improve until mid-2010. Private housing construction looks set to deteriorate further over the next two quarters. During the fourth quarter of 2008, the value of underlying private housing planning approvals fell by 90% year-on-year (i.e., virtually no significant private housing projects received planning approval in the region during the quarter). Furthermore, planning approvals have remained anaemic during the first seven months of 2009, being 43% down on a year ago.
Industrial construction starts are also expected to remain scarce, following an 81% fall in the value of underlying planning approvals during the seven months to July 2009.
In contrast to many other parts of the UK, education starts have remained weak, with the value of schemes starting on site during the first seven months of 2009 43% down on last year’s level. However, several BSF schemes are set to help lift sector starts near term and a recent pick-up in detailed planning approvals also offers encouragement for the sector’s medium term prospect.
There are a few bright spots thanks to several medium and large sized projects that have recently received planning approval. The mid-sized projects include a £30 million retail development for Hartlepool, Cleveland and a £25 million project to build a police station at Wallsend, Tyne and Wear.
Several large industrial and civil engineering projects are also scheduled to start on site this year, including £100 million energy-from-waste plant, a £325 million paper recycling facility and a £500 million power station. These projects, should they proceed without significant delay, will provided a much needed boost to construction activity in the region.
Nevertheless, the outlook for the North East remains challenging. Whilst there is an expectation, based on projects currently in our database, that construction prospects in the region will strengthen as the year progresses (see Table 21), we forecast that the value of underlying construction starts will fall by 39% during 2009 as a whole. Whilst we expect the value of underlying construction starts in the North East of England to bounce back strongly in 2010, the value of underlying project starts are still forecast to be 1% down on 2007 levels.
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Recent performance
Large projects with a construction value of £100 million or more have increasingly dominated the flow of new project starts over the last year. The value of underlying project starts, which excludes £100 million plus schemes, fell by 17% last year. Despite this underlying decline, overall sector starts rose sharply thanks to an increase in major transport projects. These schemes will help to sustain the sector activity during the current year, countering the slowdown in underlying project starts during 2008 and the first half of this year.
Regionally, only the East of England, the West Midlands and Yorkshire & the Humber enjoyed a rise in the value of underlying project starts during 2008. The West Midlands benefited from July’s start on site of a £33 million airport pier at Birmingham International Airport and, more recently, construction starts for several mid-sized road contracts. However, while other regions saw a decline in the value of underlying project starts, this was offset by the initiation of major schemes. For example, Scotland saw the value of underlying project starts fall 42% during 2008, but major projects such as the M74 extension and Edinburgh Tram ensured that the overall value of project starts doubled during the year.
Similarly, whilst the value of underlying project starts during the first eight months of 2009 was 2% down on a year earlier, major schemes—including the £275 million Blackfriars Station redevelopment and the £6.3 billion M25 widening contract—almost trebled the overall value of project starts. Again, these large projects will boost sector activity during the second half of this year and during 2010.
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Prospects
Traditionally, construction starts in the infrastructure sector have been lower in the second half of the year, and last year was no exception. The value of underlying project starts for the last two quarters was down by a third on the second quarter of 2008. This reflects the surge in new project starts that traditionally accompanies the final quarter of the financial year. Whilst the value of underlying project starts during the first quarter of 2009 fell short of a year ago, at £989 million it was significantly higher than in each of the preceding two quarters.
Whilst the first three months of the new financial year have seen the underlying project starts slip back against a year ago, a marked rise in underlying project starts is anticipated for the subsequent quarters (see table below). The second quarter saw a 10% rise in the value of the underlying projects reaching detailed planning approval. This is expected to help support a pick-up in the flow of new projects starts during the remainder of this year.
In addition, major projects (schemes of £100 million or more) account for a significant proportion of overall sector workload. A clutch of major projects starts will help boost overall sector activity over the next two years. Several large road contracts started on site last September and October and these, combined with more recent scheme starts such as the M80 upgrade and the £6.5 billion M25 motorway widening, will help lift sector output. Preparations for the London Olympics will also stimulate transport infrastructure construction starts in the Capital. Rail will be a key sub-sector over the next eighteen months, with preparatory works for the £16 billion Crossrail scheme recently starting on site and work continuing on Thameslink.
The greater concentration of sector activity upon a selection of large, high profile schemes has implications for contractors and suppliers operating in the sector. The emphasis on large schemes favours major contractor groups who are best placed to win such projects, but also means the potential risk of feast or famine hangs on securing these same projects. The importance of major schemes also leaves overall sector workload vulnerable to potential delays in the initiation of planned projects. In contrast, any drop in the underlying flow of projects will intensify the squeeze on small- and medium-sized civil engineering contractors, making the anticipated pick-up in project starts all the more welcome.
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Project News
Tenders back for Barking Park
Tenders have now been returned for the restoration of buildings at Barking Park for London Borough of Barking. The £5.2 million scheme has been designed by Randall Shaw Billingham. Works are expected to commence January 2010.
Project ID:
08411964
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Tenders back for school extension
Tenders have now been returned for the construction of an extension to Chipping Norton Secondary School in Chipping Norton. The £2.1 million scheme for Oxfordshire County Council is expected to commence January 2010 and will be on site for approximately nine months.
Project ID:
09161338
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Architect appointed for school redevelopment
Architects Design Partnership has been appointed for the redevelopment of Wexham Court Primary School in Slough for Slough Borough Council. Works are expected to commence mid 2010.
Project ID:
09155747
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Tenders invited for hospital extension
Tenders are currently being invited for the £4.5 million pathology unit extension at Maidstone Hospital for Maidstone & Tunbridge Wells NHS Trust. Works are expected to commence January 2010.
Project ID:
09184878
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Tenders for bridge refurbishment
Tenders are currently being invited for the refurbishment of the West Elloe Bridge in Spalding. The £450k scheme is for Lincolnshire County Council. Tenders are due to be returned 4th December 2009 and bidders include J Murphy & Sons Ltd.
Project ID:
09354019
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Framework contractors appointed
Walsall MBC has now appointed framework contractors to implement its transport infrastructure schemes, which will include major schemes (over £5 million), red route scheme, bus showcase schemes, other highway schemes, road safety schemes, public transport schemes and walking cycling initiatives. Framework contractors will include Fitzgerald Contractors Ltd, Birse Civils Ltd, Jackson Civil Engineering and G F Tomlinson.
Project ID:
08522132
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Company News
Persimmon in strong position to continue investment
Persimmon has said it is in a strong position to continue investment in developments and new land with debt reduction ahead of schedule and sales volumes stabilising. Despite its progress the house builder said - in its third quarter Interim Management Statement covering 1 July to 16 November 2009 - that it still had concerns about mortgage availability. In the second half of 2009 Persimmon has agreed terms to buy around 2,850 plots on 34 new sites, including 350 plots from its strategic landbank. Most of these additional plots are located in the south of England.
The company currently owns and controls 62,500 plots of land. Persimmon expects to legally complete around 9,000 homes for the year ending 31 December 2009 and a healthy forward order book for 2010 with £500 million of sales already completed. At 31 October 2009 total borrowings were £399 million compared with £960 million on 31 October 2008.
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Interserve trades well after focus on long-term contracts
Interserve said it is well placed for future growth after continuing to focus on long-term large value contracts. In a trading update for the past three months Interserve said it has enjoyed particularly strong performances from its Middle East construction and equipment services businesses. Significant new contracts won during the second half have helped maintain the company’s future workload at the record £6.7 billion level reported at the half-year.
The company said before the end of the year it will pay its £11.6 million fine from the Office of Fair Trading following its investigation into cover pricing. In a separate announcement today Interserve said it has been selected by Partnerships for Schools for its new £4 billion national contractors framework. The framework, covers the design and build of academies and other educational facilities throughout England.
There are two separate regions for the framework, North and the Midlands, and London and the South, and Interserve has been selected for both, giving it two places of the 24 awarded. PfS expects to be able to offer the successful contractors up to £500 million of work for which to bid in the first five months of the framework from November 2009 onwards, with the framework then expected to run for four years. It will operate in tandem with the current Academies Framework, which will remain in place until December 2010.
Interserve chief executive Adrian Ringrose said: “The National Contractors Framework represents an excellent opportunity to provide outstanding educational facilities across England. “Interserve has a great deal of experience in planning and building schools at all levels and we look forward to working within the framework to create the kind of learning environments that will enable pupils to excel.”
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Brookfield plans Scottish expansion
Brookfield Construction is optimistic its win on the new £840 million South Glasgow Hospitals Complex will give it more clout north of the border and open the door for it to significantly expand its presence across Scotland. The firm said it now planned to establish a Scottish base and was already eyeing a string of other major health and commercial projects. Brookfield was last week awarded the contract for Glasgow's new super-hospital - Scotland's biggest ever hospital building project. The construction contract is valued at £670m.
Work on the laboratories will start in February. Construction of the main hospital building will begin in the first quarter of 2011. The job will consist of about 100 subcontract packages. Bathgatebased Dunne Group has already secured the groundworks contract for the site. "We will start tendering the other packages straight away, and will be looking to get as many local firms as possible working with us," Mr Ballingall said.
A team from the contractor, including managing director Ashley Muldoon - who became well known across the industry in recent years after heading the troubled Wembley Stadium construction - were in Glasgow last week to formally sign the deal. Mr Muldoon said: "This project marks our first major construction project in Scotland and we are looking forward to developing our presence north of the border." Ross Ballingall, a director at Brookfield with particular responsibility for the group's healthcare division, added: "Winning Glasgow gives us the opportunity to look at further Scottish projects.
"For the foreseeable future we will focus on healthcare and highrise - that's where our specialties are. While we will be selective in what we go after, we are keen to get involved in some of the big projects in Scotland." Mr Ballingall refused to indicate which projects Brookfield - which is building the £575m Pinnacle tower in London - had its eye on, but there are a string of major schemes planned in Scotland including the Glasgow Canal Regeneration Partnership's £100m-plus office tower at Speirs Wharf. Mr Muldoon said Brookfield was "absolutely delighted" to have been chosen as the contractor for the South Glasgow project.
About 1,300 workers are expected on site at the project's peak. "That probably equates to a total of about 2,500 jobs," Mr Ballingall added. He said labour targets would be set at the site, including a goal to have 10 per cent of the workforce made up of apprentices or formerly unemployed workers. The super-hospital, which is scheduled for completion in 2015, will be built on the site of the existing Southern General Hospital. The plans include a new 1,100-bed acute-care hospital and a new Sick Children's Hospital.
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Keller order intake down 22pc in the first half
Keller has said its order intake in the first half of this year is 22 per cent down as reduced global construction spending continued to weigh on its margins. In a trading update for the period from 1 July 2009 to 11 November Keller said both turnover and margins since the first half have continued to be below the comparable period in 2008. But the statement added that viewed in the context of the difficult market conditions, the results so far reflect a resilient performance.
The ground engineering specialist said its financial position remains strong. After payment for the acquisition of Resource Holdings, net debt at the end of October stood at approximately £100 million compared with £95.3 million on 30 June 2009. Keller retains over £200 million of committed debt facilities expiring between 2010 and 2014 to meet its strategic and operational goals.
Net debt stands at 100 million pounds while markets remain depressed in the US commercial and residential sector as well as in continental Europe, it said. But it added it continues to trade in line with market expectations and its UK business will benefit in the second half from a restructuring earlier this year. A statement said: "Given our trading in the year to date, the board's expectations for the full year remain unchanged and within the current range of market expectations.
"Order intake, which in the first half of the year was down 22 per cent on a like-for-like basis compared with the preceding first half, has since remained reasonably steady. "However, reduced levels of construction expenditure around the world have, as expected, resulted in tighter pricing which will generate lower margins until our markets recover."
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Rok to make relationship with unions 'a priority'
Regional contractor Rok will put a significant focus on developing strong links with the trade unions next year, head of health and safety Shaun Davis has revealed. Speaking at a British Safety Council conference in London, Mr Davis said: "We certainly do recognise trade unions. "What we haven't done in the past is get into any formal relationship with them. It is on my priority list for next year."
General secretary at construction union Ucatt Alan Ritchie said: "I will hold Rok to that next year and I look forward to working with them." The final report of the inquiry into construction deaths urged the industry to end its "long history of union antagonism" and work with trade unions to lower the death toll.
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Turnover at North Midland Construction
Turnover at North Midland Construction is currently 30 per cent below budget, but year end profit is expected to be on target, the firm said today. But North Midland Construction said the profit level will be achieved before any provision is taken for its £1.5 million fine from the Office of Fair Trading following its cover pricing investigation. In a trading update for the period from 1 July 2009 to 30 September, North Midland said it was currently seeking legal advice with regard to the OFT ruling.
Restructuring and cost reduction measures have been implemented across the group to adjust for current market conditions. The group's marketing strategy has also been modified, due to the decline in private sector demand. A statement said: "The order book for 2010 currently stands at £64 million and this, coupled with the AMP5 framework for Severn Trent Water, due to commence on 1 April 2010, and the South Yorkshire Digital contract gives a degree of confidence for next year."
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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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