Glenigan Customer Newsletter

Glenigan Insight 24th November 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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Rise in private housing steadies construction starts

Featured Region: North West

Featured Sector: Offices

Project News
F P Hurley awarded sub-contract
E J Honeybun awarded sub-contract
Plans approved for health centre
Shortlist announced for Midlands Highways Alliance
Lovell wins £3.5m Wirral housing job
Ringway scoops £2.9m roads job

Company News
Styles & Wood turnover and pre-tax profit meet expectations
Bovis Homes reports 83pc rise in private reservations
Ex-HOK figurehead Berry joins Woods Bagot
Arup posts turnover growth but fall in profit
Travelodge to open 10 new sites
Barratt to open new sites after successful refinancing

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Rise in private housing steadies construction starts

The latest Glenigan Index has been boosted by an improved flow of private housing projects starting on site in recent months. The strength of the turnaround in the private housing sector, combined with increases in public sector and civil engineering work, limited the year–on-year fall in the Index for October to just 4% and has prompted an upward revision to the Index for August and September. This is in marked contrast to the sharp falls in project starts seen during the first half of the year. Whilst poor private sector activity, including a renewed weakening in private housing projects, is forecast to dampen construction starts near term, the flow of new work is forecast to improve during 2010.

The strengthening in public sector building and civil engineering projects has provided a particular boost to the construction industry in Scotland and Wales, while the East Midlands and the South West and the North West of England have particularly benefited from the rise in private housing schemes starting on site during the three months to October.

Whilst developers continue to prioritise completing and securing sales at existing sites, the increased flow of new project starts reflects housebuilders’ growing confidence that market conditions will improve during 2010. The steadier performance by the private housing sector, combined with continued strength in social housing starts as promised Government funding has fed through, secured a 14% rise in the Residential Index for October.

The Non-residential Index for October was 18% down on a year ago as an increase in government funded work only partially compensated for the scarcity of private sector work. The decline in commercial and industrial work is being driven by the weak rental and capital values and rising vacancy rates which continue to deter developers. The rise in public sector work during October has been led by an increase in health and community & amenity projects, while flow of education projects has weakened after the earlier surge work seen since the start of the current financial year.

The Civil Engineering Index during September was 13% up on a year ago. The value of underlying projects starts was boosted by a sharp rise in infrastructure work, while the flow of utilities projects remains firm, albeit slightly down on a strong corresponding period a year ago. Furthermore, the civil engineering sector is benefitting from several major schemes (schemes over £100 million are excluded from the Civil Engineering Index), such as the £6.3 billion M25 widening scheme, that have started on site during the summer and will continue to contribute to sector activity during 2010.

Featured region: North West

Recent performance
The decline in project starts in the region last year was led by sharp falls in private housing, industrial, office and hotel & leisure projects. This downward trend has continued during the current year, with the value of underlying private housing and industrial project starts falling by 57% and 55% respectively, year-on-year, during the first eight months of 2009. The value of office project starts was also 35% lower over the same period. The absence of any office projects of significant scale is particularly noticeable.

The education and health sectors have fared better. Building on increases in projects starts during 2008, the underlying value of education and health work starting on site during the first nine months of 2009 was respectively 57% and 19% higher than a year ago.

Disappointingly, the value of underlying social housing starts has also fallen back sharply, despite the promise of increased government funding. The underlying value of project starts fell by a third during 2008 and projects starts during the first nine months of this year were similarly 7% down on the corresponding period of 2008.

Infrastructure starts in the North West have begun to improve again following a poor few months. During the nine months to September infrastructure starts were running at almost twice last year’s level, in part due to work starting on the £46 million A34 Alderley Edge bypass. The flow of utility work has also been strong, with the value of underlying project starts during January to September 2009 119% up on a year ago, in large part due to a £80 million project at Sellafield. The sharp rise in civil engineering projects helped counter the continuing weakness in the residential and non-residential sectors, lifting the value of underlying construction starts during the first nine months of this year by 4% against the corresponding period of 2008.

Prospects
Private housing has been a particularly fragile sector over the last year. Planning approvals for private housing projects remained extremely poor during the first nine months of this year, being 64% down on a year ago, pointing to a further weakening in project starts near term. Office construction is also set to remain weak, with the value of underlying planning approvals falling by 27% year-on-year during the nine months to September.

Against this protracted weakening in private sector work, public sector related construction should remain strong, following recent increases in the underlying planning approvals for the education and health sectors. However, a 7% fall in detailed planning approvals in social housing projects since the start of 2009 points to the sector remaining a drag on construction activity in the region over the coming months.

Conditions in the region have remained difficult, but underlying construction starts are starting to stabilise as the region benefits from an increase in public sector and civil engineering projects (see table below). This is forecast to limit the annual decline in the value of underlying project starts in the region to 2% during the current year. However, with Government funding for public sector projects coming under increasing pressure and private sector projects in the region continuing to struggle, any recovery in project starts will be anaemic and slow to emerge, with project starts forecast to be flat next year and during 2011.

Featured sector: Offices

Recent performance
Office construction was one of the fastest expanding areas of construction activity over the three years to 2007 and a key driver of industry growth, with office construction output rising by more than 50% since 2004.

However, the crisis in global financial markets and the subsequent downturn in the UK economy have cast a shadow over the sector’s prospects as developers fret over the implications for occupier demand, and securing project funding has become more difficult and expensive.

The Central London office market dominates the sector, with the Capital typically accounting for 40% of new office projects. The previous boom in new office projects was underpinned by rising demand for office space, in part from a buoyant financial services sector which, at its peak, had taken on an additional 210,000 people since 2004. CB Richard Ellis estimates that together banking, finance and business services accounted for half of central London office space taken up during the third quarter of 2007.

In contrast, retrenchment in the financial service sector over the last 12 to 18 months has been a key factor contributing to a dramatic weakening in the office property market. Knight Frank recorded a 58% decline in the take-up of office accommodation accompanied by a 62% rise in available floorspace in central London during the first quarter of 2009 compared with a year earlier. Weaker demand from occupiers has prompted a marked decline in rents, with CB Richard Ellis reporting that average rental levels in the first quarter were 25% down on a year earlier. Capital values have also suffered: CB Richard Ellis estimates that in May 2009, capital values in the UK office market were 45% off their June 2007 peak. The sharp falls in capital values has prompted major write-downs for landlords, including Land Securities and British Land.

The impact upon project starts has been dramatic, with the pace of decline rapidly gaining momentum during the course of the year. Whilst the value of underlying construction starts fell 28% during the year as a whole, project starts during the final quarter of 2008 were over 36% down on a year earlier. This marked weakening has continued during the current year, with the value of underlying construction starts during the first nine months 45% down on a year ago.

The value of underlying construction starts was down sharply in many parts of the UK during the second quarter, with falls in excess of 50% recorded in the East of England, the East Midlands, the South West, West Midlands and Wales.

Over the last year London has been even more severely affected as the majority of schemes valued over £100 million are also in the capital and these, too, have become scarce. However, having fallen precipitously during 2008, the decline in underlying value of project starts has slowed since the start of the 2009. In addition, work on site is currently getting underway on the £300 million “Shard of Glass” which should provide a welcome boost to sector workload in the capital.

Prospects
The office construction sector continues to be especially hard hit by the economic downturn and the repercussions of the credit crunch on the financial services sector. The ‘Shard of Glass’ aside, there were fewer major projects (that is, projects worth £100 million or more) in the pre-construction pipeline during 2008. More worryingly, the value of underlying planning approvals also fell sharply across the country during 2008, down by 32% year-on-year. The sharp fall in underlying planning approvals has rapidly translated into a lower level of underlying construction starts.

The ongoing problems in the financial and property sectors will have a large impact on prospects for office construction. Now, with many of the City’s financial and business services firms reducing their workforces, growth in the underlying demand for office space is set to fall back even further over the coming months. Given the sharp rise in vacant floorspace and falling rental levels, developers and their financiers are understandably nervous. Many of the proposed flagship schemes have been either shelved or cancelled.

The hesitant nature of the recovery in financial markets, in particular the protracted scarcity of development finance, will remain a constraint on new project starts during the remainder of 2009. Against this background, a continued weakness in the value of underlying office starts is forecast for the closing months of 2009, and we expect the value of underlying construction starts to fall by 39% during the year as a whole.

At 3%, the decline in sector output was relatively modest last year. However, the absence of new project starts has become an increasing drag upon sector output as schemes currently on site are completed. Furthermore in the current market, developers of existing speculative schemes are likely to defer fitting out until tenants are secured, further depressing output. Output during the first nine months of 2009 was 45% down on a year earlier.

However, as the recent trading statement from Land Securities highlights, even in markets as turbulent as these, opportunities do emerge. The company notes that whilst property values are still declining, growing investor interest is now evident for both prime- and mid-quality properties. This suggests that, having fallen by around 45% from their peak, capital values may begin to stabilise over the coming months. Furthermore Land Securities is planning to press ahead with two major West End developments next year.

Looking further forward, we also expect sector starts to rebound by 2010. Based on projects currently in our database, we should see an uplift in the value of underlying construction starts by almost 50% in 2010. However, whilst dramatic, such an upturn would still leave the value of project starts some 35% adrift of 2007 levels. Furthermore, if there is a renewed weakening in economic conditions, the downside risks for the sector will increase.

Project News

F P Hurley awarded sub-contract
F P Hurley has secured the mechanical and electrical sub-contract for the construction of the extension to the Prince Phillip Hospital at Dafen in Llanelli. The £3.9 million scheme for Hywel Dda NHS Trust will provide a breast care facility, designed by Boyes Rees Architects. Main contractor Interserve Project Services commenced work January 2009.
Project ID: 08292318

E J Honeybun awarded sub-contract
E J Honeybun Ltd has secured the mechanical and electrical sub-contract for the rafting centre and canoe slalom being built at the International Sports Village in Cardiff for Cardiff Harbour Authority. Works commenced Autumn 2008 on the £12.41 million with main contractor Dean & Dyball.
Project ID: 06465527

Plans approved for health centre
Detailed plans have now been approved for the construction of a health centre at Palmerston Road, Boscombe in Bournemouth. The £1 million scheme for Bournemouth Teaching Primary Care Trust has been designed by QP Architecture and main contractor Greendale Construction Ltd is expected to commence on site January 2010.
Project ID: 08390454

Shortlist announced for Midlands Highways Alliance
A shortlist of eight contractors has been announced for the Midlands Highways Alliance Medium Schemes Framework 1 (MSF1). The shorlist will be further reduced to four contractors in March 2010. The value of the contract is between £125-300 million. The shortlist of contractors are: BAM Nuttall, Birse, Tarmac/Carillion, May Gurney, Ringway, Interserve, Aggregate Industries/Geoffrey Osborne and Jackson Civil Engineering.
Project ID: 09265578

Lovell wins £3.5m Wirral housing job
Lovell has won a £3.5 million contract with Cosmopolitan Housing Association to build a housing scheme at Rice Lane, Egremont, Wirral. The Morgan Sindall subsidiary is set to start work on the development, which will create 34 new homes and involve the refurbishment of two existing properties, in Decmeber. All of the housing, a mixture of two-, three- and four-bedroom houses and two-bedroom bungalows, will be for affordable rent. The entire development is set to be completed in 2012 and the homes will meet Level 3 of the Code for Sustainable Homes.
Project ID: 08517466

Ringway scoops £2.9m roads job
Ringway has won a £2.9 million contract with the Highways Agency to carry out the A184 White Mare Pool East and West structures refurbishment scheme in Leeds. Work to be carried out includes alterations to two 3-span bridges, which carry the A184 dual carriageway over the A194 circulatory. This scheme requires the removal and reconstruction of the reinforced concrete bearing shelves to the abutments at each bridge as well as the repair of corrosion damage to the reinforced concrete intermediate leaf piers. Both roads must remain open to traffic as the work is carried out.
Project ID: 09149356

Company News

Styles & Wood turnover and pre-tax profit meet expectations
Styles & Wood said its turnover and pre-tax profit for 2009 are anticipated to be in line with expectations. In a trading update from 1 July 2009 to 18 November Styles & Wood said all its four divisions - StoreFit, StorePlanning, StoreCare and StoreData - have traded within expectations. Bosses said the restructuring of the group to align the cost base with current revenues and future opportunities will be complete by the end of 2009 with costs of this exercise in line with expectations. The refinancing completed on 29 June 2009 has left the group with a strong balance sheet. Net cash at 31 October 2009 was £6.3 million which is better than was expected at the time of the refinancing. The trading statement said: "The retail fit out and refurbishment market place is starting to show some signs of stabilising but this is against a very difficult period in the first half of 2009. "Overall our customers remain cautious with their investment programmes and we expect that this position will continue into 2010."

Bovis Homes reports 83pc rise in private reservations
Bovis Homes Group has reported an 83 per cent increase in private home reservations in the year to 13 November. The firm said in an Interim Management Statement for the period from 1 July that it had sustained strong performance in private reservations. It achieved 1,488 private reservations in the last 12 months, up from 811 in the same period last year. The Group anticipates completing about 1,800 homes in 2008, broadly in line with the 1,817 it completed in 2008. It said in the statement: "Following signs of stabilisation in the housing market in the first half of 2009, the Group has seen further signs of an improving market backdrop."

Ex-HOK figurehead Berry joins Woods Bagot
James Berry, the ex-HOK, Skanska and British Rail architect, has joined global giant Woods Bagot to spearhead the outfit's expansion into the transport sector. The former director of management and operations at HOK, who was made redundant from the practice in September, has re-emerged on the architectural scene as Woods Bagot's director of public, transportation and institutional. Speaking to the AJ, Berry said he had ruled out going it alone and had opted to join Woods Bagot to concentrate on the large-scale projects - schemes that only become available while working 'at one of the major players'. Berry said: 'I want to build on Woods Bagot's track record on transportation. There are huge opportunities over the coming decade in new and improved transportation infrastructure across the globe.'

Based in London, Berry also wanted to expand the company's remit into the public sector, adding that although revenue was likely to reduce he wanted the practice to position 'itself for long-term gain'. However Berry said he had no hidden agenda to change the perception of Woods Bagot, 'even if he could' commenting: 'The practice is on a trajectory that appeals to me. 'As I outlined in my Royal Academy speech Architectural practices have struggled to be of a sufficient size and have sufficient resources to contribute to research and development. 'But Woods Bagot has made that investment in research, creating a knowledge base that supports design, where many haven't.' Asked whether he was worried of being made redundant again, Berry said: 'Architects should be under no illusions the next 12-18 months will be tough. 'But Woods Bagot is looking at different global regions [and diverse projects] and also investing for the future - for a time when things improve.'

Arup posts turnover growth but fall in profit
Arup announced 22.5% growth in turnover to £889M and a total profit before tax, dividends and staff profit of £77M, down from £81M in 2008. £29m of profit was paid through a global profit sharing scheme to the employees - the company' s beneficiaries under the trust ownership structure. "Conditions will continue to be challenging in many of our markets for some time, but our multi-disciplinary capability and global spread enables us to continue to win and deliver high quality projects around the world," said Arup chairman Philip Dilley. The balance sheet has also remained strong, with cash reserves of over £163;125m, up 21% on the previous year.

"With the global impact of the recession, and the rapid slow down in many areas of construction and related design activities, we have been careful to manage the level of our staff resources to match our current and expected future workload," said Group Chief Operating Officer David Whittleton. "Financial performance for 2009-10 is, however, likely to be affected as a result. We have reduced staff numbers in some locations, although the overall impact has been somewhat mitigated by growth in our infrastructure business, and resilient markets in a number of our geographies."

Travelodge to open 10 new sites
Budget hotel chain Travelodge has announced plans to build 10 new sites over the next year. Around £47 million will be invested to open 10 new hotels in 2010, creating 250 jobs. London, Edinburgh, Manchester, Newbury, Ipswich, Newcastle-under-Lyme and Llanelli are among the cities where the chain will open up new bases. The total number of Travelodge rooms will rise to 27,000 after the expansion, which is due to add 857 units to its figures.

Travelodge managing director for development Paul Harvey said: "With 60 exchanges announced in 2009, we have now signed more hotels this year than ever before. Whilst the property market is still challenging we have been able to add some fantastic sites to our estate. "We are now the biggest hotel brand in Edinburgh, having doubled our room stock in the city in the last 24 months, and we now have eight sites in Manchester." The firm is aiming to have a thousand hotels with 70,000 rooms by 2020. Founded in 1985, Travelodge operates 385 hotels, of which 10 are in Ireland and three in Spain.

Barratt to open new sites after successful refinancing
Barratt Developments has said it is in a strong position to open new sites after completing a successful refinancing of the company. In a trading update for 1 July 2009 to 8 November Barratt said it has significantly strengthen its financial position after a £720.5 million rights issue was completed on 4 November. Bosses anticipate that net debt as at 31 December 2009 will now be around £700 million compared with £1.42 billion a year earlier. During the first 19 weeks of the year Barratt opened 39 active sites and expect site numbers to be broadly stable during the year.

The business continues to focus on managing stock levels to operate at the optimal level in the current environment. Barratt Developments chief executive Mark Clare said: "With the successful refinancing of the business now completed, we have substantially reduced debt levels and are in a strong position to buy land as opportunities emerge and to open new sites. "Our net private reservation rates per site are running 34 per cent ahead of last year. While trading conditions in the housing market have improved, activity levels will remain constrained until the availability of mortgage finance increases particularly at higher loan to value levels." Assuming there is no significant change in mortgage availability Barratt expects to build 12,000 homes in 2010 with around 16 per cent of the total comprising social units.

The trading statement said: "Consistent with the re-planning and build programme, a shift in product mix towards a higher proportion of houses is expected. "We continue to anticipate that this change in mix will improve average selling prices by around 8-10 per cent for the financial year." The forward order book at 8 November 2009 stands at £846.6 million compared with £817.7 million a year ago. As at 8 November Barratt is operating from 362 active sites compared with 449 in 2008.

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Allan Wilen 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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