Glenigan Insight
16th February 2010
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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Construction down 8% as snow stalls projects
Featured Region:
East of England
Featured Sector:
Infrastructure
Project News
Naylor & Walkden awarded contract
JCJ Demolition & Construction awarded contract
Plans submitted for wind farm
Tenders returned for 232 flats
Portsmouth Water advertises £32m AMP5 framework
Willmott Dixon to build £15m school in Middlesborough
Company News
Hadden Construction win two new contracts
May Gurney development director Ian Findlater steps down
Sisk acquires design and manufacturing firm Eschmann
Rowecord turnover down while Stephenson and CJ O'Shea up
Turnover increases but profits down for demolition firms
Highgrove Homes' companies cease trading with 83 jobs lost
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The value of construction projects starting on site in January was eight per cent lower than in January 2009 according to the latest Glenigan Index. Project starts were delayed by snow, with activity in the non-residential sector being particularly weak. “Glenigan forecast a gradual recovery over the course of 2010 as private sector confidence grows, however Government spending cuts will remain a drag” according to Allan Wilen, economics director, Glenigan. He continued “The industry is bracing itself for further delays with expectations of more snow and sub-zero temperatures in February.”
Housing projects recovered well during the Autumn, peaking at 27 per cent higher by value year on year in October 2009. New housing projects were particularly affected by the bad weather resulting in the value of projects starting on site in January 2010 being one per cent lower than January 2009, despite an increase in social housing projects. The Glenigan Residential Index for January 2010 was 74.4 versus a 2006 base of 100. Mr Wilen commented “The pick-up in project starts during the autumn indicates that housebuilders are preparing to capitalise on the anticipated modest improvement in market conditions and a gradual recovery in new residential projects is forecast over the course of this year.” He added, “Weak household earnings and consumer confidence, combined with limited mortgage availability are expected to restrict the pace of recovery in new house sales during 2010”.
New non-residential projects continue to be particularly weak due to low confidence in the private commercial and industrial sectors. The Glenigan Non-Residential Index for January 2010 was 88.1 compared to 102.3 for January 2009, a 14 per cent fall. There are tentative signs however that market conditions are now stabilising. A rise in government funded work since April 2009 helped partially offset the impact of weak private sector investment upon the Non-Residential Index. However, a more recent drop in health and community and amenity projects contributed to the fall in the January Index. In contrast the flow of education projects has remained firm. Commenting on the outlook for the non-residential sector, Mr Wilen said “The forecast increase in private sector projects will be offset by Government spending cuts, making for a slow and fragile recovery over the next two years”.
Civil engineering projects slipped back in January following a surge in the Autumn which saw the value of projects starts in November 2009 31 per cent higher than November 2008 thanks to a surge in rail and road projects that has since lost momentum. The Glenigan Civil Engineering Index for November 2009 was 113.7 compared to 82.1 in January 2010, just two per cent higher than January 2009.
Read the February Glenigan Index for the latest industry analysis.
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Recent performance
Construction starts in the East of England have fallen sharply over the last two years. The region had a year-on-year fall of 37% in the value of underlying construction starts during the fourth quarter of 2008, which dragged down project starts to stand 8% lower for the year as a whole. The region would have endured a much shaper decline but for a surge in civil engineering work during the final quarter. Many sectors have experienced significant falls in both the underlying value and number of projects starting on site, with offices, private housing and retail among the hardest hit in the region. The fall in private housing has been particularly damaging. In 2006, the sector accounted for 35% of the value of underlying construction starts in the East of England, by the first quarter of this year it had fallen to 17%.
One bright spot for the East of England has been the start on site of construction work to expand Felixstowe, the UK’s major container port. Not only has the project provide a direct boost to civil engineering activity in the regions, but in the long term it should also act as a catalyst for further investment in areas such as warehousing, if the expansion is successful in delivering increased trade through the port.
Project starts in the region were squeezed further over the course of 2009. Starts remained weak during the first quarter of 2009, running at half the level of a year ago. Project starts did stabilise during the second quarter of thanks to sharp increases in education, health and social housing schemes. However while the social housing sector remained firm during the three months to September, the education sector slipped back. Whilst the closing months of the year saw a pick up in health projects, the value of construction project in the region during the fourth quarter remained on a par with the poor performance seen a year ago. Overall the value of underlying construction projects fell by 26% during 2009 as a whole.
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Prospects
Private sector residential and non-residential work in the East of England has fallen back sharply over the last year. Whilst there was a pick-up in public sector health, education and social housing projects during 2009, this proved insufficient to arrest the overall decline in project stats during the year.
Furthermore a weak development pipeline points to projects starts remaining under pressure near term. During the six months to June 2009, the underlying value of planning approvals was 22% down on a year earlier, in large part due to sharp declines in retail, infrastructure and utilities scheme approvals. However, approval for two significant education projects during July helped to counter the weak underlying trend, limiting the drop in the value of planning approvals during the first eleven months of 2009 to 15% against a year earlier. Unfortunately, having secured planning approval, the lion’s share of the work associated with these projects has been placed on hold.
Private housing construction has been especially hard hit by the downturn in the housing market. According to Halifax, house prices in the region were particularly overvalued in relation to average earnings at the peak of the market. Whilst house prices have since fallen sharply in the region, potentially improving affordability, first time buyers remained scarce during 2009.
This, together with the problems in the wider economy and constraints in accessing finance, means that it is taking time for private housing construction to recover in the region. Unsurprisingly, the value of underlying planning approvals for private housing remains weak, being 49% lower during the first eleven months of 2009 than a year earlier. The poor level of projects securing detailed planning approval is expected to remain a constraint on private housing starts in the region. Against this, housebuilders have a significant pool of shelved schemes with planning approval that could be quickly brought on stream as market conditions improve. Indeed the closing months of 2009 have already seen a sharp pick up in private housing starts, albeit from an extremely low base, as housebuilders open up new sites in anticipation of better market conditions.
Glenigan estimates that the value of underlying construction starts will slip back further near term. However, the value of starts in the region is expected to strengthen over the next two years as confidence and liquidity gradually return to the housing market and private sector investment activity improves. Indeed, the private housing sector is so critical to construction activity in the region that its forecast improvement is expected to bolster the recovery in project starts during 2010 and 2011.
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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 during 2008 and 2009. The value of underlying project starts, which excludes £100 million plus schemes, fell by 17% during 2008. Despite this underlying decline, overall sector starts rose sharply thanks to an increase in major transport projects. These schemes helped to sustain the sector activity during 2009, countering the slowdown in underlying project starts during 2008 and the first half of last 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. Growth last year was more broadly spread, with only the East of England, the East Midlands and Scotland enduring a drop in underlying project starts. .
In addition, whilst the value of underlying project starts during 2009 was 7% up on the previous year, 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 over the next two years.
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Prospects
Whilst the first three months of the new financial year saw underlying project starts slip back against a year ago, as anticipated, underlying project starts have subsequently strengthened. After an extremely weak start to 2009, the flow of projects at the detailed planning stage has strengthened markedly. As a result the value of underlying detailed planning approvals during 2009 was 20% up on a year earlier and is expected to help support a further rise in new projects starts during the coming year. Further sustained growth in underlying project starts is forecast for the next two years, driven in particular by an increase in rail related work.
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.
However, there are significant downside risks to this positive outlook for the sector. 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.
In particular, increasing pressure on government finances, continued difficulties in accessing capital markets to secure private funding for major projects and a change of Government could all disrupt the flow of work in the sector. For example, whilst London’s Conservative Mayor is pressing the party to carry on with the Crossrail project should they form the next Government, the shadow chief secretary to the Treasury has insisted that the Government should only contribute £5 billion directly to the programme and is said to be reviewing the feasibility of the private sector meeting its contribution of £6 billion. While the party would not scrap the project, it may accept delays to the planned 2017 opening. Furthermore budgetary constraint may force the Mayor to scale back investment elsewhere.
In addition the Conservatives have pledge to block further runways at Heathrow and Stansted. This would also be likely to slow future investment to raise the quality and capacity of the terminals at these airports. However, airport operators may find greater success in developing regional airports, while the new owners of Gatwick also have plans to improve the quality of existing facilities.
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
Naylor & Walkden awarded contract
Naylor & Walkden Ltd has been awarded the main contract for the construction of two commercial units for Bobby's Foods Plc at Rainford in St Helens. The £1 million scheme has been designed by Harrison Mutch Ltd and works are to commence late March 2010.
Project ID: 08104118
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JCJ Demolition & Construction awarded contract
Fife Council has appointed JCJ Demolition & Construction Ltd to demolish a C-listed, two and three storey structure at Bonnygate in Cupar. The first phase of the £300k work will involve temporarily reinforcing the building in preparation of the main demolition work as well as repairing and stabilising its chimneys. Work will start on 15th February 2010.
Project ID: 10062827
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Plans submitted for wind farm
E.ON UK Plc has submitted detailed plans to Daventry District Council for the construction of seven wind turbines in Kelmarsh, Northampton. If granted planning consent, the £17.5 million Kelmarsh wind farm could produce up to 17.5MW of power, enough to meet the annual electricity needs of 7,828 households and displace over 15,000 tonnes of CO2 a year.
Project ID: 08399265
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Tenders returned for 232 flats
Tenders have now been returned for the construction of a £12.6 million scheme for Origin Housing Group & East & North Hertfordshire NHS Trust. The site at Watermill Lane in Enfield will see the construction of 232 key worker and affordable flats and an office. Plans have been drawn up by planning consultants King Sturge LLP and PCKO Architects.
Project ID: 09335072
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Portsmouth Water advertises £32m AMP5 framework
Portsmouth Water is inviting contractors to bid for a £32 million framework agreement covering its AMP5 mains renewal programme across Hampshire and West Sussex. One contractor will be appointed to carry out the five-year programme as well as additional works. The agreement will run from July 2010 until the end of June 2015. Firms have until 11 March to register their interest and pre-qualification questionnaires are due for submission by 18 March.
Project ID: 10062926
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Willmott Dixon to build £15m school in Middlesborough
Willmott Dixon has received the green light for a £15.2 million project as part of its Middlesbrough Building Schools for the Future contract. The contractor will design and build a secondary school to replace the existing Beverley and Tollesby Schools. The project should be completed by Easter 2011 and will be the fourth to be delivered by Willmott Dixon for Middlesbrough Council as part of the BSF scheme. Willmott Dixon was appointed to the six-school BSF project under the original academies framework.
Project ID: 09302558
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Company News
Hadden Construction win two new contracts
Perthshire based firm Hadden Construction have recently secured a £1.7m contract with Rural Stirling Housing Association to build a new housing development of 18 units at Castlehill Loan, Kippen. Work is set to begin at the end of February and complete in December 2010.
Hadden has also successfully won a £908k contract to carry out alterations and an extension to Townhill Primary School, Dunfermline for Fife Council.
Work on this project will begin shortly and complete in Autumn 2010.
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May Gurney development director Ian Findlater steps down
May Gurney's group business development director Ian Findlater will step down from the board in April, the company has revealed. The infrastructure services group today told the City that Mr Findlater had "expressed his intention to retire from the business", but would continue to represent the company in his work with other trade and development organisations. The statement said: "Ian will step down from the board and full-time involvement in April 2010. "[But] on an ongoing basis, Ian will continue to represent May Gurney through his participation in key national, regional and local organisations such as the CBI, BITC, Young Enterprise and Shaping Norfolk's Future." Mr Findlater joined the group in 2001, following which the company said he played a "significant role in May Gurney's success", particularly in the development of new market opportunities and being an advocate of sustainability issues.
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Sisk acquires design and manufacturing firm Eschmann
Irish contractor Sisk is expected to increase its precense in the healthcare sector after purchasing an international design and manufacturing business in a deal understood to be worth about £25 million. The group, which has a number of distribution and healthcare-related businesses in addition to its construction and civils divisions, has acquired UK-based Eschmann, a specialist in the design and manufacture of equipment for hospitals and dental practices.
The company had offices in the UK and Singapore, and supplies to the British, European, African and Middle Eastern markets. Sisk group chief executive Liam Nagle said the acquisition was part of the continued growth and diversification of the business in a "challenging global economic climate".
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Rowecord turnover down while Stephenson and CJ O'Shea up
Steel contractor Rowecord saw its turnover fall 17.3 per cent last year while pre-tax profit plummeted 73 per cent.Group turnover for the year to 30 June 2009 totalled £104.4 million compared to £132 million the prior year while pre-tax profit fell to £1.6 million from £5.9 million. In the firm's latest group accounts, founder and chairman Ben Hoppe said the firm was in a healthy position with a successful year anticipated going forward due to an "extremely strong order book".
He said: "We are satisfied with the results for the year and believe the group has positioned itself to take advantage of all opportunities that are presented during the following period." Rowecord staff numbers increased to 1,054 from 1,017 while the highest paid director took £147,500 compared to £313,500 the prior year. Meanwhile concrete contractors CJ O'Shea and Stephenson both saw healthy rises in their turnover.
CJ O'Shea's turnover in the year to 31 March 2009 increased 32 per cent to £96.6 million from £73 million while pre-tax profit rose to £10.1 million from £6 million. CJ O'Shea said its prospects for the forthcoming year are also "very encouraging because of the level of contract work already secured". Stephenson's turnover in the year to 31 March 2009 more than doubled from £7.1 million to £14.6 million. Profit before tax rose to £540,000 from £330,000.
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Turnover increases but profits down for demolition firms
Demolition companies Coleman and 777 Demolition both reported higher turnover but falling profit in accounts for the financial year to 30 April 2009, filed with companies house this week. Turnover at the two firms rose by 3 per cent and 6 per cent to £15.5 million and £13.4 million respectively, while profit before tax fell by £80,000 to £0.5 million for Coleman and by £130,000, to £47,000 for 777 Demolition.
Coleman was keen to point out that it has invested £1.3 million in state of the art demolition equipment, including a super high reach excavator. With a reach of 65m, Coleman said this is one of the highest reach excavators in Europe and can demolish super structures up to this height, where using explosives is not an option. "Coleman is a progressive organisation that invests heavily in its future development," bosses said. During the year Coleman kept its staff numbers unchanged at 115, paying out £4 million in wages, which was a small fall from the year earlier, while 777 did not release staff numbers or wage figures.
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Highgrove Homes' companies cease trading with 83 jobs lost
Darren Healey Building Contractors and its residential arm Highgrove Homes (South West) have ceased trading with the loss of 83 jobs. The building firms in Truro, Cornwall is reported to have had bad debts totalling £800,000. At present the firms are neither in administration or receivership, but they have ceased working and a decision on the future is expected in the next few days.
Staff at the Darren Healey and Highgrove Homes (South West) were told last Thursday that they no longer had jobs after going without pay for January. The two firms are part of parent company Highgrove Homes Limited which has not ceased trading itself. Accountant Tony Jopson who has been appointed by the firms' directors said: "We are currently involved to find the best possible procedure to go forward from here. "We are trying to make the best of the situation at the moment. It is in limbo at the moment.
"It is not in administration. The directors are taking insolvency advice." Parent company Highgrove Homes Limited's last filed accounts for the year to 30 April 2009 showed turnover of £12 million, down from the prior year's £13.6 million. Emma Bridges, director at construction credit referencing agency Top Service said: "Numerous reports of non payment indicated to us that there were cash flow problems within the group."
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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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