Glenigan Insight
23rd 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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Fewer shelved projects points to improved market confidence
Featured Region:
North East
Featured Sector:
Offices
Project News
Architect appointed for John O'Groats refurb
ISG awarded college contract
Willmott Dixon awarded 42 homes contract
Barhale Construction awarded bridge contract
Contractor sought for recreation ground
Contractor sought for university scheme
Company News
Smaller stores to expand Asda chain
T Clarke re-brands SCS Building Services in Scotland
Bovis Lend Lease parent in potential £570m capital raising
Austin-Smith:Lord wins green light for Dublin station overhaul
Redrow in talks over land swap deals
Frank Galliers went into liquidation with £10m debts
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Whilst poor weather has held back project starts over the last couple of months, the latest Glenigan data for shelved schemes points to a gradual improvement in market confidence. Although seasonal factors lifted the number of projects being shelved in January off the low point seen during December last year, the number of shelved projects during the month was still 59% down on a year ago. Furthermore, at £2 billion, the value of work put on hold during the month, excluding major schemes of £100m or more, was a third of that seen in January 2009.
The relatively low level of shelved projects confirms the more positive trend that emerged during the closing months of last year.
Private housing, at 27%, still accounted for the largest proportion of work being put on hold during the three months to January. However, although the number of shelved private housing projects being re-activated has slowed slightly in recent months, such projects still accounted for a third of all projects re-activated during the three months to January.
In contrast, whilst a third fewer office projects were shelved during the three months to January 2010 than during the corresponding period a year ago, as of yet, few stalled office projects are being re-activated by clients.
Read the February Glenigan Index for the latest industry analysis.
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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 weakened further during the first six months of 2009 and remained at a low ebb during the second half of the year, despite a surge in civil engineering projects The value of underlying project starts fell by 27% during the year as a whole.
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 39% against the previous year. Project starts fell back further during the first half of 2009. Although project flow picked up during the second half of the year, starts during 2009 as a whole were still 28% 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 this year, the scheme appears to have already stimulated investment in the region. For instance, work has 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 the third quarter of 2008 on a year earlier. Unfortunately industrial project starts subsequently fell back sharply, being 81% down during 2009 on the previous year.
Other construction sectors have fared better in recent months. The flow of social housing projects in the region has climbed steadily over the last two years. In addition health and education project starts have also picked up in recent months, being respectively 239% and 177% higher during the three months to November 2009 against the same period a year ago. Whilst education and health projects starts finished the year as whole down on 2008 levels, the recent pick up in project starts will help lift construction activity in the region during 2010.
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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 for private housing projects have remained anaemic during the first eleven months of 2009, being 52% down on a year ago.
Industrial construction starts are also expected to remain scarce, following a 55% fall in the value of underlying planning approvals during the eleven months to November 2009.
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 in the development pipeline and could potentially provide a welcome boost to construction activity in the region if they start as scheduled during 2010. Schemes include a £400 million bio-mass power plant and a £300 million deep sea container terminal at Teesport.
Nevertheless, the outlook for the North East remains challenging, especially near term. Although, based on analysis of the projects currently in our database, we expect a strengthening in project starts over the course of 2010, forecast growth will be vulnerable to any further weakening in the UK economy or faster than anticipated reductions in government capital funding. Furthermore, despite the forecast bounce back during 2010 project starts will remain 14% down on 2007 levels, while the decline in project starts over the last two years will continue to depress construction output in the region.
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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% between 2004 and 2007.
However, the crisis in global financial markets and the subsequent downturn in the UK economy have hit the sector especially hard as developers have fretted 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 2 years has been a key factor contributing to a dramatic weakening in the office property market. Knight Frank recorded a 40% decline in the take-up of office accommodation accompanied by a 125% rise in available floorspace in central London over the two years to the third quarter of 2009. Weaker demand from occupiers has prompted a marked decline in rents, with CB Richard Ellis reporting that average rental levels in the first quarter of 2009 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 prompted major write-downs for landlords, including Land Securities and British Land.
However CB Richard Ellis reports that the closing months of 2009 saw a pick up in for commercial and industrial property markets, including offices. In particular property investment activity has strengthened, in part due to expenditure by overseas investors who are also benefitting from Sterling weakness. In addition, CB Richard Ellis estimate that 3.6m sq ft of central London office space was leased during the fourth quarter of 2009, which is above the long-term average and the highest level of quarterly take-up since 2008. In addition, whilst rental returns remain weak, capital values have strengthened. CB Richard Ellis reports, that capital values rose 2.9% during December, although they remained 4.9% down on a year earlier
The impact of the downturn in the UK office market upon project starts has been dramatic over the last two years. Glenigan recorded a 25% decline in the value of underlying office starts during 2008 as a whole. The rate of decline accelerated last year, with project starts half the weak level of starts seen in 2008.
The value of underlying construction starts has fallen sharply across the UK. Project starts in the capital, which accounts for a third of underlying projects starts in the UK, fell 49% during 2009, while the East of England, the East Midlands, the South West, the West Midlands and Yorkshire & the Humber suffered falls in excess of 50% Over the last two years London has been more harshly impacted than the underlying data suggests as the majority of schemes valued over £100 million are also in the capital and these, too, have become scarce.
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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 are fewer major projects (that is, projects worth £100 million or more) in the pre-construction pipeline. More worryingly, the value of underlying planning approvals has also fallen sharply across the country over the last two years, with detailed planning approvals in 2009 running at less than half the level seen in 2007.The sharp fall in underlying planning approvals has rapidly translated into a lower level of underlying construction starts.
Given the sharp rise in vacant floorspace and falling rental levels since 2007, developers and their financiers are understandably nervous. Many of the proposed flagship schemes have been either shelved or cancelled.
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. As CB Richard Ellis has reported, having fallen by around 45% from their peak, this rise in investor interest is starting to lift depressed capital values. CB Richard Ellis reports, that capital values rose 2.9% during December, although they remained 4.9% down on a year earlier. Furthermore Land Securities is planning to press ahead with two major West End developments next year.
Furthermore, whilst the flow of new office projects remains extremely weak, market conditions have moved off the low point reached in the first half of 2009. The take-up of central London office space improved considerably during the final six months of 2009 as occupier confidence strengthened, with the turnaround most noticeable in the City. CB Richard Ellis estimate that 3.6m sq ft of central London office space was leased during the fourth quarter of 2009, which is above the long-term average and the highest level of quarterly take-up since 2008.
Against this background of firmer demand for office accommodation, the next two years will see a sharp fall in the volume of new floorspace coming onto the market. This is set to support capital and rental growth as the supply of available floorspace dwindles. This in turn should encourage developers to bring forward new developments. Whilst Glenigan expects the flow of new office projects starting on site to remain weak during the first six months of 2010, we anticipate project starts will gradually pick-up from the second half of this year onwards.
Looking forward, we expect sector starts to rebound in 2010. Based on projects currently in our database, we should see an uplift in the value of underlying construction starts by 23% in 2010, with a further 13% rise during 2011. However, whilst dramatic, such an upturn would still leave the value of project starts some 48% adrift of 2007 levels. Furthermore, if there is a renewed weakening in economic conditions, the downside risks for the sector will increase.
Construction output, however, will lag behind the forecast improvement in project starts. At 3%, the decline in sector output was relatively modest during 2008. However, the absence of new project starts became an increasing drag upon sector output last year as work on site on existing schemes was 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 38% down on a year earlier. Further sharp falls in output are anticipated for the coming year as the value of projects reaching completion continues to outpace the value of new schemes starting on site.
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Project News
Architect appointed for John O'Groats refurb
GLM Architects has been appointed for the overhaul of John O'Groats in Scotland. The £15 million scheme for Highlands And Islands Enterprise will include the overhaul of John O'Groats hotel, the creation of a new harbour square, the refurbishment of the Last House Museum, the construction of a new visitor centre and new luxury self catering lodges, along with the restoration of coastal paths. Robert Adam Architects is the masterplanner on the scheme.
Project ID: 09351677
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ISG awarded college contract
ISG Plc has been awarded the main contract for the construction of an extension to Croydon College. The £14 million scheme has been designed by Nightingale Associates and will involve the construction of a new four-storey further education extension to the south of the existing campus, the extension of the third floor east wing and the refurbishment of the third and fourth floors. Work is expected to start on site March 2010.
Project ID: 09267558
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Willmott Dixon awarded 42 homes contract
Willmott Dixon Housing has been awarded the design and build contract for the construction of 42 houses and flats at The Triangle site, Northern Road in Swindon for Westlea Housing Association. The £4.1 million scheme has been designed by Glenn Howells Architects. Works are expected to commence March 2010.
Project ID: 09239168
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Barhale Construction awarded bridge contract
Cheshire West & Chester Council has appointed Barhale Construction to demolish a bridge and construct a new foot/swing bridge known as the Riversdale Bridge in Northwich. Works will start on 1st March and hoped to be completed by August 2010. The project value is £1.4 million.
Project ID: 09382641
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Contractor sought for recreation ground
London Borough of Haringey is currently inviting applications to tender for the Lordship Recreation Ground regeneration project at Lordship Lane in Tottenham, London. The £4.4 million scheme involves the refurbishment and redesign to the parks extensive landscape, provision of a revised water course and associated access bridges for vehicles and pedestrians, a new build environment centre and the refurbishment and modifications to two existing buildings on the site. Tenders will be invited May 2010 and the project will be let as a single contract including all civil engineering, building and landscape works to ensure a coordinated approach to the refurbishment of the park covering the various packages of work to be completed by December 2012.
Project ID: 08420796
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Contractor sought for university scheme
Applications to tender are currently being invited for the construction of an academic block with a 500 seater lecture theatre at University of Sussex. The quantity surveyor for the £20 million scheme is Currie & Brown. Tenders will be invited mid April 2010.
Project ID: 10065866
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Company News
Smaller stores to expand Asda chain
Supermarket chain Asda is to open three smaller stores around the UK before the end of March. They are part of plans by the Wal-Mart-owned firm to broaden the business and bring it closer to communities. The chain wants to add 10 smaller-format shops across the country this year, creating up to 6,000 jobs.
Asda reported a 6 per cent rise in like-for-like sales for 2009, with sales in the last three months up 4.6 per cent.
Growth was driven by an increase in customer numbers and higher average spend across the year and Asda said it had exceeded its forecasts for both profits and sales. Asda currently has 371 stores across the UK. The firm said the first three openings this year will be in Cumnock, Ayrshire, Kings Heath in the West Midlands and Tweedmouth, in Northumberland.
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T Clarke re-brands SCS Building Services in Scotland
Building services group T Clarke is to re-brand the SCS Building Services company it acquired in 2005. From 1 March, 2010 it will be known as T Clarke Scotland. The firm said: "T Clarke recognises the importance of its Scottish operations and has decided to re-brand the business to underscore its position as an integral part of the group."
T Clarke Scotland managing director Martin Swan said: "This announcement recognises that our senior management, staff and skilled operatives continue to deliver the highest quality of service and professionalism in the many diverse projects we undertake. "The loyalty, professionalism and desire to succeed, strengthens the foundations of the group's activities and we look forward greatly to the challenges and opportunities ahead as we continue to expand our presence in the Scottish marketplace."
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Bovis Lend Lease parent in potential £570m capital raising
Lend Lease, the Australian parent company of Bovis Lend Lease, confirmed overnight that it is in discussions with ratings agencies ahead of a potential AU$1 billion capital raising. Following speculation in the Australian financial press, Lend Lease bosses released a statement and said: "Lend Lease is in discussions with its credit ratings agencies following the announcement of a number of recent acquisitions and project wins. We expect the ratings agencies review to be completed in the next month.
"There are a number of options available to Lend Lease currently under consideration to fund its pipeline of projects including proceeds from asset sales, third party capital, debt, cash or new equity." It is unclear at this stage if this will have any implications for the UK business.
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Austin-Smith:Lord wins green light for Dublin station overhaul
Planning officials have approved a 100 million (£87 million) high-capacity railway station scheme in Dublin city centre featuring a 12-storey tower by Austin-Smith:Lord (ASL). The 20,990m² development, which includes a new concourse above Tara Street, will boost the rail hub's passenger capacity from 25,000 a day to 14,500 per hour during peak times. The landmark, 50m-tall tower will be just nine metres shorter than Ireland's first sky-scraper, Liberty Hall, which is directly across the River Liffey. According to the Liverpool-based practice, the plans are 'sympathetic towards the historic features of the existing concourse', and will retain much of the 19th century railway arches and platform walls.
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Redrow in talks over land swap deals
Housebuilder Redrow is in talks with three other "like-minded firms" about swapping planning ready land to secure more outlets to build on immediately. Redrow founder and chairman Steve Morgan told Construction News his firm could have built significantly more homes in the past year if it had more land. The firm built 2,500 homes in 2009 and has taken on about 150 direct workers since its low point last spring as it looks to ramp up production. Mr Morgan said the company was now in negotiations over land swap deals that would give Redrow more outlets to build on straight away. The idea is to negotiate itself into a geographical spread that will allow it to make the most of regional demand.
Redrow managing director John Tutte said: "There is a reputation in the market that this sort of deal is quite difficult to pull off because everyone has different views about what their land is worth." But he added: "We are in negotiations with three like-minded firms. "It is a good way of making use of the capital in your land bank while increasing your number of outlets to build on."Mr Tutte added that most local authorities are sympathetic to plot substitutions on land that had already received planning permission.
Redrow would not reveal who the talks were with, but Panmure Gordon analyst Rachael Waring said it was likely to be smaller operators on specific sites. She said: "It sounds like a good use of your balance sheet and a way of not having to use cash." Home Builders Federation director of external affairs John Slaughter said land swaps may enable firms to increase overall housing supply. If firms swap parts of sites with other developers then the result could be more than one developer operating at the same time on such sites. "Overall this ensures that more homes can be delivered," he said
"Swaps should be seen as a sign of the market working efficiently to meet customer demand and to enable firms to grow the total volume of output." Mr Morgan said he could provide work for 2,500 more housebuilders if the planning system could be streamlined. He made the claim as he launched a collection of 34 traditional homes called The New Heritage Collection. The homes are predominantly two-storey detached family houses. Mr Morgan said 50 per cent of the homes built by Redrow in 2010 would be from the New Heritage Collection, rising to 100 per cent within three years.At the peak of the housing market, Redrow built 5,000 homes, but that dropped to 2,100 in 2008.
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Frank Galliers went into liquidation with £10m debts
Frank Galliers went into liquidation with debts of nearly £10 million, according to reports. According to the Shropshire Star a creditors meeting on Wednesday was told that Shrewsbury-based Frank Galliers had gone into liquidation owing £4 million to a bank and nearly £6 million to more than 400 creditors. Directors of Frank Galliers attended a meeting in Telford to explain why the firm ceased trading with the loss of more than 130 jobs. Director George Butler said a dispute with the Centre for Alternative Technology in Machynlleth had left the firm with a bill for more than £500,000.
Mr Butler told the Shropshire Star he was "hugely disappointed" that the company had been forced into voluntary liquidation. He said: "Construction is a tough industry and the margins are pretty small. Over a period of time we consolidated the activity of the business, going for large contracts. "Two days after we ceased trading, I understand the company was the lowest bid on a large project in the town worth around £6 million and there was another possible project where we were also the lowest bidder." The Centre for Alternative Technology was awarded the settlement last month following an investigation by an independent adjudicator following a dispute with Frank Galliers over a £5.4 million building project at the site.
Phil Horton, a spokesman for CAT, said: "Galliers owe a total of £9.9 million to a wide range of creditors, of which CAT is only one." Frank Galliers had turnover in the region of the £30 million mark. Frank Galliers was initially implicated in the Office of Fair Trading's investigation into construction bid rigging, but it was one of nine firms that were told by the OFT that it would not be pursuing allegations against them. Meanwhile a creditors meeting has been called for 4 March for Darren Healey Building Contractors and its residential arm Highgrove Homes. Liquidators are expected to be appointed for the building firms from Truro in Cornwall which have ceased trading with the loss of 83 jobs.
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. 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.
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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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