Glenigan Insight
2nd 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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Planning approvals point to improved project starts for 2010
Featured Region:
London
Featured Sector:
Hotel & Leisure
Project News
Dorin Construction awarded school contract
Tenders back for community centre
Galliford Try awarded special school contract
Contractors appointed for A8
Tenders back for M5 works
Tenders invited for 2 school extensions
Company News
Amec buys Currie & Brown (Australia)
Mitie is yet to see recovery in new build and fit out
T Clarke trading "slightly ahead of market expectations"
Redworth Construction and Frank Galliers fall victim to recession
Babcock Rail slashes 300 jobs
Bone Steel bags £8m of work
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The value of underlying planning approvals fell 13% last year as developers shelved planned projects in response to the economic recession and scarce bank finance. At first glance the drop in planning approvals points to a continued slide in projects starting on site during 2010. Closer scrutiny offers a more encouraging outlook for the year ahead. Whilst trading conditions are still tough and downside risks remain, recent planning approval data point to a gradual improvement in key sectors over the next 12 months.
Whilst the value of underlying planning approvals fell during 2009 as a whole, the low point was reached during the first quarter of the year when uncertainty and fears over a global economy where at their height. Planning approvals have subsequently strengthened in each of the three following quarters; indeed approvals during the final six months of 2009 were up a year earlier.
Government funded projects have helped drive the pick-up in planning approvals, with the education, health and social housing sectors all enjoying strong year on year growth. Near term this should help to underpin the flow of project starts in these sectors as government departments, local authorities and other public sector bodies seek to secure an early start to planned schemes ahead of the general election.
However, whilst important these have not been the only source strengthening planning approvals. The flow of civil engineering projects in the pre-construction pipeline also strengthened markedly over the course of 2009. Furthermore the fourth quarter saw a strengthening in private housing approvals, which were 41% up on the corresponding quarter of 2008. The improvement in planning approvals follows a modest pick-up in private housing starts during the third quarter of 2009 and is further evidence that developers are more confident about prospects of the UK housing market over the coming year.
In contrast the private non-residential sectors remain becalmed, with planning approvals for industrial and office projects especially sparse and we expect project starts in these sectors to remain weak during the first half of 2010. However, whilst planning approvals have yet to improve we anticipate that project starts should strengthen during the second half of the year. Investor activity in the commercial and industrial sectors has picked up sharply in recent months, lifting capital values. A further strengthening in capital values coupled with improved capital market would encourage developers to re-activate some of the planned projects that were shelved as the recession hit.
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Recent performance
Construction starts in London fell sharply in the fourth quarter of 2008 as the worsening economic conditions took hold of the Capital. The value of underlying construction starts continued to slide during 2009, with starts 11% down on a year earlier.
With financial and property-related firms reducing their workforces, many developers have put planned office construction projects on hold. The value of underlying office starts, which accounted for around a quarter of the value of underlying construction starts during 2007, fell by a third during 2008. The flow of new office project continued to deteriorate last year, running at half the level of year earlier. That said, some developers are still pressing forward with major office projects and these have provided some support for the region’s office starts.
Construction in London continues to benefit from preparations for the 2012 Olympics. The £303 million Aquatics Centre and the £80 million Velopark are among the high value stadia projects to have started on site over the last year, while work has also started on the Olympic Village.
Tighter mortgage conditions and sustained pessimism in the residential housing market are now severely impacting upon private housing construction in London. Having initially held up well, sector starts in the capital have followed a similar trend to the rest of the country. The value of underlying private housing starts fell 27% during 2008 and during the first half of 2009 were 36% down on a year earlier. However project starts subsequently picked-up during the second half of 2009, cutting the decline for the year to 17%.
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Prospects
Immediate construction prospects in London remain gloomy. The value of projects in the pre-construction pipeline has dropped sharply, with underlying planning approvals falling by 17% in value during the first eleven months of 2009. This is forecast to further weaken the flow of new project starts during 2010, especially during the first half of the year. However, this overall fall masks a sharp rise in planning approvals during the third quarter: Driven by a rise in private housing and non-residential approvals, this tentative improvement suggests improved developer confidence regarding the medium term market prospects in the capital.
Nevertheless private housing and offices have endured the brunt of the downturn in construction starts for much of 2009. Although the recent pick up in private housing starts is encouraging, these sectors are expected to remain under pressure during 2010. Private housing construction will invariably suffer as the conditions in the London property market remain extremely difficult. .Looking further ahead, the recent pick-up in office and private housing approvals points to a recovery in projects starts as the London economy strengthens during 2011.
Large projects are a significant feature of construction activity in the Capital. At first glance the pre-construction pipeline for large projects looks promising. However, given the current economic climate, we expect a higher than normal proportion of planned large projects to be either delayed or abandoned. Against this, the £6.5 billion contract to widen sections of the M25 will provide a significant boost to output over the next three years, while the £16 billion Crossrail scheme is also expected to make a growing contribution to construction activity in the Capital from this year.
Overall, Glenigan expects project starts to deteriorate further over this year, with the value of underlying construction starts is forecast to fall by 9% this year. However, project starts are predicated to subsequently stabilise, with a 4% rise in project starts forecast for 2011.
However, if key large projects continue as planned, these will ease the pain of some parts of the construction industry in London. Prospects for London should also have a lift as the approaching London Olympics are also expected to boost construction opportunities over the next two years with the games acting as a catalyst for private sector investment in related areas such as hotels.
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Recent performance
The troubles of high street retailers have been widely reported. Yet, at least retail sales continue to grow, albeit weakly. Other sectors more dependent upon discretionary consumer spending, such as catering and hotels, have been hit by falling revenues over the last year. Combined with the scarcity of bank finance, this has squeezed the flow of restaurant and fast food projects securing planning approval, especially since the start of last year.
British consumers are curbing their borrowing and spending in response to the deteriorating economic environment, rising unemployment and weak earnings growth. Household consumption has been weakening progressively over the last year and the volume of household spending in the third quarter of 2009 was 3.2% down on a year ago. In particular, consumers’ spending on a wide range of discretionary items, from nights out to gym memberships, has been in the firing line.
Official statistics have recorded a marked deterioration in trading conditions faced by the restaurant and fast food sector, with sector turnover suffering an 8% fall during the first nine months of 2009 against the corresponding period of 2008. Pub and bar turnover fell 11% over the same period. The harsh trading conditions are underlined by a recent British Beer & Pub Association survey that found 52 pubs a week closed during the first half of 2009, the fastest rate of closure since the survey was introduced in 1990.
Against this economic background the value of new pubs, restaurants and café projects has fallen sharply over the last year. The flow of small scale refurbishment and fit-out work is also being squeezed as the major chains have cut back their expansion and refurbishment expenditure. However, price conscious consumers have offered opportunities as well as problems for the sector. In particular, fast food outlets have been relatively resilient, benefiting from their young customer base and consumers ‘trading down’ to takeaways and nights-in.
In addition to more cautious UK consumers, hoteliers are contending with the impact of falling domestic and international demand. The number of overseas visitors to the UK during the twelve months to October 2009 was 9% down on a year ago. Business travel has been especially hard hit, falling 24% over the same period. The impact is evident in hoteliers’s turnover which was 11% lower during the first nine months of 2009. Unsurprisingly, after a strong rise in the value of hotel project starts during 2006 and 2007, 2008 saw a sharp fall in new projects. While the budget end of the market remains relatively strong, the overall value of new hotel projects starting on site has weakened; falling 18% during 2008 and by a third last year..
Recent consolidation in the private health club market is set to continue, with companies under renewed pressure as hard-pressed consumers cancel little-used gym memberships. While public sector investment in new and renewed leisure centre facilities has helped support industry activity, 2008 saw an overall drop in the value of project starts. Taking the hotel and leisure sector as a whole, the value of underlying starts has fallen by 28% over the last two years.
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Prospects
Whilst quarterly project starts are expected to remain volatile, the sector is forecast to benefit from a 13% rise in the value of underlying project starts over the coming year... The budget hotel chains may have the moderated their investment activity over the last year, but they have not scaled back their stated ambitions for expansion as economic conditions improve. Moreover, preparations for the London Olympics continue to support the sector over the coming months with, for instance, work now underway on the Velodrome.
Several other large projects should also help boost construction starts during 2010. Obviously, the fallout from the economic downturn will continue to create downside risks for the sector. As with retail construction, the sector’s fortunes are closely aligned to the household income growth and confidence. Weak earnings growth and a higher tax burden, in particular higher VAT and excise duties, will accordingly act as a brake on sector growth activity. However, the pace of recovery in the global economy, business travel and exchange rate movements will also have a significant influence upon the pace of recovery in areas such as hotel development. Furthermore the 2012 Olympics are expected to act as a catalyst for private sector investment over the next two years.
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Project News
Dorin Construction awarded school contract
Dorin Construction Ltd has been awarded the main contract for refurbishment works to include replacement windows and doors, glass canopy to nursery and extension to existing car park at St Oswalds School in Alnwick. This £2.3 million project has been design by Darbyshire Architects. Work is due to commence on site in March 2010.
Project ID: 09390906
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Tenders back for community centre
Tenders have now been returned to South Lanarkshire Council for the construction of a new community centre at Strathaven Road in Stonehouse. The quantity surveyor for the £6.36 million scheme is Carr McLean & Watson. The main contractor is expected to be appointed in mid February, with works due to start on site March 2010.
Project ID: 09161228
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Galliford Try awarded special school contract
Galliford Try Construction has been awarded the main contract for the conversion of the Tudor Rose building at the Islington Academy to form a special needs school. The £7 million scheme for client Corporation of London has been designed by architect Swanke Hayden Connell, with works due to start on site April 2010.
Project ID: 10048363
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Contractors appointed for A8
The DRD has appointed a joint venture between Costain/Lagan/Ferrovial to carry out improvement works to the A8 between Belfast and Larne. Detailed design of the new road will be presented at a public exhibition late 2010 with an environmental statement expected to be published early in 2011. A subsequent six week period of formal public consultation will commence ahead of a public inquiry. The scheme is valued at £100 million and the start date is expect to be 2012.
Project ID: 09084251
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Tenders back for M5 works
Tenders have now been returned to Devon County Council for the £8 million scheme for the M5 Junction 29, A30 to Blackhorse Interchange in Exeter. Bidders include Carillion and Birse and a contractor will be appointed February 2010. Work is due to commence May 2010 for 12 months and involves construction and improvement of highways and signal controlled junctions including motorway slip road alterations.
Project ID: 09216321
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Tenders invited for 2 school extensions
Tenders are currently being invited for the construction of extensions to two schools in Cambridge for client Parkside Federation. The £1 million scheme has been designed by Mouchel and will extend the school at Parkside Melbourne Place and Parkside Mud Lane. Tenders are due to be returned February 19th, with works due to start on site late April 2010.
Project ID: 09245128
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Company News
Amec buys Currie & Brown (Australia)
Amec has acquired property services consultancy Currie & Brown (Australia) from its shareholders Currie & Brown International for £20.1 million (AU$36.4 million) in cash. The purchase - from its shareholders Currie & Brown International and other owner-managers - is fully aligned with Amec's Vision 2015 strategy of assured growth, through a strengthened geographic footprint and enhanced capabilities in key sectors. Currie & Brown (Australia) is a provider of independent cost, contract and consulting services to the oil and gas, mining, building, transport, utilities and infrastructure sectors. The company has some 200 professional employees. It is headquartered in Brisbane and has offices in Adelaide, Gold Coast, Melbourne, Perth and Sydney. Amec executive director Neil Bruce said: "Acquiring Currie & Brown (Australia) is another important step in our strategy of providing independent business consultancy services worldwide. "The addition of high quality people is an excellent fit with Rider Hunt International, our leading project services consultancy. The business also provides a good geographic fit with Amec's delivery of services in both mature and frontier regions."
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Mitie is yet to see recovery in new build and fit out
Mitie said its new build and fit-out elements "have seen no further deterioration in market conditions but are yet to see sustained evidence of recovery". In a trading update for the period since 1 October 2009 Mitie said it had successfully retained and expanded a number of existing contracts and secured new work across all three divisions over the past three months. The support services firm added that its facilities management team had a particularly good quarter being awarded contracts with clients from the financial services, transport and utilities sectors.
Mitie said the integration of Dalkia FM, bought in August 2009, is going well. The acquisition of Environmental Property Services in November has enhanced the firm's position in the social housing market.The firm said: "2010 should provide considerable opportunities for Mitie. Private sector clients are consolidating contracts as they seek to obtain cost and carbon efficiencies. "We also expect the public sector to increase levels of outsourcing in response to budgetary pressures although the timing of such activity is currently difficult to predict. The group is well placed for the future."
Mitie also announced the appointment of Larry Hirst as non-executive director with effect from 1 February 2010. Mr Hirst is currently chairman of IBM Europe, Middle East and Africa and has held a number of senior positions during his career with IBM over the past 32 years. He was previously general manager of IBM northern region and chief executive of IBM UK & Ireland for six years and has had management responsibility for operations in the US, Europe, and South Africa. He is also non-executive chairman of UK Trade and Industry Technology Board, chairman of e-skills Sector Skills Council, a commissioner of the UK Commission for Employment and Skills and a UK business ambassador.
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T Clarke trading "slightly ahead of market expectations"
T Clarke has said its markets have remained competitive during 2009, but its trading is still "slightly ahead of market expectations". The mechanical and electrical contractor said that the group enters 2010 as a leaner business as a result of a significant cost base reductions.
In a trading update today the firm said: "The board remains confident in the resilience of the business going forward, despite these challenging times. The group maintained its strong cash position as at 31 December 2009 with cash balances in excess of £20 million. "The board is continuing to maintain its focus on cash management and on maintaining margins where possible, despite increased competition."
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Redworth Construction and Frank Galliers fall victim to recession
Two £30 million turnover contractors are understood to have fallen victim to the recession this week leading to more than 150 job losses. Frank Galliers in Shrewsbury, Shropshire and Redworth Construction in Norton, North Yorkshire are both understood to have collapsed. Frank Galliers is understood to have gone into administration with nobody from the company available to comment leaving 138 jobs at the firm up in the air.
Meanwhile the 30 staff at Redworth Construction had to be laid off after the business was subject to a compulsory winding up order after creditors refused to accept a plan which may have been a lifeline for the company. Redworth had just begun work on a £5 million new headquarters in Old Malton at Manor Farm. The future of that project is now uncertain. Redworth's turnover hit the £30 million mark in 2008. Frank Galliers, which also had turnover in the region of the £30 million mark, was currently involved in a number of schemes including a £7 million leisure centre development at Oswald Park in Oswestry, a £1.3 million redevelopment of Bishop's Castle Community Hospital, and a £600,000 refurbishment of Market Drayton's Market Hall.
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. Earlier this week Coventry-based Benfield Construction, part of the KB Benfield Group, went into liquidation leaving 20 employees jobless according to reports in the Coventry Telegraph. Benfield Group chairman Clive Benfield told the paper that none of the group's other companies, including housebuilder Benfield Homes, would be affected by the decision.
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Babcock Rail slashes 300 jobs
Babcock Rail has announced it is cutting 300 jobs in Scotland and the North of England. The rail contractor told staff yesterday that it need to restructure the business to make sure it was "more customer-centred and competitive".
Some 300 of the firm's 1,200 staff are now being made redundant following a review of the business first outlined to staff in October 2009. It is anticipated that the job losses will be split approximately 50/50 across its operations either side of the Scottish and English border, subject to the consultation process.
The plans include a slimmed-down management team together with reductions in operational areas and a number of corporate support functions. Babcock intends that its new structure will be fully in place within 6 months. RMT general secretary Bob Crow said: "The axing of 300 jobs by Babcock Rail is another kick in the teeth for the rail industry in the UK and comes on top of plans by Network Rail to sack 1,500 maintenance staff. "Essential renewals and repairs work is being scrapped to save money with skilled workers dumped on the dole. The jobs massacre on our rail tracks will have lethal consequences for the travelling public."
Babcock said the new structure will "align the size of the workforce with the current and anticipated workload" Babcock chief executive John Howie said: "Our business transformation plan is designed to make the business fit for the future. "We very much regret that jobs will be lost, but our new structure will make the Rail Division a stronger organisation, providing greater stability for the future and for the majority of our people, who will stay with the business."
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Bone Steel bags £8m of work
Scottish firm Bone Steel has secured a series of sub contracts with Carillion, Mansell, Bourne Parking and Miller Construction worth in excess of £8 million. The contractor will supply steel for use in the construction of six new schools in the South and North West of England, a waste recycling plant in Leicestershire, a multi-storey car park in East London, and a commercial development in Edinburgh.
Bone Steel chief executive Chris Bone said: "We have enjoyed an extremely encouraging start to the year and we are well positioned to secure further large-scale contracts from our key customers. "Despite the difficult trading conditions which have affected everyone operating within the construction industry, there is still work out there to be won and this is reflected in our current pipeline of bid work, which stands at over £200 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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