Glenigan Insight
9th February 2010
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Office market foundations for recovery
Featured Region:
East Midlands
Featured Sector:
Industrial
Project News
Contractors sought for Nuclear Research facility
Manor push button on £100m Hull project
FOA's New Street Station scheme gets green light
Tenders invited for office extension
Brighton West Pier concert hall cleared for tower
Crossrail lets first six enabling contracts
Company News
Skanska back in the black as turnover breaks through £1.5bn
Bellway order book up over 30pc in first half of year
Broadway Malyan starts school in Madrid
Skanska back to profit on £1.54bn order book
Receivers appointed to £40m London contractor Harry Neal
Mouchel sets up takeover fighting fund
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How will a change of Government impact the construction industry?
The contraction in office construction projects over the last two years has been severe. The crisis in global financial markets and the subsequent downturn in the UK economy hit the sector especially hard as developers fretted over the implications for occupier demand, and as securing project funding became more difficult and expensive. Furthermore the Central London office market, which dominates the sector, felt the impact of retrenchment in the previously booming financial services sector. The value of underlying project starts last year was 63% down on the 2007 levels.
However, 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. 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.
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 pick-up from the second half of this year onwards.
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Recent performance
During the first half of 2008 the East Midlands remained remarkably resilient in the face of the credit crunch. However, project starts subsequently dropped back sharply, falling by a third during the final six months of 2008. The downward trend persisted into 2009, with the value of underlying projects starts falling 27%.
Private housing starts have performed poorly in the East Midlands. The value of underlying private housing starts fell 37% during 2008 and continued to weaken during the first half of 2009. Whilst, encouragingly, there was a tentative pick-up in private housing starts during the second half of 2009, the value of project starts during the year as a whole was 15% down on a year earlier.
Office and industrial construction starts in the East Midlands have also been hurt by the slowing economy. During 2008, the value of underlying office starts fell by a third and underlying industrial starts fell by a quarter compared to the previous year. Project starts in both sectors remained weak last year, with office and industrial starts both halving during the year.
In contrast to other regions, the East Midlands has been characterised by an absence of infrastructure and utilities starts, which explains the large decline in the underlying value of construction starts during the closing months of 2008. The value of underlying construction starts in the two civil engineering sectors totalled just £55 million during the second half of 2008. Furthermore civil engineering projects remained sparse for much of 2009, with the value of project starts during the year 9% down on the previous year.
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Prospects
After the sharp fall in project starts experienced in the region over the last two years, we anticipate that underlying construction starts will bounce back firmly in 2010, albeit from a low base. Furthermore the improvement will still leave the value of underlying project starts some 24% below their 2007 levels.
The private housing sector has been battered over the last two years by the slump in the wider housing marker. As well as sharp falls in project starts, housebuilders have put projects at an earlier stage in the development process on hold. This is reflected in a sharp fall in the value of private housing planning approvals in the region, which fell 46% during 2008 and dropped a further 49% during the first eleven months of 2009. However, the sector is showing signs of bottoming out. The tentative increase in project starts during the third quarter of 2009 points to improving housebuilder confidence and expectations of market recovery next year. Whilst we expect any recovery to be fragile, it should be sufficient to lift private housing starts off the lows seen in 2009.
However construction prospects remain weak across a number of other sectors in the East Midlands. The value of underlying planning approvals has softened in the industrial, office and civil engineering sectors. The reduced flow of projects securing planning approval and the significant number of schemes that have been put on hold over the last year has depressed the value of underlying construction starts in 2009 and is expected to remain a drag on project starts during the first half of this year.
The rise in the education, health and social housing projects in recent months has been more encouraging. However the earlier these schemes now progress to start on site, the more certain will be that they will progress as currently envisaged. Having brought forward financial support into 2009/10, Government capital funding is already set to fall back significantly from April 2010 and further financial cuts are anticipated following the general election.
Overall we are forecasting a strong 20% bounce back for in the value of underlying construction starts in East Midlands next year, followed by a further more modest rise during 2011. However, growth will be critically dependent upon improved housing market conditions as well as the timing and extent of anticipated cut back in public sector funding for capital projects.
In addition the East Midlands does not appear to have many large projects in the pre-construction pipeline. Indeed, Westfield’s £400 million Broadmarsh Shopping Centre scheme in Nottingham, which could potentially provide a significant boost to the region’s construction activity, is currently on hold. The absence of large schemes will make it difficult for many of the medium- to large-sized contractors working in the region.
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Recent performance
Four years of sustained growth in industrial construction activity came to an end during the second half of 2007. Sector output had been underpinned by strong growth in investment in warehouse facilities to meet demand from manufacturers, retailers and the logistic sector. In particular, strong demand for large warehouses of 10,000m² and over had helped fuel sector growth despite an overall rise in available floorspace.
However, with newly built, speculative developments accounting for a growing proportion of available industrial space, the flow of new projects starting on site has slowed over the last two years. The overhang of vacant premises has continued to rise, although the pace of growth has slowed; King Sturge estimates that the available industrial floorspace climbed 2.3% to 23.3 million m² during the first half of last year. In contrast the pool of available new industrial property slipped back during the first half of last year, having previously risen 26% during 2008. However, the drop in new industrial floorspace reflects the sharp fall in new projects being completed rather than a strengthening in demand.
The downturn was reflected in official figures: warehouse-related output fell by a third during 2008 and dropped a further 40% during the first nine months of 2009. The decline in output follows sharp falls in new orders for warehousing projects since 2007. New orders during the first nine months of 2009 were down by a third on a year earlier, pointing to continued weakness in sector activity over the coming months.
In addition, industrial construction has suffered from the poor outlook for the UK’s manufacturing sector. UK manufacturing slipped into sharp recession during 2008. This continued for much of 2009, with sharp declines in industrial activity during the first half of the year as firms sought to shed excess stock. Manufacturing output subsequently began to stabilise during the third quarter, albeit at a low level, before strengthening slightly during the final three months of the year. Manufacturing activity is provisionally estimated to have risen 0.4% during the final quarter of last year. However, this is in part due to the boost to motor vehicle production from the car scrappage scheme which ends next month.
Unsurprisingly, businesses’ confidence has fallen sharply, with recent CBI surveys recording manufacturers’ output expectations at their lowest level since 1980. Against this background, firms have deferred planned investment. Business investment in the second quarter of 2009 was 21.8% down on 2008’s second quarter. Official data covering manufacturing shows that the sharpest cut to date has been on vehicles, with 2009’s second quarter expenditure running at half the level of a year ago. In contrast, the fall in manufacturers’ expenditure on other capital equipment was only 22.2%, while investment in new buildings rose only 7.8% over the same period. The relative strength of investment in new buildings is likely to relate to investment decisions made prior to the economic downturn given the typically longer lead time with such expenditure and, accordingly, investment is likely to fall back sharply over the coming months.
Overall, these factors have led to dramatic falls in the value of underlying construction starts. During 2009, the value of underlying industrial starts fell 47.5%, having dropped 9% during the previous year. The North West, traditionally a strong region for industrial construction, saw the value of underlying starts fall by 19% during 2008 year, while project starts also fell across the Midlands, Wales and Yorkshire & the Humber. Nevertheless, the Midlands and the northern regions of England collectively accounted for over half of all project starts by value. The even sharper fall in industrial starts endured last year again hit the UK’s industrial heartland especially hard.
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Prospects
Industrial construction will remain under pressure near term. Although the additional squeeze from destocking has eased, UK Manufacturers are still faced with weak domestic and overseas demand and surplus capacity. Against this background few manufacturers will be looking to invest in additional production. Furthermore, sluggish consumer spending is expected to curb retailers’ appetite for large distribution facilities. The uncertain economic outlook and the limited availability of debt finance will continue to restrict the flow of new speculative developments. As yet few shelved industrial schemes are being reactivated by developers. Against this background and given the dwindling number of projects in the pre-construction pipeline we anticipate that project starts will remain weak during the opening months of next year.
Whilst excess manufacturing capacity will remain a disincentive for investment in new industrial buildings near term, the medium term outlook for 2010 and 2011 is potentially more encouraging. On the upside UK manufacturers should, in time, begin to benefit from improved competiveness following Sterling’s recent sharp falls against the Euro and the US Dollar. This should help temper the impact of the general weakening in UK and global economic growth. In addition the current expansion of UK port facilities should act as a spur to develop accompanying distribution facilities. Similarly, planned investment to remove freight bottlenecks on the rail network, coupled with growing road congestion, will encourage investment in new rail-connected distribution facilities.
Accordingly we anticipate a sustained recovery in the value of underlying industrial project starts over the next two years. However, the forecast rise in project starts is from an extremely weak base and the value of starts in 2011 is still forecast to be some 23% below 2007 levels. Furthermore, given the fragile economic climate, there is a significant risk that projects will be delayed or abandoned, hampering the sector’s anticipated recovery next year.
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Project News
Contractors sought for Nuclear Research facility
University of Sheffield is currently inviting applications to tender for contractors for the design and build of a Nuclear Advanced Manufacturing Research Centre at Catcliffe in Rotherham. The £10 million research facility has been designed by Bond Bryan Architects. It will be a centre of excellence for research and development of advanced manufacturing technologies that will deliver step change, lower cost, high-integrity components to the UK nuclear industry. Tenders are due to be invited mid March 2010.
Project ID: 10056048
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Manor push button on £100m Hull project
Manor Property Group are to go ahead with a £100m development in Hull, incorporating a 23-storey tower block which will be the city's tallest building. Located on the River Hull's east bank, the 480,000 sq ft Manor Mill site will incorporate a 185-bedroom Marriott Courtyard Hotel, four restaurants, a public plaza, sports bar, shop and parking space for 325 cars. Apollo Resorts and Leisure plan to apply for a 'large casino' licence for the site.
The Yorkshire developer, which is based near HuIl and has a £600 million development portfolio, received planning permission in November 2008. It will award a contract to demolish Clarence Mill and other buildings on the site close to Drypool Bridge. Manor Property's Philip Akrill said: "We hope that our initiative sends out a positive message to others, the development will not only create numerous new facilities for the city but re-energise the east bank."
Project ID: 07488663
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FOA's New Street Station scheme gets green light
Councillors in Birmingham have given the thumbs-up to Foreign Office Architect (FOA)'s £600 million redevelopment of the city's main railway station. The gateway scheme will, according to Network Rail, 'drag New Street Station into the 21st century' while providing improved railway links in and out of England's second city as part of a £2.3 billion stimulus package for the local economy. The new development will see passenger numbers at the station double thanks to a new concourse which will be three-and-a-half times larger than the current offering.
Preparatory work for the new concourse has been taking place since last September and has been earmarked for completion in 2012. The second phase of the development will then see the current concourse undergo development work for completion in 2015. The project is backed by Network Rail, Birmingham City Council, Advantage West Midlands, Centro and the Department for Transport and will be delivered by Network Rail. Councillor Mike Whitby, leader of Birmingham City Council, said: 'The redeveloped New Street Gateway will provide a focal point for far wider regeneration of the entire city over the next 10-15 years, and is one of the main components of the city's £6bn worth of publicly funded regeneration projects currently on our books.'
Project ID: 00331435
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Tenders invited for office extension
Tenders are currently invited for the redevelopment of the offices at Three Crowns House in Cambridge. This £4 million scheme for client Royal London Asset Management has been designed by Scott Brownrigg, and includes the extension of existing buildings along Bateman Street, alteration of vehicular access to Bateman Street and new canopy to Hills Road elevation. Work is due to start on site in April 2010.
Project ID: 07305278
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Brighton West Pier concert hall cleared for tower
The collapsed remains of Brighton's ruined West Pier's concert hall are being removed before a giant viewing tower can be built there. The tower, called the i360, is earmarked for the land end of the West Pier and will elevate visitors to nearly 500ft above sea level in a pod to enjoy panoramic views. A starting date for construction has to be set but the aim is to open it in time for the 2012 London Olympics. Brighton council is '"looking forward to the i360 development bringing a new chapter of prosperity for the seafront', said council leader Mary Mears. It is designed by Marks Barfield who were responsible for the London Eye. Visitors will be elevated on the i360 to nearly 500ft above sea level in a pod and enjoy panoramic views.
Ms Clark said 'some of the funding' was in place, meaning a start date for construction had yet to be set, but it is hoped it will open by the 2012 London Olympics. Demolition workers are removing remnants of the fire and storm-ravaged concert hall, close to the shore, during low tides over the next fortnight. The West Pier Trust, the charity which owns the pier known as the Grand Old Lady, said historical items will be salvaged for safe keeping but the landmark pavilion island will not be touched. Designed by Eugenius Birch, the West Pier was built in 1866 using dozens of cast iron threaded columns screwed into the seabed and strengthened by a lattice of ties and girders. It evolved into a pleasure pier and throughout the 1920s featured attractions including paddle steamer excursions, high divers and plays, pantomimes and ballets. A storm caused a collapse of part of the concert hall in December 2002. Months later, arsonists targeted the pier - considered one of Britain's finest structures of its kind - destroying the pavilion and concert hall. The Heritage Lottery Fund withdrew regeneration funding after the damage, dashing hopes of restoring it to its prime.
Project ID: 06096149
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Crossrail lets first six enabling contracts
Crossrail yesterday announced the award of the first six contracts under its Enabling Works Framework while work at Royal Oak gathers pace. The winning firms carrying out these first enabling packages are: Costain Skanska JV for teh Royal Oak Portal near Paddington; Carrillion for the Paddington Integrated Project; Kier Construction for a working platform over the East London Line at Whitechapel; Keltbray for Farringdon demolition for its Eastern Ticket Hall; and Select Plant Hire Company, which has won two separate contracts for Liverpool Street site facilities and Bond Street's Eastern and Western Ticket Halls.
"The first contracts awarded under the Enabling Works Framework are visible evidence that Crossrail is now gearing up towards the start of main construction this year," said Crossrail programme director Andy Mitchell. Further evidence of the build in momentum was provided by Crossrail's dual announcement that preparatory work was well underway for the tunnel portal structure at Royal Oak in west London. 2010 is a huge year for Crossrail, with main construction commencing on Europe's largest infrastructure project. Rob Holden, Crossrail
"2010 is a huge year for Crossrail, with main construction commencing on Europe's largest infrastructure project," said Crossrail chief executive Rob Holden. "Work is now underway at Canary Wharf, Farringdon, Paddington and Tottenham Court Road with construction at the remaining stations on Crossrail's central section beginning this year."
Network Rail is managing the Royal Oak portal work on behalf of Crossrail, which will construction of a 190m long diaphragm walled box to form the foundation from which tunnelling will commence in late 2011. Construction of the western tunnel portal will continue following the start of tunnelling and will be completed in 2014. Surveys of the site have now been completed and in the meantime the contractor will shortly construct protective barriers next to Royal Oak Tube station to safeguard existing Network Rail and London Underground engineering assets and locate site offices.
In late 2011, the first tunnel boring machine will start out on its journey from Royal Oak towards Farringdon. This will be followed shortly by the launch of a further tunnel boring machine in Docklands that will head towards Farringdon under central London. The first two major rail tunnelling contracts that will deliver tunnels underneath central London linking the Great Eastern and Great Western mainlines and will form the centrepiece of the Crossrail project are expected to be awarded by mid-2010. The remaining third contract will be awarded at a later date. Once complete in 2017, new 10-carriage trains carrying upwards of 1,500 passengers will travel through the 21km long tunnels, significantly reducing journey times between Heathrow, the West End, the City and Canary Wharf and providing new journey opportunities and much needed additional transport capacity.
Project ID: 09148928
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Company News
Skanska back in the black as turnover breaks through £1.5bn
Turnover at Skanska broke through the £1.5 billion barrier in 2009 as it went back into the black, the company said today. Operating profits were £38.9m for the year, compared with a loss in 2008 of £47.1m. That loss had led to a management reshuffle at the top, with David Fison out and Mats Williamson taking over. He was subsequently replaced by Mike Putnam.
Skanska said its order book is now up to £2.15bn. President and CEO Mike Putnam said, "I am very pleased with these results. They are in line with our targets and evidence of the work we have undertaken to put our past behind us and get the business back on track." "We do expect similar market trading conditions through 2010, However 2010 has started on a brilliant note for us with the announcement earlier this week that we, together with our partners RM, have been selected as Preferred Bidder for the Essex Building Schools for the Future Programme - the result of a lot of hard work and commitment of our staff." He added. While the tone from the head of the UK business was upbeat, Johan Karlströmthe boss of its Swedish parent company was more pessimistic about the UK market. "In the British market, we expect reduced public construction investments over the next several years, which will intensify competition in an already highly competitive market." he said.
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Bellway order book up over 30pc in first half of year
Bellway today said forward orders from customers were up 30 per cent, as it revealed it sold 2,247 houses in the first six months of its financial year. In the six months to 31 of January, the average selling price of each home was steady at around £156,000. Bellway said its order book at 31 January 2010 stood at £390 million compared to £296m in 2009, a rise of over 30 per cent.
It has now sold or reserved houses worth 92 per cent of its 2010 target and may increase this target as the spring selling season gets into full swing. In a relatively upbeat statement bosses said that margins, which were 6 per cent in the first half should rise closer to 7 per cent for the full year. Bellway said: "The Group has a strong balance sheet with a net cash position of £61m which was helped by a significant reduction in our stock of unsold properties compared to last year."
So far this year it has spent £76m on new land and is in negotiations to spend a further £123m. Most of the land bought is in the South of England, which is where the big property builders are focussing their attention. One note of caution was raised when bosses said: "With mortgage providers continuing to require a high level of deposit, particularly for first time buyers, we expect trading conditions during the first half of 2010 to be subdued relative to historic levels."
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Broadway Malyan starts school in Madrid
[FIRST LOOK + SKETCHES] Work has started on Broadway Malyan's 2,000-pupil school for the British Council in Madrid, Spain. The 1,250m² building, on a tight site north of the city centre in Somosaguas, is designed for children aged 3-18.
The scheme, which includes the refurbishment of the office and library facilities as well as a reconfigured entrance to the secondary school, boasts a sports pitch below the main new building. The project also has a number of 'anti-paparazzi' features to protect the children, many of whom have famous parents, from the press.
Describing the project, a practice spokesman said: 'As a principle, we have tried to dissolve the edge of the classrooms, connecting them to adjacent spaces for self-directed learning - under surveillance - utilising a buffer zone of ancillary space outside the classrooms where students can use ICT equipment but be on view to the teacher in the classroom. 'All teaching spaces front an atrium, where floors of sand blasted glass flooring allow light to percolate right through the building.'
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Skanska back to profit on £1.54bn order book
Skanska UK has reported turnover of £1.54bn, and profit of £38.9M in results for the year to December 31 2009, an improvement over an operating loss of £43M in 2008. In 2008 the contractor made 'serious write-downs', and while the increase in turnover this year was small, the margin extended to 2.5% for the year.
CEO Mike Putnam took over from Mats Williamson in 2009, having held the post of executive Vice President position since the early 2000's, firstly with responsibility for the Civil Engineering Operating Units and more recently the Building related businesses. "I am very pleased with these results. They are in line with our targets and evidence of the work we have undertaken to put our past behind us and get the business back on track," said Putnam.
"We have seen the market tightening during the year and have also seen a reduction in the number of opportunities, particularly in our building related operations. Key to our businesss model is ensuring that we carefully select and target the right projects for Skanska and our shareholders such that we can deliver to the expectations of our clients. "We do expect similar market trading conditions through 2010, However 2010 has started on a brilliant note for us with the announcement earlier this week that we, together with our partners RM, have been selected as Preferred Bidder for the Essex Building Schools for the Future Programme - the result of a lot of hard work and commitment of our staff."
Skanska, as part of the ConnectPlus consortium, finally made financial close to the M25 widening and management PFI in May 2009.Skanska has a solid forward oder book of £1.695bn, specialising in PFI schemes.
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Receivers appointed to £40m London contractor Harry Neal
UHY Hacker Young has been appointed as the receivers for London-based construction firm Harry Neal today. The £40 million-turnover contractor is understood to have been left with no choice but to place itself into voluntary receivership after falling victim to the recession. Construction credit reference agency Top Service said it had been monitoring Harry Neal's situation closely for up to six months.
Directors of the company are understood to have held a series of meetings on Wednesday to discuss its future after a winding-up petition was issued against it on 27 January. UHY Hacker Young was appointed as receivers today. Harry Neal's most recent accounts for the year to 31 December 2008 show turnover of £40 million, up from £38.8 million the previous year. Pre-tax profit of £31,500 was reported compared with £320,000 the prior year. Staff numbers increased from 128 to 143.
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Mouchel sets up takeover fighting fund
Banks have given consultant Mouchel a war chest to fight a potential hostile takeover by VT Group by relaxing one of its financial covenants. The consultant was close to breaking its fixed charge cover covenant, which measures how easily a company can pay financing expenses. It was set to not fall below 2.0, but the consultant has renegotiated additional headroom to allow it to fall to 1.875.
"We felt it was necessary to seek a carve out in the existing agreement for potential bid defence costs," said the company in a statement. "We have therefore sought a temporary easement to 1.875 for the fixed charge cover covenant for the next 12 months." Chief executive Richard Cuthbert said the firm continued to trade in line with the board's expectations. The consultant will issue a full trading update for the six months to 31 January next Thursday, when it is expected to announce that it has been successful in retaining two Highways Agency Managing Agent Contractor deals for Areas 1 and 13. The deals are worth £400M to the firm over five years. VT Group remains interested in Mouchel and has a deal on the table worth 260p per share.
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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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