Glenigan Insight
12th January 2010
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Housing market prospects
Featured Region:
Wales
Featured Sector:
Education
Project News
Make appointed for Science Central
Homes & Communities Agency submits plans
Tenders invited for Premier Inn
Tenders invited for flats & community centre
Contractor sought for road widening
Contractor sought for playground extension
Company News
Mears secures 75pc of its forecast 2010 turnover
Engle taken under TP Bennett wing
Lancsville leaves £50m of contracts
Cube developer ordered to pay £1.2m
Persimmon acquires new land after sales rise 20pc
Apollo acquires M&E firm Goldhall
The housing market has stabilised progressively over the last six months after the sharp falls in prices and activity seen over the previous two years. Private housing starts have also improved as housebuilders have sought to capitalise upon the modest upturn in the market. However, market conditions remain fragile and the recent recovery in prices is widely expected to loose momentum over the coming months.
The Halifax estimates that average house prices in December were 1.1% up on a year ago: the first annual rise in prices since February 2008. The annual rise follows a gradual improvement in property transactions from their lows during the first quarter of 2009. The number of mortgage approvals granted in November, a useful proxy for property transactions, stood at 60,000: twice the levels seen at the beginning of last year. The pick-up in mortgage lending, coupled with a shortage of available second hand properties, has helped lift house prices.
Glenigan has also recorded a rise in private housing projects starting on site during the closing months of 2009. Whilst the value of project starts fell 11% during 2009 as a whole, project starts during the final quarter were 6% up on a year earlier as housebuilders anticipated a further brightening in market conditions during the current year. Furthermore, the flow of private housing planning applications and approvals has also stabilised, despite developers also having a large pool of stalled schemes to draw upon. The number of planning applications during the final quarter is provisionally estimated to be 6% up on the previous three months, although still down on a year earlier.
Against this background, we anticipate a further strengthening in private housing starts over the course of this year. However, the recovery in the wider housing market remains fragile. Whilst the recent recovery in market turnover is likely continue, the rise in house prices is widely expected to loose momentum as the supply of available property improves. Furthermore any renewed weakening in the UK economy or potential rise in bank base rates from their current extremely low level would quickly erode market confidence.
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Recent performance
After a 2% drop in project starts in 2007, last year saw a widespread decline in Welsh project starts across different construction sectors, with the value of underlying project starts (projects of less than £100 million) falling by 16%. Construction output also slumped during the second half of 2008, with official statistics recording a 12% fall in the value of output against a year earlier. Project starts have weakened further during the first eleven months of 2009, being 25% down on a year earlier.
The private sector has led the decline in project starts. Office and hotel & leisure project starts during the first eleven months of 2009 were 51% and 53% lower respectively than a year ago, while retail projects were 73% lower. The flow of private housing projects has also slowed to a trickle: the value of fourth quarter project starts was running at a third of the level seen at the end of 2007, while starts during the first eleven months of 2009 were 39% down on a year ago.
Furthermore, the deterioration in the housing market and new private sector starts has constrained the flow of new social housing projects, many of which are part-funded through private developer contributions or shared ownership sales. As a result, the value of social housing projects starting on site would have fallen back sharply during 2008 but for a £50 million project in Newport funded by the Welsh Assembly, which started on site during the final quarter of the year. Social housing project starts have subsequently strengthened in recent months after a weak beginning to the year, with starts during the three months to November 2009 up 67%, albeit on the exceptionally weak period a year ago.
Strong contributions from the education and health sectors have partially offset the impact of the decline in private sector project starts. Education project starts rose by 68% last year, while health projects more than doubled, in large part due to the £63 million Cynon Valley Hospital project starting on site during November. Both sectors have seen a further strengthening in project starts this year after a weak first quarter.
Civil engineering has also afforded a welcome lift over the last year. The utilities sector is providing several bright spots for Wales. Carron Energy’s £450 million gas-fired power plant should boost construction activity over the next two-and-a-half years, while several wind farms have also started on site in recent months. In addition, work started this January on a £75 million dual carriageway at Pontypridd which should contribute to infrastructure workload over the next three years, while recent months have seen work start on the £29 million A40 Penblewin to Slebech Park road improvements and a £15 million Wind Farm project.
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Prospects
Despite strength in the education, health and civil engineering sectors, conditions in the Welsh construction market are expected to remain difficult. Following the fall in the value of underlying project starts during the first eleven months, Glenigan anticipates that the value of underlying construction starts will finish the year 18% down on 2008.
Private housing will continue to bear the brunt of the decline in activity, following a dramatic decline in the value of underlying planning approvals. Approvals fell sharply during the fourth quarter of 2008 and remained poor during the first ten of this year, being 54% down on a year earlier. The industrial, office, retail and hotel & leisure sectors are also expected to remain under pressure, having suffered similar declines in the value of underlying planning approvals.
The only real bright spot for construction in Wales is the utilities sector. In addition to a recent jump in the value of underlying utilities projects securing planning approval, Glenigan’s project database is tracking a number of large renewable energy projects (that is, projects worth £100 million or more) in the early planning stages. Accordingly, the utilities sector is expected to remain a growth area over the next two years, as these projects progress to start on site. However, the rise in utilities projects will be insufficient to entirely offset the significant declines anticipated in other construction sectors.
As anticipated the first three quarters of 2009 proved to be very tough for construction in Wales, with the value of underlying construction starts predicted to fall by 11% this year. Looking ahead, project starts are expected to progressively recover during 2010, before stabilising in 2011. Private sector projects are expected to gradually emerge as the principal source of growth over the course of next year, albeit from the current low base. In contrast, the deterioration in public sector finances will impose a tightening restraint upon construction activity.
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Recent performance
Over the last five years there has been a sharp increase in investment in education facilities. Amid growing concerns over the impact of the credit crunch and a slowing economy, the education sector has remained a bright spot for UK construction. Education has been a long-standing political priority for the current government. Investment in English school buildings alone has almost doubled to £3.9 billion over the last five years; at the same time, there have also been sharp increases in capital expenditure in other parts of the UK and by universities.
The key objectives of planned investment have changed. Whilst an initial priority, especially for the school estate, was tackling outstanding disrepair, the Government focus has now shifted to providing a ‘modern learning environment’. Central to this is the Building Schools for the Future (BSF) programme, which aims to rebuild or refurbish every English secondary school over a 10 to 15 year period. After a slow start, the BSF programme is now rapidly gathering momentum. While only 12 schools had been completed by April 2008, a further 42 opened during the last financial year. The Government expects 115 to open during 2009/10, with the programme scheduled to accelerate further to 200 schools a year by 2011/12. Furthermore, the Government is now embarking on a similar programme of improvements for England’s primary schools, half of which will be remodelled or refurbished over the next 14 years.
There has also been a sharp increase in capital expenditure on the Scottish school estate. Direct government funding has more than doubled since 2005/06, while PPP schemes have further accelerated the pace of renewal. In addition, rising student numbers have prompted increased investment in further and higher education facilities. The number of students in higher education has risen by 6% over the last three years and the Government anticipates a further 4% rise over the three years to 2010/11.
Against this policy background, education construction was one of the few sectors to perform strongly last year. The official statistics recorded a 12% rise in construction output during 2008. Output slipped back during the first quarter of 2009 and although it subsequently recovered in the following three months, this left output during the first half of the year unchanged on the first six months of 2008. A 17% fall in the value of underlying planning approvals last year restrained the flow of underlying construction starts during the closing months of last year and the first quarter of 2009. However, detailed planning approvals began to stabilise during the final quarter of 2008 and have subsequently strengthened this year. Approvals during the first ten months of 2009 were 24% up on a year ago. This upturn in planned education schemes has filtered through to a sharp increase in project starts since April, as a number of planned BSF projects have finally started on site. Furthermore the sector is receiving an additional boost from extra funding for school repairs and improvements to primary schools promised in last autumn’s Pre-Budget Report.
More encouragingly project starts have strengthened since the start of the new financial year as additional government funding first promised in the 2008 Pre-Budget has started to filter through. Whilst, the pace of project starts has begun to lose momentum during the early autumn after the initial surge of new work during the opening months of the current financial year, recent months have seen a renewed strengthening in project starts. The value of underlying project starts during the three months to November was 39% up on a year ago. This is expected to leave the value of underlying construction starts during the current year as a whole 16% up on 2008.
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Prospects
Looking ahead to next year, the prospects for continued sector growth are fading. In the Budget, the Chancellor announced that, following consultation last year on the future delivery of BSF, the Government has decided to move from the ‘wave’-based model used to date, so that local authorities who are currently discussing new BSF projects with Partnerships for Schools can join the programme on a rolling basis, in line with “available resources” and only if Partnership for Schools assesses that they are ready.
In theory this could enable a steadier flow of new projects over the longer term. In reality, following the decision to bring forward capital funding into the current financial year the “available resources” are set to decline by 6% in 2010/11. Against this financial background, project starts are now expected to slip back by 8% next year as proposed education projects come under increased financial scrutiny. Furthermore, the Budget also revealed a sharp contraction in gross government investment from 2011/12 onwards and it is becoming increasingly evident that a more significant retrenchment of overall government spending than currently planned will be needed over the longer term. Whilst projects in the development pipeline point to a subsequent lift in project starts during 2011, there is a significant downside risk that the value of new work will fall short as planned projects are shelved.
A change of government also poses a downside risk to project starts during the forecast period. Whilst Conservative policies support continued investment in education to drive up standards, this support does not automatically apply to existing capital programmes such as BSF. Indeed the party is proposing a redirection of the £4 billion Academies Programme; initially towards 12 new schools in the largest urban areas, with further schools to follow. The schools could be developed in conjunction with Lord Barker’s Trust. Accordingly, the flow of new projects is likely to be disrupted post-election as existing programmes are reassessed in light of funding restrictions and the new Government’s longer term ambitions. The latter includes increasing the number of new school places by over 20,000 and radically reforming the education system. In particular LEAs would loose their overarching responsibility for the management of schools and new private sector firms and not-for-profit organisations would be allowed to set up new schools. The Conservatives have earmarked £4.5 billion of funding from the Building Schools for the future programme to establishment of such schools.
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Project News
Make appointed for Science Central
Make Architects has been appointed to design the Science Central project in Newcastle-Upon-Tyne. The £700 million scheme is for clients Newcastle City Council, University of Newcastle and One North East. King Sturge LLP has been appointed as the commercial advisor and 1NG is the developer. The scheme will provide 100,000 sqm of new buildings to accommodate new world class scientific research, teaching and business facilities.
Project ID: 05530246
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Homes & Communities Agency submits plans
A planning application has now been submitted for redevelopment of the Fair Mile Hospital site in Cholsey, Wallingford. The £25 million scheme for is Homes & Communities Agency, with Linden Homes acting as the developer, and will include the construction of 353 homes.
Project ID:05648598
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Tenders invited for Premier Inn
Tenders are currently being invited for the construction of a new Premier Inn Hotel at Huntley Street in Inverness for Ardmuir Developments. Works are expected to commence April 2010 following the demolition of a bingo hall.
Project ID:08412125
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Tenders invited for flats & community centre
Tenders are currently being invited for the construction of 10 flats and a community centre scheme at Old Ford Road in London for Gateway Housing Association. The £1.8 million scheme has been designed by Rogers Partnership, with works expected to commence June 2010, following demolition, and will be on site for 11 months.
Project ID:09351557
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Contractor sought for road widening
Doncaster Borough Council is currently seeking a contractor to widen 1.9 km of a dual carriageway between junction three of the M18 and Ladybank Roundabout. The scheme will cost around £25 million and take 24 months to complete, with works starting in November 2010.
Project ID:08050815
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Contractor sought for playground extension
Blackpool Borough Council are seeking a contractor to extend an existing playground with adventurous play facilities to create new, natural and inspiring free play opportunities for children and young people. The play space should put a focus on 8-13 years old. The scheme will cost approx £400k and will start in February 2010.
Project ID:10015714
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Company News
Mears secures 75pc of its forecast 2010 turnover
Mears Group has said it has already secured 75 per cent of its consensus forecast turnover for 2010 and now has a forward order book totalling more than £1.8 billion. In a trading update Mears said it expects to announce a successful full year set of results for the year to 31 December 2009. The group said it has secured new contract awards in 2009 of £550 million with a potential worth in excess of £650 million, subject to contract extensions. This will result in a record year for the group in terms of both new contract awards and order book level.
Mear chairman Bob Holt said: "I am delighted with the progress made across the group during 2009, particularly with our achievements in continuing to build a successful care provision along side our social housing services. The demand for our services has never been stronger. Our two growth markets social housing and domiciliary care, which together account for approaching 90 per cent of group revenues, are defensive markets where spend is largely non discretionary and afford us substantial immunity from bad debts. Moreover as a result of our quality partnership relationships with public sector customers, we have not experienced any work delays in the areas in which we operate."
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Engle taken under TP Bennett wing
Shopping centre specialist Engle has merged with AJ100 big hitter TP Bennett. The move effectively creates a new retail arm for TP Bennett, which was ranked 28th in this year's list of the largest 100 architectural practices in the UK. The division, described as a 'powerful new retail and regeneration consultancy' has been given the name TP Bennett + Engle.
According to the practice, the consultancy will be able to provide an 'unrivalled breadth of sector experience and skill sets required for town centre regeneration and mixed use developments'. The combined firm will work out of TP Bennett's existing One America Street offices in Bankside, London. Among the schemes on the practice's drawing board are a town centre masterplan for Harlow North and the retail and office-led redevelopment of London Bridge station.
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Lancsville leaves £50m of contracts
A high-profile job on Candy & Candy's One Hyde Park development was among the contracts left by Lancsville Construction when it went into administration on 18 December. Lancsville, ranked 94th in the 2009 Construction News top 100 with a latest turnover of £131 million, was the largest of a number of construction firms to fall into administration over the Christmas period. Vantis Business Recovery Services was appointed as the administrator for Lancsville Construction as well as for sister companies Henry Construction Limited and Henry Cranes Limited, leaving 200 jobs at risk.
Administrator Nick O'Reilly said: "We have instructed surveyors to act on our behalf to sell on the existing contracts. But it will really be determined by the clients themselves." According to business intelligence unit Glenigan, Lancsville had more than £50m of live contracts. The most high-profile was building 70 homes for Candy & Candy as main contractor on the five-storey Peel House development in Pimlico, London. The development fulfills the affordable homes requirement of Candy & Candy's ultra-chic One Hyde Park, where flats have sold for more than £100m.
Another major project for Harrow-based Lancsville was the £65m Pioneer Point development in Ilford, Essex, to build 294 apartments in two towers 23 and 33 storeys high. But developer Empire Property Group has decided to take on the running of that project itself, pledging to ensure subcontractors will be paid through its agent.
Administrators were appointed to Lancsville by venture capital firm Agilo, which reportedly lent Lancsville around £10m in 2008. Agilo specialises in coming to the aid of distressed companies and, in return for the loan, was granted a charge over Lancsville's assets. Vantis said Lancsville had suffered from increasing cash flow pressures and that attempts to refinance the group had failed. Sector credit rating agency Top Service said 70 County Court judgements, totalling more than £1m,had been filed against Lancsville since the end of May 2009. Several companies found themselves in trouble over Christmas, and a survey from the Chartered Institute of Purchasingand Supply revealed that construction activity fell for the 22nd month running in December.
On 22 December, Vantis was also appointed administrator to civils and groundworks contractor PJ Brown. Vantis is looking to sell the Crawley-based company, but the administration has caused 150 job losses. The subsidiary parts of the PJ Brown business group are unaffected and continue to trade as going concerns. More than 300 jobs were lost after £63m-turnover Kent-based Holleran and its subsidiary Oranmore Plant Hire went into administration on 21 December. Administrator Graham Meek of Bridge Business Recovery said it was "reviewing the position of the company, but looking to honour existing contracts". Bradford-based Brenville Construction has also been placed into administration, leaving a £7.5m development of 111 apartments in the centre of Scunthorpe, known as Linea, unfinished.It is understood that more than 20 employees have been made redundant after the appointment of KPMG as administrator. And 57 jobs were lost after A&H Gadd, a Somerset-based building contractor, was forced into administration. Other firms in the Tauntonbased Gadd Group are still trading.
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Cube developer ordered to pay £1.2m
The Cube developer Build Ability has been forced to pay more than £1.2 million to subcontractor O'Donnell Developments after a lengthy legal row involving nine adjudications over the major mixed-use development in Birmingham. O'Donnell's commercial director Patrick O'Donnell said the firm was "delighted" after being backed by the High Court in a dispute over an interim valuation for subcontract works, adding: "We are hopeful now that the matter can be resolved on an amicable basis." O'Donnell was appointed as a concrete framework subcontractor by Build Ability - a subsidiary of the Birmingham Development Company - in September 2007.
However, a number of disagreements over valuations, extensions of time, loss and expense soon surfaced, leading to the nine adjudications between the two companies. The subcontractor dragged the dispute into the High Court in November 2009 after Build Ability failed to pay a sum of £1,229,393 that was found to be owed to it in the pair's two most recent adjudications. Handing down his ruling on the claim late last month, judge Justice Ramsey found in favour of the Stechford-based subcontractor. He added that while Build Ability - which said it had been concerned about O'Donnell's financial stability - had now "accepted" the subcontractor was entitled to £1.081m of the amount, it was required to pay the full sum. Build Ability had argued it should not have to pay £148,500 of the total amount because it was added by the adjudicator post decision following an "accidental error" in his judgement. But Mr Justice Ramsey warned the developer it would have "no real prospect" of defending its argument.
Meanwhile, Build Ability director Neil Edginton pointed to further High Court litigation between the pair, with claims of defective works and programme delays. A source close to the £100m project have suggested "there is still quite a bit of money in the dispute". Mr Edginton added that problems with O'Donnell had significantly affected the programme of works at The Cube. He said: "O'Donnell's contract completion was July 2009 and at today's date they are yet to complete, which has resulted in considerable cost to Build Ability.
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Persimmon acquires new land after sales rise 20pc
Persimmon said today it acquired land to build 3,000 homes in the latter months of 2009 with its second half sales up 20 per cent on the first six months of the year. In a trading update for the 12 months to 31 December Persimmon sold 8,976 homes - 4,970 being sold in the second half of the year, 4,006 in the first. The sales generated a turnover of around £1.4 billion for 2009, down 20 per cent on 2008's £1.76 billion and 54 per cent on 2007's £3.01 billion. The debt pile has significantly reduced however, from £1.2 billion in April 2008 to £270 million now. Forward sales into 2010 are around 40 per cent ahead of last year at £640 million.
The trading update said: "This gives us a good start to the year, although as usual we await the Spring selling season with keen interest. "Whilst we will remain cautious until mortgage availability and the general economy improves, we have continued confidence in the long term future of the UK housing market." Persimmon said it continued to invest in both work in progress on new and existing developments and new land acquisitions, where good opportunities at attractive margins have been identified. Of the 3,000 newly acquired plots in the latter months of 2009, over 80 per cent are in southern markets. Persimmon's land bank at the year end now allows for around 61,000 new homes. The company is currently operating from nearly 370 developments throughout mainland UK offering a wide range of family houses.
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Apollo acquires M&E firm Goldhall
Top 100 contractor Apollo Group has acquired South-west mechanical and electrical firm Goldhall Electrical in a bid to strengthen its capabilities. Essex-headquartered Apollo was ranked 59th on turnover in the 2009 CN100, with a most recent turnover of £214 million. It has a strong working relationship with Yeovil-based Goldhall, which has more than 50 employees and will continue to trade under its existing name.
The purchase comes as Apollo looks to expand in the South-west - it recently opened offices in Dorset and won a contract in Plymouth. Apollo chief executive officer Dave Sheridan said: "This purchase was a natural evolution for Apollo as we have enjoyed an excellent working relationship with Goldhall over the years. "Apollo clients will benefit from our strengthened M&E capability, and Goldhall clients from Apollo's greater resources and wider service provision." He added: "Apollo has excellent relationships with its suppliers, who we will carry on supporting as we continue to contract out the majority of our M&E work."
Goldhall founders Martyn Stephens and Alan Ritson will stay with the business.Mr Stephens said: "Having worked together for a number of years, we know that Goldhall is a good cultural fit with Apollo. "We look forward to moving forward as part of the Apollo Group, taking advantage of all the added benefits that a large national organisation can offer our staff and operations."
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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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