Glenigan Insight
26th January 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 projects being shelved
Featured Region:
Yorkshire & The Humber
Featured Sector:
Health
Project News
Contract awarded for relief road improvements
Contractor appointed for land remediation
Tenders invited for school
Planning expected in Spring for hospital scheme
Tenders returned for school refurbishment
Contractor sought for student accommodation
Company News
Drivers Jonas merges with Deloitte
Turner & Townsend proft flat on reduced turnover
Great Portland Estates reports 9pc hike in property value
Land Securities well placed to "exploit medium term opportunites"
United House wins £18m worth of Decent Homes work
Redrow announces new finance director
Promotions
Meet England World Cup winner and OBE Jason Leonard at Ecobuild 2010!
How will a change of Government impact the construction industry?
The number of projects reported as being shelved fell sharply during December. Furthermore, at £1.2 billion, the value of work put on hold during the month, excluding major schemes of £100m or more, was the lowest monthly total for eighteen months. Whilst this is in part due to seasonal factors, it also follows a drop in shelved projects during November. Indeed 11% fewer projects were shelved during the final quarter of 2008 than a year earlier and 32% fewer than at the peak seen during the first quarter of 2009.
Private housing and office projects, at 28% and 16% respectively, still accounted for the largest proportion of work being put on hold during the final quarter of 2009. However, more encouragingly Glenigan has also recorded a marked increase in the number of previously halted private housing projects that are being reactivated by developers; private housing account for a third of all projects re-activated during the second half of last year. Unfortunately, as of yet, few stalled office projects are finding their way off the shelf.
The next couple of months will be an important test of construction prospects going into 2010 as developers review market conditions and prioritise the schemes that they will take forward over the coming year. Early signs offer some encouragement. The flow of construction projects starts has stabilised in recent months, albeit at a low level. Furthermore the private housing sector has seen a rise in projects starts as housebuilders anticipate a steady improvement in market conditions and credit availability during 2010. Accordingly whilst January is likely to see a seasonal rise in the number of projects being put on hold, the number of shelved schemes should fall short of the peak level seen a year ago.
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Recent performance
Private housing typically accounts for around a third of the underlying value of construction project starts in the region. However, four consecutive years of decline have seen its share shrink to only 20% during 2009. The decline in private new housing activity and the slump in the general housing market have had a knock-on effect on social housing activity, as planned schemes have been stymied by a lack of private developer contributions. The value of social housing projects starting on site fell 32% during 2008 as a whole and during the fourth quarter was 81% down on a year earlier.
However the flow of social housing starts has recovered during 2009, rising by 17% during the period January to November as increased government funding has helped local authorities and housing associations to press on with planned project with less support from private developer contributions.
The credit crunch hit private non-residential construction starts in Yorkshire & the Humber hard during 2008. The value of industrial, office and hotels & leisure projects fell 20%, 22% and 60% respectively. The decline in industrial and office sectors gathered momentum during 2009, with starts falling by 45% and 44% respectively during the first eleven months of the year. Whilst the hotel & leisure sector has subsequently seen a tentative pick-up in project starts during 2009, the value of work commencing on site during the current year was still around 70% down on 2007 levels.
In contrast construction starts in the retail sector improved during 2008 following several supermarket extensions and work commencing on a £70 million project, part of the Trinity Walk shopping centre development in Wakefield. Unfortunately, work on the Trinity Walk scheme has subsequently been halted with the scheme in administration. Furthermore retail project starts have fallen back sharply during 2009, with starts during January to November 63% down on a year earlier.
As private sector work dried up during 2008, government funded schemes provided little support for the industry in the region. After a surge of project starts during 2007, the underlying value of project starts in the education sector halved last year. The fall in education-related starts was accompanied by a small 2% drop in health projects starting on site.
However, the flow of community & amenity, health and social housing projects have all strengthen since the start of the current financial year as promised government funding has filtered through. Furthermore a surge in education work has brought the value of project starts, at £479 million during the first eleven months of 2009, to close to the high water mark seen in 2007. In contrast, the previous growth in civil engineering projects during 2008 has been reversed over the last year, at a time when the value of civil engineering project starts has been rising nationally.
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Prospects
Two years of sharp decline have left the value of projects starting on site in Yorkshire & the Humber 35% lower than in 2007. However, having declined so sharply during 2008 and 2009, the region is expected to enjoy a modest recovery in project starts over the coming year, albeit from a very low base.
A gradual recovery in the housing market should help to lift private housing project starts during 2010, halting three consecutive years of decline. However the lack of private housing work in the pre-construction pipeline remains. The value of underlying planning approvals in the private housing sector declined by 40% last year and during the first ten months of 2009 was 30% down on a year earlier.
Over the last two years the deteriorating economic climate and the absence of available finance have prompted developers to place increasing numbers of private non-residential projects on hold. This has been reflected in sharp falls in the value of detailed planning approvals for retail and hotel & leisure projects during 2008 and 2009. Planning approvals for industrial projects were 3% lower last year and would have seen a sharper decline but for the approval in December of a £77 million glass wool insulation manufacturing plant: Detailed approvals for industrial projects during the first ten months of 2009 were 53% down on a year ago. However, looking ahead greater economic stability and improved access to capital markets should begin to unlock some of these stalled projects during the course of 2010.
In contrast the recent growth in government funded projects is expected to peter out and to be reversed over the next two years as the need for the new Government to address the budget deficit cuts available capital funding. This is expected to temper the recovery in underlying projects in the region, with a 21% rise in construction starts next year being followed by a small fall during 2011.
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Recent performance
Health sector output strengthened last year, in part boosted by work on flagship projects such as the £1 billion London & Barts hospital. Investment in the NHS remains a Government priority, with further substantial funding increases planned for the next three years. However, changes in health policies and a new funding process are markedly altering the types of projects coming forward for development. Furthermore this policy redirection has, at least temporarily, dampened the flow of new project starts. This in turn has held back sector output: The ONS estimates that the value of health related work during the first half of 2009 was 13% down on a year ago.
Government Investment
The NHS has seen capital expenditure grow by 148% since 2000/01, with PFI funded projects boosting investment further. Against this background, health-related construction output (in current prices) more than doubled between 2000 and 2007. This rise is despite NHS trusts struggling to invest all of the available funds in recent years, with actual spending during the last five years typically being a third less than initially planned.
Under revised funding provision set out in the Budget, capital spending is set to remain high during the next two years: rising 17% to £5.4 billion during the current financial year and a further 15% to £6.1 billion in 2010/11. Whilst recent experience suggests that not all of the earmarked funds will actually be spent as planned, the increase in resources could potentially boost the flow of health projects over the next two years.
Project Starts
Unfortunately, despite the funding increase, the pace of construction starts in the health sector was slow to recover. The value of underlying project starts during the first quarter of 2009 was 5% down on a year ago. Project starts have subsequently firmed since the start of the new financial year, with the value of project starts during the nine months to September 6% up on a year ago.
However, the underlying flow of new projects is expected to remain erratic near term. In addition, last year was notable for a general absence of new major hospital schemes (that is, projects greater than £100 million), reflecting a shift in Government priorities away from major hospital schemes, and this will remain a drag on sector output during 2009 and 2010. Regionally, the East of England, London and the South West saw marked declines in the value of underlying construction starts during the course of 2008, while the North East, South East and Wales enjoyed a strong rise in project starts.
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Prospects
A recent change to funding arrangements, whereby individual NHS trusts now have more power in setting investment priorities, may help explain the decline in planning approvals over the last year. During 2008, the value of underlying planning approvals fell by 23% on a year earlier; this factor dampened the flow of project starts during the first quarter.
The Government’s change in funding arrangements already appears to be having an impact on the flow of large projects (that is, projects worth £100 million or more). During 2007, seven large hospital projects, worth a total of £1.7 billion, started on site. Last year only two large hospital projects started on site. In addition the credit crunch has added to the complexity of securing the financial backing for PFI or PPP projects, while accountancy changes for the treatment of PFI projects have potentially made this a less attractive funding route for public sector bodies. As such, we do not expect many large health construction projects to start on site over the next 12 months.
More encouragingly, whilst the decline in planning approvals during 2008 is expected to remain a brake on the sector over the coming months a marked pick-up in detailed planning approvals since the start of the new financial year suggests that additional government funding is now filtering through and that NHS trusts have begun to deploy their refocused investment programmes. In the 2008 Pre-Budget Report, an additional £100 million was advanced from 2010-11 into 2009-10 to bring forward the upgrading of 600 GP surgeries.
Indeed the strengthening in project starts is now expect to offset the impact of the poor start to the year, securing an estimated 9% rise in project starts during 2009 as a whole. However the recent increase in project starts is forecast to come at the expense of continued growth during 2010, with project starts slipping back 17% next year before stabilising in 2011.
However, the anticipated flow of new projects is expected to be especially vulnerable during the latter half of the forecast period to projects being re-appraised and rescheduled. The deterioration in the public finances is likely to force the re-appraisal of departmental budgets following next year’s General Election, while a change of Government would be likely to prompt a fresh re-appraisal of individual trusts’ investment funding and priorities.
The Conservatives have promised that, if elected, health will be one of the few areas to receive real-term spending increases. However, they have rowed back somewhat from earlier commitments to maintain planned spending increases as the scale of the economic crisis has became apparent and, crucially, no specific commitment has been made to sustain the NHS capital budget.
Specific policy proposals such as the re-organisation of primary care services and their stated opposition to Labour’s polyclinics plans point to a fresh re-appraisal of the NHS capital programmes following the general election. The party has already indicated that there would be a temporary moratorium on hospital re-configurations following the elections: The Conservatives have stated that they wish to make money available for 45,000 more single rooms in the NHS over five years, almost doubling their current number.
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Project News
Contract awarded for relief road improvements
Royal Borough of Windsor and Maidenhead has appointed Balfour Beatty Civil Engineering on an Early Contractor Involvement basis to carry out the £7 million Windsor and Eton Relief Road Improvements. Work is to commence Spring 2010 and is scheduled to finish by May 2011, in time for the 2012 Olympics when the relief road will be a key transport link to the rowing events at Dorney Rowing Lake.
Project ID: 10038474
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Contractor appointed for land remediation
Marley Eternit Ltd has appointed Greendale Remediation to carry out remediation of land at the former Everite Concrete Works in Widnes. The work is to be carried out prior to the construction of 123 houses on the site which has now received planning approval.
Project ID: 09376504
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Tenders invited for school
Tenders are currently being invited for the new Lydiard Millicent School at The Butts in Swindon for Wiltshire County Council. Works are expected to commence April 2010 and will be on site for approximately nine months. Quantity surveyors for the £1.4 million scheme are Dickson Power Partnership and works will include demolition and construction of a new seven class school.
Project ID: 09388173
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Planning expected in Spring for hospital scheme
A planning application is expected to be submitted by Cardiff & Vale NHS Trust this spring for the second phase of the Children's Hospital for Wales project, Heath Park in Cardiff. This £40 million project will provide a paediatric surgical capacity, associated critical care services, outpatient support, research, development and learning facilities. The scheme is expected to be completed by 2012.
Project ID: 08340795
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Tenders returned for school refurbishment
Tenders have been returned for the St Oswalds School refurbishment project, South Road in Alnwick. The project has been design by Darbyshire Architects and comprises windows and doors replacement, re-cladding, glass canopy to nursery and extension to existing car park. Detailed plans are currently awaiting decision. Work will commence on site in March 2010.
Project ID: 09390906
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Contractor sought for student accommodation
University of West of Scotland is currently inviting applications to tender for a contractor to build a 200-bedroom student accommodation unit on the Ayr Campus. This £8 million scheme has been designed by Lewis & Hickey. The construction work is due to commence on site in August 2010, with the completion scheduled in line with new campus development for August 2011.
Project ID: 10037853
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Company News
Drivers Jonas merges with Deloitte
Real estate advisors Drivers Jonas is to merge with business advisory firm Deloitte.
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Turner & Townsend proft flat on reduced turnover
Pre-tax profits at Turner & Townsend for the six months ended 31 October 2009 at the same as the prior year despite a £10 million fall in turnover. The consultant said pre-tax profit for the period equalled £10.2 million, the same as the six months to 31 October 2008 while turnover fell to £96.9 million from £105.6 million the prior year. Chief executive Vince Clancy said the market had been particularly tough in the UK, Europe and the Middle East, but turnover in "the four As" - Americas, Africa, Asia and Australia grew compared with the prior year. He said: "Currently our turnover is 60 per cent UK and 40 per cent rest of the world. We expect that to switch around over the next two to three years. "We continue to explore we can extend our range of services. From an acquisitions point of view we are on the look out, particularly in non-UK markets." Bosses said some reduction in staffing had been necessary to control costs but added that they "are pleased that Turner & Townsend has not been forced to make large scale redundancies"
They said they had not needed to implement the flexible working arrangements that staff signed up to earlier in 2009 which would have seen them work a four day week. Executive chairman Tim Wray said: "A joint venture was recently established with HamniParsons in South Korea, and new business openings in the period include offices in Chile and Vietnam. "To support our growth plans the business has continued to recruit senior management, and we look to make further acquisitions in selected markets. "We continue to be confident that our strategy best positions Turner & Townsend to take advantage of market opportunities and for delivering further growth."
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Great Portland Estates reports 9pc hike in property value
Property firm Great Portland Estates today said the value of its property rose by 8.7 per cent in the three months to 31 December 2009. This represents its highest quarterly increase for three years and takes the value of the estate to £1.2 billion. The value of property acquired rose even further, increasing in value by 9.5 per cent over the quarter. Since the end of December, a third of Great Portland Estates' empty space had been let or was under offer. "We have seen a pick up in enquiry levels from prospective occupiers for the limited amount of space we have available," it said.
Chief executive Toby Courtauld said: "London's investment markets have continued to strengthen since we reported in November, with a significant surfeit of buyers over sellers. "With the take up of office space improving, we have seen isolated examples of rents rising. If the UK economy continues to recover, supporting occupational demand, we remain of the view that more general rental growth will return towards the end of this year as the supply of space to let diminishes." The company added that it was preparing to start work at three sites over the next few months, and could begin on many more over the coming three years. "The Group's exciting programme potentially stretches to 2.6 million sq ft across central London," it said.
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Land Securities well placed to "exploit medium term opportunites"
Land Securities it is now focusing on securing lettings and is well placed to start three new projects in the West End of London in 2010. In a third quarter trading update Land Securities said the business was positioned to exploit medium term opportunities with three new London development projects to start in 2010 with a total development cost, including land and finance, of around £655 million.
Mace, Wates and Sir Robert McAlpine have each been appointed for the projects. Land Securities said it achieved £249.3 million of investment property sales in three months to December 2009, 1.2 per cent below the three months to September 2009. Land Securities chief executive Francis Salway said: "The business continues to perform well against our operational targets and we are pleased that our portfolio is proving its appeal to occupiers with ongoing lettings, while our financial strength allows us to be first off the block with our London development programme."
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United House wins £18m worth of Decent Homes work
Specialist housing contractor United House has won three Decent Homes refurbishment contracts worth more than £18 million in total. Places for People selected United House to carry out a major works programme to its properties, from the South Coast up to the South Midlands, under a £16 million contract.
In north London, the contractor won a £2.5 million Decent Homes contract with Enfield Homes covering the refurbishment of 350 flats on the Turkey Street Estate. Meanwhile Medway Council has appointed the contractor to carry out Decent Homes refurbishments to properties in Rochester, Gillingham and Rainham.
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Redrow announces new finance director
Redrow has appointed Barbara Richmond as its new group finance director following an announcement last month that David Arnold would be stepping down from the role. Ms Richmond - who was most recently the head of finance automotive distributor and retailer Inchape - for will take up the position from today, however she will have a brief handover period with Mr Arnold, the group said today.
Redrow chairman Steve Morgan said the board would "look forward to benefitting from her wealth of strategic and commercial experience". The housebuilder will release its interim results on 25 February.
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Are you making the most out of the Social Media Revolution?
Jason will be launching the Industry’s most exclusive professional online networking facility at this year’s Ecobuild exhibition at Earls Court from 2nd - 4th March.
In partnership with the Chartered Institute of Building (CIOB), The Construction Network (tCn), combines the latest technological advances to offer the ultimate sharing of information, ideas, opportunities and expertise between those in Property, Construction and the Built Environment.
Come along and register yourself or your company and be entered into a prize draw to win England Rugby tickets or a signed shirt by Jason himself!
Contact us via info@tcn.uk.com or visit the preview site for more info at www.tcn.uk.com
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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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