Construction Update

Construction Update
Construction recovery slowly
moving up the curve
WRR Wholesale Netherlands
Industry Knowledge Team
Utrecht, August 2015
Table of contents
Sections
I
Construction in macroeconomic perspective
II
Developments Netherlands
11
III
Developments Europe & US
20
IV
European contractors: metrics & strategy
29
6
2
Executive summary (I/III)
1
•
The European construction sector has turned the corner now that the European economy is back on a growth track. We expect that
construction production will improve gradually, provided that conditions stimulating a.o. residential production will strengthen during
the year and gross fixed capital formation will increase backed by growing producer confidence and higher utilisation rates
•
An acceleration in European construction recovery is possible as of 2016 onwards, provided that public finances and fiscal and
structural economic reforms will not move too abundantly in the wrong direction. One of the prerequisites for enhanced construction
recovery is sustained economic growth, resulting in a more broadly based revival and extending beyond the residential market.
Some European housing markets could run the risk of overheating in the medium term and this might damage the construction
recovery process. Securing enough new supply and fiscal steering are remedies to contain too strong price increases. However,
Dutch contractors currently benefit from home prices increases as in 2008-2014 prices of newly built homes decreased strongly,
while new residential construction costs kept rising
•
Dutch gross fixed investments have increased markedly in the 12 months preceding March 2015, albeit that gross fixed investments
in homes strongly contributed to this growth. Also construction confidence and construction production have shown a very strong
pickup. The Netherlands is clearly outperforming Eurozone area averages, while in other European countries the recovery of
construction production is still being held back by hesitant growth of business investments and accompanying credit growth. Major
macroeconomic woes (Greece, China) might have destabilizing effects for certain European countries, but we do not foresee major
setbacks in the overall European construction outlook
•
The Dutch construction market has bottomed out in 2014 (+2% YoY) and for 2015 we pencil an accelerated growth of 4% YoY.
Although optimism is growing and is fuelling through to the residential market, the non-residential market and the infrastructure
market do not benefit in an equal way, making the current recovery still rather one-sided. Moreover, profitability will take much
longer to recover as the contracting community has started a race to the bottom by engaging in ‘lowest price’ wars during the crisis
•
As indicated, positive signs in the residential market are accumulating rapidly, but in our view production levels in 2015 and 2016
might be anomalies as currently a reservoir of postponed demand is being accommodated. However, in the coming years the
demand for newly built homes will be structurally higher than during the crisis. This poses a serious challenge for the residential
construction community as capacity has been reduced strongly in the past 7 years
•
Increasing vacancy levels and structural trends (online retail substitution, new working concepts structurally reducing need for office
space) hold back a resilient rebound of production. We foresee a transition from greenfield to brownfield developments, although
this does not immediately imply that the frequency of renovation and transformation projects will see spectacular growth in the
coming years (due to complexity, unsuitable locations)
•
Dutch Infrastructure construction still needs to absorb austerity measures, but towards 2016 the picture is improving gradually as
residential growth also fuels investments in neighbourhood infrastructure (roads, pavements, sewers). Meanwhile, an improving
investment climate drives spending by semi-public sector companies (utilities). Opportunities in the Dutch PPP market keep ramping
up, but risk-reward profiles of projects develop unfavourably and require intensive reviewing by both public clients and contractors
Construction in
macroeconomic
perspective
2
Developments
Netherlands
3
Executive summary (II/III)
3
Developments Europe
& US
•
All European countries covered in our analysis are expected to report construction growth in 2015, although not in all subsectors.
There is also a high degree of heterogeneity between the subsectors in different countries. Subject to the dependence on Eurozone
woes, exposure towards global economic challenges (oil prices, China) and the extent of public deficits the pace of recovery in
certain countries is agonizingly low. Now that private sector demand is still in the early stage of recovery, the phasing out of public
stimulus measures and the lack of new investments is being felt
•
Germany has been a relative outperformer during the crisis, but is now suffering from spluttering private sector demand and the
unwillingness from federal and local governments to invest seriously in e.g. infrastructure
•
In the past years construction in the 4 Nordic countries (Sweden, Denmark, Norway, Finland) has been more resilient than in other
European countries. The same is true for Poland, traditionally are very large beneficiary of EU funds for infrastructure upgrades.
While opportunities arise for foreign contractors in Swedish infrastructure, Poland is an unpopular expansion region due to the
unreliability of public clients and the low probability to enforce contracts
•
US construction is showing a more spectacular recovery than many European countries, but in our opinion forecasts still need to
factor in the effect of lower oil prices. The upturn in the residential and private non-residential market keeps accelerating backed by
growing consumer confidence, but public non-residential an infrastructure spending is curbed by increasing shortfalls of public
funding and lower investment appetite at major oil & gas and energy firms
•
In recent years, contractors increasingly jumped to internationalisation and diversification in order to escape weak local European
markets. However, these strategies can only be successful under excellent risk management in both home markets and activities in
adjacent industries and regions. Analysts polled by Bloomberg foresee strong improvements of EBIT margins at listed European
contractors for the coming years. However, we feel that there is a downside risk that margin recovery will be less abundant as a
result of the earlier substantial swallowing of ‘problem projects’ (too low bidding prices against weak risk-, contract-, and project
management)
•
Sales growth at main European contractors will take place at a more moderate pace, a.o. as acquisitive ambitions are still capped by
the need for further deleveraging. Moreover, deleveraging gains importance as there is a necessity to create cash for growth when
productivity levels and corresponding working capital demands are on the rise
•
All said, operational excellence and a stronger focus on risk management are the first priorities for contractors. Nevertheless
contractors also need to look beyond these ‘short term’ issues and need to build on their distinctive position in order to escape the
commoditization process in the industry
4
European contractors
– metrics
4
Executive summary (III/III)
4
European contractors
– strategy
•
Currently contractors use price as the main differentiator in their offerings, while they should focus on differentiation and innovation
and become a ‘solution’ provider instead of a provider of production capacity. Strategic alliances are the preferred way to develop
distinctive solutions which offer a client ‘best value for money’
•
In the pursuit of a ‘solution provider’ role, Dutch contractors are doing the right thing when they focus on main trends in the
industry and acknowledge the growing importance of technology. There is a need for more cross-sector collaboration and strategic
alliances between contractors and companies in other industries
•
We expect an increasing number of construction companies to become aware of the fact that in the longer run social innovation is a
fundamental prerequisite to remain competitive and profitable. However, conservatism within the sector might stir up the appetite
for hasty, capacity driven acquisitions in adjacent industries, once again creating ‘me-too’ products and re-igniting price competition
•
In our view, the mechanism of price competition will not disappear in the short term and it will take some time before contractors
acknowledge the value of social innovation as an enabler for creating a distinctive profile. Ultimately, this will result in healthier
financial ratios, but currently there are still many companies which behave like ‘rabbits caught in the headlights’, hesitating to take
the first step on the road to change
5
I
Construction in macroeconomic
perspective
European construction market has turned the corner, but economic
& political reforms will likely curb more impressive growth
GDP forecasts (% YoY)
Construction production volume (% YoY)
6
3.5
4
2
2.8
1.5
1.5
1.8
1.8
2.0
Netherlands
2.8
2.0
Germany
Volume
2013
Volume
2014
Volume
2015(e)
Volume
2016(e)
14%
-3.9%
0.3%
4.0%
3.5%
10%
45%
12%
40%
8%
-0.3%
2.4%
1.8%
0.2%
1.8%
5.2%
5.1%
3.5%
4%
Ireland
-2.0%
10.1%
9.0%
10.6%
2%
France
-3.2%
-2.8%
-0.4%
1.8%
Belgium
-0.9%
0.7%
0.0%
1.5%
-18.8%
-2.4%
1.8%
3.6%
5.7%
6.6%
7.1%
6.6%
UK
0
Construction output, GDP and new building
6%
35%
2014
2015 (e)
US
2016 (e)
New building as % GDP (LH axis)
% New building in total output (RH axis)
Source: Euroconstruct, Rabobank (NL estimates)
Source: Euroconstruct, Euroconstruct 19 countries
Economic restructuring curbing growth
Construction leaves bad years behind....
…but it is too early to cry victory
•
The European economy is back on a growth track.
Various institutes raised their forecasts, a.o. based
on low oil prices, the Euro exchange rate which has
come down and the ECB quantitative easing
programme1. Consumer confidence keeps improving
and exports and investments are growing. However,
many economies are not fully shock-resistant to
Eurozone woes (Greece) and global economic
challenges (China)
Dutch growth is widely supported by investments in
fixed assets, growing private consumption and
growth in the manufacturing industry, as recently
confirmed by the IMF. In 2H15 we expect more
significant support from declining unemployment
and higher exports of goods and services
2016(e)
Construction output as % GDP (LH axis)
Source: Rabobank Economic Research, July 2015
•
2015(e)
2014
2013
2012
2011
2010
2009
2008
2007
Ireland
Spain
US
Netherlands
Germany
UK
Eurozone
Belgium
France
2013
Spain
30%
2006
0%
-2
•
In 1Q15 Dutch economic growth was driven by a
strong impulse from private investments in homes.
Although we expect this effect to decrease during
the year, we have adjusted our estimates upwards
largely based on strongly improved prospects for
the new-built residential market
•
In 2014 European construction output represented
9.3% of GDP on average and this share will grow
only slightly in the coming years. This is the lowest
level since 2006 (decline: 25%). Especially the
decline in new building activities has had a strong
effect on total production (decline: 40%)
•
Euroconstruct’s estimates have been upped for
most European construction markets as well. We
can describe 2014 as a year of stabilization, while in
the coming years some markets might experience
construction growth that is stronger than GDP
growth. However, accelerations in growth will be
dependent on regional challenges in public finances
and the pace of fiscal reforms in the Eurozone.
Overall, we expect a scenario of moderate growth
•
Looking at the longer term, renovation and
maintenance construction will become increasingly
important for most (mature) European economies
as demographic ageing (adaptation residential
stock) and the need to upgrade obsolete buildings
or buildings with energy inefficiencies will be major
themes. On average, renovation or transformation
projects are less bulky, more complex and therefore
these projects also seem less profitable
Note (1): currently the ECB is injecting EUR 60bln monthly into the European economy by purchasing government bonds and repackaged private debt
7
Recovery will take place in all construction subsectors, although still
with a high degree of regional heterogeneity
5%
Ireland
4%
Poland
3%
Belgium
Netherlands
Spain
2%
France
Sweden
1%
Germany
0%
-1%
-15%
-10%
-5%
0%
5%
18%
16%
Ireland
14%
12%
10%
Spain
8%
Netherlands
Poland
UK
6%
4%
France
Sweden
Germany
-15%
-10%
-5%
0%
2%
0%
Belgium
-20%
Construction output growth 2011-2014
Infrastructure (% CAGR)¹
Construction output growth 2014-2017
UK
Residential (% CAGR)¹
Construction output growth 2014-2017
Construction output growth 2014-2017
Non-residential (% CAGR)¹
-2%
5%
14%
Poland
10%
8%
6%
Spain
Ireland
4%
UK
Netherlands
Belgium
France
-30% -25% -20% -15% -10% -5%
Construction output growth 2011-2014
12%
Sweden
2%
Germany
0%
-2%
0%
5%
10%
-4%
15%
Construction output growth 2011-2014
Source: Euroconstruct, FMI, January 2015
Source: Euroconstruct, FMI, January 2015
Source: Euroconstruct, FMI,January2015
Non-residential: growth curbed by vacancies
Residential: new homes are the main driver
Infrastructure: public finance still a burden
•
After a period of overheating the non-residential
market has reached calmer waters. Economic
growth is leading in this subsector and as long as
unemployment remains a major issue, new
construction is expected to be modest
•
Energy efficiency needs and high vacancy levels can
contribute to renovation growth, but again we
expect only a modest increase in this segment.
Most countries do not have ‘penalties’ for
abandoning obsolete properties, thus new
construction is the preferred investment option
•
When interpreting the forecasts for the UK, bear in
mind that there are huge regional differences, with
for example greater London, Yorkshire and Wales
making up for a major part of construction spending
•
•
Now that economic prospects seem to be reaching
more positive territories, residential construction is
gaining momentum and overall seems to be leading
construction recovery. However, economic
prospects remain fragile and increased private
spending and low interest rates can still be
counterbalanced by weak labour markets and in
some cases tight mortgage conditions
Stimulus has merely ended in broader Europe, but
the British and Irish market are still supported by
recent interventions. NAMA2 has financed 50% of all
newly constructed homes in 2014 and ‘Help to buy’3
resulted in a 41% rise in new private home
building. A serious drawback of these measures is
possible overheating of housing prices
•
Public debt burdens will continue to put a damper
on the prospects for infra production. The Juncker
‘Infrastructure investment plan’ of EUR 21bn in
guarantees is expected to raise EUR 315bn from the
side of institutional investors. However, the plan will
not fuel an increase in activity before 2016
•
Most national stimulus programmes have come to
an end and infra budget improvements are highly
dependent on economic recovery which should
reduce the need for austerity. Poland is traditionally
a large beneficiary of EU funds, resulting in
spending on new transport infrastructure
•
The still limited funds available for infra are
primarily meant for new construction, while
maintenance and renovation is broadly neglected
Note (1): Size of the bubbles in the graphs represents relative size of construction production in specific countries or regions in 2014, EC-19: nineteen Euroconstruct countries
Note (2): National Asset Management Agency, NAMA functions as a bad bank, acquiring property development loans from Irish banks in return for government bonds
Note (3): Help-to-buy equity loans and mortgage guarantee schemes were set up to support people who could pay a mortgage, but struggle to save the deposits required by lenders
8
Residential market is currently the engine for construction growth,
potential overheating of housing market could damage recovery
Residential construction costs (2010=100)2
15
105
10
100
0
Construction costs (EA)
Mortgage
Mortgage
Credit for
Credit for
Construction costs (NL)
Jan-16
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Price-to-income (EA)
Jan-02
Price-to-income (IRE)
Jan-01
Price-to-income (UK)
Jan-00
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
1999
2000
Price-to-income (NL)
Jan-15
-15
70
Jan-14
75
Jan-13
70
80
Jan-04
85
-10
Jan-12
-5
85
100
Jan-11
90
Jan-10
115
5
Jan-09
95
Jan-08
130
Jan-07
145
110
Jan-06
160
Credit for consumption & mortgages (%YoY)
Jan-05
Price-to-income (long term avg.=100)1
lending %YoY (EA)
lending %YoY (NL)
consumption YoY% (EA)
consumption YoY% (NL)
Source: OECD, 2015
Source: Eurostat, 2015
Source: ECB, DNB, 2015
Price-to-income ratios edging up
Contractors challenged to control their costs
Credit supply containing fast price increases
•
•
In various European countries (UK, IRE) there is
currently a debate about possible new housing
market bubbles. In general, possible overvaluation
of homes is measured by a.o. the price-to-income
ratio. If it is structurally developing above the long
term average of 100, there is an indication for
overheating. However, the ratio does not take into
account institutional characteristics of national
housing markets
For a more balanced judgement, we suggest the
ratios should be a.o. weighted against actual
property price developments. For example, in the
UK residential property prices are still 20% below
their 2007 peak. Overheating is currently not at all
a likely scenario for the Netherlands
•
Too fast rising housing prices can become a threat
to construction market recovery when bubbles
might burst. It is important to secure enough
supply in order to decrease pressure on prices.
Obviously, creating more supply is not the only
remedy to contain price increases. Fiscal regimes,
spatial planning procedures and financing options
are also important
•
Dutch home builders are currently eager to boost
supply under constantly improving pricing
conditions. However, the prospects of doing a
profitable job have deteriorated. Between the 3Q08
peak and 4Q14 prices for new homes decreased by
18%3, while construction costs increased by 5% in
the same period
Note (1): nominal house prices divided by nominal disposable income per head, EA = Euro area
Note (2): Labour and material costs of new residential buildings, index based in 2010, EA= Euro area
Note (3): based on prices published by Ministry of internal affairs and NEPROM, Monitor nieuwe woningen
•
While mortgage lending in the Euro area is growing
clearly, Dutch mortgage lending is developing less
abundantly. This is the result of a retrenchment of
credit availability norms (e.g. the LTV. This will not
prevent housing prices to rise further, but at least
the pace will be more moderate compared to other
countries without comparable arrangements
•
In the Netherlands the LTV will have declined to
100% by 2018. Sweden and Germany already have
a structure whereby home buyers can only get a
mortgage with a maximum LTV of 80-90%.
Therefore first time buyers often rely on ‘credit for
consumption’. However, in the Dutch housing
market this is not a common practice
9
Dutch construction confidence and production outperforming the
Euro area, gross fixed investments have risen spectacularly
3%
1.8%
1.7%
1.1%
1.3%
0.0%
1.7%
1.3%
0%
-1.7%
-1.5%
-2.5%
-2.8%
20
10
-10
-3.7%
-3.9%
-6%
-20
-6.5%
-9%
30
0
-0.4%
-3% -1.4%
-30
-40
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
-50
Jan-08
Gross domestic fixed capital formation (Euro area)
2016(e)
2015(e)
2014
2013
2012
2011
2010
2009
2008
-11.2%
Jan-07
-12%
Constr. confidence - Netherlands
Construction gross domestic fixed capital formation*
Constr. Confidence - Euro area
Source: Euroconstruct, European Commission, (*) EC 19 countries
Source: Eurostat, June 2015
Dutch gross fixed investments (% YoY)*
Construction Production index (2010 = 100)
125
15
120
10
115
5
110
0
105
-5
100
-10
95
90
-15
Homes
Infrastructure
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
1Q16
1Q15
1Q14
1Q13
1Q12
Buildings
Jan-07
85
-20
1Q11
Dutch private investments² in built assets are
supported strongly by investments in Dutch homes
(+ 9.6% YoY in 1Q15). Also the construction
confidence indicator and construction production
index benefit from this development. Currently a
catch-up effort is taking place in the residential
market. Therefore we expect a decreasing impact of
housing investments as of 2016, while investments
in buildings and infrastructure will still be tempered
by overcapacity and austerity
Construction Confidence indicator
4.0%
1Q10
•
Fixed capital growth can be further supported by
improving funding conditions. However, many
European corporates have been suffering from
profit erosion and are still focused on deleveraging.
As soon as improved GDP forecasts in the Euro zone
translate into clearly better corporate revenue
prospects and higher utilization rates, both
replacement investments and new capital
expenditure will grow. However, early July the IMF
adjusted global economic growth downwards, while
the Eurozone outlook is unchanged (1.5% in 2015)
6%
1Q09
•
The outlook for fixed capital formation (private
investments) in the Euro area¹ improves slightly in
2015, followed by more impressive growth in 2016.
Construction and real estate make up for an
important part of total investments. Stagnating
investments have been one of the most challenging
economic problems in the Euro area. Recently the
ECB has substantially lowered interest rates in order
to boost investments. The fact that investments
have improved sluggishly, proves that price
elasticity is low and confidence and expectations
play an important role
1Q08
•
European fixed capital formation (% YoY)
1Q07
Housing investments boost Dutch recovery
Construction production - Euro Area
Construction production - Netherlands
Source: CBS, quarterly moving average, (*) change in volume
Source: Eurostat, June 2015
Note (1): Fixed capital includes tangible and intangible assets that are used in the production process for longer than one year, e.g. buildings, dwellings etc. Gross investments include both expansion and replacement spending
Note (2):Dutch gross fixed investments in homes, buildings and infrastructure include the work in progress (WIP) of the construction sector commissioned by principals and costs related to conveyance, real estate brokerage,
appraisals and architect costs. For more information on the Dutch economy, please see our Dutch Economic Quarterly
10
II
Developments Netherlands
Dutch construction: new home construction pushing up
production, but indicating fragility of recovery at the same time
Dutch construction growth pushed by residential developments
•
•
•
•
In May 2015, EIB (Economisch Instituut Bouw) released its new construction
outlook. Last year we agreed with EIB about 2014 being a transitional year. EIB
forecasted a slight shrinkage for the construction sector, but we expected
production to stabilize or grow slightly. Positively, recovery has speeded up as of
2H14, resulting in a growth of 2% YoY. For 2015 we are also a bit more
optimistic than EIB with a YoY growth of 4% (3.8%). Although residential new
building is developing buoyantly, there are downside risks. The pace of
production might fall back in 2H16 due to the phasing out of the catching-up
effect and the lowering of the loan-to-income criteria for mortgages as of July
2015. Many (first time) home buyers currently spur themselves to the market
attracted by all-time low mortgage interest rates and lower unemployment.
Finally, the recovery pace in house prices determines the reduction of
undervalued mortgages which actively stimulates households inclined to move
Residential growth is supported by a steep increase in permit issuance for new
homes (+84% YoY, annualized) and sold newly built homes (+55% YoY,
annualized) in the owner-occupier segment in May 2015 (slide 12). However, in
the coming years the effects of the ‘verhuurdersheffing’ and restrictions for
housing corporations to increase rents (max. 1% above inflation) will temper the
ambitions in the new-built production of rental homes1. The fall-out by
corporations is partly substituted by housing production of commercial builders
and investors, resulting in an increasing number of homes being realized outside
the regulated sector2
Non-residential prospects are still very modest. Key issue hampering new
production is overcapacity in existing real estate. Vacancy rates are still relatively
high and real estate demand side is seriously challenged by impact of
technological innovations (e.g. online retail, working from home, more efficient
supply chain management). Improved economic prospects slightly boost
production as companies are preparing for increased CAPEX
Infrastructure shows a mixed picture. On the one hand infra suffers from
postponed infra spending on projects by the central government as well as lower
budgets at local governments. On the other hand, a strong increase of newresidential production and higher investments by the private sector drive growth
related to building site preparation and upgrades of networks (e.g. energy infra)
Dutch construction production forecasts – % YoY
2014(a)
EIB
2015(f)
EIB
2016(f)
EIB
2015(e)
Rabo
2016(e)
Rabo
2020(*)
Rabo
Residential
-0.6
7.5
6.5
8.5
9.0
5.0
New building
-5.0
10.5
10.0
12.0
13.0
6.0
Renovation
6.5
3.0
1.0
4.0
2.0
2.5
Non-residential
2.0
2,0
3.0
3,0
2.5
2.5
New building
1.5
1,0
2,5
2,0
2,0
2,0
Renovation
2.5
3.5
3.5
4.0
3.0
3,0
Infrastructure
3.0
1.5
2.0
2.0
2.5
2.0
New building &
repair
2.5
1.5
2.0
2.0
2.5
2.0
Maintenance
3.5
1.5
1.5
2.0
2.0
2.0
External
subcontracting
2.5
2.0
2.0
2.5
2.0
3.0
Maintenance
buildings
4.0
1.0
0.0
2,0
0.5
2.0
Total
2.0
3.0
(2,9)
3.0
(2,8)
4.0
(3,8)
3.5
(3,5)
3,0
(2,8)
Source: EIB May 2015, Rabobank estimates 2015-2020, (*)estimated CAGR in 2017-2020
Note (1): Sociaal huurakkoord: housing corporations are allowed to increase their total accumulated rent (of all tenants) of regulated homes by maximal 1% above inflation. This agreement is made between the
‘Woonbond’ (Dutch association for the rights of tenants) and ‘Aedes’ (association of Dutch housing corporations). The agreement will run between 2016-2018 and can be extended until 2020
Note (2): regulated homes are rental homes which are meant for lower income groups and monthly rents should stay under the current liberalisation limit of EUR 710,68
12
Dutch construction: capacity reduction will bring challenges in the
coming years, solid returns not yet within reach
Dutch construction bankruptcies (monthly)
GDP growth & added value (% YoY)
140
15
120
10
100
Higher productivity, profitability is lagging
•
Since the start of 2014 construction bankruptcies
have decreased by 21% YoY, resulting in 76
shutdowns in June 2015. Historically seen, this level
is still relatively high. We expect a further decline in
the course of this year, although there still are
many companies which become lost between the
need to deleverage and increasing working capital
needs due to improving productivity levels
•
Construction added value increased by almost 4.5%
YoY in May 2015. Structurally, we do not foresee a
growth of added value above GDP growth, because
of socio-demographic reasons (slide 14) and the
maturity of the economy and accompanying
infrastructure. Moreover, bear in mind that higher
productivity does not immediately come with an
improvement of profitability. Often projects have
been calculated an contracted for prices at or even
under cost price. Meanwhile costs of materials,
subcontractors and suppliers are on the rise. We
expect that the pipeline of e.g. new residential
projects will increase further in the coming two
years. This will lead to longer lead times as capacity
(jobs) has been reduced strongly during the crisis.
We expect vacancies to increase gradually as of
1Q16, after a general recovery in utilization rates
•
However, contractors with own land bank positions
will be the first to benefit from the recovery, as
they can convert their positions into cash by
starting e.g. new housing developments (selling
building sites to future home-owners). In due time
this also leads to improved margins as land bank
positions on average have been devaluated strongly
in the balance sheets of contractors
5
80
0
60
One-man businesses
Other firms
Construction Added Value (LH axis)
Source: CBS, 12 months moving average
Pipeline and lead times newly built homes1
Construction vacancies (# x 1000)
18
17
60,000
16
15
25
20
15
14
Pipeline (# sold & planned new homes, LH axis)
Lead time (# months, RH axis)
Source: Monitor Nieuwe Woningen, 2015
Vacancies
1Q16
1Q15
1Q14
1Q13
1Q12
0
1Q11
1Q16
1Q15
1Q14
1Q13
1Q12
1Q11
1Q10
1Q09
1Q08
10
1Q07
30,000
5
1Q10
11
10
1Q09
12
1Q08
13
40,000
1Q07
50,000
Jan-16
GDP (RH axis)
Source: CBS, Rabobank, 12 months moving average
70,000
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-07
Jan-16
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
-15
Jan-04
0
Jan-02
-10
Jan-00
20
Jan-08
-5
40
Source: CBS, quarterly moving average
Note (1): the data in the graph only take into account the construction of new owner-occupier homes, rental homes are excluded
13
Dutch Residential: new-built challenges are both qualitative and
quantitative, but numbers seem to be overestimated nationally
250
8.5
thsnd
200
8.3
thsnd
120
250
100
200
80
8.1
150
7.9
100
7.7
150
60
100
40
50
20
50
7.5
Source: ABF-Primos, PBL, 2014
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Source: Kadaster, NVB Bouw, (*) annualized numbers, moving average
NL: newly built homes and demolitions (#)
Top 14 regions with housing shortages (#)
thsnd
25
180
160
20
140
120
15
100
80
10
60
40
5
20
Newly built homes (RH axis)
Source: CBS, Rabobank (estimates), 2015
2015(e)
2010
2005
2000
0
1995
0
Demolitions (LH axis)
Thousands
thsnd
1990
Jan-03
Permits owner occupier (LH axis)
Permits rental (LH axis)
Sold new homes - owner occupier (LH axis)
Sold existing homes (RH axis)
Households (LH axis)
Housing supply (LH axis)
Housing shortage (RH axis)
1985
0
Jan-00
2040
2038
2036
2034
2032
2030
2028
2026
2024
2022
2020
2018
2016
2014
0
Jan-02
0
7.3
1980
Future housing production should be planned on a
regional level, in order to prevent overproduction at
a national level. According to ABF-Primos, there will
be only 14 regions with serious shortages in 2040.
Furthermore, permits and numbers of sold
properties predict a buoyant growth of owneroccupier homes in the short term. Meanwhile, we
observe an overall growing need for affordable
(rental) homes based on changing fiscal incentives,
migration flows and increasing worker mobility
thsnd
8.7
1975
•
In general, we feel that the ABF-Primos forecasts
(see graph upper left) offer reasonable grip for
future planning. We estimate the structural, longer
term need for new-built production at 55,00060,000 homes yearly. This number does also take
into account replacements of obsolete properties,
transformation and the impact of greying and
increasing individualisation. In 2015 we expect
new-built number to reach 48,000 homes
Sold houses & permits issued (annualized)
mln
1970
•
Prime focus of many new-built forecasts is the
ongoing growth of households due to an increase of
(one-person) households (greying, individualization
among younger generation, increasing migration).
There is much public debate about the impact of
greying and individualization. Looking at for
example greying, we see mixed effects. On the one
hand, the post-war baby boom generation dies out
which might add a substantial number of existing
homes to the market. On the other hand, an
increasing number of future ‘older’ generations is
inclined to live independently until a very high age.
This reduces the availability for younger
generations and fuels the need for new homes
Thousands
•
NL: households and housing supply (#)
Jan-01
Regionally tailored approach needed
Zaanstreek
Aggl. Haarlem
West-Noord-Brabant
Veluwe
Zuidoost-Noord-Brabant
Midden-Noord-Brabant
Delft en Westland
Groot-Rijnmond
Leiden/Bollenstreek
Aggl. 's-Gravenhage
Arnhem/Nijmegen
Overig Groningen (stad)
Utrecht
Groot-Amsterdam
-60,000
housing shortage 2040
-40,000
-20,000
0
housing shortage 2015
Source: ABF-Primos, 2014, analysed per COROP region
14
Dutch Residential: indicators for production growth clearly heading
south, while margin pressure seems a persistent challenge
Architect orders & costs of orders received
EURbn
95
90
Input price building costs (total)
Output price building costs (incl. VAT)
Input price - materials
Input price - wages
LH axis - Index costs architect orders
RH axis - Costs of orders received (annualized)
Source: EIB , May 2015
Source: CBS, Rabobank 2015, index 2010=100
Source: CBS, Rabobank, 2015
Sustainability of festive growth is indistinct
Costs indexes show visible improvements
Wages an incontrollable cost price issue
•
On the back of an improved order book and permit
issuance, new construction will increase markedly.
Renovation will grow slightly backed by improving
consumer confidence and Energiesprong initiatives1,
but is partly hold back by the exemption of the
temporary VAT reduction (effective July 2015).
•
The residential order backlog has reached a festive
level of 7`.7 months in May 2015. However,
prospects for backlog and production in 2H16 and
beyond remain a bit of a question mark. Currently,
production benefits from a good affordability and
regained home buyer confidence. Meanwhile the
ECB/IMF exert pressure for lower LTV2 levels, but
curtailments by the government as a result
upcoming elections (March 2017) are not very likely
Jan-16
Jan-15
Jan-14
85
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
0
Jan-11
0
Jan-10
2
Jan-09
50
Jan-08
4
Jan-07
Jan 2016
Jan 2015
Jan 2014
Jan 2013
Jan 2012
Jan 2011
Jan 2010
Jan 2009
Jan 2008
Jan 2007
Jan 2006
Jan 2005
Jan 2004
Jan 2003
Jan 2002
Jan 2001
Jan 2000
4
100
Jan-13
6
150
6
100
Jan-12
8
200
105
Jan-11
10
250
8
Jan-10
300
110
Jan-09
12
Jan-08
Index
10
Prices newly built homes (index 2010=100)
Thousands
Order backlog residential (in months)
•
Costs of architect orders have increased by 38% in
2014, but are currently still 65% lower than the
2007 level. On top of that, the increase is strongly
driven by renovation, while the contribution of newbuilt assignments was less significant. During the
crisis the industry shrank by ca. 60%, forcing
architects to focus more on renovation and
transformation instead of new production
•
Looking at input costs and output costs of newly
built homes, the picture does not seem to have
improved. The output price of homes (including
surcharges for general costs/risk/profit) more or
less stagnated, while the input price (representing
wages & materials) has risen in 2014. The 1H15
results of main Dutch contractors should give a
further indication of the gravity of the situation
•
The downward trend in costs of orders received by
contractors was already halted in 4Q13. After firm
growth up till 2Q15, we expect this pattern to
continue in 2H15 and 2016. The costs of orders
received are based on the value of issued building
permits by municipalities and this is a relatively
precise indicator for future production
•
The input price for wages has increased notably,
while this is currently not really a controllable item
given the huge capacity reductions in the sector and
the increasing scarcity of labour. It emphasizes the
need for smarter building, e.g. by a shift from
construction on-site to industrialised construction
followed by assembly of larger components on-site
Note (1): Energiesprong: Energiesprong (‘Energy jump’) is a construction and investment model for creating energy-neutral homes and regenerating neighbourhoods through a whole house ‘envelope’ retro-fitting
package. Housing associations buy a 30-year performance and maintenance guarantee, using a fixed monthly payment by the resident which is lower than their savings on the average bill
Note (2): LTV stands for Loan-to-value, e.g. mortgage loan weighed upon the value of property. In June 2015 ECB questioned the stability of the Dutch banking sector and is suggesting that further reduction of
the LTV in mortgage financing is necessary. IMF explicitly addressed new policy reform opportunities such as an maximal LTV of 90%
15
Dutch non-residential: increasing vacancy levels and structural
trends hold back resilient rebound of production
7
6
5
Jan 2016
Jan 2015
Jan 2014
Jan 2013
Jan 2012
Jan 2011
Jan 2010
Jan 2009
Jan 2008
Jan 2007
Jan 2006
Jan 2005
Jan 2004
Jan 2003
Jan 2002
4
Source: EIB , May 2015
Non-residential: architect orders, permits & costs orders received
Index
EURbn
250
8
200
150
6
100
4
50
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
2
Jan-10
0
Jan-09
The index of costs of architect orders has declined significantly in 2014, while in
1Q15 there has been slight rebound. The decline was driven by a strong decrease
in new-built orders. New-built orders are in general more voluminous than
renovation assignments. The fact that orders are primarily stimulated by logistics
and retail demand also implies less sophistication than the construction of e.g.
offices or hospitals. As a result both the costs of architect orders and the value of
permits for new buildings reside at a very low level. We expect a slightly higher
growth pace of new-built production in 2016. An improving economic climate
generally drives new-built investments, but there are important trends which
structurally reduce the need for space (e.g. online retail, shift from intramural to
extramural care, increased working from home)
8
Jan-08
•
New non-residential production is primarily hampered by (i) increasing vacancies
(office market, retail market), (ii) still modest demand from the corporate sector,
(iii) austerity at public clients and (iv) ongoing critical attitude on behalf of Dutch
real estate financiers. However, both foreign and national investors are
increasingly well capitalized and seek alternative investments. The ECB is
pumping more liquidity in the financial markets by buying up government bonds.
These investors are primarily interested in property at prime locations. This
leaves the problem of unoccupied, non-prime properties unresolved and might
even provide an extra impulse for vacancies in the future. Foreign investors
might ‘dump’ Dutch property at discounts as soon as more attractive investment
opportunities present themselves overseas. For the moment we observe a
stabilisation at a low level in the value of permits for new buildings. This
suggests that investors are currently still mainly oriented towards existing
properties, although longer periods of excess liquidity traditionally lead to
significantly higher investments in new-built properties
9
Jan 2001
•
The order backlog has climbed up to 7.1 months in May 2015. It should be noted
that the increase in the order backlog is mainly driven by increased demand for
new-built properties in specific sectors (logistics, retail). Also a few very large
orders can distort the overall picture (e.g. new datacentre Google or DBFMO
projects tendered by government). We expect a boost in renovation &
transformation projects in 2015, a.o. due to a lack of suitable new properties
logistics and retail. In the long run the stream of newly built large projects will
shrink further, while sizeable transformation projects will increase gradually
Jan 2000
•
Order backlog non-residential construction (in months)
Jan-07
Order backlog growing among increasing vacancies
Index costs architect orders - LH axis
Value of permits for new buildings - RH axis (annualized)
Source: CBS, Rabobank, index 2010=100
Note (1): see the report ‘FGH Real Estate report 2015, focus on flexibility’ about developments in Dutch commercial real estate markets
16
Dutch non-residential: costs of orders still stagnating, suggesting
price pressure, possible delays and cancellations
Costs of orders received – by sector1
EURbn
EURbn
11
9
7
Orders Transport & Logistics
Orders Agriculture
Orders Professional services
Orders Retail
Orders Educational sector
Orders Other
Orders Industrial
Costs of orders received
Costs of finished works
Source: CBS, May 2015
Source: CBS, May 2015
Source: CBS, May 2015
Low utilisation puts pressure on prices
Austerity & reforms hamper public orders
No clear indication for bottoming out yet
•
•
Costs of orders received express the estimated
building costs of construction works in a specific
period. This is a good proxy for future production.
From the first two graphs on this slide we can
conclude that only transport & logistics and retail
saw a considerable improvement in 2014. This does
not immediately fit in with the observed increase in
the order backlog (see previous page)
However, demand for buildings will gradually pick
up as the economy improves, while oversupply of
buildings might reduce costs and output prices of
new properties in the short run. In the longer run
new or renovated buildings are preferred above
older, obsolete buildings. On top of that, austerity
and still vulnerable liquidity positions of businesses
might cause delays in building starts and projects
are sobered down or are cancelled completely
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-01
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
5
Jan-01
Jan-16
Jan-15
Jan-14
Jan-13
0
Jan-12
0.0
Jan-11
1
Jan-10
0.2
Jan-09
2
Jan-08
0.4
Jan-07
3
Jan-06
0.6
Jan-05
13
4
Jan-04
5
0.8
Jan-03
1.0
Jan-02
6
15
Jan-01
1.2
Jan-03
EURbn
Costs of orders received & finished works¹
Jan-02
Costs of orders received – by sector1
•
Orders for Professional services are generally seen
as a proxy for new construction & renovation of
offices. We already concluded that businesses might
wait for further recovery of profits and utilisation
rates in order to expand the workspace
•
At the same time the public sector is also strongly
economizing on office space. For example the Dutch
government has announced the ambition to
disinvest 0.9 mln m2 in offices and 1.9 mln m2 in
other property types between 2015-2020. Apart
from that municipalities have approximately 43 mln
m2 in real estate properties (offices, schools,
leisure), but it is unknown which part is obsolete or
non-core. Nevertheless, more than 84% of Dutch
municipalities have plans to divest properties in
order to deal with austerity2
•
After a short lived upturn in 2014, in 2Q15 the
costs of orders received (new + residential) have
bounced back to the level of December 2013,
implying stagnation. This is also confirmed by the
EIB Construction barometer early July (not in
graph), which indicates a decline in the expected
workload for the next 12 months
•
The costs of finished non-residential construction
works are still heading downwards. Due to the latecyclical character, a full bottoming out will not
materialize before 2H16, provided that prices of
works do not sink further and that cancellations
decrease gradually. The contribution of
transformation projects will not grow spectacularly
as many buildings have unsuitable locations or the
business case is too complex (costly)
Note (1): annualized numbers, category ‘Other’ does contain various types of buildings not recorded in other categories, e.g. combinations of homes and company premises
Note (2): research by VNG/RHDHV, ‘Gemeentelijke Barometer fysieke leefomgeving’ , June 2015
17
Dutch Infrastructure: meagre growth due to absorption of austerity
and slowly growing residential and private sector impulse
Order backlog Infra construction (months)
Infra budget Central Government (EURbn)
Top 10 regions - local infra deficits (EURm)
0
8
8
-150
7
-300
6
6
-450
4
Relapse in recovery pace in 2015
Due to the phasing out of current mega projects,
the roads order backlog keeps circling around a
level of 5 months. We expect the road order
backlog to increase very modestly in 2015, driven
by residential new-built activities (neighbourhood
infrastructure), increased private sector spending
and a few PPP projects taking off
•
The Ground & Waterworks backlog has shrunk by
9.2% in 2014, but investments in dams, locks and
dikes will likely grow in the coming years. Large PPP
projects will make a contribution to order backlog
growth, as well as necessary upgrades of water
supply facilities. Overall, we observe a temporary
setback in Infra production growth due to the
further absorption of austerity
Flevoland
Midden-Noord-Brabant
Veluwe
Twente
Oost-Zuid-Holland
West-Noord-Brabant
Zuid-Limburg
Budget 2015
N.O.-Noord-Brabant
Arnhem/Nijmegen
Leiden en Bollenstreek
Zuidoost-Noord-Brabant
Railways
Regional infrastructure
Water systems
2018(e)
2017(e)
2016(e)
2015(e)
2014
2013
2012
2011
Roads
Waterways
Megaprojects
Deltafonds
Ground & waterworks
•
2010
Jan 2016
Jan 2015
Jan 2014
Jan 2013
Jan 2012
Jan 2011
Jan 2010
Jan 2009
Jan 2008
Jan 2007
Jan 2006
Jan 2005
Jan 2004
Jan 2003
Jan 2002
Jan 2001
Jan 2000
Roads
Source: EIB
2009
2008
0
3
Utrecht
4
s-Gravenhage
2
Groot-Rijnmond
Groot-Amsterdam
-600
5
Budget 2010
Source: MIRT 2015, EIB, Rabobank
Source: CBS, 2015
More focus on water related projects
Local authorities held back by weak finances
•
Infrastructure spending by the central government
will increase by 2% in 2015 up to EUR 7.3bn. This
mainly benefits contractors active in the Randstad1
and competing for railways, roads and main water
works. The roads budget decreases in favour of
railways and the Deltafonds projects (flood
protection, drinking water, sand suppletion). After
2015 the budget for water related projects declines
gradually
•
Meanwhile, delays at large and complex projects
have become more common due to increasing
disputes or lacking social support. This implies a.o.
fading appetite for PPP projects at main contractors
given unfavourable risk-reward prospects. In 2014
the government reserved EUR 1.2bn for roads,
while only EUR 900m was spent
Note (1): The Randstad is the most populated area in the Netherlands which basically comprises the urban agglomeration of Western Holland
Note (2): The ‘Gemeentefonds’ is a budget fund which subsidizes municipalities. The fund is nourished by tax proceeds of the central government
•
Austerity is a widespread challenge. The central
government has prioritized expenditures and has
lowered its contribution to the ‘Gemeentefonds’2
accompanied by the transfer of tasks (care, labour
market) to municipalities. At the same time this
leads to prioritization of local expenditures and the
conservation of infra deficits (see graph). Only
provinces are relatively well capitalized thanks to
the sale of participations in privatized energy
companies
•
A side effect of austerity is an accelerated change in
tendering at municipalities. Private tendering is less
expensive than public tendering and new legislation
offers room for more private tendering. Contractors
might become more dependent on subjective local
preferences
18
Dutch PPP market: government advocates PPP tendering, but
contractors increasingly impeded by poor risk-reward profile
Total value European PPP market and number of projects
EURbn
Overview main upcoming Dutch PPP projects (EURm)
30
30
27
24
25
22
20
20
17
15
15
18
17
19
18
16
16
13
0
1
0
1
120
Sea locks Ijmuiden (EUR 848 m)
Renovation NATO complex The Hague
100
ViA15 Arnhem Nijmegen roads (EUR 840m)
Barrack M.A. De Ruijter Vlissingen
Renovation Afsluitdijk (EUR 818m)
Expansion Naturalis Biodiversity Center Leiden
A28/1 Knooppunt Hoevelaken (EUR 400m)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2004
2003
2005
Number of projects (RH axis)
20
N18 road Varsseveld-Enschede (EUR 303m)
0
A6 road Schiphol/Amsterdam/Almere (EUR 250m)
2015(e)
Value of projects (LH axis)
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
1990
Expansion Court Amsterdam
40
3
1
A13/A16/A20 roads Rotterdam (EUR 1.500m)
140
60
5
5
Buildings (est. size in EURm)
80
12
10
8
10
17
Infra projects (est. size in EURm)
160
27
A27/A1 road Utrecht - Amersfoort (EUR 250m)
3rd chamber Beatrix locks (EUR 216m)
Source: EPEC, Rabobank, 2015
Source: Dutch Ministry of Transport and Public Works, PPS Netwerk, Rabobank
Dutch market overcrowded with funding
Maturing PPP practice and growing pipeline demand changes
•
In the pre-crisis years the size of the European PPP market has grown vigorously.
At that moment, the Dutch PPP market was still in an early stage. Driven by the
ambition to achieve a higher value-for-money, PPP has become the mainstay for
large Dutch infra and building projects
•
During the crisis the PPP market has been challenged by budget restraints
reducing the introduction of large scale construction programmes, heavy reliance
on scarce bank debt and the limited availability of alternative funding. In recent
years the EIB and the EC1 have encouraged new debt funders to enter the
market and as a result the market is now flooded with liquidity while there are
relatively few projects. Of the 82 PPP projects which reached financial close in
2014, 23 deals involved (Asian) institutional debt (totalling EUR 2.8bn)
•
Currently the eagerness of institutionals to finance Dutch projects is high,
resulting in aggressive bidding (interest rates, tenors). This seems beneficial for
Dutch contractors, but there is a downside. In our view, many contracts contain
financial covenants which might turn out costly adventures in case of a breach
•
We foresee a further increase of PPP projects in the Netherlands (mainly infra)
and also the size and complexity(risk) of the projects has the tendency to
increase. This will keep attracting foreign contractors and investors to enter the
Dutch market. It has already resulted in more aggressive bidding at both the
contracting and the financing side. Moreover, Dutch consortia tend to become
bigger (more parties involved) in order to spread risks. In some recent tenders,
high risks have already resulted in a reduced availability of bidding consortia
•
As PPP is maturing in the Netherlands, the number of (legal) disputes is also
increasing rapidly. In practice, the responsibilities and risks of public clients and
contractors are not always well-defined and discussed enough. The lack of
sufficiently robust and consistent risk management and contract management
policies at both contractors and public clients can aggravate issues. This leads to
costly delays in the execution of projects and in extreme cases this can threaten
the profitability of a whole construction company. We observe a need to
implement lessons learned from both public clients and contractors. To a lesser
extent this is also true for other types of integrated contracts
Note (1): EIB stands for European Investment Bank. The EIB supports the European PPP market for large infrastructure projects with project bond initiatives (subordinated debt) and guarantees. The plan ‘Juncker’ of the
European Commission foresees in a new fund called ‘The European Fund for Strategic investments’ (EFSI), a seed capital fund of EUR 315bn providing guarantees for infrastructure projects
19
III
Developments Europe & US
Belgium: longing for renewed and structural government stimulus
Non-residential construction and infrastructure weighed down by austerity
105
95
The quality of infrastructure is deteriorating at an accelerating pace, but a complex political structure as well
as austerity prevents allocated means for infra from being spend. Furthermore, since decades budget
allocations towards infra have been the lowest within the EU (as a % of GDP). In the build-up to the 2018
local elections, infra production is expected to grow moderately as of 2H16 as a result of election rhetoric
85
Belgian construction production by sector (% YoY)
Buildings
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
75
Jan-03
The outlook for non-residential production is mixed. The office market, with regional governments as a major
actor, seems relatively stable and is characterized by low vacancy rates when compared in European
perspective. The recently agreed lower taxation on labour will likely provide some stimulus for the logistical
market as Belgium ranks 13th in the worldwide list of countries with the highest e-commerce growth potential.
While demand for logistical sites is growing, retail properties have to deal with increasing vacancies
Jan-02
•
115
Jan-01
•
The residential sector is in relatively good shape as the perceived housing market bubble has deflated thanks
to fiscal adjustments. The sector has experienced some turbulence in recent years, due to the phasing out of
anti-crisis measures. The sobering down of the VAT rule for renovations (as of January 2016), stricter energy
saving norms (as of January 2014) and a partial lowering of the VAT for new homes (as of April 2010) caused
temporary spikes in permit issuance. Finally, the dismantlement of the Woonbonus1 and a prudential credit
granting approach prevents production in the coming years to grow exuberantly
Jan-00
•
Belgian production index
Infra
Source: Eurostat (June 2015), Indexed; 2010 = 100
Order backlog developments & confidence
10
8%
8%
8%
0
4%
4%
4%
0%
0%
0%
-4%
-4%
-4%
-8%
-8%
-8%
-10
-20
-30
Residential
Source: Eurocontstruct (June 2015), Confederatie Bouw
Infra
Order book assessment
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
2016F
2015F
2014
2013
2012
2011
2010
2009
2008
2016F
2014
Non-residential
2015F
2013
2012
2011
2010
2009
2008
2016F
2014
2015F
2013
2012
2011
2010
2009
2008
-40
Construction confidence
Source: Eurostat (June 2015)
Note (1): The Belgian ‘Woonbonus’ resulted in major tax benefits for home buyers as part of the monthly mortgage is tax-deductible. The original purpose was to make housing more affordable, but in practice
home buyers took out bigger loans to buy a more expensive (new) house or apartment, as they know they would enjoy a bigger tax return. Research by the University of Leuven suggests that the Woonbonus
pushed up housing prices instead of making housing more widely accessible
21
France: painful political reforms and austerity hamper recovery
•
French construction production by sector (% YoY)
110
100
90
Buildings
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
80
Jan-04
The necessity to make substantial cuts in fiscal budgets is strongly impacting infrastructure spending. The IMF
and Worldbank insist on a further lowering of public debt. Early 2015 France proposed 32 infra projects for
‘Plan Juncker’1 alternative funding, but unfortunately most applications did not meet the enforced criteria
120
Jan-03
Unemployment was still high in 1Q15, but came down slightly compared to 4Q14 (0.1%). A further decline will
be stimulated by labour market reforms (renewal short-term contracts twice, granting of a bonus when hiring
employees, lower taxation). The non-residential growth engines, private consumption and industrial utilization
rates, are still running in a very low gear. Moreover, economic growth seems to have slowed down in 2Q15,
implying weaker fundamentals for corporate profit generation and CAPEX in equipment and buildings
130
Jan-02
•
An important driver for a robust recovery of the residential market, namely confidence, is still lacking. Low
confidence is fuelled by a vulnerable economic situation, high unemployment, a sizeable existing stock and
substantial increases in property prices since the nineties. However, recent macro-economic data confirm that
the economy is growing slightly better than expected due to a cheap euro and low fuel prices. So far this
resulted in a 14.4% YoY increase in new home sales in 1Q15. We do not expect a strong impulse from social
housing production in the short term as the Hollande administration has not yet raised the ceiling amount for
the ‘Livret A’ savings scheme which functions as a major funding base for social housing
Jan-01
•
French production index
Jan-00
Construction recovery threatened by low confidence levels and austerity
Infra
Source: Eurostat (June 2015). Indexed: 2010=100
Order backlog developments & confidence
60
6%
6%
6%
2%
2%
2%
-2%
-2%
-2%
-6%
-6%
-6%
40
20
0
-20
-40
-60
Source: Euroconstruct (June 2015), INSEE
Order book assessment
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
2016F
2014
2015F
Jan-02
Infra
2013
2012
2011
2010
2009
2008
2016F
-80
Jan-01
Non-residential
2015F
2014
2013
2012
2011
2010
2009
2008
-10%
Jan-00
Residential
2016F
2015F
2014
2013
2012
2011
2010
2009
-10%
2008
-10%
Construction confidence
Source: Eurostat (June 2015)
Note (1): The European Commission has finalised an investment plan (EFSI) aimed at kick-starting economic investment across the European Union. The EFSI will be set up within the European Investment Bank
(EIB) and aims to mobilise €315 billion in private and public investments. Projects pre-financed by the EIB will be guaranteed by the new EFSI fund
22
Germany: curbed residential growth mixed with low infra spending
German construction production by sector (% YoY)
120
110
100
90
80
-50
-3%
-3%
-3%
-5%
-5%
-5%
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
0
7%
-10
5%
-20
3%
-30
-60
Non-residential
Infra
Order book assessment
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-00
2016F
2014
2015F
2013
2012
2011
2010
2009
2008
2016F
2015F
2014
2013
2012
2011
2010
2009
-70
2008
2016F
-1%
2014
-40
-1%
2015F
1%
-1%
2013
1%
2012
1%
2011
3%
2010
3%
2009
5%
2008
5%
Note (1): German institute for Economic Research
Infra
Order backlog developments & confidence
7%
Source: Eurocontstruct (June 2015)
Jan-04
Buildings
Source: Eurostat (June 2015). Indexed: 2010=100
7%
Residential
Jan-03
70
Jan-02
Since decades public expenditure is insufficient to prevent continuous deterioration of infrastructure. According
to DIW1 46 percent of bridges and 20 percent of highways are desperately in need of repair. Merkel plans to
spend EUR 10bn extra in 2016-2018 (0.1% GDP), being just a drop in the ocean. The real investment impetus
has to come from the Bundesländer and a new, but currently EU criticized & postponed highway toll system
130
Jan-01
•
Although GDP forecasts recently have been upped by the Bundesbank, uncertainties about the impact of
Eurozone woes (Greek tragedy) curb business confidence. GDP growth in 2Q15 was 0.3%, but the amount of
stimulus in the Eurozone should have led to a higher growth rate. Furthermore, all kinds of economic
regulations make Germany a less attractive business location compared to e.g. Spain or Ireland. This will put a
damper on the demand for (new) non-residential buildings in the coming years
140
Jan-02
•
The number of finished homes increased by 14% YoY in 2014. Low interest rates, high immigration and a
relatively healthy labour market attract investors to put their capital into residential estate. This has resulted
in strong price increases for rented properties. As of June 2015 rental prices of existing properties are capped
by a price ceiling (not for newly built properties), which will curb investments. Newly built production is
expected to grow modestly in the coming years, while renovation will stagnate or decline slightly. Main factors
are the absence of fiscal incentives for energy saving and strict energy regulations for large renovations
Jan-01
•
German production index
Jan-00
Residential construction absorbs investor appetite, Eurozone woes cap growth new orders
Construction confidence
Source: Eurostat (June 2015)
23
Ireland: construction recovery becoming more broad based
Irish construction production by sector (% YoY)
Growth
65
60
55
50
45
40
Contraction
35
30
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
25
Jan-05
Government support is instrumental for the upgrade of obsolete infrastructure. The government budget
foresees in a rise of investments in transport infrastructure, increasingly through the use of PPP’s. For 2015
EUR 1.1bn of public capital is reserved for infrastructure, mainly benefitting transport & telecom infrastructure.
The upcoming ‘public capital review’, to be published later this year, defines infrastructural priorities until 2020
70
Jan-04
•
Shortages for high quality offices, sought by multinationals, in e.g. Dublin’s central district keep growing and
are simultaneously driving up prices and rents. Backed by the economic upturn now also national companies
look for expansion of office and industrial space. Unfortunately, this won’t reduce the role of the NAMA 1
strongly in the short term, as demand focuses primarily on newly built properties
75
Jan-03
•
Positive signs have been accumulating in 2014, resulting in the fastest economic growth (4.8% YoY) within
Europe. Strong cost-competitiveness, highly productive multinationals and a depreciation of the Euro
contribute to growth of exports. Also private investments are accumulating, followed by falling unemployment
levels and increasing household income. These positive developments fuel through to residential construction
as housing completions are expected to increase by 14% YoY to 10,000. Notably rising property prices are
fuelled by fiscally supported financing tools and housing shortages in highly populated areas. Bearing in mind
the earlier property market bubble, the use of fiscal tools might be scaled back in the coming years
Jan-02
•
Irish PMI construction activity indicator
Jan-01
Accelerating growth of economy identifies new challenges in (non)-residential construction
Source: Ulster bank, Markit Economics (June 2015)
GDP, construction & housing completions
Thousands
-30%
-30%
-30%
-40%
-40%
-40%
-40%
-50%
-50%
-50%
Residential
Source: Euroconstruct (June 2015)
Non-residential
10%
80
Infra
60
40
20
2016(e)
2015(e)
2014
2013
2012
2011
2010
2009
2008
2007
0
2006
2016F
2015F
2014
2013
2012
2011
2010
2009
0%
2008
2016F
-30%
2014
-20%
2015F
-20%
2013
-20%
2012
-20%
2011
-10%
2010
-10%
2009
-10%
2008
-10%
2016F
0%
2014
0%
2015F
0%
2013
10%
2012
10%
2011
10%
2010
20%
2009
20%
2008
20%
Housing completions (RH axis)
GDP growth (YoY LH axis)
Construction growth (YoY LH axis)
Source: Euroconstruct, Central Bank of Ireland, Rabobank (June 2015)
Note (1): NAMA stands for National Asset Management Agency, NAMA functions as a bad bank, acquiring property development loans from Irish banks in return for government bonds in order to improve the
availability of credit in the Irish economy
24
Spain: contraction in construction industry seems to have ended
Spanish construction production by sector (% YoY)
170
150
130
110
90
70
50
Buildings
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
30
Jan-04
Public finance constraints are still hampering infrastructure to grow too abundantly in the short term.
Meanwhile, the central government has put a lot of effort in attracting foreign investors to engage in large
infrastructure projects. However, looking at legal disputes surrounding various privatisations, there is growing
uncertainty about political reliability regarding the sustainability of agreements (tariffs, conditions, regulation)
190
Jan-03
•
Order backlog developments indicate that Spanish construction has bottomed out. Albeit that consumer
confidence, unemployment rates, exports and business investments are improving, oversupply of commercial
real estate will be a persistent challenge in the coming years. Meanwhile, the lack of good quality assets in
urban areas and the capital flight of foreign (institutional) investors (hotels, shopping centres, distressed
assets) will contribute to a return to growth in non-residential production in 2016
210
Jan-02
•
Residential recovery will be highly dependent on continuously improving income prospects and credit
availability. House prices increased by 1.5% YoY in 1Q15 for the fourth quarter in a row. However, the market
is still sighing under a glut of post-bubble ghost towns and a lack of first-time buyer demand. Renewed foreign
investor appetite for second homes will not solve structural housing market problems in the short term. The
2015 elections will likely put an end to construction friendly policies, further curbing sales and completions of
new homes (down 23% YoY in April 2015). Regionally, patterns can deviate strongly from the overall trend
Jan-01
•
Spanish production index
Jan-00
Construction sector back on a growth track, but fundamentals still provide a fragile basis
Infra
Source: Eurostat (June 2015). Indexed: 2010=100
Order backlog developments & confidence
10%
0%
Source: Euroconstruct (June 2015)
Order book assessment
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
2016F
2014
2015F
Infra
2013
2012
2011
2016F
2014
2015F
2013
2012
2010
2009
2008
2011
Non-residential
-45%
Jan-10
-80
-40%
Jan-09
-45%
Jan-08
-45%
-60
-35%
Jan-07
-40%
Jan-06
-35%
-40%
-40
Jan-05
-35%
-30%
Jan-04
-30%
-20
Jan-03
-30%
0
Jan-02
-25%
20
Jan-01
-20%
-25%
40
-5%
Jan-00
-20%
-25%
2016F
-20%
2014
-15%
2015F
-15%
2013
-15%
2012
-10%
2011
-10%
2010
-10%
2009
0%
-5%
2008
0%
-5%
Residential
60
5%
2010
5%
2009
10%
5%
2008
10%
Construction Confidence
Source: Eurostat (June 2015)
25
United Kingdom: loss of construction momentum due to elections
Jan-13
Jan-14
Jan-15
Jan-16
1Q15
1Q16
Jan-12
1Q14
Buildings
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
50
1Q13
UK construction production by sector (% YoY)
70
Jan-04
Infra production in the coming years will likely be capped by budget deficits and a scaling down of the Network
Rail programme. However, as of 2020 road construction will be boosted by a new fund, worth billions (est.
GBP 30bn), sourced by a recently introduced vehicle excise duty. The start up of energy projects will be
hampered by e.g. the termination (1Q16) of fiscal support for renewable energy (wind farms). Water projects
are expected to flourish as many water companies increase spending on the back of the new AMP 6 1
90
Jan-03
•
Election woes also restrained private sector demand for new offices, retail, hotels, industrial buildings. Overall
private sector demand is expected to bounce back strongly, but the outlook for public sector driven
investments is mixed. Education construction is boosted by the Priority school building programme, while
healthcare construction shrinks as a result of the pipeline for new-built assignments of hospitals running dry
110
Jan-02
•
Residential construction has been the fastest growing segment in the UK construction sector in 2014. GDP
growth in 1Q15 has been revised upwards due to a better than expected performance of this sector. Although
the pace of home price increases has slowed down, the sector still benefits from sustained fiscal incentives for
home buyers & social housing, low interest rates and growing confidence. The recent dip in the order backlog
is the result of uncertainty caused by the General elections (May 2015). However, new production will grow at
a more moderate pace due to increasing capacity constraints and tighter funding for landlords (social housing)
Jan-01
•
UK production index
Jan-00
Visible impact of stimulus programmes for new home building and transport infrastructure
Infra
Source: Eurostat (March 2014). Indexed; 2010=100
Order backlog index (2005=100)
15%
15%
15%
10%
10%
10%
5%
5%
5%
0%
0%
0%
-5%
-5%
-5%
-10%
-10%
-10%
40
-15%
-15%
-15%
20
-20%
-20%
-20%
180
160
Source: Euroconstruct (June 2015)
120
100
80
60
Infra
Residential
1Q12
1Q11
1Q10
1Q09
1Q08
1Q07
1Q06
1Q05
1Q04
1Q03
1Q02
1Q01
1Q00
2016F
2015F
2014
2013
2012
2011
2010
2009
0
2008
2016F
2014
Non-residential
2015F
2013
2012
2011
2010
2009
2008
2016F
2014
Residential
2015F
2013
2012
2011
2010
2009
2008
140
Non-residential
Infra
Source: ONS, June 2015, quarterly moving average
Note (1): AMP 6 relates to the 6th Asset Management Plan under which UK Water companies are following a regulatory AMP methodology to drive continuous improvement, and reduce their OPX (Operating Expenses).
The AMP 6 spans a period of 5 years, starting in 2015
26
CEE & Nordics: markedly better recovery prospects than rest of
Europe, still hardly export regions for main European contractors
(19.6)%
115
(19.6)%
(32.9)%
15
110
105
100
Residential
Non-residential
Slovak Republic 2015
Slovak Republic 2008
Poland 2015
Poland 2008
Hungary 2015
Hungary 2008
Czech Republic 2015
0
Infrastructure
95
90
85
80
2010
2011
2012
2013
2014
Euroconstruct 19
CEE 4
Euro area
2015F
2016F
Nordic 4
European Union
Source: Euroconstruct (December 2014)
Source: Euroconstruct (June 2015), Eurostat, Rabobank index 2010=100
Construction mix Nordics (EURbn)
Ranking - Ease of doing business (2015)
45
(3.2)%
12.5%
(11.6)%
14.6%
Starting a business
100
80
30
Resolving insolvency
60
Dealing with
construction permits
15
40
Residential
Non-residential
Source: Euroconstruct (June 2015)
Infrastructure
Norway 2015
Norway 2008
Denmark 2015
Denmark 2008
0
Sweden 2015
Historically, the Nordic countries show a much
stronger construction performance than elsewhere
in Europe. Attracted by a steady supply of
upcoming infrastructure projects in predominantly
Sweden and Norway, many European contractors
now try their luck in the region. For example, the
Stockholm Bypass has an estimated budget of EUR
3.1bn and foreign expertise and capacity is needed
for tunnels and civil works. Moreover, until 2021
EUR 100bn will be spent on transport infra around
Stockholm. The past years have been merely
dominated by an upsurge in non-residential projects
(hospitals) in the region, which more specifically
required a local foothold and labour force. This has
hold back many foreign contractors from expansion
125
120
30
Sweden 2008
•
So far only a handful of European contractors has
sought compensation in Poland for deteriorating
home markets. The country has a bad reputation
(see lower right graph) as infrastructure contracts
are awarded at the lowest price, while contractors
bear the risks of permit issuance, project changes,
material price increases and land repossession. On
top of that, there are issues with the illegal exercise
of performance bonds by public clients
CEE & Nordics vs. European construction1
23.9%
45
Finland 2015
•
While the CEE -4 construction performance has
been roughly in line with the Euroconstruct -19,
recovery is accelerating at a faster pace than in
Western Europe. Boosted by substantial EU funding
(EUR 27.5bn in 2014-2020) for infrastructure,
Poland will continue to show strong growth in new
rail-, road-, power- and water works infrastructure.
Czech republic will absorb another EUR 4.7bn of
funds, benefitting mainly rail & roads
Czech Republic 2008
•
Construction mix CEE (EURbn)
Finland 2008
Strong recovery in CEE and Nordics
Enforcing contracts
Registering property
Protecting minority
investors
Sweden
OECD high income
Czech republic
Norway
Poland
Source: World Bank Group, Ease of doing business survey, 2015
Note (1): Euroconstruct -19 countries are: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, Czech Republic,
Hungary, Poland, Slovak Republic. The last four countries are also indicated as the CEE -4
27
US: (non)-residential production flourishing backed by private
sector, infra struggling with funding shortages and low oil price
10%
100
200
0%
90
-10%
80
-20%
70
-30%
60
150
50
Power
Roads
Sewage & Waste
2017(e)
2016(e)
2015(e)
2014
2013
2012
2011
0
2010
Residential
Non-residential
Infra
Index total construction (2005=100)
2016(e)
2015(e)
2014
2013
2012
2011
2010
2009
2008
2007
2006
100
Water supply/Other
Source: FMI Corporation (2015)
Source: FMI Corporation, January 2015
Residential permits owner-occupier (#)*
Non-residential & infra production (USDbn)*
Thousands (annualized)
800
2,500
700
600
2,000
500
1,500
400
300
1,000
200
500
Private construction
Source: US Census Bureau, 2015, (*) annualized numbers
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
0
Jan-05
100
Jan-09
Residential keeps developing relatively smoothly
with an ongoing increase in permits since the lowest
point in 2009, also evidenced by new home sales
reaching the highest level in seven years in May
2015 (546,000 annualized, not in graph)
250
Jan-08
•
The non-residential construction sector accounts for
almost two-thirds of total construction spending and
has increased 4.5% YoY in 5M15. Like in the infra
sector, public spending keeps declining (graph lower
right) for example in healthcare. Positively,
declining oil prices drive consumer confidence which
stimulates private sector demand for retail buildings
and e-commerce facilities. Also office building
demand is improving in prime business districts
110
Jan-07
•
Furthermore, there is a growing necessity to
upgrade the increasingly miserable state of
transport infrastructure, sewerage systems and
flood protection structures. However, public infra
funding is a serious issue as the federal and state
governments budgets have dried up after the
stimulus package of 2009. The political debate now
concentrates on enhancing funds by raising taxes
and enlarging private sector involvement (PPP)
Infrastructural production (USD bn)
20%
2005
•
At the time FMI corporation made its infrastructure
construction forecast (graph upper right), there was
still optimism about Power construction (buildings
and structures used in the oil & gas industry).
According to the US Commerce Department,
spending was down 23.5% YoY in May 2015. This is
the result of a huge decline in crude oil prices since
mid 2014. The oil price hampers US infra production
as oil & gas companies scale back investments
Jan-06
•
US construction market outlook (% YoY)
Jan-05
Infra is less robust, while residential surges
Public construction
Source: US Census Bureau, 2015, (*) annualized amounts
28
IV
European contractors:
metrics & strategy
Metrics: increased diversification and utilization rates will only result
in better margins provided that risk management is a key priority
European contractors – Sales index¹
European contractors EBIT Margin¹ (%)
8%
7.2%7.4%
180
7% 6.1%6.4%
160
6%
160%
7.0%
6.6%
6.2%
5.9%5.7%6.1%
5.5%
120%
80%
3%
60%
2%
100
40%
1%
80
04
05
06
07
08
09
10
11
12
13
20%
0%
14 15E 16E 17E
04
05
06
07
08
09
10
11
12
13
14 15E 16E 17E
0%
04
EBIT% - all activities
EBIT% - construction
average EBIT % - construction
Sales index-listed constructors
Production index - Construction EC 19
118%
112%
111%113%
104%
100%
4%
120
149%
141%
135%
134%
130%
126%
140%
5.4%
4.9%
4.4%
5%
140
Construction backlog/sales2 (%)
05
06
07
08
09
10
11
12
13
14
Order backlog as % of sales
Source: annual reports, Bloomberg estimates, Euroconstruct, Rabobank
Source: annual reports, Bloomberg estimates, Rabobank
Source: annual reports, Bloomberg estimates, Rabobank
Diversification into industry and services
EBIT margins hold back by legacy projects
New era of increasing backlog-to-sales ratio
•
Due to diversification (foreign expansion, adjacent
activities) sales of main listed European contractors
have outperformed construction production in
recent years. On the back of improving global
economic growth, sales estimates were upped for
most listed contractors. Non construction sales of
listed contractors increased by 1.4% in 2008-2014,
while non-construction sales increased by 3.5%
•
Many firms acquired projects at or below cost price
due to intense competition. This has led to strong
pressure on profitability as risk management,
process management and project controls often
have not been organised in an optimal way. For
example, UK contractor Balfour Beatty has issued 7
profit warnings since 4Q12 due to sizeable writeoffs on problem projects
•
Diversification continues, driven by the looming
threat that other industries target the construction
industry. Contractors either focused on specific
industries (energy, utility, mining) or have sought
reinforcement in services (industrial, professional).
New strategic alliances are the preferred way to
grow as deleveraging tames acquisitive ambitions
•
Equity analysts foresee a strong increase of EBIT
margins in the coming years. However, we feel that
many contractors are still vulnerable as they have
to deal with a legacy of badly performing projects
acquired in the worst years of the crisis. On the
upside, margins should benefit from higher
utilization and growth in non-construction activities
•
The increase in the backlog- to- sales ratio in 2014
is the result of a decline in sales which has been
larger than the moderate increase in the order
backlog. In the coming years we expect the ratio to
increase, stimulated by markedly growing order
backlogs while sales will increase at a more modest
pace. Contractors currently face capacity issues as
the construction industry has been rationalized
strongly. The well capitalized companies will benefit
from distressed competitors by taking over staff,
equipment and projects at attractive prices
•
During the early years of the crisis large contractors
gained market share at the expense of smaller
companies and (specialized) subcontractors by
insourcing substantial amounts of work
Note (1): numbers and percentages in these graphs are calculated from the figures of 26 largest listed European contractors (including Dutch listed companies)
Note (2): numbers and percentages in these graphs are calculated from the figures of 26 largest listed European contractors (including Dutch listed companies) and the 6 non-listed Dutch & UK companies
30
Metrics: accelerated earnings recovery expected, but need for
further deleveraging remains due to expected productivity increase
European contractors: EV/EBITDA¹
12
35
10.8
9.6
10
8.5
8.4
7.3
8
7.7
6.6
6
European contractors: P/E ratio¹
8.1
7.3 7.3
7.0
5
31.5
30
8.8
27.1 26.8
25
7.6
4
19.7
5.2
15
10
26.2
22.3
20
4
European contractors: Net debt/EBITDA¹
12.1
9.5
11.2
3
14.8
12.6 13.4 12.5
2
10.4
1
2
5
0
0
04
05
06
07
08
09
10
11
12
13
0
04
14 15E 16E 17E
05
06
07
08
09
10
11
12
13
14 15E 16E 17E
04
05
06
07
08
09
10
11
12
13
14 15E 16E 17E
Source: Bloomberg, Rabobank
Source: Bloomberg estimates, Rabobank
Source: annual reports, Bloomberg estimates, Rabobank
EV/EBITDA ratio remains relatively high
Slow earnings recovery impacts P/E ratio
Deleveraging remains key topic
•
The increase in the EV/EBITDA multiple for 2014 is
largely caused by analysts’ expectations that
EBITDA keeps improving slowly but surely, while
sizeable net debt reduction is being realized up to
levels last seen in the pre-crisis era
•
We expect that EV/EBITDA multiples in the coming
years might be slightly higher than current analysts’
estimates suggest. Although there is good potential
for earnings growth, aggressive monetary easing is
pumping a lot of (cheap) money (debt) into the
private sector
•
Monetary easing could be counterbalanced by more
restrictive lending policies at banks and a perceived
overvaluation of the equity market (still high P/E
ratios) might also restrain share price increases
•
•
The historically high P/E ratio in 2012 was caused
by substantial net losses at various major
contractors. Towards 2017 the ratio is only
declining gradually, with markedly improving
earnings prospects as of 2016. Net profits are
expected to reach pre-crisis levels (2006) at the
end of 2017. However, we feel that there are still
downside risks to earnings (net profits) estimates.
Upside potential in earnings could be skimmed as
contractors are urged to sell profitable activities in
order to raise cash and deleverage
All said, construction shares will continuously gain
attractiveness as the industry has bottomed out,
profit prospects improve backed by increasing
private sector demand and contractors are strongly
focused on loss containment
•
The ECB is currently buying loans and other assets
from banks in order to support Euro zone recovery
by lending growth. A stagnation or deceleration in
net debt reduction at European contractors could
occur in the coming period. In 2014 the Net
debt/EBITDA ratio increased due to an accelerated
decline in both net debt and EBITDA, but EBITDA
declined more strongly than net debt
•
The need for deleveraging and stronger cash flow
generation is of utmost importance in the coming
years as working capital needs become more and
more prevalent. Increasing productivity directly
fuels through to supplies, creditors and debtors.
Prospects for deleveraging are slightly better for
contractors with marketable landbank positions
Note (1): multiples on this slide have been calculated based on figures of 26 listed construction companies, in EV/EBITDA and Net debt/EBITDA calculations no adjustments for non-recourse loans have been made
31
Strategy: exploration of foreign markets and non-construction
activities have not resulted in substantial outperformance yet
0%
-5%
-10%
60%
60%
-10%
40%
40%
-20%
20%
20%
-30%
0%
-40%
Domestic sales %
ACS
Ferrovial
Skanska
Vinci
Eiffage
Bouygues
Bilfinger
0%
-180%
CAGR EBITDA 2007-2010
Skanska
Eiffage
Vinci
Bilfinger
Strabag
Ferrovial
-50%
Bouygues
ACS (2014)
ACS (2007)
Ferrovial (2014)
Ferrovial (2007)
Skanska (2014)
Skanska (2007)
Vinci (2014)
Vinci (2007)
Eiffage (2014)
Eiffage (2007)
Bouygues (2014)
Bouygues (2007)
Bilfinger (2014)
Bilfinger (2007)
BAM (2014)
BAM (2007)
Strabag (2014)
Strabag (2007)
B. Beatty (2014)
B. Beatty (2007)
0%
Source: annual reports, Rabobank
CAGR Sales 2011-2014
10%
80%
ACS
100%
80%
Other activities
BAM
CAGR Sales 2007-2010
Source: annual reports, Rabobank
CAGR EBITDA – top ten listed contractors1
100%
Construction activities
Strabag
-15%
NL Contractors
Sales mix – ten largest listed European contractors
5%
NL contractors
Balfour Beatty focused strongly on reducing its dependence on the European construction sector by the
acquisition of engineer Parsons Brinckerhoff (PB) in 2009. Balfour Beatty has not been able to realize
synergies as clients rather do not award construction & maintenance work to a company who has also been
their design and engineering consultant. Now that PB has been sold, ‘only’ the losses in its infrastructure home
markets remain, which are the result of a.o. poor bidding skills. Many contractors are currently struggling with
activities in daily bread-and-butter markets due to poor calculation-, bidding-, contractual and project
management skills. Substandard skills against a background of integrated & fixed price contracts hardly offer
room for foreign expansion and diversification which require continuous dedicated managerial attention
10%
BAM
•
Many European contractors have sought internationalization or have diversified into new activities. Closer
investigation leads to the cautious conclusion that neither internationalization nor diversification automatically
leads to higher margins. There is no shortage of examples and examples are not unique. The (partial)
acquisition of Hochtief by ACS in 2011 expanded the company’s international profile in North America, the
Middle East and Asia Pacific. It turned out that cost overruns in projects were a structural issue at Leighton,
Hochtief’s Australian daughter. Moreover, alleged corruption in the Middle East and weak contract
management resulting in payment delays and claims have added to the overall weakened performance of ACS
Balfour Beatty
•
CAGR sales – top ten listed contractors1
Balfour Beatty
Searching new opportunities while struggling with control of ‘bread-and-butter’ activities
CAGR EBITDA 2011-2014
Source: annual reports, Rabobank
Note (1): NL Contractors: calculations based on joint sales and EBITDA of largest Dutch contractors; BAM, Volker Wessels, Heijmans, Ballast Nedam, Strukton, Dura Vermeer, TBI, Van Wijnen
32
Strategy: contractors challenged by commodity ‘trap’ through sole
focus on operational excellence and risk reduction
Increasing margin,
increasing complexity of
activities
1
Doing things right:
operational
excellence
Client
mobility
2
Doing the right
things: excellent
risk management
Increasing margin
improvement potential
3
Increased intra
group cross-selling
and new services
packages
4
Diversify into
niches with
higher margins
5
Internationalisation
Decreasing margin
improvement potential
Focus on
differentiation
and innovation
Erosion market
share
Transparency
Margin
pressure
Focus on more
efficiency
Commoditization
Contractors should challenge themselves to engage in strategic alliances to establish a distinctive position
•
Zooming in on the challenge laid out in the previous slide (necessity to upgrade weaker skills), we once more would like to bring to the attention the margin
improvement ‘funnel’ on the left-hand side of this slide. The upgrading of skills in e.g. bidding, calculation and project management should contribute to step 1 and 2 in
the funnel and should result in higher operational efficiency within a construction company. Although European contractors have a serious task to enhance the level of
operational excellence, in the end this is not the cure-all for a sustainable and profitable market share
•
Currently operational excellence is high on the agenda of many contractors. However, as illustrated in the model on the right-hand side of this slide, a sole focus on
operational excellence will lead to a commodity ‘trap’. Operating in a sector which is subject to increasing transparency, there will be continuous pressure on margins.
The construction industry is increasingly dominated by a focus on standardization in order to reduce failure costs, long lead times and the complexity of the construction
process. In the end this approach will not be sufficient to obtain a distinguishing position and to maintain profitability. The mobility of clients is high and price is currently
the main differentiator. The focus should lie on differentiation and innovation in order to create added value and propositions which offer ‘best value for money’ instead
of a ‘lowest price’ offer which can only be realized by a ‘high volume’ business model
•
In developing ‘best value for money’ solutions there is no simple success formula. Characteristics of successful companies point out that a.o. they focus on the
modularity of structures, which combines standardization and flexibility at the same time. Other success factors are long term collaboration with suppliers and co-makers
(profit/loss sharing), the proofing of concepts by pilots, the re-orientation of the internal organization towards product leadership and a focus on life-cycle costs of
solutions instead of ‘fabrication only’ concepts. Once again, strategic partnerships seem to become more important to establish a distinctive and profitable position
instead of boldly growing by acquisitions in adjacent industries or new countries
Source: IG&H, Rabobank
33
Strategy: Dutch contractors need to deal with a new reality in order
to safeguard future profitability and market shares
Three main trends will define the future construction landscape
Complexer
Focus on
end-user
Focus on
transition
Lifecycle/total
costs of
ownership
(PPP)
Modularisation, semipermanent
structures,
circularity
Co-creation
crossing
industry
borders
Sustainability
: flexible/reusable/
comfortable
Dealing with
‘disruptive’
trends (e.g.
in retail)
Concepts,
brands &
perception of
quality
Bigger
regional
variation in
demand for
built
structures
Qualitative,
sustainable
growth v.s.
quantitative
growth
From newbuilt to
reuse,
brownfield
vs. greenfield
development
New mobility
solutions,
different use
of public
space
Augmented
reality
3D printing
BIM, LEAN
Domotica &
internet of
things
Nanotechnology
Online electric
vehicles
Predictive
analytics
Robotisation,
drones
Main challenges
Better &
cheaper
Increased
installation
quote in
buildings,
smart
technology
Technological drivers
Sneller
BIM/LEAN/
Prefab in
‘standardised
made-tomeasure’
approach
•
We foresee a new reality in Dutch construction which is summarized by 3
main trends: (1) better & cheaper, (2) focus on the end-user and (3) focus
on the transition. These trends are in turn strongly influenced by
technological drivers (discussed in more detail on the next page)
•
Better & cheaper: in order to create and maintain buildings and structures of
higher quality against lower total costs of ownership it is of utmost
importance that companies start to cooperate differently. Co-makers should
strive for jointly developed solutions and concepts which go beyond
traditional one-off projects. 3D printing, BIM, LEAN and domotica are the
enablers to realise lower costs and standardisation, while the conceptual
brainpower of co-makers is needed to enhance the perceived quality of
buildings (e.g. use of smart technology and sensoring in reducing energy)
•
Focus on the end-user: individualization will gain importance, as well as the
desire for convenience and sustainability (environmental impact). End-users
want to have a say in the design and construction of commercial buildings,
infrastructure and homes, even if they are not the owners. Close monitoring
of shifting preferences is key in predicting disruptive trends, e.g. the fast
rise of internet sales (lower demand for physical stores) or the growing
electrification of (non)-motorized transport (increased demand for roads
enabling induction charging). Nano-technology, online electric vehicles and
predictive analytics are key technologies in this area
•
Focus on the transition: Dutch population is expected to grow until at least
2040, albeit at a declining pace. At the same time the number of households
will grow strongly as a result of individualization and greying, while the size
of the labour force is expected to shrink. Future immigration flows are a
‘known unknown’’. An extra dimension is the increasing extent of regional
variation in the aforementioned developments. On top of that, increased
urbanisation and climate change will place more pressure on energy supply,
natural resources and infrastructure. The educated population of the
Netherlands will expect the construction sector to come up with sustainable
solutions which protect our society and the environment. Predictive
analytics, drones and the internet of things are of main importance to
measure, predict and provide solutions for transitional developments
34
Strategy: adoption of advancing technologies is necessary to
develop a future-proof construction business model
Embracement of technology is essential in creating new opportunities and business models
•
For decades the construction community has relied on a strong growth model; economic growth, population growth and the growth in demand for real estate. Now that
the crisis in Dutch construction & real estate seems to have come to an end, also the outline of a new reality becomes visible. It encompasses a shift from unbridled
growth to focused conservation. For example the need for newly built offices will decline given both high existing vacancies and changing user demands
•
Although our analysis is an attempt of ‘crystal ball gazing’, the exercise is still useful as only companies which are adaptable to change will survive in the long run. By
embracing the intelligent use of technology, Dutch contractors can prepare themselves to acquire a distinctive position and safeguard future profitability and market
shares. The discussion is no longer about ‘what is the best Dutch construction company’. Competition will increasingly take place between horizontal, cross-sector
cooperatives, focused on the early involvement of all co-makers (including the principal) in the engineering of solutions for specific types of clients
•
Various educated estimates exist about the percentage of robots which will replace the construction labour force. The construction industry also seems to agree about
e.g. the fact that in the future buildings and structures will consist of smart, sustainable materials enabled by new energy technologies, supported by BIM and
augmented reality enhanced concepts. However, the construction industry is usually a late adaptor of new technology and initially values innovations which contribute
directly to productivity
•
It is essential that Dutch contractors embrace innovation in order to boost future productivity and profitability, otherwise they will be superseded by companies in
adjacent industries. Boundaries across industries are becoming more blurred due to digital technology. According to a recent Global CEO survey2 the respondents
(including engineering & construction CEO’s) see the technology sector as a main source of cross-sector competition for their own industry. Almost 47% of the CEO’s
mention the access to new & emerging technologies as a reason for collaboration in joint ventures, strategic alliances or more informal partnerships
Augmented reality:
enhancement of realworld environment by
overlaying virtual data,
images, e.g. 3DBIM
design data adding to
better collaboration &
communication in
renovation projects
Building information
modelling (BIM):
preparation of design,
engineering, execution
of construction, facility
management, tool for
clash detection,
forecasting of duration of
building processes and
maintenance, tool for
life-cycle management
of structures
Domotica/internet of
things: automation of
the living or working
environment, ‘smart
structures’ are
increasingly connected
to the internet, enabling
e.g. smart energy
management, safety
sensoring (flood
protection dikes) and ehealth (alarm system)
Nano-technology:
nano particles used in
new construction
materials, resulting in
lighter, but stronger and
more sustainable
construction materials,
nano coatings on
windows which generate
energy
Online electric
vehicles: wireless &
induction technology will
transfer power to cars
and bikes, integrated in
the online environment
self-driving cars will
become more
mainstream
Predictive analytics:
developments like the
internet of things,
domotica and BIM create
large amounts of
unstructured data. By
combining and
interpreting data,
predictions can be made
about housing
preferences, future
traffic flows,
maintenance costs etc.
Note (1): The changing Dutch construction & real estate landscape and main trends will be discussed in more depth in a new publication (in Dutch) in 3Q15
Note (2): PWC 18th Annual global CEO survey, 2015
Robotisation/drones:
robots will take on
(repetitive) construction
tasks in segments with
labour shortages, not
only in an industrialized
prefab environment but
also on-site. Drones can
be used for inspection of
building sites or finished
structures(maintenance)
3Dprinting: enables
local, small-scale
production (modules,
construction elements
complete structures),
further reduction of lead
times possible in
combination with prefab
construction
35
Strategy: contractors are willing to initiate change right away, but
conservatism hampers the ability to effectively deal with innovation
Higher profitability not yet within reach of Dutch contractors
•
•
•
•
Six step iterative innovation model
Dutch Contractors face a future of disruption as technological innovation allows
competitors to relatively unexpectedly disrupt and eventually takeover a market
with a new and improved product or service. There is an increasing number of
examples about e.g. home building initiatives which do not require a pure play
contractors, developers and real estate agents anymore. For example ‘Original
Equipment Manufacturers’ and suppliers are united by a professional supervisor
which coordinates the execution and tests the quality of the (semi)finished
building products or modules. Examples in this area are companies like U-build
and Bohemen. Another example is The Why Factory which researches the
possibilities to work with a new, concrete like material which makes the use of
piping and wiring unnecessary within buildings and creates more possibilities for
flexible use
Social innovation is a building block for enhanced profitability at contractors,
because they increasingly compete directly with construction suppliers. Social
innovation is the change in attitude within construction companies which is
needed to initiate radical changes in processes and the portfolio. Out-of-the-box
thinking is needed instead of staying focused on ‘fixing the company’ and
primarily staying focused on efficiency instead of creativity
Fix the
company
by cutting
complexity
1
6
Break up
old
processes
and
portfolio
Iterative
innovation
model
5
Large contractors always have a substantial pool of possible projects and they
need to balance their ambitions with available capital and capacity constraints.
Often this results in the selection of larger projects, motivated by the ambition to
reach full utilization in as few steps as possible. Projects are being selected
regardless of the questions if the offered solution is ‘sustainable’ (to be
surpassed by innovations from other industries in due time) or ‘distinctive’ (truly
wanted by future clients because of its characteristics)
Many Dutch contractors are still kept prisoner by conservatism and will not be
able to enhance profitability in the longer term. They feel that social innovation is
a lengthy and costly exercise, not bringing instant success and profits. We expect
to see some hasty acquisitions in adjacent industries in the coming years, based
on the inaccurate perception that innovation and higher margins can be ‘bought’.
Moreover, copycat behaviour is high within the sector (e.g. various contractors
currently look for acquisitions in technical services), providing a breeding ground
for renewed price competition
Adjust and
pre-test for
disruption
4
Broaden
skills and
empower
employees
2
Experiment
with new
concepts
3
Improve
real time
reporting
and
analysis
Source: Rabobank
36
Contact details
Rabobank
Industry Knowledge Team
WHOLESALE CLIENTS
Leontien de Waal
Senior Industry analyst
NETHERLANDS
Office address
Croeselaan 28
Telephone
Mobile
Email
+31 (0)30 71 22 718
+31 (0)6 202 90 481
[email protected]
3521 CB Utrecht
Postal address
UCZ5096
P.O. Box 17100
3500 HG Utrecht
The Netherlands
37
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