intelligence - Faithful+Gould

International Construction
INTELLIGENCE
Volume 21, Issue 1
First Quarter 2009
Ugly, scary, dire, bleak, painful, dismal, gloomy, challenging …
These are some of the words used to describe the construction
outlook for many countries this year. As the financial crisis
spread from the U.S. to Europe, and beyond in 2008 – tightening
credit markets, crashing stock markets, rising unemployment
and falling corporate profits – it brought the once booming
construction industry to a crawl.
Many are predicting and hoping that 2010 will be better, but
making it through 2009 is the challenge. Global economic growth
– 3.7 percent in 2007 (GDP) – will be just under 1 percent this
year according to the World Bank. In this era of globalization,
it’s predicted that world trade will decline in 2009 – the first time
since 1982. Commodity prices are falling and will continue to fall
as global demand declines – a bit of good news. Experts agree
that a key to recovery is improvement in the credit markets.
While the economic crisis has global impact, there are bright
spots among the gloom. As a generalization, developed
economies will be in recession bringing major downturns in
construction activity, while developing economies will continue to
see growth, albeit at a reduced rate.
e – estimate, f – forecast
Source: World Bank
Earlier this year we polled many of our respondents about the
2009 construction industry outlook for their local markets.
e – estimate, f – forecast
Source: World Bank
a publication of Faithful+Gould with RSMeans
United Kingdom
After many consecutive years of GDP growth, the UK economy
officially entered recession in January 2009. GDP fell in the
fourth quarter of 2008 and is expected to fall in the first quarter
2009, which shows many signs of trouble. The pound fell about
20 percent against the euro during the past twelve months.
Interest rates dropped from 4.5 percent in October 2008 to 1
percent in February 2009. The government announced a GBP
20 billion stimulus package in November 2008.
The construction industry, which accounts for approximately 6
percent of GDP and about 7 percent of jobs according to the
Office of National Statistics, experienced a workload reduction of
0.7 percent in 2008. A further decline of 3.1 percent is predicted
for 2009. Tender Price Index forecasts for 2009 and 2010,
adjusted to reflect Faithful+Gould market intelligence, are -7
percent and -3 percent, respectively. Contributing to the recent
price declines is the sharp decline in commodity prices for raw
materials in the last two quarters, driven by the reduction in
demand from the emerging markets of China and India.
Ireland
Ireland has experienced huge economic growth over the last
twelve years. No industry manifested this growth more than the
construction industry. Incorporation into the Euro Zone in 2002
combined with easy access to low-cost funding and a perception
of infinite growth ensured that property became the investment of
choice and the market grew exponentially.
Commenting on the latest Construction Tender Price Index,
Society of Chartered Surveyors (SCS) President Sean
McCormick said, “The latest figures show that construction costs
fell by 11 percent in 2008, most of the reduction happening in the
second half of the year. This means we are actually back at price
levels not seen since the year 2000.”
The decline in 2009 may equal or exceed this as output
continues to decline. Housing unit construction is estimated
to fall from 88,000 units in 2008 to 20,000 units in 2009.
Commercial developments will decline significantly as well.
McCormick has predicted that construction output will fall from
EUR 39 billion in 2007 to EUR 14 billion in 2010.
Netherlands
The European Commission predicts the EU economy will shrink 2
percent in 2009. The credit crisis ensures a decline of economic
activity in the Netherlands, perhaps by 0.75 percent. However,
the Dutch economy has not declined since the beginning 1980’s.
The downturn affects each sector of the construction market
differently. Housing construction is expected to drop sharply
a publication of Faithful+Gould with RSMeans
on fears of unemployment and the risk of falling house prices.
Developers and builders are postponing or canceling projects.
The change occurred rapidly as there was a full order portfolio
for housing at the start of 2008, but ten months later it was at its
lowest since the previous decade. Other building sectors had a
difficult reversal, especially offices. However, the construction of
schools and hospitals partially compensates this loss.
Sweden
GDP growth fell considerably last year – from 2.5 percent in
2007 to 0.8 percent in 2008. New construction projects fell 7
percent during the downturn. Construction of tenant-ownership
apartments deteriorated completely in late 2008. An increase
in the production of rented flats at a moderate cost will probably
begin in the first quarter of 2009. There are many large
infrastructure projects in Stockholm just started or are about to
start. How and if they will be affected by the economic decline is
unknown; time will tell.
Layoff announcements are common for both construction and
design companies. Construction industry unemployment was
ten times higher in December 2008 than in December 2007. The
unemployment outlook for 2009 is rather gloomy, almost as bad
as when the economy hit bottom in 1992.
Prices were showing signs of moderate decline in late 2008.
It is not yet clear if this will have any impact of the market, but
everything is pointing in that direction.
Austria
Due to a good first six months, the construction economy
performance was not that bad in 2008. The residential sector
had a good year. The financial crisis had a slight influence on the
non-residential sector beginning in late summer. Construction
output increased 2 percent in 2008 to EUR 15 billion. The
civil engineering sector grew 5.5 percent, while the structural
engineering sector only grew 0.8 percent. Civil engineering
sector orders rose 28 percent with road construction contributing
significantly. However, structural engineering sector orders were
stagnant, leading to a reduction in unemployment in the industry.
Construction material prices - especially for oil and steel – were
very high in summer, but decreased in late 2008.
This year will be more difficult for the construction industry.
However, long-term contracts for construction projects will ease
the impact a little. The possibility for cancellation of current
contracts should not be very high – lower than 10 percent. An
analyst at a major Austrian bank believes this will lead to another
small decline of prices.
Russia
The construction market began declining in the late summer
2008. Many projects are frozen now as investors fear an
over supply. The downturn affected most speculative sectors,
including commercial office and retail developments, hotels,
residential and logistics. However, the impact was less on the
industrial sector as investors are keen to take advantage of
reduced construction cost and to have facilities ready when the
markets improve.
Financing is increasingly difficult to obtain and it may be late
in the year before the banks start lending again. Therefore,
significant recovery during 2009 is unlikely. When lending begins
again, the financial viability of the projects will need to be better
than in the years leading up to the credit crunch.
Steel and concrete prices dropped between 30 and 40 percent
in the recent months, although some recovery began with the
new year. There is uncertainty about whether the market has hit
bottom. However, with the seasonal nature the market will likely
hit closer to the bottom in the late spring with an overall price
reduction of about 20 percent. A quick recovery is unlikely.
Asia+Middle East Overview
China
GDP growth for the past three years was 11, 12 and 13 percent
respectively. The government aim is for an 8 percent increase
this year. Foreign Direct Investment (FDI) in 2008 was a record
USD 92 billion according to Ministry of Commerce. FDI slowed
for the first time in October. January’s drop marked the fourth
month of consecutive decline.
The construction industry accounted for 7 percent of GDP in
2007. Gross turnover grew 22.7 percent in 2007. Reduced
growth is expected in 2008, but data is not available. We can
expect fierce competition as contractors compete for a reduced
volume of construction work.
The financial crisis had the greatest impact on the residential
market. New residential construction increased by 22.7 percent
from January to November 2008, but sales decreased by 18.8
percent. Property values may be declining; however, long-term
prospects are good because of the migration to the cities.
Prices are falling - during the last quarter of 2008 bid prices fell
approximately 15 percent. The steel price fell by 40 percent,
largely due to reduced demand in overseas markets.
Japan
Japan is suffering the same problems affecting the construction
industry worldwide. Issues include limited access to capital,
falling land prices, falling demand and deflation. Several factors
are slowing construction demand. Japanese manufacturers are
making huge cuts in capital spending. A massive restructuring
in the financial sectors is creating higher vacancy rates in Tokyo.
A dearth of capital financing has crippled both Real Estate
Investment Trusts and developers alike.
As demand decreases, so do land prices. A downward spiral in
real estate value is now reaching areas and regions that have
been relatively immune. Likewise, construction prices that
peaked in 2008, raw material prices and fuel costs are falling.
Many construction company representatives believe prices will
reach 2006 levels by the middle of this year.
A decline in property and construction prices to more reasonable
levels and a slow down in construction that will remove capacity
from the commercial real estate markets will poise the industry
for a comeback once the economy hits bottoms and capital
markets ease their lending restrictions.
Singapore
The construction industry is in a curious situation. Since the
economy entered recession in the third quarter of 2008, the
construction industry has been the only sector still expanding.
Several big projects – notably the two resorts with casinos,
refinery expansions, and big investments in industrial plants
– keep large numbers employed. However, the collapse of
demand for new private homes and offices reduced the volume
of these sectors.
This year’s budget includes about SGD 4.4 billion for
infrastructure and other developments. The budget earmarks
a large portion for projects around SGD 50 million or smaller to
provide work for smaller firms.
Prices increased very substantially over the passed two years,
but are leveling off and may start to fall this year if the lack of new
projects continues. However, the existing workload combined
with the new projects coming to the market should limit the extent
of any decline.
UAE
By every statistical measure, 2008 was a bumper year in
the Middle East. The regional economy expanded about 6
percent. Escalating materials costs, shortages of equipment and
contractors and project delays plagued the first nine months. But
in September 2008, the situation changed dramatically.
The lack of global liquidity began to affect Dubai investors.
Construction projects worth USD 1.9 trillion are suspended
across the region. The scale of the cancellations became clear
in late October 2008 when news broke that local developer,
Nakheel, was placing many of its developments on hold.
The cost of construction and property values in the Gulf fell as
a result of the global economic slowdown. Between September
and October property prices plummeted by as much as 49
percent in some parts of Dubai as investors reacted to the
spiraling prices and banks tightened lending requirements. The
first quarter of 2009 has already shown that construction cost per
square foot has fallen by an average of 30 percent in the UAE
compared to the last quarter of 2008.
United States
After recovering from a brief recession in 2001, the economy
grew strongly for six years. Growth began weakening in 2007
when GDP fell to 2 percent, followed by a 1.1 percent growth in
2008. The U.S. economy officially entered into a recession in
December of 2007.
The residential construction decline began in 2006 when
construction put-in-place was unchanged over 2005. Residential
output fell 18 percent in 2007, then proceeded to fall 30 percent
in 2008. Nonresidential construction growth slowed, so the total
decline was only 2 percent in 2007 and 5 percent in 2008.
McGraw-Hill Construction contract values for 2008 show a more
severe drop of 12 percent – a sign that 2009 construction put-inplace will decline further. The nonresidential sector could decline
15 percent this year, but the more optimistic expectations put the
decline in single digits. The government reported construction
industry unemployment rose to 18 percent in January.
a publication of Faithful+Gould with RSMeans
Prices showed signs of decline in late 2008; with demand down
overall, material prices may decline about 5 percent in 2009.
Materials exhibiting greater price volatility may see double digit
declines.
Canada
The Statistics Canada Non-residential Construction Price Indices
for mid-November 2008 reported a sharp dip in prices of 2.8
percent from the previous quarter, reducing the year-over-year
increase to 8.2 percent. Regionally, only Halifax (0.1 percent)
and Montreal (1.1 percent) posted quarterly increases. Prices
fell in Toronto (-1.5 percent), Ottawa (-1.4 percent), Calgary (-4.6
percent), Edmonton (-5.3 percent) and Vancouver (-4.4 percent).
The falling prices, especially in the west, are not unexpected
given current economic conditions. In Alberta for example, falling
petroleum prices have resulted in the delay or cancellation of
many oil projects creating excess construction capacity and
sharply increasing competition.
There are indications that construction prices will continue falling.
As all levels of government seek to stimulate the economy,
increased public sector infrastructure spending may at least
partially offset the declines. Prices may continue to fall for two
more quarters, but will resume an upward trend during 2009,
albeit at a much reduced rate.
Mexico
Mexico is not formally in recession yet. While GDP growth is not
forecast for 2009, the construction sector could have a modest
growth. The construction sector should have continued growth
in the highway, infrastructure, energy, telecommunications and
low and medium cost housing sectors. Additionally, there are
ambitious plans to build health care facilities.
New investment in the manufacturing sector stopped with the
decline of exports. This explains an unemployment rate of nearly
4.5 percent. The tourism sector has reduced its investment plans
for 2009 substantially, although growth will continue for the hotel
business.
Construction inflation in 2009 is forecast at about 5 percent,
driven mainly by imported goods.
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[email protected]
information sources
In addition to the Faithful+Gould and Atkins employees
worldwide, we gratefully acknowledge the assistance of
the following companies for providing information for use in
International Construction Intelligence:
Padghams, Australia; AT•P, Austria; BoPro, Belgium;
ProjectGlobal Ltda., Brazil; Hanscomb, Ltd., Canada; Savant
International, Czech Republic, Poland and Russia; Cammisar
Consulting, Germany; KKZ Consultants, Greece; Europa Risorse,
Italy; PAE Design and Facility Management, Japan; IGG,
Netherlands; PUBM Quantity Surveyor (WM) Sdn Bhd, Malaysia;
AS Bygganalyse, Norway; Aconsa y Asociados Consultores,
Mexico; Watts and Partners, Spain; AB Bygganalys, Sweden;
Comcon Services (Thailand) Co., Ltd, Thailand
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Published by Faithful+Gould, 200 Princeton South Corporate Center, Suite 260,
Ewing, NJ 08628, and Reed Construction Data, 63 Smiths Land, Kingston, MA
02364. Editors: Christy Pain, Faithful+Gould; Bob Mewis, RS Means. Design:
Kelly Horvath, Faithful+Gould. For subscription information, visit www.fgould.com/
publications or contact International Construction Intelligence at 404.874.3638 or
email [email protected]. ISSN: 1060-8206
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