Europe map plain

Modest revenue growth and mostly stable profit margins are being forecast for the European construction sector in 2019 by Scope Ratings, but it is warning about the credit outlook which it said was in danger of deteriorating.

The German-based rating agency said that slowing economic growth and persistent labour shortages were set to weigh on construction activity in Europe after six years of growth.

Scope has revised its forecast for 2019 and 2020 down to 2.0% yearly growth from a 2.5% forecast in December 2017.

And it said that the credit outlook was in danger of deteriorating as the business cycle turned, particularly for smaller companies with less international reach.

Analyst Philipp Wass said, “Stable demand for residential construction – supported by demographic trends, increased household income and low mortgage rates – faces capacity constraints in some regions, relatively high construction costs as well as the prospect of rising lending rates longer term.

“In contrast, civil engineering activity remains buoyant, and we see an increase in non-residential output given stock under development is still below the ten-year average for Europe’s major markets.”

He added that demand for office space for most of Europe’s major cities remained robust.

For the largest companies in the sector – those that have diversified beyond their home markets and have prominent positions in civil engineering and concessions – Scope said the outlook was relatively stable.

The biggest companies by revenue – such as France’s Vinci, the Spanish/German ACS-Hochtief and Sweden’s Skanska – were predicted to benefit from Europe’s continued low interest rates, their exposure to other higher-growth markets, which it said was responsible for more than half of sales in some cases, and higher-margin, government-backed projects.

Wass said, “We expect growth in the proportion of their non-European revenues in 2019 and 2020 compared with 2014 to 2017, partly reflecting significant outbound M&A (mergers and acquisitions) activity in the past year.”

He cited Hochtief and Atlantia which acquired Abertis in a joint €16.5 billion deal, and France’s Bouygues which acquired Alpiq for around CHF900 million (€790.37 million), while local rival Eiffage acquired Meccoli, Kropman Group and EDS.

Under pressure

On the other hand, Scope said cash flow was likely to come under pressure, with increased capital spending and more deal making by larger firms, plus rising labour costs for the overall sector.

Tight labour markets, notably in Germany and the UK, are pushing up wages, especially when it comes to hiring sub-contractors, it said. Where labour markets are less stretched, much of the available workforce is unskilled – as it is in France, Spain and Poland – which Scope said made it hard for companies to improve productivity.

Rising construction costs were said to be problematic in the residential segment. Combined with relatively low housing prices and rents in the suburbs compared with more sought-after central metropolitan locations, they were felt to be discouraging developers from going ahead with new projects despite pent-up demand.

Scope said that in these circumstances, the credit outlook was less benign for smaller firms, typically those with revenue below €1 billion. It said they faced tougher competition from multinational corporations in home markets – especially in sourcing skilled employees, which hampered their ability to respond to changing market conditions – and they lacked exposure to higher-growth markets outside Europe.

“Should the downturn prove severe, smaller companies will become prey for larger construction firms,” said Scope.

Newsletter

Delivered directly to your inbox World Construction Week features the pick of the breaking news stories, product launches, show reports and more!

Sign up for free

Newsletter

Delivered directly to your inbox World Construction Week features the pick of the breaking news stories, product launches, show reports and more!

Go to newsletters