Relative boom

18 March 2008

One of the biggest non-residential projects in Europe is the new € 800 million (US$ 1.078 billion) t

One of the biggest non-residential projects in Europe is the new € 800 million (US$ 1.078 billion) trade fair complex in Stuttgart, Germany. This shot shows the construction of part of the car park fo

By Europe's subdued standards 2006 was a great year, with construction output growing +3.7% according to the Euroconstruct group of economic forecasting companies. It is not a growth level to rival other regions of the world, particularly emerging markets like China or India where +10% annual rises are the order of the day.

However, to put this into context, Europe is a region where annual construction growth has rarely exceeded +2.5% over the last decade. So while last year's +3.7% climb is not particularly impressive compared to other parts of the world, it was still the steepest annual improvement for the European market since the boom of 1991 and 1992, which was linked to the reunification of Germany.

And while growth in the European construction industry is seldom spectacular, the market is so big-about € 1410 billion (US$ 1890 billion) per year according to Euroconstruct-that small changes can make a significant difference. Last year's +3.7% climb equates to an additional € 52 billion (US$ 70 billion) of construction work, which in Dollar terms is about the same as the entire construction output of Mexico.

Germany

The big news over the last year or so has been the recovery of the German construction market. there was a huge boom in activity in the early 1990s following the reunification of East and West, but after that there was a painful 10 year recession.

But 2006 saw the slide in construction output reversed in Germany, with the market bouncing back +4.2% according to Euroconstruct. At € 214 billion (US$ 285 billion) per year it is still just about the biggest market in Europe, but Spain and the UK are now about the same size. In fact, Euroconstruct says the Spanish market will be bigger than Germany this year at € 217 billion (US$ 291 billion).

This illustrates how the relative importance of Europe's different construction markets has changed over the last decade. Ten years ago the German market accounted for about 33% of all construction activity in Europe. However, its steady decline and the persistent growth of the UK and particularly Spain over the last decade have changed things dramatically. Today, all three are similarly sized, each representing about 15% of European construction output.

But although it is not as important as it was ten or 15 years ago, the recovery of the German construction market is certainly welcome. All of the main sectors-residential, non-residential and infrastructure construction-bounced back well last year.

Looking ahead, the prospects for German construction seem brightest in the non-residential and infrastructure sectors according to Euroconstruct, with the residential market expected to slow down.

In fact this is the general pattern across Europe as a whole. Residential construction has been strong over the last few years due to low interest rates, to the point where there were serious worries about the housing market overheating in Spain, Sweden and the UK at various points over the last five years.

However, Euroconstruct figures show that residential construction is heading for a soft landing this year, rather than the type of punishing recession the US has experienced over the last 12 months. Growth is expected to tail-off over the next year or so, but the market is still expected to manage a small rise in 2008-+0.5%-rather than shrinking.

Non-residential construction and infrastructure work is expected to take up some of the slack left by the stagnating housing market, and of particular interest is the infrastructure market in Central and Eastern Europe (CEE).

Hot spots

There are now 10 former Eastern Bloc countries in the European Union (EU), following the expansion of the Union in May 2004 and January 2007. these countries have been the recipients of significant grants and loans from EU-administered institutions to help them bring their infrastructure up to the standards of the rest of the EU. there have been a few bumps in the road, but for the most part, the civil engineering markets in the CEE region have grown by +10% or more per year for the last five years.

This is expected to continue for the next few years, but it should also be said that the sector is relatively small. According to Euroconstruct, the civil engineering market in the four largest CEE economies (Czech Republic, Hungary, Poland and Slovakia) combined this year will be worth about € 23 billion (US$ 31 billion)-less than 2% of European construction output.

Consolidation

One of the symptoms of the current buoyancy in the European market has been the numbers of mergers and acquisitions taking place. This has been most pronounced in the materials supply side of the industry, with a string of huge deals.

This year has seen Heidelberg Cement of Germany acquire the UK's Hanson for UK£ 8 billion (US$ 16 billion). Acquisitions over previous years have included Cemex's purchase of RMC and Holcim's acquisition of Aggregate Industries-again for billions of Dollars.

There have also been some interesting mergers in the building and construction side of the industry, particularly in the UK.

The last year has seen the merger of Taylor Woodrow and Wimpey, to form Europe's largest house builder with about 22000 completions per year.

In Spain, the region's other persistently buoyant market, contractors have shown more interest in expanding outside their traditional areas. In the last 12 months all of the major players have made attempts to diversify in one way or another, and with different degrees of success.

Among the successful deals has been FCC's acquisition of an 80.7% stake in Austria's largest contractor, Alpine Mayreder, which cost it € 480 million (US$ 643 million). OHL meanwhile looked to the US, spending US$ 143 million on the acquisition of 70% of Community Asphalt Corp and 80% of the Tower Group, two Florida-based companies with total sales of about US$ 400 million. All three deals were done in August last year.

March this year saw ACS, Spain's largest contractor and Europe's fourth largest, take a 25% stake in Hochtief-the European number three-for € 1.26 billion (US$ 1.69 billion). However, ACS was quick to state that it did not intend to fully acquire Hochtief (which would have created the world's largest contractor with sales around US$ 38 billion), but rather was interested in smaller scale synergies.

The biggest of the lot has been Ferrovial's UK£ 10.1 billion (US$ 20.2 billion) acquisition of BAA, which operates seven of the UK's airports including Gatwick, Heathrow and Stansted in London. Operating airports is something of a departure for the company, but it is not without its precedents-both Hochtief and Mexico's ICA are active in this sector.

Acciona has also taken a big step outside construction with the bid, in partnership with Italian electricity generator Enel, to buy Spanish utilities group Endesa for € 43.7 billion (US$ 58.6 billion). It has been a politically charged deal, with the Spanish government intervening to prevent German company E.ON from buying the company outright. In a compromise, the Acciona-Enel bid will see the sale of Endesa businesses with revenues of around € 10 billion (US$ 13 billion) per year to E.ON.

The only unsuccessful deal (so far) by a Spanish contractor has been Sacyr's attempts to acquire Eiffage of France. the various tactics used by both sides have been so questionable that the French courts will now have to rule on whether Sacyr's April takeover bid was valid under stock market rules. the initial ruling was against Sacyr, but the company has appealed and is awaiting this decision.

Sacyr's problems aside, the number and the sheer size of some of the acquisitions going on in Europe is indicative of the buoyancy of the industry. It is also interesting to note that it has not just been a case of construction companies buying other construction companies. there has also been interest in the industry from the private equity sector.

In France this year PAI Partners has bought a 65% stake in Lafarge's € 2.4 billion (US$ 3.2 billion) per year roofing materials business. It has also bought a 49% holding in € 1.28 billion (US$ 1.71 billion) per year French house builder Kaufman & Broad form US residential construction company KB Home.

Outlook

With the exception of the Portuguese construction market, which has been in decline for four years, pretty much everything about the industry in Europe is positive at the moment. But while the outlook is good, and growth is expected to continue, the statistics indicate that 2006 was probably the peak of the current cycle, with the next few years looking a little more subdued.

This view is backed-up by the pattern of mergers and acquisitions. Having reached something of a fever pitch over the last 18 months-a classic sign of a peaking market-activity in this area is now likely to decline, not least because of this summer's turmoil on the world's stock markets.

Nevertheless, Europe remains a very large construction market that offers stability and some good growth prospects, particularly in the CEE region.

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