Hann-Ju Ho 

    Construction sector insight

    Author: Hann-Ju Ho, Senior Economist
    Publication date: 01.04.2010

    There is no doubt that the construction and housing sector has suffered a serious correction in the past three years. The sector has long been a net debtor, but the current ratios are at an extremely high level. However, amid the gloom, there are bright spots and some signs of a return to a cautious optimism.

    To date, the biggest losers in the sector have unquestionably been the private and commercial builders.

    Our estimates indicate a drop of 20% in activity in 2009. The reasons for this are many, but the simple fact is despite some encouraging indicators - investors are showing signs of increased interest and significant spare capacity - 2010 is set to see a further contraction. However, 2011 should hold some better news for private builders as the markets improve and confidence begins to recover.

    Construction Sector Insight Graph1 

    But what of the other sub-sectors? Public non-housing projects as well as infrastructure activity has bucked the overall trend and seen decent growth in the past 12 months.

    There is, of course, an elephant in the room - the general election. Public infrastructure projects, largely led by the Olympics and an expansion in the number of PFI-funded schemes, have enjoyed sustained growth under this government. But it may be that 2009-10 is the last gasp of that particular boom. There is no escaping the fact that public spending will undergo a serious squeeze. In our view, the need for fiscal consolidation in the coming years will constrain growth from 2011 onwards.

    So what of the housing sector? Alongside infrastructure, it was the engine of the property boom. Overall, the picture is mixed. Public housing has seen a fall in activity in 2009, largely because of the impact of weaker activity in the private sector, which has affected delivery through section 106 agreements. However, there are signs of a pick-up in the second half of last year, supported by the government's drive to increase affordable housing. We expect public housing to rise around 6%-7% per annum in the next two years. Private housing, meanwhile, has a more mixed short-term forecast. To set the context, last year output plummeted by 30%, the biggest single drop of any of the construction sectors. Within that context, the future actually looks somewhat brighter.

    Recent housing indicators show recovery in house prices and mortgage approvals, though new buyer enquiries in the December RICS survey rose at the slowest pace for nearly a year. We forecast output in this sector to rise 1% this year before accelerating to 10% in 2011.

    Of course, the sector doesn't operate in a vacuum and a number of external factors will affect confidence, output and investment. The markets have begun to show growing interest in some sections of the industry. While construction and materials underperformed the All Share index over the past year, there are elements of trend bucking.

    The general improvement in confidence in the financial markets has helped net capital issuance in the construction sector to rise by £770m last year, the strongest level since 2006. Bank lending to the sector fell to £27.7bn in Q3 2009, down 11% on the year, but this reflected weaker demand, as well as supply.

    Source: This article was first published in Lloyds Banking Group - Perspective Magazine Edition 1.


6/21/2018 11:28:53 AM