61St Euroconstruct Conference

A-1103 WIEN, POSTFACH 91 TEL. 798 26 01 • FAX 798 93 86 ÖSTERREICHISCHES INSTITUT FÜR

WIRTSCHAFTSFORSCHUNG

61st Euroconstruct Conference

The Prospects for the European Construction Market

Country Reports

Country Report

61st Euroconstruct Conference Amsterdam, June 2006

This Country Report has been written and prepared by the EUROCONSTRUCT organisation from the country reports of the 19 EUROCONSTRUCT member institutes.

The report has been edited and formatted by:

Economisch Instituut voor de Bouwnijverheid (EIB)

Visiting address: Basisweg 10, 1043 AP Amsterdam Postal address: Postbus 58248, 1040 HE Amsterdam Tel: +31.20.583.19.00 Fax: +31.20.583.19.99 E-Mail: [email protected] Website: www.eib.nl

www.euroconstruct.org

Reproduction or passing-on of the whole or parts of the report is strictly forbidden without prior written authority from EIB, acting on behalf of the EUROCONSTRUCT group.

Contents

The Euroconstruct Network...... 5

Country Reports

Austria ...... 31

Belgium ...... 43

Czech Republic...... 59

Denmark...... 75

Finland ...... 93

France ...... 113

Germany ...... 133

Hungary...... 155

Ireland ...... 177

Italy...... 195

Netherlands...... 211

Norway ...... 229

Poland ...... 245

Portugal...... 265

Slovakia...... 285

Spain ...... 305

Sweden ...... 325

Switzerland...... 345

United Kingdom...... 363

The Euroconstruct Network

EUROPEAN CONSTRUCTION BUSINESS RESEARCH AND FORECASTING GROUP

www.euroconstruct.org

EUROCONSTRUCT was set up in 1975 by a number of specialised research institutes and consulting organisations as a study group for construction analysis and forecasting. It has since expanded from the core group to include almost all Western European countries (the European Union and EFTA), as well as a number of Eastern European countries. At present, EURCONSTRUCT has member institutes in 19 European countries.

EUROCONSTRUCT’S network also extends to the Baltic States (through our Finnish partner), Japan (Research Institute for Construction and Economy, RICE, Tokyo) and Korea (Construction & Economy Research Institute of Korea, CERIK, Seoul).

The aim of EUROCONSTRUCT is to provide decision-makers in the construction sector and related markets and in ministries, agencies and national and international associations with information, analyses and forecasts to enable them to plan their business more effectively.

Construction markets are regional or even local. It is, therefore, a great advantage that the analysis and forecasts for these markets are prepared within the EUROCONSTRUCT network by competent national institutes for their respective home markets.

EUROCONSTRUCT’S research and advice focuses on:

o Short and medium-term forecasts for macro-economic and detailed construction trends in Europe o Analysis of structural changes, business strategies and competition in the European and world-wide construction industry o Market studies for industrial goods and service used by the building and infrastructure sectors.

EUROCONSTRUCT’S research and forecasts are designed to meet the needs of many types of business including:

o Construction contractors and developers; housing associations; o Manufacturers and traders supplying construction materials, products, equipment and machines; architects and other construction professionals; o Banks, financial and credit institutions; o Government departments and national agencies; industry associations; o The Commission of the European Community and other European organisations.

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Each country member of EUROCONSTRUCT has the project management resources to offer their customers turnkey studies of pan-European scope. They can guarantee: o Specific know-how and experience in database research and consulting; o A consistent multinational approach; o Expertise in project co-ordination and quality control; o Reports in the languages of the customer’s choice.

Twice a year, EUROCONSTRUCT organises an international conference on:

o Short-term forecasts by the EUROCONSTRUCT member institutes for the main market segments (housing, non-residential buildings, infrastructure and civil engineering, all sub-sectors with a breakdown in new work, and renovation/modernisation activities) in nineteen European countries. o A special issue selected for its medium-term impact on the construction industry (e.g. demographics, privatisation, lifestyles, technological change, internationalisation of strategies, changes in the demand and supply structure).

Past and forthcoming conference venues:

December 2001 Rome (Italy) June 2002 Dublin (Ireland) December 2002 Munich (Germany) June 2003 Budapest (Hungary) December 2003 Funchal (Portugal) June 2004 Stockholm (Sweden) December 2004 Paris (France) June 2005 Cardiff (UK) November 2005 Barcelona (Spain) June 2006 Amsterdam (the Netherlands)

December 2006 Munich (Germany)

In addition, EUROCONSTRUCT offers special studies for selected national and international clients based on well-founded knowledge of databases, methods, correlations and measures.

For details, please contact the EUROCONSTRUCT partner institute in your own country.

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MEMBER INSTITUTES

Austria WIFO Austrian Institute of Economic Research

Belgium Aquiec-Vkebi Association pour la Qualité des Indicateurs Économiques de la Construction Czech ÚRS Praha Institute of Rationalisation of the Construction Industry Republic Denmark CIFS Copenhagen Institute for Futures Studies

Finland VTT Building and Transport, Business Intelligence

France BIPE BIPE

Germany IFO IFO Institute for Economic Research

Hungary Build&Econ Building Economy, Art and Architecture Consulting Office

Ireland DKM DKM Economic Consultants

Italy CRESME Centro Ricerche Economiche e Soziologiche di Mercato nell'Edilizia Netherlands EIB Economisch Instituut voor de Bouwnijverheid

Norway Prognosesenteret AS PS – Building and ConstructionResearch

Poland PAB Polish Construction Research & Forecasting

Portugal ITIC Technical Institute for the Construction Industry

Slovakia ÚEOS ÚEOS - Komercia, a.s

Spain ITeC The Catalonia Institute of Construction Technology

Sweden Prognoscentret AB Prognosesenteret AB (Part of the Analysgruppen AS)

Switzerland KOF ETH Swiss Institute for Business Cycle Research, Swiss Federal Institute of Technology, Zurich

United Experian Business Kingdom Strategies © EUROCONSTRUCT 9 The Euroconstruct Network Amsterdam, June 2006

The Leading Provider of Economic Analysis and Economic Policy Consulting in Austria

WIFO analyses national and international economic trends and supplies short- to medium- term economic forecasts. Together with our studies on European integration, competitiveness and location of industries and services, these trends and forecasts provide the basis for economic policies and corporate strategies. Our activities increasingly include commissioned research and consulting for domestic and international decision-making bodies, the European Commission, OECD, major business and financial institutions. Modern empirical methods incorporating the most current data available and knowledge of the institutional and political structures - these are the factors that guarantee the quality of our work. The use of international networks as well as our independent and non-partisan approach gives particular weight to our findings. WIFO is organised as an association, with membership open to organisations and individuals. Contributions by economic policy institutions provide the foundation for basic research and access to the combined research resources of a pool of about 100 highly qualified staff. Our cooperation with sponsors and members is based on the principles of partnership, project orientation and interactive collaboration. As a member of ERECO (European Economic Research and Advisory Consortium), WIFO has partner institutes in Birmingham, Bologna, Cambridge, Madrid, Munich, Paris and Rotterdam. Main Research Fields Regional and Sector Analyses Macroeconomics Agriculture Perspectives of the Welfare State Industry, innovation and telecommunications Reforms of the Public Sector Construction Globalisation Transport, Energy Sustainable Development Banking Knowledge-Based Economy Tourism, Trade and commerce Private and public services

Austrian Institute of Economic Research Arsenal Objekt 20, A-1103 Vienna

EUROCONSTRUCT contact: Margarete Czerny, Monika Dusek E-Mail: [email protected], [email protected] Tel: (43 1) 798 2601-225 Fax: (43 1) 798 93 86

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AQUIEC-VKEBI

ASSOCIATION POUR LA QUALITÉ DES INDICATEURS ÉCONOMIQUES DE LA CONSTRUCTION VERENIGING VOOR KWALITEITSVOLLE ECONOMISCHE BOUWINDICATOREN (ASSOCIATION FOR THE QUALITY OF THE ECONOMIC INDICATORS OF THE CONSTRUCTION INDUSTRY)

Activities The AQUIEC is active in each of the fields that make it possible to improve the economic information relating to the construction sector.

As a general rule, it operates as a Forum, in which the experts coordinate the initiatives relating to the construction statistics: drawing up of statistics, quality control and analysis (of the current and forecast economic situation) and in which they exchange information that can prove useful for the objective achievement of these analyses.

As far as the prospects are concerned, it also operates as a Scientific Council responsible for: − defining the hypotheses selected for the drawing up of the « construction prospects »: macro-economic hypotheses and others (national insurance contributions, tax, policies likely to influence the construction industry, etc.) − defining the working method, for checking the pertinence of the macro-econometric model that translates the selected hypotheses into « construction prospects » and for advising its managers on the improvements to be made to them; − evaluating, in terms of coherence and probability, the prospects drawn up by the Construction Confederation (currently the only one able to carry out this work in Belgium) on the basis of the framework that it has defined (hypotheses and method); − validating (after a possible correction) the prospects drawn up in this manner.

Status The AQUIEC, Association for the Quality of the Economic Indicators of the Construction Industry, is an association of experts whose areas of expertise cover the economic and legislative environment that determines the development of the construction industry, as well as the specific characteristics of its various sub-sectors.

Organisation The AQUIEC operates according to the same principle as the « Institut des Comptes Nationaux » (an official organisation that draws up the national accounts in Belgium), which means that it is a structure made up of a group of specialists who define a working framework, delegate the practical work, control and validate this work.

The experts of the AQUIEC form a pluridisciplinary team that includes economists, jurists and specialists in tax and social matters. Most of them are members of the highest authorities that oversee their areas of expertise: Central Economic Council, Supreme Statistical Council, Economic Club, Supreme Financial Council, Supreme Employment Council, etc.

AQUIEC-VKEBI, 34-42 rue du Lombard 1000 Bruxelles Tel 32 2 545.57.40 Fax 32 2 545.59.09 Email : [email protected]

ÚRS Praha, a.s. Status ÚRS PRAHA, a.s. is an engineering and consulting company, incorporated in 1992. It is the successor of ÚRS PRAHA s.p. (Institute of Rationalisation in the Construction Industry, Prague), which was founded in 1961. ÚRS PRAHA is certified in accordance with CSN ISO 9001/2 Standard in the field of consulting activities and of development and implementation of software and databases, both for the construction industry.

Activities The focus of our activities comprises complex services in the evaluation of construction executed for construction, planning and investment organisations, regional state bodies and construction authorities, court appraisers etc. This activity includes the publication and sale of expert texts, especially of construction price-lists, construction material price-lists, as well as databases in connection with a broad range of software for the assessment of construction projects and for company management. ÚRS PRAHA, a.s. provides expert appraisals for the assessment of construction projects, land and companies. Other significant business activities carried out by ÚRS include the preparation of extensive databases of economic data on companies and industrial branches, allowing it to process financial data of company groups in various industrial branches by region, size or specialisation. We use this information for the preparation of company financial analyses. We prepare for our customers expert and consulting services for the identification and classification of products, services and works (including repairs and maintenance), of tangible assets (especially in relation to the VAT and other tax laws, depreciation groups) and for the application of the Standard Production Classification in the construction industry. All these areas are significant for the evaluation of construction projects. One part of our consulting services involves instruction courses and training (including courses on the professional use of computer technology) and regular construction briefings in Prague, Brno, Hradec Králové and Ostrava. Since 2001, ÚRS PRAHA has incorporated a department of Regional Development and Housing which carries out studies about population, settlement structure and housing at state, regional and local levels, creates a Territorial Identification Register of administrative units and functions as the National Secretariat of the Interreg III B EU program. ÚRS PRAHA is a member of ICIS, which embraces 16 member organisations from four continents. ICIS's members are organisations which provide national master specification systems and cost information systems. ICIS members are neutral in status (i.e., not political), technically authoritative, and solidly rooted in the construction industry. URS PRAHA is also a member of EUROCONSTRUCT. We are registered as a consulting firm in the PHARE Program in Brussels. Significant customers of ÚRS PRAHA include ministries and local authorities, principally the Ministry of Industry and Trade. ÚRS PRAHA produces surveys dealing with the development of the construction sector and studies dealing with industrial policy. ÚRS PRAHA has extended its consulting services for foreign business entities entering the Czech market and for co-operation with international groups of experts.

More information available at www.urspraha.cz Contact us at our headquarters: ÚRS PRAHA, a.s., Pražská 1279/18, 102 00 Praha 15 – Hostivař Phone: central **420 2 67219111 Fax: **420 2 71751175, **420 2 71750074 - E-mail: [email protected]

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The Copenhagen Institute for Futures Studies

Future-based innovation www.cifs.dk

The Copenhagen Institute for Futures Studies is an independent research organisation, founded 1970. It functions as consultant and source of inspiration to corporations, government bodies, and other elements of society, globally. The CIFS creates visions of the future, tailor-made to the need of clients in relation to corporate development, product development, etc., supported by a staff of 25, and it runs training programmes related to corporate work within trends, uncertainties and innovation for the future.

The range of products and services is large, ranging from presentations to tailor-made studies in fields like strategic development, product development, scenario building, and futures awareness in general. Tailor-made studies are based on a dialogue with the client, combining the specific knowledge of the client with the methods as well as the broad perspective of the CIFS.

Specific to the construction sector, the institute runs programmes on The Home and Family of the Future, The Office of the Future, and Creating Long-term Value in Construction, besides the EUROCONSTRUCT activities and programmes covering a wide range of Transportation issues.

Other fields of study include the future of work, of organisations and the value chain, of the information economy and the transformations it brings to western culture ("the dream society"), of growing emphasis on expression (“creative man”), of trends in financial services, retail, marketing, consumption, leisure and lifestyles, of values, politics, and media, of e-business and of physical products - Designing for the Future. The CIFS does tailor-made innovation support for corporations within product development, overall strategy and organisation development.

The CIFS offers a comprehensive membership programme. The membership base of about 160 organisations include leading corporations, government ministries, and a diverse grouping of public and private organisations from Western Europe. International memberships are highly tailor-made to the needs of the client. Working languages include English, German, French, Danish, Norwegian, and Swedish.

he Copenhagen Institute for Futures Studies Nr. Farimagsgade 65 DK-1364 Copenhagen K - Denmark Tel (+45) 33 11 71 76 - Fax (+45) 33 32 77 66 [email protected] - www.cifs.dk

Euroconstruct contact: Anders Bjerre, senior manager: [email protected]

VTT Technical Research Centre of Finland (VTT) is the largest R&D institute in the Nordic countries. The Institute VTT Building and Transport is one of VTT's 6 research institutes.

VTT's activities of the Business and Process Management Research are:

- analyses and prognoses of business environment: business cycles, market outlooks, scenarios - business and technology strategy consulting - development of new business and service concepts - customer needs, productivity, prices, costs and quality, value chains and networking - real estate and facility management, technology and economy, condition monitoring technology

VTT's Group for Business Intelligence in Construction and Property works intensively in the building market and demand forecast sector in close contact with the contractors, material producers, trade, authorities, organizations and building magazines in Finland. Demand forecasts are done for almost all important sectors, materials and employment in construction. On base of the geo-economic situation and co-operation, the construction sector development in Russia and in the whole Baltic RIM area has became more important. We are improving our forecasting methods, databases, tools and reporting concerning Moscow, St. Petersburg and Baltic Countries. We have also close co-operation with several members of the ASIACONSTRUCT network.

STATUS VTT is a government, non profit, independent and impartial organization.

STAFF VTT Building and Transport has a total staff of 400 persons, of those 60 persons in Business and Process Management Research. Most of the research scientists have a degree in construction economics and business management.

CONTACT PERSONS Mr. Pekka Pajakkala, Research Manager ([email protected]), Mr. Erkki Lehtinen, Chief Research Scientist ([email protected]) Ms. Liisa Jaakkonen, Data System Designer ([email protected])

VTT TECHNICAL RESEARCH CENTRE OF FINLAND VTT BUILDING AND TRANSPORT Hermiankatu 8 G, Tampere P.O. Box 1802, FIN–02044 VTT, Finland Tel. + 358 3 316 3111 Fax + 358 3 316 3497 [email protected] www.vtt.fi Business ID 0244679-4

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Access to unlimited information leads to a muddled vision of today’s world and a confused picture of what the future holds.

However, in order to make the right decisions and manage economic risks, decision-makers need key information regarding future economic developments.

For forty years, BIPE, a leading European provider of forward-looking economic analyses and consulting services, has provided executives with relevant advice to guide their actions.

BIPE’s actions include : • Business strategic advice: market product positionning, pricing strategy, new products and services development, marketing strategy • Forecasting and foresight activities • Competitive analysis • Assistance in elaborating, defining and assessing public policies; regulatory economics; regional economic development.

By providing them with forward-looking guidance on their environment, BIPE helps businesses to: • anticipate and respond to market disturbances; • reinforce their competitive position; • base the company’s budget on realistic assumptions; • prepare their marketing strategy with a better understanding of their customers and their growth potential; • elaborate and/or support the definition and the implementation of strategic projects, including investment, employment and training aspects; • understand relationships between companies within a given sector and/or cluster and the way these relationships must evolve; • gauge the consequences of regulatory or fiscal changes on the company and/or sectors.

In addition, BIPE helps public authorities to: • understand the roles of the different actors and the trends thereof (for example, what is the future dominant organisational model in a sector, or the likely response of businesses to regulatory or other proposed changes); • anticipate short, medium and long-term market trends and identify the factors underlying these changes; • interact with the private sector, understand the needs of businesses and develop jointly suitable strategies; • define what regulatory or fiscal changes are necessary and measure their consequences; • develop economic regulatory instruments, pilot and evaluate public actions in the economy.

BIPE’s analytical capacity is based on the specialisation of its teams in key sectors of the economy and the permanent monitoring of major social changes. BIPE combines an in-depth expertise in a large number of sectors with the analysis of key themes which influence their future.

Six recurring themes in BIPE’s analyses are: • the evolution of sociological and demographic characteristics on consumer behaviour and the labour market; • cross-sector links and the knock-on effects between sectors; • the information society and the impact of new technologies and e-commerce on the economy, the organisation of companies and consumers’ behaviour; • the impact of public policies on the economy and on society and the changing role of policy makers; • the new forms of economic regulation: organisation of regulation, tools and impacts on market players; • the local dimension of economic development: attracting business to a specific region; location strategy; new methods of governance, co-operation and exchanges; sustainable development.

BIPE’s unique capability is to optimise the interaction between different approaches, to coordinate the skills of people from varied backgrounds and marry the views of economists with those of other specialists

BIPE’s international presence BIPE participates to a number of professional international networks including: • AIECE (Association of European Conjectures Institutes); • ERECO (European Economic Research and Advisory Consortium); • Euroconstruct; • Stratorg, a top-management consulting company present in Europe, China and Russia. • The Competitiveness Institute (TCI), a European research institute for cluster practitioners based in Barcelona. • Eurostrategies, for telecom and media; • Euro-Asia Convergence, a network of partners provding assistance to European companies investing in Asia

BIPE has a quality certification from the OPQCM in the fields of strategy and corporate policy, marketing and commercial and internationalisation of businesses BIPE 11/13 rue René Jacques 92138 Issy-les-Moulineaux Cedex France Tél : + 33 (0)1 70 37 23 23 – fax : + 33 (0)1 70 37 23 00 – e-mail : [email protected] - www.bipe.com

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Ifo Institute for Economic ifo Institut Research für Wirtschaftsforschung an der Universität München at the University of Munich

Field of Activities The Ifo Institute for Economic Research is one of the six major German economic research institutes. It examines short-term developments in the overall economy and in individual sectors as well as longer term tendencies and structural changes of the German and European economy. The institute regularly conducts short-term forecasts, medium-term business cycle perspectives and long-term growth scenarios, both for the economy as the whole and for individual sectors and industries (e.g. construction industry with sub-sectors, types of work and categories of buildings). In its various business surveys the institute gathers and analyses data from more than 7,000 German firms monthly. The Ifo Institute publishes since more than 50 years the main survey findings, e.g. the well known Ifo Business Climate. Since 1981, the Ifo Institute has conducted its World Economic Survey (WES) amongst more than 1,100 business leaders and economists in about 90 countries. Every quarter, these experts assess the present and the prospective economic situation in their countries. Special attention is given to the early detection of emerging economic problems. The institute also analyses current and projected economic policy measures and puts forward its own economic policy recommendations.

Setting-up and Status The Ifo Institute was founded in 1949 in Munich as a non-profit, independent research organisation and has the legal status of a registered society. Since 2002 there is an institutionally link to the University of Munich as basis for a strong co-operation. The Ifo Institute has almost 550 personnel and institutional members, mainly enterprises, associations, foundations, interest groups and political parties.

Organisation Since 1999, the Ifo Institute is structured in the following eight research and service divisions: Business Cycle Analyses and Financial Markets; Public Finance; Social Policy and Labour Markets; Human Capital and Innovation (with Research Unit Construction and Real Estate); Industry Branch Research; Environment, Regions, Transportation; International Institutional Comparisons; Business Surveys.

Resources With more than 160 staff members, the Ifo Institute covers the whole spectrum of economic activity. Almost 60 percent of the Institute’s funds are provided by the government, according to the general agreement on joint financial support of research in Germany. The remaining 40 percent of the funds are mainly raised through contract research, multi client studies, conference fees and foundation grants. The research contracts are primarily awarded by federal and state ministries, international organisations and the EU Commission, business associations and private companies. Membership fees and the sale of the institute’s various publications contribute also to the funding of the organisation.

ifo Institut für Wirtschaftsforschung e.V. an der Ludwig-Maximilians-Universität München Ifo Institute for Economic Research at the University of Munich Box 86 04 60, D-81631 MUNICH, Germany, Tel.: ++49 89/9224-1375 and –1388; Fax: ++49 89/9224-1460; e-mail (Research Unit Construction and Real Estate): [email protected]

BuildECON, the Building Economy, Art and Architecture Consulting Office, Hungary was established in 2000 to provide market services for various sectors of the construction industry. Members of BuildECON are professionals with a wide range of experience in the fields of construction, architecture, economy and building information, construction market analysis, engineering and art, and provide their services in close co-operation with a number of major firms in Hungary and East Europe.

The management personnel of BuildECON have participated as Hungarian partners in EUROCONSTRUCT's operations since 1990, targeting Hungary and Eastern Europe. Since 2001, BuildECON has been publishing construction market reports on East Europe. Most of BuildECON’s Partners use the yearly published Eastern European construction market reports –

Russia, Romania, Ukraine, Turkey, Bulgaria, Croatia and Serbia

– for making strategic plans to enter their companies into the new market or gain further businesses. Our partners are helped not only by BuildECON’s short and succinct analyses of the developments of residential construction, non-residential building construction and civil engineering but also by elsewhere non-available current facts and figures and prognoses tabulated. Factual and numerical data of developments and expected changes compiled based on Euroconstruct’s know-how make the countries and market segments measurable and comparable.

Services of BuildECON

• EUROCONSTRUCT Construction market analyses and prognoses, edited twice a year (short- and medium-term studies) • East-European construction market country reports: Hungary, Bulgaria, Russia, Romania, Turkey, Ukraine, Serbia, Croatia • Individually tailored market research • Conference organizing • Architectural planning • Art consulting

References:

• Economic consultancy: Alukönigstahl, CHR, Doka, E-Build, Graboplast, Groupe Schneider, Henkel, Hochtief, HVB Bank, Lindab, OTP Bank, Skanska, Shell, Szonett, Volvo, Wienerberger • Art consultany: Venice Biennal, MEO Contemporary Art Assembly, Műcsarnok Hungarian Art Gallery, Mü- Terem Art Gallery, Nagyházi Art Gallery, • Architectural Planning Sports Hall ARENA Budapest, Palace Sandor, (residence of the Hungarian President), residential buildings (new and refurbishment)

BuildECON Construction Markets East Europe and Turkey Hungary 1112 Budapest Cseresznye utca 54. Tel: + 36 1 309 0301, Tel/Fax: + 36 1 249 3191 Tel: +36 30 241 0342 e-mail: [email protected] e-mail: [email protected]

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E C O N O M I C C O N S U L T A N T S

DKM Economic Consultants, Davy House, Tel: +353 872931533 49 Dawson Street, E mail:[email protected] Dublin 2.

Status DKM Economic Consultants is one of the longest-established economic research firms in Ireland. The firm was founded in 1981 as part of Davy Stockbrokers, and was bought out by its management team in March 2006.

Over the past two-and-a-half decades DKM has built up unparalleled knowledge and expertise across a wide range of areas in applied economics and economic forecasting. The firm offers a range of economic consulting services including data collection, analysis and economic forecasting across national, regional and sectoral levels; impact analysis and the reporting on outcomes of consultation; cost benefit analysis and project evaluation. The firm also completes client specific reports covering prospects across the macroeconomy, selected sectors and regional markets. DKM staff work closely with clients to determine what indicators are most relevant to their business and helps them with business planning by forecasting the economic environment in which future business activity will take place.

Field of activities The firm’s work focuses mainly on the following areas: Markets and Competition; Transport; Energy; Construction and Property; Environment; Financial Services; Macroeconomic Environment and Forecasting; Demographics; Socio-economic, Regional and Local Development.

The firm’s clients include many of the largest companies in Ireland. In addition it has acted as economic consultants to many Government Departments, Local Authorities and State agencies, and the EU Commission. Its personnel have been members of and advisors to many State boards and councils, including the Industrial Development Authority, the National Competitiveness Council, and regularly act as expert witnesses in legal cases dealing with complex economic issues. DKM has been the Irish member of Euroconstruct (www.euroconstruct.org) for the past decade.

For the decade 1989 - 1999 DKM acted as External Evaluator to the Operational Programme for Transport (OPT), and its predecessor, the Operational Programme for Peripherality (OPP). These were multi-mode programmes of investment in Ireland’s transport infrastructure, co-funded by the EU and the Irish Government.

DKM has extensive experience of the Irish housing and construction sector and a track record in economic forecasting for that sector. The firm has been engaged by the Department of the Environment and Local Government (DoELG) in recent years to (i) prepare the official estimates of national and regional construction output, (ii) assess the medium term outlook for construction and employment and (iii) examine the challenges facing the industry over the medium term.

Research Projects on Housing and Construction The firm has completed projects for a number of private companies and financial institutions operating in the housing and construction sector including studies which examined: ¾ The Implementation of the Part V Provisions for Social and Affordable Housing in the Planning and Development Act 2000. ¾ The prospects for some of the key concerns surrounding mortgage finance and housing affordability. ¾ The Outlook for Domestic Mortgage Indemnity in the Republic of Ireland. ¾ Developments in the Economy of Dublin including demographic, settlement and housing Trends in the Greater Dublin Area. ¾ The Prospects for Construction Materials in the Period to 2015. ¾ The Future Supply and Demand for Construction Professionals 2002-2015. ¾ Annual Construction Industry Review and Outlook.

Nature of work More generally, projects undertaken for clients have included: market and data analysis; project appraisals; economic impact studies; infrastructure investment appraisals and evaluations; reviews of pricing and subsidy issues; corporate strategy studies; appraisals of transport policy issues; implications of EU policies and directives; energy policy appraisals; tariff studies; housing policy appraisals; demographic and household trends and projections; housing affordability and prospects; budget submissions; employment patterns and land use markets; measurement of housing and construction output.

As External Evaluator, DKM’s role involved reviewing all aspects of the programmes, reporting on progress in their implementation, evaluating the financial, physical, economic and qualitative aspects of investments, recommending changes where necessary to investment measures and project selection criteria (including evaluation of cost-benefit studies) and liaising with Government Departments, the EU Commission and other parties as and when necessary.

DKM’ expertise in evaluation also extends to energy where the firm has carried out studies including an economic evaluation of the optimal infrastructural options for meeting gas demand up to the year 2025, and an evaluation of future gas transmission in the Republic of Ireland.

Resources The DKM Team consists of four professional economists supplemented by the economic research capability of Davy. The firm also utilises a panel of experts from Irish and United Kingdom universities and research institutes in the engineering, transport and energy fields.

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CRESME RICERCHE SPA

CRESME is a non-profit association created in 1962 in favour of promotion and information on construction industry and territory transformations. Its purpose is to carry out researches and studies and to favour meetings between public and private operators. Due to numerous and complex requests, the CRESME Research Centre (joint-stock company controlled by the Cresme Association) was created in 1982. CRESME carries out surveys and analyses regarding: aspects of production and market in the constructions field; territorial structures and transformations, with relative economic, urban and social implications; administration in public bodies, also by means of feasibility studies of definite solutions and an active participation to their management; training of professional profiles within the framework of territorial-transformation and facility-management processes. CRESME is internally specialised in: statistical, economic, urban, juridical and sociological aspects. These allow interaction between different subject-matters of major interest to the Centre. All this is facilitated by the extent and variety of the association (over 150 share holders representing the whole constructions field) and of interlocutors that normally refer to the CRESME Ricerche S.p.a. During its 40 years of activities, CRESME has acquired and developed both a scientific and cultural experience. This guarantees an accurate and correct supply of information, evolution of methods and instruments of research. A constant updating of this resource is made possible by means of two strategic bearings, which regulate the Centre's activity: a permanent observation of complexities and changes in both the construction industry and the territorial transformations; the development of scientific and cultural activities where CRESME acts as a connection link between different operators, experiences and subject-matters which are implied in processes of territorial transformations. Research studies by thematic area and information systems represent the methods and tools across the whole CRESME research activity. The CRESME activities are mostly addressed to the following fields of action: Environment and sustainability Structural analysis Territorial analysis Assistance to Public Administrations Current trend and forecast Facility management Training Strategic marketing Feasibility studies CRESME has traditionally provided assistance and support especially to local administrations and autonomous associations acting as a coordinator. CRESME RICERCHE SPA Via Fogliano, 15 - 00199 Rome – Italy - Tel. ++39068543623 – Fax ++39068415795 Euroconstruct contact: Alice Pandolfi - E-mail [email protected] - www.cresme.it

AIMS

The EIB foundation aims at fostering the knowledge of economic and social questions that are related to, or that are of importance for the Dutch construction industry in an independent and scientific way.

EIB work comprises: - scientific research, especially in the area of the construction process and the building markets; - preparation of reports on scientific research, both on own initiative and in response to outside demand.

STATUS

Independent, non-profit making foundation.

ORGANISATION

The governing body of EIB consists of representatives of the employers’ organisation and the trade unions in the construction industry and of clients, and is presided by an independent chairman. The main responsibility of the governing body is to safeguard the interests of the Institute and the achievement of its objectives, but without interfering in the scientific research itself. The scientific quality of the institute’s research work is ensured by a scientific committee.

STAFF

The EIB has three research departments. The first concentrates on the construction market and housing, the second studies the construction firms and the construction labour market. The third department has both a supporting statistical and a research function. The staff mainly consists of economists, statisticians and sociologists and comprises around 25 people.

FINANCIAL RESOURCES

The institute is partly financed by contributions from the Education and Development fund for the construction industry. Other resources come from funds for special projects and contract research. A relevant share of these commissions originates from the Dutch government.

Economisch Instituut voor de Bouwnijverheid Postbus 58248, 1040 HE Amsterdam Telephone: (++31) 20 583 1900 Telefax: (++31) 20 583 1999 E-mail: [email protected] Internet: http://www.eib.nl

Euroconstruct contact: Oebele Vries E-mail: [email protected] 22 © EUROCONSTRUCT Amsterdam, June 2006 The Euroconstruct Network

Prognosesenteret was founded in 1978, as an independent consultancy focusing on market research within the Nordic building and construction markets. Today we work as a cross-border Nordic company. Prognosesenteret AS is Norway’s representative in Euroconstruct and Prognoscentret AB represents Sweden.

With more than 25 years of experience, a consulting team consisting of economists, business analysts, engineers and anthropologist, we are the leading Nordic company in our field. We are offering regular research services along with individual clients’ projects, as well as the unique “Building Materials Barometer”, where we are covering the market of 600 different building materials.

We are offering a wide spectre of services for companies within or related to the Nordic building and construction market. Based on a customised web-solution, we are able to offer a month to month analysis of the economic outlook for the Nordic area (per country), as well as markets trends with respect to the monthly building and construction activity in each country. By using our frequently updated database (which contains data from 1981 and forwards), and regular market analysis, we update our forecasts twice a year. These forecasts are including:

• The market for new residential building activity • The market for new non-residential building activity • The market for maintenance of residential building activity • The market for maintenance of non-residential building activity

All of the mentioned analysis and forecasts are available for Sweden, Norway, Denmark and Finland. Furthermore, they are divided into several building types, such as industrial buildings, commercial buildings, hotel buildings, detached houses, semi-detached houses and row houses etc.

As a part of our full-service package, we also do analysis on the consumer behaviour related to various building markets. This analysis is built on question schemes to more than 18 000 households in Norway, Sweden and Denmark, in order to identify trends within the DIY market.

Further on, Prognoscentret AB is offering a unique service, giving detailed data on the consumption of construction materials and services in the Nordic region. This service is called “Building Materials Barometer”, and is a databank containing more than 600 products and services. The database is updated yearly, based on registration of end-use consumption.

Beside all these services, we carry out ad-hoc analysis within the same areas and countries. At present more than 1 000 customers are using our services on a regular basis. With our unique consulting team, we can handle any research task within the Nordic building and construction market.

PROGNOSCENTRET AB PROGNOSESENTERET AS Saltmätargatan 5 Sjølyst Plass 4 SE-113 57 STOCKHOLM NO-0278 OSLO SWEDEN NORWAY Phone: +46 8 440 93 60 Phone: +47 24 11 58 80 E-mail: [email protected] E-mail: [email protected] Web: www.prognoscentret.se Web: www. prognosesenteret.no

Contact person: Bengt Henricson Contact person: Björn-Erik Öye

POLISH CONSTRUCTION RESEARCH & FORECASTING PL 00-519 Warszawa, ul. Wspólna 37/39 l.24 Phone: +48 22 628 88 37 Fax: +48 22 783 38 57, +48 22 629 03 85 E-mail: [email protected] .pl; [email protected]

PAB-Polish Construction Research & Forecasting Managing Director: Mr.Mariusz Sochacki PAB - POLISH CONSTRUCTION RESEARCH & FORECASTING is a private scientific and research institute specialising in economic analysis of the construction industry. PAB was established in 2000 by specialists with more than 25 years of experience in activity within the construction industry. Basic aims : - Permanent scientific research on the field of investment and building processes, the construction industry and building market, - Preparation and issuing of reports on scientific research initiated by PAB itself as well as on orders from firms and different Polish and foreign organisations. Activity concentrates on: - Industry forecasting: short, medium and long-term construction and investment forecasts, - Workload surveys: permanent surveys of construction activity by branches and regions, - Economic analysis: research and reports focused on the construction industry network, - Statistics: preparing database and performing data researches and analyses - Monitoring: real and permanent processes of searching for changes creation of the construction industry situation , - Construction market research: market capacity, its diversification and opportunities for entering. PAB supplies top professional research and services on individual orders in the range of: - Analysis of demand, supply and competition on construction and building materials market - Cost and price analysis on construction market and building materials as well - Construction and tendering procedure advisory services, - Research on competition level in the construction and building materials market, - Promotion of small and medium sized firms, i.e. producers and contractors Monographs – reports - Construction Monitoring: general and specific reports on status and changes in construction activity - Business conditions surveys of construction: analyses of tendencies and development trends – short term prognoses - Rankings of construction companies TOP 400 Polish Contractors - Polish Construction – Key Figures Journals - newsletters for contractors and investors - Prognozy Rozwoju Budownictwa -Prognosis of Construction Development - Polish Construction Surveys - Polish Building Materials Industry Surveys - Polish Construction Market Review.

24 © EUROCONSTRUCT Amsterdam, June 2006 The Euroconstruct Network

Aims ITIC – Instituto Técnico para a Indústria da Construção (Technical Institute for the Construction Industry) offers a wide range of services, such as the development of both technical and scientific activities in the Construction Industry field in order to improve economic analysis, technological innovation and the management and productivity of construction firms.

Status ITIC is a private and non-profit institute. Its members are different agents involved in the Portuguese Construction Industry, such as universities, professional bodies, and construction firms and materials producers.

Organisation ITIC structure relies on three main departments: Economic and Management Studies; Quality Methodologies; Training.

Staff ITIC’s activities are carried out by a multi-disciplinary team, including economists, engineers and legal advisors.

Funding ITIC is partially financed by its members. However, the major part of its funds is raised through contract fees with private firms and public bodies.

Activities ITIC undertakes technical and economic studies within the Construction sector. Our activities are set to meet the needs of construction firms through technical support to reinforce management, productivity and quality patterns and therefore issue economical and technical reports, and ensure the implementation of Quality Systems and Methodologies. We produce estimates and forecasts for the Construction industry based on macroeconomic analysis and field work. ITIC’ specialists base their work on accurate and proven methodologies. ITIC also aims to establish and reinforce technical and scientific relationships between Portuguese and foreign entities within the Construction industry. ITIC organizes national and international conferences, seminars, workshops and lectures. ITIC is prepared to provide a wide range of: Economic and statistical analysis; Construction Industry forecasting; Construction Market analysis.

ITIC – Instituto Técnico para a Indústria da Construção Rua Duque de Palmela, 20 . 1250-098 Lisboa - Portugal Tel: + 351 21 351 58 81 Fax: +351 21 351 58 89 e-mail: [email protected]

ÚEOS - Komercia, a.s., Ružová dolina 27, 824 69 Bratislava, Slovak Republic tel.: 00421/2/58100510; 58100526, 58100531 fax: 00421/2/58100500 e-mail: [email protected]; web-site: www.ueos.sk

PROFILE OF THE COMPANY

ÚEOS - Komercia, a.s. (Joint-stock company) is a private research and consultancy company, established in 1992 by transformation of former Ústav ekonomiky a organizácie stavebníctva, Bratislava (Institute of Building Economics and Organisation) founded in 1963.

At present, ÚEOS - Komercia, a.s. has 30 employees. Research, advisory and consultancy services are realised by appr. 25 experts. In addition we created circle of external co-operators - University experts and further specialists, which participates on solution of important tasks and projects.

Basic fields of company activities are as follows: o applied economical research and development, o entrepreneurial and economic advisory, o monitoring and field research, o evaluation of the assets of the companies, real estates, o public procurement, o classification of building works, o technical assistance, o development of economic and calculation software, o organisation of trainings, seminars courses and further professional undertakings, o commercial, intermediate and publishing activities.

ÚEOS - Komercia, a.s. solves scientific-technological projects and state projects, elaborates analytic, comparative and prognostic studies and further outputs, focused on development of selected areas of economy of Slovak Republic, inclusive creation of purpose oriented information systems and providing of statistic documents and indicators. ÚEOS - Komercia, a.s. also participate on creation of laws and other legislative standards; elaborates financial analysis and business plans of companies; elaborates restructuring projects of the companies; elaborates studies, associated with strategic development of the companies. ÚEOS - Komercia, a.s. also execute evaluation of property and real estates in the process of privatisation, liquidation and credit - awarding; deals with problems of public procurement and with creation of classification system of sorting of building production; elaborates professional publications and statistic materials in conjunction with creation of branch economies.

Services of ÚEOS - Komercia, a.s. are oriented on various types of consumers: • central and regional administration, municipalities, etc., • enterprises (small, medium, and large), • entrepreneurial associations and further similar subjects, • research and development organisations, • foreign firms and institutions.

ÚEOS - Komercia, a.s. is by her outputs successfully integrated into international research and advisory. Within OECD, EU, EUROCONSTRUCT and bilateral funding agencies it maintains systematic and continues co- operation with research and development institutions of various countries, including Germany, Hungary, Austria, Czech Republic and Poland. Selected business activities are realised in frames of important projects, funded by various supporting programmes (PHARE, USAID, World Bank, Structural Funds, Cohesion Fund, scientific- technological projects, etc.).

26 © EUROCONSTRUCT Amsterdam, June 2006 The Euroconstruct Network

Wellington 19 E-08018 Barcelona Spain tel. +34 933 09 34 04 fax +34 933 00 48 52 e-mail: [email protected] http://www.itec.es

The Catalonia Institute of Construction Technology, ITeC, is an independent non- profitmaking organisation that carries out its work in the area of operations intended to further the progress of Construction.

ITeC is structured into Areas, Research Programme and Services. The Constructive Process Area works on the creation of information, methodology and tools (software), which are applicable to the execution and management of each constructive process phase.

The Quality Area promotes, evaluates and endorses quality. Activities include ensuring quality in companies, the evaluation of technical specifications and product certification. This area includes activities related to Economic Construction Analysis.

Maintenance and Rehabilitation Area produces information, methodology and tools (software), for the planning and management of maintenance and for rehabilitation analysis and intervention.

The Research Programme is the infrastructure for research projects development. The following research lines are open:

• Environment and Construction • Construction and New Requirements • Existing Construction

The ITeC staff is made up of a multidisciplinary team of 100 persons.

Contact person: Bengt Henricson Contact person: Björn-Erik Öye

28 © EUROCONSTRUCT Amsterdam, June 2006 The Euroconstruct Network

K O F - Konjunkturforschungstelle der ETH Zürich ETH Zentrum WEH CH-8092 Zürich Tel. +41 1 632 42 39 Fax +41 1 632 12 18 [email protected] www.kof.ethz.ch

SWISS INSTITUTE FOR BUSINESS CYCLE RESEARCH, SWISS FEDERAL INSTITUTE OF TECHNOLOGY, ZURICH (KOF ETH)

Field of activities The Swiss Institute for Business Cycle Research (KOF) analyses the development of the Swiss economy from a shorter-term perspective (economic analyses and forecasts) against the backdrop of longer-term developmental trends (growth and structural change). The research projects, products and services provided by the KOF cover a broad spectrum of topics.

Regular surveys (in the form of business, investment and innovation tendency surveys) guarantee an up-to-date, comprehensive information system for the short- and medium-term analysis of the overall economy, for individual branches of industry, for the construction sector and for cantonal/regional studies. The main activities of the KOF (analysis and prognostics of the Swiss economy, search for leading indicators, research on political economic questions) are therefore based on the business tendency survey results. Constant research based on modern empirical methods (econometric models for the overall economy and for separate branches of industry, input-output models, time series analyses) assures that quality is maintained in the analysis and forecasting of cyclical developments and structural change.

At an international level, the institute works together with authoritative organisations like the OECD and the IMF. The Swiss Institute for Business Cycle Research is an active member of various international academic and research associations (CIRET, AIECE). Since 2000, the CIRET office is placed at the Swiss Institute for Business Cycle Research.

Status The Swiss Institute for Business Cycle Research is an institute of the Swiss Federal Institute of Technology (ETH), and as such an independent body.

Organisation The KOF ETH currently employs 31 researchers. Some of them also lecture at the Swiss Federal Institute of technology and at the Zurich university. The institute is structured in the following six research division:

Macroeconomic Models and Analyses in Switzerland; International Business; Business Tendency Surveys; Innovation, Growth and Employment; Market Momentum and Competition; Economic, Financial and Social Policy. Since 2000 the administrative headquarter of CIRET (Center for International Research on Economic Tendency Surveys) has been run by the KOF/ETH.

Construction Forecasting and Research, Experian’s Business Strategies Division, Nightingale House, 65 Curzon Street, London W1J 8PE. Telephone: +44 (0)20 7355 8201 Fax: +44 (0)20 7355 8277 E-mail: [email protected]. Web Site: www.business-strategies.co.uk

Construction Forecasting & Research (CFR) has for more than a decade focused on economic analysis of the construction and related industries. CFR is now a part of Experian’s Business Strategies Division, one of the UK's leading economic consultancies.

CFR works with clients in the private and public sectors, providing a better understanding of the industry in the context of the wider economic environment. We have a thorough and detailed knowledge of the factors that influence the various markets, types of work in the sector and its operational aspects. Our major strength lies in the location and analysis of construction related information to support clients’ need for insight on past trends and forecasts of future developments. We have a portfolio of well-known and respected publications, including the industry-standard national construction forecasts and the ‘Foresight’ regional forecasts. We also collaborate with our fellow Euroconstruct members to produce compatible forecasts for nineteen European countries on a six monthly basis. Our survey unit carries out a detailed monthly state of trade of survey in the UK for the European Commission.

Our work falls into the following categories: Industry forecasting: short, medium and long-term construction forecasts, on a national and broad regional basis. Workload surveys: regular surveys of construction activity, professional services, and industry structure. Market research: the use and provision of all relevant information to help clients assess market size, structure, competition and opportunities for entry or diversification. Economic analysis: research and reports on any aspects or sectors of the construction industry chain. Statistics: data search, analysis and advice on the use and relevance to clients of macro economic and construction industry statistics. Corporate research: company finance, profitability and future outlook. International comparisons: specifically of European construction markets. Seminars: presentations and lectures relating to any of the above areas.

Experian provides strategic support to organisations around the world. It helps its clients target, acquire, manage and develop profitable customer relationships. It does this by combining its advanced decision support and outsourcing services with information on consumers, businesses, motor vehicles and property. Experian works with more than 40,000 clients across diverse industries, including financial services, telecommunications, healthcare, insurance, retail and catalogue, automotive, manufacturing, leisure, utilities, property, e-commerce and government. Millions of consumers rely on Experian's consumer credit services to meet their financial management needs. Experian is a subsidiary of GUS plc and has headquarters in Nottingham, UK, and Costa Mesa, California. It has a 175-year history and unbroken sales growth over the past 23 years. Its 13,000 people support clients in more than sixty countries. Annual sales exceed £1.2 billion.

30 © EUROCONSTRUCT Amsterdam, June 2006 Austria

AUSTRIA WIFO- Austrian Institute of Economic Research www. wifo.ac.at

Margarete Czerny e-mail: Margarete [email protected]

Michael Weingaertler e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The latest medium-term prognosis for Austria predicts an annual growth of about 2 % for the period 2006 to 2008. This is slightly higher than the growth of the former EU 15. The prognosis assumes that despite the rising prices for raw oil and energy could raise the inflation rate only by 2%. The public households are characterised by a strict spending discipline. The medium-term goal is to cut the public household deficit to ½% of the GDP. The construction industry will support the economy as a whole. We are, in particular, already seeing first signs of a strong recovery of civil engineering production. An ambitious transport infrastructure program has been launched targeting both transport infrastructure as well as railway investments. Engineering construction will grow by approx. an annual 3.5% between 2006 and 2008 which is more than the economy as a whole. Recovery is also expected in the housing and industrial construction sectors. The entire housing construction, new housing and R&M, could grow by approx. 1½% a year during the prognosis period between 2006 and 2008. Total construction output will grow by 2.5% in 2006 following 1½% last year and another 2% in 2007 and 1.8% in 2008.

Construction Output by Sector until 2008

140

130

120

110 Index 2001=100 100

90 2001 2002 2003 2004 2005 2006 2007 2008

Residential (New) Non-residential (New) Building (Renov ation) Civ il Engineering

Source: WIFO, Euroconstruct, Amsterdam, June 2006

32 © EUROCONSTRUCT Amsterdam, June 2006 Austria

2 Macroeconomic Outlook

The overall Austrian economy will increase by approximately 2% in the forecasting period 2006-2008. The Austrian economy will grow slightly above the in the EMU area, both in the short and medium term. The Austrian companies enjoy a relatively high competitiveness from which especially exports will profit during the next years. The improvements of the transport infrastructure and the expected recovery of the housing sector will lead to higher construction activities. It is assumed that the phase of weak private household consumption is slowly coming to an end. This causes an improvement of the real disposable income, higher consumer demand and the willingness to invest should experience a revival. The expected growth dynamics will still be insufficient to lead to a significant drop in unemployment figures. Over the coming years labour supply will mainly continue to rise because of increasing foreign labour force. This will provide a medium-term stimulus for economic and employment development, particularly also in the construction industry which has a higher demand for labour due to increasing demand. The significant increase in labour supply shall, however, does not lead to a drop of the unemployment rate. Economic policy efforts in foster research should also have positive effects on the economy as a whole. Austria also benefits from EU enlargement as an important trading partner of these fast growing countries. In order to be able to survive in the international structural competition Austria focuses on increased investments, particularly into infrastructure and also into information and communication technologies as well as into innovation and education.

Macroeconomic Key Indicators in Austria to 2008 (Annual percentage change)

2003 2004 2005 2006 2007 2008 GDP 1,4 2,4 1,9 2,4 2,0 1,9 Private consumption 1,6 0,8 1,4 1,9 2,0 1,9 Unemployment rate 4,3 4,8 5,2 5,2 5,2 5,3 Inflation 1,3 2,1 2,3 1,7 1,9 1,9

Source: WIFO, Euroconstruct, Amsterdam, June 2006

3 Housing Market: Slow recovery of new residential construction

In 2005 the development of total housing construction output was declining, especially because of the downturn in new construction activities. On the other hand the demand for renovation and modernisation improved. This positive trend in renovation and modernisation is expected to continue. Total housing production, however, will rise slightly over the next years. The population growth requires a considerable expansion of the housing supply. The financial means of banks and building societies have sharply increased which shows an upward trend in housing construction development. The high demand in ecological construction raises investments, especially in renovation and modernisation. This trend is mainly pushed by the significant increase in raw oil prices. More and more households demand alternative energy supplies and the implementation of ecological construction methods and materials.

Austria is experiencing an increase of immigration with clear medium-term effects on housing demand. Housing demand will rise and the trough of the last few years should be overcome. A particular trend in housing is the increased demand for rental flats. Cheap flats for rent are mostly needed by the low income population. Production of one- and two-family houses is characterised by an increased demand for ecological and energy efficient construction. Building investments can contribute to the achievement of the Kyoto target through increased investments and is therefore subsidized by the public sector. The relatively low interest rates should continue to stimulate housing demand. Also the demand for renovation will continue to rise over the next years.

As a tendency demand increases in outskirt conglomerates whereas the flat resale market is rather weak, particularly in locations suffering from a poor infrastructure. EU-enlargement has increased immigration into Austria, particularly in the east and in the federal capital Vienna. Another development seems to be the creation of a new cross-border region in the north-easthern part of Austria, centering around Vienna and stretching into the neighbouring countries of Slovakia and Hungary. This area expects an increased construction activity over the next few years.

It is expected that the number of building permits will increase from 41.000 in 2005 to 43.000 in 2008. Due to the increased immigration, however, the current demand for new flats already totals approximately 45 000 a year. It is expected that the next few years will particularly face an increased production of multi-story apartment buildings for rent. There is a strong tendency towards intensifying building activities in the inner cities to prevent negative effects of segregation. All in all, in the outlook period of 2006 to 2008 an increase in real housing production by approx. 1½ % annually is forecasted.

34 © EUROCONSTRUCT Amsterdam, June 2006 Austria

4 Non-residential Market benefits from the economic recovery

Along with the general economic recovery non-residential construction will also revive during the prognosis period. The production of office buildings will increase up to 2008, even though it must be expected that not all ambitiously planned expansion plans are actually realised. Experts estimate that available surfaces in Vienna totalled approx. 250 000 m² in 2005. Plans exist to increase this stock by 280.000 m² in 2008. Other new buildings under construction include those in the area of the federal capital’s airport. Surface supplies, however, have already attained a relatively high level so that an additional increase by 280.000 m² in 2008 can rather be seen as an optimistic upper limit.

Increased investments along with the general economic improvement can also be seen in industrial and commercial building construction. Other building construction includes a „railway station offensive“. In Vienna alone major conversion work will start on two stations in 2007/2008. Construction will be commenced on a new central station, called Station Vienna, Europe central (former Southern Railway Station). The project volume is 435 mill. € in 2007- 2013. Along with the enlargement of the station new shopping and commercial premises will be created. Another major project is the renovation of the Western Railway Station “Westbahnhof” with a volume of about 30 mio. € in the period 2007-2009. The strong increase in the number of shopping centres in urban areas, however, also goes along with an increasing migration and relocation of old shopping streets in inner-city areas, urgently requiring a reorientation of less favourably situated shopping streets.

In public building construction investments are direly needed for universities. An ambitious development program has been launched and will be executed during the prognosis period by the "Bundesimmobiliengesellschaft" BIG.

In non-residential construction growth rates of 2.3% in 2006, 1 1/2% to 1.8% 2007 through 2008 are expected.

5 Civil Engineering Market: Vivid investments into transport infrastructure

The Austrian civil engineering sector shows the strongest growth perspectives, especially transport infrastructure. The strong expansion of the development program (Generalverkehrsplan) continues in 2006 to 2008. Investments into the expansion of the high-level motorway and high-speed road network alone totalled approx. 1.1 billion € in 2005. Plans exist for a further increase to approx. 1.4 billion € by 2008. The intensified development of transport infrastructure is mainly directed towards the eastern boarder. In addition to the ambitious road infrastructure development programs plans exist for investments to boost tunnel safety and to introduce comprehensive environmental discharge measures such as noise protection walls etc. Other plans include a comprehensive investment program into railway infrastructure including investments of approx. 1.3 to 1.4 billion € annually over the next few years. Air travel infrastructure will also see further investments with an increased building focus on the Skyline project (investment volume, approx. 400 million €, planned completion of the Skyline project by 2008). As air passenger volumes are expected to rise by 800.000 annually substantial investments into air travel are also expected in the long term. All in all, during the prognosis period 2006 through 2008 an increase of real civil engineering investments of approx. 3½% annually can be expected.

36 © EUROCONSTRUCT Amsterdam, June 2006 Austria

Country/Pays/Land: AUSTRIA Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) 1) Population 8 084 8 118 8 175 8 226 8 263 8 299 8 333 Bevölkerung

Households ('000s) 1) Ménages 3 379 3 405 3 440 3 472 3 500 3 527 3 552 Haushalte

Unemployed ('000s) 2 ) Chômeurs 232,4 240,1 243,9 252,7 249,7 254,7 258,2 Arbeitslose

Unemployment rate (%) Taux de chômage 4,2 4,3 4,8 5,2 5,2 5,2 5,3 Arbeitslosenquote

Change of GDP Variation du PIB 1,0 1,4 2,4 1,9 2,4 2,0 1,9 Veränderung des BIP (% change, constant prices)

Consumer prices (% change) Prix à la consommation 1,8 1,3 2,1 2,3 1,7 1,9 1,9 Verbraucherpreise

Construction prices (% change) Prix de la construction 0,7 1,0 2,3 2,3 2,3 2,5 2,0 Baupreise

Short term interest rate 3) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 4) Taux d' intérêt à long terme 5,0 4,2 4,2 3,4 4,0 4,3 4,8 Langfristiger Zinssatz

1) Statistik Austria, Population and Housholds projection for Austria 2001 to 2050 2) According to National definition (AMS) 3) 3-month interbank rate (Euribor) 4) 10-year goverment bonds for Austria

Country/Pays/Land: AUSTRIA Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 6 904 -6,4 6,0 -0,5 -2,9 1,5 1,2 1,5

Logement Renovation 4 528 -3,9 4,5 1,5 1,2 2,5 2,1 1,0

Wohnungsbau Total 11 432 -5,4 5,5 0,3 -1,3 1,9 1,6 1,3

Non-residential construction New 6 631 -2,4 3,5 -1,5 3,2 2,5 1,6 1,9

Bâtiments non résidentiels Renovation 3 496 -3,4 1,0 0,5 2,7 2,0 0,9 1,5

übriger Hochbau Total 10 127 -2,7 2,7 -0,8 3,2 2,3 1,4 1,8

Building New 13 535 -4,5 4,8 -1,0 0,0 2,0 1,4 1,7

Bâtiment Renovation 8 024 -3,6 3,0 1,1 1,8 2,3 1,6 1,2

Hochbau Total 21 559 -4,2 4,2 -0,2 0,7 2,1 1,5 1,5

Civil engineering New 5 700 4,7 7,8 3,0 4,2 4,0 3,9 3,0

Génie civil Renovation 1 410 3,2 3,5 1,0 3,2 1,5 1,4 1,8

Tiefbau Total 7 110 4,3 6,9 2,6 4,0 3,5 3,4 2,8

TOTAL CONSTRUCTION OUTPUT 28 669 -2,3 4,8 0,5 1,5 2,5 2,0 1,8

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 5,50 5,0 -5,2 2,5 2,5 2,0 2,0 1,5 Inländischer Zementverbrauch

38 © EUROCONSTRUCT Amsterdam, June 2006 Austria

Country/Pays/Land: AUSTRIA Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 16,0 15,6 19,0 19,8 20,0 20,2 20,5

Baugenehmigungen Familienhäuser Flats Collectif 26,3 22,5 21,0 22,0 22,0 22,3 22,5 Mehrfamilienhäuser TOTAL 42,3 38,1 40,0 41,8 42,0 42,5 43,0 Housing starts 1) 1+2 family dwellings Logements commencés Individuel 15,5 16,0 15,6 19,0 19,8 20,0 20,2 Baubeginne Familienhäuser Flats Collectif 24,7 26,3 22,5 21,0 22,0 22,0 22,3 Mehrfamilienhäuser TOTAL 40,2 42,3 38,1 40,0 41,8 42,0 42,5 Housing completions 1+2 family dwellings Logements terminés Individuel 17,0 17,0 18,0 19,0 19,2 19,3 19,5 Baufertigstellungen Familienhäuser Flats Collectif 24,9 25,0 24,3 23,5 23,6 23,7 24,0 Mehrfamilienhäuser TOTAL 41,9 42,0 42,3 42,5 42,8 43,0 43,5

Housing stock Logements existants 3 819 3 822 3 846 3 872 3 897 3 902 3 936 Wohnungsbestand

thereof second-homes dont résid. Secondaires 263 266 268 270 271 272 273 davon Zweitwohnungen

thereof vacancies dont inoccupé 291 294 295 294 294 294 293 davon leerstehend

Home ownership rate 2) Taux de propriétaires occupants 56,6 56,7 56,8 56,9 56,9 56,9 57,0 Wohnungseigentumsquote

1) assumption: housing starts = building permits 2) Cf. Appendix to the individual country report

Country/Pays/Land: AUSTRIA Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 303 7,4 2,9 -7,5 -6,2 10,0 15,0 10,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 838 -9,5 9,9 0,3 1,6 1,0 1,3 1,2 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 501 -6,6 0,9 0,3 3,7 2,0 1,8 1,9 Industriegebäude

Storage buildings Bâtiments de stockage Lagergebäude

Office buildings Bureaux 1 793 6,9 6,4 -4,1 1,2 1,5 2,2 2,1 Bürogebäude

Commercial buildings Commerces 1 911 -6,6 0,9 0,3 3,7 2,0 1,8 1,9 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 10 -1,6 0,1 -3,3 -0,8 0,5 0,6 0,5 Landwirtschaftsgebäude

Miscellaneous Autres 275 8,9 -3,0 -3,1 35,1 11,6 -17,9 -9,5 Sonstiges

Total Insgesamt 6 631 -2,4 3,5 -1,5 3,2 2,5 1,6 1,9

Million euro at 2005 prices, excluding taxes.

40 © EUROCONSTRUCT Amsterdam, June 2006 Austria

Country/Pays/Land: AUSTRIA Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 954 11,9 13,6 7,7 6,9 5,0 8,2 2,3 Verkehrsinfrastruktur Straßen Railways Voies ferrées 1 469 11,0 -4,0 17,0 10,0 5,0 4,0 4,0 Bahnanlagen Other transport Autres réseaux 929 8,9 25,7 -19,0 28,3 9,7 9,1 9,6 Übrige Vekehrsinfrastruktur TOTAL 4 352 11,0 10,0 4,0 12,0 6,0 7,0 4,5

Telecommunications Télécomunications 109 -26,7 -27,8 -4,7 1,9 1,5 1,0 2,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 038 -21,7 20,1 -3,9 -0,6 2,0 3,0 3,3 Energie-und Wasserversorgung

Other Autres 1 611 14,7 -2,7 4,1 -10,5 -2,1 -6,7 -3,2 Sonstiges

Total 7 110 4,3 6,9 2,6 4,0 3,5 3,4 2,8

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: AUSTRIA Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 136,6 0,3 1,6 0,8 1,4 1,9 2,0 1,9 Privater Verbrauch

Public consumption Consommation publique 43,7 0,1 1,7 1,0 1,3 1,3 0,5 0,1 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 50,9 -5,0 6,1 0,6 0,9 3,2 2,7 2,3 of wich construction

Stocks (contribution as % of GDP) Variations de stocks 2,2 Vorratsveränderung

Exports 1) Exportations 127,4 3,8 2,3 9,0 3,8 5,7 5,0 4,5 Exporte

Imports Importations 114,4 -0,2 5,6 6,2 1,8 4,9 5,0 4,2 Importe

GDP PIB 246,5 1,0 1,4 2,4 1,9 2,4 2,0 1,9 BIP

Standard National Accounts, gross figures Billion Euro at 2005 prices, excluding taxes 1) Of goods and services

42 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

BELGIUM Aquiec-Vkebi

Jean-Pierre Liebaert e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The economic situation and outlook for Belgium haven't hardly changed since the projections presented by Euroconstruct in December 2005. The weak growth anticipated for 2005 was confirmed, as was the acceleration that had, nevertheless, been anticipated in terms of the figures relating to the second half of the year. Consequently, the experts’ forecasts remain those of a growth figure. That figure is close to the potential of the Belgian economy for the whole of 2006 and then stabilises at that level (around 2.2%) for the whole of the forecast period.

On the other hand, publication of the figures relating to fluctuation in demand on the different construction markets during the second half of 2005 leads us to amend the figures suggested for construction, particularly in terms of distribution within the 2005-2006 period and among the different segments.

There is no doubt that the biggest correction relates to civil engineering. This seems to have missed its date with the local elections of 2006: a date that the experts had described as ambitious (a growth of 35% over the whole of the 2005-2006 period) but plausible from the point of view of previous dates of this kind. Publication of the figures relating to the first stage, which was also to be the most important, showed that the opportunity was lost. Some think that part of the road initially mapped out can still be covered in 2006. But the most cautious scenario involves keeping the prospect of growth unchanged for the 2006-2007 period, though on the basis of a much lower level of output than that still being envisaged just six months ago.

The other unpleasant surprise came from the demand for new non-residential buildings, which did not continue the anticipated realignment, despite it already having been revised downwards. It is becoming increasingly apparent that this realignment will be a very long process, to the extent that it will not take place within the forecast period (by the end of 2008). In addition, the reduction in the number of utility building projects is making output, particularly in some sectors, increasingly dependent on one or other or just a few large project(s) which conceal the underlying momentum. But that momentum remains that of a realignment, sustained, among other things, by the increase in business investments.

Fortunately, a good piece of news makes up for the effect of the first two quite strongly in terms of the output of the whole of the construction sector. Demand for new dwellings, once again, proved surprisingly robust. Even if it stabilises at this level before falling by 5% in 2007, the periods necessary to produce the units authorised for the 2005-2006 period will sustain output up to and including 2007, with a strong increase in 2006. This year adds up to a net increase in terms of work begun and the completion of new dwellings.

Overall, despite a slip from 2005 to 2006, anticipated growth over the whole period remains almost unchanged (more than 10%), before stabilising during the course of 2007-2008. Those years will be characterised by a decline in civil engineering and, over the whole period, by a stabilisation in the construction of new dwellings. The latter will, to a fairly large extent, have established itself as the engine for growth in construction over the 2004-2006 period.

44 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

2 Macro-economic Outlook

Since autumn 2005, experts have agreed on a trajectory for the Belgian economy consisting of a gradual reacceleration of growth. Thus, in 2006 that growth is still expected to return to a level close to its potential (from 2.2 to 2.3% a year).

In the long term, the anticipated performance levels of the Belgian economy are unchanged with respect to previous publications. Even the way in which that economy will return to its potential is almost the same as expected 6 months ago. The weak growth recorded last year (1.5%) is fairly consistent with the forecasts that the specialists had drawn up at the end of the year, counting on an upturn during the second half of the year. In the wake of Europe’s economic recovery, the growth of Belgian GDP rose from 0.1% in the first quarter to 0.6% by the end of the year.

Today experts believe that quarterly growth will stabilise at this level throughout 2006 (with a slight slowing-down during the second half of the year). This would take growth to 2.2% for the whole year.

However, the anticipated stabilisation of quarterly growth goes hand in hand with a redistribution of roles among growth factors. While domestic growth sustained the Belgian economy in 2005 (to the extent of advancing it more than the European average), growth is expected to be more balanced in 2006. That is to say, it will probably also be the result of export development.

World trade accelerated strongly in 2005 and is expected to continue in the same vein during the first half of this year. This is obviously very advantageous for an open economy such as Belgium’s, in which trade with the rest of the world (import-export average) represents the equivalent of 85% of GDP. Thus, for the first time for many years, exports should increase more rapidly than imports and, therefore, make a positive contribution to growth.

The Federal Planning Bureau is of the view that, at the same time, growth in domestic demand is likely to slow down and fall to 1.6% (compared to 2.1% in 2005). This slow-down appears to be exclusively attributable to business investments, which are expected to become more stable, after catching up appreciably in 2005 (+8.5%). The disappearance of the booster effect linked to this catching-up should, however, be partially offset by the growth in public investments and private consumption.

The traditional cycle of local investments will probably reach a peak in this local election year, although the impetus linked to this date will probably prove to have been less intense than usual over the whole of the pre-electoral period (2005-2006). Whatever the case, the latest forecasts of the Federal Planning Bureau point to a more or less marked increase in public investments, but still more than 5% in 2006.

As far as private consumption is concerned, experts anticipate a growth of 1.6% in 2006, which is expected to result from a rise in disposable household income following the effects of the tax reform and the increase in employment.

The more sustained economic growth anticipated in 2006 should create more jobs and thus initiate a reversal of the unemployment curve. With the number of new jobs exceeding the spontaneous increase in the working population, the number of unemployed is likely, finally, to fall, although only tentatively (-5600 units).

Assuming that oil prices stabilise, inflation is likely to fall in 2006 and return to 1.8%, compared to 2.8% in 2005. This fall can be explained, among other things, by the moderate course of wage costs. However, it is not expected to prevent an increase in nominal interest rates as these were so low with respect to inflation in 2005. They attracted a rise in effective interest rates, which, moreover, has already begun on the financial markets during the first few months of 2006.

In the longer term, the Belgian economy is expected to realign itself even more with its general trend. Thus for example, general economic growth should stabilise at around 2.2%, i.e. at a level close to its growth potential. At this pace, the number of new jobs should remain higher than the increase in the working population, so the fall in unemployment can continue, though at a moderate pace. Provided there are no ‘oil shocks’ and the course of wages remains moderate, inflation should stay at around 1.8%. This would not prevent interest rates from continuing to recover, since the financial markets should continue to regain a balance around effective interest rates more in line with the usual levels.

The anticipated growth will benefit further from foreign trade support, but to a lesser degree than in 2005, with the pace of the increase in imports moving closer to that of exports. On the other hand, domestic demand is expected to strengthen as a growth factor, at least in the private sphere. The cycle of investments by the local authorities traditionally enters its downwards phase in the post-electoral year. Thus, experts expect a drop in public investments of around 10% in 2007. Conversely, business investments are likely to be stepped up again, as is household consumption, supported, among other things, by the growth in disposable income due to economic growth and the increase in employment which that growth brings in its wake.

46 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

3 Housing Market

There were pleasant surprises in store in 2005 in terms of the growth in demand for new dwellings. After increasing by 15% in 2004, no-one was expecting that demand to repeat such a performance so soon. But it did! Demand for new dwellings rose sharply in 2005 (by 14%), touching on 60,000 units (58,800 according to INS estimates). Thus, it settled at a level unparalleled over the last 25 years, bringing it close to the levels it reached before the crisis in the eighties, in the days when public housing construction was much more developed than it is today.

Such figures, which add up to an increase of more than 40% in three years (2002-2005), are obviously on an altogether different scale from the economic development characterised by continuing gloom, as evident in the average growth of this period, which is much lower than its potential.

The development in demand therefore appears to be the result of the equally unexpected course of interest rates. Mortgages became even more attractive than in 2004, thanks to a new drop in rates and more competitive options with fixed monthly payments compared to the less expensive but riskier variable alternatives. In addition, longer-term loans (25 or 30 years) were introduced into the market, offering new prospects to those for whom a monthly payment linked to a 20-year mortgage was still unaffordable.

The reaction of demand to these new lending conditions was more robust in the case of apartments than one-family homes, further increasing the redistribution of demand between these two types of dwellings in favour of apartments. Today, they account for nearly 54% of new dwellings, compared to only 45% in 2000. But they are still well below the level of their average market share in the Euroconstruct zone (58%), which has also been rising over the last few years. The increase in the share of apartments appears to be the second factor to help the development of demand for new dwellings, at a time when the economic environment, marked by a low increase in disposable household income and a rise in unemployment, was not particularly buoyant. Apartments are, on average, less spacious and less expensive than one-family homes. The choice of this type of dwelling therefore increases the number of households which, under given economic conditions, have a financial capacity that enables them to access a new dwelling.

For these projections, no new increase in the share of apartments was assumed, although it cannot be ruled out given the margin of growth they are maintaining with regard to their market share in the rest of the Euroconstruct zone (58%). Unless that assumption is made, this capacity of households to finance a dwelling is not expected to improve further in the near future.

Experts expect the increase in growth to remain limited. A strong increase in disposable household income is not, therefore, part of the most likely scenario. They are counting on an annual increase in the order of 1.8% by 2008. A rise in interest rates, which is detrimental to solvency for housing needs, is, on the other hand, part of such a scenario. So much so that it has already begun and has even led to rising mortgage rates. If inflation remains low – which assumes, among other things, that oil prices remain stable – experts think that the rise in rates will be slow (20 to 30 base points on an annual basis) as from 2006 and throughout the forecast period.

In this economic context, and taking into account the reaction time of demand to any change in decision-making factors, stabilisation appears to be the most likely outcome for 2006.

In the longer term, however, it seems unlikely that a fall of around 5% will be avoided, due to the rise in interest rates. In this respect, there is a need to take into account not only the effect of the rise in rates on the monthly payment of a 20-year home loan, but also the fact that longer-term loans will become less attractive (because the difference in monthly payments with a shorter-term loan decreases as the interest rate rises). Finally, it is essential not to overlook the fact that the psychological effect linked to lowest rates – ‘this is the time to build’ – disappears when they rise again.

Finally, by 2008, it is fair to hope that the fall in unemployment, which is then expected to last for the duration, will be able to offset the effect of a new rise in interest rates.

This scenario appears to be the "middle-ground" between two other more extreme ones: one based on an acceleration in the rise in interest rates, with a faster deterioration in demand as a consequence; the other based on new increases in the market share of apartments and putting demand at a higher level.

Despite the "middle-ground" nature of this scenario and, in particular, the stabilisation of demand expected for 2006, it is fair to hope for an acceleration in the output of new dwellings for this year. This situation appears paradoxical at first sight but is the very logical result of output periods and the fact that growth in demand was interrupted over the whole of the period 2003-2005. 2006 will be marked by an increase in work begun (reflecting the growth in demand experienced in 2005 and its stabilisation at this level). At the same time, the year will see an almost equivalent increase in the completion of dwellings under construction, most of which were begun in 2005.

In the longer term, output in 2007 will again be sustained by the strong demand of 2006 but activity will begin to slow down sharply, pointing to a fall in 2008, following the decline in demand expected in 2007.

For residential construction as a whole, variations in the output of new dwellings will, as usual, be absorbed by demand for renovation and maintenance work. For the most part, demand for renovation consists of work that does not require planning permission. It provides a cushion, accounting for 55% of residential output in Belgium, which is more stable (since 2002, planning permissions have, for example, increased half as slowly for renovation as for the construction of dwellings) and follows an upwards trend. This stability can be counted on all the more since fears of a rise in the rate of VAT applied to this type of work have disappeared, at least for the medium term. This is because Europe is allowing the continued application of a lower rate until a comprehensive agreement on VAT is concluded.

48 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

4 Non-residential Market

In contrast to the residential market, there were no pleasant surprises in the trend in demand for utility buildings. Instead, it caused amazement time after time.

At the root of this situation is the robustness with which demand reacted to the drop in business investments during the years 2002-2003. Declining by 30% in Belgium, the output of new utility buildings had, at that time, stood out starkly from the European average (-6%). It seemed inevitable that such a gap, when the economic environment was not very different, would call for a realignment of the Belgian situation. And that realignment did, for that matter, begin in 2004. From this perspective, the realignment had to continue in 2005 and therefore give rise to an appreciable increase in demand. Unfortunately, this scenario did not come about as such. The number of new buildings authorised even fell by around 1.5% and, if it had not been for one huge-scale project, the volume of new buildings authorised would have declined even further.

This is a surprising situation, which seems to point to another specifically Belgian feature, namely the fact that the share of business investments devoted to the construction of new buildings will probably remain low, at least initially. This is due, among other things, to a still fairly low rate of use of production capacities in industry.

The above-mentioned need for realignment, however, is expected to continue to underlie the basic momentum. And this will probably be sustained by the better economic prospects that already encouraged businesses to increase their investments in 2005 (+9%). It should, therefore, lead to an increase in the demand for new utility buildings in 2006.

It should be noted, however, that the basic momentum also appears to be buried among big projects. In this respect, it should be said that the average size of projects has doubled in 10 years and that the number of projects has fallen accordingly. All types of buildings together, they now barely exceed 4,000 units for the whole of the kingdom.

Consequently, the number of buildings for one or other purpose is becoming very limited, to the extent that one or other or a few large-scale project(s) completely disrupt the trend of this market segment.

This has always been the case for buildings intended for health or education purposes, for example, but it is also becoming so for office buildings or buildings intended for the service sector. Thus, office buildings have benefited from large projects in Flanders, which will again sustain output in 2006 to some extent, before it feels the effects of their completion in 2007, unless comparable new large-scale projects come about meanwhile. Conversely, buildings for services are, for the time being, suffering from a lack of large-scale projects, particularly in Wallonia. And it will probably take until 2007 for the more normal trend in demand to inject new growth back into this sector.

All in all, it is probably in industrial buildings where development will be most in step with the economic trend, i.e. a stepping-up of investments linked to better economic prospects and, therefore, a revival in the rate of use of production capacities.

Conversely, buildings for sports purposes, included under miscellaneous in these projections, are apparently the ones for which development appears most disrupted by large projects. In December permission was granted to carry out a vast ‘Snow Games’ project, accounting alone for 10% of the total volume of new utility buildings authorised in 2005. The figures relating to it are breathtaking (5 ski slopes from 300 to 850m long, 100,000 m2 of roofing and an investment of 86 million euro), with the whole thing to be completed in under 2 years for the opening in late 2007. © EUROCONSTRUCT 49 Belgium Amsterdam, June 2006

The impact of renovation on output of a non-residential nature appears quite difficult to make out. As for housing, demand for renovation appears more stable than for new construction but, over the last few years, a sort of "see-saw" phenomenon seems to have established itself between these two market segments. Thus, development in demand for new constructions could affect the potential for growth in renovation.

Whatever the case, although non-residential seems to have been left stranded by and disconnected from the rest of Europe, there is no need to fear a drop in non-residential output for 2006. But, at the end of the forecast period (2008), output is still expected to be lagging behind by around 10% compared to the level it had reached early in the decade.

50 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

5 Civil Engineering Market

In Belgium, 2006 will be local election year. Traditionally, these elections attract intense investment effort on the part of the local authorities. That is to say, the approach of the ballot heralds the return to the peak in the cycle of investments by local authorities. This is a significant event given that local authorities make nearly 50% of public investments, generating 80% of civil engineering orders.

So although it is clear that civil engineering had, and still has, an important date to keep in 2006, the exact nature of that date is obviously difficult to anticipate. Varying in scale and showing more or less late phases of acceleration, no two successive investment cycles of the local authorities are alike. However, a study of these cycles had led forecasters to promise a big date for civil engineering.

It is true that the electoral impetus has had a tendency to become more intense over the course of the cycles and that, in this context, an increase in investments of around 35% in 2006 does not appear unrealistic. The impetus linked to the 2000 elections had already reached 20% and maintaining the rate of investment compared to GDP, over the whole of the cycle, required a bigger impetus.

However, a number of observers have still expressed doubt as to the ability of local authorities to repeat their traditional investment effort in 2006. In their view, the financial difficulties of many district councils, among other things due to the additional responsibilities entrusted to this level of power during the 2000-2006 district legislature (mainly the cost of policy reform), compromise the usual scenario.

And, therefore, the all-important date predicted by the experts does not seem to be materialising. The acceleration in public investments initially promised for 2004, then deferred until 2005, was clearly not as robust as anticipated as, according to ICN estimates, public investments actually rose by only 6.5% in 2005.

In this context, the outlook for this year must be cautious. This is particularly true since, on the basis of the initial projections of the Federal Planning Bureau, though optimistic in this regard, an upturn in civil engineering of only 5 to 6% could be expected for 2006. That is to say, unless the local authorities find unsuspected resources for this year, civil engineering will, at best, continue in the same vein before starting to fall in 2007.

Very logically, it is roads (highway excepted) works, a field in which the district authorities are most active, which will see the most uneven development by 2008. Continuing, in 2006, though less intensively, the upturn begun in 2005, they are expected to show a fall over the whole 2007-2008 period, most of which will probably be concentrated in 2007.

Other civil engineering works are expected to follow a course of development which, like previous years, remains fairly gloomy, not even following the pace of growth in GDP. Meanwhile the rate of public investments is, in relation to GDP, already one of the lowest in Europe.

APPENDIX – DEFINITIONS

Table 1 • Unemployment and unemployment rate are given according to the Eurostat concept

Table 2 • Construction output includes only the production of construction companies. Self-production (Do It Yourself and construction output producing construction goods for their own use, such as the railway companies for instance) is excluded, as is the black economy

Table 3 • The definition of "1+2 family dwelling" means a one-family house as opposed to a "flats", which, in fact, indicates ‘apartments’. • Housing stock: at the beginning/end of year? • Second homes • Vacancies • The "Home ownership rate" is calculated as the ratio between the number of households occupying a dwelling that they own and the total number of households. •

Table 4a • Storage buildings are counted with industrial buildings.

Table 5 • Stocks: o For 2005, the amount corresponds to the contribution of variations in stock to GDP o For the years 2002 to 2006, the percentages correspond to the contribution made by the development of variations in stock to growth. As for growth, this contribution is expressed as a percentage of GDP. • Volume Private consumption, public consumption, etc: at market prices, VAT included or excluded?

Extra • VAT is excluded. Normal rate is 21% (6% for renovation of dwellings older than 5 years) • Sources of data: • Historical series: Institute for National Statistics, Institute for National Accounts and Construction Confederation (estimates) • Forecast and Outlook: Federal Planning Bureau and Construction Confederation

52 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

Country/Pays/Land: BELGIUM Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 10 333 10 376 10 421 10 457 10 479 10 473 10 494 Bevölkerung

Households ('000s) Ménages 4 289 4 323 4 357 4 388 4 414 4 427 4 452 Haushalte

Unemployed ('000s) Chômeurs 362,2 399,8 413,8 417,0 411,4 406,6 395,5 Arbeitslose

Unemployment rate (%) Taux de chômage 7,5 8,2 8,4 8,4 8,2 8,1 7,8 Arbeitslosenquote

Change of GDP Variation du PIB 1,5 0,9 2,6 1,5 2,2 2,2 2,2 Veränderung des BIP (% change in real terms)

Consumer prices (% change) HICP Prix à la consommation 1,6 1,6 2,1 2,8 1,8 1,9 1,7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2,4 3,7 0,9 4,3 4,6 2,4 2,2 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 5,0 4,2 4,1 3,4 3,6 4,0 4,2 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). 3) 10-year goverment bonds (or equivalent).

Country/Pays/Land: BELGIUM Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 5 501 -5,0 -0,2 8,7 7,4 13,2 2,3 -2,0

Logement Renovation 6 311 2,2 2,0 2,0 2,0 1,9 1,9 1,9

Wohnungsbau Total 11 812 -1,1 1,0 4,9 4,5 7,2 2,1 -0,0

Non-residential construction New 5 993 -15,7 -16,9 8,6 5,5 7,6 0,4 3,8

Bâtiments non résidentiels Renovation 3 953 2,2 2,9 2,4 2,3 2,4 2,4 2,2

übriger Hochbau Total 9 946 -9,9 -9,6 6,0 4,2 5,5 1,2 3,2

Building New 11 494 -11,4 -9,8 8,6 6,4 10,3 1,3 0,9

Bâtiment Renovation 10 264 2,2 2,3 2,2 2,1 2,1 2,1 2,0

Hochbau Total 21 758 -5,6 -4,1 5,4 4,3 6,4 1,7 1,4

Civil engineering New 3 972 -4,3 0,6 -1,5 7,4 6,5 -10,0 -1,8

Génie civil Renovation 965 -6,4 -1,7 -3,8 4,9 4,0 -12,1 -4,2

Tiefbau Total 4 937 -4,8 0,1 -2,0 6,9 6,0 -10,4 -2,3

TOTAL CONSTRUCTION OUTPUT 26 695 -5,4 -3,3 4,0 4,8 6,4 -0,5 0,8

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 5,80 -3,7 -1,0 5,1 0,9 3,7 -1,0 0,0 Inländischer Zementverbrauch

54 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

Country/Pays/Land: BELGIUM Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008 Building permits 1+2 family dwellings Logements autorisés Individuel 20,9 22,2 24,5 27,3 26,6 24,8 24,0 Baugenehmigungen Familienhäuser Flats Collectif 20,7 22,6 27,1 31,5 32,3 31,6 32,1 Mehrfamilienhäuser TOTAL 41,6 44,8 51,6 58,8 58,9 56,4 56,1 Housing starts 1+2 family dwellings Logements commencés Individuel 20,1 21,1 22,4 24,6 25,4 23,6 22,6 Baubeginne Familienhäuser Flats Collectif 17,9 21,5 23,3 26,9 29,1 28,3 28,5 Mehrfamilienhäuser TOTAL 38,0 42,6 45,7 51,5 54,5 51,9 51,1 Housing completions 1+2 family dwellings Logements terminés Individuel 21,4 20,1 22,0 23,0 25,6 25,2 23,6 Baufertigstellungen Familienhäuser Flats Collectif 18,4 18,5 22,5 24,3 28,4 29,3 28,7 Mehrfamilienhäuser TOTAL 39,8 38,6 44,5 47,3 54,0 54,5 52,3

Housing stock Logements existants 4 693 4 733 4 776 4 826 4 879 4 929 4 978 Wohnungsbestand

thereof second-homes dont résid. Secondaires 114 115 115 116 117 117 118 davon Zweitwohnungen

thereof vacancies dont inoccupé 290 295 304 321 348 384 408 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 65,2 65,4 65,6 65,8 66,1 66,6 66,9 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: BELGIUM Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 357 -4,0 -2,5 17,4 11,4 1,9 -12,2 -3,2 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 383 -36,1 -35,3 4,2 51,8 47,0 8,8 0,3 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 473 -37,6 -8,6 7,9 -3,1 9,4 6,1 4,9 Industriegebäude

Storage buildings Bâtiments de stockage Lagergebäude

Office buildings Bureaux 1 766 -16,9 -14,6 -1,5 6,7 2,4 -15,4 8,6 Bürogebäude

Commercial buildings Commerces 948 32,7 -33,3 21,1 -4,0 -7,3 19,6 4,5 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 374 3,8 -17,8 10,5 21,1 35,9 2,8 1,2 Landwirtschaftsgebäude

Miscellaneous Autres 693 11,9 -7,2 19,4 8,5 3,6 1,8 -1,8 Sonstiges

Total Insgesamt 5 993 -15,7 -16,9 8,6 5,5 7,6 0,4 3,8

Million euro at 2005 prices, excluding taxes.

56 © EUROCONSTRUCT Amsterdam, June 2006 Belgium

Country/Pays/Land: BELGIUM Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier Verkehrsinfrastruktur Straßen Railways Voies ferrées Bahnanlagen Other transport Autres réseaux Übrige Vekehrsinfrastruktur TOTAL 3 050 -4,5 0,3 -1,7 12,1 8,1 -16,6 -3,9

Telecommunications Télécomunications Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 012 -6,2 -1,5 -3,5 -1,9 1,3 -1,2 -1,3 Energie-und Wasserversorgung

Other Autres 875 -3,6 1,3 -0,8 0,9 4,2 1,6 1,5 Sonstiges

Total 4 937 -4,8 0,1 -2,0 6,9 6,0 -10,4 -2,3

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: BELGIUM Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 158,9 0,8 0,9 1,5 1,2 1,6 1,8 2,0 Privater Verbrauch

Public consumption Consommation publique 69,0 2,9 2,5 2,0 1,1 1,8 2,6 2,1 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 63,6 -2,3 -0,7 4,2 8,0 1,3 1,8 2,4 of wich construction

Stocks (contribution as % of GDP) Variations de stocks 0,0 0,1 -0,0 0,3 -0,6 -0,1 -0,1 -0,1 Vorratsveränderung

Exports Exportations 260,3 1,2 2,9 6,2 2,2 4,7 5,9 5,7 Exporte

Imports Importations 253,4 0,1 3,1 6,4 2,9 4,1 5,8 5,8 Importe

GDP PIB 298,4 1,5 0,9 2,6 1,5 2,2 2,2 2,2 BIP

Standard National Accounts, gross figures.

58 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic

CZECH REPUBLIC ÚRS PRAHA,a.s. www.urspraha.cz

Barbora Menclová e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The construction industry in the Czech Republic is one of main branches of the national economy and can be regarded as one of the main pillars of the economy. At present it creates 7% of gross domestic product and employees around 9,5% of workers in the civil sector.

Construction is important as a consumer of energy, materials and products. One result of its activities is a negative impact on the environment; for that reason upholding the principles of sustainable development has special significance for this sector. Construction has to a marked degree a national and regional character; it is particularly self-sustaining at the national level and, as a sector, is considerably diversified. In substantial terms it is the main creator of buildings and constructions, which are one of the main components of gross fixed capital (in 2003 buildings and constructions accounted for 48.3% of gross fixed capital, and since the year 2000 it’s share has increased by almost 5 percentage points).

The development of the organisational structure - characterised by initial demonopolisation of parts of the organisational structure and subsequent privatisation - created the kind of size structure of companies common in countries with a market economy. This restructuralisation of the production base was necessary not just for the creation of a competitive environment; it was also necessary for the quick adaptation of changes in demand and the maintenance of the level of employment, which – even given fluctuations in the volume of construction investment in the course of the last decade – has retained a satisfactory stability and has not seen a marked decline. It appears construction will enjoy future employment stability, with the possibility of increase if the conditions are created for the further development of construction work.

Neither can we overlook its multiplication effect, which is rooted in the fact that it influences demand for products in other segments (construction consumes CCA 6.3 billion EUR a year in products and services from other sectors). Investment in construction work leads to threefold growth in output in the whole economy, a rise in employment and other benefits.

Construction firms in the Czech Republic adopt the most up-to-date technology and make use of the most modern engineering; that is partly because foreign companies have significant stakes in the biggest Czech firms.

Since the year 2000 there has been, in conjunction with overall economic growth, a boom phase, with relatively high dynamic growth. Construction has in this way played an important role in the renewal and sustentation of the dynamic growth of the whole economy. In recent years it has been among the most dynamically developing segments.

The development of demand for construction output reacts to the economy’s increased performance. In 2005 GDP grew by 5.9%, while gross creation of fixed capital grew by 4.1%. Construction output, which is sensitive to the economic cycle, grew at a faster tempo than the growth of the economy as a whole. Growth of performance of the Czech economy in 2005 is accompanied by growth in investment activity, especially in the area of the construction part of tangible investments.

Around 270 thousand legal entities (including the self-employed) were active on the construction market, with the main area of activity in building. The number of construction firms employing more than 20 workers or more is almost 2,500.

Construction in the year 2005 is again among the most dynamic segments of the economy, most significantly in share of employment (CCA 457 thousand employees) and in the creation of GDP.

60 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic

Due to the marked growth of the sector, and its complex ties with other sectors which use its products, it positively influences both demand for output in those sectors and also the level of employment. Czech construction’s results show that the branch is competitive even in new conditions.

The growth of the construction industry in 2005 was positively influenced by both foreign and domestic investors in the private business sector and in the public sector. It appears that 2006 too will see a continuation of this growth trajectory for Czech construction, even though the growth of construction output will be at a lower level.

Czech construction is doing its best to achieve a more favourable comparison with the European Union in the areas of infrastructure, the state of the country’s transport network, flat complexes, environmental constructions, civic facilities and buildings in the fields, trade and services. The hitherto neglect of maintenance and repairs to the housing stock has also led to an extensive need for construction work. Plans prepared for individual areas (individual segment strategy) confirm that development, concerning as they do: - a strategy of renewal and development of the transport network, - fulfilling the plan for development of housing, including regeneration and repair of the existing housing stock (specifically the problem of regenerating pre-fabricated blocks of flats) - satisfying the demand of the entrepreneurial sector, including foreign investors (investment incentives), - filling the gaps in the standard of environmental buildings (water cleaning plants, dealing with previous damage to the environment, etc.).

Balance calculations expected in the next 10 – 15 years - 28.2 billion EUR in the transport investment sector - 15.7 billion EUR in the housing repair and maintenance sector - around 28.2 billion EUR in the construction of up to 500 thousand new flats -around 25.1 billion EUR in the entrepreneurial sector of construction investment

Total investment expansion exceeds 94 billion EUR, which will lead to growth of construction output by at least 5% annually compared to the present level.

The year 2005 found Czech construction in very good condition. Construction output grew by 4.2% year-on-year in real terms. That was despite the fact that there was great differentiation in that growth in individual periods (in the first quarter of 2005 it fell by 1.2%, in the second grew by 0.9%, in the third by only 7.5% and in the final quarter by 9.6%).

The marked development in demand for construction output also influenced the initial economic position of construction firms as the year 2006 began.

The following is a list of the 10 biggest construction companies in the Czech Republic in terms of receipts:

Receipts for construction Profitablity activities as a Receipts of Receipts percentage of Placing Company (billion EUR) % receipts 1 Skanska CZ a.s. 989,2 3.8 87.7 2 Metrostav a.s. 657,4 4.1 96.4 3 Stavby silnic a železnic, a.s. 615,0 3.5 93.4 4 STRABAG a.s. 485,7 4.2 ** 5 ŽS Brno, a.s. 271,0 1.0 97.9 6 IMOS Brno, a.s. 176,1 2.6 99.6 7 HOCHTIEF VSB a.s. 158,7 3.7 10.0 8 GEOSAN GROUP a.s. 137,0 4.0 88.7 9 Subterra a.s. 135,3 0.2 99.4 10 VCES a.s. 103,6 1.9 96.4

One legacy of the previous era is the continuing low absolute level of work productivity in terms of construction output per worker in the sector. But regardless of this, one of the factors behind the overall growth of volume of construction output in 2005 was the growth in work productivity, and that despite a 4.9% increase in the total number of workers. The fact that the 0.2% growth in productivity in construction did not exceed the 4% average wage growth (635 EUR a month in companies with 20 or more employees) can be regarded as not so positive. That ratio is expected to be maintained in the coming years.

In the forthcoming period construction is expected to see CCA 6% growth. It is expected that this positive trend will be confirmed by growth of building output in the period ahead. Forecasts are based on the expectation that use will be made of European Union investment funds, mainly supporting infrastructure construction

The number and volume of newly signed building contracts is another indicator as to future trends in construction. The volume of newly signed contracts in the 4th quarter of 2005 totalled 6.2 billion EUR, an fall of 1.3% on the previous year’s figures. In terms of volume of newly signed contracts in construction the biggest growth has been seen in non-residential building not designed for production.

At the end of the 4th quarter of 2005 construction firms with 20 or more employees – mainly in the area of underground and civil engineering construction and preparatory work for construction – had a total of 15.5 thousand closed contracts. Of that total, 94.5% of the work is in the Czech Republic, while the other 5.5% is abroad. Of total domestic contracts, public contracts account for more than 69%.

In the first half of 2005 closed contracts amounted to 6.8 billion EUR, a rise of 11.5%. Of that total, 97% of contracts are for work within the Czech Republic, of which 71% is made up of public contracts. In the following six months 47.4% of the volume (82.6% of the number) of closed contracts should be realised. In the next six months (i.e. the first half of 2006) another 26.3% of volume (12.4 percent of the number) should be completed. The volume of newly closed contracts has grown the most in the areas of water industry constructions and engineering construction; that is due to the ever growing importance of anti-flood measures

62 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic and extensive construction work on the transport infrastructure (with respective growth rates of 123.5% and 119.5%).

The outlook for demand in construction work in the near future is satisfactory.

2 Macro-economic Outlook

Financial results for the last year have been influenced by the change of economic conditions which accompanied the Czech Republic’s accession to the European Union on 1.5.2004. The impact of those changes was seen most in a broader interaction with international currencies, which was apparent in a marked growth in import and export of goods.

The Czech Republic is the most open of the new EU countries. It has the highest share of foreign capital in building products companies, especially the production and distribution of building materials. However, the protectionist labour policies of the EU countries will not allow Czech construction to reach its optimal position on the European market.

After years of recession the Czech economy turned around in the year 2000 with gross domestic product growing by 3.3%. Even though it was primarily influenced by growth in household consumption (private consumption) an increase in reserves and increased investment also played a part. That positive trend continued in 2001 when GDP grew around the same in percentage terms (3.1%). This favourable tendency was maintained in 2002, when growth in GDP was expected to reach 3.5 to 4%. The positive trend received a setback with the floods which hit many parts of the Czech Republic in August that year, but despite that year-on-year GDP growth still reached 2.0%. Compared to previous years GDP slowed slightly, but did not come to a halt, as had been forecast in the first post-flood calculations. That was due above all to a growth in industrial production (of 4.8%), an increase in private consumption and a rise in investment and reserves. By contrast, reducing factors included public consumption and a passive foreign trade balance. In 2003 the economy had not fully overcome the events of the previous August, but nevertheless GDP revived and reached almost 4% (3.7%). This trend hold in 2004, when GDP grew 4.0%year-on-year in real terms.

Gross domestic product grew 6.0% percent year-on-year in real terms in 2005. GDP increased to 98.4 billion EUR in market prices. The investment activities of economic entities and households supported the year-on-year rise in demand, which was projected into higher creation of gross fixed capital (+ 3.7%).

Overall expenditures on final consumption grew by 2.0% compared to the previous year, with its components seeing differentiated development; while household expenditures grew by 2.6%, the outlay of institutions in the government sector grew by 0.8% than the previous year.

The nominal disposable income in the household sector at market prices reached 51.1 billion EUR and grew 3.8% year-on-year. Of common incomes, households spent 62.0% on individual consumption and 32.8 percent on common expenditures, with 5.2% making up savings. The main income component – family wages – increased by 5.7%. Households spent 1.7 billion EUR more than in 2004 at market prices, which was set against year-on- year growth of 3.6%. Gross savings fell by 265.2 million EUR to 4.0 billion. The level of savings expressed as a share of gross savings on gross disposable income grew from 7,54% in 2004 to 7.79%.

The unemployment rate in recent years has fluctuated around eight percent, which is comparable with other countries. The number of people unemployed reached its highest point in the first quarter of 2000. In 2005 the annual average was 7.9%, and the rate is expected to fall in the future. © EUROCONSTRUCT 63 Czech Republic Amsterdam, June 2006

As regards the balance of public finances, meaning state and local finances, the government have prepared measures with the aim of ensuring that in 2006 they will not exceed around 4.5% percent of gross domestic product, with a further fall expected in subsequent years.

As for foreign investors, the situation is for now most satisfactory. Foreign investment can at the moment be divided into two completely distinct categories: purely financial investment such as the purchase of shares in private banks and companies, the purchase of controlling bundles of shares etc, and real investment, meaning investment in new machinery and equipment, buildings and constructions etc.

Trend in direct foreign investment in previous years (at market prices):

1998 1999 2000 2001 2002 2003 2004 2005 Investment in billion EUR 3.4 5.9 5.4 6.3 8.9 2.3 3.6 8.8

Source: Czech National Bank, specialist press, own calculations

The greatest amount of foreign direct investment flowed in the Czech Republic from European Union countries. Compared to previous years a change was seen in terms of individual countries. The Netherlands, Germany, Poland, Austria and Sweden invested in the Czech Republic most. Those states were followed by Switzerland, Great Britain and France, while investment from Slovakia, Japan and the United States was not negligible either. In terms of segment structure, the great majority of investment was in traffic and telecommunication, real estate and manufacturing industry, above all metalworking.

It is fair to say that the Czech Republic has succeeded in fulfilling conditions for EU accession. In order to maintain its position on the market it is necessary to increase the competitiveness of Czech companies, not on the basis of lowering costs in the form of wages but in qualitative factors, increasing final effect of exports and domestic use of products and services.

The development of the average inflation rate (consumer prices) was relatively positive in the period surveyed. In 2000 there was growth of 3.9%, in 2001 at 4.7% and in 2002 at 1.8%. Average year on year inflation in 2003 (0.1%) was mainly influenced by a fall in the price of foodstuffs and non-alcoholic drinks, clothing and footwear and household equipment and running costs. Given its share of the consumer basket, the increased price of housing was the main influence on the growth of the level of consumer prices. In the area of other goods and services, the greatest growth was seen in financial services (30.0%) and insurance (7.9%). In 2004 the rate of inflation increased slightly in connection with EU accession, mainly due to changes in the taxation system and a growth in strategic raw materials, principally oil. It could hold on the same level in 2006.

Inflation therefore has fallen sharply, due to weakened household demand, a weakening of the world economy, the strong Czech crown and price wars between retail chains. It should remain at 4 to 4.5 percent in the next few years. The positive inflation development opens the way for a further lowering of interest rates by the Czech National Bank.

In the period of almost five years just passed, people borrowed 7.7 billion EUR (of that 3.9 billion EUR in mortgage loans and 2.4 billion EUR in building savings loans). The average rate of growth of their loans from the banking sector reached 19.1% a year. Consumer loans were at their most dynamic up to 2002, while since that time mortgage loans have been growing the quickest. Their volume in the last seven years has seen an annual rate of growth of 33%.

64 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic

A turnaround in mortgage policy took place in 2000 with the privatisation of the Czech Republic’s biggest retail bank. The deal on the sale of the state’s sale of Česka spořitelna Bank to Austria’s Erste Bank included a commitment on the part of the new owner to support the Czech economy by improving conditions for loans to small and medium-sized companies and for housing loans. Some 125 billion EUR was earmarked for a mortgage loans programme. That launch of a mortgage loans market in the Czech Republic in time forced other banks to change their approach to clients. At the end of August 2005 people owed banks 2.6 billion EUR on the basis of mortgage contracts. And this year has seen a marked revival in consumer loans – while the average rate in the last 12 months was around 18%, in June 2005 year-on-year growth rose to 24.6%, and in August the volume of consumer loans was as much as 33.5% bigger than a year previously. In recent months the growth in consumer loans has been even faster, though its average dynamic over the last year was lower than in the case of mortgage loans and in total household loans.

Growth in construction work prices has not been so pronounced in the last four years. In the year 2000 its growth was only two tenths of a percent higher than the rate of inflation, and in 2001 the growth of prices in the construction industry was, at 4.0%, even lower than the inflation rate. In 2002 construction work prices actually fell and there was a gap of 3.9% from the inflation rate. That situation was repeated the following year when the difference grew to 4.5% in favour of the decrease in construction work prices, which fell to 2.2%. It is important to bear in mind that in relation to the European Union the price level in the Czech Republic is around two fifths higher than the EU average. Given that fact, estimates of annual price rises in construction will have to be revised in view of the Czech Republic’s accession to the EU. But even still estimates of the growth of construction work prices are still very positive.

EU accession was accompanied by harmonisation of the tax system with EU requirements. This has led to changes to indirect taxation and with it changes in the prices of certain goods. This concerns a rise in VAT from the lower to the higher rate. There are currently two VAT rates in the Czech Republic, basic VAT of 19% (down from 22%) and reduced VAT at 5%. That change will affect construction production, when construction has been included in the higher VAT group from 30.4.2004 (though construction in the area of housing has been granted an exception until the first quarter of 2007). There is constant discussion about how long this should remain in place. The government has introduced a reduction in tax on company revenues from 31%: currently tax on company revenues stands at 24%.

3 Housing Market

The housing stock in the Czech Republic stood at 4,369 thousand flats when the last census was taken in 2001.

The residential situation in the Czech Republic remains very unsatisfactory. While the number of completed flats in 2005 – 32.8 flat units – is in total the highest in recent years, it is CCA 15 thousand less than the number of flats needed, according to calculations by experts and analysts.

In 2005 there was no significant increase in the number of flats under construction (5.7% growth). The number of flats begun and completed was 3.4% and respectively 1.8% higher than in 2004. Reconstruction of the stock of flats is however falling behind, even though the situation improves every year. The main cause of that difference is the high price of new flats in the Czech Republic in comparison with the spending power of citizens and households (the price of flats rose nine-fold in the 1991 to 2001 period, whereas average wages were only 3.2 times higher). For some time the volume of residential construction in the Czech Republic is far below the average seen in developed countries. © EUROCONSTRUCT 65 Czech Republic Amsterdam, June 2006

2000 2001 2002 2003 2004 Average area of building site in m2 906.6 964.0 982.5 1062.0 1089.4 Average area built on in m2 146.8 144.9 142.7 141.1 139.3 Average value of 1 home in thousand EUR 80.7 80.9 83.9 86.6 89.2 Average value of 1 m3 in EUR 85.1 89.4 95.2 100.7 106.9

The fact that the prices of flats in the Czech Republic are beyond the financial means of the country’s citizens is borne out by the estimates of construction companies, who say that 17% of their customers are foreigners, whose interest has switched from commercial properties to flats. Every sixth flat in Prague is bought by a foreigner - mainly Russians, Israelis and Italians. Similar trends are seen in other cities and spa towns. Since more accurate figures concerning the stock of flats became available following the 2001 national census, the number of citizens per permanently occupied flat has been calculated at around 2.69. This figure places the Czech Republic among less advanced countries in this respect. The number in the best-equipped countries is approaching two citizens per flat. The situation in the Czech Republic is made worse by the fact that, due to the inflexibility of the relevant authorities, many state and municipal flats are unoccupied. Government, constitutional and other public officials devote a great deal of attention to the support of flat construction. A tightening of the conditions for building savings allowed the use of such funds on the renewal of the stock of flats. Over the years various forms of support have been introduced to encourage the construction of flats and dwellings in general, though they have not always been effective and have needed to be revised. The sum which the state devotes to residential policy includes a wide spectrum of measures for the support of housing - contributions to buildings savings, support for mortgages, subsidies for the construction of flats to rent and funds to support a long-term programme of repair of prefabricated blocks of flats and flats. Some of those funds are used for new construction, some for the modernisation of flats, completing constructions and extensions and the repair of flats in apartment buildings and houses. Since 2002 loans have been available to young people for new construction, reconstruction of and purchase of old flats and dwelling houses. Housing loans are relatively high compared to total household loans, and are approaching almost three quarters of the total volume of money that Czech households have borrowed from the banking sector – while in 1997 housing loans represented around a quarter (24.9 %) of total household loans, in 2004 it was 71.9% and at the end of August last year it was 72.4% (around 1 billion EUR). It must be said that this structure of debt is relatively positive. In the last decade six building societies have provided loans of over 3 billion EUR for new flat construction and reconstruction and another 2 billion EUR for the purchase of flats or dwelling houses. This positive trend in loan giving has continued last year: to the end of last year 582 867 loans totalling 1 668 mill Euro were given on the building savings market, a 10% rise on the same period the previous year. After an expected downturn in interest in building savings in 2004, this area is once again reviving. To the end of 2005 building societies closed 430,000 contracts, a rise of almost 37% on the same period last year.

4 Non-residential Market

Non-residential construction output remains relatively high (in 2005 it accounted for 50% of new building work, including reconstruction and modernisation), even though it was most badly-affected during the downturn in the economy and the construction industry at the end of the 1990s. A revival began, occurring some time sooner in the area of new constructions, where a mild growth in the volume of output was recorded in 1999. The downturn in reconstruction and modernisation continued - even though at a significantly lower rate than in previous years – until 2000. Currently around three-quarters of total non-residential 66 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic construction output is accounted for by new constructions, while reconstruction and modernisation account for the other quarter. Other types of construction within the area of non-residential construction are likely to see rather different development trends in the future. The year 2002 bucked the trend somewhat, due to the need to renew destroyed buildings after the floods. Of course this situation is only temporary – as with the previous revival in the area of administrative buildings as a result of the creation of new regional authorities in the Czech Republic, it can only be expected until the end year 2002. After that the downturn of the end of the 1990s should continue.

One construction which influenced this trend in 2003 was connected with the recent world championships in ice hockey. The greater part of work on the new multi-purpose SAZKA Arena in Prague and the reconstruction of the ČEZ Arena in Ostrava was done in 2003. While other sports-leisure centres are planned for the next few years, business centres will rank among the biggest contracts, albeit with a gradual lowering of year-on-year growth. In the future a maximum growth of 5% year-on-year is expected; that can be inferred from the fall in the number of construction work orders at the end of the last year. Compared to the same period in 2004, there has been a fall of 12% in non-production buildings and 9.0 percent in production buildings.

5 Civil Engineering Market

This area of the construction industry was, like most of the sector, transferred at the end of the first quarter to the higher VAT bracket. For that reason, in the second half of last year and first quarter of 2004 there was an increase, as expected, in interest from investors who are not payers of VAT; that means small entrepreneurs, non-profit organizations and municipalities (gas, sanitation…). Accession to the EU has influenced this area of the construction industry significantly, especially in transport construction. There has been extensive construction of rail corridors connected to the European international network, while the construction of further sections of motorway and the extension of the Prague underground are also significant. Transport construction currently makes up 53% percent of the total volume of civil engineering construction. Telecommunications construction increased by over one and a half times between 2000 and 2004, a development mainly due to strong growth in 2002. Following the saturation of the GSM market there was a certain downturn, though it is expected to pick up in the next few years. Energy and water industry constructions will fall from around 25% of civil engineering construction as a whole in 2001 to 21% in 2007. That is due to a downturn in energy constructions, though, based on construction orders, water industry constructions are set to rise most dramatically in the civil engineering sector. In short, it is fair to say that the decrease in construction output in the energy sector is continuing, while the volume of construction of water industry buildings is increasing slightly. Construction output in telecommunications has begun to grow again as a result of the expected abolition of the state monopoly.

Country/Pays/Land: CZECH REPUBLIC Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 10 201 10 202 10 202 10 201 10 201 10 201 10 202 Bevölkerung

Households ('000s) Ménages 4 520 4 550 4 600 4 610 4 630 4 635 4 636 Haushalte

Unemployed ('000s) Chômeurs 378,2 414,5 420,2 419,6 417,4 416,7 417,9 Arbeitslose

Unemployment rate (%) Taux de chômage 7,3 8,1 8,3 7,9 7,9 7,8 7,9 Arbeitslosenquote

Change of GDP Variation du PIB 2,0 3,7 4,0 6,0 4,3 4,4 4,4 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0,6 0,1 2,8 2,8 1,9 2,9 3,0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2,7 2,2 3,7 3,0 3,9 4,0 4,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 5,2 4,3 4,3 4,6 4,7 4,8 5,1 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 6,6 5,6 5,4 5,4 5,5 5,6 5,7 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

68 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic

Country/Pays/Land: CZECH REPUBLIC Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 1 869 3,9 20,2 10,7 5,6 7,1 5,2 4,7

Logement Renovation 623 13,8 11,5 15,3 5,8 7,5 6,1 5,8

Wohnungsbau Total 2 492 6,3 18,0 11,8 5,7 7,2 5,4 5,0

Non-residential construction New 6 084 15,1 8,7 10,8 3,6 4,2 4,3 4,8

Bâtiments non résidentiels Renovation 464 -66,8 -5,4 7,2 4,0 4,0 2,8 4,9

übriger Hochbau Total 6 548 -4,5 7,5 10,6 3,7 4,2 4,2 4,8

Building New 7 953 12,5 11,2 10,8 5,0 4,9 4,5 4,8

Bâtiment Renovation 1 087 -48,2 3,2 11,6 4,2 6,0 4,7 5,4

Hochbau Total 9 040 -2,0 10,2 10,9 4,9 5,0 4,5 4,9

Civil engineering New 4 364 22,0 7,1 7,9 4,9 4,9 6,0 6,2

Génie civil Renovation 790 -24,5 6,4 6,8 0,6 1,8 4,7 5,3

Tiefbau Total 5 154 10,9 7,0 7,7 4,2 4,4 5,8 6,1

TOTAL CONSTRUCTION OUTPUT 14 194 2,5 9,0 9,7 4,2 4,8 5,0 5,3

Million euro at 2005 prices, excluding taxes. 1 euro =29,784 CZK

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 4,00 0,1 7,8 8,6 5,3 4,0 3,8 3,5 Inländischer Zementverbrauch

Country/Pays/Land: CZECH REPUBLIC Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel Baugenehmigungen Familienhäuser Flats Collectif Mehrfamilienhäuser TOTAL 13,0 16,5 16,8 15,8 16,4 15,5 15,7 Housing starts 1+2 family dwellings Logements commencés Individuel 17,3 20,8 21,0 20,7 25,5 18,5 15,2 Baubeginne Familienhäuser Flats Collectif 16,4 15,7 18,1 19,6 18,5 11,5 14,8 Mehrfamilienhäuser TOTAL 33,7 36,5 39,1 40,3 44,0 30,0 30,0 Housing completions 1+2 family dwellings Logements terminés Individuel 14,7 13,9 15,8 15,8 19,6 20,2 16,1 Baufertigstellungen Familienhäuser Flats Collectif 12,6 13,2 16,5 17,1 15,4 14,8 13,9 Mehrfamilienhäuser TOTAL 27,3 27,1 32,3 32,9 35,0 35,0 30,0

Housing stock Logements existants 4 372 4 375 4 381 4 387 4 394 4 390 4 392 Wohnungsbestand

thereof second-homes dont résid. Secondaires 290 290 289 289 287 287 289 davon Zweitwohnungen

thereof vacancies dont inoccupé 241 239 235 233 230 230 229 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

70 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic

Country/Pays/Land: CZECH REPUBLIC Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 579 54,9 20,1 10,5 2,1 1,9 2,1 2,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 766 55,9 8,7 7,1 1,1 0,6 1,1 0,8 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 3 187 -9,3 4,5 11,2 7,7 7,4 7,5 7,4 Industriegebäude

Storage buildings Bâtiments de stockage Lagergebäude

Office buildings Bureaux 72 69,1 7,9 4,6 -3,0 -2,8 -2,0 -1,9 Bürogebäude

Commercial buildings Commerces 1 480 75,7 14,0 12,6 2,2 2,5 2,3 2,1 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles Landwirtschaftsgebäude

Miscellaneous Autres Sonstiges

Total Insgesamt 6 084 15,1 8,7 10,8 3,6 4,2 4,3 4,8

Million euro at 2005 prices, excluding taxes. 1 euro =29,784 CZK

Country/Pays/Land: CZECH REPUBLIC Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Telecommunications Télécomunications 1 210 31,5 9,2 12,9 1,9 2,2 5,7 6,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 162 5,6 3,5 3,8 2,5 2,2 3,3 3,4 Energie-und Wasserversorgung

Other Autres Sonstiges

Total 5 154 10,9 7,0 7,7 4,2 4,4 5,8 6,1

Million euro at 2005 prices, excluding taxes. 1 euro =29,784 CZK

72 © EUROCONSTRUCT Amsterdam, June 2006 Czech Republic

Country/Pays/Land: CZECH REPUBLIC Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 47,7 3,9 4,9 2,4 2,6 3,0 3,1 2,9 Privater Verbrauch

Public consumption Consommation publique 22,7 5,7 4,2 -3,1 1,3 -0,2 -0,1 -0,1 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 26,0 0,6 4,8 9,1 3,7 4,8 4,6 4,5 of wich construction

Stocks (contribution as % of GDP) Variations de stocks 0,0 1,7 0,7 0,7 0,7 1,1 1,0 0,9 Vorratsveränderung

Exports Exportations 71,7 1,8 7,3 20,9 11,1 15,1 15,2 15,1 Exporte

Imports Importations 61,6 2,1 7,9 18,5 4,8 13,7 13,6 13,6 Importe

GDP PIB 98,4 2,0 3,7 4,0 6,0 4,3 4,4 4,4 BIP

Standard National Accounts, gross figures

74 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

DENMARK The Copenhagen Institute for Futures Studies www.cifs.dk (English homepage)

Instituttet For Fremtidsforskning, København www.iff.dk (Danish homepage)

Anders Bjerre [email protected] Troels Theil Eriksen [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

Macro economy GDP growth will be in the 2.5 pct. p.a. league in the coming years. Growth in 2005 was primarily driven by private consumption and fixed investments. The upturn has thus mainly been based on domestic trends, with vigorous growth in private consumption based on increasing levels of disposable income, partly due to a tax reform and partly due to increasing employment. It is supported by growth in the international economy – which has been rather weak in parts of Europe, but much stronger in other parts of the world, including the Nordic countries.

The economy is expected to stay well on course in the coming years. Oil prices and international trends in general remain an important cause of uncertainty, of course, as is the risk of an international downturn in property values along with an increase in the level of interest. The domestic economy looks very solid, however, with a resilience which could withstand considerable international turmoil if this should occur in the period. One internal risk factor is looming larger, however: The labour market is increasingly hampered by bottlenecks, not least within the construction sector.

Construction Since the downturn of 2002, growth has accelerated to 3.7 pct. in 2005. Growth will remain moderate in the forecast period, averaging about 1.6 pct. p.a. in 2006-2008; in general, the potential for higher growth will be hampered by bottlenecks on the supply side.

Trends in 2005 were positive in all major fields of construction outside civil engineering. The growth in 2005 was especially marked in new residential construction, where rising home prices and low levels of interest has caused very strong growth in recent years. However, this growth is forecast to tail off in 2007-08. On the other hand, changing regulations regarding secondary homes just may cause somewhat higher construction levels.

Non-residential construction suffered a strong decline in 2002-04 as investments were put off. We expect some growth in the coming years. The growth figures given in Table 2 are quite low, but a planned reform of local government may cause higher growth in this field.

Civil engineering declined in 2003-05. We expect several projects under consideration to be given a go-ahead within the coming years. In the forecast figures, this is expressed as stagnation in 2006 and accelerating growth in 2007-08, but in fact the timing of the upturn is highly uncertain, as labour market bottlenecks may cause some investments to be put off.

R&M in building as well as in civil engineering is forecast to develop very moderately. In particular, lack of suitably skilled labour will probably hold back residential R&M, which could otherwise grow considerably. There is considerable influx of migrant labour from the new EU members (as of 2004), but there is considerable resistance from the established, national labour unions if wages are lower than Danish standards.

Notable changes since the last EUROCONSTRUCT report (Nov. 2005): • Even better employment trends than expected, and • In spite of the global oil price hike and increasing rates of interest, general optimism in the economy is higher than 6 months ago. Consumer optimism is still high, and business optimism has grown, which means investments are likely to increase.

76 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

2 Macro-economic Outlook

In general, the macro-economic outlook is very good. There is healthy growth in all major sectors, public budgets are in surplus and competitiveness is high. The major domestic risk factor in the forecast period is labour market bottlenecks.

Domestic demand grew vigorously in 2005, fuelled by strong growth in private consumption due to increasing disposable incomes, supported by continued capital gains on the housing market, as well as improving consumer sentiments. Disposable incomes grew strongly in 2004, as wage gains were combined with decreasing tax rates from 1 July 2004; in 2005, this growth levelled off, but there is still some positive impetus from the changes of 2004.

Fiscal policy was thus one factor in the positive trends. Another was the low levels of short- term interest rates, which in combination with changed regulations in relation to house mortgages has given a large number of consumers a considerable short-term lift in spending power. A third factor is strong employment trends. In general, after a long period with low growth of private consumption, it is now booming.

Public consumption is forecast to grow at an average of about 1.5-2 pct. p.a. during the forecast period. There is unusually high uncertainty about this due to a reform of local government, however (see below).

The main focus in the formulation of grand policies related to globalisation, competitiveness and innovation in Denmark have been on “soft” infrastructure, e.g. educational policies, policies related to corporate governance, to innovation and barriers to innovation, etc. In the political debate, there are some major issues related to physical infrastructure too, but some infrastructure projects may in fact be postponed due to labour market bottlenecks.

Gross fixed capital formation boomed in 2005-06 and is expected to grow by 4 pct. p.a. during 2007-08, reflecting the fact that development increasingly will focus on “soft” factors which are not counted as fixed capital – e.g. education. Growth in construction stays at a somewhat lower level in this period, in line with long-term trends. There is a very specific political uncertainty, however: The expected reform of the local government system may cause public construction to accelerate, as discussed below.

With buoyant domestic demand, imports grew strongly in 2004-2005 and continue to grow, but growth rates decline as the growth of private consumption levels off after 2005. Danish trends are highly dependent on international trends, of course. Looking outside Europe, the global economy seems to be in a fairly good shape, with strong growth in a number of large “third-world” countries including China and India, and strong growth in the USA. A higher (perceived) threat of terrorism combined with rising oil prices may jeopardise the upswing, however. Another is the risk related to the huge American trade deficit and the similar building up of dollar reserves in certain countries, notably in Asia. However, in this forecast we assume that there will be a “soft landing”, meaning gradual adjustments leaving room for continued growth in the World economy.

We have previously expected a weakening of economic growth after 2005, as some of the growth factors were transitory. Labour market trends indicate that growth at 2.5 pct. p.a. may still be likely. This presupposes that labour market policies are adjusted, with even higher focus on increasing the numbers in the labour force, as well as improving skills; these policies are likely to be enacted, although the details are still unclear. Unemployment is now clearly declining; this decline is expected to continue through the forecast period due to the buoyant economic trends – and supporting these trends, as consumer expectations thrive on growing employment.

Macroeconomic Key Indicators in Denmark to 2008 (Annual percentage change) 2002 2003 2004 2005 2006 2007 2008 GDP 0.5 0.7 1.9 3.1 2.8 2.5 2.5 Private consumption 1.5 1.6 3.4 3.8 3.0 2.0 2.0 Unemployment 5.2 6.1 6.4 5.7 4.7 4.3 4.0 Inflation 2.4 2.0 0.9 1.7 2.0 2.0 2.0

Source: CIFS/Euroconstruct, June 2006

Consumer price inflation is expected to stay at or below 2 pct. during the forecast period. Wage inflation has so far been quite moderate, and increasing numbers of immigrants from the new EU members may dampen wage growth within construction. Exchange rates do not cause concern, but oil prices are a major uncertainty. Oil prices may force inflation to grow; however, oil prices are already at a very high level compared to previous years, and we do not expect them to grow much further, but to level off or decline somewhat (this is of course highly debatable).

One main uncertainty is related to the trends in real estate prices and particularly home prices. Increasing home prices have fuelled consumer lending and hence supported the growth of private consumption as well as of residential R&M. As interest rates are now rising, home prices may weaken and there may be a negative impact on consumer spending. In the forecast, we have assumed that home prices have a soft landing, but in case of a strong rise in interest rates, there are some macro-economic risks related to the housing market. (See discussion in the next section).

Another uncertainty if things generally go well is whether labour bottleneck problems will become really serious. The number of unfilled positions is already considerable and we could see pretty tight bottlenecks from the end of 2006. In our forecast, we have assumed that flexibility in the labour market will grow with increasing employment, but bottlenecks may increase wage inflation and dampen real growth in 2007-08 below our forecast.

Consequences of Local Government reform in relation to construction The present system of local government is being changed strongly in the next years. The middle (regional) layer will be more or less abolished, and the size of the smallest units will increase considerably. There is a clear risk that existing local governments will accelerate spending strongly while they still have the power to do so – accelerating renovation of municipal buildings or even constructing local “monuments” which outlast the change in municipal borders. This happened the last time there was a similar reform, about 30 years ago, and it is happening in some places during 2005-2006. However, central government has to some extent reined in local governments, and size of this effect is uncertain.

Consequently, there is increased uncertainty in relation to the forecasts for public investment in non-residential construction and civil engineering, especially for 2006-07.

78 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

3 Housing Market

The outlook for residential construction 2006-07 is fairly positive, but we expect growth to level off in or around 2007. Policy changes in the forecast period include: • The policies related to supported housing/social housing are changing, with local authorities being required to foot a higher share of the cost from 2006. This will dampen this type of construction and may change the pattern towards a higher share of privately financed housing for hire. However, the uncertainties relating to the reform of local government and to its political aftermath still makes it quite hard to estimate the future of new supported residential construction. • Liberalised zoning laws permitting the construction of more secondary homes / summer cottages in attractive locations along the coasts.

New owner-occupied single-family houses etc. House prices are still rising in the most populous cities. The low levels of interest combined with more liberal home mortgage rules have been a factor in this, along with fairly good wage and employment trends and lower tax rates leading to higher disposable incomes. As interest rates are now increasing, house price trends may soften, however.

We discuss the possibility of an upcoming fall in house prices in the “box” in this section. In the main forecast, we have assumed a soft landing, with house prices flattening but no major decline in the coming years.

At the present level of house prices, new construction is very attractive in major cities and single-family builders report good sales. In the most attractive areas, it is difficult to get attractive building sites for single-family houses, however. Many local authorities have been reluctant to develop new areas, since the cost of providing public services and new infrastructure for even more people was considered too high. New housing may attract young families, accelerating demand for kindergartens and schools – costing existing local taxpayers dearly. Most likely, there will still be resistance to the expansion of residential areas in order to safeguard financial balances, even after the reform of local government.

New flats Dwellings built by private companies: Activity used to be quite low, except in very attractive locations (typically on harbour fronts, with a sea view). However, changes in the tax/subsidy regime have been designed to make this type of construction more attractive; we expect that this will accelerate construction moderately and consequently, that this segment will be an increasing share of the construction of new flats, as subsided housing declines.

Subsidised housing can be divided into 1) a general category administered and owned by non-profit housing associations; 2) the special categories administered by municipalities (housing for elderly or disabled people and student accommodation); and 3) co-operatively owned, supported housing.

The construction of general subsidised housing has been on a declining trend, among others because local authorities are much less interested in this type of construction than previously. As local authorities must foot a larger part of the financial requirements for this type of housing beginning 2006, there have been positive trends in 2005, but we expect a considerable decline from 2006.

There is an increasing need for housing suitable for elderly people in the coming years. As new generations become old, they expect much higher standards than previously. As the number of aged people is increasing strongly in the coming decade, the influence on construction needs is considerable, affecting both private developers and public supported

© EUROCONSTRUCT 79 Denmark Amsterdam, June 2006 housing for elderly. Activity is expected to grow in the coming years. A considerable part of the flats built by private developers in attractive locations, eg. on harbour fronts, is targeted at the wealthy parts of this demographic segment.

Repairs and modernisation – residential buildings There was some growth in 2005 due to the effects of a fairly serious storm 8 January 2005. We expect trends in this field to be fairly flat in the forecast period.

Previously, there were many subsidy programs for broad-scale housing renewal. This activity is much lower at present. However, the long-term trend is moderate growth in residential R&M. In recent years, trends have been quite strong, as the economy has been good, disposable incomes have increased and with lower interest rates, a large segment of homeowners have had capital gains. Quite often, these capital gains have been used as the basis for increased borrowing – for a holiday, a new car or similar, but very often also for residential R&M. Private homeowners desiring a new style (e.g., a “new” kitchen or a “new” bathroom) is an important factor in this market, which means that it is to a large extent fashion driven. However, there is actually rather low labour availability for this market; with high activity in new construction and with fairly high employment in general, in large parts of the country it can simply be quite hard to find suitable skilled labour.

A factor, which may accelerate residential R&M activity in the coming years, is increasing immigration of relatively cheap labour from the new (2004) EU members. However, to some extent this may only replace work which was already being done on a DIY or “black economy”, tax-free basis. For a number of reasons, it is hard to estimate the impact of this change in regime, but we do expect it to have some expansionary effect in the medium term. In the forecast tables, we may well have underestimated the impact of this effect in 2006, but we have chosen to err on the pessimistic side.

At the same time, the battle with the local trade unions is heating up. One thing is the fact that regulations permit companies from other EU countries to work in Denmark, without paying anything like the wage level customary in Denmark to their workers (and since there is no legal minimum wage in Denmark, there is in principle no bottom level). Another issue is whether this is accepted by local people and whether labour unions can in various ways obstruct these activities by foreign builders. The outcome is by no means certain.

House price trends in Denmark

House prices have been rising in the last years. We have on several occasions estimated that the maximum level was attained, but time and again we have been proven wrong. Among other reasons, employment and wages have developed well while interest rates have declined and capital market liberalisation has reduced the short-term costs of borrowing.

In the main forecast, we have assumed a soft landing in the housing market. On the other hand, our forecast points to increasing rates of interest, which in itself will put downward pressure on house prices. So: Is it a “bubble” set to burst, or is the market price OK?

We have discussed this issue at length in previous Euroconstruct reports. This time, we will limit ourselves to tell that the issue is increasingly taken serious by leading economists, but most forecast a soft landing of home prices, in particular because employment trends are strong. Also, the trend towards concentration of population in the larger and more dynamic cities is a logical driver for price increases. The following figure illustrates property price trends in central Copenhagen. Bubble or no bubble? We are not sure, just a bit concerned...

80 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

Average flat prices Euro/sqm. within 5 km's from Copenhagen Town Hall

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0

4 Non-residential Market

Office buildings: In line with general economic trends, there is an upturn in this field. After some years of growing surplus capacity in the Copenhagen region, the surplus of prime new capacity is now declining.

We expect considerable growth in the forecast period, as capacity utilisation in new office space is growing, particularly in Copenhagen. A new district, "Ørestad", is developed on virgin land, very close to both the Copenhagen City centre and the airport, and served by the subway opened October 2002. Construction activity in Ørestad is quite intense at the moment. This district is increasingly a competitor to areas on the harbour, where there is still room for some development.

In the medieval centre of Copenhagen, we have seen a weaker development than in other regions. As residential rents continue to rise in the city centre, an increasing number of premises previously used for offices are converted to dwellings – often luxury dwellings.

Commercial Buildings: The ban on mega-shopping-centres has dampened commercial construction in recent years. Those built have been successful; shopping malls with free parking is clearly in huge demand, while supply is rather limited. At the same time, a liberalisation of legal shopping hours has changed the competitive pattern, with increasing benefits for shopping malls with common planning and PR etc., while small-scale shops have had a harder time.

We expect fierce competition within retailing in the coming years. The number of shops may decline. One might see more competition on quality with intensified R&M-activity in old city- centre shopping areas, which remain in focus for high-experience-shopping, as well as intensified price-competition in other fields.

More liberal regulations in relation to large shopping centres is a possibility (but politically highly contentious). In that case, we might see the construction of 6-8 large shopping centres in various parts of the country within a couple of years. If this “joker” comes into play, the forecast is stronger growth in new commercial construction, while R&M may be slightly lower.

Industrial buildings: Industrial construction has been declining for some years, but we believe it bottomed out in 2004. There was growth in 2005 and we expect the positive trend to continue, fed by increasing domestic demand and moderate international growth. Industrial optimism is rising in economic surveys too.

There are different trends among different industrial sectors, however.

In particular, there has been considerable growth in biotech investments, tapping into the large pool of highly specialised knowledge workers in the Copenhagen-Malmö/Lund-region.

Surplus capacity in storage facilities is low due to the booming home market, and there is an increasing need for specialised, large-scale distribution centres. We expect more distribution centres to be built. In this context, the possible reduction of tolls on the Øresund Bridge may play a decisive role. This could lead to a completely new pattern of distribution in Southern Scandinavia, with major investments in new storage and distribution centres as a result.

Construction for agriculture: After a boom lasting up to 2001, there has been a marked decline in agricultural construction. In the coming years, we expect the decline to level off. We expect agricultural construction to remain below the level of the 1990s for two reasons. One is increasingly strict environmental regulations; another, related cause is that a large number of Danish farmers are in fact expanding production, but on land bought in e.g. 82 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

Poland and Russia, where land and labour is cheaper and environmental regulations are sometimes less restrictive.

New technologies limiting emissions from pig production may permit a new boom in agricultural construction in the coming years, supported by continuing concentration trends in the sector, but we expect a possible breakthrough to come after the forecast period.

Buildings for public services: As previously mentioned, a reform of local government is coming up, with effect from the start of 2007. Some of the smallest, most local units will disappear in the reform and some of them are spending money on building “monuments” before they disappear.

Demographics point towards significant investments in schools, where new teaching methods will imply changes and further pressure on the construction and modernisation of school buildings in the coming years. There is also some restructuring within higher education. The rise in educational construction is expected to continue the next years.

With a strong growth in the number of elderly people in the coming decade, capacity in health and related services will probably need to grow too, tax freeze or not; the result may be a stronger involvement of private capital in construction for public services.

We expect activity in cultural sector construction (fine arts, museums, etc.) and entertainment to decline, although activity will remain quite high by historical standards. Also, in this field the reform of local government just may cause construction to grow instead.

Repairs and modernisation – non-residential buildings In our economic scenario, R&M activity in non-residential building is on a very slight upward trend. Employment trends in the service sector still have a positive impact on renovation and modernisation activities. R&M needs in schools and some hospitals are very high too and activity here should grow, as in various other public service facilities. However, as mentioned above, lack of suitable labour may limit activities; as new construction is less prone to complications and hence often more profitable for firms and construction workers, R&M- activity is often out-competed by new construction.

The reform of local government may cause considerable changes in the need for administration centres. The net effect of this reform will be a positive impact on non- residential R&M in the short and medium term, but this may be restricted by various types of limitations imposed by the central government on the local government level, so in fact the effect may not be that large.

5 Civil Engineering Market

In general terms, the outlook for civil engineering is rather flat through the forecast period. However, there are huge demands in a number of fields, and a number of projects, which may or may not get a go-ahead in time to influence activity in 2007-08. In the forecast tables, we have indicated this by some growth in 2007-08, but in fact this growth may come later.

Investment in the energy field will grow, with growth in land-based windmills in 2005 and very strong growth in 2006-07 due to the construction of two very large off-shore windmill fields (probably the largest in the world at the time of completion). Investment in power distribution networks will stay at a stable level, while investment in district heating falls back a bit.

Transportation-related civil engineering is forecast to decline in 2006-08, with decreasing investment in roads. There will be growth in railway R&M, but the construction of new lines is low. The only really large infrastructure project under construction at the moment is the Copenhagen Metro. The first line opened October 2002, two years late. Construction of the line to the airport started Nov. 2003, but civil engineering activities decline after 2005. The metro may be expanded by a circle line during the coming years, but most activity will be beyond the forecast period. Also, there is increasing interest in new road infrastructure for Copenhagen using large-scale tunnelling, but as yet nothing has been decided.

Environment-related civil engineering has been growing for a number of years, but is forecast to decline from 2006. However, sewage treatment may grow considerably, as may the construction of new coastlines for recreational purposes and similar leisure-related activities.

As civil engineering activity remains on a low level and infrastructure needs and transport bottlenecks become obvious, we might see a number of simultaneous decisions on new projects. Growth could be much larger from 2007, or it could be postponed.

In particular, R&M for infrastructure is generally too low. There is a lot of discussion related to better long-term infrastructure management in general, but due to the changes in local government, such “invisible”, low-profile projects may be put off even more than usual.

And there is still a great bridge to be built. The Fehmarn Belt Project, joining Southern Denmark and Germany with a tunnel or a bridge. The cost will be in the range of 3-5 billion Euro depending on the solution. In principle, it has been decided to build the link. In practice, a lot of details need to be fixed. The political process may be speeded up, in which case activity in 2008 may be accelerated, but most likely construction will start later than that.

84 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

APPENDIX – DEFINITIONS

Table 1 • Population, Households: Number of people and households at the beginning end of the year • Unemployed and unemployment rate: The data are based on Danish ‘headline’ figures. This Danish definition used in the ‘Danish media’ is about 1 percentage point higher that the ILO- definition (used in EU-comparisons). For example our forecast of 4,7% unemployment in 2006 would be 3,7% according to ILO/EU definitions. • Change of GDP: Calculated by chain indices. For comparisons note that a number of Nordic Financial Institutions use growth data calculated by weights from the year 2000. • Consumer prices (% change): HICP, Harmonized Index of Consumer Prices in the EU. • Construction prices (% change): Construction cost index for new housing.

Tables 2, 4a and 4b. General comments and definitions • Note that data represent construction output/production, and hence represent sales value including intermediate input bought from other sectors, building materials for example. It is different from the value creation (Value Added) in construction, where the value of inputs from other sectors are deducted (value created in other sectors). Source: Detailed (unpublished) statistics in relation to National Accounts Statistics (N.A.) from the Danish National Statistical Office (Danmarks Statistik / Statistics Denmark). • Data are in ‘Basis Prices’ exclusive of Value Added Tax (VAT). Opposed to ‘Market Prices’/’Buyers Prices’ which include VAT. This must be held in mind when comparing with other sources. There is a uniform 25% VAT-rate in Denmark). • Where original data are incomplete, estimates are made by the CIFS based on whatever material available.

Construction output/production/activity is of cause intended to reflect what is says. However in the economic circuit for the total economy, there are always choices in drawing boarder lines: Where does the construction industry begin & end - and where does other, related fields end/begin? Construction activity can be done by outsiders not within the construction field, just as construction companies can have commercial activities in other fields of activity. • In our data the services input from architects/engineers to construction are included (often supplied from within the same big companies anyway). • In-house construction companies/departments in other fields of commerce are considered as belonging to the construction sector, and activity part of construction output. A number of such departments in the public sector have been in a transfer process (sold, privatised etc.) aimed to function on market conditions anyway. • Other/non-construction types of in-house commercial activities in construction companies are considered as belonging outside the construction field (software development for example). • The use of do it yourself (d.i.y) labour by private households, most of which done within repair and maintenance, and its value is not included in our data (nor in N.A.). One exception is d.i.y. activity on new homes, where the value of labour is included (calculated as investment in N.A.). • Materials supplied to d.i.y. (=‘Material Sector’), is included in our data, as it is clearly part of the official economic circuit (and N.A.). For all practical purposes this can be considered as residential R&M-activity.

Table 2 • New residential & New Non-residential buildings refer to new buildings plus i) when a building is totally rebuild/converted, for example from an old non-residential building to new residences, and ii) when a building is expanded in size/area. • R&M for buildings includes both i) repair & maintenance which is considered consumption (value preserving/conserving) in the N.A. and ii) renovation/modernisation which is considered investment in the N.A. (value increasing - increases the value of a building). • New Civil Engineering: Value-improving civil engineering works (investment in the N.A.) comprises both activity in totally new works and major renovation works. • Civil Engineering Renovation: Value-conserving civil engineering works, that is repair and maintenance (consumption in the N.A.)

Table 3 • Definition 1+2 family dwellings vs flats: 1+2 family dwellings: detached, semi-detached and row houses. Dwellings in ‘tæt lav byggeri’, modern low-build compact architecture, are included here. Flats are mostly in ‘high rise’ buildings and include student accommodations etc. • Historical data for permissions, starts and completions are based on the Danish Building Database with 'mark-up' estimates due to data delays. Data supplied by ‘Danmarks Statistik’ in this ‘mark-up’ form. However, categorizing in the two Euroconstruct groups is done by CIFS. • Note that historical data on starts and completions from Statistics Denmark sometimes show peculiar year-to-year fluctuations. Economic realities (such as hard frost in Jan-April causing ‘rolling’ delays in housing starts), special temporary policies/subsidies (such as favourable financing conditions on subsidized housing with construction start-up before Jan. 1.st), administrative practice (such as giving ‘go ahead’ to large construction works before certain cut- off dates), poor statistics and poor estimates of delays affect data. In our data presentation we sometimes smooth data/obvious/suspected errors in order to avoid unnecessary confusion. • The data (starts etc.) includes summerhouses/second homes, most of which are of a very high standard and often higher than the average (in legal terms) all-season new build house. Due to this high standard, and in order to be able to assess the construction supply side, this is the only logical treatment. However this inclusion should be held in mind when comparing with other Danish sources, some of which exclude this segment. • Housing stock, vacancies: Beginning of the year. The total stock includes summer residences. Our series (stock, vacancies) have been revised, as Statistics Denmark has applied a new definition of total stock. However our data differ from this new definition in order to reflect economic reality closer. • Home ownership rate: Share of households living in their owner-occupied house/flat. This does not include cooperative housing, in Danish “andelsboliger”. About 0.2 million dwellings (=7%) consist of this special legal type. These could be included as homeowners, even though households rent a dwelling, since the basic idea is that households own the same relative share of the co-operative housing company, as they rent from it. If we include this type of ‘ownership’ (andelsboliger), the Danish home ownership rate is 60%. We haven’t used this figure due to special regulations in this market. However, it may be included if regulations are changed. • Second homes: Mostly summer residences, but most dwellings can have the function of a second home. In practice summerhouses (in Danish legal terms) can and sometimes do work as a full-year dwelling (about 10% do).

Table 4a • Buildings for Education, Health, and Social services: Due to incomplete data and to difficulties in drawing border lines we have chosen to use data for all ‘soft’ public services: Education, health, and social services in one group (whether intended to be owned by the public sector or/and owned/facilitated by others. (The ‘hard’ part of the ‘public/semipublic/semiprivate’ supply-sector, that is utilities, public transport etc. belongs to the category ‘Miscellaneous’). • Industrial and Storage Buildings: Storage purposes are included regarding independent buildings ‘larger scale’ storage/logistic/distribution/transport purposes. Smaller back-shop, back- office, etc. storage is included in the respective categories. • Offices & Commercial buildings: Due to incomplete data these are, by necessity, grouped together: Offices, shops, shopping-, exhibition- and entertainment-centres, hotels, etc. (the shares varies, however). • Agricultural buildings: Agriculture, Horticulture, etc. • Miscellaneous buildings: Hardware ’semipublic/semiprivate’ supply-purposes, semipublic/ semiprivate transport sector, various (semi)private sector buildings

Table 4b Due to incomplete data from Statistics Denmark, regrettably we cannot at present give details.

Table 5 • National Account data in market prices, including VAT. Historical growth rate are calculated by chain indices.

86 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

Country/Pays/Land: DENMARK Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 5 368 5 384 4 398 5 411 5 427 5 440 5 450 Bevölkerung

Households ('000s) Ménages 2 456 2 467 2 481 2 499 2 517 2 530 2 540 Haushalte

Unemployed ('000s) Chômeurs 145,0 171,0 177,0 158,0 130,0 120,0 110,0 Arbeitslose

Unemployment rate (%) *) Taux de chômage 5,2 6,1 6,4 5,7 4,7 4,3 4,0 Arbeitslosenquote

Change of GDP Variation du PIB 0,5 0,7 1,9 3,1 2,8 2,5 2,5 Veränderung des BIP (% change in real terms)

Consumer prices (% change) HICP**) Prix à la consommation 2,4 2,0 0,9 1,7 2,0 2,0 2,0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2,2 2,6 2,0 2,3 2,0 2,0 2,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,5 2,4 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 5,1 4,3 4,3 3,4 3,7 3,7 3,7 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). Danish DKK-denomiated short term rate 'shadows' Euro-rates 3) 10-year goverment bonds (or equivalent). DKK-denominated long term rates almost equals euro-rates *) Danish "headline" definition. Figures are about 1% higher than the international comparable ILO/EU-definition **) HICP - Harmonized Index of Consumer Prices in the European Union

Country/Pays/Land: DENMARK Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 4 453 4,5 17,1 17,0 14,0 5,0 0,0 0,0

Logement Renovation 8 050 0,7 2,1 3,5 5,3 0,0 0,0 0,0

Wohnungsbau Total 12 503 1,7 6,3 7,7 8,2 1,8 0,0 0,0

Non-residential construction New 3 345 -13,5 -7,6 -0,1 -0,4 3,7 3,8 4,5

Bâtiments non résidentiels Renovation 2 794 -6,6 1,3 0,5 2,2 1,0 1,0 1,0

übriger Hochbau Total 6 139 -10,7 -3,8 0,2 0,8 2,5 2,5 2,1

Building New 7 798 -6,4 3,3 8,4 7,3 4,5 1,6 1,3

Bâtiment Renovation 10 844 -1,4 1,9 2,7 4,5 0,3 0,3 0,3

Hochbau Total 18 642 -3,4 2,4 5,0 5,7 2,0 0,8 0,7

Civil engineering New 3 222 4,2 -3,7 -5,3 -7,0 0,0 5,0 10,0

Génie civil Renovation 2 884 2,7 -2,2 3,7 4,7 0,0 0,0 0,0

Tiefbau Total 6 106 3,6 -3,1 -1,5 -1,8 0,0 2,6 5,4

TOTAL CONSTRUCTION OUTPUT 24 748 -1,5 0,9 3,2 3,7 1,5 1,3 1,9

Million euro at 2005 prices, excluding taxes. 1 euro = 7,4519 DKK Historical data are estimated/based on National Accounts, prices are exclusive of VAT etc.

Forecasts Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment – Inländischer Zementverbrauch

88 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

Country/Pays/Land: DENMARK Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008 Building permits 1+2 family dwellings Logements autorisés Individuel 14,0 15,5 16,5 17,0 Baugenehmigungen Familienhäuser Flats Collectif 10,0 13,0 13,0 13,5 Mehrfamilienhäuser TOTAL 24,0 28,5 29,5 30,5 Housing starts 1+2 family dwellings Logements commencés Individuel 13,0 15,0 15,0 15,0 16,0 17,0 17,0 Baubeginne Familienhäuser Flats Collectif 10,0 12,5 12,5 10,0 10,0 10,0 10,0 Mehrfamilienhäuser TOTAL 23,0 27,5 27,5 25,0 26,0 27,0 27,0 Housing completions 1+2 family dwellings Logements terminés Individuel 10,0 14,0 15,0 15,5 15,0 16,0 17,0 Baufertigstellungen Familienhäuser Flats Collectif 8,5 10,0 12,5 11,0 11,0 10,0 10,0 Mehrfamilienhäuser TOTAL 18,5 24,0 27,5 26,5 26,0 26,0 27,0

Housing stock *) Logements existants 2 773 2 792 2 814 2 844 2 865 2 885 2 905 Wohnungsbestand

thereof second-homes dont résid. Secondaires 218 220 224 226 230 235 240 davon Zweitwohnungen

thereof vacancies dont inoccupé 132 138 145 145 145 145 145 davon leerstehend

Home ownership rate **) Taux de propriétaires occupants 53,0 52,8 53,0 53,0 53,0 53,0 53,0 Wohnungseigentumsquote

*) Total stock is 'gross' incl summerresidences. Revised series in vacancies/stock. Stock data differ from Statistics Denmarks new definition. See appendix/text for further detail. **) Share of households living in their owner-occupied house/flat. Cf. Appendix to the individual country report Historical data are based on the Danish Building Database with 'mark-up' estimates due to data delays. Data in cludes summerresidences

Country/Pays/Land: DENMARK Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 1 003 -7,4 0,1 -0,2 9,8 2,0 2,0 5,0 Gebäude des Bildungswesens

Buildings for health - included above Bâtiments de santé Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 447 -15,5 -22,1 -2,1 5,3 10,0 10,0 10,0 Industriegebäude

Storage buildings _ included above Bâtiments de stockage Lagergebäude

Office buildings Bureaux 995 -14,9 -10,0 -0,9 -4,5 5,0 5,0 5,0 Bürogebäude

Commercial buildings - included above Commerces Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 398 -17,5 -7,1 -12,6 -8,7 0,0 0,0 0,0 Landwirtschaftsgebäude

Miscellaneous Autres 502 -7,5 1,9 16,3 -0,6 2,0 2,0 0,0 Sonstiges

Total Insgesamt 3 345 -13,5 -7,6 -0,1 -0,4 3,7 3,8 4,5

Million euro at 2005 prices, excluding taxes. 1 euro = 7,4519 DKK Historical data are estimated/based on National Accounts, prices are exclusive of VAT etc.

90 © EUROCONSTRUCT Amsterdam, June 2006 Denmark

Country/Pays/Land: DENMARK Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Telecommunications Télécomunications Telekommunikation

Energy and water works Réseaux d'énergie et d'eau Energie-und Wasserversorgung

Other Autres Sonstiges

Total 6 106 3,6 -3,1 -1,5 -1,8 0,0 2,6 5,4

Million euro at 2005 prices, excluding taxes. 1 euro = 7,4519 DKK

Country/Pays/Land: DENMARK Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 100,9 1,5 1,6 3,4 3,8 3,0 2,0 2,0 Privater Verbrauch

Public consumption Consommation publique 53,9 2,1 0,2 1,5 1,3 1,5 2,0 1,8 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 43,3 0,1 2,0 4,5 9,0 8,0 4,0 4,0 of wich construction *) 21,1 -3,5 2,8 4,3 5,8 3,0 3,0 4,0

Stocks (contribution as % of GDP) Variations de stocks 0,3 0,3 -0,8 0,3 -0,2 -0,1 0,0 0,0 Vorratsveränderung

Exports Exportations 101,3 4,1 1,2 2,7 8,0 5,0 5,0 5,0 Exporte

Imports Importations 91,5 7,5 -1,7 6,4 10,9 7,0 5,0 5,0 Importe

GDP PIB 208,2 0,5 0,7 1,9 3,1 2,8 2,5 2,5 BIP

Standard National Accounts, gross figures. Growth rates are based on chain indices. *)The level of construction in capital formation is here in market prices inclusive of VAT(Tab 2 and 4 are ex. VAT)

92 © EUROCONSTRUCT Amsterdam, June 2006 Finland

FINLAND VTT – Technical Research Centre of Finland www.vtt.fi

Pekka Pajakkala e-mail: [email protected]

Erkki Lehtinen e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The Finnish economy is growing at a strong rate of about 3.5 percent in 2006. The high growth is partly based on the lower than normal 2005 reference figure (just over 2 percent) due to the paper industry's labour disputes. Slightly under 3 percent growth is predicted for the next few years which is clearly above the European average.

Strong domestic demand as a result of the good financial situation of consumers, their confidence in the future, construction investments and lively foreign trade underlie the economic development. Growth in private consumption was strongest in 2005, but it is still positive thanks, for instance, to the wage trend, tax decisions and employment outlook. Foreign trade is expected to increase steadily in 2006–2008. Investments will also grow, especially at the beginning of the period, as industry invests more in machinery and equipment.

The economic development could be threatened by an unexpectedly high rise in interest rates, another steep increase in the price of oil and metals, weaker than anticipated European economic development, the bird flu reaching pandemic proportions, and political tensions exploding into international crises.

In 2005 total construction volume grew a good 5 percent. New residential construction continued to develop favourably at 7 percent. New non-residential construction grew even faster at around 10 percent. The trend in renovation remained stable; the volume increased almost 4 percent. Civil engineering increased 1 percent.

In 2006 total construction will continue to increase at a brisk rate of about 4 percent. New residential construction is expected to grow close to 10 percent. The volume of new non- residential construction is going to increase modestly. Renovation is anticipated to increase further, civil engineering will not.

In the last years of the forecast period, 2007 and 2008, total construction volume is expected to remain at about the present level. Both new residential and non-residential construction will decrease. Civil engineering is also expected to contract slightly whereas renovation of buildings should continue to increase.

CONSTRUCTION OUTPUT BY SECTORS IN FINLAND index 2000=100 140 Renovation and modernisation Residential construction 120 Total construction Civil engineering 100

Non residential construction 80

60 2000 2002 2004 2006 2008 Sources: Statistics Finland and VTT VTT, Finland 5/2006

94 © EUROCONSTRUCT Amsterdam, June 2006 Finland

2 The Macroeconomic Outlook

Strong confidence in growth of national economy

The global economy developed favourably in 2005 at 4.5 percent – only slightly less than the previous year. The U.S. GDP grew 3.5 percent, but somewhat slower growth is forecast for the coming years as private consumption and demand for housing diminish. Strong growth is seen for Asia; 10 percent in China. Japan's economic growth has reached 2.5 percent as investment and private consumption have picked up.

European economic development also looks brighter than earlier. In 2005 it decelerated to about 1.5 percent from 2 percent the year before, but the latter half of the year showed improvement. IN 2006 growth is forecast to reach about 2 percent. Favourable export development raised German growth to around 1 percent. The German economy is picking up: 2006 should see growth of about 2 percent.

The outlook for Finland's economic development remains bright; the most recent forecasts predict even stronger growth. Growth is expected to remain higher than the average for Europe. Preliminary data suggest GDP growth of 2.1 percent for 2005. The paper industry's labour disputes weakened growth figures clearly which is also reflected in the large 2006 growth based on the low reference figures. Around 3.5 percent growth is predicted for 2006. In subsequent years Finnish growth should continue at about 2.5 percent.

Favourable development of consumers' financial position and improved employment contributed significantly to the development of the Finnish economy in 2005. Foreign trade increased noticeably due to the fairly good development of the global economy: imports more than exports. Construction investments expanded briskly, but investment in machinery and equipment was negative. The strongest growth in private consumption is likely behind, but growth will continue at a fairly good pace thanks, for instance, to lower taxation of wages and salaries and improving employment. Threats to the positive development could be an unexpectedly high interest rate hike, an increase in oil and metal prices, and weaker than anticipated European economic development. Trends in international political tensions and their impacts are also a concern.

Industry's confidence in the future remains high although the volume of production contracted in 2005 mainly due to the forest industry's labour disputes. In 2006 production is expected to increase thanks to domestic and, especially, export demand.

The foreign trade volume increased clearly more than forecast in 2005: the volume of exports increased 7 percent and that of imports over 10 percent. In 2006 exports are expected to grow more than imports at 8–9 percent. Growth of 5 percent is expected for the rest of the period.

The Finnish consumer confidence indicator appears to have levelled off. Consumers' confidence in their own finances and the domestic economy has diminished slightly over the last few months. The slight increase in interest rates and the notices of dismissal by industry are probably the major reason. The Finnish confidence indicator is nevertheless still quite high.

New housing loans have been continuously taken out in large numbers although the monthly rate of increase is down. Interest on new loans has increased about 0.5 percentage points. Interest rates are likely to go up since, for instance, the 12-month Euribor has risen about one percentage point. The number of those intending to buy a dwelling has increased since spring 2005. Future consumer confidence will be affected by interest rate developments, the number of co-determination negotiations and dismissals by firms, taxation policy and general economic © EUROCONSTRUCT 95 Finland Amsterdam, June 2006

development In Europe and Finland. The continued high confidence of consumers as a result of the quite favourable general economic trend, income development, and low interest rates has been reflected, for instance, in brisk home sales.

Private consumption will continue to grow in 2006, decelerating only slightly. It is based on expectations of positive development of real incomes as a result of tax cuts, wage and salary development, low inflation, and good overall economic growth. In 2007 and 2008 growth in private consumption is anticipated to slow down, wages and salaries will increase moderately, there will be hardly any tax cuts, and interest rate will rise.

Preliminary data indicate that investments increased about 1.7 percent in 2005. Investment in machinery and equipment contracted clearly, although they increased towards the end of the year. Economic forecasters have raised their predictions for 2006 to about 4 percent. In subsequent years growth in investments is believed to decelerate. The Finnish investment rate (ratio of investment to GDP) is about 19 percent and has not reached 20 percent since the recession of the 1990s. Earlier it stood at 25–30 percent.

In 2005 inflation was about 1 percent; it is expected to accelerate only minimally over the subsequent years. The ECB has twice raised its discount rate by a quarter of a percentage point to 2.5 percent. The discount rate is likely to be increased further. The largest increase is anticipated by Nordea Bank which expects it to be 3.25 percent in December.

The unemployment rate dropped to 8.4 percent in 2005. Employment has increased by 35,000. Service jobs have replaced jobs lost in industry while industry has eliminated jobs at a slower rate. Unemployment is predicted to continue to decrease slightly.

Macroeconomic Key Indicators in Finland until end of 2008 (Annual percentage change) 2002 2003 2004 2005 2006 2007 2008 GDP 2.2 2.4 3.6 2.1 3.6 2.3 2.3 Private Consumption 1.5 4.4 3.2 3.4 3.0 2.5 2.3 Unemployment rate 9.1 9.0 8.8 8.4 7.9 7.6 7.4 Inflation 1.6 0.9 0.2 0.9 1.2 1.5 1.5 Source: EUROCONSTRUCT, 2006

CONSUMER CONFIDENCE CONSTRUCTION CONFIDENCE Balances %, latest value April 2005 Balances %, latest value April 2005 30 60 Finland 40 Finland 20

20 10 0 0 -20 EU -40 -10 EU

-60 -20 -80

-30 -100

-120 -40 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

VTT, Finland 5/2006 Sources: EK and EU Comission Sources: Statistics Finland and EU Comission VTT, Finland 5/2006

96 © EUROCONSTRUCT Amsterdam, June 2006 Finland

3 The Construction Sector

Peak in construction during period

In 2005, the third year of continuous growth in construction, growth picked up: the total volume grew over 5 percent. New residential construction increased 7 percent while new non-residential construction increased as much as 10 percent. In civil engineering a few large projects have maintained the volume. The growth trend continued in renovation.

In 2006 construction will continue to grow briskly, only slightly less than the previous year. New residential construction should increase almost 10 percent thanks to the large number of starts in 2005. New non-residential construction is likely to exceed the 2005 level only slightly mainly due to the contraction in commercial, educational, storage and agricultural building. In civil engineering the earthworks for some major projects are ending and ongoing work is unlikely to keep investment quite up to the previous year's level. Maintenance, on the other hand, is expected to increase to maintain the 2005 volume in civil engineering. Building renovation will continue to grow.

In 2007–2008 brisk growth is anticipated in construction although the volume of new residential and non-residential construction is expected to contract some. Office construction will increase while construction of commercial buildings will decrease a little. Buildings for health will fare the worst, but industrial, storage and agricultural construction will also contract. Renovation will increase while civil engineering would appear to trend downward if decisions to launch new projects are not made.

At the beginning of 2006, the turnover index of construction companies, for both residential and civil engineering construction, has grown at an annual rate of 10 percent.

The building contractors' confidence index has stayed high in the beginning of 2006 – above the long-term average. Construction's order bookings are said to have weakened slightly, but the outlook for employment remains bright. The Confederation of Finnish Construction Industries RT expects positive development in construction at about 3 percent annually in 2006 and 2007.

The volume of new construction starts in 2005 was about 42 million m3. They included two almost one million m3 mega projects: a commercial one in the Tampere region and a nuclear power plant in southwest Finland. In 2006 starts are expected to contract slightly to about 41 million m3. The volume of starts would seem to trend downward towards the end of the forecast period in both residential and non-residential construction.

The construction boom affects nearly the entire country although the areas of focus are growth centres and surrounding municipalities. Brisk internal migration continues. The shortage of building land in the central cities of growth centres curtails residential construction, especially of one- and two-family houses. That has increased the attraction of the municipalities surrounding central cities.

According to the construction cost index, costs of construction increased at an annual rate of about 3 percent in March 2006, clearly exceeding overall inflation. The prices of material inputs have increased more than the price of labour. The tender price index for the metropolitan area was about 2 percent higher in March 2006 year-on-year with regard to both residential and non-residential construction.

NEW BUILDING STARTS IN FINLAND GROWTH OF GDP AND CONSTRUCTION OUTPUT Mill. m3 50 IN FINLAND 1997–2008

Permits 12,5

40 11 GDP CONSTRUCTION

Starts 30 77 6,3

5 5,1 5,3 20 3,4 3,6 3,4 3,6 3,6

2,2 2,4 2,1 2,3 2,3 10 1,2 1 0,8 0,5

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* 2007* 2008* 1992 1994 1996 1998 2000 2002 2004 2006 2008 -0,6 *forecast -0,9 Sources: Statistics Finland and VTT VTT, Finland 5/2006 Sources: Statistics Finland, and VTT/RTE VTT, Finland 5/2006 CONSTRUCTION OUTPUT IN FINLAND CIVIL ENGINEERING IN FINLAND TOTAL EURO 22,3 BILL Y 2005 EURO 4,5 BILL. Y 2005

Residential Other renovation 13 % 17 % Residential new 22 % Roads 35 %

Energy and water Non-residential works renovation 24 % 17 %

Civil engineering Non-residential new Railways renovation 24 % 12 % 6 % Tele- Civil engineering new communications Other transport 14 % 13 % 3 % VTT, Finland 5/2006 VTT, Finland 5/2006

4 Residential Construction

Very brisk new residential construction

The volume of residential construction grew for the third successive year in 2005 by about 7 percent. In 2006 the volume is expected to increase strongly again by nearly 10 percent. Towards the end of the forecast period growth will slacken and a slight downward trend is likely to follow.

There were about 33,000 new residential starts in 2005. That means about 6.4 dwellings per 1,000 occupants which is a lot in international comparison. In 2006 starts are expected to increase to about 34,500 units. Towards the end of the period the pace will slow down reaching 30,000 in 2008. The reduction will occur mainly in row houses and flats, the share of one- and two-family houses will increase, and they will be less affected.

VTT has calculated that about 30,000 new dwellings will be needed annually for the next 10 years. The need is created by population growth, migration, changes in population structure and family status as well as a larger decrease in housing stock and a growing housing reserve.

The demand outlook remains favourable. Favourable interest rates, the ease of getting a loan, consumers' confidence in their own finances, higher earned incomes, income tax cuts, expected GDP growth, and continued internal migration will maintain growth in new residential construction. Municipalities around growth centres are better able to offer plots for one- and two-family houses than central cities which means that especially younger families often move there with the aim of improving their standard of living despite the longer distance to work.

In 2004 the share of one- and two-family houses equalled that of flats in new residential starts. That trend will continue: towards the end of the forecast period about the same number of dwellings will be built in one- and two-family houses as in blocks of flats and row houses. Construction companies are also investing resources in the development of one- and two-family house production. Row houses have not regained their popularity after the

98 © EUROCONSTRUCT Amsterdam, June 2006 Finland slump of the early 1990s. At that time, roughly the same number of dwellings was built in one- and two-family houses, row houses and blocks of flats. Today, the number built in row houses is less than half of those built in blocks of flats and a third of those built in one- and two-family houses.

Low interest rates and the consumers' relatively good financial situation make it possible for an increasing number of them to acquire the desired one- or two-family home. Moreover, people find a self-owned home safer and more advantageous than a rental unit. As a consequence, a significant number of rental units have been converted into ownership dwellings, rents have fallen, and production of rental units has declined.

State-subsidised production has fallen to less than half in a few years being about 4,000 units in 2005. The dwellings are built primarily in blocks of flats and are largely rental units. The significance of the subsidisation has weakened relatively speaking due to low interest rates which is why demand for rental units has fallen. This has reduced the production of flats. An increase in subsidised production in the near future appears unlikely.

A lot of new housing loans were still taken towards the end of 2005 and in early 2006 although at a slower rate. In early 2006 the housing loan stock has increased at an annual rate of about 16 percent. Interest rates on new housing loans have increased a good half a percentage point since autumn 2005 to 3.5 percent. The rise is likely to continue since, for instance, the 12-month Euribor has increased a good percentage point since autumn 2005, and a very large share of loans are tied to short-term interest rates. The ECB is expected to raise its discount rate as a result of the stronger expectations for European economic growth and inflationary pressures.

In the first quarter of 2006 the prices of existing flats were 9.5 percent higher year-on-year. Housing sales have remained lively thanks to stable interest rates and longer loan periods. The indebtedness of households has not become a major problem yet. The average price of existing flats in the metropolitan area is about €2,700/m2 and the national average about €1,800/m2.

NEW HOUSING STARTS IN FINLAND NEW HOUSING STARTS BY TYPES dwellings dwellings 50000 30000

Permits 25000 40000

20000 Blocks of flats Detached houses 30000 Starts 15000

20000 10000 Terraced houses 10000 5000

0 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 1992 1994 1996 1998 2000 2002 2004 2006 2008 Sources: Statistics Finland and VTT VTT, Finland 5/2006 Sources: Statistics Finland and VTT VTT, Finland 5/2006

Housing repair and maintenance

Residential repair, maintenance and improvement work are increasing steadily in Finland. Early in the forecast period renovation will increase annually less than 5 percent, and toward the end about 3 percent. VTT studies suggest growth of 3–5 percent annually over the next 10 years.

Presently half of the housing subjected to renovation was built in 1961–1980 and a quarter in 1941–1960. The total volume of housing stock renovation will be increased over the next 10 years especially by work on row houses and blocks of flats built in the 1970s.

An increasing share of Finland's quite young housing stock is thus reaching the age when repairs are a must. For instance, facades, roofs, windows and building services require major © EUROCONSTRUCT 99 Finland Amsterdam, June 2006 repair measures. The renovation of the concrete facade elements of blocks of flats is estimated to double in ten years.

According to surveys 20 years into the future, the renovation need of one-family, two-family and row houses will increase throughout the forecast period. In the case of blocks of flats, a declining trend is likely to begin in 10 years. This is due the fact that a lot of blocks of flats were built in the 1970s, and most of them are expected to be renovated in the next 10 years.

Smaller repairs are often done in connection with dwelling handovers which have increased, for instance, as a result of lively internal migration. Sales of existing dwellings have been brisk for long which is reflected in the consumer barometer as increased intentions to renovate. Increased renovation also raises demand for hardware store products.

Households can deduct from their taxable income 60 percent of the costs of contracted maintenance or repairs on, for instance, their homes or free-time residential buildings. Both spouses can make the deduction – the maximum amount is €1,150 per year. Renovation of residential buildings is also promoted by state subsidies granted for the renovation of dwellings of elderly and handicapped people, the elimination of health hazards and improvement of water supply and energy-efficiency, etc. Lifts have not been installed in existing blocks of flats to the extent expected despite the availability of subsidies.

The total value of repair, maintenance and improvement in Finland stood at about €3,800 million in 2005 (€1,400 million for one-and two-family houses, €550 million for row houses and €1,850 million for blocks of flats). It grew nearly 1.5-fold in 10 years in real terms. Of the total, 35 percent was used to repair building envelopes, 45 percent on interior repairs, and 20 percent on building services.

5 Non-residential Construction

Continued growth in new non-residential construction

In 2005 new non-residential construction increased about 10 percent. It was biggest in industrial buildings, warehouses and agricultural buildings. A clear drop occurred in buildings for education.

New non-residential construction will increase slightly also in 2006 while in 2007 and 2008 the volume will decrease moderately.

There will be a further clear drop in the volume of buildings for education in 2006, nearly a third, while relatively stable construction is anticipated for the rest of the forecast period. The volume of buildings for health will grow strongly, by about a quarter, thanks to the large number of starts towards the end of 2005, only to decline towards the end of the period.

The volume of construction of commercial buildings is quite high. In 2005 the volume still increased slightly, but decline is expected in subsequent years.

The slump in office construction appears to be over, but volume grew only modestly in 2005 due to the small number of starts. Subsequent years are expected to show quite strong growth due to the low starting level, but the volume of construction will nevertheless not be very high.

The dip in industrial building construction has ended. The 2005 volume increased by a quarter. Growth was boosted significantly by the construction of Finland's fourth nuclear power plant that will continue for another couple of years. Industrial construction will remain fairly robust also in the latter part of the forecast period as investment in production capacity is up thanks to favourable domestic economic development and exports. 100 © EUROCONSTRUCT Amsterdam, June 2006 Finland

Construction of storage buildings is very brisk but will slow down some in coming years. Construction of agricultural buildings is on a downward trend although a short period of heightened activity is under way. Construction of miscellaneous buildings (free-time residential buildings, assembly buildings, transport and communications buildings, other buildings) is increasing a few percent annually.

In Finland non-residential buildings are classified as follows:

2005 volume, MEUR Commercial and office buildings - commercial buildings 1,090 - office buildings 340 - transport and communications buildings 250 1,680 Public service buildings - buildings for institutional care 240 - assembly buildings 190 - educational buildings 470 900 Industrial buildings and warehouses - Industrial buildings 1,070 - warehouses (storage buildings) 460 1,530 Miscellaneous - free time residential buildings 310 - agricultural buildings 540 - other buildings 380 1,230 Total 5,340

The construction of commercial and office buildings has been threefold: commercial construction has been brisk, construction of transport and communications buildings has been quite stable, while office production has declined. Their combined volume increased about 4 percent in 2005 while the volume of starts amounted to just under 6.0 million m3. In 2006 the volume is expected to decline about 2 percent while stable development is forecast for the rest of the forecast period.

Domestic demand and retail sales have developed favourably even in an economic recession which has made brisk commercial construction possible. Migration into growth centres has been a major factor in accelerating commercial construction along with high consumer demand and confidence. Several large retail parks and markets are still under construction and planning. The expansion of foreign retail chains into Finland will also increase commercial construction. Commercial construction starts increased in 2005 due to, for instance, the launching of a large retail park project (over 900,000 m3) in the Tampere Region but will trend slightly downward thereafter.

The volume of office construction dropped to a third in 2001–2004 due, for instance, to the fizzling out of the strong ICT sector boom. Office starts will increase in 2006–2008, but growth will be quite small in monetary terms due to the low volume. New offices are being built although the vacancy rate is above normal in many cities. The need for extra office space is based partly on the demand by a reviving economy, and partly on the fact that new, more favourably located and better equipped offices make companies relocate. In the case of old spaces, new uses and modernisation of the spaces need to be considered.

Construction of public service buildings will decline in the forecast period. In 2005 the volume fell 9 percent, but later the decline will be less steep.

The increased population in areas of net in-migration also requires public service buildings. Furthermore, the ageing of the population calls for additional investments in social-sector construction. Yet, the financial situation of municipalities – the largest investors in the sector – has weakened recently, and no change for the better is expected in the next few years. The municipalities around growth centres will even have to think of ways of curtailing in- migration.

Construction of educational buildings contracted in 2005. The trend will continue in 2006, but in subsequent years it should point moderately upward. Educational building construction is heavily concentrated in university towns, especially the five growth centres: the metropolitan area, Turku, Tampere, Jyväskylä and Oulu.

The production volume of buildings for institutional care will grow in 2005 and 2006, but a decline will follow. There is no pressing need for large hospitals in the near future which means that primarily smaller units, such as health centres and service buildings, will be built.

The volume of assembly buildings has fluctuated strongly according to the timing of large sports-building projects. In 2005 construction contracted, but the future looks quite promising.

Industrial construction started to grow in 2004 after a few years of decline. Starts increased clearly but volume only a little. In 2005 starts and volume grew clearly, and the giant nuclear power plant project (building area over 900,000 m3) has, for its part, boosted industrial construction. Growth will continue also in 2006. Foreign trade, which is picking up, should attract a reasonable amount of industrial investments also in the remaining years of the forecast period. The volume will naturally contract some as the nuclear power plant is completed.

Warehouses are being built for the needs of industry and commerce. Commercial construction has also resulted in brisk warehouse construction: e.g. large logistics hubs have been built for retail chains. Volume growth was strong in 2004–2005 but is expected to level off and trend slightly downward.

Construction of free-time residential buildings has been quite stable in recent years. Finland has about 500,000 private free-time residential buildings, and about 6,000 new ones are built annually. They are increasingly being built for winter use or even as permanent residences. The affluence of households is increasing which makes them interested in and able to acquire free-time housing. The volume will remain relatively stable until 2008. Construction is curtailed by the difficulty of acquiring suitable lakeside plots and their rising prices.

The increase in agricultural construction in 2005 was an exception; a declining trend will prevail thereafter. Agriculture is undergoing a radical structural change. The number of active farms has fallen by a quarter in 10 years and stands now at about 75,000. At the same time, the average size of a farm has increased 1.5-fold to about 30 hectares. The number of dairy/cattle farms has fallen even more drastically, it has been nearly halved, to just over 25,000. So-called large-scale farms have also been created during the transition requiring extensive construction investments.

Other buildings include a large group of sauna buildings, outbuildings erected on the same plot with other buildings, etc. The volume has been trending up so far but is likely to turn downward towards the end of the period.

102 © EUROCONSTRUCT Amsterdam, June 2006 Finland

Non-residential renovation

Non-residential renovation has been growing at a quite stable 2–3 percent. The volume is expected to drop slightly towards the end of the period.

The value of Finnish non-residential renovation was about €3,700 million in 2005 indicating an increase of about 30 percent in ten years. The breakdown was as follows:

• educational buildings 1,050 MEUR • buildings for institutional care 350 MEUR • industrial buildings 750 MEUR • office buildings 300 MEUR • commercial buildings 350 MEUR • other buildings 900 MEUR

The long-term growth trend in non-residential renovation according to VTT studies is about 3 percent annually. The impact of the age structure of the building stock is not as significant as with residential buildings, but remodelling of the buildings to meet the requirements of modern activities will require further renovations. Increased industrial production also requires renovating industrial buildings while commercial buildings are renovated to meet the standards of modern commerce. Some centrally located office buildings are being converted into residential buildings.

6 Civil Engineering

The volume of civil engineering in Finland will remain unchanged in 2006. The favourable situation is the result of the launching of several new projects – such as the Hakamäentie street project in Helsinki, the E18 Motorway project between Muurla and Lohja, and Tampere western ring road, phase II – that replaced several projects completed in 2005. Most of the work of these huge projects will be done in 2007–2008. Allocations for infrastructure maintenance, on the other hand, are decreasing.

The busiest phase of the earthworks for Finland's fifth nuclear power plant and the Porvoo oil refinery occurred in 2005. The energy generation equipment of the nuclear plant is not included in civil engineering investments. In gross fixed capital formation they come under machinery, transport and other equipment.

Other large projects under way are the work on the road and rail links for the new Vuosaari Port and construction of the Vuosaari Port itself. The shortcut railway line between Kerava and Lahti will be completed in 2006 – it increased rail investments significantly in 2005.

Investments in waterborne traffic are up due to the Vuosaari Port project. Investments in air traffic are down; no major airport projects are under way. Municipal investments in streets and water supply and sewerage are surprisingly high despite the weak financial situation of municipalities.

Investments in civil engineering will not increase in 2006 although several large projects are about to be launched. If decisions on new major projects are not made, civil engineering investments will contract 2 percent in 2007 and 2008 and maintenance will not increase either. Cuts threaten especially road and rail allocations as well as the energy and water sectors after the completion of the nuclear plant project.

Construction of the Lappeenranta–Imatra motorway and the Lahti–Luumäki and Seinäjoki– Oulu railway renovations are under consideration. If the projects are launched in 2007–2008, the estimated contraction in investments will turn into growth of a few percent.

VTT's autumn 2005 survey of sector actors indicated that the economic outlook for civil engineering was good as concerns investors, civil engineering firms and earthwork contractors. The weakening outlook for 2006 anticipated by the respondents earlier is improving along with decisions to launch new projects. The lack of skilled employees has become the worst bottleneck for earthwork contractors. Other bottlenecks are the lack of financing, schedules, short order books and price competition. (Source: Eero Nippala, Tampere Polytechnic)

104 © EUROCONSTRUCT Amsterdam, June 2006 Finland

APPENDIX - DEFINITIONS

Tables 2, 4A, 4B • New construction: sources Statistics Finland and VTT`s estimations and forecasts. Volumes based on registered building starts in m3, estimated building costs and building times in different categories of buildings, calculations of money used in separate years, DIY included, additions included, VAT excluded. • Renovation: sources Statistics Finland and VTT`s estimations and forecasts. Includes investments and maintenance VTT has made regular researches defining the volume of R&M.works in different categories of buildings which are also the basis for official statistics. • Civil engineering: sources Statistics Finland and VTT`s estimations and forecasts.

Table 3 • Sources Statistics Finland and VTT`s estimations and forecasts. Permits, starts and completions are registered in Finland. The data comes late to the register and has underlap. VTT estimates frequently the underlap of the data.

Country/Pays/Land: FINLAND Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 5 206 5 219 5 230 5 255 5 275 5 290 5 300 Bevölkerung

Households ('000s) Ménages 2 354 2 380 2 400 2 420 2 440 2 460 2 480 Haushalte

Unemployed ('000s) Chômeurs 237,0 235,0 229,0 220,0 210,0 203,0 198,0 Arbeitslose

Unemployment rate (%) Taux de chômage 9,1 9,0 8,8 8,4 7,9 7,6 7,4 Arbeitslosenquote

Change of GDP Variation du PIB 2,2 2,4 3,6 2,1 3,6 2,3 2,3 Veränderung des BIP (% change in real terms)

Consumer prices (% change) HICP Prix à la consommation 1,6 0,9 0,2 0,9 1,2 1,5 1,5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 0,8 1,8 2,5 3,6 2,5 2,0 2,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 5,0 4,1 4,1 3,4 3,5 3,6 3,7 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). 3) 10-year goverment bonds (or equivalent).

106 © EUROCONSTRUCT Amsterdam, June 2006 Finland

Country/Pays/Land: FINLAND Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 4 930 -0,5 13,0 9,5 7,0 9,5 0,5 -3,0

Logement Renovation 3 830 3,0 4,0 5,0 5,0 5,0 4,0 3,0

Wohnungsbau Total 8 760 1,3 8,7 7,5 6,1 7,5 2,0 -0,4

Non-residential construction New 5 340 -7,0 -11,0 -0,5 10,5 1,0 -0,5 -2,0

Bâtiments non résidentiels Renovation 3 690 3,0 3,0 3,0 2,0 2,5 1,0 0,5

übriger Hochbau Total 9 030 -3,3 -5,6 1,0 6,9 1,6 0,1 -1,0

Building New 10 270 -4,5 -1,3 4,1 8,8 5,1 0,0 -2,5

Bâtiment Renovation 7 520 3,0 3,5 4,0 3,5 3,8 2,5 1,8

Hochbau Total 17 790 -1,4 0,8 4,1 6,5 4,5 1,1 -0,7

Civil engineering New 3 130 2,5 1,1 1,1 2,8 -0,1 -3,3 -2,9

Génie civil Renovation 1 350 1,0 0,3 0,6 -3,1 0,6 0,4 0,4

Tiefbau Total 4 480 2,0 0,8 0,9 0,9 0,1 -2,2 -1,9

TOTAL CONSTRUCTION OUTPUT 22 270 -0,6 0,8 3,4 5,3 3,6 0,5 -0,9

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 1,69 -2,5 2,5 3,5 3,0 5,0 0,0 -1,0 Inländischer Zementverbrauch

Country/Pays/Land: FINLAND Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008 Building permits 1+2 family dwellings Logements autorisés Individuel 12,6 14,9 15,8 17,5 18,0 17,5 17,0 Baugenehmigungen Familienhäuser Flats Collectif 18,6 21,0 19,2 19,9 20,0 18,5 18,0 Mehrfamilienhäuser TOTAL 31,2 35,9 35,0 37,4 38,0 36,0 35,0 Housing starts 1+2 family dwellings Logements commencés Individuel 10,8 13,1 14,2 15,7 16,4 16,0 15,3 Baubeginne Familienhäuser Flats Collectif 17,4 18,3 18,2 17,7 18,0 16,7 16,1 Mehrfamilienhäuser TOTAL 28,2 31,4 32,4 33,4 34,4 32,7 31,4 Housing completions 1+2 family dwellings Logements terminés Individuel 10,3 10,8 12,8 13,8 15,5 16,5 16,0 Baufertigstellungen Familienhäuser Flats Collectif 16,9 17,3 17,9 17,6 18,0 17,0 16,5 Mehrfamilienhäuser TOTAL 27,2 28,1 30,7 31,4 33,5 33,5 32,5

Housing stock Logements existants 2 574 2 595 2 625 2 655 2 680 2 705 2 730 Wohnungsbestand

thereof second-homes dont résid. Secondaires 190 190 195 195 195 195 195 davon Zweitwohnungen

thereof vacancies dont inoccupé 30 30 30 30 30 30 30 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 58,0 59,0 60,0 60,5 61,0 61,0 61,5 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

108 © EUROCONSTRUCT Amsterdam, June 2006 Finland

Country/Pays/Land: FINLAND Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 470 23,5 -15,0 -0,5 -12,0 -29,0 6,5 5,5 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 240 3,5 -25,0 -5,5 14,5 23,0 -17,0 -11,5 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 070 -14,5 -33,0 3,5 26,0 13,0 -3,0 -10,5 Industriegebäude

Storage buildings Bâtiments de stockage 460 -3,5 2,5 15,5 27,0 -4,5 -3,0 -0,5 Lagergebäude

Office buildings Bureaux 335 -42,0 -32,5 -19,5 8,5 21,0 17,5 9,0 Bürogebäude

Commercial buildings Commerces 1 090 7,0 12,5 14,0 4,5 -9,5 -7,5 -2,5 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 535 6,0 -10,0 -15,0 20,5 -5,0 -2,0 -2,5 Landwirtschaftsgebäude

Miscellaneous Autres 1 140 1,5 11,5 -6,0 4,5 8,0 5,5 2,5 Sonstiges

Total Insgesamt 5 340 -7,0 -11,0 -0,5 10,5 1,0 -0,5 -2,0

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: FINLAND Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 550 2,5 -4,5 0,5 -0,5 1,5 -1,5 -1,0 Verkehrsinfrastruktur Straßen Railways Voies ferrées 540 1,5 -0,5 6,5 -1,5 -4,5 -0,5 Bahnanlagen Other transport Autres réseaux 140 -3,0 41,0 0,0 13,0 -1,0 -23,0 Übrige Vekehrsinfrastruktur TOTAL 2 230 2,5 -3,0 2,5 1,0 1,5 -2,0 -2,5

Telecommunications Télécomunications 590 0,0 1,0 2,5 3,5 1,0 -2,5 -1,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 080 3,0 5,0 -1,5 0,5 -3,5 -3,5 -2,0 Energie-und Wasserversorgung

Other Autres 580 1,5 7,0 -1,0 -0,5 1,0 0,0 -1,0 Sonstiges

Total 4 480 2,0 0,9 1,0 1,0 0,1 -2,2 -1,9

Million euro at 2005 prices, excluding taxes.

110 © EUROCONSTRUCT Amsterdam, June 2006 Finland

Country/Pays/Land: FINLAND Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 81,3 1,5 4,4 3,2 3,4 3,0 2,5 2,5 Privater Verbrauch

Public consumption Consommation publique 35,0 4,3 1,5 1,6 1,5 1,5 1,5 1,5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 29,8 -3,1 -1,5 5,0 1,7 4,0 3,5 1,0 of wich construction 18,6 -1,9 0,7 4,6 4,9 3,8 0,1 -0,9

Stocks (contribution as % of GDP) Variations de stocks 3,7 -0,2 0,4 0,2 0,2 0,0 0,0 0,0 Vorratsveränderung

Exports Exportations 60,1 5,0 1,4 5,6 7,0 9,0 5,0 5,5 Exporte

Imports Importations 54,6 1,8 2,9 6,0 10,3 7,5 5,5 5,0 Importe

GDP PIB 155,3 2,2 2,4 3,6 2,1 3,6 2,3 2,3 BIP

Standard National Accounts, gross figures.

112 © EUROCONSTRUCT Amsterdam, June 2006 France

FRANCE BIPE www.bipe.com

[email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 General summary

The French construction market grew by 3.2% in 2005, following growth of 3.5% in the previous year. As in 2004, this growth is wholly attributable to new housing. New construction starts in this area rose to 410,000 units, a level unmatched in France for a quarter-century. Highly favourable credit conditions, sustained demographic growth, intense interest in property ownership among consumers and tax advantages for investors have all helped to generate exceptional momentum in demand for housing, despite very sharp increases in property prices. The non-residential sector experienced especially weak growth in light of the slowdown in productive investment, which continues to hamper industrial building construction. Growth has slowed in civil engineering as a result of reduced spending on transport infrastructures. Thus, despite only mild economic growth (1.4%), the new housing sector has once again proven counter-cyclical, driving growth in the industry.

The French economy is expected to see a slight improvement this year, reflected in a more significant upturn in real investment that will benefit private non-residential construction. As a result, we may witness a recovery in industrial building construction after four years of decline (in a cumulative contraction of 20%). With regard to new housing, we anticipate additional progress in construction starts during the upcoming year, given the substantial number of construction permits awarded in 2005. However, 2006 will likely mark the zenith of this residential building cycle. Sustained activity is also possible in the civil engineering sector, thanks to greater investment by local governments in the run-up to elections. All in all, the construction market will once again post a very strong performance (3.7%) as its various sectors begin to evolve in tandem.

A clear change in course is likely to emerge in 2007. Slower economic growth in France could have a negative impact on productive investment in non-residential new construction. At the same time, new housing will begin to decline against a backdrop of reversals in the property market: falling prices, higher interest rates, a wait-and-see attitude among consumers and potential cutbacks in investment. We do not anticipate a major slump, but rather a significant correction after a long cycle in which a number of longstanding records were broken (construction start-ups, prices). With fewer construction start-ups in 2007 and 2008, new production will decline during the period. The civil engineering sector, which will continue to see sustained growth in 2007 (3.3%), will experience a turnaround in 2008 during the post-election years (when local governments tend to invest at a slower pace). In this environment, the French construction market can be expected to increase by 1.2% in 2007 and a mere 0.3% in 2008.

114 © EUROCONSTRUCT Amsterdam, June 2006 France

2 France: Closer to its potential, but still behind

After a disappointing performance in 2005 (1.4% GDP growth), the economy is on track for a rebound in 2006 (1.9%). All components of manufacturing surveys are pointing upward. However, French industrial managers’ confidence level remains noticeably lower than that of their German counterparts. This can be explained by a relative loss of competitiveness.

Indeed, the external trade deficit jumped in 2005 to €26.5 billion against €8.5 billion in 2004. There are several factors behind this deterioration: dependence on European export markets, meaning that exports are insufficiently directed toward the worldwide economy’s most dynamic regions; soaring energy bills; stronger domestic demand than from its main trading partners; and, last but not least, declining competitiveness vis-à-vis its key partner, Germany. It is hoped that the ongoing rebound of our European trading partners will help somewhat in stabilizing this dwindling external performance.

Fiscal policy has no room for manoeuvre, since the 3.0% of GDP public deficit limit was almost achieved in 2005 only thanks to a one-off transaction (0.5% of GDP coming from EDF and GDF due to a transfer of pension liabilities). Moreover, the local authorities’ political cycle (elections in 2008) favours a boost in their investments. All in all, direct tax cuts on the forecasting horizon (income tax reform in 2007) will not totally offset other indirect and local tax rises as far as households are concerned.

The unemployment rate should manage to break past the 9.0% level in 2007. So far, the unemployment rate decline has been hesitant, but we have probably entered the take-off phase for employment thanks to the pick-up in economic activity and stabilization in the active population, linked to an ageing population. However, since companies are focused on productivity gains, one should not hope for a boom in job creation.

Despite weak income growth, for the last four years French household spending has hovered at about a 2.0% growth rate due to a fall in the savings ratio from 16.8% in 2002 to 15.3% in 2005. This was spurred by strong credit growth, in particular housing credit, thanks to a fall in interest rates and longer loan maturities. With an ongoing rise in long-term interest rates, we bank on a stabilization of credit production and thus envisage a stable savings ratio. In this case, consumer spending growth will move simultaneously with income, i.e. growth should remain at about 2.0% per year in 2006, 2007 and 2008. There is an upside risk if the retail banking sector continues to expand loan maturities, which remain on average below 20 years, and there are of course downside risks as well, including a sharper than expected bond market correction and purchasing power cuts in tandem with energy quotes.

Corporate investment should strengthen its recovery (improving industrial outlook, solid corporate profits), though its growth rate should remain below previous peaks.

In a nutshell, GDP growth at 1.9% should be close to potential growth in 2006 before slowing in 2007 to 1.7% in response to a less dynamic euro-zone economy, especially in Germany (VAT hike). In 2008, GDP growth should accelerate somewhat but remain moderate. There are huge downside factors threatening this outlook, including a dollar crisis, credit growth slowdown, the need for further fiscal consolidation, and the ongoing emergence of non- cooperative macroeconomic policies inside the euro zone (competitive deflations etc.), all of which serves to curb any optimism about the likelihood of higher potential growth in this cycle.

3 The housing market

3.1 2005: An exceptional year for new housing Following a very good year in 2004, we expected even better results for 2005 at the time of the Barcelona conference.

3.1.1 Over 400,000 new housing units begun in 2005 The number of construction starts in 2005 rose by nearly 50,000 over 2004. We need to go back a quarter-century to find another year in which the number of housing starts exceeded 400,000. This increase – of 13% on average – is due primarily to multi-family housing.

At the same time, we have seen a slight drop in the unit area of built housing. This confirms the hypothesis that builders have adopted a strategy of defensive adaptation: at a time of increasing insolvency (with the increase in housing prices and the very slight increase in the purchasing power of disposable income), households have lowered their expectations and are buying or building on a smaller scale.

3.1.2 Record sales of new housing alongside a slight increase in housing stocks During 2005 as a whole, developers sold over 120,000 new housing units, including about 103,000 apartments. The percentage of these units that benefited from the Robien tax incentives is not yet known, but it likely represents about half, given the 60,000 transactions of this type logged over the past two years. In this euphoric climate, developers have substantially increased their sales offerings (19.8%); this has led to a marked increase in stocks (including the addition of over 12,000 apartment units). However, stock levels are not generating significant concern, given that they represent only a little more than five months’ worth of sales. Prices have jumped sharply, reaching an average of €2,850 per square metre in 2005 for multi-family housing (an 11.3% increase) and €218,375 for an individual lot (a 9% increase).

3.1.3 A clear slowdown in price increases for existing housing stocks Selling prices per square metre for existing residential units have slowed since February 2005. Over the year as a whole, year-on-year prices rose by 9.0%; the average increase was 10.6%, compared with 15.5% in 2004. Based on these figures, prices per sq.m have cumulatively increased by 109% since 1998.

3.1.4 Double-digit growth in new housing loans in 2005 The increase in new housing loans remained steady (22% in 2005, as in 2004), reflecting consumer demand for residential property. Moreover, highly favourable loan conditions have proven a major incentive: indeed, repeat homebuyers are contributing only slightly more of their personal funds than first-time homebuyers, choosing instead to invest their liquid assets elsewhere.

3.1.5 Weak volume growth in maintenance and improvement projects By comparison, growth in maintenance and improvement work was disappointing. As a yearly average, growth in this sector increased by about 4.5% in value. The IPEA index, which measures inflation in the cost of work, stood at an annual average of 3.5%; therefore, the volume of work increased by approximately 1.0% for the year as a whole. This figure undoubtedly reflects two distinct developments: • Stagnation in the number of projects conducted without public aid, as a result of limited growth in the purchasing power of household disposable income. • A marked increase (5%) in work subsidized with public funds, thanks to urban renovation projects funded by the National Agency for Urban Renovation (ANRU) and the National Bureau for Housing Improvement (ANAH).

116 © EUROCONSTRUCT Amsterdam, June 2006 France

Moreover, it may seem surprising that there was no evidence of anticipatory activity at the close of the year, when there was great uncertainty as to whether the current provision granting reduced VAT rates would be extended.

The modest increase in maintenance and improvement work can probably also be attributed to a shortage of available manpower as small businesses and artisans devote their energies to the new housing sector.

3.2 Another highly favourable year for new construction in 2006

3.2.1 Slightly more sustained economic growth in 2006 With Europe now on a better footing overall thanks to a recovery in Germany, the French economy seems likely to recapture some of its vigour in 2006; investments and exports are expected to drive new growth. Household consumption will remain fairly solid so long as inflationary worries do not arise. Nonetheless, growth rates will fall a little short of their potential over the middle term, remaining somewhat below the European average.

3.2.2 430,000 construction starts in 2006 and a 7% increase in new production The number of building permits awarded for multi-family housing in 2005 was considerable, including an 18% increase for apartments over the year as a whole. As a result, even if we see a slight drop in the number of permits over the next few months, it appears highly unlikely that construction starts in the sector will fall below 200,000 units this year. The lag time between permit and actual construction is undoubtedly shorter for single-family housing; we believe that demand is beginning to dry up, which could lead to a very slight drop (about 5,000 units) in construction starts. Taking into account the reduction in unit areas and shorter construction timetables, this scenario yields a 7% increase in new construction in 2006: 2.5% for single-family homes and 19.5% for multi-family housing (a spectacular jump, supported by the fact that construction starts rose by nearly 60,000 units in just a two-year period).

3.3 A downturn in construction starts in 2007 and 2008 and a decline in new production The macroeconomic assessment adopted by BIPE does not provide clear support for our housing figures. It assumes a slightly less vigorous pace of growth over the next two years, notably with regard to investment. On the plus side, the purchasing power of disposable household income will remain steady and the unemployment rate will continue to fall.

The supply of rental housing is expected to remain at healthy levels, thanks to public aid: • With respect to public housing, a recovery is already underway, to judge from the notable increase in the number of financial packages awarded and the increased activity in urban renovation programmes sponsored by the PNRU, which call for reconstruction in the wake of demolition projects.

• In the private sector, new tax provisions should lead to greater equilibrium: the so-called Borloo Populaire plan will encourage the construction of rent-controlled housing for middle-income households, unlike the standard Robien plan with its amortization options. However, it is difficult to issue a verdict on these new provisions, which will not take effect until 1 July 2006, at which point the two systems will operate side by side. Preliminary calculations suggest that the Borloo plan will garner healthy profit levels (5%, versus 6.5% for the revised Robien scheme, according to some sources).

However, a number of points on the negative side of the balance must be cited as well: • The rise in long-term interest rates is still contained, but it marks the end of a period during which rates were historically low. • The increase in housing stocks may lead developers, who are currently showing signs of having considerably tempered their optimism, to change course. • As numerous observers have noted, developers undoubtedly exhausted their supply of development-ready property during the period of intense activity that lasted from 2004 into 2006, and the lack of reconstituted property portfolios could pose a genuine obstacle to any new production. • Statements by the European Central Bank that housing in France is overvalued by 30% could plant fears among investors (who could potentially leave the residential housing market and return to the stock market, which is seeing a marked improvement) and encourage a wait-and-see attitude among household consumers (who will undoubtedly put off any purchase if they are convinced that a downturn in prices is inevitable). • With this perspective in mind, we continue to believe that prices will fall slightly in 2007 and 2008 after anticipated weak growth in 2006. • Housing clearly represents a political challenge in 2006, since a healthy level of new construction will provide a strong electoral platform; this challenge will lessen in 2007 and concerns may arise regarding the post-electoral environment (i.e. the perceived risk of a change in tax policy in the event of a change in the governing majority). • An argument could be made that the ongoing trend toward longer loan periods will ensure continued strong demand; according to a survey commissioned by the ECB, European banks are beginning to grow concerned about the potential for household indebtedness and would prefer not to continue down that path (even though some institutions are announcing loan periods of up to 50 years in the press). • Finally, the year 2007 could represent a demographic low point for the 30- to 39-year-old age group, which has the greatest home-buying aspirations.

All things considered, we are projecting that construction starts will fall by 25,000 in 2007 and an additional 15,000 in 2008. This will actually represent a correction after the boom of the previous years rather than a slump in demand; the market remains strong in light of positive demographic data (the current housing supply is inadequate in the face of demand, which is probably being underestimated by traditional projection methods) and loan conditions that remain favourable.

Based on this assumption of 405,000 construction starts in 2007 and 390,000 in 2008, new production can be expected to decline by 2% in 2007 and nearly 3% in 2008.

118 © EUROCONSTRUCT Amsterdam, June 2006 France

3.4 Removal of the stumbling block regarding VAT rates on housing maintenance After a year in which private-sector demand remained at dismal levels, the market for maintenance and improvement projects on existing housing should see an improvement between 2006 and 2008. The growing percentage of transactions that involve upgrades to existing housing, interest rates that remain at attractive levels and incentives for energy- saving improvements are all likely to encourage individual consumers to take on new projects.

After lengthy negotiations, European finance ministers convened in January to extend the provision for reduced VAT rates in France until 2010. The general uncertainty (given the possibility that demand would fall in 2006 as prices rose by a steep 13%) has now been resolved. The only remaining concern is that the modest increase in disposable income purchasing power (2% in both 2006 and 2007) does not suggest spectacular growth (in this regard, all the econometric models suggest elasticity of less than one unit). The increase in short-term interest rates could also prove an obstacle; these rates play a key role for maintenance projects, given the short loan periods involved. On the other hand, the excellent performance in the market for existing housing during 2005 is likely to result in a healthy flow of renovation projects. It is estimated that one in three sales of existing homes gives rise to a significant maintenance or improvement project within two years.

The bulk of the market’s growth in 2006 and 2007 will come from work that is subsidized by the public sector. The ANRU, which continues to expand its activities, has received a commitment of €1.2 billion for the current year, with the potential to generate projects valued at €3.6 billion.

Overall, we project that maintenance and improvement work on existing housing will increase by 2.3% in volume in 2006, 1.9% in 2007 and 2% in 2008.

4 The market for non-residential construction

4.1 Education and research buildings Nearly 80% of all educational, training and research buildings in France (by area) are constructed for clients in the public sector. The country’s départements are responsible for middle schools (collèges), while regional authorities bear responsibility for high schools (lycées) and the university system is jointly financed by the central and regional governments. Construction starts for buildings in this sector fell off sharply during the latter half of the 1990s, following previous efforts to renovate high schools and construct new universities, and then mounted a very gradual recovery beginning in 2000.

The year 2005 brought a 3% drop in new construction, reflecting the aftereffects of the sector’s boom in the previous year. Despite a slight recovery between 2006 and 2008, the outlook for growth in new building over the next four years appears no more than fair (average annual volume growth of 0.7% over the 2004-2008 period), particularly in light of the need to reduce the public debt. These figures notwithstanding, inter-regional mobility among the French public will provide a stimulus for renovation of the country's schools.

4.2 Health-care buildings This category includes all health-care buildings (hospitals, clinics, rest homes and so on) as well as social-services buildings (such as day-care facilities and special-needs accommodation). In contrast to the education sector, private initiatives dominate this field, accounting for nearly 60% of construction starts in terms of surface area.

As in the education sector, health-care building starts fell sharply during the second half of the 1990s, then picked up in 2000, rising from 1.4 million sq.m. in 1999 to 2.2 million sq.m. in 2004.

The pace of growth, which was quite strong in 2004 (up 20%), weakened in 2005 (up 6%). However, completion of the “Hôpital 2007” hospital restructuring initiative in 2007 will likely bring a mild aftereffect. We estimate that the level of investment over the 2004-2008 period will be slightly positive, with average annual growth of 0.4% in volume and extensive investment throughout the period, driven by an increase in the number of elderly citizens.

4.3 Industrial buildings Industrial production grew at a modest rate of 0.9% in 2005. France’s manufacturing exports have been middling in light of a weak international economy and the competitive disadvantage created by an expensive euro.

Several factors should help bring about a recovery in the industrial sector between 2006 and 2008: • US interest rates are likely to remain higher than European rates between 2006 and 2008, which should prevent any over appreciation of the euro and maintain the euro zone’s competitiveness. • Long-term financing conditions will remain good and banks will once more target business customers as housing demand among households slows in 2007. • The upturn in the German economy should provide a boost insofar as France and Germany share a common manufacturing infrastructure.

120 © EUROCONSTRUCT Amsterdam, June 2006 France

• The gradual increase in the production capacity utilization rate over the coming years should result in a moderate upturn in industrial investment. The manufacturing sector’s current capacity utilization rate of 82% lies below the 20-year average of 84%; it fell substantially below this level only during the period of economic recession in 1993. • Significantly improved results among businesses, which have made major strides in terms of productivity and debt reduction, should facilitate this recovery.

Demand for industrial buildings between 2006 and 2008 will be driven by the automotive sector, capital goods and, in particular, the projected recovery in intermediate goods.

4.4 Offices Over the coming years, growth in this sector will result more from the renovation of existing buildings and the shift in demand toward new locations than from any increase in office- based employment at the national level. Since the sharp increase in the productivity of service industries brought about by the NICT revolution, employment momentum in the service sector has slowed. Furthermore, government departments and agencies have been forced to reduce their overhead, a situation reflected in the fact that many employees taking retirement are not being replaced.

Overall, there are three positive factors behind the gradual rise in activity in France’s office sector: • The positive image of French property among foreign investors, who believe that the French property market (particularly in Paris) holds little risk since the market remains reliable in every sector and that it offers high liquidity. • The emergence of new hubs of activity outside the Paris area. As the population migrates to the regions, markets in major metropolitan areas remain strong. These markets are also benefiting from a large number of corporate restructurings and reorganizations as well as the “service-sectorization” of regional economies (i.e. the conversion of industrial areas into areas occupied by the service sector). • The slight increase in net office job creation in 2005 and 2006 at the national level. As a result, the level of vacant office space will continue to decline at an even faster pace, both in Paris and in France’s other metropolitan centres. This in turn should lead to rising rents in Greater Paris in 2006 and provide greater assurance to property developers over time.

Thanks to strong momentum in construction starts in late 2005 and early 2006, we remain optimistic about starts for 2006 as a whole. The upturn in new building activity will continue into 2008, with average annual volume growth of 3.5% over the 2004-2008 period.

4.5 Commercial buildings Household consumption, a key variable for the production of commercial buildings, continues to rise, to the detriment of savings rates.

Beyond the positive impact of strong household consumption, the sharp increase in construction starts for commercial buildings and the explosion in the number of permits granted during 2005 can be attributed primarily to structural and regulatory developments: • The rapid growth of hard-discount stores. • The release of construction permits that had been on hold, in exchange for commitments to certain price concessions.

Despite a moderate macroeconomic outlook for the upcoming years, commercial building construction is expected to grow at an average annual rate of 3.6% between 2004 and 2008.

4.6 Other buildings This heading covers two very different categories: agricultural buildings (11.1 million sq.m in construction starts in 2005, but only €1.8 billion of new work) and public facilities other than for education and health-care (2.9 million m² in starts in 2005, but €3.0 billion of new work).

Agricultural buildings After peaking in 2000, construction of agricultural buildings has slackened as a result of overinvestment stimulated by the Common Agricultural Policy (CAP) in the 1990s (production subsidies) and the effects of livestock diseases and global economic recession in 2002 and 2003. Construction starts fell by nearly 20% between 2000 and 2004, declining from 13.5 million m² to 11.0 million m².

The volume of new activity continued to decline in 2005 (by 3.0%), but the trend with regard to construction starts seems to be reversing and the number of permits increased sharply at the end of the year.

Several factors lead us to believe that 2006 will bring confirmation of a recovery in construction starts and new construction for agricultural buildings: • Positive momentum in corporate investment. • Increased agricultural production over the next few years.

This recovery will likely be strengthened by other, structural factors specific to the agricultural sector: • Reform of the CAP (June 2003), as subsidies for farmers gradually replace production subsidies and French agriculture and breeding are reoriented toward higher value-added production, will lead to the more rapid renewal of existing buildings. • The European directive on improvement of animal welfare will entail an increase in floor areas devoted to livestock housing.

As a result, new construction will grow by an average annual rate of 1.4% over the 2004- 2008 period.

Public facilities other than for education and health care In this sector we predict a continuation until 2008 of the upturn that began in 2004, driven by both the private and public sectors: • Private companies are benefiting from renewed consumer spending favourable to the development of leisure facilities. • Local governments will be entering the growth stage of the local investment cycle (in preparation for the municipal elections of 2008), at the cost of increased borrowing.

Over the 2004-2008 period as a whole, new construction is expected to increase at an average annual rate of 1.4% in volume.

122 © EUROCONSTRUCT Amsterdam, June 2006 France

4.7 Maintenance and improvement work Following two years of decline, we are seeing a gradual improvement in maintenance and improvement work for non-residential buildings. 2005 proved a disappointing year, with growth of just 1.5% in volume – the same as that recorded in 2004.

We have used the following assumptions in forecasting growth at an annual average rate of 1.5% over the 2006-2008 period: • For local governments: maintenance and improvement work on public facilities (sporting facilities, social service and educational buildings, and cultural and leisure facilities) is likely to increase as governments gradually approach the run-up to elections beginning in 2006. • For businesses: despite healthy financing conditions (increased profit margins, moderate interest rates), the lack of recovery momentum in the economy will limit growth in projects involving the existing building stock, particularly with regard to industrial restructuring and office renovation.

4.8 Summary Overall, growth in the construction of new non-residential buildings will accelerate in 2006, rising to 3.4% in volume, compared with 1.3% in 2005. In 2007 and 2008, by contrast, the pace of growth will gradually weaken, to 2.1% in 2007 and 0.8% in 2008. The level of maintenance and improvement work will fluctuate less significantly according to a moderate trend.

5 The civil engineering market

5.1 Market determinants

Positive investment momentum among local governments Local government bodies entered a new multi-year borrowing cycle in 2003, breaking with the trend toward debt reduction that began in 1997. Investments exceeded available funding between 2003 and 2005, and this trend will continue over the next few years. In 2005, local government spending on building and public works maintained the upward trend first evident in 2003 but grew at a slower pace than in 2004 (3.5% in volume in 2005, compared with increases of 5.4% in 2004 and 4.4% in 2003).

Local governments will continue to accumulate debt in 2006 and 2007 in order to maintain a steady pace of investment in response to urgent needs regarding public facilities. In a reflection of the electoral cycle, a mild acceleration is forecast for 2007, the year preceding municipal elections in 2008. By contrast, the level of investment by local government bodies is likely to plateau in 2008 as a result of concerns over growing debt levels and less pressure to invest in facilities during the post-electoral period.

Following a strong uptick in local investment beginning in 2003, the “departments” and regions launched more expansive investment programmes in 2005, and this trend is likely to continue in the coming years.

With the 2000-2006 planning agreements between the central and regional governments (CPERs) drawing to a close, a new set of agreements, known as State/Regional Project Agreements, is scheduled to get underway in 2007 and will continue into 2013. These agreements, primarily targeting alternatives to road transport, may include local government bodies other than regional governments with regard to specific projects. It is expected that the new agreements will be signed in late 2006.

In general, investment at the local level will evolve in several ways over the next few years: • Substantial investment will be targeted at public transport systems that use dedicated lanes or facilities, primarily subways and trams. • Major sanitation and drinking water needs will have to be addressed. • Local governments will increase their investment in high-speed telecommunications. • The election cycle will provide an incentive for investment in the lead-up to the 2008 municipal elections.

A continued reduction in investment spending at the central level In the area of transport infrastructure, the central government made a strategic decision to set up a financing mechanism that would be sustainable in the medium and long term in order to fund its investments, notably with regard to waterway transport.

France’s transport infrastructure financing agency, the AFITF, which was established in January 2005, has already been forced to make sweeping changes in its financial structure following a decision by the government to sell its shares in the semi-public companies responsible for French motorways: • In future, it will no longer be able to rely on dividends generated by these companies. • In compensation, it will receive a portion of the financial windfall created by this privatization (€4 billion).

124 © EUROCONSTRUCT Amsterdam, June 2006 France

• It will also receive funding from various annual revenue sources: o The regional development tax [taxe d’aménagement du territoire] (€510 million). o The state fee collected from all motorway concessionary companies (€160 million). o Radar revenue (€80 million). • It will have a fairly large budget of about €2 billion in 2006, including €836 million generated by privatization of the motorway companies and €394 million in government subsidies. • It will be responsible for completing any remaining business from the 2000-2006 State/Regional Planning Agreements.

After a slight decline in 2005, investment by state enterprises will increase once again In the area of infrastructure, the major projects undertaken by state enterprises in the transport sector will require substantial investment that will more than offset reduced investment in the energy sector.

There are a number of developments in the field of transport: • Work on extending the metro lines for the Paris RATP has been accelerated. • 2006 will see the start of work on the Rhine-Rhône high-speed train line to ensure that the Dijon-Mulhouse branch is in full service by 2011. • The Perpignan-Figueras link between France and Spain (45 km of new line, including an 8-km tunnel) is currently being constructed. Much of the earthwork and special engineering work will be carried out before 2007, with service scheduled to begin in 2009. • Having received the go-ahead as part of the declaration of public utility, the Nîmes- Montpellier railway bypass project is expected to get underway sometime in 2006. • All of the bid packages for the TGV East (the eastern high-speed train line between Paris and Baudrecourt) have been awarded, and the earthwork has already been completed. This initial stage involves 300 km of new railway line, and includes connections to the traditional network and the construction of three new stations.

In the field of energy, a mild expansion is possible over the next few years in projects to electrify several rail lines and to overhaul the network of aerial and underground power lines (including the burial of high-voltage electrical lines). With regard to gas and petroleum pipelines, there is little likelihood of growth in this sector now that the major projects for Gaz de France have been completed. Apart from major maintenance overhauls, few new projects will emerge in the coming years.

5.2 A positive outlook for the civil engineering market in 2006 and 2007 Production of public works remained buoyant in 2005 (up 3.0% in volume) after two exceptionally good years (up 4.0% in volume in 2003 and 3.0% in 2004). On the heels of a slowdown between late 2004 and early 2005, the lowest level of growth in the volume of work being performed (expressed as a running 12-month total) was recorded in mid-2005. Growth subsequently accelerated to a rate of 4.5% in volume by the close of 2005.

A new cycle of growth in the volume of completed work began in late 2005, and the years 2006 and 2007 will see a clear acceleration in public works projects (we project volume growth of 3.5% in 2006 and 3.3% in 2007), attributable primarily to the timetable for major projects (earthworks and special engineering projects) and substantial investment at the local level prior to elections.

However, investment levels may plateau in 2008 as the level of local investment declines. © EUROCONSTRUCT 125 France Amsterdam, June 2006

Transport infrastructure In 2005, work on the construction of special civil engineering structures1 declined overall as a number of especially large projects (the Millau, Jaulny and Sioule viaducts) came to completion. On the other hand, work has just begun on a number of urban transport projects (trams and subways); coupled with the new TGV initiatives, this should lead to a recovery in the volume of construction for special civil engineering projects during 2006 and 2007.

Maritime and waterway projects received a boost from capacity and port modernization investments in 2004, particularly the Port 2000 project at Le Havre. However, investment in the port of Le Havre will decline in 2006, which will limit the prospects for overall growth in this area given the scale of these investments. With regard to navigable waterways, the projects envisioned in the 2007-2013 State/Regional Project Agreements will focus on restoration of the network. It should also be noted that, as part of the Mont Saint Michel project, dam construction will get underway in 2006 (€220 million).

Road works receive specific support from the central government, including provisions within the State/National Planning Agreements. Growth in this area was excellent in 2004 and 2005, and this trend is likely to continue in 2006 and 2007. Moreover, the level of spending on projects to maintain and improve the country’s roadways continues to increase. This work primarily involves widening roadways, creating urban bypasses and eliminating traffic bottlenecks that hinder the flow of traffic.

The outlook is also positive for projects involving the motorways operated under concession agreements, given the determination to complete the basic structural motorway network without delay.

Water and natural-gas systems In the short term, the investment necessary for sanitation and waste treatment is subject to a higher level of regulatory urgency than is the case for water supply.

However, in the coming years, maintaining and replacing water supply infrastructures (e.g. replacing lead pipework and ensuring a secure resource supply) will represent an increasingly important challenge.

Miscellaneous civil engineering projects After posting a decline in 2005, the volume of earthworks projects will increase in 2006 and 2007 as work progresses on the various TGV projects.

External works, which received a strong boost from new housing in 2005 and 2006, could level off in 2007. However, this slower growth will be partially offset by urban development projects backed by the ANRU.

1 Note that site-specific public transport work (TCSP) is included in the "Special civil engineering structures" category, with the exception of the laying of rail lines. 126 © EUROCONSTRUCT Amsterdam, June 2006 France

Country/Pays/Land: FRANCE Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 59 707 60 029 60 340 60 645 61 000 61 345 61 700 Bevölkerung

Households ('000s) Ménages 24 800 25 115 25 431 25 683 25 948 26 208 26 467 Haushalte

Unemployed ('000s) Chômeurs 2 448 2 664 2 727 2 719 2 553 2 444 2 395 Arbeitslose

Unemployment rate (%) Taux de chômage 9,0 9,8 10,0 9,9 9,3 8,9 8,7 Arbeitslosenquote

Change of GDP Variation du PIB 1,3 0,9 2,1 1,4 1,9 1,7 1,8 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1,9 2,1 2,1 1,7 1,9 1,5 1,7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2,9 3,0 4,4 3,4 3,0 2,3 2,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 3,0 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4,9 4,1 4,1 3,4 4,1 4,3 4,5 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). 3) 10-year goverment bonds (or equivalent).

Country/Pays/Land: FRANCE Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 40 882 0,9 0,9 9,1 9,5 7,2 -2,0 -2,9

Logement Renovation 43 989 -1,0 -0,5 1,0 1,0 2,3 1,9 2,0

Wohnungsbau Total 84 871 -0,2 0,1 4,6 4,9 4,7 0,0 -0,4

Non-residential construction New 26 260 -1,8 -6,7 2,9 1,3 3,4 2,1 0,8

Bâtiments non résidentiels Renovation 28 156 -1,5 -1,5 1,5 1,5 1,5 1,5 1,5

übriger Hochbau Total 54 416 -1,6 -4,1 2,2 1,4 2,4 1,8 1,2

Building New 67 142 -0,3 -2,5 6,5 6,2 5,7 -0,4 -1,5

Bâtiment Renovation 72 145 -1,2 -0,9 1,2 1,2 2,0 1,7 1,8

Hochbau Total 139 287 -0,8 -1,6 3,6 3,5 3,8 0,7 0,2

Civil engineering New 25 000 -2,9 6,7 4,6 2,0 4,0 4,0 0,7

Génie civil Renovation 12 225 -0,5 -1,0 0,0 2,0 2,5 2,0 1,0

Tiefbau Total 37 225 -2,0 4,0 3,0 2,0 3,5 3,3 0,8

TOTAL CONSTRUCTION OUTPUT 176 512 -1,0 -0,5 3,5 3,2 3,7 1,2 0,3

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 22,53 0,3 -0,2 6,1 2,6 1,5 0,0 -0,5 Inländischer Zementverbrauch

128 © EUROCONSTRUCT Amsterdam, June 2006 France

Country/Pays/Land: FRANCE Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008 Building permits 1+2 family dwellings Logements autorisés Individuel 214,0 224,0 249,0 266,0 260,0 255,0 250,0 Baugenehmigungen Familienhäuser Flats Collectif 137,0 155,0 211,0 245,0 235,0 220,0 210,0 Mehrfamilienhäuser TOTAL 351,0 379,0 460,0 511,0 495,0 475,0 460,0 Housing starts 1+2 family dwellings Logements commencés Individuel 192,0 193,0 216,0 229,0 225,0 220,0 215,0 Baubeginne Familienhäuser Flats Collectif 111,0 121,0 147,0 181,0 205,0 185,0 175,0 Mehrfamilienhäuser TOTAL 303,0 314,0 363,0 410,0 430,0 405,0 390,0 Housing completions 1+2 family dwellings Logements terminés Individuel 188,0 189,0 205,0 220,0 222,0 218,0 213,0 Baufertigstellungen Familienhäuser Flats Collectif 110,0 109,0 120,0 145,0 178,0 200,0 180,0 Mehrfamilienhäuser TOTAL 298,0 298,0 325,0 365,0 400,0 418,0 393,0

Housing stock Logements existants 29 620 29 940 30 264 30 555 30 855 31 150 31 445 Wohnungsbestand

thereof second-homes dont résid. Secondaires 2.925 2.955 2.987 3.020 3.050 3.080 3.110 davon Zweitwohnungen

thereof vacancies dont inoccupé 1 895 1 870 1 846 1 850 1 855 1 860 1 865 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 56,0 56,5 57,0 57,5 58,0 58,3 58,5 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: FRANCE Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 2 933 3,0 5,0 10,5 -3,0 2,0 3,0 1,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 3 600 -1,0 3,0 20,5 6,0 0,0 -4,0 0,0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 5 308 -4,0 -8,5 -5,0 -4,0 3,5 4,0 3,0 Industriegebäude

Storage buildings Bâtiments de stockage 1 414 5,0 -26,0 13,5 2,0 1,5 2,0 1,0 Lagergebäude

Office buildings Bureaux 4 918 2,5 -15,0 -3,5 5,5 4,0 2,5 2,0 Bürogebäude

Commercial buildings Commerces 3 290 -1,0 -1,0 4,0 5,5 6,5 1,5 1,0 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 1 836 -6,0 -6,5 -1,0 -3,0 6,5 1,0 1,5 Landwirtschaftsgebäude

Miscellaneous Autres 2 961 -10,0 -1,5 2,0 2,0 3,0 6,0 -5,0 Sonstiges

Total Insgesamt 26 260 -1,8 -6,7 2,9 1,3 3,4 2,1 0,8

Million euro at 2005 prices, excluding taxes.

130 © EUROCONSTRUCT Amsterdam, June 2006 France

Country/Pays/Land: FRANCE Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 16 374 -4,4 3,8 3,1 3,6 3,0 3,8 -1,0 Verkehrsinfrastruktur Straßen Railways Voies ferrées 1 332 0,5 -1,0 6,0 10,0 3,0 -3,0 4,0 Bahnanlagen Other transport Autres réseaux 4 058 1,9 6,7 3,9 -3,6 2,6 3,1 1,1 Übrige Vekehrsinfrastruktur TOTAL 21 764 -2,9 4,1 3,4 2,5 2,9 3,2 -0,3

Telecommunications Télécomunications 7 077 -1,5 1,0 2,0 3,0 4,5 2,0 1,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 5 067 0,1 4,4 1,8 2,8 4,2 4,0 3,4 Energie-und Wasserversorgung

Other Autres 3 317 -0,5 9,0 4,5 -4,0 4,0 6,0 3,5 Sonstiges

Total 37 225 -2,0 4,0 3,0 2,0 3,5 3,3 0,8

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: FRANCE Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 930,7 2,3 1,6 2,3 2,1 2,1 2,0 2,2 Privater Verbrauch

Public consumption Consommation publique 430,8 2,9 2,1 2,7 1,5 1,8 1,3 0,5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe 331,5 -1,7 2,7 2,1 3,3 4,2 3,0 2,6 Anlageinvestitionen

Total of wich construction

Stocks (contribution as % of GDP) Variations de stocks 15,4 -0,4 -0,1 0,8 0,2 0,2 0,0 -0,2 Vorratsveränderung

Exports Exportations 443,6 1,5 -1,8 2,2 3,2 6,0 5,3 6,5 Exporte

Imports Importations 462,6 1,5 1,3 6,1 6,6 7,8 5,9 5,9 Importe

GDP PIB 1 689,4 1,3 0,9 2,1 1,4 1,9 1,7 1,8 BIP

Standard National Accounts, gross figures.

132 © EUROCONSTRUCT Amsterdam, June 2006 Germany

GERMANY Ifo Institute for Economic Research www.ifo.de

Volker Russig e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

¾ Despite the persistent increase in oil prices and the higher frequency of natural disasters, world economic output grew by 4.8% in 2005. Growth will maintain this high speed (4.9%) in 2006 due to supportive financial markets and expansive macroeconomic policies. The Euro Area Countries experienced growth of 1.3% in 2005 and had to adjust down their expectations for the near future (economic growth: about 2.0% in 2006 and 1.9% in 2007).

¾ The German economy grew slightly faster than expected in 2005 (0.9%). Exports, the main momentum for Germany economy, slowed down due to the appreciation of the Euro, the weaker global economy and increasing energy prices. Private consumption which was already lying idle has been further depressed by the high energy prices and weak employment prospects. However, investments in machinery and equipment experienced an upward trend.

¾ Given the assumptions made in this report, real growth of GDP in Germany is expected to reach 1.8% this year (including anticipation effects) and 1.2% in 2007. In the outlook for 2008, an expansion of slightly below 2% seems to be possible. The average number of unemployed increased strongly in 2005 - partly due to a statistical change in definitions. For the following years a substantial reduction is forecast. The unemployment rate reached 11.2% in 2005. It is set to fall in until roughly 10% at the end of the forecast period.

¾ In spite of the trading-day effect and the anticipation effect in new residential construction, total construction volume decreased by almost 2.5% in 2004. Both factors caused a negative response and a decrease in the construction volume in 2005 (together with a big weather effect; almost –3.5%) A slight recovery is forecast for 2006 and 2007 (1.2% and 0.9%, respectively). In the outlook for 2008 a moderate upswing of about 1.8% (again lower than GDP growth) is expected. With exception of the year 1999, the German construction sector will have been in recession for 12 consecutive years acting as a strong “growth brake” for the whole economy.

¾ Developments in construction output differ strongly in the six Euroconstruct sub- sectors (and in addition between west and east Germany and further by regions):

• Despite a smaller than expected anticipation effect in the own-home sector, new residential construction decreased by almost 6% in 2005. For 2006 a recovery is forecast just to fall back substantially in 2007. In the outlook for 2008 only a slight increase is assumed. Renovation and modernisation of the housing stock decreased moderately in 2005 and will - for the rest of the forecast period – expand at moderate rates. • The downward process in new non-residential construction will be stopped in the course of this year. The outlook for 2007 and 2008 shows a substantial recovery to 2.2% and 2.6%, respectively. Further reductions of renovation and modernisation took place in 2005 but will be stopped in this sub-sector in 2006, and growth is expected from 2007 on. These developments suggest a further strong recovery of aggregate non-residential construction in 2006 (almost +1.0%). A substantial growth rate of about 2.0% is forecast for 2007, and in the outlook for 2008 growth is expected to reach about 2.5%. • Also total civil engineering (new work and all “professional” building measures in the existing structures) will finally recover this year recording growth of about 2%. This growth-level will be excelled in the forecast for 2007 and 2008 (almost 2.5% respectively), with stronger impulses coming from both sub-categories, new work and R&M.

134 © EUROCONSTRUCT Amsterdam, June 2006 Germany

2 The Macroeconomic Outlook

The expected slowdown in world economic expansion did not last until the end of last year. For 2006 a strong upswing will be supported by the undamped economic growth of China and a stable trend in the USA. Despite the risen energy prices (especially for oil) and raw materials, strong benefits for the world economy were achieved through favourable company profits, rising asset prices and low interest rates. In the forecast period world economy will continue to expand, though slightly less than before the expansionary effects of monetary policies and modification of bond rates were introduced.

The Economy of the European Union is expected to follow its upward trend. The European Economic recovery is continuously driven by increasing exports in some member countries (Austria, Germany, the Netherlands) and on the other side, reviving of domestic demand in other parts of the Union (France, Italy, Spain).

In 2005, the recovery of the German economy benefited from further increases in exports (more than +6%). This development will continue to be effective in 2006 (8.2%) and also with relatively high rates in the coming years.

In 2005, disposable income in Germany almost did not change. Private and public consumption and particularly gross fixed investment will recover in 2006. Total domestic demand is still remaining weak (0.4% estimated in 2006) and is expected to increase at small rates because of anticipation effects. German government is likely to raise VAT by 3 points from January 2007, and higher private expenditures are expected in anticipation of this change.

The forecast economic recovery in Germany is still impaired by severe “home-made” structural problems (e.g. long run financing problems in the social pensions and health systems) and by the consolidation process being pursued further in all state budgets (central and Länder as well as municipalities).

The GDP and sector forecasts for Germany for 2006 and 2007 as well as outlook for 2008 are based on the following specific (unstable and “risky”) key assumptions:

• The situation in Iraq will stabilise stepwise; no additional military intervention in the Middle East or in other regions and no severe terror attacks will occur. • The average oil price will remain at about USD 65/barrel in 2006 and decline to USD 60/barrel in 2007. It will fluctuate around a slightly lower level in the rest of the forecast period. • World trade will expand by about 5% this year and will also expand at high growth rates in 2007 and 2008. Germany can fully or even above average participate in this development. • Stock prices will further increase moderately and remain high in connection with the expected world-wide economic upswing and higher profits of enterprises. • The euro will fluctuate in the forecast period around 1.20 USD; no stronger or lasting revaluation is assumed. World-wide competitiveness of the German economy will further improve and remain stable in the coming years. • The European Central Bank will continue to increase the key interest rate (up to 3% in 2006) in small steps, aiming at price stability which is at risk because of increasing oil prices and stronger growth of the European economy. • Population has exceeded its maximum level and will decrease continuously, nevertheless the number of private households is still growing and will further grow until 2015 or even longer (between 1990 and 2015: almost +12%).

• Negotiated wage settlements will rise in the whole economy only slowly by an average rate of 1.5% in 2006 and a bit faster in the coming years. • The reforms of labour market regulations (esp. “Hartz IV”) will “force” more unemployed in regular jobs or in the secondary labour market. • The recovery of the German economy will lead to a state budget deficit of 2.9% of GDP in 2006 and even 2.0% in 2007 and finally meet Maastricht criteria. • Subsidies reduction programmes are assumed to be realised together with an increase in tax burden (VAT and/or income taxes).

On the basis of these conditions and assumptions economic growth in Germany is expected to rise by 1.8% in 2006. A lower but still moderate growth rate is forecast for 2007 (+1.2%) limited largely by increased VAT. In the outlook for 2008 a stronger domestic demand will accelerate economic growth (almost or even a bit more than 2%).

The optimistic economic expectations will not relieve the situation on the labour markets fundamentally. The average number of employees is expected to increase slightly because of special measures for a more flexible labour market. Due to a new registration concept, the number of unemployed has increased in 2005 to almost 4.9 million, but a substantial decrease is expected in the rest of the forecast period. A comparison of the ILO’s (International Labour Organisation) labour-force-concept with the renewed German concept of unemployment from the BA (Bundesagentur fuer Arbeit) is leading to even higher differences in the statistics. The international comparability of all unemployment figures for Germany is still restricted:

2002 2003 2004 2005 ILO-Statistics (millions) 3.23 3.70 3.93 3.89 ILO-Unemployment-rate (percent) 7.7 8.8 9.2 9.2 BA-Statistics (millions) 4.06 4.37 4.38 4.86 BA-Unemployment-rate (percent) 8.9 10.5 10.5 11.7

Profits of private enterprises have reached and are expected to reach an even higher level, and the willingness to invest in Germany (instead of investing in regions with lower wages and taxes in Europe or world-wide) will increase substantially in 2006 and in the rest of the forecast period.

In 2005, the value of net capital assets in Germany reached about 6,800 bill. €. About 5,800 bill. € are buildings and structures (more than 85%; residential buildings about 50%, all other structures almost 35.5%). An enormous effort is necessary in order to keep these buildings and structures up-to-date. Nevertheless the Real Estate transactions volume will remain weak almost until 2008 (Figure 1 at the end of this report), and a lot of R&M for all types of buildings and structures is ordered in connection with changes in ownership of these assets.

3 The Construction Sector

The recession in the German construction sector will come to an end in 2006; it has been lasting (with the only exception of 1999) for 12 years. Construction spending in Germany has been a strong (absolute and relative) “growth brake” up to 2005; it will remain a dampening factor also in 2006 and to a decreasing extent in the rest of the forecasting period.

The lengthy construction recession in west and (even more) in east Germany had cyclical and structural causes; it is (but to a rapidly decreasing extent) to be seen as a reaction to the construction boom back in the mid-1990s and the permanent pressure on public budgets

136 © EUROCONSTRUCT Amsterdam, June 2006 Germany resulting to a high degree from financing German unification mainly via public bonds and the social security systems.

On the other hand, the weak development of construction activity was and is due to the only moderate growth in the whole economy and to the macro-economic structural problems in the labour markets and in the social security systems – many of them postponed in Germany (and also in many other west European countries) for years or even decades. Some of these problems will continue to exist or even sharpen after EU enlargement and with globalisation and new distribution of labour in Europe and world-wide.

In the last years there have been creditable efforts made by the (old and new) German government(s) and by Bundestag and Bundesrat to overcome this difficult situation. But in the first phases most of these attempts will lead to negative consequences for many people or enterprises and, therefore, will increase uncertainty and investors’ reserve. The attractiveness of Germany as a location for business in the world-wide and European competition of locations will not improve immediately after the first steps in this reform process. For a long time a lack of optimism was characterising the behaviour of private households and enterprises, but also of public authorities in Germany dampening primarily activities needing a longer stable time horizon (as all construction activity).

Some of the budget consolidation decisions made in the last years and continued in 2006 had and will have direct negative consequences for the construction sector in Germany, above all for (new) residential construction, e.g.:

• Own-home government grant: Concentration of the basic grant on families with children; further reduced income limits; equal grants for new houses and purchases from the existing housing stock; total cancellation for new buildings and buyers from the beginning of 2006 and for the following years. • Depreciation on residential and non-residential buildings: Reduction of degressive depreciation and reduced linear percentage. • Mileage allowance (tax reduction possibilities for the costs of reaching work places by car or train): Substantial reduction for larger distances; (planned) cancellation for distances below 20 km from January 2007. • VAT rate: Increase in one step from 16% to 19% for most goods and services.

Some of these measures have caused and will cause in 2006 substantial anticipation effects disturbing the “normal” construction cycle in Germany since 2003 and in the whole forecasting period.

Looking at the three main sub-sectors of construction activity, in the short run positive developments are dominating partly because of special effects (anticipation of measures; government programmes; see below Figure 2 at the end of this report):

• Residential construction decreased in 2002 by almost 6% and by about 1% in 2003. The downward tendency accelerated in 2004 (about –1.5%) and in 2005 (almost -3.5%) because of the bad weather and missing orders for new houses. A slight recovery is expected in the course of 2006 (forecast for the whole year: more than +1%), mainly due to anticipation effects in new housing. The expectation for 2007 is a bit more pessimistic (about stagnation) but in the outlook for 2008 an higher increase seems to be possible with slightly stronger impulses coming from new work than from renovation and modernisation.

• In 2003 and in 2004, the decrease in non-residential construction for private firms and public authorities was not as high as in 2002 but much higher than in residential construction. The downward process continued in 2005 (about –3.0%) but for 2006 a © EUROCONSTRUCT 137 Germany Amsterdam, June 2006

slight increase is forecasted (about +1%). In the outlook for 2007 and 2008 a significant recovery is expected; both categories of work are forecast to contribute to this upswing.

• The decline of civil engineering for private firms and (even more) for public authorities in 2004 (and before) has not reached the same magnitude as in the other parts of the construction sector. The negative change rate in 2005 was again higher, but for 2006 a clear increase is forecasted, and the outlook for 2007 and 2008 is showing a substantial but still “sub-normal” growth of a bit more than 2.0%.

Despite its weak development, the share of housing measures (new work and R&M) in total construction volume remained almost stable between 1999 and 2005 (Figure 3 at the end of this report). In this period, private and public non-residential buildings are showing declining shares whereas the relative contributions of both sub-categories of civil engineering remained constant or even increasing.

Since 1991 a strongly shrinking share of total construction investment/volume is coming from main contract work (Rohbau or Bauhauptgewerbe) whereas the sub-category building installation and completion (Ausbau) is showing an increasing relative importance until 2001 and declining shares since 2002 (Figure 4 at the end of this report). While the contribution of “professional” services remained stable, the share for the estimated Do-it-yourself-work (including shadow and black economy; not so much for appurtenant structures) raised by more than 3 points to over 15.5% of total construction investment/volume.

Taken the three sub-categories together, total construction investment/volume in Germany will increase in 2006 by more than 1% bringing the long lasting recession period to an end. Total construction volume/investment will expand further in the outlook for 2007 and even more in 2008 (almost 1% and about 2%, respectively). This will be a significant contribution to total economic growth, but still below the expected GDP change rate.

The construction sector was and will remain to be a sharp brake for the economic recovery in Germany until 2006 and 2007 and to some extent also in the outlook for 2008. Measured against a “normal” increase of construction output of perhaps 2.0%, the “burden” will reach a magnitude of about 0.5% of GDP until 2007.

4 Residential Construction

The great but (since the earlier elections and the installation of a new government) rapidly decreasing economic and political uncertainty combined with high unemployment and low increases in income, the huge and qualitatively good housing stock with a excellent average supply with living space, and perhaps to some extent also the forecast long-term decrease of population (but combined with a further increase of private households until 2015/2020), have led to a fundamentally weak demand for building measures in residential construction, above all in the new Länder, but also in west Germany.

In the different planning and announcement phases for the reduction of taxes and subsidies, strong anticipation effects occurred in permissions before the end of 2002 and again at the end of 2003. Further discussions with repeated uncertainty and, therefore, additional anticipation effects occured before the end of 2005.

The “anticipated” permissions were realised only to a relatively small extent (difficult to forecast) in 2003 and in 2004. In contrast to the “basic” downward tendency (dominating until 2006 or even 2007) there has been a slight “untypical” flattening of the decrease in total residential construction in 2004. It was followed by a substantially higher reduction in 2005 and will lead to an only slight recovery in the course of 2006 (partly in order to avoid the 138 © EUROCONSTRUCT Amsterdam, June 2006 Germany higher VAT). Given the assumptions made for this report, the expectations for 2007 are again weak but are looking much more favourable for 2008.

New residential construction

Building permits for new single- and two-family houses almost doubled in December 2002 (compared with December 2001) and remained higher than in 2002 until spring of 2003 because of anticipation effects in order to still receive the full home-own government grant in the future. These effects occurred once more and almost in the same magnitude before the end of 2003 and again in 2005 (expected - and meanwhile - realised cancellation of home- own grant). These developments are dampening the prospects for a substantial recovery of the demand for new residential buildings in the rest of the forecast period.

In the sector of new multi-family houses, the long-lasting cyclical decline of demand and permits caused by stagnating or even falling rents (with the exception of some big cities such as Munich), low increases or even reductions in the (real) value of homes and a high supply surplus with about (but by some experts criticised as statistically too high) 1.6 million vacant dwellings will be stopped in 2006.

In a mid-term perspective, the construction of new single- and two-family houses (but also of some types of new apartments) will be determined also by the following positive factors:

• The number of households and, therefore, housing needs (supported by a steady increase of average space per person) will still increase in the next ten to fifteen years (despite the decreasing population). • The percentage of owner-occupied houses is still relatively low in Germany and above all in the new Länder (as compared with other European countries). People living in their own homes “demand” for more space per person than tenants. • With the expected acceleration of economic growth and rising employment, uncertainty will be reduced and disposable income of private households will increase a bit faster. • Nominal mortgage rates are still quite favourable in a long-term comparison, but they will remain (in the expectations of potential investors) for some time at this “historically“ low or an only slightly higher level; the same holds true for house prices.

Despite the relevant but until 2005 surprisingly low realisation of the anticipation effects and these more “basic” stabilising - or in the coming years even stimulating - factors demand in the own-home sector will increase only moderately in the near future since various dampening factors will retain their effectiveness:

• The group of 25 to 35 year-old inhabitants in Germany is already declining, and this trend will strengthen in the future. In this age group demand for living space is particularly high, especially for an own-home house or apartment. • The labour market situation and new rules for unemployment grants will lead to the necessity of higher mobility (at least in the expectations or fears) making the decision for buying or building an own-home more risky. • Average rents are expected to stagnate or to grow only slightly even in a mid-term perspective. The relative burden of an owner-occupied property will decline only with falling prices for land and/or construction work and not by inflation or income increases. • Construction prices continue to be (almost) stagnating, and they are not expected to increase faster in the coming years, because competition remains strong (from “self- employed” people, but also from abroad, even more after EU enlargement). • The vacancy rate will remain high, especially in the new Länder. The pressure on house prices will remain strong, making existing housing an attractive alternative compared to building or buying a new home.

Given the contradictory factors mentioned above, we expect slightly decreasing completions in the sub-sector of new single- and two-family houses in 2006. A stagnation is expected for 2007 following a recovery in the outlook for 2008.

In new multi-storey buildings there was a strong increase in permissions and completions in both parts of Germany up to the mid-1990s. In east Germany the housing boom lasted until 1997 as a result of the Development Area Law (“Fördergebietsgesetz”) with extremely favourable depreciation conditions. Since then, demand in this sub-sector has declined sharply. High vacancies and problems finding tenants at the calculated rents continue to mark many cities and regions; this is especially true for east Germany (because of a shrinking population and high unemployment). Special government grants could help (and have done to a certain extent until now) to reduce the supply surplus but substantially only in a mid-term perspective.

Potential private or institutional (German) investors in the field of multi-storey buildings remain sceptical for a number of reasons:

• In west Germany the decrease of rents for first rentals is still lasting in many cities and regions; in east Germany, high rent reductions are still common. Many investors demand a higher return on investment as compared with former periods and with other assets as the weight of tax reductions is smaller than in former decades. • Restrictions on negative incomes allowed in the income tax code for the revenues from rental property, and reduced depreciation as well as the new rental law have led to an increase of uncertainty and worsened investment conditions. It is no longer (or less) attractive to build multi-family units because of tax considerations alone. • The government spending on publicly assisted housing has been additionally reduced and the remaining funds are invested to a greater extent in the existing housing stock.

The sharp cyclical downswing in building new flats should have come to an end in 2005. Taking into consideration the big estimation and forecasting difficulties caused by the anticipation effects and the lasting uncertainty, for 2006 an increasing level of completions in this category seems to be possible, and in the outlook for 2007 and 2008 a still higher level of completions is forecast.

Total completions in new residential buildings should have reached their lowest point of this cycle in 2005. A recovery is expected for 2006 and 2007 and further in the outlook for 2008.

Total construction volume in the new residential sub-sector (houses and flats) is forecast to increase substantially in 2006 but a shrinking level is expected for 2007. In the outlook for 2008 the beginning of a moderate upward tendency is expected.

Renovation and modernisation in residential construction

A stable increase of construction activities in the existing housing stock was realised up to 2000, especially in west Germany. The decreasing volume of transactions in the existing housing stock (see Figures 1 at the end of this report; the figures include also new buildings), lower income increases and high unemployment with an increased uncertainty have dampened this development, leading again to a negative change rate in 2005 and only small or moderate increases in the rest of the forecast period.

On the other hand, competition for rental households will force private and institutional owners of rental houses to invest more in the existing housing stock because people want both more space and more quality in their housing.

140 © EUROCONSTRUCT Amsterdam, June 2006 Germany

In realisation of the new EU-Directive regarding the energy status of buildings, the German government is about to establish the so called energy-passport. While it has been obligate for new buildings since 2002 in Germany, it will be a duty for existing buildings with changing ownership from summer 2006. The aim is to visualize the energy consumption of buildings for owners, tenants and users. Two kinds of passports will be introduced, one will document the energy consumption, the other will determine the energy requirements. The requirement method analyses the mantle and material of buildings as well as its heating systems and recommends solutions for higher energy efficiency. The less expensive method is the consumption documentation, which describes the energy consumption per square meter. These passports provide better transparency for future real estate purchasers and tenants, who may now estimate the energy expenses before deciding. This will give some additional stimulus for R&M in residential (and also in non-residential) construction.

The CO2 reduction and energy savings programmes of the German government are supporting this tendency. The interest reduction programmes of the Bank for Reconstruction (KfW - “Kreditanstalt für Wiederaufbau”) for investments of the municipalities and for the modernisation of the huge housing stock (KfW-Förderprogramm “Wohnraummodernisierung” und “Sonderfonds Wachstumsimpulse im Infrastrukturprogramm”) will lead to a great degree only to “bandwagon” effects. The willingness and/or capability of owner-occupier to invest in R&M of their houses or flats will remain on a relatively low level because of the uncertainty in their income and employment situation.

Taking all these factors and both sub-regions together we expect for Germany – after further slight reductions of renovation and modernisation in residential construction (partly as a result of the anticipation effect) in 2005 – only a very small increase in 2006. The outlook to 2008 is a bit more optimistic leading this sub-sector a bit nearer to its former growth path.

5 Non-residential Construction

Almost 85% of construction investment/volume in this highly heterogeneous sub-sector was and is done by (private or “semi-private”) enterprises and only 15% by public authorities (further decreasing because of PPP projects). The great variety of investors and determinants in non-residential construction have led and will lead to different cyclical developments between private enterprises and public authorities and to some extent also between the building categories, and – in addition – between (the regions of) west and east Germany.

New private non-residential buildings

In the last years, an increasing number of private enterprises postponed many plans for expanding their production capacity in Germany and consequently also many plans for new buildings. This dampening factor seems to be no longer dominant. In a mid-term perspective the German economy is expected to reach a higher growth path again giving impulses also to new private non-residential construction in the own country. Companies are expected to react positively to the renovation plans of the social security systems (“Agenda 2010” and its prosecution by the new government).

The commercial real estate market has numerous vacancies especially in office and retail buildings, but also in newly developed industrial space. In many east German cities retail selling space per inhabitant is higher than in the old Länder.

The decrease of new construction activities of private enterprises and – as a consequence – of total new non-residential construction has continued in Germany on average until 2005 for the following (partly additional) reasons: © EUROCONSTRUCT 141 Germany Amsterdam, June 2006

• The higher prices for oil and energy and for raw materials have increased uncertainty regarding the further process of economic recovery. • New economy and I&T firms have been responsible to a great extent for the high demand for new offices and industrial buildings; but this “bubble” has burst, and no full compensation in the “old” or another “new” economy is expected. • High and still increasing vacancy rates in some categories of non-residential buildings (e.g. office buildings in big German cities: often far more than 12% and even about 10% in Munich) will dampen the demand for new buildings. • All firms are forced to continue the process of optimising the utilisation of their huge existing stock of buildings and seek to reduce the specific value of “input of buildings” per production unit in order to save costs and to improve competitiveness and to increase the return on investment. • Modern logistics is reducing the need for stock space, giving, on the other hand, impulses for special buildings. • The trend to shift parts of or to expand production abroad has once more gained momentum and will become even stronger after EU enlargement and the ongoing process of globalisation. This continues to dampen the potential extent of enlargement investment in new buildings in Germany.

On the other hand, the economic life-span of office buildings and also of industrial and commercial buildings has shortened in recent years, giving additional positive impulses to new non-residential construction. Increasing dynamics and a moderate expansion in some sub-categories of new non-residential construction will occur, partly because of a meanwhile high backlog demand.

New public non-residential building

Public investment activity in new buildings has been continuously reduced in (both parts of) Germany in recent years. Some experts are arguing that the situation in the “old” Länder is often as bad or even worse as in the new Länder. Many urgent investment plans should, therefore, no longer be postponed, because high quality infrastructure and administration systems are the basis for faster growth in the future.

On the other side, the fiscal outlook, especially in the municipalities (responsible for about two thirds of total public construction activity) has dramatically worsened until 2003 and even 2004 and will improve only incrementally in the coming years. New building activity of the public sector will, therefore, decrease also in 2006. In the outlook for 2007 and 2008 only a slight recovery from the sharply reduced level seems to be possible.

Despite the often high and increasingly urgent needs, investment activity in this sub-category of construction works will further decrease in Germany in 2006; and it will tend to remain under pressure in the rest of the forecasting period.

Many public authorities are planning the realisation of new (and the modernisation of existing) buildings also by means of Public Private Partnerships (PPP). Several models for such co-operations have been developed, but until now only few projects have been started or are under realisation. The share of such activities is still almost negligible but increasing rapidly (especially in R&M).

Renovation and modernisation in (total) non-residential construction

The additional needs and the higher demand for modern commercial and industrial buildings resulting from the economic recovery expected for the coming years and the necessity to face the increasing international competitive pressure will not only be met by the construction

142 © EUROCONSTRUCT Amsterdam, June 2006 Germany of new buildings but increasingly by the renovation and modernisation of the high stock of buildings or the enlargement of existing buildings. Such measures often make sense not only because of the lower costs (e. g. for energy and power; see section “R&M in residential construction” above) but also because of the reduced or only changing need for space resulting from staff reductions and new organisational structures in production as well as in (private and public) administration.

In connection with the optimising process in private and public real estate mentioned above, high importance is being assigned to the growing number of no longer up-to-date buildings. In view of the requirements of modern communication and information technologies, an extensive modernisation is necessary quite frequently. Many buildings need renovation measures in increasing amounts in order to restore their competitiveness in the Real Estate market. But in some cases, the modernisation of an existing building is less economical than the deconstruction and reconstruction of a new building at the same place.

The weak economic development, especially in the new Länder, the long-lasting dampening influences coming from public authorities, and the decrease of the Real Estate transactions volume are responsible for the shrinking of R&M in non-residential construction also in 2005. A slight increase is forecast for 2006. In the outlook for 2007 and 2008 a clear recovery of R&M is expected.

Taking new work and R&M for (“quasi-“)private enterprises and public authorities together, the severe recession in non-residential construction in Germany will be stopped in 2006. The outlook for 2007 and 2008 is looking even more optimistic.

Despite some differences in the cyclical development, the shares of the categories of non- residential buildings remained relatively stable in the last decade. Compared with the development of total new non-residential construction, no category is expected to realise significant increases or decreases of their shares in the forecasting period (see Table 4 a).

6 Civil Engineering

In 2005, about 52% of investment in civil engineering work was done by public authorities and 48% by (private or “quasi-private”) firms. Total civil engineering, especially new work, declined up to 1998. In 1999 the sector expanded considerably, but since 2000 (with an exception in 2003) the negative development has continued until 2005, with a concentration on the decline in new work.

Semi-private and private enterprises will remain cautious with regard to (new) civil engineering projects for the same reasons as for (new) buildings (see Section 5 above). The financial restrictions in the public sector, above all in the municipalities, will prevent an increase in this sub-category of civil engineering until 2006 or even 2007. A slightly more optimistic scenario for both categories of investors, private firms and public authorities, is underlying the outlook for 2008.

Some stimulus for new civil engineering was expected (and still is assumed in a mid-term perspective) to come from investments in road and rail construction, with the main focus on projects in the German Unity programme. These projects are aimed at improving or establishing transport links between west and east Germany (and Europe, especially after EU enlargement) and which will be carried out to a large degree in east Germany.

These influences will lead to a continued tendency of slightly increasing shares of the sub- sector “traffic and transport” in total civil engineering. On the other side, a below average performance is expected for the sub-category “other civil engineering” because of the dominance of public authorities (see Table 4b with corrected estimates). © EUROCONSTRUCT 143 Germany Amsterdam, June 2006

Impulses for civil engineering in the private enterprise sector are coming from the investment programme of Deutsche Bahn, which is still spending billions of euros per year for expanding and even more for improving its rail network. Only a decreasing share of these construction measures will be for building new high-speed stretches.

Funding for the traffic congestion reduction programme and (in a mid-term perspective) for some BOT (Built, Operate, Transfer) or PPP (Public Private Partnership) projects for the extension and modernisation of the highway network will come from revenues from the general highway (Autobahn) usage fees for trucks, which is in function since the beginning of 2005.

Increasing efforts for R&M in civil engineering will be necessary in all sub-categories of private and public infrastructure buildings in order to keep the large numbers and values of existing structures up to date. This holds true especially for the rail network, highways, airports, and docks and channels. Above all in the public sector, a paradigm change towards a more rapid extension of this kind of civil engineering activities has occurred in recent years.

In some cases it could be problematic to decide whether the construction measures belong to “new work” or to (value increasing or preserving) R&M in civil engineering (and also in non-residential construction) making estimates and forecasts for this split of total civil engineering difficult and highly uncertain (and perhaps leading to smaller differences in the figures for the Euroconstruct countries).

Both sub-categories of civil engineering, new work and R&M, are suffering under the strong budget constraints, above all of the municipalities, but also of the central government and the Länder. This holds true for the whole forecasting period.

A continued and even stronger decrease in total civil engineering has been observed until 2005 (coming mainly from new work). In the course of the expected economic upswing the forecast figure for 2006 is again positive. A recovery and a faster upward development are expected in the outlook for 2007 and 2008, respectively, with sturdier impulses coming from both, R&M and new work.

144 © EUROCONSTRUCT Amsterdam, June 2006 Germany

Figure 1: Real Estate Transactions Volume in West and East Germany 1992 to 2008 Bill. Euro 140

120

100

80 West Germany East Germany 60

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: GEWOS GmbH; Forecasts of the Ifo Institute for Economic Research, Munich.

Figure 2: Real Constructiona) Investment/Volume in Germany by Sub-sectors 1995 to 2008b) bill. Euro 160

140 Residential construction 120

100

80 Non-residential construction 60 Civil engineering 40

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

a) In constant prices of 2005; Euroconstruct definition of construction volume and sub-sectors for Germany. b) 2006 and 2007: forecast; 2008: outlook. Source: Federal Statistical Office for Germany; Ifo Institute for Economic Research.

Figure 3: Construction investment by sub-sectors 1991-2005 - at current prices -

accumulated shares 100% Public civil engineering

90% Public non-residential buildings Private civil engineering 80%

70% Private non-residential construction

60%

50%

40% Residential construction

30%

20%

10%

0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Federal Statistical Office for Germany; Ifo Institute for Economic Research.

Figure 4: Construction by type of industries and services 1991-2005 - at current prices - accumulated shares 100% D-I-Y & appurtenant structures 90%

80% Service for planning & site preparation Manufacturing industries 70%

60%

Building installation & 50% completion

40%

30% Main contract work 20%

10%

0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Federal Statistical Office for Germany; Ifo Institute for Economic Research.

146 © EUROCONSTRUCT Amsterdam, June 2006 Germany

APPENDIX – DEFINITIONS

1. The main basis for all ex-post-figures of value variables presented in this report is the German SNA – System of National Accounts (= VGR – Volkswirtschaftliche Gesamtrechnungen) with all relevant data and methodological revisions (esp. for figures in constant prices of the previous year) until 2005. Revised total gross construction investment by type in 2005 in current prices (without a split for west and east Germany, therefore also in the forecast figures) is the starting figure for all calculations and estimations for the sub-sectors and sub-categories of construction volume in the Euroconstruct definition. Non-value increasing R&M carried out by firms is included via percentage estimates.

2. The absolute value figures for construction investment/output in all tables for Germany are without VAT. The original market price figures for 2005 include VAT as follows (estimates of the Ifo Institute based on official figures of the Statistical Office for Germany): − 11.3% for residential construction − 9.1% for (private and public) non residential construction − and 6.4% for (private and public) civil engineering.

3. New data and (Ifo Institute and expert) estimates for renovation and modernisation in residential construction and in the other sub-sectors have led to slightly higher (and again increasing) shares of this kind of construction activity for the basis year 2005 in all tables for the Amsterdam conference of Euroconstruct. These revisions are considered also in the forecast figures via estimates.

4. Table 1: Population figures are at the beginning of each year. The (German, not ILO) concept for the unemployment figures and rates have changed in 2005 leading to higher values.

4. Table 2: Total construction output: This category contains construction investment in the delimitations of the official German System of National Accounts (new construction and value-increasing modernisation). Non-investive repair and maintenance measures realised by “official” firms are included in all sub-sectors via expert based estimates. Services, construction by other sectors, DIY, black economy: This entire category is contained for Germany in total construction output/volume as an official estimate. A calculation or estimation of the individual portions for these categories is not possible (cf. Figure 4 above). Construction sector output: This category contains the gross production volume (including prior goods and services received from other sectors) and therefore not only the turnover or the gross value added of the construction industry and other firms of the industrial sector. For Germany there are no official figures and there is no solid basis for an estimated split of gross value added or production into the three big sectors or even the six sub-sectors of construction output.

5. Table 3: The (partly revised) figures for second homes and vacancies and for the home ownership rate (= proportion of households living in their own home) are estimates of the Ifo Institute based on the available information and experts knowledge, partly interpolated for single years.

6. Table 4 a: The (actualised) estimates for the types of new non-residential buildings (with the new split introduced for the Barcelona conference in 2005) made by the Ifo Institute exclusively for Euroconstruct are based on the official statistics of construction activity in Germany (“Bautätigkeitsstatistik”) with two categories of “infrastructure buildings” (for education and for health). The share of the categories of buildings is calculated as a mean out of the square meters and the calculated costs of new buildings (permissions and/or completions).

7. Table 4 b: Estimates for the Euroconstruct categories of total civil engineering in Germany are made by the Ifo Institute exclusively for Euroconstruct. The figures and estimates have been actualised for the Amsterdam conference. The estimates are based on official statistics (“Bauberichterstattung – Totalerhebung”) for the (share of) turnover of construction firms in the different types of civil engineering; this restricts the initial estimates to only four categories and makes a second stage of estimation for the whole table neccessary. It has to keep in mind that official statistics relate the whole turnover of a firm to the sub-category with the highest weight leading to systematic under-estimations for the smaller categories.

Country/Pays/Land: GERMANY Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 82 540 82 530 82 500 82 470 82 460 82 470 82 480 Bevölkerung

Households ('000s) Ménages 38 430 38 570 38 640 38 720 38 750 38 800 38 850 Haushalte

Unemployed ('000s) Chômeurs 4 061 4 377 4 381 4 861 4 580 4 440 4 260 Arbeitslose

Unemployment rate (%) Taux de chômage 9,4 10,2 10,1 11,2 10,6 10,2 9,6 Arbeitslosenquote

Change of GDP Variation du PIB 0,1 -0,2 1,6 0,9 1,8 1,2 2,1 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1,4 1,1 1,6 2,0 1,6 2,5 2,1 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 0,0 0,0 1,3 1,1 1,3 1,6 0,9 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 3,0 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4,9 4,2 4,1 3,4 4,1 4,3 4,4 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). 3) 10-year goverment bonds (or equivalent).

148 © EUROCONSTRUCT Amsterdam, June 2006 Germany

Country/Pays/Land: GERMANY Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 49 830 -10,3 -3,5 -5,0 -5,8 1,8 -1,5 1,5

Logement Renovation 66 054 -1,5 1,2 1,3 -1,5 0,8 1,3 1,3

Wohnungsbau Total 115 884 -5,9 -1,0 -1,6 -3,4 1,2 0,1 1,4

Non-residential construction New 30 902 -9,1 -5,8 -6,0 -4,0 1,1 2,2 2,6

Bâtiments non résidentiels Renovation 19 757 -3,5 -2,5 -2,0 -1,1 0,6 1,8 2,4

übriger Hochbau Total 50 658 -7,1 -4,6 -4,5 -2,9 0,9 2,0 2,5

Building New 80 732 -9,8 -4,4 -5,4 -5,1 1,5 -0,1 1,9

Bâtiment Renovation 85 811 -2,0 0,3 0,5 -1,4 0,7 1,4 1,6

Hochbau Total 166 542 -6,3 -2,1 -2,5 -3,2 1,1 0,7 1,7

Civil engineering New 20 422 -4,3 1,0 -1,9 -4,5 2,0 2,3 2,4

Génie civil Renovation 11 487 -1,9 1,8 -1,3 -3,2 0,5 2,0 2,0

Tiefbau Total 31 910 -3,5 1,3 -1,7 -4,0 1,5 2,2 2,3

TOTAL CONSTRUCTION OUTPUT 198 452 -5,8 -1,6 -2,4 -3,4 1,2 0,9 1,8

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 26,93 -7,2 3,5 -3,6 -7,5 1,0 2,5 4,0 Inländischer Zementverbrauch

Country/Pays/Land: GERMANY Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008 Building permits 1+2 family dwellings Logements autorisés Individuel 171,9 192,7 167,1 154,3 147,0 149,0 153,0 Baugenehmigungen Familienhäuser Flats Collectif 71,3 70,6 69,3 65,1 76,0 83,0 88,0 Mehrfamilienhäuser TOTAL 243,2 263,3 236,4 219,4 223,0 232,0 241,0 Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser Flats Collectif Mehrfamilienhäuser TOTAL Housing completions 1+2 family dwellings Logements terminés Individuel 172,9 165,2 177,2 149,1 146,0 146,9 155,5 Baufertigstellungen Familienhäuser Flats Collectif 80,8 70,9 70,6 61,7 72,2 75,0 82,5 Mehrfamilienhäuser TOTAL 253,7 236,1 247,8 210,8 218,2 221,9 237,9

Housing stock Logements existants 37 480 37 640 37 840 38 010 38 190 38 370 38 560 Wohnungsbestand

thereof second-homes dont résid. Secondaires 3 160 3 210 3 270 3 340 3 380 3 410 3 450 davon Zweitwohnungen

thereof vacancies dont inoccupé 1 590 1 630 1 630 1 610 1 570 1 530 1 480 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 44,6 44,7 44,6 44,7 44,8 44,8 44,8 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

150 © EUROCONSTRUCT Amsterdam, June 2006 Germany

Country/Pays/Land: GERMANY Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 1 336 -12,4 -6,6 -6,3 8,2 -17,0 -13,7 2,6 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 1 961 31,8 26,3 3,7 8,5 -6,0 2,2 2,6 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 5 143 -14,9 -9,9 -5,2 -13,7 10,9 5,8 2,6 Industriegebäude

Storage buildings Bâtiments de stockage 5 326 -10,7 -1,3 -2,5 6,1 -6,4 -0,1 3,9 Lagergebäude

Office buildings Bureaux 4 695 -6,4 -11,5 -21,9 -5,3 1,1 5,8 2,6 Bürogebäude

Commercial buildings Commerces 4 576 -14,2 -5,2 -6,3 2,8 -8,2 2,5 1,1 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 3 104 -3,9 1,9 -3,0 -7,8 2,6 -6,4 2,6 Landwirtschaftsgebäude

Miscellaneous Autres 4 760 -7,1 -10,3 4,0 -11,7 14,8 5,1 2,6 Sonstiges

Total Insgesamt 30 902 -9,1 -5,8 -6,0 -4,0 1,1 2,2 2,6

Million euro at 2005 prices, excluding taxes. 1 euro = 1,95583 DM

Country/Pays/Land: GERMANY Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 8 137 -3,9 1,5 0,8 -1,1 4,5 3,1 5,2 Verkehrsinfrastruktur Straßen Railways Voies ferrées 1 595 14,3 6,9 -5,6 -4,0 1,5 16,5 -6,7 Bahnanlagen Other transport Autres réseaux 2 712 -3,9 1,5 0,8 -1,1 4,5 3,1 5,2 Übrige Vekehrsinfrastruktur TOTAL 12 445 -1,8 2,2 -0,1 -1,5 4,1 4,8 3,5

Telecommunications Télécomunications 4 467 3,4 1,3 -5,1 -7,3 1,5 2,2 -1,4 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 4 544 -6,7 0,6 -1,8 -4,1 -0,3 0,3 2,6 Energie-und Wasserversorgung

Other Autres 10 453 -6,7 0,6 -1,8 -5,4 -0,8 -0,2 2,1 Sonstiges

Total 31 910 -3,5 1,3 -1,7 -4,0 1,5 2,2 2,3

Million euro at 2005 prices, excluding taxes.

152 © EUROCONSTRUCT Amsterdam, June 2006 Germany

Country/Pays/Land: GERMANY Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 1 292,6 -0,5 0,1 0,6 0,0 0,4 -0,1 0,7 Privater Verbrauch

Public consumption Consommation publique 417,2 1,4 0,1 -1,6 0,1 0,4 0,6 0,6 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 384,7 -6,1 -0,8 -0,2 -0,2 3,1 3,0 2,8 of wich construction 210,7 -5,8 -1,6 -2,3 -3,4 1,2 0,9 2,2

Stocks (contribution as % of GDP) Variations de stocks 39,0 -1,8 -1,0 -0,1 1,7 2,0 2,0 2,2 Vorratsveränderung

Exports Exportations 901,7 4,2 2,4 9,3 6,3 8,2 6,6 7,2 Exporte

Imports Importations 789,6 -1,4 5,1 7,0 5,3 7,4 6,2 6,0 Importe

GDP PIB 2 245,5 0,1 -0,2 1,6 0,9 1,8 1,2 2,1 BIP

Standard National Accounts, gross figures.

154 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

HUNGARY BuildECON www.buildecon.com

Anna Gáspár e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The new /old government already in 2006 is left with no other option but to make reforms and take saving measures. The measures to be expected in the near future – cancellation of tax benefits, tax increases, reduction of budget expenditures, blocking the reserves – cannot be but temporary. As a result of these, economic growth may suffer a momentary deceleration. In the field of investments it can be expected that infrastructure and environmental protection investments subsidised by EU as well as motorway constructions will be carried on dynamically, producing a growth of at least 10 per cent, correspondingly to the 2nd National Development Plan and governmental priorities. However, residential and non-residential investments and housing developments are a function of the expected economic growth’s temporary deceleration. By means of favourable reforms, this tendency can be changed for 2007-2008. Supposing this, after the annual growth of above 8 per cent in 2005, we estimate the increase of the construction performance to be 5 per cent in 2006, and to reach 8 per cent in 2007 and 12 per cent for 2008.

Market conditions have been established in the field of residential construction and renovation, regarding both infrastructure and economic actors. Thanks to a favourable political and economic environment, subsidy policy and various financing forms, a market of supply has taken shape. However, a great part of the purchasing power depends on the changing housing policy, since the harmony between living standards, housing needs and housing prices can only be established gradually.

During the next period the market of new housing construction will remain characterised by a strong supply. However, solvent demand will not increase owing to a temporary economic deceleration. Consequently, we estimate the growth we have forecasted earlier to actually be of lesser importance. We consider that the high number of construction projects in progress and that of granted building permits and the dynamically expanding field of refurbishment and modernisation will allow a more modest increase in 2006, and from 2007 on a growth of about 5-10 per cent on the residential building and renovation market.

Year 2005 was far more successful in terms of non-residential building investments than it was forecasted in an earlier study of ours. The government has made truly considerable efforts to support foreign investor’s developments. Nevertheless, it has to be recognised that a good part of those potentially large-scale developments and of non-residential building projects in preparation is a function of the Hungarian economic environment and the European and global business circumstances. Macroeconomic processes of early 2006 and the restrictions which are expected to follow the elections rather point towards developers’ go-slow policy. For this reason we find it fortunate if last year’s volume of investments can be reproduced this year as well. In the case of favourable macroeconomic processes being established, the consequences of which might become perceptible in 2007, in the field of non-residential construction from 2008 on we presume a slight dynamisation.

Both transport and environmental protection are high priority developments from both the EU subsidies’ and government’s point of view. Following the elections, on account of the continual government, based on their earlier manifestations, it can be supposed that civil engineering investments will be less concerned by the upcoming restrictions. Civil engineering has a remarkable place in projects prepared both in 2005 and early 2006. For this reason, it can be expected that last year’s nearly 20 per cent growth in this field will continue during this year as well. After year 2006’s growth of circa 10 per cent, for the period of 2007-2008 we forecast an annual growth of above 15 percent.

156 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

2 Macro-economic Outlook

In early 2005, in the same way as in Europe, in Hungary an economic deceleration was to be observed, but from the middle of the year a fast and relatively favourably structured growth was established, motivated by exportation and investments (motorway construction). During the course of the previous year economy grew by 4.1 per cent, and the gross domestic product represented 21,800 billion HUF (88 billion EUR). The constructions’ rate relative to all investments corresponded to 11.6 per cent of the GDP, all in all resulting in a growth of over 8 per cent, compared to 2004. In 2005 Foreign Direct Investment (FDI) represented circa 4 billion EUR, little exceeding the previous year.

In spite of high energy prices on the world market, inflation considerably decreased in 2005. Employment did not change, but unemployment increased, and at the end of 2005 it was fixed at 7.3 per cent.

Since world economic risks are permanently high, Hungary cannot escape from the impact of the changes of USD exchange rates and that of the energy prices’ development, either. However, from the country’s point of view the development of the European Union’s economic situation is even more significant.

At the beginning of year 2006 the central budget’s deficit has increased, the demand for external financing has moderately diminished, foreign capital in- and outflow has become somewhat more lively, and the experts expect 3-4.5 billion EUR to arrive into the country in 2006. The most preferred sectors for investment are: services (telecommunication, public utilities, tourism, freighting) and industry (energetics, electronics, mechanical engineering).

The problems of public finances were criticised by both the European Union and the World Bank, and it was also reflected in the rating agencies’ decreasing appreciation. At the beginning of year 2006 it can be stated that the Hungarian private economic sector is competitive and dynamical on the one hand, but on the other hand, public activities necessitate basic reforms and the improvement of their balance.

In Hungary economic processes are strongly influenced by political factors. In April 2006 as a result of the elections, the socialist-liberal coalition, which has been in power since 2002, can continue governing. Since this autumn there will also be municipal elections, this might influence to a certain extent the new government’s first steps.

The coalition’s victory has been taken favourably by the Hungarian monetary and capital market; the forthcoming months will be perceived to a certain extent as a waiting-period. Nevertheless, the forming government is immediately going to face two things to be done that have been put off for about ten years now, which are the following: • Institutional reforms to be undertaken in the fields of government, municipalities, healthcare, education, railway and public resources management; • The balance of public finances must be improved.

For this year the new/old government has two obligations to fulfil due to the country’s EU membership that will have a considerable impact on the following years’ investments: • Presentation of the 2nd National Development Plan’s operational program; • Elaboration of the forint’s convergence program.

The new government already in 2006 is left with no other option but to make reforms and take saving measures. The measures to be expected in the near future – cancellation of tax benefits, tax increases, reduction of budget expenditures, blocking the reserves – cannot be but temporary. As a result of these, economic growth may suffer a momentary deceleration. In the field of investments it can be expected that infrastructure and environmental protection investments subsidised by EU as well as motorway constructions will be carried on © EUROCONSTRUCT 157 Hungary Amsterdam, June 2006 dynamically, producing a growth of at least 10 per cent, correspondingly to the 2nd National Development Plan and governmental priorities. However, residential and non-residential investments and housing developments are a function of the expected economic growth’s temporary deceleration. By means of favourable reforms, this tendency can be changed for 2007-2008. Supposing this, after the annual growth of above 8 per cent in 2005, we estimate the increase of the construction performance to be 5 per cent in 2006, and to reach 8 per cent in 2007 and 12 per cent for 2008.

158 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

3 Housing Market

At the end of year 2005 the Hungarian housing stock counted 4 million 200 thousand housing units, 92% of which were in private ownership. 65 per cent of the housing stock are predominantly one-family brick houses, and a further 20 percent of it are residential units situated in prefabricated large-panel construction built between 1965 and 1980. Circa 25 per cent of the Hungarian housing stock are obsolete, in a degraded condition and/or vacant. Homes newer than thirty years old represent 35 to 37 per cent of the total housing stock. About 5 to 6 thousand homes are demolished every year, and 35 to 42 thousand new homes have been built annually since 2003. The number of renovated homes is estimated to be between 100 and 140 thousand per year.

In 2005 41 thousand homes recently built up were granted usage permits and 51.5 thousand construction permits were released for new homes. The number of completed new homes dropped by 6% and that of construction permits diminished by 10% compared to 2004. 30% of residential construction was carried out in Budapest; intended new dwellings are also characterised by this regional concentration.

The number of building permits and homes put to use between 1999 and 2005 t

Numerical data Valid permits for Housing projects Granted permits for Number of homes Year * residential under building new homes put to use construction construction 1999 1.9 129,182 94,752 30,577 19,287 2000 2.2 137,000 95,791 44,709 21,583 2001 2.8 155,000 109,884 47,867 28,054 2002 3.1 165-170,000 120,652 48,762 31,511 2003 3.5 175-185,000 137,658 59,241 35,543 2004 4.4 175,000 146,637 57,500 43,900 2005 4.1 120,000 –140,000 51,490 41,084 Source: Central Statistical Office * the number of dwellings built per thousand inhabitant

Residential construction as well as renovation and refurbishment of residential estates are a function of economic development on the one hand, and of housing policy and the system of housing subsidies on the other hand. The dynamism of housing construction experienced in the latest years is unequivocally owing to the latter. Nevertheless, it is widely known that in Hungary housing policy depends on electoral terms. In the beginning of year 2006, taking into account the already known effect of the two elections – legislative and local –, it is difficult to predict the following years’ housing policy.

The previous government’s housing subsidies’ break-through effect is still showing up in new residential constructions, the number of which has dynamically increased since 2003. The present central housing policy is more modest, more budget-friendly: it can be characterised by indirect governmental aid (interest rate subsidies for additional and mortgage loans, as well as for credits for renovation and that of public utilities supply) and by mortgage bank and housing savings bank subsidies. As a joint effect of all these, and as a consequence of the arduous competition among banks on the housing credit market, from 2004 to 2005 the stock of housing loans rose by 20 percent to reach 2,300 billion HUF (9 billion EUR). Let us not forget that in January 2002 the stock of housing loans was merely 332 billion HUF.

Compared to the previous year the demand for new dwellings in Budapest rose by 20 per cent, about a half of which was built in investment undertaking – in order to be put on sale. Among the sellers we find a good number of foreign developers: after the Israelis, the Irish and the Spanish have also appeared. The capital city, as a valuable area for estate development (riverside, highland, historical city centre, developing public transport etc.), is the field of growing residential real estate development. Whereas between 1990 and 2000 from 3,000 to 5,000 dwellings were built annually in Budapest, in 2004 10,000 and in 2005 12,000 dwellings were granted usage permits. According to predictions this growth will continue in 2006 and 2007, as well.

New construction permits issued in 2005 for the following years show the predominance of homes with smaller floor-space (below 60 m2) in multi-storey, multi-unit buildings. Construction permits issued for 2005 (2004: 5.3 million m2, 2005: 4.5 million m2) reveal same tendency: the decrease in floor-space is 15 per cent. According to this 92 per cent (!) of the dwellings to be built in Budapest and 57 per cent at national level are homes to be carried out in multi-storey, multi-unit buildings, in contrast with the almost 50 per cent self-contained single one-family houses built in the past. Sales time per dwelling is increasing.

It could be observed in recent years that demand has been shifted towards smaller floor- spaced dwellings, in the capital compared to 2004 the average floor-space has diminished by 9 m2, and at national level by 6 m2. In total the average floor-space of homes built in 2005 dropped by 13 per cent compared to the year before (2004: 4.1 million m2, 2005 3.6 million m2). All in all, demand for new dwellings has considerably decreased in other parts of Hungary. This also relates to differences in the standards of living, however, the regions’ rapidly improving availability by public roads, leading to foreign capital investments and increasing employment rates, gives reason for hope for a boom in provincial housing investments in the long run. The situation is only more favourable in those towns – Győr, Székesfehérvár, Sopron, Pécs and Miskolc – where employment opportunities are better and/or several higher education institutions attract a significant number of students from all parts of the country. The proportion of constructing traditionally larger floor-space one-family houses also diminished compared to the multi-unit, multi-storey residential houses. All this is reflected in the considerable decline of the demand for traditional building materials, such as bricks.

Hereby we shall speak about the housing renovation market as well. According to an analysis entitled “Lakásviszonyok az ezredfordulón” (Housing in Hungary around the Millennium) published in 2005 by the Central Statistical Office, the number of households that would like to change their housing conditions had mounted over a million. 23 per cent of them would like to change their conditions by the refurbishment of their present dwelling, while 77 per cent wish to move to a smaller or bigger home.

Although to different extents, the present government supports both the construction of new and the reconstruction of used homes by interest subsidies on loans and in the form of grants according to the number of children in the household. The present housing policy supports young first home buyers in particular. It favours those who undertake building dwellings to be let, and the tenants inside, on a social basis, with rental contribution. The housing policy supports the renovation of nearly 500 thousand homes located in large prefabricated concrete blocks with funds within the framework of a special tender.

A few important – both global and local – factors strengthen even more the population’s disposition to renovate. First of all, it is the rapid growth of energy prices that compels the households to effect some of the necessary modernisation. From September on 2006 when new dwellings are put to sale, it is compulsory to issue an energy certificate that affects their value. Certainly, when selling existing buildings later on the verification of energy consumption will be a must as well. Secondly, the VAT decrease, hopefully supported by the EU, is going to have an impact on the invoices of those contractors performing labour intensive renovations. This proposal is being under consideration by the responsible organs 160 © EUROCONSTRUCT Amsterdam, June 2006 Hungary in Brussels. The significant state and municipal support of the renovation of prefabricated buildings (contribution parts: one third is financed by the central budget, one third by the municipalities, and one third by dwellers themselves) necessarily leads to acceleration. It is important to mention that in 2004-2005 approximately 30 thousand prefabricated homes were renovated per year, and 85 per cent of these were still only posterior heat insulations. The government prefers complex renovations, modernising the engineering installations as well, since the heating bill represents one of the major items of the population’s living expenses. Finally, taking into account all the factors influencing the renovation of the Hungarian housing stock, we believe that the value-based trends of the housing market also strengthen the direction of growth.

The approximately one million households that wish to change are mostly members of a housing savings bank. The new Housing Savings Bank Act coming into effect the 1st January 2007, is going to be more flexible and improve the financing possibilities of apartment buildings and housing co-operatives by an additional increase of state support. This can accelerate the modernisation and renovation of (prefabricated) panel house flats and put the process into a more favourable condition.

The population’s intention to move flats, the increased market-value of used flats, the expansion of trade of existing flats are accompanied by housing refurbishment and value- increasing modernisation. The turnover of modern building products (insulating materials, floor- and elevation materials, air-conditioning equipment, safety engineering, doors and windows) is increasing. Do-it-yourself shopping chains are getting stronger, new building and design centres as well as expositions are opening. The range of commercial forms – shopping parks, specialised shopping networks, specific commercial services – is constantly extending.

Synthesis: Market conditions have been established in the field of residential construction and renovation, regarding both infrastructure and economic actors. Thanks to a favourable political and economic environment, subsidy policy and various financing forms, a market of supply has taken shape. However, a great part of the purchasing power depends on the changing housing policy, since the harmony between living standards, housing needs and housing prices can only be established gradually.

4 Non-residential Market

As for the development of non-residential buildings of the built environment, year 2005 can be qualified a very successful one. It is a matter of constructing and modernising office- blocks, industrial buildings, commercial facilities, tourist service regions, agricultural buildings, research laboratories, educational, healthcare, sporting, cultural, church-related etc. institutions. The factors that motivated this success were: favourable impacts of the real estate market, a resolute economic policy facilitating the attraction of foreign capital as well as new investments of foreign companies already settled in Hungary, the more and more confident and expert exploitation of the country’s European Union membership and of the opportunities offered by the first National Development Plan, and the outset of PPP (Public- Private Partnership) based investments. During the year 960 non-residential investments were prepared or carried out, the construction costs of which exceeded 500 million HUF apiece.

Real estate market impacts

The Central and Eastern European real estate market is characterised by a strong investor demand and poor supply. In 2005 140 billion EUR were invested in the European property market, which is 40 per cent more than in the course of the previous year. 43 per cent of the capital is or was spent on office market developments, and 38 per cent on commercial development. Some priority regions for real estate investments in Central and Eastern Europe are: the Hungarian-Slovakian-Austrian common border area, the Czech-Polish- German common border area, In Russia Moscow and environs.

In 2005 estates in Hungary rose in price by 10 per cent. The non-utilisation rate diminished to reach around 11 per cent. Similarly to the preceding two years, the construction of almost 100 thousand m2 of new office space was completed, mainly in Budapest. The modest construction of new offices, as we have previously referred to it, is a sign of developers’ wariness. If we disregard Budapest and its agglomeration, office space developments are not very significant in Hungary. Still, the transactions’ volume has increased by 25 per cent and has exceeded the sum of one billion EUR. Last year 235 thousand m2 of office space was let in Budapest. (At the present time more than 2 million m2 of office space is to be found at national level.) In Hungary new economic actors to rent office buildings are typically global companies that externalise their services, bringing their so-called “outsourcing” tasks to countries with lower-paid, but qualified work force.

In 2005 real estate investment funds grew a lot stronger (the largest are: Raiffeisen, OTP, Erste, Europe Property Investment Fund), which against the decreasing banking interest rates were paying from 9 to11 per cent of yield. In the case of “A” category office blocks, the rent varies from 12 to 15 EUR/m2/month, in the case of “B” category ones it is from 10 to 11 EUR/m2/month.

In 2006-2007 an increase in office supply is to be expected: in 2006 circa 200 thousand and in 2007 between 330 and 350 thousand m2 of further office space are going to be created. Some of the largest are: Roosevelt Ház, Duna Tower, Európa Tower, Infopark West Phase I. és II., Center Point, Milennium Városközpont Irodaház, Szépvölgyi Irodapark III., Graphisoft Park etc. Not only foreign outsourcing activities, e.g. EDS, Morgan Stanley, BUW Holding demand offices, but also the national administration require significant office space. More demanding tenants move to architecturally higher-standard and functionally higher-quality buildings. Facility management, which is the management and maintenance “industry” of establishments, is gaining more and more importance. In the investors’ decision the consideration of the building’s entire life cycle as well as its high-quality and economic sustainability is gaining ground (sometimes the 15-20 years operation, management and maintenance of a building may reach the 70 per cent of its overall construction costs).

162 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

According to a 2005 HVB survey, 30 per cent of new commercial estates’ surface are shopping centres, 30 per cent are hypermarkets, 19 per cent are supermarkets, 13 per cent are do-it-yourself shops, 7 per cent are large furniture stores, on an overall surface of about 600 to 700 thousand square metres. In the past year against those commercial establishments of massive service, the first specialised higher-class stores and family shopping centres appeared. Commerce combined with leisure has been present in Hungary for about ten years now, that is why these shopping malls have become the younger generations’ typical space of time spending. The largest Hungarian estate developer, Trigránit is present in ten countries now, with a total of about 800 square metres office and commercial estate development.

Shopping centres besides their specialisation have another significant growth potential. Infrastructure developments in Budapest and in the countryside especially, like e.g. the metro, road constructions, traffic intersections, borderland town positions represent the further direction and field for development. For this reason, because of their high profitability, shopping centres play a predominant role in the real estate funds portfolio. In the shopping centres of Budapest higher rents vary from 65 to 115 EUR/m2/month.

In 2006-2008 the surface of present commercial estates may be extended by further 200 to 300 thousand square metres (Arena Plaza, Budapest Skála, Győr Árkád, developments in Váci utca and Andrássy út, small town shopping centres).

Facilitating industry and related Research & Development means the creation of new jobs, and for this reason it is definitely a governmental duty. The government since 2002 has granted circa 800 billion HUF (3.2 billion EUR) for 70 thousand enterprises in Hungary, in form of loans at preferential interest rates, contribution to the EU subsidies or grants. Besides, the present Hungarian economic policy is supposed to facilitate permanent foreign capital interest and inflow. In 2005 circa 5 billion EUR of FDI (Foreign Direct Investment) arrived into the country, 30 per cent more than in the previous year. (One of its reasons is the favourable world economic situation: 74 per cent more foreign capital was invested in Europe in 2005 than the year before.) In 2006-2008 from the sum of 5 billion EUR new investments of value of a 2.5 billion EUR, that is 34 new industrial projects will be carried out and the 16 thousand jobs will be created, e.g. Hankook Tire, Bosch, Alcoa, Grundfus, Coloplast factories, etc. A major part of these big investments, that is 62 percent, is actually the reinvested profit of existing foreign companies working in Hungary. The government has been providing subsidies for the benefit of these major industrial investments, in a specific scheme. One of the conditions of receiving this aid is that the beneficiary settle in less developed regions of the country. The settlers essentially develop in the framework of industrial parks. 2680 enterprises operated in Hungarian industrial parks in 2005, employing circa 150 thousand people.

In 2006-2008 further developments are expected to be made by the two thirds of those companies settled in the industrial and Research & Development field.

The modern warehouse (store) market offers about 1.1 million square metres, 150 thousand m2 of which was built in 2005. Hungary’s geographical position, the proximity of South and South-East European new markets, the settlement of large companies specialised in production and export, the enlargement of their production capacities all maintain a permanent need for modern logistic investments. At the present warehouse rent varies between 4 and 6 EUR/m2/month. The intermodal logistic centres, dealing with transport and distribution of goods with the help of combined ways of transport, are being built collaterally with infrastructure’s rapid development. In 2006-2008 a further expansion of warehouses of approximately 200 thousand m2 per year is to be expected. Some further area to be possibly built in, belonging already to the developers – Agrogate, AIG/Lincoln, BILK, Wallis, ProLogis, Grontmij, Dunec, CPB Immo, OTP, Autoker, BIP, Varpex etc. –, is close to 2 million square metres.

Public investments – education, healthcare, culture, sport, church – have been given a new momentum by PPP (Public-Private Partnership) based investments. Vital developments can be financed by the central budget only in the long run. Besides motorway constructions, PPP has an extremely high importance in the development of primary, secondary and higher education, including the construction of dormitories and gymnasiums and their maintenance. Some healthcare projects and prison constructions are also carried out in the public-private- partnership co-operation. The private partners are, not surprisingly, mostly capital-intensive, large construction-developer companies, such as Strabag, Magyar Építő, Arcadom, Hérosz, Kipszer and others. Two big real estate developers, Wallis and Futureál also belong to interested parties. Beyond the triple function of planning, project management and construction, operation and maintenance represent the initial conditions of all PPP projects. This requires a new kind of approach from both the public partner and designer introducing the vision of a life-long economical operation. PPP legal regulation has been introduced in Hungary, a significant number of projects are under public procurement, the construction of several projects has been commenced.

To sum up: Concerning the processes started in 2006 and market prospects of non- residential construction for the next years, construction permits issued in 2005 let us conclude the fact that big investors carry out installations of larger floor-space (new investments or the development of existing ones). The floor-space of projects granted construction permits has risen by 14 per cent, to reach 3.2 million m2. More than the three- quarters of it have one of the following functions: industrial/warehouse (34%), agricultural (24%) or commercial (18%).

164 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

5 Civil Engineering Market

In Hungary the civil engineering sector, which constituted about one-fourth of all annual construction activity in the previous years, started to grow in 2004, mainly on account of the speeding up of motorway construction and our engagements and preferences arising from our European Union membership. Thus, in 2005 the civil engineering sector’s proportion reached and somewhat exceeded the 30% of all construction activity.

Infrastructure – the road, railway, city, air and waterway transport, water- and waste- management as well as energy-supplies, telecommunication and environmental protection – is taking more and more importance in modern, globalizing economies. The countless factors which determine the performance of the infrastructure at the time of the preparation of the present survey in the form of a natural disaster (national flood emergency along 1500 fluvial km) are forecasting the priorities of our damage protection. Already 4 years ago important floods on the Tisza river compelled a new concept for water-management, the so-called Vásárhelyi plan, which includes the construction of a number of large reservoirs. However, the realisation of this is slower than nature’s recurrent capacity to cause disaster over and over again. Therefore, it is positively plausible that the acceleration of preventive flood protection and construction of large reservoirs may take high priority in 2006-2007.

It can take a long time to eliminate the underdevelopment of the Hungarian infrastructure compared to the 21st century’s geopolitical needs. The development of the economy, the global and European obligations, maintenance constraints and social impacts all require more and more complex decision taking. The current government has given priority to infrastructure development and to motorway construction in particular.

The development of transport investment, on the one hand, depends on our circumstances. In terms of the density of road and railway network, Hungary is one of the most densely supplied countries in Europe. This fact as well as the under-utilisation of waterway transport points towards the rationality of combined traffic and transport in the long run. The constraints for development are also due to the fact that in the past decade the overall performance and structure of transport has changed on account of the political and economic structures’ transformation. Traffic, transport and supply level demands have changed. The output of air traffic has doubled, that of waterway transport has significantly decreased, maritime navigation ceased. A great proportion of railway passenger and goods transport has been transferred to public roads, which proved to be not suitable enough for taking over the increasing car and freight traffic.

As a member of the European Union, Hungary can allot significant surplus sums to the development of its traffic network as it is both a transit and peripheral country of the Union, on account of its geographical position. The transit position towards Greece and, starting with 2007, EU member Romania and later on Croatia enjoys preference. Neighbouring countries such as the Ukraine and Serbia, which cannot expect an EU membership in the medium term, are peripheral, less preferred by Hungary from the point of view of EU support. However, we are interested in a strong foreign trade with these neighbouring countries.

The integrating European market, the continual strengthening of regionalism, the increasing demand for public road transport, globalisation processes appearing in the logistic chain require a new public road policy. It is based on the establishment of a coherent public road network, the elements of which are the following: • Core roads, that is to say clearways and their intersections, 1st and 2nd rank long- distance roads and their intersections. Owner: the state, length: circa 12 000 km • Regional roads (side-roads of the national public road network). Owner: regional administrations, length: 21 000 km

• Local roads (internal and external roads of settlements): Owner: local self- governments, length: 53 000 km, the two-third of which is paved internal road surface, and 70 000 km unpaved external road. • Cycle tracks, planned length: 3400 km

Public road developments: According to the Motorway Act, the radial motorway structure is going to be built up till 2007. Motorways starting from Budapest (M1, M3, M5, M7) – as part of European transport corridors – will reach the frontiers. Simultaneously, hopefully the three- quarters of the M0 ring road avoiding Budapest, which is being built in several sections, mostly financed by European funds, and including the controversial Northern Danube bridge of Budapest, will have been carried out till 2007.

The continuation of motorway and clearway investments has been a governmental priority in public road transport since 2002. A 150 km extension was carried out in 2002-2004. 95 km of roads were completed in 2005 and 252 km of them are to be finished in 2006. The altogether 337 km of motor roads cost about 674 billion HUF (2.7 billion EUR). In 2007 further 260 km of new clearway roads are to be built.

In March 2006, 800 km of clearway were used altogether, 300 km are currently being built and around 220 km are in the phase preceding or pending government purchases, moreover 900 km are at the stage of early design or so-called preparation. Before the end of 2007 the construction of 700 km of further clearway roads will be prepared. 17 further priority investments point towards the construction of a number of relief roads and by-passes in our national road network. Their realisation will last till the end of the year 2007.

Since 2004 the growth of national investments has mainly been encouraged by the construction of motorways. Even the biggest winners of year 2005’s public procurement tenders, worth 1500 billion HUF, got forward with transport development projects (railways and public roads). The extremely fierce international competition keep even the prices of specific principle highways at an acceptable level: in 2005-2007 they cost 1.17 billion HUF per kilometre (4.7 million EUR).

3000 km of Hungary’s 7600 km railway line network are linking the European main network. In Hungary the amount of transport of goods and people by railway as well as the density of our railway network exceeds the European average. However, its characteristics in quality, speed, electrification, the state of its track network are quite under the desired level. The refurbishment of the tracks has been going on for several years now. The priorities of railway infrastructure development are the following: all-European and international railway corridors, Inter-city development, enlargement of suburban and regional lines, connecting logistic centres.

The modernisation of the inland section of European railway corridors crossing Hungary is a high priority EU task. These corridors till the end of 2005 included: IV. (Paris-Bucharest), V. (Koper-Moscow), V.b. (Budapest-Rijeka), V.c. (Budapest-Belgrade), X.b. (Budapest-Athens). A goal is to achieve a speed of 160-250 km/h. However, in the first trimester of 2006 the approved EU budget for 2007-2013 modified and restricted the number of the so-called TEN-projects from 30 to 5. Sections concerning our country are: the railways between Lyon and Budapest and indirectly the one between Bratislava and Paris. The new preference is the railway network’s connection to air traffic.

Hungary, similarly to the other new member states, besides the TEN-projects, from 2007 on is granted subventions form the much more significant cohesion funds as well. With this help it will be able to carry out its priority objectives in terms of railway development, taking into account railway density and developments of the neighbouring countries, especially of the two new EU members, Romania and Bulgaria. Besides the refurbishment of railway infrastructure, the modernisation of the vehicle-fleet and –institutions also represents a

166 © EUROCONSTRUCT Amsterdam, June 2006 Hungary significant item in the budget. It is obvious that this task will continue under several National Development Plans and it will necessitate PPP investments as well as bank and private capital involvement.

The largest developments of the urban, suburban passenger transport mainly concern Budapest and its agglomeration. The 12 tender packages of the No. 4 metro line are under consideration (Section 1: Kelenföld - Keleti Railway Station: 7,3 km, 10 stations, 300 billion HUF/1.2 billion EUR). 79% of the costs are financed by the central budget (EIB credit), 21% are financed by Budapest Municipality, The credit for 75% of all expenses is provided by the European Investment Bank. Superterrestrial construction has already started, and the first section of the metro is expected to be put into operation in 2009. The structural engineer of the stations will probably be the French, German, Hungarian and Austrian BAMCO consortium (Vinci, Strabag, and Hídépítő). Preparations have begun for the 2nd section of the No. 4. metro line, which means further 4 stations in the North to be built as far as Bosnyák tér. It will probably be handed over in 2010.

The planning of the suburban railway development project worth circa 30 billion HUF, which affects the capital and its agglomeration, has started. With the co-ordination of the State Railways (MÁV), the Budapest Transport Company (BKV) and VOLÁN have formed a union in order to carry out this project. They consider the repairs of the 11 railway lines (the modernisation of tracks and vehicles, co-ordination of operation) and of those long-distance and city transport lines connected to them as an important source of incomes, the realisation of which has been started with the refurbishment the suburban railway line connecting Budapest with Érd. According to the 2nd National Development Plan, budget completion is planned to take place by 2009.

The development of air travel is motivated both by tourism and logistics. In Budapest, Ferihegy 1st terminal has been modernised for the reception of extending low-cost airlines. The ownership of the Ferihegy Airport has been transferred to British Airways, which is going to invest about 70 billion HUF (280 million EUR) into terminal-extension, cargo establishments and flight technology. Besides, developments are in progress in Debrecen, Sármellék, Pécs, Szeged, Békéscsaba and Börgönd, partly considering logistics and tourism.

Concerning projects of logistic development related to transport we find it important to mention that logistic centres and services tendered in 2005 are unequivocally situated in the North-West – South-East axe of the country, touching both the Danube and the Tisza rivers. Transportation can be optimised by the combined freightage developments of the docks of Győr-Gönyű, Csepel, Dunaújváros and Baja, ensuring a passage between the road, railway, air and waterway transport of goods.

The state of public utilities supply in households extends annually: electric power consumption increases with an annual 2-3 % (per consumer), gas supply with an annual 13- 15%, while the heating supply practically stagnates. The number of households connected to the sewer – 59% of the households in 2003 – grows with an annual 6-10%. The Government is planning to achieve an 87% sewage disposal for 2015. This means the complete canalisation of 2500 of 3200 settlements. In order to realise this project, besides the organic cleaning of all the sewage drained in the water-pipe network, 64 000 km of public sewer will be needed instead of today’s 34 000 km. The development of waste water purification capacity concerns 4.2 million inhabitants.

24 projects of sewage cleaning subsidised by the EU are planned and carried out during the first six months of 2006. The largest investment is the project of Budapest’s central sewage- treatment plant worth 180 billion HUF, which brings waste-water from both city-sides in conducting drains along the banks of the Danube to sewage purification works to be built in North-Csepel. At the same time with this project started this year the system to be inaugurated by 2010, another project for water quality improvement is being carried out in Debrecen. The project is worth 60 billion HUF and concerns 200 settlements. © EUROCONSTRUCT 167 Hungary Amsterdam, June 2006

The 2nd National Development Plan 2007-2013 marks significant developments in the field of infrastructure and environmental protection. Massive projects, the initial conceptions having been amplified, to be started in the course of the year 2007 within the framework of the 2nd NDP are the following:

Large investments to be started with EU funds in 2007

Project Site Improving drinking-water South Lowland, North Lowland (2nd cycle) quality Waste water purification, Central Sewage Collection and Purification Plant of Budapest, Zalaegerszeg and drainage environs, Veszprém and environs, Nyíregyháza and environs, Békéscsaba, Székes-fehérvár and environs, Makó and environs, Nagykanizsa and environs, Tápió area Flood-reducing reservoirs Szamos - Kraszna, Nagykunság, Hanyi -Tiszasűllyi reservoirs Other water management Tisza flood-plain project, reinforcing dikes and branches of the Duna, Kis-Balaton water-protection system, Ráckeve Duna-branch, Homokhátság Waste management Mecsek-Dráva, Győr-Moson-Sopron, Central Duna region, Heves regional waste management system Railway reconstruction Budapest – Cegléd – Lökösháza, Budapest – Székesfehérvár - Boba, Szolnok – Debrecen – Nyíregyháza – Záhony, Budapest suburban railway network development Public road development M3 Nyíregyháza – Vásárosnamény, M4 Monor – Pilis, M9 – M86 section by- passing Csorna Waste treatment North-East-Pest, Nógrád, North-Balaton, Szabolcs-Szatmár county Source: National Development Office 2006

Finally, about the energy management: The Russia-Ukraine gas dispute of the beginning of year 2006 has raised the question of energy supply security and one-sided or irrationally high energy dependence, all over Europe. Since at the present our dependence on gas in 70% links us one-sidedly to Russia, and the risks of gas supply are bigger than those of oil, in the following years:

• Energy consumption must be reduced (by the increase of effectiveness, technological development, ergonomic operation of buildings) • New and renewable sources of energy must be involved. Feasible new technologies of energy production in Hungary are the following: biomass, construction of wind- and geothermal power stations • A decision was made about the modernisation of the existing Paks nuclear power station (producing non natural gas based electric power) • The proportion of gas use in overall energy expenditure must be reduced • Energy must be procured form several sources (e.g. Nabucco natural gas pipeline from Central Asia through Turkey and the Balkans to Hungary and the EU, or purchase of liquefied natural gas /LNG/).

On account of the constrained natural gas program and the unreasonably low gas prices in recent years, the proportion of gas in the Hungarian energy balance has been 45%, and in indirect (central heating) or direct public use it has been close to 90%. In favour of a more efficient and economical energy use and the decrease of deperdition of heat, the modernisation of district-heating stations and insulation of prefabricated buildings have accelerated. Energy supply of new buildings, installation of new equipment and resources, energy-conscious refurbishment of existing buildings in terms of heating and cooling represent a complex task for the next years. From September 2006 on, the energy consumption of a new building over 50 m2 when being put to use or sale, or of already existing buildings when sold or let out, must be verified by the builder, seller or lessor.

Circa 80% of the Hungarian housing stock, over 3 million homes, do not have sufficient heat- insulation for an energy-conscious operation. The European Union wants to support energy- conscious housing renovation projects all over Eastern-Europe. 168 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

To sum up: Both transport and environmental protection are high priority developments from both the EU subsidies’ and government’s point of view. Following the elections, on account of the continual government, based on their earlier manifestations, it can be supposed that civil engineering investments will be less concerned by the upcoming restrictions. Civil engineering has a remarkable place in projects prepared both in 2005 and early 2006. For this reason, it can be expected that last year’s nearly 20 per cent growth in this field will continue during this year as well. After year 2006’s growth of circa 10 per cent, for the period of 2007-2008 we forecast an annual growth of above 15 percent.

APPENDIX – DEFINITIONS

A suggestion of some of the items that might benefit from a definition

Table 1 • Population, Households: number of people at the beginning of the year • Unemployed and unemployment rate: source, Hungarian Central Statistical Office, at the end of year • GDP: starting with 2005 and according to the T448/98 Decree of the Council of the European Union and the 1889/02. T Committee Decision, the assessment of the financial mediators’ indirectly measured delivery price (FISIM) must be done with a new method and this delivery price must be divided among the sectors/branches. Based on the October 2005 publication of the Hungarian Central Statistics Office, ‘Gross Domestic Products 2004 (Preliminary data II)’, the data concerning 2002-2004 in our analysis contain the data calculated with the new method

Table 2 • Construction output includes construction industry, non-construction organizations, DIY activity. The total volume of construction output is equal to the construction part of the yearly investment, without VAT.Source: Hungarian Central Statistical Office

Table 3 • Definition 1+2 family dwellings vs flats: detached houses vs. 3 or more residential unit-houses • Housing stock: at the end of year? • Second homes – no data • Vacancies – estimations: 300-500 000 residential units • Home ownership rate: number of residential units where the owners are living

Table 4a • Education buildings: schools, hostels, universities, high schools • Health: local health centres, hospitals, clinics, social buildings for disabled, elderly homes • Industrial: factories, workshops, R&D centres • Storage: warehouses, logistical buildings • Offices: public and private administrative buildings • Commercial: shops, supermarkets, shopping malls, hypermarkets, DIY centres, etc. • Agricultural: buildings for animals and store • Miscellaneous: culture, church, sports etc.

Table 4b • Other transport includes bridge • Table 5 • Stocks • Volume Private consumption, public consumption, etc: at market prices, VAT excluded

Extra • Sources of data: Hungarian Central Statistical Office, Economic Research Institute, E-Build Ltd., BuildECON own compilation

170 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

Country/Pays/Land: HUNGARY Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 10 175 10 142 10 117 10 096 10 075 10 060 10 045 Bevölkerung

Households ('000s) Ménages 3 880 3 860 3 870 3 880 3 890 3 900 3 900 Haushalte

Unemployed ('000s) Chômeurs 237,0 241,6 250,6 305,5 319,0 331,0 323,0 Arbeitslose

Unemployment rate (%) Taux de chômage 5,8 5,9 6,0 7,2 7,6 7,9 7,7 Arbeitslosenquote

Change of GDP Variation du PIB 3,5 3,4 4,6 4,1 4,2 4,1 4,5 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 5,3 4,7 6,8 3,6 2,7 2,5 2,5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 4,5 5,7 5,0 4,5 4,0 3,5 3,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 8,8 8,5 11,1 6,7 6,2 5,7 5,5 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 7,1 7,0 8,2 6,6 6,5 5,8 5,6 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). 3) 10-year goverment bonds (or equivalent).

Country/Pays/Land: HUNGARY Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 2 200 14,0 13,0 21,0 -11,0 0,0 3,0 7,0

Logement Renovation 890 10,0 5,0 10,0 10,0 15,0 15,0 15,0

Wohnungsbau Total 3 090 12,9 10,8 18,1 -5,8 4,3 6,8 9,7

Non-residential construction New 2 470 17,0 -5,7 -7,5 13,0 0,0 0,0 5,0

Bâtiments non résidentiels Renovation 870 4,7 -5,6 5,8 5,0 0,0 0,0 5,0

übriger Hochbau Total 3 340 13,7 -5,7 -4,2 10,8 0,0 0,0 5,0

Building New 4 670 15,7 2,1 5,7 0,3 0,0 1,4 6,0

Bâtiment Renovation 1 760 7,1 -0,7 7,8 7,5 7,6 8,1 10,7

Hochbau Total 6 430 13,4 1,4 6,3 2,1 2,1 3,3 7,4

Civil engineering New 2 870 12,8 0,0 15,0 17,0 10,0 15,0 20,0

Génie civil Renovation 1 000 14,0 0,0 15,0 25,0 10,0 15,0 13,4

Tiefbau Total 3 870 13,1 0,0 15,0 19,0 10,0 15,0 18,3

TOTAL CONSTRUCTION OUTPUT 10 300 13,3 0,9 9,2 7,9 5,1 7,9 12,0

Million euro at 2005 prices, excluding taxes. 1 euro =248,05 HUF

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 4,00 5,0 5,0 0,0 0,0 0,0 5,0 5,0 Inländischer Zementverbrauch

172 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

Country/Pays/Land: HUNGARY Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 23,4 23,8 24,2 22,1 20,0 20,0 20,0 Baugenehmigungen Familienhäuser Flats Collectif 25,4 35,4 33,3 29,4 30,0 32,0 35,0 Mehrfamilienhäuser TOTAL 48,8 59,2 57,5 51,5 50,0 52,0 55,0 Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser Flats Collectif Mehrfamilienhäuser TOTAL 30,0 43,0 42,0 40,0 40,0 40,0 42,0 Housing completions 1+2 family dwellings Logements terminés Individuel 16,7 20,1 22,9 17,4 18,0 20,0 20,0 Baufertigstellungen Familienhäuser Flats Collectif 14,8 15,4 21,0 23,7 20,0 20,0 22,0 Mehrfamilienhäuser TOTAL 31,5 35,5 43,9 41,1 38,0 40,0 42,0

Housing stock Logements existants 4 085 4 110 4 136 4 172 4 205 4 240 4 270 Wohnungsbestand

thereof second-homes dont résid. Secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 92,0 92,0 92,0 92,0 92,0 92,0 92,0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: HUNGARY Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 92 10,0 8,3 -25,0 15,0 10,0 0,0 0,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 76 8,0 2,0 -20,0 1,5 0,0 0,0 5,0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 580 22,0 -15,0 0,0 5,0 0,0 0,0 5,0 Industriegebäude

Storage buildings Bâtiments de stockage 290 0,0 15,0 2,0 2,0 5,0 Lagergebäude

Office buildings Bureaux 630 15,0 5,0 0,0 10,0 2,0 2,0 8,0 Bürogebäude

Commercial buildings Commerces 440 10,0 5,0 -20,0 15,0 0,0 5,0 5,0 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 188 -11,0 4,5 0,0 0,0 0,0 Landwirtschaftsgebäude

Miscellaneous Autres 174 Sonstiges

Total Insgesamt 2 470 17,0 -5,7 -7,5 13,0 0,0 0,0 5,0

Million euro at 2005 prices, excluding taxes. 1 euro =248,05 HUF

174 © EUROCONSTRUCT Amsterdam, June 2006 Hungary

Country/Pays/Land: HUNGARY Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 650 Verkehrsinfrastruktur Straßen Railways Voies ferrées 250 Bahnanlagen Other transport Autres réseaux 500 Übrige Vekehrsinfrastruktur TOTAL 2 400 15,0 0,0 15,0 25,0 10,0 18,0 20,0

Telecommunications Télécomunications 300 15,0 0,0 0,0 15,0 0,0 10,0 20,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 750 5,0 0,0 8,6 15,0 15,0 15,0 15,0 Energie-und Wasserversorgung

Other Autres 420 Sonstiges

Total 3 870 13,1 0,0 15,0 19,0 10,0 15,0 18,3

Million euro at 2005 prices, excluding taxes. 1 euro =248,05 HUF

Country/Pays/Land: HUNGARY Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 60,3 9,3 7,8 3,1 2,1 3,0 2,8 3,1 Privater Verbrauch

Public consumption Consommation publique 9,1 4,8 7,9 0,9 -1,4 1,0 -5,0 -1,0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 20,4 8,0 2,5 8,4 6,6 6,2 5,0 8,0 of wich construction 10,3 13,0 0,9 9,2 7,9 5,1 7,9 12,0

Stocks (contribution as % of GDP) Variations de stocks - 0,4 Vorratsveränderung

Exports Exportations 59,7 3,7 7,8 16,4 10,6 14,0 12,0 12,5 Exporte

Imports Importations 60,8 6,2 11,1 13,2 5,8 13,5 12,0 12,0 Importe

GDP PIB 88,2 3,5 3,4 4,6 4,1 4,2 4,1 4,5 BIP

Standard National Accounts, gross figures.

176 © EUROCONSTRUCT Amsterdam, June 2006 Ireland

IRELAND DKM Economic Consultants

Ms. Annette Hughes e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1. Summary

Following a return to a strong growth path in 2005 the Irish economy is expected to continue to perform strongly over the medium term. While dependence on the housing sector remains higher than the ideal, growth is also being seen in other sectors, notably consumer expenditure and non-residential investment. The projection over the medium term is for GNP growth at around 5.3% per annum on average over the next three years 2006-2008.

Table A: Key Macroeconomic Indicators for Ireland to 2008 – annual % changes 2004 2005 2006e 2007f 2008f Real GDP 4.5 4.7 6.1 5.0 4.7 Real GNP 4.0 5.4 6.1 5.0 4.7 Private Consumption 3.8 5.6 7.5 6.0 5.0 Unemployment Rate (April) 4.4 4.2 4.5 4.4 4.4 Consumer Price Inflation 2.2 2.5 3.5 3.5 3.0 Source: DKM, June 2006

The overall assessment for construction output is for growth just short of real GNP in 2006 (+5.7%), followed by a deceleration in 2007 (+3.4%) and a further slowdown in 2008 (+1.3%). The decelerating growth path is once again dictated by residential construction, which has continued to defy all expectations. The forecasts presented here assume that the level of new housebuilding in 2006 increases to 83,000 units and remains at that level in 2007 before falling back to 80,000 in 2008. Nonetheless the prospects for overall construction output remain positive due to a strong performance from both non-residential construction and civil engineering. Overall the volume of construction output by the end of 2008 is forecast to be 10.8% above its corresponding level in 2005. Given the growth in construction activity, both historic and projected, and the sector’s dominance in the economy it should not come as a surprise that there is concern about the sustainability of construction investment, employment, housebuilding levels, house prices and affordability at their current levels. It will, therefore, be important to manage carefully the transition to a higher interest rate environment together with the planned public sector infrastructure investment programme over the medium term.

Figure 1: Construction Sector by Type in Ireland to 2008

150 Constant 2005 Prices: Index 2002 = 100 140

130

120

110

100

80 2002 2003 2004 2005 2006 2007 2008 New Residential New Non-Residential R&M Building All Civil Engineering

178 © EUROCONSTRUCT Amsterdam, June 2006 Ireland

2. Macroeconomic Outlook

The return to a strong growth path in Ireland was confirmed in 2005, with GNP expanding by 5.4%, up from 4% in 2004. Annual growth in the first half of this decade has now averaged 4.3%. Some interesting patterns emerged in the 2005 GNP numbers. Growth in all elements of domestic demand (private and public consumption and investment) strengthened in 2005. Fixed Capital Formation stood out, up a remarkable 13.1%, supported by a buoyant housebuilding sector (+7%) but also a strong public capital programme and improving private non-residential investment. External trade showed a different pattern, although care needs to be taken with these numbers due to distortions from multi-national activity. The relatively larger drop in exports growth, from 7% in 2004 to 1.8% in 2005, may reflect a loss of competitiveness and subdued industrial activity, which if it continued would be a cause for concern. That said, early indicators for 2006 point to a recovery in the industrial sector. Other evidence of the current strength of the economy includes: • • The labour force grew 4.6% in the year to Q4, 2005 (September–November), driven mainly by strong immigration, and all indications are that immigration is accelerating over time. • The unemployment rate has remained below 4.5% (seasonally adjusted) for the last six quarters, so the increases in the labour force are translating into increases in employment, and Ireland now has the lowest unemployment rate in the EU. • Exchequer returns for the first five months of 2006 show tax receipts up 16.2% on the same period in 2005, driven mainly by taxes associated with consumer spending and housebuilding. This is well ahead of the Government’s expectations, which foresaw revenue growth of 6.1% for the year as a whole. Notable also is a 33% increase in Corporation Tax receipts compared with the same period in 2005, reflecting a recovery in the industrial sector. • The total number of new private cars registered, a strong indicator of consumer confidence, was up 12.7% in the first three months of 2006 compared with the same period in 2005.

All indicators to date suggest that 2006 will build on the growth levels seen in 2005, and that growth will be maintained in the following years. While dependence on the housing sector remains higher than the ideal, growth is also being seen in other sectors, notably consumer expenditure and non-residential investment. A major Government-subsidised saving scheme (SSIA2) will mature over the twelve months, and will see €16bn. injected into the economy over that period, mostly in early 2007. This is expected to give a boost to both consumer expenditure and the housing sector over the next couple of years (it is believed to have already given a boost to consumption). A recent study by a leading firm of stockbrokers3 indicated that roughly 40% would be spent on consumption with the balance invested, property being the most popular investment. Growing population, partly caused by the strong economy, is also boosting aggregate economic activity. The prospects for the international economy are generally positive, with all the major economies showing signs of improvement. There are some medium term causes for concern for the Irish economy, however, including: • Rising interest rates and fuel prices, while they don’t appear to have had a discernible impact to date, have the potential to cut growth, particularly if (as expected with interest rates at least) more increases occur. Notwithstanding some broadening in the profile of growth, there is still an over-dependence on house-building. With continued increasing house prices and the prospects of higher interest rates, the economy is increasingly vulnerable to a correction in this market. • Price inflation reached its highest level for almost three years at 2.7% in April, significantly above the European average of 2.3%. The contributory factors are the

2 Special saving investment accounts (SSIAs) introduced by Government in 2002. 3 SSIAs - the sequel, Davy, November 2005. © EUROCONSTRUCT 179 Ireland Amsterdam, June 2006

higher cost of energy and a recent acceleration in inflation in the food and services sector. If inflation of this order persists, it can only serve to damage the competitiveness of the economy, thereby restraining overall economic activity. • There may be a “hangover” period after the one-off effect of the SSIA money, as expenditure levels return to their long term pattern. If purchases of consumer durables are brought forward by the release of the SSIA money, expenditure on these items may be depressed for a time afterwards. The SSIA money also heightens the vulnerability of the property market to a correction. • US trade and budgetary imbalances remain undealt with, and point to the need for adjustment in the medium term, which would have some negative consequences for the Irish economy.

Notwithstanding the above risks, our assessment of the prospects for the Irish economy going forward are for growth in real GNP of 6% in 2006, 5% in 2007 and a deceleration to 4.7% in 2008. Real GDP growth rates are also marginally higher in 2006 and 2007 than in 2008 reflecting the strong momentum behind consumer spending and investment. A key risk going forward is the prospect of higher ECB interest rates over the forecast period, with two increases already announced and clear signs that there are further to come. The increasing dependence of the economy on the construction sector remains a risk. Based on our forecasts the sector is projected to expand by a further 10.8% over the 3 years to 2008.

3. The Construction Sector

The building and construction sector continues to be the key driver of the economic boom. Estimates of gross output in the sector suggest a value of €31bn. at the end of 2005, representing a 23% share of GNP (19% of GDP) compared with 20% of GNP in 2000. The most recent figures show construction employment at just over 250,000, representing almost one in eight persons employed or 13% of total employment in the economy. Recent employment data show a moderation in construction employment growth over the last two quarters to 11.4% year-on-year in Q4 2005 from almost 17% in Q2 2005. Employment growth in the construction sector, however, is still over 2.5 times the rate of employment growth in the economy as a whole.

There are worrying signs of a reacceleration in building and construction materials price inflation which reached an average of 6.8% year-on-year in March 2006, up from 2.6% in December 2005. However early indications for construction tender price inflation, according to a number of the major quantity surveying firms, suggest that tender prices for general contracting work will rise by between 3 and 4% this year, a similar increase to that recorded in 2005. This projection may seem somewhat modest, given that the sector continues to record above average increases in building and construction wages, equivalent to almost 8% in 2005 compared with less than 4% in the industrial sector.

4. Housing Market

• Housing continues to be supported by strong population growth, high inward migration, strong employment growth, relatively low mortgage rates, notwithstanding the total increase of one half of one percent since December 2005, and the strong economy, which is positively impacting on real income growth. Indeed following over a decade of consistent growth each year, the characteristics of the housing market have continued to defy all expectations, even over recent years: ¾ The level of housebuilding was up strongly in the first quarter of 2006, having increased by 5% to almost 81,000 in 2005. As a result Ireland’s housebuilding rate per 1,000 of the population at 20 units is almost 4 times the UK average. 180 © EUROCONSTRUCT Amsterdam, June 2006 Ireland

¾ House prices are continuing to climb. The average annual rate of house price growth nationally was 12.2% in March4 and 13% in Dublin with house prices rising by more than 1% per month. ¾ The latest data on residential mortgage lending from the Central Bank reported the level of outstanding mortgage credit at €100.1 billion in March this year which is almost 30% up on the corresponding level in March 2005. • • Following two increases in ECB interest rates in December and March of the order of one half of one percent in total, further increases are expected in the ECB rate in June of a possible one-quarter of one per cent, with further increases of the same magnitude expected in September and December. With strong statements emanating from the ECB and evidence that the Eurozone economy is strengthening, significant interest rate rises have been forecast by some banking analysts over the remainder of the year. Unless inflation and credit growth are brought under control, further increases can be expected in 2007 and possibly 2008. • The release of funds from the Government subsidised savings schemes (SSIAs) from May 2006 will help alleviate the impact of higher mortgage repayments arising from higher mortgage rates, for those households who have SSIAs. However, for the vast bulk of first- time buyers who are already financially stretched, and especially those who have purchased over the past eighteen months to two years, the higher mortgage rates will adversely impact on their ability to repay. • It is hoped that the higher mortgage rates which transpire will help to slow the rate of mortgage lending growth and house prices without damaging confidence and the wider economy. Although there is a risk, depending on the extent of interest rate increases, that the impact could dent sentiment within the overall economy, resulting in a lower rate of economic growth. • In terms of the prospects for completions over the medium term we look at current trends in respect of the leading housing indicators which are available to date: ¾ Residential commencements were unchanged in 2005 compared with 2004, despite the 5% increase in completions in 2005;

¾ Residential commencements in Dublin declined by 12.2% in 2005 and were down by 14.1% in the Greater Dublin Area5 (GDA);

¾ Planning permission fell sharply in Dublin (-45%) in 2005, with the number of apartments down by more than one half (-51%).

Based on the above trends total completions should reach around 83,000 this year. Beyond 2006 housing demand will continue to be driven by population and income growth, although the weaker position with respect to housing affordability, due to higher mortgage rates, should weaken demand from first-time buyers. Figure 2 charts the number of planning permissions for two years previously (Yt-2) against the number of registrations in the previous year (Yt-1) and the number of completions in the current year (Yt). All three indicators are very close, apart from the period 2001-2003, which corresponds to planning permissions granted over the period 1999-2001. The latter period is distorted by the provision of the Planning and Development Act, 2000 and the two-year withering rule, which was subsequently abandoned. The almost 30% hike in planning permissions granted in 2004, compared with 2003, may reflect the reapplication for permission for units which had already been granted in 1999 but were never built. The number of permissions declined modestly (-2.3%) in 2005 from the peak level in 2004. Permissions have a five year-life and the pattern of build out is not definite as the chart illustrates. The medium term forecast is for an unchanged completions level in 2007 (83,000) compared with 2006, with completions falling marginally to 80,000 in 2008. This view is more optimistic than the projection presented in November 2005 and reflects continued strong population

4 Permanent-tsb data 5 Defined as Dublin City and County and the Mid-east region (counties of Kildare, Meath and Wicklow). © EUROCONSTRUCT 181 Ireland Amsterdam, June 2006 growth, the positive impact of SSIA savings schemes on real incomes plus further real income growth.

Figure 2: Housing Indicators - Forecast levels of Housing Activity

110000 100000 90000 80000 70000 60000 50000 Planning Permissions (Year t-2) 40000 30000 Registrations (Year t-1) 20000 Completions (Year t) 10000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007f 2008f 2006e

Within the total new build, the public sector generated 5,559 units in 2005, some 7% of total completions. The various interventions and supports in respect of public housing measures comprise the following: ¾ Local Authority Housing ¾ Voluntary Housing Support Schemes ¾ Improving Access to Affordable Housing ¾ Housing Stock Improvements ¾ Accommodation for Groups with Special Needs

The public sector contribution, in terms of new build, is predominantly delivered through the local authority housing programme although the voluntary housing sector provides social housing which is funded by significant financial assistance from central Government under the Capital Assistance and Capital Loan and Subsidy schemes. The housing needs of approximately 13,000 households were met in 2005 by the total investment in housing (see Section 6). Over the past decade policy has been focused on increasing the overall supply of housing and improving access to home ownership for those persons who have been unable, due to escalating house price inflation, to provide their own housing needs in the private market.

5. Non-residential Market

The prospects for economic and employment growth are key drivers of private non- residential construction investment (including industrial, commercial, hotels, agricultural buildings, sports and leisure facilities). There are substantial data gaps in the measurement

182 © EUROCONSTRUCT Amsterdam, June 2006 Ireland of output for private non-residential construction in particular, and estimates have to be made based on the limited data available. The Central Statistics Office (CSO) is working on the production of a new quarterly survey of building and construction output and orders which will, in future, provide a firmer basis for establishing the true volume of private non-residential construction output. The recent preliminary set of National Accounts for 2005 reported a recovery in non- residential construction6 in 2005 with investment up by 12.1% on average in volume terms compared with 2004, a year in which investment levels were almost unchanged on the 2003 level. Undoubtedly the prevailing macroeconomic environment, the level of consumer expenditure, employment growth, interest rates and general investor and consumer sentiment are all factors which impact on the volume of activity in the offices, industrial and retail sectors. Thus it is no surprise that many property agents have reported a surge in activity this year across all sectors in regard to take-up, new build, land prices and rental levels. One agent has sugested that the level of new office space in the Dublin market this year will reach a record level of 230,000 square metres, making it the second highest on record7. Vacany rates are reported at around 16% overall with rates in the region of 7% to 9% in the Central Business District. Demand in the industrial market is reported to be strong, fuelled by existing and emerging infrastructure improvements which are opening up new developments on the north and south sides of the Capital City and beyond into the Greater Dublin Area. Road improvements together with competitive prices are key factors encouraging Dublin based occupiers to relocate to space outside of the City. Further infrastructure improvements are expected to encourage more firms to relocate over the next few years. One agent has suggested that speculative industrial development should resume this year8. The real success story of the Irish economic boom has been the retail sector, where the volume of retail space across the State is reported to have expanded by 40% since 2001. A number of large new retail developments are under construction or planned in major urban areas and across provincial towns while existing facilities are coming under pressure to revamp. Overall the volume of new private non-residential construction investment9 is forecast to increase by almost 15% this year led by new retail and office development activity, with growth slowing to 12% in 2007 and 9% in 2008. The prospects for new work for the individual sub-components are set out in Table 4a7. When the prospects for public sector building investment are included (Section 6 below), the volume of non-residential investment is projected to rise by over 13% in 2006, almost 11% in 2007 and just over 8% in 2008.

6. Public Sector Construction

Public sector construction is captured under the headings of social infrastructure (school buildings, hospitals, public buildings) and productive infrastructure (road, water services, airports, ports and harbours, telecommunications as well as investment by the respective semi-State organisations responsible for transport and energy). There is some private sector investment captured under these headings such as capital investment by private sector companies involved in the energy and telecommunications sectors. Very substantial resources have been allocated to public sector infrastructure, particularly over the last six years. Including the provision for 2006, the total capital spend on infrastructure since 2000 has amounted to between 6% and 7% of GNP (around 5 to 6% of GDP) whereas the norm for developed economies, which have already put in place their infrastructure, is for public investment of only around 2% of GDP. From an analysis of public capital programmes over the past twelve years, the average spend on infrastructure over the

6 Non-residential construction, for the purposes of the National Accounts, includes all general contracting work and civil engineering projects. The breakdown between the two sub-sectors is not published by the CSO. 7 Property Outlook, Hamilton Osborne King, Spring 2006. 8 Property Outlook, Hamilton Osborne King, Spring 2006. 9 Private non-residental construction in Table 4a includes industrial (plus storage) buildings, offices, commercial (retail and tourism buildings) and agricultural building investment. All of the other categories in Table 4a represent public sector building investment, the prospects for which are considered in Section 6. © EUROCONSTRUCT 183 Ireland Amsterdam, June 2006 six year period to the end of 2006 will have been €8,731m. compared with €3,394m over the period 1995-2000. The largest allocations over the past six years have been for transport (29% of total), housing (20%) and energy (16%).

Table B: Total Public Sector Spend on Infrastructure 1995-2006e

1995-2000 2000-2006e % change 2006e % change € million 2006/2005 Productive Infrastructure (nominal) Energy 2,875 8,445 194% 1,360 +9% Transport 5,541 15,434 179% 2,746 +12% Environmental Services 1,671 3,971 138% 604 +10% Telecommunications 1,824 537 -71% 98 +153% Sub-total 11,911 28,387 138% 4,808 +12% Social Infrastructure Housing 3,303 10,517 218% 1,957 +27% Education 1,662 3,798 129% 664 +19% Health 1,200 3,420 185% 639 +24% Government Construction 2,288 6,262 174% 1,415 +67% Sub-total 8,453 23,997 184% 4,675 +35%

Total Infrastructure Spend 20,364 52,384 157% 9,483 +22% Annual Average Spend 3,394 8,731 157%

% on Housing 16% 20% 21% % on Transport 27% 29% 29% Source: Public Capital Programme 2006, Department of Finance.

Once again significant increases in capital investment in the main infrastructure areas are planned for this year, of the order of 22% in value terms. There are exceptional increases right across the spectrum. Public housing and roads (within the transport figure) each have been allocated almost €2 billion, while the strongest growth rates in percentage terms are recorded by Telecommunications and Government construction. The latter includes funding for the Government’s decentralisation programme announced in the 2003 Budget. The planned investment in public housing is at a record level and reflects significant investment in local authority, regeneration and social housing programmes. There are also increased provisions for education and hospital buildings, the former due to a significantly increased allocation for accommodation in primary school buildings (+17%). In regard to productive infrastructure the total provision for national roads construction and improvement is €1,452 million, excluding €240 million from PPP projects. There is a further provision of €436 million for non-national roads. Thus the total provision for road improvement and maintenance is up 5.6% in nominal terms to €1.9 billion compared with 2005, before adjusting for inflation. With the transport total, the provision for public transport projects is up by 25% in nominal terms, mostly due to a significant increase in expenditure by the State public transport company, CIE, on the development of the suburban and mainline rail network and the bus network as well as its public transport safety programme. A number of projects are due to commence this year, including the light rail (Luas) extension to Cherrywood, the Kildare Route project, new Docklands Station, Cork Commuter services development and the Portlaoise train care depot. It is important to note that the PCP estimates also include non-construction related expenditure such as on trains, buses, housing loans, hospital equipment and the acquisition of land and buildings, for example. Estimates for the construction related expenditure are included only in ascertaining the construction related impact of the PCP. Based on these estimates derived by looking at historical trends in construction investment as well as current plans, the volume of construction related expenditure on new civil engineering projects is 184 © EUROCONSTRUCT Amsterdam, June 2006 Ireland projected to increase by 7% after inflation. The corresponding increase in construction related investment on public social infrastructure is projected to rise by 11% after inflation. Thus overall new investment in public sector construction activity is projected to be up by over 8% in real terms, after adjusting for inflation assumed to be around 4% in 2006.

Table C: Projected Exchequer Capital Allocations in Multi-annual Capital Envelopes

Current prices, € million 2004 2005 2006e % provisional @ Feb'06 Change outturn Total PCP (1) 8,422 8,560 10,603 +23.9% carryover from 2005 -289 +289 Total PCP (2) 8,422 8,271 10,892 +31.7% of which 2004 2005 2006e 2007f 2008f

Total Direct Exchequer (3) 4,975 5,385 7,056 7,315 7,650 PPP/NDFA 150 90 195 400 603 Unallocated Reserve 0 0 0 104 150 Total Exchequer Envelope 5,125 5,475 7,251 7,819 8,403 Annual % Change (nominal) -4.3% 6.8% 32.4% 7.8% 7.5%

GNP Current Prices (est) 124,250 135,623 148,932 161,852 174,543 Exchequer Envelope as % of GNP 4.1% 4.0% 4.9% 4.8% 4.8% PCP as % of GNP 6.8% 6.1% 7.3% Note: E-estimate; F-forecast (1) The PCP figures are those published in the 2006 Public Capital Programme and exclude any carryover effect. The 2006 PCP figure differs from the 2006 figure in Table B due to the inclusion of the capital spend on Sectoral Economic Investment (industry, tourism, fisheries etc.) in this Table. (2) Adjusted for carryover of €289m from 2005 to 2006; the adjustment results in a nominal increase in the toal PCP of 23.9% before the adjustment and 31.7% after the adjustment. (3) The 2005 Direct Exchequer figure excludes the carryover and the 2006 figure includes the carryover. Source: Public Capital Programme 2006 (published February 2006 by Department of Finance) and DKM.

Regarding the prospects for public sector construction over the coming years, information is available from the multi-annual capital envelopes published with the Budget every December. The Exchequer capital provision for 2006 suggests a substantial increase, of the order of 32% in nominal terms. However we believe this figure to be an overestimate. Based on past experience it is unlikely that all of this provision will be spent. We would expect the 2006 outturn by the end of the year to be a lower figure. The increases in the total Exchequer spending figures for 2007 and 2008 are more credible at around 7-8% per annum and suggest further modest increases in construction related investment after inflation, estimated at around 4% per annum. However questions are being raised about the sustainability of investment at these levels, corresponding to an estimated 7.3% of GNP in 2006, particularly given the increases recorded in the PCP to date (Table B). That said public sector investment over the medium term will receive a boost from two significant developments:

The publication of a successor to the current NDP which is expected to reinforce the commitment to spending on infrastructure. The next NDP will cover the period 2007- 2013 and is to focus on the priorities for investment in productive and social infrastructure in the transport, environmental services, housing, education, health and childcare areas.

The Government has produced a statement regarding the transport infrastructure priorities for the 21st century, Transport 2110. It provides for a ten-year transport

10 The programme was launched on 1st November 2005. © EUROCONSTRUCT 185 Ireland Amsterdam, June 2006

investment of over €34bn. in current prices over the period 2006-2015. Of the €34bn. some €26bn. will be direct Exchequer funding and about €8bn. will be toll based road investment. At its peak the Minister for Finance stated that annual investment in transport under the framework will be over twice current levels. Transport, for the purposes of the statement, refers to road and public transport only. The total Exchequer transport investment in 2006 is €1.965bn.11 Based on the Minister’s statement, the total value of transport investment will rise to over €3.6bn. at the peak over the next decade. Investment in the national road network is a key element of the Transport 21 investment programme, particularly up to 2010. There is likely to be other transport investment to improve air and sea access, including, for example, the second terminal at Dublin airport, which is expected to commence construction before the end of 2007.

Thus based on our estimates for public sector construction going forward the volume of new civil engineering infrastructure is projected to rise by around 4.5% per annum in real terms. While this view may be considered conservative in the light of the forthcoming NDP and Tansport 21 it reflects a concern about the unprecedented increase in capital spending in the past and the over dependence of the economy on the construction sector.

7. Repair, Maintenance and Improvement Expenditure (RM&I)

On the private housing side the estimates for RM&I are derived from the DEHLG/ESRI12 survey on private sector investment in housing RM&I. Survey data for 2005 suggests that the total investment in the private housing RM&I market was €3.6bn., which after inflation, represented a volume increase of just over 8% in the level of spend or 8% when public sector housing RM&I is included. The volume growth projections for 2006 and 2007 are 10% and 7% respectively, reflecting some boost to private sector investment from the special SSIA savings schemes which start to mature this year. The volume of non-residential RM&I output is also projected to increase in line with real GNP over the period 2006-2008 following a 5% increase in 2005.

11 The total investment in all transport according to the PCP (Exchequer and non-Exchequer) is €2.75bn. in 2006 compared with €2.45bn. in 2005. 12 The DOEHLG/ESRI (Economic and Social Research Institute) survey specifically asks households about expenditure on household renovation and repairs covering major home improvements such as door or window replacement, extensions, major plumbing or electrical work, as well as expenditure by households on minor home repairs, such as decorating and minor electrical, plumbing and heating repairs or minor repairs to the structure of dwellings.

186 © EUROCONSTRUCT Amsterdam, June 2006 Ireland

8. Overall Construction Output

Combining our overall assessment for residential construction with that for non-residential construction across the public and private sectors, the volume of construction output from building projects is forecast to increase by 5.6% in 2006. Growt in the volume of building output is projected to slow therafter in 2007 (+3.2%) and 2008 (+0.6%), due to the slowdown in residential construction. Taking all areas of building investment above, and combining with the prospects for civil engineering output, overall construction output is projected to increase by just under 6% in 2006. This is followed by a deceleration in 2007 (+3.4%) and 2008 (+1.3%).

Table D: Construction Output in Republic of Ireland Projected Cumulative Percentage Change 2005-2008

2005-2008 2005 2008 Cumulative Average Output (Index 2005 % Change Annual Share % =100) % Change NEW Residential Construction 53.2% 98.9 -1.1% -0.4% R&M Residential Construction 12.2% 124.5 +24.5% 7.5% Sub-total Residential 65.5% 103.7 3.7% 1.2% NEW Non-Residential Construction 13.2% 135.9 35.9% 10.7% R&M Non-Residential Construction 4.1% 118.8 18.8% 5.8% Sub-total Non-Residential 17.3% 131.9 31.9% 9.6% Total Building NEW 66.4% 106.2 6.2% 2.0% Total Building R&M 16.4% 123.1 23.1% 7.1% Total Building 82.8% 109.6 9.6% 3.1% Civil NEW 14.3% 116.5 16.5% 5.2% Civil R&M 2.9% 116.9 16.9% 5.3% Total Civil 17.2% 116.6 16.6% 5.2% Total Construction Output 100.0% 110.8 10.8% 3.4% Total NEW construction Output 80.7% 108.1 8.1% 2.6%

The cumulative volume growth in construction output over the three years 2005-2008 is forecast at 10.8% or 3.4% per annum on average. This assessment may appear conservative when set against the previous three-year period 2002-2005, when the volume of construction output expanded by 21%. However, it assumes that new residential construction contracts by just over 1% over the three years, with output at 80,000 dwellings by the end of the forecast period. It also assumes, notwithstanding the investment in infrastructure that is planned, that this investment may be undertaken over a longer period to avoid any capacity constraints emerging in the sector which would fuel inflation. The real issue here concerns the the sustainability of construction investment and employment, housebuilding, house prices and affordability at current levels as well as the record mortgage lending figures. At the time of writing, the biggest known risk on the horizon is higher interest rates which have the potential to cut economic growth, employment and damage confidence. It will be important to manage carefully the transition to a higher interest rate environment alongside the planned public sector infrastructure investment programme over the medium term.

APPENDIX – DEFINITIONS

Table 1 Population: figures represent the number of people in April each year in line with the Census of Population. Unemployed and unemployment rate: figures are taken from the Quarterly National Household Survey (QNHS) carried out by the Central Statistics Office which is based on the ILO labour force classification. Figures quoted relate to the Q2 Survey which covered the Mar-May period.

Table 2 Figures presented show the value of construction output in 2005 (€m.) and the annual percentage changes in volume over the period to 2008 (in constant 2005 prices). For further detailed information on the composition of construction output the reader should refer to the Review of the Construction Industry 2004 and Outlook 2005-2007 published by the Department of the Environment, Heritage and Local Government in September 2005. That report is available at www.environ.ie.

The value of new construction output is defined as the value of work put in place on the construction of buildings and structures and on civil engineering and land improvement projects. Output is valued inclusive of VAT at the building services rate where this is chargeable or, in the case of output of non- VAT registered bodies including direct labour units and individuals, output is valued inclusive of VAT on material inputs. Data which would allow the exclusion of deductible VAT is not readily available. Professional fees, expenses and site supervisory costs are included in the value of output. New construction output includes the value of all site development work, but excludes land costs and repair and maintenance expenditure. Except in the case of housing, expenditure on major alterations, improvements and additions to existing buildings and structures (e.g. the installation of new central heating or air conditioning systems, the addition of floor area, rooms etc) is considered as new construction output. In the case of housing, investment expenditure of this type is assigned to repair and maintenance output.

Table 3 Building permits refer to the number of dwelling units granted planning permission. Source is the quarterly series on planning permission produced by the Central Statistics Office. Housing Starts provide data on ‘registrations’ which are the number of registrations (units the builder intends to start building) by builders who are either affiliated to the National Housebuilding Guarantee Company Limited or Premier Guarantee, the two providers of new homes insurance. The data presented in Table 3 have been adjusted to include an estimate for one-off houses, which do not tend to be included in the published figures. We adjust the registrations figures by adding on an estimate for the proportion of one-off houses granted permission from the planning permissions data. This give a more comprehensive estimate of total housing starts and a better leading indicator of house completions in the pipeline. The Housing Stock figure is based on figures from the 2002 Census for the total inhabitable stock (1,458,112 at April 2002). That Census estimated the stock of second homes and the number of vacant dwellings. The housing stock figure is estimated for other years using the completions data and an estimate for the obsolescence rate of 0.6% of the housing stock, equivalent to approximately 9,000 units per annum. The Home Ownership figure is also taken from the 2002 Census which showed it had fallen to 77% by April 2002 from 80% in April 1996. We have assumed that the rate remains unchanged for the other years.

Table 4a There is no separate data available for investment in storage or warehouse buildings. This is included under industrial buildings. ‘Miscellaneous’ includes expenditure on the construction, improvement and repair and maintenance of various heritage type centres, national monuments, inland waterways; work carried out by local authorities on local authority offices, public libraries, special amenity projects and urban renewal works; churches and investment made by the Department of Arts, Sports and Tourism on sports infrastructure and facilities in the public sector.

188 © EUROCONSTRUCT Amsterdam, June 2006 Ireland

Country/Pays/Land: IRELAND Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 3 917 3 979 4 044 4 131 4 226 4 321 4 406 Bevölkerung

Households ('000s) Ménages 1 315 1 350 1 385 1 430 1 487 1 544 1 600 Haushalte

Unemployed ('000s) (Q2) Chômeurs 77,0 82,1 84,2 85,6 94,0 95,0 98,0 Arbeitslose

Unemployment rate (%) (Q2) Taux de chômage 4,2 4,4 4,4 4,2 4,5 4,4 4,4 Arbeitslosenquote

Change of GDP Variation du PIB 6,1 4,4 4,5 4,7 6,0 5,0 4,7 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 4,6 3,5 2,2 2,5 3,5 3,5 3,0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 5,8 7,6 9,4 5,7 5,5 5,8 3,9 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,30 2,30 2,10 2,20 2,90 3,30 3,60 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4,75 4,00 4,00 3,5 4,50 4,75 5,10 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). 3) 10-year goverment bonds (or equivalent).

Country/Pays/Land: IRELAND Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 16 514 7,6 16,7 11,0 5,9 2,6 0,0 -3,6

Logement Renovation 3 801 -14,0 -7,7 9,5 8,0 9,9 6,9 5,9

Wohnungsbau Total 20 315 1,9 11,2 10,7 6,3 3,9 1,4 -1,6

Non-residential construction New 4 102 -9,0 -9,1 1,1 10,6 13,3 10,7 8,4

Bâtiments non résidentiels Renovation 1 282 -2,0 3,9 7,5 7,3 6,8 5,8 5,1

übriger Hochbau Total 5 383 -7,6 -6,4 2,6 9,8 11,8 9,6 7,7

Building New 20 615 2,9 10,2 8,9 6,8 4,7 2,3 -0,8

Bâtiment Renovation 5 083 -11,5 -5,0 9,0 7,9 9,1 6,7 5,7

Hochbau Total 25 698 -0,7 6,9 9,0 7,0 5,6 3,2 0,6

Civil engineering New 4 436 18,9 -1,3 -3,9 7,7 6,7 4,4 4,6

Génie civil Renovation 901 -1,8 18,5 8,1 2,2 6,0 5,0 5,0

Tiefbau Total 5 337 15,5 1,4 -2,0 6,7 6,6 4,5 4,7

TOTAL CONSTRUCTION OUTPUT 31 035 2,1 5,8 6,9 6,9 5,7 3,4 1,3

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 3,93 -4,0 12,3 8,7 6,0 3,0 1,5 0,0 Inländischer Zementverbrauch

190 © EUROCONSTRUCT Amsterdam, June 2006 Ireland

Country/Pays/Land: IRELAND Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008 Building permits 1+2 family dwellings Logements autorisés Individuel 51,1 49,6 69,6 75,7 65,0 60,0 55,0 Baugenehmigungen Familienhäuser Flats Collectif 18,3 28,7 32,1 23,7 25,0 20,0 20,0 Mehrfamilienhäuser TOTAL 69,3 78,4 101,7 99,4 90,0 80,0 75,0 Housing starts (+) 1+2 family dwellings Logements commencés Individuel 47,6 58,6 63,7 61,1 63,0 62,0 59,0 Baubeginne Familienhäuser Flats Collectif 13,4 14,7 16,0 17,0 20,0 18,0 16,0 Mehrfamilienhäuser TOTAL 61,0 73,3 79,7 78,1 83,0 80,0 75,0 Housing completions 1+2 family dwellings Logements terminés Individuel 46,1 54,0 60,9 62,9 64,0 63,0 62,0 Baufertigstellungen Familienhäuser Flats Collectif 11,6 14,8 16,1 18,0 19,0 20,0 18,0 Mehrfamilienhäuser TOTAL 57,7 68,9 77,0 81,0 83,0 83,0 80,0

Housing stock (opening) Logements existants 1 458 1 503 1 555 1 618 1 686 1 760 1 834 Wohnungsbestand

thereof second-homes dont résid. Secondaires 40 davon Zweitwohnungen

thereof vacancies dont inoccupé 170 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 77,0 77,0 77,0 77,0 77,0 77,0 77,0 Wohnungseigentumsquote

(+) Including an estimate for one-off houses not normally counted in the figures for registrations/starts. (1) Cf. Appendix to the individual country report

Country/Pays/Land: IRELAND Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 650 28,4 -17,0 2,6 18,8 14,0 10,0 7,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 330 35,2 3,1 -8,0 3,7 9,0 10,0 10,0 Gebäude des Gesundheitswesens

Industrial buildings (-) Bâtiments industriels 703 -25,3 15,0 3,2 10,9 12,8 13,2 11,8 Industriegebäude

Storage buildings (1) Bâtiments de stockage Lagergebäude

Office buildings Bureaux 634 -30,0 -30,0 -2,0 12,0 20,0 15,0 12,0 Bürogebäude

Commercial buildings (2) Commerces 1 009 -12,7 9,2 4,5 12,9 14,6 11,1 6,3 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 188 -6,0 -6,7 28,1 5,4 5,0 4,0 5,0 Landwirtschaftsgebäude

Miscellaneous (3) (+) Autres 588 19,1 3,8 -5,1 3,2 8,9 5,0 4,9 Sonstiges

Total Insgesamt 4 102 -9,0 -9,1 1,1 10,6 13,3 10,7 8,4

Million euro at 2005 prices, excluding taxes. (1) Not separately quantified. Included under industrial. (2) Retail and tourism buildings (e.g. hotels). (3) Public buildings, work carried out by local authorities, churches, and construction projects in Gaeltacht areas. (+) denotes the non-residential construction activity that is funded by the public sector. All other categories represent private non-residential construction. (-) mostly private sector although there is some investment in industrial buildings by semi-State agencies.

192 © EUROCONSTRUCT Amsterdam, June 2006 Ireland

Country/Pays/Land: IRELAND Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 2 019 11,2 2,0 -3,2 13,6 5,6 3,9 3,5 Verkehrsinfrastruktur Straßen Railways Voies ferrées 448 7,5 45,9 -35,3 -4,1 9,1 5,0 5,0 Bahnanlagen Other transport Autres réseaux 189 24,5 -35,7 6,8 14,3 21,1 10,9 17,2 Übrige Vekehrsinfrastruktur TOTAL 2 657 11,6 7,0 -11,2 10,2 7,3 4,7 4,9

Telecommunications Télécomunications 298 6,9 -7,4 1,1 2,5 4,1 4,1 4,1 Telekommunikation

Energy and water works (1) Réseaux d'énergie et d'eau 2 383 22,0 -3,9 9,4 3,5 6,1 4,4 4,5 Energie-und Wasserversorgung

Other Autres Sonstiges

Total 5 337 15,5 1,4 -2,0 6,7 6,6 4,5 4,7

Million euro at 2005 prices, excluding taxes. (1) Over 2 billion euro of this investment in 2005 related to energy infrastructure.

Country/Pays/Land: IRELAND Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 73,9 3,5 3,4 3,8 5,6 7,5 6,0 5,0 Privater Verbrauch

Public consumption Consommation publique 22,8 7,4 3,5 2,4 3,1 4,0 4,0 3,0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 43,2 3,7 5,6 8,0 13,1 8,9 6,3 3,7 of wich construction 32,0 5,5 8,1 9,1 9,8 6,0 2,9 0,9

Stocks (contribution as % of GDP) Variations de stocks 0,1 0,4 0,9 0,0 0,1 0,6 0,6 0,5 Vorratsveränderung

Exports Exportations 127,2 4,0 0,8 7,0 1,8 5,0 5,0 5,0 Exporte

Imports Importations 106,2 1,8 -1,4 7,6 4,6 7,5 6,0 4,5 Importe

GDP (1) PIB 117,7 6,1 4,4 4,5 4,7 6,1 5,0 4,7 BIP

Standard National Accounts, gross figures. (1) Includes statistical discrepancy of -€761m. in 2005.

194 © EUROCONSTRUCT Amsterdam, June 2006 Italy

ITALY CRESME RICERCHE SPA www.cresme.it

Lorenzo Bellicini e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The final results of 2005 confirm the shaky dynamics of the Italian economy: the 1.1% growth reported in 2004 was followed by yet another zero growth year after 2003. However, the opening months of 2006 have shown signs of improvement compared to 2005, such that, while the more prudent analysts estimate a growth of about 1%, the more optimistic dare a 1.4%. Whatever the case, the Italian economy will still keep lagging behind Europe in 2006. The common belief for 2007 and 2008 is that, despite existing risks, growth should pick up pace to reach 2 annual percentage points.

Household consumption was one of the weaker spots in the Italian economy during the first half of the 2000s: 2004 and 2005 were, basically, years of stagnation, while a brighter scenario seems to have emerged in 2006, since the expected growth is 1%. After closing 2005 with a 0.6% drop in constant values, investments have started showing more encouraging signs of recovery in the early months of 2006, such that forecasts are as follows: +1.8% in 2006, +2.6% in 2007, + 3.0% in 2008. Unlike recent years, investments will no longer be driven by the construction industry. All in all, the expected reversal in 2006 will be led mainly by foreign component (export of +3.8%), while the domestic side will continue to stay weak (1%). The Italian economic scenario is afflicted by a number of critical elements: the tough transition from the lira to the euro; the heavy public debt and the arising risks related to the increase in discount rates and cost of money; an ‘odd’ weariness affecting the business world in the early 2000s, which has mainly diversified activities by focusing investments on the domestic niche of real-estate promotion. The problem of how to stop the real-estate bubble and reverse the expansion cycle is one of the hottest issues involving forecasts on the Italian economic scenario for the years 2007-2008.

The overall investment in the construction sector reported a final growth of 0.2% in 2005, against an expected 0.9% forecasted in November. The major slowdown is ascribable to two opposite, though unexpected dynamics involving the last four-month period of 2005: the sudden drop in expenditure in public works by local authorities (-1,4%) and the new rebound in new residential production (+4,7%). Since the non-residential building sector confirms the negative forecasts (-4.4%) and the large R&M market of existing property scores better than expected results, though remaining weak, aligning to the economic dynamics of the country, ultimately, with the drop in public works expenditure, the construction sector clings to the expansion phase of new housing. For new residential construction forecasts see a slowdown in investments starting from 2006 and a sharp fall in the 2007-2008 two-year period. Non-residential buildings continue to suffer the economic downturn up to 2006, and the situation is expected to regain momentum in 2007, followed by a stronger improvement in 2008. The challenge facing the civil engineering works segment today is to keep up the expenditure levels reached so far and to meet its commitments. Finally a recovery is expected in R&M starting from 2006.

196 © EUROCONSTRUCT Amsterdam, June 2006 Italy

2 Macro-economic Outlook

According to the new set of figures released by the National Accounting Office, the final results of 2005 confirm the shaky dynamics of the Italian economy: the 1.1% growth reported in 2004 was followed by yet another zero growth year after 2003. However, the opening months of 2006 have shown signs of improvement compared to 2005, such that, while the more prudent analysts estimate a growth of about 1%, the more optimistic dare a 1.4%. Whatever the case, the Italian economy will still keep lagging behind Europe in 2006. The common belief for 2007 and 2008 is that, despite existing risks, growth should pick up pace to reach 2 annual percentage points.

Household consumption was one of the weaker spots in the Italian economy during the first half of the 2000s: 2004 and 2005 were, basically, years of stagnation, while a brighter scenario seems to have emerged in 2006, since the expected growth is 1%. Although, in this case too, the figure is rather feeble. After closing 2005 with a 0.6% drop in constant values, investments have started showing more encouraging signs of recovery in the early months of 2006, such that forecasts are as follows: +1.8% in 2006, +2.6% in 2007, + 3.0% in 2008. Unlike recent years, investments will no longer be driven by the construction industry.

Against six months ago, signs of a recovery are seen in industrial production, and growth in the global economy in particular seems to spur the competitiveness of the industrial system. Confidence indicators are also on the rise for companies and, to a lower extent, for consumers.

All in all, the expected reversal in 2006 will be led mainly by foreign component (export of +3.8%), while the domestic side will continue to stay weak (1%): the domestic demand will be fuelled, however, by consumptions and by the comeback of investments.

The Italian economic scenario is afflicted by a number of critical elements involving the economy on a European and global scale (it is worthwhile recalling: the Euro strength, the growth in the oil price, the inflation pressures), but, in particular, also by certain traits marking the present economic phase of Italy: the tough transition from the lira to the euro that the Italian economy is beginning to assimilate only of late; the heavy public debt and the arising risks related to the increase in discount rates and cost of money (basically, given the situation of Italy's accounts, an increase in interest rates will further burden public policies and the need to curb consumptions and public investments); an ‘odd’ weariness affecting the business world in the early 2000s, which has mainly diversified activities by focusing investments on the domestic niche of real real-estate promotion. The problem of how to stop the real-estate bubble and reverse the expansion cycle is one of the hottest issues involving forecasts on the Italian economic scenario for the years 2007-2008.

3 The construction Sector

During the recent years of sluggish economy, the new construction sector and the real-estate market have fuelled the Italian economy. In 2006, the expansion cycle of these two sectors of the construction market appears to be losing pace, though forecasts to date say that, luckily, the slowdown will be moderate. But still, the risk of crash landing does exist. The overall investment in the construction sector reported a final growth of 0.2% in 2005, against an expected 0.9% forecasted in November. The major slowdown is ascribable to two opposite, though unexpected dynamics involving the last four-month period of 2005: the sudden drop in expenditure in public works by local authorities (representing 36% of expenditure in public works in Italy), following the government measure to curb public expenditure associated with the “2006 Finance Law”; the new rebound in new residential production, which continues to allure investors and real property advisors.

The hike in investments in new residential building in 2005 reached 4.7%, compared to an expected +2.6% forecasted in November; while new civil engineering works, which were expected to reach 6.2% - based on call for tenders for public works and the commitments undertaken by the contractees - dropped, instead, by 1.4% compared to 2004.

Since the non-residential building sector confirms the negative forecasts (-4.4%) and the large R&M market of existing property scores better than expected results, though remaining weak, aligning to the economic dynamics of the country, ultimately, with the drop in public works expenditure, the construction sector clings to the expansion phase of new housing.

The slowdown of public works, consequent to the government measure to curb the growing public debt, and the expectations of a fall in new residential production in 2006 and a subsequent slowdown in 2007-2008, despite the weak recovery in the maintenance sector and, from 2007, in non-residential building, outline a reversal in the cycle for construction.

Basically, in 2006, construction will experience a phase of “soft recession”, marked, however, by a soft landing of new residential production, which was the most dynamic sector of the real-estate expansion cycle from 1997 up to the present day.

In brief, here is the forecast for each single sector: - new residential construction: following the remarkable dynamics witnessed over the past years, driven by the extraordinary expansion cycle of the real-estate market and the high differential between production costs and the finished product price, forecasts see a slowdown in investments starting from 2006 and a sharp fall in the 2007-2008 two-year period, due to the soft landing already hitting the real-estate market; - investments in non-residential buildings used for production purposes continue to suffer the economic downturn up to 2006, and hardships are felt particularly in the industrial building sub sector. The situation is expected to regain momentum in 2007, followed by a stronger improvement in 2008. Such dynamics are to be related to the anticipatory phase of the investment cycle that marked 2001 and 2002; - new civil engineering works have spurred the building sector over the past few years, but the awkward situation of the public debt and the expenditure levels reached, which rank Italy second, just behind Spain among the Euroconstruct countries for the level of investments reached in civil engineering works, have already started to cut deep into the positive trend. The challenge facing the civil engineering works segment today is to keep up the expenditure levels reached so far and to meet its commitments. What's more, for the first time in the last 10 months, tender amounts have sharply dropped; - a recovery expected in R&M starting from 2006, concurrent to the recovery in household consumption, but thanks also to the size of property transactions recorded in Italy over the past five years, and to the effects of the extension of tax benefits under the finance law bill for 2006.

198 © EUROCONSTRUCT Amsterdam, June 2006 Italy

4 Housing Market

Figures related to the last four-month period of 2005 show a new spectacular rebound in new residential construction: accordingly, the 2.2% drop in investments forecast last December for 2006, following new predictions, becomes a 0.4% growth in investments. A period of recession is confirmed to start in 2007 (-3.1%) and 2008 (3.9%). The new residential production segment was spurred by the real-estate boom marking the first half of the 2000s. Families and entrepreneurs have poured their savings and investments in houses and residential building, bringing Italy back to extremely high levels of residential production: 271,000 legal housing will be completed in 2006. But if one considers illegal production, which accounts for a big stake of building production in large parts of Italy, then estimates for completed houses exceed 310,000 units. The reasons for such a strong expansion phase in residential building, defying the dynamics recorded throughout the 1990s, lie undoubtedly in the economic crisis and the willingness of many investors, both great and small, to turn to residential construction, and to the particular conditions which have been characterizing the cost of money and the interest rate for home loans. So basically, part of the real-estate boom was fuelled by the demand in investments, although such a demand alone would not have sufficed to boost the number of purchases and sales and the price levels to the current levels. Other two components have contributed to the current expansion phase: the search for better dwellings by part of the population that already owns a house; the increased new families in Italy.

The first case involves a big share of owner-families who have taken advantage of low interest rates and of the difficult economic situation, by selling their house to buy a better one. One of the main reasons for such a remarkable increase in property transactions is the appearance on the market of the buyer-seller. In the second case, thanks to the changes in social behaviour (more and more small families), to the Italian population history (the baby boom children of the 1970s who leave their families at a late age), and to the tidal wave of immigrants that has reached high levels in terms of entry flows and stay permits, during the 2000s, the number of new families in Italy has reached levels comparable to those formed at the end of the 1970s. To have a clearer picture of the situation, one must bear in mind that in the first half of the 2000s, population estimates mention 250,000 new families formed every year, while these were 130,000 in the 1980s.

Another factor affecting market growth, which may lead to a soft landing in the coming years, lies in the differential between construction costs (excluding area) and the finished-product prices: current construction prices in Italy range from 800 to 1,200 euro/m2, while sale prices are 2.5 to 6 times higher (depending on the various areas in the country). So, the high profit margins may justify a soft landing of the segment, forecast after the remarkable expansion cycle.

The predicted drop in new residential production in the next few years may be offset by a recovery in the R&M output. Then again, they were redevelopment, refurbishment and maintenance of the existing property that “saved” the market during the 1990s. The demand for redevelopment of the existing property is on the rise for two reasons: the history of housing production, hence, the growing share of the housing stock built over 40 years ago; the property boom itself, with most of the transactions mainly involving non-renovated houses with respect to those renovated. Basically, for many property transactions, R&M, unlike other periods, has been put off until after purchase. Several indicators lead to believe that this phase of resource build-up for redevelopment purposes is over and will be followed by the spending phase. However, recovery is influenced by the economic situation, so forecasts are modest for the moment. All in all, residential construction will experience moderate growth dynamics in 2006, while 2007 and 2008 will report a drop lower than 1% per year.

5 Non-residential Market

Forecasts for the non-residential construction scenario remain basically unvaried compared to the forecasts made six months ago. Following the peak investments recorded in 2002 and the slowdown in 2003-2005, 2006 will see a further one percentage point fall. The situation should gradually improve in 2007 (+0.7%) and 2008 (+1.3%).

2006 will witness a sharper slowdown in new non-residential production; a further 3.2% drop is expected in 2006. However, starting from 2007, new building will dig out of the recession, inching upwards at first, then picking up a stronger pace in 2008.

A new element that has affected non-residential construction dynamics is, undoubtedly, the slowdown in public component, mainly for schooling and social purposes (included under miscellaneous), which see local authorities as the lead actors: this is a new figure that falls outside previous forecasts, owing to the effects of the measures to curb public expenditure caused by the growing public debt.

In any case, industrial building is the segment that has suffered most. The survey shows that this sector posted impressive investments up to 2001, followed by a plunge in the strongest areas of the country. Basically, the market is challenged by oversupply, against a weak background of the production system and production delocalisation strategies towards other countries that weaken the demand. This phenomenon seems particularly significant in the northern-eastern and northern-western areas.

The commercial segment too witnesses negative figures in new production, less worse than those recorded in the industrial segment (-2.1%), although the dynamics in this segment are split up into the large-scale retail trade and logistics, on the rise, and the small retail stores, down. Instead, a recovery is expected starting from 2006 in the supply of office building, also thanks to the implementation phases of the town planning schemes in some of the big Italian cities.

As is always the case in periods when new production slows down, the demand turns to R&M, with the aim to improve, adjust and at times enlarge the existing property, rather than risking new production. Indeed, the dynamics in the non-residential renovation sector showed a far lower drop compared to new construction, and a 0.5% growth will be recorded starting from 2006.

Basically, the forecast scenario sees a further drop in new construction in 2006, while renovation is expected to move up slightly. Forecasts for the 2007-2008 two-year period show expectations for an improvement in the overall picture, and confirmation that the prolonged decline has finally bottomed out, although still no signs of a strong recovery of the segment appear on the horizon. A rebound from the downturn phase will, therefore, be slow.

200 © EUROCONSTRUCT Amsterdam, June 2006 Italy

6 Civil Engineering Market

Civil engineering works in Italy suffered a sudden major blow in the final months of 2005. The speed of the fall - as supported by the Report on the Treasury Ministry’s cash situation as of December 31, 2005 - was unexpected and a natural result of the measures to curb the growth of the public debt.

In the Italian construction scenario, after 2005 and following the growth in the public debt, expenditure resources have radically changed, although no one could have ever predicted such an abrupt drop in the expenditure for investments. The most badly hit sector is, without a doubt, local authorities, which account for roughly 35% of expenditure for public works in Italy, and ultimately see a sharp fall in the expenditure for investments in 2005, compared to expected growth. Other authorities - like Ferrovie dello Stato (Italian State Railways) with the high-speed programme, or the local public-service companies - kept in line with the forecast expenditure dynamics.

Basically, against last November's forecast scenario, the public works segment shows signs of a modest slowdown, although greater than expected. Based upon the tenders of works started, CRESME had previously predicted a strong slowdown of activities, with the market holding on to its footing in 2005, and the start of a period of containment in the following years; the new scenario now predicts a 1% drop in 2005, followed by a further fall in 2006, with expenditure settling in 2007 and 2008. The name of the game is, however, to maintain the ambitious investment plans on the redevelopment scheme involving the Italian infrastructures as described in the “Legge Obiettivo”13. Such plans are worth € 267 billion, to be spent in works, 80 billion of which have already been assigned or are in the making. The problem revolving around the public debt and meeting expenditure commitments for infrastructures, will be one of the main issues of the Italian economy for the coming years and of the forecast scenario in the building sector.

The new estimates on civil engineering works see value of production at € 39.9 billion, which correspond, as already said, to a 1% drop compared to the amounts invested in 2004. Forecasts for 2006, corroborated by the restrictive measures established for the sector in the latest finance law, mainly involving the Government, Anas Spa (National Road Company), and Ferrovie dello Stato, are still marked by containment (-0.7%). Forecasts for the 2007–2008 medium-term see the restart of works commenced, currently lacking the required funds, and a new upswing of the sector, which regains its lead position as the most dynamic sector in a still very weak building market: +0.4% in 2007 and +1% in 2008. In such a dark scenario, new building is the sector that is hit most by the drop in available funds, showing a drop of 1.4 percentage points compared to –0.6% of renewal. A similar result is expected for 2006, while forecasts say that it will be the engine of the entire civil engineering sector starting as from 2007.

Going back to last year's figures, new construction accounts for just over € 18 billion, compared to approximately € 22 billion allocated for actions on existing networks and infrastructures. Different dynamics were recorded last year by the main subjects investing in civil engineering works. Strictly speaking, the lead actors in the public sector drop sharply, that is Municipalities and Provincial and Regional Governments; a dull situation for the Government, and also for the private companies managing the motorway network. On the rise Ferrovie and Anas S.p.A..

13 a law setting goals to fulfil in the next few years as regards the construction of infrastructures © EUROCONSTRUCT 201 Italy Amsterdam, June 2006

Transport networks In 2005, transportation works absorbed approximately € 24 billion, which means a 0.5% drop in constant values compared to 2004. The drop is still modest, leaving unscathed the share of transport network (almost 60% in the past two years) in the civil engineering sector.

A deeper change is affecting the very structure of transportation, with railways outweighing road works more and more, due to the heavy investments to continue the High-Speed programme. In 2005, railways absorbed € 12.5 billion, equal to less than 53% of the total transport sector, a sum expected to reduce in the following years.

In terms of dynamics, 2005 saw a 1.6% drop ascribable to Municipalities and Provincial Governments, which zeroed Anas’ growth. Despite the crisis gripping the former entity in terms of liquidity, in 2005, it benefited from the payment of works started up under the “Legge Obiettivo”, like the Northern-Western Area (Quadrante Nord-Ovest) of the Rome ring road (Grande Raccordo Anulare), the new motorway section Catania-Siracusa, between Passo Martino and 130+400 km of State Road SS 114, the completion of the ring road linking A4 and the Malpensa airport, some lots of the Salerno-Reggio Calabria motorway, the State Road SS 106 Jonica and the mother road Bari-Matera, among the main projects.

2006 will see a reversal, with Anas likely to decrease its investments by approximately 7% in current values, due to the curbing measures envisaged in the Finance Law, against the comeback of Municipalities and the Provincial Governments.

Instead, Ferrovie continue to expand, although growth estimates for 2005 have been rescaled: 2.6% compared to 7.7% as forecasted six months ago. The segment, too, is affected by the situation of overall uncertainty, although no signs of a turnabout of the cycle are forecast, rather, a slower growth. The continuation of the High-Speed programme will contribute to the growth forecasts, and despite the reduction in government grants to investments in the sector for the 2006–2008 three-year period, established in the latest finance law, the company Ferrovie dello Stato itself replies by stating that there will be no repercussions on the investments laid down in the 2005-2008 Business Plan, at least as far as 2006 is concerned, since any reduction in such subsidies will be offset by resorting to its own financial resources.

As far as other transportation sectors are concerned, marked by roller-coaster dynamics, forecasts for 2005 are gloomy, due to the scant resources of the Municipalities, who are among the major buyers of underground railways, tramways and other urban transport systems. Given that such highly complex works are managed by subjects who still lack the organisation to run the process properly, the sector is repeatedly affected by delays in implementation and delivery times, which, in turn, defers the recovery of business in terms of investments to the long run. So the likely scenarios expected for the sector are affected in the short run by the negative effects of the lid on expenditure, while positive effects may be felt in the medium–long term with the adoption of new systems to implement public works, by involving private capital or other innovative forms. It is worthwhile recalling: line M5 of Milan underground (over € 500 million) to be implemented through project financing, whose call for tenders was published in April 2005 and which is currently being negotiated; or line C of Rome underground (approximately € 2.5 million) to be implemented through the general contractor by a Temporary Business Combine formed between Astaldi S.p.A. (in its capacity as representative), Vianini Lavori S.p.A., Consorzio Cooperative Costruzioni, Ansaldo Trasporti Sistemi Ferroviari S.p.A. in the early months of 2006; or the new procedure started to award implementation of line D of Rome underground (approximately € 2.9 billion) trough the project financing.

202 © EUROCONSTRUCT Amsterdam, June 2006 Italy

Infrastructures for water, energy and telecommunications The weight of infrastructures on water and energy, in the frame of the investments for civil engineering works, totals around 32%. In 2005, the sector was worth almost € 13 billion, while the trend is basically that of a stagnation compared to 2004 (+0.1%).

As far as water is concerned, accounting for 18% of civil engineering works, forecasts see the segment holding in the following years, even better than other sectors, since this market has enjoyed a strong demand for extension and reorganisation works over the past few years as provided for under the Galli Act. Overall investments, as determined in the Area Plans, and referring to the entire national territory, amount to approximately € 55 billion, equal to a per capita investment of € 37.7. However, turning planned investments into works accomplished appears to be a tricky task, as demonstrated by the great many attempts to assign the Sicilian Optimal Territorial Units (Ato, Ambiti Territoriali Ottimali): only 2 out of 9 contracts have been awarded to date. The contracts awarded regard: the Integrated Water System located inside the Optimal Territorial Unit of Enna, worth over 150 million, to be managed for 30 years, recently awarded to the consortium formed by AGAC S.p.A., Smeco S.p.A., Siciliambiente S.p.A. and GGR, in its capacity as service licensee; and the Integrated Water System located inside the Optimal Territorial Unit of Catania, worth 1.2 billion, to be managed for 30 years, promoted by Consorzio ATO Acque Catania and awarded to the temporary business combine formed by Acoset S.p.A. (the parent company) with Sidra S.p.A., Acque Carcaci del Fasano S.p.A., Acque di Casalotto S.p.A., Ama S.p.A., Consorzio Stabile Generali Infrastrutture, Sidi S.r.l., Sielte S.p.A., in its capacity as a private partner of a joint venture mainly involving public capital, in January 2006, after 15 months and two attempts. The short run should also see investments generated by some projects included in the “Legge Obiettivo” plan, such as the restructuring of the San Giuliano hydraulic feed (a total tender amount of € 18 million) for the mixed feeding of the Metaponto area in the Puglia and Basilicata regions; the reorganisation of the irrigation plants included in the district dx Ofanto and dx Rendina in Lavello (Province of Potenza), for an amount of € 12 million; the reclamation of the Ancia dam in Sicily, for an amount of approximately € 125 million; finally, two actions for a total amount of over € 130 million in Sardegna.

As far as the energy sector is concerned, accounting for 14% of civil engineering works, after the slowdown in 2004, a modest recovery is expected, due to the negative trend that still keeps hitting ENEL for the second year in a row, against the steep rise in investments by ENI, involved in the implementation of plants in Val d’Agri, in experimental researches in the Sicilian offshore and in the central Italy, as well as the in maintenance and development of the gas distribution network.

For telecommunications, following the fall reported in 2004 (-2%), estimates show a further drop (-5.4%). In this case, we are dealing with an investment volume equal to € 1.1 billion, representing less than 3% of the entire civil engineering segment. To conclude, for other works, accounting for roughly 6% of civil engineering, forecasts for 2005 see a lower drop (-9.2%), compared to the drop recorded in 2004 (-19.2%). The main share regards the environment, waste disposal in particular, which accounts for a small portion of civil engineering, with an estimated 6.3% rise compared to 2004. Strictly speaking, over the past few years, the sector has undergone sweeping changes to adopt new management and financial models. In many cases, the projects for the safeguard of the environment are embedded in plans still in the pipeline, with portions of loans either granted or extended still very low (Article 2, paragraph 8, of Law No. 194/1998 on environmental improvements, or Law No. 441/1987 on waste disposal), so the effects in terms of investments will not be felt in the short to medium term.

APPENDIX – DEFINITIONS

Table 1 Population, Households: number of people or of households at the end of the year – Source: National Institute of Statistics Unemployment rate: It’s the media at the end of the year of the rates of the four quarters of the year- Source: survey of the National Institute of Statistics.

Table 2 and 4 The absolute value figures for construction/output in all tables are without VAT, while include Do it Yourself, illegal production Source: data are CRESME estimates and forecasts based on different sources

Table 3 1+2 family dwellings include both semi-detached and row houses, while flat is a dwelling inside multi-stored building, with more than two flats Housing stock: at the end of year Second homes: include home used for holiday, or for secondary uses, or that are used for short periods. Also vacancies are included Vacancies: homes that are not used at all Home ownership rate: % on the total housing stock Data include legal production Source: data are CRESME estimates and forecasts based on different sources

Table 4a Education buildings: public and private schools, universities Health: hospitals, public and private clinics Industrial: sheds, buildings for industrial or artisan activities, storage buildings Storage: data are included partly in industrial and partly in commercial buildings Offices: administrative and business buildings Commercial: shops, shopping centres, stores, tourist buildings Agricultural: agricultural buildings thereof with residential functions Miscellaneous: military, cemetery and other kind of buildings

Table 4b Other transport includes underground railways, tramways, other urban transport systems, harbours and airports

Table 5 Stocks: % change in real terms is meant as the % change of stocks as percentage of GDP (Source National Institute of Statistics) Volume Private consumption, public consumption, etc: at market prices, VAT included (Source: National Accounts). VAT rates are variables (4% for primary goods, 20% for the others, except the case of temporary deduction as the one for the purchase of R&M materials)

204 © EUROCONSTRUCT Amsterdam, June 2006 Italy

Country/Pays/Land: ITALY Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 57 321 57 888 58 462 58 594 58 712 58 818 58 908 Bevölkerung

Households ('000s) Ménages 22 449 22 876 23 311 23 400 23 485 23 574 23 658 Haushalte

Unemployed ('000s) Chômeurs 2 062,4 2 048,2 1 960,3 1 888,6 1 850,0 1 830,0 1 810,0 Arbeitslose

Unemployment rate (%) Taux de chômage 8,6 8,4 8,0 7,7 7,6 7,5 7,5 Arbeitslosenquote

Change of GDP Variation du PIB 0,3 0,0 1,1 0,0 1,0 1,8 2,0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2,5 2,7 2,2 1,9 2,2 2,3 2,3 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3,8 3,3 4,6 3,9 4,2 4,0 3,2 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4,8 4,3 4,2 3,4 4,2 4,9 4,9 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

Country/Pays/Land: ITALY Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 36 087 6,3 5,2 7,1 4,7 0,4 -3,1 -3,9

Logement Renovation 51 345 -2,1 -0,5 0,1 0,8 0,6 0,9 1,3

Wohnungsbau Total 87 432 1,0 1,7 2,9 2,4 0,6 -0,8 -0,9

Non-residential construction New 25 444 11,8 -6,0 -3,9 -4,4 -3,2 0,8 2,0

Bâtiments non résidentiels Renovation 29 665 -0,8 -1,7 -0,7 -0,4 0,5 0,7 0,6

übriger Hochbau Total 55 109 5,4 -4,0 -2,4 -2,4 -1,3 0,7 1,3

Building New 61 531 9,0 -0,4 2,0 0,8 -1,1 -1,5 -1,5

Bâtiment Renovation 81 010 -1,6 -0,9 -0,2 0,4 0,6 0,8 1,1

Hochbau Total 142 541 2,8 -0,7 0,8 0,6 -0,2 -0,2 -0,1

Civil engineering New 18 174 4,0 7,5 3,3 -1,4 -1,0 1,2 2,0

Génie civil Renovation 21 739 2,0 1,7 2,0 -0,6 -0,5 -0,3 0,1

Tiefbau Total 39 913 2,9 4,2 2,6 -1,0 -0,7 0,4 1,0

TOTAL CONSTRUCTION OUTPUT 182 454 2,7 0,3 1,1 0,2 -0,3 -0,1 0,2

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 45,43 4,6 5,4 3,8 -2,0 -1,0 0,0 1,4 Inländischer Zementverbrauch

206 © EUROCONSTRUCT Amsterdam, June 2006 Italy

Country/Pays/Land: ITALY Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 35,0 35,0 33,0 30,0 28,0 29,0 31,0 Baugenehmigungen Familienhäuser Flats Collectif 179,0 203,0 214,0 212,0 206,0 204,0 190,0 Mehrfamilienhäuser TOTAL 214,0 238,0 247,0 242,0 234,0 233,0 221,0 Housing starts 1+2 family dwellings Logements commencés Individuel 50,0 51,0 48,0 44,0 41,0 41,0 40,0 Baubeginne Familienhäuser Flats Collectif 188,0 212,0 221,0 218,0 212,0 208,0 195,0 Mehrfamilienhäuser TOTAL 238,0 263,0 269,0 262,0 253,0 249,0 235,0 Housing completions 1+2 family dwellings Logements terminés Individuel 50,0 50,0 51,0 49,0 47,0 43,0 41,0 Baufertigstellungen Familienhäuser Flats Collectif 153,0 164,0 186,0 209,0 224,0 222,0 214,0 Mehrfamilienhäuser TOTAL 203,0 214,0 237,0 258,0 271,0 265,0 255,0

Housing stock Logements existants 27 599 27 798 28 062 28 347 28 636 28 916 29 180 Wohnungsbestand

thereof second-homes dont résid. Secondaires 5 696 5 745 5 800 5 858 5 918 5 976 6 040 davon Zweitwohnungen

thereof vacancies dont inoccupé 2 904 2 929 2 957 2 987 3 018 3 047 3 080 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 71,6 72,4 73,0 73,4 73,7 75,4 75,6 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: ITALY Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 570 2,5 3,0 2,0 -0,8 -0,6 1,0 1,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 768 4,0 2,8 1,8 1,2 0,7 1,5 1,5 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 8 764 16,9 -18,1 -7,1 -5,7 -4,9 1,1 1,9 Industriegebäude

Storage buildings 1) Bâtiments de stockage Lagergebäude

Office buildings Bureaux 1 951 12,5 -8,0 -3,8 -3,1 1,5 1,2 1,2 Bürogebäude

Commercial buildings Commerces 4 099 11,1 7,5 -3,3 -3,2 -2,1 1,1 2,7 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 6 083 7,1 2,3 -3,3 -5,8 -4,0 -0,6 1,4 Landwirtschaftsgebäude

Miscellaneous Autres 3 209 7,5 3,0 0,4 -2,1 -3,5 1,5 3,0 Sonstiges

Total Insgesamt 25 444 11,8 -6,0 -3,9 -4,4 -3,2 0,8 2,0

Million euro at 2005 prices, excluding taxes. 1) Storage building are included in industrial and commercial buildings

208 © EUROCONSTRUCT Amsterdam, June 2006 Italy

Country/Pays/Land: ITALY Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 12 508 1,9 3,4 8,4 -1,6 -1,5 0,9 2,0 Verkehrsinfrastruktur Straßen Railways Voies ferrées 8 306 23,4 18,3 4,0 2,6 3,1 2,7 2,4 Bahnanlagen Other transport Autres réseaux 2 983 -22,4 -7,9 9,1 -3,9 -4,0 -1,7 -0,4 Übrige Vekehrsinfrastruktur TOTAL 23 798 2,8 6,4 7,0 -0,5 -0,2 1,2 1,8

Telecommunications Télécomunications 1 119 -1,8 -29,0 -2,0 -5,4 -2,5 -0,9 1,2 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 12 689 4,1 2,4 0,7 0,1 0,2 0,1 0,1 Energie-und Wasserversorgung

Other Autres 2 307 1,5 15,8 -19,2 -9,2 -10,1 -6,6 -3,3 Sonstiges

Total 39 913 2,9 4,2 2,6 -1,0 -0,7 0,4 1,0

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: ITALY Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 828,7 0,2 1,0 0,5 0,1 1,0 1,6 2,0 Privater Verbrauch

Public consumption Consommation publique 292,9 2,2 2,1 0,6 1,2 0,6 1,2 1,2 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 291,8 4,0 -1,7 2,2 -0,6 1,8 2,6 3,0 of wich construction 156,3 2,8 0,4 1,2 0,2 -0,3 -0,1 0,2

Stocks (contribution as % of GDP) Variations de stocks 4,6 0,0 0,1 -0,1 0,1 0,4 0,2 0,2 Vorratsveränderung

Exports Exportations 373,0 -4,0 -2,4 3,0 0,3 3,8 4,0 4,2 Exporte

Imports Importations 373,7 -0,5 0,8 2,5 1,4 3,9 4,5 5,0 Importe

GDP PIB 1 417,2 0,3 0,0 1,1 0,0 1,0 1,8 2,0 BIP

Standard National Accounts, gross figures

210 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands

NETHERLANDS

EIB - Economisch Instituut voor de Bouwnijverheid www.eib.nl

Hans Schellevis e-mail: [email protected]

Mark Nieuwenbroek e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

In 2005, the Dutch economy grew by 1.1 percent. This means a slowdown compared to the + 1.7 that was registered in 2004. In 2005, the most important contribution to economic growth was made by the export of goods and services. Exports (exclusive of energy) increased by 6.3 percent. Another important contribution to economic growth came from private consumption. Over the past two years, growth in consumers expenditure completely came to a standstill. However, since the middle of 2005, the consumption of households picked up again. Over the year as a whole, private consumption grew by 0.3 percent. This might seem just an insignificant adjustment, but after two years of decrease and stagnation any growth of this major part of GDP is an important sign. Private investment (exclusive of investment in dwellings) couldn’t hold on to the regained vitality of 2004. In 2005 growth fell back to a meagre 0.3 percent. The revival of this quantity in 2004 was the precursor of the economic recovery in that year; the subsequent stagnation in 2005 was the main cause of the hesitant economic situation in the year behind.

Nowadays, the construction sector develops more successfully than the economy as a whole. Construction output grew in 2005 by 2.5 percent. In 2006, building production is estimated to grow further by 4.0 percent. In 2007 and 2008, growth of construction output is forecast to slow down somewhat to 2.7 and 2.1 percent. It is important to notice that from 2006 on, all major parts of the construction market contribute to the growth of the industry.

The positive development of the construction sector is strongly supported by the booming market for new residential construction. In 2004 and 2005, the number of new housing completions recovered from less than 60,000 in 200314 to 67,000. For this year and next year, there is still room for further growth. In the period 2006-2008, 75,000 to 77,500 housing completions per year are projected. In terms of production value, for 2006, 7.0 percent growth is projected, followed by 4.0 in 2007 and 1.3 percent in 2008. Repair and maintenance (including renovation) of houses is forecast to grow in a more moderate way. For 2006, a rise in production value of 3.3 percent is projected, slowing down to 1.9 percent in the years thereafter.

In particular, new non-residential construction lost ground in recent years. The recession urged companies to heavily cut in business investment plans. Production volume on this part of the construction market lost more than 25 percent of its value in three years. This heavy reaction is an average result for new non-residential construction at large. Not every segment in this market suffered as badly from the recession. On the contrary, two public financed sectors showed remarkable progression. Construction for education and health care has strongly increased. On the other hand, construction activities for the private sector even developed much worse. Despite the (modest) economic recovery, new non-residential construction in the private sectors decreased further in 2005. Especially ‘office buildings’ again lost a substantial part of its production volume (- 16 percent). In the period 2006 to 2008, a recovery is foreseen for all parts of the privately financed sector. Repair and maintenance of non-residential buildings was far less affected by the past recession than new construction. In 2005, this sector resumed growth by 1.7 percent. In the coming years , the growth rate will accelerate to around 2.5 percent.

New construction in civil engineering proved to be sensitive for the economic recession of the years behind. In 2005, no recovery could be registered. Only this year and the years to come can await new growth. However, with a forecasted growth of about 1 percent per year, recovery won’t be very exuberant. Together with a somewhat higher growth in maintenance

14 An absolute low since half a century. 212 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands and renovation, the sector will recover from the stagnation in previous years by about 1.5 percent. Government funds for new road infrastructure and maintenance will rise again, just like budgets for new investments and repair and maintenance in the regular railway system.

2 The Macroeconomic Outlook

It looks like the business cycle in the Dutch economy definitely found it’s way up these days. Economic growth reached a low in 2003. That year Gross Domestic Product contracted by 0.1 percent. In 2004 the Dutch economy picked up again when the growth rate recovered to + 1.7 percent. Yet, the recovery in 2004 didn’t fully hold out. In the first quarter of 2005 economic growth again fell back below zero. Until just half a year ago, the future development of the Dutch economy was surrounded with great uncertainty. The results of the last two quarters of 2005 however, show a remarkable correction of the general sentiment on the markets. The year 2005 as a whole showed a modest growth of a little more than 1 percent. Yet, important signs now point towards an improving performance of the economy over a wide range.

One of these signs is the development of consumer confidence. This indicator has been persistently low for many years. Since the third quarter of 2005, the confidence graduator has been gradually redressing from -25 (adjusted for seasonal changes) to -6 last April. In the same period, the European average moved from -15 to -10. The improving confidence amongst consumers, is reflected in recent data on private consumption. Over the past three years, growth in consumers expenditure completely came to a standstill. However, since the middle of 2005, the consumption of households picked up again. In the last three months of 2005, consumption of durable goods was no less than 5 percent higher than in the same period of the previous year. Private consumption on the whole is forecast to grow by 1.25 percent in both 2006 and 2007. These figures are adjusted for statistical distortion in relation to institutional reforms in sickness and disability insurance and healthcare. In the first three months of the current year the average projection on yearly basis was clearly exceeded. In this period, the volume of private consumption was almost 3 percent higher than in the first quarter of 2005. Unemployment is another important indicator for the state of the economy. In 2005 on average 485,000 persons were out of work, which is 6.5 percent of the labour force. At the end of the year the number unemployed already was 20,000 below the average. This year a decline is expected towards a level of 445,000 (6 percent of the total labour force). In 2007 a further reduction of unemployment to 5 percent (370,000 persons) is anticipated.

In 2005, the most important contribution to economic growth was made by the export of goods and services. Exports (exclusive of energy) increased by 6.3 percent. Earlier, in 2004, the export of goods and services had sharply recovered (+ 9.4 %) from a two years period of near stagnation. Part of this success was caused by the enlargement of the European Union. The recent acceleration in the export sector is, for the greater part, the result of the rapidly expanding re-exportation of goods. Re-exportation is the exportation of imported commodities after minor processing or refining. Ongoing economic growth in leading economies like the US and China, and growing demand in Europe, lead to strongly swelling flows of goods all around the world. A relatively large part of the shipment of commodities and goods passes the Dutch transport hubs, thus pushing up export figures. In 2005, the Rotterdam harbour posted a second record turnover in succession in transhipment of commodities. Besides, inland based exports also contribute more than proportionally to economic growth. For the current year, the growth of export related activities exclusive of energy, is forecast to accelerate to 8.3 percent. Next year, 2007, will even be better with an expected growth rate of 9.3 percent. Exports growthrates are somewhat lower, but remain relatively high when calculated inclusive of energy (see table 5).

Fixed capital formation is an outstanding example of a cyclically sensitive economic activity. In a declining market, investments are the first expenses to be postponed, thus worsening the regression of spending. On the other hand, growing urgency for replacement, enlargement or renewal of capital goods, contributes – and often is the initial impetus to - an upswing of the economy. In the development of private investment, exclusive of investment in dwellings, this pattern becomes most purely visible. The revival of this quantity in 2004 was the precursor of the economic recovery in that year; the subsequent stagnation in 2005 was the main cause of the hesitant economic situation in the year behind. The growth outburst of 8 and 5 percent that is projected for 2006 and 2007, is illustrative for the improved sentiment that is getting grip on the Dutch economy.

In recent years, public consumption provided a relatively high contribution to GDP growth. Because of decreasing income from taxation, growth of government expenditure could no longer be sustained. In order to prevent a further deterioration of the budget balance, robust public spending cuts were inevitable. Measures were taken to hand over former public tasks to the private sector. However, in the short run, the direct consequences for domestic demand were negative, not in the least for the construction industry. In 2004 and 2005, public consumption remained practically unchanged. Thanks to improving economic circumstances and improving public finances, growth in this sector is expected to pick up slightly, reaching a level around 2 percent from 2006 -2008.

Construction Output and GDP 1998-2008 GDP and Private Investment 1997-2007 relative changes % relative changes % 8 12 GDP Investment Construction Output GDP 6 8

4 4 2 0 0 -4 -2

-4 -8

-6 -12 1 1 2 2001 2 2 2 2 2 2007 2 998 999 00 0 003 00 005 0 0 02 06 08 199 199 199 200 200 200 200 200 200 2 200 0 4 00 7 8 9 0 1 2 3 4 5 6 7

Throughout the years of diminishing growth and recession, inflation gradually became less important. The inflation rate declined from 3.4 percent in 2002 to 1.2 percent in 2004. In 2005, general inflation firmed up to 1.7 percent. For the period 2006-2008 the projections for the inflation point towards a level of about 1.5 percent.

The projections for economic growth and inflation are based on the assumption that oil prices will remain stable this year at $ 60 per barrel Brent and tend to an average of $ 55 in the next two years. In the calculations, he exchange rate of the US dollar is fixed at 1.20 (dollar per euro) in 2006 and 2007.

3 Residential Construction

After a succession of years in which output declined, 2004 marked a turning point in the investment (new construction and renovation) in dwellings. In that year a rise in production value by 6.3 percent was registered, followed by a plus of 4.5 percent in 2005. Total investment in residential buildings in the Netherlands added up to € 33 billion last year. More than half of this production (€ 17.9 billion) concerned investment in new dwellings. This year and in the near future, further recovery is expected. Especially the construction of new houses is responsible for this positive image. New residential construction is forecast to grow by 7.0 percent in 2006, 4 percent in 2007 and 1.3 percent in 2008. By then, the

214 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands market for new residential construction will have ecxeeded the volume of 20 billion euro (in 2005 prices). The main reasons for this revival are the ongoing high demand due to new family formation and the expected economic improvement. The latter creating an environment in which more expensive houses can enlarge their share in the sectors output.

The upward trend in production value is also reflected in the number of new completions. This number went up from 65,000 in 2004 to 67.000 in 2005. For 2006, the completion of 75,000 dwellings is projected. The number of new completions is expected to peak at a level of 77,000 in 2007 and to subsequently redress somewhat to 75.000 in 2008. Anyway, looked at in a historical perspective the completed numbers remain at a modest level. The development of new completions is sustained by a similar movement in building permits for new dwellings. In 2004, building permits for 76.000 new houses were granted, followed by 83.000 in 2005. In 2006, 87,500 building permits are projected. In 2007 and 2008, this number drops to 85,000 and 80,000 respectively.

Housing production in the Netherlands is more and more determined by market conditions. Direct government intervention by means of object bound subsidies in fact does no longer exist. What remains is indirect demand support through tax deduction of mortgage interest and individual rent rebate. Economic variables like (construction) prices, interest rates, household income, business development and employment now fully affect progress in residential construction. Therefore, considering the improving economic climate, the rise in production value on the housing market in recent years is not surprising. However, construction demand does not completely depend on economic variables alone. A number of other important factors that determine the size of the construction output can be distinguished. First of all, demographic developments influence demand on the housing market: high population growth, and as a result, the increase in the number of households, requires more houses. In this respect, it is useful to note, that the number of households still increases with 50,000 to 60,000 annually. Secondly, the availability of building lots is a sine qua non for the construction of new dwellings. Disturbances in the provision of sufficient building area immediately lead to disruptions on the construction market. Other non- economic factors that influence actual production on the housing market are the conditions for physical planning and (as some say: superabundance of ) administrative regulations that must be fulfilled.

Construction Output by Sector 2005 Building Permits in New Housing 1998-2008 percentage by category of principal dwellings

60.000

Civil Engineering 22% 50.000 New Residential 28% 40.000

30.000

20.000

New Non- 10.000 Building Residential Renovation 13% 37% 0 19 1 2 2 2002 20 2004 2 2 2 2 9 0 0 0 0 0 008 9 9 0 01 0 0 0 0 8 9 0 3 5 6 7 housing corporations developers private persons

The availability of building lots is heavily regulated in the Netherlands, not in the least because of the fierce competition for various forms of land use in a densely populated country as it is. In the past, town and country planning, which was aimed at concentrating new dwellings in large developments directly connected with existing urban areas, resulted in strongly increasing land prices. By now, environmental planning is aimed at decentralisation of the administrative process to provinces, local authorities and private parties. The influence of the central government is restricted to the protection (against unsupervised building) of specific areas with a high © EUROCONSTRUCT 215 Netherlands Amsterdam, June 2006 environmental value. As a consequence of this new political view, a shift is expected from the building of new large urban settlements, towards building in smaller suburban sites and inside existing urban agglomerations.

For many years the position of property developers on the Dutch market for new dwellings, has been dominant. In 2002, the share of developing construction firms and property developers reached a level of 70 percent, leaving only 30 percent to housing corporations and private commissioners. However, due to weakening market conditions, the developers share contracted to 60 percent in 2005. In many regions, housing developers were confronted with a lack of demand, particularly in the more expensive housing market sections. In this situation, plans were cancelled, reduced or redeveloped, for instance with a shift to cheaper dwellings or rental dwellings. As a consequence, the construction of new dwellings on behalf of housing associations grew in importance from 20 percent in 2002, to 29 percent in 2005. This year, the share of housing associations in the number of issued building permits is expected to increase even further, to 30 percent (25,500 dwellings). This shift in market share is partly because of the phenomenon that housing associations get more and more involved in the development of houses for sale. A leading element in the Dutch housing policy, is the ambition to raise home-ownership to more than 60 percent of the housing stock. This goal has almost been reached, thanks to the policy to push housing associations to sell rental dwellings to tenants on the one hand and the favourable mortgage interest tax relief system on the other. Besides, the specific market for private commissioning is stimulated as well, in order to strengthen the participation of consumers in the development of new dwellings. The official goal, set down in 2000, was to have one-third of the total of new dwellings realised in private commissioning by 2005. However, this policy instrument did not prove to be very effective in recent years. At the moment, the development of private commissioning is stagnating, due to lower demand for expensive new dwellings and an insufficient supply of private building lots. Compared to a couple of years ago, when the share of the private commissioning market hovered around 16 percent, nowadays only 10 percent of the building permits are issued for this type of commissioning.

Building permits issued by type of applicant, 2002-2005 2002 2003 2004 2005 developers 44.917 47.171 47.293 51.000 housing 14.056 18.220 20.870 24.300 associations private 8.210 7.063 8.017 8.000 commissioners total 67.183 72.454 76.180 83.300

To meet the growing need for houses, the Minister for Housing adopted a plan to build 80,000 new dwellings annually in the period 2005-2010. Approximately a quarter of these houses should be suitable for the elderly. The minister aims at lowering the housing shortage rate from 2.5 percent in 2005 to 1.5 or 2 percent in 2010. The plan primarily focuses on removing bottlenecks in administrative and other measures, and on stimulating all parties involved, like municipalities, housing associations and developers. Finally, the rent policy is also slightly liberated. Rents will be allowed to increase step by step, but this policy is made conditional as it is linked to the fulfilment of specified house building tasks of private investors and housing associations. Lifting government supervision on rent will only happen in areas that are declared free of housing shortage.

216 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands

Residential renovation and maintenance came under pressure in 2002 and 2003. Under normal economic circumstances, expenditures on renovation and maintenance (r&m) gradually grow, because of an increasing and ageing housing stock. However, during the recession, construction output for renovation and maintenance slightly dropped. Private as well as professional home owners pruned their budgets down, due to stagnating disposable household income and declining trading revenues. Thanks to the improved economic situation, residential renovation and maintenance activity increased by 2.8 percent in 2004 and 2.2 percent in 2005 to € 15.2 billion. This year, growth is forecast to be about 3.3 percent, followed by 3.1 percent in 2007 and 1.5 percent in 2008. In the long run, renovation and maintenance are assumed to benefit from the increasing share of privately owned dwellings in the housing stock. Home owners are likely to spend more on r&m than tenants. In the rental sector, housing associations have announced large scale modernisation programmes, particularly for the share of the housing stock that was erected shortly after the second World War. Many of these dwellings have become obsolete, but technically not yet worn out. Besides, their location is generally favourable in relation to public facilities in city centres. This makes them attractive for renewal in favour of single person families and older couples. Housing associations are expected to generate extra funds for renovation by selling dwellings to tenants. However, since a couple of years, this process has been stagnating, due to the lack of consumer confidence and to the high prices on the housing market. Therefore, demand for rental dwellings is high at the moment. Vacancies are at an absolute low. For housing associations, this situation is not really a stimulus to invest in renovation or urban renewal.

4 Non-residential construction

In 2006, total (i.e. private and public) new non-residential construction is expected to finally recover from the cyclical low that ravaged the sector in recent years. Last year, output dropped to € 8.6 billion. This year, a growth figure of about 5 percent is projected. In 2005, renovation and maintenance (r&m) of non-residential buildings did already return to a positive growth rate. This year the ascending line is extended (+ 2.8 percent). Both new construction and r&m show decent growth rates in 2007 and 2008.

Since 2000, private and public non-residential construction went through divergent developments. For new private non-residential construction, 2006 marks the end of a long and deep recession. In recent years, many enterprises postponed investment plans in reaction to the cyclical downturn of the economy. Due to meagre production growth and low results for several years, commercial and industrial companies were not very willing to expand their production capacity. In order to build up their finances, many companies were mainly occupied with debt restructuring and outsourcing parts of their business than with new investments. From 2002 up till 2005, new private non-residential construction lost more than one third of its production output. This sharply contrasts with public non-residential construction, that managed to keep up its production volume quite well. The economic recovery and increasing investment activities, will finally accomplish a positive change for private new non-residential construction activity in 2006 and the years to come.

Within private new non-residential construction, developments differ quite a lot per type of building or branch of trade. The manufacturing industry is relatively sensitive to cyclical fluctuations. Investments have collapsed sharply, due to the cyclical downturn. Since 2001, production output, export and the number of employed persons is declining. Rising labour costs, the appreciation of the euro, low consumption growth and strongly increased competition from Eastern Europe and Asia put the performance of the industrial sector under great pressure. In this hostile climate, there has been little to no room for investment in

© EUROCONSTRUCT 217 Netherlands Amsterdam, June 2006 manufacturing accommodation, warehouses etc. In 2005, general investment activity strongly improved, due to an increasing capacity utilisation rate and a gradual recovery of the industrial entrepreneurs confidence. However, investments in new industrial buildings couldn’t immediately take advantage of this recovery. Usually, capital expenditure in buildings lags behind investments in equipment and machinery. Besides, the rental market for industrial accommodation faced high vacancy rates and excess supply. Production value in relation to the construction of new buildings for the industry, is forecast to increase by 2.5 percent this year. For 2007 and 2008 more appealing growth figures are foreseen (+7.6 and + 8.1 percent)

New Non-Residential Construction by Type 2005 New non-residential construction index 2001=100 Buildings for 160 Miscellaneous Education 13% 9% 140

Agricultural 120 Buildings Buildings for Health 10% 14% 100

80 Industrial Buildings Commercial 10% Buildings 60 15% Storage Buildinga 40 7% 2001 2002 2003 2004 2005 2006

Office Buildings Private Non-Residential Public Non-Residential 22%

The construction of new office buildings dropped dramatically in recent years. The sector includes construction activities for business and financial services (including real estate development) and the construction of facilities for public administration. Since 2001, construction output has fallen back from € 4,2 billion (prices 2005) to € 1,9 billion in 2005. This means a loss of 56 percent in 4 years. In 2003 and 2004 alone, the annual decay of the sector ran into more than 20 percent. Recently, 2005 was good for a further loss of 16 percent. Nowadays, the real estate market for office buildings is characterised by large vacancies and stabilising rents. The economic recovery will to a certain extent enlighten the problems of the sector. Not all idle capacity is situated on the location where new demand appears. In other words, although in general the vacancy rate is high, in some cases there is need for new capacity on locations where demand is growing and capacity is fully utilized. On the other hand, the new qualities asked for by the market, can’t always be met by the qualities that are incorporated in the existing supply. A striking phenomenon is that the addition of new office space to a high degree is concentrated in the top of the market. In a prestigious project as Zuidas in Amsterdam, some tens of thousands of square metres of floor space are under construction in a market with almost the highest excess supply in the country. All these activities bring about some new vitality to the construction of new office buildings. In 2006, growth is forecast to be 7.5 percent.. Next year, a growth rate of almost 4 percent is foreseen. For an great share, this is the result of an increase of the issue of building permits for accommodation for public administration. In 2008, the growth rate will increase again to almost 7 percent. Positive impulses will come from investments in new office buildings around railway stations for the new high speed rail link to Belgium and France. Another major project is the new housing for the Ministry of the Interior and Kingdom relations in The Hague and the new headquarters for the European police organisation Interpol in the same city.

Retail trade, wholesale trade, and the hotel and restaurant industry are the most important parts of the sector commercial buildings. After several years of decreasing production volumes, in 2005 the sector managed to reverse the downward tendency. In that year, construction output ended up at a level of € 1.3 billion. In 2006, a further recovery is not expected. The outlook for the this year shows a minor decline (- 0.8 percent).. The years 2007 up to 2008 show positive growth figures, in the range of 2.7 (2007) to 3.7 percent (2008). The course of events in the retail trade sector is assumed to be highly dependent on 218 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands the development of private income and consumer confidence. Both do look somewhat better at the moment. Besides, the market faces growing demand for new large-scale shop- property which is easy accessible for the consumer. The average floor space of shops is expanding steadily. The process of concentration of scattered retail outlet points into shopping malls is still continuing, as well as the renewal and upgrading of outdated shopping centres. The wholesale trade sector, which accounts for approximately 50 percent of the construction output for commercial buildings, benefits from an increase of the volume of world trade. The share of the hotel and restaurant industry in the building activity of the commercial sector is approximately 10 percent, mainly accounted for by the hotel sector. In previous years, this sector was hit with declining prices and low occupancy rates. Here, prospects are improving too.

Construction activity in agricultural buildings decreased in 2002 and 2003 rather strong. In 2004and 2005, the damage was largely repaired by an annual growth of more than 5 percent. This year, production will mark time. In the long run, production circumstances in the sector will be subject to change, due to structural developments. Lower labour costs and land prices in the new EU member states will increase international competition. In order to maintain its prominent position in many agricultural markets, the Dutch agricultural sector will have to concentrate on increased specialisation. Innovation and expansion in capital- intensive production processes, with a strong emphasis on the application of know-how, will be the only way to survive for thousands of agricultural enterprises. In many cases this will require modernised production facilities. Thus, together with the necessity to expand output to meet the growing demand resulting from the improving economic climate, the agricultural sector is expected to increase its investment (under which those in buildings) in the years after 2006. For 2007 and 2008 growth rates around 5 percent are calculated.

The category ‚miscellaneous’ includes different sectors, like transport, communication, telecom and the quaternary sector (excluding healthcare and education). As in many other sectors, the production of building facilities for transport, distribution and telecom was hit by the slowing economy. Investment in buildings for telecom, in particular, dropped sharply. New production decreased further in 2005. To a great extent, the activities in the transport and distribution sector are connected to international trade. This is because of the transit function of the Netherlands for a large part of the western European territory. In the future, this function will remain an important factor for the Dutch transport and distribution sector. In this respect, construction activities around Schiphol airport and the extension of the Rotterdam harbour (Maasvlakte 2) are two eye-catching projects. Therefore, in 2006, 2007 and 2008, construction output is projected to grow. Building activity in the category recreation, culture, sport and religion is stimulated by an increasing demand for leisure attractions, such as cinemas and amusement parks. Because of large projects, like the renovation of the Rijksmuseum in Amsterdam or new football stadiums, the volume of building permits heavily fluctuates from one year to another. However, the sector is a distinct growth sector and this will continue to be in 2006. In 2007, a small decrease of production output is projected; in 2008, its production volume will stabilise. In the long run, construction output for the housing of institutions in the educational sector is mainly determined by demographic factors, i.e. the development of the numbers of pupils and students. In recent years however, educational policy also influenced construction activities in this sector. The core of this policy can be very shortly be summarised as: concentration. In a deliberate process of scaling-up and mergers, the actual number of schools and other educational institutions, dropped dramatically. This process was accompanied by increased independency and responsibility of the various institutions, also for the construction and maintenance of the buildings. This led to a strong growth in demand for new buildings, and adaptation and renovation of old ones. Now that this process has been completed, new construction output in this sector is likely to decrease after 2006. In 2008, stabilisation of the construction activity is projected.

The same trend applies more or less to the sector health and welfare as well. Less rules and a more demand- oriented construction policy, led to positive impulses for construction activities. Raised budgets to enlarge the capacity for treatment, shorter building permit procedures, the tendency towards more extramural care and the creation of cooperative associations around hospitals, as well, stimulated construction demand. For 2007 and 2008, less construction activity is accounted for.

In recent years, contrary to new construction, non-residential renovation and maintenance activity only decreased very slightly. Because of the gradually increasing stock, in the long run the trend in renovation and maintenance activity is positive. The temporary slackening was caused by the weakness of the business cycle. In 2005, r&m activity recovered with 1.7 percent. In 2006, 2007 and 2008, growth figures of 2.5 to 3 percent will be possible. Now that the economy has found its way up again, companies are willing to invest in renovation and renewal of their buildings. In addition, funds for necessary maintenance programmes become more easily available.

5 Civil Engineering

Civil engineering encompasses not only construction activities related to main roads, rail and waterway infrastructure, flood barriers and sea and river dikes, but it also encompasses the preparation of building sites for new residential and non-residential buildings, and construction activities of local bodies, such as municipalities, provinces and polder boards, in secondary road systems, water storage, sewerage repair works etc. In 2003 and 2004, civil engineering output decreased by 2.5 and 1.0 percent, down to € 14.5 billion (2005-prices). New investments bring in about 55 percent of that figure. The fall in production volume was halted in 2005. Growth is likely to pick up again from 2006 onward, albeit at a modest rate. In the period 2006 to 2008 new construction is forecast to grow by about 1 percent each year. In the same years, renovation and maintenance will move forward twice as fast.

As indicated above, the development of new investment differs significantly from the development in renovation and maintenance work. For years, the growth rates for the production of new work lagged far behind the renovation growth rates. After another decline last year, new construction in civil engineering is finally expected to recover this year. This doesn’t mean that the sector starts working immediately to make up lost ground. The first rise in production volume in four years will only be very modest: + 1,1 percent. In the years to come, growth is expected to continue at the same pace.

Last year, expenditures on new infrastructural works financed by the government fell back by 2.5 percent, In 2006 and in the years to come, production will recover again, mainly due to projected new investments in road infrastructure and dikes. Transport infrastructure has been given high priority in the national mobility plan. Emphasis lies on measures to safeguard the accessibility of the Rotterdam harbour and Schiphol airport, and to enlarge the capacity of the main motorways. The necessary funds are not expected to be brought in entirely by the government. Alternative ways of exploitation, such as road pricing and toll roads, are to attract private capital as well. Until recently, financing of the motorway network was seen a pure public function.

The private sector already plays an important role in initiating and financing infrastructural works. Private investment in civil engineering is mainly commissioned by companies that are active in rail transport15, public utilities, telecommunication, seaports and airports. Today, almost 40 percent of all production originates from private companies and persons. In the

15 It should be noted that, in the Netherlands, although investment in rail infrastructure is registered as a private activity in the national accounts statistics, a large part is financed by capital transfers from public funds. 220 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands years behind, the sector lost a significant part of its production volume. This mainly because of the expiration of the construction of a major commodities railway from the Rotterdam harbour region to Germany (the Betuwelijn). In 2005, production in this sector fell back again by 2 percent. Demand for civil engineering work from utility and telecom companies, like investments in cables and wires, is declining, due to the slump in the ict and telecom sectors. On the other hand, the current Dutch energy market is a very liberalised one, and its current open status has become a stimulus for new investments. In the years to come, private civil engineering activity is forecasted to remain stable at the 2005 level. Especially investments by transport companies in regional railway systems will bring about a lot of work.

Civil engineering investment on behalf of local authorities, like municipalities, provinces and polder boards, strongly grew in 2005. For 2006 and subsequent years, a further recovery is forecasted. On the one hand, municipalities and provinces are faced with cutbacks in special benefits from the central government, due to austerity measures. This will affect, for instance, sewerage renovation work and construction work related to safety measures for the local and regional road network. On the other hand, investments by municipalities in preparing building sites could pick up slightly, because of the growing production of new residential and non- residential buildings.

Civil engineering, annual growth of production volume, percentages, 2004-2008 2004 2005 2006 2007-2008 New construction - central government -3.5 -2.5 2.0 2.0 - local authorities -2,0 5.0 2.0 2.0 - private sector 5.0 -2.0 1.0 0.5 Maintenance and 1.0 1.5 2.0 2.5 renovation

The maintenance an renovation market for civil engineering works only slightly expanded in 2005 (+ 0.6 percent). The increasing attention for the quality of existing infrastructural works will accelerate the growth in expenditures for maintenance and renovation. For 2006 and 2007, an annual growth of about 2 percent is to be reckoned with. Both road and railroad systems contribute to the increasing attention for good maintenance.

Civil Engineering Share in Total Construction 2000-2008 Infrastructure Fund 2006 mill. euro % Annual total expenses 2004 = 100 20000 25 18000 16000 24 14000 200 12000 23 10000 8000 22 150 6000 4000 21 100 2000 0 20 2000 2001 20 2 2004 200 2 003 006 02 5 50 2004 2005 2006 2007 2008 2009 2010 Civil Engineering Volume Share of Total Construction Motorways Waterways Dikes Railways

APPENDIX - DEFINITIONS

Statistical basis for the Dutch construction data

A. TOTAL CONSTRUCTION OUTPUT The statistical basis is largely the construction investment based on the National Accounts, adapted to the harmonised European System of National and Regional Accounts 1995 (ESA 1995). The construction output for each of the three sectors - residential, non-residential and civil engineering - contains new investment and value-increasing modernisation (fixed capital formation). This value for the construction output contains the overall registered investment construction work, including services, done by construction firms as well as firms belonging to other sectors than the construction sector. It also includes investment construction work done for themselves by non-construction companies. In addition to the investment value in each of the three sectors, non-investive repair and maintenance activities realised by construction firms (the SIC’93 groups of economic activities 451-455 Construction) and DIY/black economy are included. The value of maintenance work is part of the consumption in the National Accounts. DIY/black economy is based on an EIB-estimation. In table 2 modernisation investments, maintenance work and DIY/black economy are registered under renovation.

B. NON-RESIDENTIAL CONSTRUCTION The division of new non-residential construction investment in six categories (table 4a) is based on the building permits (only € 45,378 or higher) issued.

C. VAT All figures exclude VAT.

D. TABLE 4A The category „Miscellaneous“ in table 4a encompasses construction activities for the following industries: - transport - distribution - telecom - recreation - culture - sport - religion

222 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands

Country/Pays/Land: NETHERLANDS Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 16 193 16 258 16 306 16 336 16 361 16 394 16 428 Bevölkerung

Households ('000s) Ménages 6 996 7 049 7 091 7 146 7 196 7 246 7 298 Haushalte

Unemployed ('000s) Chômeurs 302,0 396,0 479,0 483,0 445,0 370,0 350,0 Arbeitslose

Unemployment rate (%) Taux de chômage 4,1 5,4 6,5 6,5 6,0 5,0 4,6 Arbeitslosenquote

Change of GDP Variation du PIB 0,1 -0,1 1,7 1,1 3,0 3,0 2,3 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 3,4 2,1 1,2 1,7 1,3 1,3 1,5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 5,8 3,2 2,0 1,5 1,3 1,2 1,2 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4,9 4,1 4,1 3,4 3,8 4,0 4,2 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

Country/Pays/Land: NETHERLANDS Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 17 883 -5,5 -1,7 9,6 6,6 7,0 4,0 1,3

Logement Renovation 15 154 -2,8 -1,2 2,8 2,2 3,3 1,9 1,9

Wohnungsbau Total 33 037 -4,2 -1,4 6,3 4,5 5,3 3,1 1,5

Non-residential construction New 8 562 -5,9 -12,4 -9,4 -0,4 4,8 3,1 4,5

Bâtiments non résidentiels Renovation 8 431 1,2 -1,5 -2,5 1,7 2,8 2,6 2,5

übriger Hochbau Total 16 993 -2,9 -7,6 -6,1 0,7 3,8 2,9 3,5

Building New 26 445 -5,7 -6,1 2,3 4,2 6,3 3,7 2,3

Bâtiment Renovation 23 585 -1,3 -1,3 0,8 2,0 3,1 2,2 2,1

Hochbau Total 50 031 -3,7 -3,8 1,6 3,2 4,8 3,0 2,2

Civil engineering New 8 179 -4,7 -4,8 -1,8 -0,3 1,1 1,1 1,1

Génie civil Renovation 6 319 3,5 1,0 0,2 0,6 1,9 2,3 2,3

Tiefbau Total 14 499 -1,5 -2,4 -1,0 0,1 1,5 1,7 1,6

TOTAL CONSTRUCTION OUTPUT 64 530 -3,2 -3,5 1,0 2,5 4,0 2,7 2,1

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 5,20 -7,0 -5,5 0,0 2,0 2,0 2,0 0,0 Inländischer Zementverbrauch

224 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands

Country/Pays/Land: NETHERLANDS Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 50,4 54,4 57,1 62,5 65,6 63,8 60,0 Baugenehmigungen Familienhäuser Flats Collectif 16,8 18,1 19,1 20,8 21,9 21,2 20,0 Mehrfamilienhäuser TOTAL 67,2 72,5 76,2 83,3 87,5 85,0 80,0 Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser Flats Collectif Mehrfamilienhäuser TOTAL Housing completions 1+2 family dwellings Logements terminés Individuel 49,6 43,2 49,0 47,2 56,2 58,1 56,2 Baufertigstellungen Familienhäuser Flats Collectif 17,1 16,4 16,3 19,8 18,8 19,4 18,8 Mehrfamilienhäuser TOTAL 66,7 59,6 65,3 67,0 75,0 77,5 75,0

Housing stock Logements existants 6 764 6 810 6 859 6 914 6 971 7 025 7 080 Wohnungsbestand

thereof second-homes dont résid. Secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 54,4 54,5 54,7 54,9 55,1 55,2 55,4 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: NETHERLANDS Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 798 3,4 15,1 10,7 17,5 11,8 -0,4 0,6 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 1 203 4,4 7,2 17,5 18,4 7,6 -3,8 -3,0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 896 -5,5 -18,1 -14,1 1,6 2,5 7,6 8,1 Industriegebäude

Storage buildings Bâtiments de stockage 570 -7,2 -14,6 -13,6 -8,5 3,1 7,2 7,7 Lagergebäude

Office buildings Bureaux 1 854 -8,8 -20,9 -25,4 -16,2 7,5 3,8 6,8 Bürogebäude

Commercial buildings Commerces 1 265 -4,9 -10,2 -4,1 3,0 -0,8 2,7 3,7 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 888 -3,6 -10,0 5,3 5,1 0,6 4,6 5,4 Landwirtschaftsgebäude

Miscellaneous Autres 1 087 -8,7 -8,4 -8,0 -1,8 5,0 5,8 6,5 Sonstiges

Total Insgesamt 8 562 -5,9 -12,4 -9,4 -0,4 4,8 3,1 4,5

Million euro at 2005 prices, excluding taxes.

226 © EUROCONSTRUCT Amsterdam, June 2006 Netherlands

Country/Pays/Land: NETHERLANDS Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Telecommunications Télécomunications 723 -1,2 0,4 -2,0 0,7 -2,7 -0,1 -2,8 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 739 -2,4 -1,3 1,0 2,5 -0,0 -0,1 -0,1 Energie-und Wasserversorgung

Other Autres 2 754 -0,4 -1,1 -1,2 -2,1 -1,2 -0,1 0,2 Sonstiges

Total 14 499 -1,5 -2,4 -1,0 0,1 1,5 1,7 1,6

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: NETHERLANDS Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 244,0 0,9 -0,7 0,0 0,3 1,3 1,3 1,5 Privater Verbrauch

Public consumption Consommation publique 121,0 3,3 2,4 0,0 0,5 2,2 1,5 2,0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 97,9 -4,5 -3,5 2,9 2,2 6,0 3,8 3,0 of wich construction 54,9 -4,8 -4,5 1,1 2,8 4,5 2,7 2,0

Stocks (contribution as % of GDP) Variations de stocks - 1,2 -0,6 0,2 0,2 -0,3 0,3 0,3 0,3 Vorratsveränderung

Exports Exportations 356,9 0,9 2,0 8,5 5,9 6,8 8,0 6,0 Exporte

Imports Importations 317,1 0,3 2,0 7,8 5,1 7,0 7,5 6,0 Importe

GDP PIB 501,5 0,1 -0,1 1,7 1,1 3,0 3,0 2,3 BIP

Standard National Accounts, gross figures

228 © EUROCONSTRUCT Amsterdam, June 2006 Norway

NORWAY Prognosesenteret AS http://www.prognosesenteret.no

Kjell Senneset e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

Production in the construction sector broke new records in 2005, but that record will not last for long – it will be broken already this year. Outlooks for 2007 and 2008 indicate that growth will slow to almost zero, but any downturn is not in sight. When we expect growth to slow it is more because of labour shortages than lack of demand – provided that the favourable macroeconomic conditions prevail through 2008. So they will, according to the forecast from Statistics Norway and The Central Bank of Norway – but these forecasts have not taken fully into account the soaring oil prices. If oil prices in the vicinity of 100 $ a barrel continues into the second half of 2006 and maybe also into 2007, the macroeconomic prospects may be less bright than expected. In this report, however, we prefer not to modify the forecasts – they are used as a background for our construction forecasts in their original form.

It is mainly domestic factors that accounts for the economic growth in 2005, and this will be the case also be in 2006-2008.The main driving forces have been private consumption and investments in the oil and gas industry. Investments in the oil and gas sector was expected to peak in 2005, but now it seems that these investment will grow also this year, and the decline in 2007 will be small.

Total output growth in the construction sector was 9 % in 2005. All sectors contributed – new residential and non-residential construction, building renovation and modernisation, and civil engineering. The biggest contributor was the civil engineering sector, but new dwellings and new residential construction was not far behind

This year, total output is expected to grow by 6 %, and we believe that it is room for a small growth also in 2007, but now only 2 %. For 2008 we predict zero growth rate.

Investments in new dwellings, new non-residential buildings and in civil engineering works contribute almost equally to the growth in construction in 2006.In 2007, investments in non- residential buildings will start to decline, but this will be offset by growth in the other sectors, included renovation. In 2008 also civil engineering investments will decline somewhat. Growth in investments in dwellings and in renovation will offset decline in the civil engineering and in the non-residential sector.

Construction Sector by Type in Norway to 2008 (index 2000 = 100)

190

170 Total civil engineering 150 New non-residential 130 construction Building renovation 110 and modernisation New residential 90 construction

50 2000 2002 2004 2006 2008

230 © EUROCONSTRUCT Amsterdam, June 2006 Norway

2 Macro-economic Outlook

GDP The GDP-forecast for 2006 from Statistics Norway is a very moderate 1.3 %, but this is mainly caused by the fact that there is no growth in the oil and gas production in 2006. Excluding this sector, the growth rate increases to about 2.5 %. Both forecasts could, however, very well prove to be somewhat pessimistic. The Central Bank, for instance, predicts more than 1 percentage point higher GDP-growth, with or without oil and gas. This is probably more realistic, taking into account that both housing production and the investments in non- residential houses will grow considerably.

For 2007 and 2008 the forecasts differ less – both institutions predict between 2 and 3 % growth, with or without the oil sector. This is about the best performance that the Norwegian economy could possibly do, since there are very little idle production resources left at the end of 2006. Increased production must relay on growth in the labour force and growth in productivity.

Domestic demand will outgrow production in 2006, mainly because private consumption is expected to increase by 4 % and investments in private industries by 7 %. In 2007 and 2008, private consumption and investments will slow to about 3 % according to forecasts, and domestic demand is expected to grow in line with growth in production. Norway’s huge trade surplus will thus remain huge also in the years to come. The surplus is generated by the oil and gas export, which make up some 50 % of Norway’s total export value. If today’s oil prices remain through the rest of the year, the trade surplus will make up some 20 % of GDP in 2006.

Unemployment In spite of growth rates of some 3.5-4 % for the mainland economy (excluding the oil and gas sector) in 2004 and 2005, unemployment rates was more or less stable at 4.5 %. High productivity growth and immigration from the new EU-countries provided for this. In 2006, however, neither immigration nor productivity growth seems to be able to keep up with the demand for labour. Unemployment is going down – fast. The rate seems to fall well below 4 % by the end of this year. Unemployment rates may fall a little also in 2007 and 2008, but are approaching the frictional unemployment level.

This means that lack of labour will be felt in more and more industries, as well as in the public sector. Lack of labour is already serious problem in the construction sector, and major obstacle for further growth.

Prices and wages In spite of the labour shortages, wage increases are still moderate – though a little higher than with our main trading partners. Average wage increase was 3.5 % in 2005. Thanks to reduced prices on import products, inflation is very low, 1.5 % in 2005. Excluding energy, the core inflation was only 1 %. With unemployment rates below 4 %, as expected in the forecasting period, it will be next to impossible to keep wage increases at 2005-level in 2006-2008. Some years ago, unemployment rates of 4 % would mean at least 5 % wage increase. But the world has changed, foreign firms, mainly from Eastern Europe, have “invaded” the Norwegian labour force, and price competition has toughened in many markets. Direct imports from low cost countries also help to keep wage increases and inflation down. Therefore, wage increases will probably be kept somewhere between 4 and 5 %.

Interest rates The Central Bank is obviously worried about the tight labour market. Thus to cool the economy, the bank has started to lift interest rates from its record low of 1.75 % in the first half of 2005. But the increased rates have also, together with high oil prices, strengthened the © EUROCONSTRUCT 231 Norway Amsterdam, June 2006

Norwegian currency. In the long run, this will hurt firms that compete internationally. Never the less, the Central Bank is expected to increase interest rates in the years to come, but they have to keep a sharp eye on the development of the NOK.

State finances Thanks to huge tax revenues and other income from the oil and gas industry, Government finances in Norway are very healthy. For 2006, the surplus in the state budget could reach almost 20 % of GDP. Such a large surplus may tempt the political parties to throw money into the economy in order to finance better social services, educational services, more roads and railway investments and so on, but so far such backsliding have been avoided for the most part. Taken into account the tightening of the labour market, it becomes increasingly important to hold back on public spending.

Macroeconomic Key Indicators in Norway to 2008 (GDP, private consumption and inflation: Annual percentage changes. Unemployment: Level) 2002 2003 2004 2005 2006 2007 2008 GDP 1,1 1,1 3,1 2,3 1,3 2,5 2,7 Private consumption 3,0 2,9 4,7 3,8 3,9 3,6 3,1 Unemployment 3,9 4,5 4,5 4,6 3,8 3,7 3,6 Inflation 1,3 2,5 0,4 1,5 2,6 1,9 2,0 Source: Statistics Norway

232 © EUROCONSTRUCT Amsterdam, June 2006 Norway

3 Housing Market

New residential buildings Housing starts in 2004 and 2005 reached levels which have not been seen since the beginning of the 1980’ies. A total of 30.000 new dwellings were started in 2004, and 31.600 in 2005. Compared to 2003, the level has been lifted by more than 30 %.

The main reasons for the increase in housing production the last couple of years are better supply of proper building sites, especially in Oslo, the reduction in the interest rates through 2003 and the lower unemployment level combined with the household’s increasingly optimistic evaluation about the future. The most important factor is the increased supply of building sites. Due to lack of sites, the housing production especially in Oslo has been far below demand for at least 10 years, with a sharp price increase of both new and second hand homes as a direct result. Through the years, the low production of new homes and the lack of building sites have grown into a major political issue. A few years ago, the political authorities of the city started taking measures in order to increase the supply of sites. These efforts are now paying off. However, it will probably be close to impossible to provide sites for the 5-6.000 new dwelling that are needed every year to keep up with the population increase. Further price increases may therefore be expected, though higher interest rates may dampen the price increases a little.

The good performance of the Norwegian economy and high population growth – 0.6 % a year - indicates that housing demand will be very high also in the years to come. Lack of labour in the construction sector as well as lack of building sites, particularly in the Oslo area, are the main factors that keeps housing production down. It is thus very hard to make good estimates of how many dwellings that will be build, since we are unable to measure the effect of these factors. Our best estimate is that it will be possible to increase housing production somewhat, and forecasts indicate 33.000-34.000 new dwellings in 2006-2008.

House prices The main reason behind the increase in house prices the last 10 years or so have been a mismatch between housing production and population growth. Ups and downs in the business cycle and interest rates have of course also played an important role in the price development. It was a reduction in the interest rates through 2003 that initiated the present sharp price increases. The average price of second hand homes rose by about 12 per cent in 2004, and 9 % in 2005. This year we expect a price increase of about 12 %. Higher interest rates will reduce the price increases in 2007 and 2008, but houseprices may never the less go up with some 7-8 % these two years.

Housing renovation (RMI) The market for housing renovation made some big leaps in 2004 and 2005 after a couple of years with only moderate growth. Measured at constant prices, outlays rose by 6 % in 2004 and 8 % in 2005. According to our analyses, low interest rates, high increase in house prices and an increasingly optimistic population measured by the Consumer Confidence Index were the most important factors behind the growth. Now the interest rates are going up, the growth in house prices are going down and labour shortage in the construction industry is an increasing problem.

It should also be mentioned that a there have been a surge in the rebuilding of unattractive commercial buildings to dwellings, since some 10 per cent of the office space have been vacant in many of the major cities the last couple of years. No the vacancy rates are going down, and this incentives are reduced. This also have a negative impact on the housing renovation market, but the effect is hard to quantify.

Thus, the growth in the production of RMI market will be lower in 2006-2008. But we still expect to see growth rates between 3 and 5 %. © EUROCONSTRUCT 233 Norway Amsterdam, June 2006

4 Non-residential Market

Non-residential construction overall In the years 1996-2004, non-residential starts were fairly stable, varying between 3 and 3.6 mill m2, excluding buildings for agriculture, forestry and fishery. (Statistics on these buildings where not published until 1993, and so far we have decided not to include these buildings in our forecasts on the Norwegian construction market.)

Last year, however, broke out of this interval. More than 4 mill m2 where started. This year, square meter started could hit 4.5 mill m2. But after that, the demand for new buildings will probably be reduced, and we expect square meter started to go down to about 4 mill in 2008.

It is mainly the business sector that is behind the boom in the non-residential sector, but a big increase in the building of holiday houses (which belong to the non-residential sector) has also been a major factor. Erection of holiday houses will continue to increase in the forecasting period, but the business sector will build less. Demand for new buildings for the public sector will stay at about the same level in 2006-2008.

Buildings for education Better buildings for education, mainly primary and secondary schools, have been on the political agenda for some years now. These schools are owned and run by the municipalities, and have long suffered from neglected maintenance. A few years ago, the Government introduced an arrangement were the municipalities were refunded interest payments on loans to finance investments in new schools and renovation of existing schools. The municipalities could also use tax money to finance the works, and estimated interest payment saved this way is refunded by the Government. So far, total yearly loan frames have been 2 or 3 bill. NOK. The arrangement has proved to be very popular, and have increased the erection of new schools and renovation activity on existing schools. About 300.000 m2 of new educational buildings are now started each year, compared to about 200.000 m2 before the loan arrangement was introduced. Project information indicates that 2007 will be the top year for new educational buildings – new floors space started will be about 10 % higher than in 2006 and 2008.

Buildings for health The second construction stage of the new hospital for the Trøndelag counties (North and South Trøndelag) in the city of Trondheim will dominate this market in the forecasting period. About 90.000 m2 floor space will be build. About 30.000 m2 was started in 2005, and most of the rest will be started in 2006 – which means that 2006 will be the top year for new health buildings.

Industrial buildings The erection of new industrial buildings was reduced by 40 per cent from 2000 to 2004, partly due to the slowdown in the world economy in most of this period, and partly because an overvalued NOK in 2002 and much of 2003 reduced the competitiveness of the manufacturing industry. The growth in the world economy picked up in 2005, and the value of the NOK was reduced – and so the erection of new factories picked up considerably. Late in 2005 the NOK strengthened again, and it seems to continue beeing strong throughout 2006, but we still believe that the erection of new buildings for the manufacturing industry will be higher in 2006- 2008 than in 2005.

Storage buildings Project information indicates that the erection of storage buildings will be somewhat lower in 2006-2008 than the record level of 2005, but it will still be high.

Office buildings 234 © EUROCONSTRUCT Amsterdam, June 2006 Norway

The last few years, until 2004, the new construction activity in this sector has been slowed by a sharp increase in vacancy rates of offices. In 2005, however, the vacancy rate started to fall. The strong rise in employment that is expected in 2006 will mean that vacancy rates will continue to fall sharply, and is expected to fall further in 2007 and 2008. However, this expected development has triggered a big leap in planned new office space. Project information indicates that new office space started could increase by more than 50 % from 2005 till 2006. This could prevent a further fall in vacancy rates in 2007 and 2008, and thus a reduction in floor space started these years compared to 2006.

Commercial buildings Strong growth in consumer spending has lead to a continuing high level of the erection of new commercial buildings. An all time high was reached in 2005, and project information seems to indicate that the level will be almost as high this year. In the longer run, however, the present level is not sustainable. A community with 4,5 mill. Inhabitants could not fill up some 600.000 new square meters with shops and stores every year! Our forecast is that new floor space started will go down to approximately 400.000 m2 towards 2008.

Agricultural buildings Floor space started increased steadily from 2000 to 2004, mainly due to restructuring of the farming business. In the last Euroconstruct (December 2005) report we expected this trend to reverse, mainly because the speed of this restructuring had reached a top and are about to slow down. The figures for floor space started for 2005 confirms this – the level was lower than in 2004 – but still very high. However, if the conclusions of the WTO negotiations will reduce the protection of the Norwegian farming industry, a new restructuring phase may most probably start in a few years – altough not until after the present forecasting period.

Miscellaneous About 75 per cent of new buildings in this sector are non-residential buildings for households, i.e. holiday houses and private garages. The rest is mostly assembly buildings for the public sector.

The erection of garages is closely linked to the number of dwellings built each year. The construction of new garages will therefore be somewhat higher in 2006-2008 than in 2005, since we expect a small increase in the construction of new dwellings.

Investments in new holiday houses are rising sharply – it seems to be a strong connection between floor space started for holiday houses and the price level on second hand dwellings! We expect prices on second hand dwelling to rise 12 % this year, and 7-8 % in 2007 and 2008, so this indicates further increase in the erection of holiday houses in 2006-2008

We also assume increase in the erection of assembly buildings in 2006-2008. Altogether, this means that the total level of new construction in the sector Miscellaneous will increase markedly in the forecasting period.

Non-residential renovation (RMI) About 2/3 of non-residential renovation on buildings are works for the business sector, and 1/3 for the public sector. We have no information on the value of renovation works on holiday houses and garages for the households, thus renovation on these buildings are not included in this text or in the tables for Norway.

Model simulations of the demand for renovation services from the business sector imply that age adjusted indexes for the stock of buildings taken together with operating results in the business sector and interest rates can explain much of the activity fluctuations in this sector.

With plausible assumptions for the development in operating results, and forecasts for interest rates given by Statistics Norway, the model shows that the market for renovation works on

© EUROCONSTRUCT 235 Norway Amsterdam, June 2006 commercial buildings will grow by some 2,5 per cent this year, but the expected interest rate increases in the forecasting period will reduce demand in 2007 and 2008. Another effect, that may be difficult to quantify but is probably of some importance, is the effect from seemingly increased propensity for business to change location. We take this into consideration for that part of the RMI-forecast that is related to the business sector, which then shows a higher growth this year a smaller fall in 2007 and 2008 than the model mentioned above indicates.

To evaluate renovation works on public houses, which in this context are mainly buildings for health and education, we take into consideration the growth in the building stock as well as the Government arrangement giving interest free loans to the municipalities to renovate schools (see the paragraph on Buildings for education above), and that the new Government (in office from autumn 2005) are set to increase income for the municipalities faster than the former Government. We believe that the increase in demand for RMI from the public sector will almost offset the decline from the private sector in 2007 and 2008, so that the total demand will be at about the same levels in 2007 and 2008 as in 2006. The growth from 2005 to 2006 will reach approximately 4 % according to our forecasts.

5 Civil Engineering Market

Investment in civil engineering works has increased steadily since the year 2000, due to higher investments in roads and metros, in power supply and land based oil and natural gas installations. Investments will continue to grow the next couple of years. In 2008 we foresee a small decline, only this forecast is highly uncertain. Maintenance of civil engineering works will however continue to grow, an so the total civil engineering market will be at about the same size in 2008 as in 2007. A necessary condition for continued growth in the civil engineering market to continue in 2007 is that the road and railway investment and the maintenance program in the new National Transportation Plan (NTP) is implemented. Experiences from earlier such programs show that it is a lot easier for the central authorities to approve such programs than to carry them out. This is especially true when the Parliament in fact add to the proposed investments and maintenance grants from the Government, as it is has done this time. When proposals of the former Government for the 2006 State budget for 2006 was presented last October by the former Government – it was replaced by a new one shortly afterwards since the parties in power lost this autumn’s election – grants to investments in roads and railways where much smaller than required to follow up the investment programs in NTP. We expect, however, that the new Government will increase the grants to roads and railways in 2007. The new Government has declared that their intension is to follow up the investments plans in NTP, and so we have used these plans as forecasts for the investments in roads and railways in 2007 and 2008, and also for the maintenance of roads and railways. Investments in land based oil and gas installations are now falling sharply as two major projects are just completed or about to be completed. This will, however, will partly be offset by higher investments in energy and water works. These investments are expected to grow this year, and also in 2007and 2008. High investments in the energy sector are needed to reduce the present shortages in energy production, and investments in water supply is needed because much of the water supply system is old and badly need upgrading. Information on investment trends in the telecommunication sector is scarce, but the general need for such installation in modern society indicates an increase. Project information from other sectors of the civil engineering market points to an increase in investments this year, and a reduction in 2007. The figures for 2008 are kept at the same level as 2007. Forecasts for maintenance of civil engineering works other than transport are based on growth in the capital stock, and allowing for some modernisation. This gives a yearly increase of 4-5 %.

236 © EUROCONSTRUCT Amsterdam, June 2006 Norway

APPENDIX – DEFINITIONS

Table 1 • Population, Households: number of people at the beginning of the year • Unemployed and unemployment rate: Survey-based.

Table 2 • Historical figures are based on national accounts. No black economy figures is included, but the households own work on new dwellings is included. DIY is included in the renovation figures for dwellings.

Table 3 • Definition 1+2 family dwellings vs flats: 1+2 family dwellings include row-houses, chained houses and other small houses. • Housing stock: Figures based on the housing census from 2001. • Second homes: Based on figures from Statistics Norway. • Home ownership rate: Based on the housing census from 2001.

Table 4b • Other transport includes airports and harbours.

Table 5 • Volume Private consumption, public consumption, etc: At market prices, VAT included

Extra • Sources of data: Table 1, Statistics Norway. Table 2, Prognosesenteret. Table 3, Statistics Norway and Prognosesenteret (forecasts). Table 4 a, Prognosesenteret. Historical figures are calculated from the construction statistics of Statistics Norway. Table 4 b, Statistics Norway and Prognosesenteret (forecasts). Table 5, Statistics Norway.

Country/Pays/Land: NORWAY Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 4 524 4 552 4 577 4 606 4 632 4 667 4 697 Bevölkerung

Households ('000s) Ménages 1 970 1 980 2 000 2 015 2 030 2 045 2 055 Haushalte

Unemployed ('000s) Chômeurs 93,0 107,0 106,0 112,0 93,0 91,0 89,0 Arbeitslose

Unemployment rate (%) Taux de chômage 3,9 4,5 4,5 4,6 3,8 3,7 3,6 Arbeitslosenquote

Change of GDP Variation du PIB 1,1 0,4 2,9 2,3 1,3 2,5 2,7 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1,3 2,5 0,4 1,5 2,6 1,9 2,0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2,3 2,4 3,6 3,4 3,0 3,0 3,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 6,9 4,1 2,0 2,3 3,0 3,5 3,5 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 6,4 5,0 4,4 3,9 4,5 5,0 5,0 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent). 3) 10-year goverment bonds (or equivalent).

238 © EUROCONSTRUCT Amsterdam, June 2006 Norway

Country/Pays/Land: NORWAY Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 5 259 1,6 1,4 24,3 12,3 4,2 5,2 1,2

Logement Renovation 4 835 2,0 1,0 5,9 8,0 5,0 3,0 3,0

Wohnungsbau Total 10 094 1,8 1,2 14,6 10,2 4,6 4,1 2,1

Non-residential construction New 6 199 3,4 -2,1 17,6 7,4 9,0 -0,5 -4,0

Bâtiments non résidentiels Renovation 4 186 3,9 -0,8 4,1 2,4 2,0 2,8 2,0

übriger Hochbau Total 10 385 3,6 -1,5 11,6 5,3 6,2 0,8 -1,7

Building New 11 458 2,6 -0,6 20,5 9,6 6,8 2,1 -1,6

Bâtiment Renovation 9 021 2,9 0,1 5,0 5,3 3,6 2,9 2,5

Hochbau Total 20 480 2,8 -0,2 13,0 7,7 5,4 2,4 0,2

Civil engineering New 3 735 2,7 4,0 4,2 14,9 7,2 2,1 -2,4

Génie civil Renovation 2 096 -3,5 1,4 2,4 1,5 1,8 4,9 3,5

Tiefbau Total 5 832 0,1 3,0 3,5 9,7 5,3 3,1 -0,3

TOTAL CONSTRUCTION OUTPUT 26 312 2,1 0,5 10,8 8,1 5,4 2,6 0,1

Million euro at 2005 prices, excluding taxes. 1 euro = 7,900 NOK

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 1,66 3,0 2,0 12,0 17,0 1,0 0,0 -1,0 Inländischer Zementverbrauch

Country/Pays/Land: NORWAY Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 15,5 13,8 16,5 16,0 17,5 18,0 18,0 Baugenehmigungen Familienhäuser Flats Collectif 11,8 10,8 16,4 16,0 16,5 17,5 17,5 Mehrfamilienhäuser TOTAL 27,4 24,5 32,9 32,0 34,0 35,5 35,5 Housing starts 1+2 family dwellings Logements commencés Individuel 13,3 12,3 14,3 16,6 16,9 17,3 17,1 Baubeginne Familienhäuser Flats Collectif 9,7 10,9 15,7 15,0 16,1 16,7 16,9 Mehrfamilienhäuser TOTAL 23,0 23,2 30,0 31,6 33,0 34,0 34,0 Housing completions 1+2 family dwellings Logements terminés Individuel 13,0 11,8 12,4 15,0 16,5 16,8 17,0 Baufertigstellungen Familienhäuser Flats Collectif 8,7 9,6 11,2 14,5 15,0 16,0 16,5 Mehrfamilienhäuser TOTAL 21,7 21,4 23,6 29,5 31,5 32,8 33,5

Housing stock Logements existants 2 329 2 344 2 370 2 390 2 410 2 430 2 450 Wohnungsbestand

thereof second-homes dont résid. Secondaires 359 364 370 375 380 385 390 davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 78,0 78,0 77,5 77,5 77,0 77,0 77,0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

240 © EUROCONSTRUCT Amsterdam, June 2006 Norway

Country/Pays/Land: NORWAY Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 634 9,4 11,4 41,6 -4,3 0,7 7,2 -4,4 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 525 1,6 20,8 13,8 -31,7 21,6 -8,9 0,2 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 459 7,3 -18,8 10,2 11,3 23,1 2,4 -3,9 Industriegebäude

Storage buildings Bâtiments de stockage 472 20,6 -27,6 57,6 27,0 2,2 -12,8 -3,8 Lagergebäude

Office buildings Bureaux 506 -25,3 -14,4 -20,0 53,6 69,7 -29,9 -2,2 Bürogebäude

Commercial buildings Commerces 1 513 -7,0 -16,6 27,6 23,2 -1,3 -11,4 -11,4 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 507 13,8 2,7 23,3 6,0 -12,7 0,0 -2,5 Landwirtschaftsgebäude

Miscellaneous Autres 1 583 23,7 12,9 9,3 4,0 3,6 27,6 -1,4 Sonstiges

Total Insgesamt 6 199 3,4 -2,1 17,6 7,4 9,0 -0,5 -4,0

Million euro at 2005 prices, excluding taxes. 1 euro = 7,900 NOK

Country/Pays/Land: NORWAY Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 3 130 -1,6 -1,8 4,7 15,3 3,6 6,6 -0,1 Verkehrsinfrastruktur Straßen Railways Voies ferrées 241 -14,7 10,2 4,7 6,8 14,7 58,2 2,1 Bahnanlagen Other transport Autres réseaux 127 0,2 0,2 5,0 3,2 -6,3 -1,8 0,4 Übrige Vekehrsinfrastruktur TOTAL 3 498 -2,5 -1,0 4,7 14,2 4,0 10,2 0,1

Telecommunications Télécomunications 174 0,0 -9,7 5,2 4,9 0,0 5,0 5,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 587 9,0 19,3 15,4 3,8 11,9 -0,0 1,8 Energie-und Wasserversorgung

Other Autres 1 573 3,5 7,8 -2,5 3,2 6,1 -11,4 -3,1 Sonstiges

Total 5 832 0,1 3,0 3,5 9,7 5,3 3,1 -0,3

Million euro at 2005 prices, excluding taxes. 1 euro = 7,900 NOK

242 © EUROCONSTRUCT Amsterdam, June 2006 Norway

Country/Pays/Land: NORWAY Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 101,2 3,0 2,9 4,7 3,8 3,9 3,6 3,1 Privater Verbrauch

Public consumption Consommation publique 49,1 3,7 1,3 2,2 1,4 2,0 2,3 3,8 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 45,1 -1,0 0,2 8,1 10,8 6,6 -2,4 1,1 of wich construction

Stocks (contribution as % of GDP) Variations de stocks 3,9 -0,2 -0,3 1,1 0,1 0,0 0,0 0,0 Vorratsveränderung

Exports Exportations 109,1 -0,8 0,2 0,6 0,5 -0,3 4,5 3,7 Exporte

Imports Importations 67,1 0,7 1,1 8,9 6,7 7,1 3,1 4,0 Importe

GDP PIB 241,3 1,1 0,4 2,9 2,3 1,3 2,5 2,7 BIP

Standard National Accounts, gross figures.

244 © EUROCONSTRUCT Amsterdam, June 2006 Poland

POLAND PAB-PCR&F [email protected]

Mariusz Sochacki e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

On 1 of May 2006, Poland has celebrated the second anniversary of accession to the EU. Three clearly distinct periods have been observed during those two years. The first period – lasting for 8 months of 2004: significant acceleration of the economic growth caused by so called „Union effect” in the period before the accession and keeping this high rate of development in the next 3 months after the accession, mainly due to the increase of the private consumption. The second period – since the end of the third quarter of 2004 till the half of the third quarter of 2005: more than two-fold lowering of the rate of the economic growth after so called „accession shock” (rapid acceleration of the economy), as a consequence of the significant decrease of the private consumption and slow rate of investment, what was the result of awaiting by the investors for the improvement of the market conditions. The third period – started at the end of the third quarter of 2005 and lasting till now, it means till the second quarter of 2006: return to the high dynamics of the economic growth as a result of fixing of the positive tendencies in the economy and increase of the production in the last three quarters, mainly due to the growth of investment in the economy.

Changes of the GDP and gross domestic fixed capital formation in Poland in the consecutive quarters of 2004-2006 (y-o-y), in %

GDP GDFCF 2nd union effect 10 1st union e ffe ct

% 6

0 Q4 Q1 2004 Q2 Q3 Q4 Q1 2005 Q2 Q3 Q4 Q1 Source: PAB – PCR&F

The macroeconomic indicators, noted by Central Statistical Office (CSO), showed that in 2005 the GDP has increased by 3.2% as compared to 5.3% in 2004. In 2005, the driver of the growth were both an increase of the gross domestic fixed capital formation and still high dynamics of the foreign trade. Also the situation on the labour market has improved, what was evidenced by the fall of unemployment rate from 19.2% in March 2005 to 17.8% in March 2006, it means by about 1.4 percentage points. The results of the Polish economy in the first and second quarters of 2006 have showed that many of positive Union effects are acting again. Significant acceleration of the economic growth has been observed as a result of higher increase of industrial production, sale and consumption demand. The increase of the real wages, noted since fourth quarter of 2005, has also increased the possibilities of the growth of individual consumption in 2006. After rapid growth in the first two quarters of 2006, we expect some deceleration in the next two quarters. As a result, the annual rates of growth of the GDP in 2006 should be equal to 4.5%. We estimate that the rate of growth of the GDP for 2007 and 2008 will be equal to 4.6% and 5%, respectively.

246 © EUROCONSTRUCT Amsterdam, June 2006 Poland

According to the PAB’s tentative evaluations, the growth of the construction output in 2005 has increased by about 6%. We forecast the growth in construction output for 2006 as equal to 8.9%. According to the forecast, the construction production in 2007 will increase by 8.2% and in 2008 it will increase by 9.3%. We expect some weakening of the rate of construction production in 2007. The growing demand for the construction work will collide with the lack of possibilities of its fulfilment by the domestic construction potential. We remind that during the crisis in the Polish construction in 2000-2003 about 200 thousand employees in the construction companies lost the job. At present, the situation on the Polish labour market is worsening by the extensive migration of the high-skilled staff to the EU member states, mainly to Great Britain, Ireland, Spain, etc. We expect that the lack of the skilled staff will bring the negative results for the possibilities of the development of the construction yet in 2007, and that it will cause the significant increase of the prices in construction and will limit the possibilities of use of the available financial means from the structural funds of the EU granted to Poland.

Construction Sectors by Type in Poland till 2008 (2004 year = 100) 2004=100 220

200

180 New Residential

160 New Non- residential 140 R&MBuilding 120

Civil Engineering 100

60 2002 2003 2004 2005 2006 2007 2008

Source: PAB – PCR&F

According to the warnings that PAB made half a year ago, the ambitious program of housing development with planned construction of 3 millions dwellings in the next years was only the election’s slogan.

2 Macro-economic Outlook After periods of the slow growth of GDP at the end of 2004 and during three quarters of 2005, in the fourth quarter the rate of GDP growth has increased to 4.2%. As a result, in 2005 the GDP was by 3.2% higher than a year ago, according to our prognosis from November 2005. In 2005, the GDP value reached – according to the tentative estimations – 967,7 billion PLN. According to the currency rate, the GDP per capita was equal to 6.3 thousand EURO (as compared to 5.3 thousand EURO - in 2004 and 4.8 thousand EURO - in 2000). According to the power parity, the GDP per capita was equal to about 11,6 thousand EURO (as compared to 11.1 thousand EURO and 9.4 thousand EURO, respectively). This means that the GDP value reached half of the average value for 25 countries of the EU. In 2005, the growth rate, as compared to the previous year, was higher from quarter to quarter. The reason of that was that in 2004 the opposite tendencies were observed (among others due to the accession effect in the first half of the year). The significant acceleration is observed in the field of investments, the share of which in the economic growth is still bigger. In the first quarter of 2005, the gross domestic fixed capital formation was by 6% higher than in the first quarter of 2003, yet in the fourth quarter – by 19%, respectively. The growth, estimated as equal to 10% as compared to the fourth quarter of 2004, was the highest for 7 years. In the total 2005, those assets were higher by 6.2% compared to the previous year.. The fall of investment rate, noted since 2000, has been decelerated; the rate is now back on the level of 2003 and equal to 18.3% compared to 18% in 2004 and 23.7% in 2000. The relatively high investment activity was clearly encouraged by good financial situation of the companies. In 2005, the consumption growth was slower than a year ago, particularly individual consumption – by 2.3% compared to 4% in 2004. This has taken place in the situation of the real increase of incomes in the companies (by about 3% compared to no changes in 2004), stagnation of the real incomes from pensions (as compared to 0.6% growth in 2004), increasing of the financial resources of the households (at the end of 2005, it was by 11.9% higher than a year ago, while the fall by 1.7% was noted at the end of 2004) and acceleration of the increase of debts (by 22%, compared to 9%, respectively). As a consequence, the economic development has been determined, similarly to the years 2003-2004, by net export, and the domestic demand increased slower than the GDP. The level of the domestic demand in 2005 was by 10.1% higher than in 2000, GDP by 15.7%, import by 26.6% and export by more than 50%. Starting with the second quarter of 2004, a gradual strengthening of zloty towards dollar and EURO was also observed in 2005. The average exchange rate of EURO was by 11.2% lower than in 2004 and of US dollar was by 11.5% lower than in 2004. Results of the Polish economy in the first quarter of 2006 show fixing of many of the positive accession effects. Significant economic growth has been observed as a result of higher increase of industrial production, sale and consumption demand. In the first quarter of 2006, the economic growth rate measured by GDP was equal to 6%. The increase of the sold production of the industry was as many as 12.5% higher compared to first quarter of 2005 (while in the first quarter of 2006 - only by 0.7% in comparison to first quarter of previous year), with simultaneous downfall of the domestic trade turnovers by 9.4% (0.4% a year ago) and of sale of transportation services by 14.1 (3% a year ago). There were observed the following favourable phenomena in the Polish economy in the first quarter of 2006: growth of employment rate in the companies, growth of investments and fall of inflation rate. The sale of the companies producing mainly the capital goods in the first quarter of the year was higher by 17.6% ( 9% in the first quarter - a year ago). Annual inflation rate dropped from 3.6% in the first quarter of 2005 to 0.6% in the first quarter of 2005. During twelve months the number of registered unemployed persons decreased by 7.5% (to 2 822 thousand at the end of the first quarter of 2006). The

248 © EUROCONSTRUCT Amsterdam, June 2006 Poland unemployment rate in March 2006 was equal to 17.8%, i.e. it was by 1.4 percentage point lower than at the end of the first quarter of 2005. The further revitalisation of the economic activity is predicted, stimulated by realisation of the National Programme of Development and co-financed by the EU cohesion funds. The acceleration of the economic growth in 2006 is forecasted. Government analytics predict that the rates of growth of GDP in 2006 will increase by 4.5%, and in 2007- 2008 by 4.6% and 5%, respectively. PAB-PCR&F estimates that in case of more efficient taking advantage of the EU cohesion funds that the above rates of growth of GDP in the next years could be higher by about 0.5-1 percentage point.

Macroeconomic Key Indicators in Poland to 2008 (year –of - year)

2002 2003 2004 2005 2006 2007 2008

GDP 1.4 3.8 5.3 3.2 4.5 4.6 5.0

Individual 3.3 1.9 4.0 2.3 3.3 3.0 3.2 consumption

Unemployment rate 20.0 20.0 19.1 17.6 16.5 15.5 14.5

Inflation 1.9 0.8 3.5 2.2 1.5 2.0 2.5 Source :PAB-PCR&F

3 The Construction Sector The year 2005 was advantageous for the Polish construction. The recession and stagnation observed in 2001-2003 have been broken up as a result of investment increasing caused by positive tendencies in the economy after accession of Poland to the EU and awaiting for co- financing the development projects from the cohesion funds. The Polish Construction Research & Forecasting estimates – on the basis of the own research and the analysis of the tentative CSO’s data – that the total value of the Polish construction market in the comparable prices increased by about 6% in 2005, as compared to the level of 2004. According to the PAB Institute evaluation, the total value of the Polish construction market in 2005 was equal to 24 097 billion EURO and in the constant prices it was lower by 2% in comparison with the highest one from the year 2000. We estimate that the growth of the construction production in 2005 was a result of the increase of the investment construction work by 8 percent points, while the repairing work has increased by 3 percent points. Increase of demand for the construction investment work contraction is confirmed by the good results of sale of the construction production by the companies with more than 9 employees. The symptoms are the stable rate of increase of the investment work in the consecutive quarters of 2005: 6.3% in the first quarter, 8.5% in the second one and 7.6-7.7 in the third and fourth ones.

Changes of construction work – in the consecutive quarters of 2004-2005, %

% Q1 2004 Q2 Q3 Q4 Q1 2005 Q2 Q3 Q4 10

-2

-4

-6 in total inves tm ent -8 Source: PAB, CSO

The advantageous growing tendencies in the production of the majority of construction materials and products, registered by the CSO, were still observed in 2005. The increase of the sold industrial production from the other non-metallic raw materials was 4% in 2005 (the positive indicator has been achieved only due to the big increase of the sale in the last quarter). Those advantageous phenomena on the construction market were also observed in the first quarter of 2006, when increase of production was as much as by 4.5% (according to the tentative estimations of CSO), with simultaneous increase of number of workers employed in building industry by 1.6% and salary in construction industry by 6.8%. The sale of construction products and materials after three months of 2006 was higher by almost 14% as compared to the appropriate three months of 2005 (but lower by 0.5% as compared to the record sale noted in the three months of 2004).

250 © EUROCONSTRUCT Amsterdam, June 2006 Poland

Changes in sold production of building materials and in number of employees in construction in the first quarters of 2001-2006

2001 2002 2003 2004 2005 2006 50 building materials production 38,8 40 employment in construction construction output 30

20 14,1 5,7 10 2,8 4,5 0 -3,5 -10 -5,7 -4,3 -8,6 -13 -20 -15,6 -30 -23,1

-40

Source :PAB-PCR&F On the basis of our own research, the Polish Construction Research & Forecasting estimates that the total value of the Polish construction market has increased for the first three months of 2006 by about 6-7% in comparison with appropriate three months of 2005. According to our estimations, the value of the Polish construction market in the first quarter of 2006, in current prices, amounted to about PLN 13 billion, i.e. Euro 3.3 billion. The research performed by PAB-PCR&F under the framework of Construction Monitoring shows that, besides above mentioned, the following phenomena and trends were observed in the Polish construction in the first quarter of 2006: 1. According to the Central Statistical Office, the construction production of the construction companies with more than 9 employees was by 4.5% higher than in the previous year; it was accompanied by sale of building materials on the level by 14.1% higher than in the previous year. 2. In spite of expected growth of outlays on infrastructure construction, the share of the engineering construction in the object structure of the construction production after 3 month of 2006 has not increased yet. There was observed an increase of the share of non- residential construction by 1.1 %. 3. The highest increase of the construction production was noted in Lubuskie and Malopolskie Voivodeship - an increase of 20% and lower has been noted in Swietokrzyskie Voivodeship; The production has been concentrated in three voivodships: Mazovia Voivodeship 25%, Silesia Voivodeship 13,5% and Posnania Voivodeship 11%. 4. The average monthly gross salary in the construction industry in March 2006 was equal to PLN 2373.8 and was by 7.1% higher than in the corresponding month of previous year. 5. According to the tentative data of the Central Statistical Office, 26 863 dwellings have been completed in the first quarter of 2006, i.e. by 1.4% more than in the first quarter of 2005; the increase has been noted in 10 voivodeships, decrease in 6, in which it was deeper than the country average. 6. The number of issued dwellings construction permits was in first quarter of 2006 by 21% higher than in the corresponding quarter of previous year; the number of started dwellings construction was by 2,3% higher. 7. The economic-financial indicators of the construction companies have been improved in the first half of 2006. 8. Prices of construction-assembly production have increased by 2.2% in three months of 2006 (according to the Central Statistical Office’s estimations). 9. The growth of the production of the construction products were noted in the first quarter of 2006 only for 14 from among 26 registered building materials. 10. The largest number of the construction tenders has been announced for the general construction work, road and bridges construction and sanitary and wiring systems.

PAB-PCR&F forecasts that in 2006 the construction production will increase by 8.9% as a result of acceleration of absorption the financial means from the cohesion funds. We predict some weakening of the rate of construction production to 7.2% in 2007. We expect that a lack of the skilled staff will bring the negative results for the possibilities of the development of the construction yet in 2007, and that will cause the significant increase of the prices in construction. We forecast that in 2008 the deceleration the construction production of the growth rate to 8.2%.

4 Housing Market • Improvement of the market conditions, accession of Poland to the EU and particularly an extension of the offer and availability of the mortgage loans during the last year caused the increase of the number of completed dwellings in 2005. • In 2005, the Central Statistical Office registered 114 060 dwellings as completed, that means by 5.5% more than in the previous year. In the individual construction 63 276 dwellings were completed, i.e. by 2.4 % less. In the co-operative housing construction the number of the completed dwellings was equal to 8 211 (by 12.9% less), in the company - 543 (by 12.6% less) and in the social housing construction – 5 412 (by 24.8% less). The growth has been noted in the buildings for sale or rent - by 36.4% (up to 33 055 dwellings) and in the municipal buildings - by 2 times more (up to 3 563 dwellings). The average usable floor space per 1 completed dwelling in 2005 was equal to 105.3 m2 and was by 2.2 m2 lower than in 2004. The situation in the particular regions of Poland is very much differentiated. The rapid increase of demand, noted in particular in the biggest cities like capital – Warsaw and also Krakow, Gdansk, Wrocław and Poznań, has been influenced by the growing number of foreign investors coming to Poland after Poland's accession to the EU. Counting on a high housing investment return rates, they keep investing either in flat purchase or housing development activity. As a consequence of removing the tax relieves for the individual housing investors, there is observed decreasing of the share of the dwellings completed in the individual housing construction. In 2005, however, the share of dwellings completed by the developers of buildings for sale or rent is rapidly increasing and it increased from 22.4% to 29%, respectively. The PAB estimates that the very high indicator of the private ownership of dwellings has been reached in Poland; in 2004, this share exceeded 75%.

The number of construction permits issued in 2005 was equal to 115.9 thousands (by 9.5% more than in the previous year). The number of the construction permits issued in the private housing construction was equal to 58.9 thousands, that means by 0.3% less than a year ago, but developers of buildings for sale or rent was equal to 44 thousands, that means by 33% more than a year ago. The corresponding increase of the number of the new started buildings was 102 thousands (by 4.9% more than in the previous year), including developers of buildings for sale or rent equal to 28.9 thousands, that means by 23.8% more.

252 © EUROCONSTRUCT Amsterdam, June 2006 Poland

Change in percentage of the issued permits for dwelling construction and the number of the started dwellings in 2000-2005 ( in %) 60 union effect 50

40 % 30 20

10 0 2000 I half 2001 I half 2002 I half 2003 I half 2004 I half 2005 -10 2001 2002 2003 2004 2005 -20 construction permits -30 dw ellings started -40 -50

Source: PAB – PCR&F The program of development of the housing, with planned construction of 3 millions dwellings in Poland till 2008 was only an election’s slogan, fulfilment of which is rather not possible in the next years. Good prospects for development of the housing construction are created by announcements and legislation activity of the new government, that should cause increasing of the volume of construction and expenses for this branch of construction. One of such activities is the act on financial support for the families buying own dwellings, proposed by the Ministry of Transport and Construction. The project is first legislative initiative under the framework of the governmental programme concerning the housing construction. In the next projects the government is going to propose the solutions, the aim of which will be to support the districts and other subjects in creation of dwellings for rent, with low or moderate rental level, for the households that are not able to buy own dwellings. The activities towards increase of the grounds supply for housing construction are also planned, for making the local land development and investing process in construction easier. In short-term prospects we forecast the increase of demand as a result of: - growing availability of housing loans, - increase of the number of foreign investors, coming particularly from Ireland, Spain or Israel, looking for higher return rate of capital invested in real estates that in their own countries; they shall keep investing either in apartment purchase or getting involved in the housing development activity. The observed rapid increase of the prices of the completed dwellings negatively influences the housing construction development for the less affluent groups of people, for which the government is preparing the programmes of financial support from the public means. The PAB Institute estimates that during last two years the prices of dwellings in the biggest cities, especially in Warsaw, have increased by 25-50%, while the cost of construction has increased by several percents. We also estimate that in some projects the profit margin of the developers reaches even 100% of the construction cost. According to the tentative estimations, the growth of housing investments in 2005 has been higher than expected in November 2005 and the PAB estimates that outlays for housing construction were by 4.8% higher than in the previous year. According to the forecast, the housing construction will grow by 5% in 2006. A quick growth by nearly 9% is expected in 2007 and by 15% in 2008.

5 Non-residential construction

During two years after Poland's accession to the EU a significant revitalisation on the non- residential buildings market has been observed. This improvement has taken place rather in the private sector than in the public one. The prosperity has been noted mainly in the field of real estates and has concerned more the leasing and developer companies than the construction ones. A key factor for this excellent result is a booming national economy, a trend that has continued since Poland's accession to the European Union in 2004. Poland was quick to learn the Community rules of the game and has focused on regional development.

Public non-residential construction According to the PAB’s tentative estimations, the increase of production in the range of the public buildings – schools, hospitals etc. – expected in 2005 after two years of the regression – did not take place yet. The noted growth of the number and dynamics of issued construction permits for public utility buildings points to the breaking up the stagnation tendencies in 2006 and more than 5% growth in the next years.

Number and changes (y-o-y) of public utility buildings permits issued in 2001-2005 permits 9 000,0 % number % changes 8 500,0 20,0

8 000,0 10,0 10,0 7 500,0 5,5

7 000,0 0,0 0,0

6 500,0

-4,0 6 000,0 -10,0

-10,0 5 500,0

5 000,0 -20,0 2001 2002 2003 2004 2005

Source: PAB-PCR&F, UNB According to the forecast, growth of public investments, as schools and hospitals, will amount to 5-6% in 2006 and 2007. The quick growth is expected in 2008. Private non-residential construction The demand for modern private non-residential buildings is on steady rise. PAB-PCR&F estimates that in 2005 the private non-residential construction increased by almost 4%. After accession of Poland to the EU, a lot of investors, recently holding back the finishing of opened investments and delaying of starting with new ones till the moment of market conditions improvement, now is returning to that activity. Simultaneously, new investors are coming in large numbers, mainly from Spain and Ireland, but also from Israel and Great Britain, looking for higher than in their own countries return rate of capital invested in real estates. This observation concerns, with variable intensity, all private projects: offices, warehouses, hotels and even the quickest developing construction sector, i.e. super- and hypermarkets. The noted growth of the number and dynamics of issued construction permits for production buildings and warehouses points to the acceleration of the construction of the industrial objects in 2006.

254 © EUROCONSTRUCT Amsterdam, June 2006 Poland

Number and changes (y-o-y) of permits issued for industrial and warehouses in 2001- 2005

permits % 6000 20

5900 number change 15 5800

5700 10

5600 5 5500

5400 0

5300 -5 5200

5100 -10 2001 2002 2003 2004 2005

Source: PAB-PCR&F, UNB Significant growth noted in the range of industrial and warehouse objects has been caused by the increasing of the expenses for the construction work in the industrial and commercial objects. The Polish investment market is very interesting for institutional investors expanding their property portfolios by new transactions, most recently in the logistic sector. According to the estimations of the National Bank of Poland, the value of foreign funds inflow to Poland in 2005 was about $ 8 billion. In 2005, approximately 520 000 m2 of warehouse space was leased and further 432 000 m2 was delivered (according to the estimations of DTZ Polska). According to the analysts, the logistic market investors planned construction of about 4 to 5 mln m2 of warehouse space in Poland till 2010, of which 1.2 –1.5 million m2 near Lodz and about 1 million m2 near Wroclaw. Real estate agencies estimate that the average rental in Warsaw was EURO 16.00/m2 with monthly service charges averaging EURO 4.25/m2. Average rental outside the city centre was EURO 13.00/m2 with service charges ranging between EURO 2.50/m2 and EURO 5.00/m2 per month. Based on the market activity, which remains above current level, with a possible increase of 5-10%, approximately 300,000 m2 should be expected in 2005, with perhaps 30% of market activity coming from renegotiations. Improvement of the market conditions and more than 5% growth of the wages and salaries in Poland, noted in 2005 and in the first quarter of 2006 and also expected in the next years, are the factors encouraging the further development of the retail chains. Retail markets in the cities of Poland have great potential, with good consumers and very competitive costs of land and construction when compared to the capital city. These markets are therefore very attractive for developers, as it is evidenced by the increasing popularity of such cities as Wrocław, Poznań, Three-City, Łódź and Krakow, where many large retail developments are being planned for the coming years. The world second biggest retail chain of food trade Carrefour is going to invest in Poland 250 – 300 million zlotys annually during next five years. The plans of expansion cover the increasing number of gas stations and construction of two new commercial centres. The strategy of Carrefour in Poland does not include the taking up the existing commercial centres nor the single shops, but the construction of the own ones from the basis. The element of this strategy is development of the shops with the surface of about one thousand square metres in the lesser cities. Carrefour has got now in Poland 32 hyper-markets, 71 super-markets and 10 gas stations. 4 hypermarkets and 15-20 supermarkets of Champion will be opened in 2006. The retail chain Leclerc is planning to open 2-3 shops in Poland during the next 10 years, investing 80 million zlotys annually (20.5 million EURO). As for now, Leclerc has invested in Poland 436 million EURO.

Now developers are looking to the potential of small cities, sometimes with a population of less than 100 000, in all parts of Poland, even in the 'white spots' of the east. Significant growth, by 8% to 9.5%, is expected in the range of the office, commercial and industrial objects in 2006. According to the forecast, the overall public and private non-residential construction will grow by 5.6% in 2006. We expect that the non-residential construction in 2007 will increase by 4.1% and in 2008 it will increase by 5.2%.

6 Civil Engineering

According to the government’s announcements, a significant increase of the outlays for the infrastructure has been noted in 2005. However, their financing was lower than expected due to the much lower inflow of the financial sources from the EU Cohesion Fund as compared to the government’s estimations. In 2005, as in 2004, the announcements of the big investment projects in the range of infrastructure were not accompanied by the big outlays for the construction works. Therefore, PAB-PCR&F has revised the June estimation of the rate of the growth in new civil engineering in 2005 from 20.5% to 16.4%. According to the Government Programme of Roads and Highways Construction in 2006 · the A2 highway from Konin to Strykow will be completed - 105 km · the A4 highway from Zgorzelec to Krzyzowa will be started - 50 km · the re-construction of the A4 highway between Legnica and Wroclaw will be completed - 60 km · the northern lane of the A18 highway Olszyna – Golnice will be completed - 70 km · the highway east from Krakow will be started - 27 km · the S1 express way from Bielsko-Biala to Cieszyn will be completed - 28 km. 107 billion zlotys is planned to spent for the construction of the roads and highways till 2013. 4 billion zlotys will be spent for rehabilitation of the domestic roads till 2009, in co-operation with the World Bank and European Investment Bank. Under the framework of the Sector Operational Programme – Transportation (SPOT), 70 proposals for financing the projects from the Union funds have been prepared. Till now, 37 contracts of 1206 billion zlotys have been signed up. Under the framework of the SPOT, 150 million zlotys will be spent for the modernisation and purchasing of the transportation means for the regional transport. We forecast that the investment outlays for building engineering will dynamically grow since 2005 as a result of currently starting huge road programs. Therefore, we expect that the investment outlays will grow by 21% in 2006, and in 2007 and 2008 this rate will be 18% and 15.3%, respectively. In 2005, the total value of civil engineering market of new and R&M works will increase by 11.9%, and in 2006, 2007 and 2008, it will be higher by 16.0%, 13.5% and 12.4%, respectively.

256 © EUROCONSTRUCT Amsterdam, June 2006 Poland

APPENDIX – DEFINITIONS

Statistical definitions for the construction of the Polish national report The statistics for different sectors refers to gross fixed capital formation in buildings and civil engineering, exclusive of VAT, within different sectors according to annual reports of the national accounts, issued by the CSO of Poland. The figures exclude the investor's costs of design, planning and administration of the construction projects. Table 1. • Number of population at the end of the year • Number of and unemployment rate are based on the data of the Polish Central Statistical Office, not on ILO rates. Table 2 The sectors include the following kinds of economic activity: Residential construction Single-famiły houses and multi-famiły buildings for permanent living Private non- residential construction Agriculture, forestry, fishing Mining, manufacturing, construction Wholesale and retail trade Restaurants and hotels Financing, insurance, business services Leisure houses, services Public non- residential construction Schools, universitates and hospitals and healthbuildings and services by governmental authorities Civil engineering All kinds of roads and brdiges, railways Telecomunication Electricity, gas, water suppły, sewage disposal transport Energy and water works DIY included VAT excluded Table 3 Share of private housing in total housing Home ownership rate resources in % Table 4a This table refers only new construction Table 4b This table refers only new construction

The monthly and quarterly statistical information about the construction production and employment rate, presented in the publication, are based on the current reports of the Central Statistical Office regarding the companies qualified as construction ones according to REGON and with employees number above 9. Those data should be treated as reported ones, however, they reflect only 40- 45% of the total construction production completed in Poland in the given period. The similar share - about 40% - it is the production of the companies with more than 9 employees, estimated on the basis of their annual turnovers using representative testing method (the sample covering 10%) of registered companies. The remained 10% it is the production realised as „own-production” by non-construction companies.

Country/Pays/Land: POLAND Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 38 219 38 191 38 174 38 157 38 140 38 120 38 100 Bevölkerung

Households ('000s) Ménages 13 337 13 433 13 525 13 615 13 700 13 800 13 900 Haushalte

Unemployed ('000s) Chômeurs 3 217,0 3 176,0 3 000,0 2 773,0 2 633,0 2 488,0 2 342,0 Arbeitslose

Unemployment rate (%) Taux de chômage 20,0 20,0 19,1 17,6 16,5 15,5 14,5 Arbeitslosenquote

Change of GDP Variation du PIB 1,4 3,8 5,3 3,2 4,5 4,6 5,0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1,9 0,8 3,5 2,2 2,1 2,0 2,5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 1,2 -1,1 2,5 2,5 2,2 6,0 3,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 7,5 5,8 7,0 6,5 6,0 5,5 5,3 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 12,0 9,0 12,0 10,0 9,0 8,0 7,0 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

258 © EUROCONSTRUCT Amsterdam, June 2006 Poland

Country/Pays/Land: POLAND Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 3 940 -9,2 -3,0 5,3 4,8 5,0 9,0 15,0

Logement Renovation 2 487 4,6 3,7 7,5 4,0 0,0 1,5 2,0

Wohnungsbau Total 6 427 -4,5 -0,5 6,1 4,5 3,1 6,2 10,3

Non-residential construction New 6 971 -5,1 -7,3 3,5 4,3 8,8 3,1 4,0

Bâtiments non résidentiels Renovation 3 301 -3,2 1,2 4,0 3,1 4,0 2,5 3,0

übriger Hochbau Total 10 272 -4,4 -4,8 3,7 3,9 7,3 2,9 3,7

Building New 10 911 -6,5 -5,9 4,2 4,5 7,4 5,2 8,0

Bâtiment Renovation 5 788 -0,1 2,2 5,5 3,5 2,3 2,1 2,6

Hochbau Total 16 699 -4,5 -3,2 4,6 4,1 5,6 4,1 6,2

Civil engineering New 4 805 -5,0 4,5 3,7 14,2 20,8 18,0 15,3

Génie civil Renovation 2 441 -3,8 3,4 5,0 4,5 7,5 3,5 5,0

Tiefbau Total 7 246 -4,6 4,1 4,2 10,7 16,3 13,5 12,4

TOTAL CONSTRUCTION OUTPUT 23 945 -4,5 -1,2 4,5 6,0 8,9 7,2 8,3

Million euro at 2005 prices, excluding taxes. 1 euro = 4,0254 PLN

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 11,90 -3,3 0,0 2,6 2,0 7,5 8,0 7,2 Inländischer Zementverbrauch

Country/Pays/Land: POLAND Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 45,7 67,6 59,0 58,9 55,0 52,0 55,0

Baugenehmigungen Familienhäuser Flats Collectif 40,3 28,0 46,8 57,0 70,0 88,0 110,0 Mehrfamilienhäuser TOTAL 86,0 95,6 105,8 115,9 125,0 140,0 165,0 Housing starts 1+2 family dwellings Logements commencés Individuel 47,8 57,0 61,0 58,9 55,0 52,0 55,0 Baubeginne Familienhäuser Flats Collectif 29,2 25,4 36,2 43,1 54,0 78,0 105,0 Mehrfamilienhäuser TOTAL 77,0 82,4 97,2 102,0 109,0 130,0 160,0 Housing completions 1+2 family dwellings Logements terminés Individuel 52,4 117,9 64,9 63,3 55,0 55,0 53,0 Baufertigstellungen Familienhäuser Flats Collectif 45,2 44,7 43,2 50,8 65,0 80,0 112,0 Mehrfamilienhäuser TOTAL 97,6 162,6 108,1 114,1 120,0 135,0 165,0

Housing stock Logements existants 12 570 12 730 12 830 12 905 13 010 13 130 13 285 Wohnungsbestand

thereof second-homes dont résid. Secondaires 110 140 160 170 180 190 205 davon Zweitwohnungen

thereof vacancies dont inoccupé 760 780 800 800 800 800 820 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 74,9 75,0 75,1 75,3 75,5 75,7 75,7 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

260 © EUROCONSTRUCT Amsterdam, June 2006 Poland

Country/Pays/Land: POLAND Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 671 -4,7 -9,0 3,2 0,5 5,5 4,5 8,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 222 -12,0 0,4 -5,0 -2,6 8,1 5,0 5,2 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 2 293 -27,0 11,5 20,0 6,5 10,0 2,5 3,0 Industriegebäude

Storage buildings Bâtiments de stockage n.a n.a n.a n.a n.a n.a n.a n.a Lagergebäude

Office buildings Bureaux 1 286 7,7 -7,1 -10,5 4,5 8,0 3,5 5,0 Bürogebäude

Commercial buildings Commerces 1 355 -23,5 -9,0 -2,0 8,5 9,5 2,5 4,0 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 291 -1,0 2,0 24,1 14,0 20,0 15,2 15,0 Landwirtschaftsgebäude

Miscellaneous Autres 853 -8,5 -31,0 4,9 5,0 8,5 3,5 2,5 Sonstiges

Total Insgesamt 6 971 -5,1 -7,3 3,5 4,3 8,8 3,1 4,0

Million euro at 2005 prices, excluding taxes. 1 euro = 4,0254 PLN

Country/Pays/Land: POLAND Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook NEW

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 595 11,2 12,0 3,5 25,0 40,0 30,0 20,0 Verkehrsinfrastruktur Straßen Railways Voies ferrées 195 -1,0 45,0 15,0 0,0 30,0 35,0 25,0 Bahnanlagen Other transport Autres réseaux 439 26,5 -4,5 6,5 8,5 10,0 25,0 15,0 Übrige Vekehrsinfrastruktur TOTAL 2 229 12,4 10,3 5,2 18,8 33,0 29,8 19,7

Telecommunications Télécomunications 165 -51,5 -36,7 -23,5 8,5 12,0 5,0 8,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 461 -10,6 -5,5 13,2 15,0 12,0 5,0 10,0 Energie-und Wasserversorgung

Other Autres 950 22,6 28,5 -4,5 4,8 6,0 4,5 8,7 Sonstiges

Total 4 805 -5,0 4,5 3,7 14,2 20,8 18,0 15,3

Million euro at 2005 prices, excluding taxes. 1 euro = 4,0254 PLN

262 © EUROCONSTRUCT Amsterdam, June 2006 Poland

Country/Pays/Land: POLAND Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 150,6 3,3 1,9 4,0 2,3 3,3 3,0 3,2 Privater Verbrauch

Public consumption Consommation publique 44,9 1,3 4,7 3,9 2,7 3,0 2,8 3,0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 44,0 -7,2 -0,1 6,3 6,2 9,1 10,6 11,5 of wich construction 15,7 -6,5 -3,0 4,0 7,2 11,5 9,4 10,6

Stocks (contribution as % of GDP) Variations de stocks 1,9 Vorratsveränderung

Exports Exportations 89,0 4,8 14,2 14,0 7,1 6,7 6,9 9,0 Exporte

Imports Importations 90,0 2,6 9,3 15,2 3,4 6,3 6,6 8,3 Importe

GDP PIB 240,4 1,4 3,8 5,3 3,2 4,5 4,6 5,0 BIP

Standard National Accounts, gross figures

264 © EUROCONSTRUCT Amsterdam, June 2006 Portugal

PORTUGAL ITIC – Instituto Técnico para a Indústria da Construção www.itic.pt

Bárbara Brito Martins

[email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

Economy

In 2005 the Portuguese economy barely stood above stagnation. Gross Domestic Product (GDP) grew 0.3% last year, approximately -0.8 percentage points (p.p.) than output growth in 2004.

Both private and public consumption grew above GDP level (+2.0% and +1.7%, respectively). Investment, measured by gross fixed capital formation, fell almost 3% with an acute fall in construction (-4.7%).

Exports grew just 0.9%, well below the observed in the previous year (4.5%). Increasing market globalization is having a tremendous impact over Portuguese exports, traditionally oriented towards intensive labour sectors which are now facing major competition from low cost producers like China and India.

Imports grew 1.8% in 2005 and for the second consecutive year net contribution from external demand to GDP growth was negative (-1.0 p.p. in 2004 and -0.4 p.p. in 2005).

The unemployment rate stood at 7.6% in 2005, almost +1 p.p. than in 2004, reflecting the adjustment of the labour market to slow economic growth. Consumer prices grew 2.3% in 2005. The absence of demand pressures and the dissipation of Euro 2004 Football Championship effects explain the slight slowdown in prices evolution.

Economic growth in Portugal is expected to remain sluggish in 2006. The signs of recovery are at the best very timid and there are no objective reasons to believe in a significant improvement in activity indicators along the year. In 2007 GDP is forecast to grow 0.6%, accelerating in the following two years (1.0% and 1.8%, respectively).

The main restrictions to economic growth in Portugal are the lack of competitiveness of its services and products, low productivity, high government deficit (6.0% of GDP in 2005) and high borrowing level of the economy (8.1% in 2005). The main external menaces are increasing oil prices and rise in interest rates.

Construction

Total construction output fell 3.5% in 2005. A further decrease will be observed in 2006 and 2007 (-3.3% and -2.6%, respectively) with a modest recovery taking place only in 2008 (0.9%). Both buildings and civil engineering are forecast to give a negative contribution to total construction output growth in 2006 and 2007.

New residential construction fell 6.0% in 2005, keeping the downward trend observed since 2001. Altogether, new residential construction fell approximately 37% from 2000 to 2005.

Housing supply is expected to continue to decrease in 2006 in the absence of a positive evolution on the main variables influencing demand (e.g. employment, real disposable income and interest rates). In 2007 new construction output should flat with a minor increase forecast to take place in 2008 (+1.0%). Second homes and external demand should play an important role in future housing demand. The renovation market is expected to grow along the 2005/2008 period.

266 © EUROCONSTRUCT Amsterdam, June 2006 Portugal

Non residential construction fell almost 7.0% in 2005. In the next two years non residential output should continue to decrease (4.5% and 9.1% in 2006 and 2007, respectively). Only in 2008 will growth prospects look brighter (+3.2%).

The slowdown of the economy and the announced cuts in public investment are expected to hold back investment in the construction of non residential buildings. The exception to this will most probably be the retail sector, with positive growth being put forward along the forecast period.

Civil Engineering output fell 0.6% in 2005. In 2006, 2007 and 2008 civil engineering output is likely to fall (4.2%, 2.5% and 2.6%, respectively) led by significant cuts in public investment. Transport infrastructures should be the most penalized by the decrease in investment. Energy and water works are also forecast to decrease just in 2007 and 2008 but not as much as transports. In the future, investments in environment related areas are expected to increase significantly.

2 Macro-economic Outlook

Sluggish growth in 2005

In 2005 the Portuguese economy barely stood above stagnation. Gross Domestic Product (GDP) grew 0.3% last year, approximately -0.8 percentage points (p.p.) than output growth in 2004. The outcome for 2005 could have been even worse if it wasn’t for the unexpected vigour in both private and public consumption expenditure (+2.0% and +1.7%, respectively).

Investment, measured by Gross Fixed Capital Formation (GFCF), decreased 2.9% in 2005 following weak expectations concerning future demand and low production capacity utilization. Uncertainties concerning the way actual imbalances will be corrected, both on private and public sectors, are also restraining investment growth.

Despite favourable financing conditions, companies seem to have considered that downside risks are threatening a more robust peak up of the economy and remain cautious concerning the future. Investment in construction fell 4.7% in 2005, reflecting weak economic activity, restrictions to public investment and limited room of manoeuvre for household investment.

Portuguese exports failed to take advantage of the strong external demand and rose only 0.9% in 2005. Increasing market globalization is having a tremendous impact over Portuguese exports, traditionally oriented towards intensive labour sectors (e.g. textiles and shoes), which are now facing major competition from low cost producers like China and India. On the other hand, unit labour costs have been increasing in Portugal at a much higher pace than it would be desirable given current unemployment figures and productivity growth.

2003 2004 2005 Unit Labour Costs (overall economy, % change) 2.6 1.9 2.4 Unemployment rate (%) 6.3 6.7 7.6 Source: INE and Portuguese Central Bank

Imports grew 1.8% in 2005. The significant deceleration in imports outcome comparing with 2004 is in line with the slowdown in internal demand. Imports grew more than internal demand which points to a higher penetration rate of imported products and services. For the second consecutive year net contribution from external demand to GDP growth was negative (-1.0 p.p. in 2004 and -0.4 p.p. in 2005).

The unemployment rate stood at 7.6% in 2005, almost +1 p.p. than in 2004, reflecting the adjustment of the labour market to slow economic growth. Long term employment increased in 2005. This can be partly explained by the restructuring of labour intensive industries and the inadequacy of the unemployed professional skills.

Consumer prices grew 2.3% in 2005. The absence of demand pressures and the dissipation of Euro 2004 Football Championship effects explain the slight slowdown in prices evolution. Nevertheless, inflation followed an upward trend in the second half on the year, reflecting the increase in VAT normal rate (from 19% to 21%) and the increase in oil prices.

Weak recovery in sight

268 © EUROCONSTRUCT Amsterdam, June 2006 Portugal

Moreover, for the most of them the available information only concerns the first three months of 2006, which is clearly insufficient to establish a clear trend concerning economic activity evolution, especially in a context of high uncertainty. There are, however, real reasons for concern.

The Portuguese economy is facing major imbalances in both private and public sectors. The government deficit reached 6.0% of GDP in 2005, well above the 3.0% reference value, thus forcing the Government to adopt strict measures in order to reduce public expenditures and increase revenues.

The Stability and Growth Pact presented by the Government last December point to a reduction in government deficit in 2006 to 4.6% of GDP and further reductions in subsequent years. In 2008 the government deficit should stand at 2.6% of GDP.

Meeting these goals will demand a lot from the Government and even though the consolidation strategy presented by the Government last winter points in the right direction, it remains to be seen if the measures the Government is willing to adopt are sufficient to meet the goals set in the Growth and Stability Pact. One thing seems to be for certain, public investment will be penalized in the next two to three years.

Another source of concern is the borrowing level of the Portuguese economy. The joint deficit of capital and current account balances reached 8.1% of GDP in 2005, after a slight adjustment in 2002 (6.4% of GDP) and 2003 (4.0% of GDP). (as % of GDP) 2003 2004 2005 Unit Labour Costs (overall economy, % change) 2.6 1.9 2.4 Unemployment rate (%) 6.3 6.7 7.6 Source: Portuguese Central Bank

Part of the problems the country is facing arises from the lack of competitiveness of the Portuguese products and services. Competition in the global markets are expected to increase further and unless Portugal changes its specialisation pattern towards more value added sectors its position on the global market will be severely affected.

Two exogenous factors are also threatening economic recovery in Portugal: interest rate and oil prices.

It’s possible that the increase in interest rates delays investment recovery in the next years and it’s almost sure that it will have a disturbing effect on household’s balance sheets. In this context, and also considering the foreseen increase in unemployment figures, both housing investment and consumption are to be affected.

The menace to economic recovery arising from increasing oil prices is amplified in Portugal due to its high external dependency on primary energy. The transport sector and those industries which are highly dependent on energy will be severely affected by higher oil prices but shock waves will ultimate be felt on the overall economy.

Macroeconomic key Indicators in Portugal to 2008 2002 2003 2004 2005 2006 2007 2008 GDP (% change at constant prices) 0.8 -1.1 1.1 0.3 0.6 1.0 1.8 Unemployment rate (%) 5.1 6.3 6.7 7.6 8.5 8.5 8.0 Inflation rate 3.6 3.3 2.4 2.3 2.8 2.5 2.5

3 Residential Market

New residential construction fell 6.0% in 2005 to € 6,739.7 million, keeping the negative evolution observed since 2001. Altogether, new residential construction fell approximately 37% from 2000 to 2005. The housing market is expected to continue to decrease in 2006 (3.5%) as demand remains very weak. In 2007 residential output should remain flat with a minor increase forecast to take place in 2008 (+1.0%).

Both 2005 and 2006 figures were slightly revised upwards as dwelling completions and permits evolution ended up being less negative than foreseen last winter.

New Residential Output % change at constant prices 2005 2006 2007 2008 November 2005 - Barcelona -7.5 -5.0 0.0 1.0 June 2006 - Amsterdam -6.0 -3.5 0.0 1.0

Source: ITIC

Housing demand depends on interest rates level, employment, real disposable income, housing prices, property taxes, demography and geographic mobility.

In Portugal mortgage interest rates remain at historical low levels but are rising. The decision of the European Central Bank to increase minimum bid rate on the main refinancing operations, first on December 2005 and again last March16, was anticipated by the market leading to an increase of interest rates from November.

To decrease the impact of rising interest rates on bank loans monthly payments many households are negotiating the extension of their mortgage contracts from 25/30 years up to 40 years. Although this brings some relief to household’s budget, further increases on interest rates will be dramatic for a large fringe of house owners.

Interest Rate - Loans to private individuals for house purchase

3,9

3,8

3,7

3,6

%, average, end of period 3,5 July May April June 06 August October February January - December November March - 05 March September Source: Portuguese Central Bank

16 Both on 25 basis points, to 2.25% and 2.50%. 270 © EUROCONSTRUCT Amsterdam, June 2006 Portugal

The increase of interest rates is especially severe in a context of modest economic growth, rising unemployment and narrow progression margins for disposable income growth. Unemployment is estimate to reach 8.5% in 2006 and it shouldn’t decrease before 2008. Unemployment is particularly high among young people, the potential first time buyers of a house.

Housing demand is also influenced by housing prices but its evolution is rather difficult to follow as available statistics are barely considered good proxies of market values.

Nevertheless the common opinion is that housing prices haven’t followed the significant decrease in demand, in opposition to what would be expected. The reason for this may rest on the fact that an important factor in housing price formation is the land price which is extremely high, especially near big city centres. Land prices are less volatile to demand changes meaning that unless developers/builders decrease substantially their profit margins, housing prices tend to be maintained even in face of a demand contraction.

Bank Evaluation - € per sqm 1300

1250

1200

1150

1100

1050

1000 III IV I II III IV I II III IV I II III IV I II III IV I

2001 2002 2003 2004 2005 2006

Source: INE

In the first quarter of 2006 housing prices (bank evaluation) decreased from €1,237 per square metre to €1,225. It remains to be seen if housing prices will further adjust to a limited demand or the decrease observed on the first three months of 2006 was occasional (as in the 1st quarter of 2005).

One must bear in mind, however, that there isn’t such thing as a national housing market. Instead, there are as many markets as there are streets or neighbourhoods. Therefore in some local markets housing prices may eventually have felt over the last years while on others prices may have grown significantly.

If internal housing demand is expected to remain sluggish for the coming years, the same it’s not necessarily true for external demand. There is a strong potential arising from the increase in the number of senior citizens willing to spend part of the year abroad. Portugal has the advantage of having a mild climate and a the absence of major security problems thus being a destination to take into consideration. The share of external demand in total housing demand has been increasing over the last years and is forecast to grow further in the medium/long term.

The country’ capacity to attract this sort of demand will be fundamental in the medium term if housing demand level is to exceed what could be considered the normal level of demand (around 55.000 new dwellings per year).

Second homes can, as they did in the past, play an important role in future housing demand.

New Dwelling Completions 120,0

100,0

80,0

60,0 '000s

40,0

20,0

0,0 2002 2003 2004 2005 (e) 2006 (F) 2007 (F) 2008 (O)

Source: INE, ITIC

The renovation market is forecast to grow along the 2005/2008 period. The Barcelona forecasts weren’t revised as there were no significant changes to the assumptions we made last winter.

A new legal framework regulating the rental was recently approved but it’s too early to know if the new rules will have a positive impact on R&M works or what will be the extension of the it.

Public incentives to residential R&M are expected to continue but there are no indications as to a significant increase in the medium term.

However, renovation has become a frequent subject in the public agenda. There seems to exist now a higher conscience as to the importance of building renovation, especially in historic areas.

Residential Output - 2002 to 2008

s 10,0 5,0 0,0 -5,0 -10,0 -15,0 -20,0

% change at constant price constant change at % -25,0 2002 2003 2004 2005 2006 2007 2008

New construction R&M

Source: ITIC

4 Non-residential Market

New non residential construction fell 8.5% in 2005 to € 3,711,3 million. The estimates presented last November were significantly revised downwards as recently released data concerning cement consumption and production index point to an acute fall in construction activity in 2005 for which non residential market has contributed a lot.

Economic slowdown had a tremendous effect on investment decisions and for the second consecutive year non residential market experienced an output decrease. Adjustments are expected to continue as economic recovery signs remain timid.

In the next two years new non residential output is expected to continue to decrease (5.0% and 10.0% in 2006 and 2007, respectively).

Only in 2008 will growth prospects look brighter (+3.5%).

New Non Residential Output % change at constant prices 2004 2005 2006 2007 2008 November 2005 - Barcelona -8.5 -2.5 -5.0 -10.0 3.5 June 2006 - Amsterdam -7.0 -8.5 -5.0 -10.0 3.5

Source: ITIC

The consolidation efforts made by the government were insufficient to correct government deficit. In 2005 it reached 6.0% of GDP (Excessive Deficit Procedure, March 2006) and for 2006 the Growth and Stability Programme (December 2005) forecasts a government deficit of 4.6% of GDP. This will inevitably call for a drastic reduction in public expenditure. Capital expenditures will inevitably experience the major cuts as current expenditures are usually much more difficult to limit.

Public buildings construction is therefore expected to decrease in the next three years. This seems to be confirmed by the acute decrease in offers to bid and awarded contracts in the first three months of 2006.

Public Contracts – January to March 2006* Year-on-year % change (value) Offers to bid Awarded contracts Non residential buildings -56.4 -66.0 Of which: Schools -30.8 -84.3 Hospitals -85.4 -79.1 Source : AECOPS *new + R&M

Industrial, storage, office and agricultural buildings construction are likely to experience a severe downturn in face of weak stimulus to economic activity expansion and therefore low investment in new construction.

Industrial/storage – even though there is potential for growth, as more and more companies show interest in moving to better quality spaces, with good accessibilities and preferably with lower occupation costs, demand for new spaces are on hold. In fact, the lack of a sustainable recovery of the economy will most probably postpone a significant share of these relocation

© EUROCONSTRUCT 273 Portugal Amsterdam, June 2006 decisions. Furthermore, industrial production slowdown will inevitable put a halt into any expansion decisions programmed for the next couple of years.

Offices – The high level of vacancy rate in 2005 in comparison with the observed in 2004 suggests that the office market is continuing to face a significant readjustment process. In 2005 the absorption of new offices in Lisbon stood at 120.000 sqm, well bellow the 2004 figure (160.000 sqm) and the spaces companies let vacant should have increased. Demand is not expected to pick up in the near future and therefore some of the projects in the pipeline will inevitably be postponed.

Agriculture – agricultural buildings construction is expected to fall along the 2005/2007 period. In the absence of positive signs coming from the economy, the incentive to invest in new infrastructures is almost inexistent.

Commercial buildings – commercial buildings construction should increase over all forecast period. In 2007 the biggest Portuguese shopping centre is expected to open in Amadora (increasing alone the national shopping centres total area in 122,000 m2 GLA, in an estimated investment of € 200 million) with many other projects in sight. Shopping centres represent approximately 90% of the future retail projects. The trend is for these shopping centres to open in medium size cities (Coimbra, Viseu, Covilhã).

Non residential R&M is expected to decrease in 2006 and 2007 (-2.5% and -5.0%, respectively), recovering in 2008. Both economic slowdown and public investment cuts are responsible for the downturn in R&M interventions.

Non Residential Output - 2002 to 2008

15,0 10,0 5,0 0,0 -5,0 -10,0

% changeat constant prices -15,0 2002 2003 2004 2005 2006 2007 2008

New construction R&M

Source: ITIC

5 Civil Engineering Market

New civil engineering output fell 1.0% in 2005 to €10,450.9 million, after a 4% increase in 2004. Barcelona estimates were revised downwards as several indicators point to a lack of dynamism in civil engineering in 2005 despite local elections had taken place in October.

Civil engineering output is expected to fall in the next three years (5.0%, 3.0% and 3.5% in 2006, 2007 and 2008, respectively).

New Civil Engineering Output % change at constant prices 2004 2005 2006 2007 2008 November 2005 - Barcelona 2.5 2.0 -5.0 -5.0 1.0 June 2006 - Amsterdam 4.0 -1.0 -5.0 -3.0 -3.5 Source: ITIC

The Portuguese Growth and Stability Programme for the 2005-2009 period presented to European Commission last December point to a significant decrease in public investment (measured by Gross Fixed Capital Formation) as percentage of nominal Gross Domestic Product.

Although nothing is said about investment in construction, one can only assume that a decline of the same intensity or even worse will take place in coming years.

Stability and Growth Programme 2005 - 2009 % change at current prices 2005 2006 2007 2008

% GDP % change % GDP % change % GDP % change % GDP % change GFCF 3.3 5.9 2.9 -6.4 2.9 4.7 2.8 1.5

Source: Growth and Stability Programme 2005 – 2009, ITIC

In 2006 public investment will fall from 3.3% to 2.9% as percentage of GDP which corresponds to a decrease by approximately 6.4% of public investment in comparison with 2005. The percentage change was calculated at current prices so in real terms the decrease will be even sharper.

According to the Government, public investment will have some progression margin in 2007, but in real terms that will mean no more than a marginal raise. A decrease is foreseen to take place again in 2008.

Restrictions to public investment are starting to show in public works evolution. From January to March both offers to bid and awarded contracts fell significantly in comparison with the same period of 2005.

Public Contracts – January to March 2006* Year-on-year % change (value) Offers to bid Awarded contracts Civil Engineering -33.1 -65.2 Source: AECOPS *new + R&M

Investment in energy and water works is expected to grow in 2006. In the following two years the investment in these two sectors will probably decrease (1.0% and 1.5%, respectively). However, the extent of the decline shouldn’t be as significant as for transport infrastructures.

In fact, environmental issues are becoming more important for public authorities as increasing oil prices in international markets exposes the countries dependence on primary energy. Important investments are being made by the private sector on wind energy and a reinforcement of the electric energy transport network is under way to guarantee the connection of new production facilities to the electrical system.

National Transport Network (electricity) .- planned investments 250

200

150 € million million € 100

0 2005 2006 2007 2008 2009 2010 2011

Source: REN Important investments are also planned for the water sector (approximately €3,000 million over the 2006 – 2013 period). The main goals are:

- To guarantee that by 2013 at least 95% of the population has access to public water supply networks - To reduce water losses along the supply network - To increase water quality

Financing problems may however delay some of the projects.

There is also a large potential for transport infrastructure growth. An important share of the National Road Plan is to be finished in the next years but financing problems seem to have been postponing some projects. Both public and private Investment in the road network is expected to decrease in 2006 and recovery is certainly not on the horizon at least for now.

Investment in airports is expected to increase in 2006. Construction works at Portela Airport in Lisbon will absorb the main share of the investment planned for 2006. The investment in this Airport is expected to continue to grow until 2008 despite an overall decrease in this sector.

The Portela Airport will be replaced in 2017 by Ota Airport but until there the expected increase in the number of passengers will force ANA to expand some areas of the existing airport.

Planned Investment in airports* 150

125

100

€ million € 75

0 2005 2006 2007 2008 2009 2010

Source: ANA * under ANA management

Overall, we can say that there is a great potential for civil engineering growth in the next years but severe budget consolidation efforts are a strong impediment to the fulfillment of that potential.

There are no reasons to believe that R&M works will have a favourable evolution in 2006 and 2007. A slight recovery is expected to take place in 2008.

Civil Engineering Output - 2002 to 2008

6,0 4,0 2,0 0,0 -2,0 -4,0 -6,0 -8,0

% change% constant at prices -10,0 2002 2003 2004 2005 2006 2007 2008

New construction R&M

Source: ITIC

APPENDIX – DEFINITIONS

Table 1.

Population and households: annual average. Unemployed and unemployment rate: Employment Statistics, INE (National Portuguese Institute).

Table 2.

Total Construction Output represents the value of Construction Product as defined in the National Accounts System – ESA 95. The value for 1999 was estimate using as base-year the final version of the National Accounts for that year. Total construction output includes not only the construction production generated by construction companies, but also the construction production generated by other sectors and non declared production. It is therefore a much broader concept than the sector output approach.

Services/Construction by other sectors/DIY/Black economy value is estimate by ITIC through a leading-indicators based methodology and using 1999 value as base-year.

Table 3.

Housing stock (dwellings): for 2002 and 2004 is given by INE, from 2005 onwards is an estimate, using the following formula:

Housing stock on year n = Housing Stock on year n-1 + completions - demolitions

Home ownership rate = lodgements occupied by the owner/total lodgements * 100

Table 5.

National Accounts (base Year: 2000)

Country/Pays/Land: PORTUGAL Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 10 380 10 445 10 509 10 563 10 625 10 687 10 750 Bevölkerung

Households ('000s) Ménages 3 705 3 760 3 816 3 872 3 930 3 988 4 048 Haushalte

Unemployed ('000s) Chômeurs 272,3 342,3 365,0 422,3 478,8 486,4 465,1 Arbeitslose

Unemployment rate (%) Taux de chômage 5,1 6,3 6,7 7,6 8,5 8,5 8,0 Arbeitslosenquote

Change of GDP Variation du PIB 0,8 -1,1 1,1 0,3 0,6 1,0 1,8 Veränderung des BIP (% change in real terms)

Consumer prices (% change) 1) Prix à la consommation 3,6 3,3 2,4 2,3 2,8 2,5 2,5 Verbraucherpreise

Construction prices (% change) 2) Prix de la construction 4,6 2,8 4,5 4,0 3,5 3,0 2,8 Baupreise

Short term interest rate 3) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 4) Taux d' intérêt à long terme 5,1 4,2 4,1 3,4 4,5 4,8 4,9 Langfristiger Zinssatz

1) CPI (Consumer Price Index) 2) Refers to total construction 3) 3-month interbank rate (or equivalent) 4) Yield on Treasury Bonds (10 - year)

Country/Pays/Land: PORTUGAL Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 8 633 -7,5 -20,0 -7,5 -6,0 -3,5 0,0 1,0

Logement Renovation 4 114 2,0 -2,5 6,0 2,0 1,0 1,0 2,5

Wohnungsbau Total 12 747 -5,4 -15,8 -3,8 -3,6 -2,0 0,3 1,5

Non-residential construction New 4 754 9,5 5,0 -7,0 -8,5 -5,0 -10,0 3,5

Bâtiments non résidentiels Renovation 1 069 6,0 6,5 3,0 1,0 -2,5 -5,0 2,0

übriger Hochbau Total 5 823 8,9 5,2 -5,4 -6,9 -4,5 -9,1 3,2

Building New 13 386 -3,0 -12,5 -7,3 -6,9 -4,0 -3,5 2,2

Bâtiment Renovation 5 183 3,9 -0,7 5,4 1,8 0,3 -0,2 2,4

Hochbau Total 18 570 -1,8 -10,0 -4,3 -4,6 -2,8 -2,6 2,2

Civil engineering New 6 341 -3,5 -7,5 4,0 -1,0 -5,0 -3,0 -3,5

Génie civil Renovation 1 127 5,0 2,5 5,0 2,0 0,0 0,0 2,0

Tiefbau Total 7 467 -2,4 -6,2 4,1 -0,6 -4,2 -2,5 -2,6

TOTAL CONSTRUCTION OUTPUT 26 037 -2,0 -9,0 -2,1 -3,5 -3,2 -2,6 0,9

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 8,71 -4,7 -14,5 -1,5 -4,4 -3,7 -2,2 0,7 Inländischer Zementverbrauch

Country/Pays/Land: PORTUGAL Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1) 1+2 family dwellings Logements autorisés Individuel 37,2 33,3 28,5 29,3 28,1 28,4 27,0 Baugenehmigungen Familienhäuser Flats Collectif 54,6 46,0 45,2 39,3 37,8 38,2 40,5 Mehrfamilienhäuser TOTAL 91,8 79,4 73,7 68,6 65,8 66,6 67,5 Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser Flats Collectif Mehrfamilienhäuser TOTAL Housing completions 1) 1+2 family dwellings Logements terminés Individuel 36,3 30,9 23,4 21,3 20,5 20,4 20,7 Baufertigstellungen Familienhäuser Flats Collectif 74,8 45,9 38,9 37,9 36,5 36,3 36,8 Mehrfamilienhäuser TOTAL 111,0 76,8 62,4 59,3 57,0 56,7 57,4

Housing stock 2) Logements existants 5 308 5 398 5 463 5 519 5 572 5 624 5 678 Wohnungsbestand

thereof second-homes dont résid. Secondaires 977 993 1 005 1 024 davon Zweitwohnungen

thereof vacancies dont inoccupé 573 648 710 696 davon leerstehend

Home ownership rate 2) Taux de propriétaires occupants 75,9 76,0 76,2 76,3 76,4 76,5 76,6 Wohnungseigentumsquote

1) New construction 2) Cf. Appendix to the individual country report

Country/Pays/Land: PORTUGAL Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 690 2,3 -0,6 -5,5 2,0 1,0 -12,5 -5,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 454 2,8 -0,1 1,0 1,0 -3,5 -20,0 -6,0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 642 5,0 -0,6 -1,3 -12,0 -9,0 -10,0 2,5 Industriegebäude

Storage buildings Bâtiments de stockage 156 10,0 8,0 -8,0 -15,0 -8,0 -9,0 4,0 Lagergebäude

Office buildings Bureaux 1 122 7,5 2,9 -3,5 -18,0 -7,5 -12,5 3,0 Bürogebäude

Commercial buildings Commerces 1 321 10,0 1,4 -3,0 2,0 2,0 1,5 10,0 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 69 10,0 -2,0 -7,0 -15,0 -12,0 -7,5 3,5 Landwirtschaftsgebäude

Miscellaneous Autres 300 55,0 46,1 -36,3 -27,2 -30,8 -44,1 8,1 Sonstiges

Total Insgesamt 4 754 9,5 5,0 -7,0 -8,5 -5,0 -10,0 3,5

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: PORTUGAL Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 3 457 -2,5 -7,5 5,0 1,0 -7,5 -3,0 -4,0 Verkehrsinfrastruktur Straßen Railways Voies ferrées 908 9,0 1,2 -0,5 -1,5 -4,0 -3,0 -3,5 Bahnanlagen Other transport Autres réseaux 929 1,5 -2,1 2,5 -2,5 1,0 -1,0 -1,0 Übrige Vekehrsinfrastruktur TOTAL 5 294 0,0 -5,0 3,5 -0,1 -5,4 -2,6 -3,3

Telecommunications Télécomunications Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 858 3,5 -2,5 1,0 4,0 3,0 -1,0 -1,5 Energie-und Wasserversorgung

Other Autres 1 315 -13,1 -12,4 8,5 -5,2 -4,3 -3,2 -0,5 Sonstiges

Total 7 467 -2,4 -6,2 4,1 -0,6 -4,2 -2,5 -2,6

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: PORTUGAL Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 96,5 1,3 0,1 2,4 2,0 0,7 1,0 1,5 Privater Verbrauch

Public consumption Consommation publique 30,9 2,6 0,3 2,0 1,7 0,5 -0,8 -0,9 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 31,8 -3,5 -10,0 0,9 -2,9 -1,9 -0,5 2,0 of wich construction 16,5 -3,3 -11,9 -1,6 -4,7 -3,0 -1,4 1,0

Stocks (contribution as % of GDP) Variations de stocks Vorratsveränderung

Exports Exportations 42,1 1,5 3,7 4,5 0,9 1,5 4,0 5,0 Exporte

Imports Importations 55,1 -0,7 -0,4 6,8 1,8 0,0 1,8 2,5 Importe

GDP PIB 147,2 0,8 -1,1 1,1 0,3 0,6 1,0 1,8 BIP

Standard National Accounts, gross figures.

SLOVAKIA ÚEOS – Komercia, a.s. www.ueos.sk

Vladimír Lenko e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

Successful development of Slovak economy proceeded also in the year 2005. Annual growth of GDP in constant prices represented 6,0 %, inflation reached annual growth only by 2,7 %, increased employment and unemployment decreased. High growth of economy was affected by investment, right reforms and also by force on stepwise restriction of public expenditures or increase of attractiveness of labour instead of receiving of social allowances. Government realised tax reform, reforms of health and social system are in progress (with partial corrections). After resignation of one member of government coalition government fell into crises, therefore new, premature elections will take place on June 17-th 2006 (regular elections date in autumn 2006).

Today’s opposition, with significant support, declares greater accent on social sphere. Results of parliamentary elections could therefore partially affect following development of the society.

Building in Slovakia is even faster. After longer stagnation period, Slovak construction is on rising curve of its development, which is confirmed by significant growth of constructional production in 2005 (+ 18,8 % in constant prices). Rapid growth of construction is related mostly to investment inflow to Slovakia, to significant increase of investment to building of transfer infrastructure, stabilizing of sources for residential construction and draw of EU – funds. In the year 2005 dominated public investment into road infrastructure and construction sector was also pulled by private investment in building of industrial objects and market – entertaining and administration centres. By concentration of financial sources on the investment market has been profiled several potential investment companies, among them also several solvent developers. Their investment projects significantly supported and still supports current constructional conjuncture (administration and shopping centres).

In following years will intensively continue building of transfer infrastructure, expected is growth of industrial objects and stores, residential construction business – entertaining centres, constructions for environmental protection and water infrastructure. Investment will go also to renovation and modernisation of housing stock with the aim to extend the lifetime, to remove system defects of dwelling houses and to decrease energy demand of objects. Growth of constructional production is proportional to investment activity in the country, which is in construction manifested by increased demand on construction works, by improvement of financial situation of companies and by growth of employment.

In the year 2005 manifested itself even more significant regional differences. Traditionally, the lowest volume of constructional production is in the east part of Slovakia, dominant is west part of the country with the capital Bratislava, which shares in overall production of 8 regions by 27 %.

Construction According to preliminary results, total constructional production, realized in 2005 by own employees of construction enterprises, by tradesman and by constructional plants of non- construction enterprises represented 3 229 Mill. EUR which is growth in comparison with 2004 by 18,8 % in current prices and by 13,7 % in constant prices (percentage change 2005 versus 2004 is related to revised data for 2004, not to preliminary data). Inland constructional production represented in 2005 amount of 3 092 Mill. EUR, which is in comparison with previous year growth by 15 %. Annual growth of constructional production in 2004 represented level of 5,2 %. Works on inland new construction, reconstruction and modernization in 2005 shared in total volume by 80 %, works on repair and maintenance by 19,5 %. Apart of works inland, constructional production was realised also abroad, in the amount of 136,3 Mill. EUR, which represents in comparison with previous year 2004 growth

286 © EUROCONSTRUCT Amsterdam, June 2006 Slovakia of 9,2 % in constant prices. Share of construction works abroad in total volume of construction works represented 4,2 %, in 2004 it was 4,4 %.

Share of construction production by type in %, year 2005

Residential construction; 24,2 Civil engineering; 35,3

Non-residential construction; 40,5

Employments in construction also grow. Average registered number of employees in construction for 2005 represented (without non-construction companies) 142 530 (from that 118 614 workers) and from them 74 507 tradesman. Compared to 2004, when average registered number of employees represented 133 437 (from that 110 367 workers) and from them 69 438 tradesman, which is growth of 6,8 %.

Share of enterprises by size in constructional production and employment Size group by number of employees Share in constructional Share in number of production (%) employees (%) Year 2004 Year 2005 Year 2004 Year 2005 Tradesman 32,1 30,6 52,0 52,3 50 - 249 20,7 21,6 16,4 17,3 0 -19 18,2 15,9 14,8 14,4 500 and more 14,9 15,3 6,8 6,0 20 - 49 8,1 9,8 6,6 7,1 250 - 499 6,0 6,8 3,4 2,9

In 2005 reached 18 construction enterprises higher production then 25 Mill. EUR. On the first positions are enterprises, oriented mostly on civil engineering (transport infrastructure). Eight enterprises from the manufacture of building materials achieved in 2005 earnings higher then 20 Mill. EUR. From them on first three positions are producers of cement.

Greatest construction enterprises, production up 50 mill Euro (preliminary data, 2005) After –tax Average number Production a) Enterprise/Construction Profit of employees Num In mill Euro In mill Euro. 1. Doprastav, a.s., Bratislava – highways 271,888 3154 and roads, bridges, water structures, engineering structures, residential construction (data for year 2004) 2. ZIPP BRATISLAVA, spol. s r.o., 177,843 1238 Bratislava – prefabricated concrete structures (data for year 2004) 3. Inžinierske stavby, a.s., Košice – 184,517 2,939 1320 engineering, industrial and water construction, prefabricates

Change 2005/2004 (in %) 93,2 Significant -16,3 growth 4. Skanska Group – engineering 154,053 1,093 983 structures, residential constructions Change 2005/2004 (in %) 73,9 -45,8 16,1 5. Váhostav – SK, a.s., Žilina – 82,771 2,204 1019 highways, administration and trading buildings, industrial, water and environmental constructions Change 2005/2004 (in %) 84,1 -30,6 24,9 6. Strabag a.s., organizational 75,596 5,011 297 component, Bratislava – engineering structures, engineering nets Change 2005/2004 (in %) 155,9 348,4 39,4 7 Eurovia-Cesty, a.s. Košice – 52,070 2,939 562 highways, bridges, ecological and water structures Change 2005/2004 (in %) 48,4 198,6 -8,9

Enterprises of manufacture of building materials, revenues up 30 mill Euro– (preliminary data for year 2005) Average Profit before Num Revenues number of Enterprise/goods - commodity taxation or lost . employees In mill. Euro In mill. Euro 1. Holcim (Slovensko), a.s., Rohožník – 96,014 -3,146 618 cement Change 2005/2004 (in %) 8,8 - 2. Východoslovenské stavebné hmoty, 48,643 8,319 469 a.s., Turňa nad Bodvou – cement, production of concrete, , Change 2005/2004 (in %) 25,7 31,6 3. Považská cementáreň, a.s., Ladce – 44,034 4,984 374 cement Change 2005/2004 (in %) 6,5 -13,8 4. Izomat, a.s., Nová Baňa – heat 37,046 5,735 457 insulation Change 2005/2004 (in %) 6,2 3,7 5. Baumit, spol. s r.o., Bratislava – dry 35,929 140 plaster mixture Change 2005/2004 (in %) 12,9 6. Cemmac, a.s., Horné Sŕnie – cement 32,527 6,236 176 Change 2005/2004 (in %) 7,0 71,6 Source: TREND ŠPECIÁL 2006 Stavebníctvo, Annex to magazine Trend weekly n. 12/2006 a.s. = Join stock company , s.r.o. = Limited company

In construction still exists in considerably large extent unregistered (shaded) economy, concerning purchase of construction works without book-keeping vouchers. According to statistical prospects the amounts in this field are as follows:

Total annual estimations of expenses of households for services of construction craftsmen without receiving of voucher Year 2001 2002 2003 2004 Mill. EUR 171,7 151,13 223 206,6

Development of the share of construction in GDP formation and in overall employment in national economy of SR Share of construction in % In GDP Year In current prices In constant prices 2005 In employment 2001 4,6 3,3 6,6 2004 5,2 3,7 6,6 2005 5,5 4,0 6,9

2 Macro-economic Outlook

Gross domestic product grew in comparison with previous year by 6,0 % (5,5 % in 2004). Estimation of the GDP increases in 2006 represents 5,8 % eventually 6,3 % and in following years 6,4 and 5,4 % yearly. GDP growth in 2005 was related to growth of domestic demand by 7,3 % as well as foreign demand by 10,9 %. Strengthening of domestic demand is related mostly to rapid growth of investment. Formation of gross fixed capital increased by 12,4 % and final consumption of households by 5,8 %. Revival of consumption is to be related to higher employment, growth of real wages and particularly to easier available credits. Component of GDP with the slowest growth was final consumption of public administration (increase by 2,0 %). Higher GDP formation was affected by growth of added value in construction, trade, transport, posts and telecommunications, industry and agriculture. In the year 2006 is assumed increase of final consumption of households by 4,5 % and public administration by 3,3 %. Compared to previous year it is assumed reduction of the rate of the growth of formation of gross fixed capital and import and mild acceleration of the tempo of growth of export.

Positive development of inflation was hold during the whole year 2005. Its course was affected mainly by lower extent of modifications of regulated prices then in 2004. In average, annual inflation in 2005 represented 2,7 %, the lowest in the history of Slovak republic. In comparison with 2004 price level decreased by 4,8 percentage point, growth of regulated prices was slowed down to 8,2 % (by 1,5 percentage point) and core inflation to 1,1 % (by 1,5 percentage point). Inflation for the year 2006 is assumed in the level of 3,5 %. Since beginning of the year inflation is affected by more expensive gas (in average by + 5,8 %), electricity (in average by + 5,0 %), water consumption and waste water drain for household (in average by + 23,3 %) as well as the heat price (5 %, eventually 14 to 20 %) and also raised prices of postal services. For next years is assumed inflation of about 2,0 % yearly.

Faster growth tempo created favorable environment for improvement of conditions on labor market. Employment hold 5-year growth trend, expressively declining trend was registered in development of unemployment. Average rate of registered unemployment (unemployed/economically active population in previous year) in 2005 represented 11,6 %, number of disposable applicants for job was 301 186, which represents decline compared to the year 2004, when rate of registered unemployment represented 14,3 %. Employment was increased mainly by industrial production.

Evidence of the inspection of unemployed improved, in 2005 began more rigorous inspection of “black” work and social allowances were amended. Number of employed was increased also by creation of new jobs. Average number of applicants for jobs represented in 2005 340 thousand persons, while in 2004 it was in average 409 thousand persons. © EUROCONSTRUCT 289 Slovakia Amsterdam, June 2006

Unemployment rate according to selected prospect of work forces in 2005 represented 16,2 %, i.e. decline by 1,9 percentage point.

Change of GDP, consumer prices, prices of construction works and household consumption in %

% 4

-2 2002 2003 2004 2005 2006 2007 2008 Year GDP Consumer prices Prices of construction works (new construction) Household consumption

Slovak crown towards EURO during the year 2005 valorized, but also depreciated. At the end of 2004 exchange ratio was 1 EUR = 38,796 SKK, at the end of 2005 1 EUR = 37,848 SKK,. According to the policy of National Bank of Slovakia (NBS) and Ministry of Finance Slovakia should accept at January the 1st 2009 EURO and become member of Euro zone. To avoid overheating of economy and in an effort to keep under control growth of prices, NBS adjusted basic interest rate of NBS. Basic interest rate of NBS was from March the 1st 2006 increased to 3,50 %, previous rate since March 2005 represented 3,0 %. On the ground of rapidly growing consumption, increasing of basic interest rate in following months is not excluded.

Volume of gross fixed capital grew by 12,4 %. Investment activity was affected mainly by increased formation of new fixed assets. In the investment structure in 2005 is recognized shift from demand for machines to demand for constructions. Thereby share of construction investment in formation of gross fixed capital annually increased by 1,8 percentage point to 34,1. Division of investment in regions is not balanced; insufficiently covered last year was middle and eastern Slovakia. Growth of investment is assumed in consequence of improvement of overall entrepreneurial environment. In the year 2007 is assumed reduction of the growth of gross fixed capital according to the assumption that no significant foreign investment to the country appears.

Prognosis of macroeconomic development for the years 2006 – 2008 is from February 2006, according to actual estimations, GDP growth may reach 6,3 – 6,6 %, but inflation can reach to 3,7 %. Key macroeconomic indicators in Slovakia until 2008 (Annual percentage change or rate) 2002 2003 2004 2005 2006 2007 2008 GDP 4,6 4,5 5,5 6,0 5,8 6,4 5,4 Inflation 3,3 8,5 7,5 2,7 3,5 2,0 2,0 Registered unemployment rate 17,8 15,2 14,3 11,6 10,9 10,8 10,6 Household consumption 5,5 -0,6 3,5 5,8 4,5 4,8 4,4 Gross fixed capital formation -0,6 -1,5 2,5 12,4 6,5 6,0 4,0

3 Housing Market

Residential construction formed in 2005, according to preliminary results, 23,9 % of constructional production, in previous reports was this share overvalued. Volume of residential construction annually generally grew by 17,9 %, namely on new construction, modernization and reconstruction by 15,0 % and on repairs and maintenance by 28,1 %. Number of finished dwellings compared to years 2003 and 2004 grew by 6,3 % and 18 %.. Also number of started dwellings increased and by more then 11 % grew number of dwelling under construction. Number of started dwellings and dwellings under construction grows and will grow. Within next years will continue growth of the intensity of residential construction.

In 2005 was finished 14 863 dwellings, from that 14,1 % belongs to public sector (2 103 dwellings). In family houses was completed 8 707 dwellings, what represents 58,6 % from total number of dwellings, finished in the year 2005.

Average floor area of dwelling achieved 120,8 m2 (131,7 m2 in 2004) and average living area of one dwelling reached 73,4 m2 (78,5 m2 in 2004). According to statistic data was in 2005 according to released building permissions started 19 796 dwellings (growth in comparison with previous year by 19,4 %), from that 8 422 dwellings in family houses. Decline of dwellings represented according to statistics 1 135 dwellings, from that 964 dwellings by sanitation, but real decline is higher. On the date 31.December 2005 was under construction 48 874 dwellings, representing growth by 11,1 % compared to previous year.

Number of finished dwellings in the time period 2000 - 2008

18 000 16 000 14 000 12 000 10 000 dwellings 8 000 1 + 2 family houses 6 000 4 000 2 000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year

Number of finished dwellings in 2005 was the highest number since ninetieths. Several reasons affected development of residential construction: rising economy force, various and available offer of funding of new housing with low interest rate, insufficient dwelling capability in some regions. Development of housing in territorial space of state is in market conditions in decisive extent adjusted to development of the economy. This is also the case of Slovakia, when in Bratislava region (inclusive capital) was in 2005 realized more then 30 % of finished dwellings and starts more then 35 % of total number of starting dwellings in spite of reality, that share in total number of citizens of whole state represents 11,4 %. Number of dwellings also significantly growths in regions, where are built car factories (Trnava, Žilina). Residential construction is still stagnant in regions with social problems, high unemployment, low wages and small inflow of investment.

Still more domestic developers undertakes with own construction management. Classic construction companies are therefore moved from the position of general contractor to the position of subcontractor. To reach the higher profit, began in field of residential construction

© EUROCONSTRUCT 291 Slovakia Amsterdam, June 2006 to act in position of developer also construction companies. There are greatest companies (ZIPP, Doprastav, Sibamac, Skanska) as well as companies from the second ten (Reding, Otyk, In Vest). Competition is already sharper with regard to foreign companies, which are going to start building of dwellings by hundreds.

There are built not only single dwelling houses (also with more then 20 floors), but also greater residential premises (5 – 7 floors), dwelling houses with residential dwellings and premises of family houses. It is also said about carpet build-up areas on the periphery of larger cities and housing in condominium. According to offer of dwellings in real estates media is in capital interests on dwellings in new construction in price range of 66 to 106 EUR; two-room dwellings with floor area of 55 – 60 m2, three-room dwellings with floor area of 70 – 80 m2. Prices of new dwellings in Bratislava – region are in the extent from 766 to 2 642 Euro per m2 (incl. VAT, land-price and engineering net). In other regions are the informative limits of 660 – 1 321 EUR per m2. Prices will be affected more not only by locality, but also by quality of the building. Still remains highest demand for the smaller dwellings (flat-lets, one or two room dwellings). Demand for older dwellings – as a form of investment – will decline. From older dwellings are preferred dwellings in original layout.

Finished dwellings by number of rooms for period of 2003 to 2005

From that One room Five – Dwellings Two - Three - Four - and flat- room and room room room lets more Finished dwellings 2004 12 592 874 1 816 3 548 3 733 2 621 Finished dwellings 2005 14 863 1 197 2 887 4 327 3 785 2 667 Structure in % in 2005 100,0 8,1 19,4 29,1 25,5 17,9 From that in 2005 - Finished dwellings in 8 707 88 539 2 188 3 315 2 577 family houses - Structure in % in 2005 100,0 1,0 6,2 25,1 38,1 29,6 - Flats 6 156 1 109 2 348 2 139 470 90

Within the residential construction appears also an imperfection, like not always quality architectonic design, not always quality realization of the construction (very early after handing over of the structure appears imperfections). Negative works also insensible thickening of the structure of the cities and also absence of territorial plans. Thank the EU – funds (PHARE, ERDF) is at present in – process more then 250 – 300 projects for elaboration of territorial planning documentation and programmes of economical and social development of municipality (town, region).

4 Non-residential Market

Construction of non-housing buildings forms the greatest segment of constructional production, in 2004 it represented nearly 50 %, in 2005 according to preliminary results 44,9 % of overall inland constructional production. In comparison with previous year grew volume of listed construction (inclusive maintenance and repairs) by 2,6 %, on new construction, modernization and reconstruction by 4,23 %. This growth was achieved by increase of building of industrial objects, administration buildings and market buildings. In recent and following years will be built particularly industrial buildings, namely in building of industrial parks and logistic centres, but also market centres and in capital Bratislava will be henceforth built administration buildings and also starts building of polyfunctional complexes. Significant source of financing will be henceforth direct foreign investment.

Industrial objects, industrial parks, stores In 2005 continued building of two automobile factories (Peugeot/Citroen and Huyndai/Kia, even with persisting problem of acquisition of lands). Peugeot/Citroen aims to build second factory within next three years, where should be since 2009 manufactured new model of car, investment of 370 Mill. EUR. Also manufacture plants of prime contractors are built, and actually starts to route to Slovakia also smaller companies from car industry with lower investment. Industrial objects were built on “green meadow” and in industrial parks with various specializations of producers (machinery, electrotechnics, chemical products, rubber products, packing products, glass). Even it foreign investors in Slovakia will build their plants namely on free places, ever more they are attracted also by old manufacture halls and existing areas (Myjava, Brezová pod Bradlom, Stará Turá and elsewhere). By reason of time will companies start production as soon as possible, i.e. in advance of the date, when free land will be prepared.

Along highways are built new stores. Just in Bratislava arose in 2005 altogether nearly 85 000 m2 of store and logistic surfaces. In relation to finishing of transport lines the logistic business will be moved to regions. There will be directed also investment into market rooms. Slovak agency of investment development (SARIO) prepares the database of free plots, halls and office buildings and owns data on existing and in preparation industrial parks.

Industrial parks SARIO consider as an industrial park project of regional or over regional character with the area of at least 10 hectares of legally settled and technically precisely determined plots, equipped with technical and transport infrastructure. Necessary is full support of the parks by municipality, town or higher territorial unit together with clearly defined administrator of the park. For favourable is considered, when park supports innovation and export and furthermore is connected to the network of economical, accommodation and recreational services.

Some parks fulfil all these criteria, other parks only partially or minimally. Registered are ten of industrial parks, which are prepared for immediate arrival of investor and about 75 territories, reserved for industrial parks, which are necessary to complete. By the reason of equalization of differences among regions this are strategic important locations in economically less developed regions. Building of industrial parks can be supported from structural funds. Also enterprise incubators are developed and technological parks are in preparation phase.

Summary of first category industrial parks and their investors Industrial park Established by investors

Senica Municipality Delphi Automotive Systems Slovakia, Slovenský hodváb, Slovkord, Arcelor

Kechnec Municipality Molex, Gilbos, Kuenz – SK, Plastipak, Getrag Ford, Dorsvet Plus, Transmission, Evans

Devínska Nová Ves Municipality and private SAS Automotive, Eurofit, Faurecia, Gruppo developer (J&T) Autolin, SDC, Hella

Strážske Private developer (Chemko) Chemko, Chemza, Cenon, Fiberstruct

Vráble Foreign developer (IGP Vráble) UPS, Teleflex Automotive, PAL Inaefa, Pal Hun, Hefra, Tesgaz, Plasmet, Juwa, Miba Frictec

Sládkovičovo Foreign developer (K.L.E.) Bekeart Slovakia, Monzolit – Fibron, Medea

Chemes Humenné Private developer (Chemes) Nylstar, Rhodia Industrial Yams, PJ Bike, TYTEX, Strojárne Chemes, VSK, Prefil, Twista

Malý Krstíš Private developer (Megáň) Liaz Veľký Krtíš, Baňa Dolina, Sole Slovakia

Levice - Géňa Municipality Levitex, Levické mliekárne, Ido Klein, PM Paksi Marian

Sereď Municipality and private FM Slovensko, Semmelrock, Pečivárne developer Sereď, Dong Jin Precision

Nitra Municipality Visteon, Air Liquide, Clamason

Stepwise begins also buildings of other industrial parks like Zlaté Moravce (10 ha, aim to extend to 56 ha), Senica (57 ha, aim to expend to 57 ha), Prievidza, Prešov and Myjava.

Interest of investors begins to concentrate also to east part of the country, or to locations, where investor may acquire incentives, guaranteed by government according to Principles of provision of state subsidies for foreign investors.

Administration buildings Building of administration buildings is concentrated exclusively to Bratislava. In nearest two – three years occurs unprecedented increase of the market with administration buildings. Market dispose of about one Million m2 of offices, but included are also administration buildings, where residence of state and public administration and also buildings 60 is or more years old. Competitive are about one third of offices, which are located in new buildings, built in last ten years. According to expert analyses till the end of decade should grow volume of office rooms in Bratislava by about one half. Market should absorb about 70 000 m2 of new office rooms. Greatest investors are companies HB Reavis, J & T Global, TriGrant, Soravia Group, I.P.R. Slovakia.

Categorization of rentable office rooms in Bratislava Category Price range Characteristics A 9-16,50 City centre, wider centre, good access and good connection to EUR/m2/month transport communication, parking, quality equipment (cable network, air conditioning) and modern management of the building, good civic amenities. B 8-13,50 Less attractive locations, also older buildings, limited civic EUR/m2/month amenities, limited parking. C 6-9,50 Older, energy demanding buildings in peripheral parts of the EUR/m2/month city, complicated transport connection, lower quality of equipment of the building.

Outside Bratislava, office business in Slovakia almost does not exist. Reason is low profitability, by costs comparable to Bratislava and negligible demand. In Košice, the second greatest city in Slovakia, there is surplus of offices. In the city Banská Bystrica began in this year building of Europa Business Centre (5 100 m2 of offices) next to finishing Europa Shopping Centre. Developers consider in future building of administration buildings near to now built shopping centres in larger towns.

Besides administration complexes, which are already built or their building is announced, in preparation is in Bratislava realization of large scale multifunctional projects:

- EUROVEA on left quayside of Danube, area of 250 000 m2, investor Ballymore Properties. - River Park on left quayside of Danube, investor J & T Global, assumed costs 126,8 Mill. EUR, deadline till three years. - Complex in front of Main Railway station, 100 000 m2, investor I.P.R. Slovakia, assumed costs 198,1 Mill. EUR. - Building - up near to Main Bus - station, investor HB Reavis Group, assumed costs 211,4 Mill. EUR.

Shopping Centers Expanding are present shopping centres on the periphery of the cities with good transport access and further operational objects and entertaining – relax plants (Avion Park Bratislava, Shopping Palace Bratislava). Trend for the future is building of larger shopping centres with more shops and relax – entertaining activities in several larger cities.

Large market chains begin to infiltrate to smaller towns and instead of hypermarkets they start to build smaller shops (750 to 1 000, max. 5 000 m2 floor area). Large shops with the floor area of 7 500 to 10 000 m2 are already established in regional capitals. Era of hypermarkets is stabilized, no enormous growth of their building is assumed. With time also market of supermarkets will starts to saturate, therefore even more important businessman finds its position in entertaining – market centres. These centres are in phase of building move less in each regional capital city (Auparks in Žilina, Košice, business centres Max).

Hotels, sport objects Construction of hotels represents one segment of buildings, which starts to develop. In capital city was announced building of several multi-storey hotels, built as an free – standing building or as a component part of new polyfunctional areas (Eurovea, River Park, Centrál). By means of finances from structural funds is realized reconstruction and renovation of several boarding houses and smaller hotels on various places of Slovakia. Building of accommodation capacities and building of sport – recreational – relax objects in tourist centres is related to effort for development of tourism and for higher quality of offered services. In the field of sport objects is developed construction of aqua parks, which are gradually extended and furnished by accommodation capacities. Owners of four ski-centres announced large investment aims for improvement of its equipment and improvement of condition for visit rate (ski – lines, passenger cable ways, accommodation, and accessory equipment).

5 Civil Engineering Market

Civil engineering shared in 2005 by preliminary results in constructional production by 31,2 %, inclusive repairs and maintenance. Compared to 2004, volume of works in civil engineering significantly grew, namely by 32,2 %, particularly by increased intensity of building of transport infrastructure. Also in 2006 we assume growth of constructional production, especially in transport infrastructure and water infrastructure (water pipelines, sewage, and water cleaning plants).

Highways and roads Construction of highways and road infrastructure is increasingly important and each year higher volume of financial means is invested to this segment. Financial means for building of highways are drawn from state budget, EU funds, from sale of highway stamps and greatest amount from credit. Subject of credit is National Highway Company (NDS – Národná Dialničná Spoločnosť), which arose in February 2005 and ensures preparation, execution of repairs and building of highways based on approved programmes. Total assumed

© EUROCONSTRUCT 295 Slovakia Amsterdam, June 2006 investment in realization of highways and speedways in 2005 represented about 441 mill EUR and in 2006 536,5 mill EUR. In preparation phase is building of three segments of highway in the length of 29 km (Lietavská Lúčka – Turany) for private investors. It is the first – pilot PPP project (public – private – partnership). In May 2006 should be proclaimed contest for selection of concessionary – private partner.

Highways (D) and speedways (R) Segments handed over in 2005 Length D1 Ladce – Sverepec 7,740 km D1 Bratislava, Viedenská cesta BA, Prístavný most 3,867 km D3 Skalité – boundary SR/PR - part 0,370 km R1 Nová Baňa – Rudno nad Hronom 2,800 km R1 Rudno nad Hronom – Žarnovica 2,400 km in half profile R4 Košice, Prešovská – KE, Sečovská, II. Stage 4,071 km Started in 2006 D1 Mengusovce – Jánovce, I. stage 8,0 km D1 Sverepec – Vrtižier 9,560 km R2 Figa – bypass 3,300 km R4 Svidník, shifting 4,573 km Plan of putting in service in 2006 D1 Vrtižier – Hričovské podhradie 12,900 km D3 Hričovské podhradie – Žilina, Strážov 4,000 km R1 Rudno nad Hronom – Žarnovica 10,211 km R2 Ožďany – bypass 6,090 km R2 Toornaľa - bypass 11,150 km

Financial means from Cohesion Fund were assigned for building of three highway segments of D1 Mengusovce – Jánovce (2004 – 2008), D1 Sverepec – Vrtižier (2006 – 2007) and D3 Hričovské podhradie – Žilina (Strážov) (2005 – 2006). Financial means from structural funds contributes to building of two segments of speedway R1 and two bypasses in speedway R2. Since January 2006 is NDS bounded by new provision – firms must build highways for fixed unit prices during the whole period of construction, i.e. without the price valorisation.

Railways Construction is oriented on modernization of existing routes, to increase the commercial speed to 160 km/hour. Railways are changing railway embankments, rails and electric lines. Also platforms, underpasses and railway station buildings should be reconstructed and modernized. Time schedule of modernization: Bratislava – Trnava 2000 – 2007 Trnava – Piešťany 2004 – 2008 Piešťany – Nové Mesto nad Váhom 2005 – 2008 Nové Mesto nad Váhom – Púchov 2008 – 2012 Púchov – Žilina 2008 – 2012.

Financial contribution from structural fund was provided for three projects: electrification of railway between Zvolen and Banská Bystrica (realization 2004 – 2007), amount of 29 Mill. EUR, reconstruction of railway station Poprad – Tatry (realization 2005 – 2007), amount of 27,6 Mill. EUR and reconstruction of railway station Prešov (realization 2006 – 2007), amount of 20,2 Mill. EUR.

High speed street-line in Bratislava Building of bearing traffic system of the city public transport in capital city is in preparation phase. System will be represented by high speed street-line. First stage – from greatest housing settlement of Slovakia – Petržalka to city centre is in examination stage and building should start in 2006, completion within 4 years, assumed costs 211 Mill. EUR - incl. tramcars.

Airports In relation to privatisation of two greatest airports Bratislava and Košice, winner of the contest, consortium TwoOne plans (liable to approval of the Antimonopoly Office of Slovakia) within 5 years investment to airport Bratislava in amount of 248 Mill. EUR – building of new terminal, multi-storey car park, reconstruction of landing runways. Further investments are planned after 2010.

Power plants Within the privatisation of Slovenské elektrárne (Slovak power plants) Italian company Enel obtained 66 % of stocks. Company takes in account modernization of Thermal power plant Nováky, increase of the output of the nuclear power plant V2 Jaslovské Bohunice, building of wind – park, building of water power plants on river Ipeľ. Begin of building of blocks 3 and 4 of Nuclear Power Plant Mochovce is assumed earliest in 2008, put in operation in 2012.

Water supply and sewage, flood – protection structures Ownership of water supply companies was transferred from state to municipalities. Water supply companies will face in next ten years large investments, related to ecological requirements of EU. Thank investment should by 2015 increase share of population, supplied with water from public pipeline to 90 % (85 % at begin of 2005). Till 2010 should municipalities with over 10 000 inhabitants have sewage with waste water cleaning, till 2015 municipalities with more then 2 000 people. Round 56 % share of population, connected to sewage will increase to 70 – 75 %.

For construction of water pipelines, sewage and waste water cleaning plants and for other projects of protection of environment contributes EU by means of Cohesion fund and ERDF fund.

Contributions from ERDF fund are provided in frames of Priority 2 for development of infrastructure and rational exploitation of waters (treatment of water dams and water flows, building and reconstruction of water pipelines, sewage, waste water cleaning plants), amount of approved assistance 55,5 Mill. EUR and for improvement and development of infrastructure for air-protection (reconstruction of boiler plants, transition to ecological type of fuel) and improvement and development of damps. Most of projects began with realization in the year 2005, partially in 2006.

Means from Cohesion fund (from 60 to 85 % of eligible costs) were provided for water structure of larger extent. It concerns extension and building of group water pipelines, reconstruction of water reservoirs, building of sewage and wastewater cleaning plants. Realization of projects – during the period of 2005 – 2009, assumed costs 255 Mill. EUR.

From Cohesion fund is provided contribution in amount of 85 % of eligible costs i.e. 26,5 Mill. EUR for construction of flood-protection facilities in Bratislava, namely for building and reconstruction of flood lines on the riversides of the river Danube, realization of works 2006 – 2010.

APPENDIX – DEFINITIONS Table 1 • Households – Concept of housing, Source: data for 2001 – Census in May 2001 • Unemployed – Registered unemployment, number by disposable applicants for a job • Unemployment rate (%) – Rate of registered unemployment (%), from the disposable applicants for a job. Registered unemployment rate is calculated from a number of disposable applicants for a job, which can immediately enter the work after submission of an offer of convenient job vacancy and from a number of economically active persons for a previous year from the selected survey of labour forces, in accordance with Agreement of International Labour Organisation. Source: Monitor of the Economy of the Slovak Republic 12/2 2005. • GDP development, consumer prices – prognosis of Ministry of Finance of SR from February 2006 • Construction prices (% of change) – data for new construction, annual average, statistics • Short-term interest rate – 3 months interbank rate (or equivalent) BRIBOR – Bratislava interbank offer rate – 3 months, sale, National bank of Slovakia • Long-term interest rate – 10-year state bonds (or equivalent) state bonds, maturity 10 years, National bank of Slovakia.

Table 2 Data on constructional production for years 2001 to 2004 were taken from the “Yearbook of the construction” 2005, data for 2005 from Statistical report on basic development trends in economy of SR. • Construction production – total construction output is inland construction production carried out by own employees (enterprises with more than 20 employees, with 1 – 20 employees), by tradesman, by construction plants in non-construction enterprises. The output is without black or grey economy and without DIY (do it yourself). • Renovation – this room contains repairs and maintenance. In relation to overvalued share of residential construction in a past, were, compared to previous reports recalculated shares in structure, based on information, provided from Statistical office of SR. This recalculation is expressed in the change of annual indices of the growth of individual sorts of constructional production. Prognosis of the development is in about middle of possible development, presumption of the growth in 2006 represents 7,2 – 13,7 %. • Domestic cement consumption: production – export + import.

Table 3 • Started dwellings – started dwellings according to building permissions • Finished dwellings – after final inspection. Data from Statistical report on basic development trends in the economy of SR: • Housing stock – dwellings in total; calculation: original state by census in 2001 + finished dwellings in individual years – decline of dwellings in individual years (real decline of dwellings is higher then listed in statistics) • From that second residence – source year 2001, census May 2001; recreation cottages in housing stock, unoccupied dwellings (2005 – estimation).

Table 4a In industrial buildings are included also stores; agriculture buildings are included in other buildings. Growth in the volume of constructional production in field of buildings for educational system and health care by reason of the contributions form EU – funds.

Table 5 • Data for 2001 – 2005, Statistical Office of SR, web-site (GDP amendment will occur in May). Preliminary data for 2005 taken from Statistical report on basic trends in the economy of SR in 2005, March 2006. Difference between the volume of GDP and sum of main components is raised by statistical discrepancy. Development from 2006 taken from Prognosis of selected indicators of the development of economy of SR according to the Institute of monetary policy of the Ministry of Finance of SR – February 2006. (Start point is growth of GDP in 2005 in the level of 5, 6 %; preliminary reality was 6,0 %); exclusive development of Gross Financial Capital (construction) and stock level. • Values without VAT.

Country/Pays/Land: SLOVAKIA Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 5 379 5 379 5 382 5 384 5 386 5 389 5 391 Bevölkerung

Households ('000s) Ménages 1 910 1 915 1 920 1 926 1 931 1 936 1 938 Haushalte

Unemployed ('000s) Chômeurs 481,9 403,2 373,5 301,2 284,0 280,0 275,0 Arbeitslose

Unemployment rate (%) Taux de chômage 17,8 15,2 14,3 11,6 10,9 10,8 10,6 Arbeitslosenquote

Change of GDP Variation du PIB 4,6 4,5 5,5 6,0 5,8 6,4 5,4 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 3,3 8,5 7,5 2,7 3,5 2,0 2,0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 5,0 5,1 6,1 4,3 4,6 4,4 4,3 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 6,0 6,0 3,7 3,1 3,7 3,4 3,2 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 7,7 5,0 4,9 4,9 4,7 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

Country/Pays/Land: SLOVAKIA Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 559 31,2 -6,8 2,6 15,0 12,0 11,0 7,0

Logement Renovation 181 0,0 -5,0 -16,1 28,1 6,5 10,0 8,0

Wohnungsbau Total 740 21,4 -6,3 -2,3 17,9 10,7 10,8 7,2

Non-residential construction New 1 126 -12,2 4,6 22,1 4,2 3,0 0,3 0,7

Bâtiments non résidentiels Renovation 261 2,2 9,1 -7,1 -3,7 6,5 7,0 5,0

übriger Hochbau Total 1 387 -9,1 5,7 14,9 2,6 3,7 1,6 1,6

Building New 1 685 0,2 0,3 15,3 7,5 6,0 4,1 3,0

Bâtiment Renovation 442 1,3 3,5 -10,4 7,2 6,5 8,2 6,3

Hochbau Total 2 127 0,5 1,1 8,8 7,5 6,1 4,9 3,7

Civil engineering New 806 14,8 -2,7 5,1 31,1 17,1 13,0 10,5

Génie civil Renovation 159 -7,7 26,5 -28,9 38,1 7,0 8,0 8,0

Tiefbau Total 965 10,1 2,4 -2,3 32,2 15,4 12,2 10,1

TOTAL CONSTRUCTION OUTPUT 3 092 3,1 1,5 5,6 14,1 9,0 7,3 5,9

Million euro at 2005 prices, excluding taxes. 1 euro = 37,8485 SKK

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 1,86 9,0 12,8 -2,9 11,5 7,0 5,0 5,0 Inländischer Zementverbrauch

Country/Pays/Land: SLOVAKIA Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel Baugenehmigungen Familienhäuser Flats Collectif Mehrfamilienhäuser TOTAL Housing starts 1+2 family dwellings Logements commencés Individuel 8,4 9,6 9,7 8,4 8,5 8,0 8,5 Baubeginne Familienhäuser Flats Collectif 6,2 4,4 6,9 11,4 9,0 8,0 8,0 Mehrfamilienhäuser TOTAL 14,6 14,1 16,6 19,8 17,5 16,0 16,5 Housing completions 1+2 family dwellings Logements terminés Individuel 9,1 7,6 8,6 8,7 8,5 9,0 9,1 Baufertigstellungen Familienhäuser Flats Collectif 5,1 6,4 4,0 6,2 7,5 7,5 7,7 Mehrfamilienhäuser TOTAL 14,2 14,0 12,6 14,9 16,0 16,5 16,8

Housing stock Logements existants 1 905 1 919 1 930 1 943 1 958 1 973 1 988 Wohnungsbestand

thereof second-homes dont résid. Secondaires 45 45 46 47 davon Zweitwohnungen

thereof vacancies dont inoccupé 176 176 178 179 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 78,0 78,0 80,0 84,0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: SLOVAKIA Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 33 -2,1 -25,5 14,7 9,6 4,0 84,6 14,6 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 38 -0,1 -29,4 10,6 7,8 3,4 80,0 9,3 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 420 -19,4 -11,3 48,8 7,8 3,8 -4,8 -2,5 Industriegebäude

Storage buildings Bâtiments de stockage Lagergebäude

Office buildings Bureaux 214 -21,8 -1,5 75,7 11,1 4,9 -5,9 -2,5 Bürogebäude

Commercial buildings Commerces 191 -23,9 51,0 -20,7 -7,0 -3,1 -14,3 -1,7 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles Landwirtschaftsgebäude

Miscellaneous Autres 230 26,4 4,7 15,8 1,2 4,6 1,5 4,4 Sonstiges

Total Insgesamt 1 126 -12,2 4,6 22,1 4,2 3,0 0,3 0,7

Million euro at 2005 prices, excluding taxes. 1 euro = 37,8485 SKK

Country/Pays/Land: SLOVAKIA Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Telecommunications Télécomunications 106 -5,8 4,5 -2,8 17,0 -0,5 -5,0 -1,4 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 132 -32,7 31,9 2,8 15,5 14,0 14,0 7,7 Energie-und Wasserversorgung

Other Autres 145 8,4 41,6 -18,2 35,2 -1,3 9,7 22,0 Sonstiges

Total 964 10,1 2,4 -2,3 32,2 15,4 12,2 10,1

Million euro at 2005 prices, excluding taxes. 1 euro = 37,8485 SKK

Country/Pays/Land: SLOVAKIA Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 21,6 5,5 -0,6 3,5 5,8 4,5 4,8 4,4 Privater Verbrauch

Public consumption Consommation publique 7,2 4,9 2,7 1,1 2,0 3,3 2,9 3,0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 10,0 -0,6 -1,5 2,5 12,4 6,5 6,0 4,0 of wich construction 3,4 -8,2 -4,2 -9,1 18,5 9,0 7,0 5,0

Stocks (contribution as % of GDP) Variations de stocks 0,9 1,7 -0,3 2,2 2,8 2,0 0,8 1,4 Vorratsveränderung

Exports Exportations 29,9 5,6 22,5 11,4 10,9 11,7 13,6 6,0 Exporte

Imports Importations 31,6 5,5 13,6 12,7 11,2 10,7 11,7 5,2 Importe

GDP PIB 38,0 4,6 4,5 5,5 6,0 5,8 6,4 5,4 BIP

Standard National Accounts, gross figures

SPAIN

ITeC – The Catalonia Institute of Construction Technology www.itec.es

José Ramón Fontana e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The Spanish economy continues to grow, along with the concern that viable alternatives have not yet to arisen to the current growth model, which is so dependent on internal consumption and construction and so vulnerable to inflation and the external deficit. The first interest rate rises seem not to have had much impact on a market in which there is no lack of financing, where employment is evolving favourably and demand is still stiff. Expectations therefore are positive for 2006, although not sufficiently enough to exceed 2005 forecasts in terms of growth, as it is expected that the Spanish economy in the next few years will undergo a slight deceleration in its growth.

In light of the evident correlation in Spain between its economy and its construction output, it is not surprising that this economic deceleration will run parallel to a deceleration in this sector. Although it is true that the change in pace of the construction sector has been predicted for a long time (and disproved year after year) in the last few months it has been sensed a stronger current of opinion predicting an end to the expansion cycle and a return to normality in the real estate market, and how it may be more profitable for the country to sacrifice some of its growth in exchange for establishing an economy less dependent on “brick and mortar”. In any case, we must make distinctions between the profoundly different ways in which each sub-sector (residential, non-residential and civil engineering) will deal with this adjustment.

The current situation of residential construction can be very succinctly described by saying that the boom is still on. 2005, in terms of the construction actually executed and in terms of permit volume has been exceptional, which raises expectations that there are solid guarantees that 2006 will be a growth year. We must also pay attention to the trend toward a dampening of housing price rises, since, if in a period of one or two years there is (as expected) a stabilisation, this could dissuade speculative demand, which occupies such an important position in the Spanish real estate market today. In such a scenario the consequence would be the stagnation of production of new supply.

As for non-residential construction, we have to deal with a somewhat uneven series of markets often having independent cycles, which is what appears to be happening at this time. Thus, it is expected that offices, commercial buildings and buildings for tourism and leisure activity will enter a buoyant phase and be able to counteract the start of a recession in industrial construction. The combined result would augur a moderate decrease in activity, which would tend to stump growth.

Spanish civil engineering is still gaining volume year after year at a more than respectable rate: in fact, this is the construction market with the greater increases in growth, and which has the best chances of continuing to grow in forthcoming years given the volume of works that have started and that have been planned in the medium term. The erosion of growth rates in this case has a far different meaning: the transition from years of stiff accelerated growth to still respectable increases in growth.

2 General Economic Environment

The comments above on the Spanish economic environment set out in the last few reports have been characterised by a mixture of optimism and caution, which are still valid for describing the current situation and the most immediate outlook.

The optimism is justified in light of an economy that is growing above the European average and which is not showing signs of deceleration: 2005 closed with an increase of 3.4% in GDP after having begun at 3.3.% in the first quarter and finishing off the last two at 3.5%. On the other hand, caution is also called for, as we can see once again to what extent all this growth has been caused by internal demand, leading to a deterioration in the balance of payments and an inflation rate considerably above the Eurozone average. At the same time industrial production still remains weak, relegated to the shadow of the construction sector, which continues growing indefatigably. The gains in productivity have been very modest.

In spite of all the above, certain analysts have tried to emphasise how some of these factors are beginning to vary in their behaviour:

• Final consumer spending has been 4.4% in 2005, against 4.8% in 2004, due to government spending, since family expenditure has remained at the same rate as in 2004 (4.4%). • Gross fixed capital formation has closed 2005 with considerable growth of 7.2%, boosted not only by construction, as has usually been the case, but also by investments in capital goods, which have grown by 9.5% throughout the year. • Imports showed signs of a slow down in the fourth quarter, but are still growing above 7%.

But these indicators are, for the time being, too modest to make it nothing short of premature to announce that the Spanish economy is entering into a mutation stage in its growth model:

• Family consumption is still being spurred on by the positive situation in the labour market (in the last four quarters 907,500 jobs have been created). Mortgages continue at all-time highs: according to January data, the value of home mortgages soared to Euros 16,168 million, 37.7% higher than in January last year. Moreover, the average mortgage figure grew by 16.8% on January 2005. There is concern as to what extent families are nearing over-indebtedness: the Bank of Spain has acknowledged that it has detected an increase in the “sensitivity of spending decisions” due to the fact that interest rates for the first time in a long stretch are starting to rise. • Gross fixed capital formation (GFCF) continues to be practically in the hands of the construction industry, which by itself generates 58% of total GFCF in the country. • It is not very likely that external demand will stop contributing negatively to the Spanish economy, in light of the major role energy plays in imports, and how energy prices appear to be far from stabilising.

Future outlook

The latest outlook of the Spanish government (end of last year) for 2006 calls for a 3.3% rise in growth, the same figure reported in the last Euroconstruct report for June, and which we have decided to maintain since external analysts have not significantly altered this figure. For example, the OCDE and the IMF both bank on rates of 3.2% and 3.25%, respectively. In spite of our keeping this GDP target, some of its components have been modified: consumption has been shaved downward (especially private consumption, due to the rise in interest rates) which is expected to be offset by gross fixed capital formation, in which construction is as solid as ever. It would seem reasonable also to maintain the moderate scenario for the recovery of exports.

Only minor adjustments to the economic model

Year-on-year variation rates (%, linked volume) in GDP and some of its components

GDP consumption GFCF

3.5 – forecast 6 – forecast forecast public 7 – construction 5 – 6 – 3 – 5 – 4 – 4 – 2.5 – 3 – 3 – total

private 2 – 2 – 2 – 02 03 04 05 06 07 08 02 03 04 05 06 07 08 02 03 04 05 06 07 08

Historic data from Spanish National Accounting Bureau, INE. Forecast by ITeC

Given the lack of reasons for significantly modifying the 2006 estimates, we have also not found it necessary to substantially adjust the 2007-2008 outlook in the report six months ago which, centred on the hypothesis of a slight slow down in economic growth. Specifically, we now propose a scenario with 3 decimal points less growth in 2007 than in 2006, and 2 decimal points less growth in 2008 than in 2007. The blame for this erosion in growth is due to the following factors:

• Private consumption: there are many reservations as to expecting that it could maintain the high levels of 2004-05 (while it will continue to grow, including above 2002-2003 rates - See labour market perspectives) • The new post-2006 scenario for the distribution of EU structural funds: this question will continue to give rise to incognitos that hinder correctly anticipating the repercussions both on the Spanish economy as a whole and on the construction market in particular.

3 The Construction Industry

Not too many causes for concern about the short-term health of the Spanish construction industry would arise from a general check-up of its main indicators:

• The 2005 close of the survey of Works for Companies shows a clearly positive balance: 7.5% increase on 2004. If during the first quarter of the year civil engineering and building construction grew at very similar rates, towards the end of the year there was a considerable rise in building construction. • The employment survey for the first quarter of 2006 has recorded a 0.6% rise in employment in the construction industry over the fourth quarter of 2005. As a quarterly increase it is not very considerable, but if calculated year-on-year it is a notable 7.3%. • As forecast in the previous report, the indications of a slow down in cement consumption in 2004 (3.7%) has not continued into 2005. Even the final data for 2005 has been higher than expected, and we have retuned clearly to the growth rates of 2002-2003, in which there were also rises in consumption of 5%. • Something similar has occurred in the forecast of official housing permits: after two consecutive years of record highs, our report anticipated a new record (710,000 units) which was finally surpassed by the figure of 729,000 new housing units. Only in the first six years of this decade there have been more than 3.6 million housing starts, 0.6 million more than all the starts in the 90s put together. And, in spite of everything, there are no clear signs than a change is in sight. • Municipal building licenses for non-residential construction have increased in comparison with the figure discussed in our last report. The year-on-year balance shows that in the last twelve months for which data is available (October 04- September 05) there has been an increase in permit volume by 4.4% on the period from October 03- September 04. • Public tendering is still chalking up high growth rates: 2005 posted an 18.5% annual increase, very similar to the 18.3% rate in 2004, both figures coming from the statistics of the Ministry of Public Works. As mentioned in our last report, of special note is the excellent performance of tenderings for buildings, which have not grown as much since 2000. Public tenderings for public works have grown by 10.7% in 2005. • In respect of construction costs, the sharp increase in prices did not finally materialise in 2005, and which seemed to be threatening the sector only six months ago: the aggregate increase has only been 4.5% (materials plus labour), which is still considerable but far below the forecast in our last report. The point is that it is the cost of labour that has remained under the CPI (2.9%) while materials have slowed down their growth (5.2% in 2005 against 10.3% in 2004). By material groups, the bigger impacts on price rises have come from bituminous products (+27.8%) followed by metal products, at a distance, (+6.8%). On the other hand, the types of materials that have contributed to price containment have been cement (+4.2%), electrical equipment (+ 3.0%) and, especially, ceramic bricks (+0.6%).

4 Residential Construction

In the last six months since our last report the current of opinion postulating that the Spanish residential market is nearing the end of its expansion phase has been gaining ground. Although it is true that since the beginning of the residential boom there has been almost an uninterrupted feeling of unease as to the duration of the cycle (based undoubtedly on prior history, in which the peaks lasted, at the most, two or three years) now the arguments on which the long announced “return to normality” are based have been reinforced by a major factor that has been intuited for a long time but which had yet to materialise: the rise in interest rates.

In a market with sky-rocketing prices, an interest rate rise must (at least theoretically) play a major role in cooling growth. In practice, the effect on supply has not been made immediately evident. We need to go no further than saying that 2005 saw more record- breaking housing starts and completions. And the initial figures for 2006 also show few signs that the market is feeling the interest rate pinch. In answer to the question as to why the interest rate factor has not been capable of changing production growth in the residential market, we would like to make the following points:

• The mortgage market has tried to treat the increase as a lesser evil, while, on the other hand, the factor of surprise is missing: the rises have been discreet and have been expected for quite a long time. In general, the banking sector still considers that in the short term the risk thresholds will not be breached. • As for the real estate market, there are very few surprises in the evolution of housing prices. The latest data made public on the year-on-year increase in the first quarter of 2006 is 11.8% in year-on-year growth. Growth in prices continues to decelerate (remember that the same figure one year ago was 15.5%, and 18.6% two years ago) but at a very slow rate. The idea in the last Euroconstruct report that, in spite of the slow down, revaluation rates would continue to be high enough not to dampen the appeal of speculative buying still holds true.

Interest rates Housing prices

Inter-bank market Bars= 2005 base index (scale on the left) EURIBOR at one year (%) Curve= year-on-year variation (scale on the right) 3.1 120 20%

18% 2.9 100 16%

2.7 14% 80 12% 2.5 60 10%

8% 2.3 40 6%

4% 2.1 20 2%

1.9 0 0% 03 04 05 06 02 03 04 05 06 01 03 05 07 09 11 01 03 05 07 09 11 01 03 05 07 09 11 01 03 1T 2T 3T 4T 1T 2T 3T 4T 1T 2T 3T 4T 1T 2T 3T 4T 1T Source: Bank of Spain Source: Housing Ministry

The Technical Building Code and its effects on the market

Last March the Technical Building Code (CTE, It is also expected that in one year the section on Spanish acronym) was adopted. This is new acoustic insulation that was not published in the legislation regulating the major technical aspects of March code will be released. The wording of this building projects, covering structural calculations to section is quite controversial, as in practice specific water-proofing, thermal insulation to fire-safety sound insulating materials will have to be used measures. In spite of the fact that this is a strictly (materials that are not common right now) and technical reform, it will undoubtedly have afterwards their effectiveness will have to be repercussions for the building market. checked. Obviously, this will add up more costs.

The repercussion most feared is that housing prices The adoption of the CTE may also be having a may suffer. Insofar as the new code is more parallel effect: accelerating the demand of building demanding, this will involve greater consumption of permits and licenses in order to take advantage of materials. Two examples seem a propos: increase in the transition period in which the projects drawn up the degree of thermal insulation (as per EU Energy under the old criteria will still be accepted. This is Efficiency Directive 2002/91) and the obligation to why it is possible that during the first half of 2006 install solar panels to generate hot water. The there may be a certain number of starts included in Ministry of Housing has assured the public that the the statistics that are actually only a manoeuvre to increased costs due to the CTE could total 1% of avoid the requirements of the CTE. total cost, but also indicating that the user will recover this amount in energy cost savings. But there are many analysts who believe that the code could be used as a pretext to increase the final price of housing.

The residential market in Spain is still in a situation that combines the evident inertia of production with the apparent easy with which speculative demand (which has a tremendous specific weight in relation to the demand for use) may opt for more appealing alternatives if real estate conditions worsen. This climate of stability and volatility is difficult to translate into information and forecasts, although we must still review and revise the assumptions in the last several Euroconstruct reports.

2005 Results

In the short term we must begin by admitting once again that the 2005 forecast of new residential construction volume has fallen short: in spite of the fact that six months go there was an undoubted expectation for growth that would be totally exceptional (4.8%) by any means, the spurt of activity in the last three months exceeded these expectations and the year closed with an increase of 6.4%, the highest in the last four years. Without reaching the growth levels in new construction, housing renovation also performed well: a 4.5% increase. This means that in spite of the extraordinary health of the of new construction, renovation did not lag far behind, confirming the principle by which for every 10 Euros spent on residential construction, 3 Euros are allocated to renovations. According to the latest estimates, 15% of all renovation activity relates to total renovation, 30% to collective operations affecting all the inhabitants of a building (roofing repairs, installations, and façades) and the remaining 55% to the one-off renovations of private individuals.

2006 Outlook

One year ago there were doubts as to whether 2006 would be a year of stagnation or growth for new residential construction. Given the volume of starts in 2005, including those in the first few months of 2006, it appears that all doubts have been withered in this regard: as far as supply is concerned, there is a clear potential for continued growth. And as for demand, although purchases may not be scaling the frivolous heights of a few years ago, and although there may be shifts in demand from certain zones to others, here too we see very few substantial symptoms of a reversal of fortune. Thus, we think a 3.8% growth rate would represent a still buoyant sector that is, however, beginning to manifest the odd sign of wear and tear, somewhat reasonably admissible, of course, for a sector that has grown by 85% in real terms in the last ten years, at almost 6.5% yearly on average. In 2006 there may also be © EUROCONSTRUCT 311 Spain Amsterdam, June 2006 some slippage in permit volumes, which, in spite of everything, would only be relative: the hypothesis we are putting forward would be for a repeat of 2004 results (690,000 units, which at that time was a record). There is also not much expectation of an increase in the rate of completions, which is due to the fact that the market has a high volume of supply that can satisfy demand. There are no reasons to expect a change in performance of the renovation market, which will continue growing at rates above average for the construction industry.

2007-2008 Estimates

If all the above materialises along the lines of this hypothesis, there would be little hope of substantial growth in 2007 and 2008. However, we should emphasise that this would be far from catastrophic: we can see, for example, how the permit volume expected for 2007 and 2008 is perfectly in line with that of 2002-2004, which, no doubt, were good years. We are simply working with the hypothesis that the peaks of production will be hit in 2006-2007 and that as from that time the residential sector will stabilise around production volumes more in line with: • A market that has increased by 5.3 million new housing units throughout the period from 2000 to 2008, sufficient in all respects to satisfy demographic-based demand; • A somewhat dampened speculative consumption, assuming that by 2007-2008 the current slowing trend in housing prices may finally materialise (without tears) ushering in a scenario of price stability and growth more or less in line with the CPI. • A hypothetical national soul-searching as to where these new housing flows are driving the country in terms of sustainability.

This scenario, which could slow down new housing construction, does not necessarily have to be negative for second hand or used housing: perhaps speculative purchasing will erode somewhat, but occupancy-based purchases will certainly not decline, which is what predominates in the second hand market. To the extent that interest rates do not swamp homeowners that are paying for their dwelling, there is no doubt that they will continue focussing their attention and resources on maintaining and improving their homes. It is not for nothing that homebuyers are more and more demanding in terms of the objective features they seek (insulation, installations). And in respect of subjective features (finishing, comfort), there is also little doubt that obsolescence rates will tend to accelerate.

For all the above, we expect new construction and renovation to grow at different rates: while the former will slow down and even decline, the second will maintain significant, constant growth.

5 Non-residential Construction

Non-residential construction in Spain continues in line with our reports over the last few years: there have only been slight increases in new construction, as part of the underlying trend towards a slow deceleration. This general climate is more than reasonable in a country that has theoretically covered its deficits in education and health, and whose primary and secondary sectors are being surpassed by global competitivity. On the other hand, there still seems to be margin for growth in tertiary areas, such as offices, commercial and leisure.

Indeed, 2005 ended quite in line with forecast in our report six months ago: growth (2.1%) significantly below the overall volume of the construction industry, with two sub-sectors virtually stagnant (commercial and agriculture, which did not reach +1%) and a third sector in recession (offices, which fell –0.5%). The truly powerful sub-sectors, in terms of their contribution to the creation of non-residential market value (industry and logistics) have performed above average: 3.4 and 3.0%, respectively. This is also true for the sub-sectors more orientated to public services: education (3.6%) and health (4.4%).

A look at the volume of permits issued recently can help us to anticipate the trend in the short term. As the graph below shows, we can expect growth in 2006 in industry, warehouses, commercial, and somewhat sharper growth if possible in cultural and recreational facilities (“Others”). It appears that growth rates are awakening albeit modestly in new office projects, at the same time that there is a certain reactivation of the real estate market. Rents, for example, have shaken off their lethargy in Madrid, growing by 9% in 2005, although this is not so clear in the case of Barcelona, in spite of the fact that demand seems reasonably strong in both cities.

The key markets (industry, warehouses and commercial) continue progressing

Breakdown by type of non-residential construction permits (surface areas, m² x 1000)

industry

warehouses

ofices

commercial

health

education

agriculture

other

0 1 500 3 000 4 500 6 000 7 500 9 000

period nov’04-oct’05 period nov’03-oct’04

Prepared by ITeC using permit license numbers from the city councils

Strictly in relation to the 2006-2008 forecast period, we set out below our outlook for each non-residential market:

• It is doubtful that the above-average growth rates will remain in education and health, in spite of the fact that the government policies in these areas are particularly well disposed to investment. What we expect is that the investment focus will materialise in personnel and equipment (including maintenance and improvements of existing buildings) more than in new construction.

• As for Industrial construction, the fear is that the positive conjuncture is actually a market spike subject to considerable real estate fluctuations since, from the point of view of industrial activity, the conjuncture is not very promising (see the supply side of GDP where industry grew only by 0.6% year-on-year in 2005). Something similar to what happened in 2001 could happen again: a year of major growth in industrial construction followed by four years of stagnation. The volume of permits for 2005 gives hope that the downturn is not just around the corner, and that the market will not respond negatively in 2006 to the excess, and, accordingly, the most critical moments will occur in 2007-2008.

• The Spanish warehouse construction market is caught between two forces: the industrial market and the commercial market. The trend we have observed is that in the forthcoming years it will fall steadily under the influence of the commercial sector, while will protect it from the foreseeable fall in industrial demand. In any case, growth expectations hover around the 1% to 2% mark.

• Office construction may be bidding farewell to the 2005 slump, the reasons for which were due to investment-real estate issues and not structural problems. Since we are seeing the initial signs of a return to normality in this real estate market, we expect that office construction will once again start to grow. In light of the fact that to date this recovery is quite meagre, the scenario we propose is for growth in the area of 1.6±0.1%, which, while not very substantial, will end by surpassing the overall non- residential growth rate.

• As for commercial construction, the scenario described in our last report, predicting a rebound in activity after a stagnant 2005, will hold true for this year. As we reported six months ago, the weak performance for 2005 was a logical reaction to several years of high volume: only in the 2002-2004 three-year period alone more commercial centre surface area was put on the market than in the entire five-year period from 1997-2001.

• The immediate future for construction generated by agricultural, livestock and fishing is for a moderate decline. The contribution of these primary activities to the GDP on the supply side has been showing negative signs since 2003. This situation may worsen as the announced reorientation of EU structural funding materialises with a shift of funds towards the new members of the EU.

• Finally, other non-residential construction, driven by tourist and leisure-related construction, will share, along with the commercial area, the status of the sub-market with the greatest growth potential. In spite of the fact that we are not holding out great expectations (the average rate for the forecast period would be 2.5%, something higher than the forecast six months ago), in the last few years this sector has shown itself to be rather unaffected by the fluctuations which, but for a few exceptions, usually impact the other non-residential sub-markets, and everything would point to the fact that this market will continue performing well throughout the outlook period. The inflows of tourists (both domestic and foreign) seem to prove this.

6 Civil Engineering

Several years ago, during the first phase of the residential construction boom, and with expectations that it was evident that it would not last as long as it did, the government economic authorities often resorted to the idea that “civil engineering would take over” when things got bad. The message was that they were fostering a civil engineering portfolio that was sufficiently powerful to counteract (at least in theory) a hypothetical cooling off of residential demand that would leave a large part of the construction industry, which until that time had been engaged in housing construction, out of work. The formula made sense: demand existed (given the historical infrastructural deficit that Spain had been dragging along for many years) and so did the financing (in the short term through structural EU funding, and through PPPs in the medium and long-term.

Years later, not only has residential construction activity not slipped, but it has, in fact, accelerated, and the stock of engineering projects (especially transport) are being absorbed and executed by the companies. It could be said that things have not quite turned out as planned, but there is no reason to complain: the actual scenario is turning out to be better than predicted. Moreover, the point of no return has been reached, in the sense that plans have been made public in the medium-long term stretching the scope of the new infrastructures to all parts of the country.

If to this background agenda we add the imminent election schedule in Spain (municipal elections in 2007 and general elections in 2008) the excellent results of 2005 should come as no surprise: growth of 8.2%, which even exceeds the forecast six months ago.

The short-term prospects are also positive if we view the tendering figures for 2005 as an anticipatory indicator. According to the statistics of the Ministry of Public Works, the increase in tenderings against 2004 has been 11%; and 19% according to SEOPAN. In light of this, the 2006 forecast prepared six months ago has been increased and it may now possibly reach 6.4 %.

Public tenderings: a new record

Public tenderings for engineering works | Year-on-year evolution (billion EUR)

25 SEOPAN

FOMENTO 20

10 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06

Prepared by del ITeC using data from the Ministry of Public Works and Seopan

The expectations for the forecast period from 2006-2008 for each civil engineering market are based on the following points:

• The forecast for road building in our report issued six months ago was for an improvement and everything indicated that 2005 was going to exceed the record year for tenderings, 2002, which had never been surpassed. And this is in fact what happened, and with sufficient strength as to justify a new upward adjustment both for 2005 results and the outlook for 2006.

• 2007 is going to be a key year for railroads, since the government has proposed meeting its commitments by the 2008 elections with three very significant high-speed stretches: Lleida-Barcelona, Cordoba-Malaga and Madrid-Valladolid. The latter is not a particularly long line but it has a major strategic value in having overcome an important geographic obstacle; it will facilitate the later prolongation of the high-speed rail network to the north and northeast of Spain. The branch lines include a line to the French border that will form part of a series of priority corridors in the TEN-T European program Apart from these projects which, by dint of timing coincidences, will be the subject of greater attention, an entire series of projects that are in different stages of execution and planning are underway that lead us to expect that in railroads there will be no typical “post-election” vacuum effect.

• Of special note in Other transport infrastructures are the expectations for airports, boosted by growing demand: air transit figures have hit new records in 2005 with 179 million passengers and year-on-year growth of 9%. At the beginning of the year the Canary Islands Airport Infrastructure Plan was presented which has scheduled a series of actions to meet a scenario in which transit to the islands will increase by 60% over the next 12 years. The Plan contemplates two periods: 2006-2010, for which it establishes a detailed investment plan of Euros 970 million and an advance investment for the 2020 period, in the amount of Euros 1.927 million.

• In respect of water works, on the one hand there has been a qualitative leap in 2005 tendering statistics gathered by the Ministry of Public Works in relation to irrigation, replenishment and sewage systems; and on the other hand, the A.G.U.A. Program (Water Management and Utilisation Measures) of the Ministry of the Environment is beginning to bear fruit. Thus, in 2005, 5 desalination plants have been started up, which could increase from 9 to 12 in 2006. Thus, the earlier forecast for combined water and energy-related construction has been adjusted upwards. The potential weaknesses in this sector are in energy, where there is a lack of concretion as to future investment, in the midst of the present debate on the deregulation of the energy market. The 2005 report of the International Energy Agency focussed attention on the lack of interconnectivity of the Spanish energy networks to those in Europe. The recommendation of the Agency to end the “insular” model of Spanish energy networks is not only an attempt to foster competitivity but also to increase the security of supply in the face of an apparently unstoppable increase in demand. There is also doubt as to what actions will be taken to counteract the foreseeable end of the useful lives of a series of nuclear power plants.

• Finally, the positive performance of the new urbanisation infrastructures has been boosting the “Other” figures: a new record has been set in tenderings in 2005, which bodes well for an equally brilliant 2006. The upward adjustments to residential construction have also contributed positively to this area.

APPENDIX – DEFINITIONS

Table 1

• Population: figures refer to January 1st of each year • Unemployed and unemployment rate: the Labour Force Survey (EPA) conducted by INE as per ILO definitions has suffered a methodological break in 2005. In order to present a consistent series, pre-2005 figures are not the official ones, but an OECD estimation.

Table 2

• Construction output: is the addition of the production generated by companies in the construction sector plus the construction production generated in other sectors. This explicitly excludes taxes (VAT), intermediate production (self-consumption) and the production generated in other sectors by construction companies.

Table 3

• Housing stock: total of all built spaces suitable to be inhabited by persons and dedicated exclusively to residential use. Collective dwellings (which have mixed uses i.e: residential + recreational or residential + health) and mobile dwellings are explicitly excluded. • Secondary dwellings: the part of the housing stock allocated to seasonal residential use. • Vacant dwellings: the part of the housing stock presently unoccupied, but in an adequate state to be eventually used as a main or secondary dwelling. This includes those dwellings that are at present waiting to be sold or rented, and those that are abandoned; the dwellings in state of ruin are explicitly excluded. • Home ownership rate: quotient between the dwellings where the occupant is its legal owner and the total of occupied dwellings (main + secondary)

Table 4a

• Education buildings: schools, high schools, universities, professional schools and other specialised education centres (driving schools, conservatories, religious training, military schools), nurseries. • Health: clinics, hospitals, first aid facilities, rehab centres, clinical laboratories (those for diagnosis, not those producing medicines), and buildings for veterinary activity. • Industrial: buildings allocated to the manufacture of goods, plus those for production and distribution of energy, and those related to mining, petroleum and gas. • Storage: warehouses in general, cold storage, liquid & gas storage (i.e: gasoline) • Offices: apart from strictly office-related buildings (both private and belonging to the Central, Regional or Local Government) this category includes law courts, police stations and banks. Offices are considered fully detached from the manufacturing plant, even if they share the plot. • Commercial: shops, supermarkets, hypermarkets, “public markets” (in the French sense), buildings for wholesale commerce, petrol stations and their satellite shops. • Agricultural: also includes buildings related to farming and fishing • Miscellaneous: includes the following sub-categories: o Permanent collective dwellings: residences for the elderly, residences for students and teachers (not attached to a school or a university), residences for doctors and nurses, prisons, orphanages, convents, abbeys, residential military buildings. o Eventual collective dwellings: hotels, motels. o Transport & communications: surface and underground car parks, airports, railway and bus stations, buildings for storage, repair and maintenance of railways, buses and airplanes, buildings related to river and sea transport, buildings for postal distribution, buildings for housing telephone equipment other than offices and antennae. o Other: fire stations, buildings for religious uses.

Country/Pays/Land: SPAIN Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 41 838 42 717 43 198 44 108 44 750 45 300 45 850 Bevölkerung

Households ('000s) Ménages 14 945 15 254 15 614 16 050 16 450 16 950 17 450 Haushalte

Unemployed ('000s) 1) Chômeurs 2 300 2 260 2 160 1 875 1 800 1 790 1 765 Arbeitslose

Unemployment rate (%) Taux de chômage 11,2 11,0 10,5 9,1 8,7 8,7 8,6 Arbeitslosenquote

Change of GDP Variation du PIB 2,7 2,9 3,1 3,3 3,1 2,8 2,6 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 3,5 3,0 3,0 3,4 3,4 2,9 2,6 Verbraucherpreise

Construction prices (% change) 2) Prix de la construction 3,1 1,5 7,2 4,5 4,4 3,8 2,8 Baupreise

Short term interest rate 3) Taux d' intérêt à court terme 3,3 2,3 2,1 2,2 2,9 3,3 3,6 Kurzfristiger Zinssatz

Long term interest rate 4) Taux d' intérêt à long terme 5,0 4,1 4,1 3,5 3,9 4,2 4,5 Langfristiger Zinssatz

1) New series: see details on the methodological notes 2) Refers to new construction only 3) 3-month interbank rate (or equivalent) 4) 10-year goverment bonds (or equivalent)

Country/Pays/Land: SPAIN Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 55 140 3,0 3,5 4,5 6,4 3,8 0,5 -1,4

Logement Renovation 24 710 5,0 4,0 4,1 4,5 5,0 4,5 4,0

Wohnungsbau Total 79 850 3,6 3,7 4,4 5,8 4,2 1,7 0,3

Non-residential construction New 22 400 3,5 1,8 2,5 2,1 1,9 1,0 1,0

Bâtiments non résidentiels Renovation 13 720 6,0 3,5 3,0 2,4 2,2 2,0 2,0

übriger Hochbau Total 36 120 4,4 2,4 2,7 2,2 2,0 1,4 1,4

Building New 77 540 3,2 3,0 3,9 5,1 3,3 0,6 -0,7

Bâtiment Renovation 38 430 5,4 3,8 3,7 3,7 4,0 3,6 3,3

Hochbau Total 115 970 3,9 3,3 3,8 4,7 3,5 1,6 0,6

Civil engineering New 37 410 8,3 6,9 6,6 9,0 7,3 5,5 4,2

Génie civil Renovation 7 650 4,4 3,8 3,9 4,4 4,5 3,8 3,5

Tiefbau Total 45 060 7,6 6,3 6,1 8,2 6,8 5,2 4,1

TOTAL CONSTRUCTION OUTPUT 161 030 4,8 4,1 4,4 5,6 4,4 2,7 1,7

Million euro at 2005 prices, excluding taxes.

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 51,51 4,7 4,8 3,7 5,1 4,0 2,5 1,5 Inländischer Zementverbrauch

Country/Pays/Land: SPAIN Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 171,0 196,0 207,0 221,0 205,0 190,0 170,0 Baugenehmigungen Familienhäuser Flats Collectif 446,0 485,0 554,5 600,0 570,0 540,0 490,0 Mehrfamilienhäuser TOTAL 617,0 681,0 761,5 821,0 775,0 730,0 660,0 Housing starts 1+2 family dwellings Logements commencés Individuel 145,4 183,4 186,7 193,5 182,0 170,0 152,0 Baubeginne Familienhäuser Flats Collectif 378,8 452,9 500,3 536,2 508,0 480,0 433,0 Mehrfamilienhäuser TOTAL 524,2 636,3 687,0 729,7 690,0 650,0 585,0 Housing completions 1+2 family dwellings Logements terminés Individuel 160,0 170,0 180,0 185,0 180,0 175,0 160,0 Baufertigstellungen Familienhäuser Flats Collectif 373,0 410,0 456,0 483,0 480,0 470,0 440,0 Mehrfamilienhäuser TOTAL 533,0 580,0 636,0 668,0 660,0 645,0 600,0

Housing stock Logements existants 21 275 21 810 22 390 23 030 23 700 25 360 25 000 Wohnungsbestand

thereof second-homes dont résid. Secondaires 3 430 3 530 3 645 3 765 3 890 4 190 4 100 davon Zweitwohnungen

thereof vacancies dont inoccupé 3 150 3 220 3 300 3 280 3 460 3 400 3 280 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 86,0 87,0 87,0 87,0 88,0 88,0 88,0 Wohnungseigentumsquote

SOURCES: Building permits, architects' permits as compiled by CSCAE; housing starts, technical architects' permits as compiled by Ministerio de Fomento; housing completions, elaboration ITeC 1) Cf. Appendix to the individual country report

Country/Pays/Land: SPAIN Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 515 1,5 0,7 1,5 3,6 0,5 0,9 1,4 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 265 2,9 5,3 7,0 4,4 -0,6 0,5 1,5 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 6 690 1,6 -1,5 1,2 3,4 1,8 0,0 -0,5 Industriegebäude

Storage buildings Bâtiments de stockage 5 435 4,9 4,2 2,5 3,0 2,0 1,0 0,9 Lagergebäude

Office buildings Bureaux 2 265 5,4 4,3 1,9 -0,5 1,6 1,8 1,5 Bürogebäude

Commercial buildings Commerces 3 760 6,0 3,2 6,4 0,5 3,0 2,0 2,8 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 785 0,0 0,5 1,5 0,8 -1,0 -2,0 -2,8 Landwirtschaftsgebäude

Miscellaneous Autres 2 685 2,2 2,1 1,3 1,9 2,3 2,5 2,7 Sonstiges

Total Insgesamt 22 400 3,5 1,8 2,5 2,1 1,9 1,0 1,0

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: SPAIN Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 18 020 7,3 1,5 7,0 13,3 7,3 4,5 2,5 Verkehrsinfrastruktur Straßen Railways Voies ferrées 9 130 10,2 14,0 6,4 1,9 8,5 8,5 8,0 Bahnanlagen Other transport Autres réseaux 1 895 4,5 2,9 3,3 3,0 5,0 4,5 5,0 Übrige Vekehrsinfrastruktur TOTAL 29 045 8,0 5,5 6,5 8,8 7,5 5,8 4,4

Telecommunications Télécomunications 2 740 6,0 5,4 5,4 4,8 3,5 3,2 3,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 9 675 9,0 9,8 5,0 7,2 6,0 4,5 4,0 Energie-und Wasserversorgung

Other Autres 3 600 2,9 4,0 5,8 9,3 6,0 4,5 3,5 Sonstiges

Total 45 060 7,6 6,3 6,1 8,2 6,8 5,2 4,2

Million euro at 2005 prices, excluding taxes.

Country/Pays/Land: SPAIN Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 522,2 2,9 2,6 4,4 4,4 3,6 3,3 3,1 Privater Verbrauch

Public consumption Consommation publique 160,9 4,5 4,8 6,0 4,5 4,6 4,4 3,7 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 265,5 3,3 5,4 4,9 7,2 5,8 5,5 4,9 of wich construction 154,8 6,2 6,3 5,5 6,0 4,8 3,0 1,8

Stocks (contribution as % of GDP) Variations de stocks 2,9 Vorratsveränderung

Exports Exportations 229,7 1,8 3,6 3,3 1,0 2,5 2,1 1,8 Exporte

Imports Importations 276,9 3,9 6,0 9,3 7,1 6,8 6,5 5,7 Importe

GDP PIB 904,3 2,7 2,9 3,1 3,3 3,1 2,8 2,6 BIP

Standard National Accounts, gross figures.

SWEDEN Prognoscentret AB www.prognoscentret.se

Bengt Henricson e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The Swedish economy is currently in a positive upward spiral where an improving labour market and rising household consumption are mutually reinforcing. The labour market is an upside surprise, with 105 000 new jobs forecast for 2006 and 2007. General government finances are also unexpectedly strong, partly because of a decrease in ill health. In these circumstances, un-financed reforms and extensive labour market programmes are inappropriate from the standpoint of economic policy.

The inflow of orders and production volumes have picked up to a greater extent than the firms had anticipated. Industry is currently relatively satisfied with the order situation and corporate profitability. The confidence indicator has risen a few more points and is now at its highest level since the autumn of 2000. Industrial employment dropped only slightly during the first quarter. The firms' expectations are now lower than compared with the past few quarters. This also applies to orders received and production volumes. Further on, the construction market continued growth in orders received, building work and employment was reported. The firms also mention a labour shortage. Nearly half of the firms now report that this is the main barrier to an increased level of activity. At the same time, however, the industry is optimistic and anticipates a continued upswing during the second quarter.

The structure of the Swedish construction market has changed significantly over the The market structure of the Swedish construction last decade. Before the major dropdown in market 1990 (excl. civil engineering) the construction market in early 1990ies, the four market segments were pretty 24% 24% New Residential (24%) much equally big. The volume of building starts of new residential was twice as high New Non-residential (25%) as today; that is for example that R&M Residential (27%) approximately 60.000 residents were 27% 25% R&M Non-residential (24%) started per year in early 90ies. For new non-residential the change over the last decade is even more dramatic. In 1990 approximately 4.9 million square metres new non-residential were started, and ever since then, this segment has been facing a significant negative trend. That is, until now. We are predicting a growth in the new construction non-residential market for present and the next year, and a modest decrease in 2008.

The market structure of the Swedish construction The R&M segments have also declined market 2005 (exkl. civil engineering) over the stated period, but are indeed more stable than the new construction 24% New Residential (24%) 31% segments. All in all, the total construction New Non-residential (12%) market has declined by approximately R&M Residential (33%) 20% since the early 1990ies, from 12 billion Euros to approximately 9,5 billion 12% R&M Non-residential (31%) Euros in 2005. 33% As can be seen in the graphs, the market structure of the Swedish construction market is much depending on the R&M sector. However, we believe in an increase in all segments in the coming years, and new residential buildings has already started to work its way back to levels that once were and new non- residential buildings finally turned its bitter down warding trend that has been the reality for far too long. Our forecast to 2008 is, hence, optimistic:

New New New R&M R&M R&M TOTAL Residential Non-residential Civil engineering Residential Non-residential Civil engineering CONSTRUCTION 2004 3 057 1 759 5 189 4 678 4 515 1 148 20 347 2005 3 577 1 788 4 775 4 885 4 604 1 166 20 795 2006 3 901 2 043 5 129 5 157 4 769 1 212 22 212 2007 4 119 2 197 5 381 5 304 4 938 1 251 23 189 2008 4 191 2 185 5 437 5 382 5 039 1 289 23 522

Investments in building constructions in million Euros.

To sum up; the Swedish construction market regarding residential buildings has indeed recovered well after some years of lacking construction. Both new-construction and R&M measures keep on increasing and our forecasts for the coming years are optimistic. The market of new non-residential construction has been facing a downwarding trend in several years and in 2004 the total outcome ended up at the extreme low level of 2 million square metre. However, the outcome of 2005 shows that this negative trend may have been broken. But Sweden still producing a very low level of new non-residential buildings, in fact one of the lowest in Europe. We are predicting an increase in coming years both for new-construction and R&M measures in non-residentials.

The Swedish construction market up to 2008 12 000

10 000

8 000 Residential

6 000 Non-resident. Civil engin. 4 000 Million Euros 2 000

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year

The Swedish civil engineering market has gradually increased over the last years. In 2005, the total investments in the sector ended up at 5.9 million Euros. We believe that a positive trend will linger and the total investments in new civil engineering will increase throughout the whole forecast period. The development in R&M civil engineering has been positive over the last years, and we expect this positive trend to linger throughout the forecast period.

2 Macro-economic Outlook

Swedish Economy in an Upward Spiral Exports, household consumption, general government consumption and investment are all rising rapidly. The principal forces driving this surge are high global growth, an expansionary monetary policy that has also led to a weak “krona” and high asset prices, an expansionary fiscal policy, solid balance sheets of households and firms and cyclically strong investment. Also contributing to growth is the current upward spiral of the Swedish economy, where an improving labour market and rising household consumption are mutually reinforcing. GDP will increase by 3.7 percent this year and 3.2 percent next year. Adjusted for variations between years in the number of working days - a more accurate reflection of the economic tendency - growth will be 4.0 percent this year and 3.3 percent next year.

With little inflation at the outset and resource utilization rapidly rising from a low level, monetary policy must strike a difficult balance. Tightening monetary policy too rapidly would reduce inflation far below two percent in 2006 and 2007 and unnecessarily dampen the increase in employment. Tightening monetary policy too slowly, on the other hand, would lead to excessive resource utilization, risking inflation much higher than the target after 2007. In the NIER:s opinion, it would be appropriate to maintain the current policy interest rate (repo rate) until October 2006, thereby shortening the period when inflation and resource utilization are too low. Thereafter, the repo rate should be raised relatively quickly to 3.75 percent by the end of 2007, thus counteracting any tendency toward unsustainably high resource utilization and excessive inflation after2007. In-view of the high level of resource utilization, it would be appropriate to continue raising the repo rate after 2007 as well.

The net lending of the general government sector increased from -0.2 percent of GDP in 2003 to 2.5 percent of GDP in 2005. Since resource utilization was lower in 2005 than in 2003, the improvement was not due to cyclical causes. Rather, the reason was a restrictive budget policy entailing, for example, limited upward adjustment of central government appropriations, as well as restraint in local government expenditure in order to meet the balanced-budget requirement. In addition, the sick-listing process has been made more rigorous - probably one of the main reasons for the decrease in central government expenditure related to ill health. Measured in full-year equivalents, ill health dropped from 668 000 persons in 2003 to652 000 in2005. The downward tendency in ill health is thus strengthening general government finances, not only through lower expenditure but also through higher revenue from income taxes and employer contributions.

Exports of services have risen strongly in recent years and are thus becoming an increasingly important segment of the Swedish economy. Business services in particular (including so-called merchanting) have been generating rapidly rising export revenue. This development has also meant that the contribution to growth from the balance of services – that is, exports of services minus imports of services – has been substantial in recent years.

Household consumption is accelerating. The relatively subdued tendency in previous years was due largely to a slack labour market. The current strengthening of the labour market, in combination with otherwise favourable conditions like low interest rates and a strong net wealth position, means that the outlook for a strong upswing in consumption is very promising.

The Labour Market is getting better The labour market began picking up in the second quarter of 2005 after more than three years of cyclical weakening. Employment will increase by a full 1.7 percent this year and 1.2 percent next year. In total, the number of persons employed will have risen by 105 000 between the fourth quarter of 2005 and the fourth quarter of 2007. The regular employment rate for persons aged 20-64 will increase from 77.5 percent in the fourth quarter of 2005 to

78.8 percent in the fourth quarter of 2007. To reach the Government’s and Parliament’s targeted regular employment rate of 80 percent, employment would have to increase by an additional 67 000 persons. In 2007 resource utilization is expected to be somewhat above the level sustainable in the long run. Lasting achievement of the employment target thus requires changes in rules that would increase labour supply or lower the equilibrium unemployment rate.

Given the strong employment tendency, the unemployment rate will fall from 5.9 percent in 2005 to 4.6 percent in 2008. The drop is explainable to some extent by a nonrecurring increase in the number of participants in labour market programmes. Since resource utilization will be somewhat strained in the end of the forecast period, the volume of labour market programmes is far too high from an economic policy standpoint.

Assuming no additional un-financed reductions in taxes or increases in expenditure, general government net lending will strengthen to 2.9 percent of GDP in 2007. One reason for the continued improvement is that ill health will decrease further to 629 000 full-year equivalents in 2007. Net lending is expected to average 2.1 percent of GDP for 2000-2007, a time span considered sufficient to cover a business cycle. Based on the current forecast, the conclusion is thus that the Government’s and Parliament’s net lending target of 2 percent over a business cycle will be achieved.17

% change 2002 2003 2004 2005 2006 2007 2008 GDP 2.0 1.5 3.6 2.7 3.7 3.2 2.3 Private consumption 1.4 1.5 1.8 2.4 3.3 3.5 2.9 Public consumption 2.3 0.8 0.3 1.1 1.6 1.1 0.6 Unemployment 4.3 4.9 5.9 5.9 5.0 4.8 4.6

The macro-economic impact on the Swedish construction market The non-residential market is mainly dependent on the development in employment/ unemployment, private consumption, export (regarding industrial buildings) and public investments. The forecast for private industry investments is also an indicator of the development in mainly the new production of non-residential buildings. The fluctuation in building costs and interest rates also affect the investments outcomes of the non-residential market.

In a similar way, the market of residential buildings is especially depending on disposable incomes and wage development, employment/ unemployment, interest rates and private consumption. Demographic changes also have an impact on mainly new-construction of residents, but foremost on a long-term perspective. The same goes for the building cost development, which affect both the new residential market and the R&M market.

The Swedish civil engineering market is almost exclusively ruled by the government; hence the most important factor of the development of the market is government politics and investments. New-construction and renovation of roads and infrastructure, the expansion of the digital broadcast network, and the extension of the spread of coverage of the new 3G network are all example of government investments. Of course, the general economic trends and development have impact on the civil engineering market, but not as much as governmental initiatives etcetera.

Business activity is strong in all sectors. The situation in industry has improved and exceeded firms' expectations. In the construction industry, the inflow of new orders and construction activity have picked up further. The retail trade shows strong sales figures and anticipates continued growth. The private service sector also shows an improved order situation and better corporate profitability. As regards employment figures, however, the picture is mixed. In industry, there are no indications of employment growth, but in the retail trade and the private service sector, this growth has picked up slightly. Much of the construction industry reports that a labour shortage is the main barrier to further growth.

Construction activity rose further during the first quarter. The number of incoming orders has picked up and the firms have carried out extensive recruitment. The order situation in the industry is satisfactory, with four out of five firms stating satisfaction with the size of order books. On the other hand, the industry is finding it increasingly difficult to recruit labour. Nearly half of the firms now report a labour shortage as the main barrier to a higher level of activity. Tender prices rose during the period. The industry is optimistic about the second quarter of 2006. Incoming orders are likely to continue rising, construction activity is expected to pick up further and half of the firms are planning for recruitment. An equal percentage of the firms anticipate that tender prices will be raised during the period. The outlook for the next twelve months is also bright and around 50 per cent of the firms are looking forward to continued growth.18

Swedish industrial activity picked up further during the first quarter of this year. The inflow of orders and production volumes have picked up to a greater extent than the firms had anticipated. Industry is currently relatively satisfied with the order situation and corporate profitability. The confidence indicator has risen a few more points and is now at its highest level since the autumn of 2000. Industrial employment dropped only slightly during the first quarter. The firms' expectations are now lower than compared with the past few quarters. This also applies to orders received and production volumes.

3 Housing Market

The Swedish construction market regarding residential buildings has indeed recovered well after some years of lacking construction. Both new-construction and R&M measures keep on increasing and our forecasts for the coming years are optimistic.

New residential buildings

In 2005, Sweden faced a significant upswing in the new construction market of residents. Approximately 31.500 residents were started, whereas 19.000 of these were flats and 12.100 residents in 1+2 family dwellings. These figures have to be related to the average housing construction between 1993 and 2004; 15.700 residents per year. It seems like Sweden finally has managed to crawl up to a more “normal” level of residential construction, although Sweden should be producing more residents to be able to meet the demand of the market and to lower the rate of housing shortage that almost every greater city in Sweden are facing today.

The amount of building starts increased with 3.700 units in 2005 compared to the annual outcome of 2004, which represents an increase of 14 percent. An important cause of the increase is that the Stockholm region finally has started to build flats in a noteworthy volume. The demand of smaller flats to a more “reasonable” cost has increased and we expect that the volume of buildings starts of these kinds of residential buildings will increase. Although there still is housing shortage in too many regions in Sweden, not at least in the Stockholm area, the residential construction of mainly flats has begun. As Stockholm constitutes a significant part of the total Swedish construction market, the upswing in construction of flats in this area in the previous two years means a lot for the whole industry.

Although Swedish media announce that Sweden is in a “construction boom” at the moment, we have to remember that seeing per capita, Sweden still is on a low international level; and by far the lowest level in the Nordic market. But there is optimism in the market, and we predict the positive trend to remain.

The conditions for the continued increase of demand in construction of housing are in the long term favourable. The migration to the larger urban areas and other regions of growth seems to be continuing at approximately the same pace as previous years. Another factor that works favourable of stimulate a growth in the market is the continuously increase in flat as well as housing prices. The prices of 1+2 family dwellings have additionally increased by 10 percent in the last twelve months. An average house in Sweden costs approximately 175.000 Euros, and the price of an average house in the Stockholm region is roughly 310.000 Euros. The development in prices for flats is even more positive, +26 percent over the last twelve months and every county except two had a positive pricing trend. The national average price per square metre is 1.700 Euros, and the corresponding figure for the Stockholm city is approximately 4.000 Euros.

Sweden has to produce about 30.000 – 35.000 to be able to meet the demand from the market, but it was over 10 years since new residential had an outcome that great. Until last year! Further on, we predict that the annual outcome will linger at this “high” level. We predict that the annual outcome of new-construction of residential buildings in Sweden will amount to 34.500 units in this year (2006). Divided into type of residential, this means 13.000 dwellings in 1+2 family houses and 21.000 residents in flats. This is equivalent to 3 900 million Euros in investments. The continued development during the forecasted period is of course depending on the situation of the economy. However, in our forecast for the coming years, we predict that both 1+2 family dwellings will gradually increase until 2007 and then recess somewhat in 2008. Flats will have a positive future throughout the rest of the forecast period.

Also, 2006 is an election year in Sweden which gives us reasons to believe that both residential types will increase. The development in the Stockholm region may be the key to how strong the increase will be, especially considering flats. The increase of the disposable income along with other macroeconomic indicators such as interest rates and prices of dwellings will continue to work as a driving force for new production of detached houses in the two coming years. We forecast that construction of residents will be 35.000 units in 2007 and finally 35.500 units in the final year of the forecast period.

Further on, building permits also indicates that the building starts of new construction of residents will remain at least in the near future. Sweden tends to be moving towards the fact that the private households appreciate to own their residents. Therefore, we believe that the boom in the flat construction market will linger in the coming years, with more focus on mainly semi-public flats than rental flats.

Converted in to investments, 3.600 million Euros were invested in new construction of residential buildings in 2005. As a response to the increasing development in building starts in the coming years, the annual investments will have a similar outcome; 3.900 Euros in 2006, and 4.100 respectively 4.200 million Euros will be invested in the New Residential market in the final two years of the forecast period.

R&M Residential buildings

Last year the total investments in R&M residential increased by 4 percent in 2005 to an investment level of about 4.900 million Euros. Of these investments, approximately 2.900 million Euros were invested in 1+2 family dwellings and accordingly 2.000 million Euros in flats. The lion part of the increase came from the Do-it-Yourself (DIY) market, as so many previously years before. The Do-It-Yourself market keeps on strengthening its position. The willingness to renovate in the private household is very high in Sweden, and today Swedes not only “invest” in their homes, but also “consume”. According to our quarterly surveys regarding the DIY-market, the strongest reason to renovations is in fact “tired of the old”. To change the appearance of the kitchen, repaint the living room or redecorate the garden are no longer considered as knotty or too expensive.

Over the last years, many foreign and domestic retailer stores have established on the Swedish market. The Swedish construction market in general has always been giving preferential treatment to Swedish brands of building materials etcetera, but due to the foreign retailer stores, many foreign brands have entered the market.

The trend of establish new retail stores in Sweden goes hand in hand with the growing interest in renovating private homes. This is also something that Swedish media is taking notice of, and almost every channel has their own “redecorate your home”-programme on primetime. Newspapers have serials regarding the subject, and many new “about your home”-magazines have been launched. In other words, this trend is likely here to stay.

Both prices of flats and 1+2 family dwellings keeps on increasing and this give an incentive to invest in the residents, to add more value to the homes for future selling. The trend of renovating private homes is, not surprisingly, strongest in the urban regions, but we can also see that the interest has risen even outside the cities.

The number of larger renovation projects (e.g. not DIY) started over the last few years has been almost 30 percent down on average for the last 10 years. The average annual number of flats under renovation for the period 1990-2004 has been 31,000 units. Every year, more and more properties are in need of renovation. This is especially the case for the large amount of properties being built in the period 1960-1975, the so called “The Million Project”.

The reason for the weak trend in renovation of block of flats is mostly due to a lack of incentives for renovation in this market, along with weak economies in the municipality owned residential buildings.

In 2005, the investments increased by 4.4 percent. The increase in this year mostly dues to the low interest rates and a debated governmental subsidy to help stimulate employment within the market will ensure the growth, the so called ROT-bidraget (Eng: R&M subsidy). This subsidy was also valid in the first two quarters of 2005 and likely had effect in the 1+2 family dwellings market. The largest increase came from the D-I-Y market in just 1+2 family dwellings. Larger renovations projects in flats was almost unchanged compared to 2004.

We predict that the growth in the market will keep on increasing in 2006 and that the total investments in R&M residential buildings will amount to 5.200 million Euros, and increase by 6 percent. Of these 5.200 million, almost 60 percent will be invested in 1+2 family dwellings and the remaining 40 percent in flats. We have revised our forecast somewhat upwards since the last Euroconstruct report, as a response to the low interest rate and a continuously favourable business and private climate in Sweden. The project market in this segment will be rather stable during this period, despite an accumulated need for various works. For the consumer driven market, which is mainly to be seen within the 1+2 family houses and semi- publicly owned flats, we predict a growth throughout the whole forecasting period. The demand for 1+2 family houses is still strong. The migration regions will continue to see an increase in their population with a stable labour market, especially during the later part of the forecasted period.

We estimate the number of larger modernisations to continue to grow within the forecast period, though at a slower pace. However, these modernisations are concentrated to the lager city areas, even though the R&M trend within the residential market increases all over the country. To sum up, we estimate a growth of 5.6 percent in 2006, 2.8 percent in 2007 and finally an increase of 1.5 percent in 2008.

4 Non-residential Market

The market of new non-residential construction has been facing a downwarding trend in several years and in 2004 the total outcome ended up at the extreme low level of 2 million square metre. However, the outcome of 2005 shows that this negative trend may have been broken. But Sweden still producing a very low level of new non-residential buildings, in fact one of the lowest in Europe. We are predicting an increase in coming years both for new- construction and R&M measures in non-residentials.

New non-residential buildings

Over the last decade, the level of non-residential buildings starts has dropped dramatically. The volume of building starts has decreased with as much as 60 percent since 1990, and ever since year 2000 Sweden has been facing a straight down warding trend.

The decrease over the last years is mainly explained by a weak development within the private sector, such as industrial investments, offices, and warehouses. Also, the weakening of the market is very much an urban area dilemma. Especially office buildings have earlier kept the construction on a fairly good volume, but after the decline in the IT-sector the construction of offices has dropped noticeably. This has really had an impact on the construction market in especially the Stockholm region.

The outcome of 2005 for new non-residential buildings finally gives us some positive indicators that the negative trend that has been the reality of the Swedish construction market far too long may be broken. Approximately 2.2 million square metre non-residential buildings was started in 2005, which is an increase by 7% compared to 2004. This means that approximately 1.788 million Euros were invested in this type of buildings during last year. Only investments in storage, industrial and miscellaneous buildings decreased last year, all other building types had a better outcome than in 2004. Commercial buildings rose with 13 percent in 2005, and we expect that 2006 will increase with further 29 percent. In the previous years, Sweden has had a trend of moving out commercial stores outside the cities, in other words; commercial malls have really had its breakthrough in Sweden, and this is still the accurate. New construction of offices will also increase, but will stay at rather low levels in square metre.

2004 was characterised by pessimism amongst the contractors, weak development in order reserve, expected increase in level of unemployment and high level of vacancy in the industry. But in 2005 the confidence indicators have risen, the industrial activity and investments is continuing to pick up, and the inflow of orders has risen. As the increase in new residential buildings, new non-residential seems to have turned its negative trend curve and will fight its way back to 2.2 million square metre. Furtheron, we can see an improved will amongst the actors in the Swedish construction market to change keep this postive engine within this construction segment running. And the level of built square metres non- residential buildings that have been built in the previous years is at an unsustainable level in the long run.

Considering various macroeconomic factors, political decisions and measures along with the increasing believes, need/demand, will and positive beliefs of the future, we believe that non- residential buildings will keep on working its way up to higher volumes of construction. But Sweden has a long way back to what it once was, and when the construction of non- residential buildings can fairly be compared to the Nordic neighbours and the rest of the European market. As said earlier, we expect that approximately 2.000 million Euros will be invested in the new construction non-residential market in 2006, and approximately 2.45 million square metres will be begun. In investments, this means an increase of 14.2 percent and in building starts an even greater increase; 13 percent.

Further on, in our forecast we estimate that the general economy will gradually improve. This means that the situation for new non-residential would keep on getting better during coming two years. We forecast a growth of 7.6 percent to an investment level of 2.2 million Euros in 2007. In 2008, we unfortuantely spot an decrease of -0.5 percent in investments to an investment level of 2.185 million Euros. The development is mainly a reaction of lower level of demand for industrial and commercial buildings.

R&M Non-residential buildings

Over the last years, the investment level of R&M non-residential buildings has been both up and down. In 2003, the segment faced a significant setback, and decreased with 11 percent. The total volume of R&M non-residential ended up at an investment 4.168 million Euros. There are many reasons to the decrease. The uncertainty as to when the world economy would turn may have had some negative effects on this market segment along with high level of vacancies in mainly office and commercial buildings, but also in buildings in the public sector. During periods of recession, the public sector usually increases its R&M work in education and health care.

The negative trend seemed to be temporary, though, and thus the outcome in 2004 became 8.3 percent larger. And in 2005 the R&M market for non-residential buildings increased by further 2 percent. In other words, approximately 4.604 million Euros were invested in the R&M non-residential market in 2005. Every building type, except public buildings like educational and health buildings, increased compared to the annual outcome of 2004.

We predict that R&M non-residential will face an increase throughout the rest of the forecast period. Same macroeconomic factors as mentioned earlier will be relevant for R&M non- residential buildings, but much focus will be on the new construction instead of R&M. This makes us believe that the increase in 2006 will be approximately 4 percent. The development for the rest of the forecast period is obviously still very difficult to predict. However, our main scenario is that the improvement in the general economy will linger and thus, a renewed increase in investment in new non-residential buildings. This will take away some of the resources from the R&M market. Further on, 2006 is an election year in Sweden and this may have some impact on mainly R&M measures in public buidlings. As stated earlier, these building types were the only which had a setback last year, and accordingly we spot an increase for them both in present year. We estimate the total R&M market for non- residential will increase in 2007 by 4 percent and the outlook for 2008 is also positive and we estimate a further increase of 2 percent.

As a summation, the market of R&M non-residential buildings in Sweden can be explained by:

• A temporary setback in 2003, which was followed by an increase in investments by 8 percent in 2004. • A modest increase in last year (2005); +2 percent. • Positive forecast for 2006 – 2008; +4, +4 and +2 percent. • The market of office buildings has finally reached the absolute bottom – new optimism will generate growth • The economy of the public sector will be stabilised during the coming years, and in combination with election year we spot an increase in 2006.

5 Civil Engineering Market

The total volume of investments in civil engineering rose by 3.1 percent in 2002 compared to 2001. This was mainly due to increasing investments in the sector of telecommunications. 2002 was an election year, and a common measure to please the voters is to maintain existing roads but also to build new roads, whereas this segment rose by 24.6 percent. In 2003 the investments in civil engineering decreased by 0.7 percent, and the reason for that is once again the market of telecommunication. This year, the investments in telecommunications fell by more than 23 percent. However, large investments within the water and energy sector kept the total civil engineering at still quite high levels. In 2004, roads and other infrastructure had a tough year, much thanks to that investments were put on hold due to discussions on public versus private financing. 2005 was an even worse year for the Swedish infrastructure, which fell by further 17 percent. To add to that, telecommunication investments fell by 12 percent. The investments within energy and water works had a better development, though, +17 percent. All in all, the investments in the Swedish civil engineering market summed up to an investment volume of 5.900 million Euros, approximately 6 percent less than the outcome of 2004.

Last years decrease is an effect of the rest of the Swedish construction market along with strained governmental budgets. Unlike many other countries, the Swedish civil engineering market is almost solely financed by governmental funds. However, discussions regarding Private Financed Initiatives (PFI) have begun, after a review of a British example. PFI aims to increase the investments through co operations between the Swedish government and the private sector. In the forecasted period the total civil engineering will increase with almost 7 percent in 2006, 4.6 percent in 2007 and eventually 1.4 in 2008. And as this sector is to large extent financed by governmental funds, which can easily be put off in case of a further worsening of the Swedish economy as a whole. But since 2006 is an election year in Sweden, investments in the infrastructure and roads are likely to occur.

The R&M in civil engineering is a fairly diversified part of the market and comprises everything from cleaning roads in the winter (snow-clearance) to maintenance of power plants, railways, airports and harbours. R&M in civil engineering tends to grow very slowly over the long term, but in the short run it can fluctuate, mostly due to cuts or extra spending in public budgets. However, the development in R&M civil engineering has been positive over the last years. In 2005, R&M grew by 1.5 percent, ending up at 1.166 million Euros in total R&M civil engineering investments. The forecast for the present and the two coming year is optimistic, with an annual increase by 4 percent in 2006, 4 and 3.2 percent in 2007 and finally 3.0 percent in 2008.

New political outlines have been made to invest more money on roads and bridges in Sweden. Many larger highways are inferior and either are substitute to renovation/ modernization or simply build a complementary road. In 2004, a very large road/tunnel project in Stockholm was completed, the so called The South Link (Swe: Södra Länken), which leads heavy traffic below ground to reduce traffic jams. Another debated road project is E4 outside the city of Uppsala, but this new complementary piece of the road (approximately 80 kilometres) will not be inaugurated until autumn 2007. All in all, many road projects are in the pipeline and although we may be facing a slight down warding trend this year (due to large investments in “The South Link” last year) we expect this segment to increase.

The investments in the transport sector will also face an increase for the rest of the forecast period. There will be more focus on railways. In the transport infrastructure sector it is possible to see some new larger investments in railways in the period. In the north of the country, the government has granted to extend a high-speed rail-link from Umeå to Haparanda with an investment of around 1,300 million Euros. Also, in the Malmö region there

336 © EUROCONSTRUCT Amsterdam, June 2006 Sweden is to be a new railway-tunnel beneath the city ground across to the Öresund link. This project started last year (2004) and will be completed in 2009.

The telecommunications sector is the most difficult sector to forecast, due to all the uncertainty that surrounds the new technology. The third generation of mobile telephone networks was previously anticipated to be implemented in the period 2002-2004. The nation wide coverage is proceeding at a much slower pace than planned, due to many factors. One is previously unexpected slow development in the use of mobile services amongst the broad span of the population. There are also still structural problems unsolved around how efficient third party application development and maintenance will be handled on a large scale. However, as we stated earlier, the segment has recently had a few very strong years based on a need to upgrade network capacities with 2G and 2,5G equipment. The implementation can be extended over a longer time period, which of course, will lower the annual increase in the investments. Some of this is, however, already taken into account in our predictions.

APPENDIX – DEFINITIONS

Table 1 • The macro figures 2002-2007 refer to the National Institute of Economic Research (Konjunkturinstitutet) and Statistics Sweden (Statistiska Centralbyrån). The figures regarding 2008 is Prognoscentret AB:s own estimations. • The text about Macro Economic Outlook: besides Prognoscentret AB:s own comments, inputs from National Institute of Economic Research (Konjunkturinstitutet), Nordea and The Swedish Central Bank (Sveriges Riksbank). • The figures states the end of the year • The construction prices refers to new construction of flats only

Table 2 • The figures for R&M residential includes DIY investments.

Table 3 • Housing stock at the end of year • Second homes: there is no such statistics in Sweden • Vacancies: refers to annual official figures (Statistics Sweden) of vacancies in multi-dwelling buildings. • Home ownership rate: Last official census for Sweden was carried out in 1990 and the current status of home ownership is estimated.

Table 4 A - B • There is no official statistics on “agricultural building”, as Swedish farmer do not have to apply for building permits as long as they own the land. Therefore, it is hard to even estimate the level of investments in agricultural buildings. • The figures of civil engineering is based of NIER:s and ByggIndex:s estimations, worked up by Prognoscentret AB.

Extra • For the absolute volumes in table 2, 4A and 4B, VAT is excluded. • The absolute volumes for 2005 in the Euroconstruct tables for Sweden are given in million or billion Euros (1 Euro = 9.3173 SEK, rate of May 2006).

Country/Pays/Land: SWEDEN Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 8 941 8 976 9 011 9 048 9 080 9 120 9 150 Bevölkerung

Households ('000s) Ménages 4 280 4 310 4 325 4 340 4 360 4 338 4 410 Haushalte

Unemployed ('000s) Chômeurs 176,0 217,0 246,0 246,0 206,0 182,0 175,0 Arbeitslose

Unemployment rate (%) Taux de chômage 4,3 4,9 5,9 5,9 5,0 4,8 4,6 Arbeitslosenquote

Change of GDP Variation du PIB 2,0 1,5 3,6 2,7 3,7 3,2 2,3 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2,0 1,9 0,4 0,8 1,1 2,1 2,2 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 4,5 3,5 3,1 3,5 2,0 2,0 2,0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 4,1 3,0 2,1 1,7 1,9 3,0 3,5 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 5,3 4,6 4,4 3,4 3,9 4,5 4,5 Langfristiger Zinssatz

1) Refers to new construction of flats only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

Country/Pays/Land: SWEDEN Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 3 577 -0,3 9,3 30,4 17,0 9,1 5,6 1,7

Logement Renovation 4 885 -3,0 3,4 3,1 4,4 5,6 2,8 1,5

Wohnungsbau Total 8 462 -2,1 5,4 12,4 9,4 7,0 4,0 1,6

Non-residential construction New 1 788 -14,1 -16,2 -10,8 1,6 14,2 7,6 -0,5

Bâtiments non résidentiels Renovation 4 604 0,7 -11,1 8,3 2,0 3,6 3,5 2,0

übriger Hochbau Total 6 392 -4,8 -12,8 2,2 1,9 6,6 4,7 1,2

Building New 5 365 -8,0 -4,1 11,6 11,4 10,8 6,3 1,0

Bâtiment Renovation 9 489 -1,1 -4,1 5,6 3,2 4,6 3,2 1,7

Hochbau Total 14 854 -3,5 -4,1 7,6 6,0 6,8 4,3 1,4

Civil engineering New 4 775 3,1 -1,0 -1,5 -8,0 7,4 4,9 1,1

Génie civil Renovation 1 166 3,1 0,9 3,0 1,5 4,0 3,2 3,0

Tiefbau Total 5 941 3,1 -0,7 -0,7 -6,3 6,8 4,6 1,4

TOTAL CONSTRUCTION OUTPUT 20 795 -1,5 -3,0 4,8 2,2 6,8 4,4 1,4

Million euro at 2005 prices, excluding taxes. 1 euro =9,3173 SEK

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 1,63 -3,0 3,5 2,0 2,5 2,5 2,0 -1,4 Inländischer Zementverbrauch

Country/Pays/Land: SWEDEN Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 7,7 10,0 11,2 13,6 13,5 13,0 12,5 Baugenehmigungen Familienhäuser Flats Collectif 11,0 15,4 16,9 20,1 21,5 22,5 23,0 Mehrfamilienhäuser TOTAL 18,7 25,4 28,2 33,8 35,0 35,5 35,5 Housing starts 1+2 family dwellings Logements commencés Individuel 7,5 9,3 10,6 12,1 13,0 13,5 13,0 Baubeginne Familienhäuser Flats Collectif 11,9 12,8 16,9 19,0 21,0 21,5 22,5 Mehrfamilienhäuser TOTAL 19,4 22,1 27,4 31,2 34,0 35,0 35,5 Housing completions 1+2 family dwellings Logements terminés Individuel 7,2 8,1 11,6 12,0 12,5 13,0 13,5 Baufertigstellungen Familienhäuser Flats Collectif 12,7 11,8 13,7 17,5 19,0 21,0 21,5 Mehrfamilienhäuser TOTAL 19,9 20,0 25,3 29,5 31,5 34,0 35,0

Housing stock Logements existants 4 310 4 326 4 380 4 395 4 412 4 431 4 451 Wohnungsbestand

thereof second-homes dont résid. Secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé 34 26 24 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 65,0 65,0 65,0 66,0 66,0 67,0 67,0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: SWEDEN Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 152 -26,1 2,9 -46,2 20,3 36,2 16,3 4,3 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 50 -10,4 -42,9 -28,9 78,5 -19,7 2,5 -1,0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 443 -21,1 -19,3 8,7 -15,5 0,2 9,6 -2,4 Industriegebäude

Storage buildings Bâtiments de stockage 255 40,0 30,9 0,5 -5,8 17,1 19,7 -9,3 Lagergebäude

Office buildings Bureaux 93 -28,1 -63,6 -37,6 15,4 41,8 23,4 6,0 Bürogebäude

Commercial buildings Commerces 342 -13,7 27,9 -17,9 12,9 28,5 6,2 -4,0 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles Landwirtschaftsgebäude

Miscellaneous Autres 453 24,3 -13,0 -3,3 -2,2 12,5 5,5 2,7 Sonstiges

Total Insgesamt 1 788 -14,1 -16,2 -10,8 1,6 14,2 7,6 -0,5

Million euro at 2005 prices, excluding taxes. 1 euro =9,3173 SEK

Country/Pays/Land: SWEDEN Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 400 24,6 4,3 -0,3 -21,0 4,0 5,2 -3,3 Verkehrsinfrastruktur Straßen Railways Voies ferrées 582 2,0 3,0 4,0 2,0 3,9 3,2 3,2 Bahnanlagen Other transport Autres réseaux 388 -32,1 3,0 -25,0 -26,2 3,0 2,0 -11,3 Übrige Vekehrsinfrastruktur TOTAL 2 370 0,9 3,8 -5,3 -17,4 3,8 4,2 -3,0

Telecommunications Télécomunications 961 13,1 -23,1 12,8 -11,8 5,0 4,0 -4,3 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 443 -0,8 11,1 -3,3 17,4 15,0 6,5 10,0 Energie-und Wasserversorgung

Other Autres 1 166 3,1 0,9 3,0 1,5 4,0 3,2 3,0 Sonstiges

Total 5 941 3,1 -0,7 -0,7 -6,3 6,8 4,6 1,4

Million euro at 2005 prices, excluding taxes. 1 euro =9,3173 SEK

Country/Pays/Land: SWEDEN Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 136,2 1,4 1,5 1,8 2,4 3,3 3,5 2,9 Privater Verbrauch

Public consumption Consommation publique 76,3 2,3 0,8 0,3 1,1 1,6 1,1 0,6 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 48,0 -2,6 1,1 5,1 8,3 7,0 4,7 3,0 of wich construction 20,1 2,6 -2,1 5,3 7,2 6,5 5,9 5,0

Stocks (contribution as % of GDP) Variations de stocks - 0,1 -0,2 0,3 -0,3 -0,1 0,1 0,0 0,0 Vorratsveränderung

Exports Exportations 134,8 1,2 5,0 10,5 6,4 8,0 6,7 6,3 Exporte

Imports Importations 112,0 -1,9 4,9 6,9 7,4 9,0 6,9 7,2 Importe

GDP PIB 283,2 2,0 1,5 3,6 2,7 3,7 3,2 2,3 BIP

Standard National Accounts, gross figures.

SWITZERLAND KOF ETH Zurich SWISS INSTITUTE FOR BUSINESS CYCLE RESEARCH

www.kof.ethz.ch

Yngve Abrahamsen Roswitha Kruck e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

The construction sector boomed in 2005, with total output growing by much as 5 per cent. Total output will continue to grow in 2006, but at much more moderate rate than in the last year. The growth rate is expected to reach about 1.7 per cent. All sectors will contribute, though residential building will be only a weak contributor. In 2007, growth will become negative (-1.7 per cent), but it will recover in 2008 by 1.5 per cent. Investments in new non-residential buildings will be the biggest contributor to growth in 2006. Output is expected to increase by 3.9 per cent. While the main aim over the past few years has been to cut costs and increase efficiency, the focus will now shift more towards expanding business activity, which look likely to fuel industrial and commercial construction over the course of the year.

% Construction by type: Total 20.0 Construction by type 2005 Civil engineering: 15.0 Renovation 12% 10.0 Civil Residential engineering: construction: New New 5.0 10% 36%

0.0 Non-residential construction: -5.0 Renovation 17% -10.0 Residential Non-residential 2003 2004 2005 2006 2007 2008 construction: construction: New Renovation Total construction output Residential construction 14% 11% Non-residential construction Civil engineering

The boom in residential buildings will come to an end. Although the surveys of the Swiss Federal Statistical Office reveal that the volume of housing under construction was 12 per cent higher at the end of 2005 than a year earlier, and building permits were also up 8 per cent year-on-year, the five big cities and their surrounding areas point to slowing growth. Therefore, housing construction are expected to go down in 2006 by 0.8 per cent and will fall by 2 and 1 per cent in the forecast period. Nevertheless, residential construction activity will be at high level. By a growth rate of 1.3 per cent, investments in civil engineering will stabilise at the level attained in 2005, but will decline in 2007. Now that the biggest infrastructure contracts have been awarded, this segment will no longer provide such a big stimulus as in the past years. No progression are forecast for civil engineering renovation markets. Growth rates will weaken from 1.3 per cent in 2006 to -1.7 per cent in 2007. A stronger growth is expected in 2008. The increase is depending on the starting of the «infrastructure fund». The means of this fund are granted by the Parliament, and they are provided for the completion and the removal of chronic bottlenecks of the entire national road network and for modernisation of public and private agglomeration traffic.

2 Macro-economic Outlook

In the forecast period spanning 2006 and 2007, the domestically driven recovery that started in 2005 will continue but with a shift in the components of domestic demand. The growth impulse from the construction industry peters out; and contributions to growth will come increasingly from investments in machinery and equipment. The increase in private consumption remains high and consolidates. This will entail increasing imports, partially due to the fact that inventory rundowns cannot continue to the extent observed of late. Government consumption will remain weak, and exports will be growing less than imports.

The trade balance surplus will thus shrink. Manufacturing and most of the service industries will benefit strongly from the robust demand so that gross domestic product will increase by 2.1 per cent this year and by 1.9 per cent next year. This will lead to higher employment. However, the continuing growth in the supply of labour will prevent a large decline in unemployment.

% Gross domestic product Total demand by expenditures 2005 10.0

8.0

6.0 Exports 34% Private 4.0 consumption 43% 2.0

0.0

-2.0

Stocks -4.0 0% 2002 2003 2004 2005 2006 2007 2008 Gross fixed Public capital Gross domestic product Private consumption consumption Public consumption Gross fixed capital formation formation 8% 15% Exports Imports

The growth in private consumption will continuously rise almost up through the end of the forecast period and will approach 2 per cent at its peak. Private consumption will increase in both 2006 and 2007 by almost half a percentage point more than the average of the last ten years – something that underscores the currently good consumption climate. Labour compensation payments – particularly relevant for private consumers’ purchasing decisions – will rise in the forecast period to the same extent as they did in 2005, which is by about 3 per cent in nominal terms. Because, unlike 2005, the share of net taxation in income will fall significantly and the rate of inflation will decline, growth in disposable income will outstrip consumption growth this year and the next so that the rate of saving will rise once again. Even if inflation rates are still under the influence of volatile oil prices, the Swiss consumer price level will only rise a little in the forecast period. Under the assumption of a stable crude oil price as well as a slightly stronger Swiss franc, average annual inflation should fall back to 0.9 per cent in 2006 and to 0.6 per cent in the next year. While receding prices can continue to be expected for goods, prices for services will rise – if only slightly – due to a moderate increase in wages. Residential rents will spur the greatest inflationary pressures during the forecast period. The public budgets in Switzerland are practically balanced in the forecast period. The fiscal impulse will be less restrictive in 2006 than in the year before. In 2007, the fiscal impulse will be practically neutral. Although core inflation as calculated by KOF will only rise to about 0.5 per cent by 2007, the Swiss National Bank will raise money market rates further. In doing so, it should stick to the current pace and raise the target range for the 3-month LIBOR by 25 base points at its quarterly meetings. For the end of 2006, a target rate of 2 per cent is expected. Swiss federal bond yields will rise to 2.7 per cent by early 2007 and will then remain at that level. From the middle of this year onwards, a slight appreciation of the currently somewhat undervalued Swiss franc can be expected since the Swiss currency's short-term borrowing cost advantage is gradually reducing.

3 Housing Market

In last three years, construction activities in housing market has exceeded expectations with growth rates of 16.2 per cent in 2003 and settled at around 9 per cent in 2004 and 2005. Total residential construction added up to around €16,000m in 2005. Little more than 75 per

© EUROCONSTRUCT 347 Switzerland Amsterdam, June 2006 cent of this production (€12,100m) concerned investment in new dwellings. It is no surprise, therefore, that housing has been a key contributor to overall construction output. The surveys of the Swiss Federal Statistical Office reveal that not only was the volume of housing under construction 12 per cent higher at the end of 2005 than a year earlier, but building permits were also up 8 per cent year-on-year. However, declines in building permits in the five big cities and their surrounding areas point to slowing growth, which is already beginning to feed through into our forecasts. New residential construction is forecast to grow by 0.8 per cent in 2006, to decline by 2.0 per cent in 2007 and 1.0 per cent in 2008. Nevertheless, demand for residential housing remains at high level. The production of new units accelerated from 29,100 in 2003 to around 40,000 completions in 2005. 2006 is forecast to show a slight decline to 39,500 completions. This number is expected to fall to 31,000 in 2007 and to 29,000 in 2008. This development is sustained by a steady decline in building permits for new dwellings. Since the turn of the millennium, an average of about 30 - 33,000 homes has been absorbed by the market each year. Consequently, we believe the vacancy rate will shoot up again. We expect a non-occupancy rate around 1.1 per cent this year and the next. In 2008 the number of vacant houses as a proportion of the total housing stock may well reach 1.2 per cent.

60000

50000

40000

30000

20000

10000

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Vacancies New dwellings

In both the rental and owner-occupied sectors, demand for housing remains strong, underpinned not only by low interest rates but also by demographic trends. The increase in the number of elderly people is having a generally positive impact on requirements for condominiums, while a steady inflow of people from the rest of Switzerland and abroad is boosting housing demand in Zurich and Lake Geneva regions in particular. Both these demographic trends are medium to long-term in nature. Despite the rise in residential construction activity, most housing markets can still be described as seller’s markets. This said, there are some signs of saturation in the single-family segment and large condominiums. Long-term demand for residential property is - as said - determined by demographics. In the short and medium term, individual trends are intensified or mitigated by economic developments. This is shown clearly, for example, by the boom in condominiums over recent years. As the population ages, demand for owner-occupied apartments is rising sharply. This rising trend has blossomed into a genuine boom since 2000, however, thanks to a healthy economy and falling interest rates. Since the beginning of November 2005, interest rates have started going up again. One of the main reasons for this can be found in the strength of recent economic indicators – such as the Purchasing Managers’ Index and the KOF economic barometer. We expect Switzerland’s GDP to increase by 2.1 per cent this year. Borrowing is still a lot cheaper than the long-term average, but with interest rates starting to rise again in 2006, home ownership is losing some of its appeal relative to renting. However, a healthier economy will also lead to rising wages and more employment. This will work in the opposite direction to rising interest rates by stimulating demand for home

348 © EUROCONSTRUCT Amsterdam, June 2006 Switzerland ownership. Overall the net effect on home ownership is likely to be negative for the time being, which is why demand for condominium and single family houses is likely to weaken slightly, though will remain at a high level. The intensive construction activity, with well over 39,000 additional apartments expected on the market in 2005 and 2006 spells good news for potential buyers. With production so high, continued strong demand in most regions of Switzerland has not translated into excessive price increases. With variable mortgage rates set to go up, rents for apartments already occupied will rise by about 2.5 per cent by the end of 2006. Where condominiums are concerned, we expect the strong expansion of supply to give rise to signs of saturation. On average, rents will rise only slowly, i.e. by no more than 1.0 per cent. This is very different from the situation in recent years, when we witnessed rises of 2.0 to 2.5 per cent per annum. We expect prices of single-family houses to stagnate or even to fall. Swiss owner-occupied housing markets are not overheated. The only areas seeing exaggerated prices are prime locations in the Zurich and Lake Geneva regions and in top tourist spots. The cantonal variations in the laws on building rights are of particular importance in Geneva. In development zones in Geneva, the rents for two thirds of all apartments built have to be subsidised. Another problem is the lengthy planning approvals process – it takes an average of eight years to obtain planning permission for an apartment block. This not only means it is difficult for investors to obtain the desired returns on their investments, but it also creates marketing problems. Stipulations are less rigorous in other cantons, but harmonisation and deregulation would be welcome there, too. For political reasons, however, this is unlikely to happen. Another segment where transaction prices are high is the multiple-family-unit segment. Private buyers appear to be willing to accept low initial returns in exchange for the feeling that they are investing in something that is for the long term and supposedly safe. A negative correction in transaction prices is only expected for multiple-family-houses if interest rates were to increase sharply, but there is no evidence of this for the time being. All in all, rising interest rates are putting something of a damper on demand, although a collapse is unlikely as long as interest rates do not rise too much above the average long- term rate used in affordability calculations for mortgage. Owing to the improving economic situation and a high demand to rental apartments residential renovation and maintenance activity increased by 9 per cent in 2005. This year a growth is forecast only to about 0.9 per cent, followed by -2.0 and -1.0 per cent in the years ahead. Residential renovation and maintenance stand under pressure. Of all the apartments and houses built in the period before 2000, only 23.2 per cent have been renovated in the last 10 years. Analyses show however that there is a substantial backlog of renovation to be done within the Swiss residential property market, i.e. the quality of the Swiss housing stock is falling much more quickly than it might otherwise do.

Share of Renovation 1991-2000 40 rental owner-occupied total 35

0 -1945 1946-1960 1961-1970 1971-1980 1981-2000 Construction year

It should appear at first glance that condominiums should do better than most single-owned properties as far as renovation is concerned. With this type of home, a renovation fund is usually set up and then used for any work that needs to be done. Condominiums tend to be relatively new, since this form of property ownership only became legally recognised in Switzerland in 1965. But there is often not enough money in the fund for larger renovation projects and what money there is tends not to be invested. Owners of single-family-houses and rental apartments do not usually maintain renovation funds. And even if there is capital available, in many places it is impossible to push through the rent increases that the renovation work warrants. The physically aged and conceptually obsolete residential buildings are to be accommodated to contemporary needs. At the same time, spatial planning calls for sustainable land use and for a dense mode of urban development. The development of the present assets gains more and more importance since the built stock must meet the demand for more dwelling space per capita and satisfy the increases requirements in respect of the quality of the dwellings. Furthermore, in spite of the demographic trend towards an aging society only an insufficient amount of dwelling space will be transformed to meet older people’s need. Little attention is paid to current aspects of social change and the growing differentiation of lifestyles. The conceptual weakness of a large number of objects built during the boom that followed World War II, will favour strategies of demolition and compensation by new buildings in the next cycle of renewal. Furthermore, this might have a positive impact on energy efficiency.

4 Non-residential Market

The economic recovery and the increasing investment activity accomplish a change for good for non-residential new construction activity in 2006 and the years to come. For the short term, this outlook is based on increasing volume of building permits that is issued since 2005. In 2006, a rise of about 4 per cent is projected. Also renovation and maintenance of non- residential buildings will return to a positive growth rate in 2006 (+ 3.0 per cent). A more moderate growth is foreseen in 2007 and 2008. Both new construction and renovation and maintenance are forecast to grow next year and the year after by 1 to 2.4 per cent, respectively. Education and Health Building A considerable proportion of education and health real estate, such as schools, hospitals and infrastructure buildings, is in public ownership. Public investment activity in new buildings has been reduced in the last years as the financial situation of many public authorities was rather tight. After the drop in 2003 (-11.7 per cent) and 2004 (-3 per cent), output rose again by 3.5 per cent to a volume of €565m, in 2005. Educational policy focuses particularly on new construction activities for buildings and renovation of old ones. In the years ahead, this positive development, particularly in renovation and maintenance, will continue in the current year by 1.7 per cent, by 1.0 per cent in 2007 and is likely to accelerate at the end of the forecast period (2.5 per cent). Construction output in the health care sector is projected to increase in the period up to 2005. Demand for health care increases continuously due to the ageing of the population and increasing life expectancy. Construction activity is also stimulated by the tendency toward more intramural care. This leads to a stronger demand for adaptation and maintenance of the buildings. We expect positive growth rates in the forecast period between 3.7 and 3.0 per cent. Construction volume will stabilise at a volume of around €300m.

Industrial/storage building Industrial and storage buildings make up only a small part of the different estate portfolios. This sector is relatively sensitive to cyclical fluctuations and strongly influenced by international growth. Since 2001, investments worsened sharply due to the cyclical downturn. Less orders, rising stocks and shrinking capacity utilisation rates had a strong negative impact on industrial investment. 2005, new building expenditures by private clients for industrial and storage real estate stagnated and stood at €776m, which corresponds to a share of around 17 per cent of non-residential construction. In 2006, investment activity is likely to improve somewhat. A year-to-year increase of 4.8 per cent can be expected. We are forecasting stagnation in building investment in 2007 and a slight recovery by 2.1 per cent in the outlook year. In comparison to earlier cyclical recovery phases, such growth rates are rather modest. Office building The sector of office buildings includes construction activity for business and financial services and for public administration. In the recent years, building activity dropped dramatically, due to significant overcapacities in office-space segments. Construction volume decreased from €1,183m in 2002 to €777m in 2005, that’s a decline of more than 30 per cent. In the current year, a recovery by 3.7 per cent will be possible. For 2007 and 2008 less construction activity is accounted for: output in this sector is likely to stagnate in 2007, followed by a modest recovery by 1.9 per cent in 2008. Many European cities are facing significant overcapacities in their office-space segment. Switzerland’s overcapacity is small in comparison, with figures totalling 9 per cent for the Zurich region, around 7 per cent for Berne, just under 6 per cent in Basel and 3 per cent for Geneva. By Swiss standards, however, anything in excess of 5 per cent is high and the last time figures of this magnitude were recorded was during the property crisis in the 1990s. The centre of Zurich was particularly strongly hit, as tenants were optimising their space use, taking advantage of lower rent levels and quality space available outside of the city. Banking and insurance back-office relocations from the city centre to locations such as Zurich-West, Altstetten, Oerlikon or the Glatt Valley were the feature of the market. The new office spaces that have been built in these locations in the last five years get slowly absorbed, causing increase of vacancy in secondary locations. New office construction is done primarily on a pre-let or built-to-suit basis with a number of projects with construction permit waiting to be realised. Nevertheless, major planning activity is under way for former industrial zones in and around Zurich. • Zurich-Altstetten: The UBS mixed-use development of Luwa-Areal (13,500 m2) is currently the largest office scheme under construction in this part of city. • Zurich-South: Construction continues on Sihlcity, an ambitious shopping, leisure and commercial centre project. Completion is planned for early 2007. On the former Huerlimann Area, further phase of the City-South development with 10,000 m2 of space is scheduled for completion in autumn 2006. • Glattal: Two major office developments with 34,000 m2 are currently underway in the area. Planning activity is intensive in this part of the agglomeration with a total number of projects being planned or waiting for pre-lets reaching 90,000 m2. The Glatt Valley is the area with Switzerland’s greatest economic development potential. The core of this development area, the future Glattpark, is intended for mixed use, with residential and office buildings as well as a park and an artificial lake. The first phase of the planned Glattal rail link – which will greatly increase the attraction of the region – is under construction and will become operational in 2006. • Zürich-West: Significant planning activity is under way for major projects in former industrial zones such as Escher-Wyss, Löwenbräu or Maag, where Switzerland’s highest office tower with 35,000 m2 is being planned. The winner in the current market situation in Zurich are potential users looking to improve their location and able to take advantage of the breadth of properties on offer. Tenants can optimise their space use by re-sizing, moving to more efficient premises and/or negotiating

© EUROCONSTRUCT 351 Switzerland Amsterdam, June 2006 more favourable terms with regard to the abundant supply of properties of all sizes and rent levels currently available in the market. Demand for office space appears to have picked up toward the end of 2005. Most significant take-up occurred in the main business centre of Zurich, where companies with smaller numbers of employees take advantage of lower rents and expand into larger premises or relocate from outskirts to more prestigious locations. The market in Geneva shows more positive signs. Geneva is one of the top cities for relocation projects. Supply and demand are evenly balanced and new demand for large office space can only be satisfied with development projects. Planning activity is underway in major submarkets and the airport region. The construction of these developments will only start with pre-lets in place. Brisk rental activity in the commercial property sector is stabilising rental prices in several European cities. The picture is mixed in Switzerland: whereas office rents are rising in Geneva on the back of demand from international organisations, Zurich and Basel are seeing a sideways trend. There are no signs of stabilisation in the Berne region. The new-build rental sector continues to be characterised by firms optimising their space and less by a genuine demand for additional space. The situation differs from region to region, however: while the decline in employments levels and in the resulting demand for office continues in the service sectors in the Zurich region, Lake Geneva region and North-West Switzerland, recent employment figures confirm the slight upturn in the Mittelland region, central Switzerland and eastern Switzerland. The fact that prices in some regions are drifting down despite the strong recovery in demand can be attributed in part to the greater amount of office space on offer. Otherwise, we think market price indicators do not reflect the true state of the market. They are distorted by various types of discounts. Landlords are “giving away” several months’ worth of rent, or are assuming fit-out costs. This helps to keep rents artificially high. Since the level of new buildings has fallen substantially in the office sector over the past few years, we expect to see the situation improve slightly over the medium term. Over the long term, however, competition between sellers of commercial properties will intensify. Population and employment forecasts not only in EU countries but in Switzerland as well point to a development in demand that is merely moderate or even negative over the long term. With project pipelines full, this will be exacerbated by a not insignificant expansion in the volume of properties on offer. If only a fraction of these projects come to fruition, and tenants are found, construction activity will probably still keep step with the growth in demand. A major factor driving the expansion of properties on offer is the volume of funds seeking investment in the real estate market. Conversion of prime-sited former industrial areas near city centres are an ideal choice here and stand a good chance of being snapped up, at the expense of second-class locations. Consequently, the supply overhang is likely remain over the medium term and may even grow further, with a correspondingly negative impact on rents. With the exception of prime locations, we anticipate that it will be some time before commercial property tenants see the larger bargaining power diminish. Commercial buildings Retail trade, wholesale trade and the hotel and catering branch are the most important part of the sector of commercial buildings. In 2004, building output rose by 45 per cent. Such rates of expansion are unsustainable in the larger term, therefore, we expected construction output is likely to stabilise in 2005. The outlook for 2006 is positive: the construction output is expected to be 6.5 per cent higher than 2005, followed by a moderate growth rate of 1.5 per cent in 2007 and 3.1 per cent in 2008. The construction volume will increase from €930m in 2005 to €1,037m or 11.5 per cent in 2008. The course of events in the retail trade sector is assumed to be highly depending on the development of personal income and consumers confidence. Both look very promising at the moment. Yet, the market is faced with a growing demand for new large-scale shop-properties with easy accessibility for the consumer. The average floor space of shops is expanding

352 © EUROCONSTRUCT Amsterdam, June 2006 Switzerland steadily. The process of concentration of scattered retail outlet points into shopping malls is still going on, as is the renewal and upgrading of outdated shopping centres. Since 2000, 17 large centres have opened their doors for business and the pipeline is full to bursting for the next few years as well. In some existing shopping malls, expansion work is already underway or in planning. Some of these are already in the construction phase. In future the central key to success will be transport links. The approval procedure for shopping malls is set to become increasingly complex especially with regard to this point. The criteria for accessibility by public transport on the one hand, and the often excessive restrictions or quotas applied to private transport in the form of very tightly calculated parking spaces on the other, are seriously obstacles. The number of available parking spaces allowed per 100 m2 of sales space in new construction projects is far smaller than it used to be. It is not unusual for the builders to be told to halve the number of parking spaces while doubling the amount of sales space. There are fewer vacancies in the retail sector than in the office segment. It is always possible to find tenants for such property, even if it involves bringing down quality standards. With the economy thriving, demand and sales in the retail sector will tend to rise further. Retailers will expand their network of outlets or upgrade their locations so that the rents at the less attractive locations will come under pressure in this sector too. A great deal is being built in the shopping mall segment. Owing just to the projects that have already been approved and planned, experts expect floor space throughout Switzerland to increase by 50 per cent by 2010. The companies operating these shopping centres will have to try to make their offering as attractive as possible to keep the consumers coming. If they manage to do so, this will inevitably draw customers away from other stores. The result will be cut-throat competition – and it is not always clear who the winners will be. Although the renovation market normally shows a rather stable development with growth rates of 2.5 and 3 per cent, the cyclical slowdown of the last years also weakened renovation activity in this sector. The market for r&m is supported by a steadily increasing building stock and the continuing process of devaluation of that stock. The comparatively moderate economic growth in the past involved that new investments were in some extent postponed and construction activity was largely restricted to unavoidable repair works. Up to 2005, repair activity increased again by around 2 per cent, followed by a growth rate of 3 per cent in 2006. In the years ahead, growth will continue, albeit at a modest rate. Nevertheless, from 2006 on an upturn to a construction volume of about €6,000m is possible.

5 Civil Engineering Market

The slowdown in economic growth in 2003 and 2004 led to a reduction in public sector’s spending on public works and decreasing private expenditures for transport infrastructure, the telecommunication sector and energy and water works. Thanks to on-going infrastructure projects (NEAT and Rail 2000), output in the civil engineering sector has remained at a high level. While civil engineering remained a major growth factor for the construction industry in 2005, orders will decline in the long-term as projects near completion. Now that the biggest infrastructure contracts have been awarded, this segment will no longer provide such a big stimulus. In 2006, the civil engineering market will increase by 1.3 per cent and reach a volume of €7,500m. About 47 per cent of this amount concerns new investment. While engineering output will decrease by 1.7 per cent in 2007, growth is likely to pick up again in 2008 by 5.5 per cent due to the planned «infrastructure fund». Construction work for the flat rail link under the Gotthard is progressing well. On March 2006, the contracts between AlpTransit Gotthard Ltd (ATG) and the companies commissioned to undertake the preparatory work on the Ceneri Base Tunnel were signed. This means, that realisation of the Ceneri Base Tunnel has moved from the planning phase into the implementation phase. The Ceneri Base Tunnel is an important component of the future flat

© EUROCONSTRUCT 353 Switzerland Amsterdam, June 2006 rail route through the Alps. The 15.4-kilometres-long tunnel between Camorino and Vezia, near Lugano, is expected to open in 2019. Complaint by the Marti consortium against the award of the Erstfeld tunnel construction lot on August 2005 will cause delay. Work on the Erstfeld-Amsteg section includes driving the two single-track tubes for the 7.8 kilometers-long tunnel to Amsteg. However, until the Federal Appeals Commission for Public Procurement reaches a decision, the work contract with the Gotthard Base Tunnel North Consortium cannot be signed and construction work on the last construction lot of the Gotthard Base Tunnel cannot begin. This will cause a delay for the construction of the Gotthard Base Tunnel as well as additional costs, both of an amount not yet known. The overall project costs of the NEAT are further estimated on €10,6m, although the Monte Ceneri project will become more expansive than planned. Relative to the cost estimate of €4,100m based on the scope of construction of the Gotthard Base Tunnel and €1,300m for the Ceneri Base Tunnel originally assumed by the Swiss Federal Government, according to present knowledge additional costs of €1,100m and €112m, respectively, will result. The Federal Office for traffic (BAV), therefore, requested the ATG as supervisory authority to examine the project Monte Ceneri and look for technical like operational compensation measures. Together with the BAV, the ATG will authorise independent experts for clarifications. During construction of the Gotthard and the Ceneri Base Tunnel additional investment costs arise mainly in relation to safety and the technical state of the art as well due to politically caused delays and phasing under the law for financing public transportation. Plans are afoot to build world’s deepest underground railway station in Switzerland, nearly one kilometer below the Earth’s surface. The «Porta Alpina» would be in the new transalpine Gotthard Base Tunnel linking Zurich and Milan. €32m is what has been budgeted to refit the existing tunnel and shaft with passenger facilities and safety features, including a lift to whisk travellers to the surface level from the rail platform 800 metres below. In December 2005, the Swiss Parliament approved around €5m to kick-start the €32m Porta Alpina plan. That was quickly followed by lawmakers in canton Graubünden who promised a further €13m. The people of the isolated and economically depressed mountain region in Graubünden are now well on their way to being connected to the rest of the world by a high- speed rail link. Instead of whizzing from urban Zurich to the Milan metropolis non-stop, travellers would have the option of disembarking in the heart of the Alps to go skiing or play a round of golf. A feasibility study carried out a couple of years ago by the canton figured, that it would boost tourist numbers by around 50,000 a year. The end result, according to the study, would be €23m in additional income annually – ten times higher than the forecasted operating costs. The «Porta Alpina» supporters are confident that the Sursevela Valley’s untapped potential will attract investors once the railway station is a done deal. Supporters in parliament called the project “visionary”, scoring a victory over opponents who warned that costs could spiral out of control and that having trains stop in the middle of the tunnel would slow service, defeating the purpose of the high-speed rail link. In order to enhance coordination between transport and spatial development, the federal authorities are developing a transport plan, including a strategy for infrastructure policy and the main road and rail infrastructure projects. • The strategy focuses on optimal capacity management of existing infrastructure, with the emphasis on sustainable spatial development – consolidating agglomerations and improving connectivity between Swiss cities and the European high-speed rail network. Top priority is accorded to improvement of the rail network. • The road network is to be improved in areas of high traffic density where road capacity is critical and the risk of congestion is rising. The next extension of the rail network will also be capacity oriented. Specific critical links and nodes are to be improved. Parliament has already expressed its willingness to invest in the improvement of high-speed connections and appropriated €650m.

• The plan also highlights regional priorities, with the greatest importance being attached to the reduction of capacity problems in urban areas. There is a strong link to the agglomeration programmes. • The financing of future investments is only partly guaranteed: on the basis of the national «FinÖV» system, the financing of the transalpine rail tunnels and parts of the railway network expansion is secured. In the spring 2005, the government presented its proposal for a new infrastructure fund and started a consultation process on this issue. The fund would provide the money required to secure the functionality of the national road network and to finance the needed infrastructure improvements and expansions required in urban areas. Revenues from mineral oil excise duties would be earmarked for the fund, which would allow cross-financing between road and rail to be further extended to a certain degree. The government presented a formal draft to Parliament in autumn of 2005. Depending on the outcome of the consulting process, the infrastructure fund would start in 2008. This fund is limited to 20 years and will total to around €13,000m. In the detail, €9,000m are provided for the completion and the removal of chronic bottlenecks of the entire national road network. Around €4,000m are projected of modernisation of public and private agglomeration traffic. They include rail projects around Zurich, Geneva and in southern Ticino. Because the cantons must pay half of these costs themselves at least, an investment volume of €8,000m will result. Furthermore, the Federation has to ensure that the national road network is finished and its operability remains guaranteed. These tasks are financed now by the infrastructure fund, which means more reliability and planning security. The infrastructure fund is temporally limited. It is in line with the debt brake of the federation. Increasing efforts for r&m in civil engineering will be necessary in all sub-categories of private and public infrastructure buildings in order to keep the large numbers of existing structure up to date. Although the economic recovery will entail higher increase in government revenues, there should probably recorded modest rises in r&m spending. We are forecasting a slight rise by 1.3 per cent in 2006 and a decline by 1.7 per cent in 2007. In 2008, when the infrastructure fund is starting, we expect rising expenditures in the regular railway system and other transport infrastructure. Investments and maintenance works will increase in this sector by 7.5 per cent. Overall demand for renovation and maintenance in civil engineering is to increase by 5.4 per cent.

APPENDIX – DEFINITIONS

Table 1 Population: average resident population Unemployed and unemployment rate: Official figures from State Secretariat for Economic Affairs, only registered unemployed, the unemployment rate is calculated using a constant working force from the last census (2000).

Table 2 Construction sector output: The statistical basis for the construction sector output is the «Bau- und Wohnbaustatistik für die Schweiz» from the Swiss Federal Statistical Office (BFS). It contains construction investments for all categories as well as for new construction and modernisation. Current maintenance are only published for public construction activities. Non-investive private repair and maintenace measures were estimated by KOF.

Table 3 Housing completion reflects the level of activity in the housing sector. Building permits refer to non- utilised permits at December 31…; instead of housing starts the number of houses under construction at December 31…are shown. Housing stocks, second homes and home ownership rate: Figures are available from the «Wohnungs- und Gebäudezählung 2000» for the year 2000. The housing stock is annually adjusted according to the construction and demolition activities.

Table 4a The classification of a building is determined by its main purpose. Education buildings: All kind of buildings for educational purpose, including public research buildings and sport facilities used in educational institutions. Health buildings: All kind of hospitals and nursing homes. Also included are buildings for veterinary purposes. Industrial buildings: All kind of buildings for industrial and manufacture production, also included are logistic centres, laundries and abattoirs. Storage buildings: All kind of buildings for storage, including cisterns and non-farm silos. Office buildings: All kind of public and private administrative buildings Commercial buildings: Retail and wholesale buildings, private service buildings with public access, petrol stations, exposition buildings, hotels and restaurants. Agricultural: Agriculture and forestry buildings, including farm silos. Miscellaneous: Other Buildings, including sports and sacral buildings and buildings for infrastructure purposes (e.g. airport buildings).

Table 4b Roads: All kind of roads Railways: Railway stretches, tunnels, bridges Other Transport: civil engineering work for airborne or waterborne transport, tramway and cable car civil engineering Telecommunication: Civil engineering for cable networks, communication antennas. Energy and water work: Civil engineering work for fresh and waste water treatment and transportation. Dam for power plants and civil engineering work for power cable networks, pipelines and district heating. Other civil engineering contains other infrastructure work (e.g. avalanche protection, river banks, melioration) and the civil engineering part of residential and non-residential buildings

Table 5 All national Account data are calculated according to ESA 1995 and they are incompatible with Euroconstruct publications before 2004. The growth rates are measured as changes at previous year’s prices and the chained volumes are non-additive. Financial Services indirect measured (FISIM) is treated as intermediate consumption and is not allocated to production sectors and final expenditure categories.

All construction figures in Table 1 to 4 are without VAT. The normal Swiss VAT rate is 7.6%, which is also used for construction activities.

Country/Pays/Land: SWITZERLAND Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 7 348 7 409 7 454 7 516 7 578 7 640 7 703 Bevölkerung

Households ('000s) Ménages 3 250 3 283 3 311 3 339 3 370 3 400 3 429 Haushalte

Unemployed ('000s) Chômeurs 100,5 145,7 153,1 148,5 134,1 114,6 101,2 Arbeitslose

Unemployment rate (%) Taux de chômage 2,5 3,7 3,9 3,8 3,4 2,9 2,6 Arbeitslosenquote

Change of GDP Variation du PIB 0,3 -0,3 2,1 1,9 2,1 1,9 1,9 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0,6 0,6 0,8 1,2 0,9 0,6 0,6 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction -1,1 -1,4 1,5 2,3 1,3 0,3 -0,3 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 1,1 0,2 0,4 0,7 1,5 2,1 2,0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 3,2 2,7 2,7 2,1 2,4 2,7 2,6 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

Country/Pays/Land: SWITZERLAND Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 12 104 -0,5 18,4 12,5 9,0 0,8 -2,0 -1,0

Logement Renovation 3 871 -6,4 10,6 1,4 9,0 0,9 -2,0 -1,1

Wohnungsbau Total 15 975 -2,2 16,2 9,6 9,0 0,9 -2,0 -1,0

Non-residential construction New 4 659 7,2 -16,3 2,6 1,0 3,9 0,9 2,7

Bâtiments non résidentiels Renovation 5 678 -0,1 -2,5 -4,3 1,7 3,0 1,0 2,0

übriger Hochbau Total 10 338 3,2 -9,0 -1,3 1,4 3,4 1,0 2,4

Building New 16 763 2,4 4,8 9,4 6,6 1,7 -1,2 0,1

Bâtiment Renovation 9 550 -2,4 2,0 -2,2 4,6 2,2 -0,2 0,8

Hochbau Total 26 313 0,4 3,7 4,8 5,9 1,9 -0,8 0,4

Civil engineering New 3 473 6,7 -5,3 -4,6 1,5 1,3 -1,7 5,7

Génie civil Renovation 3 905 5,4 0,3 3,7 1,4 1,3 -1,7 5,4

Tiefbau Total 7 378 6,1 -2,5 -0,4 1,4 1,3 -1,7 5,5

TOTAL CONSTRUCTION OUTPUT 33 691 1,8 2,1 3,6 4,9 1,7 -1,0 1,5

Million euro at 2005 prices, excluding taxes. 1 euro = 1,5481 CHF

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 4,67 -4,1 0,9 6,5 7,9 2,8 -0,8 0,5 Inländischer Zementverbrauch

Country/Pays/Land: SWITZERLAND Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel 7,2 7,1 7,3 7,5 7,5 7,3 7,2 Baugenehmigungen Familienhäuser Flats construction not started Collectif 19,5 21,9 23,7 25,0 25,1 23,5 22,0 at Dec. 31 Mehrfamilienhäuser TOTAL 26,7 29,0 30,9 32,5 32,6 30,8 29,2 Housing starts 1+2 family dwellings Logements commencés Individuel 10,5 10,7 11,3 11,1 10,8 10,6 10,5 Baubeginne Familienhäuser Flats under construction Collectif 28,6 34,4 41,4 41,1 40,7 40,2 39,8 at Dec. 31 Mehrfamilienhäuser TOTAL 39,2 45,0 52,7 52,2 51,5 50,8 50,3 Housing completions 1+2 family dwellings Logements terminés Individuel 10,8 11,5 13,0 13,9 13,7 13,2 13,0 Baufertigstellungen Familienhäuser Flats Collectif 17,8 20,6 24,0 25,8 25,8 25,0 24,2 Mehrfamilienhäuser TOTAL 28,6 32,1 36,9 39,7 39,5 38,2 37,2

Housing stock Logements existants 3 638 3 672 3 710 3 751 3 791 3 831 3 869 Wohnungsbestand

thereof second-homes dont résid. Secondaires 507 514 521 529 538 547 556 davon Zweitwohnungen

thereof vacancies dont inoccupé 37 33 33 37 40 43 47 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 34,7 34,8 34,8 34,9 34,9 35,2 35,3 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: SWITZERLAND Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 565 26,2 -11,7 -3,0 3,5 1,7 1,0 2,5 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 260 -0,6 4,9 -8,7 5,0 3,7 3,2 3,0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 556 -3,2 -24,8 -9,3 -0,1 4,8 0,3 2,1 Industriegebäude

Storage buildings Bâtiments de stockage 231 -13,6 -18,5 -4,3 -0,2 4,8 0,3 2,1 Lagergebäude

Office buildings Bureaux 777 27,8 -18,6 -18,1 -1,5 3,7 -0,2 1,9 Bürogebäude

Commercial buildings Commerces 930 12,2 -15,3 45,1 1,7 6,5 1,5 3,1 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 272 -11,7 -0,2 7,4 -2,8 -1,6 -0,8 1,0 Landwirtschaftsgebäude

Miscellaneous Autres 1 067 0,2 -19,0 9,8 2,0 3,9 1,6 3,9 Sonstiges

Total Insgesamt 4 659 7,2 -16,3 2,6 1,0 3,9 0,9 2,7

Million euro at 2005 prices, excluding taxes. 1 euro = 1,5481 CHF

Country/Pays/Land: SWITZERLAND Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 2 797 3,8 0,2 1,4 -4,3 1,0 1,1 11,6 Verkehrsinfrastruktur Straßen Railways Voies ferrées 2 560 39,2 -8,8 7,1 7,6 1,0 -5,3 1,8 Bahnanlagen Other transport Autres réseaux 129 -36,3 11,3 -8,9 5,2 -1,0 -0,4 21,6 Übrige Vekehrsinfrastruktur TOTAL 5 505 15,3 -3,7 3,6 1,1 0,9 -1,9 7,5

Telecommunications Télécomunications 172 30,2 -10,7 -18,5 0,9 0,6 0,0 0,8 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 998 -20,1 7,5 -7,0 2,5 2,7 -1,8 -0,4 Energie-und Wasserversorgung

Other Autres 702 -11,3 -4,3 -12,9 2,3 2,1 -0,5 0,2 Sonstiges

Total 7 378 6,1 -2,5 -0,4 1,4 1,3 -1,7 5,5

Million euro at 2005 prices, excluding taxes. 1 euro = 1,5481 CHF

Country/Pays/Land: SWITZERLAND Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption 1) Consommation privée 179,8 -0,0 0,8 1,4 1,6 1,8 1,8 1,5 Privater Verbrauch

Public consumption Consommation publique 34,8 1,7 2,2 1,4 0,5 0,3 1,7 1,9 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 63,4 0,3 -1,3 3,3 3,8 3,5 2,1 4,0 of wich construction 30,1 2,2 1,8 4,1 5,1 1,7 -1,2 1,2

Stocks 2) (contribution as % of GDP) Variations de stocks - 2,0 -0,7 -0,0 -0,8 0,1 0,4 0,6 0,5 Vorratsveränderungen

Exports Exportations 141,3 -0,7 -0,5 8,9 4,5 5,4 2,5 3,2 Exporte

Imports Importations 122,1 -2,6 1,3 7,4 5,3 6,5 3,9 4,9 Importe

GDP PIB 295,2 0,3 -0,3 2,1 1,9 2,1 1,9 1,9 BIP

Standard National Accounts, gross figures 1) Including final consumption expenditure of NPISH's, ISBLM inclus, einschließlich POoE 2) Including net aquisitions of valuables, net aquisitions d'objets de valeur inclus, inkl. Nettozugang an Wertsachen

UNITED KINGDOM Experian Business Strategies Ltd www.experian.com

Kelly Forrest e-mail: [email protected]

EUROCONSTRUCT Conference Amsterdam, June 2006

1 Summary

• Construction output declined marginally in 2005 for the first time in 11 years. Historically output remained at a high level and was worth €189.9bn. GDP growth over the year slowed to 1.8 per cent, its slowest rate since 1992, and especially subdued when you consider it rose by 3.2 per cent in 2004. • The outlook for construction is better and we are forecasting an immediate return to growth in 2006. At 1.5 per cent, we expect slower growth in construction in 2006 than was seen in the early part of the decade. Output is forecast to increase by 2.8 per cent in 2007 and 3.6 per cent in 2008. • The industry’s past robustness owed much the strength of the residential sector, especially between 2000 and 2004. Together a strong residential sector and solid non-residential sector compensated overall for the weakness of civil engineering activity. Notably going forward, civil engineering’s prospects are improved and the sector is forecast to return to growth this year. In contrast considerably slower annual growth is forecast year-on-year in both the residential and non-residential sectors. • Having apparently successfully negotiated a return to more normal operating conditions in the housing market, following the boom-like conditions between 2000 and 2004, indicators suggest housebuilders remain relatively confident and once again continue to expand their activity. However, questions about general affordability suggest increases in house prices are likely to be at a more modest rate than seen in the recent past. Essentially housing demand continues to outstrip supply in the UK and if population projections are realised this situation is set to worsen. We expect residential output to rise by 1.4 per cent in 2006, 3.3 per cent in 2007 and 4.2 per cent in 2008. • In 2005 the non-residential sector followed the declining trend seen overall. Total non-residential output declined by 0.4 per cent due to a 1.7 per cent fall in new work output. As with residential, an immediate return to relatively slower growth is forecast this year. We forecast output will rise by 1.2 per cent in 2006, 2.7 per cent in 2007 and 3.3 per cent in 2008. • Having suffered over the past few years, a civil engineering recovery is imminent as work accelerates in the roads and energy and water works sub-sectors in the short- term. We expect output to rise by 2.9 per cent in 2006, increasing to 4.5 per cent in 2007. By 2008 flagship schemes in rail, air and harbours should be on-site and output should rise by a further 4.6 per cent.

2 Macro-economic Outlook

Economic growth slowed considerably in 2005. Latest official estimates suggest Gross Domestic Product (GDP) in the UK increased by 1.8 per cent over the year, considerably slower than 3.2 per cent growth in 2004, and its lowest rate for 13 years. From the output side, there was weaker growth across both production and services. Production output contracted by 1.7 per cent in 2005. Services growth slowed to 2.6 per cent (from 3.6 per cent in 2004). 2005’s overall slowdown is broadly attributable to slower growth in household expenditure. The Consumer Price Index (CPI), the government’s target measure of inflation, fell to 1.8 per cent in March, after having risen to 2 per cent in February. The largest downward effect on the CPI annual rate came from food and non-alcoholic beverages. Over 2005 as a whole inflation ran at 2.1 per cent. The underlying rate of retail sales growth slowed further in February, following a relatively weak January and contrasting with a period of increasing growth seen towards the end of 2005. The volume of retail sales in the three months to February 2006 was 0.5 per cent higher than in the previous three months and compares with a decrease of 0.9 per cent at the same time in January. In the fourth quarter of 2005 seasonally adjusted household final consumption expenditure grew by 1.1 per cent in current prices, and by 0.7 per cent in volume terms. Strong areas of growth were food and drink, clothing and footwear and housing and restaurants and hotels. In May members of the Monetary Policy Committee voted to maintain interest rates at 4.5 per cent for the eighth consecutive month. Interest rates last changed on 4 August 2005, when they were reduced by 0.25 per cent. According to the HM Treasury’s survey of independent forecasters, the consensus is for a further 0.25 per cent decline later this year. The UK labour market appears to have softened in recent months, although it remains strong by historical standards. In the three months to January the ILO measure of unemployment rose marginally, by 0.1 per cent from the previous quarter and by 0.3 per cent from the corresponding quarter a year ago. The claimant count increase by a similar amount. Manufacturing output increased by 0.4 per cent in the three months to February 2006 compared with the previous quarter. Eight out of the 13 sub-sectors showed an increase. In monthly terms, manufacturing output declined by 0.2 per cent between January and February.

Key macroeconomic indicators in the United Kingdom to 2008 (Annual percentage change) 2002 2003 2004 2005 2006 2007 2008 GDP (2002 prices) 2.0 2.5 3.2 1.8 2.5 2.6 2.6 Household consumption 3.5 2.6 3.5 1.72.02.12.6 Government consumption 10.4 9.3 3.1 2.92.81.31.0 Unemployment rate 3.1 3.0 2.7 2.8 3.0 3.0 2.9 Inflation 1.3 1.4 1.3 2.02.02.11.7 Source: Euroconstruct.

Going forward, we expect GDP to record stronger growth this year of around 2.5 per cent. The outlook for the economy is reasonably stable and further growth at a steady rate is likely throughout the forecast period. We expect GDP to rise by 2.6 per cent in both 2007 and 2008.

Such stability bodes well for consumers and we expect to see some improvement in levels of household consumption this year. Year-on-year, we are forecasting household consumption will rise by 2 per cent in 2006, 2.1 per cent in 2007 and 2.6 per cent in 2008. Forecasting future government consumption is more problematic. While a reasonably buoyant economy ultimately means an increase in the government’s revenue stream, servicing a €9.1bn deficit on the current budget will undoubtedly be an issue. A marginal slowdown in growth in government consumption is forecast for 2006 to 2.8 per cent. By 2007 we expect any increase to be comparatively very subdued and are forecasting a 1.3 per cent rise in 2007, falling to just 1 per cent in 2008. Focusing on interest rates, we do expect a 0.25 per cent decline in 2006, probably in the second half of the year. Throughout 2007 we are forecasting rates will average 4.1 per cent, which is likely to fall to 3.8 per cent in 2008.

GROWTH IN UK CONSTRUCTION OUTPUT AND GDP

Annual % Change 6.0

Construction GDP 5.0

4.0

3.0

2.0

1.0

0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-1.0

3 Housing Market

A mild contraction in the residential sector signalled an end to the robust expansion seen over the past few years. Renovation output fell by 2.4 per cent to €48.9bn. New work output did continue to expand, although at a noticably slower rate. A 2.6 per cent increase raised new work output to €28.6bn.

New housing work

In 2005 public house building accounted for approximately 13 per cent of total residential construction output. Over 2005 as a whole the Department of Trade and Industry (DTI) report public housing orders increased moderately by 4 per cent. A robust fourth quarter followed a relatively subdued first three quarters of the year. Increasing by 41 per cent from the fourth quarter of 2004, and by 32 per cent from the third quarter of 2005, quarterly orders surpassed €580m for the first time since the second quarter of 1995. The four quarter moving total rose in both year-on-year and quarter-on-quarter terms, increasing by 4 per cent and 10 per cent respectively. Public housing starts increased by 11 per cent in England in 2005 and completions by 6 per cent. For Scotland and Wales, public housing starts and completions are only available for the first three quarters of 2005. Over this period 14 per cent more units were started in Scotland than during the corresponding part of 2004. Scottish completions increased by a robust 31 per cent in the first three quarters of 2005. In year-on-year terms, public housing starts in Wales were down by 19 per cent in the first three quarters of 2005. Completions fell by 26 per cent over the same period. Affordable housing provision is set to benefit from a €5.7bn (current prices) cash injection over the 2006-08 period, some 18 per cent higher than under the Housing Corporation’s 2004-06 Approved Development Programme. €2.8bn has been earmarked for expenditure in the 2006/07 financial year, leaving €2.9bn for 2007/08. In April HomeBuy, a new government-led low-cost home ownership initiative, was launched. New Build HomeBuy will facilitate the allocation of affordable units built under Section 106 Planning Obligations to key workers and other first time buyers currently priced out of the private housing market. The ODPM has agreed to the formation of a new Urban Regeneration Company, URC, for Northamptonshire. As part of its 20-year programme, the URC is to oversee the planning over the five-year period 2006-11 of 3,400 new homes in Corby, 2,600 in East Northamptonshire, 4,050 in Kettering and 2,975 in Wellingborough. The government is supporting this programme with increased funding from its Growth Area Fund. We expect increasing the supply of public housing to remain a government priority over the forecast period. The fact that rapid house price inflation in the private market has pushed entry to the market beyond the reach of a growing number of families on lower incomes and first-time buyers suggests the need for government intervention in this sector is at an unprecedented high. This said, the current state of the government’s finances inevitably poses a downside risk to this sector. The private housing sector takes by far the greatest share of total residential construction. In 2005 we estimate 86 per cent of the total was attributable to the private sector. New work orders reached €12.6bn, in 2000 prices, in 2005 and, as with output, peaked at their highest level since 1989. In the fourth quarter of 2005, however, orders were relatively weak, trailing by 2 per cent year-on-year and 13 per cent in quarter-on-quarter terms. The four-quarter moving total continued to rise in the fourth quarter, although at a decreasing rate.

In England, private housing starts in 2005 were marginally lower than in 2004. A total of 161,125 units started trailed levels in 2004 by 0.8 per cent. Completions, on the other hand, rose for the fourth year in a row, increasing by 4 per cent. At the time of writing starts and completions data for Scotland and Wales are only available for the first three quarters of 2005. Having risen robustly for the past two years, private housing starts in Scotland declined by a substantial 13 per cent over the first three quarters of 2005. Completions crept upwards by a marginal 0.6 per cent over the same period, after rising by nearly 5 per cent in 2004. In Wales private housing starts rose marginally by 1 per cent over the first three quarters of 2005. Completions, however, declined by 8 per cent. Latest indications suggest annual house price inflation is continuing to slow. In the first quarter of 2006 the Halifax reported annual house price inflation was running at 6.2 per cent. The Nationwide measured annual inflation at a slightly less bullish 4.9 per cent in the first quarter, considerably slower than their 9.9 per cent estimate in the first quarter of 2005. According to the Office of the Deputy Prime Minister’s (ODPM’s) mix adjusted house price index, annual inflation slowed to just 2.2 per cent in the fourth quarter of 2005. According to the latest Housing Market Report regional survey, conditions in the home building environment continue to improve. Both numbers of site visitors and net reservations were up, compared to a year ago. Of the house builders surveyed a balance of 16 per cent reported an increase in the number of site visitors in February, with 32 per cent witnessing an increase in net reservations. Offering sales incentives to attract buyers was less common in February. While more respondents reported an increase than report a decrease, the balance dropped from 20 per cent in January to just 7 per cent in February. Our forecast for the private housing sector is cautiously optimistic. Housing market indicators are strengthening and house builders appear to have successfully negotiated the transition from exceptionally buoyant market conditions to more normal operating levels. While we expect the sector to record year-on-year growth throughout the forecast period, compared to the recent past increases are likely to be subdued.

Housing renovation

Public housing takes a larger share of residential renovation output than of new work. In 2005 public housing accounted for approximately 36 per cent of the total. The government’s Decent Homes initiative, aiming to bring England’s stock of social housing up to what is deemed to be a decent standard by 2010, is fundamental to our growth projection for the public housing renovation sector. A substantial €2.3bn of the €8.0bn earmarked for the Housing Corporation’s National Affordably Housing Programme 2006- 2008 will be used to improve the existing stock of social housing. Approximately €1bn of this will provide funding for the government’s Decent Homes initiative, which is currently underway throughout the country. However, recent media reports suggest the government may consider scrapping the Decent Homes standard in favour of a wider benchmark more aligned with their sustainable mixed communities aspirations. If substantiated these reports may have implications for the public housing renovation sector as councils would have greater leeway in how money once specifically earmarked for Decent Homes is spent. Comparable initiatives in Scotland and Wales are unlikely to have a significant impact before 2009. The Welsh National Assembly plan to bring their stock of social housing up to a determined standard by 2012. Scottish social housing will be repaired where necessary in order comply with the Scottish Housing Quality Standard by 2015. We expect public housing renovation output to continue to increase year-on-year over the forecast period. Research by Experian into the drivers of renovation output in the private housing market suggested many factors have an effect, but that their relative importance can vary over time.

Generally household incomes and consumer spending are underlying drivers but levels of property transactions have been the likely cause of larger swings in the sector in the past. Household’s willingness and ability to borrow is also important. According to the Bank of England, mortgage equity withdrawal (MEW) increased in the fourth quarter of 2005 for the first time since the third quarter of 2004. Compared to a year ago MEW in the fourth quarter of 2005 was 49 per cent higher, up 33 per cent from the third quarter of 2005. Equity withdrawal of this type is often used for property improvement. As yet an official breakdown of total property transactions into its residential and non- residential components is not available for 2005. In 2004 residential transactions accounted for approximately 90 per cent of the total. Assuming this relationship held in 2005 property transactions were down by around 15 per cent in 2005 compared to 2004. Having declined in 2005 private housing renovation output is expected to stabilise in 2006 before returning to growth in 2007.

4 Non-residential Market

In 2005 non-residential construction in the UK market was worth around €88bn, significantly larger than both the residential and civil engineering sectors. New work activity declined by a moderate 1.7 per cent to €55.5bn in 2005 but continued to account for the lion’s share of the total. Renovation in the non-residential sector increased by 1.7 per cent in 2005 to €32.9bn.

Investment in the non-residential market is classified as either public or private, depending on where the majority of funding for the project originates. In 2005 we estimate 36 per cent of the new work total was public and 64 per cent private. Since 2000 the relative importance of the public sector has increased as government spending accelerated, particularly on health and education facilities.

Office, commercial, storage and industrial are predominantly driven by a combination of the wider economic environment, corporate profitability and levels of consumer confidence and spending. Public capital investment and the share delivered via the private sector is the primary driver of the health and education sub-sectors.

New non-residential work

Public non-residential orders were subdued in 2005 and fell by 10 per cent over the year as a whole. In the fourth quarter, orders declined both in year-on-year and quarter-on-quarter terms by 23 per cent and 12 per cent respectively. The four-quarter moving total also dropped by 10 per cent from the third quarter of 2005. Private non-residential orders fared better and increased by 4.2 per cent over the year as a whole. Orders were particularly strong in the fourth quarter of 2005, up by 25.1 per cent from the third quarter of 2005 and by 22.1 per cent from the fourth quarter of 2004. The four- quarter moving total rose in quarter-on-quarter terms for the seventh consecutive quarter.

Buildings for education

The public sector funds the majority of education building construction. Approximately three quarters of total education new work output was attributable to the public sector in 2005. Having said this the relative importance of private education construction has grown in recent years as Public Private Partnerships (PPP) and Private Finance Initiatives (PFI) have become increasingly common.

Public education orders totalled €5.3bn in 2005, up by 11 per cent from 2004. Private sector orders increased by a substantial 99 per cent, rising to €2.2bn, as contracts under Wave 1 of the government’s 15-year Building Schools for the Future (BSF) programme were let. Over its lifetime the BSF programme expects to invest €59bn in rebuilding or redeveloping all of England’s secondary education facilities. Funding via the PPP route will enable the majority of this investment to take place and as such the classification as either public or private will vary from project to project depending on the financing structure of each particular scheme. Four of the BSF Pathfinder and Wave 1 local authorities have announced preferred bidders. The latest being Lancashire County Council for their €366m scheme. Work on an initial six schools is set to commence later this year and are due to open their doors in time for the new school year in 2008. Recent government announcements suggest Partnerships for Schools (PfS), the BSF non- departmental public delivery body, will also take responsibility for building around 130 of 200 planned units under the ongoing Acadamies building programme. To recap, capital spending budgets in education were headline grabbers after the 2004 Spending Review (SR04). The Review promised a 26 per cent step-change in capital investment in education by 2007/08, with the Department of Skills and Education’s capital budget rising from €7.3bn in 2004/05 to €9.2bn a year in 2007/08, to enable it to deliver on flagship projects such as BSF. The focus switched to improving England’s stock of primary education facilities in the 2005 Budget. Additional funding of €219m was announced to support improvements to primary schools for 2008/09. Until then funding announced in the SR04 is deemed sufficient to support the early stages of this new initiative. The outlook is strong for the education sector going forward. BSF is a flagship project for the government and thus is less likely to suffer from any decisions to curb public expenditure. Our forecast is for year-on-year growth, accelerating to 2008.

Buildings for health

Health sector orders declined by 14 per cent in 2005. Public and private sector orders both decreased, by 24 per cent and 4 per cent respectively. Historically the public sector has been the main source of activity in this field. However, in 2005 private sector orders surpassed public sector orders in value terms for the first time since records began. Public health orders totalled €1.5bn in 2005 while private ones reached €1.9bn. The government’s Spending Review 2004 promised a significant increase in the Department of Health’s capital budget. Funding in 2006/07 surpassed that in 2005/06 by 18 per cent. By 2007/08 capital funding for health is expected to be a further 19 per cent higher at €9.2bn. Major PFI schemes currently in the pipeline have a slight southern bias. In London, a €1.5bn scheme to redevelop St Bartholomew’s and the Royal London hospital have been given the go-ahead, and a lead consultant has been appointed for two schemes, both worth in the region of €440m, at Watford General Hospital and Whipps Cross University. As with education, government promises to deliver improved health facilities make this sector politically sensitive to capital spending cuts. However, despite this there is anecdotal evidence to suggest an unofficial – not exactly tightening – but gentle squeezing of the public purse strings in this sector. An abundance of current and proposed PFI projects should nevertheless ensure a return to growth post 2006.

Industrial buildings

Industrial buildings are generally built by the private sector. While a public/private breakdown is available, public’s share of the total is marginal. Total industrial orders increased strongly in 2005 by 25 per cent, after having fallen by 7 per cent in 2004.

Experian’s latest macroeconomic forecast suggests while the immediate outlook for manufacturing is improved, the sector will not recover convincingly until 2007. Estimates for 2005 suggest manufacturing output declined over the year by around 1.2 per cent. A marginal 0.6 per cent recovery is forecast for 2006, followed by growth of 2.6 per cent in 2007. A slowdown in the rate of growth is once again expected in 2008. The industrial sub-sector is set to benefit from News International’s decision to invest in new print facilities. Hertfordshire will become home to a €234m, 12 press facility. Two smaller facilities are planned for Glasgow (€37m) and Liverpool (€66m). The latest CBI/Experian Regional Trends Survey shows little improvement in firms’ investment intentions. Investment intentions in plant and machinery have shown little movement at the UK level over the past 15 months and remain depressed. Intentions to invest in buildings are similarly depressed, as they have been over the past year. Following 2005’s sizeable fall, we do not foresee any improvement in the industrial sector’s fortunes over the coming years. Our forecast is for a further 6 per cent fall in 2006, followed by declines of 5 per cent and 4 per cent in both 2007 and 2008.

Storage buildings

Storage building construction is again predominantly undertaken by the private sector. Total orders rose by an extremely robust 35 per cent in 2005, following an equally strong 32 per cent increase in 2004. Over the year as a whole orders totalled €2.3bn. The latest King Sturge UK Industrial & Distribution Floorspace Today reports the total level of available industrial floorspace increased in December 2005 for the first time since December 2003. Availability levels in December 2005, however, were 5 per cent below the December 2003 peak level. Since its last survey in June 2005 availability in new buildings increased by nearly 11 per cent. Speculative development under construction across Great Britain rose for the fifth consecutive survey in January 2006, to stand 20 per cent higher than in July 2005. We expect output in the storage buildings sub-sector to rise year-on-year, at least until 2008.

Office buildings

Orders in the offices sub-sector grew by 12 per cent in 2005 to €7.2bn. A sizeable 88 per cent of this total was apportioned to the private sector whose orders rose robustly by 21 per cent to €6.3bn. In contrast, public offices orders declined by 28 per cent to €828m. King Sturge report that during 2005 the level of grade A space tightened or stabilised in the majority of office markets, and in some locations occupiers’ choice virtually disappeared. Office Markets 2006 suggests London’s core offices markets gave a confident performance in 2005 due to returning demand and a limited development pipeline. Major office developments in the pipeline include a €146m project to redevelop Queen Anne’s Gate Home Office building in central London, an €117m contract to build Manchester’s largest office building and a €585m scheme in the vicinity of London Bridge station. In 2005 the financial and business services sector grew by 4.7 per cent. Year-on-year growth is forecast to 2008 by 4.3 per cent, 4.5 per cent and 4.5 per cent respectively. We expect offices to be one of the strongest performing non-residential sub-sectors over the forecast period.

Commercial buildings

The commercial sector amalgamates retail and leisure construction. Total commercial sector orders rose by 8 per cent in 2005 to €8.7bn. Retail and leisure orders both increased in 2005, by 8 per cent and 9 per cent respectively. In terms of share leisure slightly trails the retail sub-sector, although a 47 per cent to 53 per cent split means the difference is only marginal and has been subject to change in the past. Growth in consumption over the forecast period is expected to average around 2.3 per cent per annum, marginally better than our forecast six months ago but still considerably slower than at the start of the decade. Nevertheless there are a number of major retailers, IKEA for example, planning to undertake significant expansion over the next three years. Consumer spending rose by 3.7 per cent in 2005. Particularly interesting was a 4 per cent increase in spending by foreign tourists, suggesting the terrorist attacks on central London in July did not have a significant, if any, impact on tourist activity over the year as a whole. However, in terms of output we cannot foresee a return to growth this year, although we do expect the rate of decline to slow to 2.1 per cent. Output is forecast to hover at around this level in 2007 before the sub-sector once again continues to grow in 2008.

Miscellaneous

The miscellaneous sub-sector covers a heterogeneous selection of private and public buildings, from police stations and courts to defence establishments. Having risen by a robust 36 per cent in 2004, new work miscellaneous orders plummeted by 41 per cent in 2005. The relative weakness of 2005 is primarily due to the release of a very large Defence Estates contract to refurbish Colchester barracks in 2004. Given the associated output stream of this contract is likely to be long, we expect the impact on output in any given year to be relatively minor. Several prisons in the UK are set to benefit from redevelopment this year and next. These include Her Majesty’s Prison (HMP) Lindholme, in Doncaster, HMP YOI Hindley, near Wigan, and HMP Polmont north of the border in Scotland. In value terms individual schemes range from €18m to nearly €30m. In the miscellaneous sector we are forecasting year-on-year growth over the next three years, by 1.9 per cent in 2006 and by 4 per cent in both 2007 and 2008.

Non-residential renovation

Again the private sector takes the greatest share of total non-residential renovation output at around 60 per cent. However, it is worth noting that in recent years the public sector has increased its share of the total.

Public non-residential renovation output increased by 5 per cent in 2005 as a whole, after declining by 4 per cent in 2004. At €10.2bn, in 2000 prices, in 2005, output was 23 per cent higher than in 2000. While output increased from the fourth quarter of 2004 in the fourth quarter of 2005 by 2 per cent, it dropped 1 per cent from the third quarter of 2005. The four- quarter moving total was roughly static throughout 2005 and in the fourth quarter did not change from the third. As the government’s financial situation tightens the outlook for the public non-residential renovation sector is slightly less positive. In 2006 we are forecasting no change in output and 1 per cent growth in both 2007 and 2008. At €17bn, in 2000 prices, private non-residential renovation output was more or less static in 2005. Since 2000 private non-residential renovation output has risen by more than 22 per cent. In the fourth quarter of 2005 output declined in both quarter-on-quarter and year-on-

372 © EUROCONSTRUCT Amsterdam, June 2006 United Kingdom year terms by 1 per cent and 2 per cent respectively. The four-quarter moving total did not change from the third quarter of 2005. Having risen by 3.5 per cent in 2004, household spending growth is estimated to have slowed considerably in 2005 to just 1.7 per cent. Over the coming years spending is forecast to accelerate a little, by 2 per cent in 2006, 2.1 per cent in 2007 and 2.6 per cent in 2008. But a repeat of the strong increases seen in the early part of the century is unlikely. We expect private non-residential renovation output to increase year-on-year to 2008. A 1 per cent rise is forecast for 2006 and growth of 2 per cent in both 2007 and 2008.

5 Civil Engineering Market

Civil engineering in the UK has been in the doldrums for the past three years. In 2005 activity in the sector declined by a further 2.8 per cent, after having fallen by 9.4 per cent in 2004. A 7.7 per cent contraction in new work was responsible for a decline overall. Renovation output recovered in 2005, increasing by 3.5 per cent over the year to €11bn. New work output fell to €13bn.

New civil engineering work

Orders rose robustly in 2005 as a whole and the particular strength of the second quarter helped raise them 34 per cent above their 2004 level to €6.7bn, in 2000 prices. Second quarter orders alone were €1.8bn, a quarterly level that has not been achieved since the second quarter of 2003. In the fourth quarter, orders failed to match those in the second quarter but remained 20 per cent higher than in the corresponding quarter of 2004.

Roads

Current priced orders in the roads sub-sector rose robustly in 2005 and were up by 43 per cent to €2.3bn. Significant when you consider orders declined year-on-year in both 2003 and 2004. The Highways Agency’s current and forward roads programme suggests work should increase considerably over the next few years. The Agency has around 100 major projects either under construction, let but still in the planning stage or in the planning stage. Current projects include a €423m scheme to widen the M1 between Junction 6A and Junction 10 started work on site in March. The project is scheduled to be completed in December 2008 and is expected to boost output this year. If all goes to plan, work should commence on widening the M25 in 2008. Over its lifetime this scheme is estimated to be worth €6.6bn. However, the fact that the Highways Agency has decided to undertake a study to get a greater grip on inflation in their Targeted Programme of Improvements (TPI) is undoubtedly a cause of concern. Resulting speculation suggests the study may have an impact on current TPI schemes, or that budgetary restrictions could be imposed in the next Comprehensive Spending Review. That said the evidence presently available favours a strong outlook for roads construction. Our forecast is for strong, accelerating growth to 2008. A 5 per cent increase in 2006 is expected to be followed by a 9 per cent increase in 2007, rising to 10 per cent in 2008.

Railways

In terms of orders growth, 2005 was a good year for the railways sub-sector. Orders increased by 15 per cent to €1.1bn. London’s successful 2012 Olympics bid is likely to have an impact on the rail sub-sector. Rail projects already in the pipeline in the capital played an indirect, but nevertheless instrumental, role in the ciy’s success and now timely delivery is essential. The East London Line and Docklands Light Railway (DLR) extensions and London Underground’s are three sizeable projects which will help boost rail output over the coming years. Beyond the south east, significant rail projects are planned in both Scotland and Wales. The Scottish Executive plans to increase capital investment in the country’s rail infrastructure by 21 per cent in the 2006/07 financial year, and then by a further 40 per cent in 2007/08. Plans include the redevelopment of Waverley Station in Edinburgh, Aberdeen Crossrail and an intercity link between Glasgow and Edinburgh city centres. While the pipeline looks healthy over the medium term, initially output in the sector is likely to decline as work on the Channel Tunnel Rail Link nears completion. We expect output to fall by 11 per cent in 2006 and remain around this level in 2007. A return to growth is forecast in 2008.

Other transport

Orders in the other transport sub-sector, incorporating air and harbours, fared well in 2005, rising by 47 per cent to €778m. On the air side orders rose strongly, by 18 per cent. However, this increase was dwarfed by a 77 per cent climb in harbours orders. Harbours orders were worth €461m in 2005 and air’s €317m. As work on Heathrow Terminal 5 nears completion, activity in air sub-sector could possibly by sustained by the €1.5bn to €2.2bn Heathrow East project. Currently in the early stages of development the proposed project could see the demolition and reconstruction of Heathrow’s Terminal 2 building. Harbour-related work on the two Liquefied Natural Gas (LNG) terminals at Milford Haven and the Isle of Grain will increase in 2006 and 2007. In 2008 it is possible work could commence on harbours schemes at Shellhaven and Felixstowe. Initial output from the €439m Harwich port development is also a slim possibility in 2008. Output is likely to continue to decline over the short term and we are forecasting a 2 per cent fall in 2006. Beyond 2006 the outlook improves as work picks up in both harbours and air. A 3 per cent increase is forecast in 2007 and 7 per cent in 2008.

Telecommunications

Bucking the increasing trend seen in all other sectors, orders in the relatively small telecommunications sector declined in 2005, falling 8 per cent to €230m. Telecommunications orders rose by 30 per cent in 2004. Going forward a marginal 1 per cent fall is expected in 2006. We expect telecommunications to grow in both 2007 and 2008 by 3 per cent and 5 per cent respectively.

Energy and water works

Energy and water works orders recovered from a 3 per cent drop in 2004 to increase substantially in 2005 by 70 per cent. Strong rises were seen pretty much across the board. Gas orders grew by 152 per cent, water’s by 100 per cent and electricity’s by 58 per cent. Sewerage orders increased at a relatively subdued 9 per cent.

Shortly the first sizable contract associated with the Nuclear Decommissioning Authority’s (NDA) nuclear waste clean-up programme will go out to tender – the €1.5bn contract to clean up the low-level waste facility at Drigg. As yet the effect of this programme is likely to have on construction output is somewhat uncertain. The highly specialised nature of majority of the work may mean it falls outside of construction’s remit, which will to a great extent depend on who the contracts are awarded to. Current estimates for the cost of the UK’s nuclear waste clean-up programme are in the region of €102bn. A definitive statement of costs is unlikely before 2008 following key government decisions. In April work commenced on a €336m project to rid the London 2012 site of its overhead powerlines. Two tunnels, each spanning 6 kilometres are being constructed to take the cables underground. The project is scheduled for completion in 2009. The water companies are in the process of implementing their current Asset Management Plans (AMP4). Five-year AMP4 framework contracts have been let and work should peak this year and next.

Civil engineering renovation

DTI statistics include civil engineering renovation expenditure within non-residential renovation spending and therefore official civil engineering renovation statistics do not exist. Thus figures quoted in this section are best estimates, based on the reported spending plans of the major players in the market, the Highways Agency and Network Rail to give a couple of examples. The main drivers of civil engineering renovation are believed to be the roads and rail sub-sectors.

We expect civil engineering renovation output to remain relatively unchanged in 2006 and are forecasting a marginal 0.4 per cent increase. In 2007 and 2008 we expect output to rise by 1.4 per cent in both years.

APPENDIX – DEFINITIONS

Table 1 • Population: mid-year estimates of the number of people in the UK • Households: Office of the Deputy Prime Minister (ODPM) estimates (historic data revised by the ODPM) • Unemployed and unemployment rate: final year estimates of the UK claimant count, not ILO rates • Inflation: Consumer Price Index (CPI) is now the UK government’s target measure – replacing the previous measure, the Retail Price Index Excluding Mortgage Repayments (RPIX)

Table 2 Construction output includes: • estimates of professional services • construction by the sectors • DIY/undeclared construction. Official Department of Trade and Industry (DTI) orders statistics, referred to in the text, do not cover professional services.

Table 3 • Housing stock: ODPM’s end of year estimate

Table 4a • Education buildings: Public and private schools, colleges, and universities • Health: Hospitals (public, private and PFI) including medical schools, clinics, welfare centres, adult training centres and nursing homes • Industrial: Factories and buildings for the purpose of industrial production or processing, oil refineries, pipelines and terminals, concrete fixed leg oil production platforms (not rigs); private steel work, all new coal mine construction such as sinking shafts, tunnelling etc • Storage: Warehouses and wholesale depots • Offices: Office buildings, banks, local and central government offices, including town halls • Commercial: All buildings for retail distribution such as shops, department stores, retail markets etc, municipal shopping developments, theatres, restaurants, swimming baths, caravan sites at holiday resorts, buildings at sports grounds, stadiums, racecourses, public houses and youth hostels • Agricultural: All buildings and work on farms, horticultural establishments • Miscellaneous: All work not clearly covered by any other heading, such as fire stations, police stations, prisons, civil defence work, council depots, museums, libraries and churches

Table 4b • Other transport: air terminals, runways, hangars, reception halls, radar installations and all works and buildings directly connected with harbours, wharves, docks, jetties, canals, waterways, sea walls, embankments and water defences

The split between gas, communications and air construction has not been available in the past in the UK and in previous reports we have applied a best estimate of this breakdown. Since November 2005 an official breakdown has been released by the DTI and this has had an affect on our historical figures.

Table 5 There has been some re-estimation of historic data by the Office of National Statistics (ONS).

Country/Pays/Land: UNITED KINGDOM Table 1

Main demographic and economic indicators Principaux indicateurs démographiques et économiques Wichtige demographische und ökonomische Indikatoren

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Population ('000s) Population 59 350 59 590 59 820 60 055 60 285 60 512 60 738 Bevölkerung

Households ('000s) Ménages 25 002 25 406 25 589 25 771 25 954 26 144 26 338 Haushalte

Unemployed ('000s) Chômeurs 946,6 933,0 853,5 861,8 931,0 952,0 929,0 Arbeitslose

Unemployment rate (%) Taux de chômage 3,1 3,0 2,7 2,7 3,0 3,0 2,9 Arbeitslosenquote

Change of GDP Variation du PIB 2,0 2,5 3,2 1,8 2,5 2,6 2,6 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1,3 1,4 1,3 2,1 2,0 2,1 1,7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2,6 3,9 7,5 4,9 0,8 1,9 3,2 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 4,0 3,7 4,4 4,7 4,4 4,1 3,8 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4,8 4,5 4,8 4,4 4,4 4,5 4,4 Langfristiger Zinssatz

1) Refers to new construction only 2) 3-month interbank rate (or equivalent) 3) 10-year goverment bonds (or equivalent)

Country/Pays/Land: UNITED KINGDOM Table 2

Construction by type Production par type d'ouvrage Bauproduktion nach Sparten

Volume mill. euro % change at constant prices

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Residential construction New 28 625 5,4 12,8 13,9 2,6 2,6 2,6 4,5

Logement Renovation 48 891 3,8 5,2 4,7 -2,4 0,7 2,3 3,2

Wohnungsbau Total 77 516 4,3 7,7 7,8 -0,6 1,4 2,4 3,7

Non-residential construction New 55 497 1,6 4,0 7,8 -1,7 1,5 3,3 4,2

Bâtiments non résidentiels Renovation 32 919 6,4 6,1 -3,7 1,7 0,7 1,7 1,7

übriger Hochbau Total 88 416 3,4 4,8 3,3 -0,4 1,2 2,7 3,3

Building New 84 122 2,7 6,6 9,8 -0,2 1,8 3,1 4,3

Bâtiment Renovation 81 810 4,8 5,6 1,2 -0,8 0,7 2,1 2,6

Hochbau Total 165 932 3,8 6,1 5,4 -0,5 1,3 2,6 3,5

Civil engineering New 12 974 7,7 -9,5 -13,1 -7,7 5,0 7,0 7,0

Génie civil Renovation 11 002 5,6 9,0 -3,8 3,5 0,4 1,4 1,4

Tiefbau Total 23 976 7,0 -2,8 -9,4 -2,8 2,9 4,5 4,6

TOTAL CONSTRUCTION OUTPUT 189 908 4,3 4,7 3,2 -0,8 1,5 2,8 3,6

Million euro at 2005 prices, excluding taxes. 1 euro = 0,6836 GBP

Forecast Outlook 2005 mill. tons 2002 2003 2004 2005 2006 2007 2008

Domestic cement consumption Consommation intérieure de ciment 11,20 -2,3 0,0 1,7 -1,7 1,0 1,7 2,0 Inländischer Zementverbrauch

Country/Pays/Land: UNITED KINGDOM Table 3

Residential construction Construction de logements Wohnungsbau

Thousands dwellings

Forecast Outlook

2002 2003 2004 2005 2006 2007 2008

Building permits 1+2 family dwellings Logements autorisés Individuel Baugenehmigungen Familienhäuser Flats Collectif Mehrfamilienhäuser TOTAL Housing starts 1+2 family dwellings Logements commencés Individuel 126,7 124,2 123,8 116,8 113,9 114,4 118,3 Baubeginne Familienhäuser Flats Collectif 54,3 69,8 89,8 95,5 93,2 93,6 96,8 Mehrfamilienhäuser TOTAL 181,0 194,0 213,6 212,3 207,0 208,0 215,0 Housing completions 1+2 family dwellings Logements terminés Individuel 125,0 119,4 119,7 103,7 105,6 108,9 112,2 Baufertigstellungen Familienhäuser Flats Collectif 43,9 56,4 67,5 88,4 86,4 89,1 91,8 Mehrfamilienhäuser TOTAL 168,9 175,7 187,2 192,2 192,0 198,0 204,0

Housing stock Logements existants 24 936 25 101 25 274 25 510 25 705 25 895 26 070 Wohnungsbestand

thereof second-homes dont résid. Secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 69,7 70,0 70,2 70,5 70,7 70,8 70,9 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: UNITED KINGDOM Table 4a

New non-residential construction (public and private) Construction neuve non résidentielle, (publique et privée) Neuer Nichtwohnbau (öffentlich und privat)

Volume % change at constant prices mill. euro Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Buildings for education Bâtiments de l'éducation et de la recherche 11 752 17,4 22,4 10,4 4,5 2,9 5,0 6,0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 5 477 7,7 17,1 35,7 -1,6 -1,1 4,0 4,0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 4 107 -17,6 6,8 9,7 -18,9 -6,1 -5,0 -4,0 Industriegebäude

Storage buildings Bâtiments de stockage 3 635 -18,3 2,9 27,2 23,0 4,9 4,0 2,0 Lagergebäude

Office buildings Bureaux 12 096 -5,2 -13,0 -4,8 8,8 6,9 7,0 8,0 Bürogebäude

Commercial buildings Commerces 14 510 10,9 0,0 6,5 -11,4 -2,1 0,0 2,0 Geschäftsgebäude

Agricultural Buildings Bâtiments agricoles 397 5,4 16,8 -6,9 -3,5 -0,1 2,0 2,0 Landwirtschaftsgebäude

Miscellaneous Autres 3 523 -1,8 31,7 4,0 -4,7 1,9 4,0 4,0 Sonstiges

Total Insgesamt 55 497 1,6 4,0 7,8 -1,7 1,5 3,3 4,2

Million euro at 2005 prices, excluding taxes. 1 euro = 0,6836 GBP

Country/Pays/Land: UNITED KINGDOM Table 4b

Total civil engineering Ensemble du génie civil Tiefbau, insgesamt

Volume % change at constant prices mill. euro

Estim. Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Transport infrastructure Roads Infrastructures de transport Réseau routier 7 203 15,6 -1,0 -9,1 -7,1 5,0 9,0 10,0 Verkehrsinfrastruktur Straßen Railways Voies ferrées 3 455 16,4 -16,9 -13,7 -10,2 -11,0 0,0 4,0 Bahnanlagen Other transport Autres réseaux 2 454 10,3 20,2 -22,3 -3,0 -2,0 3,0 7,0 Übrige Vekehrsinfrastruktur TOTAL 13 112 15,0 -2,7 -13,0 -7,2 -0,5 5,8 8,1

Telecommunications Télécomunications 1 039 -39,3 -21,7 14,8 -9,0 -1,0 3,0 5,0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 9 825 4,9 -0,5 -5,8 4,5 8,0 3,0 0,0 Energie-und Wasserversorgung

Other Autres Sonstiges

Total 23 976 7,0 -2,8 -9,4 -2,8 2,9 4,5 4,6

Million euro at 2005 prices, excluding taxes. 1 euro = 0,6836 GBP

Country/Pays/Land: UNITED KINGDOM Table 5

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

Volume % change at constant prices bill. euro

Estimate Forecast Outlook

2005 2002 2003 2004 2005 2006 2007 2008

Privat consumption Consommation privée 1 095,4 3,5 2,6 3,5 1,7 2,0 2,1 2,6 Privater Verbrauch

Public consumption Consommation publique 342,0 4,4 4,5 3,1 2,9 2,8 1,3 1,0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen Total 273,8 2,3 0,0 5,1 3,2 1,9 2,5 2,5 of wich construction 107,9 4,9 3,9 5,5 4,4 1,5 1,0 1,0

Stocks (contribution as % of GDP) Variations de stocks 3,7 -0,3 0,2 0,1 -0,3 0,0 0,1 0,0 Vorratsveränderung

Exports Exportations 449,1 0,7 2,6 4,1 7,5 6,3 6,4 5,1 Exporte

Imports Importations 512,9 2,1 2,2 6,2 9,0 4,8 4,4 3,8 Importe

GDP PIB 1 651,1 2,0 2,5 3,2 1,8 2,5 2,6 2,6 BIP

Standard National Accounts, gross figures