European Construction Monitor 2017–2018: A looming new construction crisis? European Construction Monitor | 2016-2017: Growing opportunities in local markets

European Construction Monitor is a publication edited and distributed by Deloitte.

Directors Jurriën Veldhuizen, Partner Real Estate, Segment Leader Construction, Netherlands Peter Sanders, Partner Strategy & Operations, Consulting, Netherlands

Coordinated by Coen van Beusekom Morsal Sarwarzadeh Gerben Sinke Carlo Sturm Laura Zegger

Contact Real Estate Department, Deloitte Netherlands Phone: +31-88 288 3281 Fax: +31-88 288 9752

July 2018 02 European Construction Monitor | 2017-2018: A looming new construction crisis?

Contents

1. Introduction 05

2. Context – market developments 07

3. Shaping trends 11

4. M&A analysis 17

5. Conclusion 23

Appendix: European real estate, construction and 24 infrastructure group contacts Outlook per country 27

03 European Construction Monitor | 2017-2018: A looming new construction crisis?

04 European Construction Monitor | 2017-2018: A looming new construction crisis?

1. Introduction

We are pleased to present the seventh edition of the European Construction Monitor, which looks at the latest market developments, trends and merger & acquisitions in the European construction industry. This 2017-2018 publication complements the “European Powers of Construction” (EPoC), a Deloitte research paper examining the status of major European-listed construction companies.

Local construction markets are gaining indicates construction companies are However, in the mid-market there have traction all across Europe. Northwestern focusing on strengthening their position in been a number of transactions in the tech European markets showed the strongest local markets. enabled construction space, such as the market growth over 2017. Both Northern carve out of NBS from the Royal Institute of and Western Europe are expected to show But the current rapid market recovery British Architects which are set to catalyze a stabilizing market growth for the coming is triggering sharply increasing prices. the growth in this space. years. Southern European markets are Combined with a lack of suppliers and expected to grow decently. personnel this could well lead to a new construction crisis. In the UK and the Highlights in this publication Construction companies are becoming Netherlands construction companies filed •• Almost all construction firms want increasingly aware of the opportunities for bankruptcy due to major losses on to lead in digital but construction arising from the economic growth of local projects where they had been exposed to companies have not yet utilized construction markets, which is reflected in rapidly increased supply costs. M&A to realize their “digital” agenda the increase of M&A activity: a total of 194 transactions were noted in 2017 compared M&A not yet utilized to realize •• M&A activity within the European to 149 in 2016. digital agenda construction sector is finally Digitalization and technology are two major picking up This European Construction Monitor themes in the construction industry. This •• M&A activity indicates a analyses the market trends in the European report elaborates on the main trends in the focus on strengthening “their construction industry by looking back and industry and analyses the digital strategy of classic” position in local forward at the same time. In producing major construction companies in Europe. construction markets this outlook Deloitte has combined these analyses with the in-depth, local We found that almost all construction •• Supply chain pressure remains knowledge its European member firms companies are aiming to become “leading a major issue in Northwestern have of M&A, real estate, construction and in digital construction” over the next few Europe, resulting in a looming new infrastructure. years. Large parts of the construction construction crisis companies’ strategies cover digitalization •• Industrialization of the construction Supply chain pressure remains a major and technology. sector a “must“ issue (again) issue in Northwestern Europe Over the last years we have reported signs An analysis of the M&A activity of the of increasing supply chain pressure in many Top 50 listed European Construction Northwestern European construction companies shows that only few, including markets. Supply chain pressure remains a Vinci, utilize M&A to realize their digital major issue that construction companies agenda. The majority of the construction have to face in countries like Ireland, the companies focus on internal start-ups and UK and the Netherlands. M&A activity partnerships with innovative ecosystems.

05 European Construction Monitor | 2017-2018: A looming new construction crisis?

06 European Construction Monitor | 2017-2018: A looming new construction crisis?

2. Context – market outlook

The three main themes – market growth, profit margins & digitalization – are used to briefly describe the market development in the European construction industry.

Market growth Figure 1 shows the outlook for market When looking at the profit margins, we Over the last year, market growth has growth of countries included in observe different trends throughout been the predominant trend in the this analysis. Europe. In the Northern European construction industry throughout Europe. countries costs have increased, but due Northwestern Europe showed the largest Compared with the pre-crisis period, the to high activity levels it is expected that increase in market growth in the past few production output in most European overall profit margins will not be affected years. However, growth in Northern and countries has recovered and transcended and will even increase in the coming years. Western Europe is expected to stabilize in 2010 levels. Although Southern European In the western part of Europe, such as the the coming years. The Southern European construction markets are recovering over UK, Belgium, the Netherlands and Ireland, construction market continues on last the past few years, production volumes in operating margins are under pressure due year’s road to recovery and a decent Portugal (52.5%), Greece (52.4%, 2016), Italy to an increase in labor costs, which cannot market growth is expected for the coming (68.0%), France (89.9%) and Spain (95.0%) be offset with higher activity levels. In the years. Market growth for Northwestern and have not (yet) reached 2010 levels3. southern and eastern countries, profit Southern Europe combined is forecasted margins are less affected by construction at 2.5% a year on average in 2018–20221. Profit margins costs. Construction costs have risen less Construction companies in Eastern and The production growth in most European than the European average, or have even Central Europe seem to have finally left construction markets resulted in an declined in some of these countries. behind the aftermath of the economic increase in construction costs over recent crisis and are trying to catch up with the years. During the financial crisis and its rest of Europe, resulting in a slightly higher aftermath many (sub)contractors and expected market growth of approximately suppliers in the construction industry 4.4% on average in 2018–20222. went bankrupt. Now, as many of the EU construction markets are flourishing, the In terms of production growth most EU shortage of subcontractors and suppliers construction markets are still largely is further increasing construction prices. In dependent on public investments in, addition, many well-trained construction for instance, infrastructural projects. personnel have been retrained to work in Growth in the residential and commercial sectors other than the construction sector. construction sector is highly dependent on As a result, the profit margins of mostly geographical subregions. Our local experts large construction companies are under from the Netherlands and France notice pressure in several European submarkets. this geographical dependency.

1 Source: Construction Intelligence Center – Global Construction Outlook to 2022 2 Source: Construction Intelligence Center – Global Construction Outlook to 2022 3 Source: Eurostat (2018) – Production in construction – annual data

07 European Construction Monitor | 2017-2018: A looming new construction crisis?

Market growth per country

++

+

O/+

O

O/-

Not included

Regional levels of Below Average Above

Profit margins

Digitalisation

08 European Construction Monitor | 2017-2018: A looming new construction crisis?

When looking at the profit margins, we observe different trends throughout Europe. In the Northern European countries costs have increased, but due to high activity levels it is expected that overall profit margins will not be affected and will even increase in the coming years. In the western part of Europe, such as the UK, Belgium, the Netherlands and Ireland, operating margins are under pressure due to an increase in labor costs, which cannot be offset with higher activity levels or be passed down the supply chain. In the southern and eastern countries, profit margins are less affected by construction costs. Construction costs have risen less than the European average, or have even declined in some of these countries.

09 European Construction Monitor | 2017-2018: A looming new construction crisis?

10 European Construction Monitor | 2017-2018: A looming new construction crisis?

3. Shaping trends

Over the past few years a number of trends have been shaping the construction industry or are expected to have a great impact in the near future. This section outlines a selection of the shaping trends, ranging from internationalization strategies to disruptive innovations and new entry companies.

Internationalization strategy by larger Supply chain pressure The growth strategy construction companies Over the past few years the market of Europe’s larger The share of cross-border deals shows conditions on the European continent a decline for the second year in a row, have recovered rapidly. Simultaneously, international oriented although the absolute number of cross- we have observed an increase of supply construction border deals increased. This also applies to chain pressure in most countries. Our the share of intercontinental deals within local experts have noted two important conglomerates continues the cross-border deals, indicating that recurring supply chain pressure themes. to focus on both although construction companies tend to The first theme comprises the high strengthen their positions in local markets, pressure on margins of larger construction internationalization and the international focus of European companies due to the shortage of diversification as top construction sector seemingly continues subcontractors and materials. The to be a dominant strategy. For example, second theme comprises the widespread priorities. VINCI, a France-based construction group, shortages of qualified labor, which increased its activities in areas such as hampers growth. Europe (especially in Germany and the United Kingdom), America, Asia and the High pressure on margins due Middle East. to shortage of subcontractor and materials This view is supported by the European While construction volumes developed Powers of Construction (EPoC 2016), over the past few years, we have seen which shows a ranking of the top 20 listed sharply increased subcontractors’ prices European construction players ranked by starting to put pressure on the operating market capitalization. This study shows margins of larger construction companies. internationalization to have increased in Supply chain pressure increases in the last seven years. In 2016 international recovering markets, where many sales of the EPoC represented 52%, an 8 subcontractors went bankrupt during the percentage points increase since 2010. crisis. The scarcity of subcontractors in the now rising market results in higher prices The growth strategy of Europe’s larger and pressure for main contractors to bring international oriented construction tier 2 expertise in-house. In addition, many conglomerates continues to focus on both local markets also experience a shortage of internationalization and diversification as materials. One example is the shortage of top priorities. In 2016, the “International pile drivers in the Netherlands, this drives construction” category represented more up the construction costs and increases than 50% of the Top 20 EPoC by sales the pressure on the margins of mainly the and included some of the largest EPoC in larger construction companies. In the UK terms of sales (up to nine groups fall within Brexit is anticipated to further exacerbate this category). Total revenue recorded by this trend with some construction these groups amounted to EUR 130,709 companies such as United Living million compared with EUR 106,401 million outlining that they will begin to stockpile in 2010. construction materials.

11 European Construction Monitor | 2017-2018: A looming new construction crisis?

Where in recent years signs of supply Throughout Europe, the quantitative Virtual & Augmented Reality (VR & AR) chain pressure were mainly noticed in and qualitative shortage of labor is VR and AR makes it possible to test every Northwestern European construction increasingly becoming a major issue in centimeter of a building in an artificial markets, we now see signs of supply the construction sector. Some companies computer or robot. Therefore, these chain pressure throughout Europe. All have taken measures such as increasing technologies help avoid possible danger in countries – apart from Spain and Greece - spending on training and raising workers’ the construction process to persons. One are experiencing supply chain pressure in pay, while others are advancing their example is testing the resilience of roofs some form. Brexit is expected to have an technology usage to offer employees new under different weather conditions. impact on the construction market. This skills and growth opportunities. However, trend is reflected in the construction cost implementation of advanced technologies 3D printing & additive manufacturing indices for residential buildings over the requires highly skilled employees. The Professionals use 3D printing technologies period 2010 to 2016. labor shortage has its background in to develop detailed models as well as real the economic downturn, when many size objects. It is already possible to build Inflationary pressures will challenge construction companies went bankrupt 3D printed houses in less than 24 hours, at construction companies, which may have and employees were laid off and forced relatively low costs. to fix prices months and years ahead of to retrain to professions other than the completing a project. With uncertainty construction sector. In addition, the Internet of Things (IoT) in the construction industry, builders, construction sector has great difficulty in The value of IoT in the construction sector contractors and suppliers need to be attracting and retaining the technology- is based on collecting data and online concerned about the increasing costs born millennia generation, despite inspection infrastructure. One example of of building materials. Rising material technological developments in the sector. this perspective is that in the near future and supply prices is a multi-dimensional street lights can measure traffic and warn problem that requires contractors to Our local experts across Europe expect people in traffic about possible accidents. be proactive in managing budgets and that if the construction industry is not It does so using numerous sensors that will job costing, especially with continued able to attract more and qualified labor have the possibility to catch every potential demand for materials. Over the last or find new ways to drastically improve threat signal. years, there has been a steady increase productivity, the chronic labor shortages in construction input costs in countries could result in substantial negative Construction Management Software like the Netherlands and Germany, where economic impact. (CMS) local experts expect the input cost inflation CMS comprises the adaption of intelligent trend to continue, if not sharply steepen. Disruptive innovations software solutions, such as measuring and The shortage of materials, resulting in input The construction industry is generally managing build materials in warehouses cost inflation, is pressuring the margins in considered a traditional industry in which and the prediction of procurements for the European construction markets. innovation is limited. iterations, with which intelligent software solutions save a lot of valuable time and Widespread shortages of qualified Smart materials money. The intelligent software provides personnel, which hampers growth Start-ups work on improving existing a clear understanding of a building In many European countries the materials by reconstructing the chemical company’s performance. construction industry is flooded with structure of building materials to turn them work and our local experts state that the into smart materials, such as self-healing Drones labor shortage is pushing back projects concrete, thermal insulation, aerogel and Drones make it possible to provide for months. The lack of capacity at photovoltaic glazing. These innovations construction companies with high- subcontractors, driven by the shortage of harness energy from pedestrians and quality and precise information. In the available and skilled personnel, pressures cars to instantly generate solar energy for construction industry, they are used to sector margins even more. skyscrapers, avoid the ruin of concrete inspect and deliver data in a very short and reach a maximum efficiency of amount of time, making this technology a thermal bridging. resourceful and efficient solution.

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New construction industry parties of the biggest challenges facing cities Innovation and Innovation and digitalization in the including energy use, housing affordability digitalization in the construction industry are not only driven and transportation. by traditional construction companies. construction industry Over the past few years a lot of companies Tesla Solar Roof are not only driven by specialized in innovative technologies and In 2016 Tesla announced the production services have entered the construction of the Tesla Solar Roof, combining product traditional construction industry. Some of these companies innovation and sustainability with a companies. Over the could become construction industry traditional product. The glass roof tiles disruptors. This trend towards innovation consist of a large amount of solar cells past few years a lot of and digitization has also attracted Private while its design looks like traditional types companies specialized in Equity to the sector, who have remained of stone or slate tiles. absent for a number of years. A few new innovative technologies entries are introduced below. Industrialization of construction and services have entered processes The Boring Company Not a new one on the block, though the construction industry. Elon Musk’s Boring Company aims to recently gaining new momentum is enhance tunneling speed while reducing the industrialization of construction costs by new technologies. The goal of The processes. More companies are looking Boring Company is to reduce the costs at the fabrication of building parts. The of tunneling by a factor of 10 or more. By maturation of concrete printing methods placing vehicles on a stabilized electric enables companies to scale up and skate the standard tunnel diameter could robotize prefabrication of building parts be reduced in half, reducing costs by 3-4 off the building site. Companies like times. Furthermore, the company aims Voorbij Prefab in the Netherlands are to increase the speed of tunnel boring becoming more and more visible in the machines through, e.g., automation, construction industry. increasing power and going electric.

Toronto Smart City Development – Alphabet/Google The city of Toronto has handed over the responsibility for part of its infrastructure to Alphabet, Google’s holding company. Alphabet’s subsidiary Sidewalk Labs has signed an agreement to develop the 800 acres waterfront land to a hypermodern wired city in which infrastructure and buildings become flexible and responsive to their users continuously changing needs. The combined vision of Alphabet and the city of Toronto aims to integrate the latest digital technology to the urban landscape in order to address some

13 European Construction Monitor | 2017-2018: A looming new construction crisis?

CLOSE-UP Digitalization and technology strategies of construction companies

Adaptation of new digital technologies takes a flight in the construction industry. All construction seminar nowadays address the latest trends, such as 3D printing or Smart Materials. But to what level is digital construction part of the strategies of European construction companies? This section focuses on the strategy of six of Europe’s largest construction companies. The companies include Vinci, ACS, Skanska, Strabag, Balfour Beatty and BAM. The analysis is based on their annual reports.

Top European construction companies make a strong effort to understand the benefits of using innovation and technology developments in activities in their business. They all share a focus on new technological developments, new business creation and knowledge investment. Such focus enhances customer interaction early on in the construction process and connects all process stakeholders through digitalization. All the top performers in the European construction sector develop new technology applications, such as drones and robotics.

Company Country BIM 3D/4D Robotization/ Partnerships printing Drones & knowledge sharing Vinci France

ACS Spain

Skanska Sweden

Strabag Austria

Balfour B. UK

BAM Netherlands

Specifically appointed Generally appointed Not appointed

The table above shows the six construction companies and the extent to which they address the themes (robotization/drones, 3D/4D printing, BIM and Partnerships and knowledge sharing) in their strategy. As shown in the figure, all of the top construction companies mention the focus on digital innovations as a part of their strategy. Almost all of the companies analyzed describe projects where BIM technologies are applied. Furthermore, the focus on partnerships is increasing. All of the companies discuss particular partnerships and sharing knowledge with universities in the technology business. However, contrary to expectations there is little focus on the supply chain.

Digitalization and technology strategies of construction companies For example, NCC digitalizes the construction processes and architectural drawings to capture possible design errors before construction starts, sharing information with suppliers about the exact materials to deliver. Their program, Virtual Design and Construction (VDC), allows to follow and visualize project progress and allows to enter into a dialog with customers at an early stage, offering and overview of the quality, time and cost of the project. Skanska uses automation and robotization of the construction process, and focuses on BIM, autonomous vehicles, automation and robotics, material advancements, drones and 3D printing. Eurovia, a subsidiary of Vinci is also developing new predictive maintenance systems by integrating networks of sensors in road and rail infrastructure.

Digital strategy of top EU construction companies strongly focused on internal start-ups and partnerships with innovation ecosystems The top European construction companies all focus on innovative technological developments. In order to become leading in digitalization, the strategy of the largest construction companies is strongly focused on digitalization and technical innovation. Themes that feature prominently in their annual reports. Furthermore, the creation of new start-ups is growing, both internally and through collaboration and partnerships with other ecosystem players.

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15 European Construction Monitor | 2017-2018: A looming new construction crisis?

4. M&A analysis

The earlier sections have outlined the market developments and shaping trends of the European construction industry. But how can these developments and trends be translated into or reflected in M&A activity? This section elaborates on the M&A developments in the European construction market.

Building on the previous editions, we have 194 deals were recorded in 2017 compared analyzed the M&A activity of construction to 149 deals in 2016. We have been noticing Bidding war around Spanish companies combined with installation, a continuous increase in the number of toll-road operator Abertis engineering and infrastructural companies deals since 2013. Infraestructuras SA involved in the construction sector. Including them in the sample size allows Although consolidation of market growth In May 2017, Atlantia SpA, the Italian for the presentation of a comprehensive is expected in most of the European based and listed infrastructure picture of M&A activity within the construction markets for the coming years, company, announced a voluntary construction sector. we expect the upward trend to continue tender offer to acquire Abertis over 2018. Infraestructuras S.A, the Spanish Developments in 2016 – 2017 based and listed infrastructure Due to the economic recovery in local Strong focus on residential markets company. However, in November construction markets, Deloitte expected an The significant increase of the targeted 2017, Hochtief AG, the German listed increase in market activity with an increase Residential Builders is remarkable. Over and based construction company in the number of M&A deals. This seems to 2017, 42 deals targeting a residential majority owned by Spanish based be holding true for 2017. builder were noted, compared to an ACS made a counter offer for Abertis. average of 21 deals over the past four In December 2017, both bidders were M&A activity within the European years. This significant increase reflects preparing to improve rival offers in a construction sector shows a significant rise the flourishing housing markets in many nearly 20 billion euro takeover battle. over 2017 compared to a relatively stable European countries. However, Atlantia confirmed in March level of M&A activity during previous years: 2018 that they had come to a preliminary deal with Hochtief under which they will take joint control of 250 Abertis, putting an end to a bidding war that lasted for over more than 200 four months.

150

100 194 144 132 127 149 50 111

0 2012 2013 2014 2015 2016 2017

Figure 1: number of transactions in the construction sector Source: Mergermarket, 2018

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Increased market value The increase of the The average deal value of individual The divestment of Heijmans transactions increased to EUR 327 million share of strategic deals in 2017, up from EUR 203 million in 2016. Heijmans announced in 2016 it would in general and the share Compared to an average deal value of reduce their focus to the Netherlands disclosed transactions of approximately with a tightened focus on core of deals focusing on core EUR 241 million in 2015 and EUR 253 in competences. This resulted in the business more specifically, 2014, the average deal size seems to be divestment of the Belgian activities significantly higher compared to the past and the sale of all German activities indicates that construction 4 years. The increase in average deal value over 2017. The Belgian activities have companies are focusing indicates an increase in market value driven been divested to Besix. by an economic uplift in most European on strengthening construction markets. core business. For the second year in a row the share of Focus on strengthening position in cross-border deals showed a slight decline: local markets 47.9% in 2017 compared to 54.9% in 2015, Strategic deals, i.e. non-PE deals, show although the absolute number of cross- an increase for the fourth year in a row: border deals increased to 93 cross-border 150 strategic deals in 2017 compared to deals in 2017, up from 76 cross-border 81 in 2013. The share of strategic deals deals in 2016. This also applies to the share compared to the total deals in the industry of intercontinental deals within the cross- remains stable at around 77.3%. Since border deals: 39 deals in 2017 compared to 2010, the share of strategic deals has 34 in 2016. fluctuated between a maximum of 82.4% (2010) and a minimum of 73.0% (2013). Combined with the increase in the total number of deals and an increase of the Strategic deals can be divided into two share of strategic deals, these trends main categories: diversification deals and indicate that construction companies core deals. Diversification deals involve are seeking to generate more profits in transactions in which the buyer and seller their national markets. This corresponds are not within the same industry, while in with the recovering local construction core deals they are. In 2017, there were markets across Europe. However, the 92 core strategic deals compared to 67 in international focus, both on the continent 2016. The share of core deals compared and intercontinentally, continues to be a to the total number of deals remains dominant strategy for most of the larger relatively stable. In 2017, the share of deals construction companies. focusing on the core business was 47.4% compared to 45.0% in 2016. The share of diversification deals is also in line with last year’s monitor. In 2017, 29.9% of all deals were recorded as diversification deals, compared to 28.2% in 2016.

The increase of the share of strategic deals in general and the share of deals focusing on core business more specifically, indicates that construction companies are focusing on strengthening core business.

17 European Construction Monitor | 2017-2018: A looming new construction crisis?

Rapid market recovery leading to a 40.0% new construction crisis? Since 2013, we have increasingly reported 30.0% signs of market recovery in most of the local European construction markets. The number of insolvencies is an indicator 20.0% of market recovery. Figure 4 illustrates 30.3% 31.3% 29.9% the continuation of market recovery in 27.0% 28.3% 28.2% the Europe construction sector since 10.0% 2011. Compared to 2015, the number of insolvencies in the construction sector in Western Europe dropped by 7.1%. In 0% Central & Eastern Europe, the number of 2012 2013 2014 2015 2016 2017 insolvencies remained relatively stable with a slight increase of 0.8%. Fueled by the Figure 2: Percentage of cross-border transactions economic uplift of most of the European Source: Mergermarket 2018 construction markets, we expect the number of insolvencies to drop further over 2017. 60.0%

Stukton transfers shares Tidal 50.0% Bridge BV to BAM 40.0% A joint venture of Strukton International and DEC started a 30.0% 54.9% feasibility study for the Palmerah 47.7% 49.6% 51.0% 47.3% 20.0% 42.4% Tidal Bridge project in Indonesia. This project involves the 10.0% construction of a floating bridge with the world’s largest tidal power 0% plant connected to it. 2012 2013 2014 2015 2016 2017

Tidal Bridge was an innovation in a Figure 3: Percentage of diversification transactions new country for Strukton from the Source: Mergermarket 2018 start of this research. In a reconsideration of the strategy, it was decided that Indonesia will not be a home country for Strukton in the near future.

18 European Construction Monitor | 2017-2018: A looming new construction crisis?

In contrast to the decline of the total 60,000 number of insolvencies the construction 50,000 industry is possibly facing a new crisis 14,285 11,158 13,934 due to the rapid market recovery. In 11,677 11,942 40,000 12,037 most Northwestern European countries supply chain pressure has increasingly 30,000 become a major issue for construction companies over the last few years. This has 39,654 39,325 20,000 37,155 37,519 35,556 not only resulted in pressure on margins 33,213 of the larger construction companies in 10,000 these markets, it has also resulted in the slowdown of construction production due 0% to high prices and lack of personnel and 2011 2012 2013 2014 2015 2016 the insolvencies of construction companies Western Europe Central & Eastern Europe due to unprofitable projects. Figure 4: Number of insolvencies in the construction sector In January 2018, the UK’s second-largest (Source: Creditreform.de, 2017) construction company Carillion filed for bankruptcy due to payment delays and overreaching on unprofitable projects claim that digitalization is a significant part In January 2018, in 2017. Carillion’s bankruptcy has mayor of their strategy, often substantiated by implication for over 45,000 current and exemplary projects or clear targets. the UK’s second- former employees and ongoing projects, largest construction for which a solution must be found in Hence, we would expect construction the course of 2018. In the Netherlands, companies to utilize M&A to achieve their company Carillion filed a relatively small construction company strategic objectives. However, little to no for bankruptcy due called Moonen has filed for bankruptcy evidence has been found to underpin in 2018, for reasons similar to those this strategic focus on digitalization and to payment delays of Carillion. The Dutch construction technology within the M&A activity of the and overreaching on company VolkerWessels, which raised Top 50 European Construction companies. EUR 575 million through an IPO in May The majority of these companies behave unprofitable projects 2017, has recently announced the delay traditionally on the M&A market with a in 2017. of several projects due to increased focus on the construction, real estate, prices and declining flexibility of suppliers. energy and transportation (toll road Vinci and its utilization of M&A Construction firms should look at new operators) sector. One exception is Vinci. activity to make the digital ways to industrialize their sector in order to In contrast to the other large construction strategy viable counter their supply chain issues and take companies, Vinci has been very active in Although the majority of the top 50 advantage of the huge market demand. acquiring digital and technology companies European construction companies Based on the expected continuation of over the past few years. tend to achieve their digital and market growth in markets facing high levels technology strategy internally, Vinci of supply chain pressure, we expect to see While a few M&A digitalization and seems to be one of the exceptions. In more construction companies struggling technology focused transactions took February 2017, Vinci Constructions with agreed project budgets resulting in place over the course of 2017, M&A acquired a 30% stake in XtreeE SAS, a project delays or even insolvencies. activity is thus not (yet) used to achieve France-based developer of 3D these strategic objectives. Our local printing technology for architectural M&A not (yet) utilized for realizing experts indicate that the majority of the design. In November 2017, Vinci digitalization agenda European construction companies are Energies UK required Cougar Almost all larger construction companies adapting internal departments to meet the Automation, a UK-based company aim to become leading in digital strategic objectives. that provides services in Cyber construction over the next few years. The Security, IoT and Control top 50 European construction companies Systems Integration.

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20 European Construction Monitor | 2017-2018: A looming new construction crisis?

5. Conclusion

Driven by the market recovery, M&A activity in the European construction sector is finally picking up. This section sums up the most notable trends in the industry and elaborates on what to expect in the coming years.

Most European construction markets Furthermore, industrialization is a ‘must’ show largely positive indicators for growth theme again. However, analyzing the M&A focusing on strengthening positions in local activity of the top 50 European listed markets. Based on the continuing market construction companies shows that the growth in both Northern, Western and majority does not utilize M&A to realize Southern Europe, we expect a continuation their digital agenda. The main focus is on of the increase in M&A activity. internal start-ups and partnerships with innovative ecosystems. One exception Construction companies in mainly is Vinci, which has been active in the Northwestern European countries are acquisition of digital and technology facing challenges resulting from continuing companies over the past few years. In supply chain pressure. A new construction order to realize their challenging digital crisis is looming with companies in the ambitions we expect more construction UK and the Netherlands struggling with companies to follow Vinci’s M&A strategy. rapid price increases in the supply chain and a shortage of qualified personnel. Furthermore, several disruptive We expect these trends to continue to innovations are entering the market, such hamper margins of the larger construction as smart materials, VR & AR, IoT and 3d companies and also production planning, printing. Over the past few years a lot thus possibly leading to more insolvencies. of companies specialized in innovative technologies and services have entered the Meanwhile digital construction is the construction industry. In order to become hottest new theme in the construction leading in digitalization, the strategy of industry. Most construction companies the largest construction companies is recognize the importance of technological strongly focused on digitalization and innovation and elaborate on their digital technical innovation. agenda in their strategies to some extent.

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Appendix

Construction sector in Europe – outlook The following table highlights the opinions and views of local Deloitte specialists on the short and medium term outlook for local construction markets. Subsequent pages provide extensive insights for each country.

Country Outlook Highlights

•• The M&A strategy of Strabag SE is focused of expansion in its special division, PPPs, property development and property management services and is looking for acquisitions in these fields Austria o/+ •• Porr is searching suitable targets in its core markets in Austria, Germany, Switzerland, Poland, the Czech Republic and Slovakia to raise its market share and strengthen its work force

•• Profit margins continue to be under pressure as construction businesses suffer from high labor costs, compared to Eastern Europe, and considering factors such as the stagnating economic climate and the Belgium o/+ reduced public spending due to budget constraints •• Mainly due to the compressing margins, M&A in the construction sector is characterized by an increasing focus on diversification deals and the reinforcement of the local position

•• The development and construction forecast for 2018 and the following years is more critical than Czech o/- current rates of decline Republic •• There are no noticeable large M&A transactions in the construction market in Central Europe

•• The Danish construction market is expected to grow at a rate of 10-15%. The total market will probably grow 5-10%, but the market share for the larger companies will increase. Therefore they Denmark o/+ will grow10–15%. •• M&A activity levels are generally high but not in the construction sector, where the number of transactions is limited.

•• Private equity companies are expected to continue to consolidate smaller and mid-sized construction companies Finland + •• The usage of BIM is gaining traction, especially in planning and construction projects. However, some might argue that fully adapting BIM into operations would need a generation shift in the engineering and construction companies

•• After several years of decline and a moderate growth in FY2016, FY17 was a positive year for the construction sector, essentially driven by the residential sector. Further (although lower) growth is France o/+ expected for FY18 •• M&A trends are characterized by continuous focus on diversification and international deals. However, there are some limited local and pure construction transactions as well

•• The short-term and mid-term outlook for the German construction market predicts an ongoing strong demand for housing and infrastructure investments Germany o/+ •• Many players in the market are making strong efforts in implementing and improving digital construction know-how and processes

•• The Greek economy is recovering and expected to grow in the coming years Greece o •• During 2017 M&A activity within the Greek construction and infrastructure sector has rebounded

•• US Private Equity funds, which hold around 40 sites valued in excess of 800m, are expected to continue Ireland o deleveraging their positions, considering their typical investment parameters, with greater levels of institutional investment entering the country from the US and Europe

•• The Italian economy continues on its road to recovery, the same goes for the construction sector which reported an increase in total construction investments of 0.3% in real terms for 2016, mainly due to the non-residential construction subsector Italy o •• The larger Italian companies in the construction sector are focusing their growth strategies on developing and diversifying their overseas books, both in developing markets (Africa and Asia) as well as growing into established markets that require large infrastructure investments (e.g. USA)

+ : optimistic o : neutral – : pessimistic

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Country Outlook Highlights

•• 2017 was the fourth consecutive year in which production in the construction sector in the The Netherlands increased o/+ Netherlands •• This growth in the construction sector has a big impact on the workforce. In the period of 2018-2022, the construction sector will need 55,000 new employees in executive construction

•• Construction is a major driver of Norwegian economy, as the industry accounts for 16% of Norwegian GDP Norway + •• Norwegian housing prices have decreased in 2017, mainly driven by a decrease in the Oslo area. Statistics Norway has forecasted Norwegian housing prices to fall continuously in both 2018 and 2019, until a moderate increase by 2020

•• The strategies of construction companies in Poland comprise organic growth rather than through M&A. •• Polish construction companies are focusing on the Polish market and its core strategy although Poland o/+ beyond 2020 there is awareness of the need to diversify, especially construction companies which are significantly reliant on publicly procured contracts and EU funds

•• Larger sized construction companies are acquiring small and medium-sized construction companies with the intention of expanding services or with vertical integration in mind. Portugal o •• Larger companies are focusing mainly on deleveraging through the sale of non-core assets. Construction companies focus on core assets and continue to focus on international markets, especially Africa and Latin America.

•• The recent appointment of a new Government in Spain, due to a no-confidence vote in parliament, could delay or even halt the highly awaited € 5bn PIC motorway PPP •• Private equity has focused its activity on higher value added assets, such as parking or gymnasiums Spain o concessions, where, due to the atomization of the Spanish market, a build-up process can take place and operational adjustments are easier to perform •• The two main strategies of the major construction companies involve internationalization and debt restructuring processes, which include deleveraging and core business focus

•• The growth in the construction market will continue in 2018, but to a lesser extent than in the years before Sweden + •• Sweden’s M&A activity is stable and in line with the activities over the last years. The division of deals within the same country or outside the country are evenly distributed

•• Government spending cuts and the withdrawal of private sector investment plans following the referendum vote prompted construction output to slip, by 1.1% from July to September, the biggest quarterly fall for four years •• Currently, the construction industry is facing margins pressure, and has struggled to recover to the pre- financial crisis levels. Whilst margins have had short periods of improvement, the overall trend over the last decade is one of decline United •• It is expected that the construction market will be in decline in the short to medium term as the o/- Kingdom uncertainty of the Brexit process unfolds •• There are some sub-sectors which are expected to buck this trend namely housing and in particular social housing where the UK has a large and growing deficit. This sector is expected to benefit the most from positive government stimuli. •• The tech enabled sector is also expected to grow with the UK expected to be the global leader in this sector in the coming years. Private Equity is seen as the incubator for this trend and we expect to see a number of M&A transactions to drive this.

+ : optimistic o : neutral – : pessimistic

23 European Construction Monitor | 2017-2018: A looming new construction crisis?

Overview per country to be very diverse, in line with previous The market is still recovering from the (in alphabetical order) years, and this is expected to go on in the financial crisis, which heavily affects the coming years. construction market. o/+ Austria The Austrian construction sector exhibits In comparison to other countries, Belgium’s Central Europe focuses on the core marginal growth (1.4% - 1.6% in 2017 and real estate expert notice an increasing domestic business, rather than 1.6% forecast until 2021) and a stable focus on diversification deals, mainly diversification. Furthermore, due to development in the sector’s employment due to shrinking margins and due to the increased prices of building materials level (1.2% for 2017). The margin pressure construction sector’s cyclical character. The and increased wages in the construction is still high. It can primarily be countered proportion of cross-border transactions sector, Central Europe expects that large by reducing production and logistics is similar to domestic transactions. Profit construction companies will acquire costs. This is due to regulations in the margins continue to be under pressure, as specialized subcontractors. However, it is subsidized housing sector and limited construction businesses suffer from high not expected to be a major trend. public investments due to stressed public labor costs, compared to Eastern Europe, households and the European stability and considering factors such as the The trend of digital construction and BIM pact. This forces competitors to build stagnating economic climate and reduced construction in the construction market faster at lower costs which requires higher public spending due to budget constraints. is in its early stages. The market slowly efficiency and productivity. changes the existing environment and tries Currently, the digitalization in the Belgian to adapt to digital construction activities. Many digital technologies in the Austrian construction sector is limited. Real estate Within the concept of Construction market, i.e. paperless construction sites, experts claim that this is mainly because Industry 4.0, there is an increase in the simultaneous engineering, digital logistics contractors do not seem to think the interest in themes such as innovation, and invoicing, crowd investing, automation new technologies are necessary to apply robotization and digitalization. and predictive maintenance, create in the industry. However, in Belgium fundamental changes to processes in the there is a slight increase in the use of The construction industry is facing a construction industry. According to the real digital technologies such as connected long-term lack of high quality and qualified estate experts these technologies will have technologies, BIM, robotization and workers, encompassing craftsmen, a major impact on the business. 3D-printing. While large construction technicians and managers alike. The and engineering companies increasingly industry has been challenged by a shortage The implementation of BIM systems use BIM, compared to its neighboring of qualified staff for decades. in Austria has been gradually gaining countries (UK, FRA, NL) its use in Belgium is in significance in the last few years, a not widespread. o/+ Denmark tendency which is expected to continue The Danish local experts expect a 10-15% in the coming years. Smart contracts Furthermore, in Belgium the following growth rate in the construction market. are not that common so far. However, trends are observed: more diversification There is a shortage in human capital in the public sector Wien Energie has towards real estate development, more resources. This is the greatest challenge been working on a pilot program where integrated solutions for infra and capital for more than 50% of the companies in the experimental Blockchain purchases with projects including associated services sector in the coming year. live trading systems have been run. The in terms of maintenance & operations first Blockchain transaction, involving after delivery. M&A activity levels are generally high, but an international gas transaction, was not in the construction sector, with its concluded on that basis in November 2017. o/- Czech Republic very limited number of transactions. The The result of the construction industry construction sector had no noteworthy o/+ Belgium for the year 2016 was a 6.3% year-on-year deals in 2017, even though the market is The Federal Planning Bureau estimates the decline. The construction production expected to show a 10-15% increase in economic growth to be 1.7% in 2017, mainly volume has dropped back to the level of activities and profits in the coming year. driven by increased consumer spending the year 2012. According to the Czech Profitability is getting better - not because and business investments. This is projected experts the development forecast for of efficiency gains but due to the high to be slightly less in 2018 – 2022, mainly 2017 and the following years is even activity level. PPP is still waiting for the final due to lower productivity and demographic more critical. Furthermore, there is a lack breakthrough in Denmark. Construction aging. Last year, the M&A activity in the of major noticeable M&A deals in the companies focus on their core activities Belgian construction market continued construction market in Central Europe. and local markets instead of diversification and internationalization. 24 European Construction Monitor | 2017-2018: A looming new construction crisis?

Increased digitalization is on the The use of BIM is gaining traction, o/+ Germany agenda, especially at larger companies. especially in planning and construction The short-term and mid-term outlook Danish experts expect BIM and digital projects. However, some might argue that for the German construction market construction to mature in the coming fully adapting BIM into operations would predicts an ongoing strong demand for years among the large and medium-sized need a generation shift in the engineering housing and infrastructure investments. companies. The sector uses BIM on a and construction companies. As of yet, The construction industry shows a broader scale. Implementation of VDC, Smart Contracts and Blockchain are not very high degree of capacity utilization, drones, and 3D printing is limited to the widely used in Finland. facing workforce shortness, increased large companies only. Cyber risk is a focus competition for sub suppliers and area for many construction companies, o/+ France increasing price levels. especially the larger companies. However, it After several years of decline and a is an area for further development. moderate growth in FY16, FY17 was a Over the last few years, the investment positive year for the construction sector of construction businesses to (mostly + Finland with a 4.7% growth. The growth was strategic) investors from outside Germany In 2017, construction volume growth in essentially driven by the residential sector. overshot German investments, with private Finland was strong at 5% at same time A further growth (although lower) is equity only playing a minor role. A few years when Finland’s GDP in real terms grew by expected for FY18 (2.4%) ago, German No. 1 Hochtief was taken over 2.6%. While the GDP growth is expected M&A standpoint FY17 was very active by Spanish ACS and the civil engineering to slightly accelerate in 2018 to 2.9%, for lead construction groups such as business of the then German No. 2 Bilfinger the construction volume growth is seen Vinci, which acquired four companies: was sold to (Swiss) Implenia. The largest decelerating to 2% being below the GDP Seymour White, Infratek ASA, Eitech AB and deal in 2016 in Germany was Bilfinger’s sale growth first time since 2014. Acuntia SA. The number of international of their remaining Real Estate Business to transactions is still high, mainly with other private equity investor EQT. However, in Renovation construction in Finland is still European companies, and there is a clear 2017, EQT subsequently resold the building expected to continue on a stable growth increase in the number of acquisitions in segment to Implenia again. While 12 years path in 2018, while housing construction France, which is in line with the recovery ago, 4 of the top 5 players in the German could well reach its peak level this year. of the French construction sector. construction market were German-based Currently, the construction sector’s growth Although the focus on diversification groups, now 4 of the top 5 players are is slowing down and is expected fall to 0% continuous, FY17 saw a return of pure headquartered outside Germany. in 2019 after years of strong growth. construction transactions (e.g. Seymour Whyte and Benedetti Guelp acquired German experts indicate that integration Private equity companies are expected by VINCI). The main focus of the larger of additional business segments related to to continue to consolidate smaller and French construction companies is on the core business is a relevant driver for mid-sized construction companies. international markets (Europe, North and M&A activities. In contrast, diversification Furthermore, some Finnish construction South America) but several significant local beyond the supply chain is unusual. companies are currently looking to expand transactions took place in FY17. Currently, apart from the few very large in Sweden. construction groups, internationalization The profitability of the sector continues does not seem to be a major driver, as Driven by increasing revenue, profitability to be relatively low and although the most players show a quite high degree of has generally improved since 2014. In sector is recovering in terms of volume, no capacity utilization resulting from domestic 2017, construction companies’ profitability significant improvement in profitability is demand. Investors from outside the continued to improve as well and the expected in the short term. The focus of construction industry (or the construction- sector’s aggregate EBITDA margin rose construction companies is clearly on cash related industry) rather stay away from the to 5.9%, up from 5.1% in 2016.However, management. Cash management is an construction markets. increasing costs may cause pressure on absolute priority for the companies in the profitability in 2018. Large construction sector due to the low margin generated. companies have experienced the largest Most of the players are in a situation of profitability improvements, partly negative working capital thanks to a tight driven by new building construction and monitoring of contracts cash position. large projects.

25 European Construction Monitor | 2017-2018: A looming new construction crisis?

Many players in the market are making expected to be concluded within 2018, of specialist subcontractors exiting the a strong effort in implementing and for a consideration in the order of € 1.1 market, competition in certain key areas is improving digital construction know-how bn (plus VAT). Moreover, the Greek-Indian weak, which is leading to escalating costs. and processes. The major challenge within consortium of GEK Terna-GMR Airports has It is projected, with the current increase in the German market will be standardization, been short listed to undertake the design, construction activity, that these issues will due to the fact that the construction construction, operation and maintenance become even more acute in the short to landscape is quite fragmented. The of the new Kastelli airport, in Heraklion medium term. German government and the major – Crete, an investment in the order of industry associations take significant and € 480 mn. The Irish Construction Industry has joint efforts to support standardization. traditionally been relatively slow on the Apart from these concessions, several uptake of new smart technologies, but Innovations are applied all over the other transactions were completed in momentum is now building quickly in construction life-cycle with noticeably 2017. This includes the disposal of a 32 this regard. With a significant upturn in growing relevance. This may be a risk, % stake in two major shopping malls to activity within the sector, heightened especially for smaller or mid-sized, an international fund, the acquisition of client expectations and improving specialized suppliers. They could be 5-star hotels in Athens and other hotels efficiencies, BIM activity is increasing displaced by new solutions. The major in touristic destinations, while retail & rapidly in Ireland and is now mandatory players show a certain level of supply-chain office buildings primarily in Athens and for new centrally funded public projects integration and tend to integrate such new Thessaloniki were acquired by Real Estate in neighboring countries, England and technologies, accordingly. Investment Companies, as well as the Scotland. Through its Action Plan for Jobs marble quarry assets of a major marble 2017, the Irish government is committed o Greece producer that became insolvent. to following a similar path by expanding its The Greek economy grew by 1.4% during implementation. 2017, following a 0% growth in 2016, while Moreover, the tenders for long-term the average annual real GDP growth for concession of Egnatia motorways and In recent years, the property/construction the years 2018 to 2021 is estimated to be of ports and marinas are ongoing, sector has ranked fourth from an M&A in the range of 1.9% or slightly above. After while banks are disposing of non-core perspective, behind technology, agri-food numerous reforms and austerity measures, investments, many of them with significant and healthcare/pharma. Construction Greece produced primary surpluses assets such as hospitals and real estate sector transactions contributed to 1% of between 2014 and 2017 and also expects backed non-performing loan portfolios. the total number of M&A deals completed to do so in 2018 and the following years. in 2017, compared with 2% of transactions o Ireland in 2016. US Private Equity funds, which hold As part of infrastructure development The Irish construction sector has remained around 40 sites valued in excess of 800m, and the privatization programs, significant largely unchanged for decades. Factors are expected to continue to deleverage infrastructure investments in airports, such as one off engagements, bespoke their positions, considering their typical motorways, trains and ports have contracts, unique buildings, on-site investment parameters, with greater levels been completed, while a number of activities and the fragmented nature of of institutional investment entering the developments are under construction or in the industry have all led to issues with country from the US and Europe. an advanced licensing phase. supply chain management. Resource availability is seen as a critical issue in the o/- Italy During 2017, M&A activity within the Irish Construction Industry. At 6.2% in 2017, The Italian economy continues on its Greek construction and infrastructure construction cost inflation was well above road to recovery with a GDP increase sector has rebounded. For example, the national general inflation rate, largely from 0,8% in 2016 subsequently rising to an international tender for the 40-year due to upward pressure on labor costs. over 0,9%, which will be followed by the concession of 14 regional airports reached The economic downturn has resulted in Italian construction industry. The sector its financial close in Q2 2017, as well as historically low levels of new apprentices reports an increase in total construction the disposal of 67% of Thessaloniki Port over the past 7-8 years across all trades. investments of 0,3% in real terms for Authority for a consideration of €232m. In addition, significant numbers of skilled 2016, mainly due to the non-residential Within the framework of the Greek workers and professionals emigrated from construction subsector (0,6%) compared to Privatization Program, Athens International the country during the economic downturn residential (0,1%). Airport (AIA) is to be awarded a 20-year which has compounded the skills shortage extension of its concession agreement, problem. Further, with large numbers

26 European Construction Monitor | 2017-2018: A looming new construction crisis?

The larger Italian companies operating o/+ The Netherlands protection & smart buildings is one of in the construction industry are focusing In 2017, for the fourth year in a row, those risks. Most construction companies their growth strategies on developing and production in the construction sector fail to address this right now. diversifying their overseas books. Both in the Netherlands has increased. Due geographically into developing markets to economic growth, demand for both M&A activities in the Netherlands are (Africa and Asia) as well as growing into residential and commercial buildings dominated by Heijmans. Heijmans sold established markets that require large continues to grow. Due to the flourishing German company Heijmans Oevermann investments in infrastructure (e.g. USA) housing market, the growth of construction GmbH to PORR Deutschland GmbH, part of and also across different business lines e.g. was above average in the past year. The the Austrian construction company PORR road, rail, ports, tunneling, buildings, etc. strong growth in housing construction AG. The sale of Oevermann represents is also driving infrastructure production. an important step towards further debt Within the Italian construction industry After the strong growth of 7% in 2016, the reduction and a structural improvement there is an increasing sensitivity to production increase this year amounts to of the capital ratios. Heijmans also sold integration within the construction 5.5%. For 2018 the construction sector is its subsidiary Franki, which specializes in cycle. Italian companies are developing expected to grow by 4.5%. foundations, to PORR Deutschland. Next to “sustainable” – projects that have parts of its German subsidiary companies, increasing balance from both an economic This growth in the construction market Heijmans sold its stake in the Belgian and environmental perspective that has a big impact on the workforce in the companies Heijmans Bouw, Heijmans Infra can also produce cost efficiencies. Netherlands. Executive construction will and Van den Berg to Belgian construction The approach looks to encompass the need 55,000 new employees in the period company Besix. The transaction yields whole construction lifecycle from pre- of 2018-2022. Most of this demand is more than € 40 million for Heijmans, which construction to post-construction and needed in the next two years, while the the company will use to reduce its debts. retirement/demolition and disposal of the current inflow is only gradually growing. As assets. By collaborating with the supply a result, the pressure on the construction VolkerWessels raised € 575milion through chain partners in the design and supply labor market will increase even further its initial public offering on the Amsterdam of the products the construction process in 2018 and 2019. As from 2020, the stock exchange. The country’s second- is becoming fully aligned, to shorten the construction labor market is expected to largest construction company had planning and forecasting process. reach calmer waters. been fully owned by the Wessels family. The value of the entire group is more In comparison with the other major Extensive digitalization is the next big thing than € 1.8bn. industries such as the manufacturing and in the Dutch construction sector. Mid- automotive industries, the construction October 2017, the world’s first 3D-printed One of the biggest infrastructure industry is very conservative in adapting eight-meter bicycle bridge was opened, projects in the Netherlands, the € 1.4bn new technologies. Industry players made of pre-stressed and reinforced Zuidasdok, comprises the widening and indicate that this is because the sector concrete. According to builder BAM, the undergrounding of a southern motorway operates at low margins and has suffered bridge could carry 40 trucks. Eindhoven through Amsterdam’s main business a lack of investment in research and University of Technology is currently district. The design and realization of development over recent decades. developing printed houses and aims to Zuidasdok has been awarded to ZuidPlus, However, construction contracts based develop larger bridges, viaducts and other a combination of Fluor, Heijmans on BIM technology are increasing. Of constructions with 3D concrete printers. and Hochtief. these projects, 58% relate to public works, demonstrating an increasing sensitivity Construction is expected to play a + Norway of the public administration to this topic key role in solving the environmental In 2016, the total turnover for the in recent years. BIM implementation challenges facing society. Energy-neutral construction industry in Norway increased is expected to continue to increase as new construction in 2020, a big increase by 5.7%. During the first half of 2017, the the introduction of a new law related to in productivity and a circular sector in total turnover for construction activities public tenders (“Codice degli appalti D.Lgs 2050: solid goals that the Netherlands in Norway increased by 7.8% compared to 56/2017) stipulates that from January 1, has committed to in the Paris Climate the same period of 2016. Revenue growth 2019 the BIM will become obligatory for Convention. But innovating also involves in construction has been stable over the projects with a value greater than 100 m. risks. Cyber Security in terms of data past four years. the annual growth rate

27 European Construction Monitor | 2017-2018: A looming new construction crisis?

was between 5.0% and 6.8%. The largest Norwegian housing prices decreased Construction Market although currently growth in revenues has been in building in 2017, mainly driven by a decrease in transaction activity is low. construction, with an increase of 8.2% in the Oslo area. Statistics Norway has the first half of the year. The lowest growth forecasted Norwegian housing prices to fall The strategies of construction companies can be observed in infrastructure-related continuously in both 2018 and 2019, until in Poland assume organic growth rather construction. they will rise moderately by 2020. However, than through M&A. Polish construction the housing price development in 2018 YTD companies are focusing on the Polish Interestingly, Norwegian experts observe May has been strong with an increase back market and its core strategy due to inflow that a sample of Norway’s 500 largest to peak levels in April 2017 before the down of significant EU funds in Polish economy companies across all industries reduced its turn. Such development may affect building until 2020 from the current EU budgeting EBIT by 8% from 2015 to 2016, whereas the activity negatively in the years to come. perspective. The Polish construction 27 construction companies within top 500 companies that already have international increased their EBIT by 33%. Although they In recent years, international competition eminence, in particular in Scandinavian observe slim margins for the five largest has increased. The economic downturn countries, state that they will focus on companies, the margin development in the in Europe brings foreign contractors to a maintaining their market position on the industry seems to be positive. strong market in Scandinavia, particularly international markets. Small/medium- in engineering. The expected outcome sized construction companies, especially Construction is a major driver of Norwegian is sharper competition, particularly in specialized in a particular construction economy, as the industry accounts for large-scale and complex construction and segment, or having some long-term 16% of Norwegian GDP. The Norwegian infrastructure projects. maintenance contracts, i.e. for road construction market continues to be highly maintenance might represent interesting fragmented, with a few large players and Large Norwegian players recognize that the targets for larger construction groups. intense local competition. Only three technological development and digitization Another possible stream of possible construction companies (Veidekke, AF will have a major impact on the building transactions may come from the sale of Gruppen, Skanska) in Norway exceed NOK and civil engineering industry. NCC reports companies by founders. Many companies 10 billion in revenues. M&A transactions that VDC (Virtual Design and Construction) in the construction sector were established in the Norwegian market in 2016 and 2017 and BIM empower a major leap in in the early 1990s and now the founders primarily involved large players taking technology, resulting in higher quality and are close to the retirement age. Without over midsize companies. In September lower costs in the projects. any successors for the companies, the 2017, Norvestor Equity AS (Norway-based founders might decide to sell the business. private equity firm) acquired a 60% stake o/+ Poland in Wexus Gruppen AS, a Norway-based The Polish construction market is expected There is an increased focus on digitalizing manufacturer and supplier of semi- to be in good standing in 2018–2020 due the major portion of the design stage, permanent modular buildings, established to solid GDP and investments growth especially in large construction groups who in 2016. The merger of Betonmast and expectations and significant EU funds has sufficient funds to utilize innovative Hæhre Isachsen Group forms the fifth available for infrastructure projects. technologies. Virtual modelling and drones largest construction company in Norway. However, shortages of skilled workforce have a huge potential and may significantly The two former companies have been in the construction sector translates into increase efficiency at the design stage. BIM large in two different areas: Betonmast in pressure on salary growth, combined is slowly becoming a recognized solution residential and commercial property and with growth in the cost of materials which but it would be an overstatement that it is public buildings, Hæhre Isachsen mainly in might not be fully passed through into widely used on the local market. road construction. construction contracts (especially procured by public authorities, i.e. road and railway o Portugal Deloitte observes that current market construction contracts), might result The performance of the sector is forecast conditions within large-scale public in margins being materially squeezed to accelerate, with a CAGR of 5,1% for the infrastructure such as roads and railways out. The Polish construction market is six-year period 2016–2022. IIt is anticipated could lead to industry consolidation, as already penetrated by well diversified a considerable investment in the sector will midsized Norwegian-based entrepreneurs construction companies that are part be driven by higher levels of residential and find the market challenging due to of the major international construction commercial construction. In addition to competition from larger and often groups. The positive market outlook for state subsidies for residential construction, foreign firms. the construction sector might potentially the more consistent use of European funds support M&A activity on the Polish for non-residential construction will also play an important role. 28 European Construction Monitor | 2017-2018: A looming new construction crisis?

The strategic development plan for the o Spain Spanish construction companies start Transports and Infrastructure in Portugal Spanish conservative Prime Minister analyzing the potential integration of their totals an investment of € 6.1 bn in projects Mariano Rajoy and his government were supply chain in order to align different for five main sectors (Railway, Maritime- forced out of office on 1 June 2018 by a parties and increase their projects’ profits. Port, Highway, Public Transport, Airline) to no-confidence vote in parliament, which There is no lack of availability of resources, be concluded until 2020. The construction resulted in socialist Pedro Sánchez suppliers or contractors. However, there of the second airport in Lisbon is expected becoming the new Prime Minister and is an increasing demand of more qualified to begin in 2019 and to be concluded a new Government being appointed in roles, with international experience during 2023, with an investment value Spain. The country’s infrastructure sector and skills and digital/new technologies between €300 to €400 m. is currently uncertain as highly anticipated capabilities (BIM being in demand the public investment plans such as the € most). The construction sector in Spain Moreover, the residential construction 5 bn road PPP program known as the has been historically slow to adapt new market is expected to increase in Extraordinary Investment Plan in Highways technologies. BIM techniques are still in importance and account for 13.1% of the (PIC) could be delayed or even cancelled. the early stages of development and are industry’s total value in 2021 supported Infrastructure funds already present in not yet ready to be deployed at the scale by on the growing strength of urban Spain have increased and consolidated and speed which would be required by regeneration of city centers, highly their portfolios, basically on availability for large projects on a consistent basis. correlated with the strong expansion of the payments and minimum guaranteed The attempt by the Spanish authorities to tourism sector. revenues assets; infrastructure funds such regulate BIM use, at least at public sector as Aberdeen, DIF, Meridiam and JLIF have level, will undoubtedly accelerate the Larger sized construction companies become common participants in most adoption by the Spanish companies in the are acquiring small and medium-sized Spanish PPP processes. Furthermore, next few years. construction companies with the intention some new infra funds like Queens Point, of expanding services or with vertical Mirova and UBS have included Spain on + Sweden integration in mind. Larger companies are their radar and are opening an office The overall construction market outlook focusing mainly on deleveraging through in Madrid. Their strategy focuses on for Sweden continues to be positive after the sale of non-core assets. Construction availability payments and risk demand the recovery in 2014. Public investments companies focus on core assets and assets. Private equity has focused their in infrastructure and housing are the main continue to focus on international markets, activity on higher value added assets, such drivers for growth. Over 2016 the total especially Africa and Latin America. as parking or gymnasiums concessions, construction output grew by around 4.5%. where, due to the atomization of the Growth is expected to stabilize over 2017 During the Portuguese financial crisis Spanish market, a build-up process can and 2018, mainly due to stabilisation of and subsequent construction crisis, take place and operational adjustments the total number of permits issued for specialized construction labor emigrated are easier to perform. The direct foreign the construction of residential buildings. to other European countries and to African investment in real estate and infrastructure As pointed out last year, Sweden is facing countries. Due to the increasing activity sectors has been increased to around a housing shortage – especially in the in the Portuguese construction market, 250%, where they have allocated funds of major cities. The Swedish government construction companies are facing several € 1,000 millions. has announced plans to provide financial challenges in getting the work done with support and build 250,000 houses by quality and on time. Two major construction company 2020. New amortisation requirements strategies were implemented in 2017, are expected to lead to a more balanced Although drones are being tested regarding depending on the companies’ financial housing market. construction of infrastructures (quality health: (1) debt restructuring processes assurance), Portuguese construction include bigger construction groups such In line with last year, M&A activity on the companies are typically late adopters as Sacyr and OHL as well as medium sized Swedish construction market remained of new technology. As BIM is usually groups and (2) portfolio rotation strategy: steady. The number of transactions requested by clients in mostly medium- focusing on their core activities and selling recorded in 2016 matched the 2015 activity. sized to large construction projects, their mature assets try to raise equity for M&A activity on the Swedish construction Portuguese construction companies are investments in new projects. market predominantly involves domestic preparing engineers to work with BIM. transactions. Inbound and outbound cross border transactions are mainly recorded between Nordic countries. Of the four

29 European Construction Monitor | 2017-2018: A looming new construction crisis?

largest Swedish construction companies and immediately post Brexit as European (NCC AB, Skanska AB, JM AB and Peab workers leave who form the backbone of AB) only Skanska AB was involved in M&A the construction labour market. Higher activity in 2016. Skanska divested Skanska margins in the UK construction sector Installation to Assemblin AB. tend to come from long-term relationships, such as five-year service contracts, rather o/- United Kingdom than one-off building contracts. These ‘The UK construction sector experienced long-term arrangements, such as for civil significant challenges throughout a work, tend to be driven by organizations turbulent 2016. Government spending where establishing a relationship is key to cuts and the withdrawal of private sector accessing a pipeline of contracts. investment plans following the referendum vote prompted construction output to slip Presently, governments are seriously by 1.1% from July to September according promoting the use of DBFM (Design, to the Office for National Statistics, Build, Finance and Maintain) contracts triggering the biggest quarterly fall in for their construction and infrastructure four years. projects. In this structure, the government entity presently enters into an agreement UK construction sector growth slowed with a private party under which it during June 2017, as political uncertainty allocates responsibility such as designing, and concern about the economic constructing, financing, operating and outlook deterred new orders. In 2017, maintaining the project. the growth rate for new orders in June slowed to its weakest level since March According to the UK, around 93% of of 2017. High activity levels in the sector construction industry players agree that at the start of 2017 came against a digitalization will affect each and every backdrop of rising labor and materials point of value chain. The UK industry is costs, a slowing housing market, fewer aware of the importance of the megatrend contracts for commercial offices, and toward digitalization. Digitalization of nervousness about government delivery construction is one of the biggest trends on infrastructure projects. facing the industry according to the UK, with BIM and compliance at the forefront Currently, the construction industry is of this shift to drive increased efficiency, facing margins pressure, and has struggled productivity and ultimately improved to recover to the pre-financial crisis levels. margins from the construction sector. Whilst margins have had short periods of Tech-enabled construction businesses improvement, the overall trend over the represent a small and niche vertical in last decade is one of decline. The collapse the construction sector and one which of Carillion has had a material impact UK experts feel is poised for a material on the sector both direct through the opportunity for growth in the coming cascade onto the supply chain and also a years. In addition it is expected that the corresponding decrease in confidence in increased adoption of BIM and tech the sector. Analysis of available FY 2016 enabled innovations will drive a modular/ accounts indicate another drop in margins, offsite revolution in the construction sector potentially impacted by uncertainty with design for manufacture and assemble following the Brexit vote. The impact of cost forming being driven by government inflation in the sector is that of regional backed infrastructure projects. variation with London experiencing the majority of this. The impact is also expected to increase in the run up to

30 European Construction Monitor | 2017-2018: A looming new construction crisis?

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