62Nd Euroconstruct Conference

Home , Soft infrastructure

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

WIRTSCHAFTSFORSCHUNG

62nd Euroconstruct Conference

The Prospects for the European Construction Market

Country Reports

December 2006 Munich, December 2006

Country Report

62nd Euroconstruct Conference Munich, December 2006

Ifo Institute for Economic Research at the University of Munich

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:

Ifo Institute for Economic Research Poschingerstrasse 5, 81679 Munich Germany

Tel.: ++49-89-9224-1388 or -1383 Fax: ++49-89-9224-2430 or -2383 E-Mail: [email protected] or [email protected] Website: www.ifo.de

www.euroconstruct.org

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

Contents

The Euroconstruct Network...... 5

Country Reports

Austria ...... 31

Belgium ...... 45

Czech Republic...... 63

Denmark...... 81

Finland ...... 105

France ...... 123

Germany ...... 145

Hungary...... 165

Ireland ...... 191

Italy...... 211

Netherlands...... 227

Norway ...... 245

Poland ...... 261

Portugal...... 281

Slovakia...... 303

Spain ...... 323

Sweden ...... 345

Switzerland...... 365

United Kingdom...... 383

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:

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)

June 2007 Prague (Czech Republic)

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

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 Institut Ifo Institute for für Wirtschaftsforschung Economic Research 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 Munich, December 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 Munich, December 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 (vchod Mliekárenská ul.), 824 69 Bratislava 26, 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 28 employees. Research, advisory and consultancy services are performed by approx. 20 experts. In addition we have been working with a circle of external co-operators, university experts and other specialists, who participate on solutions of important tasks and projects.

Basic fields of company activities are as follows: o applied economical research and development, o business and economic consulting, o monitoring and field survey, o solving of problems of construction market, the reviving, forming of sectoral, regional politics of construction, international comparisons; habitation and housing construction, regional development, etc., o marketing research of construction market, o preparation of legislative standards in sphere of housing and public works, o evaluation of property and real estate, o public procurement, o engineering activity – supply activity in construction, o technical assistance – EU funds, o production and development of economic and calculation software, o organisation of training courses, seminars and further other special undertakings, o Commercial, intermediate and publishing activity.

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 Slovakia, inclusive creation of purpose oriented information systems and providing of statistic documents and indicators. The company also participates 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 executes evaluation of property and real estates in various processes 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 concerning creation of branch economies.

26 © EUROCONSTRUCT Munich, December 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 Munich, December 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 Munich, December 2006 Austria

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

Michael Weingaertler e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary: Construction trends in Austria to 2009

For 2006, GDP has been gaining strength and grew by at least 3.1%; the projection for 2007 is a rate of 2.5%. In the medium term the Austrian economy is expected to grow by 2.1% per year, the growth rate should return to its long-term trend. The upgrading of the transportation infrastructure and the expected revival of residential construction will boost construction output. In addition, Austrian companies profit to a high degree from the last round of EU enlargement, with Austria being among the key trading partners of these fast-growing economies.

The Austrian construction business climate is currently very positive. The companies show a high volume of purchase orders. The business climate indicator for the construction sector which is carried out by WIFO remains at a very high level. At present the construction outlook is markedly more positive compared to last forecast. The overall construction industry grew by 4% in 2006; the projection for 2007 is a rate of 3.0% due to the strong demand for infrastructure and building investments. In the medium term growth will slightly slow down to a rate of 2.5% and 2.0% in 2008 and 2009.

Demand for new housing construction increases significantly in 2006 due to economic upswing and demographic changes, especially because of high immigration. New residential construction output increased by 5% this year and by 3.2% to 2.5% in the period from 2007 to 2009. The renovation and modernisation sector will profit from the new housing law amendment 2006 which came into force on October 1, 2006. The non residential sector faces a high demand for office buildings. Austria, especially the capitol Vienna, could attract many international investors in 2006, which caused excess demand in new office buildings. The rental rate is currently higher than during the boom in 1999/2000 - prices are rising for the first time in this century and the vacancy rate is around 6%. Also public construction, above all the educational sector, will increase significantly. Until 2010 about 2.1 bill. € will be invested in public buildings, especially in new university buildings. New non-residential construction output will grow by 3% respectively 2% in the forecast period.

Civil engineering is still the major driver in the construction sector, mainly because of high investments of the ASFINAG (the Austrian Highway Financing Agency) and the expansion of the railway network. Many major projects of the "General Infrastructure Plan" (Generalverkehrsplan) 2002 started in 2006 or will start next year. In 2006 and 2007 infrastructure investments will grow by 5.4% and 4.3% respectively. The positive trend will continue in the years 2008 and 2009, but at a lower pace.

Construction Output by Sectors in Austria 2001 to 2009

150

140

130

120

110 Index 2001=100 100

90 2001 2002 2003 2004 2005 2006 2007 2008 2009

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

Source: Statistik Austria, WIFO, EUROCONSTRUCT (2006).

32 © EUROCONSTRUCT Munich, December 2006 Austria

2 Macro-economic development in Austria: Cyclical upturn gaining full momentum 2006 – Medium-term economic growth above 2 percent

The favourable worldwide business conditions have positively affected the Austrian overall economy. For 2006, GDP growth is revised upwards to a rate of 3.1%; the projection for 2007 is 2.5%. The positive current development will lead to an upward revision of the mid- term GDP forecasts in the years 2008 and 2009. In both years, growth would thereby remain above the euro area average. Domestic business fixed investment has picked up much more strongly than expected three months ago, with a likely increase by 5% in volume this year. Demand is lively for both machinery and equipment as well as for new structures. Goods exports, the major drivers, are gaining 10% in volume in 2006. Part of the momentum is due to purchases carried forward in Germany ahead of the VAT increase at the beginning of 2007. The expected jump in car purchases in Germany will give a boost also to domestic suppliers to the German motor car industry. Correspondingly, 2007 will see a slump in demand and more generally, global demand will slacken. Austrian exports are expected to increase by more moderate gains of less than 7% in volume.

Private consumption in Austria is rising markedly faster (at 1.9% in volume) than on average during the last years, but it is trailing against other demand components. Growth in 2007, although edging up to 2.1%, will still be weaker than in earlier years. Demand incentives have been transmitted from exports to domestic investment, thereby fostering the sustainability of the upturn. The number of people in dependent active employment is rising substantially in 2006, by 46,000 or 1.5%. In manufacturing, the downward trend of the past years is coming to a halt. Employment creation is increasingly extending to full-time jobs. The number of registered unemployed is falling by 11,000 this year, to a total 242,000. This mirrors the rebound in economic activity, but also the efforts to enrol more people in job training. Although growth is set to abate, unemployment is expected to remain flat in 2007. The jobless rate, on national definitions, is receding to 6.9% of the dependent labour force this year and to 6.8% in 2007. For 2006, WIFO expects an average inflation rate of 1.6%, edging up to 1.7% in 2007. Although improved business conditions in the euro area will add to inflation, the impact of higher energy prices is expected to ebb in 2007. Because of some lags in the impact of the 2005 tax reform, the general government deficit is going up from 1.5% of GDP in 2005 to 1.6% this year. Only in 2007 the rebound in domestic demand will reduce the deficit to 1.3% of nominal GDP.

Austrian's gross domestic product is projected to increase by above 2% until 2009, the expected slow down of the economic climate in the US will affect the European and Austrian economy towards the end of the forecasting period. Nevertheless Austria's medium-term growth will exceed the euro area average mainly because of the high competitiveness of domestic companies.

Macroeconomic Key Indicators in Austria to 2009 (y-o-y, in %)

2003 2004 2005 2006 2007 2008 2009 GDP 1.1 2.4 2.0 3.1 2.5 1.9 2.2 Private consumption 1.3 1.9 1.7 1.9 2.1 1.9 1.9 Unemployment rate 4.3 4.8 5.2 5.0 5.0 5.3 5.3 Inflation 1.3 2.1 2.3 1.6 1.7 1.9 2.0

Source: Statistik Austria, WIFO, EUROCONSTRUCT (2006).

3 Housing Market in Austria

After a decline in 2005 the housing sector in Austria recovered in course of the good general economic development in 2006. The latest information from Statistik Austria confirms the dynamic development in the housing sector – especially with respect to the order back lock which was 15% higher at the end of July compared to the year before. Interest rates are slightly rising; nevertheless favourable housing loans are still available. Previous studies showed that the impact of the interest rate on housing production is historically very low in Austria. The trend to foreign currency loans for housing which started in 1995 is still holding on - they doubled since 2002, with a current volume of over 20 bill. €. Nearly all foreign currency loans are taken out in Swiss Franc. 10/2006 The WIFO-EU business survey from October

2006 shows that the business expectations - 10 % for housing construction are well above the - 20 % long term average. Especially the order - 30 % situation is very good, so new residential - 40 % construction is expected to grow strongly by - 50 % above 5% in 2006; the projection for 2007 - 60 % and 2009 is a rate of 3.5% respectively 2.5%. - 70 % Jän 01 Jän 02 Jän 03 Jän 04 Jän 05 Jän 06 The main reasons for the good performance saisonbereinigt saisonbereinigt, geglättet Source: WIFO-EU Business Survey for Housing, 2006 of new residential construction are: o Good macroeconomic framework. One of the obstacles in housing construction of the last years was the low consumer confidence. In 2006 consumer confidence improved significantly and the increasing personal available income stimulates especially the ownership market. Savings banks, which play a traditionally high role in real estate financing, report a higher demand for one and two family houses in 2006. o High demand due to a very low production rate in the last years: Between 2000 and 2005 the average amount of completions in the new residential sector was about 40.000 dwellings. According to analysis of ÖROK around 46.000 dwellings are needed in Austria to fulfil the needs. The low production rate in the years before caused a back pressure in the Austrian residential market. This will improve within the forecasting period. o Aging of the housing stock: Nearly 1.5 mill. (46%) dwellings were built between 1945 and 1980. Many of these buildings have to be replaced because they do not fit the demand. The higher living and environmental standards as well as rising energy costs cause a higher demand for new energy efficient buildings. So, re-construction is one of the main topics in the residential sector in Austria. The government is discussing about a special program which could simplify this replacement process. o Strong growth in population: In 2005 the population increased by 0.7% significantly. At the beginning of 2006 around 8.26 mill. people lived in Austria, which is a plus of 59,401 persons compared to the year before. This increase results mainly due to immigration o Ongoing trend to single-family households: Changed conditions of living create additional housing demand. Latest figures from Statistic Austria show that 34.5% of the households are single family households with a strong rising rate in the last years.

The non-profit housing construction companies, which build more the one third of the residential dwellings, confirm the positive trend in the housing market. In 2006 the non profit housing association expects about 19,000 housing starts within their network, which is above the mid-term average of about 15,000 dwellings. At the turn of the year 2006/2007 the non-

34 © EUROCONSTRUCT Munich, December 2006 Austria profit housing sector forecasts 30% more dwellings under construction than in the year before.

Residential renovation is recovering in 2006 with a growth rate of about 3%. One of the stimulating drivers will be the housing law amendment 2006 (Wohnrechtsnovelle 2006). The new amendment which came into force on October 1 2006 makes it easier for tenants to enforce the removal of harmful housing environment (e.g. isolation made of asbestos or water pipes made of lead).

There is still a strong commitment from the public sector in energy efficient renovation and modernisation programmes. All Austrian federal states have special subsidy programmes which create a big inducement to take ecological aspects into consideration during renovation. A wide range of subsidies are offered, starting from non-fossil heating systems in the cellar to photovoltaic and solar panels on the roof. On average the energy consumption of a renovated residential building could so be reduced by 120 to 150 kWh per square meter, which is the same amount of three new buildings.

Total residential construction (new and renovation) will increase by 4.3% in 2006 and within the forecasting period between 2.8 in 2007 and 1.9 in 2009.

4 Non-residential construction

New non-residential construction faces a positive market situation in the second half of 2006 and also in 2007. The main drivers will be the education and public sector as well as office construction. Analyses based on investment plans and business surveys show that the total new non-residential sector will grow by around 3% in 2006 and also in 2007.

In Austria, particularly in Vienna, the interest of national and international investors in office buildings is high – especially in the second half of 2006. Real estate companies are currently facing a higher demand than during the boom in 1999/2000. This caused access demand; new office construction is currently much lower than the recent demand. As a consequence the vacancy rate drops below 6%, but with big differences between the building types. Not renovated buildings often show a vacancy rate of over 20% according to the data of CPB, one of the largest Austrian real estate companies. In general the demand for new buildings with good infrastructure is very high. Currently investors take an interest in the planning phase and they even take a part of the rental risk.

This high engagement shows the large interests in office buildings which will lead to growth rates of at least 2% in 2007 and 1.7% in 2008. On the other hand the average rents are rising after a long period of constant prices; but in comparison to other European cities the price level is still at a low and stable level in Vienna and also in Austria.

Beside the office market, public construction is the second bearer of the non residential sector. In general, the majority of public buildings are financed off budget. The owner of the public buildings is the federal real estate company BIG-Bundesimmobiliengesellschaft, with a total assed of around 4 bill. €. The BIG budgeted an investment volume of about 2.1 bill. € until 2010. Thereof new public construction projects will amount to 1.5 bill. €. This construction offensive affects especially the educational sector. In 2007 major expansion works in the university infrastructure will start. This explains the very optimistic outlook of 8% in 2007 and 4% in 2008. Major projects are the new dental clinic in Vienna (56.5 mill. €), Technical University Vienna (42 mill. €), the Centre for Biomedicine in Graz (34.3 mill. €), the Science Park Linz (60 to 70 mill. €) and University buildings for chemistry and theoretical medicine in Innsbruck (70 mill. €).

Non-residential renovation also benefits mainly from the investments of the BIG (Bundesimmobiliengesellschaft), which budgeted around 800 mill. € for renovation and modernisation works until 2010. Renovation works are often combined with energy contracting schemes. This means that the heating system of a whole building will be established by a private company – the contractor, who also has to finance and install the new heating system at his own costs. On the other hand the contractor receives the major share of the saved energy due to the new system for a period of typically 20 to 25 years. After that time the heating system changes the owner. The major advantage is that CO2 reduction can be achieved immediately without any additional costs for the public sector. This model is favoured by the government and so many initiatives in this area were started.

Total non-residential construction (new and renovation) will increase by 2.7% in 2006 and within the forecasting period between 2.3 in 2007 and 1.7 in 2009.

5 Civil Engineering

Civil engineering is still one of the key drivers in the Austrian construction industry. Especially road and railway infrastructure works are performing very dynamically, so total civil engineering is expected to grow by 5.4% in 2006. One of the major reasons for the ongoing positive trend is that the Austrian general transportation plan (“Generalverkehrsplan), which was originally developed by the government in 2002, is put into practise. According to the plans of the Austrian highway financing body ASFINAG about 1.1 bill. € will be invested in the construction and modernisation of highways in 2006. The current major projects are the expansion of the Southern, Pyhrn and Tauern highway as well as the Semmering, Brucker, Stockerauer, Kremser and Arlberg expressway. These projects should be finished until 2010. Also the connection to the eastern neighbour countries will be improved. Therefore new construction works will take place at the Mühlviertler, Burgenland und Fürstenfeld express way as well as at the southeastern and northern highway. In 2007 investments with a volume of about 1.3 bill € for highway road infrastructure projects is budgeted, whereas nearly 70% of the investment is budgeted for new construction works. The budgeted volume of the current general transportation plan for railway infrastructure amounts to 1.4 bill. €. Major projects will be along the Danube (Westbahn) and the southern route (Pontebbanabahn) and along the Brenner.

Investment plans of the four major rail infrastructure projects Frameworkplan 2006 to 2010 2006 2007 2008 2009 2010 mill. € Danube 360 316 271 309 274 Brenner 229 209 217 220 169 Pontebbana 176 126 244 258 256 Vienna area 147 155 164 169 103 Source: BMVIT, Puwein, 2006.

Strongest demand within the infrastructure sector is expected from the flight sector. In 2006 about 200 bill. € were invested in the expansion of airports, mainly in Vienna. This high investment volume will remain also in 2007. The expansion of the Vienna airport should be finished in 2008 and so it is expected that the investments will drop significantly from then on. The extension of the underground system in Vienna gives also an impulse in civil engineering. Underground construction started in 1967 and reached the peak in 1977. The second expansion period started in 1992 and ebbed in 2001. A new construction period started last year with the aim to create a better infrastructure connection of the new housing

36 © EUROCONSTRUCT Munich, December 2006 Austria areas in Vienna and to offer new Park and Ride possibilities for commuters will reach peak in 2007 (Puwein, 2006).

Investment scheme of the major Vienna underground network projects (net-investment, in mill. €)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Line U3 1,9 4,7 3,3 0,8 0,4 Line U6 5,5 5,0 1,9 0,4 U1-Praterstern 4,0 0,2 0,0 U1-Leopoldau 94,3 43,7 6,1 0,6 0,4 0,1 U2-Stadion 151,5 132,1 62,4 17,8 3,6 0,8 U2-Aspernstraße 37,7 120,5 128,3 71,6 13,6 1,0 0,2 U2-Umbau 3,3 2,7 1,8 Stammstrecke 4th Extension plan 3,2 2,4 3,7 0,2 U1-Südtirolerplatz 2,0 10,0 10,0 10,0 10,0 4,0 U2-Nord 4,0 20,0 42,0 54,0 65,0 40,0 17,0 8,0 (Aspernstraße-Flugfeld) U1-Süd (Reumann- 10,0 24,0 76,0 113,0 122,0 115,0 88,0 44,0 16,0 platz-Rothneusiedl) U2-Süd (Karlsplatz- 18,0 40,0 76,0 139,0 116,0 94,0 Arsenal) U4-Auhof 2,0 4,0 10,0 30,0 70,0 90,0 80,0 U6-Süd (SCS) 1,0 2,0 4,0 20,0 30,0 P&R Anlagen 15,0 15,0 5th Extension plan 1,0 3,0 3,0 3,0 2,0 1,0 1,0 Total 306,4 346,2 286,5 236,2 230,0 225,8 260,2 324,0 270,0 220,0

Source: Wiener Linien. Puwein, 2006.

In the energy sector total investment of 11.5 bill. € to 2015 are budgeted. There of 5.7 bill. € are used for energy production (power plants) and about 5.5 bill. € for the extension of the net infrastructure. The effective investments will on the one hand strongly depend on the efficiency and duration of the approval process and on the other hand on the regulation of incentives. One of the major projects will be the extension of the north-south 380 kV network.

Investments in the whole telecom sector were declining since the peak in 1999 and 2000. At this time the investment volume was about 1.4 bill € (1999) and 1.9 bill € in 2000. In 2004 telecom companies invested about 730 mill. € in fixed assets. The decline in telecom investments, despite the expansion of broad band infrastructure has several reasons: Digitalisation of the fixed line network was completed at the beginning of the liberalisation of the telecom sector. The intensified competition, especially at the beginning of the liberalisation, caused that investment decisions were made very restrictively and investments with higher risks were postponed. Recent analyses show that the market situation turned in 2006 and growth rates of about 1 to 2% can be expected within the next years.

The short term prospects for the total infrastructure sector are very positive especially for 2007 and 2008 with growth rates of about 4.3% and 4.2% respectively.

38 © EUROCONSTRUCT Munich, December 2006 Austria

Country/Pays/Land: AUSTRIA Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 8 118 8 175 8 226 8 263 8 299 8 333 8 366 Bevölkerung

Households ('000s) Ménages 3 405 3 440 3 472 3 500 3 527 3 553 3 578 Haushalte

Unemployed ('000s) Chômeurs 240 244 253 242 242 248 252 Arbeitslose

Unemployment rate (%) Taux de chômage 4.3 4.8 5.2 5.0 5.0 5.3 5.3 Arbeitslosenquote

Change of GDP Variation du PIB 1.1 2.4 2.0 3.1 2.5 1.9 2.2 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.3 2.1 2.3 1.6 1.7 1.9 2.0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 1.3 2.2 2.0 2.6 2.4 2.0 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: AUSTRIA Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 6 780 6.1 3.0 -2.4 5.1 3.5 2.5 2.5

Logement Renovation 4 445 5.6 2.5 -4.4 3.0 1.8 1.5 1.0

Wohnungsbau Total 11 225 5.9 2.8 -3.2 4.3 2.8 2.1 1.9

Non-residential construction New 6 499 4.1 -1.0 2.1 3.0 3.0 2.0 2.0

Bâtiments non résidentiels Renovation 3 432 1.1 0.5 1.1 2.0 1.0 1.0 1.0

übriger Hochbau Total 9 931 3.0 -0.5 1.8 2.7 2.3 1.7 1.7

Building New 13 279 5.1 1.1 -0.2 4.1 3.3 2.3 2.3

Bâtiment Renovation 7 877 3.6 1.7 -2.1 2.6 1.5 1.3 1.0

Hochbau Total 21 156 4.5 1.3 -0.9 3.5 2.6 1.9 1.8

Civil engineering New 5 598 7.9 3.0 6.1 6.0 4.8 4.6 3.0

Génie civil Renovation 1 379 3.6 1.0 1.6 3.0 2.0 2.5 1.0

Tiefbau Total 6 977 7.0 2.6 5.2 5.4 4.3 4.2 2.6

TOTAL CONSTRUCTION OUTPUT 28 133 5.1 1.6 0.5 4.0 3.0 2.5 2.0

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 5.50 -5.2 2.5 2.5 2.0 2.0 1.5 2.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

40 © EUROCONSTRUCT Munich, December 2006 Austria

Country/Pays/Land: AUSTRIA Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 15.6 19.0 19.8 20.5 21.0 20.8 20.7 Baugenehmigungen Familienhäuser

Flats Collec tif 22.5 21.0 22.0 22.5 23.5 23.2 23.3 Mehrfamilienhäuser

TOTAL 38.1 40.0 41.8 43.0 44.5 44.0 44.0

Housing starts 1+2 family dw ellings Logements commencés Individuel 16.0 15.6 19.9 19.8 20.0 20.2 20.5 Baubeginne Familienhäuser

Flats Collec tif 26.3 22.5 21.0 22.0 22.0 22.3 22.5 Mehrfamilienhäuser

TOTAL 42.3 38.1 40.9 41.8 42.0 42.5 43.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 17.0 18.0 19.0 19.3 20.0 20.2 20.0 Baufertigstellungen Familienhäuser

Flats Collec tif 25.0 24.3 23.5 23.7 24.0 24.3 24.0 Mehrfamilienhäuser

TOTAL 42.0 42.3 42.5 43.0 44.0 44.5 44.0 Housing stock Logements existants 3 822 3 846 3 872 3 897 3 902 3 936 3 964 Wohnungsbestand

thereof second homes dont résid. secondaires 266 268 270 271 272 273 274 davon Zw eitw ohnungen

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

Home ow nership rate 1) Taux de propriétaires occupants 56.7 56.9 56.8 56.9 56.9 57.0 57.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: AUSTRIA Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 299 3.1 -7.5 -4.8 0.4 8.0 4.0 3.5 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 819 10.1 0.3 3.2 0.2 2.0 1.7 1.8 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 1 471 1.1 0.3 5.3 1.2 2.5 2.0 1.5 Industriegebäude

Storage buildings Bâtiments de stockage 52 -3.6 5.4 5.2 0.1 -1.2 1.3 1.9 Lagergebäude

Office buildings Bureaux 1 754 6.6 -4.1 2.8 2.2 2.5 1.8 1.7 Bürogebäude

Commercial buildings Commer c es 1 872 1.1 0.3 5.3 1.2 2.5 1.3 1.7 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 13 0.3 -3.3 0.8 -1.1 1.5 0.5 0.4 Landw irtschaftsgebäude

Miscellaneous Autres 219 11.3 7.9 -30.5 51.7 8.8 5.7 6.2 Sonstiges

Total 6 499 4.1 -1.0 2.1 3.0 3.0 2.0 2.0 Insgesamt

1) At 2005 prices, excluding taxes.

42 © EUROCONSTRUCT Munich, December 2006 Austria

Country/Pays/Land: AUSTRIA Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 917 13.6 7.7 4.9 9.0 8.2 5.0 2.0 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 1 443 -3.9 16.6 8.1 11.0 6.0 5.0 4.5 Bahnanlagen

Other transport Autres réseaux 910 25.7 -19.0 25.7 1.1 6.0 2.5 7.9 Übrige Verkehrsinfrastruktur

TOTAL 4 270 10.0 4.0 9.9 8.0 7.0 4.5 4.0

Telecommunications Télécommunications 105 -27.8 -4.7 -1.9 1.9 1.0 2.0 1.5 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 1 019 20.1 -3.9 -2.4 4.0 2.0 3.3 2.5 Energie- und Wasserversorgung

Other Autres 1 583 -3.5 4.3 -0.8 -0.5 -1.8 4.0 -1.7 Sonstiges

Total 6 977 7.0 2.6 5.2 5.4 4.3 4.2 2.6

1) At 2005 prices, excluding taxes.

Country/Pays/Land: AUSTRIA Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 137.6 1.3 1.9 1.7 1.9 2.1 1.9 1.9 Privater Verbrauch

Public consumption Consommation publique 44.5 1.7 1.4 1.9 1.7 1.5 0.1 0.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 50.3 6.1 0.6 0.3 5.0 4.0 2.3 2.8

of w hich construction

Stocks (as % of GDP) Variations de stocks 1.1 0.7 0.7 0.5 0.4 0.3 0.2 0.2 Vorratsveränderung

Ex por ts Exportations 133.1 2.3 10.0 6.4 8.5 6.1 4.5 5.1 Ex por te

Imports Importations 121.4 5.6 8.7 5.2 7.7 6.2 4.2 4.6 Importe

GDP PIB 245.1 1.1 2.4 2.0 3.1 2.5 1.9 2.2 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

44 © EUROCONSTRUCT Munich, December 2006 Belgium

BELGIUM Aquiec-Vkebi

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

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

The general economic outlook for Belgium has hardly changed since the 61st Euroconstruct conference. Thus for example, it still consists of an acceleration in 2006 before stabilising around its growth potential as from 2007 and for the whole forecast period. The only difference is that the performance levels of 2006 will probably exceed hopes as the economy is expected to grow by 2.7%, i.e. with an increase greater than its potential, it should achieve the best performance of the last few years.

For construction too, 2006 also looks like being more favourable than before the summer. With an anticipated increase of 7%, construction output should, once again, sustain the economy in general. But most of the pleasant surprise that seems to be emerging for 2006 lies in demand, mainly for new residential, which should once again be growing. And this will be bound to sustain output in 2007.

It is thus reasonable to hope that, viewed as a whole, construction can avoid a drop in activity in 2007. But it will suffer badly from the fall in public investments (-8.4%) immediately following the 2006 local elections. Demand for new housing must also be expected to go down in 2007, among other things due to the impact of the rise in mortgage interest rates and the costs of construction resulting from the increase in raw material prices, which has a knock-on effect on materials.

As far as new non-residential buildings are concerned, it seems that demand has returned to a level that is finally more in line with the needs of the economy and that, after the anticipated realignment has taken place, no more big movements should be expected in the short term.

This situation is not unreminiscent of the "post-2000" scenario. As in 2006, one building segment (at that time non-residential) peaked in 2000, at the time of the local elections, and subsequently slumped. The fall in public investments had amplified and anticipated the effects of this on the output of the sector, which had been through two crisis years. Hence the fear that the expected fall in public investments will plunge the sector into crisis again, particularly since, while it does not appear to be the most likely scenario, a drastic fall in the demand for new housing cannot be ruled out.

In any event, it appears that Belgian construction can no longer sustain the general economic growth over the next few years and owes its salvation to maintenance and renovation works. Particularly since, among a whole series of measures decided on by the government within the framework of the 2007 budget, it is the ones aimed at encouraging works to save energy in housing units that could have the most impact on demand aimed at the sector, and since these types of works largely concern existing buildings.

46 © EUROCONSTRUCT Munich, December 2006 Belgium

2 Macro-economic Outlook

The economic scenario on which experts have agreed since autumn 2005 is, broadly speaking, still relevant in the sense that, following an acceleration of growth in 2006, the Belgian economy is expected to develop on a basis close to its growth potential (slightly over 2%) for the remainder of the forecast period.

The figures currently available, however, show a significant change for the current year, which today appears to be markedly more favourable than initially predicted.

The expected acceleration will have such a strong effect, particularly in the course of the first two quarters, that, with a growth estimated at 2.7% (compared to 2.2% before summer), 2006 is emerging as the best year since 2000.

These good figures are the result of a boost in both domestic demand and exports. Domestic demand has benefited from an increase in consumption, particularly following the rise in available income, and from a fall in the level of household saving. It has also been favoured by an increase in investments by both businesses and public authorities, with the latter benefiting from the boost linked to the local elections in October 2006.

Exports have particularly developed thanks to the acceleration in demand on the main relevant markets for Belgium. They have, for example, developed more rapidly than imports, enabling foreign trade to make a positive contribution to growth in 2006.

For 2007 the prospects are less favourable, mainly following the loss of dynamism anticipated in exports. The European economy as a whole is expected to suffer from the slowing-down of the American economy, already observed at the end of 2006, and from the appreciation of the euro. In Germany, the slowdown will probably be even more marked in view of the fact that the increase in VAT coming into force in January 2007 is bound to affect private consumption. This is obviously not without repercussions for the Belgium economy, which counts Germany among its main trading partners. Thus, experts from the Federal Planning Bureau expect the quarterly growth in GDP, which has been shrinking since the beginning of 2006, to be reduced further before stabilising at around 0.5%. This would take annual growth to 2.2% in 2007.

Following the upheavals of the 2002-2005 period, which was characterised by three years of "disinvestment" and a year of catching-up, business investments should return to a “normal” level in relation to GDP and thus grow in the order of 4% in 2007. This is in a context that is attracting expansion investments: with rates of return still high, financing conditions remaining attractive and use of production capacities more intensive than during previous years.

Together with consumption, business investments should thus ensure the greater part of the growth in view of the fact that public investments, which are expected to fall sharply after the local elections, and foreign trade will probably make a negative contribution.

Although this is not fully reflected in terms of the consumption of households, whose savings level is expected to increase in 2007 (following a rise in unearned income, which is more widely saved than earned income), disposable household income should undergo quite a significant rise (+2.3%) following the effects of the tax reform and the increase in employment.

Thanks to the good economic performance levels recorded in 2006, the growth in employment will, moreover, be greater than initially predicted, thus reinforcing the anticipated fall in the level of unemployment.

In the longer term, with growth expected to be in the order of 2.1% a year, job creation should remain higher than the increase in the working population and therefore facilitate a continuation both in the fall in unemployment and in the rise in disposable household income. In the absence of new tax initiatives, however, this continuation will lose its dynamism, linked to the impetus effects generated by the progressive entry into force of the tax reform, when that reform applies in full.

The cycle of local investments, which entered a phase of decline immediately after the local elections in October 2006, should continue to have a big influence on public investments, for which an upturn is not foreseen until the end of the forecast period (2009).

In the absence of new energy price rises and assuming moderate pay growth, inflation could stabilise at just below 2%, which is the ECB target. However, even in the event of a stabilisation or even a slight drop in inflation, a rise in interest rates, in both the short and long term, seems inevitable in order to restore the real return on financial investments to a level more in proportion to those usually recorded. Moreover, this trend has begun in 2006 and is expected to grow stronger. This is particularly the case if, as the ECB fears, the increase in the price of raw materials ends up creating an inflationist pressure, leading to a tightening-up of European monetary policy.

48 © EUROCONSTRUCT Munich, December 2006 Belgium

3 Housing Market

As at autumn 2006, the delay by the National Institute for Statistics (INS) in publishing statistics relating to planning permissions deprives observers of a true picture as to the real direction of demand for the current year.

The figures relating to the first three months of the year show that the increase is continuing. But the demand recorded in that period was not, at that time, influenced by the raising of mortgage interest rates and the rise in construction costs that have occurred since autumn 2005. In addition, surveys on the state of the economy carried out among building contractors tend to point to bigger pressure on prices.

This could be the first sign of a reversing of the trend, which was also anticipated, in so far as the main factors underlying the development in demand over the last few years (improvement in financing terms and increased preference for apartments, which are less expensive than one-family houses) cannot reasonably be expected to continue to evolve in a way that sustains that demand even further.

Interest rate projections are, what’s more, clearly heading upwards (after several years of moving downwards). And as for the distribution of demand between one-family houses and apartments, a very clear slowing-down of the "shift" over the last few years can be seen. Thus for example, although the share of one-family houses has fallen by 15% in 5 years (from 65% in 1997 to 50% in 2002), it has lost no more than 3% over the last 3 years, suggesting that the phenomenon is also coming to an end.

All things considered, the Federal Planning Bureau, moreover, suggests in its economic projections for autumn that growth in investments in housing will probably flag from the second half of 2006. This view is fully in line with the results of the analysis being carried out by Euroconstruct in a longer-term approach. Those results draw the conclusion of a fall in demand. However, this will allow for a continuation in the growth of new construction activities until and including 2007, albeit at a slower pace.

With figures not quite as high, this was, moreover, already the conclusion of the 61st Euroconstruct conference.

The upward adjustment that has been applied meanwhile to the projections relating to the construction of new housing can be explained, in large part, by the revision of the figures relating to construction costs. That revision shows that the development of those figures had been overestimated over the course of the last few years. Thus, although the rise in the costs of raw materials, and of energy in particular, appears greater than initially foreseen for 2006, and although that rise therefore leads to a bigger rise in the cost of construction, this cost seems to be at a level that is, in the end, more attractive than predicted.

Thus, with demand being more solvent, it should therefore also be higher and even grow further in 2006 though at a much slower pace than in previous years (2.7% compared to 13 and 15% in 2005 and 2004 respectively).

In the longer term, demand is, however, expected to weaken from 2007, initially, mainly following the rise in the cost of construction which is anticipated for 2006 in view of the increase in raw materials prices, which affects the price of materials. That rise adds to the negative effects of the anticipated recovery in interest rates and cannot be offset by the positive effect of the reduction in unemployment. Although heading gradually more towards stabilisation, the decline in demand is not expected to stop until the end of the projection period. This is, among other things, the result of the development in construction costs, which will probably go on rising faster than usual in 2007, and of the rise in interest rates, which is expected to continue throughout the projection period. Two negative influences

© EUROCONSTRUCT 49 Belgium Munich, December 2006 which will be only partially offset by the fall in unemployment and the increase in disposable household income. The developments of both of these factors are, moreover, set to slow down.

According to this neutral scenario, based on the stabilisation of the share of apartments in demand for new housing, and taking into account time-to-site periods, the number of dwellings on which construction has begun will probably have again undergone a large increase in 2006 (+7.5%) before falling off from 2007. And in view of the construction periods, a reduction in the number of completed dwellings should not be expected until 2008. Throughout the projection period, that number will probably touch the 55,000 units mark, i.e. a very high level from an historic point of view.

Thus, in terms of the construction of new dwellings, the output of firms is expected to undergo a further upturn during the years 2006-2007 (though falling by more than 10% to around 5%) before moving towards stabilisation around a very high level.

Such are the conclusions of the neutral scenario mentioned.

However, the prospect of a more pessimistic scenario cannot be ruled out. It would only take a higher inflationist pressure. Weighing heavily on interest rates, that pressure would have all the more effect on the solvency of a demand which would then fall further. If such an inflationary trend, which some, starting with the Chairman of the ECB, are far from ruling out, were to have its roots in a new rise in the cost of raw materials, the effect would then be even more pronounced. It would then have an impact on the cost of materials and of construction as a whole, thus dealing a second blow to solvency of demand.

A pessimistic scenario could also have its roots in the disappearance of a psychological boost, which is perhaps in part what is behind the development that demand for new housing has undergone over the last few years. This boost is linked to the fact that "it’s the right time to build" given that the conditions (particularly financing), which have been among the most attractive we have known, will not last forever. The increasing of financing charges and construction costs could be interpreted as the fact that the time has passed. In that case, there would be an inevitable response to the anticipation caused by this psychological effect, a little like the slump in non-residential demand witnessed after the very high demand of the early part of the decade.

Whatever the case, i.e. whether or not a pessimistic view is realised (in one form or another), the time appears particularly right to support the demand for new housing. As, in any case, that demand no longer seems able to improve if things stay as they are.

This just shows that a number of measures decided on by the federal government in the context of drawing up its 2007 budget are coming at just the right time, although they do not, on the face of it, seem to be of a nature to really provide a new momentum. Particularly since their precise details, such as the date on which they enter into force, probably will not be specified before the adoption of a programme law, which traditionally occurs during the very last days of the year.

This is the case of the reduction in VAT on the construction of public housing. A reduced rate is already applied to this (12% instead of the normal rate of 21%). But that rate will go down to 6%, that is to the lowest of the two reduced rates applied in Belgium. With a constant budget, this will help to increase the output of public housing by 5%. However, in view of the very (too) small share that this type of housing represents in the total demand, the effect of this measure will remain limited (in the order of 0.1 to 0.2%)

This is also the case of the reduction in VAT from the normal 21% rate to the lower 6% rate for demolition-reconstruction activities. This measure is aimed at lowering the dilapidation

50 © EUROCONSTRUCT Munich, December 2006 Belgium threshold, making a demolition-reconstruction project economically feasible and, in doing so, at increasing the number of plots likely to take a new construction. This is a way of reducing pressure on the price of building land and, therefore, of reducing the total cost of new construction (land plus building) in order to boost demand for it. It is reckoned that, if the measure had been generally applicable, it could have increased demand by around 5% at equilibrium, i.e. once well-known and fully used, which takes several years of existence. But, as it seems accepted that it will affect only towns, its effect will obviously be reduced to a fraction of the above-mentioned potential (more or less a fifth, to give an approximate idea).

The measures decided on within the framework of the 2007 federal budget will therefore have many positive effects on demand but not to the extent of substantially changing the basic scenario forecast by 2009. A genuinely more optimistic scenario would have to draw on those resources elsewhere. (But, in the view of the way in which development of demand for new housing has continued to surprise us in the last few years, this cannot be ruled out.) For example, on a new increase in the share of apartments (which reduces the average cost of a new construction as these dwellings are generally not as spacious as one-family houses). A gain in market share, against the tendency to stabilise which seems to be emerging, but nonetheless feasible, particularly in view of the gap that remains between the level reached in Belgium (54%) and the European average (58%).

In terms of residential construction as a whole, fluctuations in new construction will, as usual, be cushioned by renovation works. With the latter accounting for more than half of output, they are experiencing a generally more stable development, which is following an upwards trend.

Their cushioning effect could be particularly pronounced during the projection period. This is because a number of measures decided on in the context of preparing the 2007 federal budget will help to boost renovation demand – although this is not necessarily their initial aim – and therefore to offset the lower performance levels expected for the construction of new housing.

It was decided to increase the tax advantage granted for renovation works aimed at saving energy. This system was introduced in 2004. It is aimed at granting a tax reduction (40% of the invoice, with a maximum of 1,300 € per housing unit and per year in 2006) for carrying out a number of works of this type. The maximum level of the tax advantage will be doubled. Eventually, this should lead to an increase in demand that can be estimated at more or less 3% as far as renovation works are concerned. Experience shows, however, that this increase is unlikely to be "instantaneous". Instead, it will probably be spread over 3 years, the time it takes for households to become fully informed of this change and to make full use of it.

It was also decided to introduce a new tax advantage linked to renovation works relating to dwellings rented out through social agencies. The aim is to encourage people to put private dwellings onto the rental market but, in return, for a lower rent. The promised tax advantage would also correspond to a tax reduction equivalent to 40% of the invoice. However, in contrast to the reduction that applies to energy-saving works, this would apply to all kinds of works and could be spread over several years. Although the effects of this measure are almost unquantifiable, it will not fail to have a positive (though probably limited) effect on demand for residential renovations.

So overall, given the anticipated upturn in renovation and also the qualitative increase of new construction, the expected fall in demand for new housing should not lead to a decline in total residential output. Following the high growth rates observed in this sphere since 2004, an initial growth reduction is nonetheless expected for 2007 and a second in 2008, before stabilising at around 1 to 1.5% in the most likely scenario.

4 Non-residential Market

The situation of new non-residential construction is quite different from that described for housing.

In contrast to the housing situation, demand for new non-residential constructions is neither at the highest level of the last 20 years nor, it seems, in a high phase of the economic cycle.

The volume of authorised new buildings only just exceeded 40 million m3 in 2005, thanks to the "Snow Game" project alone. This project alone, which involves the creation of three covered ski pistes beneath 100,000 m2 of roof, accounts for 10% of the total volume of new buildings authorised in 2005. Thus, especially disregarding the "Snow Game" project, demand appears to be much lower than it was at the beginning of the decade, when it touched on 50 million m3.

The fall that had then followed appeared to be so exaggerated with respect to both the economic environment and the developments observed in most of the other European countries, that it seemed to call for an adjusting force, aimed at repositioning demand at a level more in line with the needs of the economy.

The recovery in demand that had begun in 2004 has probably continued in 2006, after marking time for one year. The very first figures, and the econometric simulations, point, in any case, in that direction. All in all, quite a logical development in a context of "anticipated realignment" (upwards) and of more sustained private investments (following the realignment that occurred in 2005-2006).

Demand is likely to rise for buildings with an industrial purpose or intended for services, while demand for offices will probably be down following the strong increase recorded in 2005.

The highest demand that manifested itself in 2005, both in the office sphere and in that of buildings for agricultural use, will have boosted the output of that type of building in 2006. The increase in planning permissions which is emerging for 2006 (exclusively for industrial buildings situated in Flanders, according to the figures relating to the start of the year) will drive output until 2007. However, this will not be enough to offset the anticipated loss of output in the office sphere, where demand does not seem to be able to pick itself up again.

In this context, it is nevertheless reasonable to hope that the output of new non-residential buildings can stabilise in 2007, thanks to the development of buildings of a commercial nature.

In the longer term, i.e. once the realignment has occurred, both in terms of business investment as a whole (the Federal Planning Bureau indicates that this will then be at a normal level in relation to GDP) and as far as the construction of new non-residential buildings is concerned, the upturn in demand and in output will probably stabilise at around 2.5 to 3% a year.

Buildings for agricultural use do not seem, however, to be able to follow this pace, any more than those in the "miscellaneous" category, which will be affected by the completion of the "Snow Game" project, announced for 2007. For the following year (2008), this means a loss of activity of 40 million euro in this sector.

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.

52 © EUROCONSTRUCT Munich, December 2006 Belgium

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 the projections are not as optimistic for 2007, which looks like being a year of transition before a recovery of the growth of non-residential activities by the end of the projection period. However, at the end of this period, output should remain nearly 10% lower than the level it had reached at the beginning of the decade.

5 Civil Engineering Market

2006 was to be a big event for civil engineering as it was a local election year and, traditionally, the cycle of investment by local authorities (which account for 50% of public investments in Belgium) goes through a peak during such a year.

The event was to be all the bigger as the electoral impetus of the last few cycles had proved to be of increasingly larger scale. But the June projections had already revealed that this would not be the case in the end. The impetus would be there, but not with the intensity initially anticipated.

And the initial indications relating to 2006 confirm this.

Although, with an increase estimated at 8.8% for the current year, the autumn projections of the Federal Planning Bureau are slightly more favourable, they remain, however, comparable generally with those forecast in the spring.

In particular, they confirm a decline, cancelling out, during the years 2007-2008 and mainly at the start of this period, most of the increase recorded during the previous two years (2005- 2006). During the summer of 2006, surveys on the economic climate carried out among those working in the sector also revealed the initial signs of this fall: negative appreciation in terms of prices, a stagnating order book, etc.

We will no doubt have to wait until the end of the declining phase of local authority investments before seeing a recovery in total demand for civil engineering works. The Federal Planning Bureau expects the end of that phase to come in 2009. However, based on previous local investment cycles, we know that this could be much later.

Very logically, it is road works (except highways), a field in which the district authorities are most active, which will see the most uneven development by 2008. After the upturn of the years 2005-2006, 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 keeping pace with growth in GDP. Meanwhile the rate of public investments is, in relation to GDP, already one of the lowest in Europe.

54 © EUROCONSTRUCT Munich, December 2006 Belgium

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 “flats”, which, in fact, indicates ‘apartments’. • The stock of housing units or dwellings is given at the end of the year • 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 Industrial and storage buildings: The Belgian statistics do not allow for a distinction to be drawn between these two categories of buildings. The figures presented are therefore the result of an estimate based on old statistics (that did draw that distinction), which reveal that buildings intended for storage follow the demand for building for industrial use quite closely and are at the root of a more or less equivalent demand volume.

Table 5 • Stocks: For 2005, the amount corresponds to the contribution of variations in stock to GDP. For the years 2003 to 2009, 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. are given at market prices, VAT included

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

56 © EUROCONSTRUCT Munich, December 2006 Belgium

Country/Pays/Land: BELGIUM Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 10 376 10 421 10 457 10 479 10 501 10 522 10 543 Bevölkerung

Households ('000s) Ménages 4 323 4 357 4 388 4 414 4 439 4 464 4 489 Haushalte

Unemployed ('000s) Chômeurs 400 414 417 411 395 384 371 Arbeitslose

Unemployment rate (%) Taux de chômage 8.2 8.4 8.4 8.2 7.9 7.6 7.3 Arbeitslosenquote

Change of GDP Variation du PIB 0.9 2.6 1.2 2.7 2.2 2.1 2.1 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.6 2.1 2.8 1.9 1.9 1.7 1.8 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.2 -0.6 1.3 6.2 3.5 1.9 1.9 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: BELGIUM Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 5 258 -0.2 9.5 7.1 13.4 5.1 -0.1 1.7

Logement Renovation 6 006 2.0 2.0 2.0 1.9 3.9 3.8 3.6

Wohnungsbau Total 11 264 1.0 5.3 4.3 7.3 4.5 1.8 2.7

Non-residential construction New 5 678 -16.9 8.6 5.0 7.9 0.0 2.6 2.9

Bâtiments non résidentiels Renovation 3 762 2.9 2.4 2.3 2.4 2.4 2.2 2.2

übriger Hochbau Total 9 440 -9.6 6.0 3.9 5.7 0.9 2.4 2.6

Building New 10 936 -9.8 9.0 6.0 10.6 2.5 1.2 2.3

Bâtiment Renovation 9 768 2.3 2.2 2.1 2.1 3.3 3.2 3.1

Hochbau Total 20 704 -4.1 5.6 4.1 6.6 2.9 2.1 2.7

Civil engineering New 3 769 0.6 -1.5 7.0 9.3 -7.9 -1.3 4.5

Génie civil Renovation 916 -1.7 -3.8 4.6 6.7 -10.1 -3.6 2.0

Tiefbau Total 4 685 0.1 -2.0 6.5 8.8 -8.4 -1.7 4.0

TOTAL CONSTRUCTION OUTPUT 25 389 -3.3 4.2 4.6 7.0 0.8 1.5 2.9

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 5.80 -1.0 5.1 0.9 4.2 -0.5 -0.1 0.9 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

58 © EUROCONSTRUCT Munich, December 2006 Belgium

Country/Pays/Land: BELGIUM Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 22.2 24.5 27.3 27.3 26.6 26.3 26.0 Baugenehmigungen Familienhäuser

Flats Collec tif 22.6 27.1 31.4 33.0 32.2 31.8 31.5 Mehrfamilienhäuser

TOTAL 44.8 51.6 58.7 60.3 58.8 58.1 57.5

Housing starts 1+2 family dw ellings Logements commencés Individuel 21.2 22.4 24.6 26.5 25.8 25.4 25.1 Baubeginne Familienhäuser

Flats Collec tif 21.7 23.4 26.9 29.0 28.2 27.8 27.4 Mehrfamilienhäuser

TOTAL 42.9 45.8 51.5 55.5 54.0 53.2 52.5

Housing completions 1+2 family dw ellings Logements terminés Individuel 20.0 22.4 23.2 26.0 26.8 26.2 25.8 Baufertigstellungen Familienhäuser

Flats Collec tif 18.5 23.0 24.5 28.5 29.4 28.7 28.3 Mehrfamilienhäuser

TOTAL 38.5 45.4 47.7 54.5 56.2 54.9 54.1 Housing stock Logements existants 4 733 4 777 4 826 4 880 4 932 4 984 5 034 Wohnungsbestand

thereof second homes dont résid. secondaires 115 115 116 117 118 118 119 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 296 304 322 349 376 401 426 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 65.4 65.6 65.8 66.1 66.4 66.7 67.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: BELGIUM Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 348 -2.8 17.3 15.2 5.8 -11.0 -1.5 1.3 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 231 -32.0 -7.1 -5.3 10.2 8.6 1.5 -0.3 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 714 -8.9 7.9 -0.3 13.1 5.1 3.0 4.1 Industriegebäude

Storage buildings 2) Bâtiments de stockage 714 -8.9 7.9 -0.3 13.1 5.1 3.0 4.1 Lagergebäude

Office buildings Bureaux 1 714 -14.4 -1.3 8.9 5.3 -17.2 0.8 3.4 Bürogebäude

Commercial buildings Commer c es 937 -33.5 22.6 -0.7 -4.4 20.2 8.7 4.9 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 363 -18.1 15.3 19.2 18.5 17.4 4.3 -1.1 Landw irtschaftsgebäude

Miscellaneous Autres 658 -7.5 20.8 7.9 15.4 -1.5 -1.8 -0.4 Sonstiges

Total 5 678 -16.9 8.6 5.0 7.9 0.0 2.6 2.9 Insgesamt

1) At 2005 prices, excluding taxes. 2) Cf. Appendix to the Belgian country report

60 © EUROCONSTRUCT Munich, December 2006 Belgium

Country/Pays/Land: BELGIUM Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées Bahnanlagen

Other transport Autres réseaux Übrige Verkehrsinfrastruktur

TOTAL 2 889 0.3 -1.8 11.5 12.6 -13.1 -2.9 6.7

Telecommunications Télécommunications Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 963 -1.5 -3.5 -1.9 1.3 -1.2 -1.3 -1.3 Energie- und Wasserversorgung

Other Autres 832 1.3 -0.8 0.9 4.2 1.6 1.5 1.5 Sonstiges

Total 4 685 0.1 -2.0 6.5 8.8 -8.4 -1.7 4.0

1) At 2005 prices, excluding taxes.

Country/Pays/Land: BELGIUM Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 158.9 0.9 1.5 1.1 2.3 2.0 1.5 1.9 Privater Verbrauch

Public consumption Consommation publique 69.0 2.5 2.0 0.7 1.8 2.4 2.5 2.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 63.6 -0.7 4.2 8.4 2.2 2.4 2.4 2.6

of w hich construction

Stocks (as % of GDP) Variations de stocks 0.0 -0.5 0.0 0.0 0.0 0.0 0.0 0.0 Vorratsveränderung

Ex por ts Exportations 260.3 2.9 6.2 1.8 5.4 4.9 5.5 5.5 Ex por te

Imports Importations 253.4 3.1 6.4 3.4 4.8 5.0 5.4 5.6 Importe

GDP PIB 298.4 0.9 2.6 1.2 2.7 2.2 2.1 2.1 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

62 © EUROCONSTRUCT Munich, December 2006 Czech Republic

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

Jan Blahoňovský e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

Total construction output produced by the Czech construction industry in year 2005 was 15.9 bill. EUR, this represents 31.6 bill. EUR in Purchasing Power Parity (PPP), recalculated to number of inhabitants it is 3091 EUR per capita. The Czech construction industry is on 10th position out of 19 countries of Euroconstruct and 2nd from East Europe countries (behind Slovenia) in construction intensity ranking. The construction industry formed 6.3 % of the Czech Gross Domestic Product (GDP) and employed 437 thousands workers which represents 9 %. Average monthly gross wage in PPP reached only 1135 EUR per worker. Construction output had following pattern: 13.5 % new residential including renovation, 29.8 % non-residential, 29.4 % civil engineering, 25.9 % current repairs including other works and 1.4 % of work abroad. Share of new constructions was 63.8 % and of reconstructions 36.2 %. Construction output from public sources made 51.7 % in companies with more then 20 employees and 48.3 % from private sources. There are 256 thousands companies in construction sector, thereof only 2585 companies with more then 20 employees. Share of companies in construction output by size of company was following: biggest companies (over 1000 employees) 17.8 %, 200–999 employees 15.6 %, 50–199 emp. 19.9 %, 20–49 emp. 14.5 %. Construction companies with up to 20 workers produced 31.2 % but their share in construction output was formed by 65 % of workers. Construction work abroad was minimal and reached only 1.4 % in year 2005. Total Czech investments abroad is also minimal, it had only 0.7 % share, this is half of Europe average and less then Hungary.

All East Europe countries are seriously disadvantaged by continuous putting off free movement of natural persons and corporate bodies within EU. Situation is also complicated by many laws and regulations which forbid the work of Czech companies and workers mainly in adjacent countries. In the case of the Czech Republic it is in direct contradiction with process of globalisation and with opening of the Czech economy to the world.

The Czech construction industry shows second highest growth from Euroconstruct countries in 3rd millennium

The Czech construction industry has continuous growth since year 2000 and in 3rd millennium increased its output by more then half (+ 51.8 %). This represents second highest growth of construction output in Europe during the period 2000–2006. This result was reached by above-average growth of GDP (nearly by 29.1 %) caused mainly by 43.8 % growth of investments, 161.8 % growth of export and highest strengthening of currency from 19 countries of Euroconstruct, from 35.6 to 28.4 CZK/EUR (20 %). This fact confirms the correctness of chosen strategy. Lag of GDP per capita behind West Europe in PPP was lowered by 15 percent points during period 2000–2006, i.e. from 58.2 % to 73.3 %!

Also one of the lowest inflation of consumer prices in Europe is in the favour of this strategy (from 4.7 % in 2001 to 0.1 % in 2004, even after slow growth of inflation afterwards to 2.7 % in 2006). Average interest rate is dropping both for short term loans (from 6.8 % in 2000 to 4.8 % in 2006) and long-term loans (from 7 % to 5.3 %). Direct foreign investments also increased namely from 1.9 bill. EUR in 2006 to 8 bill. EUR in 2005.

In period after year 2000 construction output increased the most (more then two times) at civil engineering area (+114.2 %, +9.4 % in West Europe), residential area increased by two thirds (+66.1 %, +7.7 % in West Europe) and non-residential only by 10.2 % (stagnation in West Europe). Total growth of construction output in period from 2000 to 2006 reached +38.6 %, only +7.7 % in West Europe. Positive impact to rapid growth of the Czech Economy had also joining of the Czech Republic to EU in May 2004. Restructuring of the whole industry including constructions (which is still happening) had positive influence to overall development also thanks to openness of the Czech economy (one of the highest in the Europe).

64 © EUROCONSTRUCT Munich, December 2006 Czech Republic

There was a significant growth of foreign capital in construction industry so currently main part of the biggest construction companies (with more then 1000 employees is owned) capital is owned by foreign bodies. For example company Strabag CZ is controlled by Austrian partner Strabag, Skanska CZ is owned by Swedish partner, formal SSŽ is owned by French company Vinci, Vodní stavby is owned by German company Hochtief, ŽS Brno is controlled by Spanish company Obracon Huarto Levi, PSS holding belongs to Netherland company Desta, VCES is controlled by French company Bouygues Batiment, Metrostav is controlled by Dopravní stavby Bratislava, atd. From building materials manufacturing industry has the highest penetration of foreign capital manufacturing of other non-metallic mineral products. This process has positive influence to participation of biggest companies in tenders, to availability of loans, improvements of communication and references. Important role is played by so far inexpensive labour work, further one of the lowest real construction costs measured by PPP, using of newest technologies and improvement of construction production quality. It is understandable that such a sharp growth of construction output has its limits. This was demonstrated by decrease of growth rate already after year 2004, though expected growth rate of 4 to 5 % in the period 2005-2009 is still one of the highest in Europe. Development of the Czech economy was during 3rd millennium as follows:

2001 2002 2003 2004 2005 2006 GDP in % 2,6 4,1 3,4 4,2 6 5,6 Fixed capital % 5,3 7,2 4,9 7,3 3,6 5,4 Construction output % 8,2 3,8 9,2 9,9 4,2 5,5 Const. output/GDP % 13,5 14,3 14,2 15,8 15,5 16,7 Exchange rate CZK/EUR 34,08 30,81 31,84 30,90 29,78 28,45 Export % 12,6 20 7,5 21,9 11,2 10,2 Inflation % 4,7 1,8 0,1 2,8 1,9 2,7 Unemployment % 8,6 7,8 8,1 8,3 7,8 7,8

Development of construction output and GDP %

200

150

% 100

50 constr. GDP 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Growth of construction output is marked by two fluctuations. First one was in 2002 when there were exceptional floods which increased public expanses and directed construction activities mainly for repairs and renovations. Second (in 2005) was influenced by high comparative reference value of construction output in 2004 (last year with 5 % VAT) caused by significant increase of investment demand. The result was drop of fixed capital by 2.6 percent points which was compensated by successful balance of foreign trade, mainly by growth of export by 14.4 points.

Intensity of construction activity in the Czech Republic in EUR/inhabitant in parity reached already the average of 15 West Europe countries in 2005

Since our entrance to Euroconstruct, our delegates have been pointing out at the fact that comparing the construction industry results of the less economically developed Middle East European countries directly with West Europe countries only by using exchange rates is similarly unreliable as direct comparison of GDP. Real costs of construction works in those countries of Middle East Europe are nearly half times smaller then those calculated by currency exchange rates, so the real construction output of those countries is double in reality. If we are comparing real construction output per inhabitant or per construction worker (which is the best indicator of construction intensity) and we use data about construction output subjected to PPP (which is published yearly by participating countries in European programs for comparisons), we reach surprising results which rank Czech construction intensity in 2005 to the 10th place among Euroconstruct countries, in numbers it is 3095 EUR/inhabitant in the Czech Republic and West Europe average is 3064 EUR/inhabitant. The Czech construction industry absolutely exceeds by its construction intensity West European countries average, particularly 6 West European countries and other 3 countries from Middle East Europe. More outstanding positive results of so calculated construction intensity are reached within period 2000–2005, where is the Czech Republic together with Hungary on first two places with construction intensity growth by one third whilst West Europe countries average growth is only 5 %.

2 Macro-economic outlook

2000–2006 – The most successful period of Czech economy development from origin of the Czech Republic

At the beginning of the 3rd millennium the Czech economy represents the most successful development period from its origin. It is characterised not only by growing performance, economic stability (through continuous politic fluctuations), strengthening of national currency but also by overall increase of living standard measured by GDP in purchasing power parity which exceeded the level of 18 thousands EUR per inhabitant and gained on living standard in Portugal. Negative attributes like large financial instability, increase of indebtness growth rate, above average tax and profit payments, high unemployment and slow development of scientific and technical progress, are hard and slow to pass. This period is characterised by smooth and relatively high growth of GDP, structural rearrangement of industry in favour of manufacture of transport equipment, of electrical equipment and of plastic products. The Czech economy is furthermore opening which results in rapid expansion of export by more then half. Important role was played by high strengthening of the Czech currency, indeed it influenced the export abroad demand but nevertheless the export per worker reached the level of developed countries. Main factor of dynamic progress was used investments, they reached 113 bill. EUR during 5 years. Lowering of liabilities in balance of trade is occurring; the balance of trade is active for the first time in 2005. There are gradual improvements of ratio between total state final budget expenditures and GDP, in so far that in 2005 the expenditures were below GDP formation level. Passive revenue-expenditure balance dropped to -2.1 %, it represents gross debt of state budget expenditures deep beneath level of extern revenue-expenditure unbalance which is 5 %. The state budget imbalance was successfully put down from 4.3 % in 2003 to 1.9 % of GDP. Gross debt of state budget grew more then twice and reached 30.5 % of GDP in 2005. Whole process was followed by one of the lowest inflation in Europe. The negative issue was growth of unemployment which could not be managed because of increasing structural changes in manufacturing.

66 © EUROCONSTRUCT Munich, December 2006 Czech Republic

Growth rate of construction output in period 2005–2006 is slightly decreasing

The period from 2005 to 1st half-year 2006 is for development of the Czech economy characterised by decrease of GDP growth rate, together with investments and construction output. Main cause of investments and construction output drop is high reference level for comparison from the year 2004. Year 2004 was strongly influenced by announced increase of VAT from 5 % to 19 % in the half of 2004 resulting to high growth of investment demand and therefore also volume of construction output. As a result there was a significant drop of construction output rate in the comparing period in 2005. The evidence is in comparing of construction output development in same quarters of current and previous year 2005–2006 in %.

1st quarter 2nd quarter 3rd quarter 4th quarter 2005 96,8 100,1 107,3 109,1 2006 102,8 106,5

Development of construction output by types in 2004–2006 in % shows, that main accelerators of growth are civil engineering and in 2005 also current repairs.

non- new current con.works residential civil eng. total residential constr. repairs abroad 2004-05 4,7 -1,3 10,6 4,5 15,6 10,1 4,2 2005-06 7,2 0,9 8,6 4,8 3,9 39,8 5,5

Structure of construction output by types in 2004, 2005 and 1st half of 2006 in % was as follows:

non- civil new current con.works residential total residential eng. constr. repairs abroad 2004 18,6 41 40,4 100 25,9 1,3 127,2 2005 18,4 38,6 42,7 100 23,8 1,3 125,1 1+2Q 2006 19 37 44 100 23,7 1,7 125,4

Slow shifting of construction output from non-residential to residential type and mainly to civil engineering area. Inside non-residential output, proportion of public non-residential output is decreasing, whereas proportion of private non-residential output is nearly not changing. After 2004, the share of current repairs is decreasing and the share of renovations is slowly increasing.

Till 2009 we expect next 4 to 5 % growth of the Czech construction industry

Forecast of construction industry development after year 2006 anticipates relatively stable growth (4–5 %) with exceptions of year 2008 when negative impact of increase of VAT from 5 to 19 % for new residential constructions is expected. We expect shifting of offer from new- residential buildings to renovations because the 5 % VAT will stay for renovations at least to year 2010. We also expect that part of residential constructions capacity will move to non- residential. By reason that there are some problems with acquiring finances from EU funds (usually caused by imperfections in documents but also by lack of own finances), mainly for civil engineering constructions, we anticipate decrease of proportion of this type of output but we assume that situation will be better in 2009 and proportion of civil engineering construction will be back at current level. As factors of construction demand growth we consider: - Continuous trend of motor-ways development (about 6 sections in work this year). Increase of this output will be strengthened by tolls on motor-ways and 1st class roads.

- Continuation of construction of trade, logistic and administrative centres, influenced mainly by foreign demand. - Support of hypotecal credits by both government and financial institutions will henceforward keep growing residential development for middle class of population although demand for luxury dwelling seems to be already fulfilled. The problem is growth of dwelling prices and mainly growth of cost connected with using of dwelling.

Still high investment supply is also illustrated by increasing profitability of construction companies. One third of them had financial loss in 2000, currently the proportion of companies with profit increased to 86 %. Best economy results are reached by companies with foreign capital and further companies with 100–300 employees. If our expectations become true, the volume of constructions will increase by 20 % in period 2000–2009 with following pattern: residential by 18.8 %, non-residential by 9 %, civil engineering by 30.6 %. For the first time we used data from Czech statistical office about share of renovations within particular types of new construction production of construction companies with more then 20 employees for obtaining more precise analysis and prognosis. Mainly there increased estimated number of renovations in civil engineering area. Proportion of renovations in particular types of construction output in % was as follows:

2003 2004 2005 2006 2007 2008 2009 residential 25,6 25 25,1 25 24 27 27,8 non-res. public 48,8 44,6 53,7 53,5 50,5 48 46,4 non-res. private 27,9 34,1 34,9 33 31 31 29,4 civ. engineering 41,1 35 34,4 35,8 36 36,1 34 total 36,5 34,9 36,1 36 35,2 37,3 33

Development of renovations by types of construction output in % is as follows:

2004 2005 2006 2007 2008 2009 residential 15,3 4,8 6,7 1,2 13,7 7 non-res. public 1,9 9,9 -1,3 5,7 -1,5 -2,9 non-res. private 9 6,8 -4 -2 -1 -2 civ. engineering 2,3 8,1 14,5 8,9 4,2 -1,3 total 5,1 7,8 4,9 2,2 3,3 -0,4

Development of types of construction output %

250

200

150 % 100 resid. non-res. 50 civil eng. total 0 2001 2002 2003 2004 2005 2006 2007 2008 2009

68 © EUROCONSTRUCT Munich, December 2006 Czech Republic

According information from national reports of June Euroconstruct conference in Amsterdam is expected growth of the Czech construction industry during the period 2005–2008 nearly three times higher then average forecast of 15 West Europe countries of Euroconstruct.

15 West Europe countries Czech construction output construction output 2000- 2005- 2000- 2000- 2005- 2000- development % 2005 2008 2008 2005 2008 2008 residential +71,7 +14,0 +95,8 +5,0 +4,4 +9,5 non-residential +16,8 +6,6 +24,5 +0,3 +4,3 +4,6 civil +60,4 +21,3 +94,6 +6,2 +7,3 +14,1 engineering total +41,7 +14,3 +59,9 +6,2 +5,4 +12,0

It is possible to expect that result of those prognoses will be little bit higher construction intensity in the Czech Republic in EUR/inhabitant in parity which is already higher by 1 % in 2005 and the same is expected till year 2008.

3 Residential constructions

Proportion of the Czech residential output is nearly four times lower then in West Europe

Proportion of residential output is several times lower in Middle East Europe countries in comparison to West Europe. So in 2005 it reached in the Czech Republic only 18.7 % while West Europe countries average is 48.7 %. Intensity of residential building in EUR in parity per inhabitant in 2005 was for the Czech Republic 726 EUR, West Europe countries average was 1486 EUR which is double value. It is only type of output where the Czech Republic significantly stays behind West Europe. Investment demand of household sector forms in West Europe nearly half of total demand and in this aspect is situation of East and West Europe countries incomparable. Housing stock in the Czech Republic is according to last census in 2001 composed of 4.369 mill. dwellings in total, this is 428 dwellings/thousand inhabitants. From this conventional permanent dwellings was only 3.829 mill., this is 375 dwelling/thousand inhabitants. A difference 540 thousands dwelling is formed by profit-making (34 %), rustic (31 %) and semi- permanent dwellings (23 %) and dwellings non-intended for habitation (12 %). According to Euroconstruct methodology, the Czech housing stock has 4.139 dwellings; this is 392 dwellings/thousands inhabitants. With reference to estimated number of households it means that 376 thousands households do not have their own dwelling, this is 8.3 %. Those results are alarming because in West Europe countries is the opposite situation and housing stock is greater then number of households. There is 184 thousands free dwelling assessed for market, this is 4.4 % while West Europe average is 5.9 %. Proportion of housing expenditures in GDP in parity was in 2004 nearly by one quarter higher in the Czech Republic then in West Europe, this is 4.5 % whereas West Europe average is 11.7 (Source: ECP 2004). Nevertheless the number of completed dwellings in West Europe per inhabitant is still more then two times higher then number of completed dwellings in the Czech Republic. All those information are alarming. The reason of such a big difference is not sufficient financial cover of demand caused by very low income level of inhabitants and fast increase of new dwellings prices, faster then increasing of incomes. In contrast to all other markets is housing market only market which source is not companies, state or municipality but mainly the inhabitant. All other segments of construction market are financed by private or public sector and those are developing in the Czech Republic much faster then households. If there is no significant increment of population income, there is no possibility to increase the volume of residential constructions at least to half of West Europe structure within

© EUROCONSTRUCT 69 Czech Republic Munich, December 2006 foreseeable future. This is a big doubt of the Czech Republic and other East Europe countries. Even though residential constructions output increased in period 2000–2005 the most form all types, it is still not enough. It is documented by comparison of new dwellings/thousands inhabitants in period 2000–2008:

2000 2001 2002 2003 2004 2005 Czech Rep. 2,43 2,43 2,68 2,66 3,17 3,22 West Europe 5,22 4,85 4,97 4,95 5,36 5,56

Price of new dwelling represents in the Czech Republic 200 net monthly wages

Statement about worsening of dwelling accessibility in the Czech Republic brigs also comparison of new dwellings prices and average worker wage in period of interest:

2000 2001 2002 2003 2004 2005 2000-05 % mill. CZK/dw. 2,47 2,43 2,67 2,65 3,13 3,18 128,7 % gross wage 13614 14793 15886 16920 18035 19030 139,8 % no. of wages/dw. 181,4 164,3 168,1 156,6 173,6 167,1 92,1 %

Because this is gross wage (and difference between gross and net wage is about 20 %), it is necessary to increase number of moths needed to pay for full dwelling price by 20 %, so the employee has to work for new dwelling 200 months which is 16.7 years!! In 2005 was concurrently modernised 21.9 thousands dwellings, this is 2.3 dwellings/thousands inhabitants. Construction output for modernisations represents one quarter of residential output and this ratio is still decreasing, 28.2 % in 2000 and 25.1 % in 2005. Development of residential construction output for reconstructions has similar trend as development of whole residential construction output, the rate is decreasing since 2003. The change will be at 2008 when sharp decrease of new residential constructions is expected because of higher VAT whilst for renovations stays VAT at value of 5 % resulting to increase of renovations proportion.

Development of new dwellings by forms was as follows:

2000 2001 2002 2003 2004 2005 Dev. % New dwellings total 25207 24758 27291 27127 32268 32863 130,4 from this: in family houses 13337 13664 14673 13883 16511 17121 128,4 in multidw. houses 11800 16094 12618 14244 16657 17127 145,1 from this: cooperative 546 890 791 1468 1494 1384 253,5 municipal 2897 2686 2612 2605 3641 2430 83,9 private 2493 2336 2990 3647 5587 7712 309,3 pensions 687 708 1725 1729 1638 1047 152,4 others 2878 2623 2763 2341 2083 2979 103,5

From this review is obvious that the growth of new dwelling is the most influenced by (in order: private multi-dwellings, cooperative multi-dwellings and pensions. Oppositely municipal dwellings growth is decreasing. Increasing trend at family houses is slower then at multi-dwelling houses.

Quality turn in residential development growth should lead to construction 475 thousands new dwellings in next decade; it means to increase current realisation 32 thousands dwellings to nearly double value and in addition to renovate about 40 thousands dwelling per year mainly in panel houses. Main problem will be sufficient finances because sources for

70 © EUROCONSTRUCT Munich, December 2006 Czech Republic financing are household incomes and forecast for development of average dwelling prices together with continuous increase of operating costs limits possible development. Without continuing growth rate of GDP above Europe average there is no very big hope for realisation.

Volume of hypotecal loans increased in the Czech Republic nearly ten times during 6.5 years

Growth of number of new dwelling is highly affected by growth of hypotecal crediting. Volume of hypotecal crediting is significantly rising:

2000 2001 2002 2003 2004 2005 1/2006 No. of hyp. credits in thousands 29,6 43,8 64,8 96,3 137,3 188,3 219,7 Hyp. credits in bill. CZK 29,0 43,7 68,2 102,4 154,4 226,5 272,4 Total debt of househ. bill. CZK 121,5 139,6 180,3 236,2 312,8 413,8 463,8 Ration of hyp. credits in % 23,9 31,3 37,8 43,4 49,4 54,7 . State support of savings bill.CZK 7,72 9,31 11,06 13,26 15,34 16,09 .

The volume of hypotecal credits has increased nearly ten times since 2000. Beforehand it formed about one quarter of household debts and currently has reached about 60 %. Also the state support of dwelling development increased more then twice and contrary to year 1997 (when it was only 3.8 bill. CZK) is now more then four times higher. In comparison with developed Europe countries is still the ration of hypotecal credits and GDP very low in the Czech Republic – 4.5 % in 2003 whereas from 25–100 % (47 % in average) in developed Europe countries.

4 Non-residential constructions

The volume of non-residential output in the Czech Republic was 5.9 bill EUR in 2005, it is 38.6 % from whole construction output (30.9 % in West Europe). Intensity of non-residential production per inhabitant in parity was 1281 EUR which is by 40 % more then West Europe average (917 EUR). The Czech Statistical Office monitors non-residential construction output by sources of financing (private and public) and by design (for production and non-production). In each of those groups they monitor new constructions and renovations + modernisations.

Non-residential output is only area that is nearly stagnating

The volume of non-residential output in constant prices has been increasing untill 2001 after this year it is continuously decreasing. Proportion of renovations was only 43.4 % and opposite to development of new non-residential output was stable and slowly increasing till 2005. The reason is priority of innovations of non-residential buildings with omitted maintenance in past above new constructions. Higher rising of non-residential output is blocked by insufficient finances mainly for buildings financed by public sources. Other way round the non-residential output financed by private sources is still raising thanks also to strategy of supporting entrance of foreign capital. Mainly volume of buildings for shopping companies increased and currently also buildings for recreation and sports. Whereas private new non-residential output is increasing for whole period with only exception in 2003, public new non-residential output is decreasing again with exception in 2003 when there was necessary to fix consequences of floods.

bill.EUR Year-to-year change in %

2005 2002 2003 2004 2005 2006 2007 2008 2009 Public 2,673 -21,4 5,5 11,4 -8,7 2,6 4,9 4,8 5 Private 3,327 17,6 4,8 -10,8 4,4 4,3 5,7 4,8 2,4 Total 5,900 -3,1 5,1 -1,2 -2 -0,3 3 4,8 2,3 For production 2,604 6,2 10,8 17,7 -4 Non-production 3,296 -7,6 1,9 -12,7 -0,3 Public new 1,238 -22,9 -7 20,5 -23,7 -5,4 3,4 4,8 5,5 Private new 1,435 5,9 12,7 -18,5 3,1 7,3 5,7 7,9 4,8 R+M total 2,561 6 6 4,9 8,5 -4 -2 -1 -2

Growth of new non-residential output for public buildings were in years 2003 and 2004 influenced by development of large sport constructions. For example: multifunctional arena in Prague and Ostrava, covered swiming pool in Valašské Meziříčí, Blansko and Liberec, soccer stadiums in České Budějovice, Frýdek Místek and Tábor, winter stadiums in Ostrově u Karlových Varů, Ústí nad Labem, etc. We expect construction of further sport constructions in following years. That is why investments into constructions for sports increased very quickly in period 2003–2004 (+66.7 % in 2003 and +31.7 % in 2004). Dominant position in new non-residential output has constructions build from private sources – they form 56.4 %. In this group prevailed buildings for manufacture till year 2004, then new commercial buildings output started to grow faster and they equalise in 2006 but trend of rising new commercial buildings output will continue. Construction output from public sources has also increasing tendency but only for reconstructions because construction output for new buildings financed by public sources is still decreasing from 2003. The pattern of construction production of new non-residential from 2002 to 2006 in %:

2002 2003 2004 2005 2006 2007 2008 2009 Education 15,3 14,4 18,6 15,2 14,1 14,0 14,0 15,5 Health 21,7 18,6 23,3 20,0 18,4 18,1 17,4 16,9 Public admin. 2,4 2,0 2,4 1,9 1,7 1,6 1,8 1,8 Industry 33,3 35,2 29,8 32,4 32,9 32,5 33,5 34,9 Commerce 27,3 29,8 25,9 30,5 32,9 33,8 32,3 30,9 Non-res. total 100 100 100 100 100 100 100 100

5 Civil Engineering constructions

Civil engineering – the engine of the Czech construction industry

Civil engineering is in 3rd millennium the most important part of the Czech construction industry both for new constructions and renovations and maintenance (RaM). It represented volume of 6.5 bill. EUR in 2005, that is nearly half of total construction output (49.2 %). Intensity of construction is very high and reached 1079 EUR/inhabitant, this is almost by two thirds more then West Europe average (659 EUR/inhabitant). Civil engineering output of both new buildings and renovations follows continuous increasing trend. Main reason is building of infrastructure, especially motor-ways and railways. Rates of growth for those constructions have up to two digits. Sharp investment development of communications smooth down after entrance of foreign capital in 2004, however we expect higher growth after 2007 in connection with technical progress in informatics which importance for globalisation is still rising.

Reducing was in the growth of construction output of buildings for energy where big investments in the past were used mainly due to desulphurisation. Most of water structures investments were after joining Europe Union directed to dry-cleaners. Great influence has

72 © EUROCONSTRUCT Munich, December 2006 Czech Republic also works connected with elimination of floods consequences and with sequent higher land protection. Since realisation of subsidies from EU collides with administrative problems but their need is still high, we expect increasing of proportion of own sources for their development. Big proportion (34.4 %) had in this aspect also renovations, thought they had highest proportion in years 2002 and 2003 (41 %) and since this years is their proportion stable. This means that renovations of roads and motor-ways will always be very important. In years 2004 and 2005 was higher needs of renovations connected with uncommon winter which mainly damaged road covers.

Renovations of road communication guarantee quality of the Czech infrastructure which is regarded to geographical position of the Czech Republic within EU top-priority. Till 2010 there should be built 930 km of high-ways and 1160 km of motor-ways. State fund of transport infrastructure intends use for those purposes in next year 2.1 bill. EUR from state budget and other incomes are expected from toll system. Realisation of those structures needs acceleration of land acquiring and higher understanding of some ecological initiatives.

Also air traffic is expecting big investments especially if the Prague should become air junction between West and East Europe. In immediate period will expand capacity of airport landing areas and also airport buildings. If acquiring of land will be accelerated the realisation could be in very short time.

6 Construction current repairs and construction work abroad

Proportion of construction renovations represents one quarter of construction output

Construction output used for current repairs and maintenance formed in the Czech construction industry about one quarter of total volume. This proportion only slowly increased during period 2000–2006 so the proportion of new construction output slowly decreases (with exception of critical year 2002).

2000 2001 2002 2003 2004 2005 2006 Repairs bill. EUR 2,436 2,659 2,984 3,052 3,528 3,639 3,821 Development in % 9,2 12,2 2,3 15,6 3,1 5,0 % from total c. output 24,0 23,9 26,2 22,9 25,9 25,6 25,4 % RaM from total c.o. 36,4 31,9 35,2 36,5 34,9 36,1 36,0 % new constructions 39,6 44,2 38,6 40,6 39,2 38,3 38,6 Abroad mill. EUR 198 151 143 129 178 196 274 % from total c. output 1,9 1,3 1,2 1,0 1,3 1,5 1,7

The proportion of construction work export is nearly negligible. It decreased till 2003, after this year it slowly increases. Because we expect lower volume of domestic demand then domestic construction capacity, we expect breach of negative conditions for the Czech participation abroad, mainly in neighbouring countries. The Czech construction industry can supply conditions which can be hardly competed by foreign construction companies and we hope that globalisation process will be great support for this.

APPENDIX – DEFINITIONS

Table 1 1. unemployed persons = from ILO statistics, yearly average 2. interest rate = average client rates by banking institutions short-terms (till 1 year) or medium- terms (1-4 years)

Table 2 1. Invoiced contract construction works without taxes and VAT (5 % for residential and 19 % for other constructions) for companies with more then 20 employees including estimate for smaller companies classified in section 45 of OKEČ for new construction and renovations including proportion of construction output in current repairs, maintenance, further construction works abroad and estimate of construction output of non-contracting companies (5 % of contracting companies output) and self-help dwelling constructions (20 % of contracting dwelling output). Construction works of black economy are not incalculated. 2. Volume of construction output of new constructions and renovations is taken from statistical reports of the Czech Statistical Office for construction companies with more then 20 employees. 3. Source for table 2, 3, 4a and 4b is publication of the Czech Statistical Office “Czech construction in figures” and “The Czech Republic Statistic yearbook”.

Table 3 1. Dwellings stock includes all dwellings; it means also non-permanent dwellings, rustic dwellings, pensions and colleges, free and rented dwelling for renting and sale. Number of completed dwellings includes only new permanent dwellings. 2. Dwellings in family houses have at maximum 2 storeys. 3. Housing stock in 2001 was 4369 thousands dwellings, from this 3829 thousand permanent, 169 thousands rustic, 122 thousands semi-permanent, 65 thousands not intended fo human habitation and 184 thousands free dwellings. 4. Proportion of dwellings with individual ownership was 46.1 % in 1999.

Table 4a Division of new non-residential construction output is into 5 types as follows: - education, free-time, sport and culture financed from public sources - health and social financed from public sources - public office financed from public sources - industrial, mining, quarrying and storage buildings financed from private sources - commercial buildings financed from private sources The rest of non-residential production of other building (agriculture, other non-residential, etc.) is incalculated by aliquot portion to previous 5 types. Required detailed information will be estimated after acquiring data from the Czech statistical office in next report.

Table 4b Division of total construction output of civil engineering is into 3 types as follows: - road, rail, river and air transport - communications and posts (long and short distance routes) - energy, water and sewerage structures The rest of civil engineering construction output is incalculated by aliquot portion to previous 3 types. Required detailed information will be estimated after acquiring data from the Czech statistical office in next report.

Table 5 GDP at purchaser prices of resident producers for 2005 is in accordance with system of national accounts ICEA-NACE and is divided into 6 parts: - private consumption (including small businesses) - public consumption including non-profit organisations - gross fixed capital formation - balance of stocks as % of GDP - balance of extern trade

74 © EUROCONSTRUCT Munich, December 2006 Czech Republic

Country/Pays/Land: CZECH REPUBLIC Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 10 202 10 207 10 230 10 240 10 245 10 250 10 255 Bevölkerung

Households ('000s) Ménages 4 470 4 492 4 515 4 538 4 560 4 537 4 600 Haushalte

Unemployed ('000s) Chômeurs 374 399 426 420 405 410 400 Arbeitslose

Unemployment rate (%) Taux de chômage 7.3 7.8 8.3 7.8 7.8 7.9 7.7 Arbeitslosenquote

Change of GDP Variation du PIB 3.4 4.2 6.0 5.6 5.0 4.8 4.6 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.8 0.1 2.4 2.7 3.5 3.5 3.6 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.2 3.7 3.7 3.0 3.6 3.6 3.7 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 4.1 4.4 4.6 4.8 4.9 4.9 4.8 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 5.1 5.4 5.4 5.3 5.4 5.4 5.3 Langfristiger Zinssatz

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

Country/Pays/Land: CZECH REPUBLIC Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 2 139 24.7 19.0 4.3 7.3 6.8 -2.9 3.0

Logement Renovation 717 16.7 15.3 4.8 6.7 1.2 13.7 7.0

Wohnungsbau Total 2 856 22.5 18.1 4.4 7.1 5.4 1.1 4.1

Non-residential construction New 3 339 4.6 -4.8 -8.8 2.6 5.0 7.5 5.7

Bâtiments non résidentiels Renovation 2 561 6.0 4.9 8.5 -4.0 -2.1 0.7 -3.0

übriger Hochbau Total 5 900 5.1 -1.2 -2.0 -0.3 2.0 4.8 2.3

Building New 5 478 10.1 2.6 -13.3 4.4 5.7 4.0 4.2

Bâtiment Renovation 3 278 8.0 7.1 34.7 -1.7 -1.2 2.6 0.5

Hochbau Total 8 756 9.4 4.1 0.0 2.2 3.2 3.5 2.9

Civil engineering New 4 286 8.7 32.0 11.5 7.6 4.2 4.2 12.7

Génie civil Renovation 2 247 9.2 2.3 8.1 14.5 8.9 4.2 -1.3

Tiefbau Total 6 533 8.9 19.8 10.3 10.0 5.9 4.2 7.5

TOTAL CONSTRUCTION OUTPUT 15 289 9.2 9.9 4.2 5.5 4.4 3.8 5.0

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 4.00 7.8 9.3 8.0 5.3 4.0 3.5 2.6 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 29,784 CZK

76 © EUROCONSTRUCT Munich, December 2006 Czech Republic

Country/Pays /Land: CZECH REPUBLIC Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel Baugenehmigungen Familienhäuser

Flats Collec tif Mehrfamilienhäuser

TOTAL 16.5 16.8 16.6 18.0 16.2 15.8 16.1

Housing starts 1+2 family dw ellings Logements commencés Individuel 20.8 15.4 19.7 20.5 21.5 20.0 20.0 Baubeginne Familienhäuser

Flats Collec tif 15.7 13.6 19.6 19.9 22.5 21.0 24.0 Mehrfamilienhäuser

TOTAL 36.5 29.0 39.3 40.4 44.0 41.0 44.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 13.9 16.5 17.1 15.0 15.0 13.0 14.0 Baufertigstellungen Familienhäuser

Flats Collec tif 13.2 15.8 15.8 17.7 19.0 18.0 19.0 Mehrfamilienhäuser

TOTAL 27.1 32.3 32.9 32.7 34.0 31.0 33.0 Housing stock Logements existants 4 372 4 385 4 401 4 417 4 433 4 450 4 465 Wohnungsbestand

thereof second homes dont résid. secondaires 169 180 185 190 195 200 205 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 380 386 392 395 398 400 402 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays /Land: CZECH REPUBLIC Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 506 -0.9 22.7 -25.7 -4.7 4.4 8.2 17.3 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 670 -10.4 19.3 -21.5 -5.7 3.0 4.6 2.3 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 1 081 10.7 -19.5 -0.8 4.3 3.5 12.3 8.9 Industriegebäude

Storage buildings Bâtiments de stockage Lagergebäude

Office buildings Bureaux 63 -14.4 15.6 -29.2 -9.5 1.8 19.0 4.3 Bürogebäude

Commercial buildings Commer c es 1 019 13.8 -17.2 7.6 10.6 7.9 3.7 -0.7 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles Landw irtschaftsgebäude

Miscellaneous Autres Sonstiges

Total 3 339 4.6 -4.8 -8.8 2.6 5.0 7.5 5.7 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 29,784 CZK

78 © EUROCONSTRUCT Munich, December 2006 Czech Republic

Country/Pays/Land: CZECH REPUBLIC Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées Bahnanlagen

Other transport Autres réseaux Übrige Verkehrsinfrastruktur

TOTAL 4 050 4.4 28.6 14.0 11.8 2.4 7.6 7.7

Telecommunications Télécommunications 784 -9.4 49.8 5.9 0.9 -3.9 25.1 -10.4 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 1 699 25.1 -3.4 4.3 10.0 18.6 -10.2 15.6 Energie- und Wasserversorgung

Other Autres Sonstiges

Total 6 533 8.9 19.8 10.3 10.0 5.9 4.2 7.5

1) At 2005 prices, excluding taxes. 1 euro = 29,784 CZK

Country/Pays/Land: CZECH REPUBLIC Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 47.7 4.6 2.0 2.6 3.8 3.8 4.1 3.9 Privater Verbrauch

Public consumption Consommation publique 22.7 4.1 -2.2 0.9 0.0 0.0 -1.3 -0.4 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 25.9 4.9 7.3 3.6 5.4 7.7 5.1 3.9

of w hich construction

Stocks (as % of GDP) Variations de stocks 0.0 0.5 0.8 0.0 0.0 -0.1 0.0 0.0 Vorratsveränderung

Ex por ts Exportations 71.7 7.5 21.9 11.2 10.2 10.9 11.3 10.8 Ex por te

Imports Importations 69.6 7.9 18.4 4.8 7.2 9.8 9.8 9.5 Importe

GDP PIB 98.4 3.4 4.2 6.0 5.6 5.0 4.8 4.6 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 29,784 CZK

80 © EUROCONSTRUCT Munich, December 2006 Denmark

DENMARK Copenhagen Institute for Futures Studies www.cifs.dk

Anders Bjerre e-mail: [email protected]

Troels Theill Eriksen e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

Macro economy

At 3.5 pct. real growth of Danish GDP, 2006 is a boom year, with a booming domestic economy and good performance in exports. We expect a soft landing of the boom with about 2-2.5 pct. growth p.a. in the coming years.

At the moment there is a risk of overheating, as the labour market is increasingly hampered by bottlenecks. But other factors, such as a flattening of house prices, will probably help dampen consumption and domestic demand from 2007.

Growth in 2005-06 has primarily been driven by private consumption and fixed investments. The upturn has thus mainly been based on domestic trends, with vigorous growth in private consumption. Strong trends in world economy have helped exports grow too, but imports have grown much more than exports during the boom. In the coming years, we expect a more balanced development.

In our scenario we assume that there will be no significant international downturn and that house prices might decline a bit, but not crash outright. A minor reduction in house prices might have healthy effect on the economy in general, dampening private consumption a bit.

All in all, we expect high - and moderately increasing - employment, low inflation, and comfortable surpluses on foreign trade, on the balance of payments and on public budgets.

Construction

Since the downturn of 2002, growth accelerated to 4 pct. in 2005. Growth dampens to about 2,5% in 2006, however, as construction now operates at maximum capacity.

2007 will be a year of consolidation, with little room left for growth. Things have simply gone too fast, with too little focus on quality and with productivity in decline.

From 2008 we will once again see moderate construction growth rates at about 2% p.a.

Trends in 2005 were positive in all major fields of construction outside civil engineering, and especially positive in new residential construction.

In 2006, the expansion of new residential construction has continued at a high rate and crowded out potential growth in all other fields of construction. The main reasons have been rising home prices and low interest rates in recent years. Activity in new house building activity as well as housing starts peaks in 2006, and declines a bit in 2007. The house price boom seems to have come to end with unusual high uncertainty characterising market expectations, but we expect new housing to remain high in the forecast period.

Other types of construction demand are now forecast to grow.

The record employment, not least in the service sector, is paving the way for new office construction. In general, non-residential construction suffered a strong decline in the last years, but this trend is reversing. Industrial construction grew from 2005, office construction will grow from 2006. A reform of local government limits public service construction during 2007 (as in 2006), and creates uncertainty of when renewed growth will be seen 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

82 © EUROCONSTRUCT Munich, December 2006 Denmark 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 and the allocation of resources towards new work will probably hold back residential R&M.

There has been some influx to the construction sector of migrant labour from the new EU members (as of 2004), from the neighbouring countries, Germany and Sweden, as well as from the rest of the economy. This has eased labour bottlenecks in construction somewhat, but there are still labour shortages. And bottlenecks in the supply of materials persist. However, the labour influx has probably held back potential wage explosions in the sector, a usual building-boom-experience in the past.

To sum up: Capacity limits indicate a consolidation year with very limited growth in construction activity during 2007, and some construction growth from 2008 and onwards. The growth figures are given in Table 2.

Notable changes since the last EUROCONSTRUCT report (June 2006): • During 2006 Denmark has gone from a high growth economy to a boom economy • Even higher employment than expected, in general and within construction. Total unemployment is now about 3% using ILO/EU definitions (or 4% in Danish headlines) • In spite of high oil prices and increasing rates of interest, general optimism in the economy is higher than 6 months ago. Consumer optimism is record high, and business optimism has grown, which means investments are likely to increase • The house price boom seems to have come to an end and uncertainty is high in this field. The number of homes for sale has grown, while sales have decreased significantly. The present winter low-season looks like a wait-and-see period.

2 Macro-economic Outlook

In general, the macro-economic outlook is very good. We see healthy growth in most 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 has grown vigorously in 2005-06, fuelled by strong growth in private consumption due to declining unemployment & increasing disposable incomes, supported by continued capital gains on the housing market, as well as improving consumer sentiments.

Fiscal policy with tax reliefs decided before the last general election has been stimulating growth, along with the low level 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.

Consumer optimism is high and shops expect an incredible Christmas turnover, underpinning 2006 as an overall boom-year in the Danish economy. Growth in private consumption will dampen significantly in 2007 as a kind of breathing space after the present boom. From 2008 consumption growth will return to more normal rates at about 2%.

Public consumption is forecast to grow at an average of about 1.5-2 pct. p.a. during the forecast period. There is considerable uncertainty about this area due to a reform of local government, however. In contrast to many forecasters, we have no illusion that the planned 1% cap on public spending growth should be taken for granted. Spending limits will be slackened, but we don’t expect construction to benefit in the short term. The structural change is squeezing resources and spending on new Town Halls etc. is out of the question.

The reform of local governments and public spending – services versus investments

The structure of local government is being changed strongly in the next years. The middle (regional) layer will be more or less abolished (except in relation to hospitals), and the size of the smallest units will increase considerably from 1 January 2007. At the same time, many previously public-sector institutions (e.g. some types of schools) are changed into independent units and the division of labour between central government, local government and independent institutions is changed. A further reform of the public services is planned in the coming years.

The Government claims that the on-going reform of local government will take place at virtually no cost. To reorganise an organisation with 3/4 million employees at no cost, while it continues to produce its services in a satisfactory or even improved manner, is clearly not realistic. While strong spending limits have been imposed from central Government, in fact restrictions will be eased a bit in the coming years, as political pressure builds up in different fields and public opinion gets more critical. This has happened before and will happen again.

This situation will impact public construction activity at least in the next couple of years. Many municipalities have very limited financial freedom, and hence we shall not see the local construction boom that we saw in the last fundamental reform 3 decades ago, or as we have been seen frequently in pre-election situations. There is a potential of mobilizing public opinion about money and facilities for children, old and sick people, but hardly about local “political memorials”.

In fact, what is being invested is not invested in construction projects. In the reform process, many municipalities need to spend heavily on consultants in a number of fields, from

84 © EUROCONSTRUCT Munich, December 2006 Denmark engineers in highly technical areas to HR/culture consultants to create reasonably well- functioning corporate cultures in the new units.

At the same time, many of the merging municipalities have initiated ‘soft’ projects of branding their newly defined regional unit, but building new town halls is not on the agenda. The new municipalities have to manage with the available building resources.

Gross fixed capital formation boomed in 2005-06 and is expected to grow further by 4 pct. p.a. during 2007-08. However, in line with recent years, the main focus will be investment in machinery and equipment, while construction in this field won’t grow in 2007. Due to labour shortages, investments in labour-saving machinery will accelerate.

Growth in construction investment will stay at a lower level than total fixed investments in line with long-term trends. Growth impulses come from new non-residential building and new civil engineering. In our earlier reports, we have forecast high infrastructure growth in the coming years, and our present scenario follows this line. A recent decision about further investments in rail and road infrastructure will have some effect on construction from 2007. As this new policy includes the financing of planning preparations of some larger projects, these projects may get a fast go-ahead later. The infrastructure commission may have a major influence on construction works already from 2008, as preparation and planning of some potential projects may be ready when the commission publishes its report in October 2007.

With buoyant domestic demand, imports grew strongly in 2004-2006 and continue to grow, but growth rates decline as the growth of private consumption levels off after 2006. Exports have been supported by growth in the international economy – which has been rather weak in continental Europe, but much stronger in other parts of the world, including the Nordic countries closely linked to the Danish economy. Imports have grown much more than exports during the boom with the trade balance deteriorating, though still in a comfortable surplus. In the coming years we expect a much more balanced trade development. Danish trends are highly dependent on international trends, of course.

Unemployment has been declining faster than expected. The decline is expected to continue the next 1-2 years hitting a structural ‘floor’ at 4% of the labour force. Labour market trends indicate that economic growth at 2-2.5 pct. annually 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; such policies are likely to be enacted.

Wage inflation has so far been quite moderate compared to earlier booms. Labour influx to the construction sector has held back wage growth in the sector. Historically, high wage growth during construction booms has often in practice stopped upturns in the general economy, and the increasing ability to recruit labour from other countries creates a more flexible, more resilient and less inflationary macro economy.

The main domestic uncertainty is whether labour bottleneck problems will become really serious. The number of vacancies is already high and we could see pretty tight bottlenecks from early 2007. 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. Two mechanisms could inflate labour markets: The ordinary, collective wage bargaining is obviously influenced by the present tight labour market, and the more individual, situation-dependent, ‘spontaneous’ wage increases seen in shortage situations. If these accelerate, Danish competitiveness will be hampered somewhat.

Another domestic uncertainty is related to real estate prices and particularly home prices. Increasing home prices have fuelled consumer borrowing in recent years 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

© EUROCONSTRUCT 85 Denmark Munich, December 2006 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).

Macroeconomic Key Indicators in Denmark to 2008 (Annual percentage change) 2003 2004 2005 2006 2007 2008 2009 GDP 0.7 1.9 3.1 3.5 2.3 2.3 2.0 Private consumption 1.6 3.4 3.8 4.5 1.5 2.0 2.0 Unemployment 6.1 6.4 5.7 4.6 4.3 4.0 4.0 Inflation 2.0 0.9 1.7 2.0 2.0 2.0 2.0

Source: CIFS/Euroconstruct, December 2006

Consumer price inflation is expected to stay at or below 2 pct. during the forecast period, while prices within construction grow a bit more due to shortages, both labour and materials.

Exchange rates of the Danish Krone do not cause much concern, as the policy to ‘shadow’ the euro is considered credible by financial markets.

Looking outside Europe, there seems to be a slowdown in the US economy, but with strong growth in a number of large “third-world” countries (including China, India and ASEAN, and with Japan finally rising from its deflationary trap), the global prospects for Danish exports appear good, at least if the slowdown in the US has a “soft landing”.

Our main picture of the European economy is on the rather positive side. The potential upswing in Germany will have significant positive influence on Danish export industries and trade if realised. However present industrial excess capacity is limited, though expanding. And Danish external balances are still quite robust. Hence, from a Danish point-of-view, a delay in the potential German upswing is not of any big concern at the moment.

One global risk factor is related to the huge US trade deficit and the building up of dollar reserves in certain countries. However, in this forecast we assume a “soft landing”, meaning gradual adjustments, leaving room for continued growth in the World economy.

Oil prices are already at a high level compared to previous years; we expect them to level off or decline somewhat more, at least on average. In reality, oil prices will probably have large fluctuations. Although higher oil prices did add to consumer-price inflation during most of 2005-06, CPI inflation stayed quite low. Our oil price hypothesis indicates a slight downward effect on inflation in the next years. As Denmark is a (small) net exporter of energy, high oil price have a positive effect on both the trade balance and government budgets. Consumers’ pockets are of cause hit by high prices, but all in all, the Danish macro economy has a built- in insurance element against ups and downs in oil prices with reasonable manoeuvrability.

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3 Housing Market

Four years in a row, new residential construction has grown by 15-20%. In 2006, the rapid expansion continued, crowding out potential demand growth in other fields of construction.

This growth has been fuelled by rising home prices, low levels of interest rates and growing employment, with 2006 a showing record number of housing starts. Activity in new residential construction declines a bit in 2007, but it remains very high during the forecast period.

Residential starts will exceed 30.000 in 2006 for the first time since 1986. Starts will continue at a rather favourable level just below 30.000 in the rest of our forecast horizon.

The uncertainties relating to the reform of local government and to its political aftermath still makes it quite hard in general to estimate the future of • Subsidized rental residential dwellings. This type is administered by housing associations, but with subsidies from municipalities • Special dwellings for elderly/disabled people, students etc. Owned & controlled by municipalities • The development of new building sites for owner occupied (single) family houses in the Greater Copenhagen Area. The area planning of municipalities has limited the supply of new sites severely, resulting in very high prices. A handful of the most populous municipalities remain unchanged in the reform, including the two central municipalities in Copenhagen. Here, the pipelines are full of almost all types of new housing projects, including somewhat cheap flats for rent. • Secondary homes, as recently enacted, liberalised zoning laws permitting the construction of more secondary homes in attractive locations along the coasts will now be administered by the new entities.

Price statistics are upwards biased when sellers market comes to an end

This can be explained partly by delays in statistics and partly by a phenomenon we can call quality selection while the market is changing from growth towards stagnation or decline.

The latter reflects that price statistics represent only the dwellings sold, and not the many unsold dwellings. One year ago in the sellers market, all dwellings were sold quite fast; hence all were represented in the statistics. In the present stagnating market, asking prices have been a bit on the high side, and many less attractive dwellings have been left unsold. More attractive dwellings, on the other hand, have more often been sold (although some with a discount) and hence have entered the statistics.

In other words, price statistics are temporarily biased in an upward direction compared to the reality of the total market of both sold and unsold dwellings. This hypothesis is supported by the fact that many real estate agents are unwilling to commission low-standard dwellings, as they have enough on their shelves already. The high number of unsold dwellings is a signal of disequilibrium, which is not contained in the price statistics used by many analysts.

New owner-occupied single-family houses etc.

Starts of single family houses has risen from a nadir of about 5.000 in 1993 to reach 18.000 in 2006. Single family houses is the largest market, dominating the Danish way of living, except in the largest city centres. The market has benefited from the price boom everywhere except in a few remote and less populated regions.

Home prices have risen in the most populous cities for a decade.

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, home price trends are softening. In spite of firm signs that the market has now changed, there are still minor price rises in the latest statistics, but these could be misleading (see box above on Price statistics).

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

At the present level of home prices (and potentially at lower price levels like those of 1-2 years ago), new construction is still very profitable in major cities. In such attractive areas, it has been difficult to get attractive building sites for single-family homes, however.

Many local authorities have been reluctant to develop new areas, at least until a year ago or so, 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.

As local municipalities in practice possess a monopoly of developing new sites for housing on virgin land, this supply failure has added extra upward pressure on home prices in greater Copenhagen and a few other larger cities. The normal equilibrating mechanism relating second hand home prices and the cost of new construction has been out of work.

The new municipalities – which have different roles and incentives than previously – may change these policies. Otherwise, there is a possibility of State intervention (though unlikely).

New flats

The private rental market: Dwellings built by private companies - including pension funds – has been a low-activity field in recent years. In some very attractive locations, typically on harbour fronts with sea view, private actors have seen the potential in a niche rental market. A recent change in the tax/subsidy regime made this type of construction more attractive. However, as prices of owner-occupied flats have exploded in larger cities, it has been much more profitable for developers to build flats for sale, not least on attractive premises. So, In spite of the stated Government intentions and the improved incentives in the private residential rental market, the effect remains to be seen.

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. However the present Government abolished certain subsidies to the latter, which in practice abolished this type of ownership for new construction.

The construction of general subsidised housing by non-profit associations has been on a declining trend, among other reasons because local authorities are much less interested in this type of construction than previously. Incentives for local authorities have been changed frequently by the Central Government, however, for example by moving subsidies from one year to the next, in an attempt to increase activity temporarily.

In the 2007 Budget, a new approach was invented. Money from the Housing Associations Renovation Fund (Landsbyggefonden) will be used to subsidize the construction of a larger number of new dwellings by Housing Associations instead. This technique involves no direct cost to the Public budget, but it is a bit like feeding the dog with its own tail. 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 previous generations.

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Since the number of aged people will increase strongly in the coming decade, construction needs are considerable, affecting both private developers and public 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, at least in the sense that elderly wealthy people move to a flat where they can stay on even after they become less physically able.

House price trends in Denmark

House prices have risen strongly 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.

Now, increasing rates of interest are putting 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 say that the issue is increasingly taken seriously 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...

Average flat prices per sq.m. in CPH city,

1995Q1-2006Q3 (index 2000=100)

300

250

200

150 100

95Q1 96Q1 97Q1 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 06Q3

Repairs and modernisation – residential buildings

In recent years, R&M 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 to a large extent is fashion driven.

There was some growth in 2005 due to the effects of a fairly serious storm 8 January 2005, but in general, we expect trends in this field to be fairly flat in the forecast period.

R&M needs are increasing, but with the boom in new construction, R&M growth is hampered by lack of suitably skilled labour and to some extent lack of materials. As R&M can be unpredictable, resources are often more profitably used in new construction, which is often both less labour intensive and less skill intensive.

There has been some influx to the construction sector of migrant labour from the new EU members (as of 2004), from the neighbouring countries, as well as from the rest of the economy. This has eased labour bottlenecks in construction somewhat, but not completely. And to some extent, the use of relatively cheap, legal immigrant workers may only replace work, which was already being done on a DIY or “black economy”, tax-free basis.

For a number of reasons, we expect R&M activity by immigrant workers to increase somewhat in the medium term. In the forecast tables, we may well have underestimated the impact of this effect, 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.

90 © EUROCONSTRUCT Munich, December 2006 Denmark

4 Non-residential Market

Non-residential demand now knocks harder on the construction sectors door.

Since 2001, non-residential construction has suffered a decline. This trend is reversing. Industrial construction grew from 2005, office construction will grow from 2006. A reform of local government limits public service construction during 2007, as in 2006, and creates uncertainty of when renewed growth will be seen in this field.

The record levels of employment is paving the way for new office construction. In the aftermath of the dot.com-crash weakening demand for office space – particularly from B-2-B- services - cooled expectations, and building of new offices was declining for years.

In line with the general economic upswing (or rather, with a usual time lag), there is an upturn in new office construction. After some years of growing surplus capacity in the Copenhagen region, capacity utilisation in new office space is now growing fast, and we expect considerable growth in the forecast period.

The large-scale developing district, "Ørestad", is very close to both the Copenhagen City centre and the Copenhagen airport. The district, served by the new subway has become a tremendous success, considering the initial critique from professionals/architects etc. 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 many cities, including Copenhagen, former harbour areas are being redeveloped into new city-areas, some of which are favoured locations for new corporate head quarters.

We see old factory sites close to city-centres being redeveloped too, especially if they have a story to tell. Probably the best and largest ‘factory-park’ in the coming years is the large Carlsberg site close to Copenhagen City-centre. An overall master plan was published recently with a time-schedule for a number of architectural competitions etc.

In the medieval centre of Copenhagen, we have seen a weaker development regarding new offices. 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: We expect fiercer competition within retailing in the coming years. Not only competition for customers, but for labour too due to the tight labour market. The Danish shopping sector is characterised by many small units, and - apart from supermarkets/food- sector, by diversified ownership. The share of employment is fairly high too.

In spite of the trend of the last decades with one-stop-shopping centres gaining market shares, we might come to a turning point. Many customers seem increasingly to favour the “authenticity” and high-experience shopping of city centres, and we may see more competition on quality with intensified R&M-activity in old city-centre shopping areas, as well as intensified price-competition, rationalisation and consolidation in other fields.

At the same time, regulatory change is on the way. The ban on shopping centres exceeding a certain size 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.

Now, new planning regulations on the size and location of new retail outlets are discussed in Parliament. The idea is to balance the political priority of city centres and the need for new,

Retailers of certain voluminous types of goods like cars and furniture will have much higher freedom to build mega-outlets outside city centres. Quite many ‘medium sized’ outlets (i.e. bigger than allowed today), will be permitted due to the revised legislation in the near future. Most of them located in or close to the city centres.

When allowed, they will be built quite fast. Many existing outlets will probably be expanded too, if physical possible. Many retail chains seem to have a large desire to open new outlets, and at least some of the largest retail players have many plans for new outlets ready, just waiting for the regulatory climate to change.

The revival of the size and concentration debate in retail is related to the reform of the municipalities too, as the new municipalities become the practical planning authority.

At least all larger cities may allow new and somewhat larger outlets, with the city centres as priority locations. In the present regulatory system, the - disappearing - regional planning units could say No if local communities wanted new larger outlets, and they could avoid sub- optimisation from the competition by neighbouring communities who all wanted everything.

A new municipality will resent if the neighbouring municipality may build new, large shops, if it is not allowed to itself. This is a major reason why the final rules are not complete ready. In the present proposal smaller cities, with less freedom than the larger, are not satisfied.

We expect that regional competition between cities could result in a kind of ‘ketchup-effect’, with a great number of projects given go-ahead simultaneously. From some time next year (2007), we expect activity in new commercial construction to increase significantly.

Industrial buildings: Industrial construction has been declining for some years, but 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: This boomed until 2001, but has declined strongly since. 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. Poland and Russia, where land and labour is cheaper and environmental regulations are often 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.

92 © EUROCONSTRUCT Munich, December 2006 Denmark

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 contrary to earlier expectations only very few 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 primary/secondary school buildings in the coming years. In the next year or so, the situation is uncertain, as construction plans will await various compromises in the new municipalities.

We expect a significant rise in the construction of university-level facilities in the next years, in line with official policies to increase education at all levels. There is of cause the possibility too, that a larger share of Danes will do (part of) their higher education in other countries. The financial incentives to students who wish to do part of their studies outside Denmark will be improved considerably. Hence, high-level educational centres will have much more international competition than before, and the outcome is uncertain.

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 our earlier reports we have stipulated high infrastructure growth in the coming years, and our present scenario follows this line.

The appointment of an Infrastructure Commission and Danish National Strategy

The Government has ambitious goals. The overall agenda is to reform the Danish welfare state in a manner that Denmark will become the most competitive economy in the world.

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.

Issues related to physical infrastructure have so far very often only been politically discussed as a number of separate issues, not in a perspective where physical infrastructure is seen as a general instrument for our society coping with future challenges. But this is exactly the task for a new infrastructure commission, just appointed.

Does this herald an era with renewed focus on investment in physical infrastructure? Or is it just a way to postpone decisions? In fact, some of the most pressing needs related to physical infrastructure are in the field of maintenance, much less interesting to politicians than building visible new “monuments”. But at least there is a chance that the report of this infrastructure commission will change perspectives.

Transport infrastructure

The recommendations of the infrastructure commission (see box above) will – through the political machinery - probably determine not only which infrastructure fields have priority, but may also be decisive for a decision to spend increasing resources on infrastructure, not least because a number of projects have been discussed and postponed more than once.

There are often local interests against new transport infrastructure projects, the NIMBY principle (Not In My Back Yard). When two different alternatives are suggested, a media battle starts at once between various special interest groups, and if elections are close, politicians most often end up in no decisions.

From a construction viewpoint, the time now seems perfect for many new infrastructure project decisions. Due to the reform of local government, there is an unusual long period between local elections, and the government’s situation in Parliament seems safe too.

Due to labour market bottlenecks some infrastructure projects will have to wait anyway. But since many new civil engineering projects have low labour intensity compared to building projects and not least R&M-work; the labour bottleneck dilemma can be of less importance and some projects will be carried through. Many public and semi-public infrastructure bodies have a number of well-known plans in the drawer (and presumably a longer “wish list”), which only lacks final adjustments and approval.

A recent political decision, the ‘road-and-rail-package’ has included the funding necessary for final investigations (VVM) for a number of long discussed new projects, with the investigations starting now. This implies a potential fast go-ahead signal to a number of new infrastructure projects, when decided.

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The ‘road-and-rail-package’ package includes a decision to totally renovate and upgrade the backbone of the national rail system, including a new up-to-date security system. This work will take years, until 2014, but activity is increasing already in this field.

A number of roads (of national importance) will be handed over from the disappearing regional councils to the State. This includes a number of regional roads and motorways under construction. Financial means to accelerate work on these projects is included in the ‘road-and-rail-package’.

Investments in new roads and rail infrastructure will increase in 2007, due to these positive impulses, even though we might se a minor negative impulse from the local municipalities. They will be responsible for the rest of today’s regional roads from 2007, and it is indeed not clear what happens with the overall activity level in the last year of the regions and old municipalities (2006) and in the first year of the new communities (2007).

In 2008-09 we expect growth in new transport infrastructure; this would be a return to a more normal level from today’s quite low level. The only really large infrastructure project under construction at the moment is the 3rd phase of the Copenhagen metro, to the airport, but civil engineering activity is (almost) completed.

The Fehmarn Bridge to Germany remains a dark horse. The cost will be in the range of 3-5 billion Euro depending on the solution. Two important reasons that time isn’t ready yet are, that Germany hesitates (even though Germany in principle has said yes) and that a bridge without a rail link is politically less expedient – but appears to be more attractive financially.

Also, there is increasing interest in new road infrastructure for Copenhagen using large-scale tunnelling, but as yet nothing has been decided.

The Infrastructure commission is scheduled to give its recommendations in October 2007, and this can have affect on activity as from 2008. Just to mention a few guesses of what recommendations might include: • To push projects forward. • To consider traffic and transport in broader perspective focussing on inter-modality between different modes of transport, including park-and-ride facilities.

Two examples from Copenhagen could be: • Construct the Copenhagen metro City Ring sooner and faster than present plans indicate. • Build the – long discussed - harbour tunnel in Copenhagen soon as part of a connection between Northern suburbs in Copenhagen and the Airport in Southeast.

One example from outside Copenhagen could be • A recommendation concerning the long discussed 3rd connection across the ‘strait’ Limfjorden at Aalborg-Nørresundby (3rd largest Danish municipality). If choosing an eastern connection, the project will add inter-modality between air-traffic and car/highway-traffic, and shorten the distance to the airport for a majority of potential airline-customers.

These are examples only, and among those with a relatively long preparation time. There are huge demands in a broad number of fields, and a number of projects, which may or may not get a go-ahead in time to influence activity in 2007-09. In the forecast tables, we have indicated this by some growth in 2007 and large growth in 2008-09.

Non-Transport infrastructure

Energy Investment in the energy field will grow. The windmill strategy implies large investments in the coming years, with very strong growth in 2007-09 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 probably increase a bit. One of the two dominant electricity & energy companies will intensify work to put all of its airborne cables into the ground in the next few years. When doing this all the way to the customers’ homes, they can add fibre-optical cables at the same time “almost for free”. This will cover about 1/3 of the population, and will change the competition in digital transmission too.

Investment in district heating falls back a bit.

Telecommunication Besides energy-companies (se above), a number of other companies are investing in their own large-capacity fibre networks.

There is also considerable investment in airborne broadband. Investments are mostly in electronic equipment (transmitters/receivers), but antennas are necessary.

The supply side of digital transmission is hence becoming crowded, not least in densely populated areas, as suppliers scramble for market shares. Some plans may be reversed.

Environmental activity 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.

R&M civil engineering 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.

96 © EUROCONSTRUCT Munich, December 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 is 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, there are some issues: Where does the construction industry begin & end - and where do 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 (e.g. software development). • 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/divisions in companies in other fields of commerce are considered as belonging to the construction sector, and their activity is part of construction output. A number of such divisions in the public sector are on their way to 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 National Accounts). 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. 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 rebuilt/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 modern low-build compact architecture(‘tæt lav byggeri’), 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 new “official” all-season 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 second homes. 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 many are equipped as a full second home. About 10% of what are legally seen as summer residences function as a full-year dwelling in practice.

Table 4a • NOTE that the identical growth rates in rows 1-2 and in rows 4-6 represent aggregate figures for the grouping of these rows • Buildings for Education, Health, and Social services: Due to incomplete data and to difficulties in drawing borders, we use data split into two categories; Health and all other ‘soft’ public services (for non-housing purposes). Hence education (schools, universities) in table 4a includes social services like kindergartens etc. Construction for health purposes is in the group Hospitals. • Note that buildings in the ‘hard’ part of the ‘public/semipublic/semiprivate’ supply-sector, that is utilities, public transport etc. belongs to the category ‘Miscellaneous’. • Industrial Building: Factories or alike. • Office, Commercial buildings and Storage Buildings: In Danish official statistics these types are grouped together. We have made a rough estimate of the respective categories in Table 4a. • 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 full details. We have made rough estimates of the share of each group.

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

98 © EUROCONSTRUCT Munich, December 2006 Denmark

Country/Pays/Land: DENMARK Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 5 384 5 398 5 411 5 427 5 440 5 455 5 470 Bevölkerung

Households ('000s) Ménages 2 467 2 481 2 499 2 517 2 530 2 545 2 560 Haushalte

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

Unemployment rate (%) 1) Taux de chômage 6.1 6.4 5.7 4.6 4.3 4.0 4.0 Arbeitslosenquote

Change of GDP Variation du PIB 0.7 1.9 3.0 3.5 2.3 2.3 2.0 Veränderung des BIP (% change in real terms)

Consumer prices (% change, EU/HICP-def) Prix à la consommation 2.0 0.9 1.7 2.0 2.0 2.0 2.0 Verbraucherpreise

Construction prices (% change) 2) Prix de la construction 2.6 2.0 2.3 3.5 3.0 2.0 2.0 Baupreise

Short term interest rate 3) Taux d' intérêt à court terme 2.4 2.1 2.2 3.1 3.5 3.5 3.5 Kurzfristiger Zinssatz

Long term interest rate 4) Taux d' intérêt à long terme 4.3 4.3 3.4 3.8 3.8 3.8 3.8 Langfristiger Zinssatz

1) Danish "headline" definition. Figures are about 1% higher than the international comparable ILO/EU-definition 2) Refers to new construction only 3) 3-month interbank rate (or equivalent). Danish DKK-denomiated short term rate 'shadow s' euro-rates 4) 10-year government bonds (or equivalent). DKK-denominated long term rates almost equals euro-rates

Country/Pays/Land: DENMARK Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 4 448 17.1 17.1 14.3 15.0 -5.0 0.0 0.0

Logement Renovation 7 665 2.3 3.5 5.2 0.0 0.0 0.0 0.0

Wohnungsbau Total 12 113 6.6 7.9 8.4 5.5 -2.0 0.0 0.0

Non-residential construction New 3 625 -7.7 -0.1 1.4 -2.5 3.3 3.9 4.0

Bâtiments non résidentiels Renovation 2 933 0.7 0.8 2.8 0.0 1.0 1.0 1.0

übriger Hochbau Total 6 558 -4.2 0.3 2.0 -1.4 2.3 2.6 2.7

Building New 8 073 2.8 8.2 8.1 7.1 -1.6 1.7 1.7

Bâtiment Renovation 10 598 1.9 2.7 4.5 0.0 0.3 0.3 0.3

Hochbau Total 18 671 2.2 5.0 6.1 3.1 -0.6 0.9 0.9

Civil engineering New 3 217 -3.7 -5.3 -7.0 0.0 5.0 10.0 10.0

Génie civil Renovation 2 879 -2.2 3.7 4.8 0.0 0.0 0.0 0.0

Tiefbau Total 6 096 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6

TOTAL CONSTRUCTION OUTPUT 24 767 0.7 3.2 4.0 2.3 0.2 2.0 2.1

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 1.65 -5.0 5.0 3.0 5.0 0.0 4.0 4.0 Inländischer Zementverbrauch

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

100 © EUROCONSTRUCT Munich, December 2006 Denmark

Country/Pays/Land: DENMARK Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 15.5 17.0 18.0 Baugenehmigungen Familienhäuser

Flats Collec tif 13.0 13.5 14.5 Mehrfamilienhäuser

TOTAL 28.5 30.5 32.5

Housing starts 1+2 family dw ellings Logements commencés Individuel 15.0 16.0 16.5 18.0 17.0 17.0 17.0 Baubeginne Familienhäuser

Flats Collec tif 12.5 13.0 12.0 13.0 12.0 12.0 12.0 Mehrfamilienhäuser

TOTAL 27.5 29.0 28.5 31.0 29.0 29.0 29.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 14.0 15.0 15.5 17.0 17.5 17.5 17.5 Baufertigstellungen Familienhäuser

Flats Collec tif 10.0 12.0 11.5 13.0 13.0 13.0 13.0 Mehrfamilienhäuser

TOTAL 24.0 27.0 27.0 30.0 30.5 30.5 30.5 Housing stock 1) Logements existants 2 792 2 814 2 844 2 865 2 885 2 905 2 925 Wohnungsbestand

thereof second homes dont résid. secondaires 220 224 226 230 235 240 245 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 138 145 145 145 150 150 150 davon leerstehend

Home ow nership rate 2) Taux de propriétaires occupants 52.8 53.0 53.0 53.0 53.0 53.0 53.0 Wohnungseigentumsquote

Historical data are based on the Danish Building Database with 'mark-up' estimates due to data delays. Data include summer residences 1) Total stock is 'gross' incl. summer residences. Series in vacancies/stock revised in 2006. Stock data differ from Statistics Denmark's 'strange' new definition. See Appendix/Text for further details 2) Share of households living in their ow ner-occupied house/flat. Cf. Appendix to this country report © EUROCONSTRUCT 101 Denmark Munich, December 2006

Country/Pays/Land: DENMARK Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education & various public services exclusive of health 2) 802 0.1 -0.2 9.8 -10.0 0.0 5.0 5.0 Bâtiments de l'éducation et de la recherche Gebäude des Bildungsw esens

Buildings for health 2) Bâtiments de santé 200 0.1 -0.2 9.8 -10.0 0.0 5.0 5.0 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 458 -22.1 -2.1 8.1 10.0 10.0 5.0 5.0 Industriegebäude

Storage buildings 2) Bâtiments de stockage 148 -10.0 -0.9 -4.8 10.0 5.0 5.0 5.0 Lagergebäude

Office buildings 2) Bureaux 495 -10.0 -0.9 -4.8 10.0 5.0 5.0 5.0 Bürogebäude

Commercial buildings 2) Commer c es 346 -10.0 -0.9 -4.8 10.0 5.0 5.0 5.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 394 -7.1 -12.6 -9.4 -5.0 0.0 0.0 0.0 Landw irtschaftsgebäude

Miscellaneous Autres 781 -3.4 11.4 2.4 -15.0 2.0 2.0 2.0 Sonstiges

Total 3 625 -7.7 -0.1 1.4 -2.5 3.3 3.9 4.0 Insgesamt

Historical data for groupings are estimated/based on National Accounts, prices are exclusive of VAT etc. 1) At 2005 prices, excluding taxes. 1 euro = 7,4519 DKK 2) Note that the identical grow th rates in row 1-2 and 4-6 represent aggregate figures for the groupings of the respective row s and note that the 2005-distribution w ithin these aggregate groups are rough estimates

102 © EUROCONSTRUCT Munich, December 2006 Denmark

Country/Pays/Land: DENMARK Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 462 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 363 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6 Bahnanlagen

Other transport Autres réseaux 181 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6 Übrige Verkehrsinfrastruktur

TOTAL 2 007 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6

Telecommunications Télécommunications 271 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 3 424 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6 Energie- und Wasserversorgung

Other Autres 395 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6 Sonstiges

Total 6 096 -3.1 -1.5 -1.8 0.0 2.6 5.4 5.6

Note that the identical grow th rates in the row s represent the aggregate figures for all the row s together, that is the total, and note that the 2005-distribution betw een the categories are rough estimates. See Text/Appendix 1) At 2005 prices, excluding taxes. 1 euro = 7,4519 DKK

Country/Pays/Land: DENMARK Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 101.2 1.6 3.4 4.1 4.5 1.5 2.0 2.0 Privater Verbrauch

Public consumption Consommation publique 53.9 0.2 1.5 1.3 1.0 2.0 2.0 1.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 43.5 2.0 4.5 9.1 8.0 4.0 3.0 3.0

of w hich construction 2) 20.9 2.8 4.3 6.1 3.5 0.0 3.0 3.0

Stocks (as % of GDP) Variations de stocks 0.2 0.1 0.3 0.1 0.0 0.0 0.0 -0.1 Vorratsveränderung

Ex por ts Exportations 101.1 -1.2 2.7 8.5 8.0 4.0 4.0 4.0 Ex por te

Imports Importations 91.4 -1.7 6.4 11.9 10.0 4.0 4.0 4.0 Importe

GDP PIB 208.5 0.7 1.9 3.0 3.5 2.3 2.3 2.0 BIP

Standard National Accounts, gross figures. Grow th rates are based on chain indices 1) At 2005 prices. 1 euro = 7,4519 DKK 2) The level of construction in capital formation is here in market prices inclusive of VAT (Tab 2 and 4a/b are ex. VAT)

104 © EUROCONSTRUCT Munich, December 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 Munich, December 2006

1 Summary

The Finnish economy is growing strongly at nearly 5 percent in 2006. In 2007 growth is expected to slow to under 3 percent and to 2 percent in 2009. Presently the country's economy is growing at a clearly faster rate than Europe on average.

Economic development has clearly improved in Finland this year. Until the end of summer forecasts predicted around 3.5 percent growth, but the latest forecasts are higher – even over 5 percent. This is made possible by stronger exports, favourable development of private consumption thanks to improved employment, tax cuts and pay settlements, and continued high level of investment. Consumers, industry and building contractors still remain highly confident about the future.

The positive development in Finland could be threatened by an unexpectedly high rise in interest rates, continued rise of oil and raw material prices, and a major unforeseen slowdown of European economic development after 2006. The trends and impacts of international political tensions are also a threat.

In 2006 the total construction volume is increasing at a strong rate of about 4 percent – only slightly less than the year before. New residential construction continues to develop favourably with nearly 10 percent growth. New non-residential construction is growing at about 6 percent. The trend in renovation remains stable: the rate of increase in housing renovation is 5 percent and in other buildings over 2 percent. Civil engineering, on the other hand, is declining at about 2 percent as, for instance, high cost increases reduce the output that can be produced with granted allocations.

In 2007 the total construction volume will continue to increase but clearly less than the previous year – only a good 1 percent. New residential construction will decline while new non-residential construction increases around 4 percent. Renovation is anticipated to increase further, but at a somewhat slower rate than before. Civil engineering will face a slight downward trend.

In the last years of the forecast period, 2008 and 2009, the total construction volume is expected to decrease slightly. Both new residential and non-residential construction will decline. Civil engineering is also expected to contract whereas renovation of housing should continue to increase.

CONSTRUCTION OUTPUT BY SECTORS IN FINLAND index 2000=100 140 Renovation and modernisation

Residential construction 120

Total construction

100

Civil engineering Non residential construction 80

60 2000 2002 2004 2006 2008 Sources: Statistics Finland and VTT VTT, Finland 11/2006

106 © EUROCONSTRUCT Munich, December 2006 Finland

2 Macro-economic Outlook

Record growth in 2006

The global economy has grown at about 4.5 percent in 2006 – as much as in 2005. The U.S. GDP is anticipated to grow about 3.5 percent this year which is more than in 2005. Asian growth has remained strong: China's figure is around 10 percent and Japan has reached about 3 percent. However, the global economy is predicted to slow down some in coming years.

European economic development is also improving. Economic growth in the euro area clearly exceeds 2 percent. As the biggest euro-area country, Germany is largely responsible for that. That country is growing clearly faster than in 2005. Yet, the growth peak in Europe is likely to be short-lived. Forecasts indicate that euro-area growth will revert to around 2 percent and German growth closer to 1 percent in coming years. The steep rise of Germany's Ifo Business Climate Index levelled off already in the early months of 2006 and business expectations turned down.

The Finnish economy has improved markedly in 2006. Until the end of summer forecasts predicted about 3.5 percent growth, but the latest ones anticipate growth that may exceed 5 percent. This is made possible by stronger exports, increase in private consumption due to improved employment, tax cuts and pay settlements, and continued high level of investment. The strongest growth in private consumption is probably behind, but moderate growth of 3 percent is expected also in future.

The 2005 GDP grew 2.9 percent according to the revised method of calculation. The paper industry's labour disputes in the spring of 2005 weakened growth figures noticeably which is also reflected in the large 2006 growth based on the low reference figures. In coming years growth is expected to decelerate to around 2 percent.

Threats to positive development in Finland could be an unexpectedly high interest rate hike, a continued increase of oil and raw material prices, and bigger than anticipated slowdown in European economic development. Trends in international political tensions and their impacts are also a concern.

Industry's confidence in the future remains high; it is even improving. In the first half of 2006 output increased nearly 10 percent (partly due to the mentioned labour disputes in the paper industry in 2005). Output is expected to remain high also in the future.

The foreign trade volume increased clearly more than forecast in 2005: the volume of exports increased a good 7 percent and that of imports over 12 percent. In 2006 export volume is expected to grow more than 10 percent and imports a little less. Growth of 5 percent in foreign trade is forecast for the rest of the period.

The Finnish consumer confidence indicator dipped in spring 2006 but has returned to the previous level. Consumers are still confident about the Finnish economy and their own finances.

New housing loans have been continuously taken out in large numbers – more than a year earlier – although the monthly rate of increase is down. Interest on new loans has increased by about 1 percentage point. Interest rates continue to rise since, for instance, the 12-month Euribor has risen about 1.5 percentage points. The number of those intending to buy a dwelling remains high.

Future consumer confidence will be affected by interest rate developments, the frequency of co-determination negotiations and number of employees dismissed by companies, taxation

© EUROCONSTRUCT 107 Finland Munich, December 2006 policy, and general economic 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. The forecast is based on expected positive development of real incomes as a result of tax cuts, wage and salary development, low inflation, and brisk overall economic growth. In 2007 the growth in private consumption is anticipated to slow down, wages and salaries are not likely to increase early on, there will be hardly any tax cuts, and interest rate are rising. By the end of the forecast period growth in private consumption is believed to decline to about 2.5 percent.

Total investment increased 3.3 percent in 2005. Construction investment increased about 5 percent. Economic forecasters have raised their predictions for 2006 to about 5 percent. In 2007 investment growth is expected to drop to under 4 percent, and in subsequent years to almost zero. The Finnish investment rate (ratio of investment to GDP) is about 20 percent. Before the recession of the 1990s it stood at 25–30 percent.

In 2005 inflation was about 1 percent; in 2006 its stands at close to 1.5 percent. Euro-area inflation has reached 2.5 percent as the ECB has tried to check it by raising its discount rate five times by a quarter of a percentage point – most recently at the beginning of October (to 3.25 percent). The hike is unlikely to be the last since, for instance, the 12-month Euribor has risen more than 1.5 percentage points from its lowest level.

In 2006 the unemployment rate will drop below 8 percent. Even industry is hiring some employees instead of firing them while the service sector has generated lots of new jobs. Unemployment is predicted to decrease further. Shortage of skilled labour is constraining production in many sectors. Especially in construction the manpower shortage has become worse.

Macroeconomic Key Indicators in Finland to 2009 (Annual percentage change) 2003 2004 2005 2006 2007 2008 2009 GDP 1.8 3.5 2.9 4.5 2.8 2.5 2.0 Private Consumption 4.8 3.2 3.8 3.6 2.8 2.7 2.5 Unemployment rate 9.0 8.8 8.4 7.8 7.5 7.2 7.0 Inflation 0.9 0.2 0.9 1.5 1.6 1.6 1.7

Source: EUROCONSTRUCT, 2006

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

20 10 0

0 -20 EU -10 EU -40

-60 -20 -80

-30 -100

-40 -120 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 11/2006 Sources: Statistics Finland and EU Comission VTT, Finland 11/2006 Sources: EK and EU Comission

108 © EUROCONSTRUCT Munich, December 2006 Finland

3 Construction Sector

Continued growth in construction

In 2006 construction is growing strongly for the third consecutive year. It will reach a good 4 percent – nearly the 2005 level. New residential construction is the sub-sector that is growing the most presently; it exceeds the growth in new non-residential construction by a few percentage points. This is the fourth year of strong growth in residential construction. New non-residential construction was able to post growth only last year, but the rate was very high. Total new construction starts are expected to reach a good 43 million m3 in 2006 or about the same volume as in 2005.

In new non-residential construction, growth in industrial and commercial buildings is largest by numbers; growth is occurring also in office buildings, buildings for health and agricultural buildings as well as in the 'other buildings' group. Storage buildings are faring worse after two years of record growth, as are educational buildings.

Government allocations have allowed launching new civil engineering projects, but, for instance, due to higher costs the volume of civil engineering works will decrease this year. Renovation of buildings will continue to grow; briskly on the residential side.

In 2007 construction will still increase about 1.5 percent, but a slight downward trend occurs towards the end of the forecast period. The downturn is expected to start earlier in new residential construction but to be more gentle than in new non-residential construction. Quite strong decline is forecast for commercial buildings from the present fairly high level. Quite weak development is also anticipated for industrial, buildings for health and agricultural buildings. Offices, warehouses and assembly buildings for cultural and sports purposes under 'miscellaneous' are expected to fare better. Building renovation is likely to continue to grow in the forecast period while civil engineering volumes should remain about the same.

The turnover index of construction companies confirms today's brisk construction activity. In autumn 2006, the index for building construction is about 10 percent higher than a year earlier.

The building contractors' confidence index has stayed high during 2006 – above the long- term average. The trend towards the year-end appears slightly downward. Construction companies report that order bookings have weakened slightly, but additional employees are being hired.

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. The shortage of skilled labour has increased.

According to the construction cost index, costs of construction are increasing at an annual rate of about 4 percent in autumn 2006, clearly exceeding overall inflation. The prices of material inputs have increased more than the price of labour. The civil-engineering cost index has risen more than the building-construction cost index, about 6 percent in a year, due to the price of oil, etc. The building-construction tender price index for the metropolitan area has risen less than the construction cost index. In residential construction tender prices have risen more than in non-residential construction.

NEW BUILDING STARTS IN FINLAND GROWTH OF GDP AND CONSTRUCTION OUTPUT IN Mill. m3 50 FINLAND 1999–2009 Permits 77 GDP CONSTRUCTION 40 5,1 Starts 4,8 4,5 30 4,1 3,4 3,5 3,3 2,9 2,8 2,5 2,2 20 1,8 2 1,4 1,2 1 0,8 10

1999 2000 2001 2002 2003 2004 2005 2006* 2007* 2008* 2009* -0,6 0 *forecast -1 1992 1994 1996 1998 2000 2002 2004 2006 2008 -1,4 Sources: Statistics Finland, and VTT (forecast) Sources: Statistics Finland and VTT VTT, Finland 11/2006 VTT, Finland 11/2006

CONSTRUCTION OUTPUT IN FINLAND CIVIL ENGINEERING IN FINLAND TOTAL EURO 22,2 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 11/2006 VTT, Finland 11/2006

4 Residential Market

Continued brisk growth in new residential construction

The volume of residential construction is growing for the fourth consecutive year – this year it will increase about 9 percent. In 2007–2009 the volume is expected to drop a couple of percent per year.

There will be about 34,500 new residential starts in 2006. That means about 6.6 dwellings per 1,000 occupants which is a lot in international comparison. In 2007 starts are expected to decrease to about 33,000 units. Late in the period, in 2009, starts are believed to stand at about 31,000. The reduction will occur mainly in flats and row houses, the share of one- and two-family houses will increase, and their starts will decrease less.

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 loss of housing stock and a growing housing reserve. Present production exceeds that long-term trend.

The demand outlook remains moderately favourable. Favourable interest rates, the ease of getting a loan and long repayment periods, consumers' confidence in their own finances, higher earned incomes, tax cuts, expected GDP growth, and continued internal migration have maintained growth in new residential construction. Higher interest rates together with high prices will, however, lower demand in future. 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 to improve their standard of living despite the longer distance to work.

In 2003 the share of one- and two-family houses equalled that of flats in new residential starts. That trend continues: 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-

110 © EUROCONSTRUCT Munich, December 2006 Finland family house production. Row houses have not regained their popularity after the 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 people 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.

In 2006 state-subsidised production has fallen to a third from the earlier, to 4,000 units annually. The dwellings are built primarily in blocks of flats and are largely rental units. The impact of subsidisation has weakened relatively speaking due to low interest rates. An increase in subsidised production in the near future appears unlikely.

A lot of new housing loans have been taken also in 2006 although at a bit slower rate. In early 2006 the housing loan stock increased at an annual rate of just under 15 percent. Interest rates on new housing loans have increased a good percentage point since autumn 2005 to about 4 percent. The rise is likely to continue since, for instance, the 12-month Euribor has also increased a good 1.5 percentage points since then, and a very large share of loans are tied to short-term interest rates. The ECB is expected to further raise its discount rate based on the stronger expectations for European economic growth and inflationary pressures.

In the third quarter of 2006 the prices of existing flats had risen just under 8 percent year-on- year. Housing sales have remained lively thanks to still low 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 a good €2,800/m2 and the national average about €1,850/m2.

The actual sales prices of dwellings will become public in Finland. Before the turn of the year the prices in 15 cities will appear on the Internet. Later, the service will become nation-wide. Exact, identifying data on dwellings will not be publicised, but searches can be made, for instance, on the basis of street names.

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

Permits 25000 40000 Detached houses 20000 Blocks of flats 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 11/2006 Sources: Statistics Finland and VTT VTT, Finland 11/2006

Housing repair and maintenance

The long growth trend in residential repair, maintenance and improvement work continues. Early in the forecast period renovation will increase annually just shy of 5 percent; the brisk sales of existing dwellings have increased renovation. Towards the end of the period growth will slow to around 3 percent. VTT studies suggest annual growth of 3–5 percent 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 reaching the age when repairs are a must. For instance, facades, roofs, windows and building services require major repair measures. The renovation of the concrete facade elements of blocks of flats is estimated to double in ten years.

Surveys 20 years into the future indicate increasing renovation need of one- and two-family and row houses throughout the forecast period. In the case of blocks of flats, a declining trend appears likely 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 moves; they have increased, for instance, as a result of lively internal migration, longer loan periods and low interest rates. 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, 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 in 2006 will be about €3,800 million (€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.

112 © EUROCONSTRUCT Munich, December 2006 Finland

5 Non-Residential Market

Growth continues in 2007

In 2006 new non-residential construction will increase about 4 percent. The largest percentage growth will occur in offices, buildings for health, industrial buildings and agricultural buildings. Construction of buildings for education and storage is going to decline.

New non-residential construction is forecast to increase about 3 percent also in 2007. Then it will level off and towards the end of the period growth will decrease a few percent annually.

The construction volume of buildings for education will continue to decline noticeably in 2006 – by nearly a third. Fairly stable construction is predicted towards the end of the period. The volume is returning to normal after reaching a quite high peak. Construction of buildings for education is concentrated in areas of net in-migration, especially the five growth centres (the metropolitan area, Turku, Tampere, Jyväskylä and Oulu). Schools are being built, for instance, in new and expanding residential areas.

The volume of buildings for health will grow strongly, by about a fifth, thanks to the large number of starts towards the end of 2005 and early 2006. A downward trend will begin in 2007. The construction volume is lower than, for instance, in the 1980s, but the level can nevertheless be considered normal. There is no need for large hospitals in the near future; construction will focus mainly on smaller units such as health centres and service flats.

Industrial building construction is growing fast following the slump in 2003–2004. Last year volume increased by a quarter; 2006 will also see strong growth at nearly 15 percent. A significant boost comes from the construction of Finland's fourth nuclear power plant (over 900,000 m3) that will continue for another couple of years. Although growth will turn into decline, the level of Industrial construction will remain reasonable throughout the remainder of the forecast period. Investment is up as favourable domestic economic development and exports increase production.

Construction of storage buildings has increased at a brisk rate for a couple of years. Industry and commerce have built their own local storage facilities, and construction of different logistics hubs has been lively. In 2006 the volume will drop about 15 percent from the earlier high level and will remain fairly stable in the following years.

The volume of office construction is growing briskly from a very low level. Building permits increased already in 2005, but starts did not match them. Now a large number of starts are being launched although vacancy rates are quite high. The volume will increase strongly in 2006–2007. Construction will remain stable towards the end of the forecast period. The increased need for office space is based on demand caused by the reviving economy as well as companies relocating to new premises that have a better location and equipment. Owners will have to find new uses for old premises or modernise them.

Commercial building construction is lively. The volume will remain high in 2007 but growth is unlikely in subsequent years. Migration into growth centres has been a big boost to commercial construction along with high consumer demand and confidence. The consolidation of commerce into larger units continues while foreign retail chains are expanding here. Vacancy rates are quite low in commercial buildings.

Construction of agricultural buildings has picked up considerably contrary to expectations. In future it is believed to revert to the long-term downward trend. Agriculture is undergoing a major structural change. The number of farms has been reduced by a quarter in 10 years and stands now at about 75,000. At the same time the average farm size has increased 1.5-

The growth in Miscellaneous buildings (free-time residential buildings, assembly buildings, transport and communications buildings, other buildings) follows general economic development. The present quite large growth is likely to turn into a slight decline in future.

In Finland non-residential buildings are classified as follows, 2005 volume, MEUR:

Commercial and office buildings, total 1,690 - commercial buildings 1,090 - office buildings 340 - transport and communications buildings 260 Public service buildings, total 890 - buildings for institutional care 240 - assembly buildings 180 - educational buildings 470 Industrial buildings and warehouses, total 1,530 - Industrial buildings 1,070 - warehouses (storage buildings) 460 Miscellaneous, total 1,240 - free time residential buildings 310 - agricultural buildings 530 - other buildings 400 Total 5,350

Non-residential renovation

Non-residential renovation has been growing at a quite stable 2–3 percent – a little bit more than the calculated long-term renovation need. Towards the end of the period growth is expected to decline and revert to the forecast long-term trend which, according to VTT studies, is 1.5–2.5 percent annually.

The impact of the age structure of the non-residential stock is not as significant as in the case of residential buildings, but remodelling of non-residential buildings to meet the requirements of modern activities will require further renovation. Increased industrial production also requires renovating industrial buildings while commercial buildings are rebuilt to meet the standards of modern commerce. Some centrally located office buildings are being converted into residential buildings.

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

• educational buildings 1,050 • buildings for institutional care 350 • industrial buildings 750 • office buildings 300 • commercial buildings 350 • other buildings 900 Total 3,700 MEUR

114 © EUROCONSTRUCT Munich, December 2006 Finland

6 Civil Engineering Market

In autumn 2006 the outlook for civil engineering has improved from the spring. The state's budgetary decisions are launching several big civil engineering projects while expansion of the Helsinki metro network is also planned. According to the 2006 economic survey of the Confederation of Finnish Industries EK, the economic outlook for civil engineering contractors is good. Their equipment utilisation rate rose during the summer of 2006 to 93 percent.

Although the economic situation was favourable in the summer of 2006, the total civil engineering output will contract slightly in Finland this year. In 2007 and 2008 the favourable situation will persist.

On-going major projects are the Main Road 100 Hakamäentie project in Helsinki, the Motorway E18 project between Lohja and Muurla, and Tampere Western Ring Road, phase I, and the Vuosaari Port traffic arrangements. New road projects to be launched are: Main Road 6 Lappeenranta–Imatra, Helsinki Ring Road I, Main Road 51 Kirkkonummi–Kivenlahti, Main Road 2 Vihti–Pori, Main Road 4 Lusi–Vaajakoski, Main Road 14 Centre of Savonlinna, Tampere Western Ring Road, phase II, and Main Road 4 at Kemi. The bulk of the construction activity worth nearly 1 billion euros occurs in 2007–2009. On the other hand, appropriations for the maintenance of civil engineering constructions are decreasing.

New rail projects include the Lahti–Luumäki and Seinäjoki–Oulu links to be launched in 2007. The railway yard works in central Pasila will also commence. Work on the rail link to Vuosaari Port continues as well.

The major road projects completed in 2006 include Main Road 1 Lohja–Lohjanharju and Main Road 4 Lahti–Heinola. The Kerava–Lahti railway was inaugurated in October 2006.

The largest project under way in water supply and sewerage is the Kakolanmäki water treatment plant in Turku worth about 100 million euros. Investments in that sector are high compared to the long-term average.

Investments in waterborne traffic are still up thanks to the Vuosaari Port project. The new port will be inaugurated in 2009. Investments in air traffic are down, and no major airport projects are in sight. Negotiations on extending the rental agreement on the Saimaa Canal with Russia are slated for 2007. A decision on the improvement of the canal will be made after the negotiations are concluded.

Municipal investments in streets and water supply and sewerage are surprisingly high despite the weak financial situation of municipalities.

VTT's spring 2006 survey of sector actors indicated that the economic outlook for civil engineering was good as concerns investors, civil engineering firms and earthwork contractors. The lack of skilled employees has become the worst bottleneck for earthwork contractors and civil engineering firms. Other bottlenecks are tight schedules, short order books and price competition. (Section 6 Source: Eero Nippala, Tampere Polytechnic)

APPENDIX – DEFINITIONS

Tables 1 • Population and households at the end of the year • Unemployment and unemployment rate an average of the year, source: Statistics Finland

Tables 2, 4A, 4B • Additions included in new construction, VAT excluded, DIY, services, construction by other sectors and black economy included

• New construction: Output of construction. 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. Sources Statistics Finland and VTT`s estimations and forecasts.

• Buildings classification for Euroconstruct: o buildings for education: buildings for general and vocational education, university and research institute buildings and other educational buildings o buildings for health: all kind of buildings for institutional care, like health care buildings, social welfare buildings and other social service buildings o industrial buildings: buildings for industrial production and buildings for energy supply o storage buildings: industrial, commercial and other warehouses o office buildings o commercial buildings: wholesale and retail trade buildings, hotel buildings, residential buildings for communities, restaurants and other similar buildings o agricultural buildings: livestock buildings, other agricultural buildings (grain drying and storage, greenhouses, fur farms, buildings for forestry and fishing) o other buildings: private free-time residential buildings, transport and communication buildings (incl. car parks), assembly buildings (theatres, concert halls, libraries, exhibition halls, club buildings, buildings of religious communities, buildings for sports) and other buildings like saunas and outbuildings

• Renovation: 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. Sources Statistics Finland and VTT`s estimations and forecasts.

• Civil engineering: Output of construction. 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. o 1+2 family dwellings: detached and semi-detached houses o Flats: blocks of flats and attached houses (row houses or terraced houses with more than 2 dwellings

116 © EUROCONSTRUCT Munich, December 2006 Finland

Country/Pays/Land: FINLAND Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 5 219 5 230 5 255 5 280 5 300 5 320 5 340 Bevölkerung

Households ('000s) Ménages 2 380 2 400 2 420 2 440 2 460 2 480 2 500 Haushalte

Unemployed ('000s) Chômeurs 235 229 220 205 198 190 185 Arbeitslose

Unemployment rate (%) Taux de chômage 9.0 8.8 8.4 7.8 7.5 7.2 7.0 Arbeitslosenquote

Change of GDP Variation du PIB 1.8 3.5 2.9 4.5 2.8 2.5 2.0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0.9 0.2 0.9 1.5 1.6 1.6 1.7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 1.8 2.5 3.6 2.5 2.0 2.0 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: FINLAND Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 4 880 12.9 9.6 5.8 8.7 -1.6 -2.5 -1.8

Logement Renovation 3 830 4.0 5.0 5.1 5.1 4.0 2.9 2.7

Wohnungsbau Total 8 710 8.7 7.5 5.5 7.1 0.8 -0.1 0.3

Non-residential construction New 5 360 -10.8 -0.6 10.7 5.8 4.1 -6.5 -3.0

Bâtiments non résidentiels Renovation 3 690 3.0 2.9 2.0 2.3 1.2 0.3 -0.5

übriger Hochbau Total 9 050 -5.5 0.9 7.0 4.4 2.9 -3.8 -2.0

Building New 10 240 -1.2 4.1 8.3 7.2 1.3 -4.6 -2.4

Bâtiment Renovation 7 520 3.5 4.0 3.6 3.7 2.6 1.7 1.2

Hochbau Total 17 760 0.8 4.1 6.2 5.7 1.9 -2.0 -0.8

Civil engineering New 3 130 1.1 1.4 0.9 -2.5 -1.2 1.4 -2.3

Génie civil Renovation 1 350 0.3 -0.7 -3.5 -1.8 0.2 0.1 -0.3

Tiefbau Total 4 480 0.8 0.7 -0.5 -2.3 -0.8 1.0 -1.7

TOTAL CONSTRUCTION OUTPUT 22 240 0.8 3.3 4.8 4.1 1.4 -1.4 -1.0

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 1.69 2.5 3.5 3.0 9.0 0.0 -2.0 -1.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

118 © EUROCONSTRUCT Munich, December 2006 Finland

Country/Pays/Land: FINLAND Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 14.9 15.8 17.3 17.3 17.0 16.7 16.2 Baugenehmigungen Familienhäuser

Flats Collec tif 21.0 19.2 19.8 19.5 18.0 17.5 17.0 Mehrfamilienhäuser

TOTAL 35.9 35.0 37.1 36.8 35.0 34.2 33.2

Housing starts 1+2 family dw ellings Logements commencés Individuel 14.0 15.2 16.4 16.4 16.2 15.8 15.3 Baubeginne Familienhäuser

Flats Collec tif 18.6 18.6 18.3 18.3 17.0 16.1 15.8 Mehrfamilienhäuser

TOTAL 32.6 33.8 34.7 34.7 33.2 31.9 31.1

Housing completions 1+2 family dw ellings Logements terminés Individuel 11.6 13.8 15.4 16.2 16.4 16.3 16.0 Baufertigstellungen Familienhäuser

Flats Collec tif 17.7 17.2 18.8 18.3 18.1 17.2 16.0 Mehrfamilienhäuser

TOTAL 29.3 31.0 34.2 34.5 34.5 33.5 32.0 Housing stock Logements existants 2 595 2 625 2 655 2 680 2 705 2 730 2 755 Wohnungsbestand

thereof second homes dont résid. secondaires 190 195 195 195 195 195 195 davon Zw eitw ohnungen

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

Home ow nership rate 1) Taux de propriétaires occupants 59.0 60.0 60.5 61.0 61.0 61.5 61.5 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: FINLAND Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 465 -15.0 -0.5 -12.5 -29.0 3.0 5.5 2.5 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 235 -25.0 -5.5 13.5 20.0 -8.5 -5.0 1.0 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 1 080 -33.0 3.5 28.5 13.5 -5.0 -11.0 -7.5 Industriegebäude

Storage buildings Bâtiments de stockage 460 2.5 15.5 26.0 -14.0 7.0 0.5 -0.5 Lagergebäude

Office buildings Bureaux 340 -32.5 -19.5 8.5 30.0 23.0 -2.0 -0.5 Bürogebäude

Commercial buildings Commer c es 1 100 12.5 14.0 5.0 2.0 2.5 -14.5 -5.5 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 540 -10.0 -15.0 19.5 11.5 -4.5 -6.5 -2.5 Landw irtschaftsgebäude

Miscellaneous Autres 1 140 11.0 -5.5 5.0 11.5 14.0 -3.5 -2.0 Sonstiges

Total 5 360 -10.8 -0.6 10.7 5.8 4.1 -6.5 -3.0 Insgesamt

1) At 2005 prices, excluding taxes.

120 © EUROCONSTRUCT Munich, December 2006 Finland

Country/Pays/Land: FINLAND Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 550 -4.2 0.9 -2.5 1.7 0.3 1.0 -2.5 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 540 1.7 -0.1 4.5 -14.8 -2.2 19.5 3.9 Bahnanlagen

Other transport Autres réseaux 135 -2.8 41.5 -1.9 10.3 7.5 -17.4 -25.1 Übrige Verkehrsinfrastruktur

TOTAL 2 225 -2.8 2.5 -0.9 -1.8 0.3 3.4 -2.3

Telecommunications Télécommunications 590 1.1 1.1 3.1 -1.4 0.5 0.1 -0.1 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 1 085 4.9 -2.1 -0.7 -4.3 -3.8 -2.3 -1.6 Energie- und Wasserversorgung

Other Autres 580 7.0 -0.9 -2.3 -1.4 -0.3 -1.5 -0.8 Sonstiges

Total 4 480 0.8 0.7 -0.5 -2.3 -0.8 1.0 -1.7

1) At 2005 prices, excluding taxes.

Country/Pays/Land: FINLAND Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 81.5 4.8 3.2 3.8 3.6 2.8 2.7 2.5 Privater Verbrauch

Public consumption Consommation publique 34.8 1.5 1.7 1.6 1.5 1.7 1.8 1.7 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 29.5 4.0 4.9 3.3 5.1 4.2 0.3 0.3

of w hich construction 18.6 1.3 4.9 4.3 4.1 1.4 -1.4 -1.0

Stocks (as % of GDP) Variations de stocks 2.7 0.6 0.6 1.7 1.6 1.8 2.0 1.8 Vorratsveränderung

Ex por ts Exportations 65.8 -1.7 7.5 7.3 11.0 6.0 5.5 4.5 Ex por te

Imports Importations 56.9 3.3 7.4 12.3 9.0 7.0 5.5 4.0 Importe

GDP PIB 157.4 1.8 3.5 2.9 4.5 2.8 2.5 2.0 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

122 © EUROCONSTRUCT Munich, December 2006 France

FRANCE BIPE www.bipe.com

Patrick de La Morvonnais e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 General summary

After two splendid years (2004 and 2005), the French construction market is expected to record exceptional performances in 2006 (4.5%). This result is explained by the buoyancy of the various markets and their synchronism. Thanks to a record level of construction starts (430,000 units), production of new homes is likely to increase by nearly 8% in volume. After a disappointing year in 2005, a definite upturn is expected in new non-residential construction (particularly sharp in the case of industrial building which had suffered significantly previously). Finally, civil engineering projects are expected to increase by 5%.

A definite slowdown in activity seems likely during 2007 (1.7%). Economic growth is forecast to be markedly less buoyant (1.8% compared with 2.4% in 2006). The period of euphoria in housing is likely to come to an end due to hardening credit terms; the decline in the number of construction starts will, however, remain modest and will not penalise new production. In a less buoyant international climate, companies will no doubt step down their investment in production capacity, which will reduce the demand for industrial buildings. As regards the civil engineering market, it will remain strong (3% in 2007) due to major construction work scheduled and the buoyancy of local authority investment in the run-up to elections.

The slowdown in activity is expected to continue into 2008 (0.4%) and 2009 (0.8%) and can be explained by three factors. Housing construction starts will continue to decline slightly leading to a drop in new production; corporate investment will only increase moderately limiting demand for buildings in the private sector whereas the public building sector will see a phase of stagnation; finally, a downturn is forecast for civil engineering: a slight drop in road works and levelling off of local authority expenditure during 2008 (when municipal elections are to be held) and 2009.

124 © EUROCONSTRUCT Munich, December 2006 France

2 Macroeconomic environment: growth will remain limited in the medium term

Current economic situation revitalised in the short term. The latest quarterly financial statements from the French national institute of statistics and information, INSEE, confirmed that economic conditions improved significantly in France as in many European countries. After recording an increase of 0.5% during the first quarter of 2006, GDP leapt 1.2% during the second. The increased growth settled at 1.9%. In addition, "snapshot" business indicators suggest that the third quarter will remain buoyant. The improvement in the labour market (employment and unemployment) is strengthened as a result.

Structural difficulties must not be masked. The structural factors (national debt, operation of the labour market, ageing population, level of R&D, competitive positioning, etc.) of strong growth are still absent. In particular, the elements of a European macroeconomic management policy for monetary union are still lacking (no federal budgetary policy despite being essential for the proper operation of a monetary zone) and this leads to the development of non-cooperative economic policies within euro zone member states. The absence of a real exchange rate policy is another penalising factor for Europe. In sum, then, we forecast economic growth that barely reflects the potential of Europe (despite an already considerable slowdown in cumulative growth) and France in particular.

Constraints preventing renewed growth by 2008/2009. The euphoria of the current economic climate is not likely to continue into 2007 or beyond that into 2008-2010. Various international and specifically national factors lie behind this. Internationally, we will see a slowdown in growth in the United States and our main European partners in particular, which will influence our foreign markets in tandem with the anticipated rise in the value of the euro.

A notable reduction in credit but consumption is only expected to drop slightly during 2007-2009 due to the creation of employment. The buoyancy of the property and home loan market over the last four years has been central to the relative strength of consumption, bringing about a reduction in savings rates. A hardening of credit terms is currently taking place (increase in interest rates, non-price conditions). This is likely to result in a reduction in home loans and therefore stabilisation of the savings rate.

Not only is investment in new housing likely to level off as of 2007, furthermore, household consumption is no longer likely to be able to count on a lasting drop in the savings rate to ensure higher growth than that of income. It would therefore be dependent on the labour market again.

In total, we forecast net creation of over 150,000 jobs between 2007 and 2009, following on from 173,000 in 2006 and 65,000 in 2005. With the expected demographic development (ageing of the total population and quasi stagnation of the active population), this is expected to result in a drop in the rate of unemployment, which is a positive factor for the strength of household consumption. Between 2007 and 2009, the increase in household consumption is therefore likely to continue at a rate of between 2.0% and 2.5% compared with 2.8% in 2006.

The growth in investment will remain insufficient in the medium term. There was a notable upturn in investment during the second quarter of 2006 (+1.1% q/q after 0% during the first quarter) thanks, in particular, to companies (+1.8% q/q). The latter increased their investment expenditure in response to a significant increase in the rate of use of their production capacities and also an urgent need to modernise means of production in favourable economic conditions.

The slowdown in the international economic situation and the rise in the value of the euro (penalising their profits) are, according to models, two factors which lead companies to

© EUROCONSTRUCT 125 France Munich, December 2006 behave more cautiously: thus, after 4% growth in 2006, productive investment is not likely to register the increase in growth necessary to produce conditions for a return to improved competitiveness for our industry.

Even if between 2007 and 2009, the European economic climate and companies' financial situations were to prove favourable for maintained productive investment of around 4.5%, this would still be insufficient (and lower than the investment growth rates of preceding cycles) to make a rapid and significant improvement in the competitiveness of French companies possible by the end of the current decade in an international context marked by accelerated globalisation.

Regular and gradual reduction of the public deficit and the national debt by 2009/2010. The improved performance of the current economic situation is reflected in additional tax revenue. However, a number of current commitments in the run-up to the elections will have an impact on the capacity to reduce the deficit in 2007. After that, a concerted effort will be made to reduce the public deficit, by means of a policy to control the level of government employment in particular and local government expenditure in general. Additional tax revenues are likely to be reserved for debt reduction.

The implementation and even acceleration of the policy to curb public expenditure as of 2008/2009 is expected to bring about a gradual (but moderate) reduction in national debt over the course of 2008 to 2010. Despite this drive, the policy of reducing debt (expected to fall just below 60% of GDP by the end of the current decade) is likely to be insufficient in the light of the challenges posed by the ageing of the population as of 2015.

All told, GDP growth will have difficulty exceeding its potential in the long term. In the short term, after growing by nearly 2.5% in 2006, France's GDP is expected to rise still further by 1.8% in 2007, a growth is in line with that of the euro zone as a whole. Certainly, in 2007, stopping the expansion of home loans will have a more negative impact on us than the average for the euro zone, where real estate debt has been less dynamic. In addition, the competitiveness of the French economy has been weakened, in particular in respect of our main trading partner. But in 2007, we will not face the same budgetary restrictions as Germany and Italy.

As of 2008, the upturn in activity is likely to remain moderate in France, as in most of the rest of Europe. The factors indicated previously will influence the extent of this recovery. In particular, they will prevent French economic growth from exceeding its potential (close to 2% per year), which would not enable it (even partially) to make up for the deceleration experienced since the beginning of the 1990s compared with leading global economies in terms of the increase in GDP per capita.

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3 The Housing Market

3.1 2006 will see a historic record in terms of construction starts but signs of a slowdown in the residential property market are increasing. As we implied in June at the conference in Amsterdam, 2006 will undoubtedly be an exceptional year for new construction. There has been a significant increase in building permits (13%) and construction starts (10%) throughout the year. The number of homes begun is also likely to reach 430,000 units this year. Under these conditions, the production of new housing units is expected to rise by 8% in volume this year.

The buoyancy of the residential property market is also measured against the yardstick of home loans to households, which increased significantly. Thus, at the end of June 2006 outstanding debts registered an increase of 22% compared with 15% at the end of December 2005. These figures are explained by the exceptional increase in new loans over the last two years (22% in 2004 and 22% in 2005). Currently, home loans account for 76% of all loans granted to households by banks, a ratio never before reached.

The slowdown in the rise in the price of existing dwellings is less rapid than forecast. Thus, according to the French real estate association, FNAIM, the slowdown in the price of existing homes did not continue during the second quarter of 2006. In fact, a slight increase has been observed in the case of apartments. By the end of June 2006, the annual price increase stood at 8.8%. A price increase of less than 6% for the whole of 2006 is therefore unlikely (it currently stands at 5.6%). On the other hand, a stabilisation of prices in 2006 would mean a drop of 5% during the second quarter, which is an unlikely scenario.

There are, nonetheless, multiple signs pointing to a slowdown in the residential property market in France. During the second quarter of 2006, developers' sales registered a marked decline. As developers have not reduced their marketing of properties, we are seeing a new increase in stock-in-hand. In all, the latter amounted to nearly 61,000 homes at the end of June 2006 compared with 44,000 a year earlier. In the case of apartments, this stock-in-hand amounted to 5.8 months' sales, a ratio which is not yet evidence of clear overproduction. The current slowdown in sales points in 2006 to levels of marketing that are expected to be slightly down on levels recorded in 2005 (over 121,000 sales). We do not yet know what proportion of these homes was bought to let under the Robien scheme: it was 56% in 2005 (68,600 houses). Price pressure remains very significant. During the second quarter of 2006, the average sale price per individual house lot increased to €245,600 (up by 13.9% in one year); the sale price per m² of an apartment for the same period was €3,111 (up by 9.6% in one year).

We are currently seeing a clear hardening of credit terms as evidenced by four clear trends: • A slight increase in credit rates, although lending institutions have not yet passed on the entire increase of long rates; • A (moderate) continuance of the extension of loan terms; • A reduction in the ratio of dossiers received to dossiers processed, evidence of harsher scoring by the banks; • A marked increase in the average rate of the contribution of personal funds as shown in the graph opposite.

The banks are concerned by the level of household debt and by increased client risk. It is, of course, first-time buyers who are the most harshly penalised by the hardening of loan terms.

Finally, developers are becoming more cautious: according to the survey carried out in July 2006 by INSEE, there was a stabilisation in the demand for new house purchases and a renewed decline in respect of the demand for rental properties. Stocks-in-hand are significantly replenished and forecasts for construction starts are in decline in the case of operations aimed at the rental market.

Finally, as regards repair and maintenance work, 2006 is likely to register a real improvement after the mixed performances of 2004 and 2005. Our forecast of 2.5% this year is explained mainly by the acceleration in the distribution of public subsidies (the National Bureau for Housing Improvement, ANAH, and the National Agency for Urban Renovation, ANRU).

3.2 2007 will see a slight downturn in construction starts but this will not penalise new production The macroeconomic outlook is mixed for 2007: a very clear reversal in the trend in the United States, where we expect to see a significant adjustment on residential property, a slowdown in Germany and marked reduction in consumption expenditure in France. The growth in French GDP would therefore return to 1.8% in 2007 compared with 2.4% this year. As a result, we have modified our rates forecasts: we have now adopted a quasi-stabilisation of long rates in 2007. As experience over recent years has shown, the macroeconomic scenario is far from being a sufficient basis on which to determine the housing scenario given the continuing disconnection. It is therefore necessary to assess all of the positive and negative factors that may have an impact on this sector.

Favourable Factors for Housing The increase in households' disposable income is not likely to change significantly in 2007 and long rates are likely to stabilise. If we take into account a slight drop in the price of housing (-4% in the case of existing housing), household purchasing power would then improve. The drop in unemployment will also provide a boost to investment in housing.

Unfavourable Factors for Housing As indicated above, credit terms are becoming more stringent. The sharp increase in household debt (50% in 2006, probably 54% in 2007) and increased client risk is likely to worry the banks. Given the increase in their stocks-in-hand and the levelling-off of the demand for new housing on the buy-to-let market, developers will undoubtedly cut back on new operations. After several years during which production has been strong, developers have significantly reduced their supply of development-ready property, so renewed growth in supply would come up against the shortage of immediately available land.

Unlike in 2006, housing will not be a national political issue in 2007. Investors may fear a review of tax advantages in the event of a change of majority in the government. Private individuals may be anxious about more stringent measures (holiday tax, restrictions on inheritance and gifts). With respect to new building, the new thermal regulation (RT 2005) is expected to increase costs by 2 to 5%; in general, this will have an impact on prices. The adjustment expected in the United States residential property market, in our estimation, is a key point: it will send a strong message regarding the suddenness and seriousness of a reversal in trend. Even if the markets are not comparable and even if the consequences are more serious (negative equity) on the other side of the Atlantic, all those concerned in France will be aware of this risk: operators will act more cautiously and households will be anxious about a drop in prices and will hesitate to get into debt at the high point of the cycle.

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Numerous uncertainties remain Since 1st July 2006, two tax-based buy-to-let incentives have coexisted, the Robien and the Borloo Populaire schemes. Although the latter is deemed to have corrected the perverse effects of the former (eviction of the middle classes), it is, of course, subject to more stringent restrictions in return for improved profitability. It is very difficult today to know what the outcome of these new schemes will be. The Robien scheme concerned 68,000 houses in 2005; will this figure be entirely maintained with the two plans competing with each other? Or will we see investors opting out of the Robien scheme, without a shift of the same order of those opting for the Borloo Populaire plan? The "€100,000 house" was intended to spearhead government action for low- and middle- income property buyers. The success of this scheme will depend largely on the local authorities in charge of freeing up the necessary land; developers present at the meeting were sceptical on this point. The latest innovation to date provides for the disassociation of the land from the house: low-and middle-income property buyers would not buy the land until they had repaid the loan on the house. It is, of course, difficult to predict the impact that this scheme, which is certain to curb the decrease in the number of first-time buyers, will have.

A slight decline in construction starts but stabilisation of the volume of production In total, we believe 415,000 homes will be begun in 2007, a modest downturn which can be explained by the persistence of relatively continuous demand and prudent interest rates. This development must be interpreted as a technical adjustment following the euphoria of 2006. When gains are taken into account, this drop will not result in a downturn in new production (0.4% next year).

A levelling off in the growth of maintenance and improvement work in 2007 The slightly slower increase in the purchasing power of the disposable income of households in 2007 and the increase in short term rates are likely to penalise repair and maintenance work carried out by households next year. By contrast, work financed by public credit (National Bureau for Housing Improvement, ANAH, National Agency for Urban Renovation, ANRU) is likely to fare better. All told, we have opted for the hypothesis of a 2.2% increase in volume compared with 2.5% in 2006.

3.3 Continued downturn in construction starts in 2008 and 2009 and a decline in new production For 2008 and 2009, the scenario adopted falls within the framework of a continuation of the trends envisaged for 2007. Economic growth is not likely to differ significantly from its potential rate of 2% per year, hence a continuous increase in the purchasing power of households. The increase in long rates is likely to remain moderate and would not be a disincentive. The continued decline in unemployment will be a factor that supports demand. Similarly, the levelling-off of residential property prices, which is certain to continue throughout 2008 and 2009, may restore the home purchasing power of households. While the macroeconomic scenario justifies neither a sharp increase in construction starts nor a sudden decline, we believe the demographic context to be the decisive factor. The 2006- 2010 period will see a slowdown in the creation of new households and a decline in the number of households of 30 to 39 year-olds, which are the main potential first-time buyers (individual houses in particular). In these conditions, we are therefore forecasting 400,000 houses begun in 2008 and 395,000 in 2009. Again, a modest decline: the level of construction in France remains high in response to demand, which remains buoyant. According to these scenarios, new housing output would then decline by 2.7% in 2008 and 1.6% in 2009.

Repair and maintenance work is likely to increase by 1.5% in 2008 and 2% in 2009 (on account of a more marked increase in household purchasing power).

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 départements are in charge of lower secondary schools (11-14) while the regions are in charge of upper secondary schools (15- 18). Central and regional government both contribute to the financing of universities. Construction starts for buildings in this sector fell off sharply during the latter half of the 1990s, in response to previous efforts to renovate high schools and construct new universities. New starts picked up again gradually as of 2000. The year 2005 brought a 3% drop in new construction, reflecting the after-effects of the sector’s boom in the previous year. According to the latest information available to us, this drop also continued into 2006 (-4%) although recovery is expected in 2007. The outlook for growth in four years of new work in this sector seem poor (average annual growth 2005- 2009: +0.5% in volume), especially in light of the efforts required to reduce national 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 2.4 million sq.m in 2005.

After exceptional growth in 2004 (+20%), the sector's buoyancy has not flagged (+6% growth in 2005 and +9% forecast in 2006). However, completion of the “Hôpital 2007” hospital restructuring initiative in 2007 will likely bring a mild after-effect. We estimate that the level of investment during the entire 2005-2009 period will be positive, with average annual growth of +0.8% in volume, and extensive investment throughout the period, driven by an increase in the number of elderly citizens.

4.3 Industrial buildings After modest growth in 2005 (+0.9%), recovery in the level of industrial production is expected for 2006 (+2.5% forecast). France’s manufacturing exports, however, remain middling in light of a weak international economy and the competitive disadvantage created by a strong euro. Several factors should help bring about a recovery in the industrial sector between 2007 and 2009: • 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;

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• The gradual rise in the rate of use of production capacities in the years to come should bring about a moderate upturn in industrial investment; • Significantly improved results among businesses, which have made major strides in terms of debt reduction.

However, the medium term prospects will depend essentially on national industry productivity gains in a very competitive international environment. A significant improvement in productivity may result in a greater increase than forecast in industrial production; but that will not necessarily lead to an increase in industrial building starts, inasmuch as increased productivity could reduce the surface area requirement.

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 overheads, a situation reflected in the fact that many employees taking retirement are not being replaced.

Overall, there are three positive factors behind the gradual recovery in new work in France’s office sector: • The positive image of French property for foreign investors. The latter consider it low risk and reliable, in Paris in particular, and accept low returns, which further enhances the value of French property. • 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 reorganisations, as well as the “service-sectorisation” 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.

Positive momentum in construction starts in late 2005 – early 2006 lead us to remain optimistic for construction starts in 2006. The increase in new work is expected to continue until 2009 with an average yearly growth in 2005-2009 of +3.5% in volume.

4.5 Commercial buildings Household consumption, a key variable for the production of commercial buildings, continues to rise, to the detriment of savings rates. For 2006, we forecast a 2.8% growth in consumption.

Beyond the positive impact of buoyant household consumption, the sharp increase in construction starts for commercial buildings and the marked rise in the number of permits granted during 2005 and early 2006 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 2.6% between 2005 and 2009.

4.6 Other buildings This section covers two very different categories of building: 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 sq.m 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 2005, declining from 13.5 million sq.m. to 11.1 million sq.m.

The volume of new activity continued to decline during 2005 (-3.0%), but a reverse in the trend with regard to construction starts and the number of permits issued was observed in 2005 - early 2006.

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: • The reform of the CAP (June 2003), entailing the gradual replacement of subsidies for farmers with production subsidies, is reorienting French agriculture and livestock rearing toward higher value-added production, and will lead to the more rapid renewal of existing buildings; • The European directive on the improvement of animal welfare will lead to an increase in the surface area devoted to livestock housing.

As a result, new construction will grow by an average annual rate of 2.8% over the 2005- 2009 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: • As regards private companies, in a context of renewed consumer spending favourable to the development of leisure facilities; • As regards local public agencies, which will enter the growth stage of the local investment cycle (in preparation for the municipal elections of 2008) at the cost of an increased use of credit.

Despite a probable downturn in 2009, the 2005-2009 period remains very positive with an average annual growth for new construction work of +2.0% in volume forecast.

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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 ended with the same rate of growth as observed in 2004; +1.5% in volume.

We have used the following assumptions to forecast growth at an annual average rate of 1.4% over the 2005-2009 period: • For local authorities: maintenance and improvement work on public facilities (sports 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 business: 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 In total, the production of new non-residential buildings will increase sharply in 2006 by +5.2% in volume compared with +1.1% in 2005. In 2007 and 2009, by contrast, the pace of growth will gradually weaken, (+1.9% in 2007, +1.4% in 2008 and +1.3% in 2009). 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 authorities In 2003, local authorities entered into a new multi-year borrowing cycle in a break with the trend to reduce debt seen since 1997. Investment exceeded financial resources between 2003 and 2005, and this trend will also continue during the coming 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.

In line with the election cycle (municipal elections to be held in 2008), 2006 and 2007 will be very good years in terms of investment. Local authorities will continue to accumulate debt in order to maintain a steady pace of investment in response to the urgent need for public facilities. By contrast, the level of investment by local government bodies is likely to plateau in 2008 and 2009 as a result of concerns over growing debt levels and less pressure to invest in facilities during the post-electoral period.

Following a sharp rise in local investment beginning in 2003, the départements and regions undertook more expansive investment programmes in 2005, and this trend is likely to continue in the coming years.

With the 2000-2006 planning agreements between central and regional government (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 authorities 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; • The need to deal with substantial sanitation and drinking water needs; • Local governments will increase their investment in high-speed telecommunications; • The election cycle will provide an incentive for investment in the run-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 to fund the investment decided on by the government, notably with regard to railway transport.

France’s transport infrastructure financing agency, AFITF, which was established in January 2005, was quickly forced to make sweeping changes to its financial structure following a decision by the government to sell its shares in semi-public companies. In future, it will no longer be able to rely on dividends generated by these companies; it will, however, receive a portion of the financial windfall created by their privatisation (€4 billion).

In addition, it will also receive funding from various annual revenue sources: • The regional development tax (€510 million); • The state fee collected from all motorway concessionary companies (€160 million); • Revenue from radar speed checks (€80 million).

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It will have a fairly large budget of about €2 billion in 2006, including €836 million generated by the privatisation of the motorway companies and €394 million in government subsidies. It will be responsible for completing any remaining business from 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: • The completion this year of civil engineering work for TGV East, the eastern high-speed train line between Paris and Baudrecourt, (€3.12 billion); • Continued work on the high-speed railway line LGV Perpignan-Figueras, (€720 million) for the commissioning of the line in 2007 or 2008; • An increase in work to extend underground lines for the Paris transport authority, RATP; • The commencement this year 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 under construction. Much of the earthwork and special engineering work will be carried out before 2007, with service scheduled to begin in 2009.

In the field of energy, a slight 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 2.0% in volume) after two exceptionally good years (up 4.0% in volume in 2003 and 3.0% in 2004). Following a slowdown between late 2004 and early 2005, the lowest level of growth in the volume of work being performed (expressed as a rolling 12-month total) was recorded in mid-2005. Subsequently, there was a sustained acceleration in growth to 8% in volume by midway through this year.

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 +5.0% in 2006 and +3.0% in 2007), attributable primarily to the timetable for major projects (earthworks and special engineering projects) and substantial investment at the local level in the run-up to elections.

However, investment levels may plateau in 2008 as the level of local investment declines.

Transport infrastructure In 2005, work on the construction of special civil engineering projects1 declined overall as a number of especially large projects (the Millau, Jaulny and Sioule viaducts) reached completion. On the other hand, work has increased once again on urban transport projects

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. © EUROCONSTRUCT 135 France Munich, December 2006

(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 waterways projects received a boost from capacity and port modernisation investments in 2005, particularly the Port 2000 project in 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 got underway in 2006 (€220 million).

Road works receive specific support from central government, including provisions within the State/Regional Planning Agreements. The years 2004 and 2005 were excellent ones and this trend is likely to continue in 2006 and 2007. In addition, maintenance and improvements on the national motorways will continue to benefit from higher spending (widening roadways, bypassing urban areas 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.

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APPENDIX – DEFINITIONS

Table 1 • Population and household data are given on 1rst January of the year. Figures for 2004 are estimates from the new census (INSEE). • In France, by definition, the number of households is equivalent to the number of “main homes”.

Table 2 • All figures given in this table are based on the concept of branch and not sector. Therefore it covers the turnover of construction firms (including a correction for undeclared works), but also the construction activity realised by firms which do not belong to the construction sector (metallic construction for example, maintenance done by their own by non construction firms), architects fees, engineering expenses. • All data are given VAT excluded (19.6% normal rate or 5.5% reduced rate). • According to national accounts, the total construction output includes both investment and consumption, but excludes land expenses. • Data refers to national accounts (INSEE) and yearly survey for construction (Enquête Annuelle d’Entreprise).

Table 3 • Permits and starts refer to official construction statistics (SITADEL). • Housing completions are estimates based on starts and delay models. • Housing stock data relate to the latest census (01/01/2004) ; Total stock = main homes + second homes + vacant dwellings. • Home ownership ratio measures the percentage of households living in their own house.

Table 4a • This table refers only to new construction. • Commercial buildings concern only retail. • Miscellaneous includes hotels, restaurants, leisure and sport facilities (public or private) and so on.

Table 4b • This table refers to civil engineering as a whole.

Table 5 • This table refers to National Accounts. • Values are given at market prices, including VAT.

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Country/Pays/Land: FRANCE Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 60 029 60 340 60 643 61 002 61 347 61 697 62 043 Bevölkerung

Households ('000s) Ménages 25 115 25 431 25 727 26 033 26 332 26 626 26 915 Haushalte

Unemployed ('000s) Chômeurs 2 692 2 733 2 711 2 475 2 269 2 219 2 175 Arbeitslose

Unemployment rate (%) Taux de chômage 9.9 10.0 9.9 9.0 8.3 8.1 7.8 Arbeitslosenquote

Change of GDP Variation du PIB 1.1 2.0 1.2 2.4 1.8 2.0 2.1 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.1 2.1 1.7 1.9 1.6 1.8 1.7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.0 4.4 3.2 3.0 2.2 2.0 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: FRANCE Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 40 684 0.9 9.1 9.5 7.8 0.4 -2.7 -1.6

Logement Renovation 43 989 -0.5 1.0 1.0 2.5 2.2 1.5 2.0

Wohnungsbau Total 84 673 0.1 4.6 4.9 5.1 1.3 -0.5 0.3

Non-residential construction New 26 063 -6.7 2.9 1.1 5.2 1.9 1.4 1.3

Bâtiments non résidentiels Renovation 28 156 -1.5 1.5 1.5 1.5 1.0 1.5 1.5

übriger Hochbau Total 54 219 -4.1 2.2 1.3 3.3 1.4 1.5 1.4

Building New 66 747 -2.5 6.5 6.1 6.8 1.0 -1.1 -0.5

Bâtiment Renovation 72 145 -0.9 1.2 1.2 2.1 1.7 1.5 1.8

Hochbau Total 138 892 -1.6 3.6 3.5 4.4 1.4 0.2 0.7

Civil engineering New 24 995 6.7 4.6 2.0 5.9 3.5 1.4 1.7

Génie civil Renovation 12 230 -1.0 0.0 2.0 3.0 2.0 -0.5 0.5

Tiefbau Total 37 225 4.0 3.0 2.0 5.0 3.0 0.8 1.3

TOTAL CONSTRUCTION OUTPUT 176 117 -0.5 3.5 3.2 4.5 1.7 0.4 0.8

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 22.53 -0.2 6.1 2.6 3.9 0.9 -0.5 0.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

140 © EUROCONSTRUCT Munich, December 2006 France

Country/Pays/Land: FRANCE Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 224.0 249.0 266.0 275.0 270.0 265.0 260.0 Baugenehmigungen Familienhäuser

Flats Collec tif 155.0 211.0 245.0 275.0 255.0 240.0 235.0 Mehrfamilienhäuser

TOTAL 379.0 460.0 511.0 550.0 525.0 505.0 495.0

Housing starts 1+2 family dw ellings Logements commencés Individuel 193.0 216.0 229.0 235.0 235.0 230.0 225.0 Baubeginne Familienhäuser

Flats Collec tif 121.0 147.0 181.0 195.0 180.0 170.0 170.0 Mehrfamilienhäuser

TOTAL 314.0 363.0 410.0 430.0 415.0 400.0 395.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 189.0 205.0 220.0 228.0 230.0 227.0 222.0 Baufertigstellungen Familienhäuser

Flats Collec tif 109.0 120.0 145.0 177.0 190.0 175.0 168.0 Mehrfamilienhäuser

TOTAL 298.0 325.0 365.0 405.0 420.0 402.0 390.0 Housing stock Logements existants 29 940 30 264 30 597 30 940 31 275 31 595 31 910 Wohnungsbestand

thereof second homes dont résid. secondaires 2 955 2 987 3 020 3 052 3 083 3 114 3 145 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 1 870 1 846 1 850 1 855 1 860 1 855 1 850 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 56.5 57.0 57.5 58.0 58.5 58.9 59.3 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: FRANCE Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 2 918 5.0 10.5 -3.0 -4.0 5.0 1.0 0.0 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 3 583 3.0 20.5 6.0 9.0 -4.5 -1.0 0.0 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 5 254 -8.5 -5.0 -4.5 7.0 2.0 3.0 2.5 Industriegebäude

Storage buildings Bâtiments de stockage 1 366 -26.0 13.5 -1.0 7.5 -1.0 1.0 1.0 Lagergebäude

Office buildings Bureaux 4 894 -15.0 -3.5 5.5 8.0 1.0 2.5 2.5 Bürogebäude

Commercial buildings Commer c es 3 274 -1.0 4.0 5.5 3.0 3.5 1.5 2.5 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 1 827 -6.5 -1.0 -3.0 6.5 1.0 1.5 2.5 Landw irtschaftsgebäude

Miscellaneous Autres 2 947 -1.5 2.0 2.0 2.0 9.0 0.0 -2.5 Sonstiges

Total 26 063 -6.7 2.9 1.1 5.2 1.9 1.4 1.3 Insgesamt

1) At 2005 prices, excluding taxes.

142 © EUROCONSTRUCT Munich, December 2006 France

Country/Pays/Land: FRANCE Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 16 374 3.8 3.1 3.6 5.3 3.3 -1.0 0.3 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 1 332 -1.0 6.0 10.0 5.0 -3.0 4.0 5.0 Bahnanlagen

Other transport Autres réseaux 4 058 6.7 3.9 -3.6 3.5 3.0 1.2 4.5 Übrige Verkehrsinfrastruktur

TOTAL 21 764 4.1 3.4 2.5 5.0 2.9 -0.3 1.4

Telecommunications Télécommunications 7 077 1.0 2.0 3.0 5.0 2.0 1.0 1.0 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 5 067 4.4 1.8 2.8 4.5 4.0 2.7 1.0 Energie- und Wasserversorgung

Other Autres 3 317 9.0 4.5 -4.0 5.5 5.0 4.5 2.0 Sonstiges

Total 37 225 4.0 3.0 2.0 5.0 3.0 0.8 1.3

1) At 2005 prices, excluding taxes.

Country/Pays/Land: FRANCE Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 951.6 2.3 2.5 2.2 2.8 2.2 2.3 2.4 Privater Verbrauch

Public consumption Consommation publique 428.1 1.7 2.1 0.9 2.1 1.5 0.7 0.5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 336.0 2.3 2.6 3.7 4.5 3.2 2.7 3.1

of w hich construction

Stocks (as % of GDP) Variations de stocks 8.1 0.4 0.6 0.5 0.2 0.2 0.3 0.3 Vorratsveränderung

Ex por ts Exportations 444.5 -1.1 3.3 3.2 8.3 5.4 5.8 6.1 Ex por te

Imports Importations 461.1 1.5 6.0 6.4 9.1 6.7 5.8 6.1 Importe

GDP PIB 1 707.2 1.1 2.0 1.2 2.4 1.8 2.0 2.1 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

144 © EUROCONSTRUCT Munich, December 2006 Germany

GERMANY Ifo Institute for Economic Research www.ifo.de

Volker Russig e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

¾ Because of the (temporarily) strong increase of the oil price and the more frequent occurrence of natural disasters, the economic output in the main world regions and countries grew by 3.1% in 2005. Growth will accelerate in 2006 (3.7%) caused by supportive financial markets and expansive macroeconomic policies.

¾ The Euro Area Countries experienced a 1.4% growth in 2005 and are forecast to reach 2.6% in 2006. The expectations for the near future for these countries and for the whole EU are a bit more cautious (e.g. economic growth in 2007: about 2.1%).

¾ Given the assumptions made in this report, real growth of GDP in Germany is expected to reach 2.3% this year (with some anticipation effects) and 1.4% in 2007. In the forecast for 2008, acceleration to slightly below 2% is assumed but the expectations for 2009 are dampened (only 1.2%). The average number of unemployed has increased strongly in 2005 - partly due to changed definitions. In the following years a substantial reduction is forecast. The unemployment rate reached 11.2% in 2005 but will begin to fall until roughly 9% at the end of the forecasting period.

¾ In spite of the anticipation effect in new residential construction, total construction volume or output decreased by over 3.5% in 2005. A clear recovery is forecast for 2006 with a relapse in 2007 (1.6% and 1.2%, respectively). In the outlook for 2008 a slightly stronger upswing of about 1.5% (again lower than GDP growth) is expected but the construction cycle will expire in 2009 (+ 0.8%). With only one exception in 1999, the recession in the German construction sector has been lasting for 12 years having been (and remaining) a strong “growth brake” for the whole economy.

¾ Developments in construction output differ strongly between the six Euroconstruct sub- sectors (and in addition between west and east Germany and further by regions):

• Despite anticipation effects (smaller than expected) in the own-home sector, new residential construction decreased by almost 7% in 2005. It is forecast to recover strongly in 2006 but to flatten substantially in 2007. In the outlook for 2008 and 2009 only slight increases are assumed. Renovation and modernisation of the huge housing stock has decreased moderately in 2005 and will – in the rest of the forecast period – expand at stable but only moderate rates.

• The downward process in new non-residential construction has been stopped in the course of this year (2006: + 2.9%). The forecasts for 2007 and 2008 show a continued recovery of 2.2% and 2.5%, respectively, but the outlook for 2009 is clouded. Further reductions of renovation and modernisation took place in 2005 but will be stopped in this sub-sector in 2006, and a moderate growth is expected from 2007 on. These developments will lead to a strong recovery of aggregate non- residential construction in 2006 (about +2.0%). A substantial positive growth rate of about or above 2.0% is forecast for 2007 and 2008, respectively. In the outlook for 2009 growth is expected to flatten again to below 1.5%.

• Also total civil engineering (new work and all “professional” building measures in the existing structures) will recover this year with a small growth rate of about 0.5%. This growth-level will be excelled in the forecast for 2007 and 2008 with stronger impulses coming from both sub-categories, new work and R&M. In the outlook for 2009 are flattening of the growth process is expected.

146 © EUROCONSTRUCT Munich, December 2006 Germany

2 Macro-economic Outlook

A strong upswing of the world economic output is expected for 2006 and also (slightly weaker) for 2007 supported by the undamped economic growth of China / Far East and Russia and a steep but flattening growth trend in the USA. Albeit the risen energy prices (especially for oil) and raw materials, strong benefits for the world economy were achieved through the expansion of world trade, favourable company profits, rising asset prices and low interest rates.

In the rest of the forecast period world economy will continue to expand at a good pace though slightly less than before the robust expansionary effects of monetary policies and modification of bond rates affected great parts of the economies.

Also the economy of the European Union is expected to follow an upward tendency but with lower rates. The European economic recovery is continuously driven by increasing exports in some member countries (e.g. Austria, Germany, the Netherlands) and on the other side the revival of domestic demand in other parts of the Union (e.g. France, Italy, Spain).

The GDP and sector forecasts for Germany for 2006 to 2008 and in the outlook for 2009 are based on the following specific (partly unstable or even “risky”) key assumptions:

• The situation in Iraq will stabilise, but only 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 level at about USD 60/barrel in 2006 and remain on this reduced level in 2007. It will fluctuate around an only slightly higher level in the rest of the forecast period. • World trade will expand by about 8.5% this year and by over 7% in 2007; it will expand at high growth rates also in 2008 and 2009. Germany can fully or even above average participate in this development. • The euro will fluctuate in the forecast period around 1.28 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 key interest rates (up to 3.5% in 2007) in small steps aiming at long-run 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 but 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 almost 1.5% in 2006 and 1.9% in 2007 and only 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 2.4% of GDP in 2006 and even 1.4% in 2007 and thus again meet Maastricht criteria. • In expectation of the increasing VAT rate (from 16% to 19% at the beginning of 2007) private households and investors will bring forward purchases of consumer goods and residential construction measures to 2006.

On the basis of these conditions and assumptions economic growth in Germany is expected to rise by 2.3% in 2006 but only by 1.4% in 2007. A higher but still moderate growth rate is forecast for 2008 (+ 1.8%). In the outlook for 2009 a weaker domestic demand will lead to a flattening of economic growth (only a bit more than 1%).

In 2005, the recovery of the German economy benefited from further increases in exports (more than + 4%). This development will accelerate in 2006 (+ 8.5%); it will continue to be effective in 2007 (+ 5%) and also with relatively high rates in the coming years.

Nominal disposable income of private households in Germany increased by only 1.5% in 2005 but will expand faster in 2006 and 2007 (3.1% and 2.3%, respectively). Private and public consumption and particularly gross fixed investment will recover from 2006 on. Total domestic demand is expected to increase in 2007 at small rates because of the noticeable anticipation effects.

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 more optimistic economic expectations will improve the situation on the labour markets stepwise. The average number of employed is expected to increase slightly because of special (not yet sufficient) 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.

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.

At the beginning of 2006, the value of net capital assets in Germany reached over 6,900 bill. €. More than 5,900 bill. € are buildings and structures (more than 86%; residential buildings about 50%, all other structures almost 36%). An enormous effort is necessary in order to keep these buildings and structures up-to-date. The Real Estate transactions volume has increased slightly in 2005 and will expand even faster until 2008 (Figure 1 at the end of this report). A lot of R&M in all types of buildings and structures is ordered in connection with changes in the ownership of these assets.

3 Housing Markets and Residential Construction

For a long time in Germany there was prevailing a great economic and political uncertainty. Together 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), this uncertainty had led to a fundamentally weak demand for building measures in residential construction, above all in the new Länder, but also in west Germany. Since 2006 a new basic confidence developed stimulating also the housing markets and residential construction (new work and R&M).

In the multifaceted and often confusing 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 developed before the end of 2005.

Over the past years, the “anticipated” permissions were realised only to a relatively small extent (difficult to forecast). 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 (additionally in order to avoid the

148 © EUROCONSTRUCT Munich, December 2006 Germany higher VAT). The expectations for 2007 are, therefore, again weaker but are looking a bit 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 and at the beginning of 2006 (expected and - meanwhile - realised entire cancellation of home-own grant). These developments are dampening the prospects for a substantial recovery of the demand for new residential buildings in this category 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 of disposable incomes combined with 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. The recovery of permissions will expire in 2007, and a negative tendency will prevail until 2009.

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) giving, however, only weak cyclical impulses. • 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 (average living space per capita 2004: almost 41 square meters). • With the expected acceleration of economic growth and rising employment, uncertainty will be reduced and disposable income of private households will increase faster again. • 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. • Special programmes for ecological housing by the KfW – Kreditanstalt für Wiederaufbau (Bank for Reconstruction) will support also the construction of new houses.

Despite the relevant but until 2005 surprisingly low realisation of the anticipation effects in permissions and these more “basic” stabilising – or in the coming years even stimulating – factors, permissions in the own-home sector will stagnate 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 owner-occupied 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 remain constant 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 considerably faster in the coming years, because competition remains strong (from “self-employed” people and the “black economy”, but also from abroad). • The vacancy rate will decline only slowly, especially in the new Länder. The pressure on house prices will remain strong, making existing houses or flats an attractive alternative compared to building or buying a new home or appartment.

Given the contradictory factors mentioned above, we expect only slightly increasing completions in the sub-sector of new single- and two-family houses in 2006 and 2007. A reduction is expected again for 2008 and in the outlook for 2009.

In new multi-storey buildings there was an enormous 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 via demolition but substantially only in a mid-term perspective.

In the last two to three years there has been occurring a new category of foreign investors on the German housing markets bringing some more dynamics in this sub-sector. 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.

Taking the permissions as indicator, the sharp cyclical downswing in building new flats should have come to an end in 2005. Considering the big estimation and forecasting difficulties caused by the anticipation effects and the lasting uncertainty, for 2006 and 2007 an increasing level of completions in this category is forecast, and in the outlook for 2008 and 2009 only a slightly reduced level of completions is expected.

Total completions in new residential buildings should have reached their lowest point of the present cycle in 2005. A recovery is forecast for 2006 and 2007, but in the outlook for 2008 and 2009 a lower level is expected again.

After a long period of decline total construction volume in the new residential sub-sector (houses and flats) is forecast to increase substantially in 2006 and to some extent also in 2007 and 2008. In the outlook for 2009 only a stagnating volume is expected.

150 © EUROCONSTRUCT Munich, December 2006 Germany

Renovation and modernisation in residential construction

A steady 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 Figure 1 at the end of this report; the data 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.

On the other hand, competition for rental households will force private and institutional (German and foreign) owners of rental houses to invest more in the existing housing stock because people are willing to pay for both, more space and more quality in their housing.

In realisation of the new EU-Directive regarding the energy status of buildings, the German government has established the so called energy-passport. While it has been obligate for new buildings since 2002 in Germany, it is 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. These passports provide better transparency for future real estate purchasers and tenants, who may now estimate the energy expenses before deciding. Together with the “ERP-Environment and Energy Savings Programme” based on EU decisions, 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 loan and 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-Förderprogramme “Wohnraummodernisierung”, “Sonderfonds Wachstumsimpulse im Infrastrukturprogramm” and “CO2 Gebäudesanierungsprogramm”) will lead to a great degree only to “bandwagon” effects.

Taking these (and additional) factors and both sub-regions together we expect for Germany only moderate increases of renovation and modernisation in residential construction in 2006. The outlook for the coming years is still a bit more pessimistic. In many years of past decades the growth path of all measures in the existing housing stock was significantly steeper.

4 Non-residential Markets and Construction

In 2005, almost 83% of construction investment in this highly heterogeneous sub-sector was done for (private or “semi-private”) enterprises and only 17% for public authorities (cf. Figure 3 at the end of this report). The “public share” will further decrease because of the increasing number of PPP projects. The great variety of investors and determinants in non-residential construction have led and will lead to deviating 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

An increasing number of private enterprises has postponed in the last years 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 for new private non-residential construction in the own country. Companies have reacted

© EUROCONSTRUCT 151 Germany Munich, December 2006 positively to the consolidation plans of the social security systems (esp. “Agenda 2010” for the labour markets and its prosecution by the new government).

On the other hand, the commercial Real Estate market has still high 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 past decrease of new construction activities of (“semi-“)private enterprises and – as a consequence – of total new non-residential construction has continued on average until 2005 for the following (partly additional) reasons:

• For several years the higher prices for oil and energy and for some raw materials had increased uncertainty regarding the further process of economic recovery in Germany. • In the 1990-ies, 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) have dampened 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 (goods and services) in order to save costs and to improve competitiveness (esp. in their core business) and to raise the return on investment. • The trend to shift parts of or to expand production abroad has gained momentum and has accelerated after EU enlargement and in the ongoing process of globalisation. These developments dampen the potential extent of enlargement investment in new buildings.

But 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. Improved expectations have developed and a moderate expansion in some sub-categories of new non-residential construction occurred, partly because of a meanwhile high backlog demand.

New public non-residential buildings

Public investment in new buildings has been continuously reduced in (both parts of) Germany in recent years (cf. again Figure 3). Some experts are arguing that the situation in parts of the “old” Länder is as bad or even worse as in east Germany. 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 worsened and will improve only slowly in the coming years.

Despite the often high and increasingly urgent needs, new building activity of the public sector will, therefore, decrease also in 2006. In the outlook for the rest of the forecast period only a slight recovery from the sharply reduced level seems to be possible.

An increasing number of public authorities are planning the realisation of new (and also 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 a handful of projects have been started or are under realisation. The share of such activities is still almost negligible but increasing rapidly (especially in R&M).

152 © EUROCONSTRUCT Munich, December 2006 Germany

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 permanent high international competitive pressure will not only be met by the construction of new buildings but – perhaps to a larger extent – 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; this holds true also for ecological reasons (e.g. energy saving and CO2 reduction with special programmes for the municipalities). 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 (cf. Figure 1) are responsible for the shrinking of R&M in non-residential construction in 2005. A slight increase is forecast for 2006. In the outlook for the coming years a clear recovery of R&M with higher growth rates 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 forecasts for 2007 and 2008 are looking even more optimistic, but in the outlook for 2009 a backstroke is expected.

Despite remarkable 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).

5 Civil Engineering

In 2005, more than 51% of investment in civil engineering was initiated, planned and financed by public authorities and almost 49% 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 4). The financial restrictions in the public sector, above all in the municipalities, will prevent a rapid increase in this sub-category of civil engineering in 2006. A slightly more optimistic scenario for both categories of investors, private firms and public authorities, is underlying the outlook for 2007 and 2008 but the expansion will flatten again in 2009 (more in R&M, less in new work).

Particularly at the beginning of the forecast period, both sub-categories of civil engineering, new work and R&M, are suffering from the strong budget constraints, above all of the municipalities. Additional budgets are now mobilised by the federal government.

Some stimulus for new civil engineering will 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 will be carried out to a large degree in east Germany. These developments will lead to a continued tendency of slightly increasing shares of the sub-sector “traffic and transport” in total civil engineering (see Table 4 b with corrected and actualised estimates).

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.

Higher 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 – after severe starting problems – 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 huge 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 civil engineering (and also in non-residential construction) it could be problematic in some cases to decide whether the construction measures belong to “new work” or to (value increasing or preserving) R&M. Estimates and forecasts for this split of total civil engineering are, therefore, difficult and highly uncertain (and perhaps are leading to smaller differences in the figures for the Euroconstruct countries contributing to the whole report).

6 Total 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. Fore more than one decade and up to 2005 the construction sector in Germany has been a strong (absolute and relative) “growth brake”; to a lower extent it will remain a dampening factor for the whole economy in the forecasting period. Measured against a “normal” increase of construction output of perhaps 2.0%, the “burden” will reach an average magnitude of almost 0.3% of GDP until 2009.

The lengthy construction recession in west and (even more) in east Germany had cyclical and structural causes; it is still to be seen as a reaction to the construction boom in the mid-1990s and to the permanent pressure on public budgets 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.

154 © EUROCONSTRUCT Munich, December 2006 Germany

Some of these problems will continue to exist or even sharpen after EU enlargement and in interrelation 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 endeavours had negative consequences for many people or enterprises and, therefore, have increased 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 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. 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 discussed above, in the short run positive developments are dominating partly because of special effects (anticipation of measures, esp. omission of the home-own grant; government programmes; increase of the VAT rate; see Figure 2 at the end of this report).

Taken the three sub-categories together, total construction investment/volume in Germany will increase in 2006 by more than 1.5% bringing the long lasting recession period to an end. Total construction volume/investment will expand further in the outlook for 2007 and even sturdier in 2008 (more than 1% and about 1.5%, respectively) but growth will flatten again in 2009. There is a substantial contribution of the construction sector to total economic growth forecast for the whole period, but construction growth is still remaining below the expected GDP change rate.

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.

Figure 1: Real Estate Transactions Volume in West and East Germany 1992 to 2009 Bill. Euro 140

120

100

80 West Germany

60 East Germany

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: GEWOS GmbH; Forecasts of the Ifo Institute for Economic Research, Munich.

Figure 2: Real Construction Investment / Volumea) in Germany by Sub-sectors 1995 to 2009b) 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 2009

a) In constant prices of 2005; Euroconstruct definition of construction volume and sub-sectors for Germany. b) 1995 to 2005: revised official and specially calculated values; 2006 to 2008: forecast; 2009: outlook. Source: Federal Statistical Office for Germany; Ifo Institute for Economic Research.

156 © EUROCONSTRUCT Munich, December 2006 Germany

Figure 3: Construction investment in Germany 1991 to 2005 by sub-sectors - at current prices - accumulated shares 100% Public civil engineering

90% Public non-residential buildings Private civil engineering 80%

70% Private non-residential buildings 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 investment in Germany 1991 to 2005 by types of industries and services - at current prices - accumulated shares 100% D-I-Y & appurtenant 90% structures

80% Services for planning & site preparation Manufacturing industries 70%

60%

50% Building installation & 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.

APPENDIX – DEFINITIONS

1. The basis for all ex-post figures of value variables used in this report is the German SNA – System of National Accounts (= VGR – Volkswirtschaftliche Gesamtrechnungen) with all data and methodological revisions (esp. for figures in constant prices of the previous year) until 2006. Revised total gross construction investment by sub-sectors in 2005 in current prices 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 (R&M) 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 Munich conference of Euroconstruct. These revisions are considered also in the forecast figures via estimates.

4. Table 1: Population and household figures are at the beginning of each year. The German (not ILO or OECD) concept for the average unemployment figures and rates has changed in 2005 leading to higher values.

5. Table 2: Total construction output: This category contains construction investment in the delimitations of the official German System of National Accounts (including 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 investment/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 volume.

6. Table 3: The housing stock figures are at the end of each year. The (again 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.

7. Table 4a: 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).

8. Table 4b: 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 Munich 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.

158 © EUROCONSTRUCT Munich, December 2006 Germany

Country/Pays/Land: GERMANY Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 82 530 82 500 82 440 82 350 82 300 82 250 82 200 Bevölkerung

Households ('000s) Ménages 38 570 38 640 38 720 38 750 38 800 38 830 38 850 Haushalte

Unemployed ('000s) Chômeurs 4 377 4 381 4 861 4 523 4 308 4 200 4 050 Arbeitslose

Unemployment rate (%) Taux de chômage 10.2 10.1 11.2 10.4 9.9 9.6 9.1 Arbeitslosenquote

Change of GDP Variation du PIB -0.2 1.2 0.9 2.3 1.4 1.8 1.2 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.1 1.6 2.0 1.7 2.3 2.0 1.9 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 0.0 1.3 0.9 1.9 2.5 1.7 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: GERMANY Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 48 900 -3.5 -6.1 -6.8 2.8 0.6 0.5 0.1

Logement Renovation 64 821 1.2 -0.2 -1.7 1.1 1.0 1.4 0.8

Wohnungsbau Total 113 721 -1.0 -2.9 -4.0 1.8 0.8 1.0 0.5

Non-residential construction New 30 715 -5.8 -7.2 -3.6 2.9 2.2 2.5 1.2

Bâtiments non résidentiels Renovation 19 638 -2.2 -3.0 -1.0 0.7 1.3 2.0 1.5

übriger Hochbau Total 50 353 -4.5 -5.6 -2.6 2.0 1.8 2.3 1.3

Building New 79 615 -4.4 -6.5 -5.6 2.8 1.2 1.2 0.5

Bâtiment Renovation 84 459 0.4 -0.9 -1.6 1.0 1.0 1.6 1.0

Hochbau Total 164 074 -2.1 -3.7 -3.6 1.9 1.1 1.4 0.7

Civil engineering New 19 995 0.7 -4.5 -4.0 -0.1 2.2 2.3 1.6

Génie civil Renovation 11 247 1.2 -2.5 -2.8 1.4 1.7 1.5 0.7

Tiefbau Total 31 242 0.9 -3.8 -3.6 0.4 2.0 2.0 1.3

TOTAL CONSTRUCTION OUTPUT 195 316 -1.6 -3.8 -3.6 1.6 1.2 1.5 0.8

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 26.93 3.6 -2.8 -7.5 2.0 3.5 3.0 2.5 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

160 © EUROCONSTRUCT Munich, December 2006 Germany

Country/Pays/Land: GERMANY Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 192.7 167.1 145.3 158.0 147.0 145.0 143.0 Baugenehmigungen Familienhäuser

Flats Collec tif 70.6 69.3 66.4 77.0 73.0 71.0 67.0 Mehrfamilienhäuser

TOTAL 263.3 236.4 211.7 235.0 220.0 216.0 210.0

Housing starts 1+2 family dw ellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collec tif Mehrfamilienhäuser

TOTAL

Housing completions 1+2 family dw ellings Logements terminés Individuel 165.2 177.2 149.1 155.0 163.0 153.5 145.0 Baufertigstellungen Familienhäuser

Flats Collec tif 70.9 70.6 61.7 72.5 78.5 75.0 70.0 Mehrfamilienhäuser

TOTAL 236.1 247.8 210.8 227.5 241.5 228.5 215.0 Housing stock Logements existants 37 770 37 930 38 070 38 220 38 380 38 530 38 670 Wohnungsbestand

thereof second homes dont résid. secondaires 3 210 3 270 3 325 3 360 3 390 3 420 3 450 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 1 630 1 630 1 610 1 570 1 530 1 480 1 460 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 44.7 44.6 44.7 44.8 44.8 44.8 44.9 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: GERMANY Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 1 121 1.6 -5.5 5.1 5.7 0.8 2.5 1.2 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 998 23.2 -17.1 -2.9 -13.0 7.7 0.7 -0.6 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 5 529 -9.9 -6.4 -6.3 5.7 -3.4 4.5 3.5 Industriegebäude

Storage buildings Bâtiments de stockage 4 959 -1.3 -3.7 -0.2 5.2 3.4 1.2 1.9 Lagergebäude

Office buildings Bureaux 5 068 -10.8 -22.8 3.3 18.4 8.9 3.7 3.7 Bürogebäude

Commercial buildings Commer c es 4 180 -5.2 -7.4 -5.2 5.7 -0.9 1.0 -3.5 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 3 086 1.9 -4.2 -7.4 -12.8 12.1 -19.5 3.7 Landw irtschaftsgebäude

Miscellaneous Autres 5 777 -9.8 6.1 -7.6 -7.1 -3.7 14.3 -1.8 Sonstiges

Total 30 715 -5.8 -7.2 -3.6 2.9 2.2 2.5 1.2 Insgesamt

1) At 2005 prices, excluding taxes.

162 © EUROCONSTRUCT Munich, December 2006 Germany

Country/Pays/Land: GERMANY Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 7 849 1.1 -1.4 -2.1 3.1 4.1 3.8 0.6 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 1 718 6.5 -7.7 6.0 2.2 7.5 0.3 1.3 Bahnanlagen

Other transport Autres réseaux 2 616 1.1 -1.4 -2.1 3.1 4.1 3.8 7.7 Übrige Verkehrsinfrastruktur

TOTAL 12 183 1.8 -2.3 -1.1 3.0 4.6 3.3 2.2

Telecommunications Télécommunications 4 374 0.9 -7.2 -6.9 0.4 2.0 -1.6 -0.2 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 4 508 1.2 -3.3 -2.4 2.4 2.6 3.0 2.0 Energie- und Wasserversorgung

Other Autres 10 176 -0.2 -4.2 -5.6 -3.6 -1.5 1.6 0.2 Sonstiges

Total 31 242 0.9 -3.8 -3.6 0.4 2.0 2.0 1.3

1) At 2005 prices, excluding taxes.

Country/Pays/Land: GERMANY Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 1 321.1 -0.1 0.1 0.1 0.9 0.0 0.7 0.4 Privater Verbrauch

Public consumption Consommation publique 419.6 0.4 -1.3 0.6 1.2 0.7 0.8 0.5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 386.9 -0.8 -0.4 0.8 3.9 3.4 3.5 2.0

of w hich construction 202.3 -1.6 -3.8 -3.6 1.6 1.2 1.5 0.8

Stocks (as % of GDP) Variations de stocks - 2.6 -0.6 -0.3 -0.1 0.1 0.1 0.2 0.3 Vorratsveränderung

Ex por ts Exportations 912.3 2.4 9.6 6.9 10.0 6.2 5.0 4.5 Ex por te

Imports Importations 796.3 5.4 6.9 6.5 9.7 5.2 4.5 4.2 Importe

GDP PIB 2 241.0 -0.2 1.2 0.9 2.3 1.4 1.8 1.2 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

164 © EUROCONSTRUCT Munich, December 2006 Hungary

HUNGARY BUILDECON www.buildecon.com

Anna Gaspar e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

The economic indicators that are somewhat worse than we predicted, become even more unfavourable in 2007-2008, due to the necessary corrections and creation of balance. The pace of growth of the GDP decreases in 2007-2008, on account of the limits of domestic consumption, the moderation of state investments and the less favourable position of the labour market. At the same time, the Second National Development Plan starting in 2007 launches those favourable infrastructural developments (both intellectual and physical) that become the propelling force of economy from 2009 onwards. The construction activity has an important role in this. Although the conditions of the contest will be stricter and some market restructuring is to be expected, the number of tasks of the construction market participants at the end of the plan cycle in 2013 will be the double of the present one. Therefore, as a consequence of the uncertain economy at present, we expect a stronger decrease of the construction output in 2006-2008 than predicted half a year ago, and, a slower recovery starting in 2008-2009.

Construction growth forecast % % 20 20

15 15 Non-residential 10 Residential 10

5 5

0 0

-5 -5 Civil engineering -10 -10 2005 2006 2007 2008 2009

The market conditions for residential building construction and renovation have been created both on the level of participants and infrastructure. However, a large part of the purchasing power is a function of the fluctuating housing policy. The balance between living standards, demands and housing prices can only be achieved gradually. The strong supply remains a constant feature of the construction market of new homes in the following period. However, the effective demand does not increase on account of the temporary economic slowdown. Therefore we predict a lower rate of increase instead of the previously prognosticated one. The piling up of ongoing constructions and construction permits issued, but the strongly expanding renovation and modernisation implies a more modest growth in 2006 than that in the previous two years. Despite our earlier prognosis, housing construction will stagnate in 2007. Only in a highly favourable situation can we expect a growth in 2008, and a yearly 5-10% increase is expected in 2009 on the joint housing and renovation market.

166 © EUROCONSTRUCT Munich, December 2006 Hungary

Although the non-residential building permits issued in 2005 and the first half of 2006 show that the great investors create large floor space new buildings (new investment or the development of existing ones), the macroeconomic and political uncertainties in the second semester point towards investors biding their time. The potentially large-scale developments, a significant part of real estate projects is a function of the Hungarian economic environment, the European and global conjuncture. We consider that last year’s volume of investments can be repeated this year. However, real estate developments may slow down by 2007- 2008. In case of favourable macroeconomic processes, the results of which can be felt earliest in 2008, and taking into account the effects of the Second National Development Plan, we predict a slight speed up in non-residential construction from 2008/9 on.

As for the civil engineering construction is concerned, in the second half of 2006 we modify our forecast for increase for the next two-three years downwards on account of unfavourable macroeconomic facts and the EU responsibilities arising from these (Hungarian convergence program). Although transport and environmental developments are a priority in the EU support and government system, the civil engineering sector cannot completely free itself from the effects of powerfully decreasing investment trends in 2007-2009.

2 Macro-economic Outlook

At the beginning of 2005 there was a conjunctural slow–down in the Hungarian economy parallel with that in Europe. However, a quick and relatively favourable growth led by the export and the investments has occurred since the middle of the year. The economy increased by 4,1% during the whole of last year, the gross domestic product was 22.027 billion HUF (89 billion Euro). The proportion of construction within investments, as the government was before elections, was 11,6% of the GDP, and this was outstanding as a whole, producing a growth above 8% as compared to 2004. Foreign capital inflow (FDI) was around 5,6 billion Euro in 2005, significantly more than in the previous year. There were substantial capital investments made by Hungarian companies abroad.

Inflation in 2006 is 3,6% - a small change as compared to the previous year due to the increase of energy prices and the VAT rates. Forecasts for 2007 show a much higher proportion (7,2). There are quite many uncertainty factors in the exchange rate changes of the Forint. The yearly average value of the Forint against the Euro was 248 in 2005, in 2006 1 Euro is around 265-270 Forints which means a 7-8% drop in the exchange rate. There is a slight decrease in employment this year as compared to 2005. There will be dismissals in the public sector starting with January 2007 and, on account of the decrease in demands, in the field of services as well. Unemployment reaches circa 8%.

The outstanding performance of the year 2005 before the elections cannot be repeated in 2006. The decrease in domestic demands and state investments can already be felt at the end of 2006, but it becomes substantial in 2007. At the same time, the external trade balance will hopefully continue to be favourable in the following years: regarding foreign capital inflow and outflow, experts predict a 4,5 billion Euro inflow in 2006 in the field of services (communication, public utilities, tourism, logistics) and industry (energetics, electronics, machine industry).

The external situation had a positive impact on the Hungarian economy in 2006, however, inner developments led to a slowdown. On account of the extremely high deficit of the state budget due to previous overexpenditure, the state debt totalling up to 69% of the GDP as well as the reforms in health care, public administration, the pension system and education postponed by several governments led the Hungarian economic policy to an emergency state that implied the introduction of corrective measures. The old-new government (re- elected in April 2006) considers the introduction of restrictive measures realistic only at the very beginning of the government cycle. The announcement of the restrictions, the preliminaries of local elections in the autumn and their unfavourable results for the government led to internal political problems. Therefore the prospects for economic development in Hungary seem to be contradictory. At the end of 2006 we may conclude that economic development largely depends on changes in the internal political situation.

On account of its European Union membership, Hungary, just like the other member states that have not yet introduced the Euro, is compelled to prepare and accomplish the convergence programme. This latter was adopted in September 2006 and defines the correction of the deficit, the introduction of the reforms, the creation of balance and the commencement of long-lasting growth in two stages, up to 2011. According to the convergence programme approved by the European Commission, the main macroeconomic indicators between 2006-2011 are as follows:

168 © EUROCONSTRUCT Munich, December 2006 Hungary

Hungarian Convergence Program in numbers Table 1 Annual percentage change Denomination 2006 2007 2008 2009 2010 2011 GDP 4,1 2,2 2,6 4,1 4,2-4,5 4,5 Domestic use 2,0 -0,2 0,5 3,1 3,5 3,5 - 4,0 Of which: Consumption of households 2,4 -0,9 0 1,5 2,5 – 3,0 3,0 Gross fixed capital formation 6,6 2,1 3,7 7,0 5 - 6 5 – 6 Export 12,0 10,9 9,9 9,4 8 – 10 8 – 10 Import 9,5 8,5 8,0 8,8 7 - 9 7 – 9 Percapita real income 1,9 -1,7 0,1 2,5 3 – 3,5 3,5 Number of employed 0,3 0 0,3 0,7 0,7 - 1 1 Consumer price index 3,5 6,2 3,3 3,0 2,5 - 3 2,5 - 3

Parallel with the convergence programme the seven-year Second National Development Plan (New Hungary Programme) for 2007-2013 is being finalised. The EU budget for Hungary approved in June 2006 is 33,6 billion Euro for 2007-2013, which must be coupled with a 15% central budget “co-financing“. Due to the development strategy priorities of the Second National Development Plan, the inflowing supports – circa 10 000 billion HUF – are used to a great extent in civil engineering, the development of transport, environment and infrastructure. (www.nfh.hu: New Hungarian Development Plan, 2007-2013, www.gkm.gov.hu: Transport infrastructure development of Hungary up to 2015).

The division of EU sources is the following: agricultural funds: 10 billion Euro – circa 3 million can be used as “rural development funds“ for regional transformations (civil engineering included).

Economy development (structural and cohesion) fund: 22,6 billion Euro, of which 7 billion Euros are the cohesion fund.

Summing up: The economic indicators that are somewhat worse than we predicted, become even more unfavourable in 2007-2008, due to the necessary corrections and creation of balance. The pace of growth of the GDP decreases in 2007-2008, on account of the limits of domestic consumption, the moderation of state investments and the less favourable position of the labour market. At the same time, the Second National Development Plan starting in 2007 launches those favourable infrastructural developments (both intellectual and physical) that become the propelling force of economy from 2009 onwards. The construction industry has an important role in this. Although the conditions of the contest will be stricter and some market restructuring is to be expected, the number of tasks of the construction market participants at the end of the plan cycle in 2013 will be the double of the present one.

3 Housing Market

On 1 January 2006 the Hungarian housing stock consisted of 4 million 210 thousand homes, with an average floor space of 75 square meters, circa 88% provided with public utility water, toilet, bathroom and 57% with public sewerage. 92% of the homes is private property. 12,4% is one-unit, 40% two-unit, 31% three-unit and 16% is four or more unit home. 65% of the housing stock is family house made of brick, while a further 20% is prefabricated reinforced concrete panel block of flat built between 1965-1980. Circa 25% of the housing stock is obsolete, in rather bad condition or uninhabited. Homes younger than thirty years make up 35-37% of the whole stock. Circa 3-5 thousand homes are demolished and 35-42 thousand new homes are built yearly since 2003. The number of renovated homes is an estimated yearly 100-140 thousand.

41 084 homes received an occupation permit in 2005, and a building permit was issued for 51 490 new homes. The number of homes put to use was 6% lesser, the number of new building permits 10% lesser than in 2004. 30% of the homes were built in Budapest. This concentration around the capital is also valid for the new buildings planned. While the average floor space of homes in Budapest is decreasing for years now – from 91 to 62 square meters, that is, by 33%, in 2001-2005 – such a change is not characteristic of homes built in other parts of the country, the average floor space of which was around 96 square meters in the last years.

The decreasing number of new building permits issued at the beginning of 2006 has primarily affected constructions in the cities. One third less is the number of homes planned to be built in the capital and in cities with a population greater than 50 thousand as well as in the three and more unit buildings than in the first half of 2005. The building impetus has dropped in all the Eastern counties of Hungary. In certain counties of the Western Hungarian regions (Fejér, Somogy and Győr-Moson-Sopron county) the number of new building permits increased by 10-27%, in Pest county by 2%. The situation is only more favourable in those cities where employment conditions are better (Győr, Székesfehérvár, Sopron, Pécs and Miskolc) or the higher education institutions attract a large number of students from all parts of the country. There was a transitory building material shortage in the second part of 2006, which implies advanced purchasing. We consider this the result of unfavourable macroeconomic processes, the imminent austerity measures, the increase of energy prices and its impact on the price of building materials.

At the end of 2005, 150 thousand homes were being built. The average time of completion for homes in the central area is two years, for those in small settlements and the periphery is almost 2,5 years. The building permits issued allow the commencement of construction until the end of the third year. The completion and occupation of the house depends on the financial situation of the developer. Circa 50% of the homes are privately built or built by an entrepreneur. This explains the great number of buildings in progress.

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New residential construction Table 2

Valid building Buildings in New building Homes put Year permits progress permits issued to use 1999 129 182 94 752 30 577 19 287 2000 137 000 95 791 44 709 21 583 2001 155 000 109 884 47 867 28 054 2002 165-170 000 120 652 48 762 31 511 2003 175-185 000 137 658 59 241 35 543 2004 175 000 146 637 57 500 43 900 2005 170-185 000 149 759 51 490 41 084 2006. Q.I –III. 31 232 18 800 Source: Statistical Office of Hungary, KSH

The Hungarian housing policy is fluctuating in function of the election cycles. The system of funded housing credits providing the background for home construction before 2003 was a great impulse the results of which could be seen in 2004-2005. The infrastructure of home construction has developed, house mobility and the construction of flats increased. Starting with 2004, the restrictions and the lobbying fights temporarily slowed down the dynamism of home construction. The changing circumstances - reduced funding, the increase of energy prices and the more developed real estate market impacts placed the renovation of the existing stock in the forefront.

The present governmental housing policy is more modest and cost-effective: it is characterised by indirect state support (complementary, mortgage bond, renovation and public utility credit interest support) as well as mortgage bank support and savings bank housing support. Given the contradictory impacts of the parliamentary and local council elections, it is quite difficult to predict the housing policy of the next years, towards the end of 2006.

At the same time, on account of the favourable real estate market climate, housing finance opportunities have significantly broadened: there is a strong competition among banks to offer increasingly favourable credit terms. We mention here the zero percentage leasing construction with starting capital. The housing credit stock increased by 20% from 2004 to 2005 (it is 2140 billion Forints, or 8,6 billion Euro). In the first semester of 2006 it surpassed its value in 2005 by 12%. Circa 60% of the 2005 housing credit surpassing 500 billion Forints is foreign exchange loan. We mention that the housing credit stock was 332 billion Forints in January 2002.

Surveying the housing market trends we may conclude that the supply of homes is increasing in 2006 as compared to previous years – by circa 30% in Budapest, for example. Demand stagnates on a country average level. Almost half of the new homes (84% in Budapest) were built in enterprise, for sale. While a yearly 3-5000 homes were built in the capital in 1990-2000, 10 000 homes received an occupation permit in 2004 and 12 000 homes in 2005. Analysts say that this increase continues in 2006-2007, and probably stabilises around a yearly 12-14 000 homes. In the first half of 2006 circa 30 thousand homes are being built; they are in different stages of construction.

There are several foreign developers among those who finance housing: the Israelis were followed by the Irish, the Dutch, the Italians, the French and the Spanish. The capital as a valuable estate developing area (riverbank, mountaneus region, old city centre, developing public transport, etc.) is the most important site for the increasing housing developments.

The outstanding housing projects are accomplished by great real estate developers such as the Olympia Group, Fadesa, Orco, Coral Holding, the Engel Group, Futureál, Autóker Holding and OTP Real Estate. There are some PPP constructions among these, as well.

The growth of housing prices and the diversification of the supply is due to the increasing price of building sites (in Budapest, the agglomeration and West-Hungary), the growing costs of contractors who use illegal workforce to a much lesser extent, the increasing demands for quality and technical consistency, the increasing sales- and marketing costs. The rate of price increase is a yearly 5-10%, depending on foreign and domestic customers and the market demands. This is somewhat slowed down by the stagnating demand mentioned above.

The value of existing homes is increased by complex real estate market effects, therefore the renovation, expansion, built-in attic, restructuring and modernising activity is growing steadily and continuously. The present government supports the construction of new and used homes, even though to a different extent, by the support of credit interest as well as the non- returnable support depending on the number of children. There is a special fund for the modernisation of flats built of large prefabricated concrete blocks – a number of 500 thousand flats. A circa 300 billion Forints housing credit was offered for purchasing used homes (55 thousand homes), modernisation and extension (20 thousand homes.)

Some important global and local circumstances increase the renovating impulse of the population. First of all, the rapid growth of energy prices necessitates the modernisation of households. Starting with September 2006, an energy proof must be issued before the sale of new homes which affects the price of these homes. The EU supported VAT reduction in the invoices of entrepreneurs undertaking labour intensive renovating activities probably remains merely a possibility in the next years. It is improbable that this measure - also serving the whitening of black labour and therefore the creation of workplaces - will be part of the housing policy, working against the existing and future governmental austerity measures.

Residential construction forecast

th.units th.units 100 200 Homes under constr. (right scale) 80 160 Housing completion (left ) Housing licenses 60 issued (left scale) 120

40 80

20 40

0 0 2004 2005 2006 2007 2008 2009

Summarising: The market conditions for home construction and renovation have been created both on the level of participants and infrastructure. However, a large part of the purchasing power is a function of the fluctuating housing policy. The balance between living standards, demands and housing prices can only be achieved gradually.

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The strong supply remains a constant feature of the construction market of new homes in the following period. However, the effective demand does not increase on account of the temporary economic slowdown. Therefore we predict a lower rate of increase instead of the previously prognosticated one. The piling up of ongoing constructions and construction permits issued, but the strongly expanding renovation and modernisation implies a more modest growth in 2006 than that in the previous two years. Despite our earlier prognosis, housing construction will stagnate in 2007. Only in a highly favourable situation can we expect a growth in 2008, and a yearly 5-10% increase is expected in 2009 on the joint housing and renovation market.

4 Non-residential Market

Non-residential construction in the first half of 2006

2005 can be considered a successful year in non-residential construction. We must mention the construction and renovation of office buildings, industrial buildings, commercial objects, tourist service regions, agricultural buildings, research laboratories, educational, health care, sports, cultural and religious etc. buildings. The last year was characterised by the favourable effects of the real estate market, the strong economic policy attracting foreign capital and helping new investments in the case of established companies, European Union membership, the increasingly self-possessed and expert use of the opportunities granted by the First National Development Plan as well as the launching of PPP (Public-Private- Partnership) investments.

The non-residential construction market is affected by contradictory impacts in 2006. In the first semester, investments in the processing industry (covering a fifth of all investments) decreased by 5,5%, and there has been a regression in trade as well. On the other hand, the value of support for modernising and extending educational institutions increased, the volume of agricultural investments also increased by almost 10%. According to the data published by the Central Statistics Office, a total of 1774,7 billion Forints (circa 6.8 billion Euro) was spent for investments (construction, machinery and other items) in the first half of 2006. Thus their volume increased by 1,8%. Investments in progress, the data of which we present in the table below, let us conclude that the value of non-residential construction and renovation grows with a further 5% until the end of the year. This means a slowdown as compared to the more than 10% growth last year.

Similar to previous years, the budget allocated for non-residential public investments - educational, health care, touristic, cultural, sports, and religious buildings - is still modest, 22- 25% of non-residential building construction values, together with renovation. In 2007-2013 the Second National Development Plan focuses on community, educational, cultural, touristic, workplace-creating and preserving investments. A separate part supports agriculture, the transformation of which is going to be one of the most important chapters of NDP II.

Net construction costs Table 3 thousand HUF (Euro1) Building type 1 m2 at prices of 2005 1 m2 at prices of 2006 H1 Multi-unit residential building 164-180 (690) 170 (646) One-family house 200-230 (887) 230 (874) Gymnasium 175-180 (725) 175 (665) School 160-180 (685) 165 (627) Office building 280-290 (1148) 290 (1022) Industrial building 170-230(806) 220 (837) Warehouse 150 (604) 150 (570) Hospital 240-260 (1007) 250 (950) Commerce 175-230 (806) 200 (760) Hotel 260-280 (1100) 275 (1045) 12005: 1Euro = 248.05HUF; 2006: 1Euro = 263HUF (estimation) Source: Archigram - Buildecon

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The realisation of some large community investments was started in a PPP (Public Private Partnership) construction in 2005, as the budget affected by state debts could only finance them in the long run. Besides the construction of the concessionary motorway segments (M5, M6) the PPP plays the most important role in the Hungarian Universitas Programme. This comprises the development, construction or reconstruction of circa 80 educational units, the realisation of which began in 2005. Several smaller sports buildings and prisons are also going to be constructed by state and private capital cooperation. The compulsory, new approach of the PPP projects is the lifelong economic operation of the buildings.

ReaI estate market impacts

The Central and Eastern European reaI estate market is characterised by a strong foreign investment demand and a poor supply. Consequently, and as a result of an increase in the price of building sites, construction plans, construction costs, building materials and products, a 6-8% price increase is to be expected on the Hungarian reaI estate market in 2006. The demand for building sites for office buildings, hotels and shopping centres is increasing.

The office building market. By the end of the 1990s the Hungarian office building market produced 190 thousand m2 office area, and after an almost five years regression when demand played the most important role, there was a turn. Almost 230 thousand m2 office area was on the market in 2004-2005, the construction of 115 thousand m2 new offices was completed in the first half of 2006 and circa 400-450 thousand m2 are under construction. The offer of the whole Hungarian office stock is 2 million m2 in the second half of 2006, with an average 11-13% vacancy rate. Outside the capital and the agglomeration, office developments are insignificant. Some of the greatest ongoing constructions are: Raiffeisen tower blocks (Budapest, 70 thousand m2), Graphisoft Park (Budapest, 32 thousand m2), Corvin Office Park, Futureál development (Budapest, 150 thousand m2), Eiffel Office building (Budapest, 22 thousand m2), Átrium Park, Wallis development (Budapest, 62 thousand m2), Business Center 30, Ablon (Budapest, 50 thousand m2), City of Technologies (Székesfehérvár, R&D complex development), Talentis Park (Budakeszi region, R&D park). Here we mention the project of a new government district in the capital, that would require a minimum of 160-180 thousand m2 office buildings on a 12-15 hectare area. The present macroeconomic circumstances will probably delay the launching of the project, however, the privatisation of the government offices presently operating in valuable city centre real estates would probably cover two or two and a half times the costs of the new project. Almost 30 great real estate developers handed in their projects for the new government district. We also mention future developments in Pécs, the Cultural Capital of Europe in 2010. Only a small part of these will be office constructions; a concert hall, a library, a museum, an exhibition hall and a centre of knowledge are going to be built.

The office investment demand – although smaller than in the previous year – still remains strong. The new office supply is expected to grow in the next years, renting grows further, the decrease of the vacancy rate slows down a bit and rent prices stabilise. Offices in Hungary are rented by state offices as well as by new, global companies appearing on the market and completing ’outsourcing’ tasks in lower wage countries with a highly qualified workforce.

Renters with higher demands today move into architecturally and functionally higher quality buildings. Facility Management, the ’branch’ dealing with the operation and preservation of these buildings has an increasingly important role. In the developer’s perspective, the life expectancy, the high quality and economic preservation of the building are relevant.

The construction of commercial buildings. In 2005, 30% of the new commercial buildings were shopping centres, 30% hypermarkets, 19% supermarkets, 13% DIY stores, 7% furniture stores, on a floorspace of 6-700 thousand square meters. At the beginning of 2006 the performance of the commercial segment still shows an increasing trend, commercial investments find the capital attractive again, besides rural developments. The floor space of

© EUROCONSTRUCT 175 Hungary Munich, December 2006 newly launched projects exceeds 210 thousand square meters - ’strip malls’, smaller shopping centres that can be operated more economically enrich the supply.

Besides commercial units designed for mass provision, the first higher quality specialised department stores and family shopping centres appeared in the last years. Commerce coupled with spending free time has been present in Hungary for ten years now: these shopping malls have become places frequented by the young generation. Their development continues in the near future. Some larger new constructions are: Árkád Győr, 35 thousand m2, Vértes Center, Tatabánya, 30 thousand m2, Új Buda Center Budapest, 18 thousand m2, Arena Plaza Budapest, 180 thousand m2 as well as the 120 thousand m2 ING investment replacing Budai Skála, serving housing estate, office, restaurant, commercial and entertainment purposes. Some old department stores are also going to be renovated (Luxus Áruház, Divatcsarnok, BÉT Palace, Budapest City Centre). Commercial developers are present in every settlement with more than 100 thousand inhabitants. The appearance of hybrid plazas (combinations of shopping parks) is expected in the next years.

Besides specialisation, the shopping centres have a significant potential for increase. The discount chains developing their logistics base also show a strong development. Their market share in 2005 was already 17%, which is probably growing further. The infrastructure developments in Budapest and other towns, the subway, the road constructions, traffic junctions, the position of border cities are the future sites and lines of development. Therefore the commercial centres occupy a central position in the portfolio of real estate funds, on account of their high profitability. Rent prices in shopping centres in Budapest vary between 16-100 Eur/m2/Ft, their average occupancy rates are above 90%.

Industrial and logistics developments. The government has supplied 70 thousand Hungarian enterprises with almost 800 billion Forints (3,2 billion Euros) since 2002, in the form of loans on preferential terms, EU funds or non-returnable support. The foreign working capital inflow to Hungary was circa ten times as much as this so far. It is clearly vital for the export-oriented Hungarian economy to sustain the continuous inflow of foreign capital. The government created 180 industrial parks between 1997-2005 to win and domesticate working capital. Moreover, it supported capital inflow by significant tax benefits and infrastructure development. In 2005, the accelerated motorway constructions and the government support transferred a part of workplace-creating investors to the Northern and South-Eastern regions where unemployment rates are higher. 5,6 billion Euro entered the country in 2005, of which 2,5 billion Euro are new investments. 34 industrial projects are completed and 16 thousand workplaces created in 2006-2008 (Hankook Tire, three Bosch investments, the Alcoa-Köfém, the Grundfos, the Coloplast factories, the four Sekab industries producing bioetanol etc.)

The convergence programme considered necessary and accepted by the EU in 2006, the motorway construction delayed in the second half of 2006 and the changes in the tax system starting from 2007 may slow down the inflow of capital. The investments realised within the Second National Development Plan may moderate this unfavourable process. The Second National Development Plan considers the development of the transport infrastructure (expressway, public road and railway) and education infrastructure (skilled worker training, within this) priorities. Therefore, after a transitional slowdown, a strengthening increase can be expected from 2008-2009 onwards, in industrial constructions. The building permits issued in the first half of 2006 are also signs of this process.

The geographical position of Hungary, the proximity of Eastern and South-Eastern European new markets, the settling of great production-exporting companies and the development of their production capacity continually sustain the need for modern logistic investments. The logistics real estate developments following the transport lines expanded by 150 thousand m2 in 2005, 61 thousand m2 was ready in the first half of 2006 and a further 80 m2 is incomplete. The development potential is much larger than this. The developers ensure an increasing flexibility for the changing demands of rentals and hope for the upswing of the

176 © EUROCONSTRUCT Munich, December 2006 Hungary continuing market. Their real estate developments can be expanded: the difference between the planned, the constructed and the expandable square metres can be twenty times as much. The rental prices of warehouses are around 4-4,5 Euro/m2/month in 2006. The greatest developers are CPB Immo, Grontmij, Agrogate, BILK, ProLogis, Wallis, AIG/Lincoln and Wáberer.

Summing up: Although the building permits issued in 2005 and the first half of 2006 show that the great investors create large floor space new buildings (new investment or the development of existing ones), the macroeconomic and political uncertainties in the second semester point towards investors biding their time. The potentially large-scale developments, a significant part of real estate projects is a function of the Hungarian economic environment, the European and global conjuncture. We consider that last year’s volume of investments can be repeated this year. However, real estate developments may slow down by 2007- 2008. In case of favourable macroeconomic processes, the results of which can be felt earliest in 2008, and taking into account the effects of the Second National Development Plan, we predict a slight speed up in non-residential construction from 2008/9 on.

5 Civil Engineering Market

Survey of the civil engineering market situation

The value of civil engineering works which previously covered a fourth of the yearly construction volume, started to increase from 2004. This was mainly due to the speeding up of the motorway construction programme as well as the responsibilities and preferences arising from the EU membership. Therefore the proportion of the civil engineering sector reached and somewhat surpassed 30 percent of the whole construction output in 2005. The outstanding pace of increase in civil engineering became restrained in the first half of 2006.

Sectorial breakdown 0% 10% 20% 30% 40% 50% 60%

Civil engineering, new

Non-residential, new

Residential, new

Residential, renovation

Non-residential, renovation

Civil-engineering, renovation 2005 2001

0% 10% 20% 30% 40% 50% 60%

The transport infrastructure

The Hungarian express road network reaching the Central-European level is the most spectacular field of the prioritised transport infrastructure development. In 2002-2005 it increased by circa 400 kilometres, from 530 km to 900 km. This consists of 764 kilometres motorway and 126 km express road. The ongoing tenders and constructions signal the construction of a further 200 km by 2007, 130 km of which is the motorway. On account of the governmental measures for budget cuts, construction may slow down. The extent of this cannot be assessed yet.

Since 2004, the increase of domestic investments were primarily stimulated by the motorway constructions. The greatest winners of the 1500 billion HUF public procurement came to the forefront with transport (railway and public road) projects. The rather strong international contest held down the special main road costs of motorways. This is 1,17-1,3 billion HUF (4,7 – 4,8 million Euro) per kilometre in 2005-2007.

23 percent of our 30 thousand kilometers long state owned public road network is main road, 77 percent is minor public road. A further 140 thousand kilometer public roads belong to the local councils. The average age of the public road network is 43 years, it is in a very bad condition. A significant part of the public road network must be reinforced for 11,5 tons axle weight, renewed and continuously maintained according to EU norms. A yearly 70-100 billion HUF road renovation is in progress on state owned public roads, however, this covers the renovation costs of 2-3 percent of the whole public road network only. The gradual growth of

178 © EUROCONSTRUCT Munich, December 2006 Hungary goods and passenger transport and its 65-80% share, as compared to the railway, also explains the increasing expenditure of EU sources.

Three major road bridges are under construction (the 62 billion HUF North Danube bridge on the M0 ringroad, the Danube bridge on the M8 at Dunaújváros as well as the viaduct of the M7 motorway at Köröshegy). Preparations are made for the construction of the two Ipoly bridges in Slovakian-Hungarian collaboration and the Danube bridge at Komárom is also going to be renewed in Slovakian-Hungarian collaboration. The bridges in Budapest are also due for an overhaul. Szabadság bridge will most probably be the first to be renovated in 2007. Circa 3000 road bridges need to be renovated all over the country (42% of our road bridges). In the following years there will be a shift of stress from motorway construction to the reconstruction of public roads and, as part of this, road bridges.

3000 km of the 7727 km Hungarian railway network connects the European spine network. The length of the double-track railway is 1146 km, that of the electrified rail tracks is 2580 km. The railway goods and passenger transport and the density of the railway network exceed the European average. At the same time, the qualitative features (speed, electrification, the condition of the railway network) is much under the required level. The track reconstruction works have been going on for years now. The priorities of railway infrastructure development are: developing pan-European and international railway corridors, building in modern safety equipment, further electrification, development of the Intercity service, improving the travelling conditions for the disabled, development of suburban sections, development of regional lines, connecting in logistics centres.

The European railways passing through our country are as follows: the Lyon – Budapest and, indirectly, the Bratislava – Paris line (IV. V., V/b., V/c., X/b). Since 2001, the modernisation of the railway has been supported by ISPA, then the Cohesion Fund and the Structural Fund. The task spans over several National Development Plans. PPP investments and the use of bank and private capital will also be required. Besides the modernisation of the railway infrastructure, the modernisation of the vehicle park and of the institutions also constitute an important cost factor. The present state of the railway reform is as follows: goods transport is undertaken by an individual company, passenger transport is going to be farmed out in January 2007, the cessation of unprofitable feeders is still discussed, although parts of it are highly debated, the rate reform is going to be prepared. The difficulties arising not only Hungary but in other countries as well (Germany, Austria, Slovakia) limit the development of the unprofitable railway transport and maintenance to a level lower than required. The construction of the railway ring around Budapest is a possible long-range project for decreasing losses: it could free large city spaces for real estate development.

The most important city and suburban passenger transport projects affect Budapest and the agglomeration. The construction of Subway 4 (section I: Kelenföld – Keleti Railway Station: 7,3 km, 10 stations, 300 billion HUF/1,2 billion Euro) has started this year. 79% of the costs are covered by the central budget (EIB credit), 21% by the capital (Budapest). The European Investment Bank offers credit for 75% of the total cost. The first section of Subway 4 is expected to be put to use in 2009. The winning contractors are: Vinci, Strabag, Hídépítő (Bamco consortium), Bilfinger Berger, Porr, Vegyépszer (BPV consortium), Swietelsky, Obayashi (Sw-O consortium). The preparation of section II is in progress: this consists of further 4 stations to the North, up to Bosnyák Square. This is expected to be handed over in 2010.

The circa 30 billion HUF suburban railway development project affecting Budapest and the agglomeration is also in progress. It is coordinated by the Hungarian State Railways (MÁV) which formed a three-member regional federation with BKV and VOLÁN. They consider the improvement of the 11 railway lines and the connected coach service and city public transport (railway track, modernisation of railway stations and vehicles, P+R parking, development of the public information system, operational coordination, setting up intermodal

© EUROCONSTRUCT 179 Hungary Munich, December 2006 connections) an important source of income. The suburban project has started with the modernisation of the Érd suburban railway track and preparations for the construction of the Ferencváros – Vecsés line. The North-Hungarian and the Western Transdanubium Regional Transport Federation were also founded. Their aim is the concerted and economic operation of transport in several counties. These regional federations are entitled to use EU funds.

River navigation (Danube, 7th pan-European corridor, navigation on the Tisza, development of the Körös and Sió rivers for tourism) and port building (Győr-Gönyű, Csepel, Baja and Szeged) depend on logistic requirements and developments. 8 of our 13 great intermodal logistics centres currently under development are connected to our waterways. The improvement of navigability can only be done by taking into consideration the protection of the fauna and the aquatic environment. The growing water tourism makes necessary the construction of a new passenger port in Budapest and passenger and sailing ports on the shore of Lake Balaton. The floods on the Danube and Tisza rivers are recurrent problems in the last years. Eight flood protection reservoirs are built in Eastern Hungary within the Vásárhelyi programme. Besides decreasing the level of the Tisza, these will also bring about a new landscape management for the population of the region. Works started in 2005.

The development of air transport is motivated by business life, tourism and logistics as well. Ferihegy 1st terminal in Budapest was modernised for the reception of the expanded Ferihegy economy flights. Ferihegy was purchased by British Airways, which plans to invest almost 70 billion HUF (260 million Euros) in terminal development, cargo facilities and flight technology. There are further developments in Debrecen and Sármellék (our rural international airports) as well as in Pér near Győr, Pécs, Szeged, Békéscsaba (regional airports), partly for logistic, partly for touristic reasons. In the case of regional airports the budget does only contribute to the development of infrastructures leading to the airports.

Public utilities equipment

The public utilities equipment of households develops year by year. The consumption of electric energy increases by a yearly 2-3%, piped gas supply by a yearly 13-15%, whereas the heat supply practically stagnates. The number of households connected to the sewerage system – 57% in 2004 – increases by a yearly 6-10%. By 2010, every settlement with a population above 10 thousand will have been connected to the drainage system, by 2015, every settlement with a population above 2 thousand. This means a proportion of 87% which necessitates a 64 thousand kilometre long sewage system instead of the present 43 thousand kilometre long one. Moreover, on account of the obligations arising from our EU membership, the total amount of waste water in the drainage system must be biologically cleaned. The development of the waste water cleaning capacity covers a circa 4,2 million population.

24 EU supported waste water cleaning projects start in 2006, and the preparation of several major projects is also under way. The main environmental protection investment is the central waste water cleaning project in Budapest, the value of which is 180 billion HUF and is due for completion in 2010. This superproject means that the waste water from Buda and Pest is going to be collected in the main drainage pipes to be built on the two sides of the Danube and carried to the central sewage farm to be built in North Csepel.

Projects of energetics

At present there are no provision problems on the Hungarian energy market. The participants with financial muscle provide the necessary development; the production of the cheapest nuclear energy in Paks can be continued in the long run by the modernisation of the atomic power station. Energy consumption increases by a yearly 2%, mainly by the development of services and the increasing demands of the population. The price of household energy rose significantly on 1 August 2006.

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The capacity of energy production in Hungary must be increased by circa 30% until 2020. At the same time, 50% of the present energy producing units must be changed or renewed. Gas provision, which is more risky than that of oil, raised the question of one-sided or exaggeratedly high energy dependency on an international level at the beginning of this year, as a consequence of the Ukrainian-Russian gas debate (almost 70% of our natural gas consumption comes from Russia).

The forementioned circumstances necessitated a reduced and more efficient use of energy, on the one hand, and the search for alternative energy sources (wood, biomass, sun, wind), on the other. The transformation of power plants for the use of biomass (wood, energy grass) has started. Research is done about the increase of the usage of wind and solar energy. Home renovations are supported by tenders and government programmes so that household energy consumption can be significantly decreased. The renovation of circa 3 million homes is to be funded provided they use energy-saving solutions (changing windows and doors, modernisation of the heating system). Starting with 1 January 2007, a certificate of energy consumption must be issued for newly built homes and renovations exceeding 1000 m2. The certificate is intended to influence prices on the real estate market. This obligation is gradually also imposed on used homes on the market.

Priorities in civil engineering in the Second National Development Plan (2007-2013)

While preparing our analysis, the Second National Development Plan (New Hungary Project) coming into force in 2007 and lasting until 2013 is being finalised after being put up for a public debate. The budget approved by the EU for Hungary in June 2006 is 33,6 billion Euro for 2007-2013. This is coupled by a compulsory 15% domestic central budget ’co-financing’. We estimate that circa 35-40% of the 10.000 billion HUF sum allocated for a span of seven years is used in civil engineering, developments in transport, environment protection and energetics, as presented above, as well as a significant number of regional and rural development programs. (www.nfh.hu; www.gkm.gov.hu). The New Hungary Development Plan (NDP II) groups the development of transport around the following four tasks:

• Improving the international accessibility of the country • Development of the express road network, modernisation of the main railroads, development of the waterway infrastructure • Improving regional accessibility • The development and reinforcement of the coating of main cross roads, setting up regional transport federations • Development of public transport in the city and the agglomeration • Development of suburban railway lines and their connection to local public transport, building cycle tracks, reducing transport in city centres • Development of the transport infrastructure of goods transport and logistics • The construction of intermodal logistics centres and the related infrastructure

Alternatives for civil engineering investments up to 2013

In the second half of 2006 we modify our forecast for increase for the next two-three years downwards on account of unfavourable macroeconomic facts and the EU responsibilities arising from these (Hungarian convergence program). Although transport and environmental developments are a priority in the EU support and government system, the civil engineering sector cannot completely free itself from the effects of powerfully decreasing investment trends in 2007-2009. On the one hand, according to the principle of additionality, in the case

© EUROCONSTRUCT 181 Hungary Munich, December 2006 of developments within the NDP, the amount of domestic state structural costs cannot decrease under the level of the previous plan period. Therefore Hungary is granted the opportunity to have its major infrastructural projects supported directly by the EU until 2008. On the other hand, it is to be expected that the government will decrease its costs and investments within the 100% domestic decision competence in order to drastically decrease the twin deficit.

All this means alternatives for civil engineering which cannot be expected to exceed the previous construction performance – calculated at the same price - until 2008-2009.

Buildecon predicts three variants for increase until 2013:

1. 2007-2008 civil engineering develops from EU sources directly (on the 2005 level) 2009-2013 the development by central budget (’own fund’) starts, a yearly 10% growth 2. 2007-2008 civil engineering develops from EU sources directly (on the 2005 level) From 2009 the development by central budget (’own fund’) starts, a yearly 10% growth From 2009 PPP projects start, a further yearly + 2-3%, totally 12-13% growth 3. 2007-2008 civil engineering develops from EU sources directly (on the 2005 level) From 2009 the development by central budget (’own fund’) starts, a yearly 10% growth further PPP projects start, a further yearly + 2-3%, totally 12-13% growth From 2010 greater (state and local council) budget costs and greater private capital (PPP) participation, altogether 15-18% growth

182 © EUROCONSTRUCT Munich, December 2006 Hungary

APPENDIX – DEFINITIONS

Table 1 • Population, Households: number of people at the beginning of the year • Unemployed and unemployment rate: Hungarian Central Statistical Office, at the end of the 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 of 1+2 family dwellings vs flats: one-family houses and twin-houses vs. 3 or more residential unit-houses • Housing stock: at the beginning of year • Second homes – no data • Vacancies – estimations: 300-500 000 residential units • Home ownership rate: number of residential units owned by individuals

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 agricultural use, animals and store • Miscellaneous: culture, church, sports etc.

Table 4b • Other transport includes bridges, airport, harbour construction

Table 5 • Stocks, Volume Private consumption, Public consumption, etc: at market prices, VAT excluded

Sources of data: • Hungarian Central Statistical Office • National Bank of Hungary • Archigram • Buildecon own compilation • Real Estate Publications: Eston, Magyar Irodapiac, Otthon Centrum

184 © EUROCONSTRUCT Munich, December 2006 Hungary

Country/Pays/Land: HUNGARY Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 10 142 10 117 10 096 10 075 10 060 10 045 10 000 Bevölkerung

Households ('000s) Ménages 3 860 3 870 3 880 3 890 3 900 3 900 3 910 Haushalte

Unemployed ('000s) Chômeurs 242 251 306 319 331 323 310 Arbeitslose

Unemployment rate (%) Taux de chômage 5.9 6.0 7.2 7.6 7.9 7.7 7.5 Arbeitslosenquote

Change of GDP Variation du PIB 3.4 4.6 4.1 4.0 2.6 2.5 3.3 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 4.7 6.8 3.6 3.8 6.8 4.2 3.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 5.7 4.8 4.2 6.0 6.2 5.5 5.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 8.5 11.1 6.7 6.8 7.0 6.2 5.5 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 7.0 8.2 6.6 7.3 6.9 6.1 5.7 Langfristiger Zinssatz

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

Country/Pays/Land: HUNGARY Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 2 150 11.3 18.0 -8.4 0.0 -0.5 -0.5 3.0

Logement Renovation 970 6.7 13.8 10.0 12.0 15.0 15.0 15.0

Wohnungsbau Total 3 120 9.9 16.8 -3.4 3.7 4.7 5.2 7.8

Non-residential construction New 2 580 -7.6 -10.4 12.2 5.0 2.0 3.0 5.0

Bâtiments non résidentiels Renovation 940 -1.6 -4.5 5.0 5.0 2.0 3.0 5.0

übriger Hochbau Total 3 520 -6.0 -8.8 10.2 5.0 2.0 3.0 5.0

Building New 4 730 0.2 2.0 0.1 2.4 0.9 1.5 4.1

Bâtiment Renovation 1 910 1.8 3.6 11.1 8.5 8.8 9.7 10.8

Hochbau Total 6 640 0.4 2.5 3.4 4.4 3.3 4.1 6.4

Civil engineering New 2 800 0.5 27.8 17.0 2.0 -5.0 10.0 12.0

Génie civil Renovation 900 5.2 15.0 25.0 1.8 -5.0 10.0 12.0

Tiefbau Total 3 700 1.7 24.6 18.9 2.0 -5.0 10.0 12.0

TOTAL CONSTRUCTION OUTPUT 10 340 0.7 8.8 8.4 3.5 0.4 6.0 8.3

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 4.10 5.0 5.0 10.0 10.0 5.0 5.0 10.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 248,05 HUF

186 © EUROCONSTRUCT Munich, December 2006 Hungary

Country/Pays/Land: HUNGARY Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 23.8 24.2 22.1 20.0 20.0 20.0 20.0 Baugenehmigungen Familienhäuser

Flats Collec tif 35.4 33.3 29.4 30.0 30.0 25.0 30.0 Mehrfamilienhäuser

TOTAL 59.2 57.5 51.5 50.0 50.0 45.0 50.0

Housing starts 1+2 family dw ellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collec tif Mehrfamilienhäuser

TOTAL 43.0 42.0 40.0 40.0 35.0 35.0 40.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 20.1 22.9 20.6 18.0 18.0 18.0 20.0 Baufertigstellungen Familienhäuser

Flats Collec tif 15.4 21.0 20.5 23.0 21.0 20.0 20.0 Mehrfamilienhäuser

TOTAL 35.5 43.9 41.1 41.0 39.0 38.0 40.0 Housing stock Logements existants 4 110 4 136 4 172 4 210 4 250 4 280 4 310 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zw eitw ohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 92.0 92.0 92.0 92.0 92.0 91.0 91.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: HUNGARY Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 100 -6.8 -11.0 8.7 0.0 2.0 3.0 5.0 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 100 -10.9 -5.7 14.9 2.0 2.0 3.0 5.0 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 650 -13.0 -9.2 5.0 3.0 -1.0 1.5 5.0 Industriegebäude

Storage buildings Bâtiments de stockage 300 -16.4 -7.3 15.0 5.0 3.0 4.5 5.0 Lagergebäude

Office buildings Bureaux 600 -5.0 -10.5 12.2 5.0 2.0 2.0 5.0 Bürogebäude

Commercial buildings Commer c es 500 5.0 -14.2 21.4 10.0 5.0 5.0 5.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 180 -3.8 -11.0 10.5 10.0 7.0 3.0 5.0 Landw irtschaftsgebäude

Miscellaneous Autres 150 -11.5 -9.2 15.4 -3.2 -5.0 3.0 5.0 Sonstiges

Total 2 580 -7.6 -10.4 12.2 5.0 2.0 3.0 5.0 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 248,05 HUF

188 © EUROCONSTRUCT Munich, December 2006 Hungary

Country/Pays/Land: HUNGARY Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 600 1.0 23.8 20.0 5.0 -10.0 10.0 10.0 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 200 1.0 33.0 33.0 0.0 0.0 12.0 10.0 Bahnanlagen

Other transport Autres réseaux 270 1.0 -11.1 17.9 -6.4 -1.2 8.8 10.0 Übrige Verkehrsinfrastruktur

TOTAL 2 070 1.0 18.3 20.9 3.0 -8.0 10.0 10.0

Telecommunications Télécommunications 560 -5.7 15.2 7.3 -8.1 -20.2 10.0 13.0 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 1 040 9.3 55.0 28.8 5.5 8.0 10.0 15.0 Energie- und Wasserversorgung

Other Autres 30 13.4 -8.5 -56.7 -3.4 -10.1 10.0 12.0 Sonstiges

Total 3 700 1.7 24.6 18.9 2.0 -5.0 10.0 12.0

1) At 2005 prices, excluding taxes. 1 euro = 248,05 HUF

Country/Pays/Land: HUNGARY Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 49.2 7.8 3.1 2.1 2.3 -0.4 -0.3 0.2 Privater Verbrauch

Public consumption Consommation publique 20.1 7.9 0.9 -1.4 0.7 -0.5 -1.5 -0.5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 20.1 2.5 8.4 6.6 4.5 3.1 4.6 5.5

of w hich construction 10.3 0.7 8.8 8.4 3.5 0.4 6.0 8.3

Stocks (as % of GDP) Variations de stocks 0.6 2.0 1.7 0.7 0.2 1.0 1.9 2.0 Vorratsveränderung

Ex por ts Exportations 59.0 7.8 16.4 10.6 14.4 10.1 9.4 12.5 Ex por te

Imports Importations 60.2 11.1 13.2 5.8 11.2 8.2 8.3 10.7 Importe

GDP PIB 88.8 3.4 4.6 4.1 4.0 2.6 2.5 3.3 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 248,05 HUF

190 © EUROCONSTRUCT Munich, December 2006 Ireland

IRELAND DKM Economic Consultants www.dkm.ie

Annette Hughes e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

The Irish economy continues to out-perform its peers, assisted by a rapidly growing labour force, a buoyant housing sector and improving infrastructure. Most commentators expect strong growth to continue in the short term at least, despite the change in the interest rate environment and the deterioration in national competitiveness. However, there are some concerns for the period beyond 2007, when increased interest rates will have had time to fully work their way through the economy, and the boost from maturity of special saving investment accounts (SSIAs) will be over. Another issue going forward for the domestic economy is the sustainability of the housing boom over the medium term. There are also external issues such as the sustainability of budgetary and trade imbalances in the US economy. The timing of any correction in the US would have potentially significant implications for the Irish economy.1

That said, the projection over the medium term for the Irish economy assumes that higher interest rates cause a drag on growth while personal consumption growth moderates in 2008 and 2009. Overall GNP is forecast at a robust 5% in 2007, followed by a deceleration in 2008 (3.8%) and a modest upturn in 2009 (4.3%).

Table A: Key Macroeconomic Indicators for Ireland to 2009 – annual % changes

2004 2005 2006e 2007f 2008f 2009f Real GDP 4.3 5.5 6.2 4.9 3.8 4.3 Real GNP 3.9 5.3 6.5 5.0 3.8 4.3 Private Consumption 3.8 5.6 7.5 6.0 5.0 4.5 Unemployment Rate (April) 4.4 4.2 4.3 4.3 4.4 4.5 Consumer Price Inflation 2.2 2.5 4.0 3.5 3.0 2.5 Source: CSO to 2005. DKM estimates 2006-2009.

Economic activity is heavily concentrated on one sector, notably construction. At 24% of GNP in gross output terms or 10.5% in value added (outputs-less inputs) terms, the building and construction sector accounts for 13% of total employment. The additional broad range of economic impacts generated by housing alone are substantial - in terms of tax revenues and indirect and induced employment effects - leaving the economy vulnerable to any slowdown or correction in the housing market. Thus the prospects for construction overall are heavily dependent on the prospects for housing. The medium term scenario presented herewith assumes a decline in residential construction which culminates in a fairly anemic scenario for the construction sector as a whole, notwithstanding the very positive prognosis for non- residential construction including civil engineering projects.

Table B: Medium Term Prospects for Residential and Non-residential Construction

2005 2004 2005 2006e 2007f 2008f 2009f bn. euro annual % change in volume of construction output Residential construction 21.4 10.8% 11.4% 5.9% -3.8% -8.6% -4.3% Non-residential construction 10.1 -0.4% 2.7% 12.2% 9.3% 8.0% 6.8% Total Construction Output 31.5 6.7% 8.5% 7.9% 0.6% -2.6% 0.2% Source: DOEHLG, DKM estimates.

1 ESRI Medium Term Review 2005-2012, Economic and Social Research Institute, November 2005.

192 © EUROCONSTRUCT Munich, December 2006 Ireland

2 Macro-economic Outlook

Overall, the macroeconomic outlook for the Irish economy in 2006 and 2007 remains broadly favourable, continuing the trend as one of strongest growing economies across the EU over recent years. Consumption and investment, including construction, remain the drivers of growth. The SSIA money and the election in 2007 will tend to underpin activity in the short run, while strong growth in employment and consumption will boost the demand for non- residential buildings.

The most notable characteristics of the Irish economy’s recent performance have been:

¾ GNP growth increased by 1.6% in the first quarter and by 1.8% in the second quarter, resulting in a 7.9% (seasonally adjusted) growth in the first half of 2006 on the same period in 2005. In year-on-year terms, real GNP growth expanded by 9% in Q2 2006 compared with Q1 2005. The corresponding annual growth in real GDP at the end of Q2 2006 was 5%.

¾ Employment continues to grow at a strong rate: total employment in Q2 2006 was 4.5% higher than in Q2 2005. Growth in construction employment is much higher than the overall average, at 8.2% over the same period. The unemployment rate was 4.3% in Q2 2006. It has remained within a narrow 4.2 - 4.5% band for almost three years now, which is remarkable given the strong labour force growth being experienced.

¾ The Exchequer position, reflecting economic performance, remains healthy. The overall deficit in the first nine months of 2006 was €136m. compared with €1.1bn in the same period last year. As has been the case for the last number of years, tax receipts are ahead of expectations, up 12.2% over the same period against a budget forecast of 5.3% for the year as a whole. Thus on current trends, the overshoot is projected at well over €2.5bn for the year2. Much of this strong revenue growth is down to construction and housing related activity. Given the strength of public finances, and with a general election before next May, it is reasonable to expect some acceleration in expenditure into 2007. A full set of expenditure provisions for next year are due to be published shortly in advance of the Budget in early December.

¾ While CPI inflation is expected to average 4% this year, in part due to rising energy prices and increases in mortgage repayments, general CPI inflation is forecast to ease, with a fall to 3.5%3 in 2007 and a further moderation in 2008 and 2009.

However, strong business confidence appears to have peaked and has slowed somewhat reflecting the uncertain future for interest rates and economic sustainability. Consumer confidence has also weakened in recent months, indicating some concerns about the economy and the financial situation of households over the next twelve months.

The same risks that apply to the global economy also apply in Ireland: rising interest rates an energy prices; the risk of an appreciation of the Euro versus the US dollar; and a softening of the US housing market and the excessive US current account deficit. A number of commentators have indicated that they see a significant possibility of an economic slowdown in 2008. The magnitude of this slowdown is broadly dependent on the probability of a US downturn, although domestic concerns about excessive reliance on the construction, the risk of a correction in domestic house prices and a fall in competitiveness should also slow growth post 2007.

2 DAVY, October 2006. 3 ESRI © EUROCONSTRUCT 193 Ireland Munich, December 2006

As a result, the prospects for Irish economic growth contained herewith are for a sharp slowdown in 2008 (real GDP of 3.8%) reflecting our assumptions about a slowdown in the Irish housing market and a decline in new residential construction.

3 Housing Market

Ireland’s housing market continues to astound many housing analysts no matter which indicator one chooses to look at:

¾ Housebuilding levels, currently at around 21 units per 1,000 of the population compare with a Euroconstruct average of around 3 units and 5 units in the UK. The level of housebuilding completions looks set to reach 90,0004 units by the end of 2006 compared with less than 50,000 at the turn of the decade.

¾ Based on the estimated gap between total housing supply and household formation levels, it appears that after the demand for primary residences and the demand for replacement of dwellings (obsolescence) is accommodated, that over one-fifth of housing supply represents vacant properties and a demand for second homes.

¾ Irish house prices have risen by almost 255% in nominal terms over the ten years 1995 to 2005, or by 13% on average per year. The annual rate of house price inflation is currently running at around 15% nationally but is almost 18% in Dublin. The current ratio of average house price to average earnings is 10 compared with 6 in 2000.

¾ The value of loans paid out in mortgages reached almost 24bn. in the year to June 2006 compared with 2.3bn. in 19955. According to data from the Irish Bankers Federation (IBF), the mortgage market is larger than that reported by DOEHLG statistics. The IBF claim that the value of mortgage loans was 38bn. in the year to June 2006 comprising almost 210,000 drawdowns, which were made up as follows: 23% to existing owners moving house (29% of corresponding value), 19% (22%) to first-time buyers, 13% (19%) to residential investors and 45% (30%) for remortgages and top-up mortgages. According to the Central Bank of Ireland, the annual growth in mortgage credit, at around 27% in the year to September, is over twice the corresponding growth in the euro area6.

¾ Arising from the increased availability of credit, the level of private sector indebtedness7 has increased significantly and is expected to reach 192% of GDP by the end of 2006. Within the total private sector credit, property related lending accounted for almost 60% of the banking sector’s outstanding loan book at the end of 2005. Residential mortgage lending accounts for 64% of all property lending, with the remaining 26% and 10% to the construction and real estate sector respectively. As a result of this concentration in property related lending, Irish banks may increasingly be at risk from overexposure to a single asset class, namely property8.

4 While the published figures from the Department of the Environment, Heritage and Local Government (DOEHLG) may show a figure of around 95,000 this year, based on dwellings connected to the electricity supply, the 90,000 figure represent actual units built in 2006 and excludes some 5,200 units that were built in 2005 but will not have been connected to the electricity supply until 2006. 5 Data published on www.environ.ie 6 The Net Worth of Irish Households, John Kelly, Central Bank Quarterly Bulletin, Q3 2006. 7 Measure as private sector credit as a percentage of GDP 8 The Concentration in Property Related Lending - a Financial Stability Perspective, by Allan Kerns and MRIA Woods, Central Bank of Ireland. 194 © EUROCONSTRUCT Munich, December 2006 Ireland

The Irish housing success story has been attributed to a number of economic fundamentals which have been well documented, not least of which has been the buoyant macroeconomic performance over the past decade. Two key factors are frequently mentioned as explaining the rapid rise in house prices, notably incomes and interest rates.

The rapid rise in incomes has been generated by the strong employment growth experienced with over 350,000 jobs created since 2000. A related factor fuelling the demand for housing has been the strong level of net (inward) migration over this period. Since 2000, net migration accounted for almost 60% on average of the total population change over the period April 2000 to April 2006. In the year to April 2006 net migration accounted for 70,000 of the estimated increase in population of 104,100. With over one-half of immigrants into the country aged between 25 and 44, these numbers have further boosted the demand for owner occupied and rented units.

The interest rate environment has been particularly favourable with rates well below historical levels over the past decade. However with interest rates in the euro area now on an upward trend, there is the risk that higher interest rates could potentially damage buyer confidence, leading to a postponement of purchases and an eventual fall in house prices, with adverse implications for recent first-time buyers, existing home owners, investors and the broader macroeconomy generally. The Central Bank recently argued that this risk is heightened if house prices are considered to be already viewed as overvalued.

There have been five increases in the ECB rate since December 2005 which have raised the ECB variable rate to 3.25%, with a further increase expected in December to 3.5%. As a result mortgage rates have increased to an average of around 4.6% currently and are expected to rise to 4.9% on average by the year-end. When combined with the continued escalation in house prices, albeit at a slower rate, these developments can be expected to increase mortgage repayments for existing borrowers and damage housing affordability, particularly for first-time buyers. With further interest rates increases expected during 2007, the likelihood is that the Irish market will experience a slowdown in both housing demand and the rate of house price growth. Depending on the knock to confidence, the extent of further interest rate increases during 2007 and the response from investors, there is the risk that Ireland could experience a fall in house prices.

Against that background, our projections in regard to housing supply (Table 3) over the forecast period are 80,000 completions in 2007, 75,000 in 2008 and 72,000 in 2009. This downward trend over the medium term reflects our view that the current level of housing supply is unsustainable and that conditions in the housing market will not be as conducive to house purchase as they have been in the past. This view is also based on recent figure for planning permissions, which are expected to fall off dramatically in 2006. Figures to date show the cumulative four quarter total at the end of June for the stock of planning permissions had fallen to 87,000 units compared with 104,570 in June 2005. While housing starts continue to record strong growth, indicating strong activity in the short term, we also expect a slowdown in starts from 2007 onwards.

Figure 1: Total Dwelling Completions against Total Planning Permissions

110000 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 2000 2001 2002 2003 2004 2005 2006e 2007f 2008f 2009f

Planning Permissions (Year t-2) Dwelling Completions (Year t) Source: Planning permissions to 2005 from CSO; Dwelling completions to 2005 from Department of the Environment, heritage and Local Government (DOEHLG). Forecast 2006-2009 DKM Estimates.

This projection for residential construction activity strongly impacts on the overall prospects for construction output, as new residential construction currently represents over two-thirds of total new construction output and 55% of overall construction activity (new and renovation). Clearly a more positive prognosis for the volume of new residential construction activity would produce a more optimistic projection for total construction output.

4 Non-residential Market

The non-residential construction market covers investment in private and public non- residential buildings. The following chart provides data on the total floor area planned for new construction in regard to private sector (industrial, commercial, agricultural buildings) and public sector (health and education) buildings over the period 2002 to 2006e. While the data only relate to planning permissions which have a five year life, the figures provide an indication of the possible supply of non-residential buildings in the pipeline.

196 © EUROCONSTRUCT Munich, December 2006 Ireland

Figure 2: Total floor Area Planned for New Non-residential Buildings (thousand square metres) 3000 2001 2500 2002 2003 2000 2004 2005 1500 2006e

1000

500

0 commercial industrial agriculture health and other social (1) 2006 based on four quarters to Q2, 2006 education buildings

Source: CSO

Annual percentage growth in total floor area planned for non-residential buildings 2002 2003 2004 2005 2006e -1.2% -0.8% 8.3% 16.4% 6.0%

The figures suggest that the total floor area planned for non-residential buildings recovered in 2004 and recorded a significant increase in 2005 (+16.4%), which has boosted non- residential construction activity in 2006 and should continue to do so in 2007. Within the total, commercial building dominates the private non-residential building sector, accounting for between 50% and 60% of the total floor area granted permission for non-residential buildings over the past five years. This illustrates the dependence of the private non-residential construction sector on the growth in employment in the commercial and services sectors in particular.

In contrast the industrial building share of the total has declined from 25% in 2002 to around 15% in 2004 and 2005 but it is expected to increase its share to around 20% in 2006. The total floor area for agricultural buildings increased significantly in Q2, 2006, which explains the substantial increase projected for 2006 (+56%).

In terms of how these volumes translate into construction output, the latest official figures9 suggest that the volume of new non-residential construction output increased by almost 13% in 2005 (Table 2) and is expected to increase by over 15% in 2006. With this total, the volume of private sector output from non-residential buildings increased by 19% in 2005 and is projected to increase by a further 19% in 2006. In regard to public sector non-residential construction, the total public capital programme (PCP) provision for educational buildings and facilities was €664m while hospitals and related facilities and equipment were allocated €639m10. Other social infrastructure includes investment in public buildings, such as libraries, courthouses, garda stations, and prisons. The overall volume of construction output from public non-residential projects is projected to rise by 7% in 2007, 6% in 2008 and 5.6% in 2009.

9 Review of the Construction Industry 2005 and Outlook 2006-2008, Department of the Environment, Heritage and Local Government, September 2006. Available at www.environ.ie 10 The PCP allocations include investment in facilities and equipment which is excluded from the construction related investment amounts in Table 4a. © EUROCONSTRUCT 197 Ireland Munich, December 2006

Economic conditions are boosting employment growth and hence the demand for more commercial and industrial space from existing and new firms. Rising incomes, population growth and the sprawl of housing developments are fuelling the demand for space in the retail sector, which has expanded across urban and suburban locations. Newer developments are also substantially greater in size. A recent survey on retail developments in the pipeline, estimated that there is more than 2.25m square metres of shopping space in the planning and development pipeline, of which around one-third will be located in the Dublin area11.

Given the quantum of purpose-built retail space put in place over the last decade, one would have to be concerned about the sustainability of existing and planned shopping centre/retail park developments, particularly in provincial locations over the medium term.

The medium term projection (Table 2) is for a slow down in the rate of growth in new non- residential building output to 12.3% in 2007. A further deceleration is projected thereafter to just under 8% in 2008 and 5.6% in 2009, as the impetus to demand from SSIAs and the buoyant housing market begin to fade.

5 Public Sector Construction

The volume of public sector construction activity is determined by the Public Capital Programme and includes capital investment in social infrastructure - education, hospitals, public buildings, local authority (LA) services and public sporting facilities – and productive infrastructure - roads, water services, airports, seaports and harbours, as well as capital investment by the respective Semi-State organisations responsible for transport, energy and telecommunications. Productive infrastructure generally captures the total construction output from all civil engineering projects. There is some private sector investment which arises under this heading, such as capital investment by private sector companies involved in the energy and telecommunication sectors. The public sector has allocated substantial funding to social and productive infrastructure over the past decade. In 2006 the total public capital programme allocated almost €11bn to public capital projects compared with only €3.8bn, a decade earlier in 1996. Despite Ireland’s economic success, its physical capital infrastructure has never properly “caught-up”, however. As a result there remains a significant infrastructure gap, particularly in regard to housing, roads and public transport infrastructure. In response to this the Government has launched a number of National Development Plans, which have seen a step change in the level of public capital investment. Investment has proceeded at unprecedented levels, and while it was removing bottlenecks it was also driving growth in its own right. It was thus effectively playing catch-up with an ever-accelerating economy. The result has been rapidly increasing prices for private infrastructure and worsening congestion for public (largely unpriced) infrastructure.

Civil Engineering There are two developments which are likely to make significant inroads in addressing this infrastructure deficit over the medium term:

¾ The imminent publication of the next National Development Plan (NDP), which is expected in January, will reinforce the Government’s commitment to spending on infrastructure while at the same time helping national competitiveness. The next NDP will cover the period 2007-2013 and is to focus on the priorities for investment in the transport, environmental services, housing, education, health and childcare areas. A significant proportion of the overall funding will be allocated to infrastructure priorities.

11 The Dublin Shopping Centre and Retail Park Digest, Retail Research, November 2006. 198 © EUROCONSTRUCT Munich, December 2006 Ireland

¾ Specifically in regard to transport, the Government has produced a statement regarding the transport infrastructure priorities for the 21st century, Transport 2112. It provides for a ten-year transport 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. Based on the Minister’s statement, the total value of transport investment is expected to 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, with just under one-half of the overall total investment planned for the national primary and secondary road network.

There is likely to be other transport investment over the medium term 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 and finish in 2009.

Thus the volume of construction output arising from investment in transport infrastructure is projected to expand by around 10% per annum over the period to 2009.

Other investments in energy and water projects are expected to generate a 7% increase in the volume of construction activity in these areas while the volume of construction output from investment in telecommunications is projected to increase by 5.5% in 2007 and 4.5% per annum in 2008. Thus the overall projection from civil engineering projects is for an increase in construction output of 7.5% in 2007 and almost 9% per annum in 2008 and 2009.

Our last Euroconstruct Report on the Medium Term Prospects for Ireland (June 2006) included the multi-annual capital envelopes which were published with the Budget in December 2005. The forthcoming budget in December will provide updated Exchequer capital allocations for capital spending over the period to 2011 and we will consider these in our next Euroconstruct report (June 2007). By that stage, the NDP will have been published and there will be more detailed information on planned investment levels for the main infrastructure categories over the period to 2013.

6 Repair, Maintenance and Improvement Expenditure (RM&I)

On the private housing side the estimates for RM&I are derived from the DEHLG/ESRI13 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., or €3.8bn when public sector housing RM&I is included. After inflation, this represented a volume increase of 6.3% in the level of spend on housing RM&I. The volume growth projections for 2006 reflect a buoyant housing renovation sector, which is expected to slowdown from 2007 onwards to around 4% to 4.5% annum. Similar growth rates are projected for RM&I non-residential construction output which are close to the real rate of GDP growth over the period.

12 The programme was launched on 1st November 2005. 13 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. © EUROCONSTRUCT 199 Ireland Munich, December 2006

7 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 7.7% this year. The volume of building output is projected to decline in 2007 (-0.7%), 2008 (-4.8%) and 2009 (-1.7%), due to the decline in residential construction.

Table C: Construction Output in Republic of Ireland Projected Cumulative Percentage Change in Volume 2006-2009

2006e 2009 2006-2009 Output (Index 2005 Cumulative Average Annual Share % =100) % Change % Change NEW Residential Construction 55% 81.7 -22.2% -8.0% R&M Residential Construction 12% 123.8 13.0% 4.1% Sub-total Residential 67% 89.2 -15.7% -5.5% NEW Non-Residential Construction 14% 147.5 27.9% 8.5% R&M Non-Residential Construction 4% 130.8 14.7% 4.6% Sub-total Non-Residential 18% 143.8 25.0% 7.6% Total Building NEW 69% 94.2 -12.0% -4.1% Total Building R&M 16% 125.5 13.4% 4.2% Total Building 85% 100.1 -7.1% -2.4% Civil NEW 12% 142.5 30.0% 9.0% Civil R&M 3% 121.7 14.7% 4.6% Total Civil 15% 138.5 27.1% 8.2% Total Construction Output 100% 105.9 -1.8% -0.6% Total NEW construction Output 81% 101.6 -5.5% -1.8%

Taking all areas of building investment above, and combining with the prospects for civil engineering output, overall construction output is projected to increase by almost 8% this year. This is followed by an almost unchanged level of construction output in 2007 compared with 2006, a decline in 2008 (-2.6%), and an almost unchanged position in 2009 (+0.2%). Thus the volume of construction activity by 2009 is back to its 2006 level. The forecast decline in new housebuilding activity is almost offset by the very positive projection for other building and civil engineering output.

200 © EUROCONSTRUCT Munich, December 2006 Ireland

Figure 3: Construction Output by Sector in Ireland to 2009

160 Constant 2005 Prices: Index 2002 = 100 150

140

130

120

110 New Residential 100 New Non-Residential R&M Building 90 All Civil Engineering Total 80 2002 2003 2004 2005 2006e 2007f 2008f 2009f

APPENDIX – DEFINITIONS

Table 1 Population: figures represent the number of people in April each year in line with the preliminary estimates from the 2006 Census of Population.

Households: figures are derived taking the 2002 estimated household figure from the 2002 Census for April and adjusting for the estimated levels of household formation for the other years.

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 2009 (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 2005 and Outlook 2006-2008 published by the Department of the Environment, Heritage and Local Government in September 2006. The 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.

202 © EUROCONSTRUCT Munich, December 2006 Ireland

Table 4a There is no separate data available for investment in storage or warehouse buildings. This is included under industrial buildings. For the purposes of illustration we have assumed that the value of storage buildings in 2005 represented 33% of total industrial buildings. The annual growth rates for both categories are the same.

‘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.

Table 4b Other transport includes investment in airports, ports and harbours.

Table 5 Figures on GDP and its composition for the years 2003-2005 are the official estimates for National Accounts published by the Central Statistics Office. Figures for 2006-2009 are DKM estimates.

204 © EUROCONSTRUCT Munich, December 2006 Ireland

Country/Pays/Land: IRELAND Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 3 979 4 044 4 131 4 235 4 335 4 425 4 505 Bevölkerung

Households ('000s) Ménages 1 350 1 390 1 440 1 498 1 563 1 618 1 668 Haushalte

Unemployed ('000s) Q2 (Mar-May) Chômeurs 82 84 86 91 92 95 100 Arbeitslose

Unemployment rate (%) Q2 (Mar-May) Taux de chômage 4.4 4.4 4.2 4.3 4.3 4.4 4.5 Arbeitslosenquote

Change of GDP Variation du PIB 4.3 4.3 5.5 6.2 4.9 3.8 4.3 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 3.5 2.2 2.5 4.0 3.5 3.0 2.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 7.1 9.1 5.8 5.9 6.0 5.0 4.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: IRELAND Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 17 565 16.8 11.1 12.6 5.1 -5.5 -11.8 -6.7

Logement Renovation 3 803 -8.0 9.6 6.3 9.5 4.0 4.5 4.0

Wohnungsbau Total 21 368 11.2 10.8 11.4 5.9 -3.8 -8.6 -4.3

Non-residential construction New 4 125 -9.2 -0.1 12.8 15.3 12.3 7.9 5.6

Bâtiments non résidentiels Renovation 1 184 4.2 5.7 0.6 14.1 5.5 4.5 4.0

übriger Hochbau Total 5 309 -6.4 1.2 9.8 15.0 10.8 7.2 5.2

Building New 21 690 10.3 8.8 12.7 7.0 -1.9 -7.2 -3.4

Bâtiment Renovation 4 987 -5.2 8.6 4.9 10.6 4.4 4.5 4.0

Hochbau Total 26 677 6.8 8.8 11.1 7.7 -0.7 -4.8 -1.7

Civil engineering New 3 879 -1.3 -3.9 -6.0 9.6 7.9 9.9 9.6

Génie civil Renovation 925 18.4 8.3 3.9 6.1 5.5 4.5 4.0

Tiefbau Total 4 804 1.4 -2.0 -4.3 9.0 7.5 8.9 8.6

TOTAL CONSTRUCTION OUTPUT 31 481 5.8 6.7 8.5 7.9 0.6 -2.6 0.2

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 4.00 12.3 8.7 6.7 4.0 1.0 -3.0 0.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

206 © EUROCONSTRUCT Munich, December 2006 Ireland

Country/Pays/Land: IRELAND Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 49.6 69.6 75.7 61.0 60.0 58.0 55.0 Baugenehmigungen Familienhäuser

Flats Collec tif 28.7 32.1 23.7 20.0 20.0 17.0 17.0 Mehrfamilienhäuser

TOTAL 78.3 101.7 99.4 81.0 80.0 75.0 72.0

Housing starts 1) 1+2 family dw ellings Logements commencés Individuel 58.6 63.7 61.1 70.0 65.0 60.0 60.0 Baubeginne Familienhäuser

Flats Collec tif 14.7 16.0 17.0 20.0 15.0 15.0 12.0 Mehrfamilienhäuser

TOTAL 73.3 79.7 78.1 90.0 80.0 75.0 72.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 54.0 60.8 67.0 72.0 70.0 60.0 55.0 Baufertigstellungen Familienhäuser

Flats Collec tif 14.8 16.1 19.2 18.0 15.0 15.0 15.0 Mehrfamilienhäuser

TOTAL 68.8 76.9 86.2 90.0 85.0 75.0 70.0 Housing stock (closing) Logements existants 1 553 1 616 1 685 1 763 1 844 1 915 1 976 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zw eitw ohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ow nership rate 2) Taux de propriétaires occupants 77.0 77.0 77.0 77.0 77.0 77.0 77.0 Wohnungseigentumsquote

1) Including an estimate for one-off houses not normally counted in the figures for registrations/starts 2) Cf. Appendix to the individual country report

Country/Pays/Land: IRELAND Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 609 -17.0 6.0 8.9 -5.0 7.0 5.0 5.0 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 338 3.1 -8.0 6.3 0.5 7.0 7.0 5.0 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 465 -15.0 3.2 9.4 14.3 11.5 6.0 5.6 Industriegebäude

Storage buildings 2) Bâtiments de stockage 229 -15.0 3.2 9.4 14.3 11.5 6.0 5.6 Lagergebäude

Office buildings Bureaux 647 -30.0 -20.0 40.0 30.6 25.0 15.0 6.0 Bürogebäude

Commercial buildings Commer c es 1 121 9.2 10.2 18.9 15.1 11.7 6.7 5.4 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 179 -6.7 28.1 0.7 15.6 8.0 4.0 4.0 Landw irtschaftsgebäude

Miscellaneous Autres 536 3.9 -6.7 -4.3 31.0 7.3 6.3 6.3 Sonstiges

Total 4 125 -9.2 -0.1 12.8 15.3 12.3 7.9 5.6 Insgesamt

1) At 2005 prices, excluding taxes. 2) Figure for Storage buildings is estimated at 33% of total Industrial buildings. The annual grow th rates for Storage buildings are assumed to be similar to those for Industrial buildings

208 © EUROCONSTRUCT Munich, December 2006 Ireland

Country/Pays/Land: IRELAND Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 863 2.0 -3.2 4.4 10.4 9.3 9.1 9.1 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 365 45.9 -35.3 -21.9 11.0 8.9 8.7 8.6 Bahnanlagen

Other transport Autres réseaux 159 -35.7 6.8 -4.1 37.9 21.7 29.6 20.1 Übrige Verkehrsinfrastruktur

TOTAL 2 387 6.9 -11.1 -1.2 12.4 10.2 10.9 10.2

Telecommunications Télécommunications 257 -7.4 1.1 -11.7 -7.3 5.5 4.5 4.5 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 2 160 -3.8 9.5 -6.5 7.2 4.5 7.0 7.0 Energie- und Wasserversorgung

Other Autres Sonstiges

Total 4 804 1.4 -2.0 -4.3 9.0 7.5 8.9 8.6

1) At 2005 prices, excluding taxes.

Country/Pays/Land: IRELAND Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 74.1 3.2 3.8 6.6 7.5 6.0 4.5 4.5 Privater Verbrauch

Public consumption Consommation publique 23.0 3.2 1.8 4.6 4.0 4.0 3.0 3.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 43.6 5.7 7.4 12.8 10.3 4.6 1.2 1.7

of w hich construction 32.2 8.6 7.5 10.4 7.8 0.4 -2.8 -0.5

Stocks (as % of GDP) Variations de stocks 0.1 0.0 0.3 0.1 0.5 0.5 0.5 0.5 Vorratsveränderung

Ex por ts Exportations 131.0 0.5 7.3 3.9 5.0 5.5 5.0 5.0 Ex por te

Imports Importations 110.6 -1.2 8.6 6.5 7.5 6.0 4.5 4.0 Importe

GDP PIB 161.2 4.3 4.3 5.5 6.2 4.9 3.8 4.3 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

210 © EUROCONSTRUCT Munich, December 2006 Italy

ITALY CRESME RICERCHE SPA www.cresme.it

Antonella Stemperini e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

While the disappointing results for the Italian economy in 2005 are now largely known (+0.1% for the GDP), the news is the recovery characterising 2006. After four years of stagnation and according to the indications of the first two quarters of 2006, the year should close with an overall growth of 1.6%, even better than the most optimistic forecasts of just six months ago. For 2007, forecasts envision a slight slowdown in growth (+1.4%), while for the subsequent 2-year period the growth forecasts remain strong and could reach 2%, despite all the risks involved.

In the current phase of expansion, while the foreign sector is dynamically active, domestic rates are apparently recovering due to a revival in investments: fixed investments will recover from the fall in 2005 as a result of the more dynamic rates in 2006 (+3.3%) although will no longer be supported by the construction sector. Dynamics in the public sector are much weaker (+0.5% in 2006) also due to the need to balance the budget so as to adjust the stability parameters as soon as possible.

The slight slowdown forecast for 2007 is based on an expected decrease in household consumption (from +1.7% to +1.3%) and investments (from +3.3% to +2.1%), while the value of imports and exports should increase by 3.8% and the public sector expenditure should still be under severe control, with growth contained at +0.6%.

However, the short- and medium-term dynamics will also depend on some aspects not yet specified by the 2007 budget proposals, but also some elements of structural weakness in growth, such as the dependency of the Italian economy on the European and American situation, inflationary pressure, the rise in interest rates by the European Central Bank, the bursting of the real-estate bubble.

In this phase of the economic cycle the construction sector, at least for the medium term, may no longer be one of the strongest components supporting the Italian economy. In 2005, in fact, the building market slowed down after the significant growth observed starting in 1998, and a peak recorded in 2002; the first hints of a slowdown were already observed in 2003, though only in Renovation and Maintenance (R&M) and in private non-residential construction. The year 2004 was rather satisfying in terms of changes in prices, demand for public works and consolidation of the residential boom, thereby producing a recovery, though this positive trend ran out of steam immediately after, precisely in 2005, when public works slowed down faster than forecast (-5% in constant terms), without the compensation of higher growth in the new residential construction which gave, in turn, a final impetus before the slowdown. All building sectors were affected by the first negative trends since the 2000- 2005 period, with a fall of -0.1%.

In 2006, a stagnation phase occurred in the building market (0.2% in 2006 and 0.0% in 2007), with a confirmation of negative trends in the “non-residential construction” sub-sector (-4.3% for new construction output). Infrastructures have continued their slowdown after the drop occurred in 2005, due to the effects of the measures to contain the budget deficit; growth rates in new construction also fell by half, although this sector still drives the building market.

In any case, at the end of the longest expansion cycle in the post-war period, the crisis has not yet arrived, though it is important to note that the market has come to a halt. However, there are still risks of a more serious slowdown as envisaged in the less prudential medium- term forecasts (-1% in 2008 and -1.2% in 2009).

212 © EUROCONSTRUCT Munich, December 2006 Italy

2 Macro-economic Outlook

While the disappointing results for the Italian economy in 2005 are now largely known (+0.1% for the GDP), the news is the recovery characterising 2006. After four years of stagnation and according to the indications of the first two quarters of 2006, the year should close with an overall growth of 1.6%, even better than the most optimistic forecasts of just six months ago: an important figure, although still lower than the average rate of the European economy. For 2007, forecasts envision a slight slowdown in growth (+1.4%), while for the subsequent 2-year period the growth forecasts remain strong and could reach 2%, despite all the risks involved.

In the current phase of expansion, while the foreign sector is dynamically active, domestic rates are apparently recovering due to a revival in investments. More specifically, household consumption has been one of the weakest components of the Italian economy in the first half of the 2000-2005 period, with growth rates of 1.7%; fixed investments will recover from the fall in 2005 as a result of the more dynamic rates in 2006 (+3.3%) although, as explained below, investments will no longer be supported by the construction sector. Dynamics in the public sector are much weaker (+0.5% in 2006) also due to the need to balance the budget so as to adjust the stability parameters as soon as possible. As for foreign trade, the new estimates indicate +4.1% for imports and +5.5% for exports.

However, the short- and medium-term dynamics will also depend on some aspects not yet specified by the 2007 budget proposals, such as the specific measures for the reductions in expenditure, the final amount and the items of expenditure involved. The current phase of economic improvement and the consequent increase in the tax revenue and the government budget, seems to be leading to adjustments in the reduction of the budget deficit. It will likewise be necessary to observe the effects of the initial “liberalisation” measures and the provisions against tax evasion and illegal work, for the economy as a whole and for the entire construction sector in particular.

Together with all these elements of uncertainty for the future with regard to Italy, 2006 is also characterised by the structural weakness in growth: the dependency of the Italian economy on the European situation, which - in turn - too often revolves around the American economy now experiencing a slowing trend; inflationary pressure due to both energy prices and positive economic performance; the rise in interest rates by the European Central Bank in view of the double inflation risk associated to an “increase in energy prices and wages”; and finally, the bursting of the real-estate bubble. The way in which the real-estate speculative trends will slow down, with a reversal of the expansion cycle, is one of the key factors for forecasting the Italian economic scenario for 2007-2008.

The current phase of growth in the GDP is characterised by falling unemployment (from 7.7% in 2005 to 7.1% in 2006), likely to decrease further in the coming years when economic growth should become more consolidated. However, the improvement of the employment situation will not be generalised. In the construction sector, in fact, the third and forth quarter of 2005 experienced a slowdown in employment trends, confirmed by the significant fall in the first two quarters of 2006 (-1.1% from the first to the second quarter, which was already lower than the last quarter of 2005).

3 The Construction Sector

Following the revision of the estimates for November 2006, no significant change has been observed in the scenario illustrated six months ago for the construction sector; this latter - at least for the medium term - may no longer be one of the strongest components supporting the Italian economy.

In 2005, in fact, the building market slowed down after the significant growth observed starting in 1998 and a peak recorded in 2002; the first hints of a slowdown were already observed in 2003, though only in Renovation and Maintenance (R&M) and in private non- residential construction.

The year 2004 was rather satisfying in terms of changes in prices, demand for public works and consolidation of the residential boom, thereby producing a recovery, though this positive trend ran out of steam immediately after, precisely in 2005, when public works slowed down faster than forecast (-5% in constant terms), without the compensation of higher growth in the new residential construction which gave, in turn, a final impetus before the slowdown. All building sectors were affected by the first negative trends since the 2000-2005 period, with a fall of -0.1%.

In 2006, a stagnation phase occurred in the construction market (0.2% in 2006 and 0.0% in 2007), with a confirmation of negative trends in the “non-residential construction” sub-sector (-4.3% for new construction output). Infrastructures have continued their slowdown after the drop occurred in 2005, due to the effects of the measures to contain the budget deficit; growth rates in new construction also fell by half, although this sector still drives the building market.

Much will depend on how the various key market sectors perform and on the most probable forecasting scenario over the coming years with regard to the following elements:

New Residential Construction: after the highly positive dynamic trends observed in the past years, fuelled by the surprising expansion cycle of the real-estate market and by the high differential between construction costs and the price of the finished product, there is confirmation of a slowdown throughout 2006 (+4.6%), a stabilisation in 2007, and a consequent significant fall (-5% in 2008 and -7% in 2009). New Public Works: after the fall occurred in 2005, this sub-sector will run on the same levels recorded throughout 2006 and 2007 since measures to contain the budget deficit are associated with “special” funding; after this latter has been exhausted, there is likely to be a further reduction, with a fall in expenditure by public and private enterprises as well as by local authorities. Non-Residential Construction: this sub-sector is still sluggish, and in 2006 it will fall more than in 2005 (-4.3%), with a recovery starting to appear only from 2007 as the economy improves. Renovation & Maintenance (R&M): the signs of a recovery in this sub-sector are still weak, though R&M will play a fundamental role in the construction sector over the coming years. This trend regards both renovation which could grow by over 1% in the medium term due to the recovery of private consumption, but also as a result of the scale of real-estate dealing in Italy in the past five years; and in relation to urban renewal, one of the strategic issues for the immediate future.

214 © EUROCONSTRUCT Munich, December 2006 Italy

4 Housing Market

Forecasts a year ago envisaged that the expansion cycle in new residential construction output would come to an end in 2006 (forecast figure: -2.2%). However, six months ago the data referring to the last 4-month period of 2005 led to an initial revision, changing this figure to +0.4%. Today, new figures reveal that forecasts were based on very prudent assumptions: the growth in the residential construction is also expected to continue throughout 2006 (+4.6%) with most dynamic trends on the whole market, though nearly half the rate recorded in 2005, when the growth rates increased by 7.8%. The year 2007 will be characterised by stabilisation, and followed by a transition to a new phase of decline expected in 2008 and 2009, when the residential construction sector will lose on average 6%. The new residential construction output was driven by the real-estate boom which characterised the 2000-2005 period when families and businesses invested heavily in bricks and mortar and in residential construction, thus bringing Italy to record particularly high rates of residential construction output. Estimates show that in 2006 over 290,000 homes complying with regulations will be built. However, if unauthorised building works - which are carried out in many areas of Italy - are taken into account, estimates for the number of homes completed rise to 330,000. It is estimated that construction output will also continue to grow in 2007 (+1.6%), with a decline starting in the next 2-year period (on average -4%), when fewer than 250,000 homes complying with regulations will be built. This trend is confirmed by data on building permits and on new housing started. For both, the peak occurred in 2004, while from 2005 the trend will reverse with increasingly lower growth rates, especially for flats as compared with 1-2 family completed dwellings.

The sector has already reached its peak in output and the decrease is now underway. There are two main reasons for this downtrend. The first one regards the mature phase of the expansion cycle, with a transition from the starting phase (low prices, heavy demand by new families – with a key role being played by foreign immigrants – the tendency to invest savings, low interest rates) to the expansion phase itself when large and small players prefer to invest and speculate in bricks and mortar (thus adding to primary demand the factor of quality improvement for homeowners who, taking advantage of low interest rates and a difficult overall situation, have sold the home where they live in order to buy a better one). The current phase is characterised by the slow levelling-off after the upturn phase of the cycle, with primary demand falling because there are fewer new families (falling from 265,000 in the first half of 2000 to 169,000 in the second half, and an estimated 112,000 between 2010 and 2020).

The slowdown in new residential construction expected over the coming years could be compensated by a recovery in the R&M of existing property. Forecasts indicate low growth rates of less than 1% for 2006 and 2007, which may become slightly higher in the subsequent 2-year period (+1.3% in 2008 and +1.6% in 2009). It should be recalled that the situation in the 1990s was “saved” in market terms by renovation, refurbishing and maintenance of the existing property. The growing demand for work on the existing property has been triggered by two main reasons: the recent history of construction output and, thus, the growing percentage of real-estate holdings over 40 years old; and the real-estate boom with more home sales without R&M than sales with R&M. Basically, for many real-estate sales, R&M has been postponed until after purchase, unlike in other times.

A factor supporting the hypothesis of a new growth phase for the R&M market is the rate of application for tax relief on R&M. In 2005, this indicator fell by 2% compared to the peak observed in 2004, while in the first eight months of 2006 a recovery of 3.7% was recorded.

5 Non-residential Market

New estimates still confirm an especially modest scenario for non-residential construction, which, after reaching the peak in investments in 2002, is still in a downturn phase without attempting to move back to more “normal” levels. This fall was especially sharp in 2003 (- 4%), but also in the subsequent 3-year period the rate of decline will be on average 2% per year. In 2007 and 2008, the situation should improve slowly (+0.6% and +0.8%) and more so in 2009 when the growth rate should exceed 1%.

The slowdown of the new non-residential construction in 2006 will be even sharper, with an estimated further fall of -4.3% in 2006. However, from 2007, the recession in new construction should come to an end, with a recovery starting slowly and then improving faster in 2009.

The significant setback in new construction output in 2006, first of all, regards the industrial and agricultural sectors, with a worsening of pessimistic forecasts envisaged six months ago, and the postponement of the more significant recovery. Currently, the market has an excessive supply level, with a poor situation in the productive system and the transfer of production facilities abroad making demand weaker. This phenomenon seems to be especially significant in areas such as North-Eastern and North-Western Italy.

There is a similar situation for office buildings, with growth rates of over 1% unlikely to occur before 2009, when the effects of urban development programmes in some major Italian cities will start to have a greater impact.

It is estimated that the commercial buildings should be the first sub-sector to recover, also because while the other sub-sectors recorded a sharp slowdown, commercial trends could be better defined as a stabilisation at high production levels as a consequence of the better performance of Large Retail Chains (Supermarkets, Superstores and Hypermarkets) and logistics.

The new factor to be added to the overall negative trend is the slowdown in public housing, especially for education and social activities (such as cemetery and prison construction, included in the “miscellaneous” item). Since these are funded by local authorities, they have suffered from the need to contain public expenditure and the difficulties in finding alternative forms of financing. However, an exception should be allowed for cemeteries, which are currently one of the types of construction proving to be “less risky” for private investors.

As always occurs in phases of decline affecting new construction output, demand falls back onto renovation and maintenance for the improvement, adjustment and, sometimes, the expansion of existing property, rather than risking in new construction projects. The non- residential R&M sub-sector has, in fact, experienced a downturn trend which is definitely less marked than the trend observed in new construction, with a growth rate of 0.2% in 2006. Moreover, it is expected that there will be a gradual trend towards growth, but the most significant aspect is the strategic role played by R&M with regard to residential and non- residential construction, since R&M will be a major focus of the building market over the coming years, with partnership between the public and private sector, facilities management, and the integrated management of personal, building and housing services.

216 © EUROCONSTRUCT Munich, December 2006 Italy

6 Civil Engineering Market

The final data for 2005 has heightened the negative trend for the year stated in the estimates six months ago. With a production value of 39.6 billion euros, civil engineering works have recorded a sharp drop of -4.1% compared to 2004.

In the Italian construction scenario, with an economic stagnation and a rise in the budget deficit, expenditure dropped sharply in 2005, but no-one would have forecast such an immediate fall in investment expenditure. The sector most affected by this situation involves the local bodies, which account for approximately 35% of the expenditure on public works in Italy. As a result, a significant decline in the expenditure for investments in 2005 - instead of the forecast growth - has been clearly observed. Other bodies, ANAS (National Road Company), private motorway-concessionaire companies involving major strategic works, or the public service providers, operating mainly on the local level, have maintained the expected levels of expenditure. However, investments in Ferrovie dello Stato (Italian Railway Company) have slowed down. As already happened in June 2006 with respect to November of the same year, the negative trends have been confirmed and associated with a worse outlook. On the basis of works envisaged in tenders, CRESME had already forecast a significant slowdown of activity, with a slight downturn on the market for 2005 (-1%) and the beginning of a phase with lower expenditure in the coming years, but the new scenario also indicates a sharper fall (- 4.1%), followed by a 2-year period of stabilisation of expenditure, and then a new slowdown in 2008 and 2009.

As mentioned above, the forecasts for 2006 indicate a stabilisation after the slowdown recorded in 2005: estimates for 2006 (-0.8%) take into account the effects of the “Bersani” Decree which allocated funds to ANAS and Ferrovie dello Stato. Therefore, it is expected that this funding will produce results starting from Fall 2006, thereby compensating the shortage of resources which would otherwise have become much more serious. In 2007, the civil engineering sector should be substantially stable: on the one hand, with growth in railway works, such as the start-up of the strategic construction of new high-speed railway lines and of light rail transport systems for mass transit, and on the other with a more consistent slowdown in local road works. With regard to the medium-term forecasts, a gap is clearly evident between the commitments made and the resources actually available, due to the policy for the expansion of infrastructures re-launched by the previous Government, leading to a significant number of tenders, signed contracts and construction works undertaken, which risk being blocked if the resources needed to continue the projects are not provided. This blockage would entail severe consequences on employment as well as cause a further delay in the country’s economic development. Not surprisingly, the new Government issued initial measures with the purpose of ensuring immediate resources needed to avoid closing down building sites and to prevent possible job- cuts starting from 2006; this regards the “Bersani” Decree (Decree-Law 223/2006, Art. 17) providing new resources for ANAS and Ferrovie dello Stato. Government intervention plays a key role in the CRESME estimates for investments in the transport sector for 2006; the measures enacted by the new government would not have been considered a year ago. The extraordinary measures enacted by the new Government included increasing the ceiling of ANAS expenditure forecast in the 2006 budget proposals from 1,700 million to 2,913 million euros, with an appropriation to Ferrovie dello Stato for railway facilities amounting to 1,800 million euros for continuing the construction of the High Speed/High Capacity railway system.

Today, the first forecasts for 2008 and 2009 indicate a decline in the sector of over 2%. These forecasts are, first of all, based on the uncertain outlook for financial resources, but also on definite data, i.e. the near completion of the works started around 2000 and the sharp slowdown in the contracting market in 2006.

In this negative scenario, new construction is especially affected by the fall in liquidity, with a decrease of over 5% in 2005 compared to -3.2% for R&M. Even in the subsequent stabilisation phase, the fall in new construction is more significant compared to R&M (-1% compared to -0.6%) but especially in the medium-term scenario, slowdown rates will exceed 4% for new construction, with between -1.3 and -1.6% for R&M.

Transport Networks In 2005, all the transport infrastructures accounted for nearly 24 billion euros, representing over 60% of the civil engineering market and 13% of the entire construction market. After a long expansion phase, in 2005 this sub-sector recorded a fall of -3.5%, while in 2006 rates are basically stable due to the recovery both in road works and in light rail transport systems for mass transit which has compensated for the sharp slowdown in the railway sector. In 2006, investments in road works totalled over 12 billion euros, of which over 5 billion euros being accounted for by the companies managing the Italian road and motorway network, and 7 billion euros allocated to the Regional, Municipal and Provincial Authorities. Among the major measures under the “Legge Obiettivo” (Objective Law - a law for public works projects) producing investments in the current year, it is worthy to mention the Asti- Cuneo motorway, some “macro-lots” on the Salerno-Reggio Calabria motorway and the “SS 106 Jonica” highway, the Catania-Siracusa stretch of the Messina-Siracusa-Gela motorway, the Mestre bypass, the “Variante di Valico” motorway stretch and the improvement of the “A4” Turin-Milan motorway. In the medium term, the situation could worsen if ANAS is not guaranteed the resources required for the due completion of the strategic works under way, aggravating the already negative results as a consequence of the reduction in investments by the local authorities.

With regard to railway transport, which accounts for investments of over 8 billion euros, a highly negative trend has been recorded, since this sub-sector is now in a transition phase between the completion of some projects (Turin-Novara, and Rome-Naples High Speed/High Capacity stretches) and the opening of new railway lines leading to further growth in the railway sector: the Milan-Verona and Milan-Genoa High Speed/High Capacity stretches, where work should start in 2007, and then longer-term investments for Florence rail junction and the Verona-Padua High Speed/High Capacity stretch.

As far as other forms of transport are concerned, in 2006 an increase has been estimated on the basis of the planned start-up of some strategic works (such as “Line C” of the Rome underground) as well as the advancement of other projects previously started, whether or not these works are included in the special programme under the “Legge Obiettivo”. These projects include: the integrated public transport system for the Naples junction, with the completion planned for 2006 of the Piscinola-Aversa stretch and in 2008 for the “Dante- Garibaldi-Centro Direzionale” stretch; the extension of “Line B” of the Rome underground; the integrated tramway system in the cities of Florence and Scandicci and their surroundings. These forecasts should be regarded with caution: since these projects involve highly complex works, there is often a postponement in the times of execution and completion, so that the recovery of activity in terms of investment will probably occur only in the long term.

The scenarios in the sector will thus be affected in the short term by a shortage of liquidity, although in the medium and long term this could produce highly positive effects, such as the introduction of new systems for building public works with the participation of private capital.

Water, Energy and Telecommunication Infrastructures In 2006 investments totalling approximately 12.5 billion euros are expected in the water, energy and environment sub-sectors, equivalent to 32% of the entire civil engineering sector and 7% of the value of construction output. The comparison with 2005 shows a slight growth (1.1%), coming after the sharp fall recorded in 2005 compared to 2004 (-4.1%), due to the fall in expenditure by the local authorities.

218 © EUROCONSTRUCT Munich, December 2006 Italy

The growth estimates in this sub-sector for 2006 are based both on expectations due to measures required for expansion and reorganisation under the “Galli” Law and to more “certain” market data on tenders, with the awarding of 3 out of the 9 contracts for the 30-year management of the integrated water service for the Sicilian provinces. Other projects approved and envisaged under the “Legge Obiettivo” programme are the renovation of the “San Giuliano” water conveyor system in the Metaponto plain of Puglia and Basilicata; the revision of irrigation facilities in the “Destra Ofanto” and “Destra Rendina” areas in the Potenza province; the restoration of the “Ancipa” dam in Sicily, totalling about 125 million euros; and two measures in Sardinia for an amount of over 130 million euros. In medium-term forecasts, the trends are not encouraging, with a sharp fall in expenditure by the local authorities even in the “primary” sectors.

The telecommunications sub-sector, which in 2005 accounted for investments of approximately 1.4 billion euros, will record a fall in 2006 (-5%), after the short phase of stabilisation last year due, at least partially, to the measure issued by the Communications Authority concerning the reduction of tariffs between the fixed and the mobile networks. The resulting lower income has induced the reduction of investments in projects designed for the development of the infrastructure network, while the demand for fixed and mobile terminals and services has shown a significant growth and, therefore services remain constant.

Finally, for the other works accounting for approximately 5% of the civil engineering sector, forecasts are extremely negative, both for 2006 and for the near future (on average -6% in the 3-year period 2007-2009). The main quota refers to the environment improvement and, consequently, to waste disposal, a sector which is still facing serious emergencies (particularly in Campania). It is necessary to mention other numerous projects included in programmes, which are still in the development phase, with very little credit being granted or issued, so that the effects of investment will not be felt in the short and medium term. Another challenging field is the identification of alternative sources of funding, as confirmed by the case experienced by the Emergency Environment Commissioner in Puglia: some of the public tenders for assigning the management of urban solid waste disposal facilities in various districts have been annulled.

APPENDIX – DEFINITIONS

Table 1 • Population, Households: number of people or households at the end of the year – Source: National Institute of Statistics • Unemployment rate: It’s the average 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, but 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 terraced houses, while flats are dwellings inside multi-stored buildings, with more than two flats • Housing stock: at the end of year • Second homes: include homes used for holiday, or for secondary uses, or which are used for short periods. Also vacancies are included • Vacancies: homes that are not used at all • Home ownership rate: % of 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 including those 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 • Stock: % change in real terms is meant as the % change of stock 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)

220 © EUROCONSTRUCT Munich, December 2006 Italy

Country/Pays/Land: ITALY Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 57 888 58 462 58 594 58 712 58 818 58 908 58 986 Bevölkerung

Households ('000s) Ménages 22 876 23 311 23 600 23 742 23 879 24 012 24 140 Haushalte

Unemployed ('000s) Chômeurs 2 048 1 960 1 888 1 737 1 593 1 437 1 280 Arbeitslose

Unemployment rate (%) Taux de chômage 8.4 8.1 7.7 7.1 6.5 5.9 5.2 Arbeitslosenquote

Change of GDP Variation du PIB 0.1 0.9 0.1 1.6 1.4 2.0 2.2 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.7 2.2 1.9 2.1 2.2 2.3 2.3 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.3 4.6 3.9 3.5 3.0 3.0 3.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: ITALY Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 37 247 5.2 7.1 7.8 4.6 -1.0 -5.0 -7.0

Logement Renovation 51 080 -0.4 0.1 0.1 0.2 0.9 1.3 1.6

Wohnungsbau Total 88 327 1.7 2.8 3.2 2.0 0.1 -1.4 -2.0

Non-residential construction New 26 215 -6.1 -2.9 -2.3 -4.3 0.3 0.9 1.4

Bâtiments non résidentiels Renovation 29 119 -2.0 -0.3 -2.4 0.2 0.7 0.6 1.0

übriger Hochbau Total 55 334 -4.0 -1.5 -2.3 -1.9 0.6 0.8 1.2

Building New 63 462 -0.3 2.5 3.5 1.0 -0.5 -2.7 -3.6

Bâtiment Renovation 80 199 -1.0 0.0 -0.8 0.2 0.8 1.1 1.4

Hochbau Total 143 661 -0.7 1.1 1.1 0.5 0.2 -0.6 -0.8

Civil engineering New 18 064 7.5 7.2 -5.2 -1.0 -1.2 -4.0 -4.5

Génie civil Renovation 21 518 1.7 4.1 -3.2 -0.6 -0.3 -1.3 -1.6

Tiefbau Total 39 582 4.3 5.5 -4.1 -0.8 -0.7 -2.5 -2.9

TOTAL CONSTRUCTION OUTPUT 183 243 0.3 2.0 -0.1 0.2 0.0 -1.0 -1.2

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 45.43 5.4 3.8 -2.0 -1.0 0.0 -1.5 -0.8 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

222 © EUROCONSTRUCT Munich, December 2006 Italy

Country/Pays/Land: ITALY Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 35.0 35.0 34.0 33.0 31.0 32.0 30.0 Baugenehmigungen Familienhäuser

Flats Collec tif 203.0 232.0 238.0 232.0 225.0 200.0 185.0 Mehrfamilienhäuser

TOTAL 238.0 267.0 272.0 265.0 256.0 232.0 215.0

Housing starts 1+2 family dw ellings Logements commencés Individuel 51.0 51.0 48.0 46.0 43.0 41.0 40.0 Baubeginne Familienhäuser

Flats Collec tif 212.0 240.0 248.0 238.0 229.0 215.0 205.0 Mehrfamilienhäuser

TOTAL 263.0 291.0 296.0 284.0 272.0 256.0 245.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 50.1 50.9 49.2 51.1 48.0 46.0 44.0 Baufertigstellungen Familienhäuser

Flats Collec tif 164.2 187.2 210.8 242.3 250.1 240.0 230.0 Mehrfamilienhäuser

TOTAL 214.3 238.1 260.0 293.4 298.1 286.0 274.0 Housing stock Logements existants 27 798 28 028 28 278 28 561 28 848 29 124 29 388 Wohnungsbestand

thereof second homes dont résid. secondaires 5 745 5 790 5 843 5 900 5 960 6 017 6 072 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 2 929 2 953 2 980 3 009 3 039 3 068 3 042 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 72.4 73.0 73.4 73.8 74.3 75.0 75.5 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: ITALY Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 565 3.0 2.0 -1.5 -0.6 -0.8 1.0 1.0 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 765 2.8 2.2 0.8 0.7 1.0 0.8 1.5 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 8 473 -18.1 -11.7 -3.8 -7.1 0.7 0.8 1.5 Industriegebäude

Storage buildings Bâtiments de stockage 464 7.5 14.7 3.0 1.5 3.1 3.0 2.4 Lagergebäude

Office buildings Bureaux 1 859 -8.0 -8.2 -3.0 -2.5 0.8 0.9 1.2 Bürogebäude

Commercial buildings Commer c es 4 163 7.5 5.7 -0.9 -0.7 1.3 1.0 1.4 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 6 610 2.3 1.8 -2.5 -4.7 -1.8 0.6 0.5 Landw irtschaftsgebäude

Miscellaneous Autres 3 316 3.0 3.1 -1.2 -4.2 1.5 1.1 3.0 Sonstiges

Total 26 215 -6.1 -2.9 -2.3 -4.3 0.3 0.9 1.4 Insgesamt

1) At 2005 prices, excluding taxes.

224 © EUROCONSTRUCT Munich, December 2006 Italy

Country/Pays/Land: ITALY Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 12 404 3.5 11.4 -4.7 0.8 -1.3 -2.5 -3.2 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 8 396 18.3 9.1 -0.7 -4.1 2.9 0.9 -4.2 Bahnanlagen

Other transport Autres réseaux 2 800 -7.8 4.9 -5.8 6.2 0.6 -2.5 -2.9 Übrige Verkehrsinfrastruktur

TOTAL 23 600 6.5 9.8 -3.5 -0.3 0.4 -1.3 -3.5

Telecommunications Télécommunications 1 398 6.1 -4.8 -0.5 -5.0 -12.4 -9.1 -5.0 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 12 347 2.5 2.7 -4.1 1.1 0.2 -3.7 -1.7 Energie- und Wasserversorgung

Other Autres 2 236 -4.9 -10.7 -12.4 -14.0 -11.8 -5.9 -1.5 Sonstiges

Total 39 582 4.3 5.5 -4.1 -0.8 -0.7 -2.5 -2.9

1) At 2005 prices, excluding taxes.

Country/Pays/Land: ITALY Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 829.0 1.0 0.5 0.1 1.7 1.3 2.0 2.2 Privater Verbrauch

Public consumption Consommation publique 292.9 2.1 0.6 1.2 0.5 0.6 1.2 0.8 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 292.0 -1.5 1.9 -0.4 3.3 1.8 3.0 2.5

of w hich construction 152.7 0.4 2.3 -0.2 0.3 0.0 -1.4 -1.6

Stocks (as % of GDP) Variations de stocks 4.6 0.2 0.2 0.3 -0.2 -0.1 0.1 0.6 Vorratsveränderung

Ex por ts Exportations 373.4 -2.3 2.5 0.7 5.5 3.7 4.2 3.8 Ex por te

Imports Importations 374.1 1.0 1.9 1.8 4.1 3.8 5.0 4.8 Importe

GDP PIB 1 417.7 0.1 0.9 0.1 1.6 1.4 2.0 2.2 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

226 © EUROCONSTRUCT Munich, December 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 Munich, December 2006

1 Summary

In 2005, the Dutch economy grew by 1.5 per cent. In 2006 the growth rate of GDP is expected to increase sharply to 3.1 per cent, followed by 3 per cent in 2007. A long period of poor economic performance finally has come to an end. The most important contribution to economic growth comes from the export of goods and services. In 2006 and 2007, exports (exclusive of energy) are expected to increase by about 7.75 per cent. A relatively large part of this growth stems from the success of re-exportation of goods, which is expected to grow by 11 to 12 per cent. Another important impetus to economic growth comes from improving private consumption. From 2002 until the first half of 2005 consumers expenditure hardly made any progression. However, since the middle of 2005, the consumption of households picked up again. Over the year as a whole, private consumption grew by 0.7 per cent. This might seem just an insignificant adjustment, but after all those years of decrease and stagnation any growth of this major part of GDP is an important sign. For 2006 and 2007, growth rates of 2 per cent are predicted. After five years of decline, in 2005 private investment started to grow again. In 2006 + 5.75 is expected, followed by + 4.75 per cent in 2007. Leading sub sector in this market is the investment in machines and computers, with a plus of 12 per cent in 2006 and 11 per cent in 2007.

Construction output increased considerably in 2006. The first provisional figures over this year point towards an over all rise by 5.5 per cent. In 2007, building production is estimated to grow further by 4.8 per cent. In that year the peak production volume of 2001 will be surpassed again. By then, the recession of 2002-2004 is completely leveled out. That means at total production level; certain parts of the industry (especially new non-residential construction) still remain considerably below their former peak production. In 2008 and 2009, growth of total construction output is forecast to slow down somewhat to 3.2 and 1.6 per cent. It is important to notice that from 2006 on, all major parts of the construction market contribute to the growth of the industry.

Total Construction output 2001-2009 Construction Output and GDP 2000-2009 constant 2005 prices relative changes bill. euro %

Construction Output GDP 100 8

60 4

20 0

0 2 2002 2 2 2005 2 2007 20 2009 0 0 0 0 0 0 0 0 0 1 3 4 6 8 -4 2 2001 2002 2003 2004 2005 2 2 2008 2 0 0 0 0 0 0 0 0 branch concept output construction industry 0 6 7 9

The positive development of the construction sector is strongly supported by the booming market for new residential construction. In 2006, the number of new completions in this sector is expected to increase to 75.000, 12 per cent more than the number of completions in 2005. For the years to come there is still room for further growth. In the period 2007-2009, 77,500 completions per year are projected. In terms of production value, for 2006, growth is estimated to mount up to 9.6 per cent. This powerful result is expected to be followed by a firm + 6.4 in 2007, + 4.5 in 2008 and + 2.2 per cent in 2009.

Repair and maintenance (including renovation) of houses is forecast to grow in a more moderate way. For 2006, a rise in production value of 4.3 percent is projected, slowing down to 3.5 per cent in 2007, 2.1 per cent in 2008 and 1.9 percent in 2009.

228 © EUROCONSTRUCT Munich, December 2006 Netherlands

Construction Output by Sector 2006 percentage

Civil Engineering 21% New Residential 29%

Building New Non- Renovation Residential 36% 13%

For new non-residential construction 2006 was a momentous year. After four years of decline this part of the construction market finally succeeded in regaining new vitality. Total output in this sector is estimated to increase by almost 5 per cent. In 2007 the upward trend is even stronger continued with an estimated growth of 6 per cent. In the recession years, the production of office buildings suffered the heaviest loss. By now, this niche of the market leads the recovery with growth figures of 12 and 13 per cent in 2006 and 2007. Repair and maintenance of non-residential buildings is less sensitive for cyclical fluctuations in the economy than new construction. In 2006, this sector grew by 2 percent. In the coming years, the growth rate will accelerate somewhat to around 2.5 percent.

New construction in civil engineering awaits considerable growth in 2007. With a plus of 6 per cent the sector contributes more than proportionally to the growth of total construction output. In 2006, the sector already performed well in having increased production volume with 4.5 per cent. Civil engineering maintenance and renovation, traditionally shows a very moderate development. For this sector the expected growth rate of 3 per cent for 2006 is rather exuberant. For the years to come, the expected increase of production around 2 per cent per annum, is more appropriate. Especially the upgrading and enlarging of the telecommunications network is a promising market for 2007 and later.

2 The Macroeconomic Outlook

The Dutch economy performs better than has been the case for a long time. This not only applies to the current situation, but in a way also to the past. New data reveal that in the years behind, gross domestic product developed less adverse than until recently was assumed. Over the period 2003-2005 the Central Bureau for Statistics upgraded the yearly change of GDP with 0.4 per cent point on average. This means that the slight decline of 0.1 per cent that was booked for 2003, now turns out to be a small increase of 0.3 per cent. When we define an economic recession as a succession of at least two quarters of negative growth, there has been no recession at all in the literal sense. Nevertheless, what remains is a rather persistent period of weak performance from 2001 until 2005, making up the largest slump since 1945. By now this depression is rapidly being converted into a situation of more exuberant growth. In the first two quarters of 2006 economic growth picked up to 2.9 and 2.8 per cent. In the second part of the year, GDP is expected to accelerate even stronger. Economic growth for 2006 as a whole is expected to increase to 3.1 per cent, followed by 3 per cent in 2007.

The quickly improving economic climate in the Netherlands, is reflected in 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 +9 last September. In the same period, the European average moved from -15 to -8.

The improving confidence amongst consumers, is paralleled by rising growth figures on private consumption. Over the past three years, consumers expenditure hardly made any progression. However, since the middle of 2005, the consumption of households picked up again. Private consumption on the whole is forecast to grow by 2 per cent in both 2006 and 2007. These figures could turn out be an underestimation. In the first half of the current year the average projection on yearly basis was clearly exceeded. In this period, the volume of private consumption was already 2.6 per cent higher than in the first half of 2005. Unemployment is another important indicator for the state of the economy. In 2005 on average 483,000 persons were out of work, which is 6.5 per cent of the labour force. At the end of that year the number unemployed already was 20,000 below this average. This year the downward movement strongly continues. In August the number of unemployed people had been falling off to 400,000 (5.3 per cent of the total labour force). In 2007 a further reduction of unemployment to 4.5 per cent (345,000 persons) is expected. As was noticed earlier in connection with consumers confidence, on unemployment too the Netherlands performs better than the Euro zone in total. In the latter area unemployment in 2005 was as high as 8.6 per cent on average and is estimated to arrive at 7.75 per cent in 2006 and 7.5 per cent in 2007.

In 2005, the most important contribution to economic growth was made by the export of goods and services. Exports (exclusive of energy) increased by 6.8 per cent. 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 7.75 per cent. For 2007, an similar progression is expected. The growth rates for the re-exportation of goods are expected to be even higher: 11 to 12 per cent. When calculated inclusive of energy (as is the case in table 5) exports growth rates are somewhat lower, but remain relatively high.

As a high sensitive cyclical activity, fixed capital formation generally shows a wildly fluctuating pattern over a business cycle. In the development of private investment, exclusive of investment in dwellings, this pattern becomes most purely visible. After a series of five years of decline with –7.2 as an absolute low in 2002, in 2005 private investment started to grow again. The + 3 per cent of that year is followed by + 5.75 in 2006, while in 2007 + 4.75 per cent is expected. The fastest growing part of this market is the investment in machines and computers, with a plus of 12 per cent in 2006 and an expected 11 per cent in 2007.

GDP and Private Investment 1997-2007 GDP and Private Consumption 1997-2007 % relative changes % relative changes

16 16 GDP Investment GDP Consumption 12 12

8 8

4 4

0 0

-4 -4

-8 -8 1997 1998 1 2 2001 2 2 2004 2005 2 2 1 1998 1 2 2 2 2003 2 2 2 2007 9 0 0 0 0 0 9 9 0 0 0 0 0 0 9 0 0 0 0 0 9 9 0 0 0 0 0 0 9 0 2 3 6 7 7 9 0 1 2 4 5 6

230 © EUROCONSTRUCT Munich, December 2006 Netherlands

Throughout the years of diminishing growth and recession, inflation gradually became less important. The inflation rate declined from 3.4 per cent in 2002 to 1.2 per cent in 2004. In 2005, general inflation firmed up to 1.7 per cent. For the period 2006-2009 the projections for the inflation point towards a level of about 1.5 per cent.

The projections for economic growth are based on a number of assumptions. One of these is that oil prices will remain stable this year and next at $ 70 per barrel Brent. An eventual decline to a level of $ 60 will lead to a 0.4 per cent point higher growth of GDP. Another one is the price of the US dollar. In the calculations, the exchange rate of the US dollar is fixed at 1.25 (dollar per euro) in 2006 and 2007. If for example a growing budget deficit in the US should cause a deterioration of the exchange rate to an average of 1.35 in 2007, this will bring about a reduction of economic growth by 0.3 point.

3 Residential Construction

In 2006 residential construction will succeed again in raising it’s production volume. For the third year in row more new dwellings were delivered and more turnover was realized. 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. In the period 2007 to 2009, further growth is expected. Especially the construction of new houses is responsible for this positive image. New residential construction is forecast to grow by 6.5 per cent in 2007, 4.5 per cent in 2008 and 2.2 percent in 2009. By then, the market for new residential construction will have exceeded the annual production volume of 22 billion euro (in 2005 prices). The main reasons for this favourable development are the ongoing high demand due to new family formation and the expected generous economic climate.

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 expected. The number of new completions is expected to peak at a level of 77,500 in 2007 and to remain there for at least the next two years. 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 2005, building permits for 83.000 new houses were granted, followed by 90.000 in 2006. This level will be sustained until 2009.

Nowadays, housing production in the Netherlands is largely determined by market conditions. In the past, a number of regulating instruments were at disposal for the government to adjust the market. Meanwhile, most of these instruments have been abolished. What remains is indirect demand support through tax deduction of mortgage interest and a system of individual rent rebate. Economic variables like (construction) prices, interest rates, household income, business development and employment now strongly affect progress in residential construction. Therefore, considering the improving economic climate and the low interest rate, the rise in production value on the housing market in recent years is not surprising. However, demand on the housing market does not completely depend on economic variables alone. A number of other important factors 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 important to notice, 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 lots immediately lead to disruptions on the construction market. 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

© EUROCONSTRUCT 231 Netherlands Munich, December 2006 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 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.

Mortgage interest deduction

As said, one of the few remaining supporting facilities on the housing market, is the possibility to deduct the mortgage rent on private homes for the income tax. By now there is a general discussion going on about wether it would be wise or not to preserve this facility. If one should decide to abolish it, this certainly would cause severe reactions on the housing market. A substantial fall of the general price level is to be expected. Subsequently, the markets for new residential construction, renovation and maintenance will be faced with a massive drop in demand. In that case, the optimistic forecast that was expressed above can’t hold out.

Building Permits in New Housing 2000-2009 Completed Dwellings 2000-2009 dwellings by category of principal dwellings by category of principal

100.000 100.000

80.000 80.000

60.000 60.000

40.000 40.000

20.000 20.000

0 0 2000 2001 2 2 2004 2005 2006 2007 2 2 2000 2001 2002 2003 2 2005 2 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 3 8 9 4 6 7 8 9 housing corporations developers private persons housing corporations developers private persons

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. 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. In 2006, the share of housing associations in the number of issued building permits is expected to increase even further, to 30 percent (27,000 dwellings). This shift in market share is partly the result 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. 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, mainly due to 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, at the moment only 10 percent of the building permits are issued for this type of commissioning.

232 © EUROCONSTRUCT Munich, December 2006 Netherlands

Micro-dust

Recently European legislation caused much unrest amongst construction firms and developers of new houses. The implementation of the Council directive on Ambient air quality assessment and management (the 'micro-dust directive’), threatened to paralyze new construction initiatives (housing and transportation) in and around the big cities in the western part of the country. Environmentalists started juridical procedures against housing plans and the construction of motorways. Finally the under minister for the environment succeeded to develop a practical policy to cope with the new rules. In the so called 'balance approach’ individual plans are no longer separately judged on their compliance with this new environmental requirements, but only in relation to their contribution to the total air quality in a broader region. This means that a project that adds to the air pollution still can get the green light if elswhere in the region the deterioration of the air quality is compensated for. Additional a 800 million euro programme was launched to improve the air quality in the country.

Residential renovation and maintenance are assumed to benefit from the expansion and the ageing of the housing stock. In the public housing sector, housing associations have announced large scale modernisation programmes, particularly for the part of the housing stock that was erected in the first decades after the Second World War. Many of these dwellings have become obsolete, but are 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.

4 Non-residential construction

In 2006, total (i.e. private and public) new non-residential construction finally recovers somewhat from the cyclical low that ravaged the sector in recent years. In the years behind output dropped step by step to € 8.9 billion. This year, a growth figure of about 4.5 per cent is expected. With a plus of 6 per cent, 2007 promises to be even better. In 2006, renovation and maintenance (r&m) of non-residential buildings will face a growth rate of almost 2 percent. For the years to come, annual growth is estimated between a solid 2.4 and 3 per cent. Because of the gradually increasing stock, in the long run the trend in renovation and maintenance activity is positive. 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.

Since 2000, private and public non-residential construction witnessed diverging 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 the private new non-residential sector, developments again differ quite a lot per type of building or branch of trade. The manufacturing industry is relatively sensitive to fluctuations in the business cycle. In the first years of this decade, investments collapsed sharply, due to the cyclical downturn. In this hostile climate, there has been little or no room

© EUROCONSTRUCT 233 Netherlands Munich, December 2006 for investment in 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. The recovery in this specific niche was postponed until 2006. In this year production value in relation to the construction of new buildings for the industry, is expected to increase by 4.5 per cent. For 2007 and 2008 more powerful growth figures are foreseen (+6.5 and + 11 per cent)

New Non-Residential Construction by Type 2005 New non-residential construction index 2003=100 Buildings for Miscellaneous Education 13% 9% 140 Agricultural Buildings Buildings for Health 120 10% 14%

100

Industrial Buildings Commercial 10% 80 Buildings 15% 60 Storage Buildinga 7% 2003 2004 2005 2006 2007 2008 2009 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 almost 60 per cent in 4 years. 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 new vitality to the construction of new office buildings. The growth forecast for 2006, is upgraded to 12 per cent. For 2007, a growth rate of even 13 percent is foreseen. For an great part, this is the result of an increase of the issue of building permits for accommodation for public administration. In 2008, growth will cool down a bit to 9 per cent. Positive impulses 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.

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 of any significance is not expected. The years 2007 up to 2008 show moderate growth figures, between 2 and 3 per cent (2008). The course of events in the retail trade sector is assumed to be highly dependent on the development of private income and consumer confidence. Both do look 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 234 © EUROCONSTRUCT Munich, December 2006 Netherlands 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. In previous years, this sector was hit with declining prices and low occupancy rates. Here, prospects are only gradually improving.

Construction activity in agricultural buildings decreased in 2002 and 2003 rather strong. In 2004 and 2005, the damage was largely repaired by an annual growth of about 5 per cent on average. In 2006 the production volume will grow by 3.5 per cent. 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 enhance international competition. In order to maintain its prominent position in many agricultural markets, the Dutch agricultural sector will have to concentrate on product and process 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, the agricultural sector is expected to increase its investment (under which those in buildings, warehouses etc.) in 2007 even more to the historical high level of € 1 billion (2005 prices).

The category ‚miscellaneous’ includes different sectors, like transport, communication, telecom and the quaternary sector (excluding healthcare and education). The production of building facilities for transport and distribution are to a great extent 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 the coming years, construction output is projected to grow. Building activity in the quaternary sector (including 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, on balance building production for the sector was declining in the years behind and will continue to do so in 2006. In the near future production is projected to recover again. 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. This applies too for decisions concerning the construction and maintenance of buildings. This led to a strong growth in demand for new buildings, and adaptation and renovation of old ones. Now that this process has almost been completed, new construction output in this sector is likely to decrease after 2007.

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 strong 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. In 2006 a production volume of €1.3 (2005 prices) billion will be reached. By now this is thought to be a peak level. For 2007, 2008 and 2009, a little less construction activity is accounted for.

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 includes the preparation of building sites for new residential and non-residential buildings, together with a number of construction activities for local bodies, such as municipalities, provinces and polder boards. The latter works include activities for the construction and maintenance of secondary road systems, waterways, water storage and purification facilities, sewerage systems etc. In 2005, civil engineering output recovered by a humble 1.5 per cent to a level of € 13.7 billion. New investments bring in about 55 percent of that figure. Growth is likely to be continued in 2006 and 2007. In these years we expect a growth of about 4 per cent per annum. In the period 2008 to 2009 growth continues, but at a lower pace.

The development of new investment differs significantly from the development of renovation and maintenance work. For years, the growth rates for the production of new work lagged far behind the renovation growth rates. In 2005 roles reversed. In 2006 until 2008 this relation is continued. Expenditures on new infrastructural works financed by the government 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. Up till now, financing of the motorway network was seen a pure public function, but alternative ways of exploitation, such as road pricing and toll roads, are no longer excluded as useful constructions to attract private capital. However, public decission-making on this point has several times been delayed.

The private sector 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 transport1, public utilities, telecommunication, seaports and airports. Today, more than 40 per cent of all new production originates from private companies and persons. In 2006 the production volume in this sector grew by 1 percent. In the years to come, private civil engineering activity is forecasted to remain practically stable at the 2006 level. Inside this sector 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.

The maintenance an renovation market for civil engineering works almost stagnated in 2005 (+ 0.2 percent). The increasing attention for the quality of existing infrastructural works will accelerate the growth in expenditures for maintenance and renovation. In 2006 a rise of about 3 per cent is to be reckoned with. In 2007 and later years, an annual growth of about 2 percent is expected. Both road and railroad systems contribute to the increasing attention for good maintenance.

1 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. 236 © EUROCONSTRUCT Munich, December 2006 Netherlands

Civil Engineering Share in Total Construction 2002-2009 Infrastructure Fund 2006 bill. euro % Annual total expenses 2004 = 100

20 26

15 24 200

10 22 150

5 20 100

0 18 2002 2 200 2005 200 2007 2008 2009 003 4 6 50 2004 2005 2006 2007 2008 2009 2010 Civil Engineering Volume (bill. euro) Share in Total Construction (%) Motorways Waterways Dikes Railways

APPENDIX – DEFINITIONS

A. Statistical basis for the Dutch construction data 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 construction investment for own use by non-construction companies. In addition to the value of the investments 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) are included, as well as do-it-yourself activities and unregistered production (moonlighting/black economy). The value of the maintenance production is part of the consumption in the National Accounts. DIY/black economy is based on an EIB-estimation. This way of registration is known as the branch concept. This is opposed to the industry concept under which construction activities are limited to the production of firms that belong to the construction industry.

B. VAT All figures exclude VAT.

C. Table 1 - The numbers of population, households and unemployed reflect the situation at the end of the year. - The development of GDP in 2008 and 2009 is based on the average forecast for the period 2008- 2011 in the report Economische verkenning 2008-2011 (CPB 2006).

D. Table 2 Modernisation investments, maintenance work and DIY/black economy are registered under renovation.

E. 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.

F. Table 4a The category „Miscellaneous“ in table 4a includes construction activities for the following industries: - transport - distribution - telecom - recreation - culture - sport - religion

238 © EUROCONSTRUCT Munich, December 2006 Netherlands

Country/Pays/Land: NETHERLANDS Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 16 258 16 306 16 334 16 361 16 394 16 428 16 462 Bevölkerung

Households ('000s) Ménages 7 049 7 091 7 146 7 196 7 246 7 298 7 350 Haushalte

Unemployed ('000s) Chômeurs 396 479 483 400 345 345 345 Arbeitslose

Unemployment rate (%) Taux de chômage 5.4 6.5 6.5 5.5 4.5 4.5 4.5 Arbeitslosenquote

Change of GDP Variation du PIB 0.3 2.0 1.5 3.1 3.0 1.8 1.8 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.1 1.2 1.7 1.3 1.5 1.5 1.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.1 2.2 1.9 1.5 2.0 2.0 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: NETHERLANDS Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 17 895 -3.0 10.1 8.8 9.6 6.4 4.5 2.2

Logement Renovation 15 377 -0.7 2.8 4.6 4.3 3.5 2.1 1.9

Wohnungsbau Total 33 272 -1.9 6.5 6.8 7.1 5.1 3.4 2.1

Non-residential construction New 8 893 -7.4 -10.1 0.0 4.7 6.1 3.7 0.2

Bâtiments non résidentiels Renovation 7 770 -0.3 -2.9 0.3 1.9 2.8 2.7 2.4

übriger Hochbau Total 16 663 -4.4 -6.9 0.1 3.4 4.6 3.2 1.2

Building New 26 788 -4.8 2.0 5.7 8.0 6.3 4.2 1.6

Bâtiment Renovation 23 147 -0.6 0.8 3.1 3.5 3.3 2.3 2.1

Hochbau Total 49 935 -2.8 1.4 4.5 5.9 4.9 3.4 1.8

Civil engineering New 7 596 -5.4 -9.3 2.4 4.4 6.1 3.1 0.4

Génie civil Renovation 6 084 0.4 -1.3 0.2 3.1 1.8 2.2 1.8

Tiefbau Total 13 680 -3.0 -5.9 1.4 3.8 4.2 2.7 1.0

TOTAL CONSTRUCTION OUTPUT 63 615 -2.9 -0.3 3.8 5.5 4.8 3.2 1.6

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 5.20 -5.5 2.0 0.0 2.0 2.0 2.0 2.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

240 © EUROCONSTRUCT Munich, December 2006 Netherlands

Country/Pays/Land: NETHERLANDS Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 54.4 57.1 62.5 65.5 65.5 65.5 65.5 Baugenehmigungen Familienhäuser

Flats Collec tif 18.1 19.1 20.8 24.5 24.5 24.5 24.5 Mehrfamilienhäuser

TOTAL 72.5 76.2 83.3 90.0 90.0 90.0 90.0

Housing starts 1+2 family dw ellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collec tif Mehrfamilienhäuser

TOTAL

Housing completions 1+2 family dw ellings Logements terminés Individuel 43.2 49.0 47.2 49.5 56.4 56.4 56.4 Baufertigstellungen Familienhäuser

Flats Collec tif 16.4 16.3 19.8 25.5 21.1 21.1 21.1 Mehrfamilienhäuser

TOTAL 59.6 65.3 67.0 75.0 77.5 77.5 77.5 Housing stock Logements existants 6 810 6 859 6 914 6 972 7 026 7 080 7 134 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zw eitw ohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 54.8 55.1 55.3 55.6 55.9 56.2 56.5 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: NETHERLANDS Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 828 21.7 9.8 17.8 9.5 3.9 -9.4 -0.4 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 1 250 13.3 16.6 18.7 5.4 -1.1 -3.4 -0.2 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 955 -13.4 -14.7 2.5 4.4 6.5 10.7 -0.3 Industriegebäude

Storage buildings Bâtiments de stockage 547 -9.7 -14.2 -6.5 1.1 7.8 9.9 1.7 Lagergebäude

Office buildings Bureaux 1 933 -16.4 -26.0 -15.9 11.9 13.0 8.8 1.3 Bürogebäude

Commercial buildings Commer c es 1 325 -5.0 -4.9 3.0 0.2 1.9 3.0 -0.3 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 922 -4.9 4.5 5.4 3.4 3.6 0.0 -4.8 Landw irtschaftsgebäude

Miscellaneous Autres 1 132 -3.3 -8.8 -2.7 -3.5 9.3 5.6 2.6 Sonstiges

Total 8 893 -7.4 -10.1 0.0 4.7 6.1 3.7 0.2 Insgesamt

1) At 2005 prices, excluding taxes.

242 © EUROCONSTRUCT Munich, December 2006 Netherlands

Country/Pays/Land: NETHERLANDS Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées Bahnanlagen

Other transport Autres réseaux Übrige Verkehrsinfrastruktur

TOTAL 9 280 -1.5 -4.4 2.6 3.8 6.3 3.9 1.8

Telecommunications Télécommunications 290 -27.3 -37.2 7.4 3.8 17.7 18.6 18.6 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 1 299 -12.3 -5.9 1.3 3.8 9.0 7.2 5.7 Energie- und Wasserversorgung

Other Autres 2 812 1.7 -5.9 -3.1 3.8 -6.2 -6.2 -8.0 Sonstiges

Total 13 680 -3.0 -5.9 1.4 3.8 4.2 2.7 1.0

1) At 2005 prices, excluding taxes.

Country/Pays/Land: NETHERLANDS Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 247.1 -0.2 0.6 0.7 2.0 2.0 1.3 1.3 Privater Verbrauch

Public consumption Consommation publique 121.8 2.9 0.1 0.3 2.4 2.2 1.5 1.5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 97.7 -1.5 -0.8 3.6 4.8 4.0 1.8 1.8

of w hich construction 56.8 -3.0 -0.5 3.1 6.2 5.5 3.4 1.5

Stocks (as % of GDP) Variations de stocks 0.1 -0.2 0.2 0.0 0.1 0.4 0.4 0.4 Vorratsveränderung

Ex por ts Exportations 353.6 1.5 8.0 5.5 6.8 6.3 6.0 6.0 Ex por te

Imports Importations 314.6 1.8 6.4 5.1 6.8 6.5 6.0 6.0 Importe

GDP PIB 505.6 0.3 2.0 1.5 3.1 3.0 1.8 1.8 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

244 © EUROCONSTRUCT Munich, December 2006 Norway

NORWAY Prognosesenteret AS www.prognosesenteret.no

Kjell Senneset e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 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 again already this year. Outlooks for 2007-2009 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 2009. So they will, according to the forecast from Statistics Norway and The Central Bank of Norway.

It was mainly domestic factors that accounted for the economic growth in 2005, and this will be the case also in 2006-2009. So far, 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. A small decline in investments made by the oil and gas sector is forecasted for 2007-2009, but strong growth in private and public consumption will see to that total domestic demand will continue to grow.

Total output growth in the construction sector was 8 % 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 and 2009 we predict growth rates between 0 an 1 %.

Investments in new dwellings, new non-residential buildings and in civil engineering works all contribute to the growth in construction in 2006 and 2007.In 2008, investments in residential and non-residential buildings will start to decline, but this will be offset by growth in the other sectors, including renovation. Growth in investments in the civil engineering sector and in renovation will offset decline in the residential and the non-residential sector.

Construction Sector by Type in Norway to 2009 (index 2000 = 100)

170 Total civil engineering

160 New non-residential construction 150 Building renovation and modernisation 140 New residential construction 130

120

110

100

90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

246 © EUROCONSTRUCT Munich, December 2006 Norway

2 Macro-economic Outlook

GDP The GDP-forecast for 2006 from Statistics Norway is showing a growth rate at 2.1 %. The main reason for this relatively moderate forecast is that there is no growth in the oil and gas production in 2006. Excluding this sector, the growth rate increases to about 3.2 %. These forecasts could however prove to be a little pessimistic. The Central Bank and the Treasury, for instance, predicts a bit higher GDP-growth, with or without oil and gas. The mainland growth (i.e. excluding the oil sector) this year 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.

Both the Statistics of Norway and the Central Banks forecasts for 2007 and 2008 shows a higher growth in the total GDP compared to 2006, and somewhat lower growth when we exclude the oil sector. The lower growth in the mainland economy is caused by higher interest rates and lower exports, given a moderate slump in the US and somewhat slower growth in the EU-region.

Domestic demand will outgrow production in 2006, mainly because private consumption is expected to increase by 3, 5 % and investments in private industries by 5 %. The growth in private consumption could be even higher in 2007 than in 2006, while the growth in the investments in private industries could be a little lower and investments for the public sector will actually go down. This will affect the domestic demand, and the net effect is that the growth in the mainland economy will slow down. We expect about the same growth in domestic demand for 2008 and 2009 as we do for 2007, and also about the same growth in the mainland economy as in 2007. Growth in total GDP, including oil and gas, will be a little higher than mainland growth in 2007 and 2008, and a little lower in 2009, according to the forecasts.

Norway’s huge trade surplus will 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 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 mean rate seems to be about 3.4 % this year. Unemployment rates may fall a little also in 2007, 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 a serious problem in the construction sector, and a major obstacle for further growth.

Prices and wages In spite of the labour shortages, wage increases are still moderate – though a little higher than at our main trading partners. Average wage increase was 3.6 % in 2005. Thanks to reduced prices on import products, inflation is very low, 1.6 % in 2005. Excluding energy, the core inflation was only 1 %. With unemployment rates below 4 %, as expected in the forecasting period, it will be almost impossible to keep wage increases at 2005-level in 2006- 2009. 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 directs the sight deposit rate due to a flexible inflation target, which means it has its eye both on the inflation and the mainland activity. As mentioned above the core inflation has been very low for a while now, far lower than the defined core inflation target of 2.5 %. Therefore it has been a need for an expansive monetary policy with low interest rates. However, the inflation is still low, in spite of the high activity in the economy. The question is what will the Central Bank do? It 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. The sight deposit rate is at 3.0% today and is expected to keep rising in small and not frequent steps. In the end of 2009 it is expected to reach a normal level at 5%, but this will depend on the evolution of the inflation and the mainland activity.

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) 2003 2004 2005 2006 2007 2008 2009 GDP 1,1 3,1 2,3 2,1 2,9 2,8 1,4 Private consumption 2,9 4,7 3,4 3,5 3,7 3,0 3,7 Unemployment 4,5 4,5 4,6 3,4 3,3 3,5 3,3 Inflation 2,5 0,4 1,6 2,4 1,5 1,1 1,7 Source: Statistics Norway

248 © EUROCONSTRUCT Munich, December 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 6-7.000 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 34.000-35.000 new dwellings each year in 2006-2009.

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 % in 2004, and 9 % in 2005. This year we expect a price increase of about 15 %. Higher interest rates and the high price level of existing homes in the bigger cities will reduce the price increases in the years to come, but house prices may never the less go up with some 10 % each year.

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 slowing 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 2006-2009. But we still expect to see growth rates at 3 - 4 %.

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 forecast reports for 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 lower demand for some building types and labour shortage in the construction industry will probably lead to a small reduction in non-residential housing starts. We expect the square meter started to go down with about 3% in 2007 and further 2% in 2008.

It is mainly the business sector that contributes to the boom in the non-residential sector in 2006, particularly office buildings, commercial buildings and hotels. There is also a big increase in the building of holiday houses (which belong to the non-residential sector), and we expect the erection of holiday houses to continue increasing in the forecasting period. It is mainly the shortage of labour and lower demand for industrial buildings which will dampen the start up in 2007-2009, but higher interest rate could also affect start ups of other buildings for the business sector.

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 and 2009.

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 also the value of the NOK was reduced – and so the erection of new factories picked up considerably. It is difficult to say what will happen with the NOK, late in 2005 it was strengthened again, but when this is written, in autumn 2006, it is quite weak. If we turn our heads to the production trend in the industry instead, this shows a good growth in the production last year and so far this year. Therefore, together with the low interest rates we could expect solid growth in the starting of new industrial buildings this year. Further on we expect the interest rates to go up

250 © EUROCONSTRUCT Munich, December 2006 Norway and the growth in the production of the manufacturing industry to go down. This indicates that the starting will go down in the forecasting period, but the level will still be high.

Storage buildings Project information indicates that the erection of storage buildings will be somewhat lower in 2006-2009 than the record level of 2005, but it will still be high.

Office buildings 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 statistics for the 1. half of 2003 and project information seems to indicate that the level will be even higher this year. The high erection is partly due to political restrictions on establishing large, new shopping centres in the period 1998-2004. These restrictions are now lifted, and this will most likely contribute to a high erection of malls in the years to come.

Agricultural buildings Floor space started increased steadily from 2000 to 2004, mainly due to restructuring of the farming business. We now 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 – although 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 2006-2009 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 15 % this year, and approximately 10-13 % in 2007-2009, so this indicates further increase in the erection of holiday houses in 2006- 2009.

We also assume increase in the erection of assembly buildings in 2006-2009. 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

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 commercial buildings will grow by some 4 per cent this year, but the expected interest rate increases in the forecasting period will reduce thereafter. 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 and a smaller fall thereafter 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 also churches, 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 after 2006, so that the total demand will be at about the same levels in 2007. The growth from 2005 to 2006 will reach approximately 3 % according to our forecasts.

252 © EUROCONSTRUCT Munich, December 2006 Norway

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 in the forecasting period. Maintenance of civil engineering works will also continue to grow, and so the total civil engineering market will see yearly growth rates of some 1.5-2.5 % each year.

A necessary condition for continued growth in the civil engineering market to continue 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. The new Government has, however, increased the grants to roads and railways considerably in the budget for 2007, though not quit enough to meet the investment plans in NTP. The increase is, never the less, enough to secure good growth in investment in transport infrastructure in the forecasting period, and the increase is also high enough to avoid negative growth in investments in civil engineering, as was anticipated en the last report.

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, partly be offset by higher investments in energy and water works in 2006. These investments are expected to grow this year, go down a little in 2007 because of finishing of some major projects, and increase again in 2008 and 2009. High investments in the energy sector are needed to reduce the present shortages in energy production, and investments in water supply are 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 2007-2009.

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 %.

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.

254 © EUROCONSTRUCT Munich, December 2006 Norway

Country/Pays/Land: NORWAY Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 4 552 4 577 4 606 4 645 4 680 4 715 4 750 Bevölkerung

Households ('000s) Ménages 1 980 2 000 2 015 2 035 2 050 2 065 2 080 Haushalte

Unemployed ('000s) Chômeurs 107 106 111 84 82 88 83 Arbeitslose

Unemployment rate (%) Taux de chômage 4.5 4.5 4.6 3.4 3.3 3.5 3.3 Arbeitslosenquote

Change of GDP Variation du PIB 1.1 3.1 2.3 2.1 2.9 2.8 1.4 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.5 0.4 1.6 2.4 1.5 1.1 1.7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.4 3.6 3.4 3.7 3.5 3.5 3.5 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 4.1 2.0 2.2 3.1 3.8 3.8 3.8 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 5.0 4.4 3.9 4.5 5.0 5.0 5.0 Langfristiger Zinssatz

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

Country/Pays/Land: NORWAY Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 5 259 1.4 24.3 12.3 9.9 3.3 -2.1 0.0

Logement Renovation 4 835 1.0 5.9 8.0 4.2 3.0 3.0 3.0

Wohnungsbau Total 10 094 1.2 14.6 10.2 7.2 3.2 0.3 1.4

Non-residential construction New 6 199 -2.1 17.6 7.4 9.9 1.9 -2.0 1.8

Bâtiments non résidentiels Renovation 4 186 -0.8 4.1 2.4 3.2 0.1 0.3 1.0

übriger Hochbau Total 10 385 -1.5 11.6 5.3 7.2 1.2 -1.1 1.5

Building New 11 458 -0.6 20.5 9.6 9.9 2.5 -2.0 1.0

Bâtiment Renovation 9 021 0.1 5.0 5.3 3.7 1.7 1.8 2.1

Hochbau Total 20 479 -0.2 13.0 7.7 7.2 2.2 -0.4 1.5

Civil engineering New 3 814 4.7 7.5 12.9 3.5 1.5 2.2 0.6

Génie civil Renovation 2 103 1.4 2.4 1.8 1.4 4.9 3.5 3.5

Tiefbau Total 5 917 3.4 5.5 8.7 2.8 2.7 2.7 1.6

TOTAL CONSTRUCTION OUTPUT 26 396 0.6 11.3 7.9 6.2 2.3 0.3 1.5

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 1.66 2.0 12.0 17.0 3.0 1.0 0.0 0.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 7,9000 NOK

256 © EUROCONSTRUCT Munich, December 2006 Norway

Country/Pays/Land: NORWAY Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 13.8 16.5 16.0 16.5 16.5 16.5 16.5 Baugenehmigungen Familienhäuser

Flats Collec tif 10.8 16.4 16.0 18.5 18.5 18.5 18.5 Mehrfamilienhäuser

TOTAL 24.6 32.9 32.0 35.0 35.0 35.0 35.0

Housing starts 1+2 family dw ellings Logements commencés Individuel 12.3 14.3 16.6 15.2 16.0 16.0 16.0 Baubeginne Familienhäuser

Flats Collec tif 10.9 15.7 15.0 19.8 18.0 18.0 18.0 Mehrfamilienhäuser

TOTAL 23.2 30.0 31.6 35.0 34.0 34.0 34.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 11.8 12.4 15.0 14.5 15.0 16.0 16.0 Baufertigstellungen Familienhäuser

Flats Collec tif 9.6 11.2 14.5 16.0 18.0 18.5 18.0 Mehrfamilienhäuser

TOTAL 21.4 23.6 29.5 30.5 33.0 34.5 34.0 Housing stock Logements existants 2 344 2 370 2 390 2 410 2 430 2 450 2 470 Wohnungsbestand

thereof second homes dont résid. secondaires 364 370 375 380 385 390 395 davon Zw eitw ohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 78.0 77.5 77.5 77.0 77.0 77.0 77.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: NORWAY Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 634 11.4 41.6 -4.3 3.4 0.1 -0.1 0.0 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 525 20.8 13.8 -31.7 22.9 -4.3 -3.1 2.0 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 459 -18.8 10.2 11.3 28.4 -3.4 -2.3 -2.0 Industriegebäude

Storage buildings Bâtiments de stockage 472 -27.6 57.6 27.0 3.4 -4.8 -2.4 0.0 Lagergebäude

Office buildings Bureaux 506 -14.4 -20.0 53.6 65.5 -14.1 0.4 5.0 Bürogebäude

Commercial buildings Commer c es 1 513 -16.6 27.6 23.2 6.4 2.6 -7.9 0.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 507 2.7 23.3 6.0 -12.7 0.0 -2.5 -2.0 Landw irtschaftsgebäude

Miscellaneous Autres 1 583 12.9 9.3 4.0 -2.3 17.7 2.4 5.0 Sonstiges

Total 6 199 -2.1 17.6 7.4 9.9 1.9 -2.0 1.8 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 7,9000 NOK

258 © EUROCONSTRUCT Munich, December 2006 Norway

Country/Pays/Land: NORWAY Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 3 091 -1.8 5.8 12.6 3.9 6.0 1.8 2.0 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 223 10.2 8.2 -4.1 0.9 61.6 32.3 3.9 Bahnanlagen

Other transport Autres réseaux 127 0.2 5.0 3.2 -6.3 -1.8 2.6 2.6 Übrige Verkehrsinfrastruktur

TOTAL 3 441 -1.0 6.0 11.0 3.4 9.3 4.7 2.2

Telecommunications Télécommunications 174 -9.7 5.2 4.9 0.0 5.0 5.0 5.0 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 595 19.3 15.4 5.2 5.3 -0.7 9.4 2.4 Energie- und Wasserversorgung

Other Autres 1 707 9.4 1.7 5.8 1.1 -9.7 -5.2 -0.8 Sonstiges

Total 5 917 3.4 5.5 8.7 2.8 2.7 2.7 1.6

1) At 2005 prices, excluding taxes. 1 euro = 7,9000 NOK

Country/Pays/Land: NORWAY Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 96.3 3.0 2.9 3.4 3.5 3.7 3.0 3.7 Privater Verbrauch

Public consumption Consommation publique 49.1 1.3 2.2 1.5 2.5 2.4 3.9 3.7 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 45.1 0.2 8.1 10.9 7.7 -0.1 0.2 0.0

of w hich construction

Stocks (as % of GDP) Variations de stocks 4.6 -0.5 1.6 1.9 2.2 2.0 2.0 2.2 Vorratsveränderung

Ex por ts Exportations 109.1 0.2 0.6 0.7 1.5 4.7 2.8 -0.1 Ex por te

Imports Importations 67.6 1.1 8.9 7.4 8.2 3.7 2.0 3.7 Importe

GDP PIB 236.6 1.1 3.1 2.3 2.1 2.9 2.8 1.4 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 7,9000 NOK

260 © EUROCONSTRUCT Munich, December 2006 Poland

POLAND PAB-PCR&F [email protected]

Mariusz Sochacki e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

The macroeconomic indicators noted in the three quarters of 2006 show that the Polish economy is on the path of the constant development. According to the CSO data, the GDP in the third quarter of 2006 increased by 5.2% as compared to 5.2% in the first quarter of this year and by 5.5% in the second quarter of 2006. The high increase of investment in the economy was observed since fourth quarter of 2005. This was the result of improvement of inclination and ability of the companies to invest, caused by increasing of incomes from sale of the products and services. According to the tentative evaluation, the outlays for capital assets increased by 7.7% in the first quarter of 2006 and by 14.6% in the second quarter of 2006. The results of the Polish economy in the three 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. During the last nine months the governmental experts have several times changed the economic growth rate, what has led to revising of the governmental prognosis in the medium- term perspective. Moreover, we were led to revise our June estimation for rate of GDP growth for 2006 from 4.5% to 5.2%. This upward revision is caused mainly by the higher than expected level of private consumption and outlays of gross domestic fixed capital formation. In the medium-term perspective, we estimate that the rates of growth of GDP in 2007 and 2008 will be higher by 4.6% and 5.0 % to 5.1% and 5.3%, respectively. The even higher GDP growth – up to 5.5% – can be expected in 2009. The favourable tendencies and phenomena in the economy, observed in 2005, have been still noted in 2006. They are expressed by increase of investments and construction production. Moreover, we were led to revise our June estimation for rate of growth for construction in 2006 from 8.9% to 9.9%. This upward revision is caused mainly by the higher than expected level of outlays of civil engineering The growing demand for the construction work will collide with the lack of possibilities of its fulfilment by the domestic construction potential. 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. We expect some weakening of the rate of construction production in 2007 – only 8.5%. According to the forecast, the construction production in 2007 will increase by 12% and in 2009, it will increase by 10.4%. We predict that till 2009, the highest growth of the construction production will be observed in civil engineering sector, which will be higher by 98% than that noted in 2005.

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Construction Sectors by Type in Poland till 2009 (2005 year = 100) 2005=100 220

200 Ne w Re s id e n tia l

180

New Non- 160 residential

140

R& MB u ild in g 120

100 Civil Engineering 80

60 2002 2003 2004 2005 2006 2007 2008 2009

Source: PAB – PCR&F

2 Macro-economic Outlook

The macroeconomic indicators achieved by Polish economy in every quater of 2006 point to the fixing of the growing tendencies. High growth of GDP was noted in the fourth quarter 2005, and it has been maintained in the consecutive quaters of 2006. The GDP in the third quarter of 2006 increased by 5.2% as compared to 5.2% in the first quarter of this year and by 5.5% in the second quarter of 2006. Also big increase of investment in the economy was observed since the fourth quarter of 2005. This was the result of improvement of inclination and ability of the companies to invest, caused by increasing of incomes from sale of the products and services.

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 14

% 8

4 2 3 4 2 1 Q Q1 Q Q Q1 Q3 Q4 Q Q3 06Q2 04 Q 05 Q 0 2 20 20 Source: PAB – PCR&F In 2006, the driver of the growth were both an increase of the consumption and still high dynamics of the gross domestic fixed capital formation. Also the situation on the labour market has improved, what was evidenced by the fall of unemployment rate from 17.6% in September 2005 to 15.2% in September 2006, it means by about 2.4 percentage points.

The results of the Polish economy in the three 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 three quarters of 2006, we expect some deceleration in the next quarter. As a result, the annual rates of growth of the GDP in 2006 should be equal to 5.2%.

Prognosis concerning GDP and gross Macroeconomic Key Indicators in Poland domestic fixed capital formation in Poland till to 2009 (year of year) 2009

12 03 04 05 06 07 08 09

8 GDP 3.8 5.4 3.4 5.2 5.1 5.3 5.5

% 6 Private 1.9 4.3 2.0 4.6 3.7 3.6 3.6 4 consumption

2 Unemploy- 20.0 19.1 17.6 15.4 14.1 12.7 11.9 ment rate 0

-2 Inflation 0.8 3.5 2.1 1.1 1.9 2.5 2.5 2003 2004 2005 2006 2007 2008 2009 GDP Investment outlays

Source: PAB-PCR&F

The volume and structure of demand for the construction production till 2009 will be determined: • in macro-economic scale by the rate of economic development and ability of the economy to invest, • by influence of the structural funds on the construction demand, • in the branch scale by the rate of development of segments of the construction market. The possibilities of construction development will depend on the ability of the economy to invest in the new building objects and on the needs in the range of modernisation and volume of carried out renovations of existing building resources. Good results of the Polish economy in 2005 and 2006 point to the maintaining of the growth tendencies and possibility of acceleration of the economic development also in in the next years. The factors of favour for the rate of the economic growth and investments as well as for improvement of situation in construction in the next years will be: • increase of GDP and investments in economy, • increase of employment and decrease of the unemployment rate, • increase of domestic demand, both consumption wand supplying ones, • decrease of profitability of the bank capital investments with simultaneous too high bank credit interests rates,

264 © EUROCONSTRUCT Munich, December 2006 Poland

• increase of building investment expenses of self-governments and budget units, connected with absorption of the financial means from EU cohesion funds, • growth of profitability of enterprises, increasing their ability to invest – particularly in non-production means, like building objects, • improvement of financial fluidity of the economic units and their payment and credit abilities, • increase of investment outlays under the framework of adjusting programs ISPA involved with accession to EU. The factors affecting the economic and construction development in Poland till 2009 will be as follows: - in 2004-2006 carrying out the first program of equalisation of the regional disproportions by so called Cohesion Funds of the National Development Program – NPR 2004-2006, under the framework of which the outlays will be - in 2007-2009 carrying out the second program of equalisation of the regional disproportions by structural funds for 2007-2013, under the framework of which the outlays will be 26 055 mln Euro. Acceleration of the growth and increase of the economic activity in Poland in 2004 - 2006 creates a lot of favourable conditions for the economic development of Poland in the next years. There is prognosed in the consecutive years 2006 – 2009 the acceleration of the growth of GDP up to the level of 5.5%, accompanied by significant increase of the outlays for the fixed assets in the economy from 7.6% in 2006 to 12% in 2009.

3 The Construction Sector

The Polish construction since the fourth quarter of 2005 has showed the strong symptoms of the increase of activity as a result of absorption of the still larger inflow of EU means for payment for the contractors of the projects qualified to be financed by the cohesion funds. The second and third quarter of 2006 were the sixth and seventh consecutive quarters in which the increase of construction production has been noted. This increase after six months of 2006 for the enterprises employing more than 9 workers was equal to 9.2% (9,2% a year ago) and after nine months it was 14.4% (8% a year ago). The situation on the construction market in 2006 points to the still bigger increase of the sale of the construction services as well as the building materials and products. Sale of building products and materials after nine months of 2006 was higher by almost 13% as compared to the nine months of 2005.

Changes in sold production of construction, building materials and in number of employees in construction in I – III quarters, 2002-2006

2002 2003 2004 2005 2006 30 building materials production employment in construction construction output 15

-15

-30

Source:CSO

On the basis of our own research Polish Construction Research & Forecasting estimates that the total value of the Polish construction market during nine months of 2006 has increased by about 12% in comparison with the price level of nine months 2005.

According to our estimations, the value of the Polish construction market in three quarters of 2006, in current prices amounted to about PLN 75 bn , ie. Euro 19, 5 bn. The most rapid increase of sales value of construction production was noted in construction companies employing above 9 persons.

The research performed by PAB-PCR&F under the framework of Construction Monitoring shows, that following phenomena and trends were observed in the Polish construction in three quarters of 2006: 1. According to expected growth of outlays on infrastructure construction, the share of the engineering construction in the object structure of the construction production after 9 month of 2006 has increased by 2.2 pp. There was observed an decrease of the share of non-residential construction by 1.1 pp. 2. The highest increase of the construction production was noted in Lubelskie and Warminsko-mazurskie Voivodships - an increase of 27% and lower has been noted in Podlaskie Voivodships; The production has been concentrated in three voivodships: Mazovia Voivodship 26%, Silesia Voivodship 12% and Posnania Voivodship 11%. 3. The average monthly gross salary in the construction industry in September 2006 was PLN 2 626 and was by 8.1% higher than in the corresponding month of previous year. 4. The economic-financial indicators of the construction companies have beensignificant improved in the first half of 2006. 5. Prices of construction-assembly production has increased by 3.3% in the nine months of 2006 (according to the Central Statistical Office ‘s estimations). 6. The growth of the production of the construction products were noted in three quarters of 2006 for 22 from among 26 registered building materials. 7. The largest number of the construction tenders has been announced for the general construction works, road and bridges construction and sanitary and wiring systems. The works on the new act „Public orders law” are finishing. One of its main ideas shall be simplification and acceleration of the tender procedures.

266 © EUROCONSTRUCT Munich, December 2006 Poland

New regulations shall introduce the elasticity of the procedures, and this should enable to use the Union structural funds much more effective than now. Moreover, we were led to revise our June estimation for rate of growth for construction in 2006 from 8.9% to 9.9%. This upward revision is caused mainly by the higher than expected level of outlays of civil engineering. According to the forecast, the construction production in 2007 will increase by 8.5% and in 2008 it will increase by 12%. We expect the deceleration of the growth rate to 10.4% in 2009.

4 Housing Market

After three quarters of 2006 the Central Statistical Office has registered 75 651dwellings as completed, that means by 2.2% less than in the three quarters of the previous year. In private construction 39 245 dwellings were turned over, i.e. by 12% less.The growth has been noted in the buildings for sale or rent - by 9% (to 24 018 dwellings) and in the municipal building - by 45.9% (to 2 445 dwellings) and in the social housing construction - by 14.3% (to 4 014 dwellings); fall has been noted in the company housing construction- by 46.5% less (to 169 dwellings) The average usable floor space per 1 completed dwelling during three quarters of 2006 equalled to 103.8 sq m and was by 3.7 sq m lower than during three quarters of 2005. After the record-breaking year 2003, when the share of the dwellings completed by the individual investors has increased to 72.6%, decreasing of the share of the dwellings completed in the individual housing construction to 57.7% has been noted in nine months of 2005 and dropped to 51.9% in nine months of 2006. The share of the dwellings completed in the developers - investors’ buildings for sale or rent has increased from 14.7% to 28.9% and 31,7%, respectively. The PAB estimates that very high indicator of the private ownership of dwellings has been reached in Poland; this share in 2005 has exceeded 75,3%. The number of construction permits issued in during three quarters of 2006 was equal to 120.4 thousands (by 32.1% more than in the previous year). The number of the construction permits issued in the private housing construction was equal to 57.8 thousands, that means by 17.9% more than a year ago, and developers - investors’ buildings for sale or rent was equal to 51 thousands, that means by 64.3% more than a year ago. The corresponding increase of the number of the started new buildings was 101.6 thousands (by 22.1% more than in the previous year), including developers - investors’ buildings for sale or rent equal to 34.6 thousands, that means by 43.3% more.

Change in percentage of the issued permits for dwelling construction and the number of the started dwellings in 2000-2006 ( in %) 60 50

40 % 30 20

10 0

-10 02 03 04 4 05 001 001 0 2000 2 2002 2003 200 2005 lf 2 -20 quaters half 20 3 I ha I half 20 I half 20 I half 2 I -30 construction permits -40 dw ellings started -50

Source: PAB – PCR&F An easy access to the mortgage credits with low interest rate – particularly in Swiss Franks – influences in a positive way the possibilities of the growth of housing demand, although borrowing costs are quite expensive compared to other EU countries. Demand is high and supply is also on the rise. This year, the price of housing in large cities has already risen by 25 percent on average. The rising prices (in Warsaw, 1 sq m of residential space costs on average 6 000 zł) have prompted decisions to buy. However, the high level of the flats prices in big cities has caused the strong interest of the housing investors in the construction or purchising of somewhat cheaper but more attractive singly-family houses and residences at the border of the cities. The Polish government is determined to work to improve the residential construction market though measures such as cheap loans subsidized by the national government. Under a proposed bill, the government would finance roughly half the interest for eight years. Subsidies would benefit families and single parents buying small apartments or homes. In both cases, the subsidies would cover 50 square meters. The government hopes that around 350,000 housing units will be built over six years with these loans. According to the tentative estimations, the growth of housing investments in 2006 has been higher than expected in June 2006 and the PAB estimates that outlays for housing construction were by 7.2% higher than in the previous year. According to the forecast, the housing construction will grow by 9% in 2007. A quick growth by nearly 11.5% is expected in 2008 and by 7.8% in 2009.

5 Non-residential Market

After Poland's accession to the EU the interest in the non-residential buildings has increased greatly, owing to the fact that it does not impose any problems for the foreigners to purchase a property in Poland.

Public non-residential construction We assess that in the three quaters of 2006 the public non-residential construction has showed significant increase. The development will be observed particularly in the range of public buildings – schools, hospitals, etc.

268 © EUROCONSTRUCT Munich, December 2006 Poland

Limited opportunities for financing of the public buildings and increasing local government administration running costs indicate a further decrease in the proportion of public buildings in overall production. According to the forecast, growth of public investments, as schools and hospitals, will amount to 4% in 2006. The bigger investment outlays from the EU auxiliary funds are expected in yhe next years.

Private non-residential construction The boom on the real estate market is continuing. New offices, industrial buildings and warehouses are being built, accompanied by a steady increase in prices owing to a continuing shortage of new and modern space. The fast-expanding market is attracting foreign investors. Warsaw, Wrocław, Cracow, Gdańsk and Sopot are becoming large construction sites as developers race to win a piece of the action. No one knows just how long the investment boom will last but estimates point to several years. The market for commercial property and land is attracting the greatest interest from investors. Offices and shops still in demand Interest from investment funds has contributed to a fast increase in the price of commercial properties. Some increase of the outlays for non-residential construction has been observed in the first half of 2006. According to the tentative CSO data, PAB-PCR&F estimate that in the first half of 2006 the private non-residential construction was increased by 8 %. The Polish investment market is very interesting for institutional investors expanding their property portfolios by new transactions, most recently in the retail sector. According to the latest estimations National Bank of Poland, the value of foreign capital inflow to Poland in two quarters 2006 will be about $ 4 bn. The role of real estates purchasing is still increasing in those foreign investments. We estimate that western investors will spend about 1 bn Euros for purchasing of office buildings. Warsaw is again the center of interest on the real estates market in Poland. Around 0,7-0,8 million square meters of office space will be built in Warsaw in the next three years. Demand for modern offices is growing steadily. The percentage of vacant space declined over a year from 10 % to 8 %. At the same time, office rental prices went up. In the center of Warsaw, 1 sq m of office space costs around 20 euros per month. According PAB estimations over 600,000 sq m of new office space to be completed in Poland in this year. Most of the buildings will be built in Warsaw (nearly 200,000 sq m), especially in the Ochota and Mokotów districts. Major projects expected to take place include Ghelamco's Trinity Park II in Górny Mokotów with over 24,000 sq m and their 18,600 sq m Project Prosta, the 16,400 sq m Wiśniowy Business Park F; Acciona's upcoming 52,000 sq m facility, and finally the Golden Terraces by Lumen that will be at least 23,500 sq m, the 12,855 sq m Cirrus of ECI Obrzeźna, is located on Marynarska Street, in an area defined by developers as the "upper south zone." The other three are the CPF Bobrowiecka development with 12,450 sq m in the southeastern zone, the Colins Tower with 1,418 sq m in the upper south zone and one located at Hrubieszowska 6a with 2,100 sq m in the western part of Warsaw. According to eeal estate analysts estimated that monthly rates for prime office space in central Warsaw have stabilized at 20-22 euros/sq m. Outside the center, they reach around 13-15 euros/sq m, but the average rate has dropped over the past year to 11-13 euros/sq m. According to the forecast, the overall public and private non-residential construction will grow by 7.2% in 2006. We expect that the non-residential construction in 2007 will increase by 3.0% and in 2008 it will increase by 6.9%. We expect the deceleration of the growth rate to 5.3% in 2009.

6 Civil Engineering Market

Higher outlays took place in road construction, particularly as regards the State investments using auxiliary means and foreign credits. The fundamental re-construction of the Polish transportation system is planned on the period till the year 2020, with division into the periods 2004-2006, 2007-2013 and 2014-2020. Within that time perspective there is planned the creation of the expressways network, the modernisation of the main train lines, modernisation of the main airports and many other investments in other areas. The basic sources of financing of that programme will be the Union means, mainly from the Cohesion Fund and the budget means. The road investments will be to large extent limited to the transeuropean transportation network, because the Cohesion Fund may finance only the roads belonging to that network. In the area of the road investments the priority tasks are the connections between the biggest cities of the country, with the biggest transportation demand. In the period till 2013 the creation of the basic expressways network is planned, consisting in 3 highways and 6 expressways. Besides the investments on the state roads, the investments on the local roads will be also carried out, financed by the regional operational programmes. We forecast that in 2009 the value of the investment construction works in that segment will be by 140% higher than that of the year 2005 (in comparable prices).

Prognosis of the value and rate of growth of transport construction to 2009 (%)

mln % 9 000 40 35,5 33 8 000 35 euro % 30 7 000 30 6 000 25 20 23 5 000 20 4 000 15 15 3 000

10 2 000

5 1 000 0 0 2004 2005 2006 2007 2008 2009

Source: PAB – PCR&F So high increase of production will be possible as a result of carrying out the programme of the highways construction and quicker development of the accompanying network of the expressways and other state roads. In the range of the road construction the priority tasks till 2013 are: - the A1 highway – construction on the whole length (Gdańsk - Toruń - Łódź - Piotrków Trybunalski - Częstochowa - Gliwice - Gorzyczki) - the A2 highway – finish of the construction on the sector Świecko - Poznań - Łódź – Warszawa –Siedlce - the A4 highway – finish of the construction on the sector state border - Jędrzychowice - Krzyżowa - Legnica - Wrocław - Opole - Gliwice - Katowice - Kraków - Tarnów – Rzeszów; in 2013 the sector Rzeszów – Korczowa – state border will be under construction

270 © EUROCONSTRUCT Munich, December 2006 Poland

- the S3 expressway – construction on the sector Szczecin - Parnica - Gorzów Wielkopolski - Zielona Góra - A4 (Legnica) - the S7 expressway – finish of the construction on the sector Gdańsk - Elbląg – Olsztynek - Warszawa - Kielce - Jędrzejów i and the sector Lubień - Rabka - the S8 expressway – construction on the sector Wrocław Psie Pole – Syców - Piotrków Trybunalski - Warszawa - Ostrów Mazowiecka - Zambrów – Białystok and the sector Białystok - Augustów – Budzisko, with increased budget outlays on that particular sector - the S17 expressway – construction on the sector Warszawa - Zakręt - Kurów – Lublin - Piaski - the S19 expressway – construction on the sector Międzyrzec Podlaski - Lublin - Nisko – Rzeszów; in 2013 the sector Międzyrzec Podlaski – Białystok will be under construction and the length of the built up sector will depend on available means - the S69 expressway – finish of the construction on the sector Bielsko Biała – Żywiec - Zwardoń. In the range of the railway construction within the prognosed period, the significant increase of the outlays for the train lines PKP can be expected even in 2006 and 2007. This will be the result of carrying out the projects financed by the EU means. In the area of the railway construction the priority tasks till 2013 are: - the E65 line – finish of the modernisation on the sectors Gdynia – Warszawa, Katowice – Zebrzydowice and Czechowice Dziedzice - Bielsko Biała - Zwardoń - the E59 line – finish of the modernisation on the sector Wrocław – Rawicz – Poznań – Krzyż – Szczecin - the E20/CE20 line – the sector Warszawa - Poznań (finish of the works), the sector Łowicz - Skierniewice (finish of the works) and the sector Siedlce - Terespol (modernisation) - the E30 line - finish of the modernisation on the sectors Opole - Kędzierzyn Koźle - Gliwice – Zabrze and Legnica - Węgliniec - Bielawa Dolna – Horka - the CE 59 line – modernisation on the sector Wrocław - Zielona Góra - Rzepin – Szczecin, I stage - the Warszawa – Łódź line – finish of the modernisation on the whole length - the Psary - Kozłów – Kraków line – modernisation on the sector connecting the Central Railway Trunk Line with Krakow - the train line No. 8 – modernisation on the sector Warszawa – Radom – Kielce, with connecting line to the airport Warszawa - Okęcie - the train line No. 14 – modernisation on the sector Łódź - Zduńska Wola - Kalisz - preparation to the construction of train line of high velocity Warszawa – Łódź – Kalisz – Wrocław/Poznań The infrastructure construction in the next years will be focused on the objects involved with the sewage system and waste-water treatment as well as the new water intakes. We forecast that in 2006 will be maintained the positive tendencies for the infrastructure construction, noted in 2004. In 2008-2009 the outlays for the infrastructure construction will increase in two-digit rate. According to the assumptions of the National Programme Of the Communal Sewage Treatment, Poland should built up, expand or modernise the sewage treatment plants in 318 cities and towns with more than 15 000 RLM. Also, the expansion or modernisation of the sewage system in 459 cities and towns is required, with the total length of about 20 thous. km. Moreover, according to the assumptions of National Programme Of the Communal Sewage Treatment, Poland should built up, expand or modernise the sewage treatment plants in cities and towns with more than 2 000 RLM. This will be achieved by carrying out the group

© EUROCONSTRUCT 271 Poland Munich, December 2006 projects financed by the Cohesion Fund under the framework of PO Infrastructure and Environment and individual EFRR means, carrying out under the framework of 16 Regional Operational Programmes. We forecast that the investment outlays for civil engineering will dynamically grow since 2006 as a result of currently starting huge road programs. Therefore, we expect the investment outlays will grow by 22,4% in 2007, and in 2008 and 2009 this rate will be 22.6% and 22.2%, respectively. In 2006, total value of civil engineering market of new and R&M works will increase by 18.7%, and in 2007, 2008 and 2009, it will be higher by 17.3%, 20.3% and 18.1%, respectively.

272 © EUROCONSTRUCT Munich, December 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 Home ownership rate Share of private housing in total housing resources in % Housing stock Noted at the end of the year

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.

274 © EUROCONSTRUCT Munich, December 2006 Poland

Country/Pays/Land: POLAND Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 38 191 38 174 38 157 38 120 38 080 38 040 38 000 Bevölkerung

Households ('000s) Ménages 13 433 13 525 13 615 13 700 13 805 13 920 14 000 Haushalte

Unemployed ('000s) Chômeurs 3 176 3 000 2 773 2 667 2 450 2 236 2 087 Arbeitslose

Unemployment rate (%) Taux de chômage 20.0 19.1 17.6 15.4 14.1 12.7 11.9 Arbeitslosenquote

Change of GDP Variation du PIB 3.8 5.3 3.4 5.2 5.1 5.3 5.5 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0.8 3.5 2.1 1.1 1.9 2.5 2.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction -1.1 2.5 2.3 3.6 6.5 4.5 5.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 5.8 7.0 6.5 6.0 6.3 6.5 6.4 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 9.0 12.0 10.0 9.0 8.0 7.5 7.5 Langfristiger Zinssatz

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

Country/Pays/Land: POLAND Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 3 940 -3.0 5.3 4.8 7.2 9.0 11.5 7.8

Logement Renovation 2 487 3.7 7.5 4.0 0.0 1.5 3.0 3.2

Wohnungsbau Total 6 427 -0.5 6.1 4.5 4.4 6.2 8.5 6.3

Non-residential construction New 6 971 -7.3 3.5 4.5 8.7 3.2 8.6 6.0

Bâtiments non résidentiels Renovation 3 301 1.2 4.0 3.1 4.0 2.5 3.0 3.5

übriger Hochbau Total 10 272 -4.7 3.7 4.0 7.2 3.0 6.9 5.3

Building New 10 911 -5.8 4.1 4.6 8.2 5.3 9.7 6.7

Bâtiment Renovation 5 788 2.2 5.5 3.5 2.3 2.1 3.0 3.4

Hochbau Total 16 699 -3.2 4.6 4.2 6.1 4.2 7.5 5.6

Civil engineering New 4 805 4.5 3.7 14.2 24.6 22.4 26.1 22.2

Génie civil Renovation 2 441 3.4 5.0 4.5 7.0 5.5 5.0 5.0

Tiefbau Total 7 246 4.1 4.2 10.7 18.7 17.3 20.3 18.1

TOTAL CONSTRUCTION OUTPUT 23 945 -1.2 4.5 6.1 9.9 8.5 12.0 10.4

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 11.90 2.6 2.0 2.0 8.5 7.0 10.0 9.5 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 4,0254 PLN

276 © EUROCONSTRUCT Munich, December 2006 Poland

Country/Pays/Land: POLAND Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 67.6 59.0 58.9 65.0 63.0 65.0 70.0 Baugenehmigungen Familienhäuser

Flats Collec tif 28.0 46.8 57.0 76.0 88.0 100.0 105.0 Mehrfamilienhäuser

TOTAL 95.6 105.8 115.9 141.0 151.0 165.0 175.0

Housing starts 1+2 family dw ellings Logements commencés Individuel 57.0 61.0 58.9 62.0 60.0 61.0 65.0 Baubeginne Familienhäuser

Flats Collec tif 25.4 36.2 43.1 63.0 78.0 92.0 100.0 Mehrfamilienhäuser

TOTAL 82.4 97.2 102.0 125.0 138.0 153.0 165.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 117.9 64.9 63.3 58.2 56.5 57.0 61.0 Baufertigstellungen Familienhäuser

Flats Collec tif 44.7 43.2 50.8 58.6 65.0 77.0 88.0 Mehrfamilienhäuser

TOTAL 162.6 108.1 114.1 116.8 121.5 134.0 149.0 Housing stock Logements existants 12 730 12 830 12 905 13 010 13 130 13 262 13 405 Wohnungsbestand

thereof second homes dont résid. secondaires 140 160 170 180 190 205 220 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 780 800 800 800 800 820 836 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 75.0 75.1 75.3 75.5 75.7 75.7 75.8 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: POLAND Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 671 -9.0 3.2 0.5 5.5 4.5 7.7 6.3 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 222 0.4 -5.0 -2.6 8.2 5.0 8.2 6.8 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 1 550 8.7 14.0 6.0 8.8 4.3 8.2 3.8 Industriegebäude

Storage buildings Bâtiments de stockage 743 -10.0 15.7 7.1 16.5 6.3 12.2 8.7 Lagergebäude

Office buildings Bureaux 1 286 -7.1 -5.8 1.9 8.0 4.0 6.6 4.0 Bürogebäude

Commercial buildings Commer c es 1 355 -9.0 -2.0 6.4 4.4 -2.5 8.5 6.9 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 291 2.0 19.0 12.0 20.0 7.2 15.0 12.0 Landw irtschaftsgebäude

Miscellaneous Autres 853 -23.4 0.5 3.5 8.3 2.9 7.4 6.0 Sonstiges

Total 6 971 -7.3 3.5 4.5 8.7 3.2 8.6 6.0 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 4,0254 PLN

278 © EUROCONSTRUCT Munich, December 2006 Poland

Country/Pays/Land: POLAND Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 2 655 8.5 20.0 15.0 35.5 30.0 33.0 23.0 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 221 33.5 12.5 -20.0 21.0 33.0 18.0 20.0 Bahnanlagen

Other transport Autres réseaux 625 0.5 6.5 8.5 7.0 20.0 16.5 23.0 Übrige Verkehrsinfrastruktur

TOTAL 3 501 8.6 16.6 10.8 29.5 28.7 29.8 22.8

Telecommunications Télécommunications 295 -17.5 -16.8 6.2 9.0 5.0 6.5 5.5 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 2 026 -1.9 8.5 11.8 10.5 5.2 8.5 12.5 Energie- und Wasserversorgung

Other Autres 1 424 9.6 -17.3 9.9 5.8 3.3 5.5 7.5 Sonstiges

Total 7 246 4.1 4.2 10.7 18.7 17.3 20.3 18.1

1) At 2005 prices, excluding taxes. 1 euro = 4,0254 PLN

Country/Pays/Land: POLAND Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 150.9 1.9 4.3 2.0 4.6 3.7 3.6 3.6 Privater Verbrauch

Public consumption Consommation publique 44.6 4.7 3.1 4.9 2.0 3.5 3.2 3.1 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 44.3 -0.1 6.4 6.5 10.0 10.6 11.5 12.0

of w hich construction 15.7 -3.0 4.0 7.2 11.5 10.9 12.1 14.5

Stocks (as % of GDP) Variations de stocks 4.6 1.6 2.9 1.9 1.8 2.0 2.6 2.6 Vorratsveränderung

Ex por ts Exportations 90.6 14.2 14.0 8.1 16.5 8.6 7.0 6.5 Ex por te

Imports Importations 91.4 9.3 15.2 4.9 15.8 9.0 8.1 6.0 Importe

GDP PIB 243.6 3.8 5.3 3.4 5.2 5.1 5.3 5.5 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 4,0254 PLN

280 © EUROCONSTRUCT Munich, December 2006 Portugal

PORTUGAL ITIC – Instituto Técnico para a Indústria da Construção www.itic.pt

Bárbara Brito Martins e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

Economy

After a rather disappointing performance last year (Gross Domestic Product grew 0.4%), the Portuguese economy gained momentum in 2006. The rebound was driven by Exports, which are estimated to go up from a 0.9% growth rate in 2005 to 8.5% this year, benefiting from a stronger external demand.

Internal demand performed poorly due to significant investment cuts, both on private and public sectors, and to a deceleration in consumption. Strong measures continued to be introduced in order to decrease public expenditure levels as to meet the government deficit target (4.6% of GDP in 2006).

Prices increased in 2006 due to high energy prices and indirect taxes increase. The unemployment rate reached 7.8%.

After several years of meagre growth (between 2002 and 2006 GDP grew at an average of 0.5% per year) economic activity is expected to accelerate in the 2007-2009 period. In the near future growth will be mainly driven by Exports as internal demand is not expected to expand significantly before 2008.

Inflation should decrease along the forecast period assuming a stabilization in international oil prices and other raw materials, wage increases in line with productivity gains and no major increases in indirect taxes.

Unemployment rate is expected to decrease from 7.8% in 2006 to 6.9% in 2009.

Construction

Total construction output fell 5.7% in 2006 and is not expected to pick up in the next year (- 3.9%). A modest recovery will take place only from 2008 on (0.8% and 1.5% in 2008 and 2009, respectively). Both buildings and civil engineering were responsible for the negative performance of total construction output in 2006 and the same is expected in 2007. In 2008 and 2009 building production is expected to pick up (triggered by non residential construction) whereas civil engineering will continue to record negative growth rates.

New residential construction fell 8.0% in 2005, keeping the downward trend observed since 2001. Housing supply is expected to continue to decrease in 2007 in the absence of a positive evolution on the main variables influencing demand (e.g. real disposable income and interest rates). In 2008 new construction output should flat with a minor increase forecast to take place in 2009 (+1.0%). Second homes and external demand should play an important role in future housing demand. Residential R&M will keep a positive growth profile over all forecast period.

Non residential construction fell almost 9.0% in 2006. In 2007 non residential output should continue to decrease with recovery forecast to take place in 2008.

The announced cuts in public investment are expected to hold back investment in the construction of non residential buildings while on the private sector mixed expectations about economic evolution will hold investment until 2008. The exception to this will most probably be the retail sector, with positive growth being put forward along all forecast period.

282 © EUROCONSTRUCT Munich, December 2006 Portugal

Civil Engineering output fell 4.2% in 2006. In 2007, 2008 and 2009 civil engineering output is likely to fall (6.4%, 0.8% and 1.2%, respectively) led by significant cuts in public investment. Transport infrastructures should be the most penalized by the decrease in investment as opposed to water and energy works.

2 Macro-economic Outlook

A better than expected performance in 2006

After a rather disappointing performance last year (Gross Domestic Product grew 0.4%), the Portuguese economy gained momentum in 2006. Current estimates point to a 1.4% growth in Gross Domestic Product (GDP), well above the expected early in the year. The rebound was driven by Exports, which are estimated to go up from a 0.9% growth rate in 2005 to 8.5% this year, benefiting from a stronger external demand.

The European economy performed better than expected in 2006 (the European Commission revised by approximately 0.4 percentage points their forecasts for the EU1), with economic recovery now appearing to be more robust and domestic demand picking up. With its major trade partners within EU, this economic upswing was a break through for Portuguese exports. It should be noticed, however, that Exports also gained market share in non EU countries in 2006.

Imports have also increased more than expected (2.5%) but all in all net exports contribution to GDP growth was positive.

Both private and public consumption cooled down in 2006 but whilst companies and households consumption stood on positive ground (1.1%), public consumption remained flat (-0.2%).

On the public side, after a Government deficit of 6.0% of GDP in 2005 (well above the 3.0% ceiling imposed by Growth and Stability Pact) strong measures continued to be introduced in order to decrease public expenditure levels and this had obviously a negative impact on public consumption growth in 2006. On the private side, the increase in unemployment figures in a context of high household indebtness ratios and rising interest rates restrained private consumption growth in 2006.

2004 2005 2006 (e) Government Deficit (Excessive Deficit Procedure, 09/2006) -3.2 -6.0 -4.6 Net Lending (+) or borrowing (-) of the economy -5.7 -8.1 na Source: Portuguese Central Bank

Investment fell 3.5% in 2006 pushed by a sharp decrease in construction investment (6.0%). Both private and public investment is experiencing a significant drawback resulting from the correction of major imbalances. While the Government was forced to revise its investment priorities in order to accomplish the goal of a government deficit of 4.6% of GDP in 2006, the private sector remained cautious in face of mixed expectations concerning demand evolution and rising interest rates.

The unemployment rate stood at 7.8%, reflecting the adjustment of the labour market to weak economic growth.

Inflation, measured by Consumer Prices Index (CPI) grew from 2.3% in 2005 to 3.1% in 2006. Even though the two figures are not directly comparable due to a break in the CPI series, prices did accelerate in 2006 due to an increase in some indirect taxes and also in energy prices.

1 European Commission, September 2006 – Interim Forecast 284 © EUROCONSTRUCT Munich, December 2006 Portugal

Is growth set to resume?

After several years of meagre growth (between 2002 and 2006 GDP grew at an average of 0.5% per year) economic activity is expected to accelerate in the 2007-2009 period.

In the near future growth will be mainly driven by Exports as internal demand is not expected to expand significantly before 2008. Current imbalances in both public and private sectors are expected to prevail in the short run therefore preventing a more robust pick up of the Portuguese economy.

Even though a slight deceleration in global output is forecast to take place in 2007, Portuguese exports are expected to continue to perform well. The basic underlying assumption is that unit labour costs will be maintained at competitive levels.

Downside risks concerning these forecasts are considerable. Internal downside risks to short term economic prospects are mainly associated with rising interest rates and lack of competitiveness of Portuguese goods and services (see box). In a medium term perspective, the implementation of major reforms in education, health, justice, just to name a few, is essential to secure future growth.

Portuguese exports are traditionally oriented towards intensive labour sectors (textiles and shoes) which are now facing major competition from low cost producers like India and China. There is also a growing apprehension concerning the maintenance of other industries in Portugal, as is the case with the automotive industry. Just recently, Opel announced the decision to close the Azambuja factory, with production being transferred to Spain. This means that a significant shift in Exports orientation plus an increase in productivity is essential to increase (or at least secure) the market share of Portuguese goods and services in the global market.

On the other hand, there are important external downside risks which may slowdown the recovery of the Portuguese economy:

Oil prices evolution Oil prices (Brent) grew from an average of 54 dollars per barrel in 2005 to close 70 dollars per barrel in 2006, an increase of over 25%. Estimates point to a stabilization on international oil prices in coming years, but the risk associated to those estimates is high.

Global economic slowdown headed by the US World output is expected to continue to grow significantly in the next years although at a lower pace than the observed in 2005 and 2006 (IMF). Furthermore, a major correction in global imbalances, especially in the US, can lead to an appreciation of the euro vis-à-vis the dollar and therefore the loss of competitiveness of euro area countries.

Unemployment rate is expected to decrease from 7.8% in 2006 to 6.9% in 2009, in line with economic growth projected for the period.

2003 2004 2005 2006 2007 2008 2009 GDP (% change at real terms) -1.1 1.2 0.4 1.4 1.7 2.0 2.2 Unemployment rate (%) 6.3 6.7 7.6 7.8 7.5 7.2 6.9 Inflation rate *(CPI) 3.3 2.4 2.3 3.1 2.7 2.5 2.3 Source: INE and ITIC (Forecasts), * series break in 2006

3 Housing Market

Extremely poor performance in 2006

In 2006 new residential production fell for the sixth year in a row (8.5%). In fact, all relevant indicators show a deterioration in the housing market thus forcing a downward revision of the Amsterdam conference estimates (-3.5% in 2006). The housing market didn’t benefit from the upswing in economic activity in 2006 and continues to face severe restrictions to a short term recovery.

In 2006 approximately 54,500 new dwellings were completed in Portugal, which represent a decline of 15% in comparison with the previous year. The intensity of the decrease was somewhat surprising as data regarding building permits had been showing a less negative evolution in 2004 and 2005 in comparison with previous periods (-5% in both years after approximately -15% in 2002 and 2003).

The surface area of building permits has also “improved”2 in 2005 without an equivalent trend being observed in building completions this year.

Surface Areas (sqm) 25000000 20000000 15000000 10000000 5000000 0 2001 2002 2003 2004 2005 Permits Completions

Source: INE One of the probable reasons for the widening of the time gap between housing permits and completions is the increase in the number of non-sold dwellings which led to a forced widening of the production cycle and in the worst case scenarios to a postponing or suspension of some construction projects.

Construction Survey – Opinions on Annual Average 2006 – Quarter (average) the level of activity 2003 2004 2005 I II III Level of activity – Housing market -38 -29 -32 -33 -35 -38 Dwelling Sales -63 -57 -54 -66 -66 -62 Source: AECOPS

As for housing prices, the only known and reliable information source is INE (the national statistics office) which collects data on bank evaluations (euros per square meter). However, this indicator can hardly be considered a good proxy for market prices. Nevertheless, the general opinion is that housing prices haven’t fell significantly over the last years, in opposition to what would be expected in a context of market recession.

The reason for that may rest in 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

2 Surface areas fell 3.5% in 2005, after growth rates of -10.1%, -14.7% and -3.9% in 2002, 2003 and 2004. 286 © EUROCONSTRUCT Munich, December 2006 Portugal 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.

Housing loans increased in 2006, both in number and value of the contracts, but not as much as it did in 2004 and 2005. The increase in interest rates alongside weak expectations concerning future income evolution is probably behind the deceleration in housing loans growth.

Interest Rate - Loans to private individuals for house purchase 4,4 4,2 4,0 3,8 3,6 3,4

%, average, end of period 3,2 July July May April June 06 March August August October January 05 June February November December September

Source: Portuguese Central Bank

Low expectations for the 2007/2009 period

Prospects on residential production growth in the time horizon covered in this Report are rather unfavourable. New construction is expected to decrease 2.5% in 2007 followed by stagnation in 2008. A minor increase in new residential output is being put forward for 2009 (+1.0%). In comparison with the Amsterdam Report (June 2006) current forecasts represent a postponing of housing market recovery.

The main assumptions behind current forecasts are: Impact on Housing Variables Trend Consequences Demand Financing restrictions, Increased weight of debt service in Interest Rates Upward Negative household’s disposable income » solvency problems?

Increased competition in the real estate market (new construction); Stable/slight Emphasis on supply differentiation; Housing Prices Mixed decrease Transaction losses; Access from lower income groups to own dwellings;

Higher disposable income Unemployment Decrease Positive Higher indebtness capacity Impact of recent changes (tax Property Taxes No changes increase as result of new method to Negative calculate the value of the building)

Despite the improvement in the macroeconomic framework (GDP is expected to increase 1.7%, 2.0% and 2.2% in 2007, 2008 and 2009, respectively), there are a number of important factors holding down housing demand. Probably one the most important is the increase in interest rates. The impact of higher interest rates on the economy is inevitably negative but in Portugal the impact can be dramatic. In fact, household’s indebtness ratios are extremely high and in the medium term a significant increase in disposable income as to compensate higher debts costs is not feasible.

Households Indebtness Ratio

120 100 80 60 40 20

as % dipsosable of income 0 2000 2001 2002 2003 2004 2005

Source: Portuguese Central Bank

However, it should be stated that the decrease in housing production over such a long period of time (from 2001 to, at least, 2007) is not just the result of a sluggish macroeconomic scenario or difficult financing conditions. It’s also the result of the massive housing construction in the 90’s and the natural correction that inevitably had to follow.

So, what is to be expected in the future? At what level will housing production stabilize? Can it actually flourish?

The answer to these questions depends on:

Demographic trends (e.g. immigration, family size); Investment in second homes; External demand.

Portuguese and Foreign Population – by age groups

Men Women

Portuguese Foreign

Potential buyers?

Source: M. J. Rosa, H. Seabra and T. Santos

Current forecasts point to a decrease in dwelling completions in 2007 and a slight increase in 2008 and 2009. The number of completed dwellings is expected to be slightly bellow 55.000 units (apartments plus houses) in the forecast period. There is obviously space for interesting growth rates in the following years, depending on the evolution of the variables mentioned above. 288 © EUROCONSTRUCT Munich, December 2006 Portugal

Positive growth in housing maintenance The renovation market is expected to accelerate in the 2007/2009 period, after a slight slowdown in 2006 (0.5%).

After a period of massive new construction, the renovation market seems to be taking the lead in the residential segment. Even though the weight of renovation works in total residential construction being relatively small, in comparison with other European countries, renovation has a great progression margin.

First of all the renovation issue is in everybody’s public agenda. The awareness that competitive cities are above all those who are able to regenerate their historic centres, preserving the past and making cities a pleasant place to live has become frequent. Attracting the young, the intellectuals, the creative is essential to make a city competitive and that means increasing housing supply is noble areas which in most cases have a long history of desertification.

However, rehabilitation in historic centres is not easy. It implies conciliating modern lifestyles (larger areas, a parking place, and an elevator) to old buildings, which are not always easily adapted to meet modern requests.

In Lisbon and Porto, the two main Portuguese cities, important areas need urgent interventions due to a long period of neglect. A larger scale intervention as opposed to individual interventions has the benefit of considering other aspects beyond the renovation of a building in itself. It involves thinking about accessibilities, green areas, public equipments and other aspects that make a certain neighbourhood a good place to live.

Generally speaking that was the reason beyond the creation of SRU – Sociedades de Reabilitação Urbana in 2004 (Urban Rehabilitation Societies). Up to now, 6 SRU’s were created in Portugal (Porto Vivo, Coimbra Viva, Viseu Novo, SRU Oriental, Baixa Pombalina and Lisboa Ocidental). All of them are in early development stages.

SRU A partnership between municipalities and other public bodies; The capital is exclusevly public; The aim is to promote the rehabilitation of historic areas and other critic intervention areas; The intervention is made at a district level; It comprises the elaboration of strategic plans with the definition of accessibilities, social equipments and public spaces; Permit procedures are eased; Interventions can be coercive.

Financing is also a big issue in what concerns renovation works. As stated in previous Reports, an important share of the Portuguese housing stock (mainly in Lisboa and Porto) was completely neglected for years reaching a high level of degradation. The responsible for that was the law regulating the rental market previous to 1990. In practice the law prevented rents from being updated therefore enabling landlords from collecting any investment return arising from significant improvements or just regular buildings maintenance.

Recently the Government approved a new law regulating the rental market and established a special regime to substantially increase old rents (rent contracts prior to 1990). The update will depend on the conservation state of the building and tenants will be allowed to carry on the works if landlords refuse to do them themselves. The most severe critic to the new law is that it predicts a transition period of 2 up to 10 years.

Unless special financial supports are available for landlords it will be extremely difficult for them to make the renovation works the new law forces them to do.

Other type of public incentives to renovation is available through INH – Instituto Nacional de Habitação (Housing National Institute) but its contribution to solve housing renovation needs is relatively limited.

Private investment is also crucial for renovation to assume a more important role in the residential market. A possible increase in existing homes sale could give room for a significant increase in renovation works. A limitation to it will inevitably arise from the increase in interest rates.

Residential Output - 2003 to 2009

10,0 5,0 0,0 -5,0 -10,0 -15,0 -20,0 % change in real terms in real change % -25,0 2003 2004 2005 2006 2007 2008 2009 (e) (F) (F) (O) New construction R&M

Source: ITIC

4 Non-residential Market

Global recovery in 2008 but substantial differences among segments

The development of the non residential segment differ significantly depending on the sector we are analysing (e.g. schools, offices, industrial buildings), mainly because the demand for these different type of spaces is determined by distinct factors.

The construction of public buildings is much influenced by political factors (electoral cycles, priority areas for government intervention) and budgetary conditions whereas private investment is more dependent on economic activity growth and perspectives, level of maturity of the market or investment strategies (at a certain period investment in real estate can be more attractive than investment is the stock market).

According to the State Budget for 2007 public investment fell approximately 13% in 2006 and is estimated to decrease by almost 6.0% in 2007. Investment and current expenditure cuts are part of the effort to reduce government deficit which is expected to go down from 6.0% 2005 to 4.6% 2006 and 3.7% in 2007 (as % of GDP).

The construction is expected to be heavily penalized by investment cuts. Although central administration investment programme (PIDDAC 2007) foresees an increase of 26% in the investment made by the Ministry of Public Works, Transport and Communication in 2007 the real figure will stand, in the best case scenario, just slightly above stagnation. The correction derives from the suppression of road concession costs (PPP) relating to completed projects (it doesn’t represent production in 2007).

The restrictions imposed by the Government to municipality’s indebtness ratios will also compromise public investment evolution in the near future.

Data concerning recent evolution in public works is rather unfavourable. Both awarded contracts and offers to bid decreased in the first 3 quarters of 2006 thus anticipating a negative scenario for non residential construction in 2007. The intensity of the decrease is lower in offers to bid which may translates into a minor production decrease from mid 2007 onwards. Public Contracts – January to September 2006* % change (value) from same period 2005 Offers to bid Awarded contracts Non residential buildings -35.4 -61.2 Of which: Schools -2.6 -70.8 Hospitals 24.9 -33.7 Source: AECOPS *new + R&M

All in all, public buildings construction is expected to decrease in the next 2 years with a slight increase being forecast to take place from 2009 onwards. The main assumption is that the correction of the imbalances on the public sector will be well succeeded thus increasing the probability of increased infrastructure investments in critical areas like education and health.

Furthermore, the private initiative will play an important role in the health sector. The second phase of PPP projects in the Health sector was recently approved and their respective schedule defined. Altogether the PPP programme for the Health Sector comprises the construction of 10 hospitals.

As for the private sector, output evolution is not expected to turn positive before 2008. Even though economic activity is expected to keep a steady growth as from 2006, investment in non residential buildings is not expected to move accordingly.

First of all the construction cycle is longer than most of the other sectors and therefore a positive shift on the demand side does not have an immediate response from supply. On the other hand it’s possible that a pick up in the demand for non residential spaces are first and foremost met by vacant spaces. This is especially the case of more mature markets which grew significantly in recent years (e.g. offices).

Data on non residential permits point to a decrease of more than 10% in surface area in 2005. Agriculture, industry and other buildings fell in the same period, with industry experiencing the major decrease (almost 40%).

Tourism and services (offices, shopping centres, health, education, churches, sports facilities, etc) grew considerably. However, one should have in mind that a favourable evolution in building permits in one year does not necessarily originate a positive growth in production in the following year(s). In 2003 and 2004 building permits (surface areas) for tourism buildings grew 20.6% and 9% respectively. However, completion decreased by more than 40% in 2005.

Building Permits (square meter) 1500000

1000000

500000

0 2004 2005 Agriculture Industry Tourism Services Others

Source: INE

All in all, industrial buildings are expected to exhibit the worst growth rates in the forecast period as opposed to commercial buildings which will perform well along the period. There are several shopping centres and other retail format projects in the pipeline for the next years in Portugal including Dolce Vita Tejo (in Amadora, Lisbon surroundings), the biggest shopping centre in Portugal and one of the biggest in Iberian Peninsula.

Offices are also expected to decrease in 2007 but a slight recovery is being put forward for 2008 and 2009.

Non Residential Output - 2003 to 2009

10,0 5,0 0,0 -5,0 -10,0 -15,0

% change in real terms 2003 2004 2005 2006 2007 2008 2009

New construction R&M

Source: ITIC

5 Civil Engineering Market

In 2006 new civil engineering output fell 5.0%. Most of the investment made in civil engineering is supported by public funds, severely controlled in face of budgetary consolidation efforts, which explains its strong decrease.

Data from BRISA (the biggest private Portuguese motorway operator) point to a negative evolution (close to 22%) in road infrastructures investment in the first half of 2006. The construction of new roads fell approximately 20% summing up €61.6 million (64.6% of the overall investment).

Investment in major repairs, current maintenance and other projects also decreased in this period. Nevertheless, according to Brisa the period of major construction of new highways is ending and a drift towards repair and maintenance in now in the horizon. Investments made by BRISA € million 2005-1st half 2006-1st half 2006/2005 (%) New roads 76.9 61.6 -19.9 Major repairs 6.9 4.5 -34.8 Others (e.g. current maintenance) 38.0 29.2 -23.2 Total 121.8 95.3 -21.8 Source: Brisa

Data from PIDDAC3 2007 point to a significant investment increase in 2007. Ministry of Public Works, Transport and Communications is expected to invest €2,576.4 million in 2007, approximately 26% more than in 2005. However, this figure is influenced by PPP costs which do not represent future construction as most roads are already built and under operation. Costs related to PPP

2005 2006 2007 2008 2009 2010 Roads 295.6 339.2 719.2 727.3 726.6 740.5 Railway 51.2 18.4 17.7 47.4 4.8 4.8 Total 346.8 357.6 736.9 774.7 731.4 745.3 Total – update 410.0 894.3 779.2 768.8 777.8 Source: State Budget 2005, 2006 and 2007

Costs with PPP are expected to increase more than 100% between 2006 and 2007 (subject to revision) which indicates the distortion present in the 26% growth rate we have just mentioned as being the planned investment for 2007.

Data concerning offers to bid and awarded contracts in 2006 are also extremely unfavourable thus backing our pessimism as to the evolution of civil engineering works in the next years.

Awarded contracts fell 53.5% in the first nine months of 2006 in comparison with the same period of 2005. The number of contracts also decreased (-53.0%). All types of work, except water works (e.g. dams), were affected by public investment intention cuts, with miscellaneous construction and transport networks taking the lead in the fall (-82.8% and - 67.8%).

3 PIDDAC 2007 (Central Government Investment and Expenditure Program). Total investment (and not just investment in construction). © EUROCONSTRUCT 293 Portugal Munich, December 2006

Offers to bid remained flat from January to September (-0.04%). New construction fell by close 72.0% but the decrease was compensated by a rather favourable evolution in repair works (almost +80%). Offers to bid concerning transport infrastructures and town planning (e.g. sewers, water supply) works grew in 2006 (4.4% and 6.2%). Public Contracts – January to September 2006* % change (value) from same period 2005 Offers to bid Awarded contracts Civil Engineering -0.04 -53.5 Source: AECOPS *new + R&M

With local elections taking place in October 2009 and general elections six months earlier, several infrastructures are expected to be finished along 2008 for electoral purposes. However, if consolidation efforts are to be taken seriously the investments made in that period have to be fully justified. So, current forecasts point to a decrease in engineering output in 2008, although the intensity of the decrease is expected to be smaller than the observed in 2007.

Investment in energy and water works is expected to perform better than transport infrastructures along all period. That is because there’s a growing effort to provide the population with appropriate water supply and water waste treatment.

The government goal is: - 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 (estimates point to current losses of around 30%); - To increase water quality. Investments in the water sector (PEAASAR) € Million Water supply 1,780 Sewers 2,450 Total 4,230 Source: PEAASAR 2007 – 2013

There’s also a great potential for transport infra-structures developments in the future due to important projects like the high speed railway (TGV) and the new Lisbon Airport (OTA). However, those projects are not included in current forecast as they are still on the paper.

Civil Engineering Output - 2003 to 2009

6,0 4,0 2,0 0,0 -2,0 -4,0 -6,0 -8,0 % changein real terms -10,0 2003 2004 2005 2006 2007 2008 2009

New construction R&M

Source: ITIC

APPENDIX – DEFINITIONS

Table 1 Population and households: annual average. Unemployed and unemployment rate: Employment Statistics, INE (National Statistics Institute).

Table 2 Total Construction Output represents the value of Construction Product as defined in the National Accounts System – ESA 95. 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.

Total construction Output includes Services/Construction by other sectors/DIY/Black economy

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 year n – demolitions year n

Home ownership rate = lodgements occupied by the owner/total lodgements * 100

Table 5 National Accounts (base Year: 2000)

Country/Pays/Land: PORTUGAL Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 10 445 10 509 10 563 10 625 10 687 10 750 10 813 Bevölkerung

Households ('000s) Ménages 3 760 3 816 3 873 3 930 3 989 4 048 4 108 Haushalte

Unemployed ('000s) Chômeurs 342 365 422 437 424 412 398 Arbeitslose

Unemployment rate (%) Taux de chômage 6.3 6.7 7.6 7.8 7.5 7.2 6.9 Arbeitslosenquote

Change of GDP Variation du PIB -1.1 1.2 0.4 1.4 1.7 2.0 2.2 Veränderung des BIP (% change in real terms)

Consumer prices (% change) 1) Prix à la consommation 3.3 2.4 2.3 3.1 2.7 2.5 2.3 Verbraucherpreise

Construction prices (% change) 2) Prix de la construction 2.8 4.5 3.3 3.0 2.8 2.5 2.2 Baupreise

Short term interest rate 3) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 4) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

1) CPI (Consumer Price Index), 2006: new series 2) Refers to new construction only 3) 3-month interbank rate (or equivalent) 4) 10-year government bonds (or equivalent)

Country/Pays/Land: PORTUGAL Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 8 529 -20.0 -7.5 -6.5 -8.0 -2.5 0.0 1.0

Logement Renovation 4 086 -2.5 6.0 2.0 0.5 1.0 2.5 3.0

Wohnungsbau Total 12 615 -15.8 -3.8 -3.9 -5.2 -1.3 0.9 1.7

Non-residential construction New 4 722 5.0 -7.0 -8.5 -10.0 -7.0 3.0 5.0

Bâtiments non résidentiels Renovation 1 062 6.5 3.1 1.0 -2.5 -5.0 2.0 2.0

übriger Hochbau Total 5 784 5.2 -5.4 -6.9 -8.6 -6.6 2.8 4.4

Building New 13 251 -12.5 -7.3 -7.2 -8.7 -4.1 1.0 2.4

Bâtiment Renovation 5 148 -0.7 5.4 1.8 -0.1 -0.2 2.4 2.8

Hochbau Total 18 399 -10.0 -4.3 -4.9 -6.3 -2.9 1.4 2.5

Civil engineering New 6 234 -7.5 4.0 -2.0 -5.0 -8.0 -1.5 -2.0

Génie civil Renovation 1 119 2.5 5.0 2.0 0.0 2.0 2.5 2.5

Tiefbau Total 7 353 -6.2 4.1 -1.4 -4.2 -6.4 -0.8 -1.2

TOTAL CONSTRUCTION OUTPUT 25 752 -9.0 -2.1 -3.9 -5.7 -3.9 0.8 1.5

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 8.74 -14.5 -1.5 -4.1 -7.0 -3.0 0.5 1.1 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

Country/Pays/Land: PORTUGAL Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1) 1+2 family dw ellings Logements autorisés Individuel 33.3 29.1 28.0 28.4 28.7 27.8 28.2 Baugenehmigungen Familienhäuser

Flats Collec tif 46.0 46.5 43.9 40.6 39.6 41.6 42.3 Mehrfamilienhäuser

TOTAL 79.3 75.6 71.9 69.0 68.3 69.4 70.5

Housing starts 1+2 family dw ellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collec tif Mehrfamilienhäuser

TOTAL

Housing completions 1) 1+2 family dw ellings Logements terminés Individuel 30.9 26.1 24.4 19.6 18.8 19.0 19.4 Baufertigstellungen Familienhäuser

Flats Collec tif 45.9 42.4 39.4 34.9 33.5 33.8 34.5 Mehrfamilienhäuser

TOTAL 76.8 68.5 63.8 54.5 52.3 52.8 53.9 Housing stock 2) Logements existants 5 325 5 393 5 456 5 510 5 562 5 614 5 668 Wohnungsbestand

thereof second homes dont résid. secondaires 980 992 993 997 1 001 1 033 1 054 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 639 701 709 689 640 634 623 davon leerstehend

Home ow nership rate 2) Taux de propriétaires occupants 76.0 76.2 76.3 76.4 76.5 76.6 76.6 Wohnungseigentumsquote

1) New construction 2) Cf. Appendix to the individual country report

Country/Pays/Land: PORTUGAL Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 705 -0.6 -5.5 5.0 1.0 -20.0 -1.0 0.0 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 460 -0.1 1.0 3.0 -10.0 -15.0 2.5 3.0 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 616 -0.6 -1.3 -15.0 -35.0 -10.0 2.5 5.0 Industriegebäude

Storage buildings Bâtiments de stockage 149 8.0 -8.0 -18.0 -25.0 -9.0 1.5 7.5 Lagergebäude

Office buildings Bureaux 1 155 2.9 -3.5 -15.0 -10.0 -6.0 3.5 6.0 Bürogebäude

Commercial buildings Commer c es 1 190 1.4 -3.0 -7.5 2.0 4.0 5.0 7.5 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 71 -2.0 -7.0 -12.0 -18.0 -7.5 -2.0 0.0 Landw irtschaftsgebäude

Miscellaneous Autres 375 46.1 -36.3 -8.3 -20.2 -8.2 3.2 2.3 Sonstiges

Total 4 722 5.0 -7.0 -8.5 -10.0 -7.0 3.0 5.0 Insgesamt

1) At 2005 prices, excluding taxes.

Country/Pays/Land: PORTUGAL Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 3 433 -7.5 5.0 1.0 -7.0 -8.5 -1.0 -1.8 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 893 1.2 -0.5 -2.5 -4.0 -4.5 -2.0 -1.5 Bahnanlagen

Other transport Autres réseaux 909 -2.1 2.5 -4.0 1.0 -2.0 -1.0 -1.0 Übrige Verkehrsinfrastruktur

TOTAL 5 235 -5.1 3.5 -0.5 -5.1 -6.6 -1.2 -1.6

Telecommunications 2) Télécommunications 124 -61.7 28.4 38.5 0.0 0.0 0.0 0.0 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 844 -2.5 1.0 3.0 1.5 -3.5 1.0 -0.5 Energie- und Wasserversorgung

Other Autres 1 150 -5.3 7.4 -10.7 -5.0 -8.5 -0.7 -0.1 Sonstiges

Total 7 353 -6.2 4.1 -1.4 -4.2 -6.4 -0.8 -1.2

1) At 2005 prices, excluding taxes. 2) Rough estimate for 2002/2005. Value for 2006 to 2009 is constant and is included in Other

Country/Pays/Land: PORTUGAL Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 96.5 0.1 2.4 2.0 1.1 1.2 1.5 2.0 Privater Verbrauch

Public consumption Consommation publique 31.0 0.3 2.5 1.8 -0.2 -1.3 -0.9 -1.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 31.9 -10.0 0.9 -2.9 -3.5 -1.1 2.3 3.1

of w hich construction 16.5 -11.9 3.1 -4.7 -6.0 -4.0 1.2 2.0

Stocks (as % of GDP) Variations de stocks 1.0 0.8 0.9 0.7 0.7 1.0 1.1 1.1 Vorratsveränderung

Ex por ts Exportations 42.1 3.7 4.5 0.9 8.5 7.0 5.5 5.8 Ex por te

Imports Importations 55.2 -0.4 6.8 1.8 2.5 2.8 3.0 4.0 Importe

GDP PIB 147.4 -1.1 1.2 0.4 1.4 1.7 2.0 2.2 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

SLOVAKIA ÚEOS - Komercia, a.s. www.ueos.sk

Vladimír Lenko e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

Successful growth of Slovak economy proceeded also in the year 2005. Gross domestic product grew, compared to previous year by 6,1 %, inflation in level of 2,7 % was of the lowest within the era of independent Slovak republic (since 1993), unemployment was also sinking. After longer period of stagnation, in the year 2005 significantly grew volume of constructional production. Constructional production marked in inland works real growth of 14,1 % (in constant prices). Rapid growth of construction is related mostly to investment inflow to Slovakia, to growth of performance of economy, to ability of funding of housing by mortgage credits. In 2005 was dominant public investment into building of transport infrastructure, private investment to building of industrial objects, business - entertaining and administrative centres. By means of concentration of financial sources on the investment market has been created several potent domestic investment companies, whose projects significantly supported and still supports current boom.

Growth of economy will proceed also in the year 2006 and 2007, after 2008 is assumed reduction of GDP growth tempo to 5,5 – 5,1 % yearly. In 2006 is expected higher inflation (4,5 %) then in 2005, but in next years is expected its decrease under 3,0 %. In 2006 henceforth grew constructional production (real growth about 10 %), in next years growth – tempo shall decline. Increased shall be share of residential construction, inclusive building of residential complexes, these particularly in Bratislava and surround, renovation and modernization of housing stock (decreasing of energy demand of dwelling buildings). High volume will be hold in building of administrative and poly -functional buildings (also preferred in Bratislava), also of business – shopping public centres, decreasing is interest on hypermarkets, building of smaller supermarkets should be transferred to smaller cities. Grows interest on building of logistic parks, proceed will building of industrial buildings, particularly in industrial parks and building of transport infrastructure. Developed will be also segment of hotels and objects for free – time activities (baths, wellness activity, aqua parks). This demand is reflected also in increase of lands prices. Henceforth persists regional contrasts, as most of constructional production is realized in capital (27 % of the production volume of eight regions), following by localities, where foreign or domestic investors started to develop their activities. Construction is starting to move slowly also to other regions.

In June 2006 took place in Slovakia premature parliamentary elections. New government is of social democratic character and declares greater social approach to public then previous right oriented government. Government decided to support by greater extent building of smaller rental dwellings and to prefer mortgage credits for young citizens. Government aims until 2010 building of 100 km highways and speedways and highway feeders, while financial means for building of roads shall be planed and assigned according to stage of readiness for their building (settlement of lands, design preparation etc.). Government shall also by significant rate aim to decrease differences among regions. Also exploitation of resources of Cohesion fund and Structural funds of European Union should help to development.

Construction Construction belongs in Slovakia to important economic sectors: • Its share in total GDP is varying for recent years in extent of 5,6 – 5,8 % (in current prices). • Employs about 6,9 % persons, working in economy of Slovak Republic. • Objectively construction represents general executor of construction of buildings and structures, that forms one of very important component of Gross fixed capital formation in 2005 shared structures and buildings in Gross fixed capital formation by 34,1 %.

Constructional production, realized in 2005 by own employees of construction enterprises, tradesman and by constructional plants of non-construction enterprises represented 3,23 Bill.

EUR, which is growth in comparison with 2004 by 18,8 % in current prices and by 13,7 % in constant prices. Inland constructional production in 2005 achieved the level of 3,09 Bill. EUR, what represents, compared to previous year, growth by 14,1 % in constant prices. Annual growth of constructional production in 2004 represented level of 5,6 %. Works in inland new construction, reconstruction and modernization shared in 2005 in total volume by 80 %, works on repair and maintenance by 19,5 %. Constructional production, realized abroad achieved the value of 136,3 Mill. EUR, which represents in comparison with previous year 2004 growth by 9,2 % in constant prices. Share of construction works abroad represented in total volume 4,2 %.

Share of construction production by type in %, year 2005

Residential construction; 23,9 Civil engineering; 31,2

Non-residential construction; 44,9

Prices of construction works on new construction grew in the year 2005 in average by 4,3 %. By reason of long – term growth of energy costs increases prices of cement. The greatest cement producer announced increase of prices by 8,0 %. For that reason and also concerning boom of construction is assumed growth of prices of other construction materials. Together with growth of wages it will impress higher growth of construction works prices in the year 2007.

Average registered number of employees in construction (without non-construction companies) for the year 2005 represented 142 530 persons (from that 118 614 workers) and from them 74 507 tradesman, which is growth in comparison with 2004 by 6,8 % of employees. In 2006 also grows employment in construction (by 10,0 % for eight months).

On labour market are absent craftsmen, mainly traditional professions like carpenter, roof slather, bricklayer, fitter and professionals for new constructional technologies. Lack of skilled workers and high tempo of building could be however gradually manifested in falling quality and breach of building technology.

Share of enterprises by size in constructional production and employment Size group by Share in constructional production Share in number of employees number of (%) (%) employees Year 2004 Year 2005 I.-VIII. Year 2004 Year 2005 I. – VIII. 2006 2006 Tradesman 32,1 30,6 33,6 52,0 52,3 56,0 50 – 249 20,7 21,6 20,5 16,4 17,3 14,6 0 – 19 18,2 15,9 14,8 14,8 14,4 13,7 500 and more 14,9 15,3 15,7 6,8 6,0 6,0 20 – 49 8,1 9,3 10,6 6,6 7,1 6,5 250 – 499 6,0 6,8 4,8 3,4 2,9 3,2

In 2005 reached 21 construction enterprises higher production then 25 Mill. EUR. On first positions, except company ZIPP, are companies and enterprises, oriented mostly on civil engineering (transport infrastructure). Eleven enterprises from the sphere of manufacture of building materials achieved in 2005 earnings higher then 20 Mill. EUR. From them on first three positions are cement producers.

Greatest enterprises by revenues on construction market in 2005 Average number of Revenues for own output and employed goods on construction market on con- Num Enterprise and activity struction market Change 2005/2004 physical in Mill EUR current prices persons Construction enterprises by revenues over 50 Mill EUR 1. Doprastav, a.s., Bratislava – highways 337,437 31,2 % 2 955 and roads, bridges, water structures, engineering structures, residential construction 2. Inžinierske stavby, a.s., Košice – 165,840 77,9 % 909 engineering, industrial and water construction, prefabricates 3. ZIPP BRATISLAVA, spol. s r.o., 144,029 - 12,3 % 1 075 Bratislava – prefabricated concrete structures 4. Váhostav – SK, a.s., Žilina – highways, 79,430 80,1 % 847 administration and trading buildings, industrial, water and environmental constructions 5. Strabag a.s., organizational component, 75,379 155,2 % 297 Bratislava – engineering structures, engineering nets 6. Skanska, BS, a.s. Prievidza – 54,739 64,4 % 482 underground constructon and survey construction (tunnels, water construction, on ground construction) 7. Eurovia-Cesty, a.s. Košice – highways, 52,094 48,5 % 562 bridges, ecological and water structures Enterprises of manufacture of building materials by revenues over 30 Mill EUR 1. Holcim (Slovensko), a.s., Rohožník – 93,954 6,4 % 618 cement 2. Východoslovenské stavebné hmoty, a.s., 48,639 25,7 % 469 Turňa nad Bodvou – cement 3. Považská cementáreň, a.s. Ladce – 44,033 6,5 % 374 cement 4. Baumit, spol. s r.o., Bratislava – dry 35,928 12,9 % 140 plaster mixture 5. Izomat, a.s., Nová Baňa – heat insulation 35,570 1,9 % 481 6. CEMMAC, a.s., Horné Sŕnie – cement 32,527 7,0 % 176 Source: TOP 100, Appendix of magazine EUROSTAV N°5/2006 a.s. = Join Stock Company, s.r.o.; spol. s r. o. = Limited Company.

Purchase of construction works without receiving of voucher (statistical survey) Year 2001 2002 2003 2004 2005 Mill EUR 171,7 151,13 223 206,6 232

Support from EU funds Within programming period of 2007 – 2010 Slovakia shall obtain from EU –budget by means of Cohesion fund and Structural funds about 11 Bill. EUR. Within single objectives of cohesion policy of EU shall be individual priorities of National strategic reference frame of SR implemented through eleven operation programs (after approval in Brussels). From various programs larger part of financial means will be aimed at development of construction fund, which will call demand also on constructional production. It concerns particularly operational programs: • Operational program Transport (3 200 Mill. EUR) – highways, railways, modernization of trains, airports. • Operational program Environment (1 800 Mill. EUR) – wastes, air protection, protection and regeneration of the country, water piping, sewage, waste water cleaning plants, flood protection. • Regional operational program (1 445 Mill. EUR) – elementary and secondary schools, health and of social facilities, cultural and historical buildings, tourist trade.

2 Macro-economic Outlook

In 2005 kept on growth of Gross domestic product (annual growth by 6,1 % in constant prices; in 2004 it represented annual growth by 5,4 %). Growth of GDP was related to increased both domestic and foreign demand. Strengthening of domestic demand is to be related mostly to rapid growth of investment. Revival of households consumption is to be related to higher employment, growth of real wages and particularly easier availability of credits. GDP component with the slowest growth was final consumption of public administration (increase by 0,5 %). Higher GDP formation was affected by growth of added value in construction, trade, transport, posts and telecommunication, industry and agriculture. In 2006 is expected increase of final consumption of households by 5,7 % and increase of final consumption of public administration by 3,9 %, with the drop of their growth –tempo in following years. Compared to previous year it is assumed gradual decrease of the Gross fixed capital growth rate, related mainly to building of two car production factories and their suppliers. In the next period will export grow faster then import. In 2006 it is assumed that GDP shall grow by 6, 6 % and raising tempo of GDP growth is expected also in 2007 (+ 7, 1 %). Starting in 2008 tempo of GDP growth should decrease to 5,5 – 5,1 % annually.

Annual inflation represented in 2005 in average 2,7 %, which is by 4,8 percentual points lower compared to 2004. Its course was affected mainly by lower extent of modification of regulated prices then in 2004. For the year 2004 is assumed higher inflation rate (4,5 %). Main reason is growth of energy and heat prices and also rapid growth of domestic consumption. For following years is expected reduction of inflation rate to the level under 3,0 % yearly.

Faster tempo of economy growth created favourable environment for improvement of conditions on labour market. Employment hold 5 –year growth trend, expressively declining trend had also development of unemployment. Employment is markedly increasing by car factories, supported by suppliers; by movement of work forces and expansion of construction and services.

Change of GDP, consumer prices and household consumption in %

9 8 7 6 5 % 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 Year GDP Consumer prices Household consumption

According to selection survey of labour forces, which is published by Statistical Office SR, in 2005 represented average unemployment rate 16,2 %, i.e. decline by 1,9 percentual point compared to 2004 (18,1 %). Average number of unemployed represented 427,5 thousand persons. In 2006 is assumed reduction of unemployment rate to 13,8 %. In next years shall continue trend of decline of unemployment.

By data from Labour Centre, disposable number of applicants for job in 2005 represented 301 186 persons, average rate of registered unemployment was 11,6 %, which represents decline by 2,7 percentual point in comparison with 2004. In September 2006 sank that rate to the lowest value of 9,5 %. Number of unemployed, able immediately enter a job, represented in September nearly 250 000 persons.

Also investment effected positively on growth of Slovak economy in the year 2005. After two years of stagnation, in 2004 revived growth dynamics and in 2005 achieved annual growth 13,8 % (in constant prices). In next years growth tempo shall decline (8,2 % in 2006; 5,0 % in 2007). Construction participates by 33 – 34 % in Gross fixed capital and high growth of construction relates to inflow of investment to Slovakia. Assumed effective allocation of investment expenditures from business sphere, as well as resources and type of funding should ensure high return of investment and increase of economical growth without threatening of external balance.

Following data are taken from Prognosis of the Institute of monetary policy of the Ministry of finance of SR with expected results for the year 2006 and with development till 2010, which was published on September 29.2006.

Key macroeconomic indicators in Slovakia until 2009 (Annual percentage change or rate) 2003 2004 2005 2006 2007 2008 2009 GDP 4,2 5,4 6,1 6,6 7,1 5,5 5,1 Inflation 8,5 7,5 2,7 4,5 3,1 2,0 2,4 Average unemployment rate 17,4 18,1 16,2 13,8 13,2 12,9 12,4 Household consumption 0,1 3,8 7,2 5,7 5,3 4,4 4,2 Gross fixed capital formation - 2,3 5,0 13,8 8,2 6,0 5,0 5,0

Slovak crown (SKK) towards EURO during the year 2005 valorised, but also depreciated. At the end of 2005 exchange ratio was 1 EUR = 37,8485 SKK, and in October 2006 exchange ratio sank to the value less then 36,50 SKK per 1 EUR. According to the plan of National

308 © EUROCONSTRUCT Munich, December 2006 Slovakia bank of Slovakia and declaration of new government, Slovakia should accept EUR as a national currency at 1. January 2009.

To avoid overheating of economy and to keep under control growth of prices, National bank of Slovakia (NBS) revised in 2006 three times basic interest rate, since 27. September 2006 its level equals 4,75 % p.a. The lowest basic interest rate of NBS was valid in period from 1st March 2005 to 28th February 2006 in the level of 3,00 % p.a.

3 Housing Market

Residential construction formed in 2005 23,9 % of constructional production. Volume of residential construction annually grew generally 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 2003 and 2004 grew by 6,3 % and 18 % respectively. Also number of started dwellings increased by more then 11 % and grew number of dwellings under construction. Also in the year 2006 grows number of started dwellings and dwellings under construction, and there is assumption, that in the year 2006 will be built more dwellings then in previous year.

Within next years should proceed growth of the intensity of residential construction. In the long-term outlook it is necessary to increase number of dwellings per inhabitant. During the next years should significantly rise up volume of finances for reduction of energy demand of buildings and general renovation of older panel houses and buildings. There is also assumed, that begins removal of defects of dwelling houses and revitalization of block of flats quarters (using resources from EU–fund, except capital). New government plans in area of housing market to support young people, who are not able from their incomes to ensure in sufficient level own housing. Government will also support building of smaller rental dwellings. For the year 2007 is assumed: • Stabile development of bonus to constructional saving (for the year 2007 maximal level of 54 EUR yearly). • Renewal of bonus of new mortgage credits (provided all specified conditions are fulfilled) in amount of 1 + 1,5 %. • Preserved purpose orientation of the State fund of housing development; financial resources for residential construction will be henceforth by specified conditions provided in form of credit or non-recourse subsidy from Fund of housing development or subsidies from state budget.

Number of finished dwellings in the time period 2001 - 2009

20 000

15 000 dwellings 10 000 1 + 2 family houses

5 000

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year

In 2005 were finished 14 863 dwellings, from that 14,1 % in 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. Number of finished dwellings represents compared to previous year growth of 18,0 %.

Average floor area of dwelling achieved 120,8 m 2 (131,7 m2 in 2004) and average living area of dwelling reached 73,4 m2 (78,5 m2 in 2004). According to statistic data has been in 2005 in compliance with released building permission started 19 796 dwellings (growth in comparison with previous year 2004 by 19,4 %). Drop of dwellings represented according to statistics 1 135 dwellings, from that 964 dwellings by sanitation. Real decline is however higher, difference will appear by census. At 31 December 2005 was under construction 48 874 dwellings, representing growth of started construction by 11,1 % compared to previous year.

Finished dwellings by number of rooms in 2005 From that

One room Five - Dwellings Two - Three - Four - and flat- room and room room room lets more

Finished dwellings 2005 14 863 1 197 2 887 4 327 3 785 2 667

Structure in % 100,0 8,1 19,4 29,1 25,5 17,9

- In family houses 8 707 88 539 2 188 3 315 2 577

- Flats 6 156 1 109 2 348 2 139 470 90

Number of finished dwellings in 2005 was the highest number since ninetieths. In market conditions is development of housing in territorial space of state in dominant rate adapted to requirements of economy development. This is in certain extent also the case in Slovakia, when in Bratislava region (inclusive the capital) has been in 2005 realized more then 30 % of finished dwellings, and starts more then 35 % of total number of new started dwellings in spite of the reality, that share (of Bratislava region) on total number of citizens in Slovakia represents only 11,4 %. Number of new dwellings also significantly grows in region, where are built car factories (Trnava, Žilina). In regions with social problems, with high rate of unemployment, low wages and low inflow of investment, residential construction stagnates. Building of family houses are carried out in locations, where land – prices are lower and building of dwelling houses in not in progress.

According to announced project is in preparation phase or already in progress building of stand alone dwelling houses (also with more then 20 storeys), and also larger blocks of residential houses and buildings (5-7 storeys), dwelling houses with resident dwellings and quarters and districts of family houses. Sale prices of older dwellings in Bratislava vary from 922 EUR/m2 (including VAT, price of ground and infrastructure), prices in new buildings reaches by over standard flats up to 2 570 EUR/m2. In region with higher unemployment these prices represents about 60 % of prices in capital. Prices will be in future more affected by location, but also by quality of building. Henceforth highest demand will remain for smaller dwellings (one to two room dwellings).

4 Non-residential Market

Construction of non-housing buildings forms the greatest segment of constructional production. In 2005 it represented 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 4,2 %. 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 industrial parks and logistic centres, but also market centres and in capital Bratislava will be henceforth built administration buildings and also starts building of multifunctional complexes.

High share of constructional production on building of non-residential buildings reflects economical development of country; creation of favourable conditions for investors (investment incentives, taxation conditions, industrial parks), gaps in availability of building funds of higher quality (new administrative buildings); need of accommodation facilities (hotels, recreation objects), gradual increase of purchase power of population and lower equipment of market floors (supermarkets, shopping centres) as well as need of improvement of equipment of regional infrastructure by public buildings (schools, health care and social facilities, cultural buildings, buildings for municipal and state administration). Significant function performs also strong domestic and foreign developers (e.g. J&T Global, Penta Holding, HB Reavis, TriGránit Development Corporation, Ballymore Eurovea, Ipec Management) and important source for funding represents henceforth direct foreign investment.

Office buildings Intensive building of office buildings and larger multifunctional objects take place mostly in capital Bratislava. At disposal is here about one Million m2 floor area of offices, however inclusive buildings of lower standard of equipment. According to expert analyses should till end of decade grow volume of administration rooms in Bratislava by one half. Annual growth should represent more then 60 000 m2 of floor surface, in 2007 already more then 100 000 m2. Outside Bratislava is office rooms business developing slower. Reason is low profitability, by costs comparable with Bratislava and negligible demand, even though in bigger cities is planned construction of such buildings, particularly near to shopping centres.

In summer 2006 started by earth works building of two new zones on the left riverside of Danube (dwellings, office rooms, shops, hotels, underground garages). Larger is zone called Eurovea (investor Ballymore Eurovea), first phase should be finished in 2009, investment of 250 Mill. EUR. Upward the river is River Park (investor J&T Global, investment of 150 Mill. EUR, deadline 2008). According to announced projects is in preparation building of further complexes with modern buildings (complex in front of main railway station, redevelopment in surround of main bus-station, quay on the right riverside of Danube, expansion of Digital Park) and also solitary objects.

Industrial objects, industrial parks, storage buildings Building of industrial objects significantly grew since 2003. After 2006 is assumed decline of the works – volume in this segment. In last years “draft horse” was building of two car factories (PSA Peugeot Citroen at Trnava and KIA Motors at Žilina) inclusive industrial objects for various subcontractors. In autumn 2006 started assembly of cars in both enterprises.

Industrial objects are built in industrial parks with different aims of manufacturers (machinery, electrotechnics, chemical production, rubber products, covers, glass). Investors realize their plans by building on “green meadow”, others prefers reconstruction of old manufacture halls and existing areas and estates. Development of the segment of industrial building itself depends on inflow of both foreign and domestic investment. It relates to suitable business

Slovak Investment and Trade Development Agency (SARIO) fulfils public services and activities in the area of support of investment and trade development, attracts investors and assist by advisory activity domestic and foreign investors. Agency compiles database of free lands and parcels, halls and administration buildings and gathers data on existing and prepared industrial parks. By now exists in Slovakia eight operating industrial parks, in final phase of completion is eleven industrial parks and further more then 50 areas is reserved for new industrial parks. Parks are funded by state, municipality or by private resources and also by contributions from EU funds. The most important impact on building of industrial parks in region is on respective self – administration. Municipalities are entitled by law to apply for subventions for building of infrastructure.

Preferable close to highways and suitable road attachment are built new storehouses of higher quality level (e.g. refrigerated stores) and logistic parks. In the year 2005 was in Slovakia 16 logistic parks. Developing parks are in Bratislava, in Senec and in Záhorie region. New projects are planned in Dubnica nad Váhom, Trenčín, Nitra and Žilina, related mainly to the plant KIA Motors. Also large manufacturing and sale centres (Volkswagen, Samsung, Billa, Kaufland) expands existing or builds new logistic centres. Estimated land area of rental surface represents 800 000 m2 and will in nearest years grow by 500 000 m2 of new stores of high quality.

Commercial buildings Building of individual hypermarkets is basically in regression. Market chains supplements their market networks by smaller supermarkets in smaller cities and towns. By further buildings with premises are extended existing shopping centres. New places for free - time activities becomes business – entertainment centres. Their building is more demanding on finances, but they offer higher quality of services in shopping, restaurants, relaxation and moreover also in culture and sport. Trend of building of such shopping centres exists in several greater cities in Slovakia.

Hotels and sport objects Building of accommodation and recreation facilities is a developing segment. Several larger hotels (over 20 storeys, with higher number of rooms) will appear within the scope of new built complexes in capital. Investor takes concern in building of objects for spending of leisure (aqua parks, ski apartments, wellness activities). In following two years will be reconstructed accommodation facilities in Vysoké Tatry Mountains, eminent tourist centre. Furthermore are built also smaller hotels and boarding houses, often by reconstruction of existing older objects (funded also with contribution from EU funds). Building of accommodation facilities began also in locations, where came important investor.

In area of sports objects will be realized two important investments, each in amount of about 106 Mill. EUR: National football stadium (assumed start of building 2007 – 2008) and of Multifunctional hall for 12 000 – 14 000 spectators (finished at latest in 2011).

Buildings for culture, education and health care For reconstruction, renovation and modernization of school and health buildings, buildings for cultural and social purposes, are used non-return financial subsidies from EU structural funds and this trend will keep on also in following planning period 2007 – 2013 (Regional operational program). In case of buildings for health care and for social services (boarding- houses) is building or reconstruction funded also from private resources or domestic or foreign subsidies. Within limits of state budget and according to requirements are for new construction or reconstruction and repairs of public buildings assigned resources within capital expenses in relevant budget chapters of ministries and also support from resources of the State fund of housing development (social facilities).

5 Civil Engineering Market

Share of civil engineering comprised in the year 2005 31,2 % of constructional production inclusive repairs and maintenance. Compared to 2004, volume of works in civil engineering significantly grew (by 32,2 %), particularly by increased intensity of building of transport infrastructure by 47,8 % (highways, speedways and railways). Also in 2006 is assumed growth of constructional production, especially in transport infrastructure and water infrastructure (water pipelines, sewage, water cleaning plants). In 2007 is assumed partial decline in building of highways and speedways, which will again start to grow after 2008.

Highways and roads Within following four years intends government to ensure building of 100 km of highways and speedways. Government will support building of highway D1 Bratislava – Košice and highway segment to state boundary with Poland and putting into operation of speedway R1 Trnava – Banská Bystrica. Specification of road line, building plan and funding is in elaboration. Inter-connection of two largest cities in Slovakia (Bratislava – Košice) through highway will be finished about in year 2012 – 2013.

Building of highways is partially behind by reason of problems in preparation (purchase of parcels, design preparation, repeated public procurement). PPP system of highways building is at present not taken in account; it could be eventually used in meaningful cases. For 2007 are in state budget (inclusive EU – funds) planed sources according to degree of preparation of building of highways. In the year 2007 will start construction of three new legs on road infrastructure: Sverepec – Vrtižier (highway), Žarnovica – Šarišské podhradie (speedway) and bypass of Svidník.

Finance means for highways building are from state budget, EU funds, sale of highway labels and from credit. Credit takes over National Highway Company (arose in February 2005), company ensures preparation, realization of repairs and building of highways based on approved programs. Financial means from Cohesion Fund were assigned for building of three highway segment D1 Mengušovce – Jánovce (2004 – 2008), D1 Sverepec – Vrtižier (2006 – 2007) and D3 Hričovské Podhradie – Žilina (Strážov) (2005 – 2006). Resources from structural funds contributes to building on speedway R1 and to bypasses on speedway R2.

In May 2007 will be put in operation tunnel on highway, leading through Bratislava. It is two tube tunnel with lengths of 1,415 km and 1,440 km, begin of building in the year 2003, construction costs 93 Mill. EUR.

Since January 2006 is National Highway Company bounded by new regulation – companies must build highways with fixed unit prices during total period of construction. Companies will therefore buff out valorisation of prices. From technological point of view asphalt surface of highway is no obligatory.

Railways Building is oriented on modernization of existing routes to increase transport 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

In 2006 most part of investment were directed to the three segments of train line Bratislava – Piešťany and to modernization of two railway stations on east Slovakia: Poprad – Tatry (realization 2005 – 2007) and Prešov (realization 2006 – 2007). Investments are realized with contribution from Cohesion fund of EU. Sources form these funds are taken into account also in following planning period 2007 – 2013.

High speed street-line in Bratislava City Bratislava renewed works on building of street-line, which should connect both riversides of Danube. Building should start in autumn 2007, project in amount of 191 Mill EUR should be finished till 2011.

Airports In 2006 were privatised 66 % of stocks of the second greatest airport in Košice. New owner, company Two One (Penta Group and Vienna Schwechat Airport) aims to invest 11,4 Mill. EUR (till year 2010). Airport Bratislava was not privatised, remains in state – ownership. In regard to increasing number of passengers it is required to invest into its development 81,9 – 109 Mill. EUR to building of new terminal and park house. Investment should be funded by credit, eventually also by EU funds, start of realization in 2009.

Power plants Within the privatisation of Slovenské elektrárne (Slovak power plants) Italian company Enel acquired 66 % of stocks (taking in account modernization of thermal power plant Nováky). Concerning energy situation and its development, state considers finishing of blocks 3 and 4 of Nuclear Power Plant in Mochovce, begin of building at first in 2008. In appraisal are 30 aims of building of 300 wind power plants from private investment in several locations of Slovakia.

Water supply and sewage 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. In this relation several companies are looking for necessary investors, other rely on own sources. Thanks investment should increase till the year 2015 share of citizens supplied with water through water pipeline from 85 % (on the begin of 2005) to 90 %. Till 2010 should have sewage with cleaning of waste - water municipalities with over 10 000 inhabitant and up to 2015 municipalities with more then 2 000 people. About 56 % share of population, attached to sewage will increase to the extent of 70 – 75 %.

For building of water pipelines, sewage and waste -water cleaning plants as well as for building of flood – protection works and other projects contributes EU through Cohesion fund and Structural funds. These sources are used in abbreviated planning period 2004 – 2007 and will be exploited also in following planning period 2007 – 2013.

APPENDIX – DEFINITIONS

Table 1 • Households (thou.) – Concept of housing, Source: data for 2001 – Census in May 2001, following years estimation • Unemployed (thou.) – average number of unemployed by selected survey of work forces, published by Statistical Office SR • Unemployment rate (%) – average unemployment rate by selected survey of work forces, published by Statistical Office SR

Notice: Till 61st EUROCONSTRUCT conference (June 2006 Amsterdam) were in statistical annex presented data on unemployment, provided by Centre of Labour. According to this data unemployed (thou.) are represented by number of disposable applicants for job, and unemployment rate (%) is rate of registered unemployment, from total number of disposable applicants for job

• GDP development, consumer prices – prognosis of Ministry of Finance of SR from 29. Sept. 2006 • Construction works prices (% of change) – till 2005 by statistics, data for new construction yearly average, development for next period – estimation • Short-term interest rate – 3 months interbank rate (or equivalent) BRIBOR – Bratislava interbank offer rate – 3 months, sale, after 2006 estimation • 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 (preliminary, from monthly reporting, not from annual report).

• 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 (does it yourself). • Renovation – this row contains repairs and maintenance. • Domestic cement consumption: production – export + import.

Table 3 • Building permissions (thou. dwellings) – started dwellings by building permissions • Started dwellings (thou. dwellings) – started dwellings by advise on starting of construction • Finished dwellings (thou. dwellings) – after final inspection.

Data from Statistical Office SR (quarterly) and from Information System of Ministry of construction and regional development SR: • Housing stock (thou. dwellings) – number of dwellings in total; calculation: original state by census in 2001 + finished dwellings in single years – loss of dwellings in single years (real loss of dwellings is higher then listed in statistics, difference appears in census) • From that second residence – source year 2001, census May 2001; recreation cottages in housing stock, unoccupied dwellings (2005 – estimation) • From that summer residences (vacation flats) – source year 2001; census May 2001; unoccupied dwellings (2005 – estimation).

Table 4a Stores and agriculture buildings – rough estimation. Hotels are included in miscellaneous

Table 5 • Data for 2001 – 2005, Statistical Office of SR, web -site – revised data in May 2006 (New revision of GDP on October 20; growth of GDP 2005/2004 by 6, 0 %) • Private consumption – final consumption of households + final consumption of non –profit institutions serving households • Change of stock level – for year 2005 change in current prices; inter annual changes - % of change of stock level from GDP in constant prices.

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 – 29. Sept. 2006; exclusive development of Gross Financial Capital (construction) and stock level.

Gross fixed capital – construction, data in current prices 2005 from Statistical Office SR, % of change and prognosis by calculation of author of report.

All values without VAT.

Country/Pays/Land: SLOVAKIA Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 5 379 5 382 5 384 5 386 5 389 5 393 5 397 Bevölkerung

Households ('000s) Ménages 1 915 1 929 1 926 1 931 1 936 1 938 1 941 Haushalte

Unemployed ('000s) Chômeurs 459 481 428 368 352 344 331 Arbeitslose

Unemployment rate (%) Taux de chômage 17.4 18.1 16.2 13.8 13.2 12.9 12.4 Arbeitslosenquote

Change of GDP Variation du PIB 4.2 5.4 6.1 6.6 7.1 5.5 5.1 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 8.5 7.5 2.7 4.5 3.1 2.0 2.4 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 5.1 6.1 4.3 4.5 6.5 3.8 3.5 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 6.0 3.7 3.1 5.0 4.9 4.7 4.5 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 5.0 4.9 4.9 4.9 5.3 5.1 4.9 Langfristiger Zinssatz

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

Country/Pays/Land: SLOVAKIA Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 559 -6.8 2.6 15.0 20.0 11.0 8.0 4.0

Logement Renovation 181 -5.0 -16.1 28.1 9.0 6.0 4.5 0.5

Wohnungsbau Total 740 -6.3 -2.3 17.9 17.3 9.9 7.2 3.3

Non-residential construction New 1 126 4.6 22.1 4.2 5.0 9.0 1.0 1.0

Bâtiments non résidentiels Renovation 261 9.1 -7.1 -3.7 2.0 10.0 8.0 0.0

übriger Hochbau Total 1 387 5.7 14.9 2.6 4.4 9.2 2.3 0.8

Building New 1 685 0.3 15.3 7.5 10.0 9.7 3.6 2.1

Bâtiment Renovation 442 3.5 -10.4 7.2 4.9 8.3 6.5 0.2

Hochbau Total 2 127 1.1 8.8 7.5 8.9 9.5 4.2 1.8

Civil engineering New 806 -2.7 5.1 31.1 16.3 -10.0 8.0 16.0

Génie civil Renovation 159 26.5 -28.9 38.1 8.0 -5.0 9.0 5.0

Tiefbau Total 965 2.4 -2.3 32.2 14.9 -9.2 8.2 14.2

TOTAL CONSTRUCTION OUTPUT 3 092 1.5 5.6 14.1 10.8 3.4 5.3 5.4

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 1.86 12.8 -2.9 11.5 7.0 3.5 4.5 5.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 37,8485 SKK

Country/Pays/Land: SLOVAKIA Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 9.6 9.7 8.4 8.7 8.5 8.3 8.5 Baugenehmigungen Familienhäuser

Flats Collec tif 4.4 6.9 11.4 12.0 12.0 12.5 13.0 Mehrfamilienhäuser

TOTAL 14.0 16.6 19.8 20.7 20.5 20.8 21.5

Housing starts 1+2 family dw ellings Logements commencés Individuel 5.1 5.5 4.9 4.8 5.0 5.1 5.5 Baubeginne Familienhäuser

Flats Collec tif 2.3 3.6 5.9 7.1 7.5 8.0 8.5 Mehrfamilienhäuser

TOTAL 7.4 9.1 10.8 11.9 12.5 13.1 14.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 7.6 8.6 8.7 8.0 8.1 8.5 8.7 Baufertigstellungen Familienhäuser

Flats Collec tif 6.4 4.0 6.2 7.5 7.9 8.5 9.3 Mehrfamilienhäuser

TOTAL 14.0 12.6 14.9 15.5 16.0 17.0 18.0 Housing stock Logements existants 1 919 1 930 1 943 1 958 1 973 1 989 2 006 Wohnungsbestand

thereof second homes dont résid. secondaires 45 46 47 47 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 176 178 179 180 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 78.0 80.0 84.0 85.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: SLOVAKIA Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 32 -25.5 14.7 5.2 8.3 53.8 40.0 0.0 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 36 -29.4 10.6 0.3 11.1 53.3 26.1 6.9 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 365 -13.8 48.1 5.5 1.4 -7.1 -23.1 -10.0 Industriegebäude

Storage buildings Bâtiments de stockage 47 18.9 50.9 7.8 -5.6 17.6 -25.0 33.3 Lagergebäude

Office buildings Bureaux 198 -1.5 75.7 2.8 13.3 11.8 10.5 1.0 Bürogebäude

Commercial buildings Commer c es 211 51.0 -20.7 3.0 6.3 5.9 5.6 0.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 15 8.6 17.9 5.6 63.3 11.1 -10.0 33.3 Landw irtschaftsgebäude

Miscellaneous Autres 222 4.4 15.7 4.3 -0.8 19.5 11.9 3.5 Sonstiges

Total 1 126 4.6 22.1 4.2 5.0 9.0 1.0 1.0 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 37,8485 SKK

Country/Pays/Land: SLOVAKIA Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées Bahnanlagen

Other transport Autres réseaux Übrige Verkehrsinfrastruktur

TOTAL 616 -11.2 1.6 47.8 21.3 -18.4 16.9 18.5

Telecommunications Télécommunications 106 4.5 -2.8 16.9 -0.5 0.0 -2.5 2.6 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 132 31.9 2.8 15.4 12.0 16.1 0.0 6.2 Energie- und Wasserversorgung

Other Autres 111 41.6 -18.2 2.4 -2.3 10.5 -15.3 9.2 Sonstiges

Total 965 2.4 -2.3 32.2 14.9 -9.2 8.2 14.2

1) At 2005 prices, excluding taxes. 1 euro = 37,8485 SKK

Country/Pays/Land: SLOVAKIA Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 22.3 0.2 4.2 7.0 5.7 5.3 4.4 4.2 Privater Verbrauch

Public consumption Consommation publique 7.3 3.9 2.0 0.5 3.9 2.0 3.0 2.8 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 10.1 -2.3 5.0 13.8 8.2 6.0 5.0 5.0

of w hich construction 3.4 -7.3 -2.2 15.5 9.0 7.0 5.0 3.0

Stocks (as % of GDP) Variations de stocks 0.9 -0.1 2.0 2.4 1.6 1.4 1.5 1.6 Vorratsveränderung

Ex por ts Exportations 30.0 15.9 7.9 13.5 17.6 14.2 8.5 7.3 Ex por te

Imports Importations 31.7 7.6 8.8 15.5 15.2 11.2 7.3 6.4 Importe

GDP PIB 38.9 4.2 5.4 6.1 6.6 7.1 5.5 5.1 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 37,8485 SKK

SPAIN ITeC – The Catalonia Institute of Construction Technology www.itec.es

Josep Ramón Fontana e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

The initial indications of a slow down in the Spanish economy that were foreseen in our report six months ago have still not materialised. Thus, 2006 GDP growth is expected to be as high as it was in 2005, around 3.5%. However, these positive results are still linked to the traditional weak points of the Spanish economy, since growth remains depends on two factors (private consumption and construction, especially residential construction) particularly vulnerable to hikes in interest rates, both current and future. For all the above, the forecast of a slight slow down for 2008 and thereon is still applicable.

This view of the Spanish economy as a whole can also be applied, quite literally, to the construction industry. According to the summer forecast of Euroconstruct, the first symptoms of wear and tear on the economy were to manifest themselves in 2006, in the sub-sector with the most specific weight: housing construction. The slow down has only been noted (and just barely) in the real estate sector, where new residential developments are not being sold as rapidly as a few years ago. Residential construction itself, however, seems to be enjoying a new lease on life as the sector appears eager to take on greater risk, given the excellent results of previous years. It is also trying to take advantage as much as possible of the willingness of the banking sector to adjust its policies in order to maintain accessibility to housing. Thus, 2006 may end up beating last year’s record for housing starts, generating a pool of substantially sufficient projects so as not to have to fear, at least, 2007 results. As from 2008 there are no guarantees that there will be significant growth in the residential sector.

Little by little non-residential construction (particularly that related to trade, logistics and leisure) is showing itself to be more solid, although it continues to be the market that is having the most difficult time growing. In the medium term, it is expected that office construction is to join the aforementioned group of consolidated sub-sectors, although there is still an uncertainty as to a key market in the Spanish context, to wit: industrial construction. Thus, we see that there will be rather constrained growth, even under the expectations for GDP, showing certain signs of stagnation.

Civil engineering has maintained its characteristic strength, so the growth in the major transport infrastructure markets continues as expected. Even the other, minor markets (urbanisation, hydraulic and telecommunications infrastructures) are also gaining momentum. It will be impossible to avoid a certain slow down in growth rates, but the current solid performance of this sector is bound to continue past the 2007-2008 election period, since a significant volume of the Spanish public investment is spent according to medium- term plans, most of them covering a time span as long as 2010.

2 Macro-economic Outlook

There have not been major changes in the behaviour of the Spanish economy. GDP is still growing at a steady pace, even somewhat above expectations: 3.7% in the second quarter of 2006, 3.6% in the preceding two quarters. It seems therefore that it is going to reach (even surpass) the government’s forecast of 3.4% for 2006 as a whole.

Behind this solid performance are two factors which have not recently undergone much of a change, while others are most likely to succumb to changes:

Constant factors

o Heavy reliance on private consumptions and construction. o High inflation rate: in spite of the fact that the oil market is giving the economy a break and the containment in the rise of labour costs, Spain is still burdened with inflationary baggage dangerously close to 4%. However, the latest figure for September (2.9%, the lowest year-on-year rate since April 2004) offers some hope in terms of 2006 being the year in which inflation finally hits its highest level. o High employment and stagnant competitivity: there is a persistent sensation that growth in the Spanish economy is not driven by significant increases in production per employee, but by the increase in the working population (especially immigrant workers, whose number is growing faster than 15%). Poor productivity has also a relationship with the high levels of employment in construction, a particularly low-tech sector: almost one of each three new jobs created in Spain during the last 12 months were construction jobs. And according to the last 3T Survey the growth trend continues without showing any signs of stress: 8.4% more construction employment than in 3T 2004.

The potential sources of change

o Decline in private consumption: the growth in interest rates threatens family finances in spite of the fact that the labour market is still evolving positively. Although interest rates are low in real terms (a collateral effect of high inflation), the vulnerability of the consumer is felt more sharply due to current high level of debt. o Slow down in Gross Fixed Capital Formation: investment in construction and other products is slowly losing steam, and it remains to be seen up to what point this will be offset by investment in capital goods, which right now is the only area of investment that is accelerating. o Improvement in exports: the economic recovery of certain countries that import Spanish goods in the European Union has been the factor mostly responsible for the notable improvement in exports so far this year. The net effect of this on the economy will depend on import levels, which, at this time are still high.

Barely a slow down in the volume of mortgage-backed loans

Total mortgage loans

€ million Δ year on year In spite of the media attention given to the issue of the rise in interest rates, the mortgage market did not stop 2003 467 869 growing during the first part of 2006. The European 2004 582 600 24.5% Commission has placed Spain in the group of “risk 2005 739 296 26.9% countries” for its indebtedness and has warned that if the increase in credit continues to grow at the current rate, family debt will soon reach volumes higher than jan-06 751 746 27.0% Spanish GDP. feb-06 764 811 27.0% mar-06 783 184 27.3% The growth rate has actually been losing a bit of steam in the last few months. Although from a strictly apr-06 795 690 26.6% arithmetical point of view we can conclude that may-06 811 236 26.3% mortgage demand is slowing, the figures speak for jun-06 829 060 25.2% themselves and the situation can hardly be construed as a true sign that things are going to change. jul-06 846 488 25.2%

Source: Bank of Spain

Future outlook

There is a great deal of consensus in forecasting that 2007 will be a significant growth year for the Spanish economy, but not to the same extent as in 2006: the government has set the target of 3.2%, which both the OECD and certain bank analysts have lowered slightly. Thus, we have altered our previous forecast of 2.8% slightly upward to 3.0%, in the awareness that construction will be heading into 2007 armed with certain guarantees for a positive performance, and trusting that the recovery in exports in 2006 will not have been a passing fad and that imports, at the same time, will not surge out of control. The scenario for both public and private consumption is for a slight slowdown, in line with the last Euroconstruct report half a year ago.

The forecasts for 2008 and thereafter depend, in great measure, on forecasting the performance of the construction industry in the medium term. Increasing financing costs, the oversupply of housing and the uncertainties as to whether housing prices will be maintained, leads us to rule out a manifestly bullish scenario, leaving the most reasonable hypotheses to coalesce around the idea that construction (at least residential construction, the most significant sub-market) is approaching “end of its cycle”. Even if we assume that construction could wane in importance, there is still the question as to whether another productive sector could take over its role: at this time no candidates appear to loom on the horizon. Thus, the Spanish economy is facing the medium term with less chances of sustaining the major growth rates of the last few years. It also remains to be seen when and how this phenomenon will materialise. As for the “when”, there is almost no need to recall the insistent announcements (including in our own) of the imminent demise of the housing boom, only later to have to acknowledge its deferral year after year. As to the “how”, the most prevalent hypothesis continues to be that of a soft-landing, although at this time many are talking about the theoretical similarities between the real estate sector in Spain and in the United States, where there had also been a forecast of a soft landing while the end of the cycle may not happen strictly in that way.

With these thoughts in mind, we forecast that there will be a progressive slow down, with GDP losing 4 decimal points by 2009.

3 Housing Market

One could say that 2006 has been a major test of the solidity of the residential market, in terms of how it has faced the factor that had the most potential for hitting it where it hurts, i.e., a hike in interest rates. There has been, accordingly, much expectation as to whether supply would be affected by the change from the placid financial situation of the last three years (where interest rates had fluctuated only slightly around 2.3% - towards an obvious acceleration that has brought them to levels that have not been seen since the worst moments of 2002.

In our previous report we stated that there were no signs of any impact on the production figures of the Spring months. We argued that up until that moment the rises in the Euribor had only been slight, and that since housing prices continued to grow (somewhat less, but still above 10% year on year) there was no risk that housing would lose its appeal as an investment asset. The hypothesis was that in the short term interest rates would continue rising and prices would continue moderating, while demand would begin to slow up and, consequently, residential production for 2006 would end up applying the brakes.

Six months later, these forecasts have only come true in part: indeed, the Euribor has risen by six decimal points (September figures) and housing prices continue to decelerate (a year- on-year variation of 9,3% in 2006 3T, after five solid years with growing quotas over 10%) but housing starts have not felt any kind of impact from all this, for they are still growing at truly considerable rates.

Interest rates Housing prices

Inter-bank EURIBOR at one year (%) Bars= 2003 base index (scale on the left) Curve= year-on-year variation (scale on the right)

3.9 180 20% 3.7 18% 3.5 160 16% 3.3 14%

3.1 140 12%

2.9 10%

2.7 120 8%

2.5 6%

2.3 100 4%

2.1 2%

1.9 80 0% 03 04 05 06 03 04 05 06 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 1T 2T 3T 4T 1T 2T 3T 4T 1T 2T 3T 4T 1T 2T 3T

Source: Bank of Spain Source: Ministry of Housing

This is a reflection of the fact that demand is still practically as strong as always, perhaps not as overheated as in the hottest periods of the boom, but in any case, hot enough not to have discouraged developers and builders. Even the contrary effect seems to have occurred: indeed, the first warning signs may even have encouraged some developers to try to take advantage of the bonanza while it lasts.

In conclusion, we must admit that in our previous report we had underestimated the appetite for risk that the different agents in the sector have had: the developers chose to continue building even though they are aware that demand will have greater difficulty in absorbing their product, and the financial sector decided to continue adjusting the money supply to the steady increase in real estate prices (see our comments on the record volume of mortgages

The 2006 year end

In light of the information gathered to date in terms of starts, we must also revise upward the forecasts of our last report. In the first seven months for which we have figures, the number of housing permits has already reached the half million mark, which is an unequivocal sign that 2006 will be a new record-breaking year in these terms. The new 2006 forecast has surpassed the 800,000 mark for new housing, 100,000 more than what we forecast only six months ago, and, as has usually been the case, this will impact production volumes both for 2006 (which is expected to grow by 7.6%) and for 2007.

It is difficult to find an explanation for this behaviour: the typical argument about the forward inertia of the sector (how difficult it is to suspend developments underway or that are about to begin in spite of the fact that demand has shrunk) could explain how activity has remained stable, but it is not a convincing argument in terms of explaining the acceleration. In our last report we also pointed out that the coming into force of the new CTE Building Code could have played a role in boosting starts, since it laid down a transition period during which the authorisation for new housing projects prepared under the former regulations, which were less restrictive than the new ones, would still be valid. This transition period ended in September, and until we have the figures on building permits for the last quarter, we will not be able to test this explanation.

Decrease in single-family dwellings

Bar= number of single-family dwelling permits (scale on the The housing start figures for the last few years show left) a steady loss in market share of single-family Curve= percentage of single-family dwellings against the dwellings, which is not very significant since it total number of building permits (scale on the right) appears that this does not relate so much to a 250000 33% decline in housing of this type as to a sharp hike in apartment construction. 31%

200000 The surprise came with the number of permits 29% issued for the first half of 2006, in which, for the first

27% time in an extended period, the single-family 150000 dwelling figure did not exceed that of the same 25% period last year. There has been a decrease of 13,700 single-family dwellings, giving this housing 23% type 21% of market share 100000

21% This type of construction has been criticised a great 19% deal for its at times severe impact on infrastructures 50000 and the environment. In fact, there are some 17% municipalities that have banned single-family dwellings from their planning codes. But their 0 15% decline is mainly market-based: since they occupy 2000 2001 2002 2003 2004 2005 2006 the upper price niches, they are the first to become out of reach in spite of the fact that demand still Source: ITeC, based on Technical Architects’ figures exists.

Forecast for new construction

In light of how Euroconstruct forecasts have erred systematically in relation to the approaching end of the residential construction cycle, we are going out on a limb by making even a short-term forecast for 2007. Given the housing start figures available, we anticipate that there are solid guarantees that there will be high levels of activity in 2007. We would rule out, therefore, a recessionary scenario for 2007, and, if we accept that demand will continue to shrink as interest rates rise, the following may occur:

• Hypothesis 1: there is confirmation that a sufficiently significant number of housing starts for 2006 were a collateral effect of the new CTE Building Code and that, consequently, this has artificially masked a situation that is not very propensive to continued growth at 6% or 7%. Thus, once the transition period of the CTE ends, the growth rate of permits will slow down and for the first time in five years the year will end with fewer starts than in the previous year. In terms of value generated, we could expect less growth in 2007 and progressive stagnation in 2008 and 2009. • Hypothesis 2: housing prices continue to rise and there is no turnaround, and, consequently, speculative purchases do not flow towards other investments; at the same time, mortgage supply continues to absorb the increase in interest rates without decreasing accessibility. With the understanding that this situation cannot go on for much longer, the developers go all in while the situation lasts, aware that their profits for the last few years offer them a cushion if there is a swift change in the market. 2007 would end with as many or more housing starts than in 2006. And, in value terms, there would be growth in 2007 and 2008, but perhaps not in 2009.

Note that the main difference between these hypotheses is establishing where the spike in the cycle will be (hypothesis 1 sets it in 2006 while hypothesis 2 sets it in 2007) since it is from this point that both hypotheses draw a soft-landing scenario, which depends on having to hope that housing prices will not fall drastically, and that for the end of the forecast period we will finally reach the long-announced period of price stability or increases running parallel to the CPI.

We have opted for the hypothesis that offers more possibilities of the lengthening of the cycle, finally presenting a continuous period of growth between 2005 and 2007. During these years enough inertia will have been generated so that 2008 and 2009 would more likely be years of adjustment than years of crisis.

What can we expect from public housing?

Starts and completions of public housing As shown in the latest reports, public housing has left behind a period of scarce activity. During the three-year period from 2003-2005, there have been 80 000 starts almost 60% more starts than during the period 2000-2002. If this stiff improvement continues (and 70 000 the first statistics of 2006 are a good sign) there are those who will wonder whether we could rely on 60 000 public housing to act as a cushion for the foreseeable decrease in the rate of free market 50 000 completions production.

40 000 In 1996 there were 75,000 public housing completions and public housing occupied a 30 000 significant market share of more than 30%. In the 98 99 00 01 02 03 04 05 forecast period, this same number, as part of a market of 700,000 units, would constitute little more

Source: ITeC, using information from the Ministry of than 10% of the total. Thus, it would not be realistic Housing to expect that public housing development would be capable by itself of taking over the lead.

Forecast for repair and maintenance (R&M)

The factors that are expected to mark the pace of the renovation market in the near future are:

• Financing: a very considerable proportion of R&M (an estimated 55% of the total value generated) relates to private and individual initiatives, and it is precisely family finances that may be the most affected by a rise in interest rates. Therefore, expenditure on housing improvements could lose its priority in the following years. • The real estate market: the momentum of high prices is having two effects that are positive in principle on the renovations market. On the one hand, the recovery of practically any investment that is made in renovating a dwelling in order to put it on the second hand market is practically guaranteed, at times, at a substantial profit. On the other hand, there are some house-owners who, given the difficulty of trading up to a better home, will decide to renovate.

Therefore, there are two vectors moving in opposite directions: financing as a dissuasive factor and the real estate market as a simulating factor. Given the understanding that the real estate market will also eventually slow down (if the prices of second hand housing, as everything would seem to indicate, stop growing at the stiff rates of the past few years) we think it is necessary to lower somewhat the growth hypothesis of our last Euroconstruct report. Thus, we forecast that the average growth rate for 2007-2009 would now be situated around 3%.

In the medium term, we will also have to see whether the different administrations will reinforce their subsidy policies. At this time, there is positive news in this respect, as a result of the new Building Code. If until now one of the factors for receiving a subsidy was bringing a dwelling up to code (especially in terms of insulation and damp proofing) having replaced the existing legal framework with a more demanding one opens the door to more possibilities in opting for official government aid. For the time being the central government has already accepted that it will have to act in line with the new standards, although we will have to see whether this translates into greater funding for renovation subsidies.

4 Non-residential Market

Non-residential construction continues to show difficulties in reaching growth rates on par with Spanish GDP. Nevertheless, 2006 is heading to surpass the 1.9% forecast we made six months ago, since it would be feasible for it to reach 2.4% given the improved performance of warehouse and commercial construction.

In terms of prospects for the following years, of special note is the improvement in the office market and the maintenance of the good pace in tourist and leisure-related construction. As for warning signs for the future, we will have to watch whether the current stagnation in industrial construction becomes the prelude to a recession, since the industrial sector (still showing decrease in employment despite of a certain production recovery in the last six months) is not healthy enough to generate great demand. Furthermore, there is the risk that the decrease in private consumption will penalise demand in several non-residential categories (commerce, logistics, tourism, leisure) both in terms of new construction and renovations.

On the other hand, we can expect relatively little from public investment as a compensating factor for a potential drop in non-residential construction for two reasons. One is the weak impact of the sub-markets in which public investment intervenes, such as education and health, which only represent between 3 and 4% of total non-residential construction volume in Spain. And, on the other hand, the current tendering volume is high, which makes it improbable that there will be future significant increases that will cause a real salutary shock to the sector.

Looking at all of this as a whole, our forecast is once again conservative, as in the last few reports, as this is a sector that is still capable of growth but at more and more limited rates. In any case, we must look separately at each sub-sector, since the expectations differ in each case:

• Commercial construction has been the sub-sector leading the increase in permits in terms of surface area so far in 2006, which guarantees that 2007 will be more active than forecast in our last report. As from 2007, we must be more cautious, due to the combined effect of the following: o Macro-economic factors: the conservative prospects for private consumption mentioned above; o The internal rhythms of this sub-sector: a hangover effect after years of intense activity; o The interaction with urban growth: if the decrease in the residential sector leads to less urbanisation, the creation of commercial surface area will also decline.

• As mentioned in past reports, the Spanish warehouse market is situated between the industrial market and the commercial market, showing a steady trend towards following the pace of the latter, as shown in the latest figures for municipal building permits. Indeed, warehouse construction permits have increased since the beginning of 2006 on par with commercial construction, which will be felt at the 2006 year end (construction is swifter for warehouse construction than for commercial buildings), the same holds true of course for 2007. As for 2008-2009, it would seem sensible to apply similar reasoning as that for commercial construction, and foresee a slow decrease in growth.

Permits by sector: stagnation in industry, spike in commercial construction

Surface area to be built according to municipal building permits; Year-on-year evolution (m2 x 1000) Industrial buildings Warehouses

9500 4500

9000 4250

8500 4000

8000 3750

7500 3500

7000 3250

6500 3000

6000 2750 J03 J04 J05 J06 J03 J04 J05 J06

Office buildings Commercial buildings

1600 2800

1500 2500

1400 2200

1300 1900

1200 1600

1100 1300

1000 1000 J03 J04 J05 J06 J03 J04 J05 J06

Source: ITeC, based on information from the Ministry of Public Works

• In our previous report we pointed out the fears that the recovery in industrial construction would peak in the short term, and it appears that these fears are now coming true. As the figure for permits shows, there is a respectable volume of construction projects waiting to be executed or that are already under construction, with which to create a stock of industrial buildings which will not likely be absorbed immediately by demand. Thus, we foresee a stagnation in production throughout the forecast period.

• 2007 could be, finally, the year in which office construction once again plays a leading role, as projects that had been initiated because of the rekindling of the real estate market in the last 12 or 18 months are being built. In order to illustrate how the demand awakens we can check the office rental prices: 17% of annual increase in Madrid (Q2 2006 against 2Q 2005) and 6% in Barcelona.

• There are no unexpected changes in respect of construction in agriculture, stockbreeding and fishing. The number of permits continues to decline, employment decrease seems to accelerate and the contribution of these primary activities to GDP on the supply side continues to be negative. All of this, added to the 332 © EUROCONSTRUCT Munich, December 2006 Spain

prospects of a steady decline in EU subsidies, ratifies the hypothesis of a decline, as pointed out in previous reports.

• We confirm that this is a good time for other non-residential construction, which includes construction related to tourism and leisure, and so much so that we have thought it appropriate to increase growth expectations for the second consecutive semester, which is now set at an average of 3% for the forecast period. This could seem to contradict both the results of the last tourist seasons) the increase in income was less than the increase in the number of tourists (and the scenarios that point to a private consumer that is less and less willing to make superfluous expenses. But we must not lose sight of the fact that this is a sector in which there is a rapid obsolescence of the buildings used and where a relaxation in investment can have serious effects given the stiff competition.

5 Civil Engineering Market

The Spanish civil engineering market continues to be buoyant, and, at this time there are no indications that in the medium or short term this situation will change substantially. The decrease in growth that is reflected in the Euroconstruct forecast, is due not as much to the appearance of symptoms of weakness but to the growing difficulty of surpassing record investment volumes year after year. The fact is that the different administrations are maintaining their investment commitments (the government’s proposal for the 2007 budget includes 8.6% more funding for infrastructures) not only as an instrument for keeping the construction sector healthy, but also for keeping the rest of the Spanish economy healthy, especially at a time in which the country is not doing exceedingly well in terms of its competitivity ratios.

Public tenders continue to grow

Public tenders for engineering works; Year-on-year evolution (MEUR x 1000)

28 SEOPAN 26

22 MINISTRY 20

10 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Source: ITeC, based on information form the Ministry of Public Works and Seopan

It could be argued that part of the current positive performance is due to the electoral calendar (municipal elections in 2007 and general elections in 2008) after which a certain vacuum could follow. But bearing in mind that the most substantial allotments, such as transport, relate basically to medium and long-term programs, such the Strategic Infrastructure and Transport Plan, the fear of a decrease in activity after the elections in civil engineering does not seem to be fully justified. We should also add to this argument the growing participation of private investment.

All of this would back up the hypothesis of a market with the clear likelihood of continue growth: at rates of 6 to7% in the short term and 3 to 5% in the medium term. If a change in residential construction growth materialises between 2008 and 2009, we would be facing a new situation in which civil engineering would end up as the driver of the Spanish construction industry.

Within the generally positive situation of civil engineering in Spain there are different levels of expectations in each of its different markets. The buoyant situation of the major markets (transport, hydraulics – also extends now to other smaller markets:

• In spite of the solid numbers of tenders for road building in the first few months of 2006, it appears that the tender record for 2005 will not be surpassed and thus we have thought it wise to reduce our forecast for the 2006 year end (now 6.6%), and reaffirm the slightly slowing trend in growth that already mentioned in the last Euroconstruct report. As for investment in maintenance and improvements, in June a new law came into force on tunnels that harmonises Spanish safety requirements with those of the EU. We must recall that the EU requires, as a minimum, that all the tunnels in the trans-European road network come up to its standards. Spanish legislation intends to extend these requirements in the medium term to the entire road network managed by the national government.

• As mentioned in the previous report, 2007 will be a key year for railroads, since the government wishes to go into the 2008 elections having met its targets for building three very significant stretches of the high speed rail lines (Madrid-Malaga, Madrid- Barcelona and Madrid-Valladolid) and renew its commitment for the next legislature to complete the Madrid-Valencia and Barcelona-French border lines. In concert with these goals, it made public its new Strategic Plan of the Railroad Infrastructure Administrator. This plan presents a scenario for 2010 having 1,150 new kilometres of rail lines in service, doubling the current length of the high performance network. Over the next 5 years Euros 23,400 million will be invested, part of which will be earmarked for the maintenance and improvement of existing lines and stations.

• The latest figures on airport tenders are undoubtedly positive and have contributed to improving expectations in the short term for “other transport infrastructures”. As in the case of railways, the government’s investment s plans in the medium term have also been made public, and we see that forecast investment until 2010 totals Euros 18,000 million for the expansion and improvement of 48 airports in Spain. Half of this investment relates to the Madrid and Barcelona airports, and Euros 3,000 million will be earmarked for the Canary Islands Airport Infrastructure Plan.

Clear strengthening of the volume of tenders for urbanisation and hydraulic works

Accumulated value of official tenders since the beginning of the year (EUR billion) Rail infrastructure Roads and urban thoroughfares

6 12 2004 2005 5 10

4 8 2005 2004 3 6

2 4 2006 2006 1 2

0 0 J F M A M J J A S O N D J F M A M J J A S O N D Energy and hydraulic works Urbanisation

5 2.0 2005

2006 4 2006 2005 1.5

3 2004 1.0 2004 2

0.5 1

0 0 J F M A M J J A S O N D J F M A M J J A S O N D Source: ITeC, based on information from the Ministry of Public Works

• We can confirm the strong recovery in the number of tenders for hydraulic infrastructures that we mentioned in our last report, which leads us to increase our short-term forecast for the second consecutive semester. The medium-term also shows a likelihood for improvement if the two major initiatives of the Ministry of the Environment actually materialise: on the one hand, a national plan for the treatment of waste water to meet the requirements of European legislation in this matter (it is estimated that 11% of all Spanish cities are still not treating their waste water properly); and, the fact that a decree is being drafted on the recycling of urban waste water to be used in certain areas where water quality is less demanding (industry, irrigation, golf courses) and to reserve better quality water for other prioritised uses.

• At the time of drafting this report, the Spanish energy market has still not completed its present phase of reorganisation, and it is still uncertain as to who (and under what terms) will own Endesa, the company that accounts for 40% of electricity generation in Spain. Under these circumstances, we must be duly cautious in viewing the investment forecasts published by UNESA (Spanish Association of the Electricity Industry), according to which the electricity industry in Spain foresees investment for the period 2006-2008 to be significantly similar to that in 2003-2005, emphasising that there will be more spending on electricity production to the detriment of electricity distribution. For its part, the government adopted the 2005-2010 Renewable Energy Plan this summer. This plan lays down the basis for a 15% increase in power from installations using renewable resources, so that by 2010 12% of the energy

consumed in Spain and 29% of electricity production will come from renewable resources.

• Where in fact there have been substantial movements in the market has been in telecommunications. France Télécom has taken over the third-ranked mobile phone operator in the Spanish market as well as the second-place ADSL operator, and announced a Euros 1,500 million investment plan over the next three years, which is mostly earmarked for construction of the third generation network. This news acted as a major positive shock to the industry, and the reaction of its competitors was not long in coming, with the announcement of more investment of up to Euros 13,000 million.

• Finally, in relation to “Others”, of special note is the fact that investment in urbanisation continues to be positive, above what was forecast as the direct effect of the proximity of the 2007 municipal elections. The extension of the real estate cycle will have an obviously positive impact in 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 – new value figures In mid 2005, the National Statistics Institute of Spain began to publish the first figures of the Spanish National Accounting Office under the new CNE-2000 accounting standards, which include the changes in SEC-95 methodology adopted by the member states of the European Union. The change was included for the first time in the Euroconstruct Report for Summer 2005, where we took the opportunity to point out how both the absolute figures and the temporary evolution of GDP were affected. The most notable feature was that the under the new system GDP for the year was increased by more than Euros 250 billion.

At that time, we intuited that the change in methodology of the national accounts would have repercussions on the estimate of construction industry output although there we had no tools to evaluate this accurately. We had to wait until the publication of the first input-output tables based on CNE-2000, which are the basis for the recalculation that has been introduced in this Euroconstruct report. As one can see, the effect has not been minor: there is an additional Euros 46 million compared to the 2005 figure in terms of the total sector volume as published in our report six months ago. The variation in year-on-year percentages remains unaltered. So does the definition of construction output: the addition of the production generated by companies in the construction sector plus the construction production generated in other sectors, excluding taxes (VAT), intermediate production (self-consumption) and the production generated in other sectors by construction companies.

We should point out that these new input-output tables refer to 2000, and, accordingly, they are not the best reference point for a measurement using a 2005 base. We will try to adjust our valuation as newer i-o matrices are published.

Table 3 • Building permits source: total figure are architects' permits as compiled by CSCAE; split between single-family dwelling and apartments is an estimation by ITeC • Housing starts source: technical architects' permits as compiled by the Ministry of Public Works. • Housing completions source: ITeC’s estimations • 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. Total housing stock figures up to 2005 are supplied by the Ministry of Housing; the forecast and the split between secondary and empty stock is estimated by ITeC. • 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, 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.

Table 4b • Other transport: airports, harbours and fluvial transport. • Energy and water works: production and transport of electricity and gas; treatment, storage and distribution of drinking water, construction of sewers and treatment of waste water, irrigation infrastructures, channelling of rivers and measures against flooding. • Miscellaneous: urbanisation, sport facilities and other civil engineering projects not related with transport, energy, waterworks and IT.

Country/Pays/Land: SPAIN Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 42 717 43 198 44 108 44 750 45 300 45 850 46 350 Bevölkerung

Households ('000s) Ménages 15 254 15 614 16 050 16 450 16 950 17 450 17 700 Haushalte

Unemployed ('000s) Chômeurs 2 252 2 159 1 912 1 840 1 820 1 795 1 780 Arbeitslose

Unemployment rate (%) Taux de chômage 11.4 10.6 9.2 8.8 8.7 8.6 8.4 Arbeitslosenquote

Change of GDP Variation du PIB 3.0 3.2 3.5 3.5 3.0 2.8 2.6 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 3.0 3.0 3.4 3.8 3.1 2.8 2.7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 1.5 7.2 4.5 6.8 4.0 3.3 2.8 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.3 2.1 2.2 3.1 3.5 3.5 3.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 4.1 3.4 3.9 4.0 4.2 4.3 Langfristiger Zinssatz

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

Country/Pays/Land: SPAIN Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 71 290 3.5 4.5 6.7 7.6 4.0 -2.5 -1.0

Logement Renovation 31 860 4.0 4.1 4.5 5.0 4.0 3.0 2.0

Wohnungsbau Total 103 150 3.7 4.4 6.0 6.8 4.0 -0.8 -0.1

Non-residential construction New 28 810 1.8 2.5 2.1 2.4 2.3 1.5 1.2

Bâtiments non résidentiels Renovation 17 690 3.5 3.0 2.4 2.2 2.0 2.0 2.0

übriger Hochbau Total 46 500 2.4 2.7 2.2 2.3 2.2 1.7 1.5

Building New 100 100 3.0 3.9 5.3 6.1 3.5 -1.4 -0.4

Bâtiment Renovation 49 550 3.8 3.7 3.7 4.0 3.3 2.7 2.0

Hochbau Total 149 650 3.3 3.8 4.8 5.4 3.5 -0.1 0.4

Civil engineering New 48 235 6.9 6.6 9.0 7.3 6.2 4.7 3.6

Génie civil Renovation 9 865 3.8 3.9 4.4 4.5 3.8 3.5 2.5

Tiefbau Total 58 100 6.3 6.1 8.2 6.8 5.8 4.5 3.4

TOTAL CONSTRUCTION OUTPUT 207 750 4.1 4.4 5.7 5.8 4.1 1.2 1.3

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 51.51 4.8 3.7 5.1 7.5 4.0 2.0 1.5 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes.

Country/Pays/Land: SPAIN Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 196.0 207.0 221.0 190.0 175.0 150.0 135.0 Baugenehmigungen Familienhäuser

Flats Collec tif 485.0 554.5 600.0 660.0 635.0 565.0 555.0 Mehrfamilienhäuser

TOTAL 681.0 761.5 821.0 850.0 810.0 715.0 690.0

Housing starts 1+2 family dw ellings Logements commencés Individuel 183.4 186.7 193.5 175.0 165.0 140.0 130.0 Baubeginne Familienhäuser

Flats Collec tif 452.9 500.3 536.2 640.0 615.0 530.0 520.0 Mehrfamilienhäuser

TOTAL 636.3 687.0 729.7 815.0 780.0 670.0 650.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 170.0 180.0 185.0 180.0 175.0 155.0 140.0 Baufertigstellungen Familienhäuser

Flats Collec tif 410.0 456.0 483.0 538.0 586.0 560.0 520.0 Mehrfamilienhäuser

TOTAL 580.0 636.0 668.0 718.0 761.0 715.0 660.0 Housing stock Logements existants 22 059 22 623 23 210 23 797 24 510 25 270 25 985 Wohnungsbestand

thereof second homes dont résid. secondaires 3 570 3 680 3 795 3 910 4 025 4 155 4 275 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 3 255 3 335 3 410 3 475 3 530 3 540 3 585 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 87.0 87.0 87.0 88.0 88.0 88.0 88.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: SPAIN Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 665 0.7 1.5 3.6 0.5 0.9 1.4 0.9 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 340 5.3 7.0 4.4 0.0 0.5 1.5 0.5 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 8 605 -1.5 1.2 3.4 1.3 -0.5 -0.5 0.0 Industriegebäude

Storage buildings Bâtiments de stockage 6 990 4.2 2.5 3.0 3.8 4.0 2.2 1.4 Lagergebäude

Office buildings Bureaux 2 915 4.3 1.9 -0.5 1.9 3.5 2.6 1.8 Bürogebäude

Commercial buildings Commer c es 4 835 3.2 6.4 0.5 3.6 4.3 2.8 1.8 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 1 010 0.5 1.5 0.8 -1.0 -2.0 -2.5 -2.8 Landw irtschaftsgebäude

Miscellaneous Autres 3 450 2.1 1.3 1.9 3.0 3.5 3.0 3.0 Sonstiges

Total 28 810 1.8 2.5 2.1 2.4 2.3 1.5 1.2 Insgesamt

1) At 2005 prices, excluding taxes.

Country/Pays/Land: SPAIN Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 23 235 1.5 7.0 13.3 6.6 4.5 2.5 2.0 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 11 770 14.0 6.4 1.9 7.2 8.3 8.0 5.0 Bahnanlagen

Other transport Autres réseaux 2 445 2.9 3.3 3.0 6.0 5.2 5.0 4.0 Übrige Verkehrsinfrastruktur

TOTAL 37 450 5.5 6.5 8.8 6.7 5.7 4.4 3.1

Telecommunications Télécommunications 3 530 5.4 5.4 4.8 4.4 5.5 5.0 3.0 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 12 470 9.8 5.0 7.2 7.9 6.0 5.0 4.5 Energie- und Wasserversorgung

Other Autres 4 650 4.0 5.8 9.3 6.5 6.5 3.5 2.5 Sonstiges

Total 58 100 6.3 6.1 8.2 6.8 5.8 4.5 3.4

1) At 2005 prices, excluding taxes.

Country/Pays/Land: SPAIN Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 515.9 2.8 4.2 4.2 3.7 3.3 3.1 3.0 Privater Verbrauch

Public consumption Consommation publique 170.8 4.8 6.3 4.8 4.4 4.1 3.8 3.6 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 265.4 5.9 5.0 7.0 5.8 5.0 4.7 4.5

of w hich construction 155.0 6.3 5.5 6.0 5.9 4.5 1.6 1.8

Stocks (as % of GDP) Variations de stocks 2.0 0.4 0.3 0.2 0.2 0.2 0.2 0.2 Vorratsveränderung

Ex por ts Exportations 231.0 3.7 4.1 1.5 6.0 4.3 3.6 3.3 Ex por te

Imports Importations 279.6 6.0 9.3 7.1 8.6 7.0 6.2 6.0 Importe

GDP PIB 905.5 3.0 3.2 3.5 3.5 3.0 2.8 2.6 BIP

Standard National Accounts, gross figures 1) At 2005 prices.

SWEDEN Prognoscentret AB www.prognoscentret.se

Bengt Henricson e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

The Swedish economy is currently in a positive upward spiral and the GDP growth is expected to reach its peak of 4.1% this year. An improving labour market, rising household and public consumption are mutually reinforcing. General government finances are also unexpectedly strong, partly because of a decrease in sick leave. In these circumstances, un- financed reforms and extensive labour market programmes are inappropriate from the standpoint of economic policy. The new government have launched a budget which is expected to build a foundation for continuous growth in jobs. This is done by simplifying the routines for companies hiring personnel, tax reductions and cuts in subsidies towards unemployed. To what extent this will have a more positive effect on GDP growth and unemployment than forecasted in this report is yet to be seen.

The inflow of orders and production volumes have picked up to a greater extent than the firms had anticipated. The industrial confidence indicator has risen a few more points and is now close to the levels of year 2004 which was the highest level since the autumn of 2000. The confidence indicator for the construction industry has decreased slightly to 19 from 22 which was the highest level since the beginning of the 1990ies. The construction activity continues to grow in orders received and building starts to the extent that we now see a shortage in capacity. Today more than 60% of the firms report that a lack of experienced labour is the main barrier to an increased level of activity. At the same time, the industry is optimistic and still anticipates a continued upswing during the coming year.

The structure of the Swedish construction market has changed significantly over the The market structure of the Swedish construction market 1990 (excl. civil engineering) last decade. Before the major dropdown in the early 1990ies, which to a large extent was an effect of the government’s recon- 24% 24% New Residential (24%) struction of the Swedish economy and public subsidies to The construction New Non-residential (25%) industry, the four market segments were R&M Residential (27%) almost equally big. The volume of started 27% 25% R&M Non-residential (24%) new residential buildings was twice as high as today; approximately 60.000 residents were started per year in early 90ies. For new non-residential buildings 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, this segment has been facing a significant negative trend with an exception during the late 90ies. Last year we saw another upturn in new non-residential buildings and we see an ongoing growth for year 2006 and 2007, with a slight decrease in 2008 and 2009.

The market structure of the Swedish construction The R&M segments have also declined market 2006 (exkl. civil engineering) slightly over the stated period, but are New Residential (26%) indeed much more stable than the new 26% 30% construction segments. All in all, the total New Non-residential (11%) construction market has declined around R&M Residential (33%) 30% since 1990, from 23 billion Euros to R&M Non-residential (30%) almost 16 billion Euros in 2006. 11%

Since the Swedish construction market is 33% becoming more and more mature, the market structure is much depending on the R&M sector. We believe in an increase in all segments this year and 2007, but a predicted downturn in new constructions in the end of the forecast period will strengthen the maturing process. Our forecast for the total construction market towards 2009 including civil engineering is, hence, optimistic:

New New New R&M R&M R&M TOTAL Residential (26%) Non-residential (11%) Civil engineering Residential (33%) Non-residential (30%) Civil engineering CONSTRUCTION 2005 3 666 1 731 5 081 4 915 4 633 1 169 21 195 2006 4 073 1 817 5 515 5 204 4 818 1 239 22 666 2007 4 299 2 145 5 785 5 400 5 000 1 279 23 908 2008 4 288 2 105 6 061 5 534 5 111 1 317 24 415 2009 4 101 2 022 6 251 5 642 5 208 1 337 24 561

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 decreasing activity. Both new-construction and R&M increases further and our forecasts towards 2008 are optimistic. The market of new non- residential construction has been facing a down warding trend in several years and in 2004 the total outcome ended up at the extreme low level of 2 million square metres. However, the outcome of 2005 shows that this negative trend has been broken. But compared to the rest of the Euroconstruct members, Sweden is still producing a very low level of new non- residential buildings. Just as for residential buildings, we predict an increase towards 2008 but partly due to a weakening growth in the economy and higher interest rates. In the end of the forecast period we will probably see a decrease in new constructions of more business cycle sensitive projects. R&M is normally affected at a later stage and we see no signs of a weakening trend.

However, it is important to have in mind that the forecasts for new constructions in 2008 and especially 2009 are unusually unstable. This is due to how the new government’s policy towards the construction industry will be formulated. We can expect a lower level of public stimulation but this might be compensated by tax reductions and a higher degree of sell outs of publicly owned rental flats. The picture will be clearer by the next report in June 2007.

The Swedish construction market up to 2009 12 000

10 000

8 000 Residential

6 000 Non-resident. Civil engin. 4 000 Million Euros 2 000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year

In 2005, the total investments in civil engineering ended up at 6.2 billion Euros. This is around 5% more than expected by the beginning of the year. The predicted downturn in new projects 2005 did not become as large as expected even if roads and transport had a weak activity. A large growth of 17.4% in energy and waterworks held up the figures. However, 2006 have so far seen a strong growth in all segments and we see a positive trend 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. The major reason is a stronger public economy, a need to catch up with a previously low activity and high energy prices that have stimulated private investments in heating and energy.

2 Macro-economic Outlook

Swedish Economy in an Upward Spiral In general, the Nordic countries have for a few years seen a strong economic development. In Sweden exports, household consumption, general government consumption and investments are all rising rapidly. The principal forces driving this surge are high global growth, an expansionary fiscal policy that has also led to a weak “krona” high asset prices and solid balance sheets of households and firms. Also contributing to growth is the current upward spiral of the Swedish economy, and a slightly improving labour market. GDP is expected to increase by 4.1 percent this year and 3.3 percent next year.

The result is higher than most forecasts from the spring. Among the surprises are the investments, which went up 10% on yearly basis. This is based on the growth in energy investments, an expanding public sector and a growing activity in Business and new residential buildings. Swedish industry seems to have a middle year. The investments are predicted to grow with just a couple percent after expanding 13% 2004. The strong business cycle, the high expectations among the industries and the raising resource utilization is indicating a stronger growth 2007. Higher interest rates and weaker global economy will contribute to a dampening effect by the end of the forecast period.

After 10 years of continuous growth in private consumption, the households where in the beginning of this year, and to a certain extent last year careful with it’s consumption. The atmosphere has gone up due to a stronger business cycle, low interest rates, a better labour market situation and rising income and wealth. A part of the consumption growth is based on expansive fiscal policies connected to the election year. This has also effected public investments positively. Private consumption is expected to grow 3.1% this year and 3.4% 2007. Public consumption will probably reach its peak this year with 1.8% and drop stepwise to 0.5% in 2009. The consumption will go down as the growth of the economy dampens, the effect of the fiscal stimulation is reduced and the interest rates go up.

With little inflation 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 higher than the target after 2007. We have a strong growth of 4.1% in GDP this year driven by domestic demand, strong export development and a short term interest rate of 2.3% 2006. We have also had few years of fast growing house prices and higher depths among house holds. This has forced Riksbanken to announce raising interest rates.

There are strong arguments that Riksbanken don’t have to move along faster with raises than the traditional 0.25% that has been used and is in the forecast. The low interest rates have stimulated households to borrow with short term interest rates. Today, 40% of house holds loans are short term, compared to 10% 10 years ago. This leads to a higher sensibiliy. Another argument is that the GDP growth is achieved through higher productivity, without lowering unemployment much. However, the total amount of new jobs is predicted to grow during 2006 to 2008 with 150,000. But despise that, and due to a fairly high unemployment rate, the raise of salaries is not expected to grow as much as they usually do under similar circumstances. The price raise on houses and flats are slowing down. When the housing market drops in importance, the global economic development will be of greater importance for Riksbanken. All in all, the interest rates is predicted to stay on a low level throughout the forecast period with short term interest rates moving from 2.3% today to 4.7% 2009.

The Swedish Krona have strengthen its position towards the Euro since the spring, from around 9.45 in mars to around 9.20 in August. This can be good to know when evaluating figures from this report with previous ones. Step by step, the focus have shifted from the

348 © EUROCONSTRUCT Munich, December 2006 Sweden interest rate to more long term issues like economic growth, export and financial balance which have been favourable to the Krona. Besides that, Riksbanken is predicted to raise the interest rate more than ECB to reach the same level of 3.5% next year. Nordea expects the value of the Krona to be around 9.00 to the Euro by the middle of next year.

The Swedish economy is small and very open which is why the export industries always have been very important. The export industries impact on the economic development is also growing which is why the latest year’s strong development is met with such satisfaction. 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. A stronger Swedish Krona together with a good raise in both public and private consumption will stabilize the relation between export and import turnover the coming years.

The effect of the new government on the Swedish macro economy is difficult to predict. A tax cut for both income and property has been decided but how extensive it will be is not clear and it will differ between regions. This might raise consumption and house prices to force Riksbanken to raise the interest rate in a faster phase than planned. On the other hand it is also clear that the new government will sell out big parts of publicly owned companies and publicly owned shares in companies. This might according to Nordea contribute to a public income of around 5.4 billion Euros a year which lowers the need to lend money and limits availability of public bonds which push the interest rates down. A significant cut in fortune taxes is also announced. This would affect the value of the Krona since a flow of money outside Sweden will go down (with around 3 billion Euros a year according to Nordea). However, the fortune taxes would have to be eliminated completely to have any major effect on the Krona. All in all, it is motivated to mention the possibility that a more expansionary fiscal policy might result in a higher economic growth in 2007. This should lead to a faster raise of interest rates and possibly a stronger dampening effect on the economy by the end of our forecast period.

The Labour Market is getting better One of the first decisions made by the new government was to harmonize the policy for how to calculate unemployment with the rest of the European countries. This means that students looking for job full time is categorised as unemployed which the old government still categorized as students full time. The updated figure for 2006 should be just above 6%. Since this is a recent decision, KI (Konjunktur Institutet) have not yet adapted their figures as you can see in Table 1.

Unemployment is the most important political issue at the moment and the old government’s neglect of the problem was probably the major reason for a switch of power. Even if the labour market began picking up in 2006 after more than three years of cyclical weakening it was not good enough to save the government in such a strong economic growth. The new government will attack the problem by making it more favourable to work. This means lower income tax and costs for hiring new employees, simplifying the process when hiring/laying off labour, a cut in taxes for house hold services and downsizing support to unemployed. This will most probably generate new jobs but most of them will be short term employments and/or service jobs with low salaries. For the construction industry, this should be favourable since the need for personnel during limited periods is often useful and another extra hand makes highly qualified workers more efficient.

Change 2003 2004 2005 2006 2007 2008 2009 GDP 1.5% 3.6% 2.7% 4.1% 3.3% 2.9% 2.2% Private consumption 1.5% 1.8% 2.4% 3.1% 3.4% 2.9% 2.4% Public consumption 0.8% 0.3% 0.7% 1.8% 1.6% 1.1% 0.5% Unemployment 5.3% 5.9% 5.9% 5.4% 4.6% 4.2% 4.4%

The macro-economic impact on the Swedish construction market The non-residential market is mainly dependent on employment/unemployment, private consumption, export (regarding industrial buildings), private industry investments and public investments. The fluctuation in building costs and interest rates also affect the investments outcomes of the whole construction industry. 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 fluctuation in building costs and interest rates affect the investments outcomes of the whole construction industry.

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, (especially private investments in energy) but not as much as governmental initiatives.

Construction activity has been growing during 2006 and the amount of companies believing in a continuing expanding market is still in absolute majority (Even if it according to KI during 2006 have dropped slightly from just above 20% to 19% in September). The number of incoming orders has picked up, the firms have carried out extensive recruitment and the unemployment among construction workers has dropped under 6% this summer. Incoming orders are likely to continue rising, construction activity is expected to pick up further but the limit to growth is the availability of experienced labour. According to investigations by KI, more than 60% of the companies in the construction industry report that labour shortage is the main barrier to further growth. Construction costs has raised and the growth between summer 2005 to summer 2006 is according to ByggIndex, in average 5.8% for flats and 4.3% for family houses. Salaries have gone up 3.2% and material as much as around 7%, depending on building type. This is due to the price development on many raw materials where especially electrical installations went up as much as 20.8% during the last 12 months.

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 near future are optimistic.

New residential buildings

In 2005, Sweden faced a significant upswing in the new construction market of residential buildings. Approximately 31,500 residents were started, whereas 19.300 of these were flats and 12,200 residents in 1+2 family dwellings. These figures have to be related to the average housing construction between 1993 and 2004 of 15,700 residents per year. This upturn differs from previous ones from the early 50ties since it was not the result of a new publicly subsidised stimulation package. This growth is the result of a response to meet the demand from the market and to lower the rate of housing shortage that almost every larger city in Sweden is facing today.

The amount of building starts increased with 4.000 units in 2005 compared to the annual outcome of 2004, which represents a growth of 14 percent. An important cause of the increase is that the Stockholm region finally has followed the other big city areas and has started to build flats in a noteworthy volume. Still there is housing shortage in many regions and the amount of cities which declares a housing shortage is still growing. The demand of smaller flats to a more “reasonable” cost has always been high and we expect that the volume of buildings starts of these kinds of residential buildings will increase year 2006 and 2007, but not to the extent that the market need will be fulfilled during the forecast period. So far, most of the new residential constructions have been family houses and owned flats. Due to building costs and problems to market adapt rental prices it have been difficult to finance new rental flats with low rental costs. If the new government will remove or change the rental regulation policy is uncertain since it politically is a “hot potato” which might force people to move against their will.

Although Swedish media announce that Sweden is in a “construction boom” at the moment, we have to remember that per capita, Sweden still is on a low international level; and by far the lowest level in the Nordic market. According to Prognoscentrets calculation based on the demographic development in Sweden we need to build around 37,000 new homes a year. Looking at the activity next year, adding around 3,500 homes created through transformations of addicts and other building types like vacations houses we are reaching a normal activity. There is optimism in the market, and we predict the positive trend to remain throughout 2007.

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. The Stockholm region had for the first time in 5 years a positive net migration 2005 which indicates the Capitals grown attraction. However, the west coast (Gothenburg) and the south (Malmö) are still the regions attracting most people. Another factor that stimulates a growth in the market is the continuously increasing prices. The prices of 1+2 family houses have increased by 9 percent in the last twelve months despite that the latest quarter had a price drop. According to SCB, the three big city areas however, (Gothenburg, Malmö and especially Stockholm), is still seeing a price growth. An average 1+2 family house in Sweden costs approximately 170,000 Euros, and in the Stockholm region it is 324,000 Euros. Prices on flats have gone up 20 percent over the last twelve months and every county except two had a positive pricing trend. The national average price for a flat per square metre is 1,900 Euros, and the corresponding figure for the Stockholm region is approximately 2,900 Euros. We predict that the annual outcome of new construction of residential buildings in Sweden will amount to 34,000 units in this year (2006). Split by type of residential, this means 13,000

© EUROCONSTRUCT 351 Sweden Munich, December 2006 dwellings in 1+2 family houses and 21,000 residents in flats. 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 and 2009. Flats will have a positive development throughout 2007, flat out 2008 and then go down 2009 which slightly ads to the negative trend by the end of the forecast period.

The development in the Stockholm region may be crucial for how strong the growth will be, especially considering flats. The increase of the disposable income along with other macroeconomic indicators such as low interest rates and prices of dwellings will continue to work as a driving force for new production of 1+2 family houses in the coming year. We still believe to se a downturn in the end of the forecast period. The biggest demand for 1+2 family houses is in the big city areas where land prices is reaching painful levels and the routines to buy land and build is complicated and time consuming. New restrictions to cut energy costs in new buildings are also pushing the price upwards. How these restrictions will affect the activity is still uncertain since it also lowers the cost of living. However, this together with a rising interest rate and a slower economic growth will cool down the market.

Most of the raise in new flats has been semi-public since the price development have made these investments favourable. We have also seen a strong trend of transitions of rental flats into semi-public flats in attractive areas. The biggest demand is still for cheap rental flats but the existing stock have decreased in big cities and many customers in the target group can not pay for new constructions. The building costs are increasing due to higher prices for land, material and labour. The demand for new student homes I decreasing and most of the university cities do not have any big problems to offer rooms. We believe that we will reach the peak for new semi-public flats by 2007. We don’t se that building costs will go down or that any major change in the regulation policy for rents will be implemented. Therefore new rental flats will not be able to fill up the gap. As for 1+2 family houses, a rising interest rate and a slower economic growth will also contribute to cool down the market.

The forecast towards 2008 and 2009 is unusually difficult to predict since the election resulted in a new government. We don’t believe this will affect the activities in this or in the next year. Far from all decisions this government will take have been made official. We can for certain expect a decrease in public subsidies for new rental flats. The government have also announced an ambition to build more elderly homes but the details is unclear. The tax will be reduced for attractive properties and this will in short term make land and existing 1+2 family houses more expensive. The income tax for semi-public flats will also be lowered which should lead to lower monthly fees and as the next step, higher prices that stimulate R&M investments and perhaps in the long run, new investments. Another big impact on the total residential market is the ambition to increase transitions of rental flats to semi-public flats, a development that was halted by the previous government. This will probably speed up the migration and provide new possible buyers of flats and 1+2 family houses a base fore investments. All in all, suggestions made for the future indicates a price growth of existing 1+2 family houses and flats and a total elimination of subsidies towards flats. This will probably have a more negative effect on new rental flats than semi-public flats and it might lead to a halt on the expansion of this much needed building type. We need to be open for a larger drop in new flats by the end of this forecast period than specified in Table 3.

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 4.9 billion Euros. Of these investments, approximately 2.9 billion 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 many previously years before. The Do-It-Yourself market keeps on strengthening its position and the willingness to renovate in the private household is very high in Sweden. According to our

352 © EUROCONSTRUCT Munich, December 2006 Sweden 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 been established on the Swedish market. The trend of 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 this subject, and many new “about your home”-magazines have been launched. In other words, the 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.

However, this does not make the Swedish market unique since we see the same thing in many countries. The increased transformation of rental flats into semi-public flats which the new government have announced will speed up migration and generate more incentive to invest in your home. This will probably not affect the market until the end of the forecast period. We can also see signs of an over-established market of retail stores with pressed margins and lower profits. This will lead to a market switching from fast growth to consolidation which probably lowers the prices. This might lover investments a bit but also stimulate the activity making the net result positive.

There are clouds on the sky in the R&M market. The number of larger renovation projects (e.g. not DIY and mostly flats) 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 when the calculated need is around 60,000 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 1965-1975, the so called “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 since it is difficult to adapt rents to finance the investments. Even if the municipality owned residential buildings have had a period with improved economy due to low interest costs, these resources have often been used to support other public activities. What could solve the problem is a massive public stimulation, which is not likely. During the forecast period, we don’t see a solution of this problem even if it’s likely that the transformation of rental flats to semi-public flats will stimulate the new owners to take care of the problem. It is a sleeping market opportunity that might take off if/when more resources becomes available.

We predict that the market will keep on growing in year 2006 and that the total investments in R&M residential buildings will amount to 5.3 billion Euros. This is an increase by 8% which is 2% more than we anticipated in the previous report. This is as a response to the low interest rate and an even more favourable business and private climate in Sweden. We also see signs in our own quarterly research, of a very strong growth in the DIY-market year 2006. 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 with around 5% 2007 and 3% 2008. By 2009 the market growth will slow down further and we will have a total turnover of around 5.6 billion Euros.

4 Non-residential Markets

The market of new non-residential construction has been facing a down warding trend in several years and in 2004 the total outcome ended up at the extreme low level of 2 million square meters. However, the outcome of 2005 shows that this negative trend have been broken. But Sweden is still having a very low activity in new non-residential buildings, in fact one of the lowest in Europe and by far, the lowest among west European countries. We see a continuous growth for new-construction the coming years with a drop in the activities in the end of the forecast period. R&M is predicted to have a positive development to 2009.

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 as much as 60 percent since 1990, and ever since year 2000 Sweden has been facing a down warding trend.

The decrease since year 2000 is mainly explained by a weak development within the private sector, such as industrial investments, offices, business and warehouses. 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 dramatically down to only 85,000 square meters 2004. This has really had an impact on the construction market especially in the Stockholm region.

The outcome of 2005 for new non-residential buildings finally gives us positive indicators that the negative trend had been broken. Approximately 2.1 million square meter non-residential buildings were started in 2005, which is an increase by 8% compared to 2004. This means that approximately 1.7 billion Euros were invested in this type of buildings during last year. Only investments in storage and industrial buildings decreased last year, all other building types had a better outcome than in 2004. Commercial buildings rose 10% and we expect a growth with almost 26% year 2006. In 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 case. New construction of offices went up with 12% last year but we see a slight negative relapse 2006. Even if new office buildings is predicted to grow in 2007 and 2008 the activity will stay at low levels in square metres.

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 this year and the next. Sweden has a long way back to what it once was, and the construction of non-residential buildings can fairly be compared to the Nordic neighbours and the rest of the European market. We can not expect this market to grow towards a level of activity it once had. Sweden invested big in buildings for education and health a long time ago and new constructions in these building types is mostly complementary projects to step up the capacity in the existing stock. The trend of moving commercial buildings outside city centres has gone on for some time and the increase in storage buildings is an effect of that development. The Industry has been able to step up productivity without much new buildings and many investments have been done abroad as a result of the globalisation. The high vacation rates among especially offices (16% in Stockholm and between 14% and 12% in Gothenburg and Malmö) but also industry buildings keep the activity down. A good sign is that we see a slight increase in office rental prices in city centres and it’s fairly easy to find a customer to new and newly renovated offices.

The building type that contributes to the growth from 2004 to 2007 is commercial buildings, storage, Hotel/Restaurant buildings and vacation houses. We also see a growth in buildings for education and health but this is from low levels. These building types, except health and education buildings, are normally more sensitive to changes in the business cycle. This is one of the major reasons why we predict a decrease in the activity in the end of the forecast period when GDP growth goes down and interest rates makes investments less favourable. Office buildings are the building type that moves against the stream in 2007. This is from a very low level but with a lower unemployment rate and more jobs created a few more projects should get started. In 2009 however the activity will go down in all building types except health. This is due to a large hospital project at Karolinska Institutet in Stockholm.

R&M Non-residential buildings

The R&M non-residential market is the most stable market in the Swedish construction industry. It is also a market that should grow through the years due to an increase in the building stock. When the industry plunged in the beginning of the 90ties the non-residential R&M market kept many companies alive. Today, it is the one market where the activity per capita in Sweden is high and clearly above the average European countries.

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. There are many reasons to the decrease. The uncertainty as to when the world economy would turn may have had some negative effects 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 was temporary, and 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 4,630 million Euros were invested in the R&M non-residential market in 2005. Every building type, except public buildings like educational and health, increased compared to the annual outcome of 2004.

We predict that R&M non-residential will face an increase throughout the whole forecast period. Same macroeconomic factors as mentioned earlier will be relevant for this market since the same factors effects especially privately financed projects. Normally they affect the R&M market later which is why we don’t see a slight decrease in Storage and Business projects until 2008. Since public economy has become stronger and spending is predicted to grow through the whole period, this will drive the market in a positive direction. Public spending is more important in the R&M market than in new constructions and there is a large stock of buildings needing improvements. This makes us believe that the increase in 2006 and 2007 will be approximately 4 percent. We see a growth in all building types.

The development for the rest of the forecast period is difficult to predict. We see a growth of 2% in 2008 because of a slight downturn in privately financed R&M projects. However, our main scenario is that the improvement in the general economy will still drive the development slightly upwards in 2009. This is mostly based on a stable improved environment for public investments and that R&M in the office segment is believed to grow continuously through the whole forecast period.

One big uncertainty towards 2008 and 2009 is how the new government will prioritise future spending. So far very little details have been made official so we will be more specific in the next report in June 2007.

5 Civil Engineering Market

SCB (Statistical bureau) and KI (Konjunktur Institutet) calculated that investments in Civil Engineering went down 9.2% last year and National Accounts shows a negative trend of 4.3%. This illustrates the difficulties to get a grip of the over all investments in Civil Engineering in Sweden. The total volume of investments has been up and down the last years with big fluctuations in especially transport, energy and telecommunications. We had a positive trend 2004 with a growth of 3.0% but this where followed by a drop 2005 with 5.0% according to our estimations. Last year, transport and roads went down dramatically and together with railways the trend where -17.6%. Roads and other infrastructure had a tough year 2005, much thanks to investments that were put on hold due to discussions on public versus private financing. To ad to the negative trend 2005, the investments in telecommunications fell by almost 5% after a strong growth 2004. Energy and Water plats held the investments up due to a fast growth of energy prices which stimulates both public and private investments to save energy.

Last years weak development is mostly an effect of 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. It is likely that the new government looks at this alternative with more positive eyes than the previous one but this will probably not effect the investments in any significant way until the end of the forecast period. Totally, the investments in the Swedish civil engineering market summed up to an investment volume of around 6,250 million Euros during 2005.

The first half of 2006 showed a significant growth in investments (first quarter up 17%). The biggest growth was seen in private investments which went up 24% the first quarter. Energy and water plants continue its positive trend from 2005 much thanks to the ever growing energy prices which is predicted to remain on a high level. In many regions there are investments in heating plants to lower the use of direct electricity and oil. According to “Byggfakta” there are 21 projects worth more than 33 million Euro in plan within the category power and electricity the coming two years. This includes plants for power, heating, natural gas, bio fuel and wind mills. The ambition to build wind mils have started to show effects and outside Öresund a wind mill park project worth almost 200 million Euro was started this year. Another three similar plants is planned, among them one outside Piteå in the north. During the forecast period, Energy and Water plants will have the fastest growth with 17% this year and around 7% in 2007 and 2008. The expansion 2009 will be more modest due to a flattening growth in public spending 2009.

Investments in public construction went up almost 9% in the beginning of this year. This was expected after a few years with negative development. 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. Most of the growth is in roads and transport where we have had a few big projects started like “Norra Länken” in Stockholm and “Road 45” in Västra Götaland and E4 outside the city of Uppsala, This new complementary piece of the road (approximately 80 kilometres) will not be inaugurated until autumn 2007. We also see a positive trend in rail roads where a few large projects are running, like “Bottnia Banan” and “City tunneln” in Malmö. In the coming years we also see the start of “Ådalsbanan” and “Norrbottniabanan” which will ensure growth.

Transport and infrastructure is the single biggest segment of Civil Engineering and it has a significant impact on the total figure. Since it has been a neglected need for some time, we predict a growth through the whole forecast period. There are many projects in the pipeline. The reason for this is better public economy, a need to even up required investments and possibly a few privately financed initiatives by the end of the period. We see an average growth during 2006 to 2008 with 3.5% to almost 4% with a modest 2% in 2009.

The R&M in civil engineering is a fairly diversified part of the market and comprises everything from cleaning roads in the winter 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. We see a strong growth in 2006 with around 6%, partly due to an unusually long and cold winter in the south which has stretched the budgets for snow clearance. However, the development in R&M civil engineering has been positive over the last years. In 2005, R&M grew by 1.5%, ending up at 1,166 million Euros in total R&M civil engineering investments. The forecast for 2007 and 2008 is optimistic, with an annual increase by around 3%. In 2009 the growth will slow down to 1.5%.

The telecommunications sector is the most difficult sector to forecast, due to all the uncertainty that surrounds the new technology and problems operators are facing getting permissions to expand their networks, especially 3G networks. 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 and according to PTS (Post och Telestyrelsen), around 93% of the population has access today. The use of mobile services has picket up and the operators are obliged to cower 98% of the population. We predict a growth in both capacity and coverage through the whole forecast period, (8% this year and around 4% a year to 2009). A part of this positive development is due to an ongoing expansion of the fixed broad band network to also cover small communities.

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. There are around 65,000 farms in Sweden which is basically the same amount as in Norway. The Swedish ones are probably a bit larger in average. To give a rough estimation; assuming a similar activity in Sweden the volume should be around 500,000 m2 a year, plus minus 100,000 m2. • The figures of civil engineering is based of the National Institute of Economic Research (Konjunkturinstitutet) 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 = 9.26 SEK, rate of October 2006).

Country/Pays/Land: SWEDEN Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 8 976 9 011 9 048 9 099 9 139 9 179 9 217 Bevölkerung

Households ('000s) Ménages 4 310 4 325 4 334 4 368 4 387 4 406 4 415 Haushalte

Unemployed ('000s) Chômeurs 236 268 269 246 211 196 203 Arbeitslose

Unemployment rate (%) Taux de chômage 5.3 5.9 5.9 5.4 4.6 4.2 4.4 Arbeitslosenquote

Change of GDP Variation du PIB 1.5 3.6 2.7 4.1 3.3 2.9 2.2 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.9 0.4 0.5 1.5 1.9 2.6 2.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.3 2.3 3.1 3.4 3.9 2.6 2.4 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3.0 2.1 1.7 2.3 3.1 4.4 4.7 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.9 3.9 3.4 4.2 4.6 4.8 5.2 Langfristiger Zinssatz

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

Country/Pays/Land: SWEDEN Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 3 666 9.7 30.5 18.6 11.1 5.6 -0.3 -4.3

Logement Renovation 4 915 3.4 3.1 4.4 5.9 3.8 2.5 1.9

Wohnungsbau Total 8 581 5.5 12.5 10.0 8.1 4.6 1.3 -0.8

Non-residential construction New 1 729 -17.1 -11.2 -0.7 5.0 18.0 -1.9 -4.0

Bâtiments non résidentiels Renovation 4 633 -11.1 8.3 2.0 4.0 3.8 2.2 1.9

übriger Hochbau Total 6 362 -13.1 2.1 1.2 4.3 7.7 1.0 0.2

Building New 5 395 -4.3 11.6 11.6 9.1 9.4 -0.8 -4.2

Bâtiment Renovation 9 548 -4.1 5.6 3.2 5.0 3.8 2.3 1.9

Hochbau Total 14 943 -4.2 7.6 6.1 6.5 5.9 1.1 -0.4

Civil engineering New 5 082 -5.3 3.0 -6.5 8.5 4.9 4.8 3.1

Génie civil Renovation 1 169 0.9 3.0 1.8 6.0 3.2 3.0 1.5

Tiefbau Total 6 251 -4.2 3.0 -5.0 8.1 4.6 4.4 2.8

TOTAL CONSTRUCTION OUTPUT 21 194 -4.2 6.1 2.6 6.9 5.5 2.1 0.6

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 1.84 3.5 2.0 9.0 10.0 1.8 -1.2 -1.4 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 9,2600 SEK

Country/Pays/Land: SWEDEN Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 10.0 11.2 13.1 16.5 15.1 14.5 13.9 Baugenehmigungen Familienhäuser

Flats Collec tif 15.4 16.9 22.9 21.4 22.6 22.6 21.5 Mehrfamilienhäuser

TOTAL 25.4 28.1 36.0 37.9 37.7 37.1 35.4

Housing starts 1+2 family dw ellings Logements commencés Individuel 9.3 10.5 12.1 13.0 13.5 13.0 12.5 Baubeginne Familienhäuser

Flats Collec tif 12.8 17.0 19.3 21.0 21.5 21.5 20.5 Mehrfamilienhäuser

TOTAL 22.1 27.5 31.4 34.0 35.0 34.5 33.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 8.1 11.6 12.0 12.5 13.0 13.0 12.7 Baufertigstellungen Familienhäuser

Flats Collec tif 11.8 13.7 17.6 19.2 21.0 21.5 21.4 Mehrfamilienhäuser

TOTAL 19.9 25.3 29.6 31.7 34.0 34.5 34.1 Housing stock Logements existants 4 351 4 379 4 403 4 438 4 475 4 511 4 551 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zw eitw ohnungen

thereof vacancies dont inoccupé 34 26 22 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 65.0 66.0 66.0 66.1 66.5 67.0 67.3 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: SWEDEN Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 141 0.8 -45.3 11.2 3.4 44.0 10.2 -2.2 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 49 -44.0 -29.2 79.4 2.3 48.3 -8.0 77.7 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 419 -15.8 2.3 -6.6 -2.6 7.8 -6.7 -2.9 Industriegebäude

Storage buildings Bâtiments de stockage 248 -19.4 8.0 -17.7 8.3 8.8 -13.5 -10.2 Lagergebäude

Office buildings Bureaux 90 -63.7 -37.9 12.4 -10.6 63.2 31.8 -12.7 Bürogebäude

Commercial buildings Commer c es 333 27.6 -18.6 10.4 25.6 20.3 -7.1 -15.3 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles Landw irtschaftsgebäude

Miscellaneous Autres 449 -14.6 -3.7 -1.5 -1.1 10.6 1.5 0.0 Sonstiges

Total 1 729 -17.1 -11.2 -0.7 5.0 18.0 -1.9 -4.0 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 9,2600 SEK

Country/Pays/Land: SWEDEN Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 493 4.3 -0.3 -21.0 4.0 5.2 5.2 2.3 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 580 3.0 3.0 2.0 1.0 1.5 1.5 1.5 Bahnanlagen

Other transport Autres réseaux 398 -32.1 13.8 -26.2 5.0 2.0 2.0 1.5 Übrige Verkehrsinfrastruktur

TOTAL 2 471 -4.2 2.6 -17.6 3.5 3.8 3.9 2.0

Telecommunications Télécommunications 1 069 -23.1 12.8 -4.7 8.0 4.0 4.0 4.4 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 1 542 11.1 -3.3 17.4 17.0 7.0 6.5 3.9 Energie- und Wasserversorgung

Other Autres 1 169 0.9 3.0 1.8 6.0 3.2 3.0 1.5 Sonstiges

Total 6 251 -4.2 3.0 -5.0 8.1 4.6 4.4 2.8

1) At 2005 prices, excluding taxes. 1 euro = 9,2600 SEK

Country/Pays/Land: SWEDEN Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 138.5 1.5 1.8 2.4 3.1 3.4 2.9 2.4 Privater Verbrauch

Public consumption Consommation publique 78.6 0.8 0.3 0.7 1.8 1.6 1.1 0.5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 49.1 1.1 5.1 8.5 8.3 5.0 3.7 1.4

of w hich construction 20.9 -2.1 5.3 7.6 9.9 5.7 4.1 -0.2

Stocks (as % of GDP) Variations de stocks - 0.2 0.3 0.1 -0.1 -0.2 -0.1 0.0 0.0 Vorratsveränderung

Ex por ts Exportations 140.3 5.0 10.5 6.4 8.8 6.9 5.7 5.0 Ex por te

Imports Importations 118.0 4.9 6.9 7.3 8.4 7.7 5.5 4.5 Importe

GDP PIB 288.3 1.5 3.6 2.7 4.1 3.3 2.9 2.2 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 9,2600 SEK

SWITZERLAND KOF ETH Zurich SWISS INSTITUTE FOR BUSINESS CYCLE RESEARCH www.kof.ethz.ch

Yngve Abrahamsen Roswitha Kruck e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

In 2006, Switzerland’s constructing market will continue to grow, albeit at modest rates. The growth rate is likely to rise by 2.1 per cent in the current year. Building production as a whole is forecast to grow in 2007 by 1.2 per cent. In 2008 and 2009 construction volume is expected to develop further in positive direction. The 2008 and 2009 volume growth of construction output is forecast to slow down somewhat to 1.1 and 1 per cent, respectively.

% Construction by type: Total Construction by type 2005 10 Civil engineering: 8 Renovation 10.8% 6 Civil Residential engineering: 4 New construction: 10.2% New 35.3% 2

0 Non-residential construction: -2 Renovation 17.7% -4

Residential -6 Non-residential construction: 2004 2005 2006 2007 2008 2009 construction: Renovation New 11.3% Total construction output Residential construction 14.8% Non-residential construction Civil engineering

For two years, new non-residential construction shows the beginning of a recovery process after being involved in a serious crisis in 2003. Business investment decreased by more than 16 per cent. In 2004, a slight recovery was recorded. In 2005, investments in new non-residential buildings were the main contributor to growth and culminated in growth rates of 6.7 per cent. Owing to the economic recovery, new non-residential construction in most parts of the sector is expected to increase in 2006. Only the demand for education and health care remains very weak. In 2007, a further recovery is foreseen for all parts of the sector, while in 2008 and 2009 the positive development will slowly weaken. We expect growth rates for new non-residential buildings by 1 and 0.5 per cent, respectively. Repair and maintenance of non-residential buildings were strongly affected by the cyclical downturn. As a consequence, the actual recovery will bring positive growth rates, again. The boom in residential buildings will come to an end. In 2005, the number of new housing completions increased to 38,000, an absolute peak value since ten years. For this year and next there is still room for further growth. In the period 2006-2007, once more around 38,000 completions are projected annually, around 37,500 in 2008 and 37,000 in the following year. Compared to only a few years ago, the share of new housing investment of total construction increased from 31.8 per cent in 2003 to around 34.7 per cent in 2009. In terms of production values, for 2006, 0.9 per cent growth is projected, followed by 1.5 in 2007, 0.9 in 2008 and 0.2 per cent in the following year. Repair and maintenance of houses is forecast to grow in a moderate way, too. For 2006, a rise in production value of 1.1 per cent is projected, increasing to 1.5 per cent in 2007. In 2008, growth rate will fall under the 1- per cent mark and stagnate in 2009. New investments in civil engineering will decline in 2006 and 2007. The reasons are, firstly, that the biggest infrastructure constructs have been awarded, this segment will no longer provide such a big stimulus as in the past years, secondly, the complementary adjustment program (EP 04) seeks to eliminate the federal government structural deficit by 2007. An important source for financing new public infrastructure investments will be the infrastructure fund which starts in 2008. Government funds for new road infrastructure and maintenance will rise again and so will budgets for new investments and repair and maintenance in the regular road system. We expect growth rates for new investments by 1.8 per cent (2008) and 4.3 per cent in 2009. Together with 1.7 and 3.8 per cent growth in maintenance, the sector will recover from the loss of the previous years.

2 Macro-economic Outlook

The upswing the Swiss economy currently finds itself in will continue until the end of the year. GDP growth is broadly based and will reach 2.6 per cent this year. It is worth stressing that investment in machinery and equipment, which made only moderate advances in 2005, has been developing more dynamically in 2006. Overall, growth will increasingly be driven by the domestic economy. From 2007 onwards, quarterly GDP growth rates will stabilise around 1.5 per cent while the annual rates will recede from 2.6 per cent in 2006 to 2.1 per cent in 2007. Next year, the momentum from abroad will weaken. The Swiss economy will to a large extent be able to defy the slowdown in the world economy thanks to a robust growth in private consumption. The investment boom will be over in 2007, however, even though the growth rates remain positive up through the end of our forecast horizon. Employment will rise until the end of the forecast period, and unemployment will fall.

% Gross domestic product Total demand by expenditures 2005 10.0

8.0

Exports 6.0 33.9% Private consumption 42.7% 4.0

2.0

0.0

Stocks 0.1% -2.0 2003 2004 2005 2006 2007 2008 2009 Gross fixed Public capital Gross domestic product Private consumption consumption Public consumption Gross fixed capital formation formation 8.1% 15.2% Exports Imports

Private consumption will remain the genuine pillar of economic growth during next year. Growth rates will stay high up to the end of 2007. The basis for the unusually strong consumption growth will be above-average increases in labour compensation and also – particularly next year – in incomes from business and wealth. With a rate of 2 per cent, the growth in real disposable household income will next year turn out to be higher than it has ever been since 2001. The rise in employment as well as in wages, but also the good corporate results which raise incomes from business and wealth and encourage bonus payouts explain this strong income growth. The savings ratio will continue to sink until the end of the forecast horizon, something that underscores again the heightened optimism of Swiss consumers in an environment of reduced uncertainty. As in recent years, the prospects for low consumer price inflation are favourable. Next year, the rate of inflation will drop to 0.8 per cent from 1.2 per cent this year. However, the upswing pushes prices up to a certain amount as is evident from the course of KOF core inflation. The latter will rise next year to 1.0 per cent, to some extent due to increasing labour costs. While prices for goods will remain under pressure, services will become more expensive. The strongest inflationary impulse will once again come from residential rents. Against the background of a sustained upswing, the SNB will once again adjust the target range for three-month Libor by 0.25 percentage points in December. In view of almost non- existent risks for price stability, the focus of monetary policy will remain on the development of real economic variables. While an additional interest rate hike by 0.25 per cent cannot be ruled out, if it comes, then at the latest the short-term interest rate will have reached its peak. The short-term real interest rate will rise to about 1.4 per cent, which corresponds roughly to its average over the last 25 years. On the international bond markets, the returns have probably already reached their peak this past summer. The Swiss franc, being relatively low priced currently, will rise somewhat against the euro in the forecast period, as the narrowing of interest rate differentials suggests. By the end of 2007, the exchange rate will be around 1.56 CHF/EUR.

3 Housing Market

Following the strong increase in total construction spending last year, when 2.9 per cent more funds (€ 32,997 million) flowed into construction investments and public r&m works, the signs point towards a further, but more moderate expansion in 2006. The growth rate is expected to reach 2.2 per cent in the current year. The development is being driven almost exclusively by non-residential construction, which increases by 5.5 per cent. Residential construction will be only a weak contributor. In 2007, growth rate will be to 1.2 per cent higher than in 2006. In 2008 and 2009, we expect only a growth rate by 1 per cent, on average. Between January and June 2006, some 24,500 building permits were issued, i.e. 3.3 per cent more than in the same period of 2005. In the first half of this year, the number of apartments in construction has seen an increase of 7.4 per cent. However, the latest residential construction figures show that a renewed downturn could soon set up. According to the Swiss Federal Statistic Office, the level of residential construction in the five largest cities (Basel, Bern, Geneva, Lausanne and Zurich) increased only by 0.9 per cent. Declines in building completions in these cities and their surrounding areas - the sharpest decline was in Lausanne, which saw a drop of 31 per cent - point to slowing growth, which is already beginning to feed through into our forecast. We are forecasting a moderate rise in residential building by 1 per cent in 2006 and 1.5 per cent in 2007. In the forecast period, there will be only a slight increase in residential construction output by 0.9 per cent in 2008, investments will stagnate in the following year. Nevertheless, residential construction activity will be at high level. Owing to the large number of projects that have been approved and the large proportion of these that are actually being under construction, we estimate that there will be a net expansion of around 38,000 new homes in 2006 which will lead to a relaxation in the tight market. Although the increase of construction output activity will weaken slightly in the coming years, housing completions to approximately 37,000 to 38`000 units p.a. are expected for the next three years. Therefore, it is expected to see vacant apartment rates increasing again from 2006 onwards. Since the turn of the millennium, an average of only 33,000 homes has been absorbed by the market each year. This year, the vacancy rate will shoot up again from 0.99 in 2005 to around 1.06 per cent this year. In the period 2007 to 2009 the number of vacant homes as a proportion of the total housing stock may well reach in average 1.3 to 1.7 per cent, respectively. Swiss living space tends to be rather scarce. The vacancy rate has only seldom stood above 1.5 per cent. This was last the case in 1997 and 1998. Since 1999 vacancies have dropped again significantly, which to a large extent was due to the decline in new construction activity. While demand is increasing more rapidly in the large centres, supply remains below average. This explains why market tightness hit the centres earlier than it did in rural areas. The non-occupancy rate in the wealthy communities has not exceeded the 1per cent mark during the last ten years. This is due to a strong, accelerating demand and a structure with a high proportion of owner-occupied homes (condominiums). In the rural communities, where investment activity was high and was accompanied by a modest growth in demand, markets continue to be more liquid. After a period of stagnation, a recovery in rental apartment construction has arrived. By far the largest contributor to the growth in residential construction since 2001 is the production of apartments in multi-family units. Real estate investors, in particular, have rediscovered rental apartments as investment properties, and that there will be a corresponding expansion of supply in this segment. However, illiquid markets are expected to persist, especially in the major cities. During the last decade, newly built homes were on average very large in size. As the population ages, demand for very large homes will fall. Large homes are wanted mainly by people between the ages of 35 and 45, precisely the age group that is set to shrink

368 © EUROCONSTRUCT Munich, December 2006 Switzerland drastically in years to come. Most additional demand will again fall on 3½ and 4½ -room apartments (normally, 3½ rooms means that one of three rooms is large enough to be divided into a living room and a dining room part, kitchen and bathrooms don’t count as separate rooms). Compared with Switzerland’s existing housing stock, newly built homes will continue to be very large. A 3½ -room apartment offers average living space of 85 m², while 4½-room apartment offers 115m². Demand for the very smallest apartments will continue to shrink. By contrast, the market for 2 1/2-room apartments should become much livelier. This segment should profit from various trends. For example, there is a growing demand for first homes from households aged between 20 and 30, and a strong rise in demand for second homes in the major centres. Apartments with 2½ rooms are also the most popular option for single older people. With the current demand overhang, it is easy to charge more for newly built rental accommodation. In recent years, a gap has opened up between rents charged when a new contract is signed and existing rents. This increasing gap between rents for new and old homes, cannot always be explained by better quality and greater floor space on the part of new buildings. Changes in existing rents are governed by rent law. This dictates that rents are based on costs and on local standards in the immediate town or district, though in practice the first factor is more significant. The most important things that drive up rents are increases in mortgages rates, and consumer price inflation. Since the beginning of November 2005, interest rates have started rise again. Therefore, we expect variable mortgage rates to be adjusted upwards. Although the inflation rate will be moderate, existing rents are likely to go up by 2.5 per cent in this year. This imbalance between rents charged when a new contract is signed and existing rents can persist in the short run; but in the longer term the gap will have to close. The supply of rented apartments is set to expand significantly over the next years. As these homes are built, the tight market for rental accommodation should continue to relax. Rents on new contracts will therefore only go up by around 1 per cent in 2006. By definition, price development on the real estate market is directly related to vacancy rates There is seldom a balance between supply and demand on the real estate market. Vacancy levels vary; there is a corresponding rise in prices as a result of excess demand or a shortage of supply, whereas prices fall when the market condition reverse. In order to compare price trends in different municipalities, the IAZI Real Estate Information and Training Centre has valued a standard condominium in every municipality in Switzerland. According to this study, the price of condominiums has risen strongly over the last six years in the metropolitan centres and conurbations. This trend has been driven partly by the low increase in supply in the years until 2002. Alongside the urban centres, rural and high-income municipalities with good transport connections have seen prices rise sharply. Canton Geneva has experienced the greatest price rises of all. This can be explained by the minimal expansion in supply and the constantly high demand. Price increases in the tourist municipalities have also been substantial, driven by the additional demand for second homes. The highest prices for owner-occupied property are for condominiums in the major centres of Geneva, Lausanne, Basel, Berne and Zurich. High prices are also being paid in the more central parts of conurbations. Good reachability has a positive influence on selling prices. The bubble on the owner-occupied market causes considerable concern. Many people in the real estate business are asking themselves whether the next few years are going to bring a trend similar the one seen in the second half of 1990s, when the residential market underwent a severe correction. Will the sharply expanded supply of residential property continue to find takers, or does the market face another correction? A recently published study by the Credit-Suisse group1 showed that average prices in Switzerland are not excessive, but that individual submarkets are showing the first signs of overheating. The study showed the following results:

1 Neff, Martin: Real Estate Bubble in Switzerland?, Spotlight, December 2005 © EUROCONSTRUCT 369 Switzerland Munich, December 2006

• Between the end of the 1970s and the peak of 1989, prices2 in real terms for single- family dwellings in Switzerland increased by over 60 per cent (70 per cent for condominiums). In the subsequent 10 years, real supply prices fell again by approximately 60 per cent. Today, in real terms the price level for single-family dwellings is just 10 per cent above that of 1970 (15 per cent in the case of condominiums). • A look at the trend line shows that real term prices for single-family dwellings since 1970 have remained largely constant. A positive trend is discernible for condominiums, though after converting into an annualized rate, it only comes to 0.5 per cent. It can be assumed that the higher growth of prices is attributable to the higher quality standard of the average condominium today compared with 1990. • A comparison with the house price figures in other countries shows: between 1997 and 2005 real house prices increased by 73 per cent in the US, by 87 per cent in France, by 145 per cent in Spain and by 154 per cent in the Unites Kingdom. In comparison, price development in Switzerland must be classed as extremely modest. • The picture is quite different for real-term house prices trends in some of the world`s major cities. Cumulative price growth in Zurich and Geneva is lower – sometimes much lower – than in other large cities. Prices have more than doubled in London over the last decade; in Boston and London they have risen by more than 80 per cent. Paris bottomed out in 1980; and prices have risen by approximately 70 per cent since then. In Zurich condominium prices have gone up by 32 per cent in the last five years and in Geneva by approximately 50 per cent. Price trends do not differ very strongly between the regions. A large gap has grown up based on build quality. The price of a condominium with low build quality has gone up by 6.7 per cent over the last five years, while in the upper segment prices have gone up by no less than 28.3 per cent. However, in some region condominium prices have gone up very sharply. This has been in Zurich, Geneva, but also in low-tax municipalities. Common to all these is that the supply of new condominiums has not kept pace with demand. If supply in these regions is substantially expanded in the next years, there is a risk of significant price falls. But this does not seem likely within the near future. Owing to the improving economic situation and a high demand to rental apartments residential renovation and maintenance activity increased by 4.8 per cent in 2005. This year a growth is forecast only to about 1 per cent, followed by growth rates between 1.5 and 0.1 per cent in the years further ahead. Demand for suitable and cheap rental dwellings is high. Analyses show 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. The physically aged and conceptually obsolete residential buildings are to be accommodated to contemporary needs. 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. A large number of objects built during the boom that followed World War II don’t match today’s demand and will favour strategies of demolition and compensation by new buildings in the next cycle of renewal.

2 The prices in question for owner-occupied apartments and single-family dwellings are supply prices, i.e. prices that are demanded in the market by sellers, and not the prices that are actually paid (transaction prices). This supply index tends to overshoot the cycle at its turning points, both at the peaks and the troughs. This data also does not sufficiently reflect changes in the quality of residential property over the course of time. However, it is the oldest existing and probably best-known series of real-estate price data in Switzerland. Despite its drawbacks, this data provides a good overview of long-term price development. 370 © EUROCONSTRUCT Munich, December 2006 Switzerland

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, construction activity in non-residential buildings will increase by about 6.1 per cent. Also renovation and maintenance will return to a positive growth rate in 2006 (+ 4.6 per cent). A more moderate growth is foreseen in the forecast period 2007 to 2009. Both new construction and r&m are forecast to grow next year by 2.6 per cent and between 0.9 and 0.4 per cent in the years further ahead. Educational and Health Building After the drop in 2005 (- 7.2 per cent), educational buildings output will stagnate in 2006, but will rise again in the following years from € 507 million to a volume of € 530 million or 4.1 per cent, in 2009. Educational policy put its stamp particular on new construction activities for buildings and renovation of old ones. In the last years this positive development, particularly in renovation and maintenance, was stopped by financial restrictions of public households. Due to the economic recovery, fiscal revenue will rise and we expect more spending in educational buildings. After a moderate rise by 0.3 per cent in the current year, investments in educational buildings is likely to accelerate by 1.6 per cent in 2007 and 1.8 per cent in 2008. In 2009, a growth by 0.8 per cent is forecast. 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 also is 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 3.8 and 1.2 per cent. Construction volume will stabilise at a volume of around € 224 million in 2009. Industrial/storage building Industrial and storage buildings make up only a small part of the different estate portfolios. In the past, investments worsened sharply due to the cyclical downturn. In 2006, growth in the Swiss economy saw further acceleration. Since then all the signs are pointing to continued strong momentum. A particularly positive sign is the recent jump in industrial capacity utilisation, which has now reached its highest level since 1991 thanks to bulging order books, thus clearly indicating the need for additional production capacity. Companies are also being motivated to invest by improved earnings situations and the ongoing cheap cost of borrowing. Therefore, new building expenditures by private clients for industrial and storage real estate will rise by 8.1 per cent in 2006 and stood at € 1,565 million, which corresponds to a share of around 30.3 per cent of non-residential construction. In 2007, investment activity is likely to weaken somewhat. A year-to-year increase of 2.4 per cent can be expected. We are forecasting only a slight increase in construction activity in 2008 and 2009 by 0.7 and 0.6 per cent, respectively. 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 previous years building activity dropped dramatically, due to significant overcapacities in office-space segments. Construction volume decreased from € 1,183 million in 2002 to € 850 million in 2005, that’s a decline of about 30 per cent. In the current year, a recovery by 7.0 per cent will be possible. For 2007 and the forecast period 2008/09 less construction activity is accounted for: output in this sector is likely to increase by 1.9 per cent in 2007, followed by a moderate rise by 0.5 per cent in 2008. It will stagnate in 2009.

The office building markets in Zurich and Geneva differ considerable. In Zurich, the annually measured vacancy rate increased further in 2005. The centre of the city 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 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. The expansion of office space over the next few years will also be concentrated on those regions. Since the beginning of 2006, there has been again observed availability decrease in office space. This could signal a turn in the market situation and create good conditions for new development. There is a number of projects with construction permit waiting to be realised. Sihlcity in Zurich-Süd is currently in construction. 30,000 m² of office will be ready for new tenants in spring 2007. Around 50,000 m² of offices are planned in Zurich’s central district 5, including Switzerland’s tallest building, which is planned for the Maag-Areal site. In 2006, demand for office space rose significantly and the market passed the peak of office non-occupancy. In the longer term, however, higher non-occupancy is likely. Despite better employment prospects and greater demand for space, we expect rents to fall. The main reason for this correction can be found in the artificially high asking prices seen in recent years. We expect the biggest price corrections of all in Zurich-Nord, Zurich-West and Glattal. Geneva is one of the world’s important conference and congress venues, and is also renowned as a global commercial club. Organizations like the UN and WTO have their head office here. Many banking institutions have also chosen Geneva as a base. Construction activity in the city of Geneva has been much lower than on other major Swiss centres in recent years. As a result, the market for office space is still not particularly liquid. Supply and demand are well balanced and new demand for large office space can only be satisfied with development projects. The newly built office space that has come onto the market is mainly outside the centre of town. Planning activity is underway in major submarkets and the airport region: The construction of these developments will only start with pre-lets in place. Unlike in the city of Geneva, vacancy rate in Geneva conurbation are already comparable with the average rate for Switzerland. Commercial buildings Retail trade, wholesale trade and the hotel and catering branch are the most important part of the sector of commercial buildings. Following the sharp expansion in 2004 - building output rose by 46 per cent – construction output dropped by 10.7 per cent, in 2005. The outlook for 2006 is positive: the construction output is expected to be 9.8 per cent higher than 2005, followed by a more modest growth rate of 3.6 per cent in 2007. In the following years, construction output is likely to grow by 1.7 and 1.1 per cent, respectively. The construction volume will increase from € 817 million in 2005 to € 956 million or 17 per cent in 2009. The structure of the Swiss retail sector is in constant flux. The battle for market shares is being fought increasingly fiercely on the price front. In 2005, the sector was worried viewing the market entry of the German hard discounters Aldi and Lidl, which have secured considerable market shares in their home market by way of ultra-low prices. Although it was foreseeable, that German price levels could not be transposed to Switzerland without some adjustment, the two domestic market leader – Coop and Migros – engaged in a pitched battle on prices prior to the advent of the new players, with the only clear winner being the consumer. The traditional retail sector is also under continuing pressure for structural reasons, however. For example, growth in private consumption is to be found primarily in services such as leisure activities and healthcare, whereas the market for everyday and durable goods is

372 © EUROCONSTRUCT Munich, December 2006 Switzerland much more saturated and offers less potential. Furthermore, the most dynamic growth in these categories – albeit from a still moderate base - is in online sales, where foreign providers are also positioned. The combination of all these trends means that the established retail channels now only account for roughly a third of overall private consumption. The market entry of foreign discount traders is also primarily expected to exert further pressure on prices and thus on margins, while fears of dwindling market shares are less prominent. However, the cut-throat price battle for market shares will also continue to be waged via a considerable expansion in retail space. 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 custom away from other stores and points to a continuing concentration in the sector. The market for r&m is supported by a steadily increasing building stock and the continuing process of depreciation 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 4.5 per cent, followed by a growth rate of 2.6 per cent in 2007. In the years ahead, growth will continue, albeit at a modest rate. Nevertheless, from 2006 on an upturn to a construction volume of about € 6,000 million 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 going infrastructure projects (NEAT and Rail 2000) output in the civil engineering sector has remained at a high level. Due to the complementary adjustment program (Entlastungsprogramm 2004 – EP 04) the spendings for public investments were cut by € 700 million for roads and railways. The EP 04 seeks to eliminate the federal government structural deficit by 2007. Therefore, in 2005, growth rate dropped by 4.7 per cent. 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 decrease by 0.2 per cent and reach a volume of € 6,900 million. About 48 per cent of this amount concerns new investment. While engineering output will decrease by 1.9 per cent in 2007, growth is likely to pick up again in 2008 by 1.8 per cent due to the planned “infrastructure fund”. A further recovery is foreseen for 2009 by 4 per cent. Construction work for the flat rail link under the Gotthard is progressing well. Following the start in April 2006 of preparatory work for construction of the Ceneri Basis Tunnel, the official construction started. The Ceneri Basis Tunnel is an important component of the future flat rail route through the Alps. The 15.4-kilometres-long tunnel between Camorino and Vezia, near Lugano, is scheduled to open in 2019. In 1992, the majority of the Swiss populace voted to set the NEAT project in motion. Fourteen years later, it only seems to make headlines when cost projection surge. Needless to say, a project of this kind is not inexpensive, and officials “made the mistake of giving exceptionally low estimates at the beginning” to make it more attractive to voters. AlpTransit, the company heading construction, maintains that more than half of the costs increases have been the result of “politically influenced delays”, and investment in “cutting edge technology and safety.” Funds for the NEAT are allocated from petrol and sales tax, loans (only 15 per cent), and just over half from freight tax. The most recent estimate for the entire NEAT project was € 11,500 million, up from € 6,525 million in 1990. Through the

© EUROCONSTRUCT 373 Switzerland Munich, December 2006 financial means from the FinöV Fund (Fund for public Transport Infrastructure Projects) Switzerland is investing a large amount in modernising its rail infrastructure. The first phase of Rail 2000 was successfully put in operation in the end of 2004 (final cost: € 3,811 million) Not long ago plans were being drawn up for a second stage in the Bahn 2000 programme. Changes in transport policy, a shortfall in federal funding and an increase in the cost of building Switzerland`s two base tunnels, plus the lack of a consensus on what should be included in a second stage, have altered the situation, and future developments are no longer so clear cut. The original intention had been to move ahead immediately after the first stage was completed, but this proved impossible. However, other major projects whose funding was approved by referendum in 1998 are unaffected: The Lötschberg and Gotthard base tunnels, and the programme to reduce railway noise, which covers both modifications to the rolling stock fleet and measures such as sound barriers to cut noise in built-up areas. The cost of these schemes is covered by the FinöV, also approved by voters in 1998. Also unaffected are the plans approved by the Swiss parliament in March 2005 to improve access to the European high speed network. So work on four out of five major railway development projects is in hand. Progress is also being made with the fifth, which is a programme to develop Switzerland`s rail service to suit the needs of customer in 2030. Representatives from SBB and the Transport Ministry are currently looking at specific proposals for the future development of the network with the objective of establishing a clear framework during summer 2006. Dubbed ZEB (Future Development of Rail Projects), this envisages a step-by-step expansion of public transport services with a series of small improvements to the railway infrastructure. ZEB calls for incremental improvements that will benefit both passenger and freight traffic. Construction of the base tunnels is expected to cost up to € 1,292 million more than originally planned, which leaves between € 2,584 million and € 4,522 million for ZEB. The essential requirement is that projects should generate the greatest possible market benefit, at the same time eliminating bottlenecks. Because of the funding shortfall, major schemes such as a tunnel through the Jura from Olten to Liestal will probably have to be excluded. Originally, the proposals envisaged that the railways would pay interest on the FinöV loans and pay them back, but it became clear during 2004 that the railways would not have sufficient funds available to do this. the Swiss parliament approved a change in funding arrangements in May this year, which means that in future the government will not grant the railways any loans for FinöV projects that must be pay back. Loans already taken out on the market will be changed into advances from the fund, and at the same time the limit on advances will be raised to € 5,168 million. This will allow all projects that have already been started or authorised to be securely funded. Switzerland is investing a huge amount into the future of its rail infrastructure in order to cope with mobility for the next decades in an efficient and sustainable manner. An important source for financing will be the infrastructure funds which will start in 2008. This fund is limited to 20 years and will total to around € 13,000 million. In the detail, € 9,000 million are provided for the completion and the removal of chronic bottlenecks of the entire national road network. Around € 4,000 million are project of modernization of public and private agglomeration traffic. They include rail projects around Zurich, Geneva and in southern Ticino. • Geneva is planning a new line linking Cornavin-Eaux-Vives-Annemasse (CEVA). Total cost: € 620 million. The cross-border agglomeration of Geneva urgently needs this new railway line. • Zurich needs a new diameter line (DML) with a new underground platform at the main railway station. Total cost: € 1,098 million. This project not only serves the conurbation of Zurich but will also have positive effects upon the whole rail network between St. Gallen and Geneva. Until this is realised further investments of several

thousand million are necessary. The sheer extensions needed on complementary lines are alone said to require € 2,000 million. • The link between Mendrisio (CH) and Varese (I) is part of the Ticino regional express (S-Bahn); Yet it will also link up with the Malpensa airport of Milan and connect to the Simplon-Lötschberg axix. Cost for the Swiss part: € 84 million. The Federal authorities have commissioned themselves to contribute € 355 million to the CEVA. Following the positive decision by its electorate the canton of Zurich will contribute some € 388 million towards the underground station. The rest will be financed by the Infrastructure Fund. The Confederation will pay 50 per cent of the cost to the MEVA. Although the economic recovery will entail higher increase in government revenues, modest rises in r&m spending should still be recorded. We are forecasting a stagnation in 2006 and a decline by 1.6 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 1.7 per cent. In 2009, Overall demand for renovation and maintenance in civil engineering will rise by 3.8 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 maintenance 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 Intermediation Services Indirectly Measured (FISIM) is treated as intermediate consumption and is not allocated to production sectors and final expenditure categories. Public Consumption and the consumption of the Non Profit Institutions Serving Households (NPISH) are measured at input prices.

All construction figures in Table 2 to 4 are without VAT. The normal Swiss VAT rate is 7.6 per cent, which is also used for construction activities.

Country/Pays/Land: SWITZERLAND Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 7 409 7 470 7 532 7 594 7 656 7 719 7 783 Bevölkerung

Households ('000s) Ménages 3 283 3 311 3 339 3 368 3 393 3 416 3 438 Haushalte

Unemployed ('000s) Chômeurs 146 153 149 132 117 110 107 Arbeitslose

Unemployment rate (%) Taux de chômage 3.7 3.9 3.8 3.4 3.0 2.8 2.7 Arbeitslosenquote

Change of GDP Variation du PIB -0.2 2.3 1.9 2.6 2.1 1.5 1.8 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0.6 0.8 1.2 1.2 0.8 0.6 0.6 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction -1.4 1.5 2.2 1.5 0.7 -0.5 -0.9 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 0.2 0.4 0.7 1.4 2.1 2.1 2.3 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 2.7 2.7 2.1 2.6 2.3 2.3 2.5 Langfristiger Zinssatz

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

Country/Pays/Land: SWITZERLAND Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 11 662 18.5 12.8 5.0 0.9 1.5 0.9 0.2

Logement Renovation 3 722 10.8 1.7 4.8 1.1 1.5 0.9 0.1

Wohnungsbau Total 15 384 16.4 9.9 4.9 1.0 1.5 0.9 0.2

Non-residential construction New 4 870 -16.2 1.8 6.7 6.1 2.6 1.0 0.5

Bâtiments non résidentiels Renovation 5 827 -2.4 -4.2 4.5 4.6 2.6 0.9 0.3

übriger Hochbau Total 10 697 -9.0 -1.6 5.5 5.3 2.6 0.9 0.4

Building New 16 532 4.9 9.4 5.5 2.4 1.8 1.0 0.3

Bâtiment Renovation 9 549 2.1 -2.0 4.6 3.2 2.2 0.9 0.2

Hochbau Total 26 081 3.8 4.9 5.1 2.7 2.0 0.9 0.3

Civil engineering New 3 354 -5.3 -4.7 -1.6 -0.5 -2.2 1.8 4.3

Génie civil Renovation 3 562 0.4 3.9 -7.4 0.0 -1.6 1.7 3.8

Tiefbau Total 6 916 -2.5 -0.3 -4.7 -0.2 -1.9 1.8 4.0

TOTAL CONSTRUCTION OUTPUT 32 997 2.2 3.7 2.9 2.1 1.2 1.1 1.0

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 4.67 0.9 6.5 7.9 -2.7 -0.2 0.7 0.6 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 1,5481 CHF

Country/Pays/Land: SWITZERLAND Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel 7.1 7.3 6.9 7.0 7.1 7.2 7.1 Baugenehmigungen Familienhäuser

Flats construction not started Collec tif 21.9 23.7 25.0 26.0 25.5 25.0 24.5 at Dec. 31 Mehrfamilienhäuser TOTAL 29.0 31.0 31.9 33.0 32.6 32.2 31.6

Housing starts 1+2 family dw ellings Logements commencés Individuel 10.7 11.3 11.5 11.8 11.4 11.2 11.0 Baubeginne Familienhäuser

Flats under construction Collec tif 34.4 41.4 45.9 47.0 46.5 45.5 44.5 at Dec. 31 Mehrfamilienhäuser

TOTAL 45.1 52.7 57.4 58.8 57.9 56.7 55.5

Housing completions 1+2 family dw ellings Logements terminés Individuel 11.5 13.0 12.4 11.2 11.4 11.7 11.7 Baufertigstellungen Familienhäuser

Flats Collec tif 20.6 24.0 25.6 26.8 26.5 25.8 25.1 Mehrfamilienhäuser

TOTAL 32.1 37.0 38.0 38.0 37.9 37.5 36.8 Housing stock Logements existants 3 672 3 710 3 748 3 788 3 827 3 866 3 903 Wohnungsbestand

thereof second homes dont résid. secondaires 514 521 529 538 546 555 563 davon Zw eitw ohnungen

thereof vacancies dont inoccupé 33 33 37 40 48 56 66 davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 34.8 34.8 34.9 34.9 35.1 35.2 35.4 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: SWITZERLAND Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 507 -11.7 -3.0 -7.2 0.3 1.6 1.8 0.8 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 203 4.9 -8.4 -18.1 2.3 3.8 2.4 1.2 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 1 213 -24.7 -8.9 117.8 8.1 2.4 0.7 0.6 Industriegebäude

Storage buildings Bâtiments de stockage 234 -18.3 -3.9 1.2 8.1 2.4 0.7 0.5 Lagergebäude

Office buildings Bureaux 850 -18.4 -17.8 7.6 7.0 1.9 0.5 0.3 Bürogebäude

Commercial buildings Commer c es 817 -15.2 45.8 -10.7 9.8 3.6 1.7 1.1 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 238 -0.4 6.9 -14.9 0.5 2.0 -2.0 -3.9 Landw irtschaftsgebäude

Miscellaneous Autres 808 -19.0 5.1 -19.2 3.8 2.8 1.6 0.8 Sonstiges

Total 4 870 -16.2 1.8 6.7 6.1 2.6 1.0 0.5 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 1,5481 CHF

Country/Pays/Land: SWITZERLAND Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 2 621 0.2 1.4 -10.0 -2.3 -1.8 7.4 10.5 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 2 406 -8.8 7.2 1.5 -0.9 -5.3 -3.3 0.9 Bahnanlagen

Other transport Autres réseaux 115 4.4 -7.7 -18.4 -1.7 -0.6 25.7 5.1 Übrige Verkehrsinfrastruktur

TOTAL 5 142 -3.7 3.6 -5.2 -1.6 -3.4 2.9 6.2

Telecommunications Télécommunications 158 -10.7 -18.5 -7.0 -9.0 -5.0 -4.0 2.0 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 1 011 7.5 -7.0 3.7 6.0 3.0 -1.0 -2.5 Energie- und Wasserversorgung

Other Autres 605 -4.3 -12.6 -12.1 3.8 3.0 -0.6 -1.7 Sonstiges

Total 6 916 -2.5 -0.3 -4.7 -0.2 -1.9 1.8 4.0

1) At 2005 prices, excluding taxes. 1 euro = 1,5481 CHF

Country/Pays/Land: SWITZERLAND Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption 2) Consommation privée 177.5 0.8 1.5 1.3 1.9 2.1 1.9 1.6 Privater Verbrauch

Public consumption Consommation publique 33.6 2.6 -0.8 -1.6 -0.3 0.4 1.3 1.3 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 63.1 -1.4 4.5 3.2 3.6 2.8 1.6 1.0

of w hich construction 29.6 1.8 3.9 3.5 2.3 1.1 1.0 0.9

Stocks (as % of GDP) 3) Variations de stocks 0.2 0.5 0.3 0.1 0.6 1.3 1.1 1.1 Vorratsveränderung

Ex por ts Exportations 140.9 -0.4 8.4 6.4 7.1 2.7 3.3 5.2 Ex por te

Imports Importations 121.0 1.0 7.4 5.3 7.8 4.3 3.6 4.9 Importe

GDP PIB 294.3 -0.2 2.3 1.9 2.6 2.1 1.5 1.8 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 1,5481 CHF 2) Including final consumption expenditure of NPISH's, ISBLM inclus, einschließlich POoE 3) Including net aquisitions of valuables, net aquisitions d'objets de valeur inclus, inkl. Nettozugang an Wertsachen

UNITED KINGDOM Experian www.business-strategies.co.uk

Kelly Forrest e-mail: [email protected]

EUROCONSTRUCT Conference Munich, December 2006

1 Summary

After a subdued year in 2005, when the UK economy grew by only 1.9 per cent, a return to trend of around 2.5 per cent is expected over the next four years. The Monetary Policy Committee (MPC) has largely taken an upbeat view of the prospects for the economy, hence its recent interest rate rise, to 4.75 per cent, the first for two years, with the possibility of more to come.

In contrast, however, growth in construction activity seems to have stalled at present. Output in the first half of this year has been flat compared with the same period of 2005, and the evidence suggests that some reining in of public investment, particularly in the renovation sectors, is counteracting the strength of some of the private sectors. While this has to a certain extent been expected, the speed at which the tap seems to be turning off has caused surprise. Thus we forecast construction output will increase by just 0.6 per cent in 2006, rising to 2.6 per cent in 2007, 3.4 per cent in 2008 and falling marginally to 2.9 per cent in 2009.

The public housing sector suffered an unexpected decline in output last year, despite new orders being on an upward path since 2003. However, strong growth in the sector is predicted to resume this year with an output increase in double-digits, followed by three further years of good, if more moderate, rises in 2007, 2008 and 2009. Activity will be driven not only by the provision of more affordable and key worker housing in the south, where demand is most acute, by also by the requirement to tackle problems of low demand and market failure in other parts of the country.

The signals for private house building activity are rather mixed. The sector experienced the soft landing that everyone was hoping for, with no general fall in house prices. In fact, the most recent evidence suggests strengthening house price inflation. Furthermore, the private sector is very much embedded in the drive to meet housing demand, especially in the south east, and in helping to address problems of low demand elsewhere. Despite these factors, private housing output is struggling to show any further growth at present and a static outturn for this year is looking increasingly likely. For 2007, 2008 and 2009 we still believe that there will be more growth in the sector, which we put at 3 per cent per annum. Overall the residential sector has fared reasonably well and after a further minor decline in 2006, we expect growth to resume.

Public non-residential output is continuing to subside, partly on the back of a more constrained outlook for public finances, but also as increasing amounts of health and education construction are delivered through the PFI/PPP route and thus is reported in the private commercial sector.

Private non-residential output is expected to fare better. The office recovery in London and the South East is well underway, and PFI/PPP work in the health and education sub-sectors is continuing to increase. By 2008 work on some of the Olympic venues, which we assume will be recorded in the sector, will have begun, thus our forecast is for good growth throughout the period to 2009. However, the current boom in the construction of storage and distribution facilities must soon come to an end, by 2008 growth is forecast to be relatively subdued in this sub-sector.

The continuing decline of civil engineering output this year is puzzling in the light of a 34 per cent increase in new orders in 2005. The suspicion is that, although long-term framework agreements are now supposed to be reported to the DTI on an annual basis, in many cases this is not in fact happening, and the total value of the agreement is being reported in one tranche. Nevertheless, the very robust increase in orders last year must lead to some turnaround in the trend in output soon. We continue to expect strong growth post 2006.

2 Macro-economic Outlook

GDP grew by 1.9 per cent in 2005, the lowest rate for 13 years. The weakest sectors were manufacturing and construction, with declines in output, while distribution, hotels and catering saw much lower growth than in 2004. Overall manufacturing output declined by 1.1 per cent, while the non-manufacturing side of the economy expanded by 2.4 per cent.

In August the Monetary Policy Committee (MPC) raised interest rates by 25 basis points to 4.75 per cent, the first rise for two years. The consensus among analysts is that there may well be a further rise this year to take the rate to 5 per cent by the year-end.

Increases in employment seem to have stalled for the present with the employment rate marginally down in the three months to July, at 74.6 per cent quarter-on-quarter. The LFS/ILO unemployment rate rose to 5.5 per cent over the same period and is now 0.8 per cent higher than its trough a year ago.

Manufacturing output increased by 0.7 per cent in the three months to August 2006 compared with the previous quarter while the service sector grew by 0.9 per cent over the three months to July, with financial and business services being the most buoyant sector.

Key macroeconomic indicators in the United Kingdom to 2009 (Annual percentage change) 2003 2004 2005 2006 2007 2008 2009 GDP (2002 prices) 2.7 3.3 1.9 2.6 2.4 2.5 2.9 Household consumption 2.9 3.4 1.4 2.2 2.2 2.3 3.1 Government consumption 9.6 7.3 7.1 5.4 3.6 2.5 2.1 Unemployment rate 3.0 2.7 2.8 3.0 3.1 3.1 3.0 Inflation 1.4 1.3 2.0 2.3 2.2 1.6 1.4 Source: Euroconstruct.

Looking forward, Experian’s latest forecast is for GDP growth to return to around trend over the next three years, with 2009 being the best year. In real terms, GDP is forecast to increase by around 8 per cent between 2006 and 2009. The manufacturing sector is likely to return to growth, although increases in output will be fairly modest, but the main drivers of the economy are expected to be the transport and communications and financial and business services sectors. Output in these two sectors is forecast to increase by around 15 per cent in real terms over the three years to 2009.

The more buoyant economy is likely to lead to higher household consumption growth than was seen in 2005, although a return to the strong annual increases seen in the earlier part of the decade is not on the cards. Consumer price inflation (CPI) is expected to overshoot the Government’s target of 2 per cent this year and next, but as the long-term effects of recent energy price rises work their way out of the system, the rate should fall below target in 2008 and 2009.

Growth in total investment is predicted to remain at reasonable levels over the three years to 2008, but this disguises a fall in Government investment in 2007 and 2008 as a result of the more constrained outlook for public finances. Unfortunately, as a significant slice of public investment is targeted on the built environment, this fall does not bode well for construction.

Sentiment regarding interest rates has changed quite a bit during the course of the year. Whereas earlier on the consensus was for no change or a possible rate cut during 2006, the MPC’s surprise increase in August has lead to a belief that a further rise may well be on the cards before the end of the year. Our belief is that the rate is likely to hover between 4.5-5 per cent to the end of 2007 before declining a little in the following year.

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

Source: National Statistics, Experian.

3 Housing Market

Valued at €76.8bn in 2005 residential construction output in the UK dipped marginally from 2004. However, while the effects of wavering house price growth, fewer transactions and concerns about affordability dampened developers’ optimism a little, new work output nevertheless continued to climb. The residential renovation market on the other hand faltered. Highly indebted consumers showed reluctance to invest in extending or improving their homes. DIY expenditure, accounting for around 20 per cent of the residential renovation market, suffered a 4 per cent decline. New work output rose by 2.6 per cent to €29.2bn. Renovation output fell by 2.9 per cent but at €47.6bn continued to take the lion’s share of residential construction in the UK.

A return to growth overall is unlikely in 2006 and we estimate residential output will decline marginally. Weakness on the renovation side will once again eat into any expansion in new work output. From 2006 growth is forecast to resume and we expect healthy real growth of between 3 and 3.6 per cent year-on-year to 2009.

Residential new

In 2005 public housing output accounted for approximately 14 per cent of total residential construction output. However, with average house prices in the UK nearing €242,000 the shortage of affordable housing is a priority for the government. Funding has increased and is set to rise further over the short term. In 2006 we estimate that public housing will account for a little over 16 per cent of total residential construction output.

In the first half of 2006 the Department of Trade and Industry (DTI) report new work orders shot up by 33 per cent to €1.1bn. New work orders provide an indication of the future path of output. In 2005 they climbed more moderately by just 4 per cent. On a four-quarter moving total basis orders stagnated in the middle of last year but have been on an upward trend for the past three quarters.

In contrast to the fall in output both starts and completions rose in 2005, the former by 10 per cent to 22,500 and the latter by 8 per cent to 22,400. This suggests that registered social landlords are getting more per £ than in 2004. At the time of writing, starts and completions are only available for England for the first half of this year, with the former up by 17 per cent and the latter by 16 per cent compared with the same period of 2005. As England accounts for around 80 per cent of GB starts and completions, it gives a good indication of the direction of movement for the year.

Housing Corporation funding for affordable housing is planned to be 18 per cent higher in the 2006-08 period than the 2004-06 one, at €5.7bn. However, private house builders can now bid for this pot of money and it is by no means clear to which sector output from their use of this funding stream will be allocated – public or private.

The nine Pathfinders under the €731m Housing Market Renewal (HMR) programme have recently been running into some controversy. Pathfinders are located in Birmingham and Sandwell, East Lancashire, Humberside, Manchester and Salford, Merseyside, Newcastle and Gateshead, North Staffordshire, Oldham and Rochdale, and South Yorkshire. When the programme was originally set up, demolition of existing properties was to be a last resort, but this has increasingly been suggested as the primary way forward. On Merseyside, for example, the demolition of 120,000 houses has been proposed to make way for “modern sustainable accommodation”. However, this approach has run into increasing resistance from local residents, worried about community break-up, and a recent Select Committee has upheld the position that demolition should be a last resort. Thus the question is, how much new build will there be as part of HMR, and how fast is the programme likely to proceed in the light of residents’ reservations? Despite the problems, there is new build work currently in the HMR programme. If we take the Oldham and Rochdale Pathfinder as an example, over 1,800 new units are due to be started between now and April 2007.

The strength of public housing activity and new orders in the first half of this year suggests a very robust outturn for the year as a whole. It is probable the public housing sector will be worth near to the €3bn mark in 2006, a level last seen in 1995. The pressures to deal with the pent-up demand for affordable housing are likely to continue to push up output in the sector, although growth is expected to be more moderate from 2007.

Private house building accounted for by far the largest share of total residential construction in 2005 and was worth approximately 86 per cent of the total. New orders for private housing reached €12.6bn in 2000 prices in 2005, a 5 per cent increase on the previous year. However, in the first half of this year, they totalled €6bn, 6 per cent down on the same period of 2005. On a four-quarter moving total basis, orders seem to have peaked in the third quarter of last year and have fallen since then. Nevertheless it is worth noting prior to this new work orders had been increasing since the first quarter of 2002.

Despite the growth in output last year, the level of new starts fell by 7 per cent to around 193,500, and completions increased only modestly to 169,000. In the first half of this year starts totalled 86,000, 5 per cent up on the same period of 2005, and completions grew by 7 per cent over the same period to nearly 71,000. This suggests that the outturn for GB as a whole may be above last year’s level.

Latest quarterly data from two of the main mortgage lenders have diverged somewhat. Halifax reports annual inflation up to 9.4 per cent in the second quarter of this year, close to double the rate at the end of 2005, while the Nationwide shows a much more subdued picture, with year-on-year increases running at 4.8 per cent in the second quarter of 2006. The Department for Communities and Local Government’s (DCLG) mixed-adjusted house price series is more in line with the Nationwide than Halifax, showing annual inflation running at 5.3 per cent in the second quarter of this year.

The Housing Market Report’s latest regional survey of house builders is giving some mixed signals. While the indications are that site visitors were a little down in August compared with a year ago, net reservations moved in the opposite direction. More house builders reported rising net house prices during August, but at the same time a larger percentage reported increasing use of sales incentives than a decreasing one. However, the majority (63 per cent) still expect their level of sales to be higher this year than in 2005.

In the summer there seemed to be reason to be optimistic about further growth in the sector this year. However, the weakness of output and new orders in the first half of the year suggests that there is likely to be no change in the outturn for 2006 as a whole in output terms, despite the fact that both starts and completions may increase. The outlook for 2007, 2008 and 2009 is for moderate increases in each year.

Residential renovation

Public housing R&M output fell by nearly 2 per cent last year, after a couple of good years in 2003 and 2004. Activity in the sector has continued to decline in the first half of this year, with output reaching €4.8bn, 11 per cent down on the same period of 2005. On a four-quarter moving total basis, output has fallen by 10 per cent since its peak in the second quarter of 2005.

It has recently been reported that changes in the nature of the Decent Homes for All scheme are being considered which would effectively give local authorities more leeway on how the funding in this programme is spent with reference to a wider remit of sustainability. One can only assume that this would be likely to lead to less money being spent specifically on housing renovation. The comparable initiatives announced by the Scottish Executive and the Welsh Assembly are unlikely to really come on stream until after 2008 so should have only a marginal affect on output in this period.

Among recent public renovation contracts let are the €132m four-year agreement to maintain Birmingham’s council housing stock and an €102m Decent Homes for All project to revamp 29,500 units across Bristol over the next five years.

Public housing output is almost certain to show a second consecutive year of decline in 2006. However, as the second half of 2005 was quite weak, output for 2006 as a whole may not be more than 5 per cent down on the previous year. We are expecting no change for 2007 and modest rises in output in 2008 an 2009.

Private housing R&M output also declined in 2005, by 3 per cent to just over €17.6bn. Consumer spending is one of the main drivers of this sector and its growth was fairly muted in 2005. In the first half of this year output reached just over €8.8bn and showed a marginal fall on the same period of 2005. On a four-quarter moving total basis output has been dropping since the third quarter of 2004, although recent declines have been very marginal.

We believe that output will pick up in the second half of the year and will be followed by strengthening rises in the following three years on the back of more buoyant consumer confidence and spending.

4 Non-residential Market

The non-residential sector is the largest component of the UK construction industry and was worth around €90bn in 2005, down marginally from 2004. Structurally new work is significantly bigger than the renovation sector, accounting for 64 per cent of the total in 2005. Declines in new commercial, health, industrial and agricultural construction in 2005

388 © EUROCONSTRUCT Munich, December 2006 United Kingdom counteracted growth in education, storage and offices. Commercial is the UK’s largest non- residential new work sector.

Relative to the residential and civil engineering sectors the non-residential’s overall performance is forecast to be somewhat muted. Growth in new work output should outperform that in renovation. In its entirety the non-residential sector is estimated to expand by 2.2 per cent in 2006, 2.1 per cent in 2007, 2.8 per cent in 2008 and 2.3 per cent in 2009.

Non-residential new

New non-residential work fell by 1.6 per cent in 2005 to €57.2bn. The decline in new public non-residential orders intensified in the first half of 2006. A 9 per cent fall lowered new work orders in the sector by around €400m year-on-year to €4.4bn, in current prices. 2005 saw public non-residential orders slide for the first time in five years, albeit by a relatively subdued 2 per cent. Orders on the private side have fared somewhat better so far in 2006. Compared to the first half of 2005 they were up by a sizeable 36 per cent to €16.1bn, in current prices.

Buildings for education

Building new schools and colleges traditionally fell into the public’s domain. In 2005 public sector new work education orders were valued at €5.3bn, in current prices, some 33 per cent higher than in 2004. Private sector orders were worth a comparatively small €2.2bn, but nevertheless were nearly 100 per cent higher in current terms than they had been in 2004.

The generally accepted opinion has been that the majority of education construction delivered under the Building Schools for the Future (BSF) programme would be through the PFI/PPP route. BSF plans to invest €59bn in rebuilding or redeveloping most of England’s secondary school infrastructure over a period of 15 years. However, closer analysis of the 17 Pathfinder and Wave 1 projects suggests that this is not the case, with only 4 schemes totally PFI/PPP procured. Thus, out Wave 1’s total capital investment of €3.4bn, which includes funding for ICT provision, it is likely that considerably more than half will be public money.

Education output should expand year-on-year throughout the forecast period. Output in 2006 is estimated to rise by 6.5 per cent and is forecast to be followed with increases of 4.9 per cent, 1.5 per cent and 1.6 per cent in 2007, 2008 and 2009 respectively.

Buildings for health

New work health orders decreased by 14 per cent in 2005 after climbing by nearly 50 per cent in 2004. Orders in the first half of 2006 have been particularly strong, up by 111 per cent from the first half of 2005. However this is mainly due to the letting of the St Barts hospital PFI contract in the second quarter of 2006.

In the health sub-sector, the ProCure21 and LIFT programmes continue to generate reasonable amounts of activity, while Defence Estates work on the refurbishment of barracks trundles on.

Overall however, the sector is unlikely to experience the sort of boom seen between 2002 and 2004 for the foreseeable future. A more constrained picture for public finances will inevitably mean less money available for large capital investment programmes. The weakness of both output and new orders in the first half of this year suggests that a further fall in output is on the cards and we envisage little or no growth across the remainder of the forecast period.

In August, the Department of Health gave the go-ahead to €2.2bn worth of new hospital projects, including the €1bn University Hospitals Leicester NHS Trust project and the €400m

© EUROCONSTRUCT 389 United Kingdom Munich, December 2006 new community hospital and cancer centre for the University Hospital North Staffordshire NHS Trust. As these projects will be delivered through the PFI route they should boost output in the sub-sector over the next few years.

We are forecasting health output will rise by 4.9 per cent in 2007, 6 per cent in 2008 and 2.6 per cent in 2009.

Industrial and storage buildings

New orders rose to their highest level since 1998 in 2005, up nearly a half to €4.2bn in 2000 prices. Growth has slowed somewhat, with the total for the first half of this year up 11 per cent on the same period of 2005, and on a four-quarter moving total basis orders suffered their first fall for seven quarters in the second quarter of this year.

In recent years the traditional primacy of factory construction has been eroded with warehouses becoming more important to the overall health of the sector, and by 2005 warehouse construction output came within €73m of factory construction. This reflects in part the long-term decline of the UK manufacturing base, as well as the rise of internet shopping, and the requirement for more storage facilities to handle the increasing level of imports coming into the country.

Looking at the factories sub-sector, Experian’s latest macroeconomic forecasts do not suggest any great change for the manufacturing sector. While manufacturing output is expected to recover from its 1 per cent fall last year, growth over the 2006-2008 period is likely to be moderate at best, probably peaking at around 2 per cent in 2007.

The latest CBI/Experian Regional Trends Survey showed a modest decline in business optimism in July compared with April, although a small positive balance of manufacturers reported higher output over the quarter, with the following three months expected to be more buoyant. However, the balance on investment intentions remains stubbornly negative.

Total available floorspace across GB increased by a little over 4 per cent in the six months to June according to King Sturge’s Industrial & Distribution Floorspace Today, with the level of new available floorspace rising faster, by around 11 per cent over the same period. Not surprisingly the level of speculative development under construction fell in June, by 26 per cent compared with December, to around 820,000 square metres in 62 schemes.

The strength of output and new orders in the first half of this year suggests that another good year for the sector is on the cards. However, the current boom in the construction of distribution facilities cannot go on forever and it is our belief that, while output is unlikely to decline at any time over the forecast period, growth is likely to tail-off in 2007 and 2008 as warehouse construction output plateaus at a high level.

The boom-like conditions seen in the storage buildings sub-sector are unsustainable over the longer term. Considering output increased by nearly 25 per cent in 2005, an estimated rise of 4.5 per cent in 2006 is significant nevertheless, especially given we expect output to rise by a further 6.9 per cent in 2007. Slower growth of 2 per cent and 1.1 per cent is forecast in 2008 and 2009.

Office buildings

Worth approximately €12.5bn, in current prices, the UK’s offices sub-sector recorded solid real growth in 2005 and looks set to repeat this in 2006. The offices market in London and the South East continues to recover, with all the major property agents reporting availability falling and strong take-up rates. Office construction output rose by 5 per cent last year and has continued to increase in the first half of this year. As London and the South East account

390 © EUROCONSTRUCT Munich, December 2006 United Kingdom for between 40-50 per cent of total new orders in the sector, the health of the market in these two regions is vital for office construction as a whole.

2005 saw orders climb by 12 per cent to €7.1bn, in current terms. The rate of assent accelerated in the first half of 2006, with orders rising by a further 21 per cent.

Unsurprisingly many of the larger projects in the pipeline in this sub-sector are situated in London. These include the Heron Tower, the ‘Shard of Glass’ and the ‘Walkie-Talkie’ tower. Outside of London several projects are planned for the North West.

We expect the offices sub-sector to expand by an estimated 6.5 per cent in 2006. In 2007, 2008 and 2009 we are forecasting growth of 1.8 per cent, 5 per cent and 3.6 per cent respectively.

Commercial buildings

Commercial output’s decline in 2005 was due in part to consumer retrenchment, driven by the growing credit burden many consumers face and housing market uncertainty. Consisting of construction in retail and leisure, and with work being highly geared towards the private sector, makes the commercial sector vulnerable to even mild signals of consumer or more general economic weakness. Nevertheless consumers’ confidence is returning and a robust recovery is likely in the UK’s commercial sub-sector in 2006. In 2005 commercial orders rose by 12 per cent and have risen by a further 18 per cent so far in the first half of 2006. Worth an estimate €15bn in 2005, the commercial sub-sector is the largest single sub-sector and its recovery is vital to our forecast for a recovery in new non-residential work overall in 2006.

Plans to regenerate urban hubs around the country are currently contributing to a healthy commercial sector pipeline. Other projects include a €140m facelift for the Royal Shakespeare Theatre in Stratford-Upon-Avon in the West Midlands, a €450m leisure scheme in South Yorkshire at the Rother County Park between Sheffield and Rotherham and a €320m extension to the Tate Modern museum in London.

An increasing problem we have in assessing the amount of sub-sector construction and its likely growth or decline is the increasing prevalence of mixed-use development, particularly those that contain elements of residential, office, retail, and leisure construction. It is often difficult to ascertain which is the primary usage and thus under which sub-sector the output has, or will be, recorded. This is particularly true of large town centre regeneration developments.

Commercial construction is forecast to grow strongly in real terms over the forecast period. In 2006 we expect output to increase by around 6.5 per cent. Year-on-year growth is forecast to 2009. Commercial construction expansion is forecast to peak in 2008 when work relating to the Olympics begins to noticeably come on stream.

Miscellaneous

Construction in the miscellaneous sub-sector covers a heterogeneous selection of public and private buildings ranging from libraries and places of worship to police stations, courts and defence establishments.

In terms of orders, the miscellaneous sub-sector is traditionally relatively small and therefore is prone to sizeable fluctuation. In 2004 and early 2005 the Ministry of Defence let substantial contracts to redevelop six military sites, including Colchester and Aldermaston barracks. In total works are valued in the region of €1.8bn and as a consequence orders have since suffered declines, falling by 41 per cent 2005 and dropping a further 65 per cent in the first half of 2006.

Construction output from these contracts is set to span ten years, however, as work steps up we are forecasting output will rise by 4.5 per cent this year, accelerating to nearly 7 per cent next year. In 2008 growth is expected to slow to 4 per cent and by 2009 annual increases should be in the region of 1.1 per cent.

Non-residential renovation

The majority of non-residential renovation work is undertaken by the private sector. In 2005 the spilt was roughly 60/40 in favour of the private sector. Renovation in the non-residential sector was worth €32.2bn in 2005 and was up by 1.6 per cent from 2004.

Public non-residential R&M 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, output in 2005 was 23 per cent higher than in 2000.

However, our prognosis earlier this year that as public finances tightened the sector might suffer appears to have been accurate. Output in the sector fell by 6 per cent in the first half of this year compared with the same period of 2005, to €4.9bn, thus it looks like repairs and routine and cyclical maintenance on public buildings may be being delayed or postponed in an effort to cut spending. Thus the outturn for the sector this year is likely to be negative and we are predicting only marginal growth for 2007 and 2008.

Private non-residential renovation output remained stable in 2005 at around €16.9bn in 2000 prices. Both the public and private non-residential renovation sectors have experienced similar increases in output since 2000, with the former growing by 23 per cent and the latter by 22 per cent, although the pattern has been different.

In the first half of this year output reached €8.3bn, 2 per cent down on the same period of 2005 and on a four-quarter moving total basis output has fallen for the past three quarters.

Thus a marginal decline in activity is on the cards for the sector this year, but after a year of no change, expansion is expected to return to the sector in 2008 on the back of better GDP growth in 2007 and 2008.

Overall non-residential renovation is forecast to be roughly static in 2007, but increase by 1.7 per cent in 2008 and by 2.7 per cent in 2009.

5 Civil Engineering Market

Of late civil engineering’s demise has been particularly noticeable given the generally buoyant conditions seen in the other sectors. However, while anecdotal evidence suggests the sector should have already begun to emerge from the doldrums, it appears that an insufficient number of projects in the sector’s healthy project pipeline failed to commence on- site in time to halt the decline in output in 2005. Output contracted again, this time by 3.8 per cent. The severity of an 8.8 per cent in new work output in 2005, however, was softened by a recovery on the renovation side. Having declined by 3.8 per cent in 2004 civil engineering renovation work increased by 3.5 per cent in 2005.

To 2009 the civil engineering sector is forecast to record strong real growth. Scheduled roads and harbours work is key to an improved outlook for new civil engineering work and should help to ensure it out performs the renovation sector over the next few years. Together, growth in new work and renovation should exceed 3 per cent year-on-year from 2007. The rate of growth is forecast to peak at 5.2 per cent in 2008. However, in the very short term the

392 © EUROCONSTRUCT Munich, December 2006 United Kingdom sector is unlikely to reap the benefit of its healthy pipeline of projects and a further decline of 2.1 per cent is estimated.

Civil engineering new

New civil engineering work was valued at €13.7bn, in current prices in 2005, 56 per cent of total civil engineering output. New work civil engineering orders declined by 24 per cent in the first half of 2006, but at €8bn, in current prices, they were 47 per cent higher in 2005 than in 2004.

Work has already begun on the €2.2bn programme of infrastructure projects directly related to the Olympics, a significant slice of which needs to be completed before work begins on the main venues around 2008.

Roads

Orders in the roads sub-sector declined by 39 per cent in the first half of 2006. However, this followed a 43 per cent increase in orders in 2005.

In its 2006/07 Business Plan the Highways Agency forecast that its capital investment will total €2.8bn in the two year period 2006/07 and 2007/08. In addition a further €1.2bn will be spent on maintenance work although this figure will drop to €1.1bn in 2007/08.

The big project in the pipeline in the roads sub-sector is the M25 widening scheme, estimated to be worth between €1.8-€2.3bn over an eight-year period, although work is unlikely to start until 2008. In Scotland the Scottish Executive has set up a new transport agency, Transport Scotland, which will be responsible for delivering the Executive’s €4.4bn investment programme over the next 10 years. In Scotland, the big roads project in the pipeline is the M74 completion, estimated cost between €550m – €730m and due to start in winter 2007/08.

While the road sub-sector has a healthy future, growth is unlikely to resume before 2007 when work is scheduled to start on several major schemes. In 2006 we are forecasting output will decline by 5 per cent. By 2007 output is forecast to be growing at a rate of 6 per cent, although this is forecast to slow to 4 per cent by 2009.

Railways

Railways orders increased by 15 per cent in 2005 to €1.1bn, in current prices. At the time of writing railways orders data is only available for the first quarter of 2006 and compared to the first quarter of 2005 orders were 20 per cent lower.

In the rail sub-sector there is little taking place at present, but there are some significant station expansion and refurbishment projects in the pipeline, such as the €730m expansion of Victoria Underground station, due to start in 2008, and revamps of Birmingham New Street and Nottingham stations, worth €730m and €220m respectively. Furthermore Transport Scotland has over €1.5bn of work in the pipeline for the next few years, while the €730m extension to the Manchester Metrolink is back on again.

Given work on these projects is unlikely to build momentum until at least 2008 the railways sub-sector is in for a tough time both this year and next. A 10 per cent decline in output is estimated for 2006, the affect of which will be compounded by a further fall of around 4 per cent in 2007. Prospects improve in the latter part of the forecast period and we forecast output will return to growth in 2008. Growth rates of 4.2 per cent and 6.1 per cent are forecast for 2008 and 2009 respectively.

Other transport

Other transport refers to work undertaken in the air and harbours sub-sectors. Air and harbours orders both rose robustly in 2005, although it was the particular strength of harbours that pushed orders 47 per cent higher than in 2004. Orders were worth around €780m in 2005.

While work is winding down on Heathrow’s Terminal 5, the €1.5bn –€2.2bn Heathrow East project should take up some of the slack, although work is not due to start on this until after the forecast period. BAA, however, do have a substantial programme of ongoing works at their other major airports. A new floating jetty, estimated at around €220m in Clyde, Scotland and a €60m deal to redevelop the Alexandra Dock container port in Hull should help to boost harbours output over the forecast period. In addition the Department of Transport approved a couple of new container terminal projects in early 2006, a €220m facility at Harwich and a €260m unit at Felixstowe.

Other transport should record strong year-on-year growth throughout the forecast period. Our estimate for 2006 is for a 12 per cent expansion. Next year slower, but robust nevertheless, growth is forecast. We expect output to increase by 5.8 per cent in 2007, 7.2 per cent in 2008 and 4.1 per cent in 2009.

Telecommunications

Relative to the other infrastructure sub-sectors telecommunications is very small. Worth an estimated €1.1bn in 2005, in current prices, output in the sector accounted for just 4 per cent of total new work infrastructure activity. Orders in 2005 declined, in contrast with rises seen across the other sub-sectors by 8 per cent to €230m, although this did follow a 30 per cent increase in 2004.

Telecommunications output declined in 2005 by around 16 per cent. Prospects are better and we estimate output will rise by 9 per cent this year, by 2 per cent in both 2007 and 2008, and by 3 per cent in 2009.

Energy and water works

Orders in the energy and water works sub-sector rose by nearly 70 per cent in 2005 to €3.7bn, in current prices. Contracts to extend and improve the UK’s water infrastructure were predominantly responsible for such a robust increase, with water orders up by 100 per cent over the year. Strong increases were also seen in gas and electricity orders, but the value of their orders relative to the water sub-sector meant their overall effect was limited.

Water companies Asset Management Plan (AMP) 4 programme should peak in 2006/07 and 2007/08, although over the whole five-year period of the programme there is little overall increase in the level of investment from AMP3. The buoyancy of water orders failed to be maintained in the first half of 2006. They trailed the first half of 2005 by 70 per cent.

After one of the driest years on record concerns are increasing about the ability of some water companies to meet the growing demand for water. This will focus attention on curtailing leakage and on ways of reducing customer usage.

How the UK’s long term energy programme should proceed continued to be debated. Unless the government takes firm action with respect to the energy mix soon, that is nuclear, renewable, gas and coal, and assists in obtaining planning approvals, then no new nuclear power stations are likely to be on-stream before 2020, by which time most of the UK’ds

394 © EUROCONSTRUCT Munich, December 2006 United Kingdom current nuclear reactors should have been closed. At present, nuclear accounts for around 20 per cent of the UK’s electricity.

In the gas sector, work on building new storage facilities at Milford Haven and Isle of Grain is increasing and in early 2006 National Grid Gas awarded three gas pipeline contracts and work is expected to start on all of them by 2008.

A minor 2 per cent decline is expected in energy and water works output this year but a return to growth is likely in 2007 . We are forecasting ouptut will rise by 2.9 per cent in 2007, 5.2 perc ent in 2008 and 3.1 per cent in 2009.

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, including the Highways Agency and Network Rail. The main drivers of the civil engineering renovation sector are believed to be the roads and rail sub-sectors.

Individual civil engineering renovation projects are less likely to be reported in the media than new work schemes. Usually because they are relatively low value and work tends to be widely disseminated. Some of the larger projects, however, do attract coverage. The current pipeline includes long-term roads maintenance contracts in Essex and Scotland worth collectively around €440m, a €40m scheme to carry out safety improvements on the A14 near Kettering and a €1.5bn programme awarding one contractor with responsibility for maintaining and improving London’s roads over the next decade.

While the new work sector is likely to be the dominant force behind overall growth in the civil engineering sector, there is scope for further expansion on the renovation side. In the very short term we expect a mild contraction and estimate output will decline by around 2.3 per cent in 2006. However, a return to growth is forecast from 2007 and should strengthen to 2009. In 2009 output is forecast to rise by 2.4 per cent.

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

EUROCONSTRUCT

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

EstimateForecast Outlook

2003 2004 2005 2006 2007 2008 2009

Population ('000s) Population 59 554 59 729 59 904 60 254 60 483 60 713 60 942 Bevölkerung

Households ('000s) Ménages 24 365 24 555 24 800 25 046 25 284 25 522 25 760 Haushalte

Unemployed ('000s) Chômeurs 923 846 855 956 987 1 000 972 Arbeitslose

Unemployment rate (%) Taux de chômage 3.0 2.7 2.8 3.0 3.1 3.1 3.0 Arbeitslosenquote

Change of GDP Variation du PIB 2.7 3.3 1.9 2.6 2.4 2.5 2.9 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.4 1.3 2.1 2.2 2.1 1.6 1.3 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.9 7.5 4.9 4.7 4.9 4.9 4.4 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3.7 4.4 4.7 4.6 4.9 4.4 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.6 4.8 4.4 4.4 4.9 4.8 4.7 Langfristiger Zinssatz

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

Country/Pays/Land: UNITED KINGDOM Table 2

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Residential construction New 29 249 12.8 13.9 2.6 2.8 3.8 3.9 3.2

Logement Renovation 47 581 5.4 4.4 -2.9 -2.2 2.5 3.4 3.2

Wohnungsbau Total 76 830 7.8 7.7 -0.9 -0.3 3.0 3.6 3.2

Non-residential construction New 57 235 4.0 7.8 -1.6 4.3 3.1 3.4 2.1

Bâtiments non résidentiels Renovation 32 215 6.1 -3.7 1.6 -1.6 0.3 1.7 2.7

übriger Hochbau Total 89 450 4.8 3.5 -0.4 2.2 2.1 2.8 2.3

Building New 86 484 6.6 9.8 -0.2 3.8 3.4 3.6 2.5

Bâtiment Renovation 79 796 5.7 1.1 -1.1 -1.9 1.6 2.8 3.0

Hochbau Total 166 280 6.1 5.4 -0.6 1.1 2.5 3.2 2.7

Civil engineering New 13 919 -9.5 -13.1 -8.8 -2.0 5.0 8.0 5.0

Génie civil Renovation 10 751 9.0 -3.8 3.5 -2.3 0.6 1.4 2.4

Tiefbau Total 24 670 -3.2 -9.6 -3.8 -2.1 3.1 5.2 3.9

TOTAL CONSTRUCTION OUTPUT 190 950 4.6 3.1 -1.1 0.6 2.6 3.4 2.9

2005 Estim.Forecasts Outlook mill. tons 2003 2004 2005 2006 2007 2008 2009

Domestic cement consumption Consommation intérieure de ciment 11.20 0.0 1.7 -1.7 1.2 1.4 1.7 2.0 Inländischer Zementverbrauch

1) At 2005 prices, excluding taxes. 1 euro = 0,6836 GBP

Country/Pays /Land: UNITED KINGDOM Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnungsbau

Thousands dw ellings

Estim.Forecast Outlook

2003 2004 2005 2006 2007 2008 2009

Building permits 1+2 family dw ellings Logements autorisés Individuel Baugenehmigungen Familienhäuser

Flats Collec tif Mehrfamilienhäuser

TOTAL

Housing starts 1+2 family dw ellings Logements commencés Individuel 141.0 155.1 156.9 162.8 164.6 165.0 168.6 Baubeginne Familienhäuser

Flats Collec tif 53.0 58.3 59.0 61.2 61.9 62.0 63.4 Mehrfamilienhäuser

TOTAL 194.0 213.4 215.9 224.0 226.5 227.0 232.0

Housing completions 1+2 family dw ellings Logements terminés Individuel 127.7 136.5 139.1 144.6 148.3 148.6 152.6 Baufertigstellungen Familienhäuser

Flats Collec tif 48.0 51.3 52.3 54.4 55.7 55.9 57.4 Mehrfamilienhäuser

TOTAL 175.7 187.8 191.4 199.0 204.0 204.5 210.0 Housing stock Logements existants 25 114 25 298 25 499 25 688 25 882 26 077 26 277 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zw eitw ohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ow nership rate 1) Taux de propriétaires occupants 70.0 70.2 70.5 70.7 70.8 70.9 80.1 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays /Land: UNITED KINGDOM Table 4a

EUROCONSTRUCT

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

Volume % change in real terms 1) mill. eur o Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Buildings for education Bâtiments de l'éducation et de la recherche 12 120 21.6 11.1 5.5 6.5 4.9 1.5 1.6 Gebäude des Bildungsw esens

Buildings for health Bâtiments de santé 5 648 15.2 37.9 -12.4 -11.5 4.9 6.0 2.6 Gebäude des Gesundheitsw esens

Industrial buildings Bâtiments industriels 4 236 6.9 7.8 -8.4 4.5 -3.3 -4.9 -2.4 Industriegebäude

Storage buildings Bâtiments de stockage 3 749 2.9 25.0 24.7 4.5 6.9 2.0 1.1 Lagergebäude

Office buildings Bureaux 12 475 -12.9 -5.0 5.0 6.5 1.8 5.0 3.6 Bürogebäude

Commercial buildings Commer c es 14 964 0.3 6.2 -6.3 6.5 1.8 5.0 2.6 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 410 16.8 -7.0 -11.3 9.4 12.0 9.0 2.6 Landw irtschaftsgebäude

Miscellaneous Autres 3 633 32.3 2.0 -14.9 4.5 6.9 4.0 1.1 Sonstiges

Total 57 235 4.0 7.8 -1.6 4.3 3.1 3.4 2.1 Insgesamt

1) At 2005 prices, excluding taxes. 1 euro = 0,6836 GBP

Country/Pays/Land: UNITED KINGDOM Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

Volume % change in real terms 1) mill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Transport infrastructure Roads Infrastructures de transport Réseau routier 7 411 -1.2 -9.4 -12.8 -5.0 5.8 5.2 4.1 Verkehrsinfrastruktur Straßen

Railw ays Voies ferrées 3 555 -20.2 -13.6 -2.2 -10.0 -4.1 4.2 6.1 Bahnanlagen

Other transport Autres réseaux 2 525 31.4 -28.5 -6.5 12.0 5.8 7.2 4.1 Übrige Verkehrsinfrastruktur

TOTAL 13 491 -1.6 -14.6 -9.1 -3.1 3.4 5.4 4.6

Telecommunications Télécommunications 1 069 -32.0 32.0 -15.6 9.0 1.9 2.2 3.1 Telekommunikation

Energy and w ater w orks Réseaux d'énergie et d'eau 10 110 -2.1 -4.9 6.0 -2.0 2.9 5.2 3.1 Energie- und Wasserversorgung

Other Autres Sonstiges

Total 24 670 -3.2 -9.6 -3.8 -2.1 3.1 5.2 3.9

1) At 2005 prices, excluding taxes. 1 euro = 0,6836 GBP

Country/Pays/Land: UNITED KINGDOM Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandsprodukt

Volume % change in real terms 1) bill. euro Estim.Forecast Outlook

2005 2003 2004 2005 2006 2007 2008 2009

Private consumption Consommation privée 1 110.8 4.9 5.1 3.9 4.5 4.5 4.4 4.7 Privater Verbrauch

Public consumption Consommation publique 399.4 0.4 6.0 2.7 3.5 1.3 1.0 1.1 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 284.7 0.4 6.0 2.7 4.4 2.3 2.1 3.0

of w hich construction 110.3 3.5 7.2 3.7 1.5 1.0 1.0 1.3

Stocks (as % of GDP) Variations de stocks 62.7 6.5 5.0 3.5 1.9 0.7 -0.5 -1.5 Vorratsveränderung

Ex por ts Exportations 473.1 1.7 4.9 7.1 15.5 4.3 5.9 5.0 Ex por te

Imports Importations 539.4 2.0 6.6 6.5 14.0 3.7 4.2 4.2 Importe

GDP PIB 1 791.3 2.7 3.3 1.9 2.6 2.4 2.5 2.9 BIP

Standard National Accounts, gross figures 1) At 2005 prices. 1 euro = 0,6836 GBP