3 Residential Construction

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

WIRTSCHAFTSFORSCHUNG

64th Euroconstruct Conference

European Construction Market Trends to 2010

Country Reports

November 2007

Vienna, November 2007

This country report has been written and prepared by the EURCONSTRUCT organisation from the country reports of the 19 EUROCONSTRUCT member institutes

WIFO – Austrian Institute of Economic Research P.O. Box 91 Arsenal Objekt 20 1103 Vienna – Austria

This report has been edited by Dr. Margarete Czerny and Michael Weingärtler

For further information please contact Dr. Margarete Czerny • Telephone (+43 1) 798 2601 225 or Michael Weingärtler • Telephone (+43 1) 798 2601 483 • E-Mail: [email protected]

www.euroconstruct.org

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

2 © EUROCONSTRUCT Vienna, November 2007 Contents

Table of Contents

The Euroconstruct Network ...... 5 Austria ...... 9 Belgium ...... 25 Czech Republic ...... 41 Denmark...... 57 Finland...... 75 France ...... 95 Germany...... 117 Hungary...... 131 Ireland ...... 153 Italy...... 175 Netherlands ...... 193 Norway ...... 213 Poland ...... 231 Portugal ...... 251 Slovakia...... 269 Spain ...... 289 Sweden ...... 309 Switzerland...... 329 United Kingdom ...... 347 Member Institutes...... 367

Vienna, November 2007 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.

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) December 2007 Vienna (Austria) June 2008 Rome (Italy)

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.

6 © EUROCONSTRUCT Vienna, November 2007 The Euroconstruct Network

MEMBER INSTITUTES

Austria WIFO Austrian Institute of Economic Research

Association pour la Qualité des Indicateurs Économiques Belgium Aquiec-Vkebi de la Construction

Czech ÚRS PRAHA ÚRS PRAHA, a.s., engineering & consulting organisation 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

Centro Ricerche Economiche e Soziologiche di Mercato Italy CRESME 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)

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

United Experian Experian Business Strategies Kingdom

Vienna, November 2007 Austria

AUSTRIA

Austria Institute of Economic Research www.wifo.ac.at

Margarete Czerny e-mail: [email protected]

Michael Weingärtler e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

The Outlook of the Austrian Construction Sector until 2010

Summary

The business cycle upturn is continuing throughout the current year in Austria. After an increase of 3.3% in 2006, real gross domestic product is expected to expand by 3.4% in 2007. While export growth is gradually decelerating from a high level, investment is gaining momentum to become the key driver of the upswing. Private household consumption, while picking up this year, still lags behind its normal cyclical profile. The strong pace of growth is leading to a marked increase in the number of jobs and a further decline in unemployment. The stock of orders of big mid-term projects guarantees a sound capacity utilisation in the construction sector within the forecasting period. Housing construction recovered after weak development in the years 2006 (6%) and 2007 (7%). The restrained housing production in the first half of the century also caused a backlog in housing. Additionally, strong migration from Western and especially from Eastern and South-Eastern Europe caused a much higher demand for dwellings. A further average increase of 3% in residential construction output is expected in the period 2008 to 2010. In non-residential construction, the demand for industrial and commercial buildings increased considerably in 2007. In the course of the general economic upswing companies invested in new facilities. There is still an ongoing positive trend in office buildings and a high demand from institutional investors. Vacancy rates in office space have been declining since 2004 and are expected to fall below 6% by the end of 2007. The peak in non-residential construction will be reached this year with an expected growth of 4.4%. In the period 2008 to 2010 many big city development projects will stabilize the commercial building sector. Growth in non-residential construction is therefore estimated to increase by 2.7% (2008), 2.0% and 1.7% in 2009 and 2010 respectively. The strongest positive growth effects will arise from infrastructure investments in civil engineering, but will be slightly lower than in the previous years. Civil engineering is expected to grow by 3.5% in the forecast period 2008-2010 after a very dynamic growth of nearly 7% in 2007. The main reason for the still very favourable development is the mid-term public expansion program in road and rail infrastructure. All in all total real construction output increased by 5.5% in 2007. In the forecasted period a slowdown in growth in the course of the weaker general economic performance is expected. Analyses predict a 3% growth in 2008. In 2009 and 2010 real growth rates of about 2.5% and 2.2% respectively are forecasted for the total construction sector.

Chart 1: Construction output by sector until 2009

140 Total civ il 130 engineering New residential 120 construction New non-residential 110 construction Non-residential index 2003=100 100 renov ation Residential 90 renov ation 2003 2004 2005 2006 2007 2008 2009 2010 year

Source: WIFO, EUROCONSTRUCT Vienna, 2007.

10 © EUROCONSTRUCT Vienna, November 2007 Austria

Macroeconomic Development

The Austrian economy is currently in a booming period with a gross domestic product growth of 3.4% which is stronger than in 2006 (3.3%) and performs well above the average growth of the EURO-area. The economic boom is positively influenced by the export industry and by domestic investments. The relatively high capacity utilisation of the companies leads to higher revenues and so more and more investment projects are realised. Despite the good export and investment climate the strong boost from private consumption is still missing. The consumer demand of private households is currently growing by around 2% and in the forecasting period up to 2010, no changes are expected. One of the reasons for this relatively weak consumption in Austria is the low development of the per capita income of the employees. In contrast to this, company earnings rise significantly. Additionally, prices increased and the inflation rate went up 1.9% in 2007. Inflation is not expected to rise in the coming years so prices will only rise by around 2% on average. The strong economic upswing of the Austrian companies leads to a much higher employment level. The marked rise in the Austrian work force in the last few years resulting in more part-time and full-time employment contracts caused a slight decline in the unemployment rate. Unemployment rate however will not decline a lot because of the increase in the Austrian labour supply particularly from Eastern Europe. The influx of labour creates an immense pressure on long-term and youth employment. The overall economic growth slows down in 2008 and 2009 and is expected to grow by 2.4% after the very positive years of 2006 and 2007. This will correspond with the long term growth average. The mid-term forecasts are very uncertain because the slowdown of the world economy could affect the Austrian business more severely than currently assumed. In spite of this, it is not very likely that the real estate crises in the United States and the slump of real estate prices will have any negative effect on the Austrian construction sector. Mid-term investment schemes in infrastructure and residential housing will be responsible for a good capacity utilization of the Austrian construction industry.

Chart 2: Development of gross domestic product (GPD) against construction output 2004- 2010

6,0 5,5 5,1 5,0

4,0 3,4 3,3 3,0 2,4 3,0 2,5 2,5 2,3 2,4 2,2 2,0 2,0 1,3 Construction Sector Output

y-o-y change (in %)changey-o-y (in 1,0 Change of GDP 0,1 0,0

2004 2005 2006 2007 2008 2009 2010

year

Source: Statistik Austria, WIFO.

Table 1: Macroeconomic Key Indicators in Austria 2004 to 2010 (Annual percentage change) 2004 2005 2006 2007 2008 2009 2010 GDP 2.3 2.0 3.3 3.4 2.4 2.4 2.5 Private consumption 1.8 2.0 2.1 1.9 2.1 2.0 2.0 Gross fixed capital formation 0.1 0.3 3.8 6.3 3.7 3.2 3.0 Unemployment Rate 4.8 5.2 4.8 4.3 4.2 4.2 4.1 Inflation 2.1 2.3 1.5 1.9 2.0 2.0 2.0

Source: Statistik Austria, WIFO.

Residential Construction in Austria up to 2010 Higher mid-term demand in new residential construction

Housing production increased significantly in 2006 and 2007 from a very low level in the first half of the century. Real new housing production will grow by 7% in 2007; which is nearly as strong as in 2006 (7.7%). In the forecasting period, a further but slightly lower increase in housing production is expected with growth rates of about 3% in 2008, 2.5% and 2.2% in 2009 and 2010 respectively. The main influencing factors for housing demand up to 2010 are: - change in demographic structures due to migration, - significant increase of single households and older people - stronger demand for energy efficient buildings (to fulfil the Kyoto target) - higher demand in metropolitan areas

The high construction activity in the last two years led to a rising number of housing completions of up to 44.000 dwellings in 2007. Recent WIFO calculations show that the mid- term housing needs will be even higher. It is estimated that around 50.000 dwellings per year are required.

Chart 3: Housing permits and completions in Austria 2000 to 2010 Index 1981 =100

140

120 permits

100 completions

80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Statistik Austria, WIFO.

The reasons for the high demand are the restrained housing production at the beginning of this century and the strong migration from Western and especially from Eastern and South- Eastern Europe. It is expected that the housing production will steadily grow within the next years up to 49.000 units by 2010. In 2002, which was the last year with official statistical information, around 42.000 housing completions were registered. Due to changes in the census method no official figures on housing permits and completions have been provided until now. The main reasons are that the legal source to derive these statistics is missing due to changes in the law and the new system does not cover all projects so that the current results cannot be published.

12 © EUROCONSTRUCT Vienna, November 2007 Austria

The significant rise of net-migration to Austria has short-term as well as long-term implications on the domestic housing market. In the short-term the housing needs of migrants have to be fulfilled. Income discrepancies between domestic households and households with migration background result mainly from the differences in education and qualification which ultimately lead to different households sizes. The latest population census 2001 (Statistik Austria, 2002) showed that the average Austrian household is about 2.36 persons where as the average household size of migrants (without EU-citizens) is 2.65 persons. The highest differences could be observed in households from Turkey with 3.64 persons per household.

Table 2: Population scenarios and the additional housing demand in Austria

ÖROK- population forecast housing needs Provinces Main scenario Growth scenario Diviation of the main scenario from deviation from the growth scenario main and growth scenario 2006/2011 2006/2011 2006/2011 per year dwellings per year persons

Vienna + 34.703 + 63.285 + 28.582 + 5.716 + 2.157 Lower Austria + 26.058 + 48.949 + 22.891 + 4.578 + 1.728 Burgenland + 957 + 5.125 + 4.168 + 834 + 315 Styria – 506 + 16.204 + 16.710 + 3.342 + 1.261 Carinthia – 3.116 + 4.803 + 7.919 + 1.584 + 598 Upper Austria + 18.510 + 39.587 + 21.077 + 4.215 + 1.591 Salzburg + 11.101 + 20.009 + 8.908 + 1.782 + 672 Tirol + 21.031 + 33.813 + 12.782 + 2.556 + 965 Vorarlberg + 10.778 + 17.110 + 6.332 + 1.266 + 478

Österreich +119.516 +248.885 +129.369 + 25.874 + 9.764

Source: ÖROK, Statistik Austria, WIFO-calculation.

Housing subsidisation scheme has a significant impact on housing construction. The subsidisation volume and the distribution between government and the federal states were in the centre of public discussion during the recent financial equalisation negotiations. In autumn 2007, the government confirmed that the housing subsidisation volume with 1.78 billion euro will be kept within the next six years. Additionally it was agreed that housing subsidisation will be linked much closer to environmental protection measures. The mid to long-term target of the Austrian government is to set measures to reduce notably the energy consumption in the building area, which is one of the sectors with the biggest shares in energy accounts in Austria. The production of low energy consuming houses and so called passive houses is highly enforced by the subsidisation system. There is still a high potential in 1-2-family housing thermal renovation even if in the past years the ecologisation of the housing promotion system in the different federal states and the stronger minimum standards achieved a lot. There is a lack of private households who apply for subsidies for housing renovation. One of the governmental goals, which seem to be very ambitious, is also to reach passive house standards in new housing construction by 2015. Residential construction activity in Vienna will also be dominated by large scale projects. City planning covers also the metropolitan area. New dwellings are planned to be built in the area around the new central station (5.500 dwellings by 2015). A new city area will be created in the former airfield Aspern property (5.000 dwellings). This city development project will create a new attractive area for living and working. The booming residential activity within the last two years shows already impacts on the price development. In 2007, price index for houses increased by 4% much stronger than the consumer prices with an increase of 1.9%. Also in the following years, a further price increase in housing with growth rates between 3-3.5% p.a. is expected by 2010. Therefore the house price increase is also much stronger than the mid-term inflation rate of 2%.

Table 3: Granted private loans for housing in 2003 and to 2007 2003 2004 2005 2006 2007 Interest rate for existing loan contracts1) 5,07 4,59 4,38 4,43 5,29 Interest rates for new housing loans2) 4,82 4,8 5,09 4,76 5,41 1) loans with a duration over 5 years 2) loans with a duration over 10 years Source: Oenb, 2007 In the finance sector, a rise in interest rates could be observed. There is also an increase in mortgage interest. This led private households to be more cautious when taking out new mortgage loans. The increasing interest level is expected to dampen private demand slightly and it could also affect personal disposable income. Further increases in interest rates until 2010 is not expected.

All in all total residential construction is expected to grow in the forecasting period with growth rates of 3% in 2008, 2.5% and 2.2% in 2009 and 2010 respectively.

Non-residential Construction Benefits most from the Sound General Economic Development

Construction activity in non-residential construction developed very favourably in 2007 especially in industrial and commercial buildings. The favourable macroeconomic development and increased company profits resulted in increasing investments in construction. The new real non-residential construction in industrial buildings increased dynamically by 9.1%. Office capacities also expanded remarkably. This could result in overcapacities which would set targets of a further expansion. In the period 2008-2010 real growth of construction volume in non-residential construction of 2.5% p.a. is expected. Future demands for centrally located office and business centres with good infrastructure and for buildings with high architectural standards which fulfill the modern needs of innovative working and commercial areas will continue to rise in the next years. The demand for office buildings in Vienna is favourable since vacancy rates have been declining continuously since 2004. It is very likely that vacancies will decline below 6% by the end of this year. Experts estimate a volume of about 9.8 m2 office space in Vienna in 2007. The completed office space was between 2.1% and 2.7% of the total office stock. In 2007, the new office space in Vienna is about 300.000m2 which is significantly higher than in the previous year with a production of about 200.00m2. The top rents increased slightly for the first time since 2003 at mort than 21€/m2 and is expected to continue rising until the end of the year. Rents in office towers are slightly higher at 23 €/m2. Nevertheless, the rents in Vienna are very stable in comparison to other European capitals. The city expansion plans attract numerous international investors. For example, the Town Project, a new business area in Vienna Erdberg, has good infrastructure access and reasonable property costs making it a very attractive project. Around 30.000 m2 of office space will be established in the fifth construction period 2007 to 2010. The Austrian government has authorized an extensive program for the refurbishment and expansion of the universities. One of the latest new projects will be the relocation of the biggest business university in Austria from the 9th to the 2nd district in Vienna. Additionally, big leisure projects are planned, above all the expansion of the Vienna Prater, one of the world’s oldest amusement park. Non-residential construction in Austria gains in importance mainly because of its strategic geographical location and its excellent connection to the Eastern European countries. The establishment of CENTROPE (Central European Region), a trans-national area in the eastern part of Austria with very favourable connections to the airport in Vienna and to the cities of Bratislava (Slovak Republic) and Brünn (Czech Republic) have led to high demands from international companies which favour this region. Investments in this region are well funded by the European Union especially due to the settlement of high innovative industries and service companies in the region.

14 © EUROCONSTRUCT Vienna, November 2007 Austria

Dynamic Grow in Civil Engineering up to 2010 Continuing Growth because of Large Infrastructure Programs

Civil engineering is experiencing a dynamic growth in Austria. The real construction investments in new construction increased by 7.5% in 2007 but it is expected to increase at a lower rate in the forecasting period with an average growth rate of 3.5%. The strongest increase is observed in traffic infrastructure, followed by investments in energy and water works. Minor growth is forecasted in the telecommunication sector. Mid-term expansion programs in road infrastructure and in the railway sector are ambitious. In both sectors an investment volume of around 11billion euro are budgeted up to 2010 (6.4billion euro in rail infrastructure, 4.6billion euro in highway infrastructure). The accumulated needs are very high especially in the rail sector. The expansion of the western route, the rail network from Vienna via Salzburg to Munich will be prioritised because of capacity bottle-neck. This route is also part of the trans-european infrastructure network where Vienna takes a major role. One of the most important construction activities to establish this expansion are the construction works at the Lainzer tunnel as well as the new construction of the Central Station (which was formerly the southern railway station). This would accelerate the transportation of passengers and goods. Construction work at the central station started this year and will be finished by 2015. Total investment volume of this project is about 2billion euro. The Austrian Federal Railways will invest 600million euro, the city of Vienna 150million euro and the rest is financed by private investors. Additionally the expansion of the route Vienna-Bratislava is prioritised. This is very important for the acceleration of the eastern region. Furthermore the expansion of the rail sections in the southern direction will gain in importance. Despite this there is still a heavy ongoing discussion of the so called "Semmering-Basistunnel", with an investment volume of 1.6 to 1.9 billion euro. The construction of the Koralm railway route will start in 2008. This route is an important part of the Baltic-Adriatic-corridor making it is one of the biggest infrastructure projects with an investment volume of 4.5 billion euro. ASFINAG which plans, finances, builds, maintains and operates the entire network of motorways and express ways in Austria (with a total length of almost 2,100 km) has also very ambitious expansion plans. The investment volume for 2007 and 2008 is around 1.2 to 1.3 billion euro. This is about four times as much as 10 years ago. One of the most important projects is the northern highway route (A5). The first part with a length of 51 km was given to a PPP consortium. Also, after 2010 other big construction sections are planned by Asfinag (2011-2014). Other very important big projects in road infrastructure are investments in the Vienna area, and the realisation of the North-Eastern bypass (construction starts 2009, planned finalisation by 2015). Especially the construction of the Lobau-tunnel with investments of 3.2 billion euro by 2014 is one of the major parts of this project. Further important projects are established in the metropolitan area of Linz. The so called Mühlviertler express road would close the connection in the north to the Czech Republic. 1.5 billion euro is budgeted for 2011. For road renovation a big tunnel security program is carried out by Asfinag with a total investment volume of about 600 million euro for 2009 (e.g. Katschberg and Tauerntunnel). Additional investments to reduce noise and environmental protection programs have been started. These programs will be additionally financed by higher mineral oil taxes and the road pricing (vignette – time related toll for passenger cars and distance related toll for trucks). Currently the expansion of the distance related toll for passenger vehicles is not planned. Asfinag reinvests a very high volume at the moment. 65% of its total revenue is invested in the infrastructure expansion. In comparison to this, most of the international highway operators only reinvest 25% of their revenues.

Three measures were decided to guarantee the financing of these expansion plans: First, the transfer of ownership of the maintained roads to Asfinag. Second, one part of the mineral oil tax revenues will be given to Asfinag and third, it is expected to gather savings due to efficiency improvements. Besides road and rail infrastructure investments, the expansion of water transport via the Danube is planned. An investment volume of additionally 9 million euro per year was budgeted for the expansion of the Danube route. Furthermore the main gaps in the Austrian electricity network will be bridged. A special broadband initiative promotes the extension of the internet network in several federal states (e.g. in Styria). The target is to cover all households with broadband internet connection. PPP models which create additional impulses will be used more often in the future.

Table 4: Top 10 construction companies in Austria in 2006

Rank Company Turnover (construction Employees volume) million euro number 1 Strabag SE 10 385 52 971 2 Allgemeine Baugesellschaft A. Porr 2 323 10 615 3 Alpine Mayreder Bau GmbH 2 270 12 750 4 Swietelsky Bau GmbH 1 277 6776 5 Habau Hoch- und Tiefbau GmbH 625 2584 6 Wolf Systembau GmbH 350 2 300 7 Elk Fertighaus AG 270 1 681 8 Rhomberb Bau GmbH 269 593 9 Bauunternehmung Granit GmbH 250 1 400 10 Fröschl AG & Co KG 195 965

Source: Solid, 07/2007.

16 © EUROCONSTRUCT Vienna, November 2007 Austria

APPENDIX – DEFINITIONS

Table 1 • Statistik Austria • Population, Households: Statistik Austria – annual average. • Unemployed calculated by the national method (by Public Employment Service Austria – AMS) • Unemployment rate calculated by the Labour Force Concept (ILO). • Long term interest rate: WIFO.

Table 2 • Construction output refers to construction investment regarding the European System on National Accounts (ESA 1995). Source: Statistik Austria, WIFO.

Table 3 • Statistik Austria – except housing starts: WIFO calculation.

Table 4a • Education buildings: Bundesimmobiliengesellschaft, Statistik Austria, WIFO calculation • Health: WIFO calculation • Industrial: including storage buildings • Offices: Statistik Austia, WIFO calculation • Commercial: Statistik Austia, WIFO calculation • Agricultural: WIFO calculation

Table 4b • Other transport includes airports, water ways, harbours,

Table 5 • Statistik Austria, WIFO calculation. • Volume Private consumption, public consumption, etc: at market prices, VAT excluded.

Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 8 175 8 233 8 282 8 319 8 353 8 386 8 417 Bevölkerung

Households ('000s) Ménages 3 440 3 477 3 511 3 538 3 564 3 590 3 615 Haushalte

Unemployed ('000s) Chômeurs 244 253 239 224 223 224 224 Arbeitslose

Unemployment rate (%) Taux de chômage 4.8 5.2 4.8 4.3 4.2 4.2 4.1 Arbeitslosenquote

Change of GDP Variation du PIB 2.3 2.0 3.3 3.4 2.4 2.4 2.5 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.1 2.3 1.5 1.9 2.0 2.0 2.0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.1 2.3 3.2 3.5 3.0 3.2 3.2 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.2 3.4 3.8 4.3 4.5 4.5 4.5 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 8 055 2.4 -3.2 7.7 7.0 3.0 2.5 2.2

Logement Renovation 4 256 2.2 -5.1 3.0 3.5 2.5 1.8 1.6

Wohnungsbau Total 12 311 2.3 -3.9 6.0 5.7 2.8 2.3 2.0

Non-residential construction New 6 849 -1.0 3.1 3.5 5.5 3.0 2.3 2.0

Bâtiments non résidentiels Renovation 3 511 0.5 1.1 2.3 2.5 2.0 1.5 1.0

übriger Hochbau Total 10 360 -0.5 2.4 3.1 4.4 2.7 2.0 1.7

Building New 14 904 0.8 -0.3 5.7 6.3 3.0 2.4 2.1

Bâtiment Renovation 7 767 1.4 -2.3 2.7 3.0 2.3 1.7 1.3

Hochbau Total 22 671 1.0 -1.2 4.8 5.1 2.7 2.2 1.8

Civil engineering New 6 177 2.6 4.6 7.0 7.5 4.0 3.8 3.5

Génie civil Renovation 1 439 1.0 1.1 2.5 3.5 3.5 3.0 2.0

Tiefbau Total 7 616 2.3 3.9 6.2 6.7 3.9 3.6 3.2

TOTAL CONSTRUCTION OUTPUT 30 287 1.3 0.1 5.1 5.5 3.0 2.5 2.2

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 5.61 -5.2 2.5 2.5 3.0 2.5 2.0 1.8 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 13,7603 ATS

20 © EUROCONSTRUCT Vienna, November 2007 Austria

Country/Pays/Land: Austria Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 15.5 15.7 17.0 18.0 18.8 19.0 19.0 Baugenehmigungen Familienhäuser

Flats Collectif 27.0 27.3 28.0 29.0 30.2 30.5 31.0 Mehrfamilienhäuser

TOTAL 42.5 43.0 45.0 47.0 49.0 49.5 50.0

Housing starts 1+2 family dwellings Logements commencés Individuel 15.5 15.7 17.0 18.0 18.8 19.0 19.0 Baubeginne Familienhäuser

Flats Collectif 27.0 27.3 28.0 29.0 30.2 30.5 31.0 Mehrfamilienhäuser

TOTAL 42.5 43.0 45.0 47.0 49.0 49.5 50.0

Housing completions 1+2 family dwellings Logements terminés Individuel 17.1 17.3 16.0 16.5 17.5 18.2 19.0 Baufertigstellungen Familienhäuser

Flats Collectif 25.2 25.2 27.0 27.5 28.5 29.8 30.0 Mehrfamilienhäuser

TOTAL 42.3 42.5 43.0 44.0 46.0 48.0 49.0

Housing stock Logements existants 3 849 3 879 3 910 3 941 3 963 3 986 4 005 Wohnungsbestand

thereof second homes dont résid. secondaires 266 268 270 271 272 273 274 davon Zweitwohnungen

thereof vacancies dont inoccupé 294 295 294 294 294 293 290 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 56.7 56.8 56.9 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 315 -3.4 -1.0 1.8 1.7 2.0 1.5 1.2 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 863 -1.0 4.0 2.8 1.2 1.2 1.0 0.9 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 548 0.0 1.3 2.5 9.1 3.0 2.0 2.4 Industriegebäude

Storage buildings Bâtiments de stockage 55 -1.4 2.8 4.2 9.1 2.1 2.1 9.3 Lagergebäude

Office buildings Bureaux 1 849 -2.3 4.0 3.2 4.1 2.0 0.5 0.9 Bürogebäude

Commercial buildings Commerces 1 973 -2.5 3.5 3.7 3.2 2.0 1.8 1.4 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 14 -4.0 3.0 3.8 0.2 0.5 0.4 0.2 Landwirtschaftsgebäude

Miscellaneous Autres 232 31.1 8.4 17.4 32.8 22.3 19.7 9.9 Sonstiges

Total 6 849 -1.0 3.1 3.5 5.5 3.0 2.3 2.0 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 13,7603 ATS

22 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 2 093 7.7 4.9 9.0 9.0 6.0 2.0 2.0 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 1 575 16.6 8.0 12.0 4.0 3.0 4.5 5.0 Bahnanlagen

Other transport Autres réseaux 993 -18.8 26.0 9.0 7.5 3.6 7.6 8.9 Übrige Verkehrsinfrastruktur

TOTAL 4 661 4.0 9.9 10.0 7.0 4.5 4.0 4.5

Telecommunications Télécommunications 114 -4.7 -1.9 2.0 1.5 2.0 1.5 1.2 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 112 -3.9 -5.4 4.0 5.5 4.0 2.5 2.0 Energie- und Wasserversorgung

Other Autres 1 729 3.3 -2.7 -1.4 7.0 2.3 3.3 0.5 Sonstiges

Total 7 616 2.3 3.9 6.2 6.7 3.9 3.6 3.2

1) At 2006 prices, excluding taxes. 1 euro = 13,7603 ATS

Country/Pays/Land: Austria Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 142.9 1.8 2.0 2.1 1.9 2.1 2.0 2.0 Privater Verbrauch

Public consumption Consommation publique 46.5 1.4 1.9 2.1 2.0 2.3 1.8 1.2 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 53.1 0.1 0.3 3.8 6.3 3.7 3.2 3.0

of which construction

Stocks (contribution as % of GDP) Variations de stocks 0.7 Vorratsveränderung

Exports Exportations 144.7 8.2 6.2 7.5 8.3 6.0 6.0 6.2 Exporte

Imports Importations 130.1 6.8 5.0 5.6 7.7 4.5 6.0 6.0 Importe

GDP PIB 257.9 2.3 2.0 3.3 3.4 2.4 2.4 2.5 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 13,7603 ATS

24 © EUROCONSTRUCT Vienna, November 2007 Belgium

BELGIUM

Aquiec-Vkebi

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

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

The general economic picture that Belgium is expecting for the years 2007-2010 is quite similar to the one set out in the reports of the 63rd Euroconstruct conference.

There is, however, one essential difference in the sense that the latest estimates relating to 2007 appear much more positive than predicted. Experts are talking about a growth of 2.7%, revised upwards by 50 basis points compared to June. This change reinforces the anticipated economic scenario, particularly in terms of business investments (revised upwards) and unemployment (revised downwards).

The first statistics available regarding planning permissions granted during the course of 2007 also reveal a few differences compared to the June forecasts but in a direction that is not as positive. Because they indicate that those projections appear to be overestimated as far as the construction of dwellings is concerned and underestimated for non-residential construction.

The summary resulting from consideration all of these changes shows a trend in construction that is, in fact, overall more favourable than anticipated in June. It should thus maintain an admittedly very eroded but nonetheless substantial growth pattern, speeding up again towards the end of the period. This conclusion, at least in the short term, ties in with those of other analyses made on other bases: some analyses showing an increase in "construction manpower" in 2007, combined with a stabilisation of firms’ order books; others concluding a growth in construction probably exceeding 2% in 2007 and perhaps reaching that level in 20081.

This summary also reveals that considerable redistribution is to be expected as far as the division of output among the different activities of the sector is concerned.

Thus for example, we notice a decline in the construction of new dwellings, offset by a growth in the construction of new non-residential buildings. We also note, at least initially, a very uneven development between the construction of new dwellings and the renovation of existing dwellings, in favour of renovation activities. Also evident are changes in the nature of the new buildings: proportionately fewer offices and, for the first time in a long time, fewer apartments. These changes also affect the civil engineering sector: proportionately fewer works linked to local authority infrastructure.

The consequence is clear as far as construction firms are concerned. Despite considerable growth in the sector as a whole, some sub-sectors will be faced with a difficult situation whilst others will enjoy a more buoyant environment.

This situation is, of course, no different for construction suppliers, especially firms involved in the production of construction materials. The example of cement, tackled in the statistical appendices, is illustrative in this respect. Despite an all-in-all steady growth in construction, consumption should remain stable. What’s more, it would only take the above-mentioned shifts to be a little more pronounced for consumption to see negative growth.

1 Figures suggested by Dexia in a report on the financial status of the sector, which contains a macroeconomic analysis concluding a soft landing for construction, following the very strong growth that it experienced during the years preceding 2007. 26 © EUROCONSTRUCT Vienna, November 2007 Belgium

2 Macro-economic outlook

Economic statistics show that the Belgian economy achieved good levels of performance over the first half of 2007. In so far as those performance levels turned out to be better than predicted, the forecasters have also revised their estimates for the year.

Taking into account the growth 'gain’ achieved in the first half-year, they estimate GDP growth at more than 2.5% for the whole year (+2.7% in the case of the Federal Bureau, according to its autumn economic budget). 2007 thus appears to be one of the best years of the decade.

As in the other European countries, these good performance levels are largely attributable to the good showing of domestic demand, which is partially due to a fall in the household savings rate. This fall, which is due to sufficient confidence among households, offsets the loss of support from which domestic demand had benefited in 2006 when tax reform improved, one last time, the available income of households and when the local elections boosted public investments.

For 2008, as for the other years of the forecast period, experts expect the Belgian economy to continue its course on a basis comparable to its growth potential (±2.1% on an annual basis). For 2008, in particular, this slowing-down of growth is the consequence of less favourable demand projections and of the resulting impact on business investments, businesses being less encouraged to extend their production capacities.

The high growth (higher than the long-term trend) that will have characterised the years 2006-2007 is having a positive influence on employment but with some delay. Thus for example, employment should still rise strongly in 2008, continuing in the same vein. That is to say, on a basis whereby new jobs largely exceed the increase in the working-age population, thus leading to an appreciable drop in unemployment figures.

Driven by the rise in energy prices, even when tempered by a strong euro, inflation is expected to speed up in 2008. Experts see it exceeding the 2% mark, which is the price stability target of the ECB.

Assuming that energy prices stabilise in the longer term, Belgian inflation would soon fall below 2% again, from 2009. This explains the fact that long-term interest rates may nevertheless follow quite a stable course. Experts from the Federal Planning Bureau expect the prospect of controlled inflation to be more likely to lead to a (temporary) fall in real rates in 2008 than to a rise in nominal rates.

In this context of near-stability of nominal interest rates, of demand (both domestic and foreign) tending to grow over the whole of the forecast period and of high profitability (in particular following a pay rise expected to stay below productivity gains), businesses should continue to step up their investments on a continuous basis throughout the whole forecast period.

The proportion of GDP dedicated to business investments is expected to rise continuously, which clearly positions them as an important engine of Belgian economic growth in the next few years.

3 Housing Market

Month after month, the publication of the figures relating to authorised new dwellings shows a decline that assumed an unsuspected scale just a few months ago.

Taking these figures into account obviously leads to a downward revision in the projections for new construction, drawn up in June. This is when they were already no longer viewed positively, except for in the short term.

The main problem today is to assign the correct significance to the variations revealed by the statistics. Particularly since the most plausible explanation on the face of it, namely the entry into force of stricter standards for the energy performance of new dwellings in the Flemish part of the country (these standards are yet to be tightened up in both the Walloon Region and in the Brussels Capital Region) is unrelated to those variations. The monthly figures do not show any signs of anticipation and therefore no response effect in 2007. For very good reason: a survey carried out among private principals shows that most of them do not know anything about these new regulations.

So for other reasons, the decline in question had been anticipated (what’s more, it had clearly already begun in 2006) but not its scale, except in an alternative scenario, which, on the other hand, underestimated the speed of it.

The reason for this difference between outlook and reality is linked to the figures available when the June projections were drawn up. Those projections did not, at that time, allow for an assessment of the correct scale of the transitional nature of the situation in which Flemish demand for new dwellings found itself during the course of 2006.

The graph opposite illustrates the growth in the share represented by apartments as a proportion of authorised new dwellings in Flanders. It clearly Share of appartments in total new dwellings shows a general trend authorized in Flanders upwards, which, as more or 70% less everywhere in Europe, 65% has largely helped to raise 60% demand to the high level that it 55% has reached over the last few 50% years. But, besides this 45% momentum, it also reveals an 40% "uncoupling", without which total demand would not have 35% been recorded at the level it 30% 01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 showed in 2006, far from it. Monthly figures Short term trend Long term trend Yearly figures

It also shows that this uncoupling was probably only short term resulting from a discrepancy, temporarily very pronounced, in the growth in demand for one-family dwellings on the one hand and for apartments on the other. The latest available figures show a sharp fall in demand for apartments, which restores the balance of the market between these two segments towards a level that looks like being comparable to or even higher than that reached for the whole of 2005.

In other words, although apartments are less expensive because they take up less land and are generally less spacious, the growth in demand for apartments should realign itself with that for one-family dwellings. In Flanders, total demand in 2007 for new dwellings is therefore

28 © EUROCONSTRUCT Vienna, November 2007 Belgium showing the effects of the difficulty experienced by households in financing the increases in costs for building plots and in construction costs that have occurred over the period 2006- 2007.

At first sight, this growth appears logical, since these variations are only partially offset by an increase in the available income of households and wide use is already being made of the techniques of increasing borrowing capacity by extending the period of credit.

The paradox is, however, that secondary market prices (existing dwellings) have increased even more and that, contrary to what the newspaper cuttings appeared to indicate, the statistics relating to the first half of 2007 show no sign of any real flagging of this market. The number of transactions remains almost stable and prices continue to rise at a rate that’s hardly any slower "only to pick up more strongly again," some observers add.

This is a real paradox in so far as the growth in secondary market prices is clearly a sign of a demand for dwellings that outstrips supply and, therefore, of a need to extend stock even more. A paradox again because the effect of the growth in prices on the two alternative markets of existing dwellings, on the one hand, and the construction of new dwellings, on the other, has been to improve the competitive position of new construction.

Combining with that the anticipated economic trends towards a more moderate growth in construction prices (assuming energy prices stabilise), an increase in the available income of households and a stabilisation of borrowing terms, to which factors a drop in unemployment can also be added, the conditions are more those of a recovery in demand for the next few years.

What’s more, it should also be emphasised that, as far as the Walloon Region is concerned, an increase in the number of authorised dwellings is what was observed during the first few months of 2007. It is true that, given its lower demographic density, prices for land and for existing dwellings are not as high there as in Flanders or Brussels. But the trends are no different there, on the other hand. Except that unemployment remains high there (while it hardly exceeds the level of a temporary unemployment in Flanders any more), which continues to affect the level of Walloon residential construction. It, on the other hand, reacts more favourably to a fall in unemployment figures, such as the one taking shape for the whole of the forecast period and, in particular, at the beginning of it.

In conclusion, the scenario that appears to be most likely as far as the overall development of new residential construction is concerned consists of an appreciable correction in the demand for new dwellings in 2007, followed by stabilisation and recovery, which, at the end of the period, should take it back to the level recorded in 2006.

Taking into account time-to-site periods, on the one hand, and construction periods, on the other, the trends look like being smoother in terms of activity. However, a decline, which fortunately will probably be only temporary, no longer seems avoidable for 2008.

In residential construction, the situation of renovation looks more favourable than that of new construction, particularly as far as the first few years of the period under review are concerned.

Traditionally, this segment acts as a cushion because it is less subject to the vagaries of the short-term economic situation and more carried by a structural process of expansion. This is a market that affects an ever-growing number of dwellings since, in this category, the number of new constructions exceeds the number of demolitions every year. This is also a market that is structurally supported by the development of quality standards, which are constantly being raised. © EUROCONSTRUCT 29 Belgium Vienna, November 2007

This is particularly true of the energy performance of buildings, although, it has to be said, that is not one of the main concerns of citizens (owners or tenants) in Belgium.

However, the authorities are trying to develop a policy of incentives to this end. On the whole, this policy appears to be very encouraging but is too dispersed among the different levels of power, which affects both its consistency and its visibility.

While it is fair to say that it could be more effective in terms of the resources mobilised, it is nonetheless having some effect. Increasing these incentives should, what’s more, boost the growth of renovation works of a residential nature during the years 2007–2009.

The federal government has decided to double, as from 2007, the maximum tax advantage linked to carrying out works aimed at saving energy (insulation, double-glazing, boilers, etc.). In concrete terms, government grants correspond to 40% of the total amount of the bill, with a maximum of 2,600 € a year per dwelling. Given that the measure was fairly slow to get started, after a "timid" introduction in 2003, it is anticipated that a period of more or less three years is necessary for the relevant adjustment to take full effect. In the past, a reduction in the rate of VAT on the renovation of dwellings also took several years to take full effect.

The Flemish regional government has also decided to introduce a new subsidy for renovation starting in 2007. This is intended for large renovation projects (of more than 10,000 €) which improve either the energy performance of the dwelling or more structural elements (walls, floors, etc.) or technical elements (such as electricity), or else renovations to improve the accessibility and practicality of dwellings for less able-bodied people. In concrete terms, under certain income conditions which are not particularly restrictive, the government grant corresponds to 30% of the total bill, with a maximum of 10,000 €. Judging by the subsidy applications already submitted at the end of the third quarter and the high rate of acceptance of the applications already processed by that date, it seems that the measure will quickly reach cruising speed, probably in two years’ time.

Consequently, renovation works of a residential nature can be expected to benefit from a growth impetus which will gradually subside during the course of 2009-2010 if the legislation remains unchanged by then. A downwards revision of these support policies by 2010 would, of course, affect activities by that date.

30 © EUROCONSTRUCT Vienna, November 2007 Belgium

4 Non-residential Market

The situation of non-residential construction remains completely different from that of housing construction, as the June projections indicated. The differences have even widened since then.

If new housing construction is coming down to earth with a bump, new non-residential construction is still recovering from the collapse that it experienced at the turn of this century, when demand was close to 50 million m3.

The interim figures published during 2007 confirm these trends, even showing them more clearly, in terms of both planning permissions and general economic outlook.

Experts are seeing a strong increase in business investments emerging in 2007 and believe that this increase should characterise the whole forecast period, although they do anticipate a slowing-down in their growth over the last few years. They see private investments as an important engine for Belgian economic growth in the next few years.

The corollary is simple as far as the construction of new non-residential buildings is concerned. It should expand steadily until and including 2010, at a very fast pace during the course of 2007-2008 and gradually falling from year to year.

The increase, in the end insufficient to restore the levels of demand seen at the start of the decade, appears to show an imbalance among the different types of buildings. Paradoxically, although business investments in services are expected to grow most favourably, it seems that buildings intended for this sector (including offices) will not be in the best position for the next few years.

It is probably more industrial-type buildings that will benefit from the increase in business investments. In the Belgian statistics, this category of buildings also includes warehouses. That is to say buildings which are essential to setting up European logistical centres, for which many businesses value Belgium as a location, its infrastructure and its hinterland. A niche, admittedly, but one which is expanding!

In this favourable context for non-residential buildings, existing buildings are not expected to be overlooked. In the field of offices, for example, for which old buildings are difficult to re- develop as such. This re-development is often achieved through conversion, sometimes including a change of allocation: creating dwellings and for more industrial buildings too. Loft apartments are very popular.

Without reaching these extremes, a need for non-residential buildings, which is increasing on a lasting basis, also requires the conversion and extension of existing buildings, which are also expected to increase.

Generally, therefore, non-residential activities are moving in a positive direction but with a few shifts among the different types of buildings. Shifts are also noted for dwellings and have some repercussions for the nature of activities underlying output or for the nature of the materials used.

5 Civil Engineering Market

In contrast to the projections relating to the other two main construction segments, those for civil engineering activities appear almost unchanged compared to the conclusions of the June financial year.

These conclusions are dictated by a scenario with a familiar structure, largely influenced by the investment cycle of local authorities: strong acceleration (by 10 to 20%, or even more) in the run-up to the elections and strong deceleration (equally pronounced) over the following years.

The estimates circulating, regarding the course of public investments for the 2007 post- election year (-7.6%, almost completely cancelling out the 8.8% increase recorded in 2006), confirm this scenario for the next few years.

Although they are slightly more positive than the previous ones, the latest forecasts from the Federal Planning Bureau also confirm the trend outlined by the June projections, namely a new fall but a lot more moderate one in 2008, followed by a recovery starting in 2009.

Although the cyclical nature of the variations in civil engineering activities is clear, the question of the magnitude of the different cycles is more complex. The initial projections of the trajectory leading to 2006 had shown an increase in investments in fact twice as high as that actually observed. An observation that raises the question of a possible under-estimation of the fall expected over the period 2007-2008.

In this respect, we can see that the projections of the Federal Planning Bureau allow a positive balance for the ‘stop and go’ process (or, more accurately, ‘go and stop’) relating to the 2005–2008 period. This balance is particularly difficult for the local councils to finance as they are still in a very difficult financial position.

In other words, in contrast to the projections presented for the construction of buildings (housing or otherwise), which appear to be fairly neutral (i.e. without an alternative scenario being more plausible in one direction or the other), the projections for civil engineering, viewed as a whole, probably show more of a negative risk (a less favourable reality in fact) than a positive one.

Be that as it may, as already indicated in the June projections, it is mainly civil engineering activities directed towards local community infrastructure that will be most affected. Activities relating to large-scale infrastructure (motorways, waterways, railway, etc.) being only slightly affected by the fluctuation in local authority investments.

Undoubtedly even more than for buildings, the anticipated trend of civil engineering will not occur without shifts, with the related consequences in terms of the nature of activities underlying output and the nature of the materials used. These consequences will be proportionate to the extent of the decline observed, in the end, over the whole 2007-2008 period. And they are particularly significant as they affect activities which are typically different in nature and therefore carried out by firms with clear areas of specialisation.

32 © EUROCONSTRUCT Vienna, November 2007 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 4b 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 2006, the amount corresponds to the contribution of variations in stock to GDP. For the years 2004 to 2010, 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: • Historical series: National Institute for Statistics, Institute for National Accounts and Construction Confederation (estimates) • Forecast and Outlook: Federal Planning Bureau and Construction Confederation

Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 10 421 10 479 10 522 10 544 10 565 10 586 10 606 Bevölkerung

Households ('000s) Ménages 4 357 4 397 4 432 4 457 4 482 4 508 4 533 Haushalte

Unemployed ('000s) Chômeurs 415 419 412 355 334 327 315 Arbeitslose

Unemployment rate (%) Taux de chômage 8.4 8.4 8.2 7.0 6.6 6.4 6.1 Arbeitslosenquote

Change of GDP Variation du PIB 3.0 1.7 2.8 2.7 2.1 2.1 2.1 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.1 2.8 1.8 1.7 2.2 1.8 1.8 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 0.0 1.9 4.0 3.4 3.5 1.9 1.9 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 3.4 3.8 4.3 4.3 4.4 4.4 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 6 390 11.7 6.6 13.5 2.7 -2.2 4.3 5.1

Logement Renovation 6 454 2.0 2.0 1.9 5.3 5.0 3.5 1.7

Wohnungsbau Total 12 844 6.3 4.1 7.4 4.0 1.5 3.9 3.3

Non-residential construction New 6 535 11.8 1.2 10.0 6.2 5.2 3.2 1.9

Bâtiments non résidentiels Renovation 4 061 2.4 2.3 2.4 2.4 2.2 2.2 2.2

übriger Hochbau Total 10 595 7.9 1.7 6.9 4.7 4.1 2.9 2.0

Building New 12 925 11.8 3.8 11.7 4.4 1.6 3.7 3.4

Bâtiment Renovation 10 514 2.2 2.1 2.1 4.2 3.9 3.0 1.9

Hochbau Total 23 439 7.0 3.0 7.2 4.3 2.6 3.4 2.7

Civil engineering New 4 366 -0.9 7.0 9.3 -7.2 -0.1 2.8 4.2

Génie civil Renovation 1 036 -3.2 4.5 6.8 -9.4 -2.5 0.2 1.6

Tiefbau Total 5 402 -1.4 6.5 8.8 -7.6 -0.6 2.3 3.7

TOTAL CONSTRUCTION OUTPUT 28 841 5.4 3.6 7.5 2.1 2.1 3.2 2.9

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 6.29 5.1 0.9 8.5 0.1 0.1 1.3 2.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 40,340 BEF

36 © EUROCONSTRUCT Vienna, November 2007 Belgium

Country/Pays/Land: Belgium Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 24.5 27.3 26.2 26.4 26.5 27.3 28.6 Baugenehmigungen Familienhäuser

Flats Collectif 27.1 31.4 34.5 29.8 30.0 31.0 32.6 Mehrfamilienhäuser

TOTAL 51.6 58.7 60.7 56.2 56.5 58.3 61.2

Housing starts 1+2 family dwellings Logements commencés Individuel 23.2 24.6 24.5 24.3 24.2 24.8 25.9 Baubeginne Familienhäuser

Flats Collectif 24.4 27.9 31.4 28.4 27.7 28.5 29.9 Mehrfamilienhäuser

TOTAL 47.6 52.5 55.9 52.7 51.9 53.3 55.8

Housing completions 1+2 family dwellings Logements terminés Individuel 22.1 23.0 25.1 24.4 24.1 24.3 25.1 Baufertigstellungen Familienhäuser

Flats Collectif 22.7 24.7 29.4 30.6 28.0 27.9 28.8 Mehrfamilienhäuser

TOTAL 44.8 47.7 54.5 55.0 52.1 52.2 53.9

Housing stock Logements existants 4 778 4 828 4 882 4 933 4 982 5 034 5 087 Wohnungsbestand

thereof second homes dont résid. secondaires 115 117 117 118 119 119 120 davon Zweitwohnungen

thereof vacancies dont inoccupé 305 315 333 358 381 407 434 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 65.6 65.7 65.8 66.2 66.5 66.8 67.1 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 368 16.5 24.2 -7.5 -13.9 13.8 8.6 3.5 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 321 -7.7 11.9 11.2 15.8 -2.7 -3.3 -2.1 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 920 7.1 15.4 9.4 18.4 13.3 5.4 2.5 Industriegebäude

Storage buildings Bâtiments de stockage Lagergebäude

Office buildings Bureaux 1 724 -2.0 0.4 2.7 2.0 2.8 4.5 5.2 Bürogebäude

Commercial buildings Commerces 1 128 48.4 -26.4 25.6 5.3 3.6 0.8 -1.9 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 437 14.2 23.0 21.4 12.3 -8.5 -4.7 -4.5 Landwirtschaftsgebäude

Miscellaneous Autres 636 19.8 -3.9 12.8 -15.6 -5.5 1.8 2.4 Sonstiges

Total 6 535 11.8 1.2 10.0 6.2 5.2 3.2 1.9 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 40,340 BEF

38 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier Verkehrsinfrastruktur Straßen

Railways Voies ferrées Bahnanlagen

Other transport Autres réseaux Übrige Verkehrsinfrastruktur

TOTAL 3 425 -1.2 12.6 10.8 -14.2 -1.7 3.1 5.4

Telecommunications Télécommunications Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 047 -3.0 -3.4 4.1 2.4 -0.3 -0.3 -0.2 Energie- und Wasserversorgung

Other Autres 930 -0.2 -0.7 7.1 5.3 2.5 2.6 2.7 Sonstiges

Total 5 402 -1.4 6.5 8.8 -7.6 -0.6 2.3 3.7

1) At 2006 prices, excluding taxes. 1 euro = 40,340 BEF

Country/Pays/Land: Belgium Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 166.1 1.4 1.3 2.0 2.5 1.7 1.7 1.8 Privater Verbrauch

Public consumption Consommation publique 70.9 1.8 -0.2 0.0 2.4 2.5 1.9 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 64.1 7.1 6.7 4.2 5.9 2.3 2.7 2.5

of which construction

Stocks (contribution as % of GDP) Variations de stocks 5.1 0.3 0.0 0.8 0.0 0.1 0.0 -0.1 Vorratsveränderung

Exports Exportations 275.2 6.5 3.6 2.6 4.6 5.2 5.6 5.6 Exporte

Imports Importations 267.1 6.6 4.2 2.7 5.3 5.3 5.6 5.5 Importe

GDP PIB 314.2 3.0 1.7 2.8 2.7 2.1 2.1 2.1 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 40,340 BEF

40 © EUROCONSTRUCT Vienna, November 2007 Czech Republic

CZECH REPUBLIC

ÚRS PRAHA, a.s. www.urspraha.cz

Jiří Hezký e-mail: [email protected]

Jan Blahoňovský e-mail: [email protected]

EUROCONSTRUCT Conference Wien, November 2007

1 Summary

The Czech Republic continues with high economy growth rate also in year 2007. The volume of GDP will grow by further 5.8 %. It follows the trend of increasing GDP since year 2002 with peak in year 2005 (6.5 %). From year 2000 GDP will increase its volume by 35.6 %, i.e. 2.8 times faster then west European average. The main drivers on the supply side are growing capacity and performance of construction industry. The main drivers on the demand side are growing reinvested profits and households income. Very significant role plays foreign trade with active balance; the volume of exports even exceeds GDP by 4.6 %. Strengthening of the Czech crown, one of the lowest inflation rate and sharp decrease of unemployment are main reasons of positive recent development of Czech economy. The difference in formation of GDP/capita in parity between the Czech Republic and European Union (EU-25) lowered from -35.3 % to -25.9 % during period 2000–2006. The Czech value of GDP/capita in parity reached 18.8 Euro in year 2006 and gained on Portugal. The Czech Republic finally reached rating of category A. The Czech construction industry continues also in year 2007 in high growth rates of construction production of 3rd millennium. The construction output will increase by further 6 % and will reach growth by 56.8 % since year 2000; average year value is therefore 8.0 % which is 4.6 times more the west Europe. The 2007 Czech construction output will be 19 bill. Euro in following structure: 15.6 % residential, 32.2 % non-residential, 26.1 % civil engineering, 23.5 % current repairs and 2.6 % construction works abroad.

Real increase of GDP and construction output (% change): 2001 2002 2003 2004 2005 2006 2000 2007 –2006 GDP CZE 2,5 1,9 3,6 4,6 6,5 6,4 +28,3 5,8 West E. 1,5 1,3 1 2,2 1,5 2,5 +10,4 2,1* Construction CZE 9,5 2,4 8,6 9,5 4,2 6,5 +48,0 6,0 output West E. 1,7 0,4 1,1 2,1 1,2 3,6 +10,5 2,2* * according to forecasts in 06/2007.

Construction activity in purchasing power parity is high in Czech Republic, its value was 3182 Euro/capita in year 2006 and we assume it will reach 3550 Euro in year 2007 and it will be by 1.2 % higher then west European average; by this overtake 6 developed west European countries (France, Switzerland, Belgium, United Kingdom, Germany, Sweden) and other 3 east European countries.

42 © EUROCONSTRUCT Vienna, November 2007 Czech Republic

2 Macro-economic Outlook

Year 2006 and 2007 continue in the most successful period of Czech economy and construction industry

Main source of GDP formation were investment demand, industrial and construction production and growing domestic consumption supported by increase of real wages. Significant influence drivers where continuing industry restructuring (movement from heavy industry and textile, clothing, toys, etc. industry – where is unfair competition from China – to automobile industry and electric equipment production) and increasing export exceeding volume of GDP. Determinants of growing domestic demand were increase of productivity exceeding wage increase (reaching two digit numbers in 2007); further increase of direct foreign investments and growing of firm competitiveness. Substantial positive influence to living standard is caused by continual strengthening of Czech currency, when the Czech crown has empowered against dollar almost twice and by more then one quarter towards Euro during period 2000–2007. According to Czech National Bank, the Czech crown should strengthen by further 6 % till year 2008. The Czech inflation rate is deep below European average (2.8 % for 3rd quarter of 2007) and interest rate is one of the lowest in the Europe. Thanks to growing economy there was hard reduction of unemployment rate in 1st half-year of 2007 – down to decade record, from 8.7 % in 2004 over 6.4 % in 2006 to 6.1 % in 1st half-year of 2007. Considerable support for business is based on fact that already in year 2005 the Czech Republic together with Norway disposed by cheapest money in whole EU since key interest rate was only 1.75 % and therefore deep below European average. Even that this value increased to current value 2.75 %, it is still one of the lowest in Europe. Proportion of public debt to GDP lowered a bit to 30.1 % (however, requested rate of indebtedness was not reached). Positive is ongoing active balance of trade payments and faster increase of real wages. In 1st half-year of 2007, there was unfavourable development of current account balance, manly due to refund of double reinvested profits from inland compared to previous year. Year 2006 means change in political orientation for Czech Republic, from social state to rather liberate state. It enabled beginning of postponed program of economic reforms – for the present it started more liberally than political atmosphere can carry, mainly because it advantages minority of the richest to the prejudice of poorer middle and lower rank in the form of VAT increase. VAT increase will also affect construction production. In 1st half-year of 2007 continues large year-to-year growth of construction output by +12.6 %, from this +18.9 % in buildings and – on the contrary – civil engineering continues in decline trend so far by -3.5 %. The volume of current repairs is also decreasing. The prices of material inputs increased significantly by 5.7 %, from this bricks and tile roofing by 19.3 %, which is highest increase from year 1998. Average number of employees decreased by - 0.9 % and real wages increased by +7.8 %. Contrary the volume of construction works abroad in increasing and will be double compared to year 2005. The assumption is that in year 2007 the construction output will reach increase by +6 %, highest in residential +14.6 % and non-residential +10.2 % (mainly in new non-residential buildings designed for production), civil engineering will lower its volume by -2.5 % and similar development is expected for volume of repairs. There was massive privatisation of industry and also construction industry after November 1989 "velvet" revolution. Overwhelming majority of biggest construction companies step by step moved into the ownership of biggest west European construction companies. This fact had positive impact to further development of those firms and strengthens their financial position. Currently those firms occupy top places in ranking list and not only of Czech construction industry. There are 5 of those Czech companies inside top ten and further 3 in top forty of the most successful construction companies in 4 countries of Visegrad.

Current owners of biggest Czech construction companies: Original / new company name Owner Owner’s country Stavby silnic a železnic Vinci France Průmstav Praha Vinci France VCES Bouygues France Čermák a Hrachovec Bouygues France Skanska CZ Skanska Sweden Metrostav Doprastav Slovakia Strabag Strabag Austria Vodní stavby / Hochtief Hochtief Germany ŽS Brno / OHL ŽS Obrascon Huarte Lain Spain TCHAS Eiffage France

Highest growth of construction output is currently formed by companies with 100 to 249 employees (year-to-year +21.9 %), lowest by companies with 250 to 499 workers (-4 %). Hight rate of construction output growth – in period 2000–2006 highest from all 19 countries of Euroconstruct gradually looses its high rates even though the results of 1st half-year of 2007 still do not confirm it fully. There are changes in influence of particular types of construction at the development of construction output as a whole; this is evident for the period 2002–2007: Share in construction output % Difference % 2003 2004 2005 2006 2007 2003–5 2005–7 New Residential 12,6 13,6 13,6 15,1 15,6 1 2 New Non-residential 33,3 29,8 28,2 30,2 32,2 -5,1 4,0 New Civil engineering 26,7 29,3 31,2 26,4 26,1 4,5 -5,1 Total new 72,6 72,7 73,0 71,7 73,9 0,4 0,9 Repairs 26,3 26,0 25,6 26,2 23,5 -0,7 -2,1 Total domestic 98,9 98,7 98,6 97,9 97,4 -0,3 -1,2 Abroad 1,1 1,3 1,4 2,1 2,6 0,3 1,2 Total con. output 100 100 100 100 100 Changes % 8,6 9,7 4,5 6,7 6,0 -3,1 1,5

This table shows radical change in influence of particular types of constructions between periods 2003–5 and 2005–7. Civil engineering, originally main power of construction industry, started to be its brake (from +4.5 % to -5.1 %). Non-residential constructions become the power (from -5.1 % to +4.0 %) and with less extent also residential constructions (from +1.0 % to 1.9 %). Explanations of the causes for this development are mentioned in the chapters of particular construction types.

44 © EUROCONSTRUCT Vienna, November 2007 Czech Republic

Construction output (year-to-year changes) VI/2006 – VII/2007 %

35% 32,1% 29,0% 30% 26,4%

25% 17,6% 20% 15,4% 12,1% 15% 10,0% 7,2% 7,7% 10% 6,3% 4,2% 5% 1,4% -1,7% 0% -4,4% -5%

-10% I/07 II/07 X/06 V/07 III/07 IX/06 XI/06 IV/07 VI/07 VI/06 XII/06 VII/07 VII/06 VIII/06

While development of construction output in 2nd half-year of 2006 is represented by slight concave curve, enter to 1st half-year of 2007 is characterised initially by high increase due to very moderate winter and followed by rapid growth rate drop from February to June 2007. The drop was caused by unsolved problems with realisation of civil engineering constructions from recent year and quite high comparison level from past. There is again slight growth from July 2007. Very interesting is increasing export of construction production, directed mainly to developing countries, including Russia, especially growth after year 2005 to almost double value. High growth rates of construction output already face the barrier of number of workers, especially specialised workers for crafts and all those even though quite high number of legal foreign workers – 46 thousands (half from Ukraine, 14 % from Slovakia and 10 % from Poland). There are estimations that the number of illegal workers in construction industry is much higher compared to the legal ones. Construction materials are also becoming to be a barrier, e.g. for masonry but also for thermal insulation.

3 Housing Market

Residential constructions continues in being power for construction market despite high increase of dwelling costs exceeding increase of households income

Since 2005 residential construction output together with non-residential is the main power of Czech construction industry growth. In 2006 residential output represents 3.5 bill. CZK, i.e. 20.1 % of total construction output, this is half compared to west Europe. In year 2007 it will increase by 14.6 % in total and in this by 15.4 % in new constructions. By transition to market economy the majority of dwellings (mainly in multi-storey buildings) are not delegated by state but traded on free market. The scope of this market is determined by financially accessible demand of households which grows in relation with living standard development. Because in the Czech Republic (and similarly in other east European countries) it is still much lower then in west European area, even after 17 years after origin of market economy Czech Republic has not managed to come near the level of dwelling saturation in west Europe. Currently in the Czech Republic about 3 dwellings/thousand inhabitants are built yearly, this is hardly half of west Europe countries production. Even the scope and quality of new dwellings improved by far still cannot reach west European average. Main reason for half production is continuous worsening of availability due to high increase of dwelling costs, higher than inhabitants’ incomes. There is 78 % increase of dwelling price from year 2000 to 1st half-year of 2007 (20 % from 2006) while average income increased only by 50 %. Nowadays, the price of average new dwelling of 70 m2 represents 11 year gross wages, older dwelling in panel block-of-flat represents about 6.4 year wages. The main causes are government-regulated rents and mainly one of the highest prices for energy in Europe expressed in purchasing power parities. In spite of the fact that the volume of loans for housing increased many times, today interest rate 4 % make possible to buy 70 m2 dwelling only to households witch can repay monthly minimally 12,5 thousands CZK for 25 years, this is 58 % of average wage. Considering programming price rise of housing, energy and food products the situation will get worse. This is why structure of dwellings already changes; there is increased number of luxury dwellings for rich clients, the proportion of dwellings for middle and lower rank is decreasing. Similar situation is also in difference in incomes and difference between costs for luxury and other dwellings. Residential construction is the power of Czech construction industry despite the high increase of housing costs and lower purchasing power of households. This fact is caused by massive finance support from state and banks in the form of 13.6 times growth of mortgage loans volume, 3 times growth of state support of savings for housing and also 3 times growth of mortgage proportion while households’ indebtedness is already 5 times higher compared to year 2000. Average extent of mortgage loan currently reached 60 thousands Euro; this is 6 average year wages (increase by 13.3 % from year 2006). 97 thousands dwellings where completed in year 1975, from this 71 thousands from public sources, while 13 thousands dwellings were completed in year 1995 and from this only 5 thousands from public sources. While over 30 thousands dwellings were completed in year 2006 and started almost 44 thousands new, it is still not even half compared to year 1975. To reach the level of dwelling availability as in west Europe means to complete yearly 44 thousands in the Czech Republic, this is unreal objective at least till 2010. For year 2007 we expect 37 thousands dwellings to be completed (lower half in family houses). Developer system of construction both non-residential and residential is on increase. The prices of both new and older dwellings grow so fast that there is increasing number of completed but non-sold dwllings and also non-residential spaces. Beside the financial barrier also the absence of labour and material started to influence the situation.

46 © EUROCONSTRUCT Vienna, November 2007 Czech Republic

4 Non-residential Market

Non-residential construction output is power of construction output grow since year 2006 with volume of 6.9 bill. Euro, this is 40 % of total construction output in the Czech Republic (West Europe 30.4 %). Intensity of Czech non-residential output per capita in parity will exceed west European average by 50 % in year 2007. Non-residential production had damped period 2001–2005 and it was substituted by rapid growth of civil engineering construction. The inversion occurred in year 2006, when the leading role is overtaken by non-residential construction for at least next 2 years. There is different development of non-residential public and private production in year 2007. While private is still accelerating its growth, public is passing to inhibition. Similar tendencies are confirmed also in the development of contracts where their volume in private manufacturing sector increased almost by one half while it is decreasing in public non- manufacturing sector. The cause of variation in development is different source of financing. Manufacturing companies of private sector reach high profits and therefore they have sources for investments while public sources for financing of buildings not designed for production decrease by effort to fulfil criteria for entering European monetary union. In comparison with west Europe average the volume of non-residential output in parity per capita in year 2006 is considerably higher in the Czech Republic, with exception of agricultural and health services buildings. The difference grows quite fast in period 2004– 2006. Increase of intensity in particular sub-sectors during period 2004–2007 concerns mainly buildings for physical education and sport.

2006 edu. health office ind. storagecomm. agr. misc. total Czech 73 40 156 210 65 129 18 177 868 West E 64 43 103 103 51 116 38 80 598 %CZ 2006 114,1 93,0 151,5 203,9 127,5 111,2 47,4 221,2 145,1 %CZ 2004 44,8 77,4 69,1 88,2 95,7 48,8 10,5 113,6 68,1 diff.2004–6 69,3 15,6 82,4 115,7 31,8 62,4 36,9 97,0 77,0

Proportion of reconstructions and maintenances (RaM) in non-residential public buildings was 53.5 % in 2006, in non-residential private buildings it was only 25 %, it means 34.9 % in total for non-residential buildings. Increase of private non-residential volume is causing continuous decrease of RaM volume. West Europe has proportion of RaM about 41 % with only slight decrease tendency. Reasons for grow of private non-residential production are increase of reinvested company profits and higher governmental activity together with its organisation Czechinvest in the area of supporting direct foreign investments. The Czech Republic has very good outputs for direct foreign investments.

5 Civil Engineering Market

Year 2006 means inhibition for civil engineering constructions impacted by non-using of EU funds and negative interferences to preparation and fluency of construction

Since 2006 the civil engineering constructions are not crucial part of Czech construction output development. There was realised 6.9 bill. CZK of civil engineering production in 2006, i.e. 36.7 %. The causes of principal inversion in development of civil engineering after year 2005 were described in previous report as: 1. Increase of barriers in preparation and realisation period together with invoicing of completed construction works mainly at constructions of transport infrastructure in the form of speculations with land lots, interferences to building time schedule due to ecological activities and delays caused by local municipalities 2. Administrative barriers for release of finances from EU funds (realised releases only about 42 %) that causes invoicing problems and therefore increase of works-in-progress as well. 3. Priority was to build constructions for highly developing direct foreign investments mainly in automobile industry (effort to radically reduce unemployment) 4. High comparable level for civil engineering output from year 2005 for calculation development for further years

Consequence is quite rapid decrease of growth rates of civil engineering from period 1999–2005, this is from growth of +73.9 % (with exception of in year 2001) to period 2005– 2007, this is to decrease of -3.3 %!

2000 2001 2002 2003 2004 2005 2006 2007 Development (y-to-y) % 9,0 1,4 10,9 8,3 19,0 10,1 -0,8 -2,5

In year 2006 construction intensity in Euro per capita in parity were in majority of civil engineering sub-sectors much higher in the Czech Republic then in west European countries. Exception are constructions for communications, this is cause by high comparable level from recent years and mainly by fast and massive change to mobile wireless nets before year 2004.

roads rail oth.tra trans comm. ene+w others total Czech 525 129 126 780 12 259 91 1142 West E 250 * 95 * 48 * 393 60 167 75 731 % CZ 2007 210,0 135,8 262,5 198,5 20,0 155,1 121,3 156,2 % CZ 2004 177,2 169,2 371,1 183,0 21,4 167,3 143,8 167,7 % 2004–7 +41,7 -37,8 -12,0 +15,5 -1,4 -12,2 -22,5 -11,5 * excluding Belgium and Netherlands

Mentioned difference was in year 2004 lower in road constructions and higher in other sub- sectors. Even so development strategy for civil engineering till year 2006 is impressive and presumes to invest further almost 30 bill. Euro in transport constructions, it means to increase today capacity of highways and speedways to double value. The density of highway net is currently 6.5 km/thousands km2 which is still 2–4 times lower then average of majority of west European countries. Simultaneously there will continue construction of railway corridors mainly in west and south directions, there will be modernisation of railway stations including reconstructions of traffic junction in Prague and Brno. Prague airport should become the most largest connection to east Europe. There will be new dam on Labe near Děčín and Vltava become navigable from České Budějovice to Týn nad Vltavou. River transport share high part of other transport constructions, mainly by building of flood control structures after catastrophic floods in years 1996 and 2004. We expect the increase of civil

48 © EUROCONSTRUCT Vienna, November 2007 Czech Republic engineering works and gaining positive growth rates again after year 2008 and keeping them at least till year 2010. Average cost for 1 km of highways in the Czech Republic is 7,85 mill. Euro, this is by 17 % less then in Austria. It could be even less if there is reduction of increasing requirements of surrounding municipalities to connections and repairs of adjacent roads, building of noise damping barrier and elimination of speculation with land – these additional costs represent about 10 % of cost estimates. Prices of bridges are lower, of tunnels higher. Quite high price hang together with number of bridges and tunnels due to more problematic terrain configuration in comparison with majority of other European countries. The fact that relation of exchange rates to purchasing power parity for civil engineering (ERDI) is in the Czech Republic in 2006 almost by 80 % higher compared to west Europe (1.784 : 1.01). This demonstrates the undervalued price of civil engineering constructions in the Czech Republic – mainly with regard to significantly lower labour costs.

APPENDIX – DEFINITIONS

Table 1 - Populations. Yearly average - Households : Data estimated from last census 2001 - Unemployed and unemployment rate: ILO method, average of 4th quarter. Starting from 2005 year is the unemployment rate realised as the ratio of the number of available unemployed job applicants according to the new methodology - Interest rate: non-financial corporation credits. Short-term=till 12 months, Long-term=over 2 years.

Table 2 - Construction outputs includes also current repairs, export of construction output, DIY, 5% of total construction outputs outsides construction sector, not included are black-economy estimations. Sector form of calculations. Source "České stavebnictví v číslech 2006", Czech Statistical Office

Table 3 - 1+2 family houses = in family houses up to 2 storeys with max.3 dwellings - Housing stock: at the end of the year. Source = last census + balance of completed dwellings and taken out of use - Second homes: included - Vacancies : are not included - Home ownership rate: estimations from the last census in 2001

Table 4a In the year 2004 there was realised a change in classification of splitting construction output in sub-sectors, types and branches from system CPC to CZ-CC (Czech version of CC). - Education buildings: number 1261-1265 and 1965 - Health: number 1264 - Industrial: number 125 - Storage: number 123 - Offices: number 122 - Commercial: number 121 - Agricultural: number 1271 - Miscellaneous: number 124

Table 4b The same change refers also to dividing of civil engineering output in table 4b. - Other transport: difference between number 21 (transport) and 211 + 214 (roads + bridges, tunnels, eso) + 212 (railways). Practically air and river transport (213, 2151). - Energy and water = 90% of 22 (energy circuits) - Telecommunications = resting 10% of energy circuits - Miscellaneous: = 23 + 24. Difference between total civil engineering and transport (21), energy and water circuits and telecommunication

Table 5 - GDP – system of National accounts ICEA-NACE - Stocks: % of GDP - Volume in Euro at market prices

Extra - VAT: 19% (social residential 5%) is excluded. After 2007 may be reformed VAT - Sources of data : "České stavebnictví v číslech", "Statistical Yearbooks of the Czech Republic" – Czech Statistical Office

50 © EUROCONSTRUCT Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 10 207 10 234 10 267 10 306 10 326 10 330 10 345 Bevölkerung

Households ('000s) Ménages 4 313 4 348 4 388 4 433 4 470 4 500 4 530 Haushalte

Unemployed ('000s) Chômeurs 542 510 448 316 311 306 300 Arbeitslose

Unemployment rate (%) Taux de chômage 9.5 8.9 7.1 6.3 6.3 6.3 6.2 Arbeitslosenquote

Change of GDP Variation du PIB 4.6 6.5 6.4 5.8 5.0 4.0 5.2 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.8 1.9 2.5 3.9 4.0 3.8 3.7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.3 3.7 2.7 3.9 4.1 4.0 4.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.4 2.0 2.2 2.3 2.5 2.6 2.6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.7 4.2 4.5 4.6 4.8 4.9 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 2 636 18.3 4.0 15.9 15.4 0.5 6.1 8.5

Logement Renovation 833 14.6 4.7 9.2 12.1 9.1 6.1 2.7

Wohnungsbau Total 3 469 17.4 4.2 14.2 14.6 2.5 6.1 7.0

Non-residential construction New 4 506 -1.0 2.0 12.6 12.1 2.3 4.8 7.0

Bâtiments non résidentiels Renovation 2 417 -2.0 -7.5 7.8 6.6 0.6 5.2 5.0

übriger Hochbau Total 6 923 -1.4 -1.6 10.8 10.2 1.7 4.9 6.3

Building New 7 142 5.2 2.7 13.8 13.3 1.6 5.3 7.5

Bâtiment Renovation 3 250 1.4 -4.7 8.1 8.0 2.8 5.4 4.4

Hochbau Total 10 392 3.9 0.2 11.9 11.7 2.0 5.3 6.6

Civil engineering New 4 472 31.1 11.3 -1.9 -3.5 6.4 7.1 6.1

Génie civil Renovation 2 419 1.6 7.9 1.2 -0.6 7.3 2.6 10.9

Tiefbau Total 6 891 19.0 10.1 -0.8 -2.5 6.7 5.5 7.8

TOTAL CONSTRUCTION OUTPUT 17 283 9.5 4.2 6.5 6.0 3.7 5.4 7.0

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 4.24 5.7 0.7 7.4 7.6 3.0 2.0 4.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 28,343 CZK

52 © EUROCONSTRUCT Vienna, November 2007 Czech Republic

Country/Pays/Land: Czech Republic Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel Baugenehmigungen Familienhäuser

Flats Collectif Mehrfamilienhäuser

TOTAL 51.5 48.0 49.8 48.0 47.0 46.0 48.0

Housing starts 1+2 family dwellings Logements commencés Individuel 21.0 20.7 23.0 23.0 22.0 21.0 22.0 Baubeginne Familienhäuser

Flats Collectif 18.0 19.7 20.7 18.4 20.0 21.0 21.0 Mehrfamilienhäuser

TOTAL 39.0 40.4 43.7 41.4 42.0 42.0 43.0

Housing completions 1+2 family dwellings Logements terminés Individuel 15.8 15.7 14.9 18.1 17.5 16.0 17.0 Baufertigstellungen Familienhäuser

Flats Collectif 16.5 17.2 15.3 18.6 19.0 18.0 19.0 Mehrfamilienhäuser

TOTAL 32.3 32.9 30.2 36.7 36.5 34.0 36.0

Housing stock Logements existants 4 228 4 258 4 286 4 311 4 341 4 350 4 370 Wohnungsbestand

thereof second homes dont résid. secondaires 169 173 177 181 170 175 185 davon Zweitwohnungen

thereof vacancies dont inoccupé 300 290 290 290 280 280 280 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 46.3 61.0 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 378 11.7 27.0 1.5 3.4 6.9 6.5 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 205 -29.9 21.6 -5.0 1.9 14.3 12.5 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 087 18.8 -0.4 15.9 3.4 -6.3 3.5 Industriegebäude

Storage buildings Bâtiments de stockage 342 -4.7 70.6 42.0 3.8 12.6 12.9 Lagergebäude

Office buildings Bureaux 808 21.8 0.2 4.4 -1.2 10.8 8.9 Bürogebäude

Commercial buildings Commerces 664 0.9 -19.5 6.4 1.7 3.7 12.6 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 95 53.3 41.4 15.0 -5.0 -10.0 4.5 Landwirtschaftsgebäude

Miscellaneous Autres 927 -28.6 69.8 15.1 3.8 9.4 2.2 Sonstiges

Total 4 506 2.0 12.6 12.1 2.3 4.8 7.0 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 28,343 CZK 2) There are no data in column 2004 because the classification system of products changed at the beginning of year 2004.

54 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 3 166 18.0 16.4 -2.8 5.5 5.0 7.5 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 776 14.8 -21.8 12.1 10.0 6.5 6.0 Bahnanlagen

Other transport Autres réseaux 767 20.5 -32.1 -1.3 6.6 6.4 9.2 Übrige Verkehrsinfrastruktur

TOTAL 4 709 17.9 -2.7 -0.1 6.5 5.5 7.5

Telecommunications Télécommunications 74 5.9 5.9 12.1 11.8 5.3 10.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 561 7.5 -1.1 4.3 3.5 6.5 8.8 Energie- und Wasserversorgung

Other Autres 547 -31.6 19.7 -44.4 25.3 0.8 6.8 Sonstiges

Total 6 891 10.1 -0.8 -2.5 6.7 5.5 7.8

1) At 2006 prices, excluding taxes. 1 euro = 28,343 CZK 2) There are no data in column 2004 because the classification system of products changed at the beginning of year 2004.

Country/Pays/Land: Czech Republic Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 49.4 2.9 2.4 4.4 4.2 3.5 2.9 3.2 Privater Verbrauch

Public consumption Consommation publique 20.1 -2.8 2.4 1.2 1.0 1.5 1.7 1.4 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 28.1 3.9 2.3 7.6 6.6 6.4 6.6 7.0

of which construction

Stocks (contribution as % of GDP) Variations de stocks 1.9 2.1 0.8 1.9 3.3 3.8 3.4 3.4 Vorratsveränderung

Exports Exportations 94.2 20.7 11.8 15.9 16.5 17.0 16.0 18.0 Exporte

Imports Importations 94.6 17.9 5.0 15.2 16.3 16.5 15.5 17.2 Importe

GDP PIB 99.1 4.6 6.5 6.4 5.8 5.0 4.0 5.2 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 28,343 CZK

56 © EUROCONSTRUCT Vienna, November 2007 Denmark

DENMARK

Copenhagen Institute for Futures Studies www.cifs.dk

Anders Bjerre e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

The macro-economic outlook is fair, with GDP growth of 1,5-2% p.a. in the forecast period.

The very tight labour market is a major restriction on growth, though. There is some risk of overheating, as unemployment now approaches 3%; the Spring 2007 wage settlements indicate upward pressure on wages; in some sectors, wage growth is quite high.

On the other hand, softening (at the moment: declining) home prices will dampen the growth of consumption and domestic demand in general as from 2007.

In our forecast we assume that the international economy doesn’t suffer a major downturn and that domestic home prices only decline moderately. In that scenario, the economic trends are quite fair, with moderate growth, restricted by labour availability.

Construction trends will be moderate too, as growth prospects are increasingly limited by labour bottlenecks. Things have gone very fast in the previous years. In 2006, construction activity grew much stronger than we thought possible, as capacity limits were circumvented by labour imports and recruiting from other sectors, but in too many cases, quality, productivity and profitability suffered. According to official statistics, total real construction output grew at close to 12% in 2006. In 2007 we expect a slight decline, about 1%.

New residential construction is forecast to decline considerably after a long boom. Home prices are now softening and the stock of unsold, new dwellings has risen considerably; hence, housing starts will decline somewhat. Residential R&M is expected to remain essentially unchanged, but at a high level. While softening home prices would indicate a decline, some activity has been held back by lack of labour; the net effect could be zero.

New non-residential construction is forecast to grow considerably in the next years. Activity in this field has grown much less than residential construction during the last years; with very high profitability in residential construction, interest was focused there. Offices, commercial buildings, schools and hospitals will be growth areas in the coming years, and there will be some growth in industrial and perhaps agricultural buildings too. Non-residential R&M will grow moderately.

Civil engineering trends will gradually become stronger, with weak growth in 2007 but increasing growth in the next years. New transport infrastructure is increasingly in focus due to congestion, energy-related projects are favoured by high oil prices and the increasing focus on global climate issues, and for a number of reasons civil engineering R&M is coming more into political focus too.

Notable changes since the last EUROCONSTRUCT report (June 2007): The real surprise is that construction in 2006 managed to grow even further than preliminary figures showed at the last conference. The overall outlook - with decline in new housing, growth in non-residential building and civil engineering on the brink of an activity revival, is largely unchanged, although a lot of details have been adjusted.

58 © EUROCONSTRUCT Vienna, November 2007 Denmark

2 Macro-economic Outlook

The macro-economic outlook is fair. Public budgets are in surplus and competitiveness is fine, but the very tight labour market will dampen growth.

The Danish economy boomed all-round in 2006. Construction activity grew beyond anyone’s beliefs, as the sector managed to attract more labour than expected, and the winter weather 2006-2007 meant that activity and employment in winter exceeded summer levels.

After 3.5% growth in 2006, our forecast indicates a soft landing, with GDP growth around 1.5-2% p.a. the next years – but construction trends will be weaker than the economy overall.

Growth in private consumption will dampen significantly in 2007 after the 2004-06 boom, which was partly fuelled by strong growth in housing prices. While we do not expect a housing bust, softening house prices will lower consumption growth to around 1.5% p.a.

Tax levels on personal incomes will decline slightly in the coming years. For selected groups, there may be a stronger decline; see below regarding unemployment.

Public consumption will grow at 1-2.5% p.a. during the forecast period. A recent reform of local government is still cause for increased uncertainty, and we don’t expect the planned <1% cap on public spending growth to hold. The political pressure for increased spending is very considerable in a number of fields (including infrastructure), and spending limits will be slackened, but we don’t expect construction to benefit much in 2007.

Gross fixed capital formation boomed in 2005-06 and will grow by about 3% annually in the coming years. Due to labour shortages, investments in machinery and equipment continue to grow fast, while overall construction investments will stagnate during 2007-09. There will be some growth in new non-residential building and new civil engineering, though.

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 grown considerably, but imports have grown even more during the domestic boom; the trade balance has deteriorated, but is still in surplus and will remain so in the forecast years.

Unemployment has declined faster than expected. With actual rate at 3.2% of the labour force the structural ‘floor’ is alarmingly near. Economic growth at 1.5-2% annually is still likely. Growth necessitates both productivity-related initiatives in individual organisations, and a policy focus on increasing overall labour availability and skills. A number of policies have recently been suggested by the government, including lower net tax rates for a number of groups where labour market participation rates may be increased – including full-time students and wage-earners above 63 years of age. Also, there is increasing focus on "green card" immigration of skilled employees.

Wage inflation has so far been moderate compared to earlier booms. However, the collective private sector wage bargains, in effect from spring ‘07 and settled for the next 3 years, have quite high wage growth and within the public sector employment, there is strong pressure for higher wage growth too. With present labour shortages, wages might grow even more.

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. The increasing ability to recruit labour from other countries has created a more flexible, more resilient and less inflationary macro economy, however.

The main domestic uncertainty is whether labour bottleneck problems will become really serious. The number of vacancies is high and there are tight "bottlenecks", mostly in the public sector. The forecast assumes growing flexibility in the labour market along with increasing employment, but bottlenecks may increase wage inflation and dampen real growth in 2008-09 below our forecast.

Another domestic uncertainty relates to home prices. Increasing home prices have in recent years fuelled private consumption as well as residential R&M. As interest rates have been rising, home prices has stagnated or even decreased. This will have a negative impact on consumer spending.

In the forecast, we have assumed that home prices have a "soft landing". The markets for houses and not least flats in larger cities like Copenhagen are in disequilibria, with a much larger unsold stock than normally; that is, there is excess supply at current price levels. The psychology of the market is unpredictable. In case of a continued rise in interest rates, there are some macro-economic risks related to the housing market. Macroeconomic Key Indicators in Denmark to 2009 (Annual percentage change) 2004 2005 2006 2007 2008 2009 2010 GDP 2.0 2.9 3.5 2.0 2.0 1.5 1.5 Private consumption 4.7 4.2 3.1 2.0 1.5 1.5 1.5 Unemployment 6.4 5.7 4.5 3.5 3.2 3.2 3.2 Inflation 0.9 1.7 1.9 1.6 2.0 2.0 2.0

Source: CIFS/Euroconstruct, November 2007

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, the global prospects for Danish exports appear good, at least if the slowdown in the US has a "soft landing".

3 Housing Market

New residential construction has grown at rates above 15% for a number of years. This growth has been fuelled by rising home prices, low interest rates and growing employment, with 2006 showing a record number of housing starts. Activity in new residential construction declines 10% in 2007 and a further 5% p.a. during the forecast period.

New residential construction has benefited from the price boom of the last decade, but prices are now weakening, partly because interest rates have risen but also as a reaction to prices having been pushed too high by speculative behaviour. Flat prices may drop considerably in the largest cities, where the boom was strongest, but the outlook is highly uncertain. In the forecast, we have assumed a soft landing.

The uncertainties relating to a recent reform of local government still makes it quite hard in general to estimate the future of:

60 © EUROCONSTRUCT Vienna, November 2007 Denmark

• Subsidized rental residential dwellings. This type is administered by housing associations, but with subsidies from municipalities • Special dwellings for elderly/disabled people, controlled by municipalities • The development of new building sites for housing in the Greater Copenhagen Area. The old municipalities in some cases limited the supply of new sites severely. • Secondary homes, as new zoning laws permitting increased construction will be administered by the new municipal structure.

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.

At the present level of home prices, new construction could still be quite profitable in and around major cities, but lack of suitable building sites has held back new construction, partly because municipalities were reluctant to develop more land for housing. Policies may change as the new municipalities have different roles and incentives than previously.

But in fact the level of home prices is being tested at the moment and may decline further. In the forecast, we have assumed a soft landing and only gradually declining activity levels.

New flats The private rental market: This has been a low-activity field in recent years. 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. Due to low sales, however; as private developers face a glut and can’t sell the newly built flats at the expected prices, these flats are in many cases offered for rent. In other words, the softening house market has forced a new business model on developers.

Subsidised housing can be divided into a general category administered and owned by non- profit housing associations and the special categories administered by municipalities (housing for elderly or disabled people).

The construction of general subsidised housing by non-profit associations has been on a declining trend, as 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, which sometimes gives a temporary boom in this type of construction; in fact, we had such a one-shot boom of starts in 2006, but its effects will quickly disappear.

In the 2007 Budget, money from the Housing Associations Renovation Fund, will be used to subsidize the construction of a larger number of new dwellings. 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. The number of aged people will increase strongly – but they are typically more fit than previous generations, and they expect much higher standards than previous generations. A lot has happened in this field already, but activity will grow even more in the medium term.

Repairs and modernisation – residential buildings In recent years, R&M trends have been quite strong, as disposable incomes have increased and a large segment of homeowners have enjoyed capital gains in the housing boom. Quite often, these capital gains have been used as the basis for increased borrowing – for a holiday or a new car, but very often also for residential R&M. Private homeowners desiring a

R&M desires are still high, but R&M growth is hampered by lack of suitably skilled labour. 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.

We expect R&M activity by immigrant workers to increase somewhat in the medium term. 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.

R&M may grow in the special sector of cooperatively owned housing (Danish: andelsboliger), as changing regulations and exploding flat prices in larger cities makes it easier to finance R&M activities for this sector, which has become much more market-oriented than it has been historically. This may also foster a new housing pattern, as the incentive to stay "forever" in a cheap flat was high if you were paid only a little if you sold it; now, with higher prices, the proceeds from the sale is much more likely to pay for another home somewhere else. This in itself will increase R&M activities.

4 Non-residential Market

After a weak period, new non-residential construction grew 20% overall in 2006. Industrial construction grew from 2005, office construction from 2006. A reform of local government was designed to limit public service construction during 2006-07, but in spite of various limitations and regulations, the out-going local governments managed to construct a lot during 2006 – and to start still on-going projects in their local areas.

In line with increasing service sector employment, 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 has grown fast, and we expect further construction growth in the forecast period.

In larger cities, former harbour areas are being redeveloped into new city areas, for housing or corporate HQs. In Copenhagen, there are major green-field developments and brown-field developments in many places; the Carlsberg site – with its rich industrial heritage – will become particularly interesting.

In the medieval centre of Copenhagen, an increasing number of premises – originally built as dwellings, but in recent decades used for offices - are converted back to (luxury) dwellings.

Commercial Buildings: Competition within retail will intensify, not only for customers, but for labour too due to the tight labour market. Danish retailing is characterised by many small units, and apart from the supermarket sector, by diversified ownership. The share of employment is fairly high too.

More one-stop shopping malls will be built, but at the same time some traditional city centres are striking back. If they tell their story well, many customers favour the "authenticity" and high-experience shopping of city centres, while new malls tend to be boring. We expect more

62 © EUROCONSTRUCT Vienna, November 2007 Denmark 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.

The new pattern of local government is changing the playing field, along with new planning regulations. At least all larger cities may allow new and somewhat larger outlets, with the city centres as priority locations. In the former regulatory system, the regional planning units could stop sub-optimisation from competing neighbouring communities who all wanted everything. In the near future, we may see a medium-sized boom in commercial construction.

Industrial buildings: Industrial construction 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.

Also increasingly large and specialised storage and logistics centres are on a medium-term rising trend.

Construction for agriculture: After a period of decline, there was slight growth in 2006. We expect moderate growth in the coming years, but agricultural construction is forecast to remain below the level of the 1990s for two reasons. One is strict environmental regulations; another is that some farmers are in fact expanding, but e.g. in Poland, where land and labour is cheaper and environmental restrictions less tight. For 2007-08, the new structure of local authorities may in fact cause construction to fall below our 0% forecast, as the administrative procedures seem to be hard to get in place in some municipalities, but at the moment we are simply unable to estimate how significant this may in fact turn out to be.

Buildings for public services: A reform of local government had effect from the start of 2007, reducing the number of municipalities by nearly 2/3, and even the smallest municipalities are now much larger than before the reform.

In the medium term, buildings for new, larger administrative units and in some cases for services will be constructed to reflect this new geography. However, the "old" units managed to start a lot of construction before they were abolished, and the trend of public constructions is hence a bit uncertain in the short term.

Demographics point towards significant investments in schools and other educational facilities; a lot of educational institutions are already operating at close to (or even above) capacity limits.

Capacity in health care and services for people with disabilities should grow too, in line with strongly growing numbers of elderly in the coming decade. We expect huge investments in the hospital sector in the coming decade, as many present facilities are run-down, and major renovation or new construction is increasingly needed. There is considerable focus in this field from media and politicians. We expect room for some productivity growth in the existing system through increasing focus on "lean production" and similar methods; this may alleviate the need for construction a bit, but we still expect strong growth in this field.

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.

The private leisure sector is expected to grow in the longer term. However the non-smoking regulation have recently had a severe negative influence on the turnover at bars, cafés and restaurants.

Repairs and modernisation – non-residential buildings In our forecast, R&M activity in non-residential building is on a very slight upward trend. R&M needs in schools and hospitals are very high and activity here should grow, as in various other public service facilities. However, R&M-activity is often out-competed by new construction. Hence, the forecast assumes that while demand is high, realised R&M will only grow moderately.

5 Civil Engineering Market

Transport infrastructure A recent political decision, the ‘road-and-rail-package’, included funding for final investigations (VVM) for a number of new projects. A number of new projects may hence be able to start fast, once decided. The package includes upgrading the rail system backbone; this work will take until 2014, but activity is increasing already in this field.

A number of trunk roads have been handed over to the State, including roads under construction. Financial means to accelerate work on these projects is included in the ‘road- and-rail-package’.

The newest metro-line, the link to the airport, opened in September: CPH-city in 14 minutes every 4 minutes at the price of 3 Euro. The next construction phase doubles the Copenhagen metro during the coming decade.

Investments in new roads and rail infrastructure will increase in 2007, even though there may be minor negative impulses from the new municipalities, which became responsible for other regional roads from 2007. In 2008-09 we expect further growth in new transport infrastructure, indicating a return to more normal levels from today’s quite low level.

An official Infrastructure commission is scheduled to give its recommendations late 2007; this may affect activity as from 2008. With increasing congestion in large parts of the country, transport infrastructure is more into focus, but the usual not-in-my-back-yard issues will delay actual decisions in many cases, while capacity limits will delay some projects too.

The Fehmarn Bridge to Germany has now been agreed upon; construction is planned to start 2010. It will be owned by Denmark alone, not by both countries; bridge + connections in Denmark will be around 5 billion euro (2007 prices). Details may still change, however!

Non-Transport infrastructure Energy Investment in the energy field will grow. Growth in 2007-09 is accelerated by the construction of two very large off-shore windmill fields. Investment in power distribution networks will grow, while investment in district heating falls back a bit.

Telecommunication The supply side of digital transmission is 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. However, sewage treatment may grow considerably, as may the construction of new coastlines for recreational purposes and similar leisure-related activities.

64 © EUROCONSTRUCT Vienna, November 2007 Denmark

R&M civil engineering R&M for infrastructure is generally much 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. On the other hand, there is increasing focus on this issue in the public debate, in particular relating to the state of the rail system, as very visible delays due to speed limits are impossible to overlook. Along with hospitals and schools, transport infrastructure is a likely candidate for increased R&M in the coming years, labour bottlenecks permitting.

APPENDIX 1 – DEFINITIONS

Table 1 • Population, Households: Number of people and households at the beginning end of the year • Unemployed and unemployment rate: Data are based on Danish ‘headline’ figures. This definition 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, e.g. building materials. It is different from 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 from official sources (Danmarks Statistik / Statistics Denmark • Data are in ‘Basis Prices’ excluding Value Added Tax (VAT), (unlike ‘Market Prices’/’Buyers Prices’ which include VAT). 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. • 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. • 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 (DIY) labour by private households, most of which is within R&M, and its value is not included in our data (nor in National Accounts). One exception is DIY activity on new homes, where the value of labour is included (calculated as investment in N.A.). • Materials supplied to DIY, 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

66 © EUROCONSTRUCT Vienna, November 2007 Denmark

‘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% of total stock) 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. The market used to be characterized by queuing, not by the price mechanism clearing demand and supply. With the latest public valuation in 2006, market conditions are coming closer. Sales values have increased, sometimes manifold, however still within the same regulatory framework. It is now possible to buy flats in many cooperatives without queuing, but far from in general. The situation is now quite chaotic; hence we haven’t included these yet. • Second homes: Mostly summer residences, but many are equipped as a full second home. About 10% of registered 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.

Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 5 398 5 411 5 427 5 447 5 465 5 480 5 500 Bevölkerung

Households ('000s) Ménages 2 481 2 499 2 516 2 532 2 545 2 560 2 575 Haushalte

Unemployed ('000s) *) Chômeurs 177 157 124 100 90 90 90 Arbeitslose

Unemployment rate (%) *) Taux de chômage 6.4 5.7 4.5 3.5 3.2 3.2 3.2 Arbeitslosenquote

Change of GDP Variation du PIB 2.0 2.9 3.4 2.0 2.0 1.5 1.5 Veränderung des BIP (% change in real terms)

Consumer prices (% change EU/HICP-def.) Prix à la consommation 0.9 1.7 1.9 1.5 2.0 2.0 2.0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.0 2.3 4.7 5.0 3.0 2.0 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.2 4.2 4.0 4.0 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.3 3.4 3.8 4.2 4.0 4.0 4.0 Langfristiger Zinssatz

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

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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 5 872 17.7 17.0 25.0 -10.0 -5.0 -5.0 -5.0

Logement Renovation *) 8 933 2.8 9.2 5.0 0.0 0.0 0.0 0.0

Wohnungsbau Total 14 805 7.5 11.8 12.1 -4.0 -1.9 -1.8 -1.7

Non-residential construction New 4 557 4.1 -0.6 20.0 5.0 5.0 5.0 5.0

Bâtiments non résidentiels Renovation 3 213 -3.7 1.5 15.0 0.0 0.0 0.0 2.0

übriger Hochbau Total 7 769 0.7 0.3 17.9 2.9 3.0 3.0 3.9

Building New 10 428 10.7 8.4 22.8 -3.4 -0.2 0.0 0.3

Bâtiment Renovation 12 146 1.0 7.2 7.5 0.0 0.0 0.0 0.5

Hochbau Total 22 574 4.9 7.7 14.0 -1.6 -0.1 0.0 0.4

Civil engineering New 3 241 -14.2 -8.2 5.0 0.0 5.0 10.0 15.0

Génie civil Renovation 3 219 5.7 1.5 5.0 0.0 0.0 0.0 0.0

Tiefbau Total 6 459 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1

TOTAL CONSTRUCTION OUTPUT 29 034 1.9 4.8 11.9 -1.2 0.5 1.2 2.2

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 1.80 5.0 3.0 8.0 0.0 0.0 3.0 3.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 7,4591 DKK *) Of which materials bought for do-it-yourself work is about 3,5 billion euro

70 © EUROCONSTRUCT Vienna, November 2007 Denmark

Country/Pays/Land: Denmark Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 17.0 18.0 18.0 Baugenehmigungen Familienhäuser

Flats Collectif 13.5 15.5 12.0 Mehrfamilienhäuser

TOTAL 30.5 33.5 30.0

Housing starts 1+2 family dwellings Logements commencés Individuel 16.0 17.0 18.0 17.0 17.0 17.0 17.0 Baubeginne Familienhäuser

Flats Collectif 13.0 13.0 15.0 12.0 12.0 12.0 12.0 Mehrfamilienhäuser

TOTAL 29.0 30.0 33.0 29.0 29.0 29.0 29.0

Housing completions 1+2 family dwellings Logements terminés Individuel 15.0 15.0 17.0 18.0 18.0 18.0 17.0 Baufertigstellungen Familienhäuser

Flats Collectif 12.0 12.0 14.0 13.0 13.0 13.0 12.0 Mehrfamilienhäuser

TOTAL 27.0 27.0 31.0 31.0 31.0 31.0 29.0

Housing stock *) Logements existants 2 814 2 844 2 865 2 885 2 905 2 925 2 950 Wohnungsbestand

thereof second homes dont résid. secondaires 224 226 230 235 240 245 250 davon Zweitwohnungen

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

Home ownership rate 1) Taux de propriétaires occupants 53.0 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 includes summerresidences *) Total stock is 'gross' incl summerresidences. Series in vacancies/stock revised in 2006. Stock composition differ from Statistics Denmarks 'strange' new definition. Se appedix/text for further detail. 1) Share of households living in their owner-occupied house/flat. Cf. Appendix to this country report.

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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education *) Bâtiments de l'éducation et de la recherche 947 13.5 3.8 8.1 -5.0 5.0 5.0 5.0 Gebäude des Bildungswesens

Buildings for health *) Bâtiments de santé 237 13.5 3.8 8.1 -5.0 5.0 5.0 5.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 528 -5.6 4.7 12.7 5.0 5.0 5.0 5.0 Industriegebäude

Storage buildings *) Bâtiments de stockage 213 -4.6 -8.1 38.9 5.0 5.0 5.0 5.0 Lagergebäude

Office buildings *) Bureaux 710 -4.6 -8.1 38.9 5.0 5.0 5.0 5.0 Bürogebäude

Commercial buildings *) Commerces 497 -4.6 -8.1 38.9 5.0 5.0 5.0 5.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 474 -7.5 -7.5 2.2 0.0 0.0 5.0 5.0 Landwirtschaftsgebäude

Miscellaneous Autres 951 25.9 6.3 27.2 20.0 7.1 5.0 5.0 Sonstiges

Total 4 557 4.1 -0.6 20.0 5.0 5.0 5.0 5.0 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 7,4591 DKK *) Note the that identical growth rates in row 1-2 and 4-6 represent aggregate figures for the groupings of the respective rows and note that the 2006-distrubution within these aggregate groups are rough estimates Historical data for groupings are based on National Accounts, prices are exclusive of VAT etc.

72 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 421 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 388 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1 Bahnanlagen

Other transport Autres réseaux 258 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1 Übrige Verkehrsinfrastruktur

TOTAL 2 067 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1

Telecommunications Télécommunications 291 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 3 779 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1 Energie- und Wasserversorgung

Other Autres 323 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1 Sonstiges

Total 6 459 -5.8 -3.6 5.0 0.0 2.5 5.1 8.1

1) At 2006 prices, excluding taxes. 1 euro = 7,4591 DKK

*) Note the that identical growth rates in thel rows represent the aggregate figures for all the rows together, that is the total, and note that the 2006-distrubution between the categories are rough estimates. Se text/appendix.

Country/Pays/Land: Denmark Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 106.4 4.7 4.2 3.1 2.0 1.5 1.5 1.5 Privater Verbrauch

Public consumption Consommation publique 56.3 1.6 1.1 1.5 2.5 1.5 1.5 1.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 49.7 5.6 9.6 13.0 2.0 3.0 4.0 4.0

of which construction *) 25.4 5.4 8.2 10.0 -1.0 0.0 1.5 1.5

Stocks (growth contribution as % of GDP) Variations de stocks 1.3 0.0 -0.2 0.3 -0.1 0.0 -0.1 0.0 Vorratsveränderung

Exports Exportations 114.4 2.2 7.3 10.1 5.0 5.0 4.0 4.0 Exporte

Imports Importations 107.9 7.0 10.8 14.4 4.0 5.0 5.0 5.0 Importe

GDP PIB 220.2 2.0 2.9 3.4 2.0 2.0 1.5 1.5 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 7,4591 DKK

*)The level of construction in capital formation is here in market prices inclusive of VAT(Tab 2 and 4 are ex. VAT)

74 © EUROCONSTRUCT Vienna, November 2007 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 Vienna, November 2007

1 Summary

Continued strong growth is forecast for the global economy throughout the forecast period until 2010 with the Asian giants acting as the engines. Growth is expected to be 4.5–5.0 percent and dwindle slightly towards the end. The most recent threat to the world economy is the credit crisis that started in the U.S. sub-prime housing market. The positive forecast is based on the assumption that the global impacts of the crisis remain relatively minor.

Finnish economic development has remained robust. In 2006 the economy grew as much as 5 percent. Economic indicators published after the summer show clearly better development than was earlier predicted for 2007: the present estimates range from 4.0–4.5 percent. Economic development will remain quite brisk also in the future. The slightly increased GDP forecast for 2008 is around 3 percent. Growth should slow down towards the end of the forecast period while yet remaining moderate.

The favourable development in the early period was made possible by the positive development of private consumption due to improved employment, tax cuts and real growth of wages as well as strong investment growth thanks to improved financial performance and increased capacity of enterprises plus stronger exports. Growth will be retarded towards the end of the period by slower consumption growth and cessation of investment growth.

A sudden slowdown of global economic development, for instance due to a spread of the U.S. sub-prime crisis, an unexpectedly high interest rate hike or continued rise of oil and raw material prices could pose a threat to the positive development in Finland. The trends and impacts of international political tensions are another threat.

In 2006 the total construction volume increased about 4 percent. This year growth has picked up and is expected to reach 6.1 percent. In 2008 growth will continue but at a clearly slower rate. Negative growth is anticipated for 2009 and 2010.

New non-residential starts have increased strongly in 2007 – about a fifth. As residential construction is contracting slightly, total starts are expected to increase about 10 percent this year to nearly 50 million m3. Renovation will continue to increase but the rate will decelerate towards the end of the period. The volume of civil engineering works will grow next year after a two-year hiatus thanks to new transport infrastructure projects.

Moderate growth will still be seen in 2008, but the outlook for the remaining forecast period is not quite as good. Total construction will certainly remain quite brisk, but the volumes of both new building and infrastructure construction seem destined to decline. Renovation is anticipated to increase moderately.

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 2010 Sources: Statistics Finland and VTT VTT 10/2007

76 © EUROCONSTRUCT Vienna, November 2007 Finland

2 Macro-economic Outlook

Finnish economy still growing strongly

Continued strong growth is forecast for the global economy throughout the forecast period until 2010 with the Asian giants acting as the engines. The record growth in 2006 exceeding 5 percent is unlikely to be attained. The figure should reach 4.5–5.0 percent and dwindle slightly towards the end of the period.

The most recent threat to the world economy is the credit crises that started in the U.S. sub- prime market. Fortunately, its spread has been contained fairly well at least for the time being. The U.S. GDP is estimated to drop in 2007 from the previous year's 3 percent to under 2 percent. Forecasts based on stabilisation of the economy expect a pickup in subsequent years to around 2.5 percent.

Asian growth remains very robust: China's figure is expected to remain above 10 percent, while India should do nearly as well. Japanese growth is put at an even 2–2.5 percent.

Europe should also develop favourably in 2007–2010. The growth that reached almost 3 percent in 2006 (2.9 % in the EU area) is, however, anticipated to decline to about 2 percent towards the end of the period. The German economy that picked up clearly in 2006 is unlikely to continue performing as well. The IFO business climate index has continued to weaken since last spring. The economic boom in the Baltic States continues, but growth is not expected to remain quite at the present 10 percent rate.

Finnish economic growth has remained strong: in 2006 it went as high as 5 percent. Economic indicators published after the summer show much better development that earlier predicted for 2007 at 4.0–4.5 percent. Especially private consumption, as a result of improved employment, and investments, thanks to non-residential construction, has fared better than expected.

The Finnish economy will continue to develop favourably also in the future. The slightly raised 2008 GDP forecasts predict growth of around 3 percent, even slightly higher. However, growth is expected to decelerate some towards the end of the period, but still remain around 2 percent.

The positive development in the early forecast period was made possible by favourable development of private consumption (improved employment, tax cuts, real wage growth), strong investment growth (financial performance of enterprises) and increased imports (international demand). Growth will be diminished by slower consumption growth and the end of investment growth.

A threat to positive development in Finland could be a sudden slowdown in global economic activity due, for instance, to a spread of the U.S. sub-prime housing market credit crisis, a higher than anticipated increase in interest rates or continued increase in prices or raw materials. The trends and impacts of international political tensions are another threat.

The confidence of both industry and construction companies remains strong; even the confidence indicators have increased during 2007. Order books are fuller than normal, and the boom is expected to continue at least for the next few months.

Consumers' confidence in the future is also strong and improving although they are slightly less confident about the future of the national economy. New housing loans have been continuously taken out in large numbers, but the monthly number is no longer increasing. The interest rate on new loans has increased to 5.0 percent, and further increases are likely, though at a slower rate. The number of those intending to buy a dwelling has declined

Private consumption grew 4.3 percent in 2006. In 2007 it is continuing at a good 4 percent rate thanks to improved employment. By the end of the forecast period growth in private consumption is believed to decline to about 2.0 percent.

Total investment increased 4.1 percent in 2006. Investment in both construction and machinery and equipment grew robustly. Economic forecasters predict 4–5 percent growth for 2007 and 2008. As construction investment declines, total investment growth ends towards the end of the period.

In 2006 Finnish consumer prices increased 1.6 percent. Inflation has clearly picked up. In 2007 and 2008 prices are expected to rise about 2.5 percent, which should bring inflation down slightly. Increasing dwelling prices and the interest on housing loans have spurred national inflation this year. In the future increases in the prices of energy, alcohol and food will accelerate inflation. Higher wage increases also serve to increase inflation.

In 2006 the unemployment rate dropped to 7.7 percent. New jobs have still been generated, primarily in the service sector, but industry and the construction sector have also hired new people. Unemployment is predicted to drop further. The shortage of skilled labour is constraining production in many sectors. Especially construction is facing an increasingly severe manpower shortage.

Macroeconomic Key Indicators in Finland to 2010 (Annual percentage change) 2004 2005 2006 2007 2008 2009 2010 GDP 3.7 2.9 5.0 4.2 3.1 2.2 2.1 Private Consumption 3.0 3.8 4.3 4.0 3.0 2.5 2.0 Unemployment rate 8.8 8.4 7.7 6.8 6.4 6.0 5.7 Inflation 0.2 0.9 1.6 2.5 2.7 1.8 1.7 Source: EUROCONSTRUCT, October 2007

CONSUMER CONFIDENCE CONSTRUCTION CONFIDENCE Balances %, latest value September 2007 30 Balances %, latest value September 2007 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 2007 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 VTT 10/2007 Sources: Statistics Finland and EU Comission VTT 10/2007 Sources: EK and EU Comission

78 © EUROCONSTRUCT Vienna, November 2007 Finland

3 Construction Sector

Peak in construction activity

The outlook for Finnish construction is good in autumn 2007. New non-residential construction starts have increased faster than expected while new residential construction starts have decreased as anticipated. The growth trend in renovation continues, and the situation in civil engineering is also good.

Total construction increased about 4 percent in 2006. Growth has accelerated this year, and the annual total is expected to reach 6.1 percent. Growth will continue in 2008 but at a clearly slower rate. In 2009 and 2010 it is believed to turn negative.

New non-residential starts have increased strongly this year: the 2006 volume was 29 million m3 while this year's volume is estimated to be a fifth bigger at 35 million m3; the prediction for next year is 32 million m3. Housing included, total starts are likely to increase by about 10 percent in 2007 to nearly 50 million m3. The growth trend in renovation continues but will decelerate clearly in the remaining forecast period. The volume of civil engineering works will increase in 2008 thanks to transport infrastructure projects after a hiatus of a couple of years.

The outlook for the rest of the period is not quite as favourable. The level of construction will certainly remain quite high, but both new residential and civil engineering construction appear to be facing years of decline. The moderate growth in renovation is expected to continue.

The building contractors' confidence index and economic surveys of the Confederation of Finnish Industries EK indicate a good economic situation and continually positive expectations. The confidence index has held above the long-term average for two years now, and has trended upward in the last few months. Order books are reported to be fuller than normal, and enterprises are expecting to hire more personnel. The turnover index of construction companies confirms that construction activity remains brisk. In summer 2007 the index was about 10 percent higher for both total building construction and civil engineering than a year earlier.

According to the construction cost index, costs of building construction have increased at an accelerated annual rate reaching about 6 percent in August – clearly faster than overall inflation (which has also reached 2.5 percent). The cost of material inputs has increased clearly more (7.5 %) than that of labour inputs (3 %). The civil-engineering cost index has risen less than the building-construction cost index, a good 4.5 percent annually.

NEW BUILDING STARTS IN FINLAND Mill. m3 60

50 Permits

Starts 30

0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Sources: Statistics Finland and VTT VTT 10/2007 © EUROCONSTRUCT 79 Finland Vienna, November 2007

GROWTH OF GDP AND CONSTRUCTION OUTPUT IN FINLAND 1999–2010 7.0 7.0 GDP CONSTRUCTION 6.1 5.5 5.1 4.3 4.2 3.7 4.4 3.4 3.6 2.9 3.1 2.5 2.2 2.2 2,1 1.8 1.21.0 0.8

1999 2000 2001 2002 2003 2004 2005 2006 2007* 2008* 2009* 2010* -0.6

-1,6

*forecast -3.1 Sources: Statistics Finland, and VTT (forecast) VTT 10/2007

CONSTRUCTION OUTPUT IN FINLAND TOTAL EURO 24.0 BILL. Y 2006

Residential renovation 17 % Residential new 23 %

Non-residential renovation 16 %

Civil engineering renovation Non-residential new 6 % 24 % Civil engineering new 14 % VTT 10/2007

CIVIL ENGINEERING IN FINLAND TOTAL EURO 4.7 BILL. Y 2006 Other 13 %

Roads 35 %

Energy and water works 25 %

Railways 10 % Tele- communications Other transport 4 % 13 % VTT 10/2007

80 © EUROCONSTRUCT Vienna, November 2007 Finland

4 Residential Market

Slight downward trend in new residential construction

The four years of growth in the volume of residential construction nearly ended in the middle of 2006. Due to the robust growth early in the year, the overall figure was almost 7 percent. No growth will occur in 2007, while a drop in volume is forecast for the remaining years although at a moderate rate.

The number of new residential starts is anticipated to fall from 34,000 in 2006 to just under 30,000 in 2010. Even that means construction of 5.5 dwellings per 1,000 occupants which is quite lot in European comparison.

The demand outlook for housing remains moderately favourable. Interest rates are still moderate despite an increase, loans are quite easy to get, and long repayment periods keep annual loan costs in check. Consumers' confidence in their own finances, higher earned incomes, tax cuts, GDP growth expectations, and continued internal migration maintain growth in new residential construction.

Higher interest rates together with high prices, however, cut demand. Housing prices are high and their rising trend is evidenced by the rise in the prices of existing dwellings during the second quarter of 2007. The consumer barometer has indicated a slight decline in the desire of people to buy dwellings and take housing loans for over a year.

Although the volume of new residential construction still grew in 2006, declining demand was already reflected in the smaller number of new starts towards the year-end. Another sign of a slowdown was the about 5 percent reduction in the sales of existing flats last year.

VTT has calculated that about 30,000 new dwellings will be needed annually until around 2015. The need is the result of population growth, migration, changes in population structure and family status as well as the increased loss of housing stock and a growing housing reserve. Present demand and production exceed that long-term trend which also serves to diminish production.

Finnish residential construction is largely dominated by flats, although the share of one- and two-family houses has increased in recent years. There are still less dwellings in one- and two-family houses than in blocks of flats. In Finland blocks of flats, however, include the unique row houses which account for about 15 percent of housing production.

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. Row houses have not regained their popularity after the slump of the early 1990s.

State-subsidised production fell to a third (just over 3,500 units) in a few years by 2006. 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. Moreover, people find a self-owned home safer and more advantageous than a rental unit.

Production of rental dwellings has declined markedly, and rental units have been converted into ownership dwellings. This, again, has led to a shortage in rental units in the largest cities. Consequently, housing authorities have intervened and a lively discussion about means of increasing the production of rental units has started.

The growth in new housing loans seems to have levelled off in summer 2007. Interest rates on new housing loans have increased from under 3 percent to about 5 percent in a couple of years since the autumn of 2005 – by more than two-thirds in relative terms. New loan takers see the actual impact of the interest as they take the loan. In the case of old loans the impact is often obscure, as in the case of annuity loans where the payback period is extended while the instalments remain the same.

In the second quarter of 2007 the prices of existing flats rose about 1.3 percent over the previous quarter and were 6.5 percent higher than a year earlier. In the metropolitan area prices rose less than in the rest of Finland. The average price of an existing flat in the metropolitan area was €2,970/m2, in the rest of the country €1,440/m2, and the national average was just over €1,960/m2.

The actual sales prices of dwellings have been made public in Finland. The Internet service of the Ministry of the Environment provides price and quality data on realised housing sales in the fifteen largest cities of Finland. 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 2010 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Sources: Statistics Finland and VTT VTT 10/2007 Sources: Statistics Finland and VTT VTT 10/2007

Housing repair and maintenance

The strong growth in residential repair, maintenance and improvement work is anticipated to slow down during the remaining forecast period from 5 percent annually in 2006 to around 2.5 percent. VTT studies suggest annual growth of 3–5 percent over the long term. In the last few years growth has remained at the upper limit of the range.

The growth and ageing of the housing stock, repairs done in connection with moves, bringing the technical standard up to today's level and the improvement of the standard of equipment and finishing made possible by the affluence of consumers increase renovation. On the other hand, the availability and prices of resources, rising interest rates, fewer moves and the end of the period of strongest economic growth serve to slow renovation growth.

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 increase over the next 10 years especially due to renovation of 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 10 years.

A Finnish assessment of the state of the country's built infrastructure predicts that renovation of one- and two-family houses will increase 1.5-fold (4 %/a), that of row houses will double (7 %/a), and flat renovation will increase 1.3-fold (2.5 %/a) over the next 10 years.

82 © EUROCONSTRUCT Vienna, November 2007 Finland

Surveys 20 years into the future indicate that the need to renovate one-family, two-family and row houses will increase 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.

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 spent on housing repair, maintenance and improvement in Finland in 2006 was about €4,200 million (€1,550 million on one-and two-family houses, €600 million on row houses and €2,050 million on blocks of flats). The sum grew nearly 1.5-fold in 10 years in real terms.

5 Non-residential Market

Record growth in 2007

In 2007 the Finnish new non-residential construction volume will increase by a record-setting fifth. As 5 percent growth is expected in 2008, the total volume will become 1.5-fold in four years since the dip in the early 2000s. In the remaining forecast period the volume is assumed to decrease but still remain at today's quite high level.

In 2007 growth will be strongest in offices and commercial and storage buildings – over 30 percent in each group. The largest volume growth will occur in commercial buildings, offices and industrial buildings. Only the volumes of buildings for education and health will decline. Subsequently, the volume of the building types presently undergoing the fastest growth is expected to take a downward trend. The first to be affected are commercial and industrial buildings followed a little later by storage buildings and offices.

The construction volume of buildings for education is declining for the fifth year. It is very low – nearly at the level of the 1990s recession. Next year it would appear to become normal and remain steady until the end of the period. 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. Concentration of educational activity in larger units in municipal centres creates need for construction also elsewhere.

The volume of buildings for health is anticipated to remain quite steady in the remaining period. The level can be considered quite 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 brisk thanks to three years of continued growth. The volume is nearly the same as in the early 2000s before the most recent sharp drop. Industrial capacity utilisation has improved with increased production caused by domestic demand and exports. This has created the need to build more space or to make replacement investments. However, a downward trend is expected to start next year and last until 2010.

Construction of storage buildings has been lively in recent years as a result of moderately active industrial building construction and, especially, the strong growth in commercial construction. In 2007 the volume of storage building construction will increase by a third following last year's dip. The volume is so high that it appears unlikely that the present growth can be sustained after 2008. A decline is inevitable. The level is yet expected to remain high also for the rest of the period. Industry and commerce have been building their local storage facilities, and construction of different logistics hubs has been and remains lively. For instance, the construction of the Vuosaari Port in Helsinki is giving birth to logistics hubs across southern Finland.

The volume of office construction has been quite low in recent years. Although vacancy rates remain high, starts increased already in 2006. The volume will rapidly grow 2-fold from the low point. For the rest of the forecast period construction is likely to remain relatively stable at that level. The increased need for office space is based partly on the demand created by the reviving economy, and partly on companies relocating to new premises with a better location and equipment. Owners of old premises are faced with finding new uses for their premises or modernising them.

84 © EUROCONSTRUCT Vienna, November 2007 Finland

Commercial building construction is very lively, livelier than ever. Growth in 2007 will be record high at about 40 percent. The level is so high that a contraction in volume is unavoidable. Migration into growth centres has been a big boost to commercial construction along with high consumer demand and confidence. They have speeded up the consolidation of commerce into larger units on the outskirts of cities and in neighbouring municipalities. In Finland, the rate of return on real estate investments and the profitability of the retail trade are so high that both foreign investors and chain stores keep coming here. Retail parks are no longer built just for shopping: they are huge centres that offer opportunities for entertainment, pursuing one's hobbies, and other leisure activities. The quite low vacancy rates of commercial premises invite new investments.

Construction of agricultural buildings is quite brisk, and no major changes in the volume are expected in the next few years. Agriculture is undergoing a major structural change. The number of farms is falling while their size is increasing. These changes put pressure on the remaining farms to invest.

The volume of miscellaneous buildings follows general economic development. Its continued quite large growth is likely to turn into a slight decline towards the end of the period.

In Finland non-residential buildings are classified as follows:

2006 volume, mln €

Commercial and office buildings 1,950 - commercial buildings 1,270 - office buildings 390 - transport and communications buildings 290 Public service buildings 850 - buildings for institutional care 310 - assembly buildings 240 - educational buildings 300 Industrial buildings and warehouses 1,650 - Industrial buildings 1,270 - warehouses (storage buildings) 380 Miscellaneous 1,350 - free time residential buildings 320 - agricultural buildings 600 - other buildings 430 Total 5,800

Non-residential renovation

Non-residential renovation has been growing at a quite stable 2–3 percent in recent years. Growth has slightly exceeded the calculated long-term trend which, according to VTT studies, is 1.5–2.5 percent annually. Towards the end of the period growth is expected to decline considerably.

The impact of age structure is not nearly as significant in the case of the non-residential stock as with 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 being rebuilt to meet the standards of modern commerce.

The heightened standards of occupants due, for instance, to the recently built well-equipped buildings they have seen increase the need of renovation in the case of all building types. Increased use of services and outsourcing create needs for the service sector. In public buildings, such as schools and hospitals, problems with indoor air quality necessitate repairs and development of new repair solutions.

The value of Finnish non-residential renovation was about €3,900 million in 2006 meaning an increase of about 30 percent in ten years. The breakdown was as follows:

• educational buildings €1,000 mln • buildings for institutional care €400 mln • industrial buildings €800 mln • office buildings €300 mln • commercial buildings €400 mln • other buildings €1,000 mln

86 © EUROCONSTRUCT Vienna, November 2007 Finland

6 Civil Engineering Market

In autumn 2007 Finnish civil engineering activity is lively. The output has increased relatively evenly since the recession in the early 1990s. The euro value of civil engineering construction will grow also in 2007, but cost rises will reduce real growth. In 2008 the volume of civil engineering works will increase by a good 3 percent.

In 2007 it was decided to postpone the launching of four quite large projects due to excessively high bid prices. The projects in question are: the Vantaa Ring Rail Line, Main Road 51 Kirkkonummi–Kivenlahti, the Savonlinna Bypass Road, and Ring Road I Turunväylä–Vallikallio. The on-site construction of other major road and rail projects will start for the most part only at the end of 2007 and in 2008. In 2008 civil engineering investments will increase as several large projects get fully underway. Lively activity will continue also in 2009 with the large projects.

In autumn 2007, for instance, the following road projects are under way: Main Road 100 Hakamäentie project in Helsinki, the Motorway E18 project Lohja–Muurla, the Vuosaari Port traffic arrangements, Tampere Western Ring Road, phase II, Main Road 2 Vihti–Pori, Main Road 6 Imatra–Lappeenranta, Main Road 4 at Kemi and Main Road 4 Lusi–Vaajakoski.

Rail projects under way or about to be launched in 2007 include the railway yard works in Ilmala and central Pasila, and the improvements to the Lahti–Luumäki, the Vuosaari Port and the Seinäjoki–Oulu (phase I) rail links. Construction of the planned ring rail line for the metropolitan area will be postponed. Most of the work of these large projects will be done in 2008–2009.

In the energy sector, the earthworks for Finland's 5th nuclear power plant and the Porvoo oil refinery have been largely completed. There has been discussion of building a 6th and 7th nuclear power plant in the country in the future. Several smaller power plant projects are under planning; their construction may start in 2008. There are also plans to build a natural gas pipeline to Finland's western coast. The decision is being delayed until the fuels of the new power plants are decided. The construction of the final repository for spent nuclear fuel has reached the stage where a research tunnel is being built.

An on-going investment in waterborne traffic is the Vuosaari Port where construction of quay structures will continue into 2008. The port will be inaugurated towards the end of the year.

Investments in air traffic are down, and no major airport projects are under way. Most work involves normal resurfacing of runways.

Municipalities' investments in streets and water supply and sewerage are up because new areas require municipal engineering facilities. Investments in streets have increased throughout the 2000s and continue to do so. A major water supply project is the clean water supply project of Turku Region Water Ltd, which consists of several subprojects, and will be completed by 2010.

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

88 © EUROCONSTRUCT Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 5 237 5 255 5 277 5 300 5 320 5 340 5 360 Bevölkerung

Households ('000s) Ménages 2 402 2 430 2 454 2 480 2 500 2 520 2 540 Haushalte

Unemployed ('000s) Chômeurs 229 220 204 180 170 160 150 Arbeitslose

Unemployment rate (%) Taux de chômage 8.8 8.4 7.7 6.8 6.4 6.0 5.7 Arbeitslosenquote

Change of GDP Variation du PIB 3.7 2.9 5.0 4.2 3.1 2.2 2.1 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0.2 0.9 1.6 2.5 2.7 1.8 1.7 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.5 3.6 3.8 6.0 4.0 2.0 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 3.4 3.8 4.5 4.5 4.5 4.0 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 5 390 9.6 5.8 6.6 0.0 -0.5 -1.9 -1.1

Logement Renovation 4 170 5.0 5.1 5.1 3.0 2.9 2.7 2.4

Wohnungsbau Total 9 560 7.5 5.5 5.9 1.3 1.0 0.2 0.5

Non-residential construction New 5 830 -0.6 10.4 5.0 21.7 5.2 -10.3 -6.9

Bâtiments non résidentiels Renovation 3 940 2.9 2.0 2.3 1.7 0.8 1.0 1.2

übriger Hochbau Total 9 770 0.9 6.8 3.9 13.6 3.6 -6.4 -3.8

Building New 11 220 4.1 8.2 5.7 11.3 2.7 -6.8 -4.3

Bâtiment Renovation 8 110 4.0 3.5 3.7 2.4 1.9 1.9 1.8

Hochbau Total 19 330 4.1 6.2 4.9 7.5 2.4 -3.4 -1.8

Civil engineering New 3 280 2.2 -2.4 1.3 0.3 3.6 -3.0 -1.8

Génie civil Renovation 1 420 1.0 -2.2 -2.3 0.1 1.6 0.4 0.9

Tiefbau Total 4 700 1.8 -2.3 0.2 0.2 3.0 -2.0 -1.0

TOTAL CONSTRUCTION OUTPUT 24 030 3.6 4.3 3.9 6.1 2.5 -3.1 -1.6

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 1.84 2.5 3.5 3.0 11.0 -2.0 -2.0 -2.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 5,9457 FIM

90 © EUROCONSTRUCT Vienna, November 2007 Finland

Country/Pays/Land: Finland Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 15.8 17.3 17.0 16.7 16.5 16.0 15.7 Baugenehmigungen Familienhäuser

Flats Collectif 19.2 19.8 19.4 17.8 17.0 16.5 16.3 Mehrfamilienhäuser

TOTAL 35.0 37.1 36.4 34.5 33.5 32.5 32.0

Housing starts 1+2 family dwellings Logements commencés Individuel 15.2 16.4 15.7 15.5 15.4 15.1 14.8 Baubeginne Familienhäuser

Flats Collectif 18.6 18.3 18.3 16.4 15.7 15.1 14.9 Mehrfamilienhäuser

TOTAL 33.8 34.7 34.0 31.9 31.1 30.2 29.7

Housing completions 1+2 family dwellings Logements terminés Individuel 13.8 15.4 16.3 15.7 15.5 15.4 15.1 Baufertigstellungen Familienhäuser

Flats Collectif 17.2 18.8 18.2 18.3 16.5 15.6 15.4 Mehrfamilienhäuser

TOTAL 31.0 34.2 34.5 34.0 32.0 31.0 30.5

Housing stock Logements existants 2 635 2 667 2 700 2 730 2 760 2 785 2 810 Wohnungsbestand

thereof second homes dont résid. secondaires 215 215 215 215 215 215 215 davon Zweitwohnungen

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

Home ownership rate 1) Taux de propriétaires occupants 60.0 60.5 61.0 61.0 61.5 61.5 62.0 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 310 -0.5 -12.5 -37.0 -20.0 37.5 11.5 3.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 315 -5.5 13.5 27.0 -4.0 13.5 -9.5 5.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 265 3.5 27.0 13.0 17.0 -5.0 -9.0 -16.0 Industriegebäude

Storage buildings Bâtiments de stockage 380 15.5 26.0 -19.5 32.5 28.0 -22.5 -9.0 Lagergebäude

Office buildings Bureaux 400 -19.5 8.5 14.0 61.5 16.5 -14.0 -5.5 Bürogebäude

Commercial buildings Commerces 1 300 14.0 5.0 13.5 40.0 -5.5 -20.5 -12.5 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 600 -15.0 19.5 7.5 9.5 0.5 -6.5 -4.5 Landwirtschaftsgebäude

Miscellaneous Autres 1 260 -5.5 5.0 8.0 14.0 11.0 -0.5 -0.5 Sonstiges

Total 5 830 -0.6 10.4 5.0 21.7 5.2 -10.3 -6.9 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 5,9457 FIM

92 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 630 3.0 -4.8 1.6 2.8 2.3 -2.2 -1.0 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 450 -0.8 2.4 -19.2 -7.8 32.2 -1.0 -6.1 Bahnanlagen

Other transport Autres réseaux 190 60.5 7.4 2.0 2.5 -4.5 -34.6 -9.7 Übrige Verkehrsinfrastruktur

TOTAL 2 270 4.7 -2.3 -3.3 0.7 7.3 -4.3 -2.7

Telecommunications Télécommunications 630 1.2 3.1 0.5 -1.1 0.0 1.3 0.2 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 180 -2.0 -5.2 7.3 0.7 -2.1 0.2 1.2 Energie- und Wasserversorgung

Other Autres 620 -0.8 -2.2 0.6 -1.0 0.0 -0.1 0.3 Sonstiges

Total 4 700 1.8 -2.3 0.2 0.2 3.0 -2.0 -1.0

1) At 2006 prices, excluding taxes. 1 euro = 5,9457 FIM

Country/Pays/Land: Finland Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 85.9 3.0 3.8 4.3 4.0 3.0 2.5 2.0 Privater Verbrauch

Public consumption Consommation publique 36.3 1.8 1.7 1.0 1.4 1.5 1.5 1.4 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 32.0 3.6 3.7 4.1 5.1 5.4 -0.7 0.3

of which construction 20.2 5.0 4.1 4.6 6.1 2.5 -3.1 -1.6

Stocks (contribution as % of GDP) Variations de stocks 4.1 0.2 1.0 0.2 0.0 0.1 0.0 0.0 Vorratsveränderung

Exports Exportations 74.4 8.6 7.1 10.4 6.5 5.5 5.0 4.5 Exporte

Imports Importations 65.7 7.8 12.2 8.3 5.0 6.0 4.0 4.0 Importe

GDP PIB 167.1 3.7 2.9 5.0 4.2 3.1 2.2 2.1 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 5,9457 FIM

94 © EUROCONSTRUCT Vienna, November 2007 France

FRANCE

BIPE www.bipe.com

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

EUROCONSTRUCT Conference Vienna, November 2007

1 General Summary

The year 2006 was a very favourable one for the French construction market, which grew in volume by 4.5% thanks to the strength of all new segments.

2007 has seen a slowdown (2.4%) in a context of relatively low economic growth (1.8%). Although the non-residential sector and the civil engineering market are still posting excellent results, activity in new housing is expected to decline somewhat as a result of tighter credit terms, which are keeping building starts in check after the 2006 record year.

The tax measures adopted by the new government should support French economic growth in 2008 (2.3%). Specific initiatives favouring home buyers should allow demand to be met at a time when it is lagging and to maintain the level of building starts. A significant slowdown is expected for new non-residential buildings (oscillation between two hospital programmes, less expenditure for public facilities). This will also be true for civil engineering as a result of the election cycle: in a municipal elections year (2008 in this case), local governments ease efforts made in the two previous years. Overall, the French construction market should grow by 1.5%.

Because of their cost, the tax incentives granted by the government could worsen France’s budget problems. Adjustments are therefore likely to be necessary starting in 2009. In any case, this is the scenario adopted by BIPE, which predicts borderline growth in 2009 (1.5%) and 2010 (1.8%). This means that household income may be reduced in one way or another, which will probably have a negative impact on demand for new housing, a sector which we believe will see a slight decline in building starts. A moderate recovery is expected for new non-residential buildings (with the exception of education and public facilities, two areas that will experience a drop in activity). In terms of civil engineering, we anticipate an average growth rate of 2% per year, which takes into account the planned drop in activity in the motorway sector. Overall, the French construction market can be expected to increase by approximately 1.5% in 2009 and 2010, which is in step with economic growth.

2 The Macroeconomic Environment

Borderline growth in 2005 and 2006 In the past two years, France has demonstrated average economic performance in a European context marked by recent renewed growth and has therefore been relegated to the back of the pack. Indeed, the factors that contributed to its over-performance at the beginning of the century – namely the takeoff of housing credit and residential real estate – have been gradually thinning out for two years. Moreover, these poor results stem mainly from our country’s delay in implementing structural reforms aimed at reorganising the economic system (labour market and R&D funding). From this standpoint, the outcome of the Presidential and legislative elections should help remove the barriers to implementing these reforms.

Restore competitiveness France’s positioning in terms of products is ill-suited to worldwide demand (which, as in the case of Germany, would have limited the effects of emerging cost-based competition). For example, France has almost no presence in high-growth sectors such as information technology, mobile telephony and consumer and business electronics. France also lags behind in the capital goods sector. This is why our country is, in part, excluded from the demand trends demonstrated by high-growth areas. For its part, domestic demand (particularly that of households) is mainly for products that are not widely produced in

96 © EUROCONSTRUCT Vienna, November 2007 France

France, which partly explains the significant deterioration in foreign trade. Finally, the strategy adopted by Germany has accentuated our competitiveness problems.

Growth "boosted" in 2008 by tax incentives The hefty summer tax package (budget stimulus equal to 0.6% of GDP) will drive household purchasing power and growth to some extent, despite the fact that many crowding-out effects (increase in saving ratio, high import volumes) will offset its impact. GDP growth in 2008 will therefore be high and in line with the European average. It is important to note that domestic housing credit assets on the balance sheet of the national banking system do not carry much risk. In this sense, a US-style chain of events is very unlikely, even if residential real estate is in a clear landing phase (modest drop in prices likely in 2008).

2009, year of budget restrictions The 2008 fiscal stimulus will lead to a deterioration of the budget deficit that will isolate France’s position in Europe in terms of public finance. It will then be necessary to curb the deterioration of the public deficit. It is unfortunate that such a fine tax package was used, since the government will no longer have any budgetary leeway to ease the impact of the necessary future reforms, which promise to be painful (cf. below).

In this difficult context, France will continue to have trouble exceeding its growth potential in a significant way. Unfortunately, the relative weakness of our industrial and commercial performance should continue. The French economy should therefore not be expected to significantly exceed its potential by the year 2011, even if the situation gradually improves as a result of the reforms implemented between now and then.

Reorganising the labour market and adapting manpower to the needs of the economy are proving to be urgent matters. The French labour market is split between insiders, who enjoy a high degree of job protection, and outsiders, whose situations are much more tenuous. Labour market reform must, first and foremost, significantly increase the flexibility of the labour market. The next step will be to better adapt qualifications to the needs of businesses through educational reform (universities, grandes écoles and apprentice training) and greater emphasis on training during one’s working life. The debate on flexicurity also implies being ready to do whatever it takes to achieve active employment policies if these reforms are to be accepted. Reform of the labour market must entail a reappraisal of acquired rights.

Essential reform of the social welfare system The aging of the population is disrupting the balance between the labour force and the non- labour force. This will ultimately call into question the current social welfare system, which cannot function with a high percentage of persons not in the labour force. We are no longer far from the threshold at which the survival of the French pension and health care system will require that a policy of structural reforms be put in place. From this standpoint, France lags far behind the rest of Europe, which makes social welfare reform more urgent and more costly.

Moderate reduction of public debt Beyond electoral promises, choices must be made between reducing the deficit and lowering public debt, decreasing payroll taxes and supporting potential supply and domestic demand. Public expenditures should be shifted toward stimulating supply rather than demand. In our opinion, the adjustment, at least in the beginning, will focus mainly on households and deficit reduction will come later.

3 The Housing Market

3.1 2007: A year of hesitancy

In the fall of 2007, the French housing market can be characterised according to five main aspects: • Although somewhat difficult to interpret, statistics on new construction confirm the levelling off of new construction that began in the fourth quarter of 2006. At the end of August 2007, the annual increase in building permits was 1.2%, while building starts fell by 0.8% as of the same date. In 2007, the number of housing units begun should remain about the same. • The increase in unsold housing stock continues: this figure neared 90,000 at the end of June 2007, twice what it was in June 2005. This stock represented 7.6 months of sales, a ratio which, though still reasonable, has steadily increased over the past two years. • Price increases for existing homes are slowing down significantly. According to the French real estate association (FNAIM), prices for existing homes have continued to settle down: in the third quarter of 2007, the annual increase was 2.5%. • Housing loans have clearly begun to slow down. Compared with their high point (November 2006), new housing loans fell by nearly 5% in July 2007. • The real estate market seems to be facing a changing clientele. In contrast to the still relatively optimistic attitude of developers, real estate agencies and online brokers appear more cautious with regard to short-term market trends. According to Century 21, for the second time in six months the percentage of homebuyers who are high-level executives and professionals fell, representing not more than 3% of national clients. This fact is confirmed by Empruntis. This suggests that the most creditworthy buyers have probably already fulfilled their plans by taking maximum advantage of the favourable credit terms available in the past two years. Today’s market is therefore relying on a less stable clientele for whom a rate increase could be a serious blow. Loan periods are also increasing much more slowly, a sign that banks seem less willing to back households’ purchasing power via this mechanism. In terms of investors, there was already evidence of a levelling off of purchases benefiting from the Robien or Borloo measures in many medium-sized cities. The reasons given were related to the poor location of some of these programmes (often offered by tax mitigation organisations rather than by bona fide real estate professionals) and to often lower-than-expected rental returns. There now appears to be evidence of this phenomenon in larger metropolitan areas and even in Ile- de-France. Overall, the residential real estate market is therefore showing signs of drying up.

In this context, we anticipate a slight decline in building starts over the year as a whole, given that most short-term economic indicators point to a trend reversal. The figure we are using is 415,000 housing units begun in 2007 (versus 421,000 in 2006). We predict an increase in the social housing rental sector, which means that the decrease would primarily concern the private sector.

Based on these assumptions, new construction would decline in volume by slightly more than 1% this year, i.e. -2.5% for individual homes (for which lag times between permit and actual construction are shorter) and +1.5% for multi-family housing (which is growing significantly).

However, there are stirrings of a recovery for maintenance and improvement work. For the first time in more than two years, the DAEI/ANAH/Club de l’Amélioration de l’Habitat barometer seems to indicate a slight acceleration; the annual rate is around 1.5% in volume and prices (measured by the IPEA index) show signs of new pressures (4.5% increase). This

98 © EUROCONSTRUCT Vienna, November 2007 France modest improvement seems to be confirmed by opinion polls conducted among construction firms (but is somewhat less the case for tradesmen). The acceleration of work related to the urban renewal programme should bolster a market in which private projects are still somewhat weak. All in all, we estimate a 2% increase in volume for this year.

3.2 2008: Year of the parenthesis

Acceleration of economic growth in 2008, but a rise in interest rates Following the 2007 hiatus, the "tax package" should allow the French economy to grow next year by 0.3 points more than its medium-term trend. Household consumption should hold steady despite a new increase in the saving ratio and the unemployment rate is expected to fall below the 8% mark for the first time since 1981.

The real estate crisis in the United States should not have a direct impact on the French housing market, which is supported by strong stabilising mechanisms: emphasis on fixed versus variable rates; a much more conservative policy implemented by lending institutions, and relatively low consumer debt (housing debt of French households represents less than 60% of gross available income versus double, or even triple, in some countries).

Nevertheless, the US subprime crisis is having an indirect effect on the French real estate market by creating a climate of mistrust among banks and reducing international liquidity. As a result, lending institutions are revising their risk premiums upward. Until 2006, French banks extended housing loans at nearly the same rates as long-term rates in a context of intense competition and strategies aimed at gaining market share. It now appears that those days are gone: risk premiums have increased (rates are currently near 4.7%) and are not expected to fall. In this context, interest rates will be subject to new pressures throughout 2008, which means that credit terms will become tighter for homebuyers.

From another perspective, the ups and downs of stock prices triggered by the US subprime crisis have reminded investors in rental property of the risky nature of financial investments after four years of a nearly continuous upward trend, and of the importance of a diversified portfolio that includes property investment.

Negative and positive factors in 2008: a delicate balance Short of a worsening of the international financial crisis, the scenario that we now project is one of a hiatus in the housing market.

Some of the negative points include: • the tightening of credit terms that has begun: increase in interest rates, more conservative scoring by banks, likely obstacle to a significant increase in loan periods; • household creditworthiness which has probably reached a low point with the price levels attained; • a possible drying up of clientele (first-time home buyers and investors alike).

The positive points include: • steady demand as a result of strong population growth and a high degree of residential mobility; • improvement in the employment market, a key factor in an investment decision; • the likely increase in inter-generational transfers (thanks to measures favouring gifts), which give young householders the necessary funds to make a down payment; • the gradual upturn in the construction of social housing rental units;

• the moderate but real impact of interest deductions (see box below), which may support the purchasing power of households that were previously excluded from the market because of an overly high debt service ratio.

Overall, we estimate that building starts will stabilise in 2008, with a slight improvement for individual homes (sector in which the tax measures will have the greatest and fastest impact) but a drop in activity for multi-family housing. Without the tax measures, our figure would have been less by 10,000 units.

This scenario suggests that the volume of new construction will be about the same in 2008 (+0.6%), with individual homes increasing (+1.5%) but with multi-family housing decreasing by the same percentage (-1.5%).

Tax measures that benefit home buyers

After several ups and downs (the Constitutional Council’s rejection of the initiative announced in June 2007 because of its retroactivity), the new French government announced several tax measures in August that offer purchasers of a (new or existing) primary residence a five-year tax credit. This credit is 40% the first year (with a cap of €3,000 per couple) and 20% the following four years (with a cap of €1,500 per couple). The tax advantage of this measure can be interpreted in two ways based on the average loan amount in 2006: a 22% decrease in monthly payments the first year and a 10% decrease the following four years, or an apparent interest rate of 1.4% the first year and 2.8% the next four years instead of 4%. It is estimated that this mechanism will support the purchases of 30,000 additional homes (10,000 new and 20,000 existing). In a full year, the net cost of these measures is high, approximately €3.7 billion. As always happens in similar cases, the question is raised as to the positive effects (households borrowing more to maximise the tax advantage) and the reverse effects (the resulting rise in demand could trigger a rate hike and/or an increase in real estate prices).

A more favourable outlook for maintenance and improvement The macroeconomic scenario used for 2008 assumes greater household purchasing power and a significant increase in consumption, which should benefit the market for projects completed by individuals. In addition, the increase in projects under the National Urban Renewal Plan (PNRU) suggests a significant acceleration of work planned for 2008: subsidies granted should increase by 2.5 billion compared to 2007, thereby resulting in six to eight billion jobs, some 10% of which can be classified as housing maintenance and improvement work alone. In this context, the additional impact of PNRU projects would be approximately 1.5.%.

Overall, we have estimated a 2.5% increase in volume, a figure that could be revised upward if the PNRU proceeds as planned (i.e. without delay).

100 © EUROCONSTRUCT Vienna, November 2007 France

3.3 2009 and 2010: macroeconomic constraints could adversely affect the housing market

Because of their cost, the tax incentives granted by the new government to stimulate economic growth could worsen France’s budget problems. Adjustments are therefore likely to be necessary starting in 2009. In any case, this is the scenario adopted by BIPE, which implies a significant drop in consumption by households whose available income will be reduced in one way or another (we refer in particular to a "social VAT"). This weakened purchasing power will certainly have a negative impact on demand for housing in a context in which interest rates could further tighten somewhat. There will likely be another drop in real estate prices (BIPE already predicts a 3% decrease in prices of existing homes in 2008). It is hard to imagine how new construction would be exempt from such a downward adjustment during this transition phase. In this respect, the goal of 500,000 housing units per year announced by the government seems unrealistic. Nevertheless, because of positive fundamentals (steady population growth, a marked improvement in the employment market, upturn in the social housing rental sector, etc.), we do not anticipate a significant decrease in building starts. This means that the number of new housing units begun should increase to 405,000 in 2009 and to 400,000 in 2010. Based on these assumptions, new construction would decrease slightly (-1.2% in 2009 and -1.3% in 2010).

The outlook is more favourable for maintenance and improvement work: customary shift toward remodelling during a slowdown in new construction and a large number of projects related to the Urban Renewal Programme (PNRU), which will increase between now and 2013. We have estimated a growth rate of 2% per year for all work related to existing homes.

4 The Non-Residential Building Market

After 2006, a year marked by strong growth in the construction of non-residential buildings, 2007 is proving to be even more exceptional. Based on the macroeconomic context adopted by BIPE, 2007 will see a pause in growth and 2008 will be a year of strong GDP growth. The after-effect of 2008 will be felt in 2009 when growth in consumption will be very modest. Overall, this context is not very conducive to large investments in the non-residential sector.

4.1 Education and research buildings

In France, nearly 80% of all educational, training and research buildings (by area) are constructed for clients in the public sector. The départements are responsible for middle schools (collèges), while regional authorities bear responsibility for secondary schools (lycées). The central and regional governments both contribute to the funding of universities. Construction starts for buildings in this sector fell off sharply during the latter half of the 1990s as an after-effect of previous efforts to renovate secondary schools and build new universities. They began to pick up very gradually starting in 2000.

The year 2005 saw a 3% drop in new work, reflecting the after-effect of the boom observed in 2004. This downturn continued in the early part of 2006 and improved slightly only in the second half of the year. In terms of new work, the decline in 2006 (-4.9%) will continue and a drop in production is expected for 2007 (forecast: -2.0%). We believe that the four-year growth outlook in new work in this sector is poor (average annual growth in 2006-2010: - 2.9% in volume), especially in light of the efforts required to reduce the public debt. This holds true despite the fact that the inter-regional mobility of the French population is a factor in favour of a possible expansion of the educational infrastructure.

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 the surface areas constructed.

As in the education sector, health care building starts fell sharply during the second half of the 1990s, then picked up starting 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 continued to grow (+6% in 2005) and experienced a surprisingly intense wave of growth in building starts in 2006 (+23%). First quarter data broke all records as a result of the final phase of the "Hospital 2007" plan, with a number of projects under the programme being completed late (at the end of 2006, only 60% of the planned investments had been completed).

Levels are expected to be very high by the end of 2007 (forecast: +19% in terms of new work). On the other hand, 2008 will suffer from the completion of the hospital restructuring programme, but only briefly since it will be followed by the "Hospital 2012" programme, for which €10 billion in investments are planned and which will keep activity in this sector at a high level for an extended period.

We estimate that the level of investment over the 2006-2010 period will be positive, with average annual growth of 7.9% in volume and extensive investment throughout the period.

102 © EUROCONSTRUCT Vienna, November 2007 France

4.3 Industrial buildings

After only modest growth in 2005 (+0.9%), growth in industrial production did not improve in 2006 (+0.2%). Although the year was also marked by a decline in building starts, the outlook is more optimistic for 2007: we predict 9.8% growth in starts of industrial buildings followed by a tapering off in 2008 (+1%). Overall, France’s manufacturing exports continue to performed poorly in an unfavourable international context and in light of the competitive disadvantage created by an expensive euro.

Between 2007 and 2010, several factors should help bring about a recovery in the industrial sector: • the increase in productive investment should continue in 2008; • the increase in the operating factory rate noted in 2006 continued during the early part of 2007; • long-term financing conditions will remain favourable, with banks targeting business customers in light of the slowdown in housing demand among households in 2008; • growth forecasts for industrial production are favourable for 2007 and 2008 thanks to high worldwide demand for capital goods.

Nevertheless, the medium-term outlook will hinge primarily on the productivity gains of the national industrial sector in a very competitive international environment. Significant improvement in productivity could trigger a better-than-expected increase in industrial production; however, this will not necessarily result in a rise in starts of industrial buildings since higher productivity and preference given to rationalisation expenses could lead to a decrease in capacity requirements.

4.4 Offices

Over the coming years, growth in this sector will be driven as much by the renovation of existing buildings and the shift in demand toward new locations as by growth in office occupations at the national level. Indeed, since the creation of potential productivity gains in services brought about by the NICT revolution, which are still far from being fully realised, medium-term growth momentum in employment in the service sector has slowed. Nevertheless, the number of net service jobs created in 2006 was very high, which is driving demand for office buildings. The outlook remains very encouraging for 2007 and 2008 and forecasts have even been revised upward.

Overall, there are three positive factors behind the increase in new work in France’s office sector: • The positive image of French property for foreign investors, who believe that it is a sound investment with little risk, particularly in Paris, and accept low rates of return, which further raises the value of French real estate. • The emergence of new business centres outside the Paris area. As the population migrates to the regions, markets in large metropolitan areas remain strong. These markets are also benefiting from a large number of corporate restructurings and reorganisations as well as the "tertiarisation" of regional economies (conversion of industrial areas into service sector areas). • The upturn in net office jobs created nationally in 2005 and 2006. This will speed up the drop in the number of vacant buildings, both in Paris and in France’s other metropolitan centres, which should, in turn, trigger an ongoing rise in rental prices in Ile-de-France in 2007 and whet real estate developers’ appetite for the French office market.

The momentum gained by building starts in late 2005 mostly continued in 2006 with a growth rate of 21%. Growth in new work will remain steady: +10.0% in 2007 and +7.0% in 2008. The © EUROCONSTRUCT 103 France Vienna, November 2007 increase in new work will continue until 2010 with an average annual volume growth rate of +6.5% between 2006 and 2010.

4.5 Commercial buildings

Starts of commercial buildings posted very strong growth in 2005 (+10%) and were accompanied by a sharp rise in building permits (+17%). The soundness of this sector is the result of several cyclical and structural trends: • Household consumption, a key variable for commercial building construction, continued to rise at the expense of the saving ratio. • Hard discount continues to grow and traditional mass-market retailers are renovating their existing buildings.

In 2006, starts of commercial buildings showed signs of weakness (-2.4%). Conversely, the early part of 2007 was very strong, with building starts at levels that had not been attained in over 20 years. This surge can be attributed to decision-makers’ abandonment of their wait- and-see attitude and to mass-market retailers’ expectation of a rise in consumption in 2008 as a result of the "tax package". New work, which saw moderate growth in 2006 (+1.9%), will therefore probably pick up in 2007 (+2.3%) and 2008 (+2%). With an expected after-effect in 2009 and 2010, commercial building construction should increase in volume between 2006 and 2010 by an average of 2% per year.

4.6 Other buildings

This heading encompasses two very different categories of buildings: agricultural buildings (11.4 million sq. m. constructed in 2006, but only €2 billion in new work) and public facilities other than for education and health care (3.1 million sq. m. constructed in 2006, but only €3.1 billion in new work).

Agricultural buildings With a strong first half of the year, 2006 signalled a recovery in agricultural construction: 3% growth in building starts and 5% growth in new work. However, building starts declined throughout the year as a whole, which ended at a much lower level than it had begun (-6% based on seasonally-adjusted data between Q3 2006 and Q4 2006).

Our forecasts point to a positive trend for 2008, but with a slacking off in 2007 in line with BIPE’s macroeconomic scenario. We predict a drop in agricultural production in 2007, a key factor in the explanation of starts of agricultural buildings, for the following reasons: • French farmers are facing cash flow and profitability problems as a result of drought and poor crops and an increase in prices of supplies and petroleum products. • In the final analysis, reform of the common agricultural policy has not benefited France in the short term: this reform establishes direct aid per farm which is more or less unrelated to production according to the Member States, with priority given to new EU members.

Nevertheless, there are numerous uncertainties that impact these assumptions: • climate conditions; • energy and raw material prices; • changes in agricultural policies, etc.

Based on the scenario that we have adopted, in 2007 building starts will decline by 3% and the volume of new work by 0.5%. New work could improve again in 2008 (+1.4% in volume). Construction of agricultural buildings should increase by an average of 1.2% per year between 2006 and 2010.

104 © EUROCONSTRUCT Vienna, November 2007 France

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

Despite a likely decline in 2009 and 2010, the 2006-2010 period remains positive and new work is expected to increase in volume at an average annual rate of 1.3%.

4.7 Maintenance and improvement work

We do not yet have data for the first half of 2007 for the non-residential sector; however, by comparing data for the residential sector to that of the market as a whole, we are able to identify a slowdown in activity in the non-residential sector.

We have used the following assumptions in forecasting growth at an annual average rate of +1.7% over the 2006-2010 period: • For local governments: 2007, last year of the run-up to the elections, should be a positive one for maintenance and improvement work on public facilities (schools, sporting facilities, social service and educational buildings, and cultural and leisure facilities), while 2008 will probably see a hiatus. • For businesses: profit margins of French companies are not very good and, in light of the increase in the operating factory rate, these companies must decide in 2007 whether to build new areas or maintain existing ones, to the detriment of the latter. However, this constraint could ease in 2008 thanks to the improvement in margins brought about by the "tax package".

All in all, the rate of growth in the volume of maintenance and improvement work on non- residential buildings that we have adopted is +1.2% in 2007 and +1.7% in 2008 (decrease in the public sector offset by an increase in the private sector).

4.8 Summary

Overall, growth in the construction of new non-residential buildings in terms of volume will accelerate significantly, up 6.5% in 2007 compared with 5.0% in 2006. Between 2008 and 2010, the rate of growth should slow down considerably (+1.8% in 2008, +2.7% in 2009 and +2.9% in 2010). Maintenance and improvement work will fluctuate less significantly according to a moderate trend.

5 The Civil Engineering Market

5.1 Market determinants

Break in the investment cycle of local governments begins in 2008 In 2003, local governments entered a new multi-year borrowing cycle, breaking with the trend toward debt reduction of previous years (1997-2002). In 2006, local investments were still atypical and the trend is not expected to be reversed until 2008, a one-off election year (municipal elections were moved to 2008 to offset the legislative and presidential election cycle).

The building and public works expenditures of local governments confirmed the upward trend that began in 2003, with growth the highest it has been in recent years (6.0% growth in volume in 2006 versus 5.0% in 2005, 5.4% in 2004 and 4.4% in 2003).

By continuing to accumulate debt, local governments have been able to invest at a steady pace well into 2007 in order to meet urgent infrastructure needs and to give the added boost that is common the year before municipal elections. Starting in 2008, however, the need to reduce the debt of local governments and the after-effect of four years of sustained growth will slow down the rate of investment and force new infrastructure projects to be postponed until after 2008.

The sharp upturn in local investment that began in 2003 is now supported by the départements and regions, which have been actively expanding their investments since 2005. This general trend should, however, begin to ease in the coming years.

The next generation of contracts, known as "State-Regional Project Contracts", was introduced in 2007 and will continue until 2013. Under these contracts, which mainly concern alternatives to road transport, local governments other than regional governments may be involved in a particular project. The contracts were signed at the end of the first half of 2007 and represent a transport budget of more than €8 billion over the period.

Generally speaking, local investments in the coming years will be marked by: • substantial investment in reserved-track public transport: rail and waterways; • the need to urgently address substantial sanitation and drinking water needs; • more aggressive investment by local governments and private businesses (Internet service providers and telephone operators) in high-speed telecommunications; • strong pressure on governments at the local and central levels in 2008 and 2009 as a result of the 2008-2010 budget stability programme (which limits annual growth in volume of investments to between 0.5% and 2% for local governments and approximately -0.5% for the central government).

Continued reduction in central government investment costs France’s transport infrastructure financing agency (AFITF), established in January 2005, has already been forced to make sweeping changes to its financial structure following the government’s decision to sell its shares in semi-public companies in charge of motorways: • The agency will no longer be able to rely on dividend income from these companies in the future; • However, it will receive a portion of the financial resources resulting from this privatisation (€4 billion); • It will receive funding from several new annual revenue sources: o the regional development tax (taxe d’aménagement du territoire) (€530 million); o the state fee collected from all motorway concessionary companies (€170 million);

106 © EUROCONSTRUCT Vienna, November 2007 France

o radar revenue (€226 million, which is more than twice that of 2007). • Its 2008 budget shows a slight decrease from that of the previous year, with approximately €2.1 billion (2.2 billion in 2007), 1.3 billion of which is from the privatisation of motorway companies. However, all the credits approved for the 2005-2012 period are already committed for 2008. Moreover, as of this year the exceptional revenue from motorway privatisation will be used up and will leave the agency with a recurrent deficit, despite the recent transfer decisions (such as a greater share of radar revenues).

After a strong 2007, investments made by government enterprises will increase significantly In the field of infrastructure, major government enterprise projects in the transport and energy sector will require substantial investments, which will be bolstered by a gradual upturn in the energy and telecommunications sectors.

Developments in the field of transport include: • An expansion of the work on extending the metro lines for the Paris RATP. • Work on the Rhine-Rhone high-speed train line (TGV), which began in 2006, will continue until 2009 for the earthworks and engineering structure phases. Full service on the Dijon- Mulhouse line is scheduled to begin in 2011 at a total estimated cost of €2.31 billion. • The "Perpignan-Figueras" link between France and Spain (45 km of new line + an 8 km tunnel) is underway. A large portion of the earthworks and engineering work was completed before 2007, with service scheduled to begin in 2009. • The concurrent start in 2008-2009 of work on the Bretagne-Pays de Loire and South Europe Atlantic high-speed lines (Angoulême-Bordeaux section in a first phase) for a total budget of more than €4 billion. • Resumption of work on several railway lines as a result of the 2006-2010 network renovation plan which gives RFF an additional €1.8 billion.

In the field of energy, the stepped up production of electricity in France announced by EDF triggered an increase in work starting in 2007 (particularly in Flamanville, with a civil engineering phase estimated at more than €300 million over the 2007-2012 period). The expansion of thermal generation capacity announced this year for four sites (Vaires-sur- Marne, Montereau, Blénod-lès-pont-à-Mousson and Martigues) represents an additional investment of roughly €1 billion between now and 2010. The primary aim of GRT-Gaz de France’s 2007-2016 development plan is to expand France’s gas pipeline network and service to new communes. GDF’s goal in France is to acquire an average of 200,000 new customers per year. To do so, it plans to boost investments significantly with, among other things, the development of five gas pipelines (Fos-sur-Mer, Artère de Guyenne, Artère du Nord-Est, Artère de Beauce and Artère du Mâconnais).

Finally, in the telecommunications sector, Orange/France Telecom has begun pre- implementation of its very high-speed network in some 10 large cities, which involves €270 million in work for 2007 and 2008. It has also announced nationwide implementation starting in 2009 for an estimated total investment of more than €10 billion (one-half of which is for civil engineering, according to estimates by the French telecommunications and posts regulator (ARCEP)).

5.2 The 2008-2010 period will see a hiatus for the civil engineering market

Production of public works regained momentum in 2006 (+6.9% in volume) after a mixed year in 2005 (+2.0% in volume), posting excellent growth that surpassed even the historic levels of the past 10 years (the previous record was +6.3% in volume in 2000).

The new growth cycle of completed work that began in late 2005 and continued in 2006 will be marked by another year of strong growth (forecast: +5.2% in volume in 2007), thanks primarily to the timetable for major projects and increased local investment prior to the elections. Between 2008 and 2010, however, investment levels may taper off due to a shortage of local investment (forecast: +1.1% in volume in 2008, +2.1% in 2009 and +1.9% in 2010).

Transport infrastructure In 2007, construction work on engineering structures2 increased overall with the completion of several large projects (including TGV East). On the other hand, urban transport projects (trams and subways) have picked up. Coupled with the new TGV projects, this should keep construction of engineering structures at more moderate levels in 2008 and 2009 before the start of a new expansion phase in 2010.

"Maritime and waterway projects" were supported in 2007 by capacity and port modernisation investments. The plan to renovate EDF’s hydraulic dams resulted in a one- time additional investment of €500 million between 2007 and 2011. In terms of waterways, the investments specified in the 2007-2013 State-Regional Project Contracts total €3.5 billion, i.e. a 54% increase over the 2000-2006 period. These investments mainly concern the Seine-Nord project on which work, estimated at €3.1 to 3.5 billion, is scheduled to begin in 2010.

Road works will continue to receive funding from the central government, mainly through addenda to State-Regional Planning Contracts. 2005 and 2006 were strong years and this trend should continue in 2007 before being reversed in 2008. Maintenance and improvement work on national roads will continue to benefit from greater expenditures in the next three years.

The programme for motorways operated under concession agreements should also see a more dramatic and long-term slowdown. This slowdown in 2009 and 2010 will result from the reduction by one-half of the share of motorway credits in AFITF’s overall budget starting in 2008 which were transferred to rail and reserved-track public transport. Site utilities

In the short term, the investment necessary for sanitation and water treatment is subject to a high degree of regulatory urgency.

In the coming years, however, maintaining and replacing water supply infrastructures (e.g. replacing lead pipes and ensuring secure resources) will represent an increasingly important challenge.

Miscellaneous civil engineering projects After a sharp upturn in 2006 (due primarily to completion of work on TGV East), earthworks will continue at a more moderate pace in 2007 and 2008 thanks to the timetable for high- speed line projects and despite the many delays.

External works, which received a strong boost from new housing in 2005 and 2006, could level off between 2008 and 2010. However, this decline will be partially offset by urban development projects managed by the National Agency for Urban Renewal (ANRU).

2 Note that work related to reserved-track public transport is included in the "engineering structures" category, with the exception of the laying of rail lines. 108 © EUROCONSTRUCT Vienna, November 2007 France

FRANCE APPENDIX: DEFINITIONS, DATA, SOURCES

Table 1

• Population and household data are given on 1rst January of the year. Figures for 2005 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.

Vienna, November 2007 France

Country/Pays/Land: France Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 60 462 60 825 61 185 61 530 61 880 62 225 62 575 Bevölkerung

Households ('000s) Ménages 25 431 25 740 26 046 26 345 26 639 26 928 27 213 Haushalte

Unemployed ('000s) Chômeurs 2 733 2 711 2 476 2 238 2 121 2 036 1 965 Arbeitslose

Unemployment rate (%) Taux de chômage 10.0 9.9 8.9 8.0 7.6 7.2 7.0 Arbeitslosenquote

Change of GDP Variation du PIB 2.3 1.7 2.2 1.8 2.3 1.5 1.8 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.1 1.7 1.7 1.5 1.7 2.6 2.1 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 4.4 3.2 5.1 3.7 3.0 2.5 2.5 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 3.4 3.8 4.3 4.7 4.9 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 46 758 9.1 9.5 7.4 -1.3 0.6 -1.2 -1.3

Logement Renovation 46 389 1.0 1.0 1.4 2.0 2.5 2.0 2.0

Wohnungsbau Total 93 147 4.6 5.0 4.3 0.3 1.6 0.4 0.4

Non-residential construction New 28 732 2.9 1.1 5.0 6.5 1.8 2.7 2.9

Bâtiments non résidentiels Renovation 29 721 1.5 1.5 1.5 1.2 1.7 2.0 2.0

übriger Hochbau Total 58 453 2.2 1.3 3.2 3.8 1.7 2.3 2.5

Building New 75 490 6.5 6.1 6.5 1.7 1.1 0.3 0.4

Bâtiment Renovation 76 110 1.2 1.2 1.4 1.7 2.2 2.0 2.0

Hochbau Total 151 600 3.6 3.5 3.9 1.7 1.6 1.2 1.2

Civil engineering New 28 199 4.6 2.0 7.4 4.8 1.1 2.2 1.7

Génie civil Renovation 13 576 0.0 2.0 5.8 6.0 1.2 2.1 2.2

Tiefbau Total 41 775 3.0 2.0 6.9 5.2 1.1 2.1 1.9

TOTAL CONSTRUCTION OUTPUT 193 375 3.5 3.2 4.5 2.4 1.5 1.4 1.4

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 23.80 6.1 2.6 5.6 2.1 1.4 1.2 1.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 6,5595 FRF

112 © EUROCONSTRUCT Vienna, November 2007 France

Country/Pays/Land: France Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 248.0 265.0 277.0 275.0 275.0 270.0 265.0 Baugenehmigungen Familienhäuser

Flats Collectif 210.0 244.0 283.0 275.0 270.0 260.0 255.0 Mehrfamilienhäuser

TOTAL 458.0 509.0 560.0 550.0 545.0 530.0 520.0

Housing starts 1+2 family dwellings Logements commencés Individuel 216.0 229.0 231.0 225.0 230.0 225.0 225.0 Baubeginne Familienhäuser

Flats Collectif 147.0 181.0 190.0 190.0 185.0 180.0 175.0 Mehrfamilienhäuser

TOTAL 363.0 410.0 421.0 415.0 415.0 405.0 400.0

Housing completions 1+2 family dwellings Logements terminés Individuel 205.0 220.0 227.0 224.0 224.0 223.0 221.0 Baufertigstellungen Familienhäuser

Flats Collectif 120.0 145.0 178.0 186.0 186.0 181.0 176.0 Mehrfamilienhäuser

TOTAL 325.0 365.0 405.0 410.0 410.0 404.0 397.0

Housing stock Logements existants 30 264 30 610 30 956 31 288 31 608 31 923 32 234 Wohnungsbestand

thereof second homes dont résid. secondaires 2 987 3 020 3 052 3 083 3 114 3 145 3 176 davon Zweitwohnungen

thereof vacancies dont inoccupé 1 846 1 850 1 855 1 860 1 855 1 850 1 845 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 57.0 57.5 58.0 58.4 58.8 59.2 59.5 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 2 911 10.5 -3.0 -5.0 -2.0 -6.0 -2.5 -1.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 4 214 20.5 6.0 12.0 19.0 -1.5 6.0 9.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 5 792 -5.0 -4.5 5.0 3.0 2.5 3.5 3.0 Industriegebäude

Storage buildings Bâtiments de stockage 1 518 13.5 -1.0 5.8 1.0 4.0 3.0 -1.0 Lagergebäude

Office buildings Bureaux 5 627 -3.5 5.5 9.5 10.0 7.0 5.0 4.0 Bürogebäude

Commercial buildings Commerces 3 503 4.0 5.5 1.9 2.3 1.4 2.0 2.5 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 2 014 -1.0 -3.0 5.0 0.5 1.4 1.0 2.0 Landwirtschaftsgebäude

Miscellaneous Autres 3 153 2.0 2.0 1.9 9.0 2.0 -2.5 -3.0 Sonstiges

Total 28 732 2.9 1.1 5.0 6.5 1.8 2.7 2.9 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 6,5595 FRF

114 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 18 525 3.1 3.6 7.8 5.3 -1.4 1.6 1.5 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 1 503 6.0 10.0 7.5 2.0 4.0 5.0 5.0 Bahnanlagen

Other transport Autres réseaux 4 557 3.9 -3.6 6.9 4.1 2.2 3.2 4.5 Übrige Verkehrsinfrastruktur

TOTAL 24 585 3.4 2.5 7.6 4.9 -0.5 2.1 2.3

Telecommunications Télécommunications 7 877 2.0 3.0 6.0 7.0 5.0 3.0 1.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 5 587 1.8 2.8 5.0 4.0 2.1 1.2 0.4 Energie- und Wasserversorgung

Other Autres 3 726 4.5 -4.0 7.0 5.0 2.0 2.0 3.0 Sonstiges

Total 41 775 3.0 2.0 6.9 5.2 1.1 2.1 1.9

1) At 2006 prices, excluding taxes. 1 euro = 6,5595 FRF

Country/Pays/Land: France Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 993.2 2.5 2.2 2.3 2.0 2.7 1.0 1.8 Privater Verbrauch

Public consumption Consommation publique 447.0 2.2 0.9 1.6 1.8 1.1 1.0 0.9 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 366.4 3.3 4.1 4.1 3.6 3.7 3.6 3.5

of which construction

Stocks (contribution as % of GDP) Variations de stocks 11.2 0.4 0.0 0.0 0.1 0.2 0.0 0.1 Vorratsveränderung

Exports Exportations 481.2 3.3 3.2 6.3 3.3 5.9 4.4 6.2 Exporte

Imports Importations 507.0 6.2 5.4 7.1 4.5 6.6 4.0 6.4 Importe

GDP PIB 1 792.0 2.3 1.7 2.2 1.8 2.3 1.5 1.8 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 6,5595 FRF

116 © EUROCONSTRUCT Vienna, November 2007 Germany

GERMANY

Ifo Institute for Economic Research www.ifo.de

Erich Gluch e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

The German economy is currently in an excellent state. Just a few years ago some experts predicted Germany’s doom. After strong growth in 2006, GDP increased by 2.9%, and the cyclical upturn is continuing slightly decelerated. The growth will continue with rates of around 2.5% in 2007 and 2008 and with roughly 1½% in 2009 and 2010.

Exports will continue to strongly support the upturn. Investment also will grow at an above average pace. Consumption will probably contribute from 2008 onwards.

After a strong upturn of 6% in 2006, new residential investment will decrease by 5% in 2007. Anticipation effects in order to safeguard now cancelled home owner allowances are the cause of this decrease. From 2009 on housing demand will again increase. The reasons are: an ameliorated overall situation based on increased real income and decreased insecurity of consumers, continuously low mortgage interest rates and only moderately increased prices for construction and real estate.

Housing completions will reach their lowest point in 2008, when only 170,000 units will be completed. Despite a favourable economic environment, the number of completions will rise only moderately and reach 210,000 units by 2010.

The non-residential market will show the highest growth among construction sectors between 2007 and 2010. Average growth will probably reach about 3% per year. Differences between new construction and renovation are minor. The highest growth segments in the non- residential market will be industrial and agricultural buildings. New construction will increase in these two segments between 2007 and 2010 on average by nearly 5% per year.

Civil engineering will increase on average by nearly 3% per year between 2007 and 2010. Investment in infrastructure will be increased at an above average pace, especially in the railway segment.

German construction is rapidly recovering from a long downturn. Total construction output grew by 4.3% in 2006. In 2007 and 2008 output growth will arrive at one per cent to 1½%. In 2009 two per cent, in 2010 one per cent are expected.

2 Macro-economic Outlook

The cyclical upturn in Germany may pause in 2008 according to the economic research institutes’ last study. This is, to an important part, the result of wage restraints and the reduction of cost and overcapacities over the last years. The international competitiveness and the profits of German enterprises increased significantly.

The negative effects of the increase of value added tax (from 16 to 19%) on January 1, 2007 were less important than initially assumed, even though consumer durables and housing investment showed considerable growth to the end of 2006. Despite these anticipatory effects, GDP increased by 2.9 per cent in the first half of 2007 as compared to the first half of 2006.

Forecasts for 2007 and 2008 are based on the following assumptions:

• Crude oil prices will remain at around US$80 per barrel (Brent) during the whole period. • World trade will expand in these two years by about 5½% p.a. • The exchange rate is assumed at 1.40 US$ per euro. Price competitiveness of the German economy will remain unchanged in 2008 as compared to 2007.

118 © EUROCONSTRUCT Vienna, November 2007 Germany

• The European Central Bank will keep the key interest rate at 4.0% and raise it in the second half of 2008 to 4.25%. Money market interest rates will increase marginally. • Negotiated wages will, on average, increase by 1.9% in this year and by 2.6% in 2008. • Enterprises will anticipate investments of € 6bn in 2007 in order to profit from declining balance depreciation effective to the end of 2007. • Fiscal policy will be slightly expansion oriented in 2008. Corporate taxes will decrease, government spending will be expanded.

Based on these assumptions, GDP should grow by 2.6% in 2007 and 2.2% in 2008.

3 Residential Construction

The situation in the residential construction sector has changed dramatically within less than one decade. Until the mid-1990s the residential sector was strongly subsidized by the government, but from January 2006 on the government has completely left the market. Step by step the following measures were established:

• Cancellation of home owner allowances ("Eigenheimzulage") – a subsidy granted by the government to buyers of new or existing apartments or houses; the total amount granted depending on income and number of children. • Worsening of depreciation conditions in the rental building sector – instead of declining-balance depreciation only a linear depreciation is now possible. • Extension of the so-called speculation time limit ("Spekulationsfrist") – a tax-free sale of private dwellings without paying real estate gain taxes is now only possible after 10 years instead of 2 years. • Reduction of subsidies in the social housing construction sector.

New residential construction in 2006 was influenced by two main factors: the ultimate cancellation of the home owner allowances and declining-balance depreciation, both by January 1, 2006. However, it was possible to safeguard the preceding, better conditions. In order to "save" the home owner allowance it was even sufficient to apply for a building permit or to sign a notarised contract of acquisition up to December 31, 2005. New residential construction grew therefore strongly throughout 2006. The anticipation effects of the cancellation of the declining-balance depreciation were probably only moderate.

The anticipation of completions of dwellings in 2006 will have a negative effect on completions in 2007. Due to favourable weather conditions in the first quarter investment in residential construction surpassed the previous year’s value for the first half by 4%. In the meantime, building material producers announced decreasing orders and building contracts for freelanced architects remained on low level. Building permits decreased by one third in the first half of 2007 as compared to the first half of 2006. New residential construction will be clearly declining in 2007.

In 2008, but mainly in 2009 and 2010 the following positive factors will probably stimulate new residential construction:

• The improvement of economic activity should continue. • This should lead to a slight increase in average real income and a reduction in unemployment. The long-standing insecurity of large parts of the population will diminish considerably. Therefore in prosperous regions and among higher income groups, sufficient purchasing power will be available to stimulate housing demand. • Mortgage interest rates are estimated to rise only moderately. • Building costs will only rise substantially in regions with stronger housing demand.

• Despite a decrease in population, the number of households will rise well into the next decade. The dramatic decrease of the most important group for housing demand – the population aged between 25 and 35 – is drawing to a close.

Dampening effects will continue to come from the excellent housing supply. This fact however continuously favours the future development in renovation and modernisation.

Housing completions already reached a trough in 2005; in this year 214,000 units were completed. Due to decreasing construction permits in 2006 and 2007 completions will further decline. Completions will reach a new bottom with 170,000 units in 2008. Not until 2009 and 2010 completions will increase again. Already now, more than half of total residential construction results from renovation and modernisation activities. Due to rising energy prices in the course of recent years, investments to reduce energy consumption have increasingly been made. Therefore, the CO2 building rehabilitation programme ("CO2-Gebäudesanierungsprogramm") of the Bank for Reconstruction (KfW – "Kreditanstalt für Wiederaufbau") was a huge success in 2006. Loans amounting to €9.4bn were granted for the energetic rehabilitation of existing residential premises. Renovation and modernisation activities showed no growth in 2007. Even claims of support from the energy savings programme remained below the level of the first half of 2006.

Since 2006 expenditures to refurbish and modernise flats or houses are tax-deductible for landlords and tenants: as a result of the law on approval of household-related services ("Anerkennung haushaltsnaher Dienstleistungen") 20% of the expenditures for renovation and modernisation are tax-deductible up to a limit of €3,000 per year (only services, no material costs). The increase of VAT on January 1, 2007 is assumed to have led to anticipatory effects in renovation in 2006.

The new energy saving regulation (EnEV) passed in April 2007 by the government became effective on October first. In the future, house owners have to present "energy passports" to buyers or tenants. Since 2002 energy passports had been compulsory for new buildings. The "energy passport" gives renters and buyers comprehensive information about the energy needs and the "energy-efficiency class" of a particular property. Therefore investments for energetic rehabilitation of existing dwellings are assumed to remain at a high level or even increase.

Residential construction profited from huge anticipation effects in 2006, leading to an increase in production of 4%. In 2007 especially new construction will shrink strongly by -5%. A stagnation will probably follow in 2008. A revitalisation of demand is foreseen for 2009 (around 2%) and 2010 (1.5%).

4 Non-residential Market

The non-residential construction sector is dominated by investments of private persons and enterprises. Public investors are active mainly in the health and education segments.

After a sharp rise of investment in producers’ durable equipment in 2004 and 2005, investment in non-residential construction picked up in 2006. After eleven years of continuous decline, the upswing of 4.5% was significant. In the next years the upward trend will continue with decreasing growth rates. The main reasons for this development are:

• The overall excellent condition of the German economy. • The Ifo Business Climate Index remains on a high level. The business cycle is favourable in nearly all sectors.

120 © EUROCONSTRUCT Vienna, November 2007 Germany

• Companies have increased profit margins in recent years through reductions of overcapacities and cost, mainly by downsizing their staff. • Earnings of export-oriented enterprises have reached all-time highs.

• Positive impacts result from the still relatively low interest rates. • Also government support exerts a positive influence. A first step was the instigation of "Agenda 2010" by the former chancellor, Gerhard Schröder, which led to radical cuts in the social system. Additional impacts will come from the corporate tax reform on January first 2008. On balance the tax burden of enterprises will be reduced.

Thus the international competitiveness of German enterprises will further improve. It is not surprising that the extension of existing capacities has become a necessity for industry and services.

This is primarily evident in industrial buildings. Even a few years ago complete production sectors were outsourced because of the low wage levels in Eastern European countries and China. This development has declined significantly. Some companies have even relocated their production back to Germany. In several sectors companies have reached their capacity limits. Supply bottlenecks have become more frequent. Investment to extend existing capacities is required more often now than a few years ago.

Despite still substantial vacancy rates construction of office buildings grew significantly in 2006. The prospering German services sector is reflected by the Ifo Climate Indicator for the Services as well as the survey results of various federations. New building activity is still being slowed down by the marginally increasing number of office workplaces. Service providers continue to examine and optimise their required floor space. The average space available for an office worker in Germany is substantially larger than in other developed countries.

In the aftermath of the opening of Eastern Europe, Germany’s importance as a major traffic hub has increased. Thus many storage buildings and logistics centres need to be newly built or extended. The trend to outsource distribution, storage activities and parts of the production process will lead to a smaller number of locations but more concentrated trans-shipment centres with higher capacities. The enormous rise in trade volume from year to year leads to a growing demand in space. Rapidly changing requirements reduce the economic lifespan of buildings and stimulate demand further.

The current favourable economic development should also stimulate the construction of new commercial buildings from 2007 on. A similar development is assumed for the agricultural building segment, which is already showing growth in 2007 after three years of weak demand.

Investments in the health segment already grew significantly in 2006, mainly caused by the increasing number of private investors with a current market share of about 25%. Private hospital companies tend to invest without the delays common in public institutions. The overall investment delay is estimated at €30bn, nearly 50% of which relate to building investment. Therefore the upward trend in demand should persist in the coming years.

In the education segment construction investments should rise up to 2010. A main driver is the growing number of public private partnership (PPP) projects particularly in building construction. The first progress report of the German government lists 46 PPP projects completed by 2006 with a total investment volume of €1.4bn. 120 new PPP projects with an aggregated investment volume of €6bn are under way. A substantial improvement could be reached by passing the "ÖPP-Beschleunigungsgesetz" in 2005, a law aimed at speeding up the PPP process. In the coming years demand should further increase from new construction

5 Civil engineering Market

The main focus of civil engineering investment is infrastructure – and here road construction dominates. The German road network is already excellent. The connection to the German "Autobahn" system is very good in nearly every region of the country. Nevertheless new links are added year by year, albeit in a small range. The investment in roads, which declined 2004 and 2005, rose by nearly 5% in 2006 and is assumed to further increase in the forecast period till 2010. There are two main reasons for this positive development in the following years: • Massive revenues of the truck toll system as well as • Increasing tax receipts since 2005. Expert estimations assume an increase in tax revenues of more than 9% in 2007 (2006: +8%). In the following years the total tax revenues will rise by 3½% p.a. on average.

In the railway sector the situation is quite similar with lower new construction but huge maintenance expenditures in the existing railway system. In recent years not even the federal subsidies for maintenance have been spent completely. Due to the federal framework plan for infrastructure ("Investitionsrahmenplan für die Verkehrsinfrastruktur des Bundes" – IRP) in the five years from 2006 to 2010 the amount of €12.5bn is to be invested in the maintenance of the railway system. In the context of this project alone, approximately 5,500 km of rails and more than 2,000 switches are planned to be replaced in the years from 2007 to 2009.

The extension of other transport infrastructure is also promoted. Next year two major projects will be launched: • The new international Berlin airport and • The first German deep water harbour "JadeWeserPort".

Investments in telecommunications are already on a high level. Nevertheless, according to a study of McKinsey & Company German investments are still below the OECD average. The lag in the deployment of optical fibre – necessary for the bundled use of telephone, internet and television ("Triple Play") – is still supposed to be significant. Investment of the "Deutsche Telekom" was delayed due to uncertainties regarding price regulation and access rights of competitors. This uncertainty was dissipated by changes in the German telecommunication law (TKG). The European Commission has appealed this decision.

In recent years investments in energy and waterworks stayed significantly below 1990 levels. The energy industry is currently planning or building 23 new power plants, which should be added to the grid by 2011. 20 of these plants will be black coal and gas plants. Although 600 biogas plants are already running, experts assume that 2000 further installations will be added in the following years.

122 © EUROCONSTRUCT Vienna, November 2007 Germany

APPENDIX – DEFINITIONS

1. All ex-post figures of values used in this report are based on the German System of National Accounts (= VGR – Volkswirtschaftliche Gesamtrechnungen) including all data and methodological revisions up to 2006 (esp. for figures in constant prices of the previous year). All calculations and estimations for the sub-sectors and sub-categories of construction volume in the Euroconstruct definition are based on revised total gross construction investment by sub-sectors in 2006 in current prices. Non-value increasing repair and maintenance carried out by firms is included through share estimates.

2. The absolute value figures for construction investment/output in all tables for Germany exclude VAT. The original market price figures for 2006 include VAT as follows (estimates of the Ifo Institute based on official figures of the German Statistical Office): − 11.3% for residential construction − 9.2% for non residential construction and − 6.4% for civil engineering.

3. Table 1: Population and household figures reflect values at the beginning of each year. The German concept for the average unemployment figures and rates has changed in 2005, leading to higher values.

4. Table 2: Total construction output: contains construction investment according to the definitions of the German System of National Accounts (including new construction and value-increasing modernisation). Not investment related activities like repair and maintenance carried out by firms are included in all sub-sectors via expert estimates. Services, construction by other sectors, DIY, moonlighting: are included in total construction investment/volume figures for Germany by estimates of the Statistical Office. An estimation of shares for sectors or sub-segments is not possible. Construction sector output: contains the gross production volume (including intermediate inputs and services from other sectors).

5. Table 3: The housing stock figures are end of year figures. The figures for second homes, vacancies and for the home ownership rate (= proportion of households living in their own home) are estimates of the Ifo Institute, based on available information and expert knowledge.

6. Table 4a: The updated estimates for the segments of new, non-residential buildings by the Ifo Institute were made exclusively for Euroconstruct. They are based on official statistics on construction activity (permissions and completions) in Germany ("Bautätigkeitsstatistik"). 7. Table 4b: The updated estimates for the segments of civil engineering in Germany by the Ifo Institute were made exclusively for Euroconstruct. They are based on official statistics on turnover of construction firms ("Bauberichterstattung – Totalerhebung").

Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 82 500 82 440 82 350 82 300 82 250 82 200 82 200 Bevölkerung

Households ('000s) Ménages 38 640 38 720 38 750 38 800 38 830 38 850 38 870 Haushalte

Unemployed ('000s) Chômeurs 4 381 4 861 4 487 3 812 3 527 3 500 3 600 Arbeitslose

Unemployment rate (%) Taux de chômage 10.1 11.2 10.3 8.8 8.1 8.1 8.5 Arbeitslosenquote

Change of GDP Variation du PIB 1.1 0.8 2.9 2.6 2.2 1.7 1.5 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.6 2.0 1.7 2.1 1.8 2.0 2.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 1.3 0.9 2.3 6.5 4.0 3.0 3.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 3.4 3.8 4.3 4.7 4.9 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 52 839 -6.5 -6.6 6.0 -5.0 -0.5 2.4 1.5

Logement Renovation 79 259 -0.4 -1.9 3.2 0.0 0.0 1.7 1.5

Wohnungsbau Total 132 098 -3.0 -3.8 4.3 -2.0 -0.2 2.0 1.5

Non-residential construction New 35 601 -7.4 -2.8 4.8 5.3 3.7 2.2 0.5

Bâtiments non résidentiels Renovation 27 972 -3.0 -1.3 4.2 4.4 4.0 2.7 1.6

übriger Hochbau Total 63 573 -5.5 -2.2 4.5 4.9 3.8 2.4 1.0

Building New 88 440 -6.9 -5.1 5.5 -0.9 1.3 2.3 1.1

Bâtiment Renovation 107 231 -1.1 -1.7 3.5 1.1 1.1 2.0 1.5

Hochbau Total 195 671 -3.8 -3.3 4.4 0.2 1.2 2.1 1.3

Civil engineering New 26 266 -4.5 -2.5 4.0 4.3 3.7 2.0 0.5

Génie civil Renovation 17 511 -2.5 -1.3 3.6 4.1 3.2 2.6 1.0

Tiefbau Total 43 777 -3.7 -2.0 3.8 4.2 3.5 2.3 0.7

TOTAL CONSTRUCTION OUTPUT 239 448 -3.8 -3.0 4.3 1.0 1.6 2.2 1.2

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 28.57 -2.8 -7.1 5.6 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 1,9558 DEM

126 © EUROCONSTRUCT Vienna, November 2007 Germany

Country/Pays/Land: Germany Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 167.1 145.3 145.8 92.2 101.4 120.6 142.2 Baugenehmigungen Familienhäuser

Flats Collectif 69.3 66.4 70.5 61.4 67.2 83.0 94.5 Mehrfamilienhäuser

TOTAL 236.4 211.7 216.3 153.6 168.6 203.6 236.7

Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collectif Mehrfamilienhäuser

TOTAL

Housing completions 1+2 family dwellings Logements terminés Individuel 177.2 151.5 149.5 127.0 102.0 110.0 126.0 Baufertigstellungen Familienhäuser

Flats Collectif 70.6 62.3 70.3 72.0 68.0 73.0 85.0 Mehrfamilienhäuser

TOTAL 247.8 213.8 219.8 199.0 170.0 183.0 211.0

Housing stock Logements existants 37 930 38 070 38 220 38 360 38 500 38 640 38 780 Wohnungsbestand

thereof second homes dont résid. secondaires 3 270 3 325 3 360 3 390 3 420 3 450 3 480 davon Zweitwohnungen

thereof vacancies dont inoccupé 1 630 1 610 1 570 1 530 1 500 1 470 1 450 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 44.6 44.7 44.8 44.8 44.8 44.9 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 2 188 6.5 3.8 -3.5 4.2 5.0 2.5 2.6 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 2 322 -24.8 -11.4 19.1 2.0 4.5 2.0 2.3 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 4 959 -5.6 -13.6 1.0 12.0 4.5 3.5 -1.5 Industriegebäude

Storage buildings Bâtiments de stockage 4 702 -2.4 5.2 3.5 3.0 3.5 1.5 2.0 Lagergebäude

Office buildings Bureaux 7 588 -22.5 -4.0 11.6 -0.5 4.5 1.5 3.2 Bürogebäude

Commercial buildings Commerces 6 514 -6.7 2.1 1.7 4.0 3.5 2.5 -1.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 1 945 -4.2 -5.5 -3.7 10.0 4.0 2.5 -2.5 Landwirtschaftsgebäude

Miscellaneous Autres 5 383 20.1 0.2 6.1 10.9 1.4 2.0 -1.0 Sonstiges

Total 35 601 -7.4 -2.8 4.8 5.3 3.7 2.2 0.5 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 1,9558 DEM

128 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 16 635 -5.3 -1.7 4.7 4.5 4.0 2.5 0.5 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 3 896 -3.2 -3.0 4.6 5.5 4.5 2.5 0.5 Bahnanlagen

Other transport Autres réseaux 2 364 -0.4 -6.6 5.0 5.0 3.2 2.5 0.7 Übrige Verkehrsinfrastruktur

TOTAL 22 895 -4.4 -2.5 4.7 4.7 4.0 2.5 0.5

Telecommunications Télécommunications 7 004 1.9 1.6 3.0 4.0 3.0 1.5 1.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 6 348 3.6 -4.2 4.6 4.5 4.0 3.0 1.0 Energie- und Wasserversorgung

Other Autres 7 530 -11.3 -2.2 1.3 2.5 2.0 1.5 0.7 Sonstiges

Total 43 777 -3.7 -2.0 3.8 4.2 3.5 2.3 0.7

1) At 2006 prices, excluding taxes. 1 euro = 1,9558 DEM

Country/Pays/Land: Germany Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 1 357.5 0.2 -0.1 1.0 -0.1 1.9 1.4 1.5 Privater Verbrauch

Public consumption Consommation publique 425.9 -1.5 0.5 0.9 1.8 2.0 1.2 1.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 417.1 -0.2 1.0 6.1 5.5 3.2 2.9 2.5

of which construction 217.2 -3.8 -3.1 4.3 1.0 1.6 2.2 1.2

Stocks (contribution as % of GDP) Variations de stocks - 4.7 Vorratsveränderung

Exports Exportations 1 046.5 10.0 7.1 12.5 7.8 6.5 6.5 5.0 Exporte

Imports Importations 920.1 7.2 6.7 11.2 6.0 6.9 7.0 6.0 Importe

GDP PIB 2 322.2 1.1 0.8 2.9 2.6 2.2 1.7 1.5 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 1,9558 DEM

130 © EUROCONSTRUCT Vienna, November 2007 Hungary

HUNGARY

Buildecon www.buildecon.com

Anna Gáspár e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

In macro-economy, the balance-improving effect of the stabilisation package introduced in several steps since the summer of 2006 began to show itself; at the same time, the short- term bitter flavour of the pills to swallow was somewhat attenuated by the favourable international economic environment. The steps of the equilibrium program implemented to date have been recognised to be efficient not only by the market, but by the European Commission as well. Even though the popularity index of the government is record lows, political stability does not look like threatened. In the residential sector the output expressed in completed homes is estimated at 35,000 in 2007, increasing from 36,000 to 40,000 in the subsequent years. Buying propensity is supported by a more and more favourable financing background. The improvement of the housing stock and the reconstruction of the homes are influenced by changing energy costs and growing exposure to the changing climate. In the segment of social home construction no significant activities are expected on the short term, considering the limited growth rate – a slight decrease – in 2007 and probably also in 2008. In the very best case, starting from 2009 the combined market of home construction and reconstruction may grow at the yearly rate of 5-10%. The non-residential construction market continues to enjoy the soundest position among the three sub-sectors of the construction business.

Construction output growth

% % 15 15 Non-residential 10 Residential 10

5 5

0 0

-5 Civil engineering -5

-10 -10 2006 2007 2008 2009 2010

In the field of private investments the logistical and industrial projects have developed into a driving segment in 2007 based on a several years long history of strong presence in the local market (with exceptionally high production and export performance ratios). After several prosperous years the developments of the real estate market has continued to show the typical signs of growth in 2007 again. With respect to office building projects it is assumed that the growth trend of the office market is going to be sustained till 2009-2010 by the expansion of the service sector, the opening of local R&D centres, continued outsourcing, and the requirements of the administrative sector. The stock of retail buildings is continuously growing and there is an apparent demand for the rehabilitation of existing facilities. In the field of public welfare projects a wider use of the PPP system is expected. A standard process will be developed by the government based on actual experiences (Public Finance Act). In this segment some market growth of diminishing rate can assert itself during the period ending in 2010. The projects financed from EU funds are expected to start booming starting from the second half of year 2008 or 2009. In the civil engineering sub-sector, since the end of 2006 the continuation of infrastructural development projects has been held back due to the high fiscal deficit, the obligations

132 © EUROCONSTRUCT Vienna, November 2007 Hungary specified in the convergence programme, and the lower project financing expenditure. Therefore the high priority engineering projects have been defined by the government in two development programmes that may be launched in 2007-2008. These projects can be supported from funds made available by the EU and from the central budget. The infrastructural development activities may start increasing from the second half of 2008 or more probably from year 2009 in the case of a successful performance of the convergence programme.

2 State of the Economy

The balance-improving effect of the stabilisation package introduced in several steps since the summer of 2006 began to show itself; at the same time, the short-term bitter flavour of the pills to swallow was somewhat attenuated by the favourable international economic environment. The steps of the equilibrium program implemented to date have been recognised to be efficient not only by the market, but by the European Commission as well. Even though the popularity index of the government is record lows, political stability does not look like threatened. In recent months, a slackening in economic growth has happened. GDP expansion, usually above 4% p.a. in previous years reached to 1.4% in the second quarter of 2007, worst data in eleven years, putting the GDP growth of 1st quarter 2007 to 2.1%. In the first six months of the year, industrial output was about 8.7% above the value observed in the previous year, however the economic tightening consumed the growth of investments and of household consumption. There was a 6.8% reduction in net real wages in 1st quarter 2007, while unemployment rate remained flat at 7.5%. The market expects a GDP growth of 2.5% for 2007, to exceed 3% in 2008, again. Already in the first half of the year, the government managed to reduce the budget deficit target for 2007 from 6.8% of the GDP to 6.4%, due to processes having a favourable effect on the balance of the general government, with measures connected primarily with the healthcare reform that generated substantial discussions and discontent in the society. Part of these, exactly due to their much-disputed character, may not be sustainable in the long term, and there is also an immense uncertainty about a future introduction of property taxation, aimed at increasing revenues. In view of the ongoing processes, however, the deficit target of 3% in terms of GDP looks achievable by the year 2010. The improving deficit numbers are expected to contribute to a gradual reduction from 2007 in the ratio of government debt to GDP, having increased from the value of about 50% in 2001 to more than 67% by 2006. A jump in the consumer price index is one of the most perceptible unfavourable effects of the stabilisation package. Annual inflation peaked, after 2.3% in the spring of 2006, at 9% in March 2007, and it still stood at 8.6% by the end of June. Even if the one-off, inflation- boosting effect of the VAT rate increase in September 2006 will soon drop off from the index, the higher rate, through its implications in the pricing of services, as well as the development of food prices represent serious factors of uncertainty. The market expects an annual inflation of 6% by the end of the year, with an average annual consumer price index of 7.7% for the year 2007. According to National Bank of Hungary (NBH), a 3% inflation, understood to mean price stability shall be achievable by the end of 2008 - early 2009. The prime rate, kept at 8% since October 2006, was reduced to 7.75% by NBH Monetary Council, operating with the new central bank governor since April, who has the support of the market as well. By the end of the year, the market expects further rate cuts of a total of 75-125 basis points, in line with a decrease in inflation, the more so, because this rate is far the highest in the region. In the meantime, the European Central Bank, with its rate hikes in April and June, 25 basis points each, increased its prevailing interest rate to 4%, a height unseen since August 2001, and further rate hikes cannot be excluded either. In recent months, the exchange rate of the forint stayed stable, apart from a couple of fluctuations under the influence of international market shocks, close to the strong side of the band, at levels of 245-255 HUF/EUR. The average exchange rate in the first half of the year was 250 HUF/EUR, almost 4% stronger than in the same period of the previous year.

Due to the presence of large foreign companies well-provided with capital and also to their expected growth as a result of the EU funds, there is a fierce competition on the construction market. Diversification is going on with the service providers of the construction activity, manufacturers of building materials and products, with supply as well as commerce. The largest Hungarian companies are reinforcing their presence on eastern and south-eastern markets. Due to domestic restrictions, a reduction in public procurements and inland consumption, medium-size and smaller firms as subcontractors or suppliers are facing their partners’ difficulties in payment.

3 Residential Construction and Market

Slight decrease in housing completion in 2007, unbroken renovation activity, high level market

About the housing stock. As of January 1 2007 the total housing stock consisted of 4,239,000 homes of 75 m2 average floor area, 90% with lavatory or bathroom and 58% connected to the public sewer system. 92-93% of the total housing stock is privately owned. This high weight of private ownership has been more or less constant for several years as the home construction projects financed by local governments have remained in the range of 200 units a year. 12.4% of the homes are one-room flats vs. 40.6% two-roomed and 47% with three rooms or more. The total housing stock includes 65% single-family houses, typically brick with one residential unit. Another 20% prefabricated homes made of large size RC panel structures in housing estates completed in 1965-80.

Average age

% C % 60 31 60

45 45

65B 30 30 A 100 7,5D 15 15

0 0 - 1919 1920 - 1959 1960 - 1989 1990 -

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Distribution of homes Table 1

Regional distribution Age profile Central region 31% -1919 13% Budapest 20% 1920-1944 12% Western Hungary 29% 1945-1959 11% Eastern Hungary 40% 1960-1969 14% 1970-1979 21% 1980-1989 17% 1990-2001 7% 2002-2006 5%

Nearly 25% of the total housing stock is obsolete in poor condition, including more than 300,000 abandoned units. The stock completed before 1970 must be upgraded to the requirements of thermal insulation. Yearly 3 to 5 thousand homes are removed and, since 2003, yearly 35,000 to 40,000 new homes are completed. The holiday home (or second home) construction activities are insignificant with about 1000 or 1500 units added in a year. The yearly rate of home reconstruction projects is estimated between 100,000-140,000 units, however, the rate of partial reconstruction is much higher.

New home construction and renovation activities in 2006-2007

In 2006 commissioning permits were granted to 33,900 completed homes and construction permits were issued for almost 45,000 new homes covering about 4 million m2 total area. Compared to 2005 data the amount of completed homes and new residential construction permits decreased by 18% and 13%, respectively. This recession was especially marked in the capital city recording a 30% drop in the amount of new homes completed and 25% in terms of requests for construction permits compared to the previous year. At the same time this level was far exceeded by the amount of available homes offered in the housing market and this was also supported by the growing performance of building materials and construction products supply. In the first six months of 2007 commissioning permits were issued to more than 13,000 completed homes and construction permits were issued for more than 21,000 new homes. The amount of delivered homes increased by 2% and the amount of new permits increased by 7% over the comparable period of 2006. The growth shown especially in the 2nd quarter and in the segment of construction activities in Budapest is attributable to the growth of the housing construction business in the first place. This factor also accounts for the dominance of multi-floor multi-unit buildings along with diminishing average unit sizes. The average total area of completed homes has been reduced by 6 m2 in Budapest and 4 m2 by national average to the current 86 m2. The key role of contractor companies has been enhanced producing three times more apartments than individual builders on a home-made basis. About 33-35,000 homes are scheduled for completion before the end of the year.

Building permits and completion Table 2 number (thousand) 2003 2004 2005 2006 2007(e) 2008(f) 2009(f) 2010(f) Valid permits 177 175 177 175 175 Units under construction 138 147 150 155 160 Permits for new units 59,2 57,5 51,5 44,8 46,0 46,0 50,0 50,0 Completed units 35,5 43,9 41,1 33,8 34,0 36,0 40,0 40,0 number Built units/1000 person 3,5 4,4 4,1 3,4 3,4 3,6 4,0 4,0

The construction costs of newly built homes are expected to escalate by 5-7% following the yearly inflation rate. Higher prices are justified by underlying factors like growing land costs, growing demand for high quality, sophisticated technical content and cost efficient operation,

© EUROCONSTRUCT 135 Hungary Vienna, November 2007 the passed-on "whitening" costs of the construction sector, or the higher marketing and sales expenses. The government has decided to introduce considerable restrictions (such as revised authorisations, more rigorous procurement standards, severe penalties and other regulations are expected) in an effort to combat the "black" activities also prevailing in the construction processes. According to the latest surveys, the total Hungarian black market represents 17-18% of gross domestic production. The steady growth of home reconstruction activities is connected to obvious factors. Imperative motives include the obsolete condition of installations and thermal insulation systems in 70% of the total housing stock, the climbing energy costs and the climatic changes. The people living in blocks produced by industrialized construction methods (round 600,000 households) have the option to apply for public or local government support and debt financing facilities to cover the required down payment. By the end of 2007 the reconstruction of 190,000 prefabricated homes will be completed as a result of this "Panel Program".

Residential project financing

The outstanding demand is estimated at 150,000-250,000 homes, notwithstanding the high share of privately owned - following the privatisation – 92 percent of the total housing stock. This gap is the consequence of the very limited construction activities between 1990 and 1995, poverty, a changing life style, a growing mobility and migration. Of course there is an existing market for exquisite luxury homes too. In the period between 2000 and 2006 the relevant investment levels were fluctuating between 14% and 23%, reflecting the typical cycles of residential construction, reconstruction and purchasing activities that had been previously determined by the uncertainties and volatility of government support.

Residential investments activity Table 3 Current price, mln HUF Year Total investments Residential investments Residential to total, % 2000 2,844,989 413,402 14.5 2001 3,158,012 587,016 18.3 2002 3,525,640 713,241 20.2 2003 3,679,603 815,467 22.2 2004 4,076,172 943,911 23.2 2005 4,469,770 855,584 19.1 2006 4,647,897 773,053 16.6

Various degrees of government support are offered to buyers of new or used flats as first homes through interest rate subsidy or grants without recourse defined by the number of children. Bank financing is available to buyers at more and more favourable terms. Loans combined with insurance and limited down payment. The use of mortgage loans is rapidly growing. By comparison: while mortgage typically reaches 50% of the GDP in advanced markets, in the fastest growing Czech, Hungarian and Croatian lending markets this product amounts to 10-15% of the yearly GDP production. According to forecasts, the mortgage portfolio is estimated to grow at the yearly rate of 15% in the coming 3-5 years.

Housing market trends

Both demand and offer have shifted from small size flats. Factors include the regulations issued by the authorities trying to minimise the production of apartments that are too small for living. After Budapest the medium cities (like Eger, Tata or Tatabánya) have been discovered by the international property development business active in Hungary (in 83% Irish, British, Spanish, German, Romanian, Dutch or Austrian). In Budapest most major residential projects will be implemented in brown field rehabilitation areas, however, there is considerable demand for apartments in special green belts, or in riverside buildings along the Danube, or lofts and restored flats. The activity of local property developers and the range of 136 © EUROCONSTRUCT Vienna, November 2007 Hungary available homes are equally growing in Budapest and in the cities of Debrecen, Győr, Szeged, Veszprém, Pécs and Nyíregyháza. On a yearly basis 25-30 thousand new homes are designed for offering for sale in the local market and the units are completed according to the actual demand. Selling prices tend to become more and more negotiable in a market of abundant supply. 70-80% of the homes built for sale are multi-unit projects of 3 or more units (mostly apartment houses with more than 30 units). The buildings are completed with brick and RC structures. Light structures and prefabricated products are only used in 1700-2100 "turnkey" buildings (usually built for one family) completed in a year. The market of used flats is also growing, demand is focused on single-family houses of 100- 150 m2, or downtown apartments of large floor areas, or 40-60 m2 flats in prefabricated or condominium blocs. About 100,000 existing flats change owners in a year. Consequently the reconstruction, extension, penthouse development, redesigning and improving activities are continuously and steadily growing.

Perspectives of residential construction and renovation till 2010

In the residential construction and renovation business the competitive terms are in place in terms of actors, financiers as well as the real estate marketing infrastructure. No housing policy measures with boosting impacts on the construction activities are expected on the short term. However, from the financing point of view it is expected that property buyers will benefit from the competition of banks offering more and more attractive lending terms, loans without any down payment and higher hedging amounts. Actually the portfolio of bank loans combined with home savings bank deposits has been multiplied. The output expressed in completed homes is estimated at 35,000 in 2007, increasing from 36,000 to 40,000 in the subsequent years. Buying propensity is supported by a more and more favourable financing background. The improvement of the housing stock and the reconstruction of the homes are influenced by changing energy costs and a growing exposure to the changing climate. In the segment of social home construction no significant activities are expected on the short term, considering the limited growth rate – a slight decrease – in 2007 and probably also in 2008. In the very best case, starting from 2009 the combined market of home construction and reconstruction may grow at the yearly rate of 5- 10%.

Residential parks in the construction phase in Budapest Table 4

Project name Developer No. of flats Sizes, m2 Selling price, EUR Corvin sétány (Corvin Lane) Cordia 2800 28-90 1200-1400 Sasad Resort GTC Hungary 1200 45-128 1500-1800 Somfa Liget (Somfa Groove) OTP Ingatlan 1100 29-80 1100-1400 Sasad Liget (Sasad Groove) Biggeorge 900 34-104 1500-2000 Marina Premium Autoker Holding 900 39-142 1800-4400 Károlyi I. Városközpont (City Centre) CEU Reality 900 27-170 1300-1700 Central Park Minron 884 29-77 1100-1400 Homoktövis (Arbutus) Inter Estate 870 37-97 1400-1400 Metropolitan AL Holding 800 29-92 1200-1800 István Park SL Group 800 25-89 1300-1700 Kondorosi Csizy and Lukács 650 26-93 1200-1600 Terra Zebra Terra Zebra 640 28-148 1100-1400 Narancsliget (Orange Groove) SL Group 600 25-114 1400-1700 1 EUR (2007Q1-Q3) = 250,81 HUF

4 Non-residential Building Construction

Ongoing developments in the real estate market, unbroken industrial development, long-term public welfare projects and successful PPP Assumptions as to the future macroeconomic conditions can be derived from the processes of the non-residential building construction sector. Currently the proposed projects and the ones in the preliminary or construction phase imply a background that includes the EU member status of Hungary as from 2004, a favourable international economic environment, certain features of the advanced local real estate market, the inflow and reinvestment of finance, ongoing industrial development efforts, the entry of international outsourcing, and the active participation of the private sector in joint venture projects of the public and private sectors (PPP). The development of the built environment is not a matter of short term visions with a horizon of one or two years, disregarding any macroeconomic fluctuations (such as the convergence programme or equilibrium remedial measures). The statistical evaluation of non-residential building projects indicates that the construction market will keep growing in 2007 over a nearly 9-10% growth shown in years 2005 and 2006. The growth trend continuing for several years mainly in the area of private investments in exportable industrial production is reflected by the fact that the macroeconomic performance in the second half of 2007 is described by 12% higher production, 18% higher export and 14% higher import data. In the segment of non-residential building construction the dominance of the early planning, planning and construction processes of office, retail, industrial and logistical projects will be maintained in 2007, both in terms of volume and value. The segment of projects with public objectives and public financing has been curbed by the restrictions applied in 2006-2007 in the economy and consequently the investments. Thus in the first six months of 2007 the procurement level dropped by 17-20% and about 30% in total value compared to the year before, and the implementation of several projects has been delayed. In respect of net construction costs by one square metre an interesting change should be noted. While energy costs, building material costs or design costs were growing, the overall construction costs have not escalated at the inflation rate and even decreased in some categories. For example, the construction costs of one-family houses or hospitals were somewhat lower. In an environment of depressed market and tough competition the construction sector the internal cost increments are not acknowledged in the prices of the construction sector but rather offset by the contractors trying to use cheaper subcontractors. On the other hand, the construction costs have been higher in the category of schools, retail outlets (shopping centres), more and more sophisticated industrial facilities and warehouses where costs are increased by ever higher equipment standards. Land costs grow about the yearly rate of 6%. Property financing is highly competitive, most of the market is covered by Hungarian banks active in business lending, namely, CIB Bank, Erste Bank, K&H Bank, MKB Bank, OTP Bank, Raiffeisen Bank and UniCredit Bank. Eurohypo, a subsidiary of Commerzbank has also been present in the local market for a couple of years. Eurohypo is a very significant banker in the office building, logistical property, shopping centre and downtown business hotel financing business. Just for indication, in 2006 nearly 600 new branch offices were opened by banks in Hungary but only 33 of them in Budapest.

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Net construction costs Table 5 Current price, thousand HUF (EUR)/m2 Building type 2006 2007 Multi-unit residential building 170 (643) 173 (683) One-family house 230 (872) 210 (830) Gymnasium 175 (662) 178 (703) School 165 (625) 179 (708) Office building 290 (1020) 267 (1055) Industrial building 190-220 (780) 224 (885) Warehouse 150 (568) 153 (604) Hospital 250 (946) 223 (881) Hotel 275 (1042) 280 (1106) Commerce 210 (795) 250 (988) Agriculture 67(253) 66(261) 1EUR (2006)=264.27HUF, 1EUR (2007)=252.00HUF

The property market – A market of demand for new office buildings has been existing for several years. From the several reasons a few factors are highlighted here: higher requirements of public agencies; international business service centres settling in Hungary (17% FDI outsourcing, 18,500 jobs); long-term appeal of the Central European region (Budapest is well placed from the point of view of business environment and capital flow); advanced technologies (intelligent buildings), and higher operating efficiency. The vacancy rate has moderated, the office utilisation ratios are better and better reaching 84% in Class A office buildings and 80% in Class B. By end-2007 the total Class A office lease stock available in Budapest will reach 2.25 million m2 and another 250-260,000 m2 will be added in 2008. Office renting fees are quoted between 11-14 Euro/m2/month in Class A and 9-12 Euro/m2/month in Class B. The office market continues to boast with the soundest (or the least fluctuating) appreciation in the real estate market. This segment has been quite steadily growing during the last 18 months and its short term horizon is not gloomy either. Forecasters are definitely less optimistic about the shop area market, however, competition is too strong in the retail business to let this niche down. The logistical property market described by growing ratios is in the positive domain. On the short term this can become the most dynamically growing segment of the Hungarian property market. The predictable growth of the selling prices of newly built properties of any type will fall in the range between 2.8% and 4.6%. Prices have slightly diminished in almost every segment vs. the data stated in the April 2007 report of the Economic Research Institute. Used property prices are more or less stagnant.

Anticipated changes of new property prices in the next 12 months Table 6 % at current price Type Budapest Pest County Western Hungary Eastern Hungary National average Residential 4,5 5,0 5,0 5,0 4,6 Office 3,5 4,0 3,5 3,8 3,7 Shop 3,5 4,0 2,0 5,0 4,0 Warehouse 2,5 3,0 3,0 2,0 2,8

Retail construction projects. Busy development activities resulted in the expansion of the total stock reaching some 3.2 million m2 in 2006. Altogether 180-250,000 m2 new retail projects are scheduled for commencement or completion during 2007 (in Budapest: Neo- Center, Budai Skála, Origo City, Corvin Sétány (Mall), Downtown ING project, Orco projects, Ferihegy airport development projects; Garay square – 70,000 m2, Arena Plaza – 68,000 m2, AIG Lincoln Ferihegy – 44,000 m2 etc., in other cities as Biatorbágy, Győr, Zalaegerszeg, Pécs, Szeged, Debrecen, Miskolc. There is a growing demand for the reconstruction of existing shopping centres and traditional stores. Leasing fees tend to grow, the current level is between monthly 30-100 Euro/ m2. All of the DIY retail networks are engaged in continuous expansion (OBI, Praktiker and Baumax, each covering 120-150,000 m2). Bauhaus, Germany is a new entrant in the local market planning to develop about 360-400,000 m2 within ten years.

Along with the growth of the retail business the discount chains are robustly growing and expand their logistical bases. The future sites and directions of these projects are defined by the infrastructural development projects in and outside of Budapest, such as the Metro, road construction, intersections, or borderside urban positions. Consequently the retail centres represent a considerable weight in the portfolios of real estate funds because of their high returns. Logistical and industrial developments – 2000 can be taken as the starting year of the dynamic propagation of logistical and distribution facilities implemented on speculative development projects. 375 thousand m2 leased logistical halls or 25% of the feasible total capacity in Budapest and the agglomeration will have been completed by the end of 2007. 27% of this stock and 35% of the outstanding capacity that may be implemented in the future are controlled by the international leader ProLogis. Beside the large logistical facilities existing along the Budapest exit sections of motorways (in the vicinity of cities like Gyál, Szigetszentmiklós or Herceghalom) special note should be made of the Hegyeshalom project implemented by ProLogis at the Austrian border. The intensive development of logistical bases in the region of Eastern Hungary (with Ukrainian, Romanian and Serbian border sections) is expected to follow during the next 3-5 years. The number of existing industrial parks has reached 190 in 2007. Starting from 1997 these projects have been implemented jointly by the central government and the relevant local governments to support regional economic policy objectives and currently they are run on a total area of 10,000 ha with a 53% occupation rate. 3410 organisations operate in industrial parks with 186,000 total employees, producing one-third of total industrial output and export in up-to-date manufacturing, warehousing and shipping environments. Since their available areas can be extended, between 2007 and 2013 the further development of these parks may be eligible for support from the European regional and business development funds subject to certain tests such as total sales, employees and other operating criteria. The Central and East European TOP 2006 has been published recently. The list of companies includes several organisations operating in Hungary noted for the continuous development of their industrial capacities, profiles and manufacturing processes (such as Audi, Nokia, GE, Jabil, TVK, Dunaferr, Borsodchem, Bosch and others).

Some exceptionally ambitious new projects Table 7

Place Project Value, bln HUF Investor Central EU Biofuel Hungary Hódmezővásárhely biofuel plant 40 Kft. (Australia) Békéscsaba bio-ethanol plant 25 Global Green One (Norway) Szolnok wagon works 10 Stadler (Switzerland) DAF motor manufacturer and Zsámbék 6,5 Paccar inc. (USA) component distributor production of additional Opel- Esztergom 50 Suzuki Magyarország (Japan) Suzuki types brake manufacturer, R&D center, Kecskemét, Budapest 3 Knorr-Bremse (Germany) laboratory and workshop Dunaújváros paper mill 50 Prinzhorn (Austria) Dunaújváros iron works streamlining project 49 Dunaferr Group (Russia)

In the context of industrial projects special note should be made of the latest development projects undertaken by suppliers of building materials and products and which relate to the dynamic growth of the construction market in the East European region. The most recent ones include Grundfos (pumps), Dunaferr (steel), Creaton (roof tiles), Holcim (concrete), Tondach (roof tiles), Lindab (steel profiles), Jüllich Glas (sheet glass), Roto (ironmongery products), Strabag (cement), G4S (safety equipment). Finally the list of imminent complex projects of very high project costs financed by the private sector (in the combined segment of office, retail, logistical, residential and service buildings) must include the Ferihegy airport development project by Hochtief, Budapest

140 © EUROCONSTRUCT Vienna, November 2007 Hungary

WestEnd 2 to be launched by TriGránit, Europe Center at Ring M0, North bridge co-financed by the Hungarian Development Bank, Raiffeisen, Grifton and Terra Invest, Budapest City Hall to be implemented on PPP basis, or the Tópark (Lake Park) Project at Törökbálint community undertaken by Walker & Williams. Public projects (PPP). The education and health expenditures of the central budget are still more limited than in the last years. It may take a long time until the health system reform exposed to vehement public dispute or the revised education and social policy can "yield" the required investments and cover the necessary funds (partly based on EU sources). Currently a part of the public welfare projects like education or justice is implemented on PPP basis, i.e., co-financed by the private sector. The development, construction or reconstruction of about 80 educational facilities and the operation of these buildings are in process. In Corvinus University, Budapest a new wing of 15,000 m2 has been delivered. Another 30 PPP projects were commenced in 2005, accommodation capacity for about 8000 students, 22 sports facilities and 2 jails are implemented in public-private cooperation. Public welfare projects supporting culture, urban rehabilitation, sports or recreation are now within feasible reach. The largest short-term projects including the Government Quarter in Budapest or Pécs, Cultural Capital of Europe in 2010 may also be implemented in PPP or, preferably, the IPPP (Institutional PPP) system. The government is planning to define a standard process for this system based on the experiences and considering the positive or negative outcomes.

Conclusion

The non-residential construction market continues to enjoy the soundest position among the three sub-sectors of the construction business. In the field of private investments the logistical and industrial projects have developed into a driving segment in 2007 based on a several years long history of strong presence in the local market (with exceptionally high production and export performance ratios). After several prosperous years the developments of the real estate market has continued to show the typical signs of growth in 2007 again. With respect to office building projects it is assumed that the growth trend of the office market is going to be sustained till 2009-2010 by the expansion of the service sector, the opening of local R&D centres, continued outsourcing, and the requirements of the administrative sector. The stock of retail buildings is continuously growing and there is an apparent demand for the rehabilitation of existing facilities. In the field of public welfare projects a wider use of the PPP system is expected. A standard process will be developed by the government based on actual experiences (Public Finance Act). In this segment some market growth of diminishing rate can assert itself during the period ending in 2010. The projects financed from EU funds are expected to start booming starting from the second half of year 2008 or 2009.

5 Civil Engineering Developments

2-year transport, environmental and energy development plans in the foreground According to the Second National Development Programme approved by the EU in June 2006 a total budget of 33.6 billion Euro will be available to Hungary from 2007 through 2013 and 15% co-financing from the central budget as a mandatory condition precedent to the utilisation of the funds. The funds will be distributed between the 7 years of the period and, according to our estimation, the share to be utilised in the engineering sector will be close to 35-40%. (www.nfu.hu; www.gkm.gov.hu). Starting from 2004 the amount of civil engineering works has been growing, partly as a result of the acceleration of motorway construction activities and because of the environmental obligations implied by EU membership. In 2005 the share of civil engineering reached or even slightly exceeded 30% of the total construction performance. Since the end of 2006 the growth rate achieved in the previous years has been curbed by the high fiscal deficit and the convergence programme to a reduced level in 2007. As it appears from the evaluation of civil engineering projects, the high cost projects before or in the design phase have accumulated in the second half of 2007 and the amount of works postponed to or later than 2008 has increased by 23-25%. The total value of procurement tenders with a considerable weight of engineering projects also decreased by about 26-27% during the three first quarters of 2007. The most spectacular area of transport infrastructural development is represented by the Hungarian motorway network updated to Central European standards and extended from 534 km total length at end-2002 to over 1,000 km by September 1 2007. A Danube-bridge was completed at Dunaújváros (1683 m); construction works of a Danube-North bridge of ring M0 are in process (1861 m long bridge supported by pillars of 100 m height, with 3 crossings of RC structure and 2 crossings of steel structure); the Kőröshegy viaduct of 1872 m length and 87 m high raised alignment has been completed as part of motorway M7. Thanks to the more rigorous regulation of the tender process and more sophisticated technical requirements, the motorway construction costs have been strongly reduced to 0,6 – 1,3 billion HUF/km at 2005 terms.

Public road network Box 1 The 30,000 km long public road network controlled by the government includes 23% trunk roads and 77% secondary roads. Another road network of around 140,000 km total length is owned by local governments. The public road network of 44 years average age is in rather decayed condition. A considerable part of the public road network must be upgraded to an 11.5 t axle load capacity as specified by EU standards, reconstructed and maintained in good condition.

In the segment of railway development the privatisation sale of the cargo shipping business has been completed in 2007 and the new shareholders wish to increase the shipping performance by yearly 10-12%. A similar transformation of the passenger shipping business, currently a loss producer, remains a matter of the future. Railway markets are gradually lost to road transport. The EU has the intention to change this trend, already specifying that 50% of the available transport development funds must be allocated to fixed rail transport. As a matter of fact the development of railways and fixed rail urban public transport systems (local train, Metro and tramway lines) is continuous, even if the results are not so spectacular.

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Railway network Box 2

From the existing Hungarian railway network of 7727 km total length 3000 km sections connect the European backbone network. The network includes 1146 km double-track railway line length and 2580 km electrified rail track line length. The cargo shipping and passenger shipping performance and the railway line density are higher than the European average, however, the quality standards, speed, the share of electrified lines or the condition of the railway track network are far below the required standards.

The two-year transport system development programme of the government scheduled to start in 2007-2008 has been defined considering the priorities and it will launch 56 road projects of 446 billion HUF total cost, 5 railway projects for 375 billion HUF and 5 urban public transport projects for 450 billion HUF, and 600 bn HUF dedicated EU support will be available for utilisation during the first two years. The private sector may participate in certain road development projects according to the plans of the National Infrastructural Development Company, the organisation responsible for the development of the transport infrastructure. (www.nif.hu). Priorities of the transport infrastructure according to NDP II. • Improve the international access potentials of Hungary • Extension of the expressway network, upgrading of railway trunk lines, development of the river infrastructure. • Improve regional access potentials • Extension and pavement reinforcement of transverse highways; setting up regional transport associations • Improve public transport in urban and agglomeration areas • Development of suburban railway lines and linking to local public transport systems; construction of cycle roads; traffic mitigation measures in city centres. • Develop the logistical cargo shipping infrastructure • Completing piggyback logistical centres and the relevant infrastructure. Air transport – Development efforts are equally motivated by business, tourism and logistical requirements. Hochtief, Germany has acquired a controlling share in the operation of Budapest Ferihegy Airport. "Airport City" project, a 261 million € investment will be started in the second half of 2008 (hotel, convergence centre, parking area, cargo terminal and retail facilities). Airport development projects focused partly on logistics and partly on tourism are in process in Debrecen and Sármellék (international airports) as well as in Pér, Pécs, Szeged and Békéscsaba (regional airports). River shipping - From the existing 13 large intermodal centres currently 8 ones are linked to local waterways. One of them is a border port on river Danube at Mohács completed at 3 bn. HUF project cost funded by the EU. This port will be responsible to control all waterway shipments from the South to the EU and perform the customs check-up functions to Schengen standards. Another public port at Győr-Gönyű, in the north-western section of the river Danube close to the Austrian and Slovakian borders will be operated as a junction for road, rail and water transport systems. The tender issued – for four times! – for the railway project has been recently granted to Colas 2007 Consortium. At this port an industrial development site of 75 ha area is also available and it is actually in the cross-fire of extremely keen interest (steel or bio-energy production, etc.). The improvement of passenger shipping and ports with considerable participation of private sector and local government funds is actually supported by domestic as well as international tourism. Water resources, flood, water management and waste management - High quality water resources are available in Hungarian soil, however, long term utilisation is challenged by global warming and acute draughts. In the sign of this challenge a non traditional management of the flood draining systems was defined in Vásárhelyi Program, actually in consequence of the mounting problems faced for several years, the floods of rivers Tisza and Danube, the changing global climate and the usurpation of the environment. The existing flood control dikes of 1500 km total length need to be corrected. In the context of flood and

© EUROCONSTRUCT 143 Hungary Vienna, November 2007 waterbase control in the Tisza region, 8 detention reservoirs will be implemented in Eastern Hungary under the Vásárhelyi Program to reduce the water stage of river Tisza, develop new water management methods, and offer a new land use and management approach to the local people. The works had started in 2005, one reservoir was completed in Cigánd, the construction of a reservoir in Tiszaroff region were started and preliminary archaeological excavations are in process in the Hany-Tiszasűly site. However, this program, too, is carried out at slower rate. The construction works of Pest South waste water treatment plant are in process and the construction of the Buda main collector will be commenced early 2008 as part of this project. In Szeged a biological waste water treatment plant financed from EU funds has been completed. Up-to-date waste management systems to European standards are successfully operated on basis of 13 approved projects. In the environmental programs targets are defined for year 2015 setting out from actual data recorded in 2006. Thus the households with available connection to public sewers should be increased from the current 67% to 80%, the amount of waste water treated using biological methods from 69% to 100%, the citizens supplied with high quality drinking water from the present 75% to 96%, and acceptable protection against flood from 41% to 71% of the affected population. For the 2-year environmental and energy management program (2007-2008) six key objectives of support have been defined by the EU and the Hungarian government, including the following: settlement hygienic program (320 bn. HUF), water quality and flood control (155 Bn. HUF), nature conservation (11,2 bn. HUF), energy efficiency (11 bn. HUF), renewable energy production (18,3 bn. HUF), sustainable life (7 bn. HUF), institutions (34 bn. HUF). Energy management and energy policy - There is no need to scrutinise the uncertainties of energy supply worldwide and the consequences from the point of view of Hungary with limited local resources covering not more than some 15-18% of the total power input. As far as the European and Trans-European energy supply lines are concerned, every government strives after supply security. The energy consumption of the Hungarian economy is 15% lower than it was in the 80’s. Another 30-35% reduction is hoped to be achieved by 2020 as targeted in the latest energy policy concept drafted in 2007. According to the objectives defined in the draft, the utilisation of renewable energy should reach 10% in 2013 (and 14-20% in 2020) and at least 8% share of bio-fuels (or 10% in 2020). The two-year energy management support (18 bn. Forints in the first two years from the total amount of 86 bn. Forints available from the EU and the local expenditure program) may be spent on projects supporting the aforesaid two objectives. Furthermore, lower energy consumption (for heating and cooling) is also supported by means of a government fund contributing to the thermal insulation of round 140,000 large- panel prefabricated apartments from the budget available in 2007. The reliability of energy supply during the next 15-20 years must be increased through the replacement, streamlining and reconstruction of about 50% of the energy producer units as well as by additional capacities. Relevant major projects currently prepared or in process: Power production plant of 2400 MW capacity, gas fuelled, 1.5 bn. Euro, Northern Alföld region; reconstruction of Mátra Power Plant; Dunaferr Group, Dunaújváros – power plant of 150 MW capacity, 150 million Euro; MOL - Dunai Refinery development, 300 million Euro; E.ON - gas storage capacity development at Zsana; gas fuelled power plant implemented by Gönyű, 270 million Euro; MAVIR - electric power network reconstruction and development; FŐTÁV – North Buda fuel plant of 3 blocs; renewable energy sources: solar battery manufacturers at Környe and Ráckeve; geothermal power plants; bio power plant, Szerencs).

144 © EUROCONSTRUCT Vienna, November 2007 Hungary

Key civil engineering projects • Motorway accesses to the borders • Motorway M6 section between Dunaújváros and Pécs (the latter will be a Cultural Capital of Europe in 2010), in PPP • Ring M0 – further construction around Budapest • Cross-linking the existing radial and transversal motorways with the East-West motorways • Construction of Metro 4 in Budapest (underway) • Tramway reconstruction projects - Debrecen, Szeged and Miskolc • Railway logistical development - Záhony (Ukrainian border) • "Living Danube" - Budapest Csepel-sziget, central waste water treatment plant (430 million Euro) • New Vásárhelyi Program (flood control, 450 billion HUF) • Production of renewable energy sources Conclusion: Since the end of 2006 the continuation of infrastructural development projects has been held back due to the high fiscal deficit, the obligations specified in the convergence programme, and the lower project financing expenditure. Therefore the high priority engineering projects have been defined by the government in two development programmes that may be launched in 2007-2008. These projects can be supported from funds made available by the EU and from the central budget. The infrastructural development activities may start increasing from the second half of 2008 or more probably from year 2009 in the case of a successful performance of the convergence programme.

Appendix – Definitions

A suggestion of some of the items that might benefit from a definition

Table 1 • Population, Households: number of people at the beginning of the year • Unemployed and unemployment rate: Hungarian Central Statistical Office, at the end of the year

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

Extra • VAT: excluded at 20% rate • Sources: MNB, KSH, E-Build, Eston Market Report 2007, Archigram, GKI Zrt.- AL Holding July 2007, Buildecon data collection

146 © EUROCONSTRUCT Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 10 096 10 075 10 064 10 049 10 035 10 020 10 000 Bevölkerung

Households ('000s) Ménages 3 870 3 880 3 890 3 900 3 900 3 910 3 910 Haushalte

Unemployed ('000s) Chômeurs 253 306 317 335 323 314 300 Arbeitslose

Unemployment rate (%) Taux de chômage 6.1 7.2 7.5 7.6 7.6 7.4 7.2 Arbeitslosenquote

Change of GDP Variation du PIB 4.9 4.2 3.9 2.1 3.0 3.4 4.0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 6.8 3.6 3.9 7.6 4.5 2.5 2.6 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 4.8 4.2 7.1 6.5 6.0 4.5 4.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 11.1 6.7 7.0 7.5 6.5 5.4 5.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 8.2 6.6 7.2 6.6 6.0 5.6 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 1 900 18.0 -8.4 -16.0 -7.0 3.0 5.0 5.0

Logement Renovation 1 188 13.8 10.0 10.0 8.0 7.0 8.0 10.0

Wohnungsbau Total 3 088 16.8 -3.2 -7.6 -1.2 4.7 6.3 7.2

Non-residential construction New 2 967 -10.4 12.2 10.0 3.0 3.0 4.0 4.0

Bâtiments non résidentiels Renovation 1 067 -4.5 5.0 6.6 3.0 1.0 2.6 3.0

übriger Hochbau Total 4 034 -8.8 10.2 9.1 3.0 2.5 3.6 3.7

Building New 4 867 2.1 1.7 -1.9 -0.9 3.0 4.4 4.4

Bâtiment Renovation 2 255 4.3 7.6 8.4 5.6 4.2 5.6 7.0

Hochbau Total 7 122 2.6 3.4 1.2 1.2 3.4 4.8 5.2

Civil engineering New 2 743 27.8 17.0 -8.0 -10.0 5.0 10.0 10.0

Génie civil Renovation 959 15.0 25.0 0.0 -5.0 5.0 5.0 5.0

Tiefbau Total 3 702 24.6 18.9 -6.1 -8.7 5.0 8.7 8.7

TOTAL CONSTRUCTION OUTPUT 10 824 8.9 8.5 -1.4 -2.2 3.9 6.0 6.4

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 4.15 4.3 2.4 11.8 5.0 5.0 10.0 10.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 264,27 HUF

148 © EUROCONSTRUCT Vienna, November 2007 Hungary

Country/Pays/Land: HUNGARY Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 24.2 22.1 18.2 18.0 18.0 20.0 20.0 Baugenehmigungen Familienhäuser

Flats Collectif 33.3 29.4 26.6 28.0 28.0 30.0 30.0 Mehrfamilienhäuser

TOTAL 57.5 51.5 44.8 46.0 46.0 50.0 50.0

Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collectif Mehrfamilienhäuser

TOTAL 42.0 40.0 40.0 40.0 42.0 42.0 44.0

Housing completions 1+2 family dwellings Logements terminés Individuel 22.9 20.6 18.0 17.0 18.0 18.0 18.0 Baufertigstellungen Familienhäuser

Flats Collectif 21.0 20.5 15.9 16.0 18.0 20.0 22.0 Mehrfamilienhäuser

TOTAL 43.9 41.1 33.9 33.0 36.0 38.0 40.0

Housing stock Logements existants Wohnungsbestand

thereof second homes dont résid. secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 92.0 92.0 92.0 92.0 92.0 93.0 93.0 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 117 -11.0 9.0 10.0 4.0 4.0 5.0 5.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 109 -5.7 15.0 8.0 2.0 2.0 5.0 5.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 748 -10.0 5.0 11.0 3.5 3.0 3.0 3.0 Industriegebäude

Storage buildings Bâtiments de stockage 367 -7.3 15.0 15.0 7.0 6.0 6.0 6.0 Lagergebäude

Office buildings Bureaux 690 -10.0 12.5 10.0 6.0 2.0 2.0 2.0 Bürogebäude

Commercial buildings Commerces 586 -14.2 18.0 15.0 5.0 4.5 4.5 4.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 173 -11.0 10.5 -10.0 -8.0 3.0 2.0 2.0 Landwirtschaftsgebäude

Miscellaneous Autres 177 -9.2 23.0 5.0 -15.0 -5.5 12.0 14.0 Sonstiges

Total 2 967 -10.4 12.2 10.0 3.0 3.0 4.0 4.0 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 264,27 HUF

150 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 576 22.0 20.0 -5.0 -10.0 2.0 8.0 10.0 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 207 33.0 33.0 0.0 5.0 3.0 5.0 8.0 Bahnanlagen

Other transport Autres réseaux 290 -5.0 17.9 4.0 4.0 5.0 5.0 6.0 Übrige Verkehrsinfrastruktur

TOTAL 2 073 18.4 20.9 -3.3 -6.5 2.6 7.2 9.2

Telecommunications Télécommunications 545 13.2 7.0 -8.5 -13.5 8.5 10.5 8.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 057 50.0 22.0 -9.5 -10.0 8.3 10.5 8.0 Energie- und Wasserversorgung

Other Autres 27 -15.0 15.0 -15.0 -30.0 5.0 5.0 10.0 Sonstiges

Total 3 702 24.6 18.9 -6.1 -8.7 5.0 8.7 8.7

1) At 2006 prices, excluding taxes. 1 euro = 264,27 HUF

Country/Pays/Land: HUNGARY Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 48.3 3.0 3.3 1.4 -1.0 0.5 1.9 2.5 Privater Verbrauch

Public consumption Consommation publique 20.1 0.9 0.2 1.0 -5.5 -3.8 -1.0 0.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 19.6 7.6 5.3 -2.1 1.9 4.0 5.5 5.5

of which construction 10.8 8.9 8.5 -1.4 -2.2 3.9 6.0 6.4

Stocks (contribution as % of GDP) Variations de stocks 0.2 Vorratsveränderung

Exports Exportations 69.5 16.4 10.4 17.9 14.8 12.0 11.8 12.5 Exporte

Imports Importations 68.8 13.2 8.3 12.6 10.5 9.4 11.1 12.0 Importe

GDP PIB 88.7 4.9 4.2 3.9 2.1 3.0 3.4 4.0 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 264,27 HUF

152 © EUROCONSTRUCT Vienna, November 2007 Ireland

IRELAND

DKM Economic Consultants www.dkm.ie

Annette Hughes e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

The latest National Accounts data relates to Q2 2007 and shows the economy performed strongly in the first half of 2007. Real GNP expanded by 6.9% year-on-year in Q1 2007 and by 4.5% year-on-year in Q2 2007, resulting in an average GNP growth of 5.7% in the first half of 2007. However, seasonally adjusted data reveals that the economy contracted marginally (-0.9%) in Q2 2007 compared with Q1 2007.

Current trends suggest that the Irish economy is entering a phase during which the key drivers of growth in the past, notably consumption expenditure and residential construction, will be less evident as drivers over the next year or two. This partly reflects the impact of the hikes in interest rates, which commenced in December 2005, as well as the reduction in consumer sentiment over recent months.

That said, the labour market continued to perform well in the first half of 2007 but a deceleration is expected in employment and labour force growth in the second half of 2008, with an even more pronounced deceleration forecast in 2008.

The key influencing factor on GDP in 2008 will be the deterioration in housebuilding, will new residential construction volumes forecast to decline 32% in 2008 from the peak level in 2006. The negative trends in consumer confidence combined with lower earnings growth are likely to result in a significant moderation in consumer spending growth in 2008, which only accelerates modestly towards the end of the forecast period. As a result real GDP in the Irish economy is forecast to moderate sharply to 3.3% in 2008 from an estimated 4.7% in 2007, before recovering again in 2009 to 4.7%.

The immediate difficulty for the Irish economy is its high reliance on the construction sector in regard to output and employment. It looks increasingly likely that 2008 will be the year during which the Irish economy faces many challenges, not least of which will be managing the transition from the robust growth performance in 2006 and 2007 to the slower growth period expected in 2008.

Table A: Key Macroeconomic Indicators for Ireland to 2010 – annual % changes

2005 2006 2007E 2008F 2009F 2010F Real GDP 5.9 5.7 4.7 3.3 4.7 4.4 Real GNP 4.9 6.5 4.3 3.0 4.6 4.3 Private Consumption 7.3 5.7 6.0 3.5 3.0 3.5 Unemployment Rate (Q4) 4.4 4.1 4.6 5.2 5.7 5.5 Consumer Price Inflation 2.5 4.0 5.0 3.0 2.7 2.5 Source: CSO to 2006. DKM estimates 2007-2010.

The latest official outturn for construction activity in 2006 showed output up by 5.9% in volume terms. The estimate for 2007 suggests that volumes declined by 1.5%, reflecting the first contraction in residential building in 14 years. As a result the Irish construction sector recorded the first quarterly decline in construction employment in five years in Q2 2007. With an estimated 77,000 completions expected in 2007, down 12.6% from the peak level in 2006 (88,219), output is expected to contract only marginally (-1.5%) this year, as the total volume of non-residential construction, including civil engineering, is expected to perform strongly (+7.5%).

However, current indications from trends in leading indicators point to a substantial decline in new housing supply in 2008, of the order of 22% or almost 16% when renovation activity is included. The base case projection predicts total housing supply at 60,000 units in 2008 and

154 © EUROCONSTRUCT Vienna, November 2007 Ireland

2009, before recovering in 2010 to 65,000. But there are downside risks to these figures unless confidence is restored to the housing market in the New Year. However, a housing recovery could materialise sooner than expected, say in 2009, if, for example, there were some positive measure in the Budget in December. This would encourage registrations to ramp up again during 2008, leading to an increase in supply in 2009. The impact on overall construction output volumes would be more positive under this scenario.

Despite the weakness in new housebuilding this year and next, the construction sector is fortunate in that non-residential construction is expected to perform strongly in 2008 and 2009 on the back of very positive growth projections for public and private sector non- residential construction activity. As a result, overall output volumes in the sector rise again in 2009 (+5.7%), following two years of decline. This forecast assumes a strong and continued commitment from Government in respect of the public capital programme, with all previously planned capital provisions in the multi-annual Exchequer Framework, the National Development Plan 2007-2013 and Transport 21 assumed to be met on time. Indeed it may be necessary to ramp up public sector investment at this time, given the contraction expected in residential construction in 2008, if the transition to a more stable housing market over the medium term is to be successfully managed.

Table B: Medium Term Prospects for Residential and Non-residential Construction

2006 2005 2006 2007E 2008F 2009F2010F bn. Euro annual % change in volume of construction output Residential Construction 24.0 12.1% 4.5% -9.4% -15.6% 2.7% 7.3% Non-Residential Construction 11.5 -0.8% 2.6% 7.5% 9.5% 11.8% -0.5% Total Construction Output 35.5 8.9% 5.9% -1.5% -6.5% 5.7% 3.5% Source, Annual Review of the Construction Industry 2006 and Outlook 2006-2009, Department of the Environment, Heritage and Local Government, September 2007, available at www.environ.ie DKM estimates to 2010.

2 Macro-economic Outlook

The Irish economy has done well over recent years, with average real GNP growth of 4.7% over the period 2001-2006, albeit below the average growth rate of 8.1% over the preceding five years. Real GNP growth accelerated for the third year in a row in 2006 to 6.5% (GDP 5.7%), the strongest GNP growth since 2000.

This slowdown possibly reflects the beginning of a shift in the Irish economy, which is entering a phase during which the key drivers of growth in the past, notably consumption expenditure and residential construction, will be less evident as drivers over the next year or two. This partly reflects the impact of the hikes in interest rates, which commenced in December 2005, as well as the reduction in consumer sentiment over recent months.

Although the latest IIB/ESRI Consumer Sentiment Index was up in September from a four year low, the trend remains downward. The Survey suggested that consumers remained nervous about the Irish economy, possibly because of fears about the housing market, as well as concerns over the financial market turmoil which prevailed in September. The key message was that consumers were less inclined to make major purchases in September, an

© EUROCONSTRUCT 155 Ireland Vienna, November 2007 indication of weak consumer confidence. This is perhaps most evident in the housing market where the number of transactions and the level of new mortgage business has reduced, albeit to more sustainable levels in Q2, 2007.

The labour market continued to perform well in the first half of 2007. The labour force reached just under 2.2 million in Q2, 2007 (March-May), up 4.1% on the corresponding quarter in 2006. At the same time the unemployment rate increased to 4.5% in Q2 2007, up slightly from 4.3% twelve months previously. Although total employment growth has moderated since mid-2005 (5% year-on-year), it remained at just below 4% per annum in the first two quarters of 2007. However, a deceleration is expected in employment and labour force growth in the second half of 2008, with an even more pronounced deceleration forecast in 2008.

Figure 1: Construction employment growth versus total employment growth (% year-on-year, sa) 18% 16% Total economy 14% Construction 12% 10% 8% 6% 4% 2% 0% 1998Q4 1999Q1 1999Q2 1999Q3 1999Q4 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007 Q2 2007

The growth in construction employment, which had consistently been above the average, moderated in Q2 2007 to 6.7% compared with 3.9% for the economy as a whole. However, the latest figures show employment declined by 0.5% in Q2 2007 on the preceding quarter, to a total of 283,500 (seasonally adjusted). This is the first quarterly decline since Q2 2002 and follows a quarterly growth rate of 1.7% in the preceding quarter and 3.7% just one year previously in Q2 2006.

Further evidence that some of the buoyancy has left the economy is apparent from the trend in Exchequer returns for the first nine months of 2007. The most recent figures show the shortfall in tax revenues rose in September compared with the position at the end of August. Total tax receipts were up by 6.1% in the first nine months, compared with a Government forecast of 7.7%. Conversely, capital spending was up by 51.5% in the first nine months, well ahead of the target of 40% set for the same period. This may be a timing issue and the growth in capital spending will have to decelerate sharply, if it is to reach its target of 16.4% for the full year.

The key influencing factor on GDP in 2008 will be the deterioration in housebuilding, will new residential construction volumes forecast to decline 32% in 2008 from the peak level in 2006. The negative trends in consumer confidence combined with lower earnings growth are likely to result in a significant moderation in consumer spending growth in 2008, which only accelerates modestly towards the end of the forecast period. The easing in investment growth, mainly driven by the slowdown in residential investment will also slow growth. As a result real GDP growth in the Irish economy is forecast to moderate sharply to 3.3% in 2008

156 © EUROCONSTRUCT Vienna, November 2007 Ireland from an estimated 4.7% in 2007, before recovering again in 2009 to 4.7%. In GNP terms growth is projected to moderate to 3% in 2008 with a recovery to 4.6% in 2009, as housing output stabilises. Much will depend, however, on the indirect effects of the decline in new housebuilding across the economy and the consequential impact on employment.

3 Construction Output – A Review

The latest official estimates for construction output show the sector accounting for 21% of GDP (24% of GNP) in 2007 in gross output terms3, compared with an average of around 11% of GDP for all 19 Euroconstruct countries. The Irish economy has come to rely heavily on the construction sector, particularly housebuilding. With over one-half of the construction sector attributed to new housebuilding alone, the economy and employment are now vulnerable to the current slowdown in new housebuilding, which has been underway now since the beginning of 2007. The first year-on-year decline in housing registrations4 (i.e. starts) was recorded in October 2006.

As a result the pace of construction employment growth slowed in Q2 2007 to an annual rate of 6.7% from 11.2% in the previous two quarters. Total employment in the sector is currently 280,300, accounting for 13.4% of total persons employed. However, the first quarterly decline in five years was recorded in Q2 2007 (-0.5%), suggesting that employment in the sector has peaked. Total employment in construction by the year end is expected to be closer to 275,000 with a further fall to around 260,000 by the end of 2009, reflecting a stabilisation in housing supply.

4 Housing Market

Developments in the housing market in the year to date have been uncharacteristic of trends in the Irish housing market over the past few years. Notwithstanding some positive developments for first-time buyers, notably the doubling of mortgage interest relief in the last Budget in December 2006 and the welcome reform of the stamp duty regime in Q2 2007, there have also been a number of negative developments which have increased uncertainty in the market.

The key factor contributing to this uncertainty has been the hikes in ECB interest rates which have resulted in mortgage rates rising by around 2% over the last twenty months to around 5.35% on average in September 2007. While there seems to be a consensus emerging that we are close to the end of the cycle of interest rate increases, there has been a lower level of mortgage transactions and demand in the market, according to figures from the Irish Bankers Federation, which showed the level of new mortgage business had declined, albeit to more sustainable levels in Q2, 2007.

Clearly confidence amongst potential buyers has been dented by the uncertainty in the market. As a result, recent trends in house prices show price reductions, with average house prices nationally down by 3.4% to €300,375 in August from their peak in January.5 In Dublin average house prices peaked in April this year but by August had fallen back by 4.5% to €410,466. As a result the annual rate of house price inflation nationally was negative in July (-0.7%) and August (-1.9%) compared with almost 11% in January.

Moreover, trends in the leading indicators of housing supply suggest that the level of new supply will be lower in 2007 that in 2006, but will be substantially lower in 2008.

3 Taking the true value added by construction, the sector accounts for around 10% of GNP compared with agriculture, which accounts for less than 3% of GNP. 4 Unadjusted figures (see Section 4). 5 Permanent-tsb/esri house price index. © EUROCONSTRUCT 157 Ireland Vienna, November 2007

Figure 2: Trend in Dwelling Registrations (i.e. housebuilding starts) 90,000

85,000

80,000 Registrations* peaked 75,000 at around 88,000 in 70,000 September 2006

65,000 Fo r ecast Oct t o Dec, 60,000 based on current trends

55,000

50,000 Ju l -04 Ju l -05 Ju l -06 Ju l -07 Jan -05 Jan -06 Jan -07 Jan -08 Se p - 0 4 Se p - 0 5 Se p - 0 6 Se p - 0 7 Nov-04 Nov-05 Nov-06 Nov-07 Mar-04 Mar-05 Mar-06 Mar-07 May-04 May-05 May-06 May-07 Total registrations (i.e. starts) for the nine months to September 2007 (recorded by Homebond and Premier Guarantee), were down by 40% to 32,232 units on the same period in 2006. Moreover, taking each monthly total, the annual rate of change each month has been negative since October 2006.6

Taking our adjusted figures7 and calculating the twelve month total for registrations at the end of September this year suggests that registrations are running at around 60,000, down almost 32% on the corresponding twelve month total at the end of September 2006. Taking current levels forward to December suggest that registrations will be closer to between 50,000 and 55,000 at the end of December 2007. Assuming an average lag of around nine months, we believe that the very sharp weakness in registrations will have a negative impact on housing supply over the remainder of 2007 with a much more substantial negative impact in 2008.

Already, the total number of dwellings completed in the first eight months of 2007 is down by 6.5% on the same period in 2006.

While the response from housebuilders is clear from the trend in registrations, the public sector will continue to provide substantial Exchequer funds for public sector housing over the period of the National Development Plan 2007-2013. Public sector completions, (5,200 units in 2006) are not included in registrations.

Thus current trends suggest that the housing market peaked in 2006, after fourteen years of record growth. The housing market is adjusting to the next phase of the housing cycle, which is characterised by a lower level of production, less transactions and an easing of house prices.

However, this slowdown in supply needs to be put into perspective. There will continue to be a demand for housing, particularly in employment locations and close to public transport. The

6 With the exception of December 2006 and April 2007 when the annual rate of decline in total registrations year- on-year was very marginally positive. 7 Our adjusted figure for total housing registrations is derived by adding an estimate for one-off houses, based on the proportion of one-offs in the planning permissions data, to the registrations figure based on Homebond and Premier Guarantee data), assuming a six month lag between permissions and registrations.

158 © EUROCONSTRUCT Vienna, November 2007 Ireland absence of any significant supply constraints means that supply can be provided in these locations. Moreover, the demographics remain favourable with numbers in the first-time buyer age group expected to increase up to 2011.

Based on the above analysis, the forecast for total completions is 77,000 completions in 2007 followed by 60,000 per annum in 2008 and 2009, with a recovery to 65,000 projected in 2010 (Base Case). On the upside, the recovery could materialise sooner than expected, say in 2009, if, for example, confidence was restored by some positive measure in the Budget in December. This would encourage registrations to ramp up again during 2008, leading to an increase in supply in 2009. The impact on construction output volume would be positive under this scenario.

However, there is also a considerable downside risk to this projection over the short-term if a restoration in confidence does not materialise during 2008, in which case registrations are likely to fall further, resulting in a sharper supply downturn in 2008 which could be sustained in 2009.

The above scenario is reflected in the construction output forecasts presented for new residential construction (Table 3). Thus the volume of new housing output is forecast to decline by 12.6% in 2007 and 22.1% in 2008, before stabilising in 2009 and recovering in 2010 (+8.3%).

Including the positive projections for housing repair and maintenance, the overall volume of residential construction output is forecast to decline by 9.4% and 15.6% in 2007 and 2008 before recovering in 2009 (+2.7%). The recovery gathers momentum in 2010 (+7.3%).

The current projections for new housing supply suggest that Ireland’s rate of housebuilding per 1,000 of the population will fall from a peak of 21 per 1,000 in 2006 to an estimated 17.7 per 1,000 this year, just ahead of Spain (17), and compared with an average across the Euroconstruct countries of around 6 per 1,000 of the population.

5 Non-residential Market

Table 4a sets out the projection for the volume of construction output arising from investment in new non-residential buildings in the public and private sectors. Total new investment in the non-residential building sector amounted to €4.8bn. in 2006, of which 32% represented public sector building output.

Historically private non-residential construction has been cyclical in nature, moving from periods during which the volume of construction activity has accelerated sharply, to periods during which investment and confidence in the sector declines, due in part to the consequential oversupply of new building in the aftermath of a boom period. This is what transpired over the period 2000 to 2004 when investment in private non-residential construction activity declined by 37%. The estimates for 2007 suggest that the volume of construction output associated with new projects in the private non-residential sector will rise strongly for the third year in a row (+ 28.5%), reflecting in particular a very buoyant commercial building sector.

The sector is currently in a strong growth phase, which commenced in 2005, with strong investment underway in offices, retail and hotel buildings. The main factors influencing building activity levels tend to be growth in employment and real incomes, the level of consumer expenditure, trends in interest rates, general investor and consumer sentiment as well as tourism volumes.

The latest available data on planning permissions show the total floor area for non-residential buildings up by almost 80% in the year to Q2 2007.

Table C: Non-residential Buildings %Change in Total Floor Area granted Planning Permission

2002 2003 2004 2005 2006 2007E Health and Other Social Commercial Industrial Agriculture Total Education Buildings 2004 5.1% -8.8% 72.8% 6.6% 1.5% 8.3% 2005 25.6% 6.2% -1.2% 3.4% 16.3% 16.4% 2006 -13.6% 49.9% 226.3% 17.1% -33.4% 25.5% H1 2007 10.0% -17.7% 334.6% 50.8% 26.8% 78.9% Year to Q2 2007 2,695 990 3,996 485 235 8,401 Source: www.cso.ie

The strongest building categories are agricultural buildings, which recorded an unprecedented increase in the year to Q2 2007 (+335%), following an equally impressive performance in the calendar year 2006 (+226%). This reflects the introduction of the Nitrates Directive and other compliance regulations which require farmers to keep their farms in a good environmental condition. Thus there has been substantial increase in the volume of agricultural building output in 2006 (+55%), with further strong growth projected in 2007 (+134%). However, the medium-term projections do not expect this level of investment to be sustained. As a result the volume of output from agricultural building investment is forecast to decline in 2008 (-20%) and 2009 (-10%), before recovering in line with real GNP in 2010 (+4.5%).

Other sectors where the total floor areas are forecast to grow comprise Health and Education (see Section 5), commercial building and buildings for entertainment and recreation (other social). These trends should support non-residential building activity in 2008 at least.

Figure 3: Total Floor Area Planned for Non-Residential Buildings by Type (thousand square metres)

3000

2500 2003

2000 2004 2005

1500 2006

2007 (1) 1000

500

0 commercial industrial agriculture health and other social (1) 2007 based on four quarters to Q2, education buildings

160 © EUROCONSTRUCT Vienna, November 2007 Ireland

Moreover, there are a number of proposed mixed-use developments in the planning pipeline across the main urban areas, most notably in Dublin, many of which comprise combinations of residential, offices, retail and hotel space.

There is considerable construction activity underway or planned in the Dublin and Cork Dockland over the next five years. The main developments underway in Dublin Docklands include:

¾ The construction of the light rail (Luas) extension from Connolly to the Point (Line C1) which is underway.

¾ The construction of the €400 million National Conference Centre in Spencer Dock on the north side of the Liffey, will cater for around 8,000 delegates. The Centre will include a 2,000 seat auditorium, two 450-seat multi-media halls, exhibition spaces, conference banqueting halls, meeting and lecture rooms. The site will also house a hotel expected to cater for people who use the facility. Construction commenced this year with a completion date of around 2010.

¾ The €800 million Point Village development, which will cover a 12 acre site surrounding the Point Theatre and is expected to include a 30,000 square metre shopping centre, 13,000 square metres of offices, a 50 bed hotel and a 12 screen multiplex cinema. The development will have as its signature building the Watchtower which was granted planning permission earlier this year. The Tower is the final piece of the Point Village and will include 500 square metres of office space and luxury apartments. As part of the Point Village the Point Theatre is to be expanded to a 15,000 capacity.

¾ Another flagship project is to be delivered in the Docklands is the construction of the U2 Tower in the Grand Canal Dock area. The Tower will consist mostly of apartments and will house a recording studio for U2. The anticipated completion date is 2009.

¾ More generally, considerable construction activity continues in the Grand Canal area itself, including the construction of the Grand Canal Theatre, the Manuel Aires Mateus designed 5-star hotel, and the Grand Canal Square. The most recent Dublin Docklands Newsletter8 lists approximately 60 projects which were granted permission during 2006. As well as the projects listed above, these projects include a variety of buildings including mixed-use schemes, retail, restaurants and wine bars, offices, street furniture and a basement carparks. All of this augurs well for the prospects for construction over the next two to three years, particularly in the City Centre.

Thus over the next three years to 2010 the prospects for new non-residential construction is for a moderation in the volume of output growth to 8% in 2008 from almost 30% in 2007. A further deceleration to growth of around 3.4% in 2009 is followed by a decline in the volume of new non-residential construction output of around 5%. The latter reflects the projected contraction in new private non-residential construction output after five years of strong growth over the period 2005-2009.

8 Dublin Docklands Newsletter, Issue 26, April 2007 © EUROCONSTRUCT 161 Ireland Vienna, November 2007

6 Public Sector Construction

Public sector construction consists of investment in social and productive infrastructure. The former includes investment in public housing, educational buildings, hospitals, Government buildings and public sporting facilities. Productive infrastructure captures investment in civil engineering projects.

Construction activity in the civil engineering sector is largely funded by the public sector. It includes spending on the national and non-national road network, water services, airports, seaports and harbours, as well as investment by the respective Semi-State organisations responsible for transport, energy and telecommunications. The total also includes private sector investment which arises under this heading, such as capital investment by private sector companies involved in the energy and telecommunication sectors. The total value of construction output arising from civil engineering projects, at €5.3bn. in 2006, represented 15% of total construction output compared with 17% in 2000. Within that total, the construction related investment in transport projects (roads, airports, seaports, public transport) accounted for almost one-half, at €2.6bn.

Investment in civil engineering projects is determined by the capital allocations for productive infrastructure in the Public Capital Programme (PCP).9 Prospects for capital spending over the medium-term are set out in the multi-annual Exchequer capital envelopes for 2007- 2013.10 The envelopes only provide projections for capital spending across Government departments; they do not provide a breakdown for the main categories of public construction output. Accordingly, we derive the volume changes in construction output for each of the main categories over the period to 2010 by applying the volume changes for each of the main spending departments, after adjusting for inflation, estimated at 3% per annum. Thus, for example, the volume of construction output arising from new road and public transport projects is assumed to change in line with the annual volume changes in the allocation for the Department of Transport. Similarly, the volume of construction output arising from investment in new hospital buildings is assumed to change in line with the annual volume changes in the allocation for the Department of Health and Children.

The largest allocation relates to transport, which accounts for almost one-third of the total Exchequer envelope over the period to 2010. This reflects the Government’s Transport 2111 programme, which provides for a ten-year transport investment of over €34bn. in current prices over the period 2006-2015 in roads and public transport projects only.

Key transport projects over the next seven years in the Capital City comprise the Metro West and Metro North and extensions of LUAS, the existing light rail system. Metro North will be a new Metro line from the City Centre to north of the City, via Dublin Airport, and is scheduled for completion in 2012. Metro West will provide a mass transit transport system for commuters west of the Capital City, will take five years to construct and is expected to be completed in 2014. It is expected that both projects will have commenced by the end of 2010.

Table D suggests the total Exchequer investment in all transport projects is projected to increase by 62% by 2010 compared with 2007, with investment of almost €10 billion planned over the three year period 2008-2010. This figure includes investment in roads and public transport as well as investment to improve air and sea access.

9 The PCP allocations for public sector construction were detailed in the Euroconstruct Report on Ireland in June 2007. The period 2008-2010 is reviewed here. 10 See Public Capital Programme 2007, Department of Finance, February 2007. 11 The programme was launched on 1st November 2005. 162 © EUROCONSTRUCT Vienna, November 2007 Ireland

Other investment in civil engineering consists of investment by private and public sector companies in electricity and gas transmission and distribution networks as well as in new power generation companies and renewable energy infrastructure – approximately €1.5bn. in 2006. A further almost €0.9bn. represented the value of construction output from investment in water and sewerage schemes across the country in 2006. The volume of construction output arising from investment in both categories is forecast to increase by 6.6% in 2008 and by 10.4% in 2009 before moderating to less than 1% in 2010.

Taking all of the categories under civil engineering (Table 4a), the volume of construction output from civil engineering projects is forecast to increase by almost 10% in 2008 following an increase of only 2% in 2007. The very substantial increase in transport investment in 2009 is expected to contribute to the overall strong performance from the civil engineering sector (+17.8%). A substantial deceleration to growth of less than 2% is projected for 2010.

Table D also includes projected capital allocations for the Departments of Health and Children (for hospital buildings predominantly), Education and Science (for educational buildings predominantly), Finance (for new works and alterations to public buildings by the Office of Public Works (OPW)) and Art, Sports and Tourism (recreational, cultural and sporting facilities). The projected increases in the allocations for Education and Health over the period 2007 to 2010 are substantial at 39% and 26% respectively, while Finance/OPW and Arts, Sports and Tourism are projected to decline by 36% and 17% respectively over the same period.

Taking the overall Exchequer allocations, the volume of investment in the multi-annual programme is projected to increase by 11.7% in 2008, 13.6% in 2009 with a volume decline of 0.5% forecast for 2010. Although a revised multi-annual programme will be published in 2008, the current projections suggest that the volume of construction activity funded by the Exchequer will increase strongly over the next two years.

There will be other non-Exchequer capital investment which will include investment in construction projects by semi-State companies and State Agencies as well as investment by local authorities in housing, water, roads and regeneration projects funded from their own resources. Non-Exchequer investment also includes substantial investment by the Dublin Airport Authority in the second terminal at Dublin airport, which is expected to commence construction before the end of 2007 and be completed by the spring of 2010.

The construction output projections for public sector productive and social infrastructure projects require Government to adhere to the capital allocations in the multi-annual capital framework and in the National Development Plan 2007-2013. This is a prerequisite if the impact of the contraction in residential construction is to be somewhat curtailed.

Table D: Projected Exchequer Capital Envelopes 2008-2010 for Main Spending Departments

2007E 2008F 2009F 2010F 2007- 2008- Shares 2010F 2010F % Total % €m. Chang e Transport (Public Transport, 2,314 2,645 3,560 3,750 62% 9,955 32% Roads, Seaports, Regional Airports) Environment & Local (Housing, 2,070 2,195 2,405 2,450 18% 7,050 22% Government Water/Sewerage Services, non- national Roads, Tourism Heritage, Urban Regeneration) Education & Science Primary, Secondary 782 910 1,095 1,090 39% 3,095 10% and Tertiary Educational Infrastructure) Health & Children (Hospital Buildings, 666 705 755 840 26% 2,300 7% Furnishings & Equipment) Finance/OPW (New Building Works, 439 566 395 280 -36% 1,241 4% Purchase of Sites & Buildings) Arts, Sports and Tourism (Lansdowne Road 330 385 400 275 -17% 1,060 3% Stadium, Cultural Development, Grants for Sporting Bodies for Facilities) Remaining Departments 1,482 1,617 1,750 1,713 16% 5,080 16% Unallocated Reserve 0 280 530 760 1,570 5% Exchequer PCP 8,083 9,303 10,890 11,158 38% 31,351 100% Non-Exchequer PCP (Investment by Semi- 4,098 N/A N/A N/A State Companies and Agencies; Local Authorities’ own resources; State Airports (e.g. Terminal 2); Borrowings/EU Receipts) Total PCP (incl. PPP) 12,181 N/A N/A N/A

Exchequer PCP as % of 5.0% 5.4% 5.9% 5.7% GNP Value % change in 26.0% 15.1% 17.1% 2.5% Exchequer PCP Volume % changes (i.e. after inflation estimated at 3% per annum on average) In Exchequer PCP 26.0% 11.7% 13.6% -0.5%

7 Overall Construction Output

Taking the prospects for each of the individual sectors, overall construction output is projected to contract by 1.5% in 2007, reflecting the decline in new housebuilding. Beyond 2007 the sharper contraction in residential construction in 2008 compared with 2007 leads to a decline of 6.5% the volume of construction output next year. This is followed by a recovery in 2009 (+5.7%) and 2010 (+3.5%) as residential construction stabilises in 2009 and records a modest recovery in 2010.

164 © EUROCONSTRUCT Vienna, November 2007 Ireland

Table E: Construction Output in Republic of Ireland Projected Cumulative Percentage Change in Volume 2007-2010

2007 2010 2007-2010 Average Output Volume Cumulative Annual % Share % Index % Change Change 2006=100 NEW Residential Construction 49% 84 -15.6% -5.4% R&M Residential Construction 14% 124 23.6% 7.2% Sub-total Residential 63% 93 -6.9% -2.3% NEW Non-Residential construction 18% 106 5.9% 1.9% R&M Non-Residential Construction 4% 112 12.3% 3.9% Sub-total Non-Residential 22% 107 7.1% 2.3% made up of Total Building NEW 67% 90 -9.7% -3.3% Total Building R&M 18% 121 20.8% 6.4% Total Building 85% 97 -3.2% -1.1% Civils NEW 12% 137 37.2% 11.0% Civils R&M 3% 112 12.3% 3.9% Total Civils 15% 132 31.8% 9.6% Total Construction Output 100% 102 2.4% 0.8% Total NEW Construction Output 79% 98 -2.3% -0.8%

Figure 4: Construction Output by Sector in Ireland to 2010

200 New Residential 180 New Non-Residential R& M Bu i l d i n g 160 All Civil Engineering Tot al 140

120

100

60 2004 2005 2006 2007 2008 2009 2010

APPENDIX – DEFINITIONS

Table 1

Population: figures represent the number of people in April each year in line with the published figures from the 2006 Census of Population and are interpolated for the earlier years with DKM forecasts for the period 2007-2009.

Households: figures are the 2006 estimated household figure from the 2006 Population Census for April and are interpolated for the earlier years with DKM forecasts for the period 2007-2009.

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 Q4 Survey which covered the September-November period.

Table 2

Figures presented show the value of construction output in 2006 (€m.) and the annual percentage changes in volume over the period to 2009 (in constant 2005 prices). The figures up to 2009 are consistent with the official figures published by the Department of the Environment, Heritage and Local Government in September 2007 in the Review of the Construction Industry 2006 and Outlook 2007-2009. 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 by DKM to include an estimate for one-off houses, which do not tend to be included in the published registrations 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 gives a more comprehensive estimate of total housing starts and a better leading indicator of house

166 © EUROCONSTRUCT Vienna, November 2007 Ireland completions in the pipeline. However, the figures do exclude approximately 5,200 public sector units which are completed each year.

The Housing Stock figure is based on figures from the 2006 Census for the total inhabitable stock (1,769,613 at April 2006). 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 0.5% of the housing stock, equivalent to approximately 9,000 units per annum.

The Home Ownership figure is also taken from the 2006 Census which showed it had fallen to 75% by April 2006 from 80% in April 1996 and 76% in April 2002. We have assumed that the rate remains unchanged over the forecast period.

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 2006 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 2004-2006 are the official estimates for National Accounts published by the Central Statistics Office, available at www.cso.ie . Figures for 2007-2009 are DKM estimates.

Date: 16th October 2007 Author: Ms. Annette Hughes, DKM Economic Consultants.

Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 4 044 4 131 4 240 4 340 4 430 4 510 4 590 Bevölkerung

Households ('000s) Ménages 1 406 1 454 1 503 1 550 1 595 1 640 1 685 Haushalte

Unemployed ('000s) Q4 (Sept-Nov) Chômeurs 86 91 89 102 119 132 131 Arbeitslose

Unemployment rate (%) Q4 (Sept-Nov) Taux de chômage 4.3 4.4 4.1 4.6 5.2 5.7 5.5 Arbeitslosenquote

Change of GDP Variation du PIB 4.3 5.9 5.7 4.7 3.3 4.7 4.4 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.2 2.5 4.0 5.0 3.0 2.7 2.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 9.0 5.6 6.5 3.7 4.0 4.0 4.5 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.0 3.3 3.7 4.2 4.2 4.0 4.0 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 19 500 11.1 13.4 2.5 -12.6 -22.1 0.0 8.3

Logement Renovation 4 545 9.6 6.3 13.8 3.7 7.3 9.7 5.0

Wohnungsbau Total 24 045 10.8 12.1 4.5 -9.4 -15.6 2.7 7.3

Non-residential construction New 4 781 -0.1 13.2 11.2 29.8 8.0 3.4 -5.2

Bâtiments non résidentiels Renovation 1 380 5.7 1.0 11.6 10.2 3.0 4.3 4.5

übriger Hochbau Total 6 161 1.2 10.2 11.3 25.4 7.0 3.6 -3.3

Building New 24 281 8.8 13.4 4.2 -4.0 -13.9 1.2 3.6

Bâtiment Renovation 5 925 8.6 5.0 13.3 5.2 6.3 8.4 4.9

Hochbau Total 30 207 8.7 11.7 5.9 -2.2 -9.5 3.0 3.9

Civil engineering New 4 128 -3.9 -6.0 2.7 2.6 11.7 21.1 1.3

Génie civil Renovation 1 154 7.4 3.9 20.0 -0.3 3.0 4.3 4.5

Tiefbau Total 5 282 -2.1 -4.3 6.0 2.0 9.9 17.8 1.9

TOTAL CONSTRUCTION OUTPUT 35 489 6.7 8.9 5.9 -1.5 -6.5 5.7 3.5

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 5.10 8.7 6.4 3.5 1.0 -5.0 4.0 3.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = IR£ 0.7856

170 © EUROCONSTRUCT Vienna, November 2007 Ireland

Country/Pays/Land: IRELAND Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 69.6 75.7 60.0 64.0 65.0 60.0 55.0 Baugenehmigungen Familienhäuser

Flats Collectif 32.1 23.7 18.7 18.0 20.0 20.0 15.0 Mehrfamilienhäuser

TOTAL 101.7 99.4 78.7 82.0 85.0 80.0 70.0

Housing starts 2) 1+2 family dwellings Logements commencés Individuel 63.7 61.1 65.0 35.0 40.0 45.0 45.0 Baubeginne Familienhäuser

Flats Collectif 16.0 17.0 20.0 17.0 20.0 20.0 17.0 Mehrfamilienhäuser

TOTAL 79.7 78.1 85.0 52.0 60.0 65.0 62.0

Housing completions 1+2 family dwellings Logements terminés Individuel 60.8 67.0 69.4 59.0 43.0 43.0 45.0 Baufertigstellungen Familienhäuser

Flats Collectif 16.1 19.2 18.8 18.0 17.0 17.0 20.0 Mehrfamilienhäuser

TOTAL 76.9 86.2 88.2 77.0 60.0 60.0 65.0

Housing stock Logements existants 1 606 1 686 1 770 1 838 1 889 1 939 1 994 Wohnungsbestand

thereof second homes dont résid. secondaires 50 davon Zweitwohnungen

thereof vacancies dont inoccupé 216 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 76.0 76.0 75.0 75.0 75.0 75.0 75.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report 2) Includes an estimate for one-offs not normally in the published figures for registrations/starts.

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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 617 6.0 4.5 1.5 2.6 13.0 16.8 -3.4 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 217 -8.0 6.3 -37.6 15.3 3.0 4.0 8.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 487 3.2 8.9 1.2 14.7 3.1 4.6 4.2 Industriegebäude

Storage buildings (2) Bâtiments de stockage 240 3.2 8.9 1.2 14.7 3.1 4.6 4.2 Lagergebäude

Office buildings Bureaux 848 -20.0 40.0 26.0 25.0 15.0 10.0 -10.0 Bürogebäude

Commercial buildings (Retail) Commerces 879 15.0 25.0 20.5 5.0 10.0 5.0 -10.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 288 28.1 0.7 54.6 134.3 -20.0 -10.0 4.5 Landwirtschaftsgebäude

Miscellaneous (3) Autres 1 206 -2.7 5.7 16.4 51.9 14.3 -2.8 -8.4 Sonstiges

Total 4 781 -0.1 13.2 11.2 29.8 8.0 3.4 -5.2 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = IR£ 0.7856 2) Figure for storage building is estimated at 33% of total industrial buildings. Industrial buildings figure excludes storage buildings. 3) Tourism, Public Buildings, Public Sports facilities, Churches, Local Authority Buildings (e.g. Offices, Libraries, Urban Renewal)

172 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 2 083 -3.2 4.4 7.5 0.8 4.7 10.7 2.7 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 334 -35.3 -21.9 -12.0 64.0 24.2 66.6 2.5 Bahnanlagen

Other transport 2) Autres réseaux 182 6.8 -4.1 10.5 13.1 69.9 29.1 0.7 Übrige Verkehrsinfrastruktur

TOTAL 2 599 -11.1 -1.2 4.7 9.8 13.1 24.5 2.4

Telecommunications Télécommunications 307 1.1 -11.7 15.2 -15.8 3.0 4.3 4.5 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 2 375 9.1 -6.5 6.4 -4.3 6.6 10.4 0.9 Energie- und Wasserversorgung

Other Autres Sonstiges

Total 5 282 -2.1 -4.3 6.0 2.0 9.9 17.8 1.9

1) At 2006 prices, excluding taxes. 1 euro = IR£ 0.7856 2) Airports and Seaports

Country/Pays/Land: IRELAND Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 82.5 4.1 7.3 5.7 6.0 3.5 3.0 3.5 Privater Verbrauch

Public consumption Consommation publique 24.9 1.5 4.0 5.3 5.0 4.5 4.0 4.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 46.0 6.9 11.8 3.1 1.4 -3.5 4.9 4.1

of which construction 36.4 7.7 10.1 5.6 -2.3 -7.9 4.4 3.4

Stocks (contribution as % of GDP) Variations de stocks 1.5 0.2 0.1 0.8 0.8 0.8 0.8 0.8 Vorratsveränderung

Exports Exportations 139.8 7.3 5.2 4.4 7.0 6.0 6.0 6.0 Exporte

Imports Importations 121.0 8.5 7.7 4.4 6.0 4.5 5.0 5.5 Importe

GDP 2) PIB 173.7 4.3 5.9 5.7 4.7 3.3 4.7 4.4 BIP

Standard National Accounts, gross figures; % changes based on chain linked and referenced to year 2005. 1) At 2006 prices. 1 euro = IR£ 0.7856 2) Excludes statistical discrepancy of €1m. Published figure for GNP is €174.7 billion.

174 © EUROCONSTRUCT Vienna, November 2007 Italy

ITALY

CRESME RICERCHE SPA www.cresme.it

Antonella Stemperini e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

2006 closed with a strong increase of 1.9% in GDP, a higher growth rate than that of 2001, the last year of the economic boom at the end of the millennium. While a large part of growth in 2001 was due to public intervention in the economy to counter the imminent economic crisis, the present phase appears to be one characterised by international trade and a recovery in domestic consumption. This is a favourable moment in the cycle, in which one sees a reduction in public expenditure and an increase in household expenditure, fixed investments and the import-export binomial. In the first two quarters of 2007 there was an average growth of 2.1% compared with the same period in 2006, even if data from manufacturing sectors show signs of a slowdown in the second half of the current year. Even allowing for the expected slowdown in the third and fourth quarter, however, 2007 should close with an increase of 1.8% in GDP. As has already been mentioned, the present expansion phase is based on a continuation of the private sector improvement (household expenditure up 1.6% and fixed investments up 2.1%), which had already begun in 2006. Finally, the expected performances of imports (+ 3.0% in 2007, after the rise of 4.3% in 2006) and exports (+ 3.7% in 2007 after the rise of 5.3% in the previous year) should be carefully noted. These results appear to be favourable above all when one considers the continuous devaluation of the dollar and the parallel appreciation of the euro, which lead one to fear a decrease in the international competitiveness of European products.

In this scenario, construction sector rose in 2006 by 1%, improving on what had been an expectation of feeble growth (0.1%) six months ago. The stagnation forecast for last year, on the other hand, has slipped forward to the current year and seems to be destined to last, at least in the medium term.

The vitality of the residential property market is such that it is the basis of the growth rate of 1% recorded by the entire construction sector in 2006 instead of the stagnation. In 2007 the market will remain substantially stable (-0.4%): the sector has entrenched itself on a kind of plateau, with surprisingly high levels of production. Uncertainty is the only certainty for the current year, because the information emerging from the various indicators that determine market performance are different and often conflicting. In any case, the tendency is as outlined, with 2007 in the form of an arc in which the construction curve holds and then falls gently, which it will go on doing until 2010.

These are the main dynamics: a substantial reduction in the construction of new homes from 2007 (- 3%), which, however, will become more pronounced still in the following three years (-6% in 2008, -7% in 2009 and -8% in 2010); a drop in public works in 2007, while is forecast a recovery even in 2008 (+ 1% for new works) and greater activity in the following years (+ 2% in 2009 and + 3% in 2010); a recovery in non-residential building demand in line with the strengthening of the economy; what could become the most important driving force, however, is the extraordinary repairs and urban regeneration market, which should strengthen from 2007 onwards, pushed by demand but also by fresh incentives and regulations that will oblige new building (and also sales) to comply with new energy saving rules.

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2 Macroeconomic Outlook

As has already been mentioned, the present expansion phase is based on a continuation of the private sector improvement (household expenditure up 1.6% and fixed investments up 2.1%), which had already begun in 2006. Finally, the expected performances of imports (+ 3.0% in 2007, after the rise of 4.3% in 2006) and exports (+ 3.7% in 2007 after the rise of 5.3% in the previous year) should be carefully noted. These results appear to be favourable above all when one considers the continuous devaluation of the dollar and the parallel appreciation of the euro, which lead one to fear a decrease in the international competitiveness of European products.

Table 3.1.1 - Conto economico delle risorse e degli impieghI [Account of resources and expenditure] % variations compared with previous period - concatenation of 2000 figures 1999 2000 2001 2002 2003 2004 2005 2006 2007 (1) 2008 (1)

GDP 1,9 3,6 1,8 0,3 0,0 1,2 0,1 1,9 1,8 1,5 Imports 3,1 5,8 -0,2 -0,5 0,8 2,7 0,5 4,3 3,0 3,4

TOTAL RESOURCES 2,1 4,0 1,4 0,2 0,2 1,5 0,2 2,5 2,1 1,9 Household expenditure 2,5 2,4 0,7 0,2 1,0 0,7 0,6 1,5 1,6 2,0 Public expenditure 1,4 2,2 3,6 2,2 2,1 1,6 1,5 -0,3 0,6 1,0 Gross fixed investments 3,6 6,4 2,5 4,0 -1,7 1,6 -0,5 2,3 2,1 2,8 Variation in stocks 0,1 -0,2 0,1 0,0 0,1 -0,1 -0,2 0,6 0,1 -0,5 Exports -1,7 9,0 0,5 -4,0 -2,4 3,3 -0,5 5,3 3,7 3,5 TOTAL EXPENDITURE 2,1 4,0 1,4 0,2 0,2 1,5 0,2 2,5 2,1 1,9 Source: CRESME/SI calculations –– Congiunturale Cresme/Saie 2008 - from ISTAT Italian Statistical Institute data – Conti Economici Nazionali [Italian resources and expenditure statements] 1970-2006 and preliminary GDP forecast (1) CRESME/SI estimates and forecasts

The state of the Italian economy, therefore, is tending to be fairly favourable, even if the close relationships of dependency on the so-called strong economies have not changed. The country’s economy therefore retains its fragile nature in the extremely competitive international scenario, and this characteristic takes on even greater force, if this were possible, in the light of the problems that are at present taking shape in the real estate and financial markets of a large part of the Western world.

One interpretation of the long period of economic growth in the domestic market is the constant and gradual fall in average ten-year interest rates; it should be borne in mind that a decrease of this kind also occurs at the peaks representing maximum growth at the top of expansion cycles and in periods of substantial recourse to public borrowing, as between 1980 and 1995, when the ratio between public debt and GDP increased by 115%. The mean growth rate during the various decades are 3.8% a year in the seventies, 2.4% in the eighties and 1.6% in the nineties, and the rate fell below 1% during the first six years of the new millennium: the GDP growth rate has more than halved every twenty years.

The central themes as regards the Italian economy in 2007 and 2008 may be summarised as follows: • a close dependency on European trends remains, but these are seen to be more independent than they were before of US trends. While the United States are not in a very favourable cycle now (growth forecasts being continually cut) this does not mean that Europe will necessarily be equally effected in the near future (its growth forecasts are reduced, but less intensively; • although there have been big increases in the price of fossil energy (oil above 80 dollars a barrel), the devaluation of the dollar is helping Europe to pay its energy bills (the cost in 2007 will be 3.8% lower if the dollar remains at 1.4 to the euro); • a monetary and financial crisis is in progress connected with the securitisation of sub- prime mortgages granted in the United States but sold on all over the world in the form of financial investment products; there have been a large number of appraisals of the extent and the outcome of this crisis, but the attempts to solve the problem (supporting banks in difficulty by further injections of cash) have been considered inadequate by financial operators; • the rises in the cost of money have terminated in the United States (0.5% lower, down to 4.75%) and there is talk of a further cut at the end of October; at the same time, the ECB seems to have adopted a waiting policy, postponing any further increases in the cost of money until 2008 (it has been 4.0% since June this year); • the economic cycle has inverted the trend of the period of stagnation from 2002 to 2005 and will remain healthy, in Europe at least, until 2008, in spite of the presence of the destabilising elements that have just been mentioned.

Since world macro-economic conditions should remain more or less unvaried at least until the end of 2007, with stability in the cost of money in Europe, a tendency towards cheaper money in the United States and attempts to control the monetary and financial crisis, the forecast for Italy could be a 1.5% increase in growth in 2008 over 2007. Growth in 2008 will be sustained by household consumption (+ 2.0%) and investments (+ 2.8%), both reaching figures higher than the overall growth in the economy, which will be moderated by public investment (+ 1.0%) and the reduction in the balance of trade differential, which will fall to + 0.1% in favour of exports.

178 © EUROCONSTRUCT Vienna, November 2007 Italy

3 The Construction Sector

The analysis of the macro-economic scenario shows that 2006 was the year in which the economy recovered after it had been on the verge of, if not actually experiencing, recession between 2002 and 2005, with the partial exception of the year 2004. As we know, construction was the mainstay during this phase in the economic cycle, which was difficult for other sectors.

In 2005 construction lost speed because the first serious slowing down of a traditional market force, infrastructures, was added to the crisis in the non-residential sector that was already in progress. In 2006, according to the latest review of the estimates, construction rose by 1%, improving on what had been an expectation of feeble growth (0.1%) six months ago. The stagnation forecast for last year, on the other hand, has slipped forward to the current year and seems to be destined to last, at least in the medium term.

The scenario is the same even without considering the changes in growth rates: the first setback in this sector was felt in 2003 (0.3%), above all R&M and private non-residential building, after the long phase of expansion that started in 1998 and lasted until it peaked in 2002. 2004 (+2%) was a "particular" year, in which the price variation component, combined with the demand for public works and the consolidation of the housing boom, created a leap within a cycle that had nevertheless started to end.

2005, on the other hand, was the year of the end of the expansion phase (-0.1%), even if there are some elements of vitality. Above all the residential property market, which does not yet show signs of a large number of unsold properties, as indicated by an increase of 3.7% in sales in 2005, down to 1.3% in 2006. The vitality of the residential property market is such that it is the basis of the growth rate of 1% recorded by the entire construction sector in 2006 instead of the stagnation that was to be expected six months ago.

In 2007 the market will remain substantially stable (-0.4%): the sector has entrenched itself on a kind of plateau, with surprisingly high levels of production. Uncertainty is the only certainty for the current year, because the information emerging from the various indicators that determine market performance are different and often conflicting, such as data indicating that employment rose during the first half-year or that the consumption of cement fell; what feeds uncertainty more than anything else, however, is the question of public works, affected by a wide gap between the information in public finance documents, which speak of sustained growth, and the slowdown perceived in the manufacturing sector.

In any case, the tendency is as outlined, with 2007 in the form of an arc in which the construction curve holds and then falls gently, which it will go on doing until 2010.

The new construction curve will be characterised by four main dynamics: • a substantial reduction in the construction of new homes from 2007 (- 3%), which, however, will become more pronounced still in the following three years (-6% in 2008, - 7% in 2009 and -8% in 2010); • a drop in public works in 2007, during which they will be affected by waiting times before new works are started, thus feeding a strategic sector for which the new government appears to have found funds. This assumption, together with the trend during the past few years towards an increase in the number of public tenders and subsequent awards, support a forecast of recovery in this sector even in 2008 (+ 1% for new works) and greater activity in the following years (+ 2% in 2009 and + 3% in 2010); • a recovery in non-residential building demand in line with the strengthening of the economy, especially in some segments. Recovery will be fairly weak at first and will then become more solid in the three years from 2008 to 2010

• what could become the most important driving force, however, is the extraordinary repairs and urban regeneration market, which should strengthen from 2007 onwards, pushed by demand but also by fresh incentives and regulations that will oblige new building (and also sales) to comply with new energy saving rules.

This scenario, defined as a soft landing for the sector, therefore opens a new phase in which the market’s capacity to make a fresh start and renew itself becomes fundamental after the easy new buildings market has been exhausted. Much will depend on the actual size of the property bubble; what is happening in other parts of the world is certainly not encouraging. Other relevant factors will be immigration flows, the ECB’s interest rate decisions and the anti-tax evasion policies of the new government. But above all, perhaps, the ability to take opportunities in foreign markets and to invent new products and technologies, or to integrate services and prepare to enter three new market-driving forces: public and private partnerships, management and the environment.

4 Housing Market

2006 closed even more satisfactorily than was expected for this sector (+ 3.5%), as a result of better performance by new construction, while 2007 is confirmed as the year in which the expansion cycle of new residential building inverted its tendency, a phenomenon that is destined to condition the entire dynamics of the construction market. In 2007 new investment will be 3% lower and the rates of decrease will become more and more pronounced.

The basis of this inversion of the trend is the end of the property boom that started at the end of the nineties, when families and businesses channelled their savings and investments into bricks and mortar.

In the first half of 2007, the first data from the Italian Land Register Agency show a fall in sales that Cresme forecasts will be - 3.5% at the end of the year. What has slowed down the market is the cost of money: all the other factors within and outside the Italian economy affecting this sector played a secondary role compared with the effects of the credit squeeze. Eight years of sustained price rises from 1999 to 2006 were not enough to diminish the demand for homes or absorb the constantly increasing numbers of new homes entering the market, but demand for new homes has now been slowed down by mortgage rates, which rose from values of lower than 4.5% between 2004 and 2005 to the present 5.8% at best and even up to the 6.3% offered by some banks. Demand, therefore, has been held back by the difficulty that consumers are experiencing in adding to their existing debt that has taken shape in the last year and a half.

The factors underlying the extraordinary property boom, which can be summarised as 8 million sales completed in the last ten years, corresponding to about 30% of the country’s housing stock, are now well known. The surprising growth in the primary demand for homes during the first years of the millennium was due to a large number of small family units, the Italian baby boom and immigration. Demand reached its peak in 2002, with about 400,000 new households, but this figure dropped to 220,000 in 2006; and it will be impossible not to see the effects of this demographic trend in the property market, which produces more than 320,000 homes a year. These effects will make their presence felt next year. In 2007, in fact, the number of completed homes will continue to grow: 298,000 without counting those obtained by enlargements and those in non-residential buildings, which would bring the total to 336,000; but this will be the last year of growth before the decline. Growth was only a phenomenon of inertia, as is confirmed by investments and new buildings started, both lower in the same year, and by the forecast of a slowdown from 2008 onwards.

The decrease in new buildings has particularly involved 1+2 family dwellings, which have reacted a little earlier than higher density residential buildings; in fact there has already been

180 © EUROCONSTRUCT Vienna, November 2007 Italy a fall in the number of completed homes of this kind in 2007 (- 6%, compared with an increase of 3% in the number of multi-family buildings). The contraction forecast for 2008, minus 4%, is equal for both types.

In this phase in which new building is falling, it is thought, on the other hand, that R&M will recover its vigour. The scenario that emerges, in fact, foresees growth in residential R&M of 1.7% in 2007, progressively increasing in the two years that follow.

This is a complex market that is evolving and is rich in potential. It is sufficient to consider that the Italian Statistical Institute (ISTAT) census in 2001 counted 27 million homes, 21.6 million of which were occupied, and that it is estimated that about 10 million of these are in buildings constructed from immediately after the Second War until 1971. This is a stock that constitutes a potential field for improvement works at micro scale, but also for work defined as integrated services, or facility management. The first category involves maintenance, often ordinary day-to-day home maintenance, but also residential building restoration, which continues to increase, as shown by the 23% rise in the number of applications submitted for expenditure of this kind to be recognised as tax-deductible; it is also demonstrated by a Cresme survey of a sample of 1,000 families: in 2006 the number of families that began various types of home improvement work rose by 20% over 2005, and the propensity to carry out this kind of work during the next three years is significantly greater than in the previous five-year period. Another element that supports the supposition that the R&M activity will expand, particularly at micro scale, is the performance of the property market, which made many families put off home improvements during the period in which sales rose.

The other type of activity, on the other hand, involves large-scale R&M works whose purpose is to improve big residential estates, often included in wider urban regeneration plans, in the context of which the concept of integration and management is becoming more and more common.

From 2007 onwards, moreover, there is another feature that can play an important part in the maintenance market: active and passive energy saving in buildings.

5 Non-residential Market

The non-residential building sector follows an opposite trend to that of homes, 2007 being the year in which the cycle was at its lowest: after four years of continuous falls, it is forecast that investments will attain amounts that are very little above those of 2006 (+ 0.5%), but the rate may gradually become brisker in the next three years (+ 1.4% in 2008, + 1.7% in 2009 and 1.8% in 2010). The category mainly responsible for this turnaround will be new buildings. The recovery of the non-residential sector goes hand in hand with economic recovery, and the slowdown in the economy forecast for 2008 (GDP at + 1.5%) certainly does not encourage this sector to pick up again quickly. Furthermore, according to the Italian Federation of Industrialists’ Study Centre indicator, business confidence only began to increase last year, and not to a really decisive extent: uncertainty on the part of economic operators is still perceived.

On this basis, stagnation in new construction is forecast for 2007 with a phase of slight but significant recovery in 2008 (1.9%), destined to continue more dynamically in the following years. The industrial sector in particular, the main one, will spur on the overall economy of the sector, and will be one of the few already showing signs of recovery in 2007. The data from the property market confirm the prospects of growth in manufacturing sector: in 2006, against an overall fall of 3.3% in non-residential property sales, transactions involving factories and industrial warehouses remained at the same level (- 0.1%) as in 2005, which had been a year of brisk growth (+ 8%).

In addition to this, in 2007, new building volumes in this sector increased again (plus 1.9%) against a decline in the sector as a whole in a year that is expected to be the fifth and last year in which there will be a reduction in this figure. In fact the data on new building volumes confirm that all sectors will to a certain extent benefit from the new economic cycle from 2008. After 2001 and 2002, years in which the non-residential sector received a strong impulse owing to tax incentives (the so-called Tremonti bis law), the years that followed recorded constant negative figures. In 2007 overall new non-residential building volumes show a fall of 3.6%, settling on 135.6 million cu. m, with variations, some substantial, among all the sectors, except the industrial sector. In 2008 a turnaround is expected, with a variation of + 2.6%.

If one reads the forecast for the trends of investment in new buildings in the various sectors of activity, as has already been stated 2007 is the year of the recovery of the manufacturing sector after the marked setback experienced in 2006. In the wake of a recovery of the world economy, even if it is not a brilliant one, this sector should continue to drive the market during the next three years because its rate of expansion may exceed 3% and because it plays a dominant part in the non-residential construction market (more than 32% of all investments in non-residential property construction are in the manufacturing segment).

It was thought that the commercial sector would be one of the first to recover but the slowdown in production is still persisting in 2007, a theory also supported by a negative performance of sales in 2006 (-6.1%). It will speed up in 2008, however, thanks to mass distribution structures (hypermarkets) whose stock market prices are rising and whose profitability is still satisfactory. The other segment that is showing good signs is logistics, also because this area started off from a very modest level in comparison with other European countries (in particular France and Germany).

Growth rates of more than 1% are forecast for office buildings in 2007; these rates should afterwards improve constantly when the effects of the works scheduled in the development plans of some big Italian cities begin to make their presence felt more substantially.

The recovery expected to take place this year in the public non residential building sector is confirmed, after the very poor performance in 2006. In fact it is thought that the players in these sectors of activity, mainly local authorities, are reacting against the present public expenditure cut situation, probably also thanks to the tendency to overcome the difficulty in finding alternative forms of finance. This is a road that healthcare building is also starting to go up.

The phase of recovery in new building is accompanied by an entirely favourable performance on the part of the demand for maintenance and improvement works. In general, the sector, which almost played the part of a "shock absorber" in the previous phase of decline in new building, showed a much less marked downswing with respect to new building, and in 2006 showed an increase of 0.4%.

The rate of evolution will tend to accelerate slowly but the most important factor is the strategic role that the R&M activity may play as a container with the capacity to draw in the key segments of the building market in the next few years in relation to both the residential building and non-residential building. This is the picture as regards urban regeneration based on public and private partnerships, or, on the model of the latest European models, suburb regeneration models based on the integration between construction, services and energy, the application of the life time value concept, the application of the concept of management and maintenance not of the building alone but of the district and the concept of balance between built-up area, environment and surroundings.

182 © EUROCONSTRUCT Vienna, November 2007 Italy

These are new action models, founded on the integrated management of the district and of the urban transformation processes concerned: they are supply models that have the capacity to provide services to buildings, people and open spaces, public and social services that can be privatised, services to the quality of life and regeneration works.

6 Civil Engineering Market

In 2006 the investments for the civil engineering works sector amounted to over 40 billion euro. Last year’s final result indicated stagnation in this sector after the slowdown in 2005, stagnation limited to -1% thanks to the injection of resources envisaged for Anas and Ferrovie under the Bersani Decree, which produced its effects during the last months of 2006 making up for the decline that would otherwise have been much more substantial.

The estimate for 2007 has been reviewed downwards, because the sector is expected to record another drop of 1.1% for this year. The origin of the June forecasts is the climate of uncertainty surrounding public funds, which continues to affect estimates of investments in public works. It is difficult to analyse the different sources that contribute to the calculation of investment in public sector construction for the entire year 2007 because the information appears to be contradictory and complex to interpret and reconstruct. Specifically, pessimistic data arrive from the construction sector, while the different public finance documents speak of a strong phase of expansion in investment in the public sector. The path chosen by Cresme is that dictated by experience, and takes into account the difficulty the Italian public works machine has in getting started. Essentially, at the origin of this result is the pessimistic view of the spending capacity of the Public Administration and the actual destination of the available resources, which might partly be allotted to works already carried out or to past debt; it is also seen that there is frequently a difference between forecasts and final data issued by government sources.

The factors that led to lower the forecast for 2007 also contributed to invert the medium-term trend: the new scenario outlined by Cresme shows 2007 as the year in which the downward cycle of the public engineering works sector will close, followed by a new phase of gradual growth at least until 2010 (+ 1.7%). The basis for the expected growth is government action in the past few years, which has been trying to meet the strong demand for an improvement in the transport and logistics capacity of the Italian infrastructure system and to strengthen second level communications and urban and regional systems, acting on:

• the important trans-European lines of communication on Italian soil, the network of motorways to the sea, the big airport hub systems and the routes that are of domestic importance, namely the Tyrrhenian and Adriatic corridors and communications from one side of the peninsula to the other; • shunt goods trains that support the main system and the decongestion of city communications junctions.

In support of government action is the Economic and Financial Planning Document for 2008- 2012, with the Infrastructure Annex, approved in July 2007.

This document sets out the order of priority for works during the period from 2008 to 2012, which are works selected from those included in the "Objectives Law Strategic Infrastructures Plan" and other planning instruments involving spending from ordinary resources or additional financing provided under Community and Italian regional policies (mainly among these, the works planned using European Structural Funds 2007-2013, the RFI (Italian Railways) and ANAS (the Italian Highways Agency) "Plans Contracts" 2007-2011), on the basis of cost-benefit, environment and safety assessments. Works with a total value of 109 billion euro have been planned for the five-year period from 2008 to 2012, of which 104 billion for works included in the Objectives Law Plan, 35% of the total value of the entire © EUROCONSTRUCT 183 Italy Vienna, November 2007

Plan. The biggest share of the priority investments scheduled for the period from 2008 to 2012 goes to mobility infrastructures: 94 billion euro, 86% of the total value of the planned works, allocated to the enlargement of the road network (49 billion), railways (37 billion) and metro (8 billion).

Transport networks

In 2006 the whole of all infrastructures dedicated to transport absorbed over 24 billion euro, confirming the shares equal to 60% of the civil engineering market and to 13% of the entire construction market. The sector stopped growing in 2005 (-3.5%), and 2006 è was a year of new fall, even if slight (-0.5%), as a result of a strong drop in railways (-4.3%), against a stability in the road sector.

In 2006 investments for road works amounted to almost 13 billion euro, of which almost 5 to be attributed to the operators running the road and motorway network, and 8 to be spread out between Regional, Municipal and Provincial Governments. After a year of weak growth (+ 0.6%), a slight drop (-0.4%) in investments in highway construction is expected for 2007 as an effect of the continuing difficulty in opening new sites, which were first planned for 2006, then postponed until 2007 and will very probably not be opened before 2008. There are some big projects under the Legge Obiettivo, whose funding is assured but whose contracts are taking a long time to define. This is the case for the Asti-Cuneo works (1.6 billion euro), for which there has been complete financial cover for a long time, but its concession agreement only received its preliminary approval in May 2007 (with the works planned to begin by December) and its final approval in October 2007. The market in 2007 is also sustained by the continuation of the works on the Salerno-Reggio Calabria motorway, those for the Passante di Mestre, Variante di valico and the widening of the A4 Turin-Milan motorway. Medium-term forecasts remain uncertain: in fact on one hand it is difficult to raise public funding, but on the other hand the sector could be kick-started by the opening of worksites for some partly privately funded projects: Brescia-Bergamo-Milan direct link, Pedemontana Veneta and Lombarda, large-scale toll-road works, all situated in the North, and which will require an overall investment exceeding 8 billion.

The outlook for railway transport, absorbing investments exceeding 8 billion euro, is less gloomy than was expected in June. There is still, however, a downward trend until 2008, picking up from 2009 with the opening of new high speed train works between Milan and Verona and Milan and Genoa as well as those scheduled for the conventional railway network. Among these there are various railway access projects from Southern to Northern Italy: the Malpensa airport hub, the lines from Ventimiglia to Genoa, La Spezia to Parma and Orte to Falconara, the Rome to Pescara line, intended to provide a link crossing Italy from the Tyrrhenian to the Adriatic, work on the Adriatic corridor from Pescara to Bari and Taranto, the Battipaglia, Potenza and Metaponto lines, the enlargement of the Naples to Salerno and Reggio Calabria line and various works on the railway system in Sicily and Sardinia.

A phase of expansion is forecast for the other means of transport at least until 2010 as an effect of the action taken to improve local public transport. In detail, in the medium term this sector will be helped by investment in the metropolitan transport systems of Turin, Milan, Brescia, Venice, Genoa, Bologna, Florence, Rome, Naples, Bari, Catania and Palermo. This sector is also stimulated by some large-scale port works, such as the strengthening of Civitavecchia, Taranto and Gioia Tauro hubs, all of them contemplating the completion of works by 2009.

184 © EUROCONSTRUCT Vienna, November 2007 Italy

Infrastructures for water, energy and telecommunications

Investments for an amount of about 12.8 billion, equal to 32% of the entire civil engineering sector and 7% of the value of production, are expected to be made in the water, energy and environment sectors in 2006. After the pronounced downswing compared with 2004 (-4.1%) affected by the fall in local authorities expenditure, there was slight growth in this sector in 2006 over 2005 (+0.9%). The latest forecasts indicate a fall of 0.4% in 2007 and a new growth phase between 2008 and 2010. The telecommunications sector scenario is one of decline until 2009: after a short phase of stabilisation in 2005, investments started falling again, with rates of decrease fluctuating between -5.2% in 2006 and -1.8% in 2009, as a result of a concentration of activities on systems and terminals, rather than on infrastructures.

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 illegal production (not for permits) 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)

186 © EUROCONSTRUCT Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 58 462 58 752 58 972 59 184 59 383 59 571 59 760 Bevölkerung

Households ('000s) Ménages 23 311 23 600 23 818 24 035 24 246 24 456 24 668 Haushalte

Unemployed ('000s) Chômeurs 1 960 1 888 1 673 1 540 1 400 1 250 1 170 Arbeitslose

Unemployment rate (%) Taux de chômage 8.1 7.7 7.1 6.4 5.7 5.1 4.7 Arbeitslosenquote

Change of GDP Variation du PIB 1.2 0.1 1.9 1.8 1.5 2.0 2.0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.2 1.9 2.1 1.9 2.0 2.1 1.9 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 4.6 3.9 3.1 3.0 3.4 3.7 3.7 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.2 3.5 4.0 4.5 4.7 4.3 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 40 431 7.1 7.8 5.3 -3.0 -5.7 -7.0 -8.0

Logement Renovation 53 820 0.1 0.1 2.2 1.7 1.7 1.2 1.3

Wohnungsbau Total 94 251 2.8 3.2 3.5 -0.3 -1.4 -2.1 -2.2

Non-residential construction New 25 894 -2.9 -2.3 -4.2 0.0 1.9 2.6 2.1

Bâtiments non résidentiels Renovation 30 139 -0.3 -2.4 0.4 1.0 0.9 1.0 1.6

übriger Hochbau Total 56 034 -1.5 -2.3 -1.8 0.5 1.4 1.7 1.8

Building New 66 326 2.5 3.5 1.4 -1.8 -2.7 -3.0 -3.6

Bâtiment Renovation 83 959 -0.0 -0.8 1.6 1.5 1.4 1.1 1.4

Hochbau Total 150 285 1.1 1.1 1.5 -0.0 -0.4 -0.7 -0.7

Civil engineering New 18 344 7.2 -5.2 -1.5 -2.0 1.0 2.0 3.0

Génie civil Renovation 22 051 4.1 -3.2 -0.6 -0.3 0.1 0.9 0.7

Tiefbau Total 40 395 5.5 -4.1 -1.0 -1.1 0.5 1.4 1.7

TOTAL CONSTRUCTION OUTPUT 190 681 2.0 -0.1 1.0 -0.2 -0.2 -0.2 -0.2

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 46.70 3.0 -0.7 1.8 -1.4 -2.1 -0.8 -1.2 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 1936,270 ITL

188 © EUROCONSTRUCT Vienna, November 2007 Italy

Country/Pays/Land: ITALY Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 35.0 34.0 33.0 31.0 32.0 31.0 30.0 Baugenehmigungen Familienhäuser

Flats Collectif 232.0 238.0 234.0 225.0 200.0 198.0 198.0 Mehrfamilienhäuser

TOTAL 267.0 272.0 267.0 256.0 232.0 229.0 228.0

Housing starts 1+2 family dwellings Logements commencés Individuel 51.0 48.0 46.0 45.0 45.0 43.0 43.0 Baubeginne Familienhäuser

Flats Collectif 240.0 248.0 239.0 229.0 206.0 202.0 200.0 Mehrfamilienhäuser

TOTAL 291.0 296.0 285.0 274.0 251.0 245.0 243.0

Housing completions 1+2 family dwellings Logements terminés Individuel 50.8 49.2 51.1 48.0 46.0 45.2 44.0 Baufertigstellungen Familienhäuser

Flats Collectif 186.9 210.9 242.3 250.1 240.9 228.3 204.0 Mehrfamilienhäuser

TOTAL 237.7 260.1 293.4 298.1 286.9 273.5 248.0

Housing stock Logements existants 28 028 28 278 28 561 28 848 29 124 29 372 29 556 Wohnungsbestand

thereof second homes dont résid. secondaires 5 790 5 843 5 900 5 960 6 017 6 045 6 064 davon Zweitwohnungen

thereof vacancies dont inoccupé 2 853 2 980 3 009 3 039 3 068 3 085 3 105 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 73.0 73.4 73.8 74.3 75.0 75.4 75.6 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 570 2.0 -1.5 -2.0 4.2 4.5 1.0 1.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 794 2.2 0.8 0.7 1.0 1.0 0.5 -1.2 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 8 322 -11.7 -3.8 -4.7 2.6 2.7 3.2 2.4 Industriegebäude

Storage buildings Bâtiments de stockage 486 14.7 3.0 1.5 0.5 2.0 2.2 2.2 Lagergebäude

Office buildings Bureaux 1 862 -8.2 -3.0 -2.8 1.5 1.1 2.0 3.0 Bürogebäude

Commercial buildings Commerces 4 206 5.7 -0.9 -1.9 -2.5 2.0 3.0 2.5 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 6 199 1.8 -2.5 -9.0 -2.5 1.2 1.5 0.9 Landwirtschaftsgebäude

Miscellaneous Autres 3 455 3.1 -1.2 1.1 -1.0 2.2 3.9 3.0 Sonstiges

Total 25 894 -2.9 -2.3 -4.2 0.0 1.9 2.6 2.1 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 1936,270 ITL

190 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 12 861 11.4 -4.7 0.6 -0.4 3.7 2.6 2.0 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 8 285 9.1 -0.7 -4.3 -1.5 -1.9 1.0 1.3 Bahnanlagen

Other transport Autres réseaux 3 060 4.9 -5.8 6.0 4.2 1.8 0.4 1.5 Übrige Verkehrsinfrastruktur

TOTAL 24 206 9.8 -3.5 -0.5 -0.2 1.5 1.8 1.7

Telecommunications Télécommunications 1 366 -4.8 -0.5 -5.2 -4.0 -2.5 -1.8 1.1 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 12 843 2.7 -4.1 0.9 -0.4 0.2 2.0 2.0 Energie- und Wasserversorgung

Other Autres 1 979 -10.7 -12.4 -14.2 -13.2 -8.8 -7.7 -0.6 Sonstiges

Total 40 395 5.5 -4.1 -1.0 -1.1 0.5 1.4 1.7

1) At 2006 prices, excluding taxes. 1 euro = 1936,270 ITL

Country/Pays/Land: ITALY Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 869.2 0.7 0.6 1.5 1.6 2.0 2.0 2.0 Privater Verbrauch

Public consumption Consommation publique 305.3 1.6 1.5 -0.3 0.6 1.0 1.4 1.4 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 306.6 1.6 -0.5 2.3 2.1 2.8 3.0 2.8

of which construction

Stocks (contribution as % of GDP) Variations de stocks 6.4 0.0 -0.2 0.6 0.1 -0.5 -0.3 0.0 Vorratsveränderung

Exports Exportations 410.7 3.3 -0.5 5.3 3.7 3.5 3.6 3.8 Exporte

Imports Importations 422.8 2.7 0.5 4.3 3.0 3.4 3.8 4.0 Importe

GDP PIB 1 475.4 1.2 0.1 1.9 1.8 1.5 2.0 2.0 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 1936,270 ITL

192 © EUROCONSTRUCT Vienna, November 2007 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 Vienna, November 2007

1 Summary

The Dutch economy operates in accordance with expectations. After an increase of 3 per cent in 2006, in the first half of 2007 the volume of gross domestic product (GDP) rose by 2.6 percent. In its recent report on the state of the economy, the Netherlands Bureau for Economic Policy Analysis (CPB) stands by its prognosis of 2.75 per cent growth in the whole year. All major parts of the economy (private and public consumption, investment and exports) contribute to the expansion of GDP.

In 2006 private consumption grew by 2.75 per cent. From January to July 2007 private consumption increased further by 1.5 percent. This growth deceleration was for the greater part the result of diminishing consumption of natural gas by private households due to the extremely mild winter of 2006-2007. For the second half of 2007, consumption is expected to accelerate to 2.25 per cent. This because of a still growing labour force and lower unemployment. However, there is increasing uncertainty whether this acceleration will be fully realized. Only very recently, consumer confidence collapsed from +15 to -1, the biggest decrease ever measured. This is thought to be mainly caused by the disappointing perspective for the middle and higher income brackets, resulting from the recently presented budget of the new cabinet Balkenende 4. As yet, the breakdown of consumer confidence is considered to be too weak to impede the influence of the continuing increase of employment significantly.

Exports traditionally contribute considerably to Dutch economic growth. The export of goods and services increased by 7.0 per cent in 2006. A significant part of this growth stems from the success of the re-exportation of goods, which grew by no less than 13 per cent. The progression of the exportation of inland produced commodities proceeded more modestly. This sector picked up by 4 per cent. For 2007 and 2008, a slightly smaller overall increase (6.25 to 6.5 per cent) is expected. The acceleration of economic growth in 2006 was also strongly supported by the development of investment. In 2006 this part of GDP increased by 7.2 per cent (private and public investment together). This year and next, private investment (inclusive of investment in houses) will level off to successively 4.25 and 3.5 per cent.; public investment is expected to grow at a more moderate rate: + 3 per cent in 2007 and + 2 in 2008.

Construction output increased considerably in 2006. Total production volume was over 4 per cent higher than in the preceding period. In 2007, building production is expected to grow further by 5.3 per cent. In the years to come the sector will continue to expand, albeit at a lower rate. Provisional calculations show that in 2008 to 2010 growth rates will step by step decline from 3 to 2 percent.

Development of GDP in The Netherlands and selected Construction Output and GDP 2002-2010 relative changes countries/ areas, 2003-2008 % 10 vol. % Construction Output GDP 12 10 5 8 6 4 0 2 0 -2 2003 2004 2005 2006 2007 2008 -5 2002 2003 20 2005 2006 2007 2008 2009 20 04 10 Netherlands Eurozone USA Japan China

194 © EUROCONSTRUCT Vienna, November 2007 Netherlands

The positive development of the construction sector in 2007 is strongly supported by the improving market for new residential construction. In 2006, the number of new completions in this sector increased to 72.400, 8 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, 80,000 completions per year are projected. In terms of production value, in 2007, the market for new residential construction is expected to grow by 8 per cent. This result is expected to be followed by a firm + 5 in 2008 and + 3.2 in 2009. For 2010, provisional estimates indicate a further slow-down of the growth rate in this sector to less than 1 per cent. Residential repair and maintenance (including renovation) develops in a more moderate way. In 2007 an increase of a little less than 4 per cent is projected, slowing down to around 2 per cent in 2008-2010.

Total Construction output 2003-2010 constant 2006 prices Construction Output by Sector 2006 bill. euro percentage 100

80 Civil Engineering 22% New Residential 60 29% 40

0 2 200 2 2 2007 2 2009 2010 0 005 006 008 0 Building New Non- 3 4 Renovation Residential 35% 13% branch concept output construction industry

After four years of decline, in 2006 the market for new non-residential construction finally managed to restore growth. In 2007, total output in this sector is expected to increase by 9.2 per cent. During the years 2008 to 2010 this growth rate can’t be maintained. The annual increase of the production volume will gradually diminish from 4.4 to 1.5 per cent. Renovation (inclusive of repair and maintenance) of non-residential buildings is less sensitive for cyclical fluctuations in the economy than new construction in this sector. The recession on this market was less sharp, the recovery will be less exuberant. In 2007, this sector is expected to grow by almost 4 per cent. In 2008 and the following years, growth rates will decelerate again to values around 2.5 percent.

In 2007, new construction in civil engineering is expected to grow by 4.2 per cent. With that, the sector contributes less than proportionally to the overall growth of the construction output. This growth rate lies lower than the increase that was realized in 2006. Growth is expected to slow down further to 2.6 in 2008 and 1 per cent in 2010. Civil engineering maintenance, traditionally shows a very moderate development. For this sector the growth rate of 2 per cent which was registered in 2006, is rather exuberant. For 2007 and the years to come, the expected increase of production varies between -0,5 and +0,6 per cent per annum.

2 Macro-economic Outlook

In 2006 the Dutch economy grew by 3 per cent. This meant the highest growth rate since 2000. Until recently, the improving economic climate in the Netherlands, was paralleled by the development of consumer confidence. Since the third quarter of 2006, this indicator recorded increasing positive values after years of negative results. However, in September 2007, consumer confidence suddenly collapsed from +15 to -1, the biggest decrease ever registered. The main reason for this dramatic deterioration is the disappointing outcome for the middle and higher income brackets of the first budget (presented last September) of the new cabinet Balkenende 4 (in office since February 2007). The recovering sentiment amongst consumers in 2006, was expressed in a solid growth of private consumption. In 2006 private consumption increased by 2.75 per cent. For this year and next, growth is expected to stabilize on a level of 2 per cent. This apparently stable prospect, could be disturbed by a recent breakdown of consumer confidence. In September 2007, consumer confidence collapsed from +15 to -1, the biggest decrease ever measured since the start of the observations. The main reason is likely to be the disappointing perspective for the middle and higher income brackets, resulting from the first budget of the new cabinet Balkenende 4, which was presented in September. For the time being, the recent breakdown of consumer confidence is considered to be too weak to impede the predominant influence of the continuing increase of employment significantly. Unemployment continues to diminish strongly. In 2006 on average 413,000 persons were out of work, which is 5.5 per cent of the labour force. This year and next a further reduction of unemployment is expected to successively 4.5 per cent (340,000 persons) and 4 per cent (310,000 persons) of the labour force. In 2004 and 2005, the growth of the Dutch labour force came to a standstill. It started growing again in 2006 (+ 1.1 per cent). Growth is forecast to continue in 2007 and 2008 by 1.1 and 0.75 per cent successively.

In 2006 the most important contribution (relatively) to economic growth came from the investment in goods and services. Total investments (private and public together) picked up with 7.2 per cent. This average was restricted by the relatively moderate rise (3.2 per cent) of public investment. If we leave the construction and renovation of dwellings out of consideration, private enterprises raised their capital outlay by no less than 10 per cent. The expansion of private non residential investment is to a great extend the result of an increasing capacity utilization in the industry. This leads to a growing demand for all kinds of investment goods to enlarge production capacity. Especially computers, machinery and transport equipment were in great demand in 2006. In 2007 and 2008 an increase of 5.25 respectively 4.75 per cent is expected in this sector. Inclusive of houses, private investment is forecast to increase by respectively 4.25 and 3.5 per cent in 2007 and 2008. Public investment is forecast to grow at a moderate rate: 3 per cent in 2007 and 2 per cent in 2008. Although private investments are picking up recently, the relative level still is significantly lower than in the near past. About a decade ago, the investment quota (the expenses for investment goods as a percentage of gross value added) in the private sector fluctuated between 18 and 20 per cent. By now, this quota lies between 14 and 15 per cent.

The export of goods and services traditionally accounts for an important share in economic growth in the Netherlands. Total exports (inclusive of sources of energy, mainly natural gas) increased by 7 per cent in 2006. In 2007 and 2008 total exports are forecast to grow by 6.25 and 6.5 percent. The relatively strong acceleration of the export sector is, for the greater part, the result of the rapidly expanding re-exportation of goods. The last type of exportation in 2006 grew by 13 per cent. Re-exportation is the transit of imported commodities after minor processing or refining. However, with an increase in 2006 of 4 per cent, inland based exports also contributed more than proportionally to economic growth. The minor slackening of the expansion of exports is mainly caused by the presumption of a higher exchange rate of the euro versus the American dollar and a stagnation in the development of labour productivity. Labour costs per unit produce in the Netherlands

196 © EUROCONSTRUCT Vienna, November 2007 Netherlands decreased until 2006. In 2007 and 2008 these costs are forecast to increase by 0.25 and 0.5 per cent, whereas this indicator for the competing European countries and even more for countries from abroad, still decreases. This phenomenon is the result of growing tensions on the Dutch labour market as a consequence of decreasing unemployment and increasing vacancy rates.

GDP and Private Investment 2001-2008 GDP and Private Consumption 2001-2008 % relative changes % relative changes

12 16 GDP Investment GDP Consumption 8 12

8 4

4 0 0

-4 -4

-8 -8 2 2 2 2 2005 2 2 2 0 0 0 0 0 0 0 2001 2002 2003 2004 20 2006 2007 2008 0 0 0 04 0 0 0 05 1 2 3 6 7 8

In 2006 inflation reached a historic low. The inflation rate (consumer price index) declined from 4.5 per cent in 2001 to 1.1 per cent in 2006. For this year and next the projections point towards a reversion to somewhat higher levels. In 2007 and 2008 inflation is expected to climb to 1.75 and 2 per cent. In the same period per capita wages in the private sector are expected to rise by 2.25 and 4.5 per cent successively.

3 Housing Market

In 2006 total residential construction (new construction, renovation and maintenance together) was worth over € 35 bln. More than half of this production (€ 19.1 bln) concerned investment in new dwellings. In the period up to 2010, further growth is expected. Especially the construction of new houses is responsible for these positive prospects. New residential construction is forecast to grow by 8 per cent in 2007 and 5 per cent in 2008. For 2009 and 2010 an increase in production volume of 3.2 and 0.7 percent is expected.

Up till 2007, the upward trend in production value was reflected in the number of new completions. This number went up from less than 60,000 in 2003 to almost 72,500 in 2006. For 2007, the completion of 80,000 dwellings is expected. The number of completions is forecast to remain at this level over the period to 2010. The future growth in production volume in this sector originates from quality improvement (i.e. changes in type, size, equipment etc.). Although the number of completions has been rapidly growing in recent years, looked at in a historical perspective by now the production remains at a modest level. Only ten years ago, completions usually exceeded the number of 90,000.

Nowadays, new residential construction in the Netherlands is largely determined by market conditions. In the past, a number of regulating instruments were at disposal of the government to adjust the market. Over the years, 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 for the lower income groups. Economic variables like (construction) prices, interest rates, household income, business development and employment now strongly affect demand 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, the development of 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: 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 about 50,000 per annum. 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. The restrictive environmental planning policy in the Netherlands and the scarcity of building land together resulted in the past in relatively strong increasing land prices. European legislation (for example on the reduction of fine dust) makes things even more complicated.

Building Permits in New Housing 1996-2010 Completed Dwellings 1996-2010 dwellings by category of principal dwellings by category of principal

0.000 0.000

0 0 199 199 199 199 20 200 20 200 2 200 2 200 200 200 2010 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 00 00 0 0 6 7 8 9 0 1 2 3 4 5 6 7 8 9 housing corporations developers private persons housing corporations developers private persons

198 © EUROCONSTRUCT Vienna, November 2007 Netherlands

By now, environmental planning is aimed to foster housing development in smaller suburban sites and inside existing urban agglomerations, in stead of the development of large new urban settlements. For many years the position of commercial property developers on the Dutch market for new houses, has been dominant. In 2006, the share of developing construction firms and property developers reached a level of 63 per cent, leaving 26 per cent to housing corporations and 11 per cent to private commissioners.

Residential renovation and maintenance are assumed to benefit from the expansion and the ageing of the housing stock. This provides a permanent stimulus to the production volume in this sector. Recently, the housing associations agreed with the Minister of Housing, Communities and Integration to start large scale modernisation programmes for underprivileged areas. The sector consists of two different types of economic activity. As an investment activity renovation is more volatile than maintenance, the latter being part of consumers expenditure. Therefore the sector at large, develops in a more moderate way than new construction. After a rise in production value of 2.4 percent in 2006, for 2007 an increase of a little more than 3.5 per cent is projected, slowing down to around 2 per cent in the period 2008 - 2010.

4 Non-residential Market

In 2006, the cyclical low that ravaged new non-residential construction since 2002 at last came to an end. In the period 2002 up to 2005, the sector lost a quarter of its production volume. Last year, an increase of a meagre 1.2 per cent was realized. With an expected growth of over 9 per cent, 2007 promises to be the first good year since a long time. However, full recovery to the production level of the years before 2001; is not expected. From 2008 to 2010, growth is forecast to slow down gradually from 4.4 to 1.5 per cent per annum.

During the preceding years, private and public non-residential construction experienced 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 poor results for several years, commercial and industrial companies were very reluctant to expand their production capacity or to renew their premises. 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 the consequential increase in investment activities, finally accomplished a (limited) positive change for private new non-residential construction activity in 2006. This development is expected to be continued much stronger in 2007.

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 was little or no room for investment in manufacturing accommodation, warehouses etc. In 2005, general investment activity firmly 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 full 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 2007. In this year production value in relation to the construction of new buildings for the industry, is expected to increase by over 18 per cent. For 2008 a less powerful but still robust growth is foreseen (+12.2 per cent). The then reached production volume is expected to remain roughly on the same level for the years thereafter.

New Non-Residential Construction by Type 2006 New non-residential construction index 2002=100 Buildings for Miscellaneous Education 00 13% 10% 80 Agricultural 60 Buildings Buildings for Health 11% 40 15% 20

Industrial 00 Commercial Buildings 80 Buildings 10% 14% 60 Storage 40 Buildinga Office Buildings 6% 2002 2003 2004 2005 2006 2007 2008 2009 2010 21% Private Non-Residential Public Non-Residential

200 © EUROCONSTRUCT Vienna, November 2007 Netherlands

The construction of new office buildings dropped dramatically over the period 2002 up to 2005. The sector includes construction activities for business and financial services (including leasing and letting of office accommodation) and the construction of accommodation for public administration. Since 2001, construction output has fallen back from € 4,3 billion (prices 2006) to € 2 billion in 2005. This means a loss of about 55 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. In 2007, the value of building permits issued justifies the expectation that growth might increase to over 16 percent. For a great part, this is the result of an increase of the issue of building permits for accommodation for public administration. In 2008 and 2009, growth will continue on a relatively high tempo. Growth rates in these years are expected to be well over 10 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 starting soon, is the new housing for the Ministry for the Interior and Kingdom Relations and the Ministry of Justice in The Hague. The first indications for 2010 point towards continuing growth, albeit at a more modest rate.

Retail trade, wholesale trade, and the hotel and restaurant industry are the most important branches within the sector commercial buildings. In 2006, production dropped to a level of € 1.3 billion The sector is the only one that will see its production drop further in the current year. Building permits issued point towards a decrease of the production volume by over 8 per cent. The years 2008 up to 2010 are expected to bring only a minor recovery. The retail trade sector faces growing demand for new large-scale shop-property which is easy accessible for the consumer. The average floor space of shops is expanding steadily. The process of concentration of scattered retail outlet points into shopping malls is still continuing, as well as the renewal and upgrading of outdated shopping centres. The wholesale trade sector, which accounts for approximately 50 percent of the construction output for commercial buildings, benefits from an increase of the volume of world trade. The share of the hotel and restaurant industry in the building activity of the commercial sector is approximately 10 percent. In previous years, this sector was hit with declining prices and low occupancy rates. Here, prospects are only gradually improving.

Construction activity for the agricultural sector wasn’t disrupted very much by the cyclical low in the first years of the century. As early as in 2004, production for this sector started to grow again. 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. As a consequence, the agricultural sector is expected to increase its investment in buildings (under which sheds etc.). In 2007 growth is expected to accelerate to over 13 per cent. In 2008 construction output for this sector will grow further, but from 2009 on, a downward adjustment is expected.

The category ‚miscellaneous’ includes different sectors, like transport, communication, telecom and parts of the quaternary sector. 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 this respect, the extension of the Rotterdam harbour (Maasvlakte 2) and Schiphol airport are important projects. Therefore, in the coming years, construction output for this sub-sector is projected to grow. Building activity in the quaternary sector (including recreation, culture, sport and religion) is characterized by the existence of many small-scale projects. All together, building production for this sub-sector developed rather stable in the years behind and will continue to do so in the near future.

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, the tendency towards concentration also influenced construction activities in this sector. In a deliberate process of scaling-up and mergers, the actual number of schools and other educational institutions, dropped dramatically. This process led to a strong growth in demand for new buildings, culminating in double digit growth rates in 2004 and 2005 (12 and 15 per cent successively), thus compensating to some extend for the dramatic result of the private sectors in these years. Also 2006 showed good progression, as will 2007 do (+7 per cent). Now that this process has almost been completed, new construction output in this sector is likely to decrease after 2007.

A similar development as described above, applies more or less to the sector health and welfare. Less central steering and a more demand oriented construction policy, in recent years caused 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 service facilities around hospitals, as well, stimulated construction demand in this sector. In 2006 a production volume of almost € 1.4 billion was reached. For 2007 again, double digit growth is forecast (+13.3 per cent). As far as is to be foreseen by now, the latter year marks the end of a long production rally. From 2008 on, in this sector substantially less construction activity is to be reckoned with.

In 2006, renovation and maintenance of non-residential buildings faced a growth rate somewhat below 2 percent. In the preceding years losses could be kept within bounds. As was explained for the residential sector, in the non-residential sector too, renovation and maintenance develop in a more moderate way than does new construction. In 2007 production in renovation and maintenance is forecast to increase by 3.9 per cent. For the years to come, annual growth is estimated to drop to 2.8 and further to 2 per cent. Because of the gradually increasing stock, in the long run the trend in renovation and maintenance activity is positive. Now the prospects for the development of the economy are sound, private enterprises are willing to invest in renovation and renewal of their buildings. In addition, funds for necessary maintenance programmes become more easily available.

202 © EUROCONSTRUCT Vienna, November 2007 Netherlands

5 Civil Engineering Market

Construction in civil engineering contains various activities like the building of road, rail and waterway infrastructure (including bridges and tunnels), flood barriers, sea and river dikes, the laying of pipes and cables, water storage and purification facilities, sewerage systems and the preparation of building sites for new residential and non-residential buildings. Clients originate from the private sector (for instance utility and transport companies) as well as from the public sector, like governments, government agencies, local authorities, provinces and polder boards. In 2006, civil engineering output grew by 3.7 per cent to a level of € 14.6 billion. Investments in new or renewed infrastructure brought in 55 percent of that figure. Dutch statistics do not allow to distinguish between new work and renovation or upgrading of existing facilities; the figures in the category ‘new’ include both real new works and renovation. The category ‘renovation’ in fact contains only maintenance works. Growth is likely to decelerate in 2007 to 2.6 per cent. In the years thereafter, total growth is expected to decrease further to 1.3 in 2008 and to less than 1 per cent in 2010.

In recent years, the expenses on new investment lie significantly above those on maintenance activities. Investments in transport infrastructure were given high priority in the national mobility plan. Emphasis was laid on measures to safeguard the accessibility of the Rotterdam harbour and Schiphol airport, and to enlarge the capacity of the main motorways. Up till now, the necessary funds are brought in entirely by the government. Traditionally, 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 now as useful constructions to attract private capital. However, public decision-making on this point has several times been delayed.

The private sector plays an important role in initiating and financing new infrastructural works. Private investment in civil engineering is mainly commissioned by companies that are active in rail transport12, public utilities, telecommunication, seaports and airports. Today, almost € 2.5 bln. (40 per cent of all new production) originates from private companies and persons. In 2007 the production volume in this sector is forecast to grow by 5 per cent. In de years to come, growth in this sector will slow down to 2 per cent per annum.

In 2006, new civil engineering investment on behalf of local authorities, like municipalities, provinces and polder boards, equalled the production volume for the private sector. For 2007 the expected growth rate is also equal to the private sector: +5 per cent. One of the reasons for this development is the increasing activity in the opening up and the preparation of building sites, because of the growing production of new residential and non-residential buildings. In de near future, growth in this sector is expected to slow down to 1 per cent annually.

The development of the maintenance market for civil engineering works, proceeds rather steady. In 2006 an increase of 2 per cent was realized. Viewed at in a long-term perspective, this result is an absolute peak performance. In 2007 and later years, an annual growth between -0.5 and +0.6 percent is expected.

12 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. © EUROCONSTRUCT 203 Netherlands Vienna, November 2007

Civil Engineering Share in Total Construction 2003- Infrastructure Fund 2007, annual expenses 2010 mln euro bill. euro %

20 26 3000

2500 15 24 2000 10 22 1500

5 20 1000

0 18 500 2003 2 2005 2006 2007 2008 2009 2 0 0 0 1 0 4 0 2005 2006 2007 2008 2009 2010 201 Civil Engineering Volume (bill. euro) Share in Total Construction (%) Motorways Waterways Watersystem Railways

204 © EUROCONSTRUCT Vienna, November 2007 Netherlands

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 investments for own use, by non-construction companies. In addition to the value of the investments in each of the three sectors, repair and maintenance activities realised by construction firms (the SIC’93 groups of economic activities 451-455 Construction) are included, as well as the production of maintenance departments of housing corporations etc. Furthermore, do-it-yourself activities (for example maintenance done by home-owners) and unregistered production (black economy) are included. Figures on DIY and black economy are based on EIB-estimations. 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. The construction industry roughly accounts for three quarters of the total expenses on building activities in the Netherlands.

B. VAT All figures are exclusive of 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 2009 and 2010 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 and maintenance are registered under ‘renovation’, except in civil engineering. For this sector Dutch statistics do not allow to distinguish new work from renovation or upgrading of existing facilities; the figures in the category ‘new’ include both real new works and renovation. The category ‘renovation’ in civil engineering in fact contains only maintenance works.

E. New Non-residential construction (table 4a) The division of new non-residential construction investment in eight categories (table 4a) is based on the building permits (only € 45,378 or higher) issued. The category "Miscellaneous" includes construction activities for the following industries: - transport - distribution - telecom - recreation - culture - sport - religion

Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 16 306 16 334 16 358 16 377 16 403 16 433 16 464 Bevölkerung

Households ('000s) Ménages 7 091 7 146 7 191 7 247 7 296 7 346 7 398 Haushalte

Unemployed ('000s) Chômeurs 479 483 413 340 310 310 310 Arbeitslose

Unemployment rate (%) Taux de chômage 6.5 6.5 5.5 4.5 4.0 4.0 4.0 Arbeitslosenquote

Change of GDP Variation du PIB 2.2 1.5 3.0 2.7 2.6 1.8 1.8 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.2 1.7 1.1 1.8 2.0 1.5 1.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.2 2.0 3.4 3.8 3.0 2.5 2.5 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 3.4 3.8 4.3 4.5 4.5 4.5 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 19 184 6.8 7.7 6.1 8.0 5.0 3.2 0.7

Logement Renovation 16 058 1.3 3.9 2.4 3.6 2.2 2.0 2.0

Wohnungsbau Total 35 242 4.2 5.9 4.4 6.0 3.7 2.7 1.3

Non-residential construction New 9 434 -8.4 -2.2 1.2 9.2 4.4 2.3 1.5

Bâtiments non résidentiels Renovation 7 932 -5.2 -0.5 1.7 3.9 2.8 2.2 2.2

übriger Hochbau Total 17 366 -7.0 -1.4 1.4 6.8 3.7 2.3 1.8

Building New 28 618 0.7 4.1 4.4 8.4 4.8 2.9 1.0

Bâtiment Renovation 23 990 -1.0 2.4 2.1 3.7 2.4 2.0 2.0

Hochbau Total 52 608 -0.1 3.3 3.4 6.3 3.7 2.5 1.4

Civil engineering New 8 199 -10.3 1.1 5.1 4.2 2.6 1.2 1.0

Génie civil Renovation 6 404 -0.2 -0.6 2.0 0.6 -0.5 0.6 0.6

Tiefbau Total 14 603 -6.0 0.3 3.7 2.6 1.3 1.0 0.8

TOTAL CONSTRUCTION OUTPUT 67 211 -1.5 2.7 3.5 5.5 3.2 2.2 1.3

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 5.60 1.4 2.7 3.7 3.0 1.5 1.0 0.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 2,2037 NFL

208 © EUROCONSTRUCT Vienna, November 2007 Netherlands

Country/Pays/Land: Netherlands Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 57.1 62.5 72.3 63.8 65.0 65.0 63.2 Baugenehmigungen Familienhäuser

Flats Collectif 19.0 20.8 24.1 21.2 25.0 25.0 24.3 Mehrfamilienhäuser

TOTAL 76.1 83.3 96.4 85.0 90.0 90.0 87.5

Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collectif Mehrfamilienhäuser

TOTAL 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Housing completions 1+2 family dwellings Logements terminés Individuel 49.0 47.2 47.0 57.5 57.5 57.5 57.5 Baufertigstellungen Familienhäuser

Flats Collectif 16.3 19.8 25.4 22.5 22.5 22.5 22.5 Mehrfamilienhäuser

TOTAL 65.3 67.0 72.4 80.0 80.0 80.0 80.0

Housing stock Logements existants 6 859 6 912 6 970 7 026 7 080 7 134 7 188 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 55.2 55.5 55.8 56.0 56.2 56.4 56.6 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 946 11.7 15.4 8.9 7.1 -2.0 -2.0 -5.4 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 1 379 18.7 16.2 5.3 13.3 -6.0 -2.0 -1.2 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 911 -13.2 0.3 -8.2 18.6 12.2 0.9 1.6 Industriegebäude

Storage buildings Bâtiments de stockage 601 -12.7 -8.5 4.9 6.2 9.7 4.1 3.6 Lagergebäude

Office buildings Bureaux 2 032 -24.7 -17.7 0.3 16.6 12.8 10.2 4.3 Bürogebäude

Commercial buildings Commerces 1 340 -3.2 0.8 -3.6 -8.4 2.3 1.0 1.7 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 1 005 6.4 3.2 3.9 13.4 2.4 -5.7 -1.2 Landwirtschaftsgebäude

Miscellaneous Autres 1 220 -7.2 -4.9 2.1 4.3 1.4 3.3 3.9 Sonstiges

Total 9 434 -8.4 -2.2 1.2 9.2 4.4 2.3 1.5 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 2,2037 NFL

210 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier Verkehrsinfrastruktur Straßen

Railways Voies ferrées Bahnanlagen

Other transport Autres réseaux Übrige Verkehrsinfrastruktur

TOTAL 9 740 -4.6 -2.7 6.4 4.6 2.0 0.2 0.1

Telecommunications Télécommunications 321 -37.3 10.4 3.7 2.6 1.3 1.0 0.8 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 416 -6.0 2.4 3.7 2.6 1.3 1.0 0.8 Energie- und Wasserversorgung

Other Autres 3 125 -6.0 7.8 -3.9 -3.6 -1.2 3.5 3.3 Sonstiges

Total 14 603 -6.0 0.3 3.7 2.6 1.3 1.0 0.8

1) At 2006 prices, excluding taxes. 1 euro = 2,2037 NFL

Country/Pays/Land: Netherlands Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 253.5 1.0 0.7 2.7 1.9 2.0 1.3 1.3 Privater Verbrauch

Public consumption Consommation publique 135.4 -0.1 0.0 2.2 2.3 0.6 1.5 1.5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 105.3 -1.6 3.0 7.2 4.4 3.6 1.8 1.8

of which construction 60.3 -2.0 3.2 3.8 6.7 3.6 2.4 1.2

Stocks (contribution as % of GDP) Variations de stocks - 0.1 Vorratsveränderung

Exports Exportations 391.4 7.9 5.9 7.0 6.2 6.5 6.0 6.0 Exporte

Imports Importations 351.6 5.7 5.5 8.1 6.5 6.0 6.0 6.0 Importe

GDP PIB 534.0 2.2 1.5 3.0 2.7 2.6 1.8 1.8 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 2,2037 NFL

212 © EUROCONSTRUCT Vienna, November 2007 Norway

NORWAY

Prognosesenteret AS www.prognosesenteret.no

Kjell Senneset e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

Production in the construction sector has continued to increase strongly also in 2007, with a growth rate that is comparable to the record-breaking growth in the three previous years. Total increase in construction production in 2007 is, in October 2007, estimated to 6 %. From 2003 to 2007, output will have increased by almost 35 % measured in constant prices. The growth in 2006 and 2007 could have been even stronger, but have been limited by the production capacity in the construction sector, and to some degree also by lack of building materials. The last factor seems to be a global phenomenon.

Generally, it is the favourable macroeconomic conditions that can explain the boom in construction output. Including estimates for 2007, average annual growth in GDP has been 3.2 % since 2003. Excluding the oil and gas sector, which have limited influence on growth in construction output, the GDP of what is called Mainland-Norway, grew by as much as 4.7 % in the same period.

In addition to the effect from economic growth, there has been a rapid increase in the population, adding to the increased demand for new houses. Until recently, low interest rates also contributed to growth in construction, but now interest rates have been lifted to a level where they no longer add to demand towards construction products.

Much of the extraordinary strong growth in production these last years have been made possible by massive import of labour from abroad, in particular from Poland and other East- European countries. These labour reserves are still there, but as construction activity grows all over Europe, they are less easy to attract. A more significant obstacle to keep up the growth rates is, however, an increasing lack of clerks of work, engineers and other highly skilled personnel that can’t easily be recruited from abroad.

This lack of manpower is mostly confined to the building sector. Demand has grown also in the civil engineering sector, but not as fast as in the building sector. In addition, construction firms from abroad (Germany) has entered the stage in the civil engineering sector and added to the capacity. Thus, the construction firms have generally been able to meet the growing demand in the civil engineering sector with equally strong production growth. In the second half of 2007, however, it seems that also the civil engineering sector are approaching the capacity ceiling. Increase in demand in 2008 and 2009 will, however, be small compared to 2007, and changes in the production level will most likely depend on changes in demand.

The situation is different in the building sector. Demand for residential and non-residential buildings as well as for renovation services will grow also in 2008 and 2009. However, we believe that lack of production capacity will prevent further growth in the building sector in 2008 and 2009.

214 © EUROCONSTRUCT Vienna, November 2007 Norway

Construction Sector by Type in Norway to 2010 (index 2000 = 100)

180 New residential construction 170 New non-residential 160 construction Building renovation and 150 modernisation 140 Total civil engineering

130

120

110

100

90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2 Macro-economic Outlook

In the third quarter of 2007, the unemployment rate had fallen to well below the 3 % mark. At the end of the year, unemployment may be as low as 2.5 %. This is about as low it can get, and further growth in employment must come from increase in the labour force. In the years to come, GDP-growth will therefore depend on productivity growth and growth in the labour force. How fast the labour force may grow will, in turn, be dependent on how labour import develops. This import has been massive the last years, and to almost all industries, though the greatest share has gone to the construction sector. Much of the labour import is, however, on short-term contracts, and if this labour-source should dry up it could have serious negative effect on economic growth. Fortunately, there is yet now sign of this to happen.

GDP forecast The GDP-growth in 2007 will be about 3,5 %, and as much as 5 % for Mainland-Norway (excluding the oil and gas sector). The forecast for 2008-2010 from Statistics Norway indicates growth rates of about 3 % for Mainland-Norway. Including the oil and gas sector, forecasts for total GDP is about 3.5 % in 2008 and 2.5 % for 2009 and 2010. Forecasts for the Mainland economy implies a growth in the labour force of about 1 % a year and an increase in labour productivity of about 1.5 % a year.

The most important contributor to the GDP-growth in 2008-2010 is the households. Private consumption will rise on average 3.5 % a year, according to the forecasts from Statistics Norway. Public consumption is not far behind. The forecast show 3 % in yearly growth. In addition, the public sector increases investments by some 3.5 % a year. Private industries are also expected to increase investments by 3,5 % a year in 2009 and 2010, and by as much as 8 % in 2008. Export conditions are considered favourable, and export of so called traditional goods (excluding oil and gas) are expected to go up by 4 % in 2008, and as much as 6 % in 2009 and 2010. This latter forecast was, however, made on the assumption that there will be no strengthening of the Norwegian krone (NOK) from the value it had at the beginning of this year. This assumption could prove to be too optimistic, at the end of 2007 the value of our currency was already up some 3 % against the €, and much more against the dollar. If this tendency keeps on into 2008, the growth in export will clearly be hurt. Lower growth in exports could also hurt GDP-growth, but the effect will be small. Lower growth in exports will make way for increased public consumption and investment.

Trade surplus Norway’s huge trade surplus will remain huge also in the coming years. The surplus is generated by the oil and gas export, which make up some 50 % of Norway’s total export value. The last years this trade surplus has resulted in a current account surplus of some 15 % of GDP.

Prices and wages Because of the low unemployment, wages are now ticking upwards at a rate of 5,5 % a year, which is some 1,5 percentage points more than a couple of years ago. Good wages are now used much more actively by both the private and the public sector to attract new employees. However, prices have only to a small degree been following the wages upwards. The core inflation rate (the consumer price index, CPI, excluding energy and indirect taxes) is still well below 2 %. Growth in the CPI is below 1 % because of falling energy prices. Cheap imports from low cost countries like China and East Europe also helps to keep the inflation low.

Even though wages are rising faster than a couple of years ago, the speed of the wage increase are never the less surprisingly low. Some years ago, unemployment rates of 4 % would mean at least 5 % wage increase, and unemployment below 3 % would have sent the wages galloping. But the world has changed, foreign firms, mainly from Eastern Europe, have "invaded" the Norwegian economy, and price competition has toughened in many markets. However, with unemployment rate at 2.5 %, the economic debate is now about how low the unemployment may get before a wage and price spiral puts an end to the economic upturn. Statistics Norway seem to believe that the present unemployment rate is compatible with an inflation rate of 2-2.5 % and wage increases of 5.5 %, while the Central Bank of Norway seem to think that the unemployment rate must rise a bit to keep core inflation in line with their target of 2.5 %.

More about 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 is at present below the defined core inflation target of 2.5 %, even though wage increases are now at the 5.5 % level. Even though inflation is low, the Central Bank is lifting interest rates at a rather hefty pace at the moment. The bank believes that inflation has to take off sooner or later, as unemployment is below 3 % and wages increases are above 5 %. Their forecasts for the economy in 2008 and 2009 imply that they believe unemployment rates must rise to above 3 % to avoid higher inflation than the 2.5 % target. Their present interest rate track is to increase the sight deposit rate to 5.75 %, up from 5 % today. The present strengthening of the NOK could however, jeopardy this plan, since it will widen the present interest rate difference between the NOK, the € and the dollar.

State finances Thanks to huge tax revenues and other incomes from the oil and gas industry, Government finances in Norway are very healthy. The annual surplus in the state budget is generally in the 20 % range 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. However, 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.

216 © EUROCONSTRUCT Vienna, November 2007 Norway

Macroeconomic Key Indicators in Norway to 2009 (GDP, private consumption and inflation: Annual percentage changes. Unemployment: Level)

2004 2005 2006 2007 2008 2009 2010 GDP 3,9 2,7 2,8 3,5 3,7 2,2 2,7 GDP excluding 4,4 4,5 4,6 5,1 3,1 2,7 3,1 oil/gas Private consumption 5,6 3,3 4,4 6,3 3,7 3,3 3,9 Unemployment 4,5 4,6 3,4 2,6 2,5 2,4 2,5 Inflation 0,4 1,6 2,3 0,8 2,7 1,9 2,3 Source: Statistics Norway

3 Housing Market

New residential buildings The housing production has increased steadily the last 4 years, but not enough to keep up with demand. Lower unemployment level, sharp increase in the household’s real income and thus their increasingly optimistic evaluation about the future, and last but not least a big leap in immigration, has lead to a major increase in demand for new dwellings the last years.

The gap between demand and supply of new dwellings emerged more than 10 years ago. Norway got out of a depression in 1993, and demand for dwellings, new and second hand, immediately took off. Housing production increased according to demand in 1993 and 1994, but then settled around the 1994-level. The main reasons for this was lack of proper building sites in the bigger cities, where the demand increased the most. The deficit of building cites where particularly big in Oslo.

The production of new dwellings didn’t take off until 2003, but then in a few years it increased by 45 %. Over the years, the low production of new homes and the lack of building sites were growing into a major political issue, especially in Oslo, but also in other major cities. Some years ago, the political authorities of Oslo started taking measures in order to increase the supply of sites, and these efforts are now paying off. However, it will probably be close to impossible to provide sites for the 6.000 new dwelling that are needed every year to keep up with the present population increase in Oslo. The present lack of labour in the construction, would probably also have made it impossible to build 6.000 or more dwellings.

The good performance of the Norwegian economy and high population growth, 0.7-0.8 % a year, indicates that housing demand will be very high also in the years to come, not only in Oslo and some other cities, but on the national level in general. Lack of labour in the construction sector as well as lack of building sites will be obstacles that could keep housing production down also in the forecasting period.

During 2006 and 2007, a sharp increase in the prices of building materials has increased building costs, as well as ever increasing site prices, contributed to big leaps in prices of new dwellings. This big price increase obviously reduces demand, but by how much is more or less guesswork. The reduction in demand is probably small enough to avoid total demand to become lower what can actually be build, when taken into consideration the restricted site and production capacity.

In any case, it is very hard to make good estimates of how many dwellings that will be build, since we are unable to measure the effect of the factors mentioned above. Our best estimate is that it will not be possible to increase housing production much above the 2006-level of 33.000, and forecasts indicate 32.000-35.000 new dwellings each year in 2007-2010. Investment costs are about 6 bill. €.

House prices Increased housing production since 2004 has prevented prices from exploding, but could not avoid price increases in the double digit area. However, since spring 2007, the price increases are levelling off, and in autumn of 2007 there has been a slight decrease in prices. Higher interest rates and the present price level in the housing market are finally kicking in. Because of the big leaps in prices during 2006 and in the first months of 2007, average house prices will never the less be some 12 % higher this year than in 2006.

Beside the favourable macroeconomic conditions that emerged in 1993 and have been present more or less ever since, the main reason behind the increase in house prices the last 10 years or so, has been the mismatch between housing production and population growth. It was, however, a reduction in the interest rates through 2003 that initiated the present sharp price increase. Increased immigration in 2005 and 2006 kept the price increases going when interest rates started to rise in the second half of 2005. The average price of second hand homes rose by 12 % in 2004, 9 % in 2005 and 15 % in 2006. As mentioned above, this year we expect a price increase of about 12 %. 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 5-7 % annually also in 2008-2010. But the years of double digit price increases are fortunately over.

Housing renovation (RMI) The market for housing renovation made some big leaps in 2004-2006 after a couple of years with only moderate growth. Measured at constant prices, outlays rose by 6 - 8 % a year in this period. According to our analysis, 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. This will eventually lower the growth rate of this sector, but the reduction will hardly be noticeable this year. Growth rate in 2007 will probably be in the 6-8 % range. In 2008-2010 the forecast shows growth rates of 3-4 %. The value of this market is about 5,5 bill. €.

It should also be mentioned that 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 as late as in 2004. Now the vacancy rates are going down, and the incentives to rebuild offices are reduced. This could have a negative impact on the housing renovation market, but the effect is hard to quantify.

218 © EUROCONSTRUCT Vienna, November 2007 Norway

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, when buildings for agriculture, forestry and fishing are excluded. Building starts for these industries are generally about 0.5 mill m2, but for several reasons we have decided not to include these buildings in our national forecast reports for the Norwegian construction market. They are included in the Euroconstruct reports, but the forecasts are less elaborated than the other non-residential sectors.

In the last two years, non-residential building starts (excluding agriculture, forestry and fishing), has broken out of the 3-3.6 mill. m2 interval. More than 4 mill m2 where started in 2005 and 4.5 mill m2 in 2006. In 2007, square meters started will reach 4.75 mill (plus 0.5 mill m2 to agriculture, forestry and fishing). In 2008-2010, the non-residential starts will probably be in the level 4.7-4.9 mill m2, excluding agriculture etc.

Measured in € at 2006-prices, and including agriculture, forestry and fishing, the production value was 7.2 bill. in 2006. The forecast for 2007 is 7.8 bill. €, and this value will probably drift slowly upwards in the forecasting period. Lack of labour in the construction sector prevents a more rapid increase. Overall demand for non-residential buildings will most likely be higher than what is possible to build, even if higher interest rate and a stronger NOK could affect demand for some building types for the business sector negatively.

It is mainly the business sector that has contributed to the non-residential boom the last years, particularly office buildings, commercial buildings and buildings for the manufacturing industry. 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.

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 got 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. The arrangement has proved to be very popular, and have increased investments of new schools and renovation activity on existing schools. Some 250-300 000 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 the level in the forecasting period will continue to be close to 300 000 m2. Detailed investment forecasts for 2007-2010 shows an increase also in 2007 and a decline in 2008, before investments pick up again in 2009 and 2010.

Buildings for health In 2006, the second construction stage of the new hospital for the Trøndelag counties (North and South Trøndelag) in the city of Trondheim dominated figures for building starts in the health sector. In 2007, no major health building is planned. Square meter started and investments will drop significantly, probably by some 30 %. There will be a drop also in 2008, but the level will rise again in 2009 and 2010.

Industrial buildings The erection of new buildings for the manufacturing industry was reduced by 40 per cent from 2000 to 2004. This is partly due to the slowdown in the world economy in most of this

© EUROCONSTRUCT 219 Norway Vienna, November 2007 period, and partly because an overvalued NOK in 2002 and much of 2003, which reduced the competitiveness of the manufacturing industry. The growth in the world economy picked up in 2005, and the reduced value of the NOK made our export products more competitive again – and so the erection of new factories picked up considerably. In 2006, square meter started was 80 % higher than in 2004.

In 2007, the value of the NOK has again started to rise, hurting the competitiveness of our export industries. Together with increasing interest rates, this will reduce demand for new industrial buildings in the future. The effect will, however be insignificant in 2007, since decisions to build new factories this year were mostly taken last year or the years before that.

We also expect that more efficient use of floor space in the production of manufacturing goods will slow the demand, though this effect will be low in a year-to-year basis. All put together, we expect a small increase in floor space started in 2007. Investments may increase by 10 %, reflecting the big increase in number of m2 started in 2005 and 2006. In 2008-2010 the demand for new factories will drop significantly.

Storage buildings Project information indicates that the erection of storage buildings will stay high this year, but go down in 2008-2009. The low levels of 2008-2009 will probably increase the need for new buildings in 2010.

Office buildings The vacancy rate of office buildings have fallen sharply the last couple of years, thanks to strong rise in employment. Vacancy rates will continue to fall sharply also in 2007 and in 2008. New office space is necessary to fill the gap between total office space demanded and what is available on the market. This, coupled with project information, points to almost 50 % increase in floor space started for new office buildings from 2006 to 2007. Project information indicates a small reduction in new office buildings in 2008, but the strong demand for office space will probably provide for a new increase in 2009 and 2010.

Commercial buildings Strong growth in consumer spending has lead to a continuing high level of investments in new commercial buildings. An all time high was reached in 2006, and we expect a further increase this year. It will not stop there – investments will continue to increase in 2008, before it takes a small drop in 2009 – but a new increase is expected in 2010. Lack of capacity in the construction industry set a limit to growth.

The high demand for new commercial buildings is also due to political restrictions on establishing large, new shopping centres in the period 1998-2004. These restrictions are now lifted, and this contributes to the extraordinary growth in demand for new commercial buildings.

Agricultural buildings This sector also includes buildings forestry and fishing, but buildings for agriculture make up most of the floor space and the value of the investments.

Floor space started increased steadily from 2000 to 2004, mainly due to restructuring of the farming business. This trend is now reversing, mainly because the speed of this restructuring had reached a top and are about to slow down. In addition, the future of our protected agricultural industry is very uncertain, since any final conclusions from the more or less ongoing WTO negotiations seem further away than ever. A new restructuring phase could be starting in a few years – although not until after the present forecasting period.

220 © EUROCONSTRUCT Vienna, November 2007 Norway

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 at about the same level in 2007-2010 as in 2006, since we do not expect major changes in the construction of new dwellings.

Investments in new holiday houses are rising sharply – it seems to be a strong connection between floor space started for holiday houses and the price level on second hand dwellings! We expect prices on second hand dwelling to rise 12 % this year, and approximately 5-7 % in 2008-2010, so this indicates further increase in the erection of holiday houses. The last 10 years, the erection of holiday houses has tripled.

We also assume increase in the erection of assembly buildings in 2007-2010. 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 private sector, and 1/3 for the public sector. Renovation works on holiday houses and garages for the households are not included. The value of this market is probably around €1.5 bill. Most of this is building materials, and the works are carried out mostly by households. The renovation on these buildings is not included in this text or in the tables for Norway.

Model simulations of the demand for renovation services from the business sector imply that age adjusted indexes for the stock of buildings put 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, the model shows that the demand for renovation works on buildings for the private industry sector could be reduced. The main reason is higher interest rates. 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 smaller fall 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 churches. From 2008, however, this arrangement are coming to an end. We also take into consideration that the present Government (in office from autumn 2005) are set to improve the general economy of the municipalities. We believe that the increase in demand for RMI from the public sector will offset the decline from the private sector, so that the total demand will show a small increase in 2007-2010.

5 Civil Engineering Market

Investment in civil engineering works have increased steadily since the year 2000, due to higher investments in roads and metros, in power supply and until recently, in land based oil and natural gas installations. The last two years, growth rates have been as high as 12 % and 5 %, and another 5 % increase is expected in 2007. Investments in land based oil and natural gas installations are now declining, but this is compensated by increased investments in transport infrastructure.

Investments will continue to grow also in 2008, but the growth rate will fall to only 1 or 2 %. At the moment, 2009 looks to be the first year since 2001 with no growth, but the fall will be almost insignificant – 1 % or so. The reduction – if it materializes - is mainly coming from lower investments in roads (including bridges and tunnels). However, this forecast is based mostly on projects plans for new roads known today. If the Government should decide to give budget appropriation to investments in highways a higher priority (or lower, which is less likely) in the 2009 budget than we anticipate, this could have major implication for the forecasts for investments in roads. Since investments in roads make up as much as 30 % of the civil engineering market, a major discrepancy between our anticipation and the real budget for 2009 will also have implications for the forecast for the total civil engineering market.

Noticeable implications for the forecasts of the civil engineering market, although not to the same degree as investments in roads, are the budget plans for investments in railways. The present administration has as one of their major political priorities to strengthen the quality and availability of public transport, mainly by reducing commuter traffic by car. On the top of the agenda is the rebuilding and expansion of the railway network. Grants to investments in railway tracks was increased by 50 % in the 2007-budget. The 2007-level was kept in the 2008 budget, measured in constant prices, and we anticipate that grants will be high also in 2009 and 2010, may be even drifting slowly upwards from the 2008-budget.

Total investments in railways also include metros and trams. Some major projects in the Oslo and Bergen area, partly paid for by the municipalities, will keep investments in metros and trams extraordinary high in 2007-2009. The activity on some of these projects will fall in 2010, and this will probably prevent a further increase in total investments in railways, metros and trams in 2010.

Investments in the energy sector are increasing sharply in 2007, according to the latest surveys from Statistics Norway. High investments in the energy sector are needed to reduce the present shortages in energy production. While hydro electric power plants and power lines traditionally make up almost all of such investments, natural gas plants are now being built to reduce the shortage – in spite of major protests from environmental groups. They see the emission from these plants as an environmental threat, since they produce a lot of CO2 that contributes to global warming. Efforts are made, however, to build systems that can "trap" the emission of CO2 and then prevent it from going into the atmosphere.

The construction of these plants also makes it harder to give good forecasts for civil engineering investments in the energy sector since it is not well known how much of the investments in natural gas power plants that actually are civil engineering works and what is investments in equipment and installations.

We also expect investments in water supply and sewerage system to increase in the forecasting period. Such an increase is needed because much of the water supply system is old and badly need upgrading. It is estimated that 40 bill € is needed to get water supply and sewerage systems in good condition. The municipalities are the main builders of such

222 © EUROCONSTRUCT Vienna, November 2007 Norway installations, and since their economic situation has improved the last years, it seems safe to expect these investments to increase.

Information on investment trends in the telecommunication sector is scarce, but the general need for such installation in modern society indicates an increase.

Investments in land based oil and gas installations are an important sector in the Norwegian civil engineering market, though it is not specified in the master table. These investments are now falling sharply as two major projects are just completed or about to be completed. This is the reason for the lower activity in the "Other" sector in the master table in 2006-2008 compared to 2005. The rest of the "Other" sector will grow also in these years, as in 2009 and 2010.

Maintenance of civil engineering works (including management of highways, such as snow clearance) will continue to grow throughout the forecasting period. This year, the growth rate may be almost 10 %, due to a big leap in Government grants to maintenance of highways in the 2007-budget. Grants increased also in the 2008-budget, but this time focus shifted from ordinary maintenance to management. Maintenance of civil engineering works, including management of highways, are forecasted to grow by 3-4 % in 2008-2010, securing a small growth in the total civil engineering output also in 2008, 2009 and 2010.

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 4a • Education buildings: Public and private schools, universities and other schools for higher learning. • Health: Hospitals, including medical schools, clinics, nursing homes. • Industrial: Factories and repair shops, buildings for treatment plans and water supply, buildings in connection with energy production. • Storage buildings: Wharehouses, wholesales deposits, silos, cold storages, car parking houses. • Offices: Office buildings for private and public services, town halls, banks, media building. • Commercial: Super markets, other buildings for retail shops, department stores, hotels and restaurants, exhibition buildings, buildings for seminars and kongresses. • Agriculture: All buildings for farms, and also including buildings for forestry and fising. • Miscellaneous: Holiday houses, private garages, cultural and entertainment buildings, sports halls, churches, police stations, prisons, emergency buildings.

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, Statistics Norway and 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.

Datum : Ocotber 18 2007 Name and signature of respondent: Kjell Senneset

224 © EUROCONSTRUCT Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 4 577 4 606 4 640 4 681 4 721 4 759 4 799 Bevölkerung

Households ('000s) Ménages 1 993 2 006 2 021 2 038 2 056 2 072 2 090 Haushalte

Unemployed ('000s) Chômeurs 107 112 86 68 66 67 65 Arbeitslose

Unemployment rate (%) Taux de chômage 4.5 4.6 3.4 2.7 2.6 2.6 2.5 Arbeitslosenquote

Change of GDP Variation du PIB 3.1 2.7 2.8 3.5 3.7 2.2 2.7 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0.4 1.6 2.3 0.5 2.7 1.9 2.3 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.0 3.4 3.7 7.0 4.5 4.0 3.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.0 2.2 3.1 4.9 5.7 5.8 5.5 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.4 3.7 4.1 4.8 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 5 818 24.1 13.7 9.0 6.7 -1.6 0.8 3.5

Logement Renovation 5 303 5.9 8.0 7.2 6.0 4.0 4.0 3.0

Wohnungsbau Total 11 121 14.4 10.9 8.1 6.4 1.1 2.4 3.3

Non-residential construction New 7 218 18.2 6.2 13.7 7.7 -0.4 0.9 4.2

Bâtiments non résidentiels Renovation 4 767 4.0 2.4 3.7 1.8 0.0 0.6 2.0

übriger Hochbau Total 11 984 11.7 4.6 9.5 5.4 -0.2 0.8 3.4

Building New 13 036 20.7 9.5 11.5 7.3 -0.9 0.9 3.9

Bâtiment Renovation 10 070 5.0 5.2 5.5 4.0 2.2 2.5 2.6

Hochbau Total 23 106 12.9 7.5 8.8 5.9 0.4 1.6 3.3

Civil engineering New 4 112 2.3 12.6 4.9 4.6 1.0 -1.3 1.2

Génie civil Renovation 2 096 -1.6 -0.2 0.6 8.7 2.6 3.6 3.6

Tiefbau Total 6 209 0.8 7.8 3.4 6.0 1.6 0.4 2.0

TOTAL CONSTRUCTION OUTPUT 29 315 10.0 7.6 7.6 5.9 0.6 1.3 3.0

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 1.81 15.1 18.2 2.7 5.0 0.0 0.0 0.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 8,000 NOK

226 © EUROCONSTRUCT Vienna, November 2007 Norway

Country/Pays/Land: Norway Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 16.5 16.0 18.5 18.0 16.5 17.0 17.5 Baugenehmigungen Familienhäuser

Flats Collectif 16.4 16.0 17.9 18.0 17.0 18.0 18.5 Mehrfamilienhäuser

TOTAL 32.9 32.0 36.5 36.0 33.5 35.0 36.0

Housing starts 1+2 family dwellings Logements commencés Individuel 14.3 16.6 16.2 17.0 16.1 16.9 17.0 Baubeginne Familienhäuser

Flats Collectif 15.7 15.0 17.1 17.0 15.9 17.1 18.0 Mehrfamilienhäuser

TOTAL 30.0 31.6 33.3 34.0 32.0 34.0 35.0

Housing completions 1+2 family dwellings Logements terminés Individuel 12.4 15.0 13.8 16.0 16.0 15.5 16.0 Baufertigstellungen Familienhäuser

Flats Collectif 11.2 14.5 14.8 17.0 17.0 16.0 17.0 Mehrfamilienhäuser

TOTAL 23.6 29.5 28.6 33.0 33.0 31.5 33.0

Housing stock Logements existants 2 370 2 390 2 405 2 420 2 440 2 460 2 490 Wohnungsbestand

thereof second homes dont résid. secondaires 370 375 380 385 390 395 400 davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 77.5 77.5 77.0 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 671 41.5 -4.3 2.9 3.4 -6.4 6.7 2.8 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 759 13.8 -31.7 40.6 -30.4 -1.4 20.7 6.6 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 610 10.2 11.4 29.2 11.4 -5.5 -14.0 -3.2 Industriegebäude

Storage buildings Bâtiments de stockage 654 16.6 13.2 4.5 1.6 -1.3 -2.0 9.0 Lagergebäude

Office buildings Bureaux 462 -30.4 32.1 37.6 49.7 -5.2 4.2 12.7 Bürogebäude

Commercial buildings Commerces 1 128 40.1 33.4 16.1 6.7 7.1 -4.8 3.2 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 485 23.1 -1.4 -2.9 -8.8 -3.9 -2.1 3.3 Landwirtschaftsgebäude

Miscellaneous Autres 2 449 18.1 10.4 8.7 17.1 1.3 2.3 2.9 Sonstiges

Total 7 218 18.2 6.2 13.7 7.7 -0.4 0.9 4.2 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 8,000 NOK

228 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 3 361 2.3 11.2 8.1 8.3 1.6 -2.6 1.5 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 181 10.4 -13.2 -16.6 89.6 12.7 6.5 -0.0 Bahnanlagen

Other transport Autres réseaux 124 4.8 3.1 -6.0 -1.5 2.6 0.2 0.3 Übrige Verkehrsinfrastruktur

TOTAL 3 666 3.0 9.0 6.0 11.9 2.6 -1.7 1.3

Telecommunications Télécommunications 183 5.2 4.9 0.0 5.0 5.0 5.0 5.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 787 20.9 11.8 12.7 6.7 -1.0 5.8 -31.6 Energie- und Wasserversorgung

Other Autres 1 572 -9.3 4.2 -5.5 -8.3 -0.3 2.9 23.7 Sonstiges

Total 6 209 0.8 7.8 3.4 6.0 1.6 0.4 2.0

1) At 2006 prices, excluding taxes. 1 euro = 8,000 NOK

Country/Pays/Land: Norway Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 109.2 5.6 3.3 4.4 6.3 3.7 3.3 3.9 Privater Verbrauch

Public consumption Consommation publique 52.3 1.5 1.8 3.3 2.7 3.2 2.7 3.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 50.0 10.2 11.2 7.4 7.8 6.6 4.0 3.6

of which construction 25.1 13.9 9.2 9.0 6.0 -0.0 0.8 3.5

Stocks (contribution as % of GDP) Variations de stocks 8.4 1.7 2.7 3.1 2.4 2.3 2.2 2.1 Vorratsveränderung

Exports Exportations 125.3 1.1 0.7 1.6 2.9 4.6 2.4 2.9 Exporte

Imports Importations 76.2 8.8 8.6 8.2 6.1 6.3 5.3 5.2 Importe

GDP PIB 269.0 3.1 2.7 2.8 3.5 3.7 2.2 2.7 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 8,000 NOK

230 © EUROCONSTRUCT Vienna, November 2007 Poland

POLAND

PAB – Polish Construction Research & Forecasting www.euroconstruct.pl

Mariusz Sochacki e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

Construction Market in Poland till 2010 1 Summary

Macroeconomic indicators noted by Central Statistical Office (CSO) in 2007 show that the Poland economy is now in the midst of the strong economic expansion, sustaining a stable inflation rate, and maintaining a safe external position. According to CSO data, the GDP has increased in 2005 by 3.6% as compared to 6.2% in 2006; in the first half of 2007 it was even 6.8%. In line with the present projection, the rate of GDP growth in 2007 will reach 6.5% and in subsequent years will be significantly higher than 5.8%. The sources of the economic growth (recovery of investment demand, stable and high growth of consumption and fast growing export) indicate that the currently observed economic trends are permanent. In the year 2007, after the period of crisis and stagnation (2001-2003), the construction industry has become the leader of the ranking of the fastest developing economic sectors. Construction industry has noted in the period January – September 2007 the highest of all increase of the production, exceeding the previous year’s level by 20% (in entities with more than 9 employees), as a consequence of the picks in the first two quarters. It resulted from favourable weather conditions in January and February as well as from a ‘base effect’. Also, rapid increase of the sale of the industrial production and in the domestic and foreign trade has been observed in that period. The very high dynamics of the economic growth was possible due to increase of the domestic demand by 7.9%. The significant improvement of the financial situation of the companies, as compared to the previous year, has been noted. The wages and pensions have demonstrated real growth. Labour market performance was still improved. The average employment in enterprise sector in the three quarters of 2007 was by 4.6% higher than a year before. In September 2007, the number of registered unemployed was lower comparing to December 2006, and the registered unemployment rate in September accounted for 11.6% (against 14.9% in December 2006). Strong consumption growth was supported by a further increase in the current income of households. A continuing fast pickup in consumer loans was another factor conducive to the sustained robust growth in consumption. High growth rate in retail sales, in conjunction with a sustained recovery in the labour market and optimistic consumer sentiment, indicate that consumption demand continued to grow rapidly in three quarters of 2007. The annual average consumer price index (CPI) – inflation in the third quarter of 2007 was higher than that in the third quarter of 2006 and this was the reason of increasing of inflation rate within 9 months of 2007 from 1.5% to 2.3%. The reverse tendencies have been noted in the growth the industry producer price index was lower than in the corresponding period of 2006 and amounted to 3.6% as compared to 6.3% in the previous year. The record-breaking increase of demand for construction work has caused the also record- breaking growth of construction prices within last ten years. According to the CSO estimations, in nine months of 2007 the prices in construction and assembly production has risen by 7.1% in comparison to the corresponding period of the previous year, however, PAB-PCR&F estimates that the increase of prices in the Polish construction was by 5 per cent points higher. This situation has been caused by surplus of demand, resulting in shortages of construction materials, however, it seems to be periodical situation. In accordance with our expectations presented in the June report, after the high increase of the construction production in the first and second quarter of 2007, the dynamics will be several times lower in the last month of the year and annual rate of growth of construction production will be significantly lower.

232 © EUROCONSTRUCT Vienna, November 2007 Poland

Also in accordance with our expectations in the previous reports, the lack of the skilled staff will bring the negative results for the possibilities of the development of the construction in 2007, and that it will cause the significant increase of the prices in construction, the process has really taken place. In line with the present projection we were led to revise our June estimation for rate of growth for construction in 2007 from 10.6% to 13.1%. This upward revision is caused mainly by the higher than expected level of outlays of commercial and storage and private housing construction. The growing demand for the construction work in the next years will be limited by the lack of possibilities of its fulfilment by the domestic construction potential. The biggest increase of construction production volume in connection with organized championships in Poland in 2012 will take place in the years 2010-2012. Thus, a significant rise of investment outlays on construction in connection with EURO 2012 will take place in 2008 and 2009. According to the forecast, we were led to revise our June estimation for rate the construction production till 2010. According to the our last forecast in 2008 will increase by 15.2 % and in 2009 and 2010 it will increase by 12% and 8.7%, respectively.

Construction Sectors by Type in Poland till 2010 ( 2005 year = 100)

250 2005=100

200 New Residential

New Non- residential 150 R& MB u ild in g

Civil Engineering 100

50 2004 2005 2006 2007 2008 2009 2010

Source: PAB – PCR&F

We predict that till 2010, the highest growth of the construction production will be observed in civil engineering sector, which will be higher by 130% than that noted in 2005.

2 Macro-Economic Outlook

Poland economy is now in the midst of strong economic expansion, sustaining a stable inflation rate, and maintaining a safe external position. Since the second quarter of 2005, the rate of economic growth in Poland has been steadily increasing. CSO data on the GDP in the first half of 2007 have confirmed that the Polish economy continues to expand briskly and the consolidating recovery is present in all sectors of the economy. According to the CSO data the GDP growth increased by 6.8% in the first half of 2007. The most important factor in GDP growth is a strong rise in investment and consumption. Export continues to grow at a rapid pace, yet due to recovery in domestic demand and concurrent import acceleration. The real growth of gross fixed capital formation amounted to 23.1% in the first half of 2007. Growing investment activity has been observed in all main sectors of the economy. As it was expected, the growth rate of investment in the second half of 2007 continued to rise. However, in the last month of the analysed period the dynamics was significantly lower.

Changes of the GDP and gross domestic fixed capital formation in Poland in the consecutive quarters of 2004-2007 (y-o-y), in %

30 boom 25 GDP GDFCF 20

% 15 union effect 10

1 2 3 4 2 Q4 Q Q2 Q3 Q4 Q1 Q Q3 Q4 Q1 Q2 Q Q Q1 Q 6 7 005 200 200 2004 2

Source: PAB – PCR&F.

Strong investment revival is expected to be continued in the years to come. Strong economic growth is accompanied by accelerating employment growth and decline of unemployment rate. Average wages in the economy have been growing faster than labour productivity, leading to the rise of unit labour costs. The acceleration of GDP growth and further recovery in the labour market are still accompanied by a low, though growing, inflation and a low, though gradually increasing, current account deficit. Strong consumption growth was supported by a further increase in the current income of households. A continuing fast pickup in consumer loans was another factor conducive to the sustained robust growth in consumption. Also the situation on the labour market has improved, what was evidenced by the fall of unemployment rate from 15.2% in September 2006 to 11.6% in September 2007, it means by about 3.6 percentage points. The results of the Polish economy in the first half of 2007 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 investment outlays construction and industrial production, as well as sale and consumption demand. The significant increase of the real wages has also increased the possibilities of the growth of individual consumption in 2007. After rapid growth in three quarters of 2007, we expect some deceleration in the next quarter. As a result, the annual rate of growth of the GDP in 2007 should be equal to 6.5%.

234 © EUROCONSTRUCT Vienna, November 2007 Poland

Prognosis concerning GDP and gross domestic fixed Macroeconomic Key Indicators in Poland till 2010 capital formation in Poland till 2010 (year of year)

% % 20 18 04 05 06 07 08 09 10 16

14 GDP 5.4 3.6 6.2 6.5 5.8 6.2 6.0 12

10 Private 4.3 2.0 4.8 5.3 5.0 5.1 4.7 8 consumption

6 Unemploy- 19.1 17.6 14.9 12.0 11.0 10.2 9.5 4 ment rate

2 0 Inflation 3.5 2.1 1.1 2.0 2.5 3.0 2.8 2005 2006 2007 2008 2009 2010

Gross Domest i c Product Invest ment out l ays

Source: PAB-PCR&F

Construction industry has noted in the nine months of 2007 the highest of all increase of the production, exceeding the previous year’s level by 20% (in entities with more than 9 employees), as a consequence of the picks in the first two quarters. It resulted from favourable weather conditions in January and February as well as from a ‘base effect’. The lack of the skilled staff will bring the negative results for the possibilities of the development of the construction in 2007, and that it will cause the significant increase of the prices in construction, the process has really taken place. In our opinion the price collusions took place between some producers and commercial networks selling the building materials (mainly wall materials). They pursued towards the rapid change of unfavourable (for them) price relations, being in contrast with the market boom and big profits created by developers. As a consequence an "explosive" growth of the prices of several basic materials, including Portland cement, has been observed. Simultaneously, the problems with skilled staff have been still more intensive on the private and public construction sites in all construction segments. This was to some extent the result of big increase of the construction demand, but first of all this was the effect of losing about half people potential in the construction industry during the period of poor market conditions and mass economic emigration. As a consequence the construction market, stable and predictable until the end of 2006, within the first half of 2007 became less predictable, leading to the total unbalancing of the prices and return to the contractor’s market, when the contractors set up the prices. These phenomena have affected particularly the residential construction and conditions of construction of the public objects. The projects in that range have been stopped not only at the stage of realisation, but mainly at the stage of the contracting in the framework of the public orders. The situation on the construction market in 2007 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 2007 was higher by almost 13% as compared to the nine months of 2006.

Changes in sold production of construction, building materials and in number of employees in construction in I – III quarters 2002-2007

2002 2003 2004 2005 2006 2007 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 2007 has increased by about 17.5% in comparison to the price level of nine months of 2006. According to our estimations, the value of the Polish construction market in three quarters of 2007 in current prices amounted to about PLN 98 bln., ie. EURO 26 bln. The most rapid increase of sales value of construction production was noted in construction companies employing more than 9 persons.

The research performed by PAB-PCR&F under the framework of Construction Monitoring shows that the following phenomena and trends were observed in the Polish construction in three quarters of 2007:

1. Significant growth of outlays on residential and commercial construction: the share of the buildings construction in the object structure of the construction production after 9 month of 2007 has increased by 2.7 pp. There was observed a decrease of the share of civil engineering construction, including roads construction, by 3.2 pp. 2. The highest increase of the construction production was noted in Dolnoslaskie and Podlaskie Voivodships - an increase by 33%. The production has been concentrated in three voivodships: Mazovia Voivodship 30%, Silesia Voivodship 11% and Posnania Voivodship 10%. 3. The average monthly gross salary in the construction industry in September 2007 was PLN 2 880 and was by 16% higher than in the corresponding month of the previous year. 4. The economic-financial indicators of the construction companies have been significantly improved in the first half of 2007. 5. Prices of construction-assembly production have increased by 7.1% in the nine months of 2007 (according to the Central Statistical Office‘s estimations). PAB-PCR&F estimates that the increase of prices in the Polish construction was by 5 per cent points higher. Moreover, we were led to revise our June estimation for rate of growth for construction in 2007 from 10.6% to 13.1%. This upward revision is caused mainly by the higher than expected level of outlays on buildings. According to the forecast, the construction production in 2008 will increase by 15.2% and in 2009 it will increase by 12%. We expect the deceleration of the growth rate to 8.7% in 2010.

236 © EUROCONSTRUCT Vienna, November 2007 Poland

3 Residential Construction

Intensive movement on the real estates market, observed in 2006 and 2007, has caused very fast growth of the prices of dwellings, driving the market conditions for developers companies and for banks giving the mortgage loans. As a result, a rapid increase of the number of issued construction permits has been noted, as well as the started constructions of new objects and completion of the zero- and raw- status objects. The highest decreases in social rental fund and municipal dwellings were noted (respectively by 20.6% and 46.5%) but their share in the dwellings structure is not essential. After three quarters of 2007 the Central Statistical Office has registered 87 245 dwellings as completed, that means by 6.5% more than in three quarters of the previous year. In private construction 47 576 dwellings were turned over, i.e. by 20.8% more. The equally high rate of the growth has been noted in the buildings for sale or rent – by 21% (to 29 410 dwellings) and in the company housing construction – by 24.9% (to 221 dwellings); fall has been noted in the municipal construction - by 37% less (to 1424 dwellings), in the social housing construction - by 29% (to 3 191 dwellings) and cooperative construction - by 9% (to 5 243 dwellings). As a consequence, a share of private construction increased to 54.7% (growth by 3.2 pp), as a result of an improvement of financial situation of households and better access to housing credits. The share of the dwellings completed in the developers - investors’ buildings for sale or rent has increased from 31.7% in three quarters of 2007 to 33.7% in three quarters of 2007. The average usable floor space per 1 completed dwelling during three quarters of 2007 equalled to 106.5 sq m and was by 3.3 sq m lower than during three quarters of 2006. The PAB estimates that very high indicator of the private ownership of dwellings has been reached in Poland; this share in 2007 has exceeded 75.7%. Big increase of the prices of the building materials and services and shortage of the skilled workers has caused the acceleration of decision of many investors on the range of starting the construction of the new houses. This led to the revival in the range of issuing the construction permits, number of which during three quarters of 2007 was equal to 182.9 thousands (by 51.9% more than in the previous year). The number of the construction permits issued in the private housing construction was equal to 85.4 thousands, that means by 47.0% more than a year ago, and developers - investors’ buildings for sale or rent was equal to 83 thousands, that means by 62.9% more than a year ago. The corresponding increase of the number of the started new buildings was 141.1 thousands (by 38.8% more than in the previous year), including developers - investors’ buildings for sale or rent equal to 55.6 thousands, that means by 60.7% more; private housing construction was equal to 75.2 thousands, that means by 34.6% more. As far as credits are concerned, their value increased in March by 29.1% comparing to the corresponding month of the previous year. Such an increase was caused mainly by high growth in credits for households (37.7%), as a result of further improvement in financial situation of households, as well as positive assessment of future business outlook. It caused both residential and consumption credits. Significant increase in the level of prices of flats in the 2006 has been stopped in the first half of 2007. Because their high level led to reduction of the availability of flats for households (despite a rise in household incomes and accessibility of housing loans), in the third quarter of 2007 the first symptoms of decreasing of the flats prices have been observed. This was the consequence of growing supply of the flats offered in the cities with simultaneous lack of acceptation for their high prices.

Change in percentage of the issued permits for dwelling construction and the number of the started dwellings in 2000-2007 in %). 60

%20

0 2000 I half 2001 I half 2002 I half 2003 I half 2004 I half 2005 I half 2006 I half I-III Q 2001 2002 2003 2004 2005 2006 2007 2007 -20

-40

construction permits dwellings started -60

Source: PAB – PCR&F

The fall of the flats prices in the cities has also been involved with the growth of the number of houses completed around the big cities, with the costs of construction significantly lower than the cost of purchasing of the flats offered by the developers. Previous increase of the prices of the completed dwellings caused the worsening of housing affordability index not only for the less affluent groups of people, but also for the middle class, and particularly for young people, that want to emigrate. As a consequence, a slow reduction of interest in the purchase of flats by the part of households starts to be observed. According to the tentative estimations, the growth of housing investments in 2007 has been significant higher than expected in June 2007 and the PAB estimates that outlays for housing construction were by 15% higher than in the previous year. According to the new forecast, the housing construction will grow by 12.1% in 2008, by 10.1% in 2009 and by 7.7% in 2010.

238 © EUROCONSTRUCT Vienna, November 2007 Poland

4 Non-residential Construction

Public non-residential construction Together with accession of Poland to EU and inflow of the structural funds to the local self- governments, the revival in the range of the public buildings (cultural objects, schools, hospitals, sport, etc.) construction has been observed. Those positive tendencies, observed in 2005 and 2006, have been stopped in the first half of 2007 as a result of big chaos on the construction market. The chaos symptoms were demonstrated by apparent shortage of the building materials and speculative growth of their prices, as well as by lack of skilled staff and rapid increase of the wages in the construction. These phenomena have caused the stopping of the public construction during six months of 2007, what will affect negatively the degree of using of the EU funds granted for those aims to Poland in the whole year 2007. We expect that the rate of investing will be more than two times lower than expected before. We assess that in three quarters of 2007 the public non-residential construction has showed the stagnation tendency. According to the forecast, growth of public investments, as schools and hospitals, will amount to 4% in 2007. The bigger investment outlays from the EU auxiliary funds are expected in the next years.

Private non-residential construction Good economic prospects for Poland, confirmed by the foreign auditors, and still bigger inflow of the direct investments from abroad creates big demand for development of the 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. We expect that he high rate of the economic growth in 2007 – 2010 will cause the increase of investments in the range of the private commercial construction, not only the trade and service objects but also the office ones. At now, the investors are seeking for new places for trade and service buildings in the big cities. Increase of affluency of the households, involved with expected economic acceleration in the next years will cause the increase of demand and profitability of the trade investments, causing also the increase of the numbers of the investors in that sector. 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 estimations 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. Significant growth noted in the range of industrial and warehouse objects has been caused by the increasing of the expenses for the construction work in the industrial and commercial objects. The biggest surface of the non-residential buildings with building permits issued in 2006 has been noted in: Wielkopolskie voivodship – 2 678.8 thous. m2, Mazowieckie voivodship – 2 645.30 thous. m2, Dolnośląskie voivodship – 2 198 thous. m2, Sląskie voivodship – 1 703,5 thous. m2, Małopolskie voivodship – 1 369,6thous. m2 and Łódzkie voivodship – 1 184,6 thous. m2 . The biggest share in the voivodship structure of the surface in the buildings with building permits issued in 2006 had the Wielkopolskie voivodship – 15.1%, Mazovia voivodship 14.9%, Dolnośląskie voivodship 12.4%, Sląskie voivodship 9.6% and Malopolskie voivodship 7.7% - the share of these five voivodships is almost 60%.

Number and changes surface of new non-residential buildings with building permits issued in Poland 2006 according to voivodships m2 % 2006 changes y-o-y 3000000 100 80 2500000 60

40 2000000 20 1500000 0 -20 1000000 -40

-60 500000 -80 0 -100 skie skie sko- ą ą ń l l ódzkie ś Ś Ł opolskie ł Opolskie Podlaskie Lubelskie Lubuskie Pomorskie pomorskie tokrzyskie Kujawsko- mazurskie Ma ę Warmi Dolno Mazowieckie Wielkopolskie wi Podkarpackie. Ś

Zachodniopomorskie Source: PAB – PCR&F

The Polish investment market is very interesting for institutional investors expanding their property portfolios by new transactions, most recently in the idustry and logistic also commercial sector. According to the estimations of the National Bank of Poland, the value of foreign funds inflow to Poland in first half 2007 was about EUR 6 billion. The new field of activity in case of private construction will be created thanks to organizing the UEFA European Football Championship in 2012. According to the tentative estimations, the growth of total non- residential construction in 2007 has been higher than expected in June 2007 and the PAB estimates that overall public and private non-residential construction were by 12.6% higher than in the previous year. In line with the present projection, the construction production in 2008 will increase by 15.2% and in 2009 it will increase by 12%. We expect the deceleration of the growth rate to 8.7% in 2010.

240 © EUROCONSTRUCT Vienna, November 2007 Poland

5 Civil Engineering

We assess that in three quarters of 2007 the civil engeneering construction has showed the limitations of announced by the Government high rate of the growth in the range of infrastructural construction. The main reason of delaying in starting new projects was the necessity of the changes in the tenders conditions (prices) as a result of a sudden changes of financial conditions for the projects being completed and prepared to realisation. Lack of skilled workers and rising prices of building materials create the situation that offerers on bids demand even two-three times much reward than before the year. Thus, completion of the planned public investments in the sector of the infrastructure and involved outlays has not been reached in 2007. Moreover, we were led to revise our June estimation for the rate of growth for non-residential construction in 2007 from 19.4% to 14.2%. This downward revision is caused mainly by significantly lower than expected level of outlays for roads. The main driving force of development of engineering construction will be road engineering, an acceleration of tasks realisation will become reality as a result of organization of the European Championships in Poland and Ukraine in 2012. According the new "Construction Programme for National Roads in 2008 – 2012" the Government is going to spend PLN 121 bln for construction of roads and motorways in 2008 – 2012. On average, it is more than PLN 24 bln annually. Under the programme, the key investments are oriented to complete Motorways A1 (by 2010), A2 and A4. It is a priority to build Expressways (North – South) S19 and S3, and investments related to EURO 2012. The programme has been drafted under Article 117 (2), Public Finance Act of 30 June 2005. It is comprised of the objectives regarding development and modernisation of road infrastructure, including those within EU financial perspectives of 2004-2006 and 2007-2013, and also the objectives implemented without EU support. As Poland and Ukraine was granted a right to organise EURO 2012, it was necessary to draft a programme for development of road connections between those cities involved in EURO 2012, and transboundary links. Total worth of those objectives for EURO 2012 is 26,785,347,000 PLN. The estimated expenditure for financing the programme within all implementation period is 121,000,000,000 PLN. The programme provides financing sources for the Programme in respective phases of its implementation. It is expected that total budget expenditure for implementation of the Programme will amount to 113,270,200,000 PLN, including 34,964,435,000 PLN as a state subsidy for those projects supported by EU (Cohesion Fund, European Regional Development Fund in a previous and present financial perspective). The Programme will also be financed by National Road Fund with the estimated amount of 7,726,500,000 PLN. The Programme will be implemented by General Directorate for National Roads and Motorways (GDDKiA) and special purpose road companies established under Act of 12 January 2007 on special purpose road companies under the supervision of transport minister. The Programme stipulates the following objectives in 2008-2012: • construction of motorway network with total length of 1,676 km (including those sections built under Public Private Partnership (PPP) – 473 km; • construction of expressway section with total length of 2,267 km; • reinforcement of road bearing capacity to 115 kn/axle; • construction of 58 road bypasses in round towns with intensive transit traffic so as to protect the bypasses from new buildings; • reconstruction of those sections of national roads so as to improve safety on roads, including "traffic calming" programme on those sections going through small towns, and on one-level crossroads with level crossings;

• improvement of transit traffic and traffic servicing in agglomerations; • improvement of national roads condition so as to make 75% national roads good and 10% - satisfacory. In 2008-2012, it is planned to build 620 km motorways (additionally 473 km motorways in PPP), 1973 km expressways, and 58 town bypasses with total length of 393 km. Moreover, other national roads of 1163 km will be reinforced or modernised. Investment priorities till 2012: Motorway A1 (construction on all length): Gdańsk – Toruń – Łódź – Piotrków Trybunalski – Częstochowa – Gliwice – GorzyczkMotorway A2 (completion of construction): Świecko – Poznań – Łódź – Warszawa; Warszawa –Siedlce under way till 2014; Motorway A4 (completion of construction): state border – Jędrzychowice – Krzyżowa – Legnica – Wrocław – Opole – Gliwice – Katowice – Kraków – Tarnów – Rzeszów – Korczowa – state border; Expressway S3 (construction): Szczecin – Parnica – Gorzów Wielkopolski – Zielona Góra – Legnica – Lubawka; Nowa Sól – Legnica under way till 2013; Expressway S5 (construction): Nowe Marzy – Gniezno – Poznań ("Kleszczewo" Junction); Expressway S7 (construction on all length): Gdańsk – Elbląg – Olsztynek – Płońsk – Warszawa – Grójec – Białobrzegi – Jedlińsk – Jędrzejów – Kraków and Myślenice – Lubień – Rabka; Expressway S8 (construction): Wrocław Psie Pole – Syców –Piotrków Trybunalski – Warszawa – Ostrów Mazowiecka – Zambrów – Białystok; Białystok – Augustów – Budzisko under way till 2015; Expressway S17 (construction): Warszawa ("Zakręt" Junction) – Garwolin – Kurów – Lublin -Piaski; Expressway S19 (construction): Stobiernia – Lutoryż – Barwinek; Białystok – Międzyrzec Podlaski – Lubartów – Kraśnik – Stobiernia under way till 2014; Expressway S69 (construction on all length): Bielsko Biała – Żywiec –Zwardoń. Under the Programme, expenditure on investments is as follows: • motorways – 18,153.5 mln PLN; • expressways – 42,671.3 mln PLN; • bypasses – 6,498.2 mln PLN; • reinforcement and reconstruction – 4,781.7 mln PLN; • preparation works and supervision – 8,863.2 mln PL; • other investment expenditure (office equipment, patrol cars) – 1,634.6 mln PLN; • programme reserve and reserve for guarantee securities and litigations – 20,368.5 mln PLN. The Programme also contains the category "road maintanance" – 18,029 mln PLN. The Programme lays down a basis for application for state funds in 2008 and later. According to the forecast, we were led to revise our June estimation for rate the civil engeenering construction till 2010. According to the our last forecast in 2008 will increase by 31.3% and in 2009 and 2010 it will increase by 17.4% and 12.5%, respectively.

242 © EUROCONSTRUCT Vienna, November 2007 Poland

APPENDIX – DEFINITIONS

Statistical definitions for the construction of the Polish national report The statistics for different sectors refers to gross fixed capital formation in buildings and civil engineering, exclusive of VAT, within different sectors according to annual reports of the national accounts, issued by the CSO of Poland. The figures exclude the investor's costs of design, planning and administration of the construction projects. Table 1. • Number of population at the end of the year • Number of and unemployment rate are based on the data of the Polish Central Statistical Office, not on ILO rates.

Table 2 The sectors include the following kinds of economic activity: Residential construction Single-famiły houses and multi-famiły buildings for permanent living Private non- residential construction Agriculture, forestry, fishing Mining, manufacturing, construction Wholesale and retail trade Restaurants and hotels Financing, insurance, business services Leisure houses, services Public non- residential construction Schools, universitates and hospitals and healthbuildings and services by governmental authorities Civil engineering All kinds of roads and brdiges, railways Telecomunication Electricity, gas, water suppły, sewage disposal transport Energy and water works DIY included VAT excluded Table 3 Share of private housing in total housing Home ownership rate resources in % 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.

Vienna, November 2007 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 38 174 38 157 38 120 38 080 38 040 38 000 38 000 Bevölkerung

Households ('000s) Ménages 13 525 13 615 13 700 13 805 13 920 14 000 14 100 Haushalte

Unemployed ('000s) Chômeurs 3 000 2 773 2 310 1 820 1 680 1 580 1 500 Arbeitslose

Unemployment rate (%) Taux de chômage 19.1 17.6 14.9 12.0 11.0 10.2 9.5 Arbeitslosenquote

Change of GDP Variation du PIB 5.3 3.6 6.1 6.5 5.8 6.2 6.0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 3.5 2.1 1.1 2.0 2.5 3.0 2.8 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 2.5 2.3 3.6 12.5 6.5 5.0 5.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 7.0 6.5 6.0 6.3 6.5 6.4 6.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 12.0 10.0 9.0 8.0 8.0 8.0 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 4 445 5.3 4.8 9.2 15.6 12.1 10.1 7.7

Logement Renovation 2 700 7.5 4.0 3.3 3.8 3.0 2.7 3.3

Wohnungsbau Total 7 145 6.2 4.5 6.9 11.1 8.9 7.6 6.3

Non-residential construction New 7 789 3.5 2.2 12.0 18.2 7.6 11.8 7.2

Bâtiments non résidentiels Renovation 3 602 4.0 7.0 9.1 3.6 3.4 4.0 3.3

übriger Hochbau Total 11 391 3.7 3.7 11.1 13.6 6.4 9.6 6.2

Building New 12 234 4.2 3.1 11.0 17.3 9.2 11.2 7.4

Bâtiment Renovation 6 302 5.5 5.6 6.5 3.7 3.2 3.4 3.3

Hochbau Total 18 536 4.6 4.0 9.4 12.6 7.3 8.9 6.2

Civil engineering New 6 126 3.7 13.5 13.6 16.8 40.8 22.8 14.3

Génie civil Renovation 2 710 5.0 4.5 21.2 8.2 8.2 1.3 5.5

Tiefbau Total 8 836 4.5 10.7 15.8 14.2 31.3 17.4 12.7

TOTAL CONSTRUCTION OUTPUT 27 372 4.6 6.0 11.4 13.1 15.2 12.0 8.7

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 14.61 2.0 2.0 15.8 9.6 9.0 12.0 8.5 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 3.8951

246 © EUROCONSTRUCT Vienna, November 2007 Poland

Country/Pays/Land: POLAND Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 59.0 58.9 73.7 105.0 85.0 85.0 90.0 Baugenehmigungen Familienhäuser

Flats Collectif 46.8 56.9 86.8 97.8 100.0 100.0 110.0 Mehrfamilienhäuser

TOTAL 105.8 115.8 160.5 205.0 185.0 185.0 200.0

Housing starts 1+2 family dwellings Logements commencés Individuel 61.0 58.8 69.4 96.0 87.0 75.0 82.0 Baubeginne Familienhäuser

Flats Collectif 36.2 46.9 68.6 83.0 93.0 100.0 103.0 Mehrfamilienhäuser

TOTAL 97.2 105.7 138.0 179.0 180.0 175.0 185.0

Housing completions 1+2 family dwellings Logements terminés Individuel 64.9 63.3 57.6 67.0 73.0 75.0 75.0 Baufertigstellungen Familienhäuser

Flats Collectif 43.2 50.8 57.6 75.0 80.0 92.0 100.0 Mehrfamilienhäuser

TOTAL 108.1 114.1 115.2 142.0 153.0 167.0 175.0

Housing stock Logements existants 12 830 12 905 13 010 13 130 13 285 13 405 13 550 Wohnungsbestand

thereof second homes dont résid. secondaires 160 170 180 190 205 225 255 davon Zweitwohnungen

thereof vacancies dont inoccupé 800 800 800 800 820 835 860 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 75.1 75.3 75.5 75.7 76.0 76.2 76.5 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 742 3.2 0.5 9.6 2.5 7.7 11.5 5.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 264 -5.0 -2.6 8.2 5.0 5.4 9.0 6.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 766 20.0 6.5 12.4 19.5 8.2 13.5 8.0 Industriegebäude

Storage buildings Bâtiments de stockage 872 15.7 7.1 16.6 28.5 11.0 16.5 7.0 Lagergebäude

Office buildings Bureaux 1 365 -10.5 1.9 -3.0 15.5 6.6 7.0 5.0 Bürogebäude

Commercial buildings Commerces 1 557 -2.0 8.5 26.3 32.5 7.0 8.5 8.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 345 24.1 14.0 11.6 16.2 15.0 20.0 6.0 Landwirtschaftsgebäude

Miscellaneous Autres 878 4.9 5.0 14.5 5.5 6.5 15.0 7.0 Sonstiges

Total 7 789 3.5 2.2 12.0 18.2 7.6 11.8 7.2 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 3.8951

248 © EUROCONSTRUCT Vienna, November 2007 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 3,696 20.0 15.0 34.8 17.8 56.5 22.7 12.9 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 292 12.5 -20.0 28.1 11.2 35.0 30.0 38.2 Bahnanlagen

Other transport Autres réseaux 740 6.5 8.5 14.6 18.0 12.0 10.0 10.0 Übrige Verkehrsinfrastruktur

TOTAL 4 728 16.6 10.8 30.8 17.4 48.2 21.6 14.0

Telecommunications Télécommunications 312 -16.8 6.2 2.5 5.0 8.0 8.5 6.5 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 2,176 6.5 11.8 4.0 11.5 10.0 12.5 10.0 Energie- und Wasserversorgung

Other Autres 1,620 -17.3 9.9 0.2 10.0 12.0 8.5 11.5 Sonstiges

Total 8 836 4.5 10.7 15.8 14.2 31.3 17.4 12.7

1) At 2006 prices, excluding taxes. 1 euro = 3.8951

Country/Pays/Land: POLAND Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 168.8 4.4 2.0 4.8 5.3 5.0 5.1 4.7 Privater Verbrauch

Public consumption Consommation publique 49.7 3.1 5.2 5.8 3.8 4.5 4.3 5.5 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 53.6 6.4 6.5 15.6 18.0 15.5 18.0 8.5

of which construction 4.0 7.2 13.8 14.5 16.4 17.0 11.5

Stocks (contribution as % of GDP) Variations de stocks 0.1 300.0 -50.4 -33.0 0.0 13.0 25.0 11.0 Vorratsveränderung

Exports Exportations 109.7 14.0 8.0 8.0 6.9 8.3 11.0 6.0 Exporte

Imports Importations 111.8 15.2 4.7 15.8 8.9 10.3 12.0 7.7 Importe

GDP PIB 272.2 5.3 3.6 6.2 6.5 5.8 6.2 6.0 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 3.8951

250 © EUROCONSTRUCT Vienna, November 2007 Portugal

PORTUGAL

ITIC www.itic.pt

Bárbara Martins e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

– In 2007 the Portuguese economy is estimated to have grown 1.7%, a slight acceleration when compared with the 1.3% growth rate observed in 2006. Both private and public consumption continued to perform below historical data, investment is expected to have gone slightly up to some 0.2% and exports continued to perform well. Contribution from construction investment to GDP growth remained negative, the same for public investment. – Consumer prices index is expected to have slowed down in 2007 to 2.5%, after a +3.1% increase in the previous year and the unemployment rate is expected to have reached 8.0%. – The Portuguese economy is expected to expand over the next three years. GDP is forecast to grow 1.9% in 2008, a meagre +0.2 p.p. increase in comparison with the observed this year but a more solid growth is expected in 2009. Still, economic growth is expected to remain poor in terms of job creation. – Internal demand is forecast to recover gradually along the next three years, as private consumption gains strength and investment accelerates, pushed by a positive outturn in construction. Inflation rate should keep a downward trend along the period. No major demand pressures are to be expected in the medium term and labour costs are expected to be kept under reasonable boundaries. – Overall, economic prospects are good but it’s undeniable that the risks associated to current projections are unusually high (sub prime crisis in the US, Euro appreciation, interest rates and oil prices). – The construction output is expected to have decreased 2.8% in 2007, with all segments on negative ground. The upward revision to the Prague estimates reflects a "not so negative" evolution in non residential construction and civil engineering. – Total residential construction is expected to have reached €12,320 million in 2007, approximately 1.3% less (real variation) than the observed in the previous year. The decrease in residential output is related to the performance in new construction, which is expected to have fell 3.0% in 2007. – New residential construction is experiencing a severe adjustment period, which is not expected to be over before 2010. The severe recession in this segment reflects both the inevitable correction of the production level reached during the 90’s and the worsening of the macroeconomic framework since 2001. – In 2007 the number of completed dwellings is expected to have decreased again, reaching 55,082 units (-5.6%). In the same year the number of permits for new housing construction fell approximately 8.0%, which suggests that new residential construction will not recover in the near future. – As for housing Renovation, production is expected to have grown 2.0% in 2007 after a slight slowdown in the previous year. Figures concerning both permits and completions are extremely positive and support further growth in coming years. – Private initiative is expected to continue to lead the way but there’s a growing awareness on the public side as to the importance of housing renovation. In fact, the State Budget for 2008 (disclosed October the 12th) disposes about the creation of special tax benefits concerning renovation works. – In 2007 total non residential output is expected to have decreased almost 4.0%, reaching € 5,308 million. Both new construction and renovation works experienced negative growth rates. In 2007 the construction of public buildings, namely in the health and education sectors, was severely affected by investment cuts. – The improvement in the public works market observed in the first nine months of 2007, with positive impact on production in 2008 and 2009, is most likely to be related to the softening in budget restrictions and to local and general elections taking place in 2009. – As for the private sector, output evolution is expected to turn positive in 2008 following the consolidation of economic growth. Office, commercial and storage buildings are expected to be the most dynamic sectors along the forecast period.

252 © EUROCONSTRUCT Vienna, November 2007 Portugal

– In 2007 new civil engineering output is expected to have fell 6.0%, after a 5.0% decrease in the previous year. Renovation works performed better, with a 2.0% growth rate. Civil engineering performance was strongly influenced by the restrictions to public investment expansion arising from public finances consolidation efforts. – Investment is expected to experience a moderate recovery in 2008. Data concerning offers to bid and awarded contracts (in value) performed well in the first nine months of 2007, recovering from the low levels observed in the beginning of the year.

2 Macro-economic Outlook

In 2007 the Portuguese economy is estimated to have grown 1.7%, a slight acceleration when compared with the 1.3% growth rate observed in 2006. Both private and public consumption continued to perform below historical data, with the public component exhibiting a negative evolution in 2007. Investment is expected to have gone slightly up to some 0.2%, thanks to a positive evolution in equipment investment. Contribution from construction investment to GDP growth remained negative, the same for public investment. Overall, internal demand is estimated to have grown 0.6% in 2007. Portuguese Exports continued to perform well in 2007, even if a 2.0 p.p. deceleration is being put forward. Despite the increasing competition in global markets, mainly from low cost producers, the gradual shift in the country’s Export structure from low technology products to more value added ones has supported a steady growth trend. Imports are expected to have grown 3.2% in 2007. Despite the good news in terms of economic growth, employment figures remain poor. Data concerning the first two quarters of 2007 point to an unemployment rate of 8.2%. Even though a slight improvement is most likely to occur along the year, we were obliged to make a downward revision to our previous estimate, from 7.5% to 8.0%. Consumer prices index is expected to have slowed down in 2007 to 2.5%, after a +3.1% increase in the previous year. The dissipation of the VAT increase effect and the deceleration on energy prices in 2007 together with the absence of significant demand pressures kept price evolution under control. As thoroughly stated in previous Reports, the control of public finances has been a constraining factor in recent economic development. In 2005 the government balance reached -6.1% of GDP and forced public authorities to take harsh measures in order to bring down the government balance below the 3.0% ceiling set in the Stability Pact.

2004 2005 2006 (e) 2007 (e) Government Deficit (Excessive Deficit Procedure, -3.4 -6.1 -3.9 -3.3 09/2007) Net Lending (+) or borrowing (-) of the economy -6.2 -8.6 -8.7 -7.9 Source: INE (National Statistics Institute) and Portuguese Central Bank

The Government aimed at limiting public spending, which was satisfied mainly through investment cuts, and increasing revenues, both through tax increases (in VAT and petrol and tobacco taxes) and tax collection improvement. Therefore, budget policy was not aimed at all at supporting the economy through a serious of imbalances that severely limited its growth. It remains, however, crucial if sustainable growth is to be reached in the medium/ long term. According to Excessive Deficit Procedure estimates, disclosed last September, in 2007 the government balance is expected to stand at 3.3% of GDP. In the State Budget for 2008, the Government admitted a 3.0% figure for government balance in 2007. As for the overall economy financing needs, a slight decrease is expected in 2007.

Box 1. Measures included in the State Budget 2007

Revenue Expenditure - Savings on medication co-payment - Increase in petrol and tobacco products - Freeze of transfers to local government by - Increase in social contributions paid by central administration civil workers to health care systems - Cut or freezes in most Ministries expenditure plans

Source: European Commission, Public Finances Report 2007

The Portuguese economy is expected to expand over the next three years. GDP is forecast to grow 1.9% in 2008, a meagre +0.2 p.p. increase in comparison with the observed this year. A more solid growth is expected in 2009. Internal demand is forecast to recover gradually, as private consumption gains strength and investment accelerates, pushed by a positive outturn in construction. Public consumption is expected to continue to decrease as part of the Government’s budget consolidation efforts. Exports should increase around 6.5% in 2009 and 2010, assuming a steady market share in world trade. Imports will move according to internal demand. Economic growth is expected to remain poor in terms of job creation. In 2008 the unemployment rate is expected to remain unchanged (8.0%), with a minor decrease being put forward for 2009 and 2010.The loss of importance of intensive labour activity sectors in the production structure and hiring limitations on the public side are among the reasons for the low expectations concerning employment behaviour. Rigid labour laws are considered by a number of specialists as an additional reason for the lack of dynamism of the labour market. Inflation rate should keep a downward trend along the period. No major demand pressures are to be expected in the medium term and labour costs are expected to be kept under reasonable boundaries. Obviously, there are some risks inherent to this projections, namely those arising from tax increases (over petrol, for instance) and energy and other raw material prices. Another thing to considerer in the long run is the impact on food prices of natural disasters (floods and dry weather) and of the growing percentage of land occupied with "energy crops" (e.g. wheat, oilseeds, sugar beet).

2004 2005 2006 2007 2008 2009 2010 GDP (% change at real terms) 1.5 0.5 1.3 1.7 1.9 2.4 2.6 Unemployment rate (%) 6.7 7.6 7.7 8.0 8.0 7.8 7.5 Inflation rate *(CPI) 2.4 2.3 3.1 2.5 2.3 2.1 2.0 Source: INE and ITIC (estimate and forecasts), * series break in 2006 Overall, economic prospects are good but it’s undeniable that the risks associated to current projections are unusually high. The impact of sub prime crisis in the USA on the Portuguese economy, even being difficult to assess at the moment, can’t be overlooked. Additionally, both interest rates and exchange rates evolution will play a determinant role on coming economic activity developments.

254 © EUROCONSTRUCT Vienna, November 2007 Portugal

3 Housing Market

Total residential construction is expected to have reached €12,320 million in 2007, approximately 1.3% less (real variation) than the observed in the previous year. The decrease in residential output is related to the performance in new construction, which is expected to have fell 3.0% in 2007. Renovation performed well in 2007, with a 2.0% increase in comparison with the previous year outcome. New residential construction is experiencing a severe adjustment period, which is not expected to be over before 2010. The severe recession in this segment reflects both the inevitable correction of the production level reached during the 90’s and the worsening of the macroeconomic framework since 2001. According to Censos the Portuguese housing stock increased approximately 21% between 1991 and 2001 (+860,000 dwellings) thus keeping the two digit growth observed in the two previous decades. In the same period, and in other European countries, the pace was already slowing down.

Housing Stock Growth in Portugal an Selected Countries

Portugal Spain France France UK Finland USA

Source: Rodrigues, Duarte, "A evolução do parque habitacional português: reflexões para o futuro" (INE)

The increase in the Portuguese housing stock between 1991 and 2001 is explained by the need to satisfy part of the housing needs, some 503,000 units, and by a significant increase in the number of second and vacant homes (+265,000 and +103,000 units, respectively). The evolution in the number of second homes is probably the reason why the number of dwellings per household in Portugal reached 1.38 in 2001, a figure only beaten by Spain (1.44). Comparing the housing needs that existed in 2001 (an estimate made by INE pointed to 177,000 dwellings) with the number of vacant dwellings 13(185,000), it was reasonable to acknowledge that the country was in a surplus position in what concerned housing. Obviously that corresponds to a simple quantitative assessment of what can be seen as being housing needs. Either way, as from 2001 Portugal underwent a period of acute economic slowdown which culminated in a recession in 2003 (the GDP decreased 0.7% that year). The following years were of meagre economic growth, growing unemployment and low income increase14. The circumstances were all but favourable to residential expansion and indeed production experienced a severe decline (close to 43% between 2000 and 2007). With economic growth gaining strength (GDP grew 1.3% in 2006 and is expected to have grown 1.7% in 2007) a rebound in new residential evolution would be in order. However, that is not the case.

13 Only those available for rent or sell. 14 In 2000 household’s disposable income grew 7.8% (nominal change). It then slowed down almost continuously in the following years growing 3.1% (nominal change) in 2006. © EUROCONSTRUCT 255 Portugal Vienna, November 2007

Building Permits and Completions - New Dwellings 140 120 100 80 60 Thousand 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007

Completion Permits

Source: INE (National Statistics Institute)

In 2007 the number of completed dwellings is expected to have decreased again, reaching 55,082 units (-5.6%). In the same year the number of permits for new housing construction fell approximately 8.0%, which suggests that new residential construction will not recover in the near future. Both economic and "structural" factors continue to explain the lack of dynamism in new residential construction. In fact, economic growth has been proving to be poor in terms of job creation (+0.3% in 2007), income progression is limited and households are extremely pessimistic concerning future economic growth. Also, interest rates have been increasing which in a context of high indebtness ratio (120% of the disposable income) can be seen as an important barrier to further housing investments. % Interest Rates - Housing Loans 5,5

5,0

4,5

4,0

3,5

3,0 Jan-06 Jan-07 February March April May June July

Source: Portuguese Central Bank

The recovery in new housing construction is expected to take place in 2010 (+1.0%), under the assumption of stronger economic and employment growth. Still, completed dwellings are not forecast to go beyond 54,100 units on that year. As for housing Renovation, production is expected to have grown 2.0% in 2007 after a slight slowdown in the previous year. Figures concerning both permits and completions are extremely positive and support further growth in coming years (2.5% in 2008 and 3.0% in 2009 and 2010). Private initiative is expected to continue to lead the way but, as mentioned in previous Reports, there’s a growing awareness on the public side as to the importance of housing renovation. Despite the disappointing results of the recent law change regarding the rental market (NRAU15), which aimed at increase frozen rents as counterpart to renovation works in the dwellings, the Government seems determined to solve (at least a part of) the problem.

15 NRAU – Novo Regime do Arrendamento Urbano 256 © EUROCONSTRUCT Vienna, November 2007 Portugal

In fact, the State Budget for 2008 (disclosed October the 12th) disposes about the creation of special tax benefits concerning renovation works starting from 1st January 2008 to 31st December 2010 (works must be completed until 31st December 2012) which includes: • Total or partial exemption of property taxes (IMI16), during a period of 5 years; • Corporate income tax exemption concerning Real Estate Funds income, when at least 75% of the assets are buildings subject to renovation works; • Taxation at a special rate of 10% both on corporate and personal income tax of: i) income from units in Real Estate Funds; ii) net gains obtained by selling units in Real Estate Funds. In addition, the Government will continue to support renovation works through specific programmes and legislation. One should also mention the significant perspective change in what concerns renovation. The main goal is no longer to renovate one dwelling or one building but to renovate an entire quarter and make it an attractive place to live and work.

Residential Output in Portugal - 2004 to 2010 8,0 4,0 0,0 -4,0

real, % change real, -8,0 -12,0 2004 2005 2006 2007 2008 2009 2010

New Renovation

Source: ITIC

4 Non-residential Market

In 2007 total non residential output is expected to have decreased almost 4.0%, reaching € 5,308 million. Both new construction and renovation works experienced negative growth rates (-3.0% and -5.0%, respectively) despite the upward revision of the June forecasts. In fact, data for 2006 concerning building permits for new construction were more favourable than expected earlier therefore justifying the narrowing of the output decrease in 2007. In 2007 the construction of public buildings, namely in the health and education sectors, was severely affected by investment cuts. According to Excessive Deficit Procedure, public investment is expected to have decreased 7.3%17 in 2007, keeping the downward trend observed since 2004.

2003 2004 2005 p) 2006 p) 2007 e) Gross Fixed Capital Formation Public Administration (€ Million) 4,303.3 4,524.8 4,421.6 3,612.3 3,349.0

Source: Excessive Deficit Procedure, September 2007 (INE) p) provisional e) estimate

Data on public work’s market confirm the impact of investment cuts on the construction of public buildings over recent years:

16 IMI – Imposto Municipal sobre Imóveis 17 Total investment (gross fixed capital formation), nominal change. © EUROCONSTRUCT 257 Portugal Vienna, November 2007

Public Works Tenders - Non Residential Buildings 2000

1500 1000

Million € 500 0 2003 2004 2005 2006

Offers to Bid Awarded

Source: AECOPS

According to the latest information on public works tenders, the coming years are expected to notice a considerable development of this segment. Despite an overall negative evolution in the value of awarded contracts - non residential buildings - in the first nine months of 2007 (-6.2%), awarded contracts in the fields of education and health experienced positive growth rates. Offers to bid also decreased between January and September (-32%). Overall, buildings for education fell in the first nine years of 2007 but new construction continued to show steady growth. As for health infrastructures, both new construction and renovation works experienced two digit growth rates. The improvement in the public works market in comparison with previous years is most likely to be related to the softening in budget restrictions and to local and general elections taking place in 2009. As for the private sector, output evolution is expected to turn positive in 2008 following the consolidation of economic growth. Office, commercial and storage buildings are expected to be the most dynamic sectors along the forecast period. There are several projects in the pipeline for the next three years in the retail sector. According to Cushman & Wakefield estimates, if all projects that are now under analysis are built an additional 2,3 million sqm will be added to commercial building stock.

GLA 2007* 2007/2010** Total (Lisbon) 2,641,432 2,382,962 Source: Cushman & Wakefield * first half ** estimate

Obviously a number of projects will be postponed or abandoned, but still there are solid reasons to foresee a positive performance in this segment. In fact, a number of developments are already expected to open along 2008, comprising an addition of 210,000 sqm to commercial spaces: InterIKEA, Évora Forum, Fórum Barreiro, Forúm Santa Maria da Feira, Palácio do Gelo, Spacio, Vivaci Guarda, Vivaci Maia and Vivaci Caldas da Rainha. The main challenge to developers is, beside licence regulations, to manage to compete in an increasingly mature market, with more and more demanding consumers. Diversification and customer retention strategies are therefore in order. As for office buildings, the demand for space has been growing in Lisbon. An increasing number of companies are looking for spaces to install their call centres and back offices services, with financial services being the most dynamic. Total office supply18 grew 0.8% in the first half of year (comparison with December 2006). The most dynamic areas were Parque das Nações (Expo 98) and Out-of-Town Corridor (West Corridor). The vacancy rate decreased in comparison with 2006 and is now standing at 8.5%. Average and prime rents increased in Lisbon after a couple years of stability.

18 It doesn’t represent new construction but available spaces. 258 © EUROCONSTRUCT Vienna, November 2007 Portugal

Stock (sqm) % change 2006 2007* Total (Lisbon Area) 4,129,784 4,163,635 0.8 Source: Cushman & Wakefield *first half

Prospects on future demand are positive and several projects are in the pipeline. The areas which are expected to see the major dynamism are Parque das Nações (Expo 98) and Central Business District. As for storage buildings and industrial facilities, the coming years are expected to be more favourable to growth with the main driver being the Governments initiative "Portugal Logístico". The programme aims to increase the importance of the country in Europe’s logistic routes and it comprises significant investments in port and railway infrastructures. Private developers are expected to respond well to the favourable framework set by the Government in this sector. Economic growth will play a decisive role in the evolution of all types of private non residential buildings. The risks associated to Portuguese economic performance must therefore be taken into account when analysing this segment. All in all, non residential construction is expected to perform well in the next three years, with growth rates of 3.2%, 4.4% and 3.7% in 2008, 2009 and 2010, respectively. New construction is expected to lead the way.

5 Civil Engineering Market

In 2007 new civil engineering output is expected to have fell 6.0%, after a 5.0% decrease in the previous year. Renovation works performed better, with a 2.0% growth rate. Civil engineering performance was strongly influenced by the restrictions to public investment expansion arising from public finances consolidation efforts. Investment is expected to experience a moderate recovery in 2008. According to the Stability Programme disclosed one year ago, in 2008 public investment is expected to worth 2.3% of GDP, which will only translate into positive growth under the assumption of stronger GDP growth in 2008. In 2009 and 2010 public investment is expected to accelerate to 2.4% and 2.6% of GDP. Public Investment as % of GDP (current prices)

3,0

2,5

2,0

1,5

1,0 2005 2006 2007 2008 2009 2010

Source: Stability Programme 2006-2010 (December 2006)

Data concerning offers to bid and awarded contracts (in value) performed well in the first nine months of 2007, recovering from the low levels observed in the beginning of the year. Awarded contracts grew 24.0%19 between January and September 2007 in comparison with the same period of 2006. Renovation works led the way, with an increase close to 50%, whilst new works remained on negative ground (-1.3%).

19 Real change © EUROCONSTRUCT 259 Portugal Vienna, November 2007

Offers to bid increased almost 162% from January to September. New construction increased considerably in the same period but its performance was somewhat offset by a rather unfavourable evolution in repair works (-74%). Offers to bid concerning transport infrastructures and electrical installations grew significantly in 2007.

Public Contracts – January to September 2007 *

% change (value) from

same period 2006 Offers to bid Awarded contracts Civil Engineering (New + R&M) 161.9 24.0 Source: AECOPS

The sudden shift in public works tenders evolution comes as no surprise. With local and general elections taking place in 2009, several infrastructures are expected to be completed along 2008 and 2009 for electoral purposes. The latest information concerning public works tenders point to a better performance in transport infrastructure construction than in energy and water works, in opposition to what was expected. Despite the growing effort to provide the population with appropriate water supply and water waste treatment - by 2013 at least 95% of the population should have access to public water supply networks, water losses along the network must be reduced (its currently around 30%) and water quality increased - transport infrastructures are still considered crucial for the development of all territory.

Civil Engineering Output - 2003 to 2009 8,0 6,0 4,0 2,0 0,0 -2,0 -4,0 real, % change real, -6,0 -8,0 2004 2005 2006 2007 2008 2009 2010

New construction R&M

Source: ITIC

260 © EUROCONSTRUCT Vienna, November 2007 Portugal

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. It excludes VAT but includes subcontracts.

Table 3. Housing stock (dwellings): until 2006 is given by INE, from 2006 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 4a. Storage buildings include industrial, retail and logistic activity storage Offices include all offices dependent on industrial or commercial activity Miscellaneous buildings include coffees and restaurants, transport buildings, cinemas, theatres, hotels and home accommodations (and others not specified).

Table 5. National Accounts (base Year: 2000) National Accounts are subject to European System of Accounts (ESA) rules.

Vienna, November 2007 Portugal

Country/Pays/Land: Portugal Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 10 509 10 563 10 586 10 608 10 632 10 655 10 678 Bevölkerung

Households ('000s) Ménages 3 816 3 873 3 930 3 989 4 048 4 108 4 169 Haushalte

Unemployed ('000s) Chômeurs 365 422 428 449 453 446 435 Arbeitslose

Unemployment rate (%) Taux de chômage 6.7 7.6 7.7 8.0 8.0 7.8 7.5 Arbeitslosenquote

Change of GDP Variation du PIB 1.5 0.5 1.3 1.7 1.9 2.4 2.6 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 2.4 2.3 3.1 2.5 2.3 2.1 2.0 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 4.5 3.3 4.4 4.0 3.6 3.0 3.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 3.4 3.9 4.3 4.4 4.4 4.5 Langfristiger Zinssatz

1) New Series in 2005 2) 3-month interbank rate (or equivalent) 3) 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 8 192 -7.5 -6.5 -8.0 -3.0 -2.5 -0.5 1.0

Logement Renovation 4 288 6.0 2.0 0.5 2.0 2.5 3.0 3.0

Wohnungsbau Total 12 480 -3.8 -3.9 -5.3 -1.3 -0.7 0.8 1.8

Non-residential construction New 4 437 -7.0 -8.5 -10.0 -3.5 3.5 5.0 4.0

Bâtiments non résidentiels Renovation 1 081 3.1 1.0 -2.5 -5.0 2.0 2.0 2.5

übriger Hochbau Total 5 517 -5.5 -6.9 -8.6 -3.8 3.2 4.4 3.7

Building New 12 629 -7.3 -7.2 -8.7 -3.2 -0.4 1.5 2.1

Bâtiment Renovation 5 368 5.4 1.8 -0.1 0.6 2.4 2.8 2.9

Hochbau Total 17 997 -4.3 -4.9 -6.3 -2.1 0.5 1.9 2.4

Civil engineering New 6 183 4.0 -2.0 -5.0 -6.0 -1.0 2.0 1.5

Génie civil Renovation 1 169 5.0 2.0 0.0 2.0 6.0 2.5 2.5

Tiefbau Total 7 352 4.2 -1.4 -4.2 -4.7 0.2 2.1 1.7

TOTAL CONSTRUCTION OUTPUT 25 349 -2.1 -3.9 -5.7 -2.8 0.4 2.0 2.2

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 7.84 -1.5 -4.1 -10.3 -3.2 -0.5 1.1 2.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 200,482 PTE

264 © EUROCONSTRUCT Vienna, November 2007 Portugal

Country/Pays/Land: Portugal Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 30.8 29.9 28.2 25.3 25.4 25.8 26.2 Baugenehmigungen Familienhäuser

Flats Collectif 45.5 43.0 40.4 37.9 38.1 38.7 39.2 Mehrfamilienhäuser

TOTAL 76.3 73.0 68.6 63.2 63.5 64.4 65.4

Housing starts 1+2 family dwellings Logements commencés Individuel Baubeginne Familienhäuser

Flats Collectif Mehrfamilienhäuser

TOTAL

Housing completions 1+2 family dwellings Logements terminés Individuel 28.6 29.0 23.3 21.0 20.5 20.5 20.7 Baufertigstellungen Familienhäuser

Flats Collectif 42.8 42.8 35.1 34.0 33.2 33.1 33.4 Mehrfamilienhäuser

TOTAL 71.4 71.8 58.4 55.1 53.8 53.6 54.1

Housing stock Logements existants 5 391 5 462 5 520 5 574 5 628 5 681 5 734 Wohnungsbestand

thereof second homes dont résid. secondaires 992 994 999 1 003 1 013 1 023 1 038 davon Zweitwohnungen

thereof vacancies dont inoccupé 674 710 729 741 737 733 717 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 76.2 76.3 76.4 76.5 76.6 76.6 76.5 Wohnungseigentumsquote

1) 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 744 -5.5 5.0 1.0 -20.0 1.5 3.0 2.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 432 1.0 3.0 -10.0 -15.0 4.0 5.0 3.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 418 -1.3 -15.0 -35.0 5.0 3.0 2.5 2.5 Industriegebäude

Storage buildings Bâtiments de stockage 117 -8.0 -18.0 -25.0 -6.0 1.5 6.0 6.5 Lagergebäude

Office buildings Bureaux 1 086 -3.5 -15.0 -10.0 2.5 3.5 5.0 5.0 Bürogebäude

Commercial buildings Commerces 1 267 -3.0 -7.5 2.0 4.0 5.0 6.0 5.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 61 -7.0 -12.0 -18.0 1.0 -2.0 0.0 1.0 Landwirtschaftsgebäude

Miscellaneous Autres 312 -36.3 -8.3 -20.2 -10.9 2.8 9.0 2.6 Sonstiges

Total 4 437 -7.0 -8.5 -10.0 -3.5 3.5 5.0 4.0 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 200,482 PTE

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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 3 333 5.0 1.0 -7.0 -7.5 2.0 -1.5 0.0 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 895 -0.5 -2.5 -4.0 -4.0 2.0 6.0 3.0 Bahnanlagen

Other transport Autres réseaux 959 2.5 -4.0 1.0 -2.0 1.5 10.0 6.0 Übrige Verkehrsinfrastruktur

TOTAL 5 187 3.6 -0.5 -5.1 -5.9 1.9 2.0 1.8

Telecommunications Télécommunications 129 28.4 38.5 0.0 0.0 0.0 0.0 0.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 895 1.0 3.0 1.5 -6.0 -2.0 0.0 1.0 Energie- und Wasserversorgung

Other Autres 1 141 7.4 -10.7 -5.0 1.0 -5.4 4.2 1.9 Sonstiges

Total 7 352 4.2 -1.4 -4.2 -4.7 0.2 2.1 1.7

1) At 2006 prices, excluding taxes. 1 euro = 200,482 PTE

Country/Pays/Land: Portugal Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 101.0 2.5 2.2 1.1 1.2 1.5 2.0 2.3 Privater Verbrauch

Public consumption Consommation publique 32.0 2.6 2.2 -0.5 -0.8 -0.9 -1.0 -1.1 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 32.5 0.2 -3.3 -1.6 0.2 2.1 3.0 3.7

of which construction 16.7 -1.8 -4.8 -6.3 -3.0 0.0 1.8 2.1

Stocks (contribution as % of GDP) Variations de stocks 1.7 Vorratsveränderung

Exports Exportations 48.2 4.0 1.2 8.9 7.0 6.0 6.3 6.5 Exporte

Imports Importations 60.4 6.7 1.9 4.3 3.2 3.5 4.0 4.5 Importe

GDP PIB 155.0 1.5 0.5 1.3 1.7 1.9 2.4 2.6 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 200,482 PTE

SLOVAKIA

ÚEOS – Komercia, a.s. www.ueos.sk

Vladimír Lenko e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

Positive economical development proceeded in Slovakia also in the year 2006 and proceeds also in 2007. Inter annual GDP growth in constant prices represented 8,3 %, and there is presumption of expressive GDP growth also in 2007 in amount of 8,8 % (inter annual GDP growth for first half year 9,2 %). In 2006 declined average unemployment rate and trend will follows also in 2007.

Majority in present coalition government holds social democratic party and government declares social approach toward population. Gradually are prepared and implemented adjustments in pensioner and health caring system (insurance system, amount and assessment base for levy). Income tax rate for physical persons and legal entities remains in amount of 19 %. By physical persons with average monthly gross wage above 1 374 EUR is stepwise lowered level of non – taxable minimum up to 0. Concerning VAT, single 19 % rate was reduced to 10 % for medicaments. From 1 September 2007 came into force amendment of the Labour Code, which defines certain terms and improves titles of employees. Impact of this amendment is concerning short-term aspect negligible, probably will increase personal costs of companies, its impact could be monitored only with some lapse. From 1 October 2007 came into force amendment of Trades Licensing Act, which simplifies founding of the trade (single contact place; sufficient for founding of trade is education, no work-experience is required). For tradesman now holds, that one trade licence can list only one object of activity. Favourable are mortgages for young people, meeting defined conditions, offered is also allowance to constructional saving. Government provides investment incentives, in accordance with valid EU regulations, preferring undeveloped regions and plans also to increase intensity of building of highway infrastructure by use of PPP projects.

Constructional production of 2006 represented amount of 4 307 Mill EUR, from that works abroad in amount of 136,7 Mill EUR. Volume of inland production represented 4 170,3 Mill EUR, i.e. real growth by 16,1 % in comparison with 2005.

Share of construction production by type in %, year 2006

Residential construction; 24,4 % Civil engineering; 30,1 %

Non-residential construction; 45,5 %

Growth of constructional production was positively affected by economical development, by demand for results of constructional activity and also by more available acquiring of credits and favourable weather during last months of 2006. Positive results of construction industry reflect also investment activities into industrial constructions and investment of domestic and foreign developers to construction of office and business buildings, in lower rate also of dwelling buildings. Not in full volume were drawn financial means from structural funds (drawing off 47,6 % of total amount of 63 Bill EUR; state in June 2007); increased intensity of using of these resources from shortened planning period 2004 – 2006 is assumed for years 2007 and 2008.

Development of constructional production in following years Good economical growth and persisting demand for construction products gives assumption for further growth of constructional production in all its segments for next years, although with lower growth rate.

Production in civil engineering will be affected by government decision on increasing of intensity of building of highways with the aim to interconnect capital in the west of country to the second greatest city on east of Slovakia (Košice). According to aims, till the year 2010 should be built 151 km of highways and speedways (tunnels till 2012), with assumed costs of 3,1 Bill EUR by means of PPP projects, but Ministry of Finance plans to reduce it for 95 km. Contracts with contractors should be signed in March 2008. Volume of civil engineering in next years will increase also finishing of two blocks in nuclear power plant Mochovce, presently under construction. Major parts of overall costs are costs for technology.

In construction of non – residential buildings is in progress preparation and partly also construction of multifunctional complexes (office buildings with superior office rooms, dwelling buildings, shopping areas) on free lands and brown fields in capital. Construction in smaller extent moves already to the regions. Building of shopping centres will take place in regional and district capital cities, market chains planes building of stores with smaller surface. In industrial constructions will expand manufacture objects of established companies, development in this segment depends on arrival of foreign investment. Stores and logistic parks will be built along transport corridors. Developing is also segment of building of accommodation facilities, ranging from rests and boarding houses up to five stars hotels.

Mostly in capital will proceed construction of dwelling houses and also residential construction together with thermal insulation of older and mostly panel buildings. Construction grows also in towns with good economical development and decreasing unemployment. Due to the growth of prices are dwellings used also as an investment. Significant increase of the number of finished dwellings is at the moment not assumed.

Prices of construction works on new construction in 2006 grew in average by 3,9 %, which is lower growth rate, then 4,3 % in the year 2005. By the half year 2007 average inter annual growth of prices of constructional production in new construction achieved 4,1 %. High growth of construction production is reflected also in shortness of some construction materials, or in longer delivery periods, as well as in growth of building materials prices.

Related to the growth of the constructional production volume increases also number of persons employed in construction industry. Average registered number of employees in construction in 2006 comprised 155 829 persons, from that 132 027 workers in construction works and from total count was 87 563 tradesman, representing growth of employees in construction industry by 9,2 %. Significantly grew number of tradesmen (by 17,5 %) in comparison with previous year. In 2006, share of employees in construction industry in total number of persons, employed in economy represented 7,3 % (6,9 % in 2005). Trend of increasing of number of employees in construction industry proceeds also in 2007, number of employees for first half year met 162 420 persons, from that 92 210 tradesmen.

The greatest enterprises in construction by gains In 2006 ten construction enterprises achieved for own output and product on constructional market gains in amount of more then 50 Mill EUR, five of them of more then 100 Mill EUR. Enterprise with highest gains, in amount of 361,5 Mill EUR was Doprastav with 3 125 employees. From ten greatest enterprises, five operates mostly in civil engineering.

Seven manufacturers of building materials achieved in 2006 gains for own output and products on construction market higher then 30 Mill EUR, top five are producers of cement. The greatest, Holcim, achieved in 2006 gains in amount of 111,3 Mill EUR.

Hidden (black) economy In construction are often in form of hidden economy provided services without quittance (reconstruction of dwellings, wall – tapestry, painting and coating in dwelling, building or reconstruction of family house, cottage, garage). Since 2004 hidden economy increases. According to estimation of Statistical Office of SR achieved expenses of households for services of constructional craftsmen without receiving of quittance achieved in 2004 226 Mill EUR, in 2005 254 Mill EUR and in 2006 even 308 Mill EUR.

Support from EU funds In August 2007 European Commission approved Slovak National reference frame, under which Slovakia can draw EU funds in the years 2007 – 2013. Provided amount for this time period represents 11,588 Bill EUR (7,689 Bill from structural funds and 3,898 Bill from Cohesion fond) for financing of projects within 11 operational programmes. By begin of October were approved four operational programmes, among them also Operational programme Transport, amount 3,845 Bill EUR and Regional operational programme – amount 1,445 Bill EUR. Real draw of resources from EU funds for period 2007 – 2013 will probably start in summer or autumn of next year.

2 Macro-economic Outlooks

In 2006 proceeded strong growth of Gross domestic product (annual growth by 8,3 % in constant prices; annual growth in 2005 achieved 6,0 %). GDP growth was related to increased both inland and foreign demand. Export grew in faster rate then import, even if final balance is negative. Also formation of Gross domestic fixed capital grew, in 2006 by 7,3 %, decreased growth tempo compared to 2005, when annual growth of 17,5 % was achieved. More then 57 % of Gross fixed capital formation generated metallic products, machinery and traffic facilities, which was related to delivery of technology to new industrial plants (especially two car factories). Share of constructions on Gross fixed capital formation, in spite of strong growth of constructional production in 2006 reached 39,9 %, while in 2005 this share represented 43,6 % (in current prices). Henceforth increased consumption of households (private consumption) by 6,1 %, what reflects higher employment rate, growth of real wages and availability of credits. In comparison with last years increased also public consumption (by 4,1 %, compared to decline by 0,6 % in 2005).

Change of GDP, consumer prices and household consumption in %

20 18 16 14 12

% 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 Year GDP Consumer prices Household consumption GFC formation

Balanced high growth of economy, culminant in 2007, is proposed. This growth is based on growth of potential product, productivity and competitiveness. Efficiency of the Slovak economy will be positively affected mostly by direct foreign investment, drawing of EU funds and growth of the Euro zone. Starting and expansion of manufacturing, developed by foreign

272 © EUROCONSTRUCT Vienna, November 2007 Slovakia investors in Slovak republic will positively affect growth of productivity. Highest acceleration of production is assumed in the year 2007, in following years gradual deceleration of dynamics is expected. Expected GDP growth could be positively affected by implementation of the pretentious plan of building of highway net. Risk for development of GDP represents increase of prices of oil and energy raw materials and insufficiently effective drawing of EU funds.

According to the prognosis of Institute of financial policy (updated in September 2007) is assumed even higher growth tempo of GDP then in 2006. Growth should reach 8,8 %, with following decrease of growth tempo to 5,0 % in the year 2010. Due to production of new car factories and other industrial manufacturers, export will grow faster then import (assumed annual growth of export by 21,1 %, import by 17,2 %). Private consumption will increase by 6,7 %. Assumed growth of final consumption of public administration in 2007 represents 2,0 % (annual growth in 2005 represented 4,1 %), during the next three years is assumed maximum annual growth of 3,0 %). Growth of Gross fixed capital formation should within next years decline from 8,8 % in the year 2007 to 5,5 % in the year 2010.

Annual inflation rate reached in 2006 4,5 %, i.e. by 1,8 p.p. more then record low inflation rate in 2005, 2,7 %. On the inflation development participated particularly growth of regulated prices, which grew by 10,5 %. For the year 2007 is assumed inflation growth by 2,4 %, for next years in amount of 2,0 to 2,5 % yearly.

Increase of the growth tempo of economy created favourable environment for improvement of conditions on labour market. Employment holds growth trend, expressively declining trend had development of unemployment. According to results of selective finding of work forces, published by Statistical Office of SR, average unemployment rate in 2006 represented 13,3 %, which is by 2,9 percentage point lower then in 2005 (16,2 %). Average number of unemployed represented 353,4 thousand persons. In 2007 is assumed decline of unemployment rate by 2,4 p.p. to 10,9 % with further decline of unemployment in following years.

Key macroeconomic indicators in Slovakia from year 2004 to 2006 and forecast for years 2007 - 2009 (Annual percentage change of rate) 2004 2005 2006 2007 2008 2009 2010 GDP 5,4 6,0 8,3 8,8 6,8 5,8 5,0 Inflation 7,5 2,7 4,5 2,4 2,0 2,5 2,4 Average unemployment rate 18,1 16,2 13,3 10,9 10,0 9,6 9,2 Household consumption 4,2 7,0 6,1 6,7 6,0 4,7 4,1 Gross fixed capital formation 5,0 17,5 7,3 8,8 8,0 6,0 5,5

According to planes of the Ministry of Finance SR and National bank of Slovakia, Slovakia should accept EURO at 1. January 2009. Decision on accession will be adopted in Brussels on spring 2008. Doubts however arise, concerning holding of "development" also after accession of Euro zone. Exchange ratio – central parity was on request of Slovakia revised by European structures to 35,442 SKK/EUR. Slovak crown valorised towards EUR. By the beginning of October 2007 exchange ratio represented 1 EUR = 34,229 SKK.

Basic interest rate of National Bank of Slovakia has since March 2007 declining tendency. Since 25 April 2007 this rate represents 4,25 % p.a., while in previous period this rate represented 4,50 p.a. The lowest basic interest rate was in time period of 1. March 2005 to 28. February 2006, representing amount of 3,0 % p.a.

3 Housing Market

Construction of housing buildings comprised in the year 2006 24,4 % of inland constructional production. Volume of residential construction (exclusive of black economy and DIY), grew annually generally by 16,1 %, namely on new construction, modernization and reconstruction by 19,8 % and on repairs and maintenance by 4,8 %. Even if volume of constructional production on residential construction annually grew, number of finished dwellings in comparison with previous year fell by 2,8 %; number of started dwellings however grew by 4,1 %. By the end of the year 2006 was under construction by 10,7 % dwellings more, then by the end of 2005. In the year 2006 has been finished 2,7 dwelling per 1000 inhabitants. Results for first half year of 2007 indicates, that number of started dwellings drops, while number of finished dwelling grows. In 2007 will be finished up to 16 000 dwellings.

Considering announced projects, in 2008 and following years is assumed increase of the number of started as well as finished dwellings, and also should proceed expansion of the volume of the residential construction, related to the need to increase equipment by dwellings per thousand inhabitants and to the necessity to decrease energy demand of buildings (thermal insulation), to the general renovation of panel houses, modernization and reconstruction of bought older dwellings.

In the year 2006 was finished 14 444 dwellings, from that 14,8 % in public sector (2 143 dwellings). In family houses was completed 7 657 dwellings, representing 53,0 % of total number of dwellings, finished in the year 2006. In terms of the size structure of dwellings grows share of smaller dwellings, increases number of one and two room dwellings. Drop of dwellings in 2006, according to statistics, represented 1 442 dwellings.

Number of finished dwellings in the time period 2001 – 2006 and forecast for years 2007 - 2010

20 000

15 000 dwellings 10 000 1 + 2 family houses 5 000

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year

Finished dwellings by number of rooms in 2006 and for 1.half of 2007 From that One room Five – Dwellings Two - Three - Four - and flat- room and room room room lets more Finished dwellings 14 444 1 408 3 100 4 193 3 343 2 400 2006 Structure in % 100,0 9,8 21,5 29,0 23,1 16,6 - In family houses 7 657 129 448 1 775 2 977 2 328 - Flats 6 787 1 279 2 652 2 418 366 72 Finished 1. – 6. 2007 6 536 653 1 641 1 766 1 460 1 016

Average floor (use) area of the finished dwelling achieved 116,2 m2 (120,6 m2 in 2005) and average living area 71,0 m2 (73,4 m2 in 2005). According to statistics was in 2006 started 20 592 dwellings from released building permits, which represents increase in comparison with previous year by 4,0 %. 8 618 of started dwellings are dwellings in family houses. In first half year 2007 was started 8 892 dwellings (by 18,0 % less then in previous year), from that 4 761 in family houses. By the end of 2006 was under construction 54 086 dwellings, this number increased to 55 972 dwellings by 30. June 2007.

In terms of regions, most of dwellings were finished in region with capital Bratislava – 29,8 %, although share of inhabitants in this region comprises only 11,5 % of total number of Slovak population. About 40 % of purchasers of dwellings in Bratislava consider purchase of dwelling as a good investment. In Bratislava is in preparation, or already in progress, construction of individual dwelling houses (also with more then 20 floors), but also larger residential complexes of buildings, and quarters of family houses. Henceforth persist the highest demands for smaller dwellings. Development of housing construction moves also to regions. Projects with higher numbers of dwellings are announced in Žilina, Nitra and Košice, but housing construction starts to develop also in smaller district seats with strong economic back round. In some places is low price of old dwellings in towns reason of lag of started new projects, because of significantly more expensive and hardly saleable new dwellings. Building of family houses is often carried out by DIY and also by means of illegal work. On the market is shortness of municipal rental dwellings and also of affordable dwellings for young families.

By the data of the National bank of Slovakia basic price index of real estates for housing (SKK/m2) in second half year 2007 compared to the year 2002 represented 204,0 %. In the second half year 2007 was the average price of real estates for housing 1 052,3 EUR/m2. The highest prices for dwellings are in capital, representing (by data of NBS) in average 1 382 EUR/m2 by the end of first half of year 2007, i.e. by 15,3 % more then by the end of 2006. Prices in attractive areas and new buildings are mowing in the range of 2 892 – 4 338 EUR/m2. In the other regions prices reaches 35 – 60 % of the prices in capital.

Reasons of the growth of prices of dwellings: • Accessible mortgages (but not for everyone) (possibility of the distribution of the payment to longer time period, subsequent purchase even for higher price), • Some people "are in pocket" (economy grows purchase power grows, unemployment), • Strong years are moving to new habitation (they establish families, young people are earlier independent), • Growth of real estate prices supports demand (I buy today, because tomorrow the price is higher), • Prices of dwellings in comparison with EU – prices are still lower. Dwelling prices in our country grows also because of interest of foreign clients. These prices will henceforth increase, even if after accession of Euro zone is expected decline of the tempo of growth of prices.

State supports housing development by several forms: • Premium to constructional saving (for 2007 maximum amount 57,8 EUR), • Bonus for new mortgage credits (total amount 2,5 %) for interested persons at age till 35, maximum income 1,3 –multiple of average wage in economy in previous quarter, • Financial means for residential construction are, according to defined conditions and listed spheres henceforth offered in form of advantageous credit from State fund of housing development (acquisition of dwelling in dwelling house, in family house, construction and extension of new housing, reconstruction of facilities for social services), • Grants from state budget (through the chapter of the Ministry of construction and regional development) for building of rental dwellings, removing of system failures and completion of technical infrastructure; in some cases are provided also state guarantees.

4 Non-residential Market

In 2006 comprised construction works on non-residential buildings the share of 45,5 % of inland constructional production. In comparison with 2005 grew volume of works by 18,2 %

This is the response of market to the increasing economical activities of companies and demand for high quality office rooms, industrial and store objects. By reason of growing purchase power and consumption of households and also by insufficient equipment by relevant construction funds, are built shopping centres and also hotels and free time activities equipments. Dominant in this kind of construction are mostly investment from private sources, where investors are domestic or foreign developer companies and also direct foreign investment within the frames of industrial manufacture. Means from EU funds are used also for reconstruction and modernization of local infrastructure (schools, health and cultural equipment, social care equipment). The highest intensity of construction is still in capital. Outside Bratislava, construction activities also increases, however by realization of projects of smaller extent.

Industrial objects, logistic centres, stores Increased volume of works on building of industrial objects and modern logistic and store objects results from three impulses: • Inflow of foreign investment (new investment, expansion of manufacture of established foreign and domestic producers), especially in the field of car and electro technical industry. It means, that this segment depends significantly on foreign investment. • Expansion of the manufacture retail network and associated need of more effective logistic. Attractive areas for building of logistic stores are around capital Bratislava and along highways,. Building of logistic centres and store – manufacture areas with office rooms, adjusted to requirements of client proceeds along major traffic corridors. • Arrival of sub suppliers for big manufacturers. Large dominant companies (PSA Peugeot Citroen, KIA, SONY, SAMSUNG) attract smaller companies and firms – subcontractors, which aims to operate in reasonable accessibility to their largest consumers.

Cooperation with investors and preparation of projects is ensured by Slovak Agency for development of investment and trade (SARIO).

Industrial objects are built also in prepared industrial parks with different aims, which are situated in various places of Slovakia. According to specified conditions, there is possible to support establishing of industrial park also from public financial sources (preparation of infrastructure). Smaller investors prefers positioning of their manufacture to municipalities with 2 – 3 thousand inhabitants, to be independent and to hold work force monopoly. Utilization of existing objects is rare, depends on suitability in terms of size and positioning of technology.

Agricultural constructions – in last period Danes buys old farms in Slovakia with the aim to reconstruct them or to demolish and to build new ones (possible costs about 8,7 Mill EUR) to start with beef – breeding (up to 5 000 pieces).

Office buildings (Poly functional complexes) Demand for modern office rooms (class A, B) is large, due to further expansion of domestic and foreign companies. Office buildings are built mostly in Bratislava, in form of solitary residential high – rise buildings with office rooms as well as a complex of more office buildings. There are used lands of brown fields, in centre and in wider centre of the city, where are objects of non-functional old plants. Within next two year is possible to expect offer of 350 thousand m2 of new offices. Basic rent in city centre comprises 14 to 20 EUR/m2/month. Outside centre rent comprises 9,5 to 12 EUR/m2/month. Offer of new rooms will in next two years serve as a brake for growth of rent.

Due to inflow of foreign investment grows slowly interest for modern and good-class offices also in another towns in Slovakia. Here are built or are in preparation poly functional objects or business centres, inclusive shops and hotels. Rent in these places comprises 5,25 to 10,50 EUR/m2/month.

Large – scale poly functional complex in Bratislava One of most extensive complexes in Middle Europe started by demolition works from summer 2007 in brown field of former plant Kablo, near central bus station Mlynské Nivy. Within three years should in this locality grow Twin – City complex for 404,8 Mill EUR with dominant 42 floors sky- scraper, four stars hotel with 200 rooms, 320 luxurious dwellings, new central bus station (28,8 Mill EUR), and sport – entertaining objects, shopping centres.

Shopping centres In the year 2006 expanded existing market and shopping – entertaining complexes, also new shopping centres in larger towns have been open. Considering still not sufficient equipment by sale surface building of new trade buildings shall proceed. In several towns (regional or district capitals, towns up to 50 000 citizens) are already started or in preparation new shopping centres, in city central area small food stores and shops with luxury articles. Number of shopping centres in Slovakia grows, 21 in 2006, while in 2005 only 14. By the year 2010 is planned building of 10 centres in smaller towns One large complex includes tenths of small stores and also sporting, public social and entertaining activities. Market chain Tesco aims to strengthen its position by building of small stores Express in downtowns and by building of shopping centres at their hypermarkets.

Hotels, sporting constructions Segment of construction of hotels and accommodation facilities still grows. Investment were and still are directed to modernization, reconstruction and expansion of existing objects as well as to construction of new accommodation facilities in tourism centres, in capital and bigger towns and in places, where arrives investment to industry. Realized are also facilities for free time activities (wellness centres, aqua parks, thermal facilities, swimming pools).

Within the following years will be necessary to realize two important investments to sport facilities. In relation to Ice-hockey World Championship in 2011 (which will take place in Slovakia) should be in Bratislava built multipurpose sporting hall with the capacity of about 14 000 visitors. Assumed are costs in amount of 101,2 Mill EUR. Further task is to build within following next years new football stadium (capacity 30 000 spectators) for about 86,8 – 115,7 Mill EUR, which will meet international criteria for organization of international matches and challenge –cup matches. Way of financing is not yet decided.

Buildings for culture, public needs In April 2007 was, after 20 years of construction, put in operation new building of Slovak national theatre, with construction costs of 130 Mill EUR. Thereafter were approved financial resources for reconstruction of several cultural facilities. By different reasons (preparation, project documentation, public procurement), works on repairs and reconstruction of Bratislava Castle, Reduta (concert hall), and Slovak National gallery did not start, or were realized in very small extent. Within the frame of public works are planned reconstructions of several constructions of historical character – contravallations, town centres, and manor houses, with count on allowance from EU – funds.

In relation to accession to Schengen area were reconstructed objects on two border checkpoints to Ukraine (costs 8,7 Mill EUR). Within the frame of public works are listed some constructions in the scope of Ministry of Justice of SR – prisons, law courts and in preparation is construction of new building of Ministry of Justice of SR (begin in 2010, completion in 2012, costs 28,9 Mill EUR). Private Investment Company PENTA wants to build in Slovakia within two years 12 policlinics, interconnected by information system; building of first one already began in summer 2007.

5 Civil Engineering Market

Share of civil engineering in 2006 comprised 30,1 % of inland constructional production inclusive repairs and maintenance. In comparison with 2005, volume of works in civil engineering on new construction increased by 16,1 %, but volume of repairs and maintenance declined by 2,9 %. Determining in this field is building of transport infrastructure.

Transport infrastructure Completion of this infrastructure represents important condition for economical development of single regions of Slovakia. It concerns development of superior road infrastructure (highways and speedways) as well as modernization of railway corridors and need of development of the infrastructure for air transport (in capital). For development of transport infrastructure will be used financial sources from state budget, from EU funds (highways, speedways of first and second class, railways). Also used will be private resources through PPP – projects.

Road infrastructure – highways, speedways, PPP projects Planned length of highways in Slovakia represents 704 km, length of speedways 833 km. By 31 December 2006 was in operation 349 km of highways and 136 km of speedways.

Total lengths of highways and speedways according to the drafted schedule 2007 - 2010 (predetermination) Year Start of building Under construction Put in operation 2007 57 km 90 km 29 km 2008 55 km 121 km 23 km 2009 143 km 238 km 26 km 2010 77 km 267 km 49 km

Government wants to accelerate building of highways, till 2010 (except tunnels – they should be finished till 2012) plans to inter connect capital in the west part of country with the greatest city in the east part – Košice by the highway D1 and also to finish speedway R1 to Zvolen: Highway – total length 53,21 + 20,95 + 29,74 = 103,94 km On route – bridges (count/m) 74 + 31 + 38 = 143 / 12 776 + 7 484 + 6 635 = 26 895 m – tunnels (count/m) 6 + 2 + 1 = 9 / 14 359 +3 054 + 616 =18 029 m Speedway – total length 29,74 km, bridges 48 / 3 277 m To accomplish this plan, 151 km of the roads (costs 3,03 Bill EUR) should be built by private sector (through PPP projects), with later repayment by state.

Analysis of the Ministry of Finance SR reports, that repayments for so drafted extent will charge state budget inadequately. Overcharged could be mainly risk segments of roads and tunnels. Ministry therefore reduced drafted extent to the building of 95 km of roads constructed by PPP projects. First agreements with contractors and administrators should be signed in March 2008. In case, that building of highways will not contain initial extent, requirements on state budget will increase and deadlines terms for building will be extended.

According to the programme of preparation and building of the first class roads for the years 2007 – 2010 should be till the end of 2010 completed or reconstructed altogether 110 km of roads. Estimated costs are in amount of 3,9 Bill EUR.

Railway infrastructure, high-speed track Priorities of the investment in 2006 were modernization of existing railway for transport speed 160 km/hour (or 120 km/hour), electrification of one track and reconstruction of two railway stations (Prešov, Poprad). In 2007 proceeds modernization of railway infrastructure on the

278 © EUROCONSTRUCT Vienna, November 2007 Slovakia track Bratislava – Žilina and on the track Žilina – Krásno nad Kysucou, finished should be modernization of two railway stations. Planned deadline of the finishing of modernization the track Trnava – Žilina is in the year 2015. Within the frame of the fifth European corridor will continue modernization of the track Žilina – Košice – Čierna nad Tisou on the boundary with Ukraine. In Bratislava will begin construction of railway interconnection. Integral part of this interconnection is also building of the 6 km long tunnel, partly under river Danube, with four track stations. Construction of the tunnel and railway track should cost 361,5 Mill EUR. In preparation phase is also building of high-speed track in Bratislava from residential settlement Petržalka on the right riverside of Danube to the city-centre in amount of 202,4 Mill EUR.

Airports In 2006 were privatized 65 % of stocks of the second greatest airport of Slovakia in Košice. Antimonopoly Office of SR disapproved privatization of the airport in capital, airport remains in state ownership. Considering expressive increasing number of passengers, airport should be by the end of the decade ready to process 3,2 to 3,4 Mill passenger yearly. In this context it is necessary to build up new terminal by start of reconstruction of original terminal (costs about 144 Mill EUR). Way of financing is not yet exactly known, but it will be financing from more resources (credits and own resources). Within next years will be near to new terminal built also new railway station, market passages, office and operation objects, and hotel with congress- rooms. In 2007 were accomplished constructional works (building of accession corridors), costs 8,6 Mill EUR to meet conditions for accession to Schengen area.

Constructions for power industry In September 2007 was for public presented Strategy of energy safety of Slovakia. Energy policy was a start point for development of the power energetic, thermal energy, gas industry, exploitation, processing and transport of crude oil, coal mining and exploitation of renewable energy sources. One of the aims is to ensure such volume of electricity production, which will cover demand on economically effective principles. Program of the development of production base of power energy for ensuring of balanced consumption and production of power energy requires investment of about 13,4 Bill EUR until the year 2030. Major share of investment represents renewable energy sources (44 %), slightly less nuclear plants (36 %), thermal plants (15 %) and building of pumping through water power plant Ipeľ (15 %).

In the strategy are listed drafted projects for nearest years. Realization of listed investment is assumed with direct participation of private investors, in some reasonable cases also by PPP projects. In this report are selected only investments with realization term until the years 2010 – 2012.

In electric energy sources the greatest planned investment is completion of started blocks (3 and 4) of nuclear power plant in Mochovce (time period 2007 – 2012, assumed costs 2 100 Mill EUR). Next one is reconstruction of thermal plant Nováky (until 2011, assumed costs 150 Mill EUR), then stimulation of building of steam – gas cycles (in total for 420 Mill EUR until 2012), reconstruction or building of new one thermal plant in east of Slovakia.

Until the year 2012 should be completed interconnection of electricity supply systems to Hungary and Ukraine, assumed costs 146,3 Mill EUR. Gas interconnection Slovakia – Austria (Vysoká – Baumgarten) should be realised until 2008, assumed costs 4,52 Mill EUR. Planned is also increasing of the capacity of existing and building of over ground gas storing reservoirs within the years 2008 – 2011, or 2017, total costs 210 Mill EUR.

Environmental constructions Slovakia lags in building of construction for environmental protection (water supply, sewage, waste water cleaning plants, flood – protection, waste dumps). During the planning period 2007 – 2013 must be clearly increased using of sources from EU funds. Planned investment (old plan) of waterworks till 2015 will require 5,3 Bill EUR, from that:

• 1,5 Bill EUR for development of water pipe lines, to increase number of persons with water supply from pipelines from 85 % to 90 %. • 1,02 Bill EUR for development of sewage with the aim to ensure sewage with cleaning of wastewater in all municipalities above 2 000 inhabitants. Number of inhabitants, connected to sewage will then increase from actual 56 % to about 70 – 75 %. • 2,7 Bill EUR for flood-protection works and renovation of water flows. This field is significantly stagnant. In spring 2007 began reconstruction of actual and building of new flood-protection works on the banks of rivers Danube and Morava.

APPENDIX – DEFINITIONS

Table 1 • Population – average state. • Households (thou.) – operating households, estimated from last census. • Unemployed (thou.) – average number of unemployed by selected survey of work forces, published by Statistical Office SR, until 2006; outlook – calculation of the author of the report. • Unemployment rate, change of GDP, consumer prices – development for 2007 – 2010 according updated prognosis of the Institute of financial policy of the Ministry of Finance SR • Construction works prices (% of change) – yearly average; development for next years estimation. • Short – term interest rate – Bratislava inter bank offer rate, 3 months, sale, 2007 –2009 estimation. • Long – term interest rate –state bonds, maturity 10 years, NBS; years 2007 – 2009 estimation.

Table 2 • Constructional production – inland construction works, made by own employees in enterprises with 1 – 19 and above 20 workers, by tradesman and by constructional plants of non – construction enterprises, without black economy and DIY. In the row modernization, reconstructions are listed constructional works on repairs and maintenance. • Data on constructional production for years 2002 – 2004 are adapted from the Yearbook of construction 2006, subtracted are works abroad. Data for years 2005 and 2006 are updated according the data from Statistical Office SR; structure estimated.

Table 3 • Building permits – total number of dwellings in new family houses with one dwelling and total number of dwellings in new buildings with two and more dwellings. Not included are new dwellings in reconstructed buildings, arose by reconstruction, adaptation or by construction of additional new upper floors. • Housing starts – started dwellings from building permissions, number of dwellings, for whose constructions were issued building permits in monitored time period. • Housing completions – finished dwellings from approval decisions (in family houses, in dwelling houses, non – residential buildings, acquired by reconstruction, adaptation or construction of new upper floors). • Housing stock - calculation; original state according to census in 2001 + finished dwellings – drop of dwellings (in individual following years) • From that secondary residences – start value year 2001, census May 2001 recreation cottages in housing stock, unoccupied dwellings (individual years – estimation). • From that vacation spots and holiday dwellings – start value year 2001, census May 2001; unoccupied dwellings (individual year – estimation).

Table 4a • Industrial buildings inclusive complex industrial objects • Stores and agricultural buildings – rough estimation • In other non-residential buildings are included also hotels and similar buildings, buildings for traffic and telecommunication and buildings for culture, public entertainment

Table 4b • Roads - highways and local communications, bridges, overpasses, tunnels and estimation of repair and maintenance works. • Railways inclusive bridges, overpasses, tunnels and estimation of repair and maintenance works. • Based on Yearbook of construction 2007, Tab. II.2-10; Statistical Office SR, (preliminary)

Table 5 • Data and development for years 2004 – 2006, Statistical Office SR, www.statistics.sk • Development for 2007 – 2010 according to prognosis of the Institute of financial policy of the Ministry of Finance SR, updated in September 2007. • Gross fixed capital formation – construction, data in current prices from database SLOVSTAT; development by author of the report. All amounts are without VAT (19 %).

Vienna, November 2007 Slovakia

Country/Pays/Land: Slovak Republic Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 5 382 5 387 5 391 5 395 5 400 5 405 5 410 Bevölkerung

Households ('000s) Ménages 1 920 1 926 1 931 1 936 1 938 1 942 1 946 Haushalte

Unemployed ('000s) Chômeurs 481 428 353 288 264 253 242 Arbeitslose

Unemployment rate (%) Taux de chômage 18.1 16.2 13.3 10.9 10.0 9.6 9.2 Arbeitslosenquote

Change of GDP Variation du PIB 5.4 6.0 8.3 8.8 6.8 5.8 5.0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 7.5 2.7 4.5 2.4 2.0 2.5 2.4 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 6.1 4.3 3.9 4.5 4.2 3.9 3.5 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 3.7 3.1 4.8 4.3 4.3 4.1 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.9 4.9 4.9 4.9 4.7 4.5 4.5 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: Slovak 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 793 2.6 19.6 19.8 29.7 7.3 0.5 2.5

Logement Renovation 224 -16.1 32.9 4.8 2.6 1.2 1.2 -3.5

Wohnungsbau Total 1 017 -2.3 22.6 16.1 23.7 6.2 0.6 1.4

Non-residential construction New 1 504 22.1 4.3 17.4 -2.7 -2.7 -5.6 -7.4

Bâtiments non résidentiels Renovation 395 -7.0 5.4 21.6 -4.7 -5.2 -2.3 0.8

übriger Hochbau Total 1 899 14.9 4.5 18.2 -3.1 -3.2 -5.0 -5.7

Building New 2 297 15.3 9.1 18.2 8.5 1.5 -3.0 -2.9

Bâtiment Renovation 619 -10.4 14.8 15.0 -2.1 -2.7 -0.9 -1.0

Hochbau Total 2 916 8.8 10.3 17.5 6.2 0.6 -2.6 -2.6

Civil engineering New 1 075 5.1 32.5 16.1 -0.5 8.0 26.3 19.7

Génie civil Renovation 179 -28.9 40.7 -2.9 0.4 -3.1 0.0 1.6

Tiefbau Total 1 254 -2.3 33.8 12.9 -0.4 6.4 22.8 17.7

TOTAL CONSTRUCTION OUTPUT 4 170 5.6 16.6 16.1 4.2 2.3 5.0 4.5

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 2.30 -2.9 11.5 23.4 3.5 1.0 5.0 7.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 34,573 SKK

Country/Pays/Land: Slovak Republic Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 8.1 7.1 7.3 8.3 7.9 7.4 8.0 Baugenehmigungen Familienhäuser

Flats Collectif 6.3 10.4 10.6 7.7 10.0 10.2 10.0 Mehrfamilienhäuser

TOTAL 14.4 17.5 17.9 16.0 17.9 17.6 18.0

Housing starts 1+2 family dwellings Logements commencés Individuel 9.7 8.4 8.6 9.0 8.5 8.7 8.6 Baubeginne Familienhäuser

Flats Collectif 6.9 11.4 12.0 8.5 9.5 10.0 10.5 Mehrfamilienhäuser

TOTAL 16.6 19.8 20.6 17.5 18.0 18.7 19.1

Housing completions 1+2 family dwellings Logements terminés Individuel 8.6 8.7 7.7 8.2 8.1 8.5 8.5 Baufertigstellungen Familienhäuser

Flats Collectif 4.0 6.2 6.8 7.8 8.0 8.4 9.0 Mehrfamilienhäuser

TOTAL 12.6 14.9 14.4 16.0 16.1 16.9 17.5

Housing stock Logements existants 1 930 1 943 1 956 1 971 1 986 2 002 2 018 Wohnungsbestand

thereof second homes dont résid. secondaires 46 47 48 49 davon Zweitwohnungen

thereof vacancies dont inoccupé 178 179 180 180 davon leerstehend .

Home ownership rate 1) Taux de propriétaires occupants 80.0 84.0 86.0 87.0 87.5 87.5 88.0 Wohnungseigentumsquote

1) Cf. Appendix to the individual country report

Country/Pays/Land: Slovak 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 43 14.7 5.2 20.3 -10.6 0.0 -7.1 -7.7 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 46 10.6 0.3 14.0 -10.2 0.0 -6.7 -7.1 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 477 48.5 5.5 15.1 -9.4 -3.9 -11.3 -9.8 Industriegebäude

Storage buildings Bâtiments de stockage 101 50.9 8.5 86.1 -9.7 -6.1 -6.5 -13.8 Lagergebäude

Office buildings Bureaux 260 75.7 2.9 15.4 7.5 1.0 -3.9 -8.2 Bürogebäude

Commercial buildings Commerces 286 -20.7 3.0 19.1 -0.3 -3.9 -4.0 -12.6 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 23 17.9 7.4 37.5 19.7 0.0 -10.0 0.0 Landwirtschaftsgebäude

Miscellaneous Autres 266 15.7 4.3 5.2 -0.1 -3.1 1.1 3.2 Sonstiges

Total 1 504 22.1 4.3 17.4 -2.7 -2.7 -5.6 -7.4 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 34,573 SKK

Country/Pays/Land: Slovak Republic Table 4b

EUROCONSTRUCT

Total civil engineering Ensemble du génie civil Tiefbau insgesamt

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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 593 -3.7 51.3 16.3 0.5 22.3 40.7 24.3 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 231 2.2 81.4 20.3 -10.2 -18.7 1.6 17.7 Bahnanlagen

Other transport Autres réseaux 16 -48.3 9.0 18.5 28.6 5.6 -5.3 Übrige Verkehrsinfrastruktur

TOTAL 841 1.3 51.9 17.3 -2.1 12.1 32.6 22.8

Telecommunications Télécommunications 119 0.5 12.5 -1.4 16.8 -18.0 0.0 -7.3 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 179 1.8 21.2 14.8 2.0 3.0 4.4 7.0 Energie- und Wasserversorgung

Other Autres 116 -18.8 -4.2 -1.3 -9.0 0.0 -5.3 5.6 Sonstiges

Total 1 254 -2.3 33.8 12.9 -0.4 6.4 22.8 17.7

1) At 2006 prices, excluding taxes. 1 euro = 34,573 SKK

Country/Pays/Land: Slovak Republic Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 27.2 4.2 7.0 6.1 6.7 6.0 4.7 4.1 Privater Verbrauch

Public consumption Consommation publique 8.6 2.0 -0.6 4.1 2.0 3.0 2.8 2.8 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 12.5 5.0 17.5 7.3 8.8 8.0 6.0 5.5

of which construction 5.0 8.4 9.9 -1.7 7.8 6.0 3.0 3.0

Stocks (contribution as % of GDP) Variations de stocks 1.2 1.5 1.9 2.6 2.1 1.8 2.1 2.0 Vorratsveränderung

Exports Exportations 40.6 7.9 13.8 20.7 21.1 12.8 8.9 6.8 Exporte

Imports Importations 42.8 8.8 16.6 17.8 17.2 11.5 8.1 6.1 Importe

GDP PIB 47.3 5.4 6.0 8.3 8.8 6.8 5.8 5.0 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 34,573 SKK

SPAIN

ITeC – The Catalonia Institute of Construction Technology www.itec.es

Josep Ramon Fontana e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

Most forecasts for the Spanish economy have for some time agreed that Spain was headed for a slowdown. At this time, 2007 economic growth shows no signs of relaxation – very similar growth to the stiff 3.9% figure in 2006 is expected – but there are fewer and fewer doubts that the symptoms prognosticated will finally see the light in 2008: i.e., a cooling of internal consumption, and a loss of investor impetus, especially in construction. If this were the panorama that was being forecast before the credit market crisis hatched, after these events the future prospects for the Spanish economy can only have worsened. The caution of official sources when forecasting the impact on GDP is perhaps not fully reassuring, since the mortgage crisis is very closely tied to the real estate and residential construction sectors, which in Spain are now facing a significantly critical moment.

The deceleration of the Spanish residential sector is turning into a crisis, and more quickly than was expected. Demand has cooled considerably: interest rates have dissuaded buyers in general, and the change in the trend of housing revaluation has also dissuaded buyer- investors. We are also seeing up to what point the timing of the coming into force of the new Technical Building Code had a "smokescreen" effect, having covering up the true turning point in the residential market, which took place, in fact, in 2006 and not 2007. The result of all this has been a serious downward adjustment of expectations for new residential construction, beginning with 2007 itself. It has been calculated that a market driven simply by demographic demand is not capable of absorbing more than 500,000 dwellings per year, while the rate of growth during the 2003-2005 period had been almost 685,000 units. The key question is knowing just how sharply this readjustment in the market will occur. In terms of the assumptions used in this report, 2009 is seen as the point at which production levels will be similar to those of 2002, i.e., volumes close to the initial phase of the residential boom, but 20% under the cycle’s crest in 2006.

In view of the specific weight of new housing in relation to the entire Spanish construction industry, the brake on residential construction has affected the aggregate total very negatively, which shows signs of stagnation or a slight recession. On the basis of these results we cannot deduce that the entire sector is going through bad times: on the contrary, civil engineering is doing very well (2008 and 2009 may see growth of 4.5% p.a. on average) with non-residential construction remaining stable (growth of 1.6%). But there can be no doubt that both sub-sectors are suffering, since there are markets where the links to residential construction are very patent: less housing means less urbanization activity and less pressure to open new shops.

This is not the first time that one can speak of "passing the baton on to civil engineering", a frequent expression heard at the beginning of the decade when there was fear about the continuity of the residential boom. It seems that the moment has finally arrived where we will be able to verify whether this will in fact be possible. So far the pace of civil engineering tenders continues to be swift and the Government is insisting that public finances are strong enough to maintain it. Once again we must point up the existence of many infrastructure projects being planned and executed, which fosters trust in the continuity of activity, while not forgetting the positive impact of private initiative, which has acquired specific weight in the past few years.

2 Macro-economic Outlook

The Spanish economy in 2007 has continued to chalk up considerable growth levels, higher than those in the Euro zone. Nevertheless, it is decelerating as predicted. The materialization of the change in pace will occur in line with a somewhat different pattern than was projected six months ago in our last Euroconstruct report, where we said that 2007 would see a significant decrease and that the downward trend would moderate in 2008. Our current assumption reverses the sequence: 2007 will see only a slight slowdown (loss of a decimal point against 2006, which would leave GDP growth at 3.8%) while the impact will be concentrated more severely in 2008 (loss of 8 decimal points, i.e., a GDP of 3.0%).

2007: sufficient strength will make the turning point hardly noticeable

The factor most clearly responsible for the fact that 2007 will end above forecast levels is the strength of investment, the growth of which was initially foreseen at around 5.0% and which will probably end the year at 6.0%. Employment, in spite of beginning to show certain symptoms of a slowdown, will also finish 2007 somewhat higher than the expectations in our last report. The other areas seem to be heading towards an ever so slight deviation in our projection six months ago:

o Private consumption continues to wind down, a process that began in 2006, now at a steadily growing pace although it will not endanger its leading role in the growth of the Spanish economy. In the short term there seem not to be any possibilities of a turnaround in this trend. o Growth in exports seems to be consolidating at a certain band above 4%, which is contributing to helping the foreign balance of trade. o The containment of consumer prices also seems to be consolidating. This ratifies the possibilities of ending 2007 with a CPI at 2.6%. Analogously, construction prices also seem to be heading towards meeting the forecast that they would not exceed 4%. As in our previous report, we continue to underscore the inflationary impact of two areas with great specific weight in the sector: metallurgical products (9.5% increase year on year in June) and cement (6.8%).

2008: worsening expectations

Even before the credit market crunch began there was a general consensus in forecasting that the Spanish economy in 2008 was going to continue to decelerate. In spite of the effort made in order now to sew panic, it is obvious that the events of August in the United States marked a before and after in the economic situation awaiting Spain in 2008. Indeed, if in July the IMF published its forecast of 3.4% growth in Spanish GDP in 2008, in September there were already forecasts in the financial sector in which this figure fell to 2.8%.

The assumption chosen for this report is 3.0% growth in GDP, a mid-point between the most pessimistic vision of private analysts and the 3.3% figure that the Government has included in its 2008 budget proposal. This scenario assumes that financing will not become significantly more expensive compared to current levels, and that there will not be a significant decrease in the availability of credit. If these circumstances occur, private consumption could still cushion the fall (in spite of the fact that it would not grow above 3%) and investment would continue to grow (4% for the FBCF total) in spite of construction losing ground. No further tensions are expected to come from the export sector, since it is believed that the appreciation of the Euro has reached a maximum and that there will be a simultaneous deceleration of exports and imports.

2009: it is more likely that the slowdown will continue than a recovery will begin

At the date of this report, we can just begin to glimpse the real repercussions of the turbulence in the credit markets, and, consequently, there are fewer arguments than usual for making a two-year forecast. We would have to go back to the situation prior to the events of August in order to see how the review of the Government’s 2006-2009 stability program proposed prospects for 2009 that were a continuation of 2008: one saw a continuation of the slowdown, although private consumer growth was already stabilizing and the foreign trade balance tended to be less negative. If we were to apply this spirit to the 2008 assumptions, GDP would come in at 2.8%, similar to the 2.7% GDP of 2002, which was the moment of the weakest growth rate of the Spanish economy this decade.

2010: reactivation?

The latest recorded slowdown in the Spanish economy – after the crest in 2000 – lasted for two years: in 2003 there was already a (mild) recovery in growth. We cannot rule out that the same thing will happen in 2010, not only because previous performance is bound to repeat itself (recent economic history is full of exceptions) but because it seems hardly likely that investment would remain at such abnormally low levels, given the country’s potential, for a longer period of time.

3 Housing Market

The long-expected shift in the residential market cycle for new construction has finally occurred in 2007. Since the beginning of the year it has become evident that the real estate market started to cool once the Euribor rate broke the 4% barrier and kept rising. Against all logic, the construction industry continued to apply for building permits at rates comparable to those of the best years of the cycle. The first Euroconstruct report for 2007 was wary of this contradiction, caused by the coming into force of the new building code20 and we attempted to elaborate a hypothesis the reconciled this latest peak in start procedures to a market in which it appeared improbable that demand would be prepared to absorb all this construction. This assumption contemplated the idea that there was a possibility of growth in production in 2007, in view also of the fact that housing prices were continuing to evolve as forecast without any shocks – continuing to grow, but at a slower pace – which one could read still as a sign of relative normalcy. However, it was clear that negative growth rates were looming for 2008 onward.

A very considerable decrease was expected in the number of starts once the distortions caused by the new Building Code disappeared after March 2007, but, based on second quarter statistics, the decrease has been sharper than expected. As for financing, there have now been two years of steady hikes in interest rates, which, irrespective of the fact they may now be reaching their peak, have acted as a strong deterrent now that the banking sector has apparently exhausted all its formulas for cushioning the impact higher and higher rates by extending repayment terms. Furthermore, in addition to the growing mistrust in a potential revaluation of housing prices in the short-term21 we now have to face an international credit crunch. It is evident that our assumptions must be revised.

In light of the numerous uncertainties that the residential housing market is facing, we set out the different scenarios based on the assumptions that we set out in the table on the following page, generated by the forecast ranges represented in the charts below:

Forecast number of housing units Forecast growth in activity (permits issued for building starts x 1000) (annual change at constant prices, %) 900 10

850 5 Summer report scenario 800 Summ er r epor t 0 750 scenario

700 -5 Wi nter report scenario 650 -10 600 Range of 550 Range of -15 scenarios scenarios Winter report 500 scenario -20 450 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

20 The argument that drove the application for building permits before March 2007 was that of taking advantage of the transitory period when the building authorities still accepted projects following the old legislation which was less demanding in terms of building performance, and therefore involved lower construction costs. Thus, an artificial increase was caused in terms of the number of building permits, which can be quantified at approximately 100,000 extra units. As mentioned in the previous Euroconstruct report, there was a doubt (which still persists) as to whether all these dwellings were going to be executed immediately, or be postponed or eventually waived if an excess of risk was perceived in the real estate market. 21 According to the latest official figures from the Ministry of Housing, housing prices grew at a year-on-year rate of 5.8% in Q2 2007. However, in the last few months private studies have been published showing a much stiffer stagnation, and even decreases in prices in certain zones and in certain types of dwellings.

We have chosen an assumption that is closer to the optimistic scenario than the pessimistic scenario, in the belief that some of the assumptions on which the pessimistic scenario are based – panic after a price crash – are not very plausible. Curiously, in terms of the forecast for housing starts for 2008 and 2009, this new assumption is very close to the one set own a year and a half ago in the Euroconstruct report delivered in Munich, before the "Building Code effect" distorted the perception of the market’s health and fictitiously prolonged the cycle.

Assumption of the evolution of new construction in the residential market

Least favourable scenario Most favourable scenario

Financing Interest rates do not change in the short term and There is a shift in the trend in the next 6 to 9 remain or increase slightly over the next 18 to 24 months. The banking sector does not significantly months. The banking sector rigorously applies a revise its current credit granting policies and takes more restrictive risk evaluation policy. advantage, to the extent possible, of the formulas for improving accessibility.

Housing prices After very considerable downward adjustments Admitting the possibility of a short-term adjustment, between the end of 2007 and the beginning of 2008, a new equilibrium is reached relatively quickly which prices do not stabilize but continue to fall. A long- generates enough sensation of stability. The market term episode of devaluation would provoke the reacts positively: it is once more a time to buy feared psychological effect of the "bursting" of the without the risk that prices will be cheaper in a few bubble. months.

Inventories There is evidence of a considerable stock of housing This housing stock is not released on the market purchased during the boom years merely because of because: a) the owners think that the price its revaluation potential and which is now placed on stagnation is only a passing phase and prefer to wait the market. Housing demand is wary, which drives for a potential return to revaluations; b) the theories prices down further and impacts new construction arguing that there was no demographic explanation activity. for the absorption of these inventories are not confirmed. Scope of the "Building Code effect"(1) Given the lack of demand, the permits for starting The "extra" 2006 housing permits are executed in 100,000 dwellings (that were applied for and issued 2007, cushioning the fall in new housing starts in solely to take advantage of the final months before 2007. Analogously, part of the "surplus" at the the expiry of the old building code) are not executed. beginning of 2007 defrays the drop in starts in 2008.

Impact on construction The market converges abruptly with the 500,000 The trend is also towards convergence with the dwellings/year, which is the figure considered to figure of 500,000 units/year, but at a slower, steadier represent the demographically justifiable demand: pace.

2007 2008 2009 2010 2007 2008 2009 2010 Starts x1000 635 550 500 500 Starts x1000 710 645 610 575 Production -12% -22% -7% 0% Production -1% -8% -8% -2%

The decrease in new residential construction will affect neither social housing nor housing renovation in the same way:

o Social housing at this time continues to register record levels of activity and seems headed to hit the barrier of 100,000 housing starts in 2007, and, accordingly, the market share of social housing will reach 15%, which has not been the case since 1998. Irrespective of the results of the general elections in the spring of 2008, we can count on the maintenance of this pace in the short term, given that social housing occupies a relevant place in the programs of the political parties competing for office. Realistically, we can expect that this type of housing will not fall below 80,000 units/year throughout the forecast period, leaving behind the dark period of 2000- 2002 when social housing slowed to 45,000 units/year.

o Residential renovation: as the figures for the second semester show a clear decrease in the number of new building starts, renovation starts continue to enjoy a slight growth rate. In any case, we must examine this information cautiously, since it only measures large volume renovations and does not reflect what is happening in the significant medium and small renovations market. It is obvious that the cooling of the real estate market is having an impact on the used housing market (on occasion, this impact is even stronger than on new housing), which represents a significant brake on all renovation activity that is related to the revaluation of a certain property in order to put it up for sale. If situations of this type become less frequent, then the only renovations left are improvements and maintenance work promoted by the users for their own enjoyment, which is a market in which the greatest threat is the toughening of credit terms.

On the other hand, we can see that there is a certain revival in Government subsidized renovations. Thus, the Ministry of housing has announced a reformulation of its current economic incentive programs for those owners of unoccupied housing units who commit to renting their dwellings. These incentives consist of a non- recoverable grant of Euros 6,000 in order to upgrade these units. It also appears that the 2008-2012 E4 Energy Saving and Efficiency Action Plan will include subsidies to those renovation projects that are committed to achieve high levels of energy efficiency.

In conclusion, although our forecast has been revised somewhat downward in relation to our last report, it is expected that residential renovation will be at worse stagnant over the next few years.

4 Non-residential Market

A question that can be posed in relation to the current panorama of non-residential construction in Spain is up to what point this sector will be conditioned by the housing crisis. In general terms, there does not seem to be too much risk of this happening for various reasons: during the entire real estate boom we saw that both markets were travelling along separate roads (the expansion phase in housing did not boost growth in the non-residential sector), and on the other hand, the non-residential markets are not undergoing extraordinary activity that would lead to the suspicion that non-residential construction is above demand. Just the opposite: the recent growth in this sub-sector has been moderate and has always shown signs of reacting very quickly to the fluctuations in the markets.

Perhaps it is because the growth expectations of these markets were already significantly modest, there have hardly been changes made to the forecasts published in the previous Euroconstruct report. It is true that in the six months between both reports the expectations for the Spanish economy in general have worsened and that perhaps financing may become a growing problem, but at this time there is no reason to expect dramatic consequences in employment and production that would impact negatively on construction activity.

Viewed by sub-sectors, we can confirm that there has been a revival of industrial construction and a stiff boost to office construction, while we can already see negative signs in commercial building construction:

Continuity, except in commercial building construction

Non-residential surface area covered by municipal permits | Year-on-year evolution (index 100 = 1T03)

225 offices

200 commercial 175 industrial 150

125 warehouses

100

50 1Q 03 1Q 04 1Q 05 1Q 06 1Q 07

Prepared by ITeC on the basis of municipal building permit information

Industry Industrial production has been picking up pace in 2007 and it is expected that it will continue to do so in 2008, under the cover of a buoyant moment in industrial activity, where turnover grew by 5.8% in the 2Q of 2007 while the industrial production index clocked in at 2.6% year on year. This allows us to increase our 2008 forecast in relation to our previous report, although the hypothesis of a future slowdown in demand for industrial buildings as a result of the cooling of the country’s economic situation in general is still valid.

Commercial construction A backward movement has been detected in the figures for commercial premises based on municipal permits. We think this situation may be somewhat more than circumstantial and could be interpreted as a change in the cycle. The commercial sub-sector may be more vulnerable than the other non-residential markets: on the one hand, there is the forecast decline in private consumption, and, on the other, the fact that the slowdown in the residential sector will generate less urban growth, which brings commercial construction in its wake. Thus, stagnation is expected in new commercial construction for the 2008-2010 period, although it will not necessarily affect renovation activity involving already existing commercial premises.

Warehouses It has often been mentioned in these reports that the construction activity related to warehousing and logistics is caught between the effects of industrial and commercial construction. As we have just seen, these last two sub-sectors are confronting the medium term from different perspectives, and, it is therefore crucial to know which of the two will most directly condition warehouse construction. In the last few years the trend has been to come closer to the performance of the commercial sub-sector and it would seem quite sensible to latch on to this assumption in order to justify a new downward adjustment of the forecast for this market.

Offices After a brilliant performance in 2007, it is expected that offices will be the leading sub- sector in 2008. As our report six months ago showed, there is now confirmation that the recovery in the number of permits is not a passing phenomenon, and that employment in the services sector has become the most dynamic factor in the Spanish economy (even including its absorption of part of the negative impact of real estate services). The buoyant health of demand is not surprising, which, together with limited supply levels, explains why rental prices are still rising (15% year-on-year in Madrid in Q2 2007, with even higher rates in the city centre). From the point of view of office construction, it is expected that the number of new projects processed in 2007 will lead to solid guarantees of growth in the following years. Our forecast is for a peak in activity (+5%) in 2008, as from which time there will be certain slippage, which will not impede the office sector from becoming the non-residential sub-market with the greater growth expectations for 2009.

Agriculture, stock-breeding and fishing In our last report we mentioned that primary sector activity was positive, according to National Accounting statistics. This continues to be the case six months later. Moreover, the levels of employment in this sector continue to be stable. This situation allows us to raise our previous downward forecast slightly.

Other non-residential construction This sector includes the construction related to tourism and recreation, activities which in the last few years have been marked by their strength. 2007 is solidly expected to continue to show growth: the Government has announced that the year could end with an increase in tourist-related economic activity between 3.5% and 5%. There are no reasons to believe that the market will vary much in terms of performance in the next few years, although there is the possibility of a certain slowdown due to the sluggish performance of shopping malls construction, which often includes the construction of recreational facilities.

5 Civil Engineering Market

The position of the Government regarding public works is more than ever under the scrutiny of the construction industry, which is aware that the weakness in the residential sector has abdicated all growth expectations to civil engineering performance. The Government is sending out messages to calm fears, reminding the public how the public debt is at minimum historical levels (the forecast for 2008 is 34% of GDP, the lowest level in more than 20 years), which has resulted in a strengthening of the public finances, making it possible to maintain the growing rate of investment of the past few years. At this time the general budget act for 2008 contains a 9.4% increase in the budget for infrastructures against 2007. As has been the case, in this budgetary package the railway network will once again be receiving the most substantial allocation (25%), followed by roads and waterworks (20% each) and airports (11 %).

Thus, we can confirm the assumption in our previous report in which we saw 2008 having growth rates comparable to those of 2007; thus, if 2007 ends at around 6%, 2008 could grow at around 5%, somewhat less due to roads and urbanization works. 2009 could be a more critical year, coming as it does after the general elections and also at a foreseeable low mark in the economic cycle. Nevertheless, we propose that there will only be a certain decline in the growth rate to 4%, in the understanding that factors such as long-term programming and private participation in financing could help cushion an eventual conjunctural slump.

Public tenders, in the sights

Public tenders for engineering works | Year-on-year evolution (MEUR x 1000) 38 Seopan 36 34 32

30 Ministry 28 26 24

22 20 18

16 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07

Prepared by ITeC based on information from the Ministry of Public Works and Seopan

Roads The pace of tenders in 2007 has been very similar to that of 2006, and, accordingly, we do not expect much of a net increase in activity in 2008. This dovetails with the slowdown that we have been forecasting in our previous reports. We should also add another argument to reaffirm this hypothesis: there is a fear that the end of the residential boom will have a collateral effect in terms of the decapitalisation of local Governments which will lose a sizeable part of their income from new construction. We should remember that the city councils and provincial Governments tender out one fifth of all civil engineering works in Spain, and that a very significant part of their investment directly impacts the local road networks. Thus, we have adjusted our forecast downward, and consequently road construction has become one of the sub- sectors with the lowest growth forecast.

Railways There are sufficiently fewer uncertainties surrounding the railways both in the short and medium term. In the short-term, tendering evolution in 2007 has been particularly positive, and this guarantees that after the completion of the major projects planned for the year end (the Madrid-Valladolid, Tarragona-Barcelona and Antequera-Málaga high speed rail stretches) there will not be a vacuum in activity and work will simply shift to new geographic locations (regions of the northern coast, access to the Valencian coast from the centre of the country, stretch to the French border). In the medium term of special note is the coming into force of the first Contract Program establishing the obligations and commitments of the Government and ADIF22 for 2007-2010, under which ADIF will receive throughout this period a total amount of EUR 11,900 M, which, together with its own funds, constitutes an investment volume of EUR 23,000 M. This is therefore a formal commitment to coherence and continuity in the management of the railways. The type of projects that ADIF is expected to finance are mainly maintenance, especially rail lines, but also communications and control, electricity supply and train stations. The second four-year period (2009-2012) of the Level Crossing Security Plan (2005-2012) is also being programmed, and EUR 640 M will be allocated to eliminate 1,350 level crossings.

Other transport infrastructure Our last report discussed the contrast between the positive situation of investment in airports to the more stagnant situation of the national harbours. Six months later, we see that there has been a slight rise in harbour tendering, which leads us to make an upward adjustment in the forecast for "other transport infrastructures". Moreover, as from March 2008 the USA-EU treaty on the deregulation of air traffic will come into effect. It is expected to boost air traffic, which could contribute in the medium-term to the acceleration of certain projects to expand airport facilities.

Hydraulic infrastructure The tender volume in this area has not shown convincing growth, except in minor sub-sectors such as agricultural irrigation. As for the star sub-sector – potable water from the construction of desalination plants as part of the A.G.U.A. program – at the beginning of the year there were 7 plants under construction and another 7 tenders that had been awarded, after which there is only EUR 535 M remaining to build 11 more in 2007 and beyond.

Electrical energy Last July legislation was passed whereby the company REE (Red Eléctrica de España) was to operate as the sole, exclusive electricity transporter. To do so, the companies that are owners of transport installations must transfer their facilities to

22 ADIF stands for Administrador de Infraestructuras Ferroviarias, the public entity that is responsible of the management and maintenance of Spanish rail traffic and infrastructure since January 2005.

REE within a maximum period of three years. The company plans to invest EUR 3,000 M during the period 2007-2011. Although this includes the acquisition of assets from other transporters, most of the funding will be allocated to improving and expanding the network, especially in order to complete connections to new generating fields and to feed the high speed train lines. Enel and Acciona, whose takeover bid of Endesa is now in the acceptance period, have said that they will comply with Endesa’s investment plans, which foresaw an 8.6% increase in 2007 against 2006 investment.

Urbanisation In the last Euroconstruct report we already pointed to the fact that 2006 was going to mark the growth peak of "Others", which includes civil engineering work involved in urbanisation. The reason was the combined impact of the municipal elections in the spring of 2007 plus the imminent arrival of the end of the real estate cycle. The tendering statistics for the first half of 2007 have already begun to confirm this trend. We have adjusted our forecast downward for the period 2008-2010, in line with the hypothesis that residential demand will cool more quickly than we had originally calculated, and, as a result, a large number of urbanisation projects will be postponed or cancelled.

APPENDIX – DEFINITIONS

Table 1 • Population: figures refer to January 1st of each year • Unemployed and unemployment rate: from the results of the quarterly household Labour Force Survey (EPA) conducted by INE. Data conforms to ILO definitions.

Table 2 • Construction output: is the addition of the production generated by companies in the construction sector plus the construction production generated in other economic sectors. This explicitly excludes taxes (VAT), intermediate production (self-consumption) and the production generated in other economic sectors by construction companies.

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. Please note that strictly speaking this is not an account of how many dwellings have been effectively started, but an account of building projects that receive the technical go-ahead from an Association of Surveyors. Such permissions are not granted to preliminary projects, but to projects that include the full technical detail about materials and techniques, plus a plan of execution work. Therefore it is assumed that any project that has been developed with this degree of detail is ready to start, but there is no way to check if every one of them is finally executed. • 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 2006 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. • 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: private and public offices, law courts, police stations and banks. • 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: permanent collective dwellings (residences for the elderly, for students and teachers, prisons, orphanages, residences for the military and clergy) eventual collective dwellings (hotels, motels) buildings for transport and communications (car parks, airport terminals, railway and bus stations), fire stations, buildings for religious uses.

Sources National Statistics Institute (www.ine.es), Bank of Spain (www.bde.es), Ministry of Public Works (www.mfom.es), Ministry of Dwelling (www.mviv.es), Spanish Council of Architects (www.cscae.com), Association of National Construction Companies (www.seopan.org)

Vienna, November 2007 Spain

Country/Pays/Land: SPAIN Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 43 198 44 108 44 709 45 250 45 750 46 200 46 630 Bevölkerung

Households ('000s) Ménages 15 614 16 050 16 450 16 900 17 150 17 400 17 600 Haushalte

Unemployed ('000s) Chômeurs 2 159 1 841 1 811 1 770 1 820 1 860 1 890 Arbeitslose

Unemployment rate (%) Taux de chômage 10.6 8.7 8.3 7.9 8.0 8.1 8.1 Arbeitslosenquote

Change of GDP Variation du PIB 3.3 3.6 3.9 3.8 3.0 2.8 3.3 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 3.0 3.4 3.5 2.6 2.6 2.5 2.5 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 7.2 4.5 5.9 3.9 3.4 2.9 2.7 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.1 2.2 3.1 4.3 4.4 4.5 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.1 3.4 4.0 4.4 4.5 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 76 950 4.5 6.7 8.1 -3.0 -8.0 -10.0 -3.0

Logement Renovation 30 530 4.1 4.5 5.0 3.6 2.8 0.5 1.5

Wohnungsbau Total 107 480 4.4 6.1 7.2 -1.1 -4.8 -6.6 -1.4

Non-residential construction New 30 680 2.6 1.9 1.8 2.4 1.8 1.1 1.1

Bâtiments non résidentiels Renovation 17 150 3.0 2.4 2.1 2.2 2.0 1.6 1.8

übriger Hochbau Total 47 830 2.7 2.1 1.9 2.3 1.9 1.3 1.4

Building New 107 630 3.9 5.2 6.2 -1.5 -5.1 -6.5 -1.6

Bâtiment Renovation 47 680 3.7 3.7 3.9 3.1 2.5 0.9 1.6

Hochbau Total 155 310 3.8 4.8 5.5 -0.1 -2.7 -4.0 -0.5

Civil engineering New 43 460 6.6 9.0 7.7 6.1 5.2 4.2 4.0

Génie civil Renovation 9 380 3.9 4.6 5.2 4.4 4.3 3.0 3.0

Tiefbau Total 52 840 6.1 8.2 7.2 5.8 5.0 4.0 3.8

TOTAL CONSTRUCTION OUTPUT 208 150 4.4 5.6 5.9 1.4 -0.6 -1.8 0.8

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 55.88 3.9 7.3 8.5 1.0 -1.0 -2.0 1.0 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes.

Country/Pays/Land: SPAIN Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 207.0 221.0 180.5 140.0 130.0 130.0 135.0 Baugenehmigungen Familienhäuser

Flats Collectif 554.5 600.0 735.0 570.0 505.0 455.0 430.0 Mehrfamilienhäuser

TOTAL 761.5 821.0 915.5 710.0 635.0 585.0 565.0

Housing starts 1+2 family dwellings Logements commencés Individuel 186.7 193.5 166.0 135.0 125.0 125.0 130.0 Baubeginne Familienhäuser

Flats Collectif 500.3 536.2 699.6 550.0 485.0 435.0 415.0 Mehrfamilienhäuser

TOTAL 687.0 729.7 865.6 685.0 610.0 560.0 545.0

Housing completions 1+2 family dwellings Logements terminés Individuel 180.0 185.0 180.0 170.0 145.0 135.0 125.0 Baufertigstellungen Familienhäuser

Flats Collectif 456.0 483.0 569.0 605.0 590.0 535.0 445.0 Mehrfamilienhäuser

TOTAL 636.0 668.0 749.0 775.0 735.0 670.0 570.0

Housing stock Logements existants 22 623 23 210 23 797 24 545 25 315 26 050 26 720 Wohnungsbestand

thereof second homes dont résid. secondaires 3 680 3 795 3 910 4 030 4 160 4 285 4 400 davon Zweitwohnungen

thereof vacancies dont inoccupé 3 335 3 410 3 475 3 535 3 545 3 595 3 630 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 87.0 87.0 88.0 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 695 1.5 3.6 0.5 1.5 1.6 1.0 1.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 355 7.0 4.4 0.0 0.8 1.5 1.0 2.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 8 625 1.2 2.8 0.9 2.2 2.4 0.5 0.3 Industriegebäude

Storage buildings Bâtiments de stockage 7 475 2.5 3.0 2.1 1.6 0.4 0.8 1.4 Lagergebäude

Office buildings Bureaux 3 100 1.9 -0.5 1.6 3.8 5.0 3.2 1.9 Bürogebäude

Commercial buildings Commerces 5 535 6.4 0.5 3.4 3.0 0.2 0.0 1.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 1 050 1.5 0.8 -1.0 0.8 1.0 0.0 -0.5 Landwirtschaftsgebäude

Miscellaneous Autres 3 845 1.3 1.9 2.7 3.2 2.8 2.8 2.5 Sonstiges

Total 30 680 2.6 1.9 1.8 2.4 1.8 1.1 1.1 Insgesamt

1) At 2006 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 21 055 7.0 13.3 6.8 5.0 3.0 2.5 2.0 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 10 835 6.4 1.9 8.5 8.8 8.5 6.0 4.0 Bahnanlagen

Other transport Autres réseaux 2 200 3.3 3.0 6.0 4.8 5.5 4.0 4.0 Übrige Verkehrsinfrastruktur

TOTAL 34 090 6.5 8.8 7.3 6.2 5.0 3.8 2.8

Telecommunications Télécommunications 3 120 5.4 4.8 4.4 5.0 5.0 3.0 3.5 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 11 420 5.0 7.2 7.9 6.2 7.0 7.5 8.0 Energie- und Wasserversorgung

Other Autres 4 210 5.8 9.3 6.5 2.7 -0.5 -3.5 0.0 Sonstiges

Total 52 840 6.1 8.2 7.2 5.8 5.0 4.0 3.8

1) At 2006 prices, excluding taxes.

Country/Pays/Land: SPAIN Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 554.5 4.2 4.2 3.7 3.3 2.9 2.7 2.8 Privater Verbrauch

Public consumption Consommation publique 186.7 6.3 5.5 4.8 5.1 4.7 4.5 4.8 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 298.2 5.1 6.9 6.8 6.0 3.7 3.4 4.7

of which construction 175.4 5.6 6.1 6.0 2.0 0.0 -1.0 1.0

Stocks (contribution as % of GDP) Variations de stocks 1.8 0.3 0.1 0.2 0.2 0.2 0.1 0.2 Vorratsveränderung

Exports Exportations 255.3 4.2 2.6 5.1 4.6 4.1 3.8 4.2 Exporte

Imports Importations 315.6 9.6 7.7 8.3 6.5 5.2 5.0 5.5 Importe

GDP PIB 981.0 3.3 3.6 3.9 3.8 3.0 2.8 3.3 BIP

Standard National Accounts, gross figures

SWEDEN

Prognoscentret AB www.prognoscentret.se

Bengt Henricson e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

The Swedish economy is currently in a positive upward spiral and the GDP growth reached 4.2% last year which appears to be the peak for this business cycle. The export made the strongest contribution representing a bit more than 50% of the growth. A strongly improved labour market and rising household and public consumption are also contributing. General government finances are strong, partly because of a decrease in sick leave and lower unemployment. The government’s labour market policy has forced unemployed to the labour market at the same time demand stimulating actions has been enforced. This is expected to lower the unemployment rate in the long run. When the level of employment is growing, the demand driven part of the economy is stimulated which leads to a strong development in especially private consumption.

The inflows of orders and production volumes have picked up which by the end of the summer have led to a capacity usage close to 92 percent which is the highest level since the 80ties. The industrial confidence indicator has been stable around +8 to +9 since last summer. The latest confidence indicator for the construction industry this summer reached record levels of +43 to +48. The construction activity continues to grow to the extent that we now see a shortage in both labour and building material. At the same time, the industry is optimistic and still anticipates a continued upswing during the year to come.

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 almost 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. However, during the last two years we have seen a slight upturn in new non-residential buildings starts and this year, the growth will be significant. After 2007, the activity is predicted to grow slowly to 2009 with a slight decrease in 2010.

The R&M segments have also declined The market structure of the Swedish construction slightly since 1990, but are indeed much market 2006 (exkl. civil engineering) more stable than the new construction New Residential segments. All in all, the total construction 26% 30% market has declined around 30% since New Non-residential

1990, to a total value of around 16.3 billion R&M Residential Euros in 2006 (excl civ eng). R&M Non-residential 11% Swedish construction industry becomes more and more dependent of the R&M 33% sector. We see a growth in almost all segments this year and 2008, but a slight downturn in new constructions in the end of the forecast period. Our forecast for the total construction market towards 2010 including civil engineering is, hence, optimistic.

New New New R&M R&M R&M TOTAL Residential Non-residential Civil engineering Residential Non-residential Civil engineering CONSTRUCTION 2005 3 785 1 732 5 399 5 009 4 721 1 176 21 822 2006 4 276 1 793 5 853 5 310 4 944 1 234 23 410 2007 4 358 2 021 6 581 5 497 5 174 1 290 24 921 2008 4 294 2 102 6 919 5 772 5 400 1 335 25 822 2009 4 383 2 136 7 200 6 037 5 610 1 368 26 733 2010 4 336 2 067 7 342 6 278 5 834 1 396 27 252

Investments in building constructions in million Euros.

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 the coming years are optimistic even if the activity is flattening out. The market for 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 1.95 million square metres. The sparse upturn in building starts during 2005 and 2006 shows that the negative trend was broken but compared to the rest of the Euroconstruct members, Sweden is still producing very few new non-residential buildings. We predict an increase towards 2009 and it is especially office buildings that will contribute to the growth this year. By 2010 Sweden is reaching the end of the business cycle with higher interest rates and a weakening labour market. This is why we 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. Big residential R&M projects are expected to increase and growth in this segment will be around 4% towards 2010.

The government’s policy towards the construction industry has been clarified since the last report. Public stimulations to new rental flats was withdrawn this New Year and support to large R&M projects will not be introduced. Sell outs of publicly owned rental flats started this summer and the property tax shall be replaced by a regional fee which will lead to a significant cut in living costs, and higher prices, in attractive areas. The long term goal is to make the construction industry independent of public stimulation.

The Swedish construction market to 2010

12 000

10 000

8 000 Residential

6 000 Non-resident. Civil engin. 4 000 Million Euros 2 000

7 8 0 2 3 5 6 7 8 0 9 0 0 0 0 1 99 00 00 00 19 1 1999 20 2001 20 2 2004 20 2 20 2 2009 20 Year

In 2006, the total investments in civil engineering ended up at 7.1 billion Euros. This is very close to what we expected by the end of last year. The predicted downturn in new projects 2005 did not become as large as expected and the growth in 2006 came according to plan. A large growth in transport and infrastructure pushed up the figures for last year but we had a growth in all segments. During the forecast period we see a continuous growth in almost all segments, especially energy investments which will lead to a peak in growth this year. 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. However, this is the market based on turnover. Higher costs have forced public authorities to ask for more money to be able to stick to their previous investment plans.

2 Macro-economic Outlook

Swedish Economy in an Upward Spiral In general, the Nordic countries have for a couple of years seen a strong economic development. Exports, household consumption and investments have all been rising rapidly. The principal forces driving this surge are high global growth, an expansionary fiscal policy, 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 during this year, a surprisingly improved labour market. GDP growth was 4.2% last year and is expected to drop down to 3.5% this year and 3.8% next year, (the predicted upturn in 2008 is a result of a higher amount of working days).

This is in line with our expectations from the report in June. The growth this year has been revised slightly downwards but we are a bit more optimistic for the rest of the forecast period. Among the surprises are the investments, which went up 7.9% last year and are expected to reach an even higher growth this year with 9.6%. This is based on the growth in energy investments, an expanding public sector and a growing activity in new residential buildings. However, higher interest rates and weaker global economy will contribute to a dampening effect by the end of the forecast period.

There have been more than 10 years of continuous growth in private consumption in Sweden. A short period of slow development after 2001 has been followed by a steady growth during the latest years. The household’s confidence has gone up due to a stronger business cycle, low interest rates, a better labour market situation and rising income and wealth. This year the growth is expected to be 3.0% and next year 4.0%. The forecast for this year have been revised downwards but the growth to 2009 is higher. A part of the consumption growth is based on expansive fiscal policies connected to tax cuts on income and property. Another positive impact is the raising salaries among households which is one of the results of the strong labour market.

The strong labour market has also affected public investments positively. Public consumption did probably reach its peak last year growing 1.8% and it is expected to drop stepwise to 0.4% in 2010. This is a more positive view than this spring. The explanation for this is mostly the government’s decision to withdraw the previous government’s commitment to new jobs in the public sector and better tax income due to lower unemployment and as well as a decrease in sick leave. By the end of the forecast period, the growth in consumption will go down as the growth of the economy dampens, the effect of the fiscal stimulation is reduced and the interest rate goes up.

The amount of working hours in the private sector went up 4.9% during the second quarter this year compared to the same period 2006. During the same time, the productivity went up 4.0%. This means that the growth trend in productivity we have seen during the last years have been broken. One reason for this is that new labour has difficulties to produce at the same level as trained employees and it is difficult to increase the productivity when the utility level of the labour force is close to a maximum.

We will see a strong growth during the forecast period driven by domestic demand, strong export development and a short term interest rate of 4.0% at the end of 2007. We have had a few years of fast growing house prices, higher debts among households and raising salaries which have pushed the inflation slightly upwards. This will force Riksbanken (the Swedish Central Bank) to raise interest rates. There are arguments from banks and institutes in Sweden that Riksbanken should move along faster with raises of the interest rate. The new governments latest expansive fiscal policy have led to continuous growth of house prices, households are more in debt, a faster increase of new jobs and stronger growth of salaries.

On the other hand, today, around 40% of households loans are short term, compared to 10% 10 years ago. This leads to a higher sensibility. Another argument against moving faster with the raise of interest rates is that the GDP growth, at least until now, is achieved through higher productivity. However, the interest rates are revised upwards since the report in June. The adaptation is not dramatic, moving from 4.0% this year to 4.8% in 2010.

The Swedish economy is small and open which is why the export always has been important. The export industries impact on the economy is also growing which is why the latest year’s strong development is met with such satisfaction. A bit more than 50% of the GDP growth last year is related to the export development. One reason for this is the global demand on durable goods, which is something of a Swedish speciality. But exports of services have also 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 during the years to come.

The new government has been in power for a bit more than one year. The impact on the Swedish macro economy is getting clearer. Tax cuts for both income and property has been decided. The employer tax will be reduced or excluded for parts of the service sector and the fortune tax is cut 50% with the goal of being completely excluded before the end of 2010. We have seen a raise in consumption growth and house prices have already gone up as an effect of the lowered property tax this year. This has forced Riksbanken to raise the interest rate in a slightly faster phase than planned. On the other hand it is also clear that the government will sell out big parts of publicly owned companies and publicly owned shares in companies. This might according to Nordea this spring, 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 long term interest rates down. Thus, the gap between the short term and long term interest rates will be reduced. The changes in fortune taxes will affect the value of the Krona since the flow of money outside Sweden will go down. 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 and 2008. 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 full time jobs is categorised as unemployed which the old government didn’t. In the chart we still show the figures from the "old calculation" which for 2007 is 4.5% and will be reduced to 3.6% by 2009 (and then go up again 2010). According to the calculation harmonized with the rest of Europe, the figure for 2007 is 6.2%. The figures from the last report in June was 4.8% for 2007 so the level of employment is today growing faster then previously expected and is predicted to reach over 80% by the end of next year.

The government has battled unemployment 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 has generated new jobs but most of them in 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 2004 2005 2006 2007 2008 2009 2010 GDP 4,1% 2,9% 4,2% 3,5% 3,8% 3,1% 2,5% Private consumption 2,2% 2,4% 2,8% 3,0% 4,0% 3,9% 2,9% Public consumption 0,4% 0,3% 1,8% 1,6% 1,1% 0,7% 0,4% Unemployment 5,3% 6,0% 5,4% 4,5% 3,9% 3,6% 4,2%

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 dependant 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 for 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 are all examples of government investments. Of course, the general economic trends, energy costs and the use of different IT services have impact on the civil engineering market, (especially private investments in energy and coverage of the 3G network) but not as much as governmental initiatives.

The construction activity has been growing strong during 2006 and the amount of companies believing in a continued expanding market is still in absolute majority, (the latest confidence indicator for the construction industry reached record levels of +48 this summer). The number of incoming orders has picked up, the firms have carried out extensive recruitments and the unemployment among construction workers is less than half of what it was in the beginning of 2004. Incoming orders will likely continue to rise, construction activity is expected to pick up further but the limit to growth is the availability of experienced labour. Shortage of labour and in many cases building material is the main barrier to further growth. Construction costs have raised and the growth this year is according to ByggIndex (a part of Statistics Sweden, (SCB) and the Swedish Construction Industries), 5.8%. This is due to the price development on many raw materials and a quite good salary development for the labour force. This is one of the major reasons why we see a dampening growth in the construction sector during the forecast period.

3 Housing Market

The Swedish construction market regarding residential buildings has indeed recovered well after some years of low activity. Both new construction and R&M measures keep on growing. However, decisions from the government by the end of last year have created some statistical turbulence and made the forecast more difficult to predict. Raising costs and a lack of labour and building material is also limiting further expansion.

New residential buildings

In 2005, Sweden faced a significant upswing in new constructions of residential buildings. Almost 32.000 residents were started, whereas 19.500 of these were flats and 12.300 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 mostly 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 activity in new residential buildings is still 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 38.000 to 40.000 new dwellings a year. During 2006 to 2010 we predict 34.400 a year and adding around 3,500 homes created through transformations we are just reaching the low end of a normal activity.

The statistics of housing starts is dramatic for 2006 since it ended up on almost 45.000 which is a growth of 40% from 2005. All this can be explained by the increase in flats that went up from around 19.700 in 2005 to 31.000 last year. The new government cancelled the public subsidies for new rental flats on January the first which was earlier than expected. It was originally planned to run to the summer of 2008 and thereafter probably be exchanged by another stimulation package towards new, cheaper rental flats. This decision was announced in November and as a result, many planned projects had to cast their elevator foundations before the New Year to be able to take advantage of the subsidies, (that is what’s needed to have the project officially started). These elevator foundations have been named after the responsible politician Mats Odell as "Odell pits". This new figure shows that the effect of the withdrawn subsidy has been bigger than we saw in the spring and according to "Boverkets", a new flat is calculated to be 15% more expensive to rent. Most of these projects will be finished according to the previous plans and we calculate that 9.500 more flats have been started during 2006 which otherwise would be put in the statistics during this year and 2008. This explains the difference between the figures in table 2 and 3.

Another impact on the market is the change in property tax. According to the latest plan, the property tax for flats goes down to 0,4% of the assessed value and for family houses it will be lowered to 0.75% of the assessed value or maximum 6.000 SEK/year (and the name is changed to: "Municipal fee"). As a compensation for the drop in public income, the tax on capital gain when selling property will be raised from 20% to 22%. The respite right is limited to 1.6 Mill SEK and the respite itself, new or existing, is covered with an interest rate of 0,5%. This effects both family houses and flats and is a slight change of the proposal described in the spring. But all in all, it is still a significant cut in costs for especially attractive family houses in big city areas.

Even if the liberation and lowered municipal fee for new constructions remains during the first 10 years, these changes will make new residential constructions less favourable compared to buying existing homes. In the long run however, higher prices should stimulate new constructions. The cancelled subsidies will affect the construction of new rental flats with low

© EUROCONSTRUCT 315 Sweden Vienna, November 2007 costs negatively especially since they have been difficult to finance for some time. Even if the new government has announced an ambition to approve self owned flats by the end of 2008, this will only impact on the activity during the very end of the forecast period. All in all, we see the total impact on the market, based on these government decisions to have a negative impact on new flats. We will have a growth in new semi public flats and possibly self owned flats, but this will not cover the loss in new rental flats. However, the growth since the millennium have been mainly on family houses and semi public flats so the total impact will probably not be as large as critical voices have announced since planned new rental flats will be built as semi public or self owned flats. We see no major impact on new 1+2 Family Houses. We can expect a growth in objects for sale this year because of higher tax on capital gain from the New Year but on the other hand, we might see a lower migration from 1+2 Family houses from 2008. New residential buildings are, through these decisions, taking a major step towards market adaptation.

The conditions for a continued increase in demand for housing constructions 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. Population went up more than 65.000 last year compared to the average of just over 33.000 during the previous 5 years. The west coast (Gothenburg) and the south (Malmö) are still the regions attracting most people. Another factor that stimulates growth is the continuously increasing prices. According to statistics from real estate companies the prices of 1+2 family houses went up 13 percent and flats 17 percent over the last twelve months. However, figures for the last three months show a cooling effect on the price development. The period of price growth above 10% to 15% a year is behind us for this business cycle but for the country as a whole, we see no dramatic drop in the forecast period. The level of employment is growing faster then expected and together with raising disposable income among households and a moderate growth of the interest rate we see a continuous, for Sweden, relatively high activity during the forecast period.

We predict that the annual outcome of started new residential buildings in Sweden will amount to 33.200 units in this year. Split by type of residential, this means 14.000 dwellings in 1+2 family houses and 19.200 residents in flats. For 2008 we predict that 1+2 family dwellings will even out on 14.000 units and flats go down to 20.850 residents. This activity on flats is our assumption based on an investigation made to calculate how many of the 9.500 prematurely started flats from last year that will run this year and the next. Since there is a shortage of labour and building material, we would like to highlight the possibility that entrepreneurs have overestimated the resources available and some of the projects planned for this year will be started 2008, or perhaps even in 2009.

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. We have also seen a growth in building costs that will affect the activity in the longer term. This together with a rising interest rate and a slower economic growth will cool down the market slightly especially for 1+2 family houses. For flats we have assumed an unchanged activity but the effects of the government’s decisions will be clearer as the time goes by.

R&M Residential buildings

Last year the total investments in R&M residential increased by 6 percent to a level of 5.3 billion Euros. Of these investments, approximately 3.1 billion Euros were invested in 1+2 family dwellings and accordingly 2.2 billion Euros in flats. The lion part of the increase came from the Do-it-Yourself (DIY) market, as many previously years before, (+ 7.1% last year). The DIY market keeps on strengthening its position and the willingness to renovate in the private household is very high in Sweden. We have also seen a strong growth in household

316 © EUROCONSTRUCT Vienna, November 2007 Sweden investments to reduce energy consumption. According to our quarterly surveys regarding the DIY-market, the strongest reason to renovations is in fact "tired of the old". To change the appearance of the kitchen, repaint the living room or redecorate the garden are no longer considered as knotty or too expensive.

Over the last years, many foreign and domestic retailer stores have 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. So far, we can not see any sign of a weakening trend in media or in household’s willingness to invest. However, we can see signs of an over- established market of retail stores with pressed margins and lower profits. The higher costs on building material have so far been covered by a strong growth in the market. But by time, this will lead to a market switching from fast growth to consolidation.

Both prices of flats and 1+2 family dwellings keep on increasing and this give an incentive to invest. The trend of renovating private homes is, not surprisingly, strongest in the urban regions, but we can also see that the interest has risen outside the cities. The driving forces for new residential buildings are also affecting the R&M market in a positive direction. Important forces for R&M like the level of employment, the growth of disposable income and the development of private consumption have all been revised to a slightly more positive level today than 6 months ago. This together with tax cuts on both labour and living makes us believe that the growth will continue this year and 2008. The new government has also announced the cancellation of a law stopping the transformation of rental flats to semi-public flats. This will be done this summer and since then; there are a lot of transformations planned, especially in the attractive parts of the big city areas. This will also affect the market in a positive direction but probably not until the second half of the forecast period.

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 1990-2005 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 Program". 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. Some owners of these buildings have also been stalling projects in the hope of receiving public stimulation. The new government has announced no such thing and since they have managed to be credible in this message, we have seen signs of more large R&M projects being planned and started. These will not ad much on the total activity for 2007 or even next year but we can predict a quite significant growth of larger R&M projects on flats by the end of the forecast period. The biggest problem is the availability of skilled specialised labour and material which might drive the costs of these investments.

We predict that the market will grow through out the whole forecast period. In 2008 the total investments in R&M residential buildings will amount to 5.8 billion Euros. This is an increase by 5.0% compared to 2007 which is in line with what we anticipated in the previous report. The forecast for 2007 has been revised downwards from 8.8% to 3.5% since the report in June. Our own investigations towards the DIY market have indicated a slower growth than expected and larger R&M projects on flats have been delayed. Lack of skilled labour and higher costs on building material are partly responsible for this development. We expect the growth of the DIY market to drop down to 2.5% in 2009. The total market is predicted to grow 4.6% 2009 and 4.0% 2010. By then, larger R&M projects on flats is assumed to take the role as the growing sector from the DIY market which we predict to flatten out as a result of slow price development, higher interest rates and a weaker labour market.

4 Non-residential Market

The market of new non-residential construction has been facing a down warding trend for several years and in 2004 the total outcome ended up at the extreme low level just under 2 million square meters. The outcome of 2005 and 2006 shows a weak growth in projects started but the negative trend was at least broken. Due to a strong growth in building permits in 2006 and a lot of projects planned, we see a significant step up in the activity this year, even if the growth will be a bit weaker than anticipated in the previous report. Despite this, 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 slight drop in the activities by the end of the forecast period. R&M is predicted to have a positive development to 2010.

New non-residential buildings

The volume of building starts decreased almost 43 percent between 2000 and 2004. The decrease 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 and office buildings have earlier kept the construction on a fairly good volume. The decline in the IT-sector led to high vacancies and offices started dropped dramatically down to only around 100.000 square meters 2004. This had a significant impact on the construction market especially in the Stockholm region.

The outcome of 2005 for new non-residential buildings gave us positive indicators that the negative trend was broken. This trend continued last year but a growth in buildings started from 1.95 mill square meters in 2004 to 2.09 mill in 2006 is far from dramatic. This means that approximately 1.79 billion Euros were invested in this type of buildings during last year. Investments in education, commercial and industrial buildings decreased last year, all other building types had a better outcome than in 2005. The most dramatic change is in office buildings which grew over 100 percent and the positive trend is believed to continue almost throughout the whole forecast period. This was predicted even if it happened a bit earlier than expected. Vacancy rates go down, rents goes up and the strong economy finally starts to generate more jobs. Sweden has had a trend of moving out commercial stores outside the cities. In other words; commercial malls have really had its breakthrough. Today Sweden is in the top when it comes to existing square meters of commercial buildings per capita and last year we saw a negative reaction after a strong growth in 2005. Due to a lot of projects planned and a strong growth in household spending we predict a positive development this year and the next followed by a more significant drop towards 2010. The business cycle is weakening and we see more investments in this building type are moving to R&M projects. All building types are expected to grow this year.

We believe that non-residential buildings will keep on working its way up to higher levels in 2008. This expectation is based on macroeconomic factors, political decisions, increasing need/demand and positive beliefs on the future among households and companies. However, 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, health and industry 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 been going 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 in renovation and abroad as a result of globalisation. One exception is a new hospital project in Stockholm (Karolinska Institutet), the first really big new hospital in decades. We see a significant growth this year and it is the only building type with a positive development in 2010.

We also see a step up in buildings for education this year but this is from low levels. In Sweden we have a big population around 16 to 19 years old and a few projects in new university buildings are in plan to meet this demand. Growing tourist industries together with more frequent business travelling have lead to new Hotel/Restaurant projects during the last two years. This activity will peak this year with 100 000 new square meters but we expect a high activity throughout the whole forecast period. In total we see a slight drop in new residential buildings in 2010 when GDP growth goes down, the labour market becomes weaker and interest rates make investments less favourable. This will affect the building types that are more sensitive to changes in the business cycle. We expect a drop in commercial buildings, storage, industry and vacancy houses. Office buildings and buildings for health are the only building types that move against that stream in 2009.

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 only market segment 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 decline in the IT-sector and uncertainties 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. 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 since then has been positive with an annual growth between 2.0 and 8.3 percent. Last year the R&M market for non-residential buildings increased by 4.7 percent to approximately 4.94 billion Euros. Every building type increased compared to the annual outcome of 2005. We predict that R&M non-residential will grow throughout the whole forecast period. Same macroeconomic factors as mentioned earlier will be relevant for this market since the same factors affects especially privately financed projects. Normally they affect the R&M market later which is why we don’t see a slight decrease in Storage, Industry and Business projects. We also see a trend where the commercial segment is focusing more on R&M projects than new constructions. The industry activity is very high and export is growing (8.7 percent last year and 5.8 percent this year). This have generated R&M projects both in buildings used for production today and previously empty industry buildings taken over by expanding companies. New jobs, higher vacancies due to new large projects and tougher competition among shopping centres makes us expect a continuous growth in the R&M sector also in the end of the forecast period.

Since public economy has become stronger and spending is planned to grow through the whole period, this will drive the market for publicly financed R&M 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 that needs improvements. The government’s previous slight cut in public spending will mostly affect new jobs. In total, we see a growth throughout the forecast period with around 2.6% a year. Growth is expected in all building types, especially health.

The total development for the end of the forecast period is difficult to predict. However, our main scenario is that the improvement in the general economy will still drive the development upwards. This is mostly based on a stable improved environment for public investments and that R&M in the private sector is believed to grow continuously through the whole forecast period.

5 Civil Engineering Market

SCB (Statistical bureau) and KI (National Institute of Economic Research) calculated that investments in Civil Engineering decreased 8.2% 2005 and National Accounts shows a negative trend of a bit more than 4%. The latest statistics for 2006 is slightly more unanimous. According to KI it was growing 9.2% and according to BI; 6.0% (Sweden’s Construction Industries). This illustrates the difficulties to get a grip of the over all investments in Civil Engineering in Sweden. In any way, we can conclude that after the dip in the activities in 2005 we are back to the volumes from 2002 to 2004. We have adjusted the development in 2006 slightly down, (with 1.2%) from the conference in Prague but this will be compensated this year. The total volume of investments has been up and down the last years with big fluctuations in especially transport, energy and telecommunications. Energy and Water plants held the investments up due to a fast growth of energy prices which stimulates both public and private investments to save energy.

The weak development in 2005 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. The new government looks at this alternative for a few large railroad investments in the Stockholm region (Citybanan and Tvärbanan) However, this will probably not affect the investments in any significant way until the end of the forecast period but there is a politically understanding over party lines that PFI projects shall be introduced in this country. Totally, the investments in the Swedish civil engineering market summed up to 7.1 billion Euros in 2006.

The by far biggest growth this year is expected in Energy, Heating and Water works where we will see a growth in investments of 33%. We have adapted this figure up 5.0% from the Prague report due to very strong figures from the first half of this year. This is due to growing energy prices which are predicted to remain on a high level. There are also tougher goals for energy consumption in new buildings from this summer. In many regions there are investments in heating plants to lower the use of direct electricity and oil. This includes plants for power, heating, natural gas, bio fuel and wind mills. More and more buildings are connected to district heating and the amount of installed heating pumps and heating boilers for bio fuel is breaking records each year. The investments in wind mills have previously been low in Sweden but it is growing more than any other segment. Outside Öresund a wind mill park project worth almost 200 million Euro was started last year. Similar plants are planned and the government has set a long term goal that 10 twh/year shall be generated by wind in 2015 (compared to around 0.8 twh/year today). In September 2006 the government also decided that the limit in size of windmills that can be build without having to get approval through environmental legislations shall be increased from 1 MW to 25 MW. This is predicted to have a large impact in private investments in this segment. We expect a more moderate growth after this year with 6.0% in 2008 and around 3.5% a year towards 2010.

Investments in public construction went up almost 6% last year. This was expected after a few years with negative development. The Road and Railroad department’s budget have been strengthened and project plans is indicating a continuous growth during the forecast period. Many larger highways are inferior or substitute to major renovation/modernization. Most of the growth last year was in roads and transport where we have had a few big projects started like "Norra Länken" in Stockholm and "Road 45" in Västra Götaland. We also see a positive trend in rail roads where a few large projects are running throughout 2008, like "Bottnia Banan" "Ådalsbanan" and "City tunneln" in Malmö. By the end of May the decision to start "Citytunneln" in Stockholm was taken and all in all, an annual growth of around 5% a year on railroads during the forecast period is not unrealistic.

Transport and infrastructure as a whole 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. It is important to have in mind that a reason for a stronger budget for these investments is higher costs for prioritised projects. The raising turnover for investments has not generated the same growth in planned projects. For this year we have adapted the figures down a bit to 2.5% but for the rest of the forecast period we expect an annual growth of around 3.9%. This is a slightly more optimistic forecast than we had in Prague.

The R&M in civil engineering is a fairly diversified part of the market and comprises everything from snow clearance 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 had a strong growth in 2006 with 5.0%, 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. The forecast for 2007 and 2008 is optimistic, with an annual increase around 3%. In 2010 the growth will slow down to 2%. The Road Department has stated that under a situation of unchanged budgets, it is more important to ensure the activity in R&M.

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 major part of the 3G network (in terms of coverage) is built but the use of mobile services has increased and the operators are obliged to cower 98% of the population. This will ensure a stable activity to step up capacity and cover the last pieces of Sweden. The major part of the positive development last year is due to an ongoing expansion of the fixed broad band network to also cover small communities. The growth of around 3% a year during 2008 and 2009 is based on a continuous expansion of fixed broad band networks. This activity will probably slow down by 2010. If the use of more advanced mobile services pick up significantly by the end of the forecast period this might cover for the drop in fixed networks since operators will have to step up capacity.

APPENDIX – DEFINITIONS

Table 1 The macro figures 2004-2010 refer to the National Institute of Economic Research (Konjunkturinstitutet, KI) and Statistics Sweden (Statistiska Centralbyrån). The figures regarding 2010 is based on long term forecasts from National Institute of Economic research together with 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 state the end of the year. The construction prices refer to new construction of flats only.

Table 2 The figures for R&M residential include DIY investments.

Table 3 The figures show housing stock at the end of the 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 buildings", as Swedish farmer do not have to apply for building permits as long as they own the land. Therefore, it is hard to estimate the level of investments. There are around 65,000 farms in Sweden. It is possible to give a rough estimation based on reliable figures on sub segments within the agricultural industry. The volume should be around 500,000 m2 a year, plus minus 50,000 m2. However, new figures from National Institute of Economic Research indicate optimism among farmers in Sweden and both turnover and revenues are growing. This should affect the building activity in this segment positively during the forecast period. The figures of civil engineering is based of the National Institute of Economic Research (Konjunkturinstitutet) and ByggIndustrin: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 2006 in the Euroconstruct tables for Sweden are given in million or billion Euros (1 Euro = 9.21 SEK, rate of October 2007).

Country/Pays/Land: Sweden Table 1

EUROCONSTRUCT

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

EstimateForecast Outlook

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 9 011 9 048 9 099 9 170 9 221 9 262 9 301 Bevölkerung

Households ('000s) Ménages 4 325 4 334 4 368 4 387 4 416 4 442 4 471 Haushalte

Unemployed ('000s) Chômeurs 353 356 330 292 278 265 271 Arbeitslose

Unemployment rate (%) Taux de chômage 5.3 6.0 5.4 4.5 3.9 3.6 4.2 Arbeitslosenquote

Change of GDP Variation du PIB 4.1 2.9 4.2 3.5 3.8 3.1 2.5 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0.4 0.5 1.4 2.2 2.5 2.8 2.9 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 3.4 4.0 3.3 5.8 3.8 4.0 3.5 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 2.4 1.7 3.0 4.0 4.8 4.8 4.8 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 3.8 3.4 3.6 4.5 4.7 4.9 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 4 276 30.9 19.8 13.0 1.9 -1.4 2.1 -1.1

Logement Renovation 5 310 3.1 4.4 6.0 3.5 5.0 4.6 4.0

Wohnungsbau Total 9 586 12.6 10.5 9.0 2.8 2.1 3.5 1.9

Non-residential construction New 1 793 -10.6 -3.0 3.5 12.7 4.0 1.6 -3.2

Bâtiments non résidentiels Renovation 4 944 8.3 2.0 4.7 4.6 4.4 3.9 4.0

übriger Hochbau Total 6 737 2.2 0.6 4.4 6.8 4.3 3.2 2.0

Building New 6 068 12.1 11.6 10.0 5.1 0.3 1.9 -1.8

Bâtiment Renovation 10 255 5.6 3.2 5.4 4.1 4.7 4.2 4.0

Hochbau Total 16 323 7.7 6.1 7.1 4.5 3.0 3.4 1.9

Civil engineering New 5 853 4.9 -7.0 8.4 12.4 5.1 4.1 2.0

Génie civil Renovation 1 234 3.0 1.9 5.0 4.5 3.5 2.5 2.0

Tiefbau Total 7 087 4.5 -5.5 7.8 11.1 4.9 3.8 2.0

TOTAL CONSTRUCTION OUTPUT 23 410 6.7 2.3 7.3 6.5 3.6 3.5 1.9

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 2.10 2.0 9.0 14.2 10.7 3.2 2.1 1.2 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 9,21 SEK

Country/Pays/Land: Sweden Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 11.2 12.7 15.4 15.7 15.6 15.2 15.4 Baugenehmigungen Familienhäuser

Flats Collectif 17.0 21.4 29.8 15.5 16.9 20.1 21.5 Mehrfamilienhäuser

TOTAL 28.2 34.1 45.2 31.2 32.5 35.3 36.9

Housing starts 1+2 family dwellings Logements commencés Individuel 10.6 12.3 13.9 14.0 14.0 13.5 13.5 Baubeginne Familienhäuser

Flats Collectif 17.0 19.7 31.0 12.5 18.0 21.0 20.5 Mehrfamilienhäuser

TOTAL 27.6 32.0 44.9 26.5 32.0 34.5 34.0

Housing completions 1+2 family dwellings Logements terminés Individuel 11.6 10.5 12.6 13.7 13.9 13.8 13.5 Baufertigstellungen Familienhäuser

Flats Collectif 13.7 17.5 19.8 21.0 22.5 20.5 21.0 Mehrfamilienhäuser

TOTAL 25.3 28.0 32.4 34.7 36.4 34.3 34.5

Housing stock Logements existants 4 379 4 407 4 441 4 479 4 517 4 552 4 587 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé 26 26 24 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 66.1 66.6 66.7 66.9 67.9 68.9 69.5 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 110 -45.5 5.8 -19.2 24.8 -0.7 -6.5 -7.9 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 51 -28.1 68.6 4.9 137.7 -7.9 86.0 26.2 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 400 2.2 -8.8 -3.9 0.3 -2.6 -2.1 -3.2 Industriegebäude

Storage buildings Bâtiments de stockage 239 7.7 -22.8 31.4 19.7 4.6 -13.6 -0.4 Lagergebäude

Office buildings Bureaux 216 -28.9 -8.3 101.8 23.5 20.3 18.0 -18.1 Bürogebäude

Commercial buildings Commerces 329 -13.5 13.3 -17.7 7.9 7.2 -12.4 -35.1 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles Landwirtschaftsgebäude

Miscellaneous Autres 448 -3.6 -5.0 1.4 1.4 2.0 -2.9 -0.2 Sonstiges

Total 1 793 -10.6 -3.0 3.5 12.7 4.0 1.6 -7.3 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 9,21 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 1 751 -0.7 -20.9 10.4 0.0 5.2 5.2 2.8 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 593 3.0 2.1 1.5 5.0 5.0 7.0 0.2 Bahnanlagen

Other transport Autres réseaux 618 8.9 -2.9 18.5 7.0 5.0 2.0 0.5 Übrige Verkehrsinfrastruktur

TOTAL 2 962 1.5 -13.6 10.0 2.5 5.1 4.9 1.8

Telecommunications Télécommunications 964 14.3 -21.1 4.6 2.0 3.0 3.0 -1.9 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 927 5.2 17.5 7.9 33.0 6.0 3.5 3.6 Energie- und Wasserversorgung

Other Autres 1 234 3.0 1.9 5.0 4.5 3.5 2.5 2.0 Sonstiges

Total 7 087 4.5 -5.5 7.8 11.1 4.9 3.8 2.0

1) At 2006 prices, excluding taxes. 1 euro = 9,21 SEK

Country/Pays/Land: Sweden Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption Consommation privée 145.3 2.2 2.4 2.8 3.0 4.0 3.9 2.9 Privater Verbrauch

Public consumption Consommation publique 82.4 0.4 0.3 1.8 1.6 1.1 0.7 0.4 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 55.1 6.4 8.1 7.9 9.6 5.6 2.8 1.8

of which construction 24.2 6.4 4.8 10.8 8.6 5.2 2.4 2.5

Stocks (contribution as % of GDP) Variations de stocks - 0.1 -0.4 -0.1 -0.1 0.2 -0.1 0.0 0.0 Vorratsveränderung

Exports Exportations 157.6 11.1 6.6 8.7 5.8 7.1 5.9 5.6 Exporte

Imports Importations 133.0 7.0 6.9 7.9 7.3 6.7 5.6 5.3 Importe

GDP PIB 307.4 4.1 2.9 4.2 3.5 3.8 3.1 2.5 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 9,21 SEK

SWITZERLAND

KOF ETH Zurich Swiss Economic Institute www.kof.ethz.ch

Yngve Abrahamsen Marc Altenburg e-mail: [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

Swiss construction industry had a high level of activity in 2006 although the earlier expectations turned out to be optimistic. We had forecasted a slight increase in the overall expenditures, but the final result was a decrease in real terms by 1.3 per cent down to 33,100 million euro. This was due to a number of reasons. First of them was the significantly lower spending in the civil engineering sector which was mainly caused by delays in the Alps Crossing Railway Project (NEAT). The expenditures on these large infrastructure projects sank by roughly 25 per cent compared to what originally had been scheduled. 2006 was also the last year where the government applied strict fiscal rules according to the "debt brake". This is a mechanism fixed in the constitution which forces to balance the debt and surplus policy over the business cycle. Hence, the current upswing did not allow for an increase in expenditures. This also affected the whole infrastructure sector – especially the railway (- 10.9 per cent in 2006) and road construction (-3.6 per cent in 2006). In the current year, this situation is about to change. Since there is still the need to do the postponed work, the overall transport infrastructure investment will recover by 7 per cent on average. Due to several additional public infrastructure projects, the growth rate will even accelerate in 2008 (9.5 per cent) and continue till the year after.

% Construction by type: Total Construction by type 2006 8 Civil engineering: Renovation 6 11.4% Civil 4 engineering: Residential construction: New 2 9.8% New 35.2% 0

Non- -2 residential construction: -4 Renovation 17.5% Non- Residential -6 residential construction: 2005 2006 2007 2008 2009 2010 construction: Renovation New 11.3% Total construction output Residential construction 14.8% Non-residential construction Civil engineering The residential construction also developed more lukewarm than expected. In spite of a still low vacancy rate in the housing sector, the new building activities reduced by 1.2 per cent in real terms. It is possible that the rapidly increasing construction prices caused a slump in the demand. Perhaps, potential house- and flat-owners decided to postpone the construction work on already existing building permits. The residential construction output will not increase until the end of the forecast period. However, the decreases which reach between - 2.6 per cent and -3.7 per cent will not be dramatic. Within the non-residential construction sector, the categories of commercial buildings and buildings for health had high positive growth rates in 2006. Although general economic growth reached record-high levels of over 3 per cent, the industrial construction investment decreased by 17.3 per cent. But to evaluate this correctly, the boost of 2005 has to be taken into account, when the spending in this sector more than doubled. So the drop-back can be interpreted as a development back to a more or less normal level after an unusual positive growth. From 2007 till 2009, we expect a further, although not euphoric increase in the overall non-residential construction by 1.6 per cent up to 4.9 per cent. After the moderate development in the past year, the outlook for the future of the whole Swiss construction industry is not much better. We expect, if any, only a slight increase in the overall construction output by 1.3 per cent. However, this can mainly be seen as a counter effect to the surprising decrease in the previous year. Since the boom in the construction industry already lasts since 2003, there is not much space left for a further dynamic development. We see a very moderate increase by 1.6 per cent in 2008, followed by 0.5 per

330 © EUROCONSTRUCT Vienna, November 2007 Switzerland cent and -0.6 per cent in 2009 and 2010, respectively. During this period, the housing construction will further lose its momentum, while the industrial and office buildings can still support the construction activities. Being the main cause for the decrease in 2006, the civil engineering may again return to a stable growth path. Nevertheless, high fluctuations in this sector will have to be reckoned also in the future. This is due to some overlaps in several large public infrastructure programs. The public sector investment might also benefit from the decision to foster education and science. At the same time, the restrictive budget policy that was a consequence of public deficits at the beginning of the century will come to an end and new expenditures are motivated by rising tax revenues. Further investment in the energy sector and other civil engineering works may support the construction output additionally. One special characteristic of the recent past is the increase in construction prices which has accelerated in 2006 (3.1 per cent) and in the first-half of 2007 (4.3 per cent). These figures are significantly above the consumer price inflation of 1.5 per cent in 2006. This is mainly due to shortages of raw materials and products, caused by a high international demand. Additionally, some firms also reported a lack of skilled workers. A stable, non-growing construction output should ease these restrictions and prevent the prices from rising further. Nevertheless, another possible source of inflation comes in at the beginning of 2008. As the employers association announced, the wages will rise by 2.7 per cent on average from January on. Bearing in mind that many construction firms do not make much profits – according to their own statements -, the entrepreneurs will have to raise prices to not to incur losses. No substantial change is expected for the share of new building and renovation in the overall construction output. Since 1997, the share of new construction fluctuates around 54 per cent, coming from more than 60 per cent during the 1996 boom in the building industry. The share of new construction in the main contract work is a little bit higher and amounted to 60 per cent in the first-half of 2007. Here we see a slight trend downwards, having reached its peak in 1995 with more than 70 per cent. In the subcontracting work, the new construction stands for only 34 per cent at the beginning of the current year. This sub-sector had its trough in 2001/2002 with only 30 per cent, but is slowly recovering since then. Interpreting these figures, it seems to be clear that with existing buildings, the most investment is made in subcontracting work which is more open to smaller renovation firms. As a last remark, both the main and the subcontracting work seem to be independent from any business cycle movements and follow a long-term trend.

2 Macro-economic Outlook

Following a brief recession in 2003, the Swiss economy grew vigorously. The upswing started initially in the export-oriented manufacturing and in the financial sector. In the meantime, it has also reached the domestic-oriented manufacturing and services sectors. Residential construction has also developed vigorously since 2002. The economic upswing was mainly driven by exports, but lately, it has been mostly supported by domestic demand, which should continue into 2008. Currently, the available indicators and surveys show sustained and broad-based economic growth. The rate of export growth, however, has slowed down lately, and construction is stagnating at a high level. Hence, the growth peak was probably reached around the middle of this year. According to our forecast, the growth rate of the Swiss economy will be shrinking gradually until the end of the year. The result will be a 2.8 per cent growth in the GDP for the year as a whole, which is only a little bit less than the 3.2 per cent in 2006. By early 2008, the slight decline in growth rates should be coming to an end and be followed by a consolidation phase. The quarter-over-quarter growth within 2008 is estimated to be in the 1.5 per cent to 2 per cent range, resulting in an annual growth rate at 1.9 per cent. In 2009, the GDP growth rate will be slightly higher at 2 per cent.

Industrial production should further grow through the end of the forecast period, with private consumption as the most important buttress for growth. However, export of commodities will once again be contributing to the upswing. The outlook for the construction industry, on the other hand, is not as rosy. Its output will grow modestly at best in the present and the coming two years. For the entire forecast period, strong growth in consumer demand will bolster the service sector, particularly in retail and in the hotel and restaurant industry. As for the financial sector, the impressive results from the past two years will not be repeated.

Total Demand by Expenditures 2006 % Gross Domestic Product 10

Private 8 consumption 40.9% 6 Exports 36.2% 4

Stocks -2 0.6% 2004 2005 2006 2007 2008 2009 2010 Gross fixed Public capital consumption Gross Domestic Product Private consumption formation 7.7% Public consumption Gross fixed capital formation 14.7% Exports Imports The Swiss National Bank’s (SNB) latest move on interest rates was probably the last in the current tightening cycle, because there are no identifiable threats to price stability at the moment. Therefore, the SNB will strive for a three-month LIBOR of 2.75 per cent for the time being. The Swiss franc is currently at a comparatively low level, it should begin strengthening gradually during the forecast period. In two years, the exchange rate against the euro will be around CHF 1.62 / EUR, against the US dollar around CHF 1.14 / USD by the end of 2009. As for the government, it will be acting with great restraint. While the austerity programmes from 2004 will be tapering off gradually, the state’s revenues will grow, as will the demand for public services. The effects of the political aspirations aimed at limiting government involvements and at lowering taxes will begin to make themselves felt. The surpluses in the public sector in 2007 are climbing to almost 2 per cent of GDP. Because of the expected positive accounts of the social insurances, the surplus will remain at this level for the coming two years. The effects of several years of marked economic growth have now been felt in the labour market. Indicators show that the demand for labour is high, and for the first time since the boom in 2000, a lack of available labour is being identified as an obstacle to production. In the forecast period, the labour supply will continue expanding at about the same rate as in the past. Given the higher growth in labour demand, we expect a reduction in the unemployment rate. It will continue dropping from 2.7 per cent in 2007 to 2.2 per cent in 2008. Due to the tight labour market, one can assume that the increase in salaries will be greater in the current and coming two years than in the recent past. This will mainly affect salaries for existing work contracts. They may grow by 1.5 per cent in the current year, and by 1.7 per cent in 2008. The average wage compensation, which takes job changes and performance-based components into account, will not be growing as dynamically owing to the decline in bonus payments. The significant increase in nominal salaries, however, will lead to a stronger rise in unit labour costs. Only a small percentage of these costs can be passed on, so corporate profits will fall.

3 Housing Market

The development of the housing market seems to be somewhat ambivalent. Whereas the number of housing completions has been rising since 2003 more or less constantly, the investment has developed differently. The construction activity increased from 2003 till 2005. However, there was a surprising decline of 1.2 per cent in 2006 (down to 15,400 million euro), even though about 10 per cent more housing completions were reported. Finding the reasons for this is not easy. It could be that the sharp rise of the construction prices (by more than 3 per cent) led to a counter effect which is characterized by a postponement of construction works or a switch to cheaper materials (which leads to lower amounts in real terms).

Number of flats 45 000 Apartment Size of Completed Flats & Dwellings 40 000 4 902 35 000 4 642 4 820 11 720 30 000 3 636 4 422 3 924 11 142 11 098 25 000 4 044 10 858 9 692 20 000 8 477 8 760 15 636 15 000 13 386 13 920 10 783 10 728 10 000 10 003 9 849 5 756 7 126 5 000 4 630 4 440 4 230 5 003 5 634 0 1 779 1 720 1 401 1 792 1 665 1 941 2 125 2000 2001 2002 2003 2004 2005 2006 1 room 2 rooms 3 rooms 4 rooms 5 rooms 6+ rooms

This modest trend seems to continue at the moment. There was already a slight decrease in the number of building permits for 1+2 family dwellings and flats since the beginning of the year 2007. Whereas the first quarter showed still quite good results (an increase compared to the first quarter of 2006 by 6.3 per cent), the second quarter did worse with -4.4 per cent. At the same time, due to the aforementioned reasons for price increases, the number of building permits where the construction will not have started until the end of the year is about to rise once again slightly. This seems to be another hint for possible postponements of housing starts. All this happens against the background of constant vacancy rates in the residential sector. Coming from a very low level, vacancy rates reached slightly more than 1 per cent in 2006 and 2007. This is far away from the peak of 1.9 per cent seen in 1998 and surprisingly low regarding the high completion levels between 2003 and 2006. But there are large regional differences. The housing space is particularly scarce in the Geneva Lake region, where only 0.19 per cent of the dwellings are unrented or unsold. The agglomeration of Zurich shows a stable vacancy rate of 0.8 per cent, which also points to a good economic performance and a high attractiveness of this area. Regions with the largest share of non-occupied flats are the cantons of Uri and Jura (reaching vacancy rates higher than 2 per cent). This fits to the trend of the constant migration of people who are mainly well-educated and qualified and leave their rural homeland to move into the economic centres. What makes the demand still keep up with the high supply in flats and houses are, on the one hand, the demographic factors. There are not only more births than deaths every year in Switzerland, but there is also a large amount of immigration – especially highly-educated people with a high income that allows them to buy or rent well-equipped housing space. Population increases by 40,000 to 60,000 annually. Compared to 42,000 housing completions during the last year and an average number of people per flat of 2.3, this means that almost one-half of the newly-built dwellings is already absorbed by the rising population.

According to the immigration which is expected to continue over the next years, there is still a significant need for new housing space. At the same time, the growing demand for more space per dwelling has to be kept pace with. It is this influence that saves the housing construction market from an even sharper downturn. So, the growth rates in the current year and up till 2009 will be only between -2.6 and -3.7 per cent. In 2010, it is possible that the trend moves back into a region with at least no further decline. This means that without much doubt it pays off for investors to finance new living space because an oversupply is not to be reckoned. Support for this scenario is given by the current development of prices. The rents for flats has continued to rise and even accelerated. This is true for both newly-rented flats and flats that are already in use. The rent index of the Federal Bureau of Statistics (BFS) increased by 1.8 per cent on an annual basis at the beginning of 2006, but reached 2.5 per cent in May 2007. Although this is significantly more than it was in the previous years, the growth rates are far from being as high as in 2000/2001 (+3.8 per cent). There is another measure for the rent prices in Switzerland, called the "supply rent". It describes the development of rents for flats that are new on the market – either because the dwellings are newly built or because they have changed their tenants. Because it is probable that the landlords will raise the rents faster if they sign a new contract, this figure is usually higher than the rents for already existing tenancy agreements. So, the supply rents increased between 3 and 4 per cent in 2006. In 2007, this lowered down to 2.9 per cent in the first quarter and 2.2 per cent in the second quarter. One reason may be that the first influences of the high housing completions show here. A special feature of the Swiss rent price system has still to be mentioned. The rents are almost officially linked to the mortgage interest rate. If the interest rate rises by 0.25 per cent, landlords are allowed to raise the rents by 3 per cent. As the interest rates increased at least in the first-half of 2007, this may be one reason for the observed inflation in rents. There was an even faster increase in the prices for freehold apartments and detached houses. This may be mostly due to the good development of the economy, connected with positive income prospects for the population. Having a good earning almost for sure, people are more likely to enter long-term contracts like the purchase of real estate. Whereas freehold apartments were between 4 and 6 per cent more expensive in 2006 than the previous year, the price increases reached even 8.9 per cent (on a yearly basis) in the second quarter of 2007. The same holds true for the detached houses. A moderate increase by 2 to 4 per cent could still be observed in 2006. Since the beginning of 2007, this figure reached 6.5 per cent. Hence, the demand for property seems to be very robust. It is quite unlikely that the increase in prices has already come to an end. A crucial issue of the housing market is the growing importance of flats instead of detached houses. In the next years, the latter account for about three quarters of the overall completions. Although it looks as if there are mostly freehold flats which are constructed, the home ownership rate will grow at the same pace. Many purchasers of these flats acquire them only for financial reasons (or have a broader portfolio which assures their retirement provisions) and will rent them out further. Statistically, this means that these dwellings are still rented flats although they do not belong to a real estate company. This is also why the home ownership rate is predicted to rise at a slower pace than it could have been presumed. Regarding the fact that the private purchase of flats in larger buildings has not been possible until recently, the comparatively low home ownership rate of 34.9 per cent (2006) is not surprising. It will rise slowly to 35.1 per cent this year and up to 35.5 per cent at the end of the forecast period.

4 Non-residential Market

The non-residential investment has also shown some weakness in the past year. The construction activity decreased by 1.4 per cent to 4,900 million euro after a considerable increase in 2005 by 6.6 per cent. Regarding the outlook for the current and the next two years, the non-residential market is about to get back on its growth path again. We estimate the investment in 2007 to grow by 4.8 per cent, followed by 4.5 per cent in 2008 and still 1.3 per cent in 2009. Hence, non-residential construction supports the overall construction output and can outbalance the decreases from the residential sector at least partly. Almost every sub-sector has its share in the dynamic of growth of the non-residential market, which evidences the broad basis of the current economic growth and the end of the fiscal austerity policies. The most important and fostering factors in 2007 are the buildings for education and commercial buildings. In 2008, the growth in the buildings for education and industrial buildings also reaches approximately the same level, whereas in 2009 only the education and the health sector remain as driving forces.

Investment in Educational and Health Sector Facilities In 2007, so far, investment in the health sector concentrated on the Zurich region. As one example, the complete refurbishment of one municipal hospital (the "Waid Spital") was finished in the current year. It amounted up to 177 million euros and lasted 18 years. Another large project, the also municipal "Triemli Spital", experienced the completion of the first reconstruction stage also in the range of about 150 million euros. The next stage is the complete new building of the ward block, with estimated costs of 270 million euro, which is expected to be finished till 2012. As the government aims to reduce the costs mainly for hospitalisation, it can be assumed that there will be further renovating projects – not only to improve the quality for patients, but also to make the treatment more efficient. One of the main reasons for this is that many of the large hospitals had been built or extended in the 1960s and 1970s and they are currently in a relatively bad state. Inadequate insulation, for instance, is responsible for massive losses of energy. As an additional factor, hospitals suffer from very short renovation cycles because of their intensive use and they have to be under general overhaul every 25-30 years. Since the techniques and medical equipment become more and more complex, this raises the requirements to the existing buildings even further. What we see from the figures in 2006 is that the spending for health buildings increased by 15.5 per cent. This trend will continue, although on a weaker level, until the end of the forecast period with growth rates between 6.5 per cent (2007) and 2.3 per cent (2010). With a rather low share of students and high school graduates compared to other OECD countries, the education system seems not to be totally ready for the challenges that stem from a globalised knowledge society. Having recognised this as a problem, the Swiss government introduced a national education program which raises the means for education by 5 per cent a year beginning in 2008. This is in contrast to the saving policy which was implemented under the budget constraints in the last few years, where the means decreased by 5.6 per cent last year and even by 7.2 per cent in 2005. Hence, it is no surprise that as a result of this political change, the expenditures for education buildings will rise constantly over the next years, ranging from 2.3 per cent in 2009 to 4.5 per cent in 2008. This is only partly due to the effort to keep pace with the international development. Also, many school buildings need renovation or even refurbishment. Last but not least, there are several large projects stemming from the universities. The "Science City" of the ETH Zurich (Swiss Federal Institute of Technology), for instance, is still under construction and remains a large part of the federal investment in the education sector. All in all, the expenditures of 310 million euros in 2006 will increase by 4.3 per cent in 2007 and even 4.5 per cent in 2008. After the initial impulse, the growth rates will lower to 3.6 per cent in 2009 and 2.3 per cent in 2010.

Industrial/storage Building What might have been a big surprise in the industrial building construction in 2006 was the sharp decline by 17.3 per cent. At first sight, this is in contrary to the growth of the GDP in the same year by more than 3 per cent. To some extent, this is only a short break in the otherwise stable upwards trend. Hence, the growth rates of industrial buildings construction amount again to 4.9 per cent in the current year and 4.5 per cent in 2008. We expect that the currently positive "output gap" which is caused by the booming economy and the rising demand will be closed at the latest in 2009. This also leads to decreasing investments in industrial buildings later on. Whereas the capacity utilisation is on record levels at the moment, it can be reckoned that it slowly falls to a more long-term average level. One main reason for this is the exports which will grow less dynamically in the next years than observed in 2006 and 2007. Further, it can be stated that the very abrupt increase in 2006 with a growth rate of 117 per cent has effects on the firms. Considering the construction of factory buildings as only the first step of a company’s expanding plans, there is further investment necessary which contains machinery and the human capital. Therefore, before the investment cycle turns again to the construction component, it may take more time until the newly constructed factory buildings work on their full capacity. Construction of industrial and commercial storage buildings will grow both in the current year and in 2008 by about 4.5 per cent. The past upturn of 2006 in this sector was even bigger than it was seen in the industrial building construction. It is not easy to find an explanation for this if one only looks at the decrease in stocks in 2006. Therefore, it looks as if there was an enormous backlog demand which is not completely satisfied yet. This backlog may result from a concentration on "normal" factory building in the current boom and therewith a neglect of the facitilites for storage. Now, when the boom of the economy seems to have reached its peak, the attention might go more to other possibilities to invest. Having finished this in 2009, the growth rates will show a minus sign from then on.

Office building The office market in Switzerland gets slowly into a good condition, although there seems to be a large time lag compared to the overall economic development which is already booming since three years. In 2006, we still observed a small downturn of the construction activity by - 1.3 per cent to about 550 million euro. As several studies show, the supply of office space declined in most regions of Switzerland during the last 12 months. Only in the Geneva area (but not in the city itself) a growth of available space in this sector could be seen. Nevertheless, the estimated vacancy rate still reaches almost 10 per cent and reaches up to 4.5 million sqm that are not or not adequately rented, depending on the source of the data. But we have seen even worse in the last years. The actual development points to a slow recovery from the office crisis of the early 2000’s when the vacancy rates were higher and the rents showed a remarkable slowdown. Since then, this effect led to substantially decreasing investment in office buildings which is now replaced by large new projects being under planning. The localisation of the new buildings spreads throughout the whole country, but concentrates on the big agglomerations. Being the most important office markets in Switzerland, the Zurich and Geneva regions report a number of large projects that are about to be started within the next few years. Big efforts to establish a completely new service area have also been made in Basel. Not only the highest office tower in Switzerland (the "Roche Tower", built by the producer of pharmaceutical products of the same name), but also a completely new campus for the fast developing life science sector is planned there (announced by Novartis, a competitor in the same industrial sector). Additionally, the fast growing Basel airport provides further positive impulses on the office market there.

In Zurich, the development of a former industrial area in the west of the city centre continues. The "Züri West" project started a couple of years ago with the first projects already being finished. It is about to reach a new stage in the next few years, when several office towers (among them the "Prime Tower") will be constructed. One possible bottleneck of the development of this area could be the traffic infrastructure. Suffering already now from traffic congestions in the rush hours, the renovation and enlargement of an important infrastructure (the "Hardbrücke") are still not completely sure because it is brought to a referendum by some politicians. Same is true for the extension of a tram-track which was planned to link the area to the public transport system. Other office complexes that have recently been completed, for example in northern Zurich and near the airport, are almost completely rented out. This is mainly due to some substantial rentings to corporate clients. Finally, in Geneva there is the highest price level observed for offices in Switzerland, especially for high-quality objects in the centre of the city, ranging up to 522 euro per sqm. This is mainly due to a substantial lack of adequate office space at these locations. Because there are almost no possibilities to solve this problem in the near future, offices outside the centre are in the quite comfortable position to profit from this relocation in demand. Therefore, there are chances to attract costumers by offering high-level office space to lower prices and add features like parking lots etc. Two larger projects, the "CASAI 58" with 8,000 sqm and "Patio Plaza" with 12,000 sqm, opened this year with a high share of rented units. Other projects close to the airport (which fit also to the requirements of the international organisations) are under planning. All together, there are two main trends that characterise the office market in Switzerland. On the one hand, it becomes more and more important to modernise the office space and make it more flexible to meet the differing requirements of the customers. If this does not happen, the problem could arise that the owners of existing office space have to deal with a structural vacancy and rapidly lowering value of their property. The second trend is the aforementioned transformation of former industrial areas to high-value office locations. This gives new chances both to the local governments, who can approach the solution of infrastructural challenges that exist in part since decades, and to prospective investors who face the problem of a scarcity of new building land in the city centres. Regarding the prices and the vacancy rates, it seems that the decline of the rents and the increase of the unrented space have widely come to an end. But this has to be looked at in more detail. Whereas in the city centres the demand rises significantly and leads to a decline of the vacancies, the prospects for the outer parts of the agglomerations are not that optimistic. Due to the scarcity of building land in the centres, many project developers decided to build their office parks in the periphery during the last real estate boom in the late- 1990s. Since the demand broke down afterwards, these often not very attractive locations have lost many tenants who moved back to the centres whenever there was free space available. For example, the A-rated locations in Basel reached a price level which is about 160 euro per sqm, whereas offices in B and C locations are hardly demanded and therefore not profitable for the estate companies. The prospects for the future office building market are nevertheless quite good. Hence, we expect the construction activity to grow by 4.0 per cent this year and by 3.8 per cent in 2008, respectively. Since there is still much unrented space, the recovery could stay short-term and probably come to an end in 2009.

Commercial building For several reasons, the sector of commercial buildings might take over the leading role in the overall construction industry in the near future. One of them is that the consumer sentiment indicators in Switzerland started to rise quite late in 2005/2006. At this time, the economic upturn had already been set in motion 2 years ago. Regarding the private consumption as a lagging variable in the business cycle, this indicates increasing retail sales over the next years. The private consumption increased by less than 2 per cent in the last

© EUROCONSTRUCT 337 Switzerland Vienna, November 2007 three years and might accelerate to 2.2 per cent in the current year and 2.6 per cent in 2008, respectively. Later on, the development stays fairly well with 2.4 per cent (2009) and 2.0 per cent (2010). Bearing this in mind, the demand for new commercial buildings will probably keep pace with this. As we additionally can see from the KOF surveys, the reported customer frequency in the retail sector is predominantly seen as very positive by the firms. They also expect rising sales and profits within the next months. The strong euro might be another reason for the positive prospects regarding the Swiss retail market. Up to now, there is a large amount of "cross-border shopping" especially between Switzerland and Germany, but also to other neighbouring countries. This is due to the relatively high price level not only for food, but for durable goods, too. As the euro, which is the currency in all of Switzerland’s neighbours (except for Liechtenstein, where the Swiss franc is the official currency), gets more and more expensive, the incentives for shopping abroad diminish. Hence, purchasing power is expected to return to the domestic market where it can stimulate further investment. The exchange rate effect also works the other way around. Whereas Switzerland was known to be a "high price region" for a very long time which probably put people off to come here, latest figures from the tourism sector show a substantial increase of overnight stays. The expansion of the retail sector takes place quite fast. After some difficulties at the beginning, the German discounter Aldi seems to do quite well in the Swiss food market and expands constantly. Although another discount chain from Germany (Lidl) is also expected to enter the Swiss market, there is no reliable information yet about how many stores, when, and where. According to rumours, the company will enter by opening several dozen shops at once and then expand further. This will surely lead to a harder competition in the commercial sector with expanding retail space and rising investment. On the other hand, the margins per sqm will decrease because the private consumption cannot keep pace with the speed of the shop expansion. This might mean that also the rents cannot stay on their currnet. Last but not least, the two biggest shopping mall projects are on a good way. The Westside Mall in Bern is already under construction, completed in the building shell, and about to open in autumn 2008. The Ebisquare project near Lucerne, whose realisation seemed to be a little bit unclear during the last two years, has found an anchor tenant with a large retail group (Coop). That is one reason why the construction is about to start in 2008. Completion is planned for 2011. Depending on the business development of these major projects, this might be a jump start for similiar projects. Still, the retail space in such huge malls (including entertainment and probably even wellness or similar facilities) is well below the space available in other countries. Putting all this together, it looks as if the growth in commercial buildings construction seen in 2006 (10.8 per cent) may continue, although at a slightly more moderate level. After 6 per cent growth in the current year, the construction activity will still rise by 5.5 per cent in 2008 and 1.2 per cent in 2009. The probable downturn of -1.8 per cent in 2010 can be considered as a normal counter effect after a period with such high growth rates and might be an indicator for possible market saturation.

5 Civil Engineering Market

Generally, civil engineering is the construction sector which is less difficult to forecast. In Switzerland the share of huge infrastructure projects is high. The overall cost of these projects (NEAT – mainly the Lötschberg and Gotthard base tunnel through the Alps) sums up to more than 10,000 million euro. However, delays, unexpected difficulties in the execution of construction work and higher construction prices increases may affect not only the project itself, but also related projects with common funding. Therefore, in 2006 only 75 per cent of the designated 1,300 million euro was spent. This led to a decrease of the total civil engineering expenditures by 0.6 per cent. In the current year, the backlog will not be cleared completely. The increase of 4.4 per cent in the civil engineering output can be regarded as a

338 © EUROCONSTRUCT Vienna, November 2007 Switzerland statistical base effect, and the overall sums stay approximately on the same level as predicted in the summer forecasts. There are also good news coming from the NEAT. As the first large project, the Lötschberg line between central Switzerland and Italy will soon be finished. First trains crossed the 35 kilometres long tunnel already in summer. Regular passenger trains will follow in December and reduce the travelling time by almost one hour. The largest problem for the remaining NEAT works (that are planned to be finished in 2017 or 2018 for the Gotthard line) is the increase in costs. Since the total amount of money to be spent for the NEAT railway projects is fixed, rising costs for one of the project mean less money for the others. Therefore, a recently started initiative aims to increase the cap for the so called «Finöv»-Fund. This Fund is the main financial source for the Swiss public transportation system. It’s not only technical reasons that are responsible for the observed difficulties. An appeal of a contract of the Gotthard line, which has already caused a substantial delay in the building process, was resolved in spring 2007. However, further delays are already on their way and threaten the schedule. As reported by a newspaper, a company not considered at the submission for the installation of the railway technology, wants to appeal the placing of the contracts. Hence, the works cannot begin until the court decides. To make up the lost time later will be cause higher costs. The investment in new railway stretches and new roads balanced for the first time in 2005. The planned national motorway network is completed to 93 per cent by the end of 2006. In 2006, about 6 kilometres of new motorways were opened. In 2007, 7 kilometres should follow at the cost of about 800 million euro. The next big step are about to come in 2009 and 2010, when the western circumvention of Zurich can be passed to the car drivers. The length of the new motorway stretches amounts to 7 kilometres in 2009 and 16 kilometres in 2010. However, since most of the construction work is already done, this project will have only a small influence on the overall civil engineering investment in the next years. A larger impact comes from the renovation of a part of the very important motorway A2 between the Gotthard tunnel and Basel. Because some of the national motorways have already reached their capacity, enlargment investments are also needed (e.g. along the northern Zurich circumvent motorway, where a third tunnel is planned. The federal government has allocated 570 million eurofor this project. The cantons and the local municipalities benefit most on the current booming economy through rising tax revenue. We expect the investment for regional and local roads to increase at least at the same level as for the federal motorways. This might also be true for other public civil engineering works. However, it is also the aim of the local governments to lower tax rates in order to attract more firms and high income earners. All in all, the expenditures for streets and motorways will rise by almost the same rates as those for railways. Taking all the aforementioned difficulties and developments into account, the numbers look as follows: In 2006 about 5,000 million euro were spent for transport infrastructural purposes. That was 5.6 per cent less than in the year before. For 2007 and 2008, we expect this civil engineering part to grow by 7.0 per cent and 9.2 per cent, respectively. The growth gets weaker in 2009 (5.1 per cent) and even negative in 2010. Including the other parts of civil engineering, telecommunications, energy and water works and miscellaneous, the signs of the numbers remains, but the amplitude is weaker. The construction work for energy production and distribution is about to be influenced by the federal plans for the «2000 Watt society». If those plans are implemented, the investments in electric power supply infrastructure could turn out to be very much different from that what had been planned earlier. The focus of the plans is not to generally increase the electricity production, but to get a more efficient use and distribution and to increase the local production. This does not mean reduced investments. However, the means are redirected to other projects. Well prepared construction firms may profit if the plans comes true.

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…is 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 revised. They are calculated according to ESA 1995 and are incompatible with earlier Euroconstruct publications. 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 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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 7 454 7 501 7 561 7 622 7 683 7 744 7 806 Bevölkerung

Households ('000s) Ménages 3 311 3 339 3 368 3 403 3 437 3 467 3 494 Haushalte

Unemployed ('000s) Chômeurs 153 149 132 108 88 91 98 Arbeitslose

Unemployment rate (%) Taux de chômage 3.9 3.8 3.3 2.7 2.2 2.3 2.5 Arbeitslosenquote

Change of GDP Variation du PIB 2.5 2.4 3.2 2.8 1.9 2.0 2.0 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 0.8 0.8 1.4 0.8 0.8 0.6 0.6 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 1.5 2.2 3.1 3.6 1.2 0.2 -0.1 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 0.4 0.7 1.4 2.5 2.7 2.6 2.6 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 2.7 2.1 2.5 2.9 3.2 3.3 3.3 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: 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 11 682 12.8 5.0 -1.2 -2.7 -3.7 -2.6 0.1

Logement Renovation 3 731 1.7 4.8 -1.1 -2.3 -3.7 -2.6 0.1

Wohnungsbau Total 15 413 9.9 4.9 -1.2 -2.6 -3.7 -2.6 0.1

Non-residential construction New 4 890 1.8 6.6 -1.4 4.8 4.5 1.3 -1.3

Bâtiments non résidentiels Renovation 5 812 -4.2 4.5 -2.1 5.0 4.6 1.9 -0.4

übriger Hochbau Total 10 702 -1.6 5.5 -1.8 4.9 4.6 1.6 -0.8

Building New 16 572 9.4 5.5 -1.3 -0.5 -1.1 -1.3 -0.4

Bâtiment Renovation 9 543 -2.0 4.6 -1.7 2.1 1.5 0.3 -0.2

Hochbau Total 26 115 4.9 5.1 -1.4 0.5 -0.2 -0.7 -0.3

Civil engineering New 3 236 -4.7 -1.7 -5.7 3.9 8.0 4.2 -1.7

Génie civil Renovation 3 794 3.9 -7.6 4.1 4.9 7.8 4.5 -1.4

Tiefbau Total 7 031 -0.3 -4.8 -0.6 4.4 7.9 4.4 -1.6

TOTAL CONSTRUCTION OUTPUT 33 146 3.7 2.9 -1.3 1.3 1.6 0.5 -0.6

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 4.66 6.5 7.9 -0.2 1.5 -0.1 0.4 -0.5 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 1,57295 CHF

Country/Pays/Land: Switzerland Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel 7.3 6.9 6.5 5.7 5.4 5.1 5.1 Baugenehmigungen Familienhäuser

Flats construction not started Collectif 23.7 25.0 28.9 30.3 29.4 28.8 28.9 at Dec. 31 Mehrfamilienhäuser

TOTAL 30.9 31.9 35.4 36.0 34.7 33.9 34.0

Housing 1+2 family dwellings Logements Individuel 11.3 11.5 12.0 8.6 8.1 7.7 7.7 Wohnbauten Familienhäuser

Flats under construction Collectif 41.4 45.9 48.2 48.3 46.9 45.9 46.1 at Dec. 31 Mehrfamilienhäuser

TOTAL 52.7 57.3 60.2 56.9 54.9 53.6 53.7

Housing completions 1+2 family dwellings Logements terminés Individuel 13.0 12.4 12.0 9.5 8.9 8.5 8.5 Baufertigstellungen Familienhäuser

Flats Collectif 24.0 25.6 30.0 32.3 31.4 30.9 31.0 Mehrfamilienhäuser

TOTAL 36.9 38.0 42.0 41.8 40.3 39.4 39.5

Housing stock Logements existants 3 710 3 749 3 792 3 834 3 875 3 915 3 955 Wohnungsbestand

thereof second homes dont résid. secondaires 521 529 538 547 556 565 574 davon Zweitwohnungen

thereof vacancies dont inoccupé 33 37 40 41 42 46 51 davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 34.8 34.9 34.9 35.1 35.2 35.4 35.5 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 487 -3.0 -7.2 -5.6 4.3 4.5 3.6 2.3 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 239 -8.4 -18.1 15.5 6.5 4.5 3.6 2.3 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 1 022 -8.9 117.8 -17.3 4.9 4.5 0.2 -2.5 Industriegebäude

Storage buildings Bâtiments de stockage 313 -3.9 1.2 31.2 4.5 4.3 -0.1 -2.9 Lagergebäude

Office buildings Bureaux 855 -17.8 7.6 -1.3 4.0 3.8 -0.4 -3.0 Bürogebäude

Commercial buildings Commerces 922 45.8 -10.7 10.8 6.0 5.5 1.2 -1.8 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 238 6.9 -15.0 -1.7 -2.0 2.5 1.5 -4.0 Landwirtschaftsgebäude

Miscellaneous Autres 814 5.1 -19.2 -1.1 5.9 4.8 3.0 0.4 Sonstiges

Total 4 890 1.8 6.6 -1.4 4.8 4.5 1.3 -1.3 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 1,57295 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 2 590 1.4 -10.2 -3.6 6.3 8.8 4.6 -2.5 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 2 199 7.2 1.2 -10.9 8.2 10.3 5.7 -3.0 Bahnanlagen

Other transport Autres réseaux 186 -7.7 -18.6 57.9 2.1 10.3 5.8 3.8 Übrige Verkehrsinfrastruktur

TOTAL 4 976 3.6 -5.4 -5.6 7.0 9.5 5.1 -2.5

Telecommunications Télécommunications 237 -18.5 -7.2 46.3 -35.0 12.0 -6.0 -3.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 1 033 -7.0 3.9 0.5 2.6 3.2 3.5 2.1 Energie- und Wasserversorgung

Other Autres 785 -12.6 -12.0 27.6 2.5 2.5 2.2 0.7 Sonstiges

Total 7 031 -0.3 -4.8 -0.6 4.4 7.9 4.4 -1.6

1) At 2006 prices, excluding taxes. 1 euro = 1,57295 CHF

Country/Pays/Land: Switzerland Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Privat consumption 2) Consommation privée 183.0 1.6 1.8 1.5 2.2 2.6 2.4 2.0 Privater Verbrauch

Public consumption Consommation publique 34.3 0.8 0.5 -1.4 0.3 0.2 1.0 1.8 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 66.0 4.5 3.8 4.1 3.8 1.7 0.8 -0.4

of which construction 29.6 3.9 3.5 -1.4 1.4 -0.4 0.2 -0.8

Stocks (contribution as % of GDP) 3) Variations de stocks 2.5 -0.3 -0.3 -1.1 -0.7 0.6 -0.2 -0.0 Vorratsveränderung

Exports Exportations 162.1 7.9 7.3 9.9 7.5 3.7 5.2 5.9 Exporte

Imports Importations 138.8 7.3 6.7 6.9 5.9 5.6 5.0 5.4 Importe

GDP PIB 309.1 2.5 2.4 3.2 2.8 1.9 2.0 2.0 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 1,57295 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 [email protected]

EUROCONSTRUCT Conference Vienna, November 2007

1 Summary

Despite the recent wobbles among the world’s financial markets sparked by the well- documented problems in the US sub-prime mortgage market, the underlying economic indicators remain encouraging. However, looking further forward, we are yet to feel the full effects of the above problems. Credit is likely to be less freely available and this will have an effect on the UK economy in the short-term at least. By 2009 the ‘hit’ from the tighter credit regime should have passed through and our forecast is for GDP growth to return to its long- term trend level.

A stronger performance is anticipated for the UK construction industry in 2007, after its relatively modest growth in 2006. In addition to a long-awaited, albeit moderate, recovery in civil engineering activity, private investment in non-residential buildings will intensify. Gains on the new work side will drive the industry forward, with any change in renovation activity being much more modest throughout the forecast period.

The government’s drive to make all social housing in the UK ‘decent’ will help sustain public residential renovation construction over the forecast period. Private residential renovation work is expected to suffer from the general weakness in consumer confidence, and hence, spending in 2007 as borrowing becomes more costly and tougher economic conditions are on the horizon. The sector is likely to pick up in 2008 and grow at a steady rate through to 2010.

Activity in the non-residential sector, the largest of the three main construction sectors, rebounded fairly strongly in 2006 after it declined marginally in 2005. Going forward prospects for the new non-residential construction are relatively strong. The sector is inextricably tied to the strength of economic activity, particularly its offices and commercial sub-sectors. Our reasonable optimism about the economy’s ability to weather the current stormy conditions bodes well for this sector.

Non-residential renovation work took a hit from the deterioration in the government’s financial situation in 2005, given that relative to new work activity it can be scaled back quickly and less noticeably. Efforts to reign in spending and a strengthening economy helped the government claw back some its deficit but renovation investment cannot be postponed indefinitely and the sector is expected to return to modest growth this year. Relative to new work, renovation output growth is likely to be subdued through to 2010.

Output continued to decline in the civil engineering sector in 2006, dashing hopes that some of the schemes forming its healthy future project pipeline would actually commence in earnest and be sufficient to pull the sector out of its prolonged recession. The decline was most severe on the new work side, with output of just €13.3bn during the year it trailed the level achieved in 2005 by around 7.6 per cent. Civil engineering renovation’s decline was not so sharp but it still fell short of output in 2005 by 4.7 per cent, in real terms. Overall activity in the civil engineering sector was valued at €23.4bn in 2006, 6.4 per cent lower than in 2005.

Civil engineering construction activity is expected to recover tentatively in 2007 and with the outturn for the year as a whole expected to be marginally up by around 1 per cent. Beyond 2007 prospects are much stronger for the sector, with the outlook for transport infrastructure being particularly strong going forward.

2 Macro-economic Outlook

Despite the recent wobbles among the world’s financial markets sparked by the well- documented problems in the US sub-prime mortgage market, the underlying economic indicators remain encouraging. GDP grew by 0.8 per cent in the second quarter of this year, taking the annualised rate to 3.1 per cent. Growth is expected to slow in the second half of the year largely as an effect of slower consumer spending due to a tighter credit regime, and end the year at an above-trend 2.9 per cent.

Household expenditure, at a predicted 2.6 per cent for the year is forecast to exceed 2006’s growth rate by about half a percent. Government consumption in contrast is likely to be well down on 2006.

The upward pressure on prices seen during most of last year and the first part of this one has continued to ease and it is likely that the Bank of England’s Monetary Policy Committee will hold interest rates at 5.75 per cent for the short term. Analysts’ sentiment, which only three months ago was for at least one more rate rise, has largely reversed and the consensus is that the next movement will almost certainly be down.

Thus the outturn for the year as a whole is looking reasonably good. GDP growth will continue above trend, household expenditure growth should be higher compared to the previous year, employment continues to expand, unemployment, having risen in the early part of the year is back on a downward path, and CPI is also subsiding.

Key macroeconomic indicators in the United Kingdom to 2010 (Annual percentage change) 2004 2005 2006 2007 2008 2009 2010 GDP 3.3 1.8 2.8 2.9 2.1 2.5 2.9 Household consumption 3.4 1.5 2.1 2.6 1.6 2.1 2.8 Government consumption 3.2 2.7 2.4 1.8 1.3 1.1 1.0 Unemployment rate 2.7 2.7 3.0 3.1 3.1 3.0 2.9 Inflation 1.3 2.0 2.3 2.2 1.6 1.4 1.4 Source: Office for National Statistics, Experian Business Strategies.

However, looking further forward, we are yet to feel the full effects of the sub-prime mortgage debacle in the US, and its knock-on effects will almost certainly mean a tighter credit regime in the UK, at least in the short term.

Less available credit is likely to have two major effects on the UK economy. Firstly, mortgage loans will become harder to come by, further taking the heat out of the housing market. Currently, our belief is that there will be no overall fall in the level of house prices over the next two years, although significant regional variation is expected. However, consumer spending growth in recent years has been funded in part by the release of some of the growing levels of equity locked up in property, thus a direct effect of static or falling house prices could be a sharp reduction in equity withdrawal to finance spending.

The second effect will be on the availability of unsecured loans. The evidence is that banks will become more selective about who they lend to and how much. In an economy where consumers have funded a large part of recent spending growth on credit, this will not be a welcome development. Consumer retrenchment could also have a sizeable effect on the financial and business services sector, usually the most buoyant and dynamic sector of the

© EUROCONSTRUCT 349 United Kingdom Vienna, November 2007 economy, leading to less robust growth in output in the sector in the immediate future. Thus our forecast for 2008 is that GDP growth could be lower than in 2007 by close to a percentage point.

By 2009, however, the immediate ‘hit’ from tighter credit should have passed through the system and our forecast is for GDP growth to return to trend, a low interest rate and inflation regime to return and consumer spending to increase at a moderate rate, and by 2010 economic growth will again be approaching 3 per cent.

3 Housing

Residential construction is forecast to be the weakest sector over the next few years. Several factors are together helping to suppress activity in this sector, the most obvious of these being relatively high interest rates and a more cautious lending environment. Beyond this there is the more fundamental question of whether the planning system and demand are aligned. Over the past few years high density development was a must if an application was to be successful at the planning stage. However, with land values at an all time high and affordability a problem the question of whether developers can make lower density construction profitable inevitably arises. That said, market indicators continue to suggest that housing is in a reasonably healthy state and after a blip in 2008 we expect new residential construction activity to return to growth in 2009.

Residential new work

The public housing sector continued to go from strength to strength in the first six months of 2007. To June, €2.1bn of output was recorded, up by 21 per cent compared to the first six months of 2006, particularly significant given this is after allowing for any inflationary effects. Prices in the private market continue to rise and affordability to diminish making public housing, both for rent and low cost home ownership, more necessary than for some time. The four-quarter moving total has been rising for five quarters, with the rate of increase in the past four being particularly robust. In the second quarter of 2007 the measure stood 23 per cent higher than in the second quarter of 2006.

There was no abatement to the rate of new public housing orders growth in the first half of 2007. The outturn for 2006 was 30 per cent up in real terms compared with the previous year and new orders have continued to increase at a similar rate in the first six months of 2007. Year-on-year orders were worth a substantial €1.5bn, in 2000 prices to June 2007 and the four-quarter moving total has been recording double-digit percentage rises for the past six quarters.

In its recent green paper, Homes for the future, more affordable, more sustainable, the Department for Communities and Local Government (DCLG) pledges to help deliver at least 180,000 new affordable homes over the next three years and more than 70,000 affordable homes a year by 2010/11. In an attempt to achieve this the Housing Corporation’s National Affordable Housing Programme in 2008-11 is expected to be worth €11.7bn, a €4.4bn increase compared with the previous three years. The benefit of this funding is set to be distributed across the UK and all regions will receive an increase of at least 15 per cent by 2010/11 compared to this year. At first glance these figures seem impressive but these promised values are in nominal terms and after inflation has been allowed for it is difficult to see how the unit gains the government desires can be achieved with the available funds.

Affordable housing, incorporating both shared-ownership schemes and social rent, is now often delivered by the private sector as part of the obligations they are required to meet in order to obtain planning permission. Just how much affordable housing is delivered via this route varies significantly from region to region. However, if the activity of private house

350 © EUROCONSTRUCT Vienna, November 2007 United Kingdom builders were to slow, in line with market conditions, this could have a serious impact on the success of this means of affordable housing supply. House builders are accountable to their shareholders, hence their main objective is to maximise shareholder value and helping to meet governmental targets is of secondary importance to them.

New private housebuilding activity continued to increase in the first six months of 2007, although the sector’s performance has been somewhat lacklustre for the past 18 months. Slow but steady growth of 2 per cent in 2006 has been followed by a similar rise in the first six months of 2007. With output worth €8.4bn, in 2000 prices, it was 2 per cent higher than in the same period of 2006. While expansion is only modest, at least activity is continuing to increase in the sector at a time when the market appears to be slowing. The trend in the four- quarter moving total continues to be upwards but there has been a gradual but noticeable slowdown in the rate of growth since early in 2005.

Private housing orders, on the other hand, started to decline in 2006 and the fall has continued in the first half of 2007. Worth €6bn, in 2000 prices, orders to June 2007 were 2 per cent down on their 2006 level, which in turn were down by 3 per cent on orders in 2005 during the year as a whole. The four-quarter moving total has been on a downward path for the past five quarters.

In September the government unveiled a set of incentives, worth €734m in total to reward councils which speed up housing supply delivery and maximise the supply of land for building in their areas. Local authorities that show they are leading the way in both of these and helping to increase the supply of new homes delivered each year will receive a share of the new funding incentive. Such a package of incentives has been introduced to support the government’s bold aspiration that by the next decade, 240,000 units a year will be built in the UK.

While some indicators suggest the UK housing market is cooling, house price inflation remains stubbornly high. Three of the UK’s main market commentators in the UK all reported that annual inflation was running at more than 10 per cent in the second quarter of 2007. The government’s mix-adjusted measure of house prices was strongest, running at 11 per cent. Both the Halifax and Nationwide measures came in at just over 10 per cent. There is less agreement among commentators about the absolute level of average house prices, according to the Nationwide the average price of a residential property is around €270,000. The government’s mix-adjusted measure (as published by the Department for Communities and Local Government) makes a considerably higher estimate of around €310,000.

Property transactions were relatively strong throughout 2006 and in the first quarter of 2007. In the second quarter, however, they were nearly 4 per cent down year-on-year. First time buyer (FTB) numbers dwindled in 2007 as prices continued to rise and affordability to worsen. Council of Mortgage Lenders figures suggest that 185,500 FTBs stepped onto the ladder in the first half of 2007 compared to 194,600 in the first half of 2006. While it is becoming increasingly tough for FTBs to enter the market many are still managing to clear the hurdles placed in front of them.

Housing Market Report’s latest house builder survey found that new home site visitors in August were below a year ago for the eighth successive month. House builders reported the sharpest year-on-year decline in net reservations since June 2005. New home prices recovered slightly in August after a slight dip in July but house builders reported making increased use of incentives to encourage sales during the month. Despite their downbeat response housebuilders were generally optimistic that sales in 2007 will exceed those in 2006.

Residential renovation

Worth €46.8bn in 2006 total residential renovation output declined for the second consecutive year.

A 3 per cent decline in public housing renovation, as reported by the Department for Business, Enterprise and Regulatory Reform (DBERR) - formerly the Department of Trade and Industry - is perhaps the most surprising given that local authorities should be striving to meet the government’s Decent Homes For All target, the deadline for which is fast approaching in 2010. In the first half of 2007 public housing renovation output continued to decline, although the fall was only a marginal 1 per cent compared with the first half of 2006.

By 2010 the DCLG expect 95 per cent of all social housing to meet a decent standard. In order to be decent a home should be warm, weatherproof and have reasonably modern facilities. Extended deadlines beyond 2010 are being negotiated with some social landlords where it is necessary to achieve better value for money or higher standards of housing.

The Welsh Housing Quality Standard has similar objectives to the Decent Homes initiative in England. Social landlords in Wales are required to comply with the Standard by 2012. The Standard states that homes should be in a good state of repair, be adequately heated, fuel efficient and well insulated and contain up-to-date kitchens and bathrooms. A comparable scheme in Scotland plans to achieve a similar objective by 2015.

As the 2010 deadline approaches and work accelerates on the Welsh scheme we expect public housing renovation output to rise at a healthy rate.

Private housing renovation output has been equally subdued in recent years. DBERR data suggests that the total value of output in the sector contracted by 3 per cent in both 2005 and 2006. In the first half of 2007 private housing renovation output slipped by a further percentage point compared to output in the first half of 2006.

While much of the funding for the government’s Decent Homes initiative will be sourced publicly it does have a PFI element and most recently the North Tyneside and Salford City Councils have been given the go ahead for €293m investment to cut the number of non- decent homes by over 3,000, as part of the government’s fifth housing PFI bidding round.

Spending on DIY is forecast to grow at an accelerating rate during the forecast period. Worth €10.1bn in 2006 (in nominal terms), the rate of increase in spending is expected to strengthen from 1.1 per cent in 2007 to 4.3 per cent in 2010.

Prospects are likely to continue to be subdued for the private housing renovation sector once again in 2007, although our forecast for consistent growth in household consumption through to 2010 has positive implications for this sector. Thus a recovery is forecast for 2008 and thereafter.

4 Non-residential

Activity in the non-residential sector, the largest of the three main construction sectors, rebounded fairly strongly in 2006 after it declined by a marginal 0.5 per cent in 2005. New work activity was particularly strong while renovation output growth slipped into negative territory. Approximately two-thirds of total non-residential activity generated is new construction work, a much higher proportion of the total than in either the residential or civil engineering sector. Overall the sector was worth €92.9bn in 2006 and we forecast it will continue to expand by around 3.8 per cent in 2007.

Elements of non-residential construction activity are inextricably tied to the strength of economic activity, offices and commercial construction being the most obvious. Our current optimism about the economy generally also bodes well for these sectors, although it has to be acknowledged that the risks to our forecast are firmly on the downside. Offices and commercial are set to be key drivers of non-residential construction growth over the forecast period. The offices market continues to boom and commecial construction is benefitting from reasonably strong consumer confidence. However, it is worth mentioning that both of these sub-sectors would be particularly vulnerable to a deterioration in economic conditions.

Non-residential new work

The education sub-sector has been particularly strong of late on the back of the government’s drive to bring the country’s facilities up to a standard fit for the 21st century. Education output climbed by a substantial 15 per cent in 2006 to €13.7bn and this came after an 11 per cent increase in 2004 and a 3 per cent rise in 2005. So far education output in the first six months of 2007 has been subdued, trailing output in the corresponding part of 2006 by 2 per cent. That said this weakness is purely on the public side as Building Schools for the Future (BSF) schemes have been slower than anticipated to get underway on site. Current priced orders were also much weaker in the first half of 2007 but again this is expected to change in the second half of the year.

The BSF programme has been suffering from teething problems but to date the political will remains behind the programme. At the outset Partnerships for Schools, the public organisation responsible for delivering BSF, hoped, somewhat boldly, that around 100 new schools would be operational by the end of the year as a result of this programme. In reality only 12 schools are likely to be completed by the end of the current financial year, embarrassingly short of the target. Criticism has been levelled on several counts - contractors are angry and frustrated by the cumbersome and costly bidding process, although to date they persevere, inexperienced local authorities have been overwhelmed by the scale of the task ahead of them, and tax payers are concerned that swathes of public money could be squandered unnecessarily. As momentum builds, however, it will undoubtedly have a significant effect on construction, the first wave of the programme is worth around €3.4bn alone. While it is by no means all new money, it will nevertheless fuel significant growth in new non-residential construction work over the forecast period.

After two years of decline new health construction activity is set to stabilise in 2007. 2007’s outturn is expected to be virtually unchanged from 2006’s value of €5.3bn. So far in 2007 current priced health output is 5 per cent higher than in the corresponding part of 2006, although after allowing for inflation this increase is much more modest. Having been boosted by the exceptionally large €1.5bn PFI contract to rebuild St Barts and the Royal London Hospital in early 2006, health orders declined significantly in the first half of 2007 as they returned to a more normal level.

In its recent Comprehensive Spending Review (CSR) the government announced that the NHS’s budget will rise by around 4 per cent per annum in real terms, a lower rate of increase compared to that lavished on the sector in the previous CSR in 2004. Much of this increase will be used to fund the day-to-day running of the Service, rather than be invested in capital. The trend towards the PFI delivery of new hosiptal facilities is likely to continue and several schemes are in the pipeline, the largest of these include a €455m scheme in North Bristol/South Gloucester and a €330m programme in Maidstone and Tunbridge Wells.

2006 was a strong year for both industrial and storage construction. Amongst other schemes News International invested significant sums in constructing several print facilities around the country. On the warehousing side robust international trade increased the requirement for storage facilities, with further demand coming from the increasing popularity of internet shopping. Strong competition in the retail sector is also an important factor as many retailers have invested in developing a more efficient storage and distribution network to ensure they can compete in an increasingly competitive marketplace.

According to the latest King Sturge UK Industrial and Distribution Floorspace Today report available industrial floorspace across Great Britain increased to 21.1m sq m at June 2007, a rise of 4.5 per cent since December 2006, and the highest level recorded since their survey began. The amount of new floorspace coming to market and speculative development under construction both increased.

Levels of new office building soared in 2006 as financial and business services employment swelled and the development pipeline initially failed to keep up with the pace. An increase of approximately 13 per cent raised the sector’s value to €14.1bn. Already current priced output was 25 per cent higher in the first half of 2007, compared with the first half of 2006, suggesting another robust increase is on the cards during the year as a whole. Orders were exceptionally strong over the same period and were some 50 per cent higher year-on-year. Usually an increase of this magnitude is attributable to one particularly large scheme with a relatively long construction horizon but this was not the case in this instance. Instead orders were let on a considerably higher than usual number of schemes in the mid-value range.

Liquidity problems in financial markets, however, may spell bad news for some schemes in the offices pipeline. The start of construction work on the Shard of Glass at London Bridge has been delayed, reportedly because appropriate finance has yet to be secured. An expected fall in City employment as profits decline and redundancies follow also poses a downside risk. Developers who remember the last major collapse will be eager for history not to repeat itself and thus may cut back on purely speculative development.

So far the effect of the liquidity crisis has not been detected by the main market commentators. In the second quarter of 2007 King Sturge reported that the amount of available office space in the City reduced by a further 7 per cent as demand from an expanding financial and business services sector increased and development completions failed to keep pace. The supply of larger units (those over 10,000 sq m) was particularly limited. King Sturge’s assertion that pre-lets were at their highest level for almost five years suggests that construction in the pipeline may do little to satisfy demand when it reaches completion. Conversely however, at least it provides comfort that should conditions deteriorate significantly in the financial and business services sector, there will not be a large speculative development overhang.

Having declined in 2005 and stagnated at a lower level in 2006, prospects are stronger for commercial construction activity going forward. With steady trend-level economic expansion expected for the foreseeable future consumers should feel reasonably secure and we expect household spending to increase at a consistent rate. The first half of 2007 definitely suggests that confidence has returned to the retail and leisure sectors. Current priced output rose by 5

354 © EUROCONSTRUCT Vienna, November 2007 United Kingdom per cent compared with the first half of 2006 and new work orders over the same period were down marginally by 1 per cent.

According to the Royal Institute of Chartered Surveyors’ (RICS) commercial market survey business demand for commercial property remained firm in the second quarter of 2007 at close to a 7 year high, although retail demand slowed a little outside of the London area.

Specific major developments in the commercial pipeline include a new €150m racecourse in Manchester. In addition, however, there will be a significant amount of commercial activity associated with the large city centre regeneration/redevelopment schemes that are planned to get underway during the forecast period. Stratford City and the redevelopment of the area around Victoria station are two of the larger schemes.

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. Miscellaneous output was worth around €3bn in 2006 some 10.4 per cent higher than in 2005. At time of writing a complete breakdown for miscellaneous new work orders was not available for 2006 or the first half of 2007.

Project Allenby/Connaught continues to be the major scheme in the defence sub-sector. The Ministry of Defence has announced their preferred bidder for an €264m scheme in Wiltshire. The work will involve building communications facilities at Corsham near Chippenham.

The capital budget for crime, justice and communities is set to rise by a substantial 21 per cent in the next financial year, with year-on-year increases expected to 2008, when the available budget will be in the region of €2bn.

Non-residential renovation

The majority of non-residential renovation work is undertaken by the private sector. Non- residential renovation output was worth €31.3bn in 2006, 2 per cent lower than in 2005. We forecast that renovation activity in the non-residential sector will return to modest growth as work accelerates on in the private sector.

Public non-residential renovation output declined by around 7 per cent in 2006 as non- essential repair and maintenance work was scaled back, particularly in the NHS, in an attempt to reduce current account deficits. Output continued to slide in the first half of 2007 with output trailing the first half of 2006 by a further 13 per cent.

In August 2007 the public sector showed a deficit in the current budget of €10.3bn, compared to €8.1bn in August 2006, quite a difference in just 12 months. A lower growth forecast means actual receipts from taxation are extremely unlikely to meet what were already ambitious projections.

With the latest data in mind it is difficult to foresee anything but an additional and substantial decline for the public non-residential renovation sector in 2007, although given a large proportion of investment in this sector is spent maintaining the nation’s health and education facilities, there is a limit to what can be postponed or simply not done. However, we do not expect output in the sector to return to growth until 2009 at the earliest when the pressure on government finances has had time to subside.

Private non-residential renovation construction activity was almost static in 2006 after allowing for inflation. However, in the first half of 2007 output was 9 per cent higher, in real terms, than in the first half of 2006. Private non-residential renovation accounted for 64 per cent of total non-residential renovation in 2006.

The strength of the first half cannot but suggest that the private non-residential sector is in for a strong year of output growth this year. However, growth is likely to slow thereafter.

5 Civil Engineering Market

Civil engineering construction activity continued to decline in 2006, dashing hopes that some of the schemes forming its healthy future project pipeline would actually commence in earnest and be sufficient to pull the sector out of its prolonged recession. The decline was most severe on the new work side and with output of just €13.3bn during the year it trailed the level achieved in 2005 by around 7.6 per cent. Civil engineering renovation’s decline was less marked but it still fell short of output in 2005 by 4.7 per cent, in real terms. Overall activity in the civil engineering sector was valued at €23.4bn in 2006, 6.4 per cent lower than in 2005.

Civil engineering construction activity is expected to recover tentatively in 2007, with the outturn for the year as a whole expected to be marginally up by around 1 per cent. Beyond 2007 prospects are much stronger for the sector, with the outlook for transport infrastructure being particularly robust.

Total civil engineering activity by sector

Roads output, accounting for around 29 per cent of total infrastructure activity, took a fairly significant tumble in 2006. Output during the year fell short of 2005’s level by nearly 10 per cent and was worth approximately €6.8bn. Individual roads projects can have a large construction value and hence roads orders statistics are prone to sizeable fluctuations as these schemes are reported. The first half of 2007 was no exception and compared to the first half of 2006 new work roads orders were 106 per cent higher. New orders statistics are only available for new work activity, renovation orders are not available.

The Highways Agency’s 2007/08 Business Plan forecasts that total capital investment will amount to €1.4bn, the bulk of which, €1.1bn, is related to major improvements to the network. Work is scheduled to start on nine schemes in 2007/08, which have a total capital value of €1.3bn. In addition it has selected three consortia to work up bids for the M25 widening project, the cost of which is expected to be around €1.8bn. This sizeable scheme is due to commence in 2009.

2006 saw the decline in railways output slow considerably from around 15 per cent in both 2004 and 2005 to a little under 2 per cent last year. This prolonged period of falling output has reduced the sector’s value to just €3.6bn. The severity of this decline is partly due to the completion of construction work on the Channel Tunnel Rail Link (CTRL), but with several substantial schemes in the pipeline the effect of this fall-out is not expected to be felt beyond 2007. Railways new work orders rose by 47 per cent in the first half of 2007, with the second quarter being particularly strong.

In July the Transport Secretary approved the €8.1bn Thameslink modernisation programme. The scheme will be delivered in two phases and the first should be completed in time for the Olympic Games. When Crossrail, the proposed east to west rail link in London, will eventually get underway on site has been a hotly debated topic. The €23.5bn scheme had been plagued by planning delays, a funding shortfall and intense speculation. Recently it

356 © EUROCONSTRUCT Vienna, November 2007 United Kingdom secured the government’s backing and is now poised to start to become a reality in 2010, unless of course further unforeseen delays are encountered. Funding for Crossrail will come from a combination of the public purse, a loan secured against future ticket receipts, voluntary donations from the scheme’s beneficiaries and a special tax on all but the smallest of London’s businesses and it will link Maidenhead in the west with Shenfield and Abbey Wood in the east.

Work on air and harbours falls into the €2bn other transport sub-sector. 2006 saw output decline by 16 per cent but this did follow an increase in output of 11 per cent in 2005. In the first half of 2007 new work orders in the harbours sub-sector recorded a strong increase on the first half of 2006 and they were up by some 129 per cent. At the time of writing new work orders for the air sub-sector in the first half of 2007 were not available, but in 2006 they fell by 45 per cent.

Final approval has been given for the €2.2bn Shellhaven project although the harbours element of this scheme may only amount to €367m. Work is expected to start here in 2009. Over the shorter term a 2008 start is likely for harbours schemes at Harwich, Felixstowe and Hull and work on these schemes should be sufficient to take up the slack from slowing activity on the gas storage terminals at Milford Haven and the Isle of Grain.

BAA has unveiled plans for major works on Heathrow’s Terminal 3, which is part of the airport’s €8.8bn redevelopment over the next 10 years. Also in the pipeline, the Heathrow East project is set to deliver a new terminal that would have the combined capacity of Terminals 1 and 2. In April 2007 the company announced plans to invest €13.6bn, in 2007/08 prices, on its London airports over the period to 2018. In addition to planned projects at Heathrow there is the €2.1bn planned expansion of Stansted Airport and BAA expects to spend €88m at Aberdeen Airport and €440m at Edinburgh Airport over the next ten years.

Relative to the other civil engineering sub-sectors telecommunications is very small. Worth an estimated €915m in 2006, telecommunications output was nearly 20 per cent lower than it had been in 2005. Telecommunications orders fared better, climbing for the second year in a row. They rose by 25 per cent to €289m. At the time of writing a breakdown of telecommunications orders for the first half of 2007 was not available.

Energy and water works output totalled €10.1bn in 2006, 2 per cent less than in 2005. However, better prospects are on the horizon if orders in the first half of 2007 are anything to go by. Orders for water projects more than doubled compared with those placed in the first half of 2006 and the increase in gas orders was similarly robust in 2006 when they were up by 35 per cent. Electricity orders, however, rose by just 2 per cent in the first half of 2007 after having increased by 16 per cent in 2006.

In its 2005/06 financial review of English and Welsh water and sewerage companies, the regulator reported that they had invested around €1.5bn less than expected based on their plans. The regulator’s figures suggest several water companies will need to significantly increase their capital programmes over the remaining four years of their current asset management programme to have any hope of achieving their targets.

Since our last forecast contracts have been let for two separate power stations in Wales, valued at €587m and €1.2bn respectively and a contract to upgrade Framkley water treatment works near Birmingham has been awarded. Works will span at least two years and the project is worth around €486m.

Civil engineering renovation

DBERR 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.

In its 2006 Business Plan, Network Rail forecasts a falling level of rail maintenance expenditure from an estimated outturn of €1.8bn in 2005/06 to €1.5bn in 2008/09. We assume for the purposes of this report that renewals and enhancements are treated as capital projects and hence classed as new work in the official data.

Early this year BAA called for contractors to bid for their latest framework agreement which covers individual projects worth between €1.5m and €44m. The agreement has a total value of €954m.

As already discussed, water and sewerage companies are currently quite significantly under- spending against their Asset Management Plans. It has to be assumed that this under-spend has not only been against new work and renewals but also on renovation. This would suggest room for growth in this sub-sector over the next couple of years.

APPENDIX – DEFINITIONS

Table 1 • Population: mid-year estimates of the number of people in the UK • Households: Department for Communities and Local Government (DCLG) 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: • Official output data from the Department of Business, Enterprise and Regulatory Reform (formerly the Department of Trade and Industry), plus the following:- o estimates of professional services o construction by other sectors (e.g. retailers using own workforce) o DIY/undeclared construction. Table 3 • Housing stock: DCLG’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

Table 5 • There has been some re-estimation of historic data by the Office of National Statistics (ONS)

Extra Sterling/Euro exchange rate applied in all tables is the annual average rate for 2006 as quoted by the Bank of England

Vienna, November 2007 United Kingdom

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

2004 2005 2006 2007 2008 2009 2010

Population ('000s) Population 59 846 60 238 60 566 60 851 61 118 61 383 61 652 Bevölkerung

Households ('000s) Ménages 24 555 24 800 25 046 25 284 25 522 25 760 25 998 Haushalte

Unemployed ('000s) Chômeurs 853 862 945 987 1 000 972 928 Arbeitslose

Unemployment rate (%) Taux de chômage 2.7 2.7 3.0 3.1 3.1 3.0 2.9 Arbeitslosenquote

Change of GDP Variation du PIB 3.3 1.8 2.8 2.9 2.1 2.5 2.9 Veränderung des BIP (% change in real terms)

Consumer prices (% change) Prix à la consommation 1.3 2.0 2.3 2.2 1.6 1.4 1.4 Verbraucherpreise

Construction prices (% change) 1) Prix de la construction 6.7 5.1 3.0 4.7 3.9 2.6 2.0 Baupreise

Short term interest rate 2) Taux d' intérêt à court terme 4.4 4.6 4.6 4.9 4.4 4.0 4.0 Kurzfristiger Zinssatz

Long term interest rate 3) Taux d' intérêt à long terme 4.8 4.4 4.4 4.9 4.8 4.6 4.6 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

2006 2004 2005 2006 2007 2008 2009 2010

Residential construction New 39 392 13.8 2.5 4.6 1.8 -0.7 2.3 2.8

Logement Renovation 46 770 4.5 -2.8 -3.1 0.2 1.6 2.6 1.7

Wohnungsbau Total 86 162 8.2 -0.6 0.3 1.0 0.5 2.5 2.2

Non-residential construction New 61 627 8.1 -1.7 7.7 5.2 5.7 2.3 3.8

Bâtiments non résidentiels Renovation 31 294 -3.7 1.6 -2.0 1.0 1.5 2.0 1.0

übriger Hochbau Total 92 921 3.7 -0.5 4.2 3.8 4.3 2.2 2.9

Building New 101 019 10.2 -0.0 6.5 3.9 3.2 2.3 3.4

Bâtiment Renovation 78 064 1.1 -1.1 -2.7 0.5 1.5 2.4 1.4

Hochbau Total 179 083 5.9 -0.5 2.3 2.4 2.5 2.3 2.6

Civil engineering New 13 317 -13.1 -8.9 -7.6 5.1 2.6 10.5 5.0

Génie civil Renovation 10 045 -3.8 3.5 -4.7 -4.4 0.8 2.0 1.0

Tiefbau Total 23 362 -9.7 -4.1 -6.4 1.0 1.8 7.1 3.5

TOTAL CONSTRUCTION OUTPUT 202 445 3.6 -1.0 1.2 2.3 2.4 2.9 2.7

2006 Estim.Forecasts Outlook mill. tons 2004 2005 2006 2007 2008 2009 2010

Domestic cement consumption Consommation intérieure de ciment 11.30 1.9 -1.4 1.5 1.0 1.5 1.8 1.9 Inländischer Zementverbrauch

1) At 2006 prices, excluding taxes. 1 euro = 0.6817 GBP

Country/Pays/Land: United Kingdom Table 3

EUROCONSTRUCT

Residential construction Construction de logements Wohnbau

Thousands dwellings

Estim.Forecast Outlook

2004 2005 2006 2007 2008 2009 2010

Building permits 1+2 family dwellings Logements autorisés Individuel Baugenehmigungen Familienhäuser

Flats Collectif Mehrfamilienhäuser

TOTAL

Housing starts 1+2 family dwellings Logements commencés Individuel 140.5 124.4 115.9 115.4 113.1 114.4 116.6 Baubeginne Familienhäuser

Flats Collectif 72.9 87.6 100.4 100.6 98.9 100.7 103.4 Mehrfamilienhäuser

TOTAL 213.4 212.0 216.3 216.0 212.0 215.0 220.0

Housing completions 1+2 family dwellings Logements terminés Individuel 123.0 112.2 103.4 107.2 104.4 105.3 105.4 Baufertigstellungen Familienhäuser

Flats Collectif 64.6 79.9 90.7 93.8 91.6 92.7 94.6 Mehrfamilienhäuser

TOTAL 187.6 192.1 194.1 201.0 196.0 198.0 200.0

Housing stock Logements existants 25 301 25 497 25 710 25 925 26 135 26 347 26 561 Wohnungsbestand

thereof second homes dont résid. secondaires davon Zweitwohnungen

thereof vacancies dont inoccupé davon leerstehend

Home ownership rate 1) Taux de propriétaires occupants 70.2 70.5 70.7 70.8 70.9 71.1 71.2 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. euro Estim.Forecast Outlook

2006 2004 2005 2006 2007 2008 2009 2010

Buildings for education Bâtiments de l'éducation et de la recherche 13 714 10.9 2.7 15.2 7.4 6.1 0.0 3.0 Gebäude des Bildungswesens

Buildings for health Bâtiments de santé 5 267 37.6 -14.7 -5.1 0.1 1.1 2.9 6.0 Gebäude des Gesundheitswesens

Industrial buildings Bâtiments industriels 4 788 3.6 -8.3 10.5 -9.8 -4.7 0.0 1.0 Industriegebäude

Storage buildings Bâtiments de stockage 4 238 20.1 24.6 10.4 5.9 1.3 -2.0 1.0 Lagergebäude

Office buildings Bureaux 14 087 -3.8 6.4 12.5 12.9 10.5 3.6 -2.0 Bürogebäude

Commercial buildings Commerces 16 026 8.4 -4.9 0.7 1.9 5.1 4.6 11.0 Geschäftsgebäude

Agricultural buildings Bâtiments agricoles 464 -5.9 -10.2 12.8 10.0 10.2 0.2 3.0 Landwirtschaftsgebäude

Miscellaneous Autres 3 044 -1.1 -16.9 10.4 7.4 10.0 2.5 4.0 Sonstiges

Total 61 627 8.1 -1.7 7.7 5.2 5.7 2.3 3.8 Insgesamt

1) At 2006 prices, excluding taxes. 1 euro = 0.6817 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

2006 2004 2005 2006 2007 2008 2009 2010

Transport infrastructure Roads Infrastructures de transport Réseau routier 6 764 -9.0 -10.8 -9.8 0.9 4.3 16.3 5.0 Verkehrsinfrastruktur Straßen

Railways Voies ferrées 3 550 -15.4 -15.3 -1.3 -3.9 4.3 11.4 11.0 Bahnanlagen

Other transport Autres réseaux 2 077 -14.7 11.0 -16.0 -4.7 -2.3 4.9 0.0 Übrige Verkehrsinfrastruktur

TOTAL 12 391 -11.8 -8.8 -8.7 -1.4 3.2 13.2 6.0

Telecommunications Télécommunications 915 -14.0 14.1 -19.4 0.9 -10.6 6.6 10.0 Telekommunikation

Energy and water works Réseaux d'énergie et d'eau 10 056 -5.9 1.2 -2.0 4.0 1.4 -0.1 0.0 Energie- und Wasserversorgung

Other Autres Sonstiges

Total 23 362 -9.7 -4.1 -6.4 1.0 1.8 7.1 3.6

1) At 2006 prices, excluding taxes. 1 euro = 0.6817 GBP

Country/Pays/Land: United Kingdom Table 5

EUROCONSTRUCT

Gross domestic product Produit intérieur brut Bruttoinlandprodukt

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

2006 2004 2005 2006 2007 2008 2009 2010

Private consumption Consommation privée 1 215.7 3.4 1.5 2.1 2.6 1.6 2.1 2.8 Privater Verbrauch

Public consumption Consommation publique 419.5 3.2 2.7 2.4 1.8 1.3 1.1 1.0 Staatsverbrauch

Gross domestic fixed capital formation Formation brute de capital fixe Anlageinvestitionen

Total 342.6 5.9 1.5 8.0 4.6 1.9 3.4 3.4

of which construction 166.6

Stocks (contribution as % of GDP) Variations de stocks 3.2 0.3 0.4 0.2 0.0 0.2 0.5 0.6 Vorratsveränderung

Exports Exportations 541.7 4.9 7.1 15.5 4.3 5.9 5.1 4.7 Exporte

Imports Importations 612.6 6.6 6.5 14.0 3.3 4.5 4.3 4.0 Importe

GDP PIB 1 909.9 3.3 1.8 2.8 2.9 2.1 2.5 2.9 BIP

Standard National Accounts, gross figures 1) At 2006 prices. 1 euro = 0.6817 GBP

MEMBER INSTITUTES

EUROCONSTRUCT Conference Vienna, November 2007

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

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. engineering & consulting

[email protected] www.urspraha.cz

ÚRS PRAHA, a.s., was established in 1992 as the successor of Institute of Rationalisation in the Construction Industry. Main activities of the company are services in the area of cost estimation in the construction industry. Further activities are analysis of the construction industry and prognosis of the future development, research in the field of regional development and housing problems; all for both private and public sectors. Headquarter is located in Prague, branch offices are in Brno, Hradec Králové, Ostrava, Plzeň and České Budějovice. The activities of ÚRS PRAHA extended abroad the Czech Republic long time ago. The company is member of various international non-government associations interested in monitoring the state and trends of European and world construction industry (EUROCONSTRUCT, EDIBUILD, ICIS, etc.). ÚRS PRAHA is registered as consulting organisation for PHARE programme in Brussels and also prepares data for FIEC on behalf of the Czech Republic. ÚRS PRAHA has a certificate of the Quality Control System CSN ISO 9001 for engineering and consulting activities in the construction industry as well as for studies in the field of regional development and for SW and database development and delivery. There is regular assessment of the company rating Baa2.cz by MOODY´S CENTRAL EUROPE RATING.

Pricing system for constructions and construction works • the company is traditional creator of the methods and databases for cost estimation of the construction works, periodically updated data are published in printed and electronic forms Real estate, buildings and enterprises valuation • the company is expert institute for evaluation of real-estate, buildings and enterprises price, its services are used by various clients including banks, insurance companies and courts, clients are both domestic and foreign Sector analysis, development studies, strategies, TOP ranking lists, marketing studies • statistics, analysis and conception of construction development • economical analysis and development studies for construction companies • TOP ranking lists of construction companies and construction materials manufacturers Classifications and categorisations • traditional cooperation at the creation of classification systems of the construction products related to SKP (Standard Classification of Production) • categorisation of the products and services according to assessment of VAT, property depreciation, repairs and technical improvements Regional development and housing policy • studies of population, settlement and housing stock in regions and selected towns at the Czech Republic territory • processing of housing policy conceptions for towns and regions of the Czech Republic (analysis, prognosis) • maintaining of territorial identification registry and pattern of basic settlement units Courses and seminaries • the company organises the seminars and courses for quantity surveyors and cost estimators

Euroconstruct contact: Jan Blahoňovský | +420 549 133 435 | [email protected]

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. VTT’s expertise covers all industry sectors. VTT is a government, non profit, independent and impartial organization. VTT’s turnover is 240 Meur of which 2/3 is based on contract research and - projects. VTT has subsidiaries in Brussels, Silicon Valley, St. Petersburg and Shanghai.

VTT AS A FORESIGHT PARTNER PROVIDES AN ACCESS TO WIDE ARRAY OF EXPERTISE • VTT's tailored foresight reports and consultancy support decision and policy making process in budgeting, strategic planning, investment decisions and new business concepts • VTT's expert organisation offers access to leading-edge expertise in different industries. • VTT roadmap experts have extensive experience in the coordination of participatory processes and the facilitation of international workshops. • VTT knowledge solutions scan and analyse the latest business and technology advances. VTT's Knowledge Solutions has access to diverse global expertise data bases and other reliable information sources. • VTT's networks and research collaborators offer further possibilities for innovations.

VTT's activities in fields of business and process management in building and construction 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 • energy efficiency, ICT applications and renovation concepts are our main themes in 2008

VTT Real Estate and Construction works intensively in the building market and demand forecast sector in close contact with contractors, material producers, trade, authorities and industry organisations.

Foresight work will be continuously done for almost all important sectors, products and materials in building and construction. On base of the geo-economic location and long co-operation, the construction sector development in Russia and in the whole Baltic RIM area is more important as our working area. We are improving our networks, forecasting methods, databases, tools and reporting concerning especially Moscow, St. Petersburg and the Baltic Countries. We have also close cooperation with some members of the AsiaConstruct network.

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

VTT tecHnical research centre of finland Tekniikankatu 1, Tampere P.O. Box 1300, FIN–02044 VTT, Finland Tel. + 358 20 722 111 Fax + 358 20 722 3497 [email protected] www.vtt.fi Business ID 0244679-4

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

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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;

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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

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.: ++49-89-9224-1383; Fax: ++49-89-9224-2383; e-mail: [email protected]

BUILDECON EAST EUROPE AND TURKEY

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: RUSSIA, ROMANIA, UKRAINE, TURKEY, BULGARIA, CROATIA, SERBIA

AMONG OUR PARNERS WE PROUDLY WELCOME FIRMS LIKE ALUKÖNIGSTAHL, CHR, DOKA, GRABOPLAST, GROUPESCHNEIDER, HENKEL, HOCHTIEF, LINDAB, MERRILL LYNCH, OTP BANK, SKANSKA, SHELL, VOLVO, WIENERBERGER

COME AND VISIT US WWW.BUILDECON.COM

CONTACT: ANNA GASPAR; [email protected] A: CSERESZNYE U 54, 1112 BUDAPEST, HUNGARY; P/F: +36 1 249 3191; M: +36 30 241 0342; E: [email protected]

providing high quality research and advice to clients since 1981

DKM Economic Consultants, 6 Grand Canal Wharf, South Dock Road, Ringsend,

Dublin 4, IRELAND

Tel: +353 1 6670372 e mail: [email protected] Fax: +353 1 6144499 www.dkm.ie

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 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; cost benefit analysis and project evaluation.. 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.

Our Main Areas of Expertise

* Construction and Housing * Transport

* Energy * Markets and Competition

* The Environment * Macroeconomic Environment, Demographics and Forecasting * Socio-economic, Regional and Local Development.

We Can Provide

• Project Appraisal and Cost Benefit Analysis • Market Analysis, Competition Studies and Demand Forecasting • Regulatory, Fiscal and Economic Impact Analysis • Socio-economic and Regional Development Studies • Regional and National Demographic Forecasts • Expert Witness Services • Budget Submissions and Position Papers • Environmental Economic Studies • Corporate Strategy/Business Planning Studies

Our Clients

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) since 1993.

Our Experience in Housing and Construction DKM has extensive experience of the Irish housing and construction sector and a track record in economic forecasting for that sector. The firm has acted as consultants to the Department of the Environment, Heritage and Local Government over the past decade, responsible for (i) the preparation of the official estimates of national and regional construction output, (ii) the completion of an assessment the medium term outlook for construction and employment and (iii) examining the challenges facing the industry over the medium term. More recently, the firm has been engaged to prepare the quarterly statistical series, Construction Indicators, which tracks levels of activity and statistical trends in the construction sector. DKM’s vast knowledge of the construction sector leaves it uniquely placed to provide insight and added value to public and private sector decision-makers.

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, available at http://www.environ.ie/en/PublicationsDocuments/FileDownLoad,15353,en.pdf

¾ Construction Indicators, available at http://www.environ.ie/en/Publications/StatisticsandRegularPublications/Constructi onIndustryStatistics/

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]

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.

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.

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.

KOF Swiss Economic Institute ETH Zurich WEH D 4 Weinbergstrasse 35 8092 Zurich, Switzerland Phone +41 44 632 42 39 Fax +41 44 632 12 18 www.kof.ethz.ch [email protected]

KOF SWISS ECONOMIC INSTITUTE AT THE SWISS FEDERAL INSTITUTE OF TECHNOLOGY ZURICH (ETH)

Field of activities 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, 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. KOF is an active member of various international academic and research associations (CIRET, AIECE, Euroconstruct). Since 2000, the CIRET office has been run at KOF.

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 KOF currently employs more than 30 researchers. Some of them also lecture at the ETH and at the Zurich University. The institute is structured in the following three research divisions: Business Cycle Research; International Economics; Structural Change.

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.