Civil engineering sector leads the growth in 2015

Following the severe recession in Europe, total construction output in 2015 was 24% below 2007. Residential output, the worst affected sub-sector, fell by 29%. In 2015, the residential sector grew by 1.5% on the previous year. Non-residential construction saw growth of 0.1%. Civil engineering led the growth last year with more than +3%. All Central and Eastern European countries experienced significant growth in 2015, as they tried to absorb all available EU funds from the previous planning period.

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The European residential market showed 1.8% growth in 2015, confirming that a solid recovery is still some way off. However, new building is becoming the driving force for growth in the market, offsetting weaker renovation activity. This trend has been observed in almost all countries.

THE RESIDENTIAL SECTOR REMAINS FRAGILE

In Germany, residential construction grew by 2.7 percent in 2015. The biggest European residential market is experiencing some dynamism in new construction activity, and the recent influx of refugees will provide further stimulus to demand, especially in urban areas. Also, new investment is stimulated by the growing demand for new multifamily buildings, which reflects low interest rates, and the favourable income and employment situation. The rapidly increasing number of asylum-seekers in Germany also represents a challenge for residential construction activity. The high level of new residential construction activity in 2015, with 245,000 new apartments, is not expected to be sufficient.

Moreover, renovation activity levels remain only stable. Also, energy-efficient refurbishment is especially weak due to reduced subsidies for photovoltaic systems, as well as the low oil price, which makes investment in energy efficiency unattractive compared with previous years.

The housing market in the United Kingdom is booming. In the three-year period 2013-2015, new investment increased on average by 12% p.a. Since 2015 public housing output has started to decline, but indicators from the private sector (such as the increasing number of mortgage approvals and residential property sales, as well as strong demand for the Help to Buy Scheme) suggest continuing growth in the market. As for renovation, the situation is positive for the private sector, due to strong real disposable incomes, despite the demise of the Green Deal, the programme to finance energy efficiency and renewable generation in the built environment.

In France, 2015 ended with a further decline of 3% in volume of building activity, marking another year of decline in production. New housing continues to decline, recording a downturn of 3.9% with only 345,000 housing starts. Renovation activity didn’t improve as expected, due to only a small increase in energy efficiency renovation, despite the implementation of measures to support green renovation.

In Spain, new housing development has improved, linked to general economic improvement and job creation. The upturn in sales is beginning to reduce inventories in specific areas and segments. House prices have stopped falling, and the credit situation is improving.

In Italy, residential production continues to be the weakest segment within the construction sector, and in 2015 registered its eighth consecutive year of decline. This means that 2015 saw the lowest ever level of activity, with the completion of less than 80,000 new dwellings. Some policy measures have been taken to try and stimulate development. This includes a tax deduction of 20% off the purchase price when buying a first home, and the cancellation of the property tax on the first home. Also, the guarantee Fund for the first home, introduced to support the purchase of the principle home as well as for renovation and energy efficiency improvements. In Italy, renovation represents 82% of total residential construction.

In 2015, the markets showing strongest growth for non-residential construction were Denmark (4.7%), Ireland (4.4%) and Poland (4.1%). Amongst the five major countries within Europe, the UK showed the best performance in non-residential construction, driven by commercial and office construction, as well as new warehousing and educational construction. Non-residential output in Italy has shrunk continuously since 2008, and in 2015 it is expected to grow for the first time after the crises. A decrease of non-residential construction in Germany was mainly due to a fall in activity in industrial construction. In Spain, non-residential construction is not expected to show any growth until 2016. Finally, in France, total non-residential activity decreased by almost 1% due to a weak economic climate, a lack of visibility within national economic policy and a low rate of utilization of production capacity.

TOTAL NON-RESIDENTIAL CONSTRUCTION OUTPUT STAGNATED IN 2015

By segment, commercial construction accounts for the largest share of non-residential construction at 20% of total volume. New office construction follows with a share of 17%, and Industrial construction is ranked third in output with a share of 16%. Germany and France are the two biggest markets for new non-residential construction, and both showed declining output in 2015, with Germany at -10% and France at -5%. Within the Nordic countries, Sweden (-8.7%) and Norway (-6.3%) are also facing a decline in new industrial construction. Overall, economic growth is not strong enough to boost construction activity in the industrial sector.

Office construction suffered from weak economic performance and low confidence in 2015, and showed only 0.9% growth. However, this subsector shows signs of recovery from the 2013 crises, while in contrast, the commercial sector showed a 2.1% decline in 2015. The UK is the largest market for commercial and office construction, with Germany in second place. The latter showed a decline of 2% in this segment in 2015 due to deteriorating consumer confidence.

Construction activity in the health sector reached a new low in 2015 after seven consecutive years of decline, with output of new work declining by 1%. New construction in educational buildings increased in 2015 with growth of more than 1%.

Since 2010, the drop in civil engineering output has been much more severe ring output has been much more severe than in the other two construction sectors. Until 2013 production dropped by 15%. However, 2015 showed an increase of over 3% in output, but it is still 9% lower than in 2011. Low levels of activity are due mainly to Spain, which amongst the group of big 5 countries, used to be the biggest, accounting for almost 18% in 2009. In 2015, the share of Spain has stabilised at a low level just below 7%.

THE CIVIL ENGINEERING SECTOR IMPROVED BY MORE THAN 3% IN 2015

In 2015, the best performer was the Slovak Republic (+36.4%), due to the public investment in transport infrastructure with contributions from EU funds. In 2015 all Central-Eastern European countries experienced significant growth. Poland, the seventh biggest market in 2015 in civil engineering, showed an acceleration of growth from 6% in 2014 to 8% in 2015. Several EU countries face strong headwinds in 2015, due to tight fiscal budgets, especially France and Italy. For example, in France, civil engineering activity decreased by almost 8%. This is the biggest contraction recorded in the last 30 years.

In the UK, development of the infrastructure has been the main driver in the civil engineering sector. This is across many segments including railway construction, growth of road construction, civil engineering work for energy (new nuclear power station at Hinkley Point) and water (Thames Tideway project).

Finally, Germany remains the largest civil engineering market in Europe. This country hasn’t reduced its expenditure in this sector for fiscal reasons, like many other countries in Europe. Notably, the development of electricity production from renewable sources, especially wind mills, have been a big success in Germany.

CONCLUSION

Overall construction investment is expected to benefit from rising real disposable incomes and very low mortgage rates. High levels of household debt in some European countries will continue to prevent a strong increase in construction investment in 2016, but this should be less of a constraint in 2017.

Increased demand for housing should be stimu- lated by the inflow of asylum seekers. New residential construction is forecast to increase substantially by 6.1% in 2016. Without exception, all countries are optimistic about their non-residential markets in 2016, and only two countries, Finland and Sweden, expect minimal setbacks for the year after. Finally, civil engineering output is forecast to increase in 2016, reaching nearly the same pace as in 2015.