The shadow of the euro crisis

They say bad things come in threes: first there was the collapse of private sector development off the back of the banking crisis, then came the severe public sector cuts to address the deficit. Now, underpinning the general malaise in construction, is the lack of clarity over the future of Europe’s single currency.

“It’s all about confidence,” says Kier’s chief executive Paul Sheffield. “From issues like Horizon pulling out of the nuclear sector to property developers who are keen to invest but want to wait until this uncertainty has passed, so many people are sitting on their hands that it is having an extremely unwelcome effect.”

As the focus flits from Greece to Spain, Portugal and Italy, the uncertainty of which nation will be the next to fall victim to the euro crisis is hitting businesses here too. Figures from the Office of National Statistics (ONS) in June revealed that Britain’s trade deficit soared by £1.4bn to £4.4bn - driven by a fall in exports to the rest of Europe, the UK’s biggest trade partner. The negative impact on construction is inevitable. Output figures for the sector plummeted by 8.5% in April and confidence is the lowest it has been in the industry for six months, according to a PMI survey published in June.

And as no one has any idea how much longer the eurozone turmoil will continue, it’s difficult to predict how bad things could get.

How bad is it?

Compared with most European countries, the UK is a safe haven at the moment. But the government is already preparing companies for the negative ripple effect. Construction minister Mark Prisk told Building last week that the impact was going to be felt across the country and would hit the construction industry hard: “We can’t ignore the very large cloud of uncertainty called the eurozone hanging over us and all the investment decisions being made at the moment.”

Noble Francis from the Construction Products Association (CPA) adds that investor uncertainty will undoubtedly have an increasingly negative impact on UK construction. “It will hit the commercial sector first as business investment falters - we started to see that happening last autumn as the central London market slowed down,” he says. “Then there is the fact that45% of our exports go to the EU which will have a considerable effect too.”

And as Kier’s Sheffield points out, the longer recovery is delayed, the harder it will be: “It’s hard to say what the worst case scenario could be but if this carries on, then there will undoubtedly be more big insolvencies. Supply chains will become much riskier as main contractors could see key subcontractors go bust.”

The euro crisis is casting a large shadow over UK construction, with developers and clients holding off building, and investors holding onto their money. For developers and clients, the decision to hold off non-essential development in a period of uncertainty makes commercial sense. A report by Savills published this month revealed a slump in commercial activity in May to -13.8%, compared with +8.1% in April. The report found that activity on both private and public sector builds fell in May. The net balance of -12.3% for private activity was the first negative reading of 2012 so far, while the reading of -16.4% for public activity was at a three-month low.

Jack Pringle, senior partner at architecture practice Pringle Brandon Perkins + Will, which specialises in commercial development, says: “If you don’t have to go ahead with a project for business reasons at the moment, then why would you? Not while you are unsure whether Europe is going to hell in a handcart anyway.”

Kier’s Sheffield adds that the recent developments in the nuclear sector are likely to have been prompted by uncertainty in the eurozone: “Horizon pulling out of the nuclear sector in the UK was, fundamentally, about Europe. And any question marks over EDF’s continuing involvement is about Europe, too.”

Don Ward, chief executive of the Construction Clients Group, says that, from the clients’ perspective, it makes sense to be cautious in uncertain times. “There is no shortage of money and funding out there at the moment, but until clients see the economy moving, you can understand their reluctance to commit sizeable amounts of money to projects. What we need is certainty - even if it’s bad certainty - so people know what’s happening and how to respond.”

Then there is the issue of overseas investors reluctant to part with funds that have previously buoyed the UK construction market. Ernst & Young reported that Britain had seen a 7.1% slump in overseas investment over the past 12 months. “Global investors are nervous,”says Francis.

The impact on UK firms

Many UK companies working on the Continent have moved pretty quickly to protect themselves: “This crisis has been on the cards for a couple of years,” says the CPA’s Francis. “Most major UK firms have insulated themselves by moving to growth regions such as Eastern Europe, or much further afield to construction hotspots like the Middle and Far East.”

It’s here in the UK that the effects are being felt. Ian Tyler, chief executive of the UK’s biggest contractor Balfour Beatty, says: “The uncertainty is hugely impacting our ability to grow for the long term.”

And Sheffield has said that overseas expansion outside of the eurozone has been the only thing keeping the group’s figures on an even keel: “The value of our construction business has barely changed over the last four years,” he says. “But this is only down to rebalancing by moving into overseas markets.”

There is also a potential supply problem that UK firms need to be aware of. EC Harris’ Simon Rawlinson points out that a lot of construction products companies used by UK contractors, are European. “Around 20-25% of the value of a typical construction project in the UK is sourced from European-based suppliers,” he says. “This increases uncertainty as the likelihood of suppliers going bust mid project are increased if they are based in the eurozone.”

Bright spots

There is some good news. The high end London residential property market could see a boost. Last year 49% of these types of properties were bought by people from Central and Western Europe, according to Francis. The longer the crisis continues, the more likely it is wealthy Europeans will invest in property in the UK.

And there is evidence of big European contractors taking more interest in the UK market. Take Vinci and Bouygues, for example, the two biggest contractors in Europe: the former is looking to invest more in UK schemes and the latter bought UK contractor Thomas Vale in May.

But these investments are bright spots in a darkening picture. “We have to remember that we are not isolated from Europe and that Britain operates in a global economy,” says Brian Berry, chief executive of the Federation of Master Builders.

The future

The problem is compounded by the fact that no one knows when, or how, the eurozone crisis will be resolved. “We are waiting for either the countries with severe issues to leave the euro, or for some sort of long-term structural reform,” says Francis.

As for how UK construction companies can survive, the advice is to make a bee line for growth regions and sectors such as infrastructure and energy. For those who haven’t got the capacity to do so, it’s back to sitting tight. “The solution? I’m not sure,” says Sheffield. “But we could well be back to battening down the hatches. Now just isn’t a time to be wasting money.”

Additional reporting by Jim Dunton