dl world construction 2006-07a

Figure 1Global construction

spending 2006 (US$bn)

Source: DLSI

USA

2000 400 600 800 1000

Other countries

Japan

China

Germany

Italy

France

UK

Brazil

Spain

Korea

Mexico

Australia

India

Hong Kong

Figure 2Global construction

spending growth 2006-07 (%)

20-2 4 6 8 10

Source: DLSI

Japan

China

Germany

Italy

France

UK

Brazil

Spain

Korea

Mexico

Australia

India

Hong Kong

Other countries

USA

Overview

During 2006 overall growth in world construction activity

remained positive, but lacked some of the dynamism seen

in recent years. However, there were large regional

differences throughout the year. Demand was particularly

buoyant in the markets of Central and Eastern Europe, the

Middle East and Asia, while the other regional markets

were somewhat subdued.

The global economy in 2006 is expected to match the pace

of growth seen in 2005 of around 4.3%. However, global

growth is expected to soften somewhat going into 2007

due to a marked slowdown of the US economy. Against

that, emerging Asian and Eastern European economies are

likely to maintain their positive momentum.

Global construction spending reached $4.6 trillion in 2006,

a 4.9% increase over 2005, with slightly more subdued

growth rates expected in 2007. The US market still

dominates the global scene as the largest national

construction market (Figure 1). Japan remains second, in

terms of construction spending in 2006, but its growth

prospects are relatively poor compared to the rest of Asia,

particularly China and India (Figure 2).

Our review of world construction in 2006 and outlook for

2007 concentrates on the five main trading blocks, namely

Africa, the Americas, Asia Pacific, Australasia, and Europe

and the Middle East.

World Construction2006–2007

DAVIS LANGDON

UK

Growth in construction

activity seems to have

stalled at present.

Output during 2006 is expected to

have increased slightly over 2005, but

we expect 2007 to be slightly more

upbeat as some of the work on major

projects in the pipeline, such as the

Olympics, begins to come on stream.

Infrastructure output fell steeply for

the third year running in 2006 and

the sector has shrunk by nearly 30%

since 2002 largely as a result of

investment in other sectors, mainly

health and education construction. All

the indications are, however, that the

sector is likely to turn around over the

next few years, with growth across

the sub-sectors expected. Indeed

work directly related to the Olympics

is already beginning to build up.

In terms of public construction, there

is evidence that spending is being

reigned in, particularly in the health

sector where significant overspend at

a number of Health Trusts may mean

that capital expenditure on health

facilities could be particularly

vulnerable.

The residential sector continues to

perform reasonably well and until

supply matches demand the sector is

expected to continue growing at a

healthy rate. Activity is likely to be

driven by the provision of more

affordable and key worker housing.

Industrial construction continues to

perform surprisingly well considering

the relative weakness of the

manufacturing sector. The primary

growth in recent years has been in

the provision of distribution

warehouses rather than factories.

Geographically, demand in Scotland

and Wales saw the fastest expansion.

Workloads in London and the South

East continued to grow solidly but at

a slightly lower pace than recently.

Activity in the South West, North and

the Midlands rose reasonably strongly.

Forecasts indicate that Northern

Ireland will be the only region with

falling output.

Capacity issues have been high on the

agenda in the UK, in particular skills

shortages. However, there is evidence

that skills shortages have eased a

great deal during 2006, due largely to

the influx of migrant labour from

Eastern and Central Europe. However,

whether or not this is sustainable in

the medium to long term remains to

be seen although the construction

industry has a long history of using

migrant labour during periods of

relatively high demand.

Europe

The European construction industry

exhibited reasonable growth (+3.2%) in

2006 driven in the main by relatively high

demand in the residential and civil

engineering sectors. Indeed, construction

growth is expected to exceed GDP growth

(+2.5%) as a whole in most Euro-zone

countries. However, we expect growth in

Western European markets to be restrained

in 2007 but still positive (+2.2%).

The main focus of European activity is

residential construction accounting for

approximately one half of total construction

output in many Western European countries.

Our forecast for 2007 suggests that civil

engineering construction is likely to grow

(+3%) above trend for the market as a

whole, although much of this activity will be

concentrated in Eastern European markets.

Construction activity in the five largest

Western European economies (Germany,

France, Italy, Spain, and the UK) has been

relatively subdued although the German

market finally returned to positive territory

in 2006. A bright spot continues to be the

construction market in Ireland where growth

of 3% is forecast for 2007, largely driven by

increases in residential construction. Indeed,

Ireland currently has the highest rate of new

house building in Europe.

Overall, the sluggish growth in the West is

being off-set by strong growth in Eastern

Europe in particular in the Czech Republic

(+5%); Slovakia (+7.3%); Poland (+7.2%);

and Hungary (+7.9%) with growth forecast

to continue in these countries for the

foreseeable future. The growth in Eastern

Europe is largely being led by civil

engineering activity as governments replace

dilapidated infrastructure via European

Union funding.

Middle East

Strong economic growth across the states of

the Arabian Gulf will continue to fuel

expansion of the construction sector and

associated industries in the Middle East.

With countries in the region experiencing

some of the world’s fastest GDP growth the

outlook for the next few years looks

positive, although capacity constraints may

begin to condition growth forecasts.

In most countries in the region GDP is

forecast to grow at around 6% in 2006 with

similar levels expected for 2007. This growth

continues to fuel the booming construction

sector in the region, in some countries the

construction sector now accounts for as

much as 10% of GDP.

Saudi Arabia, Qatar and the UAE will see the

largest growth in construction activity

through 2007, which is likely to be related to

oil and gas production and also residential,

health, education and commercial

construction. However, the building boom

comes at a price and construction inflation

is currently running at relatively high levels

despite government attempts to control

investment.

Asia Pacific

The Asian market exhibited continued

growth in 2006 but with some slowdown

of activity evident when compared to 2005.

In particular, growth slowed in the largest

South East Asian economies namely,

Thailand (following the recent military

coup), Philippines, Malaysia and Singapore.

However, despite the regional slowdown,

China and India continue to grow at a very

high rate, indeed China is expected to record

double digit GDP growth in 2007 for the

fourth consecutive year. The construction

market in China is being driven by strong

growth in private housing, commercial real

estate and public infrastructure. However,

there are indications of a potential

slowdown looming in 2009 after the Beijing

Olympics in 2008.

Rapid growth in infrastructure and building

activity in China is putting strains on

available resources, and is fuelling sharp

rises in material and professional labour

costs. The Chinese government is attempting

to cool explosive growth in fixed investment

and if successful, this may help to alleviate

any capacity problems in the medium term.

India has been able to maintain its high

growth momentum with an 8.1% expansion

of GDP in 2006, significantly above trend

and higher than in 2005. The broadly

DAVIS LANGDONWorld Construction 2006–2007

favourable monsoon and robust growth in

industry and services sectors has helped

consolidate high growth.

The medium-term outlook in India is for

GDP to expand annually by 8.5% through to

2010. This will require a sizable pickup in

gross fixed capital formation from about

26% to 30% of GDP and will require making

substantial improvements in the physical

infrastructure of the country, which should

translate into increased construction

spending going forward.

Australasia

GDP growth in both Australia and New

Zealand was muted in 2006 and

inflationary pressures are likely to lead to a

further slowdown in 2007.

Indeed, three recent interest rate increases

have combined to dent activity in the

construction industry in Australia during

2006. In particular, the residential sector in

the major urban centres is slowing down

dramatically. However, there are some bright

spots as commercial and infrastructure

construction activity rose to its highest level

for over a year. The prospects for 2007 are for

a continuation of the slowdown but this is

largely dependent on the next review of

interest rates in February.

In New Zealand construction activity is

relatively flat with residential activity

experiencing a slight downturn while non-

residential activity is growing fairly robustly.

Non-residential activity is being led by

increased spending in commercial and

infrastructure sectors.

The Americas

The construction market in the United States

experienced a relatively weak showing in

2006 with growth rates moderating during

the course of the year after a strong start.

Overall our forecast for 2007 is that the

construction market will be a mix of

positives and negatives, with the net result

being that total construction output is likely

to decline by around 1%.

Our forecast is largely influenced by the

slowdown in the residential market, which

up until 2006 had been booming, but in

2007 is forecast to decline by as much as

5%. Despite the pessimism there are some

bright spots in the US market, in particular

the non-residential sector is likely to see an

increase of around 7% coupled with an

increase in manufacturing construction of

some 14%. In addition public works are

expected to grow robustly (+5%) as

infrastructure spending increases.

Despite economic stability throughout the

region the South American market was

constrained by presidential elections in a

dozen countries during 2006. Generally, the

region exhibited growth averaging 5%

during 2006, although this is forecast to

moderate somewhat through 2007 as a

result of the slowdown in the USA. Brazil

and Mexico, the regions largest construction

markets, are expected to struggle to match

the average regional growth levels due to

their exposure to the US market.

However, one bright spot is Argentina which

is expected to continue its strong comeback

after its economic meltdown in 2002, GDP

growth of 7% is forecast for 2007 and

construction activity is currently booming.

Africa

The African construction market experienced

reasonable growth in 2006 (+5.8%) and this

is expected to continue through 2007

(+5.5%). Oil-exporting countries, however,

are outpacing others by a substantial

margin. Moreover some countries continue

to face serious problems - including the

humanitarian catastrophe in the Darfur

region of Sudan, the economic collapse in

Zimbabwe, drought and food crises are also

affecting several areas in a number of East,

West and Southern African countries which

are likely to dampen their growth prospects.

Nonetheless the outlook for much of the

continent continues to be more favourable

than it has been for many years. South

Africa, in particular, is gearing up for the

2010 World Cup football competition with

construction of the stadiums due to get

under way in 2007, the construction market

is being driven by large increases in public

spending and foreign direct investment in

readiness for the event.

China

The Chinese economy

expanded by almost 11%

in 2006, this is an

astonishing growth rate for a country

the size of China. Investment in fixed

capital is booming despite over

capacity, which is resulting in many

completed facilities remaining un-

occupied for some time. In other

words supply is far exceeding demand

and this is depressing prices and

profits. The watch word currently is

for more sustainable growth, which

will entail government intervention,

cooling areas where substantial over-

investment has created surpluses and

shifting growth towards other areas.

This policy shift has potential

ramifications for the construction

industry in China with a move from

investment in non-residential to

residential construction expected.

Indeed, China is accelerating its

urbanisation plans, with 55% of the

population (approximately 0.7 billion)

expected to be in urban areas by

2020. In order to accommodate

growing urban populations, China is

expected to build two billion square

meters of residential space each year

for the next 15 years to support the

economy’s expansion and to upgrade

living standards for its people.

In addition, China is improving its

infrastructure and other facilities to

support its rapid economic

development. For example, the Three

Gorges Project, the West-to-East Gas

Project, the Olympic stadiums in

Beijing, World Expo2010 in Shanghai,

are all increasing demand in the

construction industry. Another major

project is China’s highways network,

China is expected spend $240 billion

in the next 30 years to build 85,000

kilometres of highways.

China retains its position as the

world’s global growth engine. While

that growth is moderating, China is

still expected to grow strongly

through 2007. The nation’s policy

makers are trying to cool off the

investment/real estate boom, but

monetary policy-tightening is

expected to remain cautious for the

foreseeable future.


Survey of international construction trendsDavis Langdon undertakes an annual opinion survey of international construction activity.

Every year survey questionnaires are sent to key individuals across the globe who are

knowledgeable about construction trends, both in their own country and internationally.

Many of them are opinion makers or people whom directly or indirectly influence the

views of others, i.e. leading business people, academics and policy makers. The survey

looks at important future trends in construction activity worldwide, with a particular focus

on likely market trends over the short, medium and longer terms.

This review summarises this year’s survey results, identifying future construction market

trends at the regional, national and metropolitan level. There were 35 respondents to the

survey in December 2006 from 15 countries in six continents.

Growth prospects: main countries

China is the first ranked country, in terms of growth over the short and medium terms by

a wide margin, followed by the UAE. China is also considered to be a relatively open and

profitable market, while the UAE is ranked highly because of its perceived profitability

potential. In terms of year on year changes perhaps the most interesting ranking is the

position of the UK which has moved up to third place from fifth last time. Furthermore,

India’s position has reversed since last year from third to ninth place.

Growth prospects: main cities

Dubai is the first ranked city closely followed by London and Shanghai. Generally speaking,

growth prospects are highest in Chinese cities. However London, just like the UK in the

country section, has moved up the rankings with increased scores in all categories, but in

particular perceived profitability and openness. In terms of year on year changes, US cities

have fallen out of the top ten this year and been replaced by cities from the Middle East,

including Baghdad.

Figure 4

National and metropolitan construction markets

Country ranking

Country Fastest Most Most Combined growing profitable open score

1 China 20 4 6 30

2 UAE 6 8 6 20

3 UK 1 5 8 14

4 USA 0 1 4 5

5 Nigeria 0 0 3 3

6 Germany 1 1 0 2

7 Iraq 1 1 0 2

8 Russia 0 1 1 2

9 India 1 0 0 1

10 Lebanon 0 0 1 1

Note: Frequency counts

City ranking

City Fastest Most Most Combined growing profitable open score

1 Dubai 7 10 5 22

2 London 2 7 9 18

3 Shanghai 7 2 3 12

4 Beijing 7 2 0 9

5 Baghdad 1 1 1 3

6 Moscow 1 1 1 3

7 Hong Kong 0 0 2 2

8 Istanbul 1 0 1 2

9 Abuja 0 1 1 2

10 Beirut 0 1 0 1

Note: Frequency counts


Long term regional trends

We asked respondents about trends in key markets over the next 25 years. Figure 5 provides

the median response, indicating the degree to which respondents agree or disagree with

the assertions in the questions.

There is broad agreement with all our statements on growth trends in the different regions.

However, respondents are not so sure about the more pessimistic prognosis for the South

American market. In terms of year on year changes, the respondents’ position regarding

South America has become slightly more optimistic while their views on the North American

market have become slightly more pessimistic and this seems to have been reflected in the

short and medium term changes highlighted previously.

Summary

What can the survey tell us? First, the analysis of the attractiveness of construction markets

by country and city over the short term suggests that construction markets in China and its

major cities are now the focus of attention worldwide. In addition the UAE, particularly

Dubai, stands out in terms of short to medium term growth prospects.

Second, in the longer term, the survey respondents generally share our optimistic view

about Asia and pessimism about Western Europe, East and Central Europe, Africa and North

America. However, the respondents are not so sure about our more pessimistic forecast for

South America. Next year we will see if any of these views have changed significantly.

Opinion surveys of this kind offer valuable insights into construction activity. When

repeated regularly they can provide useful indicators of market trends. We now undertake

this survey on an annual basis. For further information on the methodology or other

matters, please contact us at any of our offices or by emailing us at the address below.

The survey questionnaire is available on line at:

www.dlmc-research.info/ECERUsurvey/survey-construction.htm

from where you can download a copy of this review.

Figure 5Regional construction markets

West European market will remain large, but it will continue to decline

East and Central European markets will ultimately grow, but they will remain small

North American market will remain large, but it will first stagnate and then decline

Asian market will remain large and it will continue growing at a healthy rate

African market will ultimately grow, but it will remain small and stagnant for a considerable period

South American market will ultimately grow, but it will remain small and stagnant for a considerable period

Proposition Median response 1Strongly disagree

2Disagree

3Not sure

4Agree

5Strongly agree


Figure 3Average annual growth of global construction spending 2006-10

1 2 3 4 5 6 7 8%

Japan

China

Germany

Italy

France

UK

Brazil

Spain

Korea

Mexico

Australia

Hong Kong

Other countries

USA

India

Source: DLSI

Note: Throughout this review/outlook, figures for construction growth in 2006 are provisional; firm figures will not be

available until well into 2007.

World Construction 2006-07 was prepared by David Crosthwaite and John Connaughton of Davis Langdon

Management Consulting, London with contributions from Mark Beattie and Leon Gardiner, Davis Langdon, Melbourne;

Malcolm Johnston, Davis Langdon and Seah, Hong Kong; Johan Kemp, Davis Langdon Farrow Laing, Johannesburg;

Peter Morris, Davis Langdon, Sacramento; Michael Webb, Davis Langdon PKS, Dublin.

Enquiries: please email [email protected]

Africa

Principal contact

Johan Kemp,

Parktown

(+27 11) 484 2330

South Africa

Bloemfontein

Cape Town

Durban

George

Johannesburg

Klerksdorp

Mid Vaal

Nelspruit

Pietermaritzburg

Port Shepstone

Pretoria

Richards Bay

Sasolburg

Somerset West

Stellenbosch

Tygerberg

Vanderbijlpark

Botswana

Gaborone

The Americas

Principal contact

Nick Butcher,

Santa Monica

(+1 310) 393 9411

Boston

New York

Philidelphia

Sacramento

San Francisco

Santa Monica

Seattle

Vermont

Asia Pacific

Principal contact

Seah Choo Meng

Singapore

(+65) 6222 3888

Brunei

Bandar Seri Begawan

China

Beijing

Chongqing

Guangzhou

Hong Kong

Macau

Shanghai

Shenzhen

Wuhan

India

Bangalore

Hyderabad

Mumbai

Indonesia

Bali

Jakarta

Surabaya

Japan

Tokyo

Nagoya

Korea

Seoul

Malaysia

Johor Bahru

Kota Kinabalu

Kuala Lumpur

Kuching

Penang

Philippines

Manila

Singapore

Thailand

Bangkok

Vietnam

Hanoi

Ho Chi Minh City

Australasia

Principal contact

Mark Beattie,

Melbourne

(+61 3) 9933 8800

Australia

Adelaide

Brisbane

Cairns

Canberra

Darwin

Hobart

Melbourne

Perth

Sydney

Townsville

New Zealand

Auckland

Wellington

Europe &

The Middle East

Principal Contact

Rob Smith, London

(+44 20) 7061 7000

England

London

Birmingham

Bristol

Cambridge

Leeds

Liverpool

Maidstone

Manchester

Milton Keynes

Norwich

Oxford

Peterborough

Plymouth

Southampton

Stevenage

Wales

Cardiff

Scotland

Edinburgh

Glasgow

Ireland

Cork

Dublin

Galway

Limerick

Spain

Barcelona

Girona

Lebanon

Beirut

Bahrain

Manama

UAE

Dubai

Qatar

Doha

Egypt

Cairo

Davis Langdon & Seah International Worldwide operations www.davislangdon.com

General outlook

Our forecast is for a broad-based slowdown in global construction activity

during the next twelve months, with the prospect of a worsening trend if

interest rates continue to rise through 2007. Over the medium term average

global construction growth is likely to slow to around 3% annually

through to 2010. However, there are exceptions and countries promising

exceptional growth rates during 2006-10 are China, India and the

countries of the former Soviet Union (Figure 3).

USA

The US construction market

amounted to just over $1

trillion in 2006, with

half of that total coming from

residential construction. Any reduction

in residential construction output, as

forecast, will clearly have a major

effect on the market as a whole.

Despite this the market outlook for

2007 is reasonably buoyant with much

of the declines in the residential

sector likely to be made up by

increases in other sectors, particularly

the non-residential sector.

Geographically, demand in the

Western and Southern states is

relatively high compared to other

areas. However, construction

spending in New York City is reaching

record levels as the re-construction of

the World Trade Centre site gets

underway in earnest. Construction

spending in the city rose to a record

$21 billion in 2006 with similar levels

of spending expected in 2007. The

building boom is driving up the cost

of labour and materials in the region,

currently costs are increasing at a rate

of 1% per month.

Furthermore, the US is generally

struggling with worker availability

issues. Labour shortages in

construction are likely to be a major

issue in 2007 and for the foreseeable

future. The construction workforce is

getting older and there aren’t enough

replacement workers coming through

the ranks to meet up-coming

demand. In fact, the demand for

construction labour is so great in the

hurricane damaged state of

Mississippi that local government

officials are courting China-based

construction companies to import

Chinese labour to help re-build much

of the real estate damaged by

hurricane Katrina in 2005.

Even with the moderate slowdown in

construction activity expected in 2007,

the labour market is unlikely to ease,

due to the shortage of new entrants,

and the increased attention on illegal

immigration.


dl world construction 2006-07a

Documents