CIF Outlook on the Construction Sector

The strong growth trajectory for the construction industry continued throughout 2016. As you will read over the coming pages of the highly informative CIS Construction Opportunities Report, projects to the value of almost €19bn will commence or come to conclusion over the next 12 months. For the first time in nearly a decade, we can look ahead further than a single year and predict sustained growth up to 2020. A recent CIF commissioned economic analysis forecast 9% annual growth on average for the construction industry, reaching €20billion output by 2020. It can potentially employ 213,000 direct employees making it the largest generator of jobs in all communities around the economy.

It is forecast to contribute around 10% of GNP to the Irish economy by this time – the generally accepted sustainable proportion of construction activity within mature economics In 2016, the construction industry grew to €15billion output and it now employs 137,000 people directly. That figure grows to over 190,000, when you include indirect employment. This means that about 1 in 10 jobs in the economy are construction dependent on the construction industry. This figure will continue to grow at a rate of 1000 new jobs every month. This is all positive news.

However, the CIF has forecast sufficient demand for construction requiring 112,000 additional workers up to 2020 to deliver on the ambitious targets set out in the Government’s €43billion Capital Programme, the Rebuilding Ireland Strategy and in meeting the increasing demand from Foreign Direct Investment companies for specialist buildings. In 2017, the CIF will work with the Government and its agencies such as SOLAS and the Education and Training Boards to attract young people into the industry, upskill those on the live register with relevant experience and to attract those in the Diaspora with construction skills.

We as an industry are focusing on dramatically increasing the number of apprentices in the industry to an annual rate for sign on of 4,000 to sustain forecast activity. There were only 4,400 apprentices across all trades in construction in 2015 compared with 23,700 apprentices in Q4 2007. This year so far there were around 1,500 new registrations so we must redouble our efforts to pump prime the education and training system.

The construction industry has generally been in recovery since 2013, but it is still grappling with nearly a decade of underinvestment and is playing catch up with an economy that has expanded strongly in the meantime.

The volume of construction output contracted by almost two-thirds between 2007 and 2012. We lost almost a quarter of firms in the industry in the six years to 2014 The impact of this on the Irish economy and society is evident in an acute housing supply shortage and infrastructure deficits across the country that Ireland must now address to sustain growth.

Overall Construction Prospects to 2020

The overall volume of construction output is forecast to increase by 12.5 per cent this year to around €15billion (6.9% of GNP), followed by growth of 8.5 per cent in 2017 and 7.1 per cent in 2018. The average annual growth rate in the period 2016-2020 is projected at 9.1 per cent. The volume of construction output by 2020 is forecast to reach €20.2 billion (in 2015 prices), or just over 10% of GNP.

When the gross value added (GVA) of the industry is measured – its contribution in terms of the wages and profits earned by building workers and construction companies – the construction GVA was valued at €6 billion or 3 per cent of GNP in 2015, compared with less than 2 per cent at the height of the recession and 11 per cent of GNP at the peak. This demonstrates the criticality of construction to the domestic economy with high levels of ‘economic recycling’ within local communities across Ireland.

The sector’s economic and societal importance is further highlighted by the fact that the industry is comprised of nearly 37,000 enterprises operating in construction related activity. There were around 46,000 self-employed persons in the construction industry in 2015.

2016 was about putting in place the correct policy environment to enable the construction industry to deliver on housing and infrastructure requirements up to 2020. Measures taken under the Government’s Rebuilding Ireland strategy and increased allocations under the Public Capital programme focus removing barriers to the delivery of construction, particularly residential housing.

Buyer confidence, housing affordability, incomes and mortgage rates as well as the availability of mortgage finance are all impacting on the individual’s ability to secure homes. Recent measures such as the introduction of the first-time buyer rebate, the relaxation of the deposit levels for first-time buyers and the Local Infrastructure Fund should all begin to positively impact on housebuilding levels, particularly in 2018 when completions could reach 20,000.

The CIF will continue to work with the Department of Housing’s Delivery Unit to address issues within the planning process that are curtailing activity. However, a market failure in finance, especially for smaller housebuilders, remains a problem preventing housebuilders from meeting demand. Potential housing requirement nationally could be as high as 42,000 units per annum around 12,500 of which are required in the Dublin market.

Non-residential activity growing strongly

With a total of 6.76 million square metres of non-residential buildings granted permission in the last five years, there is increasing optimism around the prospects for the non-residential construction sector.

The retail sector is benefiting from the recovery in consumer spending. With further growth expected in 2016 and 2017, supported by employment and income growth and historically low interest rates, the market is witnessing a strong increase in demand for space from new entrants as well as from existing retailers. In the tourism area, an estimated 4,200 hotel rooms have been granted planning permission in Dublin and there is growing investment in the hotel sector.

The FDI sector is also generating significant opportunities in construction, while estimates suggest that some 18 companies are either in the process of establishing data centres in Ireland or are significantly expanding existing operations, in an overall investment valued at €3.7 billion.

Infrastructure

The CIF believes that now is the time for the Government to facilitate significant economic growth and societal development by investing in the delivery of world class infrastructure. There are growing deficits in public sector infrastructure, following years of reduced investment.

The total Exchequer capital provision represented 2.2 per cent of GNP in 2014 and 1.8 per cent in 2015, compared with 5.6 per cent in 2008. The total Exchequer capital provision in the Capital Plan over the period 2016-2021 is €27 billion (€4.5 billion on average per year). The programme for Government set out a provision for €42 billion of investment for the next six years.

The programme further states that the level of capital investment in transport, education, health, and flood defences will be increased post the mid-2017 review of the Capital Plan. While these commitments are very encouraging, the Government must secure a relaxation in the fiscal constraints placed on capital investment to enable transformative investment Irish infrastructure.

Key Risks

The availability of finance is critical the industry and ongoing international uncertainty potentially having an impact. For example, less investment may be forthcoming from UK investment companies and financial institutions, because of Brexit, which could jeopardise housing and non-residential development projects relying on non-domestic sources of finance.

Closer to home, the new political landscape can bring about significant uncertainty in relation to the delivery of necessary policy interventions such as the introduction of the Construction Industry Register of Ireland.

Other downside risks include:

• Delays in delivering the policy targets and investment provisions in the Capital Plan and the Action Plan for Housing and Homelessness
• Skills shortages that will prevent industry scaling to deliver the projected output level
• The return of tender price inflation as the industry expands over the coming years, and labour, materials and land costs come under pressure
• A lack of finance for funding private sector projects. Notwithstanding the uncertainty over Brexit, there is a substantial volume of work planned by the commercial and industrial sectors in response to the economic recovery and the growth in population.

In all, with the correct policy environment, the construction industry will fundamentally shape Ireland’s economy and society positively over the coming decade.

The CIF will continue to work with Ireland’s leading construction companies to deliver the housing, infrastructure and specialist building to drive Ireland forward.

If you’re interested in participating in any of these efforts please visit cif.ie, cifjobs.ie, or apprentices.ie to get involved.

Tom Parlon

Director General of the Construction Industry Federation (CIF)

Article taken from CIS Construction Opportunities 2017 Report