Veidekke — Audit Report / Information 2017

Sep 27, 2017

VEIDEKKE'S ECONOMIC ACTIVITY REPORT SEPTEMBER 2017

27 September 2017 Kristoffer Eide Hoen Director of Analysis

"It's tough to make predictions, especially about the future"

Yogi Berra

FORECASTS FOR CONSTRUCTION AND CIVIL ENGINEERING PRODUCTION IN 2017, 2018 AND 2019

Economic drivers Investment decisions Const. & civ. eng. market

FORECASTS FOR CONSTRUCTION AND CIVIL ENGINEERING PRODUCTION IN 2017, 2018 AND 2019

Indicators:

labour market

Construction starts, sales, orders Production / revenue GDP, interest rates,

FORECASTS FOR CONSTRUCTION AND CIVIL ENGINEERING PRODUCTION IN 2017, 2018 AND 2019

Indicators:

GDP, interest rates, labour market

Construction starts, sales, orders

2017 2018 2019

* Degree of visibility / predictability as per September 2017

• Fundamental drivers still seem good, and stronger than expected in March
• Good prospects for the construction and civil engineering market in the forecast period until the end of 2019, but with diminishing growth
• The turnaround in the residential market in Oslo and Stockholm is stronger than we expected in March

VEIDEKKE'S ECONOMIC ACTIVITY REPORT:

• Provide forecasts for investments / revenue in construction and civil engineering through to the end of 2019
• Thoughts concerning drivers and uncertainties
• Consensus economic forecasts based on data from recognised economic analysis institutions:
• The IMF, the Swedish National Institute of Economic Research (KI), Statistics Norway, the Danish Economic Councils, central banks, etc.
• The forecasts for construction and civil engineering are prepared by Veidekke on the basis of:
• Our experience of the correlation between economic factors and construction and civil engineering
• Internal observation points across Scandinavia
• Industrial reports

Economic drivers

Forecasts for 2017–2019 Key market areas

THE GLOBAL ECONOMY IS LOOKING HEALTHY

GDP growth

Figures in %	2016	2017	2018	2019
Euro zone	1.8	1.9 (1.9)	1.7 (1.6)	1.8
Germany	1.8	1.8 (1.5)	1.6 (1.5)	1.4
UK	1.8	1.7 (1.5)	1.5 (1.4)	1.6
US	1.6	2.1 (2.3)	2.1 (2.5)	2.1
China	6.7	6.7 (6.5)	6.4 (6.0)	6.0
Global	3.2	3.5 (3.4)	3.6 (3.6)	3.7

Figures from March in brackets

Stable and moderately positive forecasts for the international economy

Source: IMF

ECONOMIC GROWTH: POSITIVE GDP SURPRISES IN ALL THREE COUNTRIES

GDP growth mainland Norway (%) GDP growth Sweden (%) GDP growth Denmark (%)

Forecast Economic Activity Report March 2017 Forecast Economic Activity Report September 2017

ECONOMIC GROWTH: POSITIVE GDP SURPRISES IN ALL THREE COUNTRIES

Production growth past 3 months. GDP growth Sweden (%) GDP growth Denmark (%)

Forecast Economic Activity Report March 2017 Forecast Economic Activity Report September 2017

LABOUR MARKET: POSITIVE EMPLOYMENT FIGURES, MODERATE IN NORWAY

Employment growth Norway (%) Employment growth Sweden (%) Employment growth Denmark (%)

Forecast Economic Activity Report March 2017 Forecast Economic Activity Report September 2017

INTEREST RATES: MODERATE FUTURE INTEREST RATE PATH, LED BY SWEDEN

Forecast Economic Activity Report March 2017 Forecast Economic Activity Report September 2017

Source: Macrobond and Veidekke

Economic drivers Forecasts for 2017–2019 Key market areas

STRONG SCANDINAVIAN MARKET THROUGH TO THE END OF 2019, IN RELATIVE TERMS ...

Construction and civil engineering production in NOK billions

* Annual growth rate 2018–2019

• Residential production will remain at a high level through to the end of 2019
• The other segments are projected a solid growth rate of 5–6% in 2018–2019

... BUT GROWTH IS SLOWING DOWN AFTER A STRONG RECOVERY

Market growth in NOK billions, contribution to growth

• Almost 10% growth in construction and civil engineering in 2017
• Falling to about 6% in 2018 and 2% in 2019 (lower than inflation)

MARKET GROWTH IN METROPOLITAN REGIONS IN 2018 AND 2019

TREND FOR PRODUCTION / REVENUE IN 2018 AND 2019

Economic drivers Forecasts for 2017–2019

Key market areas

1. RESIDENTIAL – DECLINE AFTER STRONG GROWTH

Investments in Residential

Current prices – 2017, NOK billions – 2016 exchange rate

• High but falling production volumes
• Very high number of construction starts to the end of Q2 2017, but sales have slowed down
• Production growth is predictable well into the 2018
• Considerable uncertainty in the estimates for 2019

RESIDENTIAL

NORWAY: BACK TO NORMAL AFTER RECORD STRONG 2016

Prices per sq.m, apartments in selected cities

• The turnaround has been stronger than expected
• Effective credit measures
• Situation reminiscent of 2013
• Upturn before tightening of credit measures, vacuum and psychological effects afterwards
• Dip in construction starts in 2014

* Year-on-year as per august ** CAGR to end 2019 *** Growth Dec.–Dec.

Source: Veidekke, Statistics Norway and the Norwegian Real Estate Association (EFF)

NORWAY: BACK TO NORMAL AFTER RECORD STRONG 2016

Start and construction of apartments and small houses, total of rolling 12 month

Source: Veidekke and Statistics Norway

• "Normalisation" to 15,000–17,000 units
• Involves a drop of 25–35% from the record level in Q2 2017
• Fundamental conditions are good, and have improved in the past six months
• Good flow in resale housing market
• Underlying demand appears solid
  • Relocation
  • Segments with low exposure among buyers of second homes

SWEDEN: MORE BALANCED MARKET

Prices per sq.m, apartments in selected cities

Source: HOX Valueguard

• Prices have levelled off in Stockholm
• Continued strong recovery in Gothenburg and Malmö
• Healthier market situation
• Supply more in balance with demand
• More normal competition for customers (which is both positive and negative)

SWEDEN: GROWTH IN THE RESIDENTIAL SEGMENT IS SLOWING DOWN

Start and construction of apartments and small houses, total of rolling 12 month

	2016 (level) 2017P		2018P	2019P
Starts apartments and small houses	47 850	9 %	-8 %	-5 %
Units under construction	41 483	25 %	8 %	-6 %

Source: Veidekke and Statistics Sweden

• The slower pace of sales in the Stockholm region will entail fewer housing starts
• Gothenburg and Malmö still look strong
• Positive effects on industry:
• Reducing pressure on capacity and cost growth for contractors
• Better access to sites and lower prices

2. PUBLIC AND COMMERCIAL BUILDINGS

Commercial buildings: Offices, wholesale and retail trade, industry and warehouses

Public buildings: Schools, cultural and recreational buildings, nursing homes and hospitals

COMMERCIAL BUILDINGS

Investments in commercial buildings

Current prices, NOK billions – 2016 exchange rate

• Good market for public and commercial buildings through to the end of 2019
• Good growth rate in Sweden, from an already high level
• Stable level in Norway, high in the benchmark with Sweden and Denmark
• Gradual "normalisation" in Denmark
• Common denominator: positive drive in logistics & storage and hotels

COMMERCIAL BUILDINGS

Production volumes in selected segments Current prices, NOK billions

• Growth in several segments
• Retail (shopping centres)
• Storage & logistics
• Some regional differences
• More storage & logistics
• The current mood within commercial property could well trump the downturn?

Source: Veidekke

DENMARK: POSITIVE SIGNS IN THE DANISH MARKET

Office vacancy rate in selected metropolitan regions

• The vacancy rate is falling
• Low investments for many years suggest a potential for growth
• But we must not count our chickens before they hatch
• Many development projects are experiencing tough competition to secure tenants

Source: Sadolin & Albæk and Ejendomstorvet

PUBLIC BUILDINGS

Investments in public buildings

0 10 20 30 40 50 60 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Denmark Sweden Norway Current prices, NOK billions – 2016 exchange rate +3%* +4%* +7%*

* Annual growth rate 2018–2019

• Good market through to the end of 2019
• The growth in Sweden looks set to persist
• Renewed growth in Norway in 2019
• Moderate outlook in Denmark

Highlights:

• Good economy and financial situation in the municipal sector
• Still many schools, plus more hospitals

PUBLIC BUILDINGS

Hospital projects initiated in 2017–2018 Current prices, NOK billions – 2016 exchange rate

╬
Prosjekt	Sted	Status
Sykebuset i Vestfold	Vestfold	Pilbegynt - Ferdig 2017/20
Bergen Psykiatri barne- og ungdomsserter BUSP II	Hordaland	Kommer - Ferdig 2022/23	8 L .
Sykehuset Mere og Romsdall	Maria og Romsdal	Kommer - Ferdig 2022	BI MIN
Haugesund Sykelsus	Rogaland	Kommer - Ferdig 2022	Prosjekter	Sted	Status
Stevenger	Rogaland	Kommer - Ferdig 2023	Södersjukhuset	Stockholm	Pábegynt - Ferdig 2017/
Universitetssykehus			Nya Sodertalje sjuktus	Stockholm	Pilbegynt - Ferdig 2017/
Knstensend Psykistrisk syketus	Vest - Agder	Kommer - Ferdig 2020	Solentuna syukhus	Stockholm	Pábegynt - Ferdig 2018
Serlandet sykehus.	Vast - Agder	Kommer - Ferdig 2020	Nya Karolinska Solna (OPS)	Stockholm	Pábegynt - Ferdig 2018
Psykisk hotse 5900			S1 Gorans sakhus	Stockholm	Påbegynt - Ferdig 2018/
Nytt Vestre Viken sykehus.	Buskerud	Kommer - Ferdig 2024	Danderyds sjukhus	Stockholm	Pábegynt - Ferdig 2019
Ullevill Sykehus, stortykopevakt	Oslo	Kommer - Fentig 2022	Karolinska Huddinge US	Shockholm	Pábogynt - Ferdig 2019
			Helsingborgs sjukhusområde	Skåne	Pábegynt - Ferdig 2025
			Angelholms saakhusområde	Skåne	Pábegynt - Ferdig 2018
			Malmö sjukhusområde	Skáte	Konmer - Ferdig 2022
Prosjekt	Sted	Status	Nya Barnsukhuset	Geleborg	Pábegynt - Ferdig 2019
Det Nye Rigshospital	Howcidaden	Päbegynt - Ferdig 2019	Kungatus sjuktus.	Gataborg	Pilbegynt - Ferdig 2019
Nyt Hospital Herley	Hovebladen	Päbegynt - Fendig 2019	Akademiska skátkys	Uppsala	Pábegynt - Ferdig 2023
Nyt Hospital Hvidovre	Hovedstaden	Pábegynt - Ferdig 2020	Universitetssjukhuset i Linksping	Ostergötland	Pábegynt - Ferdig 2021
Nyt Hospital Nochumland	Howdstaden	Kommer - Fenby 2021	Vrimnevirgialchursal i Norrköping	Ostergottand	Kommer 2018 - Ferdig 2
Kolding Sygetius	Syddanmark	Pábegynt - Fendig 2017	Universiteitsteathuset i Orebro	Orebro	Pábegynt - Ferdig 2019
Sydwidysk Sygehus Esberg	Syddanmark	Kommer - Fendig 2020
Sygetus Senderlyfand	Syddanmark	Kommer - Fentlig 2021
Det nye Hospital i Vest, DNV - Geöstrup	Midtylland	Päbegynt - Ferdig 2020
Det nye Universitetshospital i Aachus - DNU	MidtyRand	Pábegynt - Ferdig 2019
Regionshospitalet Viborg	MidtyNend	Pilbegynt - Ferdig 2020
Nyt Aaborg Universitetshooptal	NondyNand	Påbegynt - Ferdig 2020
Projekt Universitetshospital Kege	Syndand	Kommer - Fendig 2022

• Good market through to the end of 2019
• The growth in Sweden looks set to persist
• Renewed growth in Norway in 2019
• Moderate outlook in Denmark

Highlights:

• Good economy and financial situation in the municipal sector
• Still many schools, plus more hospitals

Source: Veidekke and the respective county authorities / counties

PUBLIC BUILDINGS

Production volumes in selected segments Current prices, NOK billions

• Schools dominate the situation
• We are expecting a clear increase in institutional construction projects
• Hospital expansions from Lier to Kristiansund
• Nursing homes / care homes;
• The calm before the storm ... (expected in 2023)

Source: Veidekke

3. CIVIL ENGINEERING MARKET

3. CIVIL ENGINEERING

Investments in civil engineering Current prices, NOK billions – 2016 exchange rate

* Annual growth rate 2018–2019

• Growth expected in Norway and Sweden
• But that will reach a limit, probably not long after 2019
• Strong international competition in parts of the market
• Demanding market in Denmark

MUNICIPAL INVESTMENTS IN WATER SUPPLY AND SANITATION MATERIALISATION OF THE GREEN SHIFT?

Investments in water supply and sanitation Current prices, SEK billions

Investments in water supply and sanitation Current prices, NOK billions

Source: Statistics Norway and Statistics Sweden

ENGINEERING SWEDEN: CIVIL ENGINEERING REACHING NEW HEIGHTS?

Investments in various civil engineering segments Current prices, SEK billions

• The growth in roads is continuing, but competition is tough in the largest projects
• Strong growth in the civil engineering market related to buildings
• Residential development is driving the growth
• Positive and attractive market for small and medium-sized projects in water supply and sanitation, energy and rail

Source: Veidekke and Statistics Sweden

ENGINEERING

CIVIL

NORWAY: NEW DYNAMICS IN ROAD CONSTRUCTION

Road production by customer Current prices, NOK billions

Source: Veidekke and Statistics Norway

Further growth in infrastructure:

• High level, starting to peak in 2019
• Nye Veier and the Norwegian Public Roads Administration's PPP projects are accounting for a larger share of the market
• Scandinavian construction companies have done well so far with Nye Veier
• New contractual forms
• More design and build contracts
• Larger share of major contracts
• More prequalification criteria

NORWAY: NEW DYNAMICS IN ROAD CONSTRUCTION

Major contracts' share of the infrastructure market, Contracts over NOK 3 billion.

Further growth in infrastructure:

• High level, starting to peak in 2019
• Nye Veier and the Norwegian Public Roads Administration's PPP projects are accounting for a larger share of the market
• Scandinavian construction companies have done well so far with Nye Veier
• New contractual forms
• More design and build contracts
• Larger share of major contracts
• More prequalification criteria

Source: Veidekke

ROAD MAINTENANCE

ROADS

Current prices, NOK billions

Source: The Norwegian government, the Norwegian National Transport Plan, Statistics Norway, annual budgets and financial plans and Veidekke

RAIL

Current prices, NOK billions

IN SUMMARY

• Fundamental drivers still seem good, and stronger than expected in March
• Good prospects for the construction and civil engineering market in the forecast period until the end of 2019, but with diminishing growth
• The turnaround in the residential market in Oslo and Stockholm is stronger than we expected in March

APPENDIX – FORECASTS

NORWAY: FORECASTS – LOCAL CURRENCY

Investments in NOK billions

Current prices,	Level	2016		2017 2018		2018-2019
change (%)	NOK bill.	Growth	Growth	Growth	Growth	Growth
Residential	139	11 %	9 %	3 %	-7 %	-2 %
Commercial buildings	59	2 %	6 %	5 %	-1 %	2 %
Public buildings	36	8 %	-1 %	0 %	9 %	4 %
Construction and civil engineering	78	5 %	7 %	7 %	6 %	6 %
BA total	312	7 %	7 %	4 %	-1 %	2 %
No. of apartments and small houses started		21 000	21 000	16 500	17 500
Explanation: Forecast unchanged from EA Report March 2017 Forecast revised downwards / upwards from EA Report March 2017

Source: Statistics Norway's data for 2016 and Veidekke's forecasts for 2017, 2018 and 2019

SWEDEN: FORECASTS – LOCAL CURRENCY

Investments in SEK billions

Current prices,	Level	2016	2017	2018	2019	2018-2019
change (%)	SEK bill.	Growth	Growth	Growth	Growth	Growth
Residential	169	20 %	18 %	5 %	-5 %	0 %
Commercial buildings	85	1 %	7 %	9 %	3 %	6 %
Public buildings	44	15 %	7 %	9 %	5 %	7 %
Construction and civil engineering	82	6 %	10 %	5 %	9 %	7 %
BA total	381	11 %	13 %	6 %	1 %	4 %
No. of apartments and small houses started		48 000	52 000	48 000	45 000
Explanation:		Forecast unchanged from EA Report March 2017
Forecast revised downwards / upwards from EA Report March 2017

Source: Statistics Sweden's data for 2016 and Veidekke's forecasts for 2017, 2018 and 2019

DENMARK: FORECASTS – LOCAL CURRENCY

Investments in DKK billions

Current prices,	Level	2016	2017	2018	2019	2018-2019
change (%)	DKK bill.	Growth	Growth	Growth	Growth	Growth
Residential	66	10 %	17 %	13 %	8 %	10 %
Commercial buildings	22	4 %	8 %	10 %	10 %	10 %
Public buildings	22	2 %	-1 %	-1 %	7 %	3 %
Construction and civil engineering	41	7 %	-5 %	3 %	5 %	4 %
BA total	151	7 %	7 %	8 %	7 %	8 %
No. of apartments and small houses started		13 845	14 500	16 000	17 000
Explanation: Forecast unchanged from EA Report March 2017 Forecast revised downwards / upwards from EA Report March 2017

Source: Statistics Denmark's data for 2016 and Veidekke's forecasts for 2017 2018 and 2019

VEIDEKKE'S FORECAST FOR THE CONSTRUCTION AND CIVIL ENGINEERING MARKET

INVESTMENTS* IN CONSTRUCTION AND CIVIL ENGINEERING. GROWTH FORECAST FOR 2017-2019

All figures measured in value	2016 NOK billions**	2017 Growth	2018-2019 Annual growth	2016 SEK billions**	2017 Growth	2018-2019 Annual growth	2016 DKK billions**	2017 Growth	2018-2019 Annual growth
Residential	139	9 %	-2 %	169	18 %	0 %	66	17 %	10 %
Commercial buildings	59	6 %	2 %	85	11 %	6 %	22	8 %	10 %
Public buildings	36	-1 %	4 %	44	5 %	7 %	22	0 %	3 %
Civil engineering	78	7 %	6 %	82	10 %	7 %	41	-5 %	4 %
Constr. & civ. eng. total	312	7 %	2 %	381	14 %	4 %	151	7 %	8 %

Source: Veidekke

• * The figures show investments, including new buildings, remodelling and redevelopment. Maintenance investments (e.g. in the road sector) are not included.

Veidekkes konjunkturrapport september 2017 • ** Conversion to NOK uses exchange rates from 2016.