ECONOMIC ACTIVITY REPORT SEPTEMBER 2018
27 September 2018 Kristoffer Eide Hoen Anders Wettre
END OF AN ERA OF STRONG GROWTH
Selected contracting markets CAGR* 2014–2017
Source: Veidekke's market data
INCREASED COMPETITION FOR LABOUR?
Scandinavia
Number of people per age group, relative change (%)
-
Source: Statistics Norway, Statistics Sweden and Statistics Denmark
-
Growth in young jobseekers is declining
- New growth in workers reaching retirement age
- Decrease in labour immigration
STRONG GROWTH IN OUR REGION
GDP growth around the Baltic Sea (%)
- Economic upturn around the Baltic Sea
- Affects access to resources:
- Labour
- Suppliers
- Subcontractors
Source: IMF
VEIDEKKE'S ECONOMIC ACTIVITY REPORT
- Provides forecasts for production/revenue in construction and civil engineering through to the end of 2020
- Thoughts concerning driving forces and uncertainties
- Consensus economic forecasts based on data from recognised economic analysis institutions:
- The IMF, the Swedish National Institute of Economic Research, Statistics Norway, the Danish Economic Councils, central banks, etc.
- The forecasts for the contracting market are prepared by Veidekke on the basis of:
- Digital models for data capture and forecasting
- Internal observation points across Scandinavia
- Industry reports
ABOUT VEIDEKKE'S ECONOMIC ACTIVITY REPORT
The report outlines expected developments in the Scandinavian contracting markets for the period through to the end of 2020 but does not reflect Veidekke's expectations for the Group's own development during the period. The macroeconomic forecasts are based on consensus estimates from established forecasting companies in Norway, Sweden, and Denmark.
FORECASTS FOR CONTRACTING MARKETS 2018–2020
Macroeconomic drivers Investment decisions Const. & civ. eng. market
FORECASTS FOR CONTRACTING MARKETS 2018–2020
Indicators:
labour market
Construction starts,
sales, orders Production/revenue GDP, interest rates,
FORECASTS FOR CONTRACTING MARKETS 2018–2020
Indicators:
GDP, interest rates, labour market
Construction starts, sales, orders
Visibility/predictability as per September 2018
Better market outlook now than in March
Residential production is decreasing, but from record levels
We expect an attractive contracting market over the next two years
Market drivers
- Forecasts for the Scandinavian market
- Sector review
THE GLOBAL ECONOMY IS LOOKING HEALTHY
GDP growth
| Figures in % |
2016 |
2017 |
2018 |
2019 |
2020 |
| Euro zone |
1.8 |
2.4 (2.1) |
2.2 (1.9) |
1.9 (1.7) |
1.8 |
| Germany |
1.9 |
2.5 (2.1) |
2.2 (1.8) |
2.1 (1.5) |
1.5 |
| UK |
1.8 |
1.7 (1.7) |
1.4 (1.5) |
1.5 (1.6) |
1.5 |
| US |
1.5 |
2.3 (2.2) |
2.9 (2.3) |
2.7 (1.9) |
1.9 |
| China |
6.7 |
6.9 (6.8) |
6.6 (6.5) |
6.4 (6.3) |
6.3 |
| Global |
3.2 |
3.7 (3.7) |
3.9 (3.9) |
3.9 (3.9) |
3.8 |
Figures from March in brackets
- Continued stable, positive forecasts for the international economy
- Rising interest rates in USA, Canada and UK
- Uncertainties:
- Financial markets
- International trade
Source: IMF
ECONOMIC GROWTH: THE ECONOMIC UPSWING CONTINUES
GDP growth Norway (%) GDP growth Sweden (%) GDP growth Denmark (%)
Forecast Economic Activity Report March 2018 Forecast Economic Activity Report September 2018
Source: Statistics Norway, Statistics Sweden, the Swedish National Institute of Economic Research and the Danish Economic Councils
ECONOMIC GROWTH: THE ECONOMIC UPSWING CONTINUES
Source: Statistics Norway, Norges Bank, Statistics Sweden, the Swedish National Institute of Economic Research and the Danish Economic Councils
LABOUR MARKET: CONTINUED GOOD EMPLOYMENT FIGURES
Source: Statistics Norway, Statistics Sweden, the Swedish National Institute of Economic Research and the Danish Economic Councils
INTEREST RATES ARE RISING – UNCERTAINTY ABOUT THE EFFECT
Source: Macrobond and Handelsbanken
Market drivers
- Forecasts for the Scandinavian market
- Sector review
MARKET OVERVIEW SCANDINAVIA
Contracting market 2017
Source: Veidekke's market data
SLIGHT DOWNTURN AHEAD
Contracting market, production per year NOK billion
- Stable growth in civil engineering and public buildings
- Correction in production of apartments and small houses
Source: Veidekke
SLIGHT DOWNTURN AHEAD
Contracting market, production per year Change in NOK billion per sector and total (%)
- Stable growth in civil engineering and public buildings
- Correction in production of apartments and small houses
Source: Veidekke
Market drivers
Forecasts for the Scandinavian market
Sector review
APARTMENTS AND SMALL HOUSES – LOWER PRODUCTION LEVEL
Contracting market for apartments and small houses NOK billions, current prices (2018 exchange rate)
* Annual growth rate 2019 and 2020
Production will follow the decline in sales
- Abnormally high production in the past few years
- Positive effects:
- Strong capacity pressure led to sharp rise in contract costs, particularly in Sweden
Source: Veidekke
SWEDEN: MORE STABLE DEVELOPMENT IN RESIDENTIAL MARKET
Grey dashed line shows Veidekke's forecast from March 2018, updated
Source: Veidekke and HOX Valueguard
- Good price development
- Even regional distribution
- High but stable supply side
- Both resale and new
- Demand for loans rising again
- But more restrictive practices will affect some groups of buyers
NEW HOMES – DECREASE IN CONSTRUCTION STARTS AND PRODUCTION
*From top point 4Q 2017 to low point 1Q 2019
Construction starts – apartments and small houses No. of units, 12 months rolling
- Decrease in construction starts, with positive effect on the market
- Positive signals from sales
- Supply side remains high
- Upward adjustment from March based on:
- The resale housing market
- Strong macroeconomy
- Biggest decline in the Stockholm region
Source: Veidekke and Statistics Sweden
Grey dashed line shows Veidekke's forecast from March 2018, updated
NEW HOMES – DECREASE IN CONSTRUCTION STARTS AND PRODUCTION
Production of apartments and small houses (no. of units) SEK billions, 12 months rolling
- Decrease in construction starts, with positive effect on the market
- Positive signals from sales
- Supply side remains high
- Upward adjustment from March based on:
- The resale housing market
- Strong macroeconomy
- Biggest decline in the Stockholm region
Source: Veidekke
NORWAY: GOOD HOUSING MARKET IN FIRST HALF OF THE YEAR
Price (NOK) per square metre, all residential +7%* +7%* +3%* +2%* +3%* +4%* +4%* +1%* *Growth December–December
Source: Property Development Norway and Veidekke
- Price growth and high transaction activity
- Calming effects:
- Growing supply of new houses in the market
- Rising interest rates
- Lower population growth
- Joker: Market psychology and media
- Prices in Oslo expected to fall during autumn...
Grey dashed line shows Veidekke's forecast from March 2018
NO. OF CONSTRUCTION STARTS AND PRODUCTION WILL REFLECT SALES
Construction starts – apartments and small houses No. of units, 12 months rolling
Grey dashed line shows Veidekke's forecast from March 2018, updated
*From top point 4Q 2017 to low point 1Q 2019
Source: Veidekke and Statistics Norway
- Number of construction starts will follow sales down
- Upward adjustment from March based on:
- The resale housing market
- Registered sales of new homes
- The economy in general
- Largest market corrections in Oslo
NO. OF CONSTRUCTION STARTS AND PRODUCTION WILL REFLECT SALES
Production of apartments and small houses (no. of units) NOK billions, 12 months rolling
- Forecast Number of construction starts will follow sales down
- Upward adjustment from March based on:
- The resale housing market
- Registered sales of new homes
- The economy in general
- Largest market corrections in Oslo
Source: Veidekke's market data
NON-RESIDENTIAL BUILDINGS
Commercial buildings:
Offices, wholesale and retail trade, industry and warehouses
Public buildings:
Schools, cultural and recreational buildings, nursing homes and hospitals
COMMERCIAL BUILDINGS
Contracting market commercial buildings NOK billions, current prices (2018 exchange rate)
- Slight decline from high level in Norway
- Falling number of construction starts registered
- Market assessment from the organisation:
- Many development projects and good economic climate, but...
- Tougher competition
- Continued growth in Denmark
LARGEST OFFICE MARKETS
Contracting market office buildings – three largest markets Value of started sites – NOK billions, current prices (2018 exchange rate)
- Total number of construction starts 2017 (Norway and Sweden) ~ NOK 25 billion.
- The 2017 office market boom will result in a high number of completions in 2019 and 2020
- In Greater Oslo almost 300,000 m2 per year
- The underlying drivers are good
- Employment growth
- Interest rates
Source: Veidekke
LARGEST INDUSTRY AND WAREHOUSES MARKETS
Contracting market industry and warehouses – largest markets Value of started sites – NOK billions, current prices (2018 exchange rate)
- Total number of construction starts 2017 (Norway and Sweden) ~ NOK 45 billion
- Strong upswing for industry and warehouses
- Strong export market and weak krone in industry
- Economic and structural factors in logistics
Source: Veidekke
THE VACANCY RATE CONTINUES TO FALL IN DENMARK
Vacancy rate in the Copenhagen region
- Improvements in Copenhagen and the surrounding region
- Major urban development projects
- The vacancy rate is slowly declining
- Increased vacancy in the retail segment
Source: Ejendomstorvet
COMMERCIAL BUILDINGS: DENMARK
Production of commercial buildings DKK billions, current prices
* Annual growth rate 2018–2020
- The market is picking up again after a prolonged recession
- The Copenhagen region is leading the way
- Significant underreporting for 2017 due to technical changes in Statistics Denmark
Source: Statistics Denmark and Veidekke's market data
PUBLIC BUILDINGS
Production of public buildings
Source: Veidekke's market data
A mixed bag
- High level of production in Sweden and Norway
- The Danish market is more hesitant
- High level of debt in the municipal sector
- susceptible to interest rate hikes
SCHOOLS HAVE BEEN A DOMINANT SEGMENT
Production of public buildings per segment NOK billions, current prices (2018 exchange rate)
- New growth in the care market
- But different developments in the three countries
- There has been a boom in school building for some time – slightly declining needs going forwards?
Source: Veidekke's market data
A SURGE OF INCREASED DEMAND IN THE HEALTH SECTOR
Scandinavia
Number of people in age group, relative change (%)
- Number of school children aged 5–9 years will fall
- Number of people over 80 will increase by almost 70 % over the next 10 years
- Greatest change in Norway and Sweden
Source: Veidekke
CIVIL ENGINEERING MARKET
CIVIL ENGINEERING
* Annual growth rate 2019 and 2020
- Growth continues in Sweden
- Slowdown at a very high level in Norway
- No growth in Denmark
Source: Veidekke, Statistics Norway, Statistics Sweden and Statistics Denmark
NORWAY: LEVELLING OFF TOWARDS 2020
Production in various civil engineering segments NOK billions, current prices
- Progress in all segments this year
- Great optimism and high number of contracts among companies in the Norwegian Association of Heavy Equipment Contractors (MEF)
- Transport represents about half of the market
- Slower growth going forwards
TRANSPORT IN NORWAY: AMBITIOUS PLANS, BUT TIGHTER BUDGETS...
Source: VG and Aftenposten
ROADS IN NORWAY: STEADY AT A HIGH LEVEL
Road production by customer NOK billions, current prices
- Upward adjustment of the market for 2017
- Municipal investments in roads
- The main drivers going forwards will continue to be PPP projects and growth in Nye Veier AS
- Levelling off at a very high level towards the end of the forecast period
RAILWAYS IN NORWAY: CONTINUED DEVELOPMENT AT A SLOWER PACE
Investments in railways NOK billions, current prices
- The InterCity triangle is being developed at a more moderate pace
- Downward adjustment from March
- New contracts worth NOK 60 billion in the market over the next three years
- Railways will become the main driver in the transport segment in the future
ROAD MAINTENANCE: GRADUAL INCREASE
Operation and maintenance of railways NOK billions, current prices
SWEDEN: VERY POSITIVE PROSPECTS
Production in several civil engineering segments SEK billions, current prices
- Progress across the board in the Swedish civil engineering market
- Positive contributions from the energy sector
- Upgrade of the power grid
- Other renewable sources
- Strong growth expected in the mining industry
- Major transport projects in metropolitan areas
Source: Veidekke, Statistics Sweden, Swedish Transport Administration
ROADS IN SWEDEN: A GROWING MARKET
Road production by customer SEK billions, current prices
- The municipalities continue to dominate this market
- More large projects, representing a greater share of investments in the future
- High activity expected in Stockholm and Gothenburg
Source: Veidekke, Statistics Sweden, Swedish Transport Administration
RAILWAYS IN SWEDEN: MANY SIGNS OF NEW GROWTH
- High production in ongoing projects has contributed to stable development in recent years
- Prospects for growth in the railways market
- Realisation of huge projects
Source: Veidekke, Statistics Sweden, Swedish Transport Administration
IN SUMMARY
MARKET GROWTH IN METROPOLITAN REGIONS IN 2019 AND 2020 TREND FOR PRODUCTION AND SALES REVENUE IN 2019 AND 2020
Source: Veidekke
Better market outlook now than in March
Residential production is decreasing, but from record levels
We expect an attractive contracting market over the next two years
APPENDIX – FORECASTS
NEW DIGITALISED METHODS
Automate:
- More efficient and more detailed data capture
- Better quality and control:
- Identify strengths and weaknesses in the source material
- Consistent forecasting and uncertainty estimates
- Increase operational relevance:
- Details broken down by organisation
- Broken down by product and municipality as well as construction phase
- ... starting the digital journey
NEW DIGITALISED METHODS
Historical construction data, up to Q2 2018
- From Statistics Norway, Statistics Denmark and Statistics Sweden: Started/approved sites in square metres, broken down by municipality and type of building
- From Veidekke: Estimate of the industry's construction contract cost per square metre excl. VAT and normal construction time
Construction forecasts:
- RNN forecasting tools (AI tools)
- The tool has observations from 1996 in Sweden and 2000 in Norway, broken down by county*
- Forecasts based only on observations, most recently Q2
* The forecasting tool is currently only for Norway and Sweden
EXPLANATORY VARIABLES
- The sector's historical data and covariation with other market segments
- Income, interest
- General local and national economic indicators
- Tighter lending rules
- Psychological factors
- Demographics
| Variable (Norway) |
Variable (Sweden) |
| Construction start |
Construction start |
| Approved |
Conversion |
| Conversion |
Net immigration |
| Net immigration |
Population statistics |
| Population statistics |
Occupancy rate |
| Occupancy rate |
Municipal profit |
| Municipal profit |
Municipal debt |
| Municipal debt |
Bankruptcies |
| Bankruptcies |
House price growth |
| House price growth |
Resale housing sales |
| Credit lending indicator |
Credit lending indicator |
| Sales of new homes |
EUR-NOK |
| EUR-NOK |
USD-NOK |
| USD-NOK |
SEK-NOK |
| Oil price |
2 year government bond |
| 2 year government bond |
Unemployment rate |
| Unemployment rate |
Forecast construction |
| Oil county |
Forecast households |
ANALYSES – FROM GENERAL TO SPECIFIC
The construction market in Scandinavia Construction market in Bohuslän county
MARKET DATA NORWAY
Current prices,
relative change (%) |
Level
(NOK
billions) |
2017
Growth |
2018
Growth |
2019
Growth |
2020
Growth |
2019–
2020
Growth |
Apartments and small
houses |
58 |
24% |
7% |
-17% |
-9% |
-13% |
| Commercial buildings |
21 |
7% |
1% |
-9% |
-3% |
-6% |
| Public buildings |
26 |
-4% |
-9% |
8% |
16% |
12% |
| Civil engineering |
81 |
5% |
9% |
4% |
-2% |
2% |
| Contracting production |
217 |
10% |
3% |
-4% |
-1% |
-3% |
Number of apartments
and small houses
started |
|
24 312 |
17 000 |
18 000 |
20 500 |
|
Source: Statistics Norway and Veidekke
MARKET DATA SWEDEN
Current prices,
relative change (%) |
Level
(SEK
billions) |
2017
Growth |
2018
Growth |
2019
Growth |
2020
Growth |
2019–
2020
Growth |
Apartments and small
houses |
102 |
23% |
-9% |
-11% |
8% |
-2% |
| Commercial buildings |
49 |
23% |
-2% |
0% |
9% |
4% |
| Public buildings |
33 |
11% |
11% |
1% |
-1% |
0% |
| Civil engineering |
86 |
4% |
7% |
7% |
7% |
7% |
| Contracting production |
271 |
15% |
0% |
-1% |
6% |
3% |
Number of apartments
and small houses
started |
|
51 000 |
40 000 |
44 000 |
45 000 |
|
Source: Statistics Sweden and Veidekke
MARKET DATA DENMARK
Current prices,
relative change (%) |
Level
(DKK
billions) |
2017
Growth |
2018
Growth |
2019
Growth |
2020
Growth |
2019–
2020
Growth |
Apartments and small
houses |
26 |
22% |
12% |
6% |
0% |
3% |
| Commercial buildings |
23 |
5% |
7% |
10% |
10% |
10% |
| Public buildings |
12 |
-1% |
3% |
7% |
15% |
11% |
| Civil engineering |
39 |
-5% |
0% |
3% |
8% |
5% |
| Contracting production |
101 |
4% |
5% |
6% |
7% |
7% |
Source: Statistics Denmark and Veidekke