Veidekke — Management Reports 2017

Mar 13, 2017

VEIDEKKE'S ECONOMIC ACTIVITY REPORT MARCH 2017

13 March 2017 Kristoffer Eide Hoen Director of Analysis

SUMMARY

• Strong Scandinavian construction and civil engineering market in 2016
• Growth will continue in 2017 but level off towards 2018
• Much depends on the residential market

HOW VEIDEKKE COMPILES THE REPORT:

Provide forecasts for investments / turnover in construction this year and next year

• Reflections on market forces and uncertainties
• Macroeconomic forecasts from the consensus in 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 macroeconomic factors and construction and civil engineering
• Internal "look-out points" across Scandinavia
• Industrial reports

FORECASTS FOR "THE MARKET" IN 2017 AND 2018

Macroeconomic drivers Investment decisions Construction market

FORECASTS FOR "THE MARKET" IN 2017 AND 2018

Indicators:

GDP, interest rates, labour market

Start-ups, sales, orders Investments/turnover in construction

FORECASTS FOR "THE MARKET" IN 2017 AND 2018

Indicators:

Start-ups, sales, orders GDP, interest rates, labour market

* Degree of visibility/predictability as per March 2017

Macroeconomic drivers Forecasts for 2017 and 2018 Key market areas

INTERNATIONAL ECONOMY

GDP growth

Figures in %	2015-2016	2017	2018
Euro zone	1,9	1,9(1,4)	1,6
Germany	1,6	1, 5(1, 2)	1,5
Great Britain	2,1	1,5(0,1)	1,4
US	2,1	2,3(2,5)	2,5
China	6,8	6,5(6,2)	6,0
Global	3,2	3,4(3,4)	3,6

Stable forecasts in the international economy

Source: IMF

IS HE DRIVING LONG-TERM RATES HIGHER?

Government Bonds 10-year Yield in %

• Financial plans that drives inflation?
• Expansionary policy infrastructure and tax cuts
• Or is it a risk premium?

Kilde: ECB og Federal Reserve

INTERNASJONAL ECONOMY

Net inward migration from Baltikum and Poland

• Stronger economic conditions in the Baltics and Poland
• The influx of labor has turned
• Net emigration from Norway in Autumn 2016

ECONOMIC GROWTH: SWEDEN IN THE DRIVING SEAT

Norway: economic downturn entire 2018

• Growth appears to have bottomed out
• How strong will the upturn be?

Sweden: Strong economic expansion as predicted

• Growth slowing, in line with expectations

Denmark: GDP figures continue to disappoint

• Improvement predicted, yet again
• Still, not everything is bad...

13 Veidekke's Economic Activity Report March 2017

LABOUR MARKET: SOME IMPROVEMENT IN NORWAY, STRONG IN SWEDEN AND DENMARK

Norway: some improvement ahead?

• Employment is expected to pick up again
• Unemployment has stabilized

Source: Veidekke, SCB, DST og SSB

Forklaring: Rød stiplet linje viser Veidekkes prognoser 14 Veidekke's Economic Activity Report March 2017

Employment growth Norway,% Employment growth Sweden, % Employment growth Denmark, %

Sweden: unwinding after high growth

• Difficulties obtaining skilled labour
• Strong growth in wages, nearly 6 % in contruction in 2016

Denmark: surprisingly strong in 2016

• Employment growth has picked up strongly despite GDP decline
• Natural to expect a slowdown

INTEREST RATES: HAVE INTEREST RATES BOTTOMED OUT?

• Impact in autumn in the long-term rates
• A higher increase than expected could produce strong effects but it not very likely

Forklaring: Rød stiplet linje viser Veidekkes prognoser

15 Veidekke's Economic Activity Report March 2017

Macroeconomic drivers Forecasts for 2017 and 2018 Key market areas

TECHNICAL ADJUSTMENT

• The forecasts made now in value / current prices
• Better reflect the turnover in industry
• Rule of thumb: Approximately 1-3% higher than in forecasts with volume

SCANDINAVIAN CONSTRUCTION MARKET CONTINUES TO GROW

• Strong market, high growth in 2016
• Somewhat lower growth expected in 2017 and 2018

SCANDINAVIAN CONSTRUCTION MARKET CONTINUES TO GROW

Market growth, contribution to growth

Residental investments is the main contributor to growth

FORECASTS FOR THE CONSTRUCTION MARKET

INVESTMENTS* IN THE CONSTRUCTION. FORECASTS FOR 2017 AND 2018

Current prices	2016 NOK billions**	2016 Growth	2017-2018 Ann. Growth	2016 SEK billions**	2016 Growth	2017-2018 Ann. Growth	2016 DKK billions**	2016 Growth	2017-2018 Ann. Growth
Residental	139	11 %	5 %	171	21 %	7 %	52	11 %	17 %
Private Non residental	58	0 %	2 %	101	3 %	3 %	16	2 %	12 %
Public Non residental	35	6 %	3 %	43	12 %	5 %	22	5 %	-1 %
Civil engineering	77	4 %	5 %	81	5 %	3 %	40	5 %	-6 %
Total	309	7 %	5 %	397	12 %	5 %	130	7 %	7 %

* The figures show investment amounts that include new buildings, upgrades and conversions. Maintenance investments, e.g. in the road sector, are not included.

** Conversion to NOK uses exchange rates from 2016. New and updated .

Source: Veidekke

MARKET GROWTH 2017 AND 2018 INVESTMENT/TURNOVER TRENDS IN 2017 AND 2018

Macroeconomic drivers Forecasts for 2017 and 2018 Key market areas

1. RESIDENTIAL

Investments in residential

NOK billions – 2016 NOK up to and including 2016, current in 2017 and 2018

^* Annual growth rate 2017 og 2018

• Historically high level of construction
• ~50% growth last five years in Norway and Sweden
• Investment growth in 2017 is predictable
• Significantly higher uncertainty for 2018

RESIDENTIAL

1. RESIDENTIAL

• RESIDENTIAL
• Investments / turnover in 2018 will largely be influenced by sales and housing-starts this year
• Risk factors:
• Interest rates (and inflation)
• Expectations and psychology
• Regulations on credit
• Supply side (new and exisiting)

NORWAY: FLATTER IN BOTH PRICES AND STARTUP

Prices for apartments Index Jan 2014=100

*Annual growth from Jan 2016 to Jan 2017 ** Expected annual growth 2017 and 2018

Fundamental drivers residential Figures for Oslo

Observations 2016:

• Limited explanation of fundamental forces

RESIDENTIAL

• An increased presence of "investment"
• Low supply of housing where demand was greatest

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

25 Veidekke's Economic Activity Report March 2017

NORWAY: FLATTER IN BOTH PRICES AND STARTUP

Prices for apartments Index 2014=100

*Annual growth from Jan 2016 to Jan 2017 ** Expected annual growth 2017 and 2018

Residential start-ups No. of units

What to expect?

• Stron growth in supply

RESIDENTIAL

• Impact of recession
• Impacts in the market for secundary homes;
• Credit regulations
• Already a tenant`s market

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

PRICE GROWTH AND CONSTRUCTION OF APARTMENTS IN NORWAY

Building costs index – unit prices for labour and materials for construction of blocks of apartments Percentage change year-on-year

RESIDENTIAL

RESIDENTIAL

GROWTH IN PRICES AND COSTS FOR APARTMENTS IN OSLO

Prices and costs for construction of new apartments Price per GIA-s*

Sources: Veidekke and Econ Nye Boliger

SWEDEN: GROWTH RATE DELINES

Observations 2016:

good sales start

• Continued price hikes and

• Boindex indicates a "pain

threshold" for prices?

House prices, appartments

Swedbank's housing affordability index ("Boindex")

*Annual growth from Jan 2016 to Jan 2017 ** Expected annual growth 2017 and 2018

Swedbank's housing affordability index ("Boindex"): Measures average purchasing power of households after buying a home. A score of 100 indicates a balanced domestic economy. Lower scores indicate too low a level of purchasing power after buying a home.

Source: Mäklarstatistik (Estate Agent Statistics Sweden), Veidekke and Swedbank

SWEDEN: GROWTH IN HOUSING DECLINES RESIDENTIAL

House prices, appartments

*Annual growth from Jan 2016 to Jan 2017 ** Expected annual growth 2017 and 2018

Source: Statistics Sweden, Mäklarstatistik (Estate Agent Statistics Sweden) and Veidekke

What to expect:

• 50% growth in housing starts last year leads to growth in investments 2017
• High price levels dampens sales pace of new projects
• Slowdown in sales and housing-starts dampen investment growth in 2018

2. NON-RESIDENTAL BUILDINGS NON-RESIDENTIAL

Private non-residential buildings: Offices, wholesale and retail trade, industry and warehouses

Public non-residential buildings: School, culture and recreation, nursing homes and hospitals

PRIVATE NON-RESIDENTIAL

Investments in private non-residential buildings

Weak trend continues NOK billions – 2016 NOK up to and including 2016, current in 2017 and 2018

^* Annual growth rate 2017 and 2018

• The boom has given rise in Sweden
• But no «take of» like housing
• Restraint characterize companies in Norway
• Influenced by the «macro» environment?
• Denmark remains moderate
• Turning point?

Source: Sadolin og Albæk

DENMARK: TURNING POINT?

• Growth from very low level
• Forecasted growth of 8% in 2017
• Progsess in the macro economy
• Employment growth
• Consumption growth
• Industrial production
• …But market is still held back by continued high vacancy rates in existing buildings

Sadolin & Albæk Market Barometer Vacancy rates

PUBLIC NON RESIDENTIAL

Investments in public non-residential buildings NOK billions – 2016 NOK up to and including 2016, current in 2017 and 2018

^* Annual growth rate 2017 og 2018

Strong trend:

• Sweden: schools, universities and hospitals
• Norway: schools and culture/sports
• Denmark: hospitals and universities
• Good credit terms driving growth
• Be aware developments in interest rates and tax income

PUBLIC NON NON-RESIDENTIAL -RESIDENTIAL BUILDINGS: A WAVE OF HOSPITAL CONSTRUCTION

Norway: starting to increase Sweden: strong growth Denmark: strong growth

Prosjekt	Sted	Status
Sykehuset i Vestfold	Vestfold	Påbegynt - Ferdig 2017/20
Bergen Psykiatri barne- og ungdomssenter BUSP II	Hordaland	Kommer - Ferdig 2022/23
Sykehuset Møre og Romsdal	Møre og Romsdal	Kommer - Ferdia 2022
Haugesund Sykehus	Rogaland	Kommer - Ferdia 2022
Stavanger Universitetssykehus	Rogaland	Kommer - Ferdig 2023
Kristiansand Psykiatrisk sykehus	Vest-Agder	Kommer - Ferdig 2020
Sørlandet sykehus, Psykisk helse SKK	Vest-Agder	Kommer - Ferdig 2020

Started means that the project has started. There may still be a number of contracts in the project that have not been dealt with

Prosjekter > 1 mrd	Sted	Status
Södersjukhuset	Stockholm	Påbegynt – Ferdig 2017/20
Nya Södertälje sjukhus	Stockholm	Påbegynt - Ferdig 2017/18
S:t Eriks sjukhus	Stockholm	Påbegynt – Ferdig 2021
Nya Karolinska Solna (OPS)	Stockholm	Påbegynt – Ferdig 2018
S:t Görans sjukhus	Stockholm	Påbegynt – Ferdig 2018/19
Danderyds sjukhus	Stockholm	Påbegynt - Ferdig 2019/20
Karolinska Huddinge US	Stockholm	Påbegynt – Ferdig 2019
Helsingborgs sjukhusområde	Skåne	Påbegynt – Ferdig 2025
Angelholms sjukhusområde	Skåne	Påbegynt - Ferdig 2018
Malmö sjukhusområde	Skåne	Kommer – Ferdig 2022
Östra sjukhuset	Gøteborg	Påbegynt - Ferdig 2025
Nya Barnsjukhuset	Gøteborg	Påbegynt – Ferdig 2019
Kungälvs sjukhus	Gøteborg	Påbegynt – Ferdig 2019
Akademiska sjukhus	Uppsala	Påbegynt – Ferdig 2023
Universitetssjukhuset i Linköping	Ostergötland	Påbegynt – Ferdig 2021
Vrinnevisjukhuset i Norrköping	Ostergötland	Kommer 2018 – Ferdig 2020
Universitetssjukhuset i Orebro	Örebro	Påbegynt – Ferdig 2019

Prosjekt	Sted	Status
Det Nye Rigshospital	Hovedstaden	Påbegynt – Ferdig 2019
Nyt Hospital Herlev	Hovedstaden	Påbegynt – Ferdig 2019
Nyt Hospital Hvidovre	Hovedstaden	Påbegynt – Ferdig 2020
Nyt Hospital Nodsjælland	Hovedstaden	Kommer – Ferdig 2021
Kolding Sygehus	Syddanmark	Påbegynt – Ferdig 2017
Sydvestjysk Sygehus Esbjerg	Syddanmark	Kommer - Ferdig 2020
Sygehus Sønderjylland	Syddanmark	Kommer – Ferdig 2021
Det nye Hospital i Vest, DNV - Gødstrup	Midtiylland	Påbegynt – Ferdig 2020
Det nye Universitetshospital i Aarhus – DNU	Midtiylland	Påbegynt – Ferdig 2019
Regionshospitalet Viborg	Midtiylland	Påbegynt – Ferdig 2020
Nyt Aalborg Universitetshospital	Nordjylland	Påbegynt – Ferdig 2020
Projekt Universitetshospital Køge	Sjælland	Kommer – Ferdig 2022

3. CIVIL ENGINEERING

3. CIVIL ENGINEERING

CIVIL ENGINEERING

Investments in civil engineering

NOK billions – 2016 NOK up to and including 2016, current in 2017 and 2018

^* Annual growth rate 2017 og 2018

Observations 2016:

• Growth, though weaker than expected
• Continued growth in Sweden
• Continued upturn in 2017 and 2018
• -6%* The exception is Denmark

Foto: Hallgeir Vågenes, VG

Post 30 Riksveg inve steringer $(m$ ill. $kr)$				Lavramme					Basisramme					Midd els ramme/					Hoyramme
	Bindinge			Statlige midler	Annen		Statige midler Annen			Statlige midler			Annen		Statlige midler			Annen
		$2018 -$ 2021	$2022 -$ 2023	2024- 2029	sum	finans	$2018 -$ 2021	$2022 -$ 2023	$2024 -$ 2029	sum	finans	2018- 2021	$2022 -$ 2023	$2024 -$ 2029	sum	finans	2018-222- 202	2023	$2024 -$ 2029	sum	finans
Korridor 1
E6 Riksgrens en/Svines und- Oslo medtilknytninger
Rv 110@rebekk - Simo	x	110			110		110			110		110			110		110			110
Rv111 Dondem - Hafslund (kol- lektiv felt)									220	220	180			220	220	180			220	220	180
Rv22Bru over Glomma									1700	1700	1300			1700	1700	1300			1700	1700	1300
Korridor 2
E18 Riksgrensen/Ørje - Oslo
E18 Riksgrensen - Ørje, refusjon	x.	140			140		140			140		140			140		140			140
E18 Knapstad - retvet, refusion	x	240			240		240			240		240			240		240			240
E18 Retvet - Vinterbro (start)																			3500	3500	2800
E16 Riksgrensen/Riksåsen -Hønefoss og rv35 Hønefoss - Hokks und med tilknytninger
E16 Herbergåsen - Nybakk	(x)								1900	1900	2 10 0		500	1400	1900	2.100		500	1400	1900	2 100
E16 Eggemoen - Jevnaker - Olum	$\omega$							210	940	1150	1600		400	750	1150	1600		400	750	1150	1600
Rv35 Åmot - Vikersund									580	580				580	580				580	580
Rv25Elverum (kryss rv3 - kryss N(2)																			130	130	500
Korridor 3
ELS Oslo - Kristians and og E39 Kristiansand - Stavanger med tilknytinnger
E18 Bommestad - Sky	×	790			790		790			790		790			790		790			790
E18 Varod brua	$\mathbf x$	370			370		370			370		370			370		370			370

At page 289…

Veidekke's Economic Activity Report March 2017

TØFFERE PRIORITERINGER?

Overskudd på statsbudsjettet

Kilde: Statsbudsjettet for 2016

NORWAY: ROADS – MORE CUSTOMERS TO CONSIDER THAN THE CENTRAL GOVERNMENT

Investments in roads by customer

Current prices, NOK millions

Transport investments to increase:

• Significant investment in state-run but municipalities and counties more restrained
• «Nye Veier» started
• Larger projects, and new types of contracts
• International competition

Source: Veidekke and Statistics Norway

NORWAY: STILL UPWARD

Investments in Civil Engineering

NOK billions – 2016 NOK up to and including 2016, current in 2017 and 2018

* Annual growth rate 2017 og 2018

Source: Veidekke and Statistics Sweden

2017 and 2018 provides market growth

• Rise in all segments
• Unlikely with equally strong growth going forward as we have put behind us

	2018-2029	Förslag ny plan Nuvarande plan 2014-2025
Utveckling av transportsystemet	333.5	277
Vidmakthållande av statliga järnvägar	125	85
Vidmakthållande av statliga vägar inklusive bärighet, tjälsäkring och rekonstruktion av vägar samt till statlig medfinansiering av enskilda vägar	164	153
Ekonomisk ram för åtgärder i den statliga transport- infrastrukturen m.m. 2018-2029	622.5	515
Ramen för investeringar i vissa väg- och järnvägsprojekt, för de delar där kapitalkostnaden finansieras med inkomster från trängselskatt eller vägavgifter	52	52

⁴³ Veidekke's Economic Activity Report March ²⁰¹⁷ Foto: Henrik Montgomery/TT Infrastrukturminister Anna Johansson

SWEDEN: CIVIL TOWARDS NEW INVESTMENTS LEVELS CIVIL ENGINEERING

Investments in Civil Engineering SEK billions – 2016 SEK up to and including 2016, current in 2017 and 2018

* Annual growth rate 2017 og 2018

Source: Veidekke og SCB

Observations from 2016:

• Municipal infrastructure related to housing resulted in high growth in "other civil»
• Power industry flattening out
• Still growth in «renewable»
• Transport civil to increase, but not until 2018
• Förbifarten (roads) contributes to regional growth in Stockholm
• Västlänken (rail) contributes to regional growth in Gothenburg from 2017

SWEDEN CIVIL ENGINEERING : CIVIL TOWARDS NEW INVESTMENTS LEVELS

• Huge plans and projects
• Whats is the realities?

46 Veidekke's Economic Activity Report March 2017

Source: Veidekke and SCB

ROAD CONSTRUCTION: INTENSIVE COMPETITION

Leminkäinen	Finland	Socitea	Spanien
AF Gruppen Norge	Norge	Obrascón	Spanien
Aarslef	Danmark	Acciona	Spanien
Implenia	Tyskland	Dragodos	Spanien
Hochtief	Tyskland	Ossa	Spanien
Wayss & Freytag	Tyskland	Salini	Italien
Strabag	Österike	Condotte	Italien
Porr	Österike	Vianini	Italien
Züblin	Österike	CM C Ravenna	Italien
Habau	Tjeckien	Ittenera	Italien
Subterra	Tjeckien	Astaldi	Italien
M arty	Schweiz	Gülermak	Turkiet
Vinci	Frankrike	China general technology group (Genertec)	Kina

• Larger projects and new forms of contracts
• Strong increase in the number of companies
• Competition pushes costs down

SUMMARY

SUMMARY

• Strong Scandinavian construction and civil engineering market in 2016
• Growth will continue in 2017 but level off towards 2018
• Much depends on the residential market

APPENDIX - FORECASTS

NORWAY: FORECASTS – LOCAL CURRENCY

Current prices % change	Level 2016 Bill, NOK	2016 Growth	2017 Growth	2018 Growth	Vekstrate i 17 og 18
Residential	139	11 % $\uparrow$	$8\%$	3%	5 %
Private Non-residential	58	$0\%$	$2%$ 1	3%	2%
Public Non-residential	35	6 % 1	$4\%$ $\downarrow$	3%	3%
Civil eng.	77	$4\%$ $\downarrow$	$6\%$ $\downarrow$	5 %	5 %
Construction total	309	$6\%$	$6\%$ ↓	$4\%$	5%
Number of started appartments and townhouses		21 000 1	20 000 +	19 000

SWEDEN: FORECASTS – LOCAL CURRENCY

Current prices % change	Level 2016 Bill, SEK	2016 Growth	2017 Growth	2018 Growth	Vekstrate i 17 og 18
Residential	171	21 % 1	$10\%$ T	3%	7 %
Private Non-residential	101	$3\%$ $\downarrow$	$4\%$	3%	3%
Public Non-residential	43	12 % 1	5%	$4\%$	5 %
Civil eng.	81	$5%$ 1	$2\%$ $\downarrow$	4 %	3%
Construction total	397	12 % 1	7 % 1	3%	5 %
Number of started appartments and townhouses		53 000 1	51 000 1	49 000

DENMARK: FORECASTS – LOCAL CURRENCY

Current prices % change	Level 2016 Bill. DDK	2016 Growth	2017 Growth	2018 Growth	Growth rate 2017-2018
Residential	52	11 % 1	17 % 1	18 %	17 %
Private Non-residential	16	$2\%$ ↓	8%	16 %	$12\%$
Public Non-residential	22	5 % 1	$-1\%$ $\bullet$	$-1\%$	$-1\%$
Civil eng.	40	5 % 1	$-7%$ 1	$-4\%$	$-6\%$
Construction total	130	$7%$ 1	6%	9%	7%
Number of started appartments and townhouses		19 500 1	22 500 1	25 000