1
Economic activity report Spring 2019
Kristoffer Eide Hoen and Anders Wettre Skøyen, 11 March 2019
About Veidekke's economic activity report:
- Updated forecasts for production/revenue in construction and civil engineering through to the end of 2020
- Thoughts concerning driving forces and uncertainties
- Macroeconomic forecasts from recognised economic analysis institutions
- The IMF, the Swedish National Institute of Economic Research, Statistics Norway, the Danish Economic Councils, central banks, Almi, etc.
- The forecasts for the contracting market are prepared by Veidekke on the basis of
- Automated data capture from statistics agencies, Macrobond and Veidekke
- Digital models for forecasting
- Internal observation points across Scandinavia
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.
Forecasts for contracting markets 2019–2020
Investment decisions Construction & civil engineering market Macroeconomic drivers
Forecasts for contracting markets 2019–2020
Indicators:
labour market
Construction starts, sales, orders Production/revenue GDP, interest rates,
Forecasts for contracting markets 2019–2020
Indicators:
GDP, interest rates, labour market
Construction starts, sales, orders
2019 2020
*Visibility/predictability as per March 2019
Agenda
Market drivers 01
- Main features of the contracting markets 02
- Sector review 03
- Summary 04
Global economy
Increased uncertainty about the future, but steady forecasts
GDP growth
| Figures in % |
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
|
|
|
|
| Euro zone |
1,8 |
2,4 |
1,8 (2,2) |
1,6 (1,9) |
1,7 (1,8) |
| Germany |
1,9 |
2,5 |
1,5 (2,2) |
1,3 (2,1) |
1,6 (1,5) |
| UK |
1,8 |
1,8 |
1,4 (1,4) |
1,5 (1,5) |
1,6 (1,5) |
| US |
1,5 |
2,2 |
2,9 (2,9) |
2,5 (2,7) |
1,8 (1,9) |
| China |
6,7 |
6,9 |
6,6 (6,6) |
6,2 (6,4) |
6,2 (6,3) |
| Global |
3,2 |
3,8 |
3,7 (3,9) |
3,5 (3,9) |
3,6 (3,8) |
- Somewhat lower growth 2019–2020
- Interest rates have fallen
- Uncertainties: financial markets and international trade
- Effects in Scandinavia:
- Primary scenario is positive and stable
- Risk factors:
- Global decline in confidence and risk appetite
- Small currencies vulnerable to turbulence
Global economy Economic upswing in the Baltics
Production index construction and engineering, Baltics excluding Sweden Index, 2015=100
Comments:
- Economic upswing in the Baltics
- Macroeconomic forecasts indicate an ongoing upturn until the end of the forecast period
- Effects in Scandinavia:
- Shift in labour immigration, especially in Norway
- Higher prices and increased delivery times from this region
Source: Eurostat
Macro-perspective, Scandinavian countries In brief
- "There are prospects that the upturn in the Norwegian economy will continue, but slower growth abroad and a flattening of petroleum investment later in the projection period will likely pull down growth further out." Norges Bank, 12 December 2018
- "The economy is now entering a weakening phase, although the economic upturn will continue for the next two years." Swedish National Institute of Economic Research, 19 December 2018
- "We anticipate continued positive growth in the Danish economic, at the rate of approximately 2 per cent annually. However, there are increasing risks in the economy. These cut both ways, but there is particular reason for vigilance with respect to the risk of overheating." Danish Economic Councils, 4 December 2018
Immigration to major cities Important indicators in several construction markets
Net immigration Norway Percentage of population
Net immigration Sweden Comments: Percentage of population
- Norway: positive trends in several urban regions in the autumn
- Sweden: high growth in 2018, but buyers of new residential units are not "newcomers"
- As in the preceding years, immigration accounts for growth
- Has contributed to a fall in median household income growth since 2016
- Approx. 40 per cent of population live in and around the capital cities or largest metropolitan regions
Sources: Statistics Norway, Statistics Sweden and Veidekke's market data
Regional differences in the Norwegian economy Smaller differences than a few years ago
Last three months, converted into annual growth Last three months, converted into annual growthBusinesses facing a labour shortage*0,6 1,5 1,5 1,6 1,8 2,7 4,1 0 1 2 3 4 5 Region Inland Region Central Region Northwest Region Southwest Region North Region South Region East Q4 2017 Q4 2018
Production growth by region
growth
Access to labour Businesses facing a labour shortage*
Comments:
- More even economic situation across the regions
- High growth in eastern Norway
- Good labour capacity in all parts of the country
- Most reports of labour shortages from construction and engineering
Source: Norges Bank *Proportion of contacts replying that access to labour is limiting production
Agenda
- Market drivers 01
- Main features of the contracting markets 02
- Sector review 03
- Summary 04
Scandinavian contracting markets Dominated by civil engineering and apartment blocks
and Veidekke's market data
Commercial and public buildings include an estimate of the transparent rehabilitation, reconstruction and additions market for projects sizes > NOK 20 million. Civil engineering only encompasses new builds.
Scandinavian contracting markets Mild downturn from a high level
CAGR 2018-2020
Sources: Statistics Norway, Statistics Sweden, Statistics Denmark and Veidekke's market data
Contracting markets, annual production
- Strong historical growth with capacity challenges in several contracting sectors
- The contracting market as a whole is well-positioned for a moderate downturn
Scandinavian contracting markets Apartments are the key swing factor
Sources: Statistics Norway, Statistics Sweden, Statistics Denmark and Veidekke's market data
Contracting markets*, annual production
*Revised data from Statistics Denmark for 2014–2017 have entailed some changes in historical figures
Comments:
- Reduced apartment construction in 2019 and 2020 will have a dampening effect
- Adjustment of forecasts
- Revision 2014–2017
- Increase for 2018
- Moderate decrease for 2019 and 2020
Forecast for contracting markets:
| Report |
2018 |
2019 |
2020 |
March
2019 |
5% |
-3% |
0% |
| September 2018 |
2% |
-1% |
4% |
Geographical differences in building construction Varying short-term prospects
- Stockholm starts trend, followed by Oslo region
- Mixed picture in other major cities
- Less pressure in the largest building construction markets
Geographical differences in building construction Significantly higher production in Norway
- Far greater construction activity in Norwegian cities in relative terms
- Economic situation powered by the petroleum sector probably a material causative factor
Agenda
- Market drivers 01
- Main features of the contracting markets 02
- Sector review 03
- Summary 04
Civil engineering
Civil engineering in Norway Lower pace of growth going forward
Production in different civil engineering segments NOK billion, current prices
Sources: Statistics Norway and Veidekke
- High activity in all segments throughout last year
- Strong contribution from wind farm developments
- Increased industrial sales and exports
- Strong momentum in the municipal facilities sector
Transport infrastructure in Norway National transport plan delayed
Planning periods, national transport plan (NTP)
NOK billion, current prices
Comments:
- Project execution rate of 90 percent to date
- Could become the first time since 2002–2005 that the NTP target is not fulfilled
- Indication of new fiscal policy direction?
Sources: Norwegian Government and Veidekke
Transport infrastructure in Norway Plans vs reality
Sources: NRK, Aftenposten, Byggeindustrien
Roads in Norway High and flat until the end of the forecast period
Road production by customer
NOK billion, current prices
- Forecasts somewhat adjusted since September 2018
- Updated project information from Nye Veier AS
- PPP project delayed
- Drop in main road investments under the Norwegian Public Roads Administration
Sources: Statistics Norway, Norwegian Government, national transport plan, Norwegian Public Roads Administration and Veidekke
Railways in Norway Rising central government allocations
Comments:
- Unchanged forecasts
- This year, priority is being given to continuation of ongoing major projects
- Far behind NTP schedule
Sources: Statistics Norway, Norwegian Government, national transport plan, Bane NOR, Norwegian Railway Directorate and Veidekke
Road maintenance in Norway High priority generates new growth
Operation and maintenance of roads
NOK billion, current prices
Operation and maintenance of railways
NOK billion, current prices
Sources: Statistics Norway, Norwegian Government, national transport plan, Norwegian Public Roads Administration, Bane NOR, Norwegian Railway Directorate and Veidekke
Civil engineering in Sweden Outlook remains strong
Production in different civil engineering segments SEK billion, current prices
- High production in the first two quarters of last year
- Rising civil engineering activity in the transport infrastructure market
- Visibly positive effects in the energy sector
- The municipal facilities market is growing
Sources: Statistics Sweden and Veidekke
Municipal facilities sector Strong growth in the water supply and sewage market
Water supply and sewage investments
SEK billion, current prices
- Refurbishment of older facilities
- New residential areas are boosting demand
Sources: Statistics Sweden and Veidekke
Industrial projects Positive prospects in the mining industry
Veidekke's civil engineering projects in Swedish mines Malmberget, 2017
Source: Macrobond Source: Byggeindustrien
Transportation infrastructure in Sweden Central government allocations will result in future growth
Road production
SEK billion, current prices
Sources: Statistics Sweden, Swedish Government, NPT, Swedish Transport Administration and Veidekke
Apartments and small houses
Scandinavian residential market Sellers of new residential units face excess supply situation
- Stockholm leads the way, followed by other major cities
- Dynamic: rapid growth may be followed by rapid decline
Scandinavian residential market Many positive developments in secondhand housing market
House prices in the largest cities
Price per square metre, NOK
Sources: Property Development Norway, Mäklarstatistik, Statistics Denmark and Veidekke
The coloured stippled lines show Veidekke's forecast The grey stippled line shows the September 2018 forecast
- Developments called for a few years ago:
- Stable price and debt trends
- Large number of transactions = good dynamics
- High construction activity and high supply
- Oslo minor decrease
- Increased supply of secondhand residential units throughout the autumn
Swedish residential market Stable trend in the secondhand housing market
The grey stippled line shows the September 2018 forecast
Housing prices in the largest markets Comments:
Price per square metre, SEK
- Generally stable, flat price growth
- However, a slight fall in recent months has stirred media coverage
- High but stable supply
- Credit restrictions have dampened debt inflation, but banks forecast growth in 2019
- Increasing uncertainty in Gothenburg
Swedish residential market Pricing of new residential units remains challenging
Price per square metre of new build apartments at beginning of year 2014–2019 Comments: Selected Swedish counties
- Prices of new residential units somewhat down following strong growth in 2016 and 2017
- Double squeeze with respect to realisation last year:
- Demand side: lower willingness to pay and incentives to delay purchases
- Supply side: purchase prices taking time to adapt to lower activity
Swedish residential market Somewhat improved sales; challenging new build market
New residential unit sales in Sweden, eight listed companies Comments:
• New residential unit sales stable and moderately improved in the autumn of 2018, but far lower than in 2016 and 2017
Source: Quarterly reports of the companies
Swedish residential market Decline in sales reflected in building starts
Building starts, apartments and small houses
- Declining number of building starts
- Rental proportion has increased to 60%
- Improved contractor capacity in the residential segment will also impact other market segments
Norwegian residential market An unusually strong secondhand housing market
Source: Property Development Norway and Veidekke
37
The coloured stippled lines show Veidekke's forecast The grey stippled line shows the September 2018 forecast
- General market forces are stable and supportive
- An exception is somewhat weaker migration compared to previous years
- Stable price growth forecast to continue
Norwegian residential market Growth in completions neutralised by high transaction rate
Completed apartments and small houses Comments:
Number of units
- High transaction rate is compensating for increased supply of completed units
- Marked growth in eastern Norway; more even development in other metropolitan regions
Norwegian housing market New residential building starts track sales
Building starts, apartments and small houses
12-month rolling quarterly total, number of units
- Stable, "normal" sales in 2018, but far behind peak years 2016–2017
- Current sales indicate continued decline in building starts
- But very high number of building starts registered in Q4 2018…
- Supply is generally stable, but higher than normal
- New residential unit prices generally stable
Non-residential
Commercial buildings in Norway and Sweden Generally positive outlook despite a dip…
Building construction production, Norway
12-month rolling quarterly total, NOK billion
Building construction production, Sweden
12-month rolling quarterly total, SEK billion
Office buildings Industrial and warehouses Hotel, restaurant etc. Retail and commercial buidlings
Comments:
- High pressure in cyclical industries
- Manufacturing, logistics and offices
- Increased contractor competition from the residential sector
- Falling pressure some are waiting for reduced purchasing prices…
- Structural challenges related to retail/shopping centres
- Will become more apparent when demographic factors and residential construction decline
Source: Veidekke's market data
60
Commercial buildings in Denmark Positive outlook but uncertainty in the retail sector
Vacancy rate in Denmark* Percentage of total number of buildings
Source: Ejendomstorvet
*The stippled lines shows the vacancy rate for the region around Copenhagen
Building construction production, Comments: Denmark 12-month rolling quarterly total, DKK billion 0 5 10 15 20 25 30 35 40 45
2012 2013 2014 2015 2016 2017 2018 2019 2020
Copenhagen Central Jutland Northern Jutland Zealand Southern Denmark
- Market trends and household finances are robust
- Positive vacancy figures, but negative trend for retail premises
Public buildings in Norway and Sweden Strong years behind us – high activity levels to continue
Building construction production, Norway
12-month rolling quarterly total, NOK billion
Building construction production, Sweden
12-month rolling quarterly total, SEK billion
Health and care buildings Schools etc.
Other buildings Cultural and sport facilities
Comments:
- Strong years behind us high level
- The municipal sector has borrowed heavily
- Adjustment of forecasts:
- Sweden: reflects a decline in approved space
- Norway: postponements in the hospital sector
- General trend: more health and care at the expense of schools?
Source: Veidekke's market data
Public buildings in Norway and Sweden Demographics suggest new priorities
Comments:
- We are nearing the end of a period of strong growth in the number of schoolchildren
- The building construction market will reflect demographic changes
Source: Veidekke's market data
Hospital construction in Norway Lacks coordination?
Building construction production, hospitals
12-month rolling quarterly total, NOK billion
- Large number of hospital projects in Norway in the period towards 2022
- Large, technically challenging and complex buildings
- Will be challenging to execute efficiently and to a high standard
- Discussions about location may lead to a better distribution of projects over the years ahead
Summary Reduced pressure in contracting markets
Veidekke's market overview Comments:
- Stockholm is leading the way in the economic cycle and will bottom out in the winter of 2019/2020
- More stable, but still challenging in the new residential unit sector
- The civil engineering market remains strong
Source: Veidekke's market data *Measured by growth in building construction production in 2019
Summary Is the future certain?
Likely building starts Q4 2018 – Q4 2019 Comments:
Calculated probabilities, building construction in Norway and Sweden
- Stockholm has come furthest in the economic cycle and will bottom out in the winter of 2019/2020
- Greater stability but still challenging in the new residential unit sector
- The civil engineering market remains strong
Source: Veidekke's market data
Thank you
Norway Production forecasts for contracting markets 2019–2020
Current prices,
relative change (%) |
Level
NOK bill. |
2017
Growth |
2018
Growth |
2019
Growth |
2020
Growth |
2019-2020
Growth |
| Apartments and small houses |
63 |
24 % |
8 % |
-12 % |
-15 % |
-13 % |
| Commercial buildings |
51 |
6 % |
0 % |
-5 % |
-4 % |
-4 % |
| Public buildings |
26 |
-4 % |
-4 % |
1 % |
2 % |
2 % |
| Civil engineering |
86 |
9 % |
6 % |
4 % |
0 % |
2 % |
| Contraction production |
226 |
10 % |
4 % |
-3 % |
-4 % |
-4 % |
Number of apartments and
small houses started |
|
25 000 |
21 330 |
18 000 |
19 000 |
|
Explanation:
Forecast unchanged from EA Report September 2018 |
|
|
|
|
|
|
Forecast revised upwards/downwards from EA Report September 2018
Sweden Production forecasts for contracting markets 2019–2020
Current prices,
relative change (%) |
Level
SEK bill. |
2017
Growth |
2018
Growth |
2019
Growth |
2020
Growth |
2019-2020
Growth |
| Apartments and small houses |
104 |
22 % |
1 % |
-17 % |
0 % |
-9 % |
| Commercial buildings |
51 |
21 % |
3 % |
-7 % |
4 % |
-1 % |
| Public buildings |
36 |
12 % |
8 % |
-9 % |
-11 % |
-10 % |
| Civil engineering |
85 |
5 % |
7 % |
6 % |
7 % |
6 % |
| Contraction production |
275 |
15 % |
4 % |
-7 % |
2 % |
-3 % |
Number of apartments and
small houses started |
|
50 400 |
37 500 |
37 000 |
40 000 |
|
Explanation:
Forecast unchanged from EA Report September 2018 |
|
|
|
|
|
|
Forecast revised upwards/downwards from EA Report September 2018
Denmark Production forecasts for contracting markets 2019–2020
Current prices,
relative change (%) |
Level
DKK bill. |
2017
Growth |
2018
Growth |
2019
Growth |
2020
Growth |
2019-2020
Growth |
| Apartments and small houses |
28 |
22 % |
5 % |
3 % |
0 % |
1 % |
| Commercial buildings |
34 |
18 % |
7 % |
7 % |
7 % |
7 % |
| Public buildings |
15 |
12 % |
3 % |
5 % |
5 % |
5 % |
| Civil engineering |
52 |
2 % |
9 % |
3 % |
5 % |
4 % |
| Contraction production |
129 |
11 % |
7 % |
4 % |
4 % |
4 % |
Explanation: Forecast unchanged from EA Report September 2018 Forecast revised upwards/downwards from EA Report September 2018
Veidekke's market data
Historical construction data, up to Q4 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 excluding VAT and normal construction time for each building type; adjusted over time using construction cost indicators from the statistics agencies. An algorithm has greater effects in the event of large changes over a short period.
- Estimate of refurbishment and alteration projects involving commercial buildings are based on all refurbishment and alteration projects totalling >20 million registered in Norge Bygges and Sverige Bygges in the period 2007–2017. Estimates based on correlation with new build volumes in the same period, adjusted for different geographical areas*.
- Civil engineering data are based on data from the statistics agencies, project information and public budgets and plans.
Forecasts**:
- Forecasts are prepared for building starts by sector, county and housing prices using the same geographical areas as used by Real Estate Norway and Svensk Mäklerstatistik. These forecasts are prepared using the Recurrent Neural Network algorithm.
- Forecasts are based on observed indicators forming part of explanatory variables, primarily those available as at Q4 2018.
- Civil engineering forecasts are based on different sources/analyses of investment activity, financing capacity and project databases.
** To date, the forecasting tool is only available for Norway and Sweden.
* This has been tested without finding confirmation that the ROT (rehabilitation, reconstruction and additions) and new build markets have different economic cycles.
Explanatory variables in the model for building starts
- The construction sector's own historical data
- Local and national cyclical indicators
- Employment market
- Exchange rates
- Residential market, prices and transactions
- Interest rates
- Demographic factors
- Public finances
- Borrowing restrictions
- Psychological factors
| 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 |