A Long Way Back Irish Construction Market View - Autumn 2020 - Arcadis
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A Long
Way Back
Irish Construction
Market View
Autumn 2020
Arcadis Irish Construction Market View | Autumn 2020 1
Introduction
Even though the • The Irish economy benefits from an outsized exports
sector. Our strong performance post-Covid-19 has
contribution from exports contributed to a significant improvement to the GDP
forecast by the Central Bank of Ireland (CBI), which
to GDP exceeded the anticipates that the economy will contract by a mere
-0.4% in 2020. This is a very positive, albeit optimistic
prediction, compared with -3% anticipated by the IMF
expectations significantly, or -6.8% by the OECD. The extent to which Ireland has
been hit by the pandemic is better reflected by the
the Irish economy has forecasts for domestic demand, which is expected to
fall by -7.1% in 2020. It is typically the performance
been hit hard by Covid-19, of the domestic economy that has had the greatest
impact on investment and the wider performance of
cooling the previously the construction industry. However, it is encouraging
that domestic markets are expected to return to the
overheating construction growth territory in 2021 (1.6%).
• The end of the post-Brexit transition period is in sight
market. and while the negotiations on the new free trade deal
are ongoing, the CBI assumes a no deal scenario, and
that Ireland and the UK move to trading on WTO terms
from 1 January 2021. Even though CBI forecasts that
no-deal will reduce GDP by 2%, the baseline forecast
for 2021 is 3.4%, which is only slightly lower than the
anticipated 4.2% average among the EU27.
• Should a no-deal occur, tariffs could be an issue,
particularly in connection with agri-business, but the
main sources of disruption can be expected to be
caused by new customs procedures and potential
border delays. The construction sector relies on the UK
for 12% of materials by value and, in the short-term,
is expected to be only marginally impacted by Brexit
disruption. However, in the longer-term, regulatory
divergence may mean that UK-sourced materials are
not suitable for use in Ireland.
2 A Long Way Back
• The Irish domestic economy has been hard hit by • Sentiment in the Commercial and Civil Engineering
the effects of the pandemic. This is illustrated by segments deteriorated slightly, following little evidence
unemployment, which in October 2020 totalled of the future work pipeline. House completions are
7.3% (seasonally adjusted, source: Central Office for expected to decline to 17,500 units in 2020, down from
Statistics). This is just below the Eurozone average of 19,000 in 2019. While housing commencements and
8.1%. It is projected that unemployment in Ireland registrations held up better in Q2 2020 than expected,
will reach 8% in 2021, before falling to 7.5% in 2022. uncertainty around future demand, financing and
Based on an estimate by EY-DKM Economic Advisory, prices remains.
the pandemic has cost construction sector 20,000 jobs
• The commercial sector is also anticipated to contract
already and with the softening demand, it could take
sharply in 2020 and the recovery will be slow, with
beyond 2023 before the sector reaches 2019 levels of
35% of international businesses indicating a decline in
activity.
office space requirements according to a recent survey
• Construction has been one of the sectors most affected by Moody’s Analytics. With the private commercial
by the slowdown. According to the latest Society of sector taking a beat to find its way, investment from the
Chartered Surveyors Ireland and PwC Construction public sector will play an increasingly important role in
Monitor, construction activity in H1 underpinning the health of construction over the next
2020 fell by 20%. CBI currently forecasts this decline to 2-3 years.
reach -30% in 2020, even though most sites reopened
• Shortly prior to the announcement of the second
in mid-June and the sector is thought to be running
national lockdown, the government published their
at 85% capacity. Encouragingly, even though Ireland
Budget 2021, which included over €10 billion of
re-entered the highest level of lockdown on 21
Covid-19 related support. Of particular interest to
October 2020, the construction sector was allowed to
construction will be the announcement that capital
continue working. As a result, it is likely that levels of
spending has been increased by 25% to €10.1 billion.
activity will be sustained during this period, supported
This, however, still leaves a gap of approximately €3
by the collaborative actions of the Construction
billion needed to bring construction output back to the
Industry Federation and the Construction Employers
average 2017-2019 levels and highlights the likelihood
Federation.
of a shortfall in workload over the forecast period.
• However, the construction sector is showing little sign
of growth. Current activity is focused mainly on catch
up associated with the existing pipeline and delayed
projects. The Ulster Bank Construction Purchasing
Managers’ Index® (PMI®) registered 47points in
September, signifying contraction.
Arcadis Irish Construction Market View | Autumn 2020 3
Basis for
the forecast
Our Autumn 2020 Basis for the forecast
The summer months enabled catch up on many
forecast accounts for projects which had shut down during the first
lockdown. Whilst Site Operating Procedures do reduce
both the bounce back overall productivity, the permission to progress site
work during the most recent Level 5 lockdown will
in Irish construction help to mitigate some of the damage to the industry.
According to the Labour Force Survey by the Central
seen since lockdowns Statistics Office, during Q3 2020, 137,000 workers
were operating, a decrease of 9% compared to Q3
were lifted, as well as 2019. High levels of activity are due to the need to
catch up and meet the pent-up demand. However,
the longer-term impacts the long-term outlook remains uncertain and the new
orders pipeline should be monitored. Government
of a dramatic economic is committed to maintaining their high levels of
investment, but with the pandemic still far from over
slowdown. and with the Brexit transition period coming to a close,
the road to recovery may be bumpy.
The state of industry now
Activity in the Irish construction sector peaked in 2019,
delivering a record output of €26 billion, double the
volume seen in 2015. The transition from boom to a
pandemic-driven lull has been a real challenge for a
sector that was running at full speed. Construction
was the 3rd most impacted by Covid-19 sector, and
output is expected to drop by an unprecedented 30-
35% in 2020, including a 16% fall in housing activity.
Looking forward to the shape of the recovery, business
sentiment is reflecting the uncertainty of the long-
term outlook. The Ulster Bank Construction PMI
bounced back in June and July to above 50 points,
indicating an expansion in activity, but it dropped to 44
in August and remains below 50, signalling continuing
contraction. Even housing, the only sector to record
increase in PMI above 50, will deliver only 60% of its
annual contribution to meet annual housing need.
The sentiment for commercial and civil engineering
activities weakened too.
Covid-19 temporarily disrupted all construction
activity during the lockdown. Coming out on the
other side, particular sectors are expected to recover
at a different pace. Logistics, data centres and
manufacturing (especially pharma) are likely to
lead the pack and even accelerate.
4 A Long Way Back
By contrast, other sectors such as residential and Despite the additional burdens caused by the virus,
commercial will take longer. Whilst prices are the government plans to increase its capital spending
anticipated to be flat in the immediate future, the by €2 billion. The recently announced Budget 2021
speed of recovery will drive price inflation from 2021 is broadly in line with the commitments made in
onwards. Project 2040, allocating €2.8 billion to social housing
and additional €1 billion (taking it to a total of €3.5
The outlook and the forecast
billion) for the Department of Transport. Transport
The outset of pandemic resulted in a shift in many funding will support road projects outlined in Project
trends that, directly or indirectly, will impact the 2040, develop a range of Greenway and active travel
investment appetite of the private sector: projects, increase the EV charging infrastructure and
• The widespread adoption of working from home also support regional airports. Nevertheless, even with
practices is causing a reconsideration of both the this additional funding, total construction output in
demand and the functionality of the office space. 2021 is likely to be 15% below the average for the last
• The demand for modern logistics facilities remains three years.
strong, underpinned by a significant shift to Our forecast blends inflationary and deflationary
e-commerce and the willingness to modify the supply factors. At the moment, the balance continues to
chains post Brexit. be deflationary. Even though lower productivity and
• Manufacturing, especially for pharmaceutical industry, limited access to materials drive the costs up, they are
is likely to intensify as a result of Covid-19. more than offset by price competition enabled in part
by oversupply of the workforce, Many projects are
• The digital services and products market are strong, being delayed, and the newly announced investments
with demand for new data centres on the rise, and
will take time before they become shovel ready. The
significant investment towards production as well
uncertainty around Brexit only adds to deflationary
– such as for example the Intel’s €3.6billion
conditions.
manufacturing plant in Leixlip.
The industrial sector seems to be more robust than
the commercial one, however its contribution to the
overall construction output is approximately 5% and
hence it should not be perceived as a major driver for
the recovery. Much more will depend on the trajectory
of the public sector investment.
Inflationary Deflationary
• Productivity lower as a result of Covid-19 • Temporary decreased workload as a result of
reduced demand and confidence
• Access to scarce materials is limited due to
disrupted production and Brexit • Temporary oversupply of labour keeps wages
down
• Loss of industry capacity resulting from business
failure • Limited availability for contractors to transfer
increased risk in a competitive bidding market
Arcadis Irish Construction Market View | Autumn 2020 5
Inflation forecast
We therefore downgrade our forecast for 2020 Then, we expect the gradual increase in inflation.
and 2021, while the construction sector remains However, even beyond 2022, we do not anticipate the
constrained by the challenges of the pandemic, and TPI to return to 2019 levels. Irish construction market
whilst investors delay their projects as they wait for will remain attractive, but at the moment there is a
clarity. This, we predict, will further mute the demand, little prospect of a return to pre-Covid19 heat.
leading to increased competition for the assignments
that go ahead and hence keeping the inflation low at
least until the second half of 2021.
6 A Long Way Back
Forecast
National Construction TPI National Infrastructure Construction TPI
2019 6-8% 5-6%
2020 0% 0%
2021 0-1% 1-2%
2022 2-3% (3-5%) 4-5% (5-6%)
2023 3-5% (n/a) 4-5% (n/a)
Arcadis Irish Construction Market View | Autumn 2020 7
Spotlight on:
A Renovation
Wave for Europe
To meet the objectives of the Climate Target
60%
Less greenhouse Plan 2030, the EU needs to at least double
gas emissions the annual rate of renovation of residential
from buildings and non-residential buildings by 2030 and
foster deep energy modifications. A New
Wave for Europe document published
14%
Lower final energy by the European Commission is a part of
consumption the European Green Deal and describes a
strategy to trigger these actions. What are
the main takeaways?
18%
The heating of buildings is a major source of
Reduction in energy carbon emissions, yet the current pace and scale
consumption for of refurbishments is alarmingly low. While 11%
heating and cooling of the EU’s building stock undergoes some sort
of renovation each year, interventions focused
• …are needed to achieve the net greenhouse gases specifically on energy efficiency constitute mere 1%
reduction of 55% in the EU (compared to 1990) in line of the works.
with the Climate Target Plan 2030. The Commission acknowledges that these are
some of the most challenging projects, uncertain
in outcome, lengthy, complex and often hampered
by the limited access to funding. In response, it
has published a strategy aimed at breaking down
these barriers and accelerating the investment. The
document will inform more specific actions on the
EU level and should be used by the member states
to develop their specific implementation plans.
There are seven areas of intervention, and they
address the challenges of both the asset owners
and supply chain:
8 A Long Way Back
1. Strengthening information, legal certainty 6. Using renovation as a lever to address energy
and incentives for public and private owners poverty and access to healthy housing for all
and tenants to undertake renovations. The households, including for persons with disabilities
Commission is looking to introduce a stronger and for older people. Ways to use the EU budget
obligation to have Energy Performance resources and Emissions Trading System revenues
Certificates and minimum energy performance to fund national energy efficiency and saving
standards for existing buildings, and to expand schemes targeting lower-income population will
the requirements for building renovation to all be examined.
public administration levels.
7. Promoting the decarbonisation of heating and
2. Adequate and well-targeted funding will be made cooling through the revision of relevant directives,
available through provision of multiple grants, the application and further development of eco-
technical assistance, and project development design and labelling measures, and support to
support. It will become possible to combine district approaches.
different loans and access to attractive private
A Renovation Wave for Europe is a high-level
financing will be facilitated through the Renewed
strategy document, and it will need to be translated
Sustainable Finance Strategy.
into legislation, regulation and implementation
3. Increasing the capacity to prepare and implement plans, specific to each member state. However,
projects. Technical assistance will be scaled up it outlines the direction of travel for the coming
and made more accessible to regional and local years and, even more importantly, describes how
stakeholders. the EU’s commitment to the climate targets
will be translated into funding streams. At the
4. Promoting comprehensive and integrated
moment when the recovery of construction sector
renovation interventions for smart buildings,
is uncertain, it points to the area of unprecedented
integration of renewable energy and enabling
demand. But to unlock this very price sensitive
the measurement of actual energy consumption.
market, the construction supply chain will need to
Smart Readiness Indicator and Building
develop more cost-efficient solutions, implementing
Renovation Passports are examples of digital
digital tools and sustainable materials where
tools that will facilitate tracking the progress of
possible. The approach to projects will need
renovation projects.
to change too, from a focus on a single asset
5. Making the construction supply chain fit to to a holistic consideration of intervention on a
deliver sustainable renovation, based on circular, neighbourhood and district level.
nature-based solutions and sustainable materials.
To make the process more consistent, the
Commission proposes the use of standardised
sustainable industrial solutions. Skills Agenda,
Pact for Skills and Just Transition Fund are meant
to upskill/reskill workers and to encourage young
people to join the construction industry.
Arcadis Irish Construction Market View | Autumn 2020 9Zoom into:
Supply chain resilience
in construction
The Covid19 pandemic has revealed the Secure the supply in short term
vulnerability of businesses to supply chain 1. Tactical scenario planning.
disruption. The lockdown and halt to Assess the levels of inventory, capacity of
production in China, national lockdowns and resources available and deliverability of goods
pauses in manufacturing caused temporary needed to respond to immediate requirements.
global distress regarding materials Develop and analyse scenarios that account for
demand uncertainty and potential supply chain
availability. The situation seems to be under
constraints.
control now, although this can change
should a no-deal Brexit happen. Ensuring a 2. Secure essential resources.
Compile schedules of essential resources,
resilient supply chain remains one of the top
materials, and products required for business
priorities to a successful project delivery. continuity. Beware of the less obvious risks further
down supply chains (for example constraints
A large proportion of construction materials used
resulting from the application of ISPM15
in Ireland are internationally sourced. As such,
certification to pallets moving from the UK into
the sector is prone to the shocks caused by the
the EU from January 2021). Plan to mitigate price
temporary closures of factories, either locally
spikes in the event of a capacity contraction.
or globally. The chaos caused by the outset of
Covid19 in China and later in other countries, the 3. Mitigate operational and programme risks.
threat of no-deal Brexit and extended border Plan action to manage residual risks that cannot
controls, and the US-China trade war, are all be eliminated. Based on the risk assessment,
examples of events that disrupt the flow of goods discuss rescheduling or de-scoping of work with
and impact regular business operations. They also the client and project team. Review relevant
prove to us that some of the risks we are simply contract clauses (insurance, payment, force
not able to foresee. But it does not mean that we majeure and frustration). Consider if any changes
can only be reactive, quite the opposite. can be made that will support business continuity,
for example extensions of time or revised
Arcadis has prepared an 8-step plan that enables
payment terms.
organisations to start building a long-term
resilience here and now, focusing first on the short-
term interventions, then accelerating the recovery,
to finally create a futureproof supply chain.
10 A Long Way BackAccelerate the recovery The maps can be used dynamically to identify
possible points of failure in the event of
4. Accelerated supplier management.
future shocks and enabling strategic category
Active leadership and strong supplier relationships
management. These steps will allow buying
are essential to maintaining confidence around
organisations to be more informed about barriers
present and future work programmes. Clear,
to innovation, efficiency, and competition in their
reliable demand signals, advanced orders,
supply chains.
capability development, and improved payment
terms are all levers to consider. 8. Digitizing supply chain management.
The implementation of smart forecasting and
5. Refreshed business continuity management
analytics will enable more effective decision-
plans. Review and update the existing business
making Cloud-based systems using advanced
continuity plans for readiness to accommodate
analytics to manage strategic supply chains will
future shocks. Include tools such as home
enable organisations to evaluate the effectiveness
working infrastructure and emergency command
of existing resilience measures identifying
and control structures. Consider the maturity of a
additional mitigation steps where needed.
business continuity approach when selecting new
suppliers. So many aspects of capital delivery have been
disrupted by the Covid19 crisis, that it is difficult to
Future proof the supply highlight where lessons learned initiatives should
be focused for future performance improvement.
6. Embedding resilience.
Supply chain resilience is a good area to begin with,
Consider the various options for embedding
especially in the view of Brexit caused disruption
future resilience, such as redundancy (increased
and because of the wider opportunities to improve
stocks, spare capacity, and supply competition),
productivity and certainty of outcome. The eight
resistance (automation, so shocks no longer
steps are a programme, they reinforce one another
have an impact), and improved recovery (rapid
and rely on both strong leadership and effective
response protocols). Commercial mechanisms can
collaboration for successful implementation.
also be used to increase reliability, for example via
improved payment terms which reduce suppliers’
cashflow exposure.
7. Strategic supply chain mapping.
Implement a whole-system approach to
create strategic supply chain maps for critical
programmes and spend categories.
Arcadis Irish Construction Market View | Autumn 2020 11Contact
Sabrina Mackin
Market Lead - Ireland
sabrina.mackin@arcadis.com
Agnieszka Krzyzaniak
Market Intelligence Lead
agnieszka.krzyzaniak@arcadis.com
Andrew Beard
Global Head of Cost and
Commercial Management
andrew.beard@arcadis.com
Stephen Armstrong
Procurement and
Supply Chain Director
steve.armstrong@arcadis.com
Arcadis
Our world is under threat - from climate change and
rising sea levels to rapid urbanisation and pressure
on natural resources. We’re here to answer these
challenges at Arcadis, whether it’s clean water in Sao
Paolo or flood defences in New York; rail systems
in Doha or community homes in Nepal. We’re a
team of 27,000 and each of us is playing a part.
Disclaimer
This report is based on market perceptions and research carried out
by Arcadis, as a design and consultancy firm for natural and built
assets. It is for information and illustrative purposes only and nothing
in this report should be relied upon or construed as investment or
financial advice (whether regulated by the Central Bank of Ireland or
otherwise) or information upon which key commercial or corporate
decisions should be taken. While every effort has been made to ensure
the accuracy of the material in this document, Arcadis will not be liable
for any loss or damages incurred through the use of this report.
©2020 Arcadis
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