Review of the Construction Industry and Outlook Review of

Review of the Construction Industry 2006 and Outlook 2007–2009 Review of the Construction Industry 2006 and Outlook 2007 – 2009 PRINTED ON ENVIRONMENTALLY FRIENDLY PAPER Department of the Environment, Heritage and Local Government, PPP, Construction Policy & NDP Coordination Unit, Custom House, Dublin 1. Tel: +353 1 888 2000 Fax: +353 1 888 2107 Website: www.environ.ie DKM Economic Consultants Ltd, 6 Grand Canal Wharf, South Dock Road, Ringsend, Dublin 4. Tel: +353 1 667 0372 www.dkm.ie info@dkm.ie Explanatory note Construction output by region, 2006 Donegal Leitrim Sligo Mayo Cavan Roscommon Longford Meath Louth Monaghan Westmeath Galway Offaly Dublin Kildare Laois Clare Tipperary NR Limerick Tipperary SR Kilkenny Carlow Wexford Wicklow Kerry Cork Waterford Output (€m) Border Dublin Mid-east Midland Mid-west South-east South-west West Total output 4,893 8,193 4,078 2,644 3,027 4,026 4,833 3,794 35,489 Share of output (%) 14% 23% 11% 7% 9% 11% 14% 11% 100% DKM Report 07-09 21/09/2007 11:08 Page 1 Review of the Construction Industry 2006 and Outlook 2007 to 2009 September 2007 DKM Economic Consultants Ltd, 6, Grand Canal Wharf, South Dock Road, Ringsend, Dublin 4. Telephone: 353 1 6670372 Fax: 353 1 6144499 www.dkm.ie info@dkm.ie Table of contents Key statistics for the construction industry Summary Section 1 1.1: 1.2: 1.3: 1.4: 1.5: Section 2 2.1: 2.2: 2.3: 2.4: 2.5: 2.6: Section 3 3.1: 3.2: 3.3: 3.4: 3.5: Section 4 4.1: 4.2: 4.3: 4.4: 4.5: 4.6: 4.7: Appendix 1 Appendix 2 Appendix 3 Review of 2006 and outlook for 2007 Economic review Construction review Outlook for 2007 Construction inflation Overall construction output Sectoral review and outlook Residential construction Private non-residential construction Productive infrastructure Social infrastructure Repair, maintenance and improvement Overall construction prospects for 2007 Employment in building and construction Employment levels Focus on construction occupations Structure of the construction sector Regional breakdown of employment Construction labour force Medium-term prospects to 2009 Medium-term economic prospects Medium-term prospects for construction output Residential construction Private non-residential construction Public sector construction Overall prospects for construction output Medium term prospects for construction employment Derivation of price indices Construction output by sector 2003 to 2007E Review of construction output by region, 2006 ii iii 1 1 4 7 8 14 19 19 25 34 38 42 42 44 44 49 53 55 56 57 57 59 62 66 67 69 71 75 86 92 PAGE i Key statistics for the construction industry 2003 2004 2005 2006 2007E GNP (constant 2005 prices, €m.) % volume change in GNP Gross domestic fixed capital formation (Constant 2005 prices, €m.) Volume Change in GDFCF (%) Total construction output Value output (current prices €m.) Change in value of construction output (%) Value output (constant 2005 prices €m.) Change in volume of construction output (%) Construction output as % of GNP * New construction output ** Public sector new construction output *** - Value of output (constant 2005 prices, €m.) - Change in volume of construction output (%) - As % of total construction output * Private sector new construction output - Value of output (constant 2005 prices, €m.) - Change in volume of construction output (%) - As % of total construction output * 124,855 +5.7 35,204 +5.5 129,423 +3.7 37,624 +6.9 135,723 +4.9 42,079 +11.8 144,504 +6.5 43,377 +3.1 151,151 +4.6 44,000 +1.4 23,811 +12 27,171 +6 20.2 27,465 +15 28,992 +7 21.9 31,586 +15 31,586 +9 23.3 35,489 +12 33,451 +6 23.8 36,250 +2 33,460 -1.5 22.6 6,827 -2 26 6,574 -4 23 6,483 -1 21 6,451 -1 19 7,031 9 21 15,138 +13 54 16,773 +11 57 19,186 +14 61 20,235 +5 61 18,851 -7 58 2003 Direct employment in construction (Q4, sa1) 199 Change in capital goods price index for building and construction (materials and wages) (%) +2.5 Change in building and construction price index for all materials (%) +1 Change in tender prices (est) (%) - New housing +14 - New general contracting -2 - New civil engineering +3 Change in total construction price inflation +6 2004 226 +7 +9 +12 +4 +4 +8 2005 252 +5 +5 +7 +4 +4 +6 2006 280 +7 +8 +8 +4 +4 +6 2007E 273 +5.5 +6 +4 +3 +4 +4 Notes: * Percentages derived using output measured in current prices. ** The balance, not shown, in the table, is repair and maintenance output, which is estimated to account for 20% of total output in 2006. *** The estimate for new public sector construction includes small amounts of private sector investment under education, energy and telecommunications. (1) sa Seasonally adjusted PAGE ii Summary The Irish economy has come to rely heavily on the construction sector with the result that construction accounts for a sizeable proportion of economic activity. The direct contribution of the construction sector to the Irish economy, using the gross estimates presented in the Construction Industry Review and Outlook (CIRO) is almost €35.5bn. or almost 24% of GNP. The construction sector itself relies heavily on new residential construction, with over one half (55%) of the sector's output or €19.5bn, attributed to new housebuilding alone. This leaves the economy and employment vulnerable to the current slowdown which is underway in the new housebuilding sector. The balance, some €16bn, is made up of new construction output arising from projects in the private and public non-residential sectors (€9bn.) and output from investment in repair, maintenance and improvement projects associated with the existing stock of buildings and infrastructure (€7bn.). Based on the other approaches to measuring construction output, the ‘value-added’ (outputs less inputs) by the construction sector represents over 10% of GNP compared with agriculture, for example, which accounted for less than 3% of GNP in 2006. In the context of the total value added by all industry, the building and construction sector also represents the largest share, representing 29% of the total, ahead of chemicals, the second-largest sector, which accounted for 22% of the total value added by all industry (including construction) in 2006. 2006 Review The value of output in the construction industry in 2006 is estimated at €35.5bn compared with €31.6bn in 2005. This represents an increase of 12.4% in the value of output in 2006 or 5.9% in volume terms, after allowing for construction inflation. The pace of construction employment growth slowed in Q2 2007 to an annual rate of 6.7%, from 11.2% in the previous two quarters. This is still well ahead of general employment growth at 3.9%, although the gap has narrowed considerably. As of Q2 2007, construction employment totalled 280,300, accounting for 13.4% of the total persons employed in the economy and 22% of the total jobs created in the previous twelve months. However, the first sign of a turning point in employment was recorded in Q2 2007 when employment fell by 0.5% (seasonally adjusted) on the previous quarter, an indication possibly that employment in the sector has peaked. Based on an occupational breakdown of those who classify themselves as working in construction, approximately 46,500 are employed in the construction professions, 150,000 are employed as craft workers and 35,000 are construction labourers. Approximately 13% of persons employed in the entire sector are non-Irish nationals. The occupations recording the highest proportion of non-Irish nationals are architects (12%), scaffolders (16%) and bricklayers (14%). The overall volume growth in output was 5.9% in 2006 comprising a 4% increase in the volume of new construction output (79% of output) and a 14.4% increase in the volume of construction output associated with repair, maintenance and improvement (21% of output) projects. The split between new and RM&I work is very much an estimate and we urge caution in relying on the breakdown. PAGE iii The performance of the individual sub-sectors was mixed in 2006, although the volume of construction output in all sub-sectors, with the exception of social infrastructure output, was higher in 2006 than in 2005. The strongest growth was recorded by the private non-residential construction sector, reflecting the strong economy and the growth in employment. The key trends were as follows: • The total number of dwellings built reached 88,219 last year (as against 93,419 units connected for electricity), up a modest 2.4% on the corresponding level in 2005. The total volume of residential construction – both new and repair, maintenance and improvement (RM&I) - was up by 4.5%, after allowing for inflation. Private housing output growth moderated to single digit growth (+5%) from three years of double digit growth (+12% per annum). The private non-residential construction sector (new and RM&I) performed strongly in 2006, for the second year in a row, with overall output in the sector up by 19%. The commercial (offices and retail) building (new and RM&I) sector recorded its second buoyant performance (+23%) in two years and investment in agricultural buildings expanded at a rapid pace (+39%). The overall construction spend on productive infrastructure (new and RM&I) was up by 6% in volume terms, although output from public transport projects was lower in 2006 (12%) compared with 2005. The volume of construction output associated with social infrastructure projects declined (-3%) due to a lower level of capital spending on hospital building projects in 2006 compared with 2005. • • • • Outlook 2007 The value of output in the construction industry is forecast to increase to €36.2bn in 2007. This represents an increase in value terms of just 2.1%, which translates into a volume decline in construction output of 1.5%, after allowance is made for construction inflation. This is the first decline in overall construction output in fourteen years. The estimate for construction output this year represents 22.6% of GNP and 19% of GDP, when measured in gross output terms. The construction to GDP ratio is the second highest proportion (after Spain) and compares with an average ratio of around 12% in Western Europe and less than 11% in the UK. The modest contraction in the volume of construction output this year reflects the changing composition of construction activity. The volume of residential construction is expected to decline (-9.4%) for the first time since 1993, while the pace of growth in non-residential construction accelerates (+14.6%) compared with 2006. However, the improved prospects for non-residential construction are not sufficient to offset the decline in residential construction, resulting in the modest decline in overall output this year (-1.5%). Trends in all leading housing indicators point to a lower level of housing supply in 2007, with a decline projected for the second half of the year. Planning permissions recorded the seventh annual rate of decline in a row in Q1 2007, while registrations, the proxy for housing starts, were down by 37% over the January-August 2007 period on the same period in 2006. Assuming an average lag of around nine months, we believe that the weakness in registrations will have a negative impact on housing supply in 2007 and are projecting completions at 77,000 in 2007, down 12.7% on the level in 2006. PAGE iv Activity levels in the private non-residential construction increased strongly in 2005 and 2006 in response to the positive performance of the economy and the particularly strong growth in employment and consumer expenditure. Both factors are key drivers of the volume of nonresidential buildings put in place, particularly in regard to retail and office buildings and buildings required to accommodate the growth in consumer, business and personal services. Overall the volume of construction output arising from private non-residential building projects is expected to rise by 24.5% this year, building on the equally healthy outturn for volumes in 2006 (+19%). The overall investment in productive infrastructure projects is expected to grow modestly in volume terms (+2%) led by a substantial increase in public transport (+64%). Overall the construction output arising from road projects is projected to rise by less than 1%. The volume of construction related investment in social infrastructure projects is projected to grow strongly this year (+27%), reflecting significant investment by the Office of Public Works (OPW) in new and refurbishment building projects. Both productive and social infrastructure benefit from the substantial capital provisions in the 2007 Public Capital Programme, which include investments in public transport projects under the Government’s ten-year transport investment programme, Transport 21. The total funding allocated for all capital projects reached a record €12bn. in 2007. The construction labour force in Q2, 2007 is estimated at 415,900 persons, including an estimate for indirect employment and assuming an unemployment rate in line with the national average (4.6%). This estimate corresponds to almost 19% of the national labour force of 2.21 million (sa). Tender price indices for general contracting work, according to industry predictions, are forecast to rise by 3% to 3.75% in 2007, following an increase of 3% in 2006. The composite average tender price inflation rate for the industry, calculated in the CIRO, was 6.1% in 2006 and is forecast to moderate significantly to 3.7% in 2007. The moderation reflects the sharp deceleration in house price inflation this year. The average tender price inflation rate falls to 3.8% in 2006 and 3.4% in 2007 when residential construction is excluded. Medium-term prospects 2008-2009 The real difficulty for the Irish economy as it enters 2008 is the high reliance of output and employment growth on the construction sector. The continuing downward trend in housing registrations to date could give rise to a more marked deceleration in GNP growth next year. Thus the real challenge will be managing the transition from the robust growth performance in 2006 and 2007 to the slower growth period expected in 2008. The medium-term prospects for construction once again will be strongly influenced by residential construction. Most of the adjustment to a lower housing supply level occurs in 2008, following a more modest downward adjustment in 2007. As a result completions are projected to decline to 60,000 units per annum in 2008 and 2009. The easing back in terms of housing supply, together with more sustainable levels of prices and lending, should give rise to a more balanced and stable market over the medium-term. The current easing of house prices is a welcome development and should enable potential purchasers to enter the market who may have been prevented from doing so in the past due to affordability constraints. PAGE v The value of the housing (public and private) RM&I market is equivalent to around €4.5 billion or 19% of total housing output. There is growth in RM&I activity over the next two years, but it is not sufficient to make up the difference for the contraction in new housebuilding. The future level of private housing RM&I will be driven by changes in real personal disposable income, the trend in interest rates and the capacity for equity withdrawal. Transactions in the second-hand market also generate a demand for housing RM&I. Private non-residential construction continues to perform strongly for the third year in a row. Public sector construction benefits from the substantial public sector funds allocated for the period 2008-2009 in the National Development Plan 2007-2013, and for Transport 21. Over 70% of Exchequer funds have been allocated to the four largest Government departments covering transport, housing, water services, educational and hospital building projects. Thus there is scope to limit the impact of the contraction in residential construction over the medium-term on the construction sector provided the Government’s commitments to the delivery of essential infrastructure are honoured in a timely and cost-effective manner. The base case projection for construction output forecasts a decline (-6.2%) in 2008, due to the decline in new housing output, followed by an increase of similar proportions (+6.2%) in 2009. The recovery in 2009 reflects a stabilisation in housing output and an acceleration in the volume of construction output from civil engineering projects, most notably in public transport and airports. While the magnitude of these impacts is difficult to predict, the projected reduction in housebuilding could potentially reduce direct employment in housebuilding by around 30,000 persons by the end of 2009. However, the actual reduction in employment could be less if some unemployed housebuilding workers transfer to the non-residential and RM&I sectors of the industry or indeed to other sectors in the economy. As such construction employment could decline to 273,000 by Q4 2007, with a further reduction to around 260,000 persons from current levels (280,300 persons employed) by Q4 2009. This represents a net reduction in construction employment of around 20,000 persons over the two years. There are also likely to be indirect job losses in the businesses and services supplying the housebuilding industry. In these circumstances the unemployment rate would begin to edge upwards. While these are just indicative estimates, much will depend on the pattern of new build and the rate of employment growth across the economy as a whole. PAGE vi Section 1: Review of 2006 and outlook for 2007 The Irish economy expanded by 6.5% in 2006 in terms of real GNP, a significant acceleration on the 4.9% recorded in 2005. The 2006 GNP growth rate was the highest on record in the last five years, a period in which the average GNP growth from 2001 was 4.7%. The corresponding GDP growth rate was 5.7% in 2006 and compares with an average GDP growth rate for the euro area of 2.7% last year, leaving Ireland’s performance well ahead of growth in the Euro area. However, the growth rates for the individual components of GNP were all lower in 2006 compared with 2005 with the exception of government expenditure, which increased by 5.3%, up from 4% in 2005. The slowdown in investment growth was due to a deceleration in the growth in housing output; while the pace of non-residential construction output accelerated. The higher GNP growth rate reflects the deceleration in multi-national profit repatriation. By the end of 2006 there were signs emerging that some of the buoyancy had begun to leave the economy, partly as a result of the several hikes in ECB interest rates during the year and other developments in the housing market, which appeared to have a noticeable impact on consumer confidence in the run into 2007. While the general consensus is that economic growth will slow this year, the National Accounts data for Q1 2007 shows that real GNP expanded by a healthy 6.4% year-on-year and by 2.8% (seasonally adjusted) in the quarter compared with Q4 2006. But growth is expected to weaken in the second half of the year, resulting in average GNP growth of around 4.6% in 2007. Based on estimates in this Construction Industry Review and Outlook (CIRO), the value of output in the construction industry is estimated at €35.5bn. in 2006 and expanded by 5.9% in volume terms, after allowance is made for construction price inflation. Using the latter gross measure, the construction industry represented approximately 24% of economic activity last year. The share is reduced to 10.2% using the value-added or output based measure. Output in the building and construction sector is forecast to decline in volume terms this year (-1.5%), due to a decline in total residential construction (-9%). The growth forecast for nonresidential construction (+14.6%) is not sufficient to offset this negative movement, resulting in the forecast contraction in construction output. As a result construction’s share is expected to fall to just under 23% of GNP this year. The average rate of building and construction tender price inflation is estimated at 6.1% in 2006 and 3.7% in 2007 or around 4% in both years if residential construction is excluded. 1.1: Economic review Growth accelerated in 2006 for third year in a row Irish economic growth accelerated for the third year in a row in 2006, with GNP expanding by 6.5%, up from 4.9% in 2005 and 3.7% in 20041. This is the highest recorded GNP growth rate since the zenith of the “Celtic Tiger” in 2000, a year in which GNP expanded by 9.7%. The average annual GNP growth in the five year period 2001-2006 was 4.7% compared with 8.1% in the previous five years 1996-2001. Despite the moderation in growth over the last five years, Ireland’s performance remains well ahead of growth in the rest of the EU including the Euro area, although growth is accelerating there too. For 2006 as a whole, economic activity expanded by 3% in the EU27 (1.7% in 2005) and 2.7% in the euro area (1.4% in 2005)2. The corresponding GDP growth in the Irish economy was 5.7% last year. 1 CSO, National Accounts Annual Results for 2006, 3rd July 2007. 2 Eurostat website: Economic Forecasts, Spring 2007 http://ec.europa.eu/economy_finance/publications/european_economy/2007/ee207en.pdf PAGE 1 Figure 1.1: GDP and GNP real growth 1999-2006 (%) 12% 10% 8% 6% 4% 2% 0% 99 00 01 02 03 04 05 06 1996- 2001'01 '06 GNP Growth GDP Growth Source: CSO As with previous years, economic growth in 2006 was again driven mainly by domestic demand (private and public consumption and investment). Although it weakened in 2006, rising by 5.7% compared with 8.0% in 2005, it increased in line with GDP growth. The main cause of this weakness was the slowdown in investment growth from 11.8% to 3.1%, reflecting a deceleration in housing output growth and in Plant & Machinery (specifically aircraft) investment. Private consumption continued its strong performance, although growth slowed in the year from 7.3% in 2005 to 5.7% in 2006, the second highest growth recorded in the last six years. The improvement in the external trade position led to a positive contribution from net exports last year. Both export and import growth slowed in 2006 compared with 2005, but import growth decelerated by more than exports, resulting in an improvement in the net exports position compared with 2005. The gap between GDP growth and GNP growth is due to a deceleration in multi-national profit repatriation. Both external trade and profits repatriation can be distorted by the multinational activities, however. Table 1.1: Composition of Economic Growth 2006 vs 2005 Volume % Changes 2005 7.3 4.0 11.8 9.0 8.0 5.2 7.7 5.9 4.9 2006 5.7 5.3 3.1 3.7 5.7 4.4 4.4 5.7 6.5 Personal Consumption Public Consumption (i.e. public non-capital expenditure) Fixed Capital Formation (i.e. private and public investment) of which building and construction Domestic Demand Exports Imports GDP GNP Source: CSO National Income and Expenditure, Annual Results for 2007, 3rd July 2007. Employment growth continued last year with a total of 85,500 jobs created over the four quarters to Q4, 2006 (September–November), following a similar increase in employment in the previous year (+86,500). The unemployment rate by Q4 had reached 4.1%, the lowest level3 in five years. The labour force also continued to expand strongly, increasing by 4% to 2.17 million in Q4, 2006. As in previous years, this mainly reflects strong immigration, which numbered 87,000 (70,000 net) in the year to April 2006. 3 Based on seasonal adjusted data PAGE 2 High net inward migration combined with the highest rate of natural increase (births-deaths) recorded in twenty years, contributed to the 8.2% increase in the state’s population since 2002, according to the 2006 Census of Population, which recorded the total population at 4.24 million persons. The Exchequer position, reflecting economic performance, also ended the year on a healthy note, showing a large Exchequer surplus of €2.26 billion. On the revenue side the Exchequer position was boosted by strong taxation receipts, most notably from strong Stamp Duty and Corporation Tax returns. Economic growth expected to moderate in 2007 due to fall in residential investment There is no doubt, however, that by the end of 2006 there were signs emerging that some of the buoyancy had begun to leave the economy, partly as a result of the several hikes in ECB interest rates during the year, but also due to the uncertainties raised around the year-end regarding Stamp Duty reform, which were subsequently addressed. Nonetheless both factors appeared to have a noticeable impact on consumer confidence in the run into 2007. The general consensus is that economic growth will moderate this year due to a decline in new residential construction and a slowdown in the growth in consumer expenditure. However, data for Q1 2007 shows that GNP expanded by a healthy 6.4% year-on-year and by 2.8% (seasonally adjusted) in the quarter compared with Q4 2006. This is not surprising given that the volume of new dwellings completed in Q1 2007 was up by over 1% on the same quarter in 2006. With new housing volumes almost unchanged in Q2 2007, the economy should do well in the second quarter of the year. Evidence of the growth slowdown will become more pronounced in the second half of the year as new housing volumes are expected to weaken in response to the decline in the running twelve month total for housing registrations, underway now since October 2006. Other factors, most notably the series of interest rates hikes, the modest declines recorded in house prices over recent months and a weakening trend in consumer confidence, according to the IIB/ESRI Consumer Sentiment index, are likely to result in a deceleration in economic growth in the second half of the year. The latest IIB/ESRI index figure for August (72) was almost 23% below its level at the start of the year (Jan 2007). This implies that consumers’ perceptions about their current financial situation have weakened in recent months while there was a sharp monthly decline (-9%) in August in consumers’ perceptions about their future financial situation, the economic outlook and employment expectations. While the prospects for non-residential investment contained in this report are very positive, the housing slowdown will weaken the prospects for fixed investment in the economy and employment in H2, 2007, resulting in more modest growth in consumer expenditure this year and a contraction in building investment (-3.5%)4. The combined impact of these effects will be to generate a moderation in economic growth to around 4.6% (GNP), from 6.5% in 2006. This rate of growth would leave 2007 in line with the average GNP growth of 4.7% for the period 2001-2006. We consider the medium term economic prospects in Section 4. 4 Although gross construction output in this CIRO is estimated to have increased by 5.9% in 2006 this figure of 3.5% is based on the National Accounts definition of fixed investment in building and construction. It is estimated here for 2007 by taking all new investment in the CIRO and 60% of RM&I investment and excluding transfer costs. PAGE 3 1.2: Construction review – a major sector of the Irish economy The total value of GNP in the economy was estimated at €149 billion in 20065. Within that total the gross value of fixed investment in building and construction was estimated at €32 billion6, or almost 21.5% of GNP (18.3% of GDP). Thus construction is a major sector of the economy and has a significant impact on the level of, and growth in, economic activity. The construction industry entered 2006 against the background of a strong economic environment and a very positive prognosis for construction. Residential construction was continuing at a high rate with house price inflation running at 10% year-on-year in January 2006. Private non-residential building was growing strongly while the end of 2005 had seen the launch of Transport 21, a substantial transport investment programme for the period 2006-2013, which was set to boost public sector construction activity for many years to come. The year also saw the planned public capital programme announced in February 2006 reach in excess of €10 billion for the first time ever. Infrastructure spending also received a boost as 2006 was the last year of the National Development Plan 2000-2006. Moreover discussions on the successor to the NDP 2000-2006 and the investment priorities for the following seven years commenced during the year. The one negative factor was that the first increase in Eurozone interest rates had been announced in December 2005 with the prospect of further increases during 2006 expected to dampen housing activity. However there was sufficient opportunity to ramp up the non-residential construction sector to offset any adverse effects on the housing market in that year. The beginning of 2007 saw the publication of the largest and most ambitious investment programme ever proposed for Ireland in the National Development Plan 2007-2013. It provides for an investment in economic infrastructure of almost €55 billion. This plan is expected to support public sector construction activity for the next seven years. Delivery of this programme on time and within budget will be essential if the impact of the expected contraction in new housing investment is to be curtailed. However, the slowdown which hit the housing sector at the end of 2006 is likely to continue for a while. It constitutes a major downside risk for the economy, particularly in 2008. With recent housing data signaling a downturn in respect of a number of indicators, this raises a number of challenges for the domestic economy. The main challenge will be managing the transition to a more balanced and mature housing market over the medium term, thereby restoring stability to the market, in terms of prices, lending and output. 1.2.1: The measurement of construction output For the past two years, the CIRO has included a detailed section explaining the different approaches to the measurement of construction output7 namely: • The ‘expenditure’ measure of construction output used for the purposes of the CIRO which measures the value of work put in place from the construction of buildings and structures and from civil engineering projects plus the value of major and minor repair and maintenance expenditure on existing building and structures8. It is predominantly an expenditure based approach. The ‘investment’ measure used by the CSO for the purposes of estimating the fixed investment element of the National Accounts, which measures all new investment in building and construction projects plus investment in major repair and maintenance work only. • 5 Central Statistics Office, National Accounts, Annual Results for 2006, 3rd July 2007. 6 The sum total of residential and non-residential construction investment including the value of major repair and maintenance work as estimated by the CSO. When transfer costs are included (i.e. the costs associated with the transfer of land and buildings) construction accounts for 24% of GNP (21% of GDP). 7 See Section 1.2.1 of the 2005 and 2006 Annual Construction Reviews and Outlook 8 For detailed information on the methodology employed to measure construction output see the separate methodology paper ‘ROCI Methodology’ on the DOEHLG website under publications: www.environ.ie. PAGE 4 • The ‘output’ or value added measure9, also derived by the CSO, which amounts to taking the gross value of outputs less the value of intermediate consumption, and consists of the wages and profits earned by building workers and construction companies. It is more of an accurate measure of the contribution of the construction sector to economic growth. Table 1.2 sets out all three measures10. Table 1.2: Different approaches to measuring building and construction output (current prices, € million) CIRO1 measure Share of GNP (%) Investment Measure2 Share of GNP (%) ‘Valueadded' measure 8,145 8,944 10,100 11,700 13,504 15,137 Share of GNP (%) 2001 2002 2003 2004 2005 2006 19,926 21,293 23,811 27,465 31,586 35,489 20.3% 20.0% 20.2% 21.9% 23.3% 23.8% 18,172 20,100 23,246 27,004 32,176 36,438 18.5% 18.9% 19.8% 21.6% 23.7% 24.4% 8.3% 8.4% 8.6% 9.3% 9.9% 10.2% Source: CSO, DKM (1) CIRO = Construction Industry Review and Outlook (2) This measure includes the costs associated with the transfer of land and buildings (€4.39bn. in 2006) which are normally included in the CSO measure for National Accounts purposes. The third measure is the most accurate measure of the real contribution of the construction sector to economic activity. Using the ‘output’ based approach construction represented 10.2% of GNP in 2006. This compares with agriculture, for example, which in terms of value added, accounted for 2.6% of GNP in 2006. All three measures reveal the extent of the growth in construction output over the past five years, with construction, in gross terms, representing almost 24% of economic activity last year, up from around one-fifth at the beginning of the decade. Taking the value-added by the industrial sector alone, the building and construction sector represented 29% of the total value added by all industry (including construction) in 2006 compared with18% in 2000 - ahead of chemicals, the second-largest sector, which represented 22% of the total value added. According to the investment measure in the 2006 National Accounts, the volume of investment in building and construction was up 3.7% in 2006 compared with the corresponding level in 2005. Within the total, residential growth was more subdued (+3.5%) than in previous years, while other building and construction investment recorded modest growth (+4.4%). 1.2.2: Output Value Based on this CIRO, the value of output in the construction industry in 2006 is estimated at €35.5 billion compared with €31.6 billion in 2005. This represents an increase of 12.4% in the value of output in 2006 or an increase of 5.9% in volume terms, after allowance is made for construction price inflation. 9 The gross value added measure deducts the values of the goods and services used as intermediate inputs (intermediate consumption) from the value of output. Intermediate consumption would be defined as the sum of all purchases of materials and fuels used by the building and construction sector and the cost of all services less the value of the increases in stocks of materials and fuels. The companies included under building and construction are those defined under. 10 All three measures are stated in current prices but the value-added measure is based on the ‘income’ measure as the ‘output’ measure is not available in current prices. The two measures (income and output) should theoretically give the same answer. PAGE 5 Figure 1.2: Construction output, 1998 – 2007E 40,000 35,000 30,000 25,000 20,000 4% 15,000 10,000 5,000 0 1998 1999 2000 m. 14% 12% 10% 8% 6% 2% 0% -2% -4% 2001 2002 2003 2004 2005 2006 2007E Current prices Annual % volume growth (right-hand scale) The value of output in the industry has doubled since the turn of the decade compared with a factor of 1.7 for the expansion in the value of GNP over the same period. Over the first six years 2000-2006, output in the industry increased by 37% (average 5.4% per annum) in volume terms compared with 31% (average 4.6% per annum) for the volume of GNP over the same period. Table 1.3: Value of construction output - current prices and volume % changes 2000 current prices €m. 1995-2000 Ave. volume growth (%) 2006 current prices €m. 2000-2006 Ave. volume growth (%) 2007E current prices €m. Annual volume growth 2007E (%) -9.4% 24.5% 2.0% 27.4% -1.5% Residential Non-residential Productive infrastructure Social infrastructure Total output 9,496 3,820 3,063 1,207 17,586 11.2% 14.4% 12.0% 7.1% 11.6% 24,045 4,272 5,282 1,889 35,489 7.3% -0.8% 4.6% 4.2% 5.4% 24,689 5,490 5,587 2,483 36,250 1.2.3: Composition of output The performance of the individual sub-sectors was mixed in 2006, although the volume of construction output in all sub-sectors, with the exception of social infrastructure output, was higher in 2006 than in 2005. The strongest growth was recorded by the private non-residential construction sector, reflecting the strong economy and the growth in employment. The volume increases in residential construction and productive infrastructure output were marginally below expectations. • The total volume of residential construction – both new and repair, maintenance and improvement (RM&I) - was up by 4.5%, after allowing for inflation. Private housing output growth moderated to single digit growth (+5%) from three years of double digit growth (+12% per annum). The private non-residential construction sector (new and RM&I) performed strongly in 2006, for the second year in a row, with overall output in the sector up by 19%. The commercial (offices and retail) building (new and RM&I) sector recorded its second buoyant performance (+23%) in two years and investment in agricultural buildings expanded at a rapid pace (+39%). • PAGE 6 • The overall construction spend on productive infrastructure (new and RM&I) was up by 6% in volume terms, although output from public transport projects was lower in 2006 (-12%) compared with 2005. The volume of construction output associated with social infrastructure projects declined (-3%) due to a lower level of capital spending on hospital building projects in 2006 compared with 2005. • The overall figures suggest that the total volume of publicly funded investment in building and construction, including civil engineering projects, was up by almost 3% in 2006 compared with 2005, while the value of public funded investment reached a record level of €8.6 billion last year. 1.2.4: Repair, maintenance and improvement In regard to repair, maintenance and improvement (RM&I), we continue to collect data on new and repair and maintenance investment levels separately and this breakdown is presented in Appendix 2. However, there are still reservations as to the accuracy of the figures for nonresidential repair and maintenance. We suspect that the figures for new investment also include some repair and maintenance expenditure. This may explain the very strong increase (+20%) in the volume of repair and maintenance investment under productive infrastructure in 2006. Therefore, while we will continue to publish separate figures for both new and repair and maintenance work, we continue to urge caution in relying on the figures for repair and maintenance output. Tables 1.5-1.8 combine estimates for investment in new projects as well as expenditure on the repair and maintenance of existing buildings and structures. 1.3: Outlook for 2007 The value of output in the construction industry is forecast to increase to €36.2 billion in 2007. The 2007 estimate represents an increase in value terms of 2.1%, implying an decline in the volume of construction output in volume terms (-1.5%) compared with 2005, after allowance is made for construction inflation (3.7%). The estimate for construction output this year represents 22.6% of GNP (19.2% of GDP)11. The modest contraction in the volume of construction output this year reflects the changing composition of construction activity. The volume of residential construction is expected to decline (-9.4%) for the first time since 1993, while the pace of growth in non-residential construction accelerates (+14.6%) compared with 2006. However the improved prospects for non-residential construction are not sufficient to offset the decline in residential investment. Non-residential construction includes private non-residential building activity, which continues to benefit from strong consumer expenditure and strong employment growth. It also includes public sector construction, which benefits from the increased capital allocations for infrastructure and public building projects in the Public Capital Programme (PCP)12. The 2007 PCP provides for a 26% increase (before inflation) in the allocation for capital projects13 to €11.79 billion in 2007, compared with €6.1bn in 2000. Based on the official estimate for construction output presented in this report, total public sector investment in construction is projected to rise by just over 11% in value terms or by 7.4% after adjusting for construction inflation14. 11 Using the expenditure measure of construction output in the CIRO discussed in Section 1.2.1. Using the value added concept the proportion would be lower at around 10% this year (DKM estimate). 12 Public Capital Programme 2007, Department of Finance, February 2007. 13 The PCP covers construction related expenditure as well as other capital expenditure, for example on machinery and equipment, the acquisition of land and buildings, loans and grants, agricultural based programmes and investment in Science, Technology and Innovation (STI) programmes. 14 The public sector investment figures in the CIRO are derived from a survey of all Government departments, State agencies and other public sector bodies on estimated expenditure on construction projects in 2007. PAGE 7 1.3.1: Prospects for individual sectors in 2007 Taking the aggregate picture for both new and repair, maintenance and improvement (RM&I) projects, the prospects for the individual sectors of construction in 2007 are as follows: • Residential construction (new and RM&I) output is projected to decline in volume terms by 9.4%, with the number of dwellings built this year forecast at 77,000. The recovery in private non-residential construction activity is projected to continue this year, led by strong output growth from investment in agricultural and commercial building. The overall volume of private non-residential construction output is forecast to be up 24.5% this year. The overall investment in productive infrastructure projects is expected to grow modestly in volume terms (+2%) led by a substantial increase in public transport (+64%). Overall the construction output arising from road projects is projected to rise by less than 1%. The volume of construction related investment in social infrastructure projects is projected to grow strongly this year (+27%), reflecting significant investment by the Office of Public Works (OPW) in new and refurbishment building projects. • • • 2007 will be the first year since 1993 in which the level of new housing output declined, bringing to an end an unprecedented period of housebuilding. It has been acknowledged for some time now that the level of new housebuilding had become unsustainable when set against the growth in the population and household formation. The timing of the downturn was more difficult to call but it is now clear that 2006 represented the peak year in the current housing cycle. However, the housing market had been showing definite signs of slowdown since the end of 2006, partly as a result of rising interest rates and the uncertainty regarding Stamp Duty, which was addressed after the general election. Further uncertainty over the future direction of house prices added to nervousness, leading to reduced transactions and declines in national house prices over the seven months to July (-3.2%). The housebuilding sector has responded to this nervousness by reducing supply. A lower level of housing supply will leave Irish GNP less than it might otherwise be, through its impact on employment on-site as well as in the various sectors and services relying on the housing sector. Lower transactions will also lead to lower Exchequer revenues. We consider the medium term prospects for residential and non-residential construction and the extent of the decline in new housebuilding over the medium-term in Section 4. Section 2 provides a detailed sectoral review and outlook, and looks at current activity levels and the prospects for each category of work within each sector in 2007. 1.4: Construction inflation The measurement of changes in the prices or costs of construction work is very complex. The output of the industry in any period will include a great variety of buildings of all types, such as residential and non-residential buildings, civil engineering structures as well as repair and maintenance projects. Moreover the construction costs of seemingly identical buildings or roads can vary quite considerably because of, for example, variations in ground or site conditions. The construction industry is probably unique in the complexity and variability of its products/projects. The terms frequently used when talking about construction costs, such as “cost index” and “price index”, are often used interchangeably but do not refer to the same thing and need to be distinguished from each other. The CIRO has distinguished in the past between two main categories of construction price indices: • PAGE 8 The “construction cost” index, often referred to as an “input price” index, • The “construction price” index often referred to as an “output price” index, A construction cost index can be considered as a combination of the components of construction costs, namely raw materials and labour costs and the costs associated with the utilisation of machinery. Such an index shows the price developments of the main factors of production for construction, excluding land costs. It could also be considered as a ‘factor price’ index or a construction ‘input price’ index. Table 1.4 includes five such measures covering the cost of building materials, average earnings/wages, housebuilding costs and a general construction costs index from the Society of Chartered Surveyors (SCS) which tracks changes in labour and material costs for general contracting work. Construction costs should include all costs incurred by the contractor to carry out construction such as the cost of transport, energy, waste disposal and the hire of capital equipment. In respect of the construction cost inflation measures which are available, they predominantly focus on material and labour costs while other overheads are not included. Ideally a construction cost index should measure the change in construction costs for a fixed amount of construction work, assuming no change in technology and a constant input mix. However, the construction costs over time will also reflect changes due to technological improvements and more efficient methods of construction, both of which should deliver increases in construction productivity. The construction price index measures movements in the prices charged to clients for construction work. Such an index is synonymous with an output price or a tender price index and will include both changes in productivity and in the contractor’s margin. The pricing of individual projects varies considerably depending on their complexity, location and timescale. While tender prices will reflect changes in construction materials and labour costs, they are also subject to a range of other factors including competitiveness and the capacity of firms to bid for work, business confidence, different contract forms and general economic conditions. However, rising construction costs must ultimately impact on construction tender levels, otherwise firms go out of business, unless productivity increases are achieved. Throughout much of the period covered in Table 1.4 construction costs were above tender prices. However, a more correct comparison of costs and tender price inflation would require that the samples of projects used to derive both are identical in each case. The three tender price indices available are derived from projects in the general contracting sector of the industry only – based on a sample of projects in excess of circa €650 million worth of Irish construction projects in the case of the Bruce Shaw Tender index. As such none of the three independent tender price inflation measures in Table 1.4 can be used for the purposes of estimating the real volume of output for housebuilding and civil engineering projects. Thus for the purposes of estimating volume changes in construction output in the CIRO, we need an output price index or a measure of tender price inflation, for all categories of work, as opposed to construction cost inflation. We derive an overall estimate of the value of work put in place, which is based on the prices charged to clients for construction work. Thus, to properly measure changes in the volume of output, we need to deflate the value series by a tender or output price index. Accordingly, we need data on tender or output prices for the various types of building and infrastructure put in place. 1.4.1: Trends in Construction Costs and Tender Prices The following Table shows trends in the main measures of construction inflation over the past six years with estimates for 2007. PAGE 9 Table 1.4: Construction Inflation Measures – Annual Percentage Changes 2001 2002 2003 2004 2005 2006 2007 Construction Cost Inflation Wholesale Price Inflation of B&C Materials Average Earnings per Hour in Construction B&C Capital Goods Price Inflation DOE Housebuilding Cost Inflation SCS Construction Cost Inflation Construction Tender Price Inflation Bruce Shaw Tender Price Inflation Davis Langdon PKS Tender Price Inflation SCS Tender Price Inflation Tender Price Inflation per CIRO (est): All Construction All Construction excl. new housebuilding Consumer Price Inflation 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 5.0% 11.3% 12.8% 14.5% 14.8% 2.9% 10.5% 6.7% 6.4% 6.2% 0.7% 5.2% 2.5% 2.7% 2.8% 8.6% 4.5% 6.8% 2.8% 5.2% 5.1% 7.1% 4.7% 3.0% 4.0% 8.3% 2.1% 6.8% 3.9% 4.9% 6.0% 5.0% 5.5% 3.0% 5.0% 6.0% -2.0% -4.0% 4.0% 4.0% 3.0% 3.0% 8.0% -2.0% -3.0% 4.0% 4.0% 3.0% 3.8% 6.6% -1.9% -2.8% 7.1% 4.6% 3.9% N/A 9.6% 4.6% 5.7% 8.1% 5.6% 6.1% 3.7% 9.1% 2.1% 0.8% 4.1% 4.6% 4.2% 3.6% 4.9% 4.7% 3.5% 2.2% 2.4% 3.9% 5.0% Sources: 1, 2, 3, Central Statistics Office. 4. Housing Statistics, Department of the Environment, Heritage and Local Government. 5, 8, Society of Chartered Surveyors (SCS). 9, 10 Construction Industry Review and Outlook (CIRO) 2007, DKM estimates. Wholesale Price of Building and Construction Materials The CSO Wholesale Price index for building and construction materials provides an indication of price trends for both home produced building materials and imports. The index measures the actual prices paid for materials purchased by construction and civil engineering companies throughout the country. Thus prices subject to long and short term contracts as well as for high and low volume civil engineering works are also included. As a result long-term high volume fixed contracts for major works may dilute the impact of price changes notified by building and material suppliers. Thus the series provides only a general indication of building material price trends in the construction sector. The average increase in the prices of building materials was 8.3% in 2006, compared with 5.1% in 2005. Average prices increased by a similar amount (+8.6%) in 2004, a year in which the price of structural steel increased by almost 40%. Significant price increases were recorded in 2006 for electrical fittings (+16.6%), bituminous macadam, asphalt and bituminous emulsions (+16.1%) and concrete bricks and blocks (+14%). Other products such as timber (+2.2) and cement (+1.9%) recorded marginal increases last year while steel prices declined by over 1%. The latest figures from the CSO show the price of building materials increased by 6.5% in the first seven months of 2007 on the same period in 2006. Oil based products such as bituminous macadam, asphalt and bituminous emulsions, and timber increased by 11% over the same period while cement prices recorded average increases of around 10%. The forecast for building materials inflation in the full year is 6%. Average Earnings in Construction The Central Statistics Office collects data on average hourly and weekly earnings in the construction sector. Data are collected for a specific week in the middle of the last month of each quarter. All private businesses in the industry with ten or more persons engaged are covered in the Survey. The latest available data, published in June this year, relate to June 2007. The average hourly rate paid to all grades of construction workers (clerical and operatives) was €18.35 in June 2007, up 6.1% on the same quarter in 2006, and the number of hours per week was 43.4. The average hourly rate has risen by an average of 6.6% over the period 2000-2006. The corresponding average increase in average weekly earnings for construction workers was 6.6% per annum, which is ahead of earnings growth in all other sectors except financial services (8%). PAGE 10 Table 1.5: Annual Average Growth in Weekly Earnings – Sector Comparisons 2000 2006 Q1 2007 AA%G 2000-2006 6.6% 5.5% 5.1% 5.7% 5.7% % change Q1 2007 4.5%(1) 4.9% 5.0% 8.0% 4.8% Construction Industry Distribution and Business Services Financial Services Total Public Sector (exc. Health) 539.74 436.20 505.01 593.31 644.38 793.61 601.21 682.18 829.25 898.63 795.97 614.44 697.79 873.42 909.22 (1) Q2 2007 data. Source: CSO. The most recent increase under the new national wage agreement, Towards 2016, delivered 2.5% for workers on 1st July 2007 for six months with a further increase of 2.5% due on 1st January 2008. The total increase under Towards 2016 amounted to 10% over 27 months to 1st July 2008. Building and Construction Capital Goods Price Inflation The other traditional measure used to gauge the cost of building and construction is the CSO Capital Goods Price Index for building and construction materials and wages. This index is derived by combining a special hourly wage rate index for employees in the building and construction sector with the price index for building and construction materials. As it is a composite index, it tends to increase at rates somewhere between the building materials index and the average earnings. It includes labour cost increases which are awarded following each review of rates of pay for the construction industry. The Capital Goods Price index was up 6.8% on average in 2006, the same increase as that recorded in 2004, while a more modest increase (+4.7%) was recorded in 2005. Over the first seven months of 2007, capital goods price inflation for building and construction was 5.3%. The forecast for the composite index for the full year is 5.5% on average. DOE Housebuilding Cost Inflation This index is produced by Dublin City Council for the Department of the Environment, Heritage and Local Government (DEHLG). It measures labour and material costs only and does not include items such as overheads, profit, interest charges, land development etc. The average annual increase in the index has been relatively modest in recent years despite the escalation in house price inflation. The Housebuilding Cost index (HCI) was up by 3% or less per annum since 2003 except for in 2006 when the index increased by almost 4%. Average house price inflation over this period was 10.7%. The most recent figures for the HCI show the cost of housebuilding was up by 3.8% on average in the first six months of the year on the same period in 2006 compared with 6% for average house price inflation over the same period (permanent-tsb/esri data). SCS Construction Cost Inflation The SCS construction cost index is compiled from, and reflects actual changes in, the cost of labour, materials and other construction inputs for building projects. It does not include items such as profit, interest charges or land development. In this respect, it is similar to the HCI and only relates to construction costs. The cost index has been prepared by Dublin City Council in the past and is based on approximately 30 items that would typically be found in bills of quantities. These items are priced from current bills of quantities from a sample of chartered surveyors. Change in costs between two periods is applied to the previous index value to derive the index figure. Construction costs as measured by the SCS increased by 4% in 2005 and by 5% in 2006. Data for the first six months of 2007 show construction costs up 4.7% on average compared with the same period in 2006. PAGE 11 Bruce Shaw Tender Price index The Bruce Shaw Tender Price index reflects changes in prices charged for construction. It is compiled from a large database of tenders, circa €650 million of diverse construction (excluding civil engineering) projects. Average tender prices for general contracting work were up by 3% in 2006, following annual increases of 4% in 2004 and 2005. A similar increase is projected for 2007 (+3%). The DLPKS Tender Price index Tender price inflation trends according to the DLPKS tender price index are similar to those estimated by the Bruce Shaw index. The DLPKS index is based on a smaller sample of tenders in the general contracting area. According to this index, average tender prices for general building work are projected to rise by 3.75% in 2007. SCS Tender Price index The SCS publish a Tender Price Index twice a year. The two figures published relate to the first and second halves of each year. The index is based on new build projects, excluding housing, with tender values in the range of €0.5m. to €10m. The projects are a mixture of Government and private sector contracts. The size of sample used to derive the index relates to the number of completed forms returned from SCS members. Typically, around 50 completed forms are returned in a half-year period. The latest index value for 2006 shows tender prices increased by 3.4% in the second half of the year compared with the first half which was up by only 1.4% on the previous six months. On an annual basis tender price inflation was 3.9% on average in 2006 compared with 4.6% in 2005. First half figures for 2007 are not available. It is important to stress, however, that these published indices predominantly relate to projects in the general contracting sector as opposed to civil engineering work, where separate approaches are adopted for the purposes of the CIRO. 1.4.2: Construction Inflation Assumptions for the CIRO The remaining two tender price inflation figures in Table 1.4 are those derived in the CIRO. For the purposes of measuring volume changes in construction output in this report we need an output price index or a measure of tender price inflation as opposed to construction cost inflation for the various types of building and infrastructure put in place. While every effort is made to reflect a realistic view on the level of inflation in the construction industry by paying attention to the published tender and cost price indices summarised above, and consulting with the various Government departments and the industry, there are no regular tender price indices published by sub-sector of activity for the industry, other than those presented above for the general contracting sector. Following consultation with the relevant government departments and State agencies, we derive separate deflators for each category of work where possible to ascertain volume changes in the amount of new work, and to demonstrate the varying levels of competition and activity in each sector. We also distinguish between private and public sector projects. Thus, the individual categories of new work are each assigned a different tender price deflator, based on the previous analysis of construction cost and tender price indices and based on discussions with key players in each sector15. 15 The detailed methodology used and assumptions made to derive tender price deflators for each category of construction work are set out in Appendix 1 PAGE 12 The end result is a composite index for the industry as a whole which suggests that the overall average rate of construction price inflation was 6.1% in 2006 and is forecast at 3.7% in 2007. The overall tender price inflation figure is heavily influenced by new private housebuilding. Tender price inflation for all new housebuilding was almost 8% in 2006, (Appendix 1). Excluding all new housebuilding, construction inflation for non-residential work was 4.2% in 2006 and is expected to be marginally lower at 3.6% in 2007. These figures are more in line with the published tender price indices for general contracting work. We are confident that the deflators used provide a reasonable reflection of market conditions over the recent period of construction activity. The projections for 2007 reflect a continued competitive market in construction contracts. Government Procurement Reform It remains to be seen what the impact of the new suite of contracts16 issued by the Government will be on the level of tender price inflation. Under the new rules, which apply from February 2007 the Government has decided that all future construction projects will be on the basis of fixed price lump sum contracts with optimum risk transfer tendered on a competitive basis. The objective is to improve cost certainty, value for money and cost effective delivery of infrastructure projects. The reforms are intended to deal with the three stakeholder areas in the construction delivery process, namely the client, the consultants and the contractors. While it is too early to say what the impact might be, the new rules are likely to result in lower outturn prices at the end of the construction process. However, depending on the level of risk transferred to the contractor, it is possible that tender prices could be higher than they might otherwise be. However, the new rules should mean that the information provided up front on the scope of projects should be set out in more detail, resulting in a more efficient design stage, both of which should generate more robust pricing of jobs. Figure 1.3: Consumer price inflation and construction inflation: 2003-2007E (%) 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2003 Source: DEHLG, CSO, DKM Overall construction price inflation Non-residential construction price inflation Consumer price inflation 2004 2005 2006 2007E 16 Construction Procurement Reform, Department of Finance available at http://www.finance.gov.ie/ViewDoc.asp?fn=/documents/publications/other/constructreformdec06.htm&CatID=61&m=p PAGE 13 Comparison with consumer price inflation A comparison of changes in the derived construction output price deflator, including and excluding housebuilding, with changes in the general consumer price index is set out in Figure 1.3 for the period 2003-2007E. Overall construction inflation exceeded general consumer price inflation over the period 2003 to 2006. The gap was most pronounced in 2004, a year in which the deflator for new housebuilding was over 12%. Excluding residential construction, the annual average rate of construction inflation was around 4% in 2004, almost twice the rate of general inflation. Although general consumer price inflation accelerated in 2006 (to 3.9%), non-residential construction inflation (+4.2%) increased by around the same rate. Again the significant gap between overall construction inflation and consumer price inflation reflects the much higher deflator for new housebuilding in 2006 (+8%). The anticipated slowdown in house price inflation in 2007 to an estimated 1.5%, on average, dampens overall construction price inflation (+3.7%). 2007 will be the first year since the early 1990s, in which overall construction price inflation is expected to rise by less than general consumer price inflation, forecast at 5% on average, this year17. 1.5: Overall construction output Trends in the value and volume of construction output by sector (new and repair and maintenance activity combined) over the period 2003 to 2007E are set out in the following summary Tables 1.6 to 1.9. 17 The average annual inflation rate in the first eight months of 2007 was 5%. PAGE 14 Table 1.6: Value of construction output in current prices 2003 to 2007E (€m). 2003 2004 2005 2006 2007E Residential construction Private housing Public housing Sub-total Non residential construction Industry Commercial Agricultural Tourism Worship Sub-total Productive infrastructure Roads Water services Airports/Seaports Energy Transport Communications Sub-total Social infrastructure Education Health Public buildings Other social* Sub-total Total all construction 13,506 1,129 14,636 16,877 1,111 17,987 20,193 1,264 21,456 22,694 1,351 24,045 21,263 1,426 22,689 751 1,318 203 408 50 2,731 802 1,321 250 451 64 2,888 897 1,700 262 523 73 3,456 956 2,179 378 682 76 4,272 1,123 2,558 788 938 82 5,490 1,697 750 143 1,237 668 266 4,762 1,709 739 159 1,496 450 279 4,831 1,863 772 159 1,388 365 257 4,804 2,083 891 182 1,484 334 307 5,282 2,184 906 214 1,444 570 269 5,587 562 459 451 211 1,684 23,811 676 460 373 249 1,758 27,465 726 464 371 309 1,869 31,586 782 328 401 379 1,889 35,489 864 363 610 647 2,483 36,250 The value of construction output includes repair and maintenance expenditure. *Includes building output associated with capital investment in local authority services, sports and the Gaeltacht PAGE 15 Table 1.7: Change in construction output value in current prices, 2003 to 2007E (%) 2003 2004 2005 2006 2007E Residential construction Private housing Public housing Sub-total Non residential construction Industry Commercial Agricultural Tourism Worship Sub-total Productive infrastructure Roads Water services Airports/Seaports Energy Transport Communications Sub-total Social infrastructure Education Health Public buildings Other social* Sub-total Total all construction 24.9 1.4 22.7 25.0 -1.7 22.9 19.6 13.8 19.3 12.4 6.9 12.1 -6.3 5.5 -5.6 -7.7 -12.6 -6.8 12.9 -17.8 -7.8 6.8 0.2 23.3 10.5 26.5 5.8 11.8 28.7 4.7 16.0 14.9 19.7 6.6 28.2 44.3 30.4 4.0 23.6 17.5 17.4 108.4 37.5 8.0 28.5 4.9 -0.5 -34.1 -2.1 49.4 -5.1 3.9 0.7 -1.5 11.0 20.9 -32.7 5.1 1.5 9.0 4.5 -0.3 -7.2 -18.7 -8.2 -0.6 11.8 15.4 14.9 6.9 -8.5 19.8 9.9 4.9 1.7 17.7 -2.7 70.5 -12.4 5.8 -22.1 1.1 23.5 -24.9 -7.6 11.8 20.3 0.1 -17.2 17.8 4.4 15.3 7.3 0.8 -0.7 24.3 6.3 15.0 7.7 -29.2 8.1 22.6 1.1 12.4 10.5 10.7 52.2 70.6 31.4 2.1 The value of construction output includes repair and maintenance expenditure. *Includes building output associated with capital investment in local authority services, sports and the Gaeltacht. PAGE 16 Table 1.8: Construction output in constant (2005) prices, 2003 to 2007E (€m). 2003 2004 2005 2006 2007E Residential construction Private housing Public housing Sub-total Non residential construction Industry Commercial Agricultural Tourism Worship Sub-total Productive infrastructure Roads Water services Airports/Seaports Energy Transport Communications Sub-total Social infrastructure Education Health Public buildings Other social* Sub-total Total all construction 16,015 1,257 17,272 17,965 1,177 19,142 20,193 1,264 21,456 21,173 1,259 22,432 19,046 1,268 20,314 812 1,426 220 441 55 2,953 834 1,374 260 469 66 3,004 897 1,700 262 523 73 3,456 919 2,095 364 656 73 4,108 1,046 2,383 736 874 76 5,116 1,843 778 155 1,338 723 288 5,125 1,785 754 165 1,555 468 291 5,018 1,863 772 159 1,388 365 257 4,804 2,003 871 175 1,427 321 295 5,093 2,020 865 198 1,335 527 249 5,194 618 487 488 228 1,821 27,171 703 478 388 259 1,829 28,992 726 464 371 309 1,869 31,586 751 318 385 364 1,819 33,452 804 341 568 603 2,316 32,940 The value of construction output includes repair and maintenance expenditure. *Includes building output associated with capital investment in local authority services, sports and the Gaeltacht. PAGE 17 Table 1.9: Change in volume of construction output, 2003 to 2007E (%). 2003 2004 2005 2006 2007E Residential construction Private housing Public housing Sub-total Non residential construction Industry Commercial Agricultural Tourism Worship Sub-total Productive infrastructure Roads Water services Airports/Seaports Energy Transport Communications Sub-total Social infrastructure Education Health Public buildings Other social* Sub-total Total all construction 12.1 0.3 11.2 12.2 -6.3 10.8 12.4 7.3 12.1 4.9 -0.4 4.5 -10.0 0.7 -9.4 -5.3 -10.4 -6.8 15.8 -17.7 -5.7 2.7 -3.7 18.6 6.3 21.7 1.7 7.5 23.8 0.6 11.6 10.4 15.1 2.5 23.2 38.7 25.4 0.0 18.9 13.8 13.7 102.3 33.3 4.1 24.5 2.0 -2.7 -35.7 -4.4 45.9 -7.4 1.4 -3.2 -3.1 6.8 16.3 -35.3 1.1 -2.1 4.4 2.4 -4.1 -10.7 -21.9 -11.7 -4.3 7.5 12.9 10.5 2.8 -12.0 15.2 6.0 0.8 -0.7 13.1 -6.5 64.0 -15.8 2.0 -22.0 1.1 26.3 -22.8 -6.9 5.8 13.8 -1.7 -20.3 13.3 0.4 6.7 3.2 -3.0 -4.5 19.5 2.2 8.9 3.6 -31.5 3.9 17.8 -2.7 5.9 7.0 7.2 47.5 65.5 27.4 -1.5 The value of construction output includes repair and maintenance expenditure. *Includes building output associated with capital investment in local authority services, sports and the Gaeltacht. PAGE 18 Section 2: Sectoral review and outlook The gross value of residential construction output (new and RM&I) was €24 billion in 2006, which is equivalent to over 16% of GNP. Residential construction accounted for 68% of total construction output last year. At these proportions, it is clear that housing is a major sector of the economy and the economy has become very dependent on housing. Thus the economy is now vulnerable to the slowdown in residential construction which has already commenced. All of the leading housing indicators suggest that housing supply will be lower this year. The estimates for construction output contained in this CIRO are based on a supply estimate of 77,000 units for this year compared with the peak of 88,219 units in 2006. The overall growth in residential construction output (including RM&I) moderated to 4.5% in 2006 and is forecast to decline by 9.4% in 2007. Total output in the construction industry increased by almost 6% in 2006, just ahead of the growth in real GDP last year (5.7%). All of the individual sub-sectors of the industry made a contribution, particularly private non-residential construction which expanded by around 20% for the second year in a row. Public sector construction continued at an exceptional level, with a record €8.6 billion invested in public social and productive infrastructure projects last year. The decline in new residential construction in 2007 will result in a modest decline in the overall volume of construction output (-1.5%), as the robust pace of growth in non-residential construction (+15%) will not be sufficient to offset this decline. However investment in public sector construction projects is expected to increase to €9.6 billion this year, while private nonresidential construction expands strongly for the third year in a row. In 2007 we begin to see the impact of the Government’s transport investment programme as the total volume of construction output from new public transport projects and major improvement projects is forecast to rise significantly (124%), reflecting the project commitments under Transport 21. There is substantial growth also expected in the volume of investment in new social infrastructure projects (+33%), reflecting expenditure by the Office of Public Works in the provision of office accommodation for Government departments. We believe that housing cycle is entering a new phase and the housing market will adjust to an equilibrium position over the medium term. In the meantime it will be essential that all nonresidential projects, particularly in the public sector, proceed to the construction stage as quickly as possible, in an effort to minimise the negative impact on construction employment which is expected as the adjustment to a more sustainable level of housebuilding takes place. 2.1: Residential construction 2.1.1: Review of 2006 The peak has finally arrived The consistent increase each year in the level of new housebuilding since 1993 has finally come to an end. Fourteen years ago Ireland was building around 21,400 dwellings or around 6 units per 1,000 of the population. In 2006 the Irish housebuilding sector built 88,21918 units which was equivalent to 21 units per 1,000 of the population. This compares with an average of only 6.6 in Western Europe19, with only Spain (15 units per 1,000) coming anywhere close to the record Irish level. Housing supply peaked at 88,219 units in 2006, up only 2.4% on the corresponding level in 2005. This modest growth rate followed three years in a row when the growth in housing supply 18 The measure of housing supply here refers to the actual number of units built and completed in 2006. The estimated housing supply figure is 88,219 units. This figure differs from the figure published (93,419) by the Department of the Environment, Heritage and Local Government which is based on ESB connections. The extra 5,200 represent the estimated backlog in ESB connections in 2005, comprising units which were completed in 2005 but were not connected for electricity until 2006, due to a backlog in connections in the ESB. The split of the extra 5,200 units between private and public sector units is not available. 19 Euroconstruct: The European Housing Market, June 2007. PAGE 19 (completions) was 12% or higher. A total of almost 642,000 units have been added to the housing stock over the period 1996-2006. This implies that, based on an estimated stock level of 1.77 million at the end of 2006, just over 36% of the housing stock was built over the last decade. Despite Ireland’s exceptional rate of housebuilding, its stock level remains behind Western Europe, at 417 dwellings per 1,000 of the population in the Republic, based on the most recent Census of Population results for 2006, compared with an average across Western Europe of 478 dwellings per 1,000 of the population20. A major sector of the economy As a result housing has become a key sector of the economy and the economy has become very dependent on housing. The gross value of housing output (new and repair and maintenance) was €24 billion in 2006, which is equivalent to over 16% of GNP, compared with 8% in 1993. A strong housing market has a positive impact on the economy, not only through its direct contribution to GDP via new residential construction and home related purchases, but also through enabling home owners to extract equity from their homes to finance current consumption. Housing also influences activity and employment across a range of sectors in the Irish economy, not just construction, but also financial, property management and related services, and other business and consumer services’ sectors of the economy. In terms of the economy the housing sector has also generated substantial revenues for the Exchequer arising not just from direct property transactions but also from other indirect expenditures which have resulted from the buoyant housing market. Thus if the full range of economic impacts generated by new housing construction alone are included - not just the direct impacts in terms of output and employment, but the incremental indirect and induced impacts, in terms of the additional economic activity that results from related businesses and services - the residential construction sector would be responsible for a much higher proportion of economic activity. A key sector within the construction industry Residential construction accounted for 68% of total construction output last year compared with 54% in 2000. Since 2002 its share of total construction output has increased considerably. In the absence of any breakdown of the employment numbers between the individual sub-sectors of construction, we suspect that the strong employment growth in the sector can be attributed to the strong growth in residential construction activity. If true, this leaves the economy vulnerable to the anticipated slowdown in residential construction which is now underway. Figure 2.1: Residential construction share of total construction output (%) 1996-2007E 70% 68% 66% 64% 62% 60% 58% 56% 54% 52% 50% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E Source: DEHLG, DKM 20 Euroconstruct Summary Report June 2007. PAGE 20 New build by type The classification of dwellings built is defined according to the electricity connection21 and shows the split between individual houses (separate detached houses), scheme houses (connection to two or more houses) and apartments (centrally located electricity connection). Figure 2.2: Total house completions by type, 2005 and 2006 (% of total) 60000 52.3% 50000 54.0% 40000 30000 25.3% 20000 10000 0 Individual house Source: DEHLG Scheme estate house Apartments 24.5% 22.4% 21.4% 2006 2005 An increasing proportion of the supply provided in 2006 was in estate houses while apartments and individual houses reduced their respective shares in 2006 compared with 2005. That said, in absolute terms, the number of apartments built nationwide over the last decade years has increased almost threefold, from 6,670 in 1996 to almost 19,500 last year. In Dublin, where a total of 19,470 new units alone were provided in 2006, almost 60% (11,500) were apartments. Across the country, the trend towards apartment building is concentrated in the urban locations and in the commuter belt around Dublin. Of the 19,500 apartment built in 2006, the Greater Dublin Area22 provided 13,200 (68%) of them and Cork provided only 1,373 (7%). After the Greater Dublin Area, Sligo was the county which recorded the second highest apartment share (22% or almost 500 units) out of all dwellings built in Sligo. Private versus public sector split The private housebuilding market continues to account for the vast bulk of units completed across the State. The value of new private housebuilding output reached €18.4 billion in 200623. This represented an increase of just 3% in volume terms on the 2005 level, the lowest rate of growth since 2001. 21 The completions figures published by the Department of the Environment, Heritage and Local Government are based on the number of new dwellings connected by the ESB to the electricity supply 22 Dublin, Kildare, Meath and Wicklow comprise the Greater Dublin Area (GDA). 23 The total volume is derived by multiplying the number of private completions by the average net sales price (excluding site costs) and adjusting for house price inflation. See separate methodology paper on the DOEHLG website: www.environ.ie. PAGE 21 Table 2.1: Total Dwellings Built 2000-2006 2000 Private Sector Public Sector: of which Local Authority Regeneration Schemes Voluntary Sector Total Supply 46,657 3,155 2,204 0 951 49,812 2001 47,727 4,875 3,564 58 1,253 52,602 2002 51,932 5,763 4,083 320 1,360 57,695 2003 62,686 6,133 4,177 339 1,617 68,819 2004 71,808 5,146 3,403 136 1,607 76,954 2005* 80,598 5,559 3,817 392 1,350 86,157 2006* 83,011 5,208 3,739 229 1,240 88,219 Source: DEHLG (ESB connections) for 2000-2006 but total figures for 2005 and 2006 have been adjusted to account for the backlog of ESB connections in 2005. Note: * denotes the 2005 and 2006 housing figures after adjusting for the one-off backlog of electricity connections in the ESB estimated at 5,200 in 2005. All of the adjustment has been applied to the private sector total only in 2005 and 2006. The public sector covers all social and affordable housing measures aimed at catering for the needs of those who cannot afford to meet their own housing needs. The housing needs of 14,686 households were met in 200624. Table 2.2: Number of households Accommodated by the Provision of Social and Affordable Housing in 2006 Local authority houses Voluntary and co-operative houses Other social housing measures Affordable housing Total Provision Source: Annual Housing Bulletin 2006, DEHLG. 5,253 1,240 4,756 3,437 14,686 This figure includes new build, acquisitions and regeneration schemes under the local authority housing programme, completions by the voluntary and co-operative housing sector and units provided by other social housing measures including vacancies, extensions and improvement works in lieu of rehousing. The affordable housing units provided include those acquired under the 1999 Affordable Housing and the Part V (of the Planning and Development Act, 2000) schemes as well as units provided under the Affordable Housing Initiative (AHI) and shared ownership schemes. Under Part V arrangements and the AHI, local authorities and the voluntary and co-operative housing sector acquired 90 social housing units and 2,101 affordable housing units from developers last year. Value of residential construction Looking at the composition of residential construction, the vast bulk (81%) of the €24 billion represented new housebuilding. The estimate for the value of new build in the public sector (including regeneration) was €1.07 billion in 2006 compared with a public capital programme provision for public housing of €2.06 billion25. The estimates for residential construction output include estimate for the value of private housing repair, maintenance and improvement (RM&I) output in 2006 from the DOE/ESRI monthly survey of private repair, maintenance and improvement (RM&I) expenditure. This survey estimated private RM&I expenditure at €4.26 billion in 200626. 24 2006 Annual Housing Bulletin, Department of the Environment, Heritage and Local Government. Page 23. 25 The difference reflects investment on the acquisition of dwellings as well as local authority housing loans from the Housing Finance Agency. 26 The DOE/ESRI survey specifically asks households about expenditure on household renovation and repairs covering major home improvements such as door or window replacement, extensions, major plumbing or electrical work, as well as expenditure by households on minor home repairs, such as decorating and minor electrical, plumbing and heating repairs or minor repairs to the structure of dwellings. PAGE 22 It is important to point out that the DOE/ESRI survey is not intended to capture the entire turnover of the Irish merchanting business, some of which will be picked up under consumer expenditure in the National Accounts. The Irish merchanting business would also cover sales to the new housebuilding sector, which is separately quantified under new private housing output. Hence we have to be careful to avoid any double counting. Accordingly, we continue to use the survey figures in the absence of better information. The volume of private housing RM&I output has increased since 2000 reflecting a tendency amongst some existing owner-occupied households to extend their existing dwellings rather than to move house. Much of this increased investment is on major home improvement works, including extensions and conversions (71% according to the DOE/ESRI survey), as opposed to minor works (29%). 2.1.2: Prospects for 2007 Developments in the housing market in the year to date have been uncharacteristic of trends in the Irish housing market over the past few years. Notwithstanding some positive developments for first-time buyers, notably the doubling of mortgage interest relief in the last Budget and the welcome reform of the stamp duty regime in Q2 2007, there have also been a number of negative developments which have increased uncertainty in the market. The key factor contributing to this uncertainty has been the hikes in ECB interest rates which have resulted in mortgage rates rising by around 2% over the last twenty months to around 5.35% on average in August 2007. While there seems to be a consensus emerging that we may be close to the end of the cycle of interest rate increases, there has been a lower level of mortgage transactions and demand in the market, according to figures from the Irish Bankers Federation. The number of loans issued to first time buyers and mover purchases was down by 19.1% in the first half of 2007 compared with H1 200627. The largest decline was recorded by mover purchasers where the number of loans issued fell by 24%. The value of mortgage lending to these two segments of the market was down by 13.5% over the same period. Clearly confidence amongst potential buyers has been dented by the uncertainty in the market. As a result, recent trends in house prices show price reductions, with average house prices nationally down by 3.2% to €301,267 in July from their peak in January28. In Dublin average house prices peaked in April this year but by July had fallen back by 4.3% to €411,069. Looking at first-time buyer prices, which peaked in March, average prices had declined by 3.9% by the end of July to €268,904. As a result the annual rate of house price inflation nationally was negative (-0.7%) in July compared with almost 11% in January. Both the hike in the mortgage rate and the reductions in house prices have contributed to a stabilisation in housing affordability for first-time buyers. There is also evidence (see below) that housebuilders have responded to developments over the past twelve months by reducing the level of new supply in the pipeline. This should help stabilise house prices to some degree. Leading indicators point to a lower level of housing supply In terms of the immediate prospects for the level of housebuilding in 2007 there are three leading indicators of housing supply: planning permissions granted; registrations (a proxy for housing starts); and commencement notices, which give an indication of supply in the pipeline. Trends in all three indicators suggest that the level of new supply in 2007 will be lower than in 2006, but the decline will be significant in 2008. • The total number of residential units granted planning permission was down 8.8% in the year to Q1 2007, the seventh annual rate of decline in a row. The number of houses granted permission declined by 4.9% on Q1 2006, continuing the downward trend which 27 IBF/PwC Mortgage Market Profile, Irish Banking Federation, Q2 2007. 28 Permanent-tsb/esri house price index. PAGE 23 commenced in Q4 2005. Similarly the number of apartments granted permission fell by 19.5%, the ninth quarter to record a decline year-on-year. As a result, the twelve months total to Q1 2007 is currently 76,769 residential units, some 20.5% below the corresponding annual total in Q1 2006 and 26.5% below the peak level reached in Q2 2005 (104,454). • Total registrations for the eight months to August 2007 (recorded by Homebond and Premier Guarantee), were down by 37% to 29,701 units on the same period in 2006. Moreover, taking each monthly total, the annual rate of change each month has been negative since October 200629. Only two counties recorded growth in the first eight months of the year: Carlow (+19%) and Louth (+9%). Taking our adjusted figures30 and calculating the twelve month total for registrations at the end of August this year suggests that registrations are running at around 65,000, down almost 26% on the corresponding twelve month total at the end of August 2006. Comparing the monthly adjusted figures for the first eight months of the year the decline is more pronounced at 35%. Assuming an average lag of around nine months, we believe that the very sharp weakness in registrations will have a negative impact on housing supply in the second half of 2007 and a much more substantial negative impact in 2008. • The residential commencement series has never broken the 80,000 barrier, for reasons to do with the interpretation of units by local authorities. The annual total for commencements has been on a downward trend since July 2005 after peaking at 78,721 in June 2005. The latest figure for June 2007 shows the cumulative 12 month total at just under 66,000, down 16% compared to June 2006, another indication of the weakness expected on the supply side over the coming twelve months. The above three indicators determine the pipeline of housing supply. The latest available data on house completions, the proxy for new supply, suggest that the above trends have already begun to have an impact. The July figures show completions fell by 36% in July 2007 on July 2006, generating a decline of 5.4% in the first seven months. Completions are likely to continue to decline each month over the remainder of the year, particularly in Q4, which tends to be the record quarter each year historically. The following chart of adjusted registrations shows the extent of the contraction anticipated for supply over the next twelve months. • Figure 2.3: Trends in Housing Registrations* cumulative twelve month totals each month 90,000 85,000 80,000 75,000 70,000 65,000 60,000 55,000 50,000 May-04 May-05 May-06 May-07 Sep-04 Nov-04 Sep-05 Nov-05 Sep-06 Nov-06 Sep-07 Mar-04 Mar-05 Mar-06 Mar-07 Jan-05 Jan-06 Jan-07 Jul-04 Jul-05 Jul-06 Jul-07 Registrations* peaked at around 88,000 in September 2006 * adjusted for one-offs. Source: DEHLG, DKM estimates 29 With the exception of December 2006 and April 2007 when the annual rate of decline in total registrations year-onyear was very marginally positive. 30 Our adjusted figure for total housing registrations is derived by adding an estimate for one-off houses, based on the proportion of one-offs in the planning permissions data, to the registrations figure based on Homebond and Premier Guarantee data), assuming a six month lag between permissions and registrations. PAGE 24 Accordingly, total completions are expected to decline to 77,000 this year, down around 13% on the peak in 2006 (88,219). Thus the value of residential construction in 2007 in the CIRO is derived, based on this estimate of 77,000 new dwellings. We expect the total number of dwellings built in 2008 will be significantly lower and have assumed a figure of 60,000 completions in the discussion on the medium term prospects for construction in Section 4. The number of local authority completions in 2007 will include new dwellings expected under the main local authority housing construction and various regeneration programmes. They will also include social and affordable housing units acquired under the various Affordable Housing schemes - the 1999 Affordable Housing Initiative, Part V and the Sustaining Progress Partnership Agreement -although many of these will be captured under the private housebuilding market. For this reason we do not speculate as to the breakdown between the private and the public sectors. Thus the value of new housing output in 2007 is estimated at €17.8 billion or €22.7 billion when RM&I investment is included. Based on these estimates, the volume of new residential construction is forecast to decline by almost 13% this year, while the volume of RM&I investment is forecast to rise by almost 4%. Overall the volume of residential construction output is forecast to decline by 9.4% in 2007, the first annual decline in volume terms since 1993. Figure 2.4: Total dwellings completed, 1998-2007E 86,157 88,219 76,954 68,819 57,695 46,512 49,812 38,842 42,349 52,602 77,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E Source: DEHLG, DKM 2.2: Private non-residential construction The private non-residential construction sector covers private sector building investment (new and RM&I) in the following sub-sectors: industrial, commercial, agriculture and tourism, including hotels, restaurants and conference centres as well as privately owned cultural buildings such as museums, art galleries, racecourses and marinas. There is other private sector construction activity such as investment in private sport and leisure facilities, and golf clubs. We separately identify public sector investment in sporting facilities under social infrastructure but there is no comprehensive data on the level of private sector investment in sporting facilities. As a result it is difficult to comprehensively measure the total volume of private non-residential building put in place. The estimates provided here for construction related investment are the best estimates available, and are based on planning permissions and existing property market and related reports produced by, and discussion with, key players in the property market. PAGE 25 The private non-residential construction sector has been doing exceptionally well over the past two years. Activity levels increased strongly in 2005 and 2006 in response to the positive performance of the economy and the particularly strong growth in employment and consumer expenditure. Both factors are key drivers of the volume of non-residential buildings put in place, particularly in regard to retail and office buildings and buildings required to accommodate the growth in consumer, business and personal services. The following chart provides data on the total floor area planned for new construction of nonresidential buildings over the period 2002 to Q1 2007. Data is also published for government, health and educational buildings and buildings for social use. While the data only relate to planning permissions which have a five year life, the figures provide an indication of the potential supply of completed non-residential buildings in the pipeline. Figure 2.5: Total floor area planned for new construction of non-residential buildings (thousand square metres) 3000 2500 2003 2000 1500 1000 500 0 commercial industrial agriculture health and education other social buildings 2004 2005 2006 2007 (1) 2007 based on four quarters to Q1, Source: CSO The figures suggest that the total floor area planned for non-residential buildings recorded significant increases in 2005 (+16%) and 2006 (25%). Based on the four quarters to Q1 2007 the total floor area planned for new non-residential buildings is 7.34 million square metres. Within the total the strongest growing sectors are industrial and agriculture, each of which recorded very healthy increases in the total planned floor area in 2006. Both sectors have also recorded strong growth in the year to Q1 2007, implying that the prospects for industrial and agricultural building volumes over the next two years are good. In contrast the total planned floor area for commercial buildings was down almost 14% in 2006, evidence that the prospects for new commercial building over the next two years may not be as good as they have been in the last two years. Commercial building tends to dominate the nonresidential building sector, but its share of the total floor area granted permission for nonresidential buildings has fallen to 41% in 2006 from between 50% and 60% over the past five years. This illustrates the dependence of the private non-residential construction sector on the growth in employment in the commercial and services sectors. The industrial building share of the total was 18% in 2006 while the other sectors between them make up the balance of around 40% of the total planned floor area. PAGE 26 Figure 2.6: New private non-residential construction, 1999-2007E (constant 2005 prices, 1999 = 100) 140 120 100 80 60 40 20 0 1999 2000 Industry 2001 2002 Commercial 2003 2004 2005 2006 2007E Tourism Total Source: DEHLG, DKM Figure 2.6 shows trends in the volume of private non-residential construction output for three sectors. Agricultural buildings are excluded from the chart as there is substantial investment planned in agricultural buildings by farmers in 2007 (see Section 2.2.5) which distorts the chart. 2.2.1: Industry The estimate for industrial building output in 2006 suggests that the volume of new industrial building market was up by 5% while investment in construction by the semi-state agencies31 declined, following two exceptional years of growth. The total persons employed in the industrial sector32 declined in 2005 (-1.7%) but increased in 2006 (+1.8%). Provisional figures for March 2007 suggest that the growth moderated but remained positive (+1%), with employment at 240,700. Employment growth is a key factor driving the demand for space, especially from indigenous small and medium sized enterprises. According to reports from estate agents33 the main features of the industrial property market in 2007 are as follows: • There is strong demand for small own-door industrial units across Dublin which is leading to a significant level of new supply in North and West Dublin in particular. Many of the larger industrial buildings under construction are being designed and built as bespoke facilities. A scarcity of supply of industrial land in sought after locations in Dublin, adjacent to the main transport routes, is keeping upward pressure on industrial land values. There has been a significant increase in the level of new building activity this year in the Dublin area, most notably in Business Parks adjacent to the M50, the Port Tunnel, and the Naas Road/N7. The new route announced for the Metro West should stimulate further new building activity. The higher interest rate environment is reported to be increasing enquiries from companies looking to rent as opposed to buy, which was the trend over recent years. • • • • 31 Also included under non-residential investment. 32 According to the CSO statistical release on Industrial Employment covering local industrial units in the State with 3 or more persons engaged. These estimates exclude own account workers and very small establishments which are included in the Quarterly National Household Survey from the CSO. 33 Commercial Property Outlook reports for 2007 from CB Richard Ellis Gunne and Savills Hamilton Osborne King. PAGE 27 Estimated capital expenditure on buildings by firms We have examined again this year investment levels by firms with three or more persons engaged, covered in the Census of Industrial Production (CIP) published by the CSO. The Census provides information on the capital expenditure on buildings and other construction work by firms and their sales of capital assets (disposals). The data covers the acquisition of existing buildings as well as new buildings, hence we urge caution in relying on the figures, which are merely for illustrative purposes only. The most recent Census relates to 2004 and shows that manufacturing industries acquired €907 million of buildings and other construction work in 2004 and had total disposals (including plant and equipment) of €400 million. Assuming one half of the latter figure relates to the disposal of buildings, this would imply an estimated €707 million of additions to capital assets of buildings and other construction work by the industrial sector in 2004 compared with a level which was almost twice as high in 2002. The CIRO estimates for new industrial building output in 2004 is €550 million. Table 2.3: Capital assets additions of buildings and other construction by manufacturing industry, 2000-2006, €m. 2000 Additions to capital assets: Buildings and other construction work Sales of all capital assets of which buildings (1) Net additions to capital assets of buildings and other construction work CIRO estimate for new industrial building output 834 224 112 2001 1,146 195 98 2002 1,394 220 110 2003 630 334 167 2004 907 400 200 2005 667 337 168 2006 615 673 336 (1) 722 1,048 1,284 463 707 499 279 814 941 689 568 610 690 726 Source: 2000-2004 from Census of Industrial Production 2005, 2006 Capital Assets in Industry Inquiry (1) Estimated at 50% of total sales of capital assets (DKM assumption). Figures for 2005 and 2006 are from the CSO release on Capital Assets in Industry. The survey results are for firms with 20 or more persons engaged and are grossed up using the latest CIP results. While the figures, after grossing up, are still lower than the estimates in the CIRO, we suspect that our estimate for sales of buildings in 2006 is probably too high. On the basis of planning permissions data and developments in the industrial building market presented above, the prospects for industrial building output are assumed to be positive this year, with the volume of new building output forecast to rise strongly in 2007 (+15%). 2.2.2: Commercial – offices There is no comprehensive coverage on the extent of office building across the State, making it difficult to derive the aggregate position in terms of the amount and value of office building put in place in a given year34. Much of the research that is available tends to concentrate on the Dublin office market, covering Dublin City and its suburbs. In a very detailed analysis of the Dublin office market at the end of 200635 the following conclusions were drawn: 34 For the purposes of the CIRO DKM carried out a survey of the larger property agents in 2007 but the information was not comprehensive enough to ascertain the extent of office building across the State. 35 Dublin Office Market Report, Jones Lang LaSalle, January 2007. PAGE 28 • The total completions of new office buildings in Dublin increased by 30% to 143,919 square metres, almost all (93%) of which were located in the core Central Business District (CBD = Dublin 2 and 4) area. The total space due to be completed in 2007 was equivalent to 272,621 square metres, of which 43% is located in the CBD. A more recent report36 on trends in the first half of 2007 reported total office completions at 138,307 square metres, 53% of which had been prelet. This level is already equivalent to 96% of total completions in 2006. Again the majority (59%) of the new space was provided in the CBD. • The dominance of the Dublin CBD is evident from the level of demand for offices in the area, with an estimated 53% of the total take-up in 2006 occurring in this area. The key sectors driving demand were the Finance and Insurance, Public Administration and the Media sectors. Vacancy rates had dropped to 12% in the Dublin office market at the end of 2006 from 15% at the end of 2005. A further decline is expected in 2007. The lowest vacancy rates were in the city centre (10%). The supply pipeline in Dublin, in terms of floor area of planning permissions granted at the end of 2006 for the 2007-2009 period, was equivalent to only 1.5 years of office building at 2006 completion rates. Based on the estimated stock of office building in Dublin, the supply pipeline was equivalent to only 8% of the estimated stock at the end of 2006. The level of office space under construction declined by 32% at the end of June 2007 compared with the end of June 2006, evidence that the pace of office development is beginning to moderate. • • Outside of Dublin other areas are benefiting from the National Spatial Strategy as the main gateways seek to become significant business locations in their own right. The plan to develop the Cork Docklands is progressing with a Masterplan which predicts 6,000 new residential units and 560,000 square metres of non-residential space, much of it comprising large-scale office buildings. Significant development is likely to take place over the coming years as the main land owners in the area submit their planning applications over the next six to twelve months. The Dublin Docklands The take-up of office space in the Docklands area was very strong during 2006 with a number of major tenants moving into the area. As a result there has been a significant increase in the number of people living and working in the area during 2006. This trend is expected to continue during 2007 as the area becomes a major centre of employment over the coming years as further leading businesses locate there. The momentum behind the Dublin Docklands construction programme continues with a number of major projects due for completion over the next few years. The main developments include the following: • The construction of the Luas extension from Connolly to the Point (Line C1) which is underway. The contract for the €400 million National Conference Centre, catering for around 8,000 delegates, was awarded earlier this year. The Centre will be located at Spencer Dock on the north side of the Liffey and will include a 2,000 seat auditorium, two 450-seat multimedia halls, exhibition spaces, conference banqueting halls, meeting and lecture rooms. The site will also house a hotel expected to cater for people who use the facility. Construction commenced this year with a completion date of around 2010. • 36 Dublin Office Market Report – H1 2007 Jones Lang LaSalle. PAGE 29 • Plans are underway for the €800 million Point Village development, which will cover a 12 acre site surrounding the Point Theatre and is expected to include a 30,000 square metre shopping centre, 13,000 square metres of offices, a 50 bed hotel and a 12 screen multiplex cinema. The development will have as its signature building the Watchtower which was granted planning permission earlier this year. The Tower is the final piece of the Point Village and will include 500 square metres of office space and luxury apartments. As part of the Point Village the Point Theatre is to be expanded to a 15,000 capacity. Another flagship project is to be delivered in the Docklands is the construction of the U2 Tower in the Grand Canal Dock area. The Tower will consist mostly of apartments and will house a recording studio for U2. The anticipated completion date is 2009. George’s Dock beside the IFSC has been chosen as the location for the new Abbey Theatre. • • More generally, considerable construction activity continues in the Grand Canal area itself, including the construction of the Grand Canal Theatre, the Manuel Aires Mateus designed 5-star hotel, and the Grand Canal Square. The most recent Dublin Docklands Newsletter37 lists approximately 60 projects which were granted permission during 2006. As well as the projects listed above, these projects include a variety of buildings including mixed-use schemes, retail, restaurants and wine bars, offices, street furniture and a basement carparks. All of this augurs well for the prospects for construction over the next two to three years, particularly in the City Centre. Semi-State agencies The volume of new investment in buildings by semi-State agencies, also included under nonresidential construction, is projected to increase in 2007 (+12%), following a decline in construction output in 2006 (-26%). Much of this strong growth is down to an increased Exchequer allocation for maintenance of the IDA’s property portfolio, as well as for the capital investment plans of other development agencies. In the light of the above trends and developments the estimates for construction output suggest that the national office market will perform strongly again this year, with a volume growth rate in office building of 25% projected for 2007 following an equally impressive performance in 2006 (+26%). Based on these performances, 2007 will be the third year to record exceptional growth in the volume of office building. 2.2.3: Commercial - retail The stock of retail shopping space has increased substantially in Ireland over the past number of years. The growth in the volume of construction output from retail building activity is testament to this, with estimates in the CIRO suggesting that the overall volume of retail buildings put in place increased by 80% in the four years to 2006. Industry sources suggest that Ireland currently has the third highest shopping centre space per capita in Europe with a figure of almost 306 square metres gross letting area for every 1,000 persons38, just below Holland and Sweden. A number of factors continue to drive retail development, not least the very buoyant economy, and the increases in employment and disposable incomes which have generated strong retail sales and consumer spending. The total volume of retail sales increased by 6.2% in 2006 and by 15% in the last three years. The volume of consumer spending rose by 5.7% in 2006 after expanding by 7.3% in 2005. Despite the upward trend in interest rates and the weakness in consumer sentiment which it and other factors have generated, the demand for retail space from Irish companies looking to expand as well as from UK and European retailers remains strong. However, the pace of growth in consumer spending, while robust in 2007, is expected to moderate in 2008 as growth in employment and disposable incomes are likely to be much lower next year. 37 Dublin Docklands Newsletter, Issue 26, April 2007 38 Jones Lang LaSalle Research, December 2006. PAGE 30 The year 2005 was an exceptional year for the growth in shopping centre stock, with over 255,000 square metres (+16%) completed that year. The growth of shopping centres looks set to continue, with approximately 144,570 square metres of space currently under construction and due to open in 200739. There is a further approximately 227,000 square metres under construction which is due to open beyond 2007. The same report estimates that 21% of the shopping centre supply pipeline is in the East region. The top ten shopping centre developments currently under construction are listed in Table 2.4. There are other smaller developments which are due to open this year, including the 14,000 square metre Citywest Shopping Centre in South Dublin and the 10,500 square metre Cornmarket Centre in Cork. In addition to the new facilities being developed, refurbishment programmes are planned or underway in many older shopping centres anxious to compete with the more modern shopping centres. Table 2.4: Top 10 Shopping Centre Schemes Currently Under Construction in Ireland Town Dublin Dublin Waterford Arklow Charleville Portlaoise Kilkenny Athlone Limerick Limerick Scheme/Address Total Size (m2) 39,948 39,800 37,718 35,516 32,462 30,158 25,084 23,226 23,225 23,000 Opening Year 2009 2007 2008 2007 2007 2008 2007 2007 2009 2007 Millennium Mall, O’Connell Street, Dublin 1 Glasshaus, Tallaght Town Centre Ferrybank Shopping Centre Bridgewater Centre, North Quay, Arklow, Wicklow Charleville Town Centre, Cork The Maltings, Portlaoise MacDonagh Junction, Dublin Road, Kilkenny Athlone Town Centre, Westmeath Parkway Valley Shopping Centre, Limerick Coonagh Cross Shopping Centre, Limerick Source: Jones Lang LaSalle. The development of retail parks has been a growth area in Ireland during the past decade. The year 2005 was an exceptional year, with over 23% of the total retail warehouse stock (approximately 110,000 square metres) developed in the last decade opened in that year. Further development continued during 2006 and there is now reported to be around 91,000 square metres of retail warehousing in for planning throughout Ireland40 with a number planned for some of the larger towns which will see their first retail parks open in 2007 and 2008. A significant development during 2007 was the granting of permission by An Bord Pleanála for a 30,000 square metre Ikea store in North County Dublin on a 20 acre site. This store is due to open late 2008. Given the substantial amount of retail space already put in place across the country, growth in the volume of retail construction is expected to moderate this year to around 5% from an increase of 20% in 2006. 2.2.4: Tourism The vast bulk of private sector investment in tourism is accounted for by hotels. Nationally, Fáilte Ireland figures indicate that there were a total of 868 hotels supplying a total of 54,106 bedrooms at the start of 2007. According to their own estimates a further 49 new hotels are scheduled to open in 2007 adding an additional 4,717 bedrooms to the country’s hotel stock. This will represent a 6% increase in hotel stock and a 9% increase in bedroom stock. Based on an indicative cost per room, the potential value of investment in the sector is in the region of €825 million41. As hotels are likely to be constructed over at least a two-year period, we estimate the value of hotel construction in 2007 at around €500 million. 39 Jones Lang LaSalle Retail Report, December 2006. 40 Savills Hamilton Osborne King Property Outlook, Summer 2007. 41 Figures supplied by BDO Simpson Xavier suggest the typical hotel costs in the region of €150,000 to €200,000 per room to develop. PAGE 31 The Dublin hotel market, in particular, has enjoyed a period of sustained growth and expansion over the last decade. Both the supply and quality of hotels in Dublin has increased dramatically to the point where there are now 153 hotels in Dublin supplying a total of 16,769 bedrooms. This compares to 93 hotels and 6,300 bedrooms in 1997. Recent high profile closures are expected to result in the loss of approximately 8% of Dublin’s bedroom stock as well as a proportion of its conference facilities. Given the expected growth in tourist numbers this would imply that the short to medium term outlook for high hotel occupancy levels is extremely positive. This should boost revenues in the sector and possibly encourage the development of further new hotel in the medium term42. Other tourism related construction output covers expenditure on the construction and development of holiday accommodation, resorts and other amenities and tourism infrastructure. Public investment in tourism infrastructure captures funding provided by the Department of Arts, Sport and Tourism, such as: • Investment by Shannon Development, the regional tourism authority for the Shannon region, in tourism product initiatives; Funding allocated to Fáilte Ireland for tourism infrastructure, including refurbishment of the Tourist Information Offices network; and Funding for heritage projects, including Historic Properties, National Monuments, Parks, Inland Waterways and Wildlife Centres as well as conservation works. • • A key public sector project here, which comes under the aegis of the Department of Arts, Sport and Tourism, is the National Conference Centre (NCC), referred to earlier, which commenced construction this year and will be completed by 2010. At almost half a million square feet (44,000 sq. metres), the NCC will be the largest single-use building constructed in Dublin for decades. It is a PPP project whereby the successful tenderer, Spencer Dock Convention Centre Dublin Limited, will design, build and finance the NCC and will operate and maintain it for a period of 25 years, after which the facility will revert to the State. This facility should also attract further hotel operators to Dublin. Taking into account the tourism related construction output that it is possible to value, the overall volume of construction output associated with tourism investment is forecast to increase to €764 million or by almost 35% in 2007, after increasing by 26% in 2006. 2.2.5: Agriculture The numbers employed in the agricultural sector continue to plummet - total persons employed43 stood at 116,700 (seasonally adjusted) in Q2, 2007, down from the peak level of 123,400 in Q4, 2003. Research by Teagasc reported a decline of almost 26% in the national average family income in 2006, a year in which direct subsidies accounted for 98% of family farm income. However, farmers are continuing to invest a high proportion of their net incomes in their farm businesses on buildings, machinery, quotas, land and other miscellaneous capital items. Each year Teagasc carry out a survey to ascertain farmers’ investment intentions or plans for the coming year44. In late 2006, over 32,300 farmers stated that they planned on investing an average of €35,650 per farm in 2007, giving a total investment of €1,154m. This is an exceptional level of investment and compares with 23,320 farmers planning €26,240 investment per farm in 2006 giving a total investment of €612m. 42 Irish Independent article ‘the Future Outlook for the Dublin Hotel Market by Austin Hickey, BDO Simpson Xavier. 43 Including forestry and fishing. 44 The survey is conducted on farmers participating in the National Farm Survey (NFS) and in 2006 the survey was carried out on a random sample of 1020 farms representing 110,000 farms nationally. Results are compared to their investment plans at the same time last year i.e. planned investment for 2006 versus planned investment for 2007. PAGE 32 The total planned investment in farm buildings in 2007 was €948m. or 82 percent of the total planned investment in farms, according to the Teagasc Survey. Possible reasons for the increase in planned investment in farm buildings are the introduction of the Nitrates Directive, compliance with the Single Farm Payment, increased participation in REPS and very importantly, the closure of the Farm Waste Management Scheme at end of December 2006 – all of which require farmers to keep their farms in a good environmental and agricultural condition. All of these factors have implications for the standards of buildings and are giving rise to the increase in investment. Accordingly there is a substantial increase in the volume of agricultural building output projected for 2007. Adding investment by the OPW in arterial drainage, which is included under agriculture, the projection for 2007 is for a considerable increase in the volume of construction output associated with investment in farm buildings. The total is estimated at around €695 million or by 134% after adjusting for tender price inflation. While it seems difficult to justify this level of investment against the background of falling incomes, much of it is been driven by EU Directives and is required for compliance purposes. While this forecast is unusually high, the estimate has been reduced and is lower than the planned figure of €948m. quoted in the Teagasc Survey. Other evidence of the sizeable increase in investment is available from the planning permissions data which show the total floor area planned for agricultural buildings up by 333% to 2.9 million square metres in the year to end March 2007 compared with the previous twelve months. 2.2.6: Private non-residential summary Combining the prospects for each individual sector, the overall volume of new private nonresidential output is forecast to rise by 28.5% in 2007, following close to a 20% increase in 2006. All of the sub-sectors are expected to contribute to this strong performance. Figure 2.7: New private non-residential construction output, 2003-2007E (constant 2005 prices, €m) 2000 1800 1600 1400 1200 1000 800 600 400 200 0 2003 Industry Source: DEHLG, DKM 2004 Commercial 2005 Agriculture 2006 Tourism 2007E PAGE 33 2.3: Productive infrastructure Investment in productive infrastructure captures the total output from all civil engineering projects. It includes spending on roads, water services, airports, seaports and harbours, as well as investment by the respective Semi-State organisations responsible for transport, energy and telecommunications. The total also includes private sector investment which arises under this heading, such as capital investment by private sector companies involved in the energy and telecommunication sectors. Overall investment in construction related productive infrastructure projects amounted to €5.3bn in 2006 of which €4.1bn was on new projects and major improvement works. The total investment is predominantly funded by the provisions in the Public Capital Programme and the National Development Plan. Public sector construction represented 15% of total construction output in 2006 compared with 17% in 2000. The overall volume of investment in new productive infrastructure projects increased by 2.7% in 2006 compared with 2005. Apart from public transport, all components recorded strong growth, led by airports (+36%), telecommunications (+22%) and water services (+7%). The total volume of new road investment was up by 4.4% in 2006. Investment in new productive infrastructure projects is forecast to increase by 2.6% in volume terms in 2007. Allowing for inflation of around 4%, on average, for civil engineering projects, this is equivalent to an increase in the value of new investment of 6.4% Figure 2.8: New productive infrastructure, 1999-2007E (constant 2005 prices, 1999 = 100) 230 210 190 170 150 130 110 90 70 50 1999 Roads Source DEHLG, DKM 2000 2001 2002 2003 2004 2005 2006 2007E Water Services Energy Transport (exc. Roads) Telecomms 2.3.1: Roads Investment in the road network represents the largest element of the State’s infrastructure investment programme, accounting for 21% of the total planned for this year. 2006 was the first year of the Government’s transport investment programme, Transport 21. Fourteen major projects were completed, including the Dublin Port Tunnel, the Naas Road Upgrade, the Ashbourne bypass and the Fermoy/Rathcormac Bypass. A further twelve schemes were started, more than three times the number of schemes started in 2005. PAGE 34 The planned investment in roads in 2007, according to the 2007 PCP is €2.28bn. This represents an almost 12% increase in value terms on the corresponding investment figure in 2006. This figure includes land costs and investment in signs, road-markings and lighting as well as investment in the actual construction of roads. It is this last element only which is captured in the CIRO. Road investment - the largest share of infrastructure spending € million National roads Non-national roads PPP contribution Total road investment % of total infrastructure spend 2006 1,486 437 120 2,043 25% 2007 1,524 478 280 2,282 21% Value % change +2.6% +9.4% +133.3% +11.7% Information obtained from the NRA and the Department of Transport, shows that the construction related element will amount to a total investment of €1.81bn on road construction this year covering the national primary, secondary, non-national road network and PPP projects. This represented an annual increase of just 1.5% after adjusting for road construction inflation estimated at 4% this year and excluding land acquisition costs. The national roads investment figure this year again reflects the priorities in the Government’s transport investment programme, Transport 21. The investment will allow for the completion of works on nine schemes this year with a combined length of over 100 km. The funding will also allow for the commencement of work by the NRA on seven schemes with a combined length of 215 km. Among the national road projects to be completed this year are the Ennis Bypass, the Arklow Gorey Bypass and the 28 km Kinnegad to Kilbeggan dual carriageway. The national roads allocation allows for the continuation this year of work on 343 km of road projects, including the major inter urban network routes linking Dublin to Cork, Galway, Limerick, Waterford and the Border. Key project due to start this year are listed in Table 2.5. Priority has been given to works to improve the M50. Phase 1 of the upgrade is currently underway with Phases 2 and 3 due to start this year. The Table includes a number of PPP schemes which were awarded this year. Phase 2 of the M50 Upgrade was to be awarded in September. Table 2.5: Key national road schemes to start in 2007 Scheme Road type Length (km) Completion (Estimated) N3 Clonee to North of Kells scheme (PPP) N4 Leixlip to M50 N6 Galway to Ballinasloe (PPP) M7/M8 Portlaoise to Cullahill/Castletown (PPP) M50 Upgrade Scheme Phase 2 (PPP) Phase 2 (PPP) M50 Upgrade Scheme Phase 3 (N3 to N4) N9/M9 Waterford to Knocktopher Total kms Source: National Roads Authority www.nra.ie Motorway Dual Carriageway Dual Carriageway Motorway Motorway Motorway Motorway 60 8 56 40 25 2 24 215 2010 2009 2010 2010 2010 2008 2008 The road investment figure includes €478 million for improvements and new roads under the non-national roads programme. Almost one-fifth of this total is allocated to schemes which make a significant contribution to the implementation of the National Spatial Strategy. PAGE 35 2.3.2: Water services The investment provision for water and sewerage services is provided for in the allocation for Environmental Services in the PCP. It aims to provide an adequate supply of water of suitable quality for commercial, domestic, industrial and other users, and to provide systems for the safe and adequate disposal of sewage and other water borne wastes. The balance of the Environmental Services allocation consists of investment in the development of waste management infrastructure and landfill remediation by local authorities and is included under Local Authority Services for the purposes of estimating construction output in the CIRO. The total investment in water and sewerage services reflects commitments in the NDP 20002006 and successive Water Investment Programmes over the same period, announced by the Minister for the Environment, Heritage and Local Government. The current Water Services Investment Programme, covering the three-year period 2005-2007, amounts to €5.1 billion in new water and sewerage infrastructure. The programme contains 899 water and sewerage schemes across the country and includes: • 59 schemes at construction at the time the programme was announced (16 December 2005), 193 schemes to commence construction during 2006, 191 schemes to commence construction in 2007. • • The construction related investment component peaked at €560m of investment in new projects in 2002. The immediate outlook for 2007 is for investment of just under €500m, which represents a decline of 3.4% in the volume of construction output associated with water and sewerage schemes compared with the 2006 outturn. 2.3.3: Airports and seaports The overall investment in airports reflects major new developments and improvement works by the Dublin Airport Authority at the three State Airports of Dublin, Cork and Shannon and a very modest provision for capital development works at a number of regional airports. Significant investment is planned in airports over the next decade, reflecting plans by the Dublin Airport Authority to improve passenger services at Dublin Airport. The first tranche of new investment is expected to commence in the final quarter 2007 with construction of the new Terminal 2, including the new Pier E, in time to deliver an operational facility by the Spring of 2010. The total investment in the project, approximately €610 million (2006 prices), will generate a substantial increase in the volume of airport construction output over the next three years. When other airport projects in hand are taken into account, including the new Pier D at Dublin Airport due to open in December, the total volume of construction output from new airport projects and major works is forecast to increase by 6.6% in 2007. The total construction related investment in new and major works in seaports and commercial harbours is estimated at €42 million in 2007, an increase of almost 19% in volume terms. Expenditure this year will continue to concentrate on port development, the alleviation of capacity shortfalls and infrastructural improvements. PAGE 36 2.3.4: Energy Almost two-thirds of the construction related investment in new energy infrastructure represents investment by the ESB and Bord Gáis Éireann in enhancing the State’s electricity and gas distribution and transmission networks. The total also includes investment by private companies in the energy sector. The total PCP provision for the energy sector is forecast at €1.39 billion this year. Taking the estimated construction related investment element of this only and combining it with an estimate for the construction related investment by private sector companies, generates a total figure of €1.21 billion in 2007. This figure is 9% lower in volume terms than the estimated outturn for 2006 due partly to the completion of two new power stations by Tynagh Energy Limited and Aughinish Alumina last year. However, the estimate does include the construction related investment in the new power station (Huntstown 2) in Dublin due to be commissioned in the fourth quarter of 2007 as well as significant investment underway in wind energy projects. 2.3.5: Public transport The provision for construction related investment under public transport includes capital allocations for the CIE Group, the Railway Procurement Agency (RPA), which has responsibility for the procurement of new light rail and metro projects, and the Dublin Transportation Office, responsible for co-ordinating and implementing the agreed integrated transport strategy for the Greater Dublin Area. It is important to bear in mind that the PCP allocation for public transport projects of €643 million in 2007 also includes significant non-construction related investment in rolling stock, the Dublin and national bus fleet (by Dublin Bus and Bus Éireann), intercity railcars, the introduction of longer trams on the Luas Red line route as well as the development of Integrated Ticketing, Real Time Passenger information and travel and parking information systems. The CIE share, accounting for over three-quarter of the total spend, represents construction related investment in the suburban and mainline rail network and the bus network in Dublin and the regions, as well as investment in the DART upgrade, track renewal, upgrading of signalling, bridge renewal, level crossing improvements and improved safety management across the entire network. Projects under the Rural Transport Pilot Project scheme aimed at improving accessibility in public transport are also included. Taking the construction related investment only, it is estimated that the total volume of construction output from new public transport projects and major improvement projects is forecast to rise significantly in 2007 (124%), reflecting project commitments under Transport 21. The latter includes the ongoing developments of major projects which began in 2006 under Transport 21, such as the Kildare Route project, New Docklands Station and the Portlaoise train care depot. Projects which commenced this year include the Cork Commuter services development and Phase 1 of the Western Rail Corridor (Ennis-Athenry). The third and final component of the public transport provision reflects various projects funded by the Dublin Transportation Office (DTO) such as Quality Bus Corridors (QBCs), improved facilities for pedestrians, cyclists and disabled persons and other traffic management projects. PAGE 37 2.3.6: Telecommunications Activity in the telecommunications sector reflects the entry of new players into the market following liberalisation and thus includes a significant private sector investment component. The estimated volume of investment in new construction projects recovered in 2006 following a decline in 2005. However, there is a significant PCP provision (€46m.) under the Information and Communications Technology Programme for the rollout of broadband infrastructure in the regions in 2007. Although the construction spend estimates here also include investment by private telecommunications companies such as Eircom, O2, Vodafone and Meteor, the total investment in the telecommunications construction projects is expected to decline in 2007 (-15%). 2.3.7: Productive infrastructure summary Overall the volume of construction related investment from projects under the heading of new productive infrastructure is projected to increase by under 3% in 2007 following a similar increase in 2006. The categories recording the strongest growth in construction output are public transport and ports and harbours, although the largest investment in absolute terms is in roads and energy projects, which between them account for two-thirds of the total investment in new productive infrastructure projects. Investment in all new transport (roads, public transport, airports and seaports) projects at €2.4 billion represents 56% of the total investment in new productive infrastructure projects. Figure 2.9: New Productive Infrastructure Output 2003-2007E (constant 2005 prices, €m) 1600 1400 1200 Energy Roads 1000 800 600 400 200 0 2003 Source: DEHLG, DKM Transport (excl. Roads) Water & Sanitary Services Telecomms 2004 2005 2006 2007E 2.4: Social infrastructure Activity in this sector is also determined by the Public Capital Programme, and includes capital investment in education, hospitals, public buildings, local authority (LA) services and public sporting facilities. Following a decline (-5%) in the volume of construction related investment from new social infrastructure projects in 2006, investment is forecast to rise substantially in 2007 (+35%) with all categories recording strong growth. PAGE 38 Figure 2.10: New social infrastructure 1999 – 2007E (constant 2005 prices, 1999=100) 220 200 180 160 140 120 100 80 1999 2000 Education 2001 2002 2003 Health 2004 2005 2006 2007E Public Buildings Source: DEHLG, DKM 2.4.1: Education The PCP projected provision for capital investment in education in 2007 is €757m compared with the outturn of €675m in 2006 - an increase of 12% in value terms. The funds are used to improve accommodation and facilities in primary schools and for the construction of new schools, extensions and associated equipment in secondary schools. The allocation at third level is to fund capital works in the institutes of technology and university sectors as well as the capital element of the Programme for Research in Third Level Institutions (PRTLI). The types of buildings funded at third level comprise sports buildings, engineering/informatics buildings, student accommodation, and research buildings. By far the largest allocation, at an estimated 40% of the total spend, is allocated for the national school building programme, with just over 30% of the total allocated to secondary schools. Only the construction related investment element is measured. Thus site costs and investment in equipment, furniture and IT are excluded. There is also non-grant aided private sector investment in third level facilities, although this is expected to diminish this year, accounting for approximately 23% of total new investment in educational buildings. The overall volume of new construction output arising from investment in educational buildings is projected to rise modestly (+2.6%) in 2007 following an equally modest rise (+1.5%) in 2006. 2.4.2: Health A failure by the Health Service Executive (HSE) to spend its full allocation on capital projects in 2006 resulted in a decline in the volume of construction related output from hospital building projects last year. However, the total PCP provision for hospitals and health facilities in 2007 is €531 million, an increase of 25% in value terms on 2006. Although the capital spend by the HSE is reported to be down in the first five months of 2007, all monies are expected to be spent by the year-end. Accordingly, the total construction output from investment in hospital buildings is projected to rise by just over 15% in volume terms this year. PAGE 39 2.4.3: Public buildings There is a substantial increase in the volume of construction output arising from investment in public buildings in 2007, led by an almost twofold increase in the level of investment by the Office of Public Works (OPW). Expenditure by the OPW includes investment in the provision and refurbishment of accommodation for government departments and offices and for services under their aegis, as well as a provision for the decentralisation programme. The allocation also includes construction related investment by the Department of Justice, Equality and Law Reform on the refurbishment of prisons and courthouses as well as the commencement of work on new projects by the Department of Health under the childcare investment programme, which includes crèches. A range of building and engineering works carried out by the Department of Defence for the Defence Forces is also included. The overall volume of construction output arising from investment in new public buildings, including major renovation of existing buildings, is projected to rise by 64% in 2007 following a much more modest increase in 2006 (+7%). The 2007 public building programme includes funding for the following: • Ongoing works under the decentralisation programme as well as the commencement of a number of new buildings to accommodate the following: – Completion of the relocation of the Irish Prison Service buildings to Longford; – Relocation of the Department of Education and Science to Athlone; – Relocation of the Department of Arts, Sport and Tourism to Killarney; – Relocation of the Department of the Environment to Wexford. • The on-going prison refurbishment programme and additional capacity at Portlaoise, Castlerea Remand Wing, Loughan House in County Cavan and Shelton Abbey in County Wicklow. Construction of new garda station buildings and major renovation and improvements to individual garda stations. Refurbishment schemes for the Department of Agricultural and Food, Transport, Foreign Affairs, Justice Equality and Law Reform and the Revenue Commissioners, as well as for other state owned properties, such as the Marine Institute and National Cultural Institutions.. €32m. for activities under the Flood Relief Programme. Ongoing construction and renovation works at a number of courthouses around the country, including Fermoy, Thurles and Kilkenny. • • • • 2.4.4: Other social infrastructure The remaining categories under social infrastructure comprise local authority services, investment in the Gaeltacht and investment in public sports facilities funded by the Department of Arts, Sports and Tourism. Investment in local authority (LA) services covers work carried out by local authorities or by private contractors on behalf of local authorities and includes construction work associated with local authority offices, public libraries, the fire services and special amenity projects. Grants for waste management, waste disposal infrastructure and urban renewal works are also included. The Waste Infrastructure Capital Grants Scheme provides assistance at a rate of 75% of capital costs for the provision of waste recycling infrastructure, such as bring banks, civic amenity sites, PAGE 40 transfer stations, material recovery facilities and biological treatment plants. Overall investment in LA services is expected to rise considerably in 2007 (+91%), mostly due to a significant increase in the level of investment by local authorities in their own office accommodation, and in the allocation for waste recycling and disposal facilities. The construction related investment under sport includes a €50m. allocation for the redevelopment of the Lansdowne Road Stadium, which commenced this year. There is also capital funding provided for the development of horse and greyhound racing facilities across the country. The allocation also includes grants to local authorities for the provision and renovation of swimming pools. Funding from the National Lottery is provided for other sporting bodies, local clubs and centres as well as national, regional and municipal facilities. The types of local projects being funded include multi-purpose sports halls, community recreation halls and tennis courts. Although the vast bulk of sporting facilities are provided by the private sector, including private sporting and leisure clubs and voluntary sporting organisations, there is no estimate available for private investment in sporting facilities. Overall investment in the construction of public sporting facilities is expected to rise considerably in volume terms in 2007 (+65%), following an equally impressive volume increase in 2006 (+35%). Under the category for the Gaeltacht, the construction related element of approximately €92m covers the improvement of strategic Gaeltacht roads, access roads, village renewal and marine works as well as the provision and refurbishment of community and recreational facilities in Gaeltacht areas. The volume of construction output from new projects classified to the Gaeltacht areas is expected to rise sharply in 2007 (+42%). 2.4.5: Social infrastructure summary Overall the volume of construction output from new and major refurbishment of social infrastructure building projects is projected to rise strongly in 2007 (+33%). This is the strongest growth projected for 2007 of all of the main categories of new construction output, although social infrastructure investment accounts for only 18% of the total value of new construction output in non-residential buildings. Figure 2.11: New social infrastructure output, 2003-2007E (constant 2005 prices, €m) 700 600 500 400 300 200 100 0 2003 Education 2004 Health 2005 Public Buildings 2006 2007E Other Social PAGE 41 2.5: Repair, maintenance and improvement Despite the improvements that we continue to make each year to the methodology for ascertaining RM&I investment levels in the non-residential sector, we believe that there is insufficient data available to accurately gauge investment levels in this sector. We have reservations as to the accuracy of the figures derived for RM&I as we suspect that some of the figures for new investment may include some RM&I expenditure and vice versa. However, while we will keep publishing separate figures for both new and repair and maintenance work (Appendix 2), we urge caution in relying on the separate figures for RM&I. Tables 1.6 to 1.9 (Section 1) present construction output figures including expenditure on RM&I. The figures presented suggest that there is a slowdown in the pace of RM&I investment underway in 2007. While strong growth in RM&I investment was recorded by the housing sector (+14%) and the non-residential sector (+15%) in 2006, growth in the volume of RM&I investment is expected to slow in both the housing (+4%) and the non-residential (+5%) sectors this year. As a result, the total investment in RM&I projects was up significantly in 2006 (+14%) but is forecast to increase by a much lower rate in 2007 (+4%). 2.6: Overall construction prospects for 2007 These estimates imply that the volume of construction output in 2007 will be marginally down in 2007 (-1.5%) on the corresponding level in 2006, following a volume growth rate in 2006 (+5.9%) which was just ahead of the growth in GDP (+5.7%) last year. This output estimate reflects the decline forecast for new residential construction (-13%) but implies that the very positive pace of growth in investment in non-residential construction (+ 15%) will not be sufficient to offset the decline in residential construction. Table 2.6: Annual change in construction output, 2003-2007E (%) Value 2003 2004 2005 2006 2007E Source: DEHLG, DKM Inflation 5.7 8.1 5.6 6.1 3.7 Volume 5.8 6.7 8.9 5.9 -1.5 11.8 15.3 15.0 12.4 2.1 The next Table shows the respective shares for each of the broad sectors within construction. The contraction in new housebuilding expected this year is already expected to reduce the new residential share from 69% in the peak year 2006, to 62% this year. With the contraction in new housebuilding expected to be more pronounced in 200845, it will be essential that public and private non-residential construction projects are delivered on time in an effort to minimise the negative impact on employment in the sector, as the adjustment to more sustainable levels of housebuilding takes place. We explore the medium-term prospects for construction output and employment in Section 4. 45 See Medium Term Outlook Section 4. PAGE 42 Table 2.7: Construction output summary: growth and shares 2006 Current prices. €m New construction output: Residential construction output Private non-residential construction output Productive infrastructure output Public non-residential construction output Total new construction output RM&I Construction output: Residential RM&I output Private non-residential RM&I output Productive infrastructure RM&I output Public non-residential RM&I output Total RM&I construction output Total construction output Residential RM&I output Private non-residential RM&I output Productive infrastructure RM&I output Public non-residential RM&I output Total construction output 19,500 3,311 4,128 1,471 28,409 2006 2007 Volume growth % 2006 2007 Shares of new construction output 69% 12% 15% 5% 100% 62% 15% 15% 7% 100% +3% +20% +3% -4% +4% -13% +28% +3% +33% -3% 4,545 961 1,154 419 7,080 +14% +16% +20% +3% +14% +4% +11% 0% +8% +4% RM&I shares % 64% 64% 14% 14% 16% 16% 6% 6% 100% 100% Share of total % 68% 63% 12% 15% 15% 15% 5% 7% 100% 100% 24,045 4,272 5,282 1,889 35,489 +5% +19% +6% -3% +6% -+9% +25% +2% 27% -2% Figure 2.12: Total construction output, 1999-2007E (constant 2005 prices, 1999=100) 170 160 150 140 130 120 110 100 90 80 1999 Source: DEHLG, DKM Total Construction Output New RM&I 2000 2001 2002 2003 2004 2005 2006 2007E PAGE 43 Section 3: Employment in building and construction Construction employment growth moderated in the year to Q2 (Mar-May) 2007 to its lowest annual rate since Q4 2003. Employment in the year to Q2 2007 grew by 17,600 to 280,300, an annual increase of 6.7%, down from an annual rate of 11.2% in each the two previous quarters. The growth in construction employment has generally been stronger than in the economy as a whole for most of the last ten years, although it has also been a good deal more volatile. But since Q2 2005 the gap between the two series has narrowed considerably. However, the latest quarterly figures (seasonally adjusted) show employment declined by 0.5% in Q2 2007 to a total of 283,500. This is the first quarterly decline since Q2 2002 and follows a quarterly growth rate of 1.7% in the preceding quarter and 3.7% just one year previously in Q2 2006. There are likely to be further declines over the remainder of the year, as housebuilding activity weakens over the coming months. That said, construction accounts for 13.4% of total employment. When other indirect off-site employment is included and unemployment is assumed to be in line with the national average (4.6%), the sector accounts for almost 20% of the total Irish labour force. The growth rates for employment in small firms employing 5 or more persons are significantly lower than those recorded by the QNHS, suggesting that growth is concentrated amongst small firms and the self-employed. We suspect, however, that the effects of the slowdown in new housebuilding on employment in smaller firms have yet to come through in the QNHS figures. (We look at the medium-term prospects for employment in Section 4). 3.1: Employment levels Data sources There are two official sources of sub-annual data on direct employment numbers in construction – the Quarterly National Household Survey (QNHS) and the monthly Construction Employment Index. The QNHS is a household-based survey of the entire labour force, while the Construction Employment Index is derived from an establishment survey of construction firms with more than 5 employees. The Index is thus less comprehensive than the QNHS; being a monthly survey, however, it is a more up-to-date indicator. Another relevant official source is the quarterly Earnings and Hours Worked in Construction. Employment in construction is a function of both numbers employed and hours worked. One might have increased numbers engaged in the sector, but if, for example, there is a move to more part-time jobs or a reduction in overtime levels, then employment in terms of total labour input could actually be shrinking. In what follows the data from these three sources are analysed, followed by a consideration of indirect and total employment in construction. 3.1.1: Direct employment in building and construction Construction employment over the last decade or so has experienced sustained growth, as summarised in Table 3.146. By Q4 (Sep-Nov) 2006 construction employment accounted for 13.6% of total employment across the economy, up from 10% at the beginning of the decade. Construction employment growth moderated in the year to Q2 (Mar-May) 2007 to its lowest annual rate since Q4 2003. Employment in the year to Q2 2007 grew by 17,600 to 280,300, an annual increase of 6.7%, down from an annual rate of 11.2% in each the two previous quarters. PAGE 44 46 Methodological differences between the LFS and the QNHS make the two series difficult to compare. The table uses CSO data labour force and employment estimates for April of each year back to 1994 consistent with the methodology in the QNHS. Table 3.1: Direct employment in building and construction (not seasonally adjusted) Employment (000's) LFS 1994 1995 1996 1997 QNHS 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: CSO, QNHS and LFS. % change year-on-year % of total employment 7.5% 7.5% 7.6% 8.0% 8.4% 8.9% 9.9% 10.5% 10.3% 10.7% 11.2% 12.6% 13.0% 13.4% April April April April Mar-May Mar-May Mar-May Mar-May Mar-May Mar-May Mar-May Mar-May Mar-May Mar-May 91.5 96.6 100.8 110.4 126.1 142.1 166.2 180.0 182.2 191.4 206.0 242.4 262.7 280.3 5.6% 4.3% 9.5% 14.2% 12.7% 17.0% 8.3% 1.2% 5.0% 7.6% 17.7% 8.4% 6.7% Between April 1994 and Q1 (Dec-Feb) 2007, construction employment grew from 91,500 to 282,100 which amounts to a cumulative growth of 208%, or an average of 9.2% per annum. This compares with 4.2% per annum for the economy as a whole, making construction the fastest-growing sector in the economy over the last decade or so. The construction sector has accounted for 22% of the net increase in jobs over the period, more than any other sector. The strength of growth in construction employment is very apparent during the height of the “Celtic Tiger” boom (1998 to 2000), at well over 10% per annum. In the year to Q2 (Mar-May) 2000, construction generated almost 30% of the net employment growth in the economy. Figure 3.1 illustrates the rate of growth in construction employment versus the rate in the economy as a whole in recent years. Growth in construction employment has clearly been stronger than in the economy as a whole for most of the period, although it has also been a good deal more volatile, with significant peaks and troughs. The strongest single year of growth in the sector was the year to Q2 2005, during which construction employment grew by almost 18%, and accounted for over 39% of the net increase in jobs in the entire economy. Figure 3.1: Construction employment growth versus total employment growth (% year-on-year, sa) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1998Q4 1999Q1 1999Q2 1999Q3 1999Q4 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 Construction Source: CSO QNHS. Total PAGE 45 It is noteworthy that since Q2 2005 the gap between the two series has narrowed considerably, as a result of a rapid deceleration in construction employment growth. However, there has been a significant upturn in employment growth in the second half of 2006. Employment growth stabilised at around 10% to 11% per annum in the three quarters to Q1 2007, before moderating again in Q2 2007 to 6.7%. As a result the gap between construction employment growth and overall employment growth has narrowed significantly in Q2 2007. There are a number of reasons for the strong growth of construction employment relative to other sectors and the economy as a whole. The growth in construction output has been accompanied not just by higher standards and new methods of construction but also by a more rigorous regulatory environment and an increasing emphasis on new areas of activity, which have generated a demand for more construction workers and new occupations. First quarterly decline in employment recorded since Q2 2002 Figure 3.2 shows the development of construction employment during the current decade in more detail. The data are seasonally adjusted, so we can compare quarter-on-quarter. Construction employment has grown by 78% since 2000 Q1. Employment grew steadily up to early 2001, and experienced only modest growth over the next two years. From early 2003 growth spurted again, peaking at 4.4% in Q3 2004 on the preceding quarter. Employment growth decelerated somewhat in the second half of 2005. The latest figures show employment declined by 0.5% in Q2 2007 on the preceding quarter, to a total of 283,500. This is the first quarterly decline since Q2 2002 and follows a quarterly growth rate of 1.7% in the preceding quarter and 3.7% just one year previously in Q2 2006. Figure 3.2: Direct employment in construction 2000-Q2 2007 (seasonally adjusted) 280 285284 273 266 252 246 248 235 226 256 168 161 173 177 181 182183 197 190 191194 184185185188 199 204 218 209 Source: CSO, QNHS The recent quarterly decline in employment in Q2 2007 (in seasonally adjusted terms) can be attributed to the slowdown in new housebuilding in the first half of 2007. There is likely to be further modest declines over the remainder of the year, as housebuilding activity weakens over the coming months, resulting in employment in the sector of around 273,000 by Q4 2007. 3.1.2: Construction employment index This Index is derived from a monthly sample inquiry of approximately 1,000 private sector construction firms with 5 or more persons engaged. The sample includes all firms with 100 or more persons engaged, approximately 75% of firms with 20-99 persons engaged, and about PAGE 46 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 25% of those with 5-19 persons engaged. It covers permanent staff, proprietors, family members and labour-only subcontractors. It excludes the State sector, the self-employed (apart from the labour-only sub-contractors working for firms in the survey) and firms with less than 5 employees, and as such is not comprehensive. The index tends to be used more as a shortterm indicator of employment trends. Figure 3.3 shows the index since the start of this decade, as well as a seasonally adjusted version estimated by DKM. Figure 3.3: Construction employment index, 2000 = 100 115 113 110 108 105 103 100 98 95 93 90 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Source: CSO Construction Employment Index, seasonally adjusted by DKM Unadjusted Seas. adj. As one would expect, the series is highly seasonal. The seasonally adjusted series indicates that, for the firms in question, employment peaked in the first half of 2001, then fell for roughly a year, bottoming out in mid-2002, and experienced little improvement over the following year before staging a strong recovery in mid-2004. The month of January 2006 saw a significant weakening (seasonally adjusted), but the lost ground was recovered thereafter and the index stabilised until the end of 2006. The chart records significant drops in the months of January, March and June 2007 and by July 2007, construction employment, according to the index, had declined by 2.8% since December 2006. The latest index level for July 2007 is back in line with the corresponding level in January 2006 (seasonally adjusted). It is noteworthy that this employment index shows less growth than the series from the QNHS (Figure 3.2). This implies that most employment growth is happening in firms with fewer than five persons47 or that the industry’s employment structure has become more fragmented over time, with a greater number of smaller firms. 3.1.3: Hours worked in construction The latest release of the CSO’s quarterly Earnings and Hours Worked in Construction is for March 2007. The data are based on a survey of firms with ten or more persons engaged, and as such this release is less comprehensive than either the QNHS or the monthly Construction Employment Index. It indicates that the average hours worked by persons engaged in these firms was 43.4 hours per week. Unfortunately we have no means of knowing hours worked in smaller construction firms. Figure 3.4 presents the trend in these data during the current decade, seasonally adjusted, so they are comparable quarter-on-quarter. 47 Recall that the Construction Employment Index covers building and construction firms with 5 or more persons engaged; the QNHS captures all workers. PAGE 47 Figure 3.4: Hours worked in construction (sa), 2000 to date 47 46 45 44 43 42 41 40 2000Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 Hours Worked SA Annual Moving Avg Source: CSO Earnings and Hours Worked in Construction, seasonally adjusted by DKM Average hours worked has been on a downward trend for the first four years of this decade, falling from 46 hours per week in Q2 2000 to 43.8 hours per week in Q1 2004. It recovered somewhat thereafter, but since early 2005 has been falling again. There has been a slight recovery during 2006 followed by a slight dip in the first half of 2007. 3.1.4: Indirect and total employment numbers The QNHS figures for construction relate to direct employment only. They thus exclude employment in the manufacture and distribution of building materials, plant hire, and a proportion of construction-related employment in the professional services sector (e.g. engineers, architects, planners, etc.). While no official statistics exist for indirect construction employment, it has traditionally been estimated at 40% of direct employment48. On this basis, total employment in Construction in Q2 2007 is estimated at approximately 397,000. Table 3.2: Total construction employment Q2 2007 '000 Direct employment per QNHS (seasonally adjusted) Indirect employment estimate at 40% of direct Total Estimated Employment Source: CSO QNHS, DKM 283.5 113.4 396.9 Direct and indirect construction employment represents almost 19% of total employment in the economy. This means that roughly every fifth persons employed in the Irish economy is either directly or indirectly dependent on the construction industry. 48 This is broadly in line with the methodology used by the EU Commission (The Competitiveness of the Construction Industry [Com (97) 539 Final], 4th November 1997, Page 2). PAGE 48 3.1.5: Non-nationals in the construction sector The most recent figures suggest that 13.1% of persons employed in construction are nonnationals compared with 11.4% across the economy as a whole. The vast bulk of the nonnationals working in the construction sector and residing in the Republic are from the EU 25 countries (9% of the total). Table 3.3: Non-nationals employed in the construction sector, Q2 (Mar-May) 2007 Total employment Irish Non-Irish nationals of which United Kingdom EU 15 excl Ireland and UK New Accession countries (EU 10) Other Total persons Source: QNHS Q1 2007, CSO % share 89% 11% Construction employment 243.6 36.6 % share 87% 13% 1,856.1 239.3 39.7 26.9 116.3 56.4 2,095.4 2% 1% 5% 3% 100% 5.4 1.5 26.3 3.5 280.3 2% 1% 9% 1% 100% 23% of the year-on-year increase (between Q2 2006 and Q2 2007) in construction employment was made up of non-nationals. There has been no year-on-year change in the number of UK nationals49 working on construction sites while the number of construction workers from the new accession countries increased by 16% to 26,300 persons in Q2 2007. In Section 3.2 below we examine the non-national contribution to employment in individual construction occupations. The extent to which an occupation relies on non-Irish workers can be seen as a measure of the skill shortage that exists in this country. 3.2: Focus on construction occupations The continued growth of the construction industry and its dominance of employment growth have led to concerns about the economy’s over-exposure to the sector. FÁS and the Expert Group on Future Skills Needs (EGFSN) have been closely monitoring the developments in the construction jobs market. The latest National Skills Bulletin (October 2006) gives information on the supply and demand and characteristics of the main groups at work in construction: • • • Construction professionals Construction craft occupations and Labourers In this Section, we draw on that report and on the latest information published in the Q1 2007 QNHS50. We will look at the employment levels, growth over the past five years and the proportion of non-Irish nationals in each group. The EGFSN uses these and other indicators to assess whether a skills shortage exists for individual occupations. 49 The QNHS does not capture construction workers in the Republic from the North if they reside in Northern Ireland. 50 Total employment in this section is by ILO classification and is not strictly comparable with the NACE data in the previous section. PAGE 49 3.2.1: Construction professions The number of persons employed in the construction professions, as listed in the table below, has increased by 42% over the last five years (equivalent to an annual average growth rate of 7%). While we associate these professions primarily with construction, only 50% of people in these jobs are employed in the construction sector. 27% work in real estate, renting and business activities sector, with the remaining 23% employed in other sectors. The majority of persons in that group were employed as civil and mining engineers (12,700), followed by building managers (7,500), and architects (6,800). • Architects have been growing most rapidly over the period in the table with an annual average growth rate of 16%. Between 2000 and 2005, this group also grew very strongly, albeit at a slower annual average rate of 8.6%. The number of quantity surveyors more than doubled over the past five years to 4,100 at the beginning of 2007. Civil and mining engineers also recorded huge growth (84%), reflecting the strong growth of non-residential construction such as infrastructure building under the NDP. The number of draughtspersons was the only one to fall (by almost one third) over the past five years, reflecting the continuing move towards computer assisted design. • • • Table 3.4: Employment in construction professions51 ranked by growth, Q1 2002 to Q1 2007 Employment level Q1, 2007 ‘000 Architects Quantity surveyors Civil/mining engineers Building, mining and other surveyors Electrical engineers Mechanical engineers Engineering technicians Property & estate managers & proprietors Building managers Draughtspersons Total construction professions Source: CSO. Growth 2002Q12007Q1 113% 105% 84% 47% 41% 24% 20% 18% 14% -32% 42% Annual av. growth rate 16% 15% 13% 8% 7% 4% 4% 3% 3% -7% 7% 6.8 4.1 12.7 2.2 4.1 4.7 1.2 1.3 7.5 1.7 46.3 In Q1 2007, employers in the construction sector found vacancies in quantity surveyors and managers most difficult to fill52. The EGFSN found that in 2006, quantity surveyors had also been by far the most difficult occupation to recruit, followed by architects. As we have seen above, the proportion of non-Irish nationals working in the construction industry has grown more strongly than for the economy as a whole, reflecting the sector’s dominant position and continued strength, but also local skill and labour shortages. The EGFSN 2006 report53 gives a detailed profile of occupations in all sectors of the economy, including the proportion of non-Irish workers. The data quoted below relate to Q2 of 2005 and are the latest such figures available. 51 There were fewer than 1000 Town planners, architectural & town planning technicians, building & civil engineering technicians, building inspectors, estimators & valuers. For that reason they were not listed in the Table. 52 FÁS Quarterly Labour Market Commentary, Q1 2007, p8 53 Expert Group on Future Skills Need (October 2006): National Skills Bulletin 2006 p38ff PAGE 50 Table 3.5: Proportion of Non-Irish Nationals in Selected Construction Professions, 2005 Q2 Construction Profession Architects Quantity surveyors Building, mining and other surveyors Draughtspersons Source: EGFSN Proportion of Non-Irish Nationals 11.6% 6.9% 4.9% 0.0% The table shows that in 2005, architects were the profession which hosted the largest proportion of non-Irish nationals. We know from the QNHS that the number of foreign nationals involved in construction has gone up by 16,200 between 2002 and 2007. In the absence of more up-to-date figures we do not know in which professions or trades these persons have been employed. 3.2.2: Construction craft workers Between 2002 and 2007, 61,000 new jobs for construction trade occupations were created. Thus, by Q1 2007 there were 185,000 craft workers at work in Ireland. We estimate that around 90% were employed in the construction sector and only a small proportion worked in other sectors of the economy54. Employment grew by 49% over the past five years. • Electricians & electrical maintenance fitters were the largest construction trade with 31,200. Builders and building contractors were the next most important group with 22,000 persons employed in that trade. The number of scaffolders, riggers and steeplejacks grew by 131% over the past five years. Builders and building contractors also enjoyed healthy growth of 83%. The number of steel erectors, on the other hand, fell by 14%. Road construction and maintenance workers also saw a decline in their number (-6%). • • • • • Many of the construction trades continue to be in short supply. Most notably affected are bricklayers, plasterers, carpenters, scaffolders and floorers/tilers. FÁS reported an increased uptake of apprentices in recent years. However, as we shall see below, these shortages have been addressed by a continued inflow of non-domestic labour-supply. 54 Based on EGFSN, as above in 2005 PAGE 51 Table 3.6: Employment in construction trades55 ranked by growth, Q1 2002 to Q1 2007 Employment level Q1, 2007 Scaffolders, riggers, steeplejacks Builders, building contractors Plumbers, heating & related trades Crane drivers Bricklayers, masons Roofers, slaters, tilers, sheeters, cladders Construction and related workers Electricians, electrical maintenance fitters Floorers, floor coverers, carpet fitters, tilers Plasterers Painters & decorators Mates in Building Trade Road construction & maintenance workers Steel erectors Other construction trades n.e.c. Total construction trades Source: CSO Growth 2002Q1 2007Q1 131% 83% 75% 73% 68% 64% 55% 49% 47% 40% 26% 6% -6% -14% 71% 49% Annual av. growth rate 18% 13% 12% 12% 11% 10% 9% 8% 8% 7% 5% 1% -1% -3% 11% 8% 3.0 22.0 17.3 1.9 16.1 7.4 7.9 31.2 2.5 14.0 12.5 1.8 3.4 1.9 7.0 149.9 The proportion of non-Irish nationals among construction crafts workers in 2005 was higher than for professionals as the next table shows. • • 16.3% of scaffolders, riggers and steeple jacks were non-Irish nationals. Bricklayers also had a large non-Irish national component. Table 3.7: Proportion of Non-Irish Nationals in Selected Construction Trades, 2005 Q2 Construction Trades Scaffolders, riggers, steeple jacks Bricklayers, masons Plasterers Builders, building contractors Painters & decorators Glaziers Roofers, slaters, tilers, sheeters, cladders Floorers, floor coverers, carpet fitters, tilers Other occupations in construction Other construction trades nec Source: EGFSN Proportion of Non-Irish Nationals 16.3% 13.5% 11.8% 10.6% 10.2% 10.1% 8.1% 7.5% 14.8% 17.5% It is estimated that there were just under 35,000 labourers at work in the construction industry in Q1 of 2007, up by 8,800 over the past five years. Table 3.8: Employment in construction labourers, Q1 2002 to Q1 2007 Employment level Q1, 2007 Other building & civil engineering labourers Source: CSO 55 Glaziers, electrical engineers (not professional), water & sewerage plant attendants are not listed because there were fewer than 1000. Growth 2002 Q1 2007 Q1 34% Annual av. growth rate 7% 34.9 PAGE 52 The EGFSN estimated that almost all the rise in employment for labourers in general was accounted for by non-nationals. We expect that the same will hold for labourers in the construction sector. This suggests that Irish people are reluctant to take up these jobs themselves and is likely to reduce the vulnerability of employment in the sector to the contraction in housebuilding over the medium term. 3.3: Structure of the construction sector While there are no official data on the total number of firms in the construction sector, it is generally agreed that the number has been increasing rapidly, mainly as a result of a proliferation of small firms and sole traders. Over the past twenty years, the employment structure of the industry has changed fundamentally, with most major firms changing from being large direct employers to operating as contract managers, and the bulk of work being carried out by subcontractors. This fits with the picture presented in the QNHS and Construction Employment Index, whereby most employment growth appears to be occurring in firms with fewer than five persons and sole traders. The CSO’s Census of Building and Construction gives some information on the structure of the sector, but it only covers firms with 20 or more employees, and the latest available Census is for 200556. The results are summarised in Table 3.9. Table 3.9: 2005 Census of Building and Construction (private sector firms with 20 or more persons engaged) Census % age of total % change results construction sector on 2004 (note 1) Number of firms Persons engaged Persons engaged per firm Total turnover (€ million) Breakdown of turnover as principal contractor: € million New dwellings New other Total new Total RM&I (note 2) Grand total (note 3) 5,334 5,788 11,122 106 11,228 % split 47.5% 51.5% 99.1% 0.9% 100.0% % change on 2004 32.4% 13.2% 21.6% -29.5% 20.8% 728 66,689 91.6 14,569 NA 28% 39% -0.8% 4.9% 5.7% 19.0% Notes: 1. Industry total number of firms and turnover are estimates; total numbers engaged are from QNHS Q2 2005. 2. Repairs, Maintenance & Improvements. 3. Excludes work done as a subcontractor. Source: CSO, 2005 Census of Building & Construction. 56 Published 5th July 2007. PAGE 53 Only 728 firms employed 20 or more persons in 2005, and they accounted for 28% of direct construction employment, indicating that the bulk of construction firms are very small. The average size of firms was 92 persons engaged. Of the 728 firms covered by the Census, only 206 had 50 or more persons engaged, and only 25 had 250 or more engaged. The aggregate turnover of firms covered in the Census was €14.6 billion, representing 39% of total construction output in 2005, and was up 19% on the 2004 figure (before adjusting for inflation). Turnover growth was particularly strong for New Dwellings, up by almost a third. The Census reported total employment of 67,000 persons in the firms covered, 28% of total Construction direct employment per the QNHS for that year. This was an increase of 5% on 2004. Total Construction employment grew in the same period by 14.4%, so these larger firms recorded a much smaller employment growth rate than the industry as a whole. Comparing the proportion of the total workforce in the larger firms with their 39% share of total sectoral turnover suggests that these firms have higher labour productivity than smaller firms, but may reflect that they are engaged in more capital intensive activities, for example civil engineering rather than house-building. Table 3.10: 2005 Census of Building and Construction structure of employment Manual workers Nos. % age of total % age change on 2004 8.8% 0.2% -2.1% 3.6% 6.7% 4.8% 11.5% 7.8% 4.8% -6.8% 5.3% 4.9% Skilled operatives Apprentices Unskilled & semi-skilled Sub-total Managerial & technical Clerical Foremen & supervisors Sub-total Total employees Proprietors & family members Labour-only sub-contractors Total persons engaged Source: CSO, 2005 Census of Building & Construction. 17,289 4,564 11,899 33,752 5,705 4,227 5,401 15,333 49,085 599 17,005 66,689 25.9% 6.8% 17.8% 50.6% 8.6% 6.3% 8.1% 23.0% 73.6% 0.9% 25.5% 100.0% The breakdown of employment in these firms is summarised in Table 3.10. Of the total persons employed in 2005, 51% were manual workers, and 23% were employed in managerial, technical, and clerical positions, or as foremen. Roughly 1% were proprietors or members of family, while 26% were labour-only sub-contractors. These percentages have remained unchanged since the 2004 Census of Building and Construction. However, growth was much more subdued than in the period 2003/2004 and the number of unskilled & semi-skilled fell by 2%. The number of proprietors and family members fell by 7% indicating a consolidation of the industry. This is the only official source analysing the construction sector by size, at the moment. PAGE 54 In last year’s CIRO we covered in detail a major study published by Forfás on the structure of small business (firms with 50 or fewer persons engaged) in Ireland, including construction57. The main findings of this one-off report, covering March to May 2005 were: • There were roughly 63,000 construction firms with fewer than 50 persons engaged. As the data from the Census of Building and Construction implies, the vast bulk of these had fewer than 20 persons engaged. Roughly 31,000 construction enterprises were sole traders, with a similar number employing between 2 and 19 persons. Of the 242,000 persons engaged in construction at the time, 31,000 were sole traders, roughly 160,000 were employed in firms with between 2 and 19 persons, 22,000 were employed in firms with 20-49 persons, and 29,000 in firms with 50+ persons engaged (note that in contrast to the Census of Building and Construction, labour-only subcontractors were treated as separate enterprises by the Forfás study). • • 3.4: Regional breakdown of employment Figure 3.5 provides a breakdown of building and construction employment in Q1 of 2002 and 2007 respectively, for the eight planning regions. Figure 3.5: Regional employment in building and construction ‘000s (not seasonally adjusted) 70 60 50 40 30 20 10 0 Dublin South-West Mid-East Border South-East West Mid-West Midlands Q1 2002 Source: CSO QNHS Q1 2007 The regional distribution of construction employment (in terms of proportions) has stayed virtually unchanged over the past five years covered in the chart. Employment numbers of course have grown quite strongly. 57 A background study to this report was DKM Economic Consultants, The Economic Impact of Small Business in Ireland. Forfás, March 2006. http://www.smallbusinessforum.ie/webopt/sbf_dkm_background_report_webopt.pdf PAGE 55 The main points are: • Dublin accounted for the largest share of employment in Q1 2007, with 60,500 or 25% of the total, followed by the South-West, with 44,500 or 15% of the total. Over the five-year period, direct construction employment has grown by 98,000. Dublin recorded the highest employment gain in absolute terms, at 17,000, on a par with the South-West. At the other extreme, the Mid-West has recorded growth of only 8,000 over the period. In percentage terms, construction employment has grown by 53% in the State over the five years. All regions have recorded significant increases in numbers employed. The Midlands, while having the smallest number of construction employees in absolute terms, recorded the largest percentage increase over the period, of 90%. This was followed by the Mid-West at 65%. Construction employment in Dublin increased by 40%. The MidEast recorded the lowest percentage increase, at 32%. • • 3.5: Construction labour force Without a reliable official sectoral unemployment measure, it is not possible to measure definitively the total size of the construction sector labour force. However, we can make an estimate, based on the preceding calculations, as summarised in Table 3.11. On this basis the construction labour force in Q2 2007 amounted to roughly 416,000, or almost 19% of the total labour force in the economy (2.21 million sa). Table 3.11: Estimated construction sector labour force, Q2, 2007 (sa) ‘000s Direct employment Indirect employment (40% of direct) Total construction employment Unemployment (4.6%) Total construction labour force As % of total labour force Source: CSO, QNHS, DKM estimates. 283.5 113.4 396.9 19.0 415.9 18.8% PAGE 56 Section 4: Medium-term prospects to 2009 Recent developments in global financial markets combined with events in the US economy have led the OECD to suggest that the prospects for the international economy are “less buoyant and more uncertain” and that “downside risks have become more ominous”. That said the global economy is projected to expand by 5.2% (IMF) in 2008, although growth in the US has been revised downwards for next year (to 2%). The latest official forecasts for the Irish economy suggest that real GNP will increase by around 3.7% to 4% next year. The real difficulty for the Irish economy as it enters 2008 is the high reliance of output and employment growth on the construction sector. The downward trend in housing registrations to date could give rise to a more marked deceleration in GNP growth next year. Thus the real challenge will be managing the transition from the robust growth performance in 2006 and 2007 to the slower growth period expected in 2008. The medium-term prospects for construction once again will be strongly influenced by residential construction. Most of the adjustment to a lower housing supply level occurs in 2008, following a more modest downward adjustment in 2007. As a result completions are projected to decline to 60,000 units per annum in 2008 and 2009, leaving construction output volumes by end 2009 unchanged from the end 2007 levels. The easing back in terms of housing supply, together with more sustainable levels of prices and lending, should give rise to a more balanced and stable market over the medium-term. The current easing of house prices is a welcome development and should enable potential purchasers to enter the market who may have been prevented from doing so in the past. The value of the housing (public and private) RM&I market is equivalent to around €4.5 billion or 19% of total housing output. There is growth in RM&I activity over the next two years, but it is not sufficient to make up the difference for the contraction in new housebuilding. The future level of private housing RM&I will be driven by changes in real personal disposable income, the trend in interest rates and the capacity for equity withdrawal. Transactions in the second-hand market also generate a demand for housing RM&I. Private non-residential construction continues to perform strongly for the third year in a row. Public sector construction benefits from the substantial funds allocated for the period 20082009 in the National Development Plan, and for Transport 21. Over 70% of Exchequer funds have been allocated to the four largest Government departments covering transport, housing, water services, educational and hospital building projects. Given the forecast decline in residential construction, it will be essential that all public sector projects commence, and are completed, on time. The sector is fortunate in that the decline in residential construction is happening at a time when the non-residential sector growth prospects are very positive, particularly in the public sector. As a result the forecast decline in construction employment over the next two years will be less than it might otherwise be. Our preliminary assessment is for construction employment to fall to around 260,000 by the end of 2009. A further factor limiting the negative impact on employment is the fact that 13% of those employed in the industry (38,000 persons) are non-Irish nationals, who are more likely to seek jobs higher up the value chain as their English language skills improve. 4.1: Medium-term economic prospects 4.1.1: International economic prospects After a long period of benign global economic growth forecasts, recent market turbulence following foreclosures in the US subprime market, has shaken confidence and has led to a reduction in growth projections by both the International Monetary Fund (IMF) and the OECD. PAGE 57 To date, the swift and powerful interventions by central banks have helped contain the financial uncertainties by providing liquidity to the markets. In addition, both the European Central Bank and the Bank of England have refrained from increasing interest rates. In a recent comment, the OECD announced that recent developments have led to a more general reassessment of risks58. In the United States, confidence has weakened due to the longer than expected drag exerted by the housing sector. GNP growth is expected to fall below potential during the second half of 2007. Tighter credit standards and slower job creation will affect consumer spending. Real GDP growth in the US this year has been revised downwards by the OECD from a 2.1% forecast back in May 2007 to 1.9% published in September 2007. The OECD expects growth in the Euro area to pick up in the second half of the year. Nevertheless, the OECD considers the peak of the Euro area growth upswing to have passed. The latest average GDP growth forecast from the OECD for the Euro area is 2.7% per annum in 2007 and 2008. The IMF issued similar statements saying that policy makers should learn some lessons from the recent events in global financial markets. This turbulence will reduce global growth, particularly in the US, but also possibly in the Euro area and Japan59. That said, the IMF in July this year projected global growth at 5.2% in 2007 and 2008, which is marginally higher than the figures projected in April this year. Most of the upward revision is down to substantially higher forecasts for China, Russia and India. However the OECD suggests that recent developments in financial markets combined with the events in the US economy suggest that the prospects for the international economy are “less buoyant and more uncertain” and that “downside risks have become more ominous”60. 4.1.2: Irish economic prospects Following our discussion on the Irish economy in Section 2 we concluded that there would be a moderation in economic growth in 2007 due to the weaker prospects for residential investment. The consensus for real GNP this year is around 5%. Using the fixed investment estimates in the CIRO would generate a real GNP figure of around 4.6% in 2007 compared with 6.5% in 2006. 2008 is likely to see a continued moderation in economic growth as residential investment weakens further. The main official forecasts for 2008 are set out in Table 4.1 and suggest that real GNP in 2008 will increase by around 4%, although the ESRI is forecasting GNP growth at 3.7% for next year. There are no forecasts published yet for 2009 from these sources. Table 4.1: Macroeconomic projections for Irish economy 2007-2008 (% growth rates) Central Bank 2006 Actual Consumer expenditure Government expenditure Fixed investment of which Building & construction GDP GNP Consumer price inflation (note) 5.7 5.3 3.1 5.6 5.7 6.5 4.0 2007E 7.0 4.0 3.25 0.25 5.0 5.0 2.75 2008f 4.0 3.5 1.5 -0.5 4.0 4.0 2.25 2007f 7.8 5.5 3.7 4.9 4.8 4.9 ESRI 2008f 4.5 3.5 2.6 3.7 3.7 3.0 OECD 2007f 6.9 5.3 2.8 5.5 2.7 2008f 5.4 5.4 2.7 4.1 3.0 Source: CSO, Annual National Accounts 2006 (July 2007) Central Bank Quarterly Bulletin July 2007; ESRI Quarterly Economic Commentary, Summer 2007; OECD Economic Outlook No. 81, May 2007. Note: Inflation figures from the CB and the OECD are for the Harmonised Index of Consumer Prices (HICP). 58 Jean-Philippe Cotis, OECD Chief Economist, press briefing 5/9/2007 59 Rodrigo de Rato, IMF Managing Director, 7/9/2007 60 Jean-Philippe Cotis, OECD Chief Economist, press briefing 5/9/2007 PAGE 58 Depending on the extent of the slowdown in residential construction, there are likely to be some downside risks to the 2008 forecast. Using the projections for construction output in the CIRO would produce a deceleration in GNP growth, closer to 3% in 2008, with a pick up to over 4% in 2009. Much will depend, however, on the effects of the housing slowdown across the economy and the consequential impact on unemployment. Most forecasts project a slowdown in employment growth next year with some modest increase in the unemployment rate. The Central Bank forecast the unemployment rate at 4.75% in 2008 while the ESRI has 5% compared with 4.6% in Q2 2007. The real difficulty for the Irish economy next year will be its high reliance on the construction sector in regard to output and employment growth. It looks increasingly likely that 2008 will be the year during which the Irish economy faces many challenges, not least of which will be managing the transition from the robust growth performance in 2006 and 2007 to the slower growth period expected in 2008. Figure 4.1: GDP and GNP real growth 1999 – 2009F (%) 12% 10% 8% 6% 4% 2% 0% 99 00 01 02 03 04 05 06 07E 08F 09F GNP Growth Source: 1999-2006 CSO. 2007E from ESRI QEC, Summer 2007. 2008F, 2009F DKM estimates. GDP Growth 4.2: Medium-term prospects for construction output The construction cycle - a relatively long ‘boom’ phase It is generally accepted that construction industries are fundamentally cyclical in nature. Any review of trends across Europe over the past 50 years would reveal industries that move from boom periods, characterised by good strong growth, to recession periods or periods of more moderate growth, often brought on by, for example, fiscal restraint on the part of governments, the use of interest rates to combat overheating and/or weak private sector investment and consumer confidence. These periods can be relatively short time periods. The Irish construction industry is no different, being also cyclical in nature. Figure 4.2 charts trends in construction output volume changes versus real GNP back to 1990. The period commenced with strong growth in 1990, following the expansion in public sector investment in the late 1980s, but was followed by a period in the early 1990s during which economic growth was sluggish and private investment was relatively weak. The current buoyant phase commenced in 1994 and the volume of output in the Irish construction industry has consistently increased each year since up to 2006. The total gross output in the construction sector expanded by a factor of 6.5 in value terms over that period or PAGE 59 by 2.7 in volume terms. The average annual growth in construction output over the period 1994 to 2006 was 8.6% compared with annual average GNP growth over the period of 6.6%. This has been an exceptionally long phase of expansion. Figure 4.2: The construction cycle since 1990 – changes in the volume of output and GNP volume changes (%) 20% 15% 10% 5% 0% -5% -10% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E % change in volume of construction output GNP Growth Looking in more detail at trends on a five year basis since 1990, the next chart shows that the annual average growth in the volume of construction output has been close to real GNP growth over the periods 1990-1995 and 2000-2006 (six years). The exception is the period 1995-2000, when construction output increased by 11.6% on average, compared with a lower, but also impressive, GNP performance of 8.7% on average. This much higher growth performance from construction reflected the considerable expansion in public sector investment in the 1994-1999 National Development Plan as well as the very strong private non-residential sector which benefited from the growth in employment. The very buoyant housing market during the second half of the 1990s which was associated with record levels of house price inflation, a freeing up of credit availability and the favourable demographic background, also contributed to the impressive performance of the construction sector. It is worth noting that this five year period was also characterised by one during which capacity constraints emerged in the industry, mostly in regard to labour. As a result construction inflation was in excess of 10% per annum over the period 1998 to 2000, and reached almost 13% in 1998. Figure 4.3: Construction output versus real GNP- trends over shorter periods Real GNP Construction output volume 8.7% 11.6% 5.4% 4.4% 4.3% 4.6% 1990-1995 1995-2000 2000-2006 PAGE 60 The latest forecast for 2007 suggests that the volume of construction output will decline by 1.5%, the first decline in construction output volumes since 1993. With the anticipated slowdown in residential construction, this may represent the start of a new phase of the construction cycle during which growth is likely to be more modest and/or negative in some years, as the industry and economy adjust to the prospects of lower housing supply over the medium term. Construction/GDP ratio By the end of 2007 the estimated value of output in the industry will be €36.25 billion, equivalent to 22.6% of GNP or 19.2% of GDP. The latter is the second highest proportion (after Spain) in a ranking of 19 Western, Central and Eastern European countries61. The construction GDP ratio in Western Europe is around 12% on average and ranges from less than 8% in Sweden to over 21% in Spain. The corresponding proportion in the UK is less than 11%. Key drivers of construction The cyclical nature of the construction industry reflects the fact that the demand for construction is influenced by a number of factors: • • The macroeconomic environment and economic growth. The levels of private and foreign direct investment, the corresponding growth in employment and the future trend in ECB interest rates, all of which impact on consumer and investor confidence. We have already acknowledged that a period of lower economic and employment growth is in prospect for the next two years. • Developments in the housing market and future trends in mortgage rates and real incomes which impact on housing affordability. A restoration of confidence should allowing activity to resume at more normal levels. The changing demographic profile over time and the location of new development will have implications for investment in social and recreational infrastructure, including educational and hospital buildings. The extent to which the substantial provisions in the public capital programme and in the National Development Plan 2007-2013 will continue to be met, against the likelihood of a reduced flow of revenues into the Exchequer over the next twelve to eighteen months. Plans for major public sector projects, such as Terminal 2 at Dublin Airport and the National Convention Centre in Dublin City. Plans for major private sector projects such as new power generating stations, and tourism and sport related projects. There are also a number of large scale private mixeduse developments planned across the major urban areas, most notably in the Dublin and Cork Docklands. The prospects for investment in repair, maintenance and improvement of the existing residential and non-residential building stock. • • • • • 61 Euroconstruct Summary Report, June 2007. PAGE 61 Investment to GNP ratio The total capital investment in the economy is measured as ‘gross domestic fixed capital formation’ (GDFCF) in the CSO National Accounts62. It represents all public and private investment in building and construction, as well as in machinery and equipment. Investment in building and construction accounted for 70% on average of total GDFCF over the last decade, and reached a record high of 79% in 2006. In absolute terms, the total value of fixed investment has grown substantially, reaching €46 billion in 2006 (Figure 4.4). As a result of the strong performance of the building and construction sector the ratio of fixed investment to GNP reached a record 31% in 2005 and 2006, compared with 17% in 1993. This may well represent the peak now as output in the industry is projected to decline in 2007 and 2008, due to the decline in residential construction. The fixed investment to GNP ratio is forecast at 28.5% in 2007. Figure 4.4: Fixed Investment to GNP Ratio 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Source: CSO National Accounts and CIRO. 5% 0% 15% 10% Fixed Investment m. (current prices) Fixed investment as % of GNP 25% 20% 35% 30% 4.3: Residential construction We previously set out in Section 2.1.2 recent trends in the housing market and suggested that the number of completions would be around 77,000 in 2007. This projection assumes a sharp slowdown in the level of completions in the second half of 2007. The latest data show total completions down by 5.4% in the first seven months of 2007 on the same period in 2006. Based on our projection of 77,000 for the full year, total completions are projected to decline by 21% in the last five months of the year on the same period in 2006. No getting away from ‘cycles’ While there is a general consensus now that housing supply will weaken in 2008, the real question concerns the extent of the weakness during 2008 and the impact on the economy and employment. Firstly there is a need to acknowledge that the Irish housing cycle is no different than any other cycle. Housing cycles generally go through a number of stages, although some stages can last longer than others. The basic hypothesis is that a market is either moving up towards its peak or down to its low point on the cycle curve but it tends to fall faster than it rises. The range from trough to peak over a housing cycle can also vary depending on how the transition from one stage to the next is managed. 62 Gross domestic capital formation represents investment in all new buildings and new infrastructure and major repair and reconstruction of existing buildings and infrastructure as well as home produced and imported capital goods (machinery and equipment). PAGE 62 It is the tendency for housebuilders to overbuild in response to sudden increases in the normal level of demand and to underbuild in response to a drop below normal demand which accentuates the housing cycle. The literature on housing cycles suggests that housing cycles consist of six stages: three occur during periods of overbuilding and three occur during periods of underbuilding, and at a given point in time overbuilding and underbuilding temporarily disappear and the housing market is briefly in equilibrium. In terms of the Irish housing market, the period 1994 to 2006 would have coincided with the first two stages of overbuilding. Despite the unprecedented increase in housing supply, the market experienced excess demand over supply. Demand increased above what might be considered to be a ‘normal’ level of demand, as determined by population growth and household formation levels. This happened due to the very strong growth in employment and inward migration as well as a growing investor/second home demand. As a result the market experienced rapid house price growth relative to earnings growth and affordability problems emerged for some first-time buyers. The period of rising house prices also raised price expectations and led to many purchases being brought forward. In the most recent period, it appeared that the annual rate of house price inflation had begun to moderate towards the end of 2004 and throughout 2005. However, the availability of 100% mortgages as well as longer term mortgages fuelled demand again in 2006 and exerted further upward pressure on house prices. According to the DEHLG figures, the value of loan approvals in Q2 2006 was almost 60% higher than in the same quarter of 2004 and the total value of approvals reached a record level of over €31 billion in the full year. The inevitable result was further upward pressure on house prices. The annual rate of house price inflation reached in excess of 15% nationally and almost 18% in Dublin mid-200663. Average second-hand house prices, which rose by almost 21% in Q3 2006 year-on-year, peaked in Q3 2006 at almost €400,00064. Figure 4.5: Average house price inflation 1997-2007 % changes on an annual and monthly basis 35% % change year-on-year 5% 4% 3% 2% 30% 25% 20% 15% % change month on month (right hand scale) 1% 10% 5% 0% -5% Jan'97 Jan'98 Jan'99 Jan'00 Jan'01 Jan'02 Jan'03 Jan'04 Jan'05 Jan'06 Jan'07 Source: tsb-permanent/esri house price index 0% -1% -2% 63 Based on the permanent-tsb/esri house price index. 64 Based on average second hand prices published by the DEHLG PAGE 63 As the impact of the several hikes in interest rates hit the market throughout 2006 and into 2007, the early signs of a new stage in the housing cycle began to emerge. The increase in uncertainty around stamp duty and interest rates, the slowdown in planning permissions from peak levels in Q2 2005, the reduction in mortgage lending from Q4, 2006 (IBF data), which translated into a reduction in transactions, and the adverse impact on affordability up to December 2006 damaged housebuyer confidence. As the market progressed through 2007, we began to see marginal declines in house prices. The latest tsb-permanent/esri index figures suggest that average house prices nationally fell by 3.2% in the first seven months of 2007. Rebalancing the housing market As a result there has been much negative media coverage on the housing market in 2007 to date. However, recent trends have generated a number of positive developments which should help to rebalance the market. These are as follows: • The current easing of house prices is a welcome development and should enable potential purchasers to enter the market who may have been prevented from doing so in the past. Once existing vendors adjust their expectations by generating more realistic prices, they will be in a better position to buy than in an overheated market. The easing of house prices has helped to offset the impact of higher mortgage rates, thus helping affordability for first-time buyers. This improvement has been most evident since January 2007, after the doubling of mortgage interest relief for first-time buyers in the 2007 Budget. The perception of housing as a long-term investment has been confirmed in recent research which reported a strong desire for people to own their own homes. The research confirmed that there exists a strong underlying demand for property from first-time buyers and households in the ‘trading-up’ market65. The easing back in terms of housing supply, a process which housebuilders have already started (see below), together with more sustainable levels of prices and lending, will give rise to a more balanced and stable market over the medium-term. The strong economy and housing market which prevailed over the past decade 19962006 has accommodated some 870,000 loans for house purchase and has added almost 650,000 new dwellings to the housing stock. Moreover, the escalation in house prices of 300% in nominal terms over this period has added significantly to the housing wealth of owner occupiers. • • • • The supply side response Current trends in the housing market suggest that it is adjusting to the next phase of the housing cycle. This third stage of the cycle is characterised by housebuilders pulling back from new production. This is what has been experienced in the context of registrations, which have been on a downward trend since September 2006. By the end of August the cumulative twelve month total for registrations was down to 65,000 compared with a peak of 88,000 in September 2006. All indications are that, if the current decline continues over the remainder of the year, the cumulative total will be closer to 55,000 by the end of 2007. 65 Bank of Ireland First Time Buyer and Trading Up Survey, August 2007, available at http://www.bankofireland.ie/html/gws/includes/personal/pdfs/survey.pdf PAGE 64 Figure 4.6: Trends in registrations* to August 2007 with forecast to December 2007 90000 85000 80000 75000 70000 65000 60000 55000 50000 Sep-04 Sep-05 Sep-06 Sep-07 Mar-04 Mar-05 Mar-06 Mar-07 Dec-04 Dec-05 Dec-06 Dec-07 Jun-04 Jun-05 Jun-06 Jun-07 Forecast Sept to Dec, based on current trends Registrations* peaked at around 88,000 in September 2006 * Adjusted to include one-offs which are not counted in the registrations. Source: DEHLG, DKM estimates. This slowdown in supply needs to be put into perspective. There will continue to be a demand for housing, particularly in employment locations and close to public transport. The absence of any significant supply constraints means that supply can be provided in these locations. The demographics remain favourable with numbers in the first-time buyer age groups expected to increase up to 2011. Moreover there remains a strong pent-up demand for housing from those persons who have not yet been accommodated or were not in a position to buy over the last decade. The evidence for this can be found in the significant numbers registering for affordable housing with local authorities. Thus there is every possibility that transactions could resume again, albeit at more normal levels, as soon as confidence is restored for potential housebuyers. One factor which could help restore confidence would be certainty in regard to interest rates. With ECB interest rates assumed to be at or close to their peak, the confidence factor may be addressed sooner rather than later. There is also the possibility that further positive measures could be introduced in the December budget to boost the market, such as further increases in mortgage interest relief. While the response from housebuilders is clear from the trend in registrations, the public sector will continue to provide substantial Exchequer funds for public sector housing over the period of the National Development Plan 2007-2013. Moreover, public sector completions are not counted in the registrations. Thus based on the above, our base case forecast for completions in 2008 is 60,000 per annum in 2008 and 2009 (Scenario 1). Two alternative scenarios are considered in Section 4.6 to illustrate the impact of a recovery in new housebuilding in 2009 (Scenario 2) and a sharper supply downturn in 2008 which is sustained in 2009 (Scenario 3). Housing repair, maintenance and improvement (RM&I) There have been some suggestions that the contraction in new build will give rise to an increase in the volume of repair and maintenance expenditure. This is based on the redundant labour resources in the new build market moving into the RM&I market. However, this requires the demand for renovation work and extensions to increase and/or prices to become more competitive. PAGE 65 The value of the housing (public and private) RM&I market is equivalent to around €4.5 billion or 19% of total housing output66. As such it is unlikely to make up the difference for the contraction in new housebuilding. However, the arguments in favour of an increase in housing RM&I activity are the age and condition of the housing stock, notwithstanding that almost 40% of it was built in the last decade. The level of private housing RM&I will be driven by changes in real personal disposable income, the trend in interest rates and the capacity for equity withdrawal. One must not forget that the RM&I market is not just confined to those households who choose not to move, but will also be influenced by transactions in the second-hand market (i.e. conveyances), which can also generate a demand for housing RM&I. The CSO collect planning permissions data on private housing extensions. The most recent data show the total floor area granted planning permission for residential extensions reached 874,000 square metres in 2006, an increase of 55% on the 2002 level, the lowest level in the past six years. The average size of extensions was 64 square metres in 2005 and 2006. Figure 4.7: Total floor area granted planning permission for residential extensions 1000 900 800 700 600 500 400 300 200 100 0 2001 Source: CSO 2002 2003 2004 2005 2006 Total floor area (000 sq. m) Average permission, sq. m. (right hand scale) 65 64 63 62 61 60 59 58 57 56 55 Accordingly our preliminary assessment is for an increase of 7.5% in the volume of private RM&I housing output in 2008 and 10% in 2009. Combining the prospects for new build and RM&I activity therefore, the total volume of residential construction output is forecast to decline by almost 16% in 2008, with a modest recovery projected in 2009 (+2.7%) as housing output stabilises. 4.4: Private non-residential construction The private non-residential construction sector has been growing strongly since 2005. The estimates for 2007 suggest that the volume of construction output associated with new projects in the private non-residential sector will rise strongly for the third year in a row (+ 28.5%), reflecting in particular a very buoyant commercial building sector. Historically private nonresidential construction has been cyclical in nature, moving from periods during which the volume of construction activity has accelerated sharply, to periods during which investment and confidence in the sector declines, due in part to the consequential oversupply of new building in the aftermath of a boom period. This is what transpired over the period 2000 to 2004 when investment in private non-residential construction activity declined by 37%. 66 This figure is based on the DOE/ESRI repair, maintenance and improvement survey. This survey specifically asks households about expenditure on household renovation and repairs covering major home improvements such as door or window replacement, extensions, major plumbing or electrical work, as well as expenditure by households on minor home repairs, such as decorating and minor electrical, plumbing and heating repairs or minor repairs to the structure of dwellings. PAGE 66 The sector is currently in a strong growth phase, which commenced in 2005, with strong investment underway in offices, retail and hotel buildings. The main factors influencing building activity levels tend to be growth in employment and real incomes, the level of consumer expenditure, trends in interest rates, general investor and consumer sentiment as well as tourism volumes. There are a number of proposed mixed-use developments in the planning pipeline across the main urban areas, most notably in Dublin, many of which comprise combinations of residential, offices, retail and hotel space. With the economy entering a period of slower growth, it may be more difficult to fill these spaces, given the lower rate of employment growth expected compared with previous years. That said, schemes which are located in city centre locations or are adjacent to major transport nodes are more likely to do well. Over the next two years our assessment of the prospects for new commercial (offices and retail) construction is for a moderation in the volume of output growth to under 13% in 2008 and under 8% in 2009 from an estimated 23% in 2006 and 15% in 2007. Industrial building volumes are forecast to increase by around 5% per annum in each of the next two years. The level of agricultural building investment is projected to fall substantially, after two exceptional years of building investment activity in 2006 and 2007. As a result the overall volume of new non-residential construction investment is forecast to increase by 5.6% in 2008 and 4.6% in 2009. These more modest growth rates follow an exceptionally buoyant period in 2005, 2006 and 2007 and are consistent with the expected slowdown in economic growth in 2008 and 2009. 4.5: Public sector construction The public sector plays an important role in the construction industry through its public capital investment programme. Substantial public sector funds have been invested in the construction industry over the past decade. The most recent public capital programme provided almost €12 billion in Exchequer and non-Exchequer funds for economic, productive and social infrastructure in 2007. The corresponding figure just one decade earlier was €4.4 billion (1997). According to estimates in the CIRO, the public sector accounts for approximately 26% of all investment in construction. While the share has remained broadly stable over the past decade, apart from the period 2001-2003 when the share exceeded 30%67, the amount in absolute terms has increased substantially. An indication of the capital allocations for public sector investment over the medium term is provided for in the multi-annual capital envelopes. The latest multi-annual programme covers the period to 2013, which coincides with the period of the National Development Plan 2007-2013. Table 4.2 sets out the Exchequer capital envelopes for the period to 2010. The total Exchequer envelope for the three years 2008-2010 is €31.35 billion of €10.45 billion per annum on average. There are other non-Exchequer funds which account for the balance of capital funding. These funds amounted to just over €4 billion in 2007, approximately one-third of the total PCP. 67 This reflects a period 2001-2003 during which the volume of output from private non-residential projects declined due to the oversupply situation which transpired in the late 1990s PAGE 67 Table 4.2: Projected Exchequer capital allocations for period to 2010 Current prices, € million Total PCP (1) carryover from 2005 Total PCP (2) of which Exchequer: Total direct Exchequer PPP/NDFA Unallocated reserve Total Exchequer envelope Annual average Exchequer provision 2008-2010 Annual % change in Exchequer Envelope (nominal) Non-Exchequer: Total PCP (exc. PPP/NDFA) GNP current prices (est) Exchequer envelope as % of GNP PCP as % of GNP 2006 9,386 -159 9,227 2006 6,264 150 0 6,414 2007 @ Feb'07 11,793 159 11,952 2007E 7,854 264 0 8,118 25.6% 29.5% 2008F 8,353 670 280 9,303 2009F 8,745 1616 530 10,891 2010F 8,763 1635 760 11,158 2008-2010 25,861 3,921 1,570 31,352 10, 451 +13% 2,963 9,227 149,130 4.3% 6.2% +27% 4,098 11,952 160,516 5.1% 7.4% +15% N/A N/A 170,620 5.5% N/A +17% N/A N/A 182,580 6.0% N/A +2% E= estimate; F = forecast. (1) The PCP figures are those published in the 2007 Public Capital Programme and exclude and carryover effect. (2) Adjusted for carryover of €159m from 2006 to 2007. Source: Public Capital Programme 2007 (published February 2007 from Department of Finance). GNP figures are DKM estimates. It is important to stress that these provisions are for all capital spending, including investment in new building, major renovations to existing buildings, infrastructure projects, investment in machinery and equipment as well as land purchases and the acquisition of buildings. The figures provide in full for investment under the Transport Investment Framework, Transport 21, estimated at €24.5 billion or almost 45% of the total NDP investment in economic infrastructure over the period 2007-2013. Taking the individual allocations for each year, the value of the Exchequer provision is projected to increase by 15% in 2008 and by 17% in 2009, before inflation. The growth projected for 2010 is much more modest at 2%. For the purposes of estimating the volume of investment on construction related projects, all non-construction related expenditures must be excluded from the Exchequer capital provisions. It is impossible to ascertain what the construction spend is likely to be as the figures are only broken down for the individual Government departments and not by area of investment. However, according to the breakdown provided, 71% or €22.26 billion of the total Exchequer provision of €31.35 billion over the period 2008-2010 has been allocated to the four largest Government departments responsible for the provision of public social, economic and productive infrastructure. Almost one-third of the total of €22.26 billion represents investment in transport, which amounts to an average investment of €3,318 million per annum on average. There is a substantial increase in the transport capital provision in 2009 (+34.6%), reflecting ongoing investment in a number of major public transport projects. The second largest department is Environment, Heritage and Local Government, where capital spending is projected at €2,305 million per annum on average. The vast bulk of this investment will fund local authority and social housing programmes, water and sewerage services programmes, non-national road improvements and tourism related heritage projects. The combined capital provisions for Education and Health of €5.4 billion will fund the construction of educational buildings and hospitals as well as equipment over the three years to 2010. PAGE 68 Table 4.3: Projected Exchequer capital allocations for main spending Departments 2008-2010 €m Department Transport Environment, Heritage & Local Government Education & Science Health & Children Total Transport Environment, Heritage & Local Government Education & Science Health & Children Total 2007E 2,285 2,050 782 664 2008F 2,645 2,150 910 705 2009F 3,560 2,360 1,095 755 2010F 3,750 2,405 1,090 840 2008-2010 9,955 6,915 3,095 2,300 % of total 32% 22% 10% 7% 5,781 6,410 7,770 8,085 22,265 71% annual percentage change % in value of investment +15.8% +4.9% +16.4% +6.2% +10.9% +34.6% +9.8% +20.3% +7.1% +21.2% +5.3% +1.9% -0.5% +11.3% +4.1% Source: Public Capital Programme, February 2007. For the purposes of providing a medium-term construction forecast for 2008 an 2009 we use the percentage increases above for the four main categories of investment, after adjusting for inflation at 4% per annum. For all other non-residential investment categories we estimate the construction spend based on past and current investment levels as well as future known plans. Thus the volume of construction output associated with new public civil engineering infrastructure projects is forecast to increase by almost 12% in 2008 and around 20% in 2009 (Table 4.4), mostly due to the substantial growth in the volume of investment in public transport as well as airports (e.g. Terminal 2). The corresponding forecasts for the volume of output associated with new non-residential building projects in the public sector are 15.6% in 2008 and 8.6% in 2009. When combined with the forecasts for new public housing investment, the total volume of construction output arising from investment in new public sector projects is forecast to increase by 10.2% in 2008 and 12.5% in 2009. 4.6: Overall prospects for construction output The projection for construction output over the medium term is set out in Table 4.4. The volume of construction output is forecast at €32.8 billion (constant 2005 prices) in 2009. This is unchanged from the corresponding figure in 2007. Total output is forecast to decline in 2008 (-6.2%) with a recovery in 2009 (+6.2%) reflecting a stabilisation in housing supply. The prospects reflect the assumptions previously discussed for new residential construction activity. The total number of new dwellings built falls to 60,000 units per annum in 2008 and 2009, compared with an estimated outturn of 77,000 in 2007. Scenario analysis Two alternative scenarios are considered to illustrate the impact of a recovery in new housebuilding in 2009 (Scenario 2) and a sharper supply downturn in 2008 which is sustained in 2009 (Scenario 3). In Scenario 2, the slowdown is short-lived, and supply volumes recover in 2009. When combined with the positive prognosis for non-residential construction in Scenario 1, the volume of construction output increases by a healthy 9.5% in 2009. Thus the volume of construction output is forecast at €33.8 billion (constant 2005 prices) in 2009, which is 2.7% higher than the corresponding figure in 2007. PAGE 69 In contrast, in Scenario 3 a more pronounced supply weakness than that envisaged in Scenario 1 results in the volume of output falling sharply (-9.3%) in 2008, followed by an increase in 2009 (+6.4%), as housing supply is maintained at the lower level of 55,000 per annum compared with Scenario 1. The volume of construction output is forecast at €31.8 billion (constant 2005 prices) in 2009, which is 3.5% lower than the corresponding figure in 2007. The above three scenarios assume an unchanged level of non-residential construction activity. This may be an unrealistic assumption as the lower volumes of housebuilding output in Scenario 3 are likely to give rise to lower Exchequer revenues, more job losses, and lower consumer spending volumes in the economy. There would be the added risk that the positive prognosis for public sector investment fails to materialise, due to pressure on Exchequer revenues. The repercussions of such a scenario would be more severe, resulting in a lower rate of economic growth than that envisaged in Scenario 1. Table 4.4: Medium-term projection for construction output – volume % changes 2006-2009F 2006 (€m.) 2006 Output Share (%) 2006 2007E 2008F 2009F SCENARIO 1 – 2008 housing supply reflects downward trend in registrations Total dwellings completed (units) New housing Private sector Public sector Total new housing RM&I housing Total housing New non-residential construction Private sector Public sector Total new non-residential construction RM&I non-residential construction Total non-residential construction Sub-total building new Sub-total building RM&I Total building Productive infrastructure New productive infrastructure RM&I productive infrastructure Total productive infrastructure Total construction output of which Public sector Private sector 88,219 18,432 1068 19,500 4,545 24,045 3,246 1,535 4,781 2,534 6,161 24,281 5,925 30,207 4,128 1154 5,282 35,489 8596 26893 52% 3% 55% 13% 68% 9% 4% 13% 7% 17% 68% 17% 85% 12% 3% 15% 100% 24% 76% 3.0% -4.9% 2.5% 13.8% 4.5% 21.4% -5.5% 11.2% 11.6% 11.3% 4.2% 13.3% 5.9% 2.7% 20.0% 6.0% 5.9% 2.5% 7.1% 77,000 60,000 60,000 0.0% 0.0% 0.0% 9.7% 2.7% 4.5% 8.6% 6.0% 4.5% 5.7% 2.1% 8.4% 3.7% 20.4% 4.5% 17.2% 6.2% 12.5% 3.3% -13.3% -23.8% 0.5% 3.0% -12.6% -22.1% 3.7% 7.3% -9.4% -15.6% 28.8% 31.9% 5.5% 15.6% 29.8% 8.8% 10.2% 4.5% 25.4% 8.0% -4.0% -13.6% 5.2% 6.6% -2.2% -9.3% 2.6% -0.3% 2.0% -1.5% 11.9% 4.5% 10.4% -6.2% 7.4% 10.2% -4.5% -12.2% SCENARIO 2 – recovery in housing in 2009 Total dwellings built (units) Total construction output 88,219 5.9% 77,000 -1.5% 60,000 -6.2% 65,000 9.5% 35,489 100% SCENARIO 3 – pronounced supply weakness in 2008 sustained in 2009 Total dwellings built (units) Total construction output 88,219 5.9% 77,000 -1.5% 55,000 -9.3% 55,000 6.4% 35,489 100% Note: Scenarios 2 and 3 assume the volume of investment in non-residential construction is unchanged from Scenario 1. PAGE 70 Figure 4.8: Residential and non-residential construction – annual percentage change in volume (%) 2003-2009F 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 2003 2004 2005 2006 2007E 2008F 2009F Residential construction Non-residential building Productive infrastructure Total construction Figure 4.9: Construction output by sector 2003-2009F (constant 2005 prices) 200 180 160 140 120 100 80 60 2003 New residential New non-residential Productive infrastructure Building RM&I Total construction 2004 2005 2006 2007E 2008F 2009F 4.7: Medium term prospects for construction employment The first quarterly decline in five years reported in Q2 2007 The forecasts set out for construction output will have consequences for the level of employment in the sector, particularly for the housebuilding segment of the industry. We have previously discussed the current trends in employment (Section 3), highlighting the unprecedented increase in construction employment over the past decade, with over 170,000 jobs created in the sector since 1997. This total represented 24% or almost one in four jobs created across the economy over the past decade. There were 280,300 persons employed in construction in Q2 2007. On a seasonally adjusted basis employment in construction fell marginally (-0.5%) in Q2 on the previous quarter, the first quarterly decline since Q2 2002. We have projected construction employment at 273,000 by Q4, 2007. PAGE 71 On the one hand, employment has grown due to the exceptional growth in new housebuilding activity, while the growth in private non-residential construction and the ever increasing public capital programme have also fuelled the demand for construction jobs. It is also the case that the enormous changes in the industry over the past decade and the increasing scale and complexity of projects have increased the demand for new occupations as a result of • • • • the unprecedented growth in the demand for construction services; the more rigorous regulatory environment with respect to building work; the increasing importance of, and attention paid to, design in the construction process; the focus on new areas of activity and/or new proposals such as rural housing, conservation, sustainability, urban planning, high density and the whole living environment; higher standards and new methods of construction; the increase in public private partnership (PPP) financed projects. • • Construction vacancies There are a number of surveys carried out which provide an indication of firms’ employment expectations in the industry. One such survey is carried out by FÁS on vacancies across the main sectors of the economy. Firms are asked “Do you have any vacancies which you are actively trying to fill at the moment?” The latest survey found that the percentage of firms in the construction sector reporting vacancies has fallen to around 5% in August 2007. This is the lowest rate since records began in 2002 and compares to a vacancy rate of 16% in May 2006. All firms reporting vacancies found it difficult to fill these positions. Figure 4.10: Construction Sector: Percentage of Firms Reporting Vacancies 25 % 20 15 10 Firms with vacancies 5 3-month moving average 0 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jul-03 Jul-04 Jul-05 Jul-06 Oct-03 Oct-04 Oct-05 Oct-06 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Jul-07 Source: FÁS/ESRI Monthly Employment and Vacancy Report May 2007 PAGE 72 Employment expectations Employers in the construction industry have been pessimistic about employment levels for quite some time now. There has been a significant deterioration in sentiment over the last year. Expectations in July 2007 stood at -22 according to the FÁS survey but recovered in August (11), although still in negative territory. This means that the percentage of employers expecting a decline in employment levels over the coming months was 11 percentage points higher than those who anticipate an increase. The corresponding indicator for employment expectations in May 2006 stood at 5. Current expectations are at the most downbeat since November 2002, when the index stood at -22. Figure 4.11: Construction Sector Employment Expectations 25 20 15 10 5 0 -5 -10 -15 -20 -25 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jul-03 Jul-04 Jul-05 Jul-06 Oct-03 Oct-04 Oct-05 Oct-06 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Jul-07 Net employment expectations 3-month moving average % Source: FÁS/ESRI Monthly Employment and Vacancy Report May 2007 The employment prospects in 2008 and 2009 There is no accurate information on the split of employment between residential and nonresidential, making it difficult to ascertain the likely impact on housebuilding sector alone of the contraction in new build. Based on the analysis of the various occupations groups in the industry (Section 3.2.1) between the professions and construction craft workers, it is clear that each category could potentially work on residential or non-residential projects. With 13% of employment in the industry represented by non-nationals, this suggests that there are approximately 38,000 workers who may decide to seek jobs higher up the value chain, as their English language skills improve. We have carried out a simple regression analysis of employment on construction output over the period 1994 to 2007, based on Q2 data from the QNHS. While the results predicted actual employment closely over the period to Q2 2007, the model forecast very modest reductions in employment for Scenarios 1 and 3 above, and actually predicted an increase in employment by 2009 using the output figures in Scenario 2. Given the short time series plus the fact that both output and employment rose consistently over this time period, the results were not considered to be meaningful. Given the labour intensiveness of housebuilding, there are some unofficial estimates which suggest that housebuilding employs two-thirds of the total persons employed in construction. This would suggest that 187,000 persons are employed directly in housebuilding with approximately 93,000 persons employed in the non-residential sector. PAGE 73 The base case suggests that housing completions are forecast to decline by 17,000 in 2008, following a decline of 11,000 in 2007, generating a total decline of 28,000 units over the two years. While the magnitude of these impacts is difficult to predict, the projected reduction in housebuilding could potentially reduce direct employment in housebuilding by around 30,000 persons by the end of 2009. However, the actual reduction in employment could be less if some unemployed housebuilding workers transfer to the non-residential and RM&I sectors of the industry or indeed to other sectors in the economy. As such construction employment could decline to 273,000 by Q4 2007, with a further reduction to around 260,000 persons from current levels (280,300 persons employed) by Q4 2009. This represents a net reduction in construction employment of around 20,000 persons over the two years. There are also likely to be indirect job losses in the businesses and services supplying the housebuilding industry. In these circumstances the unemployment rate would begin to edge upwards. While these are just indicative estimates, much will depend on the pattern of new build and the rate of employment growth across the economy as a whole. PAGE 74 Appendix 1: Derivation of price indices This appendix sets out the price deflators used for calculating output in constant prices since 200368. Price deflators are used to deflate the current price estimates of the value of output in each sector into constant prices. For the purposes of calculating output in constant prices, the base year used this year is 2005, which is consistent with the base year used for National Accounts purposes. While every effort is made to reflect a realistic view on the level of tender price inflation in the construction industry, by paying attention to published tender price indices available69 from Bruce Shaw, Davis Langdon PKS (DLPKS) and the Society of Chartered Surveyors (SCS), and consulting with the various Government departments and the industry, there is no regular tender price index published by sub-sector of activity for the industry. The variation in tender price inflation across the various sub-sectors in the CIRO indicates the importance of calculating an individual tender price index for each segment of the industry, where activity levels and project types can vary significantly in any given year. The CIRO produces an overall tender price index for the industry based on inflation trends in each subsector of the industry and consultation with the relevant Government departments and State agencies. The methodology applied since 2000 is explained below70. A1.1: Construction price deflators by category of work The measure of construction output in value terms is a proxy for the value of contracts. Thus, to ascertain the volume increase in construction output we use a measure of construction tender prices for each sub-sector. The deflators are used to deflate the current price estimate of the value of output in each sector into constant prices, to ascertain the volume changes in output. The overall construction price deflator reflects the composition of construction output. We continue to distinguish this year between inflation in private and public sector projects, new and repair and maintenance work and between the different categories of work, where possible. Each deflator is discussed in turn below. We believe that the improved deflator methodology provides a true reflection of current market conditions and reflects the current very competitive market in construction contracts. A1.2: New residential construction output Two different price deflators are used to estimate the value of output in constant prices for the residential sector, one for new private housing output and one for new social housing output. A1.2.1 New private housing output The methodology employed is based on adjusting the average new house price (as published in the Annual Housing Statistics Bulletin of the Department of the Environment, Heritage and Local Government) for land acquisition costs and for the change in the size of dwellings completed. The adjustment for size of dwellings assumes that that size is a reasonable proxy for all the quality factors that affect the price of a house 68 See previous CIRO documents for tender price indices used before 2003. 69 Section 1.4 reviews trends in construction cost and tender price inflation according to the published indices. 70 See previous CIRO documents for the methodology applied for earlier years. PAGE 75 The average new house price supplied to the Department of the Environment, Heritage and Local Government by the main lending agencies is based on new house purchase loans approved by them. Average house prices are adjusted for site acquisition costs, as undeveloped site costs are not considered part of building output. The estimated site acquisition costs are extremely tentative. Land acquisition costs are assumed to represent 24% of the average house price in 2000. While there is no official data on land prices in 2001, we understand, following discussions with industry representatives, that development land prices weakened during 2001, declining to around 23% of the average house price in that year. We have assumed that site costs remained at around 23% of the average house price between 2001 and 2004 but increased to 25% in 2005 and 2006 as the housing market picked up again in those years. The average size index is calculated from information on the average size of each category of dwelling and the weight for each category. The average size of dwellings increased over the period to 2000 (except in 1998) due mostly to changes in the split between estate and one-off houses but also to a decreasing proportion of apartments in the overall mix. In contrast, the increased proportion of apartments since 2001 caused the average size of dwellings to fall in each subsequent year until 2005. The breakdown between apartments, estate houses and single houses in 2005 causes the average size of dwelling to increase by 1.3%. The price deflator is calculated by adjusting the net sales price index for the change in the size of dwellings. The deflator for new housing output is forecast to increase by 7.7% in 2006. With the very buoyant market in 2006 and the increase in average house prices of 10.6%, we have increased the site cost proportion to 27% of the total house price in that year. With the average size of dwelling is unchanged from 2005, the deflator for new housing output is forecast to increase by 7.7%71. For 2007 the average house price is assumed to increase by 1.5%. With estimated site costs back to 25% of the average house price, the net of site price is assumed to increase by 4.3%. Again there is no change in the average unit size, generating a housing output deflator of 4.3% for 2007. This figure is used to derive the volume change in housing output in 2007. 71 The deflator of 7.7% is derived as follows: Average house prices increased by 10.6% in 2006; excluding site costs at 27% of the average house price, the net of site price also went up by 7.7% in 2006 ==> index figure of 107.7 in 2006 if 2005= 100; No change assumed in the average unit size ==> index figure of 100 in 2006 if 2005 = 100; Deflator = 107.7/100 = 1.077 ==> deflator of 7.7%. PAGE 76 Table A1.1: Calculation of tender price deflator for new private housing output Average new house price € 2003 2004 2005 2006 2007E 224,567 249,191 276,221 305,637 310,222 Land as % of house price (est) 23% 23% 25% 27% 25% Land cost est € 51,650 57,314 69,055 82,522 77,555 Net sales price € 172,917 191,877 207,166 223,115 232,666 Net sales price index (2005=100) 83.468 92.620 100.000 107.699 112.309 % Change 13.4% 11.0% 10.8% 10.6% 1.5% % change 13.4% 11.0% 8.0% 7.7% 4.3% Estimated size (m2) Estate Single Apartment size house 2003 2004 2005 2006 2007E 103 103 103 103 103 142 142 142 142 142 74 72 72 72 72 Estimated weight in mix (%) Estate Single Apartment house house 53% 58% 52% 54% 54% 25% 21% 25% 25% 25% 22% 21% 23% 21% 21% Average dwelling size (m2) Index (2005 =100) % change Derived house price index price/size (2005=100) 83.04 93.85 100.00 107.71 112.32 Deflator % change 2003 2004 2005 2006 2007E 106.556 104.621 106.011 106.004 106.004 100.51 98.69 100.00 99.99 99.99 -1.8% -1.8% 1.3% 0.0% 0.0% 15.5% 13.0% 6.6% 7.7% 4.3% Source DoEHLG, DKM A1.2.2 New social housing output Following improvements to its database on tender levels for new local authority housing, the Department of the Environment, Heritage and Local Government (DEHLG) has provided more accurate deflators since 1996, which are based on an analysis of tender prices for the respective programmes in each year. According to DEHLG, the average unit tender price increased by 9.16% in 2006 over 2005, based on a sample of tenders covering 2,000 units in over 50 projects nationally. This rate of inflation reflects not only tender price inflation but other factors that impact on cost, such as an increase in the quality of design, location, restricted site, phasing considerations, revised Health and Safety Regulations (2006) and sustainable energy initiatives. Discounting for these factors, the estimated increase due to tender price inflation is 8% in 2006 and is forecast at 5% this year. A comparison of tender sums on social housing contracts by the DEHLG suggests the following increases since 2003. PAGE 77 Table A1.2: Tender price deflator for new social housing output Index Value (2005 = 1.0) 2003 2004 2005 2006 2007E 0.898 0.943 1.000 1.080 1.134 Change (%) 1.0% 5.0% 6.0% 8.0% 5.0% A1.3: General contracting output The price deflator derived for general contracting output is applied to the current price estimates of output for all categories of new private non-residential output, to calculate the value of output in constant (1995) prices. The moderation in construction output growth over the period 2001-2003 was accompanied by a reduction in the rate of tender price inflation, particularly in relation to private non-residential construction work. As a result tender prices for private non-residential work declined in 2002 and 2003. We estimate tender levels for private sector non-residential projects (excluding agricultural building projects), based on published tender price indices available from Bruce Shaw, PKS and the SCS (see Section 1) declined by 2% in 2002 and by 3% in 2003. As the recovery in non-residential construction commenced in 2004, tender price inflation moved back into positive territory (+4%) in that year. Although the pace of activity expanded at a rapid pace in 2005 and 2006, tender price inflation remained at 4% over the period 2004-2006. Tender price inflation of 3% is assumed for 2007, in line with the Bruce Shaw projection for tender inflation for general contracting work this year. Agricultural building work is also included under general contracting. The rate of tender price inflation for agricultural building work has in the past reflected the weak levels of investment in agricultural buildings over the period to 2003. Following a decline in tender levels in 2002 (-2%) and in 2003 (-4%), we estimate tender price inflation for agricultural building work moved back in line with the inflation recorded for other private non-residential work. Accordingly, tender price inflation for agricultural building work is assumed to be 4% over the period 2004 to 2006 and 3% in 2007. We continue this year to use a separate price deflator for social infrastructure projects in the public sector. Generally, tenders for hospital projects do not necessarily follow the overall industry trend as the infrastructure is procured through a limited number of contractors with the appropriate resources and particular expertise. Moreover, different market forces can affect tenders for hospital buildings compared with other sectors of the industry. Based on discussions with the respective Government departments we have assumed that tender levels for hospitals buildings increased by 3% in 2006 and are projected to increase by a further 3% in 2007. In regard to educational buildings we have been advised that tender levels were in line with industry norms, at around 4% in 2006 with a projection of 3% for 2007. For all other headings under social infrastructure it is assumed that tender levels are up by 4% per annum in 2006 and rise by a further 3% in 2007. Thus based on the available information on tender prices, and trends in building material prices and the cost of labour, tender levels for all new general contracting work increased by around 4% on average in 2006 and are expected to increase by 3% in 2007. This deflator is a weighted average of all of the individual components under new general contracting work, namely private industrial, commercial, tourism and agricultural building work as well as public sector projects covering educational, hospital and public building projects. PAGE 78 Table A1.3: Price deflator for new general contracting output General contracting - overall index value 2005 = 1.0 Change % Private non-residential construction - tender price inflation (%) Public social infrastructure – tender price inflation (%) 2003 2004 2005 2006 2007E 0.925 0.962 1.000 1.040 1.071 -2.1% 4.0% 4.0% 4.0% 3.0% -2.8% 4.0% 4.0% 4.0% 3.0% -1.0% 4.0% 4.0% 3.9% 3.0% Source: DEHLG, DES, DHC, DKM A1.4: Productive infrastructure output The projects cover a range of infrastructure including roads, water services, airports, seaports, public transport, energy and telecommunications. The difficulty with this segment of the industry is that, apart from road projects, construction projects of a similar nature do not occur with sufficient regularity to allow direct comparison of construction rates to determine inflation plus the projects which do occur tend to be too diverse to make direct comparisons. In the case of light rail projects, for example, no significant contracts were awarded in 2006. In the absence of any published tender price indices for each category of work, we estimate separate deflators for new road investment and water services investment, based on information obtained from the National Roads Authority and the Department of the Environment, Heritage and Local Government. We have also consulted with the Department of Transport and the relevant agencies in relation to public transport projects. Accordingly, this year we estimate tender price inflation for productive infrastructure projects as follows: • Based on information from the National Roads Authority concerning national road projects and information from the Department of Transport in relation to non-national road projects, we estimate that the overall inflation in road construction increased by 4% in 2006 compared with 4.5% in 2005. A further increase in tender levels of 4% is projected for 2007. Roads are one area where projects tend generally to be of the same size and scope, enabling a reasonable comparison to be made between the levels of tenders submitted. Nonetheless, adjustments are made for scope, location, ground conditions and relative complexity differences. Tenders for new national road projects showed an approximate increase of 4.1% in 2006, according to the NRA. With the bulk of 2007 starts being PPP’s, the NRA expects tender inflation to be marginally lower in 2007, as tenders for new construction remain competitive. However, the impact of the new forms of contract on tender price inflation has yet to be seen. If contractors properly price the increased risk transfer, tender price inflation could be higher. The tender levels though can be influenced by how contractors view the risk (risk attitude) and prospects of clawing back profits during implementation. For the purposes of the CIRO, we assume tender levels for all road (national and non-national) projects increase by 4% in 2006 and 2007. PAGE 79 • In contrast, there was very little increase in tender prices for water services projects since 2004 according to the Water Services Section of the DEHLG. Tenders levels increased by only 1% per annum in 2004 and 2005, based on tenders received by the DEHLG. As local authorities were given fully devolved responsibility in 2006 for contracts of less that ?5 million in value and are no loner required to submit reports on tenders to the DEHLG, the DEHLG is no longer in a position to estimate tender price inflation for a representative sample of water services projects. Accordingly, we continue to use 1% per annum for the increase in tender levels in 2006 and 2007. Following consultation in regard to public transport projects with the Department of Transport, Irish Rail, Dublin Bus and the RPA, and given the difficulties referred to earlier (regularity of projects, small samples, diversity of projects), the general views expressed were that tender levels for projects awarded increased by, on average, around 4% in 2006. We continue to assume 4% for 2007. For other productive infrastructure work, notably airports, seaports, energy and telecommunications, we have assumed that tender levels were up by 4% in 2006 with a similar increase projected for 2007. • • Thus overall tender levels for productive infrastructure projects increased by 3.6% in 2006, and are projected to increase by 3.7% this year. Table A1.4: Overall tender price deflator for new productive infrastructure output Index value (2005=1.0) 2003 2004 2005 2006 2007E Source NRA, DEHLG, Dept. of Transport, DKM 0.930 0.963 1.000 1.036 1.074 % change 2.6% 3.6% 3.8% 3.6% 3.7% A1.5: Repair and maintenance construction output Since 2004, it has been assumed that tender price inflation for maintenance projects tends to be in line with inflation for new projects. Thus the deflators assumed for repair and maintenance construction projects are as follows: • General contracting: private and public non-residential repair and maintenance work - 4% inflation in 2006 and in 2007. Productive infrastructure: 4% per annum in 2006 and 2007. Private and public housing: tender levels increase by 5% in 2006 and 4% in 2007. • • PAGE 80 A1.6: Conclusions Overall construction inflation averaged 6.6% over the period 2003 to 2006. The overall rate of construction price inflation is heavily influenced by housebuilding. Residential construction inflation (excluding site costs) peaked at almost 17% in 1998 before moderating to 7% in 2002. While both measures picked up again in 2003 and 2004, inflation in 2005 had fallen back to 5.6% for the sector as a whole and to 6.4% for residential construction. Overall construction inflation increased by 6.1% in 2006, again influenced by housebuilding, where tender prices increased by over 7%. Excluding all new housebuilding, construction inflation for all non-residential work is estimated at 4.2% in 2006 and is projected to increase by 3.6% in 2007. Tables A1.5 and A1.6 show the output price deflators and the corresponding percentage changes for each sector over the period 2003 to 2007E. PAGE 81 Table A1.5: Construction output price deflators 2003 to 2007E (2005 = 1.000) 2003 2004 2005 2006 2007E Residential construction New private New public Sub-total RM&I private RM&I public Sub-total Total residential 0.830 0.898 0.835 0.898 0.898 0.898 0.847 0.939 0.943 0.939 0.943 0.943 0.943 0.940 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.077 1.080 1.080 1.050 1.050 1.050 1.072 1.123 1.134 1.134 1.092 1.092 1.092 1.117 New non residential construction New private non residential construction Industry 0.925 Semi-state industry 0.925 Commercial Office development 0.925 Retail, wholesale 0.925 Total commercial 0.925 Agriculture 0.925 Tourism 0.925 Worship 0.925 Sub-total New productive infrastructure Roads Water and sanitary services Airport development Ports and harbours Energy including new power stations Transport Telecommunications Sub-total 0.925 0.962 0.962 0.962 0.962 0.962 0.962 0.962 0.962 0.962 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.071 1.071 1.071 1.071 1.071 1.071 1.071 1.071 1.071 0.920 0.980 0.925 0.925 0.925 0.925 0.925 0.930 0.957 0.990 0.962 0.962 0.962 0.962 0.962 0.963 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.040 1.010 1.040 1.040 1.040 1.040 1.040 1.036 1.082 1.020 1.082 1.082 1.082 1.082 1.082 1.074 New social infrastructure Education Health Public buildings Local authority services Sport Gaeltacht Sub-total Total new non-residential 0.907 0.952 0.925 0.925 0.925 0.925 0.925 0.928 0.962 0.962 0.962 0.962 0.962 0.962 0.962 0.962 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.040 1.030 1.040 1.040 1.040 1.040 1.039 1.038 1.071 1.061 1.071 1.071 1.071 1.071 1.070 1.072 PAGE 82 Table A1.5: Construction output price deflators 2003 to 2007E (2005 = 100) continued… 2003 2004 2005 2006 2007E Non-residential repair and maintenance Private non-residential Industry 0.925 Semi-state industry 0.925 Commercial Office development 0.925 Retail, wholesale 0.925 Total commercial 0.925 Agriculture 0.925 Tourism 0.925 Worship 0.925 Sub-total Productive infrastructure Roads Water and sanitary services Airport development Ports and harbours Energy Transport Telecommunications Sub-total 0.925 0.962 0.962 0.962 0.962 0.962 0.962 0.962 0.962 0.962 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.082 1.082 1.082 1.082 1.082 1.082 1.082 1.082 1.082 0.925 0.925 0.925 0.925 0.925 0.925 0.925 0.925 0.962 0.962 0.962 0.962 0.962 0.962 0.962 0.962 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.082 1.082 1.082 1.082 1.082 1.082 1.082 1.082 Social Infrastructure Education Health Public buildings Local authority services Sport Sub-total Total RM&I non-residential 0.925 0.925 0.925 0.925 0.925 0.925 0.925 0.962 0.962 0.962 0.962 0.962 0.962 0.962 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.040 1.040 1.040 1.040 1.040 1.040 1.040 1.082 1.082 1.082 1.082 1.082 1.082 1.081 Total construction output New construction output Repair and maintenance Total construction output 0.869 0.908 0.876 0.947 0.950 0.947 1.000 1.000 1.000 1.065 1.046 1.061 1.104 1.088 1.100 PAGE 83 Table A1.6: Construction output price deflators (2003 to 2007E) (annual change, %) 2003 2004 2005 2006 2007E Residential construction New private New public Sub-total RM&I private RM&I public Sub-total Total residential 15.5% 1.0% 13.8% 2.0% 2.0% 2.0% 10.4% 13.0% 5.0% 12.4% 5.0% 5.0% 5.0% 10.9% 6.6% 6.0% 6.5% 6.0% 6.0% 6.0% 6.4% 7.7% 8.0% 7.7% 5.0% 5.0% 5.0% 7.2% 4.3% 5.0% 4.3% 4.0% 4.0% 4.0% 4.2% New non residential construction New private non residential construction Industry -3.0% Semi-state industry -3.0% Commercial Office development -3.0% Retail, wholesale -3.0% Total commercial -3.0% Agriculture 0.0% Tourism -3.0% Worship -3.0% Sub-total -2.8% New productive infrastructure Roads Water and sanitary services Airport development Ports and harbours Energy including new power stations Transport Telecommunications Sub-total New social infrastructure Education Health Public buildings Local authority services Sport Gaeltacht Sub-total Total new non-residential 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.6% 4.0% 1.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.6% 4.5% 1.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.8% 4.0% 1.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.6% 4.0% 1.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.7% 0.0% 0.0% -3.0% -3.0% -3.0% -3.0% -1.0% 0.3% 6.0% 1.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.8% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.9% 4.0% 3.0% 4.0% 4.0% 4.0% 4.0% 3.9% 3.8% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.3% PAGE 84 Table A1.6: Construction output price deflators (2003 to 2007E) (annual change, %) - continued 2003 2004 2005 2006 2007E Non-residential repair and maintenance Private non-residential Industry 0.0% Semi-state industry 0.0% Commercial Office development 0.0% Retail, wholesale 0.0% Total commercial 0.0% Agriculture 0.0% Tourism 0.0% Worship 0.0% Sub-total 0.0% Productive infrastructure Roads Water and sanitary services Airport development Ports and harbours Energy Transport Telecommunications Sub-total Social Infrastructure Education Health Public buildings Local authority services Sport Sub-total Total RM&I non-residential Total construction output New construction output Repair and maintenance Total construction inflation 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 3.0% 4.0% 4.0% 3.9% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.8% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 6.9% 1.7% 5.7% 9.0% 4.6% 8.1% 5.6% 5.3% 5.6% 6.5% 4.6% 6.1% 3.7% 4.0% 3.7% PAGE 85 Appendix 2: Construction output by sector, 2003-2007E The following tables present information on the value of construction industry output in current and constant (2005) prices. Table A2.1: Value of construction output in current prices, 2003-2007E (€m) 2003 2004 2005 2006 2007E Residential construction New private housing New public housing New local authority New voluntary Total new public housing Sub-total RM&I private RM&I public Sub-total Total residential 10,770.3 720.3 212.9 933.2 11,703.5 2,735.9 196.3 2,932.2 14,635.6 13,701.6 725.3 184.8 910.1 14,611.7 3,175.2 200.6 3,375.8 17,987.5 16,614.3 870.9 168.7 1,039.6 17,653.9 3,578.6 224.0 3,802.6 21,456.4 18,431.8 882.7 185.5 1,068.2 19,500.0 4,262.3 283.0 4,545.3 24,045.2 16,658.9 868.6 258.9 1,127.5 17,786.4 4,604.0 298.5 4902.5 22,688.9 New Non-residential construction New private non residential construction Industry 528.6 Semi-State industry 39.3 Commercial Office development 533.8 Retail, wholesale 450.8 Total commercial 984.6 Agriculture 128.4 Tourism 340.1 Worship 22.4 Sub-total 2,043.4 New productive infrastructure Roads 1,444.2 Water and sanitary services 536.0 Airport development 46.8 Ports and harbours 61.2 Energy 1,103.6 Transport including LUAS 554.4 Telecommunications 249.3 Sub-total 3,995.4 New social infrastructure Education Health Public buildings Local authority services Sport Gaeltacht Sub-total Total new non-residential 549.8 59.8 444.4 539.4 983.8 171.1 367.3 17.8 2,149.6 606.0 84.2 647.0 701.2 1,348.2 179.2 420.2 18.3 2,656.0 661.7 64.5 847.8 878.9 1,726.8 288.0 550.6 19.1 3,310.6 784.0 74.2 1,092.0 950.9 2,042.9 695.0 764.3 20.6 4,381.1 1,442.1 472.5 82.2 43.6 1,316.6 353.4 265.3 3,975.6 1,577.8 474.0 94.1 30.7 1,229.7 265.5 207.8 3,879.4 1,712.7 511.1 132.7 33.8 1,282.7 192.0 262.5 4,127.6 1,808.0 498.6 147.1 41.8 1,214.4 448.1 232.4 4,390.3 478.8 329.2 341.7 92.7 83.8 14.6 1,340.9 7,379.7 538.0 306.0 282.7 95.4 115.8 27.1 1,365.0 7,490.2 584.7 338.1 262.5 155.6 94.4 45.0 1,480.2 8,015.7 617.4 217.5 292.4 147.8 132.6 63.1 1,470.9 8,909.1 652.4 258.4 492.6 291.0 225.5 92.3 2,012.2 10,783.5 PAGE 86 Table A2.1: Value of construction output in current prices, 2003-2007E (€m) – continued 2003 2004 2005 2006 2007E Non-residential repair and maintenance Private non-residential Industry 171.5 Semi-State industry 11.5 Commercial Office development 180.8 Retail, wholesale 152.7 Total commercial 333.5 Agriculture 74.6 Tourism 68.0 Worship 28.0 Sub-total 687.2 Productive infrastructure Roads Water and sanitary services Airport development Ports & harbours Energy Transport Telecommunications Sub-total Social infrastructure Education Health Public buildings Local authority services Sport Sub-total Total RM&I non-residential Total construction output New construction output Repair and Maintenance Total construction output 179.6 12.8 152.2 184.8 337.0 79.3 83.7 46.0 738.5 191.4 15.5 169.0 183.1 352.1 83.0 103.1 55.0 800.0 221.3 8.6 222.2 230.3 452.5 90.2 131.6 57.2 961.4 258.7 6.4 253.0 243.7 496.7 93.1 174.0 61.8 1,108.8 252.8 214.3 26.4 8.9 133.4 113.9 16.6 766.1 266.9 266.1 26.1 7.1 179.0 96.2 14.2 855.6 285.6 298.0 29.2 4.6 158.6 99.9 48.7 924.6 370.2 379.9 11.4 4.2 201.5 142.3 44.7 1,154.3 376.4 407.2 19.4 6.1 229.2 122.2 36.7 1,197.1 83.5 130.2 109.0 5.5 14.5 342.7 1,795.9 138.3 154.0 90.7 2.1 8.3 393.4 1,987.5 140.9 125.6 108.2 3.4 11.0 389.1 2,113.6 164.1 110.8 108.2 24.1 11.4 418.6 2,534.3 211.2 105.0 117.1 25.2 12.7 471.2 2,777.1 19,083.2 4,728.1 23,811.3 22,101.9 5,363.3 27,465.2 25,669.5 5,916.2 31,585.7 28,409.1 7,079.6 35,488.6 28,569.9 7,679.7 36,249.6 PAGE 87 Table A2.2: Value of construction output in constant prices, 2003-2007E (constant 2005 prices, €m) 2003 2004 2005 2006 2007E Residential construction New private housing New public housing New local authority New voluntary Total new public housing Sub-total RM&I private RM&I public Sub-total Total residential 12,969.9 801.7 237.0 1,038.7 14,008.5 3,045.1 218.4 3,263.5 17,272.0 14,599.3 768.8 195.9 964.7 15,564.0 3,365.7 212.6 3,578.3 19,142.4 16,614.3 870.9 168.7 1,039.6 17,653.9 3,578.6 224.0 3,802.6 21,456.4 17,114.0 817.3 171.8 989.1 18,103.1 4,059.3 269.5 4,328.8 22,431.0 14,830.2 765.9 228.3 994.2 15,824.4 4,216.1 273.4 4,489.5 20,313.9 New Non-residential construction New private non residential construction Industry 571.8 Semi-State industry 42.5 Commercial Office development 577.3 Retail, wholesale 487.6 Total commercial 1,065.0 Agriculture 138.9 Tourism 367.8 Worship 24.2 Sub-total 2,210.2 New productive infrastructure Roads 1,569.5 Water and sanitary services 546.7 Airport Development 50.7 Ports and harbours 66.2 Energy including new power stations 1,193.6 Transport 599.6 Telecommunications 269.6 Sub-total 4,296.0 New social infrastructure Education Health Public buildings Local authority services Sports Gaeltacht Sub-total Total new non-residential 571.8 62.2 462.1 561.0 1,023.1 178.0 382.0 18.5 2,235.6 606.0 84.2 647.0 701.2 1,348.2 179.2 420.2 18.3 2,656.0 636.2 62.1 815.2 845.1 1,660.3 276.9 529.4 18.3 3,183.3 731.9 69.3 1,019.4 887.7 1,907.1 648.8 713.5 19.2 4,089.9 1,506.9 477.3 85.5 45.3 1,369.3 367.5 275.9 4,127.7 1,577.8 474.0 94.1 30.7 1,229.7 265.5 207.8 3,879.4 1,646.9 506.0 127.6 32.5 1,233.4 184.6 252.4 3,983.4 1,671.6 488.8 136.0 38.6 1,122.8 414.3 214.8 4,086.9 527.8 345.8 369.6 100.3 90.6 15.8 1,450.0 7,956.2 559.5 318.2 294.0 99.2 120.5 28.1 1,419.6 7,782.9 584.7 338.1 262.5 155.6 94.4 45.0 1,480.2 8,015.7 593.7 211.2 281.2 142.1 127.5 60.7 1,416.3 8,583.1 609.1 243.5 459.9 271.7 210.5 86.2 1,880.8 10,057.5 PAGE 88 Table A2.2: Value of construction output in constant prices, 2003-2007E (constant 2005 prices, €m) – continued 2003 2004 2005 2006 2007E Non-residential repair and maintenance Private non-residential Industry 185.5 Semi-State industry 12.4 Commercial Office development 195.6 Retail, wholesale 165.2 Total commercial 360.8 Agriculture 80.7 Tourism 73.6 Worship 30.3 Sub-total 743.2 Productive infrastructure Roads Water and sanitary services Airport development Ports & harbours Energy Transport Telecommunications Sub-total Social infrastructure Education Health Public buildings Local authority services Sport Sub-total Total RM&I non-residential Total construction output New construction output Repair and Maintenance Total construction output 186.8 13.3 158.3 192.2 350.5 82.5 87.1 47.8 768.0 191.4 15.5 169.0 183.1 352.1 83.0 103.1 55.0 800.0 212.8 8.3 213.6 221.5 435.1 86.8 126.6 55.0 924.4 239.2 5.9 233.9 225.3 459.2 86.9 160.9 57.1 1,026.0 273.5 231.8 28.5 9.6 144.3 123.2 17.9 828.6 277.6 276.7 27.2 7.4 186.1 100.1 14.8 889.8 285.6 298.0 29.2 4.6 158.6 99.9 48.7 924.6 355.9 365.3 11.0 4.1 193.8 136.9 43.0 1,109.9 348.0 376.5 17.9 5.6 211.9 112.9 33.9 1,106.8 90.3 140.8 117.9 5.9 15.7 370.6 1,942.5 143.8 160.1 94.4 2.2 8.7 409.2 2,067.0 140.9 125.6 108.2 3.4 11.0 389.1 2,113.6 157.8 106.5 104.0 23.2 11.0 402.5 2,436.8 195.3 97.1 108.3 23.3 11.7 435.7 2,568.4 21,964.7 5,206.0 27,170.7 23,346.9 5,645.4 28,992.2 25,669.5 5,916.2 31,585.7 26,686.1 6,765.7 33,451.8 25,881.9 7,057.9 32,939.9 PAGE 89 Table A2.3: Change in the volume of construction output, 2003-2007E (%) 2003 2004 2005 2006 2007E Residential construction New private housing New public housing New local authority New voluntary Total new public housing Sub-total RM&I private RM&I public Sub-total Total residential 18.7% -8.1% 26.5% -1.9% 16.8% -9.2% 12.3% -8.0% 11.2% 12.6% -4.1% -17.3% -7.1% 11.1% 10.5% -2.7% 9.6% 10.8% 13.8% 13.3% -13.9% 7.8% 13.4% 6.3% 5.3% 6.3% 12.1% 3.0% -6.2% 1.8% -4.9% 2.5% 13.4% 20.3% 13.8% 4.5% -13.3% -6.3% 32.9% 0.5% 12.6% 3.9% 1.4% 3.7% -9.4% New Non-residential construction New private non residential construction Industry -15.0% Semi-State industry -15.7% Commercial Office development -30.0% Retail, wholesale 4.0% Total commercial -17.7% Agriculture -10.5% Tourism 16.9% Worship 429.2% Sub-total -11.3% New productive infrastructure Roads 2.9% Water and sanitary services -6.6% Airport Development -60.7% Ports and harbours -16.4% Energy including new power stations -8.6% Transport 35.4% Telecommunications -5.7% Sub-total -1.3% New social infrastructure Education Health Public buildings Local authority services Sports Gaeltacht Sub-total New non-residential construction 0.0% 46.4% -20.0% 15.0% -3.9% 28.1% 3.8% -23.5% 1.2% 6.0% 35.3% 40.0% 25.0% 31.8% 0.7% 10.0% -1.0% 18.8% 5.0% -26.3% 26.0% 20.5% 23.2% 54.6% 26.0% 0.0% 19.9% 15.0% 11.6% 25.0% 5.0% 14.9% 134.3% 34.8% 4.9% 28.5% -4.0% -12.7% 68.8% -31.5% 14.7% -38.7% 2.3% -3.9% 4.7% -0.7% 10.1% -32.3% -10.2% -27.8% -24.7% -6.0% 4.4% 6.8% 35.6% 5.9% 0.3% -30.4% 21.5% 2.7% 1.5% -3.4% 6.6% 18.9% -9.0% 124.4% -14.9% 2.6% -17.0% 3.1% 30.9% -47.4% -33.5% -5.1% -5.0% 6.0% -8.0% -20.5% -1.0% 32.9% 78.0% -2.1% -2.2% 4.5% 6.3% -10.7% 56.7% -21.6% 59.8% 4.3% 3.0% 1.5% -37.6% 7.1% -8.7% 35.1% 35.0% -4.3% 7.1% 2.6% 15.3% 63.6% 91.2% 65.0% 41.9% 32.8% 17.2% PAGE 90 Table A2.3: Change in the volume of construction output, 2003-2007E (%) – continued 2003 2004 2005 2006 2007E Non-residential repair and maintenance Private non-residential Industry 55.0% Semi-State industry -18.7% Commercial Office development 3.1% Retail, wholesale 53.2% Total commercial 21.3% Agriculture 0.2% Tourism 10.9% Worship -50.8% Sub-total 16.0% Productive infrastructure Roads Water and sanitary services Airport development Ports & harbours Energy Transport Telecommunications Sub-total Social infrastructure Education Health Public buildings Local authority services Sport Sub-total Total RM&I non-residential Total construction output New construction output Repair and maintenance Total construction output 0.7% 7.5% -19.0% 16.3% -2.8% 2.2% 18.4% 57.7% 3.3% 2.4% 16.1% 6.7% -4.7% 0.4% 0.6% 18.4% 14.9% 4.2% 11.2% -46.6% 26.4% 20.9% 23.6% 4.6% 22.7% 0.0% 15.6% 12.4% -28.8% 17.4% 1.7% 9.4% 0.2% 27.1% 3.9% 11.0% -2.9% 8.0% 4.0% 74.1% 53.2% 134.4% -27.2% 18.3% 1.5% 19.4% -4.7% -22.7% 29.0% -18.7% -17.6% 7.4% 2.9% 7.7% 7.6% -38.5% -14.8% -0.2% 229.8% 3.9% 24.6% 22.6% -62.4% -10.5% 22.1% 37.0% -11.7% 20.0% -2.2% 3.1% 63.1% 37.3% 9.3% -17.5% -21.1% -0.3% -42.3% -3.6% 13.5% -65.0% -13.4% 9.8% 59.2% 13.7% -20.0% -62.5% -44.9% 10.4% 6.4% -2.0% -21.6% 14.7% 54.4% 26.7% -4.9% 2.3% 12.0% -15.2% -3.9% 577.6% 0.3% 3.5% 15.3% 23.8% -8.9% 4.1% 0.5% 6.5% 8.2% 5.4% 7.9% -2.1% 5.8% 6.3% 8.4% 6.7% 9.9% 4.8% 8.9% 4.0% 14.4% 5.9% -3.0% 4.3% -1.5% PAGE 91 Appendix 3: Review of construction output by region, 2006 The regional breakdown of construction output in 2006 is broadly in line with the regional population distribution according to the 2006 Census. The breakdown this year suggests that the BMW region increased its share of the total, accounting for 32% of total construction output in 2006 compared with 29% in 2005. Within the BMW region, the Border region made the most gains, accounting for almost 14% of total construction output as against 11% in 2005. On an output per capital basis, the BMW region exceeded the S&E region for the first time since regional output figures were presented in 1995. The gap was significant (+28%) and is an indication of the extent of the progress made on infrastructure investment in the BMW region. Once again this year residential construction dominates in each region, accounting for around 68% or more of the total in four regions (Border, Dublin, Mid-east and South-east). The next largest sector across the State, the civil engineering sector, represented 17% of construction output in the Border, Midland and South-east regions. Investment in social infrastructure building projects was highest in Dublin, which accounted for 42% of the output arising from investment in public buildings. The Greater Dublin Area (Dublin and the Mid-east region), which accounted for 35% of the construction output of the State, captured around two-thirds of the construction related investment in airports and seaports and public transport and a half of the construction related investment in public buildings. Estimates of the composition of construction output by region were first presented in 1995. We continue this year with our presentation of regional estimates for construction output for 200672. The regional breakdown is provided to facilitate the CSO in the production of Gross Domestic Product (or Gross Value Added) at regional level. The CSO also uses the data in the Annual CIRO for compiling estimates of gross fixed capital investment for the National Accounts. A3.1: Definition of regions The relevant regions used to breakdown construction output for 2006 are the eight planning regions as follows: • • • • • • • • Border: Cavan, Donegal, Leitrim, Louth, Monaghan, Sligo; Dublin: Dublin City, Dun Laoghaire - Rathdown, South Dublin and Fingal; Mid-East: Kildare, Meath and Wicklow; Midland: Laois, Longford, Offaly and Westmeath; Mid-West: Clare, Limerick and North Tipperary; South-East: Carlow, Kilkenny, South Tipperary, Waterford and Wexford; South-West: Cork City, Cork County and Kerry; West: Galway, Mayo and Roscommon. 72 Although the methodology used to derive regional estimates is being constantly improved, these estimates are to be considered tentative and we urge caution in interpreting the figures and particularly, in year-on-year comparisons. PAGE 92 In addition we present estimates of construction output for the two new regions73 negotiated by Ireland in the context of the Agenda 2000 Agreement for Structural Fund purposes: (a) the Border, Midlands and Western (BMW) Region; and (b) the Southern and Eastern (S&E) Region. A3.2: Regional breakdown of construction output/population The total value of construction output in 2006 has been estimated at €35.5bn. Table A3.1 provides estimates for the regional composition of total output including repair and maintenance expenditure in 2006. The estimated regional breakdown of the total population in 2006 is shown for comparison74. Table A3.1: Value of construction output by region, 2006 Output (€m) Border Dublin Mid-east Midland Mid-west South-east South-west West 4,893 8,193 4,078 2,644 3,027 4,026 4,833 3,794 Share of output (%) 14% 23% 11% 7% 9% 11% 14% 11% Share of population (%) 11% 28% 11% 6% 9% 11% 15% 10% Total output S&E BMW 35,489 24,158 11,331 100% 68% 32% 0% 73% 27% Comparing the regional breakdown of construction output with the regional population distribution for the country as a whole, both shares are broadly similar for all regions except the Border and Dublin regions. The Border region has a higher share of construction output (14%) than its population share (11%). The opposite is the case for Dublin which has a lower output share (23%) compared with its population share (28%). Figure A3.1 illustrates the regional split showing the Dublin construction market three times larger than the smallest market (Midlands) in 2006. Other notable characteristics from Table A3.1 and Figure A3.1 are as follows: • 68% of the total output was generated in the Southern and Eastern (S&E) region compared with 32% generated in the Border, Midlands and West (BMW) region. Just under one-quarter of the total output was generated in the Dublin region in 2006 while the Greater Dublin Area (Dublin and the Mid-east) had a combined share of 35% of the total (39% of total population). Only two regions represented less than 10% of the total: Midland (7%) and Mid-west (9%). The West, South-east and Mid-east each accounted for 11% of total output, while the South-west and Border regions each accounted for 14% of the total. • • 73 For a comparative regional analysis of the BMW and S&E regions see the National Development Plan 2000-2006. 74 Census of Population, Population Classified by Area, 2006 Central Statistics Office. PAGE 93 Figure A3.1: Value of construction output by region, 2006 (€m) 8,193 4,893 4,833 4,078 4,026 3,794 3,027 2,644 Dublin Border SouthWest Mid-East South-East West Mid-West Midland Source: DEHLG, DKM A3.2.1: Construction output per capita Figure A3.2 illustrates the level of construction output per capita in 2006 by region and for the State as a whole. The average construction output per capita for the State as a whole was €8,370 in 2006. This is the first year since the regional breakdown has been presented in which the output per capita in the BMW region exceeded that for the S&E region. Output per capita in the S&E region was 28% ahead of that for the S&E region, possibly an indication of the more balanced spread across the regions of the buildings and infrastructure put in place, with a particular focus on the BMW counties. Output in the S&E region is just over twice the value of output in the BMW region but it has almost three times the population of the BMW region. Construction output per capita levels were lowest in Dublin (€6,902) and the South-west regions, which had the largest shares of the population, equivalent to 28% and 15% of the total respectively. Figure A3.2: Construction output per capita by region, 2006 (€) State BMW S&E Midland Border West South-East Mid-East Mid-West South-West Dublin 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 Source: DEHLG, CSO, DKM PAGE 94 A3.3: Composition of regional construction output The composition of regional output in 2006 is set out in Table A3.2 together with the percentage shares for each category of work. The following points are noted in respect of the composition of regional construction output in 2006: • The extent to which residential construction output dominates across each region, representing 68% of total construction output in 2006. Private non-residential output was highest in absolute terms in the Dublin region, equivalent to €0.9bn or 11% of the total for Dublin. In percentage terms the South-west had the highest share (14% of total output in South-west). The shares for the other regions were broadly similar at between 11% and 13%. Overall only 12% of construction output in 2006 comprised building projects in the private non-residential sector. The value of productive infrastructure in 2006 was €5.3bn or 15% of the total. The Border, Midland, and South-east regions had the highest shares (17% each) while Dublin had the highest absolute level of investment in productive infrastructure. The Border region had the second highest level of investment after Dublin, reflecting the significant level of investment in roads and energy (e.g. wind power, electricity and gas transmission) in the Border counties. The final category of work, social infrastructure, accounted for only 5% of total output in 2006, ranging from 8% in Dublin to only 3% in South-East region. • • • In terms of the two larger regions, the S&E and the BMW, total construction output was split in the ratio 68% to 32%. In terms of the individual market segments, the private non-residential construction sector split 70% (S&E) to 30% (BMW) while 32% of the residential construction market was located in the BMW region compared with 68% in the S&E region. The corresponding shares for the productive and social infrastructure segments were 64% and 74% respectively in the S&E region as against 36% and 26% respectively in the BMW region. PAGE 95 Table A3.2: Regional construction output in 2006 (€m) Residential Private Productive Social Regional Construction Non-Residential Infrastructure Infrastructure Output Border Dublin Mid-east Midland Mid-west South-east South-west West Total Output 3,350 5,609 2,814 1,751 2,022 2,750 3,194 2,555 24,045 502 935 548 299 352 457 687 492 4,272 850 990 586 460 442 682 689 582 5,282 191 659 131 134 210 137 263 164 1,889 4,893 8,193 4,078 2,644 3,027 4,026 4,833 3,794 35,489 S&E BMW 16,389 7,656 2,979 1293 3,389 1,893 1,400 489 24,158 11,331 Border Dublin Mid-east Midland Mid-west South-east South-west West Total Output 68% 68% 69% 66% 67% 68% 66% 67% 68% 10% 11% 13% 11% 12% 11% 14% 13% 12% 17% 12% 14% 17% 15% 17% 14% 15% 15% 4% 8% 3% 5% 7% 3% 5% 4% 5% 100% 100% 100% 100% 100% 100% 100% 100% 100% S&E BMW 68% 32% 70% 30% 64% 36% 74% 26% 68% 32% A3.4: Categories of construction work by region Figures A3.3 to A3.6 illustrate how the broad categories of work split by region in 2006, using residential, private non-residential, productive infrastructure and social infrastructure as the four main categories of construction work. A3.4.1: Residential construction The shares of residential construction output by region match closely the shares of overall dwellings completed by region in 2006: Border - 14% of residential output (16% of dwelling completions), Dublin – 23% (21%), Mid-east - 12% (11%), Midland - 7% (7%), Mid-west - 8% (8%), South-east - 11% (11%), South-west - 13% (14%), West - 11% (12%). The Dublin and Mid-east regions (a proxy for the Greater Dublin Area) represented 35% of the total value of residential construction output in 2006 compared with 32% of total completions. Approximately 40% the total investment in public sector housing was in the Greater Dublin Area (GDA). A3.4.2: Private non-residential construction The GDA accounted for 35% of the total private non-residential construction output in 2006 followed by the South-west (16%), the Border, West and South-east regions, each representing 12% of the total. The Mid-west accounted for 8% of the total, with the Midland region accounting for just 7%. The GDA accounted for 39% of new commercial building output and 37% of new industrial output. PAGE 96 A3.4.3: Productive infrastructure An interesting development in respect of productive infrastructure output is the substantial investment in the Border region (at 16% of the total), which after Dublin, had the second highest share of the total in both absolute and percentage terms. Dublin accounted for 19% of total productive infrastructure output but represented 65.5% of investment in airports and seaports and 55% of investment in public transport. Including the Mid-east region, almost 30% of the total investment took place in the GDA. The South-east and South-west regions each represented 13% of the total and the West region accounted for 11% of the total. The lowest shares were represented by the Midland (9%) and the Mid-west (8%) regions. A3.4.4: Social infrastructure Dublin has a dominant position in respect of the construction output arising from social infrastructure projects, accounting for 35% of the total in 2006. Including the Mid-east region, the GDA in total accounted for almost 42% of total construction output from social infrastructure projects. The GDA accounted for 50% of the construction output associated with public buildings, 46% of educational building output and 41% of the hospital building output. PAGE 97 Figure A3.3: Residential construction output by region, 2006 (%) 23% 14% 12% 11% 11% 11% 8% 7% Dublin Border Mid-east Southwest South-east West Mid-west Midland Source: DEHLG, DKM Table A3.3: Construction output by region, 2006 (current prices, €m.) Border Dublin Mid- Midland east Mid- South- South- West west east west State total Residential construction Private housing Public housing Sub total 3,194 156 3,350 5,159 2,705 450 109 5,609 2,814 1,666 1,945 77 85 1,751 2,022 2,581 169 2,750 2,986 2,458 22,694 97 1,351 207 3,194 2,555 24,045 Non residential construction Private non-residential construction Industry 106 Commercial 251 Agricultural 53 Tourism 81 Worship 10 Sub total 502 Productive infrastructure Roads Water services Airports and seaports Energy Transport Communications Sub total Social infrastructure Education Health Public buildings Other social Sub total Total all construction 216 565 0 134 19 935 137 275 39 92 6 548 63 152 36 44 4 299 84 151 43 65 10 352 99 229 70 51 8 457 158 335 79 105 11 687 93 222 57 111 10 492 956 2,179 378 682 76 4,272 288 106 10 409 7 29 850 171 178 7 243 184 33 990 308 130 119 82 29 95 586 276 41 0 94 27 37 460 216 99 0 77 17 23 442 377 102 8 157 19 24 682 217 96 4 268 34 24 689 229 139 37 155 17 37 582 2,083 891 7 1,484 334 35 5,282 64 32 37 58 191 4,893 310 117 169 62 659 53 16 31 31 131 35 28 49 23 134 87 23 29 72 210 62 35 19 21 137 4,026 113 59 32 59 263 57 19 35 53 164 782 328 401 379 1,889 8,193 4,078 2,644 3,027 4,833 3,794 35,489 Note: The value of construction output includes repair and maintenance expenditure. PAGE 98 Figure A3.4: Private non-residential construction output by region, 2006 (%) 22% 16% 13% 12% 12% 11% 8% 7% Dublin Southwest Mid-east Border West South-east Mid-west Midland Source: DEHLG, DKM Table A3.4: Construction output by region, 2006 (%) Border Dublin Mid- Midland east Mid- South- South- West west east west State total Residential construction Private housing Social housing Sub-total 65.3 3.2 68.5 63.0 5.5 68.5 66.3 2.7 69.0 63.0 3.2 66.2 64.3 2.6 66.8 64.1 4.2 68.3 61.8 4.3 66.1 64.8 2.5 67.3 63.9 3.8 67.8 Non residential construction Private non-residential construction Industry 2.2 Commercial 5.1 Agricultural 1.1 Tourism 1.7 Worship 0.2 Sub-total 10.3 Productive infrastructure Roads Water services Airports and seaports Energy Transport Communications Sub-total Social infrastructure Education Health Public buildings Other social Sub-total Total all construction 2.6 6.9 0.0 1.6 0.2 11.4 3.4 6.7 1.0 2.2 0.1 13.4 2.4 5.8 1.4 1.7 0.1 11.3 2.8 5.0 1.4 2.1 0.3 11.6 2.5 5.7 1.7 1.3 0.2 11.4 3.3 6.9 1.6 2.2 0.2 14.2 2.4 5.8 1.5 2.9 0.3 13.0 2.7 6.1 1.1 1.9 0.2 12.0 5.9 2.7 0.3 8.4 0.1 0.9 17.4 2.1 2.2 0.1 3.0 2.3 0.7 12.1 7.6 2.2 1.5 2.0 0.7 1.2 14.4 10.4 3.2 0.0 3.5 1.0 0.9 17.4 7.1 1.5 0.0 2.5 0.6 0.9 14.6 9.4 3.3 0.3 3.9 0.5 0.8 16.9 4.5 2.5 0.1 5.5 0.7 0.6 14.3 6.0 2.0 0.8 4.1 0.5 0.8 15.3 5.9 3.7 0.2 4.2 0.9 0.9 14.9 1.3 0.7 0.7 1.2 3.9 100 3.8 1.4 0.8 1.2 8.0 100 1.3 0.4 2.1 0.8 3.2 100 1.3 1.0 0.7 0.8 5.1 100 2.9 0.8 1.8 0.9 6.9 100 1.5 0.9 0.9 2.4 3.4 100 2.3 1.2 0.5 0.5 5.4 100 1.5 0.5 0.7 1.2 4.3 100 2.2 0.9 0.9 1.4 5.3 100 PAGE 99 Figure A3.5: Productive infrastructure construction by region, 2006 (%) 19% 16% 13% 13% 11% 11% 9% 8% Dublin Border South-east Southwest West Mid-east Midland Mid-west Source: DEHLG, DKM Table A3.5: Regional construction output by category of work, 2006 (%) Border Dublin Mid- Midland east Mid- South- South- West west east west State total Residential construction Private housing Social housing Sub-total 14.1 11.6 13.9 22.7 33.3 23.3 11.9 8.0 11.7 7.3 6.3 7.3 8.6 5.7 8.4 11.4 12.5 11.4 13.2 15.3 13.3 10.8 7.1 10.6 100 100 100 Non residential construction Private non-residential construction Industry 11.1 Commercial 11.5 Agricultural 14.1 Tourism 11.9 Worship 12.5 Sub-total 11.7 Productive infrastructure Roads Water services Airports and seaports Energy Transport Communications Sub-total Social infrastructure Education Health Public buildings Other social Sub-total Total all construction 22.6 25.9 0.0 19.7 25.0 21.9 14.3 12.6 10.3 13.4 7.8 12.8 6.6 7.0 9.6 6.4 4.7 7.0 8.8 6.9 11.3 9.5 12.5 8.2 10.4 10.5 18.6 7.4 10.9 10.7 16.5 15.4 21.0 15.4 14.1 16.1 9.7 10.2 15.1 16.3 12.5 11.5 100 100 100 100 100 100 13.8 11.9 3.9 27.5 2.0 10.7 16.1 8.2 20.0 65.5 16.3 55.2 30.8 18.8 14.8 14.5 0.0 5.5 8.6 11.9 11.1 13.2 4.6 0.0 6.3 8.2 7.4 8.7 10.4 11.1 4.5 5.2 5.1 7.9 8.4 18.1 11.4 2.0 10.6 5.6 7.8 12.9 10.4 10.8 20.4 18.1 10.1 12.0 13.0 11.0 15.6 3.6 10.4 5.2 11.4 11.0 100 100 100 100 100 100 100 8.2 9.8 9.2 15.3 10.1 13.8 39.7 35.8 42.3 16.4 34.9 23.1 6.8 4.8 7.6 8.2 6.9 11.5 4.4 8.4 12.2 6.1 7.1 7.5 11.1 7.0 7.1 19.0 11.1 8.5 8.0 10.5 4.8 5.4 7.2 11.3 14.5 17.8 7.9 15.7 13.9 13.6 7.2 5.9 8.8 14.0 8.7 10.7 100 100 100 100 100 100 Note: The value of construction output includes repair and maintenance expenditure. PAGE 100 Figure A3.6: Social infrastructure construction by region, 2006 (%) 35% 14% 11% 10% 9% 7% 7% 7% Dublin Southwest Mid-west Border West Mid-east Midland South-east Source: DEHLG, DKM Table A3.6: Construction output in the S&E region and the BMW region, 2006 (€m) State total S&E region BMW region S&E (%) share BMW (%) share Residential construction Private housing Social housing Sub total 22,694 1,351 24,045 15,376 1,013 16,389 7,318 338 7,656 63.6 4.2 67.8 64.6 3.0 67.6 Non residential construction Private non-residential construction Industry 956 Commercial 2,179 Agricultural 378 Tourism 682 Worship 76 Sub total 4,272 Productive infrastructure Roads Water services Airports and seaports Energy Transport Communications Sub total Social infrastructure Education Health Public buildings Other social Sub total Total all construction 694 1,554 231 447 54 2,979 262 626 147 236 23 1,293 2.9 6.4 1.0 1.8 0.2 12.3 2.3 5.5 1.3 2.1 0.2 11.4 2,083 891 182 1,484 334 307 5,282 1,290 605 168 827 283 216 3,389 793 286 14 657 52 91 1,893 5.3 2.5 0.7 3.4 1.2 0.9 14.0 7.0 2.5 0.1 5.8 0.5 0.8 16.7 782 328 401 379 1,889 35,489 626 249 280 245 1,400 24,158 155 79 121 134 489 11,331 2.6 1.0 1.2 1.0 5.8 100 1.4 0.7 1.1 1.2 4.3 100 PAGE 101