According to the national association of construction companies (ANCE), in 2019 investments in the construction sector increased by 1,7% compared to the previous year, amounting to approximately 130 billion euros. However, the industry has been badly hit by the insolvencies of some major players and is in one of its toughest times since 2008-09. The outlook for 2020, published by Atradius, remains uncertain due to the Coronavirus effect, modest or no economic growth (the latest forecasts speak of a maximum of +0,3%) and political uncertainty.
Investments in residential buildings increased by 5,4% last year and renovations increased by +0,7%, supported by tax incentives; however, the number of new home approvals decreased by 0,9% in the fourth quarter, setting the stage for slower growth in 2020. The average selling price has decreased by more than 15%, but this rebound was not enough to offset the sharp decline in investment (-51% in the period between 2007 and 2019). Uncertainty about government investments, political support for future projects and frequent public spending delays have further undermined growth expectations for this year.
This year public tenders will increase by 39% compared to 2019, for an amount of up to 40 billion euros, mainly driven by municipal building projects. However, it could be years before construction begins, mainly due to complicated legal compliance and delays in financial spending by major state bodies ANAS (roads, bridges, tunnels) and RFI (railway infrastructure). In the third quarter of 2019, loans for non-residential builders decreased by 30%, while at the end of last September the sector had accumulated NPLs worth 16 billion, out of a total of 55 billion of corporate NPLs in Italy.
Financial difficulties affecting both top players and small and medium-sized enterprises along the value chain, with the average duration of payments in the sector rising to 200-240 days, mainly due to the slowness of the public apparatuses, limited access to credit and the need to finance liquidity needs through expensive instruments such as bonds, without forgetting the delays in works abroad (mainly in Venezuela and Algeria).
The increase in bankruptcies of larger companies has caused problems for many subcontractors: outstanding claims, stop-and-go public works and lack of credit have led to insolvencies of many SMEs. Analysts expect both the number of non-payment notifications and delinquencies to remain high in 2020, with top players continuing to struggle with liquidity problems.
In this scenario, the Italian government is committed to the goal of establishing a building conglomerate large and strong enough to improve the implementation of large public projects, and at the same time be more competitive abroad. Just taking a look abroad and waiting for the Progetto Italia launched by Salini-Impregilo, now renamed Webuild definitively take action, in Poland the production of construction and assembly works increased by 2,6% during 2019, data from Statistics Poland.
The main contributors were ongoing road and rail infrastructure projects, housing, office and warehouse construction. However, as construction activity is strongly correlated with the economic cycle, growth in this sector is likely to slow down in line with the decline in Polish GDP during the two-year period 2020-21. Low interest and unemployment rates and rapidly growing wages continue to contribute to high demand.
Currently 2-2,5 million homes are needed in Poland; However, due to population decline, the gap will narrow over the next ten years. And despite still robust demand, residential construction companies are struggling to find and keep employees, with high labor and material/raw material costs. Also last year, in the commercial construction sector, new office buildings increased by about 15%.
Low vacancy rates encourage investment, especially in larger cities: the number of delivered retail-related buildings increased by 6%; however, the saturation of the shopping center market is already high, while the demand for warehouses (up 8%) remains driven by logistics operators. Atradius points out that the development of infrastructure is still ongoing, especially road infrastructure: the estimated costs for road construction in 2020 amount to 23,5 billion Polish zlotys (5,5 billion euros).
However, the prices offered by the companies for 2015 and 2016 were often well below budgets: these long-term contracts negatively impacted overall results in 2018-19, mainly due to material price increases construction (especially asphalt and concrete), labor and subcontracting. It is no coincidence that investors have terminated many contracts due to the slow progress of the work and this year the profitability of public construction companies will remain low due to still high costs (material, labour, energy).
Profits of construction companies have increased, but are still far from a satisfactory level: the increase has not compensated for the decline in 2018, when profits were strongly influenced by the substantial increase in prices and expenses for building materials, wages and subcontracting. Here then are many construction companies suffered significant losses due to project contracts with prices fixed in advance.
In Poland payments in construction take an average of 75 days: the trend in the last two years has been negative, with past dues up to 30 days quite common, while this year the number of non-payment notifications is expected to increase by around 10% due to the lower growth in prices and production.
