With President Sarkozy newly instated, Patrick Leniston, country manager for EC Harris in France, reports on the construction issues that may affect the country鈥檚 future leader

01 France: La force tranquille?

The challenges facing the new president are low growth, high state debt, low workload, high unemployment, low competitiveness and high taxes.

On the European stage, France has performed badly. GDP growth has been below the Organisation for Economic Co-operation and Development鈥檚 average for the past five years and, while Germany鈥檚 economy has just begun to take off, France鈥檚 has stalled.

In the fourth quarter of 2006, on a year-on-year basis, GDP in France grew more slowly than in any other European country except Portugal.

02 The state of the French economy

In France, GDP increased 2% in 2006 and is forecast to rise 1.9% in 2007 and 2% in 2008. Private consumption, which will rise by 2.4% in 2007 and 2.2% in 2008, will continue to drive growth.

Gross fixed investment is likely to be maintained at about 3.4% and the inflation rate should remain moderate at 1.7%. The trade deficit is expected to damage GDP growth, although exports will continue to recover (by 5% in 2007 and 5.8% in 2008).

The main economic challenges facing France are sharp public deficits and low employment growth. Government measures to help create jobs have begun to curb the unemployment rate, which is forecast to decline from 9.1% of the total labour force in 2006 to 8.5% in 2007. Public deficits are expected to fall from 2.7% of GDP in 2006 to 2.5% in 2007, thanks to slower public spending and increases in tax revenues.

The structure of the French economy is similar to that of the UK, with more than 70% of its output coming from the service sector and just 2% from agriculture.

France retains some of the most advanced and competitive industries in the world. Despite the enduring image of France as a protectionist country, it is a welcoming economy for foreign investment and trade: it is the world鈥檚 fifth largest importer, and Europe鈥檚 second destination for foreign inward investment after the UK.

03 The sectors

The construction industry

The general perception of the French economy, and the visibility of its construction industry in particular, are poor, but with a continued growth over the past eight years, booming investment and a controlled and safe environment, the French market is still a force to be reckoned with.

The French construction sector is of a similar size to that of the UK 鈥 *98bn (拢67bn) 鈥 and represents 8% of French GDP. Half the activity in this sector happens in the north, including Paris, and is dominated by the domestic sector which provides 60% of total output.

The French construction industry employs 2.75% of the population or 1.64 million people.

2006 was an excellent year, with construction-related activities increasing 5% in volume. The number of new residential sites reached a record 436,000 units for the first time in more than 27 years, and in contrast to previous years, new non-residential construction also progressed significantly, with the output of offices up 13.5%.

After eight years of continuous growth, the industry will have created more than 150,000 full time jobs, including 35,000 last year alone, in a market where the availability of competent resources is scarce.

The real estate market

2006 was another great year for the real estate market, with investment up by more than 45% on the 2005 figures 鈥 investment in traditional commercial real estate in France last year was more than *23bn (拢16bn). The sheer availability of capital for investment has meant that yields have continued to fall and are down to 4% for high-end Paris offices and about 7% for industrial assets.

04 Outlook for 2007

This year is still expected to be a healthy year for French construction. It is predicted to maintain its momentum, but with growth down to 2.7%, except in refurbishment projects in the private sector, where it will be maintained at 1.5%.

Risk is linked to the performance of the local economy and private consumption, the evolution of interest rates, building material and energy costs and where and how quickly the new president decides to move.

The table below, which indicates the number of building permits in new build non-residential schemes (in thousands of m2 with authorisation to built), shows a substantial increase in offices with a 28% increase in the two years to 2007, but with little movement in the other sectors.

05 Too few people, too few contractors

In line with other western European markets, construction costs have risen by more than 5.5% in the year to the fourth quarter of 2006, based on the French Institut National de la Statistique et des 脡tudes 脡conomiques (INSEE) construction index, on which a number of commercial leases are indexed.

The availability of competent staff is an important issue in France with 20,000 new jobs expected to be created in 2007. The problem is not limited to France, since there is expected to be a reduction in the availability of technically trained staff in the construction industry across much of western Europe. Last year, staff costs increased at more than the rate of general inflation, and we would expect this trend to intensify with the ageing of the working population.

The French construction industry is dominated by two of the top five construction companies in the world, Vinci and Bouygues, and a number of large national players. These companies have grown smaller subsidiaries to spread their regional presence and allow them to reach project construction values as low as a couple of million euros.

These large companies have also built up integrated supply chains to enhance their competitiveness and secure their supply. As a result, it is becoming increasingly difficult to get away from 鈥渢he big five鈥 when international selection criteria are required.

In January 2007, contractors鈥 orders books were full for the next six-and-a-half months and have shown no signs of easing since then. As a result, securing the best general and trades contractors has become a risk on projects commencing in France this year.

06 A safe and mature market

As with any mature market, the French construction industry has to study new ways of securing land, built assets and the supply chain. The 2006 trend of joint ventures and company consolidation between investment and development, and between contractors and suppliers will continue to reduce the market choice and dictate construction total project costs. The healthy output and the continued investment trends will however guarantee a sustainable and safe market.

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