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01 Introduction

Winter is upon us, but for the construction industry it is not a time to hibernate. Instead, migration to new markets and enhanced strategic focus are required.

The past six months have provided the Irish construction industry with a snapshot of what may become the norm over the short-to-medium term. Although Irish economic growth accelerated for the third year in a row in 2006 (GNP increased 6.5%, up from 4.9% in 2005), by the end of last year there were signals that some of the buoyancy had started to seep out. This was, in part, the result of hikes in European Central Bank interest rates and developments in the housing market.

Many commentators have claimed that the construction industry accounted for about 24% of economic activity in 2006, and output is forecast to fall this year because of a decline in housebuilding. Parallel forecasts for non-residential construction indicate sustainable growth, but the balance still indicates a reduction in construction output to just under 23% of GNP in 2007.

Compared with an average of 14% in western Europe, this can be seen as the start of a process of normalisation. Although construction employment growth slowed earlier this year, it is still above average.

Because this is the first decline in output for 14 years, the industry is experiencing a sharpening in tender prices which is sending ripples through the supply chain. This runs counter to forecasts of a 4% inflation rate this year. Major projects worth more than 拢10m are now competitive.

The downward trend in housing registrations may have a further negative impact on GNP growth next year. It is important that the market is able to manage the slowdown in domestic markets predicted for 2008 and beyond. This more sustainable growth in housing supply, together with modest market prices and conservative bank lending, should increase stability over the medium-term.

The Irish economy has, to some extent, been built on the growth of the construction sector in an entrepreneurial culture. The result is that volatility has impacted on wider market confidence. The Construction Industry Review and Outlook reports that the sector has a gross output of almost 拢35.5bn, with 55% delivered by the residential market alone.

The impact of a slowdown has been widely anticipated by stakeholders. The industry is considering what risks and opportunities will emerge. Many believe it will develop into a more efficient and ambitious market looking beyond traditional feeding grounds.

02 Domestic opportunities

Sixteen billion pounds of gross output is accounted for by new-build construction projects in the private and public non-residential sectors, nearly half of which is attributed to asset and facilities management. Asset management saw growth of almost 15% last year and is regarded as a growing industry in which stakeholders with key skills and resources are diversifying to deliver support services. Clients are now viewing whole-life costing and facilities management as core in business planning in much the same way as in PPP contracts. This is leading to greater outsourcing of both hard and soft facilities management.

Private investment and construction continues to perform strongly for the third year in a row as there is stable demand in retail and commercial property development.

Public-sector funding continues to signal strong growth for 2008-09, with the EU-supported 拢184m National Development Plan 2007-13 seeking to deliver economic growth, social inclusion and regional development. In addition, Transport 21 is the Irish government鈥檚 capital investment framework to develop its transport system.

Over 70% of Exchequer-announced funds have been allocated to government departments covering transport, housing, utilities, education and health. A large number of projects are at incubation stage, or being released into the market by increasingly intelligent and demanding clients. This is assisting market confidence, but also provides challenges as the contracts contain greater 鈥� and probably more appropriate 鈥� allocation of risk. Their size also dictates a more cohesive and strategic approach among developers and contractors.

New relationships are being forged as Ireland and the UK come to be seen as attractive locations for international organisations expanding into new markets. Irish contractors could soon be enjoying the benefits of fresh markets.

The impact of the new suite of contracts issued by the government this year is not yet known. There is enhanced commercial focus, with contracts for all future relevant projects based on the guaranteed maximum price, with optimum risk transfer tendered on a competitive basis. The objective is to improve programme and cost certainty, and deliver value for money to the public purse.

The reforms replicate international trends in which the industry is charged with absorbing the risks it is best suited to manage. In contract execution, far more sophisticated management is needed. This is an opportunity as contract values will increase to compensate for risk transfer and encourage the public sector to adopt a more whole-life approach. We are seeing the emergence of an industry that will be valued for its knowledge, as well as its skills.

Now the 鈥渃hill factor鈥� has thawed, more companies view Northern Ireland as part of their strategic growth plans as it is a new market on their doorstep. The procurement of larger, more complex projects has called for international players. Firms have sought local partners that can also offer balance sheet and technical capability. Although most construction companies in the north have management expertise, financial capacity has been addressed through strategic partnerships and joint ventures with international firms. For the first time this includes contractors from the Republic of Ireland.

Over the longer term, Northern Irish output is forecast to rise by an average of 4.3%. New work growth is predicted to be sustained after 2008, with commercial construction predicted to thrive over the next five years. Economic prospects bode well for the commercial sector, both by increasing demand for high-quality office space and by encouraging investment from retail and leisure companies.

In addition, some road, health, housing and education projects are being targeted by government for delivery by the private sector. A revised national investment strategy was published last month. The Northern Ireland executive unveiled its first budget in the new assembly, as well as setting out its plans for the next three years. Finance minister Peter Robinson announced that the government is seeking to underpin the private rather than the public sector. A 10-year investment programme will see 拢18bn spent on a range of projects, including a rapid transit system with two routes through Belfast, a school modernisation programme and further infrastructure investment. Ambitious targets will be set for building social housing.

After three decades of underinvestment, it is little surprise that the government has opted for strategic investment linked to priorities in key sectors. Appetites among Irish contractors and developers will continue to grow as the north evolves.

03 Wider markets

The construction industry is now international and market entry is dictated by deal-flow, cultural barriers and the ambition of the organisations involved. This will develop a skill-based industry into a knowledge export, where Irish firms can benefit from the expertise and experience gained during a decade of substantial growth 鈥� a similar trend was observed in Singapore in the 1990s. An increasing number of Irish firms have assets and net turnover that put them on a par with those in the UK and give them the financial and technical capacity to compete across Europe. Indeed, many have grabbed a toehold in a supply chain stretching across the globe in a bid to gain competitive advantage at home.

The PPP market is establishing itself in mainland Europe and is undergoing significant growth in all sectors. This year PPP has shown itself to be a viable procurement route, doubling the number of deals coming to the market. Irish contractors have significant experience both as equity investors and contractors, and the UK and Ireland are deemed a mature market by investors.

04 Conclusion

The challenge for most construction firms in Ireland is to shift from automatic pilot, where the hopper feeds the machine, to a more strategic recognition that the market is changing. It is essential that they map short to long-term forecasts and calculate how these affect their strategic targets and resource planning. New markets and diversification are obvious survival strategies in what is sure to be a more competitive and risky decade ahead. For those companies who get it right, the rewards will be great.