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Tough two years ahead for hirers

A new report suggests that uncertainty over funding in the construction sector could help plant hire firms stay afloat, as main contractors change their behaviour.

Pan-European rental trade body Leaseurope released its Yellow goods leasing report this month, focusing on the future of hire across the European construction industry.

According to the report, the UK construction plant rental market declined sharply in 2009, from around £6.5 billion in 2008 to £3.9bn. The decline of 40.5 per cent was slightly higher than the European average of 35 per cent.

The next two years are believed to be critical for the hire industry across Europe. The report notes that hire firms are facing difficulty unlocking finance, which may have a significant effect on business failures and consolidation in 2011 and 2012. “In these circumstances, financing company bad debts and early terminations seem likely to rise. The market is likely to show consolidation around large, well capitalised rental firms,” says the report.

A focus on hire

However, the report also points out that changing practices within the construction industry could provide a lifeline. Contractors currently can’t anticipate exactly how much work will be available in future. With an in-house plant fleet creating a significant maintenance expense, hire is looking like a cheaper short-term option. According to the report, “Typical construction company order books are reported to have moved from 36 to 4 months, and the risk of sleeping capital is very real. This has driven a significant change in the requirement for greater flexibility on contract duration. Related to this is the likely trend for large construction firms to move from purchase into rental, even if that were to result in higher monthly payments when the equipment is being fully utilised. This seems especially likely if the outlook for the construction industry does not improve, and the order book outlook remains short-term.”

Even so, this potential benefit may be outweighed by oversupply within the hire market. The report notes that many hire firms invested heavily in fleet before 2007 and the second-hand market, a traditional safety valve for hirers looking to get rid of excess stock, has dried up. The report says: “the recovery in rental turnover forecast by the European Rental Association for 2011 is unlikely to be strong enough to outperform growth in the construction sector as a whole. Therefore, overall rental penetration is anticipated to be, at best, stable through to 2012.”