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Slowdown may lead to consolidation

FINANCE City Site

HAVING prospered against a background of buoyant market conditions in recent years, many contractors are now facing the prospect of a fairly abrupt slowdown in growth over the next year or so.

Last week, Savills' survey of commercial development highlighted the continuing strength in July of commercial office activity, particularly for new office construction.

But the mood among private developers has clearly darkened and development growth in the key London and south-east market has eased markedly since June.

Savills' research department argued that if interest rates continue to rise, then reducing levels of development starts may be the story for the next 12 months.

This is likely to be ref lected in a more defensive tone in interim financial announcements. The emphasis may switch towards resilient markets such as social housing and PFI-related work, rather than new build and commercial work.

Morgan Sindall's results last week underlined the bright prospects in social housing, with first-half profits at its affordable housing division up by 32 per cent to £10.2 million and an order book in the sector worth £1.4 billion.

Rok said this week that much of the organic growth at its building arm, where first-half profits rose 28 per cent to £6 million, came from framework-type agreements in the social housing sector.

Slower growth prospects could also encourage more consolidation. Faced with quieter markets, the quoted groups may use their financial strength to seek acquisitions, particularly of specialist contractors with st rong regional market shares.

Rok chairman Stephen Pettit said this week that the firm saw opportunities for organic growth but added that it also believed the building sector will consolidate strongly over the next few years.

After Balfour Beatty's recent takeover of Birse and Galliford Try's purchase of Morrison Construction, the City seems keen to see more deals in the sector.