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Viewpoint - Government spending is driving deals

AGENDA - Market consolidation may hit the social housing market, writes Paul Trickett

TALK to most people about the state of the construction sector and conversation will turn to the explosion in deal activity. When you consider that Carillion, St Gobain and Persimmon made bids totalling £5 billion for competitors in November alone, you see why.

Consolidation is a key factor in these larger deals but it's not the only driver of activity in the building products market.

The desire to enter new or more predictable markets, such as those supported by Government spending, is a major catalyst for corporate deal activity, too.

The Decent Homes Standard will see £42 billion ploughed into millions of local authority houses by 2010 and much private equity money is being attracted to companies that are able to tap into this work.

With all this money the future appears rosy ? particularly for those businesses with strong local authority relationships. But the market is changing rapidly and this is not a time for complacency.

One area of concern is that the DHS initiative in some areas is moving towards maturity. In addition, some landlords are seeking to reduce the number of their preferred suppliers.

Consolidation in the short-term is inevitable, especially as the major national players account for only approximately 15 per cent to 20 per cent of the total market.

Regionally-based companies will have the dilemma of either developing a strategy to compete with the national players or positioning their business to become an attractive acquisition target.

They will need to transform their operations from relying on cyclical contracts focused around schedules of rates to models that embrace true partnership working with clients, which themselves are under pressure to deliver ongoing efficiencies as well as contributing to communities and environmental performance.

Companies must also develop a growth strategy for the medium term. Government spending on social housing is anticipated to fall by 10 per cent to 30 per cent in the next five years, which means replacement work must be found in order to f ill the gap.

There is likely to be a noticeable reduction in capital-related expenditure as the rolling improvement programme reaches maturity. But the maintenance side of the market is likely to remain buoyant.

Contractors which put in place plans to gear up for this transition now will be the best placed to compete in this changing market place.

Geographic diversification provides another outlet.

The north-west is relatively advanced in the DHS, while the programme to upgrade the 750,000-plus social housing in Scotland and Wales is running approximately five years behind England.

There are other Government initiatives that are likely to provide substantial opportunities. The Building Schools for the Future programme is expected to amount to £2.2 billion in the current year and is anticipated to last for the next 10 to 15 years. Businesses wanting to tap into this area probably need to develop a track record in new build.

There are big decisions on the horizon for firms operating within the current buoyant social housing market.

Nothing will stay the same for long and companies that just sit back will find the climate getting a lot tougher very soon.