2012 11 Davis Langdon Market Monitor Oct Nov 2012

October/ November2012

OverviewEuropean economicroundupDashboard of Europeanconstruction trendsCommoditiesExchange rates

UK activity indicatorsEconomyConstruction

Europe: A closer lookCzech RepublicRussiaGermany

OverviewEuropean economic roundupEconomic data have taken an afterthoughtfor markets in recent weeks, as politics andits impact on future economic policy havetaken centre stage. The U.S. elected BarakObama for a second term as President,China’s leadership transition gets underway,and European leaders are due to meet todiscuss the EU’s budget.

In Europe, financial market conditions appearto have stabilised following the EuropeanCentral Bank (ECB) announcement tosupport government debt markets incountries in distress, but investor sentimentremains fragile. Public finances sustainabilityconcerns remain centred on the ability ofSpain and Greece to refinance their debtobligations.

Key barometers of global and Europeaneconomic activity have pointed to asoftening in recent months. The latest GlobalManufacturing PMI shows that the downturnin the global manufacturing sectormoderated in October, with the performanceof the North American economies, Russiaand Turkey proving to be brighter spots.While stimulus across a number of emergingmarkets fuels expectations for a revival inactivity, the U.S. outlook remainscomplicated by concerns surrounding the“fiscal cliff”.

Europe remains the main centre ofweakness, as production declined in the big-four Eurozone countries - and the UK.Domestic markets generally remain subduedand the downturn in exports continues.Consequently, economic sentiment fellacross the board, with the exception of theUK, where better economic data have liftedsentiment over the past month.

40

50

60

70

80

90

100

110

120

Composite(Average=100)

Source: European Commission

EUROPE ECONOMIC SENTIMENT INDICATOR

Economic Sentiment IndicatorGermanyUKPolandTurkey

-50

-40

-30

-20

-10

0

10

20

30

40

50Balance (sa)

Source: European Commission

EUROPE ECONOMIC SENTIMENT INDICATOR

Industry Services Construction

Euro area

PolandRussiaTurkey

UK

Germany

-2

0

2

4

6

8

10

Annual %

Source; IMF

EUROPEAN EAST-WEST DIVIDEGDP Forecast

Against this backdrop, the IMF revised down its forecasts for European growth, taking the view thatthe recovery will be subdued and will take longer than initially thought. Despite the continuing talk ofthe need for growth across the Eurozone, very weak activity in most countries is limiting fiscalconsolidation. Growth engines in Europe are short of supply, as the private sector continues todeleverage, while government finances are a big drag on growth in most of the region's economies.

Dashboard of European construction trendsEuropean (EU27) construction output in August held relatively stable compared to July, but remainedweak overall. In the three months to August, output fell 2.2 percent on the preceding three monthsand down 5.7 percent on a year ago. Civil engineering saw the biggest decline, down 8 percent year-on-year, while building dropped 5 percent. Slovenia saw the largest decline, down 14.6 percent in thethree months to August compared to the preceding three months, followed by Belgium (-8.3 percent),Romania (-6.4 percent) and the UK (-5.7 percent). Construction activity rose in Hungary and Austria(2.3 percent), as well as France (0.4 percent).

Sentiment in the European construction industryfell to its lowest level in two years in October, asbuilding activity dropped and new order bookscontinued to decline.

Insufficient demand remains by far the largestdrag on construction activity in Europe.

2013 GDP f Gross Public Debt Budget Deficit 10-Year bond yield Unemployment CPI Inflation% % of GDP % of GDP October % Annual %

UK 1.1 86.0 -3.73 1.79 7.9 2.2Germany 0.9 82.8 -0.76 1.5 5.4 2.1France 0.4 91.0 -1.65 2.18 10.7 2.2Spain -1.3 76.0 -11.00 5.71 25.6 3.5Italy -0.7 126.1 -2.78 5.06 10.6 3.4Greece -4.0 144.3 -8.12 18.22 23.9 0.3Portugal -1.0 117.5 -5.85 8.28 15.7 2.9Ireland 1.4 111.5 -7.43 5 15.0 2.4Poland 2.1 57.0 -2.16 4.69 10.1 3.8Romania 2.5 35.6 -2.74 6.65 7.1 5.4Hungary 0.8 77.7 -4.36 7.38 10.9 6.4Russia 3.8 10 1 7.71 5.2 6.6Turkey 3.5 39.2 2.6 8.1 7.9 9.2Source: Government Statistics, Central BanksData: latest availablered < 0.0% > 80% > 5% > 7% > 7% > 4%yellow 0.0 - 0.5% 60 - 80% 3-5% 3-7% 5-7% 2.5-4%green > 0.5% < 60% <3% < 3% < 5% < 2.5%

EUROPE: ECONOMIC FUNDAMENTALS

-60

-50

-40

-30

-20

-10

0

10

20

30Balance (sa)

Source: European Commission

EUROPE CONSTRUCTION SENTIMENT SURVEY

Building activity over past 3 monthsEvolution of current order booksEmployment ExpectationsPrice expectations

-10

0

10

20

30

40

50

Balance (sa)

Source: European Commission

FACTORS LIMITING CONSTRUCTION ACTIVITYInsuf f icient demandWeather conditionsShortage of labourShortage of materials/ equipmentFinancial constraints

Construction production in the EU27 fell 4.9percent in the first eight months of this year.

Construction in 2012 is strongest in Turkey,Belgium, Sweden and Germany. Poland andRomania have slowed sharply in recent months.

Prime European office rents continued to ease inQ3 2012 on aggregate, with the exception ofStockholm and Munich, as slower economicgrowth impacts on occupier demand.

Office take-up in Q3 2012 decreased 5 percentin aggregate in the main European cities, withtake-up in the year to date down 15percent year-on-year. Take-up fell both in Western Europe (-2percent) and the CEE (-17percent).

Retail investment in Europe rose to €7.1 billion inQ3 2012, up 12 percent over Q2, but still 18percent lower compared to the 3-year average.

While the economic uncertainty in the Eurozonehas had an impact on occupier demand in thelogistics and industrial sector, prime rental levelshave been supported by low volumes of newsupply. Prime logistics rents have remainedbroadly unchanged in the majority of Europeanmarkets since the start of 2011.

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

60

65

70

75

80

85

90

95

100

105

110

Annual %3M avg

Index2005=100

Source; Eurostat

CONSTRUCTION PRODUCTION (EU-27)

Construction production indexBuilding construction (y-o-y)Civil engineering construction (y-o-y)

-30%

-20%

-10%

0%

10%

20%

30%

Annual3M avg

Source; Eurostat

CONSTRUCTION PRODUCTIONTop performers 2012

Poland TurkeyBelgium RomaniaSweden Germany

0

200

400

600

800

1000

1200

1400EUR/ sqm pa

Source: Jones Lang Lasalle

EUROPE PRIME OFFICE RENTS

-20

-15

-10

-5

0

5

10

15

20EUR/ sqm pa

Source: Jones Lang Lasalle

EUROPE PRIME CAPITAL VALUES

0 2,000 4,000 6,000 8,000 10,000

UK

Germany

France

Benelux

Nordics

CEE

Italy

Spain/Portugal

Europe

Source: CBRE

EUR, million

EUROPEAN RETAIL INVESTMENT

3-Year qty avg

Q3 2012

EUR/ sqm/ pa Trend % TrendAmsterdam 85 7.25Barcelona 72 8.25Brussels 45 7.25Bucharest 48 10.5Budapest 54 9Kiev 57 11Lisbon 60 8.75London City 160 6.25Madrid 72 8.25Milan 55 8Moscow 104 11Paris 53 7.25Prague 51 8Warsaw 66 7.75Zurich 140 6

Prime YieldsPrime RentsEUROPEAN LOGISTICS MARKET

Year-on-yearQuarter-on-quarter

Exchange ratesA patchy global economic performance, official intervention in currency and credit markets by centralbanks, elections in the U.S., and commodity price swings have impacted on currency markets. TheBritish Pound has shown little movement in October falling slightly against the Euro and showing nosignificant change towards the US Dollar. Better than expected UK GDP growth in Q3 instilled apositive sentiment on the Pound and lessened the prospects of deeper monetary stimulus. The Eurohas been relatively stable despite a struggling economy, as the ECB’s announcement toconditionally purchase European Government bonds appears to have calmed markets.

CommoditiesCommodity prices remain volatile, beingpulled between weak global demand,investor sentiment and geopolitical risks.

OilThe trend from the previous months of oilprices peaking in the middle of the monthand then falling before the end of the monthcontinued to October. During the month, theprice of Brent reached a two-month low ofUS$107 per barrel, but overall averagedUS$112 in October - only a dollar shy ofAugust and September averages of US$113per barrel. While demand realities areexpected to continue to pull oil prices downwith the outlook for key emerging markets inparticular China a key factor, supply worriesamid Middle East geopolitical tensions arelikely to pose a strong upside risks to oilprices in the months ahead.

Base metalsCopper LME prices traded betweenUS$7,720 and US$8,340 per ton inOctober, relatively unchanged to levelsseen in September. Year-to-date, copperprices are up 7 percent. Aluminium priceshave not changed significantly over thepast months and averaged just belowUS$2,000 per ton in September.

Global steelGlobal steel prices continued to drop inOctober, completing six months in thisdownward trend. The CruSpi global steel price index recorded a 2.8 percent decline in Octobercompared to September, with the index down 8.7 percent year-to-date. The LME steel billet price onaverage did not change significantly since September, but has fluctuated considerably throughoutOctober between US$309-344 per ton.

Latest: 25 Oct 2012 1£ buys… % since 28 Sep % YTDEuro 1.246 -0.8% 4.2%Dollar 1.614 0.0% 4.4%Yen 129.4 3.0% 8.2%Czech Koruna 31.07 -1.7% 0.7%Hungarian Forint 347.7 -2.8% -7.0%Lithuanian Litas 4.301 -0.8% 4.2%Latvian Lats 0.867 -0.8% 3.6%Polish Zloty 5.162 -0.2% -3.1%Russian Ruble 50.66 0.5% 1.7%Turkish Lira 2.907 0.2% -0.4%Danish Krone 9.291 -0.7% 4.6%Norwegian Krone 9.311 0.7% 0.2%Swiss Franc 1.507 -0.7% 3.7%Swedish Krona 10.81 2.1% 1.5%

EXCHANGE RATES AGAINST THE BRITISH POUND

Source; Bank of England

-7.0%-3.1%

-0.4%0.2%

0.7%1.5%1.7%

3.6%3.7%

4.2%4.2%4.4%4.6%

8.2%

-9% -6% -3% 0% 3% 6% 9%

Hungarian ForintPolish ZlotyTurkish Lira

Norwegian KroneCzech Koruna

Swedish KronaRussian Ruble

Latvian LatsSwiss Franc

EuroLithuanian Litas

DollarDanish Krone

Yen

Source: Bank of England

BRITISH POUND% change since beginning of 2012 against the....

300

350

400

450

500

550

600

650

700

$/tcash contract

Source: LME

LME STEEL BILLET

Aug-12 Sep-12 Oct-12 % YTD“Brent” Oil ($/bbl) 113 113 112 5%Copper ($/t) 7,492 8,068 8,115 7%Aluminium ($/t) 1,838 2,054 1,989 1%Steel billet ($/t) 353 330 331 -41%

COMMODITY PRICES

Source: FT, LME, Cruspi

70

80

90

100

110

120

130US$/bbl

Source: RBS Databank

OIL

BrentWTI

UK activity indicatorsEconomyRecent weeks have seen some tentatively encouraging signs about the economy, with the UKperforming better than many of its European peers. However latest survey evidence suggests thatthe UK economy continues to struggle, despite Q3 2012 GDP rising by 1 percent quarter-on-quarter.Consequently, whilst the UK economy has exit recession, business and consumer caution, as wellas public sector spending cuts are likely to continue to dominate the UK economic scene so thatgrowth is likely to remain sluggish near term.

Monetary PolicyThe Bank of England’s Monetary Policy Committee continued to hold its policy on both interest ratesand asset purchase programme during its November meeting, as July’s £50 billion extension to QEis due to run through to November while the Funding for Lending Scheme was only launched inAugust and is in its early stages. Despite some signs of economic improvement, it is extended weakeconomic activity rather than inflation that remains the greatest risk facing the UK economy whichmay prompt the Bank of England to deliver further stimulus still this year.

GDP growthThe UK economy posted an impressive-looking 1 percent quarter-on-quarter growthduring the third quarter of 2012, but just asthe second-quarter GDP contraction of 0.4percent markedly overstated the economy’sweakness, the third-quarter expansion islikely to overstate its strength. Indeed, year-on-year, GDP remained a marginal 0.1percent down. Growth during the quarterwas boosted by additional working dayscompared to the second quarter, and anoverall positive impact from staging the 2012London Olympic and Paralympic Games.The ONS estimates that sales of Olympictickets increased GDP growth in the quarterby 0.2 percentage points. Of the main components of the output measure of GDP, the Gamesappear to have had the most impact on the service sectors, while there is little evidence that theyhad an impact on the manufacturing industries or the construction sector. Services sector activityrose 1.3 percent both over the quarter and on a year ago.Manufacturing activity improved 1.1 percent compared to the second quarter, but remained 0.8percent down year-on-year. Construction remained the weakest sector, declining 2.5 percentquarter-on-quarter and down 10.8 percent on a year earlier. Most analysts expect the UK economyto continue to stabilise in the final quarter of this year, helped by easier inflation and a relatively firmlabour market. However, growth will be very modest at best and trading conditions in the services,manufacturing and construction sectors will remain challenging, as the UK economy continues toface headwinds from a weak external environment and tight fiscal policy.

Manufacturing output and pricesManufacturing output in August fell 1.1percent compared to July and down 1.2percent year-on-year. Domestic demandremains muted by subdued consumerspending and tight fiscal policy, while exportdemand is hampered by a weak Eurozoneeconomy. Input prices eased in September,down 0.2 percent on August and down 1.2percent year-on-year. Manufacturing outputprices rose 0.5 percent during Septemberand up 2.5 percent on a year ago, asmanufacturers sought to recover margins.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

80

85

90

95

100

105

110

2007 2008 2009 2010 2011 2012

Q-o-QGDP: Index2006=100

Source: ONS

UK ECONOMY

GDPManufacturingBusiness and Financial ServicesConstruction

-20%

-10%

0%

10%

20%

30%

40%

90

95

100

105

110

115

120

Prices - AnnualOutput Index(2009=100)

Source: ONS

MANUFACTURING OUTPUT & PRICES

Manufacturing OutputManufacturing Input PricesManufacturing Output Prices

UK Business ConditionsThe Bank of England’s survey of Business Conditions for September reveals that:

Consumer spending increased modestly. Summer events and good weather are seen asmain contributors to this increase. There was a slight improvement in the housing market,but expectation is that this improvement will not be sustained as the economic outlookrestrains both potential buyers and sellers.

The cost of borrowing showed signs of stabilizing in September, with larger firms continuingto fare better than smaller ones who struggle to secure credit. Overall the demand for creditremained modest.Manufacturing output and export production both slowed down further over the month asnational and Eurozone demand decreased. Construction output continued to fall further,primarily due to slow recovery in the private sector activity.Investment intentions continued todecline as companies looking toreduce costs, meet productionstandards and diversify/improvetheir business operations are waryof investing in the currenteconomic climate.Output price inflation eased as aresult of weaker demand andprevious falls in input costs.Consumer price inflation hasincreased slightly, partly as a resultof increases in some fresh foodand energy prices.

Business ActivityIn contrast to the positive Q3 GDP data,latest survey evidence points to a renewedweakening in UK activity in recent months.The decline in the UK manufacturing sectorgathered pace in October according to thelatest Markit/ CIPS manufacturing PMI,which dropped to 47.5 from 48.4 inSeptember. UK manufacturers during themonth faced a combination of decliningexports, weaker domestic demand andrising cost pressures. Activity wasparticularly weak in the intermediate andinvestment goods sectors, but strengthenedin the consumer goods sector. The Markit/CIPS services PMI dropped to 50.6 inOctober, down from 52.2 in September, signaling a stalling in sector activity. New orders growthweakened in October, while competitive pressures increased. Input cost inflation remained solid,with a rise in the national minimum wage reportedly contributed to higher average staff costs, whileenergy, food and fuel prices were also signalled as having increased during October.

Credit conditionsCredit conditions remained relativelyunchanged for the corporate sector in Q32012, but eased for consumers, accordingto the latest Bank of England CreditCondition Survey. Highlights:

Lenders reported a markedincrease in the amount of securedcredit made available tohouseholds. This is expected toincrease further, with the Fundingfor Lending Scheme widely citedas contributing to improvedsecured credit availability.

25

30

35

40

45

50

55

60

65

2007 Ju

l

2008 Ju

l

2009 Ju

l

2010 Ju

l

2011 Ju

l

2012 Ju

l

PMI

Source: Markit

UK ECONOMIC ACTIVITY

Manufacturing SectorServices Sector

Expansion

Contraction

-4-3.5

-3-2.5

-2-1.5

-1-0.5

00.5

11.5

22.5

33.5

4Scores

Source: BoE

MANUFACTURING AND CONSTRUCTION ACTIVITY

Manufacturing - DomesticManufacturing - ExportsConstruction

-60

-50

-40

-30

-20

-10

0

10

20

30

Balance ofRespondents

Source; BoE

CREDIT CONDITION SURVEYCredit Availability

Coporate CreditCommercial Real Estate SectorSecured Credit to HouseholdsUnsecured Credit to Households

Unsecured credit to households remained broadly unchanged in Q3 2012. Credit conditions in the corporate sector vary by the size of business. Lenders report that

there had been no change in the amount of credit made available to small, medium andlarge firms in Q3 2012. Lenders continue to expect no change in credit availability to thecorporate sector overall, although easier wholesale funding conditions are expected to havea positive impact on credit availability.

Credit availability to the commercial real estate sector also remained broadly unchanged inQ3, but is expected to increase slightly in the final quarter of 2012, despite commercialproperty prices continuing to exert a negative influence on credit availability.

Demand for corporate credit remains subdued overall due to a lack of M&A activity andcapital investment, as firms remain cautious given the current economic environment.

Spreads had widened slightly for medium-sized firms in Q3, but had remained unchangedfor small, large and other financial corporations. In contrast, some lenders report that thecommercial real estate market had seen a large increase in spreads and fees.

Consumer price inflationConsumer price inflation eased to 2.2percent in September, down from 2.5percent in August. This is the lowest levelof inflation reported in three years. Theretail price index also fell to 2.6 percent,down from 2.9 percent in August. The dropin inflation was due to gas and electricityprice rises in 2011 falling out of thecomparison calculation. However recentrises in oil prices and utility bills areexpected to put upward pressure oninflation in the months to come.Nevertheless, underlying price pressuresremain muted due to still-below-trendeconomic activity.

Labour Market and Average EarningsIn contrast to latest business surveys whichpoint to a softening in the labour marketacross the manufacturing and constructionsectors, official data show that labourmarket conditions remain resilient,supported by restrained earnings growthand more people working part time. Theemployment rate rose to 71.3 percent in thethree months to August, the highest figurerecorded since spring 2009. Theunemployment rate fell to 7.9 percent,down from 8.1 percent in the precedingthree months. Average weekly earnings forthe whole economy including bonusescrept up to 1.7 percent in the three monthsto August, which is still below historicstandards and below consumer priceinflation.

Retail SalesRetail sales in September rose by 0.6percent over the month and up 2.9 percentyear-on-year. The underlying trend in salesgrowth also remained relatively firm, withretail volumes up 2.8 percent in the thirdquarter compared to a year ago.

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Annual

Source: BoE, ONS

INFLATION AND INTEREST RATES

Bank Base Rate CPI RPI

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Source: ONS

UK AVERAGE EARNINGSAnnual, 3-months moving average

Whole economy

Construction

-18%

-14%

-10%

-6%

-2%

2%

6%

10%

14%

18%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

HPIRetail Salesexcl fuel

Latest 3 months Y-o-Y Source: Nationwide, ONS

RETAIL SALES AND HOUSE PRICES

Retail Sales (LHS)

House Prices (RHS)

Survey evidence from the British Retail Consortium and the CBI confirmed the increase in retailsales in September, supported by employment growth, lower inflation and consumers’ preparationsfor the winter months. However, consumers continue to face significant pressures, which is likely tolimit the acceleration in retail sales. Inflation continues to run ahead of average earnings growthimpacting on spending power, while the fragile economic backdrop also weighs on sentiment.

Mortgage lending and house pricesMortgage approvals for house purchasesrose modestly to 50,000 in September from48,000 in August and an 18-month low of44,400 in June. However, mortgageapprovals remain 2 percent down year-on-year and significantly below long-termaverages of 86,000 per month. Latesthouse price data also point to a soft UKhousing market. House prices rose by 0.6percent in October, according to theNationwide, but remained 0.9 percent downyear-on-year. Annual house price growthhas been in a narrow band between 1.5percent and -1.5 percent since late 2010,as weak market activity has been partiallyoffset by limited supply on the market.

Public Finances in SeptemberWhilst public finances have shown a modest improvement in September, during the first five monthsof this fiscal year, public finances were appreciably worse compared to a year ago, as a weakeconomy hit tax revenues. Public sector net borrowing stood at £12.8 billion (excluding interventions)in September, down from £13.5 billion reported a year ago and helped by better economic activity inthe third quarter and spending cuts. Public sector net debt excluding temporary effects of financialinterventions stood at £1,065.4 billion (67.9 per cent of GDP) in September, up from £1,044.8 billion(66.7 per cent of GDP) in August. The higher deficit to GDP amount could increase the borrowingcosts in the UK, however it is expected that investors would keep the interest rate low as theEurozone continues to be unstable.

ConstructionConstruction OutputConstruction output in the three months to August totalled £28.9 billion, down 2% on the precedingthree months and 12 percent lower compared to the same period last year. Within this, commercialwork at £5.69 billion saw the largest drop, down 5 percent on the preceding three months.Residential construction also weakened, with both public and private housing falling 4 percent in thethree months to August compared to the previous three months. Infrastructure rose in the threemonths to August, up 3 percent on the preceding three months, but output remained down 18percent year-on-year. Industrial construction also improved, up 1 percent on the previous threemonths and 2 percent higher compared to a year ago.

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90

100

110

120

130

140

in £ bn

Annualised, last: 3-months to Aug 2012 Source; ONS

UK CONSTRUCTION OUTPUT

Constant, 2005 pricesCurrent prices Value Volume Volume

£ million, current 3M-o-3M 3M-o-YPublic Housing 969 -4% -21%Private Housing 4,003 -4% -12%

Infrastructure 3,456 3% -18%Public non-residential 2,813 -1% -22%Industrial 900 1% 2%Commercial 5,693 -5% -14%All Repair & Maint. 11,062 -3% -4%Total Construction 28,896 -2% -12%Source: ONS

CONSTRUCTION OUTPUT: 3-months to Aug 2012

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

50,000

75,000

100,000

125,000

150,000

175,000

200,000

Annual HPIAverage House

Price £

Source: Nationwide

HOUSE PRICE INFLATION

Average House PricesAnnual HPI

Construction activityLatest survey evidence confirms thattrading conditions in the UK constructionsector remain challenging. The Markit/CIPSConstruction PMI recorded a reading of50.9 in October, up from 49.5 last month,indicating stable output. Output remainssubdued, while there was a moderatereduction in new work and employment.Construction activity was somewhatstronger in the civil engineering sector inOctober, while residential construction wasparticularly weak. Construction companies’remain subdued over businessexpectations in the year ahead, due toshortages of new business, lendingconstraints and lower budgets amongclients. Input price inflation acceleratedfurther from June’s recent low due to higherfuel and energy costs.

Construction forecastsUK construction forecasters have onceagain downgraded forecasts for theindustry, due to weaker prospects for theprivate sector to offset any cuts in publicspending. Construction fell into recessionfor a third time in five years during 2012.Experian now forecasts a 7.5 percent fall inconstruction this year, followed by a further2.5 percent fall in 2013, before seeing asmall rebound of 0.7 percent in 2014.

The CPA expects a fall of 6.3 percent thisyear and a further fall of 1.4 percent in2013, before the industry returns to moresolid growth in 2014. Key points from theCPA’s latest forecast.

Workload decline in 2012 and2013 is driven by sharp cuts in funding for public housing, education and health,exacerbated by a slowdown in commercial offices and retail. Construction growth isforecasted to return in 2014 when a stronger economic recovery combined with an end topublic sector cuts, are expected to increase workload.

Despite attempts by the government to boost private residential construction, activityremains subdued. Public housing construction has been hit by government funding cutsand the hiatus between the end of the National Affordable Housing Programme last yearand getting the replacement, Affordable Homes Programme (AHP) to start. As of July £1.76billion funding has been allocated to housing associations, local authorities and housebuilders to provide affordable housing. However, the extent of the fall in capital investmentfor the Department for Communities and Local Government (DCLG) means that publichousing construction is unlikely to rise before 2014.

Public spending cuts are having a significant impact on public non-residential work whereactivity is forecasted to fall in key sectors such as education, defence, and healthcare.Capital budgets for the Department for Education is set to fall by 10 percent in 2012/13 andby 18 percent in 2013/14, and the work on the Building Schools for the Future programmewill fall away. More positively, there is some £1.2 billion additional funding for free schoolsand initial capital investment to start the Priority Schools Building Programme.Commercial work slowed sharply in 2012 and a further decline is expected next year.Modest growth in the sector is only anticipated to return in 2014, before more rapidrecovery is penciled in for 2015 and 2016, boosted by an acceleration of work on mixed-usecommercial schemes, such as the £8 billion redevelopments of Nine Elms and Earls Court.

80

85

90

95

100

105

110

115

120

£bn2005 prices

Source: CPA, Experian

COMPARISON OF CONSTRUCTION FORECASTSAutumn 2012

CPA

Experian

2012 Output£ million, 2005 prices 2011 2012e 2013f 2014f 2015f 2016f

Private Housing 13,561 9.4 -3.0 2.0 4.0 6.0 10.0Public Housing 3,552 1.9 -20.0 -18.0 -2.0 3.0 4.0Public Non-housing 10,098 -6.7 -18.8 -11.0 -2.6 0.8 1.8Infrastructure 11,308 8.7 -13.4 5.0 8.2 6.2 7.0Industrial 3,265 -9.7 0.6 1.7 3.7 5.0 5.1Commercial 22,713 3.2 -5.7 -2.9 1.0 4.1 4.7Total New Work 64,497 2.6 -9.5 -2.4 2.5 4.5 6.0Total R&M 35,752 2.5 0.0 0.3 2.2 3.3 3.6Total Construction 100,248 2.6 -6.3 -1.4 2.4 4.1 5.1

Annual Percentage ChangeCPA CONSTRUCTION FORECAST - AUTUMN 2012

25

30

35

40

45

50

55

60

65PMI

Source: Markit

UK CONSTRUCTION ACTIVITY

Expansion

Contraction

Despite subdued investment intentions by UK manufacturers, industrial output is forecast torise in the years ahead, as a refocus in exports increases industrial demand.

After four consecutive years ofgrowth, infrastructure work stalledthis year, but prospects in theyears ahead are brighter. NetworkRail’s capital investment plans arefixed until 2013/14 and work onCrossrail and Thameslinkcontinues. However, over the nextsettlement period funding isexpected to fall by around £6billion. On the roads side, fundingfor the Highways Agency (HA) willfall by 29 percent between2011/12 and 2013/14 andconstruction is forecast to fall thisyear and next. From 2014, growth is forecasted to average 7.5 per year. Investment inwater & sewerage is anticipated to decline until 2014/15. A return to growth is anticipated in2014 with growth averaging 3 percent per year.Electricity related construction is predicted to benefit from investment in nuclear and wind &gas. However, due to a hiatus in the new nuclear programme and offshore wind, themajority of growth has been pushed back by 12-18 months. Decommissioning, worth £3billion per year, continues to be the key driver of nuclear work. Offshore wind is expected torise considerably once round three of the wind farm deployment begins. The governmentrecently announced that 20 new gas power stations would be built by 2030.

The key risks around the forecast remain on the downside, due to global and Eurozoneeconomic uncertainty and the hiatus in investment in nuclear and renewables. Morepositively, there could be an additional boost for residential and infrastructure constructionin the Government’s Autumn Statement on 5 December.

Building material pricesThe construction material price index fellmarginally by 0.1 percent on the month inAugust, while annual inflation stagnated.Fabricated structural steel was down 1percent in August and 4.6 percent loweryear-on-year. Similarly, concrete reinforcingbars fell 0.9 percent during the month and6.9 percent down on a year ago. Cementprices were relatively unchanged during themonth, but remained 6.8 percent up on ayear ago.

Central London OfficesAccording to the CBRE, take-up of officesspace in Central London in Q3 2012 was2.22 million sq ft, 16% less than in Q2 2012.All Central London markets saw below-trend levels of take-up, but both the WestEnd and Docklands saw quarter-on-quarterincreases. After four quarters of increases,availability in Central London declined by 5percent, the largest decrease in availabilitysince Q3 2010. The primary cause of thedrop in availability was a large fall in thesecondhand availability, especially in theWest End. Some 1.12 million sq ft of newoffice space was completed in Q3 2012including The Shard, London’s tallestbuilding. A further 0.96 million sq ft isexpected to be delivered in Q4 2012, bringing the 2012 total to 2.68 million sq ft, an increase on the2011 total but significantly below the 10-year average completions.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Y-o-Y

Source: BIS

CONSTRUCTION MATERIAL INFLATION

Construction Material Price IndexFabricated Structural SteelConcrete Reinforcing BarsCementWireSawn Wood

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

CPA FORECAST: INFRASTRUCTURE SECTORVolume, £ million, 2005 prices

Harbours ElectricityGas, Air & Comms RailRoads Water and Sewerage

0

2

4

6

8

10

12

14

million sq f t

Sourced: CBRE

CENTRAL LONDON DEVELOPMENT PIPELINE

Proposed Under Construction Completed

Europe: A closer lookCzech Republic

Confidence in the Czech economy hasdeteriorated since 2010. GDP has posted its 7th

quarter-on-quarter decline in Q2 2012, due toweak consumer spending. Construction hasbeen very weak since the beginning of 2011

The Czech economy is expected to end 2012 inrecession, with GDP down 0.9 percent on 2011.Only a modest recovery is forecast for next year,with the CNB predicting weak 0.2 percent growthin 2013 and 1.9 percent in 2014.

Annual consumer price inflation stood at 3.2percent in September, considerably above the 2percent target. The Czech Central Bank (CNB)forecasts inflation to start edging down, ending2012 at 2.8 percent and expecting it to dropbelow the 2 percent-target in 2014.

Construction activity has declined significantly inrecent years, due to a fall in private sectorconfidence and public sector spending cuts. Inthe first nine months of 2012, construction outputdecreased by 6.5 percent year-on-year.

Construction new orders fell throughout 2012,with civil engineering seeing the worst falls.Public budget cuts have led to a revision in the2020 Transport infrastructure strategy in January2012, postponing major projects. Non-residentialconstruction is being driven by demand for officeand logistics space.

The Czech construction sector is forecast to seeits fifth consecutive annual decline in 2013,according to Euroconstruct. A small rebound ispencilled in for 2014 at the earliest.

-12%

-8%

-4%

0%

4%

8%

12%

16%

Annual

Source: CZSO

CZECH ECONOMY

GDPConsumer spendingGovernment spendingConstruction Output

-4

-2

0

2

4

6

8

10

IV/10 I/11 II III IV I/12 II III IV I/13 II III IV I/14 II

CNB GDP FORECAST

90% 70% 50% 30% interval spolehlivosti

-1

0

1

2

3

4

5

6

7

IV/10 I/11 II III IV I/12 II III IV I/13 II III IV I/14 II

CNB INFLATION FORECAST

90% 70% 50% 30% conf idence interval

Inflation target band

Monetarypo licy

horizon

-30

-20

-10

0

10

20

30

60

70

80

90

100

110

120

3M average,annual %

2005=100Annualised

Source: CZSO

CONSTRUCTION PRODUCTION

IndexBuildings (annual change)Civil engineering (annual change)

-100

-50

0

50

100

150

0

50,000

100,000

150,000

200,000

250,000

Value, CZK m,annualised

Source: CZSO

CONSTRUCTION NEW ORDERSNew Orders - ValueTotal - Annual changeBuildings - Annual changeCivil Engineering - Annual change

0.6

-1.3

-6.8

-3.9

-7.2

-1.9

0.8

-8-7-6-5-4-3-2-1012

Annual %

Source; Euroconstruct, June 2012

CZECH REPUBLIC CONSTRUCTION OUTPUT

Total Construction Output 2011€18.4bn

Non-residential: -1.3Construction Output Forecast2012-14 per annum

Residential: -2

Civil Engineering: --6

On the back of weaker industry activity,construction prices have decreased since 2010across the majority of sectors.

No rise in construction prices is expected nearterm, in the absence of a significant turnaroundin construction industry performance.

RussiaThe Russian economy has slowed in recentmonths, but will remain relatively stronger thanmany other European countries unless there is asharp and prolonged fall in oil prices. Theconsumer sector is still firm amid low officiallevels of unemployment and firm wage growth.

Assuming an average Urals oil price of US$100per barrel, most forecasters predict the Russianeconomy to expand by 3.5 to 4.5 percent perannum in the foreseeable future.

The Urals oil price averaged US$113.5 per barrelin September, up from US$102.7 in August. Onthe back of this, the Rouble has strengthenedmodestly to an average of 30.92 per US$ inSeptember from 32.29 in August.

Annual consumer price inflation has picked up to6.6 percent in September, due to food prices andan increase in tariffs. To stem inflation, theCentral Bank has hiked all policy rates by 25basis points. In contrast, slower building activityhas led to a downward trend in building materialinflation, which stood at 6 percent in August.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Annual %

Source: CZSO

CONSTRUCTION WORKS PRICE INDEX

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Annual %

Source: CZSO

CONSTRUCTION PRICE INDEX BY SECTOR

-16

-12

-8

-4

0

4

8

12

Annual % 3Mavg

Source: GUS

RUSSIA ECONOMY: PRODUCTION AND CONSUMPTION

Industrial Output

Retail Trade

-2

0

2

4

6

8

10

12

Annual %

Sourced: IMF

GROWTH COMPARISON

WorldRussiaChinaEurozone

26

28

30

32

34

36

3850

60

70

80

90

100

110

120

130

RUB/USD -reverse axis

US$/ barrel

Source: Russia Central Bank

OIL PRICES AND EXCHANGE RATES

Urals crude price

RUB/ USD Exchange rate 0

2

4

6

8

10

12

Annual

Source: Rosstat

INFLATION

Consumer Price Index

Building Material Index

Despite turbulence in the Eurozone and overallglobal slowdown, the Russian constructionindustry continued to expand at a moderate pacethis year, driven mostly by projects with fundingsources in the public sector, while private entitiesare reluctant to commit funds in the currentlyuncertain economic outlook. Growth slowed to anannual 2.9 percent in the January-Septembertime frame.

In value terms, Russian construction output inthe first nine months of 2012 was RUB 3,649billion, compared to RUB 2,762 billion last year.Construction new orders in the first nine monthsof 2012 stood at RUB 2,992.2 billion, up fromRUB 2,734.4 billion last year

.

Regionally, the North West, Caucasus and VolgaFederal Districts saw the strongest growth in thefirst nine months of this year. The dominantCentral Federal District saw output down 1.7percent in the year to September.

Construction growth is forecast to pick up to 9percent in 2013, from 4.1 percent in 2012,according to PMR, due to the Russiangovernment’s investment in the country’stransport and energy network, as well as socialinfrastructure.

The government is implementing initiatives to boost the construction industry. In August 2012 itapproved the Construction Road Map, aimed at improving the business environment. For example,the number of procedures needed to obtain a building permit is set out to be cut from the 51 to 15 by2015 and to 11 by 2018. The period needed for all mandatory processes is aimed to be reducedfrom the current 423 days to 130 days by 2015, and to 53 by 2018.

-10

-8

-6

-4

-2

0

2

4

6

8

10

0

100

200

300

400

500

600

700

AnnualRUB, bn,current

Source: Rosstat

CONSTRUCTION OUTPUT3-month averages

Output at current pricesY-o-Y

0

0.5

1

1.5

2

2.5

3

3.5

4

0

50

100

150

200

250

300

350

400

Source: Rosstat, PMR

CONSTRUCTION ORDERS

Value of OrdersBacklog of orders (months)

Value of construction orders (RUB, bn) Backlog of orders (months)

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0Annual

Source: Rosstat

REGIONAL CONSTRUCTION GROWTH

2010

2011

2012 Jan-Sep

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

PercentRUB, billion

Source: Rosstat, PMR

RUSSIA CONSTRUCTION OUTPUT

Value (LHS)Annual change, real (RHS)

Germany

The German economy coped well with the crisisin 2008 and 2009, expanding strongly in both ofthe following years. Since mid-2011, however,confidence among German businesses andconsumers has deteriorated. The Germaneconomy is expected to face a weak winter, asinvestment falls, factory orders decline andconsumers reign in spending.

The outlook should improve gradually in 2013,as a more stable global and Eurozone economysupport exports and investments. Nevertheless,important major economies are still battlingagainst recession in 2013, including France, Italyand Spain. German exports are therefore set torise only moderately. Internally, the Germaneconomy will be helped in 2013 by rising wagesand consumption growth.

Annual consumer price inflation stood at 2.1percent in September, down slightly from 2.2percent in August. The dynamic development ofconsumer prices in the past few months hasbeen due to fluctuating energy prices. Strippingout energy, the inflation rate has been constantat 1.4 percent since June 2012. Energy priceswere up 7 percent in September year-on-year.

Construction in 2010 and 2011 benefited fromthe economic stimulus programme, but thissupport has been missing in 2012 and industrygrowth has slowed. This is being felt most keenlyin the civil engineering sector. The prospects fornon-residential commercial construction are alsomodest, but the residential segment remainsstrong with housing benefiting from investors'flight to safety.

Leading indicators, i.e. building permits and neworders have still been trending positive in 2012.The volume of building permits issued in the firsteight months of 2012 stood at €47 billion,compared to €43.7 billion last year. The picture issimilar for new orders, which are up 5 percent inthe year to August. Orders growth for residential(9 percent) and non-residential (6 percent)construction projects has outstripped those forcivil engineering (3 percent) in the year toAugust.

Construction output dropped sharply in the firsthalf of 2012, but has since performed stronger,which is expected to translate into full-yeargrowth of around 0.3 percent year-on-year,according to DB Research.

-50

-40

-30

-20

-10

0

10

20

30

40

50

0

20

40

60

80

100

120

140

SectorsComposite ECIAverage=100

Source: Ecof in

GERMANY ECONOMIC CONFIDENCE

Economic Conf idence IndicatorIndustryServicesConsumersConstruction

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

70

80

90

100

110

120

130

Annual 3M-avgIndex2005=100

Source: Destatis

GERMAN FACTORY ORDERS

Factory orders - all production industries

Investment goodsConsumer goods

-1

-1

0

1

1

2

2

3

3

4

4Annual

Destatis

CONSUMER PRICE INDEX

0

5

10

15

20

25

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Value, EUR, bnNumber

3-monhts averages Source: Destatis

BUILDING PERMITS

Non-residentialResidentialValue (EUR, bn)

Construction output is forecast to expand bysome 2.6 percent in 2013, with residential andnon-residential expected to remain the growthdrivers. In contrast, civil engineering is expectedto shrink modestly.

Construction cost inflation edged up in Q2 2012,rising by an annual 2.2 percent. The increasehas been mainly due to a 2.4 rise in labour costs.In contrast, material price inflation continues toease, with material costs up 2 percent in Q22012, compared to 4.3 percent inflation in 2011as a whole.

.

Contact:

Maren Baldauf-CunningtonSenior EconomistT: [email protected]

Jowhara [email protected]

Program, Cost, Consultancywww.davislangdon.comwww.aecom.com

-30%

-20%

-10%

0%

10%

20%

30%

60

70

80

90

100

110

120

AnnualIndex2005=100

3-months moving averages Source; Destatis

CONSTRUCTION NEW ORDERS

New ordersNew Orders - ResidentialNew Orders - Non-residentialNew Orders - Civil engineering

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

60

70

80

90

100

110

120

130

AnnualIndex2005=100

3-months moving averages Source: Destatis

CONSTRUCTION OUTPUT

Construction output - IndexConstruction output

2.8%

-0.3% -0.1% 0.2%

13.4%

0.3%

2.6%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

95

100

105

110

115

120

125

130AnnualIndex

Source: Destatis, DB Research

CONSTRUCTION OUTPUT

Index 2005=100

Annual change

-6%

-4%

-2%

0%

2%

4%

6%

8%

95

100

105

110

115

120

AnnualIndex2005=100

Destatis

CONSTRUCTION COSTS

Building costs

Materials

Labour