2016: the great construction sector bounceback?

Buying a business during a downturn will always be a gamble to some extent. But as with all business, if you play your cards right, it can be an incredibly profitable game to play - something that those who bought distressed construction businesses last year are finding at the moment.

Construction was one of the sectors hardest hit by the 2008 financial crash as lending dried up and demand for property - both commercial and residential - ground to a halt. Years later many businesses are still feeling the effect as confidence stubbornly refused to improve.

But 2016 could finally herald the change everyone has been waiting for. The November 2015 Infrastructure Outlook Report, commissioned by construction firm Tarmac and based on data from Ipsos Mori, found that two-thirds of construction industry bosses are confident about the overall infrastructure outlook over the next 12 months, with the sector in general starting to demonstrate a more buoyant mood.

The industry response to George Osborne’s Autumn Budget painted a similarly positive picture with housebuilders generally welcoming his announcements with regards to boosting house building.

In response to the Budget, Simon Hay, CEO of the Brick Development Association, said: “We look forward to making our contribution to addressing the chronic housing shortage that has built up over recent decades. The re-openings and development of new brick plants are already incredibly positive signs in the revitalisation of the housebuilding sector.

“We should take positively from the news that new-build housing has risen by such an extent, and should continue to rise over the next year as more focus is directed towards the current housing situation.”

Brian Berry, chief executive of the FMB, added that the Chancellor was “right to ‘choose housing’” when faced with a difficult array of spending cuts. Mr Berry added that SMEs will play a vital role in delivering the new increase in building that is the likely outcome of the Budget announcements: “The last time we built in excess of 200,000 homes in one year was in the late 1980s when two-thirds of all homes were built by small developers.

“SME house builders now only build little over one quarter of all new homes which points to another serious capacity issue – we need more small house builders to enter the market and also for SME house builders to crank up their delivery of new homes in order to build the Chancellor’s 400,000 new affordable homes.”

The positive outlook within the sector is being reflected by the M&A sector as construction sector growth forecasts spark strong appeal among private equity and corporate buyers.

CPA forecasts that once the data has been finalised 2015 will have recorded a 5.5 per cent growth in construction output, compared to a 4.8 per cent growth rate in 2014. With the raft of changes that came in last year, yet greater growth is predicted for the years ahead, with output expected to surpass the 2007 recession peak by 2017.

For buyers who snapped up struggling construction businesses at below-market prices last year, these figures and the positive industry outlook are no doubt music to their ears.

Among these smart early buyers is Breedon, a company which struck a deal to buy Hope Construction Materials for £336 million in November 2015. Peter Tom, chairman of Breedon, has said specifically that timing was a factor in the deal as the positive industry predictions started to tick through.

He told the Construction Enquirer: “This acquisition is well-timed, with UK construction output forecast to expand by around 15 per cent over the next four years and volumes of all our major products expected to grow strongly.”

Mr Tom added that the firm aims to create a vertically-integrated business with Breedon and Hope, allowing the larger firm to build a strength and capacity to rival its major multinational competitors.

The company expects to realise £10 million in operational improvements three years post-purchase, suggesting that Breedon is confident it got its timing spot on in buying Hope just before the uplift in the market.

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