The profit and loss accounts of businesses active in energy-intensive segments (e.g. cement) are negatively affected by elevated electricity and gas costs.
- The rebound continues, but long payment terms remain an issue
- Insolvencies expected to decrease by more than 5%
- Still low activity in the public segment
The Spanish construction sector continued its rebound, that started in 2015, with an estimated value added growth rate of 4.2% in 2017, mainly due to Spain´s economic recovery and increased foreign investments. However, it must be said that the current construction recovery comes from a very low level following years of severe recession, as domestic production had decreased by more than 50% in the period 2007-2014.
In 2018 value added construction growth is expected to increase again by about 2.5%-3%, mainly driven by residential and commercial construction, while growth in the public construction/civil engineering segment is expected to be subdued.
Competition in the industry has dropped off significantly, as a large number of players have left the market since 2008 and there is a high degree of specialisation among the remaining players. Profit margins have increased in 2017 and are expected to improve further in H1 of 2018. However, the profit and loss accounts of businesses active in energy-intensive subsectors (e.g. cement and ceramics) are negatively affected by elevated electricity and gas costs.
Spanish construction businesses are highly dependent on bank funding and other sources of external financing. In this respect, conditions for external financing have continued to improve in 2017 due to the robust performance of the Spanish economy. However high leverage still remains a serius issue for many Spanish costruction businesses.
The contruction sector maintains a record of frequent and long payment delays. Despite the fact that the average payment period has improved in recent years, it continues to be high, at 93 days on average. Late payment of mainly larger players continues to negatively affect the working capital management of many smaller players. It is expected that construction payment delays will level off in H1 of 2018.
Construction insolvencies have shown annual decreases since 2014, as the remaining businesses are more resilient. It is expected that construction insolvencies will decrease further in 2018, by 5%-9% year-on-year, due to the satisfying growth outlook and the lower indebtedness of many businesses.
Due to the ongoing rebound, our underwriting stance for the construction sector has become less restrictive than in previous years, with an open stance for larger businesses and international groups. However, we are still prudent with smaller businesses as the market has not yet fully consolidated, many companies are still highly indebted and lending conditions have not yet fully eased. We are also more cautious when underwriting businesses dependent on the public construction sector, as the activity level in civil works remain low due to constrained spending by the Spanish government (fiscal consolidation in order to reduce the public deficit).