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House Builders Look to Defy the Age of Austerity

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Austerity Measures  Infrastructure Investment  Construction and Housebuilding 

By - Wednesday 25 August 2010

Stringent government spending cuts and economic uncertainty have had an effect on property markets around the world. This new age of austerity which many European countries have entered in an attempt to tackle growing national debt has come at a price to developers and the construction industry.

Cuts to public sector budgets from various governments have had a knock-on effect on the number of public housing and other public works developments taking shape. However, earlier this week, the Spanish government announced that it would be increasing its spend of public infrastructure to help "facilitate economic recovery and job creation". Capital spending on infrastructure would rise by at least EUR 500 million, financed by spending cuts in other areas, finance minister Elena Salgado revealed.

The statement follows recent figures which show that there has been a shock increase in Spanish property construction - amid a general recovery in the eurozone building industry. Construction in the nation, which was one of the worst affected by the market collapse, grew 7.2 per cent during June in comparison to the previous month. It marks the start of a slight resurgence in interest from the building industry in the region after the European Union's (EU) statistics office revealed that overall activity in the eurozone has increased by 2.7 per cent since May.

This was mainly driven by a 15.8 per cent surge in German construction.

Optimism in the Constuction Industry

EU figures would suggest that construction and real estate businesses throughout the region may be more optimistic about the future.

According to a report from financial and business advisors Grant Thornton, many UK-based businesses are predicting that turnover and profits are likely to rise in the coming months. However, many still remain cautious believing that the growth will be constrained by a shortage in demand. Some 13 per cent are optimistic on the outlook of the UK's economy over the next 12 months compared to -20 per cent in 2009, the report shows.

Expectations of turnover/revenue and profits have also improved this year, with 37 per cent anticipating an increase in profits compared to 32 per cent in 2009. In addition 43 per cent expect turnover/revenue to increase in 2010 compared to 34 per cent last year. "Optimism in the sector has seen a slight increase from 2009 as construction and real estate PHBs show signs of recovering from the very difficult conditions seen last year," said Kathryn Hiddleston, head of construction at Grant Thornton.

"However, recovery in the sector will be very dependent on access to finance becoming more available and there is a lot of pressure on the banks to ensure this is the case." Despite this renewed sense of optimism, there are still concerns that further government announcements may have a detrimental effect on the recovery of the house-building sector in the UK. "What also might be worrying for the industry are signs of a decline in property prices which won't be helped by a lowered economic growth forecast in the UK and inflation staying higher than previously forecast," Ms Hiddleston added.

Property Investment Rises

Key to the recovery of the house-building and construction sector is the return of property investors to major European markets. Earlier this year, the latest data from CB Richard Ellis showed that commercial real estate investment turnover in the region reached EUR 23.5 billion in the second quarter of 2010. This was a 15 per cent increase on the EUR 20.3 billion transacted in the first three months of the year and points towards a gradual market recovery.

The report noted that turnover had managed to rise in spite of factors emerging in the broader capital markets, such as the sovereign debt crisis and the introduction of austerity measures by many European governments. Over the three-month period, investment activity remained concentrated in the UK, Germany and France, with the markets together accounting for 62 per cent of the European investment activity.

"With a growing number of larger transactions in Europe, we are also starting to see an increase in cross border activity," Michael Haddock, director of EMEA Capital Markets Research at CB Richard Ellis, said. "Middle Eastern and overseas investors have been particularly prominent this year, concluding a number of large deals."ADNFCR-3415-ID-800034259-ADNFCR

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