Market Monitor - Construction industry - Spain

• Finally a rebound is underway
• Still very long payment terms
• Current political uncertainty has a dampening effect

The Spanish construction sector´s contraction bottomed out in 2015, with a 0.3% contribution to GDP growth. In 2016 a robust output growth of about 4% is expected, followed by 5.5% in 2017. This upswing is due to Spain´s economic recovery, more foreign investments and a return of business confidence. Lower commodity prices have also had a positive impact on the current rebound. However, it must be said that the current construction recovery comes from a very low level following years of severe recession.

Residential construction is expected to grow by more than 4% in 2016 and 2017 due to increasing demand in big cities such as Madrid and Barcelona, where the economic recovery is well ahead of the rest of the country. However, a volatile job market could weigh on demand.

After contracting in 2015, commercial construction is expected to grow 2.5% in 2016. The key to a real improvement in this segment will be the recovery of enough demand from the commercial sector (shops and offices) to justify the launch of new projects.

Public construction has experienced a revival in 2015 as a result of the general elections in December, with growth estimated at 6%. However, a continuation of the current political uncertainty with a hung parliament could affect investments. At the same time, there is still a great deal of uncertainty about any new government´s infrastructure development plans for the future.

Competition in the industry has ceased, as a large number of players have left the market since 2008. In 2015 construction businesses’ profit margins improved slightly, and this positive trend is expected to continue. Spanish residential, non-residential construction and civil engineering are highly dependent on bank funding. In this respect, conditions for external financing have improved in 2015 due to lower country risk and better growth prospects for the Spanish economy.

Payments still take more than 100 days on average, as construction has always shown longer payment periods compared to other sectors. However, in the last two years we have seen a slight reduction in payment duration, and no increase in payment delays was recorded in 2015.

Construction insolvencies continued to decrease by 25% in January-September 2015. Due to lower leverage of businesses and the positive growth outlook we expect business failures to decrease further in 2016, by about 10%-15%.

Due to the rebound, our underwriting stance for the construction sector has become less restrictive than in previous years. However, we are still prudent as the market has not yet fully consolidated and lending conditions have not yet fully eased. Due to the still high indebtedness of many businesses active in residential and commercial construction, we are still cautious with those subsectors, and the same accounts for real-estate developers. Public construction could be negatively affected by lower government investment in case of on-going political uncertainty .