Construction and real estate

Three threats to real estate and construction growth

Clare Hartnell explores how demand, uncertainty and skills shortages are affecting real estate and construction

 

The real estate and construction sector continues to make steady progress as it recovers from a financial crisis in which investors, developers and homeowners were disproportionately hit. According to our Q1 International Business Report (IBR) figures, businesses in the sector are expecting revenues and profits to climb more or less in line with the global all-sector average. I reported in a previous post that the mood at MIPIM was as buoyant I as have seen it in recent years, and while I am optimistic for the outlook for the sector there are a couple of clouds on the horizon that business leaders should be mindful of.

The first is clearly the geopolitical uncertainty caused by the Ukraine crisis. Our IBR interviews were undertaken before the secession of Crimea but the sector is still struggling with a lack of demand according to the IBR – 38% cite a shortage of orders, compared to 30% in all sectors. Any escalation of the tension between Russia on one side, and the US and EU on the other, is likely to dampen business growth prospects, not just in Europe, but potentially across the globe. Interestingly, sector businesses in developed Asia Pacific (60%) are suffering far more from a lack of demand, compared with peers in Europe (38%) and North America (25%).

The second is that the global recovery, while certainly  on firmer footing, is in no way assured. Europe grew by just 0.1% in 2013 and while growth is forecast to be much stronger this year,  debt levels remain unsustainably high in many peripheral economies. And uncertainty persists in many developing economies which have seen their currencies plunge and inflationary pressures build as the US unwinds its huge quantitative easing programme. And while 10% fewer sector businesses cited economic uncertainty as a constraint on their potential expansion in Q1 compared with three months previously, it remains above the all-sector average, perhaps reflecting the spare capacity built up in many parts of the world in the years leading up to the financial crisis.

And finally, real estate and construction businesses remain concerned about getting people of the right calibre into their organisations: 39% of businesses in the sector globally report a lack of talent, compared to 28% of all businesses. This is a particular concern with unemployment still running above pre-crisis levels in much of the developed world. Indeed, in North America, where unemployment has been steadily falling, 41% of sector businesses say a lack of skilled labour is preventing them from growing their operations, rising  to 49% in developed Asia Pacific economies. However the issue is not uniform: just 20% of peers in Europe, where unemployment is only just starting to come down from record highs, report skills shortages.

So how should businesses respond to these challenges? Dealing with geopolitical or economic uncertainty is, by its very nature, hard to deal with. But there are steps businesses can take, such as limiting exposure to countries where sanctions or an escalation in tensions are likely to have the biggest impact, and not skating over due diligence issues before making investments. The other thing that jumps out at me is international expansion: perhaps Asia Pacific and European companies suffering from a lack of demand, should look at opportunities in North America where demand for real estate and construction looks a lot healthier. Our results suggest that North America could do with the skilled labour.

Clare Hartnell is global leader for real estate & construction at Grant Thornton .