Global economic environment and trends
The global financial crisis essentially triggered by the col- lapsing US real estate market was the key factor driving global economic trends in 2008. Banks’ confidence in one another was severely damaged, resulting among other things in a shortage of capital. A number of governments have now launched rescue packages comprising guaran- tees and loans with the aim of stabilizing the international financial and economic system. In addition, economic stimulus programs have been announced and decided worldwide.
For construction and other industries, this means changes affecting general refinancing requirements. In addition, capital market conditions pose a particular challenge for project development activities and concessions business. It remains to be seen what changes will occur, both in financ- ing development projects and on the investors market in 2009. Financing is a particularly important issue in the con- cessions business, as contract terms tend to be long. Future project financing conditions will have a decisive in- fluence if and when new projects are implemented. On the other hand, the economic stimulus programs that have been announced are expected to benefit the construction industry in particular. These programs provide for much higher investment in infrastructure.
Global economic growth was 3.4 percent last year, signifi- cantly less than originally forecast for 2008. Despite the government measures, it cannot be assumed that the finan- cial crisis is definitely coming to an end, making any fore- cast for 2009 highly uncertain. The International Monetary Fund (IMF) is anticipating global economic growth of around 0.5 percent.
Growth will vary considerably from region to region. Experts are expecting the US economy to contract by 1.6 percent in 2009 after growing by 1.1 percent last year. Much will depend on whether the rescue measures decided upon have an effect and credit flows are restored.
The Asia region was also affected by the turmoil, but to a lesser extent. The economic slowdown in a number of in- dustrialized nations is now restricting export opportunities, however. After growing by nine percent in 2008, China’s
real gross domestic product (GDP) is forecast to increase by 6.7 percent in 2009. In Japan, where the economy con- tracted by 0.3 percent in 2008, the IMF experts are ex- pecting a further fall of 2.6 percent in 2009.
Following healthy growth of 3.1 percent in 2007, the eco- nomic area comprising the EU 27* expanded by just 1.3 percent in 2008, with the trend sharply down in the sec- ond half of the year. The IMF is expecting this negative trend to continue during 2009. It is currently anticipated that the economy will shrink by 1.8 percent.
In Russia too, there is uncertainty about how the economy will trend. In 2008, the Russian economy grew by another 6.2 percent, but making a prediction for 2009 is difficult given the shorter supply of capital and fears that a pos- sible real estate bubble may burst. As investment activity within Russia is declining, the IMF is expecting GDP to fall by 0.7 percent, a surprisingly sharp drop for the region.
Markets served by HOCHTIEF
Development Project development
The past financial year was a year of two completely differ- ent halves for the real estate markets. Although the markets were completely unaffected by the international financial crisis during the first half of the year, the crisis worsened from September 2008 onwards, with the fallout particu- larly severe in the fourth quarter.
The rental market turned in a satisfactory performance overall in 2008. According to industry experts Jones Lang LaSalle, take-up in Germany’s office and warehouse seg- ments was slightly down on the record levels reached in previous years, by 8.0 percent and 7.0 percent respec- tively, only because of a weak fourth quarter. Vacancy rates in major real estate markets such as Hamburg, Frankfurt and Munich fell to all-time lows. In a welcome development, rents in Germany continued to rise, particularly for high- quality properties. Like the German market, Eastern Europe also saw a satisfactory trend in rents. Take-up declined only slightly. However, the downturn that began in the last quarter of 2008 will continue in both Germany and East- *See glossary on page 193.
ern Europe during 2009. Take-up, vacancy rates and prime rents will all trend adversely.
Having overheated in previous years, Germany’s real estate investment market returned to a normal level of activity in the first half of 2008. The volume of commercial prop- erty transactions fell by almost two thirds year on year. Although the financial crisis made for a weak fourth quar- ter, 2008 was still a better-than-average year in terms of transaction volumes on a multi-year view. This was due to strong take-up during the first half of the year. According to industry experts CB Richard Ellis, the investment market in Eastern Europe also fell sharply. One of the main rea- sons for the low volume of transactions both nationally and internationally was the very restrictive lending policies adopted by banks. These may well be relaxed again in the course of 2009. According to Jones Lang LaSalle, this would bring about a renewed increase in transaction vol- ume in Germany and Eastern Europe. During times of economic uncertainty, properties that keep a stable value are of particular interest to institutional investors.
HOCHTIEF Projektentwicklung’s core product—properties in superb locations—could be in high demand. A number of market players are expecting many of the institutional in- vestors that are still holding considerable amounts of equity capital to shift their assets into properties that keep a stable value.
Construction
The construction markets of most significance to our com- pany showed highly diverse development. In Europe, the sector was affected by the weak trend in residential con- struction in 2008. In this segment, construction activity fell by a total of 6.9 percent in the 19 countries covered by Euro- construct. As it accounts for a large proportion of the total,
construction activity as a whole declined by 2.5 percent in the period under review. According to the forecast from the Euroconstruct group of research and consultancy institutes, this situation will not change at all in 2009. Residential construction activity is likely to fall again, this time by 7.1 per- cent.
The markets of most significance to HOCHTIEF are non- residential construction and civil engineering. In Europe, these generally fared well despite the difficult economic environment, with many European countries recording sometimes sharp rates of growth. The key drivers were once again the countries of Eastern Europe, where market growth continued apace. According to the Euroconstruct group, the outlook for 2009 remains bright in many coun- tries in which HOCHTIEF operates.
Offshore wind farms are another source of potential. HOCHTIEF has sound experience in this segment and can provide special jack-up platforms that enable foundation piles to be installed at sea.
The US construction sector was hardest hit by the finan- cial crisis in the year under review. Industry experts at McGraw-Hill Construction report that construction activity fell by a total of 12.4 percent in 2008. In 2009, demand is expected to decline by 7.4 percent. It is important to note, however, that the individual segments vary considerably. Residential construction, a segment of little significance to our US subsidiary Turner, has been particularly affected, while non-residential construction, the segment served by Turner, grew by 4.3 percent. This segment is expected to shrink by 9.7 percent in 2009 as a result of the general state of the economy. In civil engineering, the market served by our US subsidiary Flatiron, investment requirements remain high. According to McGraw-Hill Construction, the market grew by 1.4 percent in 2008. A temporary decline of Australia Asia
excl. Japan
Brazil Chile Germany UK India Indo-
nesia
Austria Poland Russia Czech Republic
Hungary USA United Arab Emirates
2008 2.5 5.4 5.8 4.5 1.3 0.7 7.3 6.0 2.0 5.2 6.2 4.0 1.9 1.1 7.0
2009E 2.2 2.7 1.8 3.8 –2.5 –2.8 5.1 5.5 0.8 3.7 –0.7 3.3 2.3 –1.6 6.0
Overall real economic growth (in percent) in regions served by HOCHTIEF
Source: International Monetary Fund (as of January 28, 2009)
nine percent is forecast for 2009. After entering office, US President Barack Obama promised government programs that involve heavy investment. Over the coming ten years, up to USD 60 billion could be spent on expanding transport routes alone. Investment in infrastructure and education projects has also been announced. The economic stimu- lus package amounts to some USD 800 billion in total. Building to high environmental standards is of particular importance in the US market. For years, Turner has been the leader in green building. The trend toward green build- ing is a market driver and, according to McGraw-Hill Con- struction, a source of numerous new orders. In November 2008, Turner’s Green Building Market Barometer found that demand will remain high: The executives surveyed showed continued interest in sustainable buildings. The previous year’s positive forecasts for the Australian construction market were once again greatly exceeded. In 2008, all the segments served by HOCHTIEF saw signifi- cant market growth. In 2009, the civil engineering segment is expected to stagnate at a high level, contracting by 0.8 percent. For non-residential construction, research institute BIS Shrapnel is forecasting a decline of two percent. Despite the current slowdown and the cancellation of a small number of projects, the medium-term outlook for the Gulf region is bright. Market researchers at Middle East
Business Intelligence expect construction projects worth more than USD 1,500 billion over the next few years, which means the market remains attractive. HOCHTIEF is active in this region through the Leighton business portfolio and HOCHTIEF Construction.
According to industry experts at the Construction Indus- try Development Council (CIDC), the markets in Asia re- main on a growth path. The Indian construction market will expand by ten percent a year in the period to 2012, mainly as a result of civil engineering projects. The planned road construction projects alone add up to 30,000 kilome- ters. Market watchers also expect the Indonesian market to see positive growth rates, driven by numerous infrastruc- ture projects. HOCHTIEF has a firm foothold here through its subsidiary Leighton and the Leighton business portfolio.
Services
Facility management
The German market for facility management (FM) amounts to slightly more than EUR 63 billion. The renowned Lünen- donk study 2008 estimates its annual rate of growth to be roughly five percent. Integrated FM services currently ac- count for almost 13 percent of this overall market, a share equivalent to almost EUR 9 billion. In this segment, where HOCHTIEF Facility Management is a successful player, the rate of growth is over ten percent. The trend for clients to Region 2008 2009 Non-resi- dential con- struction Civil engi- neering Overall market Non-resi- dential con- struction Civil engi- neering Overall market Australia 2.1 8.7 5.5 –1.9 –0.8 0.3
Brazil n.a. n.a. 10.0 n.a. n.a. 10.0
Germany 5.4 4.2 3.1 – 0.3 0.5 – 0.5
UK 2.6 9.3 –1.1 – 2.8 5.8 – 3.2
India n.a. n.a. 10.0 n.a. n.a. 10.0
Indonesia n.a. n.a. 7.0 n.a. n.a. 5.0
Austria 0.0 5.5 2.0 –1.7 1.8 0.0
Eastern Europe 4.7 5.9 6.2 2.5 13.3 4.8
Poland 10.3 14.3 12.4 5.2 21.4 8.0
Russia n.a. n.a. 17.0* n.a. n.a. negative
Czech Republic –1.1 4.9 2.2 2.0 5.5 3.6
Hungary – 5.0 –16.5 – 6.5 – 5.3 – 3.8 – 3.8
USA 4.3 1.4 –12.4 – 9.7 – 9.0 – 7.4
Western Europe 1.1 1.5 – 2.9 – 4.0 – 0.6 – 4.8
*As of September 30, 2008
Percentage growth in the regional construction markets served by HOCHTIEF
Sources: Euroconstruct BIS Shrapnel McGraw-Hill German Office for Foreign Trade
outsource mainly complex secondary processes to spe- cialist service providers continues undiminished. HOCHTIEF Facility management is well positioned in this growth area. The balanced mix of industries it serves ranges from manu- facturing through healthcare to long-term public-private partnership projects.
The Gulf states are one example of a growth region for FM solutions. These have seen rapid project development ac- tivity in recent years and are forecast to experience double- digit annual growth in facility management services in the future. HOCHTIEF Facility Management’s presence in Bah- rain enables it to respond flexibly and quickly to the grow- ing needs in this region.
Sustainability is an issue of growing significance in the fa- cility management market. Clients require end-to-end con- cepts that enable them to optimize processes and manage buildings in a cost-effective and environmentally sustainable manner. HOCHTIEF Facility Management can offer them added value through a combination of modern facility and energy management.
Energy contracting
Energy contracting provides clients with an efficient route to energy-saving solutions. In light of rising energy costs, it is now a recognized cost-efficient tool in Germany. Con- tracting allows businesses to reap the benefits of contrac- tually agreed energy savings while relieving them of the need to make the necessary investment. A contractor refi- nances an investment in efficient technical installations through energy-cost savings, useful energy or a combina- tion of the two.
According to a study by market research institute trend:research, the German contracting market is poten- tially worth some EUR 20 billion. Growth rates for the period to 2015 are far in excess of ten percent. So far, only seven percent of this has been tapped. As many busi- nesses are now focusing on their site costs, energy con- tracting will continue to gain in significance. The fastest- growing segments are industry, the public sector and healthcare, all segments in which HOCHTIEF Energy Man- agement is very well positioned. Environmental aspects
are also becoming increasingly important. On projects im- plemented by HOCHTIEF Energy Management, CO2 emis- sions are being sharply reduced. The combination of pro- cess-optimizing facility management and cost-efficient contracting models offered by HOCHTIEF is also meeting with interest in the market.
Property management
Especially in times of economic difficulty, professional property management plays an important role. Although in the past gains have been realized mainly through sales, active property management is now the only way to ensure a sustainable return. Industry experts therefore expect a clear trend toward professional management by special- ists over the coming years. HOCHTIEF Property Manage- ment is best placed to cater to this trend.
There are already signs that relatively large property owners such as in the insurance industry will continue to outsource in 2009 and the years thereafter. Further growth is expected to come from the various insurance companies’ plans to increase the percentage of their investments in real estate. In Australia, the companies in the Leighton business portfolio provide a wide variety of services ranging from the maintenance of toll routes and tunnels through tele- communications services to innovative waste manage- ment. It is anticipated that these profitable segments will continue to see good rates of growth.
Concessions and operation Public-private partnerships (PPP)
The PPP model—whereby the expansion and operation of public infrastructure is privately financed—is now being used in a number of European countries. In Germany, there were a total of 94 new projects last year at federal, state and municipal level, most of them in public building con- struction, with investment totaling some EUR 3.3 billion. Further projects are in the pipeline: At the end of 2008, the number of tendered or firmly planned projects stood at 98. It is estimated that investment in the public buildings seg- ment alone will top EUR 20 billion in the period to 2011. The PPP task force at the Federal Ministry of Transport,
Building and Urban Affairs has calculated that the current projects offer efficiency gains of between 5.9 and 28 per- cent.
In 2009, PPP contract awards in the UK are forecast to total just over EUR 5 billion. Although the financial crisis could hamper the availability of long-term project finance, other European countries are increasingly recognizing the advan- tages of PPP projects. In Greece, the government is plan- ning to put out to tender contracts worth billions.
HOCHTIEF PPP Solutions is currently active in Germany, the UK, Ireland, Greece, Austria and the USA.
PPP is gaining in significance in the USA, where HOCHTIEF has had a presence through a subsidiary of HOCHTIEF PPP Solutions since early 2008. This young US market is expected to see high rates of growth: HOCHTIEF estimates that the US PPP market could be worth USD 300 billion over the next ten years. In addition, the government is likely to increase investment in infrastructure.
In Canada too, the PPP market continues to grow. Various toll road projects worth more than EUR 2.5 billion are currently at the preparation stage. Added to this are further school and hospital projects. With its focus on civil engi- neering, our subsidiary Flatiron is already operating success- fully in this region.
The growth outlook is also bright in Australia, a mature PPP market. Operating as a PPP project developer here for many years, our subsidiary Leighton has secured a leading position.
Airports
Global passenger numbers were down by just 0.6 percent and therefore almost unchanged in 2008 thanks to a strong first half of the year. At airports in Germany, pas- senger numbers increased by 1.1 percent in the year under review. HOCHTIEF airports outperformed the aver- age: Here, passenger numbers rose by a total of 1.5 percent to 90 million.
Due to the effects of the financial crisis, the Airports Council International (ACI) is expecting passenger num- bers to fall by up to four percent in 2009. Over the long term, however, the ACI industry experts are forecasting average annual growth of more than four percent. The airport privatization market will also remain dynamic. For HOCHTIEF, this trend offers long-term growth oppor- tunities, as our international presence and expertise mean we are superbly positioned for future privatizations in Eastern Europe, Asia, South America and the USA. Both lines of business—PPP and airports—require struc- tured, long-term financing, which in turn calls for properly functioning financial markets. It is currently difficult to predict when such conditions will return.
Contract mining
Despite the difficult economic trend, global demand for com- modities was high in 2008. This also benefited contract miners, for example, by generating new orders in areas such as Australia and Asia. Over the coming years, much will depend on economic growth in China. This is a key factor driving demand for ore and coal as mined by Leighton, which in turn matters to us. However, experts are currently anticipating continued, albeit temporarily slower growth. The recent drop in the price of various commodities is not impacting directly on providers of contract mining services, as the mine owners bear the price risk and contracts run for long periods. Over the medium term, a deterioration in revenues could have a dampening effect. Currently, the market remains at a gratifyingly high level. Our Australian subsidiary Leighton, the world’s largest contract miner, has been operating successfully in this segment for many years.
Geothermal energy
The geothermal market in Germany is steadily growing thanks to a favorable environment: Under the Renewable Energy Sources Act, payments for geothermal power are