Moody’s Investors Service’s outlook for the European construction sector remains stable, with the rating agency forecasting aggregate organic revenue growth of up to 8% and stable operating margins over the next 12 to 18 months.
“Our stable outlook on the European construction industry, with growing revenues and broadly flat margins into 2017, is underpinned by our forecast of 1.7% GDP growth for the euro area and G-20 advanced economies in 2016. In addition, we anticipate solid prospects for infrastructure projects and the continued global expansion of European construction companies, especially in the North American market,” said Matthias Heck, a senior analyst at Moody’s.
Residential and commercial construction is likely to remain steady or even expand, especially in larger cities that benefit from the long-term trend of urbanisation. Continued low interest rates also support investment in building construction, while the gradual execution of the EUR 315 bln EU Investment Plan for Europe is likely to contribute further to a modest increase in construction activity.
However, tight government budgets could constrain expenditure on maintenance and urbanisation infrastructure projects. Lower commodity prices could also deter investment in energy production and power generation facilities, and countries dependent on natural resources are showing subdued overall construction activity.
Companies’ individual creditworthiness is under continued pressure from the downturn in various emerging markets and from focusing on developed markets with lower margins. The resultant pressure on operating margins is driving high financial leverage for most EMEA construction companies, including Obrascon Huarte Lain SA (B2 stable) and Astaldi SpA (B2 negative).
Nevertheless, the slow return to growth in major European construction markets, such as Germany, France, Italy and the UK, will help to maintain stability in the sector. Growth in these areas is likely to offset the continued recession in Russia, although existing large Russian infrastructure projects are expected to continue to completion.
The North American market offers expansion opportunities for European construction companies. But, despite continued market growth, ongoing competition could limit upside potential for operating margins.
