Dutch construction contributes approximately EUR 70 billion to, and accounts for 4.5% of GDP.
The number of construction and construction-related companies grew 8% in 2019, to 216,000. Out of them about 160,000 were one-man businesses or employing just a single employee, while only 70 companies employ more than 250 people.
Construction output grew about 5% in 2019. However, the exceptionally high increase of more than 10% seen in Q1 of 2019 could not be matched during the rest of the year. In 2020, construction output is expected to increase only 0.5%.
18,000 building projects delayed by environmental issues
The main reasons for lower growth are a general slowdown of the Dutch economy, capacity problems (staff and building permission bottlenecks), and environmental issues: in May 2019 the country’s highest court ruled that regulations dealing with nitrogen emissions imposed by the Dutch government in 2015 were in breach of EU laws. Therefore, 18,000 building projects worth approximately EUR 14 billion have been delayed. Additionally, new rules regarding Per- and Polyfluoroalkyl Substances (PFAS) in the soil have halted about 70% of building projects involving soil removal.
While 2019 was a reasonably good year for residential construction, order portfolios for 2020 have shrunk, mainly due to fewer permits (down 33% year-on-year in October 2019). Housing corporations are building less, while projects are postponed due to environmental issues. Shortage of new construction sites is also a problem, mainly in the Randstad.
Demand for commercial and office buildings increased in 2019, but by the end of 2019 order backlog decreased from 10.7 to 9.4 months. Public infrastructure building is the segment most severely affected by the PFAS and Nitrogen issue. In 2020, output in this subsector is expected to shrink 3.5%.
Profit margins of construction businesses have been stable over the past 12 months, but due to the above mentioned challenges, deterioration is expected in 2020. That said, payment behaviour in the industry is still at an acceptable level, with no major increase in payment delays expected in 2020. The average payment duration in the industry is 60-90 days. Construction insolvencies (excluding one-man businesses) decreased slightly, from 306 cases in 2018 to 291 cases in 2019.
The mid-term outlook remains moderately optimistic
Although construction activity will be much lower in 2020 than in previous years, the mid-term outlook is still moderately benign, as the current decline is not the result of low structural demand. We expect that growth will pick up again as soon as capacity issues and the nitrogen and PFAS problems are solved. In the medium- and long-term, more housing is required, and infrastructure needs to be maintained and upgraded.
Our underwriting stance remains positive to neutral for the time being. We especially try to identify and monitor individual construction businesses that could suffer from the current decline caused by the nitrogen and PFAS issues. While we do not expect a substantial increase in construction business failures in 2020, smaller businesses, especially sole proprietorships, could find surviving a temporary backlash too difficult.