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Non-residential sector

The non-residential market accounts for 46% of Group sales and includes expenditure on:

  • Commercial buildings
  • Retail developments and warehouses
  • Education, hospitals and leisure complexes

United Kingdom

In 2015 the non-residential sector in the UK was broadly flat compared to prior year, mainly due to weakness in the retail and entertainment sectors.

Growth is expected to return in 2016, driven by stronger output in the new build commercial market, the largest component of the non-residential sector. For example, office vacancy rates in London are now at a 14 year low.

For 2016 the Construction Products Association ("CPA") is forecasting growth at a rate of 4.2% in the commercial sector and 3.2% for the UK non-residential market in total.

Mainland Europe

The non-residential sector in SIG's major markets of operation in Mainland Europe performed poorly in 2015, particularly in Germany where the market declined by 1.8% according to Euroconstruct.

This impacted the performance of the Group's German business, which has a high degree of exposure to the non-residential sector, with 60% of sales being derived from this market.

The outlook for 2016 is more positive, with Euroconstruct forecasting growth rates of 3.2% in France and 1.2% in Germany. This is based on improved macroeconomic lead indicators and a reduction in government austerity measures.

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Residential sector

The residential market accounts for 43% of Group sales and includes private and public sector expenditure on houses and apartments.

United Kingdom

The UK new build residential sector performed well during 2015, led by strong growth in the private housing market, which increased by 7% compared to prior year.

This was driven by growth in the wider economy and government policies such as Help to Buy. In contrast, output in the public sector declined by 10% as activity was constrained by reduced grant funding and near-term uncertainty over the implementation of government housing policies.

The UK RMI market was weaker than anticipated, particularly in the third quarter, most probably due to a lagged effect from a slowdown in mortgage lending and property transactions in the second half of 2014.

In 2016 the Group expects the private new build housing market to continue to exhibit strong growth, albeit likely at a lower rate than in 2015.

RMI housing expenditure is expected to pick up later in 2016 as an improvement in lead indicators feeds through to higher activity in the sector.

Mainland Europe

The residential construction market in France was challenging in 2015.

This weakness affected the performance of the Group's French business, which has a high degree of exposure to the residential sector, with 61% of sales being derived from this market.

The German residential market performed better, and was up by 2.0% in 2015, although this only accounts for around a quarter of the Group's sales in this country.

For 2016 Euroconstruct are forecasting a recovery in the French housing market as housing permits have stabilised and government measures such as the extension of zero-interest loans and continued "Pinel" programme for rental investments boost growth.

Industrial

This market accounts for 11% of Group sales and typically includes products such as technical insulation which are supplied to the industrial sector; for example, power stations or petrochemical works, where heat is an important part of the process.

The industrial sector performed well in the UK in 2015, growing by 11.5% according to the CPA*, as it continued to recover from a historical low in 2013. The CPA expects growth of 7.8% in 2016.

In France the industrial sector is expected to recover during 2016 as the combined effect of a decrease in oil prices and weakening of the Euro stimulate demand.

The outlook in Germany is less positive due to lower corporate investment.

Market drivers

Economic growth is an important demand driver in all of SIG's markets as it stimulates building activity and industrial output.

In addition, the following specific factors are also relevant to each segment of the Group's business:

Insulation and Energy Management

  • Recognising that 40% of energy consumed relates to buildings, the European Union enacted the Energy Performance of Buildings Directive in 2003;
  • This Directive requires all EU countries to improve energy efficiency and in the UK is covered under Part L of the Building Regulations; in France by the Réglementation Thermique ("RT") and in Germany by the Energy Saving Ordinance ("EnEV");
  • These standards are typically tightened every three to four years, usually leading to increased use of insulation to cut energy consumption; and
  • Furthermore, demand for offsite panelised systems and modular housing such as Insulshell is expanding significantly as customers increasingly desire complete managed solutions, which reduce build time, lower risk and help address skills shortages in the sector.

Exteriors

  • Replacement of old/damaged roofs gives rise to a core demand for RMI expenditure. In the UK, for example, around two-thirds of the housing stock is more than 40 years old;
  • Product innovation to reduce construction and exterior maintenance costs;
  • Growth of specialist distribution as the main supply route to market, gaining market share from the generalists and manufacturers; and
  • Increasing demand for offsite roofing systems such as RoofSpace, which designs, manufactures and installs rooms-in-roofs in residential properties. Similarly to Insulshell, this solution reduces cost, build time and risk for contractors.

Interiors

  • Increasingly stringent regulation, for example with regard to fire and acoustics. As well as driving demand for new products, this also benefits the specialist who can provide the necessary technical expertise;
  • Increased demand for integrated, manufactured offsite solutions; and
  • Demand for higher standards of internal fit outs.

Sources:
* Construction Products Association ("CPA")
** Euroconstruct