Construction payment delays and insolvencies have decreased, mainly because financially weak players already left the market during the past downturn.
The Spanish construction sector continued to rebound in 2016, with a value added growth rate of 3%, mainly due to Spain´s economic recovery, increased foreign investments and a return of business confidence. Lower commodity prices also had a positive impact. However, it must be said that the current construction recovery comes from a very low level following years of severe recession, as domestic production had decreased by more than 50% in the period 2007-2014.
In 2017 value added construction growth is expected to increase again by about 3%, mainly driven by residential and commercial construction, while growth in the public construction/civil engineering segment is expected to be subdued.
Competition in the industry has ceased, as a large number of players have left the market since 2008. Profit margins were stable in 2016, and are expected to remain so in 2017. Spanish construction businesses are highly dependent on bank funding. In this respect, conditions for external financing have improved since 2015 due to lower interest rates and better growth prospects for the Spanish economy.
The payment experience has been good over the past two years, and there has been a low number of defaults. This is mainly because financially weak players left the market during and immediately after the downturn, while the remaining businesses are more resilient. It is expected that construction insolvencies will level off or even decrease slightly in 2017 after major decreases in 2015 and 2016.
- Due to the on-going rebound, our underwriting stance for the construction sector has become less restrictive than in previous years, with an open stance for larger businesses and international groups. However, we are still prudent with smaller businesses as the market has not yet fully consolidated, many companies are still highly indebted and lending conditions have not yet fully eased. On-going fiscal consolidation could adversely affect the performance of businesses in the civil engineering segment.