Italian building cooperatives and smaller companies focused on domestic residential construction remain highly exposed to the risk of business failure.
- Construction investments expected to decrease again in 2017
- Lack of bank financing remains a major issue
- High insolvency level remains
Deterioration in the Italian construction sector started to slow at the end of 2014, as the economy rebounded modestly. However, construction performance is still far away from a real rebound. Italy´s GDP growth remains feeble in 2017 (up 0.7%) after growing just 0.8% in 2016, which will hamper construction growth. After a weak 0.3% increase in 2016, construction investments are expected to decrease 1.2% in 2017, with new housing investments down 3% and public works investments decreasing 3.5%.
Next to subdued spending capacity, tight lending conditions set by banks are the main reason for the poor performance of the construction sector. Given the current problems in the Italian financial sector, it seems that there will be no improvement in the restrictive loan policy anytime soon. Many businesses in the construction sector remain highly geared. Bank loans for residential building decreased from EUR 30 billion in 2007 to less than EUR 8 billion in 2015, and for non-residential construction from EUR 20 billion to EUR 10 billion.
Late payments from public bodies have also contributed to market difficulties. The average payment term stands at 5.5 months, compared to two months set by law. Average payment delays are still long, but have at least decreased since 2014 (from 146 days in H1 of 2014 to 117 days in H1 of 2015 and to 108 days in H1 of 2016). Non-payment notifications are expected to remain at a high level in 2017, but at least no major increase is expected. The same accounts for construction insolvencies, which should remain at an elevated level.
Not all businesses are equally affected by the difficult market situation. Large construction companies have proved to be resilient due to portfolio diversification and export orientation, which makes them less dependent on the domestic market. Large export oriented players (mainly active in African and Middle Eastern countries) are expected to achieve positive results.
In contrast, construction cooperatives and consortiums focused on the domestic residential construction market and dependent on public works have been severely hit by deteriorating demand, decreased bank loans and late payments. Finally, small and medium-sized businesses focused on residential construction are most severely affected, due to decreased investment in private housing (new buildings shrank by more than 60% between 2008 and 2015) and restricted bank loans. The only exceptions have been businesses active in renovation works supported by government incentives (up 19% between 2008 and 2015).
Given the on-going problems, our underwriting stance remains restrictive. However, underwriting is more open for construction players who are export-oriented and less dependent on the domestic public sector.