SUMMARY OF REPORT CONTENTS

Ireland remained the fastest growing economy of the European Union in 2002 when measured in GDP growth terms, a position it has held consistently since 1994. With a population of 3.96 million people in 2003, Ireland represents just over 1% of the total European Union population, only Luxembourg has a smaller population. Ireland is also the fastest growing population within the European Union with an increase of 1.52% in 2002 compared with 0.28% for the same year in the UK. This combination produced a 7% increase in construction output value to €21.5 billion for 2002, amounting to 2.2% of total European Union Construction estimates. Further progression is forecast in 2003 with construction output value growing by a further 3% to €22.2 billion.

During the period 1994-1999, construction industry volume increased by 13% per annum on average representing the most vigorous growth period in the history of the state. GNP grew cumulatively in real terms by 75% for the period, or around 8% per annum for the same period. The three years 2000-2002 has seen a deceleration in output growth during which the industry has experienced a weakness in demand, continued increases in building costs and very competitive tendering. Although the industry value has increased over this period, lately this has been driven by inflationary factors as output volume is forecast to drop in 2003 by 3% despite a value increase of 3%. Construction accounted for 16.8% of GDP in 2002 - around twice the contribution from construction to GDP in the UK.

Forecasts indicate that construction value will peak in 2003 and slow down annually until 2006. This is based on the continuing strength of the Housing sector, offset by a slow down of the non residential (office and retail) construction and the gradual reduction in large civil engineering projects as the 2000-2006 National Development Plan (NDP) approaches completion.

Over the last decade, the construction sector has benefited greatly from foreign direct investment, particularly from the US, which in turn has stimulated both industrial and commercial construction. Both sectors have seen considerable growth in construction since 1994.

However, foreign direct investment is expected to experience a substantial slowdown in growth rates due to the deterioration of the international environment, especially in the US, and it has been estimated that output in commercial and industrial construction will continue to decelerate in the short to medium term.

The RMI sector has seen an increase in value in both the residential and social sectors every year over the period 1997-2001. However, the annual increase in inflation every year has been greater than the increase in value, with the exception of 1999 and 2001. As a result, the volume of RMI output declined in 1997, 1998 and 2000. The subsequent modest increase in 2001 (+3.4%) reflects a strong increase on the private RMI side. However, the strong decline (-14%) in RMI investment in 2002 reflects evidence of a decline in private housing RMI investment in 2002, with a further decline expected in 2003, despite a reduction in the rate of construction inflation applied to contracts.

New private residential housing completions reached record levels in 2002 with a 3% growth in number. A new record in excess of 60,000 is expected for 2003 with the residential sector accounting for 56% of all construction output. The residential construction sector recorded its ninth year of growth in 2002.

The Builders Merchant's (known as "Builders' Providers" in Ireland) market has experienced growth over the last 5 years that is equal to the growth in the Construction sector. As a result, there has been a great deal of expansion and acquisition activity between the major and minor players in the market, with Grafton, Heiton and Brooks leading players in a relatively fragmented market. The total value of the sector at RSP in 2002 was €2.64 billion.

The DIY Retail market in Ireland was estimated to be €435 million in 2002. The sector has four major chains - Woodie's (owned by Grafton), Atlantic Homecare (owned by Heitons), Homebase (GUS plc) and B&Q (Kingfisher plc). Due to its low and dispersed population density, Ireland still has a high incidence of traditional local 'Hardware Stores' that fulfil the role of supplying many of the products needed for home decoration. All of the major DIY chains, apart from Homebase, have increased the number of store locations over the last 2 years and continue to do so. In particular B&Q, who have announced plans to have 10 stores operational in Ireland by 2008.

The overlap of ownership between the major merchants and DIY groups has prevented the same level of aggressive pricing between the sectors, as experienced in the UK, though the entry and expansion of B&Q may result in a more competitive environment.

Many of the smaller Hardware stores are members of Buying Groups such as Associated Hardware, based in Dublin, where purchase requirements are pooled to increase volume and reduce prices in an attempt to match the low prices offered by the DIY multiples. As a result, the range of products offered by the hardware stores is small and choice is limited when compared with the DIY stores. Planning restrictions on the size of retail stores in Ireland has hindered the penetration of large out of town stores across all sectors and large retail parks such as those seen in the UK and Mainland Europe are not being built. Government lobbying by interested parties to lift the store size restriction is increasing, as pressure rises to meet the needs of employment and investment as the economy cools.

Despite the moderate reduction in growth rates, prospects for the construction industry in Ireland remain stable, at least in the medium term. Inflationary pressures have eased in the second half of 2003 and the Government now faces a reduction in income revenues, but public investment projects and a buoyant housing market are anticipated to provide good opportunities for building material suppliers in the medium term. While GDP growth is forecast to fall to around 4-5%, this is still very high by European standards and should provide a sound base for construction and home improvement sales in the short to medium term, providing consumer confidence remains high.

Ireland continues to experience a rapidly growing construction market, which is now worth around €29 billion and is one of the largest sectors of the Irish economy. The rapid growth of the Irish economy over the last 10 years has lead to a boom in construction and house building, in particular, and the building materials sector has been one of the main beneficiaries of this growth.

The construction industry has become a major growth sector within the context of the overall economy.  As a percentage of GDP, construction output represented around 19% in 2005 and 17% of the national labour force are now engaged in construction activities. Although now beginning to slow, output of Ireland's construction sector has risen rapidly over the past decade, with strong demand for residential, commercial and infrastructure development, underpinned both by rapid economic growth and by the country's demographic profile.

The value of output in the construction industry during 2005 is estimated to be €29.7 billion, which represents 7% increase on the previous year when the value of output stood at €27.6 billion. Output in the construction industry is forecast to increase to €30.3 billion in 2006, which represents a smaller increase in value terms of around 2%.

In terms of sectoral output, Residential Construction accounts for the largest share of the construction market, with 64% of total output by value. Productive Infrastructure, which includes all infrastructure work, water services, roads, airports, energy, transport and telecommunications, accounts for 15%, while Non-residential construction, which includes all industrial, commercial, agricultural, religious and leisure output, accounts for 9% of the construction market.  These key sectors are followed by Social or Public Infrastructure with 5%, which includes construction of education, healthcare, public buildings and all capital investment in local authority services and sports facilities. Non-residential repair, maintenance and improvement (RMI) work accounts for the remaining 7% of the market.

Prospects for the Irish construction industry beyond 2005 are for reasonable, though at much lower growth rates, with the composition of output expected to shift from housing, which has been the main driver of growth to date, to non-residential construction. Given that the current level of housing supply seems unsustainable in the medium to long-term, it is likely that there will be some slowdown in both the Residential sector and construction output as a whole. Overall forecasts for 2005 predict that house completions are likely to fall just short of those seen in 2004, before dipping by 5% in 2006 to 71,725 and by 5% to around 68,000 in 2007.

Modest levels of recovery are expected in the Private Non-Residential sector, primarily due to the relative strength of the retail sector.  Productive Infrastructure sectors will be largely driven by the performance of the Irish economy as a whole, while prospects for Public Sector Infrastructure will be determined by capital investment levels, set by State and local authorities. Considerable public sector investment is expected in social and productive infrastructure over the medium-term, with significant expenditure on infrastructure expected to be included in the forthcoming National Development Plan for 2007-2013.

Despite the slowdown in the economy during the period 2001- 03, the building materials sector remained buoyant in 2004 and 2005 due to the on-going roll out of the National Development Plan and the unprecedented level of new house completions. In terms of distribution, the Builders Merchants (also known as “Builders Providers” in Ireland) market has experienced very high levels of growth and expansion in recent years and the sector is now considered to be worth over €3 billion.

The four major players in the builders merchants sector include, Grafton Plc, Wolseley Group, Dublin Providers and the McMahon Group.  There has been considerable consolidation between the larger groups in the sector. Consequently, in this very competitive market, the larger builders merchants are constantly seeking further acquisitions from the independent sector in order to support share gain and maintain margins. Grafton Plc recently acquired Heiton, which brought together Ireland's two largest DIY operators, Woodies and Atlantic Homecare, and the two largest owners of builders merchants, Chadwicks and Heiton Buckley. The combined group would have an estimated 32% share of the builders merchant sector and a 40% share of the retail DIY market. Wolseley Group (Brooks), the largest building materials distributor in the world, recently acquired Brooks Thomas and now operates 15 Brooks and 36 Heatmerchants outlets in the Irish Republic.

The DIY Retail market in Ireland is much smaller than the builders merchants sector in terms of value and is currently estimated to be worth around €700 million. The DIY sector has experienced significant economic growth in recent years driven by rising disposable incomes, the increasing number of households, changing lifestyles and increased media focus on DIY and related activities.

The DIY Retail market in Ireland has 4 major DIY outlets, with the Grafton Group, the major market player in the Builders Providers sector, now operating 15 Atlantic Homecare and 19 Woodie’s stores, and Co-op Superstores (owned by Dairygold) has recently launched its ‘4Home’ division, a DIY and homeware chain with 30 stores planned nationwide and specifically designed as a franchise operation.

Additionally, players from the UK including Homebase and B&Q are active within the Irish DIY market and are both expanding their number of outlets across the Republic.  A recent relaxation of the retail warehouse planning laws in the Dublin area has now enabled IKEA to establish a 300,000sqft store in Dublin; its first in the Republic, a move which may allow further penetration of overseas DIY multiples into the Irish market.

Due to its low and dispersed population density, Ireland still has a high incidence of traditional local ‘Hardware Stores’ that fulfil the role of supplying many products needed for home improvement. Many of these smaller Hardware stores are members of one of three nationwide Buying Groups, which include National Hardware Ltd (Trade name – Arro), Amalgamated Hardware Ltd (Trade name – Topline) and Associated Hardware Ltd (Trade name – Homevalue), which allows them to benefit from greater economies of scale and to source a more complete range of products at competitive prices. Around two-thirds of the DIY/hardware market is in the hands of small and medium-sized independent hardware shops gathered around three distinct buying groups, each of which has between 60-100 members in the Republic of Ireland.

Other leading distribution channels of building and home improvement materials include specialist product outlets, which tend to focus on specific areas of home improvements such as Flooring, Kitchens, Bathrooms and Sanitaryware, Timber products, Electrical appliances and Paint and Wallpaper products. 

Ireland also has a strong building products supply sector which offers a considerable range of products and services – from construction and building materials, cement production, concrete products to timber processing and timber products. Leading indigenous suppliers of building materials include CRH Group, Kingspan, Lagan Cement, Quinn Cement and Readymix. 

Both the builders merchants and retail DIY markets continue to face a number of challenges including the growth in the off-site construction and timber-frame housing sectors; increased government regulation governing minimum requirements for the energy performance of all new buildings, the recent announcement of a new National Development Plan for the period 2007-2013, continued strong activity in the house building sector, renewed signs of growth in the non-residential construction sectors and external factors such as rising energy prices and transport costs.