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Sunday, 15 July 2012

Perfect storm heading towards B&C industry: Ballast Nedam raises black ball; Moes received kiss of life, but is still in critical condition…

During the last one-and-a-half year, I have written a lot on the structural overcapacity in the building and construction industry in The Netherlands.

The B&C companies specialized in infrastructure (roads and highways, railroads, waterways etc.) have had a relatively good year, due to substantial government investments in the Dutch highway and waterway network. However, almost all building companies specialized in CRE and RRE are clinging on to life by the skin of their teeth.

My opinion is that the whole industry must go through a period of heavy reorganization and that either 30 – 40% of the B&C companies or 30 – 40% of personnel in this industry must disappear to end this period of structural overcapacity. That such a reorganization will costs tens of thousands of jobs is in my opinion unavoidable, unless the government chooses for massive Keynesian stimulus in order to help this tormented industry.

This week, there has been news on two prominent building companies that is illustrative for the critical situation in the whole B&C industry:
  • Moes, a B&C firm that is especially active in RRE (Residential Real Estate) and CRE (Commercial Real Estate) building projects has been declared bankrupt, but could make a second beginning with the help of another B&C firm
  • Ballast Nedam, a B&C company that is a.o. active in infrastructure and specialized building (football and sports stadiums) presented very disappointing figures, but still writes black figures (only by a whisker) 
Here are the stories concerning these two companies:

The Zwolle, The Netherlands-based building company Moes can make a second beginning after all. A medium-sized Dutch building company takes over a majority of Moes’ projects. This was stated this Friday night by executor Reinier Quint from Zwolle, when asked.

The company had asked for extension of payments earlier this week, but was declared bankrupt after all. Quint couldn’t mention the name of the new owner yet, as not all contract details were arranged yet. However, it is clear that 50% of the remaining 150 jobs at Moes can be saved. The new owner takes over seven projects of Moes, especially in the Amsterdam region.

Building company Moes, with branches in Zwolle and Almere, had been in financial problems for quite some time and scrapped about 100 of 250 jobs last year. Already some years before the company had reorganized, resulting in only 150 people working at the company currently.

The building company, that had more than 1000 workers only a few years ago and earned revenues of €180 mln, came recently deeper in trouble when a principal doubted the continuity of the company and stopped its payments. As a reaction to this step, the banks further refused to supply their credit lines.

The revenues and order portfolio of the building company have strongly contracted as a result of the building crisis. A few years ago, the company entered into a few projects that supplied substantial losses. At the end of last year, there was even not enough money for a social plan when hundred people were fired.

MOES is active in CRE and RRE building projects. In 2010 the invoiced revenues contracted to €103 mln (€137 in 2009). There is no official annual data yet for 2011, but a few months ago CEO Jonathan Furst declared that the revenues would not exceed €70 mln in the coming years.

Furst declared at the time that Moes was very selective in obtaining projects. The company didn’t want to work below cost-price to keep the people working. ‘You destroy the market with such behavior. You could obtain projects that only yield (small) losses, but this will only bring you problems for years to come’, according to Furst at the end of last year against the Cobouw building magazine.

You could blame the banks for revoking their credit lines to Moes, but that would be naive. At the time that banks go into 'take the money and run' modus, a company is really in trouble. When banks aren't careful with their money, the taxpayers and bank customers will be footing the bill. 

The last paragraph sketches with a few syllables the desperate situation that the CRE industry is in currently: “The company didn’t want to work below cost-price to keep the people working”. Apparently there are companies that DO want to work below cost-price to keep the people working. If this whole industry doesn’t go through a reorganization to get the overcapacity out of the market, much more companies will be doomed.

Please don’t have to much illusions on the future of companies like Moes, even after the successful rescue attempt. The problems were neither solved, nor is the overcapacity. You could call this just ‘delayed execution’.  

Ballast Nedam, a large Dutch building company, has to deal with very difficult market conditions. Last Friday, the building company warned that an earlier prognosis for the annual result is currently under pressure.

Ballast Nedam had a 2012HY1 operational result of €4 mln, a decrease by half y-o-y. The net result was break-even, whereas revenues were €575 mln, a 5% lower result y-o-y .

These results and the further deteriorating market conditions, especially at the divisions Infra and Building & Development, put the March 2012 prognosis, speaking of constant results for the whole of 2012, further under pressure.

The company recorded that in 2012HY1 the volume in the market went down, with increasing price pressure and competition as a result. The order portfolio amounted to €1.9 bln.

Ballast Nedam is a very good and innovative building company that does business domestically and abroad (a.o. the Middle-East). Their sports stadiums are truly state-of-the-art and attract international attention. This is absolutely not the kind of company that produces buildings and CRE of mediocre quality and design.
It must be a sign that even quality companies like this get nothing more than break-even results in 2012.

The Dutch central and local governments could ‘help’ these companies by supplying all kinds of Keynesian projects in order to keep all people at work. There is always a train station to fix, a dike to reinforce and a bridge to build.  

However, if you look at all the needless building projects at the centers and peripheries of the Dutch cities and villages and all the vacant CRE and industrial zones, you would think that the Dutch government did already more than enough. It is time to stop the building madness and to reorganize the structural overcapacity in this industry.

It is harsh for the people that lose their jobs. Believe me: I know what I’m talking about. But something has to be done to stop the whole building industry from imploding!

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