The real estate and construction sector is making steady progress as it recovers from a financial crisis that disproportionately impacted investors, developers, and homeowners. Our Q1 International Business Report (IBR) indicates that businesses in the sector expect revenues and profits to grow, aligning closely with the global all-sector average.
In a previous post, I noted the buoyant mood at MIPIM, one of the most optimistic in recent years. While the outlook for the sector remains positive, there are a couple of clouds on the horizon that business leaders should keep in mind as they plan ahead.
The first challenge is the geopolitical uncertainty caused by the Ukraine crisis. Our IBR interviews were conducted before the secession of Crimea, but the sector is still grappling with weak demand—38% of businesses cite a shortage of orders, compared to 30% across all sectors. Any escalation in tensions between Russia on one side, and the US and EU on the other, could dampen business growth prospects, not just in Europe, but globally. Interestingly, sector businesses in developed Asia Pacific (60%) are struggling far more with weak demand compared to Europe (38%) and North America (25%).
The second challenge is that the global recovery, while on firmer footing, is far from certain. Europe grew by just 0.1% in 2013, and while stronger growth is forecast this year, debt levels remain unsustainably high in many peripheral economies. Uncertainty also persists in several developing economies, where plunging currencies and rising inflation are a concern as the US unwinds its massive quantitative easing program. While 10% fewer sector businesses cited economic uncertainty as a constraint on expansion in Q1, it remains above the all-sector average, perhaps reflecting the spare capacity built before the crisis.
Finally, real estate and construction businesses are concerned about attracting the right talent. Globally, 39% of sector businesses report a lack of skilled workers, compared to 28% of all businesses. Unemployment remains high in much of the developed world, and in North America, 41% of sector businesses cite this as a growth barrier. The figure rises to 49% in developed Asia Pacific. However, the issue is not uniform: only 20% of businesses in Europe, where unemployment is just starting to decline, report skills shortages.
To respond to these challenges, businesses can limit exposure to countries at risk of sanctions or escalating tensions and avoid bypassing due diligence when making investments. International expansion is another option: companies in Asia Pacific and Europe facing low demand should explore opportunities in North America, where demand for real estate and construction is stronger. Our results suggest that North America could benefit from skilled labor, providing an opportunity for growth.
Clare Hartnell is global leader for real estate & construction at Grant Thornton.