I r e l a n d

Certification in Compliance with Regulation AC can be found at the end of this report

Irish Construction

Constructive thinking

Economics

• Detailed analysis of the Irish construction industry

• Short-term buoyancy in residential - 92,000 units to be built in 2006

• Non-residential to take over the baton post 2007

Economist: Dermot O’Leary +353-1-641 9167 dermot.c.o’leary@goodbody.ie

October 2006

Irish Construction

Constructive thinking

• Ireland has become addicted to construction. The sector nowaccounts for 23% of output in the economy, relative to only 14%ten years ago and an average of 12% in the rest of the EuropeanUnion. Concern has been voiced that the country has becomeoverdependant on one sector. However, such a conclusion meritsan in-depth analysis of the entire sector. One must remember thatthe construction sector is composed of many different movingparts. These sub-sectors can often move in opposing directions.We believe this will prove to be the case in the next few years, asnon-residential takes over the baton from residential construction.

• Ireland was more dependent on the construction sector at thebeginning of the 1980s than it is now. In 1981, construction outputamounted to 26% of Gross National Product (GNP). However,this was mainly due to the contribution of non-residentialconstruction, which accounted for 16% of output in the economyoverall. A quarter of a century later, the roles have fully reversed,with non-residential output only amounting to 8% of GNP.

• Therefore, Ireland’s dependence on the construction sector issolely due to housing. Output in the residential sector grew from€3.2bn in 1995 to €20.9bn by the end of 2005. In that time,completions grew from c.30,000 units to 86,000 units. Despitethis, we believe that output has not yet reached its peak. Weexpect completions to reach 92,000 units in 2006 (previously85,000 forecast) before slowing modestly to 88,000 units in 2007.

• Although population dynamics are impressive, we do not believethat the current rate of housebuilding is sustainable. We estimatethat sustainable demand is in the order of 68,000 units per annumup to 2011. This level of demand depends importantly on thecontinued decline of household sizes towards the EU average.Affordability constraints may mean that household sizes will notbe able to fall to any significant degree. We expect completionsto moderate to 77,000 units in 2008.

• Given the dependence on the residential sector, themacroeconomic impact of a sharper slowdown in building issignificant. However, even in the unlikely event of housing outputfalling from 92,000 units in 2006 to 70,000 in 2007, we estimatethat GDP growth would still come in at 2.5%, which would still beabove the European average.

• Non-residential construction, which accounts for a third of output,should take up the baton post-2006. Public capital spendingremains underpinned due to a gaping infrastructure deficit, whilethe government is committed to addressing this. Private non-residential construction will be supported by strong populationdynamics, accommodative monetary policy, increasing share ofservices employment and inward FDI. We estimate that theconstruction industry output should grow once more in 2007(4.9%) before contracting modestly (-1.4%) in 2008.

Economist: Dermot O’Leary T +353-1-641-9167 E dermot.c.o’leary@goodbody.ie 3 October 2006

Certification in Compliance with Regulation AC can be found at the end of this report

Economics

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

f

2007

f

2008

f

Un

its

House completions set to peak in 2006

Source: DoELG

0%

5%

10%

15%

20%

25%

30%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

% o

f G

NP

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

% o

f G

NP

Residential (RHS) Non-residential (RHS) Construction (LHS)

Recent dependence on construction is due to residential

Source: DoELG, CSO

Construction industry output growth2003 2004 2005 2006f 2007f 2008f

New

Housing 33.0% 25.4% 17.3% 16.5% -3.9% -13.0%New

Contracting -10.9% 4.1% 17.5% 13.2% 14.0% 12.1%

New Civil

Engineering 0.9% 0.6% 9.0% 10.5% 9.5% 8.3%RMI: 0.2% 13.3% 8.4% 20.0% 20.9% 10.5%

Housing -5.9% 15.0% 8.1% 27.0% 25.1% 13.0%Other 11.9% 10.4% 8.9% 8.4% 12.7% 5.0%

Total

Construction 12.0% 15.7% 14.4% 15.9% 4.9% -1.4%Note: in nominal prices

I r e l a n d

KEY THEMESIreland has become addicted to construction. While building activity has been robust in

many countries across the developed world in recent years, Ireland stands out in

particular. The sector now accounts for 23% of output in the economy, relative to only

14% ten years ago and an average of 12% in the rest of the European Union. As a result,

some have voiced the opinion that the economy has become overdependent on the

construction sector.

Such a conclusion merits an in-depth analysis of the entire sector. The construction

industry is composed of many different moving parts. These sub-sectors can often move

in opposing directions. For example, when private non-residential construction was

suffering in the 2002-2003 period, both residential and civil engineering buoyancy were

sufficient to take up the slack. In this report, we delve into these differing trends and

highlight the key drivers for the sector. We think non-residential will take up some of the

slack emanating from a slowdown in the residential construction sector over the next few

years.

Dependence solely due to housing• Ireland was more dependent on construction in the early 1980s (26% of GNP in

1981) than it is now. At that time, it was non-residential construction, particularly

public projects, that the sector relied on. While the 1980s saw an across the board

decline in the importance of the construction sector, residential output has been

rising as a percentage of GNP through the 1990s. Residential only became relatively

more important than non-residential in 1994. Since the turn of the decade, the

relative performances have differed sharply, culminating in the situation in 2005

whereby residential construction accounted for 15% of output in the Irish economy

(and 66% of output of the construction sector).

• Therefore, it is clear that residential housebuilding has been the key driver of the

construction sector. Completions reached a record level of 86,000 units in 2005,

representing the 11th record year of output. Completions are now running at a rate

of almost 21 units per 1000 population, relative to only 5 units per 1000 in the EU as

a whole. However, Ireland’s housing stock remains quite low (410 units per 1000)

relative to the EU average (463 units). Therefore, Ireland has been in catch-up mode

in recent years.

• The mix of residential units is important, as the characteristics of the housing stock

depend on the evolving demography of the country. As recently as 2001 individual

houses had been the most common type of house built in Ireland, accounting for

almost 50% of the total. Yet this year, this category will likely see the least amount

of completions as shortages of building land and increasing prices make higher

density housing a more attractive option. The share of individual houses in total

completions has almost halved over the past 10 years, decreasing from 46% in 1996

to 25% in 2005. Conversely, the number of scheme houses has surged. They

accounted for over half of the total number of houses built last year. The number of

apartments has also risen strongly in recent years, although as a proportion of total

output, they have remained in a relatively steady range (between 18%-22%).

Outlook for housing is vital• Given its clear importance, an in-depth analysis of the residential sector is vital to

determining the path of the economy over the coming years. Expected supply will

depend on a number of, sometimes volatile, factors over the next number of years.

Interest rates are a key factor. However, we expect interest rate increases over the

next two years to be modest, peaking at 3.75%. However, we concentrate on four

longer term demand influences for the sector, namely population dynamics,

household sizes, replacement activity and the incidence of second/holiday homes.

2

C O N S T R U C T I V E T H I N K I N G

3

Demographics are still supportive• Ireland’s demographic history has been, to say the least, volatile. The recent Census

reveals that the population reached 4.2m in April of this year, representing an 8.1%

increase on the Census carried out four years earlier. The 2.0% average annual

increase in the population is some four times greater than that seen in the rest of

Europe. Inward migration has become an increasingly important component of

population growth, with it accounting for over 60% of the increase in the most recent

Census period. This, we believe, will remain a feature going forward. On the

assumption that net immigration averages 50,000 per annum up to 2011, before

slowing to an average annual gain of 40,000 p.a. up to 2016, we estimate that the

population will breach the 5 million barrier in that year. This would represent an

average annual increase of some 2.0%.

• Due to both social and structural phenomena, Ireland still has the highest household

size in Europe (2.94 based on Census 2002). There are 36% of the Irish population

below the age of 25, relative to only 30% in the EU as a whole. Divorce rates are

exceptionally low relative to the rest of Europe. As the economy ages and social

characteristics converge, Irish household sizes should fall in line with the EU.

Still a black hole element to housing supply• Fundamental influences are not sufficient to explain the recent surge in house

completions. However, growth in housing units has exceeded that of household

formation for decades. The rest of the completions are therefore attributable to either

second, vacant or replacement (SVR) units. SVR has accounted for between 21%

and 75% of completions since 1961. Given our estimation that the average

household size in Ireland dropped to 2.8 in the 2002-2006 time-frame, we suggest

that there were 224,000 households formed over the period, representing an annual

average increase of 56,000. However, there were 71,000 p.a. residential units

completed over the same period, meaning that a total of 60,000 units built over the

last four years cannot be attributed to fundamental growth in household formation.

Demand could stretch to 68,000 units per annum• We estimate that housing demand will amount to 68,000 units per annum up to

2011, before slowing to 65,000 units per annum up to 2016. Therefore, current

output is running above sustainable demand. Nevertheless, the short-term outlook

for housing completions remains quite bright. We estimate that 92,000 residential

units will be built this year. There is also upside risk to our 88,000 forecast for 2007.

Beyond that, we expect completions to fall materially to 77,000 units in 2008, as

output falls more in line with sustainable demand.

More abrupt slowdown would have large macro impact• While we believe a slowdown in residential construction will be offset by growth in

non-residential, we have modelled the macroeconomic impact of a more abrupt

slowdown. A fall in output in the sector would hit the economy in a number of

different ways. First and foremost, growth in capital formation would be impacted

directly, while consumption would be adversely affected by a slowdown in

employment and earnings growth. Our modelling of a reduction in output from

92,000 units in 2006 to 70,000 units in 2007 would knock up to 2.7% from GDP

growth in that year. However, this would leave growth in that year at 2.6%, which is

still above the European average.

C O N S T R U C T I V E T H I N K I N G

Non-residential construction accounts for a third of output

• Although less focus has been placed on the sub-sector in recent years, the non-

residential sector is still an important component of construction output. During the

early 1980s non-residential construction was the driving force and although this

importance has lessened somewhat, the sector still accounts for 33% of output, and

can act as a counter to the forecast slowdown in the residential sector.

Productive infrastructure to remain strong

• Productive infrastructure incorporates output from the construction of road and rail

networks, as well as energy infrastructure and public buildings. This sector is the

second largest after residential and contributed some €5.2bn (17%) to the value of

the construction industry in 2005. Infrastructure spending remains high, with Ireland

ranking third in terms of output in Europe. Long-term plans have been laid out for

the sector, with the next seven-year National Development Plan for 2007-2013 due

before the end of the year. Given that a gaping infrastructure deficit still exists in the

country, further significant levels of funding will be used to address this issue into the

medium term. In this regard, given the healthy state of government finances

(government debt estimated at only 28% of GDP), we expect the current and future

governments to keep to the pledge of spending 5% of GNP on capital projects. For

this reason, the outlook for this component of the construction sector is relatively

clear.

Drivers still in place for private non-residential

• Private non-residential construction encompasses output from industrial,

commercial and tourism related building. This sector, which is highly affected by the

macro economic environment, saw output fall dramatically over the period 2001-

2003. Since then the sector has recovered with real output growth estimated at over

11% in 2005. Commercial building is the main component of private non-residential

construction. Within this, retail construction has performed particularly strongly in

recent years, whereas office development has fallen back somewhat. However, both

of these areas experienced strong growth in 2005 and into 2006. Analysis of the

fundamental drivers of private non-residential construction indicates that further

growth is likely in the coming years. Interest rates continue to be expansionary, while

services employment will continue to rise in importance in the Irish economy.

Almost 1 in 5 employed affected by construction

• Latest estimates suggest that, 262,000, or 13% of the workforce, are now employed

in the construction industry. This is far above the EU-25 average which stands at

7.9%, and is in fact the highest dependency among all EU-25 countries. Yet these

figures relate only to those directly employed in construction and may underestimate

the true extent of Ireland’s reliance on construction for employment. The ESRI

estimate that the numbers indirectly employed may extend to as much as 40% of

those directly employed, an estimation that implies some 18% of Irelands workforce

are employed in the construction industry either directly or indirectly.

4

C O N S T R U C T I V E T H I N K I N G

5

Construction sub-sectors set to diverge• We think that the different components of the construction industry are set to diverge

in the coming years. Residential output is set to moderate to more sustainable

levels, reflecting both a return to fundamental levels of demand and an ending of

important property-based tax reliefs. On the other hand, non-residential construction

is set to take over the baton of growth, with supports still in place for growth in the

sector. In 2006, we expect growth in the construction industry of 15.8%. However,

growth should moderate to 4.9% in 2007, before a slight fall in output of 1.4% in

2008.

Implications for Irish construction and building materialscompanies• Six quoted Irish construction and building material companies (Abbey, CRH,

Grafton, Kingspan, McInerney and Readymix) have operations in Ireland. Those

exposures range from a 53% EBIT dependency for Grafton to CRH, which produces

8% of its trading profits in the domestic market. Overall the group’s dependency on

Ireland at an EBIT level has fallen from 36% in 1996 to 18% in 2005.

• The core conclusion in our economic analysis is that the construction sector will

remain relatively solid over the next three years, albeit with a change in mix away

from housing towards infrastructure and non-residential activity. We have modelled

that macro-economic outlook into our company forecasts.

• Investors seeking a high exposure to the Irish construction sector should consider

Grafton, which generates over 50% of its operating profit in Ireland (largely from its

builders merchants and DIY activities) yet is trading at comfortable valuation levels

(EV/EBITDA 9.1x, PER of 12.3x for '07).

• Due to the rapid expansion of CRH in international markets, and especially in the

US, its relative exposure to Ireland has declined sharply. In 1996, 28% of operating

profits were produced in Ireland whereas in 2007 that proportion should decline to

7%. While Ireland provides a solid EBIT flow for the group, its share price is more

likely to be driven by wider macro-economic factors, including trends in the key US

housing and construction industries.

• Over 17% of Kingspan's profits are derived in Ireland and this report suggests those

operations will be exposed to a relatively benign environment. Kingspan though is

primarily, in our view, a structural growth story where positive earnings momentum

flows from the regulatory, energy efficiency and conversion trends in its key

insulation, container and timber-frame markets across a number of geographies. Its

investment case stands independent of trends inside Ireland.

• McInerney is our preferred housebuilding exposure, although we note the housing

segment within the overall Irish construction sector will show slower growth than

either infrastructure or non-residential activity.

C O N S T R U C T I V E T H I N K I N G

Irish Construction and Building Materials SectorCompany Recommendation Market Cap. P/E '06 Dividend Yield '06

Abbey Add 278.0 7.8 3.6

CRH Buy 14371.5 11.8 1.7

Grafton Buy 2469.2 13.7 1.6

Kingspan Buy 2759.1 19.7 1.0

McInerney Add 426.6 9.2 2.2

Readymix Reduce 273.9 15.0 2.8

6

C O N S T R U C T I V E T H I N K I N G

2003 2004 2005 2006f 2007f 2008f

Total Construction Output

Current Prices (€m) 23,841 27,595 31,556 36,700 38,482 37,965

% change 12.0% 15.7% 14.4% 16.3% 4.9% -1.3%

% real change 5.3% 6.9% 9.4% 10.3% 1.9% -4.3%

Capital Formation

Current Prices (€m) 31,964 36,243 43,582 49,394 52,885 53,882

Real % change 5.7% 7.4% 12.8% 7.6% 3.9% -0.1%

Real GDP growth 4.3% 4.3% 5.5% 5.7% 5.6% 3.2%

Real GNP growth 5.5% 3.9% 5.3% 6.4% 5.7% 2.9%

House completions 68,819 76,954 86,188 92,000 88,000 77,000

Private 62,686 71,808 80,629 86,000 82,000 71,000

Social 6,133 5,146 5,559 6,000 6,000 6,000

Residential output (€m) 14,645 18,055 20,873 24,703 25,083 23,333

% change (current prices) 22.8% 23.3% 15.6% 18.3% 1.5% -7.0%

Non-residential construction

Productive infrastructure (€m) 4,782 4,831 5,234 5,794 6,348 6,915

Private non-residential (€m) 2,731 2,959 3,422 3,890 4,476 4,886

Social infrastructure (€m) 1,684 1,750 2,027 2,314 2,575 2,831

House prices/inflation

House price inflation 14.3% 11.6% 7.2% 12.0% 5.0% 3.0%

Average house price (€) 205,898 234,066 254,215 272,562 305,269 320,533

House building cost index 2.7% 2.8% 3.0% - - -

Building and construction index 0.7% 8.6% 5.1% - - -

Mortgage credit growth 24.2% 27.2% 26.0% 25.6% 18.7% 13.8%

Interest rates 2.00% 2.00% 2.25% 3.50% 3.75% 3.75%

Employment in construction

Total employment ('000) 1,811 1,865 1,952 2,020 2,081 2,137

% change 1.9% 3.0% 4.7% 3.5% 3.0% 2.7%

Construction Employment ('000) 195.23 214.35 245.2 - - -

% change 4.4% 9.8% 14.4% - - -

Source: Various, Goodbody estimates

Irish Construction

7

Contents

Page

Executive Summary 1

Key Themes 2

Construction at a Glance 6

Introduction 9

The Irish Construction Industry 11

The Residential Housing Market 16

Non Residential Construction 23

Productive Infrastructure 24

Private non-residential construction 29

Social Infrastructure 34

Employment in construction 36

Construction cost inflation 39

Housing Demand 41

Population dynamics 41

Household sizes 44

Household formation versus housing completions 47

Replacement/holiday homes 48

Evidence of holiday home demand 50

Forecasting demand 54

How will the housing market look in 2011? 57

Outlook for non residential construction 59

The Macroeconomic Impact 67

Conclusions 71

Irish quoted companies’ exposure 73

Appendix 92

C O N S T R U C T I V E T H I N K I N G

8

C O N S T R U C T I V E T H I N K I N G

9

IRISH CONSTRUCTION

Ireland has become addicted to construction. While building activity has been robust in

many countries across the developed world in recent years, mainly in response to a loose

monetary stance, Ireland stands out in particular. The sector now accounts for 23% of

output in the economy, relative to only 14% ten years ago and an average of 12% in the

rest of the European Union. As a result, organisations such as the IMF have voiced their

concern that the economy has become over-reliant on this one individual sector.

Such a conclusion merits an in-depth analyis of the entire sector. One must remember

that the construction sector is composed of many different moving parts. These sub-

sectors can often move in opposing directions. For example, when private non-residential

construction was suffering in the 2002-2003 period, both residential and civil engineering

strength were sufficient to take up the slack. In this report, we delve into these differing

trends and highlight the key drivers for the sector over the coming years.

Residential has become the most important sectorResidential construction has witnessed a rapid growth period over the past few years.

Output in this sector amounted to some €20.9bn in 2005, up from only €3.2bn in 1995.

Completions have risen from 31,000 to 86,000 over the same period. Our findings

suggest that while activity is likely to reach record levels of 92,000 completions in 2006,

we estimate that supply levels will slow in line with demand fundamentals as we approach

the end of the decade. Our forecasts suggest that new residential building activity will

peak this year, but remain at relatively high levels in 2007, with 88,000 units expected to

be completed in that year. Beyond that, completions are expected to fall to 77,000 units

in 2008, as supply levels start to fall in line with the fundamental demand drivers such as

population growth, falling household sizes and second/holiday homes.

Our analysis of these fundamental drivers leads us to the conclusion that annual demand

for homes is running at the 68,000 level in the 2006-2011 period. Our demand forecasts

are very much dependent on the pattern of household size over the coming years. Ireland

currently has the highest household size in Europe (estimated at 2.9 at the most recent

count). This is partly down to the demographic structure of the economy. As the

population ages, household sizes should fall over the coming years. Nevertheless,

despite the fact that we have assumed that household sizes will fall in line with European

norms, we can not come up with a scenario whereby demand meets current supply levels

of up to 90,000 units per annum.

Economy more sensitive to movements in the sectorGiven the proportion of output emanating from the construction sector, the path of the

economy is now much more sensitive to movements in this sector. In particular, the effect

of a slowdown in residential sector is dependent on two things: (1) the nature of the

slowdown in activity, i.e. is it an abrupt slowdown or gradual one over the space of a few

years?, and (2) whether other sectors within the construction industry can take over the

slack.

On the former, our core scenario envisages a gradual slowdown to 65,000 completions

per annum over the course of the next four years. However, our modelling of a more

abrupt slowdown highlights the degree of risk that is now associated with the sector. We

estimate a slowdown in completions to 70,000 from this year’s level of 92,000 could cut

growth in half in the Irish economy over this time period. The effect of a slowdown would

be obviously felt through the impact on investment spending itself, but also through the

impact on disposable income and consumption growth.

C O N S T R U C T I V E T H I N K I N G

The latter will have an important role to play in how the economy performs during this

moderation phase for residential construction. If non-residential construction continues its

performance of recent quarters, as we believe it could well do, then the effect on the Irish

economy could be relatively subdued. Given that construction employees are one of the

most flexible types of workers, resources could switch from residential to non-residential

construction in a relatively orderly manner.

Soft landing is the core scenarioFor this reason, we believe that the sector should experience a soft landing over the next

few years. While residential output has reachd its peak, our analysis suggest that non-

residential activity will remain well underpinned by increasing levels of public spending

and continued growth in private construction activity.

Supply and demand factors detailedWe divide the report into a number of different sections. Firstly, we concentrate on the

supply side, with an in-depth review of the different components of the construction sector

over the buoyant period over the past ten years. This includes a review of the different

moving parts of the construction sector, as well as analysis of employment and pricing

trends in the sector.

The second part of the report concentrates on demand-side elements of the sector. Large

focus has been placed on the housing market, given that this sector has become such a

large part of the construction industry. We assess the fundamental influences of demand

in this sector, which comprise of population and immigration trends, household sizes and

the second-home phenomenon. We also assess the key drivers of the non-residential

sector, which includes infrastructure deficits, employment trends and FDI activity.

Interest rates to remain supportiveAllied to all of these factors, the path of interest rates will have an important influence on

the construction industry overall. On this front, we think that much of the monetary

tightening is already behind us. We expect rates to rise to 3.75% by the end of 2007. A

modest increase such as this is unlikely to lead to abrupt slowdown in the sector.

10

C O N S T R U C T I V E T H I N K I N G

11

THE IRISH CONSTRUCTION INDUSTRY

According to the Department of the Environment, Heritage and Local Government

(DoELG), the construction industry incorporates “site preparation, building, civil

engineering, building installation work, building completion work, and the renting of

construction or demolition equipment with operators”. Expenditure on all fixtures, facilities

and equipment which are considered integral and immovable parts of the structure are

also included in the value of construction output.

The following chart provides a breakdown of the construction industry into its sub-

components:

The relative importance of each component of construction is revealed above.

Residential construction has become an increasingly important source of output in the

sector as a whole. This component now accounts for two-thirds of construction output,

relative to only 51% ten years ago. Of the other sectors, productive infrastructure, which

includes the building of roads, airports and power plants, is the next most important

sector. All sectors have experienced growth over the recent past, although volatility has

indeed been a feature since the start of the decade in particular (see page 14). The

following table illustrates the degree of expansion in the sector overall:

Construction incorporates abroad range of building

services

Residential now accounts fortwo-thirds of output

Significant growth in theindustry overall

1996-2000 2001 2002 2003 2004 2005Av. Annual

growth €m €m €m €m €mValue of output at

current prices 19,926 21,293 23,820 27,595 31,556%change 22.7% 13.3% 6.9% 11.9% 15.8% 14.4%

Value of output at

constant prices 22,195 22,628 23,820 25,459 27,863

% change 11.4% 3.4% 1.9% 5.0% 7.0% 9.4%

Output as % of GDP 17.0% 16.3% 17.1% 18.6% 19.6%

Output as % of GNP 20.3% 20.0% 20.5% 22.2% 23.2%

(using current prices)

Source: DoELG, CSO

C O N S T R U C T I V E T H I N K I N G

Construction output has grown rapidly in recent years. The value of output in the sector

grew from €6.35bn in 1995 to €31.6bn by the end of 2005. This represents an almost

fivefold increase over the space of ten years. By value, the construction industry now

accounts for 23% of GNP, relative to less than 14% at the start of the time period.

The industry has also also experienced significant price pressures during the recent

buoyant period of growth. As a result, growth in real output has been eroded somewhat.

Nevertheless, real output growth in the industry has grown at an impressive pace.

Following average annual real growth of 11.4% from 1996-2000, growth has averaged

5.4% in the most recent five-year period. In the same period, GDP growth averaged only

4.3%. The performance of the sector in the last two years has been particularly

impressive, when compared to the economy as a whole. In nominal terms, the industry

grew at an average rate of over 15% in the 2004-2005 period, or by 8.2% p.a. in real

terms. There are also signs that output growth has accelerated in 2006. National

accounts data reveal that construction output surged by almost 14% yoy in the first

quarter.

How reliant is Ireland on construction?It is these continued high levels of activity have led some to suggest that the economy is

over-reliant on the sector. The graph on the next page reveals the degree of this

dependence, relative to the rest of Europe. Among the nineteen Euroconstruct countries

(a European-wide network of statistical and economic institutes), Ireland is by far the

most reliant on the construction sector. At 18% of output, Spain and Portugal are next in

line in terms of its dependence on the construction industry.

However, there are other considerations to be taken into account. The Irish construction

industry is made up of a number of different sub-sectors, some of which have different

drivers. The separate sub-sectors have also experienced differing performances over the

past few years, and thus it is necessary to look at the economy’s dependence on each of

the sub-sectors before coming to a conclusion about the construction sector as a whole.

12

Despite significant pricepressures real output growth

has been impressive

Ireland is the most dependenton construction in the EU...

...but the performance of thedifferent sub-sectors must be

examined

C O N S T R U C T I V E T H I N K I N G

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

yo

y

Real construction growth Real GDP growthSource: DoELG, Goodbody estimates

Construction has frequently outperformed the

economy as a whole

13

Dependence is solely due to housingAs we deal with later in the report (Page 60), Ireland is still in a catch-up phase with

regards to its physical and social infrastructure. As a result, one would expect public

output to remain high relative to other countries with a much more developed public

capital stock. Private non-residential construction also has key drivers which are still in

place.

In any case, our analysis below shows that the rising importance of construction in the

Irish economy over the past decade has been solely due to residential construction.

Furthermore, Ireland was more dependent on construction in the early eighties (26% of

GNP in 1981) than it is now (c.23% of GNP). At that time, it was non-residential

construction, particularly public projects, that the economy was most dependent on. While

the 1980s saw an across the board decline in the importance of the construction sector,

residential construction has been rising as a percentage of GNP through the 1990s. Only

in 1994 did residential construction become more important than non-residential. Since

the turn of the decade, the relative performances have differed sharply, culminating in the

situation in 2005 whereby residential construction accounted for 15% of output in the Irish

economy.

The rising importance ofconstruction over the past

decade has been due toresidential...

...which, in 2005, accountedfor 15% of output in the Irish

economy

C O N S T R U C T I V E T H I N K I N G

0%

5%

10%

15%

20%

25%

Ireland

Spa

in

Por

tuga

l

Finland

Italy

Net

herla

nds

Den

mar

k

Eur

ocon

stru

ct

Aus

tria

UK

Switz

erland

Franc

e

Belgium

Ger

man

y

Swed

en

% o

f G

DP

Unparalleled exposure to the construction sector (2005)

Source: Euroconstruct Note: Relative to GNP for Ireland, Euroconstruct comprises of 19 European countries

0%

5%

10%

15%

20%

25%

30%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

% o

f G

NP

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

% o

f G

NP

Residentia (RHS) Non-residential (RHS) Construction (LHS)

Recent dependence on construction is due to residential

Source: DoELG, CSO

Recent Sectoral PerformancesWhile construction overall has put in a period of uninterrupted growth in the past decade,

this has disguised some differing performances from the separate sub-sectors over the

period. The performance of private non-residential output is a case in point in this regard.

At the end of 2005, output in this sector had still not returned to 2001 levels in current

price terms. This was as a result of a significant slump in the sector in the 2001-2003

period, when output contracted by at an annual rate of 11.6% in real terms.

At the same time productive infrastructure spending continued to grow strongly, primarily

as a result of increased spending in the run-up to the General Election in 2002. This

manifested itself in significant output increases in road and power station developments

for example. Following the Election, fiscal restraint brought about a contraction in new

productive infrastructure spending in both 2003 and 2004.

Residential output has been on a sustained growth path over this period. The weakest

year of output growth in the sector came in 2002, when both an international slowdown

and the imposition of tax changes in the sector (Bacon measures) brought some

uncertainty to the sector. Since that time, however, the sector has experienced an

extraordinary performance with over 10% growth achieved per annum in real terms.

Furthermore, with output set to reach record heights once again in 2006, we can expect

an impressive contribution from the sector again this year.

14

Private non-residentialslumped in the 2001-2003

period, contracting by 11.6%p.a.

Since 2002, residential outputhas grown rapidly, with over

10% real growth achieved peryear

C O N S T R U C T I V E T H I N K I N G

Irish construction output growth 1996-20051996-2000 2001 2002 2003 2004 2005

Nominal changesResidential 24.1% 15.3% 8.9% 22.8% 23.3% 15.6%

Private non-residential construction 24.2% -2.8% -20.2% -7.8% 8.3% 15.6%

Productive Infrastructure 20.6% 20.0% 22.3% 4.4% 1.0% 8.3%

Social Infrastructure 17.2% 24.8% 20.1% -7.6% 4.0% 15.8%

Total 22.7% 12.9% 6.9% 12.0% 15.7% 14.4%

Real changesResidential 9.7% 4.8% 1.4% 10.8% 11.1% 10.4%

Private non-residential construction 14.4% -10.7% -18.7% -5.5% 4.2% 11.2%

Productive Infrastructure 13.0% 12.1% 15.4% 1.3% -2.0% 4.6%

Social Infrastructure 7.1% 15.3% 9.8% 2.4% 3.3% 8.7%

Total 11.4% 3.4% 1.9% 5.3% 6.9% 9.4%

Source: DoELG, CSO, Goodbody estimates

15

Breakdown of construction output: New and RMI

In addition to the sub-sector breakdown of construction output, activity in each area can

be further subdivided into ‘New’ construction output and ‘Repair, Maintainence and

Improvement’ or RMI output. In recent years there has been a significant shift in the

composition of total construction output, with an increasing proportion of output being

accounted for by new building.

Data for 2005 show that 81% of construction output was comprised of new building

activity, with the remaining 19% being accounted for by RMI. In 1995 this split was 66%

new and 34% RMI, highlighting the strong growth in new building in recent years. This

high concentration in new building is in contrast to the rest of the EU where the the

distribution between new building and RMI is more even at 53% New and 47% RMI.

We will now look at each of the above sectors in more detail, highlighting the trends in

construction output in each sector over the past decade. We will also look at the

employment trends seen in the construction sector as well as detail such issues as tax

reliefs and measures that have been introduced, and how they have impacted output in

the construction industry. We begin by looking at residential construction.

In 2005, new buildingaccounted for 81% of

construction output, comparedto 66% in 1995

C O N S T R U C T I V E T H I N K I N G

0

5000

10000

15000

20000

25000

30000

35000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Tota

l outp

ut in

€m

RMI New

Contruction output is being driven by new building

Source: DoELG (current prices)

THE RESIDENTIAL HOUSING MARKET

As mentioned, much of the discussion surrounding the Irish construction sector in recent

times has involved debate on the future of the housing market. This has not been without

due cause: new residential housebuilding continues to account for an increasing

proportion of new construction output. Accounting for 31% of total output in 1995, this

share has increased significantly to reach 55% in 2005. Including RMI activity the

estimated contribution to total output is over 66%. The Irish construction sector is

undoubtedly quite exposed to the residential housing market.

As mentioned earlier, there has been a significant shift to new building in construction

output. The residential sector has been a leader in this regard with the split between new

residential and residential RMI having seen a considerable shift. In 1995, RMI accounted

for 39% of total residential output, yet by 2005 this figure had fallen to only 19%. This

consequently implies that new housing has been the main driver of residential output

growth as well as the main driver of new construction output in the industry as a whole.

Ireland again ranks second to none in this regard with such a dependance on new house

building unique in a European context.

Even Spain’s economy, which has often been compared to Ireland’s in terms of

construction activity, does not have such a degree of reliance on housebuilding. In the

Spanish construction sector, a relatively modest 34.2% of construction output is

accounted for by new residential housebuilding, while the average for the EU as a whole

is 24.3%.

16

New residential housebuildingaccounted for 55% of total

output in 2005, compared to31% in 1995...

...implying that Ireland isuniquely dependent on new

housebuilding in a Europeancontext

C O N S T R U C T I V E T H I N K I N G

13

.2%

15

.1%

16

.5%

17

.2%

18

.0%

18

.1%

19

.8%

20

.6%

21

.0%

21

.4%

22

.1%

23

.2%

24

.1%

25

.1%

27

.7% 3

3.2

%

34

.2%

35

.9%

55

.0%

0%

10%

20%

30%

40%

50%

60%

Cze

ch R

epub

lic

Unite

d Kingd

om

Polan

d

Swed

en

Den

mar

k

Slova

kia

Italy

Belgium

Nor

way

Hun

gary

Finland

Franc

e

Austri

a

Ger

man

y

Net

herla

nds

Portu

gal

Spa

in

Switz

erland

Ireland

Sh

are

of

tota

l co

nstr

uctio

n

New residential as a % of total construction output

Source: Euroconstruct, DoELG

1996-2000 2001 2002 2003 2004 2005

Av. annual growth € € € € €

Residential output at current prices 10,954 11,928 14,645 18,055 20,873

% change 24.1% 15.3% 8.9% 22.8% 23.3% 15.6%

Residential output in constant '03 prices 13,028 13,216 14,645 16,266 17,951

% change 9.7% 4.8% 1.4% 10.8% 11.1% 10.4%

Residential output as % of total output 55.0% 56.0% 61.4% 65.4% 66.1%

(using current prices)

Source: DoELG

Residential output in real and current prices (2001-2005)

17

Housing completionsThis reliance on new housing is reflected in the housing completions data provided by the

Department of the Environment and Local Government (DoELG). Completions are based

on the number of first time connections by the Electricty Supply Board (ESB).

For the eleventh consecutive year in 2005, completions reached a record level,

amounting to c.86,000 (new revised figure). This is almost three times the amount of

completions in 1995 (30,575 units), and more than 35,000 units more than in 2000

(49,812 units). Supply has become dominated by private house completions over recent

years. In 1995, social and voluntary housing accounted for 13% of total completions,

whereas these components only accounted for 6% in 2005.

The latest housing completions data available show for the first seven months of 2006 a

total of 51,752 units had been completed. This compares to 41,863 units completed in the

first seven months of 2005 and represents an increase of 24%.

How does this compare internationally?The most commonly used measure of residential house building for international

comparison is completions per 1,000 of the population. In 2005, housing completions

amounted to 20.8 per 1000, exactly four times the European average of 5.2 per 1000.

Ireland’s closest neighbour, the UK, is only producing at a rate of 3.2 per 1000 of the

population. Based on estimates of supply levels (detailed on page 54), we estimate that

residential output could reach an amount equivalent to 21.7 per 1000 of the population

this year.

Despite the high levels of output in recent years, Ireland has yet to catch up with the rest

of Europe in terms of housing units per capita. We estimate that the housing stock in

Ireland currently amounts to 1.74m units. Expressed in units per 1000, this equals an

estimated 410 units, relative to c.463 per 1000 in the 19 EU countries for which we have

data. Ireland has caught up somewhat with the rest of Europe in terms of housing units,

though there is still some convergence necessary.

In 2005, completionsamounted to c.86,000, threetimes the amount in 2005...

...which implies a ratio of 20.8per 1000 of the population...

...but Ireland has yet to catchup in terms of stock

C O N S T R U C T I V E T H I N K I N G

Completions dominated by private units

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

units

Local authority/Voluntary PrivateSource: DoELG

Types of housing units being built As well as the number of units being produced, it is also imporant to analyse the mix, as

it may be the case that the type of units that are being produced are inappropriate for the

demography of the country. Last year, the DoELG revised the classification of housing

completions. The old classification system had five categories of completions, namely:

bungalow; detached; semi-detached; terraced; and apartments. The new system has only

three, namely: individual houses; (bungalow and detached), scheme houses (terraced

and semi-detached) and apartments, which has remained as a stand alone category.

Looking at completions under this new system shows marked growth in scheme houses,

in the past few years especially.

As recently as 2001, individual houses had been the most common type of house built in

Ireland, accounting for almost 50% of the total. Yet this year, this category will likely see

the least amount of completions as shortages of building land and increasing prices make

higher density housing a more attractive option. The share of individual houses in total

completions has been almost halved over the past 10 years, decreasing from 46% in

1996 to 25% in 2005.

Conversely, growth in completions of scheme houses has surged. They accounted for

over half of the total number of houses built last year. The number of apartments has also

risen strongly in recent years, although as a proportion of total output, they have

remained in a relatively steady range (between 18%-22%). These trends are indicative of

the sprawl of suburban residential accommodation that has been witnessed in commuter

counties in recent years. In the Mid-East region (capturing Kildare, Meath and Wicklow),

scheme houses and apartments accounted for 84% of total completions in 2005, up from

47% in 1996.

18

There has been markedgrowth in the number of

scheme houses...

...and accounted for over halfof the total units built last year

Share of individual houses hashalved in past decade

C O N S T R U C T I V E T H I N K I N G

1996-2000 2001 2002 2003 2004 2005

Individual houses 94,286 24,500 22,027 21,910 20,181 20,362

Scheme houses 73,758 17,076 23,612 31,370 40,267 42,160

Apartments 41,191 10,626 11,638 14,839 16,106 18,035

Total 209,235 52,202 57,277 68,119 76,554 80,557

% of Total

Individual houses 45% 47% 38% 32% 26% 25%

Scheme houses 35% 33% 41% 46% 53% 52%

Apartments 20% 20% 20% 22% 21% 22%

Source: DoELG Note: we have not included the upward revision to completions in 2005

Housing Completions by type 1996-2006

530 528 524 520508 506 500

488 486472 466 463 463

431 426 426 417 410

364341

0

100

200

300

400

500

600

Spa

in

Den

mar

k

Portu

gal

Nor

way

Finland

Franc

e

Switz

erland

Italy

Swed

en

Austri

a

Belgium

Avera

ge

Ger

man

y

Cze

ch UK

Net

herla

nds

Hun

gary

Ireland

Slova

kia

Polan

d

Housing stock per 1,000 of the population 2006

Source: Euroconstruct, Goodbody estimates

19

Regional BasisUnsurprisingly, Dublin accounts for the largest proportion of houses built in the country.

Including the so-called Greater Dublin Area (i.e. the South-East also), 35% of total

housing units were built in Dublin in 2005, similar to the average over the 1996-2005

period. The Midlands accounts for the smallest proportion of residential output. But is this

mix appropriate for the population contained in these regions?

On the following chart, we have tracked the percentage of the population versus the

proportion of housing completions in those regions in the most recent period. It shows

that although completions in Greater Dublin have grown at a rapid rate over recent years,

supply still falls short in proportionate terms relative to the country as a whole. Greater

Dublin, in fact, accounts for almost 40% of the population (as taken from Census 2006).

This has undoubtedly caused prices in the capital to rise faster than they otherwise would

have and forced certain cohorts of the population even further out from the area.

Within these regions, the supply mix has witnessed some interesting developments over

the past decade. In particular, there has been a marked shift in the amount of completions

in the Dublin region accounted for by apartments, rising from 38% in 1996 to 53% in

2005.

This is a natural response by the construction industry to land shortages in the Dublin

region and also reflects the evolving demography of the country. Given that the baby-

boom generation (births peaked in Ireland in 1980) is still coming through the prime

house-buying age cohort, these apartments are acting as suitable entry-level residential

units for these people (average FTB is 31).

These same changing supply dynamics have also been occurring in the Mid-East region,

where the proportion of individual houses built has fallen from 53% in 1996 to only 16%

in 2005. Apartments now account for 18% of total completions in this region and grew

particularly strongly in 2005. While this may be appropraite for the Irish population as it

stands now, we question whether this sector may suffer in the coming years as the bulk

of the population moves beyond this entry-level demand.

Greater Dublin accounted for35% of total houses built in

2005...

...but accounts for almost 40%of the population

Apartments accounted for 53%of total completions in Dublin...

...with similar dynamics beingwitnessed in the Mid-East

C O N S T R U C T I V E T H I N K I N G

0%

5%

10%

15%

20%

25%

30%

Dublin Border Midlands West Mid-East Mid-West South-

East

South-

West

% o

f T

ota

l

Completions Population

Comparison of completions versus population

Source: CSO, DoELG

House pricesDespite these record levels of supply, price increases have also been rapid. While house

prices are not increasing at the rates that were experienced during the Celtic Tiger period

of the late 1990’s, the latest data still show that prices are rising at an unsustainable

15.4% rate in August. Monthly data are available from the permanent tsb/ESRI price

index from 1996. On the chart below, we have tracked the performance of house prices

relative to growth in the CPI over the period. In this time-frame, house prices grew at an

annual rate of 14.8%, while the general level of prices in the economy only rose by 3.3%.

As a result, the average house price in Ireland has surged from €75,000 in March 1996

to over €300,000 in August 2006. However, average house prices in the capital are now

valued at over €410,000. As a comparison, prices in the UK average c.€260,000 at the

current time, with prices averaging c.€390,000 in the Greater London area.

Varying regional trendsAlthough the DoELG data does not take account of characteristics such as the size of the

house and the location when calculating average house prices, it does have the benefit

of a longer time frame, separate regions, as well as including average apartment prices.

20

House prices grew at anannual rate of 14.8% p.a. since

1996, relative to 3.3% for theCPI

Average price breached€300,000 level in 2006

C O N S T R U C T I V E T H I N K I N G

0%

5%

10%

15%

20%

25%

30%

35%

Apr-

97

Dec-

97

Aug-

98

Apr-

99

Dec-

99

Aug-

00

Apr-

01

Dec-

01

Aug-

02

Apr-

03

Dec-

03

Aug-

04

Apr-

05

Dec-

05

Aug-

06

YoY

Source: CSO, permanent tsb/ESRI

CPI

House prices

House price inflation consistently outperforming CPI

Supply mix by region (% of total in region)

2005 1996 2005 1996 2005 1996

Dublin 5% 9% 42% 53% 53% 38%

Border 36% 68% 54% 18% 10% 14%

Midlands 29% 62% 61% 25% 9% 12%

West 41% 63% 44% 21% 15% 15%

Mid-East 16% 53% 66% 39% 18% 7%

Mid-West 32% 52% 52% 32% 16% 16%

South-East 34% 63% 58% 25% 9% 12%

South-West 29% 60% 54% 27% 17% 14%

Total 25% 46% 52% 34% 22% 20%

Source: DoELG

ApartmentsIndividual houses Scheme houses

21

The table above reveals the extent to which prices vary throughout the country. For

example, new house prices were 27% more expensive in Dublin than the national

average in 2005, whereas prices in Waterford were at an 11% discount last year. The

situation with second-hand house prices is even more diverse, reflecting the high

incidence of much higher priced homes in mature residences close to the city centre.

Second-hand house prices in Dublin are now 33% ahead of the national average,

whereas second-hand house prices in Limerick are almost half of those in the capital.

In 2005, new house priceswere 27% more expensivethan the national average

C O N S T R U C T I V E T H I N K I N G

Price (€)New Second-hand New Second-hand New Second-hand

Whole Country 77,994 74,313 169,191 190,550 276,221 330,399 Cork 76,608 70,796 166,557 169,064 265,644 307,007 Dublin 86,671 88,939 221,724 247,039 350,891 438,790 Galway 87,783 78,370 163,824 166,145 274,905 317,811 Limerick 73,348 61,099 145,834 142,188 226,393 232,271 Waterford 69,950 59,409 145,713 141,662 246,914 252,765 Other Areas 71,829 64,170 165,936 158,442 254,006 263,653

Average annual

increases

New Second-hand New Second-hand New Second-handWhole Country 3.6% 3.6% 16.8% 20.8% 10.3% 11.7%Cork 4.7% 5.3% 16.9% 19.2% 9.9% 12.8%Dublin 1.5% 3.6% 20.9% 22.8% 9.7% 12.2%Galway 5.4% 5.2% 13.4% 16.3% 11.0% 13.9%Limerick 3.5% 2.0% 14.8% 18.5% 9.3% 10.4%Waterford 5.6% 4.1% 15.9% 19.2% 11.2% 12.3%Other Areas 5.2% 4.2% 18.3% 19.9% 9.0% 10.7%Source: DoELG

1991-1995 1996-2000 2001-2005

1995 2000 2005

22

C O N S T R U C T I V E T H I N K I N G

23

NON RESIDENTIAL CONSTRUCTION

Excluding housebuilding, the remaining sectors of the construction industry are as

follows:

• Private non residential construction

• Productive Infrastructure

• Social Infrastructure

While it is true to say that residential has been the driving force behind the growth in

construction over the past number of years in Ireland, these other sectors are also

important components of output, and will be more important going forward. While we will

look at the performances of the individual sub-sectors later, their contribution to the

construction sector in money terms can be seen below:

Non-residential output estimated at over €10bn in 2005The non-residential component of construction was worth some €10bn in value to total

construction output in 2005 (as seen above). After a relatively weak period over more

recent years, the volume of output is showing signs of recovery, with an estimated real

increase in output in 2005 of 7.8%. These sub-sectors are quite influenced by economic

conditions, as well as government plans for infrastructural investment. Encouragingly, the

current economic climate is one of continued expansion while the government budgetary

position is strong. Real GDP growth is estimated to come in at 5.7% for this year and by

a similar amount in 2007, so clearly the short-term economic backdrop for non-residential

construction is a favourable one.

We will now look at the main developments in the non-residential construction sector,

beginning with the productive infrastructure component.

Three major sub-componentsof non-residential output

Non-residential constructionpicked up strongly in 2005

C O N S T R U C T I V E T H I N K I N G

1996-2000 2000 2001 2002 2003 2004 2005

Ave. annual growth € € € € € €

Non residential output at current prices

Private non-residential construction 3817.3 3710.2 2962.4 2730.6 2958.5 3421.5

Productive Infrastructure 3119.9 3744.5 4580.0 4781.8 4831.3 5233.8

Social Infrastructure 1215.9 1517.1 1822.5 1683.6 1750.2 2027.3

%change (current prices)

Private non-residential construction 24.2% 14.3% -2.8% -20.2% -7.8% 8.3% 15.6%

Productive Infrastructure 20.6% 20.6% 20.0% 22.3% 4.4% 1.0% 8.3%

Social Infrastructure 17.2% 24.1% 24.8% 20.1% -7.6% 4.0% 15.8%

Total non residential output at current prices 8153.1 8971.8 9364.9 9196.0 9540.0 10682.6

% change 20.9% 18.1% 10.0% 4.4% -1.8% 3.7% 12.0%

% change (constant prices)

Private non-residential construction 14.4% 2.3% -10.7% -18.7% -5.5% 4.2% 11.2%

Productive Infrastructure 13.0% 7.7% 12.1% 15.4% 1.3% -2.0% 4.6%

Social Infrastructure 7.1% 10.0% 15.3% 9.8% 2.4% 3.3% 8.7%

Total % change (constant prices) 12.4% 5.5% 2.8% 2.7% -2.5% 0.2% 7.8%

Source: DoELG, Goodbody estimates

Non Residential Construction Output (1996-2005)

Productive InfrastructureOutput in this area is mainly decided on the basis of government plans for the

development of Ireland’s infrastructure. The National Development Plan (NDP) is the

framework by which these capital developments are put in place. The most recent plan is

almost at the end of its tenure, running from 2000-2006, with the next programme, to be

released before the end of the year, set to take in the period from 2007 to 2013.

In total the most recent plan involved approximately €57bn of investment, financed by

public, private and EU funds over the period 2000-2006, with the vast majority (90%)

sourced from the Exchequer or other domestic sources. The contribution from the EU

amounts to some €6bn, which included aid from Structural (€3.3bn), Cohesion (€0.6bn)

and Common Agricultural Policy (CAP) funds (€2.2bn). The overall plan detailed a

number of individual programmes. The main one of these relating to infrastructural

development was the Economic and Social Infrastructure Operational Programme

(ESIOP). Key areas designated for investment under this programme included roads,

public transport, water and waste services, as well as health services, social housing,

education, industry and rural development.

At the time of its inception, the ESIOP was the largest multi-infrastructural investment

programme in the history of the state with a total of €22.4bn allocated to improving the

deficits apparent in Ireland’s infrastructure. This translates into an expenditure per capita

of over €6,000 in both the BMW and S&E regions. The details of the NDP plan as a whole

are given below, as well as a breakdown of the ESIOP plan.

How has the programme fared?We will look in more detail at the areas where funding was directed. However, the

programme overall has been a success in terms of the spending targets, while there have

been cost and time overruns on some high-profile projects such as the Luas light-rail

project for Dublin.

In the first six years of the programme, €44bn was invested across the country, with

three-quarters of this spending in the Southern and Eastern region and the rest in the

Border, Midlands and West (BMW) region. The progress report on the NDP, released

earlier this summer, indicates that spending is expected to be close to forecast by the end

of 2006, with overspending in some categories being cancelled out by underspending in

other areas. However, while overall costs are mentioned, the progress report does not

mention the success with which the projects were completed, both relative to cost and

time. This particular aspect is key to the proper implementation of the next NDP.

24

NDP involved €57bn of capitalspending...

...with a total of €22.4bnallocated to addressing the

infrastructure deficit

Some high-profile costoverruns have occurred

C O N S T R U C T I V E T H I N K I N G

€bn

22.4

12.6

5.4

4.0

2.8

4.3

0.1

51.6

Source: Department of Finance, Figures in constant 1999 prices

NDP 2000-2006

Economic and Social Infrastructure

Employment and Human Resources

Productive Sector

Total

S&E Regional Operational Programme

BMW Regional Operational Programme

CAP Measures

Peace Programme

€bn

National Roads 6.0

Public Transport 2.8

Environmental Protection 3.2

Energy 0.2

Housing 7.6

Health 2.6

Total 22.4

Total per capita €6,167

Source: Dept of Finance

ESIOP Expenditure

25

What is included in productive infrastructure? Productive infrastructure investment includes spending on roads, water services, airports,

seaports and harbours. It also captures investment by the respective semi-state bodies

responsible for transport, energy and telecommunications. Capital investment by private

sector companies involved in the energy and telecommunications division is also

included in constuction output for this area.

Total investment in productive infrastructure amounted to €5.2bn last year. On separate

data from Euroconstruct we can compare levels of civil engineering activity across the

EU. As can be seen below, civil engineering output amounted to 4.6% of GNP in 2005

and indicates that Ireland compares quite favourably in terms of spending in this sector

in a European context. Only Portugal and Spain are experiencing higher levels of civil

engineering activity. For completeness, we have included a measure of GNP with and

without housing to show that output is not skewed by this sector in Ireland. Given the

infrastructural bottlenecks that remain, there exists significant scope for further growth in

civil engineering output.

Figures for the first eight months of 2006 show that while voted capital expenditure is

some 10% ahead on spending at this stage last year, it still lags behind the profile outlined

by the Department of Finance with spending over €200m behind the 21% planned

increase on last years outturn. With voted capital expenditure last year falling short of 5%

of GNP as committed to by the government, the figures for the year so far hint that the

same may happen again. Clearly the resources available have increased and now need

to be utilised. This has been aided by the significant improvement in public finances in

recent years which has undoubtedly increased the scope for further capital spending.

With plans for total Public Capital Programme (PCP) expenditure in 2006 of €10,603

million (7.3% of GNP) and a rise of €2,043 million, or 23.9% of last year’s outturn of

€8,560 million, this year should see an even greater contribution by infrastructural

investment to investment growth than usual.

The announcement of the €34bn 10 year Transport 21 plan as well as the aforementioned

National Development Plan, the next one of which will shortly be coming on stream,

should ensure infrastructural investment remains a top priority on the Government

agenda in the coming years. We will now look at the individual components of productive

infrastructural building.

Civil engineering outputamounted to 4.6% of GNP in

2005,...

...the third highest in the EU

Performance of public financesoffers scope for further capital

spending

C O N S T R U C T I V E T H I N K I N G

0%

1%

2%

3%

4%

5%

6%

Por

tuga

l

Spa

in

Ireland

Den

mar

k

Net

herla

nds

Finland

Aus

tria

Italy

Switz

erland

Eur

ocon

stru

ct

Franc

e

Swed

en

Belgium U

K

As a % of GDP Excl. HousingSource: Euroconstruct

Level of civil engineering activity compares well

RoadsConstruction output in the form of roads in value terms has increased over 300% since

1996, an indication of the facelift the Irish road network has undergone. With the

exception of 2004 in which a slight drop off in output was recorded, investment has

increased strongly in every year. At the beginning of the NDP in 2000 only 0.1% of the

total road network in Ireland was of motorway standard compared to an EU average of

1.3%. The allocation of over a quarter of the infrastructural development budget has gone

some way towards improving this situation.

A review of the NDP indicated that a total of over €6bn had been spent on Irish roads up

to the end of 2005. Over 422 kilometres of roadway has been built including 155km of

motorway, 99km of dual carriageway and 179km of single carriageway. At the end of 2005

according to the National Roads Authority (NRA) there was 24 major projects under

construction, a total of 217km of roadway with a further 52 projects at the planning/design

stage.

One of the larger road projects ongoing at present is the Dublin Port Tunnel. The tunnel

is classified as a proposed national road and thereby places its construction under the

overall responsibility of the National Roads Authority. The tunnel, one of the largest urban

road projects ever undertaken in Europe, is now nearing completion after over five years

of construction with a total estimated cost of €752 million (tender cost was €450m). Large

scale projects such as this one have contributed significantly to public infrastructure

construction.

Exchequer now the main source of funding The development of Ireland’s roads has, in the past, been strongly aided by EU funding,

namely the EU Cohesion funds. This was one of the major innovations within the

Maastricht Treaty of 1993. It meant that funds would be available to EU member states

which had a GNP per capita of less than 90% of the Community average. Between 80-

85% of the eligible expenditure for projects relating to the environment and transport

infrastructure was granted with the focus on larger projects costing more than €10 million.

It was intended to assist individual projects in the fields of environment and transport

infrastructure. These funds were particularly relevant to the roads network in the 1990s.

Under the Operational Programme for Transport, which ran from 1994-1999, the EU

funded 61% of the total €1.85bn spent over the period.

26

In 2000, only 0.1% of the totalroad network in Ireland was of

motorway standard

Dublin Port Tunnel is nearingcompletion after five years of

construction at a cost of€752m

Infrastructure funding hasbecome less dependent on the

EU

C O N S T R U C T I V E T H I N K I N G

Consistent investment in Ireland's roads

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

€ m

illio

n

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Yo

Y

Construction of roads (€m) Growth (%) Source: DoELG, current prices

27

However, of the €5.8bn that was allocated to spending on roads under the NDP, only 14%

emanted from EU funds. Exchequer and private funding will play an even more important

role in the funding of the road programme under the next NDP, given that Ireland is no

longer eligible to receive this source of funding. The improvement in the government’s

budgetary position over recent years is a very welcome one indeed and given that the

government should continue to run a significant current budget surplus in the coming

years, this places Ireland in a stong position to fund future development of the roads

network.

Water ServicesConstruction which improves and develops Ireland’s water services comprised

approximately 15% of total productive infrastructural output value in 2005. In recent years

significant investment has been earmarked for the development of water and sanitary

services. The NDP allocated €2.7bn for environmental infrastructural projects, an

investment which has resulted in Ireland now being 90% compliant with the EU Waste

Water Treatment Directive, up from 25% in 2000.

As part of this effort to comply with EU regulation, the current Water Services Investment

Programme was employed, which covers the three year period 2004-2006 and amounted

to investment of approximately €500m per annum. While EU funding was received to aid

these plans, as with above, the Exchequer has been playing a more important role.

EnergyThe Energy component of productive infrastructure construction has increased

substantially in value in recent years. Its contribution has increased from 24% of total new

infrastructural building in 2000 to 32% in 2005. In terms of construction output, total

energy infrastructure amounted to some €1.5bn in 2005, and so is of notable importance.

This output includes capital investment by the Electricity Supply board (ESB) and Bord

Gais Eireann on the further enhancement of their respective transmission and distribution

networks.

Ireland is in a strong positionto fund future development of

the roads network

In recent years, the NDPallocated €2.7bn for

environmental infrastructureprojects

Total energy infrastructureconstruction output amounted

to €1.5bn in 2005

C O N S T R U C T I V E T H I N K I N G

Water Services Funding 1993-1999

Cohesion Fund

41%

Exchequer

56%

Structural Fund

2%

Interreg

1%

Source: DoELG

Water Services funding 2000-2006Cohesion Fund

2%

Exchequer

95%

Structural Fund

3%

Source: DoELG

Transport funding breakdown - 1994/1999

EU

61%

Exchequer

39%

Source: NRA

Transport funding breakdown 2000/2006

EU

14%

Exchequer

63%

Private

23%

Source: NRA

More recently the private sector has come on stream and now also contributes to new

investment in energy. Companies like Airtricity and Hibernian Wind Power are two such

examples. Public-private partnerships may become common in this area in particular

going forward.

Airports and SeaportsThe development of Ireland’s airports has been a central theme among policymakers in

the past number of years but lately these plans have gathered even more steam. 2004

and 2005 were particularly strong in terms of the volume of construction related

investment in airports. This reflected the major new developments and improvement

works at Ireland’s three state airports, namely Dublin and Shannon as well as Cork which

recently unveiled its newly built second Terminal. Some minor work was also undertaken

at the regional airports. With proposed plans for expanding capacity at Dublin Airport

coming on stream as well the issue of developing Dublin Port, we should see continued

growth in investment in the coming years.

Public TransportConstruction related investment falling into the public transport category includes

allocations for the Coras Iompar Eireann (CIE) group, along with the Railway

Procurement Agency (RPA) and the Dublin Transportation Office (DTO). The RPA is

responsible for all new light rail and metro projects while the DTO is in charge of co-

ordinating and implementing the agreed integrated transport strategy for the Greater

Dublin Area.

Up to 2003 the construction of the two Luas lines did much to buoy construction output

in the public transport area. With its completion in 2003 public transport output has fallen

off slightly. The total volume of construction output from public transport projects declined

by 35% in 2004 after peaking in 2003 and a further decline in output is expected for 2005

(-20%) as investment in the LUAS system draws to a close. However, the proposed

extension of the Luas, the plans for which have just recently been approved, should

underpin construction output in this area in years to come, with 2015 as the planned

completion date.

Nevertheless, transport is still a valuable source of construction output, with output in

2005 of approximately €362 million, €264 million of which is investment in new projects.

Much of this is investment in the CIE and represents ongoing development to the

suburban and mainline rail network in Dublin and the surrounding areas, as well as

further improvements to the DART system (Dublin Area Rapid Transit). Investment in the

Rural Transport Pilot Project scheme, which aims to improve accessibility in public

transport is also included as part of this.

Funding allocated to the DTO is directed towards improving the bus network and

especially the provision of Quality Bus Corridors (QBC’s) as well as greater facilities for

pedestrians and cyclists. Along with the Tranport 12 programme, which is detailed later in

the report, should act to underpin spending in this area into the medium-term.

28

Plans in place for furtherinvestment in airports and

seaports...

...as well as for the bus andrail network

Transport construction outputamounted to c.€362m in 2005

C O N S T R U C T I V E T H I N K I N G

29

PRIVATE NON-RESIDENTIAL CONSTRUCTION

Private construction accounted for 32% of the value of non-residential output in 2005 and

for 10.8% of total construction output. It is an area where output is strongly determined

by the prevailing economic conditions and is comprised of the following areas:

• Industry

• Semi-State Industry

• Commercial

• Tourism

• Agriculture

Over the 10 year period 1996-2005 the fortunes of the private non-residential sector have

been relatively mixed. Between 1996 and 2000 the volume of construction output arising

from new building projects and improvement works saw an expansion in real terms of

over 14% on average per annum.

New levels of private non-residential construction peaked in 2000 with an output value of

€3.8bn. The downturn in the global economic environment over 2001-2003 and the

consequent decline in Irish economic growth adversely affected the level of output in the

non-residential sector. A change in fiscal measures was a contributory factor also, when

the December 2002 budget saw commercial stamp duty rates increase from 6% to 9% as

part of the Bacon report recommendations. By 2003 new private non-residential output

had declined by 29% on the value attained in 2000. Since then, however, the sector has

seen some ground recovered, growing at rates of 4.2% in 2004 and 11.2% in 2005 in real

terms. Expansion by semi-state agencies such as FÁS and Shannon Development also

fall under the category of non-residential construction. Investment by these bodies

increased strongly in 2004 and 2005, mainly due to the inclusion for the first time of

investment in business parks by IDA Ireland. We will now briefly review some of the

developments in the main sub-components of private non-residential construction.

Private non-residentialaccounted for 10.8% of total

construction in 2005

Performances have beenmixed in recent years...

...although the most recentdata points to a recovery

C O N S T R U C T I V E T H I N K I N G

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

€m

Commercial Industry Tourism Agriculture Semi state industry

Non-residential construction: Commercial and Industry

leading the way

IndustryIndustry is one of the main areas covered under the spectrum of private non-residential

construction. Growth in this area was impressive during the second half of the 90’s as the

onset of the Celtic Tiger created demand for extra industrial units and space from multi-

national firms in particular. This momentum has not been maintained in recent years

however, due to a number of factors. A more competitive international environment for

foreign direct investment has meant that demand for industrial units has weakened

somewhat. As a result, manufacturing employment has fallen and vacancy rates have

increased in this sector. Manufacturing employment has fallen by 31,000 since 2001, the

year of peak employment in this sector.

The immediate impact of these course of events was a 22% decline in the volume of

output in 2002, followed by a further real decline of 4% in the following year. Since then

we have seen some improvement. In 2005, industrial construction is estimated to have

increased by 6% in real terms. The most recent industrial production data from the CSO

shows strong momentum in industrial production, hinting that the recovery in Irish

industry may be continuing.

Commercial Along with industrial, commercial output is the other central component of private non-

residential construction. It accounted for 47% of this sector’s output value in 2005, with

output being composed of office development and retail and wholesale construction. The

trends in output from these respective categories can be seen in the following table. The

difficult economic environment over the 2002-2003 period affected commercial output

quite significantly, with output from the office sector suffering especially and negative real

growth in output recorded as recently as 2004. Retail development did pick up some of

the slack, however, and growth in output in 2005 has returned to more normal levels for

both categories.

30

A competitive internationalenvironment for FDI has

weakened demand forindustrial units

In 2005, industrial constructionincreased by 6% in real terms

Commercial output is a keycomponent of private non-

residential construction

C O N S T R U C T I V E T H I N K I N G

0

200

400

600

800

1000

1200

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

€m

-30%

-20%

-10%

0%

10%

20%

30%

% c

ha

ng

e y

oy

Industrial output (LHS) Real output growth (RHS)Source: DoELG, Goodbody estimates

Construction output in industry has started to recover

31

Office developmentOffice development is driven by the the financial and business services sector which

remains strong and is forecast to see further growth in 2006 on the back of positive

prospects for employment creation. Looking firstly at the trends in output in the office

sector, it is clear that after record growth rates in the latter years of the 1990’s contractors’

willingness to undertake office development contracts has lessened somewhat in recent

years. However, the estimated growth in the volume of new output in office development

in 2005 of 6.1% after flat output growth in 2004 has marked the turning point in this cycle,

with the prospects now more favourable for a recovery in this component of commercial

output.

Much of the research available on this sector tends to concentrate on the Dublin office

market, which consists of Dublin City and its suburbs. Therefore, coming to conclusions

regarding the future of this sector at a national level is difficult. Nevertheless it is worth

noting that demand is mainly driven by expansion of existing businesses in the capital. A

record level of job creation in 2005 at 87,000, a 4.7% annual gain, is likely to have

contributed significantly to the increased demand for office space last year. With

employment growth currently at 4.6% according to the latest QNHS, the fifth consecutive

quarter where employment growth has exceeded 4.5%, the buoyancy of the domestic

labour market augers well for office output in the near term. As the Irish economy

becomes increasingly services dominated, construction output in this sector will be set to

benefit with increased demand for office space.

RetailCommercial construction has increased its share in overall non-residential output, in

value terms, from 37% in 1996 to almost 50% in 2005. While office development has

played a key role in this, especially over the Celtic Tiger era, the retail sector has been

the main driving force of commercial construction output more recently.

Volume of output in officedevelopment grew by over 6%

in 2005

Buoyancy of domestic labourmarket augurs well for office

development

C O N S T R U C T I V E T H I N K I N G

Commercial Construction 1996

Retail,

Wholesale

38%

Office

Development

62%

Source: DoELG

Commercial Construction 2005

Retail, Wholesale

48%

Office

Development

52%

Source: DoELG

1995-2000 2001 2002 2003 2004 2005

Value of output (current prices) €m €m €m €m €m

Office Development 1337.5 961.5 714.6 730.2 851.1

Retail and Wholesale 560.2 546.6 603.5 661.0 791.0

% change (current prices)

Office Development 35.2% 12.3% -28.1% -25.7% 2.2% 16.6%

Retail and Wholesale 24.9% 14.5% -2.4% 10.4% 9.5% 19.7%

Value of output (constant prices)

Office Development 1280.9 938 714.6 702.2 786.9

Retail and Wholesale 536.5 533.2 603.5 635.6 731.2

% change constant prices

Office Development 29.9% 3.0% -26.8% -23.8% -1.7% 12.1%

Retail and Wholesale 9.5% 25.9% -0.6% 13.2% 5.3% 15.0%

Source: DoELG

Commercial Construction Output

The retail and wholesale sector has benefited significantly from the influx of some of the

UK’s largest retailers. With household disposable incomes strengthening considerably

over the past decade (up over 150% in that period) this had fed through to a booming

environment for retailers.

More recently, the surge in household consumption growth has boosted retail activity

even further. Consumption grew by 6.6% in real terms in 2005, while the indications so

far this year point to a similar outturn for 2006. We expect consumption to be the lead

contributor to growth over the next two years also. It is clear that developers believe in

this environment also, with millions of square metres of retail space planned over the next

two years. This impressive momentum has boosted competition and led to an increase in

the instances of alteration and conversion of present retail units by existing retailers.

Retail RMI as a share of new building has increased significantly over the past five years,

doubling since 2001. It now comprises over 34% of the value of building in the retail area.

Indeed with a swell of new retail developments currently under construction and more

than ten new or extended shopping centres to come on stream by 2009, building activity

in the retail sector could continue to flourish for some time yet. The decision in January

2005 to relax the Retail Planning guidelines for warehousing space in areas elected as

IAP’s (Integrated Area Plans) as part of the National Spatial Strategy, should also impact

positively on future building in the Irish retail sector.

TourismOutput covered under this spectrum includes construction and developments of hotels

and holiday accommodation, as well as other amenities and tourism infrastructure.

Growth in this category of construction declined consistently in the latter part of the

nineties before bottoming out in 2001. Since then, with the introduction of very favourable

tax incentives and reliefs relating to the construction of hotels, which form a major part of

tourism construction output, a mild recovery has been staged.

The value of output in the tourism sector as a whole has grown by 10.5% and 15.2% in

2004 and 2005 respectively with output contributing over €519 million in value terms to

the construction sector in the latter year. New building growth has been robust also with

real output increasing by 3.8% and 10.0% in 2004 and 2005, respectively. There is clearly

strong momentum in the tourism sector.

32

We expect consumption to bethe lead contributor to growth

over the next two years...

...providing a positiveenvironment for the retail

sector

Tourism-related construction isrecovering mildly

C O N S T R U C T I V E T H I N K I N G

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

outp

ut in

€m

Office Development Retail and Wholesale

Retail has become all important to commercial output

Source: DoELG, current prices

Retail sector has

increased in

importance

33

Indeed, with the hosting here of such a high profile event as the Ryder Cup, the extensive

promotion of Ireland as an attractive tourist destination should positively impact tourist

numbers to Ireland both in the short and longer term and provide a positive backdrop for

further development of Ireland’s tourism infrastructure.

Planning permissions data recently released by the CSO reveal that supply intentions

continue to remain at a high level. In 2005, there were a total of 1,006 planning

permissions granted for hotels, restaurants and cafes, equating to a total floor area of

1,245,000m2. The number of permissions were up by 17% on the 2004 level, while the

total floor area rose by 80%. This is an indication that the average size of projects is rising

significantly. In 2001, the average floor size in planning applications for hotels,

restaurants and cafes stood at 1,500,000m2, but had risen to an average size of

3,500,000m2 by 2005.

AgricultureIn recent years, construction output in agriculture has suffered most from the evolving

nature of Ireland’s economy. The overall value of output has actually decreased €138.4m

or 42% over the ten year period 1996-2005.

This is in tandem with the fall in the numbers of those employed in agriculture. Total

persons employed in agriculture stood at 114,500 in Q2 2006 according to the most

recent QNHS. In Q2 2000 this figure was 132,900, a drop of almost 14%, illustrating the

extent of the decline even in the more recent years.

According to the Teagasc National Farm Survey a not insignificant €261m was estimated

to be invested by farmers in buildings this year - a 56% increase on the amount for 2005.

This accounts for 43% of the total planned farm investment according to the farming

representative. Although spending has frequently fallen short of survey expectations and

the estimates for 2006 should likely prove an upper bound for investment, the figures still

highlight that this sector still has a role to play, albeit a declining one.

Supply intentions continue toremain at a high level

Construction output inagriculture has suffered most

from the evolving nature ofIreland’s economy

C O N S T R U C T I V E T H I N K I N G

0

50

100

150

200

250

300

350

400

450

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

€m

0%

5%

10%

15%

20%

25%

% o

f to

tal

Agricultural construction output (LHS) Agric as % of total non res (RHS)Source: DoELG, (current prices)

Agriculture has decreased notably in importance

SOCIAL INFRASTRUCTURE

Finally, social infrastructure spending is the smallest sub-component of the construction

industry, accounting for just over 6% of the total value of construction output in 2005 (7%

in volume terms). Spending in this area is also determined by the Public Capital

Programme and includes capital investment on items such as education, hospitals, public

buildings, local authority (LA) services and public sporting facilities. Total investment

under this heading peaked in 2002, largely due to an exceptional increase in the level of

investment in private-sector, non-grant-aided investment in education. For 2005 the total

amount invested in social infrastructure was just over €2bn.

EducationEducational construction output consists of expenditure on new schools, extensions and

other such capital works at primary, secondary and third level institutes. The 2006 Public

Capital Programme provision for Education of €664m represents an increase of 19% on

the outturn for 2005 and should underpin strong construction output growth this year.

Growth in output actually declined in 2003 and was also weak in 2004. There is also non-

grant aided private investment in third level facilities across the sector, which accounted

for approximately 17% of total new investment in 2005 compared with 30% in 2004. Total

construction output related to education amounted to some €812 million last year in value

terms, accounting for 40% of total social infrastructural output.

HealthThe PCP provision for health is allocated towards the development of facilities and

related services and equipment. It commands approximately 15% of the PCP Social

Infrastructural budget, an allocation which peaked in money terms in 2002, at €529m, and

will only be surpassed this year. A provisional €639m has been set aside for health

investment in the 2006 PCP and so should significantly underpin improvements in

hospital facilities and resources. This is a welcome development given the somewhat

disappointing growth in output in recent years culminating in a decline of 8.0% in new real

output growth in 2004. While growth rates in the value of construction output had been

impressive between 1999 and 2002, since 2002 there has been a marked deceleration

in the growth rates for health spending.

34

In 2005, just over €2bn wasinvested in social infrastructure

The Public Captial Programmewill underpin growth in this

area

€639m allocated to healthinvestment in 2006

C O N S T R U C T I V E T H I N K I N G

-60%

-40%

-20%

0%

20%

40%

60%

80%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

YoY

Education

Health

Public Buildings

Social Infrastructural output- growth has been mixed

Source: DoELG

35

This reflects the modest reduction in the public capital provision in 2003 (-2%) and 2004

(-2%). As mentioned, this year’s PCP Health allocation, at €639m, is some 25% ahead

of the amount budgeted for 2005 and should contribute to a more positive outturn for

2006.

Public BuildingsThis component of public investment includes expenditure by the Office of Public Works

(OPW) on the provision and refurbishment of accomodation for government departments

and offices. The allocation also includes construction related investment by the Dept of

Justice, Equality and Law reform in prisons and courthouses along with building and

engineering works carried out by the Department of Defence. Investment by the OPW

constitutes a large part of investment in public buildings and this has been declining over

the past two years. This is largely the reason why investment in public buildings has not

regained its peak level attained in 2003 when it accounted for some €450m of the volume

of social infrastructural output. In 2005 construction of public buildings is estimated to

have amounted to approximately €367m or 20% of the volume of social infrastructural

building output.

Public building constructionhas declined in the two years

since its 2003 peak

C O N S T R U C T I V E T H I N K I N G

EMPLOYMENT IN CONSTRUCTION

By its nature, construction is a very labour intensive industry. Therefore, given the

explosion in output that we have detailed, it comes as no surprise that employment in the

sector has risen at a rapid pace over the period.

There are two methods by which employment in the construction sector in Ireland is

measured:

• Quarterly National Household Survey (QNHS): A complete measure of

employment in the economy as a whole, with the data broken into 15 separate

sectors, including NACE category F for construction.

• Construction Employment Index: Amonthly survey of construction firms with more

than five employees.

13% employed in the construction sector directly...As can be seen above according to the latest QNHS data over 13% of all persons

employed in Ireland are employed directly in construction. This is substantially above the

EU average of 7.9%. However, Ireland has been consistently above the EU average in

terms of its dependancy on construction for well over a decade.

36

Two main measures ofconstruction employment

13% of workforce employed inthe construction sector

C O N S T R U C T I V E T H I N K I N G

2%

4%

6%

8%

10%

12%

14%

Ireland

Spa

in

Cyp

rus

Por

tuga

l

Cze

ch R

epub

lic

Slova

kia

Latvia

Italy

Gre

ece

Lith

uania

Aus

tria

Hun

gary

Malta

EU 2

5

Unite

d Kingd

om

Luxe

mbo

urg

Eston

ia

Den

mar

k

Franc

e

Ger

man

y

Finland

Belgium

Slove

nia

Net

herla

nds

Swed

en

Polan

d

% o

f to

tal e

mp

loye

d

Greatest construction employment dependancy in the EU

Source: Eurostat, data for Q2 '05

Total employment and construction employment1999Q2 2000Q2 2001Q2 2002Q2 2003Q2 2004Q2 2005Q2 2006Q2

Total Employment ('000's) 1,589 1,671 1,722 1,764 1,793 1,836 1,929 2,017

% change (yoy) 6.4% 5.2% 3.0% 2.4% 1.7% 2.4% 5.1% 4.6%

Construction Employment ('000's) 142 166 180 182 191 206 242 263

% change (yoy) 12.7% 17.0% 8.3% 1.2% 5.0% 7.6% 17.7% 8.4%

Construc as share of total 8.9% 9.9% 10.5% 10.3% 10.7% 11.2% 12.6% 13.0%

Monthly Index (yoy): Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-063.4% 2.5% 1.8% 1.7% 2.4% 2.6% 2.7% 2.6%

Source: CSO, data is non seasonally adjusted, monthly index is on three-month moving average basis

37

Including related activities,18% of total employment could

be affected by construction

Many occupations coveredunder the construction

umbrella

C O N S T R U C T I V E T H I N K I N G

...with another 40% indirectly exposedYet these figures relate only to those directly employed in construction. It excludes

employment in professional services such as architecture, quantity surveying and estate

agency, sectors which have unarguably grown as a result of the building boom.

According to the Economic and Social Research Institute (ESRI), indirect employment in

the Irish construction sector could extend to as much as 40% of direct employment. If this

is the case then almost 18% of those currently employed in the Irish economy are

employed, either directly or indirectly, as a result of construction activity. Concentrating

only on those employed directly in construction, the chart below clearly highlights the

contribution made to overall employment growth in recent years. We estimate that more

than one out of every four jobs (28%) created in the economy in the past five years can

be attributed to the construction industry.

Put another way, annual employment growth has averaged 3.7% since Q1 1999, but if

we exclude the construction sector, average employment growth drops to 3.1%. Still

impressive, but just less so. If we concentrate on the more recent data (2003 onwards)

the difference in growth rates is slightly more marked, at 3.4% for all sectors and 2.6%

when excluding construction.

What is construction employment comprised of?Getting a handle on the type of workers employed and the different sub-sectors they are

involved in is a difficult task. Unfortunately, the CSO does not break down the

construction component of the QNHS into its separate subcomponents. However, we

have accessed data from the CSO which relates to employment by occupation. From this,

we have extracted some occupations which we judge to be part of the construction

industry. These occupations are listed on the table of the following page.

We list 29 separate occupations according to their relative size. The data refer to the first

quarter of 2006. While we cannot guarantee that all of these are strictly in the construction

component of the QNHS, it can be reasonably assumed that they are affected by

developments in the construction sector.

0%

1%

2%

3%

4%

5%

6%

7%

8%

1999Q1 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4

YoY

Total Employment

Less Construction

Construction playing a significant role in

employment growth

Source:

Trades are flexible between sub-sectorsWhile trades such as electricians, bricklayers, plumbers, plasterers and painters make up

a large proportion of total, lower skilled labourers also take up a significant 13% of the

total. One important feature of the above occupations is that they are flexible between

residential construction and non-residential construction (although to a lesser extent for

civil engineering projects).

38

Workers could shift betweensub-sectors

C O N S T R U C T I V E T H I N K I N G

Construction related jobs Q1 2006Employed ('000) % of Total 5-year growth

Electricians, electrical maintenance fitters 29.7 13% 38%

Other building & civil engineering labourers 28.6 13% 18%

Builders, building contractors 19.7 9% 55%

Production & works managers 18.9 9% 47%

Bricklayers, masons 15.6 7% 36%

Plumbers, heating & related trades 15.2 7% 43%

Plasterers 14.2 6% 75%

Painters & decorators 11.5 5% 15%

Civil/mining engineers 10.6 5% 41%

Roofers, slaters, tilers, sheeters, cladders 6.8 3% 66%

Construction and related workers 6.3 3% 0%

Building managers 5.5 2% -8%

Mechanical engineers 5.3 2% 56%

Other construction trades n.e.c. 5 2% -2%

Electrical engineers 4.1 2% 52%

Electronic engineers 3.4 2% 10%

Floorers, floor coverers, carpet fitters, tilers 3.4 2% 100%

Scaffolders, riggers, steeplejacks 2.6 1% 53%

Building, mining and other surveyors 2 1% 11%

Design & development engineers 1.9 1% 46%

Architectural, town planning technicians 1.6 1% 33%

Planning & quality control engineers 1.4 1% -26%

Mates in Building Trade 1.4 1% -36%

Property & estate managers & proprietors 1.3 1% -28%

Glaziers 1.3 1% 160%

Pipe layers/pipe jointers 1.1 0% 38%

Crane drivers 1 0% -29%

Paviors & kerb layers 0.6 0% 20%

Building & civil engineering technicians 0.4 0% -20%

Total 220.4 100% 31%

Source: CSO Note: Not all construction related employment is included in this table

39

CONSTRUCTION COST INFLATION

While we have illustrated the house price inflation that has been evident across the

market over the past number of years, we also need to look at what have been the trends

in buildings costs over the period.

The measure of price or cost changes in the construction sector is a very difficult subject

to quantify with any degree of certainty. Indeed, the construction industry is probably

unique in the complexity and variablility of its output as noted by the DoELG. Furthermore,

the construction costs of seemingly identical buildings or roads can vary quite

considerably due to such factors such as ground or site conditions for example.

Nevertheless, there are a number of indexes which serve to provide tangible estimates

on inflation in building and construction materials. The first of these is a sub-index of the

Wholesale Price Index (WPI) which is compiled by the CSO. This index measures

general price trends for building and construction materials. It includes various items

required in the building process such as ‘Stone sand and gravel’ ‘Concrete, bricks and

blocks’, as well as other materials required in the building process such as steel and

timber. According to this index, building costs were surprisingly subdued over the period

1996-1999, despite the buoyancy of construction activity at that time. The first signs of

pressure in building costs emerged at the beginning of the decade, when in 2000 and

2001 average inflation stood at approximately 5% per annum.

Growth in costs then proceeded to fall until 2003, a reflection of the ease with which

increased capacity was brought on stream. However there was a rapid acceleration in

costs between 2004 and 2005, driven mainly by a surge in the price of steel. Over the 12

months to December 2004, structural steel prices rose over 60%, due to increasing

demand from China. More recently, building and construction materials costs are on the

increase once again according to the index after an easing in the second half of 2005.

Stone sand and gravel and concrete bricks and blocks have accounted for this latest

increase. So far 2006 has seen consistent rises in construction costs, which are currently

running at 8.7% yoy for 2006 Q2.

C O N S T R U C T I V E T H I N K I N G

Constuction costs on the up once again

0%

2%

4%

6%

8%

10%

12%

14%

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

yo

y

Source: CSO

There is also the National House Building Cost index compiled by the Department of the

Environment. It includes only labour and material costs, which make up 65% of the total

price of a house. It excludes items such as overheads, profit, interest charges and land

development etc. This index was modified in October 2000 to include changes in

payment structures following a review of rates of pay and grading structures for the

Construction Industry that came about as a result of the Programme for Prosperity and

Fairness (PPF). The trends according to this index can be seen below with 2001

recording the highest rate of house building inflation, a peak in which reached 14.5%. It

was 2003 before cost increases moderated to more sustainable levels. Currently, by this

index, housbuilding costs increased by 2.3% yoy in the most recent quarter (2006 Q2).

40

C O N S T R U C T I V E T H I N K I N G

National house build inflation

0%

2%

4%

6%

8%

10%

12%

14%

16%

1991 1993 1995 1997 1999 2001 2003 2005

% in

cre

ase

house build inflationSource: DoELG

41

HOUSING DEMAND

As we have illustrated, the outlook for the construction industry, and indeed the economy

as a whole, has become increasingly dependent on the housing market. Housing output

now represents an unprecedented 15% of output in the Irish economy, which compares

to only 6% in the rest of Europe. Therefore, a detailed analysis of trends and possible

future output in this sector is critical in forecasting the course of the economy over the

next decade. Of course, expected supply will depend on a number of, sometimes volatile,

factors over the next number of years. The outlook for interest rates, which, of course, is

outside domestic policy control, will be an important short-term influence on the demand

for property in the country. On this front, we think that interest rate increases will prove to

be modest going forward with rates peaking at 3.75%, providing support for the view that

a hard landing will not come about in the housign market. However, in this section we look

at the longer-term influences of housing demand. The key fundamental influences are:

• Population dynamics

• Household size

• Replacement activity

• Second/Vacant homes

Population dynamics

Ireland’s demographic history has been, to say the least, volatile. For the majority of the

20th century, the population was in a steady decline; by 1970, the population had fallen

by 7% relative to where it stood in 1901, and by over 50% relative to the 1841 level.

Population growth started to pick up in the 1970s before falling in the latter half of the next

decade. However, the final decade of the century saw extraordinary growth in an

historical context (see chart below), due to a combination of domestic demographic

factors and strong immigration flows. Population growth has been especially strong in

recent years, with the recent preliminary Census data highlighting this fact. The Irish

population reached 4.2m in April of 2006, representing an 8.1% increase on the Census

carried out four years earlier. The 2.0% average annual increase in the population is

some four times greater than that experienced in the rest of Europe.

Housing constructionrepresents 15% of output in

the Irish economy

Irish demographic history hasbeen volatile

C O N S T R U C T I V E T H I N K I N G

Population Growth in Ireland v's EU-15

0%

1%

1%

2%

2%

3%

3%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

An

nu

al G

row

th R

ate

EU-15 IrelandSource: Eurostat, Goodbody estimates

Population growth in Ireland

accelerating

Immigration accounting for more than half of the increaseImportantly, migration accounted for almost 60% of the growth in the population in the

2002-2006 period. As recently as 1995, migration was making a negative contribution to

population growth in Ireland. However, in the four years from 2002–2006, net immigration

amounted to over 186,000 or 46,500 per annum. Although a natural population increase

of 0.8% per annum would still mean that the Irish population was growing faster than its

counterparts in the rest of the European Union, it is clear that immigration has become

the key driver of population growth. This, we believe, is set to remain a feature going

forward.

Population dynamics increasingly dependent on the migrationoutlookThe cyclical nature of immigration creates difficulties in forecasting the sustainable scale

of population growth going forward. In particular, calculation of housing demand becomes

an increasingly onerous task. For that reason, we have presented a number of different

scenarios for future population trends, which are based on different scenarios for net

migration.

These assumptions make crucial differences to the future trajectory of the population in

the next decade. While it is possible to construct population forecasts beyond a ten-year

time horizon, the exercise is largely irrelevant due to the volatility of immigration flows. In

any case, it is not necessary for our purposes of looking at the prospects for the

construction industry into the medium-term. We have detailed the net immigration

assumptions in the table below, including details on the age breakdown of immigrants.

These age profiles have been extrapolated from the breakdown of the migration data for

2005 from the CSO.

42

Immigration is now the keydriver of population growth

We have presented a numberof different scenarios for future

population trends

C O N S T R U C T I V E T H I N K I N G

Different migration assumptionsHigh Medium Low

2006-2011 2011-2016 2006-2011 2011-2016 2006-2011 2011-2016

0-24 23 17 17 13 10 7

25-44 40 28 28 23 17 11

45-64 6 4 4 3 3 2

65+ 1 1 1 1 0 0

Total 70 50 50 40 30 20

Components of population change

-60

-40

-20

0

20

40

60

80

100

120

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

'00

0

Source: CSO

Net Migration

Population

Change

Natural

increase

43

Baseline scenario assumes net immigration of 50,000 per annumOur medium/baseline scenario assumes that net immigration averages 50,000 per

annum in the years from 2006-2011. While this assumption seems high relative to

historical precedence in Ireland, recent trends suggest that such a figure could be

sustainable. The accession of ten new EU member states in May 2004 has seen a mass

influx of migrants from Eastern Europe. CSO data show that net immigration reached

70,000 in the year to April 2006. However, data from the Department of the Environment

and Local Government reveal that there were more than 120,000 PPS numbers issued

to immigrants from the ten accession states alone in that same time period. Although the

difference may possibly be explained by immigrants returning home after a short stay,

there is also a possibility of undercounting in the population data. Furthermore, with

Romania and Bulgaria set to join the EU in 2007, the recent experience suggests that

there is an initial large wave of emigration to countries with the most favourable

employment prospects (although work restrictions may be in place for these countries).

Population to increase by 20% by 2016Under our core scenario, the population is expected to increase by 2% per annum up to

2011, before population growth slows to 1.6% in the following five years. Under this

scenario, the population of Ireland increases steadily and reaches just over 5 million by

2016. This represents a 20% increase on the 2006 Census estimate of 4.2m.

More significantly for our analysis of sustainable housing demand is the change in the

population of the prime house buying age cohorts. The most important segment of the

population in this regard is the 25-44 age group. The number of people in this age group

is forecast to increase by a cumulative 260,000 people over the next ten years (including

a 170,000 increase in the 2006-2011 period). This translates into a 20% increase on the

2006 level. In the table on the next page, we give details on the change in the population

using the different migration assumptions.

It is clear, therefore, that demographic trends continue to be positive for overall growth in

the Irish economy. However, further analysis of micro-economic trends is necessary to

determine the long-term trend for housing demand and thus output in the residential

house-building sector.

120,000 PPS numbers havebeen issued to immigrants

from Accession states sinceMay 2004

Population is set to reach 5million by 2016

20% increase in prime house-buying age cohort in next

decade

C O N S T R U C T I V E T H I N K I N G

3500

4000

4500

5000

5500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

'000

Baseline No migration High Low

Future population growth increasingly reliant

on migration flows

Source: Goodbody estimates

640K

Household sizesAs well as the population growth, the rate of household formation depends importantly on

their average size. In this regard, Ireland has consistently had a larger household size

than the rest of Europe. According to the 2002 Census, Ireland’s household size (i.e.

population divided by the number of private households) stood at 2.94. This is

significantly ahead of other countries around Europe, with the EU average standing at 2.4

(see chart on next page).

While the household size in Ireland is significantly larger than of the rest of Europe it has

fallen progessively in the past few decades. The table below illustrates this very trend. It

illustrates that household sizes have fallen in each census period since the 1960s. While

we do not have full details on the Census carried out earlier in the year just yet, there is

reason to believe that this trend has continued into the most recent period, and we

estimate that the average household size now stands at 2.8.

44

Ireland has a larger householdsize than the rest of Europe...

...although the size hasprogressively fallen in the past

few decades

C O N S T R U C T I V E T H I N K I N G

Private households by size 1966 - 2002

One Two Three Four Five

Six or

more Total

Average size

of household

1966 89.0 139.5 114.4 97.1 79.3 168.0 687.3 4.01

1971 103.6 150.4 116.6 102.8 84.3 172.8 730.5 3.93

1979 145.0 179.0 133.0 133.3 109.1 177.2 876.6 3.72

1981 155.7 184.1 136.4 140.3 117.2 177.0 910.7 3.66

1986 180.8 198.0 144.8 156.7 127.8 168.1 976.2 3.53

1991 207.6 218.5 157.8 170.9 130.9 143.4 1,029.1 3.34

1996 241.8 256.8 179.8 191.8 133.0 120.0 1,123.2 3.14

2002 277.6 333.7 227.8 223.2 134.9 90.8 1,288.0 2.94

Source: CSO

Number of persons in household ('000)

'000 0-24 25-44 45-64 65+ Total

2006 estimate 1498 1271 972 494 4235

High

2011 1,588 1,501 1,104 562 4,756

2016 1,685 1,614 1,216 664 5,179

% increase from

2006 level 13% 27% 25% 34% 22%

Medium / Core 187 344 243 170 944

2011 1,555 1,444 1,096 561 4,656

2016 1,636 1,529 1,203 662 5,029

% increase from

2006 level 9% 20% 24% 34% 19%

Low 138 258 231 168 794

2011 1,522 1,387 1,087 559 4,556

2016 1,569 1,415 1,185 659 4,829

% increase from

2006 level 5% 11% 22% 33% 14%

No migration

2011 1,472 1,302 1,074 557 4,406

2016 1,486 1,273 1,164 655 4,579

% increase from

2006 level -1% 0% 20% 33% 8%

Source: Goodbody estimates

End-period population forecasts by age cohort

(under alternative migration assumptions)

45

Structural and social phenomena at playAverage household sizes are a function of both structural and social fundamentals.

Structurally, the population of Ireland is young in European terms. In Ireland, there is 36%

of the population below the age of 25, relative to only 30% in Europe as a whole.

Therefore, a large number of people have simply been entering the age groups which are

most common with becoming heads of households and thus household sizes have been

falling. For this reason, a high household size can be attributed in part to the demographic

structure of a country. As the country matures, the household size should naturally fall as

people age and set up homes on their own or with a partner. This is a relationship which

we expect to continue in Ireland.

Divorce rates are likely to converge somewhatThe incidence of divorces can also play a role in determining household sizes in a

country. The higher the number of divorces, ceteris paribas, the more homes are needed

to accomodate these divorcees. Divorce was only legalised in Ireland in 1997 and so is

a very recent phenomenon.

Nevertheless, the evolution of social structures in the country over the coming years is

likely to see an increase in the number of divorces. Relative to the rest of Europe, divorce

rates remain exceptionally low. The latest data shows that 13% of marriages end in

divorce in Ireland. This compares to other countries in Europe such as Belgium (75%),

Sweden (54%) and the UK (51%), which have exceptionally high rates of divorce.

In terms of actual numbers, there were 3,305 divorces last year in Ireland, or 0.8 per 1000

inhabitants. This compares to 2.8 in the UK and 2.0 in the EU-15 as a whole. These are

illustrated in the chart on the next page. As divorce rates increase, this will further

facilitate the expected fall in the average household size in the coming years.

A high household size can beattributed, in part, to thedemographic structure...

...while divorces also play arole

C O N S T R U C T I V E T H I N K I N G

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

Ireland

Polan

d

Slova

kia

Spa

in

Por

tuga

l

Hun

gary

Italy

EU a

vera

ge

Belgium

Aus

tria

Franc

eUK

Net

herla

nds

Nor

way

Switz

erland

Cze

ch

Finland

Den

mar

k

Ger

man

y

Swed

en

Ho

use

ho

lds/P

op

.

Ireland still has the highest household size in Europe - 2005

Source: Euroconstruct 2006

Headship rates are more relevantTaking into account the effect that the demographic composition of the country has on the

make-up of household size, it is probably more relevant to look at age-specific headship

rates. On this measure there has been little change in what are called headship rates (i.e.

the percentage of a particular age cohort which are heads of households). This can be

seen on the table below. We expect headship rates to increase (or, alternatively,

household sizes to decrease) over the medium-term and eventually converge with our

European peers. However, given the slow nature of the reduction in average household

size (which, to some degree, is being prolonged by the high cost of housing), it would be

unrealistic to think that a rapid change may be forthcoming.

46

Headship rates shouldincrease over next few years...

...although changes have beenmarginal in recent past

C O N S T R U C T I V E T H I N K I N G

Age-Specific Headship Levels1986 1991 1996 2002

0-24 2.5% 2.4% 2.9% 4.2%

25-29 32.1% 29.8% 29.3% 31.2%

30-34 42.9% 42.8% 42.4% 42.9%

35-39 46.6% 47.6% 48.2% 47.8%

40-44 49.0% 49.6% 51.0% 50.8%

Total: 25-44 42.0% 42.2% 42.6% 42.8%

45-49 50.7% 51.8% 52.5% 52.4%

50-54 52.9% 53.5% 54.5% 53.4%

55-59 55.3% 56.0% 56.2% 55.2%

60-64 58.1% 59.1% 59.1% 56.9%

Total: 45-64 54.1% 54.8% 55.1% 54.2%

65+ 59.2% 61.1% 62.6% 61.9%

Total 27.6% 29.2% 31.0% 32.9%

Source: Census DataNote: Table uses total rather than private households only as in calculation for household size

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Belgium

Den

mar

kUK

Ger

man

y

Finland

Aus

tria

Luxe

mbo

urg

Swed

en

Por

tuga

l

Franc

e*

EU 1

5*

Net

herla

nds

Eur

o-ar

ea*

Spa

in

Gre

ece

Ireland

Italy*

per

1000 p

op

Divorce levels still low in Ireland - Divorces per

1000 of population 2004

Source: Eurostat Note: *denotes 2003 data

47

Household formation versus Housing completionsThe aforementioned factors, i.e. household formation and headship change, should, in

theory, account for the bulk of the growth in house completions. However, growth in the

number of houses has far outstripped that of household formation and headship change

for a consistent period of time.

We have analysed Census data back to 1961 which highlights this very trend. Growth in

housing units has exceeded that of household formation for decades. For example, in the

1986-1991 period the number of households grew by 52,780, whereas house

completions over roughly the same period (as the Census is conducted in April we have

used the previous year’s completions data as the cut-off) amounted to 94,391. The rest

of the completions are therefore attributable to either second, vacant or replacement

(SVR) units.

Significant proportion accounted for by either Second, Vacant orReplacement (SVR) homes SVR has accounted for between 21% and 75% of completions since 1961. Given our

estimation that the average household size in Ireland dropped to 2.8 in the 2002-2006

time-frame, we suggest that there were 224,000 households formed over the period,

representing an annual average increase of 56,000. However, there were 71,000 p.a.

residential units completed over the same period. So, we estimate that a total of some

60,000 units built over the last four years cannot be attributed to fundamental growth in

household formation. Added to the 100,000 units in the previous Census period from

1996-2002, this gives an estimate of 160,000 SVR units in the past decade. In attempting

to gauge future output trends in the residential construction industry, it is important to get

a grasp on this very important aspect of demand. So how does one calculate the second,

vacant and replacement aspects of housing demand? This is the topic of the next section

of the report.

House completions growth hasfar outstripped that ofhousehold formation

60,000 units built over the lastfour years cannot be attributed

to growth in householdformation

C O N S T R U C T I V E T H I N K I N G

0%

10%

20%

30%

40%

50%

60%

70%

80%

1961-

1966

1966-

1971

1971-

1981

1981-

1986

1986-

1991

1991-

1996

1996-

2002

2002-

2006 est

% o

f to

tal com

ple

tions

0

10

20

30

40

50

60

70

80

'000

Annual completions (RHS) Annual household growth (RHS) SVR as a % of total completions

House completions have consistently outpaced

household growth

Replacement homesReplacement homes are the most stable and predictable element of the trio of demand

we attempt to analyse here. Euroconstruct uses a replacement (or obselescence rate) of

0.6% of the housing stock, meaning that at current housing stock levels, replacement

units would account for approximately 10,000 units per year.

Given that the Irish housing stock is extremely young relative to the rest of Europe, this

rate of replacement does seem quite high. Therefore, we have decided to use a

somewhat lower rate of replacement in our forecasts. As a result, we expect that an

estimated 9,000 completions per annum will stem from this source in the 2006-2011

period, before increasing to 10,500 in the 2011-2016 period.

The effect of second/holiday homesAffluence has been a relatively recent phenomenon for most of the Irish population. A

manifestation of this affluence can be found in the the significant increase in those who

own second/holiday homes. Anecdotal evidence suggests that there has been a marked

increase in the number of households who have purchased these second homes over the

past few years in particular, either in Ireland or abroad. The use of these homes varies.

In some cases, the homes are for rental purposes, whereby the residential unit is

eventually used to form another household in the form of the renters of the property. In

this case it would appear as an additional household in the Census data.

However, in other cases, the home may be used simply for holiday purposes as a second

residence of one particular household. In this instance, the house will not get picked up

as an additional household in the Census data. In the Census collection process, the

enumerator then marks the property as vacant. The difficulty for the enumerator then lies

in whether this property is vacant due to the fact that a landlord cannot find residents for

the property, the property is in the process of being sold or the owner has made an active

decision to leave the property vacant for some part of the year and use it sporadically as

a second residence (or perhaps idle for other reasons). Given that the growth in house

completions over the past few years has exceeded the rate of household formation by a

large margin over the past few years, it is important to get a handle on this aspect of

demand.

Calculation of second homes difficultUnfortunately, there is no direct question in the Census that reveals the number of

households who own second homes. However, there is a question on the topic contained

in the Household Budget Survey (HBS), although it does not refer to the location of that

home. The latest HBS data refer to 1999/2000 (the 2004/2005 survey is not due for

release until 2007).

In the chart on the next page we detail the trend in the ownership of second homes from

the past three surveys. The data reveal that only 3.4% of households owned a second

home at the time of the 1999/2000 survey. This represented an increase from 2.1% in the

1994/1995 period, which, in turn, had remained relatively unchanged from the previous

survey. We also chart on the next page how many homes this would translate into based

on the Census data of the most closely-matched period.

48

Replacement units account forc.10,000 per year

Marked increase in thepurchase of second homes

3.4% of households ownedsecond home in 1999/2000

C O N S T R U C T I V E T H I N K I N G

49

Tentative estimate of 40,000 holiday homes in 2002According to the HBS response, there would have been almost 40,000 second homes

which belonged to Irish households at the time of the survey. Interestingly, this is precisely

the amount of houses which are categorised as holiday homes by the ESRI (Spring 2005

Quarterly Economic Commentary). It is not possible to calculate the number of holiday

homes located in the state which are owned by foreign buyers. It is, however, likely to be

significant in some parts of the country, an issue we will discuss later.

The ESRI’s analysis of the growth in the number of vacant dwellings is based on CSO

data from the previous three Censuses. The main findings of the query into the stock of

dwellings is found on the following table.

A larger proportion may be holiday homesHowever, the ESRI does question the accuracy of the details contained in the table. In

particular, it would have been difficult for the enumerator to distinguish between holiday

homes and “other” homes simply by viewing the property. The ESRI contends, therefore,

that a significant number of holiday homes were classified as “other” homes by the

enumerator.

Not possible to calculate thenumber of holiday homes

owned by foreigners

Calculation difficulties present

C O N S T R U C T I V E T H I N K I N G

Estimates of second homes

0

1

1

2

2

3

3

4

4

1991 1996 2002

% o

wn

ing

a 2

nd

ho

me

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

un

its

No. 2nd homes % of Households (LHS)Source: CSO Note: data refers to % of households owning a second home statistic in the Household Budget Survey

Household Budget Survey results1987 1994-1995 1999-2000

Own a second home 2.2 2.1 3.4

Census breakdown of the stock of dwellings

1991

Cumulative

growth 1996

Cumulative

growth 2002

Private households 1,029,084 9.5% 1,127,318 14.2% 1,287,958

% of total 88.7% 89.5% 88.3%Habitable vacant dwellings 131,165 0.4% 131,630 29.3% 170,154

% of total 11.3% 10.5% 11.7%Of which:temporarily absent 26,023 1.4% 26,380 1.3% 26,736

% of total 2.2% 2.1% 1.8%Holiday homes 14,799 73.5% 25,671 53.4% 39,383

% of total 1.3% 2.0% 2.7%Other houses/flats 90,343 -11.9% 79,579 30.7% 104,035

% of total 7.8% 6.3% 7.1%Holiday + Other 105,142 0.1% 105,250 36.3% 143,418

% of total 9.1% 8.4% 9.8%Total habitable dwellings 1,160,249 8.5% 1,258,948 15.8% 1,458,112

Total uninhabitable 25,120 80.5% 45,349 2.7% 46,555

Of which:Under construction 4,497 220.9% 14,431 94.3% 28,033

Uninhabitable 20,623 49.9% 30,918 -40.1% 18,522

Source: ESRI, CSO

Evidence of holiday home demandOne way of gauging the use of these excess homes is to look at the geographical location

of them. Below, we detail completions and population growth over the past decade (we

don’t have official data on the number of households from Census 2006 as yet to conduct

this comparison). As can be seen, there seems to be a high proportion of homes built

relative to the growth in the population in counties along the Atlantic Coast, such as Sligo,

Mayo, Donegal and Kerry. It can be generally assumed that a large proportion of these

are used for holiday purposes.

For example, in Sligo, there were 1.7 times more residential units built over the ten year

period 1996-2005 than the growth in the population. At the other end of the extreme, the

number of units built in Meath and Kildare only amounted to half the growth in the

population over the same time period. Roughly speaking, those counties at the bottom of

the table below are those which have experienced the most rapid population growth over

the past decade, while those at the top of the table are largely sparsely populated areas

with a large incidence of holiday homes. However, some of the counties at the top of this

table (Longford, Leitrim for example) would not be widely considered as locations for

holiday homes. We believe that a certain proportion of these homes were, in fact, bought

for investment purposes under some tax-incentive scheme (rural renewal scheme for

example) and are being left idle by the investor, although it is difficult to quantify the

number of homes built for this reason.

For further evidence of such an incidence of holiday homes, we can also look again at

the recent paper from the ESRI on the topic. The following table reveals the percentage

of habitable dwellings that were vacant on Census night in 1991, 1996 and 2002. The

table also reports the proportion of the change in the number of residential units that were

vacant on the census night in 2002.

50

A high proportion of homesbuilt, relative to growth in thepopulation, along the Atlantic

coast..

...as can be seen in this table

C O N S T R U C T I V E T H I N K I N G

House completions relative to population growth1996-2001 2002-2005 1996-2005

1 Leitrim 3.5 1 Sligo 1.6 1 Sligo 1.7

2 Longford 2.4 2 Kerry 1.5 2 Leitrim 1.5

3 Monaghan 2.0 3 Mayo 1.3 3 Mayo 1.5

4 Sligo 1.9 4 Limerick 1.3 4 Donegal 1.5

5 Mayo 1.7 5 Donegal 1.3 5 Kerry 1.4

6 Donegal 1.7 6 Waterford 1.3 6 Longford 1.3

7 Kerry 1.4 7 Leitrim 1.0 7 Monaghan 1.2

8 Tipperary 1.3 8 Tipperary 1.0 8 Limerick 1.2

9 Roscommon 1.2 9 Longford 1.0 9 Waterford 1.2

10 Limerick 1.1 10 Dublin 1.0 10 Tipperary 1.1

11 Cork 1.1 11 Louth 1.0 11 Cork 1.0

12 Waterford 1.0 12 Clare 1.0 12 Roscommon 0.9

13 Cavan 1.0 13 Monaghan 0.9 13 Dublin 0.9

14 Clare 0.9 14 Cork 0.9 14 Louth 0.9

15 Dublin 0.9 15 Carlow 0.9 15 Clare 0.9

16 Louth 0.9 16 Westmeath 0.9 16 Carlow 0.9

17 Carlow 0.9 17 Galway 0.9 17 Cavan 0.9

18 Wexford 0.9 18 Roscommon 0.8 18 Galway 0.9

19 Galway 0.9 19 Cavan 0.8 19 Westmeath 0.8

20 Kilkenny 0.9 20 Wexford 0.8 20 Wexford 0.8

21 Offaly 0.8 21 Kilkenny 0.7 21 Kilkenny 0.8

22 Westmeath 0.8 22 Wicklow 0.7 22 Offaly 0.8

23 Wicklow 0.7 23 Offaly 0.7 23 Wicklow 0.7

24 Laois 0.6 24 Laois 0.6 24 Laois 0.6

25 Kildare 0.5 25 Kildare 0.6 25 Kildare 0.5

26 Meath 0.4 26 Meath 0.5 26 Meath 0.5

Source: DoELG, CSO

51

Interestingly, almost 20% of the increase in dwellings over the 1996-2002 were vacant on

the Census night, according to the paper. Furthermore, in some counties such as Leitrim

(47.4%) and Donegal (46.8%), the proportion that were vacant on Census night

approached the 50% mark. In the author’s opinion, this suggests that a substantial

number of dwellings are intended as holiday homes in scenic locations. However, it also

may reflect some undercounting of households in the Census.

Second-homes estimated at between 12,000 - 15,000 units p.a. inpast few yearsThe bottom line here is that although the number of second homes is difficult to quantify,

there is clear evidence that the growing affluence of the Irish population is leading to a

large increase in the take-up of holiday homes in the country. A reasonable estimate of

such demand may be put at between 12,000-15000 per annum over recent years.

Likely to be reflective ofholiday homes in scenic

locations

Between 12,000-15,000 unitsbuilt per year are likely to

holiday homes

C O N S T R U C T I V E T H I N K I N G

Regional Breakdown of habitable vacant or second dwellingsChange in vacant as a % of

change in total

1991 1996 2002 1996-2002

Carlow 8.5 7.9 9.3 15.3

Dublin Co. Borough 9.5 8.8 8.5 0.5

Dublin - Belgard 4.2 3.8 4.2 6.7

Dublin - Fingal 6.1 5.7 7.1 11.7

Dun Laoghaire - Rathdown 6.8 5.9 7.1 29.4

Kildare 7.4 5.9 7.8 14

Kilkenny 9.5 8.2 8.2 8.6

Laois 10.5 9.5 10.4 14.8

Longford 15.9 12.6 14.2 26.9

Louth 8.7 8 7.6 6.5

Meath 8.8 8.2 10.4 20.6

Offaly 9.3 8.7 9.4 13.8

Westmeath 11.8 10.7 11.7 16.1

Wexford 13.1 11.6 16.9 35.4

Wicklow 11.5 10.3 9.6 4.8

Clare 16.5 15 18.3 34.7

Cork Co. Borough 10 8.2 8.1 4.4

Cork 13.9 13.1 13.7 16.7

Kerry 18.9 18.9 20.1 30.2

Limerick Co. Borough 8.7 9.1 7.9 -4.9

Limerick 11.3 10.3 10.9 14.5

Tipperary N 11.8 10.4 12 22.2

Tipperary S 10.5 9.3 9.1 7.5

Waterford Co. Borough 8.8 7.2 8.8 20

Waterford 13.6 13.5 16.3 30.7

Galway Co. Borough 10.7 8.9 9.8 13.5

Galway 14.7 14.3 16.6 28.3

Leitrim 19.3 20.3 23.5 47.4

Mayo 16.8 17.2 19.8 34.7

Roscommon 14.4 13.9 17.5 42.2

Sligo 15.2 14.5 15.9 26.5

Cavan 13.1 12.2 13.6 23.4

Donegal 17.7 17 22.3 46.8

Monaghan 10.5 10.2 9.4 0.1

Total 11.3 10.5 11.7 19.3

Source: ESRI

Vacant as a % of habitable

Future demand for second homesEven more so than purchasing homes for primary residency purposes, demand for

second-homes depends on the state of economic environment. Strong economic growth,

fuelled by robust gains in employment and income has ensured that confidence has

remained at a high level in the past few years. Another factor in this demand for second-

homes is the the build-up of equity in the houses. We estimate that the average loan-to-

value for the entire housing stock will be only 22% by the end of this year. This relatively

low LTV ratio has allowed homeowners to extract equity to invest in other homes, either

in Ireland or abroad. As house price growth slows over the coming years, this may lead

to a smaller number of holiday homes being purchased in the country. Nevertheless, we

estimate that second homes may account for up to 10,000 homes on average over the

coming years.

Analysis of second/vacant component of housing stockAt the time of the last Census, there were 1.458m housing units, while 1.288m

households were in existence. Therefore, some 170,000 units, or 11.7% of habitable

dwellings in the state were vacant on Census night in 2002. Tentative estimates released

by the CSO indicate that the proportion of habitable dwellings that were vacant on the

Census night of 2006 exceeded 16%.

How does Ireland compare with the rest of Europe?The chart below illustrates the percentage of the housing stock that is either second or

vacant in eleven European countries (data which is available from Euroconstruct),

including Ireland. The data reveal that second or vacant homes account for an average

of 18% of the housing stock in Europe as a whole (unweighted). In some countries, such

as Spain and Portugal, the percentage is significantly higher than that. Obviously,

countries such as Spain and Portugal have a high incidence of holiday homes, due in

large part to strong demand from other areas in Europe.

Euroconstruct reports that holiday homes account for 16% and 19% of the housing stock

in Spain and Portugal, respectively. While it would be unrealistic to think that Ireland

would get to these levels of holiday homes, the impressive growth in incomes over the

past number of years have undoubtedly facilitated an increased take-up of

holiday/second homes.

52

Wealth accumulation and abuild-up of equity likely to

impact demand for secondhomes

Possibly 16% of homes werevacant on Census night of

2006

Second or vacant homesaccount for an average of 18%of the housing stock in Europe

C O N S T R U C T I V E T H I N K I N G

0%

5%

10%

15%

20%

25%

30%

35%

Italy

Por

tuga

l

Spa

in

EU a

vera

ge

Franc

e

Switz

erland

Aus

tria

Ireland

Den

mar

k

Ger

man

y

Belgium

Finland

% o

f to

tal h

ou

sin

g s

tock

Source: Euroconstruct

Second/vacant homes as a % of total housing stock

53

7% of the EU housing stock is vacantEuroconstruct also report that vacant homes (i.e. temporarily absent or otherwise)

account for a further 7% of the housing stock in these same countries. This may be as a

result of rental accomodation that is temporarily absent, the person being unavailable or

out of the country on Census night or a habitable home which is currently in the process

of being sold. The bottom line here is that the number of homes in a country can exceed

the needs of the population itself by a quite significant margin in some cases. We,

therefore, must include this in our analysis of future supply levels.

7% of the EU housing stock isvacant

C O N S T R U C T I V E T H I N K I N G

0%

5%

10%

15%

20%

25%

Italy

Por

tuga

l

Spa

in

Switz

erland

Ave

rage

Franc

e

Ger

man

y

Den

mar

k

Finland

Aus

tria

Ireland

Belgium

% o

f h

ou

sin

g s

tock

Second Vacant

Breakdown of second and vacant dwellings

Source: Euroconstruct

Forecasting demand After going through the different aspects of demand, we can now piece them all together

to come up with an estimate of demand over the longer term. Our analysis suggest that

demand for homes amounts to an average of c.68,000 p.a. over the 2006-2011 period.

Therefore, with completions reaching c.86,000 units last year, supply is now running

significantly ahead of sustainable demand.

The breakdown of these estimates is listed in the following table:

It must be noted, however, that these estimates are very sensitive to the choice of

migration assumptions, and more importantly, average household size. We assume that

household sizes fall towards the European average over the next decade (from 2.8 in

2006 to 2.6 in 2011 and 2.5 in 2016). However, the speed of this adjustment is a matter

of debate. We must argue, that with household sizes still high relative to the rest of

Europe there is a level of pent-up demand still in the system. It may be the case that high

prices are restricting some of these people from buying property. Therefore, if prices were

to fall, these people may step into the market quicker, acting as a floor for any house price

declines.

With regards to the immigration assumptions which were detailed earlier, we detail below

the effect that these have on housing demand. Even if net immigration was to be

maintained at 70,000 per annum up to 2011, we estimate that fundamental demand

would amount to only 74,000 units per annum. It is clear, therefore, that housing supply

will have to slow over the coming years.

54

Supply is running ahead ofsustainable demand...

...but there is still a level ofpent-up demand in the system

Housing supply will have toslow over the coming years

C O N S T R U C T I V E T H I N K I N G

Annual Housing Demand 2002-20162002-2006 2006-2011 2011-2016

Population/Migration 46,903 48,903 44,797

Second/vacant homes 16,511 10,000 10,000

Replacement 9,000 9,000 10,500

Total 72,414 67,903 65,297

Source: Goodbody estimates

2002-2006 2006-2011 2011-2016

No MigrationPopulation/Migration 46,903 28,988 27,632

Second homes 16,511 10,000 10,000

Replacement 9,000 9,000 10,500

Total 72,414 47,988 48,132

2002-2006 2006-2011 2011-2016

High MigrationPopulation/Migration 46,903 54,733 47,975

Second homes 16,511 10,000 10,000

Replacement 9,000 9,000 10,500

Total 72,414 73,733 68,475

2002-2006 2006-2011 2011-2016

Low MigrationPopulation/Migration 46,903 40,022 35,802

Second homes 16,511 10,000 10,000

Replacement 9,000 9,000 10,500

Total 72,414 59,022 56,302

Source: Goodbody estimates

Annual housing demand under different scenarios

for migration flows

55

Short-term supply indicatorsThese longer-term forecasts can be calculated by looking at more fundamental elements

of housing demand. However, the short-term outlook for housing supply is, in fact, very

strong and showing signs of further growth. Here, we detail the short-term supply

indicators that we use for forecasting the outlook for housing in the next two years.

In terms of short-term indicators of supply, there are two main sources of information that

have a sufficient history for forecasting purposes. These are:

1. Planning permissions

2. Housing registrations

Planning permissionsPlanning permissions data show a strong, but somewhat uneven, correlation with

completions over the past seventeen years for which we have data. As can be seen

below, the correlation between the two was very strong for the ten-year period from 1989-

1998. However, this correlation weakened significantly from the middle of 1998, when

planning permissions grew much more strongly than completions over the period. This

discrepancy came about as a result of measures introduced by the government to

increase housing supply. In particular, new planning guidelines on higher housing

densities were introduced to expedite the use of zoned land for construction under the

“Serviced Land Initiatives”.

After the initial surge in planning permissions a slowdown occurred in the middle of 2000,

even though permissions have stayed above completions by a significant manner. The

renewed increase in permissions around 2003 is likely reflective of a re-application for

permissions that had expired (permissions last for five years). Once more, permissions

have grown faster than completions since that time, rendering the planning permissions

data less useful for forecasting future housing supply. Although planning permissions

dipped below completions for the first time since 1998 in Q2 of this year, it must be

remembered that the excess of permissions over completions for the previous three

years does signal building intent. However, it also indicates that completions growth may

have passed its peak around the turn of the year.

Short-term outlook for housingsupply is very strong

Permissions have been greaterthan completions for some

time

C O N S T R U C T I V E T H I N K I N G

Planning permissions versus completions

0

20000

40000

60000

80000

100000

120000

Q4

1989

Q2

1991

Q4

1992

Q2

1994

Q4

1995

Q2

1997

Q4

1998

Q2

2000

Q4

2001

Q2

2003

Q4

2004

Q2

2006

Un

its Strong Historic Correlation

Permissions exceeding Completions

Source: DoELG, CSO

Resurgence likely reflecting resubmissions

Permissions valid for 5 years

Building registrationsDue to the afore-mentioned forecasting difficulties associated with planning permissions

data, housing registrations data have become the indicator of choice for assessing future

completions. Residential units are usually registered with either Homebond or Premier at

the foundation-laying stage of the building process. Since 2004, we estimate that roughly

three-quarters of all completions were registered through either of the two

aforementioned agencies. The recent trend is illustrated in the chart below.

Recently, building registrations have picked up strongly. In August, on a twelve-month

trailing basis, registrations were ahead by 17% yoy, up from only 3% growth at the start

of the year. On a trailing six month basis, registrations grew by 18% yoy in August, while

the 26% growth on the trailing three-month basis reveals the scale of the surge in

registrations over the summer months.

The Department of the Environment and Local Government (DoELG) has pointed out

issues surrounding the completions data for 2005. Completions data in Ireland are based

on the number of new electricity connections. While the official total for the year is said to

be 80,957, it has been noted that there was a backlog of up to 5,000 electricity

connections in 2005, meaning that the total for 2005 could be closer to 86,000. The

Central Statisitcs Office (CSO) has included this adjustment in its calculations of

economic output for the year. The reason we mention it here is that is makes the

estimation of future output somewhat more difficult.

Completions to top 90,000 in 2006 with risks on the upsideStrictly speaking, completions could well approach the 100,000 mark in 2005. However,

we are pencilling in a completion level of 92,000 for 2006, with a modest decline (-4%) to

88,000 now expected in 2007, although we recognise that the risks to this forecast lie

firmly on the upside. For 2008, we expect housing output to begin to reflect underlying

drivers of demand, with output falling to 77,000 in that year.

56

Surge in building registrationsover summer months

We expect 92,000 completionsin 2006

C O N S T R U C T I V E T H I N K I N G

50000

52000

54000

56000

58000

60000

62000

64000

66000

68000

Q1

2003

Q2

2003

Q3

2003

Q4

2003

Q1

2004

Q2

2004

Q3

2004

Q4

2004

Q1

2005

Q2

2005

Q3

2005

Q4

2005

Q1

2006

Q2

2006

un

its

56000

61000

66000

71000

76000

81000

86000

91000

96000

un

its

Completions

(lagged 2 quarters)

Registrations

Registrations point to further growth in house completions

Source: DoELG, Homebond, Premier Data is based on twelve-month totals

57

How will the housing market look in 2011?We talked earlier about the relatively small size of the housing stock per capita in Ireland,

which was some 15% below the European average at the end of last year. While supply

levels continue to exceed the increase in demand on an annual basis, the country is

effectively catching up with the rest of Europe as far as completions are concerned.

Therefore, it is interesting to assess what level the housing stock will reach under different

assumptions for housing completions over the next five years.

Housing stock still some way off European averageIn the analysis below, we assume that the European housing stock grows at an average

pace of 0.8% per annum over the period to 2011, which is a slightly slower pace than the

previous five years. At the same time, we assume that the EU population continues to

grow at 0.4% per annum over the forecast period. Under these assumptions, the housing

stock will reach 475 units per thousand of the population by 2011, from its current level

of 463.

Were housing completions in Ireland to remain at the expected 2006 level of 92,000, the

housing stock would rise from its current level of 411 units to 450 units per 1000 by 2011.

At that stage, the Irish housing stock per capita would still be more than 5% below that of

the EU. The second scenario uses our forecasts for completions in the period. Again,

housing stock levels would remain below that of the EU as a whole. Even under the third

scenario, whereby completions increase to 100,000 per annum in 2007 and 2008, the

stock would remain below the EU average.

Essentially, Ireland remains in a period of catch-up with regards to housing stock levels.

This catch-up is set to continue over the coming years, so oversupply concerns should

not become too much of an issue just yet.

Ireland is still in a catch-upphase ...

...and this is set to continue forsome time yet

C O N S T R U C T I V E T H I N K I N G

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

f

2007

f

2008

f

Un

its

House completions set to peak in 2006

Source: DoELG

The SnapshotThe table below illustrates what we believe the housing market will look like in five years

time. We anticipate that house price inflation will moderate towards the growth in nominal

national income of about 5%-6% over the medium term (we map out our estimates for

house price inflation at the beginning of the report). We have previously detailed our

assumptions on the population and household formation. Combining all of these factors

gives the following for the projections for the housing market in 2011:

58

Still well behind in the housingstock front

A look to 2011

C O N S T R U C T I V E T H I N K I N G

A snapshot of the Irish housing market2006 2011

Population 4,234,900 4,676,839

Persons in private households 4,098,806 4,526,543

Households 1,392,416 1,537,724

Household size 2.8 2.6

Housing stock 1,744,723 2,048,307

Average house price (national) € 311,194 395,199

Outstanding mortgage credit (€m) 124,586 221,282

Source: Goodbody estimates

350

370

390

410

430

450

470

490

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sto

ck p

er

ca

pita

Housing stock still has some way to go to catch

up with rest of Europe

Source: Euroconstruct, Goodbody estimates

4

3

2

1

EU Average

Completions scenarios2006 2007 2008 2009 2010 2011

1 92 92 92 92 92 92

2 92 88 77 72 66 65

3 92 100 100 95 90 90

4 92 75 65 60 60 60

59

OUTLOOK FOR NON-RESIDENTIAL CONSTRUCTION

We have already looked extensively at the issues surrounding the biggest component of

the building industry - the residential sector (which accounted for two-thirds of output in

2005). In this section we look at the outlook for the non-residential construction sector,

which accounts for the remainder of output.

Not overly dependent on non-residential constructionIt is often assumed that the Irish economy is overreliant on the construction sector as a

whole. This is false. While we have discussed already how residential construction has

increased in importance in terms of its contribution to the economy, the dependence on

the non-residential sector is not quite as alarming. In fact, current activity levels in the

sector are not out of kilter with the trends that we have witnessed for the past quarter of

a century.

As a percentage of GNP, we estimate that non-residential construction amounted to 8%

of GNP in 2005, relative to 9% for the period from 1980-2005. Furthermore, the relative

dependence on non-residential construction was larger, both at the turn of the decade,

when it amounted to 9% of GNP, and, more significantly, in the early eighties when non-

construction output amounted to 16% (1981). As a percentage of GNP (excluding

residential construction), non-residential construction has averaged 10% of GNP. But, in

2005, it amounted to 9%, again behind the long-term average. The bottom line here is

that although non-residential construction has grown strongly in the past ten years, its

relative importance to the overall economy has shown little change.

Nevertheless, while declining in importance over recent years, this sector still

represented a third of the total value of the construction industry in 2005. As we pointed

out earlier, non-residential construction has picked up strongly recently, growing by 8% in

real terms in 2005. Non-residential construction is split roughly 68%/32% in favour of

public spending. We look at the prospects for each sector in turn.

No overdependence on non-residential construction...

...which accounted for 8% ofGNP in 2005

The sector represents a thirdof the total value ofconstruction output

C O N S T R U C T I V E T H I N K I N G

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

% o

f G

NP

Dependence on non-residential output is below

the long-term average

Public ExpenditureGiven the longer time-frame and the planning element associated with public capital

expenditure projects, the outlook for this segment of the market is relatively clear. Long-

term infrastructural plans are contained in the National Development Plan. The most

recent plan ran for a seven-year period from 2000-2006 (discussed on page 24). The

Plan for the 2007-2013 period is currently being drawn up and is expected to be

published by the end of this year. The 2000-2006 Plan provided for a total investment of

€51.5bn, though the full cost of the programme will turn out to be substantially more than

this.

Infrastructure stll laggingAs we have pointed out already, capital expenditure has grown at a rapid pace in recent

years. Despite this, a significant infrastructure deficit remains in Ireland. This is mainly

due to the significant under-investment in infrastructure through the 1980s and spending

failing to keep up with the rapid growth in the economy through the 1990s. The end result

of this underinvestment is exhibited in poor road infrastructure, air transport shortfalls etc.

The chart below, taken from the National Competitiveness Council’s (NCC) Annual report,

reveals the extent of this infrastructure deficit relative to other countries around the world.

The data is based on studies carried out by the IMF and OECD. In 2002, Ireland ranked

in 12th position out of a selected twelve in terms of the level of Public Capital Stock.

As a result of this deficit, it is clear that output from publicly funded schemes over the next

few years can remain high. The current government has set a target of an amount

equivalent to 5% of Gross National Product (GNP) per year on capital infrastructure

projects. Given that the medium-term prospects for the economy remain quite bright, we

believe that the economy could grow by up to 7% per annum in nominal terms over the

next ten years. As a result, spending by the government on capital infrastructure projects

should continue to grow by this amount per annum into the medium-term.

On this assumption, and using the Economic and Social Research Institute’s (ESRI)

forecasts for the trajectory of the economy into the medium-term, the following chart

illustrates the expected profile in government spending on capital infrastructure.

60

A significant infrastructuredeficit remains in Ireland...

...as can be seen in theinternational comparisons

Government to spend 5% ofGNP per year on capital

infrastructure projects

C O N S T R U C T I V E T H I N K I N G

0 10 20 30 40 50 60 70 80

Ireland GDP

UK

Ireland GNP

Denmark

Germany

Finland

Italy

Spain

US

France

Switzerland

Netherlands

New Zealand

Source: National Competitiveness Council

Ireland's infrastruture is still underdeveloped -

Public capital stock as a % of GDP 2002

61

Transport projects will play a significant roleA significant plank of these developments will be the transport initiative which was

announced by the Department of Transport in November 2005. The initiative, called

Transport 21, is the Government’s capital investment framework for transport for the

period 2006 to 2015. It details plans for government spending on national roads, public

transport and regional airports over the ten-year time-frame.

Transport 21 essentially comprises of two separate programmes:

• National Programme (€20bn): Develop and enhance the quality of national roads

as well as the public transport network.

• Greater Dublin Area Programme (€14bn): The key goal is to transform the public

transport system around the capital and upgrade the M50 ring road around the city.

Projects such as the development of a metro system which links parts of the city with

the airport are included in this programme.

In terms of cost, the Department of Transport has mapped out the expected profile of the

schemes. It is expected that the cost will run to €34.3bn over the ten-year time-frame. The

expected profile of spending is listed in the table on the next page. The majority (76%)

of the funds will come from the Exchequer, while the rest will be Public Private

Partnerships. The breakdown between the money to be invested in the national roads

plan (€18.5bn) and the public transport initiatives (€15.8bn) is also pretty evenly split.

Given the prudent management of the public finances in recent years, the government

has put itself in a position where it can afford to fund the public infrastructure programs

into the medium-term. With government debt levels at 28% of GDP, funding part of the

projects from borrowing is a reasonable option, given that the projects would provide a

longer-term return to the economy as a whole.

Transport 21 details plans forspending on roads, public

transport and regional airports

The expected cost runs to€34.3bn over 10-year time

frame

C O N S T R U C T I V E T H I N K I N G

ESRI expectations for capital expenditure

6000

7000

8000

9000

10000

11000

12000

2004 2005 2006 2007 2008 2009 2010 2011 2012

€m

"High Growth" scenario "Low Growth" scenarioSource: ESRI Medium-Term Review

Private non-residential construction

Private non-residential construction is a much more cyclical proposition, in that it depends

importantly on the evolution of some exogenous factors. We detail here the most

important determinants of the direction of activity in the private non-residential building

sector. Significantly, there are key supports for continued activity in the sector over the

coming years.

Key DriversInterest RatesLoose monetary policy has been a feature of the Irish economic landscape for some time

now. This has been one of the key drivers of the sustained property and construction

boom over the past decade. Of course, monetary accommodation is now in the process

of being removed by the ECB. Nevertheless, interest rates still remain at highly

stimulative levels for an economy such as Ireland. We now assume that interest rates

reach 3.5% by the end of the year, before increasing once more in 2007 to 3.75%.

Despite this, interest rates, both in nominal and real terms, will remain exceptionally low

by historical standards. In the chart below, we track real interest rates in Ireland (using

CPI inflation). It is clear that monetary policy is likely to remain stimulative to growth in the

construction sector over the short-term at least. Given that the neutral level of interest

rates in the euro-area is likely to be in and around the 3.75% to 4.0% level, we don’t see

these types of levels causing much difficulty for the construction industry.

62

Loose monetary policy hasbeen a key driver of property

and construction boom...

...and interest rates look set toremain accommodative

C O N S T R U C T I V E T H I N K I N G

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q1

1999

Q4

1999

Q3

2000

Q2

2001

Q1

2002

Q4

2002

Q3

2003

Q2

2004

Q1

2005

Q4

2005

Q3

2006

Q2

2007

Q1

2008

Q4

2008

% Y

oY

Real interest rate

3 month Euribor

Source: Datastream, CSO, Goodbody estimates Note: Interest rate forecasts are based off market rates

Interest rates will remain at stimulative levels

Transport 21 expenditure profiles

Year

Exchequer

capital (€bn)

Public Private

Partnership (€bn) Total (€bn)

2006 1.9 0.2 2.1

2007 2.3 0.5 2.8

2008 2.5 0.6 3.1

2009 2.5 1.6 4.1

2010 2.4 1.5 3.9

2011 2.5 1.6 4.1

2012 3.1 1.6 4.7

2013 3.2 0.3 3.5

2014 3.2 0.2 3.4

2015 2.6 2.6

Total 26.2 8.1 34.3

Source: Department of Transport

63

Real interest rates will remain lowIn the previous chart, we track interest rates, both real and nominal, since Ireland’s entry

to the EMU in 1999. The average real interest rate over this time period was -0.5%. In the

chart, we have also included forecasts for ECB rates at the end of the year based on

market interest rate levels, which are similar to our own expectations. In nominal terms,

we believe that interest rates will remain at accommodative levels. This will remain the

case for real interest rates also, although the expected moderation in inflation rates will

mean that the accomodation will be less than that of nominal rates. By the end of 2008,

we estimate that real interest rates will peak at 1.1%. As a result, we believe that these

levels of interest rates will be supportive of continued growth in the private non-residential

construction sector.

Employment growthGrowth in the productive capacity of the economy is vital in determining the demand for

construction activity. Currently, the labour market is extremely robust, with the most

recent data indicating that employment grew by 4.6% yoy in the second quarter of the

year.

The most important sub-component of private non-residential construction is commercial

development. A key driver of activity in this sector is obviously employment. However, we

must look at services employment in particular. As the economy continues to evolve,

services are becoming an increasingly important component of employment. Services

employment has been growing at a significantly faster pace than that of other sectors of

the economy (agriculture and industry) over recent years, indicating the shift to a service-

based economy. In the past two years (to Q2 2006), services employment grew at an

average annual rate of 5.2%, relative to a performance of 4.0% and -1.6% for industry

and agriculture, respectively. Within this, the growth in financial services (+6.7% yoy) and

wholesale and retail (+4.8% yoy) employment indicates the resurgence in commercial

construction in those sectors over this time period.

Real interest rate levels will besupportive to growth in the

sector

Robust labour market bodeswell for construction activity...

...with impressive growth inservices employment in

particular

C O N S T R U C T I V E T H I N K I N G

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

Luxe

mbo

urg

UK

Swed

en

Net

herla

nds

Belgium

Den

mar

k

Franc

e

EU15

Finland

Ger

man

y

Ireland

Aus

tria

Gre

ece

Spa

inIta

ly

Por

tuga

l

% o

f to

tal e

mp

loym

en

t

Services employment is likely to benefit from changing

structure of the economy - services as a % of total

Source: Eurostat

We estimate that services employment can continue to grow at a faster pace than the

overall economy in the coming years. At the end of 2005, services employment

accounted for 66.8% of total employment in the economy, which was still behind the

EU15 average of 69.3%. However, we think that Ireland, given the relative wealth of the

country and its continued favourable prospects, can have a larger proportion of the labour

force employed in the services sector.

Foreign Direct InvestmentDue to Ireland’s small size, domestic industrial output is relatively small. Direct

investment from abroad has, therefore, been the key driver of industrial output growth and

thus production and base facilities. For example, the south of the country has become a

key hub of some of the largest pharmaceutical companies in the world, with the

construction of large plants being key to non-residential construction in these areas over

the past decade.

While receiving a declining share of manufacturing-related investment projects, some of

this is being made up by increasing the share of high-value research and development-

related projects. The two charts below illustrate the trends in inward direct investment

over the past number of years. The chart on the left reveals the extent to which year-to-

year investment flows can be highly volatile. Some of this is down to intra-company flows,

as firms take full advantage of tax treatments in a particular country (especially the 12.5%

corporation tax rate in Ireland). While full data on FDI in 2005 are unavailable as yet, it is

likely to reveal an outflow during the period, again mainly due to taxation incentives

associated with the US Job Creation Act, which allowed companies to repatriate profits

back to the US at a substantially lower tax rate.

Nevertheless, Ireland was still able to attract 2.1% of total OECD FDI inflows in 2004,

although this was down from an average of 4.6% in the previous two years. Despite this,

Ireland still remains in ninth position in absolute terms with regard to inward direct

investment flows, revealing the extent to which the country is still an attractive location for

investment projects. The chart on the right shows the strong performance in attracting

inward FDI on a relative basis, where Ireland has remained in the top five destinations

since the beginning of the decade. These trends, we believe, are signs that demand for

office and industrial buildings should remain somewhat underpinned in the coming years.

64

FDI is the key driver ofproduction and base facilities

Investment flows can be highlyvolatile

Ireland remains in ninthposition with regard to inward

direct investment flows

C O N S T R U C T I V E T H I N K I N G

Direct investment into Ireland

0

5000

10000

15000

20000

25000

30000

35000

2001 2002 2003 2004

€m

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Ra

nkin

g

Source: UNCTAD World Investment Report 2005

Ireland has remained in the top five destinations for FDI

65

Forecasts for private non-residential construction

The prospects for non-residential construction output remain quite good. Even though a

recovery was witnessed in 2005, activity has not, as yet, recovered to 2002 levels in

nominal terms. Euroconstruct predicts that new non-residential construction will increase

by 13.3% in real terms in 2006, with growth rates of 10.7% and 8.4% expected for the

following two years. Growth of up to 6% per annum in real terms can be reasonably

expected in the civil engineering sector in the coming years, given the plans committed

to by the Irish government. Overall, we expect the non-residential construction sector to

grow in nominal terms by 11% in 2006, followed by 12% in 2007 and 9% in 2008.

New non-residentialconstruction expected to

increase by over 13% in realterms in 2006

C O N S T R U C T I V E T H I N K I N G

66

C O N S T R U C T I V E T H I N K I N G

67

THE MACRO-ECONOMIC IMPACT

Stemming from our analysis of fundamental demand influences in the Irish housing

market, it is clear that housing supply is very close to, or at, a peak. Therefore, in this

section, we attempt to describe the effect that a slowdown is expected have on the

macro-economy over the coming years.

There are many moving parts in an economy. Therefore, the effect of a slowdown in one

particular sector depends on the concurrent performance of other sectors of the

economy. In particular, our core scenario assumes that continued growth in non-

residential construction will offset a slowdown on the residential side. However, we also

model here the effect of a contemporaneous slowdown in other areas of investment

spending. The effect of a slowdown in the sector is likely to be mostly channelled through

a slowdown in investment growth. While the lack of employment growth in the

construction sector will have an impact on consumption, we argue that the effect on

consumption in Ireland of a housing slowdown would not be as severe as in other

countries such as the UK or the US because of the absence of evidence of a wealth effect

associated with the sector.

The recent contribution from housebuildingFirst of all, it is important to understand the role that residential investment has played

over the last number of years. While real investment growth averaged 6% over the five-

year period from 2001-2005, real growth in the new residential sector grew by 12% in real

terms. Its contribution to GDP over the period was also significant. GDP growth averaged

5.2% (GNP 4.3%) in the past five years. If we were to exclude new housebuilding from

output in the economy, growth falls to a still impressive 4.6% (3.4% using GNP). The most

significant contribution was witnessed in 2003, when that sector alone accounted for

about a third of GDP growth.

New house-build accounted for a fifth of GDP growthWe do not include the effect that the growth in housebuilding has had on other sectors so

it is likely that the effect on growth has been somewhat higher. All in all, we estimate that

housebuilding has contributed 13% of the growth in GDP over the past five years, while

the contribution in the past three years has been even more marked. Housebuilding

accounted for over one-fifth of GDP in the 2003-2005 period.

Moving parts of constructionsector must be taken into

account

In 2003, housebuildingaccounted for a third of GDP

growth

C O N S T R U C T I V E T H I N K I N G

Real GDP growth 2001 - 2005

-1%

0%

1%

2%

3%

4%

5%

6%

2001 2002 2003 2004 2005

%

GDP (less new housebuild) New residential componentSource: Goodbody estimates

Next, we look at our assumptions for growth in the construction sector over the next three

years and the impact that these have on the overall economy:

Non-residential construction to offset slowdown in residentialIn the chart below we detail the trajectory of the main categories of investment spending

over the past number of years and our own estimates going forward. Non-residential

spending will continue to be boosted by a recovery in the commercial building sector and

infrastructural spending under the National Development Plan.

On the residential side, we have detailed previously that we expect new housebuilding to

slow from an expected 92,000 units in 2006, to 88,000 in 2007, before slowing

significantly to 77,000 units the following year. Under these assumptions for different

components of investment spending, total investment should slow significantly in the

coming years, culminating in no growth in 2008. Beyond that, annual house completions

should continue to slow back to the 68,000 units range that was discussed earlier by the

end of the decade.

Effect on employment could prove to be smallUnder this scenario, the impact on employment should be relatively muted as workers

can transfer over to non-residential construction. The relative flexibility of the workforce is

likely to prove important to the construction sector as the residential sector slows.

Migrant reaction will be importantThe effect on unemployment could also prove to be small given the large number of

immigrants who have entered the sector in recent years. The table on the next page

details the breakdown of workers in the construction industry by nationality. The number

of foreign nationals working in the construction industry grew by a substantial 166% in the

period from Q3 2004 to Q1 2006. This amounts to an increase of over 20,000 non-Irish

nationals working in the sector over that period. The vast bulk (86%) of these have come

from the ten accession states that joined the EU back in May 2004. It is our contention

that these people are economic migrants who would leave the country (and thus the

labour force) in the event of losing employment. For this reason, the effect on the

unemployment rate would be limited.

68

Non-residential spending isboosted by the commercial

building sector and the NDP

Total investment should slowsignificantly in the coming

years

Flexibility and mobility ofconstruction workers is

important

C O N S T R U C T I V E T H I N K I N G

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005 2006 2007 2008

% Y

oY

Other categories of investment can take some of the slack

Residential

Other building &

construction

Machinery & Equipment

Source: Goodbody estimates

69

Modelling a more severe slowdownThe previous calculations are based upon the view that a slowdown in the residential

construction sector will not be accompanied by a similar slowdown in the non-residential

component of investment. However, here we posit some suggestions on the path of

economic growth in the event of a contemporaneous slowdown in the other sub-sectors

of the construction industry. While there are firm reasons to believe that this will not be

the case, including the fact that government spending is set on a multi-annual framework,

we conduct the exercise for illustrative purposes here.

In the simulation below, we model the effect on employment, investment, consumption

and GDP of a slowdown in house completions from an estimated 92,000 units in 2006 to

70,000 units in 2007 and 60,000 units in 2008. Along with this sharp slowdown in

residential construction, we assume that non-residential output remains stagnant over the

two-year period also. It must be noted that these forecasts are benchmarked against what

would have been the case under our core scenario.

Slowdown can impact through a number of channelsIt is clear that the effects of a sharp slowdown in residential construction, coupled with

stagnation in the non-residential construction sector would have a dramatic effect on the

Irish economy. These effects can come through a number of different channels:

• A fall in construction output has a direct effect on investment spending overall. As

investment has become an increasingly important component of output over recent

years, this is an important factor.

• This reduction in construction activity causes employment in the sector itself, and in

related activities, to fall.

• Falling employment would lead to increased slack in the labour market which would

have a dampening effect on wage growth and thus disposable income growth and

consumption.

• Given that confidence is likely to be dented from the slowdown in activity,

consumption growth could be affected further (we do not include this in our analysis,

however).

• While we believe wealth effects associated with housing in Ireland are small, there

could be a small knock-on impact on spending if a slowdown in the sector is also

accompanied by a decline in house prices.

Should both residential andnon-residential construction

slow...

...this would have a significanteffect on the economy througha number of different channels

C O N S T R U C T I V E T H I N K I N G

Employment in construction by nationalityQ3 2004 ('000) Q2 2006 ('000) Change ('000) Change (%)

Irish 209.5 230.2 20.7 10%

Foreign nationals 12.2 32.5 20.3 166%

Of which:UK 4.3 5.4 1.1 26%

EU 15 1.8 1.4 -0.4 -22%

Accession states 3.9 21.4 17.5 449%

Other 2.2 4.3 2.1 95%

Total 221.7 262.7 41.0 18%

Source: CSO Data is not seasonally-adjusted

Sharp construction slowdown could have dramatic impactThe results of the simulation, shown below, reveal that the effect on the economy would

be very significant. We estimate that employment growth would be cut by 1.7% in 2007

and 1.0% in 2008. This, in turn, would have a knock on impact on consumer spending

growth. Our estimates suggest that consumer spending would be reduced by 1.7% in

both years due to the slowdown. Even allowing for this, we estimate that consumer

spending would still be in positive territory due to the impact of the wall of cash becoming

available from the SSIA release.

Investment would get hit the mostUnsurprisingly, investment growth would get hit the most in 2007 as a result of a dramatic

slowdown in the construction sector. We estimate that the slowdown would cause

investment to contract in real terms in 2006 and 2007, by 6.7% and 3.0% respectively.

The overall effect on growth in real GDP is dramatic. GDP growth would half relative to

our expectations in 2007 and 0.3% would be knocked off the rate of GDP growth in 2008.

While it must be stressed that this simulation exercise is only done for illustrative

purposes, it is clear that the Irish economy’s reliance on the construction sector means

that the effect on the overall economy would be quite severe in the event of a slowdown

in the sector.

70

Consumer spending wouldsuffer...

...but investment would get hitthe most

C O N S T R U C T I V E T H I N K I N G

Assumptions for simulation exercise2006 2007 2008

Completions 92,000 70,000 60,000

RMI activity 25% 5% 0%

Other building and

construction 12% 3% 0%

Source: Goodbody estimates

Results of simulation exercise

2006 2007 2008

Employment growth 4.0% 3.0% 2.7%

Investment growth 7.6% 3.9% -0.1%

Consumption growth 6.7% 6.9% 3.6%

GDP growth 5.7% 5.6% 3.2%

Simulation

2007 2008

Employment growth 1.3% 1.7%

Investment growth -6.7% -3.0%

Consumption growth 4.9% 1.6%

GDP growth 2.6% 2.5%

Effect of slowdown

2007 2008

Employment growth -1.7% -1.0%

Investment growth -10.7% -2.9%

Consumption growth -2.0% -2.0%

GDP growth -3.0% -0.7%

Source: Goodbody estimates

Baseline

71

CONCLUSIONS

The Irish construction sector has clearly gone through an extraordinary period of growth

in the past decade. To some extent, we can view this as a catch-up due to the

underinvestment in both public and private construction in the 1970s and 1980s.

However, the construction sector has become dependent on the residential sector to an

unprecedented degree.

Output in this sector has grown to four times the European average and residential units

are being built at a rate significantly faster than the growth in household formation.

Something has to give. As a result, the fortunes of the construction sector have become

increasingly dependent on the trajectory of housebuilding. Because of the rise in its size

relative to the sector, a slowdown will thus be amplified on the way down. Nevertheless,

we think that other areas of the construction sector can take up some of the slack of a

declining residential sector.

We have mapped out the reasons why this will prove to be the case. A gaping

infrastructure deficit is still present in the country, while the public finances remain in fine

shape to address this issue. Therefore, civil engineering spending, which comprises half

of non-residential construction, should remain strong in the years ahead. Furthermore,

growth in the population will ensure that the social infrastructure (19% of non-residential

construction) of the country will need continuous upgrading and expansion going forward.

Both of these issues will be dealt with in the next National Development Plan, which is

due for release later this year.

There are fundamentals underpinning private non-residential construction also. We

highlight, in particular, the role of strong population growth, accommodative monetary

policy, increasing services employment and continued inflows of foreign direct

investment. In any case, private non-residential construction is only at the beginning of its

recovery from the 2001-2003 lull period.

The construction sector is set to slow over the coming years, after its extraordinary period

of growth over the past decade. However, as we stated at the outset, the construction

sector is essentially a collection of moving parts. These parts are set to move in opposite

directions in the second half of this decade, with residential building activity at a peak and

the outlook for non-residential construction still pretty bright. As such, after robust growth

in 2006, we expect the construction sector to grow by 3% in 2007, before contracting

moderately in 2008 on the back of a sharp slowdown in residential units.

C O N S T R U C T I V E T H I N K I N G

2004 2005 2006 2007 2008 2009New housing 14,672 17,216 20,059 19,277 16,772 16,267 New contracting 3,388 3,979 4,503 5,133 5,751 6,266 New civil engineering 4,147 4,520 4,995 5,467 5,922 6,400 RMI:Housing 3,383 3,657 4,644 5,807 6,561 7,442 Other 2,006 2,183 2,366 2,667 2,800 3,021 Total RMI 5,388 5,840 7,010 8,474 9,361 10,462 Total Construction 27,595 31,556 36,567 38,350 37,805 39,394 Construction growth (nominal) 16% 14% 16% 5% -1% 4%Source: DoELG, Goodbody estimates

72

C O N S T R U C T I V E T H I N K I N G

73

IMPLICATIONS FOR IRISH CONSTRUCTION AND

BUILDING MATERIALS COMPANIES

Six quoted Irish construction and building material companies (Abbey, CRH, Grafton,

Kingspan, McInerney and Readymix) have operations in Ireland. Those exposures range

from a 53% EBIT dependency for Grafton to CRH, which produces 8% of its trading

profits in the domestic market. Overall the group’s dependency on Ireland at an EBIT

level has fallen from 36% in 1996 to 18% in 2005.

The core conclusion in our economic analysis is that the construction sector will remain

relatively solid over the next three years, albeit with a change in mix away from housing

towards infrastructure and non-residential activity. We have modelled that macro-

economic outlook into our company forecasts.

Investors seeking a high exposure to the Irish construction sector should consider

Grafton, which generates over 50% of its operating profit in Ireland (largely from its

builders merchants and DIY activities) yet is trading at comfortable valuation levels

(EV/EBITDA 9.1x, PER of 12.3x for '07).

Due to the rapid expansion of CRH in international markets, and especially in the US, its

relative exposure to Ireland has declined sharply. In 1996, 28% of operating profits were

produced in Ireland whereas in 2007 that proportion should decline to 7%. While Ireland

provides a solid EBIT flow for the group, its share price is more likely to be driven by wider

macro-economic factors, including trends in the key US housing and construction

industries.

Over 17% of Kingspan's profits are derived in Ireland and this report suggests those

operations will be exposed to a relatively benign environment. Kingspan though is

primarily, in our view, a structural growth story where positive earnings momentum flows

from the regulatory, energy efficiency and conversion trends in its key insulation,

container and timber-frame markets across a number of geographies. Its investment case

stands independent of trends inside Ireland.

McInerney is our preferred housebuilding exposure, although we note the housing

segment within the overall Irish construction sector will show slower growth than either

infrastructure or non-residential activity.

There are six quoted Irishconstruction and building

materials companies,...

...whose exposures to Irelandvary significantly,...

..are modelled to incorporatethis report’s findings

C O N S T R U C T I V E T H I N K I N G

Irish Construction and Building Materials SectorCompany Revenue ('06) €'m EBIT ('06) €'m Irish EBIT as % of Group

Abbey 221.3 45.0 33.1%

CRH 21385.0 2031.3 7.7%

Grafton Group 2935.1 268.0 52.9%

Kingspan 1426.1 183.0 17.2%

McInerney 610.3 72.7 52.9%

Readymix 251.0 60.7 52.0%

Irish Construction and Building Materials SectorCompany Recommendation Market Cap. P/E '06 Dividend Yield '06

Abbey Add 278.0 7.8 3.6

CRH Buy 14371.5 11.8 1.7

Grafton Buy 2469.2 13.7 1.6

Kingspan Buy 2759.1 19.7 1.0

McInerney Add 426.6 9.2 2.2

Readymix Reduce 273.9 15.0 2.8

Analyst: Joe Gill T +353-1-641-9191 E joe.r.gill@goodbody.ie

Analyst: Peter Gunn T +353-1-641-6052 E peter.t.gunn@goodbody.ie

CRH

Irish Operational Overview

In Ireland CRH operations consist of cement and building products (Roadstone-Wood),

both of which have performed strongly over the past decade. Irish Cement is the market

leading cement manufacturer in Ireland, ahead of Quinn and Lagan. It operates from two

locations, one outside of Drogheda (Platin) and the other at Limerick.

Roadstone-Wood operates aggregates, asphalt and ready-mixed concrete activities from

64 locations. CRH’s sectoral exposure in Ireland is similar to that of Europe as a whole,

that is 40% residential, 25% non-residential and 35% infrastructure, with the vast majority

of sales into new build (80%). Due to the nature of the business, CRH is able to adjust its

exposure to different end markets in reaction to demand.

Finances

CRH’s Irish operations have delivered the highest returns on segmental net assets across

the whole group and have driven returns from 30.2% in 1996 to 36.4% in 2005. These

improvements have been achieved through efficiency gains and selective capex.

Compared to the wider group, in 2005 the total return on deployed net assets was 13.9%

and excluding Ireland, fell to 13.0%. In 1996, from a considerably smaller base, the total

group earned 17.4% and the non-Irish operation earned 15.0% on segmental net assets.

Whilst the Irish operations have experienced lower growth potential than the wider group,

CRH has been successful at extracting greater returns from the Irish business and using

these returns to fund expansion in other geographical and product markets.

Using Ireland as a base, Irish turnover has grown on average by 8.1% p.a. from 1996 to

2005, whilst the assets employed in Ireland has only increased by 6.8% per annum over

74

From an Irish base, CRH hasgrown organically and through

acquisitions...

...with the profitability of theIrish businesses leading the

overall group

C R H

Ireland

18%

Group

82%

Ireland as a percentage of CRH's 1996 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

6%

Group

94%

Ireland as a percentage of CRH's 2005 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

28%

Group

72%

Ireland as a percentage of CRH's 1996 Profits

Source: Company Presentation and Goodbody Estimates

Ireland

10%

Group

90%

Ireland as a percentage of CRH's 2005 Profits

Source: Company Presentation and Goodbody Estimates

the same period. This compares to the wider group where turnover has grown by 18.7%

per annum and assets deployed outside of Ireland has increased by 20.4% per annum

between 1996 and 2005.

We believe that CRH can continue to generate organic growth in its Irish operations,

whilst maintaining robust margins. For 2006, we are forecasting organic sales growth of

just over 5%, but this slowing dramatically to 1.4% in 2007 and just 0.1% in 2008. This

reflects a weakening housing market being offset by robust non-residential and

infrastructure markets. Meanwhile margins will remain very strong at over 15% during the

period. The impact on CRH’s Irish businesses will be subdued as growth in both stalls.

It has operated from an assetbase that has remained

relatively constant since 1996

CRH will continue to use theIreland operation...

...as a solid contributor tocahsflows and returns on

assets

C R H

75

CRH - Irish Operations2006f 2007f 2008f

Sales (€'m) 910.84 931.80 935.51

Cement 274.54 282.78 285.60

Roadstone-Wood 636.30 649.03 649.90

% of Group 5.0% 4.4% 4.1%

Sales Growth 5.3% 2.3% 0.4%

Cement 6.0% 3.0% 1.0%

Roadstone-Wood 5.0% 2.0% 0.1%

EBIT (€'m) 140.2 143.8 145.8

Cement 79.6 82.0 84.0

Roadstone-Wood 60.6 61.8 61.8

% of Group 7.7% 7.2% 6.7%

EBIT Growth 6.9% 2.6% 1.4%

Cement 7.5% 3.0% 2.4%

Roadstone-Wood 6.0% 2.0% 0.1%

THE ROLLING AGENDA...

Joe Gill +353-1-641-9191

ISEQ WeightFloat Bloomberg

RIC

Last ReportForecast Change

Exchange:

Interims Results Ex. Interim Div.

Final Results Ex. Final Div.

AGM

Year EndHigh Low

2006 2,945 2,2902005 2,4852,485 1,9252004 1,9702,053 1,6282003 1,6281,735 1,1102002 1,1752,040 1,122

Dec-04 Dec-05 Dec-06f Dec-07f Dec-08fYear Ending 12,755 14,449 18,293 21,385 22,654Sales 1,224 1,401 1,811 2,003 2,189Operating Profit

-45 -34 -22 -9 -4Amortisation 9 9 10 20 11Other Income

56 53 50 26 19Associates 0 0 0 0 0Exceptionals

1,250 1,438 1,850 2,031 2,209EBIT -146 -159 -271 -290 -269Financial Charge 1,104 1,279 1,579 1,742 1,940PBT

-467 -414 -370 -273 -232Tax -10 -10 -9 -8 -6Minorities 0 0 0 -0 0Discontinued Activities

866 998 1,201 1,319 1,463Attributable Profit 1,770 2,003 2,505 2,770 3,035EBITDAe

FRS3/IFRS EPS 163.6 186.7 223.1 243.0 267.4Adjusted EPS 163.4 186.9 225.2 247.2 273.3DPS 33.0 39.0 46.0 52.0 58.0Dividend Cover (x) 5.0 4.8 4.9 4.8 4.7Operating Cashflow 307.5 343.3 398.4 452.3 534.8Free Cashflow 189.8 206.6 220.1 251.8 319.5NAV 928.3 1,154.9 1,341.9 1,538.6 1,755.7

Tangible Assets 8,421 7,956 7,480 6,824 5,831Intangible Assets 2,765 2,670 2,564 2,253 1,774 of which Goodwill 1,757 2,195 2,455 2,581 2,707Financial Assets 635 666 700 735 292Fixed Assets 7,897 9,711 10,710 11,326 11,921Debtors 3,933 3,717 3,192 2,476 1,973Stock 2,663 2,517 2,161 1,723 1,309Creditors -2,442 -3,190 -3,712 -3,924 -1,864Working Capital 1,418 1,757 2,164 2,523 2,672Other Liabilities 1,205 1,029 838 1,786 1,577Net Debt 3,710 4,394 4,751 3,448 2,758Minority Interests 38 38 38 38 34Shareholders' Funds 4,944 6,194 7,246 8,386 9,639Total 9,315 11,468 12,874 13,848 14,593

Operating Profit 1,224 1,401 1,811 2,003 2,189Depreciation 516 556 634 705 781Chg in Stk,Debtors,Creditors -119 -138 -301 -254 -45Other 8 15 0 0 0Operating Cashflow 1,628 1,834 2,144 2,454 2,925Net Interest Payable -138 -139 -266 -285 -264Dividends Received 9 14 19 20 21Taxation -205 -246 -238 -288 -329Maintenance Capex -391 -462 -505 -566 -636Other 102 103 30 30 30Free Cashflow 1,005 1,104 1,184 1,366 1,748Acquisitions -1,029 -1,298 -2,158 -700 -700Development Capex -160 -190 -180 -160 -155Dividends Paid 0 -174 -219 -249 -279Disposals 0 0 0 0 0Issue / Buyback of Shares 37 61 70 70 70Currency Translation 36 -165 0 30 0Other -339 -29 0 0 0(Inc) / Dec. in Net Debt -450 -690 -1,302 357 684

9.6 9.9 9.4 9.7Operating Margin 9.7 13.8 14.1 13.9 15.1EBITDAe Margin 13.9 9.8 10.4 10.2 11.0EBIT Margin 10.0

21.0 23.1 23.3 23.5Effective Tax Rate 21.2 15.4 16.1 15.7 16.3ROACE 15.3 17.9 17.9 16.9 16.2ROAE 17.9

P/E 11.1 11.6 11.8 10.8 9.7P/Operating CF 5.9 6.3 6.7 5.9 5.0Free Cf Yield (%) 10.4 9.5 8.2 9.5 12.2Dividend Yield (%) 1.8 1.8 1.7 2.0 2.2EV/Sales 1.0 1.0 1.0 0.8 0.8EV/EBITDAe 6.9 7.4 7.1 6.4 5.9EV/EBITe 9.7 10.3 9.6 8.8 8.1P/NAV 1.9 1.9 2.0 1.7 1.5

%13.799%

CRH.ICRH ID

31 Aug 0631 Aug 06

Dublin,London,Nasdaq

PriceMkt Cap NAV

joe.r.gill@goodbody.ie

€ 14,371 m 1,155 c539.7 m

Construction & Building MaterialsCRH

15-Mar-07

6-Sep-0729-Aug-07

7-Mar-07

3-May-07

Shares

www.crh.ie

0.1 4.8 7.2 20.1-2.7 -4.3 -4.0 -1.0

AbsoluteRel. ISEQ

BUY Email

Momentum (%)

Dec-05 Dec-06f Dec-07f Dec-08fYear Ending Dec-04 15.1Sales 5.9 13.3 26.6 16.9 16.8EBITDAe 9.6 13.1 25.1 10.6

14.4 20.5 9.8 10.5Adjusted EPS 21.2 17.4DPS 11.5 18.2 17.9 13.0

Profitability (%)

Debt Test

Valuation(X)

Calendar

Price Performance (%) 1 Mth 3 Mths 6 Mths YTD

Divisional Analysis

Operating Profit byActivity (2006)

%

51Materials 911.034Products 601.914Distribution 265.1

Operating Profit byRegion FY06F

%

55USA 975.933Europe 581.7

8Ireland 141.24UK 63.9

16.9 12.316.4 11.915.2 12.213.2 0.116.3 8.9

High Low

EBITDAe/Interest (x) 12.1 12.6 9.3 9.6 11.3Interest Cover (x) 8.6 9.1 6.9 7.1 8.4Debt/EBIT (x) 2.2 2.4 2.5 2.1 1.6Debt/Operating Cashflow (x) 1.7 1.9 2.2 1.8 1.3Debt/Equity (%) 55.8 55.7 65.6 52.4 38.5

2,663 c

Profit and Loss (€m)

Cashflow Statement (€m)

Balance Sheet (€m)

(€m) (€m)

Per Share Data (c)

Price & P/E History Price (c) Hist P/E (x)

KINGSPAN

Operational Overview

The Kingspan group of companies consists of five businesses, namely: Insulated Panels;

Insulated Boards; Environmental Containers; Off-site and Structural and; Raised-access

Floors. The company has eight manufacturing plants in Ireland: an insulated panels site

located in Kingscourt; one insulated boards plant in Castleblaney; four Century homes

sites in Monaghan, Tullamore, Dungarvan and Longford, and; two environmental

containers plants in Dublin and Carrickmacross. This compares to just two manufacturing

sites in 1996, (Kingscourt and Castleblaney). The company has developed impressively

over the period 1996 to 2005, growing Irish sales from €31.9m (20%) to €215.3m (17%).

This has been achieved predominantly through organic means, augmented by

occasional acquisitions. Like all the Irish companies, Kingspan has benefited greatly from

the Irish construction boom experienced over the past ten years. The company has

expanded through concentrating its efforts on the non-residential sector, particularly

through the ‘Insulated Panels’ division, which accounts for over 30% of Irish sales. The

acquisition of Century Homes in March 2005 has increased the company’s exposure to

the booming residential sector. The other major divisions within Ireland are ‘Insulation

Boards’ and ‘Environmental Containers’, both of which are predominantly focussed on the

residential sector and account for roughly 15% of sales.

Financial Overview

In the period 1996 to 2005, Kingspan has expanded rapidly by concentrating on niche

construction markets and becoming the market leader in those sectors. Irish sales have

grown at a CAGR of 23.6%, while EBIT has grown at a similar pace. This extraordinary

growth can be attributed to the positive momentum in energy efficiency and

environmental regulation underpinning its markets.

We are forecasting Irish sales growing by 15% this year, driven primarily by the ‘Insulated

77

K I N G S PA N

Structural trends have driventhe impressive growth in

Kingspan...

...coupled with a recentincreased focus on the

residential sector

Ireland

20%

Group

80%

Ireland as a percentage of Kingspan's 1996 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

17%

Group

83%

Ireland as a percentage of Kingspan's 2005 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

23%

Group

77%

Ireland as a percentage of Kingspan's 1996 Profits

Source: Company Presentation and Goodbody Estimates

Ireland

18%

Group

82%

Ireland as a percentage of Kingspan's 2005 Profits

Source: Company Presentation and Goodbody Estimates

78

Panels’ and ‘Off-site and Structural’ divisions. We believe ‘Insulated Panels’ will continue

to benefit from the tighter regulatory background and increased energy efficiency

awareness. Likewise, sales from ‘Off-site and Structural’ are being boosted by a full year

contribution from Century Homes and the increasing penetration of timber housing in

Ireland. For 2007 and 2008, we are expecting 7% and 8% sales growth, respectively, as

all divisions experience solid expansion, with ‘Insulated Panels’ consistently being the

star performer.

Kingspan does not split out its profit by geography, but we are forecasting profit growth in

Ireland of 22% in 2006, slipping to just 6% next year and 8% in 2008.

K I N G S PA N

Kingspan concentrates onniche products...

....where above averagemargins are protected by high

barriers to entry

Irish sales have increased bymore than 23% CAGR over

the period 1996-2005

Kingspan - Irish Operations2006f 2007f 2008f

Sales (€'m) 247.2 269.6 282.0

Insulated Panels 77.2 86.4 95.1

Insulation Boards 35.4 37.1 38.2

Off-site & Structural 95.3 104.5 105.1

Environmental Containers 35.3 37.4 39.3

Raised-access Floors 4.1 4.2 4.3

Sales Growth 15% 9% 5%

Insulated Panels 15% 12% 10%

Insulation Boards 4% 5% 3%

Off-site & Structural 21% 10% 1%

Environmental Containers 12% 6% 5%

Raised-access Floors 6% 2% 2%

% of Group 17% 17% 16%

Insulated Panels 31% 32% 34%

Insulation Boards 14% 14% 14%

Off-site & Structural 39% 39% 37%

Environmental Containers 14% 14% 14%

Raised-access Floors 2% 2% 2%

Operating Profit (€'m) 31.6 34.1 35.8

Insulated Panels 13.5 15.0 16.0

Insulation Boards 4.3 4.5 4.7

Off-site & Structural 10.5 11.1 11.2

Environmental Containers 2.9 3.2 3.5

Raised-access Floors 0.4 0.4 0.4

Profit Growth 22% 8% 5%

Insulated Panels 39% 11% 7%

Insulation Boards 2% 4% 5%

Off-site & Structural 16% 6% 1%

Environmental Containers 9% 9% 11%

Raised-access Floors 34% -1% 5%

% of Group 17% 17% 16%

Insulated Panels 43% 44% 45%

Insulation Boards 14% 13% 13%

Off-site & Structural 33% 33% 31%

Environmental Containers 9% 9% 10%

Raised-access Floors 1% 1% 1%

THE ROLLING AGENDA...

Joe Gill +353-1-641-9191

ISEQ WeightFloat Bloomberg

RIC

Last ReportForecast Change

Exchange:

Interims Results Ex. Interim Div.

Final Results Ex. Final Div.

AGM

Year EndHigh Low

2006 1,625 1,0652005 1,0651,096 7052004 705715 3972003 420420 1552002 163350 135

Dec-04 Dec-05 Dec-06f Dec-07f Dec-08fYear Ending 958 1,243 1,426 1,579 1,724Sales 104 147 186 204 223Operating Profit

-3 -3 -3 -2 -1Amortisation 0 0 0 0 0Other Income 0 0 0 0 0Associates

0 0 0 0 0Exceptionals 103 145 183 202 221EBIT -7 -10 -9 -7 -5Financial Charge 96 135 174 195 215PBT

-40 -35 -33 -24 -18Tax -0 -0 -0 0 0Minorities 0 0 0 0 0Discontinued Activities

78 111 141 159 175Attributable Profit 128 178 220 242 265EBITDAe

FRS3/IFRS EPS 47.1 66.4 83.1 92.9 101.7Adjusted EPS 46.7 65.9 82.5 92.1 100.7DPS 9.6 13.4 16.9 21.1 24.3Dividend Cover (x) 4.9 4.9 4.9 4.4 4.1Operating Cashflow 61.9 105.5 102.8 127.6 141.1Free Cashflow 39.0 72.6 69.1 88.0 99.3NAV 183.4 245.9 305.5 377.5 455.8

Tangible Assets 322 294 272 251 211Intangible Assets 222 225 228 230 112 of which Goodwill 110 218 218 218 218Financial Assets 1 1 1 1 0Fixed Assets 323 482 500 520 545Debtors 373 342 309 268 221Stock 155 142 128 97 89Creditors -193 -220 -244 -266 -157Working Capital 153 172 217 240 262Other Liabilities 80 75 72 74 63Net Debt -60 36 122 164 108Minority Interests 0 0 0 0 0Shareholders' Funds 305 416 522 648 788Total 476 654 717 760 807

Operating Profit 104 147 186 204 223Depreciation 24 31 34 38 42Chg in Stk,Debtors,Creditors -26 -2 -45 -23 -22Other 0 1 0 0 0Operating Cashflow 103 177 175 219 243Net Interest Payable -7 -8 -9 -7 -5Dividends Received -0 0 0 0 0Taxation -15 -28 -23 -33 -35Maintenance Capex -19 -24 -26 -28 -32Other 2 5 0 0 0Free Cashflow 65 122 118 151 171Acquisitions -27 -142 -11 0 0Development Capex -37 -23 -29 -32 -39Dividends Paid -13 -18 -38 -35 -38Disposals 25 0 0 0 0Issue / Buyback of Shares 2 3 2 2 2Currency Translation -1 3 0 0 0Other 0 -1 0 0 0(Inc) / Dec. in Net Debt 13 -55 41 86 96

10.9 13.0 12.9 12.9Operating Margin 11.8 13.4 15.4 15.3 15.4EBITDAe Margin 14.3 10.8 12.8 12.8 12.8EBIT Margin 11.7 18.9 18.5 17.9 18.4Effective Tax Rate 17.3 22.6 27.2 27.8 28.8ROACE 26.0 28.2 30.1 27.2 24.4ROAE 30.9

P/E 11.0 14.6 19.6 17.6 16.1P/Operating CF 8.3 9.1 15.8 12.7 11.5Free Cf Yield (%) 7.5 7.5 4.3 5.5 6.2Dividend Yield (%) 1.9 1.4 1.0 1.3 1.5EV/Sales 1.0 1.4 2.0 1.8 1.7EV/EBITDAe 7.7 10.1 13.3 12.1 11.0EV/EBITe 9.5 12.3 15.9 14.5 13.2P/NAV 2.8 3.9 5.3 4.3 3.6

%2.673%

KSP.IKSP ID

7 Sep 067 Sep 06

Dublin, London

PriceMkt Cap NAV

joe.r.gill@goodbody.ie

€ 2,759 m 246 c169.8 m

Construction & Building MaterialsKingspan

15-Mar-07

13-Sep-07 5-Sep-07

6-Mar-07

25-May-07

Shares

www.kingspan.com

14.8 19.1 52.6 52.411.6 8.8 36.6 25.7

AbsoluteRel. ISEQ

BUY Email

Momentum (%)

Dec-05 Dec-06f Dec-07f Dec-08fYear Ending Dec-04 22.2Sales 9.2 29.8 14.7 10.7 27.2EBITDAe 9.8 38.4 23.8 9.9

41.1 25.2 11.6 9.3Adjusted EPS 31.0 33.3DPS 15.0 39.6 26.1 25.0

Profitability (%)

Debt Test

Valuation(X)

Calendar

Price Performance (%) 1 Mth 3 Mths 6 Mths YTD

Divisional Analysis

Turnover byRegion (FY05)

%

60UK 872.717Ireland 252.915Europe 224.0

5USA 77.02ROW 27.7

Operating Profit byActivity (05)

%

65Insulated Panels/Boards 95.016Offsite & Structural 23.513Env. Containers 18.7

7Raised Access Floors. 9.8

26.3 17.623.7 18.720.1 11.111.9 4.210.9 3.6

High Low

EBITDAe/Interest (x) 18.6 17.6 24.4 34.5 50.0Interest Cover (x) 15.1 14.6 20.6 29.1 42.1Debt/EBIT (x) 1.0 1.1 0.7 0.2 n/mDebt/Operating Cashflow (x) 1.1 0.9 0.7 0.2 n/m

n/mDebt/Equity (%) 35.5 39.3 23.5 5.6

1,625 c

Profit and Loss (€m)

Cashflow Statement (€m)

Balance Sheet (€m)

(€m) (€m)

Per Share Data (c)

Price & P/E History Price (c) Hist P/E (x)

GRAFTON GROUP

Irish Operational Overview

The Grafton Group operates three separate businesses in Ireland, namely builders

merchants, DIY retailing and manufacturing, the most important being the building

merchants accounting for 67% of Irish sales and 71% of trading profits. Through organic

development as well as acquisition activity, Grafton has transformed its exposure to the

Irish market over the past ten years. The most notable deal was the €402m acquisition

for Heiton’s in January 2005, which significantly increased its reliance on the Irish market.

At the time Heiton was the number two player in both the Irish builder merchants (through

Heiton Buckley) and DIY (through Atlantic) markets. In 2005 Heiton’s Irish operations had

sales of c.€608m, split roughly 80% merchanting and 20% DIY. Currently we estimate

that Grafton’s sectoral exposure in Ireland is 45% new housing, 35% renovation,

modernisation and improvement (RMI) and the remaining 20% in infrastructure and non-

residential. The sales to the infrastructure and non-residential sectors have been aided

by the recent Heiton and Garvey deals.

The Heiton acquisition also provided Grafton with the number one Irish steel stockholder

and tool hire businesses, through Heiton Steel and Sam Hire, respectively. Margins in the

Heiton business were significantly below those achieved in the Grafton business. We

estimate in 2005 Grafton’s legacy Irish operations had a margin of over 12%, compared

to 8.5% for Heiton.

Financial Overview

We are forecasting modest growth for Grafton’s Irish operations for the period 2006-08.

We estimate that Merchanting sales growth will peak this year at 16%, before falling to

7% in 2007 and only 2% in 2008. A lot of this growth will be driven by RMI activity, which

we believe will remain strong on the back of the the release of the special savings

incentive accounts (SSIA’s) and continued buoyancy in consumer demand. These same

80

Since 1987, Grafton has grownto become the market leader in

Ireland and a strong player inthe UK...

...with Irish exposure tomerchanting, DIY and

manufacturing sectors...

...with recent acquisitionsproviding increased exposure

to infrastructure and non-residential markets

G R A F T O N G R O U P

Group

26%

Ireland

74%

Ireland as a percentage of Grafton's 1996 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

39%

Group

61%

Ireland as a percentage of Grafton's 2005 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

89%

Group

11%

Ireland as a percentage of Grafton's 1996 Profits

Source: Company Presentation and Goodbody Estimates

Ireland

50%

Group

50%

Ireland as a percentage of Grafton's 2005 Profits

Source: Company Presentation and Goodbody Estimates

drivers will impact the retailing businesses (Woodies, Atlantic and In-house at the

Panelling Centre). We see Retail revenue growth of 21% for 2006, slowing to 14% next

year and 3% in 2008. Grafton’s Manufacturing operations will show modest growth over

the next few years of 5%, 3% and 1%, respectively.

Overall we forecast Irish sales growth of 16% in FY’06, 9% in FY’07 and 2% in FY’08. At

the operating profit level we estimate growth of 19% this year, slowing to 12% and 3%

respectively, for 2007 and 2008.

The company has committeditself to shareholder value...

....through both branch networkexpansion and strategic

acquisitions

G R A F T O N G R O U P

81

Grafton - Irish Operations2006f 2007f 2008f

Sales (€'m) 1200.6 1304.7 1335.2

Merchanting 797.9 852.3 870.2

DIY 329.1 376.7 388.2

Manufacturing 73.6 75.8 76.8

% of Group 40.9% 42.0% 42.2%

Sales Growth 16.2% 8.7% 2.3%

Merchanting 15.5% 6.8% 2.1%

DIY 20.7% 14.5% 3.0%

Manufacturing 5.4% 3.0% 1.4%

EBIT (€'m) 128.1 143.7 148.7

Merchanting 89.0 97.3 100.5

DIY 32.0 39.1 40.9

Manufacturing 7.1 7.3 7.4

% of Group 52.9% 54.0% 52.2%

EBIT Growth 18.9% 12.2% 3.5%

Merchanting 17.1% 9.3% 3.2%

DIY 27.5% 22.3% 4.5%

Manufacturing 7.8% 2.3% 1.6%

THE ROLLING AGENDA...

Joe Gill +353-1-641-9191

ISEQ WeightFloat Bloomberg

RIC

Last ReportForecast Change

Exchange:

Interims Results Ex. Interim Div.

Final Results Ex. Final Div.

AGM

Year EndHigh Low

2006 1,120 9102005 9201,055 7802004 800825 5472003 547560 2592002 338469 305

Dec-04 Dec-05 Dec-06f Dec-07f Dec-08fYear Ending 1,872 2,630 2,935 3,104 3,161Sales 160 216 242 266 285Operating Profit

-2 -2 -2 -2 0Amortisation 0 0 0 0 2Other Income 0 0 0 0 0Associates

8 10 28 8 8Exceptionals 169 223 268 272 291EBIT -23 -31 -28 -25 -18Financial Charge 146 192 241 247 273PBT

-44 -36 -33 -26 -20Tax 0 0 0 0 0Minorities 0 0 0 0 0Discontinued Activities

126 166 207 211 230Attributable Profit 196 264 295 323 345EBITDAe

FRS3/IFRS EPS 59.1 70.3 87.0 87.9 94.5Adjusted EPS 54.8 66.5 76.0 84.2 90.7DPS 13.0 15.8 18.0 20.5 22.5Dividend Cover (x) 4.2 4.2 4.2 4.1 4.0Operating Cashflow 83.7 95.0 118.7 128.2 142.1Free Cashflow 64.1 70.4 101.6 91.7 105.0NAV 232.2 343.3 412.9 475.4 543.0

Tangible Assets 576 595 602 623 406Intangible Assets 541 543 546 548 247 of which Goodwill 247 532 532 532 532Financial Assets 0 0 0 0 47Fixed Assets 700 1,171 1,148 1,139 1,118Debtors 598 587 555 499 318Stock 427 419 396 357 238Creditors -499 -555 -587 -598 -311Working Capital 245 357 396 419 427Other Liabilities 156 144 133 131 101Net Debt 58 260 421 584 349Minority Interests 0 0 0 0 0Shareholders' Funds 496 814 990 1,154 1,330Total 945 1,529 1,544 1,558 1,544

Operating Profit 160 216 242 266 285Depreciation 35 48 53 57 60Chg in Stk,Debtors,Creditors -21 -29 -39 -23 -8Other 5 -11 27 8 8Operating Cashflow 178 225 283 308 345Net Interest Payable -22 -32 -28 -25 -18Dividends Received 2 0 0 0 0Taxation -7 -15 -23 -25 -32Maintenance Capex -40 -44 -60 -63 -66Other 25 33 70 25 25Free Cashflow 137 166 242 220 255Acquisitions -75 -478 0 0 0Development Capex -49 -56 -40 -12 0Dividends Paid -26 -34 -43 -50 -55Disposals 0 0 0 0 0Issue / Buyback of Shares 1 179 4 3 3Currency Translation -1 -13 0 0 0Other -25 0 0 0 0(Inc) / Dec. in Net Debt -38 -235 163 161 202

8.5 8.2 8.6 9.0Operating Margin 8.2 10.5 10.1 10.4 10.9EBITDAe Margin 10.0 8.6 8.2 8.5 8.9EBIT Margin 8.1

13.6 13.6 14.2 15.7Effective Tax Rate 13.1 19.2 16.8 18.4 19.9ROACE 18.7 25.3 20.3 19.1 18.0ROAE 24.2

P/E 11.7 13.3 13.7 12.3 11.5P/Operating CF 7.6 9.3 8.8 8.1 7.3Free Cf Yield (%) 10.0 8.0 9.8 8.9 10.3Dividend Yield (%) 2.0 1.8 1.7 2.0 2.2EV/Sales 0.9 1.0 1.0 1.0 1.0EV/EBITDAe 8.8 9.8 10.3 9.5 8.8EV/EBITe 10.2 11.6 11.4 11.2 10.5P/NAV 2.8 2.6 2.5 2.2 1.9

%2.480%

GRF_u.IGN5 ID

15 Sep 0615 Sep 06

Dublin, London

PriceMkt Cap NAV

joe.r.gill@goodbody.ie

€ 2,469 m 343 c237.4 m

Construction & Building MaterialsGrafton Group

22-Mar-07

20-Sep-0713-Sep-07

15-Mar-07

8-May-07

Shares

www.graftonplc.com

-2.1 5.6 13.0 23.1-4.8 -3.5 1.2 1.5

AbsoluteRel. ISEQ

BUY Email

Momentum (%)

Dec-05 Dec-06f Dec-07f Dec-08fYear Ending Dec-04 25.2Sales 1.9 40.4 11.6 5.8 27.6EBITDAe 6.9 35.0 11.7 9.4

21.3 14.3 10.8 7.7Adjusted EPS 24.0 23.8DPS 9.8 21.2 14.3 13.9

Profitability (%)

Debt Test

Valuation(X)

Calendar

Price Performance (%) 1 Mth 3 Mths 6 Mths YTD

Divisional Analysis

Operating Profit byRegion FY06F

%

53Ireland 126.747UK 113.0

Turnover byActivity (FY06 F)

%

57UK Merchanting 1,590.627Irish Merch. 771.210Irish DIY 321.9

5Manufacturing 134.2

19.2 14.123.9 14.218.7 13.015.5 7.514.9 9.7

High Low

EBITDAe/Interest (x) 8.6 8.5 10.7 12.9 19.7Interest Cover (x) 7.1 6.9 8.8 10.7 16.3Debt/EBIT (x) 2.2 2.7 1.7 1.0 0.2Debt/Operating Cashflow (x) 2.0 2.6 1.5 0.8 0.2Debt/Equity (%) 70.5 71.8 42.6 22.5 4.3

1,040 c

Profit and Loss (€m)

Cashflow Statement (€m)

Balance Sheet (€m)

(€m) (€m)

Per Share Data (c)

Price & P/E History Price (c) Hist P/E (x)

MCINERNEY

Irish Operational Overview

McInerney’s Irish operations consist of housebuilding, commercial and contracting. The

contracting division is 70% exposure to the residential sector, while the commercial

operation is focussed on the non-residential market. Its Irish sales are broken down 76%

housing, 17% contracting and 7% commercial. This leaves the overall exposure at

approximately 90% residential and 10% non-residential. Therefore, after Abbey,

McInerney is the most exposed of our stocks to the new residential market.

Financial Overview

McInereny has grown Irish sales from €41.1m in 1996 to €311.6m in 2005. This

corresponds to 13% of group in 1996 and 10% in 2005, respectively. In relation to

operating profits, McInerney’s Irish operations generated €4.3m in 1996, compared to

€43.8m (71.6%) last year. This impressive growth of over 900% (CAGR of 29%) was

driven by growth in housing completions from 454 units in 1996 to 1,138 (+151%), and

average selling prices moving from €84k to €219k last year. The strong tailwind for

housing prices continued unabated in the first half of 2006, with McInerney’s average

price rising further to €262k.

Similarly to Abbey, McInerney is experiencing extremely robust demand in the Irish

market. McInerney aims at the first time buyer and affordable end of the market and

concentrates predominantly outside of Dublin, in the commuter towns and large urban

areas outside of the capital. McInerney estimates that in region of 30% of its sales are to

non-nationals, and they see this ratio continuing for the immediate future.

We are forecasting a slight drop in Irish housing completions for McInerney this year

(1,100 versus 1,138) as the company holds back units to maximise returns. This is

particularly evident in the Cork region, where demand is extremely strong at present. This

83

M C I N E R N E Y

McInerney builds over 1,000houses per annum...

...where its contracting divisionrepresents 17% of revenue...

...and has seen Irish turnovergrow by 29% per annum since

1996

Ireland

83%

Group

17%

Ireland as a percentage of McInerney's 1996 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

64%

Group

36%

Ireland as a percentage of McInerney's 2005 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

100%

Group

0%

Ireland as a percentage of McInerney's 1996 Profits

Source: Company Presentation and Goodbody Estimates

Ireland

72%

Group

28%

Ireland as a percentage of McInerney's 2005 Profits

Source: Company Presentation and Goodbody Estimates

84

demand should persist into 2007 and 2008, giving McInerney modest volume growth in

both years (4.5% and 1.7%, respectively).

For the current year we are forecasting house price inflation of 14%, easily covering any

rises in input costs. For 2007 and 2008, we are expecting house price inflation to slow to

5.5% and 4%, respectively. This will have the effect of growing Irish housing operating

profits by 20% for 2006, 4% in 2007, before declining by 2% in 2008.

Elsewhere, the commercial and contracting divisions will exhibit modest growth for the

same period. Overall Irish sales are set to grow by 14% in 2006, 8% in 2007 and 5% in

2008, leading to operating profit growth of 13% in 2006, flat in 2007 and declining

moderately in 2008 (-1%).

M C I N E R N E Y

McInerney’s housingcompletions are set to remain

steady for the next few years...

...while house price inflationdrops to just 4% in 2008

McInerney focusses on ROCE,not margins

454486

582 600 586

663

879

969

11011138

1,1001,150 1,170

0

200

400

600

800

1000

1200

1400

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006f 2007f 2008f

un

its

McInerney's Irish Completions

Source: Company Presentations and Goodbody Estimates

McInerney - Irish Operations2006f 2007f 2008f

Sales (€'m) 378.2 408.5 429.5

Housebuilding 274.2 302.5 320.0

Contracting 61.5 70.7 74.2

Commercial 25.5 26.4 27.2

Land and Sites 17.0 9.0 8.0

% of Group 62.0% 55.6% 53.7%

Sales Growth 14.4% 8.0% 5.1%

Housebuilding 12.8% 10.3% 5.8%

Contracting 30.0% 15.0% 5.0%

Commercial 20.7% 3.3% 3.2%

Land and Sites -10.1% -47.1% -11.1%

EBIT (€'m) 55.7 55.5 55.0

Housebuilding 45.0 46.8 46.1

Contracting 2.6 3.0 3.1

Commercial 3.8 4.0 4.1

Land and Sites 4.3 1.8 1.7

% of Group 76.6% 62.7% 59.2%

EBIT Growth 13.1% -0.3% -1.0%

Housebuilding 19.6% 4.0% -1.5%

Contracting 65.1% 15.0% 5.0%

Commercial -16.3% 3.3% 3.2%

Land and Sites -21.6% -57.6% -6.7%

THE ROLLING AGENDA...

Peter Gunn +353-1-641-6052

ISEQ WeightFloat Bloomberg

RIC

Last ReportForecast Change

Exchange:

Interims Results Ex. Interim Div.

Final Results Ex. Final Div.

AGM

Year EndHigh Low

2006 1,330 1,0502005 1,1591,159 6602004 660660 4502003 470473 2102002 215255 135

Dec-04 Dec-05 Dec-06f Dec-07f Dec-08fYear Ending 373.4 489.1 610.3 734.9 799.5Sales 42.7 61.2 72.7 88.5 92.9Operating Profit

0.0 0.0 0.0 0.0 0.0Amortisation 0.0 0.0 0.0 0.0 0.0Other Income 0.0 0.0 0.0 0.0 5.8Associates

0.0 0.0 0.0 0.0 0.0Exceptionals 48.4 61.1 72.7 88.5 92.9EBIT -8.8 -11.1 -12.0 -15.3 -15.3Financial Charge 39.6 50.1 60.7 73.2 77.6PBT

-16.3 -15.0 -12.1 -9.0 -4.6Tax 0.0 0.0 0.0 0.0 0.0Minorities 0.0 0.0 0.0 0.0 0.0Discontinued Activities

35.0 41.1 48.6 58.2 61.3Attributable Profit 50.7 63.1 75.1 91.2 95.8EBITDAe

FRS3/IFRS EPS 106.5 124.0 145.7 171.9 178.1Adjusted EPS 101.4 118.7 139.0 162.3 168.3DPS 18.0 24.0 28.0 32.0 36.5Dividend Cover (x) 5.6 4.9 5.0 5.1 4.6Operating Cashflow 40.9 19.8 168.4 98.9 197.7Free Cashflow 6.1 -33.9 91.8 5.1 101.9NAV 359.2 466.9 583.5 714.8 853.2

Tangible Assets 23.0 22.9 22.6 6.4 11.8Intangible Assets 41.1 41.1 41.1 22.4 21.7 of which Goodwill 21.7 22.4 41.1 41.1 41.1Financial Assets 4.7 4.6 4.6 4.5 6.9Fixed Assets 40.3 33.4 68.4 68.6 68.7Debtors 85.4 78.5 63.5 52.0 44.1Stock 503.7 463.0 384.5 333.2 266.1Creditors -131.6 -176.7 -212.5 -232.3 -127.9Working Capital 182.3 253.7 271.3 329.0 356.8Other Liabilities 11.3 9.6 8.1 20.9 14.1Net Debt 119.0 143.5 136.1 111.3 89.5Minority Interests 0.0 0.0 0.0 0.0 0.0Shareholders' Funds 119.0 154.8 195.5 244.5 295.2Total 222.7 287.1 339.6 397.6 425.5

Operating Profit 42.7 61.2 72.7 88.5 92.9Depreciation 2.3 2.0 2.4 2.7 2.9Chg in Stk,Debtors,Creditors -32.5 -56.7 -19.0 -57.7 -27.8Other 1.0 0.2 0.0 0.0 0.0Operating Cashflow 13.5 6.6 56.1 33.5 68.0Net Interest Payable -7.5 -10.6 -12.0 -15.3 -15.3Dividends Received 1.9 2.0 0.1 0.1 0.1Taxation -4.5 -7.6 -10.9 -13.5 -14.7Maintenance Capex -1.8 -1.7 -2.6 -3.0 -3.0Other 0.4 0.2 0.0 0.0 0.0Free Cashflow 2.0 -11.2 30.6 1.7 35.0Acquisitions -14.0 0.0 -47.4 0.0 0.0Development Capex 0.0 0.0 0.0 0.0 0.0Dividends Paid -4.3 -6.6 -8.4 -9.7 -11.0Disposals 0.0 0.0 0.0 0.0 0.0Issue / Buyback of Shares 0.5 0.1 0.5 0.5 0.5Currency Translation 0.0 0.0 0.0 0.0 0.0Other -0.7 -4.0 0.0 0.0 0.0(Inc) / Dec. in Net Debt -16.5 -21.8 -24.7 -7.5 24.5

11.4 11.9 12.0 11.6Operating Margin 12.5 13.6 12.3 12.4 12.0EBITDAe Margin 12.9 13.0 11.9 12.0 11.6EBIT Margin 12.5 11.5 20.0 20.5 21.0Effective Tax Rate 17.9 24.3 23.4 23.8 22.5ROACE 24.5 33.2 27.7 26.4 22.7ROAE 30.0

P/E 5.3 7.1 9.2 7.9 7.6P/Operating CF 13.1 42.6 7.6 12.9 6.5Free Cf Yield (%) 1.1 n/m 7.2 0.4 8.2Dividend Yield (%) 3.4 2.9 2.2 2.5 2.9EV/Sales 0.7 0.8 0.9 0.7 0.7EV/EBITDAe 5.2 6.2 7.2 5.9 5.6EV/EBITe 5.5 6.4 7.4 6.1 5.8P/NAV 1.5 1.8 2.2 1.8 1.5

%0.457%

MCI.IMCI ID

14 Aug 0629 Sep 05

Dublin, London

PriceMkt Cap NAV

peter.t.gunn@goodbody.ie

€ 427 m 467 c33.3 m

Construction & Building MaterialsMcInerney

1-Mar-07

11-Oct-0628-Sep-07

23-Feb-07

10-May-07

Shares

www.mcinerney.ie

8.9 14.9 10.4 51.15.9 5.0 -1.1 24.6

AbsoluteRel. ISEQ

ADD Email

Momentum (%)

Dec-05 Dec-06f Dec-07f Dec-08fYear Ending Dec-04 8.7Sales 8.8 31.0 24.8 20.4

33.1EBITDAe 5.0 24.5 19.0 21.5 17.0 17.1 16.8 3.7Adjusted EPS 39.5

63.6DPS 14.1 33.3 16.7 14.3

Profitability (%)

Debt Test

Valuation(X)

Calendar

Price Performance (%) 1 Mth 3 Mths 6 Mths YTD

Divisional Analysis

Turnover byRegion (2005)

%

64Ireland 378.031UK 182.2

5Spain 26.4

Operating Profit byRegion FY06F

%

69Ireland 49.624UK 4.9

7Spain 16.9

11.9 8.811.4 7.410.5 6.2

9.2 4.16.4 3.0

High Low

EBITDAe/Interest (x) 5.8 5.7 6.3 6.0 6.2Interest Cover (x) 5.5 5.5 6.1 5.8 6.1Debt/EBIT (x) 1.8 1.8 1.9 1.6 1.3Debt/Operating Cashflow (x) 6.7 17.0 2.4 4.3 1.8Debt/Equity (%) 75.2 71.9 69.6 58.7 40.3

1,280 c

Profit and Loss (€m)

Cashflow Statement (€m)

Balance Sheet (€m)

(€m) (€m)

Per Share Data (c)

Price & P/E History Price (c) Hist P/E (x)

ABBEY

Irish Operational Overview

Abbey’s Irish operations consist of housebuilding and property rental divisions. The

company has maintained its focus on housebuilding in Ireland and the UK, primarily in

areas around Dublin and the South of England.

Abbey completed 295 units in Ireland during the twelve months to April 2006 (41% of

total). Irish housebuilding revenues represent 34% of group sales. Trading profits were

€17.3m in the past year, and have grown at a CAGR of 23% in the past decade. The

return on net assets from 1996 to 2005 has remained remarkably constant at c.33%.

Abbey’s other Irish interest is a property rental business which produced sales and

operating profit of €800k in 1996 compared to just €316k in 2005.

86

Abbey has increased its focuson the Irish market...

A B B E Y

100

178

284

310

231212 212

276

407

348

295280 285

0

50

100

150

200

250

300

350

400

450

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006f 2007f 2008f

un

its

Progression of Abbey's Completions in Ireland

Group

79%

Ireland

21%

Ireland as percentage of Abbey's 1996 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

34%

Group

66%

Ireland as percentage of Abbey's 2005 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

32%

Group

68%

Ireland as percentage of Abbey's 1996 Profits

Source: Company Presentation and Goodbody Estimates

Ireland

34%

Group

66%

Ireland as percentage of Abbey's 2005 Profits

Source: Company Presentation and Goodbody Estimates

Financial Overview

Starting in 2005, Abbey has repurchased over four million shares, which has mitigated the

EPS reduction in FY’06 to -12%, amidst a background of a significant decline in operating

profit (-18%). At the end of April-06, Abbey was in a net cash position of €68m, which has

grown steadily from €19m at the end of April-97. This cash gives the company sufficient

scope and flexibility to pursue growth opportunities as they arise, be they in Ireland or

abroad.

A feature of the most recent set of results has been the continuing downward pressure

on margins, most notably in the year to April-06, when margins fell from over 28% to 25%.

We see this trend persisting through 2006. We forecast margins contracting to 21% in

FY’07 and 19% for FY’08 and FY’09. This is due to the coming through of a more

expensive landbank. Land price inflation has been particularly robust in and around

Dublin, where Abbey is strongest.

...positioning itself in theaffordable housing sector, with

an average selling price of€233k...

...which should insulate itagainst a fall in the housing

market.

Margin pressure has beencreated by increased land

costs

A B B E Y

87

Abbey - Irish Operations2006f 2007f 2008f

Sales (€'m) 69.7 72.4 75.1

Sales Growth -0.3% 3.8% 3.8%

% of Group 31.5% 31.0% 30.6%

EBIT (€'m) 15.5 14.9 15.3

EBIT Growth -15.8% -3.8% 2.7%

% of Group 33.1% 31.8% 32.7%

THE ROLLING AGENDA...

Peter Gunn +353-1-641-6052

ISEQ WeightFloat Bloomberg

RIC

Last ReportForecast Change

Exchange:

Interims Results Ex. Interim Div.

Final Results Ex. Final Div.

AGM

Year EndHigh Low

2006 1,120 8502005 1,0251,025 7752004 815895 6652003 665685 4302002 460530 365

Apr-05 Apr-06 Apr-07f Apr-08f Apr-09fYear Ending 206.5 204.5 221.3 233.2 245.8Sales 55.6 45.4 45.0 45.5 45.9Operating Profit

0.0 0.0 0.0 0.0 0.0Amortisation 0.0 0.0 0.0 0.0 0.0Other Income 1.0 0.0 0.0 0.0 0.1Associates

0.0 0.0 0.0 0.0 0.0Exceptionals 55.7 45.4 45.0 45.5 46.9EBIT 1.8 1.6 1.8 3.6 5.4Financial Charge

57.5 47.1 46.8 49.1 52.3PBT -12.7 -11.9 -11.3 -11.1 -13.1Tax 0.0 0.0 0.0 0.0 0.0Minorities 0.0 0.0 0.0 0.0 0.0Discontinued Activities

44.4 36.0 35.5 37.2 39.6Attributable Profit 62.2 52.2 52.1 52.8 46.9EBITDAe

FRS3/IFRS EPS 130.3 113.7 119.7 125.3 133.3Adjusted EPS 130.3 113.7 119.7 125.3 133.3DPS 33.0 34.0 34.0 34.0 34.0Dividend Cover (x) 3.9 3.3 3.5 3.7 3.9Operating Cashflow 80.6 222.6 -7.5 209.4 154.6Free Cashflow 25.7 176.6 -62.0 157.9 154.6NAV 708.3 759.0 843.7 931.3 1,023.9

Tangible Assets 28.7 33.1 34.5 35.6 35.9Intangible Assets 0.0 0.0 0.0 0.0 0.0 of which Goodwill 0.0 0.0 0.0 0.0 0.0Financial Assets 2.4 2.4 2.4 3.4 2.4Fixed Assets 38.3 38.0 36.9 35.5 32.1Debtors 11.4 10.2 9.7 8.1 7.6Stock 248.3 233.2 239.1 211.9 196.8Creditors -88.3 -62.8 -66.9 -71.8 -52.1Working Capital 152.3 131.6 185.9 176.6 188.0Other Liabilities 35.3 8.9 10.8 12.2 13.4Net Debt -119.0 -73.1 -38.3 -67.7 -64.2Minority Interests 0.0 0.0 0.0 0.0 0.0Shareholders' Funds 241.4 225.2 250.3 276.3 303.8Total 190.7 169.6 222.9 212.1 220.1

Operating Profit 55.6 45.4 45.0 45.5 45.9Depreciation 6.5 6.7 7.1 7.3 0.0Chg in Stk,Debtors,Creditors -33.5 18.7 -54.3 9.4 0.0Other -1.1 -0.4 0.0 0.0 0.0Operating Cashflow 27.5 70.4 -2.2 62.1 45.9Net Interest Payable 1.8 1.6 1.8 3.6 0.0Dividends Received 0.0 0.0 0.0 0.0 0.0Taxation -14.5 -11.0 -11.3 -11.9 0.0Maintenance Capex -8.5 -8.1 -9.2 -9.5 0.0Other 2.5 2.8 2.5 2.5 0.0Free Cashflow 8.8 55.8 -18.4 46.9 45.9Acquisitions 0.0 0.0 0.0 0.0 0.0Development Capex -0.7 0.0 0.0 0.0 0.0Dividends Paid -10.6 -11.1 -11.1 -12.0 0.0Disposals 0.0 0.0 0.0 0.0 0.0Issue / Buyback of Shares 0.0 -40.5 0.0 0.0 0.0Currency Translation 0.0 -0.6 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0(Inc) / Dec. in Net Debt -2.5 3.6 -29.5 34.9 45.9

26.9 20.3 19.5 18.7Operating Margin 22.2 30.1 23.5 22.6 19.1EBITDAe Margin 25.5 27.0 20.3 19.5 19.1EBIT Margin 22.2 22.7 24.1 24.2 24.3Effective Tax Rate 23.6 35.3 24.4 21.9 24.2ROACE 27.1 19.9 14.9 14.1 13.6ROAE 15.4

P/E 7.4 8.2 7.8 7.5 7.0P/Operating CF 11.9 4.2 n/m 4.5 6.0Free Cf Yield (%) 2.7 20.6 n/m 17.3 16.9Dividend Yield (%) 3.4 3.6 3.6 3.6 3.6EV/Sales 1.3 1.0 0.9 0.9 0.8EV/EBITDAe 4.2 3.9 3.9 3.8 4.3EV/EBITe 4.7 4.5 4.5 4.5 4.3P/NAV 1.4 1.2 1.1 1.0 0.9

%0.374%

ABBY.IABBY ID

14 Aug 0613 Jan 06

Dublin, London

PriceMkt Cap NAV

peter.t.gunn@goodbody.ie

€ 271 m 759 c29.0 m

Construction & Building MaterialsAbbey

26-Jul-07

25-Jan-0712-Jan-07

14-Jul-07

1-Oct-06

Shares

www.abbeydev.co.uk

4.5 -0.9 -8.8 5.71.6 -9.4 -18.3 -12.9

AbsoluteRel. ISEQ

ADD Email

Momentum (%)

Apr-06 Apr-07f Apr-08f Apr-09fYear Ending Apr-05 3.4Sales 5.4 -1.0 8.2 5.4 -4.7EBITDAe -11.2 -16.1 -0.1 1.3

-12.7 5.3 4.7 6.4Adjusted EPS -5.2 10.0DPS 0.0 3.0 0.0 0.0

Profitability (%)

Debt Test

Valuation(X)

Calendar

Price Performance (%) 1 Mth 3 Mths 6 Mths YTD

Divisional Analysis

Turnover byRegion (2006F)

%

66UK 134.234Ireland 70.3

Operating Profit byActivity (2006)

%

95Housebuilding 43.34Plant Hire 1.81Other 0.3

8.6 6.67.9 5.68.3 5.67.0 5.07.0 4.8

High Low

EBITDAe/Interest (x) n/m n/m n/m n/m n/mn/m n/m n/m n/m n/mInterest Cover (x)

Debt/EBIT (x) n/m n/m n/m n/m n/mDebt/Operating Cashflow (x) n/m n/m 17.2 n/m n/m

n/m n/m n/m n/m n/mDebt/Equity (%)

935 c

Profit and Loss (€m)

Cashflow Statement (€m)

Balance Sheet (€m)

(€m) (€m)

Per Share Data (c)

Price & P/E History Price (c) Hist P/E (x)

READYMIX

Irish Operational Overview

Of the six companies covered in this report, Readymix is the most reliant on the Irish

construction market. In 2006 it generated 58% of revenue and 72% of operating profits

from Ireland. Currently the sectoral split in Ireland is approximately 60% residential and

40% non-residential (including infrastructure). However, these ratios are flexible, as

Readymix is able to adjust its exposure to reflect activity levels on the ground. This

adaptability leaves it well placed to benefit from the buoyancy in the non-residential and

infrastructure sectors.

In March 2005, Cemex acquired Readymix’s majority stakeholder RMC, which gave

Cemex a controlling 63% stake in Readymix. Since then a new MD, Roger Gonzalez and

new FD, Sergio Martinez have been appointed, and with these appointments there is a

renewed sense of focus of turning the company’s recent fortunes around.

Last year Readymix sold off its road surfacing business in the final quarter to focus on its

core competencies. It has also embarked on a process of realising value by disposing of

property. The most recent example was the sale of its former headquarters in North

Dublin City for €21.5m, completed on June 30th 2006. In addition to these one-off

measures, the management has succeeded in reducing working capital, increasing cash

flow and improving the internal processes to better exploit the opportunities in the

marketplace.

Financial Overview

From 1996 to 2005, sales in the Republic of Ireland grew by 179%. However, this masks

the recent underperformance, which has seen sales fall 0.4% between 2004 and 2005.

89

R E A D Y M I X

Readymix is predominantlybased in Ireland...

...generating 65% of revenueand 47% of profit here

Recent ownership andmanagement changes have

provided a renewed focus onthe business

Group

42%

Ireland

58%

Ireland as a percentage of Readymix's 1996 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

65%

Group

35%

Ireland as a percentage of Readymix's 2005 Sales

Source: Company Presentation and Goodbody Estimates

Ireland

67%

Group

33%

Ireland as a percentage of Readymix's 1996 Profits

Source: Company Presentation and Goodbody Estimates

Ireland

48%

Group

52%

Ireland as a percentage of Readymix's 2005 Profits

Source: Company Presentation and Goodbody Estimates

Operating profit fell from €7.9m in 1996 to €6.1m in 2005, representing margins of 13.7%

and 3.8%, respectively. Margins peaked in 1999, but fell persistently to a trough of 2.5%

in 2004. With the new management in place, we forecast margins recovering strongly to

over 5% in 2006 up to 6% in 2008. Progress made in the year to date leave us with a

positive outlook for the business.

We are forecasting a marginal sales decline of 1% in 2006, followed 1% growth in 2007

and a flat performance in 2008. However, we believe the efficiency measures undertaken

by management, including the adoption of the ‘Cemex Way’ will see robust profit growth

of 38% in the current year, followed by 11% and 3% for 2007 and 2008, respectively.

R E A D Y M I X

90

Recent margin pressure is setto relent in 2006 and through

to 2008...

...by improving operationalefficiency, including the

adoption of the ‘Cemex Way’

Readymix - Irish Operations2006f 2007f 2008f

Sales (€'m) 159.4 161.0 161.0

Sales Growth -1.0% 1.0% 0.0%

% of Group 63.5% 63.3% 62.8%

EBIT (€'m) 8.4 9.3 9.7

EBIT Growth 38.5% 10.5% 3.4%

% of Group 52.0% 51.5% 51.6%

THE ROLLING AGENDA...

Peter Gunn +353-1-641-6052

ISEQ WeightFloat Bloomberg

RIC

Last ReportForecast Change

Exchange:

Interims Results Ex. Interim Div.

Final Results Ex. Final Div.

AGM

Year EndHigh Low

2006 260 2202005 235255 1802004 183210 1452003 200200 1152002 120185 112

Dec-04 Dec-05 Dec-06f Dec-07f Dec-08fYear Ending 247.5 248.1 251.0 254.5 256.3Sales 13.4 12.8 16.2 18.1 18.7Operating Profit

0.0 0.0 0.0 0.0 0.7Amortisation 0.3 0.3 0.3 0.4 0.5Other Income 0.2 0.2 0.2 0.2 0.2Associates

0.8 20.2 44.0 2.0 0.0Exceptionals 15.6 33.6 60.7 20.6 19.2EBIT -1.9 -1.4 -0.6 0.3 0.8Financial Charge 13.7 32.3 60.2 20.9 20.0PBT

-3.3 -3.8 -10.8 -7.6 -2.2Tax 0.0 0.0 0.0 0.0 0.0Minorities 0.0 0.0 0.0 0.0 0.0Discontinued Activities

11.5 24.6 49.3 17.1 16.7Attributable Profit 26.9 26.3 30.5 33.4 34.9EBITDAe

FRS3/IFRS EPS 10.6 22.7 45.3 15.7 15.3Adjusted EPS 9.3 9.2 16.9 14.3 15.2DPS 7.1 7.1 7.1 7.1 7.1Dividend Cover (x) 1.3 1.3 2.4 2.0 2.2Operating Cashflow 21.1 27.9 29.0 29.7 31.3Free Cashflow 7.6 17.3 9.9 17.1 18.8NAV 117.9 131.9 170.5 179.0 187.4

Tangible Assets 146.1 143.8 138.6 132.4 129.8Intangible Assets 10.7 10.7 10.7 10.9 10.8 of which Goodwill 10.5 10.7 10.7 10.7 10.7Financial Assets 1.7 1.8 2.0 2.1 1.5Fixed Assets 142.2 145.0 151.1 156.4 158.9Debtors 60.4 60.0 59.2 59.9 68.2Stock 17.7 17.6 17.3 17.8 16.9Creditors -38.4 -38.7 -39.2 -39.5 -38.9Working Capital 46.2 39.3 37.8 38.3 38.6Other Liabilities 37.5 34.8 34.2 31.7 20.4Net Debt -44.5 -35.2 -30.6 9.2 40.0Minority Interests 0.0 0.0 0.0 0.0 0.0Shareholders' Funds 127.9 143.3 185.3 195.1 204.5Total 188.4 184.3 188.9 194.8 197.5

Operating Profit 13.4 12.8 16.2 18.1 18.7Depreciation 12.8 12.8 13.8 14.8 15.7Chg in Stk,Debtors,Creditors -3.4 7.7 1.5 -0.5 -0.3Other 0.1 -3.1 0.0 0.0 0.0Operating Cashflow 22.9 30.3 31.5 32.4 34.1Net Interest Payable -1.9 -1.4 -0.6 0.3 0.8Dividends Received 0.0 0.0 0.0 0.0 0.0Taxation -3.6 -1.9 -10.8 -3.8 -3.3Maintenance Capex -11.5 -8.2 -12.4 -13.3 -14.1Other 2.3 0.0 3.0 3.0 3.0Free Cashflow 8.2 18.8 10.7 18.6 20.5Acquisitions -8.0 -6.6 0.0 0.0 0.0Development Capex -6.4 0.0 -7.6 -6.7 -3.9Dividends Paid -7.6 -7.7 -7.7 -7.7 -7.7Disposals 0.5 26.8 44.0 0.0 0.0Issue / Buyback of Shares 0.2 0.3 0.4 0.4 0.4Currency Translation 0.3 -0.8 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0(Inc) / Dec. in Net Debt -12.9 30.8 39.8 4.6 9.3

5.4 6.5 7.1 7.3Operating Margin 5.2 10.8 12.2 13.1 13.6EBITDAe Margin 10.5 5.9 6.7 7.3 7.5EBIT Margin 5.4

17.1 -14.7 16.7 16.7Effective Tax Rate 16.3 8.1 10.1 11.0 11.2ROACE 7.8 8.4 11.3 8.3 8.3ROAE 7.4

P/E 18.7 23.3 14.9 17.6 16.6P/Operating CF 8.2 7.7 8.7 8.5 8.0Free Cf Yield (%) 4.4 8.1 3.9 6.8 7.5Dividend Yield (%) 4.1 3.3 2.8 2.8 2.8EV/Sales 0.9 1.0 1.1 1.1 1.1EV/EBITDAe 8.3 9.9 9.3 8.5 8.1EV/EBITe 14.2 7.7 4.7 13.7 14.7P/NAV 1.5 1.6 1.5 1.4 1.3

%0.336%

RYX.IRYX ID

14 Aug 064 Mar 06

Dublin, London

PriceMkt Cap NAV

peter.t.gunn@goodbody.ie

€ 274 m 132 c108.7 m

Construction & Building MaterialsReadymix

15-Mar-07

16-Aug-0710-Aug-07

3-Mar-07

4-May-07

Shares

www.readymix.ie

3.7 6.8 7.2 7.20.8 -2.4 -4.0 -11.6

AbsoluteRel. ISEQ

REDUCE Email

Momentum (%)

Dec-05 Dec-06f Dec-07f Dec-08fYear Ending Dec-04 6.9Sales 0.7 0.2 1.2 1.4

-24.9EBITDAe 4.5 -2.3 16.3 9.5 -0.4 83.5 -15.3 6.0Adjusted EPS -44.9

0.0DPS 0.0 0.0 0.0 0.0

Profitability (%)

Debt Test

Valuation(X)

Calendar

Price Performance (%) 1 Mth 3 Mths 6 Mths YTD

Divisional Analysis

Turnover byRegion (2006F)

%

63Ireland 159.437UK 91.7

Operating Profit byActivity (2006)

%

52UK 8.448Ireland 7.8

28.2 22.325.8 10.712.6 8.612.0 6.0

9.2 5.6

High Low

EBITDAe/Interest (x) 14.3 19.0 53.6 n/m n/mn/m n/mInterest Cover (x) 7.4 9.7 29.4

Debt/EBIT (x) 2.8 0.7 n/m n/m n/mDebt/Operating Cashflow (x) 1.7 0.3 n/m n/m n/m

n/m n/m n/mDebt/Equity (%) 31.3 6.4

252 c

Profit and Loss (€m)

Cashflow Statement (€m)

Balance Sheet (€m)

(€m) (€m)

Per Share Data (c)

Price & P/E History Price (c) Hist P/E (x)

92

APPENDIX

C O N S T R U C T I V E T H I N K I N G

Breakdown of regionsBorder Mid-East

Cavan Kildare

Donegal Meath

Leitrim Wicklow

Louth

Monaghan Mid-West

Sligo Clare

Limerick City

Midlands Limerick County

Laois Tipperary N.R.

Longford

Offaly South-East

Westmeath Carlow

Kilkenny

West Tipperary S.R.

Galway City Waterford City

Galway County Waterford County

Mayo Wexford

Roscommon

South-West

Dublin Cork City

Dublin City Cork County

Dun Laoghaire/Rathdown Kerry

Fingal

South Dublin

Greater Dublin

Dublin

Kildare

Meath

Wicklow

McInerney Rating & Price Target HistoryDate From To Price Target

14-Dec-05 Add Buy € 11.20

09-Jan-06 Buy Add € 12.20

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