There are increasing signs that the Irish property market is undergoing a considerable slowdown. This has been reflected in the pace of price inflation in residential and commercial property. Nevertheless, viewed as an investment, property has maintained its lead over other asset classes so far this year. For the first quarter of 2001, Irish commercial property produced a return of approximately 3 per cent.
Figures for the second quarter are not yet available but a further modest positive return is likely. This compares with year-to-date falls of 12 per cent for the Eurotop 300 index and 9 per cent for the FTSE100 index. Only the Irish equity market has competed with property with a year-to-date rise of 12.8 per cent.
This general slowdown in activity is being reflected in a reduction in building and construction output. Irish construction activity in 2000 is estimated to have grown by 8 per cent but the forecast for growth in 2001 is no more than 1 per cent.
The bulk of the slowdown is caused by the now well documented decline in residential construction, which accounts for 50 per cent of total industry output. In contrast, all other sectors of Irish construction are expected to remain robust. The largest growth should continue to be infrastructural work, which is expected to grow by 15 per cent this year, whilst overall private non-residential construction is forecast to grow at just over 9 per cent in 2001.
For the Republic's largest industrial company, CRH, the slowdown will have a significant impact on demand for the company's products. Residential construction, which is the weakest sector, is cement intensive and, therefore, overall Irish cement demand could decline this year.
CRH's policy of international diversification over the past two decades means that the Republic now only accounts for 14 per cent of CRH's operating profits (see table).
Britain and Europe combined account for a further 28 per cent of profits, and the US accounts for 58 per cent of operating profit.
Although the Irish construction market is slowing down, it will still remain one of the best performing construction markets in Europe. Of greater concern to CRH must be the slowing pace of growth across Europe. Germany appears to be particularly weak and a substantial decline in output seems to be in prospect for this year.
Fortunately, CRH has only limited exposure to the German market. However, its largest European market is the Netherlands and this market is forecast to grow at a mere 0.2 per cent in 2001.
A better-than-expected performance from the US means that the slack in Europe is being offset by buoyancy in its US operations. Despite the weakness in the overall US economy, the housing market has remained extremely robust.
In addition, road-building has continued to be buoyant so that CRH's US materials operations are enjoying strong growth this year.
Furthermore, the strong dollar means that currency translation effects will be very positive for the company this year, given the very high proportion of group profits that are generated in US dollars.
Looking forward, the big risk to CRH would seem to be a slowdown in the US construction market. If the consensus regarding a second-half recovery in the US economy proves correct, then CRH's US businesses can continue to drive the group's profit growth for several years.
On the other hand, if the US suffers a prolonged recession, the construction sector is bound to slow sharply. This would be bad news for CRH but its regional spread within the US and its broad international diversification should limit the extent of any downturn in the group's profits.
