23 January 2025
Translink Corporate Finance UK Advisor Don Gray shares his expert opinion and insights into the key drivers of M&A in construction and building products in 2025.
Who would wish to be an economic forecaster in the current environment?
Not that long ago there appeared to be a consensus that 2025 was going to be a year of solid growth for the construction sector. In particular, private housing output was expected to bounce back, with the Construction Products Association (CPA) Autumn 2024 forecast expecting an 8% rise. Compared to a 23% decline over 2023 and 2024, this was indeed welcome news.
Roll-forward to today and it seems that might be optimistic. The S&P Global UK Construction Purchasing Managers’ Index registered 53.3 in December, down from 55.2 in November. Whilst the headline figure is still above the symbolic 50.0 no change value, delving further into the detail shows that the residential PMI contracted for the third month in a row and stood at 47.6 in December.
And then, in the first full week back after the Christmas break, we had the turmoil on the bonds market with concerns as to what this might mean for borrowing costs and consumer confidence.
Green M&A drivers in the building sector
Aside from the bumpy economic data, our view at Translink Corporate Finance is that there are several strong underlying investment drivers that will continue to prime the mergers and acquisitions (M&A) pump in 2025 and beyond.
Top of the list is the drive for decarbonisation and energy-efficiency retrofit in both the commercial and housing sectors. In the commercial space, a good example of this is Mitie plc, which has declared a strategy to be a leading provider of end-to-end green energy solutions. They have made a number of acquisitions to support this, with targets including G2 Energy, Rock Power Connections and Custom Solar, the latter of which Translink Corporate Finance advised on.
In the domestic market, we have seen the carbon reduction agenda manifest itself in consolidation from both private equity investors and strategic corporates.
An example of this is the heat pump installation market, a sector that has traditionally had many smaller, owner-managed businesses. More recently, however, we have advised on several deals where consolidators such as Aira (backed by Swedish PE investor Vargas) and Euronext listed Ariston have sought to get a foothold in the UK market through targeted M&A.
Remediation still key activity
Repair, Maintenance and Improvement (RMI) has often been viewed by investors as an attractive sub-sector, given that the Repair and Maintenance elements are typically more resilient to changes in consumer confidence and economic cycles. It is estimated that approximately 75% of UK housing stock is over 40 years old, with the requirement to keep both the building envelope and the interior habitable (and compliant with increasingly stretching energy efficiency targets).
Although public housing RMI output is about a quarter of the size of private (£7.7bn vs £29.3bn in 2024 according to the CPA, there are several regulatory frameworks such as the Social Housing (Regulation) Act and the Social Housing Decarbonisation Fund which we expect to drive investment.
Recent M&A activity in the sector includes the £120m acquisition of façade remediation specialist, Clear Line, by Sweden’s Fasadgruppen, a deal which Translink Corporate Finance originated.
It is estimated that there are approximately 1,900 of the 2,500 social housing buildings over 11 metres high in England that have yet to be remediated following the Grenfell fire. With more recent fire issues on low rise public housing stock expected to widen the remediation net, there is a significant requirement (and opportunity) for RMI specialists.
Embodied carbon moving up the agenda
One other area we would hope to see investment activity in is in relation to reducing the greenhouse gas emissions associated with embodied carbon (the carbon emitted during the extraction of raw material and the subsequent manufacturing, transportation, installation and demolition of construction products).
I’d encourage those interested in this to read this blog by Joe Farren from IndiNature https://tinyurl.com/jd66f4h8.
In short, whilst embodied carbon currently accounts for approximately 11% of UK greenhouse gas emissions, the UK government is dragging its heels on implementing legislation to limit its impact. Businesses which are at the forefront of this key issue will surely attract both PE and strategic corporate investors.
Returning then to the original question of who would wish to be an economic forecaster? Whilst it’s a ‘no thank you’ from me, I will stick my forecasting neck out and predict that even if the macro-economic picture turns out to be less benign than originally anticipated, there will be plenty of opportunities for businesses within the sector to capitalise on M&A in 2025.
If you would like to discuss how Translink Corporate Finance can help you with your M&A strategy please get in touch on dgray@translinkcf.uk.com or call 07799 477480.
