Green Shoots Are Emerging in European Construction, but a Full Recovery Still Requires Patience
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Green Shoots Are Emerging in European Construction, but a Full Recovery Still Requires Patience
Bernstein's August tracker shows that European construction permits and some PMIs are improving, but orders, starts, and project backlogs remain weak and are not yet sufficient to confirm a broad cyclical recovery. Spain continues to lead, Italy is approaching stabilization, meaningful acceleration in Germany may be delayed until late 2026 or even 2027, and caution remains warranted on France and the United Kingdom.
- The Eurozone construction PMI rose from 42.8 to 44.3 in July but remained well below the expansion threshold of 50.
- German residential and non-residential permits both increased 14% YoY in June, but the PMI fell to 42.1 in July and residential orders declined 3% YoY.
- The UK PMI rose from 38.4 to 44.7 in July, but the Glenigan Construction Starts Index declined 29% YoY, with residential starts down 47%.
- French residential starts increased 13% YoY, but the number of residential permits declined 5% YoY and the construction PMI was only 41.5.
- Italy's PMI rose to 49.1, the closest to stabilization; Spain continues to lead, supported by infrastructure, renovation, renewable energy projects, and EU funding.
- The report favors Southern Europe and believes Germany's recovery will occur later than many investors expect.
Report interpretation
Overview
This report uses monthly tracking of construction PMIs, permits, starts, orders, and transaction data in the Eurozone, Germany, the United Kingdom, France, Italy, and Spain to assess whether the European construction cycle has truly entered a recovery. It concludes that leading indicators have reduced the risk of further downside, but improvements in permits have not yet translated sufficiently into actual activity; the current picture is closer to a slow and uneven bottoming process than a V-shaped or broad-based recovery.
Core views
European construction activity is stabilizing, but the report believes that market expectations for a cyclical recovery, particularly in Germany, remain premature. Building permits across many parts of Europe have begun to improve, suggesting that the worst stage of the downturn may have passed; however, PMIs in most markets remain well below 50, orders and project backlogs remain fragile, and permits have yet to translate into actual construction. The report therefore judges that this recovery is more likely to proceed gradually rather than take the form of a V-shaped rebound. There is also a clear lag between permits and corporate earnings: heavy building materials companies typically require 3 to 9 months, while light building materials companies typically require 9 to 15 months; once projects formally break ground, the transmission period shortens materially. The Eurozone construction PMI rose from 42.8 in June to 44.3 in July, improving MoM but remaining in contractionary territory. New orders continued to deteriorate, mainly due to weak regional demand and subdued order inflows in Germany and France. Commercial construction was the weakest segment, followed by residential construction, while civil engineering was the most resilient. Easing energy-related pressures reduced input cost inflation to its lowest level since February, but companies became more pessimistic about the coming year, reflecting continued uncertainty surrounding demand and project backlogs. Germany is the key variable in Europe's recovery and the large market most likely to recover first, but evidence of a rebound remains incomplete. Residential permits increased 14% YoY in June, while non-residential permits also rose 14%, marking their 16th consecutive month of growth; non-residential construction orders increased 15% YoY, indicating resilience in infrastructure and parts of non-residential demand. On the other hand, residential orders declined 3% YoY, and the construction PMI fell from 44.8 to 42.1 in July, a three-month low, as residential and commercial activity continued to weaken and clients postponed decisions due to high prices and uncertainty. Civil engineering returned to moderate growth after two consecutive months of decline, while cost and supply-chain pressures also eased, but Germany's approximately €500 billion infrastructure investment plan has yet to translate materially into broad-based demand. The report expects meaningful acceleration in construction no earlier than late 2026, with some areas potentially delayed until 2027. There is a clear divergence between the UK PMI and actual construction starts. The construction PMI rose from 38.4 to 44.7 in July, reaching a four-month high, as the pace of decline moderated across commercial, residential, and civil engineering activity; the contraction in new orders was the smallest since September 2025, bidding opportunities recovered, and business confidence rose to its highest level since February. However, the PMI remained below 50 and actual starts continued to deteriorate: the Glenigan Total Construction Starts Index fell for an eighth consecutive month in July, declining 29% YoY to 123.7, with residential starts down 47% and both non-residential and infrastructure starts down 10%. Residential transactions increased 6% YoY in June while non-residential transactions were flat, but this was insufficient to reverse the report's cautious view of UK activity. France remains one of the weakest major European markets. The construction PMI rose from 38.2 to 41.5 in July, a five-month high, but still indicated significant contraction; commercial construction was the largest drag, while residential construction and civil engineering also continued to decline. Weak demand, client hesitation, insufficient price competitiveness, and a lack of clear recovery catalysts left companies highly pessimistic about the outlook, while employment, purchasing, and subcontractor usage also continued to decline. The number of residential permits fell 5% YoY to 35,500 units in June, while permitted residential and non-residential floor area declined 14% and 10%, respectively; meanwhile, residential starts increased 13% YoY, marking a tenth consecutive month of growth. The divergence between permits and starts indicates that localized improvement is not yet sufficient to demonstrate a solid demand foundation, while election-related uncertainty continues to weigh on the market. Italy's data are the closest to stabilization. The construction PMI rose from 45.4 to 49.1 in July; although activity contracted for a fifth consecutive month, the decline was very small. Commercial construction returned to growth, while weakness in residential construction and civil engineering also eased. New orders increased for the first time since February, as client interest and tender wins improved, driving a recovery in employment growth. However, the expiration of construction incentive programs, geopolitical uncertainty, and cost and supply-chain pressures continue to limit confidence for the coming year. The latest permit data remain weak: in February, residential permits declined 1% YoY and 15.9% MoM, non-residential permits declined 3%, and renovation permits were flat. Spain is the strongest market covered by the report. Its relative advantage stems from infrastructure investment, renovation demand, renewable energy projects, and EU funding, creating a regional pattern in which Southern Europe outperforms Northern Europe. The report's overall allocation implication is to favor Southern Europe, remain cautious on France and the United Kingdom, and avoid prematurely betting on a rapid, broad cyclical rebound in Germany. European exposure remains important for building materials companies, with Amrize being the exception identified in the report. Among light materials companies, Sika is rated Outperform, with the report favoring its leadership in construction chemicals, execution potential, and rerating opportunity; Rockwool is rated Outperform, supported by its leading position in the stone wool insulation niche, pricing resilience, and conservative guidance. Saint-Gobain is rated Market-Perform, with strong execution, portfolio diversification, and balance sheet strength, although its recovery remains constrained by the French market. Kingspan is rated Market-Perform, benefiting from data center exposure and pricing discipline, but its outlook is constrained by cyclical end markets and fire-safety issues. Geberit is rated Underperform; despite a strong moat and premium positioning, its products are later-cycle and its recovery may lag peers. Among heavy materials companies, Holcim is rated Outperform and named the top pick, based on its decarbonization initiatives, Latin American growth opportunities, pricing power, and synergies from expansion in light materials; the report believes market concerns regarding the Emissions Trading System and geopolitics have driven an excessive recent share-price reaction. CRH is rated Outperform, with the report expecting its medium-term growth to potentially exceed the company's relatively conservative targets. Heidelberg is rated Outperform and named a Q3 Best Idea, as the report considers concerns over carbon pricing and ETS reform excessive and believes the company can benefit from German infrastructure investment and improving industry pricing. European infrastructure contractors combine long-term infrastructure assets with asset-light contracting businesses, with order books spanning transportation, the energy transition, and digital infrastructure. The report believes digitalization, decarbonization, and urbanization continue to support strong order flows and record backlogs in 2026; through selective bidding, risk-sharing contracts, and an emphasis on order quality, companies prioritize earnings stability over simply pursuing scale. Bernstein remains positive on the sector, rating ACS, Vinci, Eiffage, and Sacyr Outperform and viewing Germany's €500 billion infrastructure plan as a long-term catalyst. In real estate, German incentives for private investors provide some support for residential demand, but macroeconomic uncertainty, a slow recovery in institutional demand, and limited large portfolio transactions mean that development activity is recovering slowly. Vonovia plans to achieve IRRs above 10% on build-to-sell projects and gross yields of approximately 5% on build-to-hold projects; new regulations that lower technical requirements have reduced its development costs by approximately 30% to around €3,600 per square meter, excluding land. The report rates Vonovia Market-Perform with a €25.5 target price. The French development market remains at the bottom of the cycle, commercial real estate transaction volumes are subdued, and the expiration of the Pinel tax incentive has caused a sharp decline in individual investor activity, while the new housing stimulus plan offers only potential improvement. The report rates Icade Market-Perform, with a €24.0 target price in the main text versus €22.0 in the table as of August 21; Kaufman & Broad and Nexity are both rated Outperform, with target prices of €40.1 and €13.6, respectively. Within chemicals, the European construction cycle is most relevant to Arkema, Akzo Nobel, and PPG. Arkema is rated Market-Perform; improvement in France and a potential recovery in Germany later in the second half could provide tailwinds, but the report remains cautious. Akzo Nobel and PPG are leaders in European decorative paints; because this business has high renovation exposure, it is less directly correlated with construction-start data, although overall construction activity remains relevant. Further improvement in France could be beneficial, while persistent UK weakness is particularly unfavorable for Akzo Nobel, whose largest decorative paints market is the United Kingdom; PPG is rated Outperform and Akzo Nobel Market-Perform. The report also presents views on relevant capital goods, services, and machinery companies: Siemens AG, Schneider Electric, Siemens Energy, Atlas Copco, Rexel, and Legrand are all rated Outperform, with target prices of €330, €350, €210, SEK240, €44, and €170, respectively; ABB, Prysmian, Nexans, and Schindler are all rated Market-Perform, with target prices of CHF150, €145, €150, and CHF290, respectively. Sunbelt remains rated Outperform, with a target price of $86 for its US-listed shares and GBp6300 for its London-listed shares, based on a valuation of 2.7x CY27e EV/IC using a range of 1.5x to 4.0x. United Rentals, Trimble, and Jacobs remain rated Outperform, with target prices in the main text of $1153, $85, and $163, respectively; Caterpillar, Deere, Oshkosh, and Titan America remain rated Market-Perform, with target prices in the main text of $1002, $615, $138, and $17, respectively.
Analysis framework
The report first uses PMIs to assess current business conditions and corporate sentiment, and then combines residential and non-residential permits, starts, orders, and transaction data to verify whether activity is genuinely improving. It then compares the Eurozone and five major countries horizontally while considering the time lag between permits and the earnings of heavy and light building materials companies. Finally, the report maps regional and subsector signals to the business exposure, ratings, and target prices of companies in building materials, infrastructure, real estate, chemicals, capital goods, and machinery.
Methodology notes
Construction PMI and the 50 Threshold
PMI measures purchasing managers' assessments of construction activity, orders, and the future environment; 50 is the dividing line between expansion and contraction. This report uses PMI levels and monthly changes to assess whether each country is approaching a cyclical inflection point.
Joint Tracking of Permits, Orders, Starts, and Transactions
Permits and orders represent potential project demand, while starts and transactions are closer to actual activity. By comparing these indicators, the report assesses whether improvements in leading data can translate into actual construction and demand for building materials.
Lag Between Permits and Building Materials Companies' Earnings
After permits are approved, heavy materials companies typically require 3 to 9 months and light materials companies 9 to 15 months before seeing a financial impact; the lag shortens materially after construction starts. The report therefore avoids directly equating a rebound in permits with a current-period earnings recovery.
German Infrastructure Stimulus and National Housing Incentive Policies
The report examines whether Germany's €500 billion infrastructure plan, housing incentives, and French housing stimulus can drive orders and construction, while emphasizing the time lag between policy announcements and the realization of actual demand.
EV/IC Valuation
Sunbelt's target price uses CY27e enterprise value to invested capital, with a base multiple of 2.7x and a valuation range of 1.5x to 4.0x, resulting in target prices of $86 for the US-listed shares and GBp6300 for the London-listed shares.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Sika（SIKA.SW）Stabilizing European construction activity could improve demand for construction chemicals; rated Outperform, with a table target price of CHF205.
- Strengths
- Leading position in construction chemicals and strong execution potential, while the current valuation is considered to reflect excessively pessimistic volume and margin expectations.
- Weaknesses
- It remains affected by weak European construction demand and the slow transmission from permits to earnings.
- Comparison
- The report views it as a rerating opportunity among light building materials companies.
- Risks
- European demand and margins recover more slowly than expected.
- Rockwool（ROCKB.DC）Benefits from building renovation and insulation demand; rated Outperform, with a table target price of DKK250.
- Strengths
- Prominent position in the stone wool insulation niche, strong pricing power, and conservative guidance that leaves room for upside.
- Weaknesses
- It remains exposed to the European construction cycle.
- Comparison
- It has stronger pricing resilience than later-cycle companies.
- Risks
- A delayed recovery in European construction activity.
- Saint-Gobain（SGO.FP）A European construction recovery would affect its diversified building materials businesses; rated Market-Perform, with a table target price of €80.
- Strengths
- Strong execution, diversified business portfolio, and a robust balance sheet.
- Weaknesses
- Its recovery outlook remains tied to the uncertain French market.
- Comparison
- Its operating fundamentals are relatively stable, but French exposure limits relative upside.
- Risks
- Persistently weak French demand.
- Kingspan（KSP.ID）Has exposure to data center construction; rated Market-Perform, with a table target price of €72.
- Strengths
- Data center business opportunities and disciplined pricing.
- Weaknesses
- High exposure to cyclical end markets and fire-safety issues.
- Comparison
- Structural data center opportunities are partly offset by cyclical and safety issues.
- Risks
- Weak end markets and fire-safety challenges.
- Geberit（GEBN.SW）Its products are later-cycle, and its recovery may lag building materials peers; rated Underperform, with a table target price of CHF465.
- Strengths
- Strong competitive moat and premium brand positioning.
- Weaknesses
- Later-cycle product exposure may delay its earnings recovery.
- Comparison
- The report expects its recovery to lag most peers.
- Risks
- Limited upside at the current valuation.
- Holcim（HOLN.SW）Named the top pick in heavy building materials; rated Outperform, with a table target price of CHF90.
- Strengths
- Decarbonization initiatives, Latin American growth opportunities, pricing power, and synergies from expansion in light materials.
- Weaknesses
- Faces market concerns related to the Emissions Trading System and geopolitics.
- Comparison
- The report believes these concerns have driven an excessive recent share-price reaction.
- Risks
- Changes in ETS policy and geopolitical uncertainty.
- CRH（CRH.US）Rated Outperform, with a table target price of $150.
- Strengths
- The report expects the company to outperform its relatively conservative medium-term growth targets.
- Comparison
- Included among the report's positive views on heavy building materials.
- Risks
- A weaker-than-expected construction-cycle recovery.
- Heidelberg Materials（HEI.GY）Rated Outperform and named a Q3 Best Idea, with a table target price of €230.
- Strengths
- Could benefit from German infrastructure investment and improving industry pricing, with significant rerating potential.
- Weaknesses
- The market is currently focused on the effects of carbon pricing and ETS reform.
- Comparison
- The report considers market concerns about carbon pricing and ETS reform excessive.
- Risks
- Delayed implementation of German stimulus and changes in carbon policy.
- ACS、Vinci（DG.FP）、Eiffage（FGR.FP）、Sacyr（SCYR.SM）All are rated Outperform and benefit from transportation, the energy transition, digital infrastructure, and long-term German infrastructure investment; table target prices are €153.10, €163.50, €172.50, and €5.60, respectively.
- Strengths
- Strong order flows and high backlogs, with selective bidding and risk-sharing contracts improving earnings stability.
- Weaknesses
- Large projects have long execution cycles, and there is a lag between policy announcements and order conversion.
- Comparison
- The report identifies them as positive allocation opportunities in the European infrastructure sector.
- Risks
- Project execution, contract risks, and delayed implementation of stimulus plans.
- Vonovia（VNA.GR）One of the direct beneficiaries of German residential development and housing policies; rated Market-Perform, with a target price of €25.5.
- Strengths
- Target IRR above 10% for build-to-sell projects and target gross yield of approximately 5% for build-to-hold projects; development costs have declined by approximately 30%.
- Weaknesses
- Institutional demand is recovering slowly, large portfolio transactions are limited, and development activity remains subdued.
- Comparison
- Private investor incentives provide support but are insufficient to drive a rapid recovery.
- Risks
- German macroeconomic uncertainty and a delayed recovery in residential demand.
- Icade（ICAD.FP）、Kaufman & Broad、NexityReflect the depressed state of the French real estate development market; Icade is rated Market-Perform, with a target price of €24.0 in the main text and €22.0 in the August 21 table; Kaufman & Broad and Nexity are both rated Outperform, with target prices of €40.1 and €13.6, respectively.
- Strengths
- France's new housing stimulus plan provides a potential catalyst for a future recovery.
- Weaknesses
- Commercial and residential activity is subdued, and the end of the Pinel program has caused a sharp decline in individual investor demand.
- Comparison
- Kaufman & Broad and Nexity have higher ratings than Icade.
- Risks
- The French real estate market remains at the bottom of the cycle for an extended period.
- Arkema（AKE.FP）、Akzo Nobel（AKZA.NA）、PPGAll three companies have European construction exposure; Arkema and Akzo Nobel are rated Market-Perform, with table target prices of €67 and €60, respectively, while PPG is rated Outperform with a table target price of $136.
- Strengths
- Improvement in France could create a tailwind; Akzo Nobel and PPG hold leading positions in European decorative paints and have high renovation exposure.
- Weaknesses
- Arkema's potential recovery has not yet been fully confirmed by the data; the United Kingdom is Akzo Nobel's largest decorative paints market.
- Comparison
- The report rates PPG above Arkema and Akzo Nobel.
- Risks
- Stalling improvement in France and continued weakening in the UK construction market.
- Siemens AG、Schneider Electric、Siemens Energy、Atlas Copco、Rexel、LegrandAll are rated Outperform, with target prices of €330, €350, €210, SEK240, €44, and €170, respectively.
- Comparison
- The report identifies them as its Outperform portfolio in the related capital goods sector.
- ABB、Prysmian、Nexans、SchindlerAll are rated Market-Perform, with target prices of CHF150, €145, €150, and CHF290, respectively.
- Comparison
- Their ratings are below those of the Outperform capital goods portfolio listed in the report.
- Sunbelt（SUNB）Maintained at Outperform; target price of $86 for the US-listed shares and GBp6300 for the London-listed shares.
- Comparison
- Valued at 2.7x CY27e EV/IC, using a range of 1.5x to 4.0x.
- Risks
- The valuation multiple or end-market demand is weaker than assumed in the report.
- United Rentals（URI）、Trimble（TRMB）、Jacobs（J）All remain rated Outperform, with target prices in the main text of $1153, $85, and $163, respectively.
- Comparison
- They are US machinery and related services companies on which the report maintains positive ratings.
- Caterpillar（CAT）、Deere（DE）、Oshkosh（OSK）、Titan America（TTAM）All remain rated Market-Perform, with target prices in the main text of $1002, $615, $138, and $17, respectively.
- Comparison
- Their ratings are below those of United Rentals, Trimble, and Jacobs.
Key data
- Eurozone July Construction PMI44.342.8 in June; improved but remained below 50
- Germany July Construction PMI42.144.8 in June, falling to a three-month low
- Germany June Building PermitsResidential +14% YoY; non-residential +14% YoYNon-residential permits have increased for 16 consecutive months
- Germany June Construction OrdersResidential -3% YoY; non-residential +15% YoYResidential and non-residential activity continued to diverge
- UK July Construction PMI44.738.4 in June, rising to a four-month high but still contracting
- UK July Glenigan Total Construction Starts Index123.7, -29% YoYDeclined for an eighth consecutive month
- UK July Starts by SegmentResidential -47%; non-residential -10%; infrastructure -10% YoYResidential was the main drag
- UK June TransactionsResidential +6% YoY; non-residential flatResidential transactions continued to rise
- France July Construction PMI41.538.2 in June, a five-month high but still indicating significant contraction
- France June Residential Permits35,500 units, -5% YoYBroadly flat in May and down 20% in April
- France June Residential Starts+13% YoYIncreased for a tenth consecutive month
- Permitted Floor Area in FranceResidential -14%; non-residential -10% YoYThe permit base remained weak
- Italy July Construction PMI49.145.4 in June, approaching the stabilization level of 50
- Italy February Building PermitsResidential -1% YoY, -15.9% MoM; non-residential -3%; renovation flatPermit data have yet to confirm a recovery
- Transmission Lag from Permits to EarningsHeavy materials 3 to 9 months; light materials 9 to 15 monthsThe transmission period shortens materially after projects begin construction
- German Infrastructure Plan€500 billionThe report views it as a long-term catalyst, but it has yet to translate broadly into demand
- Vonovia Development EconomicsBuild-to-sell IRR>10%; build-to-hold gross yield approximately 5%Following lower technical requirements, development costs declined approximately 30% to around €3,600 per square meter, excluding land
- Sunbelt ValuationCY27e EV/IC 2.7x, range of 1.5x to 4.0xCorresponding to target prices of $86 for the US-listed shares and GBp6300 for the London-listed shares
Impact & implications
The report believes that improving leading indicators have reduced the risk of a further sharp decline in European construction activity, but investment implications should be based on regional differences, subsectors, and transmission lags rather than treating a recovery in permits as a simultaneous recovery in corporate earnings. Southern Europe, particularly Spain, has a relative advantage, while civil engineering and infrastructure are more resilient than residential and commercial construction; Germany's infrastructure plan has long-term value, but the realization of demand may occur later than the market expects. At the company level, the report favors businesses with pricing power, leading niche positions, high-quality order backlogs, or infrastructure exposure, while remaining more cautious on companies with high exposure to France, the United Kingdom, and later-cycle products.
Risks
- European demand, new orders, and project backlogs remain weak, and improvements in permits may not translate into actual construction as expected.
- German infrastructure stimulus has yet to transmit materially into broad-based demand, while residential fundamentals and high prices may continue to delay the recovery.
- Actual construction starts in the United Kingdom continue to decline, while domestic economic weakness and geopolitical uncertainty continue to weigh on activity.
- France faces weak demand, client hesitation, insufficient price competitiveness, and election-related uncertainty.
- The expiration of Italian construction incentive programs, geopolitics, and cost and supply-chain pressures may weaken the stabilization trend.
- Uncertainty regarding carbon pricing and ETS reform affects heavy building materials companies.
- Kingspan faces the fire-safety challenges explicitly cited in the report.
- Real estate development activity in Germany and France may remain subdued due to weak institutional demand, limited transactions, and policy changes.
What to watch
- Track whether construction PMIs in each country continue to approach the expansion threshold of 50 and whether improving sentiment translates into order growth.
- Monitor whether German residential and non-residential permits further transmit into orders, starts, and actual projects under the €500 billion infrastructure plan.
- Watch whether German construction activity accelerates meaningfully in late 2026 or is delayed further into 2027.
- Track whether the divergence between the UK Glenigan Starts Index, residential starts, and recovering transactions narrows.
- Monitor whether growth in French residential starts can offset declining permits, as well as the subsequent effects of housing stimulus and political uncertainty.
- Watch whether the improvement in new orders in Italy can continue and assess demand following the expiration of construction incentive programs.
- Track whether infrastructure, renovation, renewable energy projects, and EU funding can continue to support Spain's leading position.
- Using lags of 3 to 9 months for heavy materials and 9 to 15 months for light materials, verify whether improving leading indicators flow through to corporate financial results.