20%… that’s the amount of building construction costs that are wasted according to some estimates. This is a frightening amount of money and resources when you consider that the global construction industry is worth $3.5 trillion and accounts for 14% of global GDP. It doesn’t have to be this way though. As with most issues in the world today, technology can help improve efficiency and close the black hole into which billions of pounds needlessly disappear each year.
Designing, constructing and running a building or an infrastructure project is a complex process – as I’m sure those in charge of Crossrail will testify. Not only does it involve highly technical calculations and processes but there are also likely to be a number of different parties involved. This is where digitalisation can play a huge role. And yet, despite the obvious benefits, the construction industry still lags far behind others in terms of digital penetration and IT spending. At just 1% of revenues, its IT spend trails far behind, say, banking, which spends around 6%.
Germany’s Nemetschek is one of the firms at the forefront of trying to address this shortfall, providing cutting edge software solutions in building information modelling (BIM). Founded by Professor Georg Nemetschek in 1963, the company now employs over 2,000 people and has successfully used acquisitions to build a portfolio of 16 brands, which cover the whole lifecycle of a building from design to ongoing management and maintenance. This makes it unique in offering an end-to-end solution and gives it an obvious competitive advantage over peers.
Using Nemetschek software, architects can build virtual 3D models of a construction project and share this in an open workflow with other project stakeholders like engineers and builders. Doing this virtually and having it in one place, accessible to all, means that changes can be scoped-out and plans refined or adjusted collaboratively and before problems occur, which in turn helps to reduce those costly delays that result from parties taking a parochial approach.
We think design software is a structural growth area and the market for BIM software will grow exponentially over the coming years, as it becomes an imperative for companies to operate in more efficient and sustainable ways. Nemetschek has grown revenues by around 20% per annum over the past few years and given how underpenetrated the market still is (particularly in countries like China where building regulations are at a much earlier stage of development), we think there is a great opportunity for the company to continue to expand its total addressable market.
Of course, like any high technology field, the software industry is one where standing still simply isn’t an option. Indeed, just last week, Nemetschek purchased Redshift Rendering Technologies in the US to bolster its 3D rendering capabilities. As well as acquisitions, it invests heavily in innovation and continually reinvigorating its products to ensure they provide the functionality required by customers. Whilst this has an impact on margins in the short term, we see it as a sensible long-term approach to safeguarding the competitive moat the company has established.
All-in-all, Nemetschek is an interesting company that occupies an area that is likely to see strong growth over the coming years. Led by an experienced management team and still driven by Professor Nemetschek’s guiding vision, we think the company can continue to help the construction industry to reduce the spectacular amount of wastage that it is currently burdened by.
We currently hold Nemetschek in portfolios.
Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.
About the author
Mark Peden is the architect of our global equity income strategy and has been the lead manager of the Kames Global Equity Income Strategy since its inception in 2011. European equities are his main area of research expertise where he has been analysing companies since joining the firm in 1992. Over his tenure Mark has held a number of positions and managed a range of both International and European equity funds. He graduated from the University of York and the University of California (Santa Barbara) with a BSc honours degree in Economics with Politics. He a CFA charterholder and is also an Associate member of the UK Society of Investment Professionals (ASIP). He has 26 years ’industry experience (as at 30 November 2018).