Construction activity is directly linked to the performance of the wider economy, and with a total GDP contribution of circa 6%, the industry recorded a year-on-year growth on all output of 0.7%, which represents the lowest annual growth since 2012.
UK Market Review
UK annual GDP growth was recorded at 1.2% in Q2 2019, this was circa 0.2% lower than many forecasters had predicted and notably below the long-term trend rate of around 2%. Future GDP forecasts are heavily caveated on the UK leaving the EU with a deal and are fairly modest at 1.3% to 1.5%. Should the UK leave without a deal, be it on 31 October 2019 or at a later date, then a significant decline in GDP (up to 5.5%) is forecast, along with notable increases in unemployment and inflation.
Since the referendum on 23 June 2016, the strength of sterling has depreciated by more than 15% against the US Dollar. The intrinsic link between the uncertainty of Brexit and the strength of the pound is reiterated by fluctuations typically being recorded at times of Brexit related developments.
Construction activity is directly linked to the performance of the wider economy with a total GDP contribution of circa 6.4%.. Construction output growth year on year in July 2019 was recorded at just 0.3%, which was propped by a surge in Q1 2019, as more recently, monthly declines have been witnessed with June recording the lowest output levels since April 2009.
Looking forward, growth of the construction industry to 2020 is forecast at 1.4% and is largely driven by activity on major infrastructure projects such as HS2, Thames Tideway and Hinckley Point as well as government initiatives to meet housing targets.
The intrinsic link between the uncertainty of Brexit and the strength of the pound is reiterated by fluctuations typically being recorded at times of Brexit related developments.
Labour market and wages
Average weekly earnings in the industry increased by 4.8% year on year in April 2019, which is above the national average. This ‘above average’ increase can be attributed to a lack of skilled workers, weakness of the pound (with regard to overseas workers) and an ageing working population. Should the UK leave the EU with no deal then the pressure on the labour pool will only increase and will have a more pronounced impact on preliminaries and ultimately tender prices.
If the UK leaves with a deal, then the UK unemployment rate is predicted to remain broadly flat at around 3.9%, though the Bank of England has advised that to leave with no deal could result in unemployment levels nearer 7%.
Residential remains a key sector with the Build-to-Rent (BTR) sub-sector forecast to grow in order to meet the shortfall in supply from the built-for-sale market. Other sub-sectors such as Purpose-Built Student Accommodation (PBSA) and Co-Living continue to thrive as demand for quality, city centre accommodation with flexible rental options continues. As an ageing population, there is also a need for the provision of senior living accommodation, a sub-sector whose growth has been hampered somewhat by the complex investment model, though it would appear that funders are becoming increasingly comfortable and a strong pipeline is forecast.
The Commercial Office sector is arguably the most susceptible to Brexit uncertainty and has witnessed a sharp decline in uptake from financial services tenants who traditionally took on long lease options on large floorplates. Uptake is now dominated by tech start-ups who tend to favour co-working with flexible rental options and there are no signs that the co-working phenomenon is going to slow down, with a number of developers creating their own co-working brands to meet the growing demand. In terms of pipeline, London remains the most active UK city in the sector, though a shift to refurbishment of existing assets over new builds has been witnessed, with a number of new build projects put on hold whilst developers await on the outcome of Brexit.
Retail continues to struggle with increased competition from online retailers, which conversely has led to improvement within the Industrial sub-sector, due to increased warehouse and distribution demands.
The Infrastructure sector witnessed asteady performance, with megaprojects such as HS2 and Hinckley Point stimulating growth. The sector is forecast to remain constant through 2019, with increased Government spending making the industry more ‘Brexit-proof’ than others.
Material price inflation remains above 4% and is closely linked with the performance of the pound. Key products such as structural steel, reinforcement and timber are witnessing above-average increases.
With the uncertainty surrounding future trade agreements, there are reports of stockpiling of imported materials to try and mitigate the risk associated with both delay and cost. Similarly, contractors may look to shift their supply chain to UK-based suppliers where possible, to limit exposure to potential trade tariffs.
The North East, East Anglia and Scotland all saw a decline in outputs in 2018, with the Southwest remaining flat. The West Midlands and North West have recorded a notable increase in output, which is underpinned by two key cities that have excelled in recent years; Birmingham and Manchester.
Birmingham’s development pipeline continues to grow with the Residential sector, in particular, the most active. According to the Deloitte Birmingham Crane Survey 2019, the completion of residential units in 2018 was at its highest since 2008, and a total of 5,065 units are currently under construction, which is the highest level recorded. Student Accommodation is also a thriving sector, with 2,667 bed spaces completed in 2018, and a further 1,209 and 1,458 predicted for 2019 and 2020 respectively. The office market continues to attract occupier interest, with the infrastructure improvements associated with HS2 increasing the appeal to major occupiers. However, the availability of Grade A space is limited, with prime locations typically overlooked in favour of residential opportunities. Notwithstanding a strong demand for serviced office space exists and accounted for 23% of take up in 2018.
Manchester’s record levels of development are strongly supported by the buoyant residential market, with 2,659 units completed in 2018 and a strong pipeline predicted during 2019 and 2020, with circa 5,500 and 7,500 units respectively expected to be completed.
The Manchester Hotel sector continues to thrive with 840 rooms completed in 2018, and a further 2,129 rooms under construction.
The Commercial office sector remains busy, with the amount of floorspace under construction up by 37% from 2017, and according to the Deloitte Manchester Crane Survey 2019, 85% of office space under construction is new-build Grade A space.
Michael Riordan, Callum Faulds, Andrew Callaghan, Stuart Taggart