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
Headline GDP growth in 2018 has been recorded at 1.4%, and is forecast to grow at a modest 1.5% and 1.7% over 2019 and 2020 respectively though this will be dependant on any agreement made by the UK with the EU over the coming months as political uncertainty has had a notable impact on business investment, both at home and abroad.
The strength of sterling is still in recovery following the post-referendum depreciation and remains around 17% lower than its pre-referendum peak. Performance has been volatile during recent months and this is anticipated to continue until clarity on the terms for which the UK’s withdrawal (or indeed continued membership) from the EU are known. The intrinsic link between the strength of the pound and GDP is reiterated in the Bank of England Inflation Report 2019, which highlights the sensitivities that a 5% appreciation or depreciation of sterling could have, with a swing of circa 8% on forecast GDP growth.
Early forecasts for 2019 predict year-on-year growth in construction output of 2%.
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. Key contributors to the slowdown are the collapse of Carillion, Brexit uncertainty and adverse weather conditions experienced during Q1 2018 – most notably the infamous ‘beast from the east’.
Early forecasts for 2019 predict year-on-year growth in construction output of 2%. This is reflective of the anticipated upturn in investment once clarity on the UK’s trade deals are known along with the strong pipeline of residential development in regional cities such as Birmingham and Manchester. The continuation of mega infrastructure projects, such as HS2, Thames Tideway and Hinckley Point also support industry growth.
Across the construction industry greater competition is leading to tighter margins and, in some instances, alternative risk profiles are being undertaken to secure work. As such, the financial stability across the supply chain needs to be understood from the outset of projects, with adequate due diligence being undertaken beyond Tier 1 contractors, where required.
Labour market and wages
The number of people employed in the construction industry is at its highest since the financial crisis, though this is thought to have reached its peak. The ongoing struggle with sourcing skilled labour and staff across the supply chain is set to remain, which will increase wage demands.
Skill shortages are being witnessed throughout the supply chain and key trades (e.g. bricklayers) are becoming increasingly difficult to source, which is impacting lead-in times.
Average weekly earnings in the industry increased by 4.2% year-on-year to November 2018. Wage increases are expected throughout 2019 as demand outweighs supply, though a slowdown in growth from previous years is anticipated due to companies reaching a ‘tipping point’ in what they are willing, or indeed able, to pay.
The UK unemployment rate is predicted to remain broadly flat at around 4%.
The Residential sector has performed well, supported by government policy initiatives to meet demand. The build-to-rent (PRS) market continues to grow to meet the shortfall in supply from the built-for-sale market. The private sector remains fragile, with a number of large schemes on hold pending clarity on the UK’s withdrawal from the EU. Furthermore, developers are citing the amount of red tape as prohibitive to future growth, in particular the redevelopment of derelict brown field sites.
The commercial office sub-sector has had a mixed performance across the UK. The London market has remained strong throughout 2018 with more new space delivered than 2017. The development pipeline is anticipated to soften during 2019, but will remain above average, while demand for new space is expected to continue. However, developers are adopting a more cautious approach and typically require a pre-let to be in place before committing to development, be it new build or refurbishment – a trend which is stifling growth.
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.
A steady performance was witnessed from Infrastructure, 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.
The Building Cost Information Service (BCIS) is currently projecting marginal quarterly increases in their Tender Price Index (TPI), with year-on-year growth of 2.2% expected in 2019. The industry-published indices are typically less optimistic, and are forecasting 1-2% construction inflation during 2019 for the UK.
Building input costs recorded a 4.7% yearly rate of change in Q4 2018. By default, this puts increased pressure on the supply chain when building costs are growing at a greater rate than tender inflation.
Material price inflation remains above 5% 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 future trade agreements at large, there are reports of stockpiling imported materials to try and mitigate the risk associated with both delay and cost. Likewise, 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