Construction remains a pivotal sector to the UK economy, contributing 6% of GDP, with a 1.4% increase in industry output.
UK summary 2020
UK summary 2020
UK Market Review
The UK economy is showing signs of stabilisation following the outcome of the recent general election. However, forecasts for the year ahead are understandably varied as the full implications of Brexit are yet to materialise.
Early indications suggest that 2020 will experience slightly greater levels of GDP growth when compared to the relatively stagnant results experienced in 2019, which saw growth slow to its lowest rate in almost a decade. Quarterly growth in the previous year averaged only 0.2%, which is roughly half of the rate experienced in the preceding three years, with
Brexit-related uncertainties being cited as the catalyst for such a noticeable decrease. Annual growth for 2019 was 1.2% and forecasts indicate that in 2020, rates will be in the region of 1.25-1.4%, remaining considerably lower than the post-2008 crash average of 1.91%.
Much like the UK, the global economy is experiencing major uncertainty, with trade disputes and rising political tensions adversely affecting the outlook. Global growth is expected to rise at a rate of 3.4% in 2020, with advanced economies growing on average at 1.7%. Despite these levels, the sentiment remains cautiously optimistic regarding the UK’s growth potential in 2020. Brexit has contributed widely to levels of uncertainty, as it is viewed as posing a greater risk to the UK economy than trade disputes are to the wider global economy.
The construction industry remains a pivotal sector in the UK, contributing 6% of overall GDP and influencing some of the key economic indicators, such as inflation and employment. Growth is forecast for the coming year, with construction output expected to increase by circa 1.4%. This is coupled witha 2% increase in the value of underlying construction starts in the same period, reflecting post-Brexit optimism amongst developers and investors. These figures should be viewed with caution, however, as the 2019 forecasts suffered at the hands of a prolonged Brexit process, with forecast growth not materialising as planned.
Across the construction industry, contractors continue to be forced into working to ever-tightening margins as competition intensifies, a trend which looks set to continue in the upcoming year. This is forcing contractors into a more aggressive, top-down approach to risk transfer, putting significant pressure on an already fragile supply chain.
The Building Cost Information Service (BCIS) is currently projecting marginal quarterly increases in its Tender Price Index (TPI), with year-on-year growth of 2.4% expected in 2020. Industry-published indices are forecasting a more modest increase with a 1.5-2% rise in tender prices predicted.
Brexit has not yet had a telling impact on material costs, which remain relatively flat, only rising in line with inflation. This is in large part because the UK is currently still in the EU, and therefore continues to benefit from the associated trade agreements. This should remain the case moving through 2020, whilst trade agreements are finalised during the transition period. Currently 62% of all imported building materials originate in Europe, though the UK supply chain has already started to source materials outside of the EU to mitigate any impact on material costs that are likely to arise once Brexit is finalised.
Labour market and wages
The labour shortage in key trades across the industry continues, and the problem is forecast to persist into 2020 and beyond. With the industry facing an increase in output, it would be expected that there will be an increase in the workforce. However, workforce numbers are expected to remain relatively stagnant, or even decrease due to an ageing workforce and a lower total net migration between the EU and UK (currently 25,000 net increase as opposed to 50,000 in 2016). This will therefore put increased pressure on a labour pool that is already stretched.
The above-mentioned shortage is a major contributing factor in the wage increases experienced in recent years. This is an issue that looks set to continue, as the UK Government seeks to curb the immigration of unskilled labourers, who account for the majority of the construction workforce, in favour of skills-based workers. London, in particular, relies on an overseas workforce and will be affected by any significant immigration changes made.
The private housing market became stagnant during 2019 as a direct consequence of the uncertainty surrounding Brexit. It is forecast that 2020 will be a more positive year due to the more stable political situation. However, the industry consensus is that this growth will not be truly felt until the end of 2020, with that momentum being carried into 2021 and beyond. During 2019, the build-to-rent (BTR) sector failed to grow at the swift pace seen in previous years, with a drop of 29% on 2018 recorded, though an uplift is predicted as investor confidence grows.
Currently 62% of all imported building materials originate in Europe, though the UK supply chain has already started to source materials outside of the EU to mitigate any impact once Brexit is finalised.
Purpose-built student accommodation (PBSA) schemes across the UK have seen growth of over 30% from 2013-2019. The demand for PBSA in 2019outweighed the bed spaces available, and this is expected to remain the same moving into 2020 and 2021. Although, it is expected the number of students over the next decade will rise, enabling PBSA to remain a strong sub-sector within the residential sector, possible rises in tuition fees and the affordability for students renting these spaces poses a concern.
Modern senior living developments in the UK are witnessing an upturn in demand to meet the needs of an ageing population, and look set to grow through 2020 and beyond. The increased flexibility in recent times with regard to options on ownership, coupled with local amenities and high-standard living spaces, make this an attractive offering.
The UK commercial office sector, which is traditionally propped up by London, is expected to slow significantly in 2020, with a 16% deficit in new office developments forecast, following a 6% increase in new office developments in 2019.
Despite the forecast downturn across the UK, the volume of space under construction in London remains above the long-term average. 2019 saw 11.9 million sq.ft. recorded and a healthy pipeline is forecast for 2020 to meet continuing demand for quality space. Other key cities showing growth are Birmingham and Manchester.
Retail output continued to decline, falling 10%, which is attributed partly to the change in consumer spending habits, leading to a decline of in-store spending and an increase in online purchasing. This in turn will have an impact on industrial due to the increased need for storage for online shopping, with a 20% increase forecasted. This demand is further compounded, as the UK stockpiles materials whilst the full ramifications of Brexit are understood. The civils and infrastructure sector saw underlying starts rise by 22% in 2019, slowing down to a forecasted 5% increase in 2020. The sector's continued growth is attributable to a small number of megaprojects, such as Thames Tideway, Crossrail, HS2 and Hinkley Power Point. The sector is also likely to be boosted by additional funds raised from the Government, as they have pledged to increase investment for UK infrastructure.
Birmingham’s development pipeline continues to hit new heights as it drives forward into an era of redevelopment and repurposing. Developer and investor confidence are at an all-time high in preparation for HS2 and the 2022 Commonwealth Games, leading to record levels of construction.
The residential sector is particularly active, showing year-on-year growth, with 1,696 completed units recorded in 2018 and 2,924 units due to have been completed in 2019. Output was at its highest since 2008 over the 2018-2019 period, with a total of 5,065 units under construction, which is the highest level on record.
Student accommodation is also a thriving sector, with 1,262 bed spaces completed in 2018, and a further 1,209 and 1,458 predicted for 2019 and 2020 respectively.
Office market development surpassed circa 1.4 million sq.ft. for the third consecutive year.Total availability is 2.2 million sq.ft., a decrease of 4% on 2018.
However, prime Grade A was limited, with supply to only meet demand for 1.3 years of average take-up, demonstrating an undersupply in the market. Notwithstanding, a strong demand for serviced office space exists and accounted for 45% of take up in 2019.
The regeneration of Liverpool’s docklands will create circa 21.5 million sq. ft. of mixed-use residential, business and leisure space. Everton’s new 52,000-seater stadium, plans for which have now been revealed, is just a small part of Peel Group’s £5.5bn, 30-year Merseyside development.
Among other key developments will be a new £50m cruise liner terminal, which is due to begin construction in early 2020, featuring a new 200-bed, four-star hotel by Wates Construction.
Across Prince’s Dock, Chinese firm BCEGI will continue work on The Lexington, a 34-storey, £90m build-to-rent tower block, with construction expected to finish in summer 2021.
Completions in Manchester's residential market in 2019 are expected to have exceeded 5,500 units, which is almost double the 2018 completions figure.
Manchester’s record levels of development continue, strongly supported by the buoyant residential market. Completions in 2019 are expected to have exceeded 5,500 units, which is almost double the 2018 completions figures. Due to continued investment and a strong pipeline predicted for 2020, the number of units projected to be completed may exceed 7,500. This would constitute an almost 600% increase since 2017.
The hotel sector remains strong, with an estimated 2,129 rooms completed in 2019. Strong growth is set to continue, with completions for 2020 forecast to exceed 2019’s figures.
The commercial office sector remains buoyant and diverse, with the amount of floorspace under construction up by 37% from 2017. According to the Deloitte Manchester Crane Survey 2019, 85% of office space under construction is new-build Grade A space. It is estimated that the take-up of office space in 2019 was circa 1.5m sq.ft. and according to market reports, circa 92% of all-grade office space and 98% of Grade A office space in central Manchester is occupied. Due to a reduced level of Grade A space coming to market and high occupancy rates, the commercial sector is under strain to meet demand.