Regional Analysis 2018 United Kingdom

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* UK Market Review - section updated Sept 2018

The British economy grew by 0.4% in the three months to the end of June 2018. Economic growth is projected to remain modest at 1.4% in 2018 and 1.3% in 2019, owing to a high level of uncertainty about the outcome of Brexit negotiations. Unemployment is expected to remain close to its equilibrium rate of around 4.5% in the near future, although wage growth is likely to remain low, which will result in a decline in real wages. According to the latest forecasts from the Construction Products Association (CPA), the UK’s economic growth shows little sign of improvement in Q1, despite a slight bounceback in the services sector in the last quarter of 2017. Output is expected to soften as a slowing economy, falling real wages and rising costs adversely affect the industry. Growth for 2018 is therefore only expected to rise by 0.7%, which is the slowest rate in six years, and a downward revision from 1.2% in previous forecasts.

Economic growth is projected to remain modest at 1.4% in 2018 and 1.3% in 2019, owing to a high level of uncertainty about the outcome of Brexit negotiations.

Brexit continues to impact the construction industry in the UK in a number of ways. The devaluation of sterling remains a challenge, and it is expected to continue to perform poorly against the US dollar and the euro throughout the ongoing negotiations between the UK and Europe. Like-for-like increases in the costs of imported materials are being still being reflected in tender costs, with the UK relying on large cladding and steel contractors based in continental Europe. Increasing inflation rates have continued to negatively impact on consumers as the value of sterling falls, and the rate of inflation is expected to remain higher in 2018 as a result of higher fuel prices and sterling depreciation. The rate of CPI was 2.4% in Q4 2017, and this trend is expected to continue throughout the first half of 2018. Inflation in the UK remains very high (between 2.5% and 3%) and continues to impact upon consumer spending. As a result, the Bank of England lifted interest rates to 0.75% last month (August 2018) – their highest level since the financial crisis a decade ago. 

Tender prices

Tender price forecasts were revised by the Building Cost Information Service (BCIS), reflecting the projected reduction of prices in the construction industry. According to the BCIS, the Tender Price Index (TPI) will record a decrease of 1.3% in Q1 of 2018. This is forecast to improve in Q1 2019, with an increase of 0.6%. These forecasts do not represent the opinion of the industry as a whole – given that the UK imports up to 65% of construction materials, and in light of sterling depreciation, it is likely that construction costs will increase in the short term. Overall, the prices of construction materials are expected to rise by 3.5%-4% per annum for 2018 and 2019, due to construction inflation being linked to the current currency fluctuations. We expect to see a rise of 1.5% in average wage awards in 2018, with annual increases of 1.9%, 2.5% and 3.0% in the following three years. Total construction output decreased by 2% in November 2017, marking the sixth consecutive period of decline since August 2012. Based on the current state of the market, Linesight forecasts a 2%-2.5% increase in construction inflation in 2018 for the UK.

Skills shortages

A report from the Federation of Master Builders (FMB) has revealed that skills shortages have hit a record high, as construction SMEs find it increasingly difficult to hire quality workers. A total of 87% of contractors believe that the cost of materials will rise over the next six months, compared with 82% in the previous quarter, while more than 60% of construction SMEs expect salaries and wages to increase in the next six months. The same can also be said for mechanical and electrical components, with a 7% increase in material costs in the last quarter of 2017, due to sterling’s weakness. The construction workforce in the UK is made up of 12.6% foreign-born workers, and 5.7% are from EU-accession countries. The uncertainty of the economic climate in Britain has negatively impacted upon the available workforce, which could potentially have a knock-on effect on consultants and contractors in 2018 and 2019.

Skills shortages have hit a record high, as construction SMEs find it increasingly difficult to hire quality workers.

The CPA has stated that public and private investment in housing and transport infrastructure is required to increase to boost UK productivity growth. The Infrastructure sector is expected to be a key driver of construction growth going forward in 2018.
Linesight anticipates public and private housing, and infrastructure to be the primary drivers of growth for 2018-2019. However, the unpredictability of rising costs and delays on major projects may hamper the envisaged growth.

News from the UK regions

Construction in the North West remains strong, with numerous tendering opportunities within the Residential sector in both the PRS and ‘For Sale’ markets. According to the January 2018 Manchester Crane survey from Deloitte, there are currently 11,100 residential units under construction. This represents a 60% increase from 2017 levels, and therefore pricing levels for Tier 1 and larger Tier 2 contractors on large complex projects have remained buoyant. This unprecedented volume of construction brings with it logistical, labour and resourcing challenges for the sector, which in turn have fed into a higher inflationary cycle in the North West region. However, this is not generally representative of the rest of the UK construction sector.

Manchester in particular retains its position as the most popular hotel investment destination in England, and will continue to perform at the same level for 2018 as the region delivers key projects. Demand for office space and residential housing is rising considerably within Manchester, with the population expected to increase by 20% by 2025.

UK regional cities are reporting record levels of construction activity. Overall, growth is expected to be the highest in larger cities.

Tender inflation forecasts in the North West averaged between 3%-3.5% in 2017, and this inflationary market is set to continue, albeit at a somewhat slower pace, with a forecast of 2%-2.5% up until Q3 2018. The balance of the regions within the UK is forecasted to see an annual average increase of 2.5%. Growth across a number of sectors has seen some significant increases in development within Birmingham, Manchester and Leeds. However, reports suggest that parts of the East region, such as Yorkshire and Humber, are expected to perform better than any other UK regions.

Birmingham’s construction rate in the Commercial sector has grown significantly in 2016 and residential schemes witnessed a large increase, totalling 2,331 units in the city centre. The construction of the HS2 railway line is underway, and will link towns and cities, rejuvenating businesses and markets across the supply chain. The HS2 routes from Crewe to Manchester, and from West Midlands to Leeds will be vital in linking local and regional economies.

Cambridge, Oxford and Milton Keynes will have the fastest growing economies of all British cities in 2018. Cambridge is set to grow by 2.3% in 2018, followed by Oxford and Milton Keynes, which are expected to grow by 2%. UK regional cities are reporting record levels of construction activity. Overall, growth is expected to be the highest in larger cities, such as Manchester, with the figure expected to be between 1.5%-2.5%.

Contributors: Michael Riordan, Callum Faulds, Andrew Callaghan, Dearbhla Walsh, Declan Furey