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Construction Industry

UK Construction Intelligence Report

Construction Output

The recovery from the first lockdown was swift, and while it has slowed it has been sustained through the latter half of 2020. The second lockdown in November saw construction sites remain open and having taken on board the lessons learnt from Lockdown 1 retain a high level of pre-Covid productivity with estimates varying from 80 – 90%.

When the latest lockdown was implemented the UK government made clear that construction sites should remain open. This has meant that the construction output has almost reached pre-covid levels with confidence that there will be a sustained recovery.

The threat is that suppliers will not be able to provide pre pandemic levels of stock and linked to the current transport disruption will mean that products are overdue and the knock-on effect of delaying projects.

Trends

Table 1 Construction Output Volume Seasonally Adjusted Index (2018=100)

Sectors Outlook

All sectors suffered a decline as a result of Lockdown 1 with most sites closed during March and April. Some work was able to continue in the health and infrastructure sectors. Once construction was able to resume, the emphasis was on completing existing projects, with contractors facing some problems in obtaining materials, adjusting for social distancing and having to rearrange schedules and deliveries.

While the housing market is currently buoyant, the end of the stamp duty holiday, now extended at various levels until October coupled with continued economic uncertainty and growing unemployment will suppress this market. Any increases in interest rates may also stifle demand, although as previous stated interest rates are at a historic low level.

The Government's “Help to Buy” scheme has been extended to 2023 and a new Government mortgage guarantee scheme confirmed with UK lenders. From April 2021 lenders can offer 95% mortgages under this scheme to make home ownership more accessible to those with smaller deposits.

The government's commitment to infrastructure is seen as a solution to get construction started, beginning with shovel ready small projects and highways backed up by large scale projects such as HS2 and East-West rail.

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According to the government’s National Infrastructure and Construction Pipeline there is expected to be a pipeline of between £27bn and £37bn coming to the market. The measures included:

  • £27.5bn for English roads up to 2025
  • £23bn to HS2 over the same period
  • £7.1bn to the Housing Building Fund
  • £4bn levelling up fund, allowing local communities to bid for projects based on needs

This means infrastructure is expected to be one of the most resilient sectors over the next few years. This could be impacted if the government decides to divert some funds away from construction towards other areas of the economy.

The impact of home working will affect many areas, businesses have had to adjust their operating models and the growth in on-line shopping has growth exponentially. This has hastened the demise of the traditional retail market, with developers looking to expand work on warehousing and distribution hubs.

Commercial offices will be looking at how the impact of home working will impact. New ways of working are likely to be introduced, hot desking may be unrealistic leading to a reduction in desk density, local hubs has been mooted together with more flexible working hours, people attending the office for a certain number of days and more open spaces to allow for social distancing.

Already we have seen an uplift in office space available and the possibility remains that if the financial sector is unable to remain competitive outside of the single market downsizing in the UK commercial office space as relocation to the EU occurs.

Trends

Source - Experian

London Construction Intelligence Q1 2021

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Despite the positive news of a Trade and Co-operation Agreement achieved between the UK and the EU in December 2020, the on-going uncertainty due to the Covid-19 pandemic means that prospects across sectors in London markets are currently mixed.

Prospects across sectors is mixed.


In terms of the London commercial office sector, activity is likely to remain weak. Office starts are likely to decline sharply in 2021 according to leading sources. Developers are forecasting a -9% decline in starts in 2021 due to weaker economic conditions and changes in occupier requirements. A 50% decrease in new starts was confirmed in 2020. However, a rise in office refurbishments is materialising as premises are re-modelled and re-purposed for use as hubs for collaboration.

Two thirds of new starts in 2020 were for refurbishment. New build office projects are likely to be slower to recover, due to shift to remote working, which is likely to become a more common phenomenon. In the long term, demand for office space is therefore forecast to reduce by up to 15%. This is in addition to weak underlying activity prior to Covid-19, where the focus was on construction of new office space in regional centres, rather than in the Capital.

While the prospects for the private housing sector are not as bleak, issues remain that could affect the sector in the short term. The pandemic has exacerbated the impact on demand for inner city living, with buyer interest shifting away from the centre of major conurbations, London being no exception. The build to rent sector may be particularly heavily impacted in the short term, with unemployment levels rising, weak rental growth and weak demand as a Brexit legacy.

However, In the long term, underlying demand for living and working in London is unlikely to change. Therefore, a recovery in activity is likely to occur through 2022-2023. Data from Q3 2020 shows that residential construction activity in London [13% of national share] was weaker than regions such as the Northwest [26%] and Yorkshire [30%]. Historically and over the past decade, London’s share of output has been the highest of all UK regions. The social housing sector is likely to support stronger growth in activity, with housing associations better placed to fund new projects and the government funding ACM cladding replacement. Contractor sentiment within the residential sector remains positive.

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The infrastructure sector is likely to sustain and increase activity in the capital over the coming 2-3 years, however the most significant hotspots are likely to be seen beyond London. The £4billion Thames Tideway project and further mobilisation of HS2 works is likely to impact positively on activity in the Capital, however it is worth noting that the road infrastructure projects funded by Highways England’s Roads Investment Strategy will focus activity in other regions such as Humberside, the Southwest and the Northwest.

Tender prices in London will be impacted by the rise in fabricated structural steel, steel reinforcement, structural timber components and the rise in oil prices. Due to the lack of demand in specific sectors, contractor margins are therefore likely to be reduced. Tender prices in London are therefore likely to be relatively flat in 2021, with modest increases possible in 2022.