Figures published by the ONS in September for construction output showed a -1.6% drop in the July figures and now stands at -1.8% below pre-pandemic levels after 4 months of falling output.
Material and labour shortages were cited as factors holding back work on site, which ties in with the reported reasons for a drop in confidence.
The loss of momentum spanned all major categories of construction work except for infrastructure and was most pronounced in the house building sector. The house building sector is expected to recover and continue to lead the way.
There are indications in increasing Client apprehension. The latest Glenigan report indicated that there was a drop of 19% in schemes valued at £100m or less in the last quarter as a combination input costs spiralling, and with the threat of delays omnipresence making schemes unviable at the present and resulting in clients putting on hold projects.
Similar events are occurring in Europe as the construction sector shrank again last month as material and labour shortages caused output to fall and costs to rise.
Construction Output Forecast
The recovery has been led by demand in the housing sector and the Government commitment to large scale infrastructure work such as HS2 and the road building works means that more than £100bn has been committed to boost activity over the next few years.
Meanwhile for the next decade major projects such as HS2, East-West Rail will drive growth in some regions with infrastructure and private housing should see the healthiest pace of expansion by 2025. The CITB also expects a growing contribution to come from repair, maintenance, and improvement work, as retrofitting existing buildings to meet net zero emissions targets becomes more important.
Resource shortages together with rising costs will impact on the start of buildings and output in the second half of 2021 and the early part of 2022 will be lower than in the 1st half of 2021.
Material shortages are not just a UK problem, the construction sector in Europe, North America and China has rapidly soared back bringing with it a global demand for products. However, the demand has not been met by supply due to closed or mothballed mines and processing plants. This is also linked with understaffed manufacturing plants located in countries still decimated by the impact of the pandemic and lacking the capacity to produce the volume of materials required.
The re-emergence of the construction sectors in China and the US this year has been a key driver in escalating the problems caused by shortages of products that have been hampering firms since the start of the pandemic. Limited supplies of timber and steel are now being snapped up by the two economic superpowers, leaving the relatively small UK market with supply issues.
As noted in the logistics section the aftermath of the new UK – EU trade agreement is still causing delays and the lack of HGV drivers is further delaying the supply of goods.
Reaching the local level there are reports that major projects including HS2, at both ends of the chain in Birmingham and London, and the Hinkley Point C nuclear power station are pre-purchasing vast quantities of the available supplies of materials such as steel and concrete, causing localised shortages.
Material Price Increases
The ONS Construction Materials Price Index has reported a 20% increase in the 12 months up to July 21. There has been drastic cost increases and extended lead times across a wide range of important products including timber, roof tiles, steel, and raw materials like copper.
With the surge in demand coupled with supply issues caused by mothballing and closing mines and processing plants raw materials have surged in cost. The continued demand for aluminium and steel products have seen these prices rise, the good news is that it seems copper may have peaked and in the last 3 months this raw material has fallen in price.
While the construction sector recovered quickly from the Covid-19 pandemic it faces both a short and longer-term problem with labour shortages. In August data presented by the ONS shown that there were 35,000 vacancies to be filled. By 2015 the CITB anticipate the sector will need to recruit an additional 217,000 new workers just to meet demand.
Source: Noble Francis of the CPA via Twitter.
There are a multitude of factors involved in the labour shortage:
In the short term, there are an estimated 100,000 construction workers still on furlough, who are expected to remain on the scheme until it finally ends. Once the scheme ends, dependent on the numbers who decide to remain in the industry, it should help ease the labour shortage, however previous recessions have shown that many construction workers leave the sector not to return.
The loss of many EU workers - around 1.3 million have left the UK over the past year either because of returning to their families during the pandemic or due to our departure from the EU. Over the past four years the EU construction workforce in the UK has declined by 54% with London, being the hardest hit region.
The new points-based immigration system, with an emphasis on attracting higher paid professionals or where skills are known to be missing is likely to exclude roles such HGV drivers, general labourers, and lower paid jobs.
An aging demographic within the workforce – 32% of the workforce is over 50, so within the next 15 years it is expected that 500,000 workers will be lost. The lack of appeal to younger workers means that less than half of the 36,000 people in construction further education end up taking up a job in the sector.
Obviously, the numbers don’t stack up, but the present government maintains that it can be resolved with UK labour. Whilst the UK needs to address the issue and undertake a successful recruitment and training campaign it will not be achieved in the short term. To continue the recovery impetus should be aided by placing skilled occupations such as bricklayers and trained HGV drivers on the “Shortage Occupation List” enabling recruitment visas to be easier obtained.
The current situation is that employers are faced with an increased workload, while looking at a decreasing pool of labour that can use the supply and demand dynamic to push wage costs higher. This was highlighted in August as labour costs were reported to have increased by 3.6% in the month.
In the short term this will impede the recovery while the long-term threat of increased labour costs will impact on tender price inflation.
One of the effects of the UK / EU trading agreement was the end of harmonised regulatory standards which contributed to frictionless trade movement. With this the Government announced that it was replacing CE Marking with a new “UK Conformity Assessed” mark for goods placed on the market since 1st January 2021.
Various bodies have reported that there are insufficient Approved Bodies and resources to be able carry out assessment for UK manufacturers in time, with some items such as radiators and specialist glass having little or no UK testing facilities.
Additionally UK testing centres cannot certify products for the EU market. The EU has stated that for conformity with EU legislation, it will not accept test reports (existing or new) issued by UK testing bodies. New products developed by UK companies will have to use an EU Notified Body to enable affixing of the CE marking for the EU market. This requires duplication of testing and conformity assessment for the UK and the EU markets leading to extra costs and delays.
It initially allowed a grace period until the end of 2021. In August the government announced that it was extending this period until the 1st of January 2023.
However, the long-term advice remains to use valid UK products and work to use the forthcoming UK Conformity Assessed mark.
Glenigan reported that detailed construction planning approvals across the industry are 14% above the same period in 2019. This is a fall compared to the last 3-month period, but this is an indication of a steadier approach as we come out of the post pandemic surge.
Comparing the value of main contracts awarded in the 3 months to July they were 43% higher than the same period in 2019 with major infrastructure work leading the way up 289% compared with 2019 levels.
- Private housing has been one of the leading areas of recovery. Initially this sector was hit hard but was one of the first to reopen with a priority to completing sites to benefit from the temporary stamp duty reduction which ended in September.
- There now has been a shift with new developments opening and project starts are +6% higher than 2019 levels.
- Initial demand for semi-rural & larger properties. This reflects with the move to hybrid working practices, fewer but longer commutes to the office and the wish for more green spaces.
- With increased savings from the lockdowns many people also took advantage of home improvements to facilitate home working and extensions.
- As a result there has been a large rise in house prices, up 14% over February 2020 levels, and we wait to see if the number of transactions slip back with the end of the stamp duty tax cut.
- Since the start of September 2021 mortgage lenders have started to offer historically low rates to attract borrowers. There is expected to be steady demand for the next few years, tempered by potential unemployment increases and inflation affecting spending power.
- Housebuilders face the question of whether selling prices can offset cost pressure on margins.
- Offices face the challenge of adapting to the change in working patterns. The move to “hybrid” working patterns with fewer days in the office, and remote working will see a growth in office refurbishment.
- With less office space needed firms will look to develop more collaborative working areas and taking less office space.
- The consequence will be potentially fewer new build offices coming on stream in the next few years with a focus on refurbishment.
- All parts of this sector will be reviewing learning areas because of Covid with better ventilation and greater area allocation the main priorities.
- With a shortage in secondary school places it is predicted that school buildings will see an increase in activity. This will mainly be achieved by expansion of existing schools.
- The Higher Education sector has had the opportunity to review its estates over the last 18 months, expect to see work that focuses on the need of the individual establishment rather than grand designs.
Continued Government commitment to this sector, with an extra £20bn over the next 5 years will see the pipeline remain constant for the next few years. For the next few years the focus will be on existing front-line services before new projects can be delivered.
- Traditional brick and mortar shopping in city and town centres have continued their decline, accelerated by the demise of high street giants such as Debenhams and the Arcadia Group and others rationalising their estate portfolio.
- Some are being replaced by more “destination” driven venues as retailers look to introduce experiences within their properties to woo shoppers.
- Another beneficiary may be the local high street as they might be in position to take advantage of home workers who will look to shop locally.
- With the change in shopping patterns during the pandemic, investment in logistics facilities has been boosted by online shopping and other third-party logistics.
- Continued supply chain issues due to Brexit and the effects of the pandemic exposing the frailties of the just in time supply chain is likely to maintain demand for warehouse space.
- While manufacturing has experienced a reasonable recovery, a return to more modest growth coupled with access issues to Europe and continued fears of the recovery will limit demand.
Major Civil Engineering projects such as HS2, Hinkley Point & the Thames Tideway will be major projects in this sectors output. The Government has announced record investment with other key drivers being in roads, rail (including the Northern Powerhouse Rail) and flood defences.
Over the summer of 2021, confidence has returned to London’s commercial property sector due to a successful vaccine rollout, however activity in commercial property is being restrained by the same issues which have been plaguing the UK nationally since well before the pandemic.
The rebound in activity experienced in Q1-Q2 2021 has exacerbated the impact of material and labour shortages. And although suppliers continue to blame the pandemic for such shortages, the real underlying cause is more likely to be a more fundamental and longer term, structural issue with the construction sector more generally; including an on-going lack of skills and experience in the labour market; reduced labour pools due to Brexit; an inability to adapt more quickly to modern methods of construction; and a change in living and working models which is impacting on developers’ outlook.
Deloitte analysis shows new office starts were up to 3.1m sq. ft in the summer, which is above the long-term average for London. However, 64% of office construction in central London is refurbishment, which shows a sustained trend in tenant preference for adapting existing space rather than a move to new premises. Office developers are looking to increase their pipelines over the next 6 months, but the focus will be on providing a premium product which is best in class, both in terms of sustainability and functionality.
As commercial property owners and investors look to maximise benefits from their assets, the 2020 PD update, which facilitates change in use from office to residential uses, is likely to be fuelling refurbishment and change of use projects. General sentiment within the contractor market currently is that pipelines are reaching capacity and that contractors are starting to become selective about the projects that they are tendering.
The volume of completions has been exceptionally high in Q2 demonstrating the on-going recovery in activity in London. Although sales have struggled to recover post-pandemic, currently at 13% below Q2 2020 levels, the gradual return of employees to offices in central locations will change this. Furthermore, demand for quality, affordable housing has remained. Housing associations and local authorities have significant development pipelines in place. They are therefore likely to fuel activity in the sector. Projects located in residential regeneration hotspots are also therefore likely to be impacted by upward pressure on prices.
One other potential area of growth is in the suburban build to rent sector. Analysis by Saills has shown that there is evidence of strong tenant demand where suburban BtR has been delivered and that it has significant room to grow, since suburban PRS accounts for circa 60% of all PRS households. However, only 17% of pipeline units are currently located in suburban areas. Entrant investors such as Goldman Sachs, Leaf Lviing, L&G Suburban BtR have all signalled their intentions with a strong appetite for development in this market recently.