At a glance:
- Construction output falls by 0.4% in 2019/ rise by 1.4% in 2020
- Private housing starts falls by 2.0% in 2019/ rise by 1.0% in 2020
- Offices construction falls by 11.0% in 2019 & 4.0% in 2020
- Retail construction falls 10.0% in 2019 & 2020
The Construction Products Association (CPA), which bases its forecasts on Office for National Statistics data, slightly downgraded its spring forecast for total construction output in 2019 from 0.3% quoted its winter forecast to 0.4%.
This is largely due to uncertainty around Brexit that was affecting investment decisions for larger commercial projects, as well as consumer confidence. However, while the overall picture is one of decline, it will be more or less dependent on the region and sector, with for example warehouse construction doing well, and the private housing new buildings, in certain regions outperforming London and the South East.
Brexit uncertainty continues
The CPA’s forecasts are based on either:
- a revised version of the Brexit Withdrawal Deal is ratified before 22 May, enabling the UK to exit the EU on 1 June and enter the implementation period until 31 December 2020 so that nothing changes in the near-term
- a further extension so that an alternative deal such as a Customs Union could be agreed upon and prepared for through an extension beyond 31 October
Lack of clarity is affecting companies reliant on imports from the EU, which accounts for 60% of the 24% of construction products that are imported.
- If the UK leaves the EU in 2-3 months, then stocks more likely to remain stored at great cost given the limited availability of warehousing space
- If the delay to Article 50 continues for 9-12 months, then firms could reduce stocks over six months to ensure there isn’t an excess supply and their margin isn’t excessively hit
Activity in London remains weak and is also starting to fall in some parts of the South East and East of England. Conversely, demand remains high in regions such as the East Midlands, West Midlands, North West and Yorkshire and the Humber.
Help to Buy
The government’s loan scheme continues to drive demand, underpinning 38% of completions in 2018 and supported two thirds of sales by the major house builders. This is expected to continue to 2021, when the eligibility is narrowed to first time buyers only. Other government policy aimed at increasing the supply of new homes to 300,000 homes by the mid-2020s, includes the £5.5bn Housing Infrastructure Fund and the £4.5bn Home Building Fund of loans to SMEs.
The government is also promoting BTR, in which residential developments are constructed for the rental market, as a way to reach its housing target. The past couple of years has seen considerable expansion of this sub-sector. Indeed, Glenigan reports that it has yet seemed untroubled by Brexit uncertainty, with Savills data showing that the total number of new BTR units completed, under construction or in the planning pipeline at 139,000 in Q4 of 2018, up 22% on the same period in 2017. BTR projects are also becoming larger, with 240 units on average.
Private Housing RM&I
This activity is forecast to decline 2% in 2019 as home improvements spending by demographics with pension and housing wealth fails to offset the overall weakness in household confidence, particularly for large, discretionary purchases.
In terms of energy-efficient retrofitting work, the next phase of the Energy Company Obligation programme, ECO3 (October 2018-March 2022) is valued at around £640m per year and focuses on fuel poverty. This is lower than the £870m spent under ECO and shifts focus from energy efficiency.
In contrast to private housing, the forecast for public housing starts has been revised upwards due to an increase in affordable starts at the beginning of 2019 that suggests grant funding in the form of the form of the Shared Ownership and Affordable Homes Programme, and an ending of the borrowing cap for housing association, is raising activity levels.
Public housing RM&I
No growth is expected over the forecast period as cladding remediation work on social housing towers is likely to be prioritised by housing associations and local authorities and displace routine repairs and maintenance work originally planned.
Public non-housing output is set to continue its downward trend in 2019, continuing a trend that saw new orders for education fall 12.9% to £2.8bn in 2018, the lowest since 1999. However, the sector will return to growth in 2020 and 2021, as activity picks up on schools, alongside prisons and health projects. In terms of education, Glenigan reports that university development plans and rising secondary school places will drive growth, with planning permissions rising by 13% in 2018.
Overall, this sector is forecast to fall 7% during 2019 before contracting a further 5.8% during 2020, with offices, retail, education and entertainment sub-sectors are all expected to contract for two years.
This sub-sector has witnessed the sharpest falls, especially in London, as these are most affected by up-front investment decisions, which are being delayed due to Brexit uncertainty. For example, new orders fell a further 11.6% in 2018, for the third consecutive year since the referendum.
However, outside the capital, large redevelopments, smaller scale and lower value work continues apace. Glenigan has reported, for example, that the leading main contractors are now taking on smaller projects, with the combined order books of the 50 largest contractors falling by 31% in 2018.
Spending on new retail space continues to be affected by the shift to online spending. Sub-sectors that are bucking the trend include hotels, student accommodation and leisure.
Output is forecast to increase 0.6%, a downward revision from 2.5% predicted in the Winter forecasts, due to weaker growth prospects for factories.
However, this is expected to be offset by the warehouses sub-sector, which is expected to enjoy double-digit growth over the next two years, as the ongoing expansion of e-commerce continues to provide a strong pipeline of new work.
Glenigan's top 20 contractors: April 2018-March 2019
Glenigan's top 20 clients: April 2018-March 2019