UK CONSTRUCTION MARKET VIEW - Treading Water SPRING 2019 - Arcadis
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UK
CONSTRUCTION
MARKET VIEW
Treading Water
SP R I NG 2019
1MARKET VIEW | SPRING 2019
Introduction
• With further delays to Brexit, the prospects for a post-deal
bounce have taken a hit. With no progress on the deal, and
with increasing levels of political turmoil, it’s not surprising
that some clients are choosing to sit on their hands.
• The UK economy has done quite well in 2019, growing at a relatively
brisk 0.5% in Q1. Ironically, pre-Brexit stockpiling may have boosted
GDP, so growth later in the year is expected to be softer. However,
business investment has shrunk by 2% in the past year – affecting
investment in built assets as well as plant and machinery.
• UK employment remains at a record high. Nearly 100,000 jobs were
created in the three months to March 2019. Wage inflation is still
well above the post-crash trend at 3.5%. Brexit could be the trigger
for employment growth, with businesses preferring to hire people
rather than invest in more risky long-term productivity gains.
• Economic forecasters are more positive than earlier in the year, but
this may prove short-lived. US-China trade tensions, sabre-rattling in
the Gulf and a slowing Eurozone all point to a deteriorating business
environment that may take the shine off strengthening global growth.
• Housing and infrastructure activity remain strong – compensating
for losses in the commercial and public sectors. While the
infrastructure pipeline is robust and backed by reliable funding
streams, the number of housing transactions has been
falling. How long near-record levels of housing delivery can
be sustained is a critical issue for overall industry health.
• Construction output growth was flat in 2018 but activity remains
close to record levels. Forecasters such as Construction Products
Association anticipate a slight contraction in 2019 of -0.6%.
1INTRODUCTION
Tender price forecast
We have held our short-term inflation forecasts Labour. Earnings growth for construction employees
for 2019 to 2021 but have increased our forecast has averaged 4.2% over the past year, up from 2.1% in
for 2022 and 2023 to take into account future 2017. Earnings inflation for the self-employed could
capacity constraints affecting labour markets. well be higher still. With growing concern as to whether
migrants from the EU will continue to want to work in the
The main factors influencing our
UK, contractors can anticipate sustained pressure on the
revised forecast are as follows:
payroll, particularly as unemployment is at such a low level.
Political uncertainty. Uncertainty associated with Brexit
Risk transfer. The balance of risk transfer on projects
outcomes, political leadership and a potential election
continues to have a substantial effect on overall price
mean that the headwinds affecting investment decisions
levels – ultimately contributing to inflationary pressure.
and business planning will extend into 4th quarter 2019.
On large infrastructure projects, it is necessary to transfer
more risk to the client-side to deliver an acceptable entry-
Visibility of workload. We are seeing a significant
price at tender. In commercial construction, Design & Build
proportion of projects being delayed as a result of Brexit
remains the default procurement option with Construction
and other sources of uncertainty. Delays in converting
Management being adopted on more complex projects.
pipeline into turnover mean that contractors, particularly
in the 2nd and 3rd tiers, may need to bid for more Materials. Construction materials have increased in
work. This is increasing competitive pressure even if cost by over 4% per annum for the past two years. The
the volume of work instructions is static. This trend is inflationary trend kicked-in after the Brexit referendum
highly sector specific with some markets, such as data and has not eased and may be exacerbated by the
centres, being very busy, while others including offices, weakness of Sterling. Some of the inflation will be driven
industrial and schools are on a downward curve. by demand, but rising commodity and energy prices have
also played a role. With 30% of construction materials
Selective bidding. Even though contractors need
being imported, exchange rate fluctuations could be a
to maintain their order books, many are maintaining
significant factor in the event of a negative Brexit outcome.
their discipline with respect to selective bidding. Major
contractor Wates is a good example – its construction Overall, our assessment is that there is enough competition
turnover shrank by 9% in FY18, partly as a result of in the market at present to put a partial brake on input
policies aimed at securing good quality turnover. cost inflation. Accordingly, even though background cost
These policies also influence attitude to risk. inflation is running at 3-4%, our assessment is that price
inflation in building markets will be held at 2-3% in the
New market entrants. We are seeing new entrants
medium term. In building markets from 2022, we have
in regional construction markets. This is typically for
raised our forecast by 1% per annum in anticipation of
medium-sized opportunities. Some of these organisations
tighter labour markets. For infrastructure markets, our
are bidding very competitively to secure their entry
inflation assessment continues to assume the pass through
into new markets. This is also maintaining downward
of input costs on the basis of cost-reimbursable, target-
pressure on prices in some regions and sectors.
priced contracts and is also raised from 2022 onwards.
2MARKET VIEW | SPRING 2019
Our Tender Price Forecast
• Managed exit from the EU with a period of transition
Our forecast prior to the agreement of a long-term political and
is based on economic relationship. 1
the following
assumptions: • UK GDP growth @ 1.4% (2019) and 1.5% (2020) (HM
Treasury consensus forecasts)
• UK CPI @ 1.9% (2019) and 2.0% (2020)
(HM Treasury consensus forecasts)
• UK Base Rate @ 0.75% by Q4 2020
(BoE forecast)
• £1 = €1.15 and £1 = $1.30 by Q4 2019
• New build construction output falling by 0.6% (2019)
and increasing by 1.5% (2020) (CPA)
• Construction workforce remains at 2.2 million
1 Given recent developments, our Brexit assumption is at the optimistic end of the spectrum, but is consistent with the
assumptions of the Bank of England and other forecasting bodies.
3TENDER PRICE FORECAST ASSUMPTIONS
% movement in the year to Q4.
Bracketed %s are last quarter’s forecast.
NATIONAL
REGIONAL BUILDING LONDON BUILDING
YEAR INFRASTRUCTURE
CONSTRUCTION TPI CONSTRUCTION TPI
CONSTRUCTION TPI
2018 2% (2%) 2% (2%) 3% (3%)
2019 3% (3%) 2% (2%) 4% (4%)
2020 3% (3%) 3% (3%) 4% (4%)
2021 3% (3%) 3% (3%) 4% (4%)
2022 4% (3%) 4% (3%) 5% (4%)
2023 4% (n/a) 4% (n/a) 5% (n/a)
4MARKET VIEW | SPRING 2019
Implications of a delayed Brexit
With the resignation of Theresa May on 7th June, it Investment volumes in London have
is extremely unlikely that Brexit will be delivered on been below the long-term average so
the basis of the existing transition deal. Furthermore,
following the strong showing of the Brexit Party at
far in 2019, and with further distractions
the European Elections, it is likely that a much more being introduced with the Tory leadership
aggressive approach to Brexit negotiations will follow. election and Labour’s accelerating
election preparations, this trend may
The risks of a no-deal have increased, evidenced well continue.
by a weak sterling and UK stock markets, however,
the practical difficulty of getting a no-deal through
Parliament means that other scenarios, including a With increased uncertainty, what
general election or some form of referendum are also steps can clients take to proof
likely outcomes. their projects against delay?
All of these outcomes aren’t great news for either
investors or the construction industry. Specific
Areas that we suggest include:
implications of the delay are likely to include:
• Building price adjustment
mechanisms into tender
• A continuation of the business documentation, so that negotiations
investment drought that has followed associated with delays to project
the referendum. Paradoxically, start can be simplified;
this will sustain high levels of
employment as businesses shun • Bringing forward smaller, simpler
investing in better productivity; developments such as refurbishments
with a fast turn-around;
• Cabinet reshuffles, potentially
resulting in a re-evaluation of • Developing projects to an ‘over-
current policy priorities and ready’ state to enable a responsive
delays to decision making; approach to positive political and
economic developments in real-time.
• Delays to the Comprehensive
Spending Review and the National
Infrastructure Strategy - a change
in political leadership makes it likely
that the full three year CSR will be
postponed.
5TENDER PRICE FORECAST ASSUMPTIONS
Managing the skills crisis
UK construction has a long-established skills and • Construction skills certification.
training problem. It can be argued that the industry’s Following technical changes to the
self-employment model, which become established in
the 1980s and has seen the self-employed share of the
industry’s skills certification system,
workforce increase from 30% to 41% in the past 20 60,000 workers who obtained their
years, has had a significant impact, as contractors have CSCS cards without any formal
less incentive to train their on-site workforce. qualifications prior to 2010 will
need formal qualifications from
Access to skilled labour from the EU has also been a
factor, providing a safety valve equivalent to 8 – 10% of
2024 onwards. It is widely assumed
the national workforce and again shielding specialist that many of these workers who
contractors and their employers from the necessity of are approaching retirement will
developing and maintaining the skills of the workforce. either not bother to retrain or
will enter the ‘informal’ sector.
The current employment model faces two
major disruptions over the next five years:
These two factors work together.
Ironically, because of the influx of
• Introduction of a post-Brexit, skills- younger workers from the EU, the
based migration model. The UK’s industry has a high but still below-
proposed migration model will average replacement rate over the
increase the ability of businesses to period 2014 to 2024 of 34%. However,
recruit skilled and highly educated with the loss of a flow of replacement
employees from around the world. workers from the EU and the potential
With a salary floor of £30,000, it for the accelerated retirement of older
covers jobs held by the top 20% of workers from 2024 onwards, this
earners in the UK. Unfortunately, the positive scenario could quickly reverse.
proposed temporary work-permit
for lower-skilled and lower-paid
grades does not suit construction as
the recruits need to be employed.
6MARKET VIEW | SPRING 2019
So, what can be done to address • Training took a knock following the
the approaching skills crisis? introduction of the Apprenticeship
Levy but is getting back on track
At the moment the industry is lobbying with the introduction of around
to get government to make a special 80 approved courses for different
case for construction under the proposed skills groups. The introduction of
migration policy. We think that the T-Levels in 2020 should also support
chances of change are low – partly construction recruitment. However,
because of the implications of lowering retaining recruits through their
barriers to low-skilled migrants from training is a recurring challenge
around the world, and also because the – meaning that an increased flow
industry’s self-employment model is of new talent is not assured.
incompatible with managed migration.
• Off-site currently delivers around
The results of the recent update to 8% of industry output. Through
the Shortage Occupation List (SOL) the introduction of a government
supports this viewpoint. Even though mandate and support via the sector-
the Migration Advisory Commission deal, the adoption of offsite solutions
acknowledges that construction should increase. However, the level
occupations will ‘require careful of capital investment is high – Arcadis
consideration in a future immigration estimates that it will cost £500 million
system’, no construction management to develop capacity to deliver 10%
occupations have been added to the SOL. of the increased production required
to meet the Government’s 300,000
Clients will have a role in providing homes target, requiring the entry
greater visibility and assurance of larger industrial and institutional
around workload – potentially based players to drive expansion.
on programme-wide rather than
single project procurement. This • Process improvement to eliminate
should give the supply chain greater waste, duplication and rework is an
confidence to invest in their own essential step to make best use of
labour force and will be essential in scarce resource. With on-site resource
delivering the planned £600 billion utilisation levels often no higher than
infrastructure investment programme. 50%, there are plenty of opportunities,
supported by, for example, improved
However, at least in the short-term, design coordination and logistics or
the supply chain will need to consider hand-held technology. A quick return
options associated with increasing on investment is essential to enable
productivity – either through training, off- investment, and low-cost technology
site solutions or process improvement. made available on a Software as a
Service model is an important enabler.
7PREPARING FOR BREXIT
8CONTACT
SIMON RAWLINSON
HEAD OF STRATEGIC RESEARCH & INSIGHT
SIMON.RAWLINSON@ARCADIS.COM
TOM MORGAN
UK STRATEGY DIRECTOR
TOM.MORGAN@ARCADIS.COM
Arcadis
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Disclaimer
This report is based on market perceptions and research carried out by Arcadis,
as a design and consultancy firm for natural and built assets. It is for information
WWW.ARCADIS.COM/UK
and illustrative purposes only and nothing in this report should be relied
upon or construed as investment or financial advice (whether regulated by
the Financial Conduct Authority or otherwise) or information upon which key @ArcadisUK
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