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Contractors feel pressure as starts on site slow

Value of new projects set to drop by 2 per cent to £66.5bn, according to Glenigan
July 11, 2022
  • Housebuilders expected to focus on building out existing sites
  • Costs rise more quickly than tender prices

The value of construction projects starting in the UK is set to slip this year as the worsening economic climate provokes greater caution among housebuilders.

Some £66.5bn worth of projects are due to start in 2022, a 2 per cent decline on 2021 when the post-pandemic rebound saw new starts grow by 23 per cent to £67.9bn, according to data provider Glenigan. This value should pick up again next year to over £70bn, although this is because of the higher costs going into building projects. 

The current spike in inflation, higher taxes and rising mortgage costs are expected to constrain activity in consumer-related areas such as private housing, retail, hotel and leisure schemes, the company said in its UK construction forecast. Glenigan’s data excludes major projects above £100mn, to better reflect general market conditions. 

The slowdown in housing is a combination of weakening sentiment, supply chain strains and planning snarl-ups. The time typically taken for a project to move from being greenlit to starting in site has risen from 47 weeks in 2019 to 86 currently.

Persimmon (PSN) blamed planning delays, as well as material and labour shortages, as it reported a 10 per cent decline in the number of new homes it delivered in the first half of the year, leading to a 7 per cent slide in housing revenues.

 

Betting the house

House prices have so far remained insulated from broader declines in asset prices, with Halifax reporting a 1.8 per cent month-on-month increase in June – the highest monthly growth since the peak of the last boom in early 2007.

“This is partly because, right now, the rise in the cost of living is being felt most by people on lower incomes, who are typically less active in buying and selling houses,” the lender’s managing director Russell Galley said.

The pressure on household budgets caused by inflation will eventually weigh on the market, though, given affordability pressures, he added.

The latest construction purchasing managers’ index data published this week showed that overall growth in construction was its slowest since September last year, with housebuilding the weakest-performing part of the market for the fourth month running. The housebuilding index fell to 49.3, below the neutral 50 level that separates market contraction from expansion, for the first time in just over two years.

Civil engineering and commercial activity remained the most resilient parts of the market, the survey showed.

Fit-out work for offices remains healthy, despite concerns about the amount of vacant space. The vacancy rate for central London is 7.2 per cent – still 1.7 percentage points above its 10-year average, according to agents Avison Young, despite some improvement since last year. 

The move to hybrid working in the wake of the pandemic may be lowering aggregate demand, but it is giving contractors plenty of work on refurbishments as employers redevelop space to add more collaborative working areas.

“Remodelling work is forecast to be the main driver for the sector over the next 18 months,” Allan Wilen, Glenigan’s economic director said. Compliance with tougher environmental standards will also drive more refits, he added.

 

Bricking it

Although the data provider forecasts a revival in sector-wide project starts next year – up 8 per cent to £71.6bn – the intervening period could prove tough for companies in the sector, given that workloads are falling at a time when costs are spiralling.

Material prices grew by 25 per cent in the year to April, according to the Builders Merchant Federation’s membership services director, Richard Ellithorne.

Overall, annual building cost inflation grew by 12 per cent in the year to June at a time when tender prices only increased by 9 per cent, according to the Building Cost Information Service (BCIS).

The squeeze has hit smaller companies hardest, with Begbies Traynor’s (BEG) first quarter Red Flag Alert reporting a 51 per cent increase in the number of firms from the construction sector described as being in “critical financial distress”.

Respondents to the PMI survey continued to express concerns about a shortage of people to fill roles, despite higher wage levels – the Hays/BCIS wage cost index tracking pay in the sector was up 11 per cent in the first quarter.

This means tender prices are likely to remain elevated this year – growing by 8 per cent – as contractors build in a safety margin to account for wage inflation even as building costs ease.

Site labour typically equates to about 20 per cent of an overall project's cost, with management and supervision by main contractors and subcontractors adding another 10 per cent, although this proportion dropped over the past year given the "rampant" materials price inflation, said Simon Rawlinson, a partner at construction consultancy Arcadis. 

Although wage inflation for directly-employed construction workers at 5.8 per cent outstripped the national average of 4.2 per cent in the year to April, according to Office for National Statistics Data, he expects earnings inflation "to stay in check" given a national 5 per cent increased agreed in a wage deal between the Construction Industry Joint Council and unions for 2022/23, which comes into force this month.