Glenigan Construction Forecast 2019-2020

Construction market to recover from 2018 and 2019 declines with 5% growth forecast for 2020

Overall the construction market is forecast to contract this year. Having fallen by 8% last year, project starts are forecast to decline by just 1% in 2019 before recovering 5% in 2020.

Whilst overall construction starts will decline for a third consecutive year in 2019, logistics premises, build to rent, student accommodation and social housing, secondary education and civil engineering are forecast to be growth areas.

The most robust increases are away from London and the South East, with rises in project starts during 2019 expected in the South West of England, Scotland, Wales and Northern Ireland.

A recovery in projects starts is forecast for 2020, supported by a rise in private housing, office, education, health and civil engineering projects.

UK Construction Prospects

Overall the value of construction project starts declined by 8% last year. A smaller 1% fall is now anticipated for 2019 before recovering next year. This outlook for the industry is critically dependent upon the eventual realisation of a Brexit agreement and the planned transition period. A no-deal Brexit would have a disruptive impact on the UK economy and construction activity over the forecast period.

Weak UK economic growth is forecast to constrain construction activity during 2019 and 2020. Real household earnings are now rising, although growth is weak. This combined with the extension of Help to Buy is forecast to lift new housing starts as housing market conditions improve during 2020.

Construction sectors forecast for growth

Increased investment is anticipated in the secondary school estate to accommodate rising pupil numbers, especially in the UK’s major conurbations.

Warehousing & logistics premises are forecast to remain a growth area. Technological and social changes are reshaping consumers’ retail habits and driving the demand for logistics space. In addition, companies are investing in additional warehousing capacity to help smooth potential supply chain disruptions post-Brexit. Growth in this area will be overshadowed during 2019 by a weakening in manufacturing investment in factory premises.

A weakening in office starts is forecast for 2019. However, the recent recovery in approvals during 2018 suggests renewed confidence among investors in the longer-term prospects for the sector and is expected to feed through to a rise in project starts from 2020.

Major infrastructure schemes, including Thames Tideway, HS2 and Hinckley Point, are forecast to drive civil engineering activity over the forecast period.

The value of smaller scale civil engineering projects starting on site is also expected to improve, having fallen back sharply over the last three years. Two other major infrastructure schemes, Heathrow’s third runway development and the Stonehenge tunnel are not expected to contribute during the period covered by this report with initial works on both projects potentially commencing in 2023.

Longer term construction is expected to benefit from increased public-sector investment as the Government seeks to increase capital spending to improve UK competitiveness. Network Rail’s £47 billion funding package for 2019 to 2024 is an illustration of the Government’s commitment to greater investment in the built environment.

The construction industry is facing challenges from an aging workforce. The UK’s impending departure from the EU has thrown the issue into sharper relief given the industry’s reliance on overseas labour, particularly in London where EU nationals account for 28% of the industry’s workforce. Recruitment of overseas labour has already become more difficult following the referendum and the weakening in Sterling. Reduced labour availability will add to contractors’ costs and will potentially act as a spur for the greater use of off-site manufacture.

Construction sector declines

In the retail sector, activity is forecast to decline over the forecast period as weak consumer spending and the growth in online retailing accelerate the restructuring of the retail industry and depress the demand for retail premises.

Challenges facing the construction industry

The construction industry is facing challenges from an aging workforce. The UK’s impending departure from the EU has thrown the issue into sharper relief given the industry’s reliance on overseas labour, particularly in London where EU nationals account for 28% of the industry’s workforce. Recruitment of overseas labour has already become more difficult following the referendum and the weakening in Sterling. Reduced labour availability will add to contractors’ costs and will potentially act as a spur for the greater use of off-site manufacture.

Key recommendations

• Companies will need to closely monitor and respond to shifting market conditions to maintain and build their order books. Investment in an effective CRM, digital marketing channels and a modernised salesforce will help firms to rapidly target emerging opportunities.
• The UK’s departure from the EU is exacerbating the difficulty in recruiting skilled site labour. This threatens to increase construction costs and disrupt the timely delivery of projects. Companies should invest in design solutions, site operating practices and offsite manufacturing options that reduce the reliance on site labour to safeguard the timely and profitable delivery of projects.
• The fall in Sterling has increased UK product manufacturers’ energy and raw material costs as well as increasing the price of imported products. Firms will need to adequately reflect rising labour and construction costs when tendering for projects.
• Near term, firms will need to scrutinise their supply chain arrangements carefully. The delay of the Brexit date to 31 October provides firms with additional time to prepare. The change to customs arrangements has the potential to disrupt the ready availability of imported materials and components and their timely delivery to site, especially in the event of a ‘No Deal Brexit’.

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