Gradual construction industry growth forecast for the next two years

The construction industry is forecast for gradual growth in project starts over the next two according to Glenigan’s latest industry forecast.

This year is expected to remain disappointing, but in 2024 all of the sectors covered by Glenigan will experience some form of recovery with the strongest growth at an underlying level (projects valued at below £100 million) driven by public investment and parts of the private sector.

Glenigan’s economics director Allan Wilén comments: “Public sector construction has been a relatively bright spot during 2023 as an underspend during 2022/23 was rolled forward to the current financial year, boosting government departmental capital programmes.

“Improved household spending and consumer confidence are expected to feed through to increased activity in consumer-related areas, such as private housing, retail, and hotel & leisure. Firm development pipelines are forecast to support a rise in industrial and office starts as investor confidence improves.”

School boost

The education sector provided a rare area of growth this year with starts forecast to rise by 22% after a 9% fall in 2022. The recent rise has been fuelled by a 26% increase in the Department for Education’s capital funding budget for 2022/23, which produced a 24% increase in school building starts in 2023.

The DfE’s capital budget will only increase 19% in the coming year, and the growth in underlying starts will also slow but Glenigan still forecasts a 13% improvement.

Mr Wilén adds: “The Spending Review highlighted plans for increased investment in further education. The additional funding will help address a shortage of secondary school places, especially in major conurbations.

“In addition, the Government is committed to rebuilding 500 schools over the next decade and the current RAAC crisis will require more immediate investment to address potential structural failures.”

In September, the DfE confirmed the number of schools found with reinforced autoclaved aerated concrete (RAAC) failure that needs addressing had risen from 147 to 174. Further rises are expected and these problems will be addressed through the School Rebuilding Programme, which will deliver 500 schemes over the next decade (Project ID: 20264300).

Education schemes coming up include the £80 million Fairwater Community Campus in Cardiff, which comprises the construction of the Cantonian, Woodlands and Riverbank High Schools (Project ID: 22020530). Funding was approved in October and work should begin in February 2024 according to Glenigan’s construction industry research.

Healthy workload

With waiting lists growing and industrial unrest increasing, the Department of Health & Social Care’s financial focus shifted away from capital funding. Underlying project starts are expected to fall by around 15% this year but 2024 should produce a rebound.

“The outlook for the health sector remains positive,” adds Mr Wilén. “NHS investment is a high political priority and a 3.8% per annum real-term growth rate in NHS capital funding is set to support a rise in starts from 2024.”

Glenigan’s construction industry forecast’s an 11% increase in underlying project starts aided by the Hospital Building Programme (Project ID: 19342017). This £20 billion programme was relaunched in May 2023 as the Health Infrastructure Plan. Spending plans have grown with the inclusion of five hospitals diagnosed with RAAC that need to be completely rebuilt.

The Department of Health & Social Care is recruiting a programme delivery partner on a six-year contract due to start next year, which will help deliver schemes ranging from a £350 million rebuild of Torbay Hospital in Devon (Project ID: 20397014) to a £150 million community hospital in Consett, County Durham (Project ID: 20397016). Construction on both is expected to start in 2024.

Civil benefit

The construction industry is also set to receive a fillip from another sector that is publicly funded or regulated: civil engineering.

This year will see a retreat in the value of underlying starts with only airports, power generation, and water distribution producing a rise in the first nine months but 2024 will produce a wider and stronger rebound.

A rise of 17% in underlying starts is forecast by Glenigan. Utilities work will be a driver as the next round of spending from the water companies begins.

Mr Wilén adds: “Utilities starts are expected to strengthen during 2024 as the water industry invests according to its regulator-agreed plans, and as investment in electricity generation and distribution, and broadband connectivity increases.”

Northumbrian Water is currently tendering a £4.5 billion framework for AMP spending that will begin in April (Project ID: 23130903), while a £1.75 billion aqueduct resilience programme initiated by United Utilities will begin next summer (Project ID: 19384153).

Electricity generation work is benefitting from a rise in a shift to more sustainable power. Schemes such as the £30 million Green Lane Solar Farm in Lincolnshire for Lightsource (Project ID: 22378370) and a £30 million battery energy plant in Immingham on Humberside from Volta Energy (Project ID: 17400990) will start in 2024.

The roll-out of improved broadband connections is also continuing across the country. A number of schemes will begin next year, such as the £67.2 million phase two of the Fastshire programme across Gloucestershire and Herefordshire (Project ID: 21513574), which commences in May.

Industrial work surges back

A rebound is forecast in the industrial sector, where starts will recover from a major slump this year and surge from next year onwards.

At an underlying level, more than £5 billion-worth of industrial projects are expected to start next year, which is 17% up on the figure anticipated for this year. This trend will continue into 2025, when an upswing of 21% is predicted.

Mr Wilén comments: “Online retailers’ market share slipped back post-pandemic as consumers returned to high streets and retail parks but online sales are still up on 2019 levels and a further longer-term shift towards online retailing is expected to support renewed demand for more logistics space.”

The value of industrial main contracts awarded in the first nine months of this year is up 18%. These schemes are moving onto site and more are scheduled to do so over the next year as planning and procurement continues.

Detailed plans have been submitted for the £77.7 million Telford Business Park and construction will begin in May if this application is successful (Project ID: 23293465). Elsewhere, tenders have been invited for an £85 million deal to build nine warehouse units in Waltham Forest, where work is expected to begin in May (Project ID: 23035783).

Shopping around

The retail sector has been hit hard by a shift to online shopping and this continued into this year, but a turnaround is about to materialise.

After a slump forecast to reach 28% this year, retail starts will bottom out and rise 9% next year and this growth will increase to 17% in 2025, driven by the cost-of-living crisis.

Mr Wilén explains: “Investment by the deep discount supermarkets, Aldi, and Lidl, are set to be a bright spot over the next two years, with both chains setting out long-term plans to substantially expand their estates.”

Lidl plans to boost its estate from 950 stores this summer to 1,100 by 2025. Lidl developments due to start in 2024 range from a £ £6.3 million store in Coleraine in Northern Ireland (Project ID: 18320770) to a £12 million store in Bishops Stortford (Project ID: 21338613).

Aldi has a £1.3 billion investment plan to open 500 stores over the next two years. The group recently submitted a detailed planning application to build a £5 million store in Rugby (Project ID: 22279001) and a £5.5 million store in Eastbourne (Project ID: 20195093). If successful, both schemes should start next May.

Housing plans

The underlying value of project starts in both the private residential and social housing sectors are expected to edge back into positive territory next year. ‘While social housing growth is forecast to subside in 2025, growth is expected to continue in the private residential sector, which has suffered from rising interest rates hitting the housing market.

A 4% rise next year in the underlying value of private housing starts will rise to 11% in 2025.

Mr Wilén says: “Whilst interest rates are expected to remain at, or near, current levels during 2024, housing market conditions are expected to gradually improve. Weak house prices and rising nominal average earnings will progressively improve housing affordability, while a strengthening economy will help lift purchaser confidence.”

With an improvement in the housing market expected, plans are being formulated for major new schemes that could start next year, such as the £90 million Drumshangie development in Airdrie, Scotland (Project ID: 18258483).

Social housing starts are forecast to increase by 7% next year. Growth will then slow to 5% in 2025, but student accommodation work, which forms part of this sector, will be a bright spot.

“A rise in overseas student numbers will be especially welcomed by purpose-built student accommodation developers, as international students are more likely to remain in purpose-built student halls throughout their studies,” adds Mr Wilén.

More schemes are entering the pipeline. Detailed plans have been submitted for the £70.5 million Telephone House scheme in Dundee (Project ID: 23326172) and the £90 million Ealing Student Building in West London (Project ID: 23256125). If planning is successful, construction on both schemes could start next year.

Private investment

Construction work in the office and hotel & leisure sectors is heavily reliant on the private sector, but increases of 6% are forecast by Glenigan for next year in both sectors. This will rise to 13% in 2025 in the office sector.

Mr Wilén explains: “Changing work patterns will remain an important driver for the sector, supporting a gradual recovery in starts over the next two years as landlords and occupiers refurbish and redevelop premises.”

Office schemes due to start next year include the £157.6 million Arcadia scheme in Ealing, West London, where a planning application is pending (Project ID: 15293257) and a £200 million refurbishment of 75 London Wall, also in the capital, with prequalification of contractors starting imminently (Project ID: 23099305).

Hotel & leisure starts will grow at a slower rate in 2025, but schemes are still massing in the pipeline from a £25 million redevelopment of The Williamson Hotel in Liverpool (Project ID: 18417046) to the £80 million 55 Broadway scheme in Westminster, central London (Project ID: 19441359).

With all sectors due to experience a renaissance next year, the construction industry has better times ahead after a difficult 2023.

Glenigan customers can read the full Forecast in the Insight section on Glenigan.