UK Construction Prospects

Short Term Implications of Covid-19

As the Coronavirus/COVID-19 pandemic impacts the industry, Glenigan research has identified a rising number of projects that have been put on hold as a direct result of the Coronavirus. At March 30 2020, work had been suspended on 1,924 building sites involving £89 billion-worth of work,

The government is under pressure to protect construction workers and halt the spread of the virus, but some major contractors, notably BAM, Kier, Mace and Wates are restarting work on some sites after a hiatus to ensure government health guidelines are being followed. Others are keeping sites open but with reduced numbers, such as Willmott Dixon, where 90% of sites remain open despite 800 staff being furloughed.

This differing approach has made gauging the industry’s near and long-term term outlook increasingly difficult and making firm predictions about the near term performance of the industry is problematic.

At April 2 2020, work was suspended on 28% of projects on site, predominantly large sites and the value of suspended sites reduced to £71 billion, which accounted for 44% of all work under construction. Private housing has been hit hardest with work stopping on 44% of sites due to supply chain issues and a potential slump in new house sales as purchases cannot reach sites but many major housebuilders are now beginning or have begun a phases return to site. By May 6, 36% of sites under construction were suspended, which is down from 40% in the previous week as work resumed on more than 550 sites.

Regionally, London has been hit hardest due to a larger number of higher value projects and 52% of work by value on site suspended by the start of April.

Regionally, the North of England is showing clear signs of growth in the development pipeline, which nationally remains firm and has been little affected by the virus lockdown. There has been a 10-20% drop in planning applications for domestic projects, but as yet Glenigan hasn’t seen a drop off in the number of planning applications for large commercial projects being submitted to local authorities for approval.

March 2020 compared favourably to most months in 2019 in terms of the value of planning approvals and seasonally adjusted was only down 3% on February 2020. Health and education projects both had very strong months compared to February 2020, while housing approvals was up 51%. Subsequently, the number of contracts awarded has fallen off and starts fell by 37% in the quarter to April 2020 on the same period a year earlier.

The IHS Markit purchasing managers survey reported the fastest decline in construction output since the research began 23 years earlier. Glenigan’s data suggests that the tendering process is being extended due to delays in decision-making process but the planning pipeline continues to remain firm.

This may change over the coming weeks as more clients and architects are working at home or self-isolating. In addition, the ability of local authorities to process and approve applications will be disrupted over the coming weeks, with planning staff away and committee meetings postponed. Significant delays would have a detrimental impact on firms’ order books over the coming months but some contractors are reporting a spike in tender opportunities.

Government predicts that at the pandemic’s peak up to a fifth of the UK workforce will be in self-isolation. This has clear implications for the operation of work on-site and the timely delivery of projects. Contractors will have to be alert not only to the welfare and availability of their own staff, but also the potential unavailability of staff at key sub-contractors, which can potentially disrupt the critical path of a project.

The vast majority of construction products are manufactured in the UK; an estimated 26% of all materials are imported. However, the UK does import a high proportion of certain materials such as timber products and mechanical & electrical components. In addition, 62% of all imported construction products are sourced from the EU and 16% are imported from China, both regions have been subjected to extensive shutdowns and product supply may be interrupted. 

Similarly, as the pandemic progresses the availability of UK sourced products may also be disrupted.

The likelihood is that there will be a short sharp recession, but many fundamental drivers, such as government investment in infrastructure and a shortage of new homes, remain. Making predictions is difficult as the situation unfolds, but Glenigan expects that a sharp rebound will occur with the industry returning to growth in 2021.

Near and Longer Term Prospects

Glenigan’s latest forecasts published in December 2019 and detailed below anticipated that the value of underlying construction projects would rise over the next two years. Whilst the lockdown to address the Covid-19 pandemic is set to sharply depress construction output and project starts during the second quarter of this year, a gradual easing in restrictions should enable a progressive recovery in construction activity during the second half of this year.

Overall the market has stabilised last year. This follows an 8% decline in underlying project starts (with a construction value of less than £100 million) in each of the last two years.

Construction prospects are set to brighten during 2020 and 2021 as the industry benefits from promised increases in public sector investment, particularly in infrastructure.

The forecast recovery in project starts this year will be driven by a rise in private housing, affordable housing, education, health and civil engineering projects. Industrial and commercial sector starts are expected to decline initially as businesses appraise the post-Brexit outlook for their UK operations.

Growth will also be focused outside London and the South East, with project starts in the South West, West Midlands, Yorkshire and Humberside, Scotland, Wales and Northern Ireland being the strongest performing regions.