Community & Amenity

The community and amenity sector has suffered as local authorities and government departments have diverted capital spending away to more politically sensitive areas. The value of underlying project starts fell in both in 2014 and 2015. The 2015 Autumn Statement and Spending Review confirmed that once again local authorities are the biggest losers over the course of this parliament.

Treasury analysis has estimated that councils will face a real terms cut in their spending power of 7% between 2015/16 and 2019/20. This follows a 25% decrease during the last parliament. However funding reductions have been far from equal across the country. Councils with strong bases to levy council tax and business rates against have been able to mitigate the impact of reduced grants from central government. However poorer areas, typically urban districts, have been hit disproportionately hard by cuts so far.

This sector continues to struggle from the after-effects of the recession and the austerity budget cuts placed on the key clients for community & amenity work, who are typically local authorities. Analysis by the Local Government Association shows that councils in England alone have faced a funding gap of £5.8 billion between March 2014 and the end of 2015/16.

As a result of these funding pressures, construction in this sector has been on the decline. The brunt of the pain was felt in 2012 as starts contracted by 26%, however starts have continued to weaken, falling 7% in 2014 and a further 17% in 2015.

However a further forward looking indicator of upcoming activity, the value of projects receiving detailed planning approval, has been somewhat more positive, with a rise of 7% in 2015 and there has been a mild upturn in 2016, albeit from a very low base.

Nevertheless the overall longer-term outlook remains poor and local authorities are likely to face further budget tightening during the new Parliament, dampening any expectations of a longer-term improvement. The forthcoming Spending Review will provide further detail on the funding challenges over the next five years.

Early indications are that the Spending Review will also reveal a £3 billion programme to build nine new prisons by 2020. While this would be a major boost to the sector, it is unlikely to have any impact on the ground during the next two years.

More encouragingly another key client in the sector, the Ministry of Defence, appears to be maintaining construction spend. A number of on-going frameworks awarded during 2013 and 2014 are facilitating redevelopments of military bases and improvements and maintenance to the military housing estate. 

Recent performance

Chartered Institute of Public Finance & Accountancy (CIPF&A) research shows that local authorities struggled to cope with budget cuts of almost a third over the last five years. Councils’ spending per head of population will have fallen by nearly 30% in real terms over the course of this parliament according to the CIPF&A, as spending on housing, leisure services, libraries and roads are all dramatically reduced.

Spending on housing saw the biggest fall over the past year, dropping 7.8% between 2013/14 and 2014/15. Culture expenditure fell by 6.3% and spending on highways and transport fell by 6.2% in the same period.

Not all of this spending is on capital works. In addition some areas fall under other sectors, such as roads which comes under civil engineering, but there can be no doubt about the pressure that councils are under when commissioning major construction work.

The CIPF&A’s analysis claimed that councils’ total spending on services would fall by three times more during 2014/5 than in 2013/4 with a drop of 3.1% in 2014/15 after a 1% fall in the previous year.

In response to these cuts, a Local Government Association survey suggests that 22% of councils have taken money from building programmes to help cover a ‘black hole’ in school funding estimated by the LGA to total £1 billion.

Glenigan Starts Data

Underlying value of Community and Amenity starts by region

Includes underlying projects with a construction value of £250,000 to £100 million.

Source: Glenigan.

The downturn in activity has been widespread across the UK, with every area currently registering lower levels of activity than in 2010. While several nations and English regions recorded growth in 2015, this is largely due to the impact of the odd large project in a small sector.

Work in the sector has been on a downward trend over the last two years and, while there has been some improvement since, this remains highly variable and volatile.

Monthly value of underlying Community and Amenity starts

Prospects

The value of underlying planning approvals during the first quarter of 2015 was 28% up on a year ago, but this was against a weak start to last year and in the 2015 calendar year, starts slumped by 17% By the quarter to October 2016 starts had fallen a further 45%. However, work in the planning pipeline strengthened 6% over this period and is up 9% in the 12 months to date.

In addition two major framework contracts were let during 2014, both by the Ministry of Defence, covering facilities management, new build and refurbishment work across the UK’s military bases and housing estate. The larger of these will be worth up to £626m over ten years and was awarded to a Carillion/Amey joint venture. With local government spending in particular expected to see further contraction, the Ministry of Defence is becoming an increasingly vital client for the sector.

The recent improvement in contract awards, together with the recent MoD frameworks, points to a stabilisation in sector activity over the next two years, which is reflected in Savills commercial development activity for September 2016, which showed that public sector activity continued to contract, although at a slower rate.

We expect the value of underlying project starts to rise by around 10% in 2016. Unfortunately this improved outlook for the sector is vulnerable to a renewed tightening in public capital expenditure as the Chancellor pursues further savings outside of the protected areas of health, schools and overseas aid. Measures to shield these areas from spending cuts are likely to increase the pressure on defence, police and local authorities’ capital budgets. 

Forecast construction starts for Community & Amenity

Note: Underlying projects are schemes with a construction value of £250,000 to £100 million.  Forecast updated in October 2016 p – provisional, f – forecast.

Source: Glenigan