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Construction Industry Research Roundup

Over the past two weeks, we’ve seen the release of a large number of figures and survey results related to the construction industry, and it’s been a mix of both good and bad news. So where is the construction market going? We’ve taken a look at some of the numbers.

Increase in mortar sales

In the first week of February we received some good news, when data issued by the Mineral Products Association (MPA) showed that mortar sales volumes were at the highest level since records began in 2004. According to the MPA, year-on-year mortar volumes increased by 14.3% in 2018, and since the majority of mortar sales take place within six months of a project starting, this can also be seen as an indicator of housing starts.

However, the figures also indicated a slowdown towards the end of the year, as mortar sales volumes fell by 1% in the fourth quarter. In addition, ready mixed concrete sales volumes were reported to have fallen by 1.6% in 2018, with demand in London being particularly badly hit, and this could indicate that while housebuilding appears to be doing well, the wider construction industry is seeing some larger projects being delayed or put on hold.

Funding boost for affordable homes

In other good news, the government unveiled a funding boost for affordable homes on January 31st, when community secretary James Brokenshire announced that nearly £500m would be allocated to selected housing associations across England to fund more than 11,000 new affordable homes. Through strategic partnerships with Homes England, the housing associations will be given freedom to spend the money where they think it will have the biggest impact.

The funding boost is said to be aimed at helping the government towards its target of building 300,000 properties a year by the mid-2020s. But while the initiative is aimed at building affordable homes, the definition of ‘affordable’ is a little vague, and it is also not clear what proportion will be used to build properties for social rent, so it will be interesting to see what impact this funding will have.

Homes England deal for rooftop homes

Alongside this, there was also good news for offsite construction as it was announced that 78 new homes will be built on London rooftops, in the first half of the year. Homes England has agreed a £9m funding deal with Apex Airspace Developments, which calls itself a pioneer of ’airspace’ development, whereby unused airspace above residential, commercial and public buildings is used as a location for new homes.

While this concept is not new – it has been happening in other European countries for years, and a similar scheme is underway right now on top of the office building I used to work in – this is great news since these properties, which will be built on five sites across the capital, will be largely constructed offsite before being winched on top of buildings. This could stimulate other similar schemes of ‘building up’, and although the numbers may be small compared to a standard new build housing development, it should make a positive difference.

Record number of cranes in the sky

And then, last week, it was Deloittes’ latest Crane Survey that hit the headlines. The survey results pointed to construction activity reaching record highs in 2018 across the UK’s regional cities and developer confidence remaining strong. The Deloitte Real Estate Crane Survey series monitors construction activity in Belfast, Birmingham, Leeds and Manchester and showed that all four had seen a sustained or increased level of development in 2018 across a range of sectors including offices, residential, hotels, retail, education and student housing, though it seems to have been the residential sector that has driven the majority of development.

Interestingly, the results show that Leeds recorded the highest level of construction since the crane survey began in 2002 and had a total of 21 new construction starts in 2018, including seven new office schemes. Residential development, including student accommodation, also appeared to have been strong, with five of the developments already underway being ‘Build-to-Rent’ accommodation. Manchester also saw high levels of activity in both the offices and residential sectors, and in 2018 it saw the highest level of completions in 12 years.

However, this reports only on activity in regional centres, and while it does help form a picture of office and multi-storey residential development levels, it is not a reliable indicator of construction activity in the UK as a whole. In addition, many of the projects have been ongoing for some time, and the report recognises that new starts have been relatively low in 2018, while the record numbers of completions recorded are likely related to the high number of starts seen 2 years ago. The latest crane survey for London, published in Q3 2018, actually showed a 13% drop in office space under construction, and a fall in new starts of 18%.

19% of households are in the private rented sector

In the past two weeks, we’ve also seen two seemingly contradictory reports on the private rental housing sector, one being the latest English Housing Survey, and the other a report by Knight Frank.

The Government’s latest English Housing Survey showed that in 2017/18, the private rented sector accounted for 4.5 million households across England, in comparison to 4 million in the social rented sector. Overall, the private rented sector has more than doubled since 2002, and in London, private rental is the most dominant tenure type by quite some way, making up 29%. It is predominantly younger people making up the sector, with the 25-34 age range now accounting for 44% of the entire private rented sector, a substantial increase from just 28% in 2007-08, though the number of families renting has also increased.

But on the other hand, there has also been an increase in the number of outright owners, something which is partly explained by an ageing population and ‘baby boomers’ reaching retirement age. So while the private rented sector grew strongly between 2002 and 2012, its share has remained unchanged at 19-20% for five years, leading to some people commenting that this could signal the end of the recent fast growth in the ‘Build-to-Rent’ development sector.

£75bn investment predicted for the PRS sector

In contrast, in a multi-housing survey report also released last week, real estate firm Knight Frank said it expects around £75 billion of investment to be committed to the private rented sector in the UK by 2025, and that it expects an extra 560,000 households to be renting a home by 2023.

The report also suggests that the number of individual landlords will fall as the ‘Build-to-Rent’ sector grows, something which is backed up by mortgage data, that has shown that the number of new mortgages taken out by landlords has fallen over the last two years. This is attributed to the Government’s buy-to-let tax changes.

Slowdown in construction activity

Also published in early February was the Markit/CIPS PMI survey for construction, covering the month of January 2019. This showed the Total Activity in the UK Construction Market Index to have fallen from 52.8 in December to 50.6 in January, marking the slowest expansion in the construction sector since March 2018.

Housebuilding and civil engineering both saw weaker growth, while activity in the commercial sector declined for the first time in ten months. This disappointing performance was attributed to falling confidence ahead of Brexit and the uncertain economic situation, with the commercial sector remaining cautious and residential building contractors watching their spend, only committing to building new units once they have sold properties that have already been finished. It also makes the point that without the ‘Help to Buy’ and ‘Shared Ownership’ schemes, growth would have been even lower.

Construction output falls in Q4

The latest ONS figures on economic growth and construction were published on Monday this week, and did not make for uplifting reading, as construction output was reported to have grown by just 0.7% year-on-year in 2018 as a whole, meaning output displayed its weakest year-on-year growth since 2012.

In the last quarter of 2018, construction output contracted by 0.3%, primarily driven by a fall in repair and maintenance output, and the monthly series saw a sharp decline with a 2.8% decrease in December. While it is not unusual for December output to be down compared to November, this was the largest month-on-month fall for all work since June 2012.

It’s not all bad news though. There was a 1.1% increase in new work year-on-year, driven by growth in the infrastructure and private commercial sectors, and figures revealed a year-on-year increase in the production of bricks of 7.9% for 2018 as a whole.

Mixed industry views on performance

And finally, the results of the CPA’s quarterly survey were published on Monday, revealing a ‘mixed performance’ in the final three months of 2018. The CPA’s Construction Trade Survey revealed that during Q4 2018, sales of construction products had increased according to 55% of heavy side manufacturers and 21% of light side manufacturers, whilst 25% of SME builders reported an increase in workloads. However, output, new orders and enquiries were reported lower by main building contractors, specialist contractors and civil engineering contractors.

It also reported that rising costs for raw materials continued to filter through the supply chain, leading to continued pressure on profit margins for building contractors, and that the skills shortage and ongoing concerns about the outcome of the Brexit negotiations, and the impact of the changes, remain a worry.

Muted short term outlook 

So in summary, it looks like there are a number of positive signs for the construction industry going forward, and there are also some areas showing high activity currently, but primarily this has been in the form of ongoing projects rather than in optimism and new starts. Surveys reporting on 2018 as a whole have been relatively positive, while numbers we have seen reported for Q4 2018 and January 2019, have been less so, indicating a slowdown towards the end of the year. It also seems likely now that this won’t change much in the next month or so, as the Brexit negotiation deadline looms closer.

One comforting factor, if you can call it that, is that other European countries are also seeing poor economic performance at present, with industrial output levels reportedly falling across the Eurozone, and Germany and Italy considered to be heading towards recession, with growth forecast also revised downwards for France and the Netherlands, according to recently released figures by Eurostat.

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