Over the next two years, overall construction output is forecast to remain broadly flat in 2018, rising by only 0.2%, before growth of 1.7% in 2019, driven primarily by growth in private housing and infrastructure. Outside of the private housing and infrastructure sectors, slower UK economic growth and investment uncertainty are expected to weigh on construction output in the private sectors. This, combined with the persistent uncertainty associated with the conditions of Brexit, has acted as a considerable hindrance to major new investment in private sector construction, especially for new high-end residential and commercial offices projects within London that are particularly reliant on foreign investment.
From an economic point of view, other uncertainties, such as the implications of continued inflation and the fall in real wages on consumer confidence and general UK economic growth, and the availability of skilled construction labour may also affect the rate of construction growth in 2018 and 2019.
Output in the private housing sector continued to grow in 2017 and is expected to rise further in 2018 and 2019. Property transactions in 2017 were slightly lower than transactions in the last two years and indicate a broadly flat to slightly negative general housing market. These transactions have been distorted due to changes in stamp duty in recent years that adversely affected sales at the top end of the market in particular.
UK house price inflation in 2017 was 3.0% compared to 2016 according to Nationwide, indicating that the supply of properties onto the market slowed in line with demand. As long as house price inflation continues, housebuilders will be keen to increase supply, especially given that the Government’s Help-To-Buy schemes have skewed demand towards new housebuild and they remain positive with respect to increasing supply. A key part of the housebuilding market that appears to have been adversely affected over the past year is prime London properties. House prices in central London have fallen 15% since their peak in 2014 according to Savills. Uncertainty on rates of return on high-end properties from international investors due to short-term economic and longer-term Brexit uncertainty has also affected demand for prime residential real estate in the capital.
The private housing repair, maintenance and improvement (RM&I) sector was worth an estimated £19.9 billion in 2017. The trend of slightly negative property transactions over the past year would suggest falling output in the private RM&I sector, particularly given that a higher proportion of transactions than normal involve new housebuild, encouraged by Help-To-Buy. At the same time there is a slight demographic impact on RM&I particularly among older homeowners in certain areas who prefer to release equity from pensions and stay and improve rather than move. As a result, output from private RM&I is expected to remain flat in 2018 before falling 2.0% in 2019.
As falls in housebuilding in London are offset by growth in housebuilding outside the capital, the private housing sector is forecast to continue its growth from 2017, with 3.0% in 2018 and 2.0% in 2019.
Greater certainty over grant funding and flexibility under the Shared Ownership and Affordable Homes Programme 2016–21 (SOAHP) had been expected to drive an increase in public housing activity in 2017; however, starts in England were 0.1% lower in the first three quarters of the year following two previous years of declines.
Commercial activity peaked during the first half of 2017 based on new orders signed prior to the EU Referendum.
Activity remains at historically high levels as commercial sector output rose by 3.0% in 2017, based on the ONS’s revised output data for the year. However, commercial offices new orders have fallen since the EU Referendum in June 2016 and, following the 12–18 month lag between orders and output in commercial projects, output has fallen since summer last year. Since the EU Referendum vote, international investors and developers adopted more risk-averse behaviour towards new projects and new orders have fallen sharply. Hence, output in the offices sub-sector is expected to fall by 5.0% in 2017, 15.0% in 2018 and a further 10.0% in 2019.
As a result, commercial sector output overall is expected to fall by 5.0% in 2018 and 1.4% in 2019 as the fall in orders feeds through the project pipeline.
Overall output in the infrastructure sector is expected to rise by 6.3% in 2018 and 11.1% in 2019 driven by work on large-scale infrastructure projects in the rail, water and sewerage and electricity sub-sectors, in particular.
Output in roads construction, where Polypipe has significant exposure, is expected to remain flat in 2018, with delays in some projects pushing demand into future years. Going forward, output in roads is projected to return to growth and increase 3.0% in 2019 driven by a pick-up in activity under the £15.2 billion Road Investment Strategy.
An important recent factor affecting the infrastructure construction sector has been the collapse of Carillion. According to data from Barbour ABI, around 60% of Carillion’s active schemes or projects with contracts awarded in which Carillion is the sole major contractor are infrastructure projects. Within their infrastructure work, 53% of the projects are road schemes and 42% of the projects are rail schemes. The full impact of Carillion’s liquidation is yet to play out through the long supply chain of sub-contractors, but will almost certainly add to the downside risk of project delivery timing.