European market update

1-3-2013

The latest survey from the RICS suggests that surveyors will see an improvement in workloads coming in 2013 – unfortunately much of that improvement may well be down to winning more work abroad, rather than winning work in the UK.

Whilst this will contribute income in certain sectors, it clearly does not mean the UK construction market is improving. The latest figures for construction output show the industry is continuing to shrink and data released in January is consistent with a total fall in 2012 of greater than 8%.

That would be the fourth largest annual collapse in construction since records started in 1955 - indicators suggest the industry will shrink further as this year progresses, which is in line with industry forecasts.

The construction industry accounts for 10% of the UK’s GDP and is worth £100 billion. The construction sector is investment led and is therefore susceptible to economic downturns and is inevitably going to be further affected by the on-going effects of the global financial crisis.

According to the Chancellor’s Autumn Statement in December 2012, forecasts for economic growth in the UK are as follows: 1.2% in 2013, 2% in 2014, 2.3% 2015, 2.7% in 2016 and 2.8% in 2017. However, even in 2017 economic activity will not have recovered to pre-recessionary levels.

Government backed projects account for 40% of the construction industry’s output, and public sector spending has been substantially reduced - which has had an overarching effect on the recovery of the industry.

Events in the Eurozone continue to affect domestic growth through subdued consumer and investor confidence, with many continuing to criticise the deficit reduction programme. This uncertainty within the Eurozone will continue to influence the macroeconomic environment over the coming years. This along with the inability of certain EU leaders to repay their public sector debt remains a key issue and is unlikely to be resolved.

The greatest concern for the industry is the fall in capital expenditure for public sector construction and the inability of the private sector to offset this. The office of National Statistics has said that “The construction sector continues to be hampered by major headwinds, including public spending cuts, an extended weak economy, a struggling housing sector and problems in getting funding for large scale projects.”

The success of the 2012 Olympic and Paralympic games has played a pivotal role in the redevelopment of London. It has ensured that the massive scale and pace of development connected to the Global games creates a catalyst for business investment. It has also enhanced capacity for large scale co-investment that results from public backing combined with private and institutional investment.

Public perception of UK economic recovery was heightened by the success of the Games and saw the UK as global leaders within the construction industry. Post games we are now looking to the future of the UK and how we are going to emerge from the economic downturn that we have seen in previous years.

Looking forward suggests further falls in construction activity generally across all regions to 2014.

London still seems to be the strongest market, but interestingly the North East is expected to be far less affected than many of its northern neighbours.

Construction is a big employer, providing jobs for more than 2 million and plenty more in the supply chain. But the recession has been painful with around 400,000 construction jobs lost.

However the structure of the workforce has changed, with the number of direct employees falling fast, while the number of self-employed has remained much more stable. What this may indicate, is that firms are still cautious about the future and reluctant to directly employ labour, perhaps keen to keep flexibility ahead of what remains both nationally and regionally very uncertain times.

According to the Autumn Statement the UK economy is facing global change- with the emergence of new economies such as China, India and Brazil, the UK needs to become competitive. The Government has released planning initiatives aimed at boosting infrastructure and house building. This will be achieved by a £5.5 billion capital package and support for private investments including roads, science, infrastructure, schools and academies.

The Autumn Statement also aims to support both housing and commercial development, supporting growth and jobs. This is to be achieved by the Government providing a further £683 million through capital grants and financial transactions. In England, the Government will invest £474 million in local infrastructure on a recoverable basis. Around £60 million of this will be made available to support infrastructure in a limited number of Enterprise Zones.

Around £225 million will be used to accelerate delivery of large housing sites, supporting around 50,000 homes. Around £190 million of the funding will be used to de-risk public sector land and enable the quicker disposal of surplus sites for new homes. Alongside this, the Government will provide £100 million to bring forward public sector sites for development.

It is expected that any recovery will be led by the private sector. However this has been overshadowed by the turmoil in the EU and a plateauing of the domestic economy which is influencing business and consumer confidence and ultimately private sector investment.

Although the above initiatives have been released this does not mean that economic recovery will happen overnight. The statement has had both positive and negative reviews. Some say that it is a great example of the public and private sector working together. Others are more pessimistic as they believe that the money to be released for infrastructure and schools will not help the short term fortunes of contractors, designers and consultants. Given this, it is unlikely that the Construction Industry will recover this year.

Rider Levett Bucknall

Address
60 New Broad Street
London EC2M 1JJ
United Kingdom

Telephone: 0044 1707 800455
Fax number: 0044 1707 395037
Website: rlb.com/regions/uk/
Email: Andrew.Reynolds@uk.rlb.com

Contact

Andrew Reynolds
Head of Europe
Charles O’Loughlin
Quantity Surveyor






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