Friday, December 18, 2015

Review of the UK construction market in 2015 and what lies ahead

2015 started with quite a bit of optimism within the construction industry and forecasts were for relatively buoyant output growth, following a stronger than expected performance in many sectors of the industry in 2014. Although construction output is thought to have improved in the second half of the year, official ONS data published so far indicates that 2015 has not proved to be as buoyant as forecast. However, the mood in the industry as a whole generally appears more optimistic than the latest figures show, and there have been some positive signs as the housebuilding and office construction sectors have continued to strengthen, and the education sector performed surprisingly well in 2014/15.
The construction industry is now a £140bn sector and inevitably fortunes will vary across the sector, with issues such as low-margin contracts, rising labour costs and skill shortages impacting contractors and across the supply chain. There has also been a significant amount of corporate restructuring in the construction sector during the year as material suppliers and contractors strive to improve margins.
In addition, we are starting to see the impact of changing consumer trends, with the growing impact of online retailing impacting on many sectors, while the focus is increasingly on trade sales as a result of the trend towards GSI (Get Someone In) rather than DIY. These trends have resulted in the implementation of some store rationalisation programmes, particularly among the DIY Multiples, but also in other related sectors.
However, as we move towards 2016, the pipeline and order books appear strong and AMA Research’s forecasts are positive for the short to medium term, with indications of good recovery for both residential and non-residential construction sectors likely to continue into the medium-term. Our forecast for 2016 is for around 5.5% growth, with medium term trends illustrated below. 

The next 12 months will continue to be challenging, but in general the outlook is positive across several key construction sectors, which should sustain underlying growth in the next 3-4 years.
Recently, the government has made some major announcements regarding housebuilding targets and infrastructure projects, with a substantial commitment to investment in the medium term. Among the large scale infrastructure schemes due to receive major investment are Hinckley Point C, HS2 and projects under the Roads Investment Strategy. The infrastructure sector is also likely to see a continued increase in foreign investment and involvement, in particular from Chinese or other Asian investors. However, the proposed cuts to feed-in-tariffs due to be introduced next year, may have a negative effect on growth in the renewables sector.
Housing output is also forecast to grow strongly in 2016 and beyond as a result of a general increase in demand due to improved consumer confidence and rising households, with stamp duty changes and the recently announced government Starter Homes Initiative, aimed at first time buyers also expected to drive housebuilding growth in the medium term.
However, AMA Research forecasts that the housing sector will see more of a steady recovery than a huge rise in the number of houses built. Government targets are very ambitious and similar announcements in the past have not led to any sudden increases in housebuilding. While there does now appear to be greater commitment from all parts of the political spectrum to increasing the supply of new homes, the ‘devil is in the detail’ in terms of easing planning restrictions and meeting the real demand for affordable housing in key parts of the country, such as the South East.
The education sector, which has been surprisingly buoyant of late, is also expected to remain strong, with commitments including investment in the higher education and student accommodation sectors in particular, while offices are also forecast to be among the most buoyant sectors going forward – and not just in London. However, public sector building, aside from in infrastructure, will most likely remain depressed.
Issues that will affect the building and construction industry negatively during 2016 include interest rate rises, the introduction of the National Living Wage (which will affect the FM and contracting sectors in particular) and planning issues. Planning is still causing problems, both at a local level with regards to housing as outlined above, and at a national level as has been exemplified with the delay in the decision regarding the third runway at Heathrow Airport. In addition, as output in the housing, infrastructure, health and education sectors are all politically driven, priorities may change at any time!
Nevertheless, the underlying economic drivers for growth look relatively positive for 2016 and the pipelines in most private construction sectors have continued to strengthen despite some negative pressures during 2015. Not everyone will benefit, but as construction activity continues to rise, this should feed up the supply chain in building, home improvement and related sectors.
As a result, for the longer term, AMA forecasts indicate annual growth rates of between 3-6% to 2019 when total construction output is forecast to reach around £170bn - hopefully providing you with some confidence for investment and good opportunities for growth.
Best Wishes for 2016 from all at AMA Research!

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