Uncertainty remains over the terms of what will be agreed for the United Kingdom to leave the European Union. However the recent agreement to move to Phase 2 negotiations strengthen the view that there will be a transition period, which would moderate the immediate impact of the withdrawal from the single market and customs union on both the construction industry and the economy as a whole.

The Global outlook also remains uncertain with reduced growth and recession experienced across the world with any growth expected to remain modest at best for the duration of the forecast.

Market Outlook

The overall rate of growth in construction activity has continued to reduce over the last 12 months, with a further reduction forecast for at least the next two years, continuing the trend that started back in 2015.

Financial constraints continue to be the biggest factor affecting growth levels, with the impact of the recent interest rate increase still to be felt, the availability of bank finance appears the major issue, with cash flow and liquidity challenges also widespread throughout the industry.

According to the Office for National Statistics employment in the construction industry rose by 2% over the last year. However skill shortages also continue to be an issue across most professions and trades, with 44% of contractors experiencing difficulty in securing site trades, up from the 27% previously reported, with bricklayers (40%), carpenters (75%) and plasterers (50%) in particularly short supply.

The recent RICS Market Survey reports that Quantity Surveyors are generally anticipating workloads to increase during 2018, but to a marginally lesser degree than previously forecast, which along with increasing costs and shortages of skilled labour will have a knock on impact on profit level forecasts. However, Contractors continue to report an increase in capacity utilisation, with those working at / near capacity rising to 62%, from 53% in the previous quarter.

The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions and access to labour. However, the figures could vary by +/- up to 5% over the period of the forecast if the outcome of the Brexit negotiations are more or less onerous.

Summary of Forecast

The current movements in construction costs currently reported in the BCIS Quarterly Report are as follows: –

Source: BCIS (December 2017)

Tender Price Update

Tender prices rose by 4.4% in the second quarter of 2017 compared with the previous quarter and rose by 9.5% compared with the same quarter in 2016.

Over the next year tender prices as a whole are expected fall, particularly on private sector projects more influenced by uncertainty on Brexit negotiations and more generally because of limited opportunities across all sectors. However this is likely to vary regionally with Scotland potentially performing above average as a result of a different focus within public sector construction procurement.

The forecast for the remainder of the forecast period indicates strengthening tender price increases as there is a return to higher growth in most sectors, clarity on the Brexit position and with anticipated wage pressure and increasing input prices no longer being absorbed by Contractors

The General Building Cost index rose by 1.5% in 3rd quarter 2017 compared with the previous quarter and by 4.0% when compared to a year earlier.

Costs are expected to continue to rise over the next 5 years with input costs rising to a greater degree towards the end of the forecast period following withdrawal from the European Union as a result of the anticipated trade restrictions, depressed exchange rate and reduction in availability of labour.

The Market Conditions Index rose by 4.1% in the first quarter of 2017 compared with the previous quarter and rose by 5.4% compared with the same quarter in 2016.

Materials prices rose by 1.1% in the 2nd quarter 2017 and by 5.4% when compared with the previous year. Individual material prices generally moved between -1.0% and +2.0% however steel reinforcement rose by 4.6%, sawn softwood by 2.8% and particle board by 3.8%, copper fell by 2.0% and lead by 6.0%over the quarter.

Significant increases in material prices for the civil engineering sector can be attributed to the rise in oil prices over the last quarter as oil related products are more heavily used. Products that require high energy consumption in their production such as glass and hot rolled metals have been similarly affected.

The Consumer Prices Index (the Government’s measure of Inflation) rose by 3.0% over the same period, well above the government’s target level of 2%, and it is currently anticipated to remain around 2.5% per annum for the next two years before falling to below 2.0%.

Manufacturing input prices rose by 0.5% in October 2017 compared with September 2017 and rose by 5.5% when compared with a year earlier. Output prices rose by 0.1% compared with the previous month and by 2.1% compared with June 2016.

Overall, the forecasts continue to fluctuate regularly as views on the likely picture following the withdrawal from the European Union continue to change, and the volatile worldwide economic picture makes long term forecasting particularly difficult.

Construction Output Forecast

The total volume of construction output fell by 1% in the third quarter of 2017 when compared with the previous quarter, but rose by 3% when compared to the same quarter in 2016. New work output also fell by 1% in the quarter, but rose by 3% when compared to a year earlier.

Analysis of new work output over the last quarter showed increases of 5% for public sector housing, 2% for private housing, and 6% for private industrial. Output reduced by 2% for infrastructure 3% for private commercial work and 4% for other public sector work.

Annual comparisons of new work output over the last year showed increases of 14% for public sector housing, 6% for private housing, 2% for infrastructure, 3% for private industrial sector, 2% for commercial work and a fall of 8% for other public sector work.

It is anticipated that total construction output will only increase overall in 2017 before reducing in 2018, turning to marginal growth in 2019, before rising at between 2.0% – 3.0% per annum from 2020 to 2021.

Over the period of the forecast, new work output is expected to grow by approximately 4%, less than forecast 3 months ago.

Source: BCIS (December 2017)

The forecasts assume that the private sector will be affected by reduced, or at best delayed, investment over the next few years given the unavoidable hiatus around whether projects should proceed or not unfolds during the EU withdrawal process.

It is seen as less likely that public sector projects will be affected, particularly those infrastructure and housing projects identified in the 2017 Autumn Statement and the current Scottish Government pipeline.

A return to stronger output growth is forecast for 2020 and beyond on the premise that the new infrastructure projects, particularly in the electricity, road and rail sectors proceed as planned and there is a return to growth in the private commercial and industrial sectors which have seen the biggest recent falls in activity levels.

The picture does fluctuate regionally with Northern England, Scotland and Northern Ireland appearing to be particularly badly affected when compared with those in the Midlands, Southern England and Wales, given the impact of the London area where development currently continued at pace.

To Summarise

Recent forecasts and surveys indicate that confidence levels are slipping across the industry as a whole, and particularly in Scotland and Northern Ireland, for the next year with optimism about profit levels generally declining across all parts of the industry.

2018 promises to bring some challenging market conditions to the Scottish construction and property sector.

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© 2017 Thomson Gray Ltd
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