Market commentary Q1 2021



Recent market surveys continue to paint an improved picture when compared with late 2020, as market activity continues to increase, and with the vaccination programme now expected to be completed over the summer, giving rise to greater optimism.

However, the Scottish construction sector is now facing a combination of rising material costs and a significantly disrupted supply chain. According to the Federation of Master Builders, many material prices have increased by over 25% and are also subject to extended lead times or restricted quantities per order. Increases of around 30% are being reported for plant hire, with some companies also highlighting a shortage of qualified operators.

Market Outlook

The impact of the pandemic is still being felt by the whole economy with GDP reducing by 1.6% in the last quarter and by 7.5% over the last year. This was mirrored in the construction sector with an overall drop in activity of 10%. Forecasts for GDP now indicate the bounce back which started in Q2 2020 continuing at a greater level in 2021/22 with increases of over 5%, followed by increases of 2% in each of the following three years. This would suggest that the growth in total construction output should start to increase marginally or will at least remain static in the short term given the significance of the sector to the economy.

The latest RICS Market Survey reports that the majority of Scottish Quantity Surveyors workload expectations have improved in the last quarter with responses generally anticipating workloads to increase by up to 5% over the next year. Increases are expected across most sectors, with the strongest growth being seen in the private residential and infrastructure sectors.

Employment levels and profit margins are both now expected to show some growth over the next year due to increasing demand for construction.

The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions and access to labour and no further complete lockdown due to Covid-19. However, the figures could vary by +/- up to 5% per annum over the period of the forecast if the medium-term implications of Brexit on trade are more or less onerous.

Tender Price Update

Tender prices remained unchanged over the last quarter and fell by 2.1% when compared with the same quarter in 2020. Tender prices are expected to start rising in the second quarter of 2021 with contractors being unwilling to continue absorbing the additional cost of working under the Covid-19 guidelines. In addition, sharply increasing material costs and possible reduction in competition due to liquidations will drive tender increases.

The forecast for the following 5 years indicates strong tender price increases of around 4% per annum driven by improved growth in most sectors, giving rises more than input costs. Increased access to European labour in the latter part of the forecast period could, however, dampen tender price increases from 2024, but this remains unclear at present.

Given the above, over the next five years, tender prices are currently forecast to rise by 21% overall, an increase of 4% from the last forecast. Building costs rose by 1.4% in the last quarter when compared to the previous quarter and by 2.5% from the same quarter a year ago. Overall, costs are expected to continue to rise over the next 5 years, with increases of around 3.4% per annum over the next five years.

Building costs are forecast to rise by 17% in total over the next 5 years, a fall of 2% from the previous forecast. Materials prices rose by 2.7% in the last quarter and by 5.6% when compared with the previous year, average increases of around 3.8% per annum are now forecast for the next 5 years, up from the 3.5% previously forecast.

The main factors driving ongoing price increases include oil price rises, lack of supply and new post-Brexit import tariffs.

Wage awards were negligible in 2020 and are expected to be around 3% per annum for the next 5 years, generally in line with inflation. Overall, the forecasts continue to fluctuate regularly both because of the Covid-19 pandemic and the developing impact on trade following the withdrawal from the European Union at the end of 2020.

Construction Output Forecast

Total construction output only increased by 3% in 2020 Q4 when compared with the previous quarter. This represents a significant drop from the initial bounce back over last summer following the easing of the nationwide lockdown and resumption of non-essential works. Overall, it was 6% down from December 2019, with new work output following a very similar trend.

Annual comparisons of new work output over the quarter showed most sectors increasing but over the last year (including the lockdown) every sector showed reductions, albeit lower than previously reported. Average decline was between 2% and 15% but with a 29% decrease for public housing.

Over the period of the forecast, new work output is expected to bounce back by 9% in 2021, initially led by the infrastructure and private housing sectors, before returning to lower levels of annual growth of around 5%. In total, output levels will take until 2023 to return to 2019 levels, 19% less than the last pre-covid forecast. Expenditure on repair and maintenance is also forecast to increase, this is being driven by homeowners with spending up 19% in the last quarter.

To Summarise

Whilst recent research indicates a generally positive outlook, both in terms of market activity and increasing profitability there are threats to the recovery becoming evident. A rapid increase in global construction activity following the pandemic is creating a combination of sharply rising material prices and disrupted supply chains. Britain is also experiencing a significant labour shortage resulting from the no-deal Brexit.

The continued success of the construction sector is essential to the future of the Scottish economy so it essential that all parties work together to keep increasing costs under control and maintain full order books, with support from the Scottish Government seen as essential.

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