Market Commentary Q4 2021



Recent market surveys continue to indicate a slowdown in the rate of growth over the last quarter both in Scotland and throughout the UK economy overall, but with the construction sector expected to continue to benefit from moderate growth over the next twelve months giving rise to continuing optimism.

However, supply chain pressures are continuing to grow across the Scottish construction with access to building materials and the availability of sufficient skilled labour presenting significant difficulties. According to the Royal Institution of Chartered Surveyors 84% of respondents to their latest market survey have experienced issues with material availability and 77% sourcing labour, with bricklayers and carpenters being the standout trades, but with significant issues also identified with the availability of plasterers, plumbers, and electricians.

Market Outlook

The impact of the pandemic is still being felt by the whole economy with inflation (CPI) in December up at 5.4% per annum, well above the government target of 2%, driven by increasing demand and corresponding supply shortages. This has led to the first two interest rate rises by the Bank of England with further increases up to 1.5% by 2025 predicted.

Forecasts for GDP now indicate an increase of 8% in 2021 and a 5% increase in 2022. This will be followed by increases of around 2% in each of the following three years. This would suggest that the growth in total construction output should start to increase in the short term given the significance of the sector to the economy.

The latest RICS Construction Market Survey reports that Quantity Surveyors’ workload rose quite strongly in the last quarter of 2021 with the expectation of further increases over 2022. This represents a significant shift from the previous forecast where the majority of responses were anticipating workloads to reduce by up to 15% over the next year with a corresponding reduction in profit margins.

The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions and access to labour and the removal of the last remaining Covid-19 related restrictions. However, the figures could vary by +/- up to 10% per annum over the period of the forecast depending on the medium-term implications of Brexit on trade and the extent of continuing material shortages.

Tender Price Update

Tender prices rose by 1.5% over the last quarter, a dip from the previous quarterly rise of 2.4%. However, the annual rise increased by a further 1.0% to 4.9% when compared with the same quarter in 2020.

Tender prices have been rising since the second quarter of last year, but the rate of increase is forecast to reduce from the second half of 2022 as material cost pressures ease but still with upward pressure from site costs and increasing demand as the economy recovers from the pandemic.

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. The only exception being 2021/22 where the combination of increased demand following the pandemic and increased costs of both material and labour could increase tender prices by more than 5% for a brief time.

Given the above, over the next five years tender prices are currently forecast to rise by 22% overall, a 4% decrease compared to the last forecast.

Building costs rose by 2.3% in the last quarter when compared to the previous quarter and by 10.7% from the same quarter a year ago, with both figures similar to the previous forecast. Overall, costs are expected to continue to rise over the next 5 years, with increases around 3% per annum over the next five years, except for a dip in 2022 to 2.5%. Building costs are forecast to rise by 12% in total over the next 5 years, a decrease of 4% from the previous forecast.

Materials prices rose by 3.8% in the last quarter and by 20% when compared with the previous year, an increase of 3.1% from the previous forecast. A return to more moderate increases of between 2% and 3% per annum are now forecast from the end of 2022 with an overall increase of 12% over the next 5 years (4Q21 to 4Q26). The main risks to material prices are ongoing shortages during the Covid-19 crisis, oil prices and import tariffs.

Wage awards are expected to be around 3% per annum for the next 5 years, in line with inflation, but with labour shortages expected to continue site rates are likely to see larger increases.

Overall, the forecasts continue to fluctuate regularly because of the Covid-19 pandemic, the developing impact on trade following the withdrawal from the European Union at the end of 2020 and the volatile nature of global trade at present.

Construction Output Forecast

Total construction output increased by 1% in 4Q 2021 when compared with the previous quarter, which is in line with GDP as a whole, over the last quarter. However, this represents a 3% drop from the previous report and represents a further significant reduction from initial bounce back over last summer following the easing of the nationwide lockdown and resumption of non-essential works. Overall, it remains 4% down from July 2020, with new work output following a similar trend.

Comparisons of new work output over the last quarter showed all sectors increasing. In 2021 most sectors also showed increases ranging from 5% to 10% but with a 30% increase for infrastructure and a 7% reduction for the private commercial sector.

New work output is expected to rise by only 0.7% in 2022, with the public non-housing and private industrial sectors now leading the recovery, and infrastructure and private commercial seeing reductions. Over the remaining period of the forecast annual increases will vary between 1% and 4% with 2019 levels of new work output level only being regained in 2025.

Expenditure on repair and maintenance is also forecast to continue to increase by around 3% per annum, this is being driven by non–housing work as organisations look to catch up on backlog works deferred by the pandemic.

To Summarise

Recent RICS / BCIS forecasts continue to indicate a generally positive outlook, with sustained but moderate growth across most parts of the construction industry. Expectations for the next year remain firm across Scotland despite the ongoing challenges around the retention of skilled labour and the supply of key materials. While the Covid-19 virus crisis will continue to dampen world demand the removal of restrictions in the UK can only be seen as positive for workload, employment, and profitability expectations for the remainder 2022 and beyond assuming restrictions are not re-introduced in the short/medium term because of a new and more potent variant.

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