Mid Year Construction Review & Forecast 2015

Transcription

1 Mid Year Construction Review & Forecast 2015 Special Report June 2015 Prepared by Glenigan

2 Established in 1973, Glenigan currently invests 3.1million and makes over a million research telephone calls per year to provide details on every construction project in the UK. This enables us to provide the most up-to-date and comprehensive construction sales leads and analysis, to help companies win new business. We also have exclusive partnerships with key industry associations such as the Builders Conference and the Building Research Establishment (BRE), enabling us to offer project data that s not available elsewhere in the market. Glenigan s detailed insight is used across all levels of our customers businesses. Different departments have much to gain from using our industry knowledge and product features to deliver results for their specific job role. LEAD GENERATION sales PIPELINE MANAGEMENT TARGET LISTS Marketing MARKET ANALYSIS TREND TRACKING MANAGEMENT COMPETITOR ANALYSIS RELATIONSHIP BUILDING INDUSTRY INTELLIGENCE COMMUNICATION MANAGEMENT BESPOKE REPORTING INDUSTRY FORECASTING For further information, visit glenigan.com or contact us on the details below. Switchboard Phone +44 (0) Fax +44 (0) info@glenigan.com Subscription Sales Phone info@glenigan.com Address 5th Floor, 80 Holdenhurst Road Bournemouth, BH8 8AQ Account Management Phone accountmanagement@glenigan.com Glenigan June 2015 This report is copyrighted. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Users may download and print extracts of content from this report for their own personal and non-commercial use only. Brief excerpts may be used, provided full accreditation is given to Glenigan. Republication or redistribution of Glenigan content is expressly prohibited without the prior written consent of Glenigan. Disclaimer: This report is for general information purposes only. It should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. While facts have been rigorously checked, Glenigan can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. 2 glenigan.com

3 Construction prospects for 2015 In recent months the construction industry has been buffeted by pre-election nerves as households and private investors deferred major decisions until after 7th May. However, with political uncertainty now largely removed, we anticipate a strengthening in private sector construction activity during the final six months of Construction output dipped during the first quarter of A slowdown in private new housing and housing RM&I activity and a drop in commercial sector output combined with lower public sector work to put overall construction output 0.2% down on the preceding quarter. Furthermore Glenigan recorded a marked decline in project starts in the run-up to the General Election. The value of underlying starts during the three months to April was 8% down on a year earlier, a factor that is expected to hold back construction output during the second quarter of this year. Whilst project starts have slipped back in recent months, the pipeline of planned projects has strengthened. The value of projects securing detailed planning approval during the first quarter was 28% up on a year earlier. This increase is forecast to feed through to a rise in project starts over the coming months. Tighter lending criteria have contributed to a slowing housing market over the last 12 months with the number of mortgage approvals during the first quarter of % down on a year ago. The drop in market turnover has been accompanied by more modest growth in private residential project starts. Looking ahead however, we anticipate a strengthening in new housing activity during the second half of Rising real incomes and increased employment are expected to lift housing market activity, while the Government s Help to Buy initiative is also supporting new house sales and the recent Stamp Duty changes have helped ease the moving costs for most purchasers. The last year has seen strong growth in industrial and commercial project starts. The industrial sector has seen the sharpest rise in project starts, driven by strong demand for logistics space as retailers continue to develop their on-line offering. This is forecast to remain a growth area over the coming year. In contrast there are concerns that the prospect of an EU referendum may prompt manufacturers to delay planned capital expenditure. The flow of office project starts also accelerated in 2014, growing by 20%. The value of underlying starts dipped during the first quarter of 2015 despite a strong development pipeline, suggesting that investors were deferring decisions until after the election. This slowdown is expected to be temporary with further strong growth forecast for the second half of this year. The retail and hotel & leisure sectors are set to benefit from improving consumer sentiment and spending. Whilst the value of underlying retail starts will remain subdued as the major supermarket chains scale back their capital expenditure, sector activity will also benefit from a number of high profile shopping centre developments. The hotel & leisure sector is similarly benefiting from increased capital expenditure as firms seek to capture rising discretionary spending by UK consumers and overseas visitors. In contrast Government funded investment is forecast to remain constrained. Social housing starts are a particular weak spot, with the value of project starts falling by 14% this year. Table 1: Value of underlying project starts by sector Change on previous year f Private Housing Social Housing Industrial Offices Retail Hotel & Leisure Education Health Community & Amenity Civil Engineering Total 7% 16% -6% 12% -1% 1% 21% -9% 8% 7% 8% 12% 20% -14% 17% 36% -13% 17% -4% -5% 9% 4% 7% -1% 49% 20% 8% 20% 10% 8% -6% 4% 11% Source: Glenigan N.B. Underlying project starts exclude individual projects of 100m or more 3 glenigan.com

4 Whilst the first quarter saw a number of major hospital projects starting on site, the underlying prospects for the health sector are less encouraging. Although the new government has pledged additional funding for the NHS, capital programmes are not expected to be a priority. The education sector is a relative bright spot. The sector is benefiting from increased investment as local authorities adapt and extend their primary school estate to accommodate rising pupil numbers. In addition the Government plans to expand its free schools and University investment and the Priority School Building Programmes are all also fuelling sector activity. Rail and energy are forecast to be principal drivers behind a 4% rise in the value of underlying civil engineering projects starting on site during the current year. In addition the sector should benefit from a rise in water industry work during the second half of the year as the AMP6 programme gathers momentum. Chart 1: Value of Underlying Project Starts by Country & English Region East Midlands East of England London North East Northern Ireland North West South East South West Scotland West Midlands Wales Yorkshire & the Humber 2015f % -10% 0 10% 20% 30% 40% Annual Growth Source: Glenigan Whilst London led the initial recovery in construction activity, the upturn has now become more firmly established across the UK. Almost all parts of the country saw a rise in project starts during The exceptions were Scotland, where private sector investment was temporarily disrupted in the run-up to the independence referendum, and in the West Midlands, which had previously seen strong growth during Furthermore both parts of the UK are expected to see some of the fastest growth during the current year, alongside the East of England and Yorkshire & the Humber. Project starts are forecast to slip back this year in the North West and Northern Ireland; both parts of the UK that saw strong growth in Private housing Rising consumer confidence, improved mortgage availability and the Government s Help to Buy scheme all combined to lift housing market activity and new house sales during Indeed the strength of the market recovery and house price growth prompted the Bank of England to tighten mortgage regulations and lending criteria last summer, which has subsequently tempered the pace of growth. Nevertheless there is political consensus that increased supply of new homes will be crucial to avoiding a restricted and overheated housing market in the longer term. London and the South East led the initial upturn in the wider housing market. However the recovery has become more broadly established across the UK during the last year, while the London market has slowed as high prices choked demand with the demand for prime residential properties also hit by Labour s mansion tax plans. Although mortgage lending has stabilised in recent months, the private residential sector is set for continued growth during Overall the economic outlook remains positive, especially for housing market activity outside of the capital. Rising consumer confidence and improved household incomes are expected to lift property transactions and new house sales over the coming year, while the recent Stamp Duty changes have helped ease the moving costs for most purchasers. Housebuilders have secured permission on sites across the country in anticipation of a broader based upturn in demand, with the number of dwellings approved on private sector projects climbing 24% last year to 191,000. Having grown by 12% last year, we expect the growth in the value of underlying project starts to quicken to 20% during Project starts are forecast to subsequently stabilise at this higher level with a modest increase of 3% anticipated for glenigan.com

5 Social housing Over the last few years the social housing sector has had to adjust to a radical change in its funding model. Social housing providers are now expected to rely upon private funding to meet a greater proportion of their projects development costs. Whilst landlords can now charge affordable rents of up to 80% of market levels on new lettings, providers have also been developing schemes with a higher element of shared ownership and open market properties to defray scheme costs. This model has involved Housing Associations borrowing heavily against the value of future rental streams to finance new construction. The Conservatives manifesto commitment to extend Right to Buy discounts to Housing Association tenants may impact on their balance sheets and their ability to progress new developments. Social new housing starts picked up during the 2013/14 financial year, with England seeing a 27% rise in starts to 27,000 units according to DLCG. This increase in activity reflects the successful adaptation by social landlords of their development plans to accommodate the Government s new funding regime. However the reduction in government capital funding remains a constraint on sector activity. The value of project starts slipped back by 1% last year, while DCLG recorded an 8% decline in unit starts. In addition there has been a sharp drop in the value of detailed planning approvals which is forecast to feed through to a 14% drop in the value of starts during Offices Growth in project starts accelerated in 2014 to a rise of 20%, and sector prospects remain bright with an even sharper rise in starts forecast for This strengthening pipeline will underpin output growth over the medium term. The sector saw a sharp pre-general election dip in project starts, but the flow of schemes is forecast to strengthen quickly during the second half of the year. A 43% rise in the value of underlying detailed planning approvals in London during 2014 points to a strengthening in project starts in the capital during However office project starts are also expected to pick-up outside of South East England as the demand for more quality office space spreads beyond the capital. Rising demand for office accommodation and a lack of development activity has tightened the supply of available office space in major UK office markets, and investors and developers are now racing to respond to the changing market conditions. The value of detailed planning approvals more than doubled in the West Midlands, East Midlands and Wales during 2014, while the North West also saw approvals rise by a quarter after a 36% expansion in This is set to feed through as increases in project starts in Greater Manchester and Birmingham in particular during Chart 2: Value of Office Detailed Planning Approvals by Region, 2014 ( m) Source: Glenigan 5 glenigan.com

6 Retail Whilst consumer confidence and spending are on the rise, retail construction activity is being buffeted as much by structural changes in the retail sector as by investment to capture rising sales. Underlying retail project starts rose by 8% last year, but are forecast to fall back in 2015 despite the bright economic outlook.investment by the major supermarket chains has been a long standing source of sector activity. However the contribution of the supermarket sector to the value of projects securing detailed planning approval during the last three years is substantially below the high levels seen during 2010 and The market leaders, Tesco and Sainsbury, have already scaled back their investment programmes to focus upon their convenience store network. Hit hard by intensified price competition and loss of market share to the discount chains, the latest results season has seen the leading chains announcing further retrenchment of their investment programmes for the coming year. However the sector will see new opportunities during 2015 as Aldi and Lidl step up the expansion of their supermarket network. Whilst the majority of the supermarket chains are still expanding their networks of convenience stores, this often involves the lower value refurbishment work of existing premises. More widely, refurbishment and fit-out projects are accounting for an increasing amount of work in the retail sector as retailers rationalise their estate and remodel stores in part to accommodate click and collect services. However the contraction in underlying project starts should be offset by some large shopping centre redevelopment schemes. In response to the e-commerce challenge, developers are looking to safeguard their investments by expanding established shopping centres, such as Westfield in west London. In many cases, the plans include an enhanced leisure offering in order to increase dwell time and their perception as destination shopping locations. Chart 3: Value of Detailed Planning Approvals by retail category ( m) Source: Glenigan Hotel & leisure The UK s hotel and leisure industries are benefitting from improved consumer sentiment, coupled with rising employment and emerging growth in real earnings. Visitors from overseas have also helped to boost the sector. Spending by overseas travellers jumped by 12% in 2013 and grew by a further 3% during This rise in overseas visitors appears to have bolstered investment confidence, though the capital has been the main beneficiary. London s popularity as a tourist destination drove a 47% jump in detailed planning approvals jumping in The flow of projects entering the development pipeline has been subdued elsewhere. Nevertheless we expect sector starts to strengthen during 2015 as rising disposable incomes feed through to increase discretionary spending. Growth in starts is expected to be 17% this year, building on a 20% increase in The value of contracts awarded to main contractors has been buoyant, indicating a strong flow of schemes nearing start on site. However activity at the earlier planning approval stage has been weaker, and this is likely to feed through to a fall in starts during glenigan.com

7 Industrial Industrial construction remains a bright spot for growth in Structural change in the retail sector with the continued growth of on-line retailing, click & collect and home deliveries is fuelling demand for warehousing and distribution premises, with a 17% increase in the value of industrial starts forecast for 2015, despite an almost 50% rise last year. The relatively short construction periods associated with warehousing construction has supported a rapid growth in industrial sector output, which the Office for National Statistics estimates rose by 17% during Though UK manufacturing output has now grown for eight successive quarters, the pace of the recovery has slowed since mid The Office for National Statistics estimate manufacturing output grew by just 0.1% in the first quarter of 2015, with output 1.3% up on the corresponding period of The latest CBI Industrial Trends Survey in April also recorded a slowing in output growth and sluggish export orders. The slower pace of growth appears to have tempered capital expenditure plans, especially for investment in buildings where a balance of 19% of firms plan to reduce their spending. The prospect of a referendum on the UK s membership is likely to cause further reticence to invest into new capacity, particularly in export-focused industries such as car manufacturing. It is therefore the logistics and warehousing sector that we expect to be the driver of further expansion during Health The value of underlying starts grew by 8% during 2014, reversing a decline seen the previous year. Unfortunately the upturn is forecast to prove short-lived with a renewed weakening in project starts forecast for NHS capital budgets remain under pressure, squeezed by rising costs elsewhere in the service. Though the Conservatives have pledged an extra 8 billion for the NHS budget, we expect this to be required for the cost of day-to-day services, and improvements such as 7-day GP opening hours. Moreover a steady decline in PFI funded projects points to sector activity remaining dependent upon direct government investment in NHS facilities, alongside private investment in the smaller private health sector. Exceptions to this trend include the new Papworth PF2 Hospital, and projects north of the border using the Scottish Government s NPD funding model such as the New Dumfries and Galloway Royal, which both broke ground earlier this year. Chart 4: Health Construction Output 1,200 Public Health Private Health & PFI 1, million Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Values are in current prices. Source: ONS 7 glenigan.com

8 Education The flow of education project starts slipped back during the closing months of 2014 and has remained fragile so far during Whilst education was a priority for all of the main political parties, pre-election uncertainties hung over the sector in the run-up to 7 th May. This weakness in the run-up to the general election means that we expect a mild decline in underlying education starts this year, before a rebound in Universities in particular slammed on the brakes ahead of the result, amid concerns over Labour s pledge to cap tuition fees at 6,000 pa. However the longer term outlook for education work is positive in contrast to other publicly funded areas of construction. Rising pupil numbers are necessitating increased investment by local authorities to increase primary school capacity, with the major metropolitan areas seeing the greatest pressure on existing facilities. The Priority Schools Building Programme is also expected to generate an increasing flow of work over the next year. To date only 81 schools have reached start on site, out of 261 that are scheduled to be rebuilt or improved under the programme by the end of Moreover analysis of projects attaining planning permission shows that both schools and universities will increase construction investment. There was a 16% rise in the value of detailed planning approvals during 2014, and this growth has since accelerated during the current year. This will support a pick-up in starts during the second half of this year and during Community and amenity This sector continues to struggle from the after-effects of the recession and the austerity budget cuts placed on the key clients for community & amenity work, who are typically local authorities. Analysis by the Local Government Association shows that councils in England alone face a funding gap of 5.8 billion between March 2014 and the end of 2015/16. Despite these funding pressures, construction in this sector has been largely stable over the last two years. The underlying value of starts slipped back by 6% in 2014, cancelling out growth in the previous year. We expect an upturn in starts of 9% this year, having recorded a rising value of contracts awarded since mid However a further forward looking indicator of upcoming activity, the value of projects receiving detailed planning approval, remains weak and local authorities are likely to face further budget tightening during the new Parliament, dampening expectations of a longer term improvement. More encouragingly another key client in the sector, the Ministry of Defence, appears to be maintaining construction spend, with a number of frameworks awarded during 2013 and 2014 to facilitate redevelopments of military bases and improvements and maintenance to the military housing estate. Civil engineering Rail and energy are forecast to be principal drivers behind a 4% rise in the value of underlying civil engineering projects starting on site during the current year. In addition the sector should benefit from an increase in water industry work during the second half of the year as the AMP6 programme gathers momentum. Having paused during 2013 while the industry awaited the results of energy market reform, renewable energy development picked up once more during Impending changes to subsidies for solar capacity caused a rush in new additions, which we now expect to fade. However large scale energy developments were scarcer, with fears over Labour s pledge to freeze prices potentially delaying investment. With continuity of government, we now expect the energy sector to be a strong driver of construction growth with a need for investment to meet a looming capacity crunch in the UK energy market. Transport investment is also expected to continue to boost new activity. The last major Crossrail contract has now been awarded, with the focus of construction activity moving away from the main tunnelling effort to the stations and passenger infrastructure. Construction is due to begin this year on the Northern line extension to Battersea, while outside the capital electrification work in areas around Bristol and Manchester are among the projects included in Network Rail s current Control Price Framework, moving into its second year in Announcements of increased government funding for road construction bode well for longer term prospects, however the bulk of these increases are planned for later in this parliament and beyond the next election. 8 glenigan.com