09 August 2016 #Construction
It is clear that we are still trying to assess the outcome of the Brexit vote and in the past month or so there have been some significant, if not rapid, changes within the UK. How has the construction industry been hit so far?
It seems that construction prices have risen by over 25% in the current construction cycle and a flat rate of inflation in tender prices into the next year is predicted as investors are waiting to see how the industry will react. Another factor which affects tender prices is the increase in the cost of materials due to the weakened sterling.
Alinea, a cost consultant, has predicted two possible scenarios for the UK construction market, one positive and the other quite negative. On the one hand, the government could confirm public sector investment while confidence in the construction market is restored. But on the other hand, we could have a period of continued uncertainty triggering a period of deflation, which could see tender prices drop by as much as 5% in 2018.
The UK service sector registered a fall in business activity in July, according to the latest PMI survey data from IHS Markit and CIPS. Output and new business both declined for the first time in over three-and-a-half years, and at the fastest rates since early-2009 when the industry was substantially hit by the recession. July’s readings, which were lower than the previous month, show contraction in the industry instead of growth. The main reason for this contraction is the ongoing economic uncertainty. Clients are not willing to invest but would rather wait and see how the industry will react to the wider economic impact of the Brexit vote.
This comes at the back of ONS’s recent survey which indicated that construction had entered a recession. Brian Berry, chief executive of the Fédération Nationale Bovine, commented: “The construction industry has grown steadily over the past few years and for the sector to experience two consecutive quarters of negative growth demonstrates the powerful effect uncertainty and a lack of confidence can have.”
On the bright side
The UK will always be an attractive place to do business with due to its diversity, location and favourable tax regime. For example, GlaxoSmithKline has pledged to invest £275m to develop three manufacturing sites to boost production of pharmaceuticals, the majority of which are for export. Also, two separate overseas buyers are in the final throes of acquiring substantial prime City office buildings of a combined value of £265m, adding to confidence of the enduring quality of the London real estate market.
The one thing that keeps popping up in every construction professional’s mind is uncertainty and if some certainty is not injected into the industry soon, for example with a renewed commitment to invest in infrastructure, then we do indeed have a problem. However, the UK construction industry has learned the lessons of the 2008 recession and has acquired a greater resilience, therefore it is well placed to withstand any economic storms.
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