Weak Output Next Year Before Growth in 2024 Glenigan Says

THE CONSTRUCTION industry will struggle in the face of ‘extremely challenging’ economic conditions, with predicted growth in decline during 2022 (-2%) and 2023 (-2%). However, the sunnier uplands, although far off in the distance, are starting to emerge on the horizon, with a 6% increase predicted in 2024, according to the Glenigan UK Construction Industry Forecast 2023-2024.

Slower Road to Recovery

Project starts have lost momentum during the second half of 2022 and are forecast to slip back by 2% by the end of the year, and in 2023.

Glenigan predicts the next 24 months to be a challenging period for the construction industry, with ongoing material, labour, and energy supply chain disruption continuing to hold back activity.

These external events have resulted in rocketing inflation, rising interest rates, and stalled economic growth, affecting the pipeline of future work. This has been further compounded by the promise of higher tax, utility bills, and rising mortgage costs which has constrained consumer-related construction, including private housing, retail, and hotel and leisure.

The situation has prompted some clients, contractors and developers to pause or scale back on planned investments, further stagnating output. This was confirmed by the value of projects securing detailed planning consent during the first 9 months of 2022 dropping by 5%, and main contract awards falling by 8% against 2021.

Private Residential Resurgence

Housing market activity cooled off in 2022, and is predicted to slow further in 2023 as developers respond to weakening market conditions.

Project starts are forecast to drop 4% this year, with a further 5% decline next, as lower household incomes, higher mortgage rates and lack of affordable homes continue.

The stamp duty rates reduction will provide a small benefit to first time buyers, says Glenigan. However, the end of the government’s Help to Buy scheme has removed direct support for new builds, coupled with mortgage providers significantly raising rates in reaction to inflation, meaning that any benefit for first time buyers will be negated.

Nevertheless, the growing prospect of a stabilising economy in 2023, prompted by a change in prime minister and gradually improving consumer confidence over the next two years, supports a forecast of a 15% rise in residential project starts during 2024.

Social Housing Slips

In the public sector, social housing project starts are less positive, forecast to slip back during 2022 and 2023, following a rapid 16% recovery in 2021 as housing associations pressed on with schemes delayed during the pandemic.

Despite improved funding, increased construction costs appear to be constraining development activity, with approvals similarly falling back over the past 12 months.

Industrial Consolidation

Industrial project starts have enjoyed a strong rebound post-pandemic, a rise which has largely been driven by logistics and light industrial projects as significant growth areas. Looking forward, the sector faces a period of consolidation during 2023 and 2024 as the recent spurt in activity inevitably slows.

Weak domestic and overseas demand is expected to temper manufacturing investment in facilities, but warehousing and logistics premises are forecast to remain a growth area. This is due largely to a long-term shift towards online retailing, resulting in continued demand for logistics space, and accounting for the majority of industrial project starts’ 25% growth in 2022.

Retail Dampens Construction

In the short term, however, the demand for both logistics and retail space is expected to be damped by weak retail sales as consumer confidence falls in response to higher inflation and falling earnings, says Glenigan.

An overhang of empty retail premises, weak consumer spending, and the growth in online sales’ market share is predicted to constrain retail construction starts over the forecast period.

Despite this, investment by discount supermarkets Aldi and Lidl are set to be a bright spot within the sector over the forecast period.

Back to the Office

Office starts have also bounced back sharply since 2021, increasing by 27%. The Covid-19 pandemic radically altered working trends globally as many businesses shifted to hybrid working, reducing overall floorspace requirements.

Despite this, the sector is predicted to benefit over the forecast period from a rise in refurbishment projects as tenants and landlords adapt premises to further accommodate these changing work patterns. Conversely, new build office projects are likely to be slower to recover as developers continue to assess the long-term demand for additional office accommodation.

Hospitality and Leisure

The squeeze on household budgets is set to curb consumers’ discretionary spending in the hospitality and leisure industries. The hospitality sector is still recovering from lockdowns, and fewer overseas visitors.

Combined with spiking energy costs over the last 12 months, as well as a potential fall-off in domestic custom over 2023, the hospitality sector will be under pressure. This is predicted to result in retrenchment, causing further delays to project starts as asset owners wait for confidence to return.

Public Sector Capital Cuts

A core pillar of the Government’s UK Growth Strategy, public sector investment was set to be an important driver of construction activity over the forecast period, says Glenigan. Funding for rail projects and regulated utilities in particular have been tipped to provide the bulk of the output over the forecast period.

However, as a new administration begins planned capital funding may be vulnerable to departmental cuts to counter recession.

Energy Infrastructure

Energy security is expected to drive investment in offshore wind farms, solar PV, increasing nuclear capacity and strengthening hydrogen capture capabilities.

Education

Government has committed to rebuilding 500 schools over the next decade. The latest Spending Review includes additional capital funding for the Department of Education to increase secondary school places. This is expected to support growth in school building projects in 2023 after a weak performance over the last year.

Health

Health sector project starts remained high during both 2021 and 2022, with an optimistic outlook for the future as a 3.8% real-term growth rate in NHS capital funding is set to maintain project starts over the forecast period.

Whilst starts are forecast to slip back 6% in 2023, the value of work started during 2021 and 2022 remains above pre-pandemic levels.

Allan Wilen, Glenigan Economic Director

Glenigan’s Economic Director, Allan Wilen, said, “Construction will face a challenging environment in the coming year as the Russia-Ukraine war continues to hinder the UK’s post-Covid recovery, exacerbating supply chain disruption, resulting in materials and energy shortages, and leading to cost inflation and dented market confidence.

“The pattern of UK construction activity is being reshaped by economic slowdown, but structural changes are expected to create new opportunities in warehouse and logistics, office refurbishment and new housing schemes. It will be crucial for firms to be responsive and adaptable in order to mitigate risks in the current marketplace and exploit new opportunities as they emerge over the forecast period.”

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