2 Jan 2023
UK HOUSING AND CONSTRUCTION NEWS
Construction faces significant headwinds this year as the UK slips into recession and as structural changes in the economy reshape the demand. As the pattern of construction activity changes, firms will be need to be ready to tap into new opportunities as they emerge.
UK construction has already faced turbulent market conditions over the last year as the initial post-pandemic recovery in UK economic and construction activity dissipated and material and labour supply issues restrained construction activity during 2022. Whilst these pressures will persist during 2023, faltering demand is expected to be a growing constraint upon industry workload.
Supply side disruptions initially fuelled a sharp rise in material costs as the industry emerged from the pandemic. The war in Ukraine drove prices higher with the annual rate peaking at 26.8% in June. The production of many construction products is energy intensive and are among those seeing the sharpest prices rises as gas and electricity costs soared.
Encouragingly prices stabilised somewhat during the second half of last year, helping the annual rate of material price inflation to ease to 15.5% in October. The annual rate should ease further over the coming year, although reduced government support for businesses’ energy costs may feed through to material price inflation.
Firms will continue to face stiff competition to recruit skilled staff this year. The industry’s long-standing labour supply issues intensified during 2022. Fewer EU nationals and the withdrawal of older workers from the labour market have shrunk the potential industry workforce, with the number of vacancies, at 49,000, almost double pre-pandemic levels. Designers and contractors may need to increasingly turn to modular and offsite components to ease their project’s on-site labour requirements.
Alongside these supply side issues, construction activity last year was shaped by both cyclical and structural shifts in demand which will further reshape the pattern of construction workload during 2023.
Demand will constrain overall construction activity during the coming year, with the UK economy in recession and a weakening development pipeline feeding through to a decline in project starts and construction output.
The number and value of project starts weakened during the second half of last year. Whilst there was an increase in major project starts (over £100 million), the value of underlying project starts during the final six months of 2022 were 5% lower than a year earlier and there were also 8% fewer projects started.
Similarly, the development pipeline has weakened, with 14% fewer projects securing detailed planning consent during the final six months of 2022 and the value of underlying detailed planning consents slipping by 5% against a year earlier. The shrinking pipeline is expected to feed through to a further weakening in project starts during 2023.
The UK housing market is slowing as homebuyers’ confidence has been undermined by a drop in real earnings and prospect of higher taxes and mortgage rates. House prices have softened and the number of mortgage approvals in the three months to November was 19% down on a year earlier.
Developers are adjusting their development programmes as market activity cools. Private residential starts weakened during the second half of last year as developers increased their focus on building out projects already on site.
Detailed planning consents also fell back last year, with around 16% fewer projects securing approval and a further decline in project starts is anticipated during 2023.
Structural changes in the economy and property demand will drive industrial and commercial sector activity during 2023. Strong demand for logistics space has driven rapid growth in industrial activity, which is expected to remain at a high level during 2023. Commercial starts picked up during the final quarter of 2022. Office refurbishment and fitout projects are expected to remain a growth area this year as landlords and tenants adapt office accommodation to optimise the benefits of hybrid working.
In contrast the weaker economic outlook and the squeeze on household incomes is expected to curb in retail and hotel & leisure facilities during 2023.
Public Sector & Civil Engineering
Promised increases in government capital funding should support a recovery in sector starts during 2023. The value of health project starts rose by an estimated 2% last year and increased NHS funding is expected to maintain sector activity above pre-pandemic levels during 2023.
Although the value of underlying civil engineering starts fell back last year, overall starts jumped by 13% due to a sharp increase in major projects (£100 million or more). These major contracts, including HS2 works and energy projects, will help to underpin civil engineering workload over the coming year.