2019 Construction Sector Predictions

Posted On January 21, 2019 By mhauk

2019 Construction Sector Predictions“A week is a long time in politics” is a famous quote attributed to British Prime Minister Harold Wilson which now seems more relevant than ever. Given this was said many years before the invention of the internet and Britain’s entry in to the then European Common Market, it seems outdated in these fast paced 24-hour-news-cycle times in which we currently find ourselves.

With Brexit due to take place on 29 March 2019, and with such an unpredictable economic and political climate, it would be both brave and foolish to accurately forecast conditions in the construction sector for 2019. However, there are some trends already evident in the construction sector that are likely to continue to shape the confidence of the market – the likely Government stimulus that will undoubtedly follow Brexit, refurbishment of the safety of high rise buildings after the Grenfell tragedy, to the development and the greater use of data in construction projects.

This article briefly explores these topics and is not meant to be an accurate forecast of events for 2019 which should be relied upon for investment decisions.

ICAEW UK Business Confidence Index

2019 Construction Sector Predictions

Confidence

Firstly, the one thing that always remains vitally important to the construction industry is confidence. The construction and property sector’s confidence has collectively suffered more than most in the last couple of years. The quarterly ICAEW UK Business Confidence Index shows this clearly in the recent five quarters to Q3 2018. The survey is based upon 1,000 interviews of Chartered Accountants and Financial Directors. Whilst the UK as a whole has shown a gradual return to confidence after the 2017 General Election, this evaporated in the third quarter of 2018.

However, the property sector has remained in the doldrums during this time, evidenced by the reported fall in housing prices in London and the South East in 2018. The weak state of retailers on the high street and the many Creditors Voluntary Arrangements (e.g. House of Fraser, Poundworld and Carpetright) will not help landlords to be confident.

The construction sector’s confidence showed a very mixed picture in 2018 and this is expected to continue until the Government’s Brexit position has settled and all industries can benefit from a stable economic environment.

Brexit and Public Spending

Regardless of the exact nature of Britain’s withdrawal from the EU, the Government is likely to invest in infrastructure as a stimulus to the UK economy. The large investments in HS2, the nuclear industry (new build and decommissioning), roads and housing will continue to drive demand and shape the market regionally.

Anecdotally, the fall in demand for plant hire in London and the South East has shifted focus of plant hire companies to serving HS2 in the Midlands driving down prices and margins. Similarly, the over capacity in the civil engineering sector has resulted in significant changes in regional pricing and many large players will be hoping that this doesn’t develop into a sustained price war.

On a more positive note, the announcement that Local Authorities will be able to borrow more to build good quality affordable homes and address the housing shortage is very welcome and should see more developments planned for 2019. Again, not all Local Authorities have announced that they will make use of these new powers and so there will be regional variations.

Grenfell Fire Tragedy

The construction sector is still coming to terms with the aftermath of the Grenfell fire tragedy and the lessons that must be learned. The inquiry does not have a fixed timeframe and may continue throughout the whole of 2019. Phase two of the inquiry will include a focus on the lessons to learn which will necessitate a planned programme of replacement of existing fire doors, passive fire protection systems and external cladding etc., will identify procedural improvements around fire safety evidence and will determine new building development regulations.

Such changes in legislation will require the market to adapt and will lead to new investment in the sector to meet the expected demand and greater funding for ongoing facilities management and maintenance.

Mergers and Acquisitions

2018 saw continued growth in the mergers and acquisitions market in the construction services sector which is expected to continue, however, there was one notable exception. The liquidation of Carillion plc sent shockwaves through the industry, with ripples impacting smaller contractors who suffered bad debts and a general knock to industry confidence.

On a more positive note, the sector continued to attract investors. A prime example includes, the £30m investment by LDC in NBS, the market-leading provider of technology, data and content services to the architectural, engineering and construction industries. Based in Newcastle, NBS employs more than 200 people and has successfully developed a standardised approach to Building Information Modelling (BIM) that allows construction professionals to use the most up-to-date information to make the correct decisions quickly and minimise risks on projects.

This deal was one example of how private equity investors can be attracted to the construction services sector if companies can embrace technology and develop their own intellectual property that can capture data which is relevant for the market and its professionals.

Summary

In conclusion, the Government, Local Authorities, private equity and the confidence of all of us in the construction services sector will as usual be key drivers for the sector in the year ahead.

As for making new year predictions, British Prime Minister Harold MacMillan once said in reply to a question on what would knock the Government off course “Events, dear boy, events.”

Such unforeseeable events that could impact the construction market include those which affect the UK’s attractiveness to foreign property investors (i.e. the value of sterling) or which affect home owners and the ability to fund long term projects (i.e. interest rate hikes).

We can only wait to see what events will happen in 2019 and hope that the sector can re-establish its confidence and continue to adapt and thrive.

These views are the personal views of Steve Plaskitt, member of the MHA Construction & Real Estate team, and are not the official views of MHA.

If you would like to discuss any of the issues raised in more detail or if you would like to speak with a member of our Construction & Real Estate team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

This article featured in issue 11 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters – Issue 11