Decline in new construction activity but some sectors show signs of resilience
New construction activity fell back sharply in the wake of the Brexit vote, according to the Q3 2016 JLL and Glenigan UK Commercial Construction Activity Index. The Index highlights that construction activity for the 12 months to September fell by 12.4% compared to the total for the previous quarter, However some sectors remained resilient, particularly hotels and healthcare.
Despite the decline in activity, the Q3 commercial construction picture contains mixed messages and from an alternatives sector standpoint was both buoyant and positive. Construction activity in the hotels market continued to grow reaching £2.4 billion (up 3.0% q-o-q). Added depreciation of the pound against the dollar and euro is likely to mean further good news for the hotel industry, enabling the UK to be a more affordable destination for visitors. Other facets of the alternative sectors, notably healthcare, have also been less affected by the current uncertainty and activity within the sector for the 12 months to the end of September reached £1.9 billion (up 15.3% q-o-q). However it is undeniable that the wider market appears to be pausing while it tries to grapple with the uncertainty the referendum vote has produced.
Regionally, London and the South East totalled £10.6 billion for the 12 month period, which is down 3.4% q-o-q. Together, London and the South East region accounted for 55% of commercial construction activity, an increase of 5.0% compared to Q2 2016. Elsewhere activity increased, with Scotland up 1.0% quarter-on-quarter (q-o-q) and Wales (up 4.0% q-o-q), with a rise in new build starts recorded.
The focus on issues such as passporting for financial services implies that London, which is more dependent on this sector than the regions, may begin to see more impacts over the coming months – with the regions seeing more of a delayed effect. However, the government’s increasing focus on a more general regional policy concentrating on the North and Midlands will provide a welcome boost for commercial construction in those parts of the country in the longer term.
While the latest PMI data indicates sustained expansion in the construction industry, this was largely driven by an upturn in residential activity which offset a stabilisation in commercial construction during October. However, a weakness of orders suggests a further reduction is likely. Current forecasts assume the UK housing market will experience a slowdown rather than a correction, with Central London likely to see flat pricing. Government support for residential construction will underpin the sector for the medium-term. However, the looming labour capacity crisis for the sector will need serious attention from the Housing Minister should his ambitious targets have even a hope of being achieved.
Looking ahead, EU uncertainty, financial constraints and planning delays will all remain hurdles to construction starts. Skills shortages are also likely to persist further constraining growth. The government’s recent rhetoric around immigration policy, combined with the effects of the falling pound on the earning power of EU workers in their domestic currencies, may exacerbate this over the coming months. Additionally, Sterling’s weakness has elevated the cost of imported materials and construction materials price inflation will come under pressure in the coming months, reducing development viability.
The full report is available to download here.