The results of the Q4 2018 RICS Construction and Infrastructure Market Survey show a mixed picture, but there has been a moderation to growth in output across the UK.
During Q4 2018, growth in workloads within the commercial and industrial segments came to a standstill for the first time in six years. However, the activity across construction sectors varies with a net balance of 20% of contributors to the RICS survey reporting an increase in private housing workloads in the UK. Public sector workloads were mixed, but surveyors reported growth in housing with a net balance of 14% seeing an acceleration in public sector housing likely attributable to the £1 billion in additional HRA borrowing that has come through. Public sector workloads shadowed the private sector with a slowdown in public non-housing construction activity (8%). Infrastructure activity remained steady with a net balance of 18% seeing a rise in workloads over the quarter.
Anecdotal evidence from respondents suggest that the housing market slowdown, coupled with ongoing policy ambiguity related to Brexit, is weighing on business investment decisions. When asked how business enquiries for new projects or contracts have fared in the past three months, 10% more respondents reported an increase rather than a decrease compared to 24% in Q3. Growth in repair and maintenance work remains modestly positive.
Within infrastructure, the pace of growth in output was particularly resilient in roads, rail and energy, with rail and energy experiencing the sharpest increase in two years.
Looking at factors constraining activity, financial constraints are reported by 78% of surveyors to be by far the most significant impediment to building. Difficulties with access to bank finance and credit, along with cash flow and liquidity challenges, are often cited reasons alongside generally less favourable cyclical market conditions. When asked how credit conditions have changed over the past three months, 20% more respondents report a deterioration rather than improvement.
Despite having eased in Q4, the shortage of skilled labour continues to pose a significant challenge for half of our respondents, particularly with regard to professional services such as quantity surveying. 64% of surveyors expressed the view that workers from the EU were not important to their hiring requirements of surveying professionals, and the solution to this issue remains firmly domestic within the training and education areas with 68% of contributors to this survey citing education as the most effective policy tool in addressing the current skills dilemma, compared to 15% for immigration.
However, as the Brexit deadline draws near it should be noted that EU nationals are an important part of the mix particularly with regards to addressing the skills issue in increasing capacity to build on construction sites. With EU nationals accounting for eight percent of the UK’s construction workforce, this accounts for well over 175 thousand people, according to recent RICS figures.
Looking further ahead, the more uncertain outlook for the economy as a whole has led to a reduced optimism for the construction sector over the year to come. Even so, 24% more contributors expect activity to rise rather than fall, down from 33% in Q3, and a net balance of 15% foresee an increase in hiring over the next 12 months.
Tender price expectations over the next twelve months are expected to be squeezed with 51% and 40% more respondents envisaging greater price pressures in the building and civil engineering areas, respectively. The expected increase in tender prices reflects higher input costs and ongoing competitive bidding pressures for businesses. Expectations on industry profit margins have been flat for the second consecutive quarter in Q4 2018.
In terms of geographical breakdown, workload growth is now reported to be decelerating across all regions. London and the Southeast were particularly affected with a lack of growth across the private housing, commercial and industrial subsectors buoyed by positive momentum in infrastructure and public spending. Over the past three months, new business enquiries were strongest in the North (+24%) and weakest in Northern Ireland (-21%). Meanwhile, year-ahead expectations for workloads and hiring are the most resilient in Scotland with net balances of +38% and 31%, respectively.
Jeffrey Matsu, RICS Senior Economist commented:
“The protracted uncertainty engendered by the Brexit impasse is becoming ever more apparent with workloads in the commercial and industrial sectors grinding to a standstill. While the challenges are particularly acute in London, the additional £1 billion in additional HRA borrowing to fund council housing has begun to stimulate activity. The subsequent scrapping of the cap in last year’s Budget has the potential to accelerate this positive trend in the public sector over the coming years.
“Capacity remains an ongoing constraint for activity more broadly. However, with surveyors reporting a ramping up of new hiring even despite a moderation in business enquiries, continued access to a qualified pool of non-UK workers to support this growth will be as important as ever, particularly for work on construction sites.”