黑洞社区

Many in the construction industry will be glad to see the back of 2024. 鈥淪urvive till 25鈥� was the mantra often heard this year.

2024 has been characterised by the continued fallout from the economic and political turmoil swirling since 2022. Much of this has been hugely damaging for the sector.

Private sector output falls across commercial and residential markets and a lack of counter-cyclical public sector stimulus to offset has led to yet more hollowing out of construction鈥檚 structural capacity.

Construction employers, inhibited at the best of times from investing properly in long-term employment, training and modernisation, have turned the taps off to an even greater degree this year, a situation perhaps further accelerated by some of the announcements in the recent Budget. In the past two years we have seen a collapse in apprenticeship starts, reductions in skilled migrant workers, retirements gathering pace and the overlaid challenge of business failures across the supply chain driving sector employment down below two million for the first time in over 25 years.

I have been warning for many years now that the industry鈥檚 resilience, enabled by its flexible, sub-contracting-led labour model, is now at risk of failing to respond according to historical norms. The usual upward trended sine wave expansion and contraction in workforce numbers that we have seen across postwar economic cycles is now becoming a staggered downward trajectory of steepened contraction and then dampened expansion.

This is also confirmed by construction prices now actively decoupling from construction output fluctuations with falling workloads not being matched by the commensurate tender price deflation we have seen in previous downturns. Falling workforce participation and higher employment costs are holding labour costs up and material production has been cut back sharply to manage the risk of unsold stockpiles and protect pricing. Margins are the only variable.

As we leave 2024, large parts of the capital base of the industry are still effectively in hibernation mode. Whether it be housebuilders or brick manufacturers, big businesses have hunkered down awaiting better times.

Unfortunately, thinly capitalised SMEs cannot just wind down operations in this way and certainly the workforce itself cannot just be held in stock or manufactured by restarting a production line. This is the biggest risk to any future recovery and the government should be pulling out all the stops to protect the industry from further damage in order to rely on it to fulfil its political promises.

In the immediate context of 2025, everyone will be craning their necks to see signs of sustained recovery. Response to the October Budget and the ongoing geopolitical turbulence dominating our daily news have not helped in this regard and sentiment seems to be finely balanced. Another month of output shrinkage now has us teetering on the brink of another recession.

I overheard someone at a recent function say that 鈥渟urvive till 25鈥� is already out of date and it should now be 鈥渉ibernate till 28鈥�! Although this pessimistic outlook is unlikely to be the reality, we should all be prepared for relatively sluggish market conditions in the coming year and any recovery, however welcome, being gradual rather than big bang.

Easing land and planning pinch-points and enabling regional autonomy, although crucial for enabling major infrastructure projects, is not enough to get Britain building homes again

In terms of homebuilding, the government has doubled down on a seemingly improbable target of 1.5 million new homes within this Parliament. Moves towards rules-based planning, green belt deregulation and devolution are dominating the headlines at the moment.

The reality though is that easing land and planning pinch-points and enabling regional autonomy, although crucial for enabling major infrastructure projects, is not enough to get Britain building homes again. We need other major blockers in the housing market to be addressed.

Basic viability is in reality the biggest single issue holding back delivery. Construction costs, land values, affordability ratios, sales values and rates of sale are now out of kilter more than I have ever seen in my career.

An industry that has become reliant on demand-side stimuli does not have Help to Buy to turbo-charge new-build pricing and rates of sale and interest rates are still stubbornly high, affecting mortgage pricing. Even in the build-to-rent market, basic rent affordability is being challenged.

Meanwhile, many landowners, buoyed by the recent government de-regulation, are holding out for prices that just don鈥檛 work anymore. Banks are largely resisting the temptation to fire-sell distressed assets and this is slowing any recalibration of the land market.

Moving to construction costs, as highlighted above, these are not deflating like they did in the early 1990s and post the global financial crisis. Volatile affordable housing quotas, technical regulatory requirements and labour scarcity issues set out above are all putting residual pressure on costs.

All of this drives the inconvenient truth as to why developers are not building more homes, and indeed why much commercial construction work or even public infrastructure is just not affordable. Those businesses that can push and pull the levers that restore viability, primarily through doing things differently rather than just passing the buck down the supply chain, will surely have the competitive advantage in 2025 and beyond.

Allied to viability restoration is the need to urgently build wider financial capacity and capitalisation in the homebuilding system. If we are to get anywhere near 300,000 homes per annum, the balance sheets and landbanks of the major housebuilders need to work hand in glove with a vibrant cohort of SME builders.

If we have a 鈥渂lack hole鈥� in public finances, then there needs to be a wholesale shift in the funding model for affordable housing

I expect to see the government further recognise this in 2025 as well as the importance of institutionally backed build-to-rent and later living as maturing sectors. Berkeley Group establishing a new long-term build-to-rent venture should be seen as a lead indicator of the pressure that developers are now under to find different routes to returns even if it means overall profit dilution.

Another fundamental question needs to be answered in 2025: If we have a 鈥渂lack hole鈥� in public finances, then there needs to be a wholesale shift in the funding model for affordable housing. The reality is that affordable homes need to be delivered without over reliance on either a flawed housing association cross subsidy model or using developers鈥� Section106 quotas which are both completely synchronised with the health of the private for sale market.

The last cycle has shown clearly how affordable homes, especially deeply discounted true social-rent homes, cannot be built in the required numbers via current funding models.

New models must surely involve the strategic participation and aggregation of large annuity funds combined with long-term state income underwriting. In turn, such private money needs to be aligned to derisked, scalable routes to affordable, consented land and viable construction delivery.

New towns are being touted as a possible solution to the pressing 鈥渉ousing as infrastructure鈥� question, but we need delivery not more strategy in 2025.

Viability preservation in urban and suburban settings might need a return to the emotive debate on residential space standards if we are to shift the dial on delivery over the next year. With build costs now so high, each square foot on a plan is not always generating sufficient return, so the value of creating smaller spaces enhanced by great design, natural lighting and amenity needs to be revisited away from blanket 鈥渞abbit hutch鈥� accusations.

The upcoming multi-year spending review in the spring will be an important test of the government鈥檚 ability to plan for the long term

Further related to multi-family development, I would also flag a growing crisis in progressing Higher Risk 黑洞社区 Gateway 2 submissions through the 黑洞社区 Safety Regulator. The technical and commercial implications of compliance have hit the industry hard, but a growing backlog of late decision making is now further undermining confidence at the worst possible time for the market. The next 12 months need to see this unlocked and a formulaic approach also established for Gateway 3.

From an infrastructure perspective, the upcoming multi-year spending review in the spring will be an important test of the government鈥檚 ability to plan for the long term. Whether a 10-year infrastructure strategy is politically deliverable remains to be seen, but it is vital that construction is given much more clarity and certainty on pipeline commitments and timescales so it can gear up accordingly.

The newly formed National Infrastructure and Service Transformation Authority must signal best in class clienting, including intelligent procurement and delivery leadership, as well as exploiting the appropriate planning reforms to drive projects forward with funding fully committed.

Lastly, the debate on construction workforce and skills gaps is only set to get more intense in 2025. A rebadging and repurposing of previous agencies and initiatives has been underway since the general election, including the pivot from IfATE to Skills England and the former apprenticeship levy relaunched as the growth and skills levy. Many will want to cut through the noise and quickly determine whether construction can make true inroads into its capacity and competency deficit.

Challenges to the effectiveness of the current Construction Industry Training Board model will likely be debated again in 2025 with an ITB review awaited and an upcoming CITB consensus vote. Debate should also extend to the increasing need for wider educational sector and entry pathway reforms to better support industry needs, hot off the back of news that the onsite construction T level has been withdrawn.

I would close by saying that, in the context of all of the above, many construction businesses are ready to chart a course in 2025 towards growth despite the obstacles we face 鈥� but we do now need to feel a prevailing wind to support the journey ahead! 

Mark Farmer is the founder and CEO of Cast Consultancy