London鈥檚 2012 Olympics win is set to bring not just a bonanza in venues and infrastructure, but an incalculable amount of additional work.
After the surprise announcement on 6 July that London had been chosen to host the Olympic Games in 2012, there was a feel-good factor that was almost tangible. The expectation was that there would be a construction bonanza over and above the direct Olympic spending, as everybody would want a bit of the action and London would become a magnet for inward investment of every conceivable kind.
Twenty-four hours later that sense was wiped out by the bombings on London鈥檚 Underground and overground public transport systems. No longer did it seem likely that the world would want to come to London. Security will become a big issue over the months and years ahead.
For the construction industry, the additional spending that may come from London hosting the Games, rather than the spending on the venues themselves, may be more pertinent. The venues and the associated infrastructure have been costed but other works that may not otherwise have occurred have not.
Housing development in the capital may be boosted 鈥� both for private developments and the social housing that will form a percentage of them.
Then there are areas such as the Thames Gateway, which could now be developed more quickly than may otherwise have been the case. Indeed, much of the infrastructure spending included in the Olympic bid proposal was already earmarked to happen but its progress has a definite timetable.
The prospect of millions of additional tourists visiting the capital, and extending their visits to other parts of the country, is sure to stir retail and hotel development 鈥� although weak consumer spending so far this year means these sectors are currently looking downwards.
The capital investment required for the Olympics alone has been costed at 拢9.9bn, set out in the official London 2012 Candidate File presented to the International Olympic Committee last November. This covers the sports venues, the Olympic village, the broadcasting centre and all the associated infrastructure.
Most of this sum 鈥� 拢8.5bn 鈥� is allocated to roads, railways and other infrastructure, and includes continuing projects such as the Channel Tunnel Rail Link. More than 拢3.5bn of the money has already been spent.
But can the construction industry cope with this influx of work? To place it in context, UK construction output over the past seven years totalled 拢360bn at 2004 prices. The Olympics capital investment at 2004 prices, discounting money already spent, is in the order of 拢5bn 鈥� that is, a 1.4% addition to historic levels of construction turnover. Over the past seven years there has been a 17% growth in output 鈥� albeit with inflationary consequences. So an additional 1.4% should be capable of absorption without serious distress.
Bar the new canoe slalom course planned at Broxbourne in Hertfordshire and the upgrading of facilities at Weymouth for sailing, 99% of the capital expenditure is planned to take place in the Greater London area. In terms of London only, new work output since 1998 has totalled 拢60bn at 2004 prices, which positions the proposed Olympic expenditure as an additional 8% more than recent levels.
However, only 拢1.4bn of the capital investment is associated with the Olympic village, sports venues and other building works. New building work in London (other than infrastructure) over the past seven years has totalled 拢51bn (at 2004 prices), placing the impact of the Olympic building work as an average additional 2% a year, a figure that would appear to be well within the capacity of the industry to soak up without generating undue inflation. While the 拢70m Aquatics Centre is due to start on site at the end of this year, most of the construction work will probably take place between 2008 and 2012, increasing the percentage impact during these years to something like 4%.
Although the analysis for building work suggests that the Olympic dream can be built without too much pressure on the nation鈥檚 industry, the volume of infrastructure to be completed before the opening ceremony is another matter. To achieve the goals set, the national output of the civil engineering industry over the next seven years has got to increase by 8% over its output of the last similar period. Comparing the infrastructure output within Greater London only over the past seven years, output will have to increase by 45%, falling to 25% if the remainder of the South-east is included. This is obviously a massive opportunity for civils contractors but one that the industry may struggle to deliver.
Last quarter activity
Construction output
Great Britain (down)
London (down)
Contractors鈥� new orders
Great Britain (up)
London (down)
Output
In Great Britain as a whole, DTI figures show that new construction work fell in the first quarter. The volume of output was about 5% lower than during the middle half of 2004 at constant prices. The volume of new work recorded in London was the lowest quarterly total (at current prices) since the first quarter 2001. The value was 15%, lower than the average quarterly total from 2004, ignoring inflation. This reduction was caused by falls in private commercial work (20% lower than the 2004 quarterly average), public non-housing work (down 18%) and infrastructure (down 40%).
Orders
Contractors鈥� new orders throughout Great Britain slumped in 2003 before bouncing back to register record volumes in 2004. The first five months of 2005 have maintained this upward trend, with orders 6% higher than last year鈥檚 values. This is largely because of some significant infrastructure orders after a sharp fall in this sector during 2003 and particularly 2004. There has also been an improvement in private industrial orders, also after three lean years. However, public housing and non-housing orders are so far running at a lower level this year than last.
In London, new orders slumped in 2003 but, by contrast, have been in further decline since the second quarter of 2004:
the provisional total of orders secured by contractors in London in the first quarter this year at 拢1.2bn is lower than during the 2003 trough. For this reason, inflation in London has been lower than in any other region over the past three years.
The North
Although the 2012 Olympics will inevitably focus attention on London, the North remains the area where construction activity is most intense. The chart to the right shows that workload has been generally good throughout the country, but particularly so in the North.
Yorkshire and Humberside
The pace of growth in the North-west and North-east eased last year and into the beginning of 2005, but the market in Yorkshire and the Humber region has continued to steam ahead at an even faster rate.
The region has benefited from a massive increase in private sector housebuilding and, even though a year ago the buy-to-let market in places such as Leeds was being described as saturated, development continues apace. In common with the North-west, Yorkshire and Humber has also had the benefit of large inward public sector investment over the past three years. Over the next few years, Leeds is forecast to benefit from strong growth in office development.
North-east
Like Yorkshire and Humberside, the North-east has witnessed huge growth in housebuilding, its value to the local industry increasing 177% between 2001 and 2004 to 拢625m last year, with the beginning of 2005 showing no sign of easing 鈥� unlike many regions in the South.
North-west
The North-west remains the biggest construction market of the three regions 鈥� it was worth a little more than 拢11bn last year, compared with 拢9bn in Yorkshire and Humber and 拢3.5bn in the North-east.
The private commercial sector accounts for about 30% of new-build work in all three regions, and work in this sector is likely to remain strong in the North-west in the medium-term. In Liverpool, the Paradise Street development is reshaping the centre of the city. In Manchester the Spinningfields development continues apace while the Hilton Tower, which will be the city鈥檚 tallest building is beginning to dominate the skyline.
Tender price inflation
The rise in building activity in the North over the past three years has unsurprisingly manifested itself in substantial price inflation, led in the main by site labour rates chasing limited resources. Over this period, inflation in traditional building works has been close to 25% in the northern regions, whereas everywhere else inflation has been in the order of 18-20% (except in London, where the comparatively depressed workload has held inflation to 15%).Given the increase in workload, it is not surprising that contractors of all sizes are busy. This enables them to seek out easy projects that offer good profit levels making it difficult to secure competitive interest for riskier projects. For the same reason it is now quite difficult to compile adequate tender lists for single-stage design-and-build projects, often because estimating departments are simply overstretched. Even for traditional projects with QS-prepared bills of quantities, contractors are pushing for six weeks to tender. Project preliminaries costs can now comprises more than 20% of a total bid, usually attributed to legislation requiring increased levels of administration staff and higher costs for site cleanliness and security. Although in some areas there is still a shortage of traditional skills such as bricklayers and plumbers, there is a clear trend in Manchester of labour shortages being filled by plasterers, roofers and plumbers from Eastern Europe.
Nevertheless, the volume of work in all three regions will ensure that tender prices over the next year will continue to rise at a faster rate than elsewhere with price rises of 5-6% forecast.
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