黑洞社区

In recent years we have seen massive political upheaval, from the Brexit vote to an election that nearly took veteran left-winger Jeremy Corbyn all the way to 10 Downing Street. The effect seems to have been replicated across the world, with the shock presidential victories of Donald Trump and Emmanuel Macron in the US and France respectively, to the rise of far right parties like the Alternative for Germany and Sweden Democrats.

Some have explained this as a surge on both right and left of anti-establishment populism. And whether this is caused by discomfort with current levels of immigration or despair over the inequalities perceived to have been caused by austerity, the cold, hard statistical facts of what that tidal wave has caused are starting to emerge.

In particular in the UK, the economic consequences of a weak, minority Conservative government divided over its Brexit negotiation strategy and propped up by the Democratic Unionist Party are likely to be acute. The pound has been fragile since the European Union (EU) referendum, hitting 31-year lows against the dollar in October and January. Construction, which contributes around 6% of GDP, is a bedrock of the UK economy and the unique political uncertainty the country now faces is set to hit the sector hard.

This month, the Construction Products Association (CPA) warned that the UK industry鈥檚 growth in 2018 will be 0.7%, its lowest for six years, since back when the economy was still feeling the effects of the financial crisis. This was a huge downward revision from April this year, itself already a modest forecast at 1.2%. The press release that came with it gloomily cautioned that even its more upbeat projection of 1.8% growth in 2019 was unreliable because of 鈥渢he unprecedented economic and political uncertainties鈥�.

CPA economics director Professor Noble Francis tells 黑洞社区: 鈥淭he problem over the past couple of years has been the sheer persistence of political uncertainty. This is not going to make much of a difference for a decision on whether to refurbish your house. The problem is on [construction projects] that require investment upfront where that investor is looking for a long-term rate of return, which impacts the industrial and commercial sectors. International investment will move into other cities [than London] in the EU.鈥�

So, with uncertainty the watchword going into Autumn, here 黑洞社区 examines some of the major forthcoming indicators that will show whether or not the industry is heading for a period of extreme grief.

Commercial and Infrastructure

In years to come, 27 July 2017 could be viewed as the top of the market. That鈥檚 when Hong Kong鈥檚 Infinitus Property Investment, a subsidiary of herbal medicines producer LKK Health Products Group, bought the Rafael Vi帽oly-designed 20 Fenchurch Street - better known as the 鈥淲alkie Talkie鈥� - for more than 拢1.28bn in the UK鈥檚 biggest ever office deal.

Tony Williams, chairman of corporate finance consultant 黑洞社区 Value, says: 鈥淭he commercial sector, particularly office building, peaked with that deal. Nothing鈥檚 happening in retail development, apart from one 鈥攐r two shopping centres and there鈥檚 not much in factories, except for work on Jaguar Land Rover鈥檚 design and engineering centre [valued at 拢200m] in the Midlands.

鈥淚t鈥檚 a pretty dull period going forward, but dull is good in comparison to the financial crisis.鈥�

Williams believes declines in the commercial and industrial markets, which the CPA highlighted as the main drags on growth, would have happened with or without political uncertainty. The property and construction cycle, he argues, was naturally coming to its downward slope, with consumer demand falling at its fastest rate in four years in July.

It鈥檚 a pretty dull period going forward, but dull is good in comparison to the financial crisis

Tony Williams, 黑洞社区 Value

Williams also argues infrastructure is 鈥渁 comparative bright spark鈥�. The CPA says construction work on the first phase of the 拢55.7bn High Speed 2 railway and the Thames Tideway Tunnel supersewer in London is expected to see infrastructure activity grow by
6.4% next year.

With overall growth forecasts for the industry so slim, the sector will be watching closely for any changes in these key markets.

Housebuilding

One of the few sub-sectors of sunshine, the private housing market is set to remain strong.

Help to Buy, which sees the government lend buyers up to 40% of the purchase price in London and 20% elsewhere, is expected to provide growth in private housing starts of 3% this year and 2% in 2018. The CPA says more than a third of new housebuilding is being sustained by this policy, which in the medium-term is rather concerning given Help to Buy is due to end in 2021.

Berkeley Group is one of the housebuilders that has been hit by Brexit, falling out of the FTSE 100 when its share price fell in the wake of the referendum.

The collapse of sterling has made London properties look attractive [to overseas investors]. I think housebuildingwill continue to be strong

Tony Pidgley, Berkeley Group

However, the firm鈥檚 chairman Tony Pidgley is optimistic about the sector. He says: 鈥淗elp to Buy is a good thing, because you don鈥檛 have to find [much of] a deposit. Plus, the collapse of sterling has made London properties look attractive [to overseas investors]. So, yes, I think housebuilding will continue to be strong.鈥�

Forecasts from the CPA for 2017 have largely been revised slightly upwards, from 1.3% to 1.6%, because of housing. However, this is partly because of a horrific, short-term shock, namely the public housing repair, maintenance and improvement works that are necessary as a consequence of the Grenfell Tower fire in London鈥檚 North Kensington.

Materials

Nothing is more symbolic of the building trade than bricks, though their statistical relevance is often overlooked. Office for National Statistics (ONS) figures show production is slightly on the wane, with 1.8bn bricks produced last year against more than 1.9bn in 2015. There has also been a fall in the first half of this year, albeit just 16m fewer than January-to-June 2016 at 933m.

However, Brick Development Association (BDA) chief executive Keith Aldis says deliveries are, in fact, increasing, illustrating manufacturers are able to keep up with demand. The ONS figures show deliveries are up 15% so far this year on the first half of 2016.

Last year the BDA hit out at accusations by the National Association of Estate Agents that there was a severe brick shortage - which would be made worse because of Brexit, given much of the material comes from the EU - as 鈥渘onsense鈥�.

Aldis warns uncertainty for the sector stems from the government鈥檚 focus on modern methods of construction rather than traditional construction, which depends on materials like bricks. He argues: 鈥淭he economic and political certainty needed by the construction industry - and the manufacturing sector that supplies it - is that of the government realising its commitment to invest sufficiently in industry, infrastructure and housing.

鈥淭he government must focus less on incentivising the untried, untested materials and methods it championed in the Housing White Paper, and more on supporting our domestic industry, its established supply chain and the high-quality products it makes available.鈥�

More broadly, contractors worry over the inflation of construction materials because of the weak pound, with manufacturers鈥� organisation EEF (formerly the Engineering Employers鈥� Federation) citing anecdotal evidence of a 22% hike in Spanish slate and a 20% increase in the cost of timber earlier this year.

Given around a quarter of all materials used by the British industry are imported, this shows how vulnerable construction is to continued political uncertainty undermining sterling.

The FTSE

City analysts will be paying close attention to contractors鈥� margins over the next 18 months. Numis Securities鈥� director Howard Seymour argues some of the restricted growth in the market is a result of larger contractors taking on less, but more profitable, work. Many contractors have struggled over the past few years with, he says, 鈥渕argins, generally, of 0-1%鈥�.

Margins have always been notoriously tight, but this is still well below previous norms. Seymour adds: 鈥淔rom the contractors鈥� point of view, nobody is pushing volumes that hard. They鈥檙e building their workload down a bit as 鈥榮electivity鈥� becomes the watchword.鈥�
He says the 鈥渂ig boys鈥� of the industry are currently at different points of tackling the problem, but notes Morgan Sindall announced a margin in its construction and infrastructure division of 1.1% in this month鈥檚 half-year results. This was up from 0.5% at the same point last year, reflecting the group鈥檚 strategy of a 鈥渇ocus on quality of earnings鈥�.

Similarly, Balfour Beatty has announced its ambition of hitting an 鈥渋ndustry standard鈥� UK margin of 2-3% by 2018 and 鈥渋ndustry-leading performance鈥� in the medium-term. In 2016, the UK construction division lost 拢64m, though that was a vast improvement on the previous year and it actually made a small profit in the second-half. It also, last week, reported a slim 拢2m profit for the first half of 2017.

This reflects what the group has described as a 鈥渕ore disciplined and selective approach to bidding鈥�.

Salaries and skills shortage

Falling real wages across the economy is a major cause of the broader slowdown that so threatens the construction industry鈥檚 near-term future. However, the sector has long struggled with skills shortages, meaning its own wages have been growing at a steady rate of around 4% for several years, according to the RICS.

Simon Rubinsohn, the RICS鈥� chief economist, adds this level of growth should remain even if the CPA鈥檚 figures prove correct. He says: 鈥淏elow 1% output growth is at the weaker end of expectations, but, as things stand, there is a real challenge of finding the right calibre of labour. But we鈥檙e not talking about a contraction of growth. It鈥檚 flattish with an upward tinge. Even with the CPA figures, we wouldn鈥檛 see wages materially slowing.鈥�
The RICS鈥� Q2 2017 Construction and Infrastructure Market Survey, published last month, reported 55% of respondents citing the lack of suitable skills as a constraint on growth.

The report added: 鈥淎fter having eased throughout 2016, the intensification of labour shortages appear to be biting once more. The lack of quantity surveyors and bricklayers appears to be particularly acute, but the shortfall extends to plumbers and electricians as well.鈥�

The survey also backed up the core thesis of the CPA press release, arguing: 鈥淎necdotal evidence from respondents suggests that uncertainty surrounding Brexit is weighing on investment decisions, alongside the political turmoil generated from 鈥� [the] general election.鈥�