黑洞社区

It was the vote that shook Britain. And the first shockwaves hit construction hard as shares fell, crisis meetings were convened in boardrooms, and projects were put on hold.

Two months on from the EU referendum though, the predicted doom and gloom hasn鈥檛 quite happened. A few big projects have been placed on hold, but largely, it鈥檚 been business as usual.

So far, contractors are putting on a brave face, insisting the Brexit vote has barely had an impact on them. Interserve chief executive Adrian Ringrose and Morgan Sindall鈥檚 boss John Morgan both told 黑洞社区 last month the referendum hasn鈥檛 done them any harm. In fact, Morgan pointed out his firm鈥檚 fit-out arm picked up 拢150m worth of new orders in July.

But as results from a 黑洞社区 survey of over 500 construction professionals show, many in the industry think darkness is just around the corner. The exclusive 黑洞社区 research revealed that over 72% of respondents believe Brexit will have a negative impact on the construction industry in the short term, with just under 50% saying they have already seen projects abandoned or put on hold due to the referendum result.

The 拢400m 40 Leadenhall scheme 鈥� dubbed Gotham City 鈥� and 22 Bishopsgate are two high-profile Square Mile projects bitten by the Brexit bug and put on hold, as investors get jittery about the prolonged period of uncertainty.

The lead investor behind the 62-storey 22 Bishopsgate tower project in the City of London, Axa, has asked its fellow investors whether they want to proceed with construction after the Brexit vote. And TH Real Estate, the developer behind the Make-designed 40 Leadenhall office scheme, has said it needs to pre-let some of the scheme to begin work.

Nervousness in the market

黑洞社区鈥檚 survey results show that 68% of those in the industry believe commercial will be hit the most in the short term, while 50% believe the commercial sector will also struggle in the long term post Brexit. This is a view echoed by Mark Farmer, founding director of consultant Cast. While the 鈥渞eal economy鈥� is holding up after the Brexit vote, Farmer says the general nervousness in the sentiment-led commercial sector means clients are holding off on new schemes.

He says: 鈥淭he days of the big institutional lettings could be over [鈥�] I haven鈥檛 heard of any big office schemes being committed to since the vote. Unless there鈥檚 some kind of windfall pre-letting deal where someone bucks the trends, I can鈥檛 see any new speculative office developments happening.鈥�

Unless there鈥檚 some kind of windfall pre-letting deal where someone bucks the trends, I can鈥檛 see any new speculative office developments happening

Mark Farmer, Cast

Around 50% of 黑洞社区鈥檚 survey respondents said they have seen one or more projects at least put on ice since the Brexit vote. A director at a structural engineer, who declined to be named, says it is the uncertainty that is leading investors to freeze projects. He says: 鈥淭he worry is you can鈥檛 predict demand. You can鈥檛 agree or get certainty on price, so everybody is holding.鈥�

But for consultant Buro Four, Brexit has 鈥� remarkably 鈥� brought something of an opportunity in the commercial sector. Richard Young, a director at Buro Four, says: 鈥淲e鈥檝e had one of the busiest Augusts we鈥檝e ever had. I think there鈥檚 been a bit of pent up demand.鈥�

By way of explanation, he adds: 鈥淭here has been a drop in site values, but if anything that鈥檚 made things more affordable. There鈥檚 still people buying things. There鈥檚 people investing in things now that they wouldn鈥檛 have a few months ago as it was more expensive. It鈥檚 not boom time, but it鈥檚 not doom and gloom either.鈥�

So the picture remains mixed. Construction is back in recession but latest figures show unemployment is down while retail sales were up in July. And the closely watched Markit/CIPS survey has been a good bellwether of how things have been recently, mirroring people鈥檚 worries. In July, the construction purchasing managers鈥� index tanked to its lowest level, 45.9, for seven years. The following month it recovered to 49.2 鈥� although this was still below the magic 50 figure, where above or below this indicates growth or contraction.

Good news for sure but Tim Moore, senior economist at Markit, warned: 鈥淭he latest survey indicates only a partial move towards stabilisation, rather than a return to business as usual across the construction sector.

The latest Markit/CIPs report for the services industry, such as financial services and hotels and restaurants, also rebounded 鈥� strongly it turns out 鈥� with the largest month-on-month rise in the survey鈥檚 history rising from 47.4 in July to 52.9 in August.

While 68% of 黑洞社区's survey respondents believe commercial will take a hit, 32% don鈥檛 believe there will be a major impact. And in fact, for some in the industry the drop in property values means there are opportunities to be had.

When it comes to the office sector, the director at the structural engineer adds: 鈥淭here鈥檚 still a lot of interest out there. When values get taken off shares, there鈥檚 a lot of excitement in the market. Prices drop and there鈥檚 deals to be made.鈥�

Commercial is not the only sector likely to be hit: around 50% of 黑洞社区鈥檚 survey respondents think residential will also be negatively impacted in the short term. Most in the industry agree the domestic market will be unaffected longer term due to the chronic undersupply of homes. But it鈥檚 the investor-led market with prime London developments like Battersea, Docklands and Nine Elms which many believe could be under threat. Indeed Farmer thinks the days of Asian investors buying 90% of homes off-plan in such schemes are over post-Brexit. Developers will need to change their tune if they are to sell enough homes. He says: 鈥淭hey鈥檒l have to concentrate on domestic demand, but there will have to be a price correction because those inflated prices are generally unaffordable for the domestic customer.鈥�

Which way did you vote in the EU referendum?

	Remain	Leave	Prefer not to say	No answer
Under 拢5m	61%	20%	8%	12%
拢5尘-50尘	59%	26%	7%	9%
拢50尘-500尘	69%	18%	7%	6%
拢500尘+	65%	16%	9%	9%

	Remain	Leave	Prefer not to say	No answer
Contractor	65%	17%	6%	12%
Consultant	64%	21%	7%	8%
Architect	67%	15%	5%	13%
Subcontractor	50%	27%	14%	9%
Client	20%	14%	4%	62%
Manufacturer	46%	8%	13%	33%

Do you think the Brexit vote will have a positive or negative impact in the short term on the UK construction industry?

	Positive	Negative	Neither	No answer
Under 拢5m	10%	64%	15%	11%
拢5尘-50尘	11%	66%	15%	8%
拢50尘-500尘	6%	67%	20%	6%
拢500尘+	8%	6%	16%	69%

	Positive	Negative	Neither	No answer
Contractor	11%	60%	17%	12%
Consultant	9%	68%	16%	7%
Architect	8%	64%	13%	15%
Subcontractor	18%	64%	14%	5%
Client	3%	29%	6%	62%
Manufacturer	6%	46%	15%	33%

Do you think the Brexit vote will have a positive or negative impact in the long term on the UK construction industry?

	Positive	Negative	Neither	No answer
Under 拢5m	31%	37%	20%	11%
拢5尘-50尘	34%	32%	26%	8%
拢50尘-500尘	27%	45%	23%	6%
拢500尘+	27%	41%	22%	10%

	Positive	Negative	Neither	No answer
Contractor	25%	39%	25%	11%
Consultant	34%	37%	23%	7%
Architect	26%	41%	18%	15%
Subcontractor	32%	36%	27%	5%
Client	16%	17%	6%	62%
Manufacturer	17%	25%	23%	35%

Have you seen any projects put on hold or abandoned due to the Brexit vote?

	Yes	No	Don鈥檛 know	No answer
Under 拢5m	38%	41%	8%	12%
拢5尘-50尘	45%	40%	7%	8%
拢50尘-500尘	52%	37%	5%	6%
拢500尘+	53%	33%	5%	9%

	Yes	No	Don鈥檛 know	No answer
Contractor	47%	35%	7%	11%
Consultant	45%	40%	7%	8%
Architect	43%	33%	8%	16%
Subcontractor	50%	45%	0%	5%
Client	14%	24%	0%	62%
Manufacturer	40%	17%	10%	33%

Which areas of construction do you feel will be negatively affected by the Brexit vote in the short term?

	None	Residential	Retail	Education	Healthcare	Infrastructure	Commercial	Other
Under 拢5m turnover	11%	43%	34%	15%	15%	30%	60%	2%
拢5尘-50尘	9%	43%	38%	14%	10%	30%	59%	3%
拢50尘-500尘	8%	47%	30%	18%	14%	34%	63%	2%
拢500尘+	7%	47%	34%	12%	11%	32%	63%	6%

Contractor	9%	43%	39%	9%	11%	30%	55%	5%
Consultant	11%	45%	35%	16%	14%	33%	65%	2%
Architect	5%	48%	33%	23%	13%	2800%	57%	3%
Subcontractor	9%	41%	18%	14%	14%	23%	64%	9%
Client	6%	15%	15%	6%	5%	12%	24%	2%
Manufacturer	2%	35%	23%	8%	6%	23%	46%	2%

Which areas of construction do you feel will be negatively affected by the Brexit vote in the long term?

	None	Residential	Retail	Education	Healthcare	Infrastructure	Commercial	Other
Under 拢5m	31%	25%	23%	16%	17%	29%	40%	3%
拢5尘-50尘	34%	29%	25%	23%	20%	31%	40%	2%
拢50尘-500尘	24%	27%	24%	23%	22%	34%	46%	0%
拢500尘+	20%	35%	30%	18%	19%	41%	52%	3%

Contractor	26%	27%	31%	18%	18%	41%	50%	3%
Consultant	30%	29%	26%	19%	19%	31%	44%	3%
Architect	23%	23%	18%	21%	16%	30%	39%	2%
Subcontractor	50%	27%	18%	23%	18%	23%	32%	0%
Client	12%	13%	10%	7%	6%	13%	18%	1%
Manufacturer	17%	23%	15%	17%	19%	21%	25%	0%

Impact on infrastructure projects

Closely following the commercial and residential sectors in peoples鈥� Brexit fears is infrastructure, as the referendum result also brings a threat to some multibillion-pound infrastructure projects.

Around 35% of survey respondents believe infrastructure will take a hit in the short term, and even more 鈥� 37% 鈥� think it will be affected long term. After commercial, infrastructure ranks as the second highest area of concern in the long term for the survey respondents.

There鈥檚 not a huge drop-off right now, but with this whole Brexit approach it鈥檚 easy to hold off now for projects five or 10 years down the line

Paul Dyson, Hill International

Figures from Barbour ABI show infrastructure spending nosedived in the first full month after the referendum, as the value of infrastructure contracts in July dropped by 20% to 拢1.5bn.

But Paul Dyson, head of programme advisory at consultant Hill International, says the big worry is not high-profile projects in the current pipeline, like HS2, Hinkley Point C and runway expansion, but ones further down the line like Crossrail 2.

鈥淚t鈥檚 the next pipeline that鈥檚 the worry,鈥� he says. 鈥淭here鈥檚 not a huge drop-off right now, but with this whole Brexit approach it鈥檚 easy to hold off now for projects five or 10 years down the line. It could be Crossrail 2, it could be roads, wind farms, anything that requires long-term investment.鈥�

So recent quotes from National Audit Office chief Sir Amyas Morse, about the impact of Brexit on infrastructure, will probably not sit well with construction firms pinning their hopes on the next batch of billion-pound projects.

In his keynote speech at the Institute for Government in July, Morse said: 鈥淚f we are over-committed, we need to lighten the load 鈥� and that means stopping doing things. This can be done by not adding [infrastructure] projects, or by cancelling existing ones.鈥�

Such words won鈥檛 go down well with those in the industry such as Hill International鈥檚 Dyson, who warns a drop in the post-Brexit pipeline could take construction back to the 鈥渂oom and bust鈥� years. He says: 鈥淚f you have a drop-off [in projects coming to market], there will be a big gap [in work]. It鈥檚 boom and bust. When you stop projects and start again, it鈥檚 going to cost more to get them up and running again, because when you need it, the whole supply industry has to gear up again and gearing up costs a lot of money.鈥�

Certainly there are fears over future commercial office development, big residential schemes in the prime London property market, and over the future infrastructure pipeline. But while 黑洞社区鈥檚 survey results show 72% believe Brexit will have a negative impact on the industry, only 42% think it will hit construction hard in the long term with 33% seeing Brexit as a positive down the line.

Set against the world ending after the UK voted to leave the EU 鈥� George Osborne鈥檚 Brexit budget, dubbed a 鈥減unishment budget鈥� by some, was the nadir of the Remain campaign 鈥� things, clearly, aren鈥檛 so far as bad as were being predicted. But there remains much uncertainty and it鈥檚 probably fair to say we haven鈥檛 even entered the woods, let alone come out of them.