黑洞社区

1) Executive summary

Tender price index

黑洞社区 prices continued to rise in Greater London in the first quarter of 2008 but the rate of increase eased. A pipeline of workload and higher input costs are expected to drive prices up 4-7% in the next year. Some regions may show lower rates of inflation.

黑洞社区 cost index

The building cost index rose by 4.3% over the year to the first quarter of 2008, the lowest figure for four years. Incoming materials price increases and a substantial summer wage award should push inflation above 5% by the second half of the year.

Retail prices index

The rate of increase in the retail prices index (RPI) has slipped below 4%. The government鈥檚 inflation measure, the consumer prices index, is up to 2.5%. Independent forecasters believe that the RPI should drop to 2.9% by the end of 2008.

2) Trends and forecast

Despite nine months of economic uncertainty, construction prices continued to rise in 2008. Tenders received indicate a 1% rise in the past three months, but that is slower than recent inflationary trends. The increase in prices in Greater London over the year to the first quarter of 2008 was 5.6%, but City offices suffered higher inflation.

Uncertainty about the extent of the UK economic crisis persists, and a number of surveys from across the sector indicate that the slowdown is getting worse.

The value of new-build construction output last year was 4.3% higher than in 2006. The commercial sector was the main driver for growth, rising 13%, with office-related construction up by a quarter. However, the flow of new orders started to ease in mid-2007: over the eight months to February 2008, the volume of new orders at constant prices was 5% lower than the previous eight months. Housing orders fell away sharply, and weakness in both commercial and industrial work is evident. Infrastructure work bucked the trend with a 19% increase in volume.

London has seen a much faster rate of growth over the past two years than elsewhere, as office development reached full swing. In 2006, the value of new orders in the capital leaped 47% (against 9% nationally), leading to output growth of 17.5% last year. New orders last year grew to just over 拢9bn, 50% of which was private commercial work, filling order books for 2008. However, the last quarter of 2007 saw the value of new orders fall to the lowest quarterly level since the fourth quarter of 2005, as private commercial orders fell away, showing how workload in 2009 may look somewhat different.

The private housing and commercial sectors are feeling the credit crunch most. Private housing output is now expected to decline more sharply this year and next than previously forecast. Last year鈥檚 orders for offices created a strong pipeline that should sustain near-term growth. However, new orders slowed dramatically at the end of last year, nationally down to an average 拢360m a month in the three months from December to February, compared with an average monthly spend of 拢600m during 2007 as a whole.

The retail and entertainment sectors rely on consumer confidence and spending, which are expected to be subdued in the next two years; activity in these sectors may stall.

Construction growth this year could be below the 1% forecast a few months ago. There are still few reports of projects being cancelled, but more instances of developers 鈥渞eviewing鈥� projects. Prelets or advance sales have become a requirement from funders. The industry will now rely more on the public sector to sustain growth. Most of the public capital expenditure is already committed and should go ahead, notably on schools, social housing and the Olympics.

While contractors in London remain buoyed by the pipeline of large projects, in some regions nervousness is creeping in. Contractors are no longer refusing to consider single-stage tenders. Already there are signs that one contractor may break ranks and submit a tender some way beneath the pack to secure workload.

In London there is no sign of contractors tightening margins, but elsewhere there are signs of preliminaries, profit and overheads beginning to soften. However, workload in Scotland, Wales, the North-west and the South-west is holding up and trading conditions appear unchanged.

Construction inflation remains difficult to call. Slower growth will ease price pressures but a sharp deterioration in prospects could mean lower tender price rises as tougher market conditions produce greater competition. Materials prices are likely to remain high, as demand from Asia underpins commodity prices and the weak pound makes imports more expensive. Overall, tender prices are still forecast to rise between 4% and 7% this year, with slower growth in 2009 moderating price rises to 3-6%.

3) Round-up of recent industry surveys

RICS housing market survey, March 2008

鈥� The proportion of chartered surveyors reporting house price falls rather than rises increased to a historic level in March

鈥� 78.5% more reported a fall than a rise, the lowest figure since the survey began in 1978

鈥� The East Midlands was the worst performer, with 89% more reporting a fall than a rise

鈥� Scotland was the only UK region with a net balance reporting a rise in prices

Chartered Institute of Purchasing & Supply/NTC Economics purchasing managers鈥� index 鈥� report on construction, April 2008

鈥� Construction activity shrank in March for the first time in over six years

鈥� New orders declined for the first time since October 1998

鈥� Residential and commercial activity fell at the sharpest rate in the survey鈥檚 history

鈥� Civil engineering activity rose robustly

RICS UK construction market survey, 1Q08

鈥� Workload growth slowed sharply in the first quarter

鈥� Just 1% more chartered surveyors reported a rise in workload than a fall, the weakest result since 1996

鈥� The worst-hit sector was private housing, with workload growth negative for the first time since 1999

鈥� The North was the weakest region, with workloads falling

鈥� Scotland was the strongest

Construction Products Association/Ernst & Young construction activity barometer 1Q08

鈥� The construction products industry experienced its slowest quarter for sales in two years

鈥� The survey recorded a score of 51, just above the 50 鈥渘o change鈥� mark and much lower than the 69 of the fourth quarter of 2007

鈥� Heavyside sales declined, but lightside sales held up

鈥� Some modest growth in sales is expected this quarter

4) Input costs

Labour

At the end of June, directly employed building operatives will see basic wage rates rise 6%, as part of an agreement set in May 2006. This considerably exceeds the 3.5% and 4.3% rises set for the previous two years.

Since 2004, labour shortages have been largely resolved by the influx of eastern European workers. This has kept a lid on wage rates, and labour cost inflation has not been much of an issue in the past three years.

There is evidence that some of these workers are returning to their countries of origin, as wages in eastern Europe have grown sharply. At the same time, the pound has weakened, making the prospect of working in the UK far less compelling. If there is a significant outflow of immigrant labour that is not replenished from elsewhere, labour cost inflation could return to the UK construction market.

Materials

Between 1996 and 2003, inflation in construction materials ran at about 1.5% per year. Since 2004, it has averaged over 6%, including a rise of 6.3% last year. This has been largely driven by rises in world commodity prices.

The beginning of 2008 has seen some significant price rises in materials such as sand, gravel, roadstone, cement and concrete.

Materials prices are expected to rise in 2008 well ahead of their 10-year average rise of 3.5%. In spite of fears for the world economy, commodity prices are soaring: steel has risen steeply so far in 2008 but is expected to peak in the summer; at the beginning of March, copper prices reached a new 12-month high. In contrast, timber prices seem to have stabilised.

Steel

Fabricated steel prices rose 9% last year, a figure likely to be exceeded in 2008. Suppliers have been hit by large rises in the price of raw materials 鈥� iron ore, coal and scrap. Corus introduced a rise of 拢60 per tonne on its list prices for structural steel sections and plate from 30 March 2008. A further rise is expected over the next three months in response to raw materials cost increases and global demand.

Reinforcement prices fell in the second half of last year but rose sharply at the beginning of 2008. Suppliers have implemented several price increases since the turn of the year, over 拢200 per tonne in total, following a surge in world scrap prices and continuing demand. However, prices are now expected to have peaked and are likely to start falling again through to the end of the year.

Tender rates in London were 拢900-1,000 per tonne during the second half of 2007. Rates have now reached 拢1,050-1,150 per tonne, but contractors should be able to anticipate lower purchase prices in the months ahead.

Non-ferrous metals

Non-ferrous metals also took off in 2004 as global demand increased. Aluminium prices doubled between 2004 and 2006, while copper trebled and zinc quadrupled. Most peaked in the second half of 2006, but aluminium and copper prices are now back close to record high prices. Zinc and nickel prices remained lower. Continuing global demand seems likely to ensure that metals prices remain high. Copper is forecast to surpass previous highs owing to energy shortages in Chile.

Oil

The price of oil has risen from $10 (拢6) a barrel in 1999 to $115 (拢58) today, doubling over the past 14 months. This has also driven vast increases in gas and electricity prices. Fuel costs have been responsible for increases in manufacturing costs that have driven many materials price rises in the past four years.

The US Energy Information Administration forecasts that the oil price will remain above $100 a barrel this year in spite of the global slowdown. Over the next decade it could rise much further, as peak production levels are reached but demand continues to rise. Russian oil production may have already peaked and Chinese oil imports are 25% higher than this time last year.

Sterling

Inflation in materials prices will be exacerbated by the decline in the value of the pound. Against the euro, it recently dropped to its lowest ever level and has lost 15% of its value since last summer.

Imported building materials and components were worth 拢12.3bn last year, headed by electrical wiring, timber and air-conditioning equipment. The cost of construction materials now compared with nine months ago will be 3% greater, based on currency deflation alone, if the same materials continue to be imported.