黑洞社区

01 Executive summary

Tender price index

黑洞社区 prices in Greater London rose steadily in 2007 and ended the year 6% up on the previous year. Most regions had a similar rate of inflation. The faltering economy may eventually cut private sector construction but prices are forecast to rise by 4-7% in 2008.

黑洞社区 cost index

The building cost index rose 4.9% over the year to the fourth quarter 2007, the lowest annualised figure since early 2004. It is forecast to rise again over the next year as higher labour awards are implemented in the latter half of the year.

Retail prices index

The retail prices index (RPI) ended the year registering a 4% annual inflation rate, a similar level to the past six months, but double that recorded by the consumer prices index. RPI is forecast to fall to 2.5% by the end of 2008.

02 Trends and forecast

The economic news may be full of stories about the faltering economy, falling house prices and job losses but construction prices finished 2007 in rising mood. They rose 1.5% in the fourth quarter, maintaining the momentum of the year. Year-on-year prices rose 6% in Greater London, although inflation in some micro-markets, such as City office development, have exceeded this, with prices reflecting a workload that predates the current credit squeeze.

Most of the country remains hot, nowhere more so than the London offices market. Nationally, new work output last year was worth 3-4% more than in 2006. A third of the rise was attributable directly to offices, many of them in central London.

But new orders obtained by contractors in the second half of 2007 stumbled compared with the first half and were worth about 7% less in real terms. The first half maintained the growth of the previous two years 鈥� a 6% year on year increase. The slowdown in the second half was felt in every sector equally, and may be attributable to the credit crunch that started last summer (see below). The reduction in orders may presage a slowdown in activity over the next two years.

The Construction Products Association recently cut its forecast of growth in 2008 to about 1%. Small and medium-size schemes continue to attract interest but larger, complex schemes are having difficulty attracting tenders. Contractors still prefer two-stage tenders but there may be more interest in single-stage tendering than

before, owing to contractors鈥� nervousness about the market. As the year progresses, tightening of overheads by contractors to secure future workload is expected.

Curtain walling supply continues to create concern. Fewer contractors at the top end of the market means clients are dependent on manufacturing slots in factories. Long lead times for glass further complicates matters. This year, clients will end up paying more for bespoke curtain walling from Europe, as the pound continues to slide against the euro.

Most commentators believe there will be a slowdown of activity over the next two years. The office market may have peaked and funding for speculative developments will be harder to come by. The retail market is likely to cut back development, the private housing sector will reduce owing to fewer buyers and the buy-to-let market will shrink rapidly.

Fortunately for the industry, public sector spending is expected to rise. In particular, the 黑洞社区 Schools for the Future programme should accelerate. By 2010, expenditure on schools is expected to benefit the industry by an additional 拢2bn a year.

In spite of market uncertainties, there are few reports of projects being cancelled or delayed. Some were being reviewed late last year but are now back on stream. However, there are some reports of a slowdown in enquiries which may result in a slowdown in orders over the next 12 to 18 months.

Construction price inflation over the year ahead is difficult to call. There are labour and material price pressures in the pipeline and if development continues at its present pace, the rate of inflation could exceed last year鈥檚. Conversely, if development activity shrinks, contractors will find gaps in their workload and will need to become more competitive.

A worst case scenario could see inflation become deflation but a softer landing is anticipated with mild growth in overall activity over each of the next two years. Dependent on the tail-off in demand, tender price inflation is forecast to be 4-7% over the next 12 months and 4-6% after that.

03 The London offices market

Construction output in London increased 18% in 2006 and by a similar amount in 2007, more than double the national rate of growth. Contractors undertook about 拢3bn more work in the capital last year than in 2005, nearly half in the private commercial sector and mainly office construction. The value of new orders for private commercial work last year was more than 50% higher than two years previously.

By the third quarter last year, there was 12 million ft2 of office space under construction, more than three times the amount at the end of 2004 but still less than mid 2001. Drivers Jonas estimates 63% of office space under construction was being built speculatively.

All of this activity rang the cash registers of contractors, particularly larger players capable of delivering the

拢50m-plus projects that were becoming commonplace. Main contractors and subcontractors were able to dominate the terms and conditions of procurement and adopt a take it or leave it attitude.

This remained the situation through to the end of the year in spite of the warning noises that were being sounded regarding the weakening economy and the fear of looming office oversupply after the summer鈥檚 credit crunch. Most large contractors and subcontractors have full order books which will see them through to the end of 2008 and beyond.

The market conditions have so far caused little disruption to development plans 鈥� reports of cancelled projects are, so far, few. As such, trade contractors鈥� approach to pricing new opportunities continues to reflect a certain lack of hunger. Any change in this attitude is only likely to occur if one or two of the large City schemes are actually stopped or delayed and contractors find holes appear in their workloads. If this happens, contractors鈥� attitudes could change quickly.

With the overheated market in London, some contractors have admitted to 鈥渙vertrading鈥� and a mild slowdown this year may be in the interest of everybody who is struggling to fulfil commitments.

This year is now regarded as the likely peak of the London office development cycle so 2009 may see some easing of the conditions that are currently challenging budgets.

If 2009 does see some retrenchment in office construction, the medium-term outlook remains good, with continued strong growth in banking, financial and business services employment in central London forecast through to 2016.

04 Materials

Construction materials have risen 6% overall over the past year, down from 10% over the previous year but still much higher than earlier trends. Timber prices maintained the upward movement, with a rise of about 21% over the past 12 months. The upward movement of timber-related products has created tough competitive conditions for the timber-frame industry. Timber prices in the US have been falling as the housing market there stumbles. Imported prices here started to soften at the end of last year.

Fabricated steel prices increased about 12% over the year to November. Corus introduced three price increases in 2007, totalling 拢80-105 per tonne, the last of which was July 2007. It has taken the whole year for those rises to filter through to the end user. There has been no announcement from Corus of any forthcoming price rises, although iron ore and shipping costs have risen considerably over the past six months.

Reinforcement prices rose about 10% last year but prices in Europe were in decline during the second half of 2007. The cost of rebar is expected to rise quite quickly in the first half of 2008 as a result of higher scrap values and normal seasonal demand.

Stainless steel prices fell 26% between June and October last year, as nickel prices halved. Since then, prices have drifted back up by about 5% as nickel prices search for some stability. Metals analysts anticipate that nickel will stay at about its present level.

Other metals prices began to slide downwards in the last couple of months of 2007 on concerns that the US in particular was slipping into recession. Since

Christmas, aluminium, copper and nickel have made a bit of a fight back but the future direction remains dependent on the world economy.

In 2006 imported building materials and components were valued at 拢10.7bn; these made up about 25% of all materials and components used by the British construction industry. The recent drop in the value of the pound has resulted in an increase in the costs of imported goods. Clients and construction companies who have pre-bought euros as a hedge against currency deflation will have made considerable savings. Over the past year, the pound has lost 14% in value against the euro including 10% since September. The Sterling index (based on the value of trade with other countries) has fallen by about 10% since July. If the pound remains at its current low level, this means building materials in 2008 will be 2.5% more expensive than last year simply on the currency movement alone. Most commentators think that the sterling is likely to decline further in value during 2008, exacerbating the inflationary effect.

Oil prices have virtually doubled over the last year: this will have had a direct influence over plant, transport and manufacturing costs. During 2004-6 wholesale gas prices rose significantly on the back of high oil prices. Prices in mid 2007 declined back to 2005 levels as new supplies came on stream but have risen steeply since then as oil prices climbed. Prices have not reached the extremes seen in the winter of 2005/6 but are similar to last winter from a lower base. Higher energy prices are likely to cause materials manufacturers to seek new price rises.

The new year has seen the annual round of price increases announced for cement, aggregates, concrete and asphalt (about 10%) but the market will determine how much of these will find their way to the end-user.

b % change to tender prices

(See table attached)