Construction activity expected to fall

Published:  07 April, 2012

The outlook is variable, but it’s not all gloom and doom. The Construction Products Association’s forecast for 2012-2015 shows pockets of growth that will bring some cheer to the UK merchant market.

Construction output is forecast to fall by more than 5% next year and remain flat throughout 2013 according to the latest forecasts, published by the Construction Products Association.

It will be 2014 before the industry is expected to see any significant signs of recovery, by which time output will be 12% lower than at its peak in 2007.

Commenting on these forecasts, chief executive Michael Ankers, said: “For the construction industry to return to growth, there needs to be a strong private sector recovery, but this is just not happening. Continuing uncertainty about the future of the eurozone and a lack of consumer confidence in the UK are holding back important investment decisions. As a result, the largest area of construction activity – private commercial work – is forecast to fall by a further 5% in 2012 and remain at that level in 2013.

“At the same time the cuts in public sector construction activity are really beginning to bite, with construction work on schools, hospitals, and other non-housing work forecast to fall by 23% compared with 2011. Despite the encouraging announcements on public sector investment on infrastructure projects in the Autumn Statement, capital spending on construction will still fall 30% by 2013.

“The number of new homes started in 2012 is forecast to be 5000 fewer than this year, and at just 113 000, this is less than half the number of homes needed to accommodate the additional number of households expected to be created over the next 12 months.

Growth areas

Despite all the pessimism, there are areas within the construction industry that are anticipated to grow. Private housing starts are expected to rise by 2% in 2012 and up to 29% growth is expected between 2013 and 2015.

Despite low, and falling, consumer confidence, retail construction continues to recover from the 26% fall experienced in 2008 and 2009.

Driven primarily by expansion plans from major supermarket chains, retail construction is expected to grow 3% in 2012 before stronger consumer confidence and stronger economic recovery lead to 5% growth each year between 2013 and 2015.

The infrastructure sector is set to grow in each year of the forecast, buoyed by accelerating growth in work in the rail and energy sub-sectors. Rail construction is expected to rise 90% during the forecast period, with funding fixed in a five-year spending plan and isolated from spending cuts until 2014.

Energy construction is set to rise threefold by 2015 with the main works on the first of the new nuclear power stations set to begin in 2013 and continue over the next decade.

In the near term, the greatest concerns for the industry are the fall in capital expenditure for public sector construction and the inability of the private sector to offset this. As a consequence, 2012 and 2013 are likely to be extremely challenging for the industry.

By 2015, housing starts are forecast to rise to nearly 133,000 units, a 43% increase compared with 2010, but nearly 30% lower than in 2007.

Around 57,000 units were started in England in the first nine months of 2011, a 6% decline compared with over 60 000 units during the first three quarters of 2010. At 4500, Scottish starts were also 6% lower in the first three quarters of the year.

Lending at a high loan-to-value ratio has fallen sharply in recent years, with less than 2% of mortgages agreed going to borrowers with a deposit of 10% or less in Q3 2011, significantly lower than 14% of the total in Q1 2007, according to the Financial Services Authority.

Underwritten loans will only be available on newbuild sales and it is envisaged that up to 100 000 buyers will benefit.

The Government’s liability for the scheme is capped at £1bn. In addition, a £400m fund to kickstart stalled development and ‘Get Britain Building’ was also announced, with £310m allocated for spending in 2012-13.

Mortgage availability is a key concern for housebuilders and over the next 12 months will have a crucial influence on activity.

Forecasts for transactions and gross lending are lacklustre and against this backdrop the housebuilding industry will face another challenging year.

After an estimated 2% contraction in starts in 2011, starts in GB are forecast to increase by just 2% to 93 000 units in 2012. Thereafter, starts are forecast to increase at a double-digit rate through to 2015.

However, at 132 900 units, starts in 2015 are forecast to remain nearly 30% lower than in 2007.

Homes programmes

Private housing repair, maintenance and improvement (RMI) output partially recovered in 2010 after contracting 13% in 2009. Worth £10.6bn, output remained broadly 15% lower than the long-term average.

Output rose 2%, on an annual basis, in the first nine months of 2011 but in Q3 was 6% lower than in Q3 2010.

While it is essential that a core of repair and maintenance work takes place, a proportion of activity is discretionary and, hence, deferrable.

Consumers’ confidence and housing market mobility have significant influence over this element of private housing RMI work. Government policy also plays a role in encouraging energy efficiency improvements to the existing housing stock.

Constraints on public funding and a move towards a new delivery mechanism will weigh on public housebuilding over the next two years.

However, contracts through the Affordable Homes Programme (AHP) have been swiftly let and will provide a work stream from next year.

By 2015, 20,500 public homes are expected to start on site.

Around 30,100 public housing units were started across GB in 2010, a 15% increase compared with 2009. In the first nine months of 2011, however, 16% fewer public homes broke ground in England, compared with the corresponding part of 2010 due to an hiatus between the National Affordable Housing Programme nearing its conclusion and the replacement AHP gaining momentum.

Nearly £1.5bn worth of contracts have been signed to-date, through the £1.8bn AHP and, in addition, £35.5m of public funding has been allocated to five former Housing Market Renewal areas.

Local authority housing starts in Scotland were, in contrast, relatively high in the first nine months of the year. At over 1000 units, starts rose nearly 40% on an annual basis.

Public housing RMI output grew 7% in 2010 as local authorities in England made a final push towards achieving the original Decent Homes target.

Output reduced by 3% in the first three quarters of 2011 and was 4% lower on an annual basis in the fourth quarter.

Looking ahead, after declining in 2011 and 2012, output is forecast to return to growth.

Direct funding for the Decent Homes programme fell to £260m in 2011-12, with £353m allocated in the Corporate Social Responsibility for 2012-13.

Allocations for 2013-14 and 2014-15 will be subject to future spending decisions.

Devolved governments have programmes similar to Decent Homes in place and the deadline to bring the Welsh social housing stock up to the determined standard is 2012, whereas in Scotland the programme will run until 2015.

Public housing RMI output is expected to contract in 2012 by 5% before social landlords start to take advantage of their economies of scale and embark on large-scale initiatives to improve the efficiency of their stock through the Green Deal.

Infrastructure outlook is optimistic

Infrastructure output rose 14% during Q3 and, with orders rising 8% in the same period, its future is optimistic.

Output in the sector is expected to rise 2% in both 2012 and 2013 with growth accelerating to 8% in 2014 and settling at 6% in 2015 once main work begins on the nuclear programme.

By 2015, infrastructure is expected to be worth £16bn, double its value since 2001.

Roads accounted for 30% of infrastructure in 2010. Despite the Highways Agency’s 44% fall in capital expenditure and tight constraints on local authorities, roads spending held up in the first half of 2011. Yet, this is a temporary respite and Q3 has seen the inevitable drop-off start to feed through into output. Output in Q3 was 9% lower than a year earlier.

Orders in Q3 were 29% lower than a year earlier and, as a result, output in 2012 and 2013 is expected to fall 20% and 15% respectively.

Following this, £1.6bn transport investment from the Autumn Statement should ensure that output rises by 10% in 2014 and by 4% in 2015.

Although construction output held up relatively well during 2011, with sharp public sector cuts under way and a subdued, extremely uncertain economic environment, the prospects for 2012 have deteriorated considerably over the last three months.

Overall, output is expected to fall by 5.2% during 2012 with only marginal growth of 0.4% during 2013.

A significant rise only occurs in 2014, with growth of 3.8%, and a further increase is to be expected in 2015.

However, the forecasts are dependent upon a considerable recovery in private sector construction and currently the risks to the CPA’s central forecast remain clearly on the downside.

Macro-economic forecasts con-tinue to be revised down each quarter. A great deal of uncertainty surrounds the stability of the eurozone and this was only heightened by the decision to re-align the UK away from the majority of EU countries.

Despite announcements from leaders within the EU, the ability of certain eurozone member states to repay their public sector debt remains a key issue and is unlikely to be resolved for the better in the short-term.

An unstructured breakdown of the eurozone is the greatest risk to the central forecast. Given that the EU is a key export market for the UK, this would have considerable impacts upon UK economic recovery, unemployment and consumer confidence, key drivers of the industrial, commercial and private housing sectors.

As a consequence, it is likely that this scenario would lead to a considerable fall in construction output at the start of 2013 and potentially delaying recovery until the second half of 2013.

This feature first appeared in the December/January 2012 issue of Builders' Merchants News.

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