Market forecast: Tender price turnaround?

The latest figures are showing a weakening of the construction market. The DTI is reporting a fall in construction output in the first quarter of 2005 and building materials sales showed a year-on-year drop in the second quarter of this year. With the help of softening materials prices, the result was a fall in tender prices during the past quarter.

This may be a short-lived fall. The volume of new orders obtained by contractors continues to climb, which should translate into higher output figures over the coming quarters. And the Chartered Institute of Purchasing and Supply’s construction activity index for June jumped to a six-month high.

The Construction Products Association reviewed its construction output forecasts towards the end of May, and downgraded its predictions for growth in the light of weaker-than-expected spending on housing, retail and leisure developments. Nevertheless it still forecasts a small overall increase – 0.6% – in output this year, resulting in an increase for the 11th year running. Next year the market is likely to tread water with a modest increase of 0.9%, before catching the next wave in 2007 with a 3.5% jump in output. This will be led by a recovery in infrastructure work and office development and a steady increase in social housing activity.

Experian Business Strategies released its latest forecasts to coincide with the Olympic bid decision. Most of the additional construction work emanating from that decision is unlikely to reach site during the forecast period up to 2007, so activity over the next two years will still be very dependent on public expenditure on health and education. Nevertheless Experian’s view of the market over the next two years is slightly more optimistic than that of the Construction Products Association; it forecasts rises of 1.3% and 1.8% for total work output in 2005 and 2006. In 2007, Experian forecasts a jump of 3.8%, again based on the outlook for infrastructure. This is reinforced by the Olympic success but is also in anticipation of a recovery in the private housing market.

The fall in prices in the second quarter is unlikely to be the start of a long-term trend.

But workload in the capital will not pick up significantly until next year. At the same time, labour supply continues to ease with the influx of European workers. Steel prices are on the decline but other materials are coming under price pressure. Manufacturing prices are under pressure from higher raw materials, energy prices and transport costs.

The Olympics success will not affect prices over the next 12 months but it may begin to influence things towards the end of next year. Davis Langdon’s forecast is for tender prices in Greater London to rise 3.5-4.5% over the year to the second quarter 2006. Market conditions in some of the other regions look likely to remain pressured in spite of the downturn in housing activity: prices could rise 4-6% elsewhere.

During the following 12 months, office development in London seems likely to have gained momentum, some of the infrastructure improvements required for 2012 will be under way and, it is hoped, optimism may have returned. Inflation may edge up to between 4% and 5%. In the regions, unless housing activity recovers quickly, price increases may not exceed 5%.

In the longer term, Olympic expenditure will become the dominant factor in influencing demand with its concentration in London. However it will extend its influence to other regions where Olympic training and competitor facilities will be built, and where public and private organisations will seek to capitalise on the boost in tourism.

What may be critical to the effect on prices will be the extent to which spending on health and education falls by the time Olympic construction gets under way after 2008, and the extent to which office development has returned to London.