Building intelligence Q4 2007: Mixed signals

1. Overview

Official data suggests that the collapse of the US sub-prime mortgage market and the subsequent tightening in credit availability has so far had only a limited impact on the UK’s construction industry. The more challenging conditions in the second half of 2007 were successfully negotiated by contractors and real growth in construction output accelerated to 2.5% over the year.

The new work sector was solely responsible for the strength of the overall industry, despite falling private housing output. The commercial sector steamed ahead, fuelled by a surge in demand for offices, continuing redevelopment work for the Ministry of Defence at Colchester and a couple of large PFI health schemes that are progressing well.

New private housebuilding was the only casualty of the crisis to speak of in 2007, although it is worth noting that a slowdown in the housing market and new housebuilding activity, was widely expected even before problems surfaced in the US. New private housebuilding output fell marginally by 0.6% in 2007, and the sector was noticeably weaker in the second half of the year. House prices have been falling for several months, according to many market commentators, and property transactions have fallen sharply. Mistrust in the financial sector is making banks reluctant to lend to each other. Reduced liquidity means lenders have less to lend, and hence, are more selective about who they decide to lend to. Housebuilders are likely to be in for a difficult time over the next couple of years.

Public non-residential was the only other new work sector to see an output drop in 2007. After its spending spree in the early noughties, the government is struggling to balance its books, and new public non-residential output fell for the third consecutive year after peaking at £8.1bn in 2004. In the future, public investment is set to slow in line with a more constrained Comprehensive Spending Review.

Repair and maintenance (R&M) output was broadly flat in 2007. A relatively strong private sector performance compensated for a contraction on the public side. The public non-residential R&M sector suffered the largest fall. A 7% drop in 2006 accelerated to 11% in 2007, lowering output to £5.8bn, in 2000 prices. Public housing R&M also continued to fall – surprisingly, given that the government’s 2010 Decent Homes deadline is looming. The private non-residential R&M sector, on the other hand, surged ahead. Output climbed 8% to £12.5bn. London Underground’s refurbishment programme is likely to have been a cause of this. Private housing R&M output climbed 1% to £11.7bn, in 2000 prices.

Real term growth in new work orders slowed to 1.5% in 2007, the lowest in four years. New private housing orders fell for the second consecutive year, by 6% to £7.9bn. Infrastructure orders, however, rose by 24% to over £4bn.

2. New work output

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3. R&M output

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4. New work orders

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5. Industry forecast to 2010

With no respite from the problems in the financial markets in sight, the outlook for the next two years is weak for the industry. The private housing and commercial sectors are likely to be particularly affected. Private housing output is forecast to lose more than 10% of its value between 2008 and 2010. Public housing output is expected to grow strongly but its links with the private sector mean the risks to this projection are significant. Infrastructure should be the strongest sector as Thameslink, the East London Line, Birmingham New Street and Reading all start to become a reality.

See attached graphic.

6. Regional new work output

Most region’s industries performed strongly in the final quarter of 2007. Three recorded a fall in new work output in 4Q07 compared with 4Q06. EM’s output declined by the greatest amount – a 7% drop lowered it to £1.2bn in current prices. In BED and S, falls were marginal, at 3.2% and 1.4% respectively. Double-digit rises were recorded in five regions (NE, YH, KNT, NW and WM).

See attached graphic.

7. Regional R&M output

R&M output across the regions was equally robust. Rising output was recorded in all but the WM. Double-digit increases year-on-year were seen in YH, EM, EA, BED, KNT and the NW. The NW and BED were the strongest, with R&M rising by 22% and 21%, respectively. In the WM, current priced output fell by 2.4%.

See attached graphic.

8. Regional new work orders

There was greater variation in orders in 4Q07 than output. In some regions orders rose robustly. They were particularly strong in the SW, up by 50% on 4Q06. In the S and the WM orders rose 21% in the final quarter. Five regions had a fall in orders. The sharpest decline was in Wales, with orders in 4Q07 24% down on 4Q06. Falls in the other four regions were relatively mild.

See attached graphic.