If last year was a challenge, I’m afraid 2023 doesn’t look any easier

It is never easy casting forward Cassandra-like and predicting what the new year might hold for us all. We are operating against an unnerving and discomforting backdrop at the moment, with many imponderables and more variants than a covid test laboratory.

This time last year I offered the following wisdom for those in the built environment… I mused that 2022 would see “labour shortages, materials price increases, planning regulation confusion and increased interference from the government”.

Without wishing to claim the clairvoyant powers of Mystic Meg, I think most of us would agree that all of these issues have indeed had an impact on us over the past 12 months. What I did not foresee, however, was Vladimir Putin’s crazed intervention in Ukraine and the resultant impact on energy prices.

I am sorry to say that I do not believe 2023 will see the issues created by Brexit and covid-19 resolved

I also could not have predicted the self-evisceration of the Conservative party and their madness in electing an economically illiterate prime minister and a delusional chancellor.

I am sorry to say that I do not believe that 2023 will see the issues created by Brexit and covid-19 resolved. The challenge of Home Office-imposed restrictions preventing skilled migrant labour from joining the construction workforce is especially worrying.

Take one area of activity, for example – the retrofitting of homes. This is now a core government policy yet, according to new analysis, we will need more than 46,000 workers in the South-east alone to deliver homes which meet government climate targets.

Apparently, the lack of skilled tradespeople led to £53m of grant funding being returned to the government last year by householders who simply could not find skilled workers.

We have around 29 million homes in the UK that need to have energy efficiency measures, low carbon heating, and solar installed by 2050. That is going to require a very large workforce and, so far, the Department for Business, Energy and Industrial Strategy has announced just £9.6m in funding for 8,900 training courses in heat pump and energy efficiency installations.

It is no wonder that there is currently a wait of more than six months for solar panel installation. This will get longer over the next 12 months.

Some are predicting the return of “stagflation” in 2023. A combination of stagnant growth, negligible productivity gains and high inflation. We still have one of the highest rates of inflation of any G7 country, including Germany (10%), Spain (9%) and France (5.55%). The consumer prices index (CPI) measure was at 11.1% in the 12 months to October.

Debt finance will continue to be a big issue next year, with current inflation and rising interest rates making high street lenders queasy about investing in the built environment

You only have to look at materials costs to see that, while nowhere near the level they were in the summer, they are still making developers and investors jittery and sapping confidence that is affecting the property pipeline. I fear this may continue next year, although a lot depends on how well the Chinese economy fares. If it comes out of its covid lockdowns and stokes demand, we could see materials shortages again and attendant higher building costs.

Debt finance will continue to be a big issue, with current inflation and rising interest rates making high street lenders queasy about investing in the built environment. In the first half of the year sourcing debt finance is going to impact the market, with US, UK & western European-based developers having to look for new private equity income sources.

In the UK, one of the benefits of cheap sterling is that US pension funds and sovereign wealth managers from abroad are seeing us as offering good value, although London is their focus rather than the North. In 2023, build to rent will continue to grow as will hotel developments, with investors looking for long-term rental streams and seeing the capital as offering good potential returns.

Whether the UK is heading for a recession and a repeat of 1970s stagflation will not become apparent until later this winter, when the energy crisis is at its peak. The pressure on global supply chains at a time when demand is high has the potential to cause an upwards spiral of higher average prices, making things even worse.

I see an unwanted cocktail of prolonged weak growth set against supply chain challenges as industrial action impacts transport, logistics and the service sector

In the UK market especially, this is compounded by Brexit, covid and the perception of a weak government trying to ignore ever-impactful labour disputes which ultimately erodes investor confidence. This is all being exacerbated by a global shortage of gas supplies, and while Putin remains in power that is not going away.

So, not a lot of good news for 2023… I am afraid I see an unwanted cocktail of prolonged weak growth set against supply chain challenges, as industrial action impacts transport, logistics, and the service sector. We may see inflation peak and fall, but this will take some time to feed into the system.

In 2022 I suggested labour shortages, materials price increases, planning regulation confusion and increased interference from government were the key. Without wanting to sound overly pessimistic, I am not sure that 2023 will be any different – and we will have the added imponderable effects of the war in Ukraine and Chinese growth… So not the new year I would have liked to predict.

Richard Steer is chair of Gleeds Worldwide