With the office and retail sectors bearing up well, it looks as though the tightening credit market will not be enough to destabilise the industry’s growth, says Experian Business Strategies
01 Activity in the industry
Construction activity rose in the first six months of 2007, according to the latest data from the Department for Business, Enterprise and Regulatory Reform (DBERR, formerly the DTI). The value of activity was 3% higher between January and June 2007 than it was to June 2006, and was worth £41.2bn in 2000 prices.
Undoubtedly, the strength of the offices and retail sectors has been an important factor in propelling the industry forward, but as they are both susceptible to economic fluctuation, they could be vulnerable if economic conditions deteriorate.
At present, though, indicators suggest that tightening in the credit markets will not be sufficient to destabilise economic growth, although it could constrain it as lenders re-evaluate what risks they are willing to take and decide they require a greater return on the ones they do.
A better first half of 2007 was entirely owed to robust growth in new work activity, as the value of repair and maintenance (R&M) work failed to increase from the first half of 2006. New work was up 6% in real terms.
The strength of offices and retail contributed to a 14% increase in commercial construction activity. The public housing and industrial sectors also fared well, although the relatively small size of these sectors meant the effect on overall growth was limited.
On the R&M side, the public non-residential sector took the biggest tumble. With £2.9bn of output reported in the first six months of this year, output was 13% lower than during in the corresponding part of last year.
Private non-residential R&M output, on the other hand, was much stronger and, at £6.2bn, it was 9% higher year-on-year. The change in housing R&M activity was more subdued. Output in both the public and private sectors was down 1%.
New work orders did continue to rise in the first six months of 2007 by just over 3% in real terms. Infrastructure orders recovered robustly and recorded the strongest increase out of all the sectors in the first six months of the year. They were worth £2.2bn in the first six months of 2007, some 35% higher than in the first six months of 2006. Orders in the public housing sector continued to climb strongly in the first half of 2007, and a 30% increase took them beyond the £1bn mark at the half year period for the first time since the early nineties.
Orders were not as plentiful across all sectors and declines were seen in private sectors.
Commercial orders suffered a 5% decline, although as this came after a 35% increase in its orders in 2006, the level remained healthy by historical standards. Private housing fell 2% and industrial orders 5%.
02 New work output
03 R&M output
04 New work orders
05 Offices cycle – boom to bust?
When the housing market bubble burst in the late eighties it drove the UK into recession, and this had a deep and prolonged effect on the construction industry. However, it was the collapse of commercial construction that was responsible for the overall severity of the recession, and the high level of speculative office development was a factor in this.
Having had their fingers burned, developers were later reluctant to embark on speculative builds. This helped to contain the damage to construction when the dotcom bubble burst earlier this decade. Reports suggest that the recent buoyant conditions are proving enticing for developers, and speculative office development is on the increase. It may be that the sub-prime troubles have occurred at just the right time to deflate any irrational exuberance that developers may be feeling …
06 Regional new work output
Year-on-year comparisons for new work varied considerably in the second quarter of 2007. Output was up strongly in Yorkshire (24%), the West (19%) and London (18%). For the East Midlands and Bedfordshire it was quite a different story. In the former, output was up £1.3bn, which is a 5% year-on-year fall. In the latter, new work output was down by 1%.
07 Regional R&M output
London had a strong second quarter in terms of R&M output – up 18% year-on-year. However, this paled in comparison to the North-east where R&M output climbed by 37%. For East Anglia and the West Midlands, the quarter was less successful. Output declined by 4% and 6%, respectively, in these areas. In the West, R&M output was virtually unchanged from 2Q06.
08 Regional new work orders
The size of individual construction orders can make regional series prone to sizeable fluctuations. Indeed, this was the case in the second quarter of this year, when orders rose in the North-east (70%), East Anglia (62%), Yorkshire (33%) and Kent (31%). Orders fell in the West (32%), South West (26%), London (12%) and the East Midland (10%).