Davis Langdon focuses on public sector spending, and finds government targets for hospitals, schools and housing will keep the industry busy over the next three years
The construction industry has been in a period of continuous growth for 10 years but it is only the expansion of public sector building over the past three years that has enabled the momentum to be maintained, as private commercial activity, particularly office building, went into decline.
The government claimed commitment to reversing the legacy of under investment in the nation’s infrastructure and increased capital investment to deliver improvements in health, education, transport and housing. The aim was to raise public sector net investment to 2% of GDP by 2005-06, more than four times higher in real terms than in 1997 – back to the levels last seen in 1979-80.
Beginning with the 1998 Comprehensive Spending Review, the government progressively increased capital expenditure during the intervening period and the figures, particularly for health and education, bear witness to the benefits secured by the construction industry. Health expenditure in real terms has increased more than threefold since 1999/2000, from just under £1bn to just over £3bn in 2004/05; education and transport have both enjoyed similar increases. However, there has long been criticism that actual spending has lagged behind the announced intentions and the pace of increase has really only taken off seriously in the past three years.
NHS Estates proudly proclaims “the biggest hospital building programme in the history of the NHS”. There is no denying substantial progress has been made in recent years but, nevertheless, spending plans on health building have consistently been underachieved. This has generally been attributed to the failure to reach financial close on large PFI schemes in the time frames originally envisaged. A target of 100 new hospitals by 2010 is still a stated objective though the pace of progress needs to improve to achieve this worthy aim. Greater success has been achieved in delivering primary care centres, treatment centres and the modernisation of GP premises. The NHS website lists 64 publicly funded capital projects each worth over £10m construction cost as under construction during 2004-05, totalling £1600m.
Growth in construction spending on education projects has been much more successful, increasing nearly threefold since 1998. The last government committed to rebuilding or refurbishing every secondary school in the country. The DfES has claimed that capital investment in school buildings will reach £5.1bn by 2005/06, compared with the £700m budget in 1996/97.
The Building Schools for the Future programme is expected to account for two-fifths of the school building programme in the current financial year. However doubts have been expressed as to the feasibility of getting it up and running that quickly. The first wave is supposed to see £2.2bn spent in 2005-6. However in the Newcastle scheme valued at £220m, for instance, proposals from tenderers are not expected before October and Newcastle is now considered to be ahead of the pathfinder projects in Sheffield and Greenwich.
The last Budget extended the BSF programme to rebuild or “significantly refurbish” 8900 primary schools over the next 15 years. At the same time a £1.5bn capital renewal programme for further education colleges was announced.
Housing, both new-build and refurbishment, has high government priority to provide additional affordable housing, particularly in the South-east and to bring existing housing up to decent living standards, particularly swathes of old stock in the North.
The MOD also has substantial spending plans still to be implemented and the Prison Service has a £3bn 10-year prison improvement plan.
The table below summarises the latest forecasts from Experian Business Strategies (Spring 2005 Update) in relation to public sector workload over the next three years. The figures exclude privately funded work which is included in the ‘Private Commercial’ sector.
The table shows that, even though the private commercial sector is expected to make a bit of a comeback over the next couple of years, the construction industry will still be heavily dependent on the public sector. So, now the Labour Party has won a third term, the industry must hope that spending commitments will continue to be honoured.
In 2004, DTI figures show that construction materials prices rose an average of 7.2%. Prices for new non-housing work rose 10.8%. The main influence behind these high figures was the sharp increase in the price of steel, which began at the start of 2004 but had seemingly run out of steam by the end of the year.
A small increase of £20 per tonne was introduced at the beginning of 2005 but further planned rises seem to have been put on hold.
World demand for steel will continue to increase: estimates suggest a rise of 3-4% this year compared with 2004 with the bulk of the increase accounted for by continuing Chinese development. However, at the same time, steel output is forecast to rise by a similar amount.
The main driver behind any price rises this year may come from raw material costs following rises in the price of coking coal and iron ore at the end of last year. But steel stocks are currently high, leading ThyssenKrupp to cut production in Germany and section prices in northern Europe generally have recently fallen. Overall in 2005, price reductions in steel of up to 15% have been forecast.
Other materials have also seen marked rises. Base copper prices have doubled over the past two years, forcing the price of copper pipes and cylinders and cables and wires to follow suit. Copper supplies have recently increased but demand is still reckoned to outstrip supply for the next couple of years, maintaining high prices.
Ready-mixed concrete prices responded to an increase in the price of cement at the beginning of the year by lifting by £5 per m3, although suppliers may not always have been able to implement the rise in full. The average price for concrete is now about £60 per m3 with insitu concrete rated typically at £105-110 per m3.
With oil prices still hovering at about $50 (£26) a barrel, energy costs and thus manufacturing and transport costs will probably rise further and eventually be passed down to the end-user. However, with steel prices more likely to ease than rise further this year, the outlook for material prices this year is for a much lower rate of increase than occurred last year.
In previous years, the state of the construction market in London could be gauged by the number of tower cranes visible on a stroll across Waterloo Bridge. Today that number can be counted on one hand, illustrating why inflation in the capital has been lower than virtually anywhere else in the country over the past 18 months.
However, further from the centre, there is a great deal of construction work going on, evidenced by some very large projects, including Heathrow’s Terminal 5, the White City development and Arsenal’s new football stadium, maintaining a relatively high level of construction activity in the Greater London area as a whole.
Workload in the capital fell back in 2003 as the office market declined but ended last year with a sturdy recovery. The office market may not have rebounded quite as quickly as some may optimistically have hoped nine months ago but some significant projects have now started on site, including Land Securities’ New Street Square speculative development.
As a consequence, prices have started to move upwards, following the trend of other regions that have progressively increased workload.
Features of the market include:
- Demolition contractors back in demand
- Shortage of bricklayers beginning to resurface
- M&E costs now higher
- Preliminaries costs increasing.
The outlook for the London market is strong with many projects in planning and lining up for starts over the next couple of years:
- Greenwich (£165m), Lewisham, Southwark and Waltham Forest are part of the first wave of Building Schools for the Future
- Hackney, Haringey, Islington, Lambeth and Tower Hamlets feature in wave two
- In Lambeth, nearly 2000 council homes are earmarked for £500m rebuilding and refurbishment after stock transfer in March 2006
- Millions of square feet of office building are programmed to start on site over the next year or so. In addition a number of office towers are competing to be first to market
- Battersea Power Station redevelopment has an estimated construction cost of £500m.
East Midlands and East Anglia
The East Midlands has experienced strong growth in construction activity over the past two years in virtually every sector with private housing activity leading the way:
- All contractors and subcontractors busy
- Profit and overheads allowances higher
- Requests for extensions to tender periods common, particularly where design input required
- Preliminaries costs up – site management resource shortages, increased regulation, higher insurance premiums
- Shortages of both skilled and non-skilled labour – greater use of immigrant workers – possible improvement in supply as housing demand flattens
- In Norwich and surrounding areas, the construction industry is fully occupied and more contractors are being brought in from further afield to satisfy demand. Next year’s workload for these regions also looks extremely healthy.
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