Market review: Picking up

The UK economy continues to provide mixed messages but the consensus is that growth will pick up in the second quarter. According to IHS Markit, the UK economy experienced “relatively solid” growth in the second quarter.

While the all-sector PMI fell from 54.5 in May to 53.9 in June, down for a second month in a row, this still indicates a growing economy. This quarter’s reading are consistent with second quarter growth of 0.4%, IHS Markit said.

However, these figures are set against a backdrop of falling consumer confidence and slowing growth in the dominant service sector. According to the Eurobarometer consumer survey, confidence levels have been negative since the Brexit vote in June 2016, after positive readings since the start of 2014. The latest figures showed net confidence had fallen to -7.5, the lowest level since Q2 2013.

This was mostly driven by declining expectations of economic performance.

This decline in confidence is perhaps being exacerbated by the falls in the real levels of earnings in the UK. Adjusting for the level of inflation, average weekly earnings fell by 0.7% including bonuses and 0.5% without.

Other news this month on the UK economy includes:

• A survey from the Bank of England found that financial institutions had cut back on the level of unsecured credit lending in the three months to June
• Speculation raged that the UK was ready to increase interest rates, however, the deputy governor of the Bank of England dismissed this
• A survey by the British Retail Consortium showed that retail sales in June increased by 1.2%
• The headline inflation rate fell unexpectedly from 2.9% to 2.6%.

Construction sector

The latest figures from the Office for National Statistics indicate the construction sector in the UK shrank by 1.2% between April and May 2017. Industry output was also 0.3% lower than May 2016.

The main reason for the monthly decrease in output is declines in new work in the private commercial, private housing and public sectors. New private commercial output shrank by 1.6% over the period, private housing declined by 0.1% and public work fell by 2.7%. Over the longer term new private housing was still 1% higher in May 2017 compared with May 2016. Similarly, private commercial was 2% higher than a year ago. However, looking at the past three months, compared with the preceding three months, it is clear the level of activity in construction is declining.

Looking at the past three months, compared with the preceding three months, it is clear the level of activity in construction is declining

The CPA/Barbour ABI Index, which measures the level of contracts awarded using January 2010 as its base month, recorded a reading of 141 for May. This is a decrease from the previous month but continues to support the view that overall activity in the industry remains strong.

The readings for private housing were up over the month, but commercial offices were lower than last month’s level at 94. Commercial retail increased considerably this month and the reading for industrial factories was significantly higher in May. This indicates that the pipeline of work in the private sector remains strong.

According to Barbour ABI data on all contract activity, June witnessed a rebound in construction levels with the value of new contracts awarded £5.5bn, based on a three month rolling average. This is a 12.4% increase from May but an 11.5% decrease on the value recorded in June 2016. The number of construction projects within the UK in June increased by 38.7% on May, and were 18.9% higher than June 2016.

Projects by region

The majority of the contracts awarded in June by value were in London, accounting for 26% of the UK total. This was followed by the South-east with 14% of contract award value. The highest value contract awarded in London in June was the North Quay development in Poplar which is set to deliver 1,243 flats with associated commercial and retail uses. Valued at an estimated £800m the development will contain four towers and was awarded to the Canary Wharf Group. The other major contract awarded in London in June was a further development in Poplar at 10 Bank Street. This development is for commercial offices and has an estimated value of £187.5m and will provide 6,500m2 of floorspace.

Types of project

Residential had the highest proportion of contracts awarded by value in June with 54% of the total. The North Quay development in Poplar was by far the largest value contract awarded in June. The next highest value residential contract awarded was a 1,020 apartment development in Rotherhithe valued at £85m awarded to Berkeley Homes.

Infrastructure secured the second-highest share of contracts by type with 12% of the value awarded. The largest infrastructure contract awarded in June was the IFA 2 converter station, an on-shore facility that links the UK and France’s power grids. This is valued at £100m and is part of the wider programme known as Interconnexion France-Angleterre 2 (IFA2).

The industrial sector accounted for 10% of the contract value awarded in June, with a development by logistics property developer Prologis in Northampton the largest contract at £150m.

Construction performance by sector

Spotlight on residential

After a poor April and May, the award of high-value contracts in June means residential grew strongly. Activity in the residential sector increased significantly in June with the total value of projects valued at £2.5bn based on a three-month rolling average. This is a 43.9% increase compared with April and is 39% higher than June 2016.

The number of units associated with residential contracts awarded decreased by 3.9% between May and June based on a three-month rolling average, and is 9.2% lower than June 2016.

Taken together this data shows the continued popularity of residential developments in the UK, with a refocus on London in June.

Sector performance

The latest house price indices for June from Halifax showed that average house prices are rising at 2.6% annually, down from 3.3% in May. However, there was a third consecutive quarterly decline in house prices, indicating an underlying softening in the housing market.

In contrast, Nationwide reported annual house price rises at 3.1% in June, up from 2.1% in May.

In further evidence of lessening housing market activity RICS reported that house sales fell in June for the fourth month running.

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