The UK stock market slumped in May and then launched itself on a rollercoaster ride. But this hasn't affected building tender prices or new orders, which on the whole are continuing their inexorable rise. Davis Langdon & Everest explains why, and what will happen next
The UK stock market has been in decline since its peak at the end of 1999. The events of 11 September 2001 triggered a (fairly short-lived) fall, and the FTSE 100 fell twice that distance between mid-May and mid-July this year. There have been two or three recoveries since then, and the outcome is an index 20% below its level in mid-May and 40% below its peak in December 1999.
In contrast, the construction industry has enjoyed stable growth over this period and building tender prices have risen smoothly upwards. Analysis of tenders received in the third quarter this year shows that prices rose for the sixth consecutive quarter. The provisional Tender Price Index for 3Q02 stands at 420, registering a rise of 3.7% since the second quarter for competitively let construction work in the Greater London area, and a rise of 8.2% over the year. In the same periods, the Retail Prices Index has risen by just 0.3% over the quarter and 1.5% over the year.
The sharper rise in prices in the second half of the period can be attributed to several factors.
- A significant pay award for building operatives under the Construction Industry Joint Council agreement at the end of June.
- The effects of the aggregates levy that came into effect in April have been filtering through.
- A problem with the supply of plaster and reinforcement over the summer.
- A sharp increase in insurance premiums for contractors and subcontractors.
- The continuing demand for buildings has remained strong.
These findings are supported by the results from the Federation of Master Builders' Third Quarter State of Trade Survey, which reported growth in the workload of small and medium-sized building firms for the 13th quarter in succession. Many cases of declining competition are being reported in regions such as Scotland, South Wales and East Anglia. Here, companies are reporting full order books, and are declining to tender for straightforward schemes at the smaller end of the market. The FMB survey highlighted reports of firms turning down opportunities to grow their businesses because they were unable to find sufficient skilled labour to take on extra work. Shortages of carpenters, bricklayers and plasterers are being reported, particularly in the South-east, East Anglia and Wales. Conversely, market conditions in London have eased considerably and larger contractors are beginning to look around for work to continue their present high levels of capacity usage once current contracts come to an end.
Government statistics reinforce the evidence on the ground. Latest DTI figures show that the total volume of construction output in the year to the second quarter of 2002 rose 7% compared with the previous 12 months. New work (up 9%) continued to dominate over repair and maintenance work (up 5%). The statistics show all sectors continuing to rise except the private industrial market.
The Chartered Institute of Purchasing & Supply's Construction Purchasing Managers' Index for September revealed increasing levels of activity for the 44th consecutive month with housing and civil engineering activity increasing at a faster rate than before. Commercial activity still recorded an increase but, as has been anticipated for some time, the rate of expansion has eased considerably – although it has still not moved into decline.
The DTI has released statistics for construction new orders up to August. These showed that, at constant prices, the volume of new orders in the 12 months to August was 3% higher overall than during the previous 12 months. The most recent months showed little sign of a decline: figures for April to August registered a volume of orders 2% higher than in the same period of 2001.
Orders for private industrial work have fallen away quite badly, their value (at constant prices) in the first eight months of this year is 22% lower than in the same period of 2001. That year itself was a bad one, the industrial sector having been in decline since 1997: last year the volume of industrial building orders was 73% of that in 1997 and this year is on course to fall to 63%. In 1997 industrial building orders represented 13% of the new-build market: this year that figure has declined to 7%. There is little sign of any respite for this sector: recent figures showed that profitability for UK manufacturers more than E E halved last year, a
- nd that British companies now stand at the bottom of a league table of international profitability. UK exports continue to fall as world demand slows, and surveys suggest that manufacturing investment will continue to fall next year.
The DTI's figures for new orders show that demand in the private commercial sector in 2002 is running at a level 3% higher than in 2001. For at least the last year a decline in private commercial activity has been widely forecast. The statistics in fact show a rising trend: the volume of orders for the past five months (April to August) are running at a level 10% higher than the equivalent period last year (before the 11 September atrocities, which caused a collapse in confidence and a hiatus in new orders).
It is true that privately funded health and education schemes are now allocated to this sector for statistical purposes, and these have shown an increase of 18% over this period – but they account for only £563m out of a total for the sector of £4532m. Orders for offices over the past five months are 4% up on the same period last year, entertainment orders are holding steady and shops are 23% higher. Up to the third quarter, the private commercial sector has performed better than most expectations.
However, the immediate future for this sector is not rosy. The CIPS's Commercial Activity Index for September recorded minimal growth, the slowest rate of expansion since last the aftermath of 11 September 2002. The subdued growth was attributed to delays in the commencement of new contracts by clients. This has been evident in London for some time, where speculative building has virtually ceased. In London and the South-east the level of vacant office space has risen sharply in the past 12 months, and the collapse in the equities markets has resulted in the shelving of many companies' investment plans. Office rents have fallen across the UK, but the fall in London has been twice as steep as the national average, down 13% from their peak last year. The dearth of new contracts means that demolition contractors in the capital are hungry for work and lead times for structural steelwork have fallen markedly.
The latest RICS Construction Market Survey reported that the market outside London remains strong, particularly in the Midlands and Wales.
Demand for retail developments last year was worth £2837m, overtaking the entertainment sector. It has continued to grow this year with no sign of a reduction in consumer spending.
J Sainsbury has returned to the top of Building's clients chart for work placed between October last year and September this year, starting 57 new projects, worth £389m. Asda Group and Tesco also make the top 10 clients by value of work let over this period.
With borrowing costs at their lowest for 40 years, there is no sign of the consumer boom coming to an end: retail sales figures for September were 4.6% higher than in September last year, with non-food stores registering a rise of 5.8%. New construction orders in the retail sector registered a 23% increase over the five months from April to August compared with the same period last year. While interest rates remain low – and a further reduction is now widely expected – this sector looks likely to continue to grow: what is being termed Europe's largest retail development has been approved by Liverpool council's planning committee and is due to start on site next year.
The entertainment and leisure sector declined last year after the boom of 1999 and 2000 with their pre-millennium and other lottery-funded projects. Both output and new orders picked up a little in the first half of this year but the immediate future is less than optimistic. The collapse of the stock market has done little to encourage investment and expansion plans.
Restaurant chains have retired into their shells, many issuing profit warnings. Those with the biggest exposure to London have been worst hit because of the decline in the number of tourists together with the large number of lay-offs in the City. Even fast food operators seem to have peaked, with McDonald's recently announcing a sharp cut-back in its worldwide restaurant opening plans next year. The hotel market similarly remains subdued after 11 September. Construction output in this sector will, however, be bolstered by the eventual start to the new Wembley stadium as well as Arsenal's £250m development and Fulham's on–off new stadium, followed in 2004 by the proposed £120m Ascot redevelopment and Liverpool FC's
- Anfield replacement.
In spite of booming house price inflation, up 24% in the past year according to Halifax, and the continuing demand for new housing, the response of the housing industry has been slow, frequently citing planning constraints and land unavailability for holding back development. New orders for private housing failed to increase in real terms last year and the number of homes built was at an all time low. The latest statistics show that the number of new private homes started in the first eight months of this year increased by less than 10%. Construction Forecasting and Research predicts that the number of new private sector housing starts next year will decline.
The health of the construction industry remains more firmly then ever in the hands of the government. The long-promised spending on health, education and infrastructure is now clearly visible in the statistics. Last year, spending on schools, universities and health, as evidenced by construction output, increased 19% compared with 2000 and rose in the first half of this year by a further 14%. New orders in the first eight months of this year are running 17% higher than during 2001.
CFR recently increased its forecast of output in the public non-housing sector as the spending promises now seem to be translating much more readily into on-site projects. Output this year is now forecast to be 11% higher than last year (up from their summer forecast of 8%), followed by further increases of 8% in 2003 and 7% in 2004.
Forecasts for infrastructure spending are even more bullish: CFR expects output this year to increase 12% followed by rises of 14% and 10% in 2003 and 2004.
With the government now seemingly intent on fulfilling expenditure promises between now and the next election (probably 2005), and determined not to let the growing furore over whether the PFI is value for money deflect it from that purpose, the only cloud appears to be the black hole that has opened up in the government's revenues as a result of the stock market plunge. Pundits consequently predict further tax rises to limit increased government borrowing if the spending plans are to be implemented in full: political difficulties may consequently arise.
Overall, CFR has increased its forecasts of construction output to 4.4% this year – an annual rate of increase not experienced since 1989. New work is forecast to rise 5.7%, boosted by a massive 12% rise in infrastructure spending. A further 3.8% rise in overall spending is forecast for next year, followed by another 2.9% in 2004. Such increases translate into an additional £9bn worth of construction work at today's prices, for an industry already struggling with resource constraints. It is difficult to see how so much additional work can be achieved without imparting considerable inflationary pressure.
Construction price inflation is likely to be well in excess of basic consumer price inflation over the forecast period, but it is expected that the decline in private com
- mercial activity that now seems inevitable in the near future will temper increases. Tender prices are expected to rise by 3.5 to 5% over the next year and by a similar range over the year to the third quarter of 2004.
The ups and downs at a glanceCurrent trends
UP Tender prices rose 8.2% over the past year
UP Output continued to rise, with volume increasing 7% compared with the previous 12 months
UP New work was up 9%, and repair and maintenance work rose 5%
DOWN Private industrial orders were steeply down, with total value dropping 22% year on year
DOWN Private housing starts in the first eight months of 2002 were up less than 10% – no increase in real terms and insufficient for demand Forecast
DOWN Industrial sector orders for the whole of 2002 are expected to fall to 63% of 1997 figure
DOWN Infrastructure spending to go up 12% this year, 14% next and 10% in 2004
DOWNPrivate housing starts likely to decline further next year
UPPublic non-housing orders to increase 8% in 2003 and 7% in 2004
UPTender prices are expected to rise by 3.5 to 5% over the next year