The pandemic created a fundamental shift in how we live and work, and the UK is still battling the political and economic headwinds of the past year. Despite the challenges, regional cities are seeing an exciting range of new development, across infrastructure, commercial and residential. Aecom takes a tour
01 / Manchester
Construction activity in the North-west soared in the years leading up to the pandemic. Between Q1 2015 and Q1 2020 new work output grew by 70%, close to double the GB rate. Manchester, the region’s vibrant professional centre, attracted significant investment.
Housebuilding is the backbone of construction in the North-west, generating 30% of total construction output. Affordability across the region is relatively favourable and demand remains strong. Manchester is especially desirable, recording the strongest house price growth out of all our focus cities in recent years. Despite this, new private housing starts still trail pre-pandemic levels in the city by around 34%. Build levels are rising from the early 2022 nadir, but there is a way to go and forward-looking order books are subdued.
Along with London and Birmingham, build‑to‑rent (BTR) has become a large asset class in the city and it is evolving. In recent months Developer Downing’s plans for a £400m, 2,224-bedroom co-living development have been approved and Renaker has unveiled plans to build the tallest building outside London. Dubbed The Lighthouse, the skyscraper will reach 213m and is part of the Great Jackson Street masterplan.
Large, mixed-use development is under way on the banks of the River Medlock. Mayfield Partnership’s Mayfield development is delivering 14 acres of new public realm, including the city’s first new park in more than 100 years surrounding the banks of the River Medlock, as well as 1,500 new homes, 1.7 million ft2 of office space, shops, a 650-bed hotel and a car park opposite Manchester Piccadilly station. The £1.4bn scheme is expected to create more than 10,000 office, retail, leisure and construction jobs.
Developers are pursuing parts of the city which were not of significant interest pre-pandemic, including north Manchester. The £4bn Victoria North project, which is being jointly developed and funded by Manchester city council and its development partner Far East Consortium International, is set to create 15,000 new homes across 155ha and seven neighbourhoods over the next 20 years.
Activity volumes in the North-west are slightly down on pre-pandemic levels, and the near‑term outlook is softer – although contractors are still busy, at least for now. The Manchester market in particular became accustomed to super-charged growth in the years leading up to the pandemic, when tender price inflation routinely ran at almost double the national rate. In this context, the present market conditions feel slightly lacklustre. Sensible bid prices can be achieved when projects are not overly complex and the procurement approach is fair.
Manchester’s planning pipeline is still generally buoyant and lots of large schemes are working their way through the system. How and when they come to market will influence pricing dynamics in the next few years. Market conditions can change fast, so timing will be crucial.
02 / Birmingham
Birmingham performed strongly over the past two years, helping to drive the wider West Midlands construction output up by more than a quarter since early 2020. A successful hosting of the 2022 Commonwealth Games raised the city’s profile on the global map, and the economic benefit from the enhanced connectivity that HS2 will deliver is already becoming a catalyst for regeneration.
Orders for new commercial construction have soared in the West Midlands, and in Q3 2022 reached their highest level on a four-quarter moving total basis since mid-2017. Demand for grade A office space in Birmingham is firm – both within traditional sectors, such as banking, and in tech – yet quality supply is in increasingly short supply.
Help to Buy has supported a third of sales of new-build homes in the private market since its introduction in 2013. The withdrawal of this support is inevitably challenging, and housing starts have slowed. Relative to pre-pandemic levels, private housing starts are down by around 15% in the city.
General housing market activity is subdued, with sales volumes having fallen sharply. However, housing affordability is broadly in line with the UK average and house prices continue to edge up, providing a robust foundation for when interest rate pressures eventually ease.
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Build-to-rent is a fast-growing asset class in the city. Research by Gerald Eve suggests that 4,390 BTR units are now under construction in Birmingham, and the planning pipeline prompts optimism. Currently 10 schemes, aiming to deliver 9,981 units between them, have planning approval and a further 25 schemes are working their way through the planning system.
HS2 is absorbing a huge amount of the labour and materials resources available in the Midlands. Contractors have been experiencing issues on building sites where concrete and other materials are needed, but HS2 is pulling a lot of the supply. This is leading to cost inflation and a battle for workforce on other projects.
Availability of industrial space in the Midlands market generally remains low. Without the overhang of surplus speculative development that is weighing on some regional markets, agents report that rents are increasing as demand from distribution firms remains strong.
Demand for new construction in Birmingham is reasonably stable, but concern about pipeline visibility beyond the next six months is starting to creep in. Contractors are receptive to new enquiries and will consider engagement on a single-stage basis if the right opportunity arises, but there is still a large degree of risk aversion in the market.
03 / Belfast
In the face of domestic and international upheaval, Northern Ireland performed well throughout the pandemic and into the start of 2022. However, as the year progressed, there were signs of a short-term slowdown in activity. By the middle of 2022, total construction output had declined by 6.2% year on year, despite a robust ongoing pipeline.
One of the biggest surprises of 2022 was a drop in repair and maintenance activity in Northern Ireland – despite demand for better energy efficiency and improvement to the country’s existing building stock.
Amid the wider decrease in output, housing bucked the trend, increasing by 6.5% in Q2 2022 alone. This was driven by private housing development, which so far has been able to manage inflation.
Brexit continues to complicate trade. Three years after the UK’s official January 2020 exit from the EU, the withdrawal terms are still being thrashed out. A resolution to the Northern Ireland Protocol – promised by early 2023 – is needed to provide confidence and clarity to the Northern Irish construction sector.
A lack of consensus over the protocol also means the nation remains stymied by a non-functioning government. An NI Executive was not formed after the most recent election in May 2022, preventing new policy or investment decisions from being made.
In the private sector, Belfast has several recently completed office buildings, and takeup remains steady. Hybrid working is the new normal, and after three years to test and evaluate working patterns, occupiers have a better understanding of their future office needs and desired facilities. There is a clear flight to quality: blue-chip occupiers are demanding buildings that can deliver on their ESG commitments. This should encourage landlords to invest in upgrading existing stock and push headline rents up past the £25/ft2 mark.
Northern Ireland’s public sector is highly exposed to Westminster funding decisions. The 2022 autumn statement announced severe cuts to public spending. The cash earmarked for public sector capital investment is unlikely to be able to deliver all previously planned projects, which in late 2022 were almost 11.4% more expensive than the year before.
Nevertheless, Belfast is forging ahead with the investment it has secured. The Department for Education continues to roll out its replacement schools programme. Belfast city council is pressing ahead with its flagship Belfast Stories project, a £100m arts and tourism venue that includes the repurposing of a heritage listed building. The Belfast Health and Social Care Trust is poised to begin construction on its replacement children’s hospital. Meanwhile, the universities continue to roll out student residential schemes.
Tender prices are forecast to rise 6% this year.
London
London has topped the growth league table in recent years, with the value of output growing by nearly a third since the pandemic hit. Growth in infrastructure has been outstanding, but housing – London’s largest industry sector – also posted an impressive performance. Project viability has been challenged by the exceptional inflation encountered over the past year, but London developers are generally pressing ahead with large mixed-use schemes. As signs of a slowdown emerge, can this continue?
Build-to-rent has been the star performer in London’s residential market in recent years. It is still going strong but rental growth has moderated, making the viability equation more difficult to solve. New-build for open market sale also had a strong 2022, with starts in the first nine months of the year reaching their highest level since 2015. Buyer affordability, rising build costs and higher financing costs are making 2023 a more challenging year. Orders have stabilised and activity is set to weaken.
Three years since covid shook the capital’s commercial offices sector, new construction starts remain subdued except in niche locations, and differentiation is becoming more important. Capital values have weakened, nudging yields upwards, and occupier demand is still down on the long-term trend. However, improving the energy efficiency of the existing commercial portfolios ahead of 2030 is becoming an increasingly pressing priority.
London developers face commercial challenges, with a number of supplemental regulatory requirements including the demands of the fire safety bill and the broader industry’s integration of the path to achieving net zero and high-performance buildings. In addition, there is an increasingly common need to invest to boost energy grid capacity where existing availability is insufficient to meet requirements.
The London industry is also more reliant on migrant workers. CITB estimates that half London’s construction workforce were born outside the UK, and skills shortages are now a major issue. Average day rates for labour on some sites have soared by 50% since free movement of EU nationals was abolished.
The distinction between London’s tier one and tier two contracting markets is becoming increasingly blurred. Larger tier two contractors have built capability, enabling some firms to take on bigger, more complex scheme. As the number of larger schemes in the pipeline moderates, this will create a bit more competitive tension. At the moment, project size, complexity and location are having a big impact on tendering dynamics.
Aecom’s central forecast predicts that the slowdown in London will be modest and tender price inflation will remain high in the first six months of 2023, before easing later in the year. Tender prices are forecast to rise by about 3% in 2023 and 2024.
04 / Edinburgh
Construction activity in Scotland has yet to regain ground lost during the pandemic. Strong growth in publicly financed non-housing work and an uptick in infrastructure investment have not been sufficient to offset the sharp decline in new commercial development and a lacklustre housebuilding sector. The outlook for the industry has brightened, though, and the Edinburgh market is busy – bucking the national trend.
Scotland’s capital is focused on achieving Net Zero City status by 2030, earlier than many other cities around the UK. The first of three new net zero homes pilot schemes, as part of the Edinburgh Home Demonstrator programme, broke ground in April 2022. This strategically important development is part of the £1.3bn Granton’s Waterfront regeneration project and will test the achievability of the 2030 ambition.
Decarbonising city-centre transportation is another key objective. One of the major ongoing infrastructure initiatives in Edinburgh is the completion of a second phase of its trams project. In December 2022, the development of a further phase of the tram scheme was approved in principle.
Healthcare infrastructure development in Edinburgh came out of the pandemic relatively unscathed, with projects in the feasibility stage pre-covid largely surviving. Major public spending budget cuts in 2022 have had a greater impact, creating pressure and competition across schemes to try to secure funding. Following the most recent budget, there is a perception that it is going to be more challenging to push developments forward, at least in the short term.
Grade A office space is in short supply and the development pipeline is limited. Rents are rising and CBRE data suggests 96% of under-construction office space within the city is already pre-let.
Edinburgh’s luxury hotel offer has recently benefited from a couple of high-profile additions. The Virgin Hotel, Richard Branson’s first European luxury hotel, and Gleneagles Townhouse, part of the Gleneagles group, both opened in 2022. Looking ahead, the decision to designate the city of Edinburgh council area as a short-term let control area means landlords wishing to list properties that are not their usual home will need to submit a change-of-use planning application. This will shake up the Airbnb market, potentially boosting new hotel development in the mid-range market.
Edinburgh’s tier one contracting market – contractors able to deliver larger schemes – is still relatively busy, and currently it is not possible to contract on a fixed-price basis. Capacity among specialist subcontractors with the ability to support main contractors on these larger schemes is especially stretched, and mechanical and electrical capacity is in particularly short supply – a complexity that procurement strategy should consider. Tender prices are forecast to increase by around 5% in 2023.
05 / Cambridge
Cambridge is a compact city that consistently punches above its weight in terms of output. Where recessions have taken place in the wider UK and other parts of the world, Cambridge itself enjoys, in some respects, a protected environment. This favourable microclimate is chiefly driven by the University of Cambridge and the organisations associated with it. This does not just impact on construction activity; it also affects house prices, which are less volatile than elsewhere in the UK. During the financial crisis, house prices in Cambridge fell by just 11%, compared with around 20% in other cities, according to Land Registry data.
The university is about to complete one of the largest building projects it has undertaken in modern times, with the Ray Dolby Centre, a £400m world-class physics research facility. The university’s reach and influence on investment extends across the city and the surrounding region, such as with the Biomedical Campus, which is adjacent to Addenbrooke’s and Royal Papworth hospitals.
Life sciences and technology drive commercial property markets in Cambridge. The pandemic raised the city’s profile on the global stage, and 2021 was a record year for its office investment market. New grade A supply is limited, and demand remains strong.
The city’s history and strict planning controls have prevented the development of ultra high‑rise in the city centre. However, there have been developments in the past decade near Cambridge train station which have broached the traditional three- or four-storey limit: there are now buildings of up to nine storeys.
Limited supply and strong demand have made Cambridge one of the least affordable cities in the whole of the UK. Savills suggests that the local house price to earnings ratio hit 13.5x at the peak of the market in 2018. With housing starts down by 17% in Q3 2022 compared with the previous year, on a four-quarter moving total basis, respite from affordability pressures seems unlikely over the medium term.
The East West Rail link, an upcoming major transport infrastructure project now in the early stages of construction, will be important for the city. The intention is to create a rail link between the key research and innovation hubs of Oxford, Milton Keynes and Cambridge. The project, however, is not without its detractors, and could be affected by the government’s ongoing review of capital expenditure.
06 / Bristol
Bristol is a dynamic market in both the public and private sector, with more contractor activity today than in 2019, before the pandemic. Over the next few years, the South-west is likely to be one of the leading growth markets for construction.
Big-name investors are making moves in the city: Legal & General has agreed terms with Bristol city council to invest £350m into Bristol Temple Island, transforming the disused brownfield site into a new urban quarter. With a focus on social inclusion through affordable housing, training and employment opportunities, Temple Island is intended to create 2,000 new jobs.
There is also a planned expansion to Bristol Temple Meads station and redevelopment of the area directly surrounding it, after it won a £95m government levelling up grant. The project is being delivered by the West of England combined authority, Bristol city council, Network Rail and Homes England. It will see the Temple Quarter redeveloped with 2,500 new homes by 2032, supporting 2,200 jobs. The development will provide affordable homes and improved transport links, with the goal of boosting regional productivity and economic growth.
Close by, there is a planned redevelopment of St Phillips Marsh, an industrial area east of Temple Meads. The council expects this project to be built out over the next two decades.
Since Q1 2020, housing starts across the South-west have increased by more than 20%. In Bristol, starts peaked in Q3 2021, on a four-quarter moving total basis, and have since reduced. These numbers, however, are skewed by large developments hitting the data in one go, and delivery programmes can be long.
Several prominent sites in Bristol are beginning to come under the spotlight as residential growth areas. Brabazon, close to the proposed YTL Bristol Arena, is one. Plans include a new public library, a new 15-acre public park, and a housing development known as the Hangar District.
Hinkley Point C, the South-west’s £25bn mega-project, continues to attract skilled labour, exacerbating skills shortages across the region and pushing up wages. Training body CITB reports that the South-west needs to attract more construction workers than any other region over the next five years as daily wage rates soar for skilled self‑employed tradespeople.
With a strong pipeline across residential, industrial and public sector work – even commercial activity is poised to record near-term growth – supply chain capacity will remain under pressure. Contractors have limited capacity and good pipeline visibility. Against this backdrop, risk aversion is strong and two-stage tendering prevalent. Project complexity has a big impact on contractor pricing and appetite for risk. On smaller, more straightforward schemes, introducing some competition is possible through hybrid procurement but the market is not yet conducive to single-stage tendering.
This is a contractor’s market, and early promotion of schemes is essential. Client relationships are especially important, and taking a pragmatic, equitable, approach to risk delivers the best outcomes.
07 / Southampton
Southampton has been a development hot spot in recent years, bucking the declining trend witnessed in the wider South-east. The city’s housing market remains buoyant – prices continue to rise and transaction volumes to increase strongly, in contrast with many of the other cities featured. Additionally, in 2022 the city was granted freeport status and the proposed runway extension at the airport finally secured planning permission.
Freeport status will provide an immediate boost to industrial and manufacturing investment, but the council’s medium-term strategy involves positioning the city as a hub for sustainable innovation. Investment is under way to enhance infrastructure at the port, and the council hopes to attract £1bn in investment from wind turbine manufacturers and other low carbon energy providers.
Beyond the port and the city’s transport sector, the commercial offices sector is experiencing difficulties. The desire to build new space is weak, as rental yields are not sufficient to warrant it. Existing stock is increasingly being refurbished to provide better-quality office space and to meet stricter environmental criteria, but converting offices to residential space often wins the appraisal challenge and the city is running out of grade A office space.
Southampton city council’s 2013 masterplan identified a number of priority sites around the city, many of which have progressed over the past decade. Currently Bargate Quarter is under construction and planning approval has been granted for Maritime Gateway and the former Debenhams site, collectively introducing in excess of 1,700 new homes to the city centre. In addition, there are plans to redevelop the former Leisure World with a £250m scheme that includes homes as well as hotel and leisure space.
Southampton City Vision is the next step in the city’s masterplan. Setting out the planning policy framework for new homes, employment areas, infrastructure and other supporting facilities for the next 20 years, the draft strategy is out for consultation and due to be adopted in 2025.
The Solent’s nitrates issue is hitting the residential sector. Nitrates discharging into the river have created dense algae growth, affecting protected habitats and bird species. Wastewater from homes is one source of nitrates, and this consideration has influenced planning decisions on new-build homes. Solutions are being developed which, if successful, will help to ease these planning constraints.
Southampton’s contracting market remains strong. Order books are healthy and pipeline visibility good. Clients and client teams need to be proactive. Estimating capacity is stretched, and early dialogue to promote projects and secure pricing slots is a vital part of the tender process. Risk aversion has eased since mid-2022 but it remains elevated relative to the typical position, and two-stage tendering is prevalent.
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