Economic recovery is proving much slower than construction businesses had hoped but some experts point to signs the long term outlook will improve, eventually …
Two different sets of data about the health of the construction sector came out this week – one much more gloomy than the other.
The bellwether S&P Global UK Construction Purchasing Managers Index slumped to 44.3 in July, down from 48.8 in June, which, the report says, was a reverse last seen when the country was in the grip of its first covid-19 lockdown more than five years ago.
It was the steepest fall since May 2020 with all three sectors – housebuilding, civil engineering and commercial – going backwards, with buyers citing site delays, lower volumes of incoming new business and weaker customer confidence for the drop. It added that optimism for the year ahead had also dwindled.
S&P’s principal economist Joe Hayes says: “Forward-looking indicators from the survey imply that UK constructors are preparing for challenging times ahead. They’re buying less materials and reducing the number of workers on the payroll. Expectations also continue to underwhelm.”
But a day later, a slightly more optimistic report from the RICS offered a different snapshot of the sector.
In its report for Q2, the RICS said that while overall workloads remain broadly flat, 12-month expectations point to modest growth ahead, particularly in infrastructure.
Admittedly it was nothing to get too excited by but the RICS said the fall in construction workloads in Q2 only got marginally worse from Q1.
It said the headline net balance for total construction workloads was -3%, up from -1% in Q1, adding that infrastructure continues to outperform other areas, with a net balance of +11%.
And forward-looking sentiment is positive, it added, with +17% of respondents expecting higher workloads over the next year although worries remain especially over planning and regulatory delays, such as those stalled residential schemes which have been held up by getting gateway 2 safety approval as required by the Building Safety Act.
Developers have complained that funding will only appear when those schemes required to get regulatory approval get the green light, meaning more are having to look at bridging loans.
Jonathan Samuels, chief executive of bridging loan specialist Octane Capital, says: “It’s clear that 2025 remains a testing environment for property developers. Despite the challenges, most developers are still active in the market and can access funding – albeit with more cautious terms.”
Despite the more upbeat nature of its survey, RICS’ chief economist Simon Rubinsohn admits things are still pretty flat: “The underlying tone in the construction sector remains subdued. There is a little more positivity looking forward but the indicators, at this point, are consistent with a modest rather than material uplift in development.”
Yet some think this caution about the future is only a temporary blip with even the PMI index saying that “for commercial construction, a marked but softer fall was registered”.
Max Jones, director of Infrastructure and Construction at Lloyds, says: “Despite a challenging month, signs of recovery are emerging across the UK construction sector.
“Easing inflation has likely helped to stabilise core material costs including steel, concrete and aggregates. With increased investment, progress on planning reform, and plans to expand their project pipelines, firms are likely to feel encouraged that more positive months are ahead.”
Tier one contractors have reported that jobs are taking much longer to get going, especially London commercial schemes with some pre-construction services agreements (PCSAs) taking much longer to complete now. “Before, it was get appointed and the funding was in place,” said one. “Now it’s we get appointed and they’re still sorting out the funding.”
But some big schemes have got off the blocks including Bovis winning the 60 Gracechurch Street tower, worth around £400m, and the British Library redevelopment, worth £700m, which Mace was told it had won this week. Both are due to start construction next year.
After a lean couple of years, the outlook for commercial property construction is brightening
Matthew Pointon, senior commercial real estate economist at Capital Economics
Given its size and prestige, the decision is not only a fillip for Mace and its construction business – soon to be the only division left at the firm after the sale of its consulting arm completes by the end of the year – but one for the wider London commercial market especially as a huge £1bn towers scheme at 18 Blackfriars has still not picked a winner.
Wider market sentiment in the sector is, some believe, perking up. “After a lean couple of years, the outlook for commercial property construction is brightening,” said Matthew Pointon, senior commercial real estate economist at Capital Economics.
“While the economic outlook is fairly weak, vacancy rates in some subsectors such as prime offices and residential are low which will support rental growth. Combined with falling interest rates, that should encourage developers to ramp up activity. A large rise in lending to commercial developers suggests they are now preparing to break more ground.”
Research lead at London cost consultant Core Five Jonathan Boys adds: “Investment in London commercial is returning and UK assets including equities and gilts are looking cheap by international standards. London remains a global centre of finance. The relative stability of the UK compared to the perceived instability of the US could add a further fillip to investment.”
Normally an interest rate cut would be a real tonic but yesterday’s rate cut from the Bank of England to 4% from 4.25% – while no doubt welcomed by homeowners – has drawn a mixed response.
David Crosthwaite, chief economist at BCIS, says: “While the cut may ease financing pressures at the margins, it’s unlikely to be the turning point the sector needs without broader policy and market support.
“Market confidence is still fragile, and with warnings of a fiscal shortfall likely to dominate the autumn Budget, there’s limited enthusiasm for construction investment.
“Despite recent government announcements, the recovery in demand hasn’t materialised. Many investors appear to be pressing pause and awaiting greater clarity post-budget before committing to major schemes.”
But Elliott Jordan-Doak, senior UK economist for Pantheon Macroeconomics, is more optimistic: “We still think the fundamentals point to sentiment gradually improving. Lower interest rates, easing tariff uncertainty and increased government investment should help the PMI recover over the coming months.”
This pledged increase in investment has focussed on key infrastructure such as transport, hospitals and schools.
Brian Smith, head of cost management and commercial at Aecom, says: “The new infrastructure pipeline marks a welcome shift from strategy to delivery. It provides the long-term certainty the sector needs to plan and prioritise, with 780 public and private sector projects worth £530bn helping to define the scale of opportunity ahead.”
>> Also read: Pipe dreams: Why the infrastructure pipeline must improve if construction is to benefit
Laing O’Rourke chief executive Cathal O’Rourke says he is cheered by the government’s recent announcements on its plans to rebuild the country’s infrastructure. “What I’m really optimistic about is the clarity coming out of the government. These are the things we need so we can respond positively to.”
Meanwhile, brickwork firms Forterra and Ibstock have both said in interim results recently that there has been an uptick in new build residential work.
Ibstock chief executive Joe Hudson adds: “The new-build residential market showed encouraging signs of recovery in the first half of the year.” But he cautioned against too much optimism. “Activity is still well below normalised levels.”
Other key bellwether firms are much more gloomy, however: builders merchant Travis Perkins warned that it was not seeing much sign of a recovery in the second half of this year after watching sales fall in the first six months. It was a sentiment echoed by building products firm SIG in its half year report as well.
One area that is booming is the London fit-out market with leading players, like Overbury and Structure Tone, reporting strong pipelines of work. In fact, the outlook appears so positive that Morgan Sindall has lifted its medium-term profit target at fit out up from £60m to £85m at the start of this year to between £80m and £100m.
One industry veteran who has seen it all before is Morgan Sindall’s chief executive John Morgan. He started out in 1977 and has been through countless cycles of ups and downs. Announcing record interim numbers last month, he said the overall market was “normal” at the moment.
“It’s not bad, but not great,” he says. “GDP growth is lower than we’d like it to be. Better GDP means more money to spend on capital projects.” In other words, it could be a lot better but it also could be much worse.
Many of the industry’s decision makers are on their summer holidays at the moment so we are in limbo during August. Only when the nights get shorter and the summer tans fade could this week’s alarmingly bad PMI predictions begin to feel like the blip – or something more permanent. The optimistic commentators are focused on what the autumn will bring, while acknowledging the importance of the chancellor’s forthcoming Budget and the role that could play in settling nerves and boosting confidence.
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