Last year, the tender price increase of 6.9% outstripped the building cost index, which rose 5.4% over the same period. The increase was also more than four times the rise in the retail prices index, which in 1999 registered a year-on-year increase of just 1.5%.
However, the upward trend in building tender prices was lower than the 13.6% rise in house prices, as reported by the Halifax – its highest annual rise for 10 years.
This rate of tender price inflation is higher than was expected a year ago, when global turmoil threatened to plunge the UK and other Western economies back into recession. In October 1998, the annual tender price inflation forecast was downgraded to 2-5%. As it turned out, of course, the hiccups in Russia and South America were kept within their continental boundaries, and confidence began slowly to return to some east Asian economies.
The forecast, however, proved correct – the increase in tender prices between the third quarter of 1998 and the third quarter of 1999 was 3.8%. In January 1999, the 12-month forecast was 2-5%, but the surge in prices in the last quarter of 1999 lifted the annual increase above this range.
The increase is partly a result of cost pressures in brickwork, blockwork and finishing trades such as plastering. Bricklayers in particular enjoyed a meteoric pay rise during 1999. Throughout 1998, the going rate for a bricklayer in outer London was £85 a day, a rate that showed little change during the year; by late summer 1999, it was £100 and by December the most commonly advertised rate was £110 – an increase of 30%. Even so, shortages of bricklayers are reported throughout much of the South-east, as well as in other regions, for example the North-west.
Demand for bricklayers in the second half of the year was boosted by a surge in housebuilding activity. National House Building Council figures show that applications by private sector builders and housing associations to start new homes between July and October 1999 rose 10% compared with the same period of 1998. This is an increase of more than 6000 units. There was also a rise in completions at the end of the year, with the most recent figures (for November) showing a rise of 22% to 15 690 units, compared with 12 880 units in November 1998.
The effort required to complete some projects before the end of the last millennium put pressure on some finishing trades. Plasterers, who were also in demand from housebuilders, have benefited from higher rates of pay. In London in particular, plasterers can command rates of £110-120 a day. In East Anglia, the keenest rate for plaster is now £7/m sq; a year ago a typical rate would have been £6.25/m sq.
The impact of price rises on these trades has been offset by the lower rate of inflation in less labour-intensive operations and elements employing imported materials. Steelwork rates, for example, have fallen slightly over the past year as suppliers have passed on the price benefit of cheap imported materials, and subcontractors face competition from European fabricators. Curtain-walling inflation has also been subdued, as most of the major players in this market are European, and building clients have benefited from the slide of the euro against the pound.
DETR figures show that construction output has experienced steady growth since the second quarter of 1998, even though economic uncertainty caused new orders to dip at the beginning of 1999. If output continued on this trajectory, the total volume of work for 1999 should have been 7.7% higher than it was in 1995. The rate of increase in all work output slowed a little in the first half of 1999, but was still 1.8% higher in value than in the same period of 1998. The overall impact has been sufficient to generate an increase in tender prices in London of 26% over the past three years, although the increase elsewhere has been less marked.
All the main industry forecasters are optimistic about growth rates over the next two years at least. The volume of output in 2001 should be about 5% higher than last year, according to Construction Forecasting and Research and the Building Material Producers (now the Construction Products Association). This means that the industry will undertake an extra £3.25bn of work. The additional work seems certain to create additional price pressures.
Housing repair and maintenance
The largest slice of additional work this year is likely to be in the repair and maintenance of public housing, as local authorities at last start to spend some of their capital receipts. The work may be grouped into larger packages, which should appeal to medium-sized works contractors. This type of work is quite labour-intensive, at a time when labour scarcity is the main driver behind rising prices.
The private commercial sector will continue to dominate new-build construction. Millennium-funded construction continues apace: the £82m renaissance of Portsmouth Harbour is the biggest millennium scheme on site in the South-east, and its 500 ft Millennium Tower is not likely to be finished before spring 2001. In the Midlands, Birmingham's £116m interactive science complex, Millennium Point, started on site only last April, with completion due in September 2001.
Despite the inclusion of privately funded health and education work in this category, private commercial offices dominate the workload. The value of orders for offices has been growing year-on-year in real terms since 1993. Work increased sharply in 1998 to £3.5bn, up 31% on the previous year, and coincided with a strong recovery in rents. The first 10 months of 1999 saw this level retained. Offices account for 40% of the value of the private commercial sector and 14% of all new construction orders.
However, this still does not compare with the volume of orders for office construction secured by contractors in the boom of 1988-89. In 1989, private office orders were worth almost 50% more (in real terms) than last year, and accounted for 19% of total workload.
The major difference between the two periods is the much lower level of speculative office development this time. Figures towards the end of 1999, from new organisation the London Office Database, reveal that 60% of London offices under construction were pre-let.
Everyone is agreed that such prudence is good for the industry – prudence stemming chiefly from fears of a repeat of 1991-92, when rents crashed as a result of the oversupply of office accommodation. Office rents have since recovered, growing strongly during the first half of 1999, but they have still not returned fully to the levels of 1990. Prime City of London rents now hover at about £50/ft sq; in 1990 they touched £65/ft sq.
Demand from the financial and legal services sectors seems set to continue to underpin the office market in London over the next year. And with the fall in space available in cities such as Leeds, Manchester and Birmingham, increased development prospects in the medium term are strong. In London, particularly in the City and Docklands, there is a huge amount of proposed office development with planning permission waiting to be started.
However, it is felt that interest rate rises over the next year may result in a slowdown in UK economic activity in 2001 and hold back institutional investment. Commercial construction output is forecast to experience a fall in 2001.
Figures for new orders published by the DETR show that the total volume of orders in 1999 is likely to be as much as 9% lower than in 1998. General sentiment is somewhat at odds with this statistic, and doubt still lingers about the consistency of the data, following the DETR's introduction of a new computer system and method of collection from November 1998.
Despite this concern, major pundits continue to forecast output growth over the next two years. The most recent forecasts have come from CFR, in December 1999, predicting 2.2% growth this year; the Construction Products Association in January 2000, predicting 2.3%; and Cambridge Econometrics, also in January 2000, which suggested growth of 1.4% for 2000 in its Industry and the British Economy report.
A recent survey by Interbuild 2000, based on data from planning applications, suggests that output is set to increase 2% over the next six months alone. It claims that the value of new building projects lodged with planning authorities last year was £6.1bn – a record.
The air of optimism is supported by the latest construction activity survey by the RICS, which reports the highest level of activity among its members for two years, driven mainly by private housebuilding and a buoyant commercial sector.
However, the survey flags up the potential problem of whether the industry has enough quality resources, from a contracting and trade standpoint, to manage extra work.
Materials price inflation is still not likely to play a major part in tender price movements during this year, but labour rates will continue to rise. Only a very small proportion of total workload is likely to be partnered or negotiated, so the vast majority will go on being let by competitive tender. Given that workload looks set to remain fairly buoyant, it will enable subcontractors, contractors and materials suppliers to continue to improve their margins. Tender price inflation over the year to the fourth quarter of 2000 seems likely to exceed that of nominal building cost inflation, and is forecast to rise 4-6%, with some less busy regions able to hold price rises slightly lower.
Workload is expected to continue to rise in 2001 but the increase may come from the infrastructure, housing and repair and maintenance fields. A fall-off in private commercial activity is expected, with an easing of lottery-funded construction work, plus a quieter office market and a probable decline in retail activity. These factors may not be fully offset by higher expenditure on health and education projects, resulting in slightly lower inflation in the new-build construction market expected in the following year, with a rise of 3-5%.