The construction industry is well-placed to handle the government-fuelled construction boom, according to research by the RICS.

The institution's figures show that investment in the construction sector is the highest since records began in 1965, putting it in a good position to increase production smoothly.

The report, by RICS chief economist Milan Khatri, says investment as a proportion of construction output reached 5.1% in 1999, compared with 3% in 1996.

It concludes that the current investment levels have the potential to raise the industry's long-term rate of growth.

The report says: "The benefit to the industry would be the ability to raise output at a faster pace than has been the case in the past, without generating inflationary pressures."

It predicts investment in the built environment will rise by almost £10bn over the next three years because of the government's Comprehensive Spending Review.

However, the report does warn of an impending skills shortage. Vacancies are expected to increase by 14 000 in the next four months as a result of new public spending. This figure is expected to rise to 65 000 by the end of 2004.

The RICS figures show that strong growth in construction activity earlier this year has quickly translated into a worsening skill shortage: 37% of surveyors reported a shortage of labour in the second quarter of 2000 compared with 19% at the beginning of 1999.