© 2024 ARTELIA 1 Artelia Construction Intel Q1 2024
© 2024 ARTELIA 2 Executive summary Artelia market overview Tender price analysis ONS data analysis Labour and materials analysis Macro economy Advice to clients Data Sources 03 04 05 06 07 08 09 This UK construction market intelligence report presents Artelia’s perspective on current market conditions affecting the UK construction industry. Our insights are drawn from comprehensive primary market research, including a survey of contractors, and the detailed analysis of secondary data sourced from reputable bodies such as the Building Cost Information Service (BCIS) and the Office for National Statistics (ONS). Through this blend of firsthand information and authoritative data analysis, Artelia aims to equip stakeholders with the knowledge to navigate the evolving market landscape. 10 Artelia Construction Intel Q1 2024 Contents © 2024 ARTELIA UK
© 2024 ARTELIA 3 Artelia Construction Intel Chris Pidwell Director of Cost Management Executive Summary The general market outlook is moderately positive, with conditions showing significant stabilisation compared to recent years. There exists a healthy level of competition at the tender stage, yet both contractors and clients are exercising greater caution in selecting the works they undertake or bid on. It is imperative for contractors to remain alert to price inflation, which remains a considerable risk to profit margins and could lead to insolvency if not managed correctly. At the same time, it is essential for clients to thoroughly assess the financial health of their potential contractors prior to selection, with the aim of avoiding insolvencies and project failures. Macro Economy The UK entered a technical recession, marked by two consecutive quarters of negative growth in the final half of 2023. Typically, such economic downturns would raise substantial concerns for the construction sector and broader economy. This particular recession is deemed a ‘soft recession’ due to the relatively small levels of GDP change and is primarily attibuted to the fiscal polices implemented to control post-Covid inflation levels. GDP recovery is anticipated throughout 2024, but the rebound is not expected to directly correlate with growth in the construction industry as long as interest rates remain elevated. Construction Output & New Orders The persistence of high inflation and interest rates is likely to keep Construction New Orders subdued. A primary factor is clients’ hesitance to initiate building projects when borrowing costs are high. General market sentiment In a similar vein, Total Construction Output saw a steady decline over the course of 2023 and is expected to plateau in 2024. Despite the lack of overall growth in Output, certain sectors, including public works and commercial fit-outs, have displayed resilience and signs of robustness. Inflation In line with usual economic patterns, tender prices are projected to rise throughout 2024 and into the following year. Artelia anticipates that tender prices will see an average increase of 2-3% over the course of 2024. This increase is modest relative to the unprecedented inflation rates experienced in recent years, which peaked at 10.3% in May 2022, compared to the same period the previous year. Challenges The industry continues to navigate various challenges that impede market progression. Currently, the most pressing issues affecting the industry include: y Skilled labour shortage y Insolvencies y Global conflicts Each of these factors exerts a distinct influence on the industry. However, a common consequence is the increase of total project costs for clients. This, in turn, serves as a significant barrier to the recovery of Construction Output and the generation of New Orders, posing a formidable challenge to the growth of the industry. Lewis Wright Cost Consultant
© 2024 ARTELIA 4 Primary Market Research In the course of compiling this report, Artelia carried out primary market research by distributing surveys to a variety of contractors and industry partners. The completion of these surveys has yielded standardised datasets, which have been aggregated and analysed in comparison to one another to shape our present understanding of the industry. Artelia Market Overview UK Market Tendering Conditions Contractor Order Books Our research indicates that, on average, order books are 69% full for 2024, a positive sign demonstrating the industry’s resilience despite the technical recession and political uncertainty surrounding the forthcoming general election and more immediate local elections. It should be noted, however, that these factors are causing delays in some projects. Nevertheless, client confidence in the industry generally remains quite strong. Although clients are now taking extra steps to safeguard their interests and The market has stabilised after extreme are wise to the financial stability of contractors. volatility in 2022 and 2023. The financial stability of contractors is a key issue across the supply chain and can be a deciding factor in awarding contracts. Our pipeline has shown signs of recovery after stalling in 2023. Contractor One Artelia Construction Intel We are seeing a constant flow of opportunities in the market, and we have a healthy pipeline. Contractor Two A resilient industry anticipating a steady flow of work 14% 29% 29% 14% 14% Cold Lukewarm Warm Overheating Hot General Market Sentiment The prevailing market sentiment, according to the circa 60% of the survey respondents, is that current tendering conditions are ‘warm’ or ‘lukewarm’, meaning that contractors are experiencing moderate to strong competition and moderate tender prices. This equilibrium is probably due to the reduction in Construction Output (refer to page 6 for further details) coupled with the recent rise in insolvencies. Consequently, the volume of work and the number of companies capable of performing such work are decreasing at comparable rates.
© 2024 ARTELIA 5 Tender Price Analysis Artelia View on Tender Price Inflation Artelia anticipates a moderate increase in tender prices, projecting an average rise of 2.0-3.0% throughout 2024. Although this trend of tender price inflation is expected to continue, the projected increases will be substantially lower than those witnessed in recent years. Several factors contribute to this persistent inflation, including global conflicts and economic policies. Presently, the most significant impact on tender prices is the shortage of skilled labour, as noted by respondents to the BCIS TPI questionnaire and participants in Artelia’s market research. This issue receives a more thorough analysis on page 7. BCIS Tender Prices The BCIS reports that tender price inflation saw an average increase of 0.5% from Q4 2023 to Q1 2024, culminating in an annual growth of 2.9% in the BCIS All-in Tender Price Index, a decline from the peak of 10.3% in Q2 2022. Overall, the BCIS anticipates that tender price inflation will remain stable throughout 2024, with an expected annual growth of 1.6%, followed by a slightly more marked increase in 2025, projected at 3.5% annually. Market View on Tender Price Inflation Market feedback gathered by Artelia paints a less optimistic picture than the BCIS’s perspective. We invited survey respondents to share their predictions on the rise of tender prices over the next three years. For the purpose of this report, we have calculated the average of these predictions and depicted them in the graph alongside. As illustrated, survey participants anticipate a 4.3% increase in tender prices during 2024, which is nearly triple the BCIS forecast. This discrepancy may stem from the fact that many of the contractors surveyed are based in London, implying that tender price inflation may be more pronounced in the capital compared to the national average. 4.3% 3.8% 4.2% 3.4% 3.6% 3.8% 4.0% 4.2% 4.4% 2024 2025 2026 Market View on Tender Price Increases Artelia Construction Intel 320 330 340 350 360 370 380 390 400 410 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 1Q25 Tender Price Index (BCIS) Market View on Tender Price Inflation (averaged) Artelia’s research suggests higher tender price inflation than BCIS predictions
© 2024 ARTELIA 6 ONS Data Analysis Construction New Orders Construction activity continued its decline at the close of 2023, reaching its lowest point since the Covid-19 pandemic. While forecasting future levels of new construction orders is challenging, it is improbable that there will be a significant resurgence in new orders as long as high inflation and corresponding interest rates persist. Construction Output Total construction output experienced a steady decline of -1.2% throughout 2023, but has seen a small upturn towards the start of 2024. Levels are expected to remain flat throughout the year. Despite this overall stagnation, it’s worth noting that some sectors have been outperforming others. For further details, please refer to the adjacent commentary. Total Public Work vs Total Private Work Despite the government’s decision to cancel the second phase of the High-Speed Rail 2 project, construction output for total public works has been on an uptrend, increasing by 7% over 2023. In contrast, construction output for total private works declined by 4% during the same period. This is likely due to the elevated cost of borrowing and tender price inflation. 01 Public and Private Housing Despite showing initial strength post pandemic and throughout 2022, total new housing output declined steadily throughout 2023 and is now at its lowest level since the pandemic. This decline seems set to continue with January 2024 levels reportedly 12.2% lower than January 2023 levels. 02 Commercial Fit-Out Anecdotal evidence indicates that the commercial fit-out market is performing strongly in the current market, as employers strive to attract employees back to the workplace. A respondent in our survey described the sector as “buoyant” and reported a “marked increase in enquiries” since the pandemic. 03 50 60 70 80 90 100 110 120 130 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 Construction New Orders (ONS) Construction Output (ONS) 0 200 400 600 800 1000 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 Jan-24 Total Public Total Private Total Artelia Construction Intel Definition: Quarterly new orders at current price Definition: Monthly construction output for Great Britain at current price Some sectors have outperformed others
© 2024 ARTELIA 7 Labour & Materials Analysis Material Prices After experiencing consistent declines in material price inflation during 2023, prices began to rise at the start of 2024, a trend expected to continue throughout the year. The BCIS anticipates an average increase in material prices of 1.8% from March 2024 to March 2025. BCIS View on Labour In correlation with the industry’s feedback on the shortage of skilled labour (see adjacent), the BCIS expect labour price inflation to persist throughout 2024, increasing on average by 4.7% from March 2024 to March 2025. 290 310 330 350 370 390 410 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 Jan-25 Materials Cost Index (BCIS) 450 470 490 510 530 550 570 Jan-2021 Apr-2021 Jul-2021 Oct-2021 Jan-2022 Apr-2022 Jul-2022 Oct-2022 Jan-2023 Apr-2023 Jul-2023 Oct-2023 Jan-2024 Apr-2024 Jul-2024 Oct-2024 Jan-2025 Labour Cost Index (BCIS) The data above clearly indicates that skilled labour shortages and escalating construction costs are currently two of the industry’s primary challenges. Survey respondents have observed a scarcity of qualified subcontractors, particularly in specialist trades. One contractor even suggested that this shortage extends to ‘project management and commercial resources’ highlighting a dearth of experienced individuals in the field. Given the lack of skilled labour, it stands to reason that the available workforce can command higher rates for their services, thereby driving up labour costs. Key reasons for the skills shortage 1. Brexit 2. Aging workforce 3. Lack of technical training and skilled experts 4. Industry perception and attractiveness Adverse weather Difficult contractual and legal conditions Excessive lead times Government red tape, bureaucracy, delayed approvals Insufficient credit availability Lack of confidence in the market to invest in new projects Low workplace productivity, inefficient and outdated work practices Political instability Rising costs of construction Skilled labour shortages The market is oversupplied Too many contractors chasing too few projects The graph maps contractor responses to Artelia’s market survey and illustrates the extent of various challenges faced in the industry during the past six months. Artelia Market Research on Labour Artelia Construction Intel
© 2024 ARTELIA 8 Macro Economy Gross Domestic Product The UK has entered a technical recession, having recorded two consecutive quarters of negative growth in the last half of 2023, with rates of -0.1% and -0.3%, respectively. However, the Office for Budget Responsibility (OBR) anticipates a recovery with a growth of 0.8% throughout 2024. This recession has been characterised as a ‘soft recession’ relative to previous economic downturns, attributed largely to the moderate scale of contraction and the improving conditions in other economic areas, such as inflation. Gross Domestic Product: Key Economic Indicators (source: House of Commons Library) The term ‘soft recession’ stems from the relatively small levels of GDP change that we are currently seeing, compared to previous recessions, which typically see much higher levels of change. Quarterly changes of 0.1% and 0.3% are relatively minor, not even registering on the graph. Gross Domestic Product: Key Economic Indicators (source: House of Commons Library) Inflation The current inflation rate stands at 4%, marking a decrease of 0.6% since the close of 2023. This decline signals a positive trend towards the Bank of England’s (BoE) target inflation rate of 2% by the end of 2025 and suggests that the recent period of high-interest rates is justified. Interest Rates The Bank of England has maintained the interest rate at 5.25%, the highest in 15 years, to curb borrowing and spending, which typically results in reduced inflation. However, this approach can lead to decreased investment in new projects and developments, as evidenced by the lower levels of Construction New Orders and reduced GDP. Interest rates remain at 5.25% Artelia Construction Intel Recovery with economic growth of 0.8% throughout
© 2024 ARTELIA 9 Advice for Clients Overview The advice AUK provides takes into account macroeconomic trends, the current state of the construction industry and the challenges affecting the sector. Staying well-informed and strategically agile will put clients in a stronger position to navigate the complexities and unexpected turns of the current economic landscape. CLIENT ADVICE No.1 Cautious Contractor Selection It is crucial that clients assess the financial health and past performance of contractors to mitigate the risks associated with insolvency and project failure. Clients should prioritise due diligence in contractor selection processes, ensuring that their prospective contractors have a strong track record and can manage current economic pressures, especially those related to price inflation. CLIENT ADVICE No.3 Risk Management & Cost Control Measures Artelia Construction Intel CLIENT ADVICE No.2 Adapt to Economic Trends & Market Dynamics Staying informed about economic forecasts, such as the projected tender price increases, will allow clients to plan their finances and project timelines more effectively, potentially locking in prices before the anticipated increases. Remain well-informed and strategically agile Inflation remains a significant concern, with an expectation of moderate increases in tender prices in the upcoming year. Clients must proactively implement risk management strategies to address fluctuating costs. Strategies could include reviewing procurement strategies such as negotiating fixed price contracts to hedge against future inflation, considering alternative, more cost-effective building methods or materials and allocating a flexible budget to cover unexpected expenses. Furthermore, in light of broader challenges such as skilled labour shortages and global conflicts, clients are advised to undertake thorough planning for contingencies and ensure ongoing communication with contractors and wider supply chain to address any emerging issues promptly.
© 2024 ARTELIA 10 Data Sources *House of Commons Library
© 2024 ARTELIA 11 www.uk.arteliagroup.com REPORT CONTACTS REAL ESTATE CONSULTANCY Chris Pidwell Director of Cost Management +44 7917 457 727 [email protected] RESEARCH Lewis Wright Cost Consultant +44 7387 532 897 [email protected] ©2024 Artelia This report draws on data from Artelia UK’s (AUK) market analysis and anecdotal evidence and is presented in good faith with the intent to help forecast property sector trends. The perspectives herein reflect AUK’s subjective analysis and opinions at this time but are open to uncertainties and factors outside of the company’s control.AUK provides no guarantee of accuracy for the forecasts and conclusions and assume no liability for reliance on them. No part of this report constitutes investment or valuation advice, nor an offer to transact in property. LONDON BIRMINGHAM IPSWICH