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Autumn statement: what next for construction?

A week after the NIP and autumn statement, Aecom brought together a panel of sector experts to discuss the implications.

At a lively event in partnership with Construction News, panellists debated the outlook for infrastructure, the housing market and commercial construction – and concluded there were reasons to be cheerful but pitfalls to avoid.  

Panellists

Robert Clark, head of business development, Fusion Building Solutions

Rebecca Evans (chair), Construction News

John Hicks, head of government and public sector, Aecom

Joshua Miller, senior economist, RICS

Jamie Ratcliff, assistant director, Greater London Authority

Dave Smith, managing director, Wates Construction

Ben de Waal, head of residential, Aecom

Graham Winch, professor of construction project management, Manchester Business School


The updated NIP included few new projects, but the prominence given to infrastructure was itself significant, the panellists agreed.

Aecom head of government and public sector John Hicks welcomed the elevation of the NIP to the second item in the autumn statement, saying it indicated “the direction of travel and the importance of roads and rail”.

RICS senior economist Joshua Miller said the visibility provided to the construction sector would give investors more confidence to put funds into UK infrastructure, while giving contractors the ability to plan ahead for projects.

Financial uncertainty

But the speakers were sceptical about the funding available to deliver the chancellor’s plans.

No new money from the autumn statement will be allocated to transport and energy infrastructure in this parliament, and the £375bn due to be spent on infrastructure up to 2030 is largely dependent on investment from the private sector.

“I think apprentices are fundamental. [Contractors have] got to do our 40-a-year or more. We’ve also got to do more in advancing construction’s image”

Dave Smith, Wates

Manchester Business School’s professor of construction project management Graham Winch said the UK had “still not made progress” in raising funding for infrastructure.

“If you look at where the money is coming from, it is coming from customers,” he said.

Given the recent political emphasis on reducing the cost of living, there has been little or no mention of the fact that customers would ultimately pay for High Speed 2, rail upgrades and nuclear power stations through their tickets and bills, he said.

The announcement in the NIP that tolls would be dropped from the planned A14 scheme between Cambridge and Huntingdon was an anomaly.

Prof Winch welcomed the pledge by six major insurers to invest £25bn in UK infrastructure over the next five years, but questioned whether it would materialise.

With the cost of living and pressures on affordability for the government and households, Prof Winch also asked whether the UK could afford to increase spending on national infrastructure to £45bn per year, compared with an average of £41bn per year from 2005 to 2010.

“Private sector investment from insurers and pension funds could easily go to other shores in a tough world”

John Hicks, Aecom

Mr Hicks argued that the cost to the UK could be greater if nothing was done to improve the country’s ageing infrastructure. “There [has not been] enough argument for me on the cost if we do not do something,” he said.

The Treasury must continue to prioritise infrastructure to enable the UK to compete in the global investment marketplace for economic infrastructure, Mr Hicks added.

He feared that “private sector investment from insurers and pension funds could easily go to other shores in a tough world”.

More needed on housing

Mr Osborne paid significant attention to housing in his statement, but Fusion Building Solutions head of business development Robert Clark said it was “not particularly positive in regards to housing”.

Nine projects across the country have been identified to receive funding from the £1bn extension of the Local Infrastructure Fund to unlock stalled housing sites, including in Leeds, Manchester and five sites in the South.

The funding would not go far towards addressing a 4,000-a-year shortfall in building new homes or to bring down rising house prices, Mr Clark said. The funding was just a “short-term fix”.

Aecom head of residential Ben de Waal said the government was turning to local authorities and local enterprise partnerships to take the lead on building new homes.

The extension of councils’ housing revenue account debt caps, allowing councils selected through a competitive bidding process to borrow £300m in 2015/16 and 2016/17, would empower local authorities to build more homes.

By giving LEPs access to £800m through the Public Works Loan Board, Mr Osborne was signalling the importance of collaboration between the public and private sectors at a regional level, he added.

“I would be surprised if we saw persistently double-digit housing growth ever again. I think the game is over – the Bank of England will not tolerate it”

Joshua Miller, RICS

Jamie Ratcliff, assistant director for programme, policy and services – housing and land at the Greater London Authority, said the capital needed to double the number of homes it is building.

“London created 194,000 jobs last year, compared with 21,000 homes built,” he said. “We think we need to double housebuilding to deliver around 42,000 homes a year.”

To build more homes, he said London councils needed more innovative forms of delivery to come from contractors and developers. “We want more shared ownership schemes and accelerated development.”

He said councils and landlords “really need to understand their [housing] stock” to sell off the most valuable assets and raise funds to plough into new social housing.

Capital Gains Tax

Mr de Waal described Mr Osborne’s introduction of capital gains tax on non-resident homeowners as a “populist intervention to win votes”.

He said overseas investors and non-resident homeowners had underpinned developments in London during the downturn and prevented the UK construction industry from meltdown by putting money into the London market.

With £125m due to be raised from non-residents by the CGT by 2019, Mr de Waal said he would like to see the money ringfenced and put towards funding social housing.


Mr Miller said the ability of national and local government to deliver new homes would ultimately come down to whether occupiers would be able to afford them. A more balanced composition of GDP and an increase in real wages would be needed to address affordability.

Help to Buy effect

Mr de Waal said Help to Buy had had a big impact on supply, evidenced by a sharp increase in land options being exercised and renewed optimism to build homes by the public and private sectors.

“The reaction to Help to Buy has been remarkable, which in many ways undermines how broken the market was,” he said. “The mortgage liquidity that appeared overnight could disappear as fast as it materialised if Help to Buy is removed.”

Mr Miller said he believed the Bank of England’s newly formed Financial Policy Committee would impose controls, and perhaps remove Help to Buy, to prevent inflation and create more stability in the housing market.

“I would be surprised if we saw persistently double-digit housing growth ever again,” he said. “I think the game is over – the Bank of England will not tolerate it.”

Mr Miller said he didn’t think there was a housing bubble at present, but admitted to being “slightly nervous” over forecasts that house prices in London will grow by 10 per cent a year over the next five years.

Light at end of commercial tunnel

The government’s plan to spend £375bn on infrastructure over the next 20 years could also help encourage commercial development by boosting economic activity and easing the transportation of people and goods.

In London, the commercial market remained buoyant during the downturn.

Rebuilding the high street

Asked what impact the autumn statement would have on the retail sector, panellists agreed that capping business rate increases at 2 per cent in 2014/15 was a positive move and would provide a small stimulus to high street developments.

However, the panel was divided over the future of high street retail. Mr Miller said: “Fundamentally, the way people buy has changed. I think retail in general and high streets as we know them are done.”

Meanwhile Mr Hicks blamed unaffordable rents for the high rate of vacant premises on the UK’s high streets. “I think the high street will come back – I think it will fiscally shrink but can be revitalised by a reduction in rents and business rates.”

Mr Ratcliff said new housing developments would be the key to rebuilding high streets, with growing residential populations able to support local high streets.

He added that demand for community and leisure facilities on high streets would be more important than traditional retail.


But Wates Construction managing director Dave Smith admitted the next 18 months would be difficult in the capital, with large-scale projects at King’s Cross, Oxford Street and Victoria already under way.

Outside of London and the South-east, Mr Smith said Wates is working on two speculative office developments. “We can see the light at the end of the tunnel, but it is a long tunnel.”

Prof Winch painted a positive picture of growth in Manchester: “There is a lot going on at the moment.”

Mr Osborne’s release of the cap on student numbers would allow successful universities to grow and invest in departmental buildings and student accommodation.

The University of Manchester has a £1bn capital investment programme; however, expansion of that and other Russell Group universities may now accelerate, he said.

“There is a lot going on [in Manchester] at the moment. From just walking around it feels there is a lot of activity,”

Graham Winch, Manchester Business School

Mr Miller said the commercial market was seeing a general pick-up in contractor confidence with workloads growing in the regions.

But Mr Hicks said the market was dormant in Manchester, which needed to change. He added that there was merit to the argument to start building HS2 from Manchester southwards in order to encourage developments in the city.

Challenges ahead

Panellists agreed one of the main challenges ahead for the construction industry would be its ability to train and recruit skilled labour to deliver future infrastructure projects.

Mr Miller said recent surveys by RICS had revealed a growing shortage of skilled labour.

“I am afraid to say there might have been a significant loss in industry’s capacity to deliver,” he said. “It has gone from 2 per cent of respondents reporting a skills shortage in 2008-12 to 20 to 30 per cent in 2013.”

New Year’s resolutions

Construction News editor and chair of the discussion Rebecca Evans asked the panellists what changes they would like to see the government and industry to commit to in 2014.

JH: “I want to see the government make a decision on the new south of England airport, and the industry stick to the Construction 2025 industrial strategy.”

BW: “The government must control land and secure a clear pipeline of projects. From contractors, I would like to see a greater commitment to apprentices. We need to start investing in the next generation coming into the industry.”

DS: “I want to see the government sort out the Green Deal and Energy Companies Obligation. In the industry, I think we’ve got the chance to rebuild trust and come up with a new procurement model.”

JM: “Taxation of property needs to be revised by the government. There is a lot of wealth out there if only there was a fair way of getting some of that. The industry needs to start embracing BIM more than they are at the moment, as it would help drive down costs and improve delivery.”


Mr Smith said the skills shortage was “nothing new” and that there was typically a two-year lag between work levels rising and the supply of labour recovering to meet demand.

However, that shortage is leading to rising labour costs which, coupled with build cost inflation, will continue to put pressure on contractors’ margins.

“Disparate supply chains are procured on a one-off basis [but] teams that work on more than one project benefit from shared learning [and] supply chain costs go down”

Robert Clark, Fusion Building Solutions

Mr Smith admitted the industry had lost a lot of labour during the downturn and that the number of apprenticeships had fallen significantly.

“I think apprentices are fundamental,” he said. “[Contractors have] got to do 40 [apprenticeships] a year or more. We’ve also got to do more in advancing construction’s image.”

In future, contractors “should be planning for a rise [in workload] 18 months ahead”, Mr Smith added.

He was hopeful that by prioritising the Construction 2025 industrial strategy, government and industry would be able to work together to recruit young people and train them for the industry.

Collaboration cuts costs

To reduce build costs and reduce the cost of new homes, Mr Clark said the construction industry must work on integrating its supply chain and incorporating standardisation into projects.

“In construction disparate supply chains are procured on a one-off basis [but] teams that work on more than one project benefit from shared learning [and] supply chain costs go down.”

“The National Infrastructure Plan is giving longer-term certainty, which will hopefully unlock some supply chain efficiencies [and] bring forward the development of more homes”

Jamie Ratcliff, GLA

He added that with standardised designs, such as Rational House and Willmott Dixon’s Sunesis schools, on which Fusion Building Solutions is a partner, money could be saved on building products and costs.

Although Mr Smith said he did “not like standardisation as a word”, he agreed that repeatable designs could be an asset to contractors and added that building information modelling was also a valuable tool for reducing both the build and whole-life costs of new buildings.

Bringing the debate full circle, Mr Ratcliff said the only way to unlock those supply chain efficiencies was with long-term planning.

“The NIP is giving longer-term certainty, which will hopefully unlock some supply chain efficiencies and bring forward the development of more homes,” he said.

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