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Project starts expected to recover but regions face mixed fortunes

The industry is poised to benefit from a gradual strengthening in project starts over the next year.

While this will take time to lift overall volumes, main contractors, groundwork specialists and heavy-side materials producers should be among the first to see workloads rise.

The private sector-led nature of the upturn is not treating all parts of the country equally. Private residential and commercial activity in London and southern England are important drivers behind a 3 per cent forecast rise in the total value of underlying project starts during 2012.

In contrast, parts of the UK where historically the public sector accounts for both a greater proportion of workload and the regional economy remain especially vulnerable to government investment cuts, and to the impact of weaker household confidence and spending power upon private sector activity.

In addition to underlying market conditions, the timing of major infrastructure and building projects (worth £100 million-plus) can make a significant impact on workload in different parts of the country.

London will remain a magnet for these, with Crossrail contracts and major commercial schemes in the development pipeline, though a number of major projects are scheduled to start across the UK over the next 18 months, with energy and renewables being especially active areas.

Click on chart to enlarge

Regional Forecast proportion of underlying starts in 2013

London

The capital will remain a bright spot over the next 18 months. London has already seen a strengthening in project starts over the past two years, primarily driven by increases in the private housing and office sectors.

Private new housing activity has benefited from a more buoyant market than elsewhere in the UK, with London house prices being among the first to recover. Housebuilders have capitalised on a recovery in the regional economy and tapped interest from overseas investors.

The value of underlying private housing starts during the first eight months of 2012 was 73 per cent up on the low point seen in 2009. Although the pace of growth has eased in recent months, a further strengthening in project starts is anticipated during 2013.

The London office market has benefited similarly from overseas investment, especially in prime office accommodation. This has pushed up capital values and, coupled with the tightening in available office space, is pushing developers to revive stalled jobs and seek approval for new ones.

In the first eight months of 2012 the value of office starts (excluding £100m-plus schemes) was 79 per cent up on a year earlier. Approvals in the first half of the year were 21 per cent up on 12 months earlier, pointing to further growth over the coming months.

The capital is also benefiting from the activation of several major office schemes that will further boost activity over the next year.

Click on graph to enlarge

London forecast starts

Midlands

The Midlands is well positioned to benefit from a private sector-led economic recovery over the next two years.

Indeed, the region has already benefited from a sharp rebound in industrial building projects starting on site in 2010 and 2011.

While the flow of industrial starts has slowed during 2012 so far, the development pipeline remains strong.

Detailed planning approvals during the first half of 2012 increased by 27 per cent compared with a year earlier. The past two years have also seen a revival in planning approvals for private housing projects from their 2009 low point.

This has now begun to filter through to project starts, which were up by 50 per cent during the first eight months of this year.

Further growth is anticipated going into 2013 as improving employment and consumer confidence serve to bolster new house sales.

Looking ahead, growth in these areas will be partially offset by weakness in government-funded areas, such as health and education, which have already seen sharp falls in project starts this year.

Nevertheless, the flow of underlying project starts is expected to gather momentum during the remainder of 2012 and is forecast to rise by 12 per cent next year.

Midlands forecast starts

Northern England

Government cuts have weighed heavily on activity in the North. The value of underlying starts fell 6 per cent last year in response to falls in the education, health and social housing sectors and slipped a further 2 per cent during the first eight months of 2012.

There has, however, been a marked rise in private housing, industrial and office starts. While these have been from a low base and could not offset a weakening in public sector and civils projects, the improvement bodes well.

Looking ahead to 2013, the North is forecast to see continued gains in private housing starts. However, the importance of the public sector as an employer in the region is likely to cool the pace of recovery as cuts limit employment growth, consumer confidence and activity in the wider housing market.

The private non-residential development pipeline is improving; the North-west saw a rise in approvals for office projects in the first half of this year, while approvals for industrial projects across the North rose 23 per cent.

Collectively the strengthening in private sector work is set to result in a 6 per cent rise in the value of underlying project starts next year.

The region is also set to benefit from several major energy and other civil engineering projects that are scheduled to start on site during 2013, including a £1.6bn wind farm in the Irish Sea.

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North forecast starts

Scotland

The value of project starts fell by 8 per cent last year as a result of declines in private housing, health and education and civils work. This left Scotland the poorest performing part of UK.

Underlying starts have remained weak during this year so far, but a stronger performance is expected for the coming year.

Recent months have seen a rise in private housing and civil engineering starts. Industrial and office pipelines have also been improving.

The demand for prime office accommodation in Edinburgh, Glasgow and particularly Aberdeen has tightened and should help support the reinstatement of stalled schemes.

In addition, the first half of this year saw the value of industrial projects more than double.

The anticipated strengthening in private sector starts during 2013 is forecast to offset contractions in government-funded areas, such as health and education, fuelling an 8 per cent rise in the value of underlying project starts for the year.

Click on graph to enlarge

Scotland forecast starts

Southern England

Over the past 18 months the upturn in London’s residential market has spread to the South, while the region has also seen a rise in industrial and retail work.

The value of underlying starts grew by 13 per cent in 2011 and a further 7 per cent increase is forecast for this year.

Private residential starts in the South in the first eight months of 2012 were 26 per cent up on a year ago, while a sharp rise in approvals during the first half of the year suggests the sector will remain solid in the near term.

The pace at which sites are started, however, will reflect local conditions; accordingly, locations close to London are likely to be the fastest growing areas of the region.

In contrast, the recent flurry of retail and industrial starts is set to stall due to a fall in the value of jobs gaining approval. Retail work has been driven by supermarkets’ investment schemes and will be dented by Tesco’s and Sainsbury’s decisions to scale back their plans.

This, combined with sharp falls in civil engineering work and the squeeze in public sector areas such as health and education, is set to lead to a decline in underlying project starts next year prior to growth resuming in 2014.

Click on graph to enlarge

South forecast starts

Wales

Recent months have seen project starts in Wales buoyed by a combination of strong growth in private housing and non-residential activity and a firm flow of education and health projects.

However, the flow of starts is expected to lose momentum during the remainder of this year and during 2013.

The tightening in government investment funding is evident in a marked drop in related planning approvals and is expected to feed through to a slowing in public sector projects.

In addition, the growth in private sector starts appears set to be moderate. In particular, a recent drop in private housing approvals, after a strong 31 per cent increase last year, suggests that housebuilders have become more cautious regarding the prospects for the Welsh housing market.

As a result, the value of underlying project starts is forecast to fall back by 3 per cent next year, before recovering in 2014 thanks to an increase in private sector activity as Welsh economic growth strengthens.

Click on graph to enlarge

Wales forecast starts

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