Booming infrastructure, commercial development, unaffordable housing and tax changes make for a mixed outlook for the UK’s regions, according to exclusive data from forecaster Hewes & Associates.
Regional forecasts 2015-18 growth heat map_Hewes & Associates
Source: Hewes & Associates
When will construction activity hit its peak? It’s an issue weighing on the minds of contractors across the UK as worries around the EU referendum and the flagging global economy continue to build.
Exclusive data from forecaster Hewes & Associates shows a mixed outlook for construction across the UK. Some regions show evidence of strong growth potential, but there are also regions which are expected to contract after hitting a peak in activity this year.
Major areas of opportunity include the industrial market, which is still £3bn off its pre-recession peak, and commercial development, centred primarily on the regional hubs of Manchester and Birmingham.
However, changes to stamp duty, questions of affordability and depressed wages will mean growth in the housing market may not be sustainable. Infrastructure meanwhile faces a mixed outlook, with project delays hitting some regions while certain sectors such as roads are providing a boost in others.
Here, Construction News takes a look at the UK’s regional outlook through to 2018.
Growth in the East Midlands is forecast to slow down significantly after 2016, with output falling 6 per cent in both 2017 and 2018, leaving output at £5.22bn by the end of the period – 11.4 per cent lower than this year’s expected peak of £6.88bn.
“The commercial sector in the East Midlands presents a major opportunity for contractors”
This is primarily due to a slowdown in housing: after the market nearly doubled in size over 2013 and 2014, that rate of growth will cool through to 2018.
The commercial sector, however, presents a major opportunity for contractors; new orders in the sector grew by 30 per cent in 2015, though this merely returned them to 2011 levels, indicating plenty of room for further growth.
Like other regions, the East Midlands is benefiting from the increased demand for and shortage of supply of industrial developments, especially warehousing, and this will be one the largest growth areas in the medium term.
East of England
Growth in the East of England is forecast to remain relatively flat: output will increase by 3.2 per cent in 2016, followed by a fall of 2.1 per cent in 2017 before a 2 per cent rise in 2018.
This will put output at £8.13bn at the end of the forecast period, compared with £8.15bn in 2016.
The region’s housing market will see a modest decline in 2017 and 2018. Affordability of housing is expected to be a dampener on demand in the short term, with first-time buyer prices rising by 29 per cent since 2013 but median wages growing by just 4.5 per cent over the same period.
Like the East Midlands, the commercial sector offers opportunity, with new orders on an upwards trajectory over the medium term. Total output in the region will also be buoyed by a strong infrastructure pipeline, particularly in energy and roads.
Although output in the capital is forecast to be 33 per cent higher in 2018 than it was in 2012, the capital’s share of the UK market is actually expected to fall in the medium term.
Output will reach £20.98bn in 2018, down 4.6 per cent from its peak this year of £21.99bn. London’s share of UK output will dip to 22.9 per cent in 2018, having been 23.2 per cent in both 2015 and 2016.
A strong office market, alongside mixed-use residential and commercial schemes, will underpin the capital’s activity, while further growth in these developments will be driven by infrastructure investment through to 2018, with the opening of Crossrail fast approaching.
“Stamp duty changes on second homes may deter foreign investment in residential schemes”
However, one area of risk is in the residential market: the forecasts suggest the newly introduced 3 per cent stamp duty on second homes may deter foreign investment in resi schemes.
Affordability remains a significant issue more generally, with new house prices having risen on average by 50 per cent in the capital since 2013 according to the Office for National Statistics house price index, while median wages have grown by only 5 per cent at the same time.
The North-east saw one of the highest rates of growth in 2014 at 29 per cent, albeit from a very low base, but the forecasts point to a stabilisation between 2016 and 2018.
A 1.9 per cent decline in 2017 is set to be followed by 0.5 per cent rise in 2018, when output will reach £3.70bn, down from a peak of £3.79bn in 2015.
However, there is still potential for growth in the commercial sector, with new orders only just returning to 2012 levels this year and the potential for significant growth in office construction.
Help to Buy currently props up 40 per cent of all housebuilding in the region, but forecasts show that demand will begin to wind down as affordability reduces.
Transport investment will help the North-west remain the UK’s fourth-largest market by output by 2018, although a decline in housing output will dampen growth.
Output is set to peak at £10bn in 2016, with declines of 3.3 per cent and 2.1 per cent expected in 2017 and 2018, when it will stand at £9.55bn.
“Demand for warehouses will provide a strong pipeline of projects across the North-west”
Aside from transport, office and residential schemes in the centre of Manchester will represent a potential growth area for contractors, although overall housing activity is forecast to slow down in the medium term due to cooling demand.
The industrial market will also provide a strong pipeline of projects as demand for warehousing space increases.
Growth in Scotland outpaced all other UK regions between 2012 and 2015, with output growing by 80 per cent – far and away the fastest across the UK.
Infrastructure output was three times higher in 2015 than three years earlier, while commercial building grew 63 per cent.
The public sector and infrastructure projects that drove this growth are expected to weaken over the next two years, dragging down overall activity.
“New orders fell by 15 per cent in Scotland during 2015”
Output is forecast to dip by 2.7 per cent in 2016, followed by falls of 2.5 per cent and 1.5 per cent in 2017 and 2018 respectively. Output will stand at £9.90bn at the end of the forecast period, 6.6 per cent below the peak of £10.59bn recorded in 2015.
New orders fell by 15 per cent in 2015 – the first such decline since 2011 – while major project completions (including the new Queensferry crossing) this year will remove a significant chunk of output from the data.
Tax changes will also hit growth in speculative industrial development north of the border.
The South-east will maintain its place as the UK’s second-largest construction market over the next two years.
Output grew 4.1 per cent in 2016 to hit £11.75bn, though will slip back to £11.60bn by 2018. Looking long term, this will represent growth of only 6 per cent in the six years since 2012 – compared with 47 per cent in the North-west and 67 per cent in Scotland.
This is largely due to a flat residential market: at the end of 2015, housing output was only 2.5 per cent higher than it was in 2012, compared with 60 per cent for the UK as a whole.
Affordability issues and the pull of London for residential schemes have constrained the South-east market, with changes to stamp duty further dampening demand.
The industrial sector will provide some respite, with demand for warehouses to supply the Greater London area being a key driver.
The ongoing Hinkley Point C saga will hit the construction forecast for the South-west, with the project excluded altogether from Hewes & Associates’ output figures for the next two years.
The region was one of only two, alongside Yorkshire & the Humber, to see output decline last year – down 2 per cent.
The medium-term outlook remains flat, with growth of 0.3 per cent expected this year, followed by an increase of 0.2 per cent in 2017 and 0.1 per cent in 2018, when output will reach £6.45bn.
The South-west’s primary growth market will be infrastructure, with the region set to benefit from increased roads investment through to 2018 and beyond, while speculative office development has been patchy but with signs of improvement.
The data suggests output in Wales has peaked, reaching a high of £3.44bn last year but expected to hit £2.84bn by 2018 – down 17.4 per cent.
Commercial new orders have plummeted over the past year, making for a particularly poor outlook in this sector, while retail and office starts have shown little signs of growth.
Industrial work however remains a strong albeit small market, and will provide one of the main areas of growth in the region.
Beyond 2018, works at the new Wylfa nuclear plant, if they go ahead as planned, will contribute significant output growth for Wales.
The West Midlands is forecast to be the second-fastest growing region in 2016, with output set to increase 6 per cent to hit £6.88bn.
Activity is set to moderate in 2017, with output rising just 0.4 per cent, followed by a decline of 2 per cent in 2018.
However, 2018’s output of £6.79bn will still be 33 per cent higher than it was in 2012, marking the region as one of the UK’s growth markets.
There has been a sharp rise in speculative industrial development, and while this is expected to peter out in the long term, the sector still represents a major short-term opportunity for contractors.
The office market will benefit from strong demand in Birmingham, with major developments such as Bam’s Snow Hill project driving growth. Work towards High Speed 2 will also have a positive impact on the region’s growth in the long term.
Yorkshire & the Humber
Activity in Yorkshire is forecast to fall 3 per cent this year before stabilising through to 2018. New work output is set to hit £6.29bn in 2016, followed by a dip to £6.26bn in 2017 before recovering back up to £6.30bn in 2018.
Much of this growth will be centred around the industrial market, driven by increasing demand and a short supply of warehouse and factory space.
In the commercial market, office and retail have been buoyant – particularly in Leeds, which saw office starts hit a nine-year high earlier this year.
However, the forecasts suggest this market is nearing its peak, with relatively stable output expected through to 2018.
Regional share of output 2015 vs 18_Hewes & Associates
Source: Hewes & Associates