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Expert panel warn on challenges of housing, devolution and funding despite positive forecasts

Construction accounted for nearly 7 per cent of domestic output in Q2 2014. But with disparity in regional work and a potential slowdown in private housebuilding, industry leaders have warned of challenges ahead.

The Construction News Summit 2014 saw industry leaders assess the macroeconomic outlook for the UK up to 2020 and consequences for construction.

The panel consisted of GLA deputy mayor for housing Richard Blakeway, Cabinet Office head of construction David Hancock, British Chambers of Commerce head of research Mike Spicer and Lloyds Bank chief economist Trevor Williams.

The discussion focused on several key economic areas affecting the industry, including housing demand, government spending and infrastructure.

Positive growth forecasts

A positive for the panel was the continued growth of the UK’s GDP, which, according to Lloyd’s Bank, is set to grow 3.1 per cent in 2014, 2.6 per cent in 2015 and 2.5 per cent in 2016.

“The economy is only 2.7 per cent bigger than it was last year – and next year between 2.5 per cent and 3 per cent growth is what’s needed,” Mr Williams argued.

“Momentum in the economy is easing off – partly because our European trading partners are slowing. UK plcs are adjusting to the changing economic landscape.”

Mr Spicer added: “We’re predicting 3 per cent growth over the next few years.

“The weakest forecasts are for manufacturing and manufacturing exports, mostly due to the economic slowdown in the eurozone. Next year we will see a marginal slowdown in the economy – our forecasts are just below 3 per cent for 2015.”

Value of GDP UK vs Eurozone_Lloyds

Source: Lloyds

Panellists argued it was too early to raise interest rates, with Mr Spicer and Summit chair Andrew Neil agreeing that the Bank of England was unlikely to raise rates before the general election.

Lloyds’ forecasts indicate that, going into next year and 2016, the economy still has the strength to support a booming construction industry, but the importance of housing was cited as one of the biggest factors in sustaining growth.

Changes in housebuilding

Mr Blakeway said that, despite London’s status as an ”economic powerhouse”, not enough homes were being built to support it.

“We need a big change in the industry itself – we need to think of housing as infrastructure for the economic benefits that it brings,” he argued.

“There’s enough land in London to double housebuilding by 2025… but the public sector needs to encourage the private sector to roll up their sleeves and get involved”

Richard Blakeway, GLA

“The process of housebuilding itself needs to change. Most is still Victorian – it’s an old-fashioned industry, especially compared to large commercial real estate, which depends on modular offsite assembly.

“Too much of housebuilding is bespoke; it has the potential to be standardised. Consumers need to be persuaded modular builds can be good quality, suitable housing.”

Mr Williams said the industry was aware that not enough houses were being built, but added that the UK still needed to “embark on a huge housebuilding programme to address demand”.

Experian forecasts private housing output will grow 15 per cent this year and 10 per cent in 2015. However, Experian expects this to slow down to 5 per cent in 2016.

The panel agreed that housebuilding growth was crucial to help the economy grow particularly in London and the South-east, where pressure and demand is highest.

Such growth will increasingly be privately funded, according to Experian data.

“If you build major transport links between major northern cities it de-risks the industry for employers – and that can only encourage growth”

Mike Spicer, British Chambers of Commerce

It forecasts that public housing will make up 21 per cent of total 2014 housing output, falling to 20 per cent in 2015 and 19 per cent in 2016. Despite this, the panel argued that public funds can help unlock and encourage growth in the housing market.

“Economic growth drives demand for where people want to live,” Mr Williams argued.

“High levels of productivity add to the attractiveness for firms – you need the right type of infrastructure, schools and colleges to drive firms to go there, and the public sector can help with that.”

Mr Blakeway said: “There’s enough land in London to double housebuilding by 2025 – but it’s complicated and difficult land, like brownfield sites.

“There will be infrastructure to unlock it – but the public sector needs to encourage the private sector to roll up their sleeves and get involved.”

More private funding needed

Infrastructure spending was a key focus of the debate – and there have been signs that large, publicly funded infrastructure projects can unlock private investment in housing and commercial.

Notable examples include Manchester and Birmingham, especially with the anticipated boost from High Speed 2 for both these cities.

Mr Spicer pointed out that the regional labour markets were “too thin”, particularly in the North, but investment in infrastructure could alleviate that pressure.

“If you build major transport links between major northern cities it de-risks the industry for employers – and that can only encourage growth,” he said.

“We should be thinking about getting more from the money we’ve got, rather than getting more money”

David Hancock, Cabinet Office

Funding private investments in infrastructure has been successful in Scotland, but the panel disagreed on how the industry can encourage more investment in large projects.

In terms of collaboration between public and private investment, David Hancock said old-style PFI-style contracts were “not the model” that should be used.

“I’d say the philosophy – a collaboration between public and private – was the right thing to do, but the model itself was wrong.”

Mr Hancock highlighted how the government was looking for “15 to 20 per cent savings in the government’s construction budget” and argued that Whitehall should be thinking about “getting more from the money we’ve got, rather than getting more money”.

Value of construction work_Experian

Source: Experian

Mr Blakeway argued there was “vast untapped potential” in domestic pension funds, pointing out that while foreign pension funds such as APG had invested in residential projects in London, he had seen “very little activity” from domestic funds.

“Pension funds need bigger-scale, more ambitious projects to encourage investment,” he argued.

However, Mr Williams disagreed. “There’s a great deal of risk – rules will need to be rewritten to encourage pension funds to invest in riskier projects.

“Projects need to be guaranteed and underpinned by funds before you can encourage investment.”

Further devolution?

The disparity between London and the South-east and the rest of the UK – not just in terms of housing and infrastructure, but total economic growth – is a prominent political issue affecting construction, and the panel was keen to highlight how greater devolution could provide a boost to regional economies.

“You can’t simply outsource growth to other cities – London and the South-east are driving the economy and they want to hang on to more of their money,” Mr Williams said.

“Rules will need to be rewritten to encourage pension funds to invest in riskier projects”

Trevor Williams, Lloyds Bank

“Equally, regional cities don’t want another layer of bureaucracy – if devolution does happen, it should be within existing powers rather than creating new ones.”

When asked whether cities could raise their own money through new tax powers – similar to Scotland’s plan to introduce a land and buildings transaction tax to raise additional funds – Mr Blakeway said that debate needed to happen.

“Cities are deeply dependent on government grant and very little fiscal ability themselves,” he said.

“One London borough raises more in stamp duty than the whole of Scotland but we’re not having that debate here – you have to ask, why is that?”

Despite these concerns, the panel predicted a bright future for the industry if policies such as development of technical colleges, investment in brownfield sites and encouragement of foreign investment come to fruition.

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