London and the South have borne the brunt of the referendum’s impact, with regional markets more insulated from paused contracts and stalled projects.
As the dust begins to settle on the EU referendum and the government prepares to invoke Article 50 in March next year, uncertainty is likely to continue for the foreseeable future.
Research from Gleeds illustrates a guarded ‘business as usual’ attitude across the market.
Although the research found that 42 per cent of respondents reported a decline in construction activity over the second half of 2016, it’s not necessarily cause for concern just yet.
While some building sites and boardrooms might be experiencing adverse effects following the referendum, many construction firms are of the view that the best thing to do is carry on as before while the government negotiates terms for the UK’s departure from the EU.
‘Noncommittal’ is how the market can best be described at present, with businesses expressing a wait-and-see approach and some projects being put on hold pending funding decisions, particularly in the public sector.
At the same time, most contractors are still reporting adequately full order books for 2017 as well as an appetite for recruitment, with 71 per cent of organisations in the sector currently looking to expand.
Regional outlook split
Regionally, contractors have reported different impacts from the EU referendum in the past six months.
Firms in the North-west have reported that their tender success rate remains reasonable, despite some market volatility, while major residential schemes are still coming to market.
The South-east, however, saw an immediate negative impact from Brexit, with projects put on hold awaiting confirmation of funding and a degree of concern that this could create a higher level of risk in the market – particularly in terms of increased costs.
In the North-east, there is an opportunity for PRS to establish with lower levels of mortgage lending in the region, and a number of potential schemes are in the early stages of design or at planning.
”Contractors in Scotland are being highly selective over the projects they commit to”
North of the border in Scotland, contractors are being highly selective over the projects they commit to tendering for – partly to minimise risk, but also because their tendering departments are heavily overloaded and have a finite capacity, reflecting the strong pipeline of work in the region.
In Wales there has been little immediate impact from the vote, although more broadly a lack of supplier stocks is leading to longer order and procurement periods, with particular shortages of bricks and blocks being reported.
Commercial and resi rule
Looking at the different sectors, there has been little movement in the relative pattern of sector activity since the beginning of 2015.
The commercial sector continues to present more opportunities than any other, with more firms now actively tendering in the sector in the second half of 2016 compared with the same period a year earlier.
The residential sector has also seen more tendering activity throughout the year following a brief blip in 2015. This has been bolstered by renewed foreign investment, attracted by the relative affordability due to the weakening of the pound.
Residential activity may be further stimulated in 2017 following the chancellor’s commitment to housing delivery in the latest Autumn Statement and with a housing white paper to come.
UK-based product and material manufacturers are maintaining production levels, with fewer feeling the need to increase production to keep up with demand. This could potentially be a consequence of the slight reduction in construction activity since the referendum, or that manufacturers have reached a point of equilibrium. Either way, it’s likely that material prices will increase over the next 12 months.
Following a lengthy period of skills shortages, labour availability is beginning to stabilise – 48 per cent of the supply chain consider current labour availability is sufficient, representing an 8 percentage point increase from the beginning of the year.
No more labour shortages?
Some regions are reporting that labour shortages have lessened to the point that they no longer affect capacity or the ability to bid for work. This could be a big step to rejuvenating competition in the marketplace, yet may prove short-lived.
Potential changes in the availability of migrant labour is a topic of contention in both the media and parliament at present. The issue is a cause for concern for the industry, with certain regions particularly dependent on a migrant majority labour force. Most of the supply chain anticipate that there will be an increase in labour rates due to the increase in demand in a post-EU arena.
“We are already seeing renewed interest in prime residential property in London”
The suspicions of a second interest rate cut were unfounded six months ago, but the 0.25 per cent cut in August has provided a much-needed boost to the property market.
Following stamp duty changes and the revelation in the Autumn Statement that landlords are to foot the bill for tenancy agreements, the weakened pound may serve as a magnet for overseas investment in the buy-to-let market. We are already seeing renewed interest in prime residential property in the capital, and it is hoped that this will permeate other sectors and regions in the near future.
Whichever side of the fence you sit on, the reality is we will not understand the full impact of the EU referendum and the implications for the construction industry for some time.
Until then there will be an air of uncertainty in the marketplace. Extreme cases may see projects placed on hold or cancelled, yet client confidence and the 2017 pipeline are both reasonably promising.
Sarah Davidson is head of research and development at Gleeds