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Fears on costs and margins but prospects brighten in Q2

Latest RICS survey shows workloads and optimism on the up despite rapidly increasing concerns over input costs and labour shortages.

The latest construction market survey from the Royal Institution of Chartered Surveyors has plenty of good news for the industry.

The responses of 200 surveyors for the second quarter of 2014 showed the net balance of respondents saying workloads had risen minus those seeing falls dipped by just two points to +41 from the previous quarter’s record high of +43.

Workloads Q2 12-Q2 14 RICS

Source: RICS

There is no need for concern about this very slight fall, according to RICS chief economist Simon Rubinsohn.

“Workloads are growing pretty rapidly, pretty much as quickly as they have been over the last two quarters,” he says. “I would not interpret it as a slowdown.”

Sectors behind improvements

The private housing, commercial and industrial sectors are driving the growth, the report found.

Private housing fell only two points from its record level in the previous quarter; private commercial was only four points behind the series high it reached three months earlier; and private industrial was also at near-record levels.

The survey found workloads grew across all regions over the year to Q2 2014. The Midlands and East Anglia, which are a single region in this survey, enjoyed a record rate of growth.

Workloads Q2 12 regional RICS

This result reflects how the region has taken longer to pick up than some others, driven by strong growth in housing in places such as Cambridge.

Even Northern Ireland, which was hammered by the recession, posted growth in workloads.

Other regions saw net balances for workloads that were similar or slightly down on the survey done three months earlier.

Labour difficulties

The return of growth after a downturn brings its own challenges and the survey highlights several.

For example, demand for labour can also be a problem at the start of an economic recovery, which survey respondents confirmed.

The percentage of surveyors reporting difficulty hiring trades workers, quantity surveyors and other construction professionals has been climbing since the final quarter of 2012.

Skill shortages Q2 12 regional RICS

Source: RICS

The rises continued in Q2 2014, when the percentage reporting difficulty hiring quantity surveyors rose to 54 per cent from 19 per cent a year earlier, while the number who had trouble finding bricklayers rose to 59 per cent from 7 per cent  in that period.

Industry leaders have voiced fears that the skills shortage could become a barrier to growth.

Respondents to the RICS survey had similar worries: 51 per cent viewed skills shortages as an impediment to growth, up from 7 per cent in Q2 2013.

Ways to tackle shortage

Could the shortage of labour be at least partially resolved by raising pay in order to attract people into the industry who left during the downturn?

While it might help somewhat in the medium term, it would not solve the problem overnight, Mr Rubinsohn argues.

“Input costs are still going up but developers think they can get a bit more for their money”

Simon Rubinsohn, RICS

Additionally, more people need to be hired and trained, which of course takes time.

He also wonders whether the current hostile climate on immigration might be deterring some workers from elsewhere in Europe, who were employed here in the downturn, from coming back again.

Another of the challenges for a growing industry is rising demand for materials, which can lead to longer waiting times or higher prices.

This too shows up in the survey results, with 58 per cent of respondents saying a shortage of materials was a barrier to building activity, up from 5 per cent a year earlier.

The labour shortage and demand for materials are pushing up costs. The proportion of respondents saying costs are increasing was at its highest level since the start of the economic downturn in the latest survey.

Higher prices for clients

Many contractors felt forced into offering low prices for much of the recession – some did not even cover their costs – but now they are finally able to charge clients a bit more.

More respondents have been saying output prices – the price they charge clients – were rising rather than falling since Q3 2013. The net balance has now reached +55, which is just two points behind its level at the start of 2008.

“Lending is not presenting the same sort of challenge as it was two years ago”

Simon Rubinsohn, RICS

“There is more pricing power now,” Mr Rubinsohn says. “Input costs are still going up but developers think they can get a bit more for their money.”

The fact output prices are catching up with input costs is good news for profits. However, it will take time for them to recover fully. Profit margins are currently lagging because of higher input costs. 

“The first thing to turn around is workload and the last is profit,” Mr Rubinsohn says, adding that materials and labour shortages are likely to be a concern for a while longer.

Respondents to the survey said, on balance, they expected output prices to grow ahead of input costs over the next year and that profit margins would rise by an average of 1.9 per cent.

Lending on the up

The survey did indicate that some of the problems of recession are starting to ease. One of the particular difficulties of this downturn – a lack of bank lending to some businesses – seems to be becoming less of a problem.

Factors limiting activity Q2 12 regional RICS

Source: RICS

The survey found the percentage citing financial constraints as a barrier to building fell from 84 per cent in Q2 2013 to 56 per cent a year later.

Mr Rubinsohn says financial constraints have not gone away altogether, but did seem to be improving. “Lending is not presenting the same sort of challenge as it was two years ago,” he says.

Smaller developers might still find it harder than large ones to get funding, but new forms of lending are appearing and speculative development is re-emerging in some areas of the country, he adds.

The survey also suggested competition might have become very slightly less of a barrier to work in Q2. However, the drop was slight – 5 points – making it hard to know whether it is a meaningful change.

Respondents were particularly upbeat about prospects for the coming year.

A net balance of +79 expected more work in the next 12 months – a record high for the survey – with respondents anticipating workloads to increase by an average of 4.2 per cent.

Workloads expectations Q2 12-Q2 14 RICS

Source: RICS

The net balance expecting employment to rise in the next 12 months hit record levels, too: respondents predicted a growth in headcount of 3.5 per cent over the coming year.

The increase in workloads shows the early stages of recovery are under way. But supressed profits and rising costs mean economic improvement is bringing its own challenges.

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