2014 may have been a strong year but is such solid growth sustainable over the next 12 months, and which sectors of the industry will continue to defy analysts’ expectations even as the first signs of slowdown begin to appear?
Housing was the big winner over the course of last year.
Experian estimates that private housing output grew 15 per cent last year, while the Construction Products Association expects growth of 10 per cent. Further CPA estimates point to private housing starts growing 18 per cent over 2014.
Last year was a positive for many in the industry, particularly housing and housebuilders. Public housing starts also saw growth last year, rising by 3 per cent according to the CPA.
But while the industry grew, many of the highest-profile contractors ran into problems due to work picked up at the bottom of the downturn.
The key question is whether overall growth can be sustained – and the consensus seems to be no.
Experian head of construction futures James Hastings says: “I don’t see public housing growth continuing into next year.”
“The 2015-2018 affordable housing scheme has no more money in it than the previous scheme - just to stand still in the sector, we will need to attract even more money.”
Glenigan economics director Allan Wilén agrees: “Project starts slowed down over the last half of the year across all housing,” he says.
“We are expecting project starts to have finished the year 3 per cent down on 2013, pointing to a weakening in sector output in 2015.
“House prices have moved so far ahead and consumer spending is still so restricted that growth at this rate isn’t sustainable.”
Hewes & Associates founder Martin Hewes argues that the unaffordability of new homes will be the main driver behind the slowdown.
“Forty per cent of all private sector housebuilding is supported financially by the government in some way; 10 years ago it was only 15 per cent. That tells you that there is something wrong with the market.
“We’ve seen very slow earnings growth, and this hasn’t kept pace with house price growth – meaning that most people still can’t afford a home. Ultimately, growth in private housing relies on house prices continuing to rise – but it won’t keep on growing at the same rate,” he says.
Nevertheless, data from Glenigan shows that planning approvals for private housing during the three months to November 2014 were up by a third compared with a year earlier, showing that the pipeline for these projects is still strong.
“The commercial sector will be a big growth area in 2015”
Allan Wilén, Glenigan
Cuts to stamp duty, revealed in 2014’s Autumn Statement, will boost housing transactions, according to CPA economics director Noble Francis.
“Overall, 98 per cent of stamp duty payers now get a cut, which is good and should boost housing transactions for the middle part of the housing market, which had been slowing recently,” he says.
And while a housing slowdown is widely expected, output will still grow by 10 per cent in 2015 followed by 5 per cent in 2016, according to forecasts from Experian.
Retail question marks
The commercial sector is set for a recovery this year after a slow 2014.
According to CPA estimates, commercial output grew 3.7 per cent in 2014, reaching £22.1bn by the end of the year.
But even if output hits £28.8bn by 2018 as forecast, the sector will still be 16.6 per cent behind its pre-recession peak in 2008.
In 2015, the value of new work is set to hit £23.4bn, up by 6.1 per cent compared to a year earlier.
“The commercial sector will be a big growth area in 2015,” Mr Wilen says.
“Although supermarkets are still squeezed, the pipeline suggests there will be growth in ‘destination shopping’ – out-of-town shopping and big city projects.”
Major projects in the commercial and retail sector include the £1bn extension of Westfield, and a £1bn shopping development in Croydon.
“Looking forward, infrastructure growth in 2015 is going to be slow”
Martin Hewes, Hewes & Associates
Indeed, most major retail projects last year were jobs on larger shopping centres, rather than one-off stores; larger deals include the £100m expansion of Intu Watford, won by Bam Construction, and phase one of the £120m Victoria Gate shopping centre in Leeds, won by Sir Robert McAlpine.
“There are still big long-term question marks over the retail sector as well – with consumers moving away from large supermarkets, does the sector have a future?” Mr Hastings says.
Mr Wilén agrees, saying that retail is still “squeezed”.
“Many of these larger stores don’t have the footfall to generate enough profit, so growth in this area is unlikely,” he added.
Infrastructure is one area where there have been mixed messages on growth for 2015.
Last year’s growth in infrastructure was relatively flat, with Experian estimating a fall in output of 1 per cent.
Looking into 2015, growth is set to return, with 6 per cent growth in output forecast by Experian, while the CPA predict that the value of new work will hit £15.6bn, growing 8 per cent compared with the previous year.
The consensus seems to be, though, that 2015 will be a slower year as the infrastructure pipeline gears up for major growth from 2016 onwards.
“Looking forward, infrastructure growth in 2015 is going to be slow,” Mr Hewes says.
“Crossrail work is slowing down, and bigger projects that have been announced won’t start until 2016 to 2017 – Hinkley Point, for example.
“I’d even be as bold as to say that Hinkley might not even go ahead,” he adds.
“Reading between the lines of the funding agreement, the funding partners aren’t fully on board.”
However, the CPA is forecasting growth in output value of around 8 per cent per year up to 2017, and growth of 12 per cent in 2018.
The National Infrastructure Plan has also increased certainty for the sector and will encourage more investment, according to Dr Francis.
“In the Autumn Statement, we got start and completion dates, alongside progress for the top 40 priority projects in the NIP. Again, this helps industry with certainty that the projects will go ahead,” he says.
The general election in 2015 will create uncertainty in the early part of the year, with public spending going to purdah in the months before the vote.
Mr Hewes labels the election as “the big unknown,” arguing that the industry would not see the benefits of any spending reviews “until at least 2016”.
Mr Hastings is less concerned. “Turning round public spending is a bit like turning round a supertanker – it takes a long time,” he says.
“I don’t think it will have any major effect on output in 2015.”
Whoever is in government after May, it will be a challenge to build on 2014’s success to ensure the industry keeps growing – and growing sustainably.