Faithful+Gould UK Tender Price Index (TPI) forecast
The Faithful+Gould TPI forecasts follow the BCIS industry standard forecasts, adjusted to reflect Faithful+Gould's market intelligence, and are based upon a year on year percentage change.
General economic outlook
The UK economy remains fragile with interest rates kept at 0.5% GDP (gross domestic product) and forecasts for growth revised down. ONS (Office for National Statistics) figures report GDP volume growth of 0.1% for Q2 2011, down from 0.4% in 1Q2011 (revised from 0.5%). Pressures contributing towards weak growth include declining real wage growth and an uncertain labour market leading to falling consumer demand and confidence, high levels of inflation – particularly high and rising commodity and input prices – and volatility and weakness in financial markets, particularly the Eurozone. The UK has since revised its growth forecast for 2012 from 2.3% to 1.6%.
Unemployment has reached a 17-year high with the ONS reporting the unemployment rate at 8.1%. Some commentators assert that the government’s deficit reduction strategy is cutting too hard and too fast, while others say the coalition is right to prioritise the reduction of the nation’s structural debt in order to maintain low borrowing rates. The BRC (British Retail Consortium) has indicated that the next 18 months will present a tough challenge while the underlying costs of business continue to rise.
The government has pledged to continue with its deficit reduction plan despite the IMF (International Monetary Fund) warning that economies should avoid tough budget deficit reduction programmes at the expense of growth. The Bank of England voted on 6th October 2011 to inject a further £75bn of new money into the UK economy through quantitative easing. The Bank believe that this will improve the money supply and economic activity with the CBI (Confederation of British Industry) and BCC (British Chambers of Commerce) welcoming the decision to add to the £200bn previously injected. However with an unstable Eurozone providing ongoing economic uncertainty, confidence in the construction industry remains relatively subdued.
The CPA (Construction Products Association) remains concerned about the drop in public sector construction workloads and the failure of the private sector to offset this. The biggest falls were seen in public sector work such as education and health with contractors reporting falls of up to 50% in the last year. Those within the construction industry have commented that opportunities to tender have declined whilst weak client confidence has been leading to projects being cancelled or delayed. The CPA remains cautious over growth prospects over the next 18 months. Their September 2011 report anticipates declining construction output throughout 2011 and 2012 with a recovery in order volumes expected in 2013.
The RICS (Royal Institution of Chartered Surveyors) Construction Market Survey reports deteriorating public sector workloads and marked regional and sectoral differences, though reports modestly positive workload and employment expectations over the coming 12 months and the strongest private housing workloads expected since 2007. Sectoral divergences are still clearly of concern to the economy, with public sector cuts affecting the rate of construction growth. Despite modest rises in activity in some areas of the private sector this is being tempered by what is still a highly competitive tendering environment.
Regional divergences in workload are becoming more pronounced too, owing to restrained public sector investment plans and delays to key schemes with London and the South-East recording rising workloads whilst other regions remain flat or are in decline.
Despite a relatively modest Q2, the RICS Q3 commercial market survey reports that demand, rental and capital value expectations have eased or fallen back owing to uncertainty surrounding the economy. All commercial sectors have been affected with development starts declining in all area and rental expectations for offices turning negative. Retail activity is at its lowest level since the early 1990’s due to planning delays and the high cost of holding land for development with demand slipping back and available space rising. However the industrial sector is set to experience growth, with strong private housing workloads anticipated by the CPA.
ONS figures for construction output report an increase of 0.4% for August when compared to July, though down 4.1% when compared to August 2010. Overall output was up 1.1% for Q2 2011 compared to a decline of 2.7% in Q1 2011. For the period June-August, infrastructure, private new housing and non-housing repair and maintenance fared well. This contrasts with significant falls in private housing repair and maintenance and public sector work to the tune of over £200m.
Construction orders were reported by the ONS at their lowest point since 3Q1980, down 16.3% from the previous quarter and 23.2% down from the same period in 2010. Not all sectors showed a decline, with new construction orders for private sector industry showing modest growth of 6.6% during 2Q2011. Whether the decline in orders will continue affecting construction growth remains to be seen though the consensus amongst many is that a recovery in output won’t be seen until at least 2013 as worries over wider economic conditions persist.
Private sector housing is experiencing some growth but mortgage availability and cuts in public expenditure remain obstacles to increasing housing output. The RICS Housing Market Survey reports that across the board, house prices continue to decline and activity remains flat.
With contractors seeking to fill their order books for 2012 and beyond and against a back drop of low projected output volumes we are likely to see tender prices remain competitive.
It is widely believed that tender prices have now bottomed out and that future returns will generally remain stagnant or with limited inflationary rises. However, it is anticipated that some tender returns may continue to fall due to the project specifics such as location, making the project more attractive to tendering contractors.
Selection of the most suitable tendering contractors will become paramount in project procurement as it is anticipated that contractors may seek opportunities for recovery of margins throughout the duration of the contract.
Planning permission approvals
Housing planning permission approvals have slumped to their lowest levels for 5 years, down 24% on the first quarter 2011 and 23% from the same period in 2010. The HBF (Home Builders Federation) has expressed concern over what it believes is a poor planning system that doesn’t support home building or economic growth. Despite a rise reported by the RICS in private sector housing, public sector housing construction has not performed well, driven partly by the government’s decision to cut the budget for new affordable homes by 60%. The RICS commented that despite residential workloads edging upwards slightly, there is currently insufficient pace to meet medium term housing demands. The UK government is currently undergoing a review of planning policy and process.
SME declining profits/activity
The competitive environment has lead to contractor’s looking at smaller jobs than they would have done previously, with SMEs (small and medium sized enterprises) suffering a 20% fall in sales last year. This is affecting their margins and leaving them struggling to pay off short and medium term debt with turnover and profits sliding as a result. In the last quarter alone, 117 firms in the property and construction sector have fallen into administration, up by 11% when compared to the same period the year before. The next quarter is going to be particularly difficult for SME’s.
In Q1 2011, global oil demand was 2.3 per cent higher than a year ago, but, with future growth rates expected to ease, this would follow the long term trend of the past decade. The increase in oil demand was largely satisfied by increased production in non-OPEC countries, including the US, Russia, China, Brazil, Colombia, Kazakhstan, Azerbaijan, Canada and Oman. Oil prices are expected to remain high with political turmoil adding to price volatility.
Steel prices continue to remain high and have stabilised in recent months. Prices for copper remain high and are expected to remain more or less constant over the next year as supply matches demand.
The table below illustrates the current BCIS material price index forecast between January 2010 and March 2014 and highlights positive inflationary pressures throughout this period.
BCIS Materials Cost Index
Source: BCIS (Building Cost Information Service)
Key Material Cost Movements
|Product||2nd Qrt 2010||2nd Qrt 2011||% Change from 2nd QRT 2010
|Pre-cast concrete products||116.8||120.8||3.31%|
|Timber and Joinery|
|Fabricated structural steel||110.3||133.8||17.56%|
|Lighting equipment for buildings||109.7||105.4||-4.08%|
This general upward trend in material prices has been in conflict with the general Tender Price Index and it can be seen that after 1Q 2010 the TPI started to increase which may be due to a general settling of the market. Additionally, tender prices have dropped to a level that we believe could no longer be sustained. It remains to be seen however if this is a temporary blip or if the TPI will continue to show signs of growth.
BCIS – General Building Cost Index
Source: BCIS (Building Cost Information Service)
BCIS – All-in TPI
Source: BCIS (Building Cost Information Service)
Slowing economic and construction activity growth suggest that 2012 is going to be a tough year for the construction industry. Prospects for economic growth have not improved since the last quarter, with the government’s original forecasts for 2011 appearing optimistic if not impossible to achieve. Several other institutions have also revised their growth forecasts down.
Cuts to public sector investment are beginning to take a firm grip and affect construction activity, particularly in education and health. Some areas of the private sector are faring better given the tough economic conditions though the modest activity seen here remains unable to offset deeper falls across other sectors.
Inflation remains high with upward pressure still affecting materials and input prices, leaving the tendering environment very competitive. This is demonstrated through larger contractor’s bidding for work at prices they would have previously not considered, leaving smaller firms feeling the pinch as this change in behaviour begins to affect their own workloads and even existence. There is some abatement in oil and metals prices as demand begins to match supply though input costs will continue to place pressure on pricing levels.
- Concerns remain over the UKs economic outlook for 2011 and beyond, with growth forecasts revised below previous expectations.
- Public sector workloads fall with rises in private sector workloads unable to offset this, though a slow private sector recovery points to a difficult year ahead.
- Construction orders drop from the previous quarter as concerns remain over the future state of the economy.
- Contractors begin to bid for work previously unconsidered, highlighting the competitiveness of the construction industry as securing order books for 2012 is sought.
- Materials prices set to continue rising though at more stable levels as demand begins to match supply.
The table below shows our competitor’s TPI forecasts and has seen a stable or slight downward movement in predictions.
|Cyrill Sweett||Q3 2011||0%||+1.0%||+2.5%||+3.5%||3.75%|
|Gardiner & Theobald||Q3 2011||-2.5%||+1.5%||+3.0%||+3.5%||+3.5%|
|Turner & Townsend||Spring 2011||+2.5%||+3.0%||+3.5%||N/A||N/A|