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.
- The UK economy remains weak with the Bank of England (BoE) forecast downgraded further to 0.8%.
- Construction activity remains subdued, with little sign of promise of a return to growth in the short-term.
- Consultant fee levels remain at record lows with profitability continuing to be squeezed.
- Tender price inflation set to remain flatline through to the end of 2013, with no tide-turn envisaged until 2014 at the earliest.
- Retail Price Index (RPI) Inflation increased during May 2012 to a 2.7% year-on-year increase in consumer prices, up from 2.4% during April, the largest contribution came from transport costs in the form of higher prices for fuel and air fares.
General economic outlook – UK
The Chancellor’s Budget statement delivered in March was received against the backdrop of a rating downgrade for the UK and the continuing poor performance of the eurozone economies. While there was a theme of fiscal stimulus, the Chancellor remains constrained by the need to balance this with debt writedown. UK Gross Domestic Product (GDP) growth forecasts therefore remain weak at 0.8% for the remainder of 2013 (HM Treasury). The outlook for short term economic growth remains pessimistic with many analysts predicting lean growth for the next 3 years. Meanwhile, in the long term, underlying GDP growth is still unlikely to see the 2008 peak eclipsed until at least 2016, which is 2 years later than previously forecast by the BoE.
Short term labour market and employment trends are inconsistent with a recovering economy. When comparing May’s Office for National Statistics (ONS) labour market statistics with those of December 2012, this shows an employment rate of 71.4%, down 0.1% on the previous quarter. This includes 15,000 fewer people employed since December 2012, down to 29.71m. On the other hand, 503,000 job vacancies were recorded between February and April 2013, which is the highest recorded figure since the end of 2008. In addition, the long term labour market statistics have fared better, up 0.9% from a year earlier. A combination of newly created jobs and more people entering the workforce pushed the number of people in employment up by 480,000 and unemployment has decreased by 110,000, from 2.63m to 2.52m from a year earlier. Despite criticism from the opposition, the government attribute positive labour market sentiment to the variety of employment schemes the government has implemented, as well as welfare reforms and a pick up in the private sector service industries.
Construction Activity & Inflation
The effects of the cuts in public sector capital spending, announced back in March 2012, have been pronounced. Comparing Q1 2013 to the corresponding quarter from last year, the ONS reports that there has been a 19.2% decrease in new work orders within the public sector. The forecast decrease in public sector new work orders has not been offset by the private sector, which has also seen decreases of 7.8% over the same period. In addition to this, the total volume of construction output is now estimated to be at its lowest point since Q4 1998, down 2.4% since Q4 2012. This includes a 38% decrease in private sector work output since its peak in 2008, its lowest level since Q4 1997.
Despite decline in almost all sectors, the quarter on quarter statistics show that the only exception to the rule is the private housing repair and maintenance sector, which has seen a modest increase of 0.4%. The corresponding figure for social housing repair and maintenance has however decreased by 6.9%. This is likely to be a sign that existing stock is being maintained at the expense of capital project expenditure.
The new orders position suggests that on trend, activity in the construction sector could continue to decline, leading to further future drops in construction output unless action is taken to stimulate the construction sector.
ONS Output Profile 1980 to 2013
Geographically, London still appears to be the most active part of the UK, though this will continue to impact on prices as contractors chase for the work that’s available. As of March 2013, The British Chamber of Commerce (BCC) forecasts a turn in the tide in 2014, when a modest increase of 1.0% in overall output is envisaged. Beyond this, forecasts of growth remain conservative, with a 1.1% increase forecast for 2015.
Whilst current housing data indicates precarious conditions for the housing market, house builders will hope to capitalise on gradual improvements in consumer confidence as interest rates remain low, headline inflation rates dip and government-led schemes take effect in a bid to boost consumer confidence and housing market activity, although this may be limited to the London and South East markets. The measures announced in the Budget may amount to a conservative stimulus to housebuilders; the Help to Buy scheme will provide £3.5bn of equity to fund a proportion of the purchase price of new homes, while the Help to Buy mortgage guarantee scheme allocates £12bn of guarantees to lenders offering mortgages. The affordable homes guarantee programme has also been doubled to provide an additional £255m to support the construction of a further 15,000 homes in England. A potential effect of these measures is that they may push house prices up, thus perpetuating existing problems, however the latest Royal Institution of Chartered Surveyors (RICS) housing market survey suggests that the number of homes sold during March was at a 3-year high, thanks in part also to the Funding for Lending Scheme supported by the BoE. A sustained increase in demand relies upon both a resolution to the uncertainty in the eurozone and a period of gradual, albeit slow, growth domestically. Failure to achieve these aims could yet de-rail a recovery in this sector.
The affordable homes guarantee programme has also been doubled... to support the construction of a further 15,000 homes in England.
The Infrastructure Delivery (ID) update, forming part of this year’s Budget, updated progress of the 40 projects identified as part of the National Infrastructure Plan (NIP 2011) and the Plan for Growth Implementation 2013. The eagerly anticipated boost to this sector does not appear to be as dynamic as had been expected, however. While the Budget has allowed for £3bn of additional investment per year, funded through permanent reductions in current spending, this only equates to a 5-6% overall increase in spending and will only start in 2015-16. Richard Abadie, Global Head of Infrastructure at PwC, suggests that this is unlikely to have a significant impact on economic growth, since it comprises less than 0.2% of GDP. Nonetheless, in addition to the additional investment announced, the UK Government is also continuing to attract private investment through its UK Guarantees Scheme (UKGS), which it claims could raise as much as £40bn in investment over the coming years.
The ID update shows that considerable progress is being made in the high profile projects in and around the Capital; tunnelling of the Crossrail project continues, with over 3 miles already complete and the project now entering its most active phase. The Heathrow Capital Investment Programme continues, with the structure of Heathrow Terminal 2A declared watertight in January 2013 and fit out and system installation work underway to the main terminal building. Other major infrastructure projects which are well underway include London Gateway, the UK’s most significant port development for 20 years, comprising a deep-sea container port and an adjacent logistics park of unprecedented size in Europe. When complete, this will add an additional 3.5m TEU to the nation’s port capacity and contribute £3.2bn to the UK economy each year, including the creation of 12,000 new jobs. These 3 major schemes maintain London as the hub of infrastructure development, thus rises in tender prices, albeit modest, are envisaged in this region in the medium-term.
The ID update does not fail to mention sizeable infrastructure projects affecting other regions of the UK, which have already been given the green light. In terms of the rail sector, this includes significant electrification upgrades to rail links in the north, between Manchester and Scotland, and an Intercity Express Programme providing new train sets to Great Western and East Coast Mainline Routes by 2017, this despite the recent call from the Office of Rail Regulators (OOR) for Network Rail to operate more efficiently. Phase 1 of the High Speed 2 Project to link London and Birmingham continues to face opposition, however environmental impact surveys continue to be carried out along the route and a Paving Bill has been deposited in Parliament to fast-track this £32bn project.
In terms of the energy sector, there was a decision to approve planning permission for EDF’s proposed Hinkley Point C nuclear power station in March 2013. Further to this, Drax Power has been issued with a UK Guarantee worth up to £75m to help raise finance for the partial conversion of their power station from coal to biomass. Drax produces electricity to meet 7% of the UK’s demand, thus the impact of this project will be significant.
Despite the appetite to fund extravagant infrastructure projects, it is not universally agreed that this is best strategy for stimulating growth. Simon Rubinsohn, Chief Economist for RICS, has suggested that the government has failed to realise that across the regions, it is the smaller maintenance, repair and upgrade projects which could quickly and inexpensively deliver great benefits – especially given that small and medium sized firms could pick up the work. A call to cut VAT on repair and maintenance work went unheard in this year’s budget and it remains to be seen what impact this could have on growth.
Effect of the changes to the planning system
Despite the initial criticism faced from various local authorities, it appears that the National Planning Policy Framework (NPPF) is now starting to benefit developers. The number of planning permissions received in Q4 2012 had increased by 62% on the previous year and a report released by Savilles shows that judgements in favour of granting planning permission had also increased.
Materials and input costs
There have been significant reductions in the price of important metals such as copper and gold over recent months, the former dropping 11% year-to-date, while Gold fell 15% in a fortnightly period. Copper is now suffering from over supply, after several years of excess capital investment. Now that this over-investment has been cut, Macquarie bank does not predict a hike in prices until as late as 2016-2017.
Peter Fordham, writing in Building, forecasts that other materials’ prices are likely to remain subdued. Steel is suffering a similar fate to copper, whereby iron ore is in surplus supply. A similar picture is painted for the majority of materials: reinforcement prices are 10% down and steel frame has remained unchanged. As for oil, prices have fallen due to technological advances, a reduction in demand due to the availability of alternative energy sources and an increase in production in certain areas of the Middle East.
One sector that bucks current trends is the social housing sector, which Fordham cites as an active area for contractors at the present time. Concrete frame prices and ready-mixed concrete prices have seen some small price increases in some areas; however these are generally exceptions to the rule in a UK market that remains broadly flat.
London and the South-East remains the most buoyant of all the UK regions, meaning it is the only area where construction price inflation could conceivably be forecast at a positive value over the coming year. In most other areas, it is difficult to foresee anything other than further small price falls and flat values.
Generally, there is a feeling that prices have nowhere further to fall and in some locations and sectors they are close to rising. Contractors are no longer risking substantial losses and are content to decline tendering opportunities. Meanwhile, reports of subcontractors’ price rises, which could be explained by some major companies pulling out of the M&E sector, have meant a reduction in competition. The effect of this may result in a slight increase in tender prices over the next 12 months, however we anticipate tender price inflation increasing by 1.5% in the year to 1Q 2014, with an increase of 2.25% by the beginning of 2015.
There can be no doubt that market pressures continue to influence a difficult and competitive construction market. We have captured some of these pressures within this report. Nonetheless going forward some confidence exists to support a more upbeat outlook for the UK generally which is highly likely to filter through to the construction markets, not least of these is the recent US-EU trade agreement talk announced during the G8 summit.
In addition there are signs that the housing and infrastructure sectors are forecast to continue to grow with increasing commitment to these sectors coming from central government. So with this cautious positivity in mind together with current government lead sub-sector incentives biting in the near future and the potential for private finance initiatives generating future growth we anticipate a gradual increase tender prices over the coming years.
- UK economy is showing the early signs of positivity amidst continued risk in the eurozone. Any move back to positive UK GDP growth in the medium-term relies on a recovery in global markets.
- The construction industry will remain suppressed under pricing and cash flow pressure with tender prices expected to remain competitive for the next year.
- Construction activity will remain uncertain with output and new orders continuing to suppress economic growth, though it is hoped that the government stimulus introduced in the budget and stabilisation in the eurozone will increase confidence and set the construction industry moving positively in the latter part of 2013.
- With the sub contractor market and the supply chain having now adapted to the market capacity we anticipate there may be a consolidation of main contractors as their over-supply adjusts to falling and potentially levelling outputs.
The table below shows our competitor’s TPI forecasts and has seen a downward movement in predictions over the last quarter.
|Gleeds||Q1 - 2013||+0.9%||+2.1%||+2.9%||+3.8%|
|Cyril Sweett||Q1 - 2012||+0.0%||+2.0%||+3.5%||+4.0%|
|Gardiner & Theobald||Q2 - 2013||+0.5%||+1.5%||+2.0%||+2.5%|