This forecast is based on the following commentary and market intelligence provided through our own research and external sources.
Regional forecasts are based on a number of factors, including knowledge of local market conditions. These are subject to unpredictable changes, therefore any published forecasts should be used with caution. Post-Brexit uncertainly has meant that many market commentators are currently providing a range of forecasts, demonstrating the continued volatility in market sentiment.
- General level of uncertainty remains in the industry. Constant re-evaluation of forecasts required
- Concern over levels of tenant demand have caused developers to re-consider project feasibility
- Exodus of corporations from London yet to materialise, despite revaluation of corporate rates in 2017
- Mid-price Housebuilding market in London has experienced steady growth
- Unprecedented circumstances of Brexit continue to dent market sentiment and increase uncertainty
- Upward cost pressure on materials and fuel remains, in particular steel.
- Demand likely to continue to weaken in short to mid-term; Main Contractor appetite for work may increase.
- There is likely to be an interest rate rise in the short to medium term which might have effects on the market.
On the back of relatively weak UK GDP growth estimates in Q3 2017, activity in London has been relatively subdued since Q1 2017. The Summer 2017 Deloitte Crane Survey (data collated between October 2016 and March 2017) suggests that the current volume of office construction activity has decreased by 6% in Central London in the six months prior to March 2017. The number of new starts (28) has also decreased considerably since our previous report, however it remains higher than the 10-year average (22).
Our previous forecast assumed that a reduction in occupier demand would start to affect construction activity in London by early 2018. However, current office development pipeline forecasts do not show signs of a sustained dip. Contractors providing early trades, who were previously forecasting a dip in activity, have witnessed consistent levels of activity since a year ago. Demolition activity has remained surprisingly stable. Contractors providing finishing trades have also reported fairly healthy order books, indicating that activity is likely to remain healthy, albeit modest, in the short term. Building costs are currently a key concern for developers. Trade contractors continue to report rising prices of a number of key materials. This is a key risk to office development in London currently. However, Savills are currently reporting that levels of office space take-up within the City in September 2017 are up 21% year-on-year and 38% higher than the long-term average, which shows that demand for space has sustained despite the uncertainty.
The Barbour ABI Economic & Construction Review in September 2017, which provides data for all commercial and retail projects in London, states that contract award activity has decreased by almost 9% since August 2016. Proportionally, London’s share of activity within the UK has also reduced. Typically, London’s share of activity is approximately 30%, whereas current statistics show this has dropped to only 22%.
Despite these fairly pessimistic output statistics, Q3 2017 witnessed significant contract awards, including Canary Wharf Group’s 1 Park Place development (August - £200m). A further positive is Deutsche Bank’s recent decision to pre-let the whole of 21 Moorfields (570,000 sq ft), which is an encouraging sign for the London Office market. However, news of a potential 10-year delay to the construction of Crossrail 2 due to funding constraints, despite the project recently being backed by the Department for Transport, could be a blow for wider mixed use and commercial development within the Greater London region.
The housebuilding industry is still delivering strong growth throughout the UK and is on track to deliver the government’s target of one million new homes by 2020, however, the sector continues to encounter challenges to supply housing in high-demand areas such as the South East of England. The number of new homes completed in the year to June 2017 is up 49% in three years. Availability of land in the high-demand areas remains low, which in turn drives up land prices and the price of new homes. This brings us back to the continued problem of providing affordable homes.
Despite the political uncertainty following this year’s general election, mid-market sales have risen year-on-year throughout the UK. While there are clear signs of improvement nationally, it is worth noting sales volumes in Central London are down 10% from 2015 and 28% from 2014. Furthermore, Savills have reported annual price falls in London for the first time since Q3 2009 at -0.6%. Price falls have occurred in both the mid and prime markets throughout London.
Political uncertainty over the last three months following the formal start of Brexit negotiations has dominated many property forecasts. It should be noted that the overall property market has faced political uncertainty for almost three years. In spite of Brexit, the government is committed to the housing market issue, which is underpinning the building of new homes. The government is looking to extend the Help to Buy scheme for first time buyers by pledging another £10 billion, which will provide over 100,000 first time buyers the opportunity to own their own home. In the last quarter signs are pointing towards increased activity over the next three years as large housing developments are continuing in developers’ pipelines. For example, the Wembley Park Scheme consisting of 458 Nr two, three and four bed flats, and the £800 million North Quay development in Poplar.
The risks which were identified earlier in the year have not changed. Sub-contractors continue to report rising costs, particularly in relation to materials such as structural steel and specialist trade labour rates. National forecasts provided by the BCIS are still suggesting that building costs generally are forecast to rise at a constant rate of around 4% per annum for the years 2017 through to 2021. The main factors which have been taken into account for this forecast are:
- Devaluation of £ Sterling (15-20% reduction in relation to value of the Euro)
- Increase in specific material prices as a consequence of the above (for example: external cladding, lifts and mechanical plant, such as chillers and generators, procured in the EU)
- Risk of a reduced pool of labour resources available from within the EU
- Increases in reported labour rates
The potential for rising costs and falling demand has presented an agonising conundrum for contractors, particularly for office building Contractors in London, where the proportion of imported materials for large scale office projects is likely to be higher than in other sectors and regions of the UK. Although upward pressure on costs is due to remain, our tender price forecast takes into account other factors such as weakening demand in the commercial and retail sectors and an increase in contractors’ appetite for work up to early 2019.
The principle London office sub-markets as defined by the Deloitte Crane Survey include: The City, “Midtown” (including Clerkenwell / Farringdon / St. Paul’s / Blackfriars), the West End, Canary Wharf, King’s Cross, Paddington, Vauxhall & Nine Elms Battersea, Stratford and White City.