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 uncertaintly has meant that many market commentators are currently providing a range of forecasts, demonstrating the continued volatility in market sentiment.
Key Talking Points:
- Concern over levels of tenant demand have caused developers to re-consider project feasibility
- The Chancellor’s imminent Spring Budget: the need for investment in London’s transport, energy, education and social care sectors
- Revaluation of corporate rates in 2017 may encourage large firms to re-locate
- Top-end housebuilding market in London has weakened
- Mid-market housebuilding is matching government targets and outlook is fair
- Unprecedented circumstances of Brexit continue to dent market sentiment and increase uncertainty
- Upward cost pressure on materials and fuel
- Demand likely to continue to weaken in short to mid-term; Main Contractor appetite for work may increase
- General level of uncertainty remains in the industry. Constant re-evaluation of forecasts required
On the back of reasonably strong UK GDP growth estimates in Q4 2016, activity in London has remained relatively steady in the immediate aftermath of the June 23rd Referendum. The Winter 2016 Deloitte Crane Survey (data collated between April and October 2016) suggests that current office construction activity increased by 4% in Central London in the six months prior to October 2016. The number of new starts (40) has also remained considerably higher than the 10 year average (17). There has also been an increase in demolition activity by 12%.
Each of these statistics would normally be a cause for cautious market optimism. However, the picture of resilience which is depicted by current statistics masks a more pessimistic longer term outlook. Activity has in fact dropped from its historically high early 2016 peak of 51 new starts. So, while current output reflects the very healthy pipeline that was created pre-referendum, the outlook is more concerning. Savills have forecasted tenant demand to reduce by up to 50% in the coming year. Contractors providing early trades associated with new projects such as demolition and groundworks are also forecasting a reduction in activity through 2017.
The Barbour ABI Economic & Construction Review in December 2016, which provides data for all commercial and retail projects in London, states that contract award activity has decreased by almost 30% since November 2015. Month-on-month activity has contracted consistently since June, which reinforces the concern that the sector is likely to endure a significant hiatus over the next 24 months.
Despite the pessimistic statistics, Q4 2016 witnessed significant contract awards, including Axa’s 22 Bishopsgate development (October - £600m). 2017 is also likely to see a £500m contract for the first phase of the Silvertown Regeneration mixed use scheme awarded. On the flip side, longer term doubts over the viability of HS2 remain, which could adversely affect the potential for the development of commercial and office space at the 650 hectare Old Oak and Park Royal Development and regeneration of London Euston Station.
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.
While the data for UK Private Housing shows that the sector has produced the strongest growth figures of all sectors of construction, the picture in London is slightly more complicated. The pre-Brexit stamp duty reform had already started to affect the top end of the market before June 2016, however its effects have been felt disproportionally throughout the whole sector. While the number of completions has risen since Q4 2015, the number of starts since the same period has decreased by 22%. Sales have also decreased by approximately the same percentage. This is despite the fact that homes are now overall cheaper to buy for the majority, as a result of the reform. Longer term it is probably unlikely that the wider market will be affected so greatly, since starts and sales figures have now started to stabilise. London does remain the main location of activity nationally with almost 20% of all residential contract awards in the UK located in London in December 2016. This was in fact an increase from the same month in 2015.
As part of the government’s target to build 1 million new homes in the UK by 2020, planned developments in and around London will play a key role in achieving this target. Large-scale under-construction developments (Nine Elms Battersea, 18,000 homes), approved developments (Barking Riverside, 10,800 homes) and planned developments (Old Oak Common, 24,000 homes) continue to show that an underlying demand for mid-market housing in London remains. In particular, this has been demonstrated by high foreign investor demand in property located in the more affordable outer London boroughs, which has been fuelled by £ Sterling devaluation.
National forecasts provided by the BCIS are 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.