The “beast from the east” cold snap took an estimated £1bn bite off UK building in the first quarter. Add in the hiatus in infrastructure and commercial building caused by Carillion’s liquidation in January, and 2018 did not get off to the best of starts for construction generally, according to the Construction Products Association (CPA).
“The weather badly affected work on site and Carillion was the UK’s second biggest contractor,” said CPA economics director Noble Francis. “[The combined impact is that] 2018 Q1 construction is expected to be £1.5bn lower than 2017 Q4.”
Continuing lack of clarity over Brexit and its prospective impact on the wider economy has also dented construction confidence recently, say commentators.
“The sector’s difficulties have clearly been influenced by Brexit uncertainties, fuelling clients’ caution over new projects,” said Howard Archer, EY ITEM Club chief economic adviser. “Resulting lacklustre economic activity in some sectors, such as retail, has also weighed down on building.”
However, while the industry may not yet be firing on all cylinders and some forecasters expect output to at best plateau through 2018, the broad consensus is that, after several years of growth, construction is building on increasingly firm foundations that won’t be undermined by lacklustre Q1 results. This is borne out by the construction outlook from the CPA and other bodies. It’s also demonstrated by bullish comments and new growth strategies from big name housebuilders.
Perhaps most striking for the timber sector are the housebuilders’ plans and, indeed, current action, to grow offsite prefabrication, notably, timber frame, in combined strategies to increase output while offsetting skills shortages.
UK construction entered 2018 on a fairly upbeat note. Some reports asserted that it had dipped into recession in Q3 2017 as large infrastructure projects were completed without being replaced but the Office of National Statistics’ revised figures showed output had levelled or even grown slightly in the four months to October, and momentum was reported increasing in November.
The headline figure for the year was for housing. According to the National House- Building Council, registered plans to start building were up 6% to a 10-year record high of 160,606, with completions ahead 4%, reaching 147,278 – the most since 2008.
Also encouraging, according to the latest report from the Home Builders Federation, was the 21% rise in planning permissions to 351,169. Executive chairman Stewart Baseley described the record number of applications as “a clear demonstration of industry commitment to ramping up housing supply even further than the unprecedented increases of the last four years”.
According to the CPA’s Q4 Trade Survey, 22% of main contractors and 33% of specialists reported higher output in the period, while 20% of SMEs also enjoyed increased activity. This was reflected in feedback from building product suppliers, with 13% of heavyside and 50% of lightside merchants recording increased sales over Q4 2016.
One cloud was a balance of 4% of civil engineering contractors reporting a workload fall, the first since 2013 Q2. “This was the lowest balance since 2012 and raises concern about the pace of infrastructure project delivery,” stated the CPA at the time.
While most contractors reported positive new orders and enquiries, it also seems greater uncertainty, largely attributed to Brexit, also infected building products distribution, with no heavyside merchants and only 10% of lightside anticipating sales growth in 2018.
By the time the CPA Q1 2018 report was published in late April, however, some perspectives had changed for the better. Most positive were outlooks for private housebuilding and infrastructure.
“These are now the bright spots for UK construction,” said Mr Francis. “Questions remain about government delivery of major infrastructure, and Carillion’s liquidation will contribute to a 5% fall in PFI health projects this year. But infrastructure overall is expected to grow 6.4% and 13.1% next year as main civil engineering starts on HS2, the Thames Tideway Tunnel and Hinkley Point C. Private housing starts are expected to rise 2% this year and next as Help to Buy sustains new build demand.”
Additionally, said the CPA, housing associations are commencing activity under affordable homes funding programmes. Mr Francis also said half the work lost to the hard winter was expected to be recouped this year, and that most of Carillion’s work would also likely restart in 2018. Max Jones at Lloyds Bank agreed. “The contagion from Carillion’s collapse has been relatively well contained by top-tier contractors,” he said. “The impact was felt further down the supply chain, but this has prompted renewed focus among larger firms on supporting these businesses to keep projects on track.”
The CPA expects poorest performance in 2018 in the commercial sector, where “Brexit uncertainty continues to hit international investment in London office blocks and high street woes affect new retail”. Office construction, it predicts, will decline 20% in 2018 and 10% in 2019.
Leading housebuilders, however, are optimistic. Among the most bullish going into 2018 was Barratt. In the first half of its current financial year, the company reported completions 2% up at 7,324, pre-tax profit up 6.8% to £342.7m and turnover ahead 9.5% at £1.98bn. Perhaps most significantly, land purchasing was 95% higher at £641.2m, underlining “commitment to volume growth”.
And, according to chief executive David Thomas in February, the company has made a robust start to the second half, with forward sales in February 2% higher at £3.07bn.
In its first half ending October, Berkeley reported home deliveries of 2,117, compared to 2,076 the year before, representing 10% of London’s new private and affordable homes. Despite this modest volume rise, the company increased pre-tax profit by 35.8% thanks to £194.3m sales growth and an operating expenses cut of £32.6m.
Chairman Tony Pidgley described the UK political context for housing as turbulent, but welcomed moves by London and West Midland mayors to “enable developers to get on with building good homes”. Consequently it has revised earnings guidance upwards to year-ends 2019 and 2021.
Persimmon is also setting ambitious targets after what it described as its “excellent performance” in 2017. Completions were up 873 to 16,043 homes, revenue increased 9% at £3.42bn and pre-tax profits 25% at £977m.
The company also acquired 17,301 plots. Acting chairman Nigel Mills said the 2018 spring sales season had also started promisingly, with the private sales rate per site up 7%.
Persimmon is also among builders looking to increase offsite involvement in 2018, with further growth at its Castle Bromwich Space4 timber frame and roof systems plant. Its goal, it says, is to increase capacity and productivity, but also the thermal performance and affordability of its homes. Like other construction companies, it also clearly sees offsite as a means of reducing dependence on the UK’s dwindling construction skills base. It’s estimated that to meet the UK’s true annual housing requirement of 300,000 starts the country would need another 25,000 bricklayers alone and now skills shortage concerns are heightened by the potential loss of free movement of labour with the EU in a hard Brexit. Worst-case forecasts are that 175,000 building workers could be lost.
“Volumes of Space4 house kits and insulated roof systems rose 17% to 6,450 last year and the factory has capacity to support construction of 8,000 homes annually,” stated Persimmon. “Indeed we’re reviewing the opportunity to extend this capability and achieve wider national coverage.”
Underlining the company’s commitment to offsite, it added that, following the commissioning of its own brickworks near Doncaster, it would also start producing roof tiles there this year.
Countryside, meanwhile, is making a two-pronged advance into offsite timber frame manufacture. The company, which just announced first-half profits up 22% to £74m on sales up 14% to £400m, bought Westleigh housing group in April, complete with its timber frame plant, which it plans to develop.
Now it has announced plans to build a 130,000ft2, £6m closed panel factory in Warrington, with equipment due to be installed in the second half.
“We believe offsite construction is integral to meeting our growth plans and securing our supply chain for the future,” said CEO Ian Sutcliffe. “The principal benefits are speed of build, lower reliance on scarce site skills and improved build quality from automated processes.”
Berkeley has also declared its hand by acquiring the site for a 160,000ft2 modular prefabrication plant in Northfleet. Granted planning permission in January, the facility will create 240 jobs and the company anticipates 10-15% of its homes eventually being made offsite. Mr Pidgeley said the move was driven by its ambition to boost quality, but also that it addressed skills shortages.
“Fundamentally, construction has been doing things the same way for centuries,” he said. “Historically we had the labour… Now the challenge is different.”
Barratt closed its Advance offsite plant in 2007 and chief executive David Thomas said it now wasn’t planning to “follow the Persimmon model”. He also recently highlighted the challenge of preventing modular homes becoming ‘identikit’.
“A factory likes uniformity, but it’s an issue for consumers,” he said. However, he also maintained builders “must use modern methods of construction” and predicts it will account for 20% of Barratt’s output by 2020.
Last year 1,270 of its 17,500 new homes were offsite timber frame, but it is also trialling light steel frame, large format blocks, offsite concrete garages and foundation systems.
The CPA does not expect builders’ hive of activity to offset the poor start to 2018 and forecasts the industry as a whole will flatline this year. But it also predicts the foundations being laid will accelerate growth to 2.7% in 2019, followed by 1.9% in 2020.
