Where is the UK construction industry headed? Opportunities & threats in 2018 and beyond

The UK’s construction industry has dominated newspaper headlines in recent months. Some read that the sector is “returning to growth” or even “bouncing back”, with statistics from all quarters showing that construction had recovered - in terms of output, demand in new orders and buying power - after two consecutive quarters of contraction. Meanwhile, several high-profile commercial projects such as the High Speed 2 (HS2) rail project are being delayed, and industry stalwarts like Carillion have encountered difficult trading conditions.

What’s really happening in the construction industry, then? In numerical terms, it appears to be doing well: the IHS Markit/CIPS UK Construction PMI, as close to an official estimate of the sector’s health as you can get, grew to hit 53.1 in November (up from 50.8 in October and 48.1 in September; a value above 50 indicates growth, below it indicates contraction). This increase was the highest seen in five months, the report’s authors wrote, and “signalled a solid rate of business activity growth across the construction sector”.

This growth has been almost entirely fuelled by house building, rather than commercial or infrastructure projects, however. Official growth figures from the Office for National Statistics show that from January to June 2017, the construction sector shrunk as a number of large commercial and infrastructure projects came to an end without new work to replace them.

The Markit survey backs this up, revealing that the industry’s recent growth has been propelled by the house-buying sector, where resilient demand and supportive policymaking by the government have driven the upturn. The Help to Buy equity loan system, whereby new home buyers can access interest-free loans to boost their deposit pots, and plans set out by Phillip Hammond in the Autumn Budget to build 300,000 new homes a year will hopefully see this trend continue.

New homes, new opportunities
Of course, a time of reawakening growth can realise many opportunities for the savvy business buyer. With businesses and assets likely to be undervalued on the back of a few quarters of poor performance – and better performance on the horizon – there might be some excellent opportunities to acquire an underperforming company in the short term.

This seems particularly true in the residential building sector, with the rate of new houses to be built in the UK increasing. Last year, 184,000 new homes were built in England – with 217,000 added to the total stock through renovations and similar projects – which is some way shy of the government’s projected figure of 300,000 new dwellings to be built on an annual basis.

In other words, there will be more contracts and more opportunities to secure some reliable business in the next few years. Acquiring a construction firm could instantly place you in a position to be able to exploit this increased activity. Some savvy acquirers are quick to realise this potential: one recent example is Northern Ireland firm McMullen Facades which was bought by JRL Group, who are currently constructing Britain's tallest residential building in London's Canary Wharf, just days after it was placed in administration.

Commercial options
There is also the potential of the commercial building and civil engineering sectors to consider. Despite the overall health of the construction sector, these two sub-sectors have suffered in recent years. Commercial construction was the weakest performing area of activity in November, according to Markit, continuing a trend seen for the past year, while civil engineering activity fell for the third month in a row.

These pressures are slightly harder to pin down, but Tim Moore – associate director at IHS Market and author of the sector report – writes that “heightened economic and political uncertainty” was a driving factor in repressed commercial development activity.

This can be explained in part by businesses’ concerns that Brexit will damage the UK’s financial clout, reducing investments that companies might make in new building projects, and particularly harm the financial and professional services sectors. That could mean that areas like Canary Wharf are suddenly home to fewer skyscrapers than they might otherwise have been.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that “signs that the Brexit divorce terms will be agreed imminently, enabling future relationship talks to begin, might help corporate confidence to recover”.

These deals are set to go ahead before the end of 2018 and, without speculating on their content, could put an end to uncertainty hanging around industries like construction. For those looking for new opportunities in businesses to buy, this could be good news: commercial building firms are likely to be undervalued or considered riskier endeavours in the short-term.

Another pressure of Brexit, however, is the availability of cheap labour, provided in a large part by EU citizens residing in the UK. The construction sector represents 10 per cent of the UK’s total employment, with 8 per cent of the industry’s workforce stemming from other EU countries, according to figures from the Royal Institution of Chartered Surveyors.

With less labour available and projects put on hold, there could be yet more options for a business buyer to secure an asset that has potential to grow.

Medium term health
In the medium term, the outlook for the commercial and infrastructure sectors is positive. Some respondents to Markit’s survey said that they were confident that upcoming tender opportunities for commercial buildings and infrastructure programmes, particularly in the energy and transport sectors, would help to support workloads and pick up the slack from developments such as Crossrail, which is anticipated to finish soon.

Indeed, confidence is ticking up among the respondents to PMI’s survey. Though it remained below mid-2013’s peak optimism – fuelled in part by the housing bubble – confidence in the industry has already been propelled by new invitations to tender.

According to statistics from the Office for National Statistics, construction orders saw record growth in the third quarter – July to September – 2017, growing by 37.4 per cent on the last quarter, propelled by several high-value contracts relating to HS2. Housing orders also grew by 9.5 per cent.

These statistics alone are an indication that despite recent downturns, the commercial and residential construction industries are due for a big rebound, further propelled by new policy-making and, finally, some Brexit certainty. For those business buyers with experience in the sector, there could barely be a better opportunity to find and grow a new company, particularly given the stock of distressed SMEs in the sector who could benefit from steady leadership and a renewed sense of purpose.

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