RICS says construction buoyant but Brexit ‘looms’

The Birmingham skyline dotted with cranes

The results from the latest RICS UK Construction and Infrastructure Market Survey Q3 2018 show a construction sector still growing thanks to big Government sponsored infrastructure programmes like HS2, Heathrow expansion and Hinkley Point C, but with financial constraints biting harder and Brexit uncertainty producing a cautious outlook for the future.

In addition, there are concerns about the emphasis on construction and infrastructure projects being concentrated in the south-east to the detriment of regions like the Midlands.

Geoff White, the RICS Policy manager for the North and Midlands said: “In addition to shoring up confidence and keeping its nerve on big ticket infrastructure items across the UK, there is also a need for Government to focus on Northern Powerhouse and Midlands Connect.”

“There is a concern in the North and Midlands that the devolution programme has stalled and Whitehall is trying to hang onto powers and funding. Government can allay such fears with a positive response to calls from metro mayors for control over the proposed UK Shared Prosperity Fund (UKSPF) which will replace the £2.4bn funding the regions are set to lose in 2020.”

The RICS survey shows that infrastructure projects and private house building are generating most of the work in the sector, with rail, roads and energy being the sub-sectors expected to see the strongest growth in output over the next 12 months or so. This activity has seen a general rise in the workloads of chartered surveyors, with about 20% of those surveyed saying their workloads had risen rather than fallen, up from +15 in Q2. The survey goes on to say that this is “unsurprising given the recent support form Government, private housing and infrastructure projects.”

Private house building and industrial categories also showed a rise in activity of between 9% – 11%. The pace of growth in public housing on the other hand has slowed considerably, and its current performance is described in the survey as a “soft patch”, with surveyor workloads falling from +12 to -7.

While current activity remains buoyant overall, there are growing concerns expressed by 75% of surveyors that financial constraints are the most significant barrier to growth, despite being down slightly from 80% of those surveyed in Q2. What has not changed is the difficulty of accessing bank finance, or credit with accompanying cash flow and liquidity challenges hampering growth in the construction sector in the longer term. 12% more respondents to the survey expect things to worsen over the next three to twelve months.

The general economic outlook is the other worrying factor highlighted in the survey. There is anecdotal evidence that Brexit is the main reason for the cautious outlook expressed by the respondents. Brexit caution could also be behind the recent rise in tender prices, as more respondents envisage greater price pressure in the building and civil engineering areas respectively, with a concomitant squeeze on profit margins as a result.

Jeffrey Matsu, RICS senior economist said:”While on going capacity constraints have supported steady workload activity, the outlook going forward is far from clear. Recent Brexit related indecision has added considerably to this uncertainty, but whatever the outcome, the pace of growth is expected to decelerate if only due to cyclical market conditions.”

The Head of RICS Policy, Hew Edgar commented:”We’ve long called on the government to secure funding to ensure Britain’s exit from the EU does not impact the delivery of vital infrastructure schemes, and encouragingly our latest survey reveals that rail, roads and energy are the sub-sectors expected to see the strongest growth in output over the coming twelve months, unsurprising given the recent announcements in these sectors.”

“However, the government must act promptly to put measures in place to keep the funding European Investment Bank (EIB), or introduce a new lender, or lending mechanism, to plug the gap created from the potential loss of EIB funds, particularly for big ticket infrastructure projects such as HS2, Hinkley Point C and Heathrow’s expansion as these are of great importance to the UK.”

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