Private housing workloads upholding growth in region’s construction sector

Private housing workloads are upholding growth in the Midlands construction sector despite political uncertainty, but supply is still falling short, a report today warns.

According to the RICS UK Construction and Infrastructure Market Survey, Q1 2019, once again, workloads in private housing are holding up the region’s construction sector, as a net balance of +30% of contributors report a rise, compared to +26% in Q4.

While the strongest sector, this is lower than pre-referendum, as political uncertainty and tax changes have subdued growth in the sector in recent years. In the four quarters preceding the referendum vote, 51% more respondents were reporting stronger growth in this area.

To address the shortage of housing, in the near term, the contribution to growth in workloads provided by permitted development rights (PDR) is likely to remain a supportive factor, but recent RICS research on commercial to residential conversions has identified several areas of concern related to quality and design.

The future of PDR, and its contribution to the government’s target of delivering 300,000 additional homes, will need to ensure that regulatory safeguards and minimum dwelling standards are upheld.

Amidst ongoing uncertainty, looking across the region’s construction as a whole, growth in workloads only marginally grew this quarter. At the headline level, only +14% more respondents reported a rise in workloads this quarter, up only slightly from +13% in Q4.

In the public sector, growth in activity slowed across both housing and non-housing.

Workloads in infrastructure were also subdued this quarter as only +15% more respondents reported a rise, down from +20% in Q4. Given Government’s focus on HS2, the rail subsector appears more resilient to political turmoil, as respondents expect to see the strongest growth in this area over the next year.

As the survey results remain subdued, surveyors continue to report the impact that financial constraints are having on building activity. This quarter, 81% of surveyors cite this as an issue, making this the highest reading recorded in the past five years. Anecdotally respondents suggest that stricter conditions that are being placed on firms by financial institutions are limiting growth, with SMEs being particularly impacted.

Planning delays have also been a long running concern for respondents to the survey. However, since the start of 2018, these concerns have eased and while they are elevated they are now in-line with the average of the past six years. This has the potential to ease the housing shortage and speed up the delivery of developments. Interestingly, the number of respondents reporting a shortage of skilled labour reached its lowest level in five years. Whilst respondents still struggle to employ all skill sets, particularly quantity surveyors, only +50% more highlight this as an impediment to growth.

In addition to the above, prolonged political and economic uncertainty has taken its toll on market sentiment. Looking ahead, contributors are the least optimistic they have been in six years. Only +19% more respondents expect to see workloads, employment and profit margins rise in the coming twelve months.

When broken down however, +30% more respondents expect activity in the Midlands to rise in the coming year, up from +26% in Q4, and +18% more respondents expect to see a rise in new hires for the year ahead. Expectations on profit margins remain flat for the third consecutive quarter, as tender price expectations slow.

Jeffrey Matsu, RICS economist, said: “Financial constraints continue to impede growth across the industry as lenders respond to recent events such as Carillion and Interserve with less generous lending criteria, particularly to SMEs. Although market confidence has become more subdued in recent quarters, the outlook for workloads and employment growth has modestly improved. While prolonged Brexit-related uncertainty has taken a toll on business investment, its resolution has the potential to unleash pent-up demand that can be supportive of future growth.”