Construction prices are predicted to fall by as much as 6% by the end of 2018, according to Arcadis in its latest Market View.
With the true impact of Brexit only likely to hit the market in 2017, continuing uncertainty could have a significant impact on an industry that was already seeing falling demand before the Brexit vote, says the consultant.
Arcadis says that construction entered a technical recession in June with levels of output falling by 3% in the first half of the year and that with the industrial and commercial sectors particularly sensitive to economic cycles, reduced confidence could cause a further contraction and result in growing competition among contractors for workload.
“In our view, improving post-Brexit sentiment understates potential for a slowdown in construction investment,” it said.
Contractors could find themselves caught between a rock and a hard place, with input costs rising even as demand falls away.
Arcadis has calculated that materials costs have increased by 6-8% in the last year, due in part to the devaluation of sterling, and says that this poses a risk to commercial or residential projects where dollar or euro denominated expenditure could make up 20-30% of costs.
“However, the extent to which this uplift will be passed onto clients will be directly affected by future workload. Whilst the infrastructure sector is expected to continue to expand, with the National Infrastructure Delivery Plan, which outlines a £483bn investment, remaining unchanged, demand in other private sectors such as offices, residential and retail is much less certain. If falling market confidence causes clients to delay their investments, it could trigger a price correction.”
Depending on the degree of slowdown, Arcadis forecasts that building prices will either stabilise at current levels or could fall by up to 5% during 2017. Current procurement activity in London, for example, suggests an increased appetite for bidding ahead of an anticipated fall in demand.
“Notably we could see a construction market with a number of speeds and not all sectors will be exposed to major price corrections – in the infrastructure sector, steady demand should enable suppliers to maintain price levels. However, in the high-risk prime residential sector, Arcadis anticipates that fewer contractors will be willing to bid for work.”
“Increased costs will continue to eat away at contractor margins, even as prices fall. At the start of 2016, only 3% of the industry’s workforce were registered unemployed, compared to an overall UK figure of more than 5%. This means that skills shortages will remain an inflationary factor, with labour input costs expected to rise by up to 6% per year in the short term.
“In many sectors the balance of power is shifting to clients. Whether these clients continue to build, and how they choose to procure will have a significant impact on how the construction cycle unfolds and by how much construction prices adjust.”
