Benefit of government intervention seen in infrastructure
The Q2 2020 RICS UK Construction and Infrastructure market survey results predictably show a contraction in output, as workloads decline across all sectors. Anecdotal commentary from respondents also suggests that labour shortages, some due to furlough, and difficulties in acquiring materials through the supply pipeline are causing projects to stall.
To gauge the impact of Covid-19 and subsequent lockdowns, the Q2 survey gathered additional data on project delays, productivity and bids coming in below cost. Significantly, 80% of the survey contributors noted that projects have been put hold across the UK with only 23% of contributors believing that projects which are currently on hold are likely to restart imminently. Anecdotal evidence suggests some projects are retendering due to costs.
In Q2 2020, 36% of contributors reported a decline rather than rise (net balance) in headline workloads, as they slipped across all areas covered by the survey. This including 27% more respondents reporting a fall in private housing workloads, ending a run of seven years of positive activity. A solid decline in output was also reported across public housing and the other public works categories, as some anecdotal evidence reported that council spending has seen a decline.
Meanwhile, for the first time since 2012, there was also a decline in infrastructure workloads with 17% more contributors reporting a fall (as opposed to a rise) during Q2. Commentary from respondents, suggests that as well as delayed spending due to uncertainty, a lack of labour is also impacting infrastructure projects despite the commitment to these projects still being very apparent.
The RICS market confidence indicator, a composite measure of workloads, employment and profit margins expectation for the coming twelve months remains close to a decade low. Within this, profit margins are expected to decline in the year ahead with a net balance of -41% of contributors anticipating a fall.
Interestingly, workloads are seen stabilising over the next twelve months. Activity is expected to be most resilient across the infrastructure categories with 40% more contributors expecting workloads to rise rather than fall in the year ahead. This seems to be a response to the government’s intention to boost infrastructure investment in the Budget.
Once again, financial constraints were cited as the most significant impediment to market activity with 70% of contributors taking this view. However, both labour shortages and material supply chain uncertainty were also cited in a high proportion of the anecdotal feedback. 63% of the survey contributors also noted that shortage of materials were posing a significant challenge to output.
Simon Rubinsohn, RICS chief economist, comments: “A weak Q2 survey was only to be expected given the impact of the pandemic on the construction sector. Slightly more ominously, forward looking indicators are also still fairly cautious, apart from the infrastructure sector which should benefit from recent government initiatives. However, it is important to recognise that more timely announcements around Permitted Development Rights and the planning system (both came after the survey closed) should in all probability provide a welcome lift to expectations around private housebuilding, notwithstanding the uncertain macro environment.
“Although for the time being, the signs that tenders are not consistently coming in significantly below cost estimates is encouraging, the hit to productivity evident in responses to the survey is more worrisome and if current work patterns need to be sustained for the foreseeable future, there will inevitably be cost implications.”
Hew Edgar, RICS head of UK government relations, added: “While the survey shows the inevitable impacts of Covid, it also cites barriers to construction that could be removed with a bit more impetus and innovation from government.
“The RICS medium to long term housing report and recommendations, for example, underlines our past suggestion of a new land classification of Amberfield. ‘Amberfield’ is ready to go land, identified by LA’s and communities as favourable for development in line with local needs. It would reduce costs for developers including local authorities, and enable SMEs and self/custom builders to generate homes at speed. Lifting this particular barrier, could even be some way to being that mythical silver bullet as it would address multiple concerns cited in the survey including planning delays and the drop in housebuilding, as well as spawning activity in the supply chain and thereby easing materials shortages.
“We’d also like to see further support for modular housing, which has the potential to be a star contributor to activity, with the added bonus of positively impacting green targets and product quality.
“Construction and Infrastructure need a further boost from government through long term capital investment, support for innovation, and continued streamlining of planning as the sector battles Covid. It is reassuring that the government recognises the impact of fiscal stimuli and the role that planning can play in kickstarting recovery, but it must do more.”