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Financial constraints holding up construction workloads as investment drops
RICS UK Construction and Infrastructure Market Survey, Q2 2018
• Private industrial and housing sectors see the most significant easing in activity
• New business enquiries increase despite a compression in profit margin expectations
• Capacity constraints spur additional hiring as employment expectations remain strong
Construction workloads in the Midlands slowed amid financial constraints, which were reported by 80 % of respondents to be the most significant impediment to building activity, according to the results of the Q2 2018 RICS UK Construction and Infrastructure Market Survey.
In Q2 2018, 14 % more chartered surveyors reported that their workloads had risen rather than fallen in the Midlands, and, although this is still in positive territory, the Q2 figure moderated from a net balance of + 37 % in Q1. 80 % of respondents noted that financial constraints were a limiting factor to building activity – the joint highest reading in five
The results of the Q2 2018 RICS Construction and Infrastructure Market Survey point to a broad-based deceleration in the pace of output growth. A net balance of 15 % report an increase in total workloads, down from 23 % recorded in the previous quarter. Capacity remains a constraint on activity, however, with 34 % more surveyors having increased headcount in the past three months to support new work.
Growth moderated across nearly all sectors with the private industrial and housing segments seeing the sharpest slowdown. That said, a net balance of 25 % of contributors continue to report a rise in private housing activity, compared to 36 % in Q1 and an average of 30 % over the prior two years. Meanwhile, industrial workloads were flat, registering the weakest sentiment in over five years. Anecdotal evidence from respondents suggest that the housing market slowdown, coupled with ongoing ambiguity with the Brexit negotiations, is weighing on investment decisions.
Activity in the private commercial and infrastructure sectors eased to a similar extent as well with net balances of 12 % and 11 %, respectively. Rail, roads and energy are the subsectors expected to see the strongest growth in output over the coming twelve months, whereas the prognosis for communications is less positive than current conditions. Meanwhile, public sector workloads were mixed with surveyors reporting a modest acceleration to growth in housing( 12 %) but slowdown in nonhousing( 5 %).
At the headline level, the pace of new workload activity moderated from 22 % to 16 %, while repair and maintenance rose from 8 % to 14 %. When asked how business enquiries for new projects or contracts have fared in the past three months, 14 % more respondents reported an increase rather than a decrease.
The more uncertain outlook for the economy as a whole has led to a less optimistic assessment for the sector over the year ahead; even so, 41 % more contributors expect activity to rise rather than fall. This is down from 46 % the previous quarter. Likewise, a net balance of 28 % foresee an increase in hiring, compared with an average of 32 % over the four previous quarters.
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Economics
Q2 2018: RICS UK Construction and Infrastructure Market Survey
Workloads moderate amid stable expectations
• Private industrial and housing sectors see the most significant easing in activity
• New workloads moderate while R & M rises
• New business enquiries increase despite a compression in profit margin expectations
• Capacity constraints spur additional hiring as employment expectations remain strong
Although tender price expectations over the next twelve months have moderated in Q2, 54 % and 48 % more respondents still envisage greater price pressures in the building and civil engineering areas, respectively. The expected increase in tender prices may signal rising input costs and shrinking profit margins for businesses. Indeed, expectations on profit margins have eased from a net balance of 15 % to 5 % in the latest results.
Financial constraints are reported by 80 % of surveyors to be by far the most significant impediment to building activity( from 76 % in Q1), the joint highest reading in five years. Difficulties with access to bank finance and credit, along with cash flow and liquidity challenges, are often cited reasons alongside generally less favourable cyclical market conditions. Concerns regarding planning delays and restrictive regulations have not eased either and remain at elevated levels relative to when data collection began in 2012. Ranking third, and despite having eased in recent quarters, the shortage of skilled labour continues to pose a challenge for businesses, particularly with regard to professional services such as quantity surveying.
In terms of geographical breakdown, workloads are now reported to be decelerating across all regions. This is particularly the case in the Midlands and East Anglia, which was led by the first decline in industrial activity in over five years. Meanwhile, the momentum of growth in infrastructure activity has slowed noticeably in London with just 3 % of respondents reporting an increase rather than a decrease( compared to the five-year average of 27 %). Indeed, according to the latest data, this sector is now shrinking in both Scotland and Ireland.
By way of contrast, workloads remain resilient in the North and Southwest, supported by solid activity in private housing. Across all regions, Yorkshire and Humberside report the strongest pace of growth in new business enquiries and additional hiring over the past three months. This sanguine assessment extends to the year ahead where, along with the Midlands, both activity and employment are expected to improve. rics. org / economics years. Respondents have often cited financial constraints to be causing difficulties in recent reports, and more specifically access to bank finance and credit, cash flow and liquidity challenges or less favourable cyclical market conditions.
Planning delays and restrictive regulations have also been cited as continuing to limit activity in the region. Although labour shortages continue to be referenced as a factor impeding growth, the number of respondents citing this as the most prominent factor has dropped slightly.
The RICS quarterly series indicated growth eased across nearly all sectors in the Midlands in Q2, with private industrial and housing segments observing the sharpest slowdown. While the figures are still positive in all sectors minus private industrial, the pace has slowed in housing with a net balance of + 18 % of contributors reporting a rise in private housing activity, compared to + 55 % in Q1. The Midlands still continues to see higher growth in workloads than the rest of the UK in all areas minus, private housing and industrial. Anecdotal evidence suggested that the housing market slowdown, coupled with ongoing ambiguity with the Brexit negotiations, is weighing on investment decisions.
Moving to industrial workloads, across the UK, total workloads are now reported to be slowing, with the Midlands and East of England seeing the greatest difference and is led by the first decline in industrial activity in over five years. In contrast, total workloads in the North and South West were the most resilient, supported by solid activity in private housing.
In infrastructure, 18 % more contributors reported a rise rather than a fall in activity in the region( easing from a net balance of + 35 % in Q1) with respondents expecting the rail, energy and communications subsectors to post the strongest growth over the next twelve months. Meanwhile, results for public sector workloads were mixed with 15 % more contributors reporting a modest acceleration of growth in housing, compared to a net balance of + 13 % in non-housing.
Despite the uncertain outlook for the economy, 49 % more respondents expect activity to rise rather than fall in the Midlands in the coming 12 months. In a new national question, contributors were asked how business enquiries for new projects or contracts have fared in the past three months, 14 % more respondents reported an increase rather than decrease. This is alongside a net balance of + 28 % foreseeing an increase in hiring compared with an average of + 32 % over the last four quarters.
‘ a steady pipeline of work with robust expectations for the year ahead’
Ongoing uncertainty driven by Brexit and recent market events are leading businesses to postpone or curtail investments, however, which may negatively affect the industry’ s longer term growth prospects.
Although tender price expectations over the next twelve months moderated in Q2, + 54 % and + 48 % more respondents continue to envisage greater price pressures in the building and civil engineering areas, respectively. The expected rise in tender prices may signal rising input costs and shrinking profit margins for businesses. Indeed, expectations on profit margins eased from a net balance of + 23 % to + 7 % in the latest results.
Jeffrey Matsu, RICS Senior Economist commented:“ Although growth in the sector has moderated, ongoing capacity constraints have ensured a steady pipeline of work with robust expectations for the year ahead. With businesses continuing to hire to meet this pent-up demand, the effects of any uncertainty generated by Brexit or recent market events, including Carillion, may only become more evident in the longer-term.”
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