G&T Market Research Bulletin
- The IHS Markit/ CIPS construction PMI reading edged up in November 2018 to a four-month high. The index score increased to 53.4 in November – up from 53.2 in October. The index has remained above the 50.0 no-change mark for the eighth successive month:
IHS Markit/CIPS construction PMI
- Residential, commercial and civil engineering all saw solid rates of expansion, with residential being the fastest growing sector
- New order growth accelerated amid rising client demand and the rate of job creation was the fastest since December 2015
- Greater demand for construction products and materials contributed to longer delivery times from suppliers
- Input cost inflation was the highest since June 2018 due to higher transportation costs and rising staff salaries
- The Government has announced a further Crossrail bailout of up to £2.15bn. The latest rescue package – the third this year - will include a £1.3bn loan from the Government and £100m cash from the Greater London Authority (GLA). The Government will also loan an additional £750m to TfL for contingencies, which replaces a £350m loan provided by the Government in October 2018.
- TfL has published a revised five-year business plan setting out the impact of Crossrail on its other services. The updated plan reveals a £2.1bn drop in forecast fare revenue to £28.5bn over the five-year period compared with expectations a year ago. The business plan shows the impact of government cuts, reduced ridership and fare revenue, and Crossrail delays.
- Shares in FTSE 350 property and housebuilding companies have fallen by 12.2% so far in 2018, underperforming the FTSE 100 (which fell by 11.4%) but outperforming the FTSE 250 (which fell by 13.7%) over the same period. Only five companies listed on the index saw an increase in value (Safestore Holdings, Unite Group, SEGRO, Great Portland Estates and Big Yellow Group):
- EDF has said that it can cut construction costs by 20% by reusing and developing the supply chain skills and experience from Hinkley Point C to its next nuclear new build. EDF is behind plans for a third nuclear generator at Sizewell and will begin another round of public consultations in the first week of January 2019. However, Richard Harrington, the minister responsible for construction and nuclear, said there was a need to find new financing models (such as the ‘regulated asset base’ model used for the Thames Tideway Tunnel) for new plants:
“We are trying extremely hard to grasp a new financing model. Because it is a limited industry if it simply ends in the government writing cheques for billions of pounds.”
- MPs have called for mandated 30-day payment terms in an attempt to tackle the endemic of late payments to suppliers in the construction industry. The committee produced a report suggesting that the Government should give the Small Business Commissioner powers to fine those who pay late. The report also highlighted the abuse of payment retention practices as a major issue, suggesting that independently managed project accounts should be introduced which would hold retention money.
- Mark Castle, deputy COO of Mace, has said that it is extremely difficult for contractors to achieve margins greater than 2% at a pre-tax level because of the way the current business models work and the unreasonable levels of risk contractors are being forced to take. He said that:
“When the market hardens, you see the market changing and we go back to the bad old days of single-stage, lump sum bidding which in itself drives a very different set of behaviours amongst clients and their professional teams.”
- Theresa May announced that the planned Brexit vote would be delayed after admitting that it would be defeated by a significant margin. More than 100 Conservative MPs have spoken out against the draft exit treaty, directing much of their criticism at the “backstop”, which would keep the UK in a close customs arrangement with the EU if another solution is not found to prevent a hard Irish border. The Prime Minister, who won a vote of confidence last week, travelled to Brussels seeking additional legal and political assurances on the question of the Irish backstop at the bloc’s regular summit in order to prevent a hard border in Ireland.
- The European Court of Justice has ruled that the UK has the right to unilaterally revoke its notification to leave the EU (Article 50) and halt Brexit without the permission of other member states.
- UK GDP growth grew by 0.4% in the three months to October 2018 – slower than the 0.6% in the three months to September 2018. The slowdown was attributed to a softening in the services sector and flat manufacturing growth. Construction however, whilst slowing slightly, continued its recent solid performance and saw growth in both housebuilding and infrastructure.
- UK house price growth stalled in November. According to the Halifax, annual prices rose just 0.3% year-on-year – the slowest pace since December 2012.
- In the event of a disorderly Brexit, the Bank of England has said that it would allow banks to use their ‘rainy day’ funds (currently 1% of a bank’s total assets) typically reserved for times of economic trouble. Banks and lenders capital buffers could be lowered in order to maintain £250bn of lending to the wider economy.
- According to a revised estimate from the country’s cabinet office, Japan’s GDP shrank by more than initially reported in Q3 2018. GDP fell by 0.6% in the third quarter – a much sharper contraction than the initial quarter-on-quarter reading of -0.3%. The weakness appears to have been due primarily to temporary supply constraints linked to a string of natural disasters during the period.
- Eurozone investor sentiment has fallen to its lowest level in four years over growing concerns of a potential global economic downturn. The measure from Sentix (a German research house) fell to -0.3% in December from 8.8% in November and 32.9% at the beginning of the year. Trade tensions, Italy’s budget crisis, unrest in France and Brexit uncertainty are all contributing to lower sentiment.
- According to the Australian Bureau of Statistics, growth in Australian home loans accelerated by 2.6% in October 2018 as a result of stronger financing for owner-occupied housing. The unexpected growth came after a 3.8% decline in monthly headline loan growth in September 2018.
- The IMF’s chief economist has said that the US is likely to feel the effects of slowing global growth. The IMF expects growth to progressively slow in the US throughout 2019 and 2020 despite the Federal Reserve preparing for a likely short-term interest rate rise later in December 2018.
COMMODITIES & MATERIALS
- Key commodity imports into China fell in November. The volume of imports for materials such as copper and iron ore are down from the previous year following China’s imposition of tariffs on US imports. Import volumes of copper and iron ore fell 3% and 8.8% respectively in the year to November 2018.
- OPEC has agreed to cut oil production by 1.2m barrels per day sending crude prices higher. OPEC and its oil producing allies met in Vienna where Saudi Arabia put pressure on members to join the cut. Brent crude jumped to $63 a barrel after the cut was revealed.
- Anglo American, the miner, estimates that by 2030 there will be a need for an additional 5.6m tonnes of copper production capacity in order to satisfy demand from cleaner forms of energy used in electric car batteries and wind turbines.
ANNOUNCEMENTS IN THE CONSTRUCTION PRESS
- Sir Terry Morgan, chair of the Crossrail and HS2 programmes, has resigned from both roles after disappointment at Westminster about the delays affecting Crossrail. Allan Cook has been appointed as the new chair of HS2, and a Crossrail successor will be announced in due course, the Department for Transport said.
- Interserve is negotiating the terms of a rescue finance plan with creditors as it battles its £650m debt pile. This is the second time this year that Interserve has sought to restructure its finances. The rescue plan is likely to involve the conversion of a large chunk of Interserve’s debts into new equity (a debt-to-equity swap), parts of which may be sold to existing shareholders and potentially other investors. The company then would seek to raise fresh cash and attract new investors early next year, or go private if this is not successful. Interserve said:
“These discussions also involve proposals to amend the Group's current financing agreements, including the extension of the maturity dates and repayment profiles of the existing facilities.”
“The fundamentals of our business remain strong. The deleveraging plan will give Interserve a strong long term capital structure and provide a solid foundation on which to build the future success of the Group.”
- Airbnb has announced plans to design and build sustainable smart homes. Its new initiative, Backyard, will use modern manufacturing techniques, smart technology and insights from its hosts to create adaptable green homes with a waste-conscious design. The company plans on building prototype units for testing by autumn 2019.
- TfL has revealed a shortlist of three bidders that are through to the next round of a joint venture project to build and manage a 3,000-home build-to-rent portfolio. Argent Related, Grainger and Greystar are all in the running to become TfL’s preferred investment partner on the development in which will TfL take a 49% ownership stake.
- Berkeley Group plans to start construction of modular homes once its off-site factory in Kent is operational in 2020. The factory will employ more than 200 people which will include apprentices from a local college.
- The wholesale redevelopment of the Elephant & Castle shopping centre and the London College of Communications sites have been approved by Sadiq Khan. The scheme, across two sites totalling 3.56ha, will include 979 homes for the rental market (of which 35% will be at affordable rent, including 116 social rent homes). The scheme will also include a new campus building for the University of the Arts London, improved leisure and retail uses, flexible workspace, a new Northern Line ticket hall and station box and generous public realm. (G&T have been appointed as Principal Designer and client CDM adviser, and is also providing Project Management and Cost Management services)
- UK outsourcer Amey is expected to be sold to a private equity firm in 2019. Ferrovial, its Spanish owners, is in talks with PAI Partners and Greybull Capital over a potential sale of the business and confirmed that it has appointed an adviser to explore a sale. Amey’s profits in the UK were wiped out last year when it had to set aside £209m to cover potential losses on a road contract in Birmingham, where it is still in a legal dispute with the local authority.