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Market Research Bulletin: Fire and building regulations in the wake of Hackitt, ‘project bank accounts’ and new social housing

CONSTRUCTION

  • The headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index posted above the crucial 50.0 no-change value for the ninth consecutive month in December 2018. However, the index came in at 52.8 in December 2018, down from 53.4 in the previous month:


IHS Markit/CIPS construction PMI

  Construction PMI   2
    • Subdued demand conditions were a factor behind softer output growth in December
    • Commercial was the worst performing category with new orders expanding at the slowest rate since May 2018
    • Higher public sector gross investment helped civil engineering activity see its fastest growth for over one-and-a-half years
    • New business volumes rose for the seventh successive month but at a slower rate of expansion than in November 2018 Construction companies noted that heightened political uncertainty was causing delays to investment decisions, especially to commercial development projects
  • The Government has said that it will fully implement the recommendations made in Dame Judith Hackitt’s review of the building and fire regulations. A consultation has been promised by spring 2019 which will address items such as the scope of the regulatory framework, duty-holder responsibilities and whether to establish a statutory joint competent authority. Eight firms have already signed up to the Government’s ‘early adopters’ programme under which new systems will be trialed ahead of changes to the building regulations.
  • Labour MP, Debbie Abrahams, has proposed a bill (the Public Sector Supply Chains (Project Bank Accounts) Bill) under which all payments on government and public authority contracts be made through a ‘project bank account’ system ensuring prompt payment to small businesses. The bill is set to have its first reading on 15 January.
  • A cross-party commission has urged ministers to embark on a government-backed housebuilding programme to deliver 3.1m new social homes in the UK over the next 20 years. The programme would cater for the homeless, families trapped in private rented homes and over-55 renters. One of the 16 commissioners, Lord O’Neill said:


“There needs to be a profound shift to see social housing as a national asset like any other infrastructure... It is the only hope the government has of hitting its 300,000 homes-a-year target.”

  • WeWork, the flexible office space provider, nearly halved the amount of new space it signed up in London in 2018. In 2017 the group took on nearly 1.2m sq ft of new space to make it the city’s largest private occupier of office space. Whilst WeWork remains London’s largest flexible office provider, in 2018 this dropped to just 651,446 sq ft of property as competitors ramp up their own acquisitions. Strong demand and a shrinking development pipeline have reduced the amount of suitable buildings to lease.
  • In the Builders’ Conference BC Live contracts league table Wates won more UK construction work in 2018 than any of their competitors. In 2018 Wates won 70 construction contracts with a total value of £2,826m. Wates were closely followed by Kier who won 171 contracts with a total value of £2,817m.
Builders Conference Table
  • SIG, the building materials group, warned that difficult conditions in the British and continental European construction markets will continue to hit its performance. SIG’s revenues fell 4.7% on a like for like basis in the second half of 2018 as key markets slowed materially. Of the UK market it said:

“Commercial construction demand remained dampened by macroeconomic uncertainty, house price inflation slowed and secondary housing market transactions continued to fall.”

UK ECONOMY

  • In November 2018 UK consumer credit growth fell to its slowest rate since March 2015. The annual growth rate of consumer credit, which includes borrowing using overdrafts, personal loans and credit cards, slowed to 7.1% in November, reflecting weaker flows of new lending.
  • The British Chambers of Commerce (BCC) said the economy is in a “weak holding pattern” amid persistent Brexit uncertainty and rising cost pressures. Their recent survey found that manufacturers are experiencing a sharp rise in labour shortages and upward inflationary pressure on raw material costs.
  • UK manufacturers reported near-record increases in stockpiling during December 2018 ahead of the UK’s exit from the EU. The upswing of the IHS Markit manufacturing purchasing managers’ index from 53.1 in November to 54.2 in December was largely due to stockpiling activity rather than a more permanent improvement in economic activity.
  • Chris Williamson, chief business economist at IHS Markit, has said that the UK PMI surveys point to just 0.1% GDP growth in Q4 as Brexit uncertainty intensified, hitting spending and investment. He also commented that forward looking indicators look very subdued.


WORLD NEWS

  • Eurozone growth forecasts for 2019 have been lowered to reflect global trade war concerns and political uncertainty. Economists expect Eurozone GDP to grow just below 1.6% this year – 0.4% lower than forecast in March 2018. It compares with expected growth in 2018 of 1.9% and would mark a second consecutive annual slowdown.
  • The median price of a Manhattan apartment has fallen below $1m for the first time in three years as real estate agents struggle to shift a surplus of luxury properties. Potential buyers are concerned about the outlook of the US economy. The median price paid for co-operatives and condominiums in the prime borough fell 5.8% to $999,000 in the year.
  • Delegates from the US and China held face-to-face negotiations in Beijing in an attempt to ease the bitter trade war between the two economies. As part of a 90-day truce in the escalating spat the US has postponed a planned increase of tariffs on $200bn worth of Chinese imports from 10% to 25%. Beijing has compromised by suspending additional tariffs on US cars and by buying US soybeans.
  • The European Central Bank (ECB) has said that interest rates will remain unchanged through the summer of 2019 in order to support the Eurozone economy and increase inflation. Deteriorating economic outlook has led many to believe rates will not move until mid-2020.


COMMODITIES & MATERIALS

  • Oil prices continue to rise higher as the market absorbs cuts in OPEC production that come into force later this month. On 10 January 2019 Brent Crude reached $61.85 a barrel – an increase of more than 14% since the beginning of the year.
  • The Swiss chemicals company Sika AG has agreed to buy French rival Parex in $2.55bn deal as it aims to consolidate the building materials market. Sika wishes to increase its presence in the mortar and waterproofing business.
  • An analysis of the most recent data from the Department for Business, Energy and Industrial Strategy (BEIS) shows that price indices for construction materials continue their upward movement, maintaining inflationary pressure on input costs. Imported plywood has seen the largest cost increase in the past year increasing by 15.7% between Oct 2017 – Oct 2018. Prolonged weakness in sterling has propelled the cost of imported materials and components.


Materials

ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • The Scottish Government has confirmed that it will consult on plans to reform retention practices in light of the slow progress being made on the UK-wide Aldous bill, which has been delayed four times since its second reading was due. SNP business minister Jamie Hepburn said:

“The Scottish government believes in fair and transparent working practices and a culture that supports prompt payment is essential to secure investment and jobs.”

  • Vinci, the French multinational, has bought a 50.1% controlling stake in Gatwick Airport as it considers infrastructure expansion to accommodate higher passenger volumes. Gatwick would like to move its standby runway in order to bring it in to full use. The proposals contain £1.11bn infrastructure investment plan over the course of the next five years which include an expansion of the rail station, a new departure lounge floor and two new multi-storey car parks. G&T is providing project controls services for the design team on the Pier 6 project at Gatwick Airport.
  • McAvoy have been appointed to build a regional office for Homes England in Cambridgeshire that will use modules that have been manufactured off-site. The decision to use modular comes as the Government intensifies efforts to promote modern methods of construction as a way to boost productivity in the sector.
  • Interserve announced that the key commercial principles on which its deleveraging plan (i.e. the process of converting debt into new equity) is expected to be based have been conditionally agreed. The contractor is in rescue talks with creditors after ongoing losses on problem jobs left it struggling to service its £650m net debt pile. Consideration is also being given to the possibility of placing its successful subsidiary, RMD Kwikform, into a separate holding company owned by Interserve’s lenders.
  • Kier’s recent rights issue saw just over a third (38%) of its newly issued shares taken up by existing investors, with the balance going to institutional investors such as pension funds. The net proceeds of the rights issue (£250m) will be used to repay part of the balance drawn under its revolving credit facility.
  • Mace has been appointed as the main contractor to build a new £150m arrivals-only terminal at Stansted Airport. Work on the 39,000m2 terminal, which is due to start in the spring, is part of the airport's £600m transformation which will also include a dedicated departures terminal. G&T has delivered independent assurance services to Stansted Airport on the programme, including a review of the tender enquiry and submitted bids for the new arrivals building.
  • TfL finance chief has revealed that the group is factoring in delays of up to 18 months as “Significant parts” of the core Crossrail infrastructure remain unbuilt. Mark Wild, the railways chief executive, has said that there are still, “thousands of hours of construction work to do” alongside the testing of the railway. The delays could cost TfL £600m over the next three financial years.
  • Laing O’Rourke has agreed terms with its financial partners for the 2019 refinance of its UK business, which will deliver new banking facilities until 2022. The arrangements are in the process of being taken through final credit approval protocols by each lender organisation. Their 2018 year-end accounts are being finalised and will be filed, ‘as soon as possible’.

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