4Th Nov Mrb

Market Research Bulletin: 2019 sees a record surge in purpose-built student accommodation

CONSTRUCTION

  • The IHS Markit/CIPS UK construction PMI rose to 44.2 in October – up from 43.3 in the previous month. The latest reading remained close to the 10-year low seen in June, as domestic political uncertainty and the economic slowdown continued to weigh on demand:
    • Civil engineering works contracted at the sharpest pace since October 2009 and housebuilding also decreased at a faster rate
    • Commercial construction fell for the tenth month running, but at the slowest rate since May
    • New orders dropped for the seventh month in a row, resulting in another fall in employment
    • Input cost inflation was the lowest for three-and-a-half years


  Construction PMI   Baseline


  • Research by student property platform StuRents has revealed a record surge in purpose-built student accommodation (PBSA). In the UK 34,000 new PBSA beds have been brought to the market in 2019, representing a year-on-year growth of 5.3%. Their report also found that there are 120,000 beds that have either been approved or are awaiting approval in the supply pipeline, and that by the end of 2020 the number of PBSA beds will surpass university-supplied beds for the first time.
  • Dame Judith Hackitt has been retained by the Government to provide independent advice on how to implement the recommendations contained in her Independent Review of Building Regulations and Fire Safety. The Ministry of Housing has committed to take forward all of her recommendations in the report and to form a new Building Safety Regulator that will oversee the design and management of buildings.
  • The latest state of trade survey from the Federation of Master Builders (FMB) – which typically comprises small construction firms – found that the number of companies reporting a growing workforce has fallen from 19% in Q2 2019 to 15% in Q3 2019. Consequently, employment levels for SME construction companies remained in negative territory for the second quarter in a row, following a five-year period of positive growth. FMB chief executive Brian Berry said:

“Stagnating staffing levels is a concerning sign, and if this trend continues, we could see the capacity of the industry shrink at a time when builders are needed more than ever. Skilled workers are scarce in the construction industry, and it is critical we keep people employed in the sector. The fact that SME firms are having to lay people off and are holding off taking new people on is worrying.”

Brian Berry, Federation of Master Builders
  • The Report of the first phase of the Public Inquiry into the Grenfell disaster was published last week. The report, written by former judge Sir Martin Moore-Bick, has called for owners and managers of high-rise residential blocks to be required by law to provide local fire and rescue services with up-to-date plans of every such building. The report also said that the reason fire spread so quickly across the tower was due to the presence of ACM cladding with polyethylene cores, “which acted as a source of fuel”.
  • According to KPMG that the number of building firms going into administration jumped by 55% in the third quarter of 2019. In Q3 2019 there were 76 firms that went into administration - up from 49 firms in Q2 2019. Economic uncertainty and high input prices have put pressure on the supply chain, resulting in a spike in the number of insolvencies. KPMG’s UK head of restructuring Blair Nimmo said:

“The building and construction sector continues to feel the strain of the ongoing economic uncertainty across the UK, with a softening in activity and delays in investment for large construction projects.”

Blair Nimmo, KPMG


UK ECONOMY

  • Following months of Brexit deadlock, the UK will go to the polls on 12th December 2019. By a margin of 438 votes to 20, the House of Commons approved legislation paving the way for the first December election since 1923. Meanwhile, Boris Johnson formally accepted the EU’s offer of a Brexit “flextension” until 31st January 2020 (meaning the UK could leave before the deadline if a deal was approved by Parliament), but described the delay as an “unwanted prolongation” and urged the EU to rule out any further extension.
  • Chancellor Sajid Javid has ruled out big tax giveaways in his next Budget and instead will focus on boosting the UK’s infrastructure. The Government made it clear that its initial preference will be for higher public spending over tax cuts. The announcement comes as new figures show that the government net borrowing over the first half of the fiscal year was 22% higher than the previous year — the biggest rise in first-half borrowing since 2003-04. Higher spending drove the increase, with tax receipts growing at a more modest pace.
  • The UK population is set to increase at a slower pace than previously expected due to falling fertility and gains in life expectancy tailing off. The ONS’ long-term projection published last week showed that the population was now expected to grow by 3m to 69.4m in mid-2028. This is 0.4m less than under previous projections published two years ago.



WORLD NEWS

  • US economic growth cooled slightly in the penultimate quarter of 2019 with GDP expanding at an annualised rate of 1.9% - down from the 2% annual growth seen in the second quarter. Economists had expected a growth rate of 1.6%, anticipating that consumer and government spending would fall further than it did.
  • The Aviva Investors’ 2020 Real Assets Survey – a survey of 500 leading pension funds and insurance companies across Europe – found that 51% of insurance companies and 31% of pension funds expect to increase their investment in real estate assets over the next 12 months. Whilst investors cited various challenges over the next 12 months (most notably the political and economic uncertainty and a limited supply of attractive investment opportunities), certain assets (such as long-income property and infrastructure) are likely to experience high investor demand.
  • Global foreign direct investment contracted sharply in the first half of 2019 according to the OECD. Trade tensions and an increase in the number of new investment restrictions and regulations led to investment flows falling by a fifth in the first six months of 2019 compared with the second half of the previous year, to $572bn.
  • Facebook has pledged to invest $1bn over the next ten years to help alleviate California’s housing crisis. Up to 20,000 new units will be built through a combination of public-private partnerships, loans and development on Facebook-owned land in Menlo Park. Facebook will join Google (who also recently announced a $1bn 10-year plan) to help build more affordable housing units that, according to CFO David Wehner, will “help essential workers such as teachers, nurses and first responders live closer to the communities that rely on them”.


COMMODITIES & MATERIALS

  • Last week, the London Metal Exchange hosted its annual gathering of the global metals community (LME Week). Outlook for most key metals is weak as the US-China trade war and a synchronised global slowdown pummel consumption and investor sentiment. With the exception of nickel and lead, which are up more than 44% and 18% respectively, all of the major LME-traded metals have either fallen or flatlined the past year.


Non-Ferrous Metals: LME Annual Price Change (Oct 18 - Oct 19)


  • A new white paper published by Major Infrastructure – Resource Optimisation Group (MI-ROG) has argued that introducing a national resource exchange mechanism (REM) would encourage the widespread re-use of materials in construction and deliver a range of environmental, cost-saving and social benefits. According to the report, construction is responsible for 60% of the total waste generated in the UK, and suggested that creation of a national REM (a way for surplus materials, products, components to be traded or shared rather than wasted) would significantly reduce waste in construction and help the UK meet its net zero carbon emissions 2050 target.


ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • Family-owned regional contractor Simons Group has gone into administration, putting 125 jobs at risk. The firm is thought to have run into trouble because of problems with the changing UK retail market – its core market. The joint administrator Nathan Jones said:

“After a period of challenging trading and contract delays resulted in unsustainable cashflow difficulties, the directors of Simons Group were left with no choice but to enter the business into administration”

Nathan Jones, Joint Administrator

The administrators said that the focus would be on implementing an orderly wind-down, ensuring that any live contracts are transferred across to new contractors with minimal disruption. The administrator will also be looking to market some elements of the business for sale.

  • The first tunnel boring machine on the Thames Tideway Tunnel project has broken through to complete the southern section of the Frogmore Connection Tunnel. The 1.1km Frogmore Connection Tunnel (which runs from Wandsworth to Fulham) will take sewerage overflows into the main 25km super sewer where it will be transferred for treatment instead of polluting the River Thames. G&T is providing contract administration, procurement and supply chain management services on the project.
  • The Government has announced which contractors have won places in the first tranche of a £30bn public sector construction framework. Contractors have been named for 31 of the 38 sub-lots with the remaining awards to be published shortly. Mace, Laing O’Rourke and Kier are all among the 128 firms to secure places on the framework, which is set to run for the next seven years. Of the 128 successful firms, 57 are small and medium-sized enterprises.
  • Adam Neumann, the cofounder of WeWork, has surrendered his high-vote shares, chief executive role and chairmanship in exchange for an urgent cash injection from SoftBank. After a failed IPO, reported net losses and various operational challenges, the company’s valuation dropped from $47bn in January of this year to $8bn, prompting investor and hedge fund manager Bill Ackman to say:

“I think WeWork has a pretty high probability of being a zero for the equity, as well as for the debt... As someone who has put good money after bad, I think this looks like putting good money after bad, and SoftBank should have walked away.”

Bill Ackman, INVESTOR AND HEDGE FUND MANAGER
  • Derwent London has agreed and signed a new revolving credit facility from HSBC UK, Barclays and NatWest. The financing includes a ‘green’ tranche of £300m, making it the first revolving credit facility provided to a UK REIT that meets the LMA Green Loan Principles. The tranche is available to fund activities that satisfy the criteria set out in Derwent’s newly established ‘Green Finance Framework’.

If you have any questions or have some news/information to contribute to the bulletin, please contact Michael Urie, or Nick Rowe

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