19 June 2

Market Research Bulletin: key themes from the BCO conference and ONS construction figures show output grew by 0.4% in the 3 months to April

CONSTRUCTION

  • UK construction executives reported a contraction in business activity in May. The IHS Markit/CIPS UK Construction PMI dropped to 48.6 in May 2019 from 50.5 in the previous month – well below market expectations of 50.5.
    • Steepest contraction since the snow-related downturn in output during March 2018
    • Commercial work fell the most since September 2017
    • Civil engineering activity declined for the fourth consecutive month as clients decided to hold back on major spending decisions in response to political and economic uncertainty
    • Housebuilding growth eased to a three-month low
    • New orders declined the most since March 2018
    • Input cost inflation eased to the lowest since June 2016

IHS MARKIT/CIPS UK CONSTRUCTION PMI (SOURCE:ONS)

  UK Construction PMI   Baseline


  • G&T attended the recent BCO conference in Copenhagen, which focused on the themes of work-life balance and wellness. Several examples were given of Danish architecture enhancing attitudes to workspace and integrated public realm with coordinated investment. The new 2019 Guide to Specification was also launched, updating the benchmark for best practice in office specification and which saw G&T lead the cost and value section of the Guide. A plenary address by Lord Hague also raised the prospect of a general election in September following the Conservative leadership contest, giving little hope of any political certainty over the next six months.
  • Philip Hoare, Atkins’ new global president, has called delays to high-profile infrastructure projects an “embarrassment”, suggesting that construction needed to look at other sectors to see the way intelligent use of technology can improve productivity. He said:


“We just don’t deliver what we said we’d deliver and there’s no reason we can’t get better and why we can’t make that work.

There's lots of talk and lots of studies about how other sectors have embraced technology and that's absolutely where I want us to be.”

Philip Hoare, Global President, Atkins
  • According to the latest ONS construction figures, output grew by 0.4% in the three months to April 2019 compared to the previous three month period. The ONS said the increase was driven by the all repair and maintenance sub-sector, which grew by 1.0%.
  • When asked about the 40% drop in Kier’s share price last week following yet another writedown, Stephen Bowcott, former chief operating officer at Kier, said:

“[the company has] seen a pretty substantial growth over the past four or five years […] and if you’re growing [and] the market is softening, clearly you have a cost base which needs to be realigned pretty quickly.”

Stephen Bowcott, Former COO, Kier

The firm has said its underlying operating profit will be £25m lower than previously forecast for its financial year ended 30th June 2019, while it has also said the costs of its streamlining programme, Future Proofing Kier, will be around £15m higher than expected.

  • The Federation of Master Builders (FMB) has said that the UK construction industry could be missing out on £10bn-worth of business as a result of its poor image. In an attempt to restore the sector’s reputation in the eyes of the public the FMB has joined forces with ten other industry groups to develop a mandatory licensing scheme for UK construction companies which it said would “transform the sector into a high quality and professional industry”.
  • Keith Waller, the head of the new Government-backed Construction Innovation Hub, has said contractors should be making margins of 5% if they are to break out of the boom and bust nature of the sector. He said with the top 20 contractors in the UK making an average profit margin of approximately 0.5%, it is not a business model that is investable. He said:


“It doesn’t mean [clients should] pay more. I think what it means is we should be able to deliver projects for less”

Keith Waller, Construction Innovation Hub

He said that profits that firms make should be ploughed back into R&D, making firms and processes more efficient.

  • The Government has launched a consultation on its plans to reform building safety in the wake of Dame Judith Hackitt’s Independent Review of Building Regulations and Fire Safety which came out last year. The consultation, which closes on 31st July, proposes reform of building safety and spans five broad areas.


UK ECONOMY

  • The Conservative party leadership elections are now under way. At the time of writing five candidates remain in the running to become the next Tory leader, with frontrunner Boris Johnson winning the backing of 114 of the party’s 313 MPs in the first ballot. Pledges made by candidates have included tax cuts, abolishing VAT and slashing interest rates on student loans. The new prime minister is expected to be in place by mid-July.
  • The Help to Buy scheme has left the Government exposed to “significant market risk” if property values fall, and some buyers using it risk ending up in negative equity according to a report by parliament’s spending watchdog. The National Audit Office (NAO) has said that the Government expects to recoup its investment in Help to Buy by 2032, but a downturn in the property market could hit the value of its loan books.
  • Theresa May has pledged that the UK will produce net zero greenhouse gas emissions by 2050, meaning that any emissions produced by the UK after 2050 would be offset by absorbing an equivalent amount from the atmosphere. The move will amend the Climate Change Act 2008, which set a legally binding target to cut greenhouse gas emissions to 80% below 1990 levels by 2050.
  • The UK competition watchdog has launched an investigation to find out if consumers have been mis-sold leases or forced to agree to unfair terms when they bought new homes. This comes in the wake of a scandal that came to light in 2017, when it emerged that leases on some new properties contained onerous provisions such as ground rents that doubled every 10 years and high fees for any repairs.
  • Positive job data briefly pushed sterling higher last week, as UK wage growth beat expectations. ONS figures showed that average weekly earnings grew at an annual rate of 3.3% in the three months to April, quicker than one month previously and ahead of economists’ expectations.
  • UK GDP declined by 0.4% in April compared to the previous month – the worst fall since March 2016. The decline was a result of temporary factors, including a substantial decline in car production and the fading of Brexit stockpiling activity.


WORLD NEWS

  • Chinese factory output slowed to its weakest pace on record in May – falling 5% year-on-year. The slowdown was mainly a result of weaker domestic demand, adding pressure on Beijing to unleash further fiscal and monetary stimulus as the trade war with the US remains unresolved.
  • European finance ministers have reached broad agreement on the design of the first common budget for the Eurozone area. However, a decision on the size of a Eurozone budget and how it will be funded will be made by leaders of the EU later in the year.
  • Industrial production in the Eurozone dropped by 0.5% in April compared to the previous month. The drop adds to concerns of a prolonged industrial slump in the region that may, in turn, put pressure on the European Central Bank (ECB) to act.
  • US president Donald Trump has said that he expects to meet with Chinese president Xi Jinping at this month’s G20 summit in Osaka. Despite Mr Trump’s repeated threats to put tariffs on a further $325bn of imports from China not already subject to US levies, he went on to say that:


“We will end up making a deal with China. We have a very good relationship, although it’s a little bit testy right now . . . I think they really have to make a deal.”

Donald Trump
  • Global foreign direct investment (FDI) has fallen to its lowest level since the financial crisis. According to a UN report, worldwide FDI dropped for the third consecutive year in 2018 by 13% to $1.3tn.


COMMODITIES & MATERIALS

  • Crude oil rallied 3% higher last Thursday to $61.65 a barrel, following reports that two oil tankers had been attacked in the Gulf of Oman. The incident came amid news that OPEC cut its forecast for global oil demand to 1.14m barrels a day in 2019 (70,000 barrels per day less than prior expectations).
  • The price of copper has dropped 9% since the start of May 2019 – currently sitting around $5,855 a tonne. It has been weighed down by the US-China trade uncertainties and concern about slowing global growth. There has also been a big increase in bets against copper in the futures market. As of last week hedge funds and speculators were net short in copper to the tune of 46,000 contracts (a net short position means that there are more bets on prices falling than rising).
  • Concrete block deliveries increased by 12.5% in April 2019 compared to April 2018, according to the seasonally adjusted figures. The month-on-month change shows a 3.6% increase in April 2019.
  • Provisional ONS construction building materials data shows that material prices (for All Work) declined by 0.2% in April 2019 compared to the previous month. Material prices rallied in the first three months of 2019 but material price indices for April indicate that material price growth has levelled off.


ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • Kier has said that it will cut 1,200 jobs as it seeks to make cost savings of £55m a year by 2021. Kier will be streamlined to focus on construction, infrastructure, utilities and highways and will sell its property development business (Kier Living) as well as its facilities management and environmental services businesses. Chief executive Andrew Davies said:

“These actions are focused on resetting the operational structure of Kier, simplifying the portfolio, and emphasising cash generation in order to structurally reduce debt”

Andrew Davies, Chief Executive, Kier
  • The Welsh government has shelved plans to build the £1.4bn M4 relief road despite a public inquiry backing the project. The road, which would have seen a new stretch of six-lane motorway built to the south of Newport, was the largest pending infrastructure project in Wales following Hitachi’s decision to postpone development of new nuclear power stations at Wylfa Newydd.
  • The Abu Dhabi Investment Authority has appointed British Land as asset and development manager to lead the revamp of two Slough shopping centres (the Queensmere and Observatory malls).
  • Hammerson has slashed its retail provision for Birmingham’s Martineau Galleries to approximately 10% of its initial offering. The real estate investment trust now expects less than 100,000 sq ft of the 2.8m sq ft mixed-use development to be dedicated to retail (originally 915,000 sq ft of retail was proposed). Robin Dobson, director of development at Hammerson, noted that:

“The shift is much more around commercial offices, residential, food and beverage and hotels, with very limited retail. The plans for the regeneration have just moved on, just as the mix of uses within the city has moved on”

Rob Dobson, Director of Development, Hammerson
  • Housing Secretary James Brokenshire has overruled the recommendation of a planning inspector and refused plans for a 471-home, mixed-use redevelopment of a Sainsbury’s supermarket site in Whitechapel, after attaching substantial weight to the impact the scheme would have on light to existing homes and on neighbouring heritage buildings.
  • Vinci-owned highways specialist Eurovia UK has warned that local authorities are reining in highways maintenance investment after two or three years of strong spending. Scott Wardrop, chief executive of Eurovia UK, forecasts that the slowdown is likely continue until 2020 and is the result of significant reductions to local authorities’ revenue budgets.

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