16 Dec

Market Research Bulletin: Construction new orders rise driven by strong new housing data

  • UK Construction activity picked up in November according to IHS Markit/CIPS, exceeding market expectations. Although November’s reading indicates the sector is still contracting, the latest construction PMI figure rose to 45.3 in November from 44.2 in the previous month. The latest PMI survey results revealed:


    • Slowest drop in overall construction output for four months as housing activity contracted at a softer pace
    • Civil engineering and commercial were the worst performing sectors in terms of activity
    • New orders fell for the eighth consecutive month - the longest period of decline since 2012-13
    • Input cost inflation at lowest since early 2016
    • Purchasing activity and employment continued to decrease due to cost-cutting efforts and the non-replacement of voluntary leavers



UK CONSTRUCTION PMI (SOURCE: IHS MARKIT)

  PMI Index   Baseline



  • Construction output experienced 2.3% fall in October according to the ONS. The decrease, which was the largest month-on-month fall since January last year, was driven by a 3.1% decline in new work and a 0.6% downturn in repair and maintenance activity. The ONS suggested the decline may have been impacted by adverse weather, with the autumn being one of the wettest on record.
  • According to Barbour ABI data, the total value of construction contract awards in November 2019 was £5.4 bn - a 9.1% increase compared to October and a 20.2% increase on November 2018. However, the total number of contracts awarded in November 2019 (855 contracts) was down 1% compared to the previous month and was 3.8% lower than in November 2018.
  • The number of High Court disputes in the construction industry has risen for the third consecutive year. A total of 397 construction related disputes were heard in the past year – up by 28% from 311 cases in 2015/16. Accuracy partner Hervé de Trogoff said that developers were no longer prepared to overlook claims on one job in order to recover them on future schemes, even with firms they have traditionally had long-term relationships with. He said:

“Project owners and developers are in a post-Carillion world – the days of taking the long view and relaxing contractual or commercial postures are over...That’s driving a long-term rise in disputes reaching litigation.”

Hervé de Trogoff, Accuracy

HIGH COURT DISPUTES (SOURCE: ACCURACY)



  • The ban on using combustible materials in external walls of high-rise residential towers could prevent the use of innovative products such as photovoltaic panels and green walls. Rob Buck, façade design associate at Arup, said that the current testing regime on façade safety was limited in scope and failed to consider how a particular product was going to be used. He said that he wanted to see more of a risk-based approach “based on sound fire engineering knowledge”.
  • Following a slump in Q2, UK new construction orders edged up in Q3 2019, with ‘All New Work’ rising by 0.3% compared to the previous quarter. The rise in the three months to September was driven by an 8.2% increase in new housing, but was offset by a 3.5% fall in ‘All Other Work’.
  • The Scottish Government has opened a consultation on the use of cash retentions within construction contracts. The Specialist Engineering Contractors’ (SEC) Group has been campaigning for change, lobbying members of the Scottish Parliament to support legislation to ring-fence the monies. It said that in practice the retention monies – which belong to the firms from whom they have been withheld – are used to bolster the cashflow of large companies and public sector bodies such as local authorities.


UK ECONOMY

  • Figures from the Department for Work and Pensions revealed that just 23% of construction workers (including skilled trade occupations and plant & machinery operators) are participating in a workplace pension. Roughly half of blue-collar construction workers are officially registered as self-employed and therefore not eligible for auto-enrolment, according to Unite.
  • Activity in both the manufacturing and services sectors contracted in November. The PMI reading for manufacturing fell from 49.6 in October to 48.9 in November. The PMI reading for services fell to 49.3 – the lowest reading since March 2019. Swayed by a myriad of uncertainties, the poor readings across the board suggest that economic output could contract by 0.2% in the final quarter of the year compared to the previous quarter.
  • The credit rating agency Moody’s has reduced its outlook on the UK banking system from ‘stable’ to ‘negative’. It said that uncertainty over Brexit has eroded the country’s growth prospects while low interest rates have had a negative impact on the profitability of lenders. Profits have already fallen at several big banks this year, with some acknowledging that they may have to rein in new mortgage lending in some areas as margins come under sustained pressure.


WORLD NEWS

  • China has experienced a surge in the price of construction materials, suggesting that the country’s stimulus measures have helped boost construction activity. The average price of cement has increased by 15% since September in China’s big cities and rebar prices have increased by 12% over the same period. It’s not clear what projects the building materials are being used for but Beijing has recently targeted the building of roads, bridges and other infrastructure projects to help the country weather its slowdown.
  • For the first time in eight months, investor sentiment for the economic outlook of the Eurozone turned positive in December. The sentiment index (Sentix) rose to 0.74 in December from -4.5 in the previous month, with a positive score indicating that a larger proportion of institutional and private investors reported a good economic situation than those who said it was bad. The score will raise hopes that the region's slowdown is over.
  • The US has objected to a World Bank loan programme for China that would have been worth more than $1bn per year. The programme, known as the ‘Country Partnership Framework’, was designed to help China fund green investments and encourage market oriented reforms, but the US (who is the World Bank’s largest contributor) believes that China should no longer be treated as a developing country and benefit from low-interest loans from the World Bank.


COMMODITIES & MATERIALS

  • Saudi Arabia is pushing OPEC for further cuts in oil production in a bid to raise prices ahead of a potential glut in supply next year. OPEC members discussed curbing output by a minimum of 400,000 barrels per day in a move that is designed to prop up the price above $60 a barrel. An existing deal stipulating supply cuts of 1.2m barrels a day expires at the end of March 2020. The additional cuts would take the reduction to 1.6m b/d.
  • Donald Trump plans to reimpose import tariffs on steel and aluminium from Brazil and Argentina. The move was in response to a “massive devaluation” of their currencies which hurt US farmers. Argentina and Brazil were initially shielded from the tariffs — worth 25% on steel and 10% on aluminium — but the US has decided to restore the tariffs amid fears that Brazilian and Argentinian agricultural producers are outflanking US farmers in global commodity markets.
  • According to the Department for Business, Energy and Industrial Strategy (BEIS) construction material prices edged 0.2% higher in October compared to the previous month. However, the ‘All Work’ material price index has fallen by 0.9% since March 2019, coinciding with reduced demand, falling energy and raw material prices and a stronger pound putting downward pressure on import cost inflation.


ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • Camden council is seeking £130m of damages from a consortium contractor (Partners for Improvement in Camden) and several subcontractors as a result of fire safety remediation work it had to carry out on four tower blocks in the Chalcots Estate that used ACM cladding. The council had to step in to address multiple fire safety failings and is seeking to recover costs relating to the evacuation of residents, the employment of fire marshals and security staff during the evacuation, as well as the cost of remedial work.
  • Investment firm M&G suspended withdrawals from its Property Portfolio fund last Wednesday after it was unable to sell assets fast enough to meet investors' demands for money. The fund, which is worth £2.5bn and is the UK’s largest commercial property fund, said that concerns over the UK’s departure from the EU and turmoil in retail had led investors to withdraw large sums, while also making it harder to sell the fund’s assets. The fund has shrunk sharply since June 2016 when it held £4.4bn of assets.
  • The British Property Federation has called on the Government to increase resources devoted to planning at the local level in its new Accelerated Planning Manifesto. The manifesto contains industry perspectives on the practical ways in which the existing planning system can be made more efficient, responsive and transparent. The document points out that since 2010, spending on planning per person has fallen 55% and as a result, increased housing targets pledged by the major political parties will be hard to meet.
  • New London Architecture has published a report suggesting that the hotel sector should follow the trend seen in the office market and offer more flexible-style co-working spaces on their premises to remain relevant. The report said that the hotel industry should transform public areas such as lobbies by investing in and developing new facilities to provide a more experiential offer in the face of competition from disrupter rivals such as Airbnb.
  • Rooftop housing developer Apex Airspace has revealed ambitious plans to build 10,000 affordable homes over the next decade, using modular construction techniques. Chief executive Arshad Bhatti said work will start in early 2020 on a scheme for Lambeth & Southwark Housing Association, building affordable flats above two existing residential blocks in Bermondsey, south London. He said:

“We’ve a pre-app in with one council for 120 homes and I’m confident that [soon] all London councils will be looking to do this. Currently pretty much all 33 councils are at least considering it.”

Arshad Bhatti, Apex Airspace

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