22Nd Market Research Bulletin

Market Research Bulletin: CPA downgrades construction output forecasts for 2020 and 2021 over Brexit uncertainty

CONSTRUCTION

  • In its autumn forecast, the Construction Products Association (CPA) has downgraded its forecasts for construction output growth for both 2020 and 2021. 2020 output growth has been lowered from 1% to 0.5% and 2021 growth lowered from 1.4% to 0.9%. The downgrade reflects uncertainty around Brexit and major infrastructure delivery (eg cost overruns with Hinkley Point C and the review of HS2).
  • The Government has provided more details about its plan to export the UK’s digital construction know-how. The Prosperity Fund’s Global Infrastructure Programme is a four-year initiative aiming to develop capacity of middle-income countries such as Brazil and Indonesia to carry out major infrastructure projects. The scheme, which is seen as a major export opportunity, will develop training programmes in BIM, DFMA and other digital construction techniques.
  • In a move seemingly designed to discourage councils from borrowing to fund “risky” infrastructure and property investments, the interest rate at which councils can borrow to fund new schemes is increasing by 1% above the Government’s cost of borrowing. The Treasury wrote to council finance chiefs confirming that the rate charged for money raised under the Public Works Loan Board (PWLB) would increase from 1.8% to 2.8% with immediate effect. A spokesperson for the Local Government Association said:

“[The cost hike] presents a real risk that capital schemes, including vital council house building projects, will cease to be affordable and may have to be cancelled as a result.”

Local Government Association
  • Construction output growth was more or less stagnant in August 2019. All work output grew by 0.2% thanks to growth in repair and maintenance work (up 1.1% from July). However, new work output acted as a drag with growth contracting by -0.2% compared to the previous month:
1910 Construction Output 3


  • The UK Green Building Council (UKGBC) has launched a paper containing suggested energy performance targets for commercial offices. The paper proposes the introduction of ‘Paris Proof’ energy targets that commercial offices should meet if they seek to be net zero carbon in operation. It also sets out three levels of ambition for the targets, reflecting different data sets, for respondents to consider and provide feedback on through its survey.
  • Plans to reform payment practices are being drawn up after Tory MP Peter Aldous’ retentions reform bill was not carried over to the new session of parliament. The proposed legislation, which was delayed several times, would have ensured that suppliers’ retentions were protected in ring-fenced deposit schemes, to minimise damage to subcontractors in the event of insolvencies. Work is now underway on a new private member’s bill which is likely to combine proposals from Peter Aldous and Labour MP Debbie Abrahams (who proposed the mandated use of project bank accounts on public sector projects).


UK ECONOMY

  • The Queen has set out Boris Johnson’s legislative agenda for the next UK parliamentary session, including plans for bills that could see Brexit delivered by 31st October. The Queen’s Speech included 26 pieces of legislation that in effect set out the contents of a potential Conservative party manifesto. Speaking in the House of Lords, the Queen said of the UK’s future relationship with the EU that the government:

“...intends to work towards a new partnership based on free trade and co-operation”.

  • The Queen’s Speech also set out plans to introduce new regulatory regimes for building safety and construction products. Stronger duties of accountability and competence would be imposed on those responsible for the safety of high-rise buildings and enforcement sanctions would be strengthened to deter non-compliance. The government also wants to develop a new framework to provide national oversight of construction products, to ensure all products meet high performance standards.
  • Sajid Javid announced that he plans to hold a pre-election Budget on 6th November. However, the Treasury confirmed that if the UK has left the EU without a deal, the date will be used to outline its approach to support the economy and hold a full Budget a few weeks later. If a Brexit extension is sought, the Budget will likely go ahead on 6th November.
  • The number of people in employment dropped by 56,000 in the three months to August compared with the previous quarterly period, down from an increase of 31,000 in the May-July period. The unexpected drop is the biggest fall in four years, falling short of the forecasted rise of 23,000 anticipated by economists. Wage growth also slowed over the period.


WORLD NEWS

  • The EU and UK have agreed a revised withdrawal agreement under which Northern Ireland (NI) will be subject to a hybrid arrangement whereby it would leave the EU customs union (along with the rest of the UK) but would remain aligned to the EU single market and some EU rules. However, NI would remain part of the UK customs territory, meaning that it would be included in any future British trade deals. The new agreement, which still needs to be backed by 320 MPs in parliament, avoids checks at the border between the Republic and NI. Instead, a de facto regulatory border will be drawn in the Irish Sea between the UK and NI. Whilst importers in NI would have to pay EU tariffs on goods shipped from the rest of the UK, these could be reclaimed if they could prove they had not sold the goods on in the Republic of Ireland.
  • As part of a truce the US has agreed to hold off on raising tariffs from 25% to 30% on $250bn of Chinese goods, which was due to take effect on 15th October 2019. In exchange, China agreed to boost agricultural purchases and make some limited concessions on access to its financial markets and curbs on intellectual property theft. However, further tariffs could be in store in December depending on how talks unfold
  • The IMF has said that global growth this year is on course to fall to its slowest rate (3%) since the 2009 financial crisis. Tit-for-tat tariffs have dented business confidence and investment leaving global trade stagnant and forcing central banks to cut interest rates in a bid to encourage growth. In its twice-yearly World Economic Outlook the IMF said that whilst the global economy would improve in 2020 (with a forecasted growth rate of 3.4%), there is an urgent need to cease hostilities and restore confidence to the global outlook.
  • Greece, the Eurozone’s most-indebted member, is getting paid to borrow money in the debt markets. Investors are now paying for the privilege of lending the country money. Greece sold €487.5m of bonds with a yield of minus 0.02% last week, meaning that if investors hold those bonds until they mature in three months, they would get back less than they invested. Whilst most bonds with negative yields have been purchased by local banks for use as collateral, it's one of the strongest signals yet that ultra-low interest rates are here to stay.


COMMODITIES & MATERIALS

  • Renewable energy sources generated more electricity in the UK than fossil fuel power plants for the first straight three-month period since records began more than a century ago. Research by Carbon Brief found that wind farms, solar panels, biomass and hydro plants generated an estimated 29.5 terawatt hours (TWhs) of electricity in Q3 2019, exceeding the 29.1 TWhs produced by plants that run on fossil fuels such as coal, gas and oil.
  • Ataer Holding, an arm of Turkey’s military pension fund, which is in exclusive talks to buy British Steel out of liquidation, wants to convert the steelworks eventually to run on hydrogen instead of coal. Hydrogen steelmaking, which replaces coke with hydrogen, could drastically cut CO2 emissions as the main bi-product is water. However steelmaker ArcelorMittal says that the approach could make costs 60-90% higher than existing methods.
  • Anglo American’s $5bn copper project in Peru has the potential to be a “generational” asset with enough reserves to supply a century of production, according to the executive leading its development. However with subdued demand and the prospect of stronger supply, copper prices are at a two-year low, having fallen 14% since the 2019 high of $6,600 per tonne to $5,635 per tonne.


ANNOUNCEMENTS IN THE CONSTRUCTION PRESS

  • The UK arm of flexible workspace provider WeWork posted a ten-fold increase in losses in its latest set of filed accounts. In 2018 WeWork made a loss of £75.9m (2017: £7.6m loss), despite almost doubling revenues from the previous year. The loss was the result of £109.8m of administrative expenses. The group canned its IPO last month as a result of concerns about its ballooning losses, business model and the control its founder Adam Neumann had over the company.
  • Crossrail’s chairman and CEO have said that the late-running scheme may need an additional £400m in order to complete it. However, the DfT has since said that if the job is not finished within its £17.8bn budget then Crossrail’s other co-sponsor – Transport for London (TfL) – will have to pay for any further funding needed to complete the project.
  • The UK building business of Bouygues saw profit sink last year to a pre-tax loss of £1.7m on revenue down 24% to £452m. The firm said a number of jobs had been hit by delays due to uncertain market conditions and that the loss also:


“...reflects the impact of reduced turnover during the year as a result of increased selectivity of projects targeted.”

Bouygues
  • Havering Council has agreed the first proposals in its plan to regenerate 12 estates and provide 5,200 homes over the next 12-15 years. Plans for the Napier and New Plymouth House site in Rainham (which include 126 affordable homes and 71 homes for private sale) have been agreed by the council’s strategic planning committee and will be considered by the Mayor of London before the final decision is issued.
  • Laing O’Rourke has returned to profit for the first time in four years. The group’s pre-tax profit to March 2019 was £32.8m compared to a $43.6m loss in the previous year. The contractor said it has managed to stem losses on a Canadian PFI hospital contract, helping it return to the black.
  • Laing O’Rourke has been appointed under a PCSA for the delivery of the £250m base build scheme to overhaul Whiteleys shopping centre in West London. Laing O’Rourke Group specialist contractor, Expanded, has been appointed separately to deliver the basement and frame, with piling works due to start early in 2020. The 1980’s shopping centre will be turned into a 1,000,000 sq ft mixed-use development, comprising of 153 homes (including 14 affordable), retail units, a cinema, a branded gym and a 110 key hotel. G&T is acting as project manager and employer’s agent on the full scheme and as quantity surveyor on the hotel fit out.

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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