14Th October 2020 Construction Update 780 Px Web Banner

September UK construction PMI beats expectations with rise in new orders

CONSTRUCTION

  • Monthly construction output growth slowed to 3% in August, following record monthly growth of 21.8% in June and growth of 17.2% in July. The latest ONS statistics show although output continues to recover, values are lower than they were a year ago, with ‘All Work’ output in August 2020 coming in 13% lower than it was in the same month in 2019. The increase in new work was driven by growth of 12% (£310m of work) in private new housing, but was offset somewhat by falls of 16.4% (-54m) in private industrial new work and 2% (-£40m) in private commercial new work.


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  • In a House of Commons debate the housing minister, Chris Pincher, responded to complaints about the planned algorithm for determining local housing numbers. The proposals, contained in a consultation issued in August alongside the planning White Paper, set out a new formula to determine housing need in local areas, but critics say the effect of the algorithm would be to concentrate housing in rural areas in the Midlands and south of England at the expense of northern towns and cities. It was also suggested that the proposals would threaten local democracy, local green space and the ability of local communities to deliver affordable homes. In response Pincher said that he was committed to addressing any supposed imbalances.
  • The IHS Markit/CIPS UK Construction PMI rose to 56.8 in September 2020, up from 54.6 in the previous month and beating market expectations of 54.0. The latest PMI survey revealed:
    • Reacceleration in the rate of activity growth boosted by home building activity and work on commercial projects
    • Civil engineering activity fell for the second month running
    • New orders rose the most since before the pandemic-induced lockdown and purchasing activity growth accelerated to the fastest since October 2015
    • Employment contracted for a seventh consecutive month but rate of job shedding eased
    • Cost burden inflation (i.e. raw material prices) slowed for the first time in six months to the weakest since May
    • Confidence towards the 12-month business outlook was the strongest since February
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  • According to Glenigan, new contract awards fell by £1.5bn in September from the previous month to just under £4.4bn. Most work was awarded to the commercial sector with deals worth £1.13bn (26% of all work awarded in the month) being agreed. This was followed by private housing (£583.9m of work), social housing (£528m) and civil infrastructure (£495m). The highest value contract was awarded to Bam for work on a new £230m Sky studio in Elstree, Hertfordshire but Network Rail was the top-spending clients across all sectors, handing out six contracts worth a total of £232.2m.
  • Housing Secretary Robert Jenrick has said at least 20% of homes planned through the Government’s £12bn affordable homes programme must be built using modern methods of construction (MMC). Jenrick said:

“We want this to be a significant part of our future housing investment plans and indeed at the spending review later this year. We’ve made it a condition of our £12bn affordable homes programme that at least 20% of those homes should be manufactured through modern methods.”

The Government will review the quota every year and will increase the percentage if market conditions allow. This follows from the announcement last month that housing associations looking to sign lucrative partnerships with Homes England to build large numbers of homes as part of the affordable homes programme will have to use MMC to build at least 25% of their pipeline.

To find out more about modern methods of construction using timber, see our new Mass Timber Forum series here.

  • Data from Property Week show that rent collections for the third quarter of 2020 have improved significantly from the previous quarter. However, a number of developers and landlords are reporting that collections appear to be running significantly higher for office rents than they are for hospitality and retail. Although the quarter-on-quarter improvements in rent collection are encouraging, collected rents are still some way off the same quarter in 2019, putting financial pressure on landlords and developers. In the September quarter:
    • Helical collected 84% of total rent due
    • Derwent collected 80% of total rent due
    • Palace Capital collected 70% of total rent due
    • British collected Land 69% of total rent due
    • Great Portland Estates collected 65% of total rent due
    • Landsec collected 62% of total rent due

CONTRACTOR NEWS

  • Steelwork contractor William Hare has announced that pre-tax profits jumped 50% to £5.2m last year on a turnover of £203m (down 8% from previous year). In its most recent accounts the firm noted that the pandemic has not yet hit upcoming workloads and noted that it had an extremely strong order book for 2020 and 2021:

“Whilst the impact of the COVID-19 pandemic is being closely monitored, it is encouraging to note that quality projects continue to come to market and the pipeline of opportunities remain healthy.”

  • In its latest trading statement M&E contractor T Clarke said that despite 2020 revenue being nearly £100m lower than last year, trading has improved considerably from Q2 2020. Margins have since returned to target levels of 3% (after having broken even on much reduced volumes in Q2) and the firm has reinstated its guidance for the 2020 financial year, predicting profits of £6m from a turnover of £240m. It added that its forward order book remains at a near record of £410m and that throughout the year there continues to be high levels of bidding opportunities.
  • Surrey County Council has invited expressions of interest from civil engineering contractors for a highway maintenance contract estimated at £2.5bn over 21 years. Surrey Highways' reactive, routine and planned road maintenance is currently delivered by Kier but the contract expires in April 2022. The Council, which is looking to open discussions with four potential suppliers, said it wants to establish a genuine partnership approach which embodies trust in service delivery, pricing and innovations. The Council has opted to utilise the competitive procedure with negotiation to make the procurement process less burdensome on suppliers.
  • HS2 has awarded contracts for the first two tunnelling machines to be used for London’s HS2 tunnels. The deal, which has been signed with HS2’s main works civils contractor, the Skanska Costain Strabag joint venture (SCS JV). The tunnel boring machines are being designed and manufactured by German firm Herrenknecht specifically for the London clay and chalk ground conditions they will bore through. The London tunnels for HS2 are twin bored and will be 13 miles each way.


COMMODITIES & MATERIALS

  • The UK concrete and cement industry plans to become net carbon negative by 2050, removing more CO2 from the atmosphere than it emits. UK Concrete, part of the Mineral Products Association (MPA), has published a strategy document that outlines potential carbon-saving technologies, indicating that net zero can be achieved through decarbonised electricity and transport networks, fuel switching and greater use of low-carbon cements and concretes as well as carbon capture, usage or storage (CCUS) technology for cement manufacture. CCUS technology is vital to delivering net zero manufacturing, it says, and according to the roadmap will deliver 61% of the required carbon savings.
  • A survey by the Federation of Master Builders (FMB) found that strong levels of pent up consumer demand for repair and maintenance works saw builders report a busy summer. The survey found that, regardless of whether or not the UK manages to secure a free trade agreement with the EU, more than three quarters (78%) of builders expect material costs to increase over the next two months. Brian Berry, Chief Executive of FMB, said that:

“Expected increases in material prices are a concern as builders have been reporting skyrocketing prices for years now. As we lead up to Brexit, we need to ensure that the supply chain is in step and that builders can access the materials they need.”

UK ECONOMY

  • The UK economy grew less than expected in August with GDP increasing by 2.1% in the month from July. The figure signalled that the bounceback is losing steam adding pressure on policy makers to increase support measures. While the economy has now grown for four consecutive months, output in August remained 9.2% below its pre-pandemic levels in February 2020. With the Government’s fiscal support unwinding some economists expect the Bank of England will yet expand quantitative easing by a further £250bn by the end of next year, with the next tranche of £100bn coming this November.
  • 2)The EY ITEM Club Autumn Forecast has been published. The report suggests that UK GDP will likely grow around 17% q/q in Q3 – much faster than the growth predicted in July’s summer forecast. However, growth of 1% or less in expected in Q4 and the forecast for 2021 has been lowered slightly from 6.5% to 6%. Accordingly, the Club does not expect the UK economy to return to pre-pandemic size until after mid-2023.
  • Chancellor Rishi Sunak has unveiled a multibillion-pound local furlough scheme for workers of companies forced to close by local restrictions aimed at curbing the virus. Alongside this, a new three-tier lockdown system has been revealed and some businesses in areas that are placed in the highest tier will be required to shut their doors. The Treasury will also pay cash grants to companies forced to close in local lockdowns to help with their fixed costs.


GLOBAL ECONOMY

  • According to the latest Brookings-FT tracking index, the global economic recovery has been fragile and growth in the world’s largest economies has been uneven. The index showed that the recovery in advanced economies is far from complete after a historic drop in the spring, and the situation in emerging markets is much worse with indicators still far removed from normal levels. With little scope for additional monetary policy stimulus in many countries, Professor Eswar Prasad of the Brookings Institution said that:

“A broad-based and robust recovery does not appear on the horizon... [and the] risks of substantial and long-lasting scarring effects on economies are rising”.

  • The IMF has called on advanced economies to increase public investment in order to spark a strong economic recovery from the coronavirus pandemic. The IMF urged such economies to take advantage of historically low borrowing costs to increase spending on infrastructure maintenance immediately. Rich countries should also prepare plans for subsequent new capital spending on digital infrastructure and green technology, the fund said. It also estimated that increasing public investment in current conditions by 1% of gross domestic product was likely to increase GDP by more than 2% after two years.