Project starts fall but small spots of hope indicate green shoots of recovery are there

2209 Construction Update 14th September Web Banner

Construction

  • The S&P Global/CIPS UK Construction Purchasing Managers’ Index (PMI) edged higher to 49.2 in August of 2022 from 48.9 in July but marked the second consecutive month of falling activity as high prices continued to weigh on demand.

Source: S&P Global, Chartered Institute of Procurement & Supply

According to the latest activity index, new orders increased only marginally, and to the least extent since June 2020, as clients held back on committing to new purchases amid cost pressures: Purchasing managers also reported:

  1. Concerns about wider economic prospects led to a fall in business confidence and slower job creation
  2. Contractors scaled back their input buying (ie the quantity of purchases) for the first time since the onset of COVID-19, causing delivery times and input price growth to increase at a slower pace than in previous months
  3. Lower demand is leading to fewer purchases, downward pressure on input costs and more responsive supply chains
  4. Lead times lengthened but by the least extent for two-and-a-half years, while high inflation led to activity growth declines in all three key construction sectors
  • With the UK’s new prime minister confirmed, Liz Truss has set out a plan to help support businesses tackle rising wholesale gas costs. Although businesses and other non-domestic energy users are not covered by the £2,500/year price cap provided to households until 2024, they will benefit from an “equivalent” six-month support scheme over the coming winter. After this initial scheme, the Government said it will, “…provide ongoing, focused support for vulnerable industries,” and that a review in three months’ time will determine where further support should be targeted. Alongside this support, the new PM faces calls for action by the UKGBC to retrofit homes and other buildings to improve their energy efficiency, with the body saying:

“Subsidising gas is not sustainable long term when over a quarter of heat is wasted out of our badly insulated housing and building stock. We’re left with a huge policy gap. If global prices are still high when the immediate support ends, we’ll still be in exactly the same place paying for gas heating that leaks out of every uninsulated roof and wall.”

  • G&T’s latest primary research on the UK façade/cladding market – taken from a survey of 10 trade contractors – revealed a wide range of views on curtain wall framing systems over the past year. Inflation was thought to have fallen between +5.1% and >20% with the spread of views being partly attributed to the type of material being used and the tendering date. For example, contractors tendering on aluminium curtain wall framing system projects in March 2022 (when prices were at their peak) would have seen significantly higher inflation than if tendered in July/Aug (when prices were c.40% lower. All respondents reported that raw material price inflation, higher energy-driven production costs and elevated shipping rates had pushed prices higher, but forecasts for curtain wall framing system inflation over the next 12 months is expected to drop back and fall with a narrow range of +5.1% to 10%.
Inflation curtain wall

Source: G&T Market Research

  • Glenigan’s August Construction Review revealed that work commencing on site (ie ‘project starts’) in the three months to July 2022 was 31% lower than it was in the same period one year ago and 18% lower compared to the preceding three months. Detailed planning approvals in the latest three-month period also dropped by 27% on the previous period and were significantly lower than they were in the same period in 2021. The outlook has been marred by ongoing supply chain issues following the war in Ukraine, high material price inflation, and rising energy tariffs. However, there are some sector bright spots. The industrial sector, with its strong development pipeline, saw projects approvals increase by one-fifth against the preceding three months. New hospital approvals also helped the heath sector (with new approvals 30% higher than they were a year ago) while the education sector experienced a modest improvement in new starts. Senior economist at Glenigan, Rhys Gadsby, expects slow progress until the end of the year but noted:

“…small spots of hope across some verticals and regions indicate that the green shoots of recovery are there, waiting for the right time to flourish.”

  • A new fast-track planning route announced by the Department for Levelling Up will help speed up major infrastructure projects. New powers under the Levelling Up and Regeneration Bill would allow ministers to set shorter deadlines for the examination of nationally significant infrastructure projects, such as offshore windfarms. Amendments to the Bill will also mean that smaller ‘non-material’ changes to approved projects can be made quicker. One of the justifications for the amendment is that in times of high inflation, the planning process needs to be sped up or else large-scale project costs can rise significantly. These changes build on efforts in the Government’s Energy Security Strategy to make sure the country is building the infrastructure it needs faster than before.

Client & Contractor News

  • The longest-reigning Queen of the United Kingdom, Her Majesty Queen Elizabeth II, died at Balmoral Castle last week on 8th September 2022 at the age of 96. From Sydney Opera House to the Barbican, Queen Elizabeth opened a plethora of iconic buildings during her 70-year reign. Over this period, building design has undergone a significant evolution – from post-World War 2 modernism sponsored by the welfare state to today’s innovative, low carbon designs that push architectural boundaries. G&T had the honour of providing Project Management services on the restoration of Windsor Castle following the major fire that broke out there in 1992. The complicated restoration project involved liaising with historic building specialists to replace the roof of St Georges Hall, residential and back of house facilities, as well as restoring principal function rooms. In addition, G&T has worked on numerous projects with Historic Royal Palaces and The Crown Estate. G&T mourns with the rest of the country in the passing of the Queen – a figure of continuity amid constant flux and an emblem of our great nation for so many decades
  • Plans have been submitted for 200,000 sq ft of lab and office space at Alderley Science Park in Cheshire. The two new buildings could accommodate up to 1,600 new science and tech jobs, according to plans submitted by the 50:50 joint venture between Bruntwood SciTech and Legal & General. The lab building will span five floors while the new office will be split across six floors and will offer co-working, serviced, leaded, and made and managed space. Given the lack of available lab space in the UK, Dr Kath Mackay, director of life sciences at Bruntwood, said it is “vital” to invest in specialist infrastructure that can provide space for ‘bench to bedside’ research.
  • Morgan Sindall has been retained for the second phase of a new urban innovation district outside of Cambridge city. Three wet labs will be built at Unity Campus – an old industrial estate – in order to attract life science and technology companies. The labs will each provide between 24,500 and 31,500 sq ft of space scheduled for completion in the autumn of 2023. The new buildings will benefit from a network of connected green spaces and water meadows as well as a landscaped courtyard and multi-purpose clubhouse. Morgan Sindall Construction previously built phase one of Unity Campus.
  • Lendlease is set to add to a string of high-profile office scheme wins in the capital this year after being lined up for a 13-storey Great Portland Estates scheme in the square mile. The scheme, known as 2 Aldermanbury Square, involves the demolition of the existing building and structure at 55 Basinghall Street (City Place House) and the construction of 320,000 sq ft of office-led space. It also includes the creation of individual terraces, a new pedestrian route through the site, and associated landscaping works. The scheme will incorporate extensive energy efficiency measures as well as low and zero carbon applications that will result in a high-quality, sustainable development. G&T is providing Cost Management and Life Cycle Costing services on the scheme.
  • Lendlease has also secured its place on 120 Fleet Street after being told it was the preferred bidder for the 21-storey, £429m job by Chinese Estate Holdings. The new scheme, due to open in the first half of 2026, will see the Express building turned into an art and cultural hub called the Joseph Lau Art Gallery. Work at 120 will also include the refurbishment of the nearby Daily Express building, a Grade II* Listed landmark, the former headquarters of the newspaper, and considered one of London’s finest art deco buildings.
  • Huckletree has unveiled its fifth London co-working space – a 22,000 sq ft workspace in Jubilee House, Oxford Street that will be themed around Web3 (the third generation of the evolution of web technologies) and the metaverse (a virtual/augmented reality world). Web3 and the metaverse have the potential to transform every industry, and the community working behind the scenes will use the hub as a platform for “funding, deal-flow, ideas, talent and togetherness” according to Co-founder and CEO Gabriela Hersham. The hub will support new ways of flexible working with different modes of work supported through breakout areas, socialising, wellbeing spaces and a rooftop open terrace. The office will feature NFT Creator Gallery, VR and gaming pods as well as decompression zones.

Materials & Commodities

  • Brick manufacturer Michelmersh is reportedly accelerating its alternative energy plans, ramping its use of solar power across several of its factories to tackle spiralling gas prices. Although the firm has secured 90% of its energy requirements for 2022 and 50% for 2023, the firm expects half of its electricity used at its Floren factory in Belgium to be sourced from solar panels from the beginning of 2023 – up from 25% currently. Three of its UK factories will also start using solar power from 2023. Joint chief executive Frank Hanna said:

“There is a greater sense of urgency [to look at using solar]. We’d have done it anyway but [using it more] makes the payback more compelling. Solar has rocketed up the return-on-investment spectrum.”

Michelmersh is planning on its third price increase of 2022 after introducing a 10% rise at the start of the year and a further 10% hike in July. Another rise in January 2023 is also being discussed but is being careful to collaborate with customers to avoid short-term price shocks.

  • British Steel has hiked prices for the second time in less than a month following a period in which commodity prices appeared to stabilise. Citing “extreme energy prices”, British Steel increased priced by £150/t in September, after having hiked them by £100/t on 15th August. While several factors led to many anticipating further reductions in steel prices (ie a global economic slowdown and lower Chinese consumption of steel), energy prices rocketed following Russia’s cutting off of gas supplies to Europe via its Nord Stream 1 pipeline. This has pushed up steelmaking costs.
Raw Steel Price Increases

Source: Bourne Steel


UK Economy

  • The UK economy stagnated in the three months to July, as the cost-of-living crisis hit household finances and business activity. UK output was flat in the period compared with the previous three months, according to data from the ONS. Inflation hit a 40-year high in July, hitting real incomes and profits, but some economists believe a freeze in household energy bills until 2024 will prevent a severe economic downturn. Samuel Tombs, chief UK economist at Pantheon Macroeconomics said:

“A recession over the coming quarters no longer looks likely, following the new PM’s energy price announcement”

  • Prime Minister Liz Truss has said that her £150bn energy support plan (the precise cost being dependant on wholesale gas price movements) will help sooth household fears or rising energy bills, but there is a mix of views over whether this will curb inflation or whether this additional borrowing and spending will ultimately be inflationary. The majority of economists appear to hold the latter view and anticipate that the central bank will need to respond with even higher interest rates (of potentially 3% by the end of the year) to foster price stability over the longer term. Over the shorter term however, this new fiscal stimulus is likely to lower the peak of inflation by about 5% according to economists, so that instead of peaking around 15% in January, headline inflation will stay roughly at July’s level of 10.1% before gradually falling in 2023.

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