National Infrastructure Commission has set out nine priority areas most in need of investment

Construction

• Deloitte’s latest London Office Crane survey provides a slew of positive data that indicates the office market continues to rebound. Although the number of new office starts fell by four to 27 between April and September, the volume of new starts rose by 10% – the third consecutive rise recorded by the survey. The volume of new starts rose from 3.1 to 3.4m sq ft, well above the long-term average of 2.4m sq ft. This meant that the size of the average scheme increased by 28% to 122,339 sq ft. According to the survey, it’s not just refurbishments that are driving new start volumes (although this is still a strong trend being driven concerns over sustainability and embodied carbon) - the proportion of new builds increased to 46%, from 33% in the Winter 2020 Crane Survey. While some developers are still cautious about the market, the survey points to improved confidence and a greater appetite to take on risk by pushing ahead on individual schemes.

• RIBA’s latest Future Trends survey found that architects in all regions expect workloads to grow in the coming months. However, firms in London had a less confident outlook and RIBA’s head of economic research and analysis, Adrian Malleson, said practices were increasingly having to deal with growing inflation as the cost of materials and labour headed north. The overall Future Trends Index was +15 in October – down six points on September’s figure of +21 and less than half of the +31 figure posted in June. All sectors stayed in positive territory but architectural workloads are expected to expand the most in the private housing and commercial sectors over the next three months. In terms of supply-side constraints Malleson explained:

• The National Infrastructure Commission (NIC) has set out nine priority areas most in need of investment over the next 10-30 years in order to decarbonise the economy, protect the environment and ‘level up’ poorer regions. The baseline report precedes its official report on infrastructure spending that will be published in 2023, but suggests that hydrogen, carbon capture and renewable energy will be at the heart of the NIC’s recommendations. The nine priorities include installing low carbon heating in homes, more electric vehicle charging points, further rollout of 4G broadband and improving flood resilience. The NIC said that meeting renewable energy targets will require “significant” new capacity in both wind and solar power to be built over the next 10 years, along with an expansion of battery storage capacity to maintain energy supplies during periods of unfavourable weather.
• After four consecutive quarters of growth, UK construction output fell by 1.5% in Q3 2021. Only three sectors experienced output growth in Q3: Private Industrial (+13.6%), Infrastructure (+9.9%) and Public Housing Repair and Maintenance (+1.9%). The rest saw quarterly contractions. According to the ONS, the drop in output in Q3 was most likely due to problems in the supply chain. Shortages of materials and difficulties sourcing them were widespread. While order books were healthy, the availability of certain construction products was affecting projects currently underway.

• The UKGBC launched a detailed Roadmap at COP26 that sets out how construction can achieve a net zero carbon built environment by 2050. The Roadmap builds on the UK’s recent ‘Net Zero Strategy’ and is the first quantification of the carbon reduction required each year from buildings and infrastructure if the UK is to become net zero. The Roadmap represents a shared vision and a set of actions for achieving a net zero built environment. For the first time, specific carbon emission reduction targets across sub-sectors have been set that will allow the UK to benchmark its progress in the years ahead and identify sub-sectors that are not moving fast enough. The Roadmap sets out policy recommendations, sub-sector carbon trajectories and action plans for stakeholders to help deliver the 2050 scenario. For more information about how this ties in with the Government’s Ten Point Plan for a Green Industrial Revolution, see here.
• The chief executive of Skanska told firms at COP26 that contractors should not use tight margins as an excuse for not cutting carbon emissions. Gregor Craig said it was “quite feasible” even for SMEs to switch to greener ways of working with the right mindset. He explained that there are lots of alternative materials that have been identified that don’t cost any more. However, he did caution that there is a risk when putting new carbon-saving innovations into a building. Buildings are warrantied for performance for the next 25-30 years and Craig said that we need to find ways to make sure that this is not a blocker to low carbon innovations. He also noted that:

Client & Contractor News

• In a recent trading update, steelwork contractor Billington warned that profit this year will be hit as a result of delays caused by materials and labour shortages. Shortages have delayed the completion of certain jobs which will affect their profitability, and to a lesser extent revenue, in the current financial year. Profit on delayed jobs will now be booked next year. Chief executive Mark Smith said that despite the hit to profit, “tendering opportunities remain buoyant and of a good quality, [and] together with a good order book provides an increased degree of confidence for 2022 and beyond.” Billington noted that increased new orders for retail distribution warehouses, data centres, gigafactories and food processing developments are expected to support growth.
• Foster & Partners’ Tulip scheme has been rejected by ministers, in part because of its “highly unsustainable” use of vast quantities of reinforced concrete for the foundations and lift shafts. According to some, the decision by planning inspectors may have set a precedent at the planning stage for other projects, which are now more likely to have their sustainability credentials scrutinised. Despite the designers making its construction and operation environmentally friendly, the Tulip would require the demolition of an office building less than 20 years old. The scheme replacing it would also not be carbon neutral and would not achieve zero-carbon on site. Henrietta Billings, director of campaign group Save Britain’s Heritage and a qualified town planner said:

• Bouygues has announced that both revenue and profit are now back at pre-pandemic levels. For the nine months to September, the firm said revenue during the period was up 10% to £23.25bn and just below the £23.33bn posted for the same period in 2019. Operating profit had nearly doubled to £1.04bn – above the £980m it turned in for the same period in 2019. However, Bouygues confirmed that its UK order book at the end of September 2021 was down 5% compared to the same period last year.
• A Rolls-Royce-led consortium of investors aims to build up to 16 Small Modular Reactors (SMRs) across the UK for low-carbon electricity production. Based on the technology used in nuclear submarines, these reactors will be capable of generating around 470 megawatts of power, equivalent to more than 150 onshore wind turbines and enough to power around one million homes. By way of comparison, Hinkley Point C when built will deliver 3.2 gigawatts – enough to power six million homes. However, it is estimated that these SMRs will cost less than a tenth of the £20bn power stations at Hinkley and the anticipated sister plant at Sizewell (ie £2.2bn but dropping to £1.8bn for subsequent units). SMRs are also about a tenth of the size of full-scale reactors and parts of the reactors could be produced offsite in factories and then transported to site by roads, further reducing cost and delivery times.
• Landsec, British Land, Derwent London and Great Portland Estates (GPE) have all recently posted half-year financial results or business updates. Reporting a pre-tax profit of £275m for the six months to 30^th September, Landsec is in a strong financial position. CEO Mark Allan noted its strategy is on shaping three distinct places - central London offices, major retail destinations and mixed-use urban neighbourhoods. British Land is also showing signs of recovery and reported a 2.9% increase in the value of its portfolio of shops and offices (to £9.8bn), reversing some of the £1bn-plus write-down incurred as investors and valuers fretted about the future of offices and shops. Derwent’s Q3 2021 business update noted that improved market sentiment and higher levels of business activity have led to increased leasing demand. GPE expects these positive leasing trends to continue, revealing that its portfolio valuation was up 2% to £2.6bn on the previous year. CEO of GPE Toby Courtauld said that healthy growth in office jobs is driving renewed occupier demand for City and West End offices. He added:

Materials & Commodities

• The CLC has warned that slow progress on the UK’s new product testing regime (the ‘UKCA mark’) could cause significant disruption. The switch from the existing CE mark to the UKCA on 1^st January 2023 will mean that thousands of products will have to be retested in the UK at costs of up to £50,000. With limited testing capacity for several products, new centres need to be established and staffed – something which if not done soon, would have “damaging” consequences for the Government’s homebuilding and infrastructure ambitions according to CLC chair Andy Mitchell. Mitchell said the expansion of UK testing capacity is “not happening quickly enough” and the CLC are not convinced that one year will sbe enough time to address testing capacity challenges. In a letter to business secretary Kwasi Kwarteng, the CLC set out a series of options for the Government to consider, including:

1. Finding faster ways to get new certification bodies up and running
2. Allowing testing and certification in overseas centres
3. Authorising the use of existing certifications on a temporary basis

• Data from the BEIS shows that the rate of material price inflation eased in September, with its ‘All Work’ index climbing by just 0.07%. Although this is the smallest month-on-month rise in nearly a year, the BEIS ‘All Work’ material price index rose by 23.6% in the year to September 2021, hitting yet another record high as the sector struggles with ongoing supply chain disruptions. While there are still widespread reports that shortages of materials are disrupting work on site and contractors are pre-purchasing materials to mitigate long wait times, the worst phase of the supply crunch may have passed.

UK Economy

• UK inflation climbed sharply to 4.2% in October, its highest rate for almost a decade. Driven by rising fuel and energy prices, the CPI measure of inflation is now more than double the Bank of England’s 2% target. Mirroring the increases seen for consumers, producer price inflation also shows that the prices of raw materials and goods from factories are rising. Disruption to supply chains show few signs of easing and the ongoing mismatch between the strong labour market and weak supply chain is expected to keep inflation above 4% in the first half of 2022. The BoE expect inflation will fall back towards its 2% target by 2023 as the impact of higher oil and gas prices fades and demand for goods moderates.
• Despite surging inflation, UK consumer spending continues to rise. Retail sales increased 1.3% in October compared with the same month last year according to data by the British Retail Consortium. Several factors threaten the rebound in household spending including inflation, tax rises, surging gas prices and the withdrawal of COVID support for jobs and income. But for now, consumers remain resilient and the much-reported squeeze on household spending has yet to materialise. The positive data raises expectations that the Bank of England will hike interest rates from 0.1% to 0.25% in December.

Global Economy

• The Eurozone IHS Market flash composite index, an indicator of business activity and measure of health of the economy, unexpectedly increased to a two-month high of 55.8 in November. However, supply shortages are still acute, COVID restrictions are being tightened and price pressures are intensifying and so a renewed fall in the index in the coming months seems likely. The PMI showed that the average selling price of goods and services is rising at the fastest pace since the survey began in 1998 as companies sought to pass higher costs on to customers. Businesses reported that shortages were driving up prices for many goods and services, alongside higher shipping costs, rising energy prices and increases in staff costs.
• The UN has warned that elevated shipping costs resulting from the global supply chain crunch will further fuel inflation around the world. The surge in freight rates is likely to push up global consumer prices by an additional 1.5% should they remain high for the next year, according to estimates by the United Nations Conference on Trade and Development. Given the inflationary targets set in Europe and the US of 2%, this additional 1.5% is significant. For import-dependant developing nations, the blow will be even deeper. Although freight rates have eased in recent weeks because peak season has ended, they remain extremely high – about five times their average over the past decade. High shipping prices are likely to remain sticky with Sea-Intelligence, a maritime consultancy, forecasting that it could take up to 30 months for rates to return to normal due to the depth of the supply chain crisis.