Output and new orders edge higher in Q1 but price pressures mount

CONSTRUCTION

• Both construction output and new orders edged higher in the first quarter of the year according to the latest ONS data. Output (up 2.6% Q-on-Q) and new orders (up 12.2%) have benefitted from increased demand and confidence across the industry as delayed projects resumed and new orders grew across all sub-sectors. The private industrial sector saw the sharpest new order growth in Q1 (rising 34% Q-on-Q) due to the booming demand for warehousing and logistics space. The housing sector continued to support output growth in Q1 but new infrastructure and private commercial work also made positive contributions to overall output growth, rising by 4.3% and 3% respectively.

• According to Deloitte’s latest London Office Crane Survey construction starts rose by 20% in the six months to March 2021 with 32 new office schemes providing around 3.1 million sq ft started on site. According to the survey:
  • 56% of new construction starts involved an extensive upgrade to existing office stock in as many as 21 separate schemes
  • 4.5 million sq ft of development was delivered between October 2020 and March 2021, the highest level of completions in 18 years, with 59% of it pre-let
  • Developers anticipate that the new working patterns will reduce office demand on average by 10-15% in terms of square footage, suggesting a relatively modest change rather than a seismic shift in the demand for office space
  • Most developers argue that the reduction in office occupation due to homeworking is likely to be offset by growing requirements of tenants for lower density occupation, less hot-desking and more collaborative space, all of which will require additional space
  • Volume of new offices in construction has only dropped by 9% since the last survey to 13.7 million sq ft, buoyed by the quantum of new starts, and remaining well above the long-term average of 10.9 million sq ft
  • The share of technology, media and telecoms (TMT) pre-lets in all space under construction increased to 40%
• Nick Smallwood, chief executive at the Infrastructure and Projects Authority (IPA), believes that productivity will need to improve by 30-40% as a ‘prerequisite’ to deliver the Government’s £600bn infrastructure pipeline. A step change will be necessary to build the National Infrastructure Strategy (NIS), noting that infrastructure in the UK has languished compared to other sectors. He noted that the surety in the pipeline of future projects provided a “huge opportunity” for the industry to “modernise and really join the 21st century” by adopting modern methods of construction. He also warned that a shortfall in skills needed to deliver the programme could hit the sector by the middle of this decade.
• Richard Waterhouse, former boss of the National Building Specification (NBS), has said that it will not be achievable to get the new post-Brexit certification rules ready in time. The new system for certifying construction products (UKCA marking) will replace the old CE marking scheme once the transition period ends on 31^st December 2021. But from 1^st January 2022, all products that previously required a CE mark (eg structural steel, insulation, glass and cladding) will need to be retested to obtain the UKCA mark. Many construction products will need to undergo testing – which can cost up to £50,000 per test – for the new marking between now and the start of 2022, despite the limited capacity of testing facilities in the UK. Waterhouse said that the “only sensible” option would be to extend the transition period or risk causing “massive” price hikes for construction materials. He added:

• The latest RIBA Future Trends index found that just 10% of architectural practices surveyed expect work to fall in the coming quarter. Among practices of all sizes 34% expect workloads to grow in the next three months while 56% expect it to remain flat. All regions achieved positive regional scores (indicative of an expectation of increasing workloads) but practices in the north of England remained the most optimistic with a score of +44. London, which had been consistently negative through the pandemic, has again posted a positive balance (+12). Larger practices remain the most optimistic over workloads while the private housing sector appears to be the sector about which practices are most positive.
• A report commissioned by ISG found that the UK’s built environment will need to reduce its energy consumption by approximately 80% if the country is to meet its 2050 net-zero carbon target. According to the findings, the average energy intensity across England, Scotland and Wales was found to stand at 284 kWhe/m². This will need to reduce to 55-70 kWhe/m² by 2050 – equating to approximately an 80% reduction within the space of 10,455 days. The data suggested that poorly performing building services account for a significant percentage of energy use and emissions production. The report also uncovered issues in the availability, timeliness and quality of data, underlining the difficulty in creating a uniform and transparent process for benchmarking and performance measurement.

Client & Contractor News

• Kier has completed a £241m equity raise (via a fully underwritten placing) as part of its turnaround strategy. Together with the recent £110m sale of Kier Living, the proceeds will allow Kier to pay down much of its £436m net debt, prompting chief executive Andrew Davies to say that he now hoped Kier could achieve a net cash position in two to three years. Davies said these proceeds will give Kier the financial and operational flexibility it needed to deliver an order book of £8bn which covers 62% of the year to 30^th June 2022 forecast revenues. Davies also hopes that recent actions taken to simplify and ‘right-size’ Kier would see the business target in the medium term revenue of £4-£4.5bn, with adjusted operating margin of around 3.5%.
• Sir Robert McAlpine is planning to more than double its civil engineering and infrastructure business. The firm plans to look at more jobs away from its traditional building core, hoping that it can take advantage of the Government’s construction spending commitments. The firm’s current turnover from civils and infrastructure work is between £120m and £150m, around 18% of its business, but Hamer said he wants this to eventually be between £300m and £400m moving it up to more than 30% of turnover.
• ISG reported that pre-tax profits fell by nearly 80% in 2020. Profit slumped to £8.9m last year from 2019’s £44.2m. Revenue was down 23% to £2bn although its forward order book stood at a record £1.5bn, up from £1.4bn twelve months prior. Income from its engineering services fell 63% but income at its construction arm was up 23% to £691m. However, underlying profit at its construction arm fell 60% to £1.9m as the lockdown and the cost of implementing social distancing measures took its toll. Its largest division, fit-out, fared better with turnover down 15% to £1.04bn and underlying profit slipping 6% to £30.9m. ISG said that although several projects had been delayed into 2021 and noted that the role of the office will change, they are not seeing a slowdown in that market. Chief executive Paul Cossell added:

• Bam Construct UK has secured its largest ever contract by value. BAM is now in full contract for the £250m scheme (called Co-op Live) which is being built in the Eastlands area of Manchester on a derelict plot next to Manchester City FC’s Etihad stadium. The scheme was granted planning permission in September 2020 and enabling works have been conducted since the beginning of the year. At its peak, Co-op Live’s construction site will see some 400 people working on it daily. BAM estimates that more than 2,000 people will work on the site over its three-year construction phase, comprising the majority of the 3,350 total jobs the project will support from now to 2023. The 23,500-capacity venue will use more than 9,000 tonnes of steelwork and is set to be the UK’s largest indoor arena once completed in 2023.

Materials & Commodities

• British Steel announced that it has stopped taking new structural steel section orders due to “extreme” demand impacting on capacity levels. Order books remain open for all other products and ex-stock sales of its sections are unaffected by the announcement. The manufacturer will also continue to despatch materials already produced as normal. Steel supply and prices have been a major concern for contractors in recent months with demand (both in the UK and globally) outstripping production capacity. Several price hikes by British Steel has taken the price of standard sections to around £800/tonne – a 40% increase since May 2020. However, chief executive of the British Constructional Steelwork Association David Moore said that firms should not panic:

• The RICS has suggested that material shortages are the biggest threat to construction’s post-pandemic recovery. The majority of respondents (57%) to the RCIS’ latest survey said that a shortage of materials was their biggest worry to the momentum being maintained. According to the organisation’s UK construction and infrastructure monitor, workloads hit their highest level since early 2016. Such strong demand is likely to exacerbate the impact of the current shortages of materials such as timber and steel. Bodies such as the CPA expect inflation in raw materials will continue to push up prices for the rest of 2021.

UK Economy

• UK GDP grew by a stronger-than-expected 2.1% in March 2021, putting the preliminary Q1 estimate for economic growth at -1.5%. Nationwide lockdown measures weighed on activity in the first quarter of the year but March’s growth provides a reason for optimism. 2021 is expected to be a record-breaking year for GDP growth (following the record-breaking contraction in 2020) with the Bank of England forecasting that the economy will grow 7.25% this year, returning the economy to its 2019 size.
• The IHS Markit/CIPS UK Composite PMI was revised higher to 60.7 in April 2021, from a preliminary estimate of 60, pointing to the fastest increase in private sector business activity for seven-and-a-half years. Manufacturers signalled the steepest upturn in output since last August, while service providers experienced the quickest increase in activity since October 2013. Construction also maintained a strong pace of expansion. Overall employment growth was the highest since October 2015 and business confidence hit a new record high.

Global Economy

• The US experienced the biggest rise in consumer price inflation since 2008 in the 12 months to April. Rising by 4.2% (a bigger jump than economists expected), the higher inflation reading reflects a combination of hefty fiscal support, supply bottlenecks and increased spending as economic activity picked up following the rollout of coronavirus vaccinations. The White House council of economic advisers said that the US economy was experiencing a “normalisation” of prices as it recovers from the pandemic. It explained that this isn’t the start of an upward inflationary spiral:

• China’s producer price index (which shows the price of raw materials and goods leaving its factories) rose 6.8% year-on-year in April – its fastest pace of growth in over three years. China’s PPI was in negative territory for most of 2020 as the pandemic suppressed demand. Although the recent and sudden rise was partly driven by the comparison with a year earlier, the data nonetheless points to pockets of price increases emerging. A rebound in global commodity prices (eg iron ore) has driven the surge in Chinese producer prices but the rally has also been tied to China’s recovery. Backed by strong industrial growth and a construction boom, China’s rising PPI could feed through to consumer prices and generate broader inflation within China.