TPI Survey Feedback

Workload

The construction industry is experiencing few signs of any short term drop in workloads, as contractor pipelines remain strong and ongoing projects are expected to continue being built out. However, clients are becoming increasingly concerned about project feasibility and new opportunities in some sectors have been slow to progress due to uncertainties surrounding rising borrowing costs and challenges such as planning regulation hurdles.

While projects are still being won, there have been notably fewer enquiries, requests for proposals (RFPs) and bidding opportunities of late. Additionally, some TPI survey respondents reported that certain schemes will likely to be paused after planning submission and will not restart until economic conditions improve and borrowing costs ease.

The residential sector is expected to face a protracted slowdown in the pace of construction due to rising interest rates and mortgage costs, the removal of the Help to Buy scheme and even regulatory changes to both specification and building practice. Additionally, the GLA’s introduction of a mandatory second staircase requirement for new London residential buildings over 30m has caused developers to pause residential projects as they address compliance and implementation challenges. In light of these pressures, double digit declines in output are anticipated for the residential sector in 2023 according to the CPA’s latest forecasts.

Conversely, commercial office fit-out schemes committed from previous years continue to move forward, creating above average inflation in the sector. The life sciences sector is also experiencing high demand, with a shortage of research space driving developers to explore new types of facilities to meet unprecedented needs. Higher education establishments are actively pursuing refurbishment and decarbonisation projects. Similarly, the healthcare sector remains buoyant with upcoming works in the pipeline. Since many of these clients do not rely heavily on external funding, they are less impacted by economic conditions and interest rates.

Data centres are also expected to maintain resilient workloads, as the current development pipeline is insufficient to meet the forecasted increase in demand for data storage. Several main contractors have expressed their intention to focus more on this growth market in the coming years, recognising its potential.

In summary, there is a strong early interest from clients and new opportunities continue to emerge. However, the industry is now experiencing a more natural churn of projects, with new schemes replacing completed ones rather than experiencing significant growth. Economic challenges pose significant headwinds for developers, including high debt prices, falling property values, breached loan-to-value ratios and uncertainty regarding future space requirements. As new projects come to an end, these factors will heavily influence clients' decision-making and their willingness to start new projects. Consequently, more schemes may be paused or undergo scope adjustments to address these pressures and uncertainties.

Overall, clients who have secured funding are pressing ahead with their projects, while those with projects at pre-planning stage are facing greater precarity due to the uncertain economic landscape.

Market Conditions

Respondents to our Q3 survey noted that market conditions had shifted since last quarter, with many reporting higher market activity and more passive tendering.

Market sentiment has shown a significant improvement in recent months, exceeding expectations. Nevertheless, there are certain headwinds, including rising insolvency rates and increased financing costs, that have become more prominent. Despite short-term growth prospects looking better, signs of a slowdown in construction activity are emerging on the horizon.

Some sub-sectors continue to experience strong demand and construction cost inflation has eased due to lower material prices, lifting sentiment and activity indicators into positive territory. However, there are risk factors that could hinder this positive momentum, such as stubborn inflation in the wider economy, potential global issues like geopolitical tensions and demand shifts, as well as delays in the full impact of falling raw material costs throughout the supply chain.

Insolvencies in the UK construction sector are on the rise, leading to capacity loss and reduced competitive pricing, which may cause project delays, cancellations and financial losses for various stakeholders. This situation could erode confidence, reduce investment and harm the industry's reputation. Contractors need to be proactive in managing these risks, identifying viable projects and securing repeat business to mitigate potential project stalls.

While pre-construction opportunities seem abundant, converting them into actual construction projects is challenging and many may not proceed to site. Contractors are being selective and focusing on projects with clear mandates and stable funding. Although new order growth is slowing, the current high volume of opportunities allows contractors to choose tenders selectively. However, as competition increases in the medium-term, we can expect improved tendering competition as bidding and development opportunities slow down and spaces in contractor order books open up.