Construction sector loses patience with Brexit indecision

Activity in the construction sector rose in the second quarter of the year, despite concerns that political uncertainty surrounding Brexit was holding back investment. The Royal Institution of Chartered Surveyors claims that the market has lost patience with the lack of clarity over Brexit and that clients were beginning to push ahead with projects, albeit tentatively. In its construction and infrastructure survey, a balance of 16 per cent of respondents reported an increase in work, up from 9 per cent in the previous quarter.

The markets’ patience with Brexit related indecision appears to be wearing thin, as the results of the Q2 2019 RICS Construction and Infrastructure Market Survey shows output growth accelerating, and workload and employment expectations gathering pace for the year ahead.

[perfectpullquote align=”right” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]After a prolonged period of delays and underinvestment, businesses now appear to be fed up and are proceeding cautiously with new hiring and intentions to invest[/perfectpullquote]

Jeffrey Matsu, RICS Senior Economist, says: “Three years on and the long, unrelenting shadow of Brexit uncertainty is testing the mettle of the construction industry. After a prolonged period of delays and underinvestment, businesses now appear to be fed up and are proceeding cautiously with new hiring and intentions to invest.

“While much of this is likely to be backfilling or maintaining existing capacity, the requirements of larger projects such as Hinkley Point C and HS2 are constraining growth opportunities elsewhere. With the range of possible outcomes related to Brexit as wide as ever, we expect to see continued volatility in the construction output data but in the meanwhile foresee workload activity stabilising.”

This quarter, 16 percent more respondents reported an increase in construction workloads, up from a +9 percent net balance in Q1. Relative to other sectors, workloads in public housing grew at the fastest pace, closely followed by private housing. The rise in workloads in social housing (+26 percent up from +6 percent) suggests that the lifting of the HRA borrowing cap may have begun to influence sentiment in social housing construction.

Following a dip in Q1, workloads in the infrastructure sector improved in Q2 and there was also modest growth in commercial and public non-housing activity. Looking to the year ahead, workloads are expected to be most resilient in the private housing and infrastructure sectors with 27 percent and 25 percent more surveyors, respectively, anticipating activity to rise rather than fall.

The capacity problem

Business enquiries for new projects or contracts continued to grow this quarter as 12 percent more respondents reported an increase rather than a decrease over the past three months – unchanged from Q1. However, capacity continues to constrain potential activity with 38 percent more surveyors having to increase headcount in the past three months to support new work, despite the ongoing recruitment challenges.

Other obstacles to growth cited by respondents include access to finance, which continues to be the biggest impediment to building activity (69 percent). Although 18 percent more respondents reported a deterioration in credit conditions over the past three months, year-ahead expectations have become somewhat less restrictive.

Despite an increase in hiring intentions, skill shortages continue to pose a significant challenge as well with half of respondents saying there is a shortage of quantity surveyors. This is underscored by rising labour costs with a net balance of 73 percent of respondents foreseeing an increase in such expenditures over the coming twelve months.

Within infrastructure, the energy, rail and communications subsectors are expected to see the strongest expansion in output over the coming twelve months. However, despite the potential of additional Government spending, nearly two-thirds of respondents were of the view that infrastructure projects will stall without access to funding from the European Investment Bank.

Despite the continued Brexit uncertainty, the RICS market confidence indicator – a composite measure of workload, employment and profit margin expectations over the coming twelve months – rebounded to 21 percent (from 13 percent in Q1). Investments related to equipment, software and worker training are expected to gather pace as well. However, for the fourth consecutive quarter, profit margin expectations remained flat and tender price expectations eased.

Image by Pawel Letki