The British property market has been hit hard in the recent few years, especially since the Brexit: prices were growing at a healthy rate of 5% prior to it, now the industry is witnessing multifarious challenges. The political instability has led to decreased consumer sentiments, resulting in low consumption growth and decrease in big purchases. The downturn in property market has had an adverse effect on the construction industry and changed the landscape of the industry.
Construction is a very diverse industry that included various activities which are broadly divided into three main sectors: commercial and social, residential, and infrastructure. The output of the industry is over £ 110 billion per year; and this amounts to 7% of GDP. Approximately 60% of output is undertaken for new build, while 40% is for maintenance. The industry accounts for around 3 million jobs and has the highest share of self-employed workers. In a way, the health of the economy has significantly relied on the performance of construction while both are inter-related to each other.
Alarm bells of impending slowdown can be heard now; the January PMI data revealed a fall to 50.6 from 52.8 in December, against a neutral value of 50. The data clearly shows a slowdown in growth in construction activity, which is now at its 10-months’ low level. Moreover, growth in residential and civil engineering sectors have slowed at worrying rate. The instability is partly to be blamed as the construction industry is dependent on the spending and upgradation of existing and potential homeowners. Confidence in the sector is under serious pressure and has weakened to a three-month low. The wait-and-see approach by buyers is resulting in longer sales conversion times. Concerns about the near-term outlook has resulted in a conservative approach to hiring, with employment recording the smallest pace since July 2016. The change in prices across geographies varies as well with prices in London and South England remaining stagnant or falling, and prices increasing marginally in other areas.
A tight job market, strong wage growth and record low borrowing costs have provided support to the industry but are overshadowed by looming risks of Brexit. All the supporting factor risks being at their end stage, can further accentuate the industry’s problem. Moreover, there is a scarcity of skilled workers which means difficulty in recruiting talent, thus giving negotiation power to workers. This is leading to increased costs for the firms and is affecting their profitability margin. This will only worsen if the plan approved by the government goes ahead wherein most workers from EU will not be allowed to enter UK after Brexit.
Modernisation of the industry is still lacking, and this low pace of technological upgradation is also an important constraint on growth. A reluctance to embrace technology holds back the sector from growing. A move towards better practices will result in much needed greater productivity and help to offset the labour crunch. Lack of change has resulted in a very insignificant growth in productivity relative to the economy as whole: the sector’s productivity was only 8.9% higher in the first three month of 2018 compared to 1997, whereas it has risen by 27.6% in the economy. This problem is further underlined by the fact that 47% of Britons in the sector are 45 or older, compared to just 18% from outside UK. This has resulted in difficulties in adapting to technological change and thus improve productivity.
Along with political uncertainty, the cost of doing business has also risen steadily across the country. Input cost has risen since the depreciation of pound after the referendum. Certain market reports have stated that a majority of builders are predicting a substantial rise in material prices in the upcoming half year. Fuel costs are also not giving any respite with costs expected to remain stable over the next few months. Rising fuel prices spill-over to increased inflation which further increases the cost of business.
The current political picture is anything but conducive of growth in the construction sector. With many unforeseen roadblocks hindering the growth, the industry must be ready for some rocky future.
While the construction industry has been witnessing challenges, few key construction business stocks listed on London Stock Exchange are still bucking the trend. For instance, CRH PLC (LON: CRH), was seen to be up 1.85% as at February 05, 2019, in early trade.
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