UK CONSTRUCTION MARKET VIEW - SPRING 2018 - Arcadis
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
UK
CONSTRUCTION
MARKET VIEW
SPR IN G 2 0 1 8
1
MARKET VIEW | SPRING 2018
REACHING A
TURNING POINT
• Little has moved in the Brexit negotiations,
but with just seven months until the
negotiation deadline, we are close to
entering a ‘no deal’ environment.
• A ‘no deal’ Brexit carries both tariff and
non-tariff barriers that present cost
and time risks to UK construction.
• Carillion’s failure has had a material
impact on industry capacity and poses
a contagion threat to the financial
stability of thousands of suppliers.
• Further focus on payment practice and
supply chain profitability will also affect
cost levels and industry capacity.
• Recommendations from The Hackitt
Review in Spring 2018, which is assessing
the effectiveness of current building and
fire safety regulations and related compliance
and enforcement issues in multi occupancy
high rise residential buildings, are expected
to have a material impact on construction
demand and cost.
1
REACHING A TURNING POINT
TENDER PRICE
FORECAST
We have increased our tender price forecast for buildings
markets, both regionally and for London. We have not made any
changes to our infrastructure forecast. Our previous forecast is
shown in brackets in the tender price forecast table below.
The main factors considered in our revised forecast are as follows:
-0.5%. Even across the top 100 main 2-3% of
INFLATIONARY FACTORS contractors, the average margin was around
Materials costs. Though sterling has 2%. As a result, the ability for the supply chain
strengthened relatively against the dollar, to reduce or hold pricing is very constrained.
it remains weak against the euro. Materials Supply chain fragility. Supplier fragility has
cost inflation continues to be aggressive with also further contributed to existing capacity
rates across all materials of 5-6% in the year constraints. The failure of suppliers and loss of
holding up. Currency-linked packages where ‘organised capacity’ will have a tangible impact
the whole subcontract is sourced from the on competitive tension and therefore pricing.
EU see even higher levels of cost pressure. This issue is not limited to Carillion however,
Labour costs. The market remains very busy with some other suppliers in special measures,
and capacity severely constrained. There is such as Interserve. The Carillion liquidation is
now a growing body of evidence to suggest explored in more detail later in this paper.
that the number of EU workers in UK Risk. Events surrounding Carillion are likely to
construction is falling. The skills shortage is impact levels of trust and transparency in the
not improving, which is leading to continued whole sector. As a result, we anticipate that the
labour cost inflation of at least 3% per annum. attitude to risk will generally harden. For much
Capacity. Capacity to deliver in the of the supply chain it is likely this will manifest
market remains constrained. This is itself as higher prices. Additionally, the timetable
particularly pertinent in hot regional of Brexit now means that the supply chain are
markets, such as Manchester, or on projects pricing projects that will commence on site
where complexity and scale leads to a after the Brexit deal has been made. However,
smaller available pool of expertise. because they are pricing them with no visibility of
what the Brexit deal will be and therefore what
Supply chain profitability. Tempered tender
the operating environment will be, they are likely
price growth and high input cost growth has
to factor this into the price as a risk allowance.
squeezed supplier margins. This has negatively
impacted profitability in the supply chain, Hackitt Review. The independent Hackitt
which was only just recovering from the great review was commissioned last July following
recession of 2008. Last year, the average the Grenfell tragedy. It is widely anticipated
margin for the top ten main contractors was that recommendations from the review will
2
MARKET VIEW | SPRING 2018
focus on design and performance risks of said, the Office of Budget Responsibility forecast
complex buildings – particularly residential high growth of 1.5% or under per annum to 2022.
rise. It is likely that key areas for attention will Historically, construction demand has been
include sprinkler systems, means of escape and less buoyant with weaker economic growth.
cladding together with building regulations Uncertainty impacting demand levels.
approval and assurance processes. In our view, Significant downside risks to future demand
in addition to the additional costs that arise levels remain. The private commercial sector
from essential changes introduced by the saw a gradual decline in output across the
report, the review will have a wider inflationary quarters of 2017, as did the public sector.
effect partly as a result of an increased volume Uncertainty is hampering investment decisions
of work and also as a reflection of the greater in a number of key commercial sectors, such
risk associated with complex buildings. as offices. Additionally, the government
budget deficit targets continue to constrain
DEFLATIONARY FACTORS any potential for expansion of public spending.
The potential for faster and higher interest
Economic performance. The deep uncertainty
rate rises may also threaten continued
associated with Brexit has undoubtedly had
growth in the private residential market. The
an adverse impact on the pace of economic
nature of the Brexit deal will continue to be
growth in the UK. The UK economy grew
a pivotal factor in the future outlook for all
1.8% in 2017, the slowest growth rate since
construction sectors, but particularly those
2012. The potential for global growth taking
relying on private, and speculative, investment.
off presents upside for British exporters. That
UK CONSTRUCTION OUTPUT (ONS)
25,000
20,000
Volume (£m) Seasonally Adjusted
15,000
10,000
5,000
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
PRIVATE COMMERCIAL PRIVATE INDUSTRIAL PUBLIC SECTOR
INFRASTRUCTURE PRIVATE RESIDENTIAL PUBLIC RESIDENTIAL
3
TENDER PRICE FORECAST ASSUMPTIONS
TENDER PRICE
FORECAST
ASSUMPTIONS
• Economic growth of 1.6% in 2018, falling to 1.5%
in 2019 (HM Treasury Consensus Forecasts).
Our tender price
• Construction output rising 0.2% in 2018 and 1.7%
forecast assumes a in 2019 (CPA).
‘central scenario’ in
relation to Brexit. • £1.00 remains close to $1.40 and €1.14.
This entails:
• A Brexit deal is struck with transition period. I.e. soft
Brexit where much of the ‘status quo’ is maintained.
• Global economic growth continues to be a positive
story.
We also
assume that: • That industry capacity broadly remains at the current
levels.
NATIONAL
REGIONAL BUILDING LONDON BUILDING
YEAR INFRASTRUCTURE
CONSTRUCTION TPI CONSTRUCTION TPI
CONSTRUCTION TPI
2018 2% (1%) 2% (1%) 3% (3%)
2019 3% (2%) 3% (3%) 5% (5%)
2020 4% (3%) 4% (4%) 5% (5%)
2021 4% (3%) 4% (4%) 5% (5%)
2022 4% (N/A) 4% (N/A) 5% (N/A)
( ) Last quarter’s forecast
Percentage movements are in the year to Q4
4
MARKET VIEW | SPRING 2018
ARCADIS TENDER PRICE INDICES
MARCH 2018 INDEX BASE 1985=100
350
300
250
200
150
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
REGIONAL BUILDING CONSTRUCTION TPI LONDON BUILDING CONSTRUCTION TPI NATIONAL INFRASTRUCTURE CONSTRUCTION TPI
FORECAST
CARILLION
Carillion were the second largest It has also led to questions and parliamentary
Tier 1 contractor in the UK directly enquiries about the conduct of the firm’s directors
employing 20,000 people in the UK. and auditors, and about the UK Government’s
relationships with major suppliers working on
Their 2016 construction turnover was £1.5bn Private Finance Initiative (PFI) schemes and other
and in 2016 they reported a construction privatised provision of public services.
order book of £2.5bn with further pipeline of
construction contract opportunities of £12.5bn. In our view, Carillion’s failure is an inflection point in
the industry and will materially change commercial
The company experienced financial difficulties in dynamics, including pricing behaviours, for the
2017, and went into compulsory liquidation on 15 foreseeable future.
January 2018, the most drastic procedure in UK
insolvency law. The insolvency has caused project
shutdowns, job losses - 989 UK redundancies up to
12 February 2018 - and potential financial losses to
Carillion’s 30,000 suppliers and 28,500 pensioners.
5
CARILLION
WHAT ARE THE IMPACTS OF
THE FAILURE OF CARILLION?
Carillion’s liquidation will impact levels of
competitive tension as there will be less
‘organised capacity’ to respond to market
opportunities. There will be a large amount
INDUSTRY CAPACITY of retendering opportunities coming back
to the market as a result of Carillion’s SHORT
£2.5bn order book combined with the
need to complete projects where Carillion’s
TERM
involvement has been terminated.
It is reported that Carillion owe £1bn to
their supply chain, either as retentions or
payments. Subcontractors owed money
by Carillion will be treated as ‘unsecured
creditors’, a term used to describe those
with no assets secured against their debt.
The status of unsecured creditor places
these companies at the bottom of the
pecking order when it comes to receiving
INDUSTRY SOLVENCY repayment as part of the liquidation SHORT
process. Failure to recover monies owed is
likely to spread the contagion of insolvency. TERM
Small firms are owed an average of
£141,000, with one firm reporting that
Carillion owes it £800,000. Medium-
sized businesses are owed an average of
£236,000, with the largest debt in this
category totalling £1.4m.
6MARKET VIEW | SPRING 2018
WHAT ARE THE IMPACTS OF
THE FAILURE OF CARILLION?
(CONTINUED)
The failure of Carillion will accelerate the
adoption of more prudent commercial
behaviours and a hardening of attitudes
towards risk. This is likely to be an
RISK ALLOCATION & inflationary force on prices. Governance
COMMERCIAL BEHAVIOURS models on projects and within contracting SHORT
organisations will also come under a greater
level of focus and the reliability of financial TERM
indicators that have historically been relied
upon may be called into question.
The high-profile nature of Carillion’s failure
has highlighted deeply-rooted problems
in the industry. The news of mass job
losses and negative assessments of the
construction industry will likely put off
INDUSTRY REPUTATION potential recruits, disappoint the public LONG
and reinforce some traditional negative
stereotypes and lead to review of how the TERM
government does business with the UK
construction industry.
The scale of Carillion’s failure has
reinvigorated already well-developed
debates about the need for industry
change. Many of the issues that negatively
affected Carillion are impacting the
wider supply chain, and it is clear that
industry business models are not fit for a
INDUSTRY CHANGE sustainable future. The failure of Carillion LONG
is likely to act as a catalyst for further
change in how the industry does business TERM
and manages risk. This is likely to include
increased focus on payment practices and
whether contractors can trade on project
cashflows alone.
7CARILLION
WHAT ACTIONS MIGHT CLIENTS
CONSIDER TAKING IN RESPONSE?
It may be prudent for clients to undertake a
review of their supply chain to understand
QUANTIFY SUPPLY CHAIN how exposed to Carillion any key suppliers
EXPOSURE are. There may be actions clients can take SHORT
to support affected suppliers and mitigate
any elevated risk of supplier failure. TERM
Processes aimed at providing assurance
around financial risk and governance may
REVIEW DUE DILIGENCE
need to be reviewed to ensure they are as
PROCESSES robust as possible, and importantly, being SHORT
followed. TERM
Clients may review what risk is transferred
to the supply chain and how. There may
be a greater focus on transparency of risk
SUPPORT ELIMINATION OF management and increased push earlier
AVOIDABLE RISK & RISK on in projects around eliminating avoidable
TRANSFER risks. Furthermore, clients have a role LONG
in mitigating risk through the provision
of good quality design solutions and
TERM
avoidance of change.
Clients may review their payment
processes to ensure that they are not
unduly exposed to work in progress
and title on materials. However, the
importance of fair and prompt pay
practices has been highlighted again and
REVIEW PAYMENT PRACTICES clients may review wider project payment LONG
processes to ensure that they are aligned
to progress on site and support the supply TERM
chain’s financial health, enabling cash to
reach lower tiers of the supply chain within
a reasonable timescale.
8CONTACT
WILL WALLER
MARKET INTELLIGENCE LEAD
WILL.WALLER@ARCADIS.COM
SIMON RAWLINSON
HEAD OF STRATEGIC RESEARCH & INSIGHT
SIMON.RAWLINSON@ARCADIS.COM
SIMON LIGHT
UK CLIENT DEVELOPMENT DIRECTOR
SIMON.LIGHT@ARCADIS.COM
Arcadis
Our world is under threat - from climate change and rising sea levels to
rapid urbanisation and pressure on natural resource. We’re here to answer
these challenges at Arcadis, whether it’s clean water in Sao Paolo or
flood defences in New York; rail systems in Doha or community homes
in Nepal. We’re a team of 27,000 and each of us is playing a part.
Arcadis. Improving quality of life.
Disclaimer
This report is based on market perceptions and research carried out by
Arcadis, as a design and consultancy firm for natural and built assets. It is for
WWW.ARCADIS.COM
information and illustrative purposes only and nothing in this report should be
relied upon or construed as investment or financial advice (whether regulated
by the Financial Conduct Authority or otherwise) or information upon which @ArcadisUK
key commercial or corporate decisions should be taken. While every effort
has been made to ensure the accuracy of the material in this document,
neither the Centre for Economics and Business Research Ltd nor Arcadis will Arcadis United Kingdom
be liable for any loss or damages incurred through the use of this report.
© 2017 ArcadisYou can also read
