However, the good news is we saw the UK construction market stuttering back to life in 2021, with an initial surge of delayed construction projects in Q1, which moderated during the rest of 2021 due to global supply chain disruption. Nevertheless, starts remain substantially ahead of last year, and we can now expect further growth over the next two years to lift the value of underlying starts to a total of £61bn by 2023, 3% above 2019 levels. It’s a positive indicator for property professionals, but I’d like to explore further.
So, digging a little deeper, I’ll take this chance to reveal where we believe this recovery will take place, and in which construction verticals it will be most apparent.
Increases in private and social residential activity
Focusing first on the housebuilding market. Post-lockdown, the ‘mini’ housing boom was driven by strong demand for spacious properties amid a shift to remote working during the pandemic, along with record-low interest rates, and the Stamp Duty holiday. However, we’re anticipating a slight slowdown as we head into 2022, the result of weak real earnings growth, and higher taxes and interest rates dampening housing market activity. But, as the year progresses, we forecast growth in project starts for private housing of 6% in 2022, and 5% in 2023.
Having grown sharply during 2019 and 2020, housing association work starting on-site remained stable during 2021, rising by a modest 1%. This is, in part, thanks to capital funding improvements, and we expect stronger growth of 5% next year with a 2% rise anticipated for 2023.
Looking ahead, developers/owners should bear rising labour and material costs in mind. Housebuilder Redrow has said it expects cost inflation to be around 5% for the current financial year. Quantity surveyors at Turner & Townsend increased their 2021 tender price inflation forecast from 1.5% to 5.5% in September, warning that build inflation could remain at that level for four years, due to disrupted supply chains and labour shortages.
Strong growth in health and industrial projects
Demand is trucking along nicely for logistics and warehouse facilities starts, which remained strong throughout the year, helping retailers keep pace with unprecedented growth in online shopping. This is likely to grow even more over the next two years, as planning approvals and contract awards for industrial projects continue to increase as we move into 2022.
The prognosis for the health sector is also positive. A £4.2bn increase in capital spending was announced in the Spending Review will no doubt jump-start activity, alongside the government’s commitment to building 40 new hospitals by 2030, and upgrade more than 70 during the same period. Despite a cooling-off in activity in 2021, we expect health project starts to increase 5% in 2022 and 4% in 2023, as NHS trusts develop and implement their investment programmes.
There are big civil engineering projects are on the horizon too. Many will potentially present halo investment opportunities, as proximity housing and services will be needed. The £3b Sofia Wind Farm expansion in the North Sea, the Silvertown Tunnel and various new road infrastructure and HS2-related schemes will be important drivers for construction and property sector activity during 2022 and 2023.
Belated recovery in hotel and leisure
The leisure and hospitality industries were kyboshed by the pandemic. The collapse in the number of overseas visitors to the UK and Covid regulatory restrictions on facilities’ operations have damaged business viability for many asset owners in the sector. This has delayed the recovery in hotel and leisure project-starts, which are estimated to have grown by just 8% this year, having fallen by 40% in 2020.
Glenigan’s research confirms a strengthening development pipeline in this sector, but investors are likely to be cautious for a couple more years. Overseas visitor numbers aren’t expected to recover until at least the end of 2023, with London’s Heathrow Airport’s boss John Holland-Kaye saying air traffic won’t completely recover until at least 2026. This will prevent the sector from making a significant recovery until 2024, especially in central London which is so heavily reliant on tourists.
How to thrive in 2022 and 2023
To thrive in this shifting landscape, which will possibly see the North outperform London and the South East over the next two years, property firms and industry professionals need to act with agility and flexibility. This includes understanding how supply-side constraints are disrupting project schedules and extending construction times, with implications for project delivery and capital investment returns.
Across property, the drive for cost-efficiently is stronger than ever, from recruitment and operations, to sales and CRM activities. As in so many sectors, good information and digital tools offer a competitive edge. Getting ahead on this will pay dividends, helping your business to rise on construction’s gradual tide of recovery.
Allan Wilen, Economic Director, Glenigan
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