Backlog in delivery pipeline sees construction workloads hold steady

RICS UK Construction and Infrastructure Market Survey, Q1 2018.

• Backlog in delivery pipeline helps to sustain workloads at a steady pace.
• Private housing reported the strongest rise in workloads with the most positive reading since the beginning of 2016.
  

Construction workloads

Workloads remained resilient despite bad weather and a weaker near-term economic outlook, in the first quarter of 2018 – according to the results of the Q1 2018 RICS Construction and Infrastructure Market Survey.

In Q1 2018, 23% more chartered surveyors reported that their workloads had risen as opposed to fallen. While 63% of respondents noted bad weather conditions as a limiting factor, the Beast from the East was not enough to slow the pace of growth.

The RICS quarterly series has now indicated moderate but steady growth for the past four quarters, something supported by the positive expectations expressed by surveyors in their forecasts a year ago.

In the early part of 2018 workloads increased across all subsectors, with both new work and repair and maintenance activity rising steadily. Private housing reported the strongest rise in workloads with 36% more respondents citing an increase rather than a decrease – the most positive since the beginning of 2016. This contrasts with the public sector where the pace of workloads slowed to a net balance of +10% in housing (+19 in Q4 2017).

In infrastructure, 21% more contributors reported a rise rather than a fall in activity, and nationally, respondents expect the rail and energy categories to post the most significant increases over the coming 12 months.

Workloads are now reported to be increasing across all geographic regions, with an acceleration in the pace of growth in the Midlands and Southwest.

What does this mean financially?

Higher input costs and a shortage of labour continue to restrict growth in profit margins, and while cost pressures may ease later this year, expectations on profit margins are still well below the three-year average of 40% recorded between 2014 and 2016. Indeed, tender prices are expected to rise over the next 12 months with respondents in both the building and civil engineering sectors envisaging greater price pressures.

Forecasting activity

Besides the one-off factors related to inclement weather, financial constraints, planning delays and labour shortages remain the key impediments to growth with 76%, 66% and 60% of surveyors reporting difficulties with each, respectively. In an extra question added this quarter, 85% of respondents were of the view that small and medium-sized firms are the most impacted by constraints on financing.

The lack of sufficiently skilled workers remains an obstacle for many businesses, particularly with regard to professional services such as quantity surveying. Labour shortages remain at elevated levels after having eased throughout 2016 with 60% of contributors in Q1 citing this as an impediment to growth. Indeed, the share of respondents reporting insufficient availability of quantity surveyors was the highest in ten years.

Despite the constraints that firms have been facing recently, surveyors remain relatively upbeat. Net balances of 46% and 35% of respondents expect workloads and employment levels, respectively, to continue to rise over the coming 12 months.

While a short-lived snowstorm may have snarled logistical supply chains and site works at the end of February, it was not enough to negatively impact on workload order books. Indeed, several years of limited spare capacity have resulted in a backlog within the delivery pipeline which will take some time to unwind. Risk aversion by both lenders and developers, in the wake of Carillion and ongoing Brexit negotiation, will continue to weigh on investment decisions.