What Brexit Means for the UK Construction Industry

Last week I attended an event organised by the RIBA Journal all about what Brexit means for the UK Construction Industry. For those that didn’t attend, here are my core take-aways from the speakers and the lively Q&A.

Nick Whitten, Associate Director at Surveyors JLL

Nick was the residential expert on the panel. Overall Nick and JLL was surprised by the result. The fundamentals are very different from the crash in 2008; this is a political not an economic shock. A weaker sterling and lower borrowing costs should in theory help to buoy the residential market, but Nick forecast some short and long terms impacts to consider:

Short Term

  • There has been and is likely to be a continued drop off in transactions, which is led by discretionary investors.
  • In most cases these are buy to let investors and second home owners, who primarily were already influenced by Clause 24.
  • There has been a trend towards delays in sale by vendors led by uncertainty.
  • It is too early to see the impact on Capital Values.
  • Record low borrowing costs will help support the market.
  • A weaker sterling increases the prospect of foreign investment. It also drives up the cost of UK construction as up to 60% of the raw material for the UK construction industry comes from Europe.
  • London will continue to provide a strong geographic position.
  • The continued and increasing short fall in new build homes both within and outside London and the M25 means that the UK is currently only meeting 50% of its housing targets. This will also cause the housing market to remain strong, and continue to grow due to demand.

Long Term

  • The housing market will continue to grow.
  • Investors are waiting to see where to best place their assets. It is expected that Brexit will result in 1-2 lost quarters with the lead up already resulting in a lost quarter.
  • It is expected that private rental will also remain strong.

In general Nick noted that when the 2008 crash occurred there was not the level of liquidity, property value or borrowing capacity that there is now. This will further strengthen the markets position when compared to 2008.

Mark Cleverly, Head of Commercial Development, Arcadis

Mark represented the commercial sector on the speaker panel. Brexit was not the outcome they wanted and the commercial property sector has been affected in the immediate aftermath of the result. Investors require more time to better understand the true impact of Brexit and to understand the lay of the land.

Mark first looked at the positives:

  • London maintains low vacancy rates (4%), which means the market is still strong on rental.
  • There continues to be a good take up of commercial space.
  • There is no shortage of equity or debt finance available for developers.
  • Investment remains active but this is primarily on the acquisition side.
  • The US Dollar and Euro are strong against the pound, which should make investment attractive for foreign investors.
  • Regional Markets such as Reading and Maidenhead will stay strong with further investment confirmed recently.

Mark also saw various negatives to Brexit:

  • The high level of stock on the market is destabilising the development side.
  • The uncertainty of whether banks will relocate is also destabilising the sector as developers are delaying their projects to get more certainty.
  • Banks are pausing and reviewing projects not yet on site to ascertain whether they are still good investments.

But with these negatives Mark sees opportunity too:

  • With an increase in acquisitions lead by foreign investment there is likely to be an increase in commercial refurbishment.
  • There is likely to be an upscale in PD schemes converting commercial to residential as conversion becomes more attractive.

In general there is the concern of a “Zombie Economy”, with development slowing due to uncertainty in the market. This ultimately will lead to a self-fulfilling prophecy. There is also the potential for reduction in land values, which could lead to developers purchasing land with a 5-10 year view on development.

It is expected that 30% of new stock currently in development will come online in the next 12 months. This may delay uptake with a reduction in pre-lets and downward pressure on rent.

There is a concern with regards to the pipeline for professional services too – there is a potential for new projects to dry up. For architects it will be important to be particularly careful on valuations. It is likely Brexit will reduce the amount of jobs going to tender, reducing available work for contractors and ultimately their level of liquidity. This will increase the risk of contractors going under.

Analysts predicted a 1.5-5% reduction in GDP as a result of a decision to leave the EU. Within construction this fall tends to kick down further. Experian have cut their growth prediction for the construction industry from 4% to 2%.

Nigel Coates, Nigel Coates Architects

Nigel was tasked with representing a view from the Architecture profession. Nigel gave a very impassioned speech on his feelings with regards to Brexit. He noted the impact it will have on European Architects working in the UK, as there are a significant number of EU nationals working as Architects particularly in the London market.

Nigel noted that although we could be closing ourselves off from Europe with regards to work it will also make us more attractive to foreign projects because we will be cheaper. He has already seen a marked reduction in his work in Europe since the vote.

An additional fear is the reduction in the number of foreign students coming to study Architecture. This will certainly have a marked impact on London’s international nature.

Following the three talks there was lively discussion with Q&A from the audience. The highlights and some key actions were:

The lack of a road map for Brexit has created uncertainty and this is a key factor in driving an industry slow down. The new government must quickly develop a clearer picture for how to manage Brexit over the coming years. It is likely this uncertainty will be reflected in most if not all of the major UK industries.

The industry expects there to be an impact on blue-collar workers and ultimately a skills shortage. The Construction industry needs to address this by anticipating where there will be requirements for new skills and people coming into labour force.

Public investment should be challenged and other initiatives setup by the UK Government to help buoy the construction industry post Brexit. One suggestion was to put more money into social housing and government led development to keep work in the pipeline.

It was clear from a number of comments that the construction industry needs to establish a clear and single voice to further the construction industry’s agenda to the government. Most other UK Industries are very good at this, but the construction industry is not. It also needs to establish a set of values and use these as a brand demonstrating the UK as a strong source of construction sector professionals.

Many Universities are already pushing direct communication to European bodies, showing that they are still open for business. This is a proactive approach, one that side steps the slow uptake by the government and looks to establish a clear message. The construction industry could do well to follow this.

Other immediate tactical steps that could be taken to support the sector include:

  • reduction in VAT on construction
  • steps back on clause 24 to encourage discretionary investors.
  • Regeneration needs to be back on the agenda however this does not necessarily mean gentrification.
  • fiscal stimulus may be required across a range of property types.

The event provided a very good look at the impact of Brexit and what it means to the construction sector.

One of the key take-aways for me is that without a clearer roadmap for delivering Brexit, the outlook remains uncertain. For this reason I was pleased to hear plans to revisit the subject in October when hopefully the new Government will have a much clearer picture of what’s coming next.

If you would like to discuss the implications of Brexit on your investment and development roadmap, why not contact Granit’s experienced commercial architecture team in London.

Ben Hawkins, Architect