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The UK Construction Prospects: Will 2024 Be A Less Challenging Year?

UK construction has endured challenging economic conditions during 2023, as UK economic growth effectively stalled. While economic conditions will remain sluggish over the coming year, the value of construction starts is forecast as steady after the sharp falls seen during 2023. A further strengthening in starts is forecast for 2025 as UK economic growth gathers momentum, supported by a pick-up in household spending and business investment.

Weak demand has been the greatest brake on construction activity over the past year. Sluggish economic growth and sharply higher interest rates have prompted some clients and developers to pause or scale back on planned investments.

Construction starts fell back sharply at the start of this year. Private sector starts, in particular, have continued to weaken in recent months amid concerns that interest rates will remain at current levels for longer than initially anticipated.

Public sector construction has been a relative bright spot during 2023 as an underspend of government departmental capital budgets during 2022/23 was rolled forward to the current financial year.

“Changing working patterns are expected to remain an important driver for office refurbishment projects over the forecast period”

Economic uncertainty and the rapid rise in mortgage costs has stalled housing market activity and prompted a sharp retrenchment in starts during 2023. Faced with a sharp fall in housing market activity and a weakening in house prices, developers have focused on building out existing sites rather than opening new ones in response to a slowdown in new house sales. While interest rates are expected to remain at or near current levels during 2024, weak house prices and rising nominal average earnings will progressively improve housing affordability. This is expected to support a partial recovery in project starts during 2024 and 2025 as housebuilders respond to improved consumer confidence and a strengthening in property transactions.

After a strong post-pandemic rebound, industrial starts have fallen back sharply over the past 12 months. Higher interest rates have dented the capital value of industrial property over the past year and have knocked investor confidence, while weak retail spending has temporarily dampened the demand for warehousing and logistics space starts. However, structural changes in the retail market are expected to fuel long-term demand for logistics space from online retailers and distribution companies. This is forecast to drive renewed growth over the next two years.

In contrast, an overhang of empty retail premises, weak consumer spending, and the growth of online sales’ market share will continue to constrain retail construction starts. Starts have been especially weak during 2023, dropping by an estimated 28 per cent. A partial recovery in retail starts is anticipated during 2024 and 2025 supported by increased consumer spending.

The effects of the cost-of-living crisis

The squeeze on household budgets has also curbed consumers’ discretionary spending during 2023 in areas such as hospitality and leisure activities. The financial position of many hospitality businesses has been slow to improve post-pandemic, with firms facing reduced revenues from fewer overseas visitors and a sharp rise over the past two years in energy, materials and labour costs. These pressures, combined with weaker consumer spending, have contributed to a 14 per cent decline in hotel and leisure starts during 2023, pushing back the expected recovery in sector starts to 2024.

Sharply higher interest rates and the prospect of reduced demand for office space have dampened office starts over the past 12 months. Nevertheless, changing working patterns are expected to remain an important driver for office refurbishment projects over the forecast period as landlords and occupiers adapt properties for hybrid working, lifting starts from 2024.

Underspend by a number of government departments during the past financial year was rolled forward to 2023/24 and has helped bolster public non-residential activity. Education has been a particular bright spot during 2023, growing by 22 per cent. Increased central government capital funding is helping to address a shortage of secondary school places and deliver the government’s commitment to rebuilding 500 schools over the next decade. Further growth is anticipated during 2024, with the current RAAC crisis requiring immediate investment to address potential structural failures.

Health project starts have dropped by an estimated 15 per cent during the past 12 months after strong growth in 2022 as NHS resources and management time have been prioritised to address long waiting lists and resolve industrial unrest. Nevertheless, the outlook for the health sector remains positive. NHS investment is a high political priority and a 3.8 per cent per annum real-term growth rate in NHS capital funding is set to support a rise in starts during 2024.

Higher construction costs have constrained social housing development activity during 2023, with housing associations reappraising the viability of projects. The slowdown in the private housing market has also reduced the opportunities for mixed-tenure developments. This has prompted an estimated 13 per cent decline in starts. Greater cost stability is expected to help associations to increase the development activity over the next two years. Improved market conditions should also increase the scope for more mixed-tenure schemes.

Civil engineering starts have declined by an estimated 12 per cent during 2023 as a previous sharp drop in infrastructure approvals has fed through as fewer projects starts. Utilities projects starts have been unchanged during 2023 on the previous year and are forecast to return to growth from 2024.

Value of underlying (under £100m) project starts

Square Root Group Ltd is your Professional Domestic, Commercial and Industrial Builder in Wolverhampton and its regions. We offer Quality, Value for Money and Great Service!

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