Tender price inflation continues to slow in 2016 after two years of steep increases which have left inflation 18% higher than in 2013. We are currently predicting that tender price inflation during 2016 will rise by 4.5% in Central London and by 4.2% in the remainder of the UK as a whole.
The ‘hot spots of activity’ outside of London include Cambridge, Manchester and Bristol. Construction activity in Croydon is also at a high level with a stream of office, retail and residential developments under way with works on the new Westfield/Hammerson shopping centre expected to commence in 2017.
Despite moderating national construction industry output, capacity remains an issue as supply continues to outstrip demand, although there are increased signs that some Contractors have gaps to fill in their order book. The market favours the ‘supply’ side and Contractors continue to be able to be selective in their approach to tendering which is directly linked to the tender price inflation run of the last two to three years.
There is a real concern in large parts of the property industry that a vote in favour of leaving the European Union on 23rd June 2016 could potentially cause investment money, particularly overseas investment, to dry up in the UK with a knock on effect in reducing construction output. Land Securities chief executive Robert Noel has said that “business uncertainty” during the negotiations on an exit treaty could “drive down occupational demand” potentially leading to “falling rental values and a reduction in construction commitments, particularly in London”.
New survey data produced by the RICS shows that international demand for UK office, industrial and retail property has fallen since the referendum was confirmed last summer, suggesting that international businesses are already postponing investment in the UK.
Other potential outcomes of a ‘Brexit’ are higher labour costs due to the industry’s heavy reliance on migrant labour, higher material costs due to anticipated increased import costs and also increased house price volatility.
However, this potential exit from the EU is still a moderate risk rather than reality and is not reflected in our current tender price inflation forecasts as the UK has so far been little affected by external markets and events.
Confirmed commitments announced in the March 2016 budget for major infrastructure projects (High Speed 3, Crossrail 2, school academies, flood defence works, etc.) should continue to strengthen the demand from the infrastructure construction sector. The Chancellor, George Osborne, also laid out £4bn of spending cuts and extended the extra stamp duty rate to the large ‘buy-to-let’ investors.
A copy of the full report can be found by clicking here.