Construction Investment - gloom in 2023, much better in 2024-5

Construction industry insight and intelligence consultancy Glenigan has produced its industry forecast for the next three years - and in a sea of pessimism, it provides some hope for the future.

The headline takeaway is that the construction industry will struggle in the face of extremely challenging economic conditions, with predicted declines of 18 per cent during 2023. However, there’s recovery in the not-so-distant future, with a 12 per cent increase predicted in 2024, and three per cent in 2025.

Significant disruption stifles short-term growth

Construction starts fell sharply during the first four months of this year, as the fallout from last autumn’s mini-budget and a weak outlook dented investor and consumer confidence.

Ongoing conflict in Eastern Europe, materials shortages and cost inflation, and, more recently, spiking interest rates, are expected to delay work moving to site for the remainder of the year, with an 18 per cent drop predicted.

Despite a tough start to the year and conditions remaining hard during the final six months of 2023, renewed construction growth is forecast for 2024 and 2025, with firm development pipelines already pulling through to support a rise in industrial and office starts. Improved consumer confidence and real-term wage increases are also expected to feed through to lift activity.

Public sector picks up

Public sector construction is set to be a relative bright spot during 2023, as government departmental capital programmes are boosted by underspend rollover into the current financial year.

However, disruption to project-starts is likely in the run-up to the next general election, and post-election, as a new administration looks to review and consolidate public sector investment programmes currently in the works.

Glenigan’s economic director Allan Wilen says: “The pattern of UK construction activity is being reshaped by economic slowdown and structural changes, while new regulations are transforming how projects are delivered. We are still in a state of extreme uncertainty, and the industry is set for a challenging period over the coming year, but there’s light at the end of the tunnel. 

“Structural changes are expected to create new opportunities in logistics, office and retail refurbishment and fit out, and the repurposing of redundant commercial premises. Firms will need to be responsive and adaptable to identify these growth areas and exploit new opportunities as they emerge over the next three years.”

Peaks and troughs for private residential construction

Housing market activity fell sharply during the first four months of 2023 and is predicted to slow further throughout the year as housebuilders respond to weakening market conditions and regulatory assimilation, opting to build-out schemes rather than opening new sites.

Weak private housing starts are predicted to continue through the rest of the year, with Glenigan forecasting a 33 per cent decline as falling real household incomes and rising mortgage rates cool housing market activity.

However, this slowdown appears temporary, with a renewed project-starts recovery anticipated in the second half of the Forecast period, rising seven per cent in 2024 and eight per cent in 2025, as households’ financial positions and UK economic prospects improve. 

Social housing slips back

The forecast for social housing project-starts is less positive, with starts predicted to remain flat for the duration of 2023 as eye-watering construction materials costs and labour shortages continues to constrain activity. Approvals are similarly expected to fall back over the remainder of the year.

However, improved funding for affordable housing projects is anticipated in 2024 and is set to buoy the sector, with an 11 per cent growth forecast for the period.

Higher borrowing costs are also likely to dampen student accommodation starts, near term, but improved investor confidence in 2024 is expected to counteract this, lifting starts.

Industrial Consolidation

Industrial project-starts have enjoyed a strong rebound post-pandemic, largely driven by significant growth in warehousing and light industrial projects. Looking forward, the sector faces a period of consolidation in 2023, before returning to growth in 2024.

Spiralling costs, labour shortages and supply chain disruption has tempered manufacturing investment in facilities, while slowing domestic and overseas demand is expected to exacerbate slow UK manufacturing output over the coming year.

Nevertheless, tax measures announced in the Spring Budget will help win back investor confidence, encouraging a demand revival for premises next year with a 20 per cent predicted growth in 2024, and six per cent in 2025.

Major projects to boost civil engineering

Civil engineering starts will likely soften as sharp drops in infrastructure approvals throughout 2022 feed through to this year. Overall, civil engineering starts are forecast to slip back 9% before returning to growth in 2024.

The delivery of existing and planned major capital projects will be the significant driver of sector growth over the forecast period, including HS2, the Silvertown Tunnel, and Hinckley Point C.

Retail Recovery

The sector is forecast to experience sharp falls in project-starts in the short term, slipping back 25 per cent in 2023 as stalled UK economic growth and consumer spending deter investment.

An overhang of empty retail premises, as well as the growth in online sales’ market share, are also predicted to constrain retail construction starts over the forecast period.

Despite this, improving consumer spending is expected to support a recovery in starts from 2024, with Glenigan forecasting a 42 per cent rise in 2024, and six per cent in 2025.

Investment by the deep discount supermarkets, Aldi and Lidl, is set to be a relative bright spot within the sector over the forecast period, boosting growth.

Refurb revival for offices

Office starts have rebounded since 2021, after the Covid-19 pandemic spurred changes to working practices.

The sector is predicted to benefit over the forecast period from a rise in refurbishment and extension projects, as landlords adapt premises to further accommodate for the rise in hybrid working.

Furthermore, demand for premium ‘green’ office space, is set to support a rise in new build starts during the second half of the forecast period.

These opportunities for the sector are predicted to drive growth over the next two years, 19 per cent in 2024, and 11 per cent in 2025.

Tough times for hospitality

The sector has been slow to recover post-Pandemic, faltering on its initial rebound during 2021, with starts slipping back 2% last year. Intense financial pressures due to sharp costs-inflation and labour shortages, as well as the ongoing impact of protracted closures and restrictions to their operations during lockdown, continue to dampen investment in the sector.

Squeezes on household budgets are also set to curb consumers’ spending in the hospitality and leisure industries this year, delaying the anticipated recovery in project-starts until 2024, when the sector is forecast to see a growth of 10 per cent in 2024, and three per cent in 2025. 

Back to school

The UK government has also committed to rebuilding 500 schools over the next decade. Increases to the Department of Education’s capital funding over the current financial year are expected to support growth in school building projects during 2023 (22 per cent) and 2024 (12 per cent) following a weak performance last year.

Support for the NHS

Health project-starts are forecast to fall back during 2023, dropping by 17 per cent as NHS resources are redirected toward addressing long waiting lists and resolving industrial unrest.

However, medium-term the outlook for the health sector remains positive, with NHS capital funding set to support a rise in starts from 2024, when the sector is forecast to see a 13 per cent growth in project-starts, with a three per cent growth in 2025.