ECONOMIC AND REGIONAL INFLATION REPORT

THIRD QUARTER 2012

Gleeds’ Economic and Regional Inflation Report considers factors affecting the United Kingdom construction industry looking at inflation, construction output, employment and topical matters currently affecting the regional market.

executive summary

Gleeds’ Economic and Regional Inflation Report takes an overview of factors affecting the United Kingdom construction industry and considers inflation, construction output, employment and topical matters currently affecting the regional market. Headline data

Inflation Summary

Tender Prices

According to Experian:

Consumer Prices Index (CPI) August 2012= 2.5 per cent.

The Building Cost Information Service (BCIS) forecasts that tender prices will remain constant in the year to 3Q2013 and increase by 2.8 per cent in the year to 3Q2014.

•

Output for the construction industry is forecast to decline in 2012 by between 5 and 6 per cent;

•

By the end of 2013 output could be back to only 2 per cent above its 2009 level losing most of the gains made in 2010 and 2011;

•

Growth is likely to be modest at less than 1 per cent.

The Office for National Statistics (ONS) reveal in their latest bulletins that: total volume of all construction output in 2Q2012 fell by 3.0 per cent compared with the previous quarter; when compared with the same quarter in 2011, all work fell by 9.0 per cent; new construction orders in 2Q2012 increased by 0.2 per cent compared with the previous quarter; compared with the 1Q2012 there was a large increase in public other work, which grew by 31.5 per cent; volume of new orders for infrastructure is 38.5 per cent higher than the same period twelve months earlier. the unemployment rate for the three months to July 2012 was 8.1 per cent – down by 0.1 per cent on the previous quarter (2.59 million people are reported unemployed); and total pay (including bonuses) rose by 1.5 per cent on a year earlier, down 0.3 per cent on three months to June 2012.

Retail Prices Index (RPI) August 2012 = 2.9 per cent. HM Treasury’s comparison of independent forecasts, predicts that for the calendar year 2012, the average increase for the CPI will be 2.5 per cent and for the same period the RPI will be 2.9 per cent. For subsequent years, CPI will be 1.8, 1.9, 2.1 and 2.1 per cent whilst RPI will be 2.3, 2.6, 3.0 and 3.1 per cent. The Bank of England in their quarterly inflation report published on 8 August 2012 notes that: “CPI inflation fell to 2.4 per cent in June 2012, from 3.5 per cent in March. That fall was almost entirely accounted for by lower goods price inflation, including a lower contribution from petrol prices. Agricultural commodity prices have risen following unusually dry weather in the United States… Employment growth remains puzzlingly robust. Despite the fall in output, private sector employment increased strongly in 1Q2012 while the unemployment rate edged lower. Private sector productivity is still below its pre-crisis level. Annual private sector regular pay growth remains around 2 per cent…”

Gleeds anticipates that year on year (Third Quarter) average UK construction tender price inflation will increase over the next twelve months by 0.3 per cent. Over the following three years (2013/14, 2014/15 and 2015/16), Gleeds anticipates that there will be steady growth of 1.7, 2.6 and 4.1 per cent respectively.

DETAILED REPORT

A comparison of independent forecasts GDP growth

2012

Forecasts for the UK economy

Bank of England, Inflation Report, 8 August 2012

-0.4

1.1

1.9

2.3

2.4

CPI

2.5

1.8

1.9

2.1

2.1

RPI

2.9

2.3

2.6

3.0

3.1

82.4

83.5

84.5

85.5

86.2

0.50

0.52

0.86

1.76

2.36

(per cent) (Office for Budget Responsibility)

MOVEMENT

HM Treasury’s report ‘Forecasts for the UK Economy’ provide predications for the UK economy from 2012 to 2016 as noted below:

2016

clothing and footwear.

MOVEMENT

2.9%

•

2015

3.2%

housing and household services (particularly domestic gas);

“… considerable uncertainty surrounds the inflation outlook…Domestically, it is difficult to know how developments in productivity and the margin of spare capacity will affect companies’ costs, and the extent to which profit margins will be restored by companies raising prices rather than reducing costs.”

MOVEMENT

RPI

•

2014

2.5%

furniture, households equipment and maintenance;

MOVEMENT

2.6%

•

2013

AUG 2012

CPI

Inflation

The three main factors influencing August’s CPI decrease were:

MOVEMENT

JUL 2012

INFLATION

Inflation rate (per cent)

Sterling index (Jan 2005 = 100) (HM Treasury)

Official Bank rate (annual average, per cent) (HM treasury)

*Movement relates to the predications from the previous quarter

Barclays Capital

RBS Global Banking and Markets

Oxford Economics

Nomura

JUL-12

APR-12

JAN-12

300

5.00 250

4.00 200

3.00 150

Consumer Prices Index CPI

General Index of Retail Prices (all items) RPI Base 1987–100

-50

-100

Average 2012 2.32%

Average RPI 2011 - 5.20%

5.00

1.00

0.00

INDEX

0.00 General Index of Retail Prices (all items) percentage RPI

2.70%

2.50%

2.20%

2.60%

OCT-11

JUL-11

APR-11

JAN-11

1.00 Consumer Prices Index percentage CPI

Office for Budget Responsibility

UBS

Societe Generale

1.80%

2.30%

2.00%

2.40%

Average 2013 2.58%

Scotiabank

2.00%

-2.00

1.80%

OCT-10

JUL-10

APR-10

JAN-10

OCT-09

JUL-09

APR-09

JAN-09

OCT-08

JUL-08

APR-08

JAN-08

-1.00

NIESR

Morgan Stanley

1.80%

1.50%

2.80%

2.50%

2.50%

Average 2011 5.20%

Lombard Street

Fathom Consulting

ITEM Club

ING Financial Markets

HSBC

2.60% 2.30%

Forecast 2013

Goldman Sachs

2.80%

3.10%

2.80% 2.40%

2.10%

6.00

IHS Global Insight

Experian Business Strategies

Economics Perspectives

EIU

Deutsche Bank

Credit Suisse

Commerzbank

1.90%

2.00%

2.60%

Forecast 2012

Citigroup

CEBR

3.20%

OCT-07

JUL-07

APR-07

JAN-07

PERCENTAGE

OFFICE OF NATIONAL STATISTICS

2.00

Schroders Investment Management

FORECASTER

Capital Economics

1.90%

2.40%

2.50%

4.00

CBI

British Chambers of Commerce

1.40%

2.00

Beacon Economic Forecasting

2.40%

3.00

Bank of America - Merrill Lynch

PERCENTAGE

RETAIL PRICES INDEX INFLATION FORECASTS

ANNUAL INFLATION RATES

6.00

100

50

0

MONTHS

The summary of the Treasury’s average RPI forecasts, predicts that inflation for years 2012 and 2013 will be 2.32 and 2.58 per cent respectively. The forecasts range from 1.4 to 3.2 per cent for 2012 and 1.8 to 3.6 per cent for 2013. The individual organisations forecasts as at August 2012 are noted below. The increase in RPI for 2011 was 5.2 per cent.

TENDER PRICE FORECASTS

According to the BCIS, tender prices fell by 1.4 per cent in the year ended 3Q2012 compared with the previous twelve months. They forecast that tender prices will: remain constant in the year ended 3Q2013; increase by 2.8 per cent (year ended 3Q2014); increase by 3.6 per cent (year ended 3Q2015); and increase by 4.0 per cent (year ended 3Q2016).

Gleeds’ view is that tender prices will only increase marginally over the next twelve months. Tentative growth will follow through to 2015 and by 3Q2016 tender price inflation will be circa 4.1 per cent.

BCIS expect that tender prices will rise more in line with input cost increases from 2013/14 onwards. By the end of 2017, tender prices will be in the order of 1 per cent below the peak in 2007.

The BCIS anticipates that new work output will fall sharply in 2012. With current tender price levels around 5 per cent above the reported trough of early 2010, and input costs having risen by 7% since then, there appears to be little room for further downwards movement in tender prices. However, with the sharp decline in new work output predicted for 2012 contractors may reduce tender prices a little during 2012/2013 in an attempt to win work.

These forecasts are made on the assumption that measures will be put in place to prevent a Eurozone collapse (with the economic fragility of some of its members, there is considerable uncertainty surrounding this assumption).

CONSTRUCTION PRODUCTION and ORDERS

In respect of orders:

The ONS reports that:

“What the market needs now is investment, not piecemeal planning reform... More ambition from the government would help create the homes and jobs we need to pull the UK out of recession.”

output in the construction industry fell by 3.0 per cent in 2Q2012 compared with 1Q2012;

new orders in 2Q2012 rose by just 0.2 per cent compared with previous quarter;

compared with 2Q2011, both new work and repair & maintenance sectors fell by 12.9 and 1.0 per cent respectively;

the total volume of orders in the twelve months to 2Q2012 was 5.8 per cent lower than the twelve months a year earlier; and

total volume of construction output in 2Q2012 compared with the same quarter in 2011 fell by 9.0 per cent; and

the largest fall in orders in the twelve months to 2Q2012 was in the public (new work) and infrastructure sectors at 29.9 and 29.3 per cent respectively.

Peter Bolton King, RICS Global Residential Director

in comparison with the twelve months ending 2Q2011, the total volume of construction output in the same period ending 2Q2012 fell by 3.2 per cent.

25,000

1Q2008 2Q2012

20,000

15,721

15,000

8,364 -31%

SECTORS

R&M Non Housing

R&M Private Housing

R&M Public Housing

Private Commercial

Private Industrial

Public other work

Infrastructure

Private New Housing

20%865

Public New Housing

0

2,910-15% 2,462 1,485 1,426 -4%

2,517 24% 2,510 2,051 23% 2,030 -41% 1,331 788

721

5,584 -14% 4,786

5,776

4,697 -31% 3,264

5,000

£ MILLION

CONSTRUCTION OUTPUT -

DIFFERENCE BETWEEN 1Q2008 (PEAK) & 2Q2012

10,000

Output figures for the main construction sectors (1Q2012 to 2Q2012) are as follows:

SECTORS

Output

Output figures

Movement %

CONSTRUCTION PRODUCTION and ORDERS

NEW PUBLIC HOUSING

-5.7

NEW PRIVATE HOUSING

-6.5

NEW INFRASTRUCTURE

-6.7

NEW PUBLIC NON-HOUSING

-3.9

NEW PRIVATE INDUSTRIAL

0.0

NEW PRIVATE COMMERCIAL

-0.9

PUBLIC HOUSING R&M

-1.9

PRIVATE HOUSING R&M

-5.4

NON-HOUSING R&M

0.6

A comparison of activity between the peak of 1Q2008 and 2Q2012 reveals that: All ‘construction output’ is down by 16.0 per cent; Infrastructure is up by 25.3 per cent; and Private commercial is down by 33.3 per cen.

CONSTRUCTION PRODUCTION and ORDERS

VALUE OF ORDERS NEW CONSTRUCTION IN GREAT BRITAIN The difference between the 12 months to DEC 07 (peak) and the 12 months to JUN 12

40

36.61%

SECTORS

20 0

INFRASTRUCTURE PUBLIC HOUSING

PRIVATE HOUSING

OTHER PUBLIC

PRIVATE INDUSTRIAL

PRIVATE COMMERCIAL

-20

PERCENTAGE

-23.64% -40

-34.62%

-40.80%

-60

-58.33%

-55.22%

-80

VALUE OF ORDERS NEW CONSTRUCTION IN GREAT BRITAIN The difference between the 3 months to JUN 12 and the previous quarter

40

SECTORS 31.55%

30 20 10

PERCENTAGE

0

7.28% PUBLIC HOUSING

9.18% OTHER PUBLIC

PRIVATE HOUSING INFRASTRUCTURE

PRIVATE INDUSTRIAL

-10 -20 -30

-13.31% -20.40%

PRIVATE COMMERCIAL

-4.57%

CONSTRUCTION OUTPUT FORECASTS

The RICS reports that construction activity remained weak in 2Q2012 with; Quantity surveyors advising slightly lower workloads Most sectors recording a decline in activity; but

Experian have revised their forecasts for construction output during the next three years. For 2012, they forecast a decline of between 5 and 6 per cent. By 2014, growth is predicted to return but it is likely to be at a tentative rate of less than 1 per cent.

expectations for workloads and employment over the next twelve months are positive. Due to the recession and the shortage of work downturn there are signs that middle-sized contractors are withdrawing from general contracting market and concentrating on specialisations. This action is down to a severe shortage of suitable work and the unsustainable profit margins.

20,000

Private Commercial Private Industrial Other Public Infrastructure Private Housing Public Housing

18,000 16,000

12,000 10,000 8,000 6,000 4,000

QUARTERS

1Q2012

3Q2011

1Q2011

3Q2010

1Q2010

3Q2009

1Q2009

3Q2008

1Q2008

3Q2007

1Q2007

3Q2006

1Q2006

0

3Q2005

2,000

1Q2005

£ MILLION

OFFICE OF NATIONAL STATISTICS

NEW ORDERS I N THE CONSTRUCTI ON I NDUSTRY

14,000

CONSTRUCTION SECTOR EMPLOYMENT

There is concern within the industry that as the economic downturn continues and contractor’s workforces are reduced in line with the anticipated workload, a generation of skilled craftsman may have been lost to the industry. Past recession experiences show that when highly skilled workers leave the construction industry many choose not to return when there is an upturn.

In addition, because of the lack of funding and opportunities during the downturn, the training of apprentices has been severely curtailed. Without the normal linear progression in the construction labour market there could be a chronic skill shortage for many years to come that could result in: excessive labour costs, an inability to deliver work, delayed lead in times, an influx of labour from the EU and possible fragmentation of the market.

Employment Redundancies Vacancies

2500 2400

60

50

40

2200 2100

30

2000 20 1900 10

1800 1700

QUARTERS

2Q2012

2Q2011

2Q2010

2Q2009

2Q2008

2Q2007

2Q2006

2Q2005

2Q2004

2Q2003

2Q2002

0 2Q2001

EMPLOYMENT THOUSANDS

EMPLOY MENT IN THE CONSTRUCTION INDUSTRY

2300

REDUNDANCIES & VACANCIES THOUSANDS

Since the peak in 3Q2008, employment in the construction industry has fallen by 16.45 per cent. The national average decline in employment in the industrial related sectors since 3Q2008 is 9.1 per cent.

INSOLVENCIES & PAYMENTS

9,000

80%

8,000

6,000

80%

80%

82%

5,000

2,000 81%

81% 81%

82%

80%

81%

82%

82% 1,500

This chart shows that the number of construction related business failures remained in the same proportion to all business failures throughout the period of recession.

4,000

PERCENTAGE

80%

83% 82%

2,500

Percentage of the non-construction related business failures

80%

83%

7,000

failures were construction related. Over the next seventeen quarters, this percentage fell to 17 and peaked at 20 per cent resulting in an overall average for the period of 18.75 per cent. The chart demonstrates that construction fared no worse during the recession than the rest of British Industry.

From the peak in 1Q2009, there was a steady decline in failures but in 4Q2010 and 1Q2012 there were sharp increases. The trend indicates a very gradual decline so it could be some time before the level of failures returns to pre-recession levels. In 1Q2008, 18 per cent of all business

10,000

RELATED BUSINESS FAILURES 2008-2012

ALL BUSINESS

RELATED FAILURES

The total number of construction related business failures for the year ending 1Q2012 fell by circa 6.7 per cent compared with the year ending 1Q2011. Since the peak of construction related business failures in 4Q2009, the annual number of failures has fallen by 15.3 per cent.

It can be seen from the chart (Construction Related Business Failures since 2008) below that construction related business failures peaked in 1Q2009 at 1,913 for the quarter. In the 1Q2008, some twelve months earlier, the number of failures was 1,178, so during this twelve month period business failures increased by 62.4 per cent.

3,000 2,000

1000

500 All Business Related Failures

1,000

Total Construction Related Failures

0

0 1Q2008

MONTHS

3Q2008

1Q2009

3Q2009

1Q2010

3Q2010

1Q2011

3Q2011

1Q2012

TOTAL CONSTRUCTION RELATED FAILURES

The Insolvency Service data records that in England and Wales during 1Q2012 there were 806 construction related Compulsory Liquidations and Creditors’ Voluntary Liquidations; this is a 13.7 per cent increase on the previous three months and a 3.2 per cent increase on the same period, twelve months earlier.

Compulsory liquidations

Creditors’ Voluntary Liquidations

Trading-related bankruptcies

Receiverships

Administrations (Enterprise Act)

Company voluntary arrangements

Construction Related Failures

Trend Total Construction Related Failures

1,000

2,000

900

1,800

800

1,600

700

1,400

600

1,200

500

1,000

400

8,00

300

6,00

200

4,00

100

2,00

QUARTER

2Q2012

1Q2012

4Q2011

3Q2011

2Q2011

1Q2011

4Q2010

3Q2010

2Q2010

1Q2010

4Q2009

3Q2009

2Q2009

1Q2009

4Q2008

3Q2008

2Q2008

0 1Q2008

0

TOTAL CONSTRUCTION RELATED FAILURES

SUB-SECTOR CONSTRUCTION RELATED FAILURES

Source: Insolvency and Companies House

CONSTRUCTION RELATED FAILURES SINCE 2008

INSOLVENCIES & PAYMENTS

EUROPE and the EURO

When Greece applied to join the EU, it had to meet several monetary and social conditions to gain membership but for political expediency, compliance with some of the conditions was waived. Prior to joining the Eurozone, Greece was living beyond its means and this continued unabated even after they adopted the single currency. Between 1999 and 2007 public sector wages, in Greece increased by 50 per cent faster than any other country within the Eurozone. While the money flowed out of the Greek government’s coffers, the population indulged in universal tax avoidance thus causing a huge budget deficiency. Therefore, when the credit crisis hit, Greece was ill prepared. Its debt levels had reached the point where Greece could not repay its loans and it consequently asked for help from the other EU members and the IMF. The conditions attached to these loans compounded Greece’s woes.

The recent announcement by the European Central Bank to buy Spanish and Italian bonds may (according to some economists), not assist Greece and its debts. Many Greeks fear that in saving the euro, Greece will be sacrificed. Apart from Greece, the other countries at risk are Spain and Portugal, and possibly Italy. Although the UK is not part of the Eurozone, any uncertainty in the currency market could affect our economy especially: •

higher mortgage costs, tighter availability and reduced activity;

•

safety of personal savings;

•

pensions;

•

employment - the UK is the Eurozone’s biggest trading partner; and

•

Investments.

Unemployment From the chart below the three countries, most in danger of defaulting (Greece, Spain and Portugal) are in the top five countries in the EU with the highest unemployment. GDP Although not in the bottom five, the three countries at risk are below the European average GDP per inhabitant Exchange rate Since April 2011, the Euro has reduced in value by 11 per cent against the pound and 14 per cent against the US dollar. The last time the Euro exchange rate was this low against the pound was in September 2008 and for the US dollar, May 2010 although this was only for one month.

34,800

34,700

Ireland

United States

9,500

7,500

9,800

Latvia

Lithuania

Turkey

10,500

10,100

Croatia

Hungary

12,700

11,900

Estonia

14,700

Slovakia

15,500

Malta

17,600

16,000

Slovenia

Portugal

Czech Republic

19,000

20,600

23,100

Greece

Cyprus

Spain

26,000

25,200

Italy

30,600

France

European Average

31,700

Iceland

13.30

Norway

Austria

Japan

Netherlands

Luxembourg

3.00

4.30

4.40

5.10

5.40

5.50

6.10 Germany

Malta

7.10 6.70

Czech Republic

Romania

7.80

Sweden

7.10

Finland Belgium

8.00 7.60

Denmark

8.20 7.90

Turkey

8.00

United States

United Kingdom

10.00 8.20

10.10

France Poland Slovenia

10.40 10.10

Estonia

Italy Cyprus European Average

11.00 10.50 10.70

Hungary

12.20

Lithuania Bulgaria

13.70

Slovakia

14.70

15.80 15.50

Portugal Ireland

15.90

0 Latvia

5

Croatia

10

27,800

31,700

Germany

33,700

35,200

Belgium

35,700

0

Austria

10,000

Finland

20,000

36,100

30,000

Netherlands

70,500

Spain Greece

15

United Kingdom

COUNTRIES

41,000

40,000

Sweden

43,000

50,000

Denmark

60,000 60,500

70,000

Norway

80,000

Switzerland

90,000 82,700

UNEMPLOYED %

Unemployment in the EU and other industrialised countries

23.10

24.80

25

Luxembourg

EURO

GDP EURO PER INHABITANT

EUROPE and the EURO

30 Average RPI 2011 - 5.20%

20

COUNTRIES

REGIONAL REPORTS With limited signs of any significant improvement in growth, the following reports from Gleeds’ regional offices consider the current state of the regional construction industry.

EASTERN

GREATER LONDON

MIDLANDS

Construction output in East Anglia is forecast to rise at an annual average rate of 2.9 per cent between 2012 and 2016. New work output is expected to see growth of average 3.7 per cent, compared with an average 1.8 per cent for the repair and maintenance (R&M) sector over the same period.

Greater London continues to see a high level of construction activity however, this is against a backdrop of a number of commercial schemes being mothballed until the market improves. Residential schemes at the top end of the market still appear to be strong although there are signs of prices for new property beginning to fall.

The market remains highly competitive with evidence of contractors and consultants continuing to ‘buy’ work in order to maintain turnover which is, in the longer term, unsustainable.

Although there is currently growth in the industrial construction sector output is still only expected to be 57 per cent of the 2006 level by 2016 thus reflecting the decline in output during the recession. The private housing sector is expected to see growth over the next four years as credit conditions ease and improvements in the national economy stimulate demand for new housing. The outlook for commercial construction is also strong with demand for office and retail facilities expected to strengthen thus encouraging developers to restart work on mothballed developments. In our previous quarterly report we anticipated a period of inactivity during 2012. 2013 may see tentative signs of growth.

With Contractors and sub-contractors incurring a significant reduction in turnover and several well-publicised construction related business failures there is an increasing trend amongst clients to acquire details of firm’s financial stability prior to formalising any agreement. Pricing competition amongst Contractors and Subcontractors continues to be very competitive leading to concerns over the long-term financial stability of the industry. The summer saw a period of delayed tender returns in both Central London and the South East. It is considered that this is as a result of a lack of resources to cover holiday periods as opposed to firms being too busy to respond. The concern is that this may materialise into a lack of ability to deliver work, delayed lead-ins and possible fragmentation of the market. Output in London is expected to rise at an average of 2.5 per cent over the next four to five years with the infrastructure sector at the fore. It is anticipated that the worst performing sectors will be public housing and public non-housing. In our previous quarterly report, we anticipated a period of growth (tentative to start) over the next four years.

Main contractors’ labour force have generally stabilised in line with anticipated current workloads with very little appetite for increasing staffing, training or apprenticeships which in turn will lead to future skills shortages. Long after the cuts in education funding, public sector tenders continue to be released for universities and schools projects. Clients are still looking to reduce costs where possible with specifications being challenged to ensure they are receiving value for money. There is little evidence of pinch points concerning key product lead-in periods. Over the next four years, output is predicted to increase by an average of 1 per cent with the private housing sector showing the most growth. In our previous quarterly report we anticipated a period of little or no growth in 2012.

REGIONAL REPORTS

NORTH EAST, YORKSHIRE AND HUMBERSIDE

NORTHERN IRELAND

NORTH WEST

There are still no signs of a significant upturn in the private sector construction workload following Government cutbacks to the education sector and public funded projects, although over the past few months there have been some smaller scale tenders being sought.

Findings from the latest edition of the Northern Ireland Construction Bulletin note that in 1Q2012:

Medium and large sized contractors continue to report that they are receiving opportunities to tender for works albeit the size of the projects remain smaller than those received a number of years ago.

Currency uncertainties over the Eurozone and the other international debts mean that most financial institutions are still reluctant to provide affordable finance for any construction projects and regeneration schemes. Due to low local opportunities there is still high unemployment in the construction workforce with many having to travel outside of the region in order to find employment. There are no significant shortages of materials and goods. Steel supplies in the long term have been aided by the re-opening of the old Corus steel plant on Teeside. There is still a strong emphasis on value engineering, life cycle costings and sustainability with Designers trying where possible to select cost effective materials and components from local sources. In our previous quarterly report we anticipated a period of inactivity in 2012.

The total volume of construction output increased by 6.3 per cent compared with the previous quarter and was 1.3 per cent higher compared to 1Q2011; This was the third consecutive quarter in which the total volume of construction output has increased; and New work accounted for 72 per cent of all construction output. The total volume of new work in 1Q2012 increased by 6.7 per cent compared to the previous quarter, but was 2.1 per cent lower compared to 1Q2011, and was 43.0 per cent lower than the peak in 1Q2007. It is predicted that the construction workload will increase by an average of 2.1 per cent per annum over the next four years. A recovery in private housing output is finally expected to begin in 2012, although activity in the sector will be starting from less than half of what it was in 2007. In our previous quarterly report we considered that construction growth in Northern Ireland in 2012 would be negligible.

Subcontractors are still having a hard time with several firms having ceased trading over the last quarter. Whilst tendering levels remain highly competitive across all project values, it is apparent that many contractors have decided to refrain from offering increasingly reducing tender values, in context to their envisaged cost for works. Activity appears to be most prevalent in the £250k to £5m value bracket. Frameworks continue to provide participants with a steady but lower value of workload. It is expected that the North West will not experience any meaningful growth until 2015. The public non-housing sector that accounts for the second biggest share in the new work market is anticipated to decline considerably over the short to medium term. The largest sector, private commercial, is forecast to grow at an average of 1.7 per cent peaking in 2015. In our previous quarterly report we anticipated a period of tentative activity growth.

REGIONAL REPORTS

SCOTLAND With Scottish construction output continuing to fall for the sixth consecutive quarter, (output in May 2012 is estimated to be 6.3 per cent lower than May 2011) the market remains very difficult and highly competitive. Also with business and consumer confidence remaining weak and the challenging economic conditions continuing to delay commercial sector investment there appears to be little prospect of a recovery in the short term. The reduction in public sector capital expenditure has required the Scottish Government to extensively lobby the UK Chancellor to release £300m of capital funding for 30 ‘shovel ready’ projects in an attempt to kick-start the Scottish construction sector. The number of companies failing in Scotland has reached a new record high. A total of 420 firms became insolvent or entered receivership in the first quarter of the financial year, according to figures released by Accountant in Bankruptcy (AiB).

This is 9.1 per cent up on the record level set in the previous quarter and 22.4 per cent higher than the same period last year. Law firm Pinsent Masons commented that a marked increase in the number of compulsory liquidations indicated an increasingly contentious approach to liquidation. This would suggest that creditors are more reluctant to accept further delays in payment in a market which shows no signs of improving. Conversely there is evidence (Dawn Group for example) where firms have taken the strategic decision to withdraw from the general construction division in recognition of unsustainable profit margins. Growth is predicted to return to the Scottish construction sector in 2013 and output is forecast to grow at an annual average rate of 1.3 per cent. Three sectors are expected to see annual average growth in excess of 4per cent; private housing, infrastructure and commercial construction.

“Signs of confidence beginning to return to the private sector are evident, however the continuing uncertainty of the European economy is definitely impacting confidence levels. This is in turn causing projects which would otherwise be committed to be placed on hold.” John McGlade, Director, Edinburgh In our previous quarterly report we anticipated a period high of competitiveness and continuing decline in output in the short term.

REGIONAL REPORTS

SOUTH EAST With construction output stagnant/ continuing to drop this year the labour market is easily able to cope with the reduced demands of the industry. However, the fear remains as the double dip recession continues that a generation of skilled labour will be lost and due to lack of opportunities and funding the training of apprentices will also decline. When the upturn eventually returns this lack of skilled labour may lead to higher labour costs and/ or an influx of labour from the EU. With the Olympics over and the new chief construction adviser now named, it is hoped that the government’s attention can now be turned to finding ways to kick start the UK economy as a whole and the construction economy in particular. Early decisions are required on school building and other major capital projects and not just a reliance on the now stalling infrastructure sector or the private sector where investor confidence is low and funding expensive.

SOUTH WEST Tender pricing remains highly competitive as contractors vie to keep their order books ticking over in the reduced workload climate. Sub-contractors in particular are being squeezed and many are struggling to maintain small profit margins whilst for others cash flow problems often brought about by late payments has proved to be their demise as the slow haemorrhage of administrations continues. Growth in the medium term is expected to be strongest in the commercial and private housing sectors, with both benefitting from an improvement in conditions in the wider economy, which should stimulate demand. The region’s industrial construction sector could also fare well, although this partly reflects a bounce back from the very low levels to which the sector fell to during the recession. In our previous quarterly report we anticipated a period high of competitiveness.

There has not been any significant growth in the South West construction market over the last year. This is due in main to the lack of confidence clients have in the UK economy and as a result, many schemes are being placed on hold. Workload and tender levels seem to have reached a plateau. Tenders are very keen and probably in the long term unsustainable. In order to maintain competiveness mark ups for overheads and profit on medium to large projects are between 1 and 4 per cent. Recently, there has been a trend to extend the normal single stage tender process into an ad-hoc two-stage tender in order for clients to secure a best and final offer. Labour levels and quality have remained constant. There have been no reported material shortages either. Architects are becoming more aware of material costs and the restrictive effects of the fixed budgets set by funding agencies can affect a scheme. It is expected that the infrastructure sector will be the most buoyant in the short to medium term with the private sector housing faring reasonable well as credit criteria eases and economic conditions improve. In our previous quarterly report we anticipated a reduced workload and highly competitive tenders.

REGIONAL REPORTS

WALES There is limited activity within the Welsh construction sector as the private sector has not been able to fill the void left by reduced public sector spending. The falling workloads continue to result in reduced tender pricing, and margins are being further squeezed to help win work. Only the health sector and infrastructure are bucking this trend. There have been a small number of business failures however this may increase as the recession continues. There are no shortages of labour in the region but this could change with many of the local workforce looking at adjacent regions to secure work. Material costs increases have halted, and keen prices are being received especially for cladding materials. Designers sometimes specify higher specification products but alternatives are considered through value engineering.

The placing of many Building Contracts is being delayed because of lack of confidence in market and/or the failure to secure finance. In our previous quarterly report we anticipated a period of limited growth during 2012.

summarised Gleeds forecast for inflation on a

Annual % change

(3Q 2012)

MEAN AVERAGE OF TPI FORECASTS

regional basis is summarised as follows:

3Q12 to 3Q13

3Q13 to 3Q14

3Q14 to 3Q15

3Q15 to 3Q16

EASTERN

0.5%

2.0%

3.0%

4.0%

GREATER LONDON

0.5%

2.0%

3.0%

5.0%

NORTH EAST, YORKSHIRE & HUMBERSIDE

0.0%

1.5%

2.5%

3.5%

NORTHERN IRELAND

0.0%

1.0%

1.5%

2.0%

MIDLANDS

0.5%

2.0%

3.5%

5.0%

NORTH WEST

0.0%

2.0%

3.0%

4.0%

SCOTLAND

0.0%

1.4%

1.9%

4.0%

SOUTH EAST (excluding london)

0.5%

2.0%

3.0%

5.0%

SOUTH WEST

0.3%

1.5%

2.5%

4.0%

WALES

0.3%

1.5%

2.5%

4.0%

UK AVERAGE

0.3%

1.7%

2.6%

4.1%

OUR UK OFFICES

BIRMINGHAM BRISTOL CAMBRIDGE CARDIFF EDINBURGH GLASGOW GLOUCESTER LEEDS LIVERPOOL LONDON MANCHESTER NEWCASTLE NOTTINGHAM SOUTHAMPTON TUNBRIDGE WELLS WARRINGTON WHITEHAVEN

REFERENCES

(all data current as at 20th September 2012) New Orders in the Construction Industry, Office of National Statistics Forecasts for the UK Economy, HM Treasury Northern Ireland Construction Bulletin Labour Market Statistics, Office of National Statistics Consumer Price Indices, Office of National Statistics Inflation Report, Bank of England BCIS Quarterly Briefing Output in the Construction Industry, Office of National Statistics Insolvency Statistics Experian RICS UK Construction Market Survey Construction Skills Network

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For additional information contact: Sarah Davidson or Jonathan White Gleeds Corporate Research & Development Wilford House 1 Clifton Lane Nottingham NG11 7AT Tel: 0115 977 8000 Email: [email protected] www.gleeds.com

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Legal disclaimer: This paper was prepared by Gleeds to advise on the construction market. It is for general information only and neither Gleeds nor any of their partners, employees or other persons acting on their behalf makes any warranty, express or implied and assumes any liability with respect to the use of the information or methods contained in this report to any person or party. This document is subject to copyright and may not be reproduced without permission from Gleeds Research and Development, email: [email protected]