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July 2013
Tender Cost Update
UK
Contact:
John Busby Kelly Forrest
+44 (0)121 212 6100 [email protected]
+44 (0)20 7202 2519 [email protected]
Artist’s impression of the ArcelorMittal Orbit and Marshgate Wharf area, Queen Elizabeth Olympic Park, London, UK, in 2014
Overview
Recent soaring temperatures have injected a much needed boost of
optimism into the consumer sector. Confidence is relatively high and
spending is rising, providing the lethargic UK economy with the impetus
it sorely needs. However, with inflation outstripping earnings growth,
consumer credit is once again providing the means. Can this really be
sustained?
“We are still seeing a lack of demand in the majority of sectors
which we feel is going to continue for at least another year.
We expect the market to remain very competitive in the
medium term with tender prices remaining stable.”
Chris Goldthorpe, Mace Cost Consultancy Managing Director
Construction, afflicted by severe weather conditions in Q1, will benefit
from a degree of catch-up in the second quarter, but demand in the
sector remains weak. For contractors, securing future cash flow is the
number one priority and competition remains intense. Pricing work at or
even below cost is not uncommon, a dangerous strategy considering
input costs are increasing and, overall, are likely to continue to do so.
Procuring work in current market conditions can deliver excellent value
for money but comprehensive due diligence is essential.
Mace Cost Consultancy expects tender pricing to remain
competitive over the medium term and maintains its April
forecast. Nationally, tender prices are forecast to contract by 2%
in 2013 and by a further 1% in 2014, before stabilising in 2015.
London is set to lead the revival in industry activity and, after a
further year of decline in 2013, by 1%, tender prices are
anticipated to stabilise in 2014 before recording modest growth
of 1% in 2015.
www.macegroup.com
Tender Cost Update United Kingdom
Key points
For construction, the recession has been long and severe and activity
remains approximately 14% below the 2007 peak. Q2 benefitted from a
degree of catch-up after unusually adverse weather conditions affected
site activity in Q1. Overall, underlying demand remains weak and a
sustainable recovery is unlikely prior to 2014. The Funding for Lending
scheme has simultaneously increased the flow and reduced the cost of
secured lending, helping to resolve one of the largest problems facing
the house building sector. Consequently, a greater number of new
homes are set to break ground this year, 8% more than in 2012
according to the Construction Products Association’s forecast.
Elsewhere in the industry, finance availability and cost continues to be a
significant hurdle.
A slowdown in the pace of growth in the Chinese economy has brought
the commodities super-cycle to an end. Metals prices fell sharply in
2012 and generally continued to do so in the first half of 2013. With
new production capacity becoming operational and a more moderate
outlook for Chinese consumption, there is unlikely to be a resurgence in
pressure on metals prices in the next two years. Aluminium is a notable
exception. As a relatively cheap substitute for copper, demand for the
metal increased significantly in 2012 and the World Bank predicts that
aluminium prices will record annual growth through to 2015.
Pressure on oil prices has eased in recent months as expectations
about the strength of future demand moderated. In May, the average
price of a barrel of crude oil was $99.37, 5% lower year-on-year. Brent
crude traded at $103.03 per barrel, a 7% contraction year-on-year.
Prices are anticipated to average $100 per barrel throughout 2013,
before falling modestly year-on-year, to $98 by 2016. Upside risks
prevail, not least from simmering political tensions in the middle east. Oil
producing nations have, to date, been largely unaffected by the wave of
unrest fuelled by the Arab Spring but whether this can be sustained as
discontent continues to simmer is a key unknown.
www.macegroup.com
Industry overview
Figures for new construction output and new orders published by the
Office for National Statistics show that the industry continues to be
stuck firmly in the doldrums. The latest monthly output figures for April
and May indicate a marginal improvement over Q1 but were still 2.2%
and 4.8% respectively below the same periods last year. New orders
were slightly more positive in Q1, with both private and public sectors
showing signs of strengthening although the more volatile infrastructure
sector was sharply down during the quarter.
New Construction Output
20000
£ million (2005 prices, SA)
Investment in fixed capital, essential for future prosperity, was 22%
lower in 2012 than in 2007 and was 8% lower year-on-year in 2013 Q1.
Confidence and finance continue to be significant barriers. Survey data
suggest that the corporate sector’s appetite for borrowing has
increased substantially in recent months, a trend that is expected to
continue. Lenders, however, in stark contrast to the consumer sector,
do not intend to oblige. Nearly five years since the collapse of Lehman
Brothers abruptly brought the world’s attention to the inherent
weaknesses in many advanced economies, little progress has been
made towards addressing the underlying problems in the UK economy
and securing a more sustainable future.
In June, sterling averaged 1.55 against the dollar and 1.17 against the
euro. Sterling weakened against both currencies year-on-year, by 0.6%
and 5.4% respectively. In the first half of 2013 average exchange rates
against both the euro and the dollar were more than 20% lower.
Sterling’s relative weakness makes exports significantly cheaper and yet
in 2012 UK exports were only 4% up on 2007.
15000
10000
5000
0
2011
2012
All new work
Private
Public
Infrastructure
2013
New Construction Orders
15000
£ million (2005 prices, SA)
The hesitant economic recovery finally seems to be strengthening after
years of relative stagnation. Consumer confidence has returned,
consumption is rising and business surveys convey a significant
improvement in sentiment. Independent forecasters currently anticipate
GDP growth of 0.9% this year, accelerating to 1.6% in 2014, and
optimism is increasing. A word of caution is, however, necessary.
Consumption, both by consumers and the government, rather than
investment or overseas trade, has fuelled the recent improvement.
Consumption largely financed by credit. Unsecured lending to
consumers was 6% higher year-on-year in the first half of 2013 and
lenders expect to increase credit further in the third quarter. With
inflation continuing to outstrip earnings growth, the long term
sustainability of this growth remains uncertain.
12000
9000
6000
3000
0
2011
2012
All new work
Private
Public
Infrastructure
2013
2
Tender Cost Update United Kingdom
In their latest forecast of construction output in July, Experian again
revised their forecast of total construction output for 2013 upwards to a
fall of 2.3% compared to their April forecast of a 2.6% reduction. Their
forecast for 2014 was also increased to growth of 1%, rising to 3% in
2015. The private housing sector is expected to show steady growth
during the rest of this year, with faster growth in 2014 and 2015, helped
by the recent government initiatives on lending. Infrastructure is
expected to grow strongly over the next three years through the rail,
electricity and roads sectors in particular. Experian expects the public
non-housing sector to continue to shrink but forecasts growth over the
next three years in the private industrial sector through a number of
large factory projects together with new distribution and logistics
schemes. The public sector is expected to continue its steady decline
as the government policy of reducing spending remains in place. Private
commercial work, including offices, retail and leisure, is forecast to
shrink further during 2013 and 2014 before stabilising in 2015.
Anticipated growth in the housing market has been reinforced by the
recent RICS Residential Market survey which showed that 21% more
chartered surveyors reported prices rose rather than fell in June. The
outlook is also strong with 23% more expecting prices to rise over the
next three months and 38% more reporting a rise in new buyer
enquiries. In addition, the Council of Mortgage Lenders reported that
the number of first time buyers in May rose to its highest level since
2007 and in June total mortgage lending rose a further 2% and by 26%
on the same month last year.
In their Spring forecast, The Construction Products Association expect
construction output to fall by 2.1% this year following an 8.1% decline
in 2012, citing the impacts of public sector spending cuts and
uncertainty in private sector investment. The commercial sector is
forecast to contract by 3.3% in 2013 and by 0.8% in 2014 with falls in
both offices and retail sub-sectors. The CPA confirm the expectations
of Experian that growth will come from the private housing, industrial
and infrastructure sectors over the next two to three years, although
there are still downside risks regarding the speed at which this growth
may occur.
The RICS Construction Market Survey for Q1 again reported modest
increases in surveyor’s workloads together with cautious optimism for
the next 12 months. There were significant differences between regions,
however, with the Midlands and East Anglia continuing to show strong
growth together with London and the South East but Scotland and
Northern Ireland experiencing declining workloads. The strongest areas
of growth were the private housing and commercial sectors with public
housing and non-housing the weakest. The survey showed that profit
margins are expected to remain under pressure with strong competition
for workload and increasing input costs.
A marginal level of growth was also indicated by the Markit/CIPS UK
Construction Purchasing Managers’ Index in June with the index rising
from 50.8 to 51.0 where anything above 50 indicates expansion. The
increase was led by growth in the housing sector for the fifth
consecutive month and employment rose for the first time since
February. In addition, the commercial and civil engineering sectors
stabilised after protracted declines. The data also indicates that about
four times as many companies anticipate a rise in activity over the next
12 months as those that forecast a drop.
The Deloitte Real Estate London Office Crane Survey published in May
reports that developers and occupiers are more upbeat as office
construction in the capital reaches a four year high. The survey
concludes that commercial development is up 8% over the last six
months with 9.7 million square feet of office space currently under
construction.
www.macegroup.com
Savills Commercial Development Survey for June registered a sharp
improvement with the total activity index rising from +5.8% to +18.9%
to give the highest reading for six years with private commercial work
rising for the tenth consecutive month. The improvement applied across
all the monitored regions and growth was generally linked to new
contracts, improved weather and easier access to funds. The survey
suggested that commercial activity is projected to rise in line with
forecasts of better economic conditions, strengthening client demand
and improved confidence.
The latest RICS Commercial Survey continues the theme of the
previous quarter with flat demand and slightly negative rental
expectations at a national level with London being the only region where
both tenant demand and rental expectations are positive. Sentiment
has risen significantly in the investment market with investment
enquiries recording the highest level for three years alongside an
improvement in capital value expectations.
There is an underlying trend in most of the market surveys that indicates
an upturn in confidence and an expectation that workloads are set to
improve. Whilst sentiment has clearly improved, we are yet to see
evidence that this is translating into an increase in demand for
construction generally.
The upturn in the housing market appears to be continuing, but, as the
Council for Mortgage Lending points out, it is worth bearing in mind
that activity is still barely half the rate of a decade ago and significantly
below what could reasonably be considered as normal levels.
Notwithstanding this point, the improvement in the housing market is
likely to lead to an increase in residential construction work which
should feed through into the output figures relatively quickly.
Although the small improvement in the overall economy is to be
welcomed, it is unlikely to be sufficient to enable the government to
reverse its policy of cutting public spending budgets. The Coalition is
committed to this policy for the duration of the present government
which means that public sector workloads are likely to continue to
decline in overall terms for at least the next two years. Infrastructure
investment should remain reasonably strong but many of the major
projects are already under way and there is some uncertainty regarding
the timing of other schemes that have been announced.
In the private sector, demand for industrial construction has improved
but other sub-sectors remain depressed. Levels of retail workload
continue to decrease as shopping trends move inexorably towards the
internet and away from shops, and supermarket chains reign back on
their development programmes. Although there is still a reasonable level
of office development in London, the amount of available space in other
regions means that there is little demand for new construction and the
economic recovery has some way to go before demand starts to
increase
The official figures from the Office for National Statistic confirm that
construction output remains flat and we can see no evidence that this is
likely to change significantly in the short term. In the last recession in the
early 1990s, construction output reached its low point approximately
five years after the start of the economic downturn and then took a
further five years to recover to pre-recession levels. We remain of the
view that any recovery in the current cycle will have a similar profile and
is likely to take several years of gradual improvement as the economy
recovers slowly from the severe depression.
3
Tender Cost Update United Kingdom
Materials and labour
The price of metals heavily utilised in the industry, aluminium, copper,
zinc and the iron ore spot price, continued to follow a downward
trajectory in the first half of 2013, after unanimously recording doubledigit declines in 2012. Growth in the Chinese economy slowed to 7.5%
in 2013 Q2, marginally slower than 7.7% in Q1 and the fifth consecutive
quarter of sub-8% growth. In June, Chinese exports to both the EU and
US reduced and domestic demand was subdued on the back of
weakening income growth. As China continues to lessen its reliance on
net-exports and investment, its economic outlook remains relatively
subdued. Latest World Bank forecasts point to GDP growth of 7.3%
this year, increasing to 7.5% in 2014 and 2015. Growth in consumption
by Chinese consumers is anticipated to strengthen to circa 8% per
annum, whilst the pace of fixed investment growth continues its steady
decline, from a peak of 11% in 2010, to around 6% in 2014 and 2015.
China consumes near to 50% of global production of the metals most
commonly used in construction.
Strong inflation in metals prices prior to the financial crisis and the
resurgence in inflation in 2010, leading to record highs in 2011 after
only a brief reprise, fuelled large-scale investment in production capacity
that is now starting to become operational. With demand from
developed economies unlikely to increase significantly in the next two
years, a moderation in Chinese consumption and a slowdown in
inventory building, and enhanced supply capacity, metals prices in
general are expected to continue to fall.
Aluminium is an exception. Demand for the metal, potentially a cheaper
substitute for copper in wiring and cabling, rose by nearly 7% in 2012
according to the World Bureau of Metal Statistics. Supply has also
increased significantly and stocks of the metal are high but a large
proportion of stock comprise inventories tied up in warehouse financing
deals and are therefore unavailable to the market. As a result, aluminium
prices are forecast to increase in 2014 and 2015 rising to $2,200 per
tonne by 2015. Over the same period, the price of copper is expected
to experience mild deflation. With copper prices currently averaging
around $7,100 per tonne, the price differential between the two metals
is large and, where possible, substitution is likely to continue.
Rising prices at the petrol pump may have played a significant role in
pushing CPI to its highest annual rate since April 2012 in June but
World Bank figures suggest pressure has eased on crude oil prices in
recent months. In May the crude oil per barrel average price was
$99.37, 5% lower than 12 months earlier and significantly lower than in
February when prices exceeded $107 per barrel. Prices are anticipated
to average $100 per barrel throughout 2013, before falling modestly
year-on-year, to $98 by 2016, amid subdued demand from developed
nations.
Simmering geopolitical tension in large oil producing nations continue to
threaten this sanguine outlook. Oil-rich monarchies have sought to buy
peace, to date with reasonable success. Can this continue as the Arab
Spring battles on is the key question. Anticipated growth in non-OPEC
oil production will help alleviate any adverse effects should this threat
materialise, with significant increases in the production capacity of
Brazil, the Caspian, West Africa, the US and Canada.
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In June, sterling averaged 1.55 against the dollar and 1.17 against the
euro. Sterling weakened against both currencies year-on-year, by 0.6%
and 5.4% respectively. In the first half of 2013 average exchange rates
against both the euro and the dollar were more than 20% lower.
Sterling’s relative weakness makes exports significantly cheaper and yet
in 2012 UK exports were only 4% up on 2007.
There were 1.99 million workforce jobs in the construction sector in
2013 Q1, 3% fewer than a year ago according to ONS figures.
Furthermore, in 2012 there were 13% fewer jobs than in 2007. Average
earnings in construction have recorded modest annual growth
throughout the recession, the exception being 2010 when earnings
were static, according to official data. In 2012 weekly earnings
averaged £545, 0.6% higher than in 2011. In 2013 Q1, however,
earnings were 2% lower on an annual basis. The high proportion of
self-employment in the sector makes measuring earnings in the
construction sector with accuracy particularly challenging.
Tender price inflation forecast
The headline CPI rate of inflation rose in June to 2.9% and the Bank of
England, in the Minutes of their July meeting, expect inflation to remain
around the 3% mark throughout the summer and autumn. Annual pay
growth remains subdued but rose to 1.7% for the three months to May
after having fallen to 0.6% in the same period to March. After falling in
Q1, measures for manufactured products, materials and fuel showed
significant rises in Q2. The rise in the more volatile materials and fuel
index was due mainly to the comparison with the falls experienced
during the same period last year and it is likely that these will moderate
over the coming months. The BCIS report that building cost inflation
remains in the 1% to 1.5% range and this is likely to continue through
to the early part of 2014, rising slowly to 2.3% by the end of next year
and 2.8% by the end of 2015.
Inflation Indicators
5
4
3
% annual change
General materials price inflation is currently running at less than 1%
throughout the industry, according to official BIS data. A significant
improvement compared with 2011 when the strength of global demand
drove the annual rate above 7% and a more modest pace than 2%
growth in 2012.
2
1
0
-1
-2
-3
Jun
Aug
Oct
Dec
Feb
Apr
Consumer Prices
Manufactured Products
BCIS Building Costs
Materials & Fuel Prices
Jun
Annual Pay
4
Tender Cost Update United Kingdom
Although some optimism has been generated by the return of modest
economic growth, this must be viewed in the context of the major
recession that has taken place. The peak to trough fall in GDP during
the downturn of 2008/09 was 7.2% and in Q1 2013 the economy was
still nearly 4% smaller than it had been five years previously. As
buildings cannot shrink in line with the economy, there is still some way
to go before demand returns in a way that will generate a requirement
for the slimmed down construction industry to start to grow again.
Using current forecasts for the UK, it is likely to be another three years
before the economy returns to its pre-recession level, and we anticipate
that this reflects the period of continuing stagnation that the industry
must endure before any significant increase in demand returns.
We continue to receive tenders at or below expectations which
confirms our opinion that prices are generally stable or still showing
marginal reductions. This applies both in London and other regions.
Supply chain pricing remains flat although a limited number of
specialisms continue to cause some concern regarding their capacity
to cope with larger projects following the extended period of
consolidation.
Mace
London
DL
ECH
2Q-2Q
Our forecast for average tender price inflation remains unchanged with
2013 expected to finish with prices flat or slightly down on the previous
year. We expect this situation to continue into 2014 with the regions still
experiencing highly competitive tendering leading to a slightly negative
outlook for prices. Our view for 2015 is that competition will remain
intense as workload remains at relatively low levels but we expect the
effect of general inflation to stabilise prices and lead to marginal price
increases in London.
Levels of general inflation remain a risk towards the end of the forecast
period, with exchange rates and other economic and political factors
likely to play their part. We feel that there are upside risks to the
forecast if global economic recovery gathers pace and leads to a rise in
inflation which will filter through into tender prices if workload remains
firm or starts to improve.
Gleeds
G&T
Sweett
2Q-2Q
2013
-1.0%
+2.0% to +4.0%
0.0%
+1.5%
+1.0%
+1.5%
2014
0.0%
+3.0% to +6.0%
+4.0%
+2.5%
+2.0%
+3.0%
2015
+1.0%
+4.0%
+3.5%
+3.0%
+4.0%
National
2Q-2Q
2Q-2Q
2013
-2.0%
up to +2.0%
-1.0%
+1.2%
+0.5%
0.0%
2014
-1.0%
+2.0% to +4.0%
+2.4%
+2.2%
+2.0%
+2.0%
2015
0.0%
+3.8%
+3.1%
+2.5%
+3.5%
The above table gives our current tender price inflation forecast
compared to a selection of other forecasts. The figures should be
treated as averages and there will always be variations due to
procurement methods, project type and local factors.
www.macegroup.com
5