What does BREXIT mean for the
Construction Sector?
After the surprising referendum result on
the 23rd June in the referendum all we have seen in the subsequent
six weeks is more uncertainty and the realisation that there were very few
contingency plans in place in most sectors including construction.
On reflection, it is probably fair to say
that both sides exaggerated the implications of a remain or leave result and
that the initial falls in equities have been largely reversed. So now we are in
a period of uncertainty as to what the future will look like which increases the
risk especially in Capital Expenditure so it is reasonable to expect a reduction
in construction activity.
In fact the Markit/CIPS UK ConstructionIndex has fallen for two consecutive months in June and July reflecting the
biggest decline in construction activity since 2009 most markedly in the
commercial building sector. However, the market would appear to be more
resilient than expected and as with the rest of the economy the sector has
adopted a “wait & see” approach to investment.
The Construction Sector was largely in
favour of remain, in fact one survey had the industry voting 85% to remain. Concerns
were that some 60% of building materials were imported and a fall in the value
of the pound would increase input costs. The reliance on overseas labour to
undertake construction activities, the investment of the European Investment
Bank of £7.8bn in 2015 alone and the uncertainty of the future location of the
banking, investment and insurance industries and their associated advisors were
also issues of concern. As mentioned before this uncertainty increases risk and
therefore investment decision in all sectors of construction.
This uncertainty is not going to be
resolved for some time until the exact details of the UK exit from the European
Union are known. Moreover, the risks can be managed by having contingency plans
in place (under development currently) and taking advantage of current
opportunities in the market.
For instance, the cost of borrowing at
present is at an all-time low and it is the ideal time for the British
Government to borrow to fund much needed infrastructure projects to increase
the overall competitiveness of the British economy.
The housing sector is still under building every
year and will remain strong despite BREXIT and the government could consider
borrowing to invest in the social housing sector to boost activity in an area
where there is still huge demand.
While commercial development has been
strong with low vacancy rates (circa 4%) and a significant slowdown in forward
orders, this could be cyclical as 30% of new stock currently in development
will come online in the next twelve months. Conversely a weak pound can be used
to promote Britain to foreign investors and with the current levels of
liquidity available, projects can be funded and commenced on short timescales.
In conclusion the market will not grow as
fast as in recent years, however Experian is still predicting growth in the
construction sector of 2% (down from 4%) in 2016 and some challenges to
overcome. But this has always been the reality, remember when the UK did not
join the single currency, the doom sayers were predicting economic armageddon
and we survived and grew stronger.
The Construction Sector has proved
resourceful and resilient in the face of previous challenges and it can look
forward to the future with confidence whatever may come.
