What does BREXIT mean for the Construction Sector?

After the surprising referendum result on the 23^rd 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.