Developers are having to prove the quality of their proposed schemes as the battle to find contractors intensifies.
Jeremy Titchen, director at advisory business Rockhopper Real Estate, who has worked in the sector for 30 years including as a main board director at Grosvenor, said the sector was behaving in ways that were familiar from previous downturns.
“The pool of contractors has shrunk; their order books have shrunk. They have also lost labour due to Brexit. It’s painful for them and they are far more choosy about the projects they will work on and less willing to take on risk,” he said. “Developers are being squeezed and things are going to get more difficult due to the availability of debt and the prospect of weakening occupational demand.”
Titchen said that whereas six contractors might have tendered for a project in the recent past, three or four was now the norm. “They want to see that you have the right scheme, the right client, the right design team. If you stand out, then you can get really good interest from contractors and a keen price,” he said.
He is currently working on two central London office developments for overseas investors and said contractors were bringing their full supply chain to look at projects before committing. “In the past, they might have just sent estimators. Now, they are putting in a lot of time and effort to make sure they fully understand the project.”
His comments come on the back of the latest construction market review from insight company Glenigan, which found that main contract awards slipped back 7% against the preceding three months, and were 5% lower than a year ago.
Major projects (£100m+) performed well, growing by almost a quarter (24%) on 2021 levels and up by a fifth on the previous three months, but sub-£100m projects declined by 13% against last year and by 15% compared with the previous quarter.
Despite the November review’s generally sluggish outlook, there are indications of gradual recovery, with a pipeline of work starting to flow following almost six months of blockage. Refreshingly, detailed planning approvals were up by 29% against the preceding three months and 22% higher than 2021 levels.
Commenting on the results, Glenigan’s economic director, Allan Wilen, said: “UK construction continues to be buffeted by myriad external headwinds, many of which are entirely out of the industry’s control. However, it was encouraging to see a significant uplift in major projects over the period covered by the review.”
The sector-specific and regional index, which measures underlying project performance, was characterised by a bottoming out of project start levels. However, recent events have dented market confidence, meaning that levels remain relatively depressed.
Christopher Ware, property director at investor Conygar, which currently has its mixed-use Island Quarter project under construction in Nottingham, said he was aware of “a lot of investors pausing” projects “as the cost of debt moves up and the question of viability becomes more murky” – with knock-on effects for contractors.
“Our projects are secure at the moment – we are focusing on developing assets that have a long-term upwards trend, such as student housing,” he added. “More people go to university in a recession, and it’s hard to see rental growth disappearing. But anything slightly more speculative is going to struggle to attract financing. Those are the projects that will pause at the moment. It depends where investors and developers are getting their capital from and what their exit plan is.”
He also highlighted that it has now become “a bit easier to speak to contractors now than when there was a backlog nine months ago”, adding: “Now is the time to work with contractors to get the best pricing solutions. If you are in a position to push ahead, you can take advantage of that rather than wait for blue skies.”
Benjamin Cottle, a Savills director specialising in project management within the building and project consultancy team, agreed that now may be the time to get “more bang for your buck” from contractors.
Cottle said that although there was some nervousness in the market, he was seeing an uptick in investors preparing for refurbishments and repositioning of London office buildings. This was being driven by both the 2030 deadline to reach net zero operational carbon emissions and by the need to meet the needs and expectations of occupiers ahead of lease breaks and expiries. “I’m very confident about that market, irrespective of concerns about recession, because there is so much work to be done,” he said.
Glenigan’s November review: sector analysis
Residential
The value of residential work starting on site fell by 21% against the preceding three-month period to stand 10% lower than a year ago.
Drilling down into the figures, social housing project starts fell by a substantial 26% on 2021 levels, yet fared less poorly against the previous three months, only dipping by 7%. This was a relatively good performance compared with other verticals.
In contrast, private housing dropped by 24% compared with the preceding three months but by only 6% against 2021 levels.
Non-residential
Bright spots were few and far between. However, office project starts experienced a good period, rising by 11% against the preceding three-month period to remain unchanged on a year ago. Industrial starts also experienced modest growth during the review period, but remained 15% behind 2021 figures.
Hotel and leisure experienced the sharpest decline of any vertical (-38%) against the previous year, also slipping back by 19% against the preceding three months.
Education (-24%) and health (-41%) fared little better in the three months to the end of October, respectively crashing by 28% and 31% compared with 2021.
Utilities construction starts were the only ones to experience growth on last year (+14%), despite tumbling by 15% against the previous three months. Looking at the wider civils landscape, work starting on site slipped back by 13% against the previous three months to remain largely unchanged on a year ago.
Regional performance
Regional performance was generally weak. Once again, Northern Ireland posted the most positive results, increasing by 16% against the preceding three months, to stand an impressive 35% higher than a year ago.
Scotland also had reasons to be cheerful, with starts 10% up on 2021 and 19% up on the preceding three months.
While project starts in Wales advanced on a year ago (+25%), they slipped back by 5% on the preceding three months. The North West performed relatively well compared with other regions and, while project starts remained unchanged on the previous three months, they dipped 2% against the previous year.
All other regions experienced a decline against the preceding three months and the previous year.
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