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Fortune telling

technical & practice

War! What is it good for? Absolutely nothing, except perhaps reconstruction contracts. What about the domestic market?

So, where's the problem? Construction output in 2002 rose by 8 per cent to record the highest figure ever, at almost £65 billion. With new orders also up by 8 per cent, the forecast from Construction Forecasting and Research is for a continued rise in output of 4.9 per cent this year and 1.9 per cent in 2004. Notwithstanding the demise of the London office block, construction activity in the UK remains buoyant and construction orders continued to rise in the first quarter of the year.

The outlook for the construction industry remains relatively optimistic, although activity in the commercial offices sector is on the wane and there is little sign that the private industrial sector will show any recovery in the short term. As a result, the forecast rise in workload will be driven by substantial increases in infrastructure work and other public spending. Both these sectors are hostages to fortune; if the economy underperforms, it is difficult to imagine the chancellor providing the necessary funds. Increased activity in the civil engineering sector is likely to be of limited help to much of the construction industry, which would find it almost impossible to switch from delivering buildings to delivering infrastructure. The labour force is likely to be more flexible, however, so some crossover is likely to occur.

Input costs

Contractors' input costs rose by 1.8 per cent in the past three months, to show an annual increase of just under 8 per cent. Materials prices rose by 6.8 per cent over the year, with reinforcement bars showing an increase of 18 per cent.

Daily rates for skilled labour rose by 2.4 per cent in the past quarter, and by 10 per cent for the year. The regional disparity in workload is being reflected in labour rates: daily rates in London were unchanged in the past year, while rates in the North West have risen by 25 per cent since June 2002. The Construction Industry Joint Council has just agreed a three-year deal on pay and conditions. The deal effectively gives operatives a 5.1 per cent rise from 30 June 2003, with further increases of 7.1 per cent in 2004 and 9.5 per cent in 2005.

Civil engineering Infrastructure orders last year were up by 10 per cent on 2001, the increase dominated by water, roads and rail, where the figures were up between 20-30 per cent.

With the market heating up, lack of appropriate resources could still be a problem, despite many long-term partnering relationships. A number of the infrastructure sub-sectors are on course to increase their spending hugely in the next two years. If the peaks of the different sub-sectors coincide, shortages of resources could end up setting the schedule and forcing up prices, regardless of any long-term deals that have been established.

Construction activity

Construction workload figures in the first quarter of 2003 fell by 2.5 per cent compared with the previous quarter, but were 2.5 per cent higher than the first quarter of 2002, according to the latest Department of Trade and Industry figures.

The star performer in the first quarter this year was the public nonhousing sector, which rose by 18 per cent compared with the fourth quarter. The private housing market also showed substantial growth with a rise of 2 per cent in the previous quarter, 17 per cent on the first quarter 2002.

The slowdown in offices has affected the private commercial output figures, with the sector showing a fall of 8 per cent on the previous quarter.

Take-up of office space in central London is now at a 10-year low, according to Jones Lang Lasalle's latest Central London Market Report, and, coupled with an increased supply of new offices, has resulted in falls in headline rents and increases in rent-free periods. The report shows the vacancy rate in central London reached 8.8 per cent at the end of the first quarter of 2003, while rents in the City have fallen by 78 per cent since the start of the year.

The situation is having a huge effect on workload in the capital, and the commercial offices market in London has more or less disappeared, with doom-mongers forecasting that it will take five years to recover.

Higher consumer confidence following the end of the war in Iraq led house prices to rise by 1.5 per cent during May, according to Halifax, or 1.3 per cent according to Nationwide.

Both key mortgage lenders agree that house prices rose by approximately 2122 per cent during the past year and both are expecting the rises to slow, to 9-10 per cent during 2003. Private housing construction output is forecast to increase by 7 per cent this year, following a 12 per cent surge last year.

Tender prices

Despite the fall-off in London office activity, demand for contractors' services remains healthy throughout most of the UK and shortages of labour continue to push up site rates for skilled labour. Some tenders are coming in well down on forecasts, while others are showing substantial rises, although the market generally seems to be tightening and contractors' profit levels are likely to be reduced.

The increased investment in health and education is making its presence felt, and the more forwardlooking contractors are moving towards development partnerships with universities and NHS Trusts.

The Private Finance Initiative provides a substantial market, with government targets of 100 new hospitals by 2010, while some £60 billion is due to be spent on school refurbishment over the next 10 to 15 years.

Good-value deals are being made with subcontractors by aggressive main contractors and by developers, who are returning to reliable contractors with more business. With office and retail fit-outs still buoyant, there is some evidence of fit-out contractors reorganising to improve their efficiency and focusing on specific markets.

Away from London, contractors in much of the UK are busy and the outlook remains bright for the rest of the year, but with a slowdown expected in 2004. As a result, building tender prices nationally are forecast to increase by 3.3 per cent in the year to the second quarter of 2004, with a further marginal slowdown to around a 3 per cent increase over the following year.

Notwithstanding the decimation of the offices sector, tender prices in London are being held up by a number of extra large schemes away from the centre, with Heathrow Terminal 5, Wembley Stadium and Paddington Basin to the fore. As a result, building tender prices in London are forecast to increase by 4 per cent in the year to the second quarter 2003 and by 3.8 per cent over the following year. Tender prices for infrastructure works are forecast to rise by 4.1 per cent in the next 12 months and by 3.4 per cent in the year to the second quarter of 2005.

Macro economic factors

Following the war in Iraq, stock markets appear to be rallying, with the FTSE 100 Index hitting a six-month high in May, up by more than a quarter from its March low point.

However, the sluggish recovery in the world economy remains a cause for concern; the UK's economic growth weakened in the first quarter of the year and the underlying inflation rate rose above its target. Manufacturing in the UK remains depressed, despite the dramatic fall in the pound, which has lost 8 per cent of its value against the euro since January.

The latest round-up of independent forecasters' views is that GDP will grow by 1.9 per cent this year but will recover to show 2.4 per cent growth in 2004. The figures, while well below the chancellor's Budget forecast in April of 2-2.5 per cent growth, are much healthier than for a great number of European countries and seem to indicate that the UK economy will avoid recession.

However, the Bank of England's ability to reduce interest rates to stimulate the economy has very much been limited by the continuing strength of the housing market, and the unabated growth of house prices continues to cause huge problems for the bank.

Paul Moore is an associate and head of cost research at EC Harris. Email paul. moore@echarris. com

SURVEY HIGHLIGHTS

Construction output in the first quarter of 2003 was 2.5 per cent lower than the previous quarter, but 2.5 per cent higher than the first quarter of 2002.

Construction output in 2002 was 8 per cent higher than the previous year and stood at a record of almost £65 billion.

Construction output is forecast to increase by 4.9 per cent this year, and by 1.9 per cent in 2004.

Skilled labour costs rose by 2.4 per cent during the past three months, and by 10 per cent since June 2002.

Take-up of offices in London is at a 10-year low, with rents down 5-6 per cent in the West End, and down 7-8 per cent in the City since the start of the year.

Commercial and industrial sectors are facing a slowdown.

Infrastructure output is set to rise by 9 per cent this year, and 5 per cent in 2004.

lnvestment in health and education is set to boost public non-housing sector output, helping it to rise by 8 per cent this year and a further 10 per cent in 2004.

Tender prices are forecast to rise nationally by 3.3 per cent in the next year and by almost 3 per cent in the year to the second quarter of 2005.

Tender prices in London are predicted to rise by 4 per cent in the next year and by 3.8 per cent in the following year.

Civils tender prices are expected to rise by 4 per cent in the next year with a further 3.4 per cent rise in the year to the second quarter of 2005.

The underlying rate of retail price inflation is forecast to run at 2.6 per cent this year,2.4 per cent in 2004 and thereafter to average 2.4 per cent through to the end of 2007.

Economic growth in the UK is predicted to rise by 1.9 per cent this year,2.4 per cent in 2004 and thereafter to average 2.5 per cent through to the end of 2007.

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