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Let's have some order, please

We chart the latest trends and future projections in our regular quarterly look at the construction industry

The commercial and public sectors led an upturn in orders for new construction in the second quarter of this year.Latest provisional figures from the Department of the Environment, Transport and Regions (DETR) indicate that the total volume of orders for new work won by contractors was 9 per cent higher than in the previous quarter and 8 per cent higher than the corresponding quarter of in 1999.Within this overall growth there is, however, considerable variance.

Public-sector orders (excluding infrastructure and housing) increased by almost 31 per cent in the quarter and by more than 40 per cent when compared with the second quarter of 1999. Significant further public-sector growth, especially in health and education, can be expected as a consequence of the government's recent Comprehensive Spending Review, which is set to increase investment expenditure by on average 16.75 per cent per annum over the next three years to £35 billion in 2002. The Construction Products Association predicts that its members' output levels will increase by between 2 and 3 per cent per annum over the same period.

Hewes & Associates, in its report Construction Output 2000, indicates that the rise in public-sector work will more than compensate for a forecast downturn in new work from other sectors of economy.

The majority of the new spending will be through either the Private Finance Initiative (PFI) or the government's new Public Private Partnership (PPP).

Given the current backlog of orders for projects on line to be procured through PFI, some concern has been expressed by industry bodies about how quickly the extra funding can be fed through.

The DETR reports that both infrastructure and public housing orders fell during the quarter - by 8 per cent and 5 per cent respectively. Both of these sectors are, however, on line to gain from increased government spending. In recent weeks deputy prime minister John Prescott, reversing the government's previous policies, announced a major extension to the road building and improvement programme. He also announced the long-awaited go-ahead for the upgrade of the London Underground transport system.In July, housing minister, Nick Raynsford heralded the issue of the government's Housing Green Paper and announced an extra £1.8 billion of publicsector spending on public housing over the next three years. An additional £600 million has been allocated to improving the existing local authority housing stock.

Private house building activity, according to DETR statistics, has slowed slightly in the second quarter (by 3.5 per cent when compared with the previous quarter) but was still 2.5 per cent up on the same period in 1999.This moderation in activity is not unexpected following the slowdown in demand in the general private housing market.

New orders in the private commercial sector, which comprises retail and office space, increased by almost 29 per cent in the quarter; although this represents only a 2 per cent increase on the corresponding period last year. Medium-to-long-term prospects are not, so promising.

A survey from Construction Forecasting and Research (CFR) predicts a fall of 4 per cent next year and a further 2 per cent in 2002. This follows four years of continuous growth at an average of 13 per cent per annum. The CFR reports that a downturn is expected because the market has reached the peak of its current cycle and that future retail grow th is restricted as a result of planning restrictions on out-oftown shopping centres.

The continuing manufacturing decline is reflected in the level of orders for new construction in the private industrial sector, which, according to data issued by DETR was down by 14 per cent in the quarter. Any medium- to long-term improvement in this sector cannot be anticipated unless there is a significant reduction in the strength of the pound versus the euro. Within recent weeks, Corus announced the closure of its South Wales plant at Llanwern.On a more positive note, the Construction Market Survey published by the Royal Institution of Chartered Surveyors (RICS) reports an increased demand for new warehouse property fuelled by the rapid growth in consumer online spending.

Regions and Ireland The South East and Greater London region saw the most marked growth in construction. The DETR reports that the value of new orders grew by £897 million, a rise of 41 per cent in the quarter and 35 per cent year on year. With the except ion of new private housing, all sectors in the region saw some increase in activity.

Driven by substantial orders in the private commercial sector, the South West and Wales regions saw workloads expand over the quarter (by 48 per cent and 23 per cent respectively) and both by more than 50 per cent when compared to the same period last year. Both regions, however, saw orders for new public housing tumble by approximately 70 per cent. The RICS Construction Market Survey, published in July, forecasts considerably worsened prospects for both regions in the coming months.

The North East and Cumbria, Yorkshire and Humberside, the North West and Scotland have all fared very badly compared with the UK as a whole.All four regions have seen orders fall significantly in the past quarter (by 31 per cent, 15 per cent, 20 per cent and 28 per cent respectively). When compared with the second quarter of 1999, orders for new work fell by 18 per cent in the North, 6 per cent in the North East, 1 per cent in the North West and a worrying 36 per cent in Scotland. The main area of reduction in the Scottish market was a fall in public-sector and infrastructure work, possibly indicating that devolution-related projects such as the new parliament building no longer figure in current new orders.

Prospects for construction in the central band of the country, encompassing East Anglia and the East and West Midlands, are mixed. The East Anglian construction industry is enjoying a period ofgrowth; orders were up 27 per cent over the quarter and 19 per cent when compared with the same period of last year. By contrast, the East Midlands has suffered a considerable downturn in orders for new construction, which fell by 20 per cent in the past quarter and 13 per cent when compared with the second quarter of 1999.The West Midlands construction economy is relatively flat; orders for new work increased by 5 per cent over the quarter but were 2 per cent down year on year.

The Republic of Ireland's construction industry shows no sign of slowing down.

Last year construction output increased by 11 per cent to an all-time high of £9.3billion. The Irish government has recently announced spending plans amounting to £32billion over the next six years.While most sectors of the economy in the Republic have now enjoyed consistent year-on-year growth for several years, IT and pharmaceuticals have shown the most rapid expansion. Today, 40 per cent of inward investment from the US to Europe makes its way to the Republic, where giants such Hewlett Packard, Rank Xerox and Intel, among others, have set up manufacturing plants.

The economy in Northern Ireland has mirrored the growth of its southern neighbour. There are, however, a number of major projects on hold and awaiting a political settlement in the Province, including a £400 million riverside development in Belfast, an £80 million retail park close to Belfast City Airport and an estimated £1 billion backlog of publicsector PFI-funded works.

Costs and tenders Construction cost increases are forecast to operate above levels found in the general economy. Building costs increased by 3.9 per cent in the past year and are expected to rise by around 3 per cent over the next.

General underlying inflation levels are currently at about 2 per cent.

Material costs rose by 0.6 per cent in the first quarter of 2000 when compared with both the last quarter and the first quarter of 1999. The influence of the strong pound on imported material prices has been negated because the current level of exchange rates has been effective for more than a year and is thus discounted from year-on-year calculations. This increase, however, is still considerably below the general inflation level of 2.3 per cent per annum over the same period.

Construction-sector earnings rose by an average 5.9 per cent in the year to December 1999. This roughly equates to the 5.8 per cent upward movement in average earnings in the wider economy.

The Building Cost Information Service (BCIS) reports that while skill shortages among bricklayers and plasterers have eased, demand for all trades is buoyant and carpenters are the most difficult to secure.

Tender prices rose on average by 6.1 per cent in the year to March 2000, which the BCIS reports is the result of aboveinflation labour input cost increases over the year now being passed on in tenders.

In this period, the South East and Greater London saw the greatest rise of tender prices at 8.5 per cent; in the North West prices remained unchanged. In the next year, tender price inflation is expected to level off at around 1 per cent above levels prevalent in the general economy.

In the past 10 years overall building costs have increased by about 38 per cent;

over the same period tender prices rose by approximately 37 per cent. Despite this similar price growth over the long term, annual inflation for building costs and building tender prices has been quite dissimilar.

Over the past 10 years building costs have increased fairly steadily (and roughly in line with general inflation) by between 2.4 and 4.6 per cent per annum. By contrast, annual tender price inflation has been largely driven by the prevalent state of the construction market. For example, tender prices dropped by 5 per cent in 1991 and by a further 3.6 per cent in 1992 as the construction industry went into severe recession; by 1994 the industry's fortunes were improving and tender prices increased by 13.6 per cent as contractors sought to recover lost ground on costs and profitability.

A longer-term perspective indicates that financial implications even out over time (see graph).

Architects employment The recent RIBA employment and earnings survey indicates that the average salary for an architect has for the first time risen to about £30,000, an average increase of 5.3 per cent compared with 1999.

Architects' salaries do not compare well with those of other professionals of similar standing; solicitors earn in the region of £38,000 and doctors £51,000, although the exceptionally high salaries of the leading practitioners distort the figures somewhat.

Within the headline figure there are major variances between regions and staff ages and grades. A salaried architect under the age of 30 and in private practice can expect an salary of £22,000 per annum, which is about the national average for full- time workers. A partner in private practice aged between 40 and 54 can command an average salary of £40,000.

The South East and Greater London have seen significant increases in average architects' salaries over the past year. The average salary in the South East grew by 7 per cent to £32,000 and in London by 10 per cent to £33,000. In stark contrast average salaries in the North, the Midlands, East Anglia, the South West, Wales and Scotland actually fell by 7 per cent and 10 per cent to between £27,000 (Scotland) and £28,000 (Midlands and East Anglia).

Commercial property The RICS Commercial Market Survey reports that that demand for office space is exceedingly buoyant with rental levels in the three months to May up by more than 10 per cent over the same period in 1999. CB Hillier Parker data indicates rental inflation of 20.3 per cent per annum in London over the same period.

Although chartered surveyors are less confident about overall future demand, as tenant enquiries have lessened in recent weeks suggesting weaker activity in the service sector, it is expected that the current level of rental price inflation will be maintained as the availability of floor space declines.Capital values for offices in 2000 continue to rise, albeit at a slower pace than 1999.

A slowdown in consumer demand is causing retailers to become cautious of taking on more floor space and the level of new lettings has declined. This slowdown has yet to have any significant impact on rents, which in May rose by an average 5.4 per cent per annum. The impact of the closure of all C&A stores on high street rents has yet to be felt. According to Insignia Richard Ellis, capital values for high street property have fallen for three months in a row.

Ongoing problems in the manufacturing sector of the economy are hitting demand for industrial property. However, rental levels, although slipping, were up in May by 5.7 per cent per annum. These rental levels have been supported by the strength of the service sector, particularly in goods distribution activity related to ecommerce. For these same reasons, capital values of warehouse property have risen significantly.

Residential property According to the RICS, house prices have fallen for the first time in two years.House prices fell by 2 per cent in July compared with the previous month.House prices are in decline in London (having peaked at a very high level), the South East and the Midlands, but are edging up in much of the North and Wales. Building societies and banks suggest the trend could be set to continue.

Ten years ago the average home cost about £59,000, almost four-and-a-half times average full-time earnings. Today, the average home costs £81,000 today, just under four times average earnings. This price increase of about 37 per cent is roughly in line with building cost and building tender inflation over the same period.There is, however, considerable variation between the regions. In London between 1990 and 2000, the price of the average home increased by 68 per cent from £87,000 to £146,000, whereas in the North East prices increased by just 3.5 per cent.As the political climate has improved, Northern Ireland has seen a spectacular 145 per cent rise in house prices - from £29,000 in 1990 to £71,000 this year.

Della Hughes is an associate director of the MDA Group, tel: 020 8686 5566 dhughes@mdagroup.com

IN BRIEF

New orders increased by 9 per cent in the past quarter.

New government spending will compensate for predicted slowdown in commercial workloads.

Retail orders are in decline as consumer spending slows and planners restrict out-of-town developments.

Decline in manufacturing-sector work continues unabated but e-commerce boosts demand for warehouses and distribution centres.

Growth in new orders is strongest in the South East and Greater London whereas workload declines in the North and Scotland. Construction in Ireland continues to grow apace.

Building costs increased by 3.9 per cent over the past year; building tenders rose by 6.1 per cent over the same period.

Over the past 10 years building costs and building tenders have risen by 38 and 37 per cent respectively.

For the first time the average architect's salary has reached £30,000.

House prices in July fell for the first time in two years.

The average home now costs almost four times the average full-time salary.

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