Construction sector hammered by wet weather and high interest rates – holding back UK economic growth

Construction output slumped in February, weighing on overall economic growth, as wet weather and high interest rates hammered activity.

The construction industry’s output for the month fell 1.9 per cent in volume terms, holding GDP growth back to just 0.1 per cent after every other sector showed growth, figures from the Office for National Statistics showed on Friday.

The fall, which marks a 1 per cent contraction in the three months to February, was driven by a slump in activity in eight out of nine sub sectors – with private housing repair and maintenance the only area of growth, adding 0.2 per cent.

Project delayed: Construction sector output weighed down by poor February weather

Non-housing repair and maintenance, and private commercial new work were the worst affected, contracting by 2.5 and 4 per cent, respectively.

Experts pinned the decline on particularly poor weather for the month holding up construction projects after more than double the usual amount of rainfall this February, according to the Met Office.

The rise in the Bank of England’s base rate to its current level of 5.25 per cent has driven mortgage rates higher, leading to a drop in new home purchases and a slowdown in house price growth.

Repair and maintenance work has led construction since 2020 amid weak output in the rest of the sector

Shares in the housing, building materials and merchants sector are down roughly 1 per cent over the last month, led by a 5 per cent drop for housebuilders, as investor fret the potential for interest rates to remain higher for longer.

Nicholas Hyett, investment analyst at Wealth Club, said the construction sector ‘is in the doldrums’ and ‘an interest rate cut could be quite helpful’.

Generally improved economic output globally combined with higher-than-expected US consumer price inflation this week has driven back forecasts for the BoE’s first rate cut and the scale at which base rate will fall this year.

UK GDP grew by 0.1% in February, while January’s growth was upgraded to 0.3%

Current market pricing now suggests that the first BoE cut won’t come until August, while the forecasted scale of 2024 cuts is less than 50 basis points – meaning the current base rate of 5.25 per cent will not fall below 4.75 per cent by year-end.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: ‘Falls in construction activity also indicate a broader malaise the UK is yet to shake off.

‘We’ve known for some time that major housebuilders have been building fewer homes, as people wait for finances to improve before making large financial decisions.

‘All-in-all, the rate of economic growth has slowed, and there’s still a lot of extra coals needed to stoke the UK’s engines.’

Source: This Is Money

ROBERTSON Construction Northern has successfully completed the build of Peterhead House at RAF Lossiemouth.

The completion marks a ‘significant improvement’ to accommodation for hundreds of personal at the Moray base, with it being the seventh and final of a series of new single living accommodation blocks at RAF Lossiemouth.

The seven blocks and accommodation hub, which provides 24-hour social areas for personnel living in the blocks as well as office space for accommodation staff, were delivered by the contractor for Defence Infrastructure Organisation (DIO), on behalf of the Royal Air Force (RAF).

Robertson Construction Northern, which has a local office in Elgin about six miles from the Moray base, was supported by Tetra Tech as technical service provider for the project.

In total, the seven blocks contain 426 ensuite bedrooms, with each block including laundry and kitchenette facilities while providing comfortable accommodation for RAF personnel. As well as construction, the project included demolition of existing buildings on the site, design, diversion of services and landscaping. Pedestrian access routes and 300 new car parking spaces were built and a number of EV charging points were installed.

All buildings were constructed using modern methods of construction, which sees the blocks being built off-site in sections which are then transported and assembled on site. Robertson explained that this improves the quality of the final product, minimises disruption on what is a busy operational air base, and speeds up the completion of the work. For the final five blocks, even the internal fit out was done off-site – meaning that when the modules were delivered, only minor internal works were needed.

Darren Keddie, project manager at Defence Infrastructure Organisation, said,

 “It’s fantastic to see the conclusion of several years of close work with our contractors and RAF colleagues on this element of the Lossiemouth Development Programme. We want to ensure that our dedicated RAF personnel have suitable and comfortable accommodation to go back to when the working day is done, and I hope and believe they will be happy with what we’ve provided here.”

Ian Phillips, regional MD at Robertson Construction Northern, added,

“We have enjoyed a close working relationship with the DIO and RAF Lossiemouth over the last 25 years and during that time have delivered several strategic projects including married quarters, The Atlantic Building, and this new modern single living accommodation.

“Together with Defence Infrastructure Organisation, we ensured that the accommodation and facilities meet user needs and priorities, whilst ensuring that any disruption to day-to-day activities at the base were kept to a minimum.

“Robertson is incredibly proud to play its part in supporting the defence sector and serving personnel.”

Gp Capt Pete Beckett, Lossiemouth development programme director, said,

“This handover represents a significant milestone on the LDP journey, it is the final project to be delivered in support of P8 and Typhoon growth. Of all the works we have delivered this one, perhaps, means the most as it is directly focused on our people and making RAF Lossiemouth a better place to both live and work.

“My congratulations must go to Robertson Construction Group, DIO Major Programmes and Projects, and Tetra Tech for the successful delivery of this key product; they should all be rightly proud of this quality product.”

Gp Capt Jim Lee, RAF Lossiemouth Station Commander, said:

“The handover of the final single living accommodation block to RAF Lossiemouth represents a huge moment. It signals the end of a long, collaborative journey between the station, defence infrastructure organisation, Tetra Tech and, of course, our local contractor Robertson, to improve the accommodation offer for our people.”

Source: Project Scotland

• Awards see slight fall on the previous month but the residential sector bounces back from poor February.
• A continued positive trend in contract awards in Q1 suggests the sector is looking to emerge from doldrums of 2023.
• Lack of new applications suggests the crossroads have not yet been passed.

Construction contract rewards remained stable in March following a quarter which had showed a significant increase since the beginning of the year. The value of new contracts was 3% down in February and 1% down on the previous year but remained significantly above the last quarter of 2023, according to analysis from Barbour ABI.

Notably, residential contracts were up 60% in February, returning to heights seen in January and were up 62% over the first quarter of the year. Meanwhile, infrastructure fell back to more normal levels following a stellar February but remained 38% up on the same month last year.

A new student accommodation facility on Medlock Steet, Manchester will cost £200 million, whilst a new National Grid convertor station at Eastern Green will be built at a cost of £700 million. A new prison at HMP Gartree was also awarded at a cost of £300million. Wates will carry out the work which will commence July 2024.

Barbour ABI head of business and client analytics, Ed Griffiths commented:

“When looking across the first quarter of 2024 it has become clear that both the infrastructure and residential sectors have had strong starts to the year as businesses attempt to get projects off the ground, which is a positive signal the construction sector is attempting to emerge from the doldrums of last year.

“Interestingly in March, we saw Residential and Infrastructure swapping positions in terms of leading overall contract awards value with £2.4bn and £2bn respectively. Together they are pushing the industry awards upwards.”

Elsewhere Healthcare projects were subdued in March following two strong months and Economic conditions continue to stagnate the Hotel and Leisure Sector

Applications continue to confound recovery.

Planning applications have improved in February after a weak start to the year in January but activity levels in most sectors remain low, highlighting that nervousness remains in the sector to commit to future projects ahead of potential rates cuts and upcoming elections.

Infrastructure has increased 33% since last month and remains strong against its long-term average. However, it has not returned to the highs of the end of last year. Residential applications fell once again from £3.1bn in January to £2.9bn in February.

Griffiths continued:

“The enduring story of 2024 so far has been the contradiction between a rise in contracts awarded, sometimes even for projects which have not yet been fully approved, and the continued lack of confidence shown in both in new applications and approvals – which have been contracting since last November. The industry stands at a crossroads where financial and political decisions made at a national level could tip the balance in either direction.”

National body has crucial role in delivering the government’s housing, regeneration and levelling up priorities and provides value for money, working in partnership to drive forward national, regional and local ambitions.

The review reaffirms the crucial role the Agency plays as a national public body of scale in place-making across the country, supporting local leaders, affordable housing providers and the private sector to turn housing and regeneration plans from a vision into reality for the benefit of communities.

In the past five years this has included:

• supporting development of more than 186,400 new homes
• unlocking land that could deliver close to 400,000 additional new homes
• helping more than 252,500 households into home ownership.

The review also recognises the unique expertise, capability and capacity Homes England is already putting to good use in driving delivery and outlines the potential to further expand its master development role in urban and new settlement areas.

Published by the Department for Levelling Up, Homes and Communities (DLUHC), the review is part of the government’s Public Bodies Review Programme, which routinely assesses the effectiveness and efficiency of all arm’s length bodies (ALBs).

Michael Gove, Secretary of State for Levelling Up, Homes and Communities said:

Today’s independent report shows Homes England is the right vehicle to deliver more affordable homes and support our plans to regenerate towns and cities across the country.

I welcome the report and its recommendations and we will work closely with Homes England to finalise an implementation plan. This builds on our long-term plan for housing to further strengthen Homes England’s record of delivery so we can deliver more homes that are affordable, beautiful, and built in the right places.

Peter Freeman, Homes England Chair said:

I  welcome such positive endorsement of the Agency’s efficiency and governance alongside recommendations for both improvement and for developing our mandate and structure.

Much of this work is already happening. Other recommendations will require changes in partnership with the DLUHC and Treasury, but if progressed could be transformational in how we deliver new homes and create thriving places.

While there is much to celebrate, we are steadfast in our resolve to always improve, ensuring that we are effective and efficient in driving forward the country’s housing and regeneration ambitions.

Peter Denton, Homes England Chief Executive said:

I’m proud the review acknowledges the hard work, talent and passion of our staff and partners throughout a challenging time for the market and sector.

The report makes clear we have a crucial role to play in catalysing local regeneration and housing delivery by using our land, powers, funding and expertise – reducing risk to drive investment and harnessing the potential of private and public sector skills, capital and partnerships. Bringing all of these elements together means we are greater than the sum of our parts as a collective force to deliver effective change.

Place-based work is central to this mission and well underway in numerous places, from Bradford, Bristol and Birmingham to Newcastle, Liverpool and Plymouth. By 2025 we expect to have entered into six strategic place partnerships with combined authorities, serving a combined population of more than 13million people.

Abolition of Multiple Dwellings Relief: UK Investors Brace for Thousands in Costs

UK property purchasers are being forced to increase their minimum purchase quantity or create buying groups to receive the benefits of buying in the UK 

David Hannah, Group Chairman of Cornerstone Tax, discusses how the abolition of Multiple Dwellings Relief restored a historical injustice in Stamp Duty Land Tax (SDLT)

The abolition of Multiple Dwellings Relief (MDR) following Chancellor Jeremy Hunt’s Spring Budget, has brought into sharp focus the additional costs for investors when they purchase multiple properties in the UK. Property buyers now have to pay an increased amount of tax, with investors now having to purchase six or more units in order to reap the benefits of SDLT relief. David Hannah, Group Chairman of Cornerstone Tax, asserts that  the UK government has generated another block to stopping the property market from making a recovery.

Currently, a property buyer purchasing three apartments from a developer at £350,000 each, would have to pay £46,500. However, once MDR is abolished in June, that same investor will have to pay £77,750. Property buyers in the UK who are eager to buy six units and pay the 5% rate of SDLT, will in effect have to pay £47,250 each which is less than the £77,750 they were being asked for, only slightly more than the £46,500 that they would have paid for under MDR. In reality, had the price been £400,000 each, the six units would have been cheaper than MDR.

The chart below shows the benefit that can be obtained by applying the rule of six on multiple purchases, as well as how the effect increases dramatically as the average price per dwelling increases.

As a result of this, purchasers of multiple units will either have to increase their minimum purchase quantity to six or, conceivably team up with other multiple purchasers into buying groups. This will enable them to buy six units collectively and to ensure that they receive the benefits of the non-residential rate and pay no surcharges whatsoever. The consequences of the abolishment of MDR, is that the Chancellor has, therefore, restored a historical injustice in Stamp Duty Land Tax. The UK’s Treasury and HMRC may well not see an increase in tax take but in fact a decrease, once these perfectly valid commercial arrangements become mainstream.

David Hannah comments:

“Multiple Dwellings Relief was first implemented as means to incentivise bulk purchases and provided developers with a suitable avenue for delivering low-cost homes. At a time when demand for affordable housing has skyrocketed, the government should look to create fresh incentives for developers, instead of abolishing old ones.

“The decision by the Chancellor to increase the tax that developers are forced to pay from 1-2% to 5% will have a seismic shift across Britain’s construction sector, leading to project abandonment and further increases to asking prices as supply continues to lag behind an overwhelming demand for affordable housing. Don’t be fooled, this is a stealth tax increase with a paper-thin justification laced over the top of it.

“The Chancellor could have used this opportunity to reform the private rental sector, measures including the abolition of the second home surcharge from rental sector investors and reinstating full relief on mortgage interest payments would have both reduced the costs of purchase, whilst also allowing landlords to freeze, or potentially cut, rents.”