Challenging Times for Construction, but Housing Still Bouyant

Following the release of the latest UK Construction PMI today (6 May 2022), Brendan Sharkey, Head of Construction and Real Estate at MHA, believes the construction sector faces a challenging environment as rising costs cut into profit margins, although demand for new builds in the housing market continues unabated, despite the cost of living crisis:

“The UK construction sector continues to ride a wave of strong demand. However, construction work is now less profitable due to inflation and interest rate rises. Russia’s invasion of Ukraine continues to be responsible for some staggering prices increases. We’ve seen the price of certain raw materials surge by 20% or more within a month.

“Hopefully employers and larger construction firms will be sympathetic to the struggles of smaller businesses. If they are not, we may see more than a few casualties. In the long term, the sector may experience a decline in new civil engineering, commercial and industrial projects as businesses and investors start to hold back on new orders until price stability returns and there is more economic certainty.

“Housing is a bright spot, especially outside of London. Despite the cost of living crisis, housing demand shows little signs of slowing, boosted by high levels of employment across the economy. The rising cost of living and of increasing mortgage costs will surely start to bite soon, but even then demand for new build homes should continue to be strong. Compared to second-hand properties newer builds are generally more energy efficient thereby saving running costs but also avoiding potentially expensive energy refurbishment in years to come.

“The government can do very little to support the sector at this time. It has already stimulated demand through infrastructure projects, including HS2, and work generated to meet the standards set by the Energy Performance Certificate (EPC) action plan. The big question is how businesses can meet this demand while also addressing rising costs. Now would be a good time to reassess delivery models to identify potential cost-savings. Firms also need to be vigorous in negotiating and renegotiating contracts. Rampant inflation means a job that looked profitable one month will be loss-making the next.”