London Construction Recovery to
Outstrip Rest of UK in 2011
Rise in material costs could result in
business failure, EC Harris predicts
[1 July 2010]
London’s construction market
is set to outpace the rest of the country going into 2011,
according to the latest quarterly Market View released today by EC
Harris, the Built Asset Consultancy.
The EC Harris report
predicts that London tender prices are set to move out of the red
in the second quarter of 2011 and grow by 2.5% across the following
12 months. This will be followed by a stronger increase of 3.5%
going into 2012-2013. The situation in London is in stark contrast
to the rest of the country where the recovery is expected to be
much slower. National tender prices are forecast to decrease by
3.3% to the second quarter of 2011, and then increase by just 1.2%
in the year to the second quarter 2012. Beyond this national tender
prices are anticipated to grow by 2.6-2.8% in
2013-14.
Private
sector leading recovery
With the public
sector spending being severely cut, this London upturn will be led
by the private sector. According to EC Harris, developers are
already looking to take advantage of a lack of Grade A offices and
an anticipated uplift in residential values which will drive the
commercial office and private residential
sectors.
Paul Moore, Head
of Cost Research at EC Harris explained: “Despite the expected huge
drop in public sector activity, we believe that the prospects for
the private sector remain optimistic. There is a significant
amount of pre-planning activity taking place in London, and it only
needs a few of these major schemes to go ahead for us to see a
significant increase in schemes being bid in
2011.”
Commodity price inflation and business
failure
The recent rises in the price of key
commodities such as iron ore, oil and copper, coupled with
considerable inflationary pressure on factory gate prices is
driving up material costs by between 15-20% per annum. Although
labour prices remain depressed, worldwide demand for commodities is
increasing, particularly in China and India, which could damage the
already tight contractor margins and lead to some corporate
failures.
Paul Moore continues: “Developers and
contractors need to recognise that the game has changed and may
require a different solution to their relationship. Some form
of collaboration or transparency between parties is desirable in
order to manage the risk that this increase in commodity prices
presents and ensure that the developer’s return on investment is
secured against their contractors going under.”
Infrastructure
The main industry forecasters indicate that
infrastructure workload should substantially outperform the rest of
the industry, averaging around 11% this year and 9% in 2011*,
although the forecasts were produced before the announcements of
cuts in public spending which could see much of this increase
forestalled.
Pressures in infrastructure contractors remain
despite the apparent upsurge in workload. On the cost side, higher
commodity prices are likely to see tender prices increasing sooner
rather than later. Overall, the lower expectations for
infrastructure are likely to be balanced by increasing input costs
with the result that infrastructure tender prices are expected to
fall by 0.7% over the year to the second quarter of 2011, but then
recover to show a rise of 3.2% over the following year.
The EC Harris Market View is compiled on a
quarterly basis using EC Harris’ in-house tender price data and
accompanying analysis from Experian and CPA. The EC Harris
Tender Price Index dates back to 1989.
To see the full report
click here
- Ends-
* Experian/ CPA forecast (Spring 2010)
Notes to Editors
About EC Harris
EC Harris is an International Built Asset
Consultancy - acting as trusted advisors to clients - in planning
and executing strategies that optimise the construction, operation,
use and ownership of built assets. The firm has 46 wholly
owned offices in 24 countries employing 3,400 people.
Turnover in 2008/09 was £306m.