Crunch times for construction

In The Hitchhiker’s Guide to the Galaxy, Vroomfondel has a quandary. If the supercomputer Deep Thought can crack a riddle as intractable as the Ultimate Question of Life, the Universe, and Everything, philosophers like him will be out of a job. He needn’t have worried. The necessary calculations will take Deep Thought seven and a half million years. Change will be a long time coming. Britain, of course, must resolve its future relationship with the EU far sooner. Meanwhile, its construction market powers on. Builders’ merchants’ sales were up by 3.8% in the last quarter of 2016, compared with 2015. The latest Markit/CIPS UK Construction Purchasing Managers’ Index shows a similar pattern. The government has announced a further £1bn commitment for road and rail improvements, while Hinkley Point C has been given the nod. Investment in infrastructure will improve competitiveness, as well as mitigating the consequences of any slowdown. Despite this rosy picture for construction, dark clouds still loom. The other Marmite factor Sterling remains 30% below its peak on the Bank of England’s trade-weighted index. That’s bad news for a sector that imports most of its materials – 59% from the EU alone, according to the RICS. Contractors and developers may have hedged against the referendum result using currency swaps or by forward purchasing supplies, but such initiatives are now maturing. As Marmite fans know, exchange rate costs ultimately need to be passed on. This may threaten the viability of new projects. In time, the UK can find non-EU replacements for Baltic hardwood, Italian marble or German white goods, but that will depend on concluding suitable trade agreements. Now that the prime minister considers it more likely Brexit will come without a deal on the free movement of goods, the price of projects should swell. There is the other danger that the bank’s Monetary Policy Committee could increase interest rates in order to curb spending and limit general inflation. However, development is heavily reliant on bank borrowing, which would then become more expensive. It is just as well for the industry that, with the outlook for growth gloomy, a rate drop is more likely. Who will do the work? Foreign workers have undoubtedly been a boon for construction. The Construction Industry Training Board estimates that some 230,000 new vacancies will be created by 2020. Few of these will be filled by UK nationals. The number of apprentices recruited each year by the industry pales against the ranks of those leaving it. Burdened with an unfavourable public image, it struggles to appeal to women, school leavers and older workers. By permitting skilled migrant workers to come and go as market demand requires, the EU has provided a ready solution. Reduced labour availability in future can only add to project costs and delays. Construction demand will be mixed Housebuilding and logistics are surging, reflecting the longstanding housing shortage and the popularity of online retail. Moreover, we can expect infrastructure to grow following the chancellor’s Autumn Statement. Against this, requirements for new office space in London have stagnated as a result of fears about the capital’s status as a European base for financial services amid the potential loss of passporting rights. Combined with concerns over project costs, this has seen some projects either being delayed until prices cool or sent back to the drawing board for value engineering. Let’s not waste a good crisis Though the construction industry looks set for an uncertain period, it has never had a better opportunity to reinvent itself. Quite simply, it has to. The benefits of single market access and free movement of workers have allowed the sector to become complacent. In October, the Construction Leadership Council published the Farmer Review. Its author describes a fragmented industry, saddled with opposing interests and operating in survival mode. Post-Brexit, Farmer sees spending on research and development as key to addressing a declining workforce and intensifying costs, together with the overhaul of the government’s skills and training regimes. When called on to evaluate the industry nearly two decades ago, Sir John Egan thought that greater collaboration between project participants would cure such ills. On the lessons that construction could learn from carmakers, he did not foresee prefabrication. “The parallel is not with building cars on the production line,” he wrote. How times have changed. The 1944 government’s temporary housing programme converted ordnance factories to housebuilding. The ensuing prefabricated homes were easy to assemble, labour-efficient and cheap. They were advanced, too, with major kitchen appliances built-in and central heating. Now here we are again, with the likes of Legal & General and GSK leading the charge. Except this time, the factory-built structures will be green, indistinguishable from traditional construction and intended to last a lifetime. They are a practical approach to tackling the housing crisis. At the same time, the UK has become a leader in building information modelling, the next generation of building design. It is vital for growth that the industry can build on and maximise knowledge and capabilities like these. Even with major public projects greenlit, that means looking outwards. In recent decades, a buoyant domestic market has led to fewer British contractors looking to venture abroad, enabling overseas rivals to seize and cement an advantage. But an industry retooled with innovation and a missionary zeal will create new export opportunities. Exciting times lie ahead. Francis Ho is a partner at Penningtons Manches LLP