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Construction activity has recovered strongly since the start of the year as the vaccine rollout and progressive unlocking of the economy have started to rebuild confidence. The value of underlying project starts during the three months to May rose by 20% and was 70% higher than when the UK was in the midst of the first national lockdown a year ago.

After this sharp initial upturn, a steadier progressive strengthening in project-starts is anticipated over the forecast period. By next year we now expect the value of underlying starts (projects with a construction value of less than £100 million) to total £54.2 billion, 3% above 2019 levels.

However, the recovery will not be evenly spread, with regional and sector champions and laggards reflecting a changing UK economic and social landscape. This article highlights the champions, and therefore where you might want to focus your efforts to build a robust pipeline over the next two years to 2023.

Private Housing

Private housing project-starts performed very well during the first five months to May 2021, increasing 70% against the previous year. As existing sites were completed during the second half of 2020 and as housebuilders adapted to new working practices, housebuilders have switched their attention to new developments.

Overall private housing starts are forecast to increase 53% this year and 11% in 2022. By the end of the forecast period, private housing project-starts are anticipated to reach 2017 levels.

Private Housing Project Starts

  2019 2020 2021f 2022f 2023f
£ million 17,489 11,790 18,016 19,931 20,809
Growth -4% -33% 53% 11% 4%

Development Pipeline

The value of projects securing planning approval has strengthened in recent years with growth in every year since 2015 except for 2018 when project-approvals fell slightly by 3%. The value of project-approvals in 2020 held up despite the pandemic and increased 5% against the previous year. Detailed planning approvals in 2021 have been strong, with a 41% increase in approvals during the five months to May.

Social Housing

  • Renewed growth is anticipated from 2021

The pandemic caused a short-term decline in project-starts in 2020 but renewed growth is anticipated from 2021 supported by increased investment from housing associations.

Social Housing Project Starts

  2019 2020 2021f 2022f 2023f
 £ million  6,271 5,308 6,379 7,008 7,205
Growth 0% -15% 20% 10% 3%

Housing associations are now better placed to finance and take forward new developments than in recent years. Government requirements limiting association’s rent increases to 1% below the rate of inflation have been lifted, providing associations with greater flexibility to increase their borrowing to fund new developments.

In addition, last year saw a sharp rise in capital funding for MHCLG housing and communities projects to £10.4 billion. Whilst, lower funding of £8.8 billion is available during 2021/22, it remains up on earlier levels. Together these two measures are expected to support a strengthening in housing association development activity over the forecast period.

The value of student accommodation work is anticipated to improve over the next two years; however we anticipate that it will still be 12% below its 2018 peak by the end of 2023.

Industrial

  • Strong development pipeline as project-approvals experienced strong growth in 2020 and 2021 to May

The sector is being boosted largely by a rising demand in distribution and warehousing space. Manufacturing investment has been disrupted in the short term by recession and Brexit but the future looks brighter.

Industrial Project Starts

  2019 2020 2021f 2022f 2023f
 £ million  4,380 3,094 4,066 4,015 4,102
Growth -1% -29% 31% -1% 2%

Disruption to supply chains following the introduction of customs controls with the EU single market, as well as supply issues as a result of the pandemic, is likely to fuel additional demand

for precautionary warehousing space. Warehousing and logistics project-starts are forecast to be a strong area of growth within the industrial sector in 2021 and are forecast to remain high during 2022 and 2023.

In contrast, poor growth prospects are likely to restrict manufacturers’ need to invest in additional operating capacity including new premises. Ongoing restrictions during the pandemic, rising costs of materials as well as increasing freight costs as a result of Brexit have meant many manufacturers struggled to make a profit during 2020

Hotel and Leisure

  • Strong potential development pipeline, but investors remain very cautious as pandemic and travel restrictions impact the sector

Hotel project-starts fell 35% in 2020 and are forecast to fall by a further 49% in 2021 while much of the sector recovers. This is anticipated to hold back growth of the hotel & leisure sector overall in 2021.

Hotel and Leisure Project Starts

  2019 2020 2021f 2022f 2023f
 £ million  3,645 2,230 2,280 2,862 3,834
Growth -3% -39% 2% 26% 34%

However, as lockdown restrictions are eased this summer, the hotel & leisure sector should be able to take a greater share of discretionary spending by UK households as a weaker pound and travel restrictions prompt more UK consumers to holiday in the UK. Overseas visitors are not likely to recover for some time, preventing the sector from significant recovery until 2022.

A more certain outlook is expected to encourage investors to push back projects to 2022 and 2023, with the upturn in hotel & leisure driven by investment in facilities directed at capturing UK households’ discretionary spending.

Education

  • School project-starts to drive growth for the sector
  • Increase in further education projects

An increase in school building projects is forecast to lead to a recovery in education sector activity during 2021 and 2022 as local authorities tackle a shortage of secondary school places.

Education Project Starts

  2019 2020 2021f 2022f 2023f
 £ million  5,534 4,079 4,157 4,636 4,794
Growth -10% -26% 2% 12% 3%

The pandemic largely contributed to an 18% decline in school projects commencing on-site in 2020. More positively, school project-starts are forecast to rise 5% in 2021 and 14% in 2022. Greater financial support is expected to help accelerate the delivery of much-needed school places and lift school project-starts in the longer term.

Further Education

Work to deliver further education facilities is also forecast to rebound over the next two years due to increased government investment. The value of project-starts is forecast to climb 8% in 2021 and 22% in 2022.

Health

  • Strengthened development pipeline in 2020
  • NHS capital budget increased for 2021/22
  • Continued increase in NHS funding over the next two years

The outlook for the health sector remains positive. The Nightingale hospitals program lifted project-starts in 2020, and increased NHS capital funding is set to lift project-starts further over the forecast period.

Health Project Starts

  2019 2020 2021f 2022f 2023f
 £ million  1,930 2,374 2,364 2,687 2,848
Growth -21% 23% 0% 14% 6%

The value of detailed planning approvals for the health sector fell 7% in 2018 but has strengthened since then, with project-approvals increasing 3% in 2019 and 26% in 2020. The value of project-consents during 2021 to May remained high and was unchanged on the previous year.

Looking ahead, additional government funding will begin to feed through to sector activity from 2022. Starts are forecast to remain unchanged this year after the strong performance in 2020, before rising by 14% in 2022 and 6% in 2023 as new projects come forward and as NHS trusts develop and implement their investment programs. This includes the work to deliver the 40 ‘new’ hospitals promised by the Government over the next ten years.

Civil Engineering

  • HS2 boosts the sector
  • Jump in infrastructure investment in 2021
  • Utilities projects underpin growth over forecasts period

Significant infrastructure schemes, such as Thames Tideway, HS2, Hinkley Point and the Stonehenge Tunnel will be important drivers for sector activity over the forecast period. The value of underlying main contract awards (less than £100 million in value) has risen steadily in recent months, and we anticipate a strengthening in the value of project-starts.

Civil Engineering Project Starts

  2019 2020 2021f 2022f 2023f
 £ million  6,399 5,469 6,606 6,330 6,793
Growth 27% -15% 21% -4% 7%

The Government has promised record investment in UK infrastructure, with £100 billion capital spending plans being announced for the next year. The Government has pledged £5 billion to
accelerate the roll-out of UK-wide gigabit broadband, with much of this work being delivered by the private sector.

The second Road Investment Strategy (RIS2) will spend £27.4 billion between 2020 and 2025 to build new road capacity and to improve the quality of existing roads. RIS2 will take forward
schemes such as the dualling of the A66 Trans-Pennine route and construction of the Stonehenge Tunnel which is due to start on-site at the end of 2022. Many projects included in RIS2 will take time to start on-site but many will boost the sector towards the latter months of the forecast period.

Near term, a 50% increase to local road maintenance budgets, announced as part of the March 2020 Budget, will deliver additional funding of £500 million a year to starting smaller improvement schemes.

Office and Retail Sectors

Whilst we have highlighted the strongest sectors likely to deliver a robust pipeline, there are opportunities within the office and retail sub-sectors, with office fit-outs and retail refurbishments likely to gain traction as the UK finds its feet, with ‘new normal’ ways of working and as consumers’ shopping preferences change to suit.

Glenigan customers can see the detail of all projects within each sector if part of their subscription.

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