Construction faces a progressive improvement in market conditions over the next three years after the sharp fall in starts during 2023. The recovery will not be evenly spread. A brightening economic outlook promises to initially free up new private sector opportunities.
In contrast, existing publicly funded programmes face delay and review near term as they are reviewed by the new government post-election.
Fresh opportunities are set to emerge subsequently over the next three years as the government implements measures to deliver its objectives, such as lifting new housing provision and greening the UK’s energy sector.
Weak economic activity and sharply higher interest rates prompted some clients and developers to pause or scale back on planned investments during the past 18 months. The value of project starts fell back 7 per cent during 2023. The value of main contract awards fell back 15 per cent last year and continued to soften during the first half of 2024.
However, the value of the planning pipeline has been more stable, pointing to a growing pool of projects that can be brought forward as market conditions and investor confidence improve. Renewed construction growth is forecast from the second half of 2024 as the prospect of a strengthening UK economy lifts consumer and business confidence.
Housing
Private housing starts dropped sharply last year but there are tentative signs that the housing market is now stabilising, with a rise in mortgage approvals in recent months. A strengthening economy and the recent easing in interest rates is expected to help rebuild homebuyers’ confidence during the second half of this year and during 2025 and 2026. This is expected to support a progressive recovery in project starts over the next three years as housebuilders respond to improved consumer confidence and a strengthening in property transactions.
Industrial
Industrial starts fell back sharply in 2023 as higher interest rates dented the capital value of industrial property and knocked investor confidence and as weak retail spending dampened the demand for warehousing and logistics space. Weak domestic and overseas demand similarly tempered manufacturing investment in new capacity and facilities. While a further weakening is expected this year, the industrial sector is forecast to return to growth from 2025 as a strengthening in consumer spending fuels the demand for logistics space from online retailers and third-party carriers.
Retail and hotel & leisure
Both the retail and hotel and leisure sectors have been held back over the past two years as weak household spending has deterred investment in new and upgraded premises. An overhang of empty retail premises and the growth of online retailing are expected to temper the recovery in retail construction over the new three years. Investment by the deep discount supermarkets, Aldi, and Lidl, will remain a sector bright spot. A gradual recovery in hotel & leisure project starts is anticipated from this year as households’ finances stabilise and then improve, lifting consumers’ discretionary spending and investor confidence.
Offices
Office starts dropped by 19 per cent last year as sharply higher interest rates and stalled economic growth prompted investors to defer planned projects. The sector is forecast to return to growth from 2025. While changing working patterns are reducing the overall demand for office space, they are also prompting landlords and occupiers to remodel premises to support hybrid working. Regulatory changes and demand for premium office space with a good environmental performance are also expected to generate retrofit and new build opportunities.
Infrastructure
Public sector construction was a relative bright spot during 2023 as an underspend during 2022/23 was rolled forward, boosting government departmental capital programmes. In contrast, public sector activity is expected to slow near term as planned projects are reviewed by the new government.
Road and rail investment programmes are currently being reviewed against the new government’s policy objectives ahead of next spring’s Spending Review. Recent weeks have seen a number of projects cancelled, including the Stonehenge tunnel and A27 Arundel bypass. Decisions on other major projects such as the Lower Thames Crossing have also been delayed.
In contrast, Labour’s plans to accelerate the investment in renewable energy and the pressing need for greater investment by the water industry promise to lift civil engineering activity over the next three years.
Education
Increased capital funding and action to tackle RAAC defective buildings delivered a 41 per cent leap in school building projects last year, with momentum maintained during the first half of 2024. School building projects are expected be disrupted near term as the government reviews its spending programmes, before returning to growth in 2026.
Health
Health project starts declined last year as NHS resources and management time were focussed on addressing long waiting lists and resolving industrial unrest. Renewed growth is anticipated this year as delayed projects progress to site. While the post-election spending review is expected to temper starts next year, the outlook for the health sector remains positive, with renewed growth forecast for 2026.
