UK construction sector expected to recover from 2024

The sector is grappling with critical issues that will be overcome in 2024 with the economy's gradual recovery and the growth of investment.

As in many other countries, the UK construction sector is facing a challenging environment this year. Stalled economic growth caused by inflation and rising interest rates is dampening private sector investments and housing market activity. In the first four months of 2023, the value of new construction starts decreased by 38% compared to the same period in 2022. While starts are expected to stabilise in the second half of the year, they are forecast to be 18% down on last year. A strengthening in project starts is anticipated from 2024 as UK economic growth returns, supported by a pick-up in household spending and business investment. These projections come from the report entitled Construction Industry Forecast 2023-2025 by Glenigan, a provider of construction market analysis for the UK and the Republic of Ireland.

Private residential construction

Private housing starts fell sharply during the first four months of 2023, primarily due to the rapid increase in mortgage costs as the Bank of England raised interest rates progressively to 4.5% from 0.25% at the beginning of 2022. The number of residential property transactions during April was 25% lower compared to the same period in 2022. This slowdown has been accompanied by a weakening in house prices, which were 3.4% lower in May, the sharpest annual decline in 14 years. In response to the slowdown in sales, builders are currently focusing on renovation projects.

The removal of Help to Buy incentives for first-time buyers of new build homes has also aggravated the situation. Additionally, sales of new homes to buy-to-let investors have decreased due to the significant increase in financing costs and concerns about regulatory changes in the private rental market.

In light of this scenario, 2023 is expected to end with a 33% decline, while in 2024 and 2025, improved economic prospects will lead to a partial recovery in property transactions of 7% and 8%, respectively.

Social housing

The significant increase in construction costs will also constrain the affordable housing sector this year, which is expected to remain stable at 2021 levels. However, a significant strengthening of affordable housing projects and a recovery in investments are anticipated in 2024, with 11% growth.

The government aims to deliver 180,000 new homes by 2026 through its £11.5 billion Affordable Homes Programme (AFP). Nevertheless, the rise in construction costs is still constraining the starts of these projects. The value of affordable housing projects (excluding student housing) is expected to increase by 2% in 2023 with further acceleration in 2024.

Offices

In the short term, weak economic growth in the UK and higher interest rates are expected to limit the construction of new offices. However, extension and refurbishment projects will become an important growth driver thanks to the increased demand for hybrid workspaces. This is particularly prevalent in London, where 40% of workers are taking a hybrid approach against 28% nationally, according to the ONS. Throughout the UK, projects of this kind have increased significantly, from 51% in 2019 to 58% in 2022, and totalling £3.3 billion.

Premium offices with good environmental performance have been the strongest performing segment over the last year as tenants have opted for smaller but higher quality office space. Moreover, many existing premises will require investment to meet new energy efficiency regulations. Since April 2023, any let office accommodation must reach a minimum EPC (Energy Performance Certificate) rating of band E. Legislation currently before Parliament will raise this threshold further to band B by 2030. If implemented, these proposals are set to generate substantial refurbishment and retrofit opportunities, providing new impetus to the office sector.

Retail construction

Alongside the current weakening in consumer spending, retailers are adapting to a long-term structural change in consumers’ shopping habits and growth in online retailing. Whilst online retailers’ share of UK retail sales has fallen back from a peak of 38% seen during the pandemic, they are expected to take a growing proportion of the market over the medium term, reducing the demand for new retail floorspace.

The first four months of 2023 saw a sharp deterioration, with the value of starts 35% lower than a year ago. The entire year is expected to see a 25% decline. Grocery stores have been a relatively bright spot within the retail construction sector, with physical stores continuing to outperform online shopping. A recovery in project starts is forecast from 2024 (+42%) driven by rising consumer expenditure. Growth is expected to stabilise at 6% in 2025.

Civil engineering

The value of civil engineering project starts (under £100 million) edged 4% higher last year after strong growth in 2021. Sector starts are forecast to fall back 9% in 2023 following a decline in main contract awards and detailed planning approvals. The current weakness is forecast to be short-lived, however, with a gradual strengthening in starts anticipated for the next two years (+11% in 2024 and +1% in 2025).