Thursday 7th May 2020
Whilst we started the year hopeful that the newly elected majority Government was going to bring some certainty into the construction and property markets, we now have to contend with the impact of Covid-19.
Obviously, a lot remains to be seen with how the virus and its impact develops, not least the Government’s view on balancing the release of the lockdown between health and social risks versus economic benefits. Nevertheless, we can already anticipate how some of the effects may play out in terms of construction costs.
In the immediate period we expect a lot of instability in the market. Clients who are in a position where projects are ready to be brought to the market will likely progress given that sites are coming back to work, and the duration of larger projects will (hopefully) outlast the short-term impacts of the virus. Contractors will have to make careful and possibly contractual considerations as to what the extent of the additional management and supervision costs required by social distancing will be and how long they will go on for. The risk of cost spikes in supply of labour and materials must also be factored in. For example, the cost of some types of insulation driven by increased demand from cladding projects and reduced supply from manufacturing in Europe is already increasing quickly. As a result, in the very short term we expect some costs to rise to reflect these supply side issues.
In the mid-term the situation is likely to be different. Some Clients have already taken the decision to pause and take stock of the situation and unless there are other external requirements driving the decision-making process then large investment decisions are unlikely to proceed until there is a more certain path ahead. This particularly applies to organisations driven by sales of private residential units where the market is much reduced by the virus in the short term and by all accounts will be altered in the long term.
Publicised reports of increased interest in properties outside of London, where properties are likelier to have a garden and office will mean that some schemes need to be reconsidered entirely, denser and high rise schemes in zones 1-6 may also need to look at removing and reducing studios and smaller 1 bed units, in favour of those with a bit more space for the new normal. All of this without even taking into account the ongoing Brexit position in the background and the wider economic consequences of the virus means that there is likely to be a dampening of demand in the construction industry.
Consequently we believe that in the mid-term tender prices will remain very flat and Contractors will have to shoulder some of the additional costs and risks created by the virus.
Longer term, we believe there is underlying strength in the market driven by the need to build to solve the housing crisis, a rebound from under investment throughout the Brexit negotiations and now this Covid period, whilst also not forgetting a Government who - from the last budget - appear to be willing to invest heavily in construction.
The graph below shows the BCIS figures for their entire forecast period, whilst the table shows our five year forecast versus the BCIS five year forecast.