Glenigan Construction Review – Project Starts Fall as Construction Costs Rise Sharply

• 18% decrease in detailed planning approvals compared with a year ago
• 9% decline in main contract awards against the previous year
• 18% fall in project-starts against the preceding three months

Glenigan, one of the construction industry’s leading insight and intelligence experts, has released the August 2022 edition of its Construction Review.

This Review focuses on the three months to the end of July 2022, covering all major (>£100m) and underlying (<£100m) projects, with all underlying figures seasonally adjusted.

It’s a report which provides a detailed and comprehensive analysis of year-on-year construction data, giving built environment professionals a unique insight into sector performance over the last 12 months.

The central finding of the August Review is that project-starts returned to decline as sharp rises in construction costs and a weak economic outlook continue to supress industry activity.

Detailed planning approvals and main contract awards both weakened against the preceding three months, and were far lower compared to the same period in 2021.

Soaring Costs

Unfortunately the August Review revealed a continued state of decline, with work commencing on-site slipping back 18% against the preceding three months to stand 31% lower than a year ago.

Despite strengthening 6% against the preceding three-month period to the end of July 2022, August saw the value of major project starts halved compared with the same time in 2021.

This considerable drop is primarily the result of continuing supply chain issues, brought about by the Russia-Ukraine conflict. It’s resulting in higher material costs, logistical disruption and rocketing energy prices, stalling short-term growth.

It poses an ongoing challenge to the construction industry and will inevitably take time to overcome, particularly as the wider UK economy stalls due to universal inflationary pressures.

Main contract awards also suffered a value decrease of 14% against the preceding three months, falling 9% compared with 2021 and threatening the buoyancy of the strong developmental pipeline of contract awards established since the Pandemic.

Whilst the value of major contract awards remained unchanged compared to last year, it fell 13% against the preceding three months. Likewise, underlying contract awards were down 12% against last year, also dipping 8% against the preceding three months.

Detailed planning approvals didn’t fare any better, diving 27% compared to the previous three months, and were 18% lower than 2021 levels. This fall was largely influenced by major project approval performance, which only averaged £1,688m, a drop of 44% against the preceding three months. Although Major approvals stood 2% up on the year before, this modest figure represented too small a value increase to influence any overall recovery in this category.

Underlying detailed planning approvals also fell by a tenth against the preceding three month period, and by almost a quarter (-23%) against the previous year.

Sector Analysis – Residential

July was a quiet month for residential construction, with output levels down compared to a spike of activity in recent months as developers rushed to get ahead of Approved Document L, which was introduced at the end of June 2022.

Unsurprisingly, performance in the period covered by the August Review was weak. Overall, project-starts declined against both the preceding three months (-28%) and the previous year (-15%). Results for main contract awards and detailed planning approvals were also poor, with the latter falling a third (-33%) against both the preceding three months and a year ago.

Drilling down into the sector verticals, underlying private housing work starting on-site softened during the three months to July (-4%) compared to the preceding three months, and  stood 6% lower than 2021. Underlying social housing project-starts also performed poorly, declining by 20% against the previous three months, dropping 22% down on a year ago.

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Sector Analysis – Non-Residential

Performance in the non-residential sector was also poor, having been hit heavily by cost inflation. However, a more positive outlook for health and education marginally offset the negative figures, indicating emerging opportunities for future sector development.

Underlying health construction-starts increased by 44% during the three months to July and 9% against the previous year. Underlying education project-starts showed modest improvement during this period, experiencing a 4% increase against the preceding three months but still remained 27% lower than the previous year.

Civil engineering was the only other sector vertical to experience a significant value increase during the three months to July, with project-starts increasing 57%, but remained far below 2021 levels, falling 54% against the same time last year.

Industrial project-starts remained 7% up on the previous year, but fell 18% during the three months to July. Despite this, detailed planning approvals in this vertical were very high, increasing by a fifth against the preceding three months and by a quarter against the previous year, hinting at future recovery.

Faltering for some time now, office starts continued to decline, following a flurry of activity post-pandemic. Project-starts fell sharply against both the preceding three months (-61%) and a year ago (-49%). Detailed planning approvals improved slightly, but ultimately remained lower than in 2021.

Project-starts in the retail sector rose 14% against the preceding three months, a boost accounted for by a single major project valued at £100m, but overall experienced a value decline of 13% against the previous year.

Hotel & Leisure also weakened, with project-starts falling back 54% against 2021 figures and 27% against the preceding three-month period.

Regional Analysis

UK Regional performance was mixed, with some areas posting modest value increases in project-starts but most coming in far lower than last year.

The East Midlands had the strongest results, with the value of project-starts rising by 10% against the preceding three months.

Wales also had a slight value increase, with starts rising by 1% against the preceding three months to stand 2% up on a year ago.

Project-starts fell back in all other parts of the country, with London and the North East experiencing the steepest declines on the preceding three months to July, down 35% and 32%, respectively.

Northern Ireland couldn’t maintain its recent strong performance, falling back 29% against the preceding three months, but still up 32% on 2021 figures.

Scotland, the South East, West Midlands and Yorkshire & the Humber all posted double digit declines of 29%, 22%, 18% and 17%, respectively, against the preceding three months. Project-start values fell marginally in all other regions during the three months to July, and slightly down on a year ago.

Commenting on the findings, Rhys Gadsby, Senior Economist at Glenigan, says, “This Review echoes the findings in previous iterations, highlighting that the ripple effect of international conflict is still sending shockwaves across the construction sector in the UK and Northern Ireland. Ongoing material inflation, high energy tariffs and a generally weak economic outlook imply we can expect slow progress, at least until the end of 2022. However, small spots of hope across some verticals and regions indicate that the green shoots of recovery are there, waiting for the right time to flourish.”

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