Glenigan UK Construction Industry Forecast 2023-2025: Gradual Construction Sector Growth From 2024 Following a Tough Year

Glenigan, one of the construction industry’s leading insight and intelligence experts, has released its widely anticipated UK Construction Industry Forecast 2023-2025.

The key takeaway from the November Forecast, which focuses on the three years 2023-2025, is the construction industry will continue to struggle in the face of a challenging economic climate. Particularly, restrained private sector investment, a housing market slowdown, weak UK economic growth, and high interest rates will continue to suppress sector activity for the remainder of the year.

Despite short-term woes, renewed construction growth is forecast for 2024 (+8%) and 2025 (+7%) as the prospect of a recovering economy and market certainty lifts consumer and business confidence, boosting the industry.

This report is predominantly focused on underlying starts (< £100m in value), unless otherwise stated, and contains a comprehensive overview of the current state of the construction industry.

Sluggish economic conditions set to stall short-term growth

Construction starts have remained weak throughout 2023, with a poor economic outlook putting the brakes on work starting on-site. The fallout from last Autumn’s mini-budget has weighed heavily on private sector activity, made worse by sharp interest rate rises in recent months.

The persistent economic disruption has prompted clients and developers to scale back on planned investments, causing detailed planning consents to fall back 10% during the first nine months of 2023. Main contract awards have also dipped, standing 11% lower during Q.3 2023 than the same time a year ago.

Glenigan predicts a decline across most non-residential sectors during the rest of 2023, with project-starts falling 20%.

Recovery on the horizon

It’s not all bad news, with public sector construction providing a relative bright spot during 2023 as Government underspend was rolled forward to the current financial year, boosting departmental capital programmes.

Despite conditions remaining tough for the rest of 2023, gradual recovery is forecast for 2024 and 2025, with firm development pipelines already pulling through to support a rise in industrial and office starts. Improved consumer confidence and household spending are also expected to feed through to lift activity in consumer-related verticals, including private housing and retail. This is anticipated to have a knock-on effect on investment in logistics facilities from 2024 to meet demand for online retailing.

However, these positive predictions will likely be offset by declines in public sector investment in education and health as government-funded projects are reviewed post-election.

Commenting on the Forecast, Glenigan’s Economic Director Allan Wilen says, “After sharp falls in starts and a challenging set of economic circumstances in 2023, construction can expect gradual improvement in market conditions over the next two years. Interest rates now appear to be at their peak, and a gradual easing in rates from 2024 should help to rebuild private investors’ and homebuyers’ confidence and lift private sector activity.

“As the industry emerges from the current downturn, structural changes are also providing opportunities in non-residential verticals such as warehousing and logistics, office refurbishment and fit-out, and the repurposing of redundant commercial premises. Near term, increased government funding is expected to drive education, health, and community & amenity starts, although budgets are likely to be reviewed post-election, potentially tempering activity during 2025.

“Going forward, the industry will need to target these new areas of opportunity but be adaptable to shifting conditions and moving targets, ensuring they have the expertise and resources to increase their exposure to growing markets and locations wherever they arise.”

Taking a deeper dive into sector verticals…

Tentative growth for private residential construction

Private housing market activity fell sharply during Q.1 2023 as starts on-site softened thanks to economic uncertainty and inflated mortgage costs. Retrenched starts have continued throughout the year alongside further increases to the base interest rate. Faced with a slowdown in housing market activity and low house prices, the development pipeline has also been constricted by developers opting to build out existing sites over new projects.

While weak private housing starts are expected to continue throughout the rest of 2023, with Glenigan forecasting a 23% decline, housing market conditions will gradually improve. Better household incomes may cause buyers to take advantage of reasonable house prices, helping to support a partial recovery during 2024 (+4%) and 2025 (+11%) as housebuilders respond to improved consumer confidence and strengthening property transactions.

Social housing slowdown

High construction costs over the past two years have constrained development activity into 2023, with housing associations forced to reappraise the viability of new projects. Coupled with this, the slowdown in the private housing market has had a knock-on effect on social housing starts, resulting in fewer opportunities to take forward mixed tenure developments.

This has caused an estimated fallback in project-starts of 13% this year.

However, greater cost stability is anticipated to increase development activity over the next two years, lifting starts, with a 7% growth forecast for 2024, and 5% for 2025.

Online retailing to boost industrial sector

Having enjoyed a strong rebound post-pandemic, industrial starts have fallen back sharply in 2023. Last year’s growth was largely driven by significant growth in logistics and light industrial projects, fuelled by increased demand from online retailers.

However, spiralling interest rates have dented the capital value of industrial property and have knocked investor confidence, while slowing domestic and overseas demand has tempered manufacturing investment in facilities, resulting in stifled sector output. As such, Glenigan is forecasting a massive 44% drop in 2023.

Nevertheless, industrial starts are forecast to return to growth over the next two years. A stronger economic outlook is expected to drive online retail, encouraging a demand revival for premises next year with a 17% predicted growth in 2024, and 21% in 2025.

Retail recovery

The sector is forecast to experience sharp falls in project-starts, slipping back 28% in 2023 as stalled UK economic growth and consumer spending deter investment.

An overhang of empty retail premises, as well as the growth in online sales’ market share, are also predicted to constrain retail construction starts in the short term.

Despite this, improving consumer spending is expected to support a partial recovery in starts from 2024, with Glenigan forecasting a 9% rise in 2024, and 17% in 2025.

Investment by the deep discount supermarkets, Aldi and Lidl, is set to be a relative bright spot within the sector over the forecast period, as plans to substantially expand their estates boost growth.

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Hospitality scraping by

Similarly, the squeeze on household budgets has curbed consumer spending in the hospitality and leisure industries, with Hotel & Leisure starts slipping back by an estimated 14% in 2023.

The financial position of many hospitality businesses has been slow to improve post-pandemic, faltering after a brief rebound during 2021, as they battled soaring energy and labour costs on top of already reduced revenues thanks to fewer overseas visitors.

A tentative recovery in project-starts in the hospitality sector is anticipated from 2024 as household finances stabilise and then improve, lifting consumer discretionary spending and investor confidence. As such, Glenigan forecasts growth of 6% in 2024, and 5% in 2025.

Opportunities for offices

The sector has been affected by high interest rates and reduced demand for office spaces this year, resulting in a predicted decline of nearly a third (-26%) in 2023.

Nevertheless, the sector is expected to benefit over the forecast period from a rise in refurbishment and extension projects, as hybrid working remains an important driver for landlords and occupiers to accommodate changing working patterns.

Additionally, regulatory changes and the subsequent demand for premium ‘green’ office space are set to support a rise in retrofit and redevelopment projects from 2024.

These opportunities for the sector are predicted to drive growth over the forecast period, 6% in 2024, and 13% in 2025.

Rollback of major capital projects leaves civils vulnerable

Civil engineering project-starts have declined by an estimated 12% this year as a slowdown in infrastructure approvals during 2022 has impacted the pipeline for 2023.

Utilities project-starts have influenced this figure, posting no growth in 2023 against last year. However, utilities-starts are forecast to return to growth from 2024, in part due to planned water works following investment by the industry regulator.

Importantly, the delivery of existing and planned major capital projects will have a significant influence on sector activity over the forecast period, leaving growth levels vulnerable to a post-election public spending review.

For instance, the Government’s decision to reschedule and scale back the first phase of HS2 construction will reduce its anticipated contribution to civils works over the forecast period. Similarly, the decision to push back on a range of Net Zero targets may also delay investment in renewable energy and the roll-out of EV charging schemes.

Overall, Glenigan forecasts a growth of 17% in 2024, and only 5% in 2025.

Double-digit growth for school works

In other areas like education, underspend by a number of government departments during the last financial year was rolled forward to 2023/4 and has helped bolster public non-residential activity this year.

The Department of Education’s capital funding increased by 26% during 2022/23 and is set to grow by a further 19% during the current financial year. This has supported a 24% rise in school building projects this year, with double-digit growth forecast for 2024 (+18%).

In addition, the Government’s commitment to rebuilding 500 schools over the next decade and action to address any structural failures in response to the RAAC crisis will bolster remediation works over the forecast period.

A potential caveat to this is that the flow of project-starts is likely to be disrupted during the run-up to the next general election, and post-election, as public sector investment programmes are subject to review by the new Government.

Positive outlook for the NHS

Health project-starts are forecast to fall back during 2023, dropping by 15% as NHS resources are redirected toward addressing long waiting lists and resolving industrial unrest.

However, medium-term the outlook for the health sector remains positive, with NHS capital funding set to support a rise in starts from 2024, when the sector is forecast to see an 11% growth in project-starts, with a 2% growth in 2025.

In order to request a copy of Glenigan’s UK Construction Industry Forecast 2023-2025, click here.

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