Industry sounds cautious note despite return to growth

The construction sector bounced back in July, as a surge in commercial building and civil engineering activity offset a further monthly decline in homebuilding.

The latest S&P Global/CIPS UK Construction Purchasing Managers’ Index (PMI) shows total construction output returning to growth last month with a headline figure of 51.7, up from 48.9 in June (a score above 50 indicates that activity is expanding, while below 50 suggests it is slowing). The figure was the highest recorded in five months.

Growth was led by the strongest rise in commercial building since February and a solid contribution from the civil engineering sector.

However, the data also signalled another sharp reduction in residential construction, with order books constrained by heightened interest rates and an uncertain economic outlook.

Lower volumes of residential work have now been recorded for eight consecutive months, although the rate of decline eased to its least steep since April.

John Glen, chief economist at the Chartered Institute of Procurement and Supply, warned that with the commercial and civil engineering sectors being the only engines of growth, the recovery seen in construction activity may be short-lived.

“Although the sector showed a slight uplift in activity in July, there is a question mark over the sustainability of this growth and the challenges that lie beneath the floorboards,” he said.

“[With] another fall in residential building levels and for the eighth month in a row it’s obvious that UK interest-rate rises and cost-of-living pressures have dealt a hammer blow to the housing sector.”

Accountancy firm RSM said that although the rise in headline PMI was a welcome surprise for the construction sector, which had shown “remarkable resilience” in July compared with other parts of the economy, it was unlikely to remain a positive outlier.

“We expect there will be a continued fall in housebuilding throughout 2023, albeit more slowly, as interest-rate rises will have a knock-on impact on mortgage rates – making it even harder for first-time buyers to obtain property, along with the ever-increasing difficulties in achieving planning permission,” said Stacy Eden, partner and national head of real estate and construction at RSM UK.

“It’s a real supply-and-demand issue, and housebuilders will look to tighten their pipelines to mitigate risk and protect their already squeezed margins.’

James Bailey, director and UK housing leader at PwC UK, said it was unsurprising to see construction companies referencing rising borrowing costs as a cause of fewer sales inquiries and slower decision-making among prospective homeowners.

“Against this backdrop, we expect to see housebuilders continuing to be selective on new starts on sites, focusing on areas where there is a greater confidence of realisable demand,” he said.

“Additionally, delivering alternative tenures such as affordable housing and private rental in partnership with institutional capital is likely to continue growing.”

Gemma Whittaker, construction partner at law firm Gowling WLG, said the drop in residential construction had been driven not only by mortgage rates, but also planning delays and continued uncertainty over the government’s intentions on building-safety legislation.

“The latter in particular has caused many high-rise projects to be paused whilst further information is forthcoming clarity from government over the coming months will be key in ensuring the industry has the confidence to move forward with delivering high-rise schemes,” she said.

Max Jones, director in Lloyds Bank’s infrastructure and construction team, said the return to growth reflected in the index was welcome, with inflation on salaries and materials also heading in the right direction for contractors.

“The sector’s not out of the woods yet, though, with private sector demand slowing compared to where it was 12 months ago,” he added.

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