CPA Construction Industry Forecasts Spring 2018

Construction Industry
Forecasts 2018-2020
Spring 2018 Edition
2
Contents
Overview 4
Economy 12
Private Housing 16
Private Housing RM&I 21
Public Housing 23
Public Housing RM&I 26
Public Non-housing 28
Public Non-housing R&M 32
Commercial 34
Private Non-housing R&M 42
Industrial 43
Infrastructure 46
Infrastructure R&M 52
© 2018 Construction Products Association. All rights reserved.

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DISCLAIMER
All construction figures (starts, completions, orders and output)

refer to Great Britain.
All output figures are in 2015 constant prices using the historic
figures from the Office for National Statistics (ONS).
All new orders figures are in 2005 constant prices using the
historic figures from the Office for National Statistics (ONS).
The information in this booklet has been prepared by

Construction Products Association and represents the views of
Construction Products Association without liability on the part
of the Construction Products Association and its officers.
3
Overview
Construction output is forecast to remain flat in 2018 before growth of 2.7% in 2019.
The start of 2018 has been an inauspicious one In the wider economy, UK GDP growth in 2017 Q4
for the construction industry. The liquidation of was 0.4% and GDP growth overall for 2017 was
Carillion in January, combined with the unseasonal 1.8% compared with 1.9% in the previous year. GDP
weather in February and March, will inevitably lead growth is expected to slow to 1.3% in 2018 as the
to a poor first quarter of activity for the industry. lagged impacts of last year’s falling real wages impact
The second quarter of 2018 is likely to see an upturn on consumer confidence and spending on the high
in activity but activity in the sector overall for the street. Those real wage falls have been less of an
year will be dependent upon the extent to which issue for those with substantial housing and pension
Carillion’s liquidation impacts upon sub-contractors wealth, particularly in older age demographics and
and suppliers down the supply chain in addition to this section of the population has boosted activity
the extent of catch-up following the three lost days in areas such as private housing repair, maintenance
of construction activity across the UK. As a result, and improvements (rm&i), the third largest
the key risks to the latest forecasts are clearly on the construction sector. Inflation is expected to slow
downside. over the course of this year although the impacts of
rises in commodity and component prices during
2017 suggest that inflation may dissipate at a slower
Construction activity rate than many macroeconomic forecasters are
in Q1 affected by the expecting. The Bank of England is expected to raise
its interest rate once this year, most likely in May,
Carillion liquidation although poor macroeconomic data during the first
and poor weather quarter of the year that is unrelated to the weather
could potentially push this back. UK employment
remains at amongst the highest rates seen since
Overall, construction activity is expected to comparable records in 1971, which is expected to
remain flat in 2018 with growth in private housing lead to significant nominal wage pressure and, in the
and infrastructure offsetting falls in activity in light of slowing inflation, should ensure real wage
the commercial, industrial and health sectors. growth during 2018.
Without this growth in housing and infrastructure,
Private housing output rose in each of the last
construction output would fall by almost 2.0% in
five years and it is expected to continue to rise in
2018 and without a significant catch-up in activity
2018 in spite of a slowdown in property transactions
following the poor weather this fall would be almost
and the continued falls in the Central London
3.0% in 2018.
prime housing market. UK property transactions in
2017 were 0.6% lower than in 2016. Furthermore,
transactions in January and February 2018 were
• Construction output to remain flat 1.1% lower than a year ago and suggest that the
Key Points
in 2018 (0.1%) and rise 2.7% in 2019 slowdown is accelerating. Mortgage approvals
indicate a similar story. The Bank of England
• Private housing starts to rise 2.0% in 2018 reported that the volume of mortgage approvals
and 2019 in 2017 was 1.6% lower than in 2016. In addition, in
January and February 2018, the volume of mortgage
• Offices construction to decline 20.0% in
approvals was 4.8% lower than one year earlier.
2018 and 10.0% in 2019
In spite of this, whilst there remains house price
• Retail construction to fall 10.0% in 2018 but inflation, house builders will be keen to increase
rise 5.0% in 2019 supply. Annual house price growth has more than
halved since the 4.9% growth seen in 2016 according
• Infrastructure work to rise by 6.4% in 2018
to Nationwide but it still remains positive, at 2.1%,
and 13.1% in 2019
in March 2018. The government’s Help to Buy
continues to skew home ownership incentives
4
towards purchasing of new build. It accounts for year by the mid-2020s, which appears high but
over one-third of private house building and 40% or was 217,350 in 2016/17 and includes 42,870 of
more for some major house builders. For instance, conversions from houses to multiple flats and
Help to Buy accounted for 48% of Persimmon’s sales changes of use (e.g. from offices to residential). A
during 2017. Last year the government announced 38% rise in net additional dwellings over 10 years
£10 billion of additional funding for Help to Buy does sound achievable although government will
in 2017 to ensure that it continues until 2021 but be relying on private sector to deliver it. Local
given the house builders’ reliance on Help to Buy authorities continue to sell off properties under the
and their need to invest in land years in advance, Right to Buy scheme and government admitted in
it will be essential that government announces an March 2018 that it was failing to achieve its pledge
extension to Help to Buy beyond 2021 in the next of replacing every Right to Buy home sold with a
12-18 months. If this occurs then it is likely to involve new home. The latest MHCLG figures to the end
restrictions given the concerns around its long- of 2017 Q4 indicate that it is replacing one in every
term impact on the housing market and whether four Right to Buy homes in England. Overall, private
greater enabled demand through Help to Buy is housing starts are forecast to rise by 2.0% both this
merely capitalised into higher house prices. Despite year and in 2019.
government recently focusing on house builders’
‘duty to build’ and Oliver Letwin’s independent Private housing repair, maintenance and
review to tackle barriers to building, the policy improvement (rm&i) was worth £21.9 billion
focus of politicians has consistently been on enabling in 2017. Historically, property transactions have
greater private sector demand and, consequently, a positive relationship to refurbishment activity
encouraging new build. The government still has on existing properties with a 6-9 month lag.
its target of 300,000 net additional dwellings per Yet, despite falling property transactions, private
5
half of this year after the weather impacts of Q1
are taken account of. However, the sustainability
of this growth is constrained by the initial burst
of those taking money out of the pensions early
having already occurred and the general slowing
of the housing market and consequent impacts
on the profitability of doing such improvements
work. Offsetting this however, a return to real wage
growth this year, assuming employment rates stay
high, should ensure that the general improvements
market grows in 2019 and 2020. The repair and
maintenance part of the sector tends to be relatively
flat when adjustments are made for seasonal
variation so significant changes tend to be based
around the refurbishment part of the sector. Private
housing rm&i output is expected to remain flat in
2018 before rising by 2.0% in 2019.
The key driver of growth in the forecasts remains

activity in the infrastructure sector. Infrastructure
new orders in 2017 rose by 35.2%. This is highly
distorted by HS2 contracts awarded in 2017 Q3 and
the TransPennine ExpressRail contracts awarded
in 2017 Q4. New orders for the infrastructure
sector during 2017 Q3 were at their highest level
on record, 115.5% higher than one year earlier and
infrastructure new orders in 2017 Q4 were 16.4%
higher than one year earlier. More specifically, rail
new orders in 2017 Q3 were 10 times higher than
they were one year earlier and rail new orders
in 2017 Q4 were more than double the volume
seen one year earlier. However, activity on these
contracts is unlikely to start until 2019 at the earliest
and it will be spread out over many years. As a
result, rail output is expected to grow by 5.0% in
housing rm&i continued to grow during 2017 2018 as current HS2 activity offsets declining work
and the indications are that it is likely to sustain on Crossrail whilst output rises by 20.0% in both
activity during 2018. Above a certain house price, 2019 and 2020. Highways England investment is
particularly in the South East and North West, expected to rise throughout the forecast period
activity by an older demographic with housing and yet concerns remain regarding delivery of new
pension wealth appears to be negatively related investment given that it is backloaded to the end
to property transactions as they tend to prefer of the first Road Investment Strategy (RIS) in
to improve rather than move. In addition, in the 2019/20 and the start of the second RIS in 2020/21.
second year since the freedom and choice pension 97% of roads remained under the control of local
reforms were introduced in April 2015, £5.7 billion authorities in 2016 according to the DfT and
was withdrawn from pension pots by those 55 or activity on these roads will continue to fall as long
older according to the ABI and this has helped to as councils remain financially constrained. Following
fund investment in improvements work despite the poor weather in 2018 Q1, the DfT announced
falling real wages and tighter spending for those £100 million to repair potholes, in addition to its
who are working. This activity has been sufficient £1.2 billion per year local highway maintenance
to provide growth for the sector in 2016 and 2017. funding in England. Yet, the Asphalt Industry Alliance
It is also expected to sustain activity during the first ALARM survey in March 2018 stated that the total
6
Construction Output
180,000
5.1% 0.1% 2.7% 1.9%
160,000 3.9%
4.4%
2.2% 8.9%
140,000
£ million - 2015 Constant Prices
1.5%
120,000
-6.9%
100,000
80,000
60,000
40,000
20,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association
roads spend is still considerably less than would be the market for one year. However, demand for
needed to stop the decline in local road conditions. additional high profile offices space from the financial
Overall, roads construction is expected to remain and business services sector has fallen sharply since
flat in 2018 before growth of 3.0% in 2019 and the EU Referendum vote in June 2016 although it is
5.0% in 2020. Water & sewerage forecasts remain worth noting that the moves of banking staff from
unchanged as activity under the five-year AMP6 London to other European cities has been relatively
spending plan continues and growth is driven by small so far. The Investment Property Forum (IPF)
the £4.2 billion Thames Tideway project. Water & reported in March 2018 that London offices capital
sewerage output is expected to rise 12.0% in 2018 values are expected to fall by 2.0% in 2018, 1.9%
and remain flat in 2019. Energy infrastructure activity in 2019 and 0.3% in 2020. Falls in offices demand
is expected to grow by 7.0% in 2018 and 20.0% in in London have been partially offset by growth in
2019 in line with previous forecasts. Near-term, cities outside the capital, especially in Manchester
energy infrastructure activity is expected to be and Birmingham. In Manchester, which has an offices
driven by offshore wind farm activity whilst output construction market that is only one-tenth the size
is expected to grow due to main works at Hinkley of the London market, the January 2018 Deloitte
Point C. However, as with previous forecasts, Crane Survey reported that activity on six main
further delays to the project cannot ruled out that projects accounting for over 900,000 sq. ft. of floor
would push main works into 2020. space was started in 2017 and demand continues to
outstrip supply, which was not significantly impacted
Commercial construction is forecast to endure by the UK’s vote to leave the EU. In Birmingham,
the sharpest falls in activity over the forecast Deloitte reported in January 2018 that there
period. New orders in the commercial sector fell were four new office construction starts totalling
by 7.9% during 2017 albeit from an eight-year high over 640,000 sq. ft. that helped maintain offices
in 2016. Last year’s fall in commercial new orders construction output at a record high in the city.
is expected to feed through over the next 12-18 Overall, output in the offices sub-sector is expected
months so commercial output is forecast to fall by to fall by 20.0% in 2018 and a further 10.0% in
7.8% in 2018 and a further 0.8% in 2019. Within 2019. Activity within the retail sub-sector continues
the overall sector, the key impacts are likely to be to be hindered by the continued shift away from
on the offices and retail sub-sectors. Offices new the high street towards online shopping, which
orders fell by 25.0% in 2017 and in Q4 in particular skews construction away from retail and towards
new orders were 34.6% lower than a year earlier. warehousing, combined with the impacts of business
Demand still remains high for flexible offices space rates increases of chains operating in the capital.
in London although Savills reports that in the City This has been illustrated by the recent high profile
flexible offices space providers may have saturated
7
administrations of Toys R Us and Maplin in 2018 Q1 and, as a consequence, there may be minor delays
and will only be exacerbated by the impacts of real on Carillion rail infrastructure projects. Issues are
wage falls last year on consumer spending this year likely to be found on Carillion commercial projects,
as spending patterns change. Apart from the direct where activity on site has stalled whilst clients find
impact on additional retail demand, this could have contractors willing to take over the existing work or
a knock-on impact upon retailers that were looking clients retender for work. This is particularly the case
to expand, such as Lidl, who may take over existing for the two PFI hospital projects (see Commercial),
premises of now defunct retailers rather than build which were two of the four projects on which
new premises. As a consequence, retail construction Carillion experienced serious issues that led to the
is forecast to fall by 10.0% in 2018. Looking further eventual liquidation. Even prior to the collapse of
ahead, the £1.4 billion Croydon Partnership and Carillion, the health sector prospects for the health
£1.4 billion Brent Cross extension are still expected including PFI sub-sector were not looking bright.
to drive growth for the sector as a whole whilst Two of the four major projects on which Carillion
general retail demand is likely to benefit from a suffered £845 million of write downs that eventually
recovery in real wages and, consequently, consumer led to its liquidation were the two PFI hospitals in
spending. Commercial retail output is forecast to Liverpool and Birmingham. Both projects will need
rise by 5.0% in 2019 and 2.0% in 2020. new contractors and, as a result, will suffer from
further delays before activity restarts
Public sector construction is expected to suffer
from a lack of finance available and a lack of projects In terms of the impacts of adverse weather in 2018
in the pipeline. Public housing rm&i activity fell Q1, the lack of robust data as yet covering activity in
during 2017 and is expected to fall by 5.0% in 2018 February and March makes it difficult to have a clear
before remaining flat due to essential repairs to picture and, as a consequence, we have made an
social housing towers. There appears to be little in assumption of a loss of 80% of contractors’ activity
the education and particularly the health pipeline to during the three working days of the greatest impact
provide any significant growth. The publicly-funded on construction output on three working days; 28
Priority School Building Programme 2 is likely to February to 2 March. This would mean that activity
ensure growth from 2019. However, activity is still in 2018 Q1 would be £1.6 billion less than during the
forecast to fall by 5.5% this year before growth of same period one year earlier. The extent of catch-
2.5% in both 2019 and 2020. Activity in 2020 is still up on delayed construction on site will determine
expected to be lower than in 2017. the impacts on annual construction output.
Anecdotal evidence from firms suggests that house
Key Risks building activity is unlikely to be substantially affected
Carillion was the UK’s second largest contractor as the key activity period for major house builders
before it was liquidated with a construction begins in Spring. Outside of house building, on larger
turnover of £1.5 billion, primarily operating across projects a significant degree of catch-up may be
infrastructure and commercial, including PFI, possible especially where penalty clauses for delays
projects. It had liabilities of £2.0 billion and 11,687 are in contracts. However, anecdotal evidence from
direct sub-contractors and suppliers, although only contractors suggests that in many other sectors,
488 of these were dependent on Carillion for over rather than catch-up, activity across the supply chain
£1.0 million of revenue. Within joint-venture (JV) is just pushed back.
projects in which Carillion was involved, the other The most recent previous example of significant
main contractor on the joint-venture will take over unseasonal adverse weather, worse than the ONS
under standard contract terms and, as a result, there seasonal adjustment would take account of, was
is likely to be little overall impact on JV projects during March and April 2013. This was in a period
apart from a minor hiatus whilst administrative of growing construction activity. The poor weather
details such as employment contracts are dealt with. was between 10 March and 10 April and the worst
Carillion’s largest client, Network Rail, accounting of this between 22 and 24 March 2013 (Friday-
for £350 million of turnover, has offered to pay Sunday) and it did not affect the majority of the
sub-contractors and suppliers since 15 January to country. According to the Met Office, there were
ensure that work continues on Carillion projects heavy snowfalls across North Wales, Northern
8
Construction Industry Forecasts - Spring 2018
£ million 2015
2016 2017 2018 2019 2020
constant prices
% annual change Actual Actual Estimate Forecast Projection
Housing
Private 29,717 32,182 33,791 34,467 34,812
13.1% 8.3% 5.0% 2.0% 1.0%
Public 4,861 5,498 5,663 5,833 5,833
-3.7% 13.1% 3.0% 3.0% 0.0%
Total 34,578 37,680 39,454 40,300 40,644
10.4% 9.0% 4.7% 2.1% 0.9%
Other New Work
Public Non-Housing 10,770 10,387 9,891 9,983 10,131
3.8% -3.6% -4.8% 0.9% 1.5%
Infrastructure 17,851 19,055 20,275 22,928 24,533
-3.0% 6.7% 6.4% 13.1% 7.0%
Industrial 4,439 4,308 4,408 4,469 4,581
-6.2% -3.0% 2.3% 1.4% 2.5%
Commercial 28,183 29,552 27,243 27,024 27,202
7.5% 4.9% -7.8% -0.8% 0.7%
Total other new work 61,243 63,302 61,817 64,405 66,448
2.5% 3.4% -2.3% 4.2% 3.2%
Total new work 95,821 100,982 101,271 104,705 107,092
5.2% 5.4% 0.3% 3.4% 2.3%
Repair and Maintenance
Private Housing RM&I 19,908 21,883 21,883 22,321 22,767
7.2% 9.9% 0.0% 2.0% 2.0%
Public Housing RM&I 7,708 7,389 7,020 7,020 7,020
-5.3% -4.1% -5.0% 0.0% 0.0%
Private Other R&M 12,013 12,490 12,740 12,995 13,255
4.6% 4.0% 2.0% 2.0% 2.0%
Public Other R&M 4,982 4,964 4,864 4,864 4,864
-1.3% -0.4% -2.0% 0.0% 0.0%
8,260 8,573 8,659 8,746 8,746

Infrastructure R&M
-6.3% 3.8% 1.0% 1.0% 0.0%
Total R&M 52,871 55,299 55,166 55,945 56,651
1.6% 4.6% -0.2% 1.4% 1.3%
TOTAL ALL WORK 148,692 156,281 156,437 160,650 163,743
3.9% 5.1% 0.1% 2.7% 1.9%
9
ONS Construction Output (September & October 2017 Data Releases)
125
October Release September Release

Construction Output (2013=100)
120
115
110
105
2015 2016 2017

Source: ONS
England, South-West Scotland and the east of ONS infrastructure sector and sub-sector output
Northern Ireland (the latter of which would not be data and 2015 ONS infrastructure data cannot be
in the ONS construction output as it covers only compared with data from previous years.
GB). Construction output in March 2013 was £499
million (4.7%) lower than one year earlier and in DISCLAIMER 2: The ONS determines sub-
April output was £191 million (1.8%) lower than sector output by utilising the new orders data and
a year earlier. However, activity in both months an average length of time between orders and
was also £500 million lower than the average in output. However, this means that major one-off
the second half of the year, which may point to projects may be assigned to output by the ONS
significant catch-up in activity later in the year. earlier than it actually occurs. An illustration of this
is in the water and sewerage sub-sector. General
In terms of Brexit, the UK and EU agreed on a activity in the sector occurs under frameworks and
21-month implementation period following 29 often takes relatively little time to feed through
March 2019 that will largely leave movements of from new orders to output as a part of general
people, products, capital and services similar to works under five-year plan. However, the ONS has
current conditions until 31 December 2020. This assigned work on the £4.2 billion Thames Tideway
ensures clarity for businesses in the near-term Tunnel shortly after the new orders in 2016. As a
but, in the longer-term, uncertainty regarding the consequence, the CPA is forecasting actual activity
market environment and movements of people, growth in the infrastructure sector and sub-sectors
products, capital and services after 2020 remains. As rather than forecasting distortions in the ONS data.
a consequence, it is likely that the uncertainty that
has hindered major new international investment in DISCLAIMER 3: The ONS has substantially
markets such as high-end residential and commercial revised upward all historic data going back to 2016
offices over the last two years will continue. Q2. Construction output between January and July
2017 was initially 1.3% higher than a year earlier.
DISCLAIMER 1: The Office for National Statistics However, the ONS has revised this up to 5.1%
(ONS) made major revisions to the construction higher than a year earlier with the significant step
output data in October 2015. The result of this up in construction output at the end of 2016 whilst
was to add an extra £150-200 million per month simultaneously construction employment remained
from March 2015 into the infrastructure sector. broadly flat.
As a result, there is now a structural break in the
10
11
Economy
UK GDP is expected to grow by 1.3% in 2018 and 1.4% in 2019.
UK economic growth is expected to be sustained

this year by a return to real wage growth and
UK GDP set to
positive impacts on consumer spending, assuming
that unemployment remains at historic lows and
inflation slows over the course of the year. The
grow
by 1.3% in
2018
agreement of a transition period between the
EU and UK that will last until 31 December 2020, highlights that the most optimistic forecaster
effectively keeping conditions (for labour, trade, anticipates UK GDP growth of 2.6% in 2018 and
capital and services flows) the same as before, the most pessimistic forecasts growth of only 0.6%.
pushes back issues around Brexit uncertainty in the The average of the forecasters is for UK GDP
near-term. However, economic activity is still likely growth of 1.5% in 2018. This is slightly higher than
to be hindered by the lagged impacts of real wage the CPA’s forecast as many other forecasters are
falls in 2017 on consumer spending in the first half expecting CPI inflation to slow to below 2.0% in
of this year and the falls in construction activity the Autumn of this year whilst the CPA anticipates
post-Carillion, particularly in light of the adverse that inflation will dissipate more slowly due to
impacts of unseasonal weather hindering retail rising global demand leading to sustained inflation
sales and construction on three working days in in commodities and components.
February and March.
Data covering the first quarter of 2018 have
The ONS reported that GDP growth in 2017 Q4 been mixed so far. Industrial production rose
was 0.4% and, in 2017 overall, was 1.8% higher by 1.4% in the three months to January 2018
than in 2016, only marginally lower than the 1.9% compared with a year ago, driven by a 2.6% rise
one year earlier. In 2018, GDP growth is expected manufacturing, in turn driven by exports growth.
to slow to only 1.3% and there remains a high Industrial production in Q1 would also have been
degree of uncertainty regarding forecasts for the boosted by the reopening of the Forties pipeline,
UK economy by the macroeconomic forecasters which was closed for the majority of December
from the City and Non-city forecasters. The HM and serves 40% of North Sea oil and gas. However,
Treasury consensus of forecasters in March 2018 more recently, UK manufacturing has slowed. The
Economic Indicators
2016 2017 2018 2019 2020
Actual Actual Estimate Forecast Projection

GDP 1.9% 1.8% 1.3% 1.4% 1.9%
Fixed Investment 1.8% 4.0% 2.0% 3.0% 2.0%
Household Consumption 3.1% 1.7% 1.6% 1.8% 2.0%

Real Household Disposable
0.0% 0.3% 1.0% 1.2% 1.7%
Income
Government Consumption 0.8% 0.1% 0.5% 0.4% 0.3%
CPI Inflation 0.7% 2.7% 2.5% 2.0% 2.0%
RPI Inflation 1.8% 3.6% 3.0% 2.7% 2.7%
Bank Base Rates - June 0.50% 0.25% 0.50% 0.75% 1.00%
Bank Base Rates - December 0.25% 0.50% 0.75% 1.00% 1.00%
12
Markit/CIPS PMI for manufacturing was 55.0 in 3.9% lower than one year earlier and, in addition,
February, down from 55.3 in January and marking the Markit/CIPS PMI for construction was 51.4
the weakest expansion in the manufacturing sector in February, up from January’s four-month low
since June 2017. It reported that manufacturing of 50.2 and above the no-change mark of 50,
production increased at its slowest pace in 11 indicating that construction activity expanded led
months, reflecting weak growth in the consumer, by a strong upturn in commercial work. 60% of
intermediate and investment goods sectors amid Carillion’s work was in infrastructure and Markit/
supply-chain delays. The Markit/CIPS PMI for CIPS reported that civil engineering was the
manufacturing was 55.1 in March in spite of the worst performing construction sector in February.
adverse weather, indicating steady growth in However, the surveying was conducted before the
2018 Q1. adverse weather, at the end of the month and so
March’s UK construction PMI includes the impacts
Services activity was strong early in the year. In the of the poor weather in February and March.
three months to January 2018, services output Markit/CIPS UK construction activity in March
rose by 0.6% compared with the three months fell to 47.0 in March, the first fall in six months.
ending October 2017. This was the strongest Construction activity in civil engineering endured
growth since the three months ending December the sharpest falls due to the combined effect of the
2016. The Markit/CIPS PMI for services was 54.5 impacts of Carillion’s liquidation and poor weather.
in February, up from 53.0 in January and above Commercial activity also fell in March due to the
the no-change mark of 50, indicating that services poor weather and a continued fall in demand for
activity expanded significantly. However, the PMI new office space in London from the financial
fell to 51.7 in March, highlighting the impact of sector. House building activity rose marginally in
the weather but the survey also noted economic March in spite of the weather, reflecting sustained
uncertainty and subdued consumer spending. demand from Help to Buy and also that house
Following the collapse of the UK’s second largest building mainly gets going from Spring and so is
contractor, Carillion on 15 January, the ONS less impacted by external effects in late February/
reported that construction output in January was early March than other sectors.
13
of forecasters anticipate a Central Bank rate rise
in May but, given an expected poor first quarter
of the year, it is more likely that the Bank will
wait to see the underlying trend in data after Q1.
We expect the Bank to raise interest rates in the
second half of 2018 and then wait until 2019 for
further rate rises. CPI slowed from 3.0% in January
to 2.7% in February. Although an early Easter may
lead to an upward blip in CPI inflation in March
2018, it is likely to slow over the course of this year.
Oxford Economics forecasts that CPI will be below
the Bank of England’s 2.0% target by Autumn 2018
as the effects of previous depreciations in Sterling
on import costs feed out of the annual inflation
figures. Overall for 2018, it forecasts that CPI
inflation will average 2.3% whilst the March Office
for Budget Responsibility forecast expects CPI
inflation to average 2.4% in 2018. The CPA forecast
for CPI inflation remains at 2.5% over this year as
a whole.
The depreciations in Sterling since the EU

Referendum, combined with rising global
trade, have boosted the fortunes of exporters,
particularly manufacturers. However, international
supply chains and increased demand for
components and have also meant increases in
In November, the Bank of England raised interest
imports. ONS revisions to historic UK trade data
rates from 0.25% to 0.5% and macroeconomic
mean that net trade (exports – imports) is now
forecasters are currently split on whether the Bank
estimated to have only boosted GDP growth by
will raise interest rates once or twice in 2018.
just 0.3% in 2017. As the depreciations in Sterling
The likelihood is that rate rises will depend on
feed out of the inflation figures this year, net
economic data as the year progresses. The majority
exports are expected to provide even less of an
impact on GDP growth.
Unemployment Business investment continued to grow in spite
of post-referendum uncertainty. In 2017 Q4,
1.6 Million it was estimated to have increased by 0.3% to
£46.2 billion from £46.1 billion in 2017 Q3 and
it was estimated to have increased by 2.6% from
£45.0 billion in 2016 Q4. For the whole of 2017,
business investment grew by 2.4% and the last
negative quarter-on-quarter value was in 2016
1.47 Q4. However, although business investment has
continued to rise, this growth has consistently been
Million subdued for over two years and its 2017 Q4 level
was only 1.1% higher than the level seen in
2015 Q2.
In terms of numbers of people in employment and

December 2017 2019
the unemployment rate, the labour market appears
to have remained buoyant coming into the new
14
year. Data from the ONS highlight that between If UK economic activity continues to be subdued
August to October 2017 and November 2017 to in Q2 and real wages continue to fall early in
January 2018, the number of people in work and 2018, this will impact upon consumer and business
the number of unemployed people both increased, confidence. This may lead to falls in consumer
but the the number of people aged from 16 to 64 spending and business investment and, in turn,
not working and not seeking or not available to would slow economic activity leading to a rise in
work decreased. There were 32.25 million people unemployment. The Bank of England’s interest rate
in work, 168,000 more than for August to October rise may exacerbate the slowdown. Any further
2017 and 402,000 more than for a year earlier. falls in Sterling would be likely to impact upon
The employment rate (the proportion of people import prices, and therefore UK inflation at a time
aged from 16 to 64 who were in work) was 75.3%, when wage growth is likely to be constrained by
higher than for a year earlier (74.6%) and the the rise in unemployment.
joint highest since comparable records began in
1971. There were 1.45 million unemployed people Upside Risks:
(people not in work but seeking and available to • UK economic activity rises significantly after
work), 24,000 more than for August to October poor Q1
2017 but 127,000 fewer than for a year earlier. The
unemployment rate was 4.3%, down from 4.7% for • Unemployment continues to be subdued
a year earlier and the joint lowest since 1975.
• Real wages rise significantly during 2018
Downside Risks:
If UK economic activity grows at rates of 0.5%
• Economic activity fails to recover significantly per quarter or above after 2018 Q1, the
in Q2 after weather affected Q1 unemployment rate would be anticipated to fall
even further. UK economic growth would be
• Unemployment rises due to subdued expected to ensure nominal wage pressure and
economic activity real wage growth. In addition, growth in the wider
• Real wage falls continue into 2018 UK economy and real wage growth would be
expected to lead to rises in consumer spending.
• Interest rate rises impact on
consumer confidence
Interest Rates and Inflation

4.5%
Bank of England Base Rate
CPI
4.0%
RPI
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
2012 2013 2014 2015 2016 2017 2018
Source: Bank of England, ONS
15
Private Housing
Private housing output reached a record high of £32.2 billion in 2017 and the continuation
of the government’s Help to Buy equity loan through to March 2021 is expected to maintain
demand for new build housing.
Private sector house building is closely linked to Approvals volumes weakened in the second half
the performance of the housing market, driven by of the year, averaging 65,000 per month and falling
mortgage lending, property transactions and house 5.6% in Q4. The Bank of England expects mortgage
prices. Bank of England data show that the number lending to remain around 65,000 approvals per
of mortgage approvals declined 1.6% in 2017. month during 2018 and lending volumes remained
Private Housing Starts and Completions Great Britain

2016 2017 2018 2019 2020
147,004 157,294 160,440 163,649 165,286

Starts
4.8% 7.0% 2.0% 2.0% 1.0%
133,214 149,200 153,676 155,212 156,765

Completions
2.9% 12.0% 3.0% 1.0% 1.0%
29,717 32,182 33,791 34,467 34,812

Output (£m)
13.1% 8.3% 5.0% 2.0% 1.0%
19,908 21,883 21,883 22,321 22,767

RM&I Output (£m)
7.2% 9.9% 0.0% 2.0% 2.0%
Source: MHCLG, ONS, Construction Products Association
16
Affordability House Price/Earnings Ratio
First Time Buyers’ Affordability
6.00 55
5.50
50
5.00
Mortgage Payment as a % of Income

4.50
45
Ratio
4.00
40
3.50
3.00
35
2.50
2.00 30
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
2013 Q1
2013 Q3
2014 Q1
2014 Q3
2015 Q1
2015 Q3
2016 Q1
2016 Q3
2017 Q1
2017 Q3
Source: Nationwide
at this level in January and February, on average. sustainability of high volumes of house building and
UK Finance also forecasts that lending volumes strong house price growth in prime central areas
will remain unchanged in 2018 due to a decline in of Birmingham, Manchester and Salford. Reflecting
buy-to-let lending related to changes in stamp duty general macroeconomic uncertainty, forecasts
and tax relief for residential landlords. UK property for house price inflation in the HM Treasury’s
transactions decreased in 2017, falling 0.6%, and comparison of independent economic forecasts in
were 1.1% lower in January-February 2018 than March averaged 2.0%, with a range between 0.0%
in the corresponding period of the previous year. and +3.8% for the year to 2018 Q4.
Annual property transactions have held at around
1.2 million per year since 2014. The Help to Buy equity loan, which was introduced
in April 2013, has been a significant government
Despite weaker volumes of mortgage lending and policy for supporting new build housing activity.
house purchases, particularly from the buy-to-let Between its introduction in April 2013 and
segment of the market, a reported reduction in September 2017, the equity loan was used on
the supply of existing properties for sale is likely 144,826 transactions in England, and whilst this
to have contributed to a continued increase in UK accounts for only 3.1% of property transactions
house prices and whilst this inflation continues, over the period, it represents 30.0% of new build
there would be expected to be an associated completions. Furthermore, in the most recent
increase in house building. According to the four-quarter period, this proportion rose to 35.3%.
ONS/Land Registry, UK house prices rose 4.7% For three of the top ten volume house builders,
in 2017, led by the East of England (6.8%), the equity loan purchases are reported to be used in
East Midlands (6.2%), the West Midlands (5.7%) over half of their sales. The counterpart schemes
and the South West (5.6%). Regional house price in Scotland and Wales have accounted for a similar
dynamics will also need to be monitored in 2018. proportion of transactions and building activity.
An increase in the supply of higher-end residential Given that property transactions volumes have
units in inner London led to house price falls in remained relatively unchanged during its period
each month between August and December 2017. of operation, the equity loan may be skewing
This weakness appears to have spread to outer demand towards new build. In England, between
London boroughs, where house prices have fallen 2014 and 2017, new build completions as a
since October. Questions also remain over the proportion of property transactions rose from
17
Lending to Individuals Total Mortgage Approvals for House Purchase (number)
Remortgaging (value)
140 Total Mortgage Approvals (value) 60%
120 50%
Lending – 3 month change on a year earlier

Secured Lending - Total Approvals (000s)
40%
100
30%
80
20%
60
10%
40
0%
20
-10%
0 -20%
Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18
Source: Bank of England
8.8% to 13.0%. In England and Wales, the equity to make large purchases. The Bank of England
loan scheme will be in operation until March 2021, raised interest rates by 0.25 percentage points at
whilst in Scotland, the maximum eligible purchase its November 2017 meeting. With the bank rate
value under the scheme has been tapered. This now at 0.5%, it remains at a historically low level
was reduced from £230,000 to £200,000 in and by itself is unlikely to have a material impact
April 2017 and in April 2018, the scheme was on demand. However, combined with lower real
extended by two years beyond its original end incomes, hawkish statements from policymakers
date to March 2021. Despite the strong uptake in may set expectations for higher future interest
equity loans nationwide, it is difficult to ascertain rates and worsened mortgage repayment
the substitution impact of how many of these affordability. The CPA expects interest rates to
purchases would still have occurred had the policy rise to 0.75% in the second half of 2018 (see
not been in place. Nevertheless, with the post- Economy).
2021 period now entering house builders’ strategic
plans, the industry is pressing for an extension Since the Housing White Paper was published in
to the scheme beyond this date, albeit with the February 2017, the government has announced
possibility of narrower eligibility criteria for buyers. funding and measures that aim to increase
housing supply, including the £5 billion Housing
Infrastructure Fund, a Land Assembly Fund,
New build completions accounted for remediation for small sites and the Home Building
13.3%
Fund for SMEs. The Housing Infrastructure Fund
of property is formed of two parts: the marginal viability fund
transactions and the forward fund. The former is capped at
in England in 2017 £10.0 million per bid, and aims to top up funding
for projects facing an unforeseen shortfall in
finance for site infrastructure. £866 million was
The downside risk to near-term demand stems allocated to 133 of these projects in February. The
from the deterioration in real wages and incomes. latter is for larger, strategic infrastructure projects,
Inflation outpaced increases in wages and salaries with up to £250 million in early finance available
throughout 2017, and real household disposable for each bid, with an aim of de-risking projects
income has remained largely unchanged since to attract other investment. The allocations are
2016, therefore reducing households’ willingness scheduled for Autumn, but the funding profile
18
and implementation period for these measures
will not peak until 2019/20 and beyond, however.
These policies, along with long-running reform to
the National Planning Policy Framework (NPPF),
the Mayor of London’s draft housing strategy and
long-term devolved regional housing deals have,
therefore, not been factored into the forecast. The
permanent stamp duty holiday for first-time buyers
announced in Autumn Budget 2017 is expected
to result in a minor easing of affordability, mainly in
London and the South East where the full £5,000
saving can be achieved, but as highlighted in the
Office for Budget Responsibility’s assessment, any
gains are likely to be capitalised into house prices
and, therefore, it is unlikely to provide a significant
increase in purchases that would not otherwise
have occurred. According to Nationwide, the
house price to earnings ratio for first-time buyers
in London was 9.8 in 2018 Q1 and 5.2 on a
national level.
The government is keen to develop the Build to

Rent sector, which covers new build developments
for private rent that aim to generate a long-term
return on investment. According to the British
Property Federation, there are 58,542 units of this
tenure with planning permission, concentrated
mainly in London, Manchester and Birmingham. In England, statistics from the Ministry of Housing,
This has potential to provide some uplift to house Communities and Local Government showed
building activity, but it is difficult to apportion that on a seasonally adjusted basis, private housing
activity between the private contractors and the starts in 2017 Q4 rose 7.8% from Q3 and were
housing associations active in this sector of the 1.9% higher year-on-year. For the whole year, starts
housing market. increased 8.4%. In 2016/17, MHCLG reported a
Private housing completions by type (England)

100
Houses
90
Flats
80
70
Property Completions by Type %
60
50
40
30
20
10
0
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Source: MHCLG
19
total net supply of housing of 217,350. Change of materialise. A fall in overall mortgage lending and
use accounted for 37,190 additional units, or 17.1% property transactions beyond 2018 Q1 also raises
of total supply. This has increased from 9.4% ten the risk of a significant slowdown or fall in house
years earlier. As a consequence, private housing price growth and a decrease in house building
starts are forecast to increase 2.0% per year in starts would then be expected to follow. Private
2018 and 2019. Private housing output growth housing starts may fall away relatively quickly
is expected to increase 5.0% in 2018, reflecting in response to any deterioration in the general
work on conversions and changes of use that is housing market but output and completions would
not included in starts. Output growth of 2.0% is be expected to hold up initially as house builders
then forecast in 2019, followed by a 1.0% increase destock, but fall from late 2018.
in 2020.
Upside Risks:
Downside Risks:
• UK economic activity avoids marked slowdown
• Falls in real wages deter Help to Buy purchases
• Consumer confidence maintained in line with
• Mortgage lending and property transactions fall economic growth and a rise in real wages
in 2018
• Mortgage lending and property transactions
• London house price weakness extends rise in 2018
to regions
• House price growth continues at current rates
• The Bank of England raises interest rates more
than once during 2018 If economic growth and demand for home
ownership remain strong against a backdrop
Real wages declined throughout 2017 and a large of uncertainty, and wage settlements outpace
deterioration in consumer confidence would inflation, then mortgage lending, property
reduce appetite for borrowing and, notably, big- transactions and house prices would be expected
ticket purchases. Consumer confidence would be to pick up from Q2. This is especially the case
worsened further if the Bank of England continues given reported reductions in the supply of pre-
to raise interest rates as implied in its recent owned properties on the market. There is also
rhetoric. Furthermore, in light of changes to stamp the potential for government policy measures on
duty rates and tax relief changes, an extended garden cities to provide an earlier-than-expected
decline in demand from buy-to-let investors may boost to house building in 2018 and 2019.
Private Housing Output

5.0% 2.0% 1.0%
35,000
8.3%
13.1%
30,000
10.3%
25.3%
25,000
9.4%
20,000 9.0%
15,000 -2.4%
10,000
5,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
20
Private Housing RM&I
The prospects for private housing rm&i activity in the near-term depend on consumer
confidence and, importantly, how wage settlements affect households’ willingness to make large,
discretionary purchases.
The key factors that drive activity in the sector,

particularly for improvements, are property
transactions and consumer spending on big-ticket
items. In addition, increases in housing wealth,
pension wealth and household savings enable
activity in the sector as they are used as sources of
finance for rm&i activity.
Property transactions are a key determinant of

activity in the sector because improvements to an
existing property, as opposed to new build, tend
to be made with a typical lag of 6-9 months after
purchase. Property transactions have remained
around 1.2 million per year since 2014, but
were distorted in the first half of 2016 by the
introduction of a 3.0% stamp duty surcharge for
the purchase of additional properties. This led to
property transactions rising 19.3% in quarterly in real wages during 2018 is likely to have a large
terms and 32.6% in annual terms in 2016 Q1 as impact on consumer confidence, especially for
purchases were brought forward to avoid the purchases of big-ticket items. The Bank of England
higher transaction cost. This spike in purchase raised interest rates by 0.25 percentage points in
activity is likely to have driven the pickup in rm&i November 2017. The impact of a single interest
output growth in the second half of 2016. UK rate rise is expected to be limited, but the Bank
Finance forecasts that property transactions will has indicated a further tightening in monetary
remain around 1.2 million per year in 2018 and policy is likely over the next couple of years, which
2019, limiting this as a driver of rm&i growth. may have a further negative impact on consumer
In addition, with new build accounting for an confidence.
34.1% of the English

increasing proportion of transactions due to Help
to Buy, the link between property transactions
and rm&i is likely to weaken further. The Royal
Institution of Chartered Surveyors (RICS) has housing stock is owned outright
been reporting a shortage of existing properties
for sale, and one sector of the rm&i market cited In terms of energy-efficient retrofitting work, an
as providing impetus to growth is non-movers 18-month transition towards a four-year ECO:
opting to extend or improve properties instead of Help to Heat programme began in April 2017. The
moving, either due to not gaining enough equity to programme is valued at around £640 million per
move up the housing ladder or, more significantly, year and focuses on fuel poverty. This is lower than
retired, outright homeowners who have benefited the £870 million spent under ECO previously and
from long-term rises in housing wealth and shifts focus from energy efficiency. Given its smaller
pensions freedom and do not wish to downsize. scope, activity under the ECO: Help to Heat
In terms of other funding streams for rm&i work, scheme is likely to be lower than its predecessor,
the household savings ratio has steadily declined in particular during the transition period. In the
from 10.7 in 2010 and 2011 to 4.9 in 2017, which first ten months of the programme, the number
was the lowest on record. Along with reduced of measures installed has averaged 15,009 per
savings and net housing equity repayment, the fall month, compared to a monthly average of 41,375
in real wages in 2017 and any further deterioration measures over the previous four-year ECO
programme.
21
Private Housing RM&I Output
25,000
2.0% 2.0%
9.9% 0.0%
7.2%
20,000 9.6% 3.2%
0.8%
2.3%
15,000
-4.9%
10,000
5,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
From April 2018, the Minimum Energy Efficiency economic uncertainty could result in households
Standards Regulations will require a minimum taking a precautionary savings stance and cutting
EPC rating of E to apply to new tenancies for non-essential spending. This may also be the case if
properties rented out in the private sector and will the Bank of England raises interest rates by more
apply to all tenancies from April 2020. According than the 0.25 percentage point increase the CPA
to the English Housing Survey, 320,000 private forecasts in the second half of 2018. Whilst this is
rental properties have an EPC rating of F or G, unlikely to affect basic repairs and maintenance, it
representing 6.6% of the housing stock of that could have a large impact on refurbishment work,
tenure. This suggests a stream of potential work especially in the near-term. In terms of energy-
in the sector, but questions remain over how efficient retrofit work, the ECO focus on fuel
effectively the regulations can be monitored and poverty and any potential delay in the rollout of
enforced by local authorities. the full ECO: Help to Heat scheme in 2018/19
could lead to a further drop off in energy-efficient
Output from the sector grew strongly in 2016 retrofit activity.
and 2017 and momentum is expected to weaken
in 2018, reflecting the lagged effect of falls in real Upside Risks:
wages hindering big-ticket spending. On a three-
month basis in January, output was 0.7% lower than • Above-inflation wage increases
a year earlier. Activity is forecast to remain flat in • Property transactions increase in 2018
2018. A 2.0% increase is then forecast each year in
2019 and 2020. • House price inflation continues at current rates
Downside Risks: Rising inflation during 2017 may result in higher

wage settlements in 2018 and, combined with
• Consumers retrench spending in response the possibility of a rise in property transactions in
to higher interest rates 2018, and national house price growth remaining
• Property transactions and house prices around 5.0%, the prospects for rm&i would
fall in 2018 remain positive. Whilst UK economic growth is
still expected to be below the long-term trend
• The full implementation of ECO: Help to Heat is in 2018, rm&i activity could accelerate as rises
delayed as has happened with previous supplier in transactions and incomes drive an increase
obligations in property refurbishment and improvements
spending.
A sharp deterioration in consumer confidence due
to constrained growth in real incomes or a rise in
22
Public Housing
Public housing activity continues to be affected by changes to government funding programmes
since 2015.
Housing association
39% in April 2016 (announced in 2015), a switch
from the Affordable Homes Programme 2015-
flats 18 that prioritised homes for affordable rent to
completions the Shared Ownership and Affordable Homes
in 2016/17: 61% Programme 2016-21 (SOAHP), under which
houses 88% of homes were to be for shared ownership
tenures (announced in April 2016), followed by
an allowance for greater flexibility to include
Public housing starts have declined each year since affordable rent in July 2017. Homes England and
2015, and are estimated to have fallen 3.0% in Greater London Authority affordable housing
2017. Despite this period of weakness in starts, completions data for 2016/17 shows that over
in 2017 output rose 13.1% and completions are three-quarters of completed units in that period
estimated to have increased 10.0%. This suggests were for affordable rent, most likely funded
that policy changes have led to the build out of under the original Affordable Homes Programme.
previously-approved developments, rather than Affordable housing starts data for the first half of
a rapid response to new funding programmes, 2017/18 showed the highest proportion of shared
reflecting the time taken to adjust business ownership starts on record (30.9%), signalling
plans. Since 2015, policy has been amended to that activity is now beginning on the SOAHP. This
introduce an annual 1.0% social rent cut beginning would be expected to drive growth across starts,
output and completions during 2018.
23
were for open market sale. This represented
47.7% of total starts in the period, the highest
proportion on record. However, Homes England’s
survey of providers for 2017 Q4 showed that the
stock of unsold shared ownership units has risen
in every quarter since 2016 Q3. In Q4, there was
also a 13.0% increase in the number of units that
remained unsold for more than six months.
For local authorities, the Housing White Paper

published in February 2017 confirmed the
government’s view that councils’ roles in house
building will be to assign land and monitor
delivery against local plans. The Local Government
Association also warned that local authority
building capacity is constrained by Right to Buy.
An initial £1.3 billion in SOAHP grants was Approximately two-thirds of receipts from Right
allocated in January 2017, to 157 registered to Buy sales are returned to the Treasury, leaving
providers to build 39,403 units, plus an additional little to fund replacement building after the cost
7,131 units to be built under the programme of sales and servicing of debt are also subtracted.
without grant funding. A separate £2.7 billion of The proposed extension of Right to Buy to
funding is also available for bids on an ongoing housing association tenants appears to have been
basis. At the Conservative Party Conference in given a low priority by government, but a regional
October 2017, the government announced an pilot is due to begin in the West Midlands, on an
additional £2.0 billion funding for social housing. unannounced date in 2018.
Further detail has not been provided, but
In London, Autumn Statement 2016 also
initial reports suggested that it will fund 25,000
announced £3.15 billion for 90,000 affordable
affordable rent homes in the final years of the
housing starts in London by 2021, which implies
parliament in 2020/21 and 2021/22.
22,500 per year. However, affordable starts in
A change in focus to shared ownership links London totalled 8,935 in 2016/17, similar to the
the public housing sector more closely to the five-year annual average of 8,983 starts. For the
general housing market. In addition, 6,467 starts first 11 months of 2017/18, affordable starts
by registered providers in the first half of 2017/18 were 6,725. £1.7 billion of the funding pot was
Public Housing Output

7,000
31.9%
3.0% 3.0% 0.0%
6,000 13.1%
2.2%
5,000 6.6%
-16.2%
-3.7%
4,000
-16.3%
3,000
2,000
1,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
24
Public Housing Starts and Completions Great Britain
2016 2017 2018 2019 2020
32,343 31,373 32,000 32,000 32,000

Starts
-1.5% -3.0% 2.0% 0.0% 0.0%
31,205 34,326 34,669 35,015 35,015

Completions
-15.7% 10.0% 1.0% 1.0% 0.0%
4,861 5,498 5,663 5,833 5,833

Output (£m)
-3.7% 13.1% 3.0% 3.0% 0.0%
7,708 7,389 7,020 7,020 7,020

RM&I Output (£m)
-5.3% -4.1% -5.0% 0.0% 0.0%
Source: MHCLG, ONS, Construction Products Association
allocated in July 2017, for 49,398 homes for social have warned that this, alongside lower levels of
rent, London living rent and shared ownership. A grant funding and a greater reliance on market-
further £1.67 billion funding was announced in linked housing will worsen housing association
the Spring Statement, which aims for an additional creditworthiness. There is also still uncertainty
27,000 starts by the end of parliament in 2021/22. over ability to access finance from the European
The Mayor of London published a draft housing Investment Bank once the UK leaves the EU. In
strategy (also included in the London Plan) for response to any marked slowdown in the general
the capital in September, which, in contrast to housing market that may materialise, any changes
the Housing White Paper, encourages house to the planned tenure mix of development away
building by local authorities, through lobbying from market-linked products is likely to delay start
central government for fewer restrictions on dates as housing association business plans are
council borrowing, as well as joint ventures and changed.
partnerships.
Upside Risks:
Flexibility to adjust tenures in accordance with
prevailing housing market conditions and an • Flexibility to increase housing built for
increase in starts under the SOAHP, combined affordable rent
with a potentially large funding impetus for public • Open market demand for housing
house building in London, underpin the forecast for remains buoyant
starts to increase 2.0% in 2018 but remain flat in
2019 and 2020 as build out occurs. In the first half of 2017/18, almost half of housing
association starts were for the open market
Downside Risks: and if underlying demand remains buoyant
• Difficulties in raising finance for for market sales, market rentals and shared
housing associations ownership products, this could cushion the fall
in social housing construction activity by housing
• A weakening in the housing market undermines associations. If, in contrast, market conditions
focus on market-linked products deteriorate and housing associations can quickly
adjust business plans to accommodate a larger
Housing associations’ borrowing capacity has been proportion of affordable rental tenures instead of
reduced by the annual 1.0% cut to social rents sales, this will help avoid a hiatus in activity.
implemented from April 2016. Ratings agencies
25
Public Housing RM&I
The majority of activity in the public housing rm&i sector is either basic repairs or essential
maintenance on the existing public housing stock of 2.0 million local authority homes and 2.8
million housing association dwellings in Great Britain.
required is unknown and extends beyond the

scope of the forecasts. The forecasts do take into
account that emergency measures will need to
be carried out as a priority on the public housing
stock but are assumed to displace other planned
repairs and maintenance activity given financial
constraints. MHCLG’s Building Safety Programme
indicated in March that there are 158 social housing
buildings taller than 18 metres that require cladding
work. Remediation work has completed on seven
of these and has begun on a further 103 towers.
Questions remain over funding for work, however,
with local authorities asked to approach central
government if financial constraints limit their ability
to spend on fire safety work. The extent of future
government funding for these works and wider fire
safety measures is unknown at this point.
According to Homes England, housing association

spending on major repairs decreased by 14.0%
This type of work cannot be delayed for a in 2016/17 and it forecasts a continued fall
significant period of time. Sector output has fallen throughout the duration of the social rent cut to
18.3% since 2010 Q2, due to central government 2019/20. Rm&i on social housing has also been
reducing funding to the Ministry of Housing, affected by a reduction in the number of measures
Communities and Local Government (MHCLG) installed under the Energy Companies Obligation
under its programme of fiscal austerity and, more (ECO) and the cancellation of the Green Deal in
recently, housing associations increasingly carrying July 2015. The original ECO programme ended
out r&m in-house. This means that some work may in March 2017 and its successor, ECO: Help to
not be captured in the ONS output data, which is Heat, began in April 2017, originally as a one-year
based on a survey of contractors. transition programme. However, this was extended
to 18 months, before it begins fully in September.
A weak outlook for the sector in 2018 is based on Under the Help to Heat programme, running until
financial constraints on local authorities continuing 2021/22, the focus will shift from improving energy
and the 1.0% annual cut in social rents until efficiency to reducing fuel poverty and the annual
2019/20 leading to reduced discretionary spending funding for the scheme will be cut from £870
on maintenance and improvements by housing million to £640 million. In the first eight months
associations. However, following the Grenfell Tower of the transition between ECO and ECO: Help
disaster in June 2017, the typical drivers of rm&i to Heat, an average of 15,009 measures were
work in the sector will be replaced by a shift in installed per month. This compares to an average
focus towards fire safety, structural investigations of 41,375 per month throughout the four years of
and a review of the housing stock. The response ECO. Furthermore, the public housing stock is likely
of local authorities to the disaster suggests that to be diminished through the increased uptake of
public sector rm&i resources will be redirected Right to Buy. The policy is expected to be extended
to prioritise fire safety measures for high-rise to housing association tenants, with a pilot set to
social housing towers, yet with the results of fire begin in the Midlands this year. The government’s
investigations and a public inquiry pending, the proposals for local authorities to sell off their
full scale of the issue and, therefore, future works high-value housing assets as a means of funding
26
Public Housing RM&I Output
10,000
9,000
2.2% 2.7% 1.9%
8,000
0.0% 0.0%
-8.1% -4.1% -5.3%
7,000
-4.1%
-5.0%
6,000
5,000
4,000
3,000
2,000
1,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
the policy will not be introduced until at least April spending priorities or a weaker housing market
2019, however. The government has pledged a 1:1 performance affecting housing associations’ open
replacement of homes sold through the Right to market sales revenues, also pose a downside risk to
Buy, but between the second quarter of 2012 and rm&i spending. Public housing providers may also
the fourth quarter of 2017, there were 63,517 decide to delay rm&i spending until the full scale of
Right to Buy sales in England, but only 14,275 direct wider fire safety remedial work required is known.
replacements started over the same period, a ratio
of one replacement for every four sold.
A
Any uptick in urgent repair work in the first half of
2018 is unlikely to offset the decline in output that
has occurred in consecutive quarters since 2015
92.6% of the English social
housing stock
B
C
D
Q4. Output is forecast to decline 5.0% in 2018, E
and given limited financial capacity and diversion of
has an EPC rating F
funds from previously planned rm&i work to fund of D or above G
remediation work, output is expected to remain flat
during 2019 and 2020. Upside Risks:
Downside Risks: • Housing associations focus on maintenance
• Full implementation of ECO: Help to Heat • Housing market performs stronger than expected
programme delayed
If building homes for market sale or shared
• Housing association revenues reduced by a ownership becomes less financially viable due to a
weaker than expected housing market weaker housing market throughout 2018, housing
associations may instead focus on maintaining their
The transition period for ECO: Help to Heat has existing, revenue-earning housing stock. Conversely,
already been extended from 12 to 18 months, if the housing market remains more buoyant than
ending in September 2018. Further delays to the expected, this would raise the revenues housing
launch of the full programme, therefore, cannot associations receive from sales of shared ownership
be ruled out, as has happened with previous and units sold on the open market, offering
programmes. The risk of further reductions in additional funding for rm&i work. This would help
funding, through local authorities adjusting local to offset constrained local authority rm&i spending.
27
Public Non-housing
Public non-housing construction output is largely determined by capital funding allocated to
departmental budgets by central government and, therefore, is less affected by uncertainty than
other sectors such as commercial and industrial.
The underlying driver of output in the publicly-

funded education sub-sector continues to be
Public Non-housing Output by Sub-sector the Priority School Building Programme (PSBP).
2017 (%) In the first phase of the programme 260 schools
will have been rebuilt, 214 of which are publicly
funded. The Department for Education estimates
Other that work on 23 will run over into 2018, however,
28% due to site difficulties or planning issues. The
National Audit Office assessed that the PSBP
Education
was £286 million over budget, although the
50% average cost per square metre of the completed
schools was one-third lower than the previous
Entertainment Building Schools for the Future programme. The
9% £2.0 billion second phase (PSBP2) focuses on
Health rebuilding individual blocks at 277 schools by
13% 2021. Like the first phase, rising cost pressures
Source: ONS
for contractors were highlighted by the National
Audit Office as a threat to achieving time and
budget targets for the PSBP2. An additional £100
New orders in the sector decreased 14.2% in
million of government funding, generated by the
2017, with particular weakness in the health and
soft drinks industry levy will be provided for the
other (mainly defence and prisons) sub-sectors.
Healthy Pupils Capital Fund in 2018/19, to be
Overall, public non-housing construction is
spent on improving outdoor, kitchen and medical
expected to decrease 4.8% in 2018, before rising
facilities in schools. In addition, a programme of
0.9% in 2019 and 1.5% in 2020 due to work on
new free schools, which are publicly-funded but
the second phase of the Priority School Building
operate outside of local authority control, has been
Programme and the Ministry of Defence’s Army
favoured by government since 2010. The Free
Rebasing Programme.
Schools Programme has a budget of £1.4 billion
Public Non-housing Output

16,000
14,000
-7.6%
12,000 3.8%
0.2% 0.9% 1.5%
10,000 -21.0%
-9.6% -0.9% -3.6%
-4.8%
8,000
6,000
4,000
2,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
28
per year between 2016/17 and 2020/21 to open terms) between 2014 Q4 and 2017 Q2. New
500 new schools by the end of the period and the orders increased in 2017 Q3 and Q4, however,
government allocated £320 million in additional reflecting the award of contracts on regional
funding for 140 new free schools in the March batches of the schools construction framework.
2017 Budget, although the majority is not expected Output is forecast to fall 7.0% in 2018 but
to be used until 2020. Whilst some of the premises increase 3.0% per year in 2019 and 2020 as new
for free schools are conversions or refurbishments programmes begin.
of existing buildings, in February 2017, the National
Audit Office highlighted that the low availability of Downside Risks:
sites is a key constraint on the new build element. • Cost increases and a lack of contractor interest
The Department for Education will need to spend delay start dates on the PSBP2
£2.5 billion to purchase land for the free schools
in the current pipeline to 2022, but the Public If contractors are reluctant to sign contracts for
Accounts Committee found that on average, land work due to cost inflation, the start and end
purchases to date have cost 19.0% above official dates for PSBP2 work could be pushed further
valuations. Contractors have been selected for beyond the forecast horizon, whilst start dates
both the PSBP2 and the Free Schools Programme, for future schools construction programmes in
through the government’s £8.0 billion schools England and Wales may also be delayed. In addition,
construction framework, which runs until 2021 and high bids for land may also push up costs for the
would be expected to provide output growth in Free Schools Programme. It is unlikely that the
2019 and 2020. government will increase funding as a result, leading
to a delay in the start of construction.
The Autumn Budget in November 2017 reduced
the Department for Education’s capital investment Upside Risks:
funding by a cumulative £1.0 billion between
2017/18 and 2020/21 compared to the March • Capital funding is brought forward
Budget. The Welsh Government’s £1.4 billion 21st
Additional financial support for school building is
Century Schools programme ends in March 2019
only likely to arise if government brings forward
but a second phase backed by £2.3 billion funding
funding from later years of the departmental
is scheduled to follow immediately in 2019/20. The
budget to 2018/19, as a means of covering higher
funding will be split between capital allocations
cost pressures in the near-term and providing
and the mutual investment model, a new form
confidence over start dates for new building
of public-private partnership. New orders in the
programmes.
sub-sector decreased in every quarter (in annual
29
Great Britain, this will not be included in the ONS
construction output data and it is also excluded
from the forecast. In Autumn Budget 2017, the
Department of Health was allocated £6.4 billion
for capital spending in 2018/19, £6.7 billion in
2019/20 and £6.8 billion in 2020/21. This is an
increase from £6.1 billion in 2017/18, although
it is unclear how much of the capital budget will
be assigned to new building work, rather than IT
upgrades and equipment.
The latest NHS smaller works framework, the

£4.0 billion ProCure22, started in October 2016
and will provide a stream of work over the next
few years. Between its start date and March 2018,
44 major works schemes and 19 small works
packages have started under ProCure22, at a value
of £1.8 billion. The outlook for the forecast horizon
is weak as work on large hospitals projects peaks
or completes and the pipeline is not replenished
at the same rate. However, a £400 million science
campus and a new headquarters for Public Health
England in Harlow received planning approval
in December 2017 and main work is set to
commence in 2019. Sub-sector output has been
Output in the health sub-sector has experienced on a downtrend and fell 28.0% in 2017, whilst
sharp falls in output and new orders in recent new orders were 55.6% lower and have declined
quarters. Work in this sub-sector includes publicly- for six consecutive quarters. Output is forecast to
funded work on hospitals, health centres and decline 20.0% in 2018 and 10.0% in 2019, before
clinics. Among projects currently underway are two remaining flat in 2020.
£136 million proton beam treatment centres in
London and Manchester (completion in 2018) and Downside Risks:
the £480 million Royal Sussex County Hospital,
where work is expected to continue to 2020. The • Cost rises delay projects
£90 million redevelopment of the Royal National Rising costs for raw materials and labour may
Orthopaedic Hospital in London started in early lead to delays as projects are paused to allow
2017 after the originally privately-funded project for attempts at contract renegotiation. The
was assigned capital funding from the Department cancellation of plans for a £336 million critical care
of Health in August 2016. In addition, the £160 hospital near Basingstoke in December 2017 also
million redevelopment of Springfield Hospital, on demonstrate a low appetite for high-value projects.
two sites in south London, saw contracts awarded
at the end of 2017. Work is expected to last Upside Risks:
until 2019. The largest new project entering the
pipeline is a £466 million general hospital approved • Capital funding is brought forward
in Jersey in 2017. However, as Jersey is not in A sharp rise in costs that leads to contractors
pausing activity could also prompt the government
Capital value of projects in to change the existing capital funding profile.
The increase in annual capital funding for the
the ProCure22 pipeline:
1.8 billion Department of Health already allocated in Autumn
Budget 2017 suggests that the only option would
be to bring forward spending from later years.
30
Public non-housing other covers construction work
4
on publicly-funded facilities such as prisons and NEW Full Sutton (Yorkshire),
defence projects. Output growth has accelerated
since 2016 Q3 as two large defence projects
planned Hindley (Wigan),
entered the pipeline: the £500 million, ten-year prisons: Rochester and Port Talbot
upgrade to the Faslane naval base in Scotland, which
began in early 2017, and the £135 million works Downside Risks:
at RAF Marham in Norfolk, including a new aircraft
hangar and runway and taxiway resurfacing works, • Delays to projects
with work required to be completed before new
aircraft come into service in mid-2018. In addition, Questions over contractor appetite may arise if
despite the compulsory liquidation of Carillion as prolonged financial and economic uncertainty act
one of the joint venture partners, the Ministry of as a drag on confidence and activity over the next
Defence’s £1.1 billion new accommodation and 12 to 24 months. In addition, contractors may
facilities scheme for the Army Basing Programme pause to renegotiate contracts to take account
on Salisbury Plain will continue to drive growth in of rising costs, forming the main downside risks
2018 and 2019, ahead of the project’s completion to sub-sector activity. Government and public
in mid-2020. The expansion of RAF Lossiemouth in opposition to the construction of the new prison
Scotland is also in the early stages of procurement, facilities in Port Talbot and Yorkshire would
with contract awards scheduled for 2019. delay the entire English prison redevelopment
programme indefinitely.
Autumn Budget 2017 confirmed the Ministry of
Defence’s capital budget allocation at £8.7 billion Upside Risks:
in 2018/19 (£7.8 billion previously) and £9.0 billion • Further detail and contracts for new prisons
in 2019/20 (£8.1 billion in the previous Budget).
In terms of prisons projects, there is little in the Full planning approval for the four new prisons
near-term Ministry of Justice construction pipeline announced in March 2017 would increase certainty
aside from the expansion of Rye Hill and Stocken for the sub-sector. However, construction activity
prisons and enabling works for the latter began would not be expected to begin until 2019 at the
in January. In Scotland, a £66 million new prison earliest, to allow for design and tendering.
in Inverness gained planning approval in October
2017 and is expected to start construction this year.
Back in early 2017, the government announced
four new prisons would be built in Yorkshire, Wigan,
Rochester and Port Talbot as part of its £1.3 billion
investment in the prison estate, but so far, only
one (Full Sutton in Yorkshire) has received outline
planning permission for a £100 million development.
Furthermore, the temporary closures of the current
prisons in Rochester and Wigan that would allow
redevelopment of these sites, have been deferred
beyond the current parliament. In terms of public
office buildings, the first £500 million tranche of
work under the £1.0 billion Government Hubs
programme, which seeks to reorganise public sector
offices into regional hubs, mainly through fit-out
work, was awarded in June 2017 and is expected
to provide some work this year. New orders in the
sub-sector are volatile, rising 82.0% in 2016, followed
by a 32.8% fall in 2017, but large contracts awarded
in 2016 are forecast to drive growth of 5.0% in
2018 and 2.0% in 2019.
31
Public Non-housing R&M
Output in the public non-housing repair and maintenance (r&m) sector consists of basic repairs
and maintenance carried out on schools, hospitals and other public buildings.
Public Non-housing R&M Output

6,000 6.0% 2.5%
-1.4% 0.0% 0.0%

5,000
-2.7%
-11.9% -1.3% -0.4% -2.0%
4,000
3,000
2,000
1,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Basic repairs and maintenance cannot be cancelled forecast for 2018. The schools Property Data
or postponed significantly, which has helped keep Survey and the Royal Institute of British Architects
output less volatile than in public non-housing new estimate a backlog of repairs to school buildings
build, in spite of cuts to departmental funding since of between £6.7 billion and £8.5 billion. Matching
2010. the school condition funding assigned between
2015 and 2018, a £1.4 billion investment has
Against a backdrop of reduced grant funding from been allocated for 2018/19 to help improve and
central government, and financially-constrained maintain the condition of schools. However, the
councils, output in the sector has decreased for condition of the school estate is expected to
three years and a further 2.0% contraction is deteriorate further despite planned investment
32
and the cost to return schools to satisfactory
conditions is likely to double between 2015/16
and 2020/21, according to the Department
for Education’s own estimates. The Accounts
Commission in Scotland identified structural
defects in 19 council buildings in Edinburgh
following an assessment at the end of 2017,
including schools, leisure centres and care
homes. Remedial work has been undertaken
on the majority of these buildings, but the
Commission’s report recommended that checks
and maintenance on publicly-owned buildings be
carried out across councils in Scotland.
Prior to its liquidation, Carillion held facilities

management contracts for 875 schools and was
the largest provider of facilities management
services to the NHS and the Ministry of Defence.
The government has confirmed that the contracts
on the public sector services side of Carillion’s
business will continue and, therefore, the effects
of the liquidation on public non-housing rm&i
are expected to be minimal. The methodology
for school condition capital funding allocations
for 2019/20 and beyond is being reviewed, but is
not expected to deviate significantly from funding
allocated in previous years. On this basis, output is
forecast to remain flat in 2019 and 2020.
Downside Risks:
• Local authorities cut spending plans
• Direct funding from central government is cut to

focus on new build
A further reduction in local authority spending

power, due to budget tightening by councils or
central government shifting funding profiles to
focus on new build would reduce sector output in
2019 and 2020.
Upside Risks:
• Work on framework contracts limits falls in

discretionary activity
Existing long-term contracts for maintenance on

prisons and hospitals are less likely to be affected
by economic uncertainty and will provide a steady
stream of public non-housing r&m activity. Public
sector organisations may also focus on maintaining
existing buildings, rather than new build.
33
Commercial
Commercial output is forecast to fall by 7.8% in 2018 and 0.8% in 2019.
M3 London Development Barometer: many retailers on the high street have been
exacerbated by substantial business rates rises,
57% of firms expect which particularly impacts smaller retailers in

London. The start of 2018 has seen a number of
high profile retailers go into administration and
less offices construction at this point new investment may go towards
activity in the next five years utilising these existing units rather than major new
investments. Output within the PFI health sub-
sector is likely to hindered by the hiatus on two
Commercial activity in many cities around of the four projects that led to the liquidation of
the country remains at high levels, especially Carillion. PFI education is unlikely to see growth as
in Manchester and Birmingham. The key issue the next school building programme focuses purely
outside the capital regards the sustainability of the on publicly-funded projects.
demand given the rapid expansion of commercial
developments in recent years. However, the impact Overall, output in the commercial sector during
of weaker factors driving commercial projects the year 2016 was at its highest level since pre-
in London on activity in the sector overall is crisis 2008 and output in 2017 was 4.9% higher,
inescapable given that it accounted for 31% of driven by projects signed 12-18 months previously.
commercial construction in Great Britain during However, looking across both years, output rose
2017. The CPA has highlighted in previous forecasts throughout 2016 and peaked in 2017 Q1, falling
that in the key offices sub-sector, construction in each quarter thereafter and output in 2017 Q4
demand within London has historically been was 7.2% lower than at the start of the year. This
driven by demand from the financial and business reflects the impacts of the new orders data once
services sector although demand for new offices tthe lag between contracts awarded and activity
space has fallen away sharply since the EU on the ground is taken into account. Commercial
Referendum in response to the consequent rise new orders in 2016 were 3.6% higher than in 2015.
in uncertainty. Within the retail sector, constrained However, new orders in the first half of the year, pre-
consumer spending and the continued shift to referendum, were 19.6% higher than a year earlier
online shopping has led to a significant slowdown whilst new orders during the second half of 2016,
in new investment. Furthermore, the woes for post-referendum, were 10.7% lower than a year
earlier. Furthermore, commercial new orders during
2017 were 7.9% lower than during 2016 and this is
expected to feed through during 2018 and 2019.
Commercial Output by Sub-sector 2017 (%)
The impact of the liquidation of Carillion on
Entertainment
the commercial sector is likely to be relatively
26% small overall. Carillion conducted £350 million
of commercial work annually in a sector
valued at £29.6 billion in 2017. Key high-profile
Retail
Education 17%
projects have appointed other contractors since
15% Carillion’s demise, such as BAM taking over as
Other
the main contractor at Birmingham Paradise
25%
and its sub-contractors have returned to site. In
Health 3%
March, Sunderland council announced it would
Garages & Misc 5%
be rebidding the Vaux Brewery development
Offices
Phase I project, which Carillion had started on in
34% Source: ONS
December 2016, which means that work is unlikely
to restart until towards the end of the year. The
main impact is likely to be on the Health including
34
PFI sub-sector with the two largest projects on site offices new orders were 25.4% higher than a year
prior to Carillion’s demise PFI hospitals in which earlier and, in 2016 Q2, offices new orders were
Carillion was the main contractor, in Liverpool 24.6% higher than in the previous year. However,
and near Birmingham. Both will require new following the referendum, in 2016 Q3, offices
contractors and, as a consequence, the delays in new orders were 5.9% lower than in the same
the construction activity onsite anticipated in the period one year earlier and the deterioration
previous CPA forecast are expected to continue. in new orders only accelerated throughout the
year. In 2016 Q4, offices new orders were 30.1%
lower than a year ago. In 2017, overall, new orders
IPF forecasts for offices construction were 25.0% lower than
2%
in 2016 and once again, offices new orders fell
fall in UK offices throughout the year. Offices new orders were only
capital value £794 million in 2017 Q4, 34.6% lower than one
year earlier and 54.3% lower than the £1.7 billion
of offices new orders during the same period two
Output in the offices construction sub-sector years earlier.
rose by 12.5% in 2016 as a result of projects on
site that had been signed up to in the previous London accounts for almost one-third of the
12-18 months. In addition, offices output in 2017 entire UK offices market. The prospects for offices
Q1 was 2.2% higher than in 2016 Q4 and was construction remain poor. IPF forecasts expect
5.2% higher than one year earlier. However, 2017 a 2.0% fall in offices values in London this year, a
Q2 started to see the beginning of falls in offices further 1.9% fall in 2019 and a 0.3% fall in 2020.
output that continued throughout the year. Output Deloitte Real Estate reported in January 2018
in the second quarter of 2017 was 2.8% lower that 45% of pre-completion space let in Central
than in the first quarter of the year but only 0.4% London was due to demand from the financial
lower than a year earlier. Yet, by 2017 Q4, after sector. Whilst most major banks and insurers
three consecutive falls in activity, offices output was have announced plans to move a number of
17.3% lower than a year earlier and new orders staff from London to other cities in the EU such
data over the last two years suggest further falls in as Frankfurt and Paris, the number of jobs has
output during 2018 and 2019. In 2016, new orders been considerably lower than the 10,000 banking
rose by 0.6% yet this disguises the sharp change jobs that Reuters reported, initially following the
in the direction of new orders prior to the EU EU Referendum, may be lost due to Brexit. The
Referendum and following the EU Referendum agreement of a 21-month implementation period
in June 2016. Before the referendum, in 2016 Q1, following the UK leaving the EU on 29 March 2019
35
Commercial Output
35,000
4.9%
30,000 7.5%
0.7%
2.4% 2.7%
6.3%
0.0%
25,000 -7.8% -0.8%
-9.8%
20,000
15,000
10,000
5,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
investment in projects that are high investment up

front for a long-term rate of return. This largely
affects investment in new high-end residential and
commercial offices towers in London.
The latest Deloitte Crane survey reported in

Winter 2017 that only 12.6 million sq. ft. of office
space is under construction in Central London, 9%
lower than in its previous survey in Summer 2017
and that only 1.8 million sq. ft. of new space was
started, which is the lowest volume of new space
started since 2014 and 21.0% below the survey’s
average. In addition, less than one-third of recent
offices construction activity in Central London was
new build with 70.0% the refurbishment of existing
offices facilities. Deloitte also highlighted the recent
decline in demand in Central London from the
Technology, Media and Telecommunications (TMT)
sector as a result of the completion of some
means that the conditions will broadly remain the major projects such as Bloomberg’s £300 million
same until 31 December 2020. This means the headquarters. In addition, Deloitte noted the rapid
urgency with which firms will have to deal with growth of flexible or co-working offices space. In
staff changes has been postponed and there is the first three quarters of 2017, leasing activity by
likely to be little change this year. Investment in co-working operators was greater than in three
existing towers with long-term tenants remains of the previous four years. According to Cushman
strong and the past year has seen record deals in & Wakefield, the flexible offices space provider
London by foreign investors. For instance, in the WeWork, has rented more space in Central
past year, the Leadenhall Building, also known as London since 2012 than any other company and
the Cheesegrater, was purchased for £1.2 billion flexible work providers accounted for 20.0% of
and 20 Fenchurch Street, more commonly known leases in London in 2017 compared with only 8.5%
as the Walkie Talkie, was purchased for £1.3 billion. in 2016. Although WeWork is by far the largest
Yet, the key direct impact of the referendum flexible office providers, competitors, such as
has been to increase uncertainty, primarily in Blackstone-funded The Office Group, have taken
areas that are dependent on new international up 853,000 sq. ft. of office space since 2012 and
36
landlords are also beginning to start their own co- to Savills. Take-up of offices space in the city centre
working firms. British Land, the UK’s second largest surpassed 1.0 million sq. ft., which is 51.0% above
listed property group recently set up Storey, which the ten-year average. Public services accounted for
it expects to operate across its offices portfolio 27.0% of this take-up but there remains a shortage
and the Crown Estate is also looking to start its of grade-A office space in the city centre. Overseas
own flexible offices division operating within its investors accounted for 62.0% of the total offices
buildings. However, as stated in previous forecasts, investment in Birmingham during 2017. The largest
this does raise questions about the sustainability of project currently ongoing is phase I of what was
recent growth in flexible offices demand. It clearly Carillion’s Paradise building project in the centre
benefits from changes in working practices and of Birmingham, which is an office scheme for PwC,
uncertainty in the general offices market. However, which topped out just before the liquidation of
Savills have already stated that the City may be Carillion. The hiatus since 15 January only ended in
suffering from an oversupply of co-working offices March with BAM taking over the project and sub-
space and there are still key questions regarding contractors returning to site. Consequently, this will
whether this has also become the case in other directly impact on Q1 output. The £700 million,
key areas of London. 1.8 million sq. ft. Paradise Birmingham project is
expected to be completed in the first half of 2019.
In the past 12 months, whilst the London offices The West Midlands Combined Authority launched
construction market has been falling away, albeit 20 potential development sites for private
from a relative high point, activity in Manchester investors with a total value of £10 billion for
has been growing considerably. The Manchester projects that it hopes will start this year and sustain
offices construction market is only one-tenth the demand in the long-term, to 2025.
size of the London market but 72% of offices
construction in Manchester in 2017 was focused Overall, in the offices sub-sector, current declines
on new build and only 28% of offices activity in activity since 2017 Q1 are expected to continue
was refurbishment of existing facilities according throughout this year and into 2019 due to declines
to Deloitte in January 2018. 2017’s offices in new orders and uncertainty regarding new
construction in Manchester represented its highest investment. Offices output is expected to fall by
level since the financial crisis and was 564,000 20.0% in 2018 before a further fall of 10.0%
sq. ft. over the 2002-2017 average. As a result, in 2019.
it has been a significant contributor to recent
activity in the sub-sector and the largest offices Downside Risks:
project to start in Manchester in 2017 was the • Prolonged Brexit negotiation uncertainty
526,000 sq. ft. Circle Square project. The offices
sector saw significant growth in speculative office • Business investment is constrained by subdued
development with several major schemes breaking economic activity
ground without pre-lets signed. Only 14,747 sq. ft.
(3.9%) of new offices space under construction Uncertainty throughout the Brexit negotiations
in Manchester in 2017 Q3 was pre-let. The total this year would be expected to lead to falls in
pipeline of schemes with planning permission was investment and take-up of new high-profile office
just under 3.5 million sq. ft. in January 2018. The space in London. Uncertainty regarding financial
majority of this activity is expected to occur in passporting and the UK’s participation in the Single
2019 and is primarily based around major projects Market post-2020 would particularly impact upon
such as the St. John development, continued long-term demand in the financial sector and lead
construction in Manchester City Centre, NOMA to further falls in new investment in London.
and Salford Central. As a result, after the recent Upside Risks:
high levels of activity last year, offices construction
in Manchester is expected to slow in 2018 before • Stronger economic growth despite rising inflation
accelerating in 2019.
• Clarity over post-Brexit and implementation
In Birmingham, public sector clients drove demand period market environment raises business
for offices space to record levels in 2017 according confidence
37
If the economy returns to robust growth after The UK arm of Toys R Us and Maplin Electronics
2018 Q1 and real wages rise, then business both entered administration during the first
confidence and investment would be anticipated quarter of 2018 as outdated business models and
to also rise. Additionally, confidence regarding a the shift to online impacted upon both retailers.
comprehensive deal between the UK and the EU In addition, the restaurant chain Prezzo entered
after the UK leaves the EU and the implementation a Company Voluntary Arrangement (CVA) in
period, which enables business to continue across March that will allow it to continue on the basis
the UK and EU in a frictionless manner, would also of closing almost one-third of its 300 outlets.
be expected to boost business confidence and Several other restaurant chains also announced
business investment. In turn, this could incentivise plans to close outlets and renegotiated rents
new long-term investment in commercial offices. such as Jamie’s Italian, Strada and Byron Burger. In
addition to constrained spending, over-ambitious
The start of 2018 has been a difficult one for expansion plans by mid-range restaurant chains
retail with a number of different factors hitting and the consequent impact on competition,
the high street irrespective of the poor weather in higher wage costs and rising business rates have
February and March. had a severe impact on the restaurant part of the
The ONS reported that retail sales in February retail sub-sector.
2018 were 1.5% higher than a year earlier but in
the three months to February, retail sales were
0.4% lower than a year earlier. The British Retail
Consortium reported that retail sales in February both went into
2018 were 1.6% higher than a year earlier and that
in the three months to February retail sales were administration
1.5% higher than a year ago. However, this was in 2018 Q1
due to a 4.0% rise in food sales over the period
whereas non-food sales fell by 0.5%. Consumer
spending still appears to be hindered by the lagged
impacts of last year’s rising inflation and real wage Low value supermarket chains have been
falls as general spending patterns take time to increasingly gaining market share and continue
adjust. The key areas in which spending patterns with expansion plans, particularly Lidl and Aldi.
can adjust more quickly is the shift towards online Lidl, which has 670 stores, announced in January
spending rather than spending on the high street that it would build a 1.0 million sq. ft. regional
and also spending on services such as restaurants distribution centre in Hertfordshire as it continues
and cafes/bars. its £1.5 billion investment plan in the UK and,
according to Barbour ABI, Lidl submitted 68
HDH forecasts planning applications for new stores in 2017, which
rise in retail spending would be expected to be built out over the next
53% in Croydon due to the

£1.4 billion
24 months. Aldi has 726 stores across the UK
and plans to open a further 70 shops in 2018 as
part of its target to have more than 1,000 shops
Croydon Partnership by 2022. However, one knock-on effect of the
difficulties experienced by existing retailers is that
rather than new build on empty sites, the value
According to the ONS, internet sales saw an retailers could look at taking advantage of empty
increase in its proportion of all retailing in February existing properties at lower cost, particularly Toys
when compared with January, accounting for 17.2% R Us stores that are primarily in out-of-town
of all retail sales, the highest proportion on record. developments.
This continues the general upward trend in the The key drivers of activity in the retail sector in
amount spent online as the proportion of online 2019 and 2020 are still expected to be the £1.4
spending in recent years although notably it only billion Croydon Partnership project, which the
accounted for 5.5% of food retailing.
38
Mayor of London gave final approval in January
2018 and will see the current Whitgift and
Centrale shopping centres replaced by a 1.5 million
sq. ft. building that is expected to be completed in
2022. Initial works on the £1.4 billion Brent Cross
extension started early in 2018 although main
works on the 370 acre-site are expected in the
second half of the year. It is expected to double the
size of the shopping centre to 2.0 million sq. ft. of
retail and leisure space with up to 150 new retail
stores. The project is expected to be completed
in 2022. However, in light of these projects and
existing retail developments in London, it is difficult
to see the viability of the 700,000 sq. ft. of retail
space as part of the £9.0 billion Battersea Power
Station project that the development company
sees as becoming the “fourth retail pillar of
London”, particularly as another key part of the
project is building 4,239 high-end residential for
international investors, which is increasingly looking
unviable in the current market conditions.
New orders in the retail sector fell by 9.0% in

2017 and this is expected to feed through over the
course of this year. Overall, a decline of 10.0% is
expected in 2018 before output returns to growth
with a rise of 5.0% in 2019 driven primarily by
work from Lidl and on the two £1.4 billion London
projects.
Downside Risks: unemployment would be expected to boost

consumer confidence and spending.
• Sustained inflation and real wage falls
Output in PFI education reached its highest level
• Rising unemployment on record in 2017 due to finishing projects under
If inflation dissipates slower than anticipated and the privately-funded element of the Priority School
real wages continue to fall in 2018 then this would Building Programme (PSBP) as well as expansion
be expected to impact on consumer confidence projects at universities. However, only 46 of the
and spending. Any significant rise in unemployment, PSBP schools are privately-funded and as they
albeit from historic lows, would also be expected complete, there is little to sustain activity given that
to adversely affect consumer confidence and the PSBP2 is purely publicly-financed.
spending. Both of these would also be likely to shift Universities in England have experienced a 4.0%
spending further towards cheaper online offerings. decline in funding between 2016/17 and 2017/18
Upside Risks: and capital funding has declined by over 25% over
the period. As a result, the reliance on students
• Stronger than anticipated UK economic growth fees, increasing student numbers and borrowing
from private sector will only rise going forward.
• Real wage growth Expansion plans at many universities around the
• Unemployment falls country valued at £500 million or more that
have been highlighted in previous forecasts are
Stronger UK economic growth following a poor underway but, as a consequence, are unlikely to
2018 Q1, real wage growth and further falls in provide further growth.
39
The only major new universities projects of note deliver its £65 million Sir William Henry Bragg
are in Stratford, in the near-term, and potentially Building project that is expected to complete in
Milton Keynes, in the medium-term. The £1.6 Summer 2020. The University of Oxford appointed
billion university and museum quarter in Stratford Laing O’Rourke as contractor in February this year
is a part of University Square, a partnership to deliver a £70 million phase two expansion of
between Birkbeck, University of London and the its biochemistry building that is expected to start
University of East London. The Mayor of London this year and complete during 2020. In February
granted outline planning permission for the site at 2018, the Liverpool John Moores University has
the end of March 2018 and five contractors have restarted plans to redevelop the 3.5 acre site of
been asked to submit bids for the first building the old Royal Mail sorting office at a cost of £64
project in phase 1, which will start in 2019 and million. Plans were initially submitted one year ago.
cost £200 million to build. Milton Keynes Council However, the project was not given the green
announced its intention to build a new university light due issues around project viability when it
in the city. It will be conducting an 18-month was at a cost of £100 million. Subject to planning
feasibility study, which will consider the planning, approval, phase 1 will see the development of two
design and financing of the new university and new buildings, a Student Life Building and Sports
would be looking to initially have 5,000 students, Building by Summer 2020.
from 2023.
In the medium-term, Theresa May stated that
the UK may stay in some organisations that
are overseen by the European Court of Justice
(ECJ) after the UK leaves the EU and following
The the implementation period, which may mean
signed a £250m that the UK could potentially be a part of the

European Investment Bank (EIB), which has been
a key contributor to investment in education,
major building infrastructure and social projects.
works framework PFI Education output rose by 11.2% in 2016 and
in February 2018 by 0.9% in 2017. However, output has been falling
since 2017 Q2 and output in the final quarter
Other new private projects in the last three of last year was 5.9% lower than in the second
months, since our last forecast, are below £100 quarter. New orders suggest that output is not
million in value. The University of Bath submitted likely to improve this year. PFI education new
plans in March 2018 for a new school of orders fell 7.3% in 2017 and output is expected to
management covering 170,000 sq. ft. costing £70 fall 4.0% in 2018 before growth of 2.0% per year in
million. The University of Leeds appointed BAM 2019 and 2020.
Construction as its main contractor in March to
40
Downside Risks: taking over the project but with the projects less
than two-thirds of the way through construction,
• Rising construction costs hinder viability of done by another contractor, this may take even
projects longer as the previous delays due to cost overruns
The Department for Education stated in 2016 and M&E design issues will need to be overcome.
that there was a £286 million cost overrun on the
Priority School Building Programme. Further delays The £450 million Royal Liverpool and
and cost overruns within the privately-funded part
of the programme would put at risk the volume of
Broadgreen hospital redevelopment and
work conducted or require further funding. £350 million Midland Metropolitan Hospital still
Upside Risks:
awaiting new contractors to take over from Carillion
• Increased funding from non-EU students Outside of these projects, there is little in the way
of major new projects in privately-funded health
Further rises in student fees and rises in non-
to offset the impacts of the delayed work that
EU students could incentivise further university
has been signed in the last three months apart
campus and accommodation investment.
from the £48 million Pirbright Institute research
The prospects for the PFI Health sub-sector have laboratory in Surrey. New orders in 2017 were
deteriorated in the last three months. The two 8.6% lower than in 2016 and in 2017 Q4 were
largest ongoing projects in the sub-sector are not only £95 million, the fourth lowest level on record.
on site, two of the four major projects that led Output in the sub-sector in 2016 was 4.2% lower
to the liquidation of Carillion. These were the PFI than in the previous year and output in 2017
hospital projects; the £450 million Royal Liverpool was 4.7% lower. Overall, output is expected to
and Broadgreen hospital redevelopment and the fall by 5.0% in 2018 and fall 3.0% in 2019 but
£350 million Midland Metropolitan Hospital. until contractors are appointed for the two main
Carillion PFI projects, risks to the forecasts are
The Royal Liverpool and Broadgreen hospital clearly on the downside.
redevelopment was over 70% complete at the
point of Carillion’s demise in January 2018 and Downside Risks:
was expected to finish in May 2018. However,
• Further delays to projects
construction on site is currently on hiatus and
awaiting a new contractor. The most likely scenario • Rising construction costs hinder project viability
is that Laing O’Rourke will take on the Royal
Liverpool Hospital project in the next few weeks Higher construction costs, resulting from the effect
given that Laing O’Rourke’s M&E arm Crown of Sterling depreciation pushing up the price of
House Technologies was already on the scheme imported materials, or continued large increases in
working for Carillion. However, the appointment construction wages due to labour shortages, may
of a contractor and a completion date could be lead to a pause in activity as contractors re-assess
delayed further by remedial works that need to costs and margins.
be completed on eight major concrete support
Upside Risks:
beams on the project and the legal ramifications of
who pays for it. • The number of private sector hospital projects
increases
Work on the first PF2 health project, the £350
million Midland Metropolitan Hospital began in Private healthcare providers have increased
2016 and was expected to open in 2018. However, development in recent years and a small number
delays pushed the completion date back to Spring of medium-size projects would be enough to drive
2019 and then a review into lack of capacity and growth in the sub-sector during both 2019
the potential need for an additional floor led to and 2020.
a further delay in the completion date to 2020.
Reports are that Skanska is looking at potentially
41
Private Non-housing R&M
Private non-housing repair and maintenance (r&m) covers basic repairs and maintenance of
offices, shops, warehouses, factories and other privately-owned properties.
the UK’s second largest construction, facilities and

In 2017, household spending increased £ £ property management company and, despite its
at its weakest pace since 2011 £ £ £ liquidation in January, government and key private
sector clients remain committed to sustaining
Activity in the sector is dominated by work on facilities management services. As a result, the
offices and retail, and as a result, is driven by impact of its collapse on activity is expected to be
business investment and consumer spending, limited.
with recent data showing that both remained
weak in the final quarter of 2017. Business Downside risks:
investment increased 0.3% quarter-on-quarter • Weaker than expected growth in business
in Q4, following a 0.8% rise in Q3 and was investment and household spending
the weakest growth since Q1. Despite robust
global demand, business investment reported A prolonged period of heightened uncertainty
a modest expansion of 2.4% for the whole of over the UK’s future relationship with the EU and
2017, as ongoing Brexit-related uncertainties higher inflation is likely to weigh on business and
continued to weigh on business confidence and consumer confidence in the near-term. In this case,
decision-making. Given that such uncertainties are consumers and businesses are expected to rein
unlikely to abate any time soon, the OBR expects back spending and investment plans respectively,
business investment to remain subdued in the restraining activity in offices and retail.
near-term. Meanwhile, household spending in
Q4 rose 0.3% compared with Q3 and was 1.2% Upside risks:
higher than a year earlier. For 2017 as a whole,
• Stronger than expected growth in business
spending increased 1.7%, the slowest annual
investment and consumer spending
growth since 2011 as higher inflation and muted
real wage growth eroded purchasing power. Greater clarity over the future UK-EU
Looking ahead, household spending is expected relationship, alongside stronger global economic
to remain weak over the course of 2018, before conditions that strengthen business confidence
picking up as inflation eases and wage growth and investment intentions is likely to pose an
recovers. Reflecting this, private non-housing r&m upside risk to the sector. This, coupled with a
output is expected to increase 2.0% per year marked improvement in consumer spending,
over the forecast period. Overall, output in the assuming inflation falls back quickly towards its
sector tends to be less volatile, given the reliance 2.0% target and real wage growth recovers, is
on facilities management contracts. Carillion was likely to boost activity in the sector further.
Private Non-housing R&M Output

14,000 2.0% 2.0%
2.0%
4.0%
4.6%
4.1%
12,000 8.2%
2.3% 3.6%
7.1%
10,000
8,000
6,000
4,000
2,000
0 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
42
Industrial
The outlook for the industrial sector remains
positive, with output projected to increase
6.3% by 2020 as higher warehouses activity
offsets a fall in factories construction.
Growth over the next three years will

predominantly be driven by the warehouses sub-
sector, where activity remains buoyed by strong
demand from online retailers and manufacturers
for warehousing and distribution space. This is
expected to offset the weakness in factories,
where construction output is predicted to fall
amid slower domestic economic conditions and a
limited pipeline of new work. As a result, industrial
output is forecast to increase 2.3% in 2018 and
1.4% in 2019, before accelerating to 2.5% in 2020.
By the end of the forecast period, industrial output
is projected to total £4.6 billion, £0.3 billion higher
than in 2017.
Q3, which marked the strongest two quarters

Industrial output is of growth since 2010. The strong performance in
the second half of 2017 was largely due to robust
forecast to increase global demand, particularly from the Eurozone, the
2.3% & 1.4% UK’s largest trading partner, as well as the lower
Sterling that boosted exports. In Q4, UK exports
of goods increased 4.3% year-on-year to £85.7
in 2018 in 2019 billion, marking a seventh consecutive quarter
of growth. However, such benefits to export
Output in the factories sub-sector is primarily competitiveness are expected to be short-lived, as
driven by industrial production and manufacturing the Sterling continues to appreciate and coupled
output, which, in turn are dependent on domestic with weaker domestic demand, this is likely to
demand and exports. Recent data show that weigh on manufacturing activity. Recent industry
manufacturing output increased 1.2% quarter- surveys, notably Markit/CIPS have already provided
on-quarter in Q4, following growth of 1.5% in early signs of this, as output reached an eight-
month low in February. New orders for factories
Industrial Output by Sub-sector construction fell 30.9% year-on-year in Q4 and
2017 (%) were 8.2% lower for the whole of 2017, which is
expected to feed through to output in the near-
term. As a result, factories output is forecast to fall
Warehouses
4.0% in 2018 and 2.0% in 2019, before remaining
45% flat in 2020.
Factories
Manufacturing
output rose 2.6% in 2017, the
54% strongest
Oil, Steel & Coal
1%
growth
Source: ONS
since 2014
43
uncertainty regarding the UK’s future trading
relationship with the EU is undermining business
confidence, with other car makers still holding back
major investment decisions awaiting further clarity.
Downside risks:
• Manufacturers delay or cancel investment plans
• Weaker domestic and external demand
A prolonged period of heightened Brexit-related

uncertainty will inevitably make the UK a less
attractive investment destination and, as a result,
manufacturers are likely to delay or cancel major
investment plans in the near-term. A marked
Looking at the project pipeline, construction at
slowdown in domestic demand as household
McLaren’s £50.0 million factory in South Yorkshire,
spending weakens in response to above-
Boeing’s first European manufacturing facility
target inflation and subdued real wage growth,
in Sheffield and the world’s largest corrugated
alongside weak external demand, reflecting the
cardboard manufacturing facility worth £75 million
recent Sterling appreciation is likely to weigh on
in Ellesmere Port are all due for completion
manufacturing activity.
this year. Meanwhile, work at Aston Martin’s
£200 million manufacturing facility in South Upside risks:
Wales is currently underway and is scheduled
for completion in 2019. Going forward, activity • A weaker Sterling exchange rate boosts exports
will be supported by Berkeley Group’s plans further
to build a 150,000 sq. ft. modular factory in
• Stronger global economic growth
Kent and Siemens’s £200 million rail factory in
Hull. Construction on the latter is expected to Further falls in the Sterling, alongside stronger
commence later this year, subject to the final global economic growth may boost exports of
investment decision. Despite the outcome of the goods further in the near-term. However, such
EU Referendum in June 2016, major car makers, benefits to export competiveness are unlikely
including Nissan, Honda and Toyota have all re- to fully mitigate the prospective weakening in
announced their investment commitments to domestic demand.
the UK’s automotive industry. However, ongoing
Industrial Output
6,000
5,000 11.5% 2.5%

2.3% 1.4%
16.0%
9.5%
4,000 -6.2%
-3.0%
-9.5% -9.2%
3,000
2,000
1,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
44
The near-term outlook for warehouses remains A major downside risk to sub-sector growth
bright despite recent weakness in the sub-sector’s emerges if consumers rein back their spending
two key drivers. Recent data show that both sharply in the face of above-target inflation and
UK economic growth and consumer spending falling real wage growth. Faced with lower retail
eased in Q4, leaving growth for 2017 as a whole sales, retailers may cut back on expansions plans,
at 1.8% and 1.7% respectively, the weakest in denting demand for warehousing and distribution
approximately six years. Although this was echoed space. This, alongside a fall in speculative
in recent retail sales data, the proportion of development activity due to heightened Brexit-
internet spending has continued to expand and, in related uncertainty would result in lower activity
February reached a record high of 17.2%, reflecting over the three-year forecast period.
the ongoing structural change taking place in
the retail industry. This, in turn, has continued to Upside risks:
support demand for warehouses and distribution • Stronger than anticipated consumer spending
space and, according to Savills, take-up in the UK growth and a lower Sterling boosts online
warehouse market was estimated to have reached retailers’ and manufacturers’ demand respectively
13.1 million sq. ft. in 2018 Q1, the highest on
record and 115% above the long-term average, • Higher demand for warehousing facilities linked
with online retailers the biggest single user. This has to port expansions as a result of Brexit
boosted requirements for industrial units of over
500,000 sq. ft. and, as a result, Savills reported an If real wages recover in response to a pick-up
increase in built-to-suit (BTS) units, which are more in nominal wages and inflation falls back faster
bespoke facilities, during the quarter. New orders than expected, this is likely to boost consumer
decreased 3.3% year-on-year in Q4, following an
increase of 74.2% in Q3, which was largely due to Take-up in the UK warehouse
contracts being awarded on Amazon’s 2.2 million
market is set to reach
sq. ft. mega-shed project in Bristol. Orders however,
tend to be volatile on a quarterly basis, and on a
four-quarter basis, were 18.3% higher than a year
a record high of 13.1
m sq. ft. in Q1 (Savills)
earlier. This growth in new orders is expected to
filter through to activity on the ground and, as a
result, warehouses output is forecast to increase spending. This, as well as stronger export growth
10.0% in 2018, followed by a further 5.0% in both on the back of a lower Sterling exchange rate
2019 and 2020. and healthy global growth should buoy retailers’
and manufacturers’ demand for warehousing and
Downside risks: distribution space. Demand is likely to further
increase if requirements for industrial warehousing
• A sharp slowdown in consumer spending and logistical facilities, including bonded
• Speculative development declines due to warehouses and cold storages close to all UK exit
heightened economic uncertainty and entry points such as ports and airports surge
ahead of Brexit.
45
Infrastructure
With the overall outlook positive, infrastructure is forecast to remain a key engine of growth for
the construction industry if government delivers on major projects.
Over the three-year forecast period, activity Infrastructure Output by Sub-sector

will mainly be driven by work on large-scale 2017 (%)
infrastructure projects in the rail, water &
sewerage and electricity sub-sectors such as HS2, Harbours
the Thames Tideway Tunnel and Hornsea Project Electricity
4%
One. Even the relatively small harbours sub-sector 43% Water &
Sewerage
will be boosted by projects such as the £350
12%
million Aberdeen Harbour Expansion project.
In December 2017, the government updated
the National Infrastructure and Construction
Pipeline, setting out £462.7 billion worth of Gas, Air &
Communications
planned private and public investment over this 4%
Roads
Parliament, with £182.2 billion worth of projects 21%

from 2018/19 to 2020/21. However, the annual Rail 16%
spend is broadly flat over this period. In Autumn
Source: ONS
Budget 2017, the government increased the size of
the National Productivity Investment Fund (NPIF)
from £23 billion to £31 billion and extended it and adverse weather conditions in recent months.
by one year to 2022/23. This included a new Official statistics show that majority of Carillion’s
£1.7 billion Transforming Cities Fund to improve contracts were held with the Department of
local transport connections. However, it is the Transport (DfT). This is consistent with data
delivery of these infrastructure announcements from Barbour ABI, which showed that around
that will be key. By the end of the forecast period, 60% of Carillion’s active schemes or projects
infrastructure output is projected to total £24.5 with contracts awarded in which Carillion was
billion, £5.5 billion higher than in 2017. the sole major contractor were infrastructure
projects. Within their infrastructure work, 53%
Despite a positive outlook, risks remain on the of the projects were road schemes and 42%
downside, given the collapse of Carillion in January of the projects were rail schemes. However,
46
many of Carillion’s projects were joint-ventures Infrastructure output forecast to rise
(JVs) with other major contractors and since its
liquidation in January, partner contractors have
taken over Carillion’s share of work and staff on
these projects. Network Rail, which was Carillion’s 6.4% & 13.1%
largest client has continued to pay sub-contractors in 2018 in 2019
and suppliers over the past three months to
ensure that work continues on rail projects, whilst
Highways England have signalled that there will the London-Sheffield Midland Mainline north of
be no delays to major roads projects in which Kettering and the Oxenholme to Windermere
Carillion was involved. However, in March, line in the Lake District were all cancelled by the
Transport Scotland announced that the opening government in July 2017, on the basis that it was
of the £745 million Aberdeen Western Peripheral deemed unnecessary to electrify every line to
Route has again been pushed back to Autumn, deliver passenger benefits. However, in March,
owing to the collapse of Carillion and bad weather the National Audit Office (NAO) published an
conditions during the first quarter of this year investigation into the decision, which revealed that
even though the project was taken over by the cost overruns were the main reason. Reflecting
remaining two partners on the JV. Poor weather this, further delays or cancellations on existing
conditions in late-February and March disrupted electrification schemes cannot be ruled out.
construction activity over three working days,
with infrastructure among the sectors significantly
affected. The CPA estimates a potential £195
million loss to infrastructure output, which
assumes a limited amount of catch-up throughout
Work on Phase 1of HS2,
the year. The impact of the bad weather on between London and the
infrastructure has already been echoed in recent
survey data from Markit/CIPS, which showed that West Midlands, is due to begin in 2019
civil engineering activity fell at its fastest pace for
five years in March.
Looking at 2019, output growth is forecast
Growth forecasts for the rail sub-sector remain to accelerate to 20.0%, reflecting main civil
unchanged, with output expected to increase engineering works starting on Phase 1 of HS2, as
5.0% in 2018 driven by ongoing works on the £1.2 well as works under the next five-year Control
billion Northern Line extension to Battersea and Period CP6 (2019-2024), which has a budget of
the £642 million Bank station capacity upgrade £47.9 billion, £9.6 billion higher than the £38.3
project, which is expected to reach completion in billion allocated for the current control period,
2022. Furthermore, main construction work on CP5 (2014-2019). Network Rail stated that its
the £263 million London Overground extension focus will remain on delivering the enhancement
to Barking Riverside is expected to start this schemes that were deferred from CP5, including
summer and is scheduled for completion in 2021. the TransPennine Route Upgrade, Great Western
However, in December, Transport for London electrification, as well as Phase 2 of the East West
(TfL) reported a five month delay during the Rail project. Recent data showed that new orders
procurement process due to design complications increased 133.7% year-on-year to £1.8 billion in
and anecdotal evidence suggests that the start of Q4, which reflects contracts being awarded on
works could be pushed further towards the end the £2.2 billion TransPennine Route West of
of the year. Besides this, activity will be supported Leeds that will see work commence in 2019 Q2.
by electrification of cross-country routes, This follows growth of 994.5% in Q3, which was
including the Great Western Main Line between almost entirely due to seven contracts relating
London and Cardiff and the Midland Main Line to HS2. Activity on the project is expected to
between London and Kettering. However, plans start from 2019 and will occur over many years.
to electrify three routes across the UK: the Great Reflecting this, rail output is projected to increase
Western line between Cardiff and Swansea, a further 20.0% in 2020.
47
Downside risks: part of the Round 2 Offshore Wind Programme,
as well as works at Rampion are all scheduled
• Main works on HS2 delayed for completion this year. Although this suggests
• Work stalls under CP5 as the programme slower activity in 2018, this will be offset by main
comes to an end construction works starting on major projects
under the Round 3 Offshore Wind Programme,
A main downside risk to rail growth emerges including Hornsea Project One, the world’s largest
if main construction works on Phase 1 of the offshore wind farm, East Anglia ONE and Moray
HS2 project are pushed back. Moreover, higher East. Furthermore, subject to a final investment
construction costs fuelled by inflationary pressures decision, onshore construction works at Triton
could also exacerbate the project’s budget issues, Knoll Offshore Wind Farm (a Round 2 Offshore
pushing the total cost of HS2 above the estimated Wind project) is expected to start in mid-2018
£55.7 billion. Also, a potential hiatus between the and offshore construction in 2020. As a result,
end of CP5 and the start of CP6 could slow the sub-sector output is forecast to increase 7.0%
delivery of major projects. in 2018.
Upside risks: Looking ahead, output growth is expected to

accelerate to 20.0% in 2019, followed by growth
• Network Rail brings forward finance ensuring of 5.0% in 2020, driven by construction works
delivery of projects on Hornsea Project Two, which will overtake
Hornsea Project One to become the world’s
If Network Rail brings forward capital investment
largest offshore wind farm once operational in
from the next control period (CP6), increasing the
2022, as well as main works occurring on the
volume of work on the ground, in turn, boosting
£19.6 billion Hinkley Point C project. However, in
activity within the current control period (CP5),
July 2017, following a review of costs EDF reported
this presents an upside risk to sub-sector growth.
that the project risks being delayed by up to 15
months and, if this materialises, the total cost is
expected to reach £20.3 billion. This came after a
The world’s largest report was published by the National Audit Office
in June 2017, which estimated a potential increase
offshore wind project Hornsea One, to £22.0 billion. As a result, further delays and
will be constructed over 407km² cost overruns cannot be ruled out. Besides this,
an estimated 25,000 job opportunities will be
consist of 174 turbines created during the construction phase, with 5,600
& have a capacity of 1.2GW construction workers expected onsite at its peak.
With pre-construction works on the £10 billion
Wylfa Newydd nuclear project also anticipated
Electricity, the largest infrastructure sub-sector, to occur from 2020, if development consent is
is expected to enjoy double-digit growth over granted, this raises concerns over skills availability
the three-year forecast period. In the near-term, in the medium to long-term given that other major
activity will be underpinned by ongoing nuclear infrastructure projects in roads and rail are also
decommissioning, which includes Sellafield, the expected to occur at the same time.
UK’s largest nuclear site, and work around the
Downside risks:
National Grid power connections. Alongside
this, activity will be supported by a pipeline • Hinkley Point C delayed further
of projects in the offshore wind farm sector.
Construction work at the £2.6 billion Beatrice The UK and EU have agreed on a transitional
Offshore Wind Farm, located in the Outer Firth period that will last from 29 March 2019 until the
of Moray is currently underway and expected to end of 2020, which includes the provisions of the
be commissioned by the end of 2019. Meanwhile, Euratom Treaty. However, the UK will need to
construction of the 660MW Walney and 353MW secure agreements with the International Atomic
Galloper Wind Farm extension projects that form Energy Agency and any delays to this are likely
48
Infrastructure Output
30,000
7.0%
25,000 13.1%
6.4%
6.7%
20,000 21.4%
8.4%
2.3%
-3.0%
15,000
-10.6% -3.1%
10,000
5,000
0
2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019f 2020p
to impact on new build, notably, Hinkley Point C, -2025), which are due for submission to Ofwat
which is already at risk of being delayed further. in September and the draft determination is
expected to be published in March/April 2019.
Upside risks:
In 2017 Q4, output in the sub-sector declined
• Investor confidence improves leaving large-scale 23.7% year-on-year to £482 million, marking a
projects unaffected fourth consecutive quarter of annual decline, and
Improved investor confidence amid greater fell 13.5% for the whole of 2017 despite works
clarity regarding the future UK-EU relationship occurring on the Thames Tideway Tunnel project.
and stronger than expected economic conditions Contracts for the project were awarded in
present an upside risk to the sub-sector. This February 2015 and, as result new orders increased
would, in turn, allow large-scale projects, including 426.6% in that year. Output rose 11.5% in 2015
work previously paused under the Round 3 and 65.2% in 2016 even though main tunnelling
Offshore Wind Programme to get off the ground. works on the project are yet to begin. This
suggests that the ONS’s construction output data
Output in the water & sewerage sub-sector is not accurately reflecting activity on the ground
is forecast to increase 12.0%, driven by work and is likely to have been incorporated too early in
on the largest project in the pipeline, the £4.2 official data. Water & sewerage output is forecast
billion Thames Tideway Tunnel. Preliminary to remain flat in both 2019 and 2020.
construction is currently underway, with main
tunnelling works set to begin this later this year. Downside risks:
The project has £700 million of backing from the • Thames Tideway Tunnel delayed
EIB and following the EU referendum result, the
Bank has stated that its funding commitments A downside risk to sub-sector growth arises if
to the sub-sector will remain unchanged in the work on the Thames Tideway Tunnel suffers from
near-term, until a decision is reached on the UK’s delays due to cost overruns, slowing activity on
membership of the EIB. Besides this, activity will the ground. However, in March 2017, a report
be supported by work under the current five-year by the National Audit Office revealed that the
Asset Management Plan (AMP6) running from government has provided a contingent support
2015/16 to 2019/20, but water companies will package, which aims to mitigate any downside
mainly focus on efficiency, through maintenance of risks, including providing financial support if cost
existing assets, rather than new build. Meanwhile, overruns exceed 30% or if economic and political
water companies are preparing their business events make it difficult to access capital from debt
plans for the next regulatory period, AMP7 (2020 capital markets.
49
In terms of activity on the ground, work is
currently underway on the £1.5 billion A14
The Thames Tideway Cambridge to Huntingdon improvement scheme,
the UK’s largest road project. Construction
Tunnel will be 66m work on the A19/A1058 Coast Road junction to
deep,
relieve congestion, the A1 Leeming to Barton
25km and more than 7m improvement scheme and the £745 million
long, in diameter Aberdeen Western Peripheral Route (AWRP)
project in Scotland are all expected to reach
Upside risks:
completion this year. In March, Transport Scotland
• The focus shifts to new build under AMP6 announced that the AWRP project completion
date has been pushed further back to Autumn,
Alongside construction activity on the Thames owing to poor weather conditions and the
Tideway Tunnel, increasing focus on new build collapse of Carillion. This came after one of the
under the AMP6 will lead to stronger growth rates consortium’s partners announced earlier in March
over the forecast period. that the project would be completed in Summer,
six months later than planned. Given the project’s
Growth in the roads sub-sector is expected to
history of delays, further delays cannot be ruled
remain flat in 2018, as lower activity in Scotland is
out. In the near-term, alongside works picking
offset by works elsewhere in England. New orders
up under Highways England’s RIS, activity will
fell 39.4% to a six-year low of £1.6 billion in 2017,
be underpinned by smart motorway schemes,
which is expected to feed through to output.
which focus on the use of technology rather than
This is consistent with survey data from the Civil
new roads construction. According to Highways
Engineering Contractors Association (CECA),
England, five schemes are currently underway,
which showed that workloads and order books in
including the M4 Junctions 3 to 12. Construction
roads have remained weak since 2015 Q3. Going
on twelve others is set to begin during the
forward, output is projected to return to growth
forecast period.
and increase 3.0% in 2019, followed by a further
5.0% in 2020 driven by a pick-up in activity under Downside risks:
the £15.2 billion Road Investment Strategy (RIS),
reflecting higher capital expenditure in the final • Further cuts to local authorities’ funding
two years of Road Period 1. In October 2017,
• Focus shifts further to smart motorways
Highways England published its updated delivery
plan for 2017/18, which reported that around 60 Government focus on austerity in the near-term
of the 112 major schemes have either started could see funding to local authorities fall further,
or are committed to start between 2017/18 and constraining their ability to deliver on roads
the end of the first road period. However, it also projects. This, coupled with diminishing EU funding
revealed that sixteen schemes have been delayed, over the long-term, could see local government
six paused for review, whilst two are expected budgets stretched, leaving projects unfunded.
to be delivered in Road Period 2 (2020/21- Furthermore, an increasing focus on smart
2024/25). Overall, this suggests that the majority motorways, mainly technology-based, rather than
of work is heavily skewed towards the end of new roads construction could dampen activity in
the Road Period 1 and, as a result, this will need the sub-sector.
to be matched by a significant increase in skills
and capacity in order to ensure delivery of these Upside risks:
projects.
• Highways England brings forward finance
In 2017, 39.4% to a seven-year

If Highways England brings forward finance and
projects from the final year of the first road
roads new low of period that will ensure a smoother profile of
orders fell £1.6 billion works. This would provide higher workloads in
the short-term and ensure a gradual increase in
50
funding and investment over the RIS, rather than
the bulk of activity occurring in the final year of
the programme. Moreover, financial incentives to
local authorities mainly in the form of ring-fenced
funding could provide more clarity on roads
projects and, in turn, ensure delivery of them over
the medium-term.
The near-term outlook for the gas, air and

communications sub-sector remains unchanged,
with output forecast to increase 20.0% in
2018, from a low base, driven by works under
Manchester Airport’s £1.0 billion ten-year
investment programme, as well as Gatwick
Airport’s £1.2 billion and Heathrow Airport’s £3.2
billion five-year capital investment programmes
that will support activity throughout the forecast
period. Work under Luton Airport’s £229 million
investment programme continues apace, with
the newly-extended terminal due to be opened
later this year. At London City Airport, piling
and decking works that form the first stage of
construction under its ‘£480 million expansion
programme are expected to start this Spring. the UK. In 2019, sub-sector output is forecast to
In addition to this, activity will be supported increase 10.0%, before remaining flat in 2020.
by work under Stansted Airport’s five-year
transformational programme. Construction of a Downside risks:
new arrivals building, which has an estimated cost • Further delays in expansion to superfast
of between £120-£150 million is expected to start broadband
later this year and will take three years to build,
whilst redevelopment of the departures lounge A downside risk to sub-sector growth emerges if
that has an estimated cost between £180-£230 work under both Virgin Media’s and BT’s superfast
million will also commence in the final quarter broadband programmes faces delays. In this
of 2018. case, lower activity would be anticipated in the
near-term.
Sub-sector activity will additionally be driven
by work under BT’s £6.0 billion investment Upside risks:
programme to extend its ultrafast fibre and
mobile broadband network to at least 10 million • Substantial progress is made in expanding
premises by 2020, as well as Virgin Media’s £3.0 broadband across the UK
billion Project Lightning programme, which aims to
• New gas storage investment occurs
extend its fibre network to four million additional
premises by 2019. According to Virgin Media’s If progress is made on expanding broadband
preliminary results, 159,000 new connections across the UK, including work under both Virgin
were added in 2017 Q4, up from 147,000 in Q3. Media’s £3.0 billion and BT’s £6.0 investment
For the whole of 2017, this figure was 536,000, programme, this presents an upside risk to sub-
bringing the total to 1.1 million premises since sector growth. This, as well as new investment
the project’s inception in February 2015. In the in gas storage in response to utilising shale gas
2018 Spring Statement, the government allocated reserves and given the closure of Rough, which
£95 million from the £190 million Local Full Fibre accounted for 70% of the UK’s total storage
Network (LFFN) challenge fund to support the capacity, would underpin stronger growth rates
roll-out of full-fibre broadband to 13 areas across over the next three years.
51
Infrastructure R&M
Infrastructure repair and maintenance (r&m) includes work on assets owned by utility
companies, publicly-funded assets such as roads and rail, airports and energy-generating facilities.
Highways England has a maintenance budget of

£1.3 billion over its first fixed five-year investment
period, which began in 2015/16. In 2018/19,
expenditure on maintenance is set to rise to
24,496
miles of road
£268 million from the £256 million allocated for need repairing in the
2017/18, before falling to £265 in the final year of next 12 months
the first road period. However, local authorities
(Source: AIA 2018 ALARM survey)
manage 97% of the roads network and remain
financially-constrained. According to the Local future severe weather conditions. However, the
Government Association, local authorities will Asphalt Industry Alliance’s 2018 ALARM survey
face an overall funding gap of £5.8 billion by 2020. reported that there was a 13-year backlog of local
As a result, basic repairs and maintenance are roads maintenance in England, at a value of £8.2
unlikely to be a key driver of work in the sector billion. This is lower than the one-time catch-up
despite the urgent need for basic repairs to roads. cost of £10.8 billion estimated in the 2017 survey.
In 2016, the government allocated £70 million For London, the average maintenance was 9 years
of funding from the £250 million Pothole Action (£465.9 million), which is marginally down from
Fund for use by local highway authorities across the 10 years estimated in the previous survey. The
England in 2017/18 that will help repair 1.3 million survey also reported that 40% of the local road
potholes. Furthermore, in Autumn Budget 2017, network is currently classified as amber or red. Of
the government announced that an additional this, 24,496 miles of road is identified as red (poor
£45 million will be invested in the Pothole Fund in overall condition), suggesting the urgent need for
2017/18 to tackle around 900,000 potholes across maintenance in the next 12 months.
England. More recently in March, government
announced a further £100 million to help repair In the rail sub-sector, r&m output is likely to
two million potholes and protect roads from be overshadowed by new build activity during
52
Infrastructure R&M Output
10,000
8.1%
3.8% 1.0% 1.0% 0.0%
12.3% 3.6%
8,000 -3.5%
-2.1% -6.3%
6,000
4,000
2,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
the remainder of CP5. According to the ORR’s of this, local authorities may be forced to finance
Network Rail Monitor published in December, new build from maintenance budgets in order
Network Rail’s spending on maintenance is ensure delivery. In addition, increased pressure on
forecast to reach £1.4 billion in 2017/18, £15 government departmental budgets could lead to
million higher than its initial budget. Furthermore schemes being cancelled or delayed.
rising cost pressures and a backlog of work under
the current control period are likely to increase Upside risks:
financial pressure on CP6 (2019-2024). In February, • Central government increases infrastructure r&m
Network Rail published its Strategic Business spending quickly
Plan for CP6, which focuses on maintenance over
enhancements. Of the total £47.9 billion funding A large increase in ring-fenced funding to local
allocated for the five-year period, £18.5 billion has authorities for transport projects that allows work
been earmarked for operations and maintenance, to get off the ground, in turn, providing a boost
a 25% increase from CP5, £18.5 billion for to both infrastructure r&m output and the wider
renewals and £10.1 billion for enhancements. economy presents an upside risk.
Following an increase of 3.8% in 2017, growth in
the infrastructure r&m sector is forecast to slow
to 1.0% in both 2018 and 2019, in part owing to
the impact of severe winter weather conditions
in February and March on activity on the ground.
Thereafter, growth is projected to remain flat
in 2020.
Downside risks:
• Local authorities subject to further budget cuts
• R&m output is likely to be overshadowed by new

build activity rather than basic maintenance
Further cuts to local authority funding amid

constrained spending by central government
under any further austerity programme pose a
downside risk to sub-sector activity. In the event
53
The Construction Products Association represents
the UK’s manufacturers and distributors of
construction products and materials. The sector
directly provides jobs for 313,000 people across
23,000 companies, and has an annual turnover
of more than £56.5 billion. We act as the leading
voice to promote and campaign for this vital UK
industry.
The CPA produces a range of economic reports

including quarterly Construction Industry
Forecasts, Construction Trade Surveys, State of
Trade Surveys and various bespoke research.
These publications are available free to
members and via subscription to non-members.
To learn more, please contact our
Economics team at 020 7323 3770
or visit www.constructionproducts.org.uk.
54
55
ISBN: 978-1-909415-28-7
April 2018
Construction Products Association

26 Store Street
London
WC1E 7BT
Tel: 020 7323 3770
www.constructionproducts.org.uk

CPA Construction Industry Forecasts Spring 2018

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Construction Industry

Private Housing RM&I 21

Public Housing RM&I 26

Public Non-housing R&M 32

Private Non-housing R&M 42

© 2018 Construction Products Association. All rights reserved.

All construction figures (starts, completions, orders and output)

The information in this booklet has been prepared by

The key driver of growth in the forecasts remains

Source: ONS, Construction Products Association

% annual change Actual Actual Estimate Forecast Projection

Private 29,717 32,182 33,791 34,467 34,812

13.1% 8.3% 5.0% 2.0% 1.0%

Public 4,861 5,498 5,663 5,833 5,833

-3.7% 13.1% 3.0% 3.0% 0.0%

Total 34,578 37,680 39,454 40,300 40,644

10.4% 9.0% 4.7% 2.1% 0.9%

Other New Work

Public Non-Housing 10,770 10,387 9,891 9,983 10,131

3.8% -3.6% -4.8% 0.9% 1.5%

Infrastructure 17,851 19,055 20,275 22,928 24,533

-3.0% 6.7% 6.4% 13.1% 7.0%

Industrial 4,439 4,308 4,408 4,469 4,581

-6.2% -3.0% 2.3% 1.4% 2.5%

Commercial 28,183 29,552 27,243 27,024 27,202

7.5% 4.9% -7.8% -0.8% 0.7%

Total other new work 61,243 63,302 61,817 64,405 66,448

2.5% 3.4% -2.3% 4.2% 3.2%

Total new work 95,821 100,982 101,271 104,705 107,092

5.2% 5.4% 0.3% 3.4% 2.3%

Repair and Maintenance

Private Housing RM&I 19,908 21,883 21,883 22,321 22,767

7.2% 9.9% 0.0% 2.0% 2.0%

Public Housing RM&I 7,708 7,389 7,020 7,020 7,020

-5.3% -4.1% -5.0% 0.0% 0.0%

Private Other R&M 12,013 12,490 12,740 12,995 13,255

4.6% 4.0% 2.0% 2.0% 2.0%

Public Other R&M 4,982 4,964 4,864 4,864 4,864

-1.3% -0.4% -2.0% 0.0% 0.0%

8,260 8,573 8,659 8,746 8,746

Total R&M 52,871 55,299 55,166 55,945 56,651

1.6% 4.6% -0.2% 1.4% 1.3%

TOTAL ALL WORK 148,692 156,281 156,437 160,650 163,743

3.9% 5.1% 0.1% 2.7% 1.9%

Source: ONS, Construction Products Association

October Release September Release

2015 2016 2017

UK economic growth is expected to be sustained

Actual Actual Estimate Forecast Projection

Fixed Investment 1.8% 4.0% 2.0% 3.0% 2.0%

Household Consumption 3.1% 1.7% 1.6% 1.8% 2.0%

CPI Inflation 0.7% 2.7% 2.5% 2.0% 2.0%

RPI Inflation 1.8% 3.6% 3.0% 2.7% 2.7%

Bank Base Rates - June 0.50% 0.25% 0.50% 0.75% 1.00%

Bank Base Rates - December 0.25% 0.50% 0.75% 1.00% 1.00%

Source: ONS, Construction Products Association

The depreciations in Sterling since the EU

In terms of numbers of people in employment and

Interest Rates and Inflation