In light of solid growth predictions, Julia Court examines the construction industry’s opportunities and challenges in the UK.
With the UK construction sector predicted to grow by 2.9 per cent year-on-year from 2015 to 2019, the pressure is on for the industry to meet these targets and to ensure this pattern of growth is sustainable.
Growth is expected to focus strongly on private sector residential housing, commercial offices and infrastructure and energy projects. The funding shortfall in the public sector stands out. The three major party conferences this Autumn gave no big clues as to future plans on infrastructure, although the Autumn Statement due on 3 December may shed some light on next steps for the National Infrastructure Plan.
Attracting foreign investment requires a good infrastructure. An important step forward has been made with the recent call for a national infrastructure body to develop long-term plans, but such a body must work with central government to ensure funding for future projects.
With this strategy, not only will money go to the most deserving projects, but it will also be possible to track the progress of other projects.
On a regional level, the Greater London Authority (GLA)’s London Infrastructure Plan 2050 is a welcome development, as it identifies the exponential needs for growth across the capital. That said, there is a long way to go in converting these ideas into concrete plans.
In spite of these public sector uncertainties, foreign investment into the UK is increasing and levels of interest in our construction market remain high. Spearheaded by sovereign wealth funds and Asian and Canadian investors, London’s real estate opportunities are prized by investors thanks to the superior and secure financial returns they offer. Retail and logistics assets in particular are attracting interest from investors outside of London, as well.
There has been a resurgence in the mid-level debt market for real estate development. Alternative forms of investment are becoming more common, in addition to the more traditional sources of funding provided by banks. Debt financing from Asian markets like Singapore as well as Urban Exposure and private equity funders are boosting the market’s liquidity.
It’s important for construction firms to show investors that they can deliver high-quality projects on time and on budget despite recent growth in the industry. Squeezed margins remain a frequent challenge for construction companies – with past decisions affecting current profitability – and an enormous number of external factors affect the performance and success of construction projects, from competitive pricing, rising labour, materials and transport costs to the growing skills shortage in the sector. As a result, success in capitalising on growth is far from certain.
Instruments of change
The industry, on the other hand, is making strides to address these issues. Technology and building information modelling (BIM) are set to make a huge difference to construction design and processes, increasing efficiency in the long-term. The successful companies of the future will be those with the resources to invest in research, skills and innovation. More and more in-house design skills will be required as technology improves because the divide between the initial design and construction processes may become a barrier to efficiency.
Increasing the efficiency of the construction process as a whole is also necessary if growth is to be turned into profit. In order to meet projected growth targets, the construction industry must quickly overcome the skills shortage, which the Construction Industry Training Board (CITB) estimates will require 40,000 new workers each year. In order to fill the void left by the recession-era exodus of skilled project managers, the UK must find ways to entice those workers back to the country.
Risk management is also an important consideration. For commercial and legal reasons, we must begin assessing risk at the bid stage and implement stricter risk management measures throughout the construction process in order to avoid significant losses due to one small issue. Supply chain management is critical for general contractors because new designs may necessitate the involvement of specialised subcontractors. Problems with subcontractors’ design, manufacture, and contractual obligations can arise if they aren’t closely monitored.
The building blocks of success
In the future, we can expect to see more consolidation in the sector as companies seek to diversify and find new ways to deal with the problems they face today. Firms in the UK and abroad can work together with foreign investors to co-invest in projects and earn returns as investors or developers, rather than just contractors.
The opportunity to provide private sector funding for infrastructure and energy is also likely to be a key element of future projects. As with all joint arrangements, these need to be set up in the right way – both legally and commercially – and with a thorough understanding of respective cultures for the relationship to be successful.
Julia Court, partner & co-head of construction group, King & Wood Mallesons SJ Berwin