Brexit uncertainty. Government intervention. And the rise and rise of Hull. For UK developers, 2018 is set to be a pivotal year. The country will finalise its European divorce proceedings, house builders will continue to rely on Help to Buy, and new regions could cement their place as investment hot spots for commercial and residential developers.
Forewarned is forearmed. By entering 2018 in possession of the facts, UK developers can be positioned to reap the benefits of positive trends and to take every challenge in their stride.
Savvy businesses are considering the following when looking at their plans for 2018:
1. THE GROWTH OF THE REGIONS
Big value projects are looming large outside the capital. Historically, the top 10 projects in the country have been in London. However, in 2017, there was regional spread, with the North West, Yorkshire and Humber featuring, along with the wider South East.
Outside London, scheduled residential projects include the GBP 130 million West Campus student accommodation block in Hull; Portugal Street East, a development of 340 flats, plus retail space, valued at GBP 150 million, and Charter Square, a GBP 120 million development in Staines.
Currently, London is the eighth largest economy in the world, with some commentators estimating this will fall to 15th post-Brexit.
It is expected that the city will remain a global capital, with occupiers still looking for space. Some developers are hedging their bets via smaller commitments in the capital or considering the growth profiles of both the London boroughs and regional cities. Many are committed to continuing to invest, but with a focus on the quality of their investments.
2. CONSTRUCTION SKILLS SHORTAGE
The decline in worker numbers will continue to bite, as construction firms struggle to recruit staff in the numbers required to deliver projects on time. If developers are unable to complete projects on time, this can result in reputational damage, diminished share prices and reduced investor confidence.
The 2007 recession caused a drop in workforce and slump in skills training, something the UK construction industry is still struggling to recover from.
The workforce is ageing, with staff aged 60 plus increasing, as workers aged 30 and under decrease, according to the Chartered Institute of Building. It is predicted Brexit may result in a further workforce reduction of anything from 176,500 to 214,000.
Innovative thinking can help address the issue. Canny companies are attracting school and college leavers by revamping their training and development packages. They’re embracing diversity, too, in order to draw from a wider talent pool. And they are structuring the benefits packages to position themselves as employers of choice in the industry.
In addition, companies are employing measures to eliminate waste and duplication. They are employing ageing workers in less strenuous roles, where their experience and skills can be used to assist younger workers. And they are utilising new technology to assist with manual jobs, such as heavy lifting, that require more than one worker.
3. COMPETITION FOR LAND
Demand – and prices – for residential development land could be heating up, thanks to government house building targets. Conditions for major residential builders in recent years have been favourable and, currently, land market conditions remain benign. However, the market could be set to change, due to the government build target for 300,000 new homes a year, which is 38% higher than the amount currently being built.
“Over the past five years, average green field land values across the UK have risen by a total of 21.2%, significantly below new build house price growth,” reports Propertywire.com.
“For now, land market conditions remain benign for major house builders, but they face increasing competition from other players, both for strategic and shorter term land, ready to build out,” adds Emily Williams, Senior Residential Researcher at Savills, the real estate services provider.
“To maintain benign conditions, we need to see much more land being brought forward, with more planning consents in the areas where demand is highest.”
The fastest growing markets are in the north of England and Scotland. Underpinned by strengthening housing demand in these markets, green field values rose 4.2% and 2.7% respectively in 2017.
4. INFRASTRUCTURE WOBBLES
There is a concern that infrastructure investment in the UK and Europe could have peaked. In the UK, infrastructure projects rely heavily on funding from the European Investment Bank (EIB). The feeling is that if the EIB reduces or eliminates funding, then the future of some UK infrastructure projects will be put into doubt.
While HS2 is surging ahead, and the Lower Thames Crossing has been given the green light, some experts fear that other projects will be pulled, profits warnings issued, and that contractors could fail.
Network Rail has dialled back its spending plan, there are uncertainties surrounding funding for the Northern Powerhouse project, and Crossrail 2 is still in the consultation phase. According to Crossrail 2’s website, “…dialogue continues between technical staff, stakeholders and local authorities.”
On a more positive note, finance is increasingly coming from infrastructure funds and insurance fund pension debt. With interest rates staying low, investment from banks is on the rise, and new models are being developed to support the continued growth.
Beyond the UK, forecasts for the US, Latin America, Africa and Asia are more optimistic, with none of these territories believed to be at the top of their markets yet.
5. PPP: A CHANGING LANDSCAPE
In the UK, the struggles and collapse of construction services companies have thrown public private partnerships (PPP) into the spotlight.
The liquidation of Carillion, formally the UK’s second biggest contractor and service support company, and the publically documented financial challenges of some of its competitors, could bring the existing PPP model under scrutiny. That being said, there are still some interesting projects in procurement at present such as the Silvertown Tunnel in London.
For developers looking for PPP deals opportunities beyond the UK are still widespread. Latin America is a healthy market and there is a surge of business in North America. There are some 34 projects in procurement in the US alone, all at various stages from feasibility to financial close, with an estimated capex of more than USD 20 billion.
The PPP market in Canada has been established for some time now, with Ontario and British Columbia being the most active Canadian provinces. The market looks positive, with projects such as the USD 2.2 billion Gordie Howe International Bridge, to be constructed between Detroit, Michigan, and Windsor, Ontario.
Turkey is currently investing heavily in infrastructure, including the USD 2.8 billion Canakkale 1915 Bridge, with PPP featuring heavily as a funding model.
6. POLITICAL RISKS EMERGE CLOSER TO HOME
Political risk is defined as the risk an investment's returns could suffer as a result of political changes or instability in a country. Traditionally, it has been associated with emerging economies and unstable governments. However, in the wake of Brexit, some commentators regard the UK as presenting a political risk of its own.
Consumer inflation – and housing prices – have been on the rise. The weak pound is making imported materials more expensive, adding to the inflationary environment, and having potential implications on supply and demand.
Political risk could affect investor interest, also, in the years ahead. The industry has been resilient so far but complacency is not advised.
TALK TO YOUR BROKER
Property and infrastructure development comes with a unique range of risk and insurance issues. For the best deals, contact a specialist construction insurance broker. They will have the market expertise and industry knowledge required to tailor policies to suit your business and its needs.
For more information, please contact Andrew Birt, Senior Partner on +44(0)20 7528 4927 or email firstname.lastname@example.org
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