Current market conditions within the property and construction sector remain challenging, but the short-term outlook for 2024 is not so bleak, with opportunities for growth and profitability.
January growth figures highlighted housebuilders performing well, with monthly construction output estimated to have increased 1.1% in volume terms. Additionally, six out of nine sectors saw a significant rise, with main contributors to this increase being private new housing, and non-housing repair and maintenance - increasing by 2.6% and 1.8% respectively.
High mortgage rates have impacted residential property and private investors have been reluctant to back commercial property, but government support may help take up the slack.
Mortgage rates are set to remain well above pre-pandemic levels for the foreseeable future in line with inflationary expectations. With the UK falling into a recession at the end of 2023, it’s been a difficult time for all businesses.
However, we are beginning to see lenders develop more confidence in the market, offering lower rates in 2024.
With mortgage rates topping 6% in 2023, and little sign of a significant drop in the short term, house prices are at risk of coming under pressure and falling - especially as low fixed-rate mortgages come to an end.
Developers may think twice before starting new projects due to these challenging conditions, or risk a decrease in returns on investment by needing to drop their house prices. There have also been some recent changes to planning legislation which may threaten the growth of housebuilding going forward.
Although inflationary pressures are likely to ease over the next few years, tighter environmental standards that are set to come into place from 2025 have the potential to push up costs and reduce profitability.
Under the Future Homes Standard, all new homes from 2025 are required to produce between 75%-80% fewer carbon emissions than those built before 2022. Regulations also state that new homes need to produce 31% less carbon dioxide (again, compared to those completed before 2022).
The government renewed its Affordable Homes Programme for 2021-2026, which contained a multi-year settlement of £12.2 billion - the largest cash investment made in affordable housing in a decade.
The 2020 Budget also confirmed allocations in the Housing Infrastructure Fund which totalled £1.1 billion, to build 70,000 new homes in high-demand areas. This government support and funding will be vital for residential construction contractors, who may rely on these funds to generate adequate profits.
Authorities in the largest 20 cities and towns in England will now be made to follow a “brownfield presumption” if housebuilding drops below expected levels, which is more positive news for residential construction firms.
Due to market uncertainties, we’ve seen a reluctance among private investors to commit to spending significant sums of money into capital ventures.
Hikes in interest rates and inflation continue to weigh on new projects, although firms are able to draw on a strong order book of government-tendered contracts to continue to grow and generate revenue.
After orders declined in 2022/23, high-interest rates and stubborn inflation will continue to weigh on both the private commercial and industrial construction sectors in the shorter term.
That being said, inflationary pressures are set to ease slightly from current levels which is good news in the medium and long term.
High material costs and a shortage of labour will continue to remain problematic, however.
Government-led investments in construction projects proved to be significantly more resilient and reliable during the pandemic and the subsequent economic downturn that came with it. Post-pandemic infrastructure is continuing to offer an abundance of tender opportunities for firms to secure.
The promise of 40 hospitals by 2030 as part of the Health Infrastructure Plan (HIP) will generate more tender opportunities at a value in excess of £3 billion.
Furthermore, through the School Rebuilding Programme, the government has committed to delivering 50 new schools per year, which should provide great benefit to commercial construction contractors.
The ongoing shift towards online spending habits will continue to drive hefty demand for warehouses, whereas new retail developments will become increasingly scarce due to the associated costs.
Future demand for office space remains uncertain, with most developers surveyed by Deloitte anticipating a 10% reduction in long-term demand for London office space, as a result of hybrid and flexible working arrangements.
There’s certainly a lot to think about at the moment for construction companies, and we’re aware of the pressure and challenges that your firm may be facing.
If you’re looking for an adviser who understands the industry and has vast experience in matters such as CIS, get in touch with our team of experts today.
