A reflection on economic challenges for the UK construction industry in 2023

The UK is not in recession. Equally, there was also no growth in the UK economy between October and December 2022.

So, we stand at something of a crossroads.

When asked “Do you want the good news or the bad news?” studies show more than 75% of people prefer the bad news first, followed by the sweetener of good news. So, the not so good news first.

The challenges

The challenges we are facing are well known in the industry. Some of the key issues are:

• Rising costs. Most overheads are rising: materials, labour, energy costs and lending and insurance costs. CIC reports that the cost of construction materials and components are still 44% higher than pre-Covid levels.
• Materials shortages and delays. The Construction Products Association (CPA) winter construction output forecasts anticipate up to a 4.7% fall in activity in 2023.
• Labour shortages, the skills gap and competition for good talent. By 2027 the sector will need an estimated 225,000 extra workers.
• Slowing project volumes. Recent Glenigan Insights predict a 2% decrease in demand for new construction projects.
• Increased responsibility to design and deliver projects in a sustainable way and the expansion of Ultra Low Emission Zones for London and possibly elsewhere.
• Numerous reforms and increased regulations. Most notably, all aspects of the building safety reforms affecting projects from start to finish and inside out. Changes have also been made to planning law.

Recent key developments in planning law

• Scope of s73 permissions amends to planning permissions - recent cases challenge the limits as to what constitutes minor material amends and how far this can be interpreted. A recent case (Finney v Welsh Ministers) concluded that you cannot amend the description of the development using a s73 application. The draft Levelling-up and Regeneration Bill 2022 proposes a new s73B mechanism to allow non-substantial changes to be made to planning permissions – but when and how this will be implemented remains to be seen.
• Drop in permissions – the position relating to ‘drop-in’ planning permissions changed with the ruling of the Court of Appeal in Hillside Parks Ltd v Snowdonia National Park Authority. This makes it clear that if two developments on the same site are incompatible, once the later permission is built out, no further development can take place pursuant to the earlier permission. This will apply to the whole site, not just the area affected by the ‘drop-in’.
• Nutrient neutrality – developments proposed for areas subject to Natural England’s nutrient pollution controls (updated on 16 March 2022 and taking immediate effect) now need to demonstrate that any new development would be “nutrient neutral” before planning permission can be granted. On-site or off-site mitigation strategies need to be built into the development proposal to ensure the development is ‘nutrient neutral’.
• The requirements for Biodiversity Net Gain (BNG) - from November 2023, the Environment Act 2021 will require developers to provide a minimum of 10% increase in the biodiversity compared to the pre-construction condition of the site. BNG can be provided by works on-site, or offsite on land controlled by a developer, third party or as part of a larger habitat bank site or by acquiring credits issued by the Secretary of State who will use the proceeds to deliver BNG.

Some of these challenges have been long running and others are more recent.

The impact on the construction industry, particularly on contractors who are commonly operating on very narrow profit margins already, will be significant.

• Begbies Traynor have reported that 77,077 businesses in the sector were classed as being in “significant financial distress” at the end of 2022.
• Construction was the largest proportion of total company insolvencies in England in 2022.

The opportunities

It is not all bad, there is light at the end of the tunnel and opportunities for those who can adapt.

In its Winter 2023 UK Market Intelligence (UKMI) report, Turner and Townsend forecast that real estate tender price inflation (TPI) will settle to 3.5% in 2023 before falling to 2.5% through 2024. For infrastructure, TPI is anticipated to be 5.5% over 2023 and soften slightly to 5.0% through 2024. This, says the report, is partly being fuelled by the Government’s recommitment to infrastructure spending including projects such as Sizewell C and HS2.

Challenges can force a different perspective, bringing into focus opportunities for positive change.

Demand is consistent and increasing in areas such as hotel development and buy to rent which present a long-term income opportunity for the investment market. Demand is continuing in infrastructure, private housing, repair, and maintenance. Those who can navigate increased regulation, pass on rising costs, manage delivery expectations and retain their staff can expect to benefit from increasing demand in these sectors.

The UK construction industry has faced challenges before and has a proven record in adapting to changing economic conditions. UK construction productivity is currently behind the average, with other sectors experiencing growth. According to Oxford Economics, construction productivity fell by an average of -0.6% each year between 1997 and 2019. Over the same period, the productivity of the whole UK economy rose by 2.8%, while the productivity of manufacturing grew by 3.9%.

Success will inevitably involve more efficient procedures and projects. Innovation in the industry will be key, whether that is the increased use of modern methods of construction, or use of BIM. These innovations can bring faster, cheaper, more efficient and effective construction. To be competitive, firms need to keep up with this modernisation (appreciating that this too requires investment).

Funding and support are available if one knows where to look for it. For example, the Apprenticeship Levy. Lending continues and capital funding remains available.

Where does that leave us?

There is good news and bad news. What will make the difference is what we do about it.

Good things may possibly come to those who wait but there is much more to be gained from having a plan of action and strategy to deal with these issues head on. You understand your own business, how the challenges can be met or at least mitigated, and how to take advantage of continuing (or even increasing) demand.

In the short term it is likely that the most pressing issue will involve addressing the financial security and sustainability of projects.

This Insight will be followed by two further Insights considering how specific challenges and risks might be identified and potentially avoided or, if risks materialise, how these might be managed and mitigated.

“Good fortune is what happens when opportunity meets with planning.” ― Thomas Edison, inventor

At Weightmans we understand risk, whatever the context or specifics. We can use the law to your commercial advantage. We listen to our clients and can recognise what you really need. We base our solutions on what is important to you. You will find that we are genuinely interested in how you are adapting to risk and the steps you are taking to become more resilient in the face of challenging market conditions.