Julia Court discusses the opportunities and challenges facing the UK’s construction industry in light of robust growth predictions
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 one notable gap is public sector funding. 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.
Infrastructure is key to attracting investment from abroad. The recent call for a national infrastructure body to develop long term plans would be a positive step forward, but it’s vital for such a body to work hand in hand with central Government to secure funding for future projects.
This approach will not only ensure that investment is channelled to the projects in most need of financial support but also that there is visibility on the future projects pipeline.
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. Outside of London, investment potential is also looking positive, with clear signs of interest in retail and logistics assets in particular.
The market for debt financing for real estate development has also returned, especially at the mid-level. In addition to traditional funding from banks, alternative forms of investment are also emerging. New players such as Urban Exposure and private equity funders are starting to make an impact, along with debt financing from Asian markets such as Singapore that are adding liquidity to the market.
Despite recent growth the industry is still fragile, and construction companies must position themselves as capable of delivering high quality projects on time and on budget if the sector is to continue to attract investment. 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. Capitalising on growth is, therefore, far from certain.
Tools for change
However, the industry is taking steps to tackle these challenges. 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. As technology develops, we may also see the split between initial design and construction processes becoming more of a bar to efficiency, leading to greater in-house design skills being developed.
Translating growth into profitable opportunities also requires more effective management of the construction process as a whole. The skills shortage is one hurdle that the industry needs to overcome quickly, with the Construction Industry Training Board (CITB) estimating that 40,000 new workers will be needed annually to meet predicted growth targets. One of the biggest impacts on the success of projects is the lack of experienced project managers, and to bridge this gap we need to entice the talent that went abroad during the recession to return to the UK.
Risk management is also an important consideration. One small problem on a project can lead to significant losses, and it’s vital that we start assessing risk at bid stage and implementing stricter risk management measures throughout the construction process, in a commercial and legal sense. For main contractors supply chain management is crucial, as innovative designs may require engagement of specific sub-contractors. If not monitored carefully, sub-contractor design, manufacture and contractual issues can result in significant problems.
Foundations for success
As we look to the future, we are likely to see more consolidation in the sector as companies look to diversify and find new ways to manage the challenges they face. Foreign investors offer new opportunities for firms to co-invest in projects in the UK and abroad, and to earn returns as investors or developers – not 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