Construction Industry (UK)

Executive Summary

MARKET OVERVIEW

In 2000, the UK construction industry's output was £69.53bn at current prices, up from £55.24bn in 1996. It is of major importance to the UK economy, accounting for 7.4% of UK gross domestic product (GDP) in 2000. As well as its economic significance, the construction industry is also a major employer. The majority of private contracting firms employ fewer than four people, but in terms of the value of work done, the industry is dominated by a small number of large companies.

The industry faces some fundamental challenges — particularly the need to adopt a less confrontational attitude and work more within the concept of partnership arrangements. High-level government reports have made these and other points, such as the benefit of working to targets set by key performance indicators (KPIs). There has been concern about the poor-quality work done by `cowboy builders', and the distress they cause for many years. A government-initiated quality scheme to provide customer assurance got off to a very slow start.

A major challenge is the lack of skilled labour throughout the industry. Some companies consider that this is serious enough to be a limiting factor in their business development.

The UK has a tradition of high home ownership, which, coupled with an old housing stock, means that repair and maintenance work is an important part of the construction industry.

With the increase in public-private partnership (PPP)/public finance initiative (PFI) schemes, the boundary between public- and private-sector work is becoming less distinct.

This Review analyses the construction industry in terms of the major sectors of housebuilding, infrastructure, industrial and commercial work. It also provides an analysis of the building materials market.

HOUSEBUILDING

Housebuilding is the second-largest activity in the construction industry, accounting for 38.6% of output in 2000. Of new housing work, public-sector construction showed a very small upturn in 2000 following years of decline. This could be the beginning of an upturn resulting from government-initiated urban renewal schemes. Private-sector new work grew each year between 1996 and 2000.

UK housing starts in 2000 were up by more than 25% over the previous year. Housing starts fluctuate, with the highest number of starts in the past 5 years being in 1997/1998.

Most of the housing completions in 2000 were in the South East and the East of England. Completions in London have declined in recent years, and this has contributed to the pressure on the housing market in the South East in general (completions have also decreased slightly in the South East over previous years).

There were 24.6 million dwellings in Great Britain in 1999/2000, of which almost 68% were owner occupied — an important factor in stimulating the repair and DIY markets. Three-bedroom houses are the most popular type of dwelling, followed by those with four bedrooms. The most popular size of flat is two bedrooms.

The structure of households is changing. Government sources expect the number of married-couple households to drop between 2001 and 2021, while the number of people living alone is expected to rise.

Housebuilding output is forecast to increase by 19% at constant 1995 prices between 2001 and 2005.

INFRASTRUCTURE

In 2000, infrastructure accounted for 9.2% of all construction work — a slightly lower figure than for the previous 4 years — and was worth £6.43bn. Road building is the main source of work, with the Government's 10-Year Transport Plan giving a boost to expenditure. Gas, air and communications formed the next most significant market. Water and sewerage activities continue to be a major source of work, largely as a result of determinations by the water industry regulator, Ofwat. A major upturn can be expected in the railway industry as a result of recent accidents.

There is a trend towards PPP/PFI projects in infrastructure work. Infrastructure output is forecast to grow by 24.1% at constant 1995 prices between 2001 and 2005.

INDUSTRIAL CONSTRUCTION

Industrial construction is the smallest of the basic sectors of the whole construction industry. In 2000, the output of private construction work was £3.7bn, or 5.3% of the total construction sector. The most significant type of work was that for factories, followed by warehouses.

Warehousing output has seen year-on-year growth since 1996. This growth in warehousing shows the importance of product distribution, some of which will be for imported goods previously made in the UK.

Between 2001 and 2005, industrial construction output is forecast to increase by 13.3% at constant 1995 prices.

COMMERCIAL CONSTRUCTION

Commercial construction output, which includes a wide variety of work, accounted for just over 18% of all construction work in 2000. The very high growth rate witnessed between 1996 and 2000 was due to fast growth in the most significant sectors of offices, entertainment and retail. Offices are expected to continue their high growth, with much of the demand being in London. However, growth in the entertainment and retail sectors is unlikely to maintain the level of recent years. Restrictions in planning permission for large retail stores are limiting the growth of this sector. Entertainment received a burst of activity for the new Millennium and a quieter period can be expected over the next few years. It is possible, of course, that large projects such as the Wembley Stadium could emerge and boost the output of this sector.

Looking to the future, growth can be expected in the fields of education and health. Much of the work here will be in the form of PPP/PFI schemes.

At constant 1995 prices, the output of the commercial sector is forecast to increase by 10.6% between 2001 and 2005.

BUILDING MATERIALS

The building materials sector embraces a wide range of materials and components. This Review focuses on basic materials such as bricks, tiles, cement and timber. Together, the market value of the materials covered by this report amounts to just over £8bn.

The UK construction materials sector is undergoing a period of rationalisation, with many UK companies now forming part of international companies. In the aggregate sector, important companies are Aggregate Industries, Hanson Quarry Products, Lafarge Aggregates and Tarmac (owned by Anglo American). The cement sector is dominated by Blue Circle (currently the subject of a bid by Lafarge of France), Castle Cement (owned by Heidelburger of Germany) and RMC (which owns the Rugby Group). Ready-mixed concrete is made by RMC, Aggregate Industries, Lafarge and Tarmac. In the brick business, Ibstock (owned by CRH of the Republic of Ireland) and Hanson Brick are key players.

The UK joinery business has now been reduced to two major companies, Jeld-Wen (with its John Carr and Boulton & Paul activities) and Magnet Ltd.

Building materials are distributed mainly by builders' merchants, the main companies here being Wolseley, Jewsons and Grahams. The latter two companies are now owned by Saint Gobain of France, which is also an important player in the European building materials market.

The apparent UK building materials market is forecast to increase by 13.7% at current prices between 2001 and 2005.

THE FUTURE

There are positive factors for the immediate future of the construction industry. GDP is expected to grow from 2.4% in 2001 to 2.7% in 2002 and interest rates are at their lowest level for many years. Government plans and initiatives are also positive, with long-term housing construction plans, a 10-Year Transport Plan and substantial investment in the railway networks. Funding is also being provided for education, health and regeneration schemes.

There is, however, a need for caution, due to a forecast rise in the retail price index (RPI) and a possible upturn in unemployment in the forthcoming year (2001/2002). On a wider scale, there are concerns about a downturn in the global economy, especially in the US. If these factors developed to any significant degree, there could be consequential adverse effects on the UK economy, with a knock-on effect on the UK construction market.

Key Note estimates that the total construction market will grow by 15.4% at constant 1995 prices between 2001 and 2005.

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