There’s no doubt that when we take stock of 2018 construction performance across the island of Ireland it was a case of two varying perspectives. While NI’s industry is growing, Brexit and the collapsed devolved government cast somewhat of a cloud of uncertainty over the region. ROI on the other hand experienced continued positivity.
So, what is the long view for the island of Ireland’s construction industry? The consensus for 2019 is positive, as confirmed in our survey, with 77 per cent of our respondents envisaging an increase in business in 2019, half of who expect a growth rate of five to 25 per cent.
That said, there are a range of factors that could potentially impact on performance in 2019 and beyond, not least of which is Brexit.
Our survey results reveal that funding shortages, complex procurement approaches and inflexible permission processes are the top three reasons why projects fail to ‘get off the ground’, with resource shortages seen as the key challenge in growing business over the next five years.
This is our third year of debating Brexit and a (non-functioning) devolved government, yet the economy hasn’t imploded and there’s no significant unemployment. In fact, the exact opposite has happened: unemployment fell from 4.7 per cent to 4.3 per cent in 2018 and, as we discussed in 2017, the economy has not only survived but grown, albeit modestly, with the construction industry experiencing three quarters of growth over the past twelve months (Q3 + Q4 2017 and Q2 2018). This is further demonstrated in wage inflation, which stood at 4.2 per cent in 2018 — joint highest in the UK regions.
Generally, feedback is one of frustration at the slow rate at which public sector projects are coming to market. This is almost certainly down to the lack of an Executive and the uncertainty surrounding civil servants’ ability to make decisions. However, when some clarity is brought to this, we can perhaps expect to see a flurry of public sector projects being tendered. This will obviously be welcomed by the industry and is necessary to ensure the sustainability of the industry longer term.
In 2018 the Department of Finance’s Construction and Procurement Delivery engaged with industry to recognise that fees and tender prices for public sector projects need to be at more sustainable levels and that the race to the bottom must stop. The policies now being implemented will help ensure the public sector gets better value for money from consultants and contractors alike and when more projects come to market we should expect significant interest.
The private sector has continued to perform in a robust manner with fewer difficulties in obtaining funding and demand holding for both commercial and residential buildings, with house prices continuing to rise with Q2 2018 prices 4.4 per cent higher than the same period in the previous year according to the Northern Ireland House Price Index. An additional four per cent growth is expected by 2022, making the region one of the best performing in the UK. If house prices are seen as a barometer of domestic economy performance, we should be encouraged by a steady recovery rather than one of erratic growth.
Belfast suffered the significant loss of the Primark Bank Buildings in August 2018, which has without question suppressed footfall in the retail heart of the city. NI-wide retail footfall was down 4.6 per cent in the immediate aftermath, with a 30 per cent reduction in Belfast. However, out of this terrible event, opportunity must come.
The knock-on effect of retailers relocating should stoke the market and it is of course an opportunity longer term for Belfast to reconsider what the future of retailing looks like in the city centre as well as the shape of and activity in those respective streets. Being a member of the 100 Resilient Cities will no doubt help Belfast deal with these challenges.
The Chancellor’s 2018 Autumn Statement confirmed that the Belfast Region City Deal (BRCD) was successful. City Deals are bespoke packages of funding with the BRCD comprising six councils in the surrounding regions. This will inject somewhere in the region of £1 billion into the local economy over the next 10 years with significant amounts of investment in innovation and digital, tourism-led regeneration, infrastructure and employability and skills. With the potential to create up to 20,000 new jobs, this is a good opportunity to get public and private sectors collaborating to deliver real opportunities for Belfast and the
If we take ROI’s construction industry average performance over the past 22 years as the benchmark for future performance over the next 22 years to 2040, it is in a good place based on the potential future scenarios highlighted in the construction output chart underneath. Taking the average annual growth in the value of construction output from 1996–2018 of 4.33 per cent, and applying this on a year-on-year basis, industry output in 2040 would be circa €51 billion. In the chart we run three other scenarios of a high initial growth, low initial growth and cyclical growth but arriving at the same end point to illustrate how differently that journey might be. Of course, the standard “past performance is no guarantee of future results” caveat must apply and as a small open economy, construction industry future performance is very much linked to the economy as a whole.
The introduction of the Sectoral Employment Order (SEO) increase of 10 per cent for general craftsmen and labourers in October 2017 and for mechanical services in March 2018 undoubtedly impacted on construction costs and tender prices in 2018. In contrast, material cost price increases have been more modest, with the weakened value of sterling a factor.
We estimate construction costs increased on average by 3.5 per cent in 2018 and predict an increase of 2.5 per cent for 2019.
ROI’s tender prices increased in 2018 as demand and output continued to grow, along with pressures on limited resources this entails, with the variation in regional demand impacting on tender prices, seen as an estimated increase of 4.5 per cent in the regions, 7.5 per cent in Dublin and an overall average of 6.5 per cent in 2018. In 2019 we expect tender price inflation will moderate slightly to an average of six per cent nationally with four per cent in the regions and seven per cent in Dublin. However, as is always the case, there will be sectors and locations that will fall outside such averages.
A further factor to be considered with construction costs in the broader sense, rather than unit rates specifically, is that of regulatory and industry standards and related matters.
A clear example of this, which has been on the agenda, is the Nearly Zero Emission Building. Coming into effect on newly completed public buildings after 31 December 2018 and on newly completed private buildings with a completion date post 31 December 2020, it is having an impact on overall costs and needs to be considered on a project-by-project basis.
Throughout 2018, residential was one of the most talked about sectors in ROI’s general news due to chronic shortages in key urban areas. Actual increases in housing completions have been slow relative to demand, in part due to the time lag involved; however, there are some positive signs with the number of units obtaining planning permission in the first quarter up 80 per cent on the same period in 2017. One major concern tempering this positive sign is that of viability, particularly in relation to apartment developments. In many cases the costs may exceed the sale price available; planning permissions granted may lay dormant until the viability gap is bridged.
ROI’s commercial and FDI sectors continue to perform strongly. Public sector capital spend in areas such as health and education has also grown year on year. Activity in civil infrastructure has been sluggish; however, there is optimism that the sector will see an upturn in 2019.
Life and economic development is never simple, with problems of the future being very different than those we face today. While there is an air of optimism about the prospects for the years ahead, given the cyclical nature of the industry, we also have to prepare for setbacks.
Ultimately, the complexity of the industry continues to expand, as does the frequency of issues requiring dialogue and action.
Building resilience now is vital to us developing a stronger long-term view and in helping manage tomorrow’s issues. Progress is being made on a range of industry issues such as smart technology and modular, but a lot more needs to be done, particularly around the key challenges identified in our survey.
Collaboration between industry representatives and policy makers is key to identifying the measures needed to respond to these and wider business and societal challenges, and in helping to maintain a more sustainable industry long term.