The construction industry ends 2020 as a positive player in Northern Ireland’s (NI) economy, following the unprecedented disruption and uncertainty caused by the coronavirus pandemic. Looking ahead to 2021, we believe the sector could continue to be one of the stronger performers, supported by the continued demand for housing and government backing for public sector capital projects.
In this review, we examine in detail the impact of measures taken to control the pandemic on the sector in 2020, the outlook for investment in the year ahead, the still-buoyant housing market, tender prices, and Brexit.
Like most of Europe, we saw Northern Ireland’s economy all but close overnight in March, with it slowly reopening
towards the end of June. Construction was massively disrupted within the first six weeks, although thankfully sites were able to reopen, albeit in a limited way, from mid-April onwards.
When restrictions on the wider economy were eased in the summer, pent-up demand for cars and household items gave the economy a much-needed boost, and this coupled with a travel ban which encouraged domestic spending, helped Northern Ireland post some strong growth figures throughout the summer months.
Purchasing Managers’ Indexes (PMI) are economic indicators derived from ongoing surveys of the business community, capturing activity and sentiment from private sector firms. The headline seasonally adjusted Business Activity Index posted an
unprecedented low of 8.3 in April before bouncing back to 54.5 in July (from the Ulster Bank’s PMI figures, where anything above 50 indicates growth).
However, PMI figures for December showed an expected slowdown in the private sector to 46.8, marginally better than November’s 45.6, following the re-imposition of restrictions to slow the spread of the virus. The economy as a whole in NI is projected to contract by 15 per cent over the course of 2020, which is marginally worse than the other regions of the UK.
In the construction industry, output dropped by 30 per cent in the second quarter of 2020, according to Northern Ireland Statistics and Research Agency (NISRA), however recovery is under way. Construction was the strongest part of the economy in October, and the only sector to report growth in output and orders that month. New orders increased at the fastest rate for 56 months (admittedly from a very low base and driven by public sector investment), and if this is sustained over the coming months, then the sector could continue to outperform the rest of the economy over the next few quarters.
Whilst the December PMI figures are indicating a smaller contraction in the private sector and we again stare down the barrel of another lockdown post Christmas, we should be thankful that business and construction in particular is managing to adapt to the restrictions better than the first time around. So far, we have managed to avoid a lockdown within the industry and we better understand how to manage the practicalities of supply chain slowdowns, social distancing measures etc. However, whilst applying this learning to the current restrictions will be helpful it won’t in itself be enough to prevent activity being affected to some degree.
The UK government has spent more than £200bn on supporting the economy through the job retention scheme and various business and self-employment grants. This scale of intervention has never been seen before, and the job retention scheme without doubt saved jobs in our industry at the point when activity was at an all-time low. Thankfully, the construction industry is no longer widely dependent on the scheme or using it at all. Anecdotally, we seem to have avoided significant redundancies among builders and contractors although there have been some redundancies in professional services organisations. Even then, it seems that some consultancies acted quickly to downsize but are now back into recruitment mode.
The UK and Stormont governments, along with the local authorities, have been supportive of the sector with a continued push to get public sector capital projects underway with several new schools and leisure centres in the pipeline. This has no doubt been crucial in stabilising the industry after the severe downturn during the first periods of lockdown. As with many countries, the UK government is pursuing a Keynesian model of using state spending as a catalyst for broader economic recovery.
Housing and public sector capital investment will likely be the key growth drivers over the next few years.
It is noted however, that after promising discussions (and trials) last year on how best to procure public sector projects in a more financially sustainable way (for example by using the mean narrow average on pricing rather than automatically choosing the lowest-priced bid), unfortunately it seems that procurement is becoming a pinch point again. In our Construction Skills Project report, industry executives we spoke to frequently referred to a ‘race to the bottom’ and ‘lowest-cost options’, which inevitably impact the quality and level of creativity in these projects.
Private sector investment has inevitably slowed for reasons directly related to the economic damage caused by the pandemic, such as availability of finance and the commercial, retail and particularly hospitality sectors all having their revenue streams turned off overnight. Restrictions on demand look set to continue until the spring, and we are of the opinion that these sectors will continue to see reduced activity over the next 12 months.
However, the longer-term outlook for the commercial, retail and hospitality sectors is that they will return to stable growth.
Savvy investors with the ability to finance acquisitions may therefore view this period simply as a correction in the market — and an opportunity to bag a bargain or two. There will undoubtedly be changes, particularly in the traditional high street, but with imagination these high streets could find a new lease of life catering for artisan shops and accelerated buy-local trends. As we find our way out of the current crisis a doubling down on the efforts to reach a new zero carbon economy will play well to the strengths of these local and artisan retailers.
The one constant in both public and private investment in Northern Ireland is the continued demand for housing. The population is growing with a projected increase of 3.5 per cent by 2033 and whilst NI has one of the youngest populations in the UK, it is projected to have more people over 65 than under 18 by 2028. Planning for this shift is necessary as the type of housing required will change with the needs of the population. It is well documented that the public housing stock in Northern Ireland requires a £7.1bn investment over 30 years to ensure it remains decent.
Some £3bn of this spending is required over the next 11 years. A shake-up of the NI Housing Executive was announced in November 2020
BBC News: Homes to be built by NI Housing Executive again, meaning the public housing authority will be able to borrow money and start building houses again for the first time in around 20 years. This will go some way to addressing the deficit in the standard of existing homes and to building additional ones.
On the privately-owned side, residential sales have been bolstered by the UK government temporarily suspending stamp duty on sales up to the value of £500,000. This has resulted in the increased sales and modest price rises that we have seen since summer 2019 continuing to date, despite the severe economic downturn. The stamp duty holiday is currently due to end in March 2021, so a rush of completions and sales are likely in the first quarter of 2021. We expect that after the stamp duty holiday ends, private sales will continue in positive territory particularly among first time buyers, for whom housing continues to be comparatively affordable in NI. This, coupled with extremely low interest rates and banks now being pushed to lend, will provide some certainty for the construction sector.
In both public and private housing there is a deficit in the standard of insulation, renewable energy generation and storage and this retrofitting market will become more prominent over the next few years.
While the Brexit deal is far from perfect in many eyes, it is a deal that brings certainty for business with the introduction of a sea border between NI and Great Britain. There is a guarantee of no tariffs on goods moving between Great Britain and NI, as well as between the Republic of Ireland (ROI) and NI. Whilst in the short term there may be a period of adjustment, longer term it should help mitigate any significant cost increases in materials.
It is also noted that any anticipated devaluation of the GBP has not happened, indicating Brexit costs are largely incorporated into foreign exchange rates, and/or the optimism of a post-Brexit UK economy.
We will not be the first to note that the deal which leaves NI in the EU single market for goods may even present opportunity for NI to be in the sweet spot, benefitting from both the retained status in the trading zone along with any opportunity that arises from free trade agreements that the UK government can make in the wider global economy. How this will impact on construction will remain to be seen, but opportunities in manufacturing, transport and logistics will surely present themselves.
Over the last 12 months, tender prices have experienced a bumpy ride. AECOM noted modest inflation in the first quarter of 2020, largely in line with our expectations from last year. Then in the second quarter, we saw some price reductions as the reality of what the pandemic was doing to activity in the market became clear. As the construction industry adjusted to social distancing requirements and returned to work, pent-up demand due to significant physical access issues pushed prices up again. We have noted uplifts in costs on projects that were already on site, particularly on internal labour-intensive projects where the number of operatives and trades able to work concurrently has been restricted. As such The AECOM tender price index is noting a 1.5 per cent increase in tender costs over the last twelve months.
As this pent-up demand unwinds, we expect to see reduced labour costs but an increase in materials prices largely down to increased demand globally and the short-term impact of adjusting supply chains to new trading regulations. It is expected that in Northern Ireland there will be modest increases in tender prices, likely to be in the region of
1-1.5 per cent over 2021.
The Republic of Ireland’s economy has been one of the most resilient in Europe in 2020, despite the unprecedented disruption caused by the coronavirus pandemic.
Many sectors, including hospitality and retail, have undoubtedly suffered from the series of lockdowns, yet the broader economy has been cushioned by the strong performance of multinational pharmaceutical and technology
companies based in the Republic, and as a result, gross domestic product has been estimated by The Economic
and Social Research Institute (ESRI) to have grown in 2020, significantly better than the 7.5 per cent average contraction expected across the European Union (EU).
Looking at the construction sector specifically, although the first lockdown caused a severe downturn between March and May, there are signs of recovery, including a bounce back in housing completions in the third quarter, according to the Goodbody
Analytics BER Housebuilding Tracker. Notwithstanding a deal being agreed in late December, Brexit will continue to be a source of uncertainty in 2021.The effects on supply chains and exports will not be as damaging as in other sectors, but construction demand is intrinsically linked to overall consumer demand and investment, and any major shock in the overall economy has the
potential to slow demand and building activity. However, plans for significant public sector investment in transport, housing and infrastructure are likely to provide some insulation against any potential downturn.
In this review, we will look in detail at the overall economic impact of the pandemic in 2020, the construction industry’s performance, where investment will come from in 2021, progress towards Project Ireland 2040, and cost and tender pricing.
Coronavirus has been a severe shock to the normal functioning of most economies and the Republic of Ireland is no exception. We have seen some sectors temporarily cease trading and face an economic cliff-edge, while others have experienced increased demand, and the important role of multinational companies in the country has been demonstrated by the fact the downturn is expected to be far less severe than in the rest of Europe.
Despite this, the unemployment rate is expected to exceed 12.5 per cent by the end of 2020, emphasising the ‘K’-shaped nature of the recovery, with certain sectors experiencing considerable growth while others struggle through a lengthy downturn.
Coronavirus has also been a shock to government finances. The 27 per cent increase in spending in the second quarter of 2020, in comparison to the first quarter, indicates the extent of the government support that was put in place, as well as the increased expenditure on healthcare. Subsidies and social transfers increased by €4.7bn in the first half of 2020. A classical Keynesian cure is now being applied – spending out of a downturn and relying on public works to stimulate the economy. To the benefit of the construction sector, the government is proceeding with planned infrastructure investment, with the added imperative of building a low-carbon economy, as set out in the 2020 Programme for Government.
The construction industry was negatively affected by the first lockdown, when all but essential work halted between March and May. During this period, the Purchasing Managers’ Index (PMI) – an indicator for construction activity in which a score of below 50 represents a monthly contraction – fell to just 4.5 in April and 19.9 in May, with approximately 86 per cent of construction employees at the time relying on state support to pay their wages.
While activity did recover somewhat when the economy opened again, the shutdown delayed project completions and paused or cancelled some starts. A partial rebound in activity is forecast for 2021, although any improvement ultimately depends on the course of the pandemic. The strength of this rebound will depend on factors such as the duration of the current lockdown, the timeline of the vaccine roll-out programme and the shape of the economic recovery, with the ‘K’-shaped scenario described above looking more likely.
In terms of the value of construction industry output, the Build 2020 report published by the government in July estimated output for the year would be in the region of €17.9bn. It forecast a partial recovery in private investment and overall output to around €23bn in 2021. We expect the final figures for 2020 will improve on this estimate to circa €20bn due to a further recovery in activity in the second half of the year.
The square metre area of new buildings granted planning permission is a useful barometer of the activity by sector in general construction. Figure 1 illustrates the breakdown of activity and the overall trend in the non-residential sectors over the last ten years.
Residential is by far the largest sector; floor area granted permission in a year is typically 100 to 170 per cent higher than the combined total of the other sectors. However, the economic viability of developments remains a challenge, as illustrated by the Society of Chartered Surveyors Ireland Real Cost of Housing Delivery report. While the 2021 Budget includes a significant increase in spend on housing, the sharp drop in house commencements after the coronavirus outbreak from April through to August 2020 inclusive will impact on output in 2021.
State support for construction will also come from other sectors — government departments with double-digit percentage increases in their 2021 capital budgets include higher education, environment and transport. The 2021 Budget did not include a multi-year capital investment programme, which has been a feature of recent budgets and a positive development in assisting the industry plan capacity and skills. Thus, output from the recently-launched Review to Renew review of the National Development Plan (NDP) will be eagerly awaited by the construction sector.
Private investment in sectors such as data centres as well as industrial, logistics and storage sites is continuing strongly. Yet for the most part, private sector capital investment in sectors such as commercial and hospitality, which has been strong in recent years, is likely to continue to drop in 2021. Retail investment, which has struggled in recent years to keep pace with other sectors, will continue to struggle in 2021.
Figure 1: Floor area of non-residential new build and extensions granted planning permission ('000sq m) - breakdown of activity and trends over the last ten years. Source: Central Statistics Office
The impact of coronavirus poses fresh challenges, but the government remains committed to Project Ireland 2040 and its prioritising of infrastructure investment. Public investment is expected to reach four per cent of national income (GNI) in 2020, compared with the EU average in recent years of 2.6 per cent of GDP. The July stimulus package added €500 million in additional investment to accelerate capital works across all regions of the country.
Public capital expenditure is now planned to increase in 2021 to more than €10.1bn, €2bn more than the original 2020 provision. Progress in delivery is being made across all the national strategic objectives, supported by legislative, institutional and organisational changes.
The National Economic Plan currently being developed by the government will set the priorities for Ireland’s mid-term economic recovery from the current crisis. It will inform the review of the NDP 2018-27, and a revised 10-year plan will be published that looks out to 2030, also framed by new climate change legislation arising from the Climate Action Bill 2020.
Figure 2: Project Ireland 2040 pipeline projects and programmes as of December 2020
Launched in February 2018, one of the aims of Project Ireland 2040 is that the three regions of the country grow at broadly comparable rates and that 75 per cent of future population growth will be outside Dublin. Clearly, we are at a very early stage in implementing this plan and the length of project cycles will dictate a gradual pace of change. However Figure 3. below does illustrate the scale of the challenge ahead to develop a counterbalance to the highly populated Greater Dublin Area.
One consequence of coronavirus has been a reduced need for people to travel to Dublin and other urban centres due to home working, and this has raised the very real prospect that the pandemic could be a catalyst to renew rural locations – a key objective of Project Ireland 2040.
To enable the strategy to be realised, increased government investment to address infrastructure deficits should be an increasing feature will be needed in the coming years. Access to high-speed broadband and affordable housing will be key, and in the case of the latter, the Land Development Agency in conjunction with local authorities holds the key to opening up large land banks.
Figure 3: New dwelling completions. Source: Central Statistics Office. *2020 figures estimated by AECOM
Consumer price inflation in ROI has been tracking at less than one per cent per annum since 2013 and the 2020 average for the year is likely to record price deflation. However, construction material prices have also maintained competitive levels of annual increases, with the Central Statistics Office (CSO) indicating cumulative price inflation of 7.25 per cent between January 2015 and September 2020.
Labour costs in our industry have been governed by Sectoral Employment Orders (SEOs), however a court ruling in June 2020 cast doubt on the constitutionality of these orders. Notwithstanding this decision, the 2.7 per cent increase on 1st October 2020 as set down by the SEO proceeded while the ruling is being appealed to the Supreme Court.
We estimate the combined impact of the above material and labour cost movements has been to increase average construction cost in 2020 by around one per cent. In terms of 2021, it is challenging to estimate cost inflation due to the uncertainty over Brexit and the potential impact it may have in terms of logistics and administration costs and currency fluctuations. At present we expect a marginally higher average rate of two per cent over the course of 2021.
Tender price variation in the construction sector has always been more volatile than that of costs (which tender prices encompass), as companies respond to changing volumes of work and the outlook for the next 12–24 months. It is not surprising therefore, the rate of increase in tender prices recorded a sharp drop in 2020 as a result of the coronavirus outbreak and resulting restrictions impacting activity and confidence.
The AECOM tender price index recorded an average increase of 1.5 per cent for 2020. Notwithstanding the anticipated material price increases, with continued uncertainty surrounding both coronavirus and its impact on the economy and Brexit, we expect continued tender competitiveness and average tender price inflation of two per cent over the full year. This is a national average forecast and regional, sectoral and project scale and complexity factors may give rise to movements above and below this.
Aside from the construction cost and tender price inflation changes described above, which reflect increases on a like-for-like basis, 2020 has also seen additional costs and time being incurred due to the implementation of coronavirus work protection measures such as the CIF Standard Operating Procedures. The estimated additional cost and time impacts have varied from project to project, however it is anticipated that over the course of 2021, contractors will develop efficiencies and innovations to largely mitigate these measures.
To view AECOM's 2021 indicative building costs for the Republic of Ireland and Northern Ireland, please download a copy of this year's Ireland Review using the button below.