Market Commentary Q3 2021

However, supply chain pressures are continuing to grow across the Scottish construction sector with access to building materials and the availability of sufficient skilled labour presenting significant difficulties. According to the Royal Institution of Chartered Surveyors, 89% of respondents to their latest market survey have experienced issues with material availability and 80% souring labour, with bricklayers being the standout trade.

Market Outlook

The impact of the pandemic is still being felt by the whole economy with inflation (CPI) in September up at 3.0% per annum, well above the government target of 2%, driven by increasing demand and corresponding supply shortages. This has led to the expectation of interest rate rises by the Bank of England to control demand and suppress price increases across the economy.

Forecasts for GDP now indicate the bounce back which started in late 2020 continuing at a greater level in 2021 with an increase of 7% and a 6% increase in 2022. This will be followed by increases of around 2% in each of the following three years. This would suggest that the growth in total construction output should start to increase marginally or will at least remain static in the short term given the significance of the sector to the economy.

The latest RICS Market Survey reports that most Scottish Quantity Surveyors workload expectations have decreased in the last quarter with responses generally anticipating workloads to reduce by up to 15% over the next year with a corresponding reduction in profit margins. Increases are expected in some sectors with the strongest growth being seen in the public housing and infrastructure sectors.

The following forecasts are based on a middle of the road set of assumptions with regards to trade restrictions and access to labour and no further complete lockdown due to Covid-19. However, the figures could vary by +/- up to 10% per annum over the period of the forecast depending on the medium-term implications of Brexit on trade and the extent of continuing material shortages.

Tender Price Update

Tender prices rose by 2.4% over the last quarter, a significant jump from the previous quarterly rise of 0.9%. The annual rise increased by 3.9% from a fall of 1.2% to 2.7% when compared with the same quarter in 2020.

Tender prices started rising in the second quarter of 2021 with contractors being unwilling to continue absorbing the additional cost of working under the Covid-19 guidelines. In addition, sharply increasing material costs, strong demand over the last 6 months and logistic issues are driving ever-increasing rates of tender inflation.

The forecast for the following 5 years indicates strong tender price increases of around 4% per annum driven by improved growth in most sectors, giving rises more than input costs. The only exception being 2021/22 where the combination of increased demand following the pandemic and increased costs of both material and labour could increase tender prices by more than 7% for a short time.

Given the above, over the next five years, tender prices are currently forecast to rise by 27% overall, a 6% increase compared to the last forecast.

Building costs rose by 4.2% in the last quarter when compared to the previous quarter and by 9.1% from the same quarter a year ago, with both figures approximately double the previous forecast. Overall, costs are expected to continue to rise over the next 5 years, with increases of around 3% per annum over the next five years, except for a dip in 2022 to 2%, likely to result from dampening demand. Building costs are forecast to rise by 16% in total over the next 5 years, an increase of 1% from the previous forecast.

Materials prices rose by 6.3% in the last quarter and by 16.9% when compared with the previous year, an increase of 6% from the previous forecast. A return to more moderate increases of around 3% per annum are now forecast from the end of 2022 with an overall increase of 15% over the next 5 years (3Q21 to 3Q26). However, this is based on the expectation that the current shortages of materials will ease as manufacturing returns to full capacity.

Wage awards are expected to be around 3% per annum for the next 5 years, generally in line with inflation. However, labour shortages could lead to higher increases for site-based operatives.

Overall, the forecasts continue to fluctuate regularly because of the Covid-19 pandemic, the developing impact on trade following the withdrawal from the European Union at the end of 2020 and the volatile nature of global trade at present.

Construction Output Forecast

Total construction output increased by 4% in 2Q2021 when compared with the previous quarter. This represents a 2% improvement from the previous report but is still a significant reduction from the initial bounce back over last summer following the easing of the nationwide lockdown and resumption of non-essential works. Overall, it remains 5% down from July 2020, with new work output following a very similar trend.

Comparisons of new work output over the last quarter showed all sectors increasing, but over the last year, every sector showed reductions, with an average decline in 2020 of between 5% and 20% but with a 29% decrease for public housing.

Over the period of the forecast, new work output is expected to bounce back by 9.9% in 2021, with the infrastructure and private housing sectors leading the recovery, before returning to lower levels of annual growth of around 4.5%. In total, new work output level in 2025 is forecast to be 21% less than forecast back in January 2020.

Expenditure on repair and maintenance is also forecast to increase, this is being driven by homeowners and the adaptation of commercial premises to suit new working practices, albeit at a lower rate from 2023 onwards.