Ben Woods: The construction industry is strengthening, but could an interest rate rise spoil the party?


Construction - Credit: Getty Images/iStockphoto

Strength has certainly returned to the UK construction industry.

The dark days of the recession triggered by the banking crisis took its toll on the sector, but the industry is showing signs of a renaissance.

In 2014, the sector was expected to expand 5pc – the best performance since 2010 - although forecasts suggest this will slow to a more modest 3pc in the coming years. In the east of England, the picture has also been positive – construction output increased by heady 9pc in 2013.

This momentum has also continued this year, with the sector's sustained recovery accelerating in September as growth reached its fastest rate in six months. The Markit/CIPS Construction Purchasing Managers' Index notched up to 59.9, the strongest data recorded since February.

The architect for much of this expansion is the housing market. According to the Construction Industry Training Board's (CITB) Industry Insights strategy plan, both public and private housing output recorded strong growth last year, providing 63pc of the £5.7bn (2010 prices) increase in total construction output between 2013 and 2014.

It comes as little surprise that a buoyant housing market is crucial if the construction industry is to fire on all cylinders.

And yet, the rate at which other key parts of the industry are growing suggests that an over-reliance on the housing sector could lead to heightened levels of volatility in the future.

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The CITB found that – excluding the industrial and repair and maintenance sectors – growth was 'disappointing or non-existent' in other areas of the sector between 2013 and 2014. Infrastructure activity, in particular, fell back in 2014, despite bold plans to shore up the transport and energy networks.

Even though infrastructure output was anticipated to bounce back – growing 6pc to £13.5bn this year – it is clear that the construction sector must achieve robust growth from each of the key pillars that prop up the industry if it is to guard against the negative impact of a sudden dip in the housing market.

One potential trigger for protracted turbulence is likely to come from a rise in interest rates – now expected at the end of November 2016. Even the suggestion by the Bank of England governor Mark Carney in June that the base rate may rise 'sooner than expected' was met by a fall in the share price value of major housebuilders. The day after the governor's comments, Barratt Developments shares dropped by more than 3pc, while Taylor Wimpey fell 2.5pc and Persimmon was down by more than 2pc.

Investor concerns centre around the fear that developers will no longer be able to achieve the same profit levels once low interest rates – a significant stimulus for the housing market – draw to a close.

Others suggest that an interest rate rise could cause a confidence free fall in the housing market, leaving the construction industry to pick up the pieces of another cycle of boom and bust.

That aside, in the short to long term, the construction industry will be more concerned with finding a suitable solution to its acute skills shortage. It is now clear that many of the skilled workers laid off during height of the recession have not returned to the sector.

To meet demand, East Anglia alone will require 4,260 skilled people a year between 2015 and 2019, according to the CITB.

But meeting this target may prove tricky when the construction sector factors in the cost of acclimatising to the new National Living Wage.

Furthermore, there are also challenges for businesses chasing highly-skilled workers.

David Meigh, director of Norwich-based consulting engineers Pinnacle, said the dearth of graduate engineers was causing challenges for the industry.

'There are a significant number of universities that ceased running their engineering courses, and there is a habit for graduate engineers to go into other areas of business, including accounting,' he said.

'It is a challenge that we need to rise to,' he added. 'We can sponsor school-leavers through university, or we can employ immigrant engineers, but that is fraught with dangers because they have little commitment to the business and we pay a premium for them.'

Despite the skills challenges, Mr Meigh is still confident the company can capitalise on future opportunities.

'In the UK the massive growth sector

is care. There's a race going to build

these care homes because we have a generation that generated wealth through property that want to buy into that standard of living.

'Warehousing throughout the UK is also going bananas because the venture capital investors want to make the most of the rise of digital shopping.'

He added: 'This is year is the first in three years that we have far greater visibility in forward earnings.'