Strong growth in residential sector but inflation continues to rise

Our cost consultancy business has published its tender price forecast for Q4 2016 in the UK, which has revised up the national forecast for tender prices to 2.5% across the country and remain unchanged at 1.5% in London.  

As in our previous forecast, we expect national tender prices to outperform London. The main reason for national tender prices to outperform London is the weakness of the commercial market, an area the capital is more reliant on than other regions. Before the EU referendum, a number of City firms highlighted how they may be forced to move parts of their operations if the UK chose to leave the Single Market. This is now almost certain to happen, with HSBC and UBS having already announced plans to shift jobs abroad. 

Added to this is the recent adjustment in business rates to take account of changes in property prices. Whereas London values have skyrocketed, other parts of the country have not done nearly as well, falling in some areas. The introduction of these rates in April will hurt London’s competitiveness and some firms may look for alternatives.

In the three months since our last tender price update, the economy has held up surprisingly well and eco-nomic forecasters have substantially revised upwards their expectations for growth. GDP is now forecast to grow 1.4% in 2017 as opposed to 1% three months ago, whilst fixed investment has been bumped up from -2% to -0.2%. It is the economy’s resilience, as well as additional price increases in key inputs, which have triggered our decision to raise forecast tender prices for the current year. 

Our forecasts are for typical large projects but based on the analysis in this report, we can highlight how certain developments will face differing inflation rates. In particular, we believe that projects involving sub-stantial amounts of brickwork will face higher prices. Brickwork plays a far more important role in the resi-dential sector than commercial and as we have seen, it is here where growth is most likely. Aggravating these issues and also leading to higher prices is a current shortage of skilled brick layers.

2018 is still likely to prove a tough year, especially following recent announcements from the Prime Minis-ter indicating a hard Brexit, with the UK leaving the Single Market appearing all but certain. 

Steve Mason, Managing Director of cost consultancy at Mace, said: “The current market is providing mixed messages. Whilst we are seeing foreign investors use the weaker pound as an opportunity to fund projects more cheaply, the pound’s weakness together with increasing steel and oil prices has started to filter through to the supply chain who are limited in their ability to absorb the increases. Despite the ongoing global economic uncertainty, prospects for 2017 look much more positive than forecast six months ago, although this is now balanced against anxieties around 2018. Such dynamics will continue to persist and whilst this will create challenges, with these will also come opportunities.”

Mace’s Cost Consultancy business produces a quarterly UK Tender Cost Update, offering a snapshot of construction market conditions and movements to help businesses spot and understand trends across the industry and plan accordingly.