UK construction sector stabilises with a promising boost for housing on the horizon

RICS UK Construction Monitor, Q1 2024

• Anticipation of reduced base rates together with steadying inflation creates a more promising outlook for credit conditions
• Financial constraints remain the largest barrier across the sector
• Workload expectations improve in Q1 with an increased number of survey respondents forecasting a positive trend in total construction activity for the rest of the year

The Royal Institution of Chartered Surveyors (RICS) latest UK Construction Monitor for Q1 2024, shows a slightly more optimistic picture of the market this time round, supported by an overall improved economy.

However, despite some positive results, the general sentiment from survey respondents still airs on the side of caution. The headline net balance for workloads (which captures total activity for the whole of the construction sector) returned a net balance reading of 0 (up from -8 in Q4) marking the first non-negative reading since Q1 of 2023.

Infrastructure remains the strongest performing sub sector, with a net balance of +17% of respondents reporting a rise in workloads (up from +9% in Q4).

Workload expectations across the sector picked up noticeably in Q1, with a net balance of +24% of respondents now anticipating a positive trend in total construction activity over the next year (improved from a reading of +12% in Q4). At a sector level, private residential workloads are seen recovering over the coming twelve months by a net balance of +23% of respondents (up from +5% in Q4.).

The outlook also appears to be brightening for the private commercial sector, with a positive shift in the twelve-month expectations net balance to +23% from +13% in Q4. Expectations remain solid across infrastructure (net balance +31%). Looking at employment trends moving forward, a net balance of +21% of survey participants foresee industry headcounts rising (marginally higher than +20% in Q4).

The prospect of cuts in base rates later this year, together with steadying inflation, looks to have fed through into the feedback for credit conditions this quarter. Evidenced by the three-month credit conditions outlook indicator moving out of the negative zone in Q1, recording a net balance of +2% (up from -14 %in Q4 and the first positive reading for this measure since the question was first included in the survey in 2018).

Furthermore, the twelve-month credit conditions outlook also increased from a net balance of +11% in Q4 to +22%.

However, despite improving sentiment around credit conditions, financial constraints continue to be a barrier within the sector. For the third consecutive quarter, +63% of respondents cited financial constraints as the most significant barrier to market activity, highlighting the persistence of this issue.

The next most widely referenced obstacle was planning and regulation, with +55% of respondents pointing to the current system as hindering activity. While general labour shortages remain a concern, the proportion of respondents citing this issue has stabilised to +44% which is the lowest reading since Q1 of 2021.

RICS Senior Public Affairs Officer, Robert Toomey, commented: “It is notable, but unsurprising, that planning and regulation has come back as the main obstacle impacting the construction sector, with challenges, including resource and capacity, a lack of up to date local plans and political uncertainty.  

“To ensure we move away from a fractious planning system, to a more holistic approach, we call for a comprehensive plan to meet the UK’s housing and infrastructure needs, covering adequate allocation of serviceable development land and land value sharing related to the needs arising from the development; improving the speed, capacity and efficiency of the planning system and an evidence-led review of existing Green Belt policy.”

Simon Rubinsohn, Chief Economist at RICS, commented:

“The results of the Q1 RICS Construction Monitor suggest that activity in the industry more broadly is likely to start picking up as the year progresses although for the time being, it remains the infrastructure sector where sentiment remains most positive.

“The more upbeat expectations for the residential segment is particularly encouraging given the sharp fall in supply over the last year or so but, to put this in some context, the latest reading is not indicative of a return to even previous development numbers let alone reaching the goal of 300,000 units per annum.

“Although there is a little more optimism about a likely easing in credit conditions towards the back end of this year, financial constraints currently continue to be perceived as the major challenge facing the industry. Alongside this, even with the flat trend in output, difficulties in sourcing sufficient quantities of skilled labour are still being highlighted. This points to a more fundamental problem for the construction sector if it is to deliver on a range of ambitious goals from housing to infrastructure to retrofitting the existing stock of real estate”.