Construction project pipelines in 2024 and beyond: management and financing

In a recent webinar, a panel of experts from the UK, Europe, Middle East and America discussed the drivers and barriers to construction activity and project pipelines in 2024 and beyond.

While the latest readings from the RICS Global Construction Monitor reflect construction markets stabilising over the past year, at regional level this has been more variable. In some countries, new leadership and legislation look to bring greater confidence to markets, while the picture is more uncertain in others. Housing, labour supply, complex regulation and productivity growth remain perennial issues, while easing material and cost inflation and increasing demand for more clean and renewable energy mean infrastructure has the strongest outlook for the next 12 months.

Considerable variations in construction activity growth across different countries

Tarrant Parsons is head of market analytics at RICS. Summarising the results of the Q3 2024 Global Construction Monitor, he explains that widespread growth in construction activity is reported from much of the Middle East, most notably Saudi Arabia and the UAE. In Asia Pacific, where the reading is negative, Chinese market weakness has brought down the regional figure despite positive results in India. The Americas remains one of the strongest performing regions, albeit having lost some momentum in the last few months. In Europe, conditions are gradually starting to improve following challenging conditions reported in 2023, he says.

During 2023 a surprise number of housing units completed in Germany were due to a backlog of projects and extended finishing times post-Covid-19, explains Christian Danne, economist, DW Econ GmbH. ‘We expect to see a much smaller number of housing units completed this year’, he says.

Holly Davis MRICS is director at Major Projects Advisory. She explains that in the UK, post pandemic construction growth has also been limited. ‘Housebuilding continues to be the biggest drag – down 12% over 2023 and that has continued into 2024. It is only repair and maintenance rates that are showing consistent increases in growth, pulling construction overall output up 3% in Q3 compared to the same time last year’.

Looking at the US, Rachel Personius, associate director at Currie & Brown, says ‘the industry has been strong through the first nine months of 2024, with almost a 5% increase in construction spend compared to the same period in 2023’.

Opportunities and risks associated with new governments and leadership

There has been economic uncertainty in the last quarter, continues Rachel, as people waited to see the results of the presidential election, and understand the composition of the House and Senate in the US. A change in policy around tariffs could have a big impact on the industry. Similarly, there are risks connected to the possible rollback of legislation supporting industry investment: the CHIPS and Science Act, Infrastructure Investment and Jobs Act, and the Inflation Reduction Act. While a matter for environmental concern, industry deregulation and streamlining the permitting process would probably speed up projects and benefit industry output, she says.

In Germany, regulation and permitting around construction are the most contentious topics for construction, says Christian. National and federal level regulations are not always aligned. One example of this is between environmental standards and fire safety. As a result, there is an increasing administrative burden on new construction projects.

While pre-construction periods are also very long in the UK, commitments by the new government are providing more confidence and certainty over construction pipelines, advises Holly. The new UK government has committed to developing a ten-year infrastructure strategy, creating a National Infrastructure Service Transformation Authority, and putting in place a five-year capital budget.

A positive outlook for infrastructure is underpinned by further grid decarbonisation

The last four years have been promising, with a lot of construction in clean and renewable power in the US, says Rachel. Over the coming four years, it is likely that federal tax incentives move from renewable energy back towards fossil fuels. At the same time, she says, ‘we saw multiple states pass additional climate measures in the last election, requiring clean and renewable energy’. Companies are also realising their exposure to climate risk, and so are spending more time and money to understand how to lower embodied carbon and electrify their buildings with renewables, she continues.

In the UK, Holly reports seeing a big focus on decarbonising the grid. October 2024 saw the last day that the UK generated energy from a coal-fired power station. The new government is investing heavily in large and small scale nuclear, carbon capture and storage, and on and offshore wind. Additionally, she says, leading tech companies are investigating their options. ‘Meta, Google and Amazon, they are also exploring the use of small modular reactors to power their data centres’, she says.

In the Middle East and Africa, things are still progressing, advises Laura Morgan MRICS, cost management lead, Focal Middle East. ‘We are waiting for key legislation to come into place to understand what it means for built assets and future planned assets. In the meantime, there’s certainly interest in value engineering, which involves sustainability and decarbonisation opportunities.’

Material costs and inflation becoming more normalised

Tarrant explains that almost two-thirds of respondents to the Q3 2024 RICS Global Construction Monitor highlighted financial constraints as the biggest obstacle to construction activity. Meanwhile, pressures relating to the cost of materials, while still considerable, appear to have softened.  Twelve -month projections for material costs and inflation are now at their lowest in four years. Laura agrees, ‘we have seen a slight softening of material prices, and although certain commodities like rebar and concrete are still elevated, they’re not as high as the peak in 2022, but we’re also still seeing a lot of fluctuation in prices’.

‘We believe people are adjusting to higher levels of interest rates and that’s probably going to affect the long-term outlook’, say Christian. Holly agrees, explaining ‘while there’s definitely signs of inflation starting to level off, the cost increases that this inflation has produced are becoming baked into the industry.’ Speaking about the US, Rachel says, ‘while material costs haven’t returned to pre-pandemic levels, they’ve flattened and normalised, so it is easier for people to plan.’

‘An area where I have seen change is contracting around inflation’, says Holly. For the first time in a decade, she explains, construction clients and contractors are using clause X1 (a provision allowing changes for inflation) in the NEC form of contract. There are long standing best practices around contract administration and management, including running a cash positive position and ensuring the contract management team is well resourced, continues Holly. ‘Where I am having new conversations with construction contractors regards wargaming for supply chain insolvency, quantifying risk and reviewing contingency allowances’.

Rachel agrees, ‘being more intelligent and thoughtful with risk management is something we’re seeing a lot in the US. I see some companies in the US taking action to minimise their supply chain risk through combining or purchasing below them in the supply chain’, she adds. In the Middle East, Laura sees more pushback occurring on standard clauses that try to allocate risk entirely on contractors.

Labour availability, competition and labour productivity remain headwinds

Shortages in skilled professionals across the industry is still being cited as a problem by around half of global respondents to the RICS Global Construction Monitor, says Tarrant. Holly explains, ‘in the UK, we’re seeing a big shift to white collar workers in the industry. Increases in professional services like architects, planners and surveyors, but decreases in finishing trades’. In Germany, says Christian, the construction downturn has alleviated pressure to find qualified labour and labour costs have not drastically risen.

In the US, where a pipeline of megaprojects exists, a headwind has been labour availability, resulting in increasing labour costs. The Middle East is still quite a transient region, says Laura, with people from Europe and the rest of the world relocating for work. Some competition and movement is occurring between Saudi Arabia and UAE, and that is driving up salaries, she explains.

Both Christian and Holly discuss long standing labour productivity problems in Germany and the UK. Holly continues, ‘It only exacerbates those issues we have about skills in the industry. We need to get smarter about designing for manufacture and assembly, and being smart and intentional with the use of digital tools and AI to solve this problem’.

A year on from our last sustainability report, how much have attitudes and practices in real estate and construction changed?

This webinar explores occupier demand for sustainable buildings, how ESG is shaping investment decisions and whether green buildings are commanding a premium. The panel discuss the extent to which resilience to extreme weather and climate change is becoming a key factor for both investors and the construction industry, how the construction industry is responding to both current and anticipated legislation and regulations, and the priority placed on issues such as biodiversity and embodied carbon.

In addition to exploring the biggest challenges facing real estate and construction in adopting sustainable practices – and the steps to overcome them – the panel also share their thoughts on the opportunities afforded by greater sustainability.