UK construction sector ends 2015 on a high note

Construction firms ended 2015 in party mood after a recovery in housebuilding during December.

According to the Markit/Cips UK construction purchasing managers’ index (PMI), housebuilders set aside a difficult year to invest more heavily in new plots after the general election created uncertainty over government policy.

Commercial building in UK cities also held up well to push the December index to 57.8, up from a seven-month low of 55.3 in the previous month, where a figure above 50 indicates an expansion in activity.

George Osborne’s offer of a £12bn boost to infrastructure spending over the next five years gave the outlook for construction a lift, coupled with the government’s determination to encourage an increase in housebuilding on green- and brownfield sites, which has been frustrated in recent years.

Markit said more than half of the survey panel anticipated a rise in business activity over the course of 2016, while only 7% forecast a reduction.

Commercial activity performed well in December and the civil engineering sector, a proxy for the infrastructure sector, struggled – but their fortunes appear to be reversing.

Commercial builders have reached the end of a cycle in London that has pushed land prices to new highs, discouraging further speculative building. The relative decline of regional centres to the benefit of the capital, dampening demand for new office space, has denied them a route out of the south-east.

Max Jones, a construction specialist at Lloyds Bank, said: “While 2015 appears to have ended on a high, sentiment about the outlook for this year will likely depend on which part of the sector you look at. Commercial construction is beset by uncertainty in the regions and price pressures in London and the south-east, yet housebuilding remains boosted by government measures to increase demand.”

Tim Moore, an economist at Markit, said: “Civil engineering remained the weakest performing area of construction in December. Nonetheless, civil engineering activity looks set to experience a near-term spike at the turn of 2016 from spending related to flood relief and additional capital budgets.”

Infrastructure spending on flagship projects including the Thames Tideway and Hinkley Point nuclear power station are expected to give more work to civil engineering firms over the next few years.

But Kalpana Padhiar, a construction analyst at the global credit insurer Euler Hermes, warned that the sector was still recovering from backing unprofitable projects during and after the financial crash.

“December’s figures undoubtedly bring a positive end to 2015, but risk masking the challenges faced by a sector still nursing its wounds. While many across the sector can now afford to be more selective about the work they take on, the major headwinds are unlikely to drop as we move into 2016. Rising capital pressures, an increasing skills gap and a potential interest rate hike suggest firms should continue to proceed with caution,” she said.