Market forecast: Steady on up

Index trends

Building tender prices in Greater London in the first quarter of 2005 continued the rise that began in the second half of last year. Analysis of tenders received shows a provisional rise of 1.5% in the first quarter, following a 4% increase in the previous six months. Over the year to the first quarter 2005, Davis Langdon’s Tender Price Index shows a rise of just over 6%. This remains lower than most other regions where price rises of up to 8% have been experienced.

Over the past year steel prices have been the big story with structural steel rates increasing by about 50%. Other metals, particularly copper, have also seen further significant rises. Labour rates have continued to rise as increased workload exerts further demands on an already pressured resource pool, particularly in the North. Current levels of workload mean price rises have been passed on to clients wherever possible.

Forecast

The outlook for the industry over the next 12 months continues to look rosy. Public sector procurement is set to keep rising whichever party secured victory last week – according to their election manifestos. Private commercial work in the offices and entertainment sectors continues to pick up, although the retail sector may be slowing. The private housing market looks certain to contract over the year ahead as house prices begin to fall and the buy-to-let market dries up.

Construction output forecasts by both the Construction Products Association and Experian Business Strategies show real growth in output for the next three years. By 2007 construction output in Britain will have grown for 13 years running since 1994. In real terms the industry will have grown almost 40% over that period.

This growth has been relatively steady and the industry has been able to adapt and expand with the increase in demand, in a way that has prevented overheating and the sort of rampant inflation that characterised the growth period of the late 1980s. However, construction price inflation over the past 10 years has averaged 6% a year, more than double the rate of retail price inflation. Continued growth in demand will keep driving this trend.

Inflation last year was exacerbated by the unusual influence particularly of steel prices. Few commentators believe that this will be repeated in 2005. In fact, many now believe that prices will come down this year. There are also signs that other metal prices may have peaked, although some of the effects of record copper and aluminium prices may still be working their way through the supply chain. The direction of oil prices is also uncertain: the latest trend is down from the new peak in early April of $55 (£29) a barrel but most believe that prices will remain above $40 (£21) for the next two years. High oil prices will continue to impact on energy, manufacturing and transport costs.

National labour agreements will usher in a big pay rise this summer for building operatives but site rates are more influenced by supply and demand which will ensure rates continue to rise in any case.

Materials price increases will ease back considerably from those seen in 2004, but wherever workload increases (most in Scotland, the North-west and Yorkshire and Humberside, least in the South-west and North-east), labour rates will continue to rise.

Davis Langdon’s forecast of tender price inflation over the next 12 months to first quarter 2006 is that prices will rise 4-5% in Greater London as workload continues to pick up, but already high-capacity usage in some regions will mean further inflation rises of up to 6%.

Over the following year to first quarter 2007, construction activity in Greater London is expected to have increased as more large commercial developments get on site, enabling certain sectors where prices have been restrained such as curtain walling and office fit-out, to re-establish margins and recoup cost increases. Price rises of 4-6% might be expected in Greater London but in the regions there may be some easing of price pressures, particularly if the private housing market has gone into decline, and increases of 3.5-5% may be more likely.