Tender price forecast: Hope amid uncertainty

The events of 11 September have had less of an effect on the British economy than previously thought, and the first quarter of 2002 was the 10th in a row that tender prices have risen. They are now 20% higher than they were in the third quarter of 1999. However, Davis Langdon & Everest’s analysis of tenders received in the first quarter of 2002 shows that prices rose 1% in the quarter, 2.1% in the past six months and 5.6% over the past year – the lowest rise for six years.
Tender returns in the quarter show mixed emotions among contractors. Some firms that do not have full order books for the year ahead may view the medium-term outlook with some nervousness. They are submitting more competitive tenders – no doubt with a view to placing pressure on subcontractors’ prices once work has been secured.
Statistics, similarly, are mixed. The fourth quarter 2001 survey by the Construction Confederation revealed that contractors’ spare capacity lessened after a sharp increase in the third, but shortages of traditional labour, such as bricklayers, carpenters and plasterers, eased. The Federation of Master Builders, representing the interests of smaller builders, identified a similar lessening in the difficulty of obtaining skilled labour in most regions in the last quarter of 2001, continuing into 2002.

<B>Output</b>
Figures released by the DTI show that construction output continued to rise throughout 2001. In fact, the provisional total volume of all construction work last year, at constant prices, rose for the sixth consecutive year. The yearly total exceeded the boom year of 1990 by 3% and represented 18% more work in progress than in 1993, the year with the lowest total during the 1990s.
In 2001, the volume of new construction work was just under £40bn, which is an increase over 1990 of 12.5% and an increase since 1995 of 20%. The fourth quarter figure for new work output, at seasonally adjusted constant prices, was particularly strong: the volume was 5.2% up on the third quarter.

<B>New orders</b>
DTI figures show that new orders obtained by contractors in 2001 were 2.2% higher in volume than in 2000 but were still 3% lower than in 1998 and 15% below the total for 1988. These figures lead to suspicion that the new system of data collection introduced by the DETR in January 1999 failed to produce a coherent set of results fully compatible with information published up to 1998.
The current figures do show that new orders in the second half of last year were 2.5% lower than the first half, not surprising given the knock to corporate and consumer confidence given by 11 September. However, although some projects were put on hold, many have since been reactivated.
New orders in the private commercial sector were worth £5.1bn in the six months to August 2001 and £4.8bn in the six months between September 2001 and February 2002. At seasonally adjusted constant prices this is a fall of 1.7%. Much more significant has been the decline in infrastructure orders at the end of last year. The total for the second half of 2001 was worth nearly 18% less at constant prices than during the first half. Water and sewerage works increased during the year, but the statistics were hit by a sharp fall in road building orders and a similar fall in the DTI’s “Other” category, which includes the railways.
Private industrial work has been in decline since 1998, but it has fallen away badly in the six months since 11 September after the sharp slowdown in global trade and particularly the fall-off in the property requirements of IT and telecom industries. Manufacturing profitability also fell last year to its lowest level in nine years.

<B>Economy</b>
The economic fears and uncertainty have slowly eased over the past six months even though the period has been dominated first by the Afghan war and, more recently, the Middle East. The general uncertainty caused economic growth in the UK in the fourth quarter last E E year to slip to zero, the lowest quarterly figure since 1992. Annual growth slipped to 1.7% which again was the lowest figure since 1992.
However, most commentators, including the Bank of England’s Monetary Policy Committee, have now formed the view that a modest recovery in the global economy is under way and the GDP growth for the first quarter 2002 is expected to be strong.
There is a good correlation between the UK’s GDP and the health of its construction industry. Before the latest Budget, the average forecast was that GDP for 2002 would be 1.9%, rising to 2.5% in 2003. In his Budget, Gordon Brown forecast growth of 2-2.5% this year, rising to 3-3.5% in 2003. Average GDP growth since 1996 has been 2.6%, and construction output has averaged 2.2%, leading to an average increase in building tender prices of 6.5% a year.

<B>Outlook</b>
New orders may have dipped slightly in the final quarter of last year, but orders in January and February almost recovered to average 2001 levels. Output forecasts made by the Construction Products Association and Construction Forecasting and Research at the turn of the year predicted growth in 2002 of 1.7-2.3%. The RICS now expects growth in 2002 to be 0.8%.
All forecasts expect that the decline in industrial work will continue and that there will be a fall-off in new-build private commercial work for the first time in nine years. Demand for office space has weakened considerably, particularly in London, where vacancy rates are expected to rise. However, Birmingham, Bristol, Leeds and Manchester are reckoned to be facing shortages of new space. Orders for offices in the six months since September last year were worth £2bn, a fall of 12% at current prices compared with the previous six months.
Conversely, new orders for retail developments increased 16% last year, with the second half outperforming the first by 29%. New orders in January and February were not quite as strong, but February is traditionally one of the weakest months. Retail sales remain strong: in the three months December to February the volume of sales was 5.3% higher than in the same period a year earlier. The CBI’s latest Distributive Trades Survey shows that retail sales stayed strong in March, firms remain confident about demand and expect sales to grow in the coming months. Retailers’ expansion plans remain firm as illustrated by Comet’s commitment in January to open 70 new stores over the next five years.
All the major forecasters anticipate the shortfall in private commercial output in 2002 being matched by increases in infrastructure, new build public sector work and repair and maintenance. The Budget will have reinforced and even strengthened these hopes. On Gordon Brown’s figures, total public spending (excluding investment) will increase 6.2% this year, by 7.7% during the next financial year and by a further 5.7% in 2004/5. Net investment will rise from £12bn in 2001/2 to £27bn by 2006/7. In the health sector, the chancellor proposed a 42% rise in national health spending over the next five years, which will include the construction of 42 hospitals and 750 primary one-stop care centres, due for completion by 2008.

<B>Housing</b>
House prices have been rising sharply, Nationwide Building Society most recently reporting annual house price inflation at 14% with the Halifax figure even higher at 16.9%. Nationwide now suggests that inflation in 2002 will be in the order of 10%. NHBC figures show that the median selling price of new houses in England rose 39% in the two years to the fourth quarter of 2001. Prices in Scotland have increased only 7% in this period.
Housing starts were lower in 2000 than in 1999 and continued to fall in the first half of 2001. Government figures show that fewer homes were built in 2001 than in any year since 1924, despite the fact that in the last six months of 2001 private sector starts increased by 8% over the same period of 2000. The upward trend in the private sector has been continued in the first two months of this year (12% higher) and housing association starts have increased by 16% over a similar period.

<B>Forecast</b>
The overall decline this year in private commercial work may not be as bad as some originally thought, and the private housing sector may show an increase in activity given the strength of demand. However, there are still doubts about the speed at which some infrastructure, social housing and other elements of the comprehensive spending review may translate into work on site. The likelihood is for a small increase in overall workload in 2002 compared with last year.
Cost pressures are higher than normal with significant union wage increases in the pipeline and materials prices marked up as the effects of the aggregates tax and higher oil prices are passed on.
Over the year to the first quarter 2003, it is expected that tender prices will rise between 3 and 4.5%. Over the following year it is forecast that private sector business investment will be on the road to recovery and government spending plans should be more firmly established. Construction output should, therefore, receive a double boost, pushing prices above the underlying cost trends. Clients may be wise to budget for an annual tender price increase of 4-6% by the beginning of 2004.