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RICS UK Construction
Market Survey, Q1 2008
A slowing Welsh housing market has hit the construction industry says
the RICS Construction Market Survey, published 1 April 2008.
Although still positive, Chartered Surveyors are reporting that overall
construction workload in Wales has slipped again and anticipated workload
growth is the lowest since A3 2003 as house builders and businesses feel
the effect of the credit crunch and demand for housing slowing. Public
and private housing workloads, having risen, are again static and workloads
in the private industrial sector remain stable. However, growth in private
commercial construction slowed to its lowest level since Q2 2005.
Infrastructure workloads rose for the second quarter in succession and
although other public sector growth has slowed, it still remains the highest
in the UK. However, the employment outlook rose once again for the second
successive quarter and anticipated profits remain stable.
Across the UK, growth in construction workloads fell to the lowest level
for more than a decade. Workloads fell to the worst level since 1996 with
1% more Chartered Surveyors reporting a rise than a fall, down from 16%
in the fourth quarter of 2007.
The worst hit sector was private housing with workload growth in this
sector turning negative for the first time since 1999. The fall is due
mainly to a down turn in the North, but private housing weakened in all
regions and is now static in London and the South East, the Midlands and
Northern Ireland, as well as Wales. 9% more chartered surveyors reported
a fall than a rise in private sector housing workloads down from the positive
figure of 16%.
Expectations for profit margins fell for only the second time in the survey’s
history with surveyor sentiment falling sharply as growth in the private
commercial and private housing sectors slowed. Equally, confidence that
workloads will increase has fallen for the fifth consecutive quarter,
falling below the survey’s long run average.
However, skill shortages have equalled the record low set in 2006 as the
industry continues to employ labour from EU accession countries. The UK’s
open and flexible labour market continues to provide a firm base for the
industry in a period of economic stability.
Cathy McLean, director of RICS Wales, said: “Growth in the construction
industry slowed abruptly in the first quarter of this year. Private residential
workloads are now shrinking as homebuilders react to challenging conditions
in the housing market by reducing the number of new homes under construction.
This emphasizes the difficulty that the government will have in encouraging
higher house building levels during periods when the housing market is
soft.
Private commercial workload growth has slowed rapidly as the downturn
in commercial property prices and the looming oversupply in the pipeline
forces developers too shelve plans for future construction. The RICS believes
it is likely that the combination of reduced building activity in private
housing and private commercial sectors will drag the construction industry
into recession by the end of 2008.”
Motivated by continued tumult in credit markets amidst the collapse of Bear Stearns and stagnating economic activity, the US Federal Reserve has again slashed the federal funds rate, this time by 75 basis points to 2.25%. In real terms, rates have fallen at their fastest rate since the recession of the early 1980s.
As significant as a cut of this magnitude is, it is but one of a series of steps the Fed has taken recently to calm credit markets.
There is mounting hard evidence that the real economy is stagnating. US consumption growth was flat in January and total non-farm employment recorded successive falls in January and February. Coupled with the expectation that house prices look to have even further to fall given a very large stock of unsold new homes, it appears that the US economy is at the early stages of a significant recession, and that any recovery is likely to be slow and muted given the substantial contradiction of household wealth and the possibility of a prolonged dislocation in credit markets.
The rate cut will support profitability in the banking sector but may have limited impact on the real economy if banks merely use it to widen their margins.
What impact will all this have on the commercial property market in Wales? Dan Griffiths, head of investment at DTZ Cardiff, commented, “There is no doubt that worsening news in the US adds to downside risks to the outlook for the UK, and therefore, Welsh property markets. Clearly the ongoing crisis in credit markets will impact on leveraged investors, whilst there may also be repercussions for the occupier market given the threat to the wider economy and the financial sector in particular. As such, the contraction of the financial sector may adversely impact on office demand in Wales, most particularly Cardiff, which is more dependent on the financial sector. The other sectors that could be hard hit are the retail and leisure occupiers, who will be affected by households feeling more nervous about their wealth and future earnings as a result of economic uncertainty. The pub operators are often one of the quickest indicators and they are already feeling the pinch, whilst the retail sector is already seeing both a fall in values and the failure of several operators.
However, on the positive side, the fall in US rates could signal a similar initiative in the UK. If this happens then yields could soon start to look attractive for low-leverage investors looking for solid income returns, particularly given recent falls in longer-term interest rates and bond yields. However, this is contingent on rental expectations, and the yield correction could have further to go.”