CPA CONSTRUCTION
INDUSTRY FORECAST
JANUARY 2019
Modest market growth possible
BESA is pleased to be able to offer members exclusive access to
valuable market information provided by the Construction Products’
Association (CPA). These forecasts have been very accurate in the
past and are regularly referred to by the Treasury.
Of course, forecasting anything business-related at the moment is
a tricky exercise thanks to the ongoing Parliamentary chaos around
Brexit, but the CPA has assumed that there will be a ‘deal’ of some kind
before we leave the EU on March 29th
Construction has remained surprisingly resilient despite the political
upheaval around Brexit and our rather sluggish economy. However, the
rest of this year is looking tough with the CPA predicting construction
output rising by a very modest 0.3%. It was originally forecasting better
growth until the latest parliamentary shenanigans.
However, it does still believe we are on track for a more health recovery
of 1.6% in 2020.
Office construction is under real pressure and the CPA expects that
sector to slump by 20% this year and remain flat in 2020 as a direct
result of Brexit uncertainty. On the plus side, infrastructure could see
a rise of almost 9% this year and 8% next, but only if the government
improves its record on delivering major projects.
Housing will also continue to grow, but not at the rate hoped for by the
government to meet its targets.
CPA economics director Noble Francis also explained that its forecasts
were conditional on the government getting a new Brexit deal or
delaying Article 50.
“However, even if this occurs, the uncertainty surrounding Brexit is
clearly affecting the construction industry in areas that require high
investment up front for a long-term rate of return such as commercial
offices,” he said.
KEY STATS
• Construction output UP by 0.3% in 2019 and 1.6% in 2020
• Private housing starts UP by 2.0% in 2019 and 1.0% in 2020
• Office construction DOWN by 20.0% in 2019 and 2.0% in 2020
• Retail construction DOWN 4.0% in 2019 and remaining flat in 2020
• Infrastructure work UP by 8.8% in 2019 and 7.7% in 2020
So some growth, but profit margins remain a serious concern with
main contractors still showing negative returns – the current average
for the Top 10 is -0.9%. This is likely to increase pressure on supply
chains to keep prices low and increases the risk of further insolvencies.
Construction output inflation is expected to rise to 2.8% with material
prices going up by 5.1% – putting further pressure on margins. Wages
too will go up by a significant 4.3%, according to the CPA, and the
government’s plans for restricting EU immigration could further reduce
the pool of available skills, which may drive up labour costs again.
contact@thebesa.com 0207 313 4919 thebesa.com
While the M&E sector is not heavily reliant on EU migrant labour other
trades are so this will affect everyone working on supply chain projects.
The government will require Regulated Qualifications Framework (RQF)
Level 3 and above for anyone wishing to enter the UK, which rules out
many working in construction trades.
The CPA says there is clear evidence that Brexit is depressing construction
demand with anything requiring high upfront cost in search of long-
term return under real pressure. This is leading to delays in investment
decisions and project cancellations with the full impact likely to feed
through to m&e projects in 2020.
All of these predictions also depend on us not having a disorderly
departure from the EU and it would only be right to consider the ‘worst-
case scenario’ painted by the Bank of England.
BESA is happy to pass on this information to members to keep you
informed, but we fervently hope this won’t come to pass and please
‘don’t shoot the messenger’.
A no deal exit from the EU would lead to an 8% drop in GDP with the
impact being felt in the second and third quarters of this year before the
economy starts to recover from the initial shock, according to the Bank.
To put this in perspective, the 2008 financial crash led to a 5% fall in
GDP and a consequent drop in construction activity of 17%. Therefore,
avoiding this scenario would be a major bonus.
Finally a comment on the political situation: Donald Trump may well
have instigated a US government shut down, but the UK finds itself in
a similar position because there is no bandwidth within government
for anything that is not related to Brexit at the moment.
With no clear consensus on the way forward, this impasse is hitting
investment and means we are not dealing with the other major challenges
facing us, such as climate change, air quality, social care and the housing
crisis.
The decision to suspend the project to build a new nuclear power station
in Anglesey demonstrates this point. The government has taken its eye
off the ball on energy policy and this vital infrastructure development,
which has already cost £2bn, is now in serious doubt.
In the words of Joseph de Maistre:
“Every country gets the government it deserves”
David Frise
CEO BESA
@theBESAGroup BESAGroup
Construction Industry
Forecasts 2019-2020
Winter 2018/19 Edition - £210
2
 Contents
Overview 4

Economy 12

Private Housing 16

Private Housing RM&I 22

Public Housing 26

Public Housing RM&I 32

Public Non-housing 32

Public Non-housing R&M 38

Commercial 40

Private Non-housing R&M 50

Industrial 52

Infrastructure 56

Infrastructure R&M 64

© 2019 Construction Products Association. All rights reserved.

This document is licensed for the exclusive use of
Members of the CPA and purchasers of its economic
forecasts (£210, including 20% VAT).
Please do not publicly distribute this document.
Additions to the distribution list can be made by
contacting the CPA at 020 7323 3770.

DISCLAIMER

All construction figures (starts, completions, orders and output)

refer to Great Britain.

All output figures are in 2016 constant prices using the historic
figures from the Office for National Statistics (ONS).

All new orders figures are in 2005 constant prices using the
historic figures from the Office for National Statistics (ONS).

The information in this booklet has been prepared by

Construction Products Association and represents the views of
Construction Products Association without liability on the part
of the Construction Products Association and its officers.

3
 Overview
Construction output is forecast to remain broadly flat in 2019 before growth of 1.6% in
2020 (assuming a revised Brexit Withdrawal Agreement that enables the UK to enter an
implementation period or a delay to Article 50 to allow a renegotiation with the EU).
Construction output has remained resilient this
year in spite of the rising political uncertainty
that the UK is currently experiencing. Output
in the first three quarters of 2018 was 0.7%
higher than in the same period one year earlier
despite unseasonably bad weather during the
first quarter of 2018, which suffered from
substantial rain in January in addition to snow
in February and March. However, the growth
in construction activity between January and
September varied considerably by region and by
construction sector. In the North West, Midlands
and Yorkshire, construction output continued to
enjoy growth, not just during the long Summer
but also into the Autumn and Winter. Conversely,
Construction activity to rise by only
0.3% &
1.6%
in 2019 in 2020
whilst construction activity in London still remains
at a relatively high level, output peaked in 2017
and fell throughout 2018. Across the different
sectors, although construction output during the
• Construction output to rise by 0.3% in
Key Points
2019 and 1.6% in 2020
• Private housing starts to rise 2.0% in
2019 and 1.0% in 2020
• Offices construction to decline
20.0% in 2019 and 2.0% in 2020
• Retail construction to fall 4.0% in 2019
and remain flat (0.0%) in 2020
• Infrastructure work to rise by 8.8% in
2019 and 7.7% in 2020
4
first three quarters of 2018 was 0.7% higher than
a year earlier, this was primarily driven by 7.7%
growth in private house building output, with
increases outside the capital offsetting falls in
London, the 7.8% growth in the industrial sector
as double-digit increases in the warehouses
sub-sector offset falls in activity in the
factories sub-sector, as well as 4.5% growth in
infrastructure in spite of continued delays and
cost overruns on major infrastructure projects.
Growth in these sectors during the first three
quarters of 2018 was enough to offset a 15.0% fall
in public non-housing and a 5.1% fall in commercial,
the second largest construction sector.
Uncertainty regarding the UK’s withdrawal from
the EU has increased considerably since the
CPA’s Autumn forecasts and there is less time
available for a Brexit Withdrawal Agreement
with the EU that also passes through the UK
parliament. The CPA forecasts assume that either
a revised agreement will be made with the EU
that passes through UK Parliament in spite of
the failure of the initial Parliamentary vote on 15
January or, more likely at the time of writing given
the lack of time between the vote and the UK
leaving the EU on 29 March 2019, an extension
to Article 50. Either of these would ensure that
trading conditions would remain similar in the
near-term although neither provides a solution
to the long-term relationship with the EU. The
extent of the loss in January suggests that minor
revisions to the draft agreement will not be
enough to ensure it passes through Parliament
and major revisions would require renegotiation
and agreement with the EU. Given the lack of
agreement in UK Parliament, the probability of a
second referendum has increased although there
is little to suggest what the question would be
and whether it be able to would settle such a
divisive issue. The prospect of ‘No Deal’ remains
high and is rising. Given the lack of preparation
by government, businesses, especially small
businesses, and households for ‘No Deal’, it is
unlikely to arise by design. If ‘No Deal’ does arise,
it is still only likely to arise due to the failure to
agree on any other option. An extension to
 Article 50 is more likely than No Deal and that
would, at the very least, provide a degree of
certainty and little disruption in the next three
months but the essential problems would remain
unsolved and the uncertainty would remain.
The issues of ‘No Deal’ and UK construction are
explored in the CPA Brexit Presentation.
Whilst construction output has remained robust
in spite of the political uncertainty over Brexit,
this does not mean it has had no impacts on
the construction industry, particularly since the
uncertainty increased considerably after the
Summer. Activity on site is largely determined
by projects signed up to in previous months and
years. The primary impact of Brexit uncertainty
has been on signing up to new major projects,
particularly in construction sectors that are
dependent upon high investment up front for
a long-term rate of return, especially when the
funding is from international investors. This, in
particular, impacts upon construction sectors
such as prime residential apartments in London,
commercial offices towers and industrial
factories. Conversely, construction sectors that
so far appear to have been immune from Brexit
uncertainty include private housing outside the
capital, and private housing repair, maintenance
and improvement, a sector in which an older,
wealthier demographic with housing and pension
wealth has generated growth since the pension
freedoms were introduced in April 2015.
Construction Output
180,000
160,000
2.2%
140,000
£ million - 2016 Constant Prices
120,000
100,000
80,000
60,000
40,000
20,000
0
2010 2011
Private housing starts to rise by
2.0% in 2019
1.0% in 2020
as Help to Buy sustains
growth outside London
The CPA’s private housing output forecast
remains unchanged from the past three and six
months. Clearly, there has been a slowdown
in the general housing market, which is only
expected to deteriorate further until there is
more clarity over Brexit and UK macroeconomic
fortunes. UK mortgage approvals in the year
to November 2018 were 2.5% lower than a
year earlier and property transactions in the
same period were 3.1% lower than a year
earlier. However, whilst mortgage approvals
and property transactions have fallen, house
prices have continued to rise in most regions,
clearly indicating that whilst demand has fallen
in the general market, supply has also fallen as
potential sellers adjust to uncertain conditions
by taking their properties off the market. ONS/
Land Registry average UK house prices in the
year to October 2018 by region were highest in
the North West and Yorkshire and the Humber,
where prices rose by 4.9% and 4.4%. The lowest
house price growth in the year to October
7.2% 0.3% 1.6%
4.1%
4.4% -0.2%
8.8%
1.5%
-6.9%
2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association
5

2018 was in London, where prices fell by 1.7%
but survey and anecdotal indications are that
there have been double-digit falls in demand in
London but these have yet to translate to prices
as anyone who does not need to sell has taken
their property off the market or not put it on
the market in the first place. In areas where
house price growth continues apace, such as the
North West, Yorkshire and the Humber and
the Midlands, house builders have continued
to increase building activity and increase starts
as Help to Buy is sustaining demand for new
build and growth in these areas is still expected
to offset falls in house building in London.
A 2.0% growth in private housing starts is
expected in 2019 and 1.0% growth is expected
in 2020 although it should be noted that major
housebuilder business models are flexible enough
6
to adapt to market conditions should there be a
sudden deterioration in UK economic conditions
in 2019.
The CPA continues to have serious concerns
regarding the ONS infrastructure data, which
is used as the historic data to forecast from.
These are highlighted in the disclaimers at the end
of the overview. As a result, estimated figures
for 2018 and forecasts reflect activity on the
ground measured by survey evidence as well as
sales and orders data rather than the ONS data.
Infrastructure activity is still expected to be the
key driver of growth over the next two years
and the forecast remains broadly unchanged
since the Autumn forecasts. Infrastructure
output is forecast to rise by 8.8% in 2019 and
7.7% in 2020. There remain concerns regarding
persistent and increasing delays and cost overruns
to major projects such as Crossrail and HS2 in
addition to increasing concerns regarding the
Thames Tideway Tunnel, in which there are
reports that a substantial proportion of the
contingency has already been used only a few
weeks into the tunnelling work on a project that
is set to continue until 2023. However, given
historical delivery issues in the sector, delays
and cost overruns have already been built into
CPA forecasts on major infrastructure projects.
Main work at Hinkley Point C is expected to
get going early in 2019 and should boost output
in the electricity sub-sector each year into the
middle of the next decade. However, the second
of the planned new nuclear power stations,
Wylfa Newydd, was suspended by Hitachi in
January. Water & sewerage output is expected
to continue next year at its highest level since
2012 due to work under five-year spending
plans from water companies in addition to the
Thames Tideway Tunnel. Activity in the roads
sub-sector appears to be split between smart
motorways and traditional roads construction. In
smart motorways, projects are feeding through
from Highways England and boosting activity for
electrics, signage, IT and groundworks. However,
there is little in the way of new major projects
on traditional roads construction, particularly
on local roads given that local authorities
remain highly financially-constrained despite the
government’s claims of an end to austerity. This
is reflected in surveys from the Civil Engineering
Contractors Association (CECA), which note falls
in construction activity over the last six months
on motorways, trunk roads and also local roads.
The harbours sub-sector, dominated by work on
ports, is expected to grow by 12.0% in 2019 and
10.0% in 2020 due to growth in world trade and
an improvement in facilities on site such as offices
and warehousing. In addition, an increase in
Brexit uncertainty would boost demand for ports
expansions even further.

The commercial sector is expected to endure

the sharpest falls in volume of activity over
the forecast period due to declines in offices
construction and retail construction. Falls in the
sector have also been adversely affected by the
two former Carillion PFI hospital projects in
Liverpool and Sandwell moving to public funding
due to a lack of interest from private sector
investors. Overall, commercial output is expected
to fall by 8.0% in 2019 and 1.5% in 2020. Offices
construction in London, which accounts for
over one-quarter of the UK offices construction
market, peaked at the start of 2017 and output
is expected to fall from this high level throughout
the forecast period. Small and medium-sized
projects continue, particularly in cities outside the
capital. In addition, speculative demand continues
from the Technology, Media and Telecoms (TMT)
sector but speculative demand from the financial
sector for new high-end offices projects has fallen
away the most and is expected to offset growth
in the other areas. Retail construction continues
to be adversely affected by the shift to spending
online and, in November 2018, online spending
accounted for 21.5% of total UK retail sales, the
first time that online spending has accounted
for over one-fifth of total retail sales as Black
Friday exacerbated the shift of spending further
towards online given that the greatest reductions
are often not in-store. The start of 2018 saw
many traditional retailers, which had struggled
with changing business models to match high
street and online retail spending patterns, go into
administration or liquidation and the start of 2019
is expected to see further bankruptcies. It is not
all bad news for retail construction but activity
is likely to be focused on interiors and fit-out of
existing properties for reuse by new retailers
rather than construction of new out-of-town
facilities. Overall, retail construction is expected
to fall 4.0% in 2019 and remain flat in 2020 as
large projects such as the £1.4 billion Brent Cross
Extension and Croydon Partnership offset further
falls in the sub-sector.

Public & Private Sector Construction Output

£ million 2016 2017 2018 2019 2020

Change on previous year Actual Actual Estimate Forecast Projection

37,505 38,994 37,275 37,788 38,370

Public Sector inc. PFI
-3.4% 4.0% -4.4% 1.4% 1.5%

114,266 123,707 125,101 125,083 127,100

Private Sector
6.8% 8.3% 1.1% 0.0% 1.6%

151,771 162,701 162,376 162,871 165,470

Total Construction
4.1% 7.2% -0.2% 0.3% 1.6%

Source: ONS, Construction Products Association

7

Construction Output (% Growth)
7.2%
4.1%
-0.2% 0.3%
2016 2017 2018e 2019f
Source: ONS, Construction Products Association
Industrial sector output is expected to rise
by 2.5% in 2019 and a further 4.4% in 2020 but
there are clearly contrasting fortunes between
the industrial factories and warehouses sub-
sectors. The main factories activity currently
on site is based on projects for which the
investment decision was made prior to the EU
Referendum in June 2016. It is doubtful whether
these major investments would have gone
ahead given the uncertainty over long-term
returns had these decisions been made later.
The lack of a pipeline of projects outside of
these projects suggests that output in the sub-
sector will fall 5.0% in 2019 and 2.0% in 2020.
Conversely, whilst the shift to online spending
adversely impacts retail construction, it boosts
the demand for warehouse construction, which
is not only increasing in terms of the number of
units but also in value as warehousing projects
become larger and incorporate more technology.
The increase in demand from retailers has also
drawn in speculative demand from investors
and the uncertainty regarding Brexit and need
for space to stockpile has also raised demand
for warehousing space. Both of these factors
have also led to a sharp rise in warehouse space
prices over the past year. After growth of 20.0%
in 2018, warehouses construction is forecast
to rise by 10.0% in 2019 and a further 10.0% in
2020. As with the infrastructure harbours sub-
sector, if there are major issues around Brexit,
warehousing will be a sub-sector that benefits
8
from an increase in construction activity related
to storage and stockpiling requirements.
Key Risks
Brexit
The CPA has assumed that a broad agreement is
made between the UK and EU that can be taken
to the UK Parliament and be ratified by the 27
1.6%
EU parliaments prior to Brexit on 29 March, thus
enabling the implementation period. If this were
not to be the case then the UK would be in a
2020p
‘No Deal’ scenario. Issues around Brexit and the
construction industry are explored further in the
CPA’s Brexit presentation.
Margins
In 2017/18, the average pre-tax margin of the
top 10 UK contractors was -0.9%. In the year
to October 2018, construction output inflation
averaged 2.1% compared with a year earlier
whilst construction wage inflation was 3.6% and
construction materials inflation was 5.4%, the
latter primarily due to the impacts of fuel input
prices in the energy-intensive manufacturing of
products. Margins for the main contractors are
unlikely to be substantially better in 2018/19
and issues are likely to be pushed throughout
the supply chain to sub-contractors and
manufacturers.
Housing
Private house building is expected to rise
throughout the forecast period as increases
in housing demand, sustained by Help to Buy,
ensure growth in the North West, Midlands and
Yorkshire and the Humber that offsets falls in
the London and the South East housing markets.
The confirmed extension of the equity loan
through to March 2023, albeit with narrower
eligibility conditions from March 2021, has
allayed some medium-term concerns from house
builders. However, if market uncertainty spreads
beyond London and the South East, a fall in
house building activity is likely to follow quickly
as house builders reduce starts and build out
rates, despite government pressure to increase
house building volumes to 300,000 per year.
9
 Infrastructure
Due to persistent poor procurement, delays and
cost overruns on major infrastructure projects,
in addition to projects in five-year spending plans
frequently being pushed back into the next five-
year spending plan, the CPA has been cautious
regarding infrastructure growth in 2019 and
2020. However, if government is able to improve
its delivery of infrastructure projects then
sector output would be expected to increase by
double-digit growth rates each year.
DISCLAIMER 1: The Office for National
Statistics (ONS) made major revisions to the
construction output data in October 2015. The
result of this was to add an extra £150-200
million per month from March 2015 into the
infrastructure sector. As a result, there is now
a structural break in the ONS infrastructure
sector and sub-sector output data and 2015
ONS infrastructure data cannot be compared
with data from previous years.
DISCLAIMER 2: The ONS determines sub-
sector output by utilising the new orders data
and an average length of time between orders
and output. However, this means that major
one-off projects may be assigned to output
by the ONS earlier than it actually occurs. An
illustration of this is in the water & sewerage
sub-sector. General activity in the sector occurs
under frameworks and often takes relatively
little time to feed through from new orders to
output as a part of general works under the
five-year plan. However, the ONS has assigned
work on the £4.2 billion Thames Tideway
Tunnel shortly after the new orders in 2016. As
a consequence, the CPA is forecasting actual
activity growth in the infrastructure sector and
sub-sectors rather than forecasting distortions in
the ONS data.
DISCLAIMER 3: The ONS has substantially
revised upward all historic data going back to
2016 Q2. Construction output between January
and July 2017 was initially 1.3% higher than a
year earlier. However, the ONS has revised this
up to 5.1% higher than a year earlier with the
significant step up in construction output at the
end of 2016 whilst simultaneously construction
employment remained broadly flat.

ONS Construction Output (September & October 2017 Data Releases)

126
October Release September Release
124

122
Construction Output (2013=100)

120

118

116

114

112

110

108

106

104
2015 2016 2017

Source: ONS

10
Construction Industry Forecasts - Winter 2018/19
£ million 2016
2016 2017 2018 2019 2020
constant prices

% annual change Actual Actual Estimate Forecast Projection

Housing

Private 31,189 34,334 36,051 36,772 37,139

14.9% 10.1% 5.0% 2.0% 1.0%

Public 5,102 6,205 6,081 6,142 6,142

-2.2% 21.6% -2.0% 1.0% 0.0%

Total 36,291 40,539 42,132 42,913 43,281

12.2% 11.7% 3.9% 1.9% 0.9%

Other New Work

Public Non-Housing 11,055 10,771 9,311 9,251 9,283

3.8% -2.6% -13.6% -0.6% 0.3%

Infrastructure 18,521 19,659 19,843 21,583 23,238

-3.4% 6.1% 0.9% 8.8% 7.7%

Industrial 4,572 4,710 5,134 5,261 5,492

-5.4% 3.0% 9.0% 2.5% 4.4%

Commercial 28,768 30,999 29,359 26,997 26,601

7.6% 7.8% -5.3% -8.0% -1.5%

Total other new work 62,916 66,139 63,647 63,092 64,614

2.5% 5.1% -3.8% -0.9% 2.4%

Total new work 99,207 106,678 105,778 106,005 107,895

5.8% 7.5% -0.8% 0.2% 1.8%

Repair and Maintenance

Private Housing RM&I 19,630 21,530 21,530 21,530 21,961

5.6% 9.7% 0.0% 0.0% 2.0%

Public Housing RM&I 7,581 7,391 7,391 7,391 7,391

-7.4% -2.5% 0.0% 0.0% 0.0%

Private Other R&M 12,063 13,003 13,653 13,926 14,205

5.1% 7.8% 5.0% 2.0% 2.0%

Public Other R&M 5,001 5,102 4,847 4,750 4,750

-0.8% 2.0% -5.0% -2.0% 0.0%

8,289 8,997 9,177 9,269 9,269

Infrastructure R&M
-5.8% 8.5% 2.0% 1.0% 0.0%

Total R&M 52,564 56,023 56,598 56,866 57,575

0.9% 6.6% 1.0% 0.5% 1.2%

TOTAL ALL WORK 151,771 162,701 162,376 162,871 165,470

4.1% 7.2% -0.2% 0.3% 1.6%

Source: ONS, Construction Products Association

11
 Economy
After estimated growth of 1.3% in 2018, UK GDP is expected to grow by 1.4% in 2019
(assuming a revised Brexit Withdrawal Agreement that enables the UK to enter an
implementation period or a delay to Article 50 to allow a renegotiation with the EU).

UK GDP rose by 0.6% in 2018 Q3 following
growth of 0.4% in Q2 due to a continued catch-
up from the loss of activity during the weather-
affected first quarter. In addition, growth in
the third quarter of 2018 was also buoyed by
UK GDP set to grow by
Growth in services output slowed to 0.5% yet,
as it dominates UK economic activity, services
remained the largest contributor to UK GDP
growth in the third quarter.
In terms of more recent data, the Markit/CIPS
PMI for manufacturing was 53.6 in November and
reached a six-month high of 54.2 in December.
Although the reading was above 50, the threshold
for expansion, the average reading during Q4
was the weakest in two years, indicating that

1.4% in 2019 activity in the manufacturing sector remained

increases in consumer spending. Across the
different sectors, construction output growth
rose after a weak start to the year whilst
manufacturing output increased for the first time
in 2018 after two consecutive quarters of falls.
subdued. Output and new orders both picked
up in December. Growth in new orders was
primarily driven by new product launches and
client stock-building in the domestic and overseas
markets. The December survey also showed that
optimism among manufacturers remained near
the 27-month low recorded in November, due to
concerns over Brexit uncertainty, exchange rates
and a slowing economy.

Economic Indicators
2016 2017 2018 2019 2020

Actual Actual Estimate Forecast Projection

GDP 1.8% 1.8% 1.3% 1.4% 1.9%
Fixed Investment 2.3% 3.5% 2.0% 3.0% 2.0%
Household Consumption 3.2% 2.2% 1.6% 1.8% 2.0%
Real Household Disposable Income -0.2% 0.5% 1.0% 1.2% 1.7%
Government Consumption 0.8% -0.2% 0.5% 0.4% 0.3%
CPI Inflation 0.7% 2.7% 2.5% 2.0% 2.0%
RPI Inflation 1.8% 3.6% 3.0% 2.7% 2.7%
Bank Base Rates - June 0.50% 0.25% 0.50% 0.75% 1.00%
Bank Base Rates - December 0.25% 0.50% 0.75% 1.00% 1.00%

Source: ONS, Construction Products Association

12
 Interest Rates and Inflation
Bank of England Base Rate
4.5%
CPI
RPI
4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%
2013 2014 2015 2016 2017 2018
Source: Bank of England, ONS

The Markit/CIPS PMI for construction fell to
52.8 in December from 53.4 in November but
remained above the no-change mark of 50 that
separates growth from contraction. December’s
data pointed to an expansion led by civil
engineering work. Slower growth was recorded
for housing and commercial, the latter of which
fell to the lowest since May. The prospect of large
transport and energy infrastructure projects
boosting growth in 2019 led to an uptick in
business confidence for the year ahead for the
civil engineering sector, but political uncertainty
delaying spending decisions dented confidence for
the commercial construction sector. Construction
employment continued to increase in December,
but the survey also showed that rising labour costs
mean firms are not replacing voluntary leavers.
work to replace projects that are completing. In
addition, softer demand and cost-cutting measures
led to hiring activity at its lowest for 29 months.
Looking at the year ahead, optimism among
services producers fell to the second-lowest since
March 2009, owing to Brexit-related uncertainty,
concerns about the outlook for business
investment and the availability of skilled staff.
GDP growth in 2018 Q4 is expected to slow
to between 0.3% and 0.4% and GDP growth
overall for 2018 is estimated to be 1.3%. Looking
forward, almost all macroeconomic forecasters
anticipate a deal between the UK and EU that
enables the implementation period and the
average of the forecasters expects GDP growth
of 1.5% in 2019.

The Markit/CIPS PMI for services was 51.2 in

December, up from the 28-month low of 50.4 in
November but still marking one of the weakest One interest
expansions in the services sector since mid-2016.
The slowdown in business activity reflected
rate rise
subdued business and consumer spending, with expected in 2019
survey respondents attributing this to heightened
Brexit uncertainty. New business growth also
picked up marginally from a two and a half year low The Bank of England raised interest rates from
in November, but remained subdued compared to 0.5% to 0.75% in August 2018. The continued
earlier readings. Respondents noted a lack of new uncertainty regarding Brexit and UK economic

13

growth prospects in 2019 indicates that further
rises would only occur once data are available
illustrating that UK economic activity continued
to grow in the first half of 2019, which would only
become clear in Autumn 2019. The CPA forecast
anticipates a further rate rise in the second half
of 2019.
CPI inflation slowed to 2.3% in November,
slightly lower than the 2.4% in October and it is
edging closer to the Bank of England’s target of
2.0%. The key driver of the slowdown in inflation
during November was a fall in petrol prices, a
consequence of falls in the oil price since the
Summer. The Bank of England expects a further
slowdown in inflation in January and for it to
remain below target in subsequent months.
Forecasting oil prices is challenging at the best of
times but determining the impacts of oil prices
on UK CPI inflation is likely to be extremely
challenging over the next 12-18 months given
the various uncertain factors at play. OPEC and
Russia’s decision to cut oil production at the end
of November 2018 in addition to continual falls in
Venezuelan oil production would suggest a rise in
oil prices during early 2019, providing an upward
contribution to CPI inflation that would suggest it
is likely to stay above the Bank’s target in the first
half of 2019. However, global uncertainty regarding
demand and continual increases in US shale oil
production may offset this. The larger impact of
oil, as well as other imported commodities and
components, on UK CPI inflation is likely to be
what occurs with the Sterling exchange rate due
14
to Brexit. Traders have, in general, factored in
an eventual deal between the UK and EU. If this
occurs then a slight appreciation in Sterling and
slower import price inflation would be expected.
Conversely, No Deal would suggest a sharp
depreciation in Sterling, as occurred post-EU
Referendum, which would lead to sharp rises in
import inflation in addition to supply issues initially.
The former is assumed in the CPA forecast. The
issues around the latter are highlighted in the CPA
Brexit Presentation.
The Bank of England Agents’ Summary for 2018
Q4 highlights some key points about how the
Bank’s contacts see key areas of interest for the
construction industry. It reported that, overall,
construction output growth remained modest,
split by varying performance across sectors.
Growth in house building slowed in some regions,
reflecting caution over weaker markets in London
and the southern regions by major house builders,
but activity in the private rental sector and rm&i
was firm. In terms of housing market conditions,
although intense competition among lenders has
increased the availability of higher loan-to-value
mortgages, buyers were reported to be taking
longer to commit to purchases and economic and
political uncertainty had led to an increase in the
number of purchases falling through. Activity in
the commercial and public non-housing sectors
was reported to have slowed, particularly in
retail and offices, whilst growth in infrastructure
is balanced by concern over delays and projects
being scaled back.
UK business investment continued to experience
small rises following the EU Referendum in June
2016 and by the final quarter of 2017 it was 2.9%
higher than in 2016 Q2, illustrating that whilst
major investments were affected by the rise
in uncertainty, the majority of smaller business
investments such as IT and equipment continued
broadly in line with UK economic activity.
However, business investment fell by 1.1% in 2018
Q3 compared with the previous quarter and was
1.8% lower than a year ago. This was the third
consecutive quarterly fall and business investment
is expected to have fallen further during the final
quarter of 2018 and in the first quarter of 2019
at the very least. The last time that business
investment fell for more than two consecutive
quarters was during the financial crisis during
2008 and 2009. The implication of this is that the
heightened uncertainty during 2018 and upcoming
deadline for withdrawing from the EU is not only
Unemployment 1.5 Million
2019
impacting upon the largest investments but is also
hindering general expansions, improvements and
capital investments.

The UK labour market remains buoyant in terms

of the number of people in employment. There
were 32.48 million people in work in the UK 1.38 Million
between August and October 2018, slightly above October 2018
the 32.40 million in May to July 2018 and 396,000
higher than a year earlier. The employment
rate was 75.7% between August and October
2018, matching the rate between May and July
2018 but higher than a year earlier (75.1%). The
unemployment rate was 4.1% between August
and October 2018. Between May and July, the
unemployment rate was 4.0%, which was the
lowest since 1975. Source: ONS, Construction Products Association

Although employment has continued to be

buoyant in recent years, a great concern has been
the lack of wage growth. However, in October
2018, average weekly earnings including bonuses
rose by 3.3%, which combined with CPI inflation
slowing to 2.3% in November, implies real wage
growth of 1.0%, which continues the real wage
growth since December 2017, albeit still low by
historic standards. Given increasing real wage
growth, it would be expected that retail sales
would be relatively buoyant yet retail sales in the
three months to November rose by only 0.4%
in spite of, or perhaps because of, Black Friday in
November. In addition, Black Friday is likely to have
exacerbated the trend away from the high street
towards online shopping, where the best deals
have tended to be available and, in November, UK
online retail sales reached their highest ever level
and were 21.5% of all retail sales.
Downside Risks:
• Economic activity slows due to continued
uncertainty
• Unemployment rises due to subdued
economic activity
• Real wages growth continues to be poor
in 2019
• Interest rate rises impact on consumer
confidence
Uncertainty regarding ‘No Deal’ is assumed
to dissipate but, if it continues closer to the 29
March 2019 deadline, even if a deal is eventually
concluded, then firms would be more cautious
regarding business investment and hiring whilst
focusing on cost reduction and stockpiling. This
would be expected to impact adversely on
investment, unemployment and wage growth
whilst slowing economic activity, rising uncertainty
and interest rate rises may also impact on
consumer confidence and spending.
Upside Risks:
• UK economic growth rates accelerate
• Unemployment continues to be subdued
• Real wages rise significantly during 2019
If UK economic activity grows at rates of above
0.5% per quarter or above, the unemployment
rate would be anticipated to fall even further and
nominal wages may start to rise significantly. If
the lower oil prices continue and feed through
into slower inflation, this could consequently
ensure stronger real wage growth, which boosts
consumer confidence and spending. In addition, a
final agreement on the UK’s withdrawal from the
EU would provide a boost to Sterling, lowering
imports inflation.

15
Private Housing
Growth in housing starts is expected to slow from an average growth rate of 10.4% between
2013 and 2017, to 2.0% in 2019 and 1.0% in 2020.

Private sector house building is closely linked to
the performance of the overall housing market,
driven by mortgage lending, property transactions
and house prices. Bank of England data show
that after declining 1.6% in 2017, the number
of mortgage approvals fell 2.5% year-on-year
in January-November 2018, to an average of
65,000 per month. UK property transactions
have followed a similar trend to mortgage
lending, decreasing 0.8% in 2017, and were 3.1%
lower in January to November 2018 than in the
corresponding period of the previous year. Annual
property transactions volumes have remained
at around 1.2 million per year since 2014 and

Private Housing Starts and Completions Great Britain

2016 2017 2018 2019 2020

Actual Actual Estimate Forecast Projection

147,916 155,343 158,449 161,618 163,235

Starts
5.4% 5.0% 2.0% 2.0% 1.0%

133,561 153,552 155,088 156,638 158,205

Completions
3.1% 15.0% 1.0% 1.0% 1.0%

31,189 34,334 36,051 36,772 37,139

Output (£m)
14.9% 10.1% 5.0% 2.0% 1.0%

19,630 21,530 21,530 21,530 21,961

RM&I Output (£m)
5.6% 9.7% 0.0% 0.0% 2.0%

Source: MHCLG, ONS, Construction Products Association

16
 Lending to Individuals Total Mortgage Approvals for House Purchase (number)
Remortgaging (value)
140 Total Mortgage Approvals (value) 50%

120 40%

Lending – 3 month change on a year earlier

Secured Lending - Total Approvals (000s)

100 30%

80 20%

60 10%

40 0%

20 -10%

0 -20%
Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

Source: Bank of England

the latest data to November imply the same

level for the whole of 2018. By market segment,
in 2017 the number of purchases by first-time
buyers reached its highest level since 2007, and 2018
90.9%
UK Finance data show that lending to first-time
of new mortgage lending
buyers continued to increase throughout 2018. at fixed interest rates
In contrast, mortgage lending to home movers
and buy-to-let lending has decreased, with the
latter affected by changes to stamp duty and the

reduction in tax relief for residential landlords.
In terms of house prices, there is a varying
performance by region. According to the ONS/
Land Registry, UK house prices rose 2.7% in
October, the slowest national growth rate since
July 2013. Price growth was led by the North
West (4.9%), Yorkshire and the Humber (4.4%),
the East Midlands (4.3%) and the West Midlands
(3.8%). House prices in London have fallen
since June and fell 1.7% in October. In inner
London, an increase in the supply of higher-end
residential units, as well as stamp duty changes in
2014 that raised tax on higher-value properties,
has led to a slowdown in annual house price
growth in these boroughs since July 2016, with
falls recorded throughout 2018. This weakening
appears to have spread to outer London, where
house price growth has slowed to below 1.0%
each month since February, from an average of
12.6% in 2016 and 3.5% in 2017. Surveys from the
49.7%
2008
of new mortgage lending
at fixed interest rates
Royal Institution of Chartered Surveyors (RICS)
and the Bank of England suggest that housing
market weakness will remain concentrated in
the capital, the South East and East of England
and that appears to be a view shared by major
house builders. Barratt, Crest Nicholson and
Berkeley have all announced a reduction in
operations in London. Outside of London,
pent-up demand and a reported reduction in
the supply of existing properties for sale has
contributed to the continued house price growth
and whilst this inflation continues, there would be
expected to be an associated increase in house

17
 Affordability House Price/Earnings Ratio
First Time Buyers’ Affordability
6.00 55

5.50
50
5.00

Mortgage Payment as a % of Income

4.50
45
Ratio

4.00

40
3.50

3.00
35
2.50

2.00 30
2009 Q1

2009 Q3

2010 Q1

2010 Q3

2011 Q1

2011 Q3

2012 Q1

2012 Q3

2013 Q1

2013 Q3

2014 Q1

2014 Q3

2015 Q1

2015 Q3

2016 Q1

2016 Q3

2017 Q1

2017 Q3

2018 Q1

2018 Q3
Source: Nationwide

building. Forecasts for UK house price inflation in from 8.8% to 13.0% and for the first half of 2018,
the HM Treasury’s comparison of independent rose to 13.7%. In Wales and Scotland, the equity
economic forecasts in December averaged 2.3% loan scheme will be in operation until March
for the year to 2019 Q4 and reflecting general 2021. In the Budget in October, the Chancellor
macroeconomic uncertainty for the year ahead, announced that in England the scheme would
projections range between 0.8% and 3.7%. be extended for a further two years to March
2023. From April 2021, however, the eligibility
A regional variance in demand for house criteria will be narrowed to first-time buyers and
purchases, and particularly new build, has been regional caps will be set for purchase prices. It will
underpinned by Help to Buy. The equity loan remain at £600,000 for homes in London, but
was introduced in April 2013, and between its be set at 1.5 times the current forecast regional
introduction and June 2018, the equity loan average first-time buyer price elsewhere, ranging
was used on 183,947 transactions in England. from £186,100 in the North East to £437,600 in
Although this accounts for only 3.4% of property the South East. This will have an impact on SME
transactions over the period, it represents 31.4% builders offering higher-end and higher-value
of new build completions. Furthermore, in the properties in the East and South East. In addition,
most recent four-quarter period, this proportion the proportion of first-time buyers using Help to
rose to 37.2%. Among the top 20 volume house Buy is lower than the national average of 80.9%
builders, the proportion of sales supported by in seven of the top ten local authorities with the
Help to Buy reaches as high as two-thirds. The largest equity loan uptake, particularly among
counterpart schemes in Scotland and Wales those in the South East and East.
have accounted for a similar proportion of
transactions and building activity. Given that Macroeconomic uncertainty provides the largest
property transactions volumes have remained risk to near-term demand and developments in
relatively unchanged during Help to Buy’s period the labour market, particularly with regards to
of operation, the equity loan is likely to be unemployment and job security, will be a key
skewing demand towards new build. In England, determinant of how house building moves in line
between 2014 and 2017, new build completions with the forecast. In addition, the Bank of England
as a proportion of property transactions rose raised interest rates by 0.25 percentage points

18
 at its August 2018 meeting, marking the second
increase in nine months. The bank rate of 0.75%
remains at a low level by historical standards and
these increases alone are unlikely to have a material
impact on demand. Interest rates on new fixed-
rate mortgages during 2018 remained below the
interest rates available in 2016. However, combined
with constrained real incomes, hawkish statements
from policymakers may set expectations for higher
future interest rates and a worsening in mortgage
repayment affordability.
The government’s focus on increasing net supply
to 300,000 homes per year by the mid-2020s
has resulted in a raft of policy measures since the
Housing White Paper was published in February
2017. These include the £5.5 billion Housing
Infrastructure Fund (topped up with a further
£500 million at Budget 2018), a £1.3 billion Land
Assembly Fund to acquire and prepare land
for development, a £630 million Small Sites
Fund, the £4.5 billion Home Building Fund of
loans for SMEs, and the £1.0 billion SME loan
finance package provided through a partnership
between Homes England and Barclays. £866
million was allocated to 133 projects in February
under the marginal viability arm of the Housing
Infrastructure Fund, which aims to unblock
sites held up by infrastructure funding gaps.
The second tranche covers larger, strategic
infrastructure projects, with up to £250 million
in early finance available for each bid, and an aim
Private housing completions by type (England)
100
90
80
Property Completions by Type %
70
60
50
40
30
20
10
0
2008/09 2009/10 2010/11
of de-risking projects to attract other investment.
The funding is yet to be allocated, which suggests
that the house building activity from these
measures will occur beyond the forecast period.
For the same reason, long-running reform to the
National Planning Policy Framework (NPPF), the
Mayor of London’s housing strategy and long-
term devolved regional housing deals have not
been factored into the forecast at this point.
The government is keen to develop the
Build to Rent sector, which covers new build
developments for private rent that aim to
generate a long-term return on investment.
According to the British Property Federation
in 2018 Q3, there had been a cumulative
25,665 units completed and there were 64,320
units of this tenure with planning permission,
concentrated mainly in London, Manchester and
Birmingham. This has potential to provide some
uplift to house building activity, but accounts for a
very small proportion of the 5.3 million privately-
rented housing stock in Great Britain.
In England, statistics from the Ministry of Housing,
Communities and Local Government showed
that on a seasonally adjusted basis, private
housing starts in 2018 Q3 rose 13.9% from Q2
and were 16.7% higher year-on-year. For the first
three quarters of 2018, starts increased 3.9%.
New orders in Q3 fell 8.3% year-on-year but for
the year to date, were 2.9% higher due to the
Houses
Flats
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
Source: MHCLG
19
 18.7% increase registered in Q1. Unlike starts
and completions, private housing output includes
change of use, such as offices to residential, and
conversions, commonly changing a house into
flats. The former accounted for 13.4% of net
housing supply in 2017/18 (29,720 units), whilst
conversions, added 4,550 units. Net additions
through change of use appear to have peaked in
2016/17 and, therefore, are expected to provide
less of an impetus to output growth than was
seen between 2015 and 2018, partly due to
the diminishing stock of desirable commercial
premises for this purpose. Following an estimated
2.0% rise in private housing starts and 5.0%
increase in output in 2018, the forecasts for
growth starts and output are expected to align at
2.0% in 2019 and 1.0% in 2020.
Upside Risks:
• Renewed falls in real wages deter Help to Buy
purchases
• House price weakness extends to UK regions
• The Bank of England raises interest rates more
than once in 2019
Mild growth in real wages returned in 2018, but
an upswing in inflation due to a rise in commodity
prices or further Sterling depreciation could
elicit further declines in real wages. Any large
deterioration in consumer confidence, particularly
around job security and unemployment, would
Private Housing Output
40,000
35,000
30,000
£ million - 2016 Constant Prices
25,000
9.0%
20,000
15,000
10,000
5,000
0
2010 2011
20
reduce appetite for borrowing and, notably, big-
ticket purchases. Consumer confidence would be
worsened further if the Bank of England raises
interest rates more than once in 2019, particularly
in the case of a No Deal Brexit to support
Sterling. House builders would reduce starts
relatively quickly in response to any deterioration
in the general housing market but output and
completions would be expected to hold up
initially as house builders destock, but fall from
the second half of 2019.
Upside Risks:
• UK economic activity avoids marked slowdown
• Consumer confidence maintained in line with
economic growth and a rise in real wages
• Pick up in mortgage lending and property
transactions
• House price growth continues at current rates
If economic uncertainty lifts and GDP growth
and demand for home ownership increase, then
mortgage lending, property transactions and
house prices would be expected to pick up in
2019. This is especially the case given reported
reductions in the supply of pre-owned properties
on the market. There is also the potential for
government policy measures on garden cities
such as Ebbsfleet to provide an earlier-than-
expected boost to house building in 2019.
2.0% 1.0%
5.0%
10.1%
14.9%
11.5%
25.4%
9.4%
-2.4%
2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association
21
 Private Housing RM&I
Private housing rm&i activity is forecast to remain flat in 2019 as home improvements
spending by demographics with pension and housing wealth fails to offset the overall weakness
in household confidence, particularly for large, discretionary purchases.

Planning permission approvals The key factors that drive activity in the sector,
particularly for improvements, are property
for large householder developments transactions and consumer spending on big-ticket
items. In addition, housing wealth, pension wealth
and household savings enable activity in the
Increased 6.3% in 2015 sector as they are used as sources of finance for
rm&i activity.
Increased 5.8% in 2016
Property transactions are a key determinant of
Increased 0.9% in 2017 activity in the sector because improvements to
an existing property tend to be made with a
typical lag of 6-9 months after purchase. Property
Fell 1.4% in 2018 H1 transactions have remained around 1.2 million
per year since 2014, but due to the popularity of
the Help to Buy equity loan, new build accounts
for an increasing proportion of transactions

22
 Private Housing RM&I Output
28,000
24,000
£ million - 2016 Constant Prices
20,000
0.8%
16,000
12,000
8,000
4,000
0
2010 2011
and is likely to have weakened the link between
property transactions and rm&i. In terms of
funding streams for rm&i work, the household
savings ratio has steadily declined from 10.7 in
2009 to 3.9 in 2017, which was the lowest on
record and remained at this level, on average,
in the first three quarters of 2018. Real wage
growth returned in 2018, albeit at a low rate, but
an acceleration in inflation due to higher global
commodity prices or renewed Brexit-related
uncertainty causing a depreciation in Sterling,
are a key risk to consumer confidence in 2019,
especially for purchases of big-ticket items. In
addition, record-low interest rates between 2009
and 2017 enabled homeowners to repay equity
back into their homes, rather than withdrawing
it as a means of funding home improvements.
The Bank of England raised interest rates by 0.25
percentage points in November 2017 and August
2018. The impact of a cumulative 0.5 percentage
point interest rate rise is expected to be limited,
but the Bank has indicated that a ‘smooth’ Brexit
transition would elicit a further tightening in
monetary policy over the next couple of years,
which may have a further negative impact on
consumer confidence and appetite for credit.
Conversely, there are other drivers of sector
activity that have been performing more strongly.
The Royal Institution of Chartered Surveyors
(RICS) has been reporting a low supply of existing
properties for sale, which is providing impetus for
property extensions or improvements instead
0.0% 2.0%
9.7% 0.0%
5.6%
9.2% 1.6%
2.3%
-4.9%
2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association
of moving. More significantly, retired, outright
homeowners who are unaffected by real wage
falls and have benefited from long-term rises in
housing wealth and pensions freedom and do
not wish to downsize are also driving activity.
Since pension freedoms were introduced in
April 2015, flexible payments to over-55s have
totalled £21.7 billion and according to the ONS’s
Family Spending survey, households headed by
50-64 year olds have the largest expenditure on
alterations and improvements to dwellings. For
larger householder developments that require
planning permission, figures from the Ministry of
Housing, Communities and Local Government
(MHCLG) showed that momentum in larger
improvements spending is easing, however. After
approvals increased 5.8% in 2016 and 0.9% in
2017, they fell 2.5% in the first nine months of
2018.
In terms of energy-efficient retrofitting work, the
next phase of the Energy Company Obligation
programme, ECO3, began in October, running
to March 2022. The programme is valued at
around £640 million per year and focuses on
fuel poverty. This is lower than the £870 million
spent under ECO previously and shifts focus
from energy efficiency. Given its smaller scope,
activity under the scheme is likely to be lower
than its predecessor. During the transition period,
under ECO: Help to Heat between April 2017
and September 2018, the number of measures
installed averaged 18,287 per month, compared
23

to a monthly average of 41,382 measures over the
previous four-year ECO programme.
From April 2018, the Minimum Energy Efficiency
Standards Regulations will require a minimum
EPC rating of E to apply to new tenancies for
properties rented out in the private sector
and will apply to all tenancies from April 2020.
According to the English Housing Survey,
320,000 private rental properties have an
EPC rating of F or G, representing 6.6% of the
housing stock of that tenure. This suggests a
stream of potential work in the sector, but little
has been evident so far and questions remain
over how effectively the regulations can be
monitored and enforced by local authorities.
In December, MHCLG reported that there
were 183 private sector residential buildings
with cladding systems unlikely to meet current
Building Regulations. Of these, 73 had plans for
remediation. Work has started on nine and
completed on five. The Housing Secretary, James
Brokenshire, has warned of enforcement action
for owners and developers if no action is taken.
However, high-profile examples such as New
Capital Quay in Greenwich and Citiscape in
Croydon have highlighted the issues and delays
regarding liability for financing and undertaking
remedial works on privately-owned residential
towers. There has been no standard response,
with the NHBC agreeing to pay for remediation
on New Capital Quay, whereas the original
developers are covering the cost of work on
Citiscape (Barratt) and Glasgow Harbour
(Taylor Wimpey), and the freeholder (L&G) is
24
covering costs in the case of Blenheim Centre in
Hounslow. Questions over future regulations and
policy recommendations mean work has been
slow to start, however, as evidenced by delays to
remedial work on Greenwich Square (Mace).
Output from the sector grew strongly in 2016
and 2017 but momentum weakened in 2018,
reflecting the lagged effect of falls in real wages
hindering big-ticket spending. In Q3, output fell
1.9% compared to a year earlier and was 0.6%
lower for the year to date. Output is estimated to
remain flat for the full year. No change in output
is also forecast for 2019, followed by growth
of 2.0% in 2020 as improvements in real wage
growth and consumer confidence lead to an
increase in property transactions.
Downside Risks:
• Consumers retrench spending in response
to higher interest rates and a low household
savings ratio
• House prices fall across the UK
A sharp deterioration in consumer confidence
due to a UK-wide fall in house prices, constrained
growth in real incomes or a rise in economic
uncertainty could result in households taking a
precautionary savings stance and cutting non-
essential spending. This may also be the case if the
Bank of England raises interest rates more than
once in 2019. Whilst these factors are unlikely to
affect basic repairs and maintenance, they could
have a large impact on refurbishment work,
especially in the near-term.
Upside Risks:
• Real wage growth accelerates
• House price inflation increases from current
rates
Inflation peaked during 2017 and this may continue
driving the higher wage settlements seen in 2018.
Combined with national house price growth at
3.0%-4.0%, this would see the prospects for rm&i
remain positive. Whilst UK economic growth is still
expected to be below the long-term trend in 2018,
rm&i activity could accelerate as rises in incomes
drive an increase in property refurbishment and
improvements spending.
25
Public Housing
Public housing starts were weak in 2018, in spite of certainty over grant funding. A growing
dependence on market-linked housing sales leaves the sector vulnerable to a deterioration in
the wider housing market.

The main driver of house building activity
by housing associations and local authorities
is funding through the Affordable Homes
Programme. Since 2015, government policy for
funding has been amended several times.
Housing associations and local
authorities accounted for
In light of these policy interruptions, public
housing starts declined 2.7% in 2015 and rose
1.4% in 2016 and 4.8% in 2017. In 2017 output
rose 21.6% and completions increased 9.7%.
This suggests that policy changes have led to the
build out of previously-approved developments,
rather than a rapid response to new funding
programmes, reflecting the time taken to adjust
business plans. Homes England and Greater

18.3% of
starts and completions
in 2017, the lowest
proportion in 10 years
A 1.0% annual cut in social rents is in place until
March 2020, the Affordable Homes Programme
2015-18 that prioritised homes for affordable
rent was switched to the Shared Ownership
and Affordable Homes Programme 2016-21
(SOAHP), under which 88% of homes were to
be for shared ownership tenures (announced in
April 2016), followed by an allowance for greater
flexibility to include affordable rent in July 2017.
London Authority (GLA) affordable housing
completions data show that in 2016/17, three-
quarters of completed units in that period
were for affordable rent, funded under the
original Affordable Homes Programme. Of the
affordable housing starts that received Homes
England or GLA funding in 2017/18, typically
housing associations or local authorities, 37.9%
were for shared ownership. This was the highest
proportion on record, signalling that activity is
now beginning on the SOAHP.
The change in focus to shared ownership links
the public housing sector more closely to
the general housing market, however. This is
particularly the case in London, where 57.8%
of affordable starts in the first half of 2018/19
were reported as affordable home ownership

Public Housing Starts and Completions Great Britain

2016 2017 2018 2019 2020

Actual Actual Estimate Forecast Projection

33,313 34,910 33,863 35,556 35,556

Starts
1.4% 4.8% -3.0% 5.0% 0.0%

31,355 34,383 34,383 34,727 35,074

Completions
-15.4% 9.7% 0.0% 1.0% 1.0%

5,102 6,205 6,081 6,142 6,142

Output (£m)
-2.2% 21.6% -2.0% 1.0% 0.0%

7,581 7,391 7,391 7,391 7,391

RM&I Output (£m)
-7.4% -2.5% 0.0% 0.0% 0.0%

Source: MHCLG, ONS, Construction Products Association

26
27
 Public Housing Output
7,000
6,000
2.2%
£ million - 2016 Constant Prices
5,000
4,000 -16.3%
3,000
2,000
1,000
0
2010 2011 2012
tenures. In 2018 Q3, Homes England’s survey of
registered providers showed that the stock of
unsold shared ownership units has risen in every
quarter since 2016 Q3. The number of units that
remained unsold for more than six months also
increased to the highest in three years in Q3 and
providers noted that units were taking longer to
sell. In addition, strong house price growth has
encouraged housing associations to increase open
market operations to cross-subsidise affordable
operations. In the first half of 2018/19, 32.8%
of starts by registered providers in England
(including London) were for open market sale and
the Homes England survey for Q3 showed that
providers planned to double the number of units
for open market sale in the next 18 months. In
addition, in 2017/18, 47.5% of affordable homes
were provided through Section 106 agreements,
likely built by private sector developers and
acquired by housing associations after completion.
This means that as well as exposure to the cyclical
open market, a proportion of housing that ends
up as a social tenure may not be included in
public housing data collection.
Government housing policy has already started to
increase the role of social and affordable tenures
in overall house building. In June, £1.67 billion of
outstanding SOAHP funding was allocated for
23,000 homes in England, excluding London, of
which half are intended to be for social rent in
low-affordability areas. The government published
its green paper on social housing in August 2018,
confirming £2.0 billion in additional funding
28
32.0% 21.6% 1.0% 0.0%
-2.0%
6.6%
-15.3% -2.2%
2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association
for social house building, expected to be for
affordable rent as announced at the Conservative
Party Conference in 2017. This is yet to be
allocated, however. The paper also announced
the government was abandoning plans for local
authorities to sell their highest-value properties
to fund the extension of Right to Buy to housing
association tenants. A £200 million pilot scheme
for the extended policy began in the Midlands in
mid-August and following concern from the Local
Government Association that local authority
building capacity is constrained by returning
receipts from Right to Buy sales to the Treasury, a
consultation was launched, proposing an easing of
the restrictions on combining receipts with other
funding streams. Barclays and Homes England
announced a £1.0 billion SME development
finance fund in September and it was
subsequently confirmed that housing associations
would also be able to apply for these loans, in
combination with grant funding for mixed-tenure
schemes. Of greater significance for the sector,
constraints on local authority borrowing for
housing delivery have been loosened significantly.
Initially, an additional £1.0 billion in housing
revenue account borrowing was opened for
bidding in areas of high affordability pressure in
July, followed by the complete removal of the
housing borrowing cap in England and Wales
in October. The government expects this to
increase local authority house building to 10,000
units per year. In the last ten years, housing
completions by local authorities have averaged
1,300 per year in England, whilst local planning
and development departments have seen severe
budget cuts since 2010. The government’s most
recent announcement of £2.0 billion funding for
social housing from 2022 falls beyond the current
forecast period.
£3.15 billion in funding was allocated to the Mayor
of London in 2016 to provide 90,000 affordable
housing starts by 2021. This implies 22,500 per
year, which compares to 12,555 affordable starts
in 2017/18 and a five-year annual average of 9,217
starts. In the first half of 2018/19, affordable starts
in London were only 2,400. £1.7 billion of the
funding pot was allocated in July 2017, for 49,398
homes for social rent, London living rent and
shared ownership. A further £1.67 billion funding
was announced in the Spring Statement 2018,
which aims for an additional 27,000 starts by the
end of parliament in 2021/22. This will be used to
increase grant for social rent homes to £100,000
per home, and raise the grant rate for schemes
that increase the proportion of affordable homes
to £70,000 per unit instead of £60,000. Work on
the ground would be expected to start towards
the end of the forecast period.
In the near-term, the increased exposure to a
slowing general housing market is balanced with
a clearer profile of funding for affordable housing
provision. Starts in Great Britain in the first half
of 2018 were weak, falling 4.1% compared to
the same period of 2017 and in Q3, starts in
England rose 2.1% from Q2 but fell 7.3% from
a year earlier. However, public housing output
increased 3.0% year-on-year in Q3 and reached
a record high level, which suggests that activity is
now beginning to accelerate in line with increased
funding and AHP certainty and the recovery from
poor weather in Q1. However, given the fall in
starts in Q1 to Q3, a full-year decline of 3.0% is
estimated for 2018, followed by a 5.0% increase
forecast for 2019. Starts are then expected to
remain flat at around 35,000 per year in 2020.
Downside Risks:
• Difficulties in raising finance for housing
associations
• A further weakening in the housing market
undermines focus on market-linked products
Housing associations’ borrowing capacity has
been reduced by the annual 1.0% cut to social
rents and ratings agencies have warned that
this, alongside lower levels of grant funding and
a greater reliance on market-linked housing, will
worsen housing association creditworthiness. In
the event of a marked slowdown in the general
housing market, any changes to the planned
tenure mix of development away from market-
linked products is likely to delay start dates as
housing association business plans are changed.
There is also still uncertainty over the ability to
access finance from the European Investment
Bank once the UK leaves the EU. Housing
associations have £1.2 billion of borrowing lined
up for upcoming projects, concentrated among
the G15 largest providers. With loan appraisal
periods of around two years, this raises questions
of whether new applications for EIB funding will
be pursued by the sector given uncertainties over
access once the UK leaves the EU.
Upside Risks:
• Open market demand for housing remains
buoyant
• Flexibility to increase housing built for
affordable rent
With around one-third of housing association
starts for the open market, if underlying demand
remains buoyant for market sales, market rentals
and shared ownership products, this could
cushion the fall in social housing construction
activity by housing associations. If, in contrast,
market conditions deteriorate and housing
associations can quickly adjust business plans to
accommodate a larger proportion of affordable
rental tenures instead of sales, this will help avoid
a hiatus in activity.
29
 Public Housing RM&I
Urgent remediation work on social housing towers is likely to bring work forward and displace routine
repairs and maintenance work originally planned by housing associations and local authorities.

Sector output has been on a long-term downtrend
and fell 16.2% between 2010 and 2017 as capital
investment by the Ministry of Housing, Communities
and Local Government (MHCLG) was cut as part of
the government’s austerity drive. In addition, publicly-
funded schemes for energy-efficiency improvements
on the public housing stock have either been
In England
13.6% & 11.9%
of local
authority
properties
do not meet the Decent Homes Standard
heavily revised (CERT), cancelled (the Green Deal)
or narrowed in coverage (ECO, to ECO: Help to
Heat and ECO3), whilst the 1.0% annual cut to
social rents until March 2020 will also reduce the
revenues received by housing associations who are
likely to prioritise new build and urgent remediation
over routine rm&i. Housing associations are also
increasingly carrying out r&m in-house, which means
that some work may not be captured in the ONS
output data, as it is based on a survey of contractors.
Following the Grenfell Tower disaster in June 2017,
the typical drivers of rm&i work in the sector will
be replaced by a shift in focus towards internal
and external fire safety, structural investigations
and a review of the housing stock of 2.0 million
local authority dwellings and 2.8 million housing
association dwellings in Great Britain. The response
of local authorities to the disaster suggests that
public sector rm&i resources will be redirected
to prioritise fire safety measures for high-rise
of housing social housing towers, yet with the results of fire
investigations and a public inquiry pending, the
association full scale of the issue and, therefore, future works
properties required is unknown and extends beyond the
scope of the forecasts. The forecasts assume that
emergency measures will need to be carried out
as a priority on the public housing stock but are
assumed to displace other planned repairs and
non-essential maintenance activity given financial
constraints. The government has assigned £400
million to fund the removal and replacement of
cladding by housing associations and local authorities
in England, which has been diverted from the
existing Shared Ownership and Affordable Homes
Programme (SOAHP) funding pot. By December,
£248 million had been assigned, split by £132

Public Housing RM&I Output

10,000

9,000 2.2% 2.5% 0.6%

8,000 0.0% 0.0% 0.0%
-8.1%
7,000 -4.1%
-7.4%
£ million - 2016 Constant Prices

-2.5%
6,000

5,000

4,000

3,000

2,000

1,000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p

Source: ONS, Construction Products Association

30
million to local authorities and £116 million to
housing associations. The MHCLG’s Building Safety
Programme statistics indicated in December that
there are 160 social housing buildings taller than 18
metres that have cladding unlikely to meet current
Building Regulations, split between 46 owned
by local authorities and 114 owned by housing
associations. Remediation work has completed on
34 of these and has begun on a further 82 buildings,
whilst 41 have a remediation plan in place and three
are still developing a plan.
According to the Regulator of Social Housing, in
2017/18, housing associations’ spending on major
repairs increased 3.0% in terms of cost per unit.
Total spend on major repairs was reported at £486
million (£466 million in 2016/17), £846 million was
spent on planned maintenance (£831 million in
2016/17) and £1.9 billion on routine maintenance
(also £1.9 billion in 2016/17). Rm&i on social housing
has been affected by a reduction in the number of
measures installed under the Energy Companies
Obligation (ECO) and the cancellation of the Green
Deal in July 2015. The original ECO programme
ended in March 2017 and its successor, ECO:
Help to Heat, began in April 2017, as an 18-month
transition before the full programme began in
October. Under the ECO3 programme, which runs
until March 2022, the focus will shift from improving
energy efficiency to reducing fuel poverty and the
annual funding for the scheme will be cut from
£870 million to £640 million. Between April 2017
and September 2018, which formed the 18-month
transition, Help to Heat, the number of measures
averaged 18,287 per month, compared to a monthly
average of 41,382 measures over the previous
four-year ECO programme. The government’s
social housing green paper released in August,
will consult on proposals in the Clean Growth
Strategy to improve social housing properties to a
minimum EPC rating of C. Currently, 49.4% of the
English social housing stock is below a C rating. If
implemented, this is unlikely to take full effect during
the forecast period, however.
The public housing stock is likely to be diminished
through the increased uptake of Right to Buy. The
policy is expected to be extended to housing
association tenants, subject to the results of a two-
year £200 million pilot scheme in the Midlands that
began in August. The government’s proposals for
local authorities to sell off their high-value housing
assets as a means of funding the policy have been
abandoned, however. The government’s pledge for
a 1:1 replacement of homes sold through the Right
to Buy has not been met, as between the second
quarter of 2012 and the third quarter of 2018, there
were 72,929 Right to Buy sales in England, but only
18,834 direct replacements started over the same
period, a ratio of one replacement for every four sold.
Alongside the social housing green paper in August
2018, the government also launched a consultation
on reforming the commitment to 1:1 replacement
and expanding the definition of a replacement to all
affordable homes, regardless of funding source.
Any uptick in urgent repair work in 2018 is unlikely
to offset the decline in output that has occurred
in consecutive quarters since 2015 Q4. Output
is estimated to have remained flat in 2018 and
given limited financial capacity and remediation
work taking precedence, output is also expected
to remain flat during 2019 and 2020. This does
not take into account the potential for large-scale
improvement work that may result from a longer-
running inquiry.
Downside Risks:
• Housing association revenues reduced by a
weaker than expected housing market
The risk of further reductions in funding, through
local authorities adjusting local spending priorities
or a weaker housing market performance affecting
housing associations’ open market sales revenues,
pose a downside risk to rm&i spending. Public
housing providers may also decide to delay rm&i
spending until the full scale of wider fire safety
remedial work required is known.
Upside Risks:
• Housing associations focus on maintenance
• Housing market performs stronger than expected
If building homes for market sale or shared
ownership becomes less financially viable due to a
weaker housing market throughout 2019, housing
associations may instead focus on maintaining their
existing, revenue-earning housing stock. Conversely,
if the housing market remains more buoyant than
expected, this would raise the revenues housing
associations receive from sales of shared ownership
and units sold on the open market, offering
additional funding for rm&i work. This would help to
offset constrained local authority rm&i spending.
31
 Public Non-housing
Following two years of falling output, public non-housing activity is forecast to remain broadly
flat across 2019 and 2020.

Sector output is largely determined by capital

funding allocated to departmental budgets by
Public Non-housing Output by Sub-sector central government and, therefore, is less affected
2017 (%) by uncertainty than other sectors that depend
on business and investor confidence. However,
Education Health recent data has shown declines in output in
50% 18% the three largest sub-sectors: education, health
and other, which includes defence and prisons.
Entertainment
Work on the second phase of the Priority School
7% Building Programme (PSBP) has been slow to
move through the pipeline, whilst work on the
Midland Metropolitan Hospital and the Royal
Liverpool Hospital is yet to restart. Both hospitals
Other
projects were switched to public funding, rather
25%
than PFI, after the liquidation of Carillion, the
Source: ONS main contractor for both projects. Public non-
housing construction output is expected to have

32
 Public Non-housing Output
18,000
16,000
14,000
£ million - 2016 Constant Prices
-7.6%
12,000
10,000
8,000
6,000
4,000
2,000
0
2010 2011
decreased 13.6% in 2018, followed by a forecast
fall of 0.6% in 2019. An uptick in activity on the
second phase of the Priority School Building
Programme and the two former Carillion
hospitals is forecast to see mild growth of 0.3%
in 2020, along with some uplift from work
around the Commonwealth Games to be held in
Birmingham in 2022.
Education output has fallen
40.1% since 2010
2010
21.2% since 2016
2016
In the publicly-funded education sub-sector, the
primary driver of activity continues to be the
Priority School Building Programme (PSBP). In
the first phase of the programme 260 schools
will have been rebuilt, 214 of which are publicly
funded. Work on 23 of these is yet to complete,
running beyond the original completion schedule
due to site difficulties or planning issues. In
addition, the National Audit Office assessed there
was a budget overrun of £286 million for the
programme, although the average cost per square
metre of the completed schools was one-third
0.7%
3.8%
-21.0% 0.3%
-9.6% -0.7% -2.6%
-13.6% -0.6%
2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association
lower than the previous Building Schools for the
Future programme. The £2.0 billion second phase
(PSBP2) focuses on rebuilding individual blocks at
277 schools by 2021/22. Like the first phase, rising
cost pressures for contractors were highlighted
by the National Audit Office as a threat to
achieving time and budget targets for the PSBP2.
According to the Education and Skills Funding
Agency’s (ESFA) annual report, five schools have
already completed under the PSBP2 framework
and 30 contracts have been signed. Feasibility
studies have been approved on approximately
120 others but are yet to award contracts.
According to the National Infrastructure and
Construction Pipeline (NICP) for 2017, £400
million of capital expenditure on the PSBP2 was
expected in 2017/18, but the 2018 update to the
Q1 NICP showed only £95 million actually occurred.
If work continues in line with the projected
funding profile, activity is set to peak in 2019/20.
An additional £100 million of government funding,
generated by the soft drinks industry levy will
be provided for the Healthy Pupils Capital Fund
in 2018/19, to be spent on improving outdoor,
kitchen and medical facilities in schools.
In addition, a programme of new free schools,
which are publicly-funded but operate outside
of local authority control, has been favoured
by government since 2010. The Free Schools
Programme has a budget of £1.4 billion per
year between 2016/17 and 2020/21 to open
500 new schools by the end of the period
33

and the government allocated £320 million in
additional funding for 140 new free schools in
the March 2017 Budget, although the majority is
not expected to be used until 2020. In 2017/18,
55 free schools were opened. Whilst some of
the premises for free schools are conversions
or refurbishments of existing buildings, the
National Audit Office has highlighted that the
low availability of sites is a key constraint on the
new build element. According to the National
Audit Office, the Department for Education will
need to spend £2.5 billion to purchase land for
the free schools in the current pipeline to 2022,
but the Public Accounts Committee found that
on average, land purchases to date have cost
19.0% above official valuations. Despite the slow
start to the PSBP2, work is expected to ramp up
alongside the Free Schools Programme and would
be expected to provide output growth in 2020.
Budget 2018 raised the Department for
Education’s capital spending limit for 2018/19 by
£0.4 billion to £5.6 billion. Planned spending was
left unchanged at £5.1 billion for 2019/20 and £4.5
billion for 2020/21. The Welsh Government’s £1.4
billion 21st Century Schools programme ends in
March 2019 but a second phase backed by £2.3
billion funding is scheduled to follow immediately
in 2019/20. The funding will be split between
capital allocations and the mutual investment
model, a new form of public-private partnership.
In Scotland, work continues on the £1.8 billion
Schools for the Future programme, which aims
to build or refurbish over 117 schools by March
2020. It is entirely publicly-funded, with the
Scottish government contributing £1.13 billion in
funding, and the remainder from local authorities.
So far, 75 have been completed and a further
25 are underway. In November, the Scottish
Government assigned £1.0 billion for school
rebuilding and refurbishment from 2021.
34
Output in the sub-sector has fallen in every
quarter since 2016 Q1 as work ends on the first
phase of the PSBP and takes time to enter the
pipeline on the PSBP2. In Q3, output fell 9.6%
on an annual basis and for Q1 to Q3 was 18.5%
lower than the corresponding period of 2017.
New orders have declined since 2018 Q1 but
on a four-quarter total basis increased 0.7%.
An 18.0% fall in output is estimated for 2018
and output is forecast to fall a further 2.0% in
2019, before an acceleration of work on new
programmes drives growth of 1.0% in 2020.
Downside Risks:
• Cost increases and a lack of contractor
interest delay start dates on the second phase of
government programmes
If contractors are reluctant to sign contracts for
work due to cost inflation, the start and end
dates for PSBP2 work could be pushed further
beyond the forecast horizon, whilst start dates for
future schools construction programmes in Wales
may also be delayed. In addition, high bids for
land may also push up costs for the Free Schools
Programme. It is unlikely that the government will
increase funding as a result, leading to a delay in
the start of construction.
Upside Risks:
• Capital funding is brought forward
Additional financial support for school building is
only likely to arise if government brings forward
funding from later years of the departmental
budget, as a means of covering higher cost
pressures in the near-term and providing
confidence over start dates for new building
programmes.
Output in the health sub-sector has experienced
sharp falls in output since 2017 Q2. Work in
this sub-sector includes publicly-funded work
on hospitals, health centres and clinics. Among
projects currently underway are the £136 million
proton beam treatment centre in London (in
service in 2020) and the £480 million Royal
Sussex County Hospital, where work is expected
to peak in 2019, prior to its 2020 completion.
In addition, the £160 million redevelopment
of Springfield Hospital, on two sites in south
London, saw contracts awarded at the end of
2017. Main work is expected to begin in 2019 Q2.
The largest change in the sub-sector has been
the announcement that the Midland Metropolitan
Hospital in Sandwell, and the Royal Liverpool
Hospital, where work was stalled by the demise
of Carillion, will both be completed with public
funding, rather than a replacement private finance
deal. On the Midland Metropolitan, originally a
£350 million project, it is estimated that £205
million of work was carried out by Carillion.
Rising costs due to site deterioration mean that
the new contract for remediation and build
completion is capped at £320 million, but the
work required could be as high as £400 million
to include improvements that enable the current
hospital to continue operating in the interim. The
contract for initial remedial works was awarded
in October, with work occurring in the first half
of 2019. The contract for main works is expected
to be awarded in 2019 Q1, with completion
set for 2022. The Royal Liverpool Hospital was
nearer completion when it had its PFI contract
terminated in September. The remainder of
the project’s fit-out and remediation work for
structural and cladding issues is expected to be
completed in 2020. Further delays caused by cost
rises or further site remediation cannot be ruled
out on either project, however.
In October’s Budget, the Department of Health’s
capital spending allocation for 2018/19 was
reduced from £6.4 billion to £5.9 billion, but was
left unchanged from Budget 2017 for subsequent
years at £6.7 billion in 2019/20 and £6.8 billion
in 2020/21. These levels are an increase from
£5.2 billion capital expenditure in 2017/18, but
it is unclear how much of the capital budget will
be assigned to new building work, rather than IT
upgrades and equipment. In 2017/18, over £1.5
billion was spent on IT, plant and equipment.
Furthermore, the department typically
underspends due to a degree of contingency.
The latest NHS smaller works framework, the
£4.0 billion ProCure22, started in October 2016
and will provide a stream of work over the next
few years. Between its start date and December
2018, 62 major works schemes and 21 small
works packages have started under ProCure22,
at a capital value of £2.7 billion.
New orders fell 55.7% in 2017 to a record low
ProCure22
pipeline: £4.0bn out of
£2.7bn £4.0bn
total
now allocated
of £442 million. However, new orders rose each
quarter in 2018, which reflects the award of
contracts for the Public Health England’s £400
million science campus and a new headquarters
in Harlow, taking place in four phases between
2019 and 2021, the new £350 million Llanfrechra
Grange Hospital in Gwent and an increase in
low-value departmental refurbishments. In a small
sub-sector, orders can be volatile on a quarterly
basis, and were 70.4% higher on a four-quarter
basis in Q3. As work completes on large hospital
projects already underway and the drop in new
orders in 2016 and 2017 means the pipeline is not
replenished at the same rate, output is expected
to have fallen 25.0% in 2018. Reflecting a lag
between contract awards on new projects and
the start of work, output is forecast to increase
2.0% per year in 2019 and 2020.
Downside Risks:
• Cost rises delay projects
Rising costs, particularly for the now publicly-
funded completion of the Midland Metropolitan
Hospital and Royal Liverpool Hospital, may cause
delays if contracts need to be renegotiated before
the start of works, or if further site issues arise
once work begins.
Upside Risks:
• Capital funding is brought forward
A sharp rise in costs that leads to contractors
pausing activity could also prompt the
government to change the existing capital funding
profile, bringing forward spending from later
years.
Public non-housing other covers construction
work on publicly-funded facilities such as prisons
35
and defence projects. Output growth accelerated
between 2016 Q3 and 2017 Q4 as two large
defence projects entered the pipeline: the £500
million, ten-year upgrade to the Faslane naval base
in Scotland, which began in early 2017, and the
£135 million works at RAF Marham in Norfolk,
including a new aircraft hangar and runway and
taxiway resurfacing works, which completed in
mid-2018. In addition, despite the compulsory
liquidation of Carillion as one of the joint venture
partners, the Ministry of Defence’s £1.1 billion
new accommodation and facilities scheme for
the Army Basing Programme on Salisbury Plain
is set to provide activity throughout 2019, ahead
of the project’s completion in mid-2020. The
programme includes 1,000 homes on Salisbury
Plain and the £60 million upgrade of Catterick
Garrison. Two other defence contracts were
awarded in Q4 for air base improvements at
RAF Northolt (£23 million runway resurfacing)
and £160 million of hangars and storage facilities
construction at RAF Lakenheath. In addition,
the £149 million expansion of RAF Lossiemouth
in Scotland is also in the early stages of
procurement, with contract awards scheduled for
Spring 2019.
Budget 2018 confirmed the Ministry of Defence’s
capital budget allocation at £9.4 billion in 2018/19
(£8.7 billion in Autumn Budget 2017), £9.8 billion
in 2019/20 (£9.0 billion in the previous Budget)
and was maintained at £9.6 billion for 2020/21.
In terms of prisons projects, there is little in the
near-term Ministry of Justice construction pipeline
aside from the expansion of Rye Hill (£25 million)
and Stocken (£24 million) prisons, which are both
underway. In Scotland, a £66 million new prison
in Inverness gained planning approval in October
2017 and is expected to start construction this
year. The new £150 million HMP Wellingborough
was approved in November and demolition
work on the existing prison has begun. Work is
expected to peak in late-2019 and 2020, ahead
of the planned 2021 completion. The Glen
Parva prison in Leicestershire was closed in
June 2017 and final plans for a £170 million new
build replacement are expected to be approved
imminently, with work starting in late 2019. Back
in early 2017, the government announced that
four new prisons would be built in Yorkshire,
Wigan, Rochester and Port Talbot as part of
its £1.3 billion investment in the prison estate,
36
but so far, only one (Full Sutton in Yorkshire)
has received outline planning permission for
a £100 million development. Furthermore,
the temporary closures of the current prisons
in Rochester and Wigan that would allow
redevelopment of these sites, have been deferred
beyond the current parliament. In June 2018,
the government abandoned plans to build five
community prisons for women and whilst these
represent small volumes of work, it signals a
direction of policy that may weaken sector
prospects in the longer-term. In terms of public
office buildings, the first £500 million tranche of
work under the £1.0 billion Government Hubs
programme, which seeks to reorganise public
sector offices into regional hubs, mainly through
fit-out work, was awarded in June 2017 and is
expected to continue providing work through
2019. New orders in the sub-sector are volatile,
and in Q3 declined 16.2% on a four-quarter total
basis. This follows a 32.9% fall in 2017. Despite
ongoing work on the Army Basing Programme
and naval and RAF facilities in England and
Scotland, lower volumes of work after large
projects completed are estimated to have driven
a decline in output of 5.0% in 2018. Activity is
expected to remain flat in 2019 and 2020.
Downside Risks:
• Delays to projects
Questions over contractor appetite may arise
if prolonged financial and economic uncertainty
act as a drag on confidence and activity. In
addition, contractors may pause to renegotiate
contracts to take account of rising costs, forming
the main downside risks to sub-sector activity.
Government and public opposition to the
construction of the new prison facilities in Port
Talbot and Yorkshire would delay the entire
English prison redevelopment programme
indefinitely.
Upside Risks:
• Further detail and contracts for new prisons
Full planning approval for the four new prisons
announced in March 2017 would increase
certainty for the sub-sector. However,
construction activity would not be expected to
begin until late-2019 at the earliest, to allow for
design and tendering.
37
 Public Non-housing R&M
Output in the public non-housing repair and maintenance (r&m) sector consists of basic repairs
and maintenance carried out on schools, hospitals and other public buildings.

Public Non-housing R&M Output

7,000

6,000 6.0% 1.4%

£ million - 2016 Constant Prices

2.0%
0.0%
5,000 -1.4%
-2.7%
-12.8% -0.8%
-5.0% -2.0%
4,000

3,000

2,000

1,000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association

Basic repairs and maintenance cannot be Similarly, the Ministry of Housing, Communities
cancelled or postponed significantly, which has and Local Government (MHCLG) has identified
helped keep output less volatile than in public nine publicly-owned high-rise buildings (over 18
non-housing new build, in spite of cuts to metres) that have failed large-scale wall system
departmental funding since 2010. tests in England. This is broken down into one
school and eight hospitals. Data from December
For school buildings, a £1.4 billion investment
confirmed that remediation has started on two, is
has been allocated for 2018/19 to help improve
planned for five, with two awaiting further advice.
and maintain the condition of schools, which
matches the funding assigned each year between Pauses in activity over cladding liability issues on
2015 and 2018. However, the condition of the the Papworth Hospital in Cambridge and the
school estate is expected to deteriorate further Royal Liverpool Hospital, although PFI-funded
despite this planned investment. According to the (or originally PFI-funded) projects, highlight the
Department for Education’s own estimates, the potential issues for public non-housing buildings.
cost to return schools to satisfactory conditions For the overall NHS estate, the 2017/18 Estates
is likely to have doubled between 2015/16 and Return Information Collection found that the
2020/21. The methodology for school condition backlog of general building maintenance was £6.0
capital funding allocations for 2019/20 was billion, £1.0 billion of which was classified as high
unchanged and will match the £1.4 million annual risk and requiring immediate attention.
allocation. The results of the survey of the
condition of the schools estate, the Condition
Data Collection, will be published in Autumn
and are likely to determine if future condition
funding allocations will increase. Following the
identification and remediation of structural
63% of the NHS estate was
defects in public buildings including schools, built before 1985
leisure centres and care homes in Edinburgh
during 2018, the Accounts Commission in
Scotland has recommended that checks and
maintenance on publicly-owned buildings be
carried out across local authorities.

38
The Government Hubs Programme aims to
reduce the government estate from around
800 buildings to 200 by 2023 by creating
shared regional hubs across government
departments. The programme is expected to
save approximately £2.5 billion over 10 years.
Since 2010, the government estate has been
reduced by 28.0% with 94% of this resulting
from the disposal of public sector office space.
Further reductions in the size of the government
estate are expected to exert a downward impact
on r&m activity in the sector over the longer
term. £2.9 billion of contracts on the Defence
Infrastructure Organisation’s seven-year facilities
management framework were launched for bids
in September, to follow on from the Ministry of
Defence’s contract with Amey (formerly a joint
venture with Carillion), which ends in March 2019.

Against a backdrop of reduced grant funding

from central government, and financially-
constrained councils, output in the sector is
estimated to have declined 5.0% in 2018. On the
basis of no further increases in funding, output is
forecast to decrease 2.0% in 2019 and remain at
that level in 2020.

Downside Risks:
• Local authorities cut spending plans

• Direct funding from central government is cut

to focus on new build

A further reduction in local authority spending

power, due to budget tightening by councils or
central government shifting funding profiles to
focus on new build would reduce sector output
further in 2019 and 2020.

Upside Risks:
• Work on framework contracts limits falls in
discretionary activity

Existing long-term contracts for maintenance on

prisons and hospitals are less likely to be affected
by economic uncertainty and will provide a steady
stream of public non-housing r&m activity. Public
sector organisations may also focus on maintaining
existing buildings, rather than new build.

39
 Commercial
After an estimated 5.3% fall in 2018, commercial output is forecast to fall 8.0% in 2019 and
1.5% in 2020.
Commercial Output by Sub-sector
2017 (%)
Entertainment
23%
Retail
Education 17%
16%
Other
25%
Health 3%
Garages & Misc 5%
Offices
36% Source: ONS
As anticipated in previous CPA forecasts, the falls
in commercial new orders since the second half
of 2016 are now beginning to result in weaker
activity on the ground. Activity still remains at
relatively high levels, particularly in the offices
sub-sector, due to projects on site that were
signed up to between 2015 and the second
quarter of 2016, prior to the EU Referendum.
The lag between new orders and output in the
commercial sector has historically tended to be
around 12-18 months, and it is only during 2018
that we have seen the fall in new orders translate
into declining output.
The uncertainty following the EU Referendum
regarding long-term economic prospects
and returns on investment mean that major
new investments in office and retail space
have become increasingly difficult to justify.
Accompanying the declines in offices and retail,
activity in commercial PFI hospitals has been hit
by the liquidation of Carillion, which halted work
on the two largest projects in the sub-sector,
before the remaining works were switched to
public funding. However, one bright part of
the sector has been work in the commercial
entertainment sub-sector, reflecting increased
activity on hotels, in spite of the growth of
Airbnb, as tourist numbers continue to rise.
40
In addition, ongoing work on the new delayed
Spurs stadium continues to sustain activity in the
sub-sector longer than was initially anticipated.
Commercial sector output rose by 7.6% during
2016 and a further 7.8% in 2017. In contrast to
rising output, new orders fell by 11.3% during the
second half of 2016, post-EU referendum and
fell by a further 8.2% during 2017. New orders
continued to fall in the first three quarters of
2018, to be 14.6% lower than the same period of
2017.
The high volumes of activity are demonstrated
by the cranes for towers projects visible across
the country on student accommodation projects
or high-profile mixed-use schemes. Small and
medium-sized offices construction continues
apace, including refitting of space for co-working
or fit-out of existing retail space for new value
supermarkets.
Looking to 2019, however, sector output will feel
the lagged impact of the sustained fall in new
orders since the end of 2016. The CPA forecasts
that output will fall 8.0% during 2019 before
contracting a further 1.5% during 2020. These
have been revised downwards from forecasts
of -7.1% in 2019 and -0.3% in 2020 in Autumn.
An increasing number of retailers experiencing
difficulties signals a deteriorating outlook for
new retail construction, whilst work that is set
to restart on the originally PFI-funded Midland
Metropolitan and Royal Liverpool hospitals will
now be switched to the public sector.
In the offices sub-sector, demand for space has
been demonstrated by large transactions for
existing towers in London by overseas investors
from Asia and Europe. During 2018, there were
several transactions valued over £1.0 billion,
including Plumtree Court (£1.2 billion) and 5
Broadgate (£1.0 billion). However, highlighting
the balance between currency-related discounts
after Sterling’s depreciation and heightened risk
aversion, all transactions over £500 million in
London were for towers fully occupied with
tenants. Take-up of offices space in Central
London, also remains robust. In 2018 Q3, Knight
 Commercial Output
35,000
7.8%
7.6%
30,000 2.4%
6.3% 2.6%
-5.3%
£ million - 2016 Constant Prices

0.0%
25,000 -8.0% -1.5%
-9.8%
20,000

15,000

10,000

5,000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association

Frank reported that take-up reached 3.74 million Despite strong levels of transactions for existing
sq. ft., a 12.0% increase from Q2 and 17.0% space and the Deloitte Crane Survey’s findings
above the long-term average. Three of the largest that central London office completions reached
transactions during Q3 were for Facebook’s new a record high in the second half of 2018, the
offices and firms in the Technology, Media and
Telecoms sector (TMT) accounted for 42.0% of
take-up during the quarter, overtaking the public The Deloitte London Office Crane
sector and flexible offices space. In addition, Knight
Frank reported that supply has peaked, particularly Survey found the average size
for speculative completions, which for the whole of new schemes
of 2018, are expected to be 28.0% lower than in
2017. Outside of London, Savills expects take-up
in London has
of grade A space in Manchester to have been fallen by
the highest on record in 2018, with supply at the
lowest level since 2005 and pent-up demand
a third
exerting upward pressure on rents. since Summer

41
 environment of uncertainty has held back
decisions for new major construction investments
that target a long-term rate of return. Therefore,
as current projects finish, they are unlikely to
be replaced by new projects in the short-term.
It also suggests that we are likely to see further
falls in new orders until the current uncertainty
dissipates. As highlighted in previous forecasts,
the concerns regarding long-term returns on
commercial real estate have occurred since
the first half of 2016, when the UK had its
referendum on membership of the EU. The
forecast assumes that either a revised draft Brexit
Agreement passes through the UK Parliament
or, more likely, there is a delay to Article 50 to
allow time for renegotiation with the EU on a
significantly revised Brexit withdrawal agreement
that also passes through the UK Parliament. Either
of these would provide a degree of certainty in
the near-term but uncertainty would still remain
over the UK’s relationship with the EU in the
medium-term.

IPF forecasts
capital values
for offices 2.3%
falling in 2019
1.8%
in 2020

Offices new orders reached a peak in 2016

Q1, the quarter immediately preceding the
referendum, at £1.6 billion. In the second half
of 2016, new orders for offices were 20.6%
lower than one year earlier and in 2017 orders
fell a further 25.2%. New orders continued
to fall in the first half of 2018 and were 25.5%
lower than the same period one year earlier.
Furthermore, in 2018 Q1 orders were only £0.8
billion, which was half the levels recorded before
the EU Referendum. New orders rose 33.7%
in Q3, however, driven by the £300 million,
50-storey tower for the Mitsubishi Estate at
6-8 Bishopsgate. Given that the eight quarters

42
of falling new orders between 2016 Q3 and
2018 Q2 are likely to be driven by the current
uncertainty, it is expected to have affected the
largest projects, where the expected rate of
return is over a longer period and, consequently
riskier. It also means that it affects the part of the
offices sector where the lag between orders and
output is longer. A CPA analysis of new orders
and output indicates a lag of around 12-18 months
with the larger projects at the upper end. The
largest falls in new orders since 2017 Q1 started
to filter through into lower activity from 2018
Q1, but would be expected to be felt more
acutely throughout 2019. Furthermore, it suggests
that even when the uncertainty dissipates, any
subsequent substantial rise in new orders, from a
low base, will still take around 18 months to feed
through to substantial rises in output.
The majority of the major offices projects
entering the pipeline remain in London, which
accounts for more than one quarter of the UK’s
offices construction market. Since the Autumn
forecasts, contracts have been awarded for
Facebook’s £200 million new headquarters
in Kings Cross, comprising 415,000 sq. ft. of
offices space for completion in 2021, as well
as the £300 million Mitsubishi/Bishopsgate
tower and the £100 million, 36-storey mixed-
use development at 1 Leadenhall. The largest
project in the pipeline remains the £650
million contract to start the refurbishment
of Parliament’s Northern Estate buildings in
preparation for MPs to use when the Palace of
Westminster undergoes a multi-year programme
of restoration. Transport for London (TfL) is
likely to be a driver of investment in mixed-use
offices projects, with 12 major developments
‘planned above Elizabeth line (Crossrail) stations,
covering over 3.0 million sq. ft. of development
space. The first agreement was signed in August,
to build a 138,000 sq. ft. nine-storey mixed-use
project at Farringdon station, which is expected
to be completed in 2020. Outside of London,
the top three projects entering the pipeline in
2018 were the £100 million offices and industrial
mixed-use development at Geddington Road
in Corby, the £90 million Tunbridge Wells
civic development and the £70 million new
headquarters for TK Maxx in Watford.
In November, it was announced that the
£500 million second phase of the Paradise
development in Birmingham city centre was
unable to commence as the £50 million required
for infrastructure and enabling works had been
spent as contingency on the first phase, which
experienced cost increases and was affected by
the collapse of Carillion. A request for funding
has been submitted to the local enterprise
partnership, but approval is yet to be confirmed.
Overall, new offices construction output is
estimated to have fallen 10.0% in 2018. Further
declines of 20.0% and 2.0% are forecast for 2019
and 2020, respectively. Despite these falls, output
in the sub-sector in 2020 is likely to still be above
levels in 2014 due to the rapid growth in activity
in recent years.
Downside Risks:
• Prolonged Brexit negotiation uncertainty
• Business investment is constrained by subdued
economic activity
Continued uncertainty in the lead-up to the
Brexit deal and throughout the transition period
would be expected to lead to further falls in
investment and a pause in taking contract awards
already in the system through to work on site.
Prolonged uncertainty is likely to mean firms
rapidly focus on contingency and risk rather than
expansion.
Upside Risks:
• Stronger economic growth despite rising
inflation
• Clarity over post-Brexit implementation period
raises business confidence
If the economy returns to robust GDP growth of
rates of 0.5% per quarter or above, then business
confidence and investment may also improve
markedly. Additionally, confidence regarding a
comprehensive deal between the UK and the EU
after the UK leaves the EU and at the end of the
implementation period would also be expected
to boost business confidence and business
investment. In turn, this could incentivise new
long-term major investment in commercial offices.
43
Online sales as a proportion
of total of UK retailing
4.9% 17.8%
in 2008 in 2018
The retail sub-sector has struggled in recent
years. Despite poor real wage growth since the
financial crisis and, in particular, the falls in real
wages during 2017, consumer spending continued
to hold up in 2018. The sector’s fortunes
have been more impacted by the longer-term
structural trend of rising e-commerce shifting
demand for retail premises from high street
stores to industrial space for storage, logistics and
distribution. The increase in traditional high street
retailers entering administration and Company
Voluntary Arrangements (CVAs) suggests issues
for those that are struggling to come to terms
with the long-term trend away from the high
street and towards internet shopping as well as
how to provide a balanced offering that meets
the needs of changing consumer preferences.
44
The ONS reported that in November the value of
retail sales was 1.5% higher than in October and
5.0% higher than a year earlier. In volume terms,
retail sales in November were 1.4% higher than in
October and 3.6% higher than a year earlier. For
the first eleven months of the year, sales volumes
increased by 2.7%. Internet sales increased by
13.1% in value terms in November 2018 compared
with November 2017, with all sectors showing
strong year-on-year growth. The British Retail
Consortium reported that in November total
retail sales were 0.5% higher than a year earlier but
like-for-like were 0.5% lower, despite Black Friday
discounting. Non-food online sales were reported
to have risen 2.9% in November.
According to the ONS, online sales accounted
for 21.5% of total retailing in November, the first
time the proportion has exceeded 20.0% and the
highest on record, although this is likely to have
been boosted by Black Friday discounting. For the
previous ten months of 2018, online sales were
17.3% of total retail, on average. In the Budget
in October, the Chancellor announced a digital
services tax from April 2020 for online firms with
global revenues above £500 million. However,
this is narrower in scope than anticipated and will
only apply to online marketplaces, rather than
direct sales.
The retail sector has been keen to highlight the
recent revaluation of business rates and rising staff
costs due to the increase in the living wage but the
bigger issue appears to be the large oversupply of
retail units given the structural change away from
the high street towards online shopping without
a subsequent sharp fall in retail rents, which have
been broadly flat since mid-2016.
Retail new orders
fell to
a record low in 2018 Q3
Supermarket chains such as Aldi and Lidl, with a
focus on a value offering, continue with expansion
plans, in spite of the challenging retail conditions
and, potentially, because of it. Seven of the top
20 retail projects that signed contracts in 2018
were by Aldi and Lidl. Aldi, the UK’s fifth largest
supermarket by market share in 2018, operates
827 stores in the UK and opened a further 70
new UK stores in 2018 as part of its plans to
reach 1,200 stores by 2025. Lidl, the seventh
largest retailer, is currently in its £1.45 billion UK
investment plan, opened 50 stores and revamped
30 others in 2018 and is actively advertising for 60
new sites per year. However, as stated in previous
forecasts, the value chains have refocused from
initial out-of-town stores and are increasingly

The troubles on the high street during 2018

have been highlighted clearly by the liquidations,
administrations and CVAs of traditional retailers.
In 2018, high-profile high street names such as
House of Fraser, Mothercare, Marks & Spencer
and Debenhams all announced financial difficulties
and store closures, which follows on from the
administrations of the UK arm of Toys R Us and
Maplin Electronics during the first quarter of 2018.
Retail vacancy rates at the national level were 12.6%
in 2018 Q3 according to Knight Frank, marginally
higher than the 12.4% in the first half of 2018.
Whilst retail vacancy rates are not rising rapidly
as yet, Knight Frank also stated in September that
retailers are reluctant to commit to new sites and
leases until they have greater clarity as to whether
others are vacating or remaining on compromised
terms. In addition, they highlight that uncertainty
in occupier markets is extending to investment
markets and most investors are adopting a “wait
and see” attitude. This is in line with Investment
Property Forum (IPF) forecasts for retail values
to fall 3.3% in 2019 and 1.9% in 2020 for standard
retail, and values for shopping centres to decrease
5.4% in 2019 and 3.2% in 2020. Knight Frank has
also noted limited transactions in retail units and
centres with large floor space. Shopping centre
management firm, Intu, announced in November
that it was cutting dividends to shareholders to
protect its capital investment programme. Its plan is
to diversify its centres, by reducing retail floor space
and increasing residential, leisure and hotel space.

45
looking at taking over smaller existing urban retail
units aimed at the convenience market. These
smaller stores of around 8,000 sq. ft. open their
opportunities in cities, particularly in London,
where the margins are higher and where they
can potentially take over sites from distressed
retailers. Similarly, Poundstretcher announced a
plan to double the number of retail outlets to 433
stores by 2022, prioritising vacated high street
stores, rather than new build premises.
In response to the growth of value chains, which
now account for 13.1% of supermarket sales,
Tesco has launched a value offering, Jack’s, in two
locations in Chatteris, Cambridgeshire, and at
Immingham, Lincolnshire. It is anticipating opening
between 10 and 15 stores in 2019 although many
of these will either be next to existing stores or
in converted Tesco stores. Further stores beyond
next year will be dependent upon the success
of the two existing stores but the concern must
be that it will merely take market share from
its existing Tesco stores rather than offset the
growth of value chains.
Apart from value chains, the key driver of activity
in the retail sector from 2019 is still expected to
be the £1.4 billion Croydon Partnership project,
which the Mayor of London gave final approval
in January 2018 and will see the current Whitgift
and Centrale shopping centres replaced by a
46
1.5 million sq. ft. building that is expected to be
completed in 2022. In September 2018, Croydon
Council issued notices to landowners and other
affected parties around the proposed site that
the Compulsory Purchase Order (CPO) process
was to begin and the Croydon Partnership, a joint
venture between Unibail-Rodamco-Westfield
and Hammerson, will take possession of the site
in 2019.
Initial works on the £1.4 billion Brent Cross
extension started early in 2018 but it was
announced in June 2018 that main construction
work on the shopping centre redevelopment
has been delayed by six months and will only
now start in January 2019. This will also push the
completion date back from September 2022
to March 2023 but the key concern must be
that in a declining retail sub-sector, especially in
the shopping centre category, in 2019, investing
£1.4 billion in a shopping centre extension
may become increasingly difficult to justify. In
October, Hammerson, the developer, announced
that it was considering shifting the weighting of
units away from retail, potentially to offices and
residential.
After several delays, the £1.6 billion takeover of
the commercial phase of Battersea Power Station
by a Malaysian investment management firm was
finalised in December. The development will
include 540,000 sq. ft. of office space, of which University applications
500,000 sq. ft. has already been let to Apple, and
700,000 sq. ft. of retail space. However, at the for 2018 by domicile:
time of the deal, 420,000 sq. ft. remained unlet. Non-EU:
UK: EU:
As in previous CPA forecasts, the headwinds
+3.4% +11.1%
facing the UK retail sector are primarily due to -2.6%
structural changes, although a slowdown in retail (Source: UCAS)
sales at the end of 2018 will worsen the near-
term financial woes of high street retail. New
PFI education output doubled between 2012
orders in the retail sector fell by 9.3% in 2017 and
and 2017, primarily driven by major investments
fell to a record low in 2018 Q3. For the first three
by universities attempting to compete at a
quarters of 2018, new orders were 33.3% lower
global level by improving accommodation and
than a year earlier. The decrease in orders is likely
infrastructure facilities. The most high profile of
to take around 9-12 months to feed through into
these remain the ten-year plans valued at £1.0
output, during 2019. The decline in orders in 2017
billion each by the University of Cambridge
has seen output fall in the first nine months of
(including a £250 million physics laboratory
2018 and a contraction of 10.0% is estimated for
and facilities hub to start in early 2019), the
the whole year. A further 4.0% fall is forecast for
University of Manchester, University College
2019, a revision down from the previous forecast
of -2.0%. Output is then forecast to remain flat
in 2020 due to concern over progress on the
Croydon and Brent Cross projects.

Downside Risks:
• Stubborn inflation and subdued real wage
growth

• Rising unemployment

If exchange rate weakness means inflation

accelerates in 2019 and real wages fall again in
2019 then this would be expected to impact
on consumer confidence and spending. Any
significant rise in unemployment, albeit from
historic lows, would also be expected to
adversely affect consumer confidence and
spending. Both of these would also be likely to
shift spending further towards cheaper online
offerings.

Upside Risks:
• Stronger than anticipated UK economic growth

• Real wage growth

• Unemployment falls

Stronger UK economic growth at rates above

0.5% per quarter, real wage growth and further
falls in unemployment would be expected to
boost consumer confidence and spending.

47
London (in which the £200 million East Campus a 12.0% fall in output is estimated for 2018 before
Building will start in 2019 and undergo a phased a further decline of 3.0% in 2019 as activity on
opening from September 2022), the University major university programmes eases. Activity is
of Glasgow and a joint programme between the then expected to remain flat in 2020.
University of Warwick and Coventry University.
However, over the past year, there have been Downside Risks:
increasing concerns about the sustainability
• R ising construction costs hinder viability of
of these investments given their reliance on
university projects
increasing student numbers and increasing
student fee income. For 2018 entry, university Cost overruns on the initial phases of major
applications fell 0.9% on an annual basis, with a fall investment programmes at the University of
in applications from UK students outweighing a Cambridge due to lack of project management
rise in applications from EU and non-EU students. experience may occur at other universities that
In addition, there have also been concerns about have major investment programmes. If so, this
the ability of universities to contract out and may reduce activity on further phases.
manage large investment plans. The University of
Cambridge’s audit committee highlighted some Upside Risks:
of the problems facing an academic institution
that is attempting to get involved in real estate • Increased funding from non-EU students
development on an unprecedented scale for the Further rises in student fees and rises in non-
first time and PwC reported that construction EU students could incentivise further university
costs for phase 1 of the Cambridge investment campus and accommodation investment,
programme rose from £259 million in July 2013 to especially given the increased competitive
£378 million in July 2015. environment for universities seeking to attract
More recent contract awards in the sub-sector students.
have focused on smaller universities projects such
The prospects for the PFI Health sub-sector
as the £56 million Royal College of Art campus in
have weakened from previous CPA forecasts
Battersea for completion in Summer 2020, a £55
during 2018. After the liquidation of Carillion in
million student accommodation village at Exeter
January 2018, work had been paused on the two
University, with two phases of completion in 2020
largest projects in the sub-sector, the £450 million
and 2021, a £54 million accommodation project
Royal Liverpool Hospital redevelopment and the
for the new University Campus of Football
£350 million Midland Metropolitan Hospital. The
Business in Wembley and a £55 million redesign
Royal Liverpool Hospital redevelopment was over
and refurbishment of student accommodation at
70% complete at the point of Carillion’s demise
Kingston University. Larger projects return in the
and was originally expected to finish in May 2018.
longer-term pipeline, subject to planning approval,
Failure to secure private funding for remediation
and include plans for a new university in Milton
Keynes and a £100 million project to rebuild the and remaining works on both hospitals saw the
Glasgow School of Art’s Mackintosh Building
following a fire in June 2018. PFI Health
PFI education output has risen for six consecutive new orders
years on the back of university investment plans.
Output in the sub-sector rose by 12.7% in 2015,
8.6% in 2016 and a further 9.7% in 2017. However,
output has been falling steadily since its peak in
2017 Q1 and was 21.1% lower than this peak in
2018 Q3. New orders in PFI education in 2017
were 7.5% lower than in 2016 and new orders
during the first three quarters of 2018 were 17.1% 11.4% lower
lower than one year earlier. Based on new orders, in 2018 (Q1-Q3)
48
government agree to take over responsibility for
completing the projects. As a result, this activity
will now occur in the public non-housing health
sub-sector.
Private healthcare providers’ appetite for
expansion has been reduced in recent years,
due to a fall in referrals from the NHS and lower
numbers of overseas patients coming to the
UK for private treatment. This resulted in the
cancellation of two planned £70 million private
hospitals in Milton Keynes and Manchester. There
are still some lower-value private healthcare
projects entering the pipeline, however, including
the £50 million Pirbright Institute research
laboratory in Surrey, which reached the stage of
contract awards in December. Construction is
scheduled to start in Q1, until the 2021 opening.
In addition, the first large project on the £500
million four-year Private Investment Construction
Framework for healthcare was awarded in
April, for a £65 million acute care hospital in
Birmingham, due to be completed in Winter
2020. Designs for two research facilities at the
Harwell Campus in Oxfordshire were submitted
in September, with an estimated £100 million
cost to build, and approval was granted in July
for Nuffield Health’s £60 million private cardiac
and general surgery units at St Bartholomew’s
Hospital in London. Construction work is set
to occur over the next three years. The £25
million Sight and Sound Centre project at Great
Ormond Street Hospital began in Autumn and is
expected to be completed in 18 months with the
centre due to open in 2020.
New orders in the sector peaked in 2006,
when PFI was the preferred method of financing
hospital builds. Orders have subsequently fallen
in every year except 2014 and have reached
such low levels that one or two small projects
is enough to lead to a significant rise in orders,
although the construction activity from these
projects would be spread over two or three years
and so would contribute little to output. New
orders during the first three quarters of 2018
were 11.4% lower than a year earlier. Output in
the sub-sector in 2016 was 13.7% higher than in
2015 but output fell by 26.3% in 2017. Overall,
output is estimated to have fallen 4.0% in 2018.
A further decline of 5.0% is forecast for 2019,
reflecting the removal of two major PFI projects
from the sub-sector, before output remains at
this level in 2020. The cancellation of PFI and PF2
for new projects in Budget 2018 also constrains
sub-sector growth in the longer-term beyond the
forecast period.
Downside Risks:
• Rising construction costs hinder project viability
Continued construction cost inflation may
increase risk aversion of private healthcare
providers who have already consolidated
expansion plans due to fewer patients from the
UK and abroad.
Upside Risks:
• The number of private sector hospital projects
increases
Private healthcare providers have increased
development in recent years and a small number
of medium-sized projects would be enough to
drive growth in the sub-sector during both 2019
and 2020.
49
 Private Non-housing R&M
Output in the private non-housing repair and maintenance (r&m) includes basic repairs and
maintenance of offices, shops, warehouses, factories and other privately-owned properties and is
dominated by work on offices and retail units.

Household consumption growth the government’s expansionary fiscal policy. By

contrast, household spending increased 0.5%
is set to reach £ £ £ £
£ £
£
£
£ £ ££ £
£ £
quarter-on-quarter in Q3, unchanged from
Q2, driven by warmer than usual weather.
a seven-year low of £ £ However, looking ahead, growth is expected to

1.2% in 2019 £ £ £ be constrained by weak real wage growth and

low savings and according to the OBR, consumer
£
(Source: OBR) spending is forecast to rise at its slowest pace
since 2009 in both 2019 and 2020.

Overall, output in the private non-housing r&m

The two key determinants of activity in the
sector, business investment and consumer
spending, continued to paint a mixed picture in
the third quarter of 2018. Business investment
declined 1.1% on a quarterly basis in Q3,
following a 0.4% fall in the previous quarter and
marked the sharpest decline since 2016 Q1 (see
Economy). This was also the third consecutive
quarterly fall, the first time this has occurred
since the global financial crisis, which can be
attributed to the impact of ongoing Brexit-related
uncertainty on business confidence and decision-
making. Although such effects are expected
to persist in the near-term, the Office for
Budget Responsibility (OBR) forecasts business
investment growth to pick up from an estimated
0.5% in 2018 to 2.3% in 2019, supported by
sector tends to be less volatile than new build,
given the reliance on facilities management
contracts. Carillion was the UK’s second
largest construction, facilities and property
management company and, despite its liquidation
in January 2018, government and key private
sector clients remain committed to sustaining
facilities management services. The impact of its
collapse on activity has, therefore, been limited.
Furthermore, remedial work to replace some
of the insulation materials on the public-private
partnership (PPP) Papworth hospital project in
Cambridge is currently underway and is expected
to support activity in the near-term. As a result,
following an estimated increase of 5.0% in 2018,
output growth is forecast to rise by 2.0% in both
2019 and 2020.

Private Non-housing R&M Output

16,000
5.0% 2.0% 2.0%
14,000 7.8%
5.1%
2.9%
£ million - 2016 Constant Prices

12,000 7.1%
2.3% 3.6%
7.1%
10,000

8,000

6,000

4,000

2,000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p

Source: ONS, Construction Products Association

50
Downside risks:
• Weaker than expected growth in business
investment and household spending
A prolonged period of heightened uncertainty
over the UK’s future relationship with the EU and
slower economic and real wage growth is likely
to weigh on business and consumer confidence
in the near-term. In this case, consumers and
businesses are expected to rein back spending
and investment plans respectively, restraining
activity in offices and retail.
Upside risks:
• Stronger than expected growth in business
investment and consumer spending
Greater clarity over the future UK-EU relationship
in the short-term, alongside stronger global
economic conditions that strengthen business
confidence and investment intentions is likely to
pose an upside risk to the sector. This, coupled
with a marked improvement in consumer spending
amid lower inflation and rising real wages, is likely
to boost activity in the sector further.
51
 Industrial
The outlook for the industrial sector remains bright, with output projected to increase 16.6% by
2020, as growth in warehouses, driven by e-commerce, offsets declines in factories.

Output in the industrial sector is forecast to Industrial Output by Sub-sector

increase 2.5% in 2019, an upward revision from 2017 (%)
0.4% predicted in the Autumn forecasts due to
stronger growth expectations for warehouses,
Warehouses
before accelerating to 4.4% in 2020. Growth will
45%
primarily be driven by the warehouses sub-
sector, which is expected to enjoy double-digit
growth over the forecast period driven by a
strong pipeline of projects, as the ongoing shift
towards e-commerce continues to fuel demand
for warehousing and distribution space. This is Factories
Oil, Steel
expected to offset the weakness in factories, 54% & Coal

where construction output is predicted to fall 1%

due to a limited pipeline of new work and slower
global economic growth. By the end of the Source: ONS

forecast period, industrial output is projected to

total £5.5 billion, 16.6% higher than in 2017, but Growth forecasts for factories have been
22.1% lower than its peak in 2006. downgraded since the Autumn forecasts, with
output now expected to contract 5.0% in 2019
Industrial output growth to slow from and 2.0% in 2020 due to a lack of projects with
contracts signed in the pipeline. New orders
in factories have declined in each quarter since
2017 Q3, which is expected to filter through
to lower activity on the ground. The primary
determinants of sub-sector activity are industrial
9.0% 2.5% production and manufacturing output and,
while both increased in Q3 following a decline
in 2018 in 2019 in Q2, the longer-term picture remains one
of a slowdown. In Q3, manufacturing output
rose 1.3% in annual terms, down from 2.0%
in Q2 and marked the weakest growth since

52
2016 Q3, reflecting the underlying weakness in
domestic demand, as well as weaker growth
in the Eurozone, the UK’s largest trading
partner. This is consistent with industry surveys,
notably, IHS Markit/CIPS, which reported
weaker manufacturing activity in July and
August 2018. Furthermore, the latest survey
for December showed that the average PMI
reading for Q4 was the weakest since 2016
Q3, whilst optimism among manufacturers was
at a 27-month low. Despite slower Eurozone
economic conditions and the fading effect of
the past Sterling depreciation, UK exports of
goods increased 3.2% in annual terms to a
record high of £88.9 billion in Q3, which is likely
to be attributed to robust demand from non-
EU countries such as the US. However, looking
ahead, slower global economic growth and rising
global trade tensions are expected to dampen
export growth and, according to the EEF/BDO
manufacturing outlook survey for Q4, growth in
the manufacturing sector output is forecast to
slow from 1.1% in 2018 to 0.3% in 2019.
In terms of the project pipeline, works at
Aston Martin’s £200 million manufacturing
facility in South Wales, JCB’s new 350,000 sq.
ft. factory worth £50.0 million in Staffordshire
and Berkeley Group’s 150,000 sq. ft. modular
home manufacturing facility in Kent are currently
underway and due for completion in 2019.
Looking ahead, activity will be supported by
plans to build a new £80.0 million UK Battery
Industrialisation Centre in Coventry (UKBIC),
which forms part of the government’s £246
million Faraday Battery Challenge. After
receiving planning approval in November 2018,
works are expected to commence this year and
be completed by 2020. Other notable projects
in the pipeline include Siemens’s £200 million rail
factory in Hull and Forterra’s plan to build a new
factory in Leicestershire that has an expected
cost of between £90 and £95 million. However,
there are no indicative start dates for both
projects and, as a result, there is little in the way
of new work. Furthermore, over the past 12-18
months, ongoing Brexit-related uncertainty
has continued to dampen business confidence
and investment in the UK’s automotive and
aerospace industry, with several manufacturers
holding back major long-term investment
decisions awaiting further clarity. According to
Factories new orders fell
34.3% year-on-year to
£300m
in Q3, the lowest
in seven years
an SMMT Brexit impact survey carried out in
November 2018, nearly one-third of businesses
reported that they had postponed or cancelled
investments decisions in the UK due to Brexit,
with one in five having already lost business as a
direct consequence.
Downside risks:
• Manufacturers delay or cancel investment
plans
• Weaker domestic and global demand
If manufacturers continue to delay or cancel
major long-term investment plans and possibly
shift production outside the UK in the near-term
amid heightened Brexit-related uncertainty, this
poses a downside risk. Furthermore, a marked
slowdown in domestic demand and weaker
external demand due to slower global economic
growth and escalating trade tensions are likely to
weigh on manufacturing activity.
Upside risks:
• Stockpiling activity boosts manufacturing
output
• A fall in Sterling and stronger global growth
boosts exports
Recent industry surveys (IHS/Markit, EEF and the
SMMT) revealed that some UK manufacturers
are currently stockpiling in order to avoid any
potential supply chain disruptions in the event of
a No Deal Brexit. If manufacturers continue to
undertake such precautionary measures in the
short-term amid heightened Brexit uncertainty,
this is likely to provide a temporary boost to
manufacturing activity. A Sterling depreciation
and stronger global economic growth that
supports UK export activity in the near-term
presents another upside risk.
53
 The outlook for the warehouses sub-sector
remains bright, with double-digit growth rates
forecast for both 2019 and 2020 even though
economic and consumer spending growth is set
to remain modest. Official figures show that both
these drivers recorded the strongest growth in
nearly two years in Q3, due to the temporary
effect from the unusually warm weather. This
was mirrored in the volume of retail sales, which
increased 3.5% year-on-year in Q3, up from 2.8%
in Q2. This also marked the strongest growth
in two years driven primarily by online sales,
which accounted for 18.0% of all retail sales

The £350m in Q3, the highest proportion since quarterly

records began in 2008. Although more recent
data from the British Retail Consortium show
distribution centre near that retail sales growth slowed in November,
Magna Park will provide: the online penetration rate rose to an all-time

3.6m sq. ft. of

high of 33.8%, reflecting the ongoing structural
change within the retail industry. This, in turn, has
continued to underpin demand for warehouses
warehousing space, and distribution space and, according to BNP
and 3,000 car parking spaces Paribas, total take-up for distribution warehouses

Industrial Output
6,000 4.4%
9.0% 2.5%
11.6%
5,000 3.0%
-5.4%
16.0%
£ million - 2016 Constant Prices

9.5%
4,000

-9.5% -9.2%
3,000

2,000

1,000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association

54
of more than 100,000 sq. ft. reached 22.2 million
sq. ft. in Q3, a 13.2% increase compared with a
year earlier. By region, the Midlands recorded
the highest take-up, accounting for 35.4% of
total take-up, followed by the South East (19.4%)
and the North West (16.6%). Furthermore,
Q3’s report from BNP Paribas revealed that 9.1
million sq. ft. of speculatively developed units are
expected to be completed by the end of 2018,
slightly surpassing its peak in 2016. Looking ahead,
it stated that major port expansions planned at
Tilbury 2 and Felixstowe should support activity.
New orders in warehouses increased 9.5% year-
on-year in Q3 however, quarterly orders tend to
be volatile, and on a four-quarter basis, were still
13.0% higher than a year earlier, largely due to
the contract award for Amazon’s 500,000 sq. ft.
distribution centre project at the East Midlands
Gateway in Leicestershire. This growth in new
orders is expected to filter through to activity on
the ground and, as a result, warehouses output is
forecast to increase 10.0% in both 2019 and 2020,
which also reflects work occurring on the £350
million distribution centre project near Magna
Park in Leicestershire.
Downside risks:
• A sharp slowdown in consumer spending
• Speculative development declines due to
heightened economic uncertainty
A major downside risk to sub-sector growth
emerges if consumers rein back their spending
sharply in the face of a renewed rise in inflation
and falling real wages. Faced with lower retail
sales, retailers may cut back on expansion plans,
denting demand for warehousing and distribution
space. This, alongside a fall in speculative
development activity due to heightened Brexit-
related uncertainty would result in lower activity
over the forecast period.
Upside risks:
• Stronger than anticipated consumer spending
growth and a lower Sterling boosts online
retailers and manufacturers demand
respectively
• Higher demand for warehousing facilities linked
to port expansions as a result of Brexit
Stronger-than-expected growth in real incomes
that boosts consumer spending, alongside
stronger export growth supported by a lower
Sterling exchange rate and healthy global growth
should buoy retailers’ and manufacturers’ demand
for warehousing and distribution space. Demand
may increase further if requirements for industrial
warehousing and logistics facilities, including
bonded warehouses and cold storages close to
all UK exit and entry points such as ports and
airports, surges ahead of Brexit.
55
 Infrastructure
The outlook for the infrastructure sector remains unchanged since the Autumn forecasts, but
there are ongoing concerns over the delivery of major infrastructure projects.

Please note that the ONS has issues with its Infrastructure Output by Sub-sector
measurement of the sub-sectors in infrastructure. 2017 (%)
Firstly, the ONS’s methodology means that although
the level and growth of total infrastructure overall Harbours
Electricity
may be fine, sub-sector output is determined by 3%
45%
the relationship between new orders and output Water &
Sewerage
in the medium-term, often determined by projects
12%
within five-year spending plans in regulated sectors.
However, if a new order for a major project in the
sub-sector is placed, this may underestimate the
Gas, Air &
time taken for it to provide activity on the ground Communications
and overestimate the amount of activity in one 4%
Roads
quarter or year. An example of this may potentially
Rail 15% 21%
be the extent of recent growth in water & sewerage
due to the Thames Tideway Tunnel project. Secondly, Source: ONS
the ONS only surveys firms that are officially
classified as contractors so if the activity is done
by an engineering firm then it will not be covered.
This applies to all construction sectors and firms
Infrastructure that do construction work but are not technically
output contractors. However, this issue impacts most upon
infrastructure. Therefore, given concerns regarding
forecast
8.8% 7.7%
the ONS’s data on infrastructure output, especially
to rise at sub-sector level, the forecasts are not purely
& based on the ONS output data but take into account
in 2019 in 2020 recent industry surveys and pipeline evidence. This is
particularly the case for the roads sub-sector.

56
Output in the infrastructure sector is forecast to
increase 8.8% in 2019 and 7.7% in 2020¸ driven
by construction works occurring on large-
scale infrastructure projects in the rail, water
& sewerage and electricity sub-sectors such as
HS2, the Thames Tideway Tunnel and Hinkley
Point C. However, as highlighted in previous CPA
forecasts, there remain concerns over delivery
to time and budget. In the October Budget, the
government increased the size of the National
Productivity Investment Fund (NPIF) from £31
billion to £37 billion and extended it by one year
to 2023/24. However, the annual NPIF spend
is expected to be broadly flat over the next
four years. Furthermore, as part of the NPIF,
the government also extended the £1.7 billion
Transforming Cities Fund by a year to 2022/23.
In November 2018, the government updated the
National Infrastructure and Construction Pipeline,
setting out £413 billion worth of planned private
and public investment over this Parliament, with
£188 billion worth of projects from 2018/19 to
2020/21, which is £6.0 billion higher than the £182
billion previously estimated in December 2017.
However, it is the delivery of these infrastructure
announcements that will be key. By the end of the
forecast period, infrastructure output is projected
to total £23.2 billion, £3.6 billion (18.2%) higher
than in 2017 and the highest level on record.
Rail construction output is forecast to increase
10.0% in 2019, driven by ongoing works on the
£655 million Bank station capacity upgrade
project and the £1.2 billion Northern Line
extension to Battersea. The latter project was
due to open in 2020, but it is now thought to be
running at least 12 months behind scheduled and
over budget due to design changes to the tube
station. As a result, the project is expected to
open in 2021 at the earliest. Furthermore, main
construction works on the £263 million London
Overground extension to Barking Riverside
and major upgrading work on the East Coast
Main Line are expected to commence this year.
Growth will also be supported by works under
the next five-year Control Period 6 (CP6), which
will run from April 2019 to 2024 and has a total
budget of £47.9 billion, compared to £38.3 billion
allocated for the current control period, CP5
(2014-2019), of which £34.7 billion will come
directly from government grant. However, in
October 2018, the Office of Rail and Road
published its final determination on Network
Rail’s spending plans for CP6, which showed
that the total expenditure is expected to be
£1.8 billion higher than its funding envelope.
Nevertheless, the ORR approved Network Rail’s
£34.7 billion spending plans, allocating £31.0
billion for England and Wales and £3.7 billion for
Scotland. Although the focus of CP6 will remain
on maintenance and renewals, it is also expected
to see the delivery of projects deferred from
CP5, including the Great Western electrification
and Phase 2 of the East West Rail project.
Furthermore, a £2.9 billion upgrade to the
TransPennine Route between Manchester and
Leeds is expected to occur from 2019 to 2024.
Activity will also be underpinned by electrification
of cross-country routes, including the Great
Western Main Line between London and Cardiff,
which is due to be completed this year, and the
Midland Main Line between London and Bedford,
which is scheduled to be completed in 2020.
However, given that three electrification schemes
on the MML, GWML in South Wales and the
Lakes Line (LL) from Oxenholme to Windermere
were all cancelled in July 2017, owing to cost
overruns, further delays or cancellations on major
electrification projects cannot be ruled out.
Construction
of the 4.5km
Barking
Riverside extension
to start this year
57
 Infrastructure Output
30,000
25,000
£ million - 2016 Constant Prices
20,000 8.4%
15,000
10,000
5,000
0
2010 2011
Work on the Crossrail project (also known as
the Elizabeth line) is now 95% complete and is
in its final stages of testing and commissioning
and station building. In December 2018, the
government and Transport for London (TfL)
confirmed a new financing package to deliver the
final stages, which marked the third financial rescue
plan in six months. This comes after previous
funding announcements of £590 million in July
2018 and £350 million in October 2018, as well
as the announcement in August 2018 that the
opening of the central section of the Elizabeth
line has been delayed until at least Autumn 2019.
According to a review by KPMG, additional capital
funding in the region between £1.3 billion and £1.7
billion would be required due to this delay and, as
a result, a total of £2.15 billion additional funding
was committed. This includes a £1.3 billion loan
from DfT, a £100 million cash contribution from
the GLA and a £750 contingency loan facility from
the DfT. Overall, this suggests that the total cost of
the project is now £17.6 billion, up from the £14.8
billion estimated in 2009. With the revised Autumn
2019 opening date yet to be confirmed, further
delays and cost overruns into 2020 are expected.
Consequently, the Association expects the project
to be completed by the second half of 2020.
Looking ahead, output growth is forecast to
accelerate to 20.0% in 2020, driven by main
works occurring on the £55.7 billion High
Speed 2 (HS2) rail project. Phase 1 of the
scheme (London to Birmingham) includes
the construction of four new stations and in
58
7.7%
8.8%
6.1% 0.9%
22.6%
2.3%
-3.4%
-10.6% -2.1%
2012 2013 2014 2015 2016 2017 2018e 2019f 2020p
Source: ONS, Construction Products Association
November 2018, the tender process for the
Birmingham Curzon Street station commenced,
with bidders expected to be shortlisted in
Spring before contract award in 2020. However,
anecdotal evidence suggests that main works on
HS2 are expected to be delayed by more than
a year and the costs for the main works civil
contracts are expected to exceed the budget of
£6.6 billion. Reflecting this, as well as the poor
track record of delivering major infrastructure
projects to time and budget suggests that further
delays cannot be ruled out.
Downside risks:
• Main works on HS2 delayed further
• Work slows under CP5 as the programme
comes to an end
• Additional funding requirements for the
Crossrail project impacts delivery of other
London projects
A main downside risk to rail growth emerges if
main construction works on Phase 1 of the HS2
project are pushed back further. Moreover, higher
construction costs fuelled by inflationary pressures
could also exacerbate the project’s budget issues,
pushing the total cost of HS2 above the estimated
£55.7 billion. Also, a potential hiatus between the
end of CP5 and the start of CP6 could slow the
delivery of projects. The extra capital funding
committed to Crossrail in December 2018 will be
partly funded through tax revenues earmarked
for Crossrail 2, leaving that project with a funding
shortfall. Any further capital funding requirements
in the near-term that may require tapping into
sources reserved for other rail projects in London
presents another downside risk. In this case,
projects in the capital are likely to be put on hold
or delayed whilst new funding sources are agreed.
Upside risks:
• Main civil works on Phase 1 of HS2 starts
this year
If main civil engineering works on Phase 1 of
HS2 commences in the second half of this year,
boosting activity on the ground, this presents an
upside risk to the sub-sector.
Growth forecasts for the electricity sub-sector
remain unchanged, with output set to increase
14.0% in 2019 and 7.0% in 2020. Alongside
ongoing nuclear decommissioning, which includes
Sellafield, the UK’s largest nuclear site, and work
around the National Grid power connections,
activity will be supported by a pipeline of projects
in the offshore wind farm sector. Construction
is currently underway at the £2.6 billion Beatrice
Offshore Wind Farm, located in the Outer Firth
of Moray, as well as projects under the Round 3
Offshore Wind Programme, including Hornsea
Project One, the world’s largest offshore wind
farm, and East Anglia ONE. The former is
scheduled for completion this year, whilst the
latter two are expected to be fully operational in
2020. Meanwhile, construction works on the £2.6
billion Moray Offshore Wind farm (East), which
is located off the coast of Scotland, and the 860
MW Triton Knoll offshore wind farm, located off
the Lincolnshire coast are expected to start this
year, whilst works on the 784 MW Inch Cape and
448 MW Neart na Gaoithe offshore wind farm
projects in Scotland are due to start in 2020. Main
works on Hornsea Project Two are also expected
to commence in 2020 and once operational
in 2022, it will overtake Hornsea Project One
to become the world’s largest offshore wind
farm. Besides offshore wind farms, activity will
be underpinned by the £19.6 billion Hinkley
Point C project, with main construction works
expected to occur from 2019. Approximately
80% of procurement on the project is now
complete, with 30 contracts yet to be signed.
Hornsea Project One
once completed in 2020
will provide
power to more
than 1 million homes
Pre-construction works on the 2.7 GW Wylfa
Newydd nuclear project were expected to occur
from 2020, but in January, Hitachi announced
that it was suspending the project due to
rising costs and a failure to agree final financing
arrangements. Highlighting uncertainty over such
projects, this follows Toshiba abandoning its plans
to build a nuclear power station at Moorside in
Cumbria in November. Moreover, at the peak of
construction, Hinkley Point C is expected to see
5,600 workers onsite, which raises concerns over
skills availability in the medium to long-term given
that other major infrastructure projects in roads
and rail are also expected to occur at the same
time.
Downside risks:
• Investment on key energy projects stalls
• Major nuclear projects delayed further
A potential loss of access to European Investment
Bank (EIB) funding post-Brexit or reduced
investor confidence amid heightened Brexit
uncertainty, which in turn, hinders decision-
making on key energy infrastructure projects
pose a downside risk to the sub-sector. This is
alongside the risk of further delays on major
nuclear projects, notably, Hinkley Point C.
Upside risks:
• Investor confidence improves leaving large-scale
projects unaffected
Improved investor confidence amid greater
clarity regarding the future UK-EU relationship
and stronger than expected economic conditions
presents an upside risk to the sub-sector. This
would, in turn, allow large-scale projects, including
work previously paused under the Round 3
Offshore Wind Programme to get off the ground.
59

Tunnelling works on the
25km Thames Tideway Tunnel
are currently underway
Following an estimated increase of 12.0% in
2018, output in the water & sewerage sub-
sector is forecast to remain flat, but at this high
level in both 2019 and 2020, driven by work
on the largest project in the pipeline, the £4.2
billion Thames Tideway Tunnel. The project
has £700 million of backing from the EIB and
following the EU referendum result, the Bank
has stated that its funding commitments to the
sub-sector will remain unchanged. In November
2018, tunnelling work on the 25km project
commenced and should be completed by 2021,
before being fully operational in 2023. However,
Bazalgette Holdings Group’s interim report
published in November 2018 revealed that
total spend on the project has reached £1.48
billion and contingency for the project has been
substantially eroded even before tunnelling
started due to engineering complications and
cost pressures across the programme. Although
the holding company for the project indicated
that cost saving measures are underway, it
added that it was too early to conclude whether
such measures will mitigate the cost pressures.
Activity in the sub-sector will also be supported
by work under the current five-year Asset
Management Plan (AMP6) running from 2015/16
to 2019/20, but water companies will mainly
focus on efficiency, through maintenance of
existing assets, rather than new build. With the
current regulatory period coming to an end, its
replacement AMP7, which will run from 2020
to 2025 will support activity over the medium-
term. In September 2018, Water UK published
a Manifesto for Water, which stated that water
companies plan to spend more than £50.0
billion on improving services and upgrading the
network during AMP7, 13.0% higher than the
£44.0 billion being spent in AMP6. Ofwat is
currently reviewing water companies’ business
plans, with the draft determination expected to
be published in March/April. This will be followed
by a final determination at the end of this year.
60
Recent data show that in 2018 Q3, output in
the water & sewerage sub-sector increased
10.5% quarter-on-quarter to £628 million, the
highest level since 2012 Q3, which is likely to be
attributed to preliminary works occurring on
the Thames Tideway Tunnel project. Preliminary
works, however, have been underway since 2016
and despite this, output has recorded quarterly
declines since 2017 Q4. Contracts for the
project were awarded in February 2015 and, as
result new orders increased 413.3% in that year.
Output rose 4.0% in 2015 and 26.8% in 2016,
before accelerating to 61.6% in 2017. This was the
strongest annual growth on record even though
main tunnelling works on the project were yet to
begin. This suggests that the ONS’s construction
output data is not accurately reflecting activity
on the ground and is likely to have been
incorporated too early in the data.
Downside risks:
• Thames Tideway Tunnel delayed
• Hiatus between AMP6 and AMP7
A downside risk to sub-sector growth arises if
work on the Thames Tideway Tunnel suffers from
delays due to cost overruns, slowing activity on
the ground. However, in March 2017, a report
by the National Audit Office revealed that the
government has provided a contingent support
package, which aims to mitigate any downside
risks, including providing financial support if cost
overruns exceed 30% or if economic and political
events make it difficult to access capital from debt
capital markets. Moreover, a hiatus in work during
the transition from AMP6 to AMP7 may result
in lower output growth in the final year of the
forecast period.
Upside risks:
• The focus shifts to new build under AMP6
Alongside construction activity on the Thames
Tideway Tunnel, increasing focus on new build
under the AMP6 will lead to stronger growth
rates over the forecast period.
Forecasts for the roads sub-sector remain
unchanged, with modest growth anticipated over
the next two years despite ONS data for new
orders suggesting a stronger outlook. In 2018 Q3,
new orders increased 24.6% on an annual basis,
following growth of 172.3% in Q2, which was the
strongest since 2015 Q1 driven by technology-
focused smart motorway schemes. On a four-
quarter total basis, new orders increased 21.4%
in Q3. This, however, contrasts with survey
data from the Civil Engineering Contractors
Association (CECA), which showed that both
workloads and order books in roads remained
weak in the first three quarters of 2018. In Q3,
13% and 21% of firms, on balance, reported an
annual fall in workloads in motorways/trunks
roads and local roads respectively. Both sectors
also recorded an annual decline in orders in Q3,
with local roads reporting a negative balance
(-26%) for a thirteenth consecutive quarter.
Furthermore, growth in asphalt sales, a key
indicator of activity in the sub-sector, was broadly
flat in the first nine months of the year, compared
to the same period in 2017. Despite this, official
data show that roads output in the year to Q3
was 26.3% higher than a year earlier even though
adverse weather conditions and the demise of
Carillion in Q1 impacted activity on site. Overall,
this suggests that the ONS’s construction output
data is not fully reflecting activity on the ground.
In addition, it could also reflect the increasing use
of smart motorways, as opposed to traditional
roads construction. As a result, the Association
is forecasting actual activity growth in the sub-
sector rather than distortions in the ONS data.
Output in the roads sub-sector is forecast to
increase 3.0% in 2019 and 5.0% in 2020, driven
by a pick-up in activity in the final two years
of Highways England’s £15.2 billion first Road
Investment Strategy (RIS). According to the
ORR’s Annual Assessment of Highways England’s
Performance (April 2017-March 2018) published in
July 2018, 85 major schemes are now expected to
start in Road Period 1 (2015/16 to 2019/20), down
from 112 initially planned, owing to cost overruns.
Furthermore, 39 road schemes are due to start
in the final year of Road Period 1, down from 69.
Despite these revisions, it still suggests that the
majority of work is heavily skewed towards the
end of the Road Period 1 and, as a result, this will
need to be matched by a significant increase in
skills and capacity in order to ensure delivery of
these projects. The current RIS1 is due to end in
2019/20 however, this will be replaced by a second
Road Investment Strategy (RIS2), which will run
from 2020/21 to 2024/25. In the Autumn Budget
2018, the government announced a £28.8 billion
National Roads Fund, which includes £25.3 billion
funding for RIS2, 66.4% higher than the original
allocation for RIS1. Cost increases mean that the
ORR forecasts total spend on RIS1 to be £2.9
billion above original plans.
In terms of projects in the pipeline, work is
over halfway completed on the £1.5 billion A14
Cambridge to Huntingdon improvement scheme,
the UK’s largest road project, the A19/A1058
Coast Road junction to relieve congestion and
The £1.5bn A14
Cambridge to
Huntington
will include:
improvement
scheme a new 12 mile
southern bypass,
widening the existing A14
61
the £745 million Aberdeen Western Peripheral
Route (AWRP) project in Scotland. In terms
of the latter, a trading update published in
November 2018 indicated that the final costs
have risen by a further £20 million and the
completion date of the project has been pushed
back again from Autumn 2018 to this year, due to
complexity and weather delays in implementing
repairs to the bridge over the River Don. Main
works on the project, however, are largely
completed and apart from this, there are very
few major projects in the pipeline in Scotland.
Looking ahead, the £1.0 billion Silvertown Tunnel
project, which would involve the construction
of a new twin-bore road tunnel under the River
Thames in east London will support activity.
Construction is expected to begin later this year
and be completed by 2024. Although works on
other major road projects are planned to start in
2019/20, many are still subject to final approval,
including the A63 Castle Street improvement
scheme. Even if given go-ahead, delays and
cost overruns cannot be disregarded given past
delivery experiences. According to a report
published by the Department for Transport in
August 2018, which evaluated 52 local major
transport schemes approved for construction
between 2006 and 2010, only one-third of the
schemes were delivered ahead of schedule or
on time, whilst the majority opened on average
six months later than forecast. It also reported
that on average, schemes cost 9.0% more than
initially predicted. Near-term activity will also be
supported by smart motorway schemes, which
focus on the use of technology rather than new
roads construction. According to Highways
England, nine schemes are currently underway,
including the M4 Junctions 3 to 12. Construction
on seven others is set to begin during the forecast
period, including the M25 Junctions 10 to 16.
Downside risks:
• Further cuts to local authorities’ funding
• Focus shifts further to smart motorways
• Higher construction costs due to capacity
constraints
Government focus on austerity in the near-term
could see funding to local authorities fall further,
constraining their ability to deliver on roads
62
projects. This, coupled with uncertainty regarding
European Investment Bank funding and whether
the British Business Bank will act as a replacement,
could see local government budgets stretched,
leaving projects unfunded. Furthermore, increasing
focus on smart motorways, mainly technology-
based, rather than new roads construction, as well
as higher construction costs due to a lack of plant
operators, could dampen activity in the sub-sector.
Upside risks:
• Roads schemes receive go-ahead
Several road schemes that are planned to start in
the final year of Road Period 1 are yet to receive
final approval. If given go-ahead, this is likely to
boost activity on the ground. Moreover, financial
incentives to local authorities mainly in the form
of ring-fenced funding could provide more clarity
on roads projects and, in turn, ensure delivery of
them over the medium-term.
Output in the gas, air and communications
sub-sector is forecast to increase 4.0% in 2019
and 1.0% in 2020, driven by works under
Manchester Airport’s £1.0 billion ten-year
investment programme, as well as Gatwick
Airport’s £1.1 billion and Heathrow Airport’s £3.3
billion five-year capital investment programmes
that will support activity throughout the forecast
period. Heathrow Airport’s regulatory period
Q6 (2014/15 to 2018/19) was extended by
one year to the end of December 2019 by the
Civil Aviation Authority (CAA) in 2016, and in
August 2018, a further two-year extension to
the end of December 2021 was confirmed. In
addition to this, activity will be supported by
work under London City Airport’s £480 million
expansion programme, which includes expanding
the existing terminal, constructing a three-story
passenger pier, building a new taxiway and other
facilities, as well as Stansted Airport’s £600
million five-year transformational programme.
In terms of the latter, construction of a new
£150 million arrivals terminal, which forms the
centrepiece of the programme, is expected
to start this Spring and be completed in 2020.
Meanwhile, work on Luton Airport’s new £200
million light rail system that will allow trains to run
directly into the terminal is currently underway
and due to be completed in 2021.
Sub-sector activity will additionally be driven
by work under BT’s £6.0 billion investment
programme to extend its ultrafast fibre and
mobile broadband network to at least 10 million
premises by mid-2020s, as well as Virgin Media’s
£3.0 billion Project Lightning programme, which
aims to extend its fibre network to four million
additional premises by 2019. According to
Virgin Media’s preliminary results, 109,000 new
connections were added in 2018 Q3, compared
to 118,000 in Q2, bringing the total to 1.4 million
premises since the project’s inception in February
2015. Other investments in full fibre networks
include Vodafone UK and Cityfibre’s £2.5 billion
plan to roll out full fibre to five million premises
by 2025, Hyperoptic’s £500 million project to
extend its fibre network to five million homes
by 2024 (revised from 2025 previously) and
Gigaclear’s plans to expand its network to
150,000 rural properties by 2020. In Autumn
Statement 2016, the UK government allocated
£740 million from the National Productivity
Investment Fund (NPIF) to support the roll out
of full fibre networks and 5G communications
by 2020/21. Of this, £190 million was allocated
for a new Local Full Fibre Network (LFFN)
challenge fund to stimulate investment in full fibre
networks across the UK, including rural and urban
locations, whilst £160 million has been earmarked
to support 5G development and £35 million to
improve connectivity on trains. Furthermore,
in the Autumn Budget 2018, the government
allocated £200 million for full fibre broadband
connections in rural areas across the UK, with the
first stage targeting primary schools.
Downside risks:
• Further delays in expansion to superfast
broadband
A downside risk to sub-sector growth emerges
if work under major superfast broadband
programmes face delays. In this case, lower
activity would be anticipated in the near-term.
Upside risks:
• Substantial progress is made in expanding
broadband across the UK
• New gas storage investment occurs
If progress is made on expanding broadband
across the UK, including work under Virgin
Media’s £3.0 billion and BT’s £6.0 investment
programmes, this presents an upside risk to sub-
sector growth. This, as well as new investment
in gas storage in response to utilising shale gas
reserves and given the closure of Rough, which
accounted for 70% of the UK’s total storage
capacity, would underpin stronger growth rates
over the next two years.
63
 Infrastructure R&M
Infrastructure repair and maintenance (r&m) includes work on assets owned by utility companies,
publicly-funded assets such as roads and rail, airports and energy-generating facilities.
An extra£420m
was announced to
repair potholes
and renew bridges
& tunnels in 2018/19
Highways England has a maintenance budget
of £1.3 billion over its first fixed five-year
investment period, which began in 2015/16.
In 2018/19, expenditure on maintenance was
£257 million and is expected to rise to £263
million in 2019/20, the final year of the first road
period. However, local authorities manage 97%
of the roads network and remain financially-
constrained. According to the Local Government
Association, local authorities will face an overall
funding gap of £3.2 billion in 2019/20. As a result,
basic repairs and maintenance are unlikely to be
a key driver of work in the sector despite the
urgent need for basic repairs to roads. In 2015,
the government announced a Pothole Action
Fund, which now totals £296 million between
2016/17 and 2020/21, to allow local authorities to
repair potholes or stop them forming in the first
place. £50 million of this has been allocated for
2018/19. In March 2018, government announced
a further £100 million to help repair two million
potholes and protect roads from future severe
weather conditions. Furthermore, in the Autumn
Budget 2018, the government announced an
additional £420 million to local authorities in
2018/19 to repair potholes and renew bridges
and tunnels. In addition to this, it allocated £150
million of funding from the National Productivity
Investment Fund (NPIF) to local authorities for
small congestion-related improvement projects
such as roundabouts. However, the Asphalt
Industry Alliance’s 2018 ALARM survey reported
that there was a 13-year backlog of local roads
maintenance in England, at a value of £8.2 billion.
This is lower than the one-time catch-up cost of
64
£10.8 billion estimated in the 2017 survey. For
London, the average maintenance backlog was
nine years (£465.9 million), which is marginally
down from the 10 years estimated in the previous
survey. The survey also reported that 40% of
the local road network is currently classified as
amber (some deterioration apparent) or red
(poor overall condition). Of this, 24,496 miles of
road is identified as red, suggesting the urgent
need for maintenance in the next 12 months.
Reflecting this, in August 2018, the Transport
Select Committee launched an inquiry into the
funding and governance of local roads in England.
Evidence to the inquiry continues to highlight
the lack of investment in local road maintenance
and the Asphalt Industry Alliance estimates that
highway authorities in England (except London)
would need an additional £1.05 billion per year
for 10 years for road maintenance.
In the rail sub-sector, the current CP5
(2014/15-2018/19) that largely focused on new
building activity is coming to an end and will
be replaced by the next control period, CP6
(2019/20-2023/24). In February 2018, Network
Rail published its Strategic Business Plan for
CP6, which stated that the focus will be on
maintenance and renewals, with fewer new
enhancements. CP6 has a budget of £47.9
billion, compared to £38.3 billion allocated for
CP5. In October 2018, the Office of Rail and
Road (ORR) set out its final determination on
Network Rail’s £34.7 billion five-year spending
plans. It approved £7.7 billion spending on
maintenance and £16.6 billion on renewing the
existing railway, with renewal work seeing a
17.0% increase from the £14.2 billion in CP5.
The breakdown of the spending plans shows
that expenditure on maintenance in England and
Wales is set to rise from £1.2 billion in 2018/19
to £1.4 billion in 2019/20, before remaining at
that level in 2020/21. For Scotland, spending on
maintenance work is set to increase from £121
million in 2018/19 to £145 million in 2019/20
and remain at that level in 2020/21. Renewals
spending in England and Wales was £2.1 billion
in 2018/19 and is set to rise to £2.7 billion in
2019/20 and £3.1 billion in 2020/21. For Scotland,
 Infrastructure R&M Output
12,000

10,000 7.0% 2.0% 1.0% 0.0%

3.6% 8.5%
12.3%
£ million - 2016 Constant Prices

8,000 -4.6%
-2.1% -5.8%

6,000

4,000

2,000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020p

Source: ONS, Construction Products Association

spending on renewals work is expected to Upside risks:

increase from £343 million in 2018/19 to £377
million in 2019/20 and £510 million in 2020/21. • Central government increases infrastructure
r&m spending quickly
Overall, output in the infrastructure r&m sector
is forecast to increase 1.0% in 2019, driven by A large increase in ring-fenced funding to local
ongoing maintenance activity under the current authorities for transport projects that allows work
five-year Asset Management Programme, to get off the ground, in turn, providing a boost
(AMP6) in water & sewerage and maintenance to both infrastructure r&m output and the wider
and renewal work in the rail sub-sector. Although economy presents an upside risk.
expenditure on roads maintenance is expected
to be higher in the final two years of Road Period
1, 2018/19 and 2019/20, anecdotal evidence
suggests that this has not yet filtered through to
activity on the ground. Output growth is forecast
to remain flat in 2020.

Downside risks:
• Local authorities subject to further budget cuts

• R &m output is likely to be overshadowed

by new build activity rather than basic
maintenance

Further cuts to local authority funding amid

constrained spending by central government
under any further austerity programme pose a
downside risk to sub-sector activity. In the event
of this, local authorities may be forced to finance
new build from maintenance budgets in order to
ensure delivery. In addition, increased pressure
on government departmental budgets could lead
to schemes being cancelled or delayed.

65
The Construction Products Association represents
the UK’s manufacturers and distributors of
construction products and materials. The sector
directly provides jobs for 337,000 people across
24,000 companies, and has an annual turnover of
more than £60.2 billion. We act as the leading voice
to promote and campaign for this vital UK industry.

The CPA produces a range of economic reports

including quarterly Construction Industry
Forecasts, Construction Trade Surveys, State of
Trade Surveys and various bespoke research. 
These publications are available free to
members and via subscription to non-members. 
To learn more, please contact our
Economics team at 020 7323 3770
or visit www.constructionproducts.org.uk.

66
67
ISBN: 978-1-909415-31-7

February 2019

Construction Products Association

26 Store Street
London
WC1E 7BT
Tel: 020 7323 3770
www.constructionproducts.org.uk