2018 continues to be an interesting year for the construction industry as we are seeing pressure on input costs but tender price inflation remaining relatively stable. External factors such as US trade tariffs and Brexit will undoubtedly influence those costs into 2019 and beyond
Lowest score on record
■ With the news in the first quarter of 2018 that a transition period for the UK's withdrawal from the EU has been agreed confidence is expected to rise in the construction sector for the remainder of the year.
■ Tender price inflation is set to be just 1% for 2018 according to figures from G&T as even though input costs are rising contractors may be trying to build order books for 2019 and onward, assuming that developers and occupiers will be less willing to commit to new projects given the current economic headwinds.
■ However, the varying property sectors and geographies are faring in remarkably different ways which in turn is having an impact on new programme delivery and fit-out as demonstrated in table one.
■ The logistics sector in particular is seeing demand for build to suit and speculative development rise sharply, and we examine the prospects for the sector in more detail below.
■ This is reflected in our S.P.E.C.S index for Q1 2018 with a score for of eight, which is the lowest quarterly score since the results of the EU referendum were announced. Meaning that both costs and programme timescales may have reached a nadir.
GRAPH 1 | S.P.E.C.S Q1 2018
Source: Savills Research
We are starting to see strain in certain segments of the contractor market, and the beginning of some selection of tenders due to the volume of work. Splitting out development readiness works and smart procurement are helping to mitigate this
Savills Research
TABLE 1 | Q1 2018 S.P.E.C.S Indicators
Source: Savills Building and Project Consultancy
Strong demand for logistics buildings to alter build costs?
■ 2017 was a record year for Industrial property as £11bn was invested into the sector making it the highest total volume ever recorded. This capital deployment also accounted for 17% of all investments into UK commercial real estate, again the highest proportion of the market ever recorded. This weight of capital has helped push Savills prime yields for industrial properties to their lowest level ever recorded at 4.25% for both multi-let estates and distribution warehouses.
■ Continued medium term rental growth is expected to continue, as whilst the rate of growth for online retail is slowing, it is crucially, still growing and in November 2017 accounted for 19.8% of all retail sales, setting yet another record. The UK also remains, on a per capita basis an "under-warehoused country" with just 7.61 sq ft of warehousing per head compared to almost 39 sq ft per head in the US.
■ Combined these factors are pushing occupiers to take more warehouse space, and in turn investors and developers are responding by developing more warehouse stock speculatively.
■ We are already seeing an increase in speculative development in 2018 with 7.7m million sq ft under construction as major developers, with new sources of capital, aim to deliver stock to satisfy current demand levels. Indeed, take-up levels remain exceptionally strong with Q1 take-up reaching just over 11m sq ft, the best Q1 ever recorded.
■ Of the take-up recorded in the first quarter of 2018 over two thirds of this for build to suit units, with a number of significant occupiers buying land to self-build. For the construction industry this higher level of development and occupier demand is manifesting itself in a number of different ways. For small to mid box schemes we are seeing programme and cost pressure whereas on the larger schemes these are being absorbed for the time being.
■ Lastly, Brexit could see medium term demand for warehouse space increase. Recent research from the UK Warehousing Association details a scenario where grocery and manufacturing supply chains are placed under increased time pressures, therefore requiring more inventory to be stored in the UK.
GRAPH 2 | Strong occupier demand continues
Source: Savills Research