Construction material inflation has peaked but ‘H1 spike and labour shortages will hit development’

Glenigan said although materials inflation had settled at around 15%, international geopolitical events and domestic socio-economic disruption indicated market volatility and possibly another inflation spike in H1 2023.

Glenigan’s 2022 Construction Performance Review found that energy-intensive products were hit hardest, with the price of aggregates and insulation rising 53% and 32% respectively.

Post-Brexit barriers to imports and rocketing power prices were cited as the key reasons for these rises, which Glenigan said would put considerable pressure on contractors already working to extremely tight margins.

The report said the construction sector also felt the pinch in terms of labour supply, which intensified over 2022. Alongside legacy issues, such as a shallow recruitment pool and a greying workforce, Brexit and the pandemic had resulted in less ready access to EU workers, Gelnigan added.

According to Glenigan, 2.14 million people are employed in the sector, almost 7% below pre-pandemic levels and down 2.4% on a year ago.

“Couple this with 49,000 construction vacancies and there’s a shortfall, with the very real potential to stifle 2023 activity. This might put a serious dent in the government’s ambitious infrastructure and levelling-up plans in the short-term,” Glenigan warned.

Despite material and labour pressures, output increased by 6% tear-on-year in 2022. Industrial new build output leapt 52%, while private residential new build output rose 11%.

“However, tempering any optimism for a speedy recovery, an [overall] drop in the number of projects starting on site last year points to a weakening in construction output in 2023,” Glenigan said.

The report highlighted a slowdown in projects progressing to work on site last year, as price inflation and regulatory changes led contractors and clients to reappraise the design and cost of developments.

For example, many housing developers pushed back start dates in Q3 2022, following the introduction of Part L of the Building Code. Overall, this has led to a 50% increase in the time it takes from planning approval to commencing on site, Glenigan reported.

The value of underlying project starts fell by 5% year on year in H2 2022, the report found. This was reflected in a 5% dip in the value of underlying planning consents during the same period and a 14% drop in the number of projects securing planning consent.

Glenigan economic director Allan Wilen said: “While supply-side pressures may ease, the skills shortage is a persistent problem that the industry will urgently need to tackle if it wants to return to pre-pandemic output levels.”

“However, there are a few bright spots in the gloom, with major projects including HS2 driving activity, as well as an increased focus on other critical infrastructure in energy, healthcare and data centre developments.”

Source: Property Week