Post-Brexit uncertainty raises investment concerns for construction sector

Uncertainty following the Brexit vote is having an adverse impact on the construction industry as investment may be delayed or cancelled.

The UK’s decision to leave the European Union has triggered a period of uncertainty for the UK economy. Following the vote, the UK GDP outlook has been downgraded to 1.8% for 2016 and <1% for 2017, compared to 2.2% in 2015.

UK Prime Minister Teresa May recently announced that the process to trigger Brexit will start by the end of March 2017, providing some clarity around the timings of the UK’s exit from the EU. However, uncertainty surrounding the outcome of Brexit negotiations between the UK and the EU remain, making it difficult to predict the longer-term impact of Brexit on the UK economy.

This uncertainty is bad news for the construction industry, which is perceived to be vulnerable to this adverse economic climate, says Robert Walker, engineering and construction leader at PwC. “The sector is reliant on both large and small-scale capital investment projects that may be more susceptible to delays or cancellations following the Brexit vote.”

These concerns materialised immediately after the vote by a drop in the share price of a number of large construction-related companies, such as Kier or Taylor Wimpey.

However, in practice the effects of Brexit on the construction sector have so far been milder than expected. The Office for National Statistics (ONS) indicated that the UK construction sector, after going into recession in the first half of 2016, put in a better-than-expected performance in July 2016.

Nonetheless, new construction contracts were down to £5.8bn in July, with the infrastructure sector performing particularly poorly. In the first full month after the Brexit vote, the value of infrastructure construction contracts dropped by 20% to £1.5bn.

Since then, however, the government sent very encouraging signals with the confirmation of the Hinckley point project and the launch of three consultations on the HS2 Phase 2 route, and share prices of many listed construction-related companies recovered in August and September.

“Overall, market fundamentals remain favourable (e.g. structural shortage in UK housing, need for rail infrastructure upgrades, etc.), but understandably the industry is on a ‘wait and see’ mode,” Walker explains.

The general view is that a Brexit is more likely to adversely impact, rather than benefit, the construction sector. Construction activity is heavily correlated to GDP growth, and the projected slowdown of the economy will likely have a knock-on effect on building demand.

Walker says the effects of Brexit on procurement are unclear. “The EU accounts for a material share of building materials imports, the cost of which may be negatively impacted by a weakening of the pound or a rise in EU tariffs. However, commentators note that if the EU chooses to raise tariffs to Britain e.g. on steel, prices would likely remain unaffected as the country would still be able to obtain inexpensive products from other countries.

“Longer term, a key concern for the industry is the impact of Brexit on the workforce. The industry’s reliance on EU labour is material. Non-UK nationals notably help bridging the underlying skills gap, more noticeable in core trades such as bricklaying.”

According to Walker, Brexit raises a variety of questions and issues that each construction company should consider:

• How much does our activity rely on European countries for revenue growth?
• How reliant is our value chain on EU labour?
• How can we best manage volatility in the Sterling exchange rate?
• Is our organisation ready for a worst-case scenario where there is a prolonged period of uncertainty?

Addressing these questions, both at industry and company levels, is critical to preserve competitiveness, Walker believes.

“At company level, it is critical for management teams to be on the front foot in times of uncertainty. This means making time to establish a clear ‘diagnostic’ to understand how Brexit might impact their business, and to revise the company’s commercial/operational strategy accordingly. Ongoing monitoring of political and economic developments is also key to anticipate risks and opportunities in the marketplace.

“At industry level, the sector should engage in wider discussions around key topics such as labour (e.g. how to attract, train and retain local talents) or financing (e.g. increasing role of private finance, develop PPP deals in the infrastructure sector).”