Development Outlook - Summer 2011

Report Summary:

Key uncertainties revolve around the strength of the economic upturn, the effects of public spending cuts at the local level, localism and changes to the planning system and the availability of development finance.

On a national basis development activity remains somewhat constrained, largely due to capital values remaining depressed and the lack of availability of development finance. There are however some signs of a small upturn, with the recent rise in values stimulating activity. New construction orders were up in most sectors at the end of 2010, by 12-14% in the retail and office sectors and 66% in the residential sector, but from a very low base. In contrast, new orders in the industrial sector continue to fall.

• The outlook for the economy shows weak growth in the short term, reflecting public spending cuts, higher taxes and relatively high inflation. This will affect occupier demand, and national forecasts for rental value and capital value growth in the commercial and residential sectors show no growth in 2011, and marginal growth in 2012. With development finance remaining constrained, a strong upturn in development activity is unlikely.
• The London development market proves to be the exception. London offices are performing well with healthy occupier demand, limited new supply and stronger growth in rents and capital values. Development activity is notably stronger than in 2010, which is set to continue with demand outstripping supply. Likewise residential development activity remains strong.

Overall building costs rose by 4.4% in the year to Q1 2011 (BCIS General Index), slightly lower than inflation. While material costs have risen by more, labour costs have risen by significantly less and are likely to remain subdued. Significantly tender prices have been falling since 2008, with a high number of projects stalled and subsequent fierce competition for those projects able to proceed. Tender prices are currently c.13% below their peak in Q4 2007 but are now no longer falling. Again London bucks the trend with more resilient tender prices as a result of a more active marketplace.

About the Author:

GVA's award winning Research team provides high quality research and analysis to the business and its clients. Our market commentaries, thought leadership pieces and consultancy advice drive industry debate, distinguish GVA from its competitors, and add value for our clients.

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