GVA Q2 2013 Building cost update
The report examines the movement of tender prices and input costs such as material prices and labour costs, with forecasts over the next five years.
It also provides an analysis of the sectoral components of construction output, together with forecasts for construction output. But firstly the scene is set by examining the wider market conditions.
UK economic growth was positive in Q1 2013, exactly offsetting negative growth in the previous quarter, meaning no overall growth over the last six months. Occupier demand is, not surprisingly, generally weak outside London and the south east.
Rental values continue to decline for anything other than prime property, where rents are stable or improving slightly.
Investment transactions increased slightly over the last six months, with strong activity mainly confined to London, due to intense overseas demand. Prime property yields remain stable or have edged lower, but poorer quality property investment yields have continued their upward trajectory over the last six months. Consequently, prime capital values have been stable or have increased slightly, but at the other end of the quality spectrum capital values continue to fall due to lower rental values and higher yields.
Outside London weak economic growth and occupier demand, stable prime rents and capital values and little change in tender prices has meant little change in development viability or activity over the last six months. Over the last year new office construction orders have weakened slightly, new retail construction orders have declined noticeably, but new industrial construction orders have actually increased.
GVA view
• Economic growth and occupier demand should be slightly stronger in 2013 compared to 2012 and stronger still in 2014, but the improvement will be slow and patchy. Below trend growth is expected up to 2016. Rental and capital values should increase (marginally) in many areas in 2013 and in most areas in 2014.
• New development activity should slowly increase in 2013 and thereafter, reflecting the gradual improvement in rental and capital values and the increasing shortages of available prime office and industrial property. Development finance will remain a constraint, but increasingly less so as market conditions improve. The retail sector will recover more slowly due to the continuing decline in wages (in inflation adjusted terms) and the continuing strong growth of online retail spending.
• London and its hinterland should continue to see stronger economic growth and occupier demand than the rest of the UK. The world economic slowdown in 2012 did affect the level of office occupier demand in London, but not investment demand, which increased. Stronger world economic growth in 2013 and particularly in 2014 should strengthen office occupier demand and rental values, and overseas investors will continue to see London as an attractive safe haven, pushing up capital values.