A new report from Turner & Townsend warns construction firms against short-term thinking which could ‘derail’ vital, long-term strategic priorities.
The professional services firm’s Autumn 2023 UK Market Intelligence Report underlines the ‘perfect storm’ of challenges the sector currently faces – from slowing demand and interest rate hikes to high material and labour costs – and acknowledges the need for clients to tackle these in the short-term.
However, Turner & Townsend is calling for clients to take a strategic approach that will also ensure long-term benefits. This includes prioritising sustainability commitments to protect project viability and future profitability.
Despite falling demand, tender price inflation forecasts remain ‘stubbornly’ high, and unchanged from the summer report. Real estate forecasts are 3.7 and 2.7% for 2023 and 2024, respectively, and 5.5 and 4.5% for infrastructure.
Turner & Townsend said that, more concerningly, total construction new orders have been declining, settling below pre-pandemic levels by 10.9%. The deflationary pressure that might be expected from this is being offset by higher borrowing costs, labour shortages, and high material costs, which stand 42.3% above February 2020 levels.
Whilst demand in the real estate sector as a whole slows, by sub-sector the landscape is more mixed. Non-housing repairs and maintenance was up 2.7% in the last quarter. In contrast, private housing and private repair and maintenance was down by 3.3 and 1.3%, respectively, reflecting high borrowing costs and tight household budgets.
In infrastructure, the impacts are being felt from the projects rescheduled due to prolonged inflationary pressure, and a wider cooling of work pipelines, especially in rail and road sectors. However, ‘pockets’ of increased investment in other sub-sectors are providing balance. The water sector is described as ‘buoyant’, while energy remains ‘strong’.
The report acknowledges clients are becoming more risk-averse. However, Turner & Townsend advises clients to act now to strengthen their long-term strategic approaches. One key area to protect is sustainability, as energy efficiency and carbon reporting become increasingly important for long-term compliance, attracting investment, and avoiding ‘stranded assets’ in client portfolios.
Martin Sudweeks, UK MD of cost management at Turner & Townsend, said, “Our industry is currently managing an incredibly complex landscape as we experience both softening demand and the continued input cost inflation. This is driven in large part by an endemic skills shortage that is pushing up labour costs. (The) sector must work with government and education bodies to tackle the jobs market crunch.
“In the face of immediate cost challenges, it may appear an attractive option for clients to dedicate their efforts to firefighting the issues of ‘today’, while losing sight of commitments to policies like net zero. However, clients should instead be prioritising their long-term strategies, and understanding how profitability, project performance and sustainability can be complementary goals. By doing this, clients will be able to achieve both short-term stability and future, strategic success.”
