Arcadis report puts construction sector on the rocks as autumn looms

A construction slowdown is set to rock the sector according to Arcadis, after new orders fell for the third consecutive quarter.

The firm's latest Market View report, which is subtitled Lower for Longer, outlines data from the Office for National Statistics (ONS), which shows new orders fell by 7.1% in the three months to June. 

This followed a 12.4% drop in Q1 2023 and represented the third consecutive quarterly fall.  

A drop in public sector ‘other new work’ such as health and education, which fell 33%, as well as a 27% decline in infrastructure new work were both significant factors in the gloomy picture, with high interest rates also having a significant impact on the demand for new housing.

However, despite the report’s negative findings, the overall resilience of the construction sector can be seen in the fact that total output has grown for the eighth successive quarter, albeit at a much slower rate of 0.3%. Such resilience is largely being driven by the repair and maintenance segment rather than by new build projects.

Simon Rawlinson, head of strategic research and insight at Arcadis, said market conditions had "deteriorated significantly" over the summer.

“Borrowing costs are expected to remain high for the next two years and prospects for the investment economy including housebuilding and commercial development are likely to be further downgraded," he added.

“The unexpectedly rapid slowdown in public sector procurement is also a reminder that there are few safe havens for workload other than net-zero and fire-safety retrofit which still see strong demand.  

“Our central prediction for the period from 2023 to 2025 remains low inflation, not deflation. 

"However, in the light of worsening data, particularly in connection with the housebuilding sector, we highlight that there is now a material downside risk of a competitive price correction in 2024.”    

Arcadis says that while it’s important not to overread a single datapoint, the slowdown in public sector investment is one to watch and shows no sector is immune to a reduction in demand.

The report points to a recent National Audit Office report, which found the Department for Education was behind its initial schedule for awarding contracts on its 10-year programme of major rebuilding and refurbishment, having awarded just 24 contracts as of March 2023. This was well below its target of 83.

In terms of the impact on the housing market, Arcadis highlights housebuilder Crest Nicholson issued a profit warning in August 2023, saying its sales rates had halved during the summer months because higher interest rates had put off buyers. 

The forward pipeline also looks weak, with the National Housebuilding Council recently reporting a 42% decline in new homes registrations compared to Q2 2022.

The government’s ruling of an 18m height threshold for second staircases in new residential buildings throughout England will not help the sector in the short-term, according to the report, with delays likely to follow as residential schemes are redesigned to accommodate the new requirements, the report’s authors assert. 

The construction industry, too, is responding to the storms ahead by battening down the hatches, with contractors like Wates, Sir Robert McAlpine and BAM implementing restructures to create efficiencies and focus on sectors with a greater potential for growth.

Similar measures can be seen among housebuilders like Bellway, which is weighing up the potential closure of two divisions and a limited number of redundancies, whilst major brick manufacturer Forterra has outlined job losses following a restructure of its commercial and support operations.

These restructures come amid reports of disturbingly high level of business failures across the sector. Latest data from the government’s Insolvency Service showed there were 2,244 business failures in construction in England and Wales in the second quarter of 2023. 

That is the highest quarterly total since at least 2010 and way above the average quarterly total over the past 13 years (1,579).   

The latest EY-Parthenon profit warning report is also cited by Arcadis as finding that changing credit conditions triggered one in five profit warnings in Q2 2023, the highest proportion since Q2 2008. 

This is most noticeable in the housing market, where a slowdown triggered 14% of profit warnings in Q2 2023 and in construction, which saw the highest level of warnings in a single quarter in three years.  

Contractors including Higgins Group, Morrisroe Group and the UK-arm of Sisk have all announced pre-tax losses, with most citing the inflation on fixed price contracts as the main trigger.