In the wake of COVID-19, the Building Products and Services (BP&S) sector experienced strong recovery and in areas such as residential improvement, high growth. At the same time the sector – like so many others – has had to contend with challenges often beyond its control including Brexit, geo-political unrest, record levels of inflation, rising interest rates, and a spike in the cost of doing business – whether that be the price of raw materials, fuel, or energy and labour shortages. Some of those factors, along with the impact of Government leadership changes are now creating stronger headwinds for the sector with overall growth forecasts tailing off, especially in residential improvement and housebuilding.
But the reality is, even against a challenging backdrop, there are a plethora of opportunities just waiting to be seized upon by a sector that’s no stranger to fluctuations in fortune. Exciting prospects lie ahead, driven by an underlying long-term demand for housing and better infrastructure, the shift towards energy efficiency, sustainability and decarbonisation, plus the evolution of technology. Structural changes in the regulatory landscape will also create long-term opportunity for the sector. Here we take a closer look at some of those themes.
The Levelling Up agenda and infrastructure
The Government has been very clear about its aim to spread opportunity more equally across the UK through its Levelling Up agenda. This will, in turn, lead to significant infrastructure investment, including a newly announced £2.1 billion fund that is set to breathe new life into more than 100 communities across the UK. This includes a new rail link in Cornwall, and a major regeneration scheme in Gateshead that will create jobs and grow the economy.
When you add landmark infrastructure projects, such as HS2 and the announcement that Network Rail will be granted £27.5 billion from April 2024, as part of a specified programme of works and renewals under its ‘Control Periods’ commitment, then the opportunity to be seized is vast.
The CPA is forecasting growth of 2.4% in 2023 and 2.5% in 2024 in the infrastructure sector, one of the few sectors to see growth in the short term.
UK housing shortage
Demand in the housing market and the private house building sector continues to be strong; however, in light of sharp rises in interest and mortgage rates, plus further expected rises in 2023 (albeit we are now beginning to see more competitive fixed rate mortgages from lenders), the CPA expects pressure to grow in this sub-sector in Q2 onwards. A decline of 11% is expected in 2023, followed by 1% fall in 2024, which will significantly dampen short-term prospects. However, demand for new homes to be built remains a strong underlying theme, and we can expect the sector to play a critical role in addressing the ongoing housing shortage in the medium-term.
Pressure will remain on the Government in the year ahead to support both purchasers of residential property, as well as the housing market as a whole. Although the Government made a U-turn on permanently increasing the Stamp Duty Land Tax threshold from £125,000 to £250,000 and has relinquished the Help to Buy scheme which ends on 31 March 2023, we would expect to see new measures introduced to support the market.
One area of strong potential growth is the rise in modular builds. This follows the Government’s announcement that it has commissioned the British Standards Institution to come up with a UK-wide standard for modern methods of construction (MMC) homes. It is also encouraging to see the Government leading the way, by tendering an offsite framework across all departments worth £10 billion.
These initiatives should spur the market to deliver more high-quality MMC homes, increasing choice and providing access to product warranties, insurance and mortgages. It will also reduce the costs of prefabricated homes for housebuilders and consumers, as well as allowing developers to make better use of technology.
We have recently seen some private equity investors entering the housebuilding market, which is evidence of taking a view on the longer-term opportunity. Another area that institutional investors are looking at is the build to rent sector, where private landlords have been waning in the wake of tax and legislation changes and higher cost of borrowing.
Sustainable building trends
Sustainability and the drive to net zero will play a central part in the growth of the sector in the coming years.
Creating energy efficient buildings is nothing new, but with electricity prices in the UK rising by 65.5%, and gas prices increasing by 128.9% in the 12 months to November 2022, energy efficiency has swiftly moved to the top of the agenda for most businesses.
The Skidmore review is adding weight to the agenda, highlighting priorities the Government should take to deliver on its net zero promises, with many of these relating to the built environment.
The emphasis is that there is no time to waste. In the short term, the repairs, maintenance and improvements market is expected to be buoyed by businesses looking to retrofit energy-efficient measures, but we can expect a proliferation of initiatives and support measures to follow, including greater scrutiny of existing buildings, the rising prominence in solar powered energy, with new channels of funding, such as the Green Heat Network Fund (GHNF), also playing their part. The UK has a lot of old housing stock that is in urgent need of investment.
Building Safety Act 2022
The ground-breaking reforms give residents and homeowners more rights, powers, and protections to ensure homes across the country are safer. While the legislation may pose certain challenges, the Act will have a significant role in shaping the BP&S landscape in 2023.
After receiving Royal Assent in April last year, more detailed provisions in the Act have, and will be implemented, through a programme of secondary legislation which will continue over the next 15 months. This includes Government proposals to mandate second staircases for new tower blocks and sprinkler systems for new care homes, together with a consultation on the design and implementation of the Building Safety Levy.
The Levy will be paid by developers and charged on new residential buildings requiring building control approval in England, for the purpose of meeting building safety expenditure. Further consultations on building safety director proposals are also set to close in February 2023 and will lead to yet more profound changes under the new law as we progress through this year.
The impact on the industry’s culture and practices is expected to be significant, and we anticipate it could eventually lead to mandated product standardisation. Although this impact is unlikely to be felt immediately by BP&S players, the direction of the market is clear and is worth preparing for.
M&A Outlook
While the headwinds remain, and certain sub-sectors are bracing themselves for a more challenging year, 2023 is also likely to see significant strides forward, in terms of the evolution of e-commerce, automation and the use of big data. As more and more businesses attempt to keep pace with the changing face of the industry this, in turn, will drive M&A activity, with diversification and consolidation set to be strong themes in the year ahead. It really is a ‘watch this space’ sector in 2023 and beyond.
This article first appeared at www.bdo.co.uk
