Industry wobbles are inevitable until we know what Brexit means, but there are potential positives for Britain
What does the Brexit decision mean, for the UK economy, UK construction and British architects? The NBS RIBA Economics Panel met in early July to investigate the only topic really worth discussing at the minute. With a range of expert opinion ready to be deployed, we set about uncovering what may be in store, though mindful that events are overtaking opinions and facts quickly.
Before we look at any detail of the discussion though, one theme came straight to the fore. The only thing we can be sure of is uncertainty. These are early days, there is a lot we do not know. Only in the coming months and years will the meaning of the Brexit decision become clear.
What we are seeing, in the economy and markets, is a result of that uncertainty. It is not due to our future relationship with the EU: we don’t know yet what that will look like. We can expect this period to last some while though. We already have a new prime minister and before any future relationship is determined, we will see the the invocation of ‘Article 50’ and up to two years of negotiation with the EU nations. It could well be 2019 before the uncertainty begins to lift.
What we are seeing, in the economy and markets, is a result of uncertainty. It is not due to our future relationship with the EU: we don’t know yet what that will look like. It could well be 2019 before the uncertainty begins to lift
What this negotiated agreement will look like is unclear. There are existing models. Norway, for example, is a member of the European Economic Area (EEA) and, as such, has freedom of movement of goods, services, people and capital between it and the EU. Switzerland has negotiated a series of bi-lateral agreements with the EU that allows it (for now at least) free trade in goods, and free movement of people with the EU. Even if the UK and the EU were to fail to reach any agreement about future trading in the two years permitted, we could fall back on pre-existing World Trade Organization (WTO) agreements. There would be trade in goods, perhaps subject to tariffs.
The panel’s view was not, however, that the UK would simply adopt some pre-existing model for non-member trading with the EU. Given the size and importance of the UK to the EU (and the EU to the UK), a more likely outcome is that we would strike a different deal, one for the UK alone.
Long-term trade deals are for the future, and the sooner they are reached the better. For the present, the response to the Brexit vote has been concerning. Share prices of housebuilding firms have been very significantly reduced, property investment funds have been marked down in value, or had trading suspended altogether. Against the dollar, the pound is reaching lows not seen for decades. The panel also gave anecdotal evidence of job cuts in some practices, as a response to projects being cancelled or put on hold, and a marked cooling in office leasing and land sales. We can expect a fall in property prices across the country, but most markedly in London and the South East.
Does this mean we are entering a recession? Possibly, but we are not seeing the sudden global economic seizure of 2008. Instead, we are likely to see postponement of investment decisions, hesitancy over building projects and exploration of relocation options. A slow erosion of investment such that growth over the coming years will be lower than it might have been. Why work with uncertainty in the UK when you could invest in Paris or Berlin? The panel expects the economy to be diminished in the short term. Whether this means overall growth is a little above zero, or a little below, is perhaps not so significant.
That said, for the UK construction industry some of the fundamentals for medium and longer-term growth remain in place. Regardless of the referendum, we still need many more houses than we build, (housing accounts for some 55% of RIBA chartered practices’ revenue). Our infrastructure needs ongoing investment, whether road, rail, power, or water. We continue to need new schools and hospitals to support a growing population. Indeed, the fall in the pound may yet make the UK construction a more attractive investment than it was pre-Brexit, as asset valuations become increasingly attractive, and so spur foreign investment.
Home and abroad
What does this mean for the architectural profession? We can look at in two ways: what it means for international working, and what it means for UK working.
First, a weaker pound makes architectural services invoiced in sterling, more competitive. There may be an immediate competitive edge for UK architects from the pound’s depreciation.
Does this mean we are entering a recession? Possibly, but we are not seeing the sudden global economic seizure of 2008. Instead, we are likely to see postponement of investment decisions, hesitancy over building projects and exploration of relocation options
The panel took a wider view though. London is a a global centre of architectural excellence. This excellence extends from innovative early stage design through to leading techniques for detailed design, such as BIM.
This is due partly to some UK architectural practices being thoroughly cosmopolitan. Around 500 EU architects register each year with Arb, and there are many more UK-based overseas architects who don’t need to be Arb registered (perhaps as many as 4,500). This flow of overseas talent into the UK pools global architectural expertise, and forges relationships across the world. In turn, it supports our enviable global position and opens up an increasing number of markets to us.
The RIBA Business Benchmarking survey tells us that RIBA chartered practices generated £514 million of revenue from projects based outside the UK last year. Compare that with the £93 million worth of architectural services the ONS tells us was imported in 2014, and we can see that architecture is a strong positive contributor to our poor balance of payments. It is worth noting that 40% of overseas architectural earnings come from trade within the EU.
For the ongoing success of UK architecture, particularly for London as a global centre of excellence, the panel suggested that freedom of trade in services, along with freedom of movement among architecture professionals, is a must.
Outside the capital
For the nations and regions outside London, the picture is nuanced. In previous slowdowns, we have seen the construction sector suffer more than the general economy, and architectural workload deteriorating more than the construction sector. In the short term, we might expect this again. However, the referendum result might present new opportunities. Will the government look again at capital expenditure, in schools, universities, hospitals, for example, as the investment needed to improve our productivity and competitive standing? If London’s standing as a global finance provider is reduced, will other more-geographically diverse, industries, flourish instead? Will there be renewed investment in the nations and regions as London fails to generate the tax receipts it does now?
It is clear that a successful UK economy – and importantly political and social cohesion – requires investment in those regions that have lost out economically in the period of de-industrialisation. Capital investment needs to be spread more effectively beyond London and the South East. London alone cannot maintain a national economy and this vote may be a spur to a more concentrated government efforts to rebalance the national economy. Will a regional rebalancing of the UK economy better support the 64% of RIBA Chartered Practices working outside London? For now, these questions can only outline possibilities but unless a Brexit agreement is very similar to our current trading arrangements, we can expect significant change.
While we are in this period of uncertainty, what’s the best thing to do? The next few weeks and months may be difficult. It is worth repeating that this is primarily a result of the uncertainty; we don’t yet know what that future will look like.
Polarised views were a hallmark of the referendum, and the days following the result. A more considered approach may be what’s needed now. As ever, careful attention to the data may help decision making. The Bank of England is providing both data and a thought-through response. Information from the Bank on mortgage lending and the ONS on property transactions will help give an understanding of underlying trends. The share prices of tier one contractors and the larger construction product manufacturers will, after the initial volatility, give an indication of which way the wind blows. Most important perhaps will be the government’s autumn statement. With a new prime minister in Theresa May, and chancellor Philip Hammond (who has construction experience as director of Castlemead), this will set out the direction of travel for the UK economy.
The Panel’s assessment was that the uncertainty of the next few months will be challenging. There are significant risks ahead, but change may yet bring opportunities we had not anticipated.
MEMBERS OF THE PANEL
Noble Francis, economics director, Construction Products Association
Sue Foxley, research director, ThinkBarn
Aziz Mirza, director, The Fees Bureau
Adrian Dobson, executive director members, RIBA
Lucy Carmichael, director of practice, RIBA
Eleanor Young, executive editor, RIBA Journal
Adrian Malleson, head of research, NBS