The NBS RIBA economics panel identifies some ways practices might prosper in the post-Brexit years
We will see fundamental changes to our relationship with Europe and the rest of the world in coming years. Little will be untouched by our decision to leave Europe. Only occasionally does the country set out on such a path. At the start there’s uncertainty and confusion, but the general direction can be clear.
When we look back, we may see the significance of the 2016 referendum being as great as that of the general election of 1945, marking the start of the NHS and the welfare state, or of 1979, which led to today’s market-based economy.
Just over three months after the referendum, the NBS RIBA economics panel met again. In a time of rapid political and economic flux, could the experts guide us through the uncertainty and change?
First, what does the current economic intelligence tell us? The Bank of England’s inflation report suggests a dip in national output from this year through to the middle of next. It is a significant downgrade of UK economic performance, but it is not a recession; the bank isn’t predicting anything like the crash we saw in 2008.
Sentiment indicators, such as the RIBA Future Trends survey or the Markit Purchase Managers’ Index, showed a dramatic fall in confidence after the referendum but picked up markedly in following months. The latest GDP figures from the ONS suggest the UK economy increased by 0.5% in quarter 3 2016, following growth of 0.7% in Q2. The shock of the referendum has mostly passed, but medium term uncertainty remains.
The panel stressed the importance of not being diverted by each month’s figures. The changes to come will take years to unfold. A long-term strategic assessment of a practice’s market is preferable to month by month reaction to fluctuating indicators.
Sterling’s weakness, however, may well be a new fact of post-referendum life. The fall is significant: from £1 being worth a shade under $1.5 in June to around $1.2 (at the time of writing). We can expect this to create inflation as the cost, in pounds, of imported goods increases.
On the other hand, might this be an excellent opportunity for UK architects to export? A weak pound can do no harm; it means either more attractive pricing for overseas clients, or a higher margin for UK architects working overseas. The panel stressed that UK architecture is not valued overseas primarily because of price. Rather, the excellence of UK design and innovation makes it a world leader. For architects currently working overseas, the weak pound may be a blessing.
For UK construction, the lower pound presents an immediate increase in the cost of imported products, which will increase overall construction costs. But it is not the only problem the industry faces.
Economic uncertainty discourages investment in buildings – why increase capital outlay when the necessarily long-term return on investment is so uncertain? We can expect a slowdown in new orders over the next year or two because of this – in fact some potential projects have been scrapped or are on hold already.
Skills shortages will be compounded by any restrictions on EU labour coming to the UK. The government wants to restrict overall migration, but to allow migration where we need it. The need is often for high quality labour that can’t be readily replaced by our native workforce. ARB registered non-UK architects made up 46% and 48% of new architect registrations in the last two years respectively. It might be difficult to maintain that level of architectural expertise coming to the UK within a more restrictive labour market. It will be even more difficult to get the tradespeople we need on site.
Current projections from forecasters such as the Construction Products Association suggest there will be a slowing in construction output in the second half of 2017 and in 2018, but a modest pick-up after that. Before output falls, new commissions for architects will reduce.
The panel explored regional differences. London faces particular challenges. Property costs are becoming prohibitive for businesses and people alike, so there is likely to be greater dispersal of the functions that can be moved outside central London to the wider South East.
Shift in office market
The finance sector is particularly vulnerable to any ‘hard’ Brexit. Does this leave the property market equally vulnerable? The capital’s economy has become more diverse and balanced recently, so the London office market is more varied than might be thought. For example, media and tech was responsible for 20% of office take-up in the West End in 2016 to the end of Q3, compared with 13% for banking and finance. The figure was 18% in the City market, and 29% in mid-town (compared with 3% from banking and finance). Could this be a start of a rebalancing?
There is a cooling of the ‘prime’ and ‘super prime’ residential markets. The prime central London market is seeing price readjustments, even more so at the super prime level. This was on the cards before the referendum, but has been exacerbated by it.
The RIBA Future Trends data still shows workloads growing in the North. While the statistics suggest the impact of the referendum result on workloads is currently less pronounced in the North, anecdotal evidence suggests that this may just be a delay in effect, due to the North’s economic geography. The panel heard of a marked slowing in architectural work for some here, with small developments hit particularly badly.
It could pay to specialise
There are areas of growth to watch. Education, particularly higher education, is one. Infrastructure is another, led by large projects such as Hinkley Point C, HS2, the Thames Tideway and, in time, Heathrow’s third runway. It is a challenge to get architects embedded in infrastructure projects, but there can be big payoffs when they are. Foster + Partners is one example of this, as are practices such Knight Architects, with bridges, or Grimshaw with railway station and airport design.
The panel suggest there was something in this: specialisation. Particularly for overseas working the key may be to find a niche area of design work and exploit that expertise fully. Don’t try to be all things to all people in all markets.
We should not, however, underestimate the importance of housing. The RIBA Business Benchmarking survey tells us that 41% of chartered practice workload, by value, comes from one-off new houses, extensions, conversions and alterations. Is this threatened? If household income is eroded through inflation outstripping wage growth, then perhaps. But tightening household finances could see homeowners choosing renovation over new house purchase.
The UK needs houses; last year we built around 140,000 when we needed at least 220,000. For chartered practices, public and private housing accounts for 19% of workload. The housing shortage won’t be fixed by doing a bit more of what we do now. The panel saw the need for a transformative approach. This means building at scale, with new funding mechanisms, planning reform, and for greater action from the government in supplying homes, not just stimulating demand for them.
Architects lead in demonstrating the value of design, and the UK does need better-designed houses. The architectural community has a role in advancing new design and construction techniques; not just BIM, though that’s important, but also bringing expertise to processes such as offsite manufacture and modular construction. Should potential constraints on labour ability be realised in the Brexit settlement, the need for new models for creating housing will become more acute.
Should potential constraints on labour ability be realised in the Brexit settlement, the need for new models for creating housing will become more acute
The obvious analogy here is the automotive industry; a highly innovative, digital sector that delivers millions of units. Consumer choice is provided through a modular approach. Performance is improved and cost reduced through an iterative approach to design. Perhaps we should model design and construction on these practices?
The panel felt this analogy was easy to reach for, but not right. Few people outside the construction industry understand the Byzantine nature of it; its layers of contractors, its complex trade and employment mechanisms, its many procurement mechanisms, its legal complexities, and the need to design for local or even site-specific conditions.
Nevertheless, innovation is the future of practice. We are in a time of great change, and great change is often the catalyst for innovation. The panel suggested that while the coming years will be challenging, they will also present real opportunities to the most forward-looking practices.
The panel were:
Tim Bailey, partner, Xsite
Lucy Carmichael, RIBA, director of practice
Adrian Dobson, RIBA, executive director of members
Noble Francis, economics director, Construction Products Association
Adrian Malleson, head of research, NBS
Simon Rawlinson, head of strategic research and insight, Arcadis UK
Richard Steer, worldwide chairman of Gleeds