Brexit and homes are the two greatest influences in any analysis of the future
Whatever common bonds bind architects together in the process of shaping the built environment, one feature of the sector stands out – the diversity of business forms.
That diversity is powerfully presented in the RIBA Business Benchmarking 2017 report, which provides a rich insight into the corporate structure of architecture – now a £3 billion a year contributor to the UK’s creative economy.
The near 40,000 people estimated to be employed within UK practices are dispersed among an array of organisational entities from single-person practices to large corporate operations, covering a multitude of tasks in a variety of mixes.
That diversity can spread risk, provide resilience and flexibility and offer a wide choice to those eager to engage the services of an architect. From the point of view of the architect, it can provide a variety of niches into which they might most comfortably fit in pursuit of their vocation.
But for all the diversity, a quick scan of the numbers suggests that two main forces, albeit very different forces, will dominate in shaping the future of architecture as a UK industry over the next few years. These are developments in the housing market and the ability to feed an appetite abroad for the talents of UK-based practices.
According to the report, 57% of practice revenue came from housing in 2017, with the proportion tending to be higher the smaller the practice. Meanwhile, chartered practices generated 18 per cent of their revenue from work on jobs based outside the UK. For larger practices, those employing more than 100 staff, the proportion of overseas work was 29%.
So, interestingly, the progress of these two work streams will have the most acute, though different, impact, at what might be thought of as either end of the spectrum of architectural practices. Housing activity will have its greatest effect on smaller practices, especially in the regions and most notably in the south east and south west of England. Meanwhile any change in international work will be felt most keenly by the large London-based practices which employ young architects in large numbers.
Either way, a change in the fortunes of one or both has the potential to reshape the landscape of architectural practices, so significant is their scale. This is not to understate the importance of other workstreams, but as things stand these two areas dominate, as we see in charts 1 and 2.
It is impossible to discuss the future economic performance of the UK without some reference to Brexit. It will play a part in determining the outcome of both overseas trade and the domestic housing market. But what role that will be is hard to fathom with any precision and how strong any influences will be relative to other factors is extremely tough to judge.
The general view is that it will not help the housing market, if only because a major motivation to leave was to curb growth in the population. Meanwhile, despite the pro-Brexit rhetoric of re-establishing the UK as a ‘buccaneering’ trading nation, it would take a brave person to suggest unreservedly that leaving the EU would necessarily benefit the appeal of UK architectural practices abroad, with or without the buccaneering epithet. The big boost in UK architectural activity internationally occurred in recent years, while the nation was firmly rooted in the EU and viewed itself in more staid terms.
Turning first to housing, it is notable just how much work rests on consumer demand. As the report notes: ‘Consumer clients, such as house owners, are the most significant type of client for architectural practices. These clients account for 42 per cent of practices’ revenue.’ And this share has been rising, up from 40% in 2016.
Power of the householder
For one and two-person practices consumers account for about two thirds of revenue. For the largest firms the figure averages 2%.
There has been solid growth for some years in this market, partly as the nation rose from a long and deep recession. But two other big factors played a part. First, the swell in housing equity, mainly among baby boomers at or reaching retirement, has helped fuel investment in either refurbishing or building ‘dream’ homes. Secondly, house prices have risen sharply, bolstering the economic case for improvements to a home. Simply put, when the land value rises faster than build costs, the added value of an extension or a loft conversion generally becomes more attractive. Furthermore, there is a case to suggest that higher transactions costs, such as stamp duty, will also have tipped the balance more towards improve than move.
The question is for how long and how much might these factors sustain this market?
As things stand there is little to suggest this market is deteriorating. The number of smaller residential planning applications appears to be holding, according to Barbour ABI data.
However, house price growth is expected to halt this year, at least according to the RICS forecast produced late last year. This mirrors a wider consensus. Furthermore, we have seen the beginnings of a decline in ‘big ticket’ consumer spending in the form of slowing car sales. These are not positive signals.
This brings us to consider how the amount of demand from equity-rich households, such as retiring baby boomers, will change in coming years. This is tricky to assess. But the data on wealth distribution does paint an optimistic picture in the medium term.
It is worth noting the amount of demand for housing work that flows from equity will tend to be far more resilient than that from which flows from income. This equity is not just that of the super-rich migrant into London keen to expand their Kensington home downward in search of a pleasure palace. For instance, through the recession, housing improvement work was far less affected in the South West, which is well supported by retirees moving in, than it was in the commuter belt around London where household income plays a greater part in determining investment spending.
Putting to one side fluctuation in the demand for ‘iceberg houses’ among the super-rich, we should not expect to see sudden changes in demand from the equity driven downsizers and downshifters or ‘dream retirement home’ seekers, which have provided a rich flow of revenue for small architectural practices in the regions in recent years.
However, the surge in equity-rich baby boomers (which accounts for a sizeable chunk of this market) is not inexhaustible. The data from the ONS Wealth and Assets Survey may not be perfect in illustrating a complex issue, but in Chart 3 it shows how the spread of wealth across age bands has shifted in the period 2007 to 2015. (For reference – the 2007 figures have been adjusted upward to account for inflation over the period).
Broadly speaking the chart illustrates how the average (median) head of household (Household Reference Person) within the older generation over recent years has managed to accumulate more wealth than those who went before them. This pattern however breaks for those in or younger than the 45-54 age bracket and goes into reverse when we adjust for inflation.
This does not bode well for a market that for years has seen growth. It suggests that the average household about to move into prime downsizer or retirement age will have relatively less wealth.
These of course are broad figures and the distribution within each age band and within regions, plus the future cost of construction, will all influence how much wealth is invested in the future in housing work and in turn provided as revenue for architects.
But taken overall there are signs that some of the drivers of growth in housing-related revenue for architects may be less potent, if not negative, in the years ahead than they were in the years just past.
The Brexit effect
Turning to the prospects for overseas work, we cannot avoid the Brexit effect. However, without a detailed understanding of how the UK’s membership of the EU supported or restricted growth in overseas markets it is hard to gauge how not being in the EU will play out. We also do not yet know the terms of the divorce and how this will affect work within the EU.
The RIBA Benchmarking Survey suggests that in the year to May 2017, the other EU countries provided 21% of overseas revenue for UK practices and had grown in importance as the Middle East waned. It is evident that being within the EU had not restricted activity across the globe, with work in Asia, the Middle East and Africa accounting for more than half of overseas revenue.
Putting Brexit to one side, the good news is that while growth in the UK is sluggish and expected to remain slower than most other advanced economies for some while, growth in the global economy is higher than previously expected – not least the EU.
Chart 4 shows the latest IMF World Economic Outlook figures published in January.
For UK exporters of architectural services this is good news. GDP growth strongly correlates with growth in construction activity. Stronger GDP growth means the opportunities for work abroad will be greater than might have been expected.
Hard Brexit, Soft Brexit or no Brexit, it would seem that now is a good time for those larger practices to be getting out and about across the globe to sell their wares trading on the growing international reputation the UK has built over recent years.
It is generally unwise to predict without heavy caveats. But on the balance of evidence it seems that the greater opportunities within the architecture sector lie with the larger practices. However, with expectations of growth in mainstream construction work at best pallid, it might be that they also face the largest threats.
But if opportunities are seized and apparent trends realised, we might reasonably expect, over the coming years, to see a gentle flow in architectural activity towards the larger metropolitan practices and away from smaller local practices. Future editions of the RIBA Business Benchmarking report will no doubt tell us.
That, however, all comes with a massive IF. Not least because behind the rhetoric, the bluster, the dodgy analysis and fake news, the blinkered ideology and all the other ugliness that seems to have oozed from this toxic topic, we really don’t know what the UK is to make of Brexit or what Brexit is to make of the UK.