All change

AMa: We are meeting just after the general election, and with a majority Conservative government. I had expected to be talking about the instabilities that come with a prolonged period of coalition forming; but no. Looking at the industry data, the RIBA Future Trends survey remains upbeat, and the latest Construction Products Association data is also positive. But the latest from the ONS shows construction output has formally slipped back into recession.

So let me open by asking: what is the true state of the market?

RS: The underlying trend feels like one of quite strong growth. The political certainty the election gave us will help. As for the ONS data, even if it’s correct, we can only be seeing a quarterly slowdown; it doesn’t feel like renewed recession.

NF: I’d agree; there is growth, not recession. There’s lots of evidence for this. Cement sales, for example, are up 8% year-on-year; they are shifting a lot of product. Construction employment has increased. The CPA data shows slower growth, but still growth. This is in line with other industry surveys; they are all positive and show growth in Q4 2014 and Q1 2015. So something doesn’t add up with the most recent ONS data. Take housing repair, maintenance and improvements data, for example, they suggest there has been significant price deflation, but also that demand in the sector has been growing strongly. The ONS picture of two consecutive quarters of falls overall in construction output just doesn’t seem right. However, the ONS says it will revise the data in June, so hopefully this will go some way to addressing the concerns. I think it’s a growing sector, and we’ll continue to see growth in the coming years.

SF: House sales slowed before the election as people waited to see what would happen. But with the clear result, more certainty and stronger growth will return. Over the last year we’ve seen a rise in the average for office rentals. The market backdrop is broadly positive.

AMa: Let’s turn to the downside – what are the risks to growth in the design and ­construction market?

RS: The EU referendum will undoubtedly have an impact. Why would a German bank commission a major UK office fit-out if we might leave the EU in two or three years’ time?

SF: The referendum is a risk; business investment levels in the UK remain relatively weak, and this won’t help confidence to invest. We expect the global economy to expand over the next couple of years, but the EU question may dent short term UK growth.

AMa: Is the EU risk just one of uncertainty? Do we think there is a realistic chance that the UK will leave the EU?

RS: I’d hope that there isn’t a realistic chance of the UK leaving. I couldn’t envisage us having the same construction industry if that was to be the case.

SR: For UKplc the overall impact would be significant, but perhaps not so much for the construction industry as for financial services and manufacturing.

AD: When it comes to architects, the key export markets for UK architectural practices at the moment are the Gulf region and South East Asia. Any talk of emerging markets closer to home, is often Turkey rather than the EU. Perhaps the referendum may turn out to be beneficial in the longer term if it puts to rest all the speculation and uncertainty about the UK’s position in the EU.

AMa: Are there any other downside risks?

SF: The cost of living and doing business in London is an issue; it’s an increasingly unaffordable location. Labour-intensive activities are looking at alternative locations. London makes sense as a global hub but increasingly not as a service production centre.

AD: In many ways England looks increasingly like a super-city region centred on London. This is perhaps partly fuelling the devolution/independence debate and driving the ideas behind the northern powerhouse concept; a desire to create a healthier balance. Are we likely to see central London emerge as more of a ‘front end’ centre for global architectural services?

SF: That seems likely; productivity is believed to be rising more quickly in rural areas, due to the strong growth in knowledge-intensive industries. In fact, there are forecasts that productivity in rural areas will grow faster than urban ones. We can see high skill activity starting to relocate, but still having a foot in the capital, particularly for a global market presence.

SR: Looking globally, I think the residential market in China is a ticking bomb. Can it really sustain these levels of growth? China is an increasingly significant investor in the UK, so what happens there is doubly important to us. Interest rate rises in the UK keep being put off, but I think a rise in US interest rates will happen within the next six months, which makes a rise here more likely.

AMi: UK interest rates are likely to rise, but we might expect them to peak at around 2%, in the next cycle. It seems that the low interest rate, low inflation scenario is set to continue for some time. The Eurozone economy is also now beginning to improve.

NF: A separate risk is on the supply side. Do we have the skills and capacity to meet growth forecast in the short and medium term? So far that has primarily been in housing, but if other sectors start to recover more strongly, we will need different skill sets in professional services, contracting, and on the products side. If we can’t meet this demand there is a capacity issue and inflation risk.

AMa: What do we think the effects of the Conservative government are likely to be on construction?  Infrastructure spending seems to be quite a priority. There is the right to buy for Housing Association (HA) tenants. Then there is ‘build to rent’ and the commitment to the release of government land.

SF: Well, the release of government land has proved disappointing in the past.

NF:  …and what proportion of this land is actually in the places where development is needed and people want to live?  It sounds sensible, but I question the practicality.

SR: There is a commitment to 200,000 low cost starter homes. There is a real risk of creating 200,000 sub-standard homes.

NF: It’s surprising that the homes pledge is as high as it is in a market where the government only controls 20%.

SF: If major cities get more powers they may develop social housing more proactively.

NF:  If we are to create stability we need a more balanced house building sector; say 30-40% of the total market that is not based around the major private house builders but through increased public housing, or a greater contribution by SME house builders.

SF: We need more social housing, but right to buy could become a real problem for housing associations. It makes the buildings they own vulnerable, and so difficult to borrow against for investment. The cost of finance may become too high for associations to invest in new stock.

SR: It’s all a bit broken. It’s true that right to buy will make it more difficult for HAs to get the credit ratings they need. It might be better to just free them from regulation.

NF: The government doesn’t see regulation as a good thing, but it can drive innovation.

SR: There isn’t much evidence of a real commitment to supporting sustainability; a deafening silence on low carbon at present.

AD: Sustainability is a core component of the Government Construction Strategy.

RS: I think the strategy will quietly disappear; it wasn’t measurable anyway. It seems the public sector just wants to build cheaper.

NF: I can see the July budget bringing even greater austerity in the short term. It was expected to focus on welfare cuts, but this is always more difficult to achieve than anticipated. They turn to elements of capital investment to meet their targets. Public sector spending, especially at local authority level, is going to be tight for the next five years.

SR: The brakes are meant to come off public sector capital spending in 2018. Until then, the commitment is to expand capital investment at the rate of GDP growth. The idea of a single public estate is quite interesting, where public agencies come together, to use public assets more effectively and change the way services are delivered. Greater Manchester is in the vanguard of this. George Osborne has personally aligned himself to it as part of the northern powerhouse initiative.

SF: It could work well with the right structure.

NF: Local authorities should be better placed to work out what public land can be developed. It needs genuinely devolved powers though.

SF: Regional planning is necessary too.

AMa: Considering these issues, what are your tips for those working in architecture and construction during the next five years?

RS: Architects should have plenty of work.

AMi: Architects need to find ways to raise fees to realistically sustainable levels.  

SR: Focus on the growth areas: further and higher education, research. Accelerate the promotion of your talent; the recession has left management gaps.

SF: The build to let market will grow.

NF: Look to the key growth areas: private housing, commercial and infrastructure.

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