A newcomer to London might expect to see a skyline dominated by St. Paul’s Cathedral, the Houses of Parliament and other landmarks.
Yet it’s the construction cranes that can really stand out. They’ve sprung up over the years, helping to build office space for the U.K. capital’s giant financial industry, and funded in part by overseas investors seeking big or at least steady returns.
But there has been a dropoff in new projects in London, driven in large part by the uncertainty around Brexit. The U.K. is scheduled to leave the European Union on March 29 next year, but the details of the future relationship between the two have yet to be hammered out — and that is casting a shadow.
“What we are doing at the moment is what the Brits do best: Putting on a stiff upper lip and just cracking on with it — continuing business as usual,” said Andrew Reynolds, a U.K.-based director for Rider Levett Bucknall, a construction and property consultancy. “I’d call it making the best of an uncertain moment.”
While there are signs of slowing construction, there are bright spots as well. Reynolds has a multilayered view of the state of affairs, nearly two years after the Brexit vote. But the changes coming, and those already underway, are a concern.
It’s not clear what kind of trade arrangements the U.K. will end up with at the end of the Brexit process — and that presents a challenge to the country’s construction sector. Like other British industries, it wants more long-term clarity about issues such as access to the EU’s single market, both for itself and for clients such as London’s big financial companies.
“We just can’t quite get our finger on what it’s going to mean in terms of the trade deal that we strike — the free movement of labor, what that will mean,” Reynolds said. “Some of these issues are really keen in the construction sector, not only for the sector directly, but what it means for the kinds of buildings that we build.”
The single market allows unfettered movement of goods, services, money and people within the EU, and an estimated 27% of construction workers in London are from member nations. So future relations are important to the construction industry, which already has a shortage of skilled builders. The prospect of workers heading back home to Poland, Bulgaria and elsewhere is a worry for employers, even as it is a joy for some Brexiteers.
And as a global financial hub, London is feeling a Brexit bite from bank jobs shifting to cities in other parts of the EU. J.P. Morgan Chase & Co.
CEO Jamie Dimon, for example, has warned the giant American bank could cut a quarter of its 16,000 U.K. jobs. That financial industry exodus doesn’t bode well for demand for new office space.
Another issue is disruption to trade. That could result in higher prices for key materials, especially as the fall in the pound
since the Brexit vote has already chipped away at companies’ buying power for imports.
The British currency recently was changing hands around $1.37, down more than 8% from its pre-referendum level around $1.50, though it’s well above a “flash crash” low under $1.20 hit in October 2016.
Construction costs in central London are likely to rise in the months ahead, RLB reckons, even as other forecasters see a drop. The shortage of skilled labor is providing some upward pressure on costs, too.
Right now, looking at the sectors that have been great London customers for construction industry, Reynolds strikes a downbeat note.
“Housing, offices and retail are all showing quite a significant decline at the moment, with only industrial buildings, hotels and leisure, and civil infrastructure showing an increase,” he said.
Preliminary official figures show construction across the U.K. fell 3.3% in the first quarter. That was the biggest factor in dragging gross domestic product down to its lowest rate of growth since 2012.
And for London in particular, the RLB graphic below shows that just three out of seven London sectors tracked by the company are in growth mode, as of last year’s third quarter. Expansion is represented by a red or gray up arrow.
“What we’re seeing is quite a drop-off in small-project starts — and really the market being underpinned by the more significant projects that span almost economic cycles,” the RLB director said.
Other experts are telling a similar tale, as they look at project starts — for example, the most recent London Office Crane Survey from consulting giant Deloitte. The survey found 25 new office developments in London started construction in the third quarter of 2017, adding 1.8 million square feet. That was the lowest amount of new office space started in more than three years, as shown in the Deloitte chart below.
“While not necessarily a leading indicator of further activity slowdown, the current volume of new starts certainly indicates caution on behalf of developers,” Deloitte’s consultants said in their report.
Sentiment has been wobbly, Deloitte’s consultants also noted. Trades across London’s construction sector signaled they expected a drop in their workloads, when surveyed not long after the Brexit referendum in June 2016. Then they sounded upbeat in early 2017, only to register another decline in sentiment a few months later.
What’s still looking good
But there are encouraging counter-trends, according to Reynolds.
“The major urban regeneration continues to flow through,” he said, referring to around 10 massive London projects. These have 7- to-10-year development cycles that are less affected by year-to-year worries. They range from a $12 billion revamp of the iconic Battersea Power Station, where Apple Inc.
is slated to put its London headquarters, to the redevelopment of the Nine Elms area, where the U.S. embassy now can be found.
Big overseas developers are benefiting from the drop in the pound since the Brexit vote. That has boosted their buying power, even as it has raised the cost of imported materials for the U.K. construction industry.
Beyond London, other U.K. cities look like bright spots. RLB’s graphic above shows Manchester and Birmingham are in growth mode, with Northern powerhouse Manchester earning up arrows across all seven sectors tracked.
The U.K.’s economic expansion has slowed since the Brexit vote, but not as sharply as predicted by some in the “remain” camp. While the British economy lagged its peers in last year’s final quarter, it still grew 1.4%.
“We are most definitely seeing a shift in starts from London to other regions within the country,” Reynolds said.
And that helps makes him sound stoic overall on the U.K. construction industry’s situation. “I would describe it as cautiously difficult, and what I mean by that is it’s difficult, but not terribly difficult,” he said.
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Housing prices tell a similar tale about a better situation outside London. The average price of a home in the capital dropped 2.6% in the three months to January, according to a report by data provider Acadata. But house prices across all of England and Wales rose 0.7% from the same period a year ago, with the biggest jump seen in the North West, home to Manchester.
“On the basis of housing transactions, it certainly suggests that the concept of a Northern powerhouse to rival London has already begun to emerge,” Acadata analysts said in their report.
Countdown to Brexit
The whole country, though, is in wait-and-see mode. Though there’s less than a year to go to the day the U.K.’s membership of the EU lapses, in March 2019, not much has been nailed down. The argument over what shape the withdrawal should take is raging not just between the ruling Conservative Party and its Labour Party opposition, but between factions in the government itself.
Prime Minister Theresa May has said the U.K. will leave the EU’s customs union, so it has the flexibility to strike free-trade deals on its own. Jeremy Corbyn, head of Labour, has said the nation should maintain close economic ties with the trade bloc, as he tries to win over pro-EU Conservative lawmakers and trigger an early election.
Amid that domestic politicking, the U.K. and EU have agreed on a two-year transition deal that’s expected to take effect when Britain leaves the bloc. Thanks to that pact, the U.K. looks set to continue implementing all EU rules until the end of 2020.
But Brits seem to have adapted to the lack of detail, at least in the short term, and that goes for the construction industry itself. Longer term is a different matter — and that makes it hard to plan clearly.
As Reynolds says: “We are literally in a waiting game at the moment.”
What’s happening to London’s cranes? Brexit bites into UK construction – MarketWatch