UK construction plummets to 11-year low as rising costs bite

CONSTRUCTION of offices, retail facilities and warehouses in the UK plunged to the lowest level in 11 years as rising costs and protracted political uncertainty since Brexit discouraged developers from putting their shovels on the ground.

No commercial asset class has been spared, with construction across office, retail and industrial sectors down 21 per cent to 63 million square feet at the end of the third quarter from the same period a year earlier, according to the latest data from CoStar Group. 

That is the least since 2014 and comes on the back of a slowdown in housebuilding as weak demand frustrates the Labour government’s five-year target of constructing 1.5 million homes. 

While there are signs that investment is picking up, the construction numbers show it is a long road to recovery for an industry that’s been hit by higher interest rates in the aftermath of Russia’s invasion of Ukraine and a slow deflation in property values from their peak in 2022. The conditions are a far cry from the heyday of the post-financial crisis era, when borrowing costs were low and returns were relatively higher.

This year is also currently on course to be the weakest for construction starts this century. 

Logistics is among those that’s particularly hit hard. The sector was favoured by investors during the pandemic as people swapped high streets for online shopping. However, some got ahead of themselves and built more than the market could handle. 

Cooling demand after the end of the pandemic and a supply overhang caused vacancy rates to rise, with the reading now at 5.5 per cent, up from 2.5 per cent in the middle of 2022.

CoStar said this is not expected to increase much further and will likely fall during 2026. 

The London office market is faring slightly better than the rest, because rising rents means it’s simply easier to make the economics stack up. City of London prime tower rents have soared over the last year, reaching highs of £147 (S$255) per square foot this summer, CoStar said. 

SEE ALSO

Britain lost over 1,500 homebuilders in past year on weak demand

As a result, about three quarters of office space across the country was built in London, compared to 50 per cent before the pandemic, with tenants competing to secure the best available space. 

“Construction activity on offices has never been more dominated by London,” said Mark Stansfield, senior director of market analytics at CoStar. He added that outside the capital city, Oxford and Cambridge were leading the way, with a lot of development seen in the life sciences.

Some parts of London are also heavily under-supplied. Prime availability in the hedge fund heartlands of Mayfair have hit a 20-year low, putting further upwards pressure on rents.

At the same time, some regional markets are still suffering from falling demand. Compared with the net 2.1 million square feet of space taken up last quarter in London, regions outside saw demand for 1 million square feet vanish. 

This means that for construction to start booming again, either rents need to rise or interest rates need to come down – or both. 

However, rising rents are only one part of the equation and viability remains challenging, particularly in non-core parts of London, where many developers bought land based on yesterday’s cost inputs. “The land value is severely under pressure and in some cases it’s technically nil,” said Robert Buchele, director of London commercial development at Savills. BLOOMBERG