The implications between the construction industry and Brexit remain unclear to date.
This will affect the construction sector, an industry that relies heavily on certainty and market confidence. The impact of the continuing uncertainty is most seen on the four most affected areas: workforce, materials, red tape, and funding. These are all primary areas related to the building industry.
The availability of labour constitutes one of the biggest issues Brexit. The UK construction industry and architectural consultancies are significantly dependent on EU migrant workers, both for skilled and non-skilled roles. Given that some say there are currently not enough British workers to meet the current demands of the industry, a departure from the EU risks making this trend worse.
First, a shortage of workers could lead to higher project costs. In a post-Brexit environment, where demand outstrips supply, UK workers would increase payroll costs for construction and consultancy companies. Second, this could hinder the achievement of the government’s objective to build one million new homes. This decline in housebuilding could worsen the housing crisis, especially in bigger cities such as London.
Third, the replacement schemes that might be put in place by the government are not very promising. A new visa system could seriously deter EU workers from working in the UK. Such a scheme would not only take time and involve complex procedures but also be unattractive in comparison to other visa-free European countries. In turn, construction companies will face lengthy and costly procedures when employing foreign nationals.
Uk imports approximately two-thirds of construction materials directly from the EU. The problem is twofold. On the one hand, a weaker pound will lead to the rising costs of imported materials. On the other hand, the UK risks losing its tariff-free access to the single market, as well as facing the imposition of duties and limits on quantities.
However, this will affect all the relevant parties in the industry: investors, employers and contractors. Therefore, we can anticipate that they will be more inclined to work collaboratively to limit such effects.
Those in favour of Brexit have pointed out that extensive red tape and complex procurement regulations will disappear when the UK departs from the EU. However, it is important to appreciate that Brexit will not mark the end of any trade relationship between the UK and the EU.
While there are still uncertainties regarding the type of deal that will be put in place, it is highly likely that new trade agreements would follow existing trading standards. This is confirmed by the government’s white paper (The Great Repeal Bill), which seems to seek to convert directly applicable EU law into UK law.
As a member of the EU, the UK has been one of the biggest net beneficiaries of EU funding. The potential loss of such funding could seriously challenge the existence of future construction projects, such as High Speed 2 (HS2) and Crossrail 2. A departure from the EU may close some funding doors but could open up others.
Any loss of funding may be rebalanced after the saving of the UK’s contribution to the EU, while the weak pound puts the UK in a positive light for investors. Overall then, the biggest challenge for the industry will be to present itself as an attractive investment choice regardless of the political uncertainties that dominate the delivery of Brexit.
Reduced Skills Availability
The industry is already trying to tackle a skills shortage. The latest analysis shows that the loss of EU workers will exacerbate the problem. This will affect the productivity of this vital industry. Turner & Townsend’s latest UK market intelligence report finds that across the UK, construction businesses are operating at an average of 86.2% of capacity in Q1 2018 – up 1.9% from Q1 2017. This comes despite ONS data shows a continued fall in the three-on-three month series and the sharpest decline since 2012.
Highlights for the sector will see infrastructure grow at its fastest tender price inflation this year (3.8%). We anticipate more measured growth (1.7%) for building projects. However, we can expect labour costs to grow an average of 4% over the coming year, putting pressures on margins as competition for skilled workers grows.
Official ONS data shows that the number of EU-born workers as a share of the construction workforce fell by 1% between the time of the EU referendum and the end of 2017. With the highest construction activity and heaviest reliance on foreign labour, the London market is especially exposed. At the time of the referendum, nearly half the capital’s construction workforce had been born abroad. Its current figures place it at 42% and this is the fastest 18-month decline seen in 15 years.
So, the only thing that is certain is that the position remains uncertain and the issues highlighted above will continue to haunt the construction sector. One way in which SpaceShapers has prepared for Brexit is to ensure our projects are not just UK-based. Also, we source our consultancy teams from the UK as well as overseas. This will ensure we are able to adapt to the increasingly uncertain and changing climate.