TENDER PRICE INDICATOR 1 ST QUARTER 2016

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1 TENDER PRICE INDICATOR 1 ST QUARTER 2016 Elements of uncertainty are creeping into the economic outlook with the Brexit referendum and global slowdown will see continued demand for construction from a supply constrained industry maintaining levels of tender price increase, not yet reflecting any significant slowdown or caution from the uncertain outlook. UK average rates of tender prices are unchanged at 4% for 2016 and 3½% for 2017, with a levelling off in The North West is forecast to rise ahead of the national average in 2016 and 2017, with London and South East continuing to dominate with strongest demand in effectively a two tier national market. In this issue Spotlight on South East

2 INPUT COSTS Over the quarter the Pound has weakened across currency markets - the biggest impact to construction being a 15% drop against the Euro. As circa 60% of construction components are imported from the Eurozone, we see this compounding forward tender pricing. Early January saw oil trading at US$ 30 a barrel due to the global slowdown of demand and continued effective over supply. Scotland s economy is particularly hard hit by this considering that oil averaged US$ 110 a barrel in 2011 to The majority of materials cost indices have recorded modest growth in the quarter averaging 1.2% per annum, led by electrical and mechanical components, ahead of CPI headline rates of inflation. UNEMPLOYMENT Over half a million more people were in work at the end of 2015 compared to The unemployment rate at 5.1% is the same as it was in 2005, following continual reductions in This is not an even recovery. The North East has 1.6% higher unemployment than before the recession, whilst London has 1% lower. More than 230,000 construction workers will be required by 2020 to meet the skills gap according to the CITB. With supply constrained by workers leaving the industry, new entrants and training, particularly through apprenticeships, are seen as vital to keep the lifeblood of the industry flowing. STRUCTURAL STEEL 4Q % Down REINFORCEMENT 4Q % Down CONCRETE 4Q % Up OIL PRICES $30 Down CONSTRUCTION INDUSTRY Wage Increase 4.0% Up CONSTRUCTION OUTPUT 3.6% Down CPI JANUARY % Up GDP OUTPUT 4Q % Up ECONOMY Wage Increase 3.1% Up gardiner&theobald

3 MACRO ECONOMICS The Consumer Price Index (CPI) measure of inflation moved to 0.3% in January 2016 up from 0.20% in December Although food and fuel prices fell in January they did so by less than the same month in 2015 pushing the inflation rate higher. Infrastructure remains the solid sector underpinning demand with over 10% growth this year and 15% projected in BREXIT UNEXPLORED TERRITORY The referendum for the UK to remain or stay in the European Union is dividing opinions and creating uncertainty. The Retail Price Index measure (RPI) rose to 1.3% in January up from 1.2% in December The impact of leaving is not clear and it is difficult to predict the outcome. Uncertainty Interest rates remain firm at 0.5% with will prevail in the short-term and could commentators largely pushing out their cause a pause to economic growth, mirroring expectation for rises to the end of the effect of the Scottish referendum, with businesses waiting and seeing rather than CONSTRUCTION OUTPUT pressing on with investment decisions. The Construction Products Association (CPA) revised down its forecast for 2016 by 0.2% to The upside is business as usual or better, the 3.6%. However, its forecasts for 2017 onwards downside could be an economic crash. have all been revised upwards to 4.1% in 2017 and 4.2% in NEW FORECAST TO 2020 Our long term forecast to 2020 is included at Private housing is forecast to see steady growth the statistical average rate of 3.5%per annum of 5% per annum over the next two years, for a normal growth market. contrasting limited growth in public housing. Commercial office output remains strong with 7% increases in both 2016 and 2017, but has a weaker pipeline in TENDER PRICE INDICATOR 1ST QUARTER 2016

4 SPOTLIGHT ON SOUTH EAST The region s proximity to London, together with the capital s demand for construction, impacts greatly on cost and availability of skilled labour, particularly in the north of the region where the workforce is willing to commute to enjoy higher rates of pay. Conversely, the symbiosis of the capital generates developing businesses that need to be close to, but not in the capital, which drives the demand for residential and infrastructure in the region, together with industry, that has been dominated by the residential sector. The ports of Southampton and Portsmouth have seen construction generated around the success of the marine industry. Portsmouth is benefiting from the government s City Deal initiative together with providing the base for Sir Ben Ainsley s UK America s Cup sailing team and Queen Elizabeth Class aircraft carriers, necessitating new quays and a channel dredge to accommodate the vessels. Southampton has seen growth in the cruise and automotive sectors, with some 450 cruises embarking in 2015 compared with 100 only ten years ago and some 850,000 cars imported and exported through the port each year. The first phase of 80m West Quay Watermark is due for completion in 2016 introducing 20 new restaurants and multi-screen cinemas, followed in 2017 by Phases 2 and 3 comprising hotels and residential towers. The Southampton City Masterplan comprising the Fruit & Vegetable Market Quarter mixed-use redevelopment, expansion of Solent University, the City Council s Arts Quarter, the Royal Pier waterfront development and the Itchen Riverside residential scheme are also under development. The region s universities have continued to expand with student numbers in Southampton alone increasing by 6,500 in ten years, generating additions to both academic and student accommodation. The residential sector is very active, however the shortage of labour and materials has had its impact and it is likely this sector will be much constrained by the lack of available development land and delays to planning consent. Driven by residential we are forecasting continued growth in demand for construction activity in the region, as it benefits from its juxtaposition to London. gardiner&theobald

5 TENDER PRICE TREND TENDER PRICE TREND ALL UK TPI 1Q 2016 INDEX YEAR BCIS ALL IN G&T ALL IN TENDER PRICE TREND LONDON TPI 1Q 2016 INDEX 130 Note: BCIS do not publish regional forecasts only records of prices recieved BCIS LONDON G&T LONDON 70 YEAR gardiner&theobald

6 TENDER PRICE CHANGE TENDER PRICE ANNUAL PERCENTAGE CHANGE 4Q15 % Regional forecasts Now Last Now Last Now Last Now Last Now Last Greater London South East South West East Anglia Midlands Wales Yorks & Humber North West North Scotland Northern Ireland UK Average Eire COMPARISON OF PUBLISHED FORECASTS FOR TENDER PRICE CHANGE G&T UK AVER. BCIS UK AVER. G&T LONDON AECOM LONDON ARCADIS LONDON 1Q TO 1Q FEB 16 1Q TO 1Q 4Q15 4Q15 % CHANGE Note: All figures relate to year on year quarterly changes FURTHER INFORMATION Please speak with your Gardiner & Theobald expert, or contact Gavin Murgatroyd (Partner, London) or Owen Weatherley (Market Analyst) T: +44 (0) g.murgatroyd@gardiner.com o.weatherley@gardiner.com Remember Our advice is to review each project on its own merits. This forecast publication must be treated as a guide only, being that it is based on averages of various types and sizes of projects across a region, ascertained through our latest market research. The quality, both of design and desired end product, procurement route (particularly ownership and transfer risk), delivery timescales, complexity of design and desire of contractors to tender should be carefully considered in project specific estimates and their outturn cost. Suitable allowances should be made for project specific designs, site conditions and local market conditions, which should be reviewed regularly with your Gardiner & Theobald team to determine the appropriate base cost. Neither the Author nor Gardiner & Theobald LLP owe a duty of care to the reader or accept responsibility for any reliance on the foregoing.