Allan Wilen, economics director, Glenigan, stresses that a stalled UK housing market remains the biggest barrier to an increase in construction activity
The latest Glenigan Construction Index reveals that a stalled housing market is holding back construction, deterring new residential developments and overshadowing tentative signs of recovery in non-residential and civil engineering activity.
A market stuck in neutral
The unpleasant truth is that the sluggish UK housing market remains a brake on construction. In the three months to July, new residential project starts declined sharply as weak house sales, lower house prices and market uncertainty deterred developers from bringing forward new sites for development. Instead, developers shifted their focus to building out and securing sales on their existing sites.
Housebuilders retreat as market uncertainty bites
Several major housebuilders have cut back their planned completions for the current year in the face of weak market conditions. Taylor Wimpey has indicated that its completions may be as much as 7.5% down on last year.
Social housing project starts also fell back during the three months to July. The drop in both private and social housing projects underlines the significant scale of the challenge facing the new Prime Minister, who has pledged to increase social housing provision. Action in the next Budget to lift house-purchasers’ confidence and increase market activity would support a recovery in new house construction. As developers start breaking ground on new sites, this would also realise increased social housing provision through Section 106 commitments.
Elsewhere, there are tentative signs of improvement despite the host of international and domestic socio-economic headwinds bearing down on the industry.
Logistics demand keeps industry moving
Strong demand for logistics space from online retailers and third-party distributors continues to drive investment into the industrial sector. Industrial project starts jumped 30% during the three months to July. And although new starts remained slightly down on a year earlier, the promising turnaround against the preceding three months indicates that investors are pressing ahead despite the current economic turbulence. Fresh developments include a £74 million storage and distribution project in Leicestershire.
Quality, sustainability and data centres fuel office growth
Office construction is another bright spot. The value of project starts rose by a quarter during the three months to July and was 35% up on a year ago. This much-needed growth is being fuelled by strong demand from occupiers for high-quality, sustainable buildings, together with the prospect of tighter EPC rating requirements on lettings. Another element stimulating growth is the resilience of hybrid working; it has prompted tenants to demand accommodation that supports more collaborative ways of working. These pressures are fuelling growth in both refurbishment and new build office projects. In addition, the sector is starting to benefit from increased investment in data centres, a burgeoning segment that is widely anticipated to grow strongly over the next two years.
Government spending starts filtering through on site
There are tentative signs that the increased government investment promised in the 2025 Spending Review is beginning to filter through to real work now happening on site. Community & Amenity project starts rose by 18% and were 8% higher than a year ago, driven by an increase in military and law & order projects.
Whilst the index recorded an underlying decline in health project starts during the last quarter, overall starts were supported by work commencing on the £250 million Sussex Cancer Centre at the Royal Sussex County Hospital.
Unfortunately, promised funding increases have yet to lift education sector activity, and the sector remains stuck in the doldrums.
Roads, rail and flood defences behind an upturn in civils
More encouragingly, civil engineering starts jumped 34% during the three months to July, with a strengthening occurring in both infrastructure and utilities work. An increase in road and rail projects indicates that the rise in government funding is enabling planned projects to progress to site. The increase in utilities work was driven by a much-needed boost in flood protection efforts, including a £68 million scheme in Dumfries. Whilst there was an absence of major utilities projects starting on site, the silver lining here is that the development pipeline is strengthening. Higher water industry capital expenditure is expected over the next 12 months as the AMP8 programme gathers momentum.
Reasons for cautious optimism, but housing remains the missing piece
Whilst an overall 11% decline in project starts recorded by the latest Glenigan index is naturally disappointing, there are tentative signs that construction activity is beginning to stabilise, despite the challenging economic environment. Increased public sector capital expenditure and private sector investment in industrial and commercial projects offer encouraging signs for a strengthening in construction activity over the coming months.
However, a becalmed housing market remains a drag on new housing activity, affecting overall construction. On the positive side of the ledger, the new government has reaffirmed housing as a political priority: steps to improve household finances and consumer confidence would therefore revive the potential of private housing activity and support the delivery of a key government objective.
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