What will be the impact of BREXIT on the UK Construction Industry?

Brexit is More than Brexit Resisting the temptation to consider the impact that leaving the EU will have on Construction as a single event, this paper approaches this question more holistically. In part it regards historical background, recent trends, emerging technologies, social structures, emerging nations and international business as being just as important for the event as Brexit itself. Setting these as the context in which Brexit needs to be considered, it examines some of the pros and cons which emerge and poses tantalising prospective outcomes, before finally postulating that Brexit could be ‘Just what the Doctor ordered’ for the future of Construction. Planning Membership of the EU saw a shift in UK town and country planning considerations toward European style regulation of zoning and pre-determination of land use. Although not directly acknowledged, the UK’s decision to leave the EU in June 2016 may have caused officials in the MHCLG, as well as Government, to view the direction and requirements of National & Local Planning Policy as affording a return to greater freedom and flexibility. This can be seen in their September 2018 Planning Guidance Update Newsletter which, inter alia, “… combines stronger protection for the natural environment, with a greater emphasis on meeting the housing needs of communities”. Recent Appeal Decisions suggest that the Planning Inspectorate may already be leaning in this direction. If correct, then landowners, developers and builders may expect this to continue, leading to the progressive release of more land for, in particular, residential development as Government pushes its response to the UK’s circa 1.5 million housing shortfall. However, as DHCLG’s update infers, their developments will have to bear the increased costs of protecting the natural environment. Energy EU targets for progressively reducing greenhouse gas emissions up to 2050 have already been reflected in, e.g. UK Building Regulations. These now require all building works to deliver improved energy performance and, where possible, promote the use of on-site renewable energy. Although Miguel Arias Cañete, the EU energy commissioner, wants the bloc to adopt more aggressive carbon reduction targets, this may be stalled by the interests of individual nations. However, with massive wind, wave and (fracked) gas potential, post Brexit the UK may seek to take the lead in developing ‘clean energy’ technologies further, providing a source of employment and potential exports, as well as power. R&D in this sector is now coming to the fore, with new and improved products for insulation, on-site energy generation, integration of electric-vehicles and other innovations being encouraged by a fresh approach to regulation and design. Industry professionals and their clients should expect to see these trends accelerate as Britain leaves and moves beyond the EU and its collective shackles to maintain its status as a’ Standards Maker’ (Brexit White Paper, July 2018). Building Standards & Regulations In addressing Climate Change issues – and possibly seeking to lead in this field – Britain is more likely to enhance regulatory requirements than reduce them. To maintain, or even improve, its potential for exporting to EU states, it is likely to continue to follow material and product standards and markings, e.g. Euro Codes and CE markings. The Building Industry as a whole should expect to see increased regulatory pressures to improve the overall performance of buildings, coupled with possible derogations to encourage experimentation and innovative forms of material use and construction. Design While architects and engineers have started to attune their activities to the demands noted above, in recent years a growing body of ‘other professionals’ like environmental specialisms, energy and transport consultants, and so on have become increasingly important. Facing such increased complexity, the realisation of Brexit may encourage all these professions to coalesce as integrated deliverers of ‘Green’ environments. In some respects BIM (Building Information Modelling) is already encouraging this trend with, for example, architects becoming (conceptual) members of design teams - much like in the aircraft or motor industries - rather than ‘Gods’ over individual ad hoc projects. They will, however, need to develop an increased awareness of innovative materials and methods in order to function adequately within these teams. For example, the development of ‘intelligent’ wall, window and roof energy generation, coupled with in-house battery storage, increases the potential for (near) autonomous buildings and is likely to have a marked effect upon their appearance and the way this is conceived. Rising to the challenges and opportunities that Brexit presents to construction is likely to hasten all such integrations. Materials Unlike the motor and aircraft industries, construction has few complex, extended delivery chains. However, it does import over £10 billion of Building Materials & Components from the EU, the top 5 of which are electrical wires, lifts & escalators, slag for construction, air conditioning equipment, and central heating boilers (source: DBEIS Monthly Statistics). This belies the fact that 92% of softwood imports are from the EU (CPA Brexit Issues for Construction August 2018). Of course there are other countries who we could buy from, but if they have trade agreements with the EU, possibly incorporating ‘rules of origin’, this could impact adversely on terms and prices of supply to the UK. Additionally, demand for the same softwood products is increasing from other countries, especially in response to higher populations and as their economies improve. It seems highly likely that prices for timber and other imported materials will increase. Such considerations are likely to upset the business models of importers, e.g. with any prepayment requirement to pay VAT on import, as well as the potential for import deliveries to become slowed down. This could be problematical, especially for small to medium sized firms. Unless there is ‘No Deal’, the 21 month implementation period during which things carry on as usual, agreed in March 2018, means that there will be no immediate effect. Potentially this will allow time for alternative sources of supply to be brought on line. It may also encourage further developments in material substitutes as well as domestic supplies, for instance greater use of composites produced from poor quality UK timber and/or timber supplies from the USA or Canada, unless the later are constrained by their arrangements with the EU. Labour Contractors already face skills issues, especially bricklayers, carpenters and plasterers. They have also had difficulty recruiting good quality roofers, plumbers, site managers, planners and civil engineers. This is especially so for London, where officially 27% of construction workers come from the EU, although unofficially this is thought to exceed 50%. This is especially so in housing. However, with commercial projects stalling, some of this workforce could potentially be released for residential schemes. Unsurprisingly, this also affects the UK regions from where skills and experience are sourced to meet London centric demand (source: Construction Products Association). As with materials, if there is a ‘Deal’ there is unlikely to be an immediate effect, with extended provisions possibly moving this into the future. However, whether or not this happens, the UK is likely to remain an attractive workplace for skilled workers from other countries as well as from the EU, with wage premiums on quality skills. After an initial settling down, the likelihood is that the position will remain much as it is now after Brexit, but with possibly renewed downward pressure on wages. This could also reduce labour pressure on the regions. While not directly affecting skills, this could encourage moves to improve training. In itself this is becoming an urgent issue, as those retiring or otherwise moving out o the workforce increases over the next 10 years. Demand Orders for commercial buildings have slowed considerably, especially in London. This is likely to continue, together with possibly a small reduction in demand for better quality housing in the capital. Elsewhere, the requirement for new homes is unlikely to reduce, although private open market ‘spec’ housing may be slightly adversely impacted. In part this may be triggered if the finance sector reacts unfavourably to Brexit, making mortgages more difficult and costly to find. At the same time, UK households are likely to experience increased costs of food, lessening the amount available for housing, be it mortgage or rental. Either or both could lead to a reduced demand for each type of housing and, in turn, for new residential development sites. Combined with more land with development approvals being made available, this will further lessen upward pressure on land prices, although the effect of this may be delayed as landowners sit on their land waiting for price recovery. Contrarily, current and future moves to counter both this and ‘land banking’ may result in a reduction in development land prices which in turn could lower the overall costs of housing delivery, house prices and rents. While some emigration may reduce growth in the housing shortfall, this is already so huge that Governments of all colours cannot afford not to find ways to deliver upward of 200-250,000 new homes a year for at least the next 8-10 years. This assumes a static rate of demolition and replacement, meaning that the repair and renewal sector will remain at least as busy as it has been. Furthermore, as highlighted by University if Cambridge research, the UK has some of the smallest homes in Europe, so existing demand from homeowners for increased space in their often cramped homes is likely to maintain growth in the home extension market. However, this will be subject to much the same financial pressures as the new build market. In summary, while overall, Brexit will change the mix of labour, materials, finances, and markets, it is unlikely to do more than slow the ongoing growth of housing output. To provide for this Government measures may be taken to repress, if not actually reduce, land prices, The big question, remains, how will the industry respond? Methods & Quality For most of this century there has been much interest in MMC (Modern Methods of Construction), particularly “Off-Site” construction, generally meaning factory built elements, if not complete homes. However, this is ‘manufacturing’ and manufacturing does not like volatility, something that the UK housing sector has become used to dealing with. By comparison, Japan, for example, with a population of 127 million – around double that of the UK - uses Off-Site to a much greater degree1. But it also renews it’s housing much more frequently, demolishing over 120,000 homes in 2013, almost as many homes as the UK built that year, and starting over 980,00 new homes at the same time resulting in its’ pre-war housing stock being only 3% as against the UK’s 37%. This huge volume – the equivalent of almost 500,000 p.a. in the UK – is subject to far less volatility, making manufacturing more feasible and attractive. Recent moves by UK (insurance) funds and overseas (Chinese) investors, as well as some UK volume residential building firms, in the establishment of major manufacturing facilities seem to overlook this and to ignore possible negative effects of Brexit. This signals moves toward higher levels of output for the rental market, a note sounded by property analysts over the last few years, together with the recognition that factory built homes are generally finished to a better standard and deliver higher performance than site built products. However, a key requisite for these factories to succeed is the provision of large areas of land with development approvals – most of which will need to be in some way allocated to these industrial home manufacturers. This is likely to have an impact on both land tenure and the amount of land available for traditional house builders in several ways. First, in the main, these factories will be providing mass ‘affordable’ housing. This requires that the land where they are sited is available at low, or even negligible, costs. To enable this, local authorities may look to lease rather than sell the land, doing this on, say, peppercorn or similar ground rents. Rather than borrowing to buy the land initially, they may resort to compulsory purchase at existing land values. The land so acquired could be derelict brownfield sites, maybe with a negative value and retrospectively require the owners to pay for any clean up needed, or low value farmland removed from conventional concepts of being developable. After acquisition the LA’s can then grant themselves such development permissions as they wish. Second, local planning authorities are likely to demand the same or better housing performance for any new permissions. However, at the same time the ‘deals’ done with mass housing producers may enable LPA’s to reduce or remove demands for ‘affordable’ home allocations. Likewise the shift in perceptions of land tenure could influence both the way land owners dispose of their land and the way housebuilders market their developments. Third, this will require smaller firms and their architects to rethink the way they design and deliver their offerings. At the same time this will encourage them to differentiate their designs from the potentially bland mass housing output. Fourth, market demand for improved quality, space standards, and performance will raise the bar for real craft skills, demand improved design and site management, particularly in the areas of waste reduction, health & safety, and reduced delivery times – creating premium wage levels for those who can provide these. Fifth, the acknowledged preference from open market buyers for ‘detached’ homes, combined with the demand for more internal and external space plus the prospect of more planning permissions may lead to lower densities with larger plot sizes and more, larger, detached properties. Sixth, this would potentially release smaller homes for those who retain the aspiration to own their own home, possibly resulting in more remodelling and refurbishment projects. Nevertheless, all of these changes will be accompanied by the need for more efficient use of land, materials and labour, supporting the benefits available from factory led production on different levels. Here again the construction industry is likely to be impacted in several different ways. a) Demands for higher quality will see the best skills moving into factory based finishing operations. However, this will spawn additional sub specialisms, possibly even creating ‘new’ trade skills. b) In part this will reduce requirements for ‘foreign’ or ‘non-local’ tradesmen, easing the shortages faced by traditional constructors. c) These firms will improve their efficiency by using more factory produced components, similar to the way they currently use timber frame panels, but extending this into, for example, flat pack dormers and porches, party wall roof spandrels and gable ends. d) They may require their timber frame suppliers to extend their capabilities. This is already happening in, for instance, fitting of windows in the factory and providing ‘closed’ panels, but is likely to move more to surface finished walls complete with electrical wiring, plumbing and other services. e) To counter likely increases in timber prices, manufacturers will turn to composites and other substitute materials (of which design teams must be aware). f) Factory based construction will mean reduced on-site waste, but will demand greater care in handling and storing materials on site, requiring increased pre-planning and site control – both needing better experienced and qualified supervision and management. g) The need for improved materials handling will lead to greater use of appropriate – even different - equipment and attendant health and safety measures. h) All of the above will encourage greater use of both on and off-site technology and the need for truly capable (new) trades and technicians. Training Industry moves to ‘the lump’ – lump sum pricing by sub-contract gangs in the mid nineteen seventies - sounded the death nell for many apprenticeships. Having subbed-out trades, builders were disinclined to provide them, as were the subbie gangs focussed on production with no time to train others. Short college based NVQ schemes introduced in part to tackle this, did little to replace those who had ‘served their time’ over 5 or so years at the side of a master craftsman. Tony Blair’s government temporarily removed many built up tensions allowing firms desperate for qualified operatives to recruit often highly skilled craftsmen from the EU, particularly those from the east. But this merely deferred the need to properly train the next generation with the skills required. Brexit will undoubtedly impact this. Although any loss of EU workers may be replaced by crafts from other countries, Government could wake up to the unintended consequences of past actions to ensure better disciplined, fuller and better training for new entrants, as well as helping others to enhance their capabilities. However, as should be apparent from this paper, the changes in all aspects of construction already underway will be reinforced by Brexit. These changes will require new skills, greater professionalism, and improved technical awareness to deliver different and better buildings in the future. And this will require a new and fresh approach to the areas where training is needed, will be conceived, and delivered. Conclusion Despite its’ uncharted waters and the hazards that these hold, Brexit can and should be seen as a positive influence on what many have perceived as a moribund construction industry. It will be a major agent for (disruptive) change. Brexit can and will give impetus to the words of the Farmer Review “Modernise, or Die”