Construction Industry Scenarios 2020-22 Autumn 2020 Edition - £210 Contents

Overview 3 Economy 14 Private Housing 23 Private Housing RM&I 29 Public Housing 34 Public Housing RM&I 39 Public Non-housing 43 Public Non-housing R&M 51 Commercial 54 Private Non-housing R&M 65 Industrial 67 Infrastructure 71 Infrastructure R&M 83

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DISCLAIMER

All construction figures (starts, completions, orders and output) refer to Great Britain.

All output figures are in 2016 constant prices using the historic figures from the Office for National Statistics (ONS) – as at 30 September when the Scenarios were finalised.

All new orders figures are in 2016 constant prices using the historic figures from the Office for National Statistics (ONS).

The information in this booklet has been prepared by Construction Products Association and represents the views of Construction Products Association without liability on the part of the Construction Products Association and its officers.

*Please note the images in this publication were shot before social distancing measures took effect.

2 Overview

In the CPA’s main construction scenario, construction output is anticipated to fall by 14.5% overall in 2020 before rising by 13.5% in 2021.

Although the Autumn estimate for construction output contraction in 2020 would be the largest fall in construction output on record, this still relies on sustained recovery throughout the second half of 2020 following the historic falls in construction output in the first half of the year. Output in 2020 Q2 was 36.1% lower than in 2019 Q4, prior to the social distancing restrictions, and 36.8% lower than the 2019 Q1 construction output peak. Furthermore, the overall figure for 2020 represents an upward revision to the Autumn Main Scenario compared with Summer due to the rapid return to site for existing projects and pent-up demand for housing and refurbishment work as well as social distancing and other safety measures easing and, consequently, being less of an hindrance to productivity on site than previously assumed.

The CPA’s Main Scenario is still based upon a ‘V’-shaped UK economic recession and recovery, which is better described as ‘tick’-shaped. The ‘V’-shaped scenario describes the sharp decline in UK economic activity in 2020 Q1 and, in particular, Q2 following the social distancing restrictions imposed on 23 March that started to be eased in mid-May, as assumed in previous CPA scenario documents. UK GDP fell by 2.5% in 2020 Q1 and 19.8% in 2020 Q2. The unprecedented fall in UK economic activity in the first half of the year reflects the effective shutdown of large parts of the economy and, in particular, the services sector, which accounts for 79.6% of the UK economy. The ‘V’-shaped or ‘tick’-shaped scenario also describes an initial rapid UK economic recovery in June Construction output to and Q3 due to easing of social distancing restrictions and fall by during 2020, reopening of large parts of 15% the economy, so rapid growth the sharpest fall on record from a low base. However, despite rapid recovery in the from Q4 onwards, although economic growth is expected second half of the year to continue, growth rates

• Construction output falls 14.5% in 2020 are expected to be slower due to rising unemployment after the end • Construction output in 2021 anticipated to of the government’s Coronavirus be 3.0% lower than in 2019, pre-coronavirus Job Retentions Scheme (CJRS) in • Private housing output falls 20.7% in 2020 October. Although the government has announced a Job Support Key Points • Commercial output is anticipated to fall Scheme to replace this, starting in 18.2% in 2020 November, in its current form it is unlikely to be utilised as much • Private housing repair, maintenance and as the CJRS (see Economy). The improvement falls 14.5% in 2020 CPA’s alternative scenario, the ‘W’- • Infrastructure output in 2021 is expected to shaped scenario, describes an initial be 27.4% higher than 2019, pre-coronavirus recovery in June and Q3 similar to

3 the ‘V’-shaped scenario but takes account of a potential second wave of coronavirus infections Construction output in the colder weather during Winter alongside to grow by flu that may necessitate a return to a nationwide lockdown. At the time of writing, local and regional lockdowns are currently ongoing that 14% in 2021 restrict social interactions but they are primarily not aiming at restricting economic activity, which occurred between 23 March and mid-May. If the UK had a return to a strong nationwide lockdown then UK GDP may see a second dip in Q4 although it is worth noting that if this were to occur then the second decline in economic activity would not be as sharp a fall due to the increased business continuity having learnt from the initial experience of restrictions with social distancing and other safety measures in place. In particular, within construction, site operating procedures would enable a considerably higher degree of construction activity in a second lockdown than occurred in April and May.

The construction activity recovery so far during the second half of 2020 has been boosted by government, either directly through infrastructure and public housing repair, maintenance and improvements (rm&i) spending or indirectly through housing policy stimulus for housing that provides a boost to house building and potentially energy-efficient retrofitting activity.

Infrastructure activity has been sustained to a considerably greater extent than most other construction sectors throughout the whole year due to a strong pipeline of projects and frameworks across all key infrastructure areas. Infrastructure clients, public and regulated sectors, largely have long-term certainty of finance and have been keen to continue with on- site activity through the social distancing restrictions. In addition, it has proved considerably easier to enact social distancing and other safety measures on infrastructure sites, which generally tend to be large sites with fewer trades mixing in tight spaces compared with other construction sectors. Overall, infrastructure output is expected to fall by 3.0% in the main scenario in 2020 before growth of 31.4% in 2021. This growth is expected to be driven by main construction works ramping on large-scale projects such as HS2, following the notice to proceed in April, as well as an increase in activity in the second year of five-year investment programmes within regulated sectors. Government’s announcements have focused on a £5 billion ‘New Deal’ and “build, build, build” but this finance involves reannouncements

Construction Output - Main Scenario

200,000

180,000 5.0% 5.9% 0.0% 1.9% 13.5% 3.9% 160,000 4.0% 10.0% 140,000 1.7% -14.5% 120,000

100,000

80,000

60,000 £ million - 2016 Constant Prices 40,000

20,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

4 or allocations of existing funding. The key government infrastructure announcement during Infrastructure the Summer was the National Infrastructure and Construction Procurement Pipeline for output in 2021 2020/21, which details work packages, projects expected to be and programmes that are planned to go out to market for procurement during this financial year higher than with a contract value of between £29 billion 27% and £37 billion. The detail of this increases the pre-coronavirus 2019 likelihood that this will occur to time and output from the smaller and medium-sized projects from the pipeline should be seen on the ground in 2021 and 2022. The only infrastructure sub-sector that is likely to see declines in activity over the next two years is gas, air and communications, due to retrenching activity from airports expansions and refurbishment programmes due to sharp declines in expected passenger numbers and consequent impacts on airport revenue.

Private housing is currently relatively buoyant, having been the worst affected construction sector during the social distancing restrictions. Activity Private housing returned quickly to site during May and June primarily -21% focusing on completions of existing developments the worst affected but since July has moved towards also starting new sector in 2020, developments in response to strong consumer demand, illustrated by high house price inflation expected to fall by and forward sales figures higher than one year earlier. This house builder optimism has only been added to by government policy stimulus focusing on enabling more housing transactions in the general housing market through a stamp duty holiday in England and Northern Ireland with similar home sale tax reductions in Scotland and Wales that currently last until 31 March 2021. In addition, government has extended the deadline for completing homes under the current unconstrained version of Help to Buy to 28 February 2021 whilst the policy itself still finishes on 31 March 2021. As a result, house builders have been keen to take advantage of the positivity in the market and make up for lost ground in the second quarter of 2020.

Public & Private Sector Construction Output - Main Scenario

£ million 2018 2019 2020 2021 2022

Change on previous year Actual Actual Scenario Scenario Projection

37,740 39,246 34,964 40,500 41,976 Public Sector inc. PFI -3.7% 4.0% -10.9% 15.8% 3.6%

122,786 124,405 104,901 118,191 124,700 Private Sector 1.3% 1.3% -15.7% 12.7% 5.5%

160,526 163,651 139,865 158,691 166,676 Total Construction 0.0% 1.9% -14.5% 13.5% 5.0%

Source: ONS, Construction Products Association

5 Overall, private housing output is expected to fall 20.7% in 2020 but given that in April, during the social distancing restrictions, private housing output was 63.1% lower than a year earlier, the overall estimate for 2020 is based upon rapid recovery in 2020 Q3 and Q4. However, it is worth raising two notes of caution. Firstly, demand currently appears to be split by region but also by type of home. Housing demand appears strongest outside the capital, particularly in cities such as Nottingham and Manchester. In addition, demand also appears to be strong from existing homeowners looking for a house whilst demand for first-time buyers, in particular looking to buy flats, appears to be falling after an initial burst of pent-up demand that fed through during the Summer. This may reflect rising job concerns for first-time buyers but is also likely to reflect increasing risk-aversion from lenders, which are restricting the availability of high loan-to-value (LTV) mortgages, which disproportionately impacts on first-time buyers. Secondly, whilst demand in Q3 was strong for house builders, they have consistently warned that they may potentially face a cliff edge in March 2021, with the end of the stamp duty holiday (and equivalents in Scotland and Wales) and the end of the current version of Help to Buy, combined with the impacts of expected economy-wide rises in unemployment after the furlough scheme ends in October.

Public housing rm&i is a sector that has previously been in decline, even prior to the social distancing restrictions between March and May. Since restrictions eased, activity in the sector has rapidly risen from a low base due to urgent remediation work to address fire safety measures for high-rise social housing towers. The main scenario continues to assume that remediation will need to be carried out as a priority on the public housing stock but is assumed to largely displace other planned repairs and non-essential maintenance activity given the financial constraints and extensions to the government’s previous 31 December 2019 completion deadline. The government has assigned £400 million to fund the removal and replacement of cladding by housing associations and local authorities in England, which has been diverted from the existing Shared Ownership and Affordable Homes Programme (SOAHP) funding pot. The MHCLG’s Building Safety Programme statistics indicated that at the end of August, there were 155 social housing buildings taller than 18 metres that have cladding unlikely to meet current Building Regulations. Remediation work has completed on 83 of these and is underway on a further 63 buildings, with nine yet to start work. 141 out of the towers affected will use £270 million from the £400 million government fund, with the remainder funded through a combination of existing funds and litigation action. Progress in the public sector has been faster than in the private sector and although output in the main scenario still falls by 16.1% in 2020, a further 28.1% growth is anticipated in 2021.

Private housing rm&i activity appears to have been buoyed by many households’ increased time at home due to domestic working. In addition, many households have sustained real disposable incomes. This has been helped by the government’s furloughing scheme and less household expenditure due to lower hospitality and travel/commuting spending. In turn, this has meant that many households have higher disposable spending power for essentials and for saving or safe investments, which many improvements for residential can been seen as. In theory, private housing rm&i output should also be boosted by a stream of urgent cladding remediation work on privately-owned residential towers that are taller than 18 metres although progress has been slow. At the end of August, the MHCLG reported that there were 209 private sector buildings with cladding systems that are unlikely to meet current Building Regulations. Work has completed on only 32 of these, despite an initial deadline of 31 December 2019. There is a £200 million Private Sector Remediation Fund in place for cases where building owners have failed to act. In addition, Budget 2020 announced a further £1.0 billion fund for the remediation of non-ACM combustible cladding, to be shared between private and public sector residential towers but at present the funding is only available for 2020/21. Government stimulus may also boost private housing rm&i from October through the Green Homes Grant, which makes £2 billion available until 31 March 2021 for energy- efficient retrofit of the existing stock. It was announced in June but only starts at the end of

6 September, which means that for some activity it has created a hiatus until the scheme starts. It also relies on providing funding of up to £5,000 relying on homeowners making certain energy-efficient retrofit changes such as insulation and double-glazing only utilising contractors that are registered with Trustmark or MCS and receiving the vouchers after the work has been done and paid for. As a result, the CPA is currently assuming that the majority of retrofitting work under the scheme will be activity that would have occurred anyway; activity delayed between the scheme’s announcement and start combined with activity that would have occurred between October 2020 and March 2021. It may bring forward some activity from April to July 2021 into the Spring and, if government extends the scheme and provides additional finance, then it may make a difference in the long-term but as the scheme stands, it is unlikely to see a significant proportion of the £2 billion funding spent on energy-efficient retrofit between October and March. Overall, private housing rm&i output is forecast to fall by 14.5% in 2020 based on sharp falls in activity in Q2 and recovery during the second half of the year with growth of 14.3% anticipated in 2021.

Whilst there are many positives for the construction industry highlighted above, there are some key concerns currently and in the near future.

The indications that the CPA has from contractors are that productivity on Construction Output (% Growth) site has improved considerably since Main Scenario April and May but remains 10%- 15% lower than pre-coronavirus, which is a particular issue outside of 13.5% infrastructure and housing, particularly for major projects signed up to 5.0% 1.9% in previous years as it means that 0.0% projects cost more and take longer so the key question is who will pay for increased cost? We are increasingly hearing that main contractors and -14.5% major house builders are asking

2018 2019 2020s 2021s 2022p specialists and sub-contractors to cut rates, which are the least able to

Source: ONS, Construction Products Association deal with a cut to revenue given that cash flow is a big issue for many small and medium-sized firms. 36.1% of construction firms reported between 24 August to 6 September 2020 having cash reserves lasting 3 months or fewer compared with 32.3% one month earlier according to the Office for National Statistics (ONS).

In terms of activity on site, a key issue may be that after the flurry of activity restarting on previously halted projects, where will new demand for projects come from? This is particularly the case in commercial, which is the second largest construction sector and almost one- third (31%) of commercial activity is in London. Over the Summer, projects signed prior to the social distancing restrictions have returned to site, albeit at significantly lower productivity for tower projects in London that often involve groups of trades operating in small, tight spaces that conflict with social distancing. However, in the medium-term, there is likely to be a structural change in work and spending patterns due to increased working from home, involving less use of existing office space and greater use of online spending at the expense of in-store retail, less spending in cafes, bars and restaurants in cities with a lower demand that is focused more on local communities. The recent financial woes of commercial property owners and large, flexible tenant business models such as WeWork and IWG, formerly Regus, illustrate this. And if demand for existing commercial space falls and is skewed away from the capital then it will be more difficult to justify new large up-front investment in towers projects

7 in London. In addition, investment in the hotels element of commercial is also likely to suffer from a lack of new major projects given uncertain demand over international tourism, which is likely to impact especially on London. Overall, commercial output in the main scenario is expected to fall by 18.2% in 2020 before rising by 5.6% in 2021. Even with growth of 4.0% in the following year, output in 2022 is still expected to be lower than in 2019.

Industrial output is expected to fall by 22.1% in 2020 overall and despite growth of 11.5% next year, sector output is anticipated to still be 13.1% lower than in 2019, pre-coronavirus due to the contrasting fortunes of the factories and warehouses sub-sectors. Whilst the social distancing restrictions adversely affected warehouses, construction has returned to site and the focus is on completing previously-paused warehouses schemes. Segro reported in August that 1.3 million sq. ft. of development projects are currently under construction or in advanced pre-let discussions, whilst Tritax Big Box reported that work is underway on four pre-let developments totalling 5.3 million sq. ft. and is planned to start on projects totalling 5.8 million sq. ft. within one to three years. In terms of demand, Savills and CBRE reported that take-up of industrial and logistics space reached record high levels in 2020 H1, with online retail accounting for the largest proportion.

The long-term shift in demand away from in-store demand and towards online shopping was exacerbated short-term by social distancing and is likely to rise due to increased working from home in the medium-term. This is likely to boost investment in industrial warehouses even further at the expense of commercial retail. Conversely, the industrial factories sub-sector is likely to suffer from a lack of projects currently in the pipeline and a lack of new investment due to excess capacity currently in manufacturing, combined with increased uncertainty regarding UK economic fortunes and, in particular for exporters, UK trading terms post-Brexit implementation period. Projects that were already on site pre-coronavirus have gone back on site such as the £80.0 million UK Battery Industrialisation Centre (UKBIC) in Coventry, Forterra’s £95.0 million brick manufacturing facility in Leicestershire and Siemens’s £200 million rail factory in Hull but very few new major projects are anticipated near-term to boost sub-sector output.

• The CPA main scenario anticipates construction output in 2020 falling by 14.5%.

• The largest falls in activity in industrial (-22.1%) and private housing (-20.7%).

• The least affected sectors are anticipated to be infrastructure (-3.0%) and public non- housing (-8.5%).

• The CPA main scenario anticipates construction output rising 13.5% overall in 2021.

• The largest growth rates are expected to be in infrastructure (31.4%), public housing rm&i (28.1%) and private housing rm&i (14.3%).

8 Construction Industry Forecasts - Autumn 2020 - Main Scenario

2018 2019 2020 2021 2022

% annual change Actual Actual Scenario Scenario Projection Housing

Private 34,668 35,979 28,546 31,570 34,096 5.5% 3.8% -20.7% 10.6% 8.0%

Public 5,593 6,482 5,153 5,630 5,912 -2.7% 15.9% -20.5% 9.3% 5.0%

Total 40,261 42,461 33,699 37,200 40,007 4.3% 5.5% -20.6% 10.4% 7.5% Other New Work

Public Non-Housing 9,763 9,523 8,711 9,540 9,922 -11.0% -2.5% -8.5% 9.5% 4.0%

Infrastructure 21,255 22,461 21,785 28,621 30,338 3.6% 5.7% -3.0% 31.4% 6.0%

Industrial 5,072 5,307 4,136 4,610 4,702 10.4% 4.6% -22.1% 11.5% 2.0%

Commercial 28,648 28,134 23,011 24,300 25,272 -6.7% -1.8% -18.2% 5.6% 4.0%

Total other new work 64,738 65,425 57,643 67,071 70,234 -3.1% 1.1% -11.9% 16.4% 4.7%

Total new work 104,999 107,886 91,342 104,271 110,241 -0.4% 2.7% -15.3% 14.2% 5.7% Repair and Maintenance

Private Housing RM&I 20,848 20,667 17,672 20,200 21,008 -0.4% -0.9% -14.5% 14.3% 4.0%

Public Housing RM&I 7,499 7,554 6,339 8,120 8,282 -3.9% 0.7% -16.1% 28.1% 2.0%

Private Other R&M 13,322 13,226 10,852 12,050 12,800 5.7% -0.7% -18.0% 11.0% 6.2%

Public Other R&M 4,838 5,130 4,695 4,950 5,080 -4.6% 6.0% -8.5% 5.4% 2.6%

9,020 9,188 8,966 9,100 9,264 Infrastructure R&M 4.2% 1.9% -2.4% 1.5% 1.8%

Total R&M 55,527 55,765 48,523 54,420 56,434 0.8% 0.4% -13.0% 12.2% 3.7%

TOTAL ALL WORK 160,526 163,651 139,865 158,691 166,676 0.0% 1.9% -14.5% 13.5% 5.0%

Source: ONS, Construction Products Association

9 Key Risks Second National Lockdown

The majority of economic forecasters continue to assume no further waves of coronavirus and no further lockdowns and this is in line with the CPA’s main scenario. So far government has focused subsequent social distancing restrictions on social interactions rather than hindering economic activity by preventing certain industries from operating. However, if coronavirus returns in Winter 2020 before a vaccine or it returns in a different strain alongside flu, 2020 Q4 could see the extent of social distancing restrictions experienced between 23 March and mid-May and a slowdown in UK economic growth. This is highlighted in the CPA’s ‘W’-shaped Scenario (see W-shaped Scenario). Brexit

The UK left the EU on 31 January 2020 and entered the implementation period until 31 December 2020. The CPA scenarios assume that a Free Trade Agreement with the EU will be agreed at the top level with detail to be determined over time with an approximate probability of 60%. The Free Trade Agreement would involve administrative difficulties for UK trade but would only have minor impacts on UK GDP compared with a ‘No Deal’ scenario. ‘No Deal’ is currently estimated at an approximate 40% probability but as time gets closer to the deadline then this probability may rise and the rhetoric from politicians is likely to increase further. The detail of the CPA’s ‘No Deal’ scenario for the economy and construction industry is available in the CPA Brexit Update. Government Policy Reliance

The positive growth in construction activity during the second half of 2020 and in 2021 is heavily reliant on government funding, policy and stimulus. Indirectly, from the economy-wide point of view, government has prevented sharp rises in unemployment through the Coronavirus Job Retention Scheme (furloughing) and the Self-employment Income Support Scheme, which have helped to sustain consumer confidence and demand for housing new build and rm&i. However, these schemes come to an end soon (see Economy) and may have a negative impact on demand. Directly, government is sustaining construction activity via infrastructure funding and HS2 in particular, Europe’s largest construction project. However, government states that it is also funding the procurement of up to £37 billion of infrastructure in 2020/21 as well as funding £1 billion cladding remediation, £1 billion decarbonisation of public sector buildings and £2 billion funding for energy-efficiency retrofit within the next year. As ever with government announcements, the key will be whether the rhetoric is matched by construction activity on the ground.

10 Margins

The CPA has consistently highlighted issues regarding main contractor margins. After six consecutive years of growth in construction output, the average pre-tax margin of the top 10 UK contractors was -0.1% in 2018/19. This makes the major contractors particularly vulnerable to falls in demand, unforeseen cost rises and delays to major projects, all of which are major risks currently. Furthermore, any potential issues for major contractors would most likely be pushed onto the supply chain, hindering cash flow issues for sub-contractors and specialists in particular. Given the sustained activity throughout 2020 in some sectors such as infrastructure and rapid return to activity in other sectors such as house building, the contractors most at risk are likely to be those that rely on work in the commercial sector and industrial factories. Productivity

Anecdotally, productivity on site initially fell by as much as 30%-40% dependent on the site in April and May due to social distancing and other safety measures. This has reduced significantly since and appears to be around 10%-15% lower due to easing of social distancing and other safety measures combined with increased working hours on many sites. However, this still means construction activity will take longer and cost more at least initially. In the medium-term, it is likely that contractors will be innovative and find ways of reducing the productivity loss especially as they get used to the new ways of working but if not then there will be serious issues regarding delayed work on existing contractors and who will be paying the additional cost. In addition, the re-imposition of stronger social distancing and other safety measures in response to other outbreaks of further waves of coronavirus could raises costs and lead to further delays in projects.

11 W-shaped Scenario

Assumptions

• Nationwide distancing restrictions return in Q4 as COVID-19 (coronavirus) infections rise with colder weather either in the same strain without a vaccine or in a different strain of the virus • Person-to-person services (e.g. hospitality and tourism) activity falls sharply in Q4 • Unemployment rises more sharply in Q4 and 2021 H1 • Lending to businesses falls in Q4 and 2021 Q1 despite Government and Bank of England measures to increase liquidity and lending • Property transactions fall in Q4 in spite of the stamp duty holiday, especially for first-time buyers as housing market stalls again • Consumer spending on non-essential items and big- ticket items falls sharply in Q4 and 2021 Q1 • Business investment falls in Q4 and 2021 H1 as firms return to thinking solely on near-term cost cutting

Key Effects

• Construction output falls by 17.8% in 2020 and despite growth of 13.5% from a low base in 2021, total output at the end of 2021 is anticipated to be 6.7% lower than during 2019, pre- social distancing restrictions • Private housing output is the worst affected sector and output in this scenario falls by 25.4% in 2020 due to the housing market effectively being ‘frozen’ twice during the year. Recovery in 2021 is expected but after 10.1% growth, private housing output in 2021 is still expected to be 17.8% lower than in 2019’s recent historic peak • Investment in new commercial offices, retail and hotel space is adversely affected by a sharp decline in consumer and business confidence in Q4, particularly in the light of increased working from home reducing the demand for traditional city office space and in-store retail. Commercial output declines 20.5% in 2020 and only rises by 7.1% from a low base in 2021 • The slowdown in property transactions, rise in unemployment and fall in consumer confidence and spending leads to a fall of 19.3% in private housing rm&i work in 2020 before a recovery in the economy and housing market from Q2 next year generates 16.2% growth in 2021 but output at the end of next year remains 6.1% lower than in 2019

12 Construction Industry Forecasts - Autumn 2020 - W-shaped Scenario

2018 2019 2020 2021 2022

% annual change Actual Actual Scenario Scenario Projection Housing

Private 34,668 35,979 26,851 29,570 31,344 5.5% 3.8% -25.4% 10.1% 6.0%

Public 5,593 6,482 5,026 5,420 5,691 -2.7% 15.9% -22.5% 7.8% 5.0%

Total 40,261 42,461 31,876 34,990 37,035 4.3% 5.5% -24.9% 9.8% 5.8% Other New Work

Public Non-Housing 9,763 9,523 8,448 9,020 9,291 -11.0% -2.5% -11.3% 6.8% 3.0%

Infrastructure 21,255 22,461 21,646 28,337 32,588 3.6% 5.7% -3.6% 30.9% 15.0%

Industrial 5,072 5,307 4,054 4,490 4,715 10.4% 4.6% -23.6% 10.7% 5.0%

Commercial 28,648 28,134 22,356 23,950 24,908 -6.7% -1.8% -20.5% 7.1% 4.0%

Total other new work 64,738 65,425 56,504 65,797 71,501 -3.1% 1.1% -13.6% 16.4% 8.7%

Total new work 104,999 107,886 88,380 100,787 108,536 -0.4% 2.7% -18.1% 14.0% 7.7% Repair and Maintenance

Private Housing RM&I 20,848 20,667 16,688 19,400 20,370 -0.4% -0.9% -19.3% 16.2% 5.0%

Public Housing RM&I 7,499 7,554 6,026 7,350 7,571 -3.9% 0.7% -20.2% 22.0% 3.0%

Private Other R&M 13,322 13,226 10,345 11,650 12,400 5.7% -0.7% -21.8% 12.6% 6.4%

Public Other R&M 4,838 5,130 4,377 4,800 4,800 -4.6% 6.0% -14.7% 9.7% 0.0%

9,020 9,188 8,766 8,750 9,008 Infrastructure R&M 4.2% 1.9% -4.6% -0.2% 2.9%

Total R&M 55,527 55,765 46,201 51,950 54,149 0.8% 0.4% -17.2% 12.4% 4.2%

TOTAL ALL WORK 160,526 163,651 134,581 152,737 162,685 0.0% 1.9% -17.8% 13.5% 6.5%

Source: ONS, Construction Products Association

13 Economy

Following strong growth in the third quarter, UK GDP is expected to fall by 10.7% overall in 2020 in the CPA’s main scenario, revised up from the 11.4% decline in the Summer, as the UK continues to recover from the unprecedented fall in Q2 due to the social distancing restrictions imposed as a consequence of the impacts of COVID-19 (coronavirus). GDP is expected to rise by 7.2% in 2021 and 3.6% in 2022. UK economic activity is only anticipated to recover to pre-coronavirus 2019 levels during 2022.

Three months on from the CPA’s previous set of scenarios, the economy continues to recover in line with the main scenario, which remains the ‘V’-shaped recession and recovery that is better described as ‘tick’-shaped. This scenario was based upon social distancing restrictions easing from mid-May and an initial rapid recovery in June and 2020 Q3 as social distancing restrictions eased and large parts of the UK economy reopened. The main scenario also assumed that this would be followed by growth at slower rates from 2020 Q4 as unemployment rises when the government’s Coronavirus Job Retention Scheme (CJRS), better known as furloughing, finishes at the UK GDP anticipated end of October. Even though the Chancellor announced a new Job Support Scheme in to fall by 10.7% September to replace the CJRS, it is not overall in 2020 expected to be as widely used and is unlikely to prevent a sharp rise in unemployment across the economy. Social distancing restrictions have been reimposed at a local and regional level since Summer 2020 and further restrictions are expected during the next six months although government is likely to focus these largely on social interactions and it will be attempting to avoid restrictions that hinder the majority of economic activity, unlike restrictions that were imposed between 23 March and mid-May. In the CPA’s UK economic Main Scenario, after the 2.5% fall in GDP in 2020 Q4 and the record 19.8% fall in GDP in 2020 Q2, GDP is expected to rise by 14% in Q3 but this rapid growth from a low base is due to ‘easy gains’ as large parts of the economy reopened. Subsequent positive but slower growth rates mean that GDP is expected to fall by 10.7% in 2020 and then rise by 7.2% in 2021 in the main scenario.

If social distancing restrictions similar to those imposed between 23 March and mid-May are reimposed then economic activity is more likely to be in line with the CPA’s ‘W’-shaped scenario. In this scenario, a second wave of infections with the colder weather alongside flu in Winter and the consequent restrictions on large parts of the economy, in particular person-to-person services such as hospitality and tourism, mean that economic activity falls once again in 2020

14 Q4 before recovering from 2021 Q1. In this scenario, UK GDP falls by 13.1% in 2020 before rising by 3.0% in 2021. However, in this scenario, activity during the second wave and dip in activity does not fall to the levels seen in Q2 due to a higher level of business continuity and learning from the experience of the initial social distancing restrictions. In particular, a higher degree of construction activity would be expected to take place than during the initial restrictions as a result of site operating procedures and other safety measures allowing contractors to operate, which was not apparent early on in the initial social distancing restrictions.

As highlighted in previous CPA forecasts and scenarios documents, Brexit remains a key risk to the scenarios in spite of the UK leaving the EU in January 2020 and the focus on coronavirus for the majority of 2020. The UK remains in an implementation period until 31 December 2020 during which trading conditions remain the same. As with previous forecasts and scenarios, at the time of writing, the CPA’s ‘V’-shaped and ‘W’-shaped scenarios are based on a Free Trade Agreement at the top level being agreed in October between the UK and EU with substantial detail to be discussed and agreed later, which the CPA approximately assumes is a 60% probability. However, it is worth noting that the risk of ‘No Deal’ at the end of the implementation period on 31 December has continued to rise due to the lack of time available and the increasingly aggressive rhetoric but it remains a 40% probability.

If the UK economy was to face a ‘No Deal’ scenario after 31 December 2020 then this may lead to a three percentage point loss to UK GDP compared with the CPA’s Main Scenario, primarily affecting the final quarter of 2020 and, in particular, the first quarter of 2021 due to the disruption to trade and the depreciation in Sterling compared with Euro and the US Dollar. A ‘No Deal’ scenario would be expected to lead to the Sterling: Euro exchange rate falling to 1:1 whilst the Sterling: Dollar exchange rate falls to 1:1.12, which inevitably leads to imported cost inflation in addition to the initial tariff impacts from defaulting to WTO trade terms. The complex issues around a ‘No Deal’ are available separately in the CPA’s Brexit Update.

UK GDP forecasts for 2020 and 2021 from the main forecasters have stabilised in the last two months after consistent revisions down during the Summer. The latest HM Treasury consensus of UK macroeconomic forecasters in September 2020 provides the range of different forecasts and scenarios. Of the main City and non-City macroeconomic forecasters, the average (median) estimate for GDP in 2020 is -10.0% although there remains a surprising degree of variation between the forecasters given that forecasts were provided with only three months of the year left. Forecasts ranged from the most optimistic estimate of -6.6% to the most pessimistic forecast of -13.4%. Of the main City and non-City macroeconomic

Economic Indicators - Main Scenario

2018 2019 2020 2021 2022

Actual Actual Scenario Scenario Projection GDP 1.3% 1.3% -10.7% 7.2% 3.6% Fixed Investment 0.4% 1.5% -13.5% 3.0% 3.5% Household Consumption 1.3% 0.8% -9.5% 4.5% 1.8% Real Household Disposable Income 2.4% 1.7% -2.0% 1.0% 2.7% Government Consumption 0.6% 4.1% -6.5% 4.5% 2.5% CPI Inflation 2.5% 1.8% 0.8% 1.6% 2.3% RPI Inflation 3.3% 2.6% 1.5% 2.3% 3.0% Bank Base Rates - June 0.50% 0.75% 0.10% 0.10% 0.10% Bank Base Rates - December 0.75% 0.75% 0.10% 0.10% 0.10%

Source: ONS, Construction Products Association

15 forecasters, the average (median) estimate for GDP in 2021 is 6.5% and there is a high degree of variation between the forecasters although this is less surprising given different assumptions about the rate of recovery and impacts of social distancing restrictions on economic activity. Forecasts for 2021 ranged from the most pessimistic estimate of 3.9% to the most optimistic forecast of 9.7%.

It is once again worth noting the extent of the recession that the UK has endured and that we have not fully seen the impacts due to the CJRS (furloughing) preventing large rises in unemployment so far. The 2.5% fall in GDP in the first quarter of 2020 and the 19.8% fall in GDP in the second quarter is a considerably larger decline than the recession experienced during the financial crisis of 2008/09.

During the financial crisis, the UK economy experienced a 5.9% fall in five quarters whereas on this occasion the fall was 21.8% in just two quarters and, unlike previous recessions, was not primarily due to a lack of demand but rather a public health intervention through social distancing restrictions that led to shutdowns of key sectors of the UK economy, particularly in services, which accounts for three-quarters of UK GDP. The consequence of this is that as the social distancing restrictions ease, not only does economic activity start to recover rapidly but is added to initially by pent-up demand that could not be enacted between late March and mid-May. This is particularly noticeable in areas of spending that could not physically take place, such as home purchases and refurbishments. However, this pent-up demand is expected to only have lasted between June and September with activity returning to a ‘new normal’ following this.

GDP in Q2 fell by 19.8% but July’s growth was 6.6% alone and we can expect that GDP in Q3 rises by 14% due to the initial gains from a low base as the economy has been reopened, particularly given that employment, and consequently consumer spending, have been sustained by furloughing through the CJRS. This finishes at the end of October but will be replaced by a Job Support Scheme, announced in September.

Employees need to work a minimum of 33% of their usual hours. For every hour not worked the employer and the government will each pay one-third of the employee’s usual pay, and the government contribution will be capped at £697.92 per month. Employees using the scheme will receive at least 77% of their pay, where the government contribution has not been capped. The employee must not be on a redundancy notice. The scheme will run for six months from 1 November. It is worth noting that effectively businesses will be required to pay 55% of the employee’s salary for 33% of hours worked. As a result, it is likely to only be of limited use given that it relies on the willingness of businesses to take the 22% difference and additional cost at this time.

Furthermore, under the Job Support Scheme, it is more expensive for companies to employ two people on 50% of their hours than one Unemployment rate worker on 100% hours as a firm would have to pay part-time workers for the hours worked in set to hit in 2021 addition to one-third of the salary shortfall. So, 9.5% an employer would pay 50% salary and a 17% top-up to those employees. However, if they get rid of one employee and kept the other on full- time hours, they would just pay one full salary. In October, the Chancellor announced that the scheme would be extended to cover 67% of employee wages up to £2,100 per month only for firms that are forced to close by government restrictions although this is only likely to impact on some hospitality firms in local areas.

In September, the Chancellor also announced a 6-month extension of the Self-Employment

16 Income Support Scheme (SEISS) from November 2020 to April 2021 in the form of two taxable grants. The initial grant will cover 20% of average monthly trading profits capped at £1,875 in total. The second grant will be from the start of February until the end of April and government will review the level of this grant. The key concern with this scheme is that it will initially only cover 20% of average monthly profits so it is unlikely that this will be enough to sustain self-employed workers particularly in the services sectors that rely on person-to- person interaction such as hospitality and tourism. It is worth noting that in construction 41% of workers are self-employed.

Given the concerns regarding the less effective schemes to help employed workers and those who are self-employed, it is likely that UK unemployment rises in line with expectations in previous CPA scenarios publications. Unemployment is expected to rise sharply in 2020 Q4 to around 2 million and continues during the first half of 2021, pushing unemployment to over 3 million, 9.5% of the labour force, in mid-2021 before unemployment falls back towards 2.5 million over the next 12 months. The rise in unemployment towards the end of the year and into 2021 is expected to lead households and businesses to become more risk averse and retrench spending and investment respectively. UK GDP is still forecast to rise 7.2% in 2021 from a low base but, as with the CPA’s Summer Scenario, UK GDP is only expected to return to the pre-coronavirus 2019 level of GDP in 2022.

The 6.6% GDP growth in July compared with June was the third consecutive monthly increase but it has still only recovered just over half of the lost output during the social distancing restrictions. July 2020 GDP was 18.6% higher than its April low point. However, in July, even though virtually all restrictions on economic activity had been lifted, GDP remained 11.7% below the levels seen in February 2020, before the full impact of the coronavirus pandemic. In addition, the shortfall still is far bigger than seen at any point during the past four recessions.

The largest impacts of the social distancing restrictions between 23 March and mid-May were on services, which accounts for 79.6% of the UK economy and, as a consequence, explains Consumer the extent of the fall. It has also been the largest spending contributor to the recent rapid growth from SALES a low base but it is also the key reason for the expected to lack of recovery so far, given expectations that unemployment will rise significantly over the fall next 6-9 months and, consequently, why the -9.5% main scenario anticipates that recovery to pre- in 2020 coronavirus levels of UK GDP will take until 2022. There was a rise of 6.1% in the Index of Services between June and July 2020 with over half of the growth coming from industries where continued easing of lockdown restrictions had a significant impact, namely education, motor trades, pubs and restaurants, personal services, and hotels and accommodation. In July, the ONS reported that services output was still 12.6% below February 2020, the most recent month of trading conditions prior to social distancing restrictions due to the coronavirus pandemic. Services output decreased by 8.1% for the three months to July compared with the previous three months in spite of July’s monthly rise. This fall was as a result of a 62.7% decline in the hard-hit accommodation and food service sub- sector. In particular, food and beverages services saw 99.0% growth in July 2020 yet remained 58.7% below February 2020, with most of the impact from higher demand from businesses that had reopened or were preparing to reopen. Yet, overall, food and beverages services output level remained very weak.

Industrial production output rose by 5.2% between June and July 2020, with the largest

17 upward contributions coming from manufacturing (6.3%), electricity and gas (2.7%), water and waste (2.4%) and mining and quarrying (0.7%). However, industrial production in July remained 7.0% below February’s pre-coronavirus level. The monthly increase of 6.3% in manufacturing output was led by transport equipment, which rose by 18.5%; all of the 13 sub- sectors displayed upward contributions. Industrial production output decreased by 3.5% for the three months to July 2020, compared with the three months to April 2020; this was led by manufacturing output, which fell by 4.4%. In turn, the three-monthly fall in manufacturing was due to widespread weakness across the sector, with 10 of the 13 sub-sectors providing downward contributions; in particular, transport equipment, which fell by 19.1%.

The ONS construction output in July 2020, which is determined by a survey of contractors and then grossed up to determine the overall output, was 17.6% higher than in June but still 12.8% lower than the same month one year earlier as it recovers from the low levels of work in late March, April and May. Over half of the growth in construction output (55%) in July 2020 was driven by housing new build and rm&i but, given sharp falls in most sectors during the social distancing restrictions, output in July remained lower than a year ago in all sectors except infrastructure despite growth in June and July. Year to date (January-July 2020), construction output was 18.5% lower than in 2019 with falls in all sectors and the largest falls were in new house building and private housing rm&i, the worst affected sectors in the social distancing restrictions (March-May).

After discussions with the ONS, it is worth noting that the ONS construction output data between March and May are likely to be an overestimate of activity due to the low ONS survey response rate and survivor bias in the survey. The survey response rate fell from 66% in early 2019 to 46% in April. Furthermore, the firms responding to the survey are those still operating, which implies that there is likely to be a bias in the data that overestimates the level of activity during a sharp downturn and underestimates the decline in activity during the social distancing restrictions. The ONS reported that construction output in April 2020 was 44.3% lower than the same month one year earlier although estimates of construction activity based on product and materials sales suggest that construction activity in April 2020 was approximately 55-60% lower than one year earlier.

Discussions with firms working in house building and in rm&i also point toward this issue indicating that construction output during the recovery is likely to be underestimated. July’s ONS construction output indicates that private new housing output was 22.7% lower than one year earlier and private housing rm&i output in July was 21.0% lower than one year. However, indications from firms within these two sectors point towards activity having recovered to pre-coronavirus levels due to pent-up demand and a catch-up in activity that could not be enacted between 23 March and May.

The most recent indicators covering UK economic activity since coronavirus are the IHS Markit/CIPS Purchasing Managers Indices (PMI), which are timely surveys of monthly activity across UK Manufacturing, Services and Construction.

The UK service sector continued its recent recovery in September according to the IHS/Markit CIPS UK Services PMI. Business activity rose for the third

18 successive month. The Services PMI fell from 58.8 in August, the highest reading Unemployment since April 2015, to 56.1 in September. This indicates further growth but at a slower Peak at 3 Million in 2021 rate than in August. Growth across the services sector was uneven with gains mainly in business-to-business services. Areas of services more exposed to social contact such as hotels, restaurants and catering reported downturns in work during September, partly due to the end of 1.40 Million in 2020 Q2 government schemes such as Eat Out to Help Out and tightening of social distancing Source: ONS, Construction Products Association restrictions at a local or regional level. Growth in new business was slower than in August and a lack of international tourism was also reported to have weighed on foreign business. From those firms operating in business-to-business services or real estate activities, market demand was continuing to improve. This helped confidence regarding the future, with sentiment about the year ahead remaining in positive territory despite easing to a four-month low. Companies expect that investment in new products and services, plus an uplift in sales and demand once the pandemic has been brought fully under control, will help to drive business expansion. However, the latest PMI indicated that employee numbers in the service sector continued to fall. Whilst easing to the slowest rate since March, the rate of job losses was again marked amid evidence of ongoing spare capacity.

The IHS/Markit CIPS UK Manufacturing PMI rose for the fourth consecutive month in September although growth slowed slightly to 54.1 in September from 55.2 in August, which was its highest levels for over 2.5 years. Increased manufacturing production was due to higher demand, companies reopening and staff returning to work. Expansions were seen in the consumer, intermediate and investment goods sectors, with the steepest increase in intermediate goods. Large manufacturers saw the fastest growth and small-sized firms the slowest. New business rose for the third successive month, reflecting a combination of improving customer demand, rising export orders, signs of recovery in the retail sector and the reopening of schools. Manufacturing firms reported job cuts for the eighth consecutive month in September but the rate of job losses eased to its lowest since February. In September, manufacturers maintained a positive outlook for the year ahead, with 60% expecting output to be higher in 12 months’ time and the extent of confidence remained close to July’s 28-month high. However, a rising number of firms also noted a high degree of uncertainty due to coronavirus and the end of the Brexit implementation period.

The IHS Markit/CIPS UK Construction PMI in September was 56.8, up from 54.6 in August. As the 50 level represents no monthly change, September’s index value illustrates further growth in September and faster growth than in August. September’s growth in construction activity accelerated after a slowdown in growth during the second half of August. Contractors reported the slowdown in activity during the latter part of August was largely as a result of holidays and also poor weather affecting on site activity. Construction growth in September continued to be driven by house building and there was also growth in commercial activity in September according to IHS Markit/CIPS but civil engineering activity in September fell for the second consecutive month.

In housing, new house building activity remained strong in September whilst house price inflation was robust, particularly for existing homeowners and those using Help to Buy not reliant on high loan-to-value (LTV) mortgages. This demand was also assisted by pent-up demand feeding through whilst employment rates remain high and government signalling that

19 it is underpinning housing market demand and prices through the stamp duty holiday (and equivalents in Scotland and Wales). Housing refurbishments continued to grow in September as pent-up demand still feeds through and employment rates remained high, supported by furloughing, which ends in October.

Commercial activity rose in September at its fastest rate for over two years as work continued on large projects signed pre-coronavirus, which clients are not paying more for so contractors will be keen to get these projects finished as quickly as possible. Commercial has also been boosted by some activity on retail and leisure facilities in local communities that have benefited from an increase in demand at the expense of city centre commercial due to increased working from home for some households.

The IHS/Markit CIPS PMI for civil engineering activity in September fell for the second month in a row. IHS Markit/CIPS stated that “bigger construction developments stayed in suspended animation” although that is not in line with the indications that the CPA has from contractors working in infrastructure. The indications we have from contractors are that large infrastructure sites are open and activity is both high and rising due to a strong pipeline of projects, programmes and frameworks as well as key clients with certainty over funding from both the public and regulated sector. However, local authority funding for smaller infrastructure projects appears to be highly constrained as is resource to procure and deal with projects. In addition, early works on new projects within other construction sectors apart from housing have been slowing.

It is worth noting that, despite continued construction recovery, IHS Markit/CIPS reported continued falls in staff numbers during September, albeit at its slowest rate for seven months, due to “releasing furloughed workers following a restructuring of their operations”, which is a concern given the furlough scheme ends this month. In addition, IHS Markit/CIPS reported falling staff numbers for the last three months and even before this, UK construction employment in 2020 Q2 was 124,534 lower than a year ago.

The Bank of England reduced its main rate initially to 0.25% in March 2020 and then to 0.1% in April, the lowest level since the Bank was established in 1694. It also introduced a near- term funding scheme allowing banks to borrow at similar rates to the Bank of England for

Interest Rates and Inflation Bank of England Base rate RPI CPI 4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5% 2015 2016 2017 2018 2019 2020

Source: Bank of England, ONS

20 up to four years with additional incentives to encourage lending to SMEs. It also returned to asset purchases or Quantitative Easing (QE), with an announced increase in the stock of asset purchases, financed by the issuance of central bank reserves, of £200 billion to a total of £645 billion and, in June, the Bank purchased a further £100 billion of government debt. Given that growth is expected to slow significantly in the light of rising unemployment, the Bank of England’s Monetary Policy Committee is likely to enact further QE and may even lower interest rates further, making them negative towards the end of 2020 or in early 2021 although further falls in the interest rate are unlikely to make any significant difference apart from acting as a signal that the Bank is doing its utmost to help stimulate growth.

Household incomes are expected to be less impacted than initially expected when the recession hit in the Spring primarily due to government measures so far to sustain incomes for employees through furloughing as well as the support for those who are self-employed. In addition, for those working from home, costs have fallen for many people due to lack of travel and daily work-related expenses. Real household disposable income is expected to only fall by 2.0% in 2020 and rise marginally in 2021.

Despite this, consumer spending is expected to fall by 9.5% this year. Households are expected to increase saving, as generally occurs during recessions, due to the impacts of risk- averse households reducing spending. The savings ratio is expected to rise from around 6.8% in 2019 to 18% in 2020 before falling back to 11% in 2021. In addition, increased working from home for many workers and avoidance of hospitality in which social distancing may be an issue is likely to suppress spending. Plus, rising unemployment towards the end of the year is likely to cause risk aversion for households.

CPI inflation is forecast to remain considerably below the 2.0% inflation target in the main scenario but remains positive as the effects of coronavirus are expected to reduce both demand and supply. The Chancellor’s ‘Eat Out to Help Out’ scheme and temporary VAT cut for the hospitality sector caused CPI inflation to slow abruptly in August. The Consumer Prices Index (CPI) 12-month rate was 0.2% in August 2020, down from 1.0% in July.

The prospect of core inflation remaining low in reaction to very weak activity leads us to forecast that the CPI measure of inflation will average just 0.5% in 2020 H2 and, overall for 2020 is expected to average just 0.8% before rising to 1.6% in 2021. This will provide a sizeable boost to household spending power but the key question will be whether households will be willing to spend or, as is expected, focus on saving.

A key element of the slowdown in inflation was due to the sharp fall in commodities prices during the economic slowdown. Most commodities fell by double-digit percentages between January 2020 and April 2020. Oil prices fell $63.6 per barrel at the start of the year to $23.3 per barrel in April but recovered to $44.3 per barrel in August and would be expected to rise to $55-$60 per barrel (excluding political impacts). The Sterling exchange rate is likely to continue to be volatile during Q4 with significant falls in Sterling expected due to politicians’ statements and speculation over a potential ‘No Deal’. A Free Trade Agreement, even only at the top level with detail to be determined and agreed later, would be expected to offset these falls. However, were a ‘No Deal’ to occur, then Sterling would be expected to fall to 1:1 against the Euro and 1:1.12 against the US Dollar.

Business investment is expected to fall sharply in both 2020 and 2021 as firms focus on near- term reductions in cost and risk. When compared with 2018, business investment increased by 1.1% in 2019 overall but it is worth noting that business investment fell by 0.2% during the final quarter of 2019 due to increased risk and uncertainty given a subsequently delayed Brexit deadline in October 2019 and a General Election in December 2019. Despite the resolution of the election and Brexit, with the latter leading the UK to enter an implementation period during which trade terms with the EU did not change, business investment fell by 0.5% between 2019 Q4 and 2020 Q1, with uncertainty regarding the potential impacts of coronavirus hitting

21 investment during March. Unsurprisingly, the largest impacts were on business investment during the second quarter of 2020, which fell by Business investment expected to 26.5% compared with 2020 Q1. This is the largest quarterly fall on record and as a reference point, fall 11. 5% as firms focus on business investment fell peak to trough by 24.2% during the 2008 global economic downturn. risk aversion and cost cutting Business investment during the second half of the year should partially recover from Q2’s nadir but, overall, business investment is expected to fall by 14% in 2020 before rising by 6% in 2021 from a COST low base as firms next year focus on returning to medium-term thinking regarding growth.

In August 2020, retail sales volumes increased by 0.8% when compared with July; this is the fourth consecutive month of growth and retail sales in August were 4.0% higher than February’s pre-pandemic level. There remained a mixed picture within the retail sales; spending for home improvements continued to rise in August as sales volumes within household goods stores increased by 9.9% when compared with pre-coronavirus February. Online retail sales fell by 2.5% in August when compared with July, but the strong growth experienced over the pandemic has meant that sales were still 46.8% higher than February’s pre-pandemic levels due to the higher proportion of households still working from home and, at this stage it appears unlikely that spending online will fall back to pre-coronavirus levels.

In terms of big-ticket item spending, the CPA uses new car registrations as a proxy variable for the improvements side of rm&i spending as it represents spending that can be delayed if necessary but also spending that occurs when households have finance available for major spending. The UK new car market declined in 2019 by 2.4%, the third consecutive annual fall according to the Society of Motor Manufacturers and Traders (SMMT). At the height of the social distancing restrictions in April, new car registrations were 97.3% lower than a year ago due to social distancing restrictions according to SMMT. By August, new car registrations had recovered sharply to only 5.8% lower than one year ago and in September were only 4.4% lower than one year earlier but, given sharp falls during the first half of 2020, year to date (January to September), new car registrations remained 33.2% lower than during the same period in 2019. Normally, car registrations tend to go in line with home improvements but, during sharp recessions, spending on new cars tends to fall sharply whilst there is a proportion of households that spend, on their home rather than move given that it is a relatively low risk area for investment in an asset given available finance. W-shaped Scenario:

• Economic activity falls in Q4

• Medium-term recovery only begins in 2021 Q1

• Consumer confidence and spending remains subdued throughout 2021

The W-shaped Scenario also assumes that recovery occurs in June and Q3 but economic activity falls in Q4. This fall is due to social distancing restrictions being tightened once again if coronavirus returns as a serious issue in Q4 either before a vaccine or if it returns in a different strain. In this scenario, activity in Q4 does not fall to levels seen in Q2 as a degree of learning from the experience of the initial restrictions is assumed in terms of a slightly higher level of business continuity. In the W-shaped Scenario, the consequent rise in unemployment, further falls in consumer confidence and spending and negative impacts on income and wealth mean that GDP only returns to pre-coronavirus levels in mid-2023, three quarters later than in the main scenario.

22 Private Housing

Since house building sites began re-opening in May, activity has focused on the build out of units already underway, supported by pent-up demand, the stamp duty holiday and the Help to Buy equity loan.

Most major house builders closed down sites from the announcement of public health measures on 23 March until mid-May. As a consequence, viewings, site visits, surveys and valuations were unable to take place and ONS output data reported that activity declined 59.3% in April. BEIS data for April showed an 86.4% fall in brick deliveries and the Mineral Products Association recorded a 94.0% fall in mortar sales volumes. The restart of activity began in May, with output rising 17.2% month-on-month. Throughout Q3, the release of pent-up demand from buyers unable to progress under lockdown, as well as stimulus from the eight-month stamp duty holiday from 8 July, was reflected in further rises in enquiries, site visits, reservations and agreed sales. Major house builders have reported that the near-term focus has primarily been on completions, moreso than starts, for units that are contractually- exchanged or reserved, or covered under the first phase of the Help to Buy equity loan, for which building must be complete by the end of February 2021.

Since lockdown was eased, house builders have reported a pent-up flow of interest, as well as strong increases in sales and reservations. Zoopla reported that in the year to September, sales agreed were 3.0% above the same period of 2019, whilst its broad measure of demand in the general housing market, based on enquiries, was 39.0% higher for the year to date. However, both are leading indicators that take around three to four months to reach transaction completion. Mortgage lending has followed suit, though, with the number of approvals for house purchase in August rising to the highest since October 2007. For the year to date, however, mortgage approvals volumes remain 20.3% lower than the same period of 2019. This suggests that the rebound in buyer activity will be unable to fully compensate for the pause in activity in Q2, particularly for completed transactions. Both Zoopla and Knight Frank anticipate that property transactions will be 15.0% lower for the full year.

Private Housing Starts and Completions Great Britain - Main Scenario

2018 2019 2020 2021 2022

Actual Actual Scenario Scenario Projection

158,371 144,371 74,965 111,192 143,332 Starts 2.8% -8.8% -48.1% 48.3% 28.9%

154,937 165,217 125,449 135,165 140,779 Completions 1.5% 6.6% -24.1% 7.7% 4.2%

34,668 35,979 28,546 31,570 34,096 Output (£m) 5.5% 3.8% -20.7% 10.6% 8.0%

20,848 20,667 17,672 20,200 21,008 RM&I Output (£m) -0.4% -0.9% -14.5% 14.3% 4.0%

Source: MHCLG, ONS, Construction Products Association

23 Beyond the initial flurry of housing market activity returning, the underlying pace of recovery will be determined by consumer sentiment, notably related to job security, and confidence to commit to large purchases and long-term mortgage repayment commitments. House builders had highlighted the uncertainty over prospects for demand beyond Summer, coinciding with the winding down of the Coronavirus Job Retention Scheme and the transition in November to the Job Support Scheme, which is narrower in coverage. This may lead to concern over redundancies or, at best, a period of weakened job security, which limits confidence for potential buyers to make decisions on major spending. Major house builders have already signalled a break in their development pipelines is likely, through withdrawal from harder-hit markets (Redrow), a reticence to commit to towers (Bellway) or replanning to split large schemes into smaller phases of investment (Barratt). Current levels of demand are expected to sustain price growth in the near-term and the ‘tick’-shaped economic recovery assumed in the main scenario is also suggestive of a limited number of forced sales and mortgage arrears, limiting the downward effects on house prices. The Royal Institution of Chartered Surveyors (RICS) residential survey from September showed that UK prices are expected to rise over the next three months, whilst Knight Frank forecasts a 2.0% nationwide increase in 2020, but falls in prime central and outer London, and Savills is forecasting a 4.0% national increase.

The stamp duty holiday is expected to help underpin demand in the housing market during Summer and Autumn, but raises concern over a drop in demand after it ends in Spring 2021, particularly as the first phase of Help to Buy ends at the same time. The Office for Budget Responsibility (OBR) judges that property transactions in England will increase by 100,000 due to the stamp duty change, but three-quarters of this will be planned purchases that have been brought forward from later in 2021. Given the uncertainty over demand in 2021, HM Treasury’s comparison of independent forecasts shows a median forecast for house prices of -0.2% in 2021 across a wide range of -4.8% to +16.9%.

The potential for falling house prices, combined with the prospect of a deteriorating labour market and one in six mortgages currently being subject to a repayment holiday has also worsened credit availability. Lenders began withdrawing high loan-to-value mortgages in June, particularly those above 85%. This also occurred during the period of lockdown, but lenders are now citing a reduced appetite to lend to those with low deposits, rather than the operational constraints that prevented surveys and valuations to process loan applications.

Lending to Individuals Total Mortgage Approvals for House Purchase (number) Remortgaging (value) 140 Total Mortgage Approvals (value) 30%

20% 120 10%

100 0%

-10% 80

-20% 60 -30%

Mortgage Approvals (000s) MortgageApprovals 40 -40%

-50% earlierLending – 3 month change on a year 20 -60%

0 -70% Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19 Jan 20 Jul 20

Source: Bank of England

24 Access to higher loan-to-value lending is particularly important for first-time buyers, who accounted for the largest volume of new mortgage lending in 2019, overtaking home movers, according to UK Finance. Zoopla’s early indicators show that demand from home movers is outpacing demand from first-time buyers in all regions and suggests that market conditions are becoming more favourable to cash-rich or equity-rich buyers, rather than those with low deposits dependent on mortgage lending. The HBF (Home Builders Federation) survey for Q2 found that mortgage availability and mortgage terms were considered the primary constraints on demand, overtaking buyer confidence for the first time in a year. The stamp duty holiday until 31 March 2021 will also reduce the stamp duty payable for those purchasing additional properties in England and Scotland. Therefore, this may lead to greater activity in the buy-to- let segment of the market that is typically important in the sale of flats off-plan.

Nevertheless, demand for new build for those with low deposits, and first-time buyers in particular, will continue to be supported by the Help to Buy equity loan. The policy has particularly supported activity outside of London and the South East and given the nationwide property price cap of £600,000, raised the proportion of houses to 82.0% of private completions in England in 2018/19, according to the MHCLG, marking the highest proportion since 2000/01. Furthermore, 73.0% of completions were for three or four-bed properties, the highest proportion on record. From April 2021, eligibility for the equity loan will be narrowed to first-time buyers and purchase prices will be subject to regional house price caps. It will remain at £600,000 for homes in London, but be set at 1.5 times the forecast regional average first-time buyer price elsewhere, ranging from £186,100 in the North East to £437,600 in the South East. House builders were already expected to respond to the narrower eligibility criteria for the second phase of Help to Buy by switching to lower-value, higher-density flats. Under the main scenario of wider demand slowing in 2021, this becomes more likely and may involve the re-planning of sites that are near to the start of works. This was reported to have already begun in the South East with large sites being split into smaller plots so that starts on units being built for completion in 2021 and beyond will be more closely aligned to changes in Help to Buy demand. This may be at odds with any potential shift in preferences for larger properties with outdoor space that may emerge if a structural change in working practices occurs.

In June, the Help to Buy scheme in Scotland was extended for an additional 12 months to March 2022, with £55 million of funding that is expected to be used on 2,000 properties.

Private Housing Completions by Type (England)

100 Houses Flats 90

80

70

60

50

40

30

Property Completions by Type % Type Property Completions by 20

10

0 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

Source: MHCLG

25 The annual average over the last four years has been 2,273. The Scottish government is also operating a £150 million pilot of a First Home Fund, offering interest-free loans of up to £25,000 to first-time buyers, secured against a new or existing home. This is close to the average equity loan of £25,500 advanced by the Scottish government for new build homes. The Welsh version of the Help to Buy scheme was also extended for 12 months to March 2022, although the price cap will be reduced from £300,000 to £250,000 for this phase. Any further extension is contingent on funding allocations as part of the UK Budget. The Scottish and Welsh stamp duty holiday equivalents will also end on 31 March 2021. Unlike the changes in England and Scotland, there will be no change to the tax payable on purchases of second or additional properties in Wales.

Longer-term government policies to increase housing supply are still geared towards the ambition of 300,000 net additional homes per year by the mid-2020s, although a significant shortfall is now inevitable. The largest of the government’s schemes is the £5.5 billion Housing Infrastructure Fund, which aims to unblock sites held up by missing infrastructure funding. £4.0 billion had been allocated by March 2020. Given the longer lead times for large sites that are led by infrastructure, and with a reluctance to start large, new developments in the near-term, the house building activity from these measures will peak beyond the forecast period. The government has also consulted on its ‘First Homes’ policy for new homes to be sold at a 30% discount to first-time buyers. A pilot was announced in the Prime Minister’s speech in June, and is expected to deliver 1,500 homes. It will be funded through the new Affordable Homes Programme starting from April 2021, and primarily delivered through Section 106 agreements. Household income caps will match those for shared ownership: £80,000 in England and £90,000 in London. The previous Starter Homes policy that was first announced in 2014 and pledged a 20% discount failed to deliver any homes, Mortgage interest rates: however. The Prime Minister also announced plans 2-year fixed rate at to widen the scope of commercial buildings that can be converted into residential units without planning 95% LTV: 3.9% permission. Nevertheless, the role of such changes % 2-year fixed rate at of use in the broader measure of net housing supply has diminished over the last few years. It accounted 90% LTV: 2.8% for 17.1% of net supply at peak in 2016/17 and 12.1% in the most recent data for 2018/19. In volume terms, 2-year fixed rate at this represents a 21.3% decline. However, combined 75% LTV: 1.6% with the difficulties faced by the retail sector, any increase in vacant units may lead to a rise in changes Source: Bank of England, data for August of use to housing as demand picks up more strongly moving into 2022.

The Build to Rent sector covers new build developments for private rent that aim to generate a long-term return on investment and is typically financed by institutional investors. It has been a niche growth area of private house building in recent years and according to the British Property Federation in 2020 Q2, there had been a cumulative 47,754 Build to Rent units completed, 12,896 of which in the four quarters to Q2. During a time of heightened uncertainty that impacts investments, there is a risk that sentiment is affected if vacancy periods are prolonged by a drop in demand related to falls in employment and income, especially in London where rents are particularly high and which has suffered from declines in employment within the services and hospitality sector. Given the long-term nature of the investment and returns, however, institutional investment in Build to Rent has the potential to provide some uplift to house building activity, although this accounts for a small proportion of the 5.3 million privately-rented housing stock in Great Britain. The number of Build to Rent developments in the planning system rose strongly for the regions

26 in Q2. In Birmingham, Moda Living submitted plans for its second Build to Rent tower in Birmingham at the end of March and a 48-storey tower had plans submitted in August. In Leeds, Galliford Try submitted plans for a 350-flat development in June and was awarded contracts for a £105 million scheme in the city in August.

House builder sentiment had begun to weaken throughout 2019, with private housing starts in Great Britain declining by 8.8% compared to 2018. In 2020 Q2, seasonally adjusted starts in England fell 59.4% compared to a year earlier and reached the lowest level since 2009 Q1. Completions and output displayed similar contractions, of 62.1% and 52.6%, respectively, but are expected to recover more quickly than starts as house builders focus on building out developments already underway amid an increase in reservations and sales agreed before and immediately after lockdown restrictions. House builders tend to adapt to changes in market conditions quickly, whilst cash flow considerations, the February 2021 build completion deadline for Help to Buy phase one eligibility and the March 2021 end of the stamp duty holiday will remain the primary drivers in the near-term. New starts are likely to recover less sharply, however, as confidence to start new sites and developments will be highly dependent on the UK economic recovery, particularly in terms of the labour market, job security and incomes, as well as appetite for mortgage lending at a time when policies providing support for demand are set to be reduced or withdrawn in early 2021.

The classification of private and public house building has increasingly been blurred by social housing providers acquiring units from private house builders and joint ventures between social and private house builders. Furthermore, in April, the ONS began classifying housing association house building as private sector output. This implies a structural break in the ONS split of housing output data, but given that this also coincides with the sharp declines in output due to coronavirus, the impact is currently unclear. The methodology for the MHCLG quarterly completions was also changed in April. Completions volumes are now modelled from the affordable housing supply statistics, rather than building control data, to capture the unit’s final tenure more accurately. Combining private and public housing, total housing starts are forecast to fall 47.2% in 2020 and rise 45.8% in 2021 to reach 140,000.

Affordability House Price/Earnings Ratio First Time Buyers’ 6.0 Affordability 55

5.5 50 5.0

4.5 45

4.0 Ratio

40 3.5

3.0 Mortgage as a % of Income Payment 35 2.5

2.0 30 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 2014 Q3 2015 Q1 2015 Q3 2016 Q1 2016 Q3 2017 Q1 2017 Q3 2018 Q1 2018 Q3 2019 Q1 2019 Q3 2020 Q1

Source: Nationwide

27 W-shaped Scenario:

• Completions are restricted in the final months of Help to Buy phase 1 • Output and completions fall away again in 2020 Q4 and 2021 Q1 • Further falls in household incomes

A renewed implementation of strict social distancing measures in Winter 2020 would ease the pace of work on site and may restrict visits to sites and show homes. There is also likely to be a more limited fiscal response, leading to concern over household incomes and job security. Financial worries would be expected to reduce large purchases and long-term mortgage commitments, despite record-low interest rates. This would also coincide with the build completion date of 28 February for the first phase of Help to Buy scheme, which is open to second-steppers as well as first-time buyers and operates a nationwide price cap of £600,000. With a reduction in incentives at a time of constrained demand, it seems unavoidable that the government would need to extend the deadline as a means of spurring recovery.

Private Housing Output - Main Scenario

45,000

40,000 3.8% 5.5% 8.1% 8.0% 35,000 13.2% 10.6% 30,000 9.8% 27.8% -20.7% 25,000 9.8% 20,000

15,000

£ million – 2016 constant prices 10,000

5,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

28 Private Housing RM&I

Pent-up demand drove activity through the Summer, whilst increased property transactions during the stamp duty holiday are expected to continue providing support to the recovery. Weaker consumer confidence related to job security and incomes will temper demand from the second half of 2021, however.

Core activity in the private housing rm&i sector is basic repairs and maintenance, which cannot be delayed indefinitely. It is the improvements element of rm&i that accounts for the largest proportion of activity and drives the variance in the sector. In turn, improvements are dependent on property transactions, consumer spending on big-ticket items and the wealth, savings and finance options that enable activity. Site activity resumed quickly from mid-May and continued accelerating during Summer, reflecting catch-up and pent-up demand on projects that were paused or unable to start during lockdown. An increase in home-based working has also, anecdotally, led to higher improvements spending, particularly for garden and outdoor work. Once existing projects complete, however, uncertainty over near-term employment and incomes is likely to reduce consumer confidence, whilst early signs of a precautionary savings stance may also divert households further away from discretionary spending in the near-term.

Property transactions are a key determinant of activity in the sector because improvements to an existing property tend to be made with a typical lag of 6-9 months after purchase. The housing market was largely inactive from late March to mid-May and, consequently, transactions volumes fell 47.7% in Q2. Although transactions subsequently increased, given the lag between agreeing a sale and the completion of the transaction, in August they were still 17.7% below February’s pre-coronavirus levels. National governments introduced a stamp duty holiday between July and 31 March, eliminating duty on properties under £500,000 in England and £250,000 in Scotland and reducing it on properties over this threshold for the purchase of additional properties. In Wales, the raising of the threshold to £250,000 was restricted to main properties only. The signs of rises in sales agreed in July and August are likely to complete several months later so the related increase in rm&i investment is expected to be felt from the end of 2020. The Office for Budget Responsibility (OBR) estimates that the stamp duty holiday will add 100,000 transactions in 2020/21, but as three-quarters of these are assumed to be brought forward from 2021/22, a dip in transactions is expected thereafter.

During periods of uncertainty, consumer confidence to make large, discretionary purchases becomes impaired, particularly when it is accompanied by concerns over job security and the stability of incomes. The GfK consumer confidence index was -25 in September, rising only slightly throughout Q3 and from its trough of -34 in April and May. The largest fall initially in April was in the major purchase index, which declined by 50 points to -52 and although it had improved to -21 in September, this compares to +3 in September 2019. The CPA also uses new private car registrations as a proxy for big-ticket purchases. According to the SMMT, registrations fell 1.7% in August and 1.1% in September, although this follows an 11.3% rise in July. Before coronavirus, registrations had fallen for three consecutive years. Growth in total UK retail sales volumes was already beginning to slow at the end of 2019 and early 2020 and in Q2, sales volumes were 9.5% lower than the previous quarter. In line with the reopening of in-store retail, sales volumes increased in each month from May, with the largest gains in household goods stores. In August, sales in the category were 9.9% higher than in February, pre-coronavirus, suggesting that homeowners are prioritising spending on home improvements or focusing their available finance on investing in their home as an

29 asset. This category covers hardware, paints, furniture and electrical appliances so is broader than construction, however. It is also important to note that any DIY work carried out by homeowners rather than contractors will not be recorded as construction work, as that is recorded by a survey of building contractors.

In terms of funding streams for rm&i work, economic uncertainty typically prompts households to increase precautionary savings instead of spending. After the recession and financial crisis, the household saving ratio rose to a 14-year high of 11.2% in 2010, and declined gradually to 5.6% in 2017 and the lowest since 1971, as savings were used to finance consumer spending that drove the economic recovery. There were signs of renewed caution among consumers in 2019 and early 2020, despite the return of real wage growth since early 2018, as the saving ratio increased to 6.2% in 2018 and 7.7% in 2019 Q4. It rose to 9.6% in 2020 Q1, which includes only one week of coronavirus lockdown, and a record 29.1% in Q2. This is likely to combine precautionary saving and a record 23.6% fall in household consumption that outpaced a 2.3% fall in real disposable incomes. The Bank of England reported that household deposits in banks rose by a record £25.6 billion in May, although this had fallen to £5.2 billion in August, in line with the six-month average to February 2020. Similarly, this will reflect lower spending due to store closures as well as precautionary saving. The process of furloughing workers at 80% of pay between 19 March and 31 July, topped up to 100% of pay by some employers, and the rising employer contributions required to the scheme between August and October, is also likely to affect household preferences for saving and spending, and particularly on big-ticket home improvements that may require additional borrowing or spending of savings. In August, gross consumer borrowing was still 16.5% lower than February. As well as reduced consumer appetite for taking on loans, the availability of credit is also a key consideration for financing large home improvements projects. Lenders may also take a risk-averse approach to new borrowing given labour market instability, volatility in wages and a broad take-up of repayment holidays for consumer loans and mortgages, although there has been little change in interest rates for consumer credit. UK Finance reported that at peak in June, one in six UK mortgages was subject to a repayment deferral with the number halving in August. There were also 1.7 million deferrals for personal loan and credit card repayments in Q2.

On the flipside, rising bank deposits and a higher savings ratio, as well as furloughed workers and homeworking, may also drive households to invest in the value of their home through home improvements. Anecdotally, this has centred on outdoor work and landscaping under social distancing measures, but there is a potential for homeowners to reassess indoor layouts and use of space for a longer-term shift towards homeworking. This may particularly be the case for households headed by people aged 30-49 who, according to the ONS’s Family

Private Housing RM&I Output - Main Scenario

28,000

24,000 6.3% 5.5% 14.3% 4.0% 20,000 8.7% 3.0% 2.9% -0.4% -0.9% 16,000 -14.5%

12,000

£ million - 2016 Constant Prices 8,000

4,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

30 Spending survey, overtook the 50-64 year-old age category to spend the most on home alterations and improvements in 2018/19. As with rises in builders’ merchant sales, there is also likely to be an element of DIY in this activity, particularly among furloughed workers and, therefore, it will not be classed in construction data.

With the near-term outlook shaped by developments in the housing market and consumer confidence, there are several other longer-term drivers that will also have an impact on rm&i work. First, the steady increase in take-up of the Help to Buy equity loan, means that new build accounts for an increasing proportion of property transactions and is likely to have weakened the link between property transactions and spending on rm&i. In 2019, new build accounted for 14.6% of property transactions in England, rising from 13.3% in 2018 and 8.8% in 2014. The end of the first phase of scheme in March 2021, as well as the lower availability of higher loan-to-value mortgages, may skew demand further to new build, particularly for first-time buyers.

Second, the next phase of the Energy Company Obligation programme, ECO3, began in October 2018 and runs to March 2022 and aims to encourage energy-efficient retrofit measures on the existing housing stock. The programme is valued at around £640 million per year and focuses on fuel poverty. This is lower than the £870 million per year spent under ECO previously and shifts focus from energy efficiency. Given its smaller scope, activity under the scheme is likely to be lower than its predecessor. Between October 2018 and July 2020, an average of 17,231 measures were installed each month under ECO3. During the transition period, under ECO: Help to Heat between April 2017 and October 2018, the number of measures installed averaged 18,151 per month, compared to a monthly average of 41,375 measures over the previous four-year ECO programme.

On 8 July, the Chancellor announced a £2 billion Green Homes Grant of up to £5,000 per household, or £10,000 for low-income households, for energy efficiency improvements to be completed by the end of March 2021. It primarily covers retrofit measures for insulation and low carbon heating systems, as well as some glazing upgrades when fitted alongside these primary measures. It is intended to cover 600,000 households but there is concern, that the length of the programme may be too short or that poor implementation or shortages of eligible contractors may limit take-up, as has been the case with previous government schemes for energy efficient retrofit. The English Housing Survey for 2018/19 showed that 70.9% of owner-occupied homes and 67.4% of those privately rented have an EPC rating below C. Between the announcement of the Grant in July and its introduction in October, there is likely to have been a hiatus in eligible categories of retrofit spending whilst households delay work to see if they can use the Green Homes Grant to do work that they were already intending to do. Anecdotally, this has centred around glazing and gas boiler replacements. In addition, both the Green Homes Grant and ECO cover insulation measures for low-income households and whilst there is potential for a stream of additional

31 work, there is also the risk that activity is merely displaced between the schemes. Under ECO3, insulation accounts for 28.9% of all measures installed.

Since April 2018, the Minimum Energy Efficiency Standards Regulations require a minimum EPC rating of E to apply to new tenancies for properties rented out in the private sector and applied to all tenancies from April 2020. According to the English Housing Survey for 2018/19, 256,000 private rental properties have an EPC rating of F or G, representing 5.3% of the housing stock of that tenure. This suggests a stream of potential work in the sector, but with the proportion of F and G-rated properties at 6.3% in the previous year’s survey, progress is still slow. Furthermore, the question still remains over how effectively the regulations can be monitored and enforced by local authorities.

There is also a stream of urgent cladding remediation work on privately-owned residential towers that are taller than 18 metres. At the end of August, the MHCLG reported that there were 209 private sector buildings with cladding systems that are unlikely to meet current Building Regulations. Work has completed on only 32 of these, despite an initial deadline of 31 December 2019. Cladding has been removed on 24, remediation has started on 65 but is yet to start on 88. A National Audit Office report in June laid out MHCLG’s estimations that the peak of private sector remediation work would be in the second half of 2021. There is a £200 million Private Sector Remediation Fund in place for cases where building owners have failed to act. This compares to an allocation of £400 million for 155 towers in the public housing sector. 96 privately-owned buildings are eligible for the fund, and since bidding was opened in September, 32 have been approved for full funding and 23 have been approved for pre-contract support such as surveys and design. Of the buildings that fall outside the scope of the fund, the developer or freeholder is funding remediation on 88 buildings and works on 21 buildings are covered by a building warranty. Nine months beyond the original remediation deadline, funding liability was still being determined for four buildings. Budget 2020 announced a further £1.0 billion fund for the remediation of non-ACM combustible cladding, to be shared between private and public sector residential towers. It will cover all types of combustible cladding and cover costs which would otherwise be passed on to leaseholders. The government has estimated this to be the case for 1,700 residential towers taller than 18 metres. However, there had been 2,975 applications to the fund at the closing date and with the funding only available for 2020/21, an extension appears highly likely.

Momentum in output growth from the sector had begun to weaken in 2018, reflecting the lagged effect of falls in real wages and housing market uncertainty hindering big-ticket spending. Following declines of 0.4% in 2018 and 0.9% in 2019, output fell 11.2% year-on-year in 2020 Q1, and by 51.1% year-on-year in Q2, reflecting the full impact of coronavirus lockdown. According to the ONS data, activity picked up from June, reflecting the return to site to finish projects that had been paused, or start those which had been delayed. However, ONS data recorded that output was still 21.0% lower than a year ago in July, in contrast to manufacturers’ and merchants’ sales

32 that suggested a stronger pickup and it is likely that any survivor bias in the ONS survey sample could New build be underestimating the recovery as well as the extent of the falls as a % of in activity in April. Beyond the property catch-up, demand is split between transactions: demographics and types of projects. Demand for contracted-out improvements projects is likely to 14.6% be maintained for those with higher incomes and more time at home 8.8% to undertake and supervise work, whereas demand is likely to weaken for those who are reticent over big-ticket spending due to concerns 2014 2019 over job security. Similarly, changes to floor space and outdoor space are likely to be in demand, whilst demand for replacement glazing or gas boilers is likely to be constrained by narrower than expected coverage on the Green Homes Grant scheme. Low numbers of tradespeople registered with Trustmark and MCS may also limit work from the Green Homes Grant.

Consumer confidence is expected to improve in 2021 in line with an improvement in economic performance, a gradual increase in discretionary improvements spending and short- term government policy support to provide impetus to the recovery. The key determinants of output moving in line with the forecast will be the strength of the labour market and job security, particularly once the furlough scheme ends and is replaced by the narrower Job Support Scheme. Uncertainty over house price growth once demand loses support of the stamp duty holiday from 2021 Q2 also adds a downside risk. In the main scenario, output is expected to fall 14.5% in 2020 and rise 14.3% in 2021. A rise of 4.0% projected in 2022 will take output 1.6% above 2019 levels. W-shaped Scenario:

• Further weakening in activity and demand in 2020 Q4 and 2021 Q1

• Households take a precautionary savings stance beyond 2020

A slowdown or contraction in GDP in 2020 Q4 would derail a nascent recovery in consumer confidence. The prospect of further job losses and reduced household incomes would prompt households to continue their precautionary savings stance and cut non-essential spending in the first half of 2021. This would also keep property transactions low and raise the risk of falling house prices. Whilst these factors are unlikely to affect basic repairs and essential maintenance, they would have a large impact on improvements work and non-essential maintenance, especially in the near-term.

33 Public Housing

Detail on the new five-year Affordable Homes Programme from April 2021 gives some certainty to the sector, but a dependence on market-linked products and a pipeline of repair and maintenance work taking priority are likely to limit growth in new build activity.

Public housing activity has become increasingly reliant on market-linked tenures and partnerships between private and public sector house builders have meant the sector is increasingly exposed to the cyclicality of the wider housing market. In addition, a broadening focus on fire safety and remediation has seen capital expenditure priorities shift from new build to rm&i work. Following lockdown measures that were introduced on 23 March, housing associations closed sites and restricted construction activity to essential r&m work only and, consequently, in Q2, ONS data showed that output declined 56.9% compared to a year earlier. However, this is likely to underestimate the extent of the fall, due to issues that the ONS has encountered in surveying contractors, whilst the government estimates that work on 53,000 units was affected.

The ONS also began to reclassify housing association activity as private sector output from April, which makes interpretation of the data difficult in the near-term. Site activity restarted more slowly than in the private sector, occurring more widely from June and in July, output was 81.3% of February’s precoronavirus levels. In the near-term, the stamp duty holiday (and equivalents in Scotland and Wales) in place until 31 March 2021 would be expected to support demand for shared ownership and market sale properties, although this is balanced by a tightening in mortgage lending criteria. Affordable rental tenures will provide a buffer, however. In addition, private house builders were already increasing joint ventures and partnerships with housing associations to insulate against a slowing housing market in 2019 and this would also be expected to increase as private sector demand takes time to recover.

Public Housing Starts and Completions Great Britain - Main Scenario

2018 2019 2020 2021 2022

Actual Actual Scenario Scenario Projection

38,280 37,160 20,845 28,478 33,625 Starts 7.6% -2.9% -43.9% 36.6% 18.1%

36,397 41,550 29,808 30,317 30,334 Completions 6.6% 14.2% -28.3% 1.7% 0.1%

5,593 6,482 5,153 5,630 5,912 Output (£m) -2.7% 15.9% -20.5% 9.3% 5.0%

7,499 7,554 6,339 8,120 8,282 RM&I Output (£m) -3.9% 0.7% -16.1% 28.1% 2.0%

Source: MHCLG, ONS, Construction Products Association

34 The main driver of activity in the public housing sector is funding through the Affordable Homes Programme in Shared ownership completions England. as a % of affordable completions: The current Shared Ownership and Affordable Homes Programme 2016/17: 21% (SOAHP) began in April 2016 and was scheduled to end in March 2021. 2017/18: 23% Given the pause in work in Q2, the government announced in July that 2018/19: social housing providers will now be 33% able to use SOAHP funding for starts up until March 2023. A change in 2019/20: 36% government policy towards prioritising home ownership has reduced the provision of affordable and social rental tenures and increased delivery of market-linked housing such as shared ownership and private sale. This is set to continue under the Affordable Homes Programme which follows, covering 2021 to 2026. Funding for the five-year programme was set at £12.2 billion at Budget 2020, but the launch of the programme in September confirmed that £700 million was being assigned to the current SOAHP. The remaining £11.5 billion is expected to provide 180,000 homes over the duration of the programme, split between £4.0 billion for London and £7.5 billion for the rest of England. Half of the homes delivered with this funding are intended to be for affordable home ownership, with the minimum initial share being reduced to 10% of the purchase price, from 25% currently. Given the focus on this tenure in the current SOAHP, affordable home ownership has increased as a proportion of starts and completions since the programme began, averaging 28.7% of total affordable completions in England between 2016/17 and 2019/20. In 2019/20 it became the largest tenure for starts but even so, still accounted for 36.2% of the total, significantly below the government’s intentions for the new programme.

The sector will also be keen to avoid frequent changes in policy that beset the SOAHP. The £11.5 billion of funding for the new programme compares to £9.0 billion for the five-year SOAHP, but is lower on a per-year basis than the £8.9 billion committed to the three-year Affordable Homes Programme 2008-2011. It also does not take into account the shifting focus towards remediation and fire safety work, which the National Housing Federation has warned may affect development plans directly or through reduced interest cover ratios, which, in turn, affects housing associations’ capacity to borrow to supplement grant funding for new build. Furthermore, housing associations have raised concern that viability and cross-subsidisation of rental tenures will be affected by the reduced 10% initial stake for shared ownership purchases under the new programme, as well as the switch to allowing further ‘staircasing’ share purchases in increments of 1% (10% currently). This is likely to be of particular concern in higher-value areas such as London and the South East, as well as lower-value areas such as the North East. Prior to this announcement, plans for affordable home ownership development were declining, with the Regulator of Social Housing’s quarterly survey for Q2 showing that forecasts for affordable home ownership completions over the next 18 months were 2.1% lower than forecasts made in December, pre-coronavirus.

The focus on shared ownership links the public housing sector more closely to the general housing market. This is particularly the case in London, where 47.1% of affordable starts in 2019/20 were reported as affordable home ownership tenures. Slowing sales have been highlighted as an issue for housing associations over the last few years. Registered providers have reported that the stock of unsold shared ownership units in England has risen since 2017,

35 whilst in 2020 Q2, margins on shared ownership properties fell to the lowest since 2013.

Since 2014, housing associations have also increased open market operations at a time of nationwide house price growth that allowed the cross-subsidisation of affordable operations. For providers in England (excluding London), open market units represented 35.6% of starts at peak in 2015/16 and although that proportion fell to 25.3% in 2019/20, surveys of providers show plans to increase the number of units for open market over the near-term, although projections made in Q2 decreased 13.9% from those made in December. In London, where the general housing market has slowed and prices fell between March 2018 and August 2019, open market starts by housing associations accounted for 17.3% of total starts in 2019/20. This was a four-year high but is still significantly below the peak of 39.4% in 2015/16. Providers had already begun to report falls in surpluses due to reduced sales income and rising r&m costs, leading some large housing associations in the South East to pause starts on new developments, in addition to now taking a cautious approach over new starts in the pipeline as a result of the coronavirus impact. The 2020 Q1 survey of registered providers showed that the forecast investment in new housing supply over the next 12 months was 22.5% lower than the forecast made in 2019 Q4. This had improved in the Q2 survey, but remained 8.3% lower than forecast in 2019 Q4 as housing associations factored in delays, increased fire safety spending and uncertainty over the economic recovery leading to caution over arrears and falling rents.

The government has announced a series of strategic partnerships between Homes England and housing associations in three waves since July 2018, allocating £1.7 billion to 23 housing associations to build an additional 39,431 homes above their existing development programmes by March 2022, although Homes England has acknowledged this deadline may now need to be extended. For strategic partnerships agreed from 2021, one-quarter of the units delivered must be built using modern methods of construction. Back in March 2019, the Spring Statement assigned £3.0 billion to government underwriting Affordable Homes Guarantees, intended to encourage low-interest rate lending to housing associations to support 30,000 new homes. Unlike previous versions of the scheme, in which half the loan funding was provided by the European Investment Bank (EIB), the tender was launched in November 2019 for domestic delivery partners. The guarantees are expected to launch in late 2020. Some housing associations have questioned whether higher levels of direct grant would be more effective than loans during a period when cross-subsidy from open market sales is diminishing and the risk of rent arrears as a result of coronavirus could reduce revenues.

For local authorities, which account for less than 10.0% of public housing completions in Great Britain, constraints on borrowing for housing delivery in England and Wales were removed in October 2018, and this is expected to provide the largest impetus to public house building over the medium and long-term. The government expected this to increase local authority house building to 10,000 units per year. In the last ten years, housing completions by local authorities have averaged 1,674 per year in England, whilst local planning and development

36 departments have seen severe budget cuts since 2010. The growth from this, therefore, will be beyond the forecast period. Local authorities have also raised concern that with pauses to house building and a slow recovery, Right to Buy receipts may not be spent on replacement homes within the current three-year deadline, despite a six-month extension announced by the government in June. Receipts from Right to Buy sales fell 40.5% in Q2 as transactions were paused and lags between purchase decisions and transaction completions suggest levels will remain low in Q3.

In Scotland, the Affordable Housing Supply Programme (AHSP) runs between 2016/17 and 2020/21, with £3.3 billion in grant funding to build 50,000 homes, 35,000 of which are intended to be for social rent. Annual allocations rose each year from £592 million spent in 2017/18, to £843 million in the single-year Scottish Budget for 2020/21 and a one-year agreement for 2021/22 allocated £300 million. The Scottish First Minister confirmed on 7 April that new house building should not continue under lockdown measures resulting in a sharp decrease in output, starts and completions activity through April, May and June. Subsequently, the government warned that its 50,000 affordable homes target would be unlikely to be met. Scottish government figures showed that between 2016/17 and 2019/20, there were 34,791 affordable homes delivered, suggesting that the target may not have been met anyway. In addition, as highlighted by Audit Scotland, concerns over the lack of confirmed funding beyond 2021/22 will limit plans for adding to the recovery pipeline. In Wales, a five- year rent-setting policy was implemented from April 2020 and the draft budget for 2020/21 allocated £175 million in capital funding for housing, of which £48 million is for social housing grant and £50 million is loans to fund housing development. Like Scotland, plans for beyond this are yet to be confirmed until the Comprehensive Spending Review, which is likely to hold back starts from the end of 2020.

The increased exposure to the general housing market had already started to have an impact on housing association development plans in regions of the country experiencing housing market slowdowns in 2019, notably London and the South East. As a consequence, starts decreased by 2.9% in 2019, whilst new orders fell in 2017, 2018 and 2019 and completions reached a record high in 2019. Activity on site resumed widely from 2020 Q3, but given a large proportion of work was halted in Q2, in the main scenario output is expected to decline 20.5% for the whole of 2020. Whilst demand for shared ownership and market sale homes is expected to receive a short-term boost by the stamp duty holiday, weak sentiment related to employment and incomes is expected to emerge as a constraint in 2021. Construction

Public Housing Output - Main Scenario

7,000 15.9% 32.9% 16.5% 5.0% 6,000 9.3% -2.7% 5,000 6.1% -16.2% -20.5% -4.8% 4,000

3,000

2,000 £ million - 2016 Constant Prices 1,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

37 on units of affordable tenures already funded under the current SOAHP is expected to accelerate relatively quickly, and new orders rose 9.7% in the first half of 2020. Overall, output is expected to rise by 9.3% in 2021. Starts are likely to be hindered more severely by business planning following details and the funding prospectus for the next Affordable Homes Programme, as well as the redirection of resources towards a broad scope of fire safety work as a priority.

Joint ventures and partnerships between housing associations and private sector house builders increased from 2019 and such partnerships would be expected to increase in the near-term, to insulate against the slow recovery in demand projected for the private market. However, given the crossovers between private and public provision, in particular partnerships of this nature and the acquisition of affordable units by housing associations from private developers during the building process, ONS statistical classification of private and public sector activity may also change across starts, output and completions. From April, the methodology for MHCLG house building data was changed to source completions from affordable housing supply data, rather than building control. However, in April, the ONS also began classifying housing association house building as private sector output. This implies a structural break in the ONS split of housing output data, but given that this also coincides with the sharp declines in output due to the impacts of the social distancing restrictions imposed following the pandemic, the impact of this change is currently unclear. As with all sectors, the CPA is forecasting activity on the ground rather than matching the ONS data. Starts, output and completions are all expected to be below the high levels recorded in 2019 throughout the forecast period. W-shaped Scenario:

• A weakening in the housing market undermines a focus on market-linked products

• Activity to complete at the end of the SOAHP is reduced

The fast-changing nature of virus-related restrictions will limit how housing associations can change the tenure mix of developments under construction to respond to changes in the housing market in a W-shaped economic recovery scenario. Any constraints on activity in 2020 Q4 and into 2021 Q1 will coincide with when work would have been accelerating to complete units that are to receive funding under the SOAHP. Beyond that, development by housing associations is dependent on grant funding and tenure preferences from government, but would also be expected to be bolstered by the private sector insulating their levels of activity with social housing partnerships.

38 Public Housing RM&I

A pipeline of urgent cladding remediation and fire safety work on social housing towers is expected to drive a sharp acceleration in sector output in 2021 well beyond pre-COVID-19 (coronavirus) levels of output.

Since the Grenfell Tower fire in June 2017, the main focus of sector activity has been urgent cladding remediation and fire safety works, which have been prioritised over routine rm&i and in some cases, new build. Despite this work being classed as critical and permitted to continue during lockdown, monthly data from the Ministry of Housing, Communities and Local Government (MHCLG) showed that work paused on two-thirds of these projects between 23 March and July, with activity back on all sites in August. Outside of cladding remediation, if social distancing cannot be maintained on site, housing associations are prioritising essential maintenance. In Q2, the Regulator of Social Housing’s quarterly survey found that housing associations’ r&m expenditure decreased 59.0% due to a reduced ability to carry out work.

The near-term drivers of social housing rm&i activity remain largely unchanged, despite the uncertain economic backdrop. The focus on urgent cladding work, as the pipeline extends beyond ACM systems, is expected to reverse the long-term downward trend in sector output. The sector reached its peak in 2010 Q2, but output had fallen 19.9% by 2019 Q1. This reflects reductions in capital investment by the MHCLG as part of the government’s austerity drive, the 1.0% annual cut in social rents in place between April 2016 and March 2020, and work under the Decent Homes Standard. In addition, publicly-funded schemes for energy- efficiency improvements on the public housing stock have either been heavily revised (CERT), cancelled (the Green Deal) or significantly narrowed in coverage (ECO, to ECO: Help to Heat and ECO3).

The urgent remediation work that needed to be prioritised after the Grenfell Tower fire in June 2017 has seen public sector rm&i resources redirected to address fire safety measures for high-rise social housing towers, leading to the first annual rise in output in four years in

Public Housing RM&I Output

10,000

3.6% 1.3% 2.0% 28.1% 8,000 0.7% -3.5% -5.0% -2.8% -3.9%

6,000 -16.1%

4,000

£ million - 2016 Constant Prices 2,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

39 2019. The main scenario continues to assume that remediation will need to be ACM cladding remediation has carried out as a priority on the public housing stock but is assumed to displace completed on other planned repairs and non-essential maintenance activity given the financial constraints and extensions to the 54% of government’s previous 31 December social housing 2019 completion deadline. The government has assigned £400 million towers to fund the removal and replacement of cladding by housing associations and compared to 15% local authorities in England, which has in the private sector been diverted from the existing Shared Ownership and Affordable Homes Programme (SOAHP) funding pot. The MHCLG’s Building Safety Programme statistics indicated that at the end of August, there were 155 social housing buildings taller than 18 metres that have cladding unlikely to meet current Building Regulations. Remediation work has completed on 83 of these and is underway on a further 63 buildings, with nine yet to start work. 141 out of the towers affected will use £270 million from the £400 million government fund, with the remainder funded through a combination of existing funds and litigation action. Progress in the public sector has been faster than in the private sector, where only 15.0% of affected towers have had ACM cladding remediation work completed.

The Regulator of Social Housing has identified stock condition as a major issue for social housing providers, namely identifying potential issues related to fire safety and determining the investment that will be required to remediate. Government financial support has now been extended to cover the remediation of other external wall systems beyond aluminium composite material and in Budget 2020, £1.0 billion was allocated to cover private and social housing. The full prospectus was published in May and confirmed that social housing providers would only be allowed to apply where remediation costs threatened financial viability in the case of housing associations or the Housing Revenue Account for local authorities. The deadline for registration for the fund was 31 July, despite the National Audit Office cautioning that data collection on externals wall systems was still underway. In late 2019, the G15 group of the largest housing associations in Greater London estimated that remediating their full stock of 1,145 high-rise buildings with external wall systems would cost £6.9 billion. The National Housing Federation has estimated that for all housing associations, the cost could run above £10 billion. The Regulator also highlighted that cost inflation resulting from the increased demand for rm&i work could outpace growth in rental revenues under the new rent-setting agreement (CPI inflation +1.0%) that began in April 2020.

Repair and maintenance spending by housing associations for the 12 months to June 2021 is forecast at £2.3 billion, according to the Regulator of Social Housing’s survey for Q2. This is 27.8% above their expenditure in the 12 months to June 2020, although this includes the reduced level of expenditure in Q2. Most providers reported that delayed work was being rescheduled for the next 12 months. However, a pipeline dominated by cladding work has raised concern over the availability of labour and plant, which may be worsened by a backlog of work that has built up due to social distancing restrictions.

For local authorities, in Wales, the government confirmed it was maintaining its £108 million annual funding allocation for 2020/21 for social landlords to ensure the Welsh Housing Quality Standard. In August, a £9.5 million Optimised Retrofit Programme was announced to

40 fund energy efficiency measures in up to 1,000 homes owned by registered providers and councils. In turn, this forms part of the Welsh Government’s £45m Innovative Housing Programme announced earlier this year, which focuses on building new carbon-neutral homes using offsite methods. The Scottish budget for 2020/21 has allocated £137.1 million to expenditure on alleviating fuel poverty and improving energy efficiency, rising from £119.6 million in 2019/20. Funding beyond this will not be determined until national allocations are set by central government’s Comprehensive Spending Review.

More generally, social housing rm&i activity has been affected by a reduction in energy efficiency retrofit. Following the cancellation of the Green Deal in July 2015, a narrowing in the scope of the Energy Companies Obligation (ECO) has also driven a reduction in the number of measures installed. For ECO, the current scheme, ECO3, started in October 2018 and will run until March 2022. The focus of the scheme has shifted from improving energy efficiency under the first two phases of the scheme to reducing fuel poverty. The annual funding for the scheme has also been cut from £870 million to £640 million. Between its introduction and July 2020, the number of measures installed under ECO3 has averaged 17,231 per month, below the 41,375 monthly average for ECO1 and ECO2 between January 2013 and March 2017 and 18,151 measures on the ECO: Help to Heat transition. Reflecting the pause in work due to coronavirus, the number of measures installed in April and May decreased 53.4% compared to February and March, but returned to pre-coronavirus levels in June and July. The government addressed the potential for new energy efficiency measures in its social housing green paper that was released in August 2018 and is still consulting on proposals in the Clean Growth Strategy to improve social housing properties to a minimum EPC rating of C by 2030. If implemented, this is unlikely to take full effect during the forecast period, however. Currently, 44.1% of the English social housing stock is below a C rating, according to the English Housing Survey for 2018/19. This has improved from 47.8% in the 2017/18 survey.

In the Summer Economic Update for 2020, the Chancellor announced funding of £50 million for a pilot of the Social Housing Decarbonisation Fund but no further detail has been provided. This scheme was included in the Conservative Party manifesto in 2019, costed at £3.8 billion over ten years. In August, the Chancellor confirmed that the £2 billion Green Homes Grant scheme would also be open to social housing landlords. Both the Green Homes Grant and ECO cover insulation measures and whilst there is potential for a stream of additional work, there is also the risk that activity is displaced between the schemes. Under ECO3, insulation accounts for 28.9% of all measures installed.

The Energy Efficiency Standard for Social Housing in Scotland targets a minimum EPC rating of D by 2025. The Scottish government has made available a £3.9 million funding round across 2019/20 and 2020/21 to help social landlords deliver energy efficiency and heat decarbonisation programmes within their existing stock. This is an extension of a £3.5 million fund in place for 2018/19 and 2019/20. Only 6.0% of the 597,000 social sector dwellings in Scotland had an EPC rating below D in 2018, compared to 17.0% of owner-occupied

41 properties and 26.0% of properties in the private rental sector.

The public housing stock is likely to continue to be diminished through the increased uptake of Right to Buy in England. A £200 million, two-year pilot to extend the Right to Buy to housing association tenants began in the West Midlands in July 2018. A low take-up has been reported and although the scheme has been extended, a new deadline has not been determined. If rolled out nationwide and extended to include shared ownership as proposed, this would further diminish the public housing stock. However, a nationwide rollout appears unlikely given the lack of success of the initial trial and, in particular, given the levels of uncertainty in the housing market. Expanding the policy to the Right to Shared Ownership announced in September would accelerate this trend. Social and affordable rental tenants will be able to buy a 10% to 75% of their home, but would assume all responsibility for repairs and maintenance after ten years.

Sector output rose 0.7% in 2019, balanced between a 3.1% decrease in the first half of the year and a 4.6% increase in the second half, which is likely to reflect increased remediation work ahead of the initial end-year deadline set by the government. This continued with a 9.0% rise in 2020 Q1. However, output fell 42.4% in Q2 given that approximately one-quarter of cladding remediation projects were still paused at the end of June. Activity returned to all sites in August, suggesting that quarterly output volumes will return to 2019 levels in Q4. Although this represents a 16.1% fall for the whole of 2020, output is expected to continue increasing throughout 2021 and 2022, given the pipeline of urgent work. W-shaped Scenario:

• Catch-up on critical safety work drives 2021 activity

A second pause in work in 2020 Q4 due to a tightening of social distancing measures would again delay fire safety work that has been deemed a priority. This would then lead to catch- up from 2021 Q1, assuming labour and materials capacity is available. This work will add to the growing pipeline in the sector as the remediation focus expands to additional types of cladding.

42 Public Non-housing

After falling by an estimated 8.5% in 2020, output is expected to exceed pre- coronavirus levels in 2021, as work on large-scale hospital projects is accompanied by a pickup in activity under school building programmes in England, Wales and Scotland.

Sector output is largely determined by capital funding Public Non-housing Output by Sub-sector 2019 (%) allocated to departmental

Entertainment budgets by central government 8% and, therefore, is less affected by uncertainties than other sectors that depend on private sector business and

Other Education investor confidence. Despite 23% 54% this, output in the sector has declined in every year since 2017, as work on the second phase of the Priority School Building Programme (PSBP) has

Health been slow to move through 15% the pipeline and large hospital Source: ONS projects reached completion. This downward trend is set to continue in 2020, as the outbreak of COVID-19 (coronavirus) and implementation of a nationwide lockdown from late March to mid-May led to pauses in construction work, notably in Scotland, during the first half of the year. Official data show that sector output declined 8.2% year-on-year in H1, which is significantly better than the falls in most other construction sectors due to accelerated work on a few healthcare projects and new temporary field hospitals that were set up in response to the pandemic.

Public Non-housing Output - Main Scenario

18,000

16,000

14,000

0.5% 4.3% 12,000 0.9% 4.0% -2.6% 9.5% 10,000 -9.2% -11.0% -2.5% 8,000 -8.5%

6,000

£ million - 2016 Constant Prices 4,000

2,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p s = scenario p = projection Source: ONS, Construction Products Association

43 In addition, many schools were able to bring forward refurbishment works whilst pupils were not in class. Since social distancing restrictions eased, activity has partially recovered but activity in the second half of the year is still expected to be lower than one year ago as the focus will remain on completing existing projects that were halted during lockdown. As a result, the main scenario estimates output falling 8.5% to £8.7 billion in 2020, the lowest level since 2002. Output is then expected to return to growth and accelerate to 9.5% in 2021, as work under previously halted school building programmes in Scotland and Wales is accompanied by projects coming through the PSBP2 pipeline and a pick- up in activity on large-scale projects in the health sub-sector, including the two former Carillion hospitals, the Midland Metropolitan and the Royal Liverpool.

In the Summer Economic Update 2020, the government confirmed a £1.0 billion Public Sector Decarbonisation Scheme that will offer grants to public sector bodies, including schools and hospitals, to fund both energy efficiency and low carbon heat upgrades over the next year. The 2022 Commwealth Games in Birmingham is also expected to provide a pipeline of work, but the construction programme has been signficantly scaled back after plans to build a new £350 million Athletes’ Village were abandoned due to delays that were exacerbated by the coronavirus pandemic. Looking forward to 2022, output is projected to rise 4.0% due to a few hospital projects entering the pipeline, which is expected to partially offset approved works completing on the 2022 Commonwealth Games and the two former PFI hospital schemes.

In the publicly-funded education sub-sector, output is estimated to contract 10.9% in 2020, even though activity has been picking up during the second half of the year due to catch-up and work completing on delayed school projects for the new academic year after nationwide lockdown restrictions were eased in May. As PSBP2 projects come through the pipeline and work accelerates under school building programmes in Scotland and Wales, growth is then expected to recover to 10.7% in 2021, however, output is not expected to return to pre-coronavirus levels until 2022, when the sub-sector sector would see a further expansion of 10.1%.

The primary driver of activity continues to be the Priority School Building Programme (PSBP), the £2.0 billion second phase of which is currently underway to rebuild and refurbish individual blocks at 277 schools by 2025. This is significantly later than the original completion of date of December 2021 as progress on the second phase of the PSBP has been slow, with less than half of schools now thought to be completed. In July, the Infrastructure and Projects Authority (IPA) published its 2020 annual report on major projects, which revealed that the PSBP2 was rated amber (successful delivery feasible but significant issues exist) in 2019/20. This was an improvement from the amber/red rating (successful delivery in doubt) recorded in the previous two financial years. The annual report also stated that 55 school buildings were completed in the year ending September 2019, whilst 115 new contracts were signed over the same period. Moreover, the IPA reported that 90% of school projects are expected to be handed over by the end of 2021, whilst the remaining 10% are to be completed after December 2021, with five projects due for completion after December 2022. Overall, the programme is now scheduled for completion in 2025, four years later than initially planned.

44 The government’s focus on scaling up the adoption of modern methods of construction for publicly-funded projects may also be delaying the procurement process.

In addition, a programme of new free schools, which are publicly-funded but operate outside of local authority control, has been favoured by government since 2010. The Free Schools Programme has a budget of £1.4 billion per year between 2016/17 and 2020/21 to open 500 new schools by the end of the period. Although there have been no updates on the overall progress of the programme, the National Infrastructure and Construction Procurement Pipeline published in June revealed that contracts for 45 schemes are expected to be awarded between 2020/21 Q3 and 2021/22 Q3. However, it is not clear whether these are delayed schemes or part of a new programme altogether. Whilst some of the premises for free schools are refurbishments of existing buildings, the National Audit Office has highlighted that the low availability of sites is a key constraint on the new build element. It reported that the Department for Education will need to spend £2.5 billion to purchase land for the free schools in the current pipeline to 2022, but bidding has exceeded official valuations by 60% on 20 sites so far. The Public Accounts Committee has also cited concerns over value for money with the Free Schools Programme.

The Department for Education has a capital budget of £4.5 billion for 2020/21, which is marginally lower than the £4.6 billion allocated for 2019/20. Although capital budgets from 2021/22 to 2024/25 are yet to be set out in the Spending Review this Autumn, Budget 2020 announced £1.5 billion of capital investment to refurbish further education colleges over the next five years. £200 million of this has been allocated to more than 180 colleges to repair and refurbish buildings and campuses in this financial year. Furthermore, in June, the government announced a new ten-year school rebuilding programme starting from 2020/21, with £1.0 billion of funding committed for the first 50 projects. These projects are to be confirmed this Autumn, and construction on the first sites is due to begin in September 2021. Further details of the new programme will also be set out at the next Spending Review.

In Scotland, activity has been supported by the £1.8 billion Schools for the Future programme, which aims to build or refurbish over 117 schools by early 2021. Although this is later than the initial March 2020 completion date, reflecting the impact of the strict lockdown measures imposed by the Scottish Government from late March to May, this should help bridge the hiatus previously anticipated between the end of the programme and the start of the new £1.0 billion Learning Estate Investment Programme that aims to rebuild or refurbish schools from 2021. In September 2019, the Scottish Government announced funding of between £220 million and £275 million for 11 projects that includes the replacement of 26 schools across the country, as part of the first phase of the programme. These projects are expected to be completed in time for the new term in August 2024. A second phase of new school projects is expected to be announced by the end of this year. In Wales, the £2.3 billion second phase of Learning Estate the Government’s 21st Century Schools and Colleges that aims to support an estimated Investment 200 projects to rebuild and refurbish £1bn Programme aims to schools and colleges started in April 2019 and will last until 2024. The funding will benefit around be split between capital allocations from the Welsh government and £500 million 50,000 through its mutual investment model, a new pupils across form of public-private partnership. So far, more than £650 million has been invested Scotland and in its final Budget for 2020/21, the Welsh government announced that £208

45 million of capital funding will be made available through the education infrastructure budget. Despite this, progress under the programme is likely to have been hindered by the coronavirus pandemic and imposition of physical distancing measures by the Welsh Government in late March 2020. W-shaped Scenario:

• Work on existing schools building programmes paused amid a second wave of infections and tightening of social distancing restrictions

If a second wave of the coronavirus outbreak emerges in 2020 Q4 and containment measures are reintroduced, activity under existing school building programmes is likely to be paused, particularly in Scotland and Wales. A resumption of previously halted school projects and the start of future school building programmes to schedule would underpin a strong recovery in 2021 and 2022.

Growth prospects for health, which covers publicly-funded work on hospitals, health centres and clinics remains upbeat, as it is one of the few sub- sectors in which construction demand has been positively affected by the outbreak of COVID-19 (coronavirus) due to a temporary surge in demand for emergency healthcare facilities to treat patients affected by the virus. As the coronavirus took hold in March 2020, the government announced the conversion of commercial and other sites into temporary field hospitals across the UK to help ease pressure on existing hospitals and provide additional capacity to the NHS during the pandemic. Although work on these hospitals has been completed, near-term activity will be supported by works on existing projects in the pipeline, including Stage 1 of the £485 million Royal Sussex County Hospital (known as the 3Ts redevelopment programme), the £136 million proton beam treatment centre in London and the new £350 million Llanfrechra Grange Hospital in Gwent, which are all due for completion this Autumn/Winter although delays to the former cannot be dismissed due to the impact of the coronavirus. The £150 million redevelopment of Springfield Hospital that comprises two new mental health facilities in South London is also underway for completion in 2022, but the project is experiencing a short delay after works were temporarily paused by the social distancing restrictions.

46 The Midland Metropolitan Hospital and the Royal Liverpool Hospital, two former PFI Carillion contracts, are the largest projects in the current pipeline. Main contruction and remediation works on the £663 million Midland Metropolitan Hospital project are currently underway for completion in 2022, nearly four years late. Meanwhile, outstanding works on the £724 million Royal Liverpool Hospital (orginally budgeted at £350 million) include installing additional steelwork and concrete across three floors to reinforce the building’s structure, repeating the interior fit-out across the three floors and replacing the non-compliant cladding on the hospital. Although the former involves repair and maintenance work, it is likely to have been packaged along with the new build element and will, consequently, be classified in this sub-sector rather than public non-housing r&m. Board papers published by the Liverpool University Hospitals NHS Foundation Trust in May revealed that capital spending on the hospital is estimated to rise 17.5% to £154 million in 2020/21. In June, the procurement process for replacing the aluminium composite materials (ACM) cladding on the hospital was suspended as it will now be carried out by the original manufacturer over a 20-month period. Overall, the hospital is now expected to be completed in 2022, five years later than initially planned. Further delays and cost overruns on both hospital projects, however, cannot be ruled out especially in light of the pandemic.

Although activity will also be supported by large projects re-entering the pipeline, concerns have risen over their progress. This includes plans to build a new £400 million science campus and headquarters in Harlow for the National Institute for Health Protection (formerly Public Health England), which now risks being scrapped and the Baird Family Hospital and Anchor Centre in Aberdeen, where main construction work is now expected to start in January 2021, subject to the full business case being approved by the Scottish government. The cost is now estimated at £233 million, £70 million higher than the original budget of £164 million due to a number of factors including the impact of the coronavirus. The Anchor Centre is now anticipated to open in Spring 2023 and the Baird Family Hospital in Winter 2023. The Scottish Budget for 2017/18 also confirmed £200 million for the expansion of the Golden Jubilee Hospital in Glasgow over a ten-year period. The first phase involved the construction of a new eye centre, which is now due to open later than initially planned in October, whilst the second phase of expansion to provide additional capacity for orthopaedic surgery, general surgery and endoscopy is due for completion in 2022 but further delays cannot be disregarded given the impact of the coronavirus.

In August 2019, the government announced £850 million for 20 hospital upgrades that will cover new blocks, as well as IT and equipment upgrades over a five-year period. Although there is little detail on the funding allocation for 2020/21, planned projects range from £12.7 million to extend and refurbish critical care units at the Croydon University Hospital to £99.9 million to build a new women’s and children’s hospital in Government has committed Truro. Furthermore, in September 2019, the government pledged to deliver 40 new hospitals across the country by 2030 but details of the newly-named Health to build six new Infrastructure Plan hospital building £2.7bn programme show that this includes the hospitals four major hospital projects already under construction, whilst four are by 2025 subject to final approval. Six projects have also been allocated funding of £2.7 billion as part of the first phase of the programme between 2020 and 2025.

47 Leeds Teaching Hospitals NHS Trust is one of the six to receive £650 million funding for a new adult and children’s hospital. Preliminary works are currently underway and construction is due to be completed in 2023. £700 million has also been earmarked for Barts Health NHS Trust’s plan to redevelop Whipps Cross Hospital in North East London, whilst Epsom and St Helier University Hospitals NHS Trust is set to benefit from £500 million of funding to build a new emergency care hospital in Sutton and modernise existing hospitals. Previously in August, the Princess Alexandra Hospital NHS Trust, also in the first phase of the programme, stated that the delivery of its new build project in Harlow risks being delayed due to challenges in finding a suitable contractor, as well as insufficient skills and capability. In October 2020, the government announced a further £3.7 billion for 25 hospitals as part of the second phase of the Health Infrastructure Plan (2025-2030) and added one more hospital project to the programme.

In Budget 2020, the Department of Health and Social Care (DHSC) was allocated £8.2 billion for capital expenditure in 2020/21. This is higher than the £7.0 billion previously announced at the 2019 Spending Review and £1.1 billion higher than the allocation for 2019/20, partly as a result of £683 million of additional funding to allow NHS Trusts to invest in capital projects such as estate refurbishments and building maintenance. Despite this, a report published by the National Audit Office in January 2020 revealed that since 2014/15 the DHSC has transferred a total of £4.3 billion from its capital budget to its revenue budget as it prioritised day-to-day spending over longer-term investment in buildings and other assets and, for 2019/20, it planned to reallocate £0.5 billion. Furthermore, it stated that the DHSC underspent its capital budget by a total of £2.7 billion between 2010/11 and 2018/19.

The NHS smaller works framework, the £4.0 billion ProCure22, began in October 2016 and will continue to provide a stream of work in the near-term. Since its start date, 105 major works schemes and 34 small works packages have started under ProCure22, at a value of £3.9 billion. The current framework was due to expire in September but was extended by 12 months in response to the coronavirus pandemic, delaying the launch of the new seven- year ProCure2020 framework, worth £20.0 billion. The new framework is set to support the delivery of the Health Infrastructure Plan, which incorporates the previously mentioned plan to build 40 new hospitals across the UK.

Overall, output in the sub-sector is estimated to increase 5.5% in 2020 under the main scenario, reflecting the development of temporary coronavirus field hospitals across the UK in the first half of the year that largely involved fit-out work and the conversion of suitable sites, as well as construction work accelerating on a few existing projects to help support the National Health Service during the pandemic. Thereafter, output is expected to increase 12.1% in 2021, driven by large-scale health projects already in the pipeline, notably the Midland Metropolitan and the Royal Liverpool Hospitals. As work on these projects reach completion and is partially offset by a few hospital projects entering the pipeline, output is then projected to fall by 8.9% in 2022.

48 W-shaped Scenario:

• Activity halts amid a second wave of infections

• ProCure22 extended further

A second wave of coronavirus infections in 2020 Q4 is unlikely to boost demand for healthcare facilities to the same extent that was seen during the first outbreak, reducing the need for developing further field hospitals and given potential pauses elsewhere in the sub-sector, modest growth would be expected for the whole of 2020. In March 2020, the Department of Health and Social Care extended the current ProCure22 framework by 12 months in response to the coronavirus. A further extension to the existing framework to cover a second outbreak, is likely to push the start date of the new ProCure2020 framework beyond 2021.

Public non-housing other covers construction work on publicly-funded facilities such as prisons and defence projects. Output in the sub-sector has fallen in every quarter since 2018 Q2, as major military projects reached completion, including those under the Army Basing Programme (ABP), which was set up in May 2013 to provide accommodation and new facilities for Service families by 2020. Although the programme is due for completion this year, near- term defence activity will be supported by work under the RAF Lossiemouth Development Programme (LDP), which includes a £75 million contract to resurface the runway and airfield operating surfaces by the end of this year and a £20 million contract to refurbish the existing hangar and construct new technical and storage facilities over a two-year period, starting from late Summer. Furthermore, work to build a maintenance unit, new hangars and storage facilities at RAF Lakenheath, worth £160 million, is currently underway but anecdotal evidence suggests that the project is running behind schedule and over budget. In Budget 2020, the Ministry of Defence was allocated £10.6 billion for capital investment in 2020/21, which is marginally higher than the £10.5 billion allocated for 2019/20. Capital budgets beyond 2020/21 are yet to be set out in the Comprehensive Spending Review this Autumn.

In terms of prison projects in the Ministry of Justice construction pipeline, activity will be supported by the £1.3 billion Prison Estate Transformation Programme (PETP), which now aims to deliver 3,566 new prison places by 2023/24, against an original target of 10,000 new- for-old prison places by 2020. So far, only 206 new places have been built. The remaining 3,360 places will be delivered at new builds in Wellingborough and Glen Parva. Construction on both the £253 million HMP Wellingborough in Northamptonshire (completion in 2021) and the £170 million Glen Parva prison in Leicestershire (completion in 2023) is currently underway, however, the cost of the latter project has risen £116 million to £286 million due to inflation and additional ground works. In Spending Round 2019, the government increased the size of the PETP to £2.5 billion to cover existing projects, although plans for many have either been delayed or cancelled, and committed to create an additional 10,000 prison places, on top of the 3,360 already being delivered, which brings back the original 2020 target. 6,500 of the 10,000 additional places will be delivered through the construction of four new prisons over the next six years. This includes Full Sutton in Yorkshire, which has already received planning

49 permission for a £91 million 1,440-capacity prison by 2024, whilst work is underway to identify locations for a further prison in the North West of England and two in the South East (the latter revised from previous plans to build one new prison in the South East and one in South Wales). Meanwhile, the Ministry of Justice’s programme to increase the capacity of the prison estate through the provision of 2,000 temporary accommodations units is also underway. In April, the Ministry announced work to install 500 temporary single-occupancy cells across six prisons to help reduce the spread of the coronavirus and in July, £63 million of funding was announced for 1,000 prison places. There is little detail on the programme’s timeline, however.

In Scotland, the government abandoned plans to build five community prisons for women in June 2018 and pledged to build five new residential centres instead, and whilst these represent small volumes of work, it signals a direction of policy away from prison sentencing towards community sentences in an effort to reduce the size of the prison population that may weaken sector prospects in the longer-term. Activity in Scotland will be supported by the Scottish Prison Service (SPS) Estate Development Programme, which includes the construction of a £54 million national women’s prison at HMP Cornton Vale and the development of two of the five community-based custody units for women in Glasgow and Dundee by the end of 2022, as well as the delayed and over budget HMP Highland redevelopment project, where work is now expected to start in 2021 at the earliest. Further delays to these projects, however, are likely given the impact of the pandemic. Although there are two large prison projects in the procurement pipeline, HMP Glasgow and HMP Greenock, work on both prisons is expected to occur beyond the forecast period.

In terms of public office buildings, the £1.0 billion Government Hubs programme aims to reorganise public sector offices into 20 regional hubs by the end of this parliament. The first round saw the creation of 14 office hubs across the UK and for the second round, the government has announced the development of three new hubs. Although work on two of these hubs, in Birmingham and Peterborough, is underway for completion in 2021, delays are expected due to the pandemic. Meanwhile, ground works on the Croydon hub are expected to start before the end of this year with main construction starting in April 2021. The Northern Estate Programme, which has an estimated cost of £1.4 to £1.6 billion and includes the refurbishment of buildings and the construction of a temporary House of Commons chamber will also support activity over the medium-term. Although some preparatory works have been carried out, this is likely to have been captured in the public housing r&m sector. Main construction work was due to commence this year, subject to planning approval, and complete in the mid-2020s, in line with the expected start date of the restoration and renewal of the Palace of Westminster. However, the Palace of Westminster project is currently under review given the extensive cost and increase in government debt resulting from its coronavirus mitigation programme.

Overall, in the main scenario, sub-sector output is estimated to contract 8.7% in 2020, reflecting the impact of the coronavirus outbreak on activity in the first half of the year, notably in Scotland, where all justice and custodial construction work paused, as well as the completion of the Army Basing Programme. Output is then expected to return to growth and increase 2.8% in 2021 as construction activity ramps up on previously paused projects, followed by a further 4.7% rise in 2022. W-shaped Scenario:

• Prison projects paused

If social distancing measures are reintroduced in 2020 Q4 amid a second wave of the coronavirus outbreak, work to redevelop or build new prisons under both the English and Scottish prison estate programmes is likely to be paused again, whilst plans for future prison projects could be delayed.

50 Public Non-housing R&M

Despite the urgent need to address the condition of the NHS, school and prison estates, public non-housing repair and maintenance (r&m) output is expected to decline in 2020, as although resources are redirected towards essential r&m works linked to the coronavirus, the focus remains on restarting and catching-up on new build.

Output in the public non-housing repair and maintenance (r&m) sector consists of basic repairs and maintenance carried out on schools, hospitals, prisons and other public buildings. Basic repairs and maintenance cannot be cancelled or postponed significantly, which has helped keep output less volatile than in public non-housing new build, in spite of cuts to departmental funding since 2010. Furthermore, essential repairs and maintenance of hospitals, schools and other public services that were able to take place under social distancing guidelines in England and Wales during the COVID-19 (coronavirus) lockdown period from late March to mid-May will also help restrict the extent of falls compared to new build. In Scotland, only essential repairs on health facilities or repurposing of facilities for coronavirus assistance were allowed to take place, however.

For school buildings, an average of £1.5 billion of funding was allocated each year between 2015/16 and 2019/20 to help improve and maintain the condition of schools. For 2020/21, the £1.5 billion includes £800 million for local authorities, large multi-academy trusts and academy sponsors to maintain and improve their schools, and £434 million through the Condition Improvement Fund (CIF) for 1,476 projects at 1,243 academies, sixth-form colleges and non- diocesan voluntary aided schools. Furthermore, in June, the government announced £560 million of additional condition funding for school repairs and upgrades this year. £180 million of this has been earmarked for 580 school building projects at academies, sixth form colleges and voluntary aided schools in England to repair and improve facilities. It also allows for a small number of expansion projects to increase school capacity. The remaining £360 million has been allocated to local authorities, larger multi-academy trusts and large voluntary aided school bodies to spend on improving the condition of their schools. This seeks to address

Public Non-Housing R&M Output - Main Scenario

7,000

2.8% 6,000 6.3% 0.0% 6.0% 5.4% 2.6% 5,000 -12.0% -2.1% -4.6% -8.5% 4,000

3,000

2,000 £ million - 2016 Constant Prices

1,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

51 previous concerns over the condition of the school estate, including the Department for Education’s (DfE) own estimates that the cost to return schools to satisfactory conditions is likely to have doubled between 2015/16 and 2020/21. Moreover, in December 2019, preliminary figures from the DfE’s school condition data collection programme (collected between 2017 and 2019) revealed that from a total of 21,796 schools investigated in England, 3,731 require immediate repair, whilst 1,313 had elements that were given the worst possible condition rating of D, defined as life expired and/or serious risk of imminent failure.

The Ministry of Housing, Communities and Local Government (MHCLG) has identified ten public non-residential high-rise buildings (over 18 metres) that have failed large-scale wall system tests in England. The data breakdown shows that one is a school building and nine are health buildings. Data from August showed that remediation has completed on four and started on three, with three waiting to commence. Given that remediation work of high-rise buildings is deemed critical to public safety, building safety improvements continued during the March-May lockdown period within official social distancing guidelines, although over half of residential remediation was paused during April. Pauses in activity over cladding liability issues on the PFI-funded Papworth Hospital in Cambridge and the originally PFI-funded Royal Liverpool and Midland Metropolitan Hospitals, highlight the potential issues for public non- housing buildings, in addition to the high-profile examples in the housing sector. While the government has allocated £1.6 billion of funding for cladding remediation, it is only available for high-rise buildings in the residential sector. Meanwhile, please note that the repair and maintenance work on the Royal Liverpool Hospital is likely to be incorporated in a broader package including new build works and, consequently, will most likely be classified in the public non-housing health sub-sector.

In Budget 2020, the Department of Health and Social Care was allocated £8.2 billion for capital expenditure in 117 NHS Trusts in England 2020/21. This is higher than the £7.0 billion previously announced at the have been allocated 2019 Spending Review and £1.1 billion £300m higher than the allocation for 2019/20, UPGRADING partly as a result of £683 million of additional funding to allow NHS Trusts to invest in capital projects such as estate refurbishments and building to upgrade A&E facilities maintenance. In June, the government allocated £1.5 billion of funding for hospital maintenance, eradicating mental health dormitories, enabling hospital building and improving A&E capacity this year. Of this, £300 million has been assigned to 117 NHS Trusts to upgrade their A&E facilities across England in time for the Winter. These projects are expected to be completed by the start of 2021. This, however, is unlikely to fully address the NHS’s estate maintenance backlog, which currently stands at £6.5 billion, of which £1.1 billion is classified as high risk and requiring immediate attention. Furthermore, the National Audit Office stated that the top 20 NHS providers account for 45% of all backlog maintenance.

Budget 2020 revealed that the Ministry of Justice’s capital expenditure limit for 2020/21 will be £0.7 billion. This is higher than the £0.6 billion previously set out at the 2019 Spending Round and higher than the £0.5 billion allocated for 2019/20. In June, the government allocated £83 million from the capital budget for maintenance of prisons and youth offender facilities this year and in July, announced £63 million in additional maintenance in its Summer Economic Update. Despite this, the cost to improve the condition of the current prison estate has

52 continued to increase and HM Prison & Probation Service (HMPPS) estimates that £916 million is needed to address its backlog of major capital works.

The Government Hubs Programme aims to reduce the government estate from around 800 buildings to 200 by 2023 by creating shared regional hubs across government departments. The programme is expected to save approximately £2.5 billion over 10 years. Since 2010, the government estate has been reduced by 28.0% with 94.0% of this resulting from the disposal of public sector office space. Further reductions in the size of the government estate are expected to exert a downward impact on r&m activity in the sector over the longer-term. Although capital spending across key government departments is expected to increase in the current financial year, output is expected to fall 8.5% to a record low of £4.7 billion in 2020 under the main scenario, as resources are switched towards critical repair and maintenance work that support frontline services during the coronavirus pandemic. The decline also reflects a shift in focus away from routine r&m towards urgent fire safety remediation on high-rise hospital buildings. A modest rebound of 5.4% is then expected in 2021, followed by growth of 2.6% in 2022, which does not take the level of output back to pre-coronavirus levels. W-shaped Scenario:

• Central government and local authority funding switched to focus on coronavirus-related work

If a national lockdown emerges in 2020 Q4, councils and central government are likely to shift funding profiles once again to focus on critical repair and maintenance work linked to the pandemic. A catch-up in routine r&m work, alongside greater focus on safety remediation work on high-rise hospital buildings is then expected to support a recovery from 2021.

53 Commercial

Disruption related to COVID-19 (coronavirus) will exacerbate the existing near- term downward trends occurring in the commercial construction sector given that demand in the largest sub-sectors of offices, in-store retail and leisure is likely to be the hardest hit by public health restrictions that also limit the recovery in 2021.

As work was paused on sites in response to coronavirus Commercial Output by Sub-sector 2019 (%) social distancing measures from the end of March, commercial Entertainment output fell 33.4% in the second 29% quarter, including a 37.6% fall in April, according to the ONS, Education 16% although this is likely to be an Retail 13% underestimate (see Overview). Other Activity on site resumed 27% Health 4% more strongly from June and July, when output rose 25.5% Garages & Misc 7% and 14.8%, respectively, but Offices remained 12.2% below the

31% Source: ONS pre-coronavirus from February due to ongoing social distancing on site. Some sub-sectors such as offices and retail were already forecast to see declines in output in 2020 in previous forecasts. For the former this is due to economic and political uncertainty around Brexit stalling investment decision-making on large projects and resulting in falls in new orders and a gap in the pipeline of projects. For the latter, it is a rising cost base and demand for retail space has been redirected to logistics, distribution and storage facilities over the long-term, linked to the structural shift within the retail industry towards

Commercial Output - Main Scenario

40,000

35,000 6.0% 8.0% 30,000 2.5% 6.7% 0.9% 4.0% -6.7% 5.6% 25,000 -1.8%

20,000 -18.2%

15,000

10,000 £ million - 2016 Constant Prices

5,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p s = scenario p = projection Source: ONS, Construction Products Association

54 e-commerce operations that is affecting high street and shopping centre retail most severely. Despite stores reopening, these impacts are likely to intensify, particularly given uncertainty around the strength of the economic recovery and the financial toll on high street and in-store retail.

Leisure and entertainment is the sub- sector that has displayed the strongest growth in recent years, despite the climate of uncertainty holding back developer confidence elsewhere in the commercial sector. It is now the second-largest sub-sector after offices and accounted for 28.6% of total sector output in 2019. Driving its growth, hotel chains were benefiting from an increase in domestic and business visitors, as well as a move towards hotel or leisure-led redevelopments of existing shopping centres or store premises vacated as part of CVAs or administration. For example, vacant units left by the closure of department stores in town and city centres have been approved for conversion to hotels by different providers in Exeter, Lincoln, Guildford and Hull.

In 2019, two of the top ten largest commercial contract awards were for hotels: the £270 million refurbishment of the Hilton Park Lane and a £137 million new aparthotel on Tower Bridge Road. The redevelopments of retail districts in Leeds and Bolton are also set to be led by hotel and leisure facilities. However, as tourism has been reduced to a standstill by coronavirus and the industry is preparing for a longer period of low volumes, hotel chains have already begun cost-cutting measures and planned expansions for the near-term may be delayed or cancelled. Nevertheless, expectations that travel and tourism will recover beyond 2021 have led to new projects entering the pipeline. A £230 million luxury hotel in Marylebone, London secured development finance in June, based on tourism recovering by its opening in 2023. Similarly, five hotel projects over £50 million have been awarded contracts since April, with completion dates from 2022.

The commercial sector is dependent on investor and consumer confidence and output in the commercial sector had already fallen for six consecutive quarters between 2018 Q1 and 2019 Q2, reflecting Brexit-related uncertainty stalling investment in offices towers that typically drive activity in the largest sub-sector of commercial construction. This is particularly the case for office projects in London and whilst major cities such as Manchester, Birmingham, Leeds and Sheffield have seen strong levels of activity, they are unlikely to offset the falls and overall dominance of London in the sub-sector, particularly given a narrowing pipeline of projects for late 2020 and 2021 and a reassessment of working practices leading to lower leasing and investment activity. This combines with the near-term financial woes of the high street, with cash flow severely affected by large-scale and lengthy shutdowns for retail and, notably, leisure and entertainment, and the longer-term structural shift in retail due to the rising role of e-commerce and associated demand for distribution and storage facilities over traditional retail space. Niche areas of growth exist in retail, such as discount supermarket chains and multi-use redevelopments of town centres, but these are unlikely to alter the downward trajectory of the sub-sector, particularly as confidence may take a while to return.

55 Universities across the country are also in the midst of multi-year investments in new buildings for teaching and research, with the largest-value projects for student accommodation. In a similar vein, reflecting uncertainty over student numbers, particularly from international students paying higher fees, capital spending programmes were paused in Q2 and confidence to proceed with projects may be dented.

Commercial new orders fell in 2017 and 2018 but rose 1.4% in 2019, with falls in offices and education offset by rises in entertainment and leisure, health and retail (albeit from a low base). Pauses in existing work that occurred during Q2 are likely to lengthen the time between new orders and construction output occurring in most sub-sectors, and more so given that new orders fell 46.3% in Q2. As a result, total commercial output is estimated to fall 18.2% in 2020. A slow recovery in offices as occupier demands are reassessed and financial concerns for retail, leisure and hotels will restrict growth in 2021 to 5.6%, leaving output 13.6% lower than in 2019.

Offices is the largest commercial sub-sector, accounting for 30.7% of commercial output, and investor confidence towards construction Companies with activity and starts is highly reactive to prevailing economic conditions. 1,000+ employees Since 2016, new orders and activity before coronavirus: rising to have been adversely affected by Brexit-related uncertainty since of employees 39% the Referendum in June 2016. In 7% response to the coronavirus, work worked 3+ days post- on site was then paused by most at home lockdown contractors at the end of March and early April, before resuming in late April and May, which will lead to a volatile growth profile Source: Savills in each quarter of 2020 and delay completions by three to six months. Throughout late 2020 and 2021, the fundamental drivers of sub-sector activity will remain mixed, but largely dependent on overall macroeconomic conditions.

Prior to the coronavirus, the UK offices market was experiencing strong demand for high- profile existing space and low availability of new space across UK cities. The coronavirus lockdown starting on 23 March led to a pause in activity on a large number of sites in the opening weeks of Q2 and investments and transactions declined significantly. Savills recorded investment volumes in the City of London at the lowest level since 1996, whilst volumes in the West End were 91.0% below the five-year average. This is likely to reflect both the closure of commercial property operations, as well as a reassessment of investor decisions, particularly given uncertainty over economic conditions, as well as any potential change in occupiers’ space requirements. Since lockdown conditions have been eased, commercial estate agents have reported that decision-making on offices transactions and leases has lengthened, particularly for larger floor space.

In London, starts activity was buoyed from the end of 2019 by the definitive General Election result. The Deloitte London Crane Survey reported that new starts in the capital reached 5.0 million sq. ft. in the six months to March 2020, marking the highest volume on record in the survey, including the towers at 40 Leadenhall and 8 Bishopsgate. Combined with other large schemes that were awarded contracts in 2019, such as the £400 million Paddington Cube and the £400 million 10 Bank Street in Canary Wharf, this took floor space under construction to 15.3 million sq. ft., 41.0% above the long-term average of the survey. For projects of this size,

56 delays relating to coronavirus stoppages and social distancing on site are likely to be the longest. Savills reported that in Central London, 6.0 million sq. ft. of space is now due to complete in 2020, down from 7.2 million sq. ft. pre- coronavirus disruption, as illustrated by 1 Triton Square and 100 Liverpool Street, which were due to complete at the end of 2020 but have now been pushed back six months and into 2021. Delays to projects already underway may also push back dates for new starts, such as the first phase of the £1.0 billion Bankside Yards regeneration that was approved in February. The first phase is led by an 18-floor tower providing 230,000 sq. ft. of office space. Even before the economic and confidence shock from coronavirus, investors were placing a high importance on securing tenants before and during construction and if near-term caution continues from investors, pre- letting is likely to be crucial to projects that have been approved but are yet to start. Knight Frank, Savills and Deloitte have all noted a low proportion of pre-lets for projects in the pipeline for 2021 onwards, particularly in Central London.

Outside of London, activity levels were also buoyant before activity paused in March, with constrained availability across regional cities. Although this has led to rising rents for space, it has not led to an increase speculative investment, with pre-letting a similarly high importance as in London. According to JLL, there is 2.5 million sq. ft. of speculative office space under construction in Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester and 1.2 million sq. ft. of this is due to complete in 2020. In turn, half of this is in Manchester. Investor confidence for speculative developments completing beyond 2022 appears to have been unaffected, however. The second phase of the £400 million Kirkstall Forge development in Leeds was approved during lockdown, comprising 200,000 sq. ft. of offices and ground floor mixed-use, as was the 200,000 sq. ft. 4 Angel Square in Manchester, neither of which are pre-let.

The biggest question for offices investment revolves around whether the near-term shift to home-working will become a longer-term structural change in working patterns. Large employers have recently announced that working from home policies will be in place until 2021, whilst only 15% of the 120,000 workers in Canary Wharf are estimated to have returned to office working so far. Potential changes to office working mean agents and landlords are also expecting an increase in vacancy rates in 2021 as existing tenants release space that no longer meets requirements for lower occupancy. Similarly, Knight Frank has reported that new enquiries from Q2 have been for new floor space that is one-quarter smaller than previous demands. The uncertainty over the levels of future demand and occupiers’ space requirements are likely to act as a drag on the volume and size of new projects entering the pipeline.

Uncertainty may be most acute for flexible offices providers. The provider WeWork became the largest occupier of central London office space in 2018, only four years after the company

57 entered the UK market. However, the sale of one of its largest sites in London fell through in 2019 Q3 and more recently, the potential for cost-cutting or rent defaults by its tenants affected by the coronavirus shutdown, as well as the potential shift towards home working have emphasised concerns over the sustainability and financial viability of WeWork’s leasing model that the CPA has been raising since 2017. This was echoed by IWG, formerly known as Regus, which has threatened insolvency if building owners do not reduce rents on its long- term lease agreements. This contrasts with IWG’s earlier view that demand for flexible office and meeting space will increase at the expense of standard office demand, particularly in smaller towns and suburban areas.

New orders in the sub-sector declined 9.2% in 2020 Q1 and 17.7% in Q2 and are expected to remain muted for the rest of the year. Illustrating the impact of uncertainty on investor sentiment and new orders, uncertainty after the EU Referendum led to a fall in orders in each quarter between 2016 Q3 and 2018 Q2. This sustained period of decline affected the largest projects, where the expected rate of return is over a longer period and, consequently, riskier. It also means that it affects the part of the offices sector where the lag between orders and output is longer. A CPA analysis of new orders and output indicates a lag of around 12-18 months on average and offices output has subsequently declined since 2017 Q3. New orders rose in late 2018 and early 2019, reflecting the award of contracts for large central London schemes. This increase, from a low base, may now take even longer than 18 months to filter through to starts in activity, given delays to construction work currently from the pauses in activity and a renewed deterioration in confidence. However, new orders in 2019 Q3 were the lowest quarterly value in seven years and were 6.0% lower for the whole of 2019, suggesting the pipeline of sub-sector output was already reducing. Strengthening business confidence as the economic recovery develops throughout 2021 means greater certainty for investors and the supply chain will lead to an increase in starts from Q1, although the recovery will be gradual as any shift in working patterns is assessed. W-shaped Scenario:

• Volatility in the UK’s economic recovery prolongs the period of uncertainty and constrained business investment

• Worsened financial problems for flexible office space providers

Business investment fell between 2018 Q1 and 2019 Q1 in annual terms and in 2020 Q2, investment decreased 26.1% alongside pauses in activity. Existing uncertainty over the economic recovery and evolution of coronavirus infections is likely to restrict business investment throughout 2020, but a renewed period of lockdown and social distancing measures in Q4 would lead to another sharp decline, along with reticence on contract awards and project starts. Whilst the rapid growth of flexible office providers has been key in supporting demand for offices under construction in cities across the UK since 2019, questions remain over their ability to weather a short period of financial stress and a potential longer- term shift away from office-based working in city centres.

In the retail sub-sector, construction output has fallen every year since 2015 and was forecast to continue declining during 2020 and 2021 even before the sector was adversely affected by coronavirus disruption. The effects of the coronavirus lockdown between 23 March and mid- May, followed by ongoing social distancing measures and further local lockdowns during Q2 and Q3, add a third strand to the woes of high-street retailers. The sector has been affected by broad increases in the cost base, as a result of the business rates revaluation in 2017 and annual rises in wages mandated by the national living wage. In addition, as the CPA has been highlighting over the past decade, retail is also experiencing a longer-term structural trend of rising e-commerce shifting demand for retail premises to industrial space for storage, logistics and distribution.

58 Unsurprisingly, given the existing difficulties in the Shopping centre rents retail sector, investor appetite towards retail premises has are forecast to fall experienced a significant deterioration in recent years. 13.4% in 2020 Shopping centres have been the worst performing retail Shopping centre asset and Savills has recorded capital values falls in investment in this category in every year since are forecast to fall 2014. Shopping centre owner, Intu, entered administration 28.3% Source: IPF UK Consensus Forecasts in June as retailers deferred rent payments, worsening its existing position of £4.5 billion of indebtedness. Its 17 shopping centres will be put up for sale but are likely to remain unattractive. Construction work was underway on the £75 million redevelopment of Barton Square at the Trafford Centre and the redevelopment of Broadmarsh in Nottingham. Ownership of the latter has been handed to the local council but with an estimated £70 million cost to complete, a restart is uncertain. Lenders, landlords and private equity firms are actively trying to reduce their exposure to the shopping centre category and retail-led projects including a £300 million extension of Meadowhall and two £1.4 billion major shopping centre redevelopments, the Brent Cross extension and the Croydon Partnership, have been put on hold for viability reasons. As retail tenants requested rent delays and freezes due to the closure of non-essential retail, sharp decreases in rent collections for Q2 and Q3 will have exacerbated this. Shopping centre owners, Hammerson and URW (Westfield), reported that rental income fell 44.3% and 35.9% in the first half of 2020, respectively. In contrast, developers that focus on warehousing space (boosted by online shopping) reported high proportions of rents paid, whilst Segro’s rental revenues rose 6.3% in the first half of 2020. The IPF (International Property Forum) consensus forecast from September suggests that retail assets will remain unattractive. A 28.3% fall in capital values is forecast for shopping centres in 2020, followed by a further decline of 8.4% in 2021 and a 3.0% decrease in 2022. Falls in rental values were also forecast for each year of the forecast period, across shopping centres, high street retail and out-of-town retail.

Previously, one way shopping centre owners mitigated the risk of retail-led assets was through plans to diversify by reducing retail floor space and increasing residential, leisure and hotel space. At least in the short-term, and until the economy returns to pre-coronavirus levels of activity, there is likely to be a pause on these plans. Projects of this type that are in the pipeline include Ikea’s purchase of the Kings Mall in west London to redevelop into a mixed-use development around one of its urban stores, as part of a strategy to move away from out-of- town sites. In addition, the redevelopment of Bolton’s central shopping centre into new retail, leisure, office and residential space, and Hammerson’s plans for the Victoria Gate shopping centre in Leeds and the Martineau Galleries redevelopment in Birmingham are anchored by a 14-storey hotel and residential flats, respectively. The £70 million Chester Northgate redevelopment began work in June, although it is funded by the local authority and forms part of a local coronavirus recovery plan. As other projects get underway, although the lack of retail construction will exacerbate the falls in the sub-sector, it is likely to provide a boost to the commercial entertainment sub-sector, which overtook retail as the second-largest commercial sub-sector in 2015. A loosening in permitted development rights for changes of

59 use from vacant commercial buildings to residential may also divert some activity to the housing sector, particularly as retail is likely to be the slowest sub-sector of construction to recover. According to the BRC and the Local Data Company, the retail vacancy rate for Great Britain was 12.4% in 2020 Q2. This compares with 12.2% in Q1 and 11.1% two years earlier. Echoing other data, this was highest for shopping centres at 14.3%, 12.4% for high street premises and 8.3% for retail parks.

Within retail there exists niche growth areas, however. Supermarket chains such as Aldi and Lidl continue with expansion plans, potentially benefiting from a value offering against a backdrop of challenging retail conditions, as well as increased demand and profits during the UK’s period of lockdown, despite no online presence for groceries. Aldi, the UK’s fifth largest supermarket by market share in 2019, plans to reach 1,200 stores by 2025, from 840 currently, including 100 new stores planned to open across 2020 and 2021, as well as upgrades to 100 existing stores. Lidl, the seventh largest supermarket retailer, is currently in its £1.45 billion UK investment plan and plans to increase its total UK estate to 1,000 by 2023, by adding 50-60 new stores per year. Both discount chains’ plans include smaller convenience-style stores in the South East, including central London locations. As highlighted in previous forecasts, this signals a shift from purpose-built out-of-town sites to central locations where the margins are higher and where they can potentially take over sites from distressed retailers and focus on fit-out rather than new build. However, these plans may be reassessed if town and city centre footfall remains low. The move to smaller, central locations was also echoed in the Co-op’s latest announcement of a £130 million investment plan, with 65 new stores targeted at city centres, universities and high-rise residential sites, as well as 100 re-fits of existing stores. Similarly, Sainsbury’s has also announced plans for new convenience store openings. However, as with the discounters, if post-coronavirus there is a structural change towards people working from home and using the office less then this may force supermarkets to move away from their long-term plans to focus on city centre developments. In addition, a potential structural change towards increased working from home may lead to growth in retail activity in local communities, particularly within commuter belts, at the expense of commercial retail in urban metropolises such as Central London.

Town and city centre regeneration schemes will also provide retail work over the forecast period, although such projects are following the trend for mixed-use, rather than solely retail developments. In 2019, contracts were awarded for the £70 million Glassworks phase of the Barnsley Markets regeneration, the £250 million Victoria Square scheme in Bolton and the £300 million Borough Yards redevelopment around London Bridge. In addition, schemes in the planning pipeline include the £300 million Viadux project in central Manchester, a £250 million redevelopment of Bolton’s Compton Place and a £100 million redevelopment of an underground car park in Cavendish Square in London.

Unsurprisingly, given broad closures of non-essential stores, retail sales volumes and values declined in Q2, by 9.5% and 11.0%, respectively. Gradual reopening has led to month-on-

60 month increases since May, with sales volumes in August 4.0% higher than in February. There has been a clear split in the recovery across in-store retail categories, however. In August, sales at household goods stores were recorded at 9.9% above February, which includes hardware, paints, furniture and electrical appliances. In contrast, sales for clothing stores were 15.9% below February’s levels.

Closures of in-store retail have resulted in large increases in non-store, predominantly online, retail sales. Growth in the internet sales sub-category has consistently outpaced general retail performance since 2008. In value terms, internet retail sales growth was already outpacing general retail growth before the pandemic, but in Q2, internet sales rose by 43.3% from Q1. Month-on-month growth fell in July and August, however, reflecting a wider reopening of in-store retail. Internet retailing accounted for a record 33.5% of total retail sales in May. This compares to a pre-coronavirus high of 20.1% in February. Since May, the proportion of online sales has fallen, suggesting May’s figure was the peak before in-store retail reopened. However, it is unlikely to fall back to pre-coronavirus levels as many households continue to purchase online.

Accompanying the restrictions on activity, consumer confidence measures also weakened significantly. The GfK consumer confidence index reached a trough of -34 in April and May compared to -13 a year earlier, and was -25 in September. The lowest readings remain for expectations of the general economic situation over the next 12 months.

As in previous CPA forecasts and scenarios, the UK retail sector is facing headwinds due to longer-term structural changes, which have been worsened by recent financial pressures on high street retailers. In turn, these were worsened by temporary closures imposed by public health measures from March, ongoing social distancing and consumer concerns over job security and incomes. For the whole of 2019, output had already fallen 13.7%. A muted recovery in 2021 primarily reflects the ongoing structural rebalancing towards e-commerce activities, but also takes into account weakened consumer confidence and the financial impacts of retail shutdowns in Q1 and Q2 that are likely to linger and further worsen retailer and investor appetite for expansion. W-shaped Scenario:

• High streets and shopping centres severely affected by second period of lockdown

• Rising unemployment and falling incomes restricts household spending

Retailers with premises on high streets and in shopping centres are those who would experience the most severe financial impacts if further social distancing measures were implemented in Winter. Payment of fixed costs including rents would be made even more difficult once these secondary measures are then lifted in 2021 if household spending is reined in further as the prospects for employment and incomes worsen. Both of these would also be likely to shift spending further towards cheaper and accessible online offerings.

For the commercial education sub-sector, initial concerns among universities centred on the impact that the coronavirus pandemic would have on student numbers for the 2020/21 academic year, due to cancelled exams for domestic students and cancelled English language tests and travel advisories for international students. However, data from UCAS showed that by the final June deadline, total applications for 2020 entry rose 2.3% to 652,790 and the highest since 2016. By region, UK applications rose 1.6%, EU applications fell 2.0% and non-EU applications rose 9.6%. Subsequent data on the number of students that have been placed showed a 4.0% increase compared to the previous year’s entry. Mirroring the trends in applications, there were increases among UK and non-EU students and a decline for EU students. Overseas applications have been on a general upward trend since 2010, with higher

61 tuition fees for overseas students helping to lift universities’ income from fees from £15.5 billion in 2014/15 to £19.9 billion in 2018/19. 36.4% The uncertainty over final student numbers and changing government policy on UK of 18-year olds exam results has led to a cautious approach had university places being taken on university finances, with for 2020, a institutions announcing a pause to capital spending or delays to construction projects record high entry rate underway. Beyond the near-term concerns over coronavirus for the current academic year, questions remain over 2021 entries for EU students after the government confirmed that international fees would apply once the Brexit implementation period ends.

Sub-sector output has averaged £1.2 billion per quarter since 2014, compared to an average of £691 million per quarter in the previous five years. Activity has been driven by major capital investments by universities attempting to compete at a global level by improving accommodation, teaching and research facilities. Multi-million pound capital investment plans are underway across universities in the UK but there have been increasing questions about the sustainability of these large capital investment programmes, particularly regarding the ability of universities to contract out and manage large investment plans, real estate development and expansion into the residential sector, particularly given their reliance on rising student fee income. Capital spending was one of the first areas to be suspended as a means of controlling finances and cutting costs during the coronavirus lockdown period in Q2. Capital projects have been paused at the Universities of Manchester, Reading and York, among others, whilst individual projects such as a £55 million postgraduate teaching facility at the University of Exeter and Anglia Ruskin University’s new campus in Chelmsford have been delayed until next year.

New orders in the sector fell 19.6% in 2019, with falls registered in each quarter. In the first half of 2020, new orders fell 12.8% but among the university contracts awarded in the first half of the year were a £50 million science block at Salford University, the University of Glasgow’s £86 million post-graduate teaching block and a £30 million research hub at Swansea University, which are all scheduled to start this year. Larger projects return in the longer- term pipeline, including phased work on the University of Birmingham’s £500 million ten- year investment framework, which was awarded in January, a £100 million, 13-storey faculty building at the University of Portsmouth and a £120 million life sciences building that the University of Oxford. A new university in Milton Keynes is now in the planning stages and has some early funding committed, whilst the tender process for the next phase of the University of Manchester’s £1.5 billion, 15-year science and innovation quarter has been delayed from mid-2020 to Spring 2021.

As well as education facilities, purpose-built student accommodation continues to provide a pipeline of projects and although work paused in April, the subsequent catch-up work during the remainder of Q2 prioritised projects required to be completed for the 2020 academic year. For projects in late 2020 or 2021, coronavirus will have delayed start dates. For example, student accommodation developer Unite has cautioned that two of its developments in London and Bristol scheduled for completion in 2021 will be deferred to 2022 and no new starts will commence until there is clarity over the economic outcome of the coronavirus. Developer Empiric also paused projects for beyond the 2020/21 academic year initially, in Southampton, Bristol and Canterbury, although only the latter remained suspended in September. Confidence for student accommodation projects beyond 2021 appears to be unaffected, however. In Q3, plans were submitted for the conversion of a derelict hotel

62 to a 475-bed student residence in Leicester, which follows a £200 million contract for the development of seven accommodation blocks at the University of Leicester in July 2019. Also in Q3, a £100 million student accommodation tower was approved in Leeds and Kingston University began a £100 million refurbishment and extension of its halls of residence.

Commercial education output decreased by 1.7% in 2019 and output is expected to be volatile throughout 2020, reflecting the pause in activity on the majority of sites from late March and the subsequent return to sites from May. The weakness in new orders throughout 2019 and the first half of 2020, as well as delays to universities’ capital spending programmes and developer-led student accommodation projects, are then expected to filter through into weaker construction activity over the next 12-24 months. W-shaped Scenario:

• Deterioration in university finances hinders the viability of university projects

The closure of university facilities for the second half of the 2019/20 academic year prompted cost-cutting measures to protect finances, which would be repeated in a further period of nationwide or regional lockdown in Winter. In turn, this suggests a changing risk profile for project finance due to an increasing reliance on private sector borrowing such as private and public bond issuance to finance work. Appetite for bond issuance will be limited if the economic recovery is derailed by further lockdown measures at the end of 2020, which worsens investor risk aversion. Questions also remain whether loans from the European Investment Bank will be an option for universities once the Brexit transition period ends or whether the proposed alternative, the British Business Bank, will be able to lend at the same volumes.

The commercial health sub- sector is half the size it was a decade ago, when PFI was the preferred method of financing for the government and a hospital Since 2010, new build programme existed. The sole driver of activity in £579m annual new orders recent years has been new have averaged only facilities construction by private healthcare providers or privately- £579 million funded redevelopments of NHS hospitals. In general, private healthcare providers’ appetite for expansion has been reduced in recent years, due to a fall in revenue and reduced referrals from the NHS and lower numbers of overseas patients coming to the UK for private treatment. This is likely to have been exacerbated by the coronavirus pandemic and continued restrictions on international travel.

There are still some lower-value private healthcare projects underway, however, including the £50 million Pirbright Institute research laboratory in Surrey, which started in early 2019, and is set to open in 2021. In addition, both the £25 million rebuild of the Sancta Maria Hospital in Swansea and Nuffield Health’s £60 million private cardiac and general surgery units at St Bartholomew’s Hospital in London are now at fit-out stage. The first large project on the £500 million four-year Private Investment Construction Framework for healthcare began in April 2019, for a £100 million acute care hospital in Birmingham, due to be completed in 2022. It is a partnership between HCA Healthcare and M&G Investments. The framework has also procured two smaller projects of a staff accommodation scheme at Yeovil Hospital and Hereford Medical Centre, which also began in 2019 and are both scheduled for completion in late 2020. Work on

63 a new £40 million research laboratory at the Harwell Campus in Oxfordshire began in Summer 2019 and will complete in late 2020. Construction of the Vaccines Manufacturing and Innovation Centre, also at the Harwell Campus, started in April after being brought forward by once year in response to the coronavirus pandemic. Funding is split between the government and the pharmaceuticals industry. The £70 million Royal Marsden Oak Cancer Centre adds to the pipeline and a contractor was due to be selected in 2019 Q4, for a scheduled start in Summer. So far, £59 million of the cost has been raised from private donations. Healthcare developer, Assura, has a £77 million pipeline of 18 upcoming projects, mainly local GP and primary care facilities. Excluding the HCA Birmingham hospital, there is still an absence of larger projects, however. A pre-construction services agreement for the £190 million phase 4 of Great Ormond Street’s expansion was signed in January, to finalise the detailed design and budget but work will largely be outside of the forecast period from 2022.

Since 2010, annual new orders have averaged only £579 million. At this low level, one or two small projects is enough to lead to a significant rise in orders, although the construction activity from these projects would be spread over two or three years and so would contribute little to output. Output in the sub-sector has risen since 2018 Q2, but remains low in historical volume terms. Reflecting the four years of falls in new orders and pauses in on-site activity in April and May, in 2021, output is expected to be 7.5% below the level recorded in 2019. W-shaped Scenario:

• Hospital projects paused as NHS and private sector demand falls

A second wave of infections and a further period of lockdown in Winter 2020 would be expected to lead to reduced capacity and reduce both NHS referrals and privately-funded elective procedures. This would be likely to result in pauses to projects underway and delays to those yet to start.

64 Private Non-housing R&M

A focus on restarting and catching up on new build activity that was paused in Q2 will initially shift focus away from non-essential r&m. In 2021, weaker pipelines of commercial and industrial new build will support maintenance of existing assets.

Output in the private non-housing repair and maintenance (r&m) sector includes basic repairs and maintenance of offices, retail premises, warehouses, factories and other privately-owned non-residential properties and is dominated by work on offices and retail units. Sector output tends to be less volatile than new build, given the reliance on long-term facilities management contracts, although a discretionary element is dependent on macroeconomic fundamentals related to business investment and consumer spending.

As the main drivers of privately-funded R&M, business investment and household consumption were significantly affected by shutdowns in Q2 and uncertainty over trading conditions has continued even as restrictions have been lifted. The negative impact on business confidence in the retail and entertainment sub-sectors, in which business shutdowns were implemented earlier and ended later, will be exacerbated given the existing financial strains for in-store retail in particular. Conversely, with new investment in new build constrained in these sub-sectors, building owners are likely to increase their focus on r&m of existing building assets as the pipeline for new work reduces in 2021.

The sector had already seen an element of volatility since the liquidation of Carillion in January 2018 and the administration of Interserve in March 2019, followed by its subsequent restructuring. In these previous cases, contracts were switched to alternative providers allowing work to continue, but concern has been raised over facilities management services provided by other contractors that may be at risk of financial issues given low profit margins and decreasing work volumes in commercial and public sector new build even before the financial effects of pauses in site activity in Q2.

Private Non-housing R&M Output - Main Scenario

16,000 5.7% 14,000 4.7% 6.2% 3.2% 11.0% 3.3% -0.7% 12,000 9.2% 3.7%

10,000 -18.0%

8,000

6,000

4,000 £ million - 2016 Constant Prices

2,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

65 There are 84 private non-residential buildings above 18 metres that require cladding remediation work, ACM cladding remediation according to the Ministry of Housing, complete on: Communities and Local Government’s (MHCLG) monthly update at the end of August. Of these, 54 are student accommodation buildings and 30 are of student hotels. For student accommodation 69% 37% buildings, 11 are yet to be remediated, accommodation and work on six of these has started. blocks and of hotels For hotels, 17 buildings are still to be remediated, and work has started on five of these. However, plans are still unclear for five buildings. Paused work had resumed on all hotel remediation sites in August.

Sector output fell 0.7% in 2019, marking the first fall since data collection for the sector began in 2010. Output fell 6.3% in 2020 Q1 and 40.2% in Q2. The initial focus is likely to shift away from r&m and towards getting existing new build projects back on schedule and catch-up in Q3 and Q4. In 2021, as prolonged uncertainty and low business confidence lead to a slowdown in activity on new developments in commercial offices, retail and entertainment, as well as industrial factories, building owners are likely to switch towards refurbishments and maintenance of existing buildings. The main scenario envisages a fall of 18.0% in 2020, followed by an 11.0% increase in 2021 and a projection of 6.2% growth in 2022. W-shaped Scenario:

• Focus on r&m starts later in 2021

Output would be expected to be volatile by quarter in 2020, reflecting periods of paused work followed by new build activity resuming as a priority. As the second period of post-lockdown economic recovery begins in 2021 Q1, the focus is likely to gradually shift to r&m as new build projects complete.

66 Industrial

After falling sharply in H1, industrial output is expected to recover slowly in the second half of the year, as investment in factories will remain constrained by renewed Brexit uncertainties, offsetting sharp growth in the warehouses sub-sector.

In the main scenario, industrial output is estimated to contract 22.1% in 2020, Industrial Output by Sub-sector 2019 (%) which would represent the largest decline since 2009 during the financial crisis, as the outbreak of COVID-19 (coronavirus)

Oil, Steel & Coal and the implementation of lockdown measures from late March to mid-May Warehouses 0% 59% led to stoppages in both warehouses and factories construction work on site during

Factories the first half of the year. Official data show 41% that in the first half of 2020, sector output declined 20.1% compared with a year earlier. This reflects a fall of 1.4% in Q1 and a record fall of 39.7% in Q2, in which April was fully affected by the lockdown.

Source: ONS As lockdown measures were eased, output rose from May but even so, in July, output was 29.9% lower than its February pre-coronavirus level. Although output growth is expected to pick up further in the second half of the year, a focus on completing previously-paused warehouses schemes and limited new work in factories due to ongoing uncertainties suggests that the recovery will be slow. In 2021, output is expected to increase 11.5%, driven mainly by warehouses activity, as post-Brexit uncertainty in the first half of the year is likely to dampen business confidence and investment and limit the pace of recovery in factories, before growth of 2.0% in 2022. Output is projected to total £4.7 billion at the end of 2022, 11.4% lower than pre-coronavirus levels in 2019.

The main scenario estimates factories construction output contracting 22.4% to a record low of £1.7 billion in 2020. This reflects the economic consequence of the coronavirus pandemic, as well as the impact of heightened Brexit uncertainty towards the Industrial output is end of the transition period expected to fall 22% (31 December 2020) on in 2020, the manufacturing and export 22% sharpest activity, which is likely to decline since 2009 limit the pace of recovery during the second half of

67 this year, even as lockdown restrictions are relaxed. Given that some disruptions to trade will be inevitable from 1 January even if the UK secures new top-line trade agreements with the EU and countries outside the EU as assumed in the main scenario, business confidence and export activity is set to remain weak in the first half of 2021. As a result, output in the sub- sector is not anticipated to recover to its pre-coronavirus level in 2021 or even 2022, with growth of 18.5% and 2.0%, respectively, under the main scenario.

Activity in the sub-sector is primarily driven by industrial production and export demand for UK manufactured goods, which contracted sharply in the second quarter of 2020, as the full impact of coronavirus lockdown measures introduced from late March to mid-May was felt. In Q2, manufacturing output declined 21.1% quarter-on-quarter, following a 1.8% fall in Q1. This marked the fifth consecutive quarterly contraction and the largest fall on record, due to widespread factory shutdowns during the lockdown period. In line with the progressive easing of lockdown restrictions and reopening of factories, output increased from May and although further growth was recorded in July and August, it still remained 8.5% below its pre- coronavirus level in February.

Industrial Output - Main Scenario

8,000

7,000

6,000 4.6% 10.4% 5,000 11.9% 1.3% 11.5% 2.0% 17.8%

4,000 -6.3% -22.1% -8.1% 3,000

2,000 £ million - 2016 Constant Prices

1,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p

s = scenario p = projection Source: ONS, Construction Products Association

Meanwhile, UK exports of goods decreased 10.0% quarter-on-quarter in Q2, following a 19.0% decline in Q1, as global supply chains and external demand was impacted by the pandemic. Furthermore, in August, exports of goods fell for the seventh consecutive month, as containment measures in some countries continued to constrain demand. More timely indicators of activity, notably, IHS Markit/CIPS PMI survey data, show that manufacturing output continued to expand in September, as companies reopened and staff returned to work following the coronavirus lockdown, providing further evidence of a ‘V’-shaped or ‘tick’-shaped recovery (see Economy). The manufacturing PMI data for September also showed that new orders rose for the third consecutive month, with new export business rising at the strongest pace in almost two years due to stronger demand from Europe, Asia and North America. Nevertheless, HM Treasury’s monthly comparison of independent forecasts published in September showed that the average forecast is for a 10.8% decline in manufacturing output in 2020, before a 5.5% rise in 2021.

68 Looking at the project pipeline, work is Construction is Siemens underway on the new £80.0 million UK underway on the rail factory Battery Industrialisation Centre (UKBIC) £200 in Coventry, where the focus has shifted to internal fit-out ahead of its opening million later this year and Forterra’s £95.0 million new brick manufacturing facility in Leicestershire, which is due to open six months later than initially planned in late-2022 due to the coronavirus. Construction is also underway the £200 million Siemens rail factory in Hull, with the first phase of development due to open in 2023. Activity will also be underpinned by plans to develop coronavirus vaccine manufacturing facilities across the UK, including a £100 million Cell and Gene Therapy Catapult Manufacturing Innovation Centre in Essex, a £93 million Vaccines Manufacturing and Innovation Centre (VMIC) in Oxfordshire and a multi-million pound manufacturing facility in Scotland. The former two are due for completion in 2021. In terms of planned projects, the CPA has consistently highlighted a lack of major new work with contracts signed in the near-term pipeline, which continues to be the case. Given the ongoing pandemic and rising uncertainty regarding the UK’s future trading relationship with the EU, decision making on planned projects in the pipeline is likely to be delayed further, limiting growth prospects for the sub-sector and its ability to return quickly to pre-coronavirus levels. W-shaped Scenario:

• Manufacturers halt investment plans again

• Domestic and global demand declines amid a second wave of infection

Manufacturers pause or cancel major long-term investment plans amid a second national lockdown in 2020 Q4 and heightened uncertainty regarding the future UK-EU relationship towards the end of the transition period on 31 December 2020. A resurgence of coronavirus and a return of containment measures at the end of 2020 that leads to a sharp fall in domestic and global demand is also expected to restrain growth in manufacturing activity in Q4 and 2021 Q1.

Warehouses output is expected to contract 21.9% in 2020 under the main scenario, even though the sub-sector benefitted from a significant surge in demand for logistics space during the coronavirus lockdown period, which accelerated the structural shift already underway within retail. The sharp decline reflects a weak performance in the first half of the year, as speculative development activity was temporarily halted or delayed at the end of Q1 and Q2 amid the coronavirus lockdown. Although lockdown restrictions were eased from mid-May, the focus is expected to remain on completing previously-paused warehouses schemes and with planned speculative developments delayed, a strong rebound is unlikely in the second half of 2020.

Activity in the sub-sector is primarily driven by consumer spending, which saw the largest quarterly contraction on record in Q2, as the full impact of social distancing measures was realised. Consistent with this, the volume of retail sales fell by a record 9.5% quarter-on- quarter in Q2, but the overall figure masks the recovery that began in May, when sales rose 12.1% month-on-month, followed by further growth in June and July due to strong growth in non-food and fuel stores as non-essential stores reopened amid the easing of coronavirus lockdown restrictions. More recently in August, retail sales increased 0.8% month-on-month and were 4.0% higher that the pre-pandemic level in February. Online retail sales have also

69 played a major role in limiting the falls in retail, as many people still worked from home and continued to Take-up of industrial and logistics space alter their shopping habits towards e-commerce, which accounted for hit record levels 32.1% of total retail sales in Q2, the highest proportion on record. in 2020 H1 Although recent data showed that online retail sales fell in August due to the reopening of non-essential stores and other parts of the economy, they were still significantly higher than February’s pre-pandemic level and accounted for a high proportion of total retail sales by historical standards, a pattern that is unlikely to change in the near-term and one that would create further demand for warehousing and distribution space.

Property agents such as Savills and CBRE reported that take-up of industrial and logistics space reached record high levels in 2020 H1, with online retail accounting for the largest proportion, in part due to the impact of the coronavirus, which created a surge in demand for short-term space. Savills, however, reported that the high level of take-up seen in the first half of this year is unlikely to be sustained in the near-term, even though demand from online retail remains strong, as consumer confidence is expected to deteriorate further once the government’s furlough scheme comes to an end in October. However, if requirements for industrial warehousing and logistics facilities, including bonded warehouses and cold storages close to all UK exit and entry points such as ports and airports, surge in response to increased uncertainty about the future UK-EU trading relationship towards the end of the transition period on 31 December 2020, this would be an upside risk.

On the supply side, Segro reported in August that 1.3 million sq. ft. of development projects are currently under construction or in advanced pre-let discussions, whilst Tritax Big Box reported that work is underway on four pre-let developments totalling 5.3 million sq. ft. and is planned to start on projects totalling 5.8 million sq. ft. within one to three years. However, given changes in working practices to accommodate social distancing, projects are likely to take longer to complete. Segro also stated that it had already collected 93% of rents due for Q3, whilst Tritax Big Box has secured 90%, which highlights the strong demand from customers and contrasts sharply with rent collection from commercial retail developers.

After reaching a 12-year high of £2.6 billion in 2018, new orders declined 18.6% to £2.1 billion in 2019. Furthermore, in 2020 H1, new orders declined 38.9% compared to a year earlier. Reflecting this, as well as works completing on previously stalled projects, warehouses output is expected to increase by a modest 4.9% in 2021, followed by a further 3.4% in 2022. W-shaped Scenario:

• Demand for short-term warehousing space strengthens amid a second wave of store closures

• Warehouses construction activity stalls due to another economic downturn in Q4

If consumers resume stockpiling and shift spending towards online platforms due to store closures amid a second wave of the coronavirus outbreak in 2020 Q4, this could raise retailers’ short-term requirements for warehousing and distribution space once again. However, given that this would coincide with seasonal storage requirements for Christmas retail, questions remain how any additional demand will be met given that the delayed delivery of previously paused new build projects is likely to create a shortage of warehousing space in the near-term.

70 Infrastructure

Following a coronavirus-related fall in 2020 H1, infrastructure activity is set to rebound strongly in H2, as projects continue to regain lost ground and main construction work on Phase 1 of HS2 gets underway.

Please note that the ONS has issues with its measurement of the sub-sectors in Infrastructure Output by Sub-sector 2019 (%) infrastructure. Firstly, the ONS’s methodology means that although total infrastructure

Harbours Water & Sewerage overall may be fine, sub-sector output is 6% 8% determined by the average time between new orders and output in the medium- term, often determined by projects within Electricity Roads five-year spending plans in regulated 28% 21% sectors. However, if a new order for a major project in the sub-sector is placed, this may underestimate the time taken for it to provide activity on the ground and

Gas, Air & overestimate the amount of activity earlier Communications on. An example of this may potentially 4% Rail 33% be the extent of recent growth in water & sewerage due to the Thames Tideway

Source: ONS project. Secondly, the ONS only surveys firms that are officially classified as contractors so if the activity is done by an engineering firm then it will not be covered. This applies to all construction sectors and firms that do construction work but are not technically contractors. However, this issue impacts most upon infrastructure. Therefore, given concerns regarding the ONS’s data on infrastructure output, especially at sub-sector level, the forecasts are not purely based on the ONS output data but take into account recent industry surveys and pipeline evidence. This is particularly the case for the roads, rail and electricity sub-sectors. Please refer to the relevant sub-sectors for a more detailed explanation and specific examples.

Infrastructure, which has been at the centre of the government’s announcements to rebuild the UK economy post-coronavirus, has been less affected by the COVID-19 (coronavirus) pandemic than other sectors of the construction industry, with output estimated to fall 3.0% in 2020 under the main scenario. This is a slight upward revision from the 4.1% decline previously anticipated in the Summer Scenarios. It is also a much smaller decline than the falls estimated for other construction sectors, reflecting a higher degree of activity occurring throughout the social distancing restrictions from late March to mid-May and a strong recovery post-lockdown. After falling by a record 18.2% month-on-month in April, the first full month of the coronavirus lockdown, infrastructure output returned to growth in May, as large-scale projects, where it is easier to implement social distancing measures, resumed earlier than anticipated. Further growth was recorded in June and in July, output increased 10.2% month-on-month and was 6.1% higher than its pre-coronavirus level in February. Infrastructure was the only construction sector to have recovered above its pre-coronavirus levels in July. As catch-up work continues and main civil engineering works commence on Phase 1 of HS2, this recovery is set to persist throughout the second half of the year and given

71 Infrastructure Output - Main Scenerio 6.0% 31.4% 30,000

25,000 5.7% 12.2% 3.6% -3.0% 20,000 20.0% 1.0% 2.1% 15,000 -0.7%

10,000 £ million - 2016 Constant Prices 5,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p s = scenario p = projection Source: ONS, Construction Products Association

government’s plan to bring forward ‘shovel-ready’ infrastructure schemes, there are certainly some upside risks. In 2021, output is set to increase by 31.4%, driven by main construction works ramping up on large-scale projects such as HS2, as well as an increase in activty in the second year of five-year investment programmes within Infrastructure output regulated sectors. Although this is slightly slower than the 34.6% growth rate previously anticipated in the is estimated to fall Summer Scenarios, reflecting the extent of catch-up in 2020 H2, output is still expected to surpass pre- 3% in 2020 coronavirus levels and reach a record high in 2021. In 2022, growth is projected to slow to 6.0% as main tunnelling works on the Thames Tideway Tunnel come to an end, but given a healthy pipeline of work in rail and electricity, activity would still remain at historically high levels.

The CPA, however, has consistently highlighted that uncertainty, delays and cost overruns on major infrastructure projects remain the main downside risk to the outlook, and this will continue to be case once activity fully returns to site in the main scenario. These concerns were also echoed in the Infrastructure and Projects Authority’s 2020 annual report on major projects, which showed that HS2 and Crossrail were both assigned a red rating (successful delivery appears unachievable) in 2019/20. However, please note that the annual report is based on data submmited in September 2019. Furthermore, as stated previously, the delivery of key infrastructure announcments such as the National Infrastructure and Construction Pipeline (valued at £413 billion), the Transforming Cities Fund (totalling £2.5 billion), as well as the National Infrastructure and Construction Procurement Pipeline, which includes 340 contract opportunities with a total value of up to £37 billion for 2020/21 will be key.

Meanwhile, the National Infrastructure Strategy, which is expected to detail £100 billion worth of investment to transform the UK’s infrastructure and formally respond to the National Infrastructure Commission’s 2018 National Infrastructure Assessment is expected to be published this Autumn. However, it is worth noting that government measures to mitigate the economic cost of the coronavirus will inevitably raise public sector debt, potentially by £200 billion (see Economy) and raises key questions regarding whether government’s focus will be on as much infrastructure investment as announced pre-coronavirus. In June, the government announced plans to bring forward £5.0 billion worth of capital investment projects as part of its ‘New Deal’ recovery plan post-coronavirus, but the package was largely made up of reannouncements or allocations of existing funding.

72 Rail activity is expected to recover rapidly to pre- coronavirus levels during the second half of this year as catch-up work on Crossrail and TfL projects will be accompanied by main construction works commencing on Phase 1 of HS2, but given temporary site closures during the lockdown period, output is still estimated to fall 6.0% in 2020 as a whole under the main scenario. As main civil engineering work ramps up on HS2, a strong rebound of 40.9% is anticipated in 2021, before growth of 12.9% in 2022.

Please note that the ONS historical output figures for rail should be treated with caution given the ONS’s mismeasurement of infrastructure sub-sector level data. For example, in 2018, output in the rail sub-sector increased 73.3% to £5.5 billion, the highest level since records began in 1997. Double-digit growth was also recorded in 2019, even though CP5 concluded in March 2019 and main construction works on Europe’s largest infrastructure project, HS2, were yet to begin. The main civil engineering contracts for the first phase of the project, worth £6.6 billion were awarded in July 2017 and, as a result, new orders rose 315.4% to a record high of £9.0 billion in 2017. Rail output rose 35.5% in that year. The divergence between new orders and output has meant that the levels of output appear inflated in 2018 and 2019 and, as a result, the CPA is forecasting growth rates for actual activity on the ground, rather than ONS sub-sector data given the ONS’s data issues.

Following a temporary coronavirus-related pause from late March to May, work on several Transport for London’s (TfL) projects have now resumed. This includes the £656 million Bank station capacity upgrade (completion in 2022) and the £1.2 billion Northern Line extension to Battersea (completion in Autumn 2021), where the focus will be on station fit-out works and the £263 million London Overground extension to Barking Riverside, where main works are underway for completion in late-2021. However, in its revised budget published in July, TfL announced that capital investment for 2020/21 has been cut from £1.0 billion to £807 million due to the impact of the coronavirus on finances, signalling delays to these projects. Construction work is also underway on the £150 million upgrade of Gatwick Airport’s railway station, despite the suspension of its capital investment programme, and is due for completion in 2023.

The Crossrail project (also known as the Elizabeth line) also remains in the pipeline, given that there are still works to be carried out, including the completion of construction and fit- out of the tunnels and stations, and the testing of signalling and other systems. In its update published in September, Crossrail Limited reported that it successfully completed a six-week construction blockade during August and September to recover some of the time lost during the lockdown period, which will now enable the Trial Running phase to start at the earliest opportunity in 2021. It restated that all central section stations have now been certified as ready to support Trial Running, apart from Bond Street, where work has been further delayed by the need to adapt workforce numbers on site in line with the latest government guidance on social distancing. Overall, a maximum of 2,000 people are now allowed on Crossrail sites, 50% lower than pre-coronavirus levels. This, as well as lower than planned productivity in the final completion of shafts and portals and the complexity of central section stations, has meant that the opening of the central section of the line has been delayed further from Summer 2021 to the first half of 2022. Furthermore, Crossrail Limited reported that an additional £1.1 billion is now required to complete works, raising the total cost of the project to £19.4 billion (originally a £14.8 billion project). Given that TfL is expected to remain financially constrained in the near-term, even with the government’s £1.6 billion emergency funding package, this

73 raises questions over how Crossrail’s funding gap will be filled. Reflecting this, works may be delayed further and continue at the expense of other rail projects in the capital. Main construction In February 2020, the government gave the works on Phase 1 of entire HS2 project go-ahead, but with Phase HS2 officially started 1 (London to Birmingham) combined with Phase 2a (West Midlands to Crewe), and in September Phase 2b (West Midlands to Leeds New Lane) delivered as part of an Integrated Rail Plan under a new separate body, consistent with the recommendations of the Oakervee Review. The Integrated Rail Plan is expected to be published by the end of this year. Phase 1 of the scheme involves the development of four new stations, two of which have been awarded contracts (Euston and Old Oak Common). Design and Build contracts for the remaining two, Birmingham Curzon Street and Birmingham Interchange, are expected to be awarded in 2021 and 2022 respectively. After government issued the Notice to Proceed in April, HS2 Ltd announced the formal start of main construction work on Phase 1 of the route in September. Construction of the Old Oak Common and Euston stations, as well as the major compounds at Old Common, South Portal, Calvert and Streethay will be the initial focus of activity in the second half of this year, before tunnelling across sections of the route begins from April 2021. According to the full business case for Phase 1, services between Old Oak Common and Birmingham are now expected to start between 2029 and 2033, with the line extended to London Euston between 2031 and 2036. The cost range of Phase 1 has also been revised to £35.0-£45.0 billion, whilst the official cost of the whole project is expected to rise further beyond its budget of £55.7 billion to £108 billion. Despite this, the National Audit Office stated that the final cost and opening of the full HS2 network remains unclear. Reflecting this, as well as concerns over the project’s environmental impact, further delays and cost overruns cannot be disregarded.

Activity in the sub-sector will also be supported by Network Rail’s five-year Control Period 6 (CP6), which has a total budget of £47.9 billion for the period 2019/20 to 2023/24, compared to £38.3 billion allocated for CP5 (2014-2019). Of this, £34.7 billion will come directly from government grant, with the remainder coming from track access charges and income from other sources, such as Network Rail’s property portfolio. Total expenditure, however, is expected to be £1.8 billion higher than its funding envelope, according to the Office of Rail and Road’s (ORR) final determination for CP6. Nevertheless, the ORR has approved Network Rail’s £34.7 billion spending plans, allocating £31.0 billion for England and Wales and £3.7 billion for Scotland.

Whilst the focus of CP6 will remain on maintenance and renewals, it is also expected to see the delivery of key projects deferred from CP5 such as Phase 2 of the East West Rail project (Bicester to Bedford) and electrification of key routes on the Midland Mainline (MML) electrification programme. However, in its 2020 annual report, the Infrastructure and Projects Authority assigned the East West Rail project (Western Section) a red rating (successful delivery appears unachievable) for the first time since 2017. A £780 million upgrade to the East Coast Main Line and a £2.9 billion upgrade to the TransPennine Route between Manchester and Leeds, which includes both electrification and civil engineering works are also expected to occur during CP6. In terms of the latter, £589 million of funding has been allocated to kickstart electrification and upgrading works. Despite a healthy pipeline of work, the ORR stated that the coronavirus pandemic is set to impact performance and delivery in 2020/21 and beyond. As an illustration, in September, Network Rail delayed the procurement process for the £900 million Western Rail Link to Heathrow project by two years due to the coronavirus.

74 W-shaped Scenario:

• Rail projects paused amid tighter social distancing restrictions that impact on construction activity

A second wave of the coronavirus outbreak that leads to widespread site closures in 2020 Q4 is likely to impact the delivery of rail projects in the current pipeline further, whilst contract awards would be temporarily suspended amid a renewed economic downturn. In this W-shaped Scenario, activity is then expected to rebound sharply again from 2021 Q1, driven by catch-up and an acceleration in construction work on major rail projects, notably HS2.

Electricity, the second-largest infrastructure sub-sector will have a key role in driving the overall sector’s recovery expected throughout the second half of 2020 and 2021 due to major construction works taking place at the UK’s first nuclear power plant in a generation, Hinkley Point C. Near-term activity will additionally be supported by ongoing work around the National Grid power connections and nuclear decommissioning, which includes Sellafield, the UK’s largest nuclear site. Following a temporary pause at the start of the coronavirus lockdown in late March, site activities at Sellafield and Springfields (the UK’s nuclear fuel manufacturing facility), are now being remobilised in a phased way, although these sites are not expected to be fully operational until April 2021.

Plans to build new gas-fired power stations across the UK are also in the pipeline, but many are subject to a final investment decision and would need to secure a capacity market agreement. Progress has only recently been seen on VPI Immingham’s plan for a 299MW Open Cycle Gas Turbine (OCGT) in Immingham after it was granted development consent in August. Construction is expected to start in early 2021 at the earliest and span three years. Meanwhile, a decision is yet to be made on EP Waste Management Ltd’s (EPWN) plans to increase the capacity of its consented £300 million energy from waste (EFW) power station in Lincolnshire from 50MW to 95MW. In Budget 2020, the government announced a new £800 million Carbon Capture and Storage (CCS) Infrastructure Fund to establish CCS in at least two UK sites, one by the mid-2020s, a second by 2030.

In terms of offshore wind, significant progress continues to be made on projects under the Round 3 Offshore Wind Programme despite the ongoing pandemic. Main construction work is currently underway on the 860MW Triton Knoll offshore wind farm, located off the Lincolnshire coast for operation in 2021 and the 1.4GW Hornsea Project Two, off the Yorkshire coast in the North Sea, which is set to become the world’s largest offshore wind farm once operational in 2022. In addition, preliminary works on the 3.6GW Dogger Bank wind farm project, which comprises three 1.2GW phases – Dogger Bank A (formerly Creyke Beck A), The Dogger Bank B (formerly UK homes Creyke Beck B) and Dogger Dogger Bank 4.5m every year once complete Bank C (formerly Teesside wind farm A) – started in January 2020 and subject to a final will power investment decision, main works are scheduled to begin in 2021/22. The first phase, Dogger Bank A, is due to begin producing electricity in 2023 and once fully complete, Dogger

75 Bank would produce enough renewable energy power for more than 4.5 million homes per year, equivalent to 5% of the UK’s electricity demand. Subject to a final investment decision, onshore works on the 1.4GW Sofia offshore wind farm are also due to begin in 2021 Q1. In Scotland, construction is underway on the £2.6 billion 950MW Moray East (completion in 2022) and the 448MW Neart na Gaoithe (completion in 2023) wind farms. In July, the government gave the go- ahead for Vattenfall’s Norfolk Vanguard 1.8GW offshore wind farm, whilst the Inch Cape wind farm project received consent to increase its maximum capacity from around 700MW to 1.0GW. However, a final decision on Ørsted’s 2.4GW Hornsea Project Three has been delayed further to 31 December 2020.

Renewable energy is expected to remain a key driver of activity over the medium to long-term, given the government’s target to deliver 40GW of installed offshore wind capacity by 2030. Reflecting this commitment, in September 2019, the government awarded 15-year contracts to 12 renewable energy projects in its third Contract for Difference (CfD) round, which will provide around 5.8GW of new capacity by 2025. This includes six offshore wind projects (totalling 5.5GW), four remote island wind farms (0.3GW) and two Advanced Conversion Technology facilities (275MW). The offshore wind projects are set to be delivered at a strike price as low as £39.65/MWh. Furthermore, in March 2020, the government lifted the ban on onshore wind farm subsidies that has been in place since 2015.

Apart from offshore wind farms, activity will be driven by the largest project in the sub- sector, the £22.5 billion Hinkley Point C project, which has an agreed strike price of £92.5/ MWh (in 2012 prices), inflation linked, for 35 years. Despite the ongoing pandemic and the adoption of new working practices to enable social distancing, the construction of the second nuclear reactor at Hinkley Point C reached another major milestone in September, with the lifting of the first part of the steel containment liner. The focus of the project has shifted to the installation of storage tanks, fitting of electrical systems, cables and pipework and, once completed in 2025, EDF expects the plant to deliver 7% of the UK’s electricity needs. However, in September 2019, EDF stated that the risk of delays at unit one and two, of 15 and nine months respectively, had increased. In July 2020, EDF reported that risks of further delays and cost overruns remained high due to the impacts of the coronavirus, which is currently

76 under review. Reflecting this, as well as major setbacks at similar projects in France, Finland and China that are all using the EPR technology, further delays are likely. In May 2020, a planning application for EDF’s second nuclear power station, Sizewell C in Suffolk, was submitted to the planning inspectorate and, if approved, the project would be a near replica of Hinkley Point C and supply around six million homes with low-carbon electricity. In September, Hitachi confirmed its withdrawal from the Wylfa Newydd nuclear project in Anglesey, hindering long- term prospects for the sub-sector out of the scope of the scenarios.

Recent data show that output in the sub-sector declined 9.3% to a five-year low of £6.3 billion in 2019 even though main civil engineering works above ground on Hinkley Point C started in September 2019. This suggests that the ONS construction output data is not accurately reflecting activity on the ground, and as a result, the CPA is forecasting actual activity growth in the sub-sector rather than distortions in the ONS data.

Despite ongoing works on major offshore wind farm projects, output growth is estimated to remain flat in 2020 under the main scenario, reflecting reduced activity at Hinkley Point C and temporary site closures at nuclear decommissioning projects during the coronavirus lockdown period. However, as construction work ramps up once again at Hinkley Point C and site activities fully resume on nuclear decommissioning projects, a sharp rebound of 44.1% is expected in 2021, before growth of 3.0% in 2022. W-shaped Scenario:

• Investment in key energy projects stalls amid another economic downturn

• Activity at Hinkley Point C is scaled back again

A fall in investment or reduced investor confidence amid a renewed economic downturn in 2020 Q4 is likely to hinder decision-making on key energy infrastructure projects in the near-term. If a second wave of the coronavirus outbreak leads to the reinstatement of social distancing measures in 2020 Q4, workforce numbers at Hinkley Point C could be cut again, resulting in lower activity on the ground, before a recovery from 2021 Q1.

Over the next three years, activity in the water & sewerage sub-sector will primarily be driven by the £4.2 billion Thames Thames Tideway Tunnel hit Tideway Tunnel, which has £700 million of backing from the European Investment Bank. Following a temporary pause in all but by a nine-month essential works during the UK lockdown period, construction works on the Thames delay Tideway Tunnel have now resumed, but the level of activity has been reduced due to social distancing measures in place. In its investor report published in July, Tideway revealed that the project is now 56% complete and still in its peak construction phase. However, in August, Bazalgette Finance’s update to investors revealed that the cost for completing the project (tunnel infrastructure budget) has increased by a further £233 million to £4.133 billion, whilst the completion date has been delayed by a further nine months to 2025 H1 due to the coronavirus. This is consistent with the plausible downside scenario set out in Tideway’s 2019/20 annual report. The report also outlined a severe downside scenario, which estimated an increase of 24% to £4.3 billion. A package of measures that would mitigate the financial impact of the coronavirus is expected to be announced this Autumn.

77 Sub-sector activity will also be supported by work under the new five-year Asset Management Plan (AMP7), which began in April 2020 and will run until March 2025. In its final determinations published in December 2019, Ofwat approved a £51.0 billion spending package that will allow water companies in England and Wales to maintain existing services and improve resilience during AMP7, 13.0% higher than the £44.0 billion allocated for AMP6. This includes £13.0 billion for new and improved services, and to tackle challenges facing the environment. It also includes building a new reservoir in Hampshire and a major pipeline between Essex and North Lincolnshire. In addition, Ofwat set out targets for water companies to achieve by 2025, including a 16% leakage reduction, 12% fewer mains bursts and more than 12,000 km of river improvements. However, in September 2019, the Consumer Council for Water (CCWater) signalled concerns whether some of these targets are achievable given that some water companies struggled to meet their targets during AMP6. These concerns were also echoed in a Public Accounts Committee report published in July, which additionally stated that meeting these targets relies on “unknown and untested approaches”.

Please note that the ONS historic construction output figures for water & sewerage should be treated with caution given the ONS’s mismeasurement of sub-sector level data. For example, in 2019, output in the water & sewerage sub-sector declined for a second consecutive year, by 12.3% to £1.7 billion, despite main construction works occurring on the Thames Tideway Tunnel. Contracts for the project were awarded in February 2015 and, as a result new orders increased 429.2% in that year. Output declined 18.7% in 2015, before accelerating to 66.1% in 2016 and 70.3% in 2017. This was the strongest annual growth on record even though main tunnelling works on the project were yet to begin. This suggests that the ONS’s construction output data is not accurately reflecting activity on the ground and is likely to have been incorporated too early in the data. As a result, the CPA’s forecasts for the sub-sector focus on growth rates that are more illustrative of activity on the ground.

In the main scenario, sub-sector output is estimated to decline 3.8% in 2020, reflecting reduced construction activities on the Thames Tideway Tunnel amid the lockdown period during the first half of the year. After main construction works on the project recommenced in May, in line with the easing of lockdown restrictions, output growth is expected to rebound in the second half of 2020, before accelerating to 42.7% in 2021, as work under the new five- year regulatory period, AMP7, also adds to the pipeline. Output is then projected to fall 3.0% in 2022, as tunnelling works on the Thames Tideway Tunnel come to an end. W-shaped Scenario:

• Work on the Thames Tideway Tunnel is paused or scaled back amid a second national lockdown

If a second wave of coronavirus infections materialises later this year and measures to contain its spread are reintroduced, work on the Thames Tideway Tunnel project is likely to be scaled back or halted once again in 2020 Q4. Consistent with a sharp economic recovery, activity in the sub-sector is expected to rebound strongly from 2021 Q1 driven by catch-up and works ramping up on the Thames Tideway Tunnel.

road schemes In 2020, roads construction output is estimated to increase by 2.9% under the main are set to open during the scenario, reflecting work on smart motorway second Road Period (2020-2025) schemes that focuses on technology and signage rather than new roads construction, as well as a hiatus between Highways England’s first and second Road Investment

78 Strategy. The weak growth for 2020 also reflects reduced roads activity in the first half of the year even though Highways England and local authorities took advantage of quieter roads during the lockdown period to do more work, as all major project work in Scotland was suspended amid stricter social distancing guidelines. Looking ahead, growth is projected to pick up to 6.5% in 2021 and 4.8% in 2022, driven by an increase in activity in the second Road Period and works commencing on major road projects such as the Silvertown Tunnel.

Please note that in a similar vein to the water & sewerage and rail sub-sectors, the ONS’s mismeasurement of sub- sector level data has meant that historical figures for roads output appear inflated, contradicting other pipeline evidence and industry surveys. For example, in 2018, roads output increased 18.0% to a record high of £5.0 billion, despite slow progress under Highways England’s first Road Investment Strategy (2015/16-2019/20), the impact of adverse weather conditions and the liquidation of Carillion in Q1 on activity on site. This contrasts with survey data from the Civil Engineering Contractors Association (CECA), which showed that workloads in both motorways/trunk roads and local roads have largely been falling since the second half of 2015. Furthermore, data from the Mineral Products Association (MPA) show that asphalt sales, a key indicator of activity, remained weak in 2018. Overall, this suggests that the ONS’s construction output data is not accurately reflecting activity on the ground, and as a result, the CPA is forecasting actual activity growth in the sub-sector rather than distortions in the ONS data. The data may also be reflecting an increase in smart motorway schemes.

Activity in the sub-sector will primarily be driven by Highways England’s Road Investment Strategy 2 (RIS2), which has £27.4 billion of confirmed funding for the second Road Period (RP2), running from 2020/21 to 2024/25. This is £2.1 billion higher than the £25.3 billion set out in the draft RIS2 to cover two previous PF2 projects, the Lower Thames Crossing and the A303 Stonehenge Tunnel, and is £10.0 billion higher than the revised funding allocation for RIS1. Highways England’s five-year Delivery Plan for RIS2 confirmed that £14.2 billion of the overall £27.4 billion budget has been earmarked for road enhancements schemes, whilst £10.8 billion has been allocated for operations, maintenance and renewal schemes. Although Highways England aims to open 52 schemes in the second Road Period, which includes those that have been carried over from RIS1, and start work on 12 new major road projects, the CPA expects a hiatus during the transition between RIS1 and RIS2. Furthermore, in the final RIS2 report, the Department for Transport cautioned that some project start dates could be delayed beyond 2025 due to external factors.

During the coronavirus lockdown, Highways England continued to operate as close to business as usual, as roads were deemed crucial in the transport of essential workers and deliveries, whereas in Scotland, all major road construction work except for essential repair and maintenance was paused until restrictions were eased in June. In terms of the current project pipeline, work is underway on a number of projects valued below £200 million, including the A19 Testos junction, A1 Scotswood to North Brunton, A585 Windy Harbour

79 to Skippool and A19 Norton to Wynyard schemes. Works have also begun on a few major road schemes, including the £355 million A63 Castle Street, the £282 million M42 Junction 6 and the £330 million A30 Chiverton to Carland Cross, which is being partly funded by an £8.0 million contribution from the European Regional Development Fund. Going forward, activity will be supported by the £1.2 billion Silvertown Tunnel project, which includes a new twin-bore road tunnel under the River Thames in east London. Enabling works are currently underway, with main construction due to start in 2021 and complete in 2025. However, given the impact of coronavirus pandemic on TfL’s finances, as well as ongoing environmental concerns surrounding the project, delays are expected.

The National Infrastructure and Construction Procurement Pipeline published in June 2020 also revealed that contracts on four major projects, the A303 Amesbury to Berwick Down (Stonehenge), A428 Black Cat to Caxton Gibbet, the Lower Thames Crossing and the Northern Link Road worth a combined value of £4.7 billion, are due to be awarded in 2021. However, in July, the Department for Transport delayed its decision on Stonehenge’s Development Consent Order further to November following more archaeological finds at the site. Reflecting this, further delays and cost overruns to this project, as well as other planned projects in the pipeline, cannot be disregarded given past delivery experiences. For example, progress has been slow on the £3.5 billion Oxford to Cambridge Expressway since plans were initially announced in 2014 and in November 2019, the Transport secretary announced a further review of the scheme.

Near-term activity will also be underpinned by smart motorway schemes, which focus on the use of technology, electrics and signage rather than solely new roads construction. Following a review into the safety of smart motorways, the government announced an 18-point package of measures to improve safety and public confidence in March 2020. This includes abolishing dynamic hard shoulder motorways, installing ten additional emergency areas on the existing M25 smart motorway and more traffic signs. According to Highways England, seven schemes are currently underway, including the M4 Junctions 3 to 12, which is due for completion in Spring 2022. Construction on one more is set to begin during the forecast period. Furthermore, the National Infrastructure and Construction Procurement Pipeline from June revealed that a 10-year £7.0 billion Smart Motorways Alliance contract, the largest roads contract in the pipeline, is expected to be awarded in 2021 Q1. W-shaped Scenario:

• Road schemes put on hold amid a second national lockdown

• Capital investment delayed until 2021

If a second national lockdown, similar to that experienced between 23 March and mid- May, occurs in 2020 Q4, work on some road schemes is likely to be paused, particularly in Scotland and Wales, whilst capital investment would be delayed until economic conditions improve in 2021.

80 Output in the gas, air and communications sub-sector is estimated to fall 13.1% in 2020 under the main scenario, as nearly all airports across the UK halted non-essential work, and reduced or deferred capital investment plans in the first half of the year due to the impact of the coronavirus pandemic on the aviation industry. Although travel restrictions between the UK and some countries were relaxed from early July, passenger numbers are expected to recover gradually from 2021. Reflecting this, output is expected to increase by only 0.8% in 2021, as the focus of work in the sub-sector would chiefly be on expanding full-fibre broadband networks and completing a limited number of airport projects in the current pipeline that were previously halted by the pandemic. Looking further ahead, growth is projected to pick up to 9.8% in 2022, but given that a full recovery of the aviation industry will stretch beyond the forecast period, output would still remain below its pre-coronavirus level.

Following the outbreak of the coronavirus and its subsequent impact on air travel demand from late March, many airports across the UK have halted expansion plans and deferred or reduced capital investment programmes for the foreseeable future. Heathrow Airport has a £3.95 billion five-year capital investment programme, which had been extended by an additional two years to the end of 2021. However, the June investor report revealed that capital expenditure for 2020 and 2021 has been cut from £1.1 billion and £1.8 billion to £445 million and £357 million, respectively. This is consistent with its previous report published in May, which also stated that expansion plans and related capital investment at the airport could be deferred by two years due to the coronavirus, which raises serious questions regarding what airport capacity will be needed in the next few years. The announcement to delay Heathrow Airport’s plans for a third runway further is not expected to have an impact on the sub-sector’s outlook, as the CPA has always taken the view that works would occur well beyond the forecast horizon. Gatwick Airport’s rolling £1.1 billion five-year capital investment programme (2019 to 2024) has also been impacted by the pandemic, with planned capital expenditure cut by £157 million for 2020 and £196 million for 2021. More than half of the projects in delivery have been paused, with only critical projects continuing or those nearing completion, whilst 47 of the 49 projects in the design phase have been suspended. The Pier 6 western extension, which is the single largest project within the programme, is among the projects affected, with construction works on hold until 2022. Similarly, the focus of Manchester Airport’s £1.0 billion ten-year investment programme and Stansted Airport’s £600 million five-year transformational programme will be on completing the current phase of work at both airports, whilst future phases have been paused until economic conditions normalise. Birmingham Airport’s £500 million investment plan to improve, modernise and extend facilities by 2033 has also been put on hold, whilst London City Airport’s £480 million expansion programme will be paused at the end of the year when work is completed on the new aircraft stands, a full-length parallel taxiway and new passenger facilities. Although there

81 has been no indication of when some of these airports would restart expansion plans, it would largely depend on the recovery in air travel demand, which is not expected to return to pre-coronavirus levels until 2023 at the earliest. Meanwhile, work on Luton Airport’s new £200 million light rail system that will allow trains to run directly into the terminal is currently underway and is due to be completed in 2021. Plans to build a new £150 million three-storey terminal at Leeds Bradford Airport by 2030 are also in the pipeline, but given the impact of the pandemic on the aviation industry and environmental concerns, delays to the decision- making process cannot be ruled out.

Unlike airport expansion programmes, plans to expand full-fibre broadband across the UK have continued throughout the coronavirus pandemic. This includes BT’s £6.0 billion investment programme, which aims to extend its full-fibre network to 4.5 million premises by the end of March 2021, and 20 million properties by the mid- to late-2020s. So far, 3.0 million premises have been connected to Openreach’s full-fibre network. Furthermore, Virgin Media’s £3.0 billion Project Lightning programme aimed at extending its fibre network to four million additional premises by the end of 2019/20. Virgin Media’s preliminary results for 2020 Q2, however, revealed that a total of 2.3 million premises were connected during the programme, significantly below its target. Virgin Media also aims to roll out gigabit broadband to nearly 15 million homes by the end of 2021. To date, Virgin Media has delivered its Gig1 broadband to 3.7 million homes across the UK. Other investments in full-fibre networks include CityFibre’s £4.0 billion Gigabit City Investment Programme that aims to roll out full-fibre to eight million premises by 2025 (revised up from five million following the acquisition of TalkTalk’s FibreNation), Hyperoptic’s £500 million project to extend its fibre network to five million homes by 2024 and Gigaclear’s plans to expand its network to 500,000 rural properties by 2023. In addition to this, the government has allocated £740 million from the National Productivity Investment Fund (NPIF) to support the market to roll out full-fibre connections and future 5G communications by 2023/24. From the NPIF funding, £200 million was allocated for a new Local Full Fibre Network (LFFN) challenge fund to stimulate investment in full-fibre networks across the UK, including rural and urban locations, £200 million for the Rural Gigabit Connectivity Programme (RGCP), whilst £160 million has been earmarked to support 5G development and £35 million to improve connectivity on trains. In Budget 2020, the government announced £40.8 million of funding from the third wave of the LFFN for seven areas, and committed £5.0 billion of funding to support the rollout of gigabit-capable broadband in the most difficult to reach 20% of the country, notably rural areas. W-shaped Scenario:

• Expansion of full-fibre networks scaled back again due to resurgence of nationwide restrictions

• UK airports halt capital projects for reassessment

If a second wave of the coronavirus emerges at the end of 2020, works under major full- fibre broadband programmes are likely to be scaled back once again, whilst capital projects at major airports across the UK would be paused. Although activity under broadband expansion programmes is expected to recover strongly from 2021 Q1, capital projects and long-term investment programmes at UK airports are likely to remain on hold for a longer period to reassess plans and decisions.

82 Infrastructure R&M

Infrastructure repair and maintenance (r&m) includes work on assets owned by utility companies, publicly-funded assets such as roads and rail, airports and energy- generating facilities.

Infrastructure R&M Output - Main Scenario

12,000

10,000 8.6% 4.2% 1.9% 1.5% 1.8% 1.1% 5.0% -4.6% -2.4% 8,000 -6.1%

6,000

4,000 £ million - 2016 Constant Prices 2,000

0 2013 2014 2015 2016 2017 2018 2019 2020s 2021s 2022p s = scenario p = projection Source: ONS, Construction Products Association

Infrastructure repair and maintenance (r&m) work continued throughout the COVID-19 (coronavirus) lockdown from late March to mid-May, as it was deemed critical to the running of the country’s infrastructure, but with some inevitable pauses, activity was impacted in the first half of year. Although this suggests that the profile of the sector has been temporarily disrupted by the coronavirus pandemic, the underlying drivers of activity remain unchanged from previous forecasts and will continue to support activity from the second half of this year.

In its second Road Investment Strategy (RIS2), Highways England has committed to £5.8 billion of capital funding for operations, maintenance renewals and business costs during Road Period 2, running from 2020/21 to 2024/25. Although annual spending in this area is expected to average £1.1 billion during the first three years of Road Period 2, the CPA expects a hiatus during the transition from the RIS1 and RIS2. Meanwhile, local authorities manage 97% of the roads network and remain financially-constrained due to cuts in central government funding since 2010. According to the Local Government Association, local authorities will face an overall funding gap of almost £8.0 billion by 2025, which is likely to be worsened in the near-term. As a result, basic repairs and maintenance are unlikely to be a key driver of work in the sector despite the urgent need for basic repairs to roads.

The UK government has committed £4.7 billion of capital funding for local highways maintenance over a six-year period between 2015/16 and 2020/21. Of this, £674 million has been allocated for 2020/21, which is lower than the £725 million allocated for 2019/20 and 2018/19. Over the same six-year period, the government has also committed £6.6 billion of funding to improve local roads and tackle potholes. In 2015, the government announced a Pothole Action Fund, which now totals £296 million between 2016/17 and 2021, to allow local authorities to repair potholes or stop them forming in the first place. £25 million of this was earmarked for 2019/20 and £50 million for 2020/21. In Budget 2018, the government allocated £150 million of funding from the

83 National Productivity Investment Fund (NPIF) to local authorities for small congestion-related improvement projects such as roundabouts, with £75 million available in each financial year, 2021/22 and 2022/23. There is little evidence, however, to suggest these funding announcements have filtered through to activity on the ground and given that funding for road maintenance is not ringfenced, local authorities may use this funding on other priorities. Nevertheless, there are indications that local authorities and Highways England had both taken advantage of quieter roads across the UK during the coronavirus lockdown period by carrying out repairs and maintenance work that is often capital intensive and, therefore, is less affected by social distancing measures. In Budget 2020, the government announced a new £2.5 billion Potholes Fund with £500 million in each year between 2020/21 and 2024/25. Combined with other announcements, £1.5 billion is expected to be spent on pothole repairs in 2020/21. Furthermore, in its £5.0 billion “New Deal” announced in June, the government earmarked £100 million of funding for this year to deliver 29 road improvement schemes across England, which includes repairing eight bridges and viaducts and fixing local roads.

Despite these funding announcements, the Asphalt Industry Alliance’s 2020 ALARM survey revealed that the maintenance backlog for local roads in England, London and Wales increased 13.8% to £11.14 billion, from the £9.79 billion reported last year. For England, there was a 12- year backlog of local roads maintenance, at a value of £9.6 billion. This is £1.7 billion higher than the one-time catch-up cost of £8.0 billion estimated in the 2019 survey. For London, the average maintenance backlog was eight years, at a cost of £777.0 million, down from £1.0 billion in the previous survey. The survey also reported that 9% (19,034 miles) of the overall network is likely to require maintenance within the next 12 month. The Asphalt Industry Alliance estimates that an additional £1.5 billion per year for the next 10 years for road maintenance is needed in order to bring local roads up to a standard from which they can be maintained in a cost-effective way. Furthermore, in its report published in July 2019, the Transport Committee stated that a front-loaded long-term funding settlement is needed to address the backlog of maintenance and should be considered at the Spending Review in 2019, but this was delayed.

In the rail sub-sector, the focus of Network Rail’s Control Period, CP6, running from 2019/20 to 2023/24 will largely be on maintenance and renewals, with fewer new enhancements. CP6 has a budget of £47.9 billion, compared to £38.3 billion allocated for CP5. In October 2018, the Office of Rail and Road (ORR) set out its final determination on Network Rail’s £34.7 billion five-year spending plans. It approved £7.7 billion spending on maintenance and £16.6 billion on renewing the existing railway, with renewal work seeing a 17.0% increase from the £14.2 billion in CP5.

Highways England Road Investment Strategy 2 (2020-2025)

£000’s

2020/21 2021/22 2022/23 2023/24 2024/25 Total Operations, maintenance renewals and business costs Resource 1,201 1,160 1,199 1,221 1,293 6,074

Capital 1,098 1,145 1,113 1,276 1,193 5,825

Capital enhancements 2,475 3,076 2,980 2,885 2,702 14,118

Designated funds* 159 169 174 184 184 870

Preparing for RIS3 39 59 107 142 124 472

Total 4,973 5,609 5,572 5,708 5,496 27,358 *Ring-fenced funding to support environmental and community wellbeing, users and communities, innovation and modernisation, and safety and congestion across the Strategic Road Network (SRN)

Source: Highways England

84 Within water & sewerage, activity will be supported by the new five-year Asset Management Plan (AMP7), running The £2.5bn Potholes from 2020/21 to 2024/25. In its final Fund aims to repair determinations published in December 2019, Ofwat approved a £51.0 billion potholes spending package that will allow water 50m companies in England and Wales to maintain existing services and improve resilience during AMP7, 13.0% higher than the £44.0 billion allocated for AMP6. over the next five years Although the new five-year regulatory periods in the water & sewerage, rail and roads sub-sectors are expected to underpin activity in the near-term, the CPA expects a hiatus before any work comes through the pipeline. This, as well as reduced activity in the first half of 2020, due to shifting priorities to address only essential repair and maintenance and restarting new build during the coronavirus pandemic, would result in a 2.4% decline for the full year under the main scenario. Growth is then expected to pick up slightly to 1.5% in 2021 and 1.8% in 2022, as r&m activity increases under the five-year regulatory periods. W-shaped Scenario:

• Local authorities focus on critical coronavirus related r&m in 2020

• R&M output is likely to be overshadowed by new build activity rather than basic maintenance in 2021 and 2022

If local authorities shift funding profiles once again to focus on essential repair and maintenance work amid a resurgence of the outbreak before the end of the year, this would result in lower activity in 2020 Q4. Activity is then expected to pick up from 2021 Q1, reflecting some degree of catch-up, but given that the focus would largely remain on major new build projects, the pace of recovery would be moderate.

85 Image courtesy of Highways England. The Construction Products Association is the leading organisation that represents and champions construction product manufacturers and suppliers. This vital UK industry defines our built environment, providing the products and materials needed for homes, offices, shops, road, railways, schools and hospitals. Our industry directly provides jobs for 373,000 people across 24,000 companies and has an annual turnover of £61 billion.

The CPA produces a range of economic reports that provide our members, policy-makers, and wider industry with a detailed understanding of the construction market to facilitate planning and business development. Members of the Association are entitled to receive these insights at no additional cost. Non-members can make one off purchases or subscribe for a full information package.

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86 ISBN: 978-1-909415-39-3

October 2020

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