Brexit – Uncertainty in construction momentum long-term

Looking back at the boom and subsequent bust in our economy over the last 8-10 years, we can feel somewhat relieved that things have improved, but ask the man on the street, he will say we have a long way to go. In the construction industry we have lost seven to eight years there is a lot of catching up to do.

Colm McGrath, Managing Director, Surety Bonds.

Ireland is emerging from a protracted recession, marked by a return to moderate growth and rising international competitiveness. For the past year or so, genuine optimism has started to return to many parts of the economy. This increased confidence has helped to stimulate the economy, for example, international investors have been investing in Irish property, both directly through the acquisition of large hotels and commercial buildings, and indirectly through the purchase of Irish loan portfolios. A number of multinational IT and fund management companies continue to see Ireland as a hub for their European operations and have invested accordingly. To add to this positivity, the construction industry has momentum and is on the upswing. The commercial sector is leading construction due to expenditure on Foreign Direct Investment projects and by renewed activity in the commercial office sector due to rapidly rising rental levels. The residential sector lags behind, onerous planning conditions, the tight lending environment, high levels of indebtedness amongst developers and the cost of construction still placing downward pressure on this sector. The required volume of 26,000 units per annum are far from being met with around 12,000 units being completed in 2015, there is still massive scope for growth.

But this positivity looks somewhat uncertain following the UK’s decision to leave the EU, “Brexit”, on the 23rd of June. While growth in the Irish construction sector is predicted to be strong over the next 12 months Ulster Banks Construction PMI rose to 61 in July the 35th month of continuous growth, the UK’s construction sector is firmly back in recession. The UK’s construction industry was already slowing down but Brexit was a sharp shock that has seen the fastest fall in construction PMI since June 2009, now 45.9 as of July 2016. Brexit has taken many by surprise causing many businesses to hold off on capital expenditure, the protracted negotiations which will take years will impact the UK’s construction industry until there is more certainty.

Although the Irish construction sector is primarily domestically focused in order for it to sustain momentum it needs our Government to actively pursue its public capital expenditure programme and it needs our local banks to have confidence to take calculated risk. The industry now more than ever needs certainty.

With growth broadly based with the commercial sector there is huge scope for civil engineering projects which is currently posting the weakest rise in activity, growth lies firmly on the shoulders of the Government here. Housing as mentioned previously is lagging way behind demand, the Department of Housing, planning, Community and Local Government completion stats for 2015 were 12,666 and to the end of June 2016 it is 6,642 which is marginally ahead of last year. Planning delays, the cost of planning and the lack of availability of development bonds all hampering commencement.

The potential to benefit from Brexit which may be obtained by Foreign Direct Investment could be negated by the lack of infrastructural investment that is required and the failure for housing to reach the required demand of 25,000+ homes per annum. As evidenced by the skyrocketing rents both commercial and residential we have capacity issues, mainly in Dublin but that is where the larger corporates want to be. Our roads are grid locked with traffic and our trains are bulging to capacity at peak times as workers are pushed further and further away from their place of work. If these problems are not addressed companies and workers may look elsewhere to set up home.

While uncertainty remains high, it is too early to know what the impact of Brexit will be in the medium too long-term for the Irish construction industry but we cannot wait to find out we need to be proactive and we should all be looking for some joined-up thinking in relation to planning, funding and development in the sector. Financial investments need to be channelled into and be compatible with demands across the entire economy. Integration of construction project’s into larger economic frameworks of local and regional requirements that show a positive impact on the economy, on society and on the environment. Momentum will be maintained in the long-term once all factors are taken into consideration.