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Brexit in the construction industry

Introduction

If it seems like there's not been much the UK and the EU can agree on in recent months, the importance of construction to the wider economy is one such rare area of consensus.   As the UK enters a labyrinth of political, legal and trade negotiations, securing an outcome which works for the construction industry will be crucial to the future good health of the broader UK economy. Government statistics put construction’s annual contribution to the UK economy at anywhere between £90 billion pounds and £110 billion pounds, which works out at about 7 percent of the UK's entire GDP.

In addition, there are 2.9 million jobs supported by the domestic construction industry. This includes everything from plumbers and electricians working on small-scale home improvements to architects, engineers and industry executives.  

Prior to the referendum, sentiment on the wisdom or otherwise of staying in the EU was mixed in the construction industry – although everything from formal surveys to anecdotal evidence suggested that the sector as a whole favoured staying in the EU, which is, of course, the world's largest trading bloc. However, there were key figures in the industry in favour of the UK voting leave – not least Lord Bamford, the chairman of JCB who was a high-profile supporter of the 'Leave' campaign and said the UK had ‘little to fear from leaving the EU’.

Other leading industry figures were equally vocal that the UK should remain in the EU – David Thomas, CEO of housebuilder Barratt, said his firm would ‘much prefer that the UK stays within the EU’ and firms across the industry including ISG, Mott Macdonald and Jones Lang LaSalle publicly threw their weight behind the 'remain' cause.

The Referendum – The initial impact

The first impacts of the UK's vote to leave the European Union were felt in construction within minutes. Markets in London opened at 7am and shares in some of the country's biggest housebuilders were in freefall as soon as trading commenced. By breakfast, David Cameron had resigned and by mid-afternoon newswire, Persimmon and Taylor Wimpey saw their share price fall by almost a quarter, with Barratt and Berkeley down by around a fifth. At the close of the market on the first day of trading following the Brexit result, these four housebuilders made up four of the five biggest losers on the FTSE 100 – with Lloyds Banking Group the only non-housebuilder in the Top 5.

However, as the weeks and months have passed since the referendum there are signs that the immediate aftermath of the vote has not been as bad as originally feared.  By August, the Office for National Statistics (ONS) was reporting that, in respect of construction, there was ‘very little anecdotal evidence at present to suggest that the referendum had an impact on output’. A month later, in September, its experts were again reporting little evidence of any kind of plunge in industry sentiment. Output figures for July this year were largely flat when compared to the year before and something of an eerie calm appears to have descended upon the industry as the key players nervously eye the government's strategy as Britain proceeds towards the business end of Brexit.

Depending upon who you listen to, Brexit will lead to a UK construction industry freed from the shackles of EU bureaucracy, allowing the Government and major private sector firms to favour British suppliers in their procurement processes, or will result in prohibitive restrictions on the movement of labour and goods that will send project costs higher and badly hit demand across the industry. And of course, these are some of the critical issues that are likely to dominate the discussion in the months and years ahead.

Freedom of labour

Perhaps the issue which is most cited as being of critical importance for the construction industry with regard to the coming negotiations is the freedom of movement for labour. Put simply, foreign labour is essential to the UK construction industry. The Royal Institution of Chartered Surveyors (RICS) said, in a briefing note following Brexit that ‘construction within London, in particular, has become almost reliant on importing skilled labour’.

Approximately 10 per cent of the UK construction workforce is foreign-born according to figures from the OECD (the Organisation for Economic Co-Operation and Development). Any post-Brexit curbs on freedom of movement for workers will therefore, affect a substantial proportion of the industry's workers – and given that any such curbs would also come at a time when the industry is already facing a shortage of skilled labour.

Add in the fact that by one account 22 percent of those working in construction in the UK are over 50, with 15 per cent over 60, and it becomes clear than tough restrictions on European workers could be a disaster for construction. Workers in key professions available for work can expect to be able to charge a premium for their services – driving up project costs and perhaps further hitting output.

Supporters of Brexit say that a new visa regime will allow the UK to better-target the skilled workers that it needs. In either case, expect construction to make vigorous representations to the Government throughout the forthcoming Brexit negotiations. As engineering figurehead, Sir John Armitt noted in his post-referendum remarks: ‘The issue of free movement in a Brexit world is extremely complex, politically charged, and requires careful consideration. Politicians and officials leading the exit negotiations must be equipped with the facts’.  I am sure we would all agree with that.

Materials

Aside from the movement of labour, the movement of materials is also a concern and back in 2010, the UK Government's Department for Business, Innovation and Skills estimated that 64% of building materials used in the UK were imported from the EU. That figure is unlikely to have altered in the intervening years and any exit from the European Union which results in UK firms having to pay additional tariffs on such goods will have a significant adverse impact on their operations. On the flip side, some cite the UK's imminent departure from large swathes of European regulations as creating the conditions for a boost to the sector, allowing public sector bodies to stipulate the use of 'UK firms and materials only' in their procurement processes, providing a significant helping hand to British business.

Funding

A further issue is that of the availability of funding as with EU membership for the UK came access to the European Investment Bank (EIB) and the European Investment Fund (EIF). Last year these institutions invested €7.8 billion in major UK infrastructure projects – the largest sum in a single year to date. They also lent €665 million to small and medium-sized enterprises (SMEs) last year. A recent survey conducted by a business magazine found that 58.5 per cent of business leaders considered a loss of EU funding to be the biggest barrier facing their business post-Brexit.  Without such funding some fear for the future of high-profile UK infrastructure projects such as the High-Speed 2 (HS2) railway project.  

However, the recent approval of the Hinkley Point nuclear power station proves that the UK has not lost its appetite for large-scale infrastructure and while we might be losing potential EU funding, funding from other sources, such as China (as Hinkley would suggest) and possibly other emerging economies, might become available.

Conclusion  

In conclusion, the future for construction, as with most other industries and sectors, is uncertain and the playing field seems to have shifted from, not whether there will be a Brexit at all, to the type of Brexit that might face us in two years’ time.  A ‘hard’ Brexit would have serious issues for our industry in terms of funding, materials and labour.  A ‘soft’ Brexit will possibly not deliver on the electorate’s verdict. As Sir John Armitt concluded in post-vote remarks on behalf of the Institute of Civil Engineers (ICE): ‘Access to skills, foreign investment, use of codes, standards and regulations, and funding for research - the things which are core to delivering the infrastructure that forms the backbone of the UK economy - are hanging in the balance’.

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