The Real Face of Construction 2020

Doka UK, May 7, 2020.- The confinement of half the world population to avoid the spread of the Covid-19 Coronavirus will mean the economic recession in 185 countries. A situation similar to that suffered in the depression of 1929. It is a unique situation in the history of the human being, unprecedented and full of uncertainties. The productive apparatus of these countries is stopped, or with low activity because there is no consumption. The construction sector in the UK will suffer its own impact, but aid is already being prepared.

Coronavirus (COVID-19) has had a significant impact on construction projects across the country. Whilst the majority of infrastructure projects were able to implement the Site Operating Procedures without too many delays, city centre building sites and those with limited space have taken time to adjust to the new ways of working. The Construction Leadership Council (CLC) is also looking at a recovery plan for the industry and how to release workers from furlough in a phased manner. Following its statement on payment and Contracts earlier this month, the CLC also continues to call for collaborative ways of working to avoid costly contractual disputes which are more than likely to result in insolvencies. While construction clients have responded in different ways, the government has been very clear on the response expected from public sector clients. Earlier this month the Cabinet Office published supplementary guidance notes for construction contracts to support contracting authorities in implementing PPN 02/20 – supplier relief due to covid-19.

Chartered Institute of Building (CIOB) has published the study: “The Real Face of Construction 2020 – Socio-Economic Analysis of the true value of the built environment”. This is a very detailed report highlighting the current status of the UK construction industry. Below, we publish a summary and invite you to read this study in its entirety.

The construction industry is recognised as a vital cog within the economy. But it is far more than just an economic driver. Construction has shaped the built environment that has increasingly influenced how we live, the quality of our lives and the world we live in.

The buildings and structures constructed today will last decades, centuries even. They have lasting consequences, shaping not only our present but also our own and future of generations to come. Good buildings and structures are a source of pride and pleasure. Poor buildings scar the environment and damage the reputation of the industry. Great power is entrusted to the construction industry and in those who determine the quality of our built environment. With this comes a huge responsibility to the public good. 

The CIOB’s first Real Face of Construction report published back in 2014, sought to highlight some of the often-overlooked ways in which construction shapes all our futures. Furthermore, it looked at how construction also shapes the lives of those who work within the sector. This latest update seeks to take these themes on and provide recommendations for improving the industry and its social, environmental and economic impact. While the influence of construction ranges well beyond its economic impact, its contribution to the UK economy is substantial. 

The construction industry, as it is defined, accounts for about 6% of the economic output of the UK. However, the narrow definition used for the industry ignores the work of architects, engineers and quantity surveyors. It ignores the manufacturers dedicated to the industry and many other firms that feed into the working of the sectors such as builders’ merchants and plant hire firms. A broader definition of the industry to include these would suggest an industry nearly double of that recorded. Construction provides jobs for 2.3 million people, about 7.1% of the UK total, with hundreds of thousands more employed within other related businesses. 

Construction is the largest provider of the fixed assets that underpin the UK economy. In 2017, under half of the gross fixed capital formation, the creation of vital assets, resulted from the construction of dwellings and other buildings and structures. In monetary terms, this totalled about £132 billion.

To understand the value generated by construction it is essential to understand its relationship with land, or perhaps more pertinently, its relationship with location. It is often argued, especially when it comes to housing, that the price of land determines the value of a house. That is to misunderstand the dynamic. The value of land is derived from the existing building and the community value that already exists. Without nearby buildings the land would have limited value. So, it is safe to suggest that construction gives value to land. The main mechanism for pricing land is the residual land value model. With this model the asset values of nearby buildings are assessed to establish a gross development value (GDV) – that is the likely sales value of a proposed development. 

From this value the estimated cost of build is subtracted along with any other costs such as marketing and fees and professional assistance. The developer then considers the lowest margin acceptable and what remains (the residual) is what that developer is willing to pay for the land needed for the proposed development. Clearly land near high-quality infrastructure and other amenities will be more valuable than land, however attractive, far from urban populations. To illustrate this, we need only check what can be bought with £1.2 million. In the picturesque Scottish Highlands, it buys 4,000 acres. In the leafy suburbs of Surbiton, Surrey, it buys a plot with planning permission of a third of an acre. Equally there is the need to recognise that by improving buildings, transport and other amenities within a community, then it can add to the land value. 

However, it is tricky to extract the total value, outside of taxation, and the added social value felt from the construction of a new urban rail link, for example, by existing landowners and homeowners. These spillovers or ‘positive externalities’ are commonplace in construction and represent a transfer in the value added away by investment in the built environment from those financing the construction to those who may benefit without contributing to the cost. Transport for London (TfL) commissioned a study to evaluate the increase in land value generated by its investment. 

The study took a sample of eight prospective TfL projects that cost around £36 billion (including Crossrail 2, the Bakerloo line extension and the DLR extension to Thamesmead) and found they could produce land value uplifts of about £87 billion over a 30-year period. The increase in the value of land that results from development tends to take a long time and is highly dependent on how successful the area becomes over time. This makes it hard to predict and capture by private sector promoters who have relatively short investment horizons. This ultimately makes it difficult to understand the impact of construction on land value.

The economic impact of major projects It is not feasible to provide an overarching figure for the economic impact or wider impacts of all the projects delivered by the construction industry. Values change over time and the way that we use buildings also changes. However, it is common practice to value the impact of individual projects, particularly larger infrastructure projects, where so much of the value spills over into the wider economy. 

Taking one ongoing major construction project that injects economic momentum into an area as an example is the more than £1 billion Manchester Airport which is investing in a 10-year transformation programme. This will more than double the size of the existing Terminal 2. Assumptions are essential in assessing the balance of costs and benefits. These can and should be challenged. There will be both costs and benefits that are missed or miscalculated, the analysis forms the basis for decision making. According to the airport’s analysis there are huge benefits to the local area from the investment. It is all part of a vision to become a top 10 European airport and one of two primary international gateways in the UK, which serves the Northern economy. 

Listed among its impact on the local area it includes:

  • 22,500 people employed at Manchester Airport
  • 220 direct destinations served by Manchester Airport 
  • 10% growth in point-to-point long haul growth in past three years 
  • £1.7 billion contribution to the UK economy each year 
  • 13th in the world for number of different destinations 
  • An internationally respected airport is seen as a major draw for firms looking to invest in an area, especially for those trading globally. 

The expansion would provide capacity for 55 million passengers a year. The number of passengers in 2018 was 28.3 million, according to Civil Aviation Authority figures, so the major expansion would put it on par with Gatwick, which last year carried 46 million passengers. Clearly the economic benefits of major projects such as the expansion of Manchester Airport are impressive. However, these need to be set within a context of potential negatives. In the case of airport expansions these are most likely to be concerns over the environmental impact of air travel.

Looking more immediately at what construction provides, it is a major employer providing well-paid jobs. In 2018 it provided employment for 2.3 million of the 32.2 million people in work and in doing so put an estimated £74 billion into the pockets of the workforce. This figure includes about £28 billion earned by the large numbers of self-employed that work in construction. These figures, however, do not include the engineers, architects, surveyors and a host of others who work within the broader construction sector which are not directly classified within the industry. 

Analysis by the Department for Business Innovation & Skills in 2013 (now known as the Department for Business, Energy & Industrial Strategy), suggested that the broader construction sector employed about 44% more people than the narrowly defined construction industry. In today’s terms that would add a further one million workers who earn a living as a result of construction projects. In terms of employment the construction sector does more than just provide incomes. 

Among other benefits, the public fully accepts the notion that improving the UK infrastructure would improve productivity, with 81% agreeing versus just 10% disagreeing. However, a frequent complaint levelled at construction and development is lack of consultation. This was supported by the research. 77% of respondents agreed with the statement “the local public is not consulted enough on major projects” compared with 15% who disagreed. 

This suggests a need for the public to be more engaged and their needs to be better understood. Not that this is easy. The public has an imbalanced view of construction when we compare its view with what actual work is undertaken. When quizzed on what they associate with construction, they heavily emphasised roads, despite this sector accounting for a relatively small proportion of overall construction. 

Commercial building, educational building and leisure construction projects account for significantly more than roads in terms of activity, yet these were far less front of mind for the public. This suggests that it is not only important that the industry and policy makers take on board the views of the public, but also that they appreciate where the public lacks understanding of construction and the built environment and where possible seek to correct misconceptions, honestly and openly. 

Not doing so is likely to lead to miscommunication and confusion and generate poorer outcomes. It is also important for policy makers to note how opinions differ within the public at large, regionally and by other demographics. One result that emerged from the survey that deserves attention in this regard, and indeed more investigation, was the differences in attitudes to newer versus older buildings. When asked for their level of agreement on the statement “I feel more comfortable in newer buildings than old ones”, there was a marked difference in views across the age groups. 

On balance the survey found people seem to feel more comfortable with older buildings – 42% agreeing with the above statement and 47% disagreeing. Dig deeper and those aged 18-34 are far more comfortable with new buildings, 57% agreeing with the statement versus 32% disagreeing. But this proportion is reversed for those aged 55+. How we interpret this result is important if we are to make the right decisions over how to reshape the environment. Is it that the older generation just happened to be a generation that preferred older buildings, or is it that, as people age, they prefer older buildings? If today’s younger adults as a generation prefer newer buildings and will continue to do so as they get older, then it might be appropriate to account for these preferences, rather than assume that they will prefer older buildings as they age. How we interpret people’s desires matters. It is important that they are properly thought through and that we do not rely on stereotypes and presumption, particularly as most buildings in the UK will stand for many decades. 

This clearly links to a further difficult question of whether we are building for the present or the future – a future which will always be uncertain. It is not just age that separates the public views on the built environment. Perhaps not surprisingly, adults living in urban areas tend to be more positive about infrastructure, construction and building than those in rural areas. Asked about construction locally to them, 55% of urbanites were positive with 13% negative, while the proportion of those in rural areas that were positive was 48% with 19% negative. Interestingly both urban and rural dwellers were more positive about construction at a national level, with positive scores of 59% and 54% respectively. 

This does suggest a tinge of nimbyism, with the negatives of construction appearing to weigh more heavily with the people the closer it is to their home. When asked about what positives and negatives respondents associate with construction, the highest negative was for road or travel congestion. 39% referred to this factor from a provided list of positives and negatives. This to some degree may reflect the strong association of construction with roads mentioned earlier. On the positive side, 38% referred to the local economic benefits construction brings and 34% noted the job opportunities created. 

Source:  Chartered Institute of Building (CIOB). 

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