UK construction industry 1 - The UK construction market after the London Olympics

 

UK construction market that continues to expand even after the Olympic Games

Currently, the construction market in Japan is booming supported by vigorous construction investment. When talking with people in the construction industry, this boom is until the Tokyo Olympic Games and thereafter there is a possibility that it may stagnate over the long term. On the other hand, there seems to be some expectation that the business conditions will continue to be favorable due to the demand for construction related to Linear Shinkansen and repair work of aging infrastructure and buildings. I can not tell what will actually happen unless the time approaches. However, in predicting the future, one way is to refer to examples of other countries?

In recent years, the Olympic Games were held in developed countries like London, the capital of the United Kingdom. The London Olympic Games were held in 2012, but until the year 2013, the size of the construction market in the UK has temporarily stagnated but has since expanded to the present.

 

(Source: Office for National Statistics of UK)→ Click here to download the original data

 

(Source: Office for National Statistics of UK)→ Click here to download the original data

 

The housing construction market is mainly driving the market growth. The background of expanding the housing construction market is that the population is increasing due to the increase in immigration etc. On the other hand, due to continued insufficient housing supply capability, the government has asked the construction industry to increase the number of housing constructions. This is why now companies in each industry have a policy of responding to it. In addition, private commercial facilities, offices, and infrastructure construction markets other than houses are gradually expanding. Although the growth of the renovation maintenance market is gradual compared to that of the new construction, it can be said that it is an upward trend.

In the UK and Japan, the environment surrounding the construction market will not be the same. Therefore, there is no guarantee that the Japanese construction market will have a similar trend. However, I think that the construction market in Japan probably will also be stagnating in the short term, during the Olympic year and next year. And also, I think that the possibility of re-expansion of the construction market may be in Japan If there is sufficient demand, even though it is not as high as the British from around 2022, the next year of the Olympic Games.

 

The profit margin of non-residential construction projects that has declined after the Olympics

As I mentioned above, the scale of the UK construction market is expanding. However, the performance of the construction business is not necessarily doing well. While the performance of the housing construction business is strong, the business performance of non-residential construction (commercial facilities/office, industrial facilities, infrastructure, etc.) continues to deteriorate. Below are the trends of sales and operating profit margins of each of the top share companies in the UK housing construction business and those in the non-housing construction business over the past 10 years.

 

Barratt Developments (1st place in the UK housing construction market sales share)

 

Galliford Try (7th place in the UK housing construction market sales share)

 

Kier (1st place in the UK non-housing construction market sales share)[1]

 

Interserve (4th place in the UK non-residential construction market sales share)

 

It can be read from the above data that housing construction business has been booming and both sales and operating profit margin are on the rise since 2009 when the financial crisis was caused by the collapse of Lehman Brothers. On the other hand, the operating profit margin of non-housing construction business is declining over the long term. In the UK, non-residential construction business seems to be gradually becoming a less profitable business.

There are two reasons for this. One is that construction materials are getting more and more expensive and they are pressing on the profits. The other is that personnel expenses are rising and are also pressing on the profits

 

Major construction companies in the UK have switched business models largely since 2012, in order to respond to this situation. Apart from construction projects, they began to focus on providing various support services[2] in areas related to construction projects. Data to support this trend is presented below.

 

 

(Source of data of each company introduced above: Annual report of each company)

→ Click here to download more detailed performance data of major UK construction companies

Kier has the No. 1 share in the UK domestic non-residential construction market. It has significantly expanded its support service business in 2014 by a corporate acquisition. As a result, they succeeded in bringing the company's overall operating margin towards an upward trend. Moreover, Interserve corporation in the same industry also expanded the support service business significantly in 2014 by acquiring companies. The company successfully greatly increased the operating profit margin during the 3 years from 2014 to 2016, even though the operating profit margin of the year 2017 declined significantly by the large shortfall of profitabilities of specific projects.

 

In the construction market in Japan, I do not know how the prices of construction materials will change after the Olympic Games. But in Japan where the declining birth rate and aging population continues, the rising trend of labor cost is probably a phenomenon that can occur similarly to the UK. If the economic environment where construction companies can charge higher construction cost to their customers continues in the future, it would be very favorable for Japanese builders. If not, there is a sufficient possibility that the profit margin of the construction business is going to decline over the long term. Thinking about the business models Japanese construction companies should adopt in that situation, I think that one hint is in the way taken by construction companies in the UK. In this blog, from the next time on, I will provide various information regarding the trend of expanding support services in major UK construction companies.

Posted by Tetsuo Matsushita on March 29th, 2019.

[1] The performance of Kier's non-residential construction business includes the results of construction projects outside of the UK, but the ratio is only about 15%.

[2] Support services are various services which let the tenants of the building reside and use it comfortably. The examples of support services are building maintenance, cleaning floor and windows, reception service at an entrance or security guard, etc.