The recent
volatility in the stock market has underlined the likelihood of further
interest rate rises this year which will inevitably impact on the private
construction sector.
The swings in the US
Dow Jones Index in early February (followed closely by the FTSE 100) reflected
alarm on stock markets that rising wages and prices would put pressure on
interest rates.
In the UK, where the
consumer price index rose at an annualised rate of 3% in January (the retail
price index rose at 4%) - compared with a Bank of England target of 2% - a rise
in base rates from the current level of 0.5% is now expected in May.
The prospect of
rising interest rates has already taken its toll on housebuilders’ share
prices. Persimmon’s share price (now down 15% since its peak last October) and
Taylor Wimpey (down 10% this year) has come under pressure as the market
worries that rising mortgage rates will slow sales in the months ahead.
Yet there have been
signs of life in the housing market in the new year. Although mortgage
approvals remain subdued, house prices rose by 3.2 % nationally in January on
the month a year ago and up from 2.6% in December, according to the Nationwide.
One factor behind the jump is thought to be a shortage of existing homes, which
if anything bodes well for new housebuilders. The Nationwide believes housing
market activity should only slow modestly this year, as unemployment and
mortgage rates are set to remain low by historic standards.
The January Glenigan
Index also pointed to a promising start to the year for housebuilders as the
strong finish which they saw to 2017 continued into January. The index showed
private housing projects starts in the three months to January rose 9% on the period
a year ago.
Meanwhile, the
housing pipeline also remains healthy. The latest Glenigan/HBF Housing Pipeline
Report showed that the number of units approved in the third quarter of 2017
was up 6% on the previous quarter and 9% higher than the period a year earlier.
Despite stock market
volatility, demand for commercial and industrial space on prime sites remains
healthy. Recent figures show that Harwell Campus near Oxford (see aerial photo)
let 160,000 sq ft of new speculative Grade A space in 2017, equal to 40% of the
total in the area and the largest combined commercial take-up and development
of new space ever seen in Oxfordshire.
The City’s
confidence in the industrial building sector does not seem to have been dented
by recent stock market turbulence. The share price of Segro, the leading UK
industrial developer, soon recovered the losses seen when Wall Street started
falling and at 585p, is just off its all-time high. Activity in the sector
remains buoyant; the Glenigan Index showed industrial project starts in the
three months to January were up 21% on the period a year earlier.
As well as warehouse
development for online commerce, exporters are continuing to thrive,
particularly those with Continental markets. The Eurozone has started the year
with the strongest growth in new activity since 2006, according to the latest
purchasing managers survey from IHT Markit.
On the commercial
property front, the share prices of the major quoted developers such as British
Land and Hammerson
have not fared much worse than the overall market, suggesting early rate rises
have not dramatically changed the outlook for the sector.
Savills
– a bellweather for the sector, whose share price is just 4% off its all time
high - recently pointed to robust occupier demand in the UK and continued
strong investment interest from the Asia Pacific region. Activity might have
slowed in the commercial sector - the latest Glenigan Index points to a halving
in office project starts in the three months to January, compared to a year
earlier – but the mood across the commercial property sector is far from
downbeat.
