RICS Global Construction Monitor, Q1 2021
- Global Construction Activity Index rose to +14, substantially higher than the low of -24 in Q2 2020
- Accessing finance remains difficult and the main impediment to activity, due to uncertainty surrounding the path of recovery
- Supply chain bottlenecks emerging, with border closures impacting on rising costs of materials and labour costs
- Impact of COVID on onsite productivity not as bad as initially expected with 6.7% predicted decline compared to Q2 2020 prediction of 11.7% decline
The global construction market appears to be firmly on a recovery footing in the first quarter of 2021 as forecasts for the global recovery are revised upwards according to the latest RICS Global Construction Monitor. However, whilst sentiment has broadly improved, areas of weakness remain with uncertainties surrounding the path of recovery and evidence of supply chain bottlenecks coming to the surface.
The RICS Global Construction Activity Index*, a measure of current and expected construction market conditions among construction professionals, has risen to +14 in Q1 2021 up from +3 in Q4 2020. This is substantially higher than the low of -24 in Q2 of 2020, and indicative of the market now in expansionary territory following the stablisation seen in Q4 2020. Unlike in previous quarters the data signals expansion in all regions, albeit stronger in Europe (+16), Asia Pacific (+15) and the Americas (+13) than in the Middle East and Africa (+3).
Variations in vaccine rollouts causing dispersion within regions
Whilst the headline figures signal improvement in every region, within-regions there is a dispersion of market conditions, suggesting that although the industry is globally continuing to recover, idiosyncratic factors are affecting the state of construction markets across various geographies. The dispersion between markets is likely to increase in the coming months given that the economic outlook is highly leveraged on the success or failure of national vaccine rollouts.
In addition to the impact of vaccine rollouts, the uncertainty surrounding the path of the recovery is having a strong influence on the construction market. Tough financing conditions are cited as a factor in holding back activity by two-thirds of respondents, which may be a symptom of lingering uncertainty and financers unwilling to take on risk at this point in the cycle.
Concerns rising material costs could hamper profit margins over coming year
After financial constraints, the cost of materials is the second biggest factor cited by respondents as holding back activity, sitting at 66% up from 45% in Q2 2020. The increase in respondents citing cost of materials as constraining activity appears to be a symptom of emerging supply chain bottlenecks. Respondents commentary suggests that border closures in the wake of COVID lockdowns have pushed up the price of materials and are also appearing to have an upward impact on labour costs in markets that depend on foreign labour or migrant labour from other parts of the country.
In line with the positive overall outlook recovery narrative, expectations for tenders are now expected to rise 3.1% over the next year, up against the 1.4% increase predicted in Q4 2020. However, profit margins are expected to be hampered over the coming year as the cost of materials is expected to increase 6.3% over the next twelve months, which is driving the predicted increase of 5.9% in construction costs over the same period.
Upbeat expectations for workloads over the next year may be driving the larger increases in tenders and costs. Workloads are generally expected to rise over the coming twelve months, painting a far more optimistic picture after a quarter of mixed demand. There are exceptions, with some markets in the Middle East and Africa (Oman, Kenya and Mauritius) expecting a fall in workloads, whilst other markets expect activity to stabalise (Spain, South Africa and Malaysia). Notably the construction market in the world’s two largest economies, China and the USA, is expected to undergo a robust expansion.
Measuring the impact of COVID on the construction market
As part of the Q1 2021 survey, respondents were asked additional questions about the impact of the pandemic on construction markets. When asked about the impact on productivity on construction sites, participants responded that onsite productivity is expected to decline 6.7% globally because of COVID. This is less than the decline expected in the Q2 2020 survey, when respondents expected a 11.7% decline in onsite productivity, signifying that the impact on productivity from the pandemic may not be as bad as initially expected.
Sean Ellison, Senior Economist at RICS commented: “Feedback from Chartered Surveyors indicate that the recovery in the global construction market is gaining momentum, propelled by work on infrastructure projects in Asia Pacific and residential projects in Europe (and to a lesser degree the Americas). With few exceptions, RICS professionals in most global markets expect a pickup in construction market activity across all segments of the market over the next year.
However, the recovery is not without its challenges. Increasingly respondents are pointing out difficulty in sourcing materials amid supply chain bottlenecks; which appear to have resulted in the cost of materials pushing up overall construction costs. In markets that rely on migrant labour, the persistent restrictions on mobility have led to a shortage of labour. As a result, construction costs are expected to rise twice as much as tender prices over the next twelve months, which will undoubtedly put margin pressure on construction firms.”
* The Global Construction Activity Index is a weighted composite measure encompassing variables on current and expected market activity as well as margin pressures.