20/07/2016
With the dust settling after the shocking referendum results, where a small majority of Britain’s public chose to leave the European Union, it is a good time to examine the challenges and opportunities that the British construction industry face going forward into a post-Brexit future.
We can only work on the assumption that Article 50 will be triggered sometime next year, as Theresa May, the new British Prime Minister made clear that, “Brexit means Brexit…and we will make a success of it”. Indeed, when forming her new Cabinet, Mrs May created the role of Secretary of State for Exiting the European Union, and put Leave supporter David Davis in the role.
So what lies ahead for the UK construction industry? There is little doubt that there will be turbulent times ahead, but what opportunities does Brexit hold for the market?
Uncertainty – the curse of all economies
The biggest immediate threat to the construction sector is the uncertainty. Investors, both foreign and domestic, like to operate in politically and economically stable environments, to reduce unnecessary risk. Prolonged delay in triggering Article 50 and endless Brexit negotiations will do little to calm investors’ fears.
Before the referendum vote, one forecaster wrote of a potential vote to leave as likely to entail, “an immediate and simultaneous economic and financial shock for the UK, due to an expected drop in business investment, hiring and confidence, cease in flow of capital into the UK and a sharp fall in the value of the Pound”.
This prediction has proved correct, especially in relation to the value of the Pound. With some investors already over-extended, there is likely to be a drop in investment values and transactional volume. Developers are also challenged by the fact that construction costs may rise if free movement of labour ceases.
The Opportunities
Although 85% of the construction industry supported Britain remaining in the EU, there were some strong remain supporters that believed exiting the single market could provide great benefits.
One of those in support is Lord Bamford, the Chairman of JCB, one of the country’s most successful family-owned businesses.
In the lead up to the referendum, Mr Bamford dismissed the ‘scare mongering’ of those who insist it would make trade far more difficult with other European nations, because he believes that it is in everyone’s interests to trade openly and freely:
“I think it would be, because I really don’t think it would make a blind bit of difference to trade with Europe. There has been far too much scaremongering about things like jobs. I don’t think it’s in anyone’s interest to stop trade. I don’t think we or Brussels will put up trade barriers”.
He also claimed that the red tape imposed by Europe can often make it easier to trade with those outside the EU:
“It’s a burden on our business and it’s easier selling to North America than to Europe sometimes."
He also has commented,
“If the UK wished to remain in the single market but outside the European Economic Area (EEA), like Switzerland, it would probably have to accept certain EU rules by arrangement. Whether these would include the free movement of people would depend on the outcome of UK-EU negotiations.
Most studies on the impact of migration on the UK economy have found weak or ambiguous effects on economic output, employment and wages on average
On the other hand, if the UK were to negotiate a relationship with the EU similar to the EEA states or Switzerland, it might find that it did not have any greater scope to control EU immigration to the UK than it did as an EU Member State.”
Developers can also take heart in the fact that in May 2016, just prior to the referendum, the construction industry reported an 8% rise in contracts (around £6.1 billion worth). The largest project awarded in the capital was a £325.8m deal with Canary Wharf Group to build the new office building known as Ten Bank Street.
Concluding remarks
No one is under any illusions that leaving the EU will be smooth sailing. And the impact will not just affect Britain. The IMF has recently cut its global growth forecast for the next two years, citing uncertainty surrounding Brexit as a reason.
On the day before Britain's 23rd June EU referendum, the IMF was "prepared to upgrade our 2016-17 global growth projections slightly", IMF chief economist Maury Obstfeld said in a statement; "But Brexit has thrown a spanner in the works."
Britain’s 2017 growth prediction was slashed by 0.9% to 1.3%.
To take advantage of the opportunities, a post-Brexit UK may present, the construction sector will need to plan diligently and strategically, keeping a sharp eye out for areas in the market that can be exploited.
Fisher Scoggins Waters are a London based law firm who are experts in construction, manufacturing and engineering law. If you would like more information about the impact of Brexit on your sector, please phone us on 0207 993 6960.