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Despite signs of recovery in housing and non-residential spending, the UK construction industry is facing slow growth due to high costs and project delays.
Economic Outlook and Construction Growth
Real GDP growth is expected to be only 1.0% in 2025 and 1.3% in 2026. The Autumn Budget of 2024 presents further risks to short-term growth. It raised significant revenue through higher labor taxes to address a £21.9 billion budget “black hole.”
This poses risks to business investment, as higher corporate costs may reduce job creation capacity. Additionally, high interest rates will affect around 3 million homeowners with fixed mortgage rates below 3%, most of which are set to expire by the end of 2026. Meanwhile, the cost of essential goods remains a concern, with electricity, gas, and other fuel prices in October 2024 still 38% higher than in October 2021.
Real total UK construction spending is expected to decline by 2.8% in 2024. However, with economic and financial conditions improving, growth should rebound to 2.7% in 2025.
Housing Construction Market
The latest data from the UK Office for National Statistics (ONS) shows that total UK construction output grew by 0.8% in Q3 2024, following three consecutive quarters of decline. The quarterly rebound was entirely driven by a 2.0% increase in new work, while repair and maintenance fell by 0.6%. Meanwhile, new orders fell by 22.0% in Q3, following two consecutive quarters of growth.
At the sector level, new housing orders declined by 32.6%, nearing a five-year low, while commercial orders dropped by 20.8%. Public sector (-28.0%) and industrial sector (-26.9%) orders also saw significant declines. More recent indicators, such as the S&P Global/CIPS Purchasing Managers’ Index (PMI), suggest a positive trend in construction activity in recent months.
However, the pace of output growth and new orders slowed in October 2024, with business confidence about the next 12 months reaching a 10-month low.
Residential construction spending is expected to contract by 2.0% in 2024. However, higher real incomes and lower mortgage rates should drive a 3.5% rebound in 2025. Most UK mortgages are fixed-rate, and the Bank of England estimates that about 800,000 fixed-rate mortgages with interest rates of 3% or lower will expire annually until 2027. Many homeowners may face significantly higher monthly repayments upon refinancing.
Non-Residential Construction Market
Non-residential building construction spending is projected to decline by 2.5% in 2024. As financial conditions ease and investor confidence improves, growth is expected to recover to 2.1% in 2025 and 2.6% in 2026.
The Bank of England’s Q3 2024 Business Conditions Report indicates that new commercial development remains below year-ago levels, particularly for traditional office spaces. High funding and construction costs continue to weigh on investor sentiment, especially given the risks to developers’ potential returns.
Subcontractor insolvencies, lengthy planning processes, and national budget uncertainty have also dampened investor confidence. However, demand for office space renovations is increasing as tenants seek modern, sustainable buildings that meet environmental, social, and governance (ESG) standards. For instance, during high-rise building renovations, overhead cranes are used for structural steel lifting to optimize construction efficiency and ensure operational safety.
The Deloitte Summer 2024 London Office Crane Survey reported that 42 new office projects, totaling 4.2 million square feet, commenced construction in the six months to March 2024. Although this represents an 18% decline from the Winter 2023 survey, the volume of new starts remains well above the 10-year average of 3.3 million square feet.
Infrastructure Construction and Future Outlook
Despite ongoing major projects under five-year spending plans for roads, rail, and water infrastructure, infrastructure construction spending is expected to decline by 4.8% in 2024. This reflects delays and cancellations of several planned transport projects, particularly in the road sector, which will limit the expected 2.0% recovery in 2025.
Transport activity will continue to be driven by five-year funding programs, including Network Rail’s Control Period 7 (CP7), which will invest £42.8 billion through March 2029. National Highways is implementing the second Road Investment Strategy (RIS2) through March 2025, followed by the third Road Investment Strategy (RIS3) through March 2030.
However, as multiple infrastructure projects face high costs and supply chain disruptions, many contractors are optimizing construction processes. For example, in railway and bridge construction, gantry cranes are used for lifting and assembling large components, reducing construction time and improving project quality.
The updated Infrastructure Investment Pipeline outlines plans and projected investments of £700 billion to £775 billion across 660 projects over the next decade. Of this, £164 billion is set to be allocated to major infrastructure and construction projects in 2024-25, averaging £82 billion annually.
Conclusion
Overall, the UK construction market is expected to experience moderate recovery in 2025 but will continue to face challenges. Investor sentiment is improving in both housing and non-residential construction, while long-term infrastructure plans provide further industry support. However, high interest rates, project delays, and policy uncertainty remain key factors affecting the sector’s growth.
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