Whitepaper: What potential changes could we see in 2020 in construction and infrastructure from the new Conservative government?
2019 was a year of upheaval and change for the UK. A December election produced a new administration – a Conservative government with a significant majority. Described as a shock by many, the results provided the new government with a considerable mandate to make change on the basis of the manifesto that was put forward before the election took place.
Although the new government has only just taken up its role already expectations are high. Some of the biggest promises that were made pre-election involve the construction sector and will require some significant shifts in UK infrastructure. In this whitepaper we’ll look at the potential change that may be likely as a result of the new government, in construction and infrastructure terms.
Why the 2019 December election was key
2019 was an important year for the Conservative party. Having failed to obtain a majority in the 2017 election, many of the previous government’s attempts to follow through on manifesto promises had been cut short. With the constant shadow of Brexit significantly hampering political decision making over the past couple of years there was a clear need for decisive change. This is something that the British public provided when it voted on 12th December, giving the Conservative government a large majority when it gained 66 seats.
Many traditional Labour voters appeared to swing towards the Conservatives for the first time and this has created a very specific obligation on the new government to try and ensure that those voters stay loyal. With the next election potentially only five years away the pressure is already on for Boris Johnson and the Conservatives to capitalise on such a surprise and historic win.
The issues that matter
Whether voters chose the Conservatives on the basis of Boris’ “get Brexit done” promise, as result of financial policies or a specific dislike of other candidates is difficult to determine. A mix of motivations could have created the election result. However, what was interesting during the election was the success that the Conservatives had in many Labour heartlands in the Midlands and the North of the country.
Former mining towns such as Workington, for example, which have historically always voted Labour switched to the Conservatives this time around. So dramatic was the shift that it was described as Labour’s “red wall” coming down with a blue path being carved across Greater Manchester and Lincolnshire, and from the Black Country to Northumberland. It’s partly from this incredible shift that a considerable amount of change with respect to construction and infrastructure could come.
How might construction benefit from the recent election?
If the most positive predictions are to be believed, construction spending in the UK could be about to experience significant upward movement. Infrastructure was made a priority in the election and it’s from this that some in the industry have drawn forecasts of an imminent boom for the construction sector. But where has this actually come from? There are two key sources that could explain why an increase in construction sector activity has been predicted:
1. Investment promises
Before the election, chancellor Sajid Javid promised to spend an additional £20 billion a year on capital projects, including railways and roads. This would clearly require considerable involvement from the construction sector with projects across the country potentially providing opportunities for a range of businesses in the industry.
2. Housing related promises in the Conservative manifesto
Housing was a priority for every party before the election took place, as the UK remains in the grip of a significant housing crisis. The Conservatives lit the touch paper of expectations about a construction boom fuelled by investment in housing by outlining plans to build a million more homes over the next five years. Again, this can only be brought into being with the resources of the construction sector and indicates that there could be significant demands placed on the industry in the near future.
A word of warning comes from political and economic experts, many of whom identified before the election that the promises being made by many of the parties were a little “pie in the sky.” The Institute for Fiscal Studies, for example, said that a construction boom would require the government to directly tackle “shortages in the number of suitably skilled construction workers, a dearth of ‘shovel-ready’ projects and practical issues relating to delivery.” So, it could happen, but there are practicalities that would have to be effectively dealt with first.
However, despite this there are also some key factors that might put more pressure than usual on this particular government to ensure that it delivers on its spending promises, such as those relating to construction. For example:
This government has a clear mandate
In 2017 the Conservatives failed to win a majority and didn’t have a clear mandate to move ahead with manifesto promises. That’s not the same this time around. This particular government has a substantial majority and that means that it will be difficult to justify failures with respect to promises to improve infrastructure and housing. As a result the government is likely to press ahead in ensuring that these very visible signs of progress and promises kept are realised.
There are now a lot more Conservative MPs in northern constituencies
As already discussed, this election saw many traditionally Labour constituencies in the Midlands and the north become Conservative for the first time. New MPs in these areas are under pressure to justify the faith that was placed in them during the election and will be keen to ensure that their constituents benefit from Conservative rule. Infrastructure and housing projects provide a very obvious way to do this and so could well be the focus for new MPs with ambitions to stick around for longer than a single term.
What promises were made in terms of roads and railways?
With one eye on sustaining voter confidence through to another election further down the line this is a government that is keen to quickly make a difference. There is a lot of potential to do this in policies relating to roads and railways, especially those that will create new benefits and connections for the Midlands and the North of the country.
Specific spending promises
A total of around £80 billion has been planned for infrastructure projects like roads and railways between now and 2025. The Conservative’s fiscal rules currently allow for £100bn of additional capital spending within this period. £22 billion has now been allocated to projects such as flood defences, leaving around £78 billion for bus, bridge and transport schemes. It’s not clear how this will be allocated at present but there is huge political capital for the current government in making sure that spending promises on roads and railways are followed up on, particularly in a way that benefits the constituencies of new northern MPs. There are two projects in particular that may help to boost confidence in the Conservative government as a result of increased spending on roads and railways.
1. The Northern Powerhouse
First devised by the Coalition government in 2015, the Northern Powerhouse received a new lease of life during the 2019 election. The original objective of the project was to “increase the impact and contribution of the North of England to the UK economy.” Investment in transport and logistics has always been fundamental to the success of the project, which focuses on key northern cities such as Manchester and Leeds.
Given the wealth of new Conservative voters in these areas it’s no surprise that the Northern Powerhouse project has been significantly revived via the recent election. If the project is to deliver in terms of rebalancing the economy in North-South terms, transport is going to be one of the key elements. There are many new discussions around this topic now – for example, in January 2020 George Osborne said that the government should sign off HS3 – also known as Northern Powerhouse Rail – a fast rail route connecting cities in the North from east to west.
2. HS2 and Crossrail 2
While HS2 and Crossrail have both attracted their share of controversy the projects also offer a way for the government to show a clear commitment to pre-election plans. Nevertheless, both projects continue to attract criticism. For example, a Tory backbencher recently urged the government to “pull the plug” on HS2 and former Labour transport spokesman Lord Berkeley said Parliament was “seriously misled” over the costs of HS2, which would be poor value for money and bad for the environment.
However, the recent Queen’s Speech showed that the current regime was forging ahead, despite many criticisms of the projects, as the government promised to legislate to take the HS2 rail line north past Birmingham. The new legislation will give the government the power it needs to acquire relevant land and build on it. In construction terms this is a positive step for the industry.
Potential construction changes in 2020 – housing
According to the most recent Conservative manifesto at least a million homes will be built by the new government over the next five years. This would create a lot of activity in the construction sector and could potentially ease some of the problems resulting from the current UK housing crisis.
Before the election there was a significant focus on creating more social and affordable housing. The Conservatives promised to ensure that A Social Housing White Paper is delivered this year focusing on the social housing needs of the UK and to invest more in this type of construction. However, many are sceptical – and perhaps with good reason. In 2015, the Conservative government promised to build 200,000 affordable homes. The National Audit Office found in 2019 that none had been built. Nevertheless many remain hopeful that this Conservative government could be responsible for driving up construction in the housing market for a number of reasons:
A new approach to planning and consents
Some of the issues that prevent housing construction arise from problems with the planning process and obstacles when it comes to obtaining the correct consents. The Conservative manifesto promised an “accelerated” green paper on planning, which would be structured in such a way as to make planning a quicker and more efficient process.
Making shared ownership easier to achieve
Plans have been outlined by the Conservatives to create one set of rules for shared ownership for housing associations across the UK to make it easier for those who are looking to get on the property ladder to access shared housing options. This could potentially create new opportunities for construction of properties for shared ownership purposes.
Prioritising construction for first time buyers
Plans have been identified for a new scheme of ‘First Homes,’ which seems to have been inspired by David Cameron’s Starter Homes pledge. This is designed to help first time buyers on to the property ladder by offering properties sold at a 30% discount.
Right to Buy
The housing association Right to Buy pilot established by the previous government and tested in the Midlands is likely to be extended across the UK, giving many more people the right to buy their homes. As of October 2019 only 10 homes had been sold under this pilot but it is hoped that in future it will enable many more people to buy discounted properties. Success could potentially put more pressure on the government to then focus on the construction of new council and housing association properties.
Driving expansion in the rental market
Although landlords have faced some changes in recent years that have negatively affected rental yields, the demand for rental property is rising and this could continue to increase the need to construct more properties suitable for buy to let. Measures such as ending no-fault evictions and the idea of ‘lifetime’ deposits, which would enable tenants to take their deposits with them to a new tenancy when they move, could continue to make renting a popular option among UK households.
A property boom already under way?
There is plenty of speculation about changes in construction that could be coming this year – but a significant shift in the industry may already have taken place. Before the election in December property insiders spoke hopefully of a ‘Boris Bounce’ in terms of the impact on house prices if the Conservative party won the election. But did that actually amount to anything?
The most recent reports indicate that property prices received a 1.7% bump in December – this was a surprise to many who had predicted that the Boris Bounce would not actually materialise. Currently, forecasts for 2020 are not that impressive. For example The Royal Institution of Chartered Surveyors said that 2020 transaction levels would be fairly flat. It predicted price increases of around 2%, which was a figure also supported by the property website Rightmove. Whether this will change as the year goes on – and in light of the recently reported December rise – remains to be seen.
The positive impact already felt
While the potential future impact on property prices remains uncertain, the Conservative victory in December did have an instant effect on potential construction projects in a number of key ways.
The election results triggered movement on many paused deals
Transactions that had been shelved by those waiting to see what the election results would be immediately began to move on 13th December. These included transactions of many different sizes – for example, a six-bedroom Belgravia penthouse was sold for £65 million to a Hong Kong businessman in the hours after the election results were confirmed.
Increase in interest in property also took a turn for the better
Many agents said they registered a pre-Christmas property rush after the election results came in, a contrast to flat activity in the months before. The decisiveness of the election result was identified as the reason why so many buyers suddenly started to move with such confidence. In fact, there was a rush to avoid the loss of negotiated deals by buyers who had previously been hesitant about closing.
Green light for development
Pre-election uncertainty impacted many businesses in the construction sector, including developers. As a result, when the election results were announced projects that had been mothballed for some time also started to move. For example, investment company Ganco Assets said it had given the green light to two small sites in Croydon as a result of the election outcome. JR Capital said it had a fund of £75 million of capital for multi-let industrial property that had been stagnating since the summer but which would now be put to into use for 2020.
We have already begun to see some potential change in construction and property since the general election in December 2019. If the new Conservative government lives up to its promises with respect to issues like building houses and following through on HS2, 2020 could be a boom year for the British construction industry.
Stay in touch with the latest construction industry news by reading the RG Group blog.