Building & Construction

Deals Activity: Moderate

Restructuring Activity: Very high

Uncertain demand and rising inflation put mounting pressure on the sector.

Deals activity in Building & Construction

  1. 1. Deal volumes have been remarkably steady in recent years, with a pandemic-related dip in Q2 2020 largely offset by a spike in Q1 2021.
  2. 2. Increased borrowing costs may cause a temporary hit to deal activity, but we expect private equity firms active in the sector in recent years to seek exits in the coming months.

Restructuring activity in Building & Construction

There has been something of a market shift for commercial property post-pandemic, with a ‘flight to quality’ underpinning the sector.

Demand for residential, retail and industrial space has all been impacted by economic headwinds.

At the same time, there is the risk of overcapacity in the logistics space.

The industry is facing challenges on a number of fronts. A shortage of labour, driven by the impact of Brexit, COVID-19 and changes to IR35 regulation, is impacting contractors.

In turn, the scant availability of skilled labour is creating wage inflation and quality issues.

The sector has also seen significant inflation in the cost of materials – with the material price index for 'all work' increasing year-on-year by 25.2% in April 2022. Subcontractors face challenges in passing these increased costs on to main contractors, squeezing margins and impacting on liquidity.

Building & Construction

For decades, UK construction has been a bellwether for the wider economy, presenting a microcosm of the challenges facing British business.

A worsening economic outlook and rampant labour and materials inflation has weakened the sector. Increasing interest rates have the potential to deter homebuyers, while the market for international investors has cooled in the wake of Brexit. However, demand for homes continues to outstrip supply in many parts of the UK. This imbalance continues to support housebuilders, particularly in suburban locations.

Warehousing is another area where construction efforts remain focused. The pandemic and recent geopolitical tensions have encouraged businesses to reassess supply chains and seek to hold more inventory locally. This huge demand for logistics space pushes the construction sector to work to develop key sites supporting this marked shift in supply chain activity.

Commercial and retail space construction has already started to struggle – and is likely to remain under pressure for the foreseeable future. Despite a marked surplus of commercial office space across the UK, demand is spread unevenly. High-grade space remains in extremely short supply while older and/or lower-quality accommodation is difficult to fill. This mixed picture should continue to stoke strong demand for construction of high-quality 'flagship' office spaces across the UK.

Ongoing demand, particularly for logistics and, to a lesser extent, residential space, will continue to provide opportunities for well-backed businesses.

We're likely to see significant consolidation in the sector over the next 12-18 months as the strongest players seek economies of scale and identify opportunities to enhance their market position. Non-core asset disposals are also expected to remain at the top of board agendas.

Find Your Expert

Steve Absolom is Interpath Sector Leader for what we call the 'Infrastructure & Property' sector. This includes Building & Construction as one of three core segments. Neil Morley leads our approach to the Building & Construction sector nationally. For a full list of our senior people with experience in this sector use the button below.

Our senior team