New construction orders - November 2006: Expert analysis (Benchmark)

PDF of November 2006 orders

Contractors enjoyed an 8% rise in new orders during the first eleven months of 2006, underpinning expectations of a rise in new work activity that will lead to a strengthening in construction activity this year. While new orders in the three months to November appear to have paused for breath, slipping back against the previous three months, order volumes were still 2% higher than a year ago.

Strong commercial sector activity has been the key driver sustaining total new orders over the last year and although orders during the three months to November slipped back sharply on the previous three months, order volumes were still up by 9% on a year earlier.

In particular, new orders for office projects remain strong, with the value of orders in November at their highest level in the past two years. Improved take-up of office accommodation and a limited supply of vacant property in the central London market have stimulated a strong rise in new orders as developers anticipate further increases in demand for office accommodation. In contrast, subdued consumer spending growth continues to curb retail- and entertainment-related new orders. In addition, new orders for PFI education and health projects have stalled in recent months after the marked rise in schemes reaching financial close earlier in 2006.

Public housing new orders remained particularly strong, up 37% on a year earlier, marking one year of double-digit growth figures. This should bode well for sector activity in 2007 and given the  government’s commitment to social new housing provision, a positive trend in volumes is expected in the near-term.

While private housing new orders were sluggish throughout most of 2006, the latest data shows a strengthening in order volumes, both compared with the previous three months and a year earlier. This suggests that the current strength in the housing market, with rising annual house price inflation and an increase in net reservations has begun to filter through as new work.

However, while purchasers appear to have shrugged off the earlier hikes in interest rates, the Bank of England’s decision to raise rates for a third time in five months in January may prove more difficult to ignore. Indeed, the general housing market may lose momentum as 2007 progresses.

Infrastructure new orders remain disappointingly weak. While new orders improved somewhat on the previous three months, order volumes remain 19% down on a year ago. Fewer water, electricity and road projects contributed to the poor performance; the value of water industry-related projects fell by a third, while electricity orders were around two-thirds lower.

New orders for roads also weakened, indicating that the Highways Agency’s investment programme has yet to turnaround road construction activity. However, despite the current weakness of new orders, this year should mark a turning point in the sector’s fortunes with a sustained recovery in overall sector work anticipated for the next twelve months.