Regional overview

UK

⏱ 4 min read

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New growth catalysts revving the economic engine

Author: Chris Sargent, Regional Real Estate Lead, UK

An increasingly optimistic real estate industry is eyeing opportunities in new manufacturing sectors, alongside a recalibration of commercial space.

In its April Outlook, the International Monetary Fund (IMF) predicted that the UK’s GDP growth would accelerate to 1.5 percent in 2025 from 0.5 percent in 2024. This forecast is fostering hope for construction investment across real estate development, against a backdrop of a stubborn period of low growth. In 2023, output increased by just 2.0 percent, according to the ONS, down from the 5.6 percent growth seen the year before.

With Bank of England interest rates remaining high though, there is caution among investors, meaning investment volume remains subdued – reinforced by uncertainty over which party will form the next government. However, now that the next general election has been formally called and a date set, the construction sector is looking forward to the clarity of direction which 4 July will bring. Regardless of the outcome of the vote, the hope is now that project starts will rebound by the end of 2024 as debt costs reduce.

Current tendering condition

Future market outlook

Remapping the UK’s investment geography

While constrained economic growth has helped slow inflation, overall pricing has continued to climb, deterring new development in the short term. With 3.5 percent construction cost inflation through 2023, London is now the tenth most expensive city in which to build globally. Construction costs have risen from US$3,879 last year to US$4,473 per m². In 2024, the rate of cost escalation is expected to settle to 2.0 percent.

Outside of the southeast, prices have also increased. London is followed in this year’s rankings by Manchester (30th globally, US$3,309 per m²), which has seen a 4.5 percent increase in construction costs since last year. This growth has been matched in Bristol (34th, US$3,145 per m²), Birmingham (41st, US$3,021 per m²) and Belfast (47th, US$2,939 per m²).

Large-scale industrial investment is being made across several regions. This includes growing demand for data centres to keep up with the boom in AI, as well as gigafactories to provide batteries for electric vehicles. Both facilities require an abundance of land and energy, making areas with a greater supply of available space and opportunities for quicker connection with the power grid particularly attractive to investors.

These boxes are all ticked by many northern and southwestern regions. Pockets of investment there are steadily pushing up costs. Construction for advanced manufacturing facilities in Bristol is now priced at US$2,801 per m², and in Leeds, US$2,649 per m².

This points to the new dynamics at play across the UK’s investment geography, in which increasing activity across a number of critical sectors is playing a role.

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The race to reduce emissions

Tightening environmental and climate regulation is impacting commercial development as owners seek to retrofit and upgrade their portfolios and futureproof new schemes against changing occupier priorities.

High-quality, low-energy buildings with ESG credentials, amenity space and smart building technologies, reflecting the needs of a post-pandemic workforce, are increasingly in demand among corporate occupiers. The cost of building a high-rise prestige office in central London has now reached US$6,035 per m².

Residential retrofitting programmes are also picking up, driven by government funding, and electric heat pump installers are especially in demand. Our figures show that this is the most sought-after green skill in construction across the majority of UK regions. Costs are high as a result. Green collar operatives, which include heat pump installers, are paid on average US$88 per hour in the capital.

Lack of supply is starting to drive up rents, as well as costs to build.

The capacity crunch

These skilled labour shortages are just one facet to the escalating capacity crunch within the construction industry, where real estate demand is drawing on the same pool as major infrastructure programmes in clean energy – including in nuclear, where there are plans to install 24GW of new capacity by 2050.

Some areas, notably mechanical, engineering and plumbing (MEP), are particularly badly affected. According to the Engineering Construction Industry Training Board, a fifth of engineers will have retired, or be close to it, by 2026.

Enduring skilled labour shortages

While some clients have started deploying strategies to counteract the supply crunch, its immediate impacts are already being felt. The average construction wage in the UK is now US$50 per hour, compared with US$45 in 2023.

A particularly large increase has been seen in Belfast, where investment has rebounded following the restoration of the devolved Northern Ireland government after a 24-month hiatus, prompted by concerns about post-Brexit trade arrangements.

Against a backdrop of rising labour costs and ongoing skilled labour shortages, there is a critical need for investment in modern methods of construction and digitalisation – driving efficiency, streamlining processes and reducing the construction sector’s vulnerabilities to the capacity shortfall.