Glaeconomics laying the foundations London’s construction industry February 2006 Transport for London London Development Agency Mayor of London Greater London Authority




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GLAECONOMICS


Laying the foundations

London’s construction industry


February 2006


Transport for London
London Development Agency
Mayor of London


Copyright


Greater London Authority

February 2006


Published by

Greater London Authority

City Hall

The Queen’s Walk

More London

London SE1 2AA

www.london.gov.uk

enquiries 020 7983 4000

minicom 020 7983 4458


ISBN 1 85261 764 0


Cover photograph

© Hayley Madden, Adam Hinton


This document is printed on 9 Lives 80 Silk – 80 per cent recycled fibre,
20 per cent from sustainable forest management totally chlorine free fibre.


For more information about this publication, please contact:

GLA Economics

telephone 020 7983 4922

email glaeconomics@london.gov.uk


The Mayor of London established GLA Economics in May 2002 to provide a firm statistical, factual and forecasting basis for policy decision-making by the GLA group. GLA Economics is funded by Transport for London (TfL), the London Development Agency (LDA) and the Greater London Authority (GLA).


GLA Economics uses a wide range of information and data sourced from third party suppliers within its analysis and reports. GLA Economics cannot be held responsible for the accuracy or timeliness of this information and data.


GLA Economics, the GLA, LDA and TfL will not be liable for any losses suffered or liabilities incurred by a party as a result of that party relying in any way on the information contained in this report.

Contents


Executive summary


1 Laying the foundations


2 Defining construction


3 Construction activity in London


4 Construction demand in London


5 Constraints on construction in London


6 Comparing projections of London’s construction employment


7 Building on the foundations


Abbreviations


Notes

References

Foreword


We’re reminded of the retail sector whenever we visit a store. We know the leisure sector exists whenever we eat at a restaurant. And the constant flow of tourists through our capital, ensures the tourism sector is never forgotten.

For the construction sector, we look at the cranes. But this is only a partial indicator of what is going on. Much of the construction sector is less visible to many Londoners, but is no less pivotal.

Without the construction sector, we wouldn’t have homes to live in, offices to work in or schools in which to learn. Major infrastructure projects vital for our city’s progress – such as Heathrow Terminal 5 or the Jubilee Line extension – would be impossible without construction. Our jubilation at winning the 2012 Olympic Games, would not be a reality without this sector. Plus, there’s the continual stream of repairs and maintenance required by all our buildings and infrastructure. Crossrail, the Thames Gateway Bridge and many more projects need a sector with a wide range of skills and expertise.

In truth, construction has been and always will be at the very heart of making London tick.

But despite its pivotal role, the construction sector in London is not properly understood. An abundance of data and statistics exist on the sector, but these are often conflicting and inaccurate.

This report is the first step in helping develop a better understanding of this important sector. As we look forward to London’s growing population, sustained economic progress and major events such as the Olympics, we know we’ll continue to rely on this sector. This report raises the question of whether the construction sector can adequately meet the needs of London’s expanding economy?


Bridget Rosewell

Consultant Chief Economist

GLA Economics

Executive summary


This report aims to develop a deeper understanding of a sector that is traditionally hard to measure – construction in London. It begins the task of identifying whether the construction sector can adequately meet the needs of London’s expanding economy.


Construction represents around five per cent of London’s economy and employs 200,000 people. While output in construction has risen sharply since the early 1990s, the level of employment remained steady implying that labour productivity has increased rapidly. However, as it is difficult to explain why productivity has ‘increased’, questions over the data’s reliability have been raised. Further, the industry’s characteristics of small business, contracting, sub-contracting and cash payment makes the sector difficult to assess.


Around three-fifths of construction activity in London is new build, the remainder is repairs and maintenance of existing structures. The composition of the construction industry in London is very different than the rest of Great Britain because London has a much greater share of private commercial construction.


Predicting future demand for construction is complex. The market for construction is influenced by the state of the property market and the relative performance of non-property investments. The annual volume of new housing has declined in London over recent decades and remained at low levels throughout the 1990s and early 2000s. However, if the targets for new housing set out in The London Plan are achieved then a substantial increase in the demand for constructing homes is needed.


It is the growth in construction for business uses, namely offices, which accounted for most of the growth in construction in London from the mid 1990s to the early 2000s. One question which arises is whether the demand for business space is now satiated such that the construction industry can turn its attention elsewhere?


If so, the attention of the construction industry in London may be directed towards transport infrastructure where the Mayor of London has identified several large projects. To meet these projects however, a substantial increase is needed in the construction resources employed in transport infrastructure.

Construction has a workforce of unique characteristics compared to other London sectors. Its workforce has few women, a low share of workers from black and minority ethnic groups, and construction workers are more likely to have trade apprenticeships. Almost a quarter of construction jobs are filled by commuters living outside London. However, some common perceptions of the construction workforce are not supported by statistical evidence. Its workforce is not as old as some other sectors nor is it as dependent on international migrant workers as much as other sectors are.


Workers in construction in London have higher earnings than those in construction across Great Britain as a whole. The trend number of construction vacancies has not increased in recent years. Construction businesses in London have a lower share of unfilled or hard-to-fill vacancies than construction businesses within and outside London.


The construction sector has high levels of self-employment and dependence on small businesses. Only in non-residential building, civil engineering and transport infrastructure does construction activity become characterised by large firms. Overall, the industry is highly fragmented, mostly with British companies, with none holding a dominant impact on the market as a whole.


The lack of large businesses means the industry is unlikely to fully exploit economies of scale. The dependence on small businesses means the industry is characterised by the barriers that face all small businesses.

London depends on buying in its construction materials from elsewhere

in Great Britain or the world. There is competition for supplying construction materials and real prices for most construction materials

have fallen in the last few years. The extraction of raw materials for construction purposes naturally has environmental implications. Legislation to protect the environment has the potential to restrict the supply of some construction resources.


The future for construction in London causes much disagreement with some forecasters projecting an employment boom while others predict decline.


The statistical evidence is that while construction activity and output in construction has increased throughout the past decade, the number of construction workers within London has remained static. On this basis, unless the amount of construction activity can be shown to significantly increase to an even higher level over the next decade than over the previous decade, then it is unlikely that the number of construction workers in London will grow beyond its current level.

1 Laying the foundations

The issue

London is a growing city. Its economy is expanding and its population is growing. The London Plan1, the Mayor’s spatial development strategy, illustrates the scale of London’s need in meeting this growth. The Economic Development Strategy2 sets the London Development Agency’s priorities in working to promote investment in London’s infrastructure, people and enterprises.

London needs new homes for people to live in. London needs new commercial buildings such as offices for people to work in, shops for people to buy in and leisure venues for people to play in. London needs new social buildings such as schools in which people can learn and hospitals in which people can be cared for. London needs new infrastructure to bring this together such as the rails, roads, terminals, bridges and tunnels on and through which people can travel and transport their goods - but also the pipes, sewers, cables and pylons which all people use if not always see. Moreover, a city of London’s age must do more than just build new things. It needs to continually maintain and repair most of the older homes, buildings and infrastructure that served London’s people in previous decades or centuries, so they can continue to meet the needs of London’s people for years to come.

The future prosperity of London’s economy, the quality of life of its people and the visible appearance of the environment, depend on London’s capacity to construct and maintain its buildings and infrastructure. The spotlight falls upon the construction industry. The question is whether the construction industry has the necessary resources to meet the challenges of London’s needs.

Aims and objectives of this study

GLA Economics has a clear aim for this study:

• To begin to identify whether the construction industry can adequately meet the demands London’s expanding economy will place upon it.


To achieve this, GLA Economics has a series of objectives:

• Define what is meant by London’s construction industry

• Review the economic performance of London’s construction industry

• Begin to consider the volume of construction demand in London to the year 2016

• Identify the constraints on London’s construction industry in terms of employment, business and resources

• Assess the projections for construction in London.


This report begins the process of laying the foundations of GLA Economics’ understanding of the construction industry in London. This will help guide decisions within the Greater London Authority (GLA), London Development Agency (LDA) and Transport for London (TfL) but also contribute to wider discussions on the construction industry with public stakeholders such as the Department of Trade and Industry (DTI), Learning and Skills Councils, and Sector Skills Councils, and also within the construction industry itself.

Potential for future study

Construction is a broad topic and there are many more aspects of this sector that could be explored. For example, there is wide interest in concepts such as sustainable construction with the recycling of building materials and modern methods of construction such as development in prefabricated building. There is scope to explore the relationships within the industry between clients, contractors and sub-contractors. There are concerns as to the extent professional services may affect the construction sector, such as whether there are sufficient town planners or housing inspectors.

Such issues are highly relevant. The findings of this report can be built on to help explore these issues.

Promoting discussion

GLA Economics is conscious that there is a wide range of interest in the construction industry. Construction, perhaps more than any other industrial sector, appears to generate research from academia, public sector and the industry itself. Some of this research is good, some poor, but rarely is it joined up with other research nor does it result in complementary findings. Similarly, construction is a sector in which there is no shortage in the volume of statistics some useful, some irrelevant, some misleading and some confusing - but usually there is a scarcity of statistics on what researchers truly need to know.

In short, construction is an industry that is particularly difficult for economic researchers. Problems in understanding construction at a UK level are often magnified in trying to assess the industry at a regional or city level. This paper is therefore, to GLA Economics’ knowledge, the first of its kind in bringing together economic statistics on construction in London and from this can the full story on the trends and prospects of London’s construction sector begun to be told.


2 Defining construction

When looking at the construction industry it is important to define what is meant in terms of the outputs the industry produces, its industrial classifications and its occupations.

DTI statistics on construction

The Department of Trade and Industry produces a Construction Statistics Annual3, which is the most comprehensive source of public data on the sector. It outlines trends across the construction industry in Great Britain throughout the last decade.

It is important to make clear that the Office for National Statistics (ONS) and DTI have different definitions of output for construction. While these DTI statistics feed into official statistics on construction published by the ONS; the final numbers they each report, for example for output or employment, are dissimilar.

The DTI’s annual defines construction in terms of ‘output’, which perhaps more precisely is ‘work done’. From this point, this paper will use the term ‘work done’ for the DTI results to avoid confusion with what the ONS also calls ‘output’. The DTI classifies work done in terms of new work in housing and non-housing and in repairs and maintenance (see Table 2.1).

Table 2.1 DTI definitions of construction work done



New housing PublicBuilding of dwellings, whether flats, houses or parts of other buildings lived in by households.PrivateOther new work non-housingInfrastructureRoad, railway, airports and seaports, but also utilities in water, sewerage, electricity and gas, telephone networks. Consists of both private and public sector.PublicTraditionally public sector in the construction of new schools and hospitals, but increasingly blurred through Public Private Partnership initiatives.Private industrialThis includes a range of factories, warehouses, oil installations, refineries and pipelines and steelworks.Private commercialWide range of construction work including shops, offices, garages and buildings used for entertainment and leisure.Repair and maintenanceHousing - publicRepair maintenance and refurbishment of existing buildings. Housing - privateOther work - publicOther work - private

Source: DTI

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