UK Construction Sector Faces Sharpest Downturn Since 2020

What It Means for the Industry and Investors

The latest figures from S&P Global Market Intelligence reveal that the UK construction sector contracted in July at its fastest pace since the height of the Covid-19 pandemic. The UK Construction Purchasing Managers’ Index (PMI) fell sharply to 44.3, down from 48.8 in June, marking the lowest reading since May 2020. Any figure below 50 signals contraction.

This sharp slowdown was driven by a steep fall in residential building activity, compounded by declines in civil engineering and a softer downturn in commercial construction. The findings underscore the mounting challenge facing the government in delivering on its pledge to build 1.5 million new homes by the end of the current parliament.

Housebuilding in Reverse

The housing activity index, a key subcomponent of the PMI, dropped from 50.7 in June to 45.3 in July, signalling a sudden reversal from marginal growth to a clear decline.

Joe Hayes, Principal Economist at S&P Global Market Intelligence, noted that forward-looking indicators suggest the sector is bracing for further difficulties. “Companies reported a lack of tender opportunities and a hesitancy from customers to commit to projects. Broader uncertainty, both domestically and internationally, will do little to reignite investment appetites.”

This sentiment is echoed by the Federation of Master Builders (FMB), which has warned that policy changes are falling short and has called for faster planning approvals and stronger support for the industry.

What’s Driving the Slowdown?

Several factors are converging to dampen construction activity:

1. Economic Uncertainty
   The Bank of England is widely expected to cut borrowing costs this month, with markets putting the odds of a quarter-point reduction at 95%. The move comes amid rising unemployment, stubborn inflation, and weak output in April and May.

2. Policy and Regulatory Delays
   The Financial Times has reported that housebuilding is being stymied by delays at the Building Safety Regulator, alongside bottlenecks in planning and staffing. These delays create a backlog that can take months, if not years, to unwind.

3. Labour and Cost Pressures
   Labour shortages continue to inflate wage bills, compounded by higher employers’ National Insurance Contributions and the national living wage increase. These cost pressures have been exacerbated by elevated materials prices and lingering supply chain issues.

4. Global Trade and Tariffs
   International instability, including the latest round of US tariffs on specific countries, has contributed to cost volatility and uncertainty in supply chains.

Government Ambitions vs. Industry Reality

The government’s strategy to meet its 1.5 million homes target includes changes to planning rules, proposals for new towns, and £39 billion in additional funding for social housing. However, industry experts warn that these measures may be insufficient to overcome structural barriers in the sector.

Matt Swannell, Chief Economic Adviser to the EY Item Club, points to a mixed outlook for housebuilding. “Planning reforms are counter-balanced by elevated construction costs and labour market shortages,” he explains.

Market Outlook: A Gradual Recovery?

While the near-term picture is challenging, some economists believe sentiment could improve over the next 12–18 months. Elliott Jordan-Doak, Senior UK Economist at Pantheon Macroeconomics, suggests that interest rate cuts and the fading impact of tariff uncertainty could support a slow recovery. The government’s focus on investment spending and planning reforms may also provide a modest boost.

Still, the road ahead is far from certain. As the National Institute of Economic and Social Research warns, the chancellor may be facing a public finance shortfall of up to £50 billion in the autumn budget, raising the risk of further tax rises that could weigh on growth.

Implications for Investors, Developers, and Asset Owners

For developers and investors, this downturn demands a more cautious, data-led approach. With weaker demand, higher costs, and longer lead times, understanding the real value and potential of assets becomes critical. Opportunities will still exist, particularly in strategically located projects or sectors where demand remains resilient, but selecting the right opportunities will require precision and foresight.

Impacts to Asset Valuations in the Construction Sector

The current contraction in UK construction activity has significant implications for asset valuations across the sector. When construction slows sharply, the value of related assets — including land, work-in-progress, machinery, and completed developments — can be materially affected.

1. Reduced Market Demand and Price Pressure
Falling construction activity often correlates with weakening demand for new properties and infrastructure. As a result, developers and investors may face downward pressure on asset prices, reflecting reduced buyer interest and longer sales cycles.

2. Increased Uncertainty and Risk Premiums
Heightened economic uncertainty and project delays increase perceived risks, which can cause lenders and investors to demand higher returns. This risk premium often translates into lower valuations, especially for projects exposed to planning or financing uncertainties.

3. Cost Inflation vs. Market Value Disparity
Construction costs remain elevated due to labour shortages, material price volatility, and rising employer taxes. When these input costs rise faster than market values, profit margins compress, which can negatively impact the fair value of ongoing developments and future projects.

4. Impairment Risks for Work-in-Progress Assets
For developments underway, extended timelines and escalating costs may trigger impairment reviews. If market conditions suggest that the expected future cash flows from a project have declined, the carrying value of these assets on balance sheets may need to be written down.

5. Impact on Investment and Financing Decisions
Valuation uncertainty can lead to more cautious lending and investment behaviour, further tightening capital availability. This can create a feedback loop, where constrained finance suppresses construction activity and asset values even more.

How Hickman Shearer Can Help

At Hickman Shearer, we specialise in unlocking the potential of assets through robust valuation, strategic advisory, and market insight. Whether you are assessing the viability of a new development, reviewing the market value of existing assets, or exploring exit strategies, our expertise can help you navigate uncertainty with confidence.

The current climate may be challenging, but with the right strategy and data-driven decision-making, businesses can position themselves to take advantage of the eventual recovery.

If your business is affected by these market changes or you need clarity on the true value of your construction-related assets, get in touch with our team today. Contact Us>>