Construction Sector: Market Update Autumn 2024

Navigating the Construction Sector: Sustainability, M&A, and Future Opportunities

The UK construction sector is undergoing a period of profound change, driven by sustainability imperatives, regulatory pressures, and evolving economic conditions. As businesses navigate these shifting dynamics, asset valuations, M&A activity, and operational strategies are increasingly influenced by the push toward greener, more sustainable practices.

Here’s a closer look at the current state of the sector, the forces shaping its evolution, and what this means for valuations and investment opportunities.

Sustainability Drives Transformation

Sustainability is now a core focus in construction, as the industry faces mounting pressure to contribute to the UK’s Net Zero targets. Globally, construction and buildings account for 21% of greenhouse gas emissions, and in the UK, the sector generates 61% of total waste. Regulatory frameworks such as the Environmental Protection Act 1990 and the Environment Act 2021 are pushing businesses toward greener operations, while landfill taxes incentivise recycling and waste reduction.

Sustainability isn’t just about compliance—it’s good business. Companies adopting circular models, where waste is reused or recycled, not only reduce environmental impact but also improve efficiency. For example, consolidating operations—such as using the same fleet for material delivery and waste collection—offers a one-stop-shop service to customers while cutting costs and emissions.

M&A Activity Reflects Sustainability Goals

The pursuit of sustainability is a key driver behind the surge in M&A activity within the construction materials sector. Between 2021 and 2023, transactions involving aggregates and construction material suppliers in the UK tripled. Buyers are particularly drawn to firms with recycling capabilities and localised operations, which enhance the sustainability and resilience of their portfolios.

Trade buyers, often long-term players in the sector, dominate this activity. Family-owned businesses with generational expertise are leveraging M&A to position themselves for future growth. Private equity investors are also stepping in, particularly for assets with strong sustainability potential. For instance, Stellex Capital’s support for Fox Brothers’ merger with J A Jackson highlights the growing appeal of businesses aligned with the green agenda.

Additionally, innovation is receiving substantial backing. In 2024, Low Carbon Materials (LCM) raised £3 million to scale decarbonisation efforts, while cleantech startups like Neustark and Material Evolution have also secured significant funding. Such investments underscore the industry’s recognition of sustainability as a critical driver of long-term value.

Economic Challenges and Budget Impact

Despite a challenging economic backdrop marked by inflation, labour shortages, and rising interest rates, the construction sector has proven resilient. The Autumn Budget 2024 introduced increased costs through higher National Insurance and minimum wage rates, which may weigh on profit margins. However, the government’s pledge to “Get Britain building again” brings opportunities, with commitments to 1.5 million new homes and a 10-year infrastructure strategy.

While these initiatives promise growth, uncertainties remain. Delayed decisions on major projects like the Lower Thames Crossing and incomplete details on the new National Infrastructure and Service Transformation Authority (NISTA) create planning challenges for firms. Furthermore, increased costs could fuel inflation within the sector, with firms likely passing these costs on to clients.

Valuations and Investment Opportunities

The evolving landscape is reshaping asset valuations in construction. Businesses with strong sustainability credentials, integrated supply chains, and innovative approaches are well-positioned to command higher valuations. Meanwhile, investors are drawn to assets with the potential to deliver long-term returns amid tightening regulatory requirements and environmental targets.

For businesses looking to buy, sell, or manage assets, understanding these market dynamics is critical. Whether it’s navigating the implications of the green agenda, evaluating the impact of economic shifts, or identifying high-value opportunities, expert guidance is essential.

Impact on Asset Valuations

The trends reshaping the construction sector are already having a profound impact on asset valuations. Companies with strong recycling capabilities, sustainable supply chains, and innovative technologies are likely to see their valuations rise, as these features align with market demands and investor priorities.

On the other hand, businesses failing to adapt to the green agenda or mitigate operational inefficiencies could face declining asset values. Regulatory compliance, environmental performance, and the ability to deliver integrated services are now key drivers of valuation, reflecting both current market conditions and future growth potential.

As economic pressures increase, the ability to navigate rising costs, secure funding, and attract investment will further influence valuations. Businesses that can demonstrate resilience, operational efficiency, and alignment with Net Zero goals will hold a competitive edge in securing higher valuations in a consolidating and increasingly eco-conscious market.

At Hickman Shearer, we specialise in understanding these complexities and providing expert advice to help you optimise asset value in a rapidly evolving industry. Contact us today to discuss how these trends could impact your business. >> Contact Us

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