Brexit and construction companies

The UK’s referendum on Brexit has had a significant impact on the world economy, one of the most significant effects has been on the construction industry in the UK. In our previous blog post we commented on the potential effect on the construction industry as the Brexit details are finalised in the next 2-3 years.

However, the share prices for many of the publicly listed construction companies dropped significantly once the Brexit result was announced. In many cases this was more significant than other areas of the economy. In this blog we comment on the likely effect on the construction industry in the short term that has led to the market reacting in the way it has.

First, the construction industry in the UK was already struggling as it faced a severe shortage of skilled labour and increasing costs. The referendum result has only added to the challenges that the industry will face and significant uncertainty moving forward.

Second, the entire construction industry grows more than other industries during periods of economic growth, but falls harder when the economy contracts. This particular risk is likely to be one of the driving forces for the current pricing of construction industry shares in the UK. Additionally, while the drop has been significant across construction companies, there has also been a distinct difference between the effect on residential home builders (Barratt Developments and Persimmon), compared to the commercial giants like Balfour Beatty and Carillion. The drop in demand is likely to have a far greater effect on the residential and development companies than those exposed to commercial projects.

Third, many banks and sovereign wealth funds that have invested in many of the projects around the UK are likely to pull back and take a more conservative approach when considering future projects. This is most likely to have an effect on projects that are around 6 or 7 months away as they will be put on ice. However, this will apply to projects outside the UK as well. Many major international infrastructure funders are based in the UK and Brexit will be front of mind when making business decisions both due to the market uncertainty, but also the exchange rate risk in the short to medium term.

It will be interesting to see whether the construction and financial industries recover in the next 2-3 months as the details around the Brexit process become clear. Particularly because the EU members are very clear that, until the UK triggers article 50, they will not engage in exit discussions with the UK something required to get clarity about the process.

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