Construction industry disruption intensifies amid Covid-19 outbreak

25 March 2020 (Last Updated March 25th, 2020 17:12)

Construction industry disruption intensifies amid Covid-19 outbreak

As major markets enter lockdowns, the construction industry across the world is at risk of grinding to a halt. A GlobalData survey of key industry leaders reveals the impact to date.

Construction work across the world is being disrupted to varying degrees by the impact of Covid-19. In countries where the coronavirus has spread rapidly, lockdowns have been imposed and citizens are being strictly policed. The original epicentre of the virus, the city of Wuhan, Hubei province, China, is considering partially lifting the lockdown in early April, having been in place since the middle of January.

The impact of this on the country’s construction industry will be severe. Hubei province alone accounts for 7% of total construction output and, including neighbouring provinces of Anhui, Chongqing and Zhejiang, which have also been among the provinces facing the tightest restrictions on travel, the share of China’s overall construction output rises to approximately 22%.

In Italy, the worst-affected country in terms of Covid-19 related deaths, the industry is in a dire state. In the country’s worst affected region, Lombardy, all businesses, excluding those having a part in essential supply chains have been ordered to close and all work on building sites has been ordered to stop, apart from those working on hospitals, roads and railways.

In the most recent announcements in the UK, construction sites have been permitted to stay open, but this has caused a backlash from workers and unions over the risks to health, not least because of the implications for wider public health risks given the thousands still having to use public transport to travel to and from sites. Some contractors and housebuilders have already taken the decision to close sites, and Transport for London and Crossrail said they were shutting sites to ensure the safety of their construction workers.

This situation is being played out across major markets, including most of Western Europe, the US and India, among others. There is no doubting that the impact on construction output will be severe. This is not only in terms of the immediate impact on projects in execution, in terms of shutdowns and lack of materials and other issues relating to supply chain disruptions but also for projects at pre-construction stages, given likely delays in the processing of building permits, tendering and contract awards.

GlobalData recently surveyed industry executives globally to gauge the extent, to which they have been subject to the impact of Covid-19. Notably, 68% agreed or strongly agreed that the Covid-19 outbreak had led to a halt in construction work, while 79% agreed or strongly agreed that it had led to delays in the commencement of new projects.

With the initial round of the survey being concluded on 24 March, there had yet to be an overwhelming view that containment measures had greatly impacted the supply of materials and equipment. Nevertheless, globally 33% of respondents agreed that there had been issues relating to shortages of equipment, 42% with shortages of key materials and 54% with shortages of labour.

The main challenge for the industry in the short term is that projects that are under construction are being delayed, resulting in a range of legal and financial ramifications for contractors. The risk of project cancellations is also high. The survey shows that 49% of respondents agreed or strongly agreed that Covid-19 had resulted in project cancellations, while 78% agreed or strongly agreed that contract awards were being delayed as a result of the outbreak and its impact on investor confidence and general operations.

In the event that the lockdowns are not prolonged beyond a few weeks and that containment measures are effective in terms of controlling the spread of Covid-19, project owners, key contractors and other firms, should they still be in business, will aim to restart projects quickly and accelerate delivery where possible to avoid lengthy delays to completion.

However, if the lockdowns are extensive and companies do not get the support they need, at best, there could be delays, while new funding is secured or new contracts tendered and awarded. At worst, there is a high risk of companies failing and projects being cancelled outright or left partially completed.

Despite the huge stimulus packages, sharp cuts in interest rates, and other unprecedented policy measures across all major markets, the construction industry is likely to be subdued beyond the immediate period of lockdowns and other containment measures. GlobalData foresees particular struggles in the commercial and industrial sectors. Businesses in these sectors are most at risk from the severe drop in economic activity, domestically and globally, and their immediate priorities will be on staying afloat and rebuilding their core operations rather than expanding and investing in new premises or capacity.

The residential sector will also struggle as economic activity weakens and unemployment rises, despite low-interest rates and direct government support. There is a high risk that a considerable proportion of the early-stage projects in these sectors will be cancelled or at least pushed back, with few new projects starting in the second quarter.

Governments and public authorities will likely be aiming to advance spending on infrastructure projects as soon as normality returns so as to reinvigorate the industry. This will be spread across all areas of transport infrastructure and energy and utilities.

With interest rates falling to record lows, borrowing costs will be at a minimum, but the success of government efforts to spend heavily on infrastructure will be dependent in part on their current financial standing. Nevertheless, the third quarter could be a period of a ramping up of infrastructure works.

Based on the views of the industry executives, the expectation is that the crisis will continue for up to nine months. At this point in the crisis period, there is still considerable uncertainty as to how events will unfold and the extent, to which the global economy will be affected. The IMF now predicts the global economy will go into a recession in 2020.