EY projects stronger output and activity for construction industry

EY projects stronger output and activity for the construction sector over the next three years but challenges remain, particularly in housing.

Construction volumes are projected to increase by 4.9% this year, and the estimated value of construction output will be €29.1 billlion, according to the EY Economic Advisory report for Euroconstruct.

Further growth in construction volumes of 4.1% is projected in 2023. This growth is expected despite construction inflation which is projected at 10% on average in 2022 and 6% in 2023.

Preliminary projections for 2024 are for an increase in construction output volumes of 5.4% in 2024, after a moderation in inflation to 4%. In nominal terms, the value of construction output is projected at €35.2bn in 2024, which would correspond to 6.7% of GDP, compared with 6.2% of GDP in 2022.

Annette Hughes, Director at EY Economic Advisory, said, following subdued construction activity in 2020 and 2021 due to the pandemic, the industry commenced the year with cautious optimism and much work to be done.

"Recovery has, however, been varied across sectors and is set against a challenging market backdrop related to inflation and supply chain issues. The excessive price rises experienced in 2022 thus far are putting a strain on, for example, the cost of delivering some of the infrastructure projects in the NDP, as capital budgets for the year are already determined."

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Housing Outlook

For 2022, the report forecasts 25,000 completions, up from the outturn of 20,473 in 2021.
There has been a downward revision of the housing supply projections for 2023 and 2024, with completions forecast at 27,000 in 2023 and 32,000 in 2024.

These projections are below the Housing for All targets of 29,000 and 33,450 respectively and reflect a combination of factors, including delays with respect to planning, the servicing of lands, the longer delivery time due to an increase in the number of apartments as well as the escalation in building costs, which is impacting the viability of some schemes.

Ms Hughes said, "Although recent data show a substantial increase in the number of units granted planning permission - almost 43,000 in 2021 of which 60% were for apartments - there are constraints on the supply side in converting these permissions to completed units, such as a lack of services and other infrastructure to enable development."

The report also notes concerns over the capacity of the construction industry to deliver the unprecedented scale of public capital investment planned, which is projected at €35.4bn over the three years from 2022-2024.

The availability of skilled labour is an additional challenge given competing demands from the new build and retrofitting sectors. In the non-residential sector, the report notes that almost 12 million square metres of new non-residential buildings were granted planning in the last five years.

The main concern in the current environment is whether these permissions will progress due to the downside risks for projects around building cost inflation and supply chain disruptions.

"The size of the housing challenge cannot be overlooked but Ireland does have the potential to tackle the supply issue," said Ms Hughes. "A number of public and private affordable housing schemes are to be introduced to address affordability while one of the four pillars in the Housing for All plan is focused on increasing supply - including a number of schemes designed to activate zoned lands and existing planning permissions – which will be essential in addressing the issue head on.

"There are also a number of subsidies and grants designed to unlock the potential in the market. This multi-pronged approach should be welcomed and with ongoing input from both industry and government, it will hopefully make it possible to expedite delivery and deliver much needed supply."