Recent market research by Unlatch predicts that the value of the UK’s residential building industry will climb by nearly 20% by 2025 – but still not set to reach pre-pandemic levels.

The subsequent growth of the residential construction industry is due to a variety of underlying trends, such as the continued demand for housing in areas with strong economic prospects, the government’s new home targets, as well as the increased development of new builds.

Property development finance specialist Finbri explains, “Whilst the current market value and number of construction businesses is down compared to pre-pandemic times,  the UK housing demand continues to outpace supply and is on the rise.The rate of new build properties with lower EPC ratings being developed and the Government’s failure to meet housing targets, has been a contributing factor to the value increase of this industry.”

Not only is the total industry value increasingly and showing positive signs, this growth is predicted to continue for the next few years.

Why is the residential construction industry set to increase in value?

There are currently around 44,166 businesses operating in the residential construction industry with a combined total revenue of £78.9 billion. According to Unlatch, the number of active businesses in the residential building sector could potentially rise by 30% by 2025, totaling 57,401.

Demand outweighs supply.  Between 2020 – 2021, 216,000 new dwellings were delivered – this number is lower than the 243,000 new dwellings supplied previously. The Government has consistently missed the targets of 300,000 new homes following the pandemic, which has consequently created a shortage. This means that there is a backlog of demand that needs to be met, which is one of the reasons why the industry is set to see such strong growth in the next few years.

There are a number of areas in the UK that are seeing continued demand for housing, due to strong economic prospects. According to Statista, the number of housing starts has been rising gradually over the past three years with 17,690 units started between 2021–2022 so far.

Continued new-build development.  In the UK, the demand for new-build properties continues to accelerate – with those looking for new-build increasing by 11% according to whathouse.com. However, the sales increase and reports of buyers desperate for new, luxury homes before the mini budget in October has disastrous effects on the housing market, rates and mortgage availability. It could be suggested that whilst new-builds continue to be developed, some areas are struggling more than others to sell.

Importance of energy efficiency. The requirement for property to become more energy efficient is a part of the government’s ongoing initiative to modernise privately rented housing to help it reach its ‘net zero’ goal by 2050. New builds typically have a much higher EPC rating in comparison to older properties, and given the cost-of-living crisis experienced by the UK, many are looking for energy-efficient homes.

What factors have negatively impacted this growth rate?

Aside from the pandemic having such a devastating impact throughout the world and significantly affecting the construction industry, there have been  a variety of underlying trends that have also affected the growth rate of the residential construction industry:

Ukraine conflict. The conflict in the Ukraine has led to a deterioration in relations between the West and Russia. This has had an indirect impact on the construction industry as it has led to increased geopolitical uncertainty. As a result, the cost of imported goods has increased, which has had an inflationary effect on the construction industry.

Rate of inflation. The increased inflation rate of 10.1%, which is predicted to reach highs of 13% in Q1 of 2023, with the price of materials and labour continuing to increase.

Availability of skilled labour. The UK construction industry is facing a skills shortage, with 83% in the construction industry reporting difficulties in recruitment.

What do the next few years look like? Is Build-to-Rent going to be a factor?

As it is forecast there will be more construction businesses operating throughout the UK construction industry, there will be more competition which is likely to reduce the average revenue per business.

However, whilst increased competition is inevitable, some are saying as the market value goes, this won’t dent profit margins.

Indeed, whilst new-builds are increasingly being developed, there may be an issue that their added luxury is too expensive for buyers. With more people turning to the rental market, the number of completed Build-to-Rent homes could increase five-fold to reach 380,000 by 2032. This increase would see the sector worth £170bn. The need for homes is increasing but with mortgages harder to come by, and with increased rates for those that are available, the demand for professionally managed homes for rent is set to increase. Build-to-rent could be a driving force in the forthcoming increase in value of the residential construction industry.

Final thoughts

The value of the residential construction industry is set to grow significantly in the next few years as demand continues to outweigh supply. The popularity of new-build property development , combined with the importance of energy efficiency, is set to play a part in the industry’s growth. However, it is worth noting that the impact of the mortgage crisis could result in continued volatility in the market impacting the number of property sales. This might make build-to-rent construction a larger part of the industry over the forthcoming years.