Construction 2017: Trends and Conclusions
The construction industry is currently experiencing turbulent times, owing particularly to the recent fall in oil and commodities prices, which has caused a shortfall in funds available for construction projects worldwide. In addition, recent political events, such as the election of Donald Trump as US president and the UK’s vote to leave the European Union, have caused significant uncertainty in these major jurisdictions, which may negatively impact business in these countries and beyond. Yet practitioners report that domestic construction markets are still strong, and while the legal market is “feeling pressurised”, demand for legal services remains high.
Sources reported to us that there has been a lot of domestic activity in the residential properties construction market over the past year. Very-high-value projects such as the £8 billion Battersea Power Station redevelopment as well as affordable housing projects aimed to tackle the current housing shortages have both seen an uptick. The latter end of the scale was given a boost when the Chancellor of the Exchequer, Phillip Hammond, announced measures in his first Autumn Statement in October 2016 to tackle the housing crisis. These included additional funding for a home-building fund that will see an extra 25,000 homes completed over the duration of this parliament, public land to be used to build homes quicker and planning rules to be modified to ensure brownfield land is favoured over greenfield land for development.
In addition, infrastructure construction has also seen considerable recent growth in recent years as evidenced by flagship projects such as the redevelopment of King’s Cross Station in London and Birmingham New Street Station’s £750 million transformation. Additionally, the HS2 high-speed rail network project, linking London, Birmingham, the East Midlands, Leeds, Sheffield and Manchester is scheduled to begin construction in 2017. Our interviewees commented that this trend in residential property and infrastructure construction is expected to continue well on into next year and “bring in a significant amount of work for construction lawyers” across the board, in terms of transactional, regulatory, compliance and litigation legal services.
Undoubtedly one of the biggest recent political and economic considerations for the United Kingdom is its forthcoming exit from the European Union. Economists have been widely quoted in the media as saying that Brexit is likely to cause a significant downturn in the UK economy, with the inevitable consequence that there will less money available for construction projects. Yet many lawyers spoken to in our research consider that “it is still too early to say what the consequences of Brexit will be on the construction industry”. While, according to interviewees, “many projects have gone on hold, this is just until companies are more clear as to what the situation will be post-Brexit” . Additionally, clients “may wish to reconsider their investments depending on the terms Britain can negotiate with the European Union”.
In fact, some practitioners told us that “the construction market may actually benefit from Brexit”. A “definite positive” that Brexit will bring is the government’s recognition that “one of the ways to offset some of the potential negative effects is through new infrastructure projects.” Subsequent to the referendum, the government announced the construction of the Hinkley Point C nuclear power plant, which will be the first such plant built in the UK in 20 years. In addition, a third runway at London Heathrow airport has also been approved. The proposals for the new runway include plans to increase the number of domestic routes to 14, and thereby spread the economic benefits across the country. As a result, an increased demand in local road and rail infrastructure construction around established airports is also expected. Practitioners are therefore anticipating a significant uptick in domestic construction legal services to meet this demand for new infrastructure projects.
The potential benefits to the wider UK economy of the new runway at Heathrow are claimed to be worth up to £61 billion, and by making such investments it is hoped that the government will be able to “get the economy going again”, and thus encourage foreign construction companies to invest in this market. David Cameron made it clear that the UK is “very much open for business” when announcing the construction of Hinkley Point C, and the weakness of the pound following the Brexit vote is “making the UK very attractive for foreign investors”, according to sources. Whether Cameron’s political rhetoric will turn out to be an accurate prediction remains to be seen. In terms of the legal market, however, it seems highly likely that domestic law firms will see a boost in instructions as local counsel, as international companies seek to navigate the complexities and changes in UK law once it is no longer covered by EU legislation. This may be an opportunity for increased specialisation for firms looking to expand the breadth of their practices, to capture a share of this growing market.
However, some lawyers we spoke to expressed some scepticism about Brexit’s positive impact on the legal market, with one respondent highlighting that “the question will be whether the government will be able to bring these projects online quick enough”. Owing to the nature of construction projects “there is always a lag from their design to any positive effects coming down to the legal market; by that time, it may be too late for many firms”. This may be especially true for firms with smaller, domestically focused practices, if construction companies pause their projects to wait to see “the nature of the economic environment they will be building in”. Firms with larger international practices are likely to find themselves more protected from this scenario.
In addition, sources point out that “if the Brexit negotiations result in it becoming very difficult to get adequate labour into the country”, this will “discourage the big European contractors from investing in the UK” and seriously disrupt the construction market as a result. Fundamentally, as one practitioner argued, local labour “will not be sufficient” for impending construction projects, adding that there is currently “a huge underestimation of the extent to which the construction industry in the UK is dependent on foreign engineers, labourers, technicians, etc”. The importance of “a sensible trading relationship where people can come and go easily” is very high for the sector.
In summary, practitioners were broadly “cautiously optimistic” about the future of construction law practice in the UK. While there are “a range of different potential outcomes from Brexit, and uncertainty will never be good for business”, Brexit “doesn’t seem to be having much impact right now” as demand for construction law services “are still at levels we saw this time last year, if not higher”.
Looking beyond the UK, it was reported that Switzerland remains a popular jurisdiction for construction projects. Commercial property developments continue to be in high demand owing to interest from foreign investors seeking to invest and diversify their portfolios. In particular, there is renewed interest from investors from less stable areas of the world, such as the Middle East, looking to invest in more stable real estate markets. Switzerland is a particularly attractive country in Western Europe because of the stability of its currency, especially at a time when elsewhere in Europe the euro is struggling to retain its value. Firms looking to strengthen their European construction practices may look to focus on providing services in this jurisdiction, to capture a share of this growing market.
More generally respondents from across Europe agreed that the legal market on the continent is a “much more competitive environment” than has been seen in previous years. In particular, clients are “getting more aware of price and really trying to drive rates down”. Practitioners told us that, as a result, there has been a tendency in the EU legal market “towards more specialisation”, with “medium-sized firms disappearing or getting smaller”, and small, boutique firms that “specialise and can offer cheaper, but still very high quality services to clients, having a good period.”
A further significant event that “will undoubtedly affect the construction market” has been the election of Donald Trump as US president. Some lawyers thought that Trump will “probably be a good thing in the end”, as he is “promising significant amounts of money for infrastructure”, which will therefore offer a boost to the US construction industry. In such a scenario, this would likely benefit legal markets beyond the US as well. However, “Trump is unpredictable and businesses hate uncertainty”. There is concern that construction companies “will go and invest in places where they feel safe instead”. US firms with strong offerings in multiple jurisdictions may therefore stand to reap the most benefits.
Increasing Disputes Work
The increased pressure on legal fees mentioned above is “in part caused by the recent fall in oil and commodities prices”, meaning that construction clients “have far less money to spend on legal fees.” Yet contradictorily, this lack of available finances to clients has also been beneficial for the legal market, particularly for firms that have well-developed international construction litigation departments. While there has been “some scaling back or suspension of projects” undertaken by clients, this has also led to an uptick in construction disputes. More and more businesses “are pulling out of certain projects and then choosing either litigation or alternative dispute resolution as a means of trying to maximise their profits or recover their losses”. As a result, construction dispute practices “have been incredibly buoyant across the globe over the past year”, with several firms actively recruiting in this area in order to take advantage of the increased demand for such legal services.
In particular, there has been a significant upsurge in the amount of construction arbitration, as “tougher economic conditions drive businesses to make hard decisions” and be “more willing to settle matters” without the cost of litigation. For UK firms, this may help to further counter any negative effects of Brexit on the UK’s legal market, as London remains an important arbitration centre for construction disputes, owing to English law’s prevalence in international contracts across Europe, the Middle East and Africa. Thus, alternative dispute resolution will be a potentially lucrative area for firms looking to expand the range of their practices in light of Brexit.
The construction legal market was the subject of contradictions in 2016. While it “is getting tougher for clients”, this is beneficial for lawyers “as the hard times produce lots of legal work”. Yet such an environment also produces “a lot more competition among law firms”. Practitioners told us that the most important thing for firms is that they “have very experienced lawyers advising clients”, as “clients aren’t willing at the moment to pay for the time spent training up less experienced lawyers as part of the advice they receive”. With the pressures on firm fees, existing sector knowledge and understanding appear to be the probable keys for firms trying to stay ahead in the market.