UK construction activity stabilises but so far without recovery

UK construction activity spent the entire year in contraction territory in 2025, with conditions deteriorating sharply in November, when firms recorded the fastest decline in new orders in five and a half years. The slump was attributed to Budget-related uncertainty and deferred investment, which subdued demand, accentuated fragile client confidence and delayed spending decisions, contributing to weak sales pipelines into the year end. Expectations have improved from depressed levels in December, but this initial stabilisation has not yet developed into a recovery. 

The headline S&P Global UK Construction PMI registered 40.1 in December, up from 39.4 in November but below the 50.0 threshold that marks expansion for a 12th consecutive month. The rise in December – the second-lowest reading since May 2020 – reflected a slowing in the decline in civil engineering activity, while housing and commercial activity fell to new post-pandemic lows. 

Weak housing activity reflects structural constraints in planning, affordability and financing, with Capital Economics forecasting only a modest rise in new housing starts from around 115,000 in 2025 to approximately 140,000 in 2026. However, this modest increase is contingent on lower borrowing costs translating into the viability of affordable housing schemes – and remains well below the Government’s 370,000 annual homebuilding target.

Further signs that November could mark a nadir include construction firms repositioning for potential work in specific submarkets – utilities, particularly energy and water, and defence – while commercial development is concentrated in logistics and data centres. More than one-third surveyed (37%) predicted a rise in output levels in 2026, signalling a five-month high in business confidence. However, the most promising opportunities tend to be absorbed by a small contingent of contractors in public sector infrastructure schemes through procurement processes. Contractors without access to these workstreams face a more competitive environment. Any recovery from here is likely to be narrow and policy-dependent, with recent experience showing that announced pipelines do not always convert into delivered workloads. While the Government has re-affirmed commitment to major infrastructure projects – including HS2, Sizewell C and the Lower Thames Crossing – further delays, downsizing, or cancellation remain possible due to funding constraints, competing cost pressures and legal deadlines. 

UK construction activity in 2026 hinges on the UK economy remaining stable and inflation easing. Capital Economics forecasts inflation will finally fall back to its 2% target in 2026, allowing the BoE’s Monetary Policy Committee (MPC) to cut rates by 100 basis points to 3.0%. If realised, lower borrowing costs would support sentiment and help unblock stalled projects, igniting a narrow rebound. In late 2025, increased sector competition helped input price inflation ease across the supply chain, while average cost burdens rose at the slowest pace since October 2024. Additionally, subcontractors’ rates increased at the weakest pace for just over one year, according to the PMI release.

Planning and affordable housing

Recent improvements in planning processes and policy support continue to take time to translate into a material uplift in housing starts. Land Securities – the UK REIT that develops, operates and owns a pipeline of 9,000 homes across four nationwide projects – recently delayed the start of its ambitious residential projects to 2027, citing currently insufficient projected returns. In late October, new policies reduced affordable housing quotas in London, qualifying developers for fast-track planning status if their project included 20% affordable housing, down from the previous target of 35%. Qualifying residential schemes can also secure temporary 50% relief from the Community Infrastructure Levy (CIL). Land Securities reported capex on residential remains “very limited” for now, but the REIT is focused on securing these policy benefits, which could “lead to an improved outlook for residential development returns in 12-18 months”. In this context, London housebuilding is likely to remain subdued through 2026, as developers defer starts to capture improved scheme economics once policy changes are fully embedded. Even amid prevailing consensus forecasts of lower borrowing costs and easing inflation, housing starts are forecast to remain below policy targets across the UK, reinforcing that scheme viability – rather than demand alone – remains the binding constraint. 

Planning permission in England was granted for just 42,000 new homes during Q3 2025, 31% below Q3 2024 and the lowest quarterly total in more than 15 years. Brownfield development schemes remain very challenging as high upfront costs and policy and planning bottlenecks weaken affordability and scheme viability. This is further evident in two Budget announcements: an increase in the Landfill Tax, an environmental levy, from April; and a new tax on new residential buildings, the Building Safety Levy (BSL), from October, which is forecast to increase the cost of an average new home by £3,000. Housebuilder Persimmon reported strong sales in 2025, despite some market softening since last summer, and ongoing affordability constraints. The Berkeley Group reported 4% lower sales in the lead-up to the Budget. In commercial real estate, the UK government designated large-scale data centres as Nationally Significant Infrastructure Projects (NSIP), allowing developers to bypass local planning bottlenecks via the NSIP regime, aiming for a 12-month consenting fast-track. This aims to support investment in data centre development and use of AI, which is considered an enabler of economic growth.

Capital recycling and labour

In broader real estate markets, the UK was the only major European market to record a decline in investment volumes in the first nine months of 2025, according to MSCI data, indicating thin liquidity across the asset class. Slower capital recycling and caution among institutional and private buyers have tempered developers’ ability to redeploy capital into new schemes. This also helps to explain why the nascent construction stabilisation has not yet turned into growth momentum.

Labour availability has improved as construction activity softened through 2025 and is not currently the binding constraint on delivery. However, labour remains a source of cost pressure, and the industry’s ability to remobilise skilled labour to meet rising demand in the event of a recovery could shape the pace and durability of any recovery. ONS data shows the construction workforce fell to just over 2.05 million in Q3 2025, around 12% below pre-pandemic levels and nearly half a million lower than at the start of the global financial crisis. This erosion of capacity does not appear to be constraining activity today, but it raises questions about how quickly labour can be remobilised if demand returns unevenly, particularly in specialist and regulated sectors.

The UK construction sector is primarily constrained by the mechanics of delivery and capital flow. These frictions explain why stabilisation in sentiment and costs has not yet translated into a recovery. For 2026, positioning ahead of a narrow-based potential recovery and execution will be key to success.

Navigating the complexities outlined in this insight requires specialist partners who understand the construction sector. Our group of companies brings together integrated expertise, supporting businesses across planning, financing, cost oversight and challenges. Please contact our team today for further information and assistance. 

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