Necessity of Investment in Building and Infrastructure

Necessity of Investment in Building and Infrastucture

Introduction

Construction industry and infrastructure play an essential role for the current stage of economic development of a country. Necessity to invest in building and infrastructure is generated by the decision pertaining to modernization of enterprises, housing needs, proper distribution of inhabitants, the increase of employment due to creation of additional job places, the growth of GDP, etc. The financing of construction industry and infrastructure is vital for the prosperity of national economy.

Construction Industry within an Economic System

The value of construction industry and appropriate state of infrastructure is determined by the strengthening of essential industries of a country, the pace of economic growth, and solution of important socioeconomic tasks (Cox & Townsend 2009). Structural reorganization and financing support of the building area of a country determine the ability of the national economy to ensure further development of other industries, enterprises, and households that affect living conditions of people. Social conditions of living should be improved through the proper development of the construction industry and its infrastructure.

The functional meaning of the construction industry for the growth of the UK economy includes various aspects of their interconnection (Nadim & Goulding 2010). Occupation of employees in the building sphere affects common employment of the country. For this reason, achievement of full employment owing to significant investment would stimulate the macroeconomic state of the country and its economic sustainability. Another aspect refers to the opportunity to increase living standards of population through the enlargement of the living area. Therefore, construction industry may directly contribute to the improved quality of life. Moreover, the building area of an economy boosts other fields like consulting, economics, analytical investigations, advertisements, production of building materials, leasing, etc. In addition, tendencies of building influence the tendencies of living. Creation of social and entertaining infrastructure attracts new inhabitants in new built-up areas and stimulates social movements.

Although the construction industry supports the economic growth, its role of a major economic driver was eliminated and appeared to be less dominant. Instead of the prospective ensuring of development, this industry immediately reflects the volume and quality of the governmental care for the shelter and welfare of inhabitants. The articles of expenditure of governmental budget should consider effective functioning of the entire building complex, good conditions of agricultural and industrial enterprises, transferring infrastructure, the objects of national defense, and other establishments (Oladinrin, Ogunsemi & Aje 2012). These tangibles serve to support public and private sectors and individual construction projects of citizens in order to improve welfare of people within the country. 

The Construction Industry and National Economy

The construction industry is located among other macroeconomic issues of the UK national economy. Its contribution is the participation in GDP formation, reflection in social indicators, tight integration with other economic fields, etc.

The role of the construction industry in the formation of total or real GDP is similar to other large and developed economic areas. Income composition of this macroeconomic indicator includes the rent as a particular payment for the temporary property owing and the income of an owner in terms of the created value. Although the level of GDP is formed particularly through the building outputs, GDP should not be used to determine rent rates due to the macroeconomic mechanism of income composition of GDP. Its derivatives as the determinants of rent sometimes demonstrate the complexities in evaluation of simple equations of rent based on regional and national data. Among different types of the rented property, offices demonstrated a strong rent cycle and an appropriate ability to respond to the changing conditions of the real estate market.

The contribution of the construction industry to GDP of the United Kingdom was estimated to be more than £40 billion in 2012. Comparing to other economic industries, the construction area is commensurate with the transport and telecommunications industries. The property investment sphere includes the companies involved in fund management, professional and financial services, repair and management of buildings, and construction. The total value of assets on the commercial basis increased to more than £500 billion.

The major commercial property in the UK is owned by characteristic institutions including pension funds and insurance companies. This proportion decreased by 4% in 2012 comparing with 2003. Overseas investors own more than £70 billion of UK property assets. Another investment forms are collective schemes. Their common volume increased to more than £65 billion. REIT companies own almost £50 billion, while the unlisted property owners constitute nearly 11% of the total number of investors. The rest of entities have 3-4% of total ownership (Property Data Report 2013).

According to the data, investment in the construction industry would promote the opportunities to gain benefits from business partnership and ownership that come as foreign initiatives. A significant number of investors and the increasing price on property make the UK building sphere economically attractive and beneficial. Therefore, governmental support of the construction would be contributive to achievement of the long-term economic growth.

Peculiarities of Investment in Property

The construction industry returns the investment according to the common economic mechanism of crediting. Despite the attractiveness of investment in building, there are a few factors affecting the real value of the real estate. Along with the dynamics of value of building that has changed in the UK over the last decades, inflation and interest rates lead to depreciation of property. Nevertheless, the return on investment is achieved from generation of income, production of psychic benefit, or reduction of income and capital taxes.

The ability of the construction industry to form the difference between the created value and initial investment depends on the peculiarities of the construction sector and common investment climate within the national economy. Since 1965, rent index has increased approximately by 36% for shops, 12 % for offices, and 2% for industrials. These changes were invoked due to the inflation rate. Nowadays, the average rent index in the UK exceeded 100 in 2013 .

In May 2013, rental prices climbed by 1.3% and led to the increase of the average rate of property prices. Therefore, the value of rent rose in 2013. The countries constituting the UK faced the same tendencies of rent index. The common growth of rent price would facilitate the fastest return of building investment and ease the crediting of the national economy (Ayuso & Restoy 2006).

Rent price remains to be the main driver of investment management and the indicator of financial sustainability of the construction industry. The most expensive industrial rents represent the maximum level of profitability of the industry. Several cities of the UK have the highest annual rent prices, from €55 to €166 per square meter.

Therefore, the difference in various objects of investment may cause volatility of investment in the construction industry.

Relationship between Construction and Economic Growth

The construction industry ensures the economic growth of the UK through the use of appropriate infrastructure. Its meaning for the entire industry is vital as the infrastructure provides the construction industry and the national economy with a variety of informational and material connections. High economic growth is promoted by the established mechanism of interaction of educational and social institutions, transportation companies, and information services with the building complex of the UK (Bauer 2010). In turn, these companies fulfill their responsibilities through owing or renting particular property. The importance of infrastructure is also ensured by its direct connection with the housing stock and commercial operations on the property market. Subsidiary, technological, organizational, economic, and other processes ensure optimal functioning of the property market infrastructure and affect the construction, use of properties, and their distribution throughout the market environment (Ball & Nanda 2014).

In order to improve the living standards and the socioeconomic efficiency of the government's housing policy, housing stock should also be supported with investment. Housing conditions are proclaimed to be an essential part of many governmental reforms. Therefore, investment should facilitate a variety of improving mechanisms. One of the key directions is the division of the housing stock, particularly into the rented and private property sectors (Lovell & Smith 2010). According to these measures, the government should be focused on the creation of private and public partnerships that would be beneficial for the management and care of public buildings. A rental housing fund could be owned by private investors, while rent for public building would be fixed at an optimal and reasonable level (Booth & Choudhary 2013). Budget distribution would not be a single source. Herein, budget deficit along with the external financing will not pose an economic threat (Kirkpatrick, Parker & Zhang 2006).

The formation of housing stock and efficient management of public buildings belong to the most essential and effective stabilizing factors of current economic conditions for the UK (Meen 2008). They would also ease the economic crisis and decrease the dependence of the UK economy on fluctuations of the global economic system. The possibility of renting on acceptable terms will allow the government to respond flexibly to social and economic changes (Killip 2008).

The necessity to create an optimal structure of financing confirms the optimal distribution of economic resources of governmental, public, and private efforts in order to ensure the appropriate economic growth of the national economy (Delmon 2009). Exploitation of opportunities to built strong infrastructure and housing stock should be performed according to the peculiarities of socioeconomic development of the construction industry (Hall & Purchase 2006).

Volatility of Investment

Although the prospect of investment return is high in the UK, the volatility of income may occur despite the negotiations of the investors. This volatility is measured by the probability of risks occurring in case of variations in the factual level of income and returns of its expected level, or variations of real value of factual income and returns of its expected level on the property market of the UK.

The risk analysis will assume examination of the risks pertaining to property value or creation of new construction (Gruneberg, Hughes & Ancell 2007). Volatility may be reflected on the value or rent index of the constructed objects. Offices, shops, and industrials demonstrated different types of volatility during different phases of economic cycle. Therefore, development of plans and construction of offices take more time in comparison with industrials. The demand cannot be satisfied within a short time owing to the ill-equipment of this sector. Moreover, the rent growth reflected sharp cut of rents and enlargement of supply within the past years.

Shops kept upward tendencies of rents in the long run. Different phases of economic cycle are reflected on the dynamics of shop rents. The peak in 1989 compelled the decrease of real rents of shops. Nevertheless, the level of rental growth was exceeding the previous years. At the same time, industrials yield more than office investments by approximately 1-3 %. This property steadily reflects current peculiarities of business cycle (Regional Office Market Report 2014). Industrials have much lower short-term perspectives and higher rent risks. Moreover, industrial property does not have sharp volatility in the short run, but the probability of its affection by depression of business cycle is higher.

The property sector impacts the wider economy throughout the length of life cycles and determines the distinguishing business activity, market conjuncture, impact of global economy, etc. Each phase of the building cycle in the UK is characterized by particular market conditions that determine the ability of the construction industry to supply a certain volume of property, demonstrate high business activity, respond to demand, improve profitability, and support relative subindustries. The economic growth is provided by the upturn of property cycle in boom phase with the closest match of rent price and purchasing power of consumers. In this case, the profitability of the construction industry is high. In order to ensure the proper return, the industry should invest during the most acceptable phase with strong demand, rise of rents, and the waves of construction starts.

Conclusion

The construction industry plays an important role for the formation of a stable economic path of the United Kingdom. The necessity of this business activity to fund is invoked by its tight connection with other strategic areas of the national economy and desire to improve social conditions of life and ensure decent management of the property in the country. The contribution of the construction industry to the national GDP is significant. This fact presents additional arguments in favor of investing in the construction industry. The real estate market functions according to the common economic conditions, but its autonomous cyclical development affects the national economy. The profitability of the real estate market is confirmed by the increase of property prices and rents. The economic benefits of investments in the construction industry are very high, especially taking into consideration the prospects of reforming the housing stock and the support of infrastructure.