Schools, Universities and Hospitals - UK - March 2016
Executive Summary
 
“Education and health are critical issues of public policy and are perceived to be very influential in a party gaining votes. This encourages government policies to deviate from normal market influences. The importance of investment in the sector clearly encouraged the private finance initiative models in both sectors, whereby taxpayers do not have to fund building with costs spread over many years, effectively passing the payment onto the next generation of taxpayers. PFI and PF2 have been widely used in the sectors and spending distortions have contributed to the national debt. This has encouraged the government to restrict public spending, while the ‘ring fencing’ of education and health spending does not always translate into capital investment.”
-Terry Leggett, Senior Analyst

The market
Education and health are hugely important to politicians. However, ring fencing expenditure in such sectors does not necessarily translate into capital expenditure. With public spending under such intense and prolonged scrutiny by the government, the strong growth in construction activity in both 2014 and 2015 is testament to the extreme importance of these sectors politically. Even so, construction activity has still not returned to the level recorded in 2011.

Expenditure on the new construction of schools, universities and hospitals grew by 5% in 2015 to £13 billion, representing slower growth than the 8% recorded in 2014, while the market has still not returned to levels achieved in 2011. New construction activity is expected to increase over the next few years, reflecting continued demographic pressures on the health service; the short-term boost to schools spending as part of government policy; and intensifying competition in the university sector, which is directly affecting investment decisions as an integral part of the marketing and appeal of institutions.

FIGURE 1: UK market for new construction of schools, universities and hospitals, 2011-15 and forecast 2016-20
 
(£ billion)
 
Source: MBD analysis of ONS data and MBD forecasts

In addition to new construction, the market for property maintenance was valued at a further £5.3 billion in 2015.

FIGURE 2: Segmentation of the UK market for new construction of schools, universities and hospitals, 2015
 
(% by value)
 
Source: MBD analysis of ONS data

The segmentation of maintenance expenditure is very different, with a reversal of the importance of schools and health:

FIGURE 3: Segmentation of the UK market for property maintenance in schools, universities and hospitals, 2015
 
(% by value)
 
Source: MBD estimates

An alternative segmentation can be made via funding, whether public or private finance. The situation has, however, been complicated by various PFI/PF2 initiatives as successive governments have looked to spread the cost of new projects without impacting the tax burden at the time of commissioning:

FIGURE 4: UK market for new construction of schools, universities and hospitals, by funding, 2015
 
(% by value)
 
Source: MBD analysis of ONS data

There are major differences in trends in the new construction element of the market. The schools sector is dynamic for new construction due to changes in government policy, while the health sector is more sedate, despite continued demographic pressures on the sector (which have been not shared by schools, where the growth of the relevant age groups is more modest). Population trends are also more consistent for the universities sector, though the huge growth in competition facilitated by government policy has stimulated new construction activity.

FIGURE 5: Segmentation of the UK market for new construction of schools, universities and hospitals, 2011-15 and forecast 2016-20
 
(£ billion)
 
Source: MBD analysis of ONS data and MBD forecasts

Market factors
There are 22,081 schools in England. The current government policy’s is to form academies, which represents a continuation from the previous coalition government’s strategy. This has been accompanied by a series of changes to the school funding system, which are designed to establish a simpler national funding formula. In the previous system, local authorities determined how to allocate money between schools based on a bespoke range of criteria, and academies received the equivalent amount of money direct from the Education Funding Agency (EFA), an arm of DfE. 

The schools capital funding system has also been reformed, following the coalition’s cancellation of Labour’s Building Schools for the Future (BSF) programme in July 2010, and the government-commissioned James (2011) review of education capital. This represents a significant change in policy, though it is a relatively small part of the overall education budget. BSF had proposed a total replacement of the entire secondary school stock over a 15 to 20-year period, starting first with schools in the most disadvantaged areas. Its ambitions went beyond physical improvements.

FIGURE 6: English schools estate, by period of construction, 2015
 
(% by area)
 
Source: MBD analysis of PDSA

In April 2015 there were 2,538 schools in Scotland.

FIGURE 7: Scottish schools estate, by grade, 2015
 
(% by number)
 
Source: MBD analysis of Government Scotland data

Between 2011 and 2015, the number of schools in Wales declined by more than 7%. The major rationalisation has been in primary schools, where the number has fallen from 1,435 in 2011 to 1,330 in 2015. Some 80% of schools in Wales are primary schools, 12% are secondary schools, and 4% are independent schools.

There are 154 higher learning institutions in the UK that can award degrees, catering for some two million students. Universities in the UK have a total income of £28 billion, up by £1 billion in the last year. The oldest university in the UK is the University of Oxford, which has been in operation since before 1167. One of the newest is the University of the Highlands and Islands, which has operated 13 campuses in the highlands and northern islands of Scotland since 2011.

The size of estate across the UK has remained relatively stable over the last three years. Total gross internal area has remained at around 20.4 million m2, while the net internal area remains at 13.7 million m2. Over the last 10 years, universities have continued to spend significant capital on their estate. The first five years of the last decade saw a steadily rise in expenditure; however, the last five years have seen spending fluctuate significantly. Expenditure in 2013/14 was more than £2.5 billion, which is the highest annual figure ever recorded. This represents the capital programme for universities, and typically includes new buildings and major refurbishment projects. Most expenditure on buildings is focused on new buildings rather than upgrading and re-purposing or maintaining existing infrastructure, and revenue expenditure on property was £1.92 billion.

The NHS in England comprises 7,278 sites, of which around 1,600 are less than 200 m2 GIA. They occupy a land area of 65.2 million m2. The NHS has a GIA of 26.4 million m2 and an occupied floor area of 24.3 million m2, of which patients occupy 13.2 million m2. According to an annual review of the estate in 2015, 12.3% of the occupied floor area was not functionally suitable, 9.8% of the patient occupied area was not functionally suitable, and 4.4% of the occupied floor area was under or not utilised.

The proportion of the NHS estate built prior to 1948 (the year the NHS was established) has reduced to below 20% over the past four years. The impact of older buildings leaving the estate has raised proportions in other age bands, so that the average age has fallen, and 57% of buildings are now no more than 30 years old, up from 47% four years ago.

FIGURE 8: Age profile of NHS buildings, 2015
 
(% of total)
 
Source: MBD analysis of Health and Social Care Information Centre data

NHS Scotland includes 228 hospitals covering an area of some 3.3 million m2.

FIGURE 9: Age profile of NHS Scotland estate, 2014
 
(% of total)
 
Source: MBD analysis of Government Scotland data

The NHS Wales estate comprises approximately 100 hospitals, more than 200 health centres and clinics, 80 mental health and learning disability units, 90 ambulance stations, and more than 160 miscellaneous properties in the form of offices, housing, storage and distribution warehouses.

FIGURE 10: Age profile of NHS Wales buildings, 2015
 
(% of total)
 
Source: MBD analysis of NHS Wales data

Companies
The health and education sectors tend to use framework agreements, which are dominated by the very largest construction companies. Between the end of 2013 and 2017, the Education Funding Agency’s contractors framework has been used to design and build larger schools, either singly or in grouped school projects, worth £4 billion in capital costs. Ten companies have such framework agreements. In England there are six PSCPs for Procure21+; while in Scotland, the Frameworks Scotland 2 for health sector provision has five PSCPs. This illustrates a relatively concentrated level of supply. However, the situation in not quite so straightforward since, in practice, many contractors subcontract significant elements of work to local businesses. For some contractors, this subcontracting policy forms an important part of their marketing strategy. So while the market has significant areas of concentration, in practice a much wider element of the construction industry is involved.

What we think
Hospital investment is subject to both population growth and, more importantly, the ageing profile of that population. Population projections are far less significant as a driver of growth in the education sector, but schools investment is being boosted by current government policy. Such policies are also boosting university investment, but primarily due to intensifying competition between institutions. The schools and health sectors also have major backlogs of repair and maintenance requirements. Growth will therefore continue to be a feature of these markets, particularly when considering their significant importance to public policy.