The UK construction sector is at a crossroads. While the headline PMI for June 2025 edged up to 48.8—marking the slowest pace of contraction since January—the data tells a story of stark contrasts. Residential construction, buoyed by resilient demand and hopes of policy reforms, has become the sector’s lone bright spot. Meanwhile, commercial and civil engineering projects are mired in their worst declines since the pandemic, dragged down by corporate caution and supply chain headwinds. This divergence creates a clear investment playbook: lean into residential real estate exposure while avoiding commercial-focused firms until macro uncertainties ease.
The Data Divide: Residential Steadfastness vs. Commercial Collapse
The May and June PMI reports reveal a sector split at its core. Residential construction—a critical pillar of UK housing—posted a PMI of 50.7 in June, its first expansion since September 2024. This recovery, though modest, reflects a stabilization in buyer demand amid whispers of impending interest rate cuts and government reforms to planning rules. By contrast, commercial construction’s PMI plummeted to 45.1 in June, its sharpest decline since May 2020, as businesses delay investments amid economic uncertainty.
The gap is widening. While residential activity benefits from pent-up demand and affordability programs, commercial projects face a perfect storm: weak corporate demand, delayed decision-making, and elevated input costs.
Why Residential Holds Up—and Commercial Struggles
Residential Resilience:
– Demand Stability: Despite high mortgage rates, UK households are prioritizing homeownership. Firms report “stable sales pipelines” and optimism around future buyer activity, particularly if interest rates drop.
– Policy Tailwinds: Government reforms to streamline planning permissions and incentivize housing development are nearing implementation, potentially unlocking pent-up supply.
– Limited Alternatives: With equity markets volatile and bonds offering meager returns, housing remains a safe haven for capital.
Commercial Collapse:
– Corporate Caution: Businesses are holding back on office and retail space investments, opting for a “wait-and-see” approach amid uncertain economic growth.
– Supply Chain Pressures: While input costs like concrete and timber have moderated, they remain elevated, squeezing margins for firms reliant on large-scale projects.
– Global Uncertainties: Lingering trade tensions and geopolitical risks—such as US tariff policies—threaten to delay major infrastructure projects.
Investment Implications: Tactical Plays in Residential, Caution on Commercial
The data underscores a clear thematic opportunity: residential real estate equities. Companies with exposure to housing development, such as Taylor Wimpey or Berkeley Group, stand to benefit from rising buyer confidence and policy tailwinds.
Investors should prioritize firms with strong balance sheets, diversified land banks, and exposure to affordable housing segments. Conversely, commercial-focused firms—including those in office or retail development—face a prolonged downturn. Avoid equity stakes in these until the PMI for commercial construction stabilizes above 50.
Risks and Considerations
- Interest Rate Volatility: While rate cuts could boost residential demand, a surprise hike would reverse momentum. Monitor Bank of England policy closely.
- Policy Delays: Planning reforms must materialize to unlock supply. Any setbacks could prolong the sector’s stagnation.
- Global Shocks: A sharp deterioration in trade relations or a US recession could further depress commercial activity.
Conclusion: A Sector Split, a Strategic Bet
The UK construction sector is a tale of two markets: residential stability and commercial fragility. For investors, this bifurcation isn’t just a data point—it’s a call to action. Focus on residential equities for tactical gains, but stay wary of commercial exposure until the macro fog lifts. The bricks may be slowing, but in housing, they’re still standing.
Andrew Ross Sorkin
June 19, 2025
