Although by May 2020 seven years of revenue growth had ended, practices have held up well against multiple challenges. The full impact of coronavirus, however, will not show until next year
Each year, RIBA chartered practices provide detailed information about their business performance through the RIBA Business Benchmarking Survey. For a detailed understanding of the practice and business of architecture, it’s unique.
In the 2020 report, the seven-year run of growth in revenue came to an end.
The 2020 report describes practices’ financial information up to May 2020, so captures only the very early effects of Covid-19. Assuming the pandemic is over by May 2021 (an assumption based mainly on hope) we will see its full effect next year.
Context
The period of rapid revenue growth has come to an end, but practice revenue and profitability are holding up.
Last year, when looking at the 2019 results of the survey, there was ‘a weak economic environment, political uncertainty, and the reticence of investors’. Things looked uncertain then – but as the benchmarking surveys were being completed we faced the sudden rise of Covid-19, a lockdown, the ever-looming threat of a no-deal Brexit, the biggest post-war UK economic slump and the insufficiently mitigated climate emergency. And yet a constant finding of the benchmarking survey has been just how resilient practices are. We can see it again. In the face of growing uncertainty in 2019 and early 2020, the business of architecture has held steady.
Revenue and profits
In 2020 RIBA chartered practices together brought in revenue of over £3.5 billion. However, although their number has increased, this is less than in 2019. A small fall of 1% on last year marks the end of seven years of growth, during which year-on-year revenue rose by, on average, 12%. For these seven years, practices’ revenue growth has been three times the average rate of the construction industry, and four times that of the overall UK economy. That remarkable performance paused this year, and architectural revenue will continue to be under significant pressure during the pandemic and our recovery from it.
Geography of revenue
One constant over the last few years has been the increasing importance of London to UK architecture. While we’ve seen regional hot-spots, most notably in the North West, the capital continues to dominate the UK profession. And London’s pre-eminence continues to expand. For the first time, in 2020, London generated over two-thirds of all chartered practice revenue, having increased its share of the architecture market by over 10% in just five years. The importance of London, as both the leading region and a global hub for architecture, make it particularly sensitive to the current twin threats of a no-deal Brexit and the potential pandemic-driven shift away from city centres.
International
In the last set of available data, architecture contributed more than £450 million to the UK trade balance, exporting 12 times more architectural services, by value, than it imports. RIBA chartered practices play a very significant part in this. The value of international work has more than doubled since 2013. In 2019 we saw the value of international work jump by over 20%, from £513 million to £625 million; that growth has been consolidated in 2020, although not built upon. In 2020, chartered practices carried out work on overseas projects to a value of £624 million. Overseas work accounts for 17% of all chartered practice revenue.
Practices with more than 100 staff carry out 88% of international work, and more than half of these very large practices have at least one office outside the UK.
While the value of international working remains constant, there has been a shift in where this work has come from. Significant growth in work in the Middle East stands out: from £104 million in 2018 to £178 million in 2020. For the profession, this is a rise from 20% of all international work to 38%. The value of Middle East work is back to the kind of levels that we last saw in 2015 and 2016.
Inauspiciously, after successive years of growth, the value of work from the EU has fallen this year, by over a fifth, although there is still more work from the EU than there was three years ago. Trading in Europe is likely to become more challenging, and it is the region in which practices with fewer than 100 employees are most likely to work.
As an aside, for the first time, the RIBA Benchmarking Survey asked about the value of work in the Arctic or Antarctic. It’s pleasingly to see that RIBA practices are creating buildings in all parts of the world, even if polar work accounts for less than 1% of all overseas work.
Flattening expenditure
Turning to expenditure, for the first time since 2012, expenditure has flattened.
By quite some way, staff are the largest cost category for practices. In 2020, 58% of total expenditure was for staff. From 2012 to 2019 total staff costs had been increasing each year but this too came to an end in 2020. Total staff costs are have fallen and the average payroll cost, across all practice sizes, has decreased by around 7%. The number of people has decreased too; there are just under 5% fewer staff than there were last year, with 42,000 employed now compared to 44,000 in 2019.
There have also been falls in other areas of expenditure. Premises (6% of costs) and travel (2%) are reduced and look set for a downward trend throughout most of 2021. However, the broad basket of ‘other’ costs has pretty much eaten up the savings made in other areas. Notably, although accounting for a relatively small (just under 2%) portion of overall costs, the average expenditure on professional indemnity insurance has risen by 8%.
Dipping revenue
And so to profits. In 2019 growing revenue and expenditure saw profits flatlining. 2020 shows a slight dip in revenue and flat expenditure, so a small dip in profits. Total profit among chartered practices was £518 million in 2020, down a little from £528 million in 2019. In increasingly tough times, so far at least, profits have been holding up fairly well, and chartered practices are again proving their resilience. There is some unevenness here, however; the largest practices have increased their profits while medium and smaller practices have seen them fall back slightly. Overall, profits are around 13% of revenue. Remember though, benchmarking data takes us to May 2020. We’re likely to witness intense pressure on profits through 2020 and into 2021.
The results mark the end of a sustained period of growth. Revenue has been holding up, but the challenges that chartered practices face already and over the coming months and years will be testing. The monthly RIBA Future Trends report will continue to give a snapshot of how architects feel about future work. For now, after a dramatic fall and recovery in confidence, architects remain positive. Next year’s benchmarking survey will give us the full picture of the damage Covid-19 has inflicted.
Thanks to those who spent the time completing the survey this year and to the Fees Bureau and MRM, our research partners.
RIBA chartered practices can access the full findings here