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Finance in the UK construction sector in light of Brexit

Julie Warren, Director of Sales and Marketing at Growth Street, discusses the impact of Brexit on construction finance.

“Construction firms must now take positive steps to mitigate business risk by having a constant supply of working capital to enable them to survive and thrive post-Brexit.”

It would be fair to say that the past 12 months have been a rollercoaster for the construction industry. The difficulties with which the sector has had to contend have been both varied and numerous. From the uncertainty following the Brexit vote to the ‘Beast from the East’ and its horrendous weather, to say nothing of the ongoing impact of the Carillion collapse, which is still reverberating through the supply chain, this is a sector facing more challenges than most.

The latest IHS Markit Purchasing Managers’ Index (PMI) has recently seen a recovery in housebuilding and other commercial work. The fact that activity has increased at its fastest level in seven months says a great deal about the resilience of the sector. However, at the same time prices are also reported to have risen at their fastest rate in months, resulting in sharp increases in the cost of new materials.

Contractors have blamed ‘Brexit uncertainty’ for many project delays and cancellations. The double whammy of a heavy reliance on migrant labour for skilled and non-skilled roles, in addition to pricing pressures caused by a weaker pound, could also serve to drive up project costs. Furthermore, the European Investment Bank (EIB) and the European Investment Fund (EIF) have invested billions in major infrastructure projects: losing access to these sources of funding could have a major impact.

Macroeconomic factors aside, there are also the day-to-day pressures with which construction firms will be all too familiar: paying up front for labour and materials; long, phased payment terms; late payments from customers; bad debt, and the perennial uncertainty of retentions.

In my view, construction firms looking to thrive post-Brexit should be taking positive steps to mitigate business risk by having a reliable, flexible supply of working capital, which could provide valuable security and peace of mind.

Remember: a ‘no’ from the bank does not mean a ‘no’ to finance

With traditional banks coming under pressure from increased regulatory capital requirements in recent years, businesses I’ve spoken to have noticed they can be more cautious when lending funds.

It is understandable that contractors who have had funding applications declined by a bank, or have spent weeks or even months waiting for a decision, might have an impression that all lenders are the same. I want to say to any business owner: just because your bank might have said ‘no’, that doesn’t mean there won’t be other lenders ready and able to help.

I spoke to construction finance specialist Euan Bell, Regional Director for Specialist Finance at Ultimate Finance, who outlines the importance of finding the right funding partner: “The construction industry is the backbone of the UK economy. It is imperative that we rally behind the sector with funding, investment and training. Construction comes with a distinct set of working capital challenges and requirements. What that demands is deep sector knowledge and experience of how to fund and run a facility that can take into account both certified and uncertified applications for payment as well as staged payments or good old-fashioned invoices.”

Euan adds: “Since traditional banks are less willing to offer new facilities, or extend existing ones, it is therefore vital that independent funding providers step up and deliver much needed working capital to this deserving sector.”

A new wave of funding options

Technological innovation has been a game changer for the financial services industry, with digital channels such as peer-to-peer lending and crowdfunding growing in popularity over the last decade.

‘Alternative’ solutions are going beyond standard finance products like invoice finance and term debt, too. Growth Street’s flagship business finance product, GrowthLine, is a tech-enabled transformation of the traditional bank overdraft. Once a limit has been agreed, the contractor has the flexibility to draw down funds and make repayments as often as they like in a given month, much like a regular overdraft. And since limits are based on businesses’ working capital assets, they can grow over time.

It’s important to know exactly what different finance products will bring to your business. Some facilities are designed to provide an immediate cash injection to cover project funding requirements, while others offer ongoing working capital that can keep pace with a company’s business development pipeline. Certainty over future prospects can help businesses select the right form of finance with confidence, of course, which brings us back to the impact of Brexit uncertainty. The more certain business is on trade after the UK leaves the EU, the easier it will be for companies to plan ahead.

It’s worth thinking about the solutions that sit alongside finance, too. Trade credit insurance enables contractors to cover receivables due within 12 months to safeguard cash flow. If customers become insolvent or fall into protracted default, trade credit insurance should indemnify the contractor against the cost of goods and services delivered.

With an array of options comes choice – and with choice comes complexity. A local finance broker will have the experience and knowledge to guide a business through the maze of alternatives to secure the best deal. Brokers who are members of the National Association of Commercial Finance Brokers (NACFB) adhere to an industry recognised Code of Practice, which could be a helpful guide.

Helping the construction sector weather any storm

We are living in a world in which change is the only constant. A maelstrom of political, economic, legal, technological and environmental factors are exerting disruptive influence on our infrastructure, real estate and other assets. This has obvious ramifications for the construction sector.

For finance providers, understanding the dynamics of the construction industry as it evolves is the key to creating innovative funding solutions that let contractors maximise their potential for growth beyond Brexit.

The business owners I speak to within the construction industry remain positive, pragmatic and prepared to grasp new opportunities. Although I’m confident that construction firms can thrive post-Brexit, having the right kind of finance in place could prove key, irrespective of any prevailing storm.

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Construction growth to rebound to 2.3% next year

UK construction output is expected to bounce back to 2.3% growth in 2019 after dipping by 0.6% this year.

The growth hiatus this year ends the five-year run enjoyed by the industry, fed mainly by private sector home building and strong commercial and industrial activity.

While forecast 2019 and 2020 growth will boost civils contractors and trade contractors working for house builders, commercial building contractors are expected to continue to feel the squeeze in both commercial and retail work opportunities.

The latest forecast from economists at the Construction Products Association, revises 2018 output down from stagnation to contraction, due mainly to bad weather and the fall-out from Carillion.

Forecasters predict growth will bounce back in 2019 and then expand by 1.9% in 2020.

Strong house building activity outside London will drive up activity in this sector by 5% in 2018 and 2% in 2019.

Infrastructure will also become a primary driver of growth for the whole industry, with output forecast to hit a historic high of £23.6bn by 2020, driven by large projects such as HS2 and Hinkley Point C.

CPA summer 2018 forecast

  • Construction output to fall by 0.6% in 2018 before growth of 2.3% in 2019 and 1.9% in 2020
  • Private housing starts to rise by 2.0% in 2018 and 2019
  • Commercial offices output to fall by 20.0% in 2018 and by 10.0% in 2019
  • Commercial retail output to fall by 10.0% in 2018 and remain flat in 2019
  • Infrastructure construction to grow by only 3.2% in 2018 and 13.0% in 2019

Without the forecast growth in infrastructure and private housing activity, total construction output would fall by 3% in 2018 and remain flat in 2019.

The demise of Carillion resulted in a poor performance for the industry at the start of the year, which combined with the bad weather, lost UK construction £1bn of work.

It is estimated 60% of this work may be recovered, but Carillion’s collapse will cause further delays at two major hospitals as work on the £335m Royal Liverpool University and Birmingham’s £350m Midland Metropolitan hospitals is on hold until at least 2019.

Brexit uncertainty continues to drive the sharpest decline for construction in the commercial sector, particularly felt in the offices sub-sector which is expected to fall 20% in 2018 and a further 10% in 2019.

Meanwhile, the shift to online shopping is causing woes for the high street, with new retail construction expected to fall by 10% this year.

Noble Francis, Economics Director at the Construction Products Association said: “Overall, it’s mixed fortunes for contractors at the moment.

“On the positive side, house builders are keen on accelerating building rates outside of London and that is expected to be enough to offset sharp falls in house building in the capital.

“Firms working on major infrastructure projects also have a lot of work in the pipeline. Infrastructure output is forecast to rise by 3% in 2018 and 13% in 2019.

“This growth is highly dependent on large projects such as HS2 and Hinkley Point C. As ever, there remain concerns about government’s ability to deliver infrastructure projects without the cost overruns and delays that we have seen on Crossrail and HS2 recently.

“On the negative side, the elephant in the room is clearly Brexit uncertainty, which has had a big effect on international investment, especially where it is high up-front investment for a long-term rate of return, which is now highly uncertain.

“It badly affects demand in sectors such as prime residential in London, commercial offices towers and industrial factories, which is dependent on manufacturing.”

Source: Construction Enquirer

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More land needs to be released for new homes in the UK to meet demand

A rapid expansion of the house building industry has the UK on track to deliver the Government’s target of one million new homes by 2020, but more are needed, according to a new analysis.

Indeed, an additional 100,000 homes are needed each year if the new supply is to have any effect on housing affordability and to boost volumes and improve affordability more land needs to be released in the areas of greatest need, including green belt swaps, says the report from international real estate adviser Savills.

It explains that new homes volumes are up almost 50% on three years ago, meaning that new housing supply is almost meeting demand across most of the UK. However, London and South East regions are bearing the brunt of the shortfall, accounting for 104,000 of the 2015/2016 total, which puts great pressure on affordability. Only a fifth of households can afford to buy the average new home in these regions.

‘Policymakers must take this shortfall in the south east of England seriously if we are to finish the job of solving the housing crisis. Many more new homes are needed at price points that are affordable to the many, and across a range of tenures, if affordability pressures are to be eased,’ said Chris Buckle, director of Savills residential research.

New homes need to be priced as a mass market product to ensure high sales rates, the report says. Increased land release in areas of high housing demand would reduce competition for development sites, leading to lower land values and enabling new homes to be sold at lower price points.

If there were more land on the market, land owners may need to realign expectations on the value of land, Savills argues, though that value will still need to be high enough to persuade them to sell. For the policymaker, it means recognising that lower new homes values may result in less land value to be captured through CIL and section 106.

A commitment to solving the housing crisis is evident in the housing white paper, but to address the crisis where it is most acute will require a regional market led strategy for land release, including a programme of green belt swaps, the firm says.

The report also points out that Government aid, particularly in the form of Help to Buy, has helped boost the number of homes being built and will support around 20% of the 190,000 new homes expected to be built in 2016/2017, compared with 34,000 in 2015/2016 and 28,000 in 2014/2015.

Far the biggest increase has been in the number of homes being built without public funding, both market sale and built to rent units, up from only 62,000 in 2015 to an expected 111,000 this year, an increase of 79%.

The Savills report details evidence of high delivery sites in high demand areas across the South East. These include sites in Andover, Aylesbury and Bedfordshire where homes are priced at a discount of up to 15% compared to the local market on an average price per square foot basis. Each of these sites completed more than 600 new homes for sale in the past three years, a build-out rate significantly above average.

Even in high demand areas, such as Cambridge and Horsham, there are large numbers of homes being sold at a discount to market averages on a per square foot basis, the firm’s researchers found.

‘To build on this momentum, policy needs to go further, and our report contains some uncomfortable truths. Help to Buy may have helped boost housing delivery and given aspiring home owners a welcome leg up onto the market, but something more fundamental needs to be done to ensure we deliver more homes quickly, and at prices that more people can afford, whether to buy or to rent,’ said Buckle.

‘Policymakers need to recognise that high volume delivery of lower priced housing will limit the capacity of developers to fund infrastructure and affordable housing in the way they currently do, via section 106 and CIL payments, so other sources of funding for infrastructure and affordable housing will be essential,’ he added.

Developers will need to change their approach, Savills says, adding that the Government clearly wants to hold developers to account for new home delivery, through better, more transparent data and sharper tools to ensure housing with planning permission is built.

‘Although it is unclear what form these tools will take, this pressure, combined with the new housing delivery test for local authorities, means that it will not be enough for the development industry simply to maintain current modes of delivery,’ Buckle concluded.

Source: Property Wire