Categories
Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery

Will proposed relaxation of planning laws revitalise construction?

Last month the Government announced that it would enact legislation to relax planning laws so that full planning applications will not be required to demolish and rebuild unused buildings making it easy to convert commercial and retail properties into residential property. This could be the key to a swift revival of high streets and town centres by repurposing existing property.

If approved these new rules should come into effect in September.

The Government is also proposing to reform England’s planning system, it claims, “to deliver more high-quality, well-designed homes, and beautiful and greener communities for people to live in.” although the details have not yet been made public.

On the face of it, if the rule changes do become law this will be a significant boost to construction and building companies and suppliers, like us, of building materials.

Presumably, also, developers could benefit from a relaxation of the planning conditions that often accompany such projects, whereby local authorities can make planning consent conditional on the provision of a proportion of affordable housing or other community amenities via a Section 106 Agreement.

In answer to concerns raised by such bodies as the Council for the Protection of Rural England (CPRE) and the Local Government Association (LGA) that it will lead to a decline in standards, the Government has said that the measures are designed to cut out bureaucracy “to get Britain building” but will also protect high standards: “Developers will still need to adhere to building regulations.”

It has also pledged that pubs, libraries, village shops and other buildings essential to communities will not be covered by these new flexibilities. This will help avoid the decline of village and community life by preserving local amenities although most local libraries and many pubs have already closed.

Although a controversial initiative, we believe this would be a welcome boost for construction and associated industries and for employment through the jobs it will create. What do you think?

Has your business struggled as a result of the Coronavirus Pandemic? Are you having to consider redundancies as the Furlough measures are scaled down?  

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Insolvency Turnaround

Sector blog – The north of England and the future of the construction industry

construction industryThere is no doubt that the construction industry has been having a torrid time in the last couple of years, especially since the collapse of the contractor Carillion with debts of £1.5bn at the start of 2018.
The most recently published insolvency statistics, for the third quarter of 2019, showed a 55% increase in the number of companies falling into administration, continuing an upward trend that had been going on all year.
There is little doubt that the political uncertainty since the UK voted in June 2016 to leave the EU has been a contributory factor to the industry’s woes, which are compounded by a shortage of people with appropriate skills. The skills shortage in the construction industry and its reliance on labour, often as subcontractors, has for several years been mitigated by the use of EU labour, particularly from Poland, but this, too, has been disrupted in the aftermath of Brexit as attitudes to migrants have become less welcoming.
But there have also been knock-on effects from the collapse of Carillion, which are being attributed to the structure of the industry, where major contractors like Carillion were focused on winning projects and managing them, relying on subcontractors to carry not only the responsibility for doing the work but also for taking the financial risk based on exposure to fixed price contracts and poor payment terms.
Indeed, when they go bust there is little left for creditors which highlights the level of credit risk.

Is the situation for the construction industry about to change?

Now that the Election is over and that the Government has a solid majority, hopefully, it will focus on the many pressing domestic issues that had been overshadowed by Brexit, not least the economic imbalance between various UK regions and London.
Indeed, the Prime Minister has already been warned that unless more attention is paid to the North of England particularly, those voters who lent him their vote, they may well withdraw their support equally quickly if they don’t see tangible investment.
In late December and again this week there were some signs that the message had been received and understood.
The Prime Minister had already promised that their trust in his government would be repaid and both The Times and the BBC were reporting that there was the prospect of changes to Treasury rules coming that would allow more cash to be allocated to projects outside of London and the South East, notably on infrastructure, business development projects and schemes like free ports.
Then, on Tuesday, when March 11th was announced as the date for the Chancellor’s first budget, the predictions of Treasury changes were again emphasised:
“In the intervening two months, the Treasury will have to work up a new National Infrastructure strategy that delivers on the plan to rebalance regional inequalities, some of which stem from decisions made nationally on, for example, transport spending.”
While doubts have been raised about the viability of the proposed HS2 rail project to connect London to the North, said to be likely to cost almost three times more than predicted, should this radical rethinking of Treasury rules come to pass, hopefully it could open up opportunities for the construction industry to work on plenty of other big projects in the North and possibly also the Midlands.
The other area that is likely to benefit the industry is a massive house building initiative. While no policies have been announced, Dominic Cummings’ Alternative Civil Service may light a bonfire under planning restrictions that are often blamed as the impediment to achieving previous governments’ targets. I am also sure we shall see more financial stimulus aimed at new owners, again all initiatives that will benefit the industry irrespective of what happens to the economy.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Turnaround

K2 Key Indicator: is the UK construction industry in terminal decline?

construction industry at workThere is no doubt that the UK’s construction industry is facing a number of pressures including a lack of funding, inadequate planning approval processes and a severe skills shortage.
In this first of a monthly Key Indicator series that looks at major industries and their future, this month I look at the construction industry.
In the November 2017 Budget, the Government set a target to build 300,000 new homes per year to address the country’s chronic housing shortage. This has been estimated by the lender Urban Exposure as requiring £20 billion-plus of new funding.
In January this year, the Government launched a new national housing agency, Homes England, in order to help achieve this target. Its aim is to bring together existing planning expertise and new land buying powers.

Financing new housing development

There is a distinction to be made between the smaller house-building companies (those building 100-150 homes per year) and the relatively small number of large concerns.
Despite the controversial profits made by some larger house builders from the Help-to-Buy scheme, the House Builders Federation (HBF) estimated that between 2007 and 2009 after the 2008 Financial Crash one third of smaller companies stopped building homes. This equated to a loss of 25,000 homes per year being built.
Since then, of course, a combination of massive losses post-2008, consequent risk aversion and the tighter Basel 3 regulations on bank lending to what are termed High-Volatility Commercial Real Estate Loans (HVCRE Loans) has made borrowing by developers much more difficult.  Basel 3 means that banks are now required to set aside 18% of capital as a buffer for these loans compared to buy to let property loans of just 4%.
Consequently, lending to developers by the big banks, particularly to the smaller construction companies, who cannot access the bond markets direct, has plummeted. In 2016, CityAM reported that UK banks had halved their lending to property developers, down from £32.5bn in April 2014 to £14.9bn in April 2016.
The lending policies are clearly daft given that Loan-To-Value (LTV) on development property is typically 60% whereas the LTV on buy-to-let can be 95%
This has led to the growth of specialist property lenders such as Shawcross, Close Brothers and Paragon, the first two of which won top awards in this year’s online publication Moneyfacts awards. None of these specialist lenders has incurred any losses for some years which begs the question about the banks’ understanding of the market.
As yet, however, these specialist lenders, along with newer entrants such as HCA, Titlestone and Urban exposure, have not filled the funding gap.
In the meantime, according to a Reuters report on a survey mid-2017, the directors of small British construction businesses have been plugging the funding gap with their own resources but this has been limited and not at the amounts required, hence a significant scaling back by small builders.
Still, UK Finance reported in February 2018 that while, manufacturers’ borrowing had expanded slightly, the construction and property-related sectors had contracted.
Meanwhile despite the 300,000 target and the new Government agency, the Government continues to push its Help-to-Buy scheme that has improved the profits for larger firms by pushing up house prices due to limited supply.

The construction industry, planning, Brexit and the skills shortage

It would be impossible to fairly assess the future of the UK construction industry without considering planning, Brexit and the industry’s skills shortage. I make no apologies for calling it a crisis, not least because that is what the Federation of Master Builders (FMB) called it earlier this year.
This was after its quarterly survey into skills revealed that companies are particularly struggling to recruit bricklayers and carpenters, but that demand for skilled plumbers, electricians and plasterers is also outstripping supply.
This is also pushing up wages, thus adding to the costs being borne particularly by the smaller businesses many of which are losing staff to larger firms.
It has been estimated that one in five construction workers in the housebuilding sectors is foreign-born with 17.7% from EU countries. Across the country, Romania is by far the most common country of origin, followed by Poland, Lithuania and Ireland.
There has been plenty of evidence that EU nationals including construction workers have been leaving the UK in large numbers, while fewer have been coming since the June 2016 decision to leave the EU.
A combination of rising hostility towards migrant workers, the tediously lengthy and uncertain process of agreeing the status of migrant labour during the Brexit negotiations and more recently the revelations by the Home Office of a “hostile environment” for immigrants despite them having lived and worked in the UK for years are not helping the UK plug its construction skills gap.
Planning consent has been for some time an issue causing delay by depleted departments drowning in applications and appeals. This along with the system of local and regional planning committees staffed by inexperienced councillors dealing with NIMBY local inhabitants and the lack of local and regional frameworks to identify land for housebuilding are all contributing to a sclerosis in the planning system.
Myopia and an absence of joined-up thinking seem, sadly, to have been the characteristic features of Governments for some time and despite the rhetoric it continues, which bodes ill for the future of the construction industry.
I am not however yet willing to drive the final nail into the industry coffin.  There is a chorus of voices from many sectors of UK industry warning against the foolishness that characterises much of the Brexit negotiating stance, and the volume of noise is rising as the consequences emerge.
Being an optimist, I hope that they will be listened to and sanity will prevail before it is too late.

Categories
Cash Flow & Forecasting Debt Collection & Credit Management Finance Rescue, Restructuring & Recovery

Why do so many in the construction industry get into difficulty?

construction contractorWe have been experiencing a rash of main and sub-contractors in the construction industry coming to us for advice because they have got into financial difficulty.
It has become clear that those who contact us have not been managing the financial side of their business.  They generally pay wages, labour, sub-contractors and suppliers in that order but all too often not other bills, such as to HM Revenue and Customs (HMRC).
Another characteristic is that those who end up dealing with HMRC and debt collectors don’t tend to have good quality financial information.
It has also become clear that their suppliers have been tightening up on sub-contractor payments and this has been putting pressure on their cash flow.
Traditionally construction is a cyclical industry, where there are seasonal peaks and troughs as well as fluctuations in demand for building, often influenced by conditions in the wider economy.  For example, the demand for commercial building construction has been diminishing in the uncertainty over the outcome of Brexit negotiations, as businesses hold onto their money and cut back on investment. These factors impact on margins.
In the housing sector given the lack of availability it might seem that there was a continuing, high demand, but again, the available cash for projects is limited, partly because there is a lack of government cash and local authority power to build those homes that are most needed – at the affordable end of the market.
At the other end of the scale, the property market has slowed as householders economise in the face of rising inflation and stagnating pay, plus, again the Brexit uncertainty.

How can contractors manage their finances to ensure success?

The pressure of ensuring an adequate work flow can lead to a sense of urgency in bidding for jobs at the lowest price, risking making a loss, and in taking on more work or agreeing to projects that there is insufficient capacity to handle.
It is also easy to bury one’s head in the sand, such as hoping HMRC won’t notice non-payment of CIS, PAYE or VAT, or ignoring their demands when they do; never a sensible long-term strategy.
All too often contractors succumb to factoring their book debts instead of getting help when they experience cash flow pressure. This often means they lose control of their business the next time they are subject to creditor pressure or get into arrears with HMRC.
Contractors generally need external support to help them manage their finances and in particular help them stay in control of their cash flow.
When pricing and bidding for work, contractors should not feel under pressure to win tenders at a loss just to keep the work coming in. Instead they should make honest assessments of each project and include a margin for overheads and profit. All too often premiums are ignored. Fixed prices also need a risk weighted margin to cover delays and unforeseen costs. It may be better to remove risk by retaining the right to use variation orders to cover unforeseen costs, external factors and inflation such as increased sub- contractor costs. Another approach is open book with an agreed margin.
However work is priced, contractors should walk away from projects that are not profitable and where they have any concern about being paid on time.
Once a contract has been won the contractor should keep careful track of the ongoing external and prelim related costs and constantly monitor profit and cash flow, ideally by trade.
Ultimately, success in a fluctuating and seasonal market means tight control but also whenever possible putting aside a proportion of the profit from the busy period to offset the leaner time.
 

Categories
Cash Flow & Forecasting Finance General Turnaround

A look at the UK construction industry at the end of 2016

bricklaying in construction industryIn December 2015 KPMG was forecasting a “positive outlook” for the construction Industry for 2016, when Richard Threlfall, KPMG Head of Infrastructure, predicted steady growth and gradually improving margins.
He said: “2015 has been a particularly ghastly year for many Tier 1 firms, who have been knocked off-course by losses on legacy contracts signed too cheaply in order to maintain volume in the depth of recession……….
“Weak profitability in the industry won’t improve overnight, but we can expect to see steady growth in order books and gradually improving margins. For the supply chain, the outlook is really good.”
A year on, the statistics suggest that the industry, both Tier 1 and smaller construction SMEs, have experienced mixed fortunes.

Some key construction industry statistics and pressures

According to the Office for National Statistics (ONS) most recent findings published for October 2016 construction output had decreased by an estimated 0.6% compared with September 2016. All new work decreased by 0.9%, with the largest downward contribution coming from infrastructure. This was despite an upward revision in the figures for the third quarter (Q3, July to September).  Even repair and maintenance, traditionally the preserve of construction SMEs, had experienced no growth.
Nevertheless, it said, new orders remained at their highest level since 2009, immediately after the 2008 economic crash.
Similarly, according to a Guardian report in November, construction work for office space in central London had reached its highest level for eight years, up by more than 4% compared with the period before June’s EU Referendum.
Chris Lewis, head of occupier advisory at Deloitte Real Estate, said the figures showed the capital was resilient.
That may be true for commercial property in London, despite the post-Brexit uncertainty, but what about housing construction, especially outside the capital?
Despite the evidence of considerable demand, particularly for affordable and social housing, here too, ONS figures showed that output had dropped by an estimated 1.4% in Q3, despite a slight upward revision in the figures.
Housebuilder Redrow noted, however, that housing was still up 8.7% when compared with the same period in 2015 as private new housing increased by 10.8% but public new housing – a much smaller part of the sector – fell 3.1%.
Undoubtedly there are pressures on the construction industry not least the post-Brexit uncertainty and ongoing skills shortages.  The massive devaluation of £Sterling is also an issue, given that much building material has to be imported, particularly bricks, which are no longer produced in the UK and will therefore be more expensive.
The stagnation in the repairs and maintenance side can hardly be good news for smaller, local SMEs. It remains to be seen whether the announcements in the Chancellor’s Autumn Statement of increased spending of £1.1bn extra investment in English local transport networks, £220m to reduce traffic pinch points and of the promised £1.4bn for 40,000 extra affordable homes will be enough to ease the pressure on SME builders.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Turnaround

Insolvencies continued to fall in the three months up to the EU referendum

insolvency graphPerhaps because of the feverish media coverage before and after the UK EU referendum vote, there has been little if any comment on the continued reduction in company insolvencies.
The most recent figures, published at the end of July for April to June 2016 (Q2) showed a continuation of the downward trend that has been in evidence since their peak in 2009 in the aftermath of the 2008 Great Recession.
An estimated total of 3,617 companies entered insolvency in the last quarter, down 4.2% on the first three months of 2016 and down 2.7% on Q2 in 2015.
By far the biggest driving force remained Creditors’ Voluntary Liquidations, showing a slight rise, by 0.7% on the same period in 2015, and suggesting that creditors are unwilling, or unable, to wait for their money or to enter into arrangements for repayments over a longer period since the use of Company Voluntary Arrangements (CVAs) remains at rock bottom.

Construction Industry struggles

The Insolvency Service has as yet produced no figures for insolvencies by industry sector, but Construction was by far the worst hit from January to March (Q1) 2016.
However, the monthly Markit/PMI statistics are a good indication of the ongoing state of the Construction industry, showing a consistent contraction in both confidence and activity throughout the last six months.
Indeed, after two quarters of contraction the industry is in recession and the post-Brexit July figures gave no relief to the gloom, producing the worst set of monthly figures for seven years.
Given the uncertainty since the referendum, plus the erosion of profit margins due to increased materials costs and a skills shortage in the sector optimism about the health of Construction is not likely to return any time soon.
Certainly there is little prospect of much in the way of commercial construction while the future of the UK economy is in limbo.
It remains to be seen what the Government proposes to do about the acknowledged acute shortage of affordable homes that has been causing such problems (while at the same time pushing up property values). If there is some relaxation of the current restrictions on Housing Associations for new building of social housing there might be at least some relief for Construction.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Is it all doom and gloom or are there rays of sunshine on the horizon?

It started mid-May with the Bank of England governor Sir Mervyn King upgrading the economic forecast for the rest of this year.
The British Chamber of Commerce (BCI) was also slightly more optimistic in its forecasts and reports on business confidence.
In the last few days we’ve had three forecasts on monthly performance for the manufacturing, service and construction sectors, all of them showing signs of growth.
While no-one is denying that there are some years to go on paying down household and business debt, as the Telegraph’s CItyAM editor Allister Heath emphasises this week, is his doom-laden piece predicting an even more cataclysmic crisis really justified?
He cites the need to further massively cut the welfare state and also to what he calls the “terrifying recklessness” of the Government’s proposed Help to Buy scheme that could stoke up another credit-fuelled housing bubble.
It doesn’t help that we are only building 100,000 new houses a year instead of the 300,000 that we need to satisfy demand.
However, if the scheme were to stimulate house building we might stem house price inflation and avoid a bubble. It could also be used to redress the scarcity of smaller homes for both first time buyers and older people wanting to downsize as well as provide jobs for the approximate 20% of all SMEs that a thriving construction industry could employ.
We all know that “bad news” sells papers but there is also a converse argument that we need businesses to believe they have a future. With some measure of confidence in the future, businesses and SMEs in particular might begin to invest in growth.
So are you a pessimist, a realist or an optimist?

Categories
Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Construction in Crisis – Time for a Reconstruction?

The ongoing economic crisis continues to take its toll on the construction industry with the sad news that a high profile company that was more than 100 years old has gone into administration.
KPMG have been appointed as administrators of London-based Holloway White Allom, which recently completed a refurbishment of the Victoria & Albert Museum, for which it won a conservation award.
The company, founded in 1882, was known for high profile contracts including the refurbishment of the Bank of England in the 1930s, the construction of Admiralty Buildings on Horse Guards Parade, of the Old Bailey in the early 1900s and the fountains in Trafalgar Square.
Although the company was undergoing a turnaround and restructure, following a cash injection earlier in the year from private equity firm Privet Capital, it is understood that it was forced into administration by late payment for one large project.
This latest high profile casualty comes as the construction industry faces increasing pressure. ONS figures show that output on public housing was down by 5.3% and on other public projects by 7.5% during the three months to August 2011 compared with Q3 last year, and accountancy firm Deloitte reports that the number of property and construction companies that went into administration in Q3 2011 rose by 11% to 117 compared to 105 in the same period last year.
However, some sectors of the industry are faring better than others.  Bellway, for example, this week posted a 50% annual increase in pre-tax profits, smaller construction companies focusing on repair and refurbishment are also surviving well and commercial construction activity has increased for the 19th month in a row.
Those companies that took steps to restructure their business to focus on what is likely to survive in a declining market and to deal with indebtedness early in the recession have done well. 
This suggests that those companies with a bad debt or over-indebtedness due to historical loans should consider restructuring their businesses before they run out of cash. It is not too late for them, but they are likely to require a restructuring adviser to help them.