A report recently compiled by strategy consultant Roland Berger reveals that more construction and property companies have had unused credit withdrawn than any other sector of the economy. 44% of construction and property firms have had overdrafts cut compared to the 34% UK average. The survey also found that 44% of respondents now have tighter covenants on their debt. These figures have created waves in the industry with construction companies commenting that banks do not fully appreciate the cashflow patterns of the construction industry which fluctuate throughout the year. The fluctuations mean that at some points in the year credit facilities are utilised and at other times, they are not. Taking away the unused facility is not considered to be a feasible option, particularly in an already troubled industry.
A pivotal question for most working within the UK’s construction and property industries at the moment is, ‘when will the markets show signs of improving?’ The answer seems simply that we just don’t know. There is no escaping the fact that some of the UK’s, and indeed the world’s, leading corporate bodies are facing some of the toughest obstacles the recession has to throw at them. Cash is no longer flowing as freely as it once did. Overdrafts are being drastically cut by funders. Lending is arguably a distant memory for many. And for those fortunate, or foolish enough, many would argue, to obtain funding, neither the lender nor the borrower are in a comfortable position.
So what is the Government’s take on the condition of these markets?
It would seem that public spending on construction is about the only thing keeping the industry going, but the recent Budget has made it clear that this will slow down. Another £1.5bn a year will have to be made in ‘efficiency savings’. But how, in fact, will this be possible?
We may never know the true extent of the UK’s debt but it is speculated to be in the region of a colossal £1.2 trillion. With Government borrowings set to soar to £175 billion this year, it is inevitable that the Government’s ever expanding purse strings will need to be cut. And yes, you’ve guessed it, the construction industry will no doubt be the first to feel the pinch.
The easiest way to achieve these cuts is to follow in the footsteps of the Republic of Ireland, where the Government has ordered an 8% fee reduction on all services procured with public money with effect from 1 March 2009. The implications of this for all involved in a construction project, including the Government, are far-reaching and whilst many contractors and consultants may be able to sustain these cuts for a period, it is clear that this cannot be a long term solution. A danger is that it will lead to dumbed-down procurement and a far less productive construction industry.
A new Construction Trade Survey from the Construction Products Association already makes alarming revelations. The construction industry is reported to be facing its sharpest decline on record, with no prospect of an improvement in the near term and output and employment is set to fall even further in 2009 and 2010.
It is envisaged that there will be no respite from the current recession, with the decline endured in the industry in 2008 being set to be exacerbated in 2009 with decreasing demand in the economy leading to unprecedented falls in output and employment within the construction industry.
The Construction Products Association anticipates that the construction sector as a whole will fall 12.1% during 2009, the sharpest decline on record and the private sector is expected to endure the worst falls, falling 20% in 2009 alone. While 2008 saw private housing and industrial sectors suffering, 2009 is expected to see sharp falls in offices and retail new build, with private housing repair and maintenance also set to be hit hard.
The Government does appear to be living up to its promise to assist the construction industry however. Gordon Brown has recently announced that a £1.5 billion tranche of funding will be made available for social housing as part of the re-launch of ‘Building Britain’s Future’. As part of this, the Homes and Communities Agency has announced plans to give contractors the chance to build an initial 500 homes on public land in exchange for an equity share in any development. Whilst there are clear concerns about the implication of equity share developments, this will arguably give many contractors the kick start they need to develop again.
Perhaps confidence to invest in the market again is all that is needed. That confidence of course being required from the Government and lending institutions in equal measures to that required of commercial property investors and UK housebuilders.
One thing that is for sure is that despite what the Government portrays as its best efforts, it will be some time before the recession releases the UK construction and commercial property industries from its tight grip, and when it does, brace yourself for unfamiliar territory. Lending will never be the same again, and if the Government continues to cut public spending in the construction industry, neither will procurement. For the full comment see Greens Property Law Issue 100, June 2009