The “credit crunch” is a term we are hearing everywhere at the moment, but what could it mean for the construction industry?
The current US sub-prime mortgage crisis caused an increase in the interest rate at which banks lend to each other. In the UK, this led to Northern Rock’s decision to seek emergency support from the Bank of England. UK lenders have, unsurprisingly, reacted by taking a step back and implementing a more cautious approach to any new lending propositions, as a temporary measure at least.
Some say that the availability of cheap and plentiful debt in recent years could not have continued and that it was inevitable that there would be some stocktaking sooner or later. It may not necessarily be a bad thing that this is happening now, which could prevent a crisis similar to that in the US. The construction industry may find itself affected by this more cautious lending climate for two reasons.
- First, the industry is one that relies heavily on cashflow. Lenders may be less likely to help solve liquidity problems, for new customers anyway. Loans that are given credit sanction could impose less appealing rates and terms than in recent years.
- Second, the industry also relies on developers obtaining finance for their schemes. They may find this more difficult, particularly from new banking relationships. Development finance has traditionally been one of the more risky prospects for lenders and so only the strongest development appraisals are likely to survive the credit sanction process in the current climate.
It is not all doom and gloom though. The message from the banking industry seems to be a belief that the credit crunch in the UK is only temporary and that it will not be long before confidence is restored and lending continues, although maybe not at the levels we have seen in recent years.