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Construction industry pressure starting to show

Construction industry pressure starting to show

The UK construction industry is starting to show early signs of stress and distress. Successive external shocks have tested the industry’s resilience – from the consequences of Brexit to the Covid-19 pandemic and the war in Ukraine. Each of these catalysts have hurt the sector’s ability to recruit and keep skilled labour, pushed up prices and reduced supplies of vital construction materials (e.g. concrete, plaster, bricks, sand, gravel, and asphalt-related products). For example, Brexit border protocols, under the Trade and Cooperation Agreement (TCA), complicated cross-border transportation of construction materials, as materials sourced from within the European Union (EU) are now subject to tariffs.

Simultaneous pressure of labour shortages and industrial action is maintaining elevated wage inflation pressures on construction firms. These inflationary forces have prompted the Bank of England (BoE) to raise interest rates and tighten financial conditions. The rise in the cost of borrowing has increased tension throughout the industry, while dampening business sentiment and putting some construction projects at risk.

As these pressures build, signs of distress are starting to emerge. Government data for purchasing of building materials and components reveals this shift in construction sector sentiment. Data from the Department for Business, Energy & Industrial Strategy (BEIS) shows the purchase volume of bricks, cement, concrete, sand and gravel has started to fall. Within the month of August, almost one quarter (22.7%) of construction firms currently trading reported decreased turnover while six out of ten construction firms (60.4%) reported that the price of goods or services had increased. UK construction output rose slightly by 0.1% in the three months to August 2022, according to data from the Office for National Statistics (ONS). While output fractionally rose on a monthly basis in August, the three-month growth in output represents the slowest rate of growth for 12 months. In August business repair and maintenance fell for the fourth month out of the last five, as businesses cite the cost of living crisis as a reason to pare back necessary repair and maintenance work, while high prices for construction materials prompted some projects to stall. However, some new construction projects – agreed on fixed price contracts – are continuing despite recent price increases and will be absorbed by construction firms, according to the ONS report.

Anecdotally, there are examples of construction schemes which have stalled across the UK, while many others have overrun on time and budget. In the last two months, separate vehicles behind three luxury Manchester residential projects entered administration. The scheme’s lender, Maslow Capital, cited “economic challenges” as the cause of the collapse of the DeTrafford development schemes.

For residential developers, rising costs for building materials and wages can coincide with reduced presales which create a financial hole that worsens over time. Barratt Developments, the UK’s largest housebuilder, this week reported slowing demand for new build housing. Sale reservations are down to 188 per week, compared to 281 per week this time last year due to increased “economic uncertainty, where growing cost of living concerns have been compounded by increased mortgage interest rates and reduced mortgage availability”. Barratt Developments lowered the outlook for the pace of sales and expects to see build cost inflation of between 9% and 10% in 2023.

Profitable construction projects require disciplined costing, resources, and diligent time management to deliver. However, over the past three years, it has become more difficult to accurately assess the end price of a construction project upfront. Tight labour markets, inflationary pressures and higher borrowing costs in a weakening economy has made fixed-price construction contracts untenable. Eventually something must give. In construction, most firms fund contracts via credit, therefore the lender is typically funding a construction contract. If the lender sees a slowdown in customer payments and increase in unpaid invoices to suppliers, for example, they may want external assistance to recover the situation. The solution is always bespoke, but often a simple mediation between counterparties can help. BTG Advisory is well placed to play this role between contractors, key suppliers, banks, and other creditors.

Sometimes it comes down to timing – both the schedule of liabilities due and scheme milestone delivery. BTG Advisory takes a bird’s eye view of all financial obligations and deliverables and ascertain what kind of help is most relevant – whether bridging finance, fresh equity, a corporate restructuring, or if events have already gone too far, insolvency proceedings. The earlier we are instructed, the higher the probability for a positive outcome.

Risk mitigation is a vital part of a construction firms’ toolkit. For those firms able to weather the months ahead, structural demand drivers are supportive for the sector in the long term (e.g. demographics trends supportive of housing and healthcare, while sustainability and technology are supporting energy and digital infrastructure). However, the sector may experience a correction before the medium-term opportunities to pick up market share and profitable contracts are presented.

If your or your client’s business is affected by these issues, please do get in touch and let us see how we can help. We can advise on how to navigate the turbulent environment, with advice bespoke to the businesses’ circumstances.

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