What is happening in Construction?

Paul Wells30th October 2012.

 

What’s happening in construction?

 

By Paul Wells, Director, Building


 
 

 

From a commercial property viewpoint an easing of credit and availability of finance for property lending will provide some real impetus to growth.  My colleague Neil Slade talked about a shortage of new development where demand exists but credit is difficult and I thought it was worth supporting Neil’s piece with a little more detail.
Well the headline from the latest Ernst & Young Item Club that “The crippling credit crunch is loosening” certainly seems to be a pointer that the availability of credit may be getting a little easier.
There is little doubt that the ongoing credit crunch and crisis in the Banks continues to affect business thinking nearly 5 years on from the start of the world’s economic woes.  The effects on property both commercial and residential are well catalogued and there for all to see – not least the retreat of values!
It is not an argument for inflating property values – what we need is more financial liquidity in the market to ‘make things happen’.
The Item Club lays bare some of the statistics around the credit crunch.  Part of their commentary was how UK Banks borrowed “£900 billion” that was borrowed from overseas up to 2008 and how we’ve been paying the price ever since as the UK reigns back from the £100 billion a year that Banks were using to fund domestic lending.
The Item Club explain that once it happened, the breakdown in the funding markets triggered several other crucial factors.  Secondary banking subsidiaries had to be supported, straining capital adequacy ratios.  Loan losses had the same effect.  Bank boards, as well as their shareholders and regulators, became very risk-averse as the losses mounted.  Tougher capital and liquidity requirements exacerbated the lending squeeze.  The ensuing recession made Banks even more worried and of specific concern for those earning their money in the property market, about the solvency of mortgage borrowers and small businesses.  Lending was depressed because the economy was depressed and vice versa, a classic vicious circle.
The Item Club thinks the background of tight credit and the Banks’ liquidity issues may be coming to an end with credit and liquidity requirements having been relaxed.  The Bank of England’s new Funding for Lending Scheme is designed to increase the flow of credit and reduce its cost, increasing the funding gap, or at least slowing the speed at which it is paid down.  It will reinforce the effect of the revival of the UK mortgage-backed securities market seen in recent weeks.
Ernst & Young say that ‘Although banks remain very risk-averse, they are effectively shifting the risk lending to affluent home buyers who have equity to invest.  In the case of first-time buyers, the builders and the government are shouldering the risk through new-buy schemes.  The banks’ capital base is also recovering’ they say.  Furthermore they comment that ‘These developments help to explain the marked improvement in the mortgage market suddenly being signalled by the Bank of England’s Credit Conditions survey, the sharpest since this survey began in 2007.  In the third quarter of this year, a significant proportion of mortgage lenders said they had loosened their lending criteria or were planning to do so, while 22% were planning to reduce the mark-up on mortgage rates.  The survey suggested that little movement in unsecured lending and forecast a continued deterioration in the outlook for lending to small companies, which it seems, are still regarded as too risky.  Nevertheless, these developments are encouraging.’
A lot of economic detail but for ‘property watchers’ and for those like us working in the property industry these are important pointers for how the market may perform over the next 12 to 24 months.
Not sure we can say this is the end of the credit crunch although we’d all hope that, it may just be the ‘end of the beginning’ though

The economy has been cheered by the estimated Q3 growth figures for the UK with a 1% increase in Gross Domestic Product overall.

 

One of the amusing quotes I read about the Q3 figures was from Graeme Leach, Chief Economist at The Institute of Directors who said on hearing the news:-

 

“The key message is that we’re out of recession, but uncertain where we’re going”.

 

The really disappointing fact in the GDP figures though was the continuing decline in the construction industry.  The Q3 figure showed contraction of 2.5% which is sad on its own but very worrying on the back of a decline in Q2 of 3% and a fall of 4.9% in Q1 of 2012.

 

For our business as Surveyors, Planners and Project Managers, construction is a large part of what we do.  Whilst we act nationally we do see some of the regional variances in the strength of the economy too.  We work for instance, in Scotland, with firms involved in the oil and gas industry.  We also work with national retailers and a good cross section of the Banks.  We are in a good position therefore to comment, and are central to the national economic trends.

 

Why has construction fallen over 10% this year?  Well public expenditure cutbacks certainly matter, as does the continuing credit crunch.  You have to read what some of my agency colleagues say though about the lack of speculative development on the market to see that it is little wonder that the construction sector is in such a deep recession of its own.

 

This decline in 2012 may well be as a result in the ‘sugar rush’ projects of the last few years – the major PFI projects and the Olympics.  It may be a return to normal levels of activity.

 

Whilst we have construction and development projects on site as well as in the pipeline we are going to need to see a resurgence in the sector very soon.  This may come from several areas but a loosening of credit will be essential.

 

The good factor for the ‘consumers’ is that there has perhaps never been a better time to roll out expansion plans and build new facilities or extend existing properties.

 
 


To discuss any project or building proposals contact one of the Building Surveying team at Harris Lamb on 0121 4559455 or email paul.wells@harrislamb.com.

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