Upsides in the construction sector

Andrew Lamb
13th November, 2012.

 

UPSIDES IN THE CONSTRUCTION SECTOR

 

By Kevin Scrivener, Building Department


 
 

 

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

My colleague Paul Wells chatted about the disappointing contribution that the Construction Sector is making as part of the UK’s overall output in GDP at the moment and some more figures just released seem to reinforce this somewhat.

 

The report was that UK construction activity fell by 13.1% in September from a year ago as the downturn being experienced by the sector steepened further.

 

One of the brightest spots in the figures was a 5% increase in housebuilding activity according to Office of National Statistics data.  This relatively good picture in housebuilding is something we are seeing directly with housebuilder interest and activity being very positive.  The issues for housebuilders remain viability and development finance concerns even in the ‘hot’ markets of London and the South East.

 

If you need examples of why the construction sector is slowing so markedly you need look little further than one of the headlines in Building Magazine on 5th November which read:- “No major NHS building work until 2014” with the NHS’s new property boss adding he was unlikely to be procuring major construction work until at least 2014.

 

What these headlines are not saying though is that ‘construction work has stopped on all fronts’ and whilst some areas of work have slowed, most obviously in the public sector, other areas are seeing growth and some of the other Building Magazine articles bear this out from: – “Vinci wins £60m Jaguar Land Rover plant” for a new 1.2m sq ft production building in Solihull to the London Deputy Major for Housing saying that London will hit its London Plan figures for 30,000 new homes this year.

 

The construction projects we are running and have coming in the pipeline are all still subject to the vagaries of the market but we will be delivering from our project team some significant new schemes over the next 12 months.
 


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

Disclaimer: The views expressed within this article or weblog (‘blog’) are the personal views of the contributors and authors only and do not necessarily reflect the views of any named companies or their employees.