Jonathan Pochin, managing director of Pochin Construction, warns that further improvements, particularly in financing, are needed before we can see a true return to growth, despite a 0.9% increase in GDP output estimates for the construction sector.
It’s important to have confidence, as the post-2007 building market taught us. So the news last week that the construction sector has expanded by 0.9 percent quarter-on-quarter would undoubtedly have a beneficial influence on firms. Even if the growth is slight, it is significant after years of underwhelming results.
A key issue for many in the sector has been the ongoing negativity that has been infiltrating construction enterprises across the UK, and the perception of some that we talked ourselves into a recession that we are now fighting to come out of.
While it has been a hard to ignore the incessant doom and gloom surrounding construction in the media, as well as the deflating GDP data from the ONS, the most successful enterprises have been those that have tried their very best to continue with business as usual.
However, confidence has its limits. As a result of the persistently poor output figures, businesses have reexamined their plans and budgets, deciding to compete fiercely for the limited available work and drastically reducing their profit margins in order to price competitively. In spite of the fact that this strategy has kept many companies busy in recent years, it is unsustainable. It has slowly weakened the financial viability of the construction activity, while simultaneously pushing a reduction in pricing across the sector as competitors follow suit.
While larger contractors have financial reserves, which enable them to keep active and continue to produce turnover with lesser profit, others that have been unable to reduce their margins in this way have struggled and many have been forced to abandon the industry.
It’s hoped that the revelation of a growth rate of 0.9% will give construction companies more confidence in running their enterprises. Crucially, it should also signal to people outside the sector that now is the moment to get started on new projects – in particular developers who have been substantially lowering their output over the previous few years. A rise in the development pipeline will result in a bigger number of projects that contractors can compete for, allowing for a return to reasonable profit margins and ultimately a higher degree of stability within the industry.
There is also good news in that the number of consultants such as architects, project managers, and quantity surveyors continues to rise in popularity. While there is generally a six- to 12-month time lag between results in the consulting services and output in the construction sector, it is likely that growth looks set to continue.
However, there is one critical element that could limit the growth trajectory – finance. Project funding is not as stable as it should be to enable growth in a world still reliant on credit. So despite the mood beginning to pick up, a lack of trust in the sector’s stability means that significant due diligence processes are still in place before investments are made. As a result, the lead time is excessive, which has a negative impact on financial forecasts.
A shift is occurring in the traditional funding sources. Because of the increased use of investment funds to fund construction projects instead of traditional banks, the cost requirements have become stricter, and the expected return is larger than what banks had previously requested. Contractors may feel more pressure to lower their prices as a result of this increase in demand. The risk is that, despite confidence returning to the market and project levels improving, the construction sector could miss the opportunity to reclaim its pre-recession position thanks to continuous pressure to preserve low service costs.
Ultimately, the interaction between developers, contractors and financiers is never going to be straightforward. Construction companies, on the other hand, will benefit from a rise in confidence. 0.9 percent growth may only be little, but for many it signifies a light at the end of the tunnel and the prospect of an increase in opportunities in the future.