Jamie Johnson, CEO, FJP Investment, explains why the construction sector needs more support.
The UK’s construction sector is experiencing rapid growth at present. In March 2021, the industry expanded at its fastest pace for more than six years, according to the IHS Markit/Cips UK construction purchasing managers’ index.
Housebuilding, commercial properties, and civil engineering have all witnessed a sharp uptick in activity since the start of the year, exceeding many analysts’ expectations. What are the reasons for this?
For one, Britain’s multiple lockdowns over the past year have caused pent-up demand. Indeed, construction leaders surveyed in the aforementioned Markit/Cips research stated that the mobilisation of delayed projects was a key factor in explaining this busy period – this is particularly true when it comes to leisure, hospitality and office buildings.
However, as well as creating a bottleneck of dormant projects that are now coming back to life, the pandemic has also triggered other areas of demand.
Activity booms as lockdown eases
One of the by-products of Covid-related lockdowns is that homeowners are now investing more heavily in extensions and renovations. After all, with people unable to travel, working remotely and unable to socialise as normal, it is understandable that homeowners would look to improve their current surroundings.
Indeed, a survey of UK 2,000 homeowners by Checkatrade found that they spent an average of £2,608 on property improvements in 2020, up 15% when compared to the previous year. It might not sound like a huge figure, but if every owner-occupied household spent that much, it would amount to £39 billion worth of residential developments.
Property improvements have not, of course, been limited to the residential sector. Commercial real estate owners across the UK have been also been carrying out extensive works on their buildings – although, this trend is driven much more by necessity.
For instance, offices have had to be refigured to better allow social distancing between colleagues, with new health and safety measures installed to protect workers. Meanwhile, hospitality venues have needed to quickly create outdoor areas for drinking and eating, enabling them to serve customers during periods when indoor dining is not allowed.
It is not simply a case of the pandemic halting projects that were in the pipeline. The virus itself – and the social distancing rules it has brought about – has also catalysed a great deal of activity within the UK’s construction sector.
Significant concerns remain
However, while the performance of the industry over recent months has certainly been a cause for optimism, it would be foolish to pretend there are not still very serious issues within the sector. At the end of January 2021, a survey of 3,568 construction firms by the Office for National Statistics found that one in eight had low or no confidence that they would survive until the end of April. The impact of social distancing on productivity levels remained a chief concern, but so too were price rises for materials and labour shortages – two problems that are likely to have been exacerbated by Brexit.
Then comes the longstanding difficulty of accessing finance, which is felt worst by SME housebuilders. Three years ago, a study showed that more than half of SME housebuilders (54%) were impeded in their ability to build more homes due to a lack of finance.
In the wider context of the housing crisis, this is a challenge that must be addressed. Research carried out by Heriot-Watt University for the National Housing Federation and Crisis says that 145,000 affordable homes must be built annually for the next five years if we are to tackle the housing crisis. Yet this can only be achieved if residential developers, little and large alike, can access the capital required to commence and complete projects.
An opportune moment
As the construction market swings back into life, now is an opportune moment to return to this issue and explore how the UK’s housebuilding firms can be better supported financially.
Positively, in November 2020’ Spending Review, the Chancellor Rishi Sunak pledged £7.1 billion over the next four years for the National Home Building Fund. This large sum of funding will purportedly help unlock up to 860,000 homes, with finance designated for SME housebuilders within this package.
The private sector, too, can play its part. Individuals and groups have the opportunity to support developers through loan note investments, for instance; this form of debt investment essentially involves private investors loaning capital to developers (which is then repaid with interest over a pre-agreed period), enabling the construction firm to complete its projects.
Whatever the chosen avenues, the important message at present is that the construction sector requires further support as it emerges from the rubble of the pandemic. There have been plenty of positives to take from the opening months of 2021; however, without carefully addressing potential labour shortages and funding issues, progress is bound to be stunted. The public and private sectors must collaborate to tackle these challenges and fuel further growth in this industry.
Jamie Johnson is the CEO of FJP Investment, an introducer of UK and overseas property-based investments to a global audience of high net-worth and sophisticated investors, institutions as well as family offices. Founded in 2013, the business also partners with developers in order to provide them with a readily accessible source of funding for their development projects.
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