Fears mount on back of industry indicators
Industry representatives have been swift to respond to yesterday’s news that UK construction hit a seven-year low in June.
The Federation of Master Builders (FMB) said that the latest statistics from the monthly survey of construction purchasing managers “are a cautionary sign of the damage that current uncertainty is causing to the building industry”.
The Construction Products Association said that economic uncertainty had had a particular impact on smaller projects.
As we reported yesterday, the UK construction purchasing managers’ index (PMI) from Markit/CIPS scored just 46.0 in June 2016, down from 51.2 in May, indicating industry contraction for the first time in more than three years and the worst score for seven years.
FMB chief executive Brian Berry said: “June’s PMI figures, which show a huge dip in construction output, reflect our fears that uncertainty over the outcome of the EU referendum would hit our sector. In the wake of the UK’s vote to leave the EU, there is a growing concern that this period of uncertainty is only just beginning. Construction is an industry that is particularly vulnerable to dips in confidence and it appears that many clients were hesitant to commit to new projects as they were unsure of what the future held. An exit road map is needed to show what steps are going to be taken to withdraw from the EU."
He continued: ‘”The results underline the importance of clear leadership from the government – it’s imperative that it attempts to offset any uncertainty firms will be feeling. Today’s announcement by the chancellor that he would seek to lower corporation tax to below 15% is a positive step, as was Greg Clark’s recent reaffirmation that the government will still aim to build one million new homes by 2020. However, much more needs to be done. Dithering over infrastructure decisions will send out entirely the wrong message to firms of all sizes. More than ever, investment is needed in a sector that generates £2.84 in the wider economy for every £1 spent. Public investment in our sector could play a vital part in warding off an economic slump, but today’s findings show that it will be far from business as usual.”
Construction Products Association economics director Noble Francis said: “This was a very sharp fall in the Markit/CIPS for construction activity in June overall and particularly in private housing and commercial, two of the largest sectors.
“In terms of what we have seen within the industry, commercial activity in central London still continues apace and there is also still a lot of activity in cities like Birmingham and Manchester. The uncertainty prior to the referendum, however, has had an impact on new contracts signed, especially for smaller projects.
“In terms of housing, private house building continues but we are seeing evidence that this same uncertainty has had an impact on new housing starts.
“Infrastructure activity was broadly flat, which is not surprising as it has a longer lead in time, so the majority of work occurring in this sector is on large projects based upon contracts signed in 2014 and 2015.
“Our own surveys in the months before the vote showed that uncertainty around the event was dampening business confidence and investment across the industry. Though today’s PMI figures were largely generated before 23 June, it will serve to highlight the impact of uncertainty on UK construction whilst government formulates a plan ahead.”
One house-building contractor that has definitely noticed a strongly negative Brexit effect is London-based Golden Houses. Owner Monika Slowikowska said: “The day after Brexit, seven of our building materials suppliers told us they‘d be raising their prices in July – the hikes ranging from three to eight per cent. Then, on the following Monday, while checking the stability of our clients’ funding, we learned that one of our projects is being put on hold. The client’s bank has withdrawn from talks while it analyses the new economic environment. The client contacted 11 other banks and they all said the same thing: no engagement until they know what’s happening in the property market.
“What’s significant here is that our client owns the property it’s borrowing against and that the funding it seeks represents just 50% of its value. Banks are refusing to talk to would-be borrowers even where the risk profile is extremely low.
“So, we can’t deny that the industry will be hit and many businesses may fail. We expect the cost of building projects to increase and that homebuyers and developers will find it harder to borrow money. The same time contractors will be forced to keep the prices low as competing for the remaining on the market projects. This will result in the loss of profitability and inevitability the fall of some contractors.”
But she remains optimistic. “However, I know our sector will bounce back. If we stay flexible, negotiate well with suppliers and clients, control our costs and become even more efficient, we will overcome these challenges.”
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This article was published on 5 Jul 2016 (last updated on 5 Jul 2016).