KPMG’s head of infrastructure, building and construction Richard Threlfall said that there would be no more major company failures in the construction industry but that life would remain tough for them for a while yet.
Commenting on industry outlook for 2014, he said that it would be a year of rising demand, with a shrunken supply chain struggling to keep up.
Mr Threlfall’s commentary in full reads:
“Construction is a sentiment-driven industry and sentiment in the sector is clearly on the up. Higher GDP projections of 1.4% for this year and 2.4% for 2014 are indicative of the pace at which the recovery is accelerating. The construction industry usually overreacts like no other to the promise of better times. That reaction can already be seen in our housing market where demand is far outstripping the ability of housebuilders to deliver but it will be seen soon across other industry segments as well.”
“We predict the first half of the year will be tough, not because demand will be slow but because it will pick up too quickly for an industry which has lost 20% of its capacity over the last five years and where consequently the supply chain is weak. At the moment we are observing shortages of bricks, blocks, timber, aggregates and also of skilled labour across the sector.
“However, more capacity in the supply chain will be opening up every day, but it will be the second half of the year at the earliest before supply catches up with demand. Until then the power will remain with the supply chain. Tier 1 contractors will continue to feel the squeeze, particularly those who chased volume during the recession and were left with wafer-thin margins.
“We don’t expect any more major failures - those who survived the recession are all too big to fail – but life will remain tough in the short term.
“The electoral cycle will also exacerbate the uplift in demand. Often Government policy is slow and hence counter-cyclical, supporting the industry in the downturn and moderating its highs. But with an election now 18 months away, the Government is already moving gradually into spending gear, especially on infrastructure, as announcements through the year and most recently in the Autumn Statement have shown. Projects like the A14, shelved as the government came into power, are being dusted off and delivery on simpler road and rail network projects is being accelerated.
“Availability of finance is no longer a major constraint on project delivery, and we expect during the year to see increasing breadth and depth in financing capacity in the market. There are already some signs of competition between bank and capital markets solutions re-emerging on some projects, though we are long way off the rock-bottom pricing of 2006/7 and few hope we head back to that unsustainable territory. Within the capital markets, expect growing interest from direct investors, including insurance and pension funds, putting pressure on infrastructure funds.
“What does seem clear is that by the end of next year we will have a much more buoyant and competitive market across infrastructure and construction, with a clearer sense of pipeline, especially in energy, and more opportunities across all sectors. By that point some nervousness about the impending election may creep in but whether that creates another hiatus in an industry that historically lurches from boom to bust remains to be seen.”
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