黑洞社区

The business environment

鈥淚鈥檝e been doing this job for 12 years and all the certainties I had have just gone out of the window; the rule book has been ripped up.鈥� That was the conclusion of one City analyst on Wednesday morning last week, an hour after the story broke that Lloyds TSB was buying HBOS.

So, what鈥檚 changed now that Britain鈥檚 largest mortgage lender has had to be bailed out? 鈥淵ou can forget 110% mortgages,鈥� says Richard Kelly, construction partner at BDO Stoy Hayward. 鈥淭hese latest collapses immediately sent rates back up and will prolong the pain for housebuilders.鈥�

And banks will clamp down on builders as well as buyers, according to one senior banking source: 鈥淏ank credit is now a scarce resource. Combined with a worsening credit environment, bankers need to be even more judicious when lending cash.鈥�

According to another industry figure, most construction companies with high borrowing are locked in 鈥渟erious conversations with their banks鈥�, which are 鈥渓ooking to put them on a tight leash鈥�.

Those sitting on cash are clearly not suffering as greatly, and the crunch could bring acquisition opportunities for cash-rich contractors such as Wates, Kier, Laing O鈥橰ourke and Balfour Beatty.

Meanwhile, Berkeley is the sole housebuilder well positioned to hoover up cheap land from distressed sellers when it senses prices have stopped falling. But there are few predicting that the crunch will trigger a wave of consolidation in housebuilding. Kelly says: 鈥淢ergers are about enhancing earnings, which only kicks in a few years down the line. The current problems are all about cash flow, so I鈥檓 not sure how mergers or acquisitions will help anyone.鈥�

The macroeconomic picture

One factor underlying construction鈥檚 vulnerability to the downturn is that the public sector does not have the power it once to had to act as a Keynsian counterweight to the business cycle. According to the Construction Products Association (CPA), the public sector market in 1970 was worth 拢27.5bn and the private sector 拢28bn. In 2007 the public sector鈥檚 demand had shrunk to 拢21.5bn, about a third of the private sector鈥檚 拢61bn. Noble Francis, economics policy development director at the CPA, says: 鈥淭he public sector provides a certain safety net but it can鈥檛 completely offset the falls in the private sector.鈥�

Tony Williams, a construction analyst at 黑洞社区 Value, puts it more succinctly: 鈥淐ommercial property has gone to hell in a handcart and it is not going to come back anytime soon.鈥�

Leading the way in the public sector is education and the 黑洞社区 Schools for the Future (BSF) programme. Some 拢22bn will be spent on this between 2008 and 2011. For those lucky enough to be on a BSF framework, there will be rich pickings whatever the colour of the government.

According to Williams, health spending has peaked and there are no large hospital schemes in the pipeline. Social housing is a boom area but, as he points out, 鈥渋t鈥檚 a very small drop in the cosmos鈥�.

So what about the longed-for cut in interest rates? Speaking at a 黑洞社区/Pinsent Masons conference last week, Holger Schmieding, chief economist Europe at Bank of America, said inflation was the only thing preventing action. The good news is that lower oil prices should push inflation back down to 3.5% by next year and Schmieding predicts a housing recovery by 2010, on the back of pent-up demand and greater affordability.

But he believes the UK will find it tougher than other European countries to come out of the downturn because so much of the boom was fuelled by the buy-to-let market and mortgage equity release schemes, which have come to an end.

Large-scale regeneration schemes

For the past 10 years, the race has been on to rejuvenate the nation鈥檚 decaying urban environment, but the pace is slowing rapidly. Big regeneration projects, with all their planning costs, and all their transport and social infrastructure, were predicated on high and rising land values. But land values have plummeted far faster than house prices 鈥� by up to 34% according to Savills. Yolande Barnes, the estate agent鈥檚 lead analyst, says that big sites will no longer come forward.

Tony Pidgley, Berkeley Group鈥檚 chief executive, has already moved his company towards smaller infill sites.

鈥淭he big regeneration sites are going to get pulled until there鈥檚 a change in the market,鈥� he says, before adding that some will get replanned and go back from high-rise schemes to more traditional housing.

Speaking at the 黑洞社区 conference, Stephen Stone, Crest Nicholson鈥檚 chief executive, agreed. He predicted the 鈥渄eath of the tower block鈥�, as local authorities no longer want them in their plans, and housebuilders find they are tough to sell in places such as Leeds and Manchester. He added that most inner-city schemes no longer stacked up and we should expect 鈥渁 return to traditional low-density housing鈥�. New planning laws make it easier to build on the green belt, with no more than 20 units per hectare, he added.

As a result of this, the government will not meet its target for building 3 million homes by 2020 according to David Orr, the National Housing Federation鈥檚 chief executive. Indeed, planning sources are predicting that government and councils will have to forget all their calculations about how much social and affordable housing will come from section 106 agreements.

In a further blow to the government鈥檚 housing policy, John Stewart, director of economics at the Home Builders Federation, says the raft of eco initiatives that ministers have launched looks increasingly unlikely to be realised. These include such treasured initiatives as the Code for Sustainable Homes, eco-towns and the pledge that all new homes will be carbon-neutral by 2016.

Small businesses

鈥淚 always gauge the state of the market by the number of people calling up offering me work,鈥� says Les Hillman of LJH 黑洞社区 Refurbishment Maintenance, a one-man outfit in the South-east. 鈥淭he phone鈥檚 been very quiet recently.

鈥淭he other sign of trouble is that tradespeople keep asking me if I鈥檝e got any work for them. A year ago it was a struggle to get them but now they are desperate.鈥�

LJH is typical of the small construction firms feeling the pinch: 鈥淚 can handle two or three jobs at once but I鈥檝e only got one running at the moment,鈥� says Hillman. 鈥淚鈥檓 making just enough money to keep going.鈥�

Brian Berry, director of external affairs at the Federation of Master Builders, says the lack of business for small builders is being compounded by credit conditions. 鈥淚t鈥檚 a double whammy. Small builders are suffering from the fact they can鈥檛 get loans easily from banks, which puts pressure on their cash flow. Meanwhile, their clients can鈥檛 borrow money either, so that extension or loft conversion is being cancelled.鈥�

Builders are resorting to emergency strategies to stay afloat. Hillman thinks he will still make his usual turnover of 拢150,000 a year but he will have to work much harder to get there. 鈥淚鈥檝e got a client who wants me to put a toilet under their stairs,鈥� he says. 鈥淚鈥檓 not doing so many nice jobs these days.鈥�

Other strategies include looking for clients likely to offer repeat business, such as letting agents, or hiring contract staff. Hillman regularly employs two people 鈥� a labourer and kitchen-fitter 鈥� on a subcontractor basis. He says: 鈥淚鈥檓 in a better position employing subbies rather than employees because if I have to shut down I can do it at no cost.鈥�

Procurement

The self-employed people at the bottom of the supply chain will be getting paid less and waiting longer for it

Simon Rawlinson, Davis Langdon

The credit crunch could reverse the industry鈥檚 trend towards negotiated contracts and partnering. Instead, there is likely to be a swing back towards single-stage, lowest bid tenders aimed at achieving the lowest possible outturn cost. Simon Rawlinson, head of research and development at Davis Langdon, predicts that tenders will rise by between 0-3% next year, in contrast to the 3-4% rise likely in 2008.

To twist the knife further, contractors will also be faced with soaring materials prices. 鈥淭he input costs for manufacturers have gone up by 25% this year and inflationary pressure is still there,鈥� says Rawlinson.

Then there is the labour market. During the last downturn, labour costs were rocketing, which gave contractors scope to save money by pushing them down again. But that is not happening now because workers from eastern Europe has kept wages artificially low.

Although contractors are being less choosy about what work they take and the levels of risk they shoulder, Rawlinson says clients are unsympathetic. 鈥淭hey feel contractors have been getting a bigger share of their profits in recent years. Now clients are more interested in going down the single-stage tender route.鈥�

With their margins being squeezed, contractors will do as the housebuilders have, and seek to squeeze profit from further down the supply chain. So in the coming months it is likely we will see contractors trying to get fixed prices from materials suppliers and discounts from specialists. Rawlinson warns: 鈥淭he self-employed people at the bottom of the supply chain will be getting paid less and waiting longer for it.鈥�

Recruitment and job security

Job security has been one of the principal victims of the credit crunch. UK unemployment rose 3.7 percentage points in August, its fastest rate since December 1992. That was the seventh monthly rise in a row.

In the construction industry in general, and the housing sector in particular, everyone from Wolseley to Persimmon and Barratt to Kier has been shedding jobs. It has been predicted by Experian and ConstructionSkills that employment in the housing sector could fall more than 35,000 in the next two years.

But Tim Cook, managing director of recruitment consultant Hays, says that though recruitment in the housing market has been 鈥渄ecimated鈥� by the downturn, the bad news is not unalloyed. 鈥淏uilders have stopped building but there is a lot of work in the pipeline, especially in the public sector, so that鈥檚 a good place to be looking. Then there is international work, too. Lots of opportunities are coming up overseas.鈥�

He adds that things would be worse were it not for 鈥渢he eastern European shock absorber鈥�. He says that as these workers have responded to the downturn by returning home, this has eased the severity of the jobs situation. 鈥淭hese people are going back now as the market cools down, freeing up work.鈥�

Cook鈥檚 final piece of advice is to look into freelance work, as companies are increasingly looking to hire people on a temporary basis. 鈥淧eople shouldn鈥檛 be frightened of this type of work,鈥� he says. 鈥淲e are placing lots of people this way as companies are more likely to hire on a non-permanent basis until the financial situation calms down a bit.鈥�

Victims of the credit crunch

The worker

鈥淚t has been four weeks since I was made redundant. I worked in quality control for concrete maker Tarmac Topfloor and 16 of us have gone. I was on a good wage and I loved my job.

鈥淎fter we were told there were going to be redundancies, we had to work for three weeks before we knew whether we鈥檇 be one of the ones going. Then I was on the night shift and one of our managers had envelopes in his hand. I walked past him a few times and he didn鈥檛 say anything to me, so I thought I鈥檇 be okay. But then he shouted for me to come over and said: 鈥淚鈥檓 very sorry to do this but I have an envelope for you.鈥� I burst into tears. Then I had to carry on working there for another two weeks with the people who鈥檇 had kept their jobs.

鈥淥n the night we left, none of the managers came to say goodbye or thank us for our contribution. We just clocked out and that was it. I鈥檓 very worried about paying my bills because I left school without any qualifications. I鈥檝e always thought there would be jobs out there for people that wanted them. But it is not as easy as that. I had to go on the dole today for the first time ever. I鈥檓 not sleeping properly and the doctor has given me some sleeping tablets. He has also given me some Prozac. I just don鈥檛 know what to do next.鈥�

Lesley Shearman, 46, former quality control worker, Tarmac Topfloor

The manager

鈥淎s a contractor, about 90% of our business comes from housebuilders and the business has gone off a cliff since May. Our turnover was about 拢13m last year and this year it could be down by 50%. The business is drying up and we have had to go into the commercial markets. It is going to be a difficult year. I am so cross with myself because I have a background as a stockbroker and if I had seen it coming six months earlier, I could have diversified. This time last year we had 240 employees but since then I have had to lay off about 40% of the workforce. Some of these people have worked for us for more than 20 years. I鈥檓 disappointed with the way the regulators have allowed the banks to operate. At the moment, I am spending more time in the office and it鈥檚 hard to go home smiling and cheerful.鈥�

Mat McAdams, 39, managing director, WA Browne

The graduate

鈥淚 completed a degree in project management in July and was excited about starting work. I wanted to do a chartership and was looking for a graduate scheme. After contacting 40 firms in the West Midlands I have had rejections from most and there are lots of others who didn鈥檛 bother to reply. After a while, I just started to expect rejection. It is depressing and embarrassing. I know economic conditions are not ideal but people are sometimes outright rude and a lot just say 鈥榥o鈥� there and then if I phone up. I have a student loan of 拢15,000 to pay off and an overdraft of 拢2,000 so I just have to keep chipping away.鈥�

Thomas Parrott, 22, graduate, University of Central Lancashire