DEVELOPERS FEEL THE SQUEEZE

Spring 2021 saw the construction sector growing faster than at any time in the previous 6 years. Indeed, May’s Purchasing Managers Index (PMI) showed new order volumes growing at their fastest pace since the monthly survey began almost 25 years ago. As the old saying goes however, “all good things must come to an end” and summer has seen supply chain issues really beginning to bite.

Construction output fell by 1.6% in July with private housebuilding seeing the biggest drop thanks to a 7% fall. There were also sizable reductions in public building and private commercial output, with only infrastructure, boosted by government spending, and industrial units, driven by the online shopping boom, bucking this trend.

The seeds for this recent fall in output were sown last year, with the onset of the global Covid pandemic resulting in a dramatic decline in production in early 2020. Couple this with unprecedented demand for raw materials across the globe and huge shortages have resulted. Back in May Brian Berry, chief executive of the Master Builders Federation, stated: “We can’t build our way to recovery from the pandemic if we don’t have the materials.” Consequently, supply chain issues and price rises building since the beginning of the year are now beginning to weigh very heavily on output. Widespread shortages and long delays are creating a creeping sense of uncertainty.

Recent data from the Department of Business Energy and Industrial Strategy revealed that overall construction material costs had risen more than 20% in the year to July 2021, and it’s feared they could rise by at least another 10% over the coming year. The laws of supply and demand have kicked in with shortages giving rise to sharp price increases and these increases are not just limited to materials with labour rates also skyrocketing, particularly in areas where Eastern European workers returned home after Brexit.

Add to the above the ever-present fear of tighter Covid restrictions and even a fourth national lockdown this autumn and it’s not hard to see why some developers are beginning to think about pausing and moth-balling their developments, at least until next Spring. The latest PMI data shows new orders are now coming in at their slowest rate since March. Now, more than ever, it is harder for developers to accurately schedule works and to project build costs and cashflow, so their caution, often reflected in larger contingency funds, is entirely understandable.

With problems likely to get worse before they get better, now is a time for greater collaboration between developers, lenders, and all professional partners. In times of adversity, the best lenders come into their own, working collaboratively with developer partners to analyse the viability of every single scheme. In the coming difficult months, it really will pay to be working with the right partners.

Thanks Moneyfacts for the feature. Read their latest edition here

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