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Why 2020 Could Be a Turning Point for the UK’s Construction Industry

by internationaldirector

By Jerald Solis, CEO, Experience Invest 

 

 

 

Over the past few decades, governments have sought to address the housing crisis by focusing on one primary solution – constructing new-build properties. While the construction of residential new-builds will naturally play a pivotal role in rectifying the current imbalance between housing supply and demand, commentators have criticised the targets set by the Government as being simply unattainable.  

Prime Minister Boris Johnson recently promised that his government would ensure one million new homes are added to the national housing stock by the end of the current parliament. This ambition is commendable, yet there is still an underlying concern of whether the construction industry can meet this target.

Quotes such as these are geared toward massively increasing the supply of housing in order to meet growing market demand. At the moment, current conditions are leading to issues like affordability with more people struggling to get on and move up the property ladder. Should the housing crisis not be addressed in the next decade, it could lead to more serious long-term problems. 

The construction sector is on the front line when it comes to tackling the housing crisis, with the creation of marketable and well-connected new build properties a key aspect of the Government’s national housing strategy. That is why it is imperative for the Government to support the needs and interests of construction firms in 2020.  

The challenges facing the construction sector  

There are a variety of factors that influence the overall performance of the construction sector. Like most industries, Brexit uncertainty has played a defining role – creating a new set of challenges that have yet to be effectively resolved. Three in particular come to mind. 

The first is access to finance. A recent survey conducted by the NHBC Foundation found that 20% of companies considered the availability of funds their biggest concern for the future. There are plenty of reasons for this. Banks and traditional financial institutions adhere to a stringent lending process, making the process of acquiring a loan time-consuming and complicated. As such, construction companies can suffer when it comes to commissioning new projects, recruiting new staff, and planning projects for the future. This has become all the more significant as a result of Brexit uncertainty.  

The second issue is the dominating effect of Brexit over other pressing national concerns. The process of leaving the European Union is one of the most work-intensive and complex administrative undertakings ever attempted, so in many respects this is understandable. However, there is sense among construction companies that their interests have been neglected as a result. Aside from policy rhetoric, they have yet to receive a strategy or benefit from recent policy designed to increase their potential output capabilities.  

Finally, the construction industry has also been faced with a skills shortage. Many UK firms have concerns over how they will attract their workforces after we leave the European Union, and for good reason; the Office for National Statistics reports that 28% of London-based construction workers are EU nationals. Until the Government confirms how migration will be managed after we leave, there is an ongoing risk that the skills shortage will worsen as those unsure about their future working rights leave Britain. 

Collectively, this uncertainty has taken a hit on the output of the industry. It fell throughout 2019, with June of last year marking some of the lowest figures of UK construction output since the financial crash. Thankfully, according to data from the Markit/CUPS UK Construction Index, the figures for the start of this year indicated a slowdown in the rate of decline. This is not yet indicative of a market turnaround, but after a period of dampened activity this news is positive.  

Optimistic signs for the future

There are some positive signs of things to come, however. With a weaker pound, investment into UK property has been surprisingly resilient, especially outside London.  

For example, in 2018, EY conducted an Attractiveness Survey. It found that the Midlands had attracted the second highest amount of foreign direct investment over the previous ten years. Similarly, prices in Leicester, a city in the East Midlands, have grown 15% since the referendum in 2016. The Government’s recently confirmed HS2 line, alongside other investments, should help augment this trend and create further activity in areas that may have felt ‘left behind’.  

Put simply, the 2019 General Election delivered the first government with a large majority since the previous Labour administration. Whatever your political slant, the promise of several election-free years, with less political hostility and uncertainty, is likely appealing. For the business world, this was seen in a significant stock market surge — to the tune of £33 billion — in the aftermath the vote, while house prices in London experienced a noticeable uptick.  

Supporting property developers in 2020

Much more needs to be done this year to help the construction sector address the challenges it currently faces. Former Chancellor Sajid Javid recently announced a £100 billion infrastructure construction project to support projects over the course of this parliament. This is a promising step in the right direction.  

There are other creative ways the Government could help the industry, including encouraging public-private enterprises. Ultimately, the housing crisis is so great that neither the public sector nor the private sector will be able to tackle it alone. Collaborative partnerships are clearly warranted.  

The Government has been heeding this call from the industry in recent years; it announced £653 million for Homes England to help create more strategic partnerships in the 2018 Autumn Budget. However, provisions such as these are not yet on the kind of scale to meet the huge demand for new property. For example, one industry survey found that 57% of SME developers consider access to finance to be their biggest obstacle. In this light, the Government must ensure that more public bodies have the kind of lending facilities needed to support construction and development.  

Looking forward, 2020 could be a positive year for the construction sector. A small bounce in growth after the election, pledged government investment and the conclusion of the first part of the Brexit process has help create some confidence amongst industry leaders. However, huge concerns still remain around the skills shortage and whether the Government will actually make enough funds available to tackle the housing crisis. I now look forward to the 11th of March, when the Government will have the chance to confirm its commitment to investment and provide some long overdue reform.

 

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