Real Estate Matters Issue 14 Construction & Real Estate Newsletter November 2019 Now, for tomorrow Contents 04 MHA report: Further decline in construction sector’s fortunes with suppressed sales, turnover and profits 06 Funding Property Development in England and Wales 07 House Price Growth 08 Construction & Real Estate | Insolvency 10 About MHA 11 Contact Your Local MHA Office 2 MHA report: Further decline in construction sector’s fortunes with suppressed sales, turnover and profits 3 MHA report: Further decline in construction sector’s fortunes with suppressed sales, turnover and profits The UK construction industry has experienced a further year of slowdown in sales, turnover and profits pointing to a sustained downward trend, according to latest UK Construction Sector Report. £ Turnover growth Year on year decline Sales cool as depressed Stalling profits highlight continues to slow with puts squeeze on demand and Brexit potential labour costs larger firms hit hardest profit margins uncertainty bites exposure Turnover in the last year grew 5.3% but was in marked For mid-tier firms (£100-150m turnover) the margins drop contrast to the 14.1% increase recorded over the past to just over 14% (14.4%) and larger firms have seen a two years, revealing a slowdown in the industry’s growth. decline to 11.2% Larger businesses, those with turnover of £200m and over, continue to experience a decline in turnover levels Overall, average margins are declining year on year and for the larger firms the fall in turnover and the with the average dropping by 13.8% this year. desire to maintain workforce continuity, as well as In the face of this decrease, larger firms have reduced general competitive pressures, are behind the squeeze. their workforce numbers from last year, with the average In a post Carillion world, the report seems to indicate number of employees reducing from 878 to 777. these firms are looking to improve profitability rather Elsewhere, staffing levels remain static. The extension than chase turnover. of the IR35 legislation ‘off-payroll’ rules for the private A slowdown in the sector is further emphasised by sector, which comes into force in April 2020, is likely to the biggest fall in new work for a decade according see employment numbers rise and with it, the potential to the IHS Markit/Cips UK construction PMI survey. impact on prices or further squeeze on margins. This together with a lack of new infrastructure projects However, there appears no apparent material increase and major developments and a depressed demand in employment numbers at this stage. created by Brexit uncertainty, are also contributing to While the average gross profit margins are in double the slowdown. All these factors contributed to a decline figures across the board, it is the smaller companies in sales growth across all turnover brackets with the (under £25m turnover) that have seen the highest largest companies actually contracting over the past margins of between 20-25%. two years. 4 Robert Dowling, Head of Construction and Real Estate at MHA, comments “It remains a challenging time for the UK’s construction industry. Nationally, firms have managed to maintain similar levels of profitability with slightly lower gross profit margins than last year. But the indications of a downward trend are there. Declining workloads and the potential impact these may have on profits could mean tougher times ahead for some firms. At such times it is important that firms adopt and maintain disciplined and strong management whether that is remaining focused on your core specialisms or strengthening the balance sheet by retaining higher levels of profit. “Firms should look at technology investment and the implementation of strategies to reduce tiers of management whilst retaining key personnel and the adoption of robust project risk management; all of which can enable firms to ride the downturn and even Whilst there is a general upward trend in dividends, the levels have fluctuated across the different sizes prosper. of firms. The smaller firms have either remained static or seen a decline. Most notably, those in the “It is impossible to talk about the future £5-10m turnover bracket saw a significant decrease prospects of the industry without in pay outs of 85.6%; this is in marked contrast to a leap of nearly 250% the previous year. For the largest mentioning Brexit. Beyond the impact of businesses there was a 60% decrease in dividends the current uncertainty, the industry could from last year compared to a 17.1% rise over a even stand to gain from a post-Brexit boost three-year period. and any UK government commitments and The overall construction industry’s profit before tax plans for infrastructure investment will be performance showed a decline in 2019 with only small firms experiencing increases, although these warmly welcomed.” were lower than two years ago. For the larger companies, who saw the biggest declines – the largest drop being from £46m last year to £26.3m MHA’s national outlook on the UK construction sector in the current year – lower profit before tax is the used company accounts information published by credit inevitable result of reduced turnover and margins. reporting agency Experian, for construction firms in England, Companies in this group will undoubtedly try to Scotland and Wales with an annual turnover of between £5 reduce overheads, but this tends to be difficult in and £200m+. the short term as certain costs are fixed. This does raise the prospect of future labour cost-cutting. Visit: mha-uk.co.uk/insight/publications/ to read the full report. 55 Funding Property Development in England and Wales As a government-backed initiative, the Home In May 2019, the then Housing Building Fund also reflects wider government minister Kit Malthouse said the priorities including: Government targeted the building obtaining value for money for the taxpayer; of 222,000 new homes. This was more than built in all but one of the supporting projects that focus on areas of high last 31 years and its development affordability pressures; accelerator Homes England would continue to provide assistance to supporting projects that help the SME developer market, brownfield developments or innovative build properties more quickly. developments; and assisting applicants who can demonstrate that without this funding the scheme would not progress as quickly or would not progress at all. A large part of this assistance by Homes England This may allow the developer of at least five properties directed towards Small and Medium-Sized Enterprises to use their existing high street banker along with their (SME’s) developers is The Home Building Fund. income from off-plan sales or sales of completed homes The Fund provides Development Finance Loan funding to pull together a funding package that can allow the to meet the development costs of building homes and whole of the project to be developed whilst minimising Infrastructure Finance Loan funding for site preparation. the number of external loan costs. We consider some of the funding options for the SME One final point is that the developments must be in property developer outside of their first points of call England, though other areas within the United Kingdom of their existing bank or their funds. Certainly, for SME have similar support schemes. The Wales Property developers seeking to build more than five homes, Fund can provide two-year loans of up to £4m for the use of their own funds (or indeed of their family residential and mixed-use developments only in Wales, and friends) may soon be exhausted. If there are project including loans up to 65% of Gross Development Value delays or unforeseen problems, then the build-up of or 100% of build costs. financial pressures may mean their family and friends may find themselves exhausted too! Within the North East of England, seven local authorities have combined to work together to secure a £10m This is where The Home Building Fund seeks to make a Fund operated by FW Capital to offer development difference. Its lending will require appropriate security, funding to local SME housebuilders. The aim is to help typically against property assets, and can be provided on kick start the development of small-scale property either a short- or long-term basis. And it may be able to schemes throughout the North East. unlock developments that would not otherwise happen. Similar to the scheme in Wales, two-year loans are The Fund offers development finance loans of over available. However, in the North East, Property Fund £250,000, typically for a period of up to five years. loans are limited to £1m to fund development costs. Whilst the infrastructure finance is available before 31 March 2021, loans for development finance can Furthermore, within other English regions, there may be drawn down until 31 March 2023. The Fund provides be additional support. So, it’s wise to speak to your loan finance which can work alongside other forms corporate finance adviser to understand the financing of financial support too, so subordinated lending will options available to fund property development. be considered. 6 House Price Growth The Office for National Statistics has Monthly House Price Changes recently released the House Price data for July 2019. The published data shows the slowest rate of growth in UK house price growth since 2012, driven mainly by a slowdown in the south and east of England. £233,000 In July 2019 which is up £2,000 on the same time last year. On an annual basis house prices are still edging up The North East continued to have the lowest average overall, albeit that the rate of growth has been gradually price at £127,000 and prices fell by 2.9% over the last year.