n construction sector report BRIEFING october 2012 accountancy BRICKS AND MORTAR 24 The erosion of capital allowances and changes to lease accounting are just a few of the barriers to 24 growth in the building trade, says James Allen 24 hen the economy catches a that the construction sector contracted by cold, the construction sector nearly 10% over the period. has flu’, declares KPMG After seasonal adjustments, the gloomy partner Andrew Marshall, results did brighten up somewhat. Whereas and unless you’ve been living initially it had been estimated that output in 24 Wunder a rock for the past year or so, news that construction for Q2 had shrunk by 5.2%, ONS the UK economy is not in its healthiest state revised this to -3.9%, a change which made a should lead naturally to the conclusion that significant contribution to the adjusted overall the building industry is metaphorically under GDP figures for the quarter – from -0.7% to an the weather, despite a slurry of strong pre-tax improved -0.5%. 24 profits announced over the summer. Such news clearly needs to be taken in According to research by PwC, over 5,500 context; a less negative figure is still a negative companies have gone into insolvency since the one and construction output is 9.5% down on third quarter of 2010, equating to more than like-for-like comparisons with 2011. 600 insolvencies occurring in each three-month The impact on the economy though – alluded Collectively, as period. Of course, whenever companies go out of to in the altered GDP figure – cannot be ignored. business, job losses follow, taking another batch of The construction sector contributes £2.84 to a nation, we are skilled tradesmen out of the employment market. UK GDP for every £1 invested and, together building 100,000 The housing sector typifies the situation. with its supply chains, currently employs around new homes a ‘Collectively, as a nation, we are building three million people. Not only that, but the UK year, which is 100,000 new homes a year, which is way Contractors Group argued in a 2009 report that way short of the short of the 250-300,000 that most estimate 92p of every £1 spent on the industry is retained we should be doing. That is to cope with in the UK. 250-300,000 that the population increases and demographic It is not surprising that the government is most estimate we changes we are seeing, with more single people putting so much pressure on the sector to pull should be doing for instance,’ explains David Orr, CEO of the UK plc out of the current recession. National Housing Federation (NHF). David Orr, CEO, ‘And, of course, if you are only building a third PROFIT STREAMS National Housing of the houses that are needed, there are only a But the experience of contraction and Federation third of the construction workers.’ insolvency is not faced by every construction Is the ‘flu’ that the sector is suffering from business. Companies like Carillion, which though, simply a bad case of ‘man flu’? Figures saw first-half profits for 2012 surge by 69%, for the first six months of 2012, published by is seeing the benefits of scaling down its UK the Office for National Statistics (ONS), showed business and focusing instead on overseas www.accountancylive.com accountancy october 2012 BRIEFINGBRIEFING construction sector report n 25 25 25 25 Construction in projects, while other builders are also profiting central London despite difficult trading. Hampton homes, Rouse partner David Sharp says: ‘Take Gloucestershire Taylor Wimpey – a major house builder – they (Barratt) have just posted large pre-tax profits [£100.6m] 25 Timber frame through to June, bucking the trend. It really is a student flats, London (Ocon) mixed message.’ West Burton Fellow house builders, Balfour Beatty and CGT power station, Bovis have also recently reported increases in Nottinghamshire pre-tax profits for the first six months of 2012. (Kier) Marshall says: ‘The construction sector tends Greenfields to slightly lag the rest of the economy, it has a housing development, much longer gestation period. The companies Hampshire (Barratt) might have a number of orders on their books they know will see them through for the time ability of people to play the development game being and so the picture looks fairly good for the in London is pretty much limited to those with big contractors at the moment. large equity checks, sovereign wealth positions ‘But next year might not be so bright, as or very strong balance sheets who can bring order books are maybe at 50% and normally you on board corporate debt,’ said Martin Jepson, would hope to be at least 60-70% by now.’ Brookfield Office Properties senior vice president Without doubt, the biggest obstacle stopping for development and investment. projects from being given the green light is the lack of funding. ‘Banks are just not interested in FINANCE OPTIONS lending. Without a tenant committed or buyer for Aware of the lack of available credit, the Bank of the property from the outset, not one brick is laid,’ England and the government, set up Project Merlin says Sharp. ‘One in three lenders in the UK last in February last year, in an effort to encourage year did not invoice a single loan, not 1p.’ banks to lend to small businesses; 12 months on, The problem has become so bad that ‘the it was revealed net lending from the five main 26 www.accountancylive.com n construction sector report BRIEFING october 2012 accountancy CONSTRUCTION TRENDS TRADIng conDITIONS CIS OUTPUT FAllS AS RECESSIon BITES clAMPIng Down on CASH IN HAND Q2 2011 Q2 2012 The Construction Industry Scheme (CIS) Total construction is run by HMRC to monitor and regulate The volume of how subcontractors receive payment for construction output work, as the nature of the building trade in Q2 2012 fell by – requiring input from a variety of skills – 3.9% compared with often sees projects outsourced to smaller Q1 2012. Overall companies. CIS applies to sole traders, the 9.5% volume fell by 9.5%. self-employed, businesses and partnerships. If a business does not carry out building work as its primary function, it may still be classed as a mainstream contractor or ‘deemed contractor’ and will have to register with CIS. For example, if a business spends in excess 26 New work of £1m annually on construction operations over a three-year The amount of new period which nets some large businesses, local authorities, contracts won fell government departments and housing associations. by 4.6% compared A Unique Tax Reference (UTR) is issued to a subcontractor with Q1 2012, to ensure the right tax is deducted. If tax is deducted, a equal to a 12.8% subcontractor operating as a partnership or sole trader, can 26 12.8% year-on-yar fall. treat this tax as income tax on profits. Source: Pinsent Masons 26 Repair and EMPloYMEnt maintenance Total volume of SME VERSUS work was down BIG BUSINESS 2.7% compared SME with Q1 2012, workers 26 The majority of (85%) 2.8% reflecting an 85% annual decline construction industry of 2.8%. workers are hired by SMEs as opposed to big business or the public sector. 26 There were widespread falls in the sectors, with the largest decrease volume of construction output in in new infrastructure, which fell by Other Q2 2012 compared with Q1. There a significant 8.6%. workers were falls in eight of the nine Source: ONS 15% Source: BIS UK banks had fallen in every quarter for 2011. because cashflow in a construction company As a result, the Funding for Lending Scheme can change a lot throughout the year and private 72.4% (FLS) was launched in August, which provides leasing allows for more flexibility. For the difference an 18-month window of opportunity for banks in rates alone, it may be well worth doing,’ he adds. to borrow at cheaper rates for up to a four-year Public sector building projects are also having period, on condition that the financial institutions difficulties raising finance and, after growing the SME pass the preferential rates on to businesses and concern over the viability of private finance sector accounts individuals in need of credit. initiatives (PFI), the government put a temporary for 72.4% share of total ‘It is still early days, will it work, won’t it work? hiatus on what has become the standard turnover in construction Do the banks have the appetite to put their financing model for civil construction projects. Source: BIS balance sheet at further risk?’ asks Sharp. However, the PFI model is currently under review In the uncertainty, alternative sources of and the government is likely to publish revised funding are also being considered. guidelines before the end of the year. ‘US private leasing seems to be popular and ‘It has become an understood method of offers much better rates than banks do,’ says accounting and the government recognises Marshall. ‘Funding has to be quite flexible at times that it does need to spend on infrastructure but www.accountancylive.com accountancy october 2012 BRIEFING construction sector report n toP SIX BUILDERS Source: theconstruction index.co.uk % % 2.45 2.37 £m £m OPERATIng MARGIN 561.3 588.2 Operating margin Balfour 3.1% Pre-tax Beatty 3.0% profit 3.3% Carillion 2.8% PERFORMANCE Laing 0.9% O’Rourke 0.7% 2.8% Balfour Beatty reported turnover of Interserve £11,035m in 2011/12, twice the turnover 2.9% £m £m Morgan 1.9% 27 25,441 of nearest rival Carillion.