Adapting to the past year’s challenges in UK ConstructionDigital Manager
When Covid-19 first hit UK shores, the initial impact on the construction supply chain was severe, demanding an immediate and continuing need for adjustment. CREFCE’s Construction Sector Snap-shot Webinar, which I spoke on a couple of weeks ago (alongside Emma Anderson, Bill Sexton, and Miles Flynn) did an excellent job of unpacking the many challenges faced by contractors since March 2020, and the knock-on effects that have forced construction lenders such as Fortwell to adapt the way we underwrite new business and manage our existing book.
By Mid-April last year it was estimated 700,000 construction workers were put on furlough, while sweeping job cuts and the materials supply-squeeze resulting from transport obstruction caused well-reported programme delays across UK sites. Furthermore, the exodus of EU construction workers from the UK has been a persistent, and perhaps more concerning, issue since the referendum. Now that free movement of labour has ended, the new points-based application system and ongoing sponsorship costs for EU workers could be hugely prohibitive for some contractors. There was also added nervousness around the impact of Brexit on material imports mid-last year amidst rising congestion reported at UK ports due to Covid-19, although the agreement of the EU trade deal has helped to quell some of those concerns around material supply shortages and tariffs.
In the early stages of the pandemic, on the ground, we witnessed many of these supply-chain problems at Fortwell; firstly, due to an initial recoil reaction where businesses were addressing how they were going to deal with the new challenges of safely working on site. Then as things opened back up, we certainly experienced material delivery issues for steel and timber, leading to completion deadlines being pushed back. As a lender, a core priority at that time was to provide borrowers in our existing loan book the requisite flexibility to get through the difficult period, and now we have found that projects – varying from contractor to contractor – have generally caught up.
Over the course of the last year, the UK construction sector as a whole has experienced a V-shaped recovery. As Savills’ Emma Anderson confirmed during the CREFCE webinar, construction output valued relatively strongly in H1 2020, reflecting the return of aggregate construction activity as more sites re- opened and contractors improved productivity against the backdrop of lockdown restrictions. ONS recorded a 41% increase in construction values between Q2 and Q3 2020, cancelling out the fall in output from the first national lockdown.
However, for many contractors, the challenges of material price inflation and labour shortages – compounded by the restrictions on EU workers brought on by Brexit – persist, while cost-overruns and time delays will almost certainly have a lasting impact on the underlying real estate market. Despite the impressive recovery, it is estimated that construction activity for 2020 was 15% lower than 2019, and towards the end of the year, speculative development levels remained low, which means contractors havebeen pricing projects accordingly to maintain previously strong order books – and that we might see more selective tendering as a consequence.
Still, the data varies across sectors – with development activity in Retail, Hospitality and Commercial Office still muted, while logistics has seen record take up and a switch to purpose-built development in the last 12 months. Fortwell has continued to focus on the Residential, Industrial and Later Living sectors, which are expected to offset the drop in construction output in the harder hit sectors in the months ahead.
Fortwell has always stressed construction cashflows when underwriting development loans and will continue to critically assess new business proposals in light of ongoing issues within the sector caused by both COVID and Brexit. Realistic and deliverable budgets and programmes remain key to any construction financing and these must reflect what is happening across the construction sector.
Undeniably some contractors will feel the effects of cost inflation, labour shortages and project delays over the long term. However, those who build in the necessary risk buffers for future unknown problems regarding labour and materials should continue to deliver schemes on appropriate budgets and time scales. We expect the financially strong and very well organised contractors & sub-contractors to adapt to the pressures and market forces in 2021 and beyond. Careful selection of the project team and delivery team will be of the utmost importance to ensure projects are delivered on time, budget and crucially to the required level of quality.
An area where we consistently see challenges across the sector is the availability of insurance; from PI cover to buildings insurance. Levels of cover are seemingly being watered down, whilst premiums have increased. One of our professional advisors recently commented “the insurance market has never had it better”. There is a danger such items can get overlooked when underwriting a deal or moved to later in the process. It is only when things do not go to plan that the cover is needed, so it has to be right from the outset.
From our perspective, in the wake of the pandemic, vast amounts of UK real estate will need to be repurposed as the market adapts to the post-Covid landscape. We anticipate growth in demand for capital to fund that development, creating new opportunities for alternative lenders to come to the forefront and add value to the market, albeit with a more measured approach to risk assessment than in years gone by.