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The construction sector needs more support in the months ahead

Jamie Johnson - FJP Investment

Jamie Johnson, CEO, FJP Investment

The construction sector has arguably been one of the fastest industries out of the blocks as we emerge from the challenging and restricted trading conditions of the pandemic.

In fact, new data released shows construction has experienced rapid growth, leading analysts to suggest the sector could lead the UK’s economic recovery. According to the IHS Markit/Cips UK construction purchasing managers’ index, the month of March 2021 saw the fastest acceleration of growth in the construction sector for more than six years. This is a trend that held true across housebuilding, commercial construction and civil engineering – a positive sign that the industry as a whole can expect to meet a robust level of demand in the coming months.

However, there are numerous factors underpinning these broader trends in the sector which require careful consideration, particularly if the buoyancy of the industry in the immediate aftermath of the pandemic is to be maintained.

Could bust follow boom?

To understand why there has been such a sharp uptick in construction in the early months of 2021, two key factors must be reviewed. Firstly, Britain’s lockdowns have naturally caused a backlog of incomplete projects. So, as Covid-related restrictions begin to ease, we are seeing a significant rise in the number of paused works restarting.

Indeed, the aforementioned Markit/Cips analysis revealed that construction leaders feel the resumption of delayed projects was the most significant factor in the construction boom experienced at the start of the year. This was found to be pertinent especially in commercial construction, with a substantive rise in the number of hospitality and office buildings being developed (or redeveloped) in the face of changing consumer needs and behaviours.

The second notable factor is the increase in renovation and refurbishment projects. This is again a by-product of the pandemic: with remote working forcing all non-essential workers to spend a lot more time indoors, many homeowners have looked to develop and improve their properties. For instance, there has been a marked increase in loft conversion and home extension developments.

A survey of 2,000 homeowners conducted by trades directory Checkatrade observed a 15% increase in the amount spent on home improvements between 2019 and 2020. This figure might not immediately appear to be hugely significant – yet a 15% increase across all owner-occupied households in the UK would represent £39 billion worth of activity for the construction sector.

So, what are the causes for concern?

The buoyancy of the construction industry in the first months of this year will, rightly, be celebrated as a silver lining after a very difficult year. However, further analysis reveals that there are long-term structural issues that remain, and the short-term rewards may only be of benefit to a handful of companies.

A major survey of 3,568 construction companies conducted by the Office for National Statistics in January found that as many as one in eight had little to no confidence in their ability to survive through to the end of April. While uncertainty and low confidence was the mood among many industries at the turn of the year, construction business leaders had rightful cause for concern, with decreased availability of labour and sharp price rises for certain materials – two issues exacerbated by Brexit.

Firms looking to take fullest advantage of the spike in demand face another issue: the availability of accessible finance. As with the increase in operational costs, this will sting the small and medium sized business hardest. Even before the pandemic, a study revealed that more than half (54%) of SMEs in construction felt hamstrung by the inaccessibility of capital to get projects off the ground.

It was, then, an encouraging sign to see the announcement of a £7.1 billion investment National Home Building Fund by Chancellor Rishi Sunak in the November 2020 Spending Review – in particular, it was positive to note that some of this stimulus will be targeted at smaller construction firms.

In addition to state support, private businesses and individuals could spot a great opportunity to invest in a booming sector. Supporting developers with, for instance, loan note investments, a form of debt investment where private interests can loan capital to firms to be repaid over a fixed period, would enable the seamless and dependable completion of projects that will be crucial to keeping demand high.

Clearly, there are positive signs for the construction industry as society emerges fully from the pandemic. However, this short-term boom must not be taken for granted. To ensure it is sustained, some longstanding structural issues must be addressed, particularly in supporting small business running their projects smoothly in the face of volatile market conditions. To this end, the chief concern for the state and private sector must be improving access to finance to prop up the industry’s ability to meet demand.

Jamie Johnson is the CEO of FJP Investment, an introducer of UK and overseas property-based investments to a global audience of high net-worth and sophisticated investors, institutions as well as family offices. Founded in 2013, the business also partners with developers in order to provide them with a readily accessible source of funding for their development projects.