OPINION


WHERE NOW FOR BUILDING SERVICES CONTRACTORS?


The double-dip recession is making life hard for construction fi rms as work dries up in sectors previously driven by public sector investment. Noble Francis looks at the state of the industry and fi nds a glimmer of hope in the rail market


Construction and the economy are not in a great state. Despite


the recent optimism from the Olympics, the economy is in a deepening ‘double-dip’ recession and construction is suffering from the adverse effects of sharp falls in government cuts at the same time as a faltering private sector. You can add to this the excess capacity that still exists following the initial downturn in 2008/09, and for anyone who has been in the industry for a long time, the depressingly familiar reaction of the major contractors in extending payment terms and tighter retentions. But it’s not all bad news. If you are in private housing,


it depends whether you deal with large house builders or SMEs. The main housebuilders are happy at the moment. They are raising the book value of the land, enjoying profi t margins of around 10%-15% and gradually raising units. They also have 6-7 years of land


with planning permission. However, SME housebuilders are not so fortunate. They suffer from delays in planning, struggle to obtain lending facilities and they don’t benefi t from NewBuy. Private housing starts are anticipated to rise 3% in 2012 before economic recovery boosts house


Construction forecasts £ m Constant Prices (2005)


Rail


2012 2013 2014 2015 2016


20


3797 16% 4633 22% 5063 9.3% 5086 0.5% 4688 -7.8%


Offi ce


6,235 -2% 6,298 -1% 6,612 5%


2,379 6% 2,260 -5% 2,238 -1%


7,009 6% 2,372 6% 7,360 5%


2,491 5% CIBSE Journal September 2012


building by an average of 10% each year between 2013 and 2016. On the public side, housing is falling sharply and we’re anticipating that starts will fall 23% this year and a further 10% next year due to the sharp fall in DCLG’s capital investment. Education and health are


also falling away due to cuts in departmental spending. This is in addition to PFI now being off the agenda – is it no longer considered value for money and there is no replacement to fi ll the funding gap. Education construction is expected to fall 15% this year and a further 12% in 2013 with no growth until 2015. The priority schools investment will


help, but certainly won’t completely replace work fi nishing on BSF projects. Work on small and medium- size hospitals continues in the health sector, but the multiple large hospital projects of £500 million-plus that occurred in the last decade are long gone. As a consequence, work in the sector is expected to fall 15% in 2012 before a 9% fall in 2013 and, again, no growth till 2015. The government was hoping that


the fall in public sector work would be offset by private sector growth, but the UK recession has led to falls in consumer and business confi dence, reducing both consumer spending and business investment respectively


Source: ONS, Construction Products Assocation Education Retail 5,259 -3%


Public new housing


3,463 -22%


5,364 2% 2,944 -15% 5,553 3.5%


2,796 -5%


5,803 4.5% 2,880 3% 6,057 4.4% 3,053 6%


Private housing


14,294 2% 14,866 4% 15,757 6% 16,860 7% 18,547 10%


that, in turn, are vital for retail and offi ce demand. Until recently, offi ce construction


Most


contractors don’t think they do rail as they don’t do tracks, but remember an awful lot of rail investment isn’t track


was shot to pieces outside of London but relatively buoyant within the M25. However, even within London, apart from a few major projects, the offi ces market is slowing and this does not bode well over the next 12 months. Within retail, the supermarket expansion plans were driving recovery in the last 12 months, but they now appear to be scaling back. Work will continue to grow on small urban retail units, which will benefi t interiors, lighting and HVAC contractors, but you have to be in with the major supermarket chains, some of whom don’t have a great reputation on payment. One of the greatest opportunities


is in rail. Most contractors don’t think they do rail as they don’t do tracks, but remember that an awful lot of rail investment isn’t track maintenance. It is station refurbs – retail, offi ces and even residential. There is a £1 billion redevelopment at Tottenham Court Road station as part of Crossrail, Europe’s largest construction project. This includes 500,000 ft2


high profi le


retail, offi ce and residential fl oor space. Plus, there are station refurbs all around the country. Rail output is forecast to grow by 16% in 2012 and expected to accelerate to 22% in 2013, followed by 9.3% growth in 2014. Overall, it is going to be a diffi cult


year ahead for building services contractors and it is a case of either beating the market or moving into areas where there is likely to be growth. When recovery does come, it is likely to be relatively rapid, but it won’t be in the next 12 months.


● NOBLE FRANCIS is economics director at the Construction Products Assocciation www.cibse.org


www.cibsejournal.com


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