Thursday April 25, 2024

Drilling further into construction: Exploring key insights from FRP’s Breakfast Club

Earlier this week we hosted the latest FRP Breakfast Club at Searcy’s at The Gherkin, marking the launch of our newly released construction report that unearths the views of over 500 of the sector’s senior decision makers across the UK, showcasing both the opportunities and challenges facing the industry.

Leading the discussion was a panel of industry experts including, Andrew Cox, Managing Director at CCi, Andy Garton, Director at Corbyn Construction, Ross Faragher, Group Operations Director at Inland Homes, and Lucinda Robinson, Partner at Fenwick Elliott – alongside FRP’s Restructuring Advisory Partner, David Hudson and Financial Advisory Partner Justin Matthews, who facilitated the discussion.

Panellists drilled into the core influencing factors impacting the sector’s struggles, including delay disruption, operational challenges, heavy debt, outstanding tax liabilities as well as difficulties with securing new funding. There’s no doubt that the industry has had to remain resilient through multiple major shockwaves over the past few years.

Fiscal challenges

Conversation covered how the recent merger of the R&D Expenditure Credit and SME tax credit schemes announced in 2023 as a move to simplify existing innovation support avenues, has raised concerns – with suggestions that the change was rushed and came too soon after disruption caused by earlier reform – frustrations that look to be reflected in our report findings.

Tax burdens are proving to be a major concern for the construction sector, with 65% of survey respondents admitting that they will struggle to pay their tax liabilities or any outstanding tax in full this year. Firms are looking at methods of payment relief, such as electing not to pay pension additional contributions and deferring VAT and tax.

The BBC recently reported that some of the UK’s biggest banks are raising mortgage rates, as expectations of when the Bank of England will cut interest rates are pushed back. Site rates have been increasing in tandem with inflation, while the rate of annual growth in labour costs is anticipated to decelerate, which may see construction firms experience some relief in terms of cost pressures.

Political uncertainty

The panellists discussed how the major political parties differ in their approaches to sustainability, planning, infrastructure, and housebuilding, complicating construction firms ability to make reliable assumptions. Additionally, the persistent skills shortage poses an ongoing risk. While inflation has decreased across the economy, labour supply constraints could maintain high construction costs.

Meanwhile, more than three quarters (76%) of our surveyed businesses said that political uncertainty in an election year is either causing them to delay investments or prompting clients to postpone commissioning new work. The event highlighted how the feeling amongst most was that the anticipated parliamentary shuffle will bring a renewed energy to the government.

Grenfell effect

Over a third (37%) of our survey respondents highlighted the Building Safety Act as negatively impacting project progression, which was implemented in the wake of the Grenfell Tower tragedy and adds a range of new design considerations for developers and delivery partners, with millions of pounds going into readjusting previous developments that were carried out before the regulations were enforced.

As the cementing of the Building Safety Act concludes this April, it’s clear how crucial it will be for construction firms to grasp the compliance of new regulations. The discussion also highlighted potential setbacks this year, with added delays and disputes anticipated due to legislative changes, however, some regulations will not be until 2026, such as the requirement of second staircases in all new buildings over 18 meters.

Funding

The session focused on funding and investment, highlighting the increasingly stringent requirements from lenders and the struggle to raise finance, even for Blue Chip firms, who are now expected to provide bonds along with thorough cost-benefit analysis. Shareholders are exercising caution, especially surrounding medium-term loans, with secured lending often the only option available.

Our report outlines how (51%) of businesses said it was harder to obtain funding in 2023, compared to 2022, and only 31% said access had improved. When asked why it was harder, businesses cited higher cost of capital (35%), lower risk appetite from lenders (33%) and increased scrutiny over their projected (34%) and existing financial performance (33%) when seeking funding.

Future predictions

Panellists were hopeful that once the election is out of the way inflation may drop, but the trading landscape will remain uncertain for some time. Some believed that infrastructure will receive the investment required, as we look for ways to accommodate a growing population, supply and demand will kick in.

36% of businesses surveyed are unconfident that they will be able to trade through the next 12 months, however many felt that hope is on the horizon as the sector has already weathered the roughest part of the storm, and if businesses can survive the next 12 months, they’ll be on the road to recovery.

Discover our latest sector series report – ‘Resilience to recovery: The future of UK construction.’