Slowing market: a time to take stock - and get savvy

Everyone’s got their own views on Brexit. Some want it hard, some want it soft, and others don’t want it at all. But what everyone in construction can agree on is that it’s casting a long shadow over the industry. The most recent economic data underline this.

January’s Construction PMI came in below expectation, with even housebuilding slipping into decline for the first time in 16 months – despite figures released last week by the Office for National Statistics showing it had made a ‘notable positive contribution to growth in Q4’. 

The PMI also revealed that commercial and civil engineering remained ‘near-stagnant’ and that new orders across the board had fallen due to ‘market uncertainty’ (translation: Brexit). In short, demand from consumers and businesses alike is under growing pressure due to the lack of economic visibility.

2018 and 2019 could see it become a lot harder to shift units as prospective buyers deal with the toxic cocktail of high living costs, rising borrowing costs and economic uncertainty as Brexit negotiations enter the final straight

“New orders received by UK construction companies decreased slightly for the first time in four months during the latest survey period. Many respondents linked falling new business to worries fuelled by general political and economic uncertainty,” the January PMI stated.

Rates to rise quicker than expected

Last Thursday, at the unveiling of the Bank of England’s latest inflation report, Governor Mark Carney proceeded to fan the flames of uncertainty, informing markets (in typically highly caveated and quasi-robotic central Bank speak) that rates will have to riser quicker than expected to contain inflation. 

He mused: “In order to bring inflation back to target, it is likely to be necessary to raise interest rates, to a limited degree, in a gradual process, but somewhat earlier and to a somewhat greater extent than we had thought in November.”

Now interest rates going up quicker than expected will clearly impact all sectors of the construction industry, but a particular concern is the adverse effect it is likely to have on residential property development.

After all, against a backdrop of Brexit-related uncertainty and stubbornly high inflation, the one thing that has kept demand among buyers relatively strong is the allure of exceptionally low borrowing costs. They’ve almost certainly been the difference between many people buying and not. 

But when rates go up again, people who are 50/50 about buying a new home may increasingly choose to sit tight and see how our exit from the EU pans out. For housebuilders, that could see transaction levels fall, accentuating the impact of high inflation (caused by sterling weakness) on already squeezed margins and cash flow.

In short, 2018 and 2019 could see it become a lot harder to shift units as prospective buyers deal with the toxic cocktail of high living costs, rising borrowing costs and economic uncertainty as Brexit negotiations enter the final straight.

Reduce the pressure during slowdown

It’s for this reason that the way developers choose to finance their projects, and how they manage that finance throughout a project’s lifecycle, has never been as important. It can’t change the market but it can alleviate the pressure when unit sales are in slowdown.

Very few developers are even aware that, once the construction phase of a project is complete, they can refinance off standard development finance rates onto ‘exit finance’ rates that in some cases can be under 0.5% per month. 

And yet, depending on the size of an individual project, the savings can be substantial, and can amount to tens of thousands of pounds, which represents all-important cash flow for developers in a sluggish market— or indeed capital to be directed towards future projects. Which is, after all, what it’s all about.