The years of storm and stress
Before 2007, the main economic worry for government and industry was whether the industry had the capacity to build all the upgrades to public services Labour had promised the electorate without pushing up inflation. Throughout the decade public spending never fell below £32bn, and peaked at £38.5bn in 2004.
The most important category was education, above all the £45bn Building Schools for the Future programme, announced in 2004 (later to become £55bn as academies, other schools funding and a few cost overruns were added). The housing market, too, was fuelled by taxpayers’ cash – the government pledged to build 70,000 affordable homes a year by 2010/11 – a target that ultimately, proved overambitious. It also gave £21bn to upgrade social housing to the decent homes standard by 2010. Healthcare was a big winner in the early part of the decade, with billions pledged for PFI hospitals, local hospitals and community health care centres. That said, the government never quite got its procurement processes up to scratch and there were constant complaints about outlandish bid costs, delays and the quality of the product.
Then everything changed. After the scale of the banking crises slowly became apparent between the run on Northern Rock in September 2007 and the collapse of Lehman Brothers in September 2008, the concern became whether there would be any work at all: the housebuilding sector collapsed, commercial developers couldn’t get credit and the government spent £850bn on bailing out the banking system.
The scale of the transformation is clear when you consider what happened at the begining of 2007, when the industry resembled a huge party thrown by lemmings and attended by locusts. Hoards of them descended on networking orgies in MIPIM and MAPIC and Claridges and the Savoy were booked out for business meetings over lavish lunches. Some started to warn that the industry was getting carried away, and the point was borne out when an RICS ball for young surveyors in April 2007 resulted in £1,700 worth of damage to the London Marriott after party-goers threw food, brawled and set tables alight.
Meanwhile, development pipelines were bulging, eastern Europe, Dubai and Abu Dhabi were roaring, China was intent on buying most of the world’s raw materials (steel prices rose 150% in two years), consultants’ fees rose by a quarter and staff by a fifth; even Davis Langdon’s warning that tender inflation was getting out of hand didn’t spoil the party.
The £5bn merger of Taylor Woodrow and George Wimpey in March, which created the UK’s largest housebuilder, was another sign of confidence in the market, particularly since it followed another huge housebuilding deal – Barratt’s £2.2bn takeover of Wilson Bowden in February. Commentators were certain that this marked a new economic era. Which, ironically, it did.
In September Northern Rock admitted financial difficulties and the world’s economic and political leaders were in the position of Wile E Coyote finally noticing that he had run off a cliff. And so the credit crunch was born, the housing market stopped working and housebuilders’ market worth disappeared in puffs of smoke.
The year 2008 will forever been remembered with a shudder. Some 71,000 construction workers lost their jobs, hundreds of companies folded and any firms that were overextended suffered falls in turnover, profit and share prices. At Building, we invested an imaginary £100 into the construction industry to see how it would fare, and the results were abysmal. By October, out holding in Taylor Wimpey was worth £6. That said, some firms continued to do well
The storm was too much for the grotesquely overextended consultant Erinaceous – it folded in April. Other big names including housebuilder Consort David McLean Homes, Pettifer Construction and City Loft, were to follow in the coming months.
Others, particularly the top contractors, seemed unaffected. The most notable successes were Balfour Beatty, which announced a 24% increase in pre-tax profit for 2008 and Carillion, whose turnover rose 32% to £5.2bn in 2008, largely as a result of the acquisition of Alfred McAlpine. Its profit increased 23% to £115.9m. Then there was Berkeley: its results for the year to 30 April actually showed an increase of 3% in profit.
By this time the downturn had become the first ever global recessioon, but a pretty real-looking mirage was in place in the UAE, which continued to unveil megaprojects – particularly in Dubai. The 1.4km Nakheel Tower, Dubai Property’s £9bn Culture Village and Atkins’ £430m Executive Towers were but a few of the projects in the pipeline for the emirate. Abu Dhabi had £80bn ready to roll, including four entire districts by 2030. Amid all the promise of contracts, many British contractors relocated to the Emirates, chasing lucrative projects. It was another six months before they started spending more time chasing unpaid debts …
The optimism at the end of the year that followed the election of Barack Obama to the White House was not mirrored in the global economy. Just before Christmas, the UAE – that final domino – began to wobble …
Construction output from public sector work
See attached graphics
1 Private sector output soars in 2004 and collapses in 2007
2 The public sector steps in to take the strain
3 But only temporarily …
Review of the Decade 2000-2009
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2007 - 2008