The recent glut of bad news has made every headline going and sent the industry into blind panic. But we’ve been here many times before, says Richard Steer, so what did we expect …
Do you ever get the feeling that events are repeating themselves? With the price of oil rising to unprecedented levels and negative equity creeping back into the housing market, I feel we are experiencing the economic equivalent of deja vu.
Once again, parts of the industry – housebuilding in particular – are in a slump. This has displaced about 10,000 workers (if you include suppliers) in the past quarter and house prices are falling at their fastest rate since records began. But this has happened before and it will happen again. Frankly, I am amazed by the shock and awe with which commentators are greeting these events. We are in a risky business: this is not news. If you want a reasonable salary, long holidays and the chance to grab some bargains at John Lewis on your expenses then try politics – don’t go into construction.
Being successful in the property and construction business is about trying to control risk. Maybe we are starting to hear the sound of wings flapping as chickens come home to roost, but we need to get some perspective. In our work we are often called in to look at risk management on a project, and the first thing the client wants to know is, quite understandably how bad things could get.
But what about our own economic outlook? Well, we are nowhere near the position we were in during the recessions of the mid-seventies, when output contracted 2%, or the early eighties, when it shrank 3.5% or the early nineties, when it shrank 1.5%. In the nineties it took 13 quarters for the economy to recover, in the seventies it took 14 quarters and in the eighties, 17.
Pessimists are predicting that in the third and fourth quarters of this year we might see a shrinkage, but even then the figure for the whole of 2008 will be a growth of 1.5%.
So year-on-year we are unlikely to go backwards, although with the daily delivery of bad news from across the Atlantic one can never be sure.
My fellow consultants and I agree that this slump is unlikely to be a huge dip, but could be a long-lasting decline that hits the bottom early and continues for some years. For instance, we cannot control commodity prices and as they are undergoing a surge comparable to the seventies, we could see real earnings contract for the first time in 30 years. This does not encourage people to rush out and spend and the banks are not going to rush out and lend anytime soon, either.
So are there any positives to come out of this precarious business environment? Well, I am not facing a line of project managers asking for pay rises at the moment, which is a refreshing change, and our switchboard is no longer plagued by headhunters pretending to be somebody friend or relatives in an effort to get entice our staff away with the promise of short-term riches.
Our work in the sustainability arena has also taken on a new hue. The snake oil salesmen that popped up offering advice and consultancy to clients based on no more experience of life-cycle costing than a visit to their local bottlebank, are being undone as developers and architects now require a bit more expertise.
Sustainability is one area that hopefully will not be sacrificed as the industry enters a tough time. The announcement by Gordon Brown that thousands of wind turbines could be built across the UK over the coming decade as part of a £100bn plan to boost renewable energy is seen by some as evidence that sustainability could be a rich new seam of opportunity.
An extra 7,000 wind turbines, 3,000 on sea and 4,000 on land, could have a vast impact. First, the government estimates that up to 160,000 jobs, many in construction and engineering, could be generated. Second, the level of investment proposed is likely to create an economy of scale that will result in capital cost reductions of between 25% and 50%. Finally, with oil forecast to hit $200 a barrel next year the whole-life costs of renewable energy are making more and more sense.
All those in the built environment stand to benefit from the government’s announcement. Of course, there is a downside – as yet we don’t know how this will relate to planning and tax – but at the moment any news like this is good news.
So we may feel a little like Bill Murray’s character in Groundhog Day, trapped in situation that seems to keep repeating itself, but perhaps, just perhaps, compared with times past, things are not yet as bad as we think.
Richard Steer is senior partner at Gleeds