Despite all the publicity surrounding the economic downturn, the construction industry is managing to stay afloat – if only just. But long-term survival will depend on the economy’s health. Victoria Madine explains
The morning headlines are enough to put anyone in business off their cornflakes. Stories of record fuel and energy price hikes, the credit crunch and job losses all make sobering reading. So, are we heading towards a repeat of the difficult days of the early 1990s, when the ceilings market halved and many interiors companies went to the wall? According to industry leaders, the negative headlines belie a more complex picture of how the sector is faring.
At a glance, the outlook for the construction market looks gloomy. The country’s largest housebuilder, Taylor Wimpey, recently announced a record loss of L1.5bn, and there have been fewer new housing developments under construction in Britain since 1945.
Industry reports are just as worrying. According to the Construction Confederation (CC) and Construction Products Association (CPA), construction output is set to contract further than 2009 as the economic slowdown and rising energy costs take their toll. But for many in the interiors market, the evidence so far is that the downturn is yet to bite. “The trading environment is not as bad as it was in the early 1990s,” says Stuart Burton, chairman of Poole Partitioning (trading as Invotek): “We are very busy and even taking on new people.”
But Burton and most business leaders admit to feeling worried about the future. After all, a drop in new building orders now may not be felt in the interiors sector until next year or later.
And Noble Francis, economics director at the CPA, warns that the effects of the current downturn will be felt in 2009. “Contractors are still finishing projects, so there is a lag between the fall in new orders and the effects on interiors,” he says. But he concedes: “It is a mixed picture, with some sectors faring better than others.”
AIS chief executive Simon Forrester agrees: “Finishing trades are at the end of the project cycle and thus at the end of the ‘wave’ of any downturn. Every indication is that 2009 will be when fit-out contractors start to really feel the pinch. It is likely those contractors with a broad client base, a range of skillsets, and the backing of both their supply chain and a recognised trade association, will be best placed to withstand whatever happens – good or bad.”
According to Hugh Rattray, director of ceiling contractor Clansman Interiors, orders are strong across the commercial and public sectors, and new enquiries are still high. “No jobs have been pulled in the commercial sector and building for public schools, colleges and hospitals is strong,” says Rattray. “We are expecting to be busy for another two or three years in the education sector as public spending remains high, particularly in Scotland where we are based.”
Expectations are generally high that the public sector markets will continue to be strong as the government looks to deliver its pledges ahead of the next general election in 2010. This is despite the fact that a lot of these projects will be delivered through PFI schemes, so access to private funding will be critical. The government’s L45bn Building Schools for the Future (BSF) programme is gathering momentum and 50 new schools are expected to open by 2009. The government has also committed to building 20 new hospitals over the next three years.
Depending on the area of specialisation, some contractors, including Poole Partitioning’s Burton, say they are already benefiting from Olympic-related work. Others, however, are not expecting to feel the Olympics effect until around 2011. “A lot of our work ends up as internal wall, so we come in at quite a late stage,” says Gerry Tuohy, sales director at metal systems manufacturer Richter Systems. “But in the meantime, there are still major projects in the pipeline to work on, such as Ireland’s new national stadium planned for Dublin’s Lansdowne Road.”
The CPA also expects growth in education, health, prisons and the Olympics to lead to a 12% growth in public non-housing by the end of 2008, and 7% growth during 2009. Given this potential, some contractors fear that talk of a recession could expedite a downturn. “If the media didn’t continually talk about how bad things are, it would help keep things in perspective,” says Jonathan Hope, director at John Atkinson Interiors. “People are affected by all the negative comment.”
Others agree. “As media keep putting about the word recession, people may start to think, ‘Let’s wait to invest in our building’ or decide not to take on new offices,” says Rattray.
These concerns are echoed by the director general of the Confederation of British Industry (CBI) Richard Lambert, who has cautioned business leaders to “avoid believing a recession is inevitable or talk ourselves into unnecessary trouble”. This advice follows the CBI’s own prediction that 2009 will see the slowest economic growth in the UK for 17 years.
The business organisation clearly believes expectations play a huge role in the economy’s health, but some areas in the construction sector do have a less than cheery outlook.
According to Jonathan Cherry, manager of British Gypsum’s Drywall Academy, the company is expecting new orders to tail off in the office and retail sectors. And the CPA’s figures back this up: it expects retail to contract over the next three years, while office work could increase by around 8% in 2008 and then contract in 2009 and 2010.
Specialist contractors and companies that have grown too fast could be vulnerable to these downturns and will need to diversify away from weak sectors, says Wendy Frampton, who runs ceiling manufacturer Armstrong World Industries’ register of Omega-registered contractors. “At the moment, we haven’t seen significant changes in the way contractors operate, but it is possible that a contractor who normally works in housebuilding will try to enter the stronger sectors, such as health and education.”
Frampton adds: “Often, when times get tough, you see this kind of shift among contractors. Also, products get downgraded. For example, a high-spec ceiling is downgraded to a standard ceiling. This is particularly the case in the London market, but it hasn’t become a trend yet.”
Cashflow could also become an issue, says Tuohy. “As costs go up, the question is, will lenders provide more money to keep contractors going? For example, distributors allow people to buy products on credit, but if the amount of cash required suddenly goes up their contractors will have to go to their banks for more money,” he says. “When these requests are refused, the whole supply chain is affected.”
So, to what extent do the bleak economic predictions affect business plans? For suppliers there is always the option of cutting back on production, but this is only possible to a limited extent before the measure adversely affects the business. Tuohy says Richter Systems’ recruitment plans have been affected. “We are not letting people go,” he says. “But we will seriously consider whether we need new recruits. We are also pulling back on advertising and generally looking at our costs.”
Remaining competitive in a market where fuel costs and commodity prices are rising requires careful management. The price of oil alone has increased by more than 40% this year. Cherry says the energy efficiency of the business is under scrutiny, as is the cost base of the business in general. Gauging where there is potential for market growth is also important.
According to Burton, demand for straw board is rising as clients become increasingly aware of the cost of disposing of plasterboard. Negotiating a fluctuating price arrangement into a tender to take into account increasing materials costs is another possibility.
Forrester says, “Those businesses with membership of a recognised trade association are often better placed to survive difficult times. Clients can be assured that association members are vetted and have a wide support network – from technical advice to financial services. These companies will be less of a risk. They are often more in touch with their supply chain through networking events, research and state of trade surveys provided by reputable federations that can also provide support and advice to assist with diversification, identifying funding and support from government, and keeping their members up to speed with environmental issues.”
The economy is slowing in certain sectors, but most industry leaders are keen to avoid comparisons with the early 1990s and are approaching the future with cautious optimism. “Business is good at the moment, but we are conscious that we need a successful UK economy to continue to do really well,” says Burton.