Renovation nation

The consensus on the Budget appears to be that the Chancellor had very few options. With growth forecasts downgraded yet again, borrowing up and the deficit essentially unchanged, he has little room for manoeuvre.

After an £11bn departmental “underspend” in 2012/13, public sector spending is set to be even more tightly controlled, with £11.5bn worth of savings (or cuts, depending on your politics) to be found in the June spending review.

Measures for growth amounted to a stimulus for the housing market by underwriting some mortgage lending, a cut in corporation tax (but not for two years) and an increase in spending on infrastructure, also from 2015.

“Infrastructure” was the budget buzzword. It appears 57 times in the Treasury’s Budget Report, compared with construction, which is mentioned just three times. Of course infrastructure investment usually involves some construction but the key issue is timing.

Research by The Guardian shows that less than a quarter of the Government’s projects will be completed during this parliament. The regularly updated “pipeline” of more than 500 infrastructure projects lacks start dates for many schemes. As the paper puts it, the national infrastructure plan includes “dozens if not hundreds of schemes that will not start buying equipment and materials or employing labour until long after the next general election.”

The UK certainly needs long-term investment in infrastructure but the economy, and in particular the construction sector, needs a stimulus now.

It’s instructive to read reactions to the budget from some of the organisations involved in the sector.

Here’s the RICS on infrastructure:

“The £3bn a year announced by the Chancellor is welcome but will not come on stream until 2015-16 – far too late for many businesses that are struggling now. Our members have told us repeatedly that the success of infrastructure projects are about delivery on the ground. RICS believe Government should spend more time and resource in supporting business to gain access to these public sector projects.

“The Government has largely failed to realise that infrastructure projects don’t need to be big to be effective in creating growth. In fact small might very well be beautiful. Across the regions and the  nations it’s the smaller repair, maintenance and upgrade projects which can be picked up by medium and small construction businesses. Rail maintenance and school refurbishment are just  two areas where a small amount of capital investment would quickly deliver great benefits.”

… and the Federation of Master Builders on housing:

“The FMB worries that the measures announced today may not go far enough to allow smaller builders to deliver the energy-efficent new homes Britain needs. Britain’s SME builders are in need of relief after years of shrinking workloads and rising costs. More than three-quarters of our members recently told us that the most important thing the Government could do to revitalise the home repair, maintenance and energy-efficiency markets would be to cut VAT. This would also provide a level playing field when competing with builders who choose to avoid charging VAT.”

In austere times, maintenance and repair always suffer. While new, large-scale projects are being proposed and (eventually) funded, the everyday infrastructure on which we all rely is being neglected – from roads to rail, from houses to hospitals.

Put this together with the need to make buildings of all types more energy efficient and you have a once in a generation opportunity to tackle the maintenance backlog, to upgrade and to improve performance. Surely that’s worth investing in?

Move into maintenance?

On Tuesday the Chancellor’s Autumn Statement set out the scale of the challenge facing the British economy over the next decade. Growth forecasts have been downgraded, the budget will not be balanced by the time of the next election, we face at least six more years of big spending cuts and as if that isn’t bad enough, further deterioration in the Eurozone would threaten any recovery.

Exactly a week before George Osborne stood up in the House of Commons, I was sitting in the Building Centre, off Tottenham Court Road, at the Construction Industry Council’s regular Economic and Policy Forum.

We heard from the Bank of England on the macro-economic situation and from the Construction Products Association (CPA) on the sectoral impact of the recession and the outlook for the next five years – it wasn’t a fun-filled few hours.

The Bank’s most recent analysis showed that, although pre-recession growth was actually better than previously calculated, the lowest point of the trough was comparable to the situation in the 1930s.

Even before the OBR’s forecast of another 200,000 job cuts, the public sector employment trend has not been following its projection of a gradual decline to around 5.3m by 2016 but has tracked sharply down. Half a million private sector jobs have been added since the depths of the recession but there is a long way to go.

There was not much in the Autumn Statement to cheer those in the construction and FM sectors. Government investment in infrastructure made for a few headlines but £5bn over three years is less than 0.1% of GDP per annum. The pension funds may respond but will need some persuading.

The missed opportunity is investment in the green economy and some recent decisions, on feed in tariffs and planning for example, suggest that the Government is stepping back from its commitment to protect the environment. The flagship Green Deal has been met with scepticism, particularly as it might apply to the commercial sector.

According to the CPA, the 73,000 houses started in 2009, represent the lowest figure (excluding the war) since 1923. Public housing appears to be off the agenda, set to fall from 30,000 starts in 2010 to just over 19,000 in 2013. With 267,000 new households created each year, we have a housing gap of well over half a million in 2011-15.

So, is there a glimmer of hope anywhere? Well, maybe if you run a maintenance business.

The theme running through the CPA’s presentation was that the pressure on capital programmes and a backlog of work should boost maintenance across schools, hospitals, roads and even public housing.

Capital expenditure on education is set to fall from £7.3bn in 2010/11 to £3.3bn in 2013/14. The focus will be on finishing off projects under the Building Schools for the Future programme and Academies. But, says the CPA, don’t underestimate the maintenance workload as schools put off work in anticipation of BSF funding.

From 2013 onwards the CPA suggests that DCLG will need to increase funding to deal with the maintenance backlog in public housing.

It’s a similar picture in healthcare – as we come to the end of a period of investment in major hospitals, the emphasis will be on medium-sized hospitals, GP clinics, IT and … maintenance.

Even so, with confidence in short supply, it might take a leap of faith for companies to invest in the systems, training and infrastructure required to meet this anticipated demand.

Much has been written about the different attitudes of the British and our continental European cousins to home ownership. But with higher deposits demanded from first time buyers and house price deflation perhaps people will start to view the roof over their head differently.

During an interesting discussion at the CIC Forum, there was just a hint that we could see a market develop for well-built and importantly, well-managed residential property to let.

Construction futures

So, we have not dipped back into recession … just. The economy has essentially flatlined for the last six months, with growth of 0.5% in the first three months of 2011 following a contraction by the same amount in the final quarter of last year.

However, as the national media highlighted this week, construction was down by 4.7% at the start of 2011. It was also one of the worst hit sectors at the end of 2010.

On Tuesday, the day before the ONS figures were released, the Construction Industry Council (CIC) held its third Economic and Policy Forum at the Building Centre in London. The CIC brings together the industry’s professional bodies, research organisations and specialist trade associations.

Those attending the forum heard Allan Wilen, Economics Director and Head of Market Intelligence at market data firm Glenigans, argue that we need growth of 2% in the wider economy for construction to expand.

The reliance of the UK construction industry on public sector capital investment is an inherent weakness and the aim of the coalition Government to rebalance the economy away from public spending will only make it more difficult for construction to recover. Wilen summarised the situation – a public sector squeeze as capital funding is cut; a slow private sector recovery, hampered by access to capital and consumer caution.

But construction is not just new build. The theme running through most presentations on the sector these days is the switch to refurbishment and maintenance. In the education sector, for example, maintenance work delayed in expectation of the Building Schools for the Future programme delivering new facilities will now need to be done and urgently. Demographics are putting pressure on classroom space, with a forecast 10% increase over the next four years in demand for primary school places.

Of course, local authorities are being squeezed and there will be a temptation to limit expenditure on maintenance to protect revenue budgets for “frontline” services, storing up more problems for the future.

The CIC’s main concern is the loss of skilled resources. In a press release issued in response to yesterday’s GDP figures it said: “The recession of the late 1980s/early 1990s took 500,000 people out of the industry and led to eighteen years of skills shortages.”

It is notoriously difficult to synchronise training programmes with economic cycles but it is clear that the UK needs to rebalance construction training, away from new build towards retrofit and maintenance. This would ensure we have the skills to keep the UK’s infrastructure running and to carry out the work necessary for a low carbon future.

A radical report trying to get out?

Will Paul Morrell’s report, delivered at the end of last month, turn out to be a turning point for the construction industry or will it get lost in the plethora of policy initiatives coming our way next Spring, when the Government is due to respond.

The voice of the Government’s chief construction adviser comes through loud and clear. Anyone who has heard Morrell speak will recognise the logical approach and the pithy, punchy style. With a few exceptions it is also mercifully free of jargon.

The topic, nothing less than the re-engineering of an entire industry to meet arguably the most pressing problem facing the world, is enormous and it must have been difficult to know where to stop.

The Innovation & Growth Team’s remit was to look at the construction industry’s readiness to take on the challenge of carbon reduction but the report does not confine itself to technical matters of embedded carbon and Display Energy Certificates. It ranges across procurement, skills, innovation, regulation and data gathering.

What’s very striking is the number of recommendations that call on the Government to do something. Conceived under Labour, it was commissioned by Peter Mandelson, these aspects of the report might receive a frostier reception from the coalition. Morrell has said that, for this Government, regulation is the last resort.

The report makes 65 recommendations and there are some quite radical (or just plain sensible, depending on your perspective) ideas amongst them.

How about requiring landlords and tenants to co-operate on an energy management plan for their buildings?

Why not offer enhanced capital allowances for whole buildings, rather than just plant and equipment.

Not radical enough? Well what about this: “It may therefore be necessary to implement regulations to target the worst performing buildings by simply making it illegal to sell, lease, or insure them after a certain date. The 6% of buildings with EPC “G” ratings are responsible for around 15% of carbon emissions. Although there will be some overlap with other measures, this would ensure that the worst-performing buildings do not slip through the net.”

The final recommendation is not as strongly worded but it will be interesting to see the response of the property world to that one.

The report talks of a “quite spectacular programme of work, stretched out over at least the next 40 years.” That’s eight five-year parliaments. Throughout the report there are arguments for clarity and stability. The 2050 Group of young professionals calls for “confidence in the direction of long term policy.”

If the construction industry (and that very much includes FM on Morrell’s definition) is to achieve anything like the programme being suggested, then some sort of cross-party consensus must be reached. These policies need to survive changes of government.