Lending is not just needed for residential

Apart from being able to get a seat in a first-class rail carriage, the chancellor had something else to smile about recently as the UK returned to growth with the economy expanding by 1% in Q3 2012. However, he may wonder at the fortunes of the construction industry, which continued to drop with output shrinking by 2.5%. In time these figures will be adjusted, as they always are, but either way construction’s contribution to growth will still be zero. Food for thought as cold winter nights draw in.

It is not just SMEs starved of funds - the Bank of England figures show the overall level of bank lending to the construction sector in its entirety has dropped 12% in the last 18 months

From my perspective, I would say we are today in the economic equivalent of a financial foxtrot with the global market growing at a rate that is slow, slow, quick, quick, slow. Most of the UK growth is still slow, Western Europe, still slower, London in its own bubble is expanding quicker and Asia is still moving quickly with the US still slow. Our industry is more limping than dancing out of recession as the ONS figures illustrate.

So why are we lagging behind when the rest of the country is moving forward? The lack of finance is still a key inhibitor for our sector at the moment. Indeed, no recent statistic illustrates this better than the lending figures from the Enterprise Finance Guarantee (EFG) scheme, a seemingly little known initiative that has all the profile of an Eskimo in a snowstorm. The government-backed EFG was supposed to assist business in getting over the risk-adverse attitude of the banks and was designed to help smaller firms with a turnover of up to £40m. Under the stealth-like EFG scheme, the government guarantees 75% of the value of lending in an individual loan to a business. But it’s not working for construction. The latest figures show that bank lending to SMEs in our sector has dwindled to virtually nothing or, put another way, lending through the scheme fell 86% to just £3.5m in Q2 this year. At its peak in 2009 it was at £25m.

It is not just SMEs starved of funds either; the Bank of England figures show that the overall level of bank lending to the construction sector in its entirety has dropped 12% in the last 18 months, from £22.7bn in outstanding loans at the start of 2011 to £20bn this summer. This lack of investment impacts on us all. No investment means no property pipeline.

In time, there will be the demand as the economy eventually hauls itself back, when long-term leases end and when investors from mainland Europe look for safe heavens to do business. Understandably contractors and consultants that have paired down during the lean times to survive are wary about over-extending again when they have not got the staff to take on the work. This will either mean foreign competitors coming in to take up the slack or price hikes, probably both.

There’s a generation of craftspeople wiped out from the industry as courses have disappeared, and young people continue to spurn the opportunity to learn a trade

We are not predicting a large increase in raw material prices for the next 12 months but with the volatility in the supply chain one cannot accurately predict further than this. Labour is a different matter and remains a worry. There has been a whole generation of craftspeople wiped out from the industry as courses have disappeared, and young people continue to spurn the opportunity to learn a trade for an industry that they know has no openings. Also, the gap that used to be filled by operatives from other parts of Europe will be affected by a change in immigration rules. All this means that labour costs will rise and these costs will need to be absorbed or passed onto the client. I understand that for many outside of London, the idea of over-demand in the market may seem like a distant dream as they are struggling with cash flow issues and still just staying afloat, but historically a ripple effect means that once one area prospers others can follow, even if it takes time.

So, with many in the sector hanging on by their finger-tips, lending is not just important, it is vital for survival. Government and lenders alike should realise that, according to the Office for National Statistics, total construction output still makes up 6.8% of gross domestic product and that new homes make up around a fifth of that output or 1% of GDP. Lending is not just about residential property, it is about commercial, mixed use, infrastructure and retail projects.

The continuing rise in home builders’ share prices tells its own story. Let’s look at the majority of the sector and ease the taps a little for responsible lending. To return to my dancing analogy, we need to move from a slow waltz to a quickstep if we are going to act as contributor to UK growth.

Richard Steer is chairman of Gleeds Worldwide