Brexit: Dominoes start falling

And so it begins. Just a fortnight after the UK voted to leave the European Union, the construction industry is starting to feel a nasty pinch.

Two well-known architectural practices - Make and Sheppard Robson - have become among the first firms to make staff redundant, citing post-referendum uncertainty. After a rush of withdrawals from investors, Standard Life has suspended trading in its £2.9bn UK real estate fund for commercial properties; the second large lender, after Singapore’s United Overseas Bank, to take evasive action in the wake of the vote. Aviva became the third just one day after, telling customers they would have to wait to pull money out of its UK property fund because of “a lack of immediate liquidity”. Meanwhile, housebuilders’ share prices have tumbled, with the sector losing almost £9bn of value in the six trading days to 1 July.

Those are the headlines: unseasonably but unsurprisingly bleak. But, although it might not feel like it after two weeks of Brexit-related argument and debate, it’s still very early days in this post-vote world. So how bad is the situation really?

One important factor to remember, for those attempting to apply a cold compress in light of the latest developments, is that much of this reaction is based on anticipation of an economic shock, rather than a response to conditions on the ground.

The share price drops, in particular, fall into this category. But so too do redundancies. Bosses of architects, consultants and contractors up and down the country will be facing the same decision: scale back now in anticipation of reduced workloads, with the only risk being that they lose out on a few schemes if construction is not badly hit; or continue business as usual and risk being caught with a dangerously high cost base in the event that it is. With memories of the 2008 crash still raw and still plaguing many a balance sheet, it’s easy to understand why some are already taking the cautious approach.

So by far the most significant development to date in trying to gauge the extent of the impact of the vote is the reaction of the investors to UK property markets

So by far the most significant development to date in trying to gauge the extent of the impact of the vote is the reaction of the investors to UK property markets. And here, the worry is that the moves by Aviva, Standard Life and United Overseas Bank may be just the tip of an especially scary iceberg.

As Building went to press this week, rumours were circling over the future of several high-profile City schemes, 22 Bishopsgate chief among them. At this stage, these are just rumours; but even in a best-case scenario, it seems inevitable that the market will continue to shy away from speculative investment, as seen already in the run-up to the vote, and this week on the £400m Gotham City scheme. And this will put renewed pressure on clients to compete for pre-lets before development work can continue.

The damage that a prolonged period of economic uncertainty could inflict on the industry was indicated in a gloomy set of figures from Markit/CIPS this week. These showed that the industry’s output plummeted at its fastest rate since 2009 in June, amid what now seems mercifully short-lived ambiguity in the run-up to the referendum.  

With the timetable and eventual terms of a Brexit painfully unclear - not to mention the question of who will be the prime minister to lead those negotiations - an era of uncertainty is now beyond question. But in the absence of a Grand Plan, one extremely helpful action clients and investors in individual projects could take to mitigate that uncertainty as far as construction is concerned would be to clarify the position on individual projects as swiftly as possible. Particularly those clients from the public sector whose colleagues have walked the country into this situation.

On a national level, clarity is needed on the large-scale infrastructure schemes that form the backbone of both the industry’s pipeline of work and the country’s drive for regional rebalancing and growth. But equally important to companies on the ground are the myriad local and regional regeneration and area development schemes, many worth in the hundreds of millions of pounds, which have been commissioned or supported by local government leaders.

The need for these schemes, at a time when the UK faces a shortage of housing, school places and infrastructure, will not have changed, even if the climate in which they are to be delivered is now unclear.

The UK is fortunate enough to have some powerful, resourceful regional and city heads; people whose communities are heavily invested in the schemes they have advocated. From a construction perspective, let’s hope they show more leadership and resolve during the challenging times ahead than their counterparts in Westminster are demonstrating.

Sarah Richardson, editor