Hot topic: The pre-Budget report

Gordon Brown’s Pre-Budget Report presented updated assessments and forecasts of the economy and public finances, reports on how the government’s policies are helping to deliver its long-term goals and reforms the government is considering ahead of the 2006 Budget.

Residential property will not be allowed in SIPPs – which is a setback for the buy-to-let market

The report included the response to Kate Barker’s housing supply review. The aim is to increase the annual addition to UK housing stock to 200,000 homes by 2016. The Construction Products Association, among others, has pointed out this is far fewer than Barker recommended and also remains unconvinced the proposed mechanisms will achieve what is hoped.

The proposed changes include:

• The establishment of an independent National Advice Unit by autumn 2006 to advise the government and regional planning bodies on the level and broad distribution of future housebuilding
• Regional planning bodies and regional housing boards to be merged by September 2006, to help regions take a more strategic view of housing and infrastructure needs
• Draft Planning Policy Statement 3: Housing (PPS3), a replacement for PPG3. The intention is that local and regional plans should be more responsive to housing markets. Councils will be responsible for allocating a five-year supply of land for development and for identifying land for the longer term. They will also be able to dictate the balance of dwellings, which is thought more likely to reduce than increase the private sector’s willingness to invest. PPS3 also increases the minimum density of schemes in urban and suburban areas, with further increases in apartment building.

Kate Barker calculated that 17,000 additional social houses were required each year just to keep up with demographic trends. The government claims to have “ambitious plans for increasing supply in social housing” and will announce investment alongside “further efficiencies and innovation in provision” as part of the 2007 Comprehensive Spending Review. This includes the possibility of local authorities with arms length management organisations being allowed to use their own resources (including land) to build and own homes, and attempts to increase the effectiveness of PFIs.

One of the more controversial features of the government’s response is a planning gain supplement, designed to help finance the infrastructure needed to stimulate and service proposed housing growth. There will be a scaling back of Section 106 agreements. The proposal is currently out for consultation. Any levy will not be implemented until 2008 and brownfield sites should benefit from a lower rate. However there are fears any sort of tax is likely to have a negative effect on bringing schemes forward.

REITs

Following last year’s discussion paper on the creation of real estate investment trusts in the UK (UK-REITS), the pre-Budget report announced that the government would bring forward draft legislation to enable UK-REITS to be included in the 2006 finance bill. Formal consultation on draft clauses is now under way.

REITS have been successful in the US and Australia in recent years and are anticipated to increase UK property investment in both the commercial and residential sectors. However, there are concerns that the proposals may be interpreted by the property industry as too restrictive, particularly with regard to a proposal to restrict the ability of REITs to borrow. It is feared that this may negatively impact on the attractiveness of the REIT structure for property companies.

Oil prices are sky high at $60 a barrel, which has a knock-on effect on most material costs

SIPPs

A surprise - and disappointment - for the construction industry was the decision not to allow residential property to be included in self-invested personal pensions (SIPPs). It was anticipated that from April 2006 residential property would be allowed in a SIPP for the first time. This was expected to lead to something of a property bonanza, boosting both the flagging buy-to-let and wider residential market. But fears over the use of the scheme to fund second homes and other possible abuses has scotched this potential boost to the industry at the last moment.

Materials

After 2004’s 7% increase in the cost of materials, last year the rate of increase fell to 2%. In 2004, the increase was dominated by steel at a time when the cost of structural steel sections rose as much as 60% and all steel-based components were affected by the worldwide demand. Last year brought a period of relative supply-demand stability and prices drifted downwards, but recovered only about 15% of the 2004 hike. In Europe, prices fell further and began to recover at the end of the year. In the UK, Corus tried to introduce a small price rise in October, but steel prices are not now expected to increase significantly before the summer.

For other materials, however, it is a different story. Oil prices have been more than $50 a barrel for much of the past year (and have risen to more than $60 since 2006 began). Gas and electricity costs are tied directly to the change in oil prices, and companies renegotiating their energy contracts have been faced with huge increases. This has had a significant impact on production and transport costs. The result is that even more materials suppliers than usual have tried to introduce price rises at the beginning of the year, nearly all citing increased fuel and haulage costs.

Many brick manufacturers, lumbered with an energy-intensive manufacturing process, but also suffering from a drop in sales, extended their Christmas shutdown periods. Designers have sought dry cladding and walling systems instead of brickwork as a means of sidestepping the shortage of bricklayers and manufacturers have also suffered from the trend away from two-storey housing to multistorey apartment blocks. Most introduced price rises in January of between 7 and 12%. Concrete block manufacturers have introduced price rises of a similar amount.

Cement prices rose last October and ready-mixed concrete suppliers, also faced with an 8% increase in aggregates costs, announced price increases from January, generally of about £6/m3. As a result, prices for precast concrete goods have also risen.

From the beginning of the year, contractors have also been faced with price rises for bitumen and asphalt products, reinforcing steel, plaster and plasterboard, insulation, clay and plastic drainage products and joinery. In a buoyant market, most of these price rises are likely to be passed on to the client.

Regional trends

The statistics may indicate a slight reduction in total construction workload last year but, generally, market conditions remain buoyant with high capacity utilisation. The following comments translate into almost every region.

Because of the volume of available work opportunities, contractors are able to be very selective about which projects they seriously pursue, leaving unattractive or high risk schemes on the shelf.

The popularity of two-stage tendering means there is a lack of keenness towards single stage competitive tendering, especially of design and build projects.

In particularly busy regions such as the North-west there are now a greater number of subcontractors declining to tender as a result of full order books; others choose to go ahead but are obviously too busy to submit genuinely competitive tenders.

With the carrot of improved margins, large subcontractors in particular are keen to work on negotiation only, keeping away from competitive tendering for as long as the market will allow, offering design services in return.

For the larger projects, major contractors’ best teams are already committed, increasing the risk of less than satisfactory performance. This sometimes provides an opportunity for regional level contractors, who may have more spare capacity, to bid for a greater range of projects. Senior staff on major schemes can command significant premiums.

In the same way as steel subcontractors in 2004, it is now concrete contractors who are nervous about supply prices and seek to caveat their quotations to avoid a repeat of the past.

Preliminaries costs are noticeably higher in both main contracts and subcontract packages. In negotiated contracts, contractors understandably seek to recover full management costs which reflect time spent in negotiations and carrying out value engineering. After a couple of years of declining premiums, insurance costs are rising once again.