The property market is riding high with cranes scattered across our city skylines but with the London investment market becoming saturated the focus is turning to the regions (cue the excitement) to create industry hubs across the nation – regional hubs so to speak. This investment is helping all around – the money is more speculative on areas such as retail development, for example Thorpe Park in Leeds. High levels of investment in commercial property, both from national developers and overseas investors, are resulting in increased asset management initiatives across the country. Occupier demand is such that clients are increasingly fast-tracking contract work.
This creates a challenge and it is pretty clear that the construction industry is under pressure and there is a need for the management of risk to ensure delivery on projects is prompt. The market is expecting construction inflation of around 6-7% over the next year or so driven by an under supply to the industry – this will self-correct over time as new entrants join the market. It goes back to a point a few weeks ago about the number of projects being delayed or cancelled ultimately due to costs – it needs to be expected by customers that the construction industry is still recovering and prices need to reflect the modern world not the world of four years ago. A key part of the process is subcontractor labour which is currently in short supply.
As a customer what can you do? Well think about the overall picture and relationship you have with the constructor – is the relationship strong as it may take some strain now. If you work with them on a number of projects think about this also in the context of price and delivery. Contracts that are subject to a fixed price now may come under pressure, which could lead to disputes, claims or risks to clients. The value of strong relationships with the supply chain should not be underestimated. Bulk buying and repeat instructions can be techniques to maintain relationships.
Think about the delivery of a program based on this – everything is under pressure, whether the bricks, steel and glass through to the utility providers struggling under the pressure. Obtaining quote, delivery and installation across this will need factoring in to any work program.
A number of people have asked me this week why PRS isn’t working outside London as well as inside. I don’t think it’s a question of where the PRS is, though being in London will undoubtedly help, but the skill set of the owner. Being a PRS landlord differs from commercial property or development to sell. You have more customers, more rents to collect and more people to demand on your services. You require or outsource a different skill set than you currently have and with it comes cost – simply eats away at the margin. The market will continue to grow I’m sure as people will fine tune models that work but it will come down to keen pricing and the availability of projects.
One million homes in five years is an ambitious
target - England hasn’t regularly built that many homes so quickly since the
immediate post-war years. In 2014 there was around 120,000 homes built and
there are plenty of planning approvals out there and continually being
delivered but how can an industry that is continually capacity light from a
resource perspective deliver. The workforce of the construction industry is
ageing. There is continued investment allowing for the next generation to come
through but this does not cover the outgoing workers. The apprenticeship
schemes in place will support the industry in the future but fail to meet
current demand.
So what could be done? Firstly the government need
to change a number of policies to deliver more housebuilding. This could
include reforming the planning system – not because it is failing but more to
make the process quicker to reach decisions. By allowing developers a pipeline
allows for options to deliver more houses. It was welcome in July that
Brownfield Housing Zones was announced but more needed. There must be more
public sector land that could be released for develop or combining, for example
residential developments on top of hospitals. One million figure is
unrealistic. To get more homes built, the government and housebuilders need to
work better together.
So the message of today is London and everywhere
else are different. The London market has reached a point where investors are
looking elsewhere and this is creating its challenges but also exciting times
ahead. The PRS market which is starting to dip into the regions needs careful
consideration to ensure that the delivery is beneficial to all parties.
Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to
property and construction.
Enjoy
the weekend
Lee
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