UK construction sector braced for pain

By Gill Plimmer

When the architects Kohn Pedersen Fox designed a corkscrew-like skyscraper that would be the tallest in the City of London, the market for eye-popping offices was booming and the British economy seemingly unassailable.

Now, however, the economy is stumbling and despite the 60ft deep concrete foundations and numerous blue cranes still on site, the 64-storey Pinnacle tower is on hold for the second time since it received the go-ahead in 2007 as developers struggle to raise both tenants and cash.

Many builders are braced for the worst.
Balfour Beatty, the UK’s biggest building company by sales, may have been the most open, putting thousands of staff on notice and warning of “difficult headwinds”. But from grim talk of “restructuring” at the FTSE250-listed Carillion to Bam Construct’s mention of “suicide” bids by rivals, pessimistic warnings about the year ahead have become the rule, not the exception.

The Construction Products Association, which represents more than 80 per cent of the building materials industry, has estimated that there will be no recovery until at least 2014 as government spending cuts combined with a poor commercial sector outside London put new-build projects and refurbishments on hold. Rival forecasts, for example from Hewes & Associates, find even those predictions optimistic.

Analysts say that while smaller regional contractors have been struggling since the fall of Lehman Brothers – with some such as Rok and Connaught going bust – the bigger contractors are now feeling the pain as the eurozone crisis dampens private sector confidence and long-running government infrastructure projects such as the Olympic Games and Thameslink near completion.

“Everyone has been hit hard, from your small one-man band to your big publicly listed company,” says Gary Lee, partner at Begbies Traynor, the insolvency specialist. “There’s just not enough work to go round.”

The larger, international players are likely to survive by pushing into new markets or facilities management and pressing for a larger slice of smaller contracts. Others, including the Australian Lend Lease, are foreign-owned and may simply divert attention from the UK.

But as the bigger players fight for smaller deals, the middle-sized firms are being squeezed, and it is here that the list of corporate casualties, such as the 152-year old Killby & Gayford, is starting to grow.

According to Begbies Traynor, the number of building companies in distress has more than doubled from 10,053 in the past three months of 2011 to 20,532 in the first quarter of this year. “Companies are putting in low-ball bids to win work then finding that it’s taking longer to complete and that’s when the distress sets in,” says Mr Lee.

Some of the mid-ranking players are likely to be taken over in a fresh wave of consolidation. The French contractor Bouygues has recently bought both Leadbitter Group in Oxford as well as Thomas Vale in the Midlands – both with turnovers of between £200m and £400m a year. Two social housing contractors – Keepmoat and Apollo Group – have also joined forces.

But Jonathan Hook, a partner at PwC, says there will also be more casualties. “If you are getting work you can mask a problem for a while because you can win a job at the wrong prices. The trouble is that is just storing up the problem for the next year – and that is when the real crisis begins.”

Some sectors are faring better than others. Just as the south of the UK is faring better than the north, those businesses that are focused on large-scale infrastructure such as rail and energy are faring marginally better than those in schools, hospitals and social housing, where the government’s spending cuts are expected to lead to a near 20 per cent fall between 2011 and 2014, according to CPA figures. Retail is also growing – driven primarily by the supermarkets and the expansion of coffee shop and sandwich bar chains, such as Costa Coffee and Pret A Manger.

But for every upbeat growth story, there is a sector where the number of new projects is falling. New factory buildings fell 14 per cent in 2011 to levels 45 per cent lower than five years earlier. Warehouse construction also fell 7 per cent in the year.

Although orders for new offices rose slightly last year they were still at just 30 per cent of the 2007 peak and agents report that market activity has been depressed in the first quarter of this year.

“There’s still nuggets of work out there,” said one builder who declined to be named. “The trouble is that no one knows quite where the bottom is and given the eurozone and the economy, it just feels like there’s more angst to come.”