The Yorkshire skyline may be full of cranes at the moment, but is that necessarily good news for everyone involved in construction in Yorkshire? Jim Simpson finds out.
Looking at the horizon of any city or town in the region you would have to conclude that it is a case of “crisis, what crisis?” for the construction industry as tower cranes loom over every landscape.
For all the talk of credit crunch, meltdown in the financial sector and the collapse of the housing market there is still a lot of activity visible throughout the region and more is forecast to come.
“The market is still reasonably strong as a whole, though the industry does tend to lag behind the rest of the economy because it feeds off longer term order books,” says Derek Coe, a Leeds based partner in the property and construction division of PricewaterhouseCoopers.
“If there are problems for the sector then it will become evident in the second half of the year when order books begin to dry up. But a lot of the work is being driven by government spending, particularly in regeneration – and there’s no sign of that drying up.”
That is a point that is echoed by Paul Gouland, a director of Clugston Construction, a privately-owned Scunthorpe and Leeds-based contractor with an annual turnover of £100m.
“Commitment to health, education and waste reduction/recycling by the government, coupled with increasing demand for affordable housing – both public and private – and the impending 2012 Olympics will all be substantial public drivers of construction activity over the remainder of this decade,” he says.
For example, in autumn last year Housing and Planning Minister Yvette Cooper announced a major package of proposals to accelerate the building of affordable homes, particularly on brownfield sites, following the publication of the Housing Green Paper in July.
Figures from the Construction Skills Network show that the industry in Yorkshire and the Humber accounts for 8 per cent of UK total and its output will rise by 1.6 per cent per year up until 2012. This, in turn, will lead to jobs in construction rising to 231,960 by 2012 – which means it requires 6,620 new recruits each year to meet demand.
So there are strong grounds for thinking that the sector will continue to thrive, although perhaps not as much as it has done over the past six years when several sectors of the market – housebuilding, commercial development and public sector programmes – were all increasing.
A recent survey by the Leeds Business School of the Top 50 Yorkshire construction companies demonstrated the continued growth of the sector in the Yorkshire and Humber region.
Together, the top 50 companies enjoyed a growth in turnover of 16 per cent (the latest year aggregate turnover was more than £11.25bn), and an average pre-tax profits growth of 32 per cent. These figures represent a considerable increase on the 2006 figures, which showed a 5 per cent growth in turnover and 10 per cent growth in pre-tax profits on the previous year.
But the credit crunch must have some impact upon the industry as Gouland acknowledges. “Recent concerns over a slowdown in the economy and the ‘credit crunch’ is already knocking confidence,” he says.
Frank Kofler, a director at York House, a construction company with a turnover of more than £40m, is more pessimistic, saying: “Work will be thinly spread. Companies with a wide and varied client base and a healthy balance sheet will ride the storm. Those that don’t will have a difficult time.”
A similar note is sounded by Marie Ashall, Yorkshire regional director for the National Federation of Builders – which represents around 2,000 small and medium sized contractors across England and Wales.
“Few would disagree that 2008 is likely to bring a bumpier ride for parts of the economy. But whether or not we see two quarters of zero or negative growth (the technical definition of a recession), demand for most of the industry’s product is likely to remain relatively unaffected,” she says.
But Coe and Andrew Simpson, partner at the surveyor and consultant EC Harris, both see problems around housebuilding. “Long term the position is very strong because the economics suggest more houses have to be built but, in the short term, there could be an issue especially for those exposed to the apartment market in the city centres,” says Coe.
“A lot of funders are getting very twitchy about lending into the city living apartment type of product,” adds Simpson, “although the high demand for apartments in the Lumiere (the Leeds skyscraper that will become Europe’s tallest residential tower) shows that there is a market for the right product.”
The team behind the 54 storey Lumiere – developers KW Linfoot, Fraser Property Developments and international property design and branding company YOO – recently announced that more than 95 per cent of apartments released under the scheme’s first phase have been sold.
A more conventional housebuilder – York-based Persimmon – has already seen its market perform an abrupt about-turn but is guardedly optimistic. Group chairman John White says 2007 had been a “challenging” year, but adds: “When confidence returns and sentiment improves we anticipate a return to a stronger market.”
The Charles Church owner says the impact of the credit crunch on the housing market appeared to be ‘easing a little’ following rate cuts in December and February.
But, apart from worries about the economy, the main issue for the industry remains the shortage of skills at all levels and the difficulty of recruiting enough young people to meet demand.
As Ashall says: “A lot of government policy has been geared towards encouraging young people into university education, which has undoubtedly had an impact on the intake for traditional trades.”
Research published this year by ConstructionSkills, the Sector Skills Council for Construction, entitled 2007-2011 Construction Skills Network Labour Market Intelligence: Yorkshire and Humber, predicts that annual growth in construction in the Yorkshire and Humber region will be 1.9 per cent between now and 2011.
Employment in construction in Yorkshire and Humber is predicted to grow by 7.5 per cent per year between 2007 and 2011, with the strongest demand being for professional and technical staff. This makes the construction industry the industrial sector that is expected to create the most jobs over this period, outstripping the financial and business services sector.
ConstructionSkills predicts that the construction industry in the Yorkshire and Humber region will need 6,090 new recruits each year, and this is an issue the industry needs to address. ConstructionSkills encourages companies to take on apprentices, pointing out that the UK lags behind other EU countries in the proportion of school leavers enrolling on apprenticeships.
The Leitch Review of Skills for the Government has advocated that more public funding should be made available to increase the number of apprenticeships available across the whole economy. But, in the construction sector, many would-be apprentices struggle to find employers to take them on – last year in Yorkshire and Humber more than 500 were young people looking for apprenticeship places in construction.
And Ashall admits: “Around 30,000 people applied for apprenticeships last year yet only 8,500 were placed. The government has launched a new initiative to drive up this number, but the industry still has concerns due to the level of investment needed and the changing work cycles.”
The lack of skilled labour seems likely to be made far worse by preparations for the Olympic Games in 2012. According to a report by the Taxpayers’ Alliance (TPA), construction inflation is one of the biggest ‘hidden costs’ of the London Games, and it is set to rise by £3.9bn in total by 2012.
Construction and regeneration costs for the Olympic Delivery Authority now stand at £5.3bn. The huge demand for construction this represents will have knock-on effects in the wider construction industry, pushing up construction inflation each year until the Games have been held.
For new construction orders in this region, which are expected to reach well in excess of £10bn by 2012, this will mean substantially higher prices for buyers. The TPA calculates the Olympics could see a £1.5bn increase in the cost of private commercial buildings, new office and retail space and a £921m increase in the cost of building private housing.
At the moment the consensus is that the region has yet to feel any impact from the Games. As Steve Ellmore, managing director of Leeds-based Ellmore Construction, says: “There’s no evidence of resources being drawn away from the region yet but, when the main construction phase is underway, I am sure workers will be attracted by the potential earnings they can make.”
A bigger worry is rising material costs as a recent survey from EC Harris shows – materials prices are 9 per cent higher than in November 2006. It says that the main driver was the price of steel with reinforcement up 10 per cent and structural steel prices 11 per cent higher than a year ago.
Copper and aluminium prices are also on the increase thanks to increased demand from the Far East.
Changing methods of public sector procurement are also a worry to all but the largest contractors. In recent years Government has insisted on local authorities and other procurement bodies ‘batching’ major public sector programmes. This was supposed to provide both value for money and create continuity of work for contractors, so that, in turn, they would plan long term investment in training.
But Gouland says: “Such is the size and complexity of these ‘opportunities’ that they generally benefit the bigger national and international contractors, at the expense of the local medium sized businesses who find that the bidding costs or the option of operating in the supply chain isn’t always one they are comfortable with.”
“It is therefore important that local government plays its part in ensuring local contractors are able to participate cost effectively in these procurement routes,” he says.