Builders finding extra strength in mergers

Apr 23 2008 by Chris Knox, The Journal

As the credit crunch worsens and house prices fall the construction sector looks likely to take a big hit. But Christopher Knox finds the North East’s builders surprisingly bullish.

THERE has been a fair amount of doom and gloom in the national business pages of late. The combination of the increased cost of lending, higher fuel duties and increased taxation are blighting businesses across the UK.

A downturn in consumer sentiment means that the general public is far less likely to splash the cash than it was a year ago and has made moving house a much less viable option.

This has had an almost immediate impact on the country’s house builders, which have been used to selling plots of land to their customers but are now finding it hard to shift properties long after they have been built.

One victim is Newcastle-based housebuilder Bellway, which believes a recovery in the sector could take as long as late next year to kick in.

In February the firm recorded a 3.9% drop in its interim pre-tax profits to £96.9m. Finance director Alistair Leitch said that it was the quickest slowdown he had seen in the housing sector, and that it was far more violent than the housing crisis of the early 1990s.

Other local house builders are now cautious about the rate at which they can grow in the current market, with shares in both Newcastle-based Barratt Homes and York-based Persimmon Homes experiencing daily volatility as more and more banks withdraw their competitive mortgage rates.

Gerry Choat, deputy managing director at Persimmon Homes North East, said: “It is a pretty nervy time for most house builders at the moment and there is an element of perfectly good new builds being left vacant where once they would have been snapped up immediately, allowing the builder the cash to invest in the next development. However, I am confident that things will begin to resolve themselves by the autumn.”

As a measure of the region’s troubled industry, a recent report by research company Construction Skills Network (CSN) concluded that the North East should see combined growth of only 1.1% over the next four years, lagging behind a still fairly strained UK average of 1.7%.

And it’s not just house builders that are baring the brunt. Firms involved in refurbishment projects and corporate contracts are also well aware of the current state of play in the sector and are having to diversify their business models as they attempt to keep out of the firing line.

Firms such as Newcastle-based Surgo Construction have expanded their operations over recent years to take on work ranging from the development of wetland areas for local wildlife to the £1.2m refurbishment of St Mary’s Church in Gateshead.

Jeff Alexander, director at Surgo, said: “The big housing companies are having a rough time of it at the moment, however, we are confident of avoiding much of the fallout from the credit crunch through the variation of our projects. I would say to any local firm trying to compete with the nationals, that to have all their eggs in one basket is commercial suicide.”

It is the looming presence of national contractors that represents another threat to the North East firms trying to fight through the current trading conditions.

With the government looking to cut down its own costs during the economic downturn, contractors in the region are fearful that they may find it difficult to compete with national firms who are often more attractive to the public sector due to larger economies of scale.

Richard Brown, financial director at Newcastle-based Dorin Construction, said: “As regional contractors we have to be aware of what the nationals are doing. Although Dorin is currently working on a number of public sector contracts, we may very well find them harder to procure in future if the government believes it can save money by approaching the national companies.

“Some of these companies just come to the region, do the job, and do nothing to increase skills and workforce in the area. Further drives towards central purchasing will only harm local contractors and put smaller firms off from fighting for new public sector contracts.”

This is crystal clear to Jeff Alexander, whose firm has significant exposure to the public sector through its many education projects such as the ongoing £17.3m extension of Bishop Auckland College.

He said: “Of course we are aware we might not be able to win these contracts as easily over the second half of the year if the Government decides to work closer with national firms. However, we have built up a strong reputation in the North East and believe we can attract enough work to sustain our growth.”

Despite such concerns, Chancellor Alistair Darling’s pledge in the Budget that 30% of all public sector business will go to SMEs was well received by the North East’s construction sector. A further interest rate cut earlier this month also provided a little extra breathing space for the industry.

However, many believe this was undone by the public outcry surrounding Gordon Brown’s decision to scrap the 10p tax band. Some fear that even tighter purse strings could mean less refurbishment contracts , especially from those businesses located on the high-street.

Tom Bill, business editor at Building magazine, said: “I don’t think the credit crunch has taken hold in the construction market quite yet. However, there is definitely a feeling of anxiety that the current market could dry up by the end of the year, especially within the commercial sector, which has been the staple for many firms for some time.”

As a result there is increasing consolidation in the industry. As companies find it difficult to cope in the tougher environment they are agreeing to acquisitions or merging with other firms in a bid to increase their market share and ensure a continued stream of orders.

There have been a number of buy-outs in recent months, including the purchase of Newcastle-based Graydon Dawson by Cramlington demolition specialists Owen Pugh and the purchase of Blyth-based David Wilkinson Building Contractors by the Esh Group, based in Bowburn, County Durham.

Mr Bill said: “The first three months of 2009 are going to be really telling as we will see who has survived intact. We are expecting an increase in merger activity for the rest of the year as firms become increasingly worried about their futures.”

Another problem which has reared its head over the last two years is the rising cost of building materials. Last year saw the price of materials grow by around 8%, compared to 3% during the previous six years, due to a combination of rising energy pricers and stricter government legislation over environmentally friendly sources.

Although experts predict that this inflation will calm to around 5% this year, there are still concerns surrounding the booming oil price, which recently hit a record high of $115 a barrel.

Steve Robinson, managing director at Newcastle-based builders merchant JT Dove, said: “One area that has rocketed in price over recent years is cement manufacture, which has obviously had an effect on the building sector.

“However, there are certain materials that are coming down in price, such as timber. With the US housing market in such disarray, Canadian firms are now shipping their wood overseas at a discounted price.

“Although higher overall prices are part of the overall picture, I don’t think that they would singularly prevent a developer going ahead with a project.”

With the Council of Mortgage Lenders still predicting borrowing to fall for the rest of the year, despite a rise of 5% in February, it looks like the issues facing the construction sector are not going to go away soon.

Despite reassurances by the government over the strong fundamentals of the economy, the collapse of a number of firms this year, including Sunderland housebuilder Wilcomm, has prolonged jitters within the North East.

However, a host of the region’s firms are determined to make the most of it and remain upbeat.

Mitchell Smith, regional director at builder Rok in the North East, said: “There are big concerns at the moment and I can’t see these concerns disappearing in the near future. However, the environment in the North East is very diverse and robust. Rok is certainly positive at the moment”.

HOUSE BUILDER WOES

Taylor Wimpey 2007 results

Group sales down 12% to £5.9bn

Completions down 11% to 27,642.

£19.5m loss for 2007 compared to £405.5m pre-tax profit in 2006.

Bellway:

Half year results to January 31 2008

Profit before tax down 3.9% to £96.9m

3,252 houses sold compared to 3,264 last year

Turnover up just 1% to £581.5