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Small builders resilient despite material price hikes

The workloads of small and medium-sized (SME) construction firms grew slightly in the first three months of this year despite record numbers of builders reporting rising material prices, according to the Federation of Master Builders (FMB).

Key results from the FMB’s latest State of Trade Survey, which is the only quarterly assessment of the UK-wide SME construction sector, include:

  • Construction SME workloads remained positive in Q1 2018 but grew at a slower rate than in Q4 2017
  • The construction SME sector has now enjoyed five years of consecutive growth
  • More construction SMEs predict rising workloads in the coming three months, up from 38% in the previous quarter to 49% in Q1 2018
  • 90% of builders reported increasing material prices in Q1 2018, this is the highest reading on record
  • More than half (58%) of construction SMEs are struggling to hire bricklayers and 55% are struggling to hire carpenters and joiners
  • Two-thirds (66%) of construction SMEs expect salaries and wages to increase during the next six months, up from 62% in the previous quarter

Brian Berry, Chief Executive of the FMB, said “Workloads for builders continued to grow in the first quarter of 2018 despite the ‘Beast from the East’ wreaking havoc across the UK’s construction sites. However, once again, the growth we are seeing is slower than in the previous three months and this can be partly attributed to pressure from rising costs. Indeed, 90% of builders reported increasing material prices in the first three months of 2018 and this is the highest reading on record. Insulation, bricks and timber are the materials that have increased the most and builders are predicting that these price increases will continue. We are also seeing increased salaries for tradespeople stemming from the acute skills crisis and that, coupled with material price hikes, are squeezing margins and stifling growth for construction firms of all sizes.”

“In terms of house building, these latest results should sound some alarm bells with the workloads of SME house builders dropping off in the first quarter of this year. In 2017/18, 197,000 homes were started in England but this is some way off the Government’s target to build 300,000 homes per year. The FMB has worked closely with the Government to identify how to remove barriers to small local house builders, but these latest results act as a reminder that there is more to be done. The FMB would now like to see the continued and speedy implementation of some positive Government policies designed to bring forward more small sites, properly resource planning departments and increase the flow of finance to SME house builders. If we are to reach our ambitious house building targets, we cannot rely solely on the largest house builders.”

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Cross-party MPs call on Government to support small builders

A cross-party group of MPs has urged the Government to introduce a new ‘Dedicated Strategy for Small Housebuilders’ to reverse the decline in the number of new homes built by small builders, which has plummeted to just 2,500 today from 12,000 in 1998.

Describing the new proposals, the MPs leading the report said ‘We have many legitimate disagreements with each other on many aspects of housing policy, but on this we are agreed: we cannot solve the housing shortage without smaller builders.’

‘An Inquiry into Support for Small Housebuilders’, supported by the Federation of Small Businesses (FSB), calls for a ‘Dedicated Strategy for Small Housebuilders’ which must address the key challenges holding housebuilders back, including:

  1. Limited access to finance: MPs are calling for a Government backed guarantee on loans to small housebuilders, who are more reliant on financing than bigger builders with large reserves of cash.
  2. Action against businesses that pay their suppliers late: The report asks for a strengthened prompt payment code with a new “three strikes and you’re out” rule targeting big businesses who repeatedly pay late.
  3. More help to increase apprenticeships in the building trade: Large businesses paying the new apprentice levy must prioritise transferring their levy to small, rather than large, businesses, helping to increase apprenticeship opportunities in the building trade.
  4. Remove barriers to building on small sites: Government must use the revised NPPF to streamline the planning process for smaller firms.

Robert Courts MP, Chair of the APPG, said “Government action has started to address some of the needs of small builders but we must leave no stone unturned to truly unlock the housing market.

“A new, dedicated strategy for small housebuilders would be an important step in achieving this. This needs to centre on a positive package of measures that removes some the biggest barriers for small builders including the inability to access finance and reducing the cost of developer contributions like the Community Infrastructure Levy.”

Catherine West MP, Vice Chair of the Inquiry, said “The current state of the UK housing market leaves no doubt that there is huge potential for small builders to make a vital contribution to building the homes we need.

“Our report sets out a series of proposals that will enable small builders to scale up, grow and build more which will help relieve the housing shortage.

“The simple truth is that the UK cannot expect to build the homes we so desperately need unless smaller builders are backed. Giving small builders the keys they need could result in tens of thousands of urgently needed homes being built up and down the UK.

“This will help create jobs, stimulate economic growth and provide the homes the UK need.”

FSB acts as the secretariat for the APPG and supported them on the inquiry.

Mike Cherry, National Chairman at the Federation of Small Businesses (FSB), said “Small housebuilders will welcome the cross-party effort to shine a light on the very real challenges that are holding them back from playing their part in building the homes the UK needs.

“It is vital that the Government does not turn a blind eye to the findings of this report and commits to creating a dedicated strategy aimed at giving small homebuilders the finance, skills and support they need to help fix the broken housing market.”

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Soaring material prices hampering small building firms

A third of small building firms say that soaring material prices are squeezing their margins and almost a quarter have had to pass these price increases onto consumers, according research by the Federation of Master Builders (FMB).

Construction SMEs have reported a range of material price increases since the depreciation of sterling following the EU referendum in June 2016. Small building firms were asked which materials have increased the most and the results were as follows:

  • Timber
  • Insulation
  • Bricks
  • Blocks
  • Windows
  • Plasterboard / Slate (joint sixth)
  • Boilers and radiators
  • Porcelain products

The impact of these material price increases includes:

  • 85% of builders think material price rises could drive consumers to hire rogue traders in an effort to save money on their building projects
  • One third of construction SMEs (32%) have had their margins squeezed
  • Almost one quarter (22%) have been forced to pass material price increases onto their clients, making projects more expensive for consumers
  • More than one-in-ten builders report making losses on their building projects due to material price increases

Brian Berry, Chief Executive of the FMB, said “Material price increases have left builders under severe pressure. This research shows that following the fall in the exchange rate, timber is the material that the majority of builders say has increased most in price but the problem doesn’t end there – everything from insulation to windows to bricks and blocks are soaring in price. A third of builders report that these price increases are eating into their already razor-thin margins – and this on top of increased wages and salaries stemming from long-term construction skills shortages. Furthermore, one-in-ten builders say that they’ve actually made losses on projects due to material price increases – this is most likely to happen when a particular product or material jumps up in price mid-project when then builder has already quoted for the work. Perhaps unwisely, some builders are absorbing these extra costs as opposed to re-quoting for the project.”

“Material price spikes aren’t just a problem for builders – they’re also a problem for the home owner, with almost one quarter of builders saying that they have had to pass on price increases to their clients. This means that building projects now cost significantly more than they did this time last year. What with stagnant wages and price inflation across the economy, consumers are feeling the pinch and it might be that they decide not to commission that loft conversion or extension after all. Or worse still, 85% of builders believe that home owners will be tempted to hire rogue traders who are quoting a lower price than a professional building firm such as those that belong to the FMB. If that’s the case, material price rises could lead to a flurry of botched jobs and distressed consumers. We’re calling on home owners to hold their nerve – they’re better off commissioning a more modest project from a professional builder than a high spec project from a cowboy. Don’t take the risk.”

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Chancellor must improve access to finance for small builders

The Chancellor must take bold action in the forthcoming Budget to improve access to finance for SME builders if he wants to tackle the housing crisis, according to the Federation of Master Builders (FMB).

Brian Berry, Chief Executive of the FMB said “If the Government wants to solve the housing crisis, it must address the access to finance issue that local housebuilders continue to face. The Chancellor needs to commit to underwriting loans from banks to small house builders to get finance flowing into our sector once more. Nearly a decade after the financial crisis, difficulty in accessing finance remains a major barrier to small house builders increasing their delivery of new homes. Indeed, the FMB’s 2017 House Builders’ Survey showed little signs of improvement in this picture and if anything suggested slight deterioration in lending conditions. Assessments of lending conditions to SME developers were down slightly from 2016, the first fall in this measure since 2013. These difficulties make it much harder for existing SME house builders to flourish and grow and deter new firms from entering the market. This has resulted in a less dynamic house building sector that is less able to expand to build the homes we need.”

“If local housebuilders are to build Britain out of the housing crisis, the Chancellor must use the Budget to pull as many levers as possible in order to enable more finance to reach SMEs. One thing the Government can do is act to reduce the capital costs of lending to this sector for smaller specialist lenders. The initiative announced last week by the British Business Bank to extend its ENABLE Guarantee to house building by striking a deal with United Trust Bank is welcome. This type of Government action, because it pushes down the capital costs of lending to SME builders, will allow lenders to do much more of this. The Chancellor needs to back this initiative, encourage its expansion and explore all other options to reduce the risk and costs to banks of lending into this sector. If the Government wants to meet the ambitious housing targets it has set itself, it will need to ensure the long-constrained SME housing sector can once again access the finance it needs to meet the challenge of tackling Britain’s housing crisis.”

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£5bn Government injection to help small builders

At the Conservative Party conference in Birmingham this week, Communities Secretary Sajid Javid and Chancellor Philip Hammond revealed that the government are planning to make new money available for builders in the UK.

This will consist of a £2bn Accelerated Construction scheme to make publicly-owned brownfield land available for quick development and the already announced £3bn Home Builders Fund, which seeks to help fund the development of 25,500 homes by 2020.

How it will work

The intention of the new funding is to provide short-term loans for small builders, which will be borrowed from the public sector. This will help them build quicker as public land will be made available with outline planning permission already available to them and money will enable them to undertake any required remediation work on the brownfield sites prior to construction starting.

The ministers are also urge builders to use modular technologies to meet housing demand, as it will shorten the delivery time.

Redevelopment

At the conference the ministers also confirmed that they are also pushing ahead with allowing office blocks to be repurposed or replaced entirely with residential developments. This alone has the potential to create 4,000 homes by the start of 2022.

Chancellor Philip Hammond commented: “There has been a housing shortage in this country for decades, and this Government is determined to take action to tackle it. “We’ll use all the tools at our disposal to accelerate housebuilding and ensure that, over time, housing becomes more affordable. That is why we are committing £2 billion of additional investment towards this.”

Sajid Javid concluded: “Tackling the housing shortfall isn’t about political expediency. It’s a moral duty. And it’s one that falls on all of us. Not just in Parliament, but in business, in local government and in our communities. So my message today is clear: it’s time to get building.”

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