Memorandum from the Royal Institute of
Chartered Surveyors (RICS) (WM 17)
RICS West Midlands is pleased to have this opportunity
to submit comments to the West Midlands Regional Select Committee
in response to their request for evidence.
EXECUTIVE SUMMARY
— The Gap Funding Scheme has been a very
positive action.
— The region has been slow to fully understand
the complexities of the impact of current economic conditions
on the property/construction sector in terms of identifying support
specifically for the sector despite its significance to the regional
economy.
— Action through the HCA "one conversation"
initiative and others has brought some positive outcomes for parts
of the sector.
— It is evident that the Task Force discussion
on the construction sector has kicked off more action as well
as better understanding of issues that will seep into regional
strategies and action plans.
— Support for the sector requires further
central government recognition of the complex issues as well as
regional action and those involved directly in the sector must
be included in discussions to find solutions.
1. Introduction
1.1 RICS is the largest organisation worldwide
for professionals in property, land, construction and related
environmental issues. In the West Midlands, the RICS represents
approximately 8,000 members who come from businesses of all
sizes, from sole practitioners to multinational corporations of
all types, whilst also being well represented within the public
sector in local authorities and many other public sector agencies.
1.2 Our members' skills and services are
diverse. Not only are they experts in all matters relating to
real estate and construction, but they can offer strategic advice
in a number of other areas. These include economic advice, valuation,
finance, investment and management of all the world's physical
assets from the construction of major public buildings to surveying
the sea bed, managing large property portfolios, auctioning antiques,
transportation issues, regeneration projects and sustainable development.
2. Impact of the financial and economic situation
on the property/construction sector
2.1 The property sector was effectively
the first to be hit by the "credit crunch" as mortgage
lending shrank. This filtered through to impact on house building,
with speculative build in particular coming to a standstill when
there were no apparent buyers available. As credit tightened even
more affecting business as well as private finance, construction
and property activity in all areas rapidly slowed even further,
with many projects stalling or being mothballed and large numbers
of jobs lost. The combination of a wide range of factors and the
diversity of the sector has in many ways made it a difficult one
to get to grips with in terms of impact, consequences and remedies.
Moreover, whilst job losses in the sector were headline news in
late November/early December 2008 they rapidly lost out to
the large scale closures in the retail sector such as Woolworths,
Zavvi and many others since.
2.2 Affordable housing has also been hit
with a severe drop in homes produced through Section 106 agreements,
as part of mixed tenure developments. This has also led to RSLs
acquiring unsold standing stock from house builders. The big danger
is that with greatly reduced starts on site for mixed tenure schemes
then the future output (over next three to five years) of affordable
housing will be hit.
2.3 Government policy itself has in some
aspects heightened the impact of the "credit crunch"
and recession of the property/construction sector. Empty property
rates, which came into force in April 2008 have impacted
significantly. In the current economic climate their raison
d'etre of ensuring property was not left empty is somewhat
hollow and with business failing or contracting the burden of
empty rates is falling on those who are already suffering with
reduced or no income from their properties. Budget relief measures
have not been substantial enough to counter the harm to the sector
which in regeneration areas includes the demolishing of building
that could otherwise be refurbished.
2.4 Since then there has been some concern
that the continuing difficulties within the construction/property
sectors are seen more in terms of bricks and mortar, ie how many
houses are not being built etc, and missing the human element
in terms of jobs and skills lost. Government housing targets being
missed have been overshadowing numbers joining the ranks of the
unemployed. As background, before the credit crunch, many skills
at all levels within the construction sector, from professional
to trade skills were in short supply in the UK and being supplemented
where possible from abroad. Quantity surveying and project managers
were amongst those making the MAC skills shortage list. Part of
this was for demographic reasons as a result of the previous recession
and despite the severe downturn, some of these shortages remain
whilst others may well be in abeyance for the moment but will
reappear as activity picks up.
2.5 According to ONS data analysing the
West Midlands regional economy 21.2% is in the real estate, renting
and business activities with a further 6.8% in construction, making
a total of 28% in the broader property sector. This indicates
the key importance of this sector to the region.
2.6 Latest statistics from a range of sources
also show that the West Midlands region has been one of the worst
hit regions in the country in terms of impact of the recession.
One of the reasons for this is the region's historical dependence
upon manufacturing and associated areas for employment (a further
17.2% of the regional economy). This then has an impact through
to other sectors.
2.7 The latest RICS Housing Survey published
on 15 April 2009 demonstrates how this impact is manifested.
Despite new buyer inquiries and the sales to stock ratio increasing,
the West Midlands is only one of two regions in the country where
expectations of participating surveyors that sales will improve
have decreased further and three monthly transactions per surveyor
also decreased. Generally, nationwide these two elements have
also shown increases giving rise to tentative hopes that the bottom
of the housing market trough is in sight.
2.8 In the latest RICS Construction Survey
in February 2009, the regional decline reflected national decline.
Workloads had slipped to a new low driven principally by weakness
in the private sector. New inquiries about starting projects continue
to slide particularly in the housing, commercial and industrial
sectors. Unfortunately, new inquiries in the infrastructure sector
have also been reported as sliding leading overall to expectations
on future workloads and profit margins being under heavy pressure.
2.9 In the downturn of the early 1990s,
construction output fell back by approximately 15%, peak to trough.
Given the severity and breadth of this downturn, recession preceded
and dominated by credit crunch, it would not be unreasonable to
expect a similar decline this time around. Indeed due to the increased
reliance, compared to then, of public sector build on private
sector contribution with PFI programmes for example, public sector
build, whilst of very significant importance, is not necessarily
as easy a route to build us through the recession as previously
thought.
3. Role of Advantage West Midlands and Business
Links in assisting businesses
3.1 Specific sectoral support for businesses
in the region has been focussed mainly around those in the manufacturing
and automotive sectors. However the £48m Gap Funding Scheme
is aimed specifically at the property sector and has been welcomed.
We need to ensure that these continue to be funded to sufficient
levels.
3.2 AWM and the Business Link have also
been working together with WMCCE (West Midlands Centre for Construction
Excellence) to ensure support specifically designed for the construction
sector.
3.3 In the last six to nine months the West
Midlands has seen the demise of several large construction firms
as a result of the economic climate. We understand that where
appropriate AWM and others have worked hard to see if these situations
can be avoided and jobs saved. Unfortunately situations are not
as black and white as often portrayed in the press and other factors
have contributed to the inevitable loss of jobs from such business
failures.
3.4 The reality is however, that we still
need to enable more lending to the sector to back up established
commitments and arrangements. The difficulty that we have is in
presenting solid evidence for this prior to collapse, due to commercial
sensitivities.
3.5 In the property/construction sector
however, the impact of difficulty of accessing finance is not
just confined to business finance because the property sector
is also very dependent upon private mortgage finance and capital
funding. Despite exceptionally low interest rates and additional
government schemes to help house buyers there is still a desperate
need for more mortgage lending. In the most recent RICS Housing
Survey (April 2009) the West Midlands is one of the worst areas
of the country in terms of housing transactions (see paragraph
2.5). The inextricable interdependence between private mortgage
lending and impact on construction firms and their need and ability
to obtain finance is therefore complex but crucial to moving forward.
3.6 Restrictions on capital funding and
the need to conserve cash, are deterring the private sector from
investing in "up-front" costs associated with future
development work which will contribute to the decline in starts
on site for new projects and exacerbate the layoffs of skilled
people within the wider industry.
4. The role of the West Midlands Task Force
4.1 We welcome the concept of a regional
task force in helping to identify urgent situations and find solutions
to deal with them. As a key member of the West Midlands Business
Council however we do share their disappointment that the wider
business community is not directly represented on the Task Force
and the reasoning behind such views.
4.2 Our experience of the Task Force so
far has been as part of the actions undertaken by the West Midlands
Business Council (WMBC). We helped raise the difficulties, complexities
and seriousness of the construction sector to suggest that action
on the construction sector be treated on a par with automotive
and manufacturing—the latter being perhaps more discrete
and easier to identify with. Subsequently we contributed to the
initial briefing paper requested of the WMBC by the Task Force
and then participated in a presentation and discussion at a Task
Force meeting to explore the issues and difficulties within the
construction sector.
4.3 We are pleased that the Task Force now
have a better understanding of the issues and some sense of urgency
about the need for actions quickly to help halt the loss of skills
from the sector's workforce. We look forward to the construction
action plan referred to by the Minister in a letter to the WMBC
following that meeting. We also look forward to a meeting with
the HCA that also came as a consequence of that Task Force meeting.
4.4 We also acknowledge and welcome the
specific inclusion in the West Midlands Housing Action Plan 2009-2011 launched
recently of increasing jobs and increased capital investment in
skills in the sector.
4.5 We hope also that issues raised with
the Task Force that are perhaps beyond regional control are taken
back by the Minister and other agencies as appropriate to feed
into national government thinking and action on these issues.
5. The role of other Government agencies such
as GOWM and of partnerships between and with Government Agencies,
local government and the private sector in providing support for
businesses
5.1 The work of all agencies whether alone
or in partnership is crucial to those in the property/construction
sector at this current time. For this to be fully effective however,
it does require substantial liaison with representatives from
all affected/involved parties and full understanding of the issues
to be resolved. It is difficult to make judgement on this however
unless we have been involved but our instinct would be that in
certain cases at least, fuller understanding and discussion/consultation
would be beneficial.
5.2 The setting up of the Joint Investment
Strategy Board is an excellent move to help join up activity,
spend and effectiveness for major infrastructure and regeneration
activities including housing, however there are some concerns
that a wider membership would address some of the points made
in paragraph 5.1.
5.3 As a member of the WMBC we endorse their
comments in respect of the LSC. However we also have some concerns
amongst members that whilst trade skills in the sector might be
addressed by measures such as Train2Gain, the professional skills
issues and shortages are missed and are not being picked up either
at national or regional levels.
5.4 WMBC also make a statement about RSLs
and encouragement of Jobcentre Plus to liaise and work with them.
The background to this is that RSLs are being encouraged to expand
their role in creating jobs and training within their development
and maintenance programmes. Difficulties arise however from the
slow down in affordable housing production that is resulting from
the additional financial pressures being placed on RSLs as a result
of the general financial climate.
5.5 The following are suggestions of where
more focus and support would help enable our sector to be one
of those helping lead us out of current difficulties:
5.5.1 The Homes and Community Agency (HCA) is
working with RSLs and Local Authorities to maintain development
activity for affordable housing by providing higher grant rates
but there is need for a new financial model and new partnerships
to deliver housing in a market that is so radically different
to what it was only 18 months ago. The RICS supports the
need for immediate action to help to "de-risk" the development
process and to encourage and enable RSLs to deliver "mixed
income" housing schemes at a time when "mixed tenure"
is too risky and financially unviable.
5.5.2 However, there is also more that needs
to be done both by the HCA and others to include more involvement
of private sector developers as well as RSLs. It is also clear
that much needs either action or facilitation by both national
and regional bodies.
5.5.3 More support to enable RSLs to develop
rented tenure homes within mixed income schemes rather than mixed
tenure—a model that relies on mainly rented or rent to purchase
tenures. The private sector is unwilling to undertake outright
sales at a time of falling values and mortgage restrictions, but
by working in partnerships with RSLs the mixed income solution
enables development to start with a view to "flexing"
the tenures as the market recovers and demand changes.
5.5.4 Closer working frameworks between the private
sector funders, developers/house builders, RSLs, local authorities,
government agencies and other stakeholders to seek to de-risk
development so as to get more building moving in the short term.
If these can rationalise and reduce time and costs of pre-development
they will also bring better cost effectiveness of both public
and private sector monies.
5.5.5 New models for the above partnerships based
on deferred land payments, risk and profit sharing and using public
sector land more imaginatively to ensure better development, sooner
and recognising that the "landscape" has irretrievably
changed for all sides for the short to medium term at least.
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