Written evidence from the Federation of
Master Builders
INTRODUCTION
We are writing in response to the House of Commons
Business, Innovation and Skills Committee announcement and call
for evidence of 21st July 2010 on the launch of its second inquiry
of the new Parliament, Government Assistance to Industry. The
Federation of Master Builders (FMB) is the largest employers'
body for small and medium sized firms in the construction industry,
and with 11,000 members is the recognised voice of small and medium
sized builders. FMB is committed to promoting excellent standards
in craftsmanship and assisting builders to improve levels of building
performance and customer service. Within its membership, the FMB
has around 4180 firms which engage in house building, either as
their primary function, or as part for the suite of building services
they provide.
The remainder of this submission is divided
into sections as follows;
— Executive Summary and Recommendations.
— Construction and the Recession.
— Survey Responses: Changes in Access to
Credit and their Impact on Construction SMEs.
— The Effectiveness of Government Policy
in Assisting Businesses During the Credit Crisis.
EXECUTIVE SUMMARY
AND RECOMMENDATIONS
1. As the UK construction industry contributes
8.5% of UK GDP and every £1 spent on construction results
in £2.84 of additional economic output, construction is essential
to the recovery of the UK economy.
2. A formal survey of FMB members suggests that
credit has become more difficult to access and more expensive,
resulting in reduced activity by firms, restrictions on clients'
ability to commission work, and reduced levels of employment of
full time workers and apprentices.
3. An informal survey of FMB members suggests
that banks are increasing the costs of lending in a variety of
ways in addition to refusing access to credit as the construction
sector is seen as too much of a risk.
4. The informal survey results reinforce the
consensus view that lack of available mortgage finance is the
single most important factor constraining house building.
5. We call on the Government to take immediate
action to end the bank policy of penalising businesses operating
in construction on the basis of the sector they operate in, through
denial of credit facilities or excessive increases in its cost.
6. We call on the Government to take immediate
action to address the gap between latent demand for housing and
access to the finance required to stimulate its production.
CONSTRUCTION AND
THE RECESSION
7. The UK construction industry contributes
8.5% of UK GDP directly, around £124 Billion per annum, and
this rises to 10% when the overall value chain is taken into account.
8. When value chain jobs such as construction
products and the professional services such as architects and
engineers are added to those directly classified as construction,
the industry employs around three million peopled in a multitude
of roles representing 8% of UK employment.
9. Construction is a SME dominated industry
with 99% of firms employing fewer than 60 people and 93% fewer
than 14.
10. Every £1 spent on construction output
generates a total of £2.84 in total economic activity, and
provides financial returns to the treasury in tax income and benefit
savings of around £0.56. As such it is the most effective
focus for government investment. Investment in construction has
three other key advantages:
i. The industry's low import requirements mean
that a very high proportion of any investment remains in the UK
economy;
ii. It is labour intensive creating jobs for
all skill levels but especially those lower skilled workers who
are most vulnerable in times of recession;
iii. Construction is not only immediate economic
production. It is also investment rather than consumption, and
as such provides significant long term economic and social benefits
to the country by adding to its capital stock.
11. According to the data from the Office for
National Statistics, there were 159,000 jobs lost in the construction
industry between Q3 2008 and Q2 2010: A number roughly equal to
the regular personnel of the British Army and the RAF combined,
and comparable with the population of Oxford.
12. The latest FMB survey showed that construction
workloads continued to decline in the third quarter of the year,
an 11th consecutive quarterly fall.
SURVEY RESPONSES:
CHANGES IN
ACCESS TO
CREDIT AND
THEIR IMPACT
ON CONSTRUCTION
SMES
13. In September 2010, the FMB conducted two
surveys of its membership on their experiences with banks, the
impact of changes in policy, and their awareness and use of government
assistance programmes. The first was a formal independent survey
conducted for the FMB by Experian as an additional question set
in the quarterly State of Trade Survey that it runs on the FMB's
behalf. This received 374 responses from a sample size of 2000
construction SMEs and is statistically robust. As such its results
can reasonably be assumed as representative of construction SMEs'
experiences in the wider industry.
14. The second was an informal on-line survey
of FMB members looking for answers to more specific questions,
and for case studies of experiences. This received 255 responses
from 7922 members invited to participate. The survey is statistically
robust and included 94 written comments.
FORMAL SURVEY
Access
15. Access to credit facilities has become more
difficult for many construction SMEs: When asked "in the
past 2 years has your firm found it harder to access credit facilities"
more than a quarter of respondents, 36%, said yes. If this is
reflected across the industry, credit may have become more difficult
to access for around 70,000 private SME contractors.
Cost
16. Access to credit facilities has become more
expensive for nearly half of construction SMEs responding: When
asked "in the past 2 years has your firm found it more expensive
to access credit facilities" nearly half of respondents,
48.4%, said yes.
Impact
17. Restricted access to finance has resulted
in lower activity in over a quarter of firms responding. If this
figure of 27.2% of firms were reflected in the wider construction
industry, this would suggest that credit issues had resulted in
lower activity levels for nearly 53,000 private contractors.
18. Restriction of access to credit is also
hampering the commissioning of work by clients, with over 61%
of firms responding saying that it had reduced their clients'
commissioning of projects.
19. Credit issues are also having an impact
on employment practices of FMB members. Over 15% of respondents
said that the firm's access to credit had resulted in their having
to decrease overall employment, and nearly 25% said that the same
issue had caused them to decrease their employment of apprentices.
This suggests that credit issues not only have implications for
employment, but also for training and skills in the industry as
if the survey trend is reflected in the wider FMB membership then
around 2700 firms may have reduced the number of apprenticeship
places that they provide, and that many more places may have been
lost.
INFORMAL SURVEY
Access
20. Members were given a number of options for
how their access to credit had changed since the beginning of
the credit crisis, and asked to select all options that applied.
21. 36% of respondents experienced no problems
with credit as their business either did not require credit facilities,
or because the bank had not changed its lending policy towards
them.
22. The remaining 64% who had experienced problems
selected 2.6 options each on average, indicating that firms were
experiencing multiple adverse changes to their access to credit.
23. The overall picture implied by those indicating
that they had experience problems was that, while banks were not
commonly removing all access to credit, they were increasing its
cost in a variety of ways for both new and existing services,
and frequently turning down requests for new credit facilities
as well. Refusal of new credit facilities was the single most
commonly selected option, and over half of all selections related
to increased costs for existing or new credit facilities and loans.
Cost
24. Members produced numerous examples of how
costs for them were increased. One member stated "Interest
rates have increased for a development loan from 1.75% over BOE
to 4.5% over BOE rate. Facility will only be extended for 6 months
at a time and a fee of at least £7,500 has been charged at
each renewal!!!" Another stated "we have two loans which
we took out at an agreed rate of 2% over base. When these came
up for renewal the rate was increased to 4.1% over base, on renewal
again this year this has been increased to 4.65% over base. We
have never defaulted on any monies borrowed during our 25+ years
of trading."
Lending policy
25. Responses and comments seem to support the
proposition that banks consider construction to be risky and that
policy decisions have been taken to reduce their exposure to the
sector on principle, rather than on a case by case basis. When
asked if they had been refused credit by a bank which had previously
considered the firm creditworthy explicitly because of the sector
the business operates in, 38.6% of respondents indicated that
this was the case.
26. This is supported by a considerable number
of comments to the effect that banks consider the sector to be
risky and wish to limit their exposure to it. One member stated
"Banks have specifically said to us that they will not entertain
any business plan that involves property. Our overdraft has been
reduced by over 90%. We have been notified of overdraft termination
in December this year." Another said "I asked my bank
manager "if I had a project worth £1million and had
£900k would he loan me the £100k" the answer was
no as the HSBC have a no loan to developers policy." The
policy does not seem to be restricted to HSBC. One respondent
stated "We have been quoted from the Manager of RBS that
they have a policy of not funding any new development and they
are trying to reduce their exposure from 2.5 Billion to 1.0 Billion
in the next 18 months."
27. This policy also seems to make no exceptions
for long standing customers. A member stated "we have been
trading with the same bank since 1924. They take no account of
our previous trading records. Because we are in house building
we are deemed a risk."
28. Not all comments on bank policy have been
negative with several members writing in stating that they have
a good relationship with their bank, and that the bank/manager
had been both helpful and supportive.
Impact
29. Responses suggest that limiting firms' ability
to raise funds is hampering a significant number of construction
SMEs. When asked "Has the business lost business opportunities
or had to abandon plans for growth or investment because it was
unable to raise the necessary funds from the banks", nearly
57% said yes. If this were to be reflected across all private
SME contractors in the industry, this would suggest that around
97,000 firms in the construction industry were feeling the effects.
30. Withdrawal of funding for existing projects
seems to be an issue for a considerable number of firms. When
asked "Has the business lost business because a bank has
withdrawn funding from a client for a project which is already
underway?" nearly a quarter said yes.
31. Refusal of funding to clients seems to be
suppressing demand for work which would otherwise go ahead. When
asked "Has the business lost business because a bank has
refused funding to a client for a project which they would have
otherwise commissioned?" 46% said yes.
32. Access to credit is particularly important
for firms who are experiencing problems with late paying customers,
and anecdotal evidence suggests that refusal has resulted in firms
going out of business. Over 55% of firms responding to the survey
said that the length of time that their business typically had
to wait for payment had increase since the beginning of the down
turn, and a further 30% said that they were aware of firms in
their area which had requested a bridging loan as a result of
a defaulting customer, been denied, and been wound up as a result.
Small firms are particularly vulnerable to this kind of threat
as it may only take one default on one large value contract to
instigate a cash flow crisis.
33. It is widely acknowledged that credit availability
issues are having a serious impact on housing supply, and this
reflected in responses to the survey. 67% of those building homes
stated that lack of mortgage finance was preventing potential
clients from buying homes from them, and 79% stated that the lack
of mortgage finance was causing the business to slow the rate
at which it builds homes.
THE EFFECTIVENESS
OF GOVERNMENT
POLICY IN
ASSISTING BUSINESSES
DURING THE
CREDIT CRISIS.
Mortgage Lending and Housing Supply Policy
34. The availability of mortgage finance is
the key restriction on housing production, and as such the key
to assisting business in this area is to ease restrictions on
the credit available to drive the housing market.
35. The main problem is that significant rises
in the size of the deposits required mean that aspiring home owners
are unable to access the levels of finance required to purchase
a home. If a lender will only lend 85% of a property's value whereas
previously they would lend 125%, the potential borrower is transferred
from a position where little or no saving is required to one where
they will need to provide 15% of the property's value as well
as stamp duty and professional fees. If the average house price
is now £224,064 (BBC May 2010 covering January to March 2010)
then the borrower will need to provide a £33,609.60 deposit
and this alone will often prove an insurmountable problem.
36. The banking crisis has led to changes in
the price and availability of mortgage finance to first time buyers
who in July this year slipped to just 34% of the housing market:
their lowest proportion since the beginning of the credit crisis
in August 2007. The Council for Mortgage Lenders (CML) has reduced
its forecast for total lending for the year by £10 Billion
to £140 Billion. This compares to a total of £362 Billion
in 2007 and £345 Billion in 2006.
37. Gross mortgage lending declined to an estimated
£11.4 Billion in August, down 14% from £13.3 Billion
in July and six% from £12.1 Billion in August 2009, according
to the most recent data from the CML. This is the lowest August
total since 2000 (£11.1 Billion) and the CML expects lending
volumes to remain below last year's level in the coming months
as activity was buoyed by the upcoming end of the stamp duty holiday
in the last few months of 2009.
38. The UK currently faces an extremely serious
housing shortage. In August 2009 the Government's own housing
adviser the National Housing and Planning Advice Unit (NHPAU)
stated that at least 237,800 new homes are needed every year between
now and 2031. As a result of the financial crisis the UK built
just 123,000 new homes in 2009-10 and annual completions are not
set to rise to anything close to the necessary levels in the near
future.
39. There is no magical cure all policy and
a wide range of measures will be needed to tackle the issue, many
of which will have to be delivered by departments other than that
for Business, Innovation, and Skills.
40. The extent to which Government demands that
banks increase lending have been successful is certainly open
to question given the significant reduction in mortgage lending.
However, it could be argued that Government policy in this area
is unclear and possibly contradictory as demands to lend more
could be seen to conflict with other messages such as those from
Lord Turner relating to potentially "unpopular" credit
controls as part of proposed financial regulation overhaul. This
issue of clarity is one which merits further consideration but
what is clear is that restrictions on credit at their current
levels are having a serious impact on the construction of desperately
needed housing, and must be significantly relaxed.
41. A study by MoneyFacts has concluded that,
although the rate at which banks borrow money is falling, this
is not being passed on in full to those seeking a fixed term mortgage
as banks are increasing margins in order to repair their balance
sheets. It further reports that that three years ago the margin
on a three year fixed term mortgage deal stood at 0.41%, but that
this figure now stands at 3.57%.
42. The Government must take urgent action to
ensure that banks pass on savings to home owners and first time
buyers, and to address the size of deposits required by first
time buyers.
43. The government must also undertake significant
reforms of stamp duty including its move to a graduated tax, the
adjustment of thresholds so that family housing is not caught
by a measure that should only tax genuinely luxury homes, and
the introduction of a permanent exclusion from stamp duty for
all first time buyers.
BUSINESS LENDING
AND ASSISTANCE
SCHEMES
44. Awareness of Government schemes to assist
industry appears limited in the construction SME sector. According
to the formal survey of FMB members, 19.5% of respondents were
aware of the Small Firms Loans Guarantee and 11% of its successor
the Enterprise Finance Guarantee. A further 12% were aware of
the Capital for Enterprise Fund, just under 11% had awareness
of the Working Capital Guarantee Scheme and just over 9% were
aware of the strategic investment fund. Of those who had heard
of any of the schemes, 3% said that they had directly benefitted
from any of them, the remaining 97% saying that they had not.
24 September 2010
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