With construction growth showing signs of slowing, increased bank lending to construction firms could help kick-start the industry.
Financial backing from banks and lenders is vital for getting construction projects off the ground.
But when it comes to lending for companies, the industry’s risk profile has always resulted in difficulties in securing lending, particularly for SMEs.
In the last 18 months the industry has benefited from a relatively steady pattern of growth, with workloads picking up and construction insolvencies hitting an all-time low.
But banks have been reluctant to back speculative development ever since the financial crash, making it difficult for construction firms – SMEs in particular – to secure financing.
Instead of the industry’s growth resulting in increased financial support helping more development get off the ground, data from banking institutions shows that lending is in some cases getting worse.
Is this due to companies having greater cashflow or seeking alternative finance? Or are traditional lenders simply shying away from construction firms?
No, money down
The most recent available data from the Bank of England shows that overall lending to the construction industry for March 2016 was 9.3 per cent lower than it was in the same month a year earlier.
Moreover, lending in 2015 as a whole was 20.1 per cent lower than it was in 2014.
These results tally closely with data from the British Bankers’ Association (BBA), which has reported lending slumps across three out the five main construction sectors in the six months to March 2016.
Average monthly lending for construction of commercial buildings, development of buildings and ‘other’ construction all fell by £42.5m, £138.1m and £17.3m respectively. Only civil engineering and housebuilders have seen lending improve on average in that time.
The effect of this ongoing decline in lending on construction firms is increasingly apparent.
The Royal Institution of Chartered Surveyors’ Q1 Construction Trade Survey shows that contractors are citing ‘financial constraints’ as the largest factor limiting activity – 60 per cent of firms said it was a concern, ahead of skills shortages and planning constraints.
RICS chief economist Simon Rubinsohn says the lack of lending has been “an ongoing problem rather than a newly emerging one”, with little progress being made on increasing funding to contractors.
“The feedback from members suggests the idea of lending on anything that might be viewed as in any way speculative hasn’t come back; we’ve never really recovered from the global financial crisis in that sense,” he says.
He adds that traditional lenders have been “very, very reluctant” to put up money for development in some cases, especially when it comes to SME lending.
“Our members who are either part of or work with SMEs are finding the ability of their sector to contribute to the recovery has been [hampered], and continues to be so.”
Federation of Master Builders chief executive Brian Berry agrees banks need to be doing “far more” to help SME construction firms.
“SMEs are finding their ability to contribute to the recovery has been hampered”
Simon Rubinsohn, RICS
Statistics from the BBA suggest the value of new loans to construction SMEs is beginning to improve, with values increasing by 17.3 per cent in December 2015 compared with the same month a year earlier.
However, FMB data shows two-thirds of SME housebuilders still consider a lack of finance to be one of the biggest impediments to growth, closely mirroring the results from the RICS survey.
Mr Berry says this is evidence that small housebuilders “are still finding it very hard to access the lending they need”.
“When banks are willing to lend, they’ll often charge eye-watering fees and even then, will likely offer only 60 per cent of a project’s value,” he says.
“SME firms, which suffered greatly during the downturn, are now struggling to play their part in the recovery, with dangerous ramifications for the housing crisis.”
Unsurprisingly, lending to housebuilders has been more consistent than to any other construction industry sector, with BBA data showing that the average month-on-month change for the six months to March 2016 was positive at £16.8m as the demand for housing increases.
Mr Rubinsohn says banks have shown more appetite for lending to “traditional bricks and mortar” developments over commercial schemes that are perceived to carry more risk.
“It wouldn’t surprise me that banks may be more concerned about lending to commercial development over housebuilding due to its more open-ended nature,” he says.
Henning Holter, head of global business development at online invoicing and finance firm Tungsten, says much of this reluctance comes from banks being unable to get the “balance of risk” in place.
“The regulatory and compliance burden that has been placed on banks [since the recession] is partly to blame for the decline in lending,” he says.
Bibby Financial Services managing director of construction finance Helen Wheeler says accessing finance is not the biggest issue for SMEs – “finding the right type of finance is”.
“It’s much harder for construction sector SMEs to find a funder who can work with their business at a time when their growth is reliant on the supply chain,” she says. “When times are tough, cashflow can come under strain and SMEs need a plan.”
Alternative lending sources, away from the traditional banks, have been cited as one way small firms can secure finance. Areas include peer-to-peer lending schemes and new firms specialising in small-scale lending to construction.
With the rise of alternative finance, Mr Rubinsohn says the banking stats alone cannot be used as a bellwether for how much finance is available to construction firms.
“The days of just looking at the banking numbers to identify the funding opportunities for the sector are long gone, and there is a much broader range of opportunities,” he argues. “That in part might explain why development is continuing to take place despite the concerns over access to finance through the traditional channels.”
“When banks are willing to lend, they’ll often charge eye watering fees”
Brian Berry, FMB
However, he warns that alternative financing will still carry some of the caveats that are affecting lending from high street banks. “I suspect that these alternative funding sources will tend to cherry-pick and you’re not suddenly going to find that all of them are making money available on the advantageous terms that would provide encouragement for the SME sector,” he says.
Mr Berry agrees that these providers have “a role to play” in making finance available, but says SMEs should not look to “rely on them solely” to prop up bank lending. “We need to see the major banks increase lending to our sector if we are to empower SME housebuilders to step up and build more new homes,” he argues.
It is clear that lending needs to improve, given recent growth in the construction industry and the government’s assurances around future housebuilding and infrastructure programmes.
The burden cannot be placed on alternative financing alone to plug the gap and help SMEs contribute to this growth – bank lending is needed to help the industry’s recovery continue.