This week’s Winning Work turns the spotlight on the highs and lows of refurbishment sector
There is an unfortunate asymmetry in the relationship between the refurbishment market and the state of the UK economy. Refurbishments have suffered along with the economy so far. But as capital projects such as the Decent Homes initiative come to a halt in the next couple of years, and the Government funnels cash towards new builds, refurbishments in their current form, look likely to languish regardless of the expected upturn in the economy.
There are, however, some reasons to be cheerful, as well as opportunities for firms whose bosses are willing to be proactive. According to the Carbon Trust, construction accounts for 40 per cent of all UK carbon emissions, and with the government’s target of an 80 per cent emissions reduction by 2050, industry watchers such as the Federation of Master Builders, are banking on green retrofitting becoming a leading industry on its own.
The traditional market is also hardly shot. According to Glenigan, the top 100 refurbishment jobs in the UK are worth a combined total of £4.7billion. The top 30 alone are worth £3.3bn. It remains a vast market, but one which, nevertheless, the Construction Products Association (CPA) says is shrinking.
Noble Francis, CPA chief economist, says that any contract wins in the refurbishment sector in 2009-2010 are going to have to come through gains in market share rather then any market growth. He has forecast falls in each of its refurbishment and improvement categories for the rest of 2009 and 2010 (see box).
Public Non-housing Repair and maintenance
“With public finances in a relatively poor state, it is increasingly likely that the government will be looking to cut all non-essential and relatively low-profile areas of spending,” says Mr Francis. “Public non-housing looks set to be a casualty of these spending cuts in the short and medium term. They are likely to cut spending in lower profile projects like refurbishment, rather than not building a hospital.”
According to CPA figures, public non-housing refurbishment and maintenance (R&M) output is expected to fall in every year of the forecast period. A fall of 5 per cent in 2009 is expected to be followed by a further 5 per cent fall in 2010 and a 7.5 per cent fall in 2011 with further falls in later years. However, Kevin Ellis, owner of Ellis & Hughes believes niche contractors can still make gains, providing they can offer a niche service.
His firm has traditionally been called in by health authorities when they are against the wall in terms of timings and need to complete projects within weeks. “We bypass the usual tender process, and come in and deliver refurbishments in impossible time frames. We have done this time and again, so that has become our speciality,” he says (see top tips box).
Private Non-housing R&M
Work in this part of the refurbishment market is tied more closely to the fortunes of the economy than elsewhere. The private non-housing R&M sector covers a wide range of work from general repairs on commercial and industrial properties to PFI maintenance on roads, schools and hospitals. The sector is generally governed mainly, although not wholly, by the macroeconomic effects that have led to a fall in demand for repairs and maintenance on commercial and industrial properties. In addition, the fall in credit availability has led to a sharp slowdown in the number of PFI contracts awarded, which have fallen by 50 per cent in the past year. With an 18 per cent fall in the first quarter of 2009, which was on a 14 per cent fall in the first quarter of last year, the sector is in a fix.
But it should return once the economy picks up. According to Mr Francis, contractors could do worse than position themselves for work in this market once the public money dries up around 2010-2011.
Private Housing Repair, Maintenance and Improvement
This section of the market is expected to fall by 17 per cent in 2009 based on the CPA’s model, which draws its conclusions from savings rates and equity withdrawals which are considered crucial in freeing up cash for home improvement. Saving rates have risen to 4.5 per cent of income, up from 1.2 per cent last year, and mortgage equity withdrawals have slipped into negative territory as clients prefer to pay back debt rather than spend more money. Discretionary spending on items such as extensions and conservatories has fallen sharply in the last 6-9 months, which would also be expected to lead to a fall in refurbishment maintenance and improvement output. The rate of decline is expected to slow in 2010, but at 5 per cent it is still challenging.
However, Kevin Ellis, owner of East Midlands firm Ellis & Hughes, says a more circumspect market is an opportunity for builders who can point to a record of on-budget and on-time projects (see box). “We are almost bomb proof, even in a recession,” he says. “We don’t over-promise and we always deliver on time.”
Public Housing Repair, Maintenance and Improvement
Wates is a major player in public refurbishments. It is tendering for refurbishment works for public housing in Nottinghamshire and Enfield in North London, worth £200m and £160m respectively. It is also one of the main contractors on the £400m Hertfordshire Decent Homes programme. However, Decent Homes, which is supposed to guarantee a minimum standard for 95 per cent of social housing, is due to be completed by an elastic 2012 deadline. And the Government has already signalled that it puts a premium on new builds over refurbishments, by raiding the Decent Homes programme.
However, Steve Trusler, Wates strategy director, believes the budgets for public housing refurbishments are fairly watertight for the next couple of years. “It is 2010, 2011 and beyond which is a much more difficult picture,” he says.
The CPA’s Mr Francis agrees. He has the public housing market falling by 5.5 per cent in 2009 and 5 per cent in 2010, but then falling off a cliff after that. “We are coming to the end of the Decent Homes programme and spending always slips towards then end,” he says.
However, Mr Trusler refuses to be too downhearted, and urges sub-contractors looking to win work with Wates to upskill in anticipation of a pick up in retro-fitting public and private homes for moves towards CO2 reductions.