COMMERCIAL REVIEW: Construction - Commitment to build 50,000 affordable new homes presents challenges and opportunities

There are clear difficulties in terms of funding and planning. Plus, there are question marks over the sector’s ability to resource building on that scale even if the funding and planning challenges were somehow to be overcome.

Lovell Scotland’s managing director, Stephen Profili, makes the point that if one views the house building sector as a manufacturing industry, one that takes land and materials and turns out houses, then it is clear that the sector has not kept pace, in terms of technological manufacturing innovations, with sectors like the automotive or electronics industries.

"We are seeing some technological innovation, but nothing on the scale you see elsewhere in manufacturing," he says. At present the house building sector is accustomed to laying the blame for below-target rates of house building at the door of the various planning departments around the country. However, Profili argues that if the planning issue was somehow solved overnight, the sector would probably get a shock as it faced up to the problem of resourcing a ramped-up build schedule.

"We have been using the planners as a bit of a scapegoat, albeit with some justification. But I think if we were given free rein as an industry to build we’d discover that we were well behind the technology curve, and very under-resourced to build 50,000 homes on that timescale," he notes.

Allan Callaghan, managing director of Cruden Homes West, makes the point that despite initiatives from the Scottish government, efforts to speed up the planning process or to make more land available for building, have not been markedly successful so far. He points out, too, that funding is a very significant problem, as is the mismatch between the funding that is available to registered social landlords (RSLs) to build affordable homes, and the aspirations of various councils to make continual improvements in the specifications of affordable housing.

"We have Glasgow Council aspiring to have the Gold Standard for all builds in 2018. So far, this has had the effect of accelerating planning applications in 2017 as building companies look to get approvals through before this heightened set of specifications comes into effect," he says.

Once it does, if RSLs are not able to come forward with additional funding to meet the expense of "Gold Standard" builds, then the immediate threat to builders will be a serious squeeze on their margins, which are already less than generous.

"For some years now, we have all been very conscious in the sector of the need to do more with less money and resources, but there are very real limits to this," he says.

"If Government wants to build more homes, squeezing the sector is not the best way forward to achieve this.

"There is a real contradiction in funding affordable homes," he notes. You want to create a benefit for the people who are going to live in the houses but the benefit is not at all coupled to the beneficiary’s ability to pay. In the private sector there is a clear equation you look at: is there a sufficient demand for what you are going to build to justify making the house more expensive? Is there a market for it?

"In the social housing sector, you can have political aspirations at both government and local authority levels to build the most sustainable, high spec homes possible, regardless of the recipient’s ability to pay. However, those aspirations tend to be protected from market realities – until both government and councils have to face up to the fact that they don’t have the funds to achieve their goals. And there is a good deal of scope for fudging and avoiding that plain fact.

"When you build for sale to the private sector you are always asking yourself how much demand there is for specifications that are above the norm? RSLs and councils want to drive up standards, and that is a good thing, but it should not be done at the builder’s expense. We already build very efficient, low energy homes. The standard right now is Silver Aspects 1-8, with additional funding available if you build to Silver Aspect 2. Moving to the Gold standard is fine if there is the funding to go with it," he says.

The better building firms will always be looking to find better, more productive ways of doing things, but this brings with it the requirement for a very significant investment in staff training and career development. The margins on house building have to be sufficient to allow this and to deal with cost inflation.

Callaghan points out that the large suppliers to the building industry are already warning that they expect materials costs to rise by some 10 per cent to 15 per cent as Brexit starts to bite.

Irrespective of whether these are genuine cost increases caused by relative shifts in value between the pound and the currencies of overseas countries, or are simply opportunistic price rises, it is clear that the sector is looking at some sharp future increases in build costs.

Add in the increases in wages generated by the government raising the minimum wage and it adds up to a significant potential brake on house-building.

"If returns get thinner then with many building companies, the first thing that goes is training. That generates a self-defeating cycle in the medium term. What we need is for the construction industry – which is very fragmented and lacks a unified voice – to come together with government and the councils to look at a long-term view of how these aspirations on house building can be delivered," he notes.

It takes four years to take a young person through the apprenticeship programme to the point where they are a skilled practitioner in whatever trade they are studying. Callaghan points out that the Farmer Review made it very clear that there are huge problems in getting the sector to train sufficient numbers of new entrants to replace those retiring each year.

In February 2016 Mike Farmer was tasked by the Westminster government to review the UK’s construction labour model both from a funding and build perspective. His report made it clear that the sector is facing a demographic time bomb in that it was losing far more skilled workers each year than it is able to replace with newly trained workers.

Callaghan points out that the position in Scotland is even worse in that whenever there is a major infrastructure project down south, such as the Jubilee line build, then significant numbers of trades specialists in the Scottish building sector opt to go south, since they can earn significantly more. This exacerbates existing shortages.

Part of the solution, he argues, is for more large firms to take the approach adopted by the Cruden Group and to invest heavily in recruiting and training their own skilled workforce. "Firms who rely heavily on outsourced labour are going to find themselves hard hit whenever the supply of labour falls off, irrespective of what causes the shortages," he warns.

Cruden plans for the future

Any long established player in the "boom and bust" house building sector has to be doing something right. The building industry is notorious for having a high casualty rate, in terms of companies going bust, when the economic tide goes out and recession sets in.

The key to long-term success in this industry, according to Allan Callaghan, Managing Director of Cruden Homes West, is for management teams to focus on sustainable, steady organic growth.

This means having a constant eye to developing your own skilled staff, providing them with great learning and career opportunities, while delivering a consistent, high quality product and service to clients.

"We have always focused on organic growth and on staff retention. We set up our own Cruden Academy, which provides both training and staff career development initiatives. There is tremendous pressure on us and on construction companies generally, to deliver more with less, and this means you have to multi-skill your
staff," he says.

Callaghan points out that by its very nature this has to be a long term approach, and one that is designed to deliver lasting benefits to the organisation for decades. In an industry where projects tend to be of short duration and the work pipeline has to be constantly restocked, this kind of planning requires confidence and commitment.

Many construction companies – even at the larger end – focus on the short term and then have to try to increase staff numbers when they win projects. "We have a very high retention rate for our staff, but it is frustrating when another company comes along and offers one of our team a huge increase to switch.

"Our staff know that with Cruden they have the support of a stable company and a management team that plans for the future and offers excellent career progression and training.

"But the lure of a large short-term increase can be destabilising. It is just something we have to deal with," he says.

Amongst the projects Cruden Homes has on at present are the development of two large private housing projects at Kings View, Toryglen and Barons Vale, Glasgow.

Callaghan says that sales are holding up strongly at both sites with quality family homes moving relatively quickly. Other new projects are due to commence shortly. "We are seeing a good level of confidence in the market as far as purchases of good quality affordable housing is concerned," he notes. Turnover in the West of Scotland Construction Business in Cruden Building and Renewals is also growing and the firm has a strong forward order book.

The main projects currently under construction include major developments of some 241 units for Wheatley Group across Glasgow. Sites involved include Hinshelwood, Ibrox and Meiklerig, Pollok.

"Elsewhere, we are building for a broad range of housing associations and Local Authorities to meet their needs. Some of these are large scale with recent projects with River Clyde Homes approaching 300 units across a range of sites in Inverclyde. Some 120 units are being developed for South Lanarkshire Council across four sites.

"Other significant clients are Link HA, Home HA, Tollcross HA, Places for People, Rosehill Co-op, Southside HA, Govanhill HA and
Thenue HA.

Overall we have live projects on site at present that will deliver in excess of 1,300 units," he notes.

Lovell excels in social sector

Building for the social housing sector, or, as it is often termed these days, the affordable housing sector, has long been something of a specialist niche for house-builders.

Lovell, part of the £2.6 billion turnover Morgan Sindall Group since its acquisition in 1999, has built up a solid reputation for itself in this sector, having built the first affordable partnership homes back in 1972.

As Stephen Profili, Regional Managing Director of Lovell Scotland points out about 85 per cent of the company’s Scottish business is about delivering social housing, though it is now also venturing back into the private housing market.

One of Lovell Scotland’s major projects at present is a 133 homes site at Kinghorn in Fife. The vast majority of the homes in this development are private, with just 10 of the units reserved for social housing.

By way of contrast, Profili points out that the firm has just finished a mixed tenure project in Wester Hailes, in Edinburgh, for 109 social housing units and 74 shared equity units.

In August it began work on a new £3.4 million development of 30 flats for social rent just off Lasswade Road, five miles south of Edinburgh City centre. The client here is Link Group Ltd.

Profili says that given the firm’s long history in social housing, and the fact that RSLs and the Scottish government are committed to a strong build programme over the next few years, he is confident that the firm will not be particularly bothered by any Brexit-related slowdown.

However, he makes the point that some of the larger construction companies are already taking steps to de-risk some of their larger projects, just in case of trouble. "Already we are seeing firms with large sites of, say 300 to 350 units looking for a joint venture partner to take on the build out of half the units.

"This shows that people are adopting a measured, cautious approach to the problem of navigating through Brexit," he notes.

Profili says that Lovell itself is actively looking to generate new revenue streams for the business, as its greater interest in building-for-sale demonstrates.

"We are seeing new opportunities developing and we are pursuing them. "As a sector across Scotland it is very clear to me that we need to be more flexible and more receptive to new ideas and new ways of procuring work," he comments.

In Lovell’s case, this has meant strengthening its in-house design departments as a response to the Local Authorities and Registered Social Landlord’s slimming down their own in-house teams.

"This creates a great opportunity for us to offer them a complete design and build housing solution," he says.