Commercial property

Is it time to worry about the commercial development sector?

The September figures did not make pretty reading for the development industry as a whole. The construction sector experienced its sharpest decline in a year as commercial building work dries up.

We all know that it is uncertainty that affects markets and the construction industry – which is often seen as the bellwether for the wider economy – is clearly struggling. 

We are seeing an almost perfect storm of Brexit, skills shortages, prices of raw materials rising and the long-term nature of major construction projects, which is threatening to blow the industry on to the rocks.

Let’s start with Brexit: without a doubt it is causing businesses to halt investment, hiring and preparing for the void that is March 2019. Every day you read about businesses delaying major projects, reducing retail space, worrying about the effect of a no-deal Brexit or actively talking about relocating overseas. Even Goldman Sachs’ CEO is tweeting that he will be spending a lot more time in Frankfurt. This phenomenon and general unease is seeing demand for office space soften at an alarming rate.

Factor in reduced government spending and economic certainty and developers in the commercial sector are sitting on their hands and avoiding starting long-term projects, while the outlook is so murky. It is the long-term nature of many commercial projects – often requiring commission many years before completion – that require benign conditions before embarkation. 

Construction companies will be looking at their pipelines for 2018 and there will be real concern that there may not be a satisfactory level of orders. The problem is that confidence become self-fulfilling and it is easy to talk the market down. This has a knock-on effect across the market and will see commercial lenders suffering from a lack of confidence to invest, plus a reduced number of deals to lend on. We are all in the same boat and at a time when business confidence is waning and there is evidence of the flow of investment, labour and services being curtailed meaning the desire for capital is dropping, we need the government to step in.

This could well be in the shape of major infrastructure projects, such as rail, road and other civil engineering schemes to boost growth and employment and hopefully kick-start the industry.

Conversely, the residential housebuilding sector is bucking the trend with robust growth. This is the sector that Regentsmead has been funding in some shape or form for over 70 years. 

Arguably the residential markets growth is spurred on by the government’s Help to Buy and the chronic lack of supply of good-quality housing stock, which mask underlying symptoms in the industry. I have made my views known on Help to Buy previously, an initiative that serves the demand side of the housing coin and creates winners and losers with resulting house price increases. My views are that other measures should be introduced to cure the stricken housing market, including – among others – that the government provides a planning policy that is fit for purpose to ensure the right houses are built in the right places, a review of the green belt policy and a proper social housing policy should be implemented enabling housing associations to build the social housing that this country needs. 

Arguably in both the commercial development and residential development sectors it is now time for the government to step up to the plate and jump-start the ailing patients back to life.

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