Rise in developments cements strong year in North East construction

Cranes are back on the skyline but concerns still persist in the building industry. Coreena Ford looks back on the year in construction

The sun sets over a crane working on the Science Central in the Centre of Newcastle
The sun sets over a crane working on the Science Central in the Centre of Newcastle

A resurgence in developments as the economy climbs out of the recession has cemented a strong year for the region’s construction sector.

Buoyant healthcare and hospitality sectors, as well as an increase in education projects, has driven a return to healthy balance sheets for a raft of companies across the region.

Cranes and scaffolding across the North East skyline reflect increasing optimism, with projects gathering momentum at Science City and Stephenson Quarter in Newcastle, as well as on a series of hotels including the Hilton by Hamptons and Premier Inn, both in Newcastle city centre.

However, firms are also warning that the impending General Election carries much uncertainty, together with an expectation that public sector contracts will remain at low levels.

Inflation and raw material costs are also a worry for the year ahead.

Jeff Alexander, director at Newcastle-based Surgo Construction, said: “In the past two or three months we have seen a significant improvement in market activity in comparison to the economic climate that previously existed, especially at the beginning of the year.

“The level of enquiries has risen markedly during what has been a very successful final two months of the year and we have every reason to be optimistic that this trend will continue throughout 2015.

“There appears, as expected, to be a re-balancing of the regional construction economy with significantly more non-public sector projects coming to the fore at the same time as the ongoing reduction in public spending by the government.”

Surgo director Jeff Alexander
Surgo director Jeff Alexander
 

John Wood, chairman of Gateshead-based Tolent, reckons the construction industry is “out of intensive care and back on the ward”, but said there are still issues which will continue to affect the market in the year ahead.

He said: “Things are definitely picking up and there are more enquiries, but in the North East particularly, there are still a lot of stupid prices being tendered.

“Here, firms are pricing very competitively, whereas in London and the South East the market is less price sensitive and there is the chance to make a decent margin on jobs again.

“There are issues, however.

“Firstly, there’s inflation and the cost of raw materials such as scaffolding and brickwork. Prices are escalating and while the price of crude oil has fallen by 40-50%, we are not seeing this translated into lower prices for any hydro carbon related products.

“Skills shortages are also a big problem and the industry is suffering from a lack of investment in training over the last few years.

“At the same time, there is a merry-go-round of staff as they leave one company to go to another for more money – so the workforce lacks stability and wages are rising.

“The recently-introduced new rules for holiday pay are also going to have a massive impact, where holiday pay has to be based on the previous 12 weeks’ pay whereas the flat rate was paid previously.

“The new rules have been implemented immediately and the industry has not even had a chance to factor this into its forward costs.

“It will cost us alone £350,000 next year to operate this way and other companies will be in the same boat.”

Mr Wood also claims banks are “still very negative and bondsmen are still very cautious” for large projects.

“They are often asking for cash collateral,” he said. “This is a direct result of the bad news pouring out of the large national firms which have lost a lot of money during the recession, as a result of bidding too low for work.

“But Tolent is winning work and looking forward to the next year with confidence – we have just picked up the £12.5m Hilton Hotel in Sunderland and we have a few other projects that are looking good.”

Gavin Richardson, founder and MD, Opus Building Services
Gavin Richardson, founder and MD, Opus Building Services
 

Gavin Richardson, managing director at Boldon-based Opus Building Services, doesn’t believe the economic recovery will dramatically surge ahead in the near future, but he remains confident the market is turning.

“This positivity is derived from a few factors,” he said.

“Market competition has been flushed and cleansed; the construction industry and the government has failed to heed industry warnings regarding skilled labour replenishment for the last decade, and construction market indicators are projecting growth, not just from the housing market but also from the commercial sectors. “While many subcontractors have been feeling the harsh reality of limited work, I think things are turning full circle.

“Resource scarcity is already prevalent, with demand for bricklayers significantly rising. This will undoubtedly cascade to all subcontractors and service providers.”

Mr Richardson said the London construction market has weathered the storm better than some, yet interesting indicators have emerged for the sector as a whole.

“Clients are creating their own frameworks, allowing for contracts being led, not just by builders, but by a variety of differing leading specialists,” he said. “Is this because the larger contractors prefer a contract manager’s role, rather than builders that have their own workforce?

“Another eye-catching news article was that a client needed to re-advertise for a main contractor in a significant development, due to various parties preferring to opt out as they were busy with refurbishment work. It’s a new phenomenon and potentially early warning for tomorrow’s issues.”

Meanwhile, xsite architecture in Newcastle has been involved in a number of key North East developments, including the redevelopment of the Tyneside Cinema and The AmberSide Collection.

And while banks may be seen to be cautious, other avenues are being sought, said the firm’s partner Tim Bailey.

He said: “The last 12 months has provided a lot of optimistic moments. We have seen more activity at early stages of development, increased numbers and scales of planning applications and a very interesting diversity in funding routes for projects.

“Where banks are continuing to be very cautious, other funders are seeing opportunities to utilise the cost conscious but eye catching design experience of the last five years to be ambitious.

“The next 12 months has the inevitable uncertainty brought by the election and what follows in public finances.

“We expect further downward impacts on public sector procured projects but lots of opportunities to exploit for the clever design or smart cost development approach.”

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