In the fifth roundtable, Neal Taylor, Audit Partner and Robert Gibson, Assurance Director, were joined recently by industry leaders at the firm’s Belfast office to discuss activity within the construction sector.
Participants included Kenneth Fleming, Partner in Isherwood & Ellis, Stephen Kane, Managing Director at Ridgeway, Shane McCullagh, Contracts Director at McAleer & Rushe and David Magee, Building Director at Antrim Construction.
NT: In terms of sources of project finance – what projects are easiest to fund and which are still challenging? How have you come through the recession and how are things going at the minute?
SM: Thankfully, we’ve been able to navigate our way through the recession and are now in a strong financial position from which to push forward into the future. We generally don’t tender for any construction work locally in Northern Ireland - instead we generate the work via our development arm given the unique skill set we possess as a company. We do tender competitively across the water in England and Scotland though much of the work tends to be negotiated also. In terms of finance, the biggest change is really associated with availability of finance. Whereas once upon a time it was 100% finance and a case of ‘how much do you want?’ the maximum you’re really looking at now is 65% on cost or 55% on gross development value (GDV). Sources of finance have been equally challenging and the traditional bank debt has been a no-go area for a number of years. That’s changed a little and now if you’ve got the track record to deliver and the right opportunity, banks are potentially willing to back you.
RG: What are your thoughts on the alternative sources of finance which appear to be available in the Republic of Ireland? Those private equity houses don’t seem to be playing in Northern Ireland - have you come across any of them yet?
SM: I think the reality is that the private equity houses in the south are largely external funds that have been sourced elsewhere in places like America and Europe. They see Ireland as a recovering economy and therefore a location with potential. They see a depressed economy with distressed assets which in turn provides opportunity. The reality is that most of that so far has been in the south because the northern economy always had a level of stagnation associated with it. The Irish economy, in fairness, has navigated a reasonable course of recovery now and so that’s what we see. It’s a catalyst for development to start coming through as we’re seeing schemes actually be delivered, whereas before you could have a project for which appraisals and viability work on paper, but you couldn’t access the finance to bring it through. We believe there’ll be a little bit of that coming to Northern Ireland, but maybe not as much as the south.
DM: From the private housing sector, we’re totally based in the north and very dependent on traditional banking for finance. The purchasing of new land is very much in and around 55-65% - the banks are prepared to get involved at these sorts of levels. The difficulty we have is that they’re looking for a fairly quick return and, with our new planning policies and new planning system, it’s very hard to actually predict exactly when you’re going to be getting on site to get some of that return. I see that as being a big problem for the private housing market at the minute. There’s land out there and prices are starting to go up a bit higher now, but all the negativity has made it a bit more difficult to get that reassurance to the banks of where exactly we’re going with their returns. From the finance point of view, the construction industry is a very good investment.
RG: In terms of planning having moved across to local councils, is it the case that in certain places there’s a blockage and in other places it’s not just as bad? Is it just as patchy as it always was?
KF: The issues with planning are quality, consistency and speed. It’s maybe too early to say, but I have spoken to other architects and other disciplines and it seems to be the same old story really. In the private and public sector, it’s very, very difficult to anticipate when you are actually going to be able to engage with them. It’s particularly difficult as the speed hasn’t got any better. We’re not dealing with all the councils at the minute, but from speaking to other people it seems to be the same.
RG: Stephen, you sit on a construction industry group. Are you hearing much from members in the supply chain for whom a lack of funding or lack of speed in planning permission is holding up projects and therefore holding up business?
SK: The construction industry group has been campaigning with government to get more sources of finance raised, but all aspects of that group - mainly suppliers, contractors, specialists and professionals - are effected badly by this finance bubble. There are some ideas being suggested – such as finance and transactions capital, European Investment Bank and the investment fund for Northern Ireland - but the reality is the supply chain chases candy. If there’s work in England, that’s where they go, if there’s work in the south that’s where they go, because that’s where the money is. So the actual red tape and the sheer amount of work that has to be done to get access to some of this funding is beyond a lot of the resources in most of the construction industry here. The construction industry might be worth £2.18 billion, but £1.5 billion of that is done by the top 20 contractors and £1 billion of that is currently outside Northern Ireland, so that’s where they’ve gone. Whether it be an architect or a builder’s merchant group, they are all going where the work actually is. They’re not sitting around resting on their laurels waiting for it to happen. For every 10 jobs that are going out in the island of Ireland at the moment, eight of them are in the south and two are in the north.
RG: The Institute of Civil Engineers (ICE) has been very active in skills and they’re saying there is a major shortage of people with three to seven years experience. Therefore, the graduates are picking up four job offers, they’re going over to England and they’re probably staying. The Northern Ireland market requires experience to deliver on some of the work that is here and they’re looking for people with three to seven years experience to start there, which is opening a gap across a lot of other disciplines. Is it the same in architecture?
DM: It’s exactly the same and they’re like hen’s teeth at the minute. To get an architect is easy, but to get the right architect with the right experience and the right portfolio is more difficult. A lot of large public sector projects didn’t progress and the guys haven’t had the experience, so there is a gap. There are plenty of students and plenty of 50-year-olds, but where do you get the experience from?
SM: I think that’s actually reflective of the industry changing. We do not undertake any traditional contracting – it’s all design and build and has been for 20 years. We aren’t just a contractor who goes and orders blocks in the morning and builds them that evening. For us the process starts from acquiring the site, putting a funding package together, developing the design, putting an operator in place, and having the design and build skill set there to procure and design that which achieves best value and return.
RG: What do you find in terms of the trades that you need to get the houses built - is there still a decent supply or is it under pressure?
KF: As a company we’re ok. I think generally the industry would be experiencing the skills shortage, it’s definitely starting to hit us now. I suppose the government has been trying to introduce apprentices to every scheme which is due to come in early next year, which seems a bit late, where they’re obviously trying to create the funds to try and encourage people into the industry and get the apprenticeships going again. But I think it’s going to be important that the funding from the government scheme is ring fenced to go into apprenticeships so that it doesn’t end up finding its way into another area of the market.
SK: It’s important that investment is made at a young age in vocational skills and specifically training that actually leads to jobs, not just complying with social clauses in the contract. It’s really important that we get the parental pull at an early age to pull these young people into an industry where they think there’s longevity and sustainability, because the recession has taught their parents that this is perhaps not the area that they should be moving into. The fact that everyone who’s been in the industry over the last seven or eight years has gone to England and is doing quite nicely has left this gap. We’ve got to get back to grassroots, get a system that works and get industry actually delivering with government to build a model that will deliver what the industry actually needs.
SM: I think there is a danger of the government trying to tick boxes and have statistics which read well rather than being realistic about what can be achieved by the sector itself in relation to apprenticeships. We have our own workforce and are being asked to take on a partially skilled personnel just to tick a box and pay them for a year or whatever the length of the contract is. I think that’s symptomatic of the NI economy where it is so heavily dependent on the public sector. There is a tendency to get bogged down in bureaucracy that focus is actually lost in what is trying to be achieved.
NT: In terms of government plans for infrastructure projects, what are your thoughts on current plans, and plans announced, versus what actually happens?
SM: If you look at the construction sector of any economy, government spending does underpin the bulk of the work. There are certainly significant spin-offs in terms of market confidence, promotion of growth and critical mass to sustain the associated supply chain. Ultimately, if you’re investing in infrastructure then you’re making your location more attractive to external investors who are an essential component in order to allow the economy to prosper. I will admit that we have one eye on the planned reduction in corporation tax and see that as a worthy government initiative to compliment spending on infrastructure. We see it as something that’s coming down the line which, if we can get our act together locally, should prove attractive to external investors coming in. If you consider the commercial office market as an example, N Ireland rents are very low and yields are weak in comparison to the rest of the UK. By reducing the rate of corporation tax it has the potential to act as a stimulus to encourage demand and therefore act as the driver for growth
NT: That’s interesting because the professional services sector has brought a lot of back office work in.
DM: FDI and expansion from large corporates comes when they understand that infrastructure in a country is not only existing now but forward-thinking for the future to be sustainable as the country grows. In Northern Ireland we have quite a chequered history in terms of our inability to deliver some of these infrastructure projects. We need a central delivery unit and I think we could do well by asking the likes of the national infrastructure commission to extend its remit, not just from the UK but into Northern Ireland, and highlight what we need for this central delivery agency.
KF: In terms of infrastructure, NI Water is a major, major problem at the minute. I’m led to believe they have 175 waste water treatment plants in the north of Ireland and 35 of these require urgent attention. There is no capacity left in those waste water treatment plants and NI Water only has finances to deal with about 10 of them. So we’re talking about building more houses and we’re talking about trying to get infrastructure going but we haven’t got the sewage system to actually deal with what we’re going to add to it.
SK: It’s basic stuff like the grid, which needs upgraded. We’ve focused on renewable energy and solar and wind, but where’s the storage coming from in the future? How are we going to upgrade our substations? These are real things, it’s not just about schools and hospitals, it’s going to be all about real things that we all use and need every day. I think government need good advice and I think they would do well by tapping into what’s happening in the UK and get the infrastructure commission to actually do an exercise of what we need.