What solutions need Construction after Brexit?

UK, 20 September 2016.- The construction sector in the UK need an urgent public investment strategy and a dynamic response of the private sector. So far, this analysis we will summarize the first results recorded by this sensitive market.

Information published by Reuters

British construction output held steady during the first full month after the June vote to leave the European Union, bucking expectations for a fall, while the trade deficit narrowed slightly, official data showed on Friday. Construction volumes were unchanged in July after a 1.0 percent drop in June, a smaller fall than the average 0.8 percent decline forecast in a Reuters poll, the Office for National Statistics said. But compared with a year earlier, volumes were 1.5 percent lower, the biggest drop since April 2013 though a smaller decline than the 3.2 percent economists had forecast. Friday’s figures are the first official numbers on Britain’s construction industry, which makes up 6 percent of the economy.

They follow a closely watched survey of purchasing managers which pointed to the steepest decline in seven years in July, before rebounding in August. “Construction output remained steady in July with growth in infrastructure offset by falls in repair work and commercial buildings,” ONS statistician Nick Vaughan said. “There was strong growth in construction orders, led by housing, after nearly two years of orders remaining relatively flat,” he added. The ONS said there was very little anecdotal evidence that the vote to leave the EU had affected construction output.
Britain’s economy has shown signs of weathering the initial shock of the vote to leave the EU better than many economists had feared, but the Bank of England still expects construction to be one of the hardest hit sectors. Last month it predicted housing investment would slow sharply this year and fall by nearly 5 percent in 2017, and on Wednesday BoE Governor Mark Carney estimated overall economic growth during the current quarter would be half its second-quarter rate of around 0.6 percent.However, Britain’s biggest house builder, Barratt Developments (BDEV.L), has defied predictions of a Brexit market freeze, saying sales had risen since the vote to leave the European Union. ONS figures on Friday showed new construction orders in the three months to the end of June were 8.6 percent higher than the previous quarter, the biggest rise since the second quarter of 2013. Private housing was up 28.2 percent on the quarter, the sharpest jump since 2010. Barratt’s confidence echoed that of smaller rival Redrow (RDW.L) which said that sales had climbed 8 percent since June 30, and Persimmon (PSN.L) which last month said reservations of new homes had jumped. New finance minister Philip Hammond said on Thursday that boosting house-building was essential to lift the country’s weak productivity growth.Separate figures released by the ONS on Friday showed Britain’s trade deficit narrowed in July to 4.502 billion pounds from 5.573 billion in June.

The deficit in goods alone narrowed to 11.764 billion pounds compared, almost exactly in line with economists’ forecasts. Goods export volumes rose by 2.0 percent in July, while imports dropped by 3.6 percent. The ONS said it was too soon to know if the sharp fall in sterling after Britain voted to leave the EU was behind the rise in export volumes.

Information published by The Guardian

The Markit/Cips survey of construction companies was disturbingly clear in the picture it presented of a sector badly damaged by the EU referendum. Empty plots waiting for the digger to turn up and foundations to be laid look likely to stay that way, at least until the Brexit dust has settled, and maybe even longer, if the doom-mongers who predicted a big drop in house prices prove correct. As the former head of the civil service Lord Turnbull said last week, the industry is extremely sensitive to economic sentiment and will not build a single house more than it believes can be sold. He blamed this sensitivity on the 2008 financial crisis, saying the industry remains deeply scarred by those events. The latest evidence goes to support his main point – that the industry is unable to build the homes that the nation needs, where it needs them and at a reasonable price.

The House of Lords economic affairs committee, of which Turnbull is a member, is due to publish a report on the housing sector imminently. He said it had become clear to members that local authorities and housing associations must play a much bigger role after years of cutbacks. The public sector has to be a steady supplier of homes, much as it was during the 1950s under the Winston Churchill, Anthony Eden and Harold Macmillan governments. To most people in the housing industry, this was obvious for years. Labour, under Tony Blair and Gordon Brown, attempted to bully private housebuilders into including social housing in their estates. But it was always an uphill task. Tony Pidgley, the chairman of Berkeley Group, who pocketed a 42% rise in his take home pay to £23m last year, could not close the supply gap even if he wanted to.

Information published by The Telegraph

Britain´s building sector is officially in recession as housebuilding and infrastructure output both fell in the second quarter of the year. Economists believe this could be an early sign that the wider economy could enter a mild recession later this year. Overall the construction sector shrank by 0.7pc in the three months to the end of June, following on from the 1.1pc fall in the first quarter of the year. Output fell 1.4pc compared with the same period of 2015. The figures from the Office for National Statistics looked at the period before the Brexit referendum on 23 June. Since that vote economic confidence has taken a knock and house prices have shown some signs of slipping. As a result economists believe the construction sector’s recession is likely to get worse.

“The downturn looks set to deepen,” said Samuel Tombs from Pantheon Economics, pointing to private sector surveys which show a fall in orders placed with construction companies. “Brexit negotiations will be protracted, so businesses will hold off committing to major capital expenditure for a long time to come. In addition, the public investment plans won’t be reviewed until the Autumn Statement at the end of the year and few construction projects are genuinely ‘shovel ready’,” he said. “Accordingly, we think that a slump in construction activity will play a key role in pushing the overall economy into recession over the coming quarters.” New work on building houses fell 1.1pc on the quarter, while new work on infrastructure dived 3.7pc.

Even work maintaining existing buildings fell by 0.5pc in the quarter. The biggest fall in output over the past year came in government-backed housing construction, which crashed 6.5pc compared with the second quarter of 2015. Private housing slid 0.2pc, while infrastructure output fell 3.7pc on the year. One area of growth, however, was private industrial construction, which grew by 7.3pc on the year. Public sector construction firm Scape argued that the downturn means the Government should press ahead with big building projects. “The Government must not lose sight of its commitment to the Northern Powerhouse or the wider devolution agenda, and ensure investment in vital projects there continues as this will not only provide the area with the boost it needs, but also have a positive impact on the UK economy at a time where uncertainty continues to linger,” said Scape’s chief executive Mark Robinson.

Information published by The Economist

After the initial post-Brexit sell-off in sterling and equities, financial markets had quietened down in the wake of the shock referendum result. The FTSE 100 even moved ahead of its pre-Brexit level. But investor concerns have shown up in another market – property, Today Standard Life, the Scottish insurer, suspended redemptions in its UK Retail property fund, with £2.9 billion of assets under management. Here is the press reléase:


Due to exceptional market circumstances, Standard Life Investments has taken the decision to suspend all trading in the Standard Life Investments UK Real Estate Fund (and its associated Feeder Funds) from 12:00 noon on 4 July 2016. The decision was taken following an increase in redemption requests as a result of uncertainty for the UK commercial real estate market following the EU referendum result. The suspension was requested to protect the interests of all investors in the fund and to avoid compromising investment returns from the range, mix and quality of assets within the portfolio. “The Standard Life Investments UK Real Estate Fund invests in a diverse mix of prime commercial real estate assets from across the office, retail, industrial and other sectors. Its lower risk positioning should be beneficial for performance in times of market stress and uncertainty.

The fund continues to offer a stable and secure income return with a distribution yield of c3.86% (SLI UK Real Estate Fund, Institutional Income Share – class on 15 June 2016). However, unlike investing in equities, the selling process for real estate can be lengthy as the fund manager needs to offer assets for sale, find prospective buyers, secure the best price and complete the legal transaction. Unless this selling process is controlled, there is a risk that the fund manager will not achieve the best deal for investors in the fund, including those who intend to remain invested over the medium to long-term. Approval for the suspension was received from Citibank Europe plc, in its capacity as Depositary for the fund. The suspension will end as soon as practicable, and will be formally reviewed at least every 28 days.

Commercial property values have come under pressure since the referendum result because of doubts about London’s attractiveness as an investment destination outside the EU. Given the uncertainties, Henderson, Aberdeen, Legal & General, M&G and Standard Life had all applied “fair value adjustments” to fund values of 4-5%. There have been bigger falls in the value of quoted property funds or real estate investment trusts (REITs) with some dropping by 20%; funds based in central London have taken the biggest hit. Earlier today, there was a big fall in the purchasing managers’ index of the construction sector, taking it to its lowest level since 2009.The Financial Times reported on Friday that deals worth £650m had been pulled since the result, including the purchase of a Cannon Street development, in the heart of the City, by Germany’s Union Investment. Russell Chaplin, chief investment officer of the property division of Aberdeen, says many deals had a “Brexit clause” allowing purchasers to walk away if Britain voted to leave.

This has happened to Aberdeen in two cases; one buyer abandoned the purchase altogether while the other asked for a price discount, which has not been accepted. Of course, Aberdeen is a buyer as well as a seller and can negotiate its own discounts. The big question is how this news will affect retail investors elsewhere. The risk is of a run; if buyers fear they will lose access to their money, they will rush to withdraw their savings, triggering the event they dread. Property mutual funds have a liquidity mismatch; savers can withdraw their money every day but property takes months to sell. Funds tend to run with high levels of cash in order to meet this eventuality; Aberdeen says its fund has a cash level of 18% of assets. Standard Life’s last factsheet showed the fund had “liquidity” of 13% of assets but it clearly felt it had to take action. The fund had around 62% of its assets in London and the south east; its biggest investments included shopping centres in Leamington Spa, Newcastle and Slough.

Regulators worried last year about the possibility of systemic risk in the mutual fund sector, although then their concern was about corporate bonds, rather than property. The good news is that this is not like the money market fund crisis of 2008; few people will be keeping their spare cash in a property fund and most will realise that they can lose, as well as make, money. Nevertheless, this is the first real sign of post-Brexit financial stress.

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