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There’s no doubt that the UK’s property and construction sector continues to face significant challenges, with insolvencies at their highest rate in over a decade. According to government statistics, there were 4,263 insolvencies in the 12 months to August 2023, 8.3% higher than the same period a year ago, and close to the peak of 4,537 insolvencies in 2012, in the aftermath of the financial crisis writes Justin Moss, Partner and construction specialist at MHA.
The sector has been particularly hard hit by increases in the cost of energy, materials and borrowing, compounded by supply chain issues, skills shortages, a slowdown in housebuilding, government delays on major infrastructure projects, as well as unpaid bills and bad debt left by firms that have failed.
The latest ONS UK House Price statistics indicate average prices are up 0.2% in the 12 months to August 2023. However, this is at odds with both the Halifax and Nationwide House Price index, which in September, reported year-on-year falls of 4.7% and 5.3% respectively. At the same time, the construction sector saw its biggest slide in activity for over three years according to the latest S&P Global/CIPS UK construction Purchasing Managers’ Index (PMI). Their monthly survey showed a steeper than expected decline to 45 in September from a fairly neutral 50.8 in August, indicating that the housing market is flat and confidence is fragile.
The build to rent (BTR) sector has faired a little better with institutional investors taking the longer-term view of investment returns.
It’s also a concerning time for those in the commercial property sector, with landlords of older office space, facing difficult choices around investment to compete with newer office buildings that tick more of the green credentials.
Buy to let (BTL) landlords are also facing significant challenges with higher mortgage costs and legislative changes to contend with. The controversial Renters’ Reform Bill had its second reading in Parliament on 23 October, where Housing Secretary Michael Gove spoke of the need to balance the needs of tenants and landlords in the progress of the bill. He announced that the abolition of section 21 (no-fault evictions) will not proceed until reforms to the justice system are in place. The bill was due to come into force in England next year.
BTL mortgage rates have shot up in 2023 as lenders increased costs in response to the Bank of England raising the base rate. However, the demand for rental properties remains high and market rents grew by an average of 6% in the 12 months to September 2023.
In September 2023 the base rate, which plays a pivotal role in determining mortgage rates, stood at 5.25%. This was the first month since November 2021 that the BoE didn’t increase rates.
Landlords and owner-occupiers alike will therefore be feeling the effects when they come to remortgage. Those with expiring fixed-rate deals secured when rates were much lower, could be in for a financial shock when refinancing to a new deal; or find they no longer meet the lenders affordability criteria.
However, there was some relief for landlords with the government scrapping Energy Performance Certificate (EPC) targets. As it stood, landlords would have been required to bring their properties up to an EPC level of C by the end of 2025 for new tenancies, and by 2028 for existing tenancies.
In contrast, student accommodation is expected to see material growth this year with record applications for university places and limited supply. This has led to high levels of investment in purpose-built student accommodation (PBSA) over the last few years, however, the rising cost of university attendance, a clamp down on ‘low quality’ degrees, and a tougher stance on international student visas may hit future demand.
The UK construction and property sector is resilient, but it needs strong leadership and stability. In February 2023 Rachel Maclean became the sixth housing minister within a year, and the fifteenth since 2010. Such a rapid turnover is not conducive to the development and execution of a co-ordinated strategy to address the multi-faceted issues the sector is facing; and capitalise on the sectors potential to drive growth in all areas of the economy and address the current housing crisis.
MHA understands the nature of the property and construction sector and the challenges faced by those who operate within it. With accounting and financial management at our core, we guide businesses from start-up all the way through to exit planning, advising on growth strategies and on how to survive a changing economy and an uncertain future.
We are hosting our annual Construction & Real Estate Forum on Thursday 23rd November 2023 at our London office, for Business Owners and Finance Directors operating in the sector.
The forum is designed to keep your technical knowledge up to date and help you comply with the ever-changing regulatory environment in the worlds of Financial Reporting and Tax; whilst highlighting planning points which can be used in practice.
With expert speakers from across MHA, this event will focus on the latest developments in Tax, VAT and UK company law and accounting standards, including:
Further information about the event and booking details can be found on our website: www.mha.co.uk/events
Contact MHA’s experienced Construction & Real Estate specialists by email: webenquiries@mha.co.uk or call 01628 955915
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