Will construction lead us into economic growth?

Both RICS and the Ulster Bank have reported that Northern Ireland’s construction sector is at last showing the green shoots of growth, while the University of Ulster quarterly house price index shows that house sales increased by more than 20% in the third quarter of this year. But what do the companies on the coal face of the industry say? Emma Cowan reports.

Seems it’s good news all the way for the construction sector, vital in driving economic growth, during the third quarter of 2013. Both RICS (the Royal Institute of Chartered Surveyors) and the Ulster Bank report a sector moving out of recession for two quarters in a row.

The RICS Construction Market Survey reports Northern Ireland’s first workload rise since the first quarter of 2008. Nevertheless, according to RICS, whose survey was UK-wide, Northern Ireland continues to lag behind the rest of the UK which recorded an overall score of +38 on the index, against a mere +10 for Northern Ireland.

Jim Sammon, RICS Northern Ireland construction spokesman, was realistic about the reported rises: “The survey chimes with anecdotal evidence of more positivity in the sector. However, we are talking about small improvements from a low base, and the key challenges for the sector locally remain. Finance is tight, private sector activity remains scarce, and public sector demand remains constrained.”

First In Last Out

The latest report from the Ulster Bank PMI (purchasing managers’ index) corroborates the RICS survey findings: “According to the official quarterly output and employment surveys, Northern Ireland’s construction industry was the first sector to enter recession and remains the last to exit. However, the PMI survey, which has been a reliable indicator of the local construction industry’s performance to date, suggests that the sector has finally boarded the recovery train. Indeed, the September survey represents the best set of monthly figures within the quarter, with a marked acceleration in construction activity and a pick-up in new orders and employment levels. Furthermore, construction firms were able to raise prices for the first time in the series history.”

The University of Ulster’s quarterly house price index shows a growth in house sales of 20% during the third quarter of 2013, recording 1,706 transactions over the three-month period – the highest rise since the second quarter of 2007.

It is widely recognised that construction is an important barometer of overall economic health and growth, so what do the companies in the sector report? NI Business Now talked to Stephen Kane, Managing Director of Ridgeway,  a leading supplier of access and work at height products and specialist metal mesh and building products to the construction, engineering and renewable sectors.

Cautious Optimism

According to Stephen Kane, order books have shown a modest increase over 2012 levels. “Much of our growth has been fuelled by new, private-funded projects, particularly in the energy – oil, gas and renewables – sector in Europe. Over the last quarter, however, we have seen enquiries growing in the home market, with more pricing requests and a more positive vibe locally.

“I think there is a growing momentum, but we have still to see the results to prove it. The local industry has been torn apart over the last six years, especially at the professional, supplier and subcontractor levels, resulting in a loss of key skills and experience. It’s undeniable that a shortage of skills and cash to scale up could be an issue looking forward. With fewer projects and sub-economic tendering activity, combined with late payments into the chain , confidence is very low and we are all still cautious to suggest this is finally over, albeit it feels like things are building from a low base which is the good news we have all been waiting for.

“We need to plan for growth, however, and be prepared with the right accreditations, systems, skills and efficiencies needed to be preferred suppliers that add value, rather than just lowest cost for someone else’s benefit. Businesses that want to rebuild revenue levels cannot sustain their own growth and recovery without a margin. The public sector, in particular, must appreciate this point – lowest price does not necessarily give lowest lifetime cost or best value.”

Workflow and cashflow

According to Stephen Kane,  the  public sector still has a key role on the road to recovery:  “Government spend has been very slow to release on key projects and frameworks and it is only in recent months that progress seems to have been made towards deal flow and red tape relaxation.”  He believes this will help build the confidence needed to allow the industry to scale up and that public sector movement will lead on to a dynamic environment that is more flexible and progressive , thus encouraging more private investment.

“There is still much work to do from the big white house on the hill. Local industry needs brave , capable and strong leadership for economic recovery , focused on delivery and willing to listen to what the people in the industry are saying to help achieve this goal. We must not forget the huge multiplier effect the construction industry has on the local economy and benefits for indigenous businesses that have supported it.”

It is not just increasing orders that will point the way to recovery, but also improved cashflow within the system. According to Stephen Kane, this is still a major issue for companies in the construction sector, particularly in the supply chain.

“I’m sure we are similar to others that have been turning more pounds for less profit and prices in Irish markets are among the lowest in Europe. Debtor days have risen by over 20% and even more dramatically in certain customer segments. Despite every effort to support loyal business suppliers are having to get much tougher to force cash flow down supply chain faster. Pay when paid is no longer an option for the future.”

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