In the fourth of our debate series, we assembled a panel of experts to look at what contributes to a successful economic environment for the construction industry to thrive in Scotland.
The main issues debated were:
- The need for clarity and stability
- Attracting and securing funding and investment
- The challenges of the Scottish planning system
- The ever increasing need to encourage new talent and skills into construction
- The need for innovation and modified procurement models
Of all the proposed solutions, our panel suggested that collaboration and clarity are key to unlocking development and they highlighted that while innovation is essential across all sectors and practices (in both public and private sectors and across financial, advisory and contractor markets) – it is also important that we learn from previous lessons and hold on to fundamentals which have been effective, instead of always needing to recreate and re-educate.
The panel
Our chair for this debate was Managing Partner of The Glenmhor Partnership Kevin Bradley. With over 25 years’ experience in the construction and property industry he was well placed to manage the variety of subjects covered by our six panellists. We were delighted and privileged to have an economic and financial perspective to the debate with the Bank of England’s Agent for Scotland, Will Dowson and Jonathan Kelly, Director for Large Corporate Group at Santander UK plc. Also joining the debate were developers Stephen Lewis, Managing Director of HFD Property Group and Lynn Smith, Senior Director Development at Aviva Investors. We were also pleased to have a planning viewpoint to discussions with Iceni Projects Planning Director Gary Mappin. Murray Collins, Managing Director for Fusion Assets (North Lanarkshire Council’s development and regeneration partnership vehicle) brought another dimension to the debate with a public sector and industrial market outlook.
Context
The construction industry in Scotland contributes circa 10% to our GDP which equated to around £15.5bn but in 2018, that figure had dropped to £14bn.
Despite a small 1.3% growth in the Scottish economy in 2018 and with more people in employment than in recent years, the construction industry has seen 5000 jobs lost in Scotland in the last year and the collapse of major players or profit warnings from large companies in the market. The high street has seen an increase in CVAs (company voluntary arrangements) across retail and restaurant brands and as a result more empty units, yet there is a lack of quality office space and an increase in housing demand and supply. There is a dichotomy in reality and we must address it to ensure we survive.
Volatility, Clarity and Stability
It appears that Scotland’s economy is in a growth period (albeit small) and our debate opened with discussion around whether the current political backdrop had actually created a more positive environment for Scottish business.
Our panellists highlighted that business just wants clarity. The market is constrained as businesses aren’t prepared to make big decisions while they are unsure of the direction of travel. Stephen Lewis highlighted that while there is finance in the market, there is a fantastic imbalance between supply and demand on speculative office development due to a historic lack of development. Murray Collins agreed that there is a lack of developers and contractors in the current Scottish marketplace who are prepared to build industrial units on spec too.
Will Dowson highlighted Scotland’s economy is performing largely the same as the UK but what the Bank of England Agents have noticed is that the volatility of Brexit has made people think more about their strategy. Will said that a pick up in investment is expected once there is some clarity around Brexit and businesses that are likely to capitalise are those which are adapting to serve the economy of the future.
The panel agreed that there has been some movement in the market with a surge in investment to UK funds mainly from Sovereign Wealth and Asia Pacific markets. These investors have no preconceptions of where within the UK their money is invested – for many it’s a currency play at the moment and with an aggressive London commercial market, the regions are very attractive. There has also been better access to loan finance options through the public sector in the last 18 months e.g. SPRUCE.
There was discussion around the damage a protracted Brexit process is having on business in general -with Jonathan Kelly’s personal view that the longer discussions may result in a ‘harder’ Brexit, which in turn will likely trigger IndyRef2 prior to the Scottish Parliament elections in 2021.
The audience agreed that the market needs clarity – the impact of instability on the sector’s supply chain is that there are a lack of skills and resources able to commit to a project for its duration.
Some of the panel suggested that innovation should not only be about strategy and approach but also apply to procurement and financial models. There was also debate around the need for non-guaranteed fixed price contracts, with early contractor involvement and open discussions to provide more certainty in delivering a project’s budget, quality and programme.
Planning
A common discussion point across the debate was planning consents and the barrier the current planning system creates to development in Scotland. Gary Mappin highlighted that there have always been reviews to make the planning system faster, cheaper and better but in reality there is no ‘silver bullet’ solution. His view is that there was nothing fundamentally wrong with the current system that could not be addressed, however a very open and social media led review with lots of lobbying from non-experts, has resulted in a draft Planning Bill going through approval which is now not fit for purpose. Both Gary and Lynn suggested that practical solutions should be learned from the English system with the adoption of Planning Performance Agreements (PPAs) in lieu of some of the more radical objectives.
Gary suggested that to unlock development the whole country needs a strong, effective, forward thinking and innovative planning system. Everyone agreed that there is only so much which can be achieved by throwing money at it – the planning system needs properly resourced and invested in. Developers already pay significant fees and the return service is wholly inadequate. There was acknowledgement across the panel that the planning officers have a really tough job – their role within Local Authority has been devalued and departments are hugely under resourced and influenced by inexperienced elected members. It was highlighted that there is also disparity across Local Authorities around Scotland on the level of service delivered.
When asked how the system could be improved, the panellists agreed that there is appetite for change at a Scottish Government level, but professional and industry bodies such as SPF need to influence and work with executive officers early on to ensure that resources are sufficiently provided.
Resources and skills
Expanding on the topic of resources, discussions moved to highlight that these issues are not unique to planning, with all of the supply chain experiencing a shortage of skills.
Lynn Smith expressed her delight in seeing contractors in Scotland leading the way in bringing young people in to the sector, citing Robertson and ISG as great examples. But some of the panel stressed that more needs to be done by the industry’s professional institutes such as the RICS and RITP, to encourage new entrants to the construction skills market. They highlighted the lack of support in promoting professional skills and education routes with Lynn’s view that too great a focus is given to University courses and insufficient support of further education and apprenticeships.
With a predicted fall in migration post Brexit it was expressed that more should be done to retain the best talent within the UK’s construction industry and, that lessons could be learned from countries such as Japan where innovation utilising digital skills, automation and artificial intelligence attract young people to the industry.
Reigniting town centre development
Our panel were asked what could be done to drive town and city centre development to help regenerate the urban economy. Stephen proposed a simple solution; “get more people living in town centres”.
The panel agreed that town centre regeneration is a challenge, which can take time, but needs to be driven by creating footfall both during traditional trading hours and for twilight trading. Gary advocated that retail is not dead, it just needs repositioned and town centres need to return to having complementary facilities such as doctors, dentists and further education buildings. Stephen highlighted that focus in previous years has been on developing housing in out of town and on greenfield sites, but to create urban hubs there needs to be innovation in housing development, with Murray addressing the planning challenges again by suggesting the adoption of zoning to promote effective development.
Funding future development
When challenged on what the UK’s financial institutions could be doing to help unlock development, Will’s view is clear; “collaborate or die!” Will complimented Scotland’s construction industry for its innovation but suggested that funders will need to consider how they support that innovation. As the economy is changing so too must the relationships between funders and developers, with more collaboration perhaps being the key to unlocking innovative schemes.
Post Brexit investment
Revisiting the topic of foreign investment, the panel were questioned on how to ensure its attraction if the value of the Pound improves. Our panellists outlined that to investors outside of the UK, Brexit is not the only influence. Whilst UK assets currently present good value; fundamentally what attracts investment is a safe, favourable business environment, with a strong framework (good legal system, confident advisers, strong legacy of successful development and entrepreneurial spirit) and a stable banking and political system.
The Bank of England’s interest rate and quantitative easing policy continues to support the economy, including investors in the property market. Also the Bank has stress tested the major banks against a potential shock from Brexit and they are able to withstand that.
Summary
Despite the current political environment and with the end to Brexit still not yet in sight, our panellists are confident that to the outside world, all is not as bad as it might seem domestically. Their advice is to look at the construction industry with an optimistic view – markets are moving and there are huge opportunities in the future.
To unlock development and help the economy thrive, we need to be entrepreneurial, collaborate to develop innovative solutions and attract talent to build a sustainable construction and property industry for the future.
Mackenzie England would like to thank everyone who came along and participated in making the debate a great discussion. Special thanks go to Kevin Bradley for chairing the debate and to our panel Will Dowson, Jonathan Kelly, Stephen Lewis, Lynn Smith, Gary Mappin and Murray Collins for sharing their honest opinions and informed views. Thanks also to RICS Glasgow regional committee Vice Chair John Edwards, RICS Matrics Chair David Robertson, CIOB and NOVUS for their support.
We would welcome your views on the topic, which you are invited to share through LinkedIn here.
Mackenzie England will be hosting another panel debate on 12 September 2019. Chaired by Derek Shewan, CEO of Robertson Group, we are currently proposing the topic of the future talent of the construction industry and how to create a sustainable workforce. Follow us on LinkedIn to find out more. If you would like to be added to our email invitation list, please contact kirsty@mackenzieengland.com.
