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Will the sector cope with ‘no-deal’ Brexit shortages?

The social housing sector is bracing for a shortage of bricks, mortar and other materials if we end up with a no-deal Brexit. Rhiannon Curry finds out more. Illustration by Ben Scruton

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Will the #ukhousing sector cope with ‘no-deal’ Brexit shortages?

The social housing sector is bracing for a shortage of bricks, mortar and other materials if we end up with a no-deal Brexit. We find out more #ukhousing

A home, as we are so often told, is not just bricks and mortar.

That statement is as true in the literal sense as it is in the more poetic one it is often meant in.

In 2017/18, housing associations completed 41,566 homes, according to National Housing Federation figures.

This doubtless necessitated the use of large quantities of bricks and mortar, but also cement, windows, kitchens, plug sockets, timber and tiles, as well as thousands of hours of labour.

Many of these things came from, or through, Europe. And as the spectre of a no-deal Brexit rises, the question becomes: will they still be available?

And if so, how much will they cost?

The construction industry is perhaps even more invested in favourable trading arrangements with the EU than other sectors are.

A 2016 study by the Department for Business, Energy & Industrial Strategy estimated that 62% of building materials imported to the UK came from the EU. If no deal is agreed, imports may be limited or subject to extra duties, which could lead to shortages and increased costs passed down the supply chain in the years to come.

“There’s a reliance on imports for mechanical components for lifts, boilers and air conditioning units, so the effects extend to repairs and maintenance as well as new build” – Rebecca Larkin, Construction Products Association

Meanwhile, Office for National Statistics figures show that one-third of workers on construction sites in London are from overseas, with 28% coming from the EU. Across the whole country, about 7% of workers in the construction industry are EU nationals. Trade bodies say that in housebuilding this is even higher – especially in the capital.

At the end of last month, the construction sector’s biggest trade bodies urged the government and MPs to agree terms with the EU, warning that a no-deal Brexit could lead to a 4% drop in output.

The implications for the housing industry are clear: if the UK crashes out of the bloc without having finalised how goods can be brought in or whether foreign nationals can stay and keep coming, then companies that plan on developing homes face a deeply uncertain future.


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“Any rise in products and materials prices would predominantly affect imports, and instantly, as a result of a depreciation in sterling,” warns Rebecca Larkin, senior economist at the Construction Products Association.

“Given the 15-20% depreciation we saw after the EU referendum, a similar depreciation would not be unexpected in the event of a no-deal outcome at the end of the month.”

The UK is highly dependent on imports for certain products, including timber, structural metals such as steel and aluminium, heating and ventilation equipment and electrical components.

“In addition, there’s a reliance on imports for mechanical components for lifts, boilers and air conditioning units, so the effects extend to repairs and maintenance as well as new build,” Ms Larkin explains.

“We’re already in the part of the cycle where [house sale] prices have fallen but costs have risen” – Nick Hutchings, A2Dominion

Any price rises as a result of a no-deal Brexit will add to increases borne by the sector over the past three years.

According to government data, materials and components prices in new housebuilding rose 4.7% in 2018 and 5.2% in 2017, following a 0.3% rise in prices in 2016.

The Federation of Master Builders’ latest survey of its members showed that around 87% of businesses think costs will rise during the first half of the current year.

“We’re already in the part of the cycle where [house sale] prices have fallen but costs have risen,” says Nick Hutchings, managing director of A2Dominion’s commercial arm. “Contractors are beginning to look at their margins.”

He says that the availability of labour isn’t particularly a concern, as a slowdown in the number of homes being started has evened out the supply of workers.

“We thought that after Christmas we would see a drop in Eastern European labour, but that hasn’t really happened. I think that is because of the nature of the workforce: they don’t plan ahead and tend to go where the work is, and at the moment there is plenty of work in the UK.”

As it stands, the government’s post-Brexit immigration plan would effectively bar most construction workers from coming to the UK to work for more than a year.

Instead it focuses on ‘skilled’ workers earning more than £30,000 per year.

This proposal assumes that the UK can provide its own workers for the sector, explains Will Jeffwitz, policy leader at the National Housing Federation.

“Housing associations are doing a lot, and are keen to do more, in training people up through apprenticeship schemes and so on, but that will take a while to filter through,” he says. “There will definitely still be a need for construction workers from the EU if we are to sustain the level of housebuilding that we need.”

What happens next?

Workers

During a post-Brexit transition period, or immediately following a no-deal Brexit, EU workers in the UK will have to register for settled status to continue living in Britain after 30 June 2021.

People need to apply even if they were born in the UK but are not a British citizen, have a UK ‘permanent residence document’, or moved to the UK before it joined the EU.

Materials

Timber imported from the EU to the UK will be subject to the same checks as are currently imposed on the rest of the world. This means suppliers will have to prove it has been legally harvested.

Other products or components are likely to face more stringent regulations, and imposing a new system of border checks could hold up some deliveries, especially in the first few weeks.

Housing minister Kit Malthouse has previously told Inside Housing that the government wants a skills and needs-based immigration system, and that “if there is a need for bricklayers and plumbers you would hope that would be reflected in immigration rules”. But businesses cannot trade on hope.

In fact, it is uncertainty like this that is currently causing the most concern, and that will continue until the terms of the UK’s ongoing relationship with the EU are established. In the meantime, where contracts are being signed, contractors are keen to agree a price beforehand, to protect themselves from price rises.

“There aren’t many contractors out there looking at flexible price contracts because of those cost increases,” Mr Hutchings says. “Where people are looking at that, they will have to pay a premium because the contracting partner will need to build cost increases in as a contingency.”

Some developers have begun writing so-called Brexit clauses into their contracts in a bid to protect themselves from disruption brought about by a no-deal. It is vital to establish who bears the risk of cost increases, or costs resulting from delays to projects if materials take longer to source than initially planned.

Paul Hackett, chief executive of Optivo, says that the organisation has also increased the amount of work it is doing in the pre-tender stage, to try to limit the “unknown risks”.

“Things like bricks: we're trying to source them from the UK as much as we can” – Nick Hutchings, A2Dominion

“Housing associations have to be much more proactive about the detail they provide during the procurement process,” he explains. “We’ve also got our own procurement team and they spend a lot of time talking to the supply chain.”

Other housing associations are taking a more proactive approach to protecting themselves from price rises.

“We’re now trying to source materials from the UK,” says Mr Hutchings. “Things like bricks: we’re trying to source them from the UK as much as we can and we’re trying to find sources for tiles, kitchens and so on.”

The company has been stockpiling some materials including bricks and roof tiles, he reveals, although it is not possible to do this for all the components it might need. An added complication is the threat that the UK’s exit from the European Union could be delayed while negotiations are ongoing.

But stockpiling is only possible while associations have somewhere to store the goods, explains Ms Larkin. “To hedge against further price rises in 2019, housing associations are likely to be doing an element of stockpiling, particularly of imported products. However, this is likely to be naturally constrained, due to either the types of products – timber doesn’t store well on sites that aren’t fully weatherproof, for example – or the limited space available for storage.”

While some companies are able to use their landbanks to hold some materials, the availability of warehouse space to hold others is limited. The industrial sector as a whole is facing a shortage of properties, thanks to the inexorable rise of online shopping, which has taken much of the available space.

With almost a fortnight to go, nobody knows exactly what will happen. And until we do, nobody can say with confidence quite where our bricks, mortar and everything else will come from in the future.

Read more about Brexit

 

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Downturn: why is L&Q cutting its surplus in half and what does it mean for the sector After L&Q revealed it is likely to cut its surplus by £158m this year, Peter Apps asks what this means for the financial model which has defined the housing association sector since 2010

What housing associations are doing to stress-test for Brexit With the UK’s departure from the EU looming, Luke Barratt looks at what housing associations have been doing to prepare

Regulator writes to housing associations with no-deal Brexit warning The regulator has issued a warning to housing associations over the threat of a no-deal Brexit, outlining key risk areas including shortages of crucial materials, a housing market crash and difficulties accessing ‘business-critical’ data

Sector draws up contingency plans for no-deal Brexit The country’s largest housing associations are putting in place contingency plans to protect the future of their organisations

How would the sector cope with a no-deal Brexit? As uncertainty around Brexit mounts and a no-deal looms, Inside Housing asks what it could mean for the housing sector

Current grant system won’t work in a falling market The government needs to think again about grant to prevent housing association development from collapsing in a falling market, writes Matthew Bailes.

S&P would downgrade half its rated housing associations after no-deal Brexit The credit ratings agency Standard & Poor’s (S&P) has said it will downgrade associations it rates if the UK leaves the European Union without a deal

 

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