Construction SME, brexit

2020 was a challenging year for businesses with SMEs being hit the hardest. The Covid-19 pandemic put the brakes on major economic investment and caused significant supply chain disruption, but not all is lost. Andrew Dixon, commercial director specialist finance at Aldermore explains

Despite the current national lockdown, there is hope that in the medium term, a degree of normality will return as the vaccination rollout continues at pace. However, in the meantime businesses will have to manage both the changes brought about by Brexit and the continued impact of the pandemic.

Construction was fortunate in that they only had to down tools during the first national lockdown in March last year. Although extra measures and costs had to be incurred to ensure that sites could operate in a Covid-safe manner, the damage inflicted was far less than in sectors such as hospitality and transport.

Recent data from the ONS shows that the construction industry recorded a seventh consecutive month of growth in November 2020 since the record decline of 40.7% in April 2020. Encouragingly, all construction output has now recovered above its pre-pandemic level for the first time.

Sentiment among SME construction firms is also more upbeat; nearly half of construction decision-makers (47%) described their overall mood now as positive according to UK Finance’s most recent SME Finance Monitor, up from just 19% in Q2 2020. Construction SMEs along with business services firms were also the most likely to say they were ‘planning for the future’, with only 17% of building firms saying they were still focused simply on dealing with the crisis.

In short, the data reveals growing signs of the construction sector beginning to look ahead and anticipate something much more akin to business as usual. The new lockdown is a setback for the wider economy but its impact on construction firms should be limited. Businesses have used various government support schemes to protect their themselves financially. Our own experience with clients’, it that activity has largely recovered with turnovers returning towards where they were when the pandemic began.

Brexit uncertainty remains among SMEs

Whilst the construction sector fared relatively well during the pandemic in comparison to other industries, Brexit uncertainty still lingers.  It will take some time for the new trading conditions to settle and it is quite possible that we’ll see some teething problems as everyone gets used to the new regime. On a positive note, it was a huge boost to businesses that a trade deal was agreed, the absence of any tariffs or quotas being a key win.

Similar to the impact of Covid-19 on businesses, construction SMEs are perhaps more shielded from the possible effects of Brexit than other sectors as they generally do less work with the EU. A recent survey conducted by Aldermore found that just over than a quarter (28%) of UK construction SMEs monthly income is dependent on business with the EU.

However, one area of construction which could be prone to disruption is the supply of materials. Around £10bn of building materials are imported to the UK every year and if there are delays at ports and transport bottlenecks, this could create costly building delays. Aldermore’s research found that many SMEs in the sector had made little arrangements for such disruption, with 40% of construction SMEs saying that they had made no preparations for Brexit.

Another important area which could be impacted is the availability of labour. Many workers in the UK construction industry are from overseas and a points-based system to live and work is coming into effect. Those already resident in the UK have until 30 June to apply to remain. Construction firms need to analyse the possible impacts of this on their business carefully and support staff caught by the new regulations through the process.

Our survey indicated less than one in ten (8%) employers had ensured that relevant employees had applied for the EU Settlement Scheme (a figure that was similarly low across all sectors). Businesses should first consult the government’s guidance for SMEs post-Brexit transition to help work out how regulatory and policy changes might impact them, which can be found via Aldermore’s dedicated Brexit page.

Whilst Brexit poses some challenges to SMEs in the sector, there is also an opportunity for businesses to take advantage of the changes. In our recent survey, nearly a quarter of construction respondents (23%) said they expected to find more suppliers within the UK. Meanwhile, as a result of Brexit, one in five (19%) SMEs have diversified into new markets. It will be interesting to observe the impact of Brexit on businesses in the coming months and what the pattern is over time.

With the UK/EU trade deal agreed and the vaccination rollout continuing at pace, the outlook of UK construction businesses is improving, however, there are still a variety of challenges SMEs need to prepare for. Construction firms have proven themselves to be resilient, determined, and adaptable in the last year and we have every confidence that this will continue through into 2021.

 

 

Andrew Dixon

Commercial director specialist finance

Aldermore

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