CORONAVIRUS COVID-19 LOCKDOWN – WHAT DOES IT MEAN FOR CHIC’S MEMBERS AND SUPPLY CHAIN PARTNERS?

We are united by the huge disruption to normal life that the current pandemic has caused. Frontline staff are working flat out in high risk situations to protect the nations vulnerable, whilst many of us are working or furloughed at home. The construction industry and many of its supply chains’ have halted production – except for emergency activities – but our members – which provide people’s homes – must continue to function. Homes are now more occupied than ever.

The social effects of enforced lockdown will play out for many months and years to come. There could be a baby boom, an increase in divorce rates and partnership breakdowns. All of these will increase pressure on the need for more housing, and of a decent size and quality, with increased capacity for home working.

So, what are the two halves?

 

FIRSTLY, CHIC’s MEMBERS – HA’s an LA’s

·         They are required to have 12-18 months of liquidity by the housing regulator. This, plus a funding frenzy in 2019 in the run up to a potential ‘no deal Brexit’, means that landlords went into this in relatively good shape.

·         They may face rising arrears as Universal Credit applications hit record highs – but while the % increase may be significant, particularly in respect of leaseholders, for many the material impact will be limited, helped by government support.

·         And some are also looking to use the Bank of England support measures to further boost liquidity.

·         Planned rent rises, from 1st April 2020, after four years of the rent reduction, are proceeding, supporting operating income.

·         Maintenance work has reduced to emergency and essential compliance activities (where reporting responsibilities remain), so spend is significantly reduced and therefore more cash is being retained.

·         Newbuild construction sites have closed with a stall in development spend – this is also cash positive, as they are spending less.

·         Calls are already being made for additional investment from government to help get the housing market up and running again, with HAs’ the best-placed financially and structurally to move quickly.

·         Investors very much see this is a low risk sector vs. other industries/asset classes: retail, restaurants, hospitality etc. and credit rating agencies have also signalled strengthened sector liquidity. Recent bond issues were heavily oversubscribed.

So, the client half of the tale is in a sound place financially; most will come out of this period more cash rich than they entered it.

Reactions to supporting the supply chain and the response to the Cabinet Office’s guidance in PPN 02/20 (obliging organisations subject to Public Procurement Regulations to support contractors and suppliers) have been very varied. Some HAs’ recognise the responsibility they have to both direct employees, interims, temporary and zero hours staff but also to their suppliers and contractors employees and businesses.

They continue to provide support and payments, living up to their values as responsible employers and clients. But others have been more extreme. Some have terminated all interim and temporary contracts – with little or no notice – are not paying the supply chain and refusing to accept that PPN 02/20 is relevant to them (legal advice on this is conflicted). Some are the same organisations who claim to be great employers and have strong social values and responsibilities. For these contract clients, hopefully in a small minority, it is good news for their financial bottom line but their social dividend will take a hammering.

 

AND OUR SUPPLY CHAIN PARTNERS – THE OTHER HALF

Life for construction firms, contractors and the supply chain is far more challenging, with the whole industry – CHIC included – feeling the squeeze.

Many staff are furloughed but overheads (management, premises, vehicles, plant, IT, insurances etc.) still have to be paid. Margins, which are already tight, will be further eroded. For many, these months are about a survival strategy, keeping contracts and jobs intact, so that when a degree of normality returns the construction industry has a hope of quickly re-establishing ‘business as usual’.

Any extra cash staying with clients will have the opposite effect on ‘the other half’. Contractors and suppliers will come out of this with tighter cash balances and a greater reliance on funders.

There are reports of some contractors seeing this as an opportunity to generate claims. If these are in the spirit (and detail) of PPN 02/20 then that would support survival, but if any are exploitative that would be, at least, unfortunate.

The sector has seen a significant decline in larger contractors over the last decade – tight margins and decisions made on cost (not value) have taken their toll. The sector needs to support its contractors and suppliers, which need to remain viable and profitable. There will, after all, be a lot of catch up work to do.

 

WHAT’S NEXT?

As lockdown restrictions ease – in due course – contracting and supply chain demand will be increased. There will be a big backlog of repairs (probably nearly one repair per home in the sector) and the need to catch up on stalled planned investment and new development.

We need to manage this carefully together, to avoid big claims, peaks in labour and materials pricing and any exploitation of market opportunities (by clients, contractors and the supply chain).

My hope is that the strong social values that are shared across the sector will bind us all together after lockdown, to re-establish ‘normal life’ and prove that our joint ability to be socially responsible in response to the pandemic can be equalled in our commercial behaviours thereafter.

 

John Fisher
Managing Director
Central Housing Investment Consortium Ltd

 

 

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