2020 Year in Review – Construction & Property Sector

BLOG14th Dec 2020

2020 will undoubtedly be remembered as the year of ‘unprecedented’ challenges and change, for individuals and businesses across all sectors, particularly in Q1 and the start of Q2.

As we reached the mid-year mark, the construction sector was one of the first to mobilise out of lockdown, beginning early June with the start of the Scottish Government’s six phase recovery plan. As such the sector was at the forefront of the return to work initiative, making changes to working practices and H&S procedures as needed.

The property sector has followed a slightly different route, particularly developers with office space and with interests in hospitality and retail. With the majority of businesses still working from home, and with restrictions continuing to impact the leisure, hospitality and retail sectors, property developers have had to review their portfolios in a way no one could have anticipated this time last year.

As teams worked to protect their businesses against the impact of COVID, there was a noticeable increase in the understanding of the importance of cashflow position; with businesses taking the time to understand whether there were working capital shortfalls and which sources of capital were available to them. In short, were the KPI’s pre COVID still the right indicators for the business to operate effectively during COVID?

Financial support in 2020

For businesses that sought financial support earlier in the year, many are now nervously considering whether the support gained will be enough and many are once again running their financial models to identify when they may have cash shortfalls. By comparison, those businesses that went into the first lockdown on a sound financial footing with cash reserves are currently looking at various impact scenarios for their business.

For those whose cash reserves were slim and decided to delay seeking government supported funding, there will be some extremely difficult times and decisions ahead if there is a government enforced shutdown and revisiting cashflow modelling is recommended as a matter of urgency.

From our discussions with businesses operating successfully in both sectors, cash management and preservation is critical. Businesses need to have a clear short and medium term view of cash and working capital, identifying potential gaps early so that solutions can be found. Timely financial data is the foundation for sound decision making and allows businesses to go armed to banks and other funders with clear proposals.

Managing cash collection is an obvious focus when looking at working capital, but taking a holistic view of working capital includes managing exposure to land, bank and housing stock in particular given the uncertain outlook in residential housing.

As the economic effects of COVID worsen into the winter, companies should anticipate the impact on their workforce as many worry about employment security. The extension of the furlough scheme until March 2021 will have will have been welcomed for businesses who were likely to have been considering difficult decisions such reducing their workforce, wages and contracted hours. Additionally, many may need to reconsider staff cuts in light of the forthcoming vaccination program and how this may affect trading in 2021.

The impacts of Brexit

Looking ahead to 2021, we anticipate the risk of Brexit having a negative impact for many construction and property development businesses. In particular, Brexit will create issues with the movement of goods and the movement of people. If the current supply chain involves the direct sourcing of construction materials from supplier’s in other EU member states, the increased customs requirements and potential import tariffs will create a real administrative and financial cost for businesses [Link to https://aab.uk/downloads/technical-articles/tax-technical/816-life-after-brexit-november-2020].

Skilled and unskilled migrant workers account for approximately 14% of the UK construction sector workforce. Although certain building trades have been recognised by the UK Government as skilled workers, other important roles have not. For those construction businesses that rely on migrant workers from other EU member states, it will be necessary to understand how the end of free movement will impact on their future staffing requirements.

In addition, the construction sector will have to ensure that they are geared up for the introduction of the VAT reverse charge on construction services. These changes are an additional complication for what is already a complex area of the VAT legislation. Consequently, all businesses involved in the construction industry should review their supply chains to consider how they will be impacted by the changes and ensure that they have the necessary systems and controls in place.

Property developers should ‘take the long view’

For property developers there will continue to be a requirement to ‘take the long view’ with certain developments, easier said than done for those with developments in leisure, retail and hospitality and indeed those with office space as all businesses re-assess their office needs. It is therefore likely that ‘repurposing’ developments may be high on the agenda as we move into the New Year. If this is the case, our advice would be to ensure you fully understand the tax implications of any redevelopment. Look at the tax relief available through research and development and capital allowances for example. Whilst these can appear complex, the benefits of receiving relief as you innovate will be worth it in the long run, particularly with such a focus on cashflow.

If “unprecedented challenges” is the phrase of 2020, a close runner up would be “Cash is King”, and for both the construction and property sector cash must continue to be King as we close off the year and start a new one.

As a priority, businesses should focus on getting to a position where they can produce timely and accurate cashflow information, to enable them to react quickly and effectively to whatever is thrown at us in 2021.

Find out more about how we work with the Construction & Property sector.