Supply Chain Issues A Ticking Time Bomb For UK Property Sector?
The property boom in the UK has been well documented despite continuing issues like Brexit and COVID, but is this key sector due a rude awakening thanks to supply chain issues? Thomas Pearson and Hannah Smith from leading law firm JMW Solicitors have their say on this pressing matter…
British Steel, one of the main suppliers of steel in the UK, abruptly stopped taking new orders in May due to ‘extreme high demand’. This comes just weeks after the major financial backer of Liberty Steel, Greensill Capital, goes into administration and financial pressures mount for the company.
The potential impact of the closure of British Steel’s order book was discussed by Real estate professionals from a variety of sectors at the weekly JMW Real Estate Zoom meeting.
This just appears to be one more addition to the recent stories of raw materials shortages in the UK construction industry which are starting to cause price increases and delays nationally and ongoing reports suggesting that delays and shortages may run into the Summer.
Thomas Pearson, Partner and Head of JMW’s Real Estate Commercial Department and host of the Round table commented:
“ We started the round table in the first lockdown to provide a forum to share knowledge across clients, prospects and fellow property professionals. Discussing salient issues facing the property industry such as supply shortages is important and helps us to understand the pressures that clients are facing on development projects and also to share possible solutions and insight across the various sectors.”
Thomas Pearson, Partner and Joint Head of Department at JMW Solicitors.
Rising Costs
SME builders have already seen the impact of British Steel’s actions, with the cost for steel increasing by a reported 10%, with further price hikes anticipated in June. This means that not only will it take longer for steel to be delivered to projects, it will also be far more expensive.
In addition to the problem of supply and demand, prices have been affected by a near doubling in the price of iron ore and scrap steel, according to Billington Holdings Plc. This is in addition to the inevitable impacts of Brexit, delays to sea freight caused by the blocking of the Suez canal, and the worldwide effect of the pandemic on trade and finance.
And steel is not the only commodity which has seen prices soar and supply become increasingly limited. The Guardian has reported the effect of rising cost of materials such as concrete and roof tiles, whilst some real estate professionals have taken to LinkedIn to lament one supplier’s 5% price increase on all products.
Impact
Existing contracts
According to JMW Real Estate construction specialist, partner Helen Daley, the impact of delays and costs increases has a differing effect depending on the terms of the contract but it can leave a contractor exposed to paying damages; or a Developer exposed to higher development costs.
Some have altered their approach to contracts in the wake of the pandemic and clauses relating to delays or rising costs as a result may stand contractors in good stead now, possibly allowing them to mitigate the potential loss due to lack of raw materials.
Most construction contracts should include a force majeure clause as standard. A force majeure clause sets out what should happen in an exceptional event, out of the control of either party. Force majeure clauses are however very difficult to rely on and it may be difficult to persuade a court or an arbitrator that price rises are an exceptional circumstance.
Future contracts
Contractors and developers should both give consideration to how the issue of rising costs and delays should be handled from the outset and should include a clear procedure for dealing with these in the contract.
Helen adds that consideration should always be given as to the terms of the contract being proffered since the terms and conditions can add to an already heavy cost and time burden. Our construction team at JMW is able to advise in relation to contracts and the effect of such clauses for both the contractor and the developer.
Alternative materials
While steel has long been the material of choice for high and low rise developments alike, Real Estate Zoom member Marcel Ridyard of AFL Architects was of the view that the current difficulties involved in sourcing steel may lead many projects to turn to alternatives. For Marcel, timber was a good alternative option in many cases. Timber is generally as long lasting as steel, and also achieves good fire safety ratings when handled correctly. When the environmental benefits compared to carbon hungry steel are added to the current financial arguments, more developers may turn to this green solution.
That said, timber supplies have also been hit; with some reporting price hikes of up to 70-80% in the last six months alone. In the longer term however, the current squeeze on steel may lead to a greater use of more environmentally sustainable materials.
But is it all bad news?
Helen for one is optimistic. The temporary closure of order books is just that; temporary and is, in any event, linked at least in part to the increase in projects in UK infrastructure in the first part of Q1.
In March 2021, construction ‘output’ grew by 5.8% - the growth since September 2019 (and 2.4% above pre- pandemic levels recorded in February 2020).
While factors related to the pandemic may have skewed that data, there does seem to be an upwards trend (the March figure was up from the reported 1,6% growth in the preceding month).
The JMW Real Estate Zoom is a weekly round table involving a range of professionals from all sectors of real estate. If you would like further information, or to attend future Real Estate Zooms, hosted by JMW Solicitors, please contact Thomas Pearson.
