Aaron Baker is an investor at investment firm BGF
There is little doubt that the last two years have thrown significant challenges at the construction industry. But, unlike many sectors, it has demonstrated real strength and depth by rebounding quickly from the impact of the pandemic, with most subsectors now either close to or at pre-pandemic levels of growth.
While the lingering effects of the pandemic remain, the outlook for the construction sector is positive and growth is firmly on the cards for many businesses. However, the landscape has altered, bringing new considerations when it comes to attracting growth capital in the current climate.
When preparing for growth, what do you need to take into account?
- It may sound obvious, but be good with money
Construction is a business that absorbs a lot of cash. At any point in time you might have millions of pounds tied up in part-finished or unsold properties. Managers need to strike the right balance so they are continuing to invest in future sites, still paying their overheads, but not running out of money. To do this effectively, the management team needs to be driven by data, understand the appropriate levers and react to the market quickly.
- Trusted subcontractors
A lot of construction businesses operate with subcontractors, and they ultimately determine the quality of the build and the margins that can be delivered. Will they battle to maintain your brand? Can they scale with you? The key to earning the loyalty of subcontractors is to treat them well and honestly, pay them on time and offer predictable work. This is especially important as factors such as Brexit have made it even harder than usual to attract and retain tradespeople.
- Navigate the planning process
A piece of land could be worth £40,000 or £4m, depending on whether it has planning permission. To navigate the planning process successfully, a business needs a strong technical team who understand the needs of local communities, planning agendas, local plans and suitable end-products for the market. A lot of people are involved in planning – committees, councillors and local people. We tend to back businesses because they have the local knowledge needed to get approvals, delivering schemes and projects that local communities want.
- A healthy pipeline
Investors want to back businesses with the potential to grow. That means that on top of any current projects, they have a land bank or project pipeline with planning permissions under way, or a clear path to increasing output. Again, this comes down to having a strong technical team to find the right sites, acquire them at the right prices and reliably convert.
- Consistently strong margins
A good management team has a firm grasp of the business model, plans ahead for potential cost increases and other difficulties, and still delivers the right level of profit. I look at gross margin, which is revenue minus the cost of the build. A business that delivers a consistent gross margin of 20-30 per cent is well managed and clearly knows what it is doing, especially in a turbulent market or over a sustained period.
- Cost control and management
Linked to the last point, it is essential to control costs. This applies to procurement and wastage, but also time. If a project is supposed to take six months but takes seven, you might have a problem – whether it be time availability, cost overruns or cash management. You don’t necessarily need a large, central overhead base, but you need good people and good systems, and a management team with the ability to pull everything together into a coherent view. To take housebuilding as an example, there is always a lag between setting the sales price and completing a sale – often with costs still to be incurred, which may be different to those initially forecast. In between those two points in time, a good housebuilder will do everything it can to protect its margin.
Even in traditional industries, such as housebuilding, technologies are evolving quickly, with gas being phased out of new builds, increasing use of renewable and sustainable technologies, remote working and electric vehicles all changing the blueprints of traditional house engineering. Businesses willing to adapt to market change or, even better, get ahead of it excite investors – as do the associated supply chains that will support the growth of new technologies, or change the way in which we use or buy products in the sector.
Of course, those businesses with big ambitions across the sector are the most exciting for the investment community. Providing the tools and the capital to deliver on this ambition is what the investment journey is all about.