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The outbreak of the Covid-19 has devastated the whole economy and almost all the sectors, including the home construction sector are under severe pressure due to it. Things seem to be tough, as the unemployment has gone up significantly, which would eventually lead to a decrease in consumer spending. Secondly, people and businesses are struggling to pay rents which would eventually decrease the value of the property. In such a scenario, the businesses involved in this sector are facing a huge liquidity crisis.
The most vulnerable of these businesses are small and medium-sized housebuilders (SME’s). Due to their limited scale of operations, they have a limited amount of access to credit. As per some media reports, housebuilders in the United Kingdom are lobbying with the government for a dedicated emergency fund for the sector identical to the stimulus provided by the Scottish government. While other methods are being looked upon, it is very early to make an assessment regarding the outcome of the discussion.
The businesses in the sector are currently grappling with a cash crunch and are pushing hard for this deal. Amid the outbreak, the British government has announced multiple rate cuts along with dedicated schemes for different sections of the economy. These include the Job Retention Scheme or the Furlough scheme for working people. The government announced a dedicated scheme to support the self-employed. Similarly, for businesses, the government launched coronavirus business interruption loan scheme, Bounce Back loan scheme.
However, across the world, smaller entities are still struggling for access to credit. The plight of the UK’s smaller housebuilders is no different as they struggle to access government-backed loans from the financial institutions.
Boris Johnson, the British Prime Minister, has included the Home Construction sector in the lockdown easing plans, provided they implement the new safety measures and practice social distancing.
What is Scottish Government’s loan scheme for SME housebuilders all about?
This scheme was announced earlier this month. The loan amount offered under this scheme is between 50,000 to £1 million at a fixed rate of interest of 2 per cent per annum and is expected to be repaid within 24 months. However, the loan repayment terms are flexible.
The short-term loan funding is being provided to cover 3 months of liquidity support to the businesses. The businesses would be asked to justify as to why they were not able to secure any loan from existing support routes. The loans would only be granted after proper due diligence is done without any negligence.
Due to the temporary closure of the housebuilding sector because of COVID-19 spread containment measure, the Scottish government had announced an emergency loan fund to support small and medium-sized housebuilders with liquidity issues. An emergency loan fund of £100 million has been announced by the Scottish government to lend support to the vulnerable sector facing an existential crisis due to temporary suspension of operations at sites. The highlight of this scheme is that it is complementary and can be clubbed with other schemes as well. The SME housebuilders operating within Scotland can apply for this scheme.
The scheme aims to prevent the collapse of the housebuilding sector and retain its diversity. The stimulus would not only protect job losses but would also ensure the livelihood of the suppliers. On the same time, the revival of this sector would ensure a continuous supply of homes and would also help in economic recovery in the post-Covid-19 scenario.
However, the SME housebuilders must fulfil some conditions to avail of this scheme. The housebuilders should be established business in the pre-Covid-19 era and must be severely impacted by the outbreak of the pandemic. The loan seekers must have a turnover of £45 million or less along with a viable business model in the pre-Covid-19 era. Also, the housebuilders must have delivered five or more houses per year in the past. These schemes are for housebuilders who are not able to secure credit from the Scottish government or the British government amid the coronavirus crisis. It is important to note that this scheme cannot be availed from existing lenders.
What can the British Government do?
As the Bank of England announced several rate cuts to historic lows, and the availability of various relief packages to businesses and the individuals, people gained access to cheap money. If the government announces a similar package for housebuilders in the UK like that of Scotland, the home construction players would have the incentive to initiate more projects. Job losses would also be prevented to some extent.
With interest rates close to zero and inflation in the mild range of 1 to 3 per cent, would lure people into buying homes, which would lead to increase in the GDP of the country and could potentially be a footstep towards recovery.
This would further make housing more affordable in an economy with an increase in the supply of mortgage finance. The SME’s housebuilder projects are targeted towards an audience which is in dire need of homes to live in and not for investment purposes. With affordable housing, access to easy credit and flexible repayment terms, the sector might bring some good news for the government.
However, every scheme is presently burning a hole in the government’s pocket. The government is largely dependent on the taxpayer’s money. These schemes would lead to an increase in public debt which would impact every Briton in the times to come. But saving different businesses are in the larger interest of the nation. Let us examine a few stocks in the construction and housebuilder space and see how they have performed off late.
- MJ Gleeson Plc (LON:GLE)
MJ Gleeson Plc is United Kingdom-based company, which is involved in providing two businesses: strategic land trading, mainly in the South of England and house building on brownfield land in the North of England.
MJ Gleeson Plc shares were trading at GBX 696.00, while writing at 3:29 PM before the market close on 18th May 2020. The UK stock market was worst impacted in mid of March due to lockdown induced by the Covid-19 since then the stock seems to have created a bottom and has delivered nearly 20 per cent of price return.
- Crest Nicholson Holdings Plc (LON:CRST)
Crest Nicholson Holdings Plc is a United Kingdom-based fifty-year-old residential developer. Crest Nicholson Holdings Plc shares were trading at GBX 236.60, while writing at 3:37 PM before the market close on 18th May 2020. The UK stock market was worst impacted in mid of March due to lockdown induced by the Covid-19 since then the stock seems to have created a bottom and has delivered nearly 25 per cent of price return.
- Persimmon Plc (LON:PSN)
Founded in 1972, Persimmon Plc is a York, United Kingdom-based housebuilders’ group. Persimmon Plc shares were trading at GBX 2,162, while writing at 3:40 PM before the market close on 18th May 2020. The UK stock market was worst impacted in mid of March due to lockdown induced by the Covid-19 since then the stock seems to have created a bottom and has delivered nearly 33 per cent of price return.
