Agenda item

Committee received a presentation from Roger Arnold, Managing Director of Martin Arnold Limited, a multidisciplinary construction consultancy who specialise in residential and affordable housing. The following issues were highlighted:

·       Consultancy currently employs 130 people within the London Borough of Greenwich and although it has never worked with Islington Council on any of its schemes it has worked with 16 London boroughs.

·       It is primarily involved in the residential sector of the industry, working with housing builders, housing associations and local authorities with particular focus on joint ventures between housing associations and developers such as the 1500 units built by Clarion and Countryside.

·       Meeting was advised that current market issues affecting the industry are contractor insolvency, legacy projects, fire remediation, second staircase and Building Safety Act.

·       With regards to contractor insolvency, meeting was advised that in light of the challenging economic climate over the last 12-18 months with inflation, Brexit, a lack of skill set, some contractors have found it difficult to survive and folded up with the result that clients are now left with legacy projects.

·       Legacy projects left behind by contractors are now being picked up by clients especially as contractors are unwilling to undertake housing schemes especially with the risks that might arise further down when carrying out the building process especially with potential increasing construction prices.

·       Fire remediation remains a challenge for the industry with its involvement in rectifying cladding which has been the industry model for over 2 decades with the result that available skills is being overstretched.

·       The provision of second staircase in tall buildings is another issue which has resulted in additional construction costs and raised viability concerns for developers.

·       Another concern is the implementation of the Building Safety Act with its regulator which still remains unclear, a legislation which aims to address safety concerns for high risk residential buildings of over 18m. Most developers have had to include a further period of 15 months to the process of delivering homes, thereby resulting in increase in cost.

·       With regards to construction pricing, the consultant advised that contractors are not willing to take risks, that what is noticeable is that with recent design and build pricing submitted, a number of caveats have been incorporated before you get to the end of contract so clients are taking more risks.

·       Industry is taking a number of measures to mitigate risks by being involved in Joint ventures, a model favoured by housing associations; construction management plans with the use of sub-contractors; having sensible discussions with their legacy projects; sharing knowledge and skill and involvement of Housing Involvement partnerships.

·       Joint Ventures provides an opportunity for both client and contractors to share risks and is a tried and tested model in the delivery of social home and despite the advantages of risk and skill sharing, it also keeps design and build risks lower.

·       Construction Management Schemes exists for ambitious clients, where sub-contractors are employed to carry out the works which is a high risk model, although with its own benefits it tends to take up a lot of client time.

·       Markets are currently looking at grant support especially in the light of the requirement of second staircase for tower blocks, the GLA is currently inundated with claims such that it is affecting the delivery of affordable housing.

·       In response to a question on abandoned legacy projects, Council’s are advised to complete such projects especially as costs will continue to go up in the long run .

·       In terms of Housing Management Partnership, meeting was advised that over the last few years the likes of Pension funds and Hedge funds have come into the affordable housing market to help with funding the project by providing funds.

·       The consultant informed the meeting that in light of the challenges of building homes LGA’s are reviewing their housing delivery, questioning what it actually looks like and making sure that schemes already in the offering are actually deliverable and viable.

·       Most LGA schemes tend to be on infill sites and garages rather than big sites especially as they are identified as ‘low hanging fruit’, however such schemes tend to be difficult due to land issues, access on site and can be expensive.

·       LGA should be wary and cautious when reviewing schemes as a lot of time developers over promise on what they can actually do on such small sites with the result that costs sky rocket.

·       Maintaining good relationship with planners is key especially in terms of the tenure of the project as it is important to meet the requirement of the local planning policy as it needs to set a good benchmark.

·       Some LGA’s are using the recent announcement on the 5 year land supply by NPPF to review its strategy on home delivery especially in light of the recent Fire Safety regulation and the requirements of the second stair case and it’s consequences on whether it is deliverable.

·       Over the next 12-18 months, the industry is anticipating construction costs to fall, which is welcomed by the industry although concerns around fire safety regulation and staircase requirement still remains.

·       Another issue for contractor is level of risk appetite and insolvency balance, that most contractors are not willing to carry the risk in light of what has occurred to the industry over the last few years.

·       The uncertainty around the Building Safety Act which is pertinent to high risk residential buildings over 18m and issues around the resources to deliver it has resulted in developers adding another 15 months to the time line in delivering homes which adds to the cost.

·       There is still a strong reliance on housing associations to kickstart the building of social homes, however with ongoing issues such as damp and mould, fire safety to resolve, capital funds are being diverted to address these issues within existing stock rather than building new homes.

·       In response to whether Islington would be able to deliver its 750 homes in light of the risks highlighted, the Consultant advised that it depends on factors such as how far the Council is on its journey in terms of planning process, its procurement exercise, type of sites being developed, whether they are infill developments or buildings of over 18m with its associated issues of fire safety regulation etc.

·       On the question on whether Islington had experienced any contractor insolvency, the interim Director advised of the one instance a contractor did go insolvent and had to bring in another contractor to complete it. In another instance there was a mutual termination agreement because of concerns about the financial health of the company.

·       Meeting was advised to minimise financial risks the Council is involved in organisations that rate the financial health of contractors and also has made changes to its payments arrangements. Also senior officers partake in forums like the London Development Directors where commercially sensitive information is discussed.

 On the request for a second staircase, meeting was advised that this extra provision will result in the loss of floor space and thus affecting the viability model of the scheme and that the industry is having discussions planning officers to ensure that such provision does not result in the loss of units. 

·       In response to a suggestion to use MMS construction , where units are manufactured off site and assembled on site, meeting was advised that although it is to be welcomed, it is not suitable in schemes such as infill sites or garage conversions as economies of scale come into play with larger schemes. Mr Arnold also reminded members that this methodology has its own challenges, that funds would be required upfront and that there have been a number of such companies involved in MMS who have fallen into difficulty and filed for insolvency.

·       On the use of Pension and Hedge funds to build social housing, meeting was advised that this type of financing is solely used by housing associations and not a preference of local authorities.

·       With regards Joint Ventures, meeting was advised that where council have land, developers are invited to build social homes on a 50:50 basis where private sector make funds available.

·       In response, meeting was advised that in light of Covid, high inflation, the additional staircase request, fire safety regulation and damp mould remediation, Council’s have had to divert funds from the HRA instead of building social housing. 

·       A suggestion for sub-contracting not to be encouraged or involved in building social housing was noted. Also  LGA’s should explore partnership working and skills shortage within the industry should be addressed and Council should give serious consideration to building homes over 18m as the borough lacks land were noted.

·       On developer’s claim schemes viability, Consultant advised that developers always aim to maximise any scheme it is involved in terms of types of tenures it delivers, that Council with its own in-house viability experts or independent experts should be able to review their claims.

RESOLVED:

That the presentation be noted.