We speak to Paragon Bank’s Head of Construction Terry Lloyd about trends in the construction sector and the opportunities that exist despite the challenging conditions of the past two years.

Terry, what do you see as the key opportunities for the construction sector in 2022?

Despite the challenges of the past two years, there are several reasons to be positive.

Coming on the back of 2020’s “Build Build Build” announcement, the Government has just refreshed its business council with a brief to boost jobs, unlock investment and accelerate net zero ambitions. 

The Levelling Up plan will result in huge investment across the UK with upgraded public transport systems, town centre rejuvenations and a new £1.5 billion Home Building Fund. We are seeing customers working on new schools and NHS projects across the UK, whilst housebuilding continues to boom and creates huge demand for civil engineering and groundworkers. 

We are also seeing changes to commercial building use driving demand, with some being converted to allow for the new way of flexible working and many now being converted for residential use. In addition, some of the largest building projects in Europe are taking place in the UK, such as Crossrail, Hinkley Point and HS2. 

 I also think we will see a huge amount of work in the coming years around the infrastructure required for electric vehicles and the ability to charge these.

What are the main challenges?

Labour, an aging workforce and a decrease in younger talent entering the trades are challenges our customers are experiencing. In addition, material costs are rising and shortages and long lead times are becoming the norm.  This is the same for new Construction Plant and Machinery.

In April the ability to use Red Diesel will be removed, which will result in a huge cost to construction work using heavy plant and machinery.  The exact cost is yet unknown, however the Civil Engineering Contractors Association estimate between £280 million and £490 million per annum – a cost which will be passed on through to the customer in many cases. 

Along with the increased cost of the fuel, many companies will experience additional costs in terms of theft, as white diesel will be much more desirable for thieves, and then additional technology and security to protect storage on sites.

I expect this issue to mainly impact construction, but agriculture will also be affected. This brings another headache to plant hire companies that hire to both sectors. Under new rules machinery can have no trace of red diesel in the tank and so they will require either separate identical machines for hire to each sector or be required to flush and clean fuel tanks if hiring between the two.

How are you seeing your customers responding to the green agenda?

Many customers are looking towards more efficient ways of working and certainly the fuel costs of machinery have become a major factor in purchase thoughts. Recycling has been prevalent in the sector for many years, and it is amazing how much material from sites is salvaged and used again. 

We have seen hybrid machinery for a few years and are seeing an increasing range of electric construction machinery. However, the take up has been slow due to two main factors. The first being the ability to charge the machinery on site where the only real option available is to use a Diesel Generator and, secondly, the amount of power these machines would draw from the batteries.   

However, we are seeing an increased use in alternative fuels such as Hydrotreated Vegetable Oil (HVO) fuel which reduces carbon emissions by 90%.  Last year, the National Federation of Demolition Contractors announced its members will be expected to phase out the use of Red Diesel on sites.  Laing O’Rourke have announced in the last week they will move to HVO on all plant before the end of March.

I personally believe that the future will be Hydrogen powered.  JCB has been developing Hydrogen Powered machinery for several years and have a number of models (including a 22-tonne excavator) undergoing long term testing and announced last Autumn they were investing £100 million into a project to produce super-efficient Hydrogen engines and we may see some come to market by the end of this year.

What are you seeing with regards to asset values in the sector?

Asset values are high and, noting long lead times for new machinery, I cannot see this changing in the short term. We hear stories of people purchasing machines and then running them for 18 months to sell them for what they purchased on a regular basis.  The way it has changed our business is that we are seeing a lot of Business-to-Business transactions as many people are selling unwanted items direct to end users rather than trading-in or selling to dealers.  We are seeing unprecedented requests for settlement figures on machinery due to this.

Connect with Terry Lloyd on LinkedIn.