Construction SMEs are set to increase investment following improved financial performance, Paragon Bank research has found.
Q3 2023: Investing for Success presents a detailed look into the improving position of the sector’s SMEs. Conducted for Paragon by Opinium, the research found that over half (52%) of construction SMEs have reported improved turnover in Q3 – a seven percentage point increase on data collected by Paragon during Q2.
The rise in turnover corresponds with expectations for improved cashflow in the coming months. In the previous data set, less than half (44%) expected to see improved cashflow in the coming months but this rises to 52% in the latest data.
New investment in critical assets
The research identified that construction SMEs are set to utilise improved turnover and cashflow by acquiring plant and machinery, equipment, and transport assets.
Equipment is set to record the largest increase in the proportion of construction firms planning to invest, with 40% of those surveyed planning to do so – a nine percentage point increase from the previously recorded data. The new data also finds a three percentage point rise in the proportion of firms planning to spend on plant and machinery assets (33%). On average, firms expect to spend £122,000 on general equipment and £123,000 on plant and machinery.
HGV assets will also see a slight investment increase, thanks to the proportion of firms investing rising from 19% to 20% – but the new data finds a reduction in the number of firms set to invest in LCVs and electric vehicles. While LCVs only see a 1% fall to 14%, electric vehicles are due to fall from 22% to 19% of firms investing.
Improving confidence for key sectors and the wider economy
Over half (52%) of construction SMEs surveyed were confident about the prospects of their own business over the next three months, a decline from the 54% recorded in the previous data. This small decline is concurrent with 51% of firms continuing to have confidence in the sector, a 1% reduction on past data.
While firms report a decline in confidence for their business and the wider sector, there has been an improvement in confidence in the UK economy – rising by five percentage points in Q2 to 39% in the new data.
Cost increases
The increasing costs of energy, raw materials and production assets and equipment have continued to challenge construction SMEs. Firms said that energy costs have increased by an average of 21%, with raw material inflation also at this level. General asset prices, meanwhile, were 17% higher and employee salaries 15% more than the same period last year.
Reductions in output and services have proven crucial with over a third (29%) having reduced their costs by reducing energy use, 11% by reducing their output, and 5% by limiting the range of services available to customers.
SMEs have also sought to address rising costs by raising their own prices (44%), reducing energy (29%) and changing suppliers (27%).
Seeking to not pass on full cost rises to customers, 20% of the construction SMEs surveyed choose to absorb all costs without passing on any increases.
Paragon Bank SME Lending Sales Director Stewart Good said:
“In a year that has continued to present significant challenges to the UK economy, construction SMEs are once again demonstrating their ability to adapt, innovate and prepare for the future.
“The evidence for this is clear in our new report. Following the strong evidence for optimism published by Paragon in our previous construction sector report, Investing for Success demonstrates not only how cashflow and turnover within the sector continue to improve, but also that SMEs are ready to increase investment and acquire the assets that will create future success.
“New assets will enable firms to refresh their operations, provide an excellent service for their clients, and will prepare SMEs for the future – and it is greatly encouraging to see the data uncovering that a growing number of firms planning to make substantial investments in green assets alongside continued investment in equipment and machinery.”
To read the full report from Paragon Bank visit How SMEs are investing for success (paragonbank.co.uk).
