Tony Whelan is managing director of the £30m turnover company Whelan Construction, which employs 80 people. The last 15 years have seen Whelan successfully extend its reach into the development market.
Graham Forrest is chief executive of AIM-listed Northern Bear plc. The company employs 450 people and has a turnover of £35m. Its 13 North East businesses include roofing, roof truss manufacture, fork lift truck rental, asbestos removal, fire protection and general building. The majority of its client base is public sector, with a small exposure to new house build and general construction.
Ian Baggett is managing director and founder of the Adderstone Group. A dozen businesses make up the property group, with a combined turnover of £30m and staff numbers at 200.
Lynn Gate is the owner and managing director of the Office Company, which owns the former Metro Radio building in Swalwell which it converted. The building houses 32 entrepreneurial businesses and is full to capacity. The Office Company is looking at taking over Nickalls House, at the Metro Centre Business Park.
WHEN IS THE MARKET LIKELY TO PICK UP?
Tony: If you are waiting for something to happen you’re going to be waiting for a long time – you’ve got to make things happen yourself and it’s down to entrepreneurs like ourselves to create the opportunities I’m working with two very successful businesses at the minute and they’re focussing on exporting. The UK market is a little stagnant at the minute and opportunities are not going to come hitting you in the face like they were a few years ago; you have to dig deep and seek them out.
All of our current business is in the private sector; we’ve never been into the public sector. I’ve often wondered whether that was right but now all our opportunities are private sector.
Lynn: I agree with Tony. The politicians and the banks are all outside our control so it’s up to people not to just wait for something to happen. We’ve got to try and think outside the box and make things happen otherwise life is just going to pass us all by and we’re not going to be able to move on. It’s no use blaming the banks or London, or use the situation as an excuse not to develop further.
We’ve got to think of different strategies and pull together as entrepreneurs and business people to try and lift the North East region as a whole. I’m hopeful that the Olympic Games might give us all a bit of a buzz and a lift – maybe it will re-kindle the flame and we can all take off from 2012.
Graham: When the Northern Rock situation kicked off back in 2007, I felt then that it was probably a five-year window before the world returned to any sort of normality. There are two stages, the first is that the banks would effectively not be lending anywhere near as generously, or on as generous terms as they had previously. I thought then that it would be three years before banks would be brave enough to lend money to businesses like ourselves. They are probably are lending less now than they’ve ever done, so I think we’re not out of that first phase. But I think the second and most significant phase will come when banks are ready to lend – will finance directors and chief execs be brave enough to borrow?
The banks’ credibility has been damaged in recent years. We’ve seen good businesses which, for reasons outside their control, have had a bad quarter and have breached covenants, and the way that the banks have dealt with that has irreparably damaged many businesses. So I’m very negative about the sector because I think it’s gridlocked at the moment. Until you get money flowing in to do developments – and a lot of these developments are non-income earning for the first phase – you can’t get them to the point where they start earning income. Unless you’ve got a business angel or a cash rich individual it’s not going to kick start the process – that’s the problem that I see.
Ian Baggett: Interesting view, I echo all of those thoughts. I like the more positive outlook from Lynn and Tony, which is maybe that we just have to think about things a little bit differently. I think recovery is sector-specific and probably location specific too. In our own experience things have been a bit more positive in the last six to 12 months. We are able to borrow money again, there are some funders out there who are lending, perhaps not against speculative schemes – but they are lending. And as Graham mentioned there are business angels or the scope for joint ventures or getting people involved in an equity capacity who want to get a return on their cash. And property still features up there as one of the safest – if fairly cautious – ways to get a return on cash.
We have noticed improvement – let’s face it, two or three years ago no one knew what was going to happen and I certainly don’t think, as Tony and Graham have said, there’ll be recovery any time in the near future. Even when there is a recovery, will it ever be the same?
Graham: There’s a saying that you go into a recession very quickly and you come out very slowly. We are in infinitely better shape than we were 12 months ago but I think Ian’s made a good point that the days of the contracts where you have nice juicy fat margins have gone forever. I can’t see that returning, not for at least a decade. The way the world is now is the way it’s going to be for the foreseeable future, so we might as well get on with it. You’ve got to search harder and only the stronger will survive.
ARE THERE ANY POSITIVE OPPORTUNITIES OUT OF THE ECONOMIC SITUATION?
Graham: At Northern Bear our strategy is based on buy and build. There are businesses like Connaught, a huge building services supplier which went into administration a few weeks ago – that would have been absolutely unheard of two or three years ago. Instances like Connaught have positive and negative effects. The negative side is that as a main contractor for local authorities Connaught employed local sub-contractors such as roofing and plumbing businesses. When Connaught went down it will have had a very detrimental effect on a lot of local businesses and therefore the local economy. To give you a fictional example – say that Connaught owed a local plumbing company £250k and that firm was already up to its bank limit. Connaught goes down and maybe the contract is taken over by another firm, which is good news. But the small plumbing company owed £250k would probably shut down by virtue of its bad debt. And lots of businesses are suffering that way.
But the positive side, for which I’ve been waiting for the last couple of years – unfortunately with no real evidence of it yet – is that when local competitors do go down you see the supply curve shifting and can look at reinstating your margins. Less people chasing the same amount of work means your prices can start to tweak upwards. There have been too many instances lately where competitors have been buying work, pricing it at levels where they can’t even be making a gross profit.
Tony: You’re never going to eliminate that, you’ll always have that.
Graham: It’s never been as prevalent though Tony.
Tony: Yes that’s true. In the 1990s recession we priced a refurbishment of an apartment block in the West End of Newcastle. It was a £1million job and McAlpine came in and they were £100,000 cheaper. They obviously wanted the job and were determined to have it. You’re not going to eliminate that sort of thing.
Ian: I think it’s a good time to be lean and small. A period like this does shake the marketplace up. The smaller guys have a competitive advantage because they are trying to grow in a tough time, whereas the more established companies are maybe trying to do the reverse or fight harder.
Tony: What I’ve done recently is have a good look at my business and see how I can get in really good shape for two to three years time. What I’ve found is that I’ve got some fantastic young people and I’m starting to develop them through training and other projects. We are also looking at the Middle East markets, there’s a fantastic opportunity out there, and we’re talking to local people about joint ventures. You’ve just got to do everything you can – get in there and look at all the aspects of the business and how you can grow it.
Ian: There’s obviously two different sides to it, in as much as there’s the service side of it, which I’d say Graham and Tony have got more exposure to and then there’s the investors side, which is the angle myself and Lynn are approaching it from. Graham and Tony are experiencing a tightening of the market place in terms of what work is on offer and at what margins. Lynn and I are experiencing the same I think in terms of the rents we can achieve, and tenants who have become insolvent. The price of commercial property both in rental and capital terms has taken such a hit in the last few years that it’s already been priced into the market. But it is inevitable in the next couple of years – in fact we’ve experienced it in the last few weeks – a couple of relatively high profile tenants who’ve become insolvent and obviously that’s a hit to us. It limits our borrowing and it affects my appetite to take on new projects so that is another relevant factor.
Lynn: I’m on a much smaller scale so it’s a bit easier for me, because my business is fairly small and lean. We have 32 entrepreneurial businesses and I’ve always said I would never let more than one third of the space to one particular tenant. We have had things fall by the wayside but what I’m finding is that we’re full, but we can’t get the funding to do any new build – because we rent to entrepreneurial businesses the banks just don’t like that. They are always looking for a good covenant, which I can’t understand – what is a good covenant these days?
Ian: I think that’s going to turn on its head. Traditionally the banks have always said a good covenant is a big company and one tenant in a building but I think you’re spot on – I’d rather have 30 small tenants.
Lynn: Yes, they’re harder to manage and it’s more costly because we offer a one stop shop office on flexible terms – easy in easy out. People like that in this market, they don’t want to tie themselves down to five years.
My business model really does work, but I’m frustrated because we can’t grow. We’re full and I can’t do anything so I’m having to do a joint venture with a London based investment company. I don’t particularly want to do that but we have a waiting list of people and in order for the business to grow that’s what I have to do.
Tony: It’s not a bad thing though, I spent a day with TSG a couple of weeks ago going through their business model and I found that fascinating. They would rather have small companies and that’s what they concentrate on. They don’t want a big company to take over half their order book, they would rather have small companies because if they go bump they can quickly replace that with another couple of companies. So it’s more of a shared risk isn’t it?
HOW IMPORTANT IS MARKETING TO FILLING PROPERTIES/WHAT INCENTIVES ARE NEEDED IN CURRENT CLIMATE?
Ian: I ended up in an awful position building a small business park in Sunderland throughout the middle of the recession. It was something we got caught up in. I had a lot of them sold off-plan so I was under an obligation to build out expeditiously. And then of course those purchasers went bust and I was left with a lot of small empty offices which caused me a lot of stress and concern but in actual fact, similar to Lynn’s experience, it was probably the best product we could have been stuck with in the current market because there’s some great stories there of the tenants.
There are some 40-50 tenants who’ve all got their own stories. Some of them had been made redundant, set up their own business and were progressing from working from home into a small office. And yes we’ve had to offer them flexible terms and incentives but on the other hand we’ve often been given personal guarantees on the leases. I’d rather have a personal guarantee from an accountant than have an AIM listed plc as a tenant, so I think a lot of the common perceptions have been turned on their head in our market.
WHAT ARE THE FUTURE OPPORTUNITIES? EG RENEWABLES SECTOR, WHAT WILL PROJECTS SUCH AS NEW WIND TURBINES OFFER DEVELOPERS/THE PROPERTY MARKET?
Lynn: I think there’s a big opportunity in renewables and energy. I do think that we’ve got to jump on that bandwagon now. Ten years ago I’d never even heard of the word entrepreneur. We all jumped onto that entrepreneurial bandwagon and we have to do the same with renewables. It doesn’t really affect my particular business but I think the North East can shine in that area – for example we have the electric car – we have the capabilities of doing something like that in this region.
Ian: I worry that it’s very dependent on the Government supporting it. Yes, it might take off but if the Government loses its appetite to support renewables then I think on a standalone basis that sector probably can’t support itself.
Graham: And can the Government actually afford to support it in the short term?
Ian: I think it’s a brave person that puts a lot of resources into that sector but there could be spin offs, some of the stuff that we’re hoping are going to happen on the Tyne, like offshore wind turbines will have an effect on construction and commercial property in the North East if it takes off. But you wouldn’t put all your bets on that would you?
Tony: No, it’s interesting what you say, I mean in construction renewable is all you hear about at the minute. How you can build leaner, and of course building excellent BREEAM buildings.
Ian: Someone’s got to pay for it haven’t they?
Tony: Yes, you can add 10-20% onto a building cost by making it very energy efficient. Some of my younger staff are keen to get involved in the renewable side of things and I’ve given them the responsibility of starting an environmental department. They’re right into it too, going to seminars, meeting people, talking to architects etc. It’s another opportunity for us.
Ian: There was a big push a few years ago and we needed to show you had designed 10 or 15% renewables into any new development. But actually now there’s an appreciation within the public sector that unless it’s going to be subsidised, this can affect the viability of a development to the extent that it won’t happen.
The local authorities that we deal with want to see you have future-proofed your development. They understand that you can’t add 10% or 20% on to costs of an unsubsidised, speculative development. It could mean the difference between a project going ahead or not. There are some tough decisions to make and a lot of the technologies are relatively unproven. I’ve had some good conversations with Entrepreneurs’ Forum members about certain unproven technologies. It would be a shame if the viability of a development was affected to the extent that it didn’t happen just because of an unproven technology.
Graham: It’s incredibly expensive at this stage in the development. Look at how much the Americans are throwing at green technologies compared to what we are in investing. It’s very difficult for our businesses to compete with American rivals who are getting big grants.
IF YOU HAD A HOTLINE TO DAVID CAMERON, WHAT WOULD YOU SAY TO HIM?
Ian: Streamline the planning process, and create tax incentives from the bottom up as advocated by the CBI. Not the sort of grants imposed on the wrong businesses by people who aren’t qualified to provide those grants.
Tony: Make it less complicated to get grants too. We’ve applied for a grant for some training and there are mountains of forms to fill in.
Ian: I think it’s a good thing because it stops people from waiting until they get a grant before they do something.
Graham: My biggest bugbear is the vast quantity of public work out there and what’s involved in just getting on the tender list – you need a PHd in astrophysics to be able to fill out all the forms.
Ian: And they favour the big nationals.
Graham: Very much so. There was a report a couple of years ago about how to allow SMEs to get on these lists, but as Ian says they very much favour the multinationals. And going back to what we said before I think in the North East we’ve got to pay our own way and we can be very proud of what we’ve got here. It’s all about creating jobs and keeping the work in the North East. There’s a lot of work here, but there’s so much of it we allow to go through our hands to other parts of the UK.
Tony: Well I’m right on that with you. Our local authority is far too quick to put projects in situations where we haven’t got the capability to win them really. They go to the multinationals.
Ian: I want an opportunity to price them, you don’t even get that opportunity.
Tony: The chief executive of Henry Boult told me recently he’d just priced some hospitals and spent £300,000 on putting tenders together, and that was just for a chance to win the work.
Graham: We can’t live with that, we can’t fish in that pond, it’s nonsense. All this public work and we don’t actually have the opportunity. And don’t forget that we are perceived, in North East terms, as being a reasonably large company with a £35m turnover. But we couldn’t spend £300k on a speculative contract.
Ian: And the frustrating thing is you’re better placed and Graham is better placed, to provide better value.
Graham: The nonsense is that if this national company gets the job we’ll end up doing it anyway as their sub-contractor. All that happens is that the margin that they take would go down South or wherever they’re based. And that may be 10 or 15% of the contract value, which just goes straight out of the region.
Ian: We could petition for empty business rates too, that’s definitely something that’s worth sorting out. There is no greater disincentive to develop or not knock down properties or own properties. I don’t see how anything positive can come from empty business rates and I know it’s been quite a controversial subject, but they should go.
Lynn: I would like to ask him if he’s going to really do what he says, in terms of the private-public partnership working together. What I mean is not having such complicated situations, and working with public sector people who have some knowledge of what the private sector is like, so we can work together to grow. That’s what he’s said but I’d like to know that he can do exactly what it says on the tin. The public sector doesn’t create wealth, it’s entrepreneurs and business people that do that.
Graham: I would ask him to start thinking like an entrepreneur about how you can really grow business properly in the UK. Because at the minute I don’t think they’ve got a handle on it.
The authentic exchange of business ideas in the North East