‘They have a tendency to run out of cash quick’: Crunch hits construction
Sunday, 11 February 2024
Construction company liquidations are running at a rate twice that of other businesses, and there is a warning that things could be about to get tougher.
Data from Centrix shows that there were 99 liquidations of construction companies in the last quarter of last year, down from 118 the quarter before, and 132 in the June quarter of 2023.
The next highest category, apart from “other” was property, where there were 57 in the last quarter of last year.
Gareth Kiernan, chief forecaster at Infometrics, said times appeared tough for the sector.
Responses to the Quarterly Survey of Business Option showed a net 38% of construction company respondents had experienced an increase in overdue debtors in the most recent three months and were waiting to be paid.
It was the second-highest level since the Global Financial Crisis.
The Centrix data showed liquidations of construction businesses were steady between 50 and 80 per quarter in 2021 and the first half of 2022.
“Liquidation numbers rose to over 100 in the September 2022 quarter and have held in the 100 to 130 per quarter range since then,” Kiernan said.
“Centrix has identified that construction companies are currently 2.2 times more likely to fail than the typical NZ business. Non-residential building construction firms are presently the most likely to be liquidated, despite non-residential work put in place reaching a record high in mid-2023. However, the struggles in the construction industry are widespread, and only firms involved in the repair of residential buildings currently have a liquidation rate lower than the economy-wide average.”
He said while building consent figures were down sharply, that was not yet reflected in activity levels.
“We are already seeing signs of stress in the construction industry, although for the data we have, the figures do not look as bad as in 2008/09. We expect 2024 to be tough for the industry, and financial indicators are likely to worsen throughout the year. Businesses would be well-advised to be cautious about who they extend credit to in coming quarters.”
John Tookey, professor in the AUT school of future environments, said construction companies were often set up without a lot of working capital.
“What you’re dealing with is a lot of small companies that go to the wall. They’re set up on the back of one guy who happens to be a qualified chippy, or whatever. They start a business and they operate but they haven’t got much in the way of strategic depth when their finances are concerned. They have a tendency to run out of cash quite quick.”
He said the other issue for the industry was that most of the work was done with borrowed money.
“If you’re going to have minor work done, up to building a house, a company building a new unit or whatever, it’s all done with borrowed money. As the cost of borrowing goes up, so the amount of money available for construction tends to go down. There’s always this cyclic behaviour that takes place.”
Master Builders chief executive David Kelly said the industry had been through an “endless boom and bust cycle” for the past five decades.
“In 2021, consents were at an all-time high eclipsing figures dating back to before the second World War and builders were in high demand. This followed more than a decade of upward growth in the residential construction sector. As a result, a large number of new building firms entered the market.
“Since then, there has been a sharp correction and a deterioration of economic conditions particularly linked to the cost of living, and the lift in interest rates by the Reserve Bank to try to curb inflationary pressures,” he said.
“We have been working with our membership to help them prepare for changing circumstances. Unlike with the GFC, where there was a sudden drop in work, this change has been more gradual, which has given people time to prepare. It is still unfortunate that some businesses are unable to weather the changing environment.”
He said people engaging a builder should seek advice from a specialist construction lawyer and use a contract with a staged payment schedule.
“And in the current inflationary environment, homeowners should be way of fixed-price contracts, as it is tricky to predict how much a build will cost, putting the entire project at risk.
“We also strongly encourage all homeowners to purchase a building guarantee. These provide an efficient process to get a resolution and protect your investment in the unlikely event something goes wrong.“
The Ministry of Business, Innovation and Employment this week published a projection of national building and construction activity out to 2028. It said things were likely to moderate at a level that was seen pre-pandemic.
“Several indicators show that the unprecedented post-Covid demand for residential building, which saw record numbers of building consents issued, is alleviating and significantly reducing the demand on the sector,” said Micheal Warren, manager system strategy and performance.
“The overall activity forecast is positive, short-term reductions across various measures in the report suggest activity fluctuations in the sector are being less affected by Covid-19 and returning to a more usual pattern.
“Residential building activity is forecast to return to levels that align with the sector’s capacity to deliver buildings ready for occupation, settling the sector into a more sustainable level where supply and demand is much closer than it has been in recent years.”