Building company failures are the ‘new pandemic’

Sunday, 7 April 2024

Every day Canterbury-based construction expert Mike Blackburn hears about another building sector company that has fallen on hard times as the downturn in the sector starts to bite.

With demand for new build homes significantly reduced, it is the residential market that is feeling the pressure, and where companies are buckling, he says.

“It feels like a new pandemic, but one involving the liquidation of building companies, and I fear that this is the tip of the iceberg.”

A total of 435 companies in construction have gone into liquidation over the year to February 29, according to new figures from the Ministry of Business, Innovation and Employment (MBIE).

On a regional basis, Auckland and Canterbury had the highest numbers of building sector companies to be put into liquidation over that time, at 224 and 47 respectively.

The MBIE figures also show there were 423 construction industry liquidations in the 2023 calendar year, up from 325 in 2023 and 221 in 2021.

In 2019, the year before Covid, there were 253, while this year up to March 25, there have been 104 liquidations. This suggests a rising trend of liquidations in the sector compared to recent years.

There are some caveats with the MBIE figures as the building industry classification code is voluntary and the numbers are drawn from companies which provided a code.

Also, the “construction” classification includes all types of construction from road, bridge and dam construction to carpentry and joinery, air conditioning installation and tiling services.

But credit reporting bureau Centrix’s latest figures show construction company liquidations in February were up 21% annually.

And in the three weeks between March 11 and March 29, 10 applications were lodged to put building sector companies into liquidation, according to the Government Gazette.

Most of the applications were lodged by the Commissioner of Inland Revenue, and most of the companies were based in Auckland.

With many years in the industry under his belt, Blackburn has been through downturns before, and he says this one has the potential to be worse than the global financial crisis (GFC).

On the face of it, new home consent numbers are not as bad as they were then, he says.

“But the market is down more than the numbers show because there’s a high number of situations where a consent has been issued, but the project has been delayed or cancelled.

“Many building companies went ‘batshit crazy’ in 2021 when the market was booming, and over-leveraged themselves to buy land to develop double the houses they usually would in a year.“

When the market turned, sales dropped, interest rates went up, and economic times got tough, they were left struggling with costs, he says.

Now, there are regular reports of building companies going under, with high-end Auckland building company Selah Homes Ltd, former All Black Dave Hewett’s Christchurch-based Bainbridge Homes, and Canterbury’s Build 7 South Island some recent examples.

Blackburn says there is also talk about big companies like Du Val and Williams Corporation running into problems.

That is a concern because if a large company were to go under it would have a catastrophic effect on financial confidence in the home building market, he says.

He understands Williams Corporation is having trouble selling a large block of land in Hornby it bought but no longer wants to develop, and the company is trying to move out of the expensive office space it rents in Christchurch.

“So it looks like they are trying to sell down assets to raise cash to alleviate pressure and to continue making payments, which is a responsible thing to do.

“But given where they were a couple of years ago, it must be tough, and you have to wonder if the positive steps being taken are in time.”

Group home builder Mike Greer Homes had bought a large land parcel on Christchurch’s Papanui Road in 2021, and that block was now for sale, he says.

“I’ve never known Mike Greer to sell off land, so it shows just how tight the market is. There are two sides to the market, and some companies are doing well, but the bulk of the market is doing it tough.”

Liquidator Steven Khov, from Khov Jones, says his company has been dealing with its fair share of building sector companies, but liquidations generally are on the rise.

That is due to high interest rates, the economic climate, and cash flow pressures, and an increase this year suggests some companies may be suffering a post-Christmas cash crunch.

In his experience, whatever the economic climate, building companies often come under pressure from the skinny margins involved and rework.

“Even in good economic times, people will underquote to get the job, but because the margins are thin it doesn’t take much for things to go wrong, lots of rework to be required, and the costs to blow out.

“It might happen once, and they can weather it, but you just need a few of those situations, and it snowballs out and affects the business.”

It is common for company directors to talk about how much work they have on, and how much a job is worth, but if the jobs are not making a profit, it does not matter what the turnover is, he says.

“Then, if a larger building company fails, there tends to be a domino effect on the smaller sub-contractors and tradies involved.”

Inexperience as a company owner was also an element in many building company liquidations, he says.

“You might have a good builder or tradie who decides to go out on their own to maximise high hourly rates, but they don’t consider that if you own a company you have to find the work, get it done, collect the money, pay taxes, take care of staff, and generally shoulder the burden.

“That can trip people up, especially if times get tough and there are cash flow pressures.”

The current downturn is different to the GFC because of the fiscal support for companies from the government and banks during the Covid years, he says.

“In 2021 to 2022, the number of liquidations were down on ‘normal’ because businesses were surviving longer because of the support out there.

“Now, that support has gone, and Inland Revenue has stopped being lenient on debt, and is applying for lots more liquidations. So there has been a pick-up in the numbers.

“But many companies failing now could have failed much earlier without the support they had. If it was a more traditional economic cycle, the pressure would have impacted on many businesses much faster.”

It is worth noting that liquidator views tend to be tainted as they only see the companies that fail, but there are plenty of building companies out there who have work, and are not failing, he says.

The number of new home consents being issued is often used as a barometer for the industry, and consents have declined sharply from their peak in May 2022, when they hit a record annual high of 51,015.

Stats NZ’s latest figures show there were 36,276 new homes consented nationwide over the year to February, a fall of 25% from the same period last year.

But Ronnie Tan, who is managing director of Creditworks, a credit reporting company which has the country’s largest trade database, does not believe the situation is as grim as it might appear.

He says when consents were at their peak the numbers were inflated by new H1 building code requirements, and by the amount of retirement village and social housing building going on.

While consent numbers have come back to around 36,000,which is above the long term average, in the GFC they fell from 33,000 to 13,000, he says.

“Now, that is a collapse. This time round MBIE’s forecast is for consents to fall to 29,000 next year, and then pick up. But we are not building enough new homes, and we have a shortfall already.

“Buying an existing house is cheaper than building because of all the costs, but the trend will change, and people will start to build more again because they have to.”

There is still plenty of building activity going on, and his data suggests construction sales in February and March were on a par with sales at the same time last year, he says.

“People seem to have forgotten the industry has cycles and it always will. You can’t expect momentum to build to keep growing at extreme levels each year.

“But it is wrong to expect the industry will now collapse – it won’t. The situation in Australia is worse, and China is a real basket case, with 40% of building companies there expected to fail.”

Building Industry Federation chief executive Julian Leys agrees the situation is not as bad as is being reported, and says a portion of the 51,000 consents at the peak were speculative.

Many of the liquidations involve companies that overcommitted themselves to a number of projects, and were caught out by rising costs for everything from finance to labour to materials, he says.

“But there tends to be a six month or so lag, so the stories we are seeing currently are probably more reflective of the more difficult circumstances at play last year.

“For many the situation is improving, although finance remains costly and hard to get, but prices are stabilising, and there are green shoots appearing with some demand for housing coming back.”

Even in the recent building boom the country did not catch up with the historic demand for the housing needed, and record migration was now driving further demand, he says.

“New Zealand desperately needs more housing, and that will start to drive the industry again soon. It will be a tough six months or so, but by the end of the year the outlook should be better.”

For Master Builders head of government relations David Kelly, the reality is there is not enough residential work to go around for the number of companies that exist.

That means some are struggling, while others are adjusting, he says. “The companies in trouble tend to be ones who don’t have a pipeline of work going forward, or their work has run out.

“In contrast, companies who are doing well recognised when the market was changing, thought about how best to manage in a different climate, and have been sticking to a plan for the last 18 months.”

There is interest out there, but high interest rates and a lack of confidence is holding buyers back, and so the question is when will interest transition into concrete plans to build, he says.

“The situation is better for commercial building companies, although there are concerns around government building activity, and how much of what is planned might be stopped.

“But although the outlook seems to shift every quarter, we would like to think that by the end of the year things will be looking up.”