Due diligence key amid rising construction insolvency

The latest data from the credit bureau found that residential and commercial builders were experiencing higher levels of distress, with 23 per cent downgraded in the last nine months and home builders in particular seen as more vulnerable with six rating downgrades for every upgrade.

Managing director of Acuity Funding, Ranjit Thambyrajah, said Equifax’s data was being reflected among construction firms, but stated that many of those struggling are less accomplished.

Mr Thambyrajah stated: “Many of them are less experienced and are refusing to face the reality of having to downsize their operations, nor do they want to realise their losses early enough to minimise their damage.”

Dan Holden, principal at HoldenCAPITAL, remarked that the building groups his company tends to deal with were less impacted: “This may be due to them having exposure to shorter term contracts and therefore less impacted by both the significant pricing shifts and labour cost hikes.”

Equifax’s data revealed that more than 30 per cent of large residential builders were reporting negative cash flow, nearly double the proportion that reported negative cash flow before the pandemic.

It said annual business exits in construction increased to 16.5 per cent, a third higher than last year and nearly 50 per cent up on two years ago, with nearly one in three company insolvencies from the construction industry.

Mr Holden encouraged brokers to increase the level of due diligence they conduct on clients to ensure that developers have “adequate balance sheets and forward cash flow to cover the job at hand”.

This followed Equifax’s data finding inadequate cash flow and trading losses are the two largest causes of failure in the construction industry.

Despite the concerns facing the construction sector, Mr Thambyrajah said now is the time that “good commercial brokers are needed”.

“Our experience is that when banks are saying yes easily, we are not in demand, but at times like these our workload dramatically increases,” he added.

He said that Acuity Funding was looking to help construction clients in distress by organising:

• Funding that will assist with long-term holding of the units.
• Attractive funding models that enable the developers to secure more buyers.
• Improve their ability to market to the overseas markets.

Mr Holden commented that brokers dealing with construction sector clients needed to ensure they “ask the relevant questions to ensure their finance submission to the lenders covers off all the appropriate risk mitigants”.

“It is easy to try and get the job half done before you tackle the hard questions, we find it less painful to just jump in and ask them straight away to ensure no surprises down the track,” he added.

“From our experience, it’s more a question of project viability due to the impact of the rising costs, but this is beginning to ease, so there may be less of a concern as we move into 2024.

“What I tell people is, this too will pass, markets will change and we need to be prepared to change with it if we are serious about our profession.”

[Related: Brokers navigate construction industry turmoil]