In the year to 31 March 2023, the Restructuring Insolvency & Turnaround Association of New Zealand (RITANZ) reported 265 insolvent liquidations, up from 206 for the same period in 2022.
The construction industry accounts for 29% (or 77) of these appointments which is the largest percentage of total appointments. The next closest industry, accommodation and food services, accounts for 12% (or 32). These figures are a clear indication of the strain the construction industry has faced for some time now.
If we look at the reasons given for failure in some of the more notable collapses in recent months, namely, Scarbro Construction (and its related entities), Benmax NZ and AH Construction Services, the reasons provided by the directors of these companies are consistent and range from:
- supply disruptions
- fixed price contracts squeezing margins as the price of materials increase (especially where one or two major contracts were unprofitable)
- adverse weather events impacting delivery and timing
- the on-going impacts of COVID and resulting disruptions
- tight labour market conditions making it hard to staff projects despite the borders now being open.
These challenges make it difficult to turn a profit, especially where margins are already thin, and capital is not as readily available as it has been in recent years.
It is likely that we will see further collapses as a result of the bigger liquidations. And, if subcontractors on the affected projects aren’t paid and don’t have a healthy balance sheet to support non-payment, they can’t trade through.
Non-payment of PAYE, GST and other taxes are also prevalent. It is reported that AH Construction Services had not paid GST or income tax for close to six years prior to its collapse. This area will come under increased scrutiny as the Inland Revenue Department look to greater enforcement action, as non-payment of taxes is often the first port of call for some directors to ‘finance’ their way through a tough trading period. The leniency afforded to companies in the uncertain COVID lockdown times is now at an end.
What does all of this mean?
While these failures are sizeable, leaving tens of millions of dollars unpaid to creditors, fortunately they are not of the size and scale of a collapse like Mainzeal back in 2013; the impact of which had a widespread ripple effect for the entire industry and led to a number of legislative reforms to better protect subcontractors.
Instead, the BCI Construction League report (BCI report), published on 17 April 2023, illustrates many, larger players, still have a healthy pipeline of work to complete.
The BCI report looks at the top 50 construction companies (including commercial and residential) by total project value which commenced in 2022. The combined total pipeline across 488 projects is $8.9 billion (or an average of $18.3 million per project). The largest single project featured is the multi-use Christchurch arena valued at $683 million by BESIX Watpac.
In terms of total output from the construction industry, this pipeline across the top 50 companies accounts for roughly 50% of the industries’ contribution to GDP based on the 2022 output.
So, while we are seeing an uptick in failures in the construction industry, it’s largely the smaller to medium sized players that are not as well capitalised to weather one or more loss-making contracts.
The rapid increase in interest rates is also a key factor for many of the smaller operators, especially where their personal properties are used as collateral (and may be rolling off historically low interest rates), or a project has second tier finance which will become ever increasingly difficult to service (upwards of 12% isn’t uncommon for such lending).
The Benmax NZ Limited liquidation is a good example of these challenges, as it highlights where a company has grown quickly on the back of a boom in construction work following the Christchurch earthquakes, but has then expanded into other regions without having the ability, or balance sheet, to trade through the recent adverse conditions.
Silver linings
The sale of all 350 vehicles and equipment by the Administrator of AH Construction Services Limited, exceeding the reserve of $9.6 million, shows there is still confidence in the market.
The auction, which had more than 2,500 registered bidders, is evidence many still see an opportunity to grow and prosper in the current climate and that despite the recent headline failures, there is still opportunity.
A further silver lining is the insurance money to flow from the rebuild required following Cyclone Gabrielle and the Auckland floods earlier in the year. Treasury has recently estimated the cost of the rebuild at between $9 billion - $14.5 billion. Although inflationary in nature, industry participants who are agile enough to pivot and assist the rebuild in the affected region will stand to benefit from the significant increase in spending.
This inflow of insurance money is likely to stave off further collapses in the SME space, where industry players shift to the affected regions to benefit from the additional work – much like we saw in Christchurch to assist with the city’s rebuild.
There will also be numerous opportunities for those with sufficient capital available to them to look to expand in situations of distressed M&A or where there is the possibility of vertical or horizontal integration of existing, but struggling, industry players.
So, it isn’t all doom and gloom in the construction industry, with evidence that there is still appetite from a number of players to take advantage of, and to leverage, the current market conditions to support their own growth.
