Cash-short builders are taking longer to pay their bills and are beginning to credit check their suppliers as the construction industry defaults on its debts
New Zealand’s construction industry is feeling the financial crunch, with a disproportionate number of liquidations and rising number of credit defaults in the sector, according to new figures.
The latest to go bust is Auckland residential builder KB Project Management. The collapse of the company has reportedly left more than 45 workers in limbo.
The company has been put into liquidation. Liquidators Steven Khov and Kieran Jones issued their first report last week, showing the company has nil in cash reserves, but is owing nearly $16 million to unsecured creditors, including $15.8m to trade creditors. The balance is owed to Inland Revenue.
The sole-shareholder, Ankit Budhiraja, appears to no longer reside in New Zealand, but he is in contact and cooperating with the liquidators, according to the report.
Credit ratings agency Centrix has recorded 168 company liquidations in August 2022 – the highest counted by the organisation so far this year. Of those, 44 are known to be construction companies, representing about 28 percent of the liquidations.
New data from the agency shows business credit demand across all sectors is up slightly by 1 percent year on year, with the average credit score for new business applicants rising to 765. But sadly, the construction sector is bucking this trend.
“We’re going to see the dominoes fall over. That might take a year, sometimes more, because these [sub-contractors] will be doing a job to cover costs for a previous one they didn’t get paid for." – Brent Norling, Norling Law
According to an insolvency litigator, dozens of property developers are also trying to back out on deals worth millions of dollars as those projects are no longer as viable due to increased costs and sliding land values.
Centrix is unable to provide specific data due to commercial sensitivity, but managing director Keith McLaughlin says fewer construction companies were seeking credit as businesses continued to clock credit defaults.
McLaughlin says the sector is feeling the stress in the economy, with a disproportionate amount of companies going under compared to the size of the industry in the wider economy.
“The construction sector does not represent nearly 30 percent of the economy, yet they represent this percentage of liquidations.”
A Ministry of Business, Innovation, and Employment report from last year shows the sector contributes nearly 7 percent of total GDP in 2019.
While the sector represents a large proportion of liquidations, McLaughlin says these are at relatively low levels as the Inland Revenue Department is not being as aggressive in winding companies up.
“It falls on trade creditors to wind up, and they will only do that if they think there’s going to be a return or if there’s a material solvency issue,” he says.
“Otherwise, they’ll probably just walk away and close the door. Nobody bothers to wind the company up because there’s nothing to wind it up for.”
Property developers feeling buyer's regret
Brent Norling, insolvency dispute litigator and director at Norling Law, is familiar with the number of building businesses going bust.
As earlier reported by Newsroom, about two-thirds of the liquidations the firm is involved in are within the construction industries.
Norling says the collapse of large companies, such as Wellington-based Armstrong Downes which owes over 300 creditors more than $9m, will trigger waves that flow on and bring down smaller businesses.
“We’re going to see the dominoes fall over. That might take a year, sometimes more, because these [sub-contractors] will be doing a job to cover costs for a previous one they didn’t get paid for.”
There is also a “significant” increase in property developers defaulting on their purchase agreements in the last four to six weeks, according to Norling.
Norling says he is aware of about 30 sales in Auckland that are not set to go through in the next month, meaning many millions of dollars are not going to change hands.
This is predominantly because of the increased cost to build and develop land due to the crunch on supplies and labour, while the value of land has decreased.
“When [the developer] first looked at the viability of the project, it was all fine but those market shifts mean it's not viable anymore. Maybe they don’t have funding anymore, or maybe it's not profitable so they’re trying to pull out,” Norling says.
He says disgruntled vendors can get an order from the court that requires the purchaser to settle if they have the funds. The vendor could also seek damages, including legal costs, agency fees, and the price difference between the old and new value of the land.
“We are seeing people negotiating and paying some amount of money to get out of their purchase agreement,” Norling says.
Builders taking longer to pay bills, credit checking suppliers
Julien Leys, chief executive of the Building Industry Federation of New Zealand, isn’t expecting the situation for Kiwi builders to improve anytime soon.
He’s nervously eyeing the construction sector across the ditch, where firms are also financially struggling. Oracle Homes is one of the latest companies to collapse, owing $AUS 14m and leaving about 300 homeowners with unfinished homes. This follows a series of other failures earlier this year, including Norris Construction Group which is $AUS27m in debt and owes $AUS3.2m to about 140 staff.
Back in New Zealand, Leys says signs of pressure include smaller builders or contractors taking longer to pay their bills, as they don’t have the same cashflow or overdrafts to fall back on that larger outfits might have.
Instead of paying bills on the usual monthly basis, he says it's often taking builders up to 90 days to tick off incoming invoices.
“It shows the pressure of not having enough staff, along with a crunch on supplies and cash flow, is starting to show,” he says.
Leys says builders are also doing credit checks on their suppliers to gauge whether they can be relied on, or steering away from jobs that might require some kind of upfront cash investment, such as new equipment.
Others are simply throwing in the towel and voluntarily winding up their business because it's simply too hard to continue, he says.
Leys urges builders to avoid fixed price contract work and potentially hold off purchasing new equipment until next year, to ensure they have the cashflow to get through the summer holiday shutdown period.
Richard Philip, Inland Revenue’s spokesperson on outstanding debt, says in the 2021/2022 year, the department’s focus has continued to be on supporting businesses through the economic and financial fallout of the Covid-19 pandemic.
Across all sectors, Inland Revenue has filed 358 liquidation applications for the most recent financial year ending June 30, 2022. This is a decrease from 422 the year before.
Of those, 152 companies were liquidated last year and 163 this year. Inland Revenue, however, is not the only source of liquidation applications to the courts, Philips says.
“Liquidating a business is the last resort but a necessary one to assist viable businesses trying to recover from Covid from the damage caused by unviable companies who continue to trade whilst insolvent,” he says.
“Since November 2021, we’ve looked more closely at those with more significant debts. As at the end of August 2022, we’ve contacted around 1762 businesses with debts totalling $366.7 million to see if they have underlying issues that mean they can’t pay what they owe.
“Some of the businesses we contacted were able to pay their debt. At the end of August, approximately $161.7 million had been paid in full or was under an instalment arrangement.”
