More construction companies expected to fail

Over in Australia generally home prices have now been falling for the past year, caused by tighter lending standards, more properties coming into the market and a drop-off in both local and foreign investor demand. This has caused trouble for developers including Fletcher Building’s Australian unit, Lend Lease Corporation, and a number of other developers.

Over in New Zealand, the market has slowed down but more importantly, the tightening lending standards have put some developers and construction companies into pressure.

The problem is the rising building costs. By the way Councils don’t help either when they add a development levy contribution to any new developments. Currently developers and more importantly, construction companies are struggling with escalating costs and labour shortages. With funding sources being harder to secure, construction companies are getting caught out in a liquidity squeeze. Unlike in some businesses which fail due to a lack of  profitability, housing projects (not commercial projects) generally are really profitable for construction companies.  Oftentimes its is the lack of cash and cash flow that puts construction companies in trouble. This has meant also lead to failure of big construction companies. Corbel construction recently went into liquidation. That was due to a leaky building issue (again Apartments). But Bella Vista went into liquidation and they were building houses due to cash flow problems. And the truth is more contractors and construction companies are going to experience liquidity problems and fall in the next few years.

Of course this means more construction companies will fail which will spell trouble for large construction projects (hint: apartments).That’s why in another reason why in an environment like this it is better to invest in houses rather than apartments. Housing construction companies has a quicker turnaround and better cash flow than apartment builders. Apartment builders must wait for the entire apartment building to be complete before they receive the final payment. And if the apartment construction contractors experience cash flow shortages before they finish the project, they either ask the buyers to vary the contract (ie pay more) or in the worse case they go into receivership meaning more delays for the apartment projects until another contractor is found.

On another note, This is of concern for the Kiwibuild programme and for policy makers who want to increase the supply of housing. What’s the solution? Why can’t New Zealand be like other countries that build homes for half the price of ours? The question is how to lower the cost of housing? Warehouse founder, Mr Tindall put forward the possibility of prefabricated homes which can be brought and installed onto a site. This will be a significant change to how things are currently done in the construction sector. The question is will it work?



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