18 May

The Up’s and Down’s of the Construction Industry

Recent media articles have highlighted the demise of two more significant Construction companies and building projects.

ups_and_downs_of_the_construction_industryPoint to Point Holdings Ltd (although now conveniently known as HPTP (2014) Ltd) based in Auckland, actually closed it’s doors in January, although details of the pain caused are only now emerging (see NZ Herald article 2/5/17). More on this later.

And the $13million failure of property company, FCL Holdings in Christchurch means a planned 900-section housing subdivision at Rolleston is now unlikely to proceed (see Stuff article 2/5/17.)

So what is going on with our construction industry? All the obvious signs suggest it is on the up, and yet we still have building and development companies going down?

Let’s then have a look at some of the factors in play here -the Up’s and the Down’s- and try to get a handle on why we are seeing construction companies fail, and what surprises the short to medium term future for the industry may hold.

Firstly, whats on the Up:

Building activity & Consents; House Prices; Building Costs; Debt levels; Interest rates, Statutory Demands and collection activity.

And what’s going Down:

Property demand in Auckland, Bank commercial funding, and debt collection levels.

These factors, when put in perspective, don’t augur well for the solvency of the construction industry going forward. So let’s just see how the interaction of these key components individually, and collectively, impact on the market.

Firstly, we have construction opportunity – particularly in Auckland – growing at unprecedented levels. However, we have the major banks clearly defining the levels of lending they will provide to the different sectors, and this is impacting particularly on developers whose ability to obtain project finance is severely restrained.

With a lack of funding, or working capital, suppliers and tradesmen are having to carry the can until profits can be extracted from the build. Thus we are seeing unprecedented debt levels (and likely debt aging) in the industry as suppliers become quasi-funders.

Building costs are increasing, as are house prices (even though these have eased off, the damage has largely been done.) Fixed price, and term, contracts are also causing pain for the builders, who are finding that, as a result of price increases, the perceived profit margins are being eroded by the end of the build in many cases.

Our sources in the Collection Agency field are also reporting a large increase in the amount of creditor led Statutory Demands (intention to wind-up a company) being delivered on construction firms who are not meeting their payment obligations. (By the time this goes to press, I am reliably told by a certain liquidator there will have been another $1.0M + failure in the construction sector.)

With regard to the existing housing market, consumers have been borrowing heavily – particularly on mortgages – based around a strong economic climate, and low interest rates. However, interest rates are already starting to rise, and even a small increase can severely affect affordability for many recent home buyers. Concern in this area may well be reinforcing the statistics recently released by Realestate.co.nz showing property demand in Auckland down 31% in April.

So, what to watch out for, from a supplier’s perspective.

Let’s take a closer look at the demise of Point to Point Holdings Ltd. Were the warning signs there?

Most definitely.

Firstly, the background.

Stephen Foley, the director, was an ex-bankrupt, and had been banned as a director for 3 years due to earlier business failures. As a result, most of the companies he was involved in were registered under his wife’s name – Dianne Jean Foley – although Point to Point was (originally) in joint directorship.

The timeline.

The CreditWorks database shows that – after a stumble in the middle of 2016 – debt payment profiles were good until October / November of that year. Then things began to change.

Debt levels began to grow, and debt aging began to extend. From a good payment profile of around 30 days in October, by December this had extended to 50 days. By January, it was taking the company 73 days to pay their debts, and 80% of their total exposure was overdue.

On the 15th January, the company changed its name to the innocuous and unrecognisable HPTP (2014) Ltd. This is a ploy often used by companies who recognise they are in financial strife, and seek – either because of contractual requirements, and / or to protect the brand – to ‘fly under the radar’ with regard to subsequent publicity.

On the 17th January, Dianne Foley resigned as a director. No doubt to try and protect her from future legal proceedings and actions against the failing company, and from being subject to the possible ramifications of being a Failed Director. No doubt there was also a desire to ensure the other companies that she is a (sole ) director of were not impacted by the association – including her directorship of Point To Point Construction Ltd.

Surprise, surprise, on the 23rd January, the company was liquidated by a Shareholders Resolution, and once again creditors are left out in the cold.

Whether or not the convoluted (but fairly obvious) attempt to extricate at least one of the directors from liability and responsibility, is successful, will depend on the liquidators, and on any canny creditors who sensibly had the foresight to take a personal guarantee over Dianne Foley.

Clearly, the market forces at play are going to be cause for greater concern in the industry going forward. There will be more business failures. How much pain this causes to the supplier and sub-contractor community will depend on their levels of vigilance, and attention paid to the signs, such as those highlighted in the Point to Point scenario.

About the Author

Alan Johnston
Alan heads up the Information bureau side of the business (CRISworks) as well as providing credit expertise and consultancy to clients in the areas of Credit Management best practices, credit training, Credit Terms of Trade reviews, PPSR education, and pretty much all other credit requirements of clients in need.

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