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Having survived the pandemic, supply chain problems and the ongoing skills shortage, easing demand should return the sector to normal, says CreditorWatch.
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Building industry 'can absorb blows and emerge in better shape'
21 November 2022
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There is no silver bullet for problems in the building industry but there are signs that it will survive supply issues, labour shortages and late payments to emerge in better shape next year, according to a CreditorWatch report.
“The construction sector is a hugely varied industry,” said Patrick Coghlan, CEO of CreditorWatch. “The largest companies work on massive government infrastructure projects, such as the Sydney Metro project and Melbourne’s West Gate Tunnel, at the other end of the market are sole-operator tradespeople working on new housing constructions.
“These sub-contractors are often at the mercy of larger contractors when it comes to payments.”
“No matter the size of the business, presently all operators are impacted by labour shortages and supply chain issues. Initiatives to bring in workers from overseas to plug skills gaps are welcome. But there is no silver bullet to fix the problems the sector is facing.”
The issue of supply chain struggles and therefore increased costs for those in the sector had impacted businesses due to fixed price contracts and bank funding for projects not keeping pace with costs, said CreditorWatch.
“Where we see consistent issues in the sector is the rate of payment arrears,” said CreditorWatch chief economist Anneke Thompson.
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“Construction consistently tops the industry ranks for late payments.”
“In August 2022, 11.7 per cent of construction companies had payments more than 60 days in arrears. The average is 8.5 per cent.”
While prices for certain building materials lowered throughout the year, worsening economic conditions and increased wages due to a lack of labour has meant some construction firms have had to work with low cash flow, said the report.
“The cost increase is sucking up contingency and profit margins builders have built into projects,” said Ms Thompson.
“In the worst cases, these increases are putting builders out of business.”
“Restarting migration will help to ease wage increases as more workers enter the workforce, although this will take some time to materialise.”
Despite the increased costs and the high level of late payments, the construction industry displayed a relatively low probability of default, according to CreditorWatch.
Its business risk index found only 3.8 per cent of firms were expected to miss payments, which was significantly lower than the sector with the highest rate, food and beverage services, which had a probability of default of 7.2 per cent.
The increased costs flowed into a rise in the price of construction which should lessen demand and see the industry return to more normalised levels, according to CreditorWatch.
“For contracts, higher prices and higher interest rates mean home owners need to take out larger loans to cover the cost and finance of new houses,” said Ms Thompson.
“This should result in much lower housing construction starts as we move into 2023.”
The report said as demand slowed development site values and asset values would recalibrate back to normal, which would return the industry to a long-term sustainable place.
“Overall, while the construction sector is likely to experience a challenging 12 months, the long-term prospects for the industry remain sound,” the report concluded.
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