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This week’s interest rate rise is pushing insolvency figures north, with construction and hospitality in the front line.
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Building industry ‘starting to fall over’, retail on the run
05 May 2023
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This week’s RBA rate rise and economic conditions reminiscent of the global financial crisis mean “things are starting to fall over” in construction and real estate, according to HLB Mann Judd.
Sydney restructuring and risk advisory partner Todd Gammel said only way was up for corporate insolvencies, with the building industry in the front line.
“Things are starting to fall over,” he said. “The stereotypical problem is real estate development where a builder has a loan and churns through money, but is only 70 to 75 per cent through the build.
“The cost of labour and materials have increased, increasing the costs, developers can then lose confidence and one or all of the parties take advice around their respective positions and options from restructuring experts, lawyers and the like.
“Historical fixed-price contracts are continuing to cause headaches but fortunately there is increasing willingness to explore options on how to complete projects without formal insolvency processes if they can be avoided.
“Notwithstanding, unless the parties can come to a commercial financial agreement, they’re collapsing and will continue to do so.”
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The latest ASIC figures show 1,672 construction companies have entered administration over the first nine months of 2022-23, an 84 per cent increase over the previous year.
Mr Gammel said early-stage businesses – until recently, popular with investors – was another sector hit hard by inflation.
“These businesses were more popular with funding during COVID when interest rates were zero, but now there is infinitely less willingness to explore some of these businesses,” he said.
“The environment for earlier-stage growth prospects has gone south and a lot of them are being wound down – why would you put money into something with uncertainty of material investment return or repayment of the funds?”
From the perspective of US-based Rehmann, a member of HLB International, there were recognisable “hallmarks of the GFC”. Head of consulting Chip Hoebeke, who is currently in Australia, said the parallels were stark.
“In 2007-08, we had the tech company layoffs, real estate pressures, banking receiverships, and we’re starting to follow a very similar pattern now, both in the US and Australia,” he said.
“All of those fingerprints have re-emerged. The government is trying to fend it off through inflation but there’s conjecture as to whether that’s the right way. We’ve been in catch-up mode and rate rises are biting hard.”
Insolvency Australia director Gareth Gammon said the hospitality sector was also high on the danger list following the RBA’s increase in the cash rate to 3.85 per cent.
“The original hit taken by the construction sector continues but it is consumer spending that the RBA tried to impact and that is beginning to flow through and be reflected in the number of retail and hospitality insolvencies,” he said.
People were simultaneously spending more money on their home loans and cutting back on discretionary spending.
“When consumer spending decreases, it's the retail hospitality sectors that suffer the most and that's being borne out in the insolvency numbers.”
The ASIC figures financial year-to-date show 845 companies in food and accommodation entered administration, a 55 per cent increase.
Mr Gammon said while insolvencies were clearly going up each month, it would be some time before pre-pandemic levels returned.
“I still don't think we've got back to business as usual. Maybe by the end of this year, or beginning of next, we might be tracking back up to what used to be business as usual.”
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