Construction firm debt defaults are up 16 percent, liquidations are up 72 percent, and those still working say it's getting tougher by the week.
West Auckland brothers Nico and Joseph Smith, and their mate Ross Scott, come into the city most days. They're doing the odd commercial building job, but mostly working on Grey Lynn villa renovations. It feels like more secure work than the new-build townhouses springing up in every suburban street.
The new townhouses won't last: "They're eyesores," Joseph Smith says. "Especially around our way, they're going up in between the nice old houses in the streets we grew up on."
His brother agrees: "I did townhouses for the past year and the quality of the designs and materials was pretty bad."
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The three says they're bracing to defy a further slowdown in the house building industry. First it was Covid lockdowns, then supply chain delays worsening inflation, then labour shortages. Now, with interest rates rising, neither homebuyers nor developers are willing to risk putting down money – especially on the townhouses at the lower end of the market.
"I've got a townhouse that I bought a year ago," Ross Scott chips in, "and it looks a bit rushed, the quality's not all there. It's just to make it affordable for a first homebuyer so they can get in the market.
"The entire business wasn’t doing great, and it has put a lot of pressure on his family with him working away from home and only seeing his family on a weekend." – liquidator of Riley Construction, Tauranga
"That's the thing with us, we're working with those materials all the time, we pick up on the actual quality of what they're building now. That's why we work on villas, because they're built so good – the weatherboards are 100 years old and they're still there. They're sweet."
They're the lucky ones. Every week, more builders are forced to hang up their tools.
Their pain shows through the usually dry language of the liquidators' reports. "Difficult trading conditions resulting from Covid-19, exacerbated by increasing costs, delayed debtor payments, and the resultant negative impact on cashflow resulted in the company unable to pay its debts as they fell due," reads one from Upper Hutt.
Company liquidations up 35 percent, year-on-year
"With the recent recession, they were finding it super hard to get any further work to continue the business and also having great difficulty paying the bills and creditors," reads another, from the Bay of Plenty. "The entire business wasn’t doing great, and it has put a lot of pressure on his family, with him working away from home and seeing his family only on a weekend."
And those are just the builders. Behind them are lines of trade creditors left unpaid, often forced into liquidation as well. And behind them, sometimes, are the bright-eyed aspiring homeowners.
Ahmad Zainudin is part of a chain of three Auckland building and development companies that have been put into liquidation in the past few weeks. After discussing their problems, he sends a polite message to sum up the state of the troubled industry. "We hope it will get better," he writes.
"If you're a spec builder out there putting five houses up on a fixed price, then you're not gonna make it work." – Keith McLaughlin, Centrix
Statistics NZ data, published this week, shows a sharp downturn in the numbers of homes consented in the past year, down 11 percent from last year's peak, to levels last seen at the start of 2021.
There's still work building hospitals and nursing homes (up 56 percent to $1.6 billion). There are still jobs on offices, administration, and public transport buildings (up 14 percent to $1.6b). There are still jobs on schools and other education buildings (up 1.4 percent to $1.5b).
But the Government's vaunted house-building boom is over.
Westpac senior economist Satish Ranchhod expects the downward trend in issuing consents to deepen over the coming months. "Financial conditions in the construction sector have become a lot tougher," he says.
"House prices have tumbled over the past year, dropping by 17 percent across the country.
"At the same time, operating costs for construction firms have skyrocketed, rising by around 9 percent over the past year. On top of that, interest rates have risen to their highest levels in more than a decade.
"With that pressure on margins and fewer new projects coming to market, there’s definitely a risk that more businesses in the sector come under financial stress." – Satish Ranchhod, Westpac
"The combination of those factors mean that prospective buyers are reluctant to purchase off the plan, while developers are increasingly hesitant to bring new projects to market. Consistent with that, those in the industry continue to report low levels of forward orders," Ranchhod says.
Builders will keep working through existing projects this year, but as the existing pipeline of projects is completed, construction activity will fall away, Ranchhod predicts. Auckland Council compliance certificate figures show consented homes are still being completed, but this is as good as it gets. Completion numbers will also drop away.
"I expect the same financial pressures that are weighing on conditions in Auckland will also dampen home building throughout the rest of the nation."
Businesses are reporting that their margins are being squeezed, Ranchhod says. "Supply chain pressures have eased in the sense that firms can get supplies, and so we aren’t seeing the sort of very large cost increases we saw 18 months ago. However, we haven’t really seen input costs decline – just more gradual rises. And as you mentioned, it's still hard to get staff.
"Over the past couple of years, when demand was stronger, it was easier to pass on cost increases to purchasers. But with demand in the building sector cooling, it’s a lot tougher to do that. With that pressure on margins and fewer new projects coming to market, there’s definitely a risk more businesses in the sector come under financial stress."
Debt defaults and liquidations
Ranchhod is right, and these pressures are already translating into stress on builders. The credit agency Centrix publishes its update today, showing a 27 percent drop in new mortgage lending that's putting the squeeze on the home-building market.
The number of credit defaults in the construction sector have risen 16 percent since last year – almost as high as the rate of defaults in the retail and property/rental sectors.
Centrix managing director Keith McLaughlin says the number of liquidations roses 72 percent in the year to May 2023. "It's grim in the construction sector at the moment," he tells Newsroom.
"If you're a spec builder out there putting five houses up on a fixed price, then you're not gonna make it work." – Keith McLaughlin, Centrix
"Liquidations across the board are up from where they were last year. A lot of that was because the IRD held back and weren't winding companies up."
But the sheer scale of the problem is bigger in the construction sector, because of the size of the accounts, the nature of the debt, and the fact it's often consumers at the back end of it, who may be waiting for properties. "So the size of the pie is bigger," McLaughlin says.
"The access to labour has been difficult and expensive, the raw materials have been expensive, and the cost of capital to fund the development has gone up – so all your input costs have been going up and the value of the finished article has been going down.
"If you're a spec builder out there putting five houses up on a fixed price, then you're not gonna make it work."
When the cost crunches
Iain McLennan, from McDonald Vague insolvency practitioners, has three related companies on his liquidation books at present.
Developer Ariston Bays Rise and building company Modular Construction contracted to build four of the nine townhouses at the small Bays Rise development overlooking Murrays Bay, on Auckland's North Shore.
"North-facing and drenched in sun, these liveable three-bedroom townhouses proudly display their bold architecture," the promotional website boasted to potential buyers. "Traditional steep colonial-style roof lines and natural timber-finish walls are punctured with modern insets of contrasting window blocks and crisp white pergolas."
The new owners will judge whether the townhouses have lived up to the marketing claims – but for the developer and builder, the experience has been less sunny.
After a dispute over $625,000 that both said they were owed by the other, the two companies agreed to an alternative dispute resolution process. During that process, the liquidators' first report says, it became clear the third party developer could not pay the final invoice. "It was agreed that both companies would be placed into liquidation as a result."
Inland Revenue and an unsecured creditor, together owed $567,000, will be left out of pocket in the Ariston Bays Rise liquidation. And McLennan has written to the Companies Office asking it to wind up Modular Construction.
The building company's owner-directors, Dr Anjaneya Prasad Penneru from Flat Bush and Ahmad Zainudin from Takapuna, will be left out of pocket in that liquidation.
"Thank you for looking at the industry. We hope it will get better." – Ahmad Zainudin, Modular Construction
Initially they pair had planned to get into modular, offsite construction – the Government's Holy Grail for bringing down the cost of construction. But they didn't carry through on that. "Too capital intensive and too high risks," Zainudin says. "We just did normal construction.
"Our dispute with Ariston was over bills they didn't pay. At mediation, both companies agreed to liquidate."
McLennan explains further: "This project appeared to me to have been financially viable, but for the disputes between the two key parties. Both agreed that given the amounts involved, they would be better to each just drop hands, and liquidate."
And now, the pair are also likely to lose money when McLennan liquidates an associated company, Pikiheke Development, in which they are both shareholders, and were previously directors.
According to the first liquidator's report, two weeks ago, that company took relatively short-term finance to buy land in Manurewa, but wasn't able to refinance it last month. Unlike the Bays Rise development, builders never broke ground on the 19 townhouses planned for this development.
Ray White Takanini is to put the 2336m2 section at 108-112 Mahia Rd on the auction block on Wednesday this week. "Must sell!" says the listing.
The liquidators will look to dispose of the land, in order to pay back the $578,741 owed to trade and vendor creditors. The $1.65 million owed in shareholder advances seems less likely to be realised in its entirety, in this market downturn.
Zainudin says he does not expect these liquidations to impact on the pair's other building company.
"Thank you for looking at the industry," he concludes. "We hope it will get better."
