Australia’s construction sector faces zombie apocalypse

As Australia’s housing crisis worsens amid a critical shortage of labour and rising costs, experts are warning that major construction companies are increasingly at risk of becoming “zombie companies”.

New data from KPMG Australia reveals that the number of ASX-listed zombies has spiked by 31 per cent in just six months, climbing from 94 in May to 122 companies.

Companies are considered “zombies” when showing signs of financial distress while managing not to collapse.

Going into COVID, Australia had one of the lowest home-to-population ratios in the developed world.Credit: Bloomberg

Gayle Dickerson, KPMG’s head of turnaround and restructuring, said that while there was a strong demand for housing, builders were being squeezed by soaring costs and lack of available labour.

“It means that there are less builders to meet any demand for new housing stock,” she said.

“This is exacerbated by builders flocking to government infrastructure projects, where there is more security of payment, and cost overruns can usually be renegotiated.”

Dickerson added that only the most seasoned developers with long-standing relationships would be able to secure builders for residential housing or apartment projects.

“And that will only be for those projects that can stack up. Many project approvals have not gotten off the ground as the costs to build remains high, impacting project feasibility,” she said.

Most new apartment developments are aimed at affluent Baby Boomers looking to downsize who are willing to pay top dollar. Dickerson warned that until construction costs and labour issues improved, the outlook for increasing housing supply remained grim.

On the ASX, the mining sector has the lion’s share of zombie companies listed on the index, largely due to plummeting nickel and lithium prices.

“Stubborn inflation, sustained high interest rates and low consumer sentiment have left businesses with little breathing room to keep themselves solvent. These factors are simultaneously biting into profit margins and increasing debt burdens [turning] once stable businesses into zombies,” Dickerson said.

“In prior years, the increase in zombie companies was largely due to the removal of COVID stimulus, which had propped up many businesses. Now, insolvency appointments are 50 per cent higher than pre-COVID levels, which is a symptom of more challenging market conditions.”

The federal government’s safe harbour legislation presents companies with a chance at revival. The legislation introduced in 2017 gives companies in financial distress “breathing space” to turn around their business without the risk of personal liability.

Companies are not required to disclose whether they are operating in a safe harbour environment, which allows them to discreetly look through options that may lead to a better outcome than insolvency.

Dickerson said it was likely that companies in the zombie-zone may be using the safe harbour provisions and were not completely destined for the graveyard.

“The taming of inflation and the subsequent lowering of interest rates by the RBA, which we anticipate by February next year, will be the best cure of zombification,” she said.

“It does take time for the effects of interest rate drops to filter through the economy, but for businesses struggling, there are still a raft of options available like safe harbour laws and private credit that simply didn’t exist in previous downturns.”

Some sectors, with stronger underlying market conditions, remain zombie-free. These include aerospace and defence, agriculture, real estate trusts, manufacturing and utilities, all of which have not recorded a zombie company in the past six months.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.