Builder distress levels on the rise with elevated industry risks

Residential and commercial builders were experiencing higher levels of distress, with a major rating agency downgrading 23 per cent of the sector over the last nine months.

Equifax has downgraded 30 per cent of all construction companies assessed in the last 18 months.

A leading credit rating agency has warned of heightened risks for the construction sector with the residential segment of the market faring the worst.

Equifax’s Quarterly Commercial Insights has downgraded 30 per cent of all construction companies assessed in the last 18 months, with 17 per cent being downgraded in the nine months to September 2023.

The credit rating agency found the civil and infrastructure segments were more resilient, with only 13 per cent being downgraded in the last nine months while residential and commercial builders were experiencing higher levels of distress, with 23 per cent downgraded over the same period.

Equifax’s head of Product and Rating Services Brad Walters said he expected the tough times to continue in the construction sector over the next six to 12 months.

“When you look at the data and then home builders in particular, there are elevated levels of risk for those businesses that have already been identified as being more vulnerable,” he said.

“For all intents and purposes those that are risky are getting riskier. The question is what does the next six to 12 months look like and they are going to be challenging.”

According to the latest insolvency figures from the Australian Securities & Investments Commission construction-related companies represented almost one-third of collapses (944) since the start of the 2024 financial year. That was up 34 per cent on the 705 firms in the sector which failed over the same period a year ago.

Equifax said the last few years have been particularly challenging for housing construction, with nearly a quarter of larger home builders reporting net margins below 1 per cent, because of cost blowouts bought in by material prices increases, labour shortages and bad weather.

“The number reporting trading losses has nearly doubled over the last 12 months, with a greater proportion paying dividends in excess of profits and/or despite losses,” Mr Walters said.

“As such, the share of large residential builders with negative cash flows increased sharply over the past couple of years, now more than 30 per cent reporting negative cashflow.

“This is nearly double the proportion reporting negative cash flow prior to the pandemic. This has impacted cash reserves, and the more vulnerable constructors have experienced a rapid erosion in their liquidity metrics.”

Mr Walters said Equifax research has shown that the share of aged trade credit builders owe to suppliers (91+ days overdue) has been increasing.

“This is concerning as, in more than 90 per cent of cases, unsecured creditors get less than 10 cents back in the dollar when a construction firm collapses,” he said.

“The good news is there are early warning signs, well in advance, and ratings provide the market with a forward looking assessment of this risk.”

The Equifax research found that business exits in construction increased to 16.5 per cent – almost a third higher than last year and nearly 50 per cent up on two years ago.