UK Construction Updates Q3 2023

The construction industry represented almost a fifth of all UK insolvencies in H1 2023.

There have been several failures of major companies so far this year.

The problem also persists in China where the country’s biggest property developers are experiencing problems.

Issues at home and abroad can affect supply chains and investor confidence.

What’s happening in construction and property at home and abroad?

Mortgage rates are still high and home ownership seems a mere dream for many. Meanwhile, the firms tasked with building new homes and working on major construction and infrastructure projects face increasing pressures themselves. With the recent news of crumbling concrete in public buildings across the UK, the construction sector faces more scrutiny than ever. The issues persist both at home and abroad.

UK construction woes pile up

The UK has seen major problems in the property and construction sectors recently. The construction industry represented almost a fifth of all UK insolvencies in H1 2023.

June saw the failure of high-rise housing contractor Henry Construction. This left around 700 suppliers and contractors in its supply chain out of pocket to the tune of £43 million.

More recently, Buckingham Group ceased trading due to “rapidly escalating contract losses.” The firm worked on major construction projects, including HS2 and the expansion of Liverpool FC’s Anfield stadium.

Meanwhile, a London-based mechanical and electrical (M&E) firm recently called in administrators. Haydon Mechanical and Electrical had traded for around 140 years and employed over 100 people. It reportedly struggled to recover since a fraud incident in 2017 compounded by the effects of the pandemic. Its accounts noted “cash flow issues”.

China’s property worries continue despite Country Garden rally

Construction and property sector troubles aren’t just a UK problem. One of China’s biggest property developers agreed a last-minute debt deal. After teetering on the brink of failure, Country Garden narrowly avoided collapse. The global financial community breathed a collective sigh of relief … for now.

European stocks hit a three-week high after the news of a bond bailout emerged. The FTSE100 index of blue-chip shares gained 45 points. Companies in industries such as mining saw the biggest gains as they benefit from Chinese commodity demand.

But China’s property market troubles extend beyond Country Garden. Shares in developer Evergrande have dropped by 99% in the past three years. The company posted a 33bn yuan ($4.5bn; £3.6bn) loss in H1 2023.

The fallout of such a significant collapse in the world’s second-largest economy would impact globally, not just locally. In an increasingly global marketplace, such uncertainty can leave investors on edge due to potential consequences for global supply chains. UK firms trading with China must pay close attention.

What’s causing issues for UK construction firms?

Multiple factors at play are causing headaches for UK firms in and out of the construction and property sectors:

The post-pandemic rise in insolvencies is often attributed to the withdrawal of government-backed support programmes.
On top of this, the rising cost of materials has caused cash flow issues for many UK businesses.
The increase in energy costs due to the ongoing conflict in Ukraine continues to have an impact.
Rising inflation and Bank of England interest rate hikes are stifling lending.
An increase in late payments is also squeezing cash flow. In 2022, 52% of small businesses in the UK experienced late payments.

As well as macro-economic pressures, insolvency can originate from various factors. This can be anything from bad cash flow management to failure of clients or excessive expenditure. So, businesses must make accurate credit risk assessments to protect against insolvency risk.

When a company becomes insolvent, it may file for bankruptcy. Bankruptcy is a debt restructuring that aims to help the company pay its debts and maintain its business. In worst cases, suppliers and customers go unpaid and may go under themselves. This chain of events is known as the insolvency domino effect.

How can your business spot the warning signs of cash flow issues?

Best practice tips to spot the warning signs of cash flow problems in your own business include:

Keep good records of company income and expenses.
Look out for red flags of emerging threats. This includes customer non-payment (ensure credit checks), large bills and loan repayment dates.
Manage your cash better. Create a cash flow statement and cash flow forecast – and act on conclusions.
Review your finances regularly.
Invoice quickly and have a strong method to chase late payments.
Use digital accounting products.

What more can you do to protect against insolvency?

As your business navigates the short-term and mid-term future, you should hope for the best but prepare for the worst. This preparation should take the form of:

Building up cash reserves
Reducing debt levels and avoiding negative cash flow
Increasing efficiencies and profit margins
Improving financial performance
Seeking professional advice
Taking out insurance to protect against insolvency

Solutions from Allianz Trade

Whether it’s business fraud protection, bonds in construction and manufacturing, or a Trade Credit Insurance policy that indemnifies your losses if a customer fails to pay or becomes insolvent, we’ve got you covered.