Construction and Real Estate and the impact of Insolvency

The real estate market is experiencing a significant downturn which is being felt by a number of related sectors. It is a sector that is sensitive to changes in the business lifecycle and this is starting to trigger financial stress as we are now seeing increasing levels of corporate insolvencies.

In Q1 2019, there were 121 insolvencies and it is the second most common sector affected by insolvency.

Construction

Insolvency statistics reflect that capital-intensive sectors such as construction, manufacturing and steel depend on the stability of the real estate market.

The construction industry is starting to see increased levels of insolvencies as growth slows due to a result of currency depreciation and lower government spending. This sector is particularly at risk due to the increasing cost of building materials and falling property valuations. This not only affects the company itself but also the supply chain and those contracted to work on various projects.

Companies which use fixed-rate contract terms increase the risk of under-performing contracts with projects over-running both in duration and cost, placing pressure on already narrow margins.

In 2018 we saw the collapse of construction giant, Carillion, and in Q1 2019, the construction sector had the second-highest number (799) of corporate insolvencies. The construction industry is likely to continue to suffer and it is only a matter of time before we see another large name fail.

Housing

In the UK, a significant proportion of people’s wealth is tied up in house prices. When there is an increase in property values, it results in a ‘wealth effect’, and when prices decrease, it causes the reverse effect, therefore bringing down consumer confidence and their appetite to spend.

The collapse in residential property prices was last seen in 2008 and pressure on the UK housing market continued with the uncertainty caused by Brexit. This, combining with increasing cost of raw materials (due to a weaker Pound) and employment costs (due to a shortage of EU migrant workers and UK workers insisting on higher wages) has caused a ripple effect of insolvencies.

How we can help

We have extensive experience in dealing with real estate in insolvency related situations. These include advising landlords, tenants and receiverships over low and high value properties.

With several recent cases of high street retailers restructuring under Company Voluntary Arrangements (CVA), it is crucial to have an understanding of property insolvency and the options for both landlords and tenants.

We can assist tenants in understanding what could happen if the landlord becomes insolvent, understanding who assumes responsibility for management issues, maintenance and insurance obligations that the landlord would ordinarily be responsible for.

Conclusion

Whether or not your business operates in the real estate sector we recommend that you obtain appropriate advice at the earliest opportunity in order that we can assess your position and ensure you have many options to consider as possible.

For more information on the impact of insolvencies on the construction and real estate industry, read Issue 14 of our newsletter Real Estate Matters.

Read Real Estate Matters Issue 14

If you would like further advice, please get in touch and speak to a member of our Construction and Real Estate team.