Construction & Real Estate | Insolvency
The real estate market is experiencing a significant downtown which is being felt by a number of related sectors. It is a sector that is sensitive to changes in the business lifecycle and the downturn is starting to trigger financial stress as we are now starting to see increasing levels of corporate insolvencies. In Q1 2019, there were 121 insolvencies and it is the second most common sector affected by insolvency.
The market has historically taken advantage of low interest rates and high liquidity. However, with the political uncertainty of Brexit, this sector has been facing economic challenges due to the depreciation of Sterling over the last couple of years causing residential property prices across the UK to fall.
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 as 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 has not only affected 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 bothin duration and cost, placing pressure on already narrow margins.
These companies have incurred considerable sums of capital expenditure on expanding their capacity with a significant proportion of the investment funded through raising US Dollar debt.
Unfortunately, many of these companies have been unable to generate the projected turnover and profits as economic growth has slowed. Furthermore, the appreciation of US Dollar has placed additional pressure on these companies’ ability to service the debt.
Last year 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.
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 decease, it causes the reverse effect therefore bringing down consumer confidence and their appetite to spend. In October 2018, sales figures reflect a 3% decrease in white goods purchased by consumers who are moving to a new house.
The collapse in residential property prices was last seen in 2008 and pressure on the UK housing market is likely to continue 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 and paints a gloomy picture for this sector.
Example – The insolvent tenant
The financial obligations under a lease can be one of the largest expenses for a business.
We can explain the impact of various insolvency processes to you, assess your options and help you understand your rights as a landlord of an insolvency tenant. If you have received proposals for a CVA, we can help you interpret the proposals, complete the voting forms and attend meetings of creditors if required.
Where the tenant is in Administration or Liquidation, we have access to specialist property and insolvency solicitors to assist landlords with the negotiation of any deeds of surrender or licences to assign that that they are asked to consider.
Example – The insolvent landlord
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.
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. At MHA we will always exhaust the informal or turnaround options before recommending other, more formal options.
How MHA can help you
We have extensive experience of 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.
This article was taken from Real Estate Matters – Issue 14. Read the full publication.
If you would like to discuss in more detail or if you would like to speak with a member of our Construction & Real Estate team about how we can help, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.