Gloomy outlook for UK’s construction industry as close to 6,000 firms on the brink of collapse

construction industry, HS2, recession, RICS, UK,

November 3, 2023

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Almost 6,000 UK construction firms are now in ‘critical’ financial distress as the number of companies on the brink of collapse has surged by 46% in just three months, according to latest data.

The Begbies Traynor “Red Flag Alert” report reveals that the 25% rise in critical financial distress pushes almost 40,000 UK companies towards insolvency.

• There has been a marked increase in the number of businesses in ‘critical’ financial distress since Q2, up nearly 25% to 37,722 in Q3 2023.
• Almost 480,000 businesses across the UK in ‘significant’ financial distress, 8.7% higher than Q2 and 4.7% higher than the same period in 2022 (Q3 2022: 456,949).
• 18 of the 22 sectors covered by Red Flag saw a double digit increase in companies in critical financial distress compared to the prior quarter.
• Serious concerns regarding the outlook for the Construction and Real Estate & Property Services sectors as critical financial distress jumps 46% and 38% respectively on Q2. 
• Critical financial distress also rose considerably in the retail sector, with Food & Drug Retailers up 33% and General Retailers up 14%, compared to the previous quarter.

The latest Begbies Traynor “Red Flag Alert” report, which has provided a snapshot of British corporate health for the past 15 years, paints a worrying picture for UK businesses as nearly 40,000 companies are revealed to be in a critical financial situation as the pressure of higher interest rates, resilient inflation and weaker consumer confidence take their toll. These pressures are now clearly being seen beyond consumer facing sectors and are becoming widespread, particularly within the construction and property sectors.

With many UK companies accustomed to years of near zero interest rates and access to Government-backed Covid support loans, the new world of elevated interest rates will continue to push many businesses the very edge of failure.

Evidence of the stress in the UK economy can be seen in the rapid quarter-on-quarter growth in the number of companies in critical financial distress, up 24.9% to 37,722. The sectors driving this increase were the Construction, Real Estate & Property Services and Support Services, up 46%, 38% and 28% respectively.

The Construction and Real Estate companies now account for almost 30% of all companies in critical financial distress as the slowdown in the residential housing market continues to bite. Rises in the retail sector, with Food & Drug Retailers up 33% and General Retailers up 14% quarter on quarter also contributed to the overall uplift in critical financial distress.

Additionally, there has also been a marked acceleration in the number of companies experiencing significant financial distress with 478,176 businesses now affected, up 8.7% on the prior quarter (Q2 2023: 439,815). The Construction and Support Services sectors accounted for nearly 50% of the quarter-on-quarter rise, as they were up by 17.4% or 10,741 companies, and 11.1% or 7,584 companies, respectively.

“Tens of thousands of British companies are now in financial dire straits now that the era of cheap money is firmly behind us,” says Partner at Begbies Traynor Julie Palmer.

“Businesses that had loaded up on debt at rock-bottom rates, and were only able to cling on during the pandemic thanks to Government support, must now deal with a financial reality check as higher interest rates hit working capital for the foreseeable future,” says Partner at Begbies Traynor Julie Palmer.

“Taken together with stubbornly high inflation and weak consumer confidence, many of these businesses will inevitably head towards failure,” says Partner at Begbies Traynor Julie Palmer.

“The construction industry, which has long been a bellwether for the health of the economy, looks particularly vulnerable with over 70,000 firms now in significant financial distress and circa 6,000 in much more serious critical financial distress – often a precursor to formal insolvency,” says Partner at Begbies Traynor Julie Palmer.

“These businesses must now struggle through a period of inflation-eroded margins, weak demand and a looming recession. It is likely to be an insurmountable task for many,” says Partner at Begbies Traynor Julie Palmer.

“This latest data highlights how the debt storm, which has been brewing for years, but had been held off by several measures to provide breathing space for companies, may very well break. Something that will send shockwaves through the whole economy,” says Partner at Begbies Traynor Julie Palmer.

“The current combination of macro-economic risks is piling on the pressure and really starting to take its toll on UK businesses, as evidenced by the latest research data from Red Flag Alert,” says Begbies Traynor executive chairman Ric Traynor.

“I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time and insolvencies often peak long after a recovery has started. Unfortunately for many businesses, time is not on their side,” says Begbies Traynor executive chairman Ric Traynor.

“The ongoing geo-political uncertainty, which is particularly affecting commodity and energy prices, coupled with high interest rates, weak consumer demand, sticky levels of inflation and an anticipated recession over the coming year, may simply prove too much for many of these distressed businesses,” says Begbies Traynor executive chairman Ric Traynor.

“So, given the challenges the economy still faces, the outlook remains pretty bleak, and I expect many more ‘zombie’ companies to continue to fail for some time to come as the impact of this economic backdrop makes them increasingly unviable,” says Begbies Traynor executive chairman Ric Traynor.

Top 10 Sector Ranking – Critical Financial Distress (Number of Companies in Critical Financial Distress)

1.    Construction (5,919)

2.    Support Services (5,741)

3.    Real Estate & Property Services (4,994)

4.    Professional Services (3,032)

5.    General Retailers (2,759)

6.    Telecommunications & Information Technology (2,264)

7.    Health & Education (1,924)

8.    Media (1,481)

9.    Food & Drug Retailers (1,222)

10.  Bars & Restaurants (1,073)

Top 10 Sector Ranking – Significant Financial Distress (Number of Companies in Significant Financial Distress)

1.    Support Services (75,589)

2.    Construction (72, 257)

3.    Real Estate & Property Services (51,240)

4.    Professional Services (44,491)

5.    Telecommunications & Information Technology (32,234

6.    General Retailers (30,177)

7.    Health & Education (30,176)

8.    Media (18,921)

9.    Financial Services (15,123)

10.  Other Manufacturing (13,535)

Significant distress by region

1.    London (137,515)

2.    South East (83,598)

3.    Midlands (58,053)

4.    North West (49,856)

5.    South West (34,332)

6.    Yorkshire (32,837)

7.    East of England (30,462)

8.    Scotland (22,839)

9.    Wales (12,613)

10.  North East8480

11.  Northern Ireland (7,526)

12.  Misc (65)

Critical distress by region

1.    London (12,146)

2.    South East (6,233)

3.    Midlands (4,242)

4.    North West (4,007

5.    Yorkshire (2,495)

6.    South West (2,405)

7.    East of England (2,261)

8.    Scotland (1,783)

9.    Wales (953)

10.  North East (658)

11.  Northern Ireland (538)

12.  Misc (1)

Housebuilding slump and scrapping of HS2 leg concerning

Construction workloads in the UK have turned negative in Q3 driven by a drop in housebuilding, and current financial challenges, according to the latest Royal Institution of Chartered Surveyors (RICS) UK Construction Monitor. 

The headline reading, which captures workload activity for the whole of the construction industry, saw a net balance of -10% of respondents reporting a decrease in activity this quarter, which is the most downbeat result since the early months of the pandemic.

Looking at individual sectors. infrastructure is still growing although is now showing a slowdown (+10% vs +17% in Q2) as are public works (net balance of +8% vs +14% Q2). All other segments are now seeing a fall.

The largest fall is in private housebuilding where the net balance has dropped from -12% to -26%. This reflects the challenges housebuilders are facing with slower sales and tougher prices. Public housing, private industrial and private commercial workloads are also declining. It is also noteworthy that new business enquiries when taken across the sector are now also negative with a  reading of +6% in Q2 to -2% in Q3.

Construction Recruitment challenges ease

As workload drops, the challenges around recruitment in the industry continue to ease although they still remain significant. Just over half of the contributors to the survey cite labour supply as an issue. Roughly 40% of respondents are still drawing attention to problems in hiring the likes of bricklayers, carpenters, plumbers and electricians and the issue around quantity surveyors appears more problematic, with still around half of the feedback received to this question highlighting a shortage of qualified professionals to take up roles.

Looking ahead, only around one-third of respondents anticipate an increase in productivity over the course of the next year.

Gloomy outlook for the construction industry

According to the CPA’s Autumn Forecasts, construction output is expected to fall by 6.8% in 2023, similar to the 7.0% contraction forecast three months ago, before a further marginal fall of 0.3% in 2024. This is a revision down from the 0.7% growth forecast in the Summer publication due to a weaker economic backdrop.

Although UK interest rates are now likely to have reached a peak that is lower than previous expectations, it is now anticipated that they will remain at this level for longer, until 2025, due to stubborn inflation.

Consequently, the UK economy is expected to flatline throughout 2024, holding back the recovery in major sectors of construction activity such as new build housing and repair, maintenance and improvement (rm&i) to 2025.

Even in infrastructure, output is now expected to fall marginally as more roads projects appear likely to be pushed back or cancelled than anticipated only three months ago. Nevertheless, activity will remain near the current high levels due to work continuing on major projects already down on the ground.

In the third-largest sector, infrastructure activity remains strong down on the ground due to work continuing on major projects such as HS2 between Old Oak Common and Birmingham, the Thames Tideway Tunnel and Hinkley Point C.

Unfortunately however, following on from earlier announcements of delays to major road and rail schemes, it appears that more roads projects are being pushed back or cancelled than anticipated in the forecasts in Summer, whilst new projects continue to be delayed due to strong cost escalation and viability concerns.

The impact of the government’s decision to cancel HS2 between Birmingham and Manchester is limited as the majority of this work was planned to occur beyond the forecast period. Similarly, the £36 billion of local and regional projects around the country announced by the Prime Minister are unlikely to start before 2029, at the earliest, if they occur at all.

Overall, infrastructure output is expected to fall by 0.5% in 2023, from its current high level, before remaining broadly flat (-0.1%) in 2024.

Source: © 2023 London Stock Exchange plc.

Source: RICS

Source: CPA

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