BORROWING COSTS KEY TO CONSTRUCTION RISK

By NZHJ October 27, 2021 Industry News

Construction industry risk may magnify if the cost of borrowing becomes an issue for those who have over-extended themselves.

Our regular data series from CreditWorks Data Solutions (www.creditworks.co.nz) assesses the level of credit risk posed by the four business sectors most closely associated with our chosen industry:

  • Residential Construction
  • Commercial Construction
  • Hardware, Building & Garden Supplies Retailing
  • Core Retailing

In our last update reporting on the August month (posted 30 September), we noted businesses that were previously in the "very low risk" categories were starting to show payment stress, alongside an aging out of average DSO debt.

Now armed with September's risk data, CreditWorks’ Alan Johnston comments: "The difficulties facing the building industry have been well documented in recent months.

"Aside from the obvious limitations enforced on building from a Covid-19 standpoint – particularly in our largest metropolitan area – cost increases, a lack of availability of most building materials, and chronic delays in gaining consents are all providing challenges to the industry.

"These are also factors in the rising inflation rate we are experiencing, which is putting pressure on borrowing costs."

Despite these headwinds, the building industry is still showing high levels of activity and, while many projects have been delayed or seen costs blow out, construction is still seeing exceptional growth.

"Nevertheless," warns Alan Johnston, "rising debt costs may become an issue and, while from an historical perspective interest rates are still relatively low, we are yet to see who may have over-extended themselves in regard to borrowings at this point."

As a result, risk to the construction industry may magnify, and we are already seeing a slight upward movement through the various risk bands in both Residential and Commercial Construction (see charts 1 & 2 below).

As far as our other two sectors of interest are concerned, there has been little change to the risk profiles for Core Retailing and Hardware, Building & Garden Supplies Retailing (see charts 3 & 4 below).

This may be thanks to consumers going online, clicking & collecting during lockdown and/or Covid-19 restrictions, so retail sales remain relatively high and risk relatively low in these areas.


 

Now see the charts below for a visual explanation of the last three months’ risk profiles across our four chosen sectors.

The left axis indicates the % of a sector that is at risk. The bottom axis shows the % likelihood of failure over the next 18 months.

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