The construction industry has been a backbone of economic growth and job creation in the UK for decades. However, current challenges including acute skill shortages, economic uncertainties, and the broader financial crunch have hit the sector hard. The country’s current economic landscape is reminiscent of the 2009 crisis, marked by a deep recession, soaring inflation, and a cautious consumer base.
This has led to glaring distress signals within construction and real estate all through 2023 and especially during recent months. While current trends and economic uncertainties suggest a prolonged struggle, recession also spells opportunity for savvy investors and business buyers eyeing distressed assets in this sector. Let’s take a closer look at some recent news to find out what they are.
The state of the construction industry has a direct impact on real estate outcomes, showcasing the interdependence of these two sectors. The recent “Red Flag” report by Begbies Traynor has rung alarm bells with a concerning 25% increase in critical financial distress for construction and real estate in the second consecutive quarter. Both these industries collectively account for 30% of businesses under significant financial strain. This distress is even more pronounced in the construction industry, witnessing a staggering 32.6% quarterly increase.
More than 60,000 property and real estate businesses have started the year in financial distress. In a tough economic landscape marked by geopolitical uncertainty, an impending rise in national wages, and high mortgage rates coupled with the cost of living crisis, nearly 7,849 construction firms found themselves on the edge of collapse. Notably, the housing market shows a dichotomy, with property website Zoopla reporting a 10% annual surge in homebuyers, while sellers contend with reduced purchasing power. Despite a buyer’s market, property prices have not witnessed a significant decline, with a predicted 3% decrease expected in 2024.
In response to the prevailing economic conditions, the government has introduced five new Investment Zones (IZs) in strategic locations, including Manchester, the East and West Midlands, and North and South Wales. Existing IZs will benefit from extended lifespans and increased investment and tax reliefs. The aim here is to attract additional investment and stimulate economic activity in these regions. This presents potential M&A opportunities for investors looking to capitalise on emerging trends and navigate market volatility.
What does this mean for distressed business buyers?
Success in distressed business acquisitions requires a comprehensive understanding of market dynamics and risk management. Notably, there are opportunities that distressed business buyers can capitalise on within this economic turbulence, including:
Strategic Acquisitions: Positioning themselves in a recovering market by identifying distressed construction firms with valuable assets or unique capabilities.
Portfolio diversification: Exploring distressed real estate assets with growth potential, acquiring properties at a lower cost and aiming for future appreciation as the market stabilises.
Adapting to changing consumer behaviour: Analysing trends in housing and acquiring businesses that align with evolving demands, such as sustainable construction or flexible living spaces.
Region specific diversification: Evaluating opportunities in investment focused regions that offer better potential for broader economic development plans.
Stewart Milne Administration Update: Group in 9.2M debt to Homes England
Homes England is owed up to £9.2m by collapsed Scotland-based housebuilder Stewart Milne Group. Since 2018, Stewart Milne Homes North West England (Developments) had received a series of loans from the taxpayer-funded housing agency.
BDO, the administrator for Stewart Milne Homes North West England (Developments), revealed that Homes England “wishes to consider strategies for the company with BDO separate to the administrations of the other seven companies in the wider group.” This revelation follows Stewart Milne Group entering administration, resulting in site closures and the loss of over 200 jobs.
The Manchester-based subsidiary, Stewart Milne Homes North West England (Developments), also entered administration four days later under a different administrator. Earlier in the month, Homes England expressed intentions to collaborate with the administrator to support the continued delivery of housing developments it was involved in.
North Wales based Brenig Construction’s Debt Revealed
Brenig Construction, the Mochdre based collapsed construction business, which halted trading and projects across the region last year, has now revealed a multi-million pound debt pile. The company was co-founded by Mark Parry and Howard Vaughan in 2012. It expanded rapidly, earning the title of the fastest-growing North Wales firm in 2021. However, like many others in construction, Brenig’s challenges multiplied due to rising energy prices, and increased labour and supply costs.
James D Robinson of Finn Associates and Patrick Lannagan of Mazars LLP were appointed joint liquidators in December. A recent statement of affairs has disclosed significant debts, including over £850,000 to HMRC for VAT and PAYE, nearly £1 million owed to Huxley Capital Solutions, and approximately £1.9 million owed to trade creditors, including Conwy council.
The company also owes £285,000 to 45 employees and has director loans exceeding £500,000. Estimated assets for liquidation are around £470,000, intended to support staff and HMRC payments, leaving trade creditors likely out of pocket. The total deficiency, subtracting assets from the amount owed, stands at £5.4 million. Several projects, including Denbighshire council’s Llwyn Eirin housing development and Adra’s Plas Penrhyn affordable homes development, have been adversely affected by the liquidation.
For distressed business buyers interested in capitalising on this situation, exploring the completion or takeover of any unfinished projects could be a good starting point. This could be advantageous in terms of utilising existing contracts and relationships. There are also potential opportunities available to acquire valuable assets, such as construction equipment and property, at lower costs than their market value. A detailed due diligence, assessing factors like legal obligations, project status, and asset conditions can help with informed decision making and mitigate acquisition risks
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