The construction industry has long served as a cornerstone of economic expansion and employment generation in the UK. However, it faces significant challenges today, including severe shortages in skilled labour, economic instability, and wider financial constraints. These factors have severely impacted the sector, particularly evident in the recent technical recession, where it has experienced the highest rate of insolvencies compared to other industries in the UK. This trend, observed throughout 2023, has persisted into the present.

Despite the prevailing difficulties, the downturn also presents opportunities for astute investors and business acquirers seeking growth through distressed asset acquisitions. Let’s explore how. 

Sector Overview 

At the close of last year, the UK entered a recession, and many analysts anticipate a period of stagnation for the current year. Moreover, among major European economies, the UK exhibits the highest proportion of “fragile firms.” 

With inflation persisting above target levels and interest rates reaching their highest point since 2008, businesses are experiencing heightened pressure. If insolvencies persist at this rate, particularly within high-risk sectors such as construction, real estate and hospitality, which rely on discretionary spending or entail intensive labour, over 7,000 firms will collapse. The construction industry faces significant challenges, with more than 4,00 construction companies entering administration in the 12 months leading up to the end of Q3 2023, constituting 18% of the UK’s total insolvencies during that period.

The building and construction sector grapples with numerous challenges, notably persistent cost inflation and material shortages. These have steadily eroded the already narrow profit margins common in competitive fixed-price contracts. According to forecasts by the Construction Products Association (CPA), the sector is poised to experience a 2.1% decline in output this year. A modest recovery of 2 percent is anticipated in 2025. 

Notably, industrial construction output is projected to plummet by 7.5%, followed by a 4% drop in private housing construction. These figures combined represent approximately 40 percent of total construction output volumes. This ongoing deceleration, approximately 38% higher than pre-pandemic levels present a clear risk of escalating contractor insolvencies in the current year.

What does this mean for distressed business buyers?

To succeed in distressed business acquisitions, one must grasp market dynamics and adeptly manage risks. Amid economic turbulence, distressed business buyers can seize strategic opportunities, such as:

Acquisition of Undervalued Assets: The recession and high rate of insolvencies provide an opportunity to acquire distressed businesses at a fraction of their true value. These assets may include tangible assets like property, equipment and machinery, as well as intangible assets such as long standing brand reputation and customer relationships.

Market Consolidation: Economic downturns often lead to market consolidation as weaker players exit the market. Distressed business buyers can take advantage of this consolidation to strengthen their market position with multiple assets from different businesses to expand their customer base and achieve economies of scale.

Access to Talent: In a market that is already facing stark labour challenges, acquiring distressed construction businesses may also provide access to skilled employees and management teams who are seeking stability and opportunities for growth. By retaining key personnel and their expertise, buyers can accelerate the turnaround process smoothly. 

CMA’s Investigation into Major UK Housebuilders

The Competition and Markets Authority (CMA) is investigating major UK housebuilders over potential information sharing that could impact house prices. This probe follows a year-long examination into house building across England, Wales, and Scotland. 

The investigation focuses on evidence suggesting confidential exchanges of information among housebuilders regarding sales prices and sale rates in an already escalating cost of living crisis within the country. While the CMA has not reached conclusions regarding competition law violations, any sharing of non-public information could distort competition. Housebuilders under scrutiny include Barratt, Bellway, Berkeley, Bloor Homes, Persimmon, Redrow, Taylor Wimpey, and Vistry.

While these firms are cooperating with the CMA’s investigation, share prices for listed companies such as Persimmon and Taylor Wimpey have fallen in early trading. The CMA’s broader report identifies persistent shortages in home construction, especially in critical areas, negatively impacting affordability. It emphasises the complex and unpredictable nature of the planning system, which often delays construction projects.

West Midlands Construction firm Collapses into Administration

Fox Industrial Services Limited, a construction firm headquartered in the West Midlands, is facing closure after entering administration. Despite being in operation for more than 20 years, the Redditch-based company succumbed to recent financial difficulties. These were aided by COVID-19-related delays in key contracts and subsequent inflationary pressures. 

In its last financial report for the year ending March 31, 2023, Fox Industrial Services showed total assets valued at approximately £1.5 million, while it owed creditors over £1.6 million, resulting in net liabilities exceeding £228,000. Although part of the wider Fox Construction Group, the company’s closure does not affect the group’s continued operations.

Administrators Ben Jones and Rajnesh Mittal from FRP Advisory were appointed to oversee the winding down of the business and maximise returns to creditors. The company’s workforce had already left prior to the administrators’ appointment.

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. Here’s a list of the latest construction firms in distress from all across the UK, sourced exclusively from our platform. 

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