Construction companies continue to collapse by the thousands

The number of Australian construction companies hitting the wall continues to soar, with almost 1,400 businesses collapsing in the second half of 2023.

The news emerged just days before Victorian builder Montego Homes went into voluntary administration and jeopardised the home building of 90 clients and careers of 11 staff, it was revealed Wednesday (17 January).

The latest numbers released this week by the corporate regulator, Australian Securities and Investments Commission (ASIC), revealed that 29 per cent more companies folded than in the same period in 2022.

Overall company collapses surged 37 per cent in the December half, with construction taking up over a quarter of that tally.

According to the Housing Industry Association, the construction market is facing one of the worst storms since the energy crisis in the mid-1970s.

Factors including high demand, labour shortages, and material supply constraints due to the pandemic effect have resulted in higher construction costs and longer build times.

Among some of the most recent sizeable companies to go under are Wake Concepts and Residence Building Group. Millbrook Homes in New South Wales entered into liquidation owing over $4 million to nearly 80 creditors, while Victorian residential builder Bentley Homes also appointed liquidators and has left around 50 customers facing unfinished builds.

Contributing to the downfall of so many builders are factors such as the global pandemic, pressure of the HomeBuilder Program, inflation, and fixed price contract price movements.

Analysis in the Australia Construction Industry Databook Series concluded that the Australian construction industry is facing the toughest conditions in decade.

“Most affected have been developers who signed fixed-price contracts with buyers before the construction costs skyrocketed,” the report noted.

“Developers who sought to increase their volume of homes rapidly during the global pandemic outbreak have also been affected significantly in Australia.”

While the construction insolvency trend is projected to continue into the first quarter of 2024, the report’s authors said they expect the interest rate trajectory and borrowing costs to dampen the recovery prospects of the residential construction market.

While construction costs have continued to rise, the growth rate has slowed down significantly in the Australian market, according to the latest data from CoreLogic's Cordell Construction Cost Index (CCCI).

According to the index, the annual growth rate stands at 4 per cent, which is lower than the 4.7per cent observed at the end of September 2022. This downward cost trend is expected to continue improving into 2024.

Some state governments are offering assistance to builders, including the Western Australian Government resorting to offering interest-free loans to builders in an effort to clear the backlog of unfinished homes.

While testing economic conditions will undoubtedly claim more scalps, the construction sector overall is still forecast to grow over the next four quarters.

The compound annual growth rate (CAGR) of the sector is forecast to lift 5.6 per cent during 2023-2027. The construction output in the country is expected to reach $215.81 billion by 2027.

Canberra developers disqualified

The administrators of Montego Homes told media they were seeking a buyer “to restructure or recapitalise the business” and added they had begun an “urgent review” into the company’s financial position.

ASIC also announced on Friday (12 January) that its had barred two Canberra-based development company directors in response to their involvement in the collapse of four companies between January 2019 and August 2021.

Jamie Charles Farrelly and Gary James Kelly were directors of Be Athletic Canberra, (formerly Tiger Property Group or TPG), and 3 Property Group 13. Kelly also served as a director of and Lifestyle Homes Accounts (ACT).

The companies were all engaged in commercial and residential property development in Canberra.

ASIC found that both directors failed to meet the expected standards. Farrelly allowed TPG to lend $7,437,710 without documented terms, resigned before loan repayment, neglected 3PG13's financial affairs, traded insolvently, and deferred tax payments to bolster other companies' cash flow.

The companies owed a combined $9,435,642 to unsecured creditors, with $3,084,593 owed to the Australian Taxation Office and $19,652 to the ACT Office of Revenue.

This article was originally published on 14 January and was updated on 17 January with news of Montego Homes lapsing into voluntary administration.