Civil construction firms are hitting rock bottom, caught between this summer's tropical downpours and rising concrete prices, reports Jonathan Milne.
In its marketing materials, Tonu Civil Construction described owner/director Sullivan Halaifonua as its secret weapon. "Although he established Tonu Civil only two years ago to fulfil a dream, Sullivan has been in the industry all his adult life," one article said. "His ability to develop and maintain strong personal and working relationships with clients is legendary.
"He believes clients should be able to have what they want at a reasonable cost and is constantly looking at ways Tonu can offer reduced prices."
In the end though, he admits he reduced prices too far. The dream turned to a nightmare. By early this year Tonu, which did groundworks and laid pipes and culverts for residential developers in Canterbury, was insolvent. Before calling in the liquidators two weeks ago, Halaifonua reluctantly laid off his staff – at least they wouldn't be left out of pocket.
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The likes of Fletcher Concrete, Placemakers, Cirtex Industries, Commercial Vehicle Holdings and A1 Diggers had placed securities over the goods they'd supplied. There's another $40,000 owed to Inland Revenue. Others aren't so fortunate: there is $600,000 owed to unsecured creditors.
Liquidator Brenton Hunt quickly discovered that some projects in recent months had run at a deficit, which had caused stress on the working capital of the company; a number of trade creditors had the company on stop credit.
It's an increasingly familiar story.
“More expensive materials and higher labour costs are driving the increase of building a new home.” – Nicola Growden, Stats NZ
Last week, Inland Revenue filed a High Court application to liquidate Auckland Concrete Ltd, owned and run by well-known Northcote entrepreneur David Burton. Otautahi Kerb and Concrete has been put into liquidation due to issues with pricing, growing too quickly, and general economic conditions.
Hamilton-based Anthem Homes announced this week it's laying off some of its 20 staff, citing material shortages, falling sales, rising interest rates and house price drops. The company had been a golden child; Government ministers had visited its sites to see how it was addressing the housing shortage.
Also last week, a liquidator was appointed to JacksCo Civil and its three sister companies, which employed more than 100 people. The company said it had suffered delays in completing contracts due to the Covid pandemic, staffing issues and more recently, weather conditions.
Monthly building consent values, concrete volumes and house prices
Even the giant Fletcher Building has this week reported challenges. Ahead of the scheduled publication of its half-year result on Wednesday, chief executive Ross Taylor disclosed the company was downgrading its full-year earnings before interest, taxes and depreciation guidance to as little as $800 million. From Friday's close, its shares fell 40c cents to $5.03, before recovering slightly to $5.13 at Monday's close.
As well as being hit by the residential construction downturn, Fletcher subsidiaries like Placemakers, Winstone Wallboards and Golden Bay Cement are commonly creditors in building company liquidations. Placemakers raised its price for bagged concrete by 10 percent in one hike, last year – just one of the increases that drove up construction costs.
Stats NZ says the overall price of building a new house increased 14 percent last year. “Respondents reported more expensive materials and higher labour costs are driving the increase of building a new home,” consumer prices senior manager Nicola Growden said.
"While the underlying performance of the business is strong, trading in New Zealand in January-February has been heavily impacted by the adverse weather events." – Ross Taylor, Fletcher Building
That, alongside rising interest rates, is scaring buyers and developers away from the market. Consents were issued for just 49,538 new homes in the year to December – a 7.2 percent end-of-year decline. And Stats NZ reports that the volume of ready-mixed concrete produced – a good indicator of the construction sector's size – was 1.17 million cubic metres in the December quarter, down 9 percent on last year's record high.
"While these latest concrete production figures are not exactly weak, they are hard evidence of a rolling over in New Zealand’s construction cycle taking shape, from a point of extreme," says BNZ senior markets economist Craig Ebert. "We expect this process to become a lot more obvious over the course of 2023, led by a cool-down in residential construction – albeit with flood-related activity and spending in Auckland and surrounding regions filling some of the gaps."
Economists warn the Auckland floods will further stretch the sector. "Over the coming months there will be increases in spending associated with the replacement of damaged items and repairs to property," says Westpac's Nathan Penny. "With the construction sector already stretched, those repairs could take an extended period to complete. Some existing planned work could be delayed to make way for essential repairs. There will be some cost increases in the wake of these events, with most of that related to construction."
But some in the construction sector find themselves in the unfortunate position that although there will be demand for builders, they are unable to profit from that. The shortages of workers and supply delays, combined with soaring prices for most building supplies, and higher interest payments on their vehicles and spec properties, creates a perfect storm.
“It’s hard enough that people are already grappling with rising interest rates, inflation, and a still increasing cost of living. Now many people in the upper North Island are having to deal with cleaning up after some pretty extreme weather." – David Nagel, QV
It's not just JacksCo blaming the weather as a contributor to its woes.
Fletcher Building, too, says the storms are a factor in its downgraded ebit (earnings before interest and taxes) outlook for the 2023 financial year. "While the underlying performance of the business is strong, trading in New Zealand in January-February has been heavily impacted by the adverse weather events," says Taylor. "We expect the softening of residential markets to continue into FY24 in both New Zealand and Australia. This lower activity is likely to reduce volumes in our materials and distribution businesses by circa 10 to 15 percent."
And to top things off, Quotable Value chief operating officer David Nagel says the record amount of rainfall has been yet another obstacle for potential house buyers and sellers to deal with at a time when sales volumes are already at an historic low. That's contributed to average house prices in Auckland dropping 14.3 percent to $1,320,813 at the end of January. Nationwide, the average is down to $934,761.
“It’s hard enough that people are already grappling with rising interest rates, inflation, and a still increasing cost of living," Nagel says. "Now many people in the upper North Island have been having to deal with cleaning up after some pretty extreme weather. It’s little wonder it’s been a slow start to the year for the residential property market – I’d suggest it’s probably going to stay that way for a while yet."
