Thu, 05 Jan 2023 | BUSINESS NEWS
According to a new report from Red Flag Alert, a “perfect storm” of factors could lead to more than 6,000 company insolvencies in the UK construction sector during 2023. Red Flag Alert has estimated that there is currently around £300 million of bad debt within the UK construction sector, which it says could rise to £1 billion by the beginning of 2024.
As a result of the issues facing the construction industry, Red Flag Alert has warned that over 100 firms in the sector could collapse each week. There are fears that the total number of UK company insolvencies across all sectors could rise to 32,000 this year.
The construction sector is facing a raft of headwinds at the outset of 2023, with bad debt at failing companies dragging other companies into distress as unpaid bills exacerbate other issues, including supply chain disruption, staffing shortages, inflation, interest rate increases and the ongoing impact of COVID-19.
Mark Halstead, Red Flag Alert’s Director of Data, said: “The rising costs of operation and borrowing, married with supply issues and economic uncertainty means that 2023 is a perfect storm for insolvency in the construction industry.”
Red Flag Alert Chief Economist Dr Nicola Headlam commented: “This is not good news for the industry and UK as a whole. This will lead to a much smaller pool of construction companies available for contracts and for suppliers to do business with.”
Dr Headlam also warned that widespread insolvencies within the construction sector could have dire consequences for the wider UK economy: “The post-recession economic bounce back will be hampered by a lack of building companies available for projects in the next growth stage, and a supply chain that will be unable to respond to growth signals. This will choke off growth in the next economic cycle.”
One potential upside of this situation is that a lack of companies competing for lucrative building projects could open up greater opportunities for solvent firms, as well as for acquirers within the construction sector. This includes buyers targeting distressed acquisitions, which are likely to be rife should current pressures continue to impact the industry.
The issues facing construction have led to calls for greater government support for the sector, with Mark Halstead saying: “The UK cannot afford to have a weak construction industry and it is time the government showed firm support.”
“Not only do we need construction to lead the bounce back from this recession but we are facing a housing crisis where we are short one million homes in our housing stock. This problem can only be solved by a healthy and well supported construction industry.”
Dr Headlam added: “By supporting construction and funding house building, the government can turn the vicious cycle of insolvency in the industry into a virtuous circle where money flows through the supply chain as opposed to bad debt.”
Read about how the struggles of UK sectors such as construction could drive M&A activity.
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