Rate rises blunt growth and make attracting further investment into construction more difficult, EY-Parthenon says

The impact of rising interest rates and a slowdown in housing activity meant those construction companies listed on the Stock Exchange issued their highest number of profit warnings in three years.

In all, six profit warnings were issued in the sector between April and June with construction recording the second highest amount of the 66 warnings issued during the period and only behind industrial support services with seven.

Five of the six warnings issued in the second quarter cited a slowdown in housebuilding as a key trigger.

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Profit warnings among listed firms in construction have hit a three year high

A report out today by accountant EY-Parthenon said persistent inflation and rising interest rates have played a significant role in the UK’s overall Q2 profit warnings, driving a tighter and more expensive lending environment.

Amanda Blackhall O’Sullivan, partner and creditor advisory leader, said: “Most of the profit warnings issued in Q2 are from squeezed mid-market subcontractors and suppliers, which have seen material cost and labour headwinds combine with a slowdown in the housing market prompted by rising interest rates.

“The construction sector’s biggest businesses have been largely protected from stress so far, as they typically work across diverse portfolios that include projects within the still-buoyant infrastructure sector, with relatively low exposure to the UK housing market. However, if the sector’s slowdown continues then we may see this economic stress move further up the value chain.”

And EY-Parthenon’s head of construction Ian Marson added: “This sustained period of [rate rises] has impacted revenue growth in the short-term but it’s also affected the sector’s image as an investible proposition.

“Attracting financing has become increasingly difficult for some construction companies, particularly for those at the small or mid end of the market, as increasing debt levels in recent years have reduced profitability even if revenues have increased. Companies that can access funding extensions are likely to find that rising interest rates have made refinancing markedly more expensive, and recovery will be challenging without the capital to reinvest into growth.”

The report found that after industrial support services and construction, those sectors with the most amount of profit warnings during the second quarter were retail and pharma firms with five apiece.