Small housebuilders are facing ‘dire situation’

After a spate of gloomy announcements from the big housebuilders, there cannot be many who still believe the sector can sit back and wait for the economic storm to pass.

At the smaller end of the market the effects of the credit crunch are arguably even worse as one local firm after another succumbs to what one expert describes as a “dire” time for the sector.

In just over a month the credit crunch has claimed West Country group Cotswoldgate, which collapsed with debts of £3m, Welsh firm Meadgate Western, which went under owing about £36m, and Leeds-based housebuilder Consort Homes, which has debts believed to be in excess of £20m. If the experts are right, there is a lot more blood to be spilt yet.

Richard Kelly, a construction partner at business services company BDO Stoy Hayward, has seen a significant increase in the number of housebuilders turning to him for help and many of these, he says, are left with few options other than to go into administration.

“We should expect more of the same,” says Kelly. “We’re experiencing a buyers’ strike and many smaller firms sitting on unsold developments are struggling to keep up with interest payments on land they bought at the peak of the market. Usually, one option for them is to sell some of their land, but it’s very tough to find buyers now. The situation is dire.”

Last week housebuilder Wren illustrated this point by announcing a loss of £393,970 in the six months to 31 January after failing to sell a single house.

“I’m certainly seeing an increase in the numbers of firms seeking help. The files across my desk are much more frequent,” says Kelly. “I wouldn’t say it’s a flood right now, but it’s certainly more than a trickle.”

Kelly is convinced that there will be more collapses and even some of the bigger names in the sector are not immune. Mark Firmin, a restructuring partner at KPMG and joint administrator of Consort, is in agreement with Kelly. “I’d be surprised if another housebuilder didn’t go bust between now and Christmas,” he says.

“It’s got tougher since the beginning of the year because the credit crunch didn’t feed through immediately. People have found it difficult to get mortgages and unless they have found a house they absolutely love they’re going to be cautious.”

The key is to speak to someone sooner rather than later. Don’t bury your head in the sand or live in denial.

Mark Firmin, KPMG

Firmin advises firms that realise trouble is around the corner to seek advice as quickly as possible. “The key is to speak to someone sooner rather than later,” he says. “Don’t bury your head in the sand or live in denial that everything will be okay.”

Company directors have various duties when things turn sour. If they become insolvent they have to take advice quickly, as continuing to trade while insolvent is, to say the least, legally problematic.

Firmin adds: “Quite often a fall into administration is a death by a thousand cuts as companies slowly have to start postponing payments to creditors and agreeing new banking facilities. The monitoring of the market that a company should undertake when problems arise should be done on a daily basis.”

According to almost everyone with an opinion to offer, the outlook remains bleak for some time to come. Andy Brown, a construction analyst at Panmure Gordon, believes the situations firms find themselves in now are more akin to the early nineties than the booming noughties.

However, while he feels many smaller groups could be staring down the barrel of a gun, he is confident the largest builders such as Persimmon, Bellway and Bovis Homes have set themselves up to ride out the downturn.

“Clearly, the market is tougher than it has been for a long time,” he says. “But in the past few years the industry has consolidated with big firm mergers. This has allowed the large groups to cut costs and make themselves more efficient, more able to cope with the tough times.”

Speculation that Redrow and Bellway are in talks is proof that more margers may follow.

But although the big players may experience little more than a lack of confidence in their share price, the rest of 2008 is going to hurt the smaller players. The list of Cotswoldgate, Meadgate and Consort is likely to get a great deal longer.