Hundreds of Australian building companies are at 'high risk' of failure, as Chinese investors retreat

Brisbane. Photo: Glenn Hunt/Getty Images
  • More than 30 construction companies in Queensland have collapsed this year.
  • A new report into the risk of further failures puts another 444 building businesses at “high to severe” risk of failure in the next 12 months.
  • An apartment glut and loss of Chinese investors are believed to be factors.

A Brisbane-based construction company linked to a massive Chinese building business is on the brink of collapse in another sign that Queensland’s building industry is struggling.

Rimfire Constructions had its building licence cancelled by the Queensland Building and Construction Commission (QBCC) in July and is currently seeking a court-approved scheme of arrangement to pay its creditors after months of cashflow problems.

It could be the next in a string of high profile Queensland construction industry collapses this year, amid fears that an apartment glut combined with a slowdown in Chinese investment will hit the state’s property market hard.

The good news for now is that the national insolvency trend is currently downwards for construction, with Australian Securities and Investments Commission (ASIC) Insolvency Statistics reporting 1481 failures, down 5.9% since June 2016.

However, rising risks in the sector are apparent in a new report from insolvency group SVP Partners 2017 Commercial Risk Outlook and Queensland looks set to be hardest hit.

The Courier Mail says there have been more than 30 insolvencies this year in Queensland, with building workers and suppliers owed more than $100 million.

Nationally, construction tops the list of the analysis by SVP Partners of businesses at “high to severe” financial risk. The company believes 3.1% of the sector – 2026 companies – sit in that band, with nearly half, 931, in the $1 million -$10 million turnover bracket. A further 23.2% of construction companies are at medium risk.

Construction has been a vital component of economic activity in the wake of the mining boom, creating jobs and providing much-needed housing in Australia’s major cities, as interest rates fell and Chinese investment dollars flowed. But the boom has prompted concern among economists and market observers that the supply of apartments is simply too high to meet demand.

SVP Partners director Matthew Bookless said the figures were based on a wide range of data points and the drop in existing insolvencies – overall there’s been a 33% drop in company failures according to ASIC – could be explained by the more lenient approach taken by the Australian Tax Office when it’s owed money.

He believes creditors are being more lenient and are not as willing to reach the wind up phase as they once were.

“A big driver of this is what the ATO does,” he told Business Insider.

“They took a different approach to last year and have been more willing to consider and accept payment arrangements.

“They’re preferring that method at the moment over and above issuing hundreds of winding up applications against businesses.”

But Bookless fears that won’t change the ultimate outcome for hundreds of companies.

“When you look at the data that our Commercial Risk Outlook shows, I would have real questions over whether this approach is working for creditors and whether businesses will be able to work their way out of it or it’s just putting off the inevitable.”

There are other factors also coming into play, from changes in state government legislation – Queensland introduced a 3% charge on foreign property buyer surcharge last year, in NSW it’s 8% and 7% in Victoria – and China’s own stricter rules on foreign investment, which have had a direct impact on Rimfire.

Rimfire was originally set up in 2013 by Lendlease’s former head of apartment construction Adam Moore, project engineer Cameron and Danny Cain.

Cain has been writing as a director to sub-contractors and suppliers seeking payment since May, but has struggled to raise the finances required. Last year the government-owned China Railway Construction Group, the world’s third-largest construction company, took a majority stake in the business to create CRCG Rimfire, a joint venture for residential and infrastructure projects in Australia and Asia.

The JV has been working on two luxury apartment projects, Omega and Lume, in Brisbane.

Cain told creditors on July 19 that he’s spend two days in discussions with CRCG, which is dual-listed and worth an estimated $28 billion, “seeking their support to provide a solution to the company’s cashflow problems”.

The discussions “went well”, he said, but needed approval from head office, which would take 10 business days. His next letter on creditors on August 15 announced plans to launch a scheme of arrangement to attempt to satisfy creditor claims.

“We believe this is the best opportunity to maximise the return to creditors,” he wrote.

Cain said they were still trying to raise additional capital and other funds from debtors to finalise the payment offer.

He told The Courier-Mail that their Chinese partners couldn’t help with a bail out because of Chinese government restrictions on overseas investments.

Business Insider has contacted Cain for comment.

Rimfire’s travails are just the latest in a string of problems leaving Queensland building workers, suppliers and homeowners out of pocket following multiple company collapses.

Queensland One Homes went into liquidation last month owing $3 million to 133 creditors and the Gold Coast Bulletin reports that the QBCC investigated the company’s finances three times, in December 2015, August 2016 and January 2017, but did not find a reason to cancel its licence.

The regulator was warned by several people about the business and a related company, Empire Constructions, is now under investigation for alleged illegal phoenix activities. The Bulletin reports a creditor’s meeting for Queensland One Homes was told funds and contracts from Paul Travis Callender’s failed business had been transferred to Empire Constructions, which is run by his wife.

Tweed Heads-based Ware Building Pty Ltd, which was constructing 82 townhouses for the Gold Coast’s Parklands development, part of the Commonwealth Games athletes village, went into voluntary liquidation last week. Claims by the project’s head developer, Grocon, that Ware had paid all its debts were disputed by several companies claiming they were owed up to $200,000.

A number of building companies on the Gold Coast have gone into liquidation this year, starting with the Cullen Group, which collapsed over Christmas owing around $20 million, while building the Boheme apartments complex in Robina. Batir Pty Ltd collapsed soon after owing $2.1 million with the Rainbow Beach ambulance station under construction.

Bluestone Constructions also failed owing at least $6.8 million as it worked on the Waterford apartments in Bundall.

Another high profile collapse was Bloomer Constructions, which its ASX-listed owner, Onterran, put into voluntary administration in April owing $14 million to around 600 creditors. The move closed dozens of building sites across the state.

Bloomer’s creditors subsequently voted for a deed of company arrangement (DOCA) rather than liquidation in the hope of recouping more funds.

Onterra’s shares had been in voluntary suspension since the beginning of the year as it deals with the winding up of Bloomer and another business, McGrath Modular, winds down. On June 30, the company told the ASX “the formalities of entering into the DOCA are in the process of being completed and a market update will be provided once done”.

ASX suspension

The company was praised by the building industry for its efforts to pay contractors, but this week ASX suspended Onterra from official quotation along with dozens of other companies for failure to pay listing fees.

The failure of Bloomer came 12 months after another Brisbane builder, Trac Construction, went into liquidation owing $19.7 million to 330 creditors. A report into the failure in May this year concluded that unsecured creditors would receive any funds.

Brisbane apartment builder CMF Projects collapsed in May this year owing 225 creditors $12 million.

The SVP Partners 2017 Commercial Risk Outlook report paints a bleaker picture for Queensland’s construction industry than the rest of the country.

The state figures for potential business collapses over the next year are higher than the national average with 3.4% – 444 companies at high to severe risk of financial failure. That figure has increased by around 13%, or 51 companies over the last six months.

The regional breakdown is even more alarming, 3.7% (84 companies) on the Gold Coast, and 3.9% (150 companies) in Brisbane in the high to severe risk range.

The vast majority of those businesses sit in the $1 million-$10 million turnover bracket, although in Brisbane SVP Partners has also identified 34 in the $10m-$50m band, two at $50m-$100m turnover and even one in the $100m-$500m bracket.

Bookless said there are regional factors at play in the differences.

“The Gold Coast, for example, has the Commonwealth Games as an obvious influencer for a number of industries,” he said.

In Brisbane, “the public view now is there is potentially an oversupply of apartments”, while regulatory changes, both here and abroad “are likely to have a flow on effect to property values and therefore construction levels”.

“It sounds logical that those changes will add to the challenges for the construction industry,” Bookless said.

The Gold Coast Bulletin reports that local industry veteran Steve Marais, managing director of Condev Construction, has warned that this year’s collapses are “the tip of the iceberg” and “next year is going to be a bloodbath” for mid-tier builders.

Marais told the Bulletin that he expects “half a dozen” companies would collapse in 2018.

“I think it’s going to take a big one to go for people to see how distressed builders are,” he said.

The Queensland government is currently looking at introducing new laws that require builders and contractors to deposit funds in project bank accounts to pay subcontractors on time.

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