UK property slowdown causes surge in firms in critical distress
THE number of British businesses in financial distress has soared, driven by high interest rates and mounting trouble in the construction and property sectors.
Official figures Tuesday (Oct 31) showed the number of company insolvencies in England and Wales jumped 10 per cent year-on-year to 6,208 in the third quarter. That was only slightly lower than in the three months through June, the Insolvency Service said, with the two quarters together the worst for corporate failures since 2009 during the depths of the financial crisis.
A separate report by Begbies Traynor Group found that there were 5,919 construction firms in “critical” financial distress in the three months through September, up 46 per cent from the second quarter.
The figures lay bare the huge pressure put on company finances by the sharp rise in interest rates, a stagnant economy and a string of crises, including the pandemic and the surge in energy bills. It will add to economists’ concerns over a possible recession and the risk of a sharp rise in unemployment.
The Insolvency Service said that creditors’ voluntary liquidations – which account for the bulk of the insolvencies – were the highest since records began in 1960 during the last two quarters.
Begbies Traynor said real estate businesses suffered a 38 per cent jump. Construction and real estate made up nearly 30 per cent of all UK companies in critical financial distress.
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Slowing home construction, a pullback on major infrastructure and a surge in building material costs in recent years have all contributed to a downturn in the UK property industry. Banks and building societies authorised 43,328 mortgages in September, the lowest in eight months, data from the Bank of England showed.
“The construction industry, which has long been a bellwether for the health of the economy, looks particularly vulnerable,” said Julie Palmer, partner at Begbies Traynor. “This latest data highlights how the debt storm, which has been brewing for years, may very well break.”
Almost 40,000 businesses across the UK are in critical financial distress, up 25 per cent on the quarter, while the number of businesses in “significant” financial distress has climbed 8.7 per cent to around 480,000, the report said.
SEE ALSO
The BOE decides on Thursday whether to increase its key interest rate, which has risen to 5.25 per cent from 0.1 per cent in less than two years. governor Andrew Bailey and other rate-setters have said monetary conditions will need to stay tight until inflation is under control, even as Britain faces a renewed risk of recession.
Zombies
A mix of higher interest rates, falling consumer demand and inflation-eroded margins, coupled with fluctuations in commodity and energy costs due to geopolitical uncertainty, may prove too much for some businesses. There will also be more “zombie” firms going bust in the next months, Begbies Traynor said, referring to businesses that accumulated debt while rates were low and relied on government support during the pandemic.
Distress increased in the third quarter across 18 of the 22 sectors covered by the research, which measures county court judgements filed against businesses that fail to repay debt.
“I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time,” said Ric Traynor, executive chairman at Begbies Traynor. “Unfortunately for many businesses, time is not on their side.” BLOOMBERG
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