Why the collapse of building companies is a wake-up call to private credit investors
With our own construction industry grappling with challenges and vulnerabilities highlighted by a wave of recent high-profile collapses, investors – especially private credit investors – you need to sit up, pay attention and make some decisions.
Australia’s construction industry has been under siege since COVID-19, battered by a confluence of rising material costs, labour shortages, supply chain disruptions and the lingering effects of fixed-price contracts signed since the pandemic. These pressures have driven a record number of company failures, with more than 2,140 construction firms entering external administration between July 2023 and March 2024 alone, according to KPMG data. High-profile names have collapsed, including Grocon, St Hilliers, ProBuild, Porter Davis, Millbrook Homes and Bentley Homes, with many citing rising costs, fixed-priced contracts and labour shortages as primary reasons.
On February 6 this year, NSW Central Coast-based Clarke Homes reportedly entered administration, citing rising material and labour costs. This left behind $3.1 million in debt, unfinished homes, and more than 100 creditors.
The collapse follows a pattern that has left thousands of projects stalled and creditors out of pocket.
Private credit fund managers, who have increasingly filled the financing gap left by traditional banks, have been hit by these collapses. Just as there are riskier and safer stocks listed on the stock market, there are also riskier and safer private credit funds.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
If you haven’t noticed, the U.S. construction sector is that economy’s wildcard, and it’s sounding an alarm bell that can be heard across the Pacific all the way to Australia.