An insolvency specialist is warning that the real estate sector of the UK is seeing more firms in financial distress despite the soaring housing market.
Begbies Traynor’s latest Red Flag report says: “Despite the booming residential property market, the whole real estate and property sector - a key indicator of the economy's performance - has seen another 11,000 businesses enter significant distress in the last quarter and rise by 15 per cent (73,952 - Q4 2020, 85,165 - Q1 2021) with a leap of 51 per cent since the same period last year.”
The specialist says construction businesses have also been impacted, despite building activity continuing even during lockdowns. There are now 96,557 construction businesses in significant distress, a year-on-year increase of 48 per cent and a quarterly increase of 21 per cent.
Begbies Traynor measures financial distress by the frequency of County Court Judgments served on companies within sectors.
It warns that with lockdowns and Covid restrictions preventing the usual CCJ process, “the dam of zombie businesses could be about to break.”
The number of CCJs and winding up petitions are both substantially below pre-Covid levels, Begbies states, partly due to a ban on winding up petitions with regard to Coronavirus related debts.
Data shows there were 23,325 CCJs lodged against companies during January, February and March in 2020, with only 9,377 lodged during the same period in 2021, a fall of 60 per cent. The situation is even more acute with regard to more serious winding up petitions. During January, February and March 2020, 715 were lodged compared to just 15 during the same period in 2021, a fall of 98 per cent.
Begbies insists that this fall is not a cause for celebration, but a sign that the situation is likely to be much worse than figures show.
The insolvency firm’s partner, Julie Palmer, says: "The dam of zombie businesses could be about to break. The last 12 months have undoubtedly been some of the hardest that many businesses have ever encountered. We must remember that this is no ordinary recession and while businesses have had significant assistance from central government, large parts of the economy have been put on hold with substantially reduced revenues.”
She continues: "Our experience shows that unmanageable levels of debts and subsequent overtrading are likely to be the hidden icebergs waiting to sink even the highest profile businesses.
"However, businesses that were profitable before the pandemic, have manageable debt and are still relevant in the post pandemic world could flourish and be the real winners in this climate. They need guidance and need to act quickly. In a market that is moving fast dithering companies will be swept away in the sheer force of distress that is forcing its way across the UK."
She also warns that London's reliance on financial services - as well as leisure and hospitality - makes the capital particularly vulnerable to business failures if they emerge once Covid restrictions and support both fall back.