Belfast Telegraph

Saturday 25 October 2014

Stuck between rock and hard place

The construction industry faces tough times

Month by month the evidence of the impact of the recession on individual businesses is accumulating.

The property market is coping with a very complex recession. Property owners, domestic and commercial, are facing reduced valuations or negative equity. Property developers now have fewer attractive investment projects. The construction industry has fewer opportunities to tender for new work.

In the last 10 days, fortuitously, two large local unconnected companies have published annual reports which show how seriously their businesses have been impacted.

Killultagh Estates is a large property-owning company which, over the years before 2006, could expect to earn an acceptable rental return on property and in some years add to the balance sheet value of its assets an unrealised gain as property market values increased.

In the registered results for 2010, two adverse features are in evidence. The company has taken exceptional charges of £21m as a deduction in its profit and loss accounts.

In addition, £25m was taken from the balance sheet as an unrealised loss on the revaluation of some fixed assets. In Northern Ireland there is a sizeable group of property companies which have, in the past, driven many major commercial developments and now face crisis management. Many are owned by individual or family investors who are sometimes averse to personal publicity. As a construction firm, the report from the Patton Group shows that, even for a company that has been coping well with recession, finances have been hit by non-operating exceptional costs. The value of turnover, at £163m, fell in 2010 by 12% and this sharp fall produced a switch from an operating profit to an operating loss of £2.5m. Profit margins had already become tight and in 2010 were further strained.

The exceptional costs for the Patton Group included a writedown of £4.7m on the value of land held for development and a write-off of a debt due to the company of £1.2m. The overall result produced a pre-tax loss of just over £10m. The group is still a strong competitor and is continuing to trade.

The immediate impact of the reduced workload for the construction industry falls on a large number of construction employers ranging from small micro-businesses to the larger better known contractors such as Northstone (formerly known as Farrans), John Graham, the Patton Group and McLaughlin and Harvey.

Perhaps less conspicuous on the local scene but one of the largest businesses, which has a major proportion of contracts outside Northern Ireland, is the group of companies formerly linked in Lagan Holdings.

There are different ways of ranking construction firms by size.

However, the firms with the largest numbers of direct employees tend also to be those with the largest financial turnover.

In the most recent two-year period for which financial figures have been released seven of the top 10 companies reported a significant fall in turnover.

Nine of the top 10 companies saw a fall in their operating profits.

The recession is hitting property development companies hard. Reductions in valuations of assets have been large. Turnover has been falling.

Developers and builders are facing serious but differing types of recession. Developers are helpless to counter the scale of capital write-off. Builders hope to survive in slimmed down form.

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