The two-year boom in the New Zealand construction sector is set to come crashing down amid growing economic uncertainty, rising interest rates and tumbling house prices, Westpac economist Paul Clark has warned.
After record-breaking activity and consent levels, prospective buyers of new builds have become increasingly nervous, while property developers are more cautious about bringing new projects to market.
Westpac is predicting a drop in building work of around 15% by 2025, but firms need to become battle ready well before then.
“In prosperous times, builders are often so busy they don’t spend any time working on their businesses,” Clark says. “That’s OK when work is plentiful, but once the investment cycle turns and demand dries up, they’re scrambling to survive.”
Clark predicts another downturn is fast approaching and says accountants can help their clients by talking them through six steps they can take right now.
1. Protect margins
In any downturn, it’s critical to preserve profits by making some tough decisions such as laying off staff, selling underutilised equipment and minimising underquoting. Switching from fixed to variable price contracts can also help when raw material costs are rising.
“Some projects are less affected by an economic downturn,” Clark says. “Think about renovations, government or council contracts and retirement villages. Or go after some of the abundant work that’s on offer from agencies like Kainga Ora.”
3. Keep the cash flowing
Lack of ready cash is the main reason Kiwi construction firms fail. “Anecdotally, we’ve been told 50% of builders with fewer than six employees face ongoing difficulties. Maintaining a solid cash fund is vital so outgoings can always be met.”
4. Eliminate waste
“Inefficiency is baked into the construction sector – we have weak productivity growth, too much waste and projects regularly run over time and budget. Think about whether your operation has a ‘that’s the way we’ve always done it’ attitude that’s holding you back.” Common examples are adversarial project relationships, poor communication and unrealistic customer expectations.
5. Digital upskilling
Automation and digitalisation are sweeping across nearly every industry. Although home-building in Aotearoa can be a low-tech sector that lags behind in innovation and adoption, more and more businesses are harnessing new technologies to enhance their service.
6. Plan for constant change
“The businesses that thrive in tough times tend to have leaders who actively plan for constant change. They take fast, bold, and strategic action to ensure their prosperity and have a sharpened focus on cutting costs and paying down debt, while making sure they have ongoing access to credit.”
“Businesses that thrive in tough times tend to have leaders who actively plan for constant change.”
Since the early 1990s, there have been five big upturns and four downturns, so builders need to prepare for both, Clark says. “Accountants can actively help their construction clients by ensuring they’re financially fit, structurally prepared, and focusing on their strengths to enable them to not only ride out the downturn, but stand ready to maximise gains when the market rebounds.”
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For details on how Westpac can work with accountants to help their client visit westpac.co.nz.