Construction sector, real estate in the doldrums: Dun & Bradstreet

Further evidence of the tough trading conditions for the real-estate sector has been revealed in the 75% jump in the number of construction businesses whose risk assessment was downgraded during the March quarter 2011.

One in seven (14%) construction firms was downgraded in the March 2011 quarter, compared with 8% a year ago, according to the latest Dun & Bradstreet Corporate Health Watch report.

Nearly one in 10 (9%) businesses in the category of real estate, finance and insurance suffered a similar fate in the March 2011 quarter. In the March 2010 quarter just 3% of businesses in this category were downgraded into riskier categories.

Dun & Bradstreet is unable to provide a breakdown of these figures.

In absolute terms 20,185 firms out of a total of 229,649 finance, real-estate and insurance companies on the Dun and Bradstreet suffered ratings downgrades, compared with 6,726 (out of 222,792) that experienced deteriorating risk scores in the first three months of 2010.

Source: Dun & Bradstreet

The figures come on the back of Real Estate Institute of Australia president David Airey claiming in May that up to 10,000 real-estate agents have quit the industry in the past year, reducing total numbers from 60,000 to 50,000.

Businesses operating in the Northern Territory, Victoria, South Australia and Tasmania recorded the worst deterioration of risk scores over the past 12 months, with the Northern Territory the country’s most precarious commercial market during the March quarter 2011, according to Dun & Bradstreet.

Downgrades in Western Australian rose only minimally since the first quarter of 2010, reflecting the robust outlook for that state.

Professionals CEO David Hobbs, who manages 66 offices in WA and the Northern Territory, calls the market the “toughest it has been in 20 years”.

“There are fewer investors in the market, fewer first-home buyers and difficulties in obtaining financing from lenders,” he tells Property Observer.

He estimates that the number of WA estate agents has decreased from about 11,500 three years ago to about 7,500 now.

In total, more than 145,000 businesses have suffered a risk downgrade in the March quarter 2011.

Businesses faced challenges from rising payment terms and a weaker than expected outlook for sales and profits, which put pressure on cash flow.

The risk outlook is not likely to improve in the June quarter, with interim results revealing that more than 62,000 firms were downgraded in April (29,100) and May (32,656).

Dun & Bradstreet CEO Christine Christian says “almost exclusively business failure is a result of poor credit risk and negative cash flow.”

“These factors are the primary cause of insolvency and can occur at any time regardless of the macroeconomic outlook,” she says. “It is a reminder of the need for firms to pay attention to the fundamentals particularly, at times when rapid growth places pressure on a firm’s cash flow.”