Red flags continue on real estate and construction

Construction and real estate and property services continue to be the most at risk sectors, according to the latest Begbies Traynor Red Flag Alert report. Construction tops both the critical financial distress and significant financial distress rankings, with real estate and property services taking third in both. The report reveals a particularly worrying picture as the number of UK companies in ‘significant’ financial distress jumped by nearly 10% in Q2 2024 to 601,950 businesses. Begbies said that with a large number of the businesses in ‘critical’ financial distress expected to enter insolvency over the next 12 months, the state of the construction, real estate, hospitality, financial and support services sectors continued to be of concern as companies from these sectors accounted for almost half of the businesses in ‘critical’ financial distress. Julie Palmer, partner at Begbies Traynor, said: “It looks like 2024 will prove to be another tough year for UK businesses. Six months in, and we’re seeing clear signs that financial distress is growing across almost every sector. “It is a particularly difficult situation for businesses in consumer facing sectors, such as hospitality. While a fall in inflation to more palatable levels will likely provide some relief, consumers simply aren’t behaving like they used to and these businesses, which are still grappling with higher costs pushed up by higher wages, are really struggling.” She added: “In a climate like this one, many businesses which were supported through the pandemic and its aftershocks by the government, will be hugely concerned by the very real prospect of a prolonged period of higher interest rates. Many businesses who loaded up on cheap debt prior to the pandemic are simply not equipped to survive the current pressures and the financial burdens they face may ultimately prove too much.” Ric Traynor, executive chairman of Begbies Traynor, said: “We are a little over halfway through the year and the macro-economic environment for UK companies remains extremely testing. There might be a greater sense of optimism in certain corners of the economy, but this is yet to translate into anything meaningful for the hundreds of thousands of businesses fighting for survival. “The situation for many British firms remains grave, with the latest Red Flag Alert data highlighting a substantial increase in the number of businesses in significant financial distress in comparison to this time last year.” He added: “The good news is that we now have some political certainty after the recent elections, which should result in some momentum starting to build this summer. A continuation of falling inflation levels will be especially helpful for businesses, particularly if interest rates begin to inch backwards later this year. “Beyond these small glimmers of hope, all eyes are now on our new government as we ask ourselves what they can do to kickstart economic growth in the UK. Sadly, the reality is that the government may not be able to act fast enough to stop many struggling businesses from succumbing to the economic pressures with which they are currently grappling. In short, the prevailing economic situation means that we still expect to see heightened levels of company insolvencies extend into 2025 and beyond.”