Record number of property firms suffer ‘Red Flag’ financial distress

There’s a record number of property industry companies, including agencies, in financial distress according to the latest Red Flag alert monitor.

The figures would be even worse but some of the measurements - County Court judgements and winding-up petitions against indebted companies - were suspended for several months during spring and early summer because of the pandemic.

Even so, this latest research by corporate recovery and insolvency specialists Begbie Traynor, suggest that a record 527,000 businesses across all sectors were in significant financial distress at the end of June this year.

In the last quarter alone more than 17,000 estate agency and other property businesses, including building firms, have fallen into distress, in addition to many thousands of others already in that position.

Begbies Traynor says: “The deteriorating financial performance of the real estate sector is brought into sharp focus with a 19 per cent increase in significant financial distress between Q2 2019 (49,549) and Q2 2020 (58,844), with a further four per cent increase between Q1 2020 (56,482) and Q2 2020 (58,844).”

The company warns that even though all 22 sectors of the economy measured by the Red Flag Alert research showed an increase in significant distress “it is likely that the true impact of the Coronavirus pandemic will only become apparent during the third and fourth quarters of 2020 as government support initiatives are unwound and courts fully reopen so that enforcement action can be taken.”

Begbies defines ‘significant' distress as those businesses with county court judgements filed against them or which have been identified by the firm’s credit risk scoring system which screens companies for a marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.

"There is a dam of company financial distress waiting to break upon the UK economy. Despite more than 30,000 businesses [across all sectors] having fallen into distress since the start of the year, the real level of corporate underperformance is being concealed by inaction on distressed businesses in the courts” according to Begbies Traynor partner Julie Palmer.

"With government initiatives to support businesses now winding down, we will start to see the true impact of coronavirus on the UK during the autumn. This crisis will force many zombie companies out of business. While these were clinging on to survival prior to the pandemic, many will now have become simply unviable due to high levels of debts and poor sales. 

“Going forward, businesses that have the capital and the management ability, will adapt to the new normal and likely flourish at the expense of weaker rivals.   

"It is likely that this situation will get worse for many businesses before it gets better, but those that can operate and adapt to these conditions will survive the flood and live to prosper on the other side."