The Effects of the Global Financial Crisis on the Australian Building Construction Supply Chain

This study involves a financial analysis of 43 publicly listed and large private companies in the building and construction supply chain from 2005 to 2010; straddling the period of the global financial crisis (GFC); and examines the impact of the GFC on the performance of these companies. The construction supply chain was divided into four sectors – material suppliers, construction companies, property developers and real estate investment trusts (REITs). The findings indicate that the impact was minimal for both material suppliers and construction companies, but especially severe for the more leveraged property developers and REITs. Building material suppliers and construction companies have benefitted substantially from the building economic stimulus packages provided by the Australian government to mitigate the effects of the GFC. Decreases in the valuation of assets have, to a large extent, reduced the profitability of property developers and REITs during the GFC but these companies have recovered quickly from these adverse conditions to return to a sound financial position by the end of the 2010 financial year. The results will inform investors, construction company managers and construction professionals in devising strategies for prudent financial management and for weathering future financial crises.


Introduction
The global financial crisis (GFC) is commonly believed to have begun in July 2007 when a loss of confidence by American investors in the value of sub-prime mortgages caused a liquidity crisis.By September 2008, the crisis had worsened with a sudden dramatic decline of stock prices around the globe.With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on the market than the bank had loaned out originally.When Lehman Brothers collapsed in September 2008, governments around the world struggled to rescue large financial institutions as the fallout from the housing and stock market collapse worsened.
The Australian equity market was no different to many other countries in facing the GFC.The S&P/ASX200 index fell from a peak of 6700 in late 2007 to 3400 in November 2008.It was initially thought that Australia would fare much better as the local banks' exposure to collateralised debt obligations (CDOs) was relatively small in comparison with other countries.The housing market was also in a strong position with non-conforming loans in Australia accounting for only about 1% compared to 13% in the U.S. (Debelle 2008).
Despite the smaller exposure to toxic debts and a stronger housing market, the Australian gross domestic product (GDP) declined in the December quarter of 2008.Building construction commencements had reduced by 10% in the September 2008 quarter in response to the tightening of credit.Total building output for three subsequent quarters reduced as a consequence of the diminishing building commencements.Figure 1 below illustrates the change in GDP, building commencements and building output for each quarter between 2005 and 2010.The Australian property market was no different from any other industry facing the GFC.From the December 2007 quarter to the December 2008 quarter, owner occupied housing commitments fell by 22% (ABS 2010).This can be attributed to an increase in the unemployment rate during that period, and reduced confidence in the market.A market report states that office property developers in Australia experienced a 20.6% decline in their revenue for the financial year 2007-08 (IBISWorld 2011a).The retail market was also affected, resulting from reduced consumer spending.

Australia's Response to the GFC
The first significant macroeconomic policy response to the global financial crisis came from the Reserve Bank of Australia (RBA).On October 7, 2008, the RBA Board cut interest rates by 100 basis points to 6%.On October 12, the Australian Government announced it would guarantee all Australian bank deposits.Two days later, the Government announced an AUD10.4 billion stimulus package that included AUD1.5 billion to support housing construction.The housing aspect of the stimulus packagea time-limited grant to first home buyerstook effect immediately.To prepare for the possibility that the global financial crisis might be deeper and longer lasting than expected, the Government brought forward the commencement of large-scale infrastructure projects with a first tranche worth AUD4.7 billion announced in early December.On February 3, 2009 the Australian Government announced a second AUD42 billion stimulus package titled the Nation Building and Jobs Plan.As the global recession was expected to be deep and long, infrastructure spending played the central role with 70% of the second stimulus package to be spent on schools (AUD14.7 billion), social and defence housing (AUD6.6 billion), energy efficiency measures (AUD3.9 billion), and AUD890 million on road, rail and small-scale community infrastructure projects.More recent steps were contained in the 2009-10 Budget delivered in May 2009 where the Government introduced the third phase in its infrastructure program where an additional AUD22 billion was announced.The large increases in building starts in the third and fourth quarters of 2009 resulted from the initiation of stimulus packages earlier in the year.The Building the Education Revolution (BER), the single largest element of the Australian Government's Nation Building -Economic Stimulus Plan accounted for 23,600 projects.
These developments provided the motivation to develop a broader understanding of the effects of this recent financial crisis on the construction supply chain.The analysis focused on characterizing the impact of the GFC on the financial performance of companies within four sectors of the industry: building material suppliers, building contractors, property  developers and Australian Real Estate Investment Trusts (A-REITs).The key points examined are the severity of the impact by means of ratio analysis, changes in cost structure and financial distress.The predicament of firms that were most affected was discussed in order to explore possible common characteristics of distress or failure.The findings will inform investors, managers and construction professionals in devising strategies for prudent financial management and for weathering future financial crises.

Background
Investigations into the financial performance of construction companies were initially reported in the 1970's.Sales turnover was identified to have a great impact on the profitability of the enterprise (Fadel 1977).A detailed industry level analysis of UK construction industry identified the similarities and differences in profits across general contractors and home builders (Akintoye and Skitmore 1991).Pre-tax profit margins among eighty general contractors hovered around 3.23% over the analysed period.Though uncorrelated with firm size, home builders' profit margin was observed to be four times more than general contractors.Low (1997) examined the performance of property companies in the Singapore stock exchange over a period of twenty one years and concluded that their performance was not better than the stock market and was highly correlated with the property market itself.Other researchers yielded the same findings in different countries (Abdul-Rasheed and Tajudeen 2006).On the contrary, Balatbat et al. (2011) reported that the performance of thirty Australian Securities Exchange (ASX) listed construction firms operating in civil infrastructure, residential and non-residential sectors over a 10 year period performed better than the All Ordinaries Index and a pool of blue chip companies.This was due to construction companies' higher efficiency in the utilisation of assets for revenue generation.A study (Cheah et al. 2004) on global construction firms indicates that business strategy has to account for efficiency in financial, operational, technical and human factors, and that corporate failure was largely due to failures in or two critical factors.
It is generally accepted practice to assess company performance using financial ratiosthe analysis of these ratios over a period of time may provide substantial and reliable information on a company's financial health.Early statistical models based on these financial ratios were developed to analyse company failures.Beaver (1966) identified differences based on thirty financial ratios among groups of failed and non-failed firms as early as five years before the firms failed.The differences became more significant as firms approached failure.Altman (1968) combined ratio analysis and multiple discriminant analysis to formulate a statistical tool for prediction of company failure.This methodology analysed a combination of ratios, thereby eliminating possibilities of uncertainty in relying on single ratios.From a sample of sixty six manufacturing companies, of which half of them had filed for bankruptcy from 1946-1965, Altman derived a set of ratios covering liquidity, profitability, leverage, solvency and activity ratios.Many variations of this model have been created over time for specific industry segments in various regions: construction in the UK (Mason and Harris 1979;Abidali and Harris 1995), and for construction in China (Ng et al. 2011).Macroeconomic factors such as low construction activity, high interest rates, rise in inflation, and reduction in consumer spending have been identified by researchers to be significant factors that can drive companies towards failure (Kangari 1988;Arditi et al. 2000).
Both Beaver (1966) and Altman (1968) are of the view that financial ratios, based solely on financial statements, are an indicator of a company's past performance, and future performance is beyond prediction.Mason and Harris (1979) went on to declare that their model is able to identify companies that are 'at risk' of failure but cannot forecast whether a company will actually fail.It is worth pointing out at this stage that these tools only give an indication, and at any point changes in a company's strategy can transform a company from poor performance to market dominance.Langford et al. (1993) recognised that these analytical tools, along with the company's financial performance have to be used in combination for greater understanding of corporate performance.Similar views have been echoed by Chan et al. (2005) when analysing the impact of the Asian financial crisis on construction companies in Hong Kong.
Recent studies (Abdul-Rasheed and Tajudeen 2006, Chen 2009, Balatbat et al. 2010, Balatbat et al. 2011) have excluded building material suppliers and real estate investment trusts (REITs) in the review of financial performance, ignoring their importance within the building construction industry.An industry report estimates about 6,100 establishments to be operating in the materials supply sector in 2010-11 generating an estimated AUD20.5 billion in annual revenues (IBISWorld 2011b).Understanding the performance of the building material suppliers and REITs, in comparison with the builders and developers, is vital to the construction industry's resilience to future market downturns.

Data and Methodology
In this study, the supply chain for building construction was limited to 4 sectors: building material suppliers, building contractors, property developers and A-REITs.A list of companies in each sector was determined by examining companies listed in the Australian Securities Exchange under Global Industry Classification Standards (GICS) capital goods and real estate industry groups.The next selection criteria for these companies were as follows to ensure that these companies were representative of the local economy; (i) listed in the ASX prior to 2006 financial year, (ii) more than 50% of their revenues were generated from Australian operations, and (iii) more than 50% of their revenue were generated from the sectors they represent, respectively.This filter resulted in a total of only 36 companies with only one operating exclusively as a building contractor.This is because most public listed building construction companies in Australia were concurrently operating in both construction and development.Hence in order to obtain a representative sample of the building contractors, the search was enlarged to include large (revenues exceeding AUD25 million) private construction companies that were required to file annual report to the Australian Security Investment Commission (ASIC).This search identified 51 companies of which only 16 had filed Form 388 for the years 2006 to 2010.Among the 16, only 7 companies were predominantly engaged in building construction.The other firms that were involved in either development or infrastructure works along with construction were not taken into consideration.The lack of local investment opportunities has seen Australian REITs seeking international property investments in 2000s.While this strategy brings about diversification gains, international property introduces additional currency, political and economic risks.Many of the A-REITs with large total assets were excluded from this analysis as these comprised significant international properties.A full list of the companies analysed is listed in Table 1.
The financial performance of all selected companies was calculated over the 2006-10 period, both years inclusive.Despite its many drawbacks, the most precise information on these companies can only be determined by relying on audited financial statements (Langford et al. 1993).In order to assess the impact of the GFC on the performance of these companies, the values for every consecutive year was compared in a trend analysis.The cost structure for the four sectors has been examined with cost of goods sold (COGS), expenses, depreciation, amortization, interest and profit displayed as a percentage of revenue.Items such as rent, utilities, wages and purchases were not always discernable or available and were considered as part of expenses.A distress analysis was conducted using  and Building, 12 (3) 16-30  20 the Altman's Z-index (1968).This was considered to be the most appropriate model to compare the risk of failure across the four different sectors.

Performance Analysis of Companies
The best gauge for measure of a recession, next to GDP is the stock market.The market index is a reliable tool to plot the timeline of recession right from start to recovery.The primary investable benchmark in Australia, the S&P/ASX200, fell from its peak of 6748 in October 2007 to 3145 in March 2009, losing 46% of its valuation.Since then the markets have recovered and remained fairly buoyant at 4500 until the end of 2010.With the market as a reliable pointer, the period of analysis has been set from financial year 2006 to 2010 to cater for the boom, fall and recovery due to the GFC in Australia.
In terms of revenue, property developers and A-REITs exhibited significant decline in revenues in 2008 and 2009, and    Ratios measuring profitability, liquidity, activity, leverage and solvency are generally accepted as the most significant indicators of corporate performance.Table 3 lists at least one financial ratio in each of the categories above to evaluate the performance of the companies in the building construction supply chain.These ratios were weighted based on the annual revenues of the respective companies.In terms of profitability, the net profit margin (net profit divided by sales revenue) for material suppliers reduced progressively from more than 7% in 2006 to 0.8% in 2010.Net profit margin for building contractors was low at between 3-4% in 2006 and 2007, and reduced to a minimum of 1.6% during the depths of the financial crisis.It recovered slightly to 1.9% in 2010.The net profit margin for property developers was more than 30% before the onset of the GFC, but converted into a 59% loss in 2009.Similarly, A-REITs reported a net profit margin of 70% and 53% pre-GFC and a massive loss of 106% in 2009.Both the property developer and AREIT sectors returned to profitability and recovered to approximately one half their pre-GFC margins in 2010.
Return on average equity (ROE) measures the rate of return on the shareholders' equity and reflects the company's efficiency at generating profits from every dollar of equity.Defined as net profits divided by average equity, the building material supplier sector exhibited returns between 13% and 17% during the period examined but dropped to a low of 0.2% during 2009 when net profits were depressed by the effects of the GFC.Pre-GFC, the building contractors were achieving returns in excess of 40% but fell to 23.1% in 2008 and eventually to a low of 8.3% in 2010.This corresponded with the observed drop in net profit margin from more than 30% pre-GFC to less than 20% post-GFC.The current ratio, defined as current assets divided by current liabilities, provides a measure of liquidity or the company's ability to pay back its short-term liabilities with cash, inventory and receivables.As can be seen from Table 3, the current ratios for both the building material suppliers and building contractors were between 1.5 and 1.9, indicating that these companies were adequately liquid and able to pay its obligations.The current ratios remained above 1.0 during the period of the financial crisis indicating that these companies were managing their cash flows prudently.A number of companies invested in additional property, plant and equipment, increasing debts and consequently reducing the current ratio slightly in 2008.Once the effects of the GFC were apparent, these companies sought ways to reduce their current liabilities with a slight improvement in current ratio in 2009.Property developers exhibited an increase in current ratios in 2007-08 as completed and unsold properties were accounted for under current inventories leading to a higher current asset value.Impairments to the value of properties in inventories and the increases in interest bearing liabilities resulted in higher current liabilities.These changes led to current ratios fluctuating between 1.4 and 2.3 during this period.The current ratio for AREITs ranged from 0.66 to 1.33 during this period, but was not considered further as this sector invested primarily in properties -a non-current asset.The quick ratio, a more severe measure of liquidity, defines the company's ability to meet its short-term obligations with its most liquid assets.Inventory was excluded from the current assets because of the delays involved in turning inventory into cash.As expected, the quick ratios for material suppliers were less than the current ratio, but were observed to be slightly below 1.0 indicating that current liabilities were marginally higher than current assets.The increase in short term debt in 2008 resulted in a large drop in quick ratio to 0.722.Once these liabilities were restructured in response to the GFC, the quick ratio improved to previous levels.Recognising that building contractors operate on very tight but prudent cash flows, the quick ratios for this sector were all marginally above 1.0 during the entire period examined.The property developers and AREITs exhibited notably low quick ratios as properties were considered to be non-current assets.Again, some of these companies had to restructure their liabilities in 2009 leading to improved quick ratios for the year.
The working capital turnover (WCT) ratio is an activity ratio which represents the number of times the working capital is turned over in the course of a year.A higher WCT ratio indicates the efficiency with which the working capital is being used to generate revenue.The building material suppliers exhibited a WCT ratio between 6.8 and 11.8 for the period examined except for 2008 when the ratio jumped to a high of 54.This was due to large current liabilities incurred by a number of companies leading to a reduced working capital.The large WCT ratio for building contractors between 2008 and 2010 was also due to reductions in working capital as the revenue was previously reported to be relatively constant over this period.The WCT ratio for both the property developers and AREITs did not provide much information as the values fluctuated between -2.2 and +3.5, most likely attributed to large changes in the levels of current assets and liabilities.
The use of debt to finance the company's assets was evaluated by examining the debt ratio which is defined as the ratio of total debt to total assets.The debt ratios remained fairly constant over the entire period examined for all four sectors although the building contractors showed the highest debt ratio at 65% whereas the AREITs had the lowest ratio of approximately 33%.Building contractors exhibited comparatively higher debt ratios due to high levels of short term trade debts payable to sub-contractors.When the debt ratio was examined together with the Times Interest Earned (TIE) ratio, it clearly indicated that although the building contractors were most highly leveraged, the debt amounts were small relative to the net profits earned by these companies.Building contractors were obviously able to meet its debt obligations many times over.It can be inferred from an examination of the combination of debt and the TIE ratios that most of the liabilities of the AREITs business structure are long term debts whereas building contractors incur short term debts.The TIE ratio for building material suppliers reduced drastically from 93 in 2006 to 3.6 in 2009 due to a drop in net profits.The effect of the GFC was evident in two sectors; the property developers and AREITs, where a majority of these companies suffered losses in 2009 leading to negative TIE ratios.

Industry Cost Structure
The industry cost structure was examined by comparing input costs to revenue for each sector.The cost of input materials (represented by cost of goods sold, COGS) and operating expenses are a significant component of the material supplier cost structure.From Figure 2a it can be observed that COGS and expenses have remained fairly consistent at 56-58% and 29-30%, respectively, leading up to the GFC.Other costs such as depreciation, amortization and interest expense accounts for very small percentages of the total revenue.The most significant effect of the GFC is the drop in profit from 8% in 2007 to 1% in 2010.
For the building construction sector, COGS represents close to 90% of total revenue with profits accounting for 3-4% pre-GFC as illustrated in Figure 2b.It can be seen that all the inputs have remained relatively stable with an evident squeeze on profits.Interest expense for the building construction sector is lowest amongst all four sectors at less than 0.1% indicating that companies in this sector have insignificant bank loans.The cost structure for property developers include 70% for cost of goods and another 12-15% for operating expenses.Interest payments amount to approximately 3% of total revenues.In terms of profits, property development sector have reported large swings in figures in excess of 12% profit pre-GFC to losses amounting to approximately 20% of revenue in 2009.The increase in expenses was attributed to a write-down in the value of property assets held by these companies during the construction stage.It may be worthwhile to note that this sector recovered in 2010 reporting a profit of 7%.
Property investment companies and REITs have been relatively quick to react to the GFC compared to the other sectors in the supply chain.This is clearly due to a drop in value of the financial assets held by the investment companies and trusts.REITs operate in a similar manner as investment funds and do not report COGS.Interest payments amount to approximately 10% as this sector is heavily reliant on debt to finance the purchase of real estate assets.Figure 2d clearly indicates that REITs were amongst the most severely affected with a reported cost structure nearly three times that of the total revenue for 2009.This sector exhibited the highest profit margins with pre-GFC profit levels at 66% of total revenue.A decline was seen in the 2008 financial year, when the effects of the GFC started to affect the bottom line with a loss of 27%, and continuing the decline with a loss amounting to nearly 200% of total revenue in 2009.The effect of the GFC was two-fold: a loss of confidence in the property market meant that real estate valuations plunged requiring these investment companies and trusts to write-down assets values; and a drop in occupancy leading to a sharp decline in revenue.

Distress Analysis
Altman (1968) used the multiple discriminant analysis model to combine several financial ratios into a single index, called the 'distress score' to discriminate between failed and nofailed groups.Altman's proposed Z-score, based on an analysis of 66 manufacturing companies of which 33 had failed in 1946, estimated the risk of bankruptcy within a period of two to three years.This analysis was performed to investigate the possibility of business failures in response to the GFC.Property developers and REITs with higher returns initially have seen greater erosion in their profitability to the extent of negative earnings in 2009 whereas building supplies and building contractors have remained profitable throughout the period.For both developers and REITs, interest expenses, depreciation and amortization have remained fairly stable throughout the period.The reduction in profitability was significantly influenced by decreases in valuation of their assets and financial derivatives on hold, and impairment charges.
The distress analysis indicates that the building materials and contractors in Australia were financially sound and were able to accommodate the impact of the GFC.A similar analysis

Discussion of Results
The results indicate that each of the four sectors of the building supply chain was affected to different extents by the GFC.The building material suppliers were the least affected exhibiting a 3% year-on-year drop in revenue in 2009 and another 7% drop in 2010.These companies remained profitable albeit at a much reduced profit margin.Net assets of these companies continued to grow over the entire period of study.A number of these companies were in the business of manufacturing products for other sectors of the economy and were marginally affected by the decline in construction demand in 2008.The activity ratio for these companies remained relatively constant over the period.These companies were moderately leveraged with debt, but earned sufficient revenues to cover the interest payments many times over.
The building contractors sector exhibited increases in revenue despite the drop in total building starts in 2008 and the consequential drop in building volumes in 2009.This reflects the mode of operation of building contractors where the project duration delays the effects of a downturn to a couple of years after the onset of a fall in building starts.The net assets of the building contractors, although lowest of all four sectors, have more than doubled from 2006 to 2010, indicating that substantial additional investments were made into these companies.Profit margins which were initially low at 3% to 4% were further depressed by the competition for jobs during the lead up to the GFC.The profit margins shown in Table 3 for the building contractor sector were the lowest of all sectors examined.Although the profit margin was low, this sector remained profitable and financially liquid throughout the GFC period.The observed profit margin was not much different from the margin of 3.23% reported by Akintoye and Skitmore (1991) for an analysis of 80 general contractors in the UK.It also compares reasonable better than the 1% to 2% reported by Chan et al. (2005) for construction companies in Hong Kong immediately after the 1997 Asian Financial Crisis.The ROE ratios in excess of 40% confirms the perception that construction activities require relatively lower amounts of equity and that operations is normally funded through judicious utilisation of working capital.Construction companies, though exhibiting debt ratios approximately 60%, are able to repay the interests on their debts from their profits.In general, the financial ratios indicate that they have a well-founded financial position, and are not directly prone to demand fluctuations are generally perceived.A recent study by Balabat (2011) of thirty ASX-listed construction firms operating in the civil infrastructure, residential and non-residential sectors reported that these firms exhibited a 25% higher growth in share value compared to blue chip companies and 48% higher compared to the ASX-All Ordinaries Index.
Apparently, both the building material supplier and building contractor sectors benefitted from the stimulus packages once the numerous building projects commenced in earnest in mid-to late-2009.These sectors remained profitable and solvent, exhibited insignificant changes to leverage levels; the only indication of concern was a drop in net profits and interest coverage.
Property developers generally rely on internally generated funds and borrowings to finance their investment opportunities resulting in the largest net assets reported for the four sectors as shown in Table 2. Given that these developers in Australia were making healthy profits on the back of the property boom before the onset of the GFC, these companies tend to utilise more long-term debt to finance their business operations.Although the year-on-year falls in revenue between 2007 and 2009 were only 16% and 12%, respectively, a drop in the valuation of properties held or under-construction resulted in serious losses in 2009.Once the market recovered partially in 2010 and the revaluation of properties was conducted, these companies reported net profits and reverted to a healthy balance sheet.
The REITs in Australia engage in the acquisition and ownership of property and primarily derive their income from rental or leasing whereas property developers are mainly involved in the development and management of real estate properties.Given that rental revenues are usually relatively stable, REITs tend to be perceived as a low risk investment vehicle.This study observed net profit margins in excess of 70% during 2006 and 2007, before the onset of the GFC, to a substantial loss of 106% of revenue reported in the 2009 financial year for the REITs sector.However, a revaluation of its property portfolio post-GFC resulted in net profit margins recovering to 37% in 2010.Although property portfolios of the developers and REITs were similarly assessed each financial year, the impact of any upward and downward swings was greater for the REITs sector than the property development sector.Among the sub sectors being analysed, REITs were in a much better situation to cover for their current liabilities with the lowest debt ratios of 0.33 to 0.36.As the REITs' business risk is relatively lower than the other three sectors, these companies utilise more long-term debts to finance their investments in real estate.It may be worthwhile to note that the sample of REITs shown here have reduced the debt ratio from 0.36 in 2006 to 0.33 in 2010.Excessive levels of gearing have magnified the steep decline in asset values for a number of REITs during the GFC.

Conclusions
The financial analysis of the companies operating across the building construction supply chain in Australia indicates that all four sectors examined were susceptible to the global financial crisis.From the ratio and cost structure analyses, it was evident that building material suppliers were the least affected as these companies have remained profitable and solvent throughout the period examined.These companies have benefited substantially from the building economic stimulus package provided by the Australian government.The impact on building contractors was also limited, as they have also remained profitable albeit at significantly reduced levels.However, there is a very high likelihood that the findings may be different if the study period was extended beyond 2010 as the projects let under the stimulus package are completed.
Developers and REITs were the most affected sectors in this financial crisis where significant erosion in profitability was observed.The most severe drop in profitability was reported in 2009 when developers and REITs exhibited losses amounting to 25% and 105% of revenue, respectively.Decreases in the valuation of their assets and financial derivatives on hold, and impairment charges, have played a major role in reducing their profitability.The post-GFC recovery to profitability has been triggered by an increase in their asset valuation, more specifically, owned properties and those for sale in inventories.Since 2008, the Zscores for developers and REITs have fallen below the 'distress' level, but it was encouraging to see an increase from 2009 and 2010 indicating that the worse was over.The GFC eroded the peak market capitalisation of Australian REITs from AUD147 billion in 2007 to its present value of AUD74 billion at the end of the 2010 financial year (ASX 2007;ASX 2011).The steep decline of asset values during the GFC was magnified by the high gearing employed by the A-REIT sector.The level of debt has reduced slightly to 0.33 in 2010 indicating a more conservative and managed approach to gearing in this sector after the GFC.

Post Script
After this research project was completed, two companies in the list shown in Table 1 -Reed Constructions and St Hilliers Construction, were reported to be in financial distress.
Reed Constructions, based in NSW, was reported to be in financial distress, with up to $80 million of bills outstanding, despite being allocated $383.3 million under the Building the Education Revolution program (Moran, 2012a).On 15 June 2012, Reed Constructions Australia Pty Limited was placed in Voluntary Administration (Ferrier Hodgson, 2012) where debts were reportedly at $182.1 million after suffering losses on several other government contracts.On 9 July 2012, Reed Constructions was placed in the hands of a liquidator following a successful winding up application filed in the NSW Supreme Court by a creditor, SCE Group (Schlesinger, 2012).Data for Reed Constructions indicate that revenues increased at a compounded annual growth rate of 25% from $171 million in 2006 to $466 million in 2011 with profit before tax at $18 million and $24 million, respectively for these two financial years.At the end of the 2011 financial year, net assets were at $99 million, quick ratio at 1.12 and the debt ratio at 0.54 indicating that the company was reasonably healthy at that point in time.The 2011 financial statements indicate a $47.1 million net cash outflow from its construction activities.
St Hilliers Construction Pty Limited was placed in Voluntary Administration on 16 May 2012 after a dispute over the funding of the $350 million Ararat Prison project that it was constructing under a public-private partnership approach (Zappone, 2012).It was reported that St Hillers Construction owed its creditors and employees a total of $121 million (Moran, 2012b).The financial statements indicate that although the revenues increases from $347 million in 2006 to $515 million in 2008 and declined slightly to $476 and $492 million in 2009 and 2010, respectively, the company returned profits between $5 million and $12 million between 2006 to 2009.The company exhibited early signs on distress when it incurred a loss of nearly $18 million, before tax, for the 2010 financial year mainly due to higher construction costs (or conversely, lower margins).Net assets remained positive as $27 million, but its quick ratio deteriorated to 0.54 in 2010 compared to 1.00 the previous year.It suffered a net cash outflow of $16.0 million in 2010 and a further $13.3 million in the 2011 financial year.
These two recent cases of financial distress is the subject of an ongoing study to further characterise the performance of the building and construction sector in these uncertain financial conditions: the results will follow in a future publication.Preliminary data seems to suggest that an adequate profit margin is required to provide a buffer against unforeseen project risks.The continued effects of the GFC will become more evident once financial statements and other pertinent corporate information are made available in the public domain.

Figure 1
Figure 1 Changes in GDP, building starts and building volume(ABS 2010; ABS 2011)

Figure 2
Figure 2 Cost structure for material suppliers, construction, property developers and REIT sectors (weighted based on revenue)

Table 1 List of Companies studied
Cedar Woods Properties Ltd (ASX:CWP) CIC Australia Limited (ASX:CNB) Devine Limited (ASX:DVN) Finbar Group Limited (ASX:FRI) FKP Property Group (ASX:FKP) Geo Property Group (ASX:GPM) International Equities Corp Ltd (ASX:IEQ) Lend Lease Group (ASX:LLC) Metroland Australia Limited (ASX:MTD) Mirvac Group (ASX:MGR) Payce Consolidated Limited (ASX:PAY) Peet Limited (ASX:PPC) Stockland (ASX:SGP) Sunland Group Limited (ASX:SDG) in the case of developers, continuing into 2010.The building material sector exhibited a marginal contraction of 2.8% in 2009 followed by a further reduction of nearly 7% in 2010.On the contrary, revenues for building contractors continued to increase, albeit by only 1.6% in 2009 and 0.8% in 2010 despite the slump in building starts in late 2008.The nature of the building construction business is that builders are not immediately affected by a downturn due to continuing construction projects awarded a couple of years earlier.The launch of a number of stimulus packages; bringing forward spending on large-scale infrastructure and additional spending on new school buildings in late 2008 and early 2009 by the Australian government to mitigate the effects of the GFC on the local construction market have maintained building starts at a level of AUD81.5 billion andAUD75.6 billion in 2008 and 2009, respectively (ABS 2010; ABS 2011).

Table 2
indicates that the total net assets of all the companies analysed have increased in the period examined.In fact, net assets for building contractors have more than doubled compared to 2006 with other sectors averaging an increase of 50%.This is not withstanding the small decreases in net assets for property developers and A-REITs that had to revalue some of their assets in 2009 and 2010.Net asset in this table is usually equal to the shareholders' equity in the company balance sheet or total assets minus total liabilities.

Table 3
Financial ratios (weighted on revenue) Thangaraj, R K and Chan, T K (2012) 'The effects of the global financial crisis on the Australian building construction supply chain', Australasian Journal of Construction Economics and Building, 12 (3) 16-30 23

Table 4
indicates that building contractors have remained fairly stable and well above the 'at risk' score of 2.7 throughout the period of study.Material suppliers on the other hand exhibited excellent scores for 2006-08 but dipped slightly into the 'at risk' score for 2009-10 having suffered a drop in revenue and market value.Property developers and REITs were categorised as 'at risk' before the onset of the GFC but fell below the 'imminent failure' threshold of 1.8 in 2008.On examining the individual factors for the Z-score, it is clear that the fall from the safe level for property developers and REITs in 2008 has been influenced by a loss in profitability and productivity.

Table 4 Distress analysis (weighted on revenue)
Chan et al. 2005) reported Z-scores falling from 2.33 in 1997/98 to 1.41 in 2001/02 due to severe competition and reduced demand for property.