UK property company insolvencies soar as interest rates rise

The number of UK property companies going bankrupt has soared in recent months as investors who have been weakened by the pandemic now risk being killed by rising interest rates.

In the first three months of the year, 81 real estate investment companies went bankrupt, according to tax and consultancy firm Mazars. It’s the highest quarterly figure in more than a decade and a big increase out of the 46 companies that went insolvent in the last three months of 2021.

Among the businesses most at risk are those that took out loans to finance speculative development projects before the pandemic hit and commercial owners who lost income when stores were closed during the lockdowns.

Now they face an existential threat in the form of rising borrowing costs, as the Bank of England seeks to rein in soaring inflation by raising interest rates – the committee The BoE’s monetary policy maker has tightened policy in five consecutive meetings, taking the benchmark rate to 1.25 percent.

“With so many rents still overdue and creditors growing, the recent round of interest rate hikes could not have come at a worse time. Unfortunately, further increases are expected to follow, which means the sector is likely to see further insolvencies,” said Rebecca Dacre, partner at Mazars.

Some businesses have only survived so far because borrowers have been protected by government coronavirus measures. But a moratorium on issuing liquidation petitions ended earlier this year, meaning lenders are no longer required to forbear.

After surviving the coronavirus, investors had hoped to recover shortfalls and catch up on delayed projects amid an economic recovery.

But the invasion of Ukraine has tipped the global economy ever closer to recession, stoking a cost-of-living crisis that has weighed on high street spending and raising the prospect of a slowdown in the economy. UK housing market.

Property developers are also grappling with rising labor and material costs due to wage inflation, high energy prices and supply chain disruptions.

Separate research from accounting firm Price Bailey shows a sharp rise in the number of companies in the construction sector that have defaulted on government loans meant to support small businesses during the pandemic.

Companies in the construction sector have filed 14,255 applications for reimbursement from the Coronavirus Business Interruption Loan Scheme, or CBILS. So far, 354 companies have defaulted, representing 2.5% of the total, according to the firm.

The default rate in the construction sector is much higher than in other sectors and should herald more insolvencies to come, according to Price Bailey.

“The full impact of the big three shocks of Brexit, Covid and Ukraine is yet to come. The current rise in insolvencies is largely of businesses that were likely to fail before the various shocks on the side of the supply suffered by the UK economy,” said Matt Howard, Head of Insolvency and Collections at Price Bailey.

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