ANOTHER major and longstanding construction firm folded earlier this month, with Style Group, including its building contractor AC Mauger, joining a growing list of businesses that have ceased trading over the past couple of years. Together, they left a lasting impression on Jersey’s landscape but today they are no more…
A mere coincidence or evidence of a deeper issue in the sector? The JEP investigates…
Earlier this month came the news that yet another significant player in the construction industry had suddenly stopped trading, with the loss of hundreds of jobs.
Style Group, which included the long-standing builder AC Mauger, told its staff on 14 August that the company was not “in a position to make any payments” and they would not receive any more wages.
In the aftermath, both the Chamber of Commerce and Jersey Construction Council expressed sadness, sympathy for staff and made a call for more government action.
However, while small-island economies often rely on the government to provide major infrastructure projects, individuals connected to the industry have told the JEP that Union Street cannot be held wholly to blame.
Yes, the planning process can be slow, a percentage-for-art obligation can be costly, and the pipeline of major work is often blocked with detritus, but other factors were at play, they said.
At a macrolevel, rising interest rates, stagnating house prices and a waning appetite for new flats contributed, the sources suggested, but at a microlevel, cross-guarantees between group companies, poor or ill-timed management decisions and a high-stakes lending environment may have played their part.
Within the last few years, there have been several high-profile collapses of building firms, including Style Group, Garenne Group – which included Camerons, Mitchell Building Contractors, MAC Group, JP Mauger and K-Land Construction.
Each would have had their particular circumstances but they all fell within a relatively short space of time and operated within the same 45-square-mile ecosystem.
This environment was one that, since the late noughties until the end of 2021, had got used to low interest rates and relatively low inflation. It was a time when credit was cheap and commodity prices were low.
Then the much-referenced but no-less-significant bombshells of Covid, Brexit and Putin’s invasion of Ukraine arrived, shaking up the comfortable order that the western world had grown used to.
The UK base rate was just 0.1% in 2020; it is now 5.25%, a far cry from 1979’s 17% but still a significant rise.
Construction projects, especially large ones, take a long time from inception to completion. The sums at the drafting and financing phase can be very different to the numbers once the For Sale sign goes up.
Critics of the government say this is why delays in the political part of construction, including the planning process and appealing decisions, can be so costly and make once viable projects unviable. It is certainly why developer Le Masurier says it is unable to proceed, at this stage, with its vast Les Sablons development between Broad Street and Commercial Street.
Building materials, such as timber, steel and plasterboard, have seen double-digit cost increases since 2022, which particularly hit firms, such as Camerons, which had signed fixed-price contracts.
Firms that forward purchased and/or hedged their prices, or built in ample contingencies to weather a storm, faired better.
It also appears that when credit was cheap and demand was high, some contractors decided to enter the development game, which were traditionally two separate areas.
At the time, it would have made sense: why pay a developer a margin when you have the skills, resources and sites to do it yourself?
However, when the market contracted and homes struggled to sell, this left the firms exposed.
Multiple sources have told the JEP that Style Windows and Interiors were profitable industries within the group, but development arm Style Homes was the weak card that may have brought the house down.
With construction firms entering the development market, some cross guaranteed, meaning that lenders were able to recover money from whichever company in the group had the most assets.
Unlike the finance industry, construction is not regulated and there is no minimum capitalisation; it is up to the directors of the business to decide on the amount of equity or assets it holds at any one time.
Insiders have told the JEP that some businesses may have had back luck, made poor decisions and/or been tempted by quick wins over long-term prudence.
Peer-to-peer lending
The way projects are financed may have had an impact on some businesses.
Whereas most individuals pay for their home through a mortgage with a bank or building society, peer-to-peer lending has become another financing option.
This is when a business or individual – perhaps a high-net-worth resident – lends money directly or through a lending platform, which is paid an arrangement fee.
Money will be lent at, for example, 8-10% interest but the fees could take the interest up to 12-14%. The loan will typically be secured against the property and can cover the full development costs, meaning that the developer need not necessarily put their own money into the project.
That is all well and good if the property or properties sell at their expected market value, but should a debtor default on their loan, then the penalties can be significant – up to 50%.
That’s an extra £5 million a year on a £10m loan. Should the debtor be unable to pay back their loan and becomes insolvent, the lender is a secured creditor; however, others potentially owed money, such as sub-contractors and engineers, may be unsecured parties.
A recent Royal Court judgment shed light on a peer-to-peer lending arrangement which resulted in a dispute between developer and lender, including over interest rates charged.
Two properties built and owned by a developer were valued at around £28m but the business had debts of approximately £26m, including £22m of secured debt to a peer-to-peer lender.
The court concluded that the developer was cashflow insolvent and possibly balance-sheet insolvent too.
The dispute was over whether the developer’s group of companies should be wound up on a “just and equitable” basis, as it wanted, or, as the lender wanted, by means of a creditors’ winding up of a company which owned the two properties it built: a luxury apartment block in St Lawrence and another apartment block in Old St John’s Road.
In its judgment, the court explained: “The representors [the developer] seek a just and equitable winding up on two main grounds. Firstly, it would allow [the developer’s group] to keep trading for a limited period with the hope of selling the assets for the benefit of the companies’ creditors as a whole and/or investigating the affairs of [the developer’s property-owning company] in connection with some of the alleged actions of [the lender] and the making, so it is claimed, of preference payments to unsecured creditors and matters of clawback.”
The court continued: “We do not intend to go into all of the factual details underpinning the various allegations and suggestions made in argument before us and contained in the skeleton arguments and affidavits.
“We are not in any position definitively to determine any of these points, many of which, we are sure, will be hotly contested should they ultimately fall to be litigated.”
However, the court did refer to some of the allegations, including that the lender may have taken on liabilities that should not be paid by the developer, and it had “charged interest rates to such a high level that it will be susceptible to review by the court.”
•Scaffolding on the Airport’s Air Traffic Control tower, which won AC Mauger Project of the Year at the Jersey Construction Awards in 2010
The lender denied these allegations, arguing, among other things, that the interest that it charged was included in the contract and agreed by the developer.
In its judgment, the court sided with the developer in ordering a “just and equitable” winding up of the developer’s group of companies. It also approved the developer’s chosen liquidators and called for six-monthly progress reports on the winding up.
Peer-to-peer arrangements were popular when interest rates were low but rate rises may have stifled businesses’ appetite for them. Arrangement fees can be high but the lenders themselves will usually warn of the high risks at stake and the lack of protection if something goes wrong.
Caveat emptor, it could be argued, although the Royal Court does have the power to determine if arrangements and fees are excessive.
The fragility of the industry is not just down to potential cross-guarantees across group companies; each firm is also in a supply chain, which often relies on credit: a builder can be both creditor and debtor, with the strength of the chain reliant on each link paying in full and delivering on time.
• Rising interest rates and stagnating house prices have turned the screw on the construction industry but numerous factors are at play
•Style Group went under on 14 August
If there are rumours, substantiated or not, about the strength of a business, then sources of money, labour and supplies can quickly dry up; it is the reason why news of a firm going under can be so sudden and unexpected, outside of the boardroom.
The state of the market
Market conditions have clearly played their part in the viability of businesses: Covid caused the market to overheat, and contractors and developers were busy, but the boom times were never going to last forever, and some firms clearly did not have enough strength in depth.
Sources have told the JEP that some firms may have been intoxicated by the cheap credit and high profit to be had and failed to save for the bad times.
Buy-to-let investors may have also been dissuaded by the introduction of a 3% stamp duty charge, although some argue that 3% is not enough to be a true deal-breaker.
The government, however, has had influence in many other ways, including the slow pace of implementing the policies and decisions of the all-important Bridging Island Plan.
It was passed in March 2022 but then there was a wait for supplementary planning guidance on each of the rezoned affordable housing sites, which took more than 12 months to come through.
The first application was for Sion, next to the former Methodist chapel, which was made in February 2024 and approved last September. Only now are the houses there shooting up.
The Planning Committee has also knocked back applications, which have caused subsequent delays, as have ministers, including the Jersey Development Company’s plans for the Waterfront.
The government has now published a plan called Investing in Jersey 2026-2050, which sets out some long-term projects and a new funding arrangement, but the details are yet to be finalised.
A new Fire and Ambulance Headquarters, primary school in Gas Place and improved sea defences are part of the plan. All these will create all-important supply to the trade, ministers have argued.
Among remaining businesses in the construction industry, it will surely be hoped that the House of Jersey will stand on firmer ground in future.
