As South African construction Industry representative negotiate for resumption of projects across the country, there has been the question of “what next”, as layoffs and revenue losses continue due to the impact of the Covid19 Pandemic.
The impacts of the virus on the global construction business might prove to be detrimental. Contractors are at the forefront as they are service and product providers at the same time. Covid-19 affects both material and labour, key cost components of construction projects, and by doing so, challenge on-going project delivery, companies’ liquidity and whole business models.
All-of-society quarantines have resulted in a full stall of different sized construction sites and partially non-operational business to effectively apply social distance in a unified effort to limit a further outbreak. In addition to physical wellness, contractors are considering mental health care following reports on anxiety among workers. Contractors currently prepare the introduction of short-term working conditions to circumvent dismissals.
Many countries such as China and Italy have slowed or shut down their production sectors leading to forecasts of a sharp decrease in production of a wide range of materials ranging from steel to cement. Contractors that rely on Chinese-made goods and materials are likely to be faced with higher costs and, caused by shortages of construction material, slower project completion. This, in turn, implies higher prices and more projects cancelled. Limited public transportation and travel bans slow down project delivery as sub-contractors are not able to perform or provide required material. While works are stalled, equipment rental companies are starting to face problems with equipment left on inoperative sites.
Contractors may be faced with dramatic turbulences alongside their supply chains. With smaller companies facing the real risk of bankruptcy, major contractors will be forced in legal disputes over non-deliverance and “empty” spending. Quarantine periods across the world vary in length. The uptake of cross-boarder projects will require a higher administrative burden. Contractors should be mindful to claim possible time and financial coverage entitlement as early as possible. Borrowers may make back-to-back force majeure claims under concession agreements to avoid breaching milestone completion dates and incurring liability for liquidated damages.
Many countries have introduced financial support instruments of unprecedented scope to cover losses of revenue, but on-going expenses, the lack of income, a prospect of client insolvency or possible inabilities to claim “force majeure” will put a huge financial burden on the sector. As production output is expected to decrease by 20-40%, investment in public infrastructure is likely to fall off the table. Such development has the potential to hit hard on contractors specialised in non-viable public infrastructure. Governments are implementing short term export credit insurances to cover losses in exports of goods and services.
According to BDO SA, COVID-19 has hit countries extremely hard, and many of the aftershocks may only be felt over the next 6 – 12 months. With businesses in South Africa scrambling to institute remote working for their staff where they can, or shutting down entirely for the lockdown period, commentators are forecasting significantly lower growth, a recession or even a depression.
One sector that may see longer-term effects of the devastating coronavirus is real estate and construction. Already, there are immediate sectoral impacts, such as on leisure, tourism and retail, which are being hit hard and fast.
The office sector is one where we expect the effects to show a lag, as companies that have suddenly been forced to work remotely start to take stock of the medium- to longer term impacts of this on the office space they rent or own. This may push companies to ask themselves whether they need such a large building when the COVID-19 lockdown proved that staff can in fact work remotely. Although many businesses are locked into long-term leases, which may be difficult to re-negotiate in the short to medium term, the question of office downsizing will likely be considered when leases are up for renewal.
Over the next few months, companies are likely to negotiate for deferred rental payments or payment holidays, as many businesses may experience pressure on cash flow, and landlords may need to be creative on how this is managed.
Finally, we believe this pandemic will force businesses to think carefully about their workforces and space requirements. Companies may consider that flexibility and agility is more important than one workforce being together in the same space. Tenants may want to be able to exit a lease far more nimbly than they are able to currently.
Source: ICEF, BDO
