Cashflow is the lifeblood of any business, and the construction sector is no exception. Developers and investors constantly wrestle with the challenges of ‘lumpy’ income and expenditure, especially on multi-year and complex developments. Ensuring the optimum balance between long-term financing and day-to-day working capital requirements is a key challenge.
Too little liquidity could be challenging for businesses – for their relationships and reputation in the industry – whilst too much feels like ‘paying on the double’ if money is sitting idle, earning no return, as financing costs increase.
Davy has been active in the construction sector over many years, working with business owners and helping raise equity and debt for the sector. 2023 was a standout year in terms of the demand from the construction sector for short-term liquidity solutions in particular. This is consistent with a broader trend across industries that saw Davy channelling over €2.5bn to secure returns of typically 3-4% on short-term funds. The construction sector accounted for approximately 9% of this total, or close to a quarter of a billion euros.
The catalyst for this surge in liquidity solutions was the dramatic change in market dynamics over the last 12-18 months. With 10 European Central Bank rate hikes since July 2022, and a 450 basis points increase in rates, the conversations within the construction sector have intensified.
Interestingly, these conversations underscore the surplus liquidity present, often surpassing immediate needs. This surplus, a residue of an ultra-prudent approach coupled with historically low interest rates, presents both challenges and opportunities to the construction landscape.
In the face of inflation, this excess liquidity not only risks a loss of value growth and future provision but also jeopardises the purchasing power of ‘idle’ money. Recognising this, Davy has been able to work with the sector to capture low-risk, short-term returns of 3-4% while maintaining a high level of liquidity – a vital element for a sector that thrives on seizing timely opportunities.
This proactive approach to managing liquidity reflects a unique point in the cycle, as interest rates are widely expected to reduce somewhat later in 2024. Though the construction sector has seen substantial investment in more attractive short-term returns, many companies may yet lose out on the opportunities present at this point in the cycle. Inaction is also a decision, and in this instance, it may be a costly one.
Other conversations with clients indicate an inclination towards some rebalancing of short-term funds into longer-term investments at this point in the cycle, while certain structuring opportunities to manage tax efficiently and extract surplus cash from the business remain hugely relevant and topical.
The right solution for you will depend on your specific situation together with the objectives of you and your business. Our personalised approach, wide investment platform, and team of experienced advisers and specialists will help you understand the best options available.
For more, visit www.davy.ie/potential
Authors
Brian Cox, Director, Davy Private Clients; and Tom Hamilton, Director, Davy Private Clients
Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.
Warning: The information in this article is not a recommendation or investment research. It does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. There is no guarantee that by putting a financial or investment plan in place, you will meet your objectives. You should speak to your advisor, in the context of your own personal circumstances, prior to making any financial or investment decision. J & E Davy Unlimited Company, trading as Davy and Davy Private Clients, is regulated by the Central Bank of Ireland. Davy is a Davy Group company and also a member of the Bank of Ireland Group.