Australian Construction & Real-Estate Development Giant Grocon Hits Wall, amid Industry Swoon that Started in Mid-2019

The Pandemic accelerated the mess.

By Nick Corbishley, for WOLF STREET:

Construction and real-estate development giant and funds management firm Grocon Group — which built some of Australia’s most iconic modern buildings, including three of its five tallest skyscrapers, as well as major projects in India and Abu Dhabi — declared insolvency on Friday, according to ABC News, and is putting several of its construction companies into administration (a form of bankruptcy), following years of legal wrangles, industrial disputes, and months of lockdown. The company, which is family owned, reportedly owes tens of millions of dollars to creditors, including hundreds of subcontractors.

Australia’s construction industry, which accounts for 13% of Australia’s GDP and one in ten jobs, has been in cyclical decline since mid-2019. The residential building segment has borne the brunt of this downturn — largely a result of banks being forced to rein in their reckless lending in the wake of the Royal Commission’s investigation into their dodgy mortgage lending practices. The disruptions from last year’s bushfires then added to it. By Q2 2020, according to the latest data from the Australian Bureau of Statistics, construction activity tumbled 12.5% from Q2 2019 and 20% from Q2 2018:

Grocon also runs a real estate investment and asset management platform in a joint venture with UBS. And it built smaller developments in Australia and recently won a AUD75 million contract to help clean up and rebuild after Victoria’s recent bushfires.

Like many construction companies, Grocon has been pummeled by the coronavirus outbreak and the strict lockdowns that ensued, bringing some projects to a standstill.

For many of the small businesses and subcontractors that do much of the hands-on work on big construction sites, the strains are already becoming unbearable. Late payment of invoices has long been a scourge in Australia, particularly in the construction industry, creating huge cash-flow problems for companies lower and lower down the value chain. While the government has pledged to take action, the problem, according to some reports, appears to be getting worse as more and companies fall behind with their bills.

The work-from-home and strict social distancing measures have put immense strain on office and apartment developers, many of whom have struggled to balance high-cost building commitments with slow sales and non-paying tenants.

But Grocon was already in deep trouble before the crisis had even begun. A major source of its woes was a joint venture with the Chinese developer Aqualand and shopping center group Scentre to build a shopping center, apartments and open space at Central Barangaroo, on Sydney’s waterfront. One of the development’s biggest selling points was the privileged views it would have overlooking the Sydney Opera House and Harbour.

The problem was that the New South Wales government had also promised the exact same views to another project on Barangaroo: the Crown’s hotel and casino development. If Grocon finished its project first, the apartment buildings would have blotted out those views. To prevent that from happening, the project’s developers, Crown Resorts and Landlease, sued the government of New South Wales to protect the “sight lines” from their developments. And they won.

For Grocon, it was a hammer blow. As a result of a confidential out-of-court settlement reached between Crown Resorts, Landlease and NSW, the Central Barangaroo development had to be significantly downsized. Yet Grocon had already shelled out a huge amount of money on the project. Facing serious cash-flow issues and mounting legal bills, the company ended up selling its stake in the project at a steep discount to its Chinese partner, Aqualand.

Besides the “challenges faced by the construction industry during the Covid-19 pandemic”, Grocon pins much of the blame for its current predicament on the Barangaroo debacle. CEO Daniel Grollo — grandson of the company’s founder — said on Friday: “It is unfortunate that INSW (Infrastructure for New South Wales) is forcing our hand to place the construction business into administration.”

The company is now suing INSW for AUD270 million in damages, on the grounds that INSW had sold the same view twice. It has also been locked in multi-million dollar legal fights with commercial property heavyweight Dexus in the Queensland courts, as a result of which it put two of its subsidiaries into administration a year ago, and APN Property in Victoria.

On top of that, it has a long history of disputes with the construction union CFMEU over occupational health and safety conditions. In 2012, blockades of Grocon sites became so intense that they ended up shutting down entire swathes of Melbourne’s Central Business District for months on end.

The concerns now are that the Grocon, one of Australia’s most emblematic builders, could be the tip of an iceberg, as more construction companies, large and small, become insolvent and follow its steps into bankruptcy, thereby exacerbating the industry’s problems. By Nick Corbishley, for WOLF STREET.

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  27 comments for “Australian Construction & Real-Estate Development Giant Grocon Hits Wall, amid Industry Swoon that Started in Mid-2019

  1. WES says:

    This is the bust that follows the boom.

    Their customers can no longer support them in the style they have become accustomed to.

  2. Sound of the Suburbs says:

    Why don’t you wreck your economy with a real estate boom and bust?
    World leaders can’t resist it.

    The wealth is there and then it’s gone – real estate.
    1990s – UK, US (S&L), Canada (Toronto), Scandinavia, Japan, Philippines, Thailand
    2000s – Iceland, Dubai, US (2008), Vietnam
    2010s – Ireland, Spain, Greece, India
    Get ready to put Australia, Canada, Norway, Sweden and Hong Kong on the list.

    This is the trouble with neoclassical economics; you get these ponzi schemes of inflated prices.
    When they collapse it feeds back into the financial system.
    Neoclassical economics still has its 1920’s problems.

    The last lamb to the slaughter, India
    https://www.wsj.com/articles/indias-ghost-towns-saddle-middle-class-with-debtand-broken-dreams-11579189678
    Now they need to recapitalize their banks.
    Their financial system is in a bad way, recovery from the coronavirus isn’t going to be easy.

    Come on in Australia, the water’s fine.

    • Les Francis says:

      There are plenty of ghost apartments in the inner city high rise apartments buildings. Land banking by Asian investors.
      Lots of empty apartments with no rental tenants or owners in them.
      Causing a real headache for apartment building managers.

      Then.
      There’s the flammable cladding issue. There are literally thousands of buildings in Australia which must be retro fitted with outside cladding.
      There are still pent up law suits ready to be filed to sort out who is ultimately responsible for this mess. It could be that the tax payer is going to be on the hook to rectify all these buildings.
      This is a time bomb. Overseas investors do not want to pay the thousands of dollars for rectification work. They’d rather sell up.

      • Mira says:

        “Lots of empty apartments with no paying tenants” ..
        Is the fault of the Federal & State governments .. we have negative gearing .. we have homelessness & a mass of empty dwellings .. houses .. town houses .. apartments .. units .. throughout Victoria & so .. I imagine throughout Australia .. in Victoria an owner of an empty dwelling pays $5,000 per every $500.000 of empty property value .. as a penalty or is it accommodation money to the government ??
        How do empty dwelling speak to me ??
        The Australian property market is profusely haemorrhaging money & the Australian coffers State & Federal are deprived of taxable monies .. this is not fraud but insanity on the part of the Australian political arena.

        • Lee says:

          The Australia property market is not “is profusely haemorrhaging money”.

          Total bs as usual.

          Where do these people and comments come from?

          The CBD and near CBD apartment markets are slowly falling in price at the same time other areas are soaring in price.

          Queensland in the Noosa and Sunshine Coast area is booming. Gold Coast is booming prices up 25% or more.

          In Victoria the Mornigton Peninsula area, Lorne, Bendigo, Ballarat and are booming. Some outer suburbs in Melbourne are seeing record prices as well.

          Lots of places have seen increase of 15 – 25% since the virus crisis started.

  3. Morty Mc Mort says:

    What if Bankruptcy is the End Game for Fraud.. Let’s see an over view of the cycle.. Inflate and make money all the way up..
    Then Off Load Debt through Bankruptcy..
    Insiders pick up the leavings at fire sale prices..
    Rinse and repeat.
    It would be interesting to trace the provenance of the power and money of the groups that pick up the ‘Fire Sale”
    So.. While the Average Sucker..”Tsk tskssss ” over the Bankruptcy..
    The “insiders” laugh” all the way to the Bank.. (Which they also happen to own or Control)…

    • coalman says:

      Also add to this the governments suspension of company law that allows businesses to continue to operate while insolvent. Next year the shite will really hit the fan!!

  4. Martha Careful says:

    As with many energy related bankruptcies, this is probably a strategic move to restructure and play with debts.

  5. Auld Kodjer says:

    If anyone should sue on the grounds of “sight lines”, it should be the good citizens of Sydney. THAT Crown Casino is the most phallic of phallus-like architecture that the modern world has ever seen.

    Perhaps an eternal reminder that all involved are a bag of dicks.

    • Javert, Chip says:

      Most times, a cigar is just a cigar.

      Kinda curious how some people can look at almost anything and see…a dick. Shades of Beavis & Butt-Head.

    • BuySome says:

      Have to rely on the photographer’s perspective, but I’d swear someone dropped an old Soviet sub nose down from the sky. They ought to top it off with some propellers.

    • Mira says:

      It actually looks like my humidifier .. I use bergamot essential oil ..

    • Frengineer says:

      Gotta agree with Auld on that one though…

  6. 2banana says:

    Hit the wall mid 2019…

    Well before Covid.

  7. gorbachev says:

    As Wolf has often written

    It does not matter until it does.

  8. sunny129 says:

    C 19 is slowly unravelling and cratering of all mega castles, mansions built on shifting sands created by ‘debt on debt with leverage’ for over a decade. Fed and CBers are in complicit in on going scadal and still denial of their part.
    Equity Mkts are next!

    For all the excesses, unaccounted and committed by Fed & Cbers, since ’09, ironically C 19 appears to act an equaliser!

    • Hans Brink NZ says:

      Isn’t it funny that covid becomes a convenient excuse for failures that have been developing in the past.

  9. MiTurn says:

    Bear with me as my question might make apparent my ignorance, but might these construction companies be liable for buyout by foreign buyers (by which I mean, of course, Chinese)?

    That would be rich…

  10. BruceInNZ says:

    First comment from me. This is getting close to home (Auckland New Zealand). The luxury apartment construction sector seems to be booming here. All those in the pipeline were of course planned and financed before COVID-19 so the developers can’t stop, even if they want to. We have record low mortgage rates here too, but with the impending recession there should be a limited demand for multi-million dollar apartments. We shall see.

    • topcat says:

      No worries mate – lots of US millionaires and billionaires want to escape to NZ so there should be no problem with finance.

  11. Mira says:

    Thank you !!

  12. Michael Francis says:

    Currently, if you’re trading and insolvent in Australia that’s OK.
    Bankruptcy laws that allow you to trade whilst insolvent end 31 December 2020.

    https://www.afsa.gov.au/about-us/newsroom/changes-bankruptcy-law-extended-31-december-2020

  13. Yort says:

    If you look only at GDP, Australia has had zero recession since 1991. Yet if you look at GDP per capita, Australia has had three recessions since 1991. Large population growth is said to explain this phenomenon. Question I have is how does the population keep growing so fast when the younger generations can not afford a simple starter home (due to zero price reducing deflationary recessions)? Do young people live in vans, in their parents basements, etc? Who is driving the population growth, is it wealthy foreigners driven by central bank induced wealth inequality? Is Australia becoming the next “New Zealand”? As Japan is the world’s experiment on decades of ZIRP policy, Australia seems to be the world’s experiment on the never ending housing boom. Yet better than the American experiment of how quickly the central banks can create inequality to the point there the top 5% own 100% of everything. Historicans will look back and call the 1970s-2030s the “Financial Full-Retard Era”…soon to be followed with the “Great Yada Yada Reset Era”, or maybe “Wow it’s hot on Earth Era”(perhaps pulling future consumption forward by decades was not the smartest idea ever)? Anyone else see the irony on how a housing construction boom, money printing boom, debt based consumption boom, energy usage boom, etc, speeds up the release of carbon into the atmosphere. Every continent has its own boom scheme to pull forward carbon creation from the future into the present, because we are sure someday we will create energy using machines that create carbon to remove carbon. How did a carbon lifeform ever get this far…HA Perhaps a silicon based intelligence will do better someday…

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