The Tribune

• BCA chief: Abandoned clients 'reaching out'

• 'Significant' complaints rise over 12-18 months

• 'Smart contractors': 30-40% not starting jobs

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian Contractors Association's (BCA) president yesterday revealed there has been "an horrendous" increase in complaints over the past 12-18 months about contractors abandoning clients.

Leonard Sands told Tribune Business that some in the industry are "walking away" from residential projects where the financing is either inadequate or not properly structured for them to earn the profit margin they desire.

While not condoning such behaviour, he quickly pointed out that there is little to nothing the BCA and its members can do about such complaints due to the continued failure to implement the Construction Contractors Act and the potential remedies it provides for shoddy workmanship and other harmful behaviours that impact consumers.

Mr Sands told this newspaper that many homeowners are failing to budget for the significant increase in materials and other construction-related costs over the past 10-20 years and this, combined with an inability to qualify for the true mortgage financing required, often leaves persons unable to fulfill their housing desires.

He added that between 30-40 percent of "smart contractors", spotting that potential clients have inadequate financing upfront, are walking away from such contracts because they do not want to "start something they know they cannot complete" and either suffer a financial loss or "tarnish their reputation" by abandoning the project.

"A lot of times you find contractors walking away from agreements saying 'I can't engage in this contract; I can't start something I can't complete'," Mr Sands said. "That's the story we are finding more often than not: That contractors are not going to take on risk-laden projects where financing is not properly organised to complete this structure.

"At least 30-40 percent are walking away. Projects are just not feasible. They just look at it and say: 'We're going to pass on this'. Smart contractors are not going to put their company in that position where they take on a loss just to do work. At the end of the day their reputation will be tarnished if they just move on to the next project without finishing.

"We've seen an increase in persons not completing projects. They're [clients] immediately reaching out to the BCA. That's picked up significantly over the last 12-18 months. It's horrendous," the BCA president continued.

"It's back to what I am saying. Persons are taking on these projects that are not properly financed, finding themselves in a difficult situation, and walking away. The clients then come to the BCA looking for a remedy that we unfortunately cannot provide." He added that, without regulation, construction will continue to endure "the hodge podge challenging situation that exists".

Speaking after the Central Bank's 2023 second half lending conditions survey revealed that new mortgage loan applications fell by 14.6 percent year-over-year, Mr Sands said: "It's not really concerning. It's what we've predicted and it will continue to decline."

Mortgage-financed home and residential construction has typically been the so-called 'bread and butter' for Bahamian contractors and sub-contractors, but the BCA president said his assessment is based on the "diminishing capacity" of Bahamians to qualify for such loans as well as the challenges many have in meeting the requirements set by the commercial banks.

"Those two produce the net outcome of a reduced number of persons qualifying for mortgages," Mr Sands said, while citing a third factor as the lack of awareness among many successful mortgage applicants over how much home their loan will allow them to build.

Homeowners, he argued, had failed to account for the increase in construction costs and were still budgeting using figures from 10-20 years ago. "They are not realistic," Mr Sands said. "We find they go to the bank, qualify for $200,000 and want a 4,000 square home. It's not realistic, it's not practical and is largely based on the lack of education of the public.

"That's the long and short of it. It's unrealistic, it's pie in the sky. One of the factors that persons don't consider is that construction companies are businesses. As the business environment becomes more and more regulated, the cost in goods and services has to be represented in the work we do.

"The biggest challenge we find is the amount of persons able to qualify for the homes they require. They don't appreciate how much they have to spend to build a home. Persons who may be wanting a 3,500 square foot home may not recognise the cost per square foot and have to scale back or come up. It's simple economics."

Besides 10 percent VAT, which did not exist ten years ago, Mr Sands said contractors and clients also have to contend with relentless inflation and other government tax and fee increases. Contractors typically seek a gross profit margin of 10 percent.

While the improvement in the 2023 second half mortgage loan approvals rate was "encouraging", the BCA chief argued that bank lending in The Bahamas needs to "evolve" into how it functions in the US and Canada where it is treated as a "line of credit" as opposed to a residential mortgage.

The latter treatment, Mr Sands argued, "limits the ability to access financing to complete construction". He added: "Banks need to get out of construction. They tend to manage construction and how they dispense the funds," he added. "That creates another level of hardship for homeowner and contractor relationships. That has continued to produce the reduced numbers we will see for the considerable future."

The latest Central Bank lending conditions survey revealed continued sluggishness when it came to mortgage lending. Applications were down when compared to both the 2023 first half and final six months of 2022, although the approval rate for these improved by almost 15 percentage points to 52.9 percent.

Mortgage lending continues to be relatively weaker than its consumer and commercial lending counterparts. Total mortgage applications for the 2023 second half, numbering 785, were 14.4 percent down on the 917 received during the same period in 2022, and also some 28.9 percent below the 1,104 submitted during the 2023 first half.

However, the 2023 second half applications appear to have been of better quality. Some 415, or 52.9 percent, of those mortgage loan submissions were approved, making for a year-over-year improvement of 19.3 percent in the number that received the go-ahead and a 14.9 percentage point rise in the approval rate.

Similarly, compared to the 2023 first half, the number of approved mortgages over the final six months of 2023 jumped by 16.6 percent while there was a 20.6 percentage point improvement in the approval rate.

Residential mortgage applications contracted by 14.6 percent year-on-year, a slowdown from the 21.6 percent decline in December 2022. Reductions were recorded for all three major categories: New construction (27.3 percent), existing dwellings (12.7 percent) and rehabilitations and additions (8.5 percent)," the Central Bank survey said.

"Mortgage applications retained the lowest approval rate of all credit categories at 52.9 percent over the last half of 2023. The approval rate for renovation projects was 14.5 percent, while new construction approvals were 69.1 percent. Meanwhile, 92.5 percent of requested borrowings against existing dwellings were approved."