Increased credit risk for smaller builders serving retail, hotel and restaurant segments
![Japan construction credit risk industry trends | Atradius](https://group.atradius.com/image/japan-construction-credit-risk-assessment-chart.png)
![Japan construction output industry trends | Atradius](https://group.atradius.com/image/japan-construction-output-chart.png)
After contracting 4.9% in 2020, Japanese construction output is forecast to rebound by about 4% annually in 2021 and in 2022. The recovery is mainly driven by major public sector investments in infrastructure projects. While demand for residential and non-residential construction is currently also robust, investments in private construction are still susceptible to downside risks, as the pandemic is not yet under control.
The positive effect of rebounding construction demand and activity is impaired by higher prices for commodities (mainly for lumber) and for shipments. Another issue is the shortage of a skilled workforce due to the ageing population, which has driven up labour costs. Higher input prices have put the margins of both larger construction companies and of subcontractors under pressure, with further decreases expected in the coming months. Mainly smaller and medium-sized construction businesses suffer from the surge in construction materials and labour prices. Many of them are highly leveraged, and are forced to increase their gearing even further in order to pay the higher material and wage rates needed to continue their building activities/projects.
Payments in the construction industry take about 120 - 150 days on average. While non-payment notifications increased in H2 of 2020 and Q1 of 2021, the situation has improved since March this year. Construction insolvencies have, however, increased in H1 of 2021, and are expected to increase further in the coming months.
Mainly affected by rising business failures are smaller players, in particular those dependent on building projects in the retail and hotel/restaurant sectors. In both sectors demand for construction remains subdued due the pandemic, while at the same time builders have to bear higher construction material and labour costs, as well as additional expenses for sanitary measures. That said, due to the ongoing robust demand in the coming months our sector assessment remains “Fair” for the time being.
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