Is Now the Right Time to Build?

Did you know that 15 major builders across Australia have gone into receivership in 2022?

Rising interest rates, disrupted supply changes, labour shortages, and increasing cost of commercial construction materials and labour have all placed unprecedented pressure on Australia’s property development sector. With six consecutive rate rises, the RBA’s official cash rate (OCR) rocketed from 0.10% to 2.60%, with further increases imminent as global economies look to fight inflation.

So how would a property developer know if they should hold their cards or push through to acquiring a construction loan?

FACTORS TO CONSIDER:

If a property developer carried out their feasibility study in Q3, Q4 2021 or even Q1 2022, consider it obsolete. As macro and microeconomic environment conditions have changed, they will need to recalculate their figures based on Q3 2022 and beyond conditions.

Feasibility based on 2022 economic tailwinds

Any new feasibility study should contemplate:

Reduced project revenuesIncreased commercial construction costs
Increased development and documentation costs. This is particularly relevant with the D&BP Act for Class 2 Buildings in NSW
Protracted construction periods (supply and labour shortages)
Increased funding and interest costs

What is the developers' proven track record in good times and in bad?

Performance is captured in the sponsors’ ability to complete their project on time and on budget. During periods of elevated risk, private lenders and banks will look at the developer’s ability to navigate during downturns and turbulent market conditions.

If the delivery team has demonstrated management experience in a recessionary or comparable complex environment, this is a hallmark of sound financial discipline and risk management.

What is the project’s marketability?

Developers should anchor their decisions on what will best serve their market and should not be predisposed to 2021 conditions, prices and liquidity.

The euphoria of FOMO has now come to an end, which means more choice for buyers in a receding market. Commercial construction projects are no longer selling themselves so success is now contingent on the developer demonstrating key project USPs.

Does the sponsor have adequate liquidity and capitalisation?

Reduced values, combined with lower leverage funding will result in developers required to contribute additional equity.

Furthermore, increased construction costs are resulting in margins being eroded, thus compromising fixed price contracts. This impacts both builders and developers, with either party having to provide additional liquidity. This is where the strength of a builder or developer’s balance sheet is paramount.

We understand the nuances of property development in the current environment.

If you need more insights about the right time to build, the viability and likelihood of funding a project, don’t hesitate to reach out to us today for a confidential discussion.