Seizing the construction momentum

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Despite a global pandemic, ongoing lockdowns and a dramatic dip in immigration numbers, Australia’s housing market boomed through most of 2020 and 2021. With supply tipped as the only constraint on this market, is now the right time for developers to make their move – and meet this surge in demand?

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CoreLogic estimates the total value of residential real estate in Australia reached $9.1 trillion in October 2021 – adding $1 trillion in just six months. That’s almost 30% more than the value of superannuation, the ASX and commercial real estate combined.

Developers are stepping up to the challenge of increasing housing supply, with crane numbers lifting 4% across Australia in October as easing pandemic restrictions allowed more onsite work. In September, national unit approvals were 47% higher than the previous year – however, detached house build approvals had dropped back to pre-COVID levels as the effects of HomeBuilder grants wore off.

It’s not surprising search and enquire indexes for greenfield land sales remain high. But is now the right time to acquire sites?

The opportunity right now is for developers who have been holding properties or land for a while, and who are committed to quality builds. Developers need their lenders to be able to turn things around very quickly in this market.”

George Khoury, Managing Director  – Construction & Development Finance

He says it’s increasingly difficult for developers to align time and money at the moment. “Time delays, such as waiting for bank finance, can make or break the profitability of a build,” he explains. “Developers are probably more likely to get reliable pre-sales and end sales in the next 12 to 24 months, than in three years’ time. So if you have to wait months for capital, and you’re paying land tax in that time, it can become a problem.”

The RBA has already signalled it will look to raise interest rates in 2023, and APRA’s most recent regulation changes are likely to curb demand amongst first home buyers and highly leveraged investors.

“I think the recent growth has been too rapid and we will see a correction in this next period” says George. Core Logic analysis also suggests affordability constraints will see housing price growth slow in 2022. However, one silver lining may be the return of foreign buyers, who are expected to increased their market share over the next year as international borders reopen.

The rising cost of construction

Ongoing unpredictability of construction costs are creating additional pressure on developers. Shortages of materials, along with a lack of unskilled labour, are causing delays along with potential building cost blow-outs.

With reports of up to six month delays on some timber supplies, it may be necessary to re-engineer builds. “All these additional costs are absorbed by the developer,” says George.

“For example, we have been working with a townhouse developer who has had to change to a steel structure, and this variation exhausted his original contingency budget.” When the Assetline Capital team worked through the details, their calculations showed it was worth the extra month of interest to avoid the project delay.

“We can also discuss an extra contingency if it’s needed,” George explains.“ In these situations, it’s essential to work through the numbers with your lender and be transparent about the impact on costs and timeframes.”

To avoid unexpected costs or delays, it’s also never been more important for developers to understand their regulatory obligations. For example, the ongoing changes to the NSW Strata Building Bond & Inspections Scheme (SBBIS). “Our team has all undergone training in these processes, and can help developers understand how to manage the requirements,” says George.

More than money

Having a lender onside who can help you navigate this fast-paced market can be a major advantage for developers. “Assetline Capital is set up to respond to a scenario within eight hours, that’s our approach. And while not every scenario will meet our criteria, we can help borrowers work through complex scenarios to develop a realistic solution,” says George.

With an in-house project team comprising quantity surveying, planning, valuation and development expertise, Assetline Capital’s construction lending division can provide value beyond the necessary capital. “It’s not so unusual these days to work with a non-bank lender, because borrowers see that it’s about getting things done in this market – rather than ticking boxes.”

If you have a construction deal you’d like to fast-track to make the most of the market opportunities, please get in touch.

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