[+] Risk and Reward: Construction Crunch Keeps Developers Up at Night

“I’m often asked what keeps me up at night, and it’s the contractor risk and what’s going on with building prices. The reality is there are a lot of feasibilities that aren’t stacking up.” Speaking at The Urban Developer and MaxCap roundtable in Sydney recently, MaxCap chief investment officer Bill McWilliams succinctly expresses the concern etched across the furrowed brows of every developer sitting down for lunch. Nothing is off the table as some of New South Wales’ biggest developers across industrial, greenfield, office and residential talk shop and look for the blue skies on the horizon. ▲ MaxCap chief investment officer says construction contractor risk is the main concern in the debt funding space. But construction risk continues to dominate conversation. Integrated builder-developer Growthbuilt co-founder Colin Rahim is acutely aware of the challenges in the landscape. “I’ve been told it’s not going to rain for a while,” Rahim says as the room erupts in laughter. It’s gallows humour for an industry that has been pushed to its limits with a pandemic, unabated price escalations, labour shortages and more than 200 rain days in 2022. “We haven’t been immune to everything that’s happened over the past few years with Covid, price escalations, La Niña and what’s happening with planning. It’s taking so much longer for projects to get started, and that’s affecting pricing, ” Rahim says. “Three years ago formwork for example was $80 a square metre, we’re paying up to $140 to $160 per square metre today. ▲ Growthbuilt co-founder Colin Rahim says the time involved in getting projects out of the ground is adding cost to the bottom line. Rahim says builders are now more like “risk merchants” and are having to manage consultants and subcontractors harder in order to meet time frames. He says the Design and Building Practitioner Act, which was adopted in 2021 has added more time and costs into projects, impacting feasibility. “In the Class 2 space, builders are increasingly choosing not to participate. Contracts haven’t changed to reflect the additional regulation, which leaves contractors taking on a lot of the risk. We have made adjustments to our strategy to ensure we can weather the storm and that’s been very effective for us, but at a certain point that level of risk becomes non commercial.” he says. “There’s no doubt the DBP Act will improve quality throughout the industry, which was really needed, at Growthbuilt we have always aimed for, and achieved, high quality process and product. However, it has made the whole design process that we work through with our consultants so much longer and that adds enormous pressure to project timelines.” ▲ Abadeen Group managing director Justin Brown says the luxury end of the residential market has remained robust. Abadeen Group Managing Director Justin Brown agrees planning constraints and regulatory requirements are significantly adding to the costs and viability of projects. “I think the site market at the moment is a function of time versus price,” Brown says. “It now takes 2.5 years to get a project to construction versus 4 years ago being 12 to 18 months. “We are starting to see green shoots within the market, premium projects such as One Circular Quay in Sydney, Woollahra Collection in Woollahra, Helm’s new development in Mosman, are showing that the discerning Boomer market that isn’t reliant on debt is robust.” Legacy Property chief executive Matthew Hyder says the greenfield sector is no different when it comes to planning difficulties. “Rezonings have only gotten more challenging in recent years, particularly the amount of time required to be successful,” Hyder says. “We are 100 per cent focused on working with the best consultants, and it has still taken more than five years each to rezone sites in North Sydney, Penrith and Northern Wollongong. But it’s worth it because once you do, you have a tremendously valuable piece of land. You do get paid for it, but it’s hard, risky work. ▲ Legacy Property chief executive Matthew Hyder says greenfield has also been impacted by planning constraints. “In Greater Sydney, because the planning system is so challenging, I like the risk-reward trade. The riskiest part of development here is in planning when you have the least amount of money out the door.” MaxCap’s Bill McWilliams says he is seeing more tension between developers and builders on cost escalation in the current landscape. “I’m seeing builders locked into a fixed price contract maybe 18 months ago, and the reality is they cannot build it for what that fixed price is. So, in some instances, they will ask for more money, and good developers are acknowledging that,” McWilliams says. “The worst thing that can happen on any project is the builder falls over. So I think there’s a willingness to make that work, albeit developers profit margins have also been squeezed by increased funding costs, so the solution is not always straightforward.” McWilliams says due diligence with contractors has stepped up to mitigate risk and builders and contractors were more aware of that and providing more financial information. He is forecasting more development sites will come to market in the next 12 months but most developers would look to blue skies and hold their site through the current cycle. ▲ MaxCap head of research Bruce Wan brought data insights to the conversation. MaxCap head of research Bruce Wan says the inflationary shock of fuel price rises materially impacted the cost of building materials, and as it unwinds over the next year it will flow back through the market. “We always see fuel prices tick up first, steel tends to follow and your other building components rise during an inflation shock. The same sort of thing applies as we pull back from this inflationary environment,” Wan says. “We have already seen fuel prices starting to fall 33 per cent from its peak last year, and it’s already found its way to steel prices. The rest of that transmission mechanism will take about a year to flow through. The unwind will take a year or two. “The good news is we’ve probably seen the peak. The bad news is discounting is going to work its way back into builder margins.” The Urban Developer and MaxCap Group hosted the roundtable in Sydney this month to tackle the issues impacting development in New South Wales and get a temperature check on the health of the sector. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Risk and Reward: Construction Crunch Keeps Developers Up at Night

Want to read more?

It Takes More Than a Room: PBSA Evolves to Meet Student Demands

Soheil Abedian: What’s Driven the Man Who’s Transformed a City

Robots Not a Miracle Cure for Housing Productivity Crisis

Where 600 Wealthy Families Are Putting Their Millions

Brique Thrives in Cauldron of SE Queensland Development

[+] Risk and Reward: Construction Crunch Keeps Developers Up at Night

Want to read more?

It Takes More Than a Room: PBSA Evolves to Meet Student Demands

Soheil Abedian: What’s Driven the Man Who’s Transformed a City

Robots Not a Miracle Cure for Housing Productivity Crisis

Where 600 Wealthy Families Are Putting Their Millions

Brique Thrives in Cauldron of SE Queensland Development

Star Back to Square One After Queens Wharf Deal Collapses

Invest Gold Coast Launches Hunt for $500m Arena Partner

ISPT Files Plans for Dandenong Mega-Logistics Project

Star Back to Square One After Queens Wharf Deal Collapses

Invest Gold Coast Launches Hunt for $500m Arena Partner

ISPT Files Plans for Dandenong Mega-Logistics Project

It Takes More Than a Room: PBSA Evolves to Meet Student Demands