Developers Need to Take Appropriate Measures to Prepare for Downturn: EY

The Banking Royal Commission has sent tremors through Australia’s housing sector, and combined with a 67 per cent drop in offshore buyers, the nation's slowdown has several serious implications for developers, builders and financiers.

Australia’s construction industry employs 1.18 million people – about 9.4 per cent of the total workforce – a sizeable portion that would have implications on unemployment rates should the nation’s housing market stall, according to Ernst and Young research.

“When household wealth is in decline, consumers reign in their spending,” EY Australia’s real estate partner Richard Bowman.

"The regulatory clamp-down has created uncertainty around access to credit, which has a real economic impact."

In the latest NAB Commercial Property Index survey, the biggest risk facing commercial developers was the availability of debt capital for development finance to start new projects.

Bowman says the emergence of non-bank lenders are filling the void left by tighter lending conditions from the major banks.

“The greater role of non-bank lenders have improved competition, but this has happened by accident rather than design. There is now a significant opportunity developing in the market to replace this source of capital,” Bowman said.

Development health check?

The report warns of falling prices combined with tightening lending standards for developers, builders and lenders, noting a slowdown in project and land sales might affect the timing of cash flows, leaving developers vulnerable in the medium-to-long term.

Bowman said it’s critical the property sector adopt a proactive approach to reducing risk, but also taking advantage of opportunities.

“At this stage in the property cycle, developers need to make sure their projects are the right size for the current market. It’s a good time to re-run their feasibilities, to ensure they suit current conditions.

“Developers may need to diversify capital sources and consider options like build-to-rent. It’s also a good time to manage your cash flows and check on the solvency of your contractors.”

A recent real estate development trends report, released by real estate software provider Altus Group, revealed escalating costs and construction skills shortages topped developer concerns.

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