[+] Lockdowns Shift Medium-Term Outlook for Property

Construction in NSW partially re-opened on July 31 in all but five local government areas as Covid-19 delta strain case numbers proliferate.

But developers, project managers and builders are still suffering sleepless nights working through medium-term challenges caused by the lockdowns.

New research by UBS’s real estate investment team indicates the investment bank expects the net property income for landlords that own retail and office property assets to be negatively affected by recent and current lockdowns. The recovery of income from ancillary assets such as car parks will also be pushed out.

Consequently, the UBS property team has changed its buy-sell recommendations for a number of listed property businesses.

Bunnings’ owners, the BWP Trust, and Centuria Office have been downgraded from neutral to sell.

Dexus was downgraded from buy to neutral. Property group GPT withdrew market guidance due to the uncertainty about when the Sydney lockdown would end.

Nevertheless, UBS analyst Tom Bodor says there’s an expectation construction will recover quickly once Covid restrictions end.

“The property market has been relatively resilient,” Bodor says.

“But the recovery comes back to the question of the length of time we’re locked down and the broader impacts of shutdowns to jobs and the economy, which is still an open question.

“On a more positive note, some of the groups we cover are positioning to launch projects into a re-opening.”

▲ Mirvac is currently looking to develop a cluster of apartment buildings on the site the Nine Network sold to Lotus Capital and Hong Kong-based Euro Properties five years ago.

An example is Mirvac’s Willoughby apartment project, due to launch in July, which has been pushed back to August and could be delayed again.

“There will also be delays to sales’ launches. This won’t impact the big developers. But some of the small ones might get caught out because they rely on pre-sales for finance,” Bodor says.

M3property director James Ruben says while property investor and developer confidence was bouncing back from the earlier impacts of Covid before the most recent lockdowns, this had reversed.

“It is too early to understand the full impact of current lockdowns,” Ruben says.

“But anecdotal evidence suggests developers and investors in most sectors are nervous with so much uncertainty as to the length and severity of lockdowns.”

Ruben says it would be months before the full impact of current lockdowns was truly understood.

“The knock-on effect of delays to the construction program is difficult to gauge at this stage.

“This is especially the case with long lead time capital items such as lifts and air conditioning systems that need to be ordered months in advance.

“They require a particular program of onsite works to be maintained to be ready for their delivery, for instance, the lift shaft needs to be constructed before the lift is delivered onsite.”

Developers react to lockdowns

▲ Aland CEO George Tadrosse has spoken out against "disproportionate" NSW lockdowns. Pictured: The 366-apartment Paramount on Parkes.

St Trinity Property Group managing director Nicholas El-Khoury agrees the pause to construction activity in some areas of Sydney will have a knock-on effect on projects down the line.

“The delays will be longer than the lockdown periods, due to supply chain impacts that will cascade through the construction sector and result in slow restarts,” El-Khoury says.

“A two-month lockdown means a three-month delay.

“Potential labour shortages are also an issue, given the government areas LGAs in lockdown are an important pool of labour and materials for the construction sector.”

It’s a sentiment with which Australian Constructors Association chief executive Jon Davies agrees.

“With eight local government areas in lockdown approximately half the workforce on any given project will be missing and many activities will be either stopped completely or significantly disrupted,” Davies said in a statement.

Prominent western Sydney developer Aland has $925 million under construction—about 1450 residential dwellings—across five major construction sites.

Aland chief executive George Tadrosse called the restrictions “disproportionate”, and criticised the lack of industry consultation.

“The premier’s decision will mean that thousands of tradespeople, project managers and suppliers to our major construction sites across Western Sydney will not be able to return to work, creating ongoing uncertainty for them, and their households,” Tadrosse says.

“We need the government to provide clear answers [and] a clear pathway for families and businesses to support economic stability and eventual recovery through these challenging times.”

Construction halt flows through to pre-sales

▲ The NSW government has been under increasing pressure from the construction sector to reopen worksites.

Aside from construction delays, construction lockdowns have the potential to impact the financial chain.

“Banks’ credit and construction risk committees are adjusting lending facilities to allow for extended delays in pay down periods for their loan facilities,” El-Khoury says.

“They are also closely scrutinising sunset dates in off-the-plan contracts to mitigate the risks of defaults. Banks are taking up to 30 days to approve finance applications, with refinance applications taking even longer.”

But the main impact on new project launches will be achieving pre-sales milestones.

“The main reason for this is restrictions to open home appointments reducing sales rates,” El-Khoury says.

Due to the delays, covenants in construction finance arrangements may not be met and the pursuant effect to parallel contractual obligations cannot yet be measured.

For example, a commercial lease agreement that requires fit out to be completed and occupation by a particular date may find these clauses cannot be met. Says Ruben: “The impact on developers who will now miss sunset dates in sale contracts is yet to be understood.”

As for the future, the property and construction sector now wants a clearly articulated way out of the pandemic so these sectors can plan for the future with confidence.

“While we continue to focus on the immediate challenges, we will need a strong roadmap implemented to exit from the lockdown successfully,” acting NSW executive director of the Property Council of Australia, Lauren Conceicao said in a statement.

“We know that vaccination is key to getting the state’s economy back up and running, with vaccination of our workers made a priority.”

Expect further updates about construction activity recommencing in the five worst-affected local government areas as we get closer to the supposed end of the NSW lockdown, scheduled for the end of August.

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Article originally posted at: https://www.theurbandeveloper.com/articles/lockdown-construction-sites-property-development