Securing finance is a critical tool to improve cashflow and keep projects moving. Though, the current economic climate, coupled with low consumer confidence and tighter lending conditions, is making it harder for developers to secure finance.
The Australian construction industry is in a state of decline. The number of building companies that entered administration during the first nine months of 2022-23 has risen by 84%1 compared to the previous year. What's more, the value of off-the-plan apartment sales fell by 30% in the first quarter of 20232.
According to Andrew Blundell, principal of restructuring and turnaround firm, Cathro & Partners Pty Ltd, there is a correction in the industry overall. “There is a structural shift in the way project feasibility is being undertaken, and a resetting of the risk appetite of financiers, builders and developers in relation to completing projects.”
“Historically, the risk has been borne predominately by builders. Shrinking margins, supply chain issues, inflation, interest rates and fixed price contracting have all combined to force a change in this approach,” says Blundell.
Factors driving increased insolvencies
The rising cost of materials is a key factor driving the increase in insolvencies. Research from KPMG revealed a 30% increase in residential construction costs over the past two years, prompting developers to shelve almost 16,400 dwellings in NSW alone. These increases, coupled with slow-to-construction developments have made it harder for builders to make a profit on their projects.
Supply chain disruptions are also a major problem. The COVID-19 pandemic has disrupted the global supply chain, making it difficult for builders to get the materials they need. This has led to delays in projects, which in turn costs builders money.
Compounding the issue further, the shortage of skilled workers is another factor contributing to the increase in insolvencies. The construction industry is facing a skills shortage, and builders are finding it difficult to secure the workers they need to complete projects. This gives way to delays and overrun costs, which can put builders out of business.
The increase in building insolvencies is a worrying trend for the Australian construction industry. It is therefore crucial for builders to be aware of the risks and to take necessary steps to mitigate them.
Low consumer confidence and off-the-plan sales
According to Matthew Royal, Co-Founder & Director of DFP, “the number one credit risk that both bank and non-bank construction loan lenders are focusing on in recent times is builder solvency and capacity, especially in the residential sector.”
In addition to the myriad of challenges builders face, there is also a lack of consumer confidence in the off-the-plan apartment market. According to a recent survey by the Urban Development Institute of Australia, only 15% of people are now considering buying an off-the-plan apartment, down from 30% in the same period last year.
- The value of off-the-plan apartment sales in Australia fell by 30% in the first quarter of 2023, compared to the same period last year2.
- The number of off-the-plan apartments sold in Australia fell by 25% in the first quarter of 2023, compared to the same period last year3.
- The average price of an off-the-plan apartment in Australia fell by 5% in the first quarter of 2023, compared to the same period last year4.
- The number of off-the-plan apartments under construction in Australia fell by 15% in the first quarter of 2023, compared to the same period last year5.
Several factors have contributed to the decline in consumer confidence, including rising interest rates, the cost of living, and concerns about the future of the property market.
Rising interest rates are making it more expensive to borrow money, which is putting a strain on budgets. Paired with the rising cost of living, people are being left with less disposable income and diminishing borrowing capacities.
Making matters worse there are concerns about the future of the property market. Some experts believe that the market is overvalued and prices are due to fall6. As a result, people are reluctant to commit to buying an off-the-plan apartment since they are worried about losing money if prices fall.
The decline in consumer confidence is having a profound impact on the construction industry. Developers are finding it harder than ever to sell off-the-plan apartments, which, in turn, is leading to delays and cancellations of projects.
The industry is calling on the government to take action to boost consumer confidence. This might include measures such as providing tax breaks for first-home buyers or offering guarantees on the completion of projects.
The government has recognised the challenges faced by the construction industry and that it is working on a plan to address them.
In the meantime, developers are urging potential buyers not to lose faith in the market. They say that the off-the-plan market still offers a number of advantages, such as the ability to lock in a price and the chance to choose a custom design.
No-presales finance is the answer for off-the-plan developments
With the growing number of building company insolvencies, today’s buyers need assurance that they their developer has a good track record and can deliver on their promise.
To help with the insolvency risk, Andrew Blundell of Cathro & Partners Pty Ltd says, “it’s critical for businesses operating in this space to be on top of their ongoing cash requirements. Ensuring all stakeholders accounting records are up to date with the forward cash flow required to complete builds is always critical, particularly so in this environment.”
He further adds, “ensuring that builders engaged in a project are in a position to weather the industry upheaval is also critical to successfully get it off the ground and through to completion.”
Securing finance is a critical tool to improve cashflow and keep projects moving. Though, the current economic climate, coupled with low consumer confidence and tighter lending conditions, is making it harder for developers to secure finance. Many traditional lenders require strict ‘presales’ conditions prior to agreeing finance. This is proving increasingly difficult for developers to obtain due to the level of confidence in the market.
“A lack of consumer confidence has led to a significant increase in the level of enquiries and demand for construction finance loans which do not require presales from our Property Developer clients,” says Matthew Royal of DFP.
“Our clients are increasingly taking advantage of no presales financing in order to lock down construction costs and bring forward the commencement of construction and profit from the high demand for completed new stock from both investors, owner occupiers and foreign purchasers”.
By utilising a zero-presales finance facility, property developers can boost liquidity and complete projects without the hassle of strict pre-sales conditions. In turn, this brings surety and encouragement to buyers to secure units ‘off-the-plan.’
In spite of difficult times, there are always ways to keep projects moving. Better financial prudence and ‘fit for purpose’ lending solutions will help developers weather the storm and bring back confidence to the ‘off the plan’ market.
If you're considering a zero presales finance solution, speak with a member of our team to get the right solution for your project
Resources: 1. ASIC | 2. The Urban Development Institute of Australia | 3. The Australian Bureau of Statistics | 4. The Reserve Bank of Australia | 5. The Property Council of Australia | 6. Propertyupdate.com.au