Half-built blots on the landscape are testimony to the construction slowdown … and it will get uglier
The property market upheaval brings billionaire investor Warren Buffett’s oft-quoted piece of wisdom to mind: “Only when the tide goes out do you discover who’s been swimming naked.”
- 40,000 jobs have been lost in the construction sector in the past year
- Oversupply in apartments is expected to hit the market hard in the next six to 12 months
- Financing for new projects is going offshore or to private investors as local banks tighten lending
We are witnessing more naked developers as half-finished projects dot the landscape of our major cities.
As the year progresses, many more operators who’ve pushed the boundaries will join them.
“Areas of oversupply will see a bit more chaos in the next six to twelve months,” Scott Gray-Spencer, local head of capital markets at the global real estate firm CBRE, told ABC’s The Business.
Mr Gray-Spencer sees areas more than 10 kilometres from the city centres of Sydney and Melbourne, and parts of Queensland, as the most vulnerable.
Job losses mounting up
Construction jobs are an important support for the economy. Spending in the sector flows through to other industries, including the manufacturing, retail and services sectors.
Given the importance of this part of the economy, it’s hardly surprising the Reserve Bank is keeping a close eye on activity — or lack of it.
Governor Philip Lowe and his deputies have been at pains to point out that the property slump has been contained and will not derail the economy.
However, almost 40,000 jobs have already been lost in the construction sector during the past year as the regulator-driven crackdown on lending started to bite.
Property investors, who were major targets of the crackdown, accounted for almost 50 per cent of mortgages two to three years ago.
They have largely left the market and political uncertainty may keep them on the sidelines for longer as they await the outcome of the looming federal election.
Should Labor win, it’s likely investors will wait to see how its plans to curb the negative gearing and capital gains tax concessions pan out.
Even though Labor’s proposed negative gearing changes will not affect new housing, investors may still be worried about price growth because the next buyer is unable to negatively gear.
So it could be some time before developers see an important group of buyers return in force. If the banks don’t stop them, the less generous tax laws might.
“At the moment we’re seeing a lack of sales in the marketplace,” said Luke Mackintosh, partner with EY Real Estate Advisory Services.
It means developers are finding it hard to get to what’s called financial close.
Financial close tends to happen about 12 months after a site is purchased. During that 12 months, developers go through the planning process and start marketing.
Typically, 80 per cent of the development must be sold to get finance. Once that’s achieved, a developer can get finance and start construction.
But, in this environment, developers aren’t launching their projects.
Construction research group BCI Australia looked at the fate of projects started in 2015 when the property boom was in full swing.
It found that 50 per cent of those projects reached the construction phase in NSW and South Australia.
In Victoria it was only 20 per cent. Queensland fared marginally better with 23 per cent, and in Western Australia none started building.
Even if developers do get enough buyers, there is an increasing risk that their customers can’t come up with the money.
Banks were willing to lend borrowers more money two or three years ago amid the property boom, when buyers put down their deposit and signed a contract.
Now property valuations are lower.
“The bank might say, ‘I’m now only going to lend you x per cent’ rather than the original amount, and the purchaser will have to come up with the extra cash from somewhere,” property lawyer Richard Harvey warned.
Most analysts think there’s worse to come for developers over the next six to 12 months.
Some projects, like this one in the southern beachside Sydney suburb of Cronulla have already hit financial trouble.
Despite the increasing signs of stress, many analysts don’t see this downturn ripping through the industry’s heart.
Still buyers for distressed sales
The more experienced players have seen this coming and can wait it out. Some operators have switched the zoning on their sites while others have had to sell.
For the most part there is still strong demand for good development sites and projects offloaded by stressed operators.
Mr Gray-Spencer represents some of those buyers.
“There’s one of my clients who’s in the process of trying to buy distressed stock and he has had 2,000 apartments put to him in different forms.”
Established players with good reputations have managed to circumvent the credit squeeze imposed by banks to find alternative sources of funding from offshore — including money from the US, Singapore and Hong Kong — and domestic lenders, such as wealthy family investors.
“We never had a business raising debt for developers four years ago,” Luke Mackintosh said.
“Last year alone we did circa $800 million in construction funding. Now most of that went offshore.
Mr Mackintosh is bullish. He’s telling his clients to snap up good development sites on the cheap if possible because in two years’ time they’ll be richly rewarded by demographics.
“We have 50 per cent of the population that are under 35; 35 per cent of millennials still live with their parents. The oldest of the millennials are turning 35 this year. They are the buyers’ market. They are the market that developers will be selling into.”
Mr Gray-Spencer prefers to look at some of the economic fundamentals.
“I look at unemployment, I look at indicators such as interest rates, net migration which are three key factors people look at when considering the housing sector. And they’re all sitting at very positive levels.”
But the tide is still going out. Hopefully when it comes back in again some will at least still be swimming, naked or not.