Stalled development hulks spread over east coast

Ever visited an emerging market where the landscape is dotted with failed developments like broken transformers? Welcome to Little China, via the ABC:

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.”

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 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.

Almost 40,000 jobs have been lost in the construction sector during the past year as the regulator-driven crackdown on lending started to bite.

Investors sidelined

Buyers like 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 the 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.

“There’s a lack of foreign buyers, a lack of investors and not much confidence in the marketplace for first home buyers, and hence sales rates of 24 to 30 a month are lucky to be one or two a month on a project.”

Projects stalled

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.

Job advertisement data indicates the banking royal commission and house price falls may have already curtailed career opportunities in finance, construction and retail.
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 valuations are lower.

Property lawyer Richard Harvey warned: “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.”

Most analysts think there’s worse to come for developers over the next six to 12 months.

“If you’re settling a project between now and Christmas, you’d want to be closely looking at your defaults,” EY’s Luke Mackenzie said.

Despite the increasing signs of stress, many analysts don’t see this downturn ripping through the industry’s heart.

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 overseas like 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.

“That should have been done by Australian banks. That was good debt and good projects, but they couldn’t.”

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.

Unemployment is going to rise. Interest rates are irrelevant. Immigration is in outright chaos and, at minimum, Labor will cut temporary visas. Millennials with no pay rises and no Bank of Mum and Dad are useless to anybody. The one good thing in the pipeline is Labor’s negative gearing reforms shifting to new builds. But that will not arrive before mid-2020 and likely won’t work much until house prices stop falling.

It’s going to get a lot worse before it gets better for developers.

Comments

  1. reusachtigeMEMBER

    Most of that was rubbish #fakenews and #alternativefacts. Only one guy in that story gets what is really happening – “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.”

    • +1
      He just a bit off the mark with his forecast.. not 2 years but should be 18 months before those savy investors make profit.

    • Hey, reusa. What happened to your beautiful picture? I now have much harder time finding your posts.

      • Absolutely NSFW but search ‘facial’ at Urban dictionary and you get the gist of what happened to him.

        That must have been some relations party!

  2. It’s not just half built stuff, unsold completed units are also a problem. Here’s a developer that went bust after only selling half the units in a complex in “the vibrant hub” of Carlingford NSW

    61 completed units for sale in one-line (Receiver and Manager Appointed)
    https://www.realcommercial.com.au/property-land+development-nsw-epping-503078070

    Big guys like LendLease & High rise Harry have the money to hold back and not discount apartments by trickling them into the market, or renting them out directly or through Airbnb, but smaller developers can’t do this and fold.

    • I do not understand this at all.

      First, we know that receivership means fees eat any semblance of profit, personal guarantees get activated and most likely there will be loss of developers own homes. You want to avoid it at all costs. I appreciate that the developer was Chinese and it was an offshore bank that put in the receivers, but still.

      Second, you are asking $788,000 for 1 BR apartments 20KM from the CBD. That is not exactly bargain basement. I would have thought that represents a 30% margin. Surely if discounted enough, they will sell to some dumbasses?

      Are your margins so thin that you have no room to discount?

      If there is no fat in a $788,000 pricetag for a 1 BR apartment 20KM from the CBD, then even Martin North has hugely underestimated the coming downturn.

      • JojoyubbyMEMBER

        Well, the profit margin for the development company is not the same as the margin of the project. With some creative accounting treatments, the BOSS may have realised the profit and left the company to go into receivership. Who knows what happen behind the scene.

      • Australians are going to learn a lot about the ‘pathology’ of bankruptcy. Much talk of extend and pretend by banks, but the vehicle finance mob cares not and will pull the trigger and everything gets marked to market and liquidated.

        More importantly I think there is enough of this multi lender stuff to bring banks undone.

      • Mass madness in marketplace is common. And it is by no means unique to residential property. Most of the market participants cannot even spell profit margin or return on equity, let alone net present value. Dot.com bubble was a case in point.

        The Moron Side of the Force rules.

      • What happened with this site is that the 69 settled pre-sales plus the remaining 61 (ish) deposits were not enough to clear the non-bank construction debt. The developer wanted longer to re-sell some of the 61 titles that had failed to settle to the Chinese buyers. The non-bank lender lost patience, called in their loan, an insolvency was precipitated and then the non-bank lender appointed its receiver.
        The likely amount required to retire the outstanding non-bank construction loan, by my estimation is about $20 million. That works out to be about $330k per apartment. That is probably worth buying being at least 50% discount off the circa 2017 pre-sold prices.

    • Ronin8317MEMBER

      Both the builder and developer went bust, so it is sold without any warranty what-so-ever. The only buyer will be the really stupid or overseas Chinese buyers. (which is not the same thing, you can be really stupid without being an overseas Chinese buyer, the vice versa is not true). Getting your car out onto Carlingford Road in the morning peak hour is also a challenge.

  3. – I have changed my mind. Changing the rules for Negative Gearing will help to make the property implosion even worse. No matter how you slice or dice it.