Developers shelve projects as construction costs soar

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Written by David Lovato – CPC Development Lending Solutions

June 2023

 

Another month, another 25 basis point rate hike from the Reserve Bank of Australia – with the latest move taking the official interest rate to an 11-year high of 4.10%.

It’s not just homeowners who are feeling the pain from higher interest rates; property developers and homebuilders are too, leading to a massive slowdown in construction levels.   

For instance, Australian Bureau of Statistics data showed building approvals hit an 11-year low in April, after total dwelling approvals fell 8.1% over the month, following a 1.0% drop in March. 

Multi-unit approvals fell to just 3,469 – 35.4% fewer than the same time last year.  

The slowing rate of construction comes at a time when many capital cities are already grappling with a housing supply crunch that’s driven vacancy rates close to record lows. 

It gets worse. 

That’s because the RBA’s interest rate rises haven’t happened in isolation; rather, they’ve occurred amid a 30% surge in residential construction costs during the two years to March 2023, according to KPMG Australia. 

This, in turn, has led to an increasing number of projects being put on hold, despite already gaining planning approval.

KPMG’s analysis found almost 16,400 dwellings in New South Wales were approved but not yet commenced by the end of March, up from 13,800 at the same time last year.

As the graph below shows, the last time there was such a vast backlog of paused construction projects with approvals was in 2019. However, back then, developers in Sydney were hitting the brakes due to a historically high vacancy rate of 3.5%. 

By contrast, Sydney’s vacancy rate was just 1.1% in May, according to Domain. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Similarly, in Victoria, almost 10,500 dwellings were approved but construction had not yet commenced by the end of March, the highest number of stalled projects since December 2017.

KPMG urban economist, Terry Rawnsley, said around three-quarters of the not-yet-commenced dwellings in New South Wales and Victoria were slated to be apartments or townhouses.

“Both Victoria and New South Wales have increased demand for new dwelling approvals, but dwellings are far from materialising, due to significantly higher input costs,” he said. 

Managing cost overruns in development finance 

There’s no doubt skyrocketing prices, as well as material and labour shortages, are making the development environment particularly challenging. 

So you may be wondering if there’s anything you can do to avoid costs spiralling out of control on your project.

Well, in many cases, prevention is better than cure. 

That means: 

  • Estimating costs accurately: Don’t be tempted to use a one-size-fits-all approach. Rather, do your due diligence in the planning phase to create a realistic budget.
  • Planning for surprises: Identify and assess risks that could lead to cost overruns, and develop a risk management plan with contingency funds.
  • Clearly defining project scope: Changes in project scope are a common cause of cost overruns. So use a robust change order control process that includes assessing the impact of proposed changes on cost, schedule, and quality before approving them. 
  • Tracking your budget: Monitor your project progress and costs regularly. This includes comparing actual costs against the budget, tracking project milestones, and promptly addressing any deviations.
  • Contingency planning: Allocating contingency funds in the project budget to account for unforeseen expenses. The contingency amount should be based on a realistic assessment of potential risks and should be managed carefully throughout the project.

Crowd Property Capital is a property development finance specialist. We help property developers overcome their funding challenges by sourcing loans for land, construction and residual stock. Contact us at [email protected] or fill in this form.

 

Resetting the NSW building industry

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Written by David Lovato – CPC Development Lending Solutions

June 2023

 

The New South Wales building regulation landscape significantly changed when David Chandler was appointed as the state’s inaugural building commissioner in 2019. 

Mr Chandler was tasked with improving the quality of residential apartment buildings and restoring public trust in the industry following the Opal Tower and Mascot Towers incidents. 

This is being achieved through the Construct NSW strategy, which focuses on six key areas for reform:

  • Protecting homebuyers from defective building work through legislation
  • Developing a rating system to make it easier for homeowners to identify trustworthy practitioners 
  • Upskilling the building and construction industry
  • Strengthening standard contracts used in the industry by clearly outlining the roles and responsibilities of all practitioners
  • Using digital platforms to improve transparency and communications between the government, the building sector and the community
  • Conducting research and collecting data about the state of the industry, its capabilities and areas for change

Key reforms so far

In 2020, two major laws were passed by the state parliament:

The RAB Act gives the NSW Building Commissioner sweeping powers to enter a construction site and issue a:

  • Prohibition order: This prohibits the issue of an occupation certificate and/or the registration of a strata plan for a residential apartment building
  • Stop work order: This prevents a developer from continuing work
  • Building work rectification order: This requires a developer to carry out or refrain from carrying out building work to eliminate, minimise or remediate a serious or potential serious defect

Meanwhile, the DB Act requires designers, engineers and builders working on new residential apartment buildings in NSW to declare the compliance of their work with the Building Code of Australia. In doing so, it imposes a duty of care meaning that current and future owners can make a claim against them if they act negligently. 

When the RAB and the DB Act came into effect in 2020 they applied only for apartment buildings. However, from 1 July 2023, both Acts are being bolstered to include other types of buildings where people live and work, such as shared accommodation, hostels, boarding houses and residential aged care.

The NSW government also released the Independent Construction Industry Rating Tool (iCIRT). This uses a five-star system to rate builders on their apartment build to help homebuyers find a “trustworthy” developer.

Reforms in the pipeline 

It’s no secret that a perfect storm is wreaking havoc on Australia’s construction industry with companies failing amid challenging conditions. 

As such, the next phase of the NSW building reforms will look at reducing insolvency risks and improving outcomes for consumers by:

  • Establishing clear lines of responsibility and end-to-end accountability – for example, by developing new contract terms where developers may indemnify consultants and builders for some work done by prior developers and others to ensure clear continuing accountability.
  • Promoting active project governance, monitoring and risk identification
  • Addressing insolvency risks through proper financial due diligence 
  • Requiring completion undertakings and securities in most of these procurement models from financiers, developers, and/or receiver managers.

Crowd Property Capital is a property development finance specialist. We help property developers overcome their funding challenges by sourcing loans for land, construction and residual stock. Contact us at [email protected] or fill in this form.

 

Non-Bank Lending Jargon Explained

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Written by David Lovato September  2021

 

National “Drop the Jargon Day” for the healthcare industry is on Tuesday 20th October so here’s some meanings around jargon that exist within the non-bank lending space.

 

Working in development finance you come across many personalities and a lot of ego’s. Eliminating jargon actually makes you appear more intelligent than less.  For now we need to live with jargon so here’s a cheat sheet of terms used in our industry.

 

The bottom line is no one knows everything so when someone tries to bamboozle you with industry jargon ask them to explain what they mean.

 

Download the CPC Lending Guide by clicking below for more insights into the non-bank lending space for development projects.

 

CPC Lending Guide Download

 

 

Non-bank lending guide jargon

 

 

 

 

 

HOW WE PROVIDE VALUE TO OUR DEVELOPER CLIENTS

CPC Development Lending Solutions secures market leading finance on behalf of developers – we get projects funded.

Working closely with our clients we are that new set of eyes that stress test your feasibility and project assumptions around revenue and costs.

We examine presales targets, project delivery team, transaction structure, funding request and timings. This allows your project to be presented professionally and takes it to the front of the queue leveraging off our strong non-bank lending relationships.

Engaging with CPC allows you to focus on managing your project and driving your consultant team. If you are looking to break ground in 2022 get in touch now. Its never too early.

For more information about CPC Development Lending Solutions check out our FAQ page 

To confidentially discuss your bespoke funding solution contact us today on email [email protected] or phone +61 434 932 634

5 Key Metrics Private Lenders are focused on during the COVID Pandemic

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August 2021

 

These are unprecedented times with no one  able to predict the future, CPC has summarised 5 of the key metrics private lenders are currently focusing on to ensure they are investing in the right projects suitable to the current climate. To ensure you can secure funding for your next project look at these metrics closely and see how your project stacks up.

Metric 1 – DEVELOPER EXPERIENCE

Private lenders want to partner with experienced developers who have cut their teeth on past projects and learnt from their mistakes and experience. They are ready to back project sponsors who can demonstrate its not their first project and have runs on the board.

Metric 2 – PROJECT LOCATION

Middle ring suburbs with median price points, close to the CBD, excellent existing infrastructure (not promised). With foreign buyers are temporarily out of the local market and immigration suspended there is a renewed focus on a local catchment and established suburbs that have had recent gentrification and infrastructure investment. Locations that appeal to families, downsizers, retirees are strongly preferred by lenders.

Metric 3 – PROJECT SIZE

Lenders are spreading risk by project diversification. A loan book with more projects at a lower investment value per project  is much more attractive than a loan book with the same FUM made up of one or two large projects. Smaller boutique style projects make a lot of sense to lenders, less stock to shift, more competitive build environment and generally less project risk. If your project is from 2 to 15 dwellings you are more likely to get funding and your project started sooner.

Metric 4 – DEVELOPER EQUITY

Key loan to value ratios have shifted post COVID-19. Senior debt secured by 1st mortgage remains the focus for quality stable lenders. Generally lenders will require developers to put more equity into projects upfront, GRV around 65-70% is current senior. Mezz is available but is still expensive.  Developers also need to ensure they are not to heavily reliant on cash flow from other project completions.

Metric 5 – PRE SALES

Lenders will typically favour projects that have exiting pre sales purely due to the potential impact of COVID-19 on property prices. Having presales also proves to a lender you have a sales process in place that is delivering in these challenging times. Sales revenue remains one of the biggest risks to all projects moving forward.

 

OUR PROCESSESS

CPC Development Lending Solutions secures market leading finance on your behalf – we get projects funded.

Working closely with our developer clients we are that new set of eyes that stress test your feasibility and project assumptions around revenue and costs.

We examine presales targets, project delivery team, transaction structure, funding request and timings. This allows your project to be presented professionally and takes it to the front of the queue leveraging off our strong non bank lending relationships.

Engaging CPC allows you to focus on managing your project and driving your consultant team. If you are looking to break ground in 2022 get in touch now. Its never too early.

For more information about CPC Development Lending Solutions check out our FAQ page 

To confidentially discuss your bespoke funding solution contact us today on email [email protected] or phone +61 434 932 634

 

 

 

Breaking Ground in 2022? Start your development funding journey now!

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June 2021

I always get asked by developers when should I start seeking construction funding for my project? Every time my answer is – As early as possible!

Its never too early to be seeking finance  in this current climate and this is why.

Our industry like many others is going thru a COVID related shift. Development professionals (architects, engineers, valuers, QS, lenders) are choosing to work more remotely from home, taking on more work and perhaps not working as efficiently as before. This remote working shift may ultimately become more streamlined as technology and management mindsets change – but we are not there yet.

Currently property industry businesses are finding it hard to onboard and employ additional staff. As demand increases processes and reports are taking longer to finalise. For example lending valuation report timeframes have recently doubled from normally 3-4 weeks to now 6-8 weeks. Some companies are refusing new work as they struggle to keep up.

The bottom line is to expect longer lead-in times to get your project commenced. Try to de-risk all aspects of your project that you have control over. The earlier you start the important process of securing project funding the better off you’ll be. You might not have your DA approved, appointed a selling agent or engaged your preferred builder – it doesn’t matter, its never too early.

 

Get in touch now and get your journey started.

 

David Lovato 

Managing Director

CPC Development Lending Solutions

M +61 434 932 634

E [email protected]

W crowdpropertycapital.com.au

 

OUR PROCESSESS

CPC Development Lending Solutions secures market leading finance on your behalf – we get projects funded.

Working closely with our developer clients we are that new set of eyes that stress test your feasibility and project assumptions around revenue and costs.

We examine presales targets, project delivery team, transaction structure, funding request and timings. This allows your project to be presented professionally and takes it to the front of the queue leveraging off our strong non bank lending relationships.

Engaging CPC allows you to focus on managing your project and driving your consultant team. If you are looking to break ground in 2022 get in touch now. Its never too early.

For more information about CPC Development Lending Solutions check out our FAQ page 

 

 

 

 

 

Developing Property in 2021? 5 Key considerations to prepare for in the current market

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As we move forward into the back half of 2021 the market remains strong in pockets but getting projects off the ground remains challenging.

Here are 5 key issues if you are considering bringing your development to market.
  1. Development finance 
  2. Planning delays
  3. Lack of qualifying Pre-Sales
  4. Price stagnation
  5. Construction Cost Increases

Development Finance

Reset your Project Feasibility and try to be more pessimistic

Its hard for developers to be pessimists but sometimes you should be. If you haven’t had a valuation carried out for funding purposes you should be cautious on your projected revenues. If your current project feasibility  assumes low-interest rates, bullish sales off the plan and optimistic timelines do yourself a favour and stress test your assumptions. Run some more conservative numbers to see the effect this has on your bottom line profit. 

Smarter developers are allowing higher finance costs and factoring of common delays to reach you project milestones (e.g increased presales timeframes and push back of construction start dates).

Remember its always good to under promise and over deliver!

Planning Delays

Steer clear of sites with rezoning and infrastructure risk

If you are a small to mid-sized developer right now you should avoid developing sites that require rezonings or significant developer (or government) contributions towards key infrastructure.

Governments are constantly in flux and key service providers (e.g Sydney Water, RMS) are inefficient and disinterested in your infrastructure problems. Many government announcements are made for political reasons but not all projects are funded and virtually none get delivered on time.

Focusing on areas that don’t rely on rezonings or major infrastructure will provide you with tangible outcomes.

Lack of Qualifying Presales

Where have all the off the plan buyers gone?

With a lot of completed developer stock on the market buyers now have a choice between buying new (generally owner occupiers) or buying off the plan (generally investors hoping for price growth before settlement).

With the foreign investor market flat theres generally not as many off the plan buyers around at the moment. Smaller boutique projects in established locations will be well positioned to break ground in these challenging times as lenders agree to fund construction without debt cover via exchanged contracts.  Try and secure your construction funding with a zero presales condition even if you plan to sell off the plan, it gives you more pricing control and potential uplift once the projects completed. 

Presales are a numbers game, smaller projects will get funded with zero presales and allow you to sell during construction. 

Non-bank lenders will work with you to ensure your project revenues are not capped and will allow flexibility if market conditions keep changing.

You should see your lender as a project partner at all stages of the development journey.

Pricing Stagnation

Know your market and be cautious of predicting bullish price increases

Momentum continues to shift in Sydney as house and townhouse  prices are booming but only pockets of apartment prices are rising. Recent sales indicate prices are flattening out and falling in pockets of oversupply.  Developers should be cautious in the pricing of unsold stock and look to residual stock loans so they don’t flood the market with product upon completion.

Allow in your feaso for contingencies such as incentives, increased sell down periods and completed stock holding costs. If you rate of sale has slowed or stopped altogether your price point needs review.

Construction Costs

The only way is up

In Sydney year on year tender inflation is  +4.5% this equates to a +25% increase in building costs over the last 5 years. This is a big risk to your projects quality and feasibility. Be wary of builders who are providing you with seemingly cheap pricing – do your research on their track record and financial stability prior to signing a contract.

If you are unsure about the construction costs in your market engage a QS early on to provide you with high-level current cost information so you can have a better idea of pricing expectations prior to design finalisation and tender stage.

 

 

OUR PROCESSESS

CPC Development Lending Solutions secures market leading finance on your behalf – we get projects funded.

Working closely with our developer clients we are that new set of eyes that stress test your feasibility and project assumptions around revenue and costs.

We examine presales targets, project delivery team, transaction structure, funding request and timings. This allows your project to be presented professionally and takes it to the front of the queue leveraging off our strong non bank lending relationships.

Engaging CPC allows you to focus on managing your project and driving your consultant team.

For more information about CPC Development Lending Solutions check out our FAQ page 

Email:[email protected]

Lower LVR’s – The New Normal for Developers

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cpc-logo

 

23rd April 2020 

 

The COVID-19 pandemic is reshaping economies around the globe with the local lending environment for development projects changing rapidly since March.

The property industry has already seen major impacts with lenders passing on riskier projects resulting in a substantial reduction in deal flow. One of the key changes over the last few weeks is the reduction in Loan to Value Ratios (LVR’s).

Lenders are requiring more equity from developers to protect their loan investment. We have seen a general reduction in risk/gearing with increased pricing. There are genuine post COVID deals being done now giving us and our clients the benefit of real time risk and pricing benchmarks.

If you are in the market for project funding there are options available as long as your  project generally sits within the following criteria :- 

  • First mortgage funding only 
  • DA approved projects preferred with minimal planing risk
  • Experienced project sponsors with access to additional equity
  • Loan size $3m to $10m max 
  • Gearing to a maximum of 55% LVR against GRV 
  • Postcodes with no actual (or perceived future) oversupply
  • Purchaser demographic – local owner occupier focused, not reliant on investors 
  • Generally 15 month max loan period 
  • Zero pre-sales still available for smaller projects (2 – 10 dwellings)

Projects that sit outside of the above criteria may find it challenging in the current climate to secure funding. Some of our lenders at the moment are carrying out internal valuations as they reduce reliance on external valuer reports instead relying on their in house lending expertise and committees loan decision making.

CPC has a solid network of reliable private lenders who understand risk and property cycles – they are open for business and adjusting their lending criteria to strengthen their loan book in  this current market cycle. The private lending market for developers remains active in pockets and generally excited by opportunities this dislocation is providing.

 

To confidentially discuss your bespoke funding solution contact us today on email [email protected] or phone +61 434 932 634

 

 

 

Planning Alert NSW – Back down on Housing Affordability as 47 Council areas fail to introduce Low Rise Housing Legislation

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2056 Greater Sydney Commission - 3 cities

2056 Greater Sydney Commission – 3 cities

cpc-logo  July 2018

NSW Planning Update

Legislation designed to allow developers clarity around low rise housing has spectacularly failed to deliver in 47 LGA’s – providing a major blow to housing affordability in Sydney.

Sydney needs 41,250 new homes each year over the next 20 years. This move will impact supply resulting in more people continuing to be priced out of Sydney.

The state governments back down to allow local government’s further time to assess the impacts of the New Medium Density Housing Code is yet another example of the lack of cohesion between the local and state government departments. 

The perfect storm of planning approval delays, lack of planning certainty and tightening credit markets are all impacting developers bottom line feasibilities and profits. These all add up to challenging times in the development space.

What you need to know

The below is a list of LGA’s with and without deferral for further information click here

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The benefits of the new Low Rise Medium Density Housing Code include:

  • increasing the supply of housing across NSW, especially in Sydney, which will help improve housing affordability;
  • better meet the needs of our changing population by providing a broader range of housing options to suit different lifestyle needs;
  • help to maintain the local character of neighbourhoods with a storey height limit. This will ensure the size and scale of development will fit into established streetscapes and new release areas; and
  • ensure a consistent approach to the good design of medium density housing across NSW.

 

Contact CPC to better understand the full development potential of your site to maximise the value of your asset. Email: [email protected]

Private Lending – The Future of Development Finance

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cpc-logo  March 2018

Rates from 7.5% p.a*
Flexible Presale Terms
LVR 65% on completion

As we move well into 2018 significant trends that align both investors and developers are emerging in the private lending space.

Private lenders entered the market in a big way last year, they were seen as the expensive option of last resort. This is now changing as the private lending market is taking a bigger share of overall development funding.

Why go private? The many benefits include flexibility with LTV ratios, lower presales hurdles and flexible repayment terms. Speed to settlement and funding decisions are made on the spot and can be relied upon.

Most developers have recently been hit with a perfect storm of events. Whether it’s lack of funding to settle sites under option or construction stage most developers are experiencing restrictive levels of developer equity. The realities are starting to bite.

Presales are slow, site holding costs are eating into profits and construction costs continue to rise.

Many developers have been forced by the banks to lower pricing on off the plan sales to reach high presales hurdles. This results in project revenue becoming capped in turn damaging bottom line profits.

Savvy developers are benefiting in many ways from these less onerous private funding channels.

Privates are becoming true business partners who will likely back not just their current project but also their future pipeline.

CPC provides developer advisory services to determine our clients short and long-term funding needs. We are connecting investors and developers with cost-effective opportunities that weren’t around months ago.

See below for our latest offerings and contact us today to discuss private lending options if you want to get your project ahead of the curve.

Contact – David Lovato
M +61 434 932 634
E: [email protected]
W: www.crowdpropertycapital.com.au
* Rates will vary depending on the projects location, stage of development and private lenders appetite for risk.

Planning Alert NSW – S96 Submission will now be a S4.55 Modification

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cpc-logo  March 2018

NSW Planning Update

Legislation regarding the Environmental Planning and Assessment Act 1979 has introduced a major change to the numbering of sections. From March 1st, 2018 terminology has changed – below is a cheat sheet of updates 

For Example 

  • A S96 Modification has become a S4.55 Submission
  • An S94 Contribution has become s S7.11 Contribution

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Contact CPC to better understand the full development potential of your site to maximise the value of your asset. Email: [email protected]