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How property developers can avoid collaborating with builders on the brink

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Written by David Lovato – CPC Development Lending Solutions

August 2023

 

Recent statistics from ASIC, the financial services regulator, show over 2000 Australian construction companies went into liquidation since mid-2021. That averages out to more than two companies every day. 

And it’s not just fledgling enterprises either, with notable names like Porter Davis Homes Group, Probuild, ABG Group and Condev among the casualties.

Australian Constructors Association (ACA) chief executive Jon Davis said the industry was in deep trouble, with firms entering administration at more than twice the rate of other sectors. 

“Building sector profit margins have fallen from around 3% to below 1% and liquidity has collapsed from 15% to below 5%. Most concerningly, over half of all large builders are now carrying current liabilities in excess of current assets— a technical definition of insolvency,” he said. 

“The building industry is a textbook example of market failure.”

Given this, you might be wondering if there is anything you can do to avoid working with a builder who might go bust during the project. 

Well, while nothing is ever guaranteed, there are steps you can take to minimise risk

1. Do your due diligence

Before signing on any dotted line, conduct a thorough background check on the potential builder. Investigate their trading history, past projects, and any media coverage. A simple online search can reveal a wealth of information, including any red flags or controversies. 

2. Run credit checks 

You can investigate a builder’s payment history with suppliers and subcontractors by getting a report from credit agencies, such as Equifax, illion and Experian. Delayed payments or defaults are often an early warning sign of financial trouble.

3. Talk to previous clients

Nothing beats talking to others who’ve worked with the builder. Ask them candidly about their experience. Were there any delays? How did they handle problems? Would they hire them again? This can give you a real insight into how the builder operates.

4. Avoid lowest-bid temptations

While it can be tempting to choose the cheapest bid, this might mean compromising on quality and reliability. Balance the cost with other factors like experience, reputation, and financial stability.

5. Assess their supply chain strength

 A builder’s financial health isn’t only about their immediate finances. If they’re reliant on a supply chain that’s struggling, it could affect your project. Ask about their suppliers, their payment terms, and any contingencies in place for disruptions.

6. Understand their business model 

A builder’s business model should be sustainable and not overly reliant on one or two large projects or clients. Diversification in projects and clientele often indicates a more resilient business.

7. Don’t pay upfront

To reduce financial risks, set clear milestones for payments rather than large upfront sums. This ensures you’re paying for completed work and provides an incentive for the builder to maintain timelines.

8. Build long-term relationships

Foster long-term relationships with trusted builders. As you collaborate on multiple projects, you’ll get a better sense of their reliability and financial stability. This familiarity can act as a buffer against potential risks.

9. Consult with experts 

Last, but by no means least, engage with professionals who have their finger on the pulse. As a broker specialising in developer loans, Crowd Property Capital can offer you valuable advice on financial risk management.

CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected].

 

Fast-tracked planning approval pathways in NSW

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Written by David Lovato – CPC Development Lending Solutions

July 2023

 

Greater Sydney is in the midst of a housing supply crisis, with the city facing a projected shortfall of 134,000 dwellings over the next five years. 

To tackle this, the NSW government is reforming the planning system so that it incentivises developers to build affordable, high-density housing.

Under the changes, housing developments valued at more than $75m, which include a minimum of 15% affordable housing, will gain access to a new State Significant Development pathway, meaning planning decisions will be made faster.

Developers will also be able to build 30% higher and add 30% to the floor space to land size ratio than local environment plans allow, as this fast-tracked planning pathway pulls the approval process out of the local council’s control.

But what about smaller projects? 

After all, getting local council planning approval for a development project can be a complicated, expensive and time-consuming process, regardless of its size, as:

  • Every council has different local planning rules and regulations
  • Every council interprets statewide planning laws in its own way

Fortunately, the Low Rise Housing Diversity Code (formerly known as the Low-Rise Medium Density Housing Code) can be used to ‘sidestep’ the local development pathway.

Here is how it works. 

A fast-track approval pathway

The Low Rise Housing Diversity Code was introduced by the state government to promote the construction of diverse and affordable housing options in low-rise residential areas.

It does this by creating a fast-track approval pathway for the following property types:

  • Dual occupancies
  • Terraces
  • Manor houses

This means that as long as the proposal complies with the State Environmental Planning Policy (Exempt and Complying Development Codes) 2008, you can receive approval in as little as 20 days, giving you planning timeframe and outcome certainty. 

What do you need to know about the code?

The code applies to eligible residential lots located in areas zoned:

  • R1 (general residential)
  • R2 (low-density Residential)
  • R3 (medium-density residential)
  • RU5 (village)

These areas generally consist of established neighbourhoods and urban environments where low-rise housing can be integrated seamlessly. 

Some exclusions do apply though, including:

  • State or locally-listed heritage items and heritage conservation areas
  • Land reserved for public purposes 
  • Environmentally sensitive areas.

Housing types under the Code

As mentioned, the Code allows for the fast-tracking of dual occupancies, terraces, and manor houses. 

Dual occupancies refer to two separate dwellings located on the same lot, that can be attached or detached. 

Terraces allow for up to three dwellings on a single lot. These dwellings must front a public road, with no other dwellings located above or below.

A manor house is a building containing between three and four dwellings that is up to two storeys in height (excluding any basement). Each dwelling is attached by a common wall or floor with at least one dwelling fully or partially located above another dwelling.

Lot sizes and development standards

To comply with the code, proposed developments need to meet the minimum lot size requirements:

  • Dual occupancy – the size of the lot being developed must meet the minimum lot size required to build a dual occupancy under the relevant council’s local environmental plan (LEP). If the LEP does not specify a minimum lot size, the Code applies a minimum 400m2 lot size.
  • Manor houses – a minimum 600m2 lot size requirement applies.
  • Terraces – the size of the lot being developed must meet the minimum lot size required to build multi-dwelling housing under the relevant council’s LEP. If the LEP does not specify a minimum lot size, the Code applies a minimum 600m2 lot size.

There are also specific criteria related to building design, setbacks, landscaping, privacy, and parking.

CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected].

 

 

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.

 

Government incentives that can help developers break ground in NSW, Victoria and Queensland

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Written by David Lovato – CPC Development Lending Solutions

 

Australia’s housing supply crisis is set to worsen with the National Housing Finance and Investment Corporation expecting a shortfall of 106,000 homes by 2027 across the country.

The NHFIC’s State of the Nation’s Housing 2022-2023 report said Australia’s population growth had rebounded more strongly than expected since the international border reopened in early 2022. That, combined with soaring construction costs and higher interest rates, had resulted in the projected deficit as supply failed to keep pace with demand. 

The report also highlighted a collapse in the construction of medium-density dwellings (such as apartments and townhouses) over the five years to 2026-27, with net additions projected to be 57,000 a year on average. That’s around 40% less than the levels seen in the late 2010s.

Housing Industry Association chief economist Tim Reardon said the government was likely to fall well short of its goal of building a million homes across five years.

“Every state and territory needs to take action to attract more investment in the housing sector to improve the supply of new homes,” he said. 

With this in mind, what are some of the state government incentives currently available in New South Wales, Victoria, and Queensland which can help developers break ground on their projects?

New South Wales

  • Low Rise Medium Density Housing Code: The code allows property developers to build dual occupancies, manor houses and terraces without the need for a development application, subject to meeting specific design standards. Fast-tracking development approval via the code can potentially save developers up to $15,000 when compared to the costs of a standard application.
  • Land tax discount for build-to-rent developments: The land tax concession is designed to support the development of new build-to-rent projects in NSW by reducing the tax burden on developers. Eligible developments can qualify for a 50% reduction in land tax for up to 20 years.
  • The Community Housing Innovation Fund: This $225 million fund provides financial assistance to eligible community housing providers for innovative projects that increase the supply of affordable housing across NSW.

Victoria

  • The Big Housing Build: The BHB is investing $5.3 billion in social housing and aims to deliver over 12,000 new dwellings across metropolitan and regional Victoria. The BHB also includes funding for planning reforms that aim to improve housing supply.
  • Land tax discount for build-to-rent developments: Eligible BTR developments get a 50% reduction on land tax for up to 30 years. They are also exempt from any absentee owner surcharge in respect of that land during that time. 

Queensland

  • The Housing Infrastructure Fund: This $2 billion fund provides subsidies, one-off capital grants and other support to encourage developers, builders and other investors to build 5,600 social and affordable home commencements across Queensland by 30 June 2027.
  • Land tax discount for build-to-rent developments: From 1 July 2023, eligible BTR developments that feature at least 10% affordable housing can qualify for:
    • A 50% discount on land tax payable for up to 20 years
    • A full exemption for the 2% foreign investor land tax surcharge for up to 20 years
    • A full exemption from the additional foreign acquirer duty for the future transfer of a BTR site.

Want to break ground on your next project? Crowd Property Capital can help you get finance and overcome your funding challenges. Contact us at [email protected] or fill in this form.

 

CPC’s 2023 Development Lending Guide is out now!

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We have just released our 2023 Development Lending Guide.

 

This comprehensive guide will provide you everything you need to know about looking for and obtaining property finance for your next project. It is an essential read for any property professional and covers off:-

  • Why there will be a lack of new projects coming to market over the next several years.
  • Bank v Non-bank finance and which option is best for your project.
  • Current lending rates for land loans, construction loans, mezzanine loans and residual stock.
  • Tips for avoiding untrustworthily lenders and what to look out for
  • A jargon guide for all the terminology referred to by lenders and financers in the industry.

 

Download your copy of the 2023 CPC Development Lending guide below

 

 

 

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Crowd Property Capital is a property development finance specialist. We help developers obtain finance for their projects. Contact us at [email protected]

 

Applying for a loan? 5 Tips for every property professional

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Written by David Lovato – CPC Development Lending Solutions

 

What’s the number one key to succeeding with property development?

No, it’s not getting the property side of the equation right – that’s number two. It’s getting the finance right and this starts with your initial loan application.

To get the finance right, you should always think about the strength of your application. Here are five things you should consider before applying :

* Reducing your current debt levels – in this market, lenders are attracted to loans with lover LVRs.

* Ensure your financials are up-to-date – this includes your latest business and personal tax returns.

* Update your CV – showcase your skillset and previous development experience.

* Update your project feasibility – make sure your costs reflect the current market’s increases in consultant fees and construction.

* Present a strong exit strategy – the lender is primarily concerned with how you will repay their loan.

CPC has assisted numerous developers in getting their projects in front of the right lenders. We know how to best present your application to get the best loan available in the marketplace.

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Crowd Property Capital is a property development finance specialist. We help developers obtain finance for their projects. Contact us at [email protected]

 

What are the odds of a bank collapse happening here in Australia?

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Written by David Lovato – CPC Development Lending Solutions

 

You’ve probably seen the news on the collapse of Silicon Valley Bank – the second-largest in American history.

So what happened?

* SVB had to sell securities at a loss to get cash
* To counter this loss, SVB announced it would sell US$2.5 billion of shares
* Investors advised companies to withdraw their funds, which prompted a bank run
* Within 48 hours, the federal government had to step in because the bank could no longer pay its clients

In the wake of the SVB collapse, and the consequent downgrading of the entire US banking sector from stable to negative by Moody’s, Australians may be wondering how safe our banks are.

Australian banks are strictly regulated and must comply with prudential standards. The regulatory body, APRA (the Australian Prudential Regulation Authority), is an independent statutory authority that answers to the federal parliament.

Although APRA does everything it can to prevent a financial institution from failing, it can’t guarantee that will never happen.

If an APRA-regulated institution fails, the government can activate the Financial Claims Scheme, also known as the ‘government guarantee’, under which the government guarantees deposits of up to $250,000 per account holder.

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Crowd Property Capital is a property development finance specialist. We help you structure and submit your finance applications to lenders across Australia. Contact us at [email protected]

 

Australia’s apartment supply forecast to plunge sharply

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Written by David Lovato – CPC Development Lending Solutions

 

Australia is suffering a housing shortage, with the national vacancy rate just 1.0%, according to SQM Research. To counter this shortage, and to cope with an increasing population and immigration, additional housing is needed. But not enough apartments are being built. 

Property advisory group Charter Keck Kramer estimates that 41,200 apartments will be constructed across the capital cities in 2023. But their estimates for the next two years are much lower:

  • 27,300 in 2024 
  • 11,100 in 2025

That would be a 73% national reduction in two years. Their forecast decreases in construction for the major cities are:

  • 87.8% in Brisbane
  • 83.5% in Sydney
  • 78.3% in Canberra
  • 65.3% in Melbourne
  • 65.2% in Perth

The reasons Charter Keck Kramer are forecasting fewer apartments will be built include:

1. Rising interest rates

The Reserve Bank has increased the cash rate for 10 months in a row. In March 2023, it was 3.60%, which is the highest rate since May 2012.

 

The Reserve Bank may increase the cash rate further, due to high inflation.

The Australian Bureau of Statistics (ABS) reported that annual inflation was at:

  • 7.8% for the quarterly measurement ending in December 2022 
  • 7.4% for monthly measurement up to January 2023 (this is based on a limited set of prices)

The Reserve Bank wants to reduce inflation to be between 2-3%. Although they see the slight decrease of 0.4 percentage points from December 2022 to January 2023 as positive, they are concerned the inflation rate will stabilise at a high level. To prevent this, the Reserve Bank may increase the cash rate again.

Rising interest rates affect developers in two ways:

  • Developers experience an increase in their borrowing costs
  • Buyers experience a reduction in their borrowing capacity, so may not be able to afford to buy these apartments

2. Rising construction costs

Residential construction has become more expensive because of:

  • A labour shortage – when Australia shut its border during Covid-19, it disrupted the flow of migrant workers, which still hasn’t been fixed
  • A shortage of materials – global supply chains were disrupted by Covid-19
  • Increased transport costs – transport costs rose 6.3% for the year to January 2023, while automotive fuel prices rose 7.5% (see graph), according to the ABS

3. Reduced profits

The combination of rising interest rates and construction costs has resulted in some developments no longer being financially feasible, according to Charter Keck Kramer director of research and strategy Richard Temlett.

“Rising rates are increasing project costs and also diminishing purchaser capacity and buyer demand, which is leading to slower presales in many projects,” he said. 

“Alarmingly, but not surprisingly, construction costs continue to increase and the residual supply constraints have resulted in many projects not being financially feasible. This will lead to certain projects being deferred or even abandoned.”

Temlett also said prices would have to rise. “Otherwise, developers won’t build it because of the heightened risk they are taking.”

So with increasing demand and fewer apartments being constructed, the supply of apartments may plunge.

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. 

Mezzanine vs Preferred Equity Financing

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Written by David Lovato – CPC Development Lending Solutions

 

The key ingredient in any property development is finance. Sometimes, the best way to finance a project is with a traditional loan. At other times, the developer may need to take a more creative approach.

 

In that case, the developer could consider applying for mezzanine financing or preferred equity financing. But which one?

 

Mezzanine financing

 

Mezzanine financing is secondary financing.

 

For example, if Developer A takes out a loan from Lender B to develop a property and needs additional financing, Developer A can ask Lender B for additional funds in the form of mezzanine financing or ask Lender C for mezzanine financing.

 

Lender C can only grant mezzanine financing with Lender B’s permission. Once the project is complete, Lender B will be repaid first, then Lender C and then only Developer A.

 

 

 

If there are insufficient funds to repay Lender C, the agreement Lender C has with Developer A will determine what happens next:

 

  • Lender C could take a share of Developer A’s project
  • Lender C could claim the property or part of the property
  • Lender C might book a loss, especially if Developer A is declared bankrupt and Lender B has claimed the property

 

Because Lender C’s position is risky, and subordinate to Lender B, mezzanine finance is often expensive and has strict borrowing conditions.

 

But there are several advantages:

 

  • Mezzanine loans are at higher loan-to-value ratios, so developers can access extra funding
  • Mezzanine loans may work out cheaper than forming a joint venture with another company to raise additional funds
  • The developer has to put less of their own money into the project
  • Repayments are often delayed until the end of the project, which helps with cash flow

 

 

Preferred equity financing

 

Another form of financing is preferred equity financing, which gives the lender an equity stake in the project, which usually involves a percentage of the project profits. With preferred equity, you surrender a stake in your project and give the lender a preferred pay-out position ranking ahead of the common equity shareholders.

 

 

In this scenario:

 

  • Lender B provides a loan to Developer A on a fixed interest rate at an agreed LVR
  • Preferred Equity Financier C loans funds that are secured against the borrowing entity  in the form of a project shareholding (rather than a registered second mortgage)
  • Preferred Equity Financier C is repaid a fixed rate or return and/or profit share at the end of the project ahead of Developer A
  • Generally Lender B will count the preferred equity funding as if these funds were Developer A’s own funds, which will allow better terms to be negotiated with the senior lender

 

Which is better?

 

With preferred equity financing, the developer gives a share of the project to the lender. This means the lender also has a share in profits earned. This ownership also gives the lender the right to interfere with the running of the project and ability to ‘step in’ and take control if things don’t go as originally planned.

 

In contrast, a lender that offers mezzanine equity financing does not automatically receive a share of the project as mezzanine is regarded as secured debt. So the relationship is very clear: the lender receives their principal and agreed interest at the completion of the project.

 

But if the lender can’t get mezzanine financing, then preferred equity financing may be a good option. That’s because getting only a portion of the profits is still better than not getting the project off the ground and earning nothing.

 

Crowd Property Capital is a property development finance specialist. We help you structure and submit your finance applications to lenders across Australia, whether you need a conventional mortgage, mezzanine loan or preferred equity loan. Contact us at [email protected] or fill in this form.