You don’t need to be a finance guru to see that many development projects just won’t get off the ground in the current market.
Builders have been faced with a perfect storm over the last 2-3 years. There’s been COVID lockdowns and delays, supply chain issues, severe price increases and finally, rain, rain and more rain. For the many builders who offer fixed prices for their clients, they’ve either been forced into liquidation, or they’ve had to wear the losses on their balance sheet. Those builders that have been able to weather the storm, they’ve made sure that their current pricing for new jobs considers both current market pricing and what the future pricing might look like. They might also like to increase gross margins on future jobs to cover other losses. All in all, expenses have taken a hit across all project feasibilities. On the revenue side, the low-interest-rate environment has helped draw money into the buyer’s market, significantly lifting borrowing capacity. These buyers were able to pay higher prices in the ‘frenzy’ market which allowed developers to go some way to offsetting the rise in building costs.
Unfortunately, many developers exchanged off-the-plan purchases before their build contract was finalised, which resulted in their projects becoming infeasible for most traditional lending parameters.
The interest rate cycle has now officially turned – RBA cash rates increased 0.25% following May’s meeting, and 0.5% following June’s meeting. This has been talked about for some time and was expected. However one of the first things to change in a rising interest rate environment is consumer sentiment. We have food and petrol prices skyrocketing, and the cost of living going up too. All this feeds into inflation, and now there’s an emerging energy ‘crisis’. The ability of central banks to use monetary policy to curb inflation is limited.
While we’re not approaching a total Doomsday scenario, it’s a difficult period in time for all industries – and developers are not immune. Developers need to think outside the box when forecasting how their projects will be completed. And brokers like Allcap Finance need to engineer solutions that allow projects to complete. There needs to be a realisation that the supernormal profits that may have first been anticipated when a project was started are simply not going to be there in this market.
I see four options for developers::
- Contribute additional equity to bring the feasibility into ‘order’.
- Hold the asset until market conditions change.
- Sell the asset (incoming buyers will run their feasibilities on current market inputs and you’ll likely need to take a loss).
- Explore a structured solution where you give up some profit, entertain a builder vendor finance solution, or bring in a delivery partner to share the risk/return.
Allcap Finance is here to discuss any funding situation, no matter how complex. All are welcome to reach out to Lincoln Frost on 0422 222 992 to review your unique situation.