The Construction Industry is in Trouble so What Can Developers do about it?
The Australian construction industry, inclusive of both residential and commercial, makes up less of the country's gross domestic product (GDP) than it used to, so with rising interest rates and the cost of living, what does its future hold and what does this mean for property developers?
Ten years ago, Australian construction contributed around 20 per cent of total GDP, which was around double the 10.5 per cent it recorded for the most recent four quarters.
After suffering big commercial construction contractions in the mid-2010s, overall construction hasn't been a significant contributor to GDP growth since 2018, primarily due to tighter bank credit policies, increased government regulation, scaling back of off-the-plan incentives, and restrictions on foreign purchasers in Australia.
While there was a boost in construction during 2021 due to COVID 19 stimulus packages, the sector has hit some extreme hurdles this year, with supply chain issues and staff shortages already causing many issues even prior to the recent surge in interest rates. This has been made starkly apparent with several recent high-profile construction companies going into liquidation, in some cases leaving developers with over-capitalised, half-completed projects.
So what does this mean for developers? In summary, we are seeing developers face:
- Larger cost variations as construction businesses amend costs mid-construction, in some cases even with fixed price contracts. The developer is exposed mid-development and is often left with little choice but to cover the increased costs;
- Tighter margins as build costs increase at a much higher pace than house and unit prices; and
- Delays as construction companies struggle to arrange trades and manage their own cash flow in the face of shrinking margins.
In our opinion of all, a project's risk factors construction risk has always been the most crucial for a developer to manage. As the building industry becomes more volatile, it is even more critical for the right amount of due diligence to occur. Here are some suggestions that may assist with navigating the current environment and ensuring your project isn't compromised:
- Choose builders based on experience and financial capability as much as price.
- Please spend some time developing trust with your builders and understanding how they work
- Ensure you are across industry standards
- Form relationships with industry professionals, in particular quantity surveyors and project managers who can guide on current construction costs
- Increase your project contingency and ensure you have the ability to cover cost overruns
While the current environment carries a lot of extra risk for projects, this will always create opportunities for smart operators who manage these risks.