Construction demand dip sparks creative solutions

Indeed, the construction sector has been one of the hardest hit industries during the pandemic with site lockdowns, supply constraints, and labour shortages driving construction costs high and pushing many companies to the brink of insolvency.

Despite this, there is a relatively low probability of default, with CreditorWatch Business Risk Index (BRI) October reporting just 3.7 per cent of firms expected to miss payments compared to the sector with the highest rate, food and beverage services, which has a probability of default of 7.2 per cent.

However, the group’s latest BRI also revealed small businesses are feeling the pinch from delayed payments with only 22 per cent of big businesses in construction paying small business within 30 days.

CreditorWatch chief executive chief economist, Anneke Thompson, said construction consistently tops the industry rankings for late payments.

“In August 2022, 11.7 per cent of construction companies had payments more than 60 days in arrears. The average is 8.5 per cent,” Ms Thompson said.

“Cost overruns have severely impacted the housing construction sector largely because of fixed price contracts and bank funding for projects not keeping pace with costs.”

Building material costs are still “well above” where they were when construction contracts were entered into Ms Thompson said.

“The cost increase is sucking up contingency and profit margins builders have built into projects,” says Ms Thompson.

“For new contracts, higher prices and higher interest rates mean homeowners need to take out larger loans to cover the cost and finance of new houses. This should result in much lower housing construction starts as we move into 2023.”

But, costs are beginning to wind down managing director of quantity surveyors Sarah Slattery said, during a webinar (15 November), pointing out steel futures peaked in August 2021 and have come down 25 per cent from that point.

“We’re seeing steel down about 45 per cent this year, reinforcements have fallen 20 per cent from the peak, timber’s down ⅔ lower than what it was at its peak and copper as well,” Ms Slattery said.

“Copper is considered a dependable barometer of economic health and I think the other side of that is falling prices could be a bad omen for the global economy.”

Nonetheless, costs are dropping — a positive for the sector to bounce back, she said.

Given the pressures faced across the sector, CreditorWatch published the white paper: Rebuilding construction: tools for the future to explore what was needed to support recovery.

Director of GM Advisory, Ginette Muller, weighed in during the webinar and said when a company does go into liquidation, small contractors are often the ones that lose out.

“Some of the things that might be able to help people would be to look into preferential payments,” Ms Muller said.

“When a company does go into liquidation, do we really need to punish our contractors by clawing back payments for them when they had no idea?

“I think we really have an opportunity for the government to look at the standards. And try and make more balance into it.

“[The government] has made some changes in it, in some circumstances you can’t clawback more than $30,000 within a certain period of time, but I think they need to go a little bit further.”

Build-to-rent, good alternative

While there are opportunities to repurpose second-tier office developments as build-to-rent residential developments, traditionally this has proven problematic and council requirements and existing building infrastructure don’t always align, managing director of Di Marco Group, Adam Di Marco said.

“In the office space, developers are getting creative. A good example being the Brisbane CBD Midtown development, in which two, 40-year-old government buildings have been combined into one building,” Mr Di Marco said.

The economics just needs to work, which comes down to the cost of a building, refurbishment, and the rental market, he said.

“Several large financiers are starting to specialise in this space because they can see the opportunity to bring these buildings back to life,” he said.

“Build-to-rent developments have the upper hand over build-to-buy developments because they are underwritten by a different business model, which is far more skewed towards the long-term hold of those assets rather than the immediate requirement from private developers to get in and get out.”

He added that it is new in Australia, with around 16,000 projects under development and has the potential to scale up.

“It’s an attractive proposition for investment capital seeking long-term, reliable returns. I’m excited by how this emerging asset class will transform cities,” said Mr Di Marco.

[Related: Homebuilder grants effectiveness reviewed]