Construction Funding – Industry Update

It has been pretty well documented in the mainstream media, the issues that have faced the construction industry over the past 12 months. Volatility within the market has been caused by a mix of supply chain issues, rising costs of materials and labour shortages.

Construction – 12 Month Look-Back

It has been pretty well documented in the mainstream media, the issues that have faced the construction industry over the past 12 months. Volatility within the market has been caused by a mix of supply chain issues, rising costs of materials and labour shortages. Each week heralds reports of another builder “going under”, or at the very least under severe pressure to deliver their current and future workbooks. The issues haven’t been constrained to the smaller end of town either, as builders large and small have fallen by the wayside.

At present, there doesn’t seem to be an immediate end in sight to these issues. Unemployment is running at all-time lows, precipitating a real skill and trade shortage. Throw into the mix the recent east coast floods, which has meant “Insurance work” is moving to the ‘front of the queue’ by offering higher prices for trade work. The lack of certainty around cost and supply of human resourcing to projects, is as real as the supply and cost of the materials themselves.

A global surge in demand for construction materials, particularly for timber and steel products has certainly been felt across Australia. The Master Builders Association of Victoria estimates lead times for frames, trusses and laminated veneer lumber has blown out to 16 weeks, from 2-4 weeks pre-Covid. The Housing Industry Association (HIA) recently reported that the average time to build a house has increased from 8.3 months pre-COVID to 12.2 months in 2022.

In real terms, in our clients’ feasibilities, we have seen construction costs rise by 20% – 30% over the past 12 -18 months. This is dependent on location, scale of project and the sophistication of the builder. Regardless, it’s fair to say that there is not a project, developer, or builder, that hasn’t felt the effect of these issues.

Construction – 12 Month Look-Ahead

We see construction costs perhaps plateauing for the foreseeable future, with a possible correction in costs (decline) in 12 or so months. I think further substantial increases off the back of massive price hikes in the past 12-18 months is unlikely. Of course, some materials may differ from others for more localised reasons.

Interest Rate Rises

The RBA cash rate rose to 1.85% in the month of August, with three consecutive 0.50% increases over the past 3 months. Whilst this has seen borrowing costs for developers increase from historic lows, it’s more the pressure this is putting on end values, both residential and commercial, that is affecting projects “getting out of the ground”. Residential dwelling values are on the decline across the vast majority of the country, both metropolitan and regional. Whilst the decline in values is fairly modest for the most part, it is the knock on effect to general consumer confidence in the housing sector that is causing the most angst for developers.

Interest rate rises have taken the heat out of the market and we are seeing a lack of FOMO (fear of missing out), which typically fuels a rising market. Purchasers don’t want to be the ones to “pay too much”, buying at the top of the market. Valuations on “as if complete” developments are proving to be a “negotiation”, as the comparable value from 6 months ago may not be adopted by a valuer in “todays” market.

Of course, this is not constrained to the residential market only. Rising interest rates has seen borrowing costs on commercial investment properties double in the space of 6 months – rising from 2.00% – 2.50% to around 4.00% – 4.50% per annum with a major bank. Whilst there is probably limited evidence in market to firmly say what affect this has had on yields, there will definitely be some softening, albeit I don’t think catastrophic. Demand for well located, well designed and tenanted assets will remain strong, as always.


We have seen a slow down in off-the-plan sales over recent months. Given the uncertainty in parts of the market, purchasing something now, which won’t be completed for at least 18 months, has been a bridge too far for many intending purchasers. Purchasers thinking about buying off the plan, will be considering:

  • Where will borrowing costs and general appetite for residential lending be in 18-24 months?
  • How financially viable is the builder undertaking the project?
  • How financially viable is the developer undertaking the project?
  • Will my purchase value at what I paid for it in 18-24 months?
  • If I purchase, will the developer be able to obtain sufficient other presales to commence construction, or will I be waiting indefinitely for a start in construction?

Reports in the media of abandoned housing sites and development sites are certainly not assisting. Instances such as these are of course the exception, however perception is what drives consumer behaviour, and the perception at present has a negative slant.

As is always the case, regardless of the time in the cycle – quality developments, delivered by long standing developers, built by reputable builders, will traverse the market conditions and buck this trend. If you can cover on the aforementioned issues, I actually think it is a good time to be buying an apartment in our capital cities. Supply is so constrained and residential vacancy rates are, by and large, low across the country.

What are the flow on effects?

Developing property has a long lead in time. From acquiring sites, to obtaining planning permissions, to pre-sales and delivery of the project – the total timeframe can be anywhere from 2 – 4 years, or more.

A sudden and immediate change in prices or market conditions is hard to plan for, given the sort of lead times mentioned.

Developers, who typically acquire or option land 12 months or more before they commence construction, have had to adjust their feasibility markedly from their assumptions 12 months ago. No feasibility is the same, but they are potentially now faced with a rising cost of construction, a rising cost of funding (interest rates) and a stagnant (at best) end value.

The construction component of a project comprises anywhere from 50%-90% of the total cost of delivering a project. That component of the project has risen 20%-30% in the past 12 months. Typically developers aim to deliver a 20% margin on the total cost of the development – obviously more if possible. We are certainly seeing more and more projects under pressure to deliver a 20% margin due to current market conditions.

Construction Funding Market

Despite the aforementioned issues, we are actually in a relatively strong funding market for projects in high demand locations, with experienced delivery teams.

Both in the bank and non-bank space, we haven’t seen any material decline in liquidity to fund deals – in fact I would say these remain at historic highs.

Of course, lenders are cognisant of the prevailing market conditions and doing a little more due diligence on developers and builders prior to funding.

Loan to Value ratios (LVR’s) are probably slightly on the decline – where once non-bank lenders were happy to fund construction to 75% LVR with no pre-sales (or minimal), that has probably dropped to 70%. That said, with pre-sales, we are still getting construction deals funded to LVR’s of 75% and even 80%.

An example of some recent deals:

Location – South East QLD – Residential Apartments

· Facility Limit – $263,000,000

· LVR – 75%

· Lender – Offshore Fund

· Presales – Approx $100,000,000

Location – South East QLD – Residential Apartments

· Facility Limit – approx. $75,000,000

· LVR – 80%

· Lender – Bank + Mezzanine Debt

· Presales – $80,000,000

Location – Sydney NSW – Commercial Office

· Facility Limit – $151,000,000

· LVR – 70%

· Lender – Non-Bank

· Pre-Commit – Nil

This article was originally written by Stamford Capital

How else can Stamford help

Stamford has best in market access to capital. We have access to literally hundreds of lenders, all with a slightly different slant on what deals fit their appetite. Our role is to fit the deal with the right lender, to meet the needs of all parties. Since our inception in 2010, we have successfully advised on capital placements in excess of $8b, across the country.

We are currently helping our clients navigate the current market conditions by assisting them obtain greater leverage, lower or no pre-sales, or additional structured capital to assist with rising costs. No two deals are the same, nor are the solutions.

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