How has COVID-19 affected the property and construction industry?
Forecasts for the property and construction sectors have swung wildly from the early days of the pandemic. Some banks initially forecasted declines of up to 30% in the residential sector, but we’ve since seen significant growth numbers for detached dwellings in most markets and renewed concerns for affordability.
The market uncertainty in the early stages of the pandemic delayed commencement of many commercial projects, particularly in those states dealing with larger outbreaks – like Victoria and NSW, which also experienced industry shutdowns – and commercial builders have had to bear the cost of that. As market confidence improves, these commercial builders will also face the challenge of funding growth from a low base and delivering projects tendered at 2020 prices.
Whilst the building boom was initially concentrated in detached dwellings and infrastructure, driven by Homebuilder and infrastructure investment by all levels of government, the surge in construction demand is very much a global phenomenon with many governments intent on building their way out of the crisis. The combination of surging levels of demand and lingering supply chain constraints have resulted in a global shortage of goods and materials. Intense competition for human resources on projects has further magnified execution risk.
What is causing building supply chain delays?
Anecdotal reports suggest supplier lead times have blown out across all manner of materials, including concrete slabs, concrete pipes and frames and trusses. Already facing pressure from bushfire damage from 2019-2020, locally produced structural pine has suffered delays and, although BlueScope Steel’s production volumes had already increased 15% in the year ended 30 June 2021, domestic steel producers have also struggled to satisfy the surge demand.
Internationally, the freight and shipping situation has been dire with reports that a standard large container costs four times greater than it was a year ago. This comes off the back of cargo volumes increasing (in the first half of 2021, cargo volumes between Asia and North America were up 27%).
In this period of high demand and restricted supplies, pressure is on the shipping industry to move more goods. When new ship builds to increase capacity require a 2-3 year wait, they have limited opportunity to respond quickly – hence the prices rise while demand remains high.
It’s not only the vessels to run the routes, but the limited supply of containers that is causing the delays and both are contributing to the shortage of building material imports. The bulkier the goods, the greater the impact of higher shipping costs.
What is the extent of cost escalation being experienced by builders and developers?
The ABS figures for September 2021 quantify the extent of inflation in detached residential building costs – with inputs up by over 9% since commencement of the pandemic with further growth projected. That said, anecdotal reports from mid-market builders suggests that they are experiencing input cost inflation of at least twice this level. The outcome being that many pre-committed projects are now unprofitable – and this is before factoring in the extended delays they are facing in sourcing those inputs.
There have been instances of large building companies collapsing, leaving many customers in limbo. Unfortunately, the capacity of developers to support non-residential builders through this period of cost increases and growing pains may be limited – particularly where the project is predominantly pre-sold and the realisation value is capped at yesterday’s prices.
How can builders, developers and key stakeholders minimise risk during the COVID-19 boom?
Despite the challenges, the current shortage in building capacity has empowered contractors. Developers, well aware of this shift, are generally taking a more collaborative approach to managing completion of projects and allocating risk in new contracts.
Grant Thornton Australia assists builders, developers, financiers or other key stakeholders identify risks early and navigate distress in various ways:
- Quantifying the financial impact of these market factors on business cash flow;
- Connecting data provided by quality surveyors to create dynamic cash flow forecasts, specified to contract terms and the pipeline of specific businesses;
- Assisting in securing finance to improve working capital, via debtor financiers, alternate debt or extension of existing bank facilities;
- Assisting in negotiations with key counterparties, such as the ATO, contract principals or sub-contractors; and
- Managing regulatory compliance with bodies like the QBCC or State Government pre-qualifications.