EDITION 26 / QUARTER 3 - 2022
ProjectsReview
1 A DirectorsfromWordOur 2 Spotlight 3 5 ProjectsCurrent From Contributorsour 14 − 19 THE OUTLOOK.-APARTMENTMELBOURNEMARKET2022UPDATEAND Written by Richard Temlett Charter Keck charterkc.com.auCramer 20 − WHAT21HAPPENS WHEN A INDEPENDENTLY?FAILSSUPERINTENDENTTOASSESSCLAIMS Written by Paul Woods & Ben McLeodmaddocks.com.auMaddocks 22 − 23 CBA TO OFFER LOWER RATES FOR GREEN HOMES Written by Clancy Yeates, Columnist - The Sydney Morning Herald | www.smh.com.au 24 − WHY25WOULD DEVELOPERS LOCK IN PRESALES?FUNDINGCONSTRUCTIONNOWWITHOUT Written by Adam Slade - Monark Partners | monarkpartners.com.au 6 − PROBUILD9 AND BEYOND: CONSTRUCTIONISSUESINSOLVENCYFOR PROJECTS Written by Sam Kingston Maddocks | maddocks.com.au 10RESIDENTIAL13 UPDATECONSTRUCTIONHOUSINGCOSTS Written by Richard Temlett & Edmund D'Cruz Charter Keck charterkc.com.auCramer MATTONE 27-31 Gibdon Street, Richmond MCINTYRE 43 McIntyre Street, Burwood ARGYLE SQ 121 Cardigan Street, Carlton CHATHAM GARDENS 21 Chatham Road, Canterbury FABRIC 679-683 Glen Huntly Road, Caulfield MARTIN 129-135 Martin Street, Brighton 30 - 31 5 With...Minutes FROM THE BEST PEOPLE IN THE PROPERTY BUSINESS 32 Our Points of Difference 26 - 29 ProjectsPast KEYS ESTATE 46-62 Darren Road, Keysborough BOSTON 16 Boston Road, Balwyn CONTOUR 250-252 Wattletree Road, Malvern ASCOT PLACE 9 Newsom Street, Ascot Vale 1
Therefore, the articles within look as to how you can best prepare yourself for the next financial year ahead, ensuring we simply all get through and continue to prosper.
Rest assured, appropriate stock in either blue chip locations or along growth corridors, correctly priced and appropriately marketed, still sells well. There's just a lot more homework to do by way of confirming your project is viable before you start.
An excellent example of this is the ‘Keys’ development in Darren Road, Keysborough.
Mark Dayman - Director T 85642387 M 0409 342 mark.dayman@marshallwhite.com.au462
28 Townhomes sold and six blocks of land, all to a retail audience of young couples and investors within 15 weeks of a launch. Build it and they will come – see the summary within for further details. As always, if you need to speak to the right people before launching then don’t hesitate to reach out to us and we'd be pleased to put you touch with the best advisors in the business today.
The ever-prominent challenges around the rising costs of construction currently beset upon the building industry, regrettably won't be dissipating anytime soon.
If, however, it’s a necessity to push forecast revenues above market value (i.e., otherwise it won’t be bankable) then it’s prudent to consider your alternatives now, such as tucking your project away for the next two – three years in the hope that construction costs have then settled.
Leonard Teplin - Director T 85642318 M 0402 431 leonard.teplin@marshallwhite.com.au657
The most prevalent discussion we have today with our developer clients is, "if it costs more to build, then why can't we simply charge more”? Unfortunately, every project potentially increasing its gross revenue in unison, isn't the answer (did somebody say collusion?).
So, when a buyer has the luxury of choice, as they most certainty will have for this year’s pending spring market, then substantial premiums aren’t inclined to be paid any time soon for any off the plan opportunity. We'll often decline an opportunity to launch a project when asked to float a development above market value. Whilst you'll sometimes place five to ten percent of a project to unsophisticated buyers, you'll rarely (if ever) get to financial close.
The majority of projects we will launch throughout the 22 - 23 financial year at some stage will have the developer face the decision of either locking in today’s construction costs and commence to build without presales or alternatively wait out a six to nine month selling period to get to financial close, thus qualifying for more traditional construction funding.
+ 61 3 9822 9999 1111 High Street, Armadale VIC 3143 Cover Photo - Fabric 679-683 Glen Huntly Road, Caulfield
A Word From Our Directors
Your competition today isn't the off the plan project down the road, it's the established house, apartment, or townhouse currently offered for sale throughout metropolitan 50%Melbourne.ofevery purchaser who proceeds to buy a property, other than the off the plan project they first inquired on, will ultimately buy something established.
This is also with the hope that construction costs won’t continue to escalate throughout next year – this by all accounts seems to be a forlorn hope.
Polina Tokareva Business Manager to Team Projects Positivity, determination, and empathy are the key qualities that allow Polina to excel in her role as Business Manager to Team Projects. Always dedicated to providing exceptional service to her colleagues and clients, Polina thrives on supporting her team to ensure the best possible outcomes for all. With a creative yet analytical mindset, and strong attention to detail, Polina, who has her Agents Representative Licence, has worked in the property industry for more than seven years, joining Marshall White in 2019. She also has experience in the retail and medical industries and loves the creative side of marketing the beautiful new properties that Team Projects manage. She is always mindful that, in many cases, she is dealing with the client’s most precious financial asset, and that buying a home is always an emotional undertaking. Outside of the office, Polina loves spending time with her young son, and sharing her love of sports, including soccer and tennis with him. She is also interested in travel, music, psychology, mental health and supports You Matter and has volunteered at AMCS (Australian Multicultural Community Services). She has a great passion for Melbourne and loves the food, culture, museums, and street art.
Daniel Secatore Sales Executive Daniel’s first foray into real estate was in residential sales where he became an award-winning sales consultant as well as auctioneer. He prides himself on acting in the very best interests of each of his clients. Daniel’s interest in property is lifelong. Growing up with a father in the business, he attended numerous open for inspections as a child. Now as a Lead Generator for the Projects team, he is thrilled to be indulging his passion for new, modern developments while working with clients looking for new first-class properties. Before transitioning into the property market, Daniel completed a Bachelor of Business at Monash followed by Diplomas in financial planning and financial services. Working as an advisor and broker, he gained valuable experience presenting and selling financial products while at the same time honing his communication and listening skills, so useful in his current role. Daniel’s first foray into real estate was in residential sales where he became an award-winning sales consultant as well as auctioneer. He prides himself on acting in the very best interests of each of his clients. Carefully listening to what they hope to achieve, Daniel asks the right questions and provides honest, straightforward advice. Outgoing and personable, he is easy to get along with and aims to take any stress out of the buying experience.
Kierra Hagedorn Partner A driven and compassionate Partner, Kierra has grown a stellar reputation for outstanding results and exceptional customer service. Kierra’s process-driven approach and excellent communication skills complement an innate attention to detail and genuine care for each person she encounters. A firm believer in spending as much time as necessary to gain a comprehensive understanding of what her clients seek in a new home, she is well-positioned to achieve tailored outcomes. A driven and compassionate Partner, Kierra has grown a stellar reputation for outstanding results and exceptional customer service. Kierra’s process-driven approach and excellent communication skills complement an innate attention to detail and genuine care for each person she encounters. A firm believer in spending as much time as necessary to gain a comprehensive understanding of what her clients seek in a new home, she is well-positioned to achieve tailored outcomes. Kierra relishes the opportunity to forge strong relationships and connections with clients and colleagues alike. Having spent several years of her career as an integral part of Australia’s top performing real estate team helping with over 800 sales and settlements, Kierra has an enviable depth of knowledge of the real estate industry.
27-31MattoneProjectGibdon Street, Burwood43McIntyreProjectRichmondMcIntyreStreet,
Spotlight CURRENT PROJECTS 2 3
ChathamProject Gardens 21 Chatham Road, Canterbury ArgyleProject SQ 121 Cardigan Street, Carlton 679-683FabricProjectGlen Huntly Road, Caulfield 129-135MartinProjectMartin Street, Brighton CURRENT PROJECTS 4 5
Construction contracts often state that an insolvency event arises where, relevantly:
Oncederegistered.aliquidator is appointed to a company, they are able to exercise all of the rights previously held by a company, such as the rights a builder has under a contract. Liquidators also have powers to take steps to unwind transactions entered into by the company within certain periods (called voidable transactions). It is not uncommon for liquidators to make claims against principals in relation to developments, such as for payment of progress claims. As a general proposition, liquidation is the simplest external administration process for a principal as it is unlikely that the builder will continue to trade, and the focus can immediately move to completing the development. Although court proceedings against the company are stayed, there is no stay on a principal exercising contractual rights, such as calling securities (usually bank guarantees). In practice, there is no urgency in calling on bank guarantees as the bank remains obliged to make payment notwithstanding the liquidation of the company.
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THE RELEVANT PROCESSES
LIQUIDATION Liquidation involves the appointment of a liquidator to investigate and wind-up the company’s affairs. To the extent possible, the liquidator will facilitate a distribution of funds to unsecured creditors. Liquidation is generally the end of a company and concludes with a company being
Probuild and beyond: Insolvency issues for construction projects.
The appointment of voluntary administrators to Probuild in March 2022 sent shockwaves through the construction industry. External administrations of other recognised brands such as Caydon Group, Grocon, ABD Group, Privium and Condev have also caught media attention. External administrations in the construction industry have been increasing for some time (notwithstanding that the insolvency numbers generally declined to historical 20-year lows) and are at their highest levels since 2019. The insolvency of each builder impacts numerous parties including developers, principals, subcontractors, suppliers, consultants and employees. The ripple out effect can be Whensignificant.abuilder enters external administration, principals are often uncertain of their rights and how best to mitigate their loss and finish any development. This article gives a high level summary of the issues that commonly arise and some relevant considerations.
The voluntary administrators may recommend that creditors approve a Deed of Company Arrangement (DOCA).
VOLUNTARY ADMINISTRATION
Steps are taken to wind-up the builder or a liquidator is appointed A controller or receiver is appointed or a mortgagee takes possession of any secured property; or Voluntary administrators are appointed.
If a DOCA is not possible, the voluntary administrators will, after conducting preliminary investigations into the company’s affairs, recommend that the company be placed in liquidation. It is also possible that control of the company returns to the directors, but this is uncommon.
FROM OUR CONTRIBUTORS
Voluntary administration is a process that allows a company and its directors time to consider whether the company can be restructured or whether the company should enter liquidation. The purpose of voluntary administration is to maximise the chances of the company or its business continuing in existence. If this is not possible, administration is intended to achieve a better return for the company's creditors and members than would result from an immediate winding up of the company.
Depending on the circumstances and the terms of the contract, a principal may be unable to exercise their rights where administrators are appointed. When the company is subject to voluntary administration, there is stay on the exercise of contractual rights where the right arises solely from the appointment of the voluntary administrators, the company’s finance position during the voluntary administration or a reason that is in substance contrary to the intention of the stay (called the ipso facto stay). There are numerous exceptions to the ipso facto stay including, most relevantly, exceptions for take out rights or where there are non-performance or nonpayment defaults. The ipso facto stay can be extended or lifted by a Court and the voluntary administrator can consent to the rights being exercised. There are various other stays, including in relation to Court proceedings and restricting the rights of some secured creditors.
A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with.
A DOCA binds all creditors and may resolve all debts that arose by the date specified in the DOCA, potentially including future or contingent claims. The precise effect of each DOCA depends on its terms.
Written by Sam Kingston, Maddocks, 03 9258 3898, www.maddocks.com.au
Many standard form contracts are outdated and their insolvency related clauses should be reviewed. In simple terms, principals need to carefully consider their position before exercising any rights during the external administration of a company, but particularly where the relevant process involves voluntary administration, small business restructuring, a managing controller or a creditors’ scheme of arrangement. The relevant processes are very briefly summarised below.
Importantly, the ipso facto stay may extend beyond the administration period.
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A creditors’ scheme of arrangement is a procedure that allows a company to restructure through a Court approved and binding agreement between the company and its creditors. In practice, schemes of arrangement are far less common than voluntary administration. For completeness, the ipso facto stay on the enforcement of certain contractual rights also arises for a scheme.
However, in view of the significant pressures facing the construction industry, principals should take the opportunity to take stock and consider whether there are any steps they can take to protect their position.
MANAGING CONTROLLER, RECEIVERSHIP AND MORTGAGEES IN POSSESSION
A mortgagee in possession is a lender who has exercised its right to take control of property due to breaches of its security. A mortgagee in possession will frequently appoint an agent who will oversee the sale of the secured property for the benefit of the mortgagee.
There are various steps that principals can take to mitigate the risks arising from their builder entering external administration. The steps that should be taken will depend on the circumstances, but some considerations that often arise are set out below.
The steps that principals should take will depend on the type of external administration and circumstances at the time. However, general considerations that principals should take into account include the following:
FROM OUR CONTRIBUTORS
Principals should ensure that show cause notices and payment schedules are issued within any relevant timeframes to ensure that any breaches are documented. Prior to practical completion, principals should ensure that the builder has complied with all obligations under the contract (such as those relating to insurance and assignment of warranties). Doing so mitigates the potential impacts of an external administration as it is generally far more difficult to obtain details of insurance and warranties later.
POTENTIAL MITIGATION STEPS
CONCLUSION While the voluntary administration of most of the Probuild entities continues, the precise impact and flow out effects remain unclear.
AT AND BEFORE THE CONTRACT
WHEN EXTERNAL ADMINISTRATORS ARE APPOINTED
5. The focus should be on completing the project and confirming the implications of the external administration. Matters such as lodging a proof of debt in liquidation or administration are generally a lower priority but should be considered
3. Principals should take steps to confirm any amounts that are or may be payable to them, often through a process involving the superintendent. Payment schedules under the relevant security of payment legislation in each state should be considered as well as rights to set-off;
CREDITORS’ SCHEME OF ARRANGEMENT
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As the name suggests, the SBR process is only relevant for small businesses that have total liabilities less than $1mil. The intention of the SBR process is to allow the directors to remain in control of the company while they develop a restructuring plan that may be approved by the company’s creditors.
Receivership is an insolvency procedure where a receiver or receiver and manager is appointed over some or all of the company’s assets either by court order or by a secured creditor enforcing a security interest.
It is vitally important that a contract contains appropriate provisions allowing a principal to take out or terminate the contract. There also must be appropriate security for the performance of the builder’s obligations.
In general terms, bank guarantees are Principalspreferable.should also protect their position by registering security interests that arise under the contract on the Personal Property Securities Register. Depending on the terms of the contact, security interests may arise in relation to, for example, monies held in retention accounts or the right to take works out of the hands of the builder and deal with any goods or equipment of the builder on Appropriatesite.due diligence before entering into a contract is important, but so too is ongoing review of the builder’s position through, for example, finance audits and requiring the builder to provide details of any sub-contractors or suppliers. Principals should generally ensure that payment is not made for unfixed plant or materials unless the builder provides additional security and/ or appropriate assurances.
1. Confirming the type of external administration and individual/s appointed is critical;
The SBR process commenced in January 2021, but as of January 2022 had been used for less than 30 companies. The uptake of SBR may increase for smaller builders, and it is important that principals are aware that the ipso facto stay may restrict the exercise of contractual rights based on the SBR process.
4. It is important to consider whether there are any impediments to exercising any rights under the contract and, for example, whether the ipso facto stay may arise. Subject to this, notices to take out the works or terminate the contract should be considered. Notices to call on any securities (such as bank guarantees) can also be considered; and
The ipso facto stay on the exercise of contractual rights applies where a “managing controller” is appointed, which is generally a receiver and manager appointed over the whole or substantially all of the property of the company. Again, if receivers are appointed, principals need to carefully consider their position before taking any step.
2. Principals need to urgently confirm the details and status of any project, including matters such as the date of the contract, whether there are any known issues or defects, any potential or anticipated defects or claims against the builder and any other amounts owing to the builder;
PRIOR TO PRACTICAL COMPLETION
SMALL BUSINESS RESTRUCTURING (SBR)
Charter Keck Cramer release the latest insights including an update on construction costs.
• The items that have increased the most are timber, board and joinery (such as structural timber, timber doors and windows, plywood and board) as well as steel products (such as steel beams and sections and reinforcing steel).
Charter Keck Cramer has considered the Australian Bureau of Statistics (ABS) price indices of residential housing across Australia to understand the change in prices across various materials used in the construction of housing. Some key take outs include: 1. Price increases across various items, in several states, are the highest since the introduction of the GST in 2000 (or in some instances since the GFC in 2008/2009). This has led to an overall increase in costs across Australia (across all price groups tracked by the ABS) of +13.6% since the start of COVID-19.
Over the past 2 years there has been extremely strong demand for detached housing across Australia. This has been primarily driven by government stimulus in response to the pandemic and historically low interest rates. COVID-19 has also caused major disruptions to the supply of building materials, and it is important to remember that there have also been bushfires in Victoria in 2019 (which destroyed timber) and floods in Queensland and NSW in 2022 (which have further delayed several supply chains).
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FROM OUR CONTRIBUTORS
• To date revenue increases in the greenfield markets have been greater than cost increases and these costs have been able to be passed on to the purchaser in the form of higher prices. This is not the case in the medium and high-density space where revenues have not increased as much as costs and projects are no longer feasible.
• The Charter Keck Cramer investigations with the industry suggest that:
It is anticipated that there will be further builder insolvencies as well as an increase in purchaser disputes over the costs and / or timing in a number of building contracts.
Written by Richard Temlett - Director & Edmund D'Cruz - National Executive Director, Charter Keck Cramer, 1300 242 787, www.charterkc.com.au
• Industry sentiment is that house building costs will increase by around another 10-15% over the next 12 months and there is tremendous uncertainty with respect to the impact of China’s COVID-zero policy, as well with the war in Ukraine. This is not a good sign for housing affordability, the stability of the construction industry and the overall supply of new dwellings (houses, townhouses and apartments) over the next few years.
• It is observed that timber, board and joinery has increased the most in Adelaide whilst steel products have increased the most in Brisbane.
Residential ConstructionHousingCosts Update
What's causing disruptions to the supply of building materials?
ConstructionHousingCosts
FROM OUR CONTRIBUTORS
Residential Update
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FROM OUR CONTRIBUTORS The Melbourne Apartment Market2022 Update and Outlook Written by Richard Temlett - Director, Email: richard.temlett@charterkc.com.au Charter Keck Cramer, 1300 242 787, www.charterkc.com.au 14 15
FROM OUR CONTRIBUTORS 16 17
FROM OUR CONTRIBUTORS 18 19
Written by Paul Woods & Ben McLeod, Maddocks, 03 9258 3898, www.maddocks.com.au
PROBUILD’S EOT CLAIMS Completion of the early works had been delayed. Probuild had claimed and been given an EOT under the Contract up to the end of January 2012. However, in the proceeding, Probuild claimed a longer EOT on the basis that early works completion was not achieved until July 2012. It relied on clause 9A of the Contract, which contained a stand-alone EOT entitlement relating to the early works: "Notwithstanding clause 34, the Dates for Practical Completion under the Contract shall be extended for each day after the 7th October 2011 that Early Works Completion has not been achieved."
• due to the Superintendent’s failure to assess Probuild’s EOT claims properly, a proper assessment of delay had to be undertaken well after Practical Completion • a retrospective analysis was a more practical, accurate and common sense method of delay
ACCELERATION CLAIM Probuild claimed that it had accelerated the works in an effort to overcome delay because of the failure by the Superintendent to grant EOTs when it should have. Probuild claimed its costs of additional labour, new site coordinators and additional plant. Probuild advanced the claim on a number of bases as:
What happens when a Superintendent fails to assess claims independently?
V601 argued that Probuild’s claim under clause 9A should be rejected because it was inconsistent with its earlier EOT claim.
How should a Principal and Superintendent ensure that a contractor’s claims are assessed fairly? What happens when the Superintendent fails to act independently? Can a contractor recover acceleration costs where an extension of time (EOT) claim is unfairly rejected?
BACKGROUND V601 Developments (V601) carried out a mixed use development at a large site in Abbotsford, Melbourne. It engaged Probuild to prepare the site under an early works contract, and then to complete design and construction under a head contract The(Contract).Contract required V601 to ensure that the Superintendent acted as an independent certifier when assessing EOT claims. Probuild was delayed in completing the project. Its EOT claim during the project had largely been rejected by the Superintendent. V601 commenced proceeding claiming liquidated damages (LDs) for late completion. Probuild counterclaimed for EOTs, delay damages, acceleration costs, an early completion bonus and payment for a Thevariation.Court dismissed V601’s claims and awarded Probuild the EOTs claimed, together with delay damages and other amounts totalling $13.8 million.
• the EOT provision contemplated a retrospective form of delay analysis, given the inclusion of the words "the delay has affected", and the requirement to measure delay at the time it occurred
INDEPENDENCE OF THE SUPERINTENDENT Digby J found that V601 had breached the Contract by failing to ensure that the Superintendent acted independently when assessing EOT claims. There was: • evidence of widespread ‘collusion’ between V601 and the Superintendent • a collective effort "to develop and implement a strategy and tactics to defeat and / or delay, and to minimise…" Probuild’s entitlements • undue influence on the Superintendent.
FROM OUR CONTRIBUTORS
Probuild also succeeded on its other EOT claims. DELAY ANALYSIS METHODOLOGY
The parties relied on different delay methodologies for measuring the delays. Digby J held that:
It was found that early works completion had been delayed until July 2012 and held that Probuild should not be barred from recovering a full EOT under clause 9A.
• damages flowing from V601’s breaches of the contract relating to the Superintendent’s independence and failures
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• the cost of mitigating its loss flowing from V601’s breaches • costs payable under the acceleration clause, on the basis that the Superintendent’s failure to grant EOT’s amounted to a ‘Direction’ to accelerate. This type of claim is often described as a ‘constructive acceleration’ claim, a concept not generally recognised by Australian courts. Digby J was not satisfied that there had been any relevant ‘Direction’. But after considering the relevant authorities, His Honour allowed Probuild’s claim as damages for V601’s breaches, and alternatively as mitigation costs.
• The Superintendent’s LDs certificates were set aside. V601’s LDs claim failed.
These were some of the questions considered in V601 Developments Pty Ltd v Probuild Constructions (Aust) Pty Ltd[1], a decision by Justice Digby of the Supreme Court of [MaddocksVictoria.acted for Probuild in the litigation. At the time of publication, V601 has sought leave to appeal. This article may be updated.]
• a prospective assessment is a ‘theoretical forecast’ and is ‘inferior’ to a retrospective method undertaken when the facts are known and actual delay can be assessed.
IMPLICATIONS This is a significant decision. The observations about undue influence on, and collusion with, the Superintendent are important for parties procuring or delivering works, and for lawyers who draft and advise on the administration of contracts. The success of Probuild’s claim for acceleration costs will likely be relied upon by claimant contractors in the future.
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CBAchange.said the loan would offer variable rates as low as 1.99 per cent for owner-occupiers who had a deposit of at least 20 per cent, and who took out a mortgage package. To qualify, the customer’s home would need to meet detailed criteria that included having a minimum amount of solar panels, and having electric cooking and heating instead of gas.
CBA on Wednesday became the first big four bank to offer a green home loan, promising lower rates if customers’ homes meet specific criteria including minimum usage of solar panels, and no gas appliances or hot water heating.
“We want to reward new and existing customers who are taking actionable steps to reduce their environmental footprint by investing in homes that are efficient, comfortable and healthier for them and the environment,”
CBA to offer lower rates for green homes
The launch, which comes as smaller lenders are already targeting the green home loan market, is the latest sign of banks competing for environmentally conscious customers as banks face pressure over their role in climate
FROM OUR CONTRIBUTORS
The Commonwealth Bank is trying to win millennial and younger customers by offering lower interest rates on mortgages for homes that meet high environmental standards, as banks compete to promote their green credentials.
“We see a lot of customers, especially when we are talking to more millennial customers or Gen Zs who are really pushing us, but also some of their parents… to think about how they can build and work sustainably,”
Written by Clancy Yeates, Columnist, The Sydney Morning Herald, 02 9288 3000, www.smh.com.au
Sally Tindall, research director at comparison website RateCity, said it was the lowest variable rate advertised by CBA, and predicted other big lenders would seek to move into this part of the market.
He acknowledged the number of homes that would be eligible for the rate would initially be “relatively limited.” However, he said the bank believed there would be strong growth in green home construction, and it wanted to provide financing to help customers improve their environmental footprint.
Dr Michael Baumann, the bank’s executive general manager of home buying, said the product would be open to people building new homes and those renovating, noting that many younger customers raised sustainability issues.
Construction costs have risen and are expected to continue to rise by up to 20%. As a result, there is an inherent risk that developers successful in pre-selling a project prior to locking in a fixed price construction contract could be eroding profit margins. In some instances, particularly in Queensland where legislation does not ensure sunset clauses are for the benefit of purchasers only, developers are counteracting this by terminating pre-sales in order to resell at a higher price, once construction costs are known. The better and more prudent option is to hold off on pre-selling until a construction contract is signed. Once construction pricing is ascertained, it is possible to attribute a price per square metre for each apartment thus ensuring the project remains profitable.
AN EXPERIENCED TEAM The more experienced a developer the more likely a lender will view the project as less risky, even with no pre-sales. In situations where the developer has little experience the appointment of a strong team, including a highly experienced Project Manager and seasoned consultants is imperative. An experienced team will provide a financier with comfort the project will complete within budget and projected time-frames and be sold during and/or post construction.
VIABLE EXIT STRATEGY Without pre-sales a clear exit is trickier to demonstrate. Funders are more likely to lend against boutique, high end projects in inner urban locations, where property values are underpinned by a robust, established housing market. Experienced agents like Marshall White Projects are successfully selling these projects during or post construction using the requisite expertise and knowledge of the market. Moreover, with the weight of capital seeking to be deployed, residual apartment loans are becoming common practice and are a reliable source of repayment for the incumbent financier.
DUE DILIGENCE ON BUILDER
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There is no doubting that obtaining pre-sales is advantageous where construction costs are known, however present market conditions are challenging developers and financiers. The uncertainty around building costs and property prices, coupled with decreased offshore/investor purchasers and changes to purchaser sentiment are factors likely to persist for some time. Nimble non-bank lenders such as Monark, are well placed with a strong understanding of the market, to identify risks and gain the necessary comfort to provide construction funding without pre-sales.
Monark Property Partners aspires to be the capital partner of choice for quality developers in middle property markets. Our thematic is focussed on well designed, boutique residential and commercial projects located in city fringe locations with an end value of between $25 to $75 million.
CASH EQUITY CONTRIBUTION
Written by Adam Slade-Jacobson and Ashley Hartman, Monark Property Partners, 03 9661 8253, www.monarkpartners.com.au
INCREASED CONSTRUCTION PRICES
FROM OUR CONTRIBUTORS
Without pre-sales, non-bank lenders are looking to several factors to gain comfort that risk is adequately mitigated before approving finance. Some of these factors include:
Pre-sales have traditionally been a key factor to obtaining project development finance (particularly via major Australian banks). Historically, securing presales provided certainty to a developer that inventory would be ‘settled’ upon construction completion and, for a lender, mitigated risk by providing comfort loans would be repaid. However, changing market conditions, including rising labour and material costs are seeing construction prices continually escalate resulting in costing uncertainty and apartment projects commencing in the absence of presales. Subsequently, in the current environment developers are seeking alternative and bespoke sources of capital to facilitate construction commencement.
BUYER REQUIREMENTS
A benefit of selling during construction is eliminating the need to outlay money on expensive display suites. The increased number of purchasers desiring to walkthrough the ‘end product’ before purchasing is challenging the notion of a traditional display suite on site. This outlay may be better directed towards purchaser incentives, such as furniture packages.
A benefit of selling post construction is eliminating the need to outlay money on expensive display suits. The increased number of purchasers desiring to walkthrough the ‘end product’ before purchasing questions the justification and expense of a display suit. Amongst this background, the viability of pre-sales as a requirement to obtaining construction funding is being challenged.
Appointing an experienced builder with a track record of completing similar projects in size and quality has never been more critical. Lenders are carrying out detailed due diligence on proposed builders before approving finance. A builder with a strong track record who is financially sound and able to work through any movements in price is critical.
DISPLAY SUITE EXPENSE
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Why would developers commence construction with minimal presales?
The increase of owner-occupier purchasers (in particular downsizers who sell a family home when scaling down) has meant that more buyers are looking for certainty around construction completion and settlement date. This results in hesitancy to enter into sales contracts pre-construction. These purchasers are more particular about will the project actually proceed whilst reticent to have their deposits sit in a trust account earning minimal interest whilst a developer secures pre-sales. In addition, they want certainty to align the purchasing of furniture with a move in date. This is particularly an issue with long supply lead times from overseas.
Greater cash equity provides lenders with confidence that the developer has genuine “skin in the game”. Whilst developers have recently been able to increase equity through value uplift in the site, lenders are more likely to look at true cash equity indicating the developer has more to lose and is less likely to walk-away if development issues arise.
Whilst major Australian banks continue to require high levels of pre-commitments nonbank financiers, such as Monark Property Partners, are providing developers with certainty and flexibility by funding projects with minimal or even no pre-sales. In some instances, step down pricing provisions may be appropriate, allowing rates to reduce once certain pre-sales hurdles are met.
Target No. % Totalof Average Size per m2 Average Price per m2 PriceAverage 3 Bed, 2 Bath 3 43 230.4 $11,290 $2,600,000 3 Bed + 3 Bath 2 29 212.8 $10,499 $2,235,000 4 Bed + S, 3 Bath 1 14 238.0 $10,839 $2,580,000 5 Bed, 3 Bath 1 14 368.4 $12,215 $4,500,000 Keys Estate 46-62 Darren Road, Keysborough Price Range $599,000 - $1,054,000 Boston 16 Boston Road, Balwyn Price Range $2,150,000 - $4,500,000 PAST PROJECTS Target No. % Totalof Average Size per m2 Average Price per m2 PriceAverage 2 Bed, 2 Bath 6 21 125.0 $4,865 $608,167 3 Bed, 2 Bath 7 25 153.8 $4,681 $719,500 4 Bed, 2 Bath 14 50 157.1 $4,744 $745,357 4 Bed, 3 Bath 1 4 196.0 $5,378 $1,054,000 26 27
Contour 250-252 Wattletree Road, Malvern Price Range $895,000 - $2,095,000 Ascot Place 9 Newsom Street, Ascot vale Price Range $699,000 - $1,180,000 PAST PROJECTS Target No. % Totalof Average Size per m2 Average Price per m2 PriceAverage 2 Bed, 2 Bath 26 69 155.3 $5,948 $922,773 3 Bed, 2 Bath 7 18 182.4 $5,877 $1,062,000 3 Bed, 3 Bath 4 11 180.5 $5,709 $1,030,625 4 Bed, 2 Bath 1 3 178.8 $6,600 $1,180,000 Target No. % Totalof Average Size per m2 Average Price per m2 PriceAverage 2 Bed, 2 Bath 4 21 83.8 $11,641 $975,000 2 Bed, 2 Bath + Study 1 5 98.0 $13,622 $1,335,000 3 Bed, 2 Bath 10 53 128.8 $13,616 $1,756,500 28 29
We have asked 2 questions –
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Question One
Director - BHC Property bhcproperty.com Question One Definitely, sustainability becomes a most important key for our new project – good ventilation, large outdoor entertainment areas have been taken into consideration for all our new projects. Also, a separate study area within the unit will help buyer with the new WFH norm. Team or Zoom meetings are now replacing the majority of our face-to-face meeting, which does not really affect our productivity. But we find it a bit challenging and takes more time when we speak to the Councils and Authorities, as they are under the pump and short staffed due to the Covid cases. We always ask our team to stay safe and try to protect themselves as best they can.
Our designs are always evolving and we are confident that there will be learnings from the events of the past two years. Our apartments have had built in studies in them for more than fifteen years which meant that, on this design feature, we have been well ahead of the market. I would imagine that if extended work-from-home was to become more and more acceptable, that we would have to design work spaces that can accommodate more than one householder.
Question One
At Marshall White Project, we are in a fortunate position to call upon the best in the business to get a sense of how they have come through 2021 and now made their business fit for purpose for 2022 and beyond.
David Kobritz
Question One It may change our approach to OYO apartments and town houses and perhaps amenities for other apartment buildings eg business centre with work stations. Going forward for new projects will be tricky given the fact that delays are increasing to obtain permits and construction cost and duration has become less predictable.
Question Two The biggest issue facing developers and the public is the massive escalations in construction costs. The market is yet to digest the resulting and unavoidable uplift in retail pricing that must inevitably follow. I can see a period where lack of supply will be the only way to rollout a new price structure that allows normalized settings to be established again.
Question One It has definitely changed the way of design for our new product due to the Covid lockdown. With ‘Working from home’ becoming a norm, it has been welcomed by the younger generation and people who live far from their office. It leads us to think about creating a product with flexibility that will cater for that, separate working space, minimise noise while working and more outdoor space. Half of our team is working from home and we will catch up weekly from online meetings.
Question Two What would be the major pitfalls a developer should look out for this year, apart from the old adage of failing to ‘buy low and selling high’.
Question Two Biggest issue facing developers this year is rising construction costs, and how that risk is mitigated on a project. Ensuring that every project we conceive is properly considered in the context of each unique market has always been a priority for Metro, however it’s even more important now given the build cost outlook.
Question Two Construction cost will be the hottest topic this year for developers. Builders going into liquidation and could not complete projects will be a big concern. Also the low efficiency from authorities and long waiting period from VCAT is another problem.
Question Two I guess the biggest thing is to understand the market well. Developers needs to put buyer’s shoe on and find out what they really want – buyers at today’s market expect much more than 3-4 years ago. Developers need to balance out the price vs what the project can offer. Secondly, the soaring construction cost doesn’t help at all.
Question One Has the impact of COVID and the result of lockdowns changed the way you now design and build new product for the work from home market. Otherwise, will it affect the way you now manage your own team going forward?
Michael Zhang
Question Two The strong market over much of the past decade has hidden many pitfalls in our industry. As production costs have risen these have been largely covered by increased prices at the retail end. This is very unlikely to continue and as we operate in an industry which is highly inflationary the challenge will be to control costs and projects remain viable.
AM, KJGC - Bensons Property Group bensonsproperty.com.au
Jian Zhou Associate Director - Young Group younggroup.com.au Executive Chairman - DealCorp dealcorp.com.au
David Steele General Manager - Metro Property Development metroprop.com.au Elias Jreissati
The key term that comes to mind here is flexibility. Flexibility in physical spaces, energy consumption, working arrangements - nearly every aspect of our lives has been changed over the past two years and as such it is of primary importance to ensure our offering is adaptable, and can be demonstrated as such.
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Marshall White Projects has evolved as a team, maturing in a market where buyers learn to expect more than ever before, whilest developers must work harder to achieve the same reslut. They say knowledge is power, so we invite you to click on the button below and enjoy the resource of our first publication through to today.
• Attempt to seek out reliable referral partners, both locally and overseas • Commission marketing designed to attract buyers to your project Three years ago these procedures were enough to generate sufficient pre-sales to then cover debt funding, however, we are now in a newpost covid market. Strategies with the benefits of strong relationships and front of mind market presence must be leveraged to ensure a successful outcome. The unique initiatives we’ve put in place for every client has resulted in the successful sell out of over 200 projects and counting – make your project count by calling us today.
Celebrating over 200 Successful Sell Outs CLICK HERE
+ 61 3 9822 9999 1111 High Street, Armadale VIC 3143
Your Own Marketing Team or Marshall White Project Marketing?
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• Work out of a dedicated display suite
Our Unique Points of Difference
We appreciate a number of developers have in the past successfully ran their own sales team, work exclusively through their own projects and selected channels. With 32 % of our annual sales as a result of cross referring from one project to another, the days of a cost prohibitive data base from only one or two projects is fast disappearing. From a project’s data base of over 280,000 and a residential data base of over 460,000 we consistently generate low cost, stress free sales that can get your project moving within the shortest possible time-frame.
Disclaimer: Information provided is believed to be accurate as at the date of printing, no responsibility is taken for any errors or omissions. It is your responsibility to obtain independent, professional advice. Every effort is made to provide accurate and complete information in Marshall White’s (trading as Marshall White Projects) technical and regulatory newsletters.
However, Marshall White cannot guarantee that there will be no errors. Marshall White and its contributors to the newsletter make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of the newsletters and expressly disclaims liability for errors and omissions in the contents of this newsletters.
Since the inception of Marshall White Projects in 2013, we've attempted to provide an insight into the ever changing world of property development b sharing the hard earnt lessons of those in the field and generous enough to share their experieces for the betterment of their peers.
Most developers and other project marketers are all doing the following to generate sales;
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