2019 has got off to a positive start, with an exciting mix of projects coming through the doors at White Associates.
The market is still showing its appetite to proceed with projects that have strong fundamentals, and we’re seeing a high concentration of residential projects within this number.
As you’d have seen from all the cranes around the Auckland in particular, the activity and momentum of last year is continuing, although we expect that residential activity may well ease in the final quarter of this year, due to where we are in the market cycle.
One thing we know for sure is that the myriad of challenges that have plagued the construction sector over the last few years remains. Cost escalation, labour constraints, challenges with construction personnel capability and subcontractor capacity, design and consenting delays are all leading to increased development durations and costs. As the market is still reasonably heated, with strong demands on all resources with the larger projects and especially in Auckland, this in turn means that the challenges that affect the funding of projects also remain.
Difficulties in obtaining project pre-sales, project feasibilities, and the continued potential for construction company failures are just some of the landmines that lurk, ready to explode in the face of the unprepared.
Borrowers and funders will need to come up with innovative ways to fund projects with strong fundamentals, in order to enable them to proceed without the current level of presales required.
Limiting potential risk exposure
High land values and construction pricing still exist, creating project feasibility conundrums. That said, we are seeing some developers exit land holdings at discounted rates in selected areas due to projects not stacking up. We expect this trend to continue this year as the cycle continues.
In turn, these factors are also leading to housing companies in Auckland pulling back on the level of spec builds they undertake, in order to limit their potential risk exposure and cashflow restraints by having too much stock on the market.
Housing shortage – or social housing shortage?
We note with interest the many mentions in the media of a housing shortage in New Zealand. It occurs to us that in reality what we are seeing is in fact a social housing shortage, and the supply of housing above this level has stock available. This is partly behind the reasons why purchasers are not under as much pressure to buy. They have time for more in-depth and time-consuming due diligence, and are generally moving away from buying off the plans in case the market falls further.
Need to innovate
So, as we look ahead, what we’re seeing is that borrowers and funders will need to come up with innovative ways to approach the funding of projects with strong fundamentals, in order to enable them to proceed without the current level of pre-sales required.
This is where quantity surveyors’ continued level of scrutiny during the pre-condition report and drawdown phase will help to read the signs if a contractor may be heading for trouble, and our increased scrutiny on contractor selection and due diligence will help project funders and deliverers both have more confidence.
From July this year, we are planning to run a seminar for project finance teams on the state of the market to give funders a heads-up on trends in commercial/residential construction space so you can gain insights as to where we see the market moving forward. Please contact us on (09) 362 0624 or email email@example.com if you’d like us to come to your office to run a seminar.