This is why the construction outlook has gone to garbage.
There were shock-waves going through the commercial government sector last week when a major developer suddenly put over a dozen sites on the market, many with development approvals already in place.
“Market realities” including rising inflation, labour shortages and higher construction costs have forced private developer APH Holding to put more than $200 million worth of sites on the market and abandon plans to develop over a $1 billion of projects including a “mini-city” in Melbourne’s Forest Hill.
In response to written questions from The Australian Financial Review, APH Holding CEO Johnson Zhang (no relation to owner James Zhang) said the developer was committed to completing its projects under construction including Wellington Health and an apartment development, also in Box Hill, but would not undertake other projects.
“Our intention is to position APH Holding to navigate challenging market realities (inflation, labour shortages, higher construction costs and the like) while preserving our most valuable assets, like Wellington Health Box Hill.”
A spokeswoman from Accor, said it could not comment on the fate of its Novotel Box Hill hotel, which was due to open next year. That site, worth around $13 million, is now on the market with a permit for a 162-room hotel.
A site with approval for a 162-room hotel is emblematic of the current shake out in the construction sector.
Major sites – and many major residential projects – are coming on to the market with approvals fully in place, because the developer just can’t do the actual development anymore.
The numbers just don’t stack up:
A surge in holding costs, squeezed profit margins and a collapse in the off-the-plan apartment market are fuelling a sharp rise in the number of development sites being put up for sale, many of which have existing permits.
Analysis by DevelopmentReady.com.au, a portal that specialises in development sites, found more than a third of sites listed for sale over the past six months (September to March) were being offered with a permit (or an approved development application). This compared with 22 per cent of sites being sold with permits in the first two quarters of last year.
The growing number of development sites hitting the market comes after apartment sales last year slumped to their lowest level since the global financial crisis, according to the latest UDIA State of the Land Report.
Highlighting the challenges being faced by developers and their financial backers, non-bank lender Salvest provided land and construction funding on 22 developments last year – none of which have commenced construction.
“The project feasibility is no longer stacking up. In some instances, profit margins are coming up at negative 4 per cent when they used to be in the mid-20s,” Salvest managing director Anthony Ferraro told The Australian Financial Review.
A collapse in profit margins from 20% to negative 4% sounds wild, but when you remember that the cost construction materials alone is up 40% on pre-Covid levels (before you get to labour costs), it sort of makes sense.
But it’s why Australia is going to struggle to bring a meaningful amount of housing online this year.
And why the housing shortage just goes from bad to worse.
DB