What the building crisis means for property investors

Australia is currently experiencing a rapidly emerging crisis in the building and construction industry. Rising labour costs, building delays, material shortages and depleted workforces have all contributed to our current situation.

Property investment is a contemplation of finance and servicing that finance, just as much as it is a game of bricks and mortar. But what happens when this bricks and mortar – and the cost to put it all together – starts to cost too much?

Chris Wolfe from Wolfe Advisory Group has described the building crisis as a “new pandemic” that can be linked to the lingering effects of COVID-19 and the combined pressures of a hot property market.

Building Backlogs

We are now seeing a huge swell in the backlogs of building companies, but a significant shortfall in workers and available funds to complete these builds.

The dilemma for builders lies in the nature of the contracts that have become a staple in the industry. These contracts lock in the prices agreed to upon signing, stripping builders of the ability to raise them to accommodate for build cost volatility, which is dangerous for an industry with thin margins. Therefore, many of the contracts signed pre-pandemic are simply no longer profitable to complete.

This forces builders to either conduct builds they know are unprofitable, or to simply delay projects, upsetting the end customer. For the builders that do choose to go ahead with builds, they in turn face difficulties paying the workers that they have employed to complete the job, due to the lack of profit. This forces builders to choose between using any sales proceeds to pay for the high price of materials or the cost of labour.

Paying the price of materials leads to a distressed workforce, and paying the workforce leads to unpaid suppliers, leaving builders between a rock and a hard place. There are many notable builders/developers in Australia that have faced financial difficulties due to this issue.

Property Investors and Developers

The current building crisis is impacting Australians looking to enter the property market and investment property owners and developers who are currently building or have plans to build.

Key2 Realty Business Manager, Larissa Llowarch, said property investors should always have a long-term view when it comes to investing and holding property.

“Material expenditures such as a renovation or planned and long-term maintenance upgrades can be timed to market conditions, however responsive maintenance or fixing safety hazards should never be delayed. Those projects should always be dealt with, as and when required, to ensure the reasonable obligations placed on a landlord are upheld.”

Asked about his views on how the current builder crisis is going to affect property developers over the next 6-18 months, Samuel Property’s Managing Director, Illan Samuel is optimistic, believing that market corrections lie just around the corner.

“I expect pricing to stabilise in 2023 with a lack of work for builders following a reduction of shovel ready developments that are funded, combined with more labour resources as immigration comes back and less government infrastructure projects”. Much of the view that selling and building in the same market allows developers to be covering rising costs with rising revenues, he adds “developers need to keep one eye on sales rates and the other in building rates, ensuring they have developments that can sustain price adjustments to reflect construction costs, together with a strong relationship with a preferred builder.”

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