What causes a delay in project completion?

Posted by Dominic Cavagnino

When purchasing a property off-the-plan, you’re advised of an expected completion date. Of course, there’s always the possibility that this date can shift either forwards and backwards. From a developer’s perspective providing an anticipated completion date is extremely difficult, as there are a variety of moving parts which come into consideration throughout the development process. In this insight, we’ll break down the process and focus on aspects which can impact you as an investor.

Acquisition

Identify potential development site
Complete due diligence – comparable sales and potential sale of properties
Negotiations with the vendor to purchase at the right price
Converse with banks and financiers for land funding

Town Planning

Development brief
Engage architects to begin design
Feasibility testing
Consultant reports

Sales & marketing

Develop marketing collateral and strategies
Begin sales strategy
Release pricing
Prepare individual apartment contracts

Tender & Delivery

Documentation
Tender out for the construction of the project
Organise construction funding
Begin construction

Settlement

Transfer Docs
Settlement Tracking

The Blue Wealth Acquisitions Team try to get involved as early as possible. With developers who we’ve had longstanding relationships with, consulting us has become part of their due diligence within stage one of acquisition. Early involvement provides us with the opportunity tailor properties to align with our strict criteria and research methodology. In some cases, it can be over 12 months before we see a property which was brought to us at the early stages of planning. These projects are then re-assessed based on the changed market conditions.

As an investor, your first exposure to a project is during the sales and marketing phase. At this point a developer needs to sell a specific percentage of apartments within the project to ensure they’re able to achieve funding for the project. In tighter market conditions the percentage of sales a bank will require is increased. The length of time a project remains in this phase of the development cycle is dependant on the number of sales which can be achieved and how long it takes to do so. If you benefit from being one of the first to purchase in the project, delays in the selling process may result in a push-back of the project completion date.

Once a project has achieved what is believed to be the required pre-sales. The developer will then begin tendering out for a builder to take on the project. Securing a builder includes the time taken to negotiate, which can vary greatly between projects. Selecting the right builder is important to ensure the project is delivered to a high standard. Blue Wealth aim to align themselves with developers who have strong relationships with top tier builders around the country.

Once the construction stage has begun, you may be subject to a number of unexpected occurrences. Weather delays and/or trade and material delays can push out construction timeframes. In some instances, the excavation of a site can lead to unexpected and abrupt setbacks. As an example, in the past developers have begun excavations and hit rock causing a delay as they require specialised additional machinery to continue works. All of these aspects are not easily known prior to construction commencement and have the ability to push out practical completion.

We understand that clients invest for various reasons. Some may do so to reduce tax, or to execute a pre-determined strategy in building a portfolio. We also understand that a delay in construction may conflict with the original strategy, however, this is one of the possibilities when investing in an off-the-plan (OTP) property. For most investors, a delay is considered a positive thing, they’re able to delay the need to finance the property while also being locked into a purchase price and having a more passive interest within the property market. Any growth or capital gain achieved over the period they will benefit from.

The advantages of investing OTP outweigh the potential disadvantages of a delay in completion. Some of the main advantages include:

Increased selection and choice: you are not limited to what’s available on market. You have a broad selection of the best properties available within the project.
Price locked in: the purchase price is locked in at the date of exchange. Any delays to construction do not affect the price you pay. In some cases, properties which take 2 – 3 years to complete, investors can benefit from some capital growth.
Depreciation benefits: new legislation means that only the first owner of a property is eligible to claim depreciation on fixtures and fittings. Improving your tax position and your holding costs.
More time to save money, minimising the amount needed to borrow.

For a developer, the development process is costly, strenuous and stressful. Many parts of the development process are out of their control or can be affected by external factors. We do our best to allow buffers in the anticipated completion dates as to minimise the potential for an extensive construction delay. Of course, some are unavoidable, however aligning ourselves with the right developers ensures that delays do not result in any sacrifice to the quality of the property.

Posted by Dominic Cavagnino, on 12th Jun 2018