Challenges in the construction industry

Not only are we in unprecedented times globally, but we are currently in the middle of the largest property boom I have experienced in my 20-year property career. This is amazing for homeowners and investors, but what usually happens when the market is peaking, is the demand for home building. This demand pushes the house industry into a frenzy, delivering record numbers of new homes across the country. This a great outcome for the property market and the economy, but this also increases risk.

So, what went wrong?

Those of you who attended our Business Partner Briefing earlier this month would have heard Gavin, our Senior Research Analyst, and I talk about the strain across the building industry on the back of supply chain issues. This has a major domino effect, leading all the way down to labour shortages.

With material costs rising fortnightly, builders are hesitant to take work on. That is not a bad scenario, as they haven’t commenced the build and no fixed price contract has been signed.

For builders in the middle of building a project, they are currently attempting to manage increases of 30%, where reputable builders work off a 15-20% gross margin. Suddenly, these builders are now 10% (best case) in the red. Now if you’re building one home, you might be able to absorb the loss. What happens if you’re a major builder who has 200 to 500 of these homes and are now working on a 10% loss?

These are the challenges at the moment across the industry. The figures I have used are numbers thrown at me by multiple builders I deal with and are obviously different depending on the dwelling type and the size of the project.

It became clear that the challenge is universal after a visit to the Sunshine Coast last week. After meeting with a number of builders and developers, there was a common message – they had our busiest 12 months last year and will be happy if we can somehow break even. One of Sunshine Coast’s most active builders has projected a $10 million loss in 2021.

We are not oblivious to the challenges, but are very limited in what we can ask for when researching developers and builders when approving projects. As Acquisitions Manager at Blue Wealth Property, I can assure you that we are pro-active in finding out as much as possible about the developers and builders that will be delivering the project, but are also aware that this can change at any time with external factor influences such as material rises etc.

Now that the current construction update is out of the way, what does 2022 and beyond look like for your clients who are investing now and those who have previously invested? One word of advice is hold onto your assets. There is going to be one of Australia’s largest supply issues in the coming months. More than ever, projects are being shelved or not completed. Demand will overtake supply pushing the established market into a frenzy. Remember as frustrating as it has been over the past few years, particular in Brisbane, your clients purchased an amazing property at 10-15% less than ones delivered in the same suburb today.

Do not lose focus on why your clients began this journey and remember markets are cyclical and can turn on a dime.

I look forward to seeing you all next Thursday for our property showcase and hopefully in person soon.

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