It is that time of year when, if you are brave enough, you make predictions for what 2017 has in store for us.
Based on what is coming across my desk, and the conversations I am having within the residential development industry for Brisbane, it is clear that there has been a major change.
Some of my predictions for 2017 are:
1. The banks are out
Funding from the banks for residential developments (particularly apartments) will get even harder during 2017. Included in this newsletter is an article titled “The Day the Presales Died”, which I wrote for the GPS investor newsletter. My understanding is that the banks have everyone up their ribs over capitalisation levels. In residential development lending the risk mitigant for the banks to reduce capital levels, so that they can lend, is presales. No presales – no lending. In times of oversupply of product, buyers generally move to completed product. Even when the market returns to undersupply, it generally takes time for the underlying demand to build up so as to drive price growth and therefore the ability to achieve preconstruction presales.
Predicting that the banks will not return in any great degree to residential development lending in 2017 seems to me to be a no brainer. The crystal ball stuff is predicting whether it will be one, two, three or more years, or even ever. My prediction is that the world has changed, life will not go back to as it was before and the banks will not return to how lending was previously conducted. I believe it will become more “balance sheet” focused so as to be a commercial rather than a development lend, which will attract a wider range of risk mitigant options to deal with capitalisation tests.
2. Builders are vulnerable
There will be more failures of building firms. To me this is just a symptom of being at the top of the oversupply segment of the residential property cycle.
3. Where did the cranes go?
New building starts will substantially decrease. We will go from “the cranes, the cranes!” to “where did the cranes go?” There is simply not enough finance. I have already heard that front end trades are looking for work and being more competitive on pricing.
4. A soft landing
As a consequence of the above items, my view is that unless you are in some specific areas, such as West End through to Teneriffe, it will be a relatively soft landing from oversupply. Overall there will be a relatively flat market for prices for 2017 and longer.
My message to developers for 2017 is to look at the cost of finance as an overall project cost, and one of doing business. The cost of preconstruction presales, even if you can get them, and other costs associated with waiting to achieve the presales, add up to an awful lot of interest.
I am receiving a lot of calls along the lines of “Richard, old friend, old buddy, sorry I went to the banks – have I got a deal for you!” It will be finance which will sort out the oversupply in the market.
My message to builders for 2017 is to make sure your clients have the money. You should have this right in your building contract. You do not want to be 14 days after lodgement of progress draw number one to find out that the developer was counting on achieving presales once construction had started. But they didn’t get them, and now the bank is being difficult. If the developer is going to take that punt, then ensure that it is done on their monies and not yours.