We all know the importance of planning when it comes to laying the foundations for a successful property development, so what is your plan B in the wake of the coronavirus pandemic?
COVID-19 has created unprecedented industry uncertainty and challenges for developers yet to commence or in the midst of a live construction project.
However, among emerging challenges there are also opportunities.
Whether your project is facing delays, supply chain disruptions, labour shortages, potential contract disputes, increased settlement risk or all of the above - in any crisis it’s critical to be proactive and pragmatic.
While the government’s economic stimulus packages and early signs of flattening the infection curve could help soften the coronavirus blow sooner than we thought, there are several risk mitigation strategies you can implement right now to boost your project’s immunity and ultimately, protect your bottom line.
Use this time to accelerate pre construction approvals
The State Government, led by the Planning Minister, is displaying tangible signs of understanding the role the construction industry can play in sustaining and underpinning our local economic recovery.
Industry heads are hopeful of seeing strong leadership in this space with an increasing focus on redirecting funding and cutting red tape and approval times in order to allow more projects to commence sooner.
Some Local Councils are showing signs of pragmatism and genuine endeavours to do their part to stimulate economic activity such as allowing online Design Advisory Committee meetings and prioritising approvals for shovel-ready projects. Others however appear operationally impaired and overwhelmed leading to responses like ‘I might start looking at that development application in two months’, so it’s important you do your homework and elevate up the chain quicker than usual.
We all need to support our Local Councils to support themselves or they will unknowingly or knowingly choke the flow of capital and new construction starts and with it thousands of local jobs.
Do you have any projects that are or could be shovel-ready?
Identify these and accelerate pre-construction approvals whether it be development applications, structure plans, local development plans, etc.
We don’t know how long our industry will be severely disrupted for but we do know it won’t last forever.
By continuing to progress your pre-construction approvals you will make use of this ‘down time’ and ensure your project will be ready to go as soon as the economic conditions allow.
If you are considering delaying the commencement of projects, the Planning Minister recently announced a blanket two-year extension to all development approvals along with other pragmatic but temporary local planning scheme exemptions to assist with COVID-19 response and recovery.
Existing projects, things to look out for
Construction sites across Perth are still open and so far operating quite well under the circumstances.
Generally, all parties - builder, developer and lender - are all working collaboratively to keep things moving as no one benefits from sites being significantly delayed or shut down.
We are fortunate that both our state and the federal governments understand the important role the construction industry plays in helping to keep the economy ticking over.
Western Australia is even more fortunate in that our infection curve over the past week has been flattening, which is positive news for construction sites as this increases the likelihood of them remaining open and continuing to provide critical employment.
More than 60 per cent of Australia’s $6 billion worth of construct-related materials are sourced from China, according to the Australian Construction Industry Forum, representing a major challenge for current supply chains. With China and its supply chains beginning to come back on line it is hoped that the backlog of supply orders might be able to normalise in coming months, however this is difficult to predict.
If postponement of your project is not an option, early engagement with your builder is crucial in establishing what materials are still able to be imported from China, assessing, selecting and processing alternative materials, as well as determining what can be acquired locally and who bears the additional costs.
The same applies to reviewing construction methods. With the government imposing strict social distancing health and safety guidelines you need to consider the impact on your sites.
It is also a good time to review your head contract and confirm how terms like force majeure or unpredictable events are defined as this will determine your exposure to items like project extensions, cost of alternative materials, import exchange rate fluctuations, increased OH&S site costs and the recovery of liquidated damages.
Talk to and engage early with your builder to sit down, interrogate and resolve disputes. This will help avoid costly and time-consuming disputes in what is sure to be a backlogged tribunal and court system.
Tendering and commencement of new projects
With a market impacted by a pandemic that’s constantly evolving each day, builders and subcontractors are finding it increasingly difficult to fix pricing, with many wary of or unable to take on COVID-19’s associated cost and delay risks.
When asked to price risk, some builders are applying significant risk margins and potentially rendering projects unviable.
For projects out to tender or about to start construction this causes major underlying issues, the main issues being: who carries that risk and how does the contract need to be amended?
If you are conducting a tender can you review how it is being carried out? Has the risk of increased costs and delays been priced by the builder and their subcontractors, and should you consider alternative tendering or procurement strategies to reduce cost premiums?
If there is no urgency to commence construction it may be possible to have builders and subcontractors exclude the COVID-19 related risks and allow time for the market to normalise before finalising the contract.
Keep in mind that builders will also face increasing cash flow pressure on account of incurring costs out of imposed restrictions, material supply issues and delayed forecast project commencements so increased financial due diligence, securities and project bank accounts are worth considering.
Understand potential settlement and completion challenges
Consider your cash flow and payment arrangements tied to key project milestones at a time when suppliers and contractors may require longer completion periods.
Consumer confidence, particularly due to employment uncertainty, is contributing to a sharp decline in off the plan buyer activity.
We have just started receiving reports from mortgage brokers over the past week that retail banks are beginning to clamp down on and withdraw pre-approvals for off the plan buyers they view as having altered or higher risk professions.
This has the potential to be a major acute issue for apartment developments approaching completion however, like international supply chains, will hopefully normalise quickly as social distancing measures are relaxed and people go back to work.
In the meantime we need to dig out our post GFC buyer tracker schedules, closely monitor buyers well out from settlement and be ready to assist those in genuine distress.
Review your portfolio and investment strategies
Only time will tell when the business and employment markets will begin to normalise. It is important that you review your portfolio’s strategic plans and capital works programs to respond to the short-term disruptions as well as ensuring your portfolio is best positioned to take advantage of the market once it rebounds (and it will, eventually, even Perth).
The business as usual approach is challenging us all and it’s more important than ever to be proactive and measured with the decisions we make for our projects.
We’re here to help
The COVID-19 pandemic has created unchartered waters for many of us across our projects - but there is a lot you can do to improve your position and you don’t have to navigate this challenging period alone.
We can also help you start planning your property development strategy for when the pandemic passes and new opportunities present themselves.
At OP Properties we specialise in development advisory, project management and superintendency of construction projects across WA, but mostly built form across Perth. We are a specialist development consultant available to assist you with your property growth planning as well as end-to-end management of a construction project.
Our superintendency advisory team is led by Project Director Bill Fiddian. Backed by more than 30 years of experience across the construction sector as a builder, developer and quantity surveyor throughout the UK and Australia, Bill’s recent superintendency appointments include Blackburne’s Enclave and Essence apartment developments.
To find out more about our project management and superintendent consultancy services visit www.opproperties.com.au.