Scramble to keep starts up

Divergent strategies are emerging as builders struggle to maintain relevance in WA’s hard-hit housing construction sector.

It is no secret that Western Australia’s builders are under extreme pressure.

Residential construction has quickly retreated from record highs in 2014-15, and while activity remains around historical averages, it is the relative drop that is hurting builders.

Dwelling starts fell by 22 per cent in 2015-16, to 24,600, according to the Housing Industry Association, which has predicted a further 20 per cent drop in 2016-17, to 19,780 homes.

The main contributing factor is that fewer people are moving to WA, particularly since June 2014, with the number of people moving to eastern states far greater than those entering WA since that time.

And, according to the HIA’s latest outlook, things aren’t expected to get better any time soon, with WA ahead only of Tasmania on the nation’s economic ladder.

Those statistics prompted prominent land developer Nigel Satterley to issue a sobering warning to the industry earlier this year; he believes housing starts in 2016-17 will come in closer to 12,000, rather than the 19,700 predicted by the HIA.

ABN Group managing director Dale Alcock said builders were already two years into a downward cycle, and that the market was bouncing along the bottom.

The difficult market conditions are not only putting pressure on builders, but also the state government, which has been reinsuring all losses under WA’s housing indemnity insurance scheme since November 2013.

Home indemnity insurance acts as a last resort for consumers in the event a builder collapses, or its work is unsatisfactory.

Since work started slowing towards the end of 2014, there has been a growing list of collapsed builders in WA, the largest being Capital Works Constructions, which was building 229 houses under the Freelife Homes and Visionaire brands when it collapsed in May 2015.

Six small builders have gone out of business since June – Quattro Homes, Pitaro Homes, Nominated Homes, Shane Crothers Homes, BCA Homes, and M3 Building & Construction.

In 2015-16, the state government outlaid $74.08 million in home indemnity insurance expenses, with sources suggesting rising concern in government ranks over its increased exposure.

While most pressure has hit smaller builders with little room to move on margin, Mr Alcock said his company, the second largest builder in the state, hadn’t been immune to the slowdown, with its housing starts in WA down around 1,200 on the previous year.

During the past 12 months, ABN Group reduced its total workforce, a process Mr Alcock called ‘right-sizing’, to ensure it was still competitive as activity plunged.

However, Mr Alcock said he was beginning to see signs of improvement in the industry.

“We’ve probably got another 12 or 15 months of this sort of activity,” Mr Alcock told Business News.

“But the next turn will be up.

“What we’re suffering at the moment is very much a lack of consumer confidence, and we’re no orphans in that; that’s really a state economic issue, there is a lack of solid consumer sentiment.

“I don’t blame government for where we are at, but people look for signals of stability and confidence and I don’t think with the recent federal election and where the state government has been at, from their own internal bickering and issues, that that’s a great lead for the public to see.”

Mr Alcock said WA’s many builders were rolling out a range of diverse strategies to deal with the downturn, with ABN Group targeting Melbourne’s more active housing market to offset the slowdown in WA.

ABN Group operates two brands in Melbourne, Homebuyers Centre and Boutique Homes, constructing more than 1,000 homes per year in Victoria for the past two years.

“Melbourne has certainly been an educational journey,” Mr Alcock said.

“We’ve established ourselves very firmly there and it has been a good move for us, because as tough as WA is at the moment, that Melbourne market is still very buoyant.

“The effort and work we’ve put in since 2009 to establish ourselves is really paying back in this current cycle in WA.”

Summit Homes Group chief executive David Simpson, who described the market as hard and difficult, said much of the pessimism in WA stemmed from rising unemployment.

“When there is nervousness about employment, even though interest rates are low, people become a little bit more conservative,” Mr Simpson said.

“We’re all pretty sombre because we’ve had a good run and now we’re in a cycle again.”

Nevertheless, Mr Simpson said current conditions were simply part of the normal property cycle, and he had every confidence of a rebound in coming years.

To back that belief, Summit Homes Group, whose housing starts held up better than most builders (only dropping by 14 per cent in the past year), is investing $20 million on a new headquarters and showroom on Leach Highway in Myaree.

“We’ve invested in a new building, and we’re really excited about that,” Mr Simpson told Business News.

“I’m confident enough in the industry to spend the money in having a first-class office for our staff.

“Our staff deserves a fantastic working environment; we have a lot of long-term employees, and by giving them a first-class working environment we’ll retain the best people, and by retaining the best people we’ll do the best by the client, and that adds to our reputation.

“Reputation is critical to us. We’ve been around for nearly 40 years and our reputation is so important to us, and doing the right things by our clients is as well.”

BGC Residential managing director Kelvin Ryan said the state’s biggest builder was able to maintain its lead at the top of WA’s builder rankings by maintaining a strong focus on what it’s good at.

“Everyone’s feeling it tough at the moment, but it does depend on which segment you play in,” Mr Ryan told Business News.

“We’re heavily into first homebuyers, in fact we would call ourselves a first homebuyer specialist, and the good thing about first homebuyers is they are always there.

“There are always people that are getting to an age where they get a job, they start a family and they want their own home.

“That’s a big saving grace in my book – they are always there, so we target them and specialise in them.”

Mr Ryan said slowing population growth was an issue, but the other factor hurting a lot of builders at the moment was that, during a boom, prices did not increase in line with demand.

“In a normal market, when it’s a boom, people normally get prices up, it’s just supply and demand,” he  said.

“We didn’t see that in the last boom. The main reason was because when someone goes and buys a house, they buy a block of land first and if the price of land rises, as it does in a boom, they spend the money first on the block of land, and then they are capped at what they can buy a house for.

“So the builder is hamstrung by how much this person can afford, so you can’t get your price up.

“Land developers are going to have to come to the party.

“The housing component of a house-and-land package has been squeezed as far as it can go; there is not a lot of wiggle room.”

Mr Ryan said people only had to switch on the television or open up a weekend newspaper to get an indication of the extreme pressure being faced by builders seeking to maintain their order books.

He said potential homebuyers were being bombarded with special offers, with builders offering to triple the first homebuyer’s grant, luxury incentive packages were becoming the norm, and even cars and holidays were offered to those willing to sign up for a new house.

“If you watch free-to-air TV at night, (building advertisements are) one after the other, including our own brands, and other builders that haven’t traditionally advertised,” Mr Ryan said.

“That’s very challenging. I don’t think there would be a builder around at the moment that’s not coughing up margin left, right and centre.”

But Mr Ryan said BGC had a different model to most of its competitors, with its business geared to provide work for the various building supplies companies under the BGC banner, including Brikmakers and BGC Concrete, among others.

“We pretty much say ‘how many houses do we need to support the supply companies and keep their orders full’,” Mr Ryan said.

“Across the board, we want our 4,000 units a year or thereabouts, so we’ll pull whatever levers we have to do to try and reach that quantum.”

At Summit Homes, Mr Simpson said he didn’t believe in gimmick advertising.

“We can put all the press ads in the world about spruiking how great we area, but it’s usually the talk around the barbecue that attracts the most attention,” he said.

“When you get a reputation for quality and service, at a good price, I think that is a better reference than opening a paper.”

JWH Group managing director Julian Walter said his housing brands, which include Oswald Homes, Plunkett Homes and Residential Building WA, also tried to avoid cash-back offers and other incentives.

“The industry is too thin to actually give a true cash-back; it’s a smoke and mirrors exercise most of the time,” he said.

“We’re trying to sell using a conventional methodology, saying there is value in the deal.”

Mr Walter said while some industries could give proper rebates because a manufacturer had given it to move stock, that wasn’t the case for residential builders.

“It’s still swings and roundabouts. If you give a higher ceiling you have to take something out of something else, there’s not the fat in houses these days to give something away,” he said.

“In our case, we build to order, so we haven’t got that gross margin to operate in. 

“They’re not getting any more or less, if that makes any sense. You see someone giving a car away one month, the next month will be a furniture pack. The price of the house will stay the same but the offer changes.”

Mr Walter said the big issue with incentive packages and rebates, which were not a direct part of the house, was the final build generally did not stand up to valuation.

“What’s happening is some of the developers have gotten a bit desperate, so they’ve given a true rebate of $20,000 off a $200,000 block,” he said.

“The valuers are very quick to pick that up and they’re quick to write $20,000 off every block, and then there is a problem.”