Developers abandon apartment projects as credit squeeze continues

The building and construction industry warns developers are in trouble, with a lack of available credit forcing the number of abandoned projects up by 69% during the past year, possibly forcing up prices in the rental market.

Some experts warn the lack of available finance is also due to softer demand in the property market in general, suggesting construction won’t pick up until at least the end of the year.

“This is the so-called credit crunch that we’ve been talking about for some time,” says Housing Industry Association chief economist Harley Dale.

“We conducted a survey of our members back in the New Year, and it reinforced the fact that a lack of available credit is one of the biggest constraints on new home building.”

These experts say a flood of factors is bringing the construction industry down, including interest rate hikes, soft demand in the property market in general and delays in the building approval process that have plagued the industry for years.

Figures from Cordell published in the Australian Financial Review today state that while 476 new apartment projects were approved in March, the actual number of projects that began was down by 27% from 2010.

Dale says while building approvals have been strong, there is a disconnect between actual construction starts.

“The spike in approvals last year did give the impression that there was a little bit of a recovery underway, but there are two issues here – the first is that this recovery petered out quite quickly after the November rate hike.”

And the second is that this evidence of a recovery was mainly based on building approvals – but approvals are quite different from actual construction and Dale says many don’t even reach that stage.

SQM Research managing director Louis Christopher says many apartment projects aren’t approved for finance until the developer has pre-sold many of the residences. And as demand continues to fall, filling buildings with new residents seems more unlikely.

“Predominantly this is happening in Melbourne and a little bit in Brisbane, but not so much in Sydney from what I can see.”

“It is credit, but it’s also this softening demand for apartments as well,” he says.

What effect this will have on prices is uncertain. An oversupply of dwellings and higher interest rates combined with softer demand is pushing prices down, but Christopher says the lack of apartments will also mean rents will continue to tighten.

“This will have an effect on the rental market,” he says, although he warns this will vary from city to city and there won’t be an impact on the market immediately.

Dun & Bradstreet director of corporate affairs Damian Karmelich also says this lack of credit for building developers is tied into the softness of the market.

“We do know the issues with the construction companies are related to that softness, and of course what that would mean is that smaller players need to find strong interest in their respective projects if they are going to acquire finance.”

“And of course, that means pre-selling a number of units and that can be hard in a soft market.”

Dale says these factors combine to create a paradox where buildings may be approved but are eventually abandoned.

This is also exacerbated by laws developers call stringent and restrictive. The planning process is incredibly complex and builders often have to pay through the nose years before a project is even approved, let alone constructed.

The recent report from the Productivity Commission into rezoning recommends some changes to these laws, (and many housing associations such as Urban Taskforce Australia welcomed them), but for now it appears builders are stuck with a limited number of buildings and even fewer people who want to live in them.

“That’s where you’ve got this disconnect. You’ve got projects that just aren’t going ahead at all, and then you’ve got other projects where they might look as if they could go ahead but there just isn’t significant finance.”

“It’s unfortunate when bodies like the HIA and the Master Builders Association speak about this a while out, but it’s quite another situation when it actually happens.”