Construction industry cracks showing as major developer collapses
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The cracks first appeared in the buildings. Now they have begun to spread across the industry.
The collapse of two high-rise apartment developers — the Sydney-based Ralan Group and Melbourne’s Stellar Group — within the past month has ignited the property industry’s worst fears: that large numbers of would-be buyers either are unable or unwilling to settle on pre-sold apartments.
Lured by the prospect of easy profits in a booming market, property investors snapped up units off the plan, armed with a small deposit and in many cases a non-binding assurance from a financier, usually a bank.
But the property downturn in the past two years has seen sharp falls in apartment prices in Brisbane, Sydney and Melbourne, adding to the already depressed markets in Perth and Darwin.
Off-the-plan buyers in a sticky situation
That’s put many would-be investors under water, left holding agreements to pay boomtime prices, usually well above the current market rate.
And that’s when things get sticky.
That agreement with the bank was never a guarantee. It wasn’t even a promise.
While the bank may lend money, often it will only be for a reduced amount, leaving the buyer scrambling to raise the extra cash to buy an overvalued apartment.
As an off-the-plan buyer, however, there is a legal obligation to take the unit. Either they cough up the full, final payment or face default, which results in losing the deposit and being potentially exposed to legal action to recover the full amount.
The situation has been deteriorating for the past year. Banks have been under pressure to impose greater scrutiny on borrowers’ finances and eradicate the irresponsible lending practices that helped fuel the property bubble.
Property research group CoreLogic reported in April that about one in five units bought off-the-plan were now valued at 10 per cent less than the agreed purchase price.
That was way above levels of a year earlier. Not surprisingly, there were far more under water for less than 10 per cent. About half of all units up for settlement came up short of the agreed contract price.
Economic nightmare scenario
For smaller, privately owned developers, like Ralan, this creates the kind of liquidity crisis from which there is no recovery.
It is also the scenario the Reserve Bank has been praying would not play out.
Earlier this week, residential approvals — particularly for new units — slumped to a six-year low, 26 per cent below the levels in the same period last year.
Even without the sudden shock of collapses such as Ralan — with a pipeline of 3,000 units under construction — that kind of industry downturn will result in large-scale layoffs.
According to investment bank UBS, the recent slide in construction job advertisements is consistent with its forecasts for about 100,000 job losses before the end of this year.
After pledging to drop the unemployment rate to 4.5 per cent, it’s little wonder Reserve Bank governor Philip Lowe has been urging the Commonwealth and state governments to fire up infrastructure spending.
Then, there’s the ripple effect across the building supply industry.
Share prices across the sector tumbled on Wednesday after cement group Adelaide Brighton downgraded its earnings for the second time in three months and canned its dividend.
On Wednesday, its shares slumped more than 18 per cent. The slide continued on Thursday, with another 5 per cent drop.
Expect those falls to be mirrored by interest rates.
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