This article was written by Ben Abbott, originally published by Australian Broker on 11 April 2023. It is reproduced here in full without amendment with thanks to Australian Broker.
A media focus on the problems facing the construction industry is obscuring positive signs of an improving outlook and a good level of appetite for new projects in 2023, according to commercial property development financier Trilogy Funds.
Clinton Arentz (pictured above), executive director lending and property at Trilogy Funds, said the lender was seeing “an improving set of conditions moving forward”.
This included a stabilisation of inflation-driven cost increases on materials and labour in the construction industry and more certainty on interest rates.
CoreLogic’s Cordell Construction Cost Index ended last year on a new high, climbing 11.9% over the 2022 calendar year, making it one of the largest annual increases on record. However, it also showed that on a quarterly basis, there was an easing in overall residential construction costs.
Arentz said improving conditions were leading to a lot of inquiries from entrepreneurial property developers looking at getting property projects off the ground throughout the year 2023, a trend being supported by a large undersupply problem in the residential property market.
“A lot of people had projects hamstrung last year and they have got parked for six or 12 months,” Arentz said. “But we are seeing an enormous amount of demand for the end product and a general shortage of supply across the residential housing market, whether that is in the apartment or housing markets.”
Arentz said while volatility in recent times had impacted the development and construction industry and had done “quite a lot of damage that will take a little bit of time to repair”, good builders with good balance sheets are “going just fine and have performed very well in our experience”.
Good prospects for residential projects
Arentz expects the ultra-premium market may soften a little bit, while the house and land market may also be subdued due to affordability problems at the bottom end of the market as well as demand from first homebuyers being brought forward. However other segments look positive.
“Medium density is strong and we will see more of that. Although apartment projects are wearing a higher cost base now, values have now risen by a similar amount, so both cost and value have shifted up about 15% to 20% depending on where and what the project is exactly,” Arentz said.
He said city markets were performing well, as were coastal and regional hot spots. This showed that Covid’s demographic changes were “solidly baked in”, with people moving to areas such as the coast or the mountains driving subdivision projects in rural or coastal locations.
Along with other lenders Trilogy Funds has adjusted its rates in line with interest rate increases, but Arentz said that the group’s collective loan book had absorbed those increases “remarkably well”, and that projects were still being completed and there was no distress apparent.
“The traditional projects we like to fund are going really well and we are sitting on a book of funds under management greater than this time last year. There is demand for new loans and existing loans have repaid well, giving us the liquidity to lend on new projects.”
Brokers need to work harder to get deals financed
Brokers may have to work harder to get deals across the line, Arentz said, as many of the projects that had begun during boom times may no longer stack up for lenders on paper.
“Brokers are a versatile breed, they roll with the punches pretty well, and they have taken the news during this interest rate cycle very well. I think what brokers are finding is that some transactions don’t work at the moment, because not all transactions are blessed the same way.”
This means brokers may have to “pick through more projects to get one that works”, as lenders exhibit more caution in the way they approach lending on projects in 2023, Arentz said. For brokers, this means they may need to work harder to generate an income flow for the next six months or so.
“That is not because lenders won’t lend, but because they are trying to sort the wheat from the chaff, to see if these are good projects with good fundamentals, or a project that has been ill-conceived during the recent boom and doesn’t’ have the same value in the current market.”
This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the management investment schemes mentioned in this article. Application for investment can only be made on the application form accompanying the relevant Product Disclosure Statement (PDS) and by considering the Target Market Determination (TMD) available at www.trilogyfunds.com.au. The PDS contain full details of the terms and conditions of investment and should be read in full, particularly the risk section prior to lodging any application or making a further investment, together with the TMD. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.