Small-scale developers can expect a mix of both headwinds and opportunities in the Australian property market, as a crisis of worsening home affordability prompts concerted action from government.
A range of market pressures in Australia pose major challenges for these developers, including rising materials costs, an acute scarcity of skilled labour and difficulty accessing finance.
At the same time, however, smaller developers could soon encounter a bevy of project opportunities, courtesy of efforts by the Australian government to deal with the nationwide housing crisis.
The federal government has set ambitious targets for growth in dwelling supply, to remedy the housing shortages that have created affordability woes for everyday Australians.
This will create ample opportunities for smaller developers, especially when it comes to in-fill projects needed to increase home supply in established areas.
Inflation undermines project feasibility
Perhaps the biggest factor posing a headwind for property development has been the rampant inflation that wracked Australia and other economies in the wake of the Covid pandemic.
Inflation in Australia hit a peak of 7.8 percent in the fourth quarter of December 2022, rising on the back of the expansionary fiscal and monetary policies used to keep the economy on an even keel during the pandemic.
The supply chain disruptions created by widespread lockdown measures further compounded inflationary pressures in countries around the globe.
This rampant inflation may have capsized many Australian developers, by raising the cost of projects whose delivery prices had been negotiated in advance.
While inflation may have significantly abated, it remains a concern for the Reserve Bank of Australia (RBA), which has kept interest rates on hold for over six months. Following its board meeting in May 2024, the RBA said inflation is still high and falling more slowly than expected.
Australia’s CPI grew 3.6 percent over the year to the March quarter, slipping just half a percentage point from 4.1 percent over the year to December.
This stubborn inflationary pressure continues to hamper project feasibility, by creating uncertainty over the building costs for developments.
Recent data from Proptrack highlights the compounding challenges faced by SME developers, exacerbating the already complex landscape of the Australian property market. Rising construction costs, which have surged 33.4 percent for building inputs since the pandemic, have significantly compressed profit margins for developers, delaying many projects.
This is echoed by Domenic Schiafone, director at construction consultancy Rider, Levett, Bucknall, who said the problem would continue to thwart the completion of projects in 2024.
“Project delays and cancellations are a specific impact of current cost escalation,” Schiafone said in a recent report on the Australian construction market.
“Increased construction costs, holding costs and general project feasibility have made it difficult for some projects to proceed as planned, leading to delays and even cancellations.”
Additionally, the higher financing costs and ongoing labour shortages further strain the feasibility of new developments, intensifying the crisis in housing supply and affordability.
Despite these challenges, there is potential for new housing supply to be unlocked through a combination of rising home prices and strategic government interventions. As property values continue to increase, especially in established markets, the financial viability of new developments may improve, providing better pricing conditions for developers.
The Proptrack report indicates that the median price of new houses in Western Sydney is currently listed at a 21 percent premium over existing houses, potentially making new builds more attractive as prices rise. This dynamic could help bridge the gap between the cost of new and existing homes, facilitating the flow of capital into new housing projects. Additionally, the adoption of advanced manufacturing techniques and productivity enhancements in the construction sector can play a crucial role in mitigating high costs, thereby supporting the growth of infill housing projects needed to meet the nation’s housing targets.
Labour scarcity a major concern
Another market factor that continues to hamper project feasibility is a worsening shortage of the skilled labour needed to bring quality developments to completion.
A survey conducted by construction software and research company BCI Central last year found that 91 percent of builders considered labour shortages to be a key challenge for their businesses in 2023.
This finding was subsequently echoed by the HIA Trades report released in April this year. According to HIA senior economist Tom Devitt, the Australian building sector continues to suffer from labour shortages even amidst the slowdown in development caused by high interest rates.
“Australia’s acute shortage of skilled trades remains despite the slowing in building activity,” Devitt said.
“It is still among the most acute shortages of skilled tradespeople in Australia since HIA first published this report in 2003.”
A scarcity of skilled workers can have a major impact on project feasibility, given that labour is a key component of development and any rise in trade prices will bump up overall costs.
Trade prices rose by 6.2 percent in the 12 months to March 2024, as compared to an average annual increase of 2.0 percent prior to 2020.
Access to finance an issue for small developers
One factor affecting project feasibility that has a disproportionate impact on small-scale developers is the ability to access finance.
Australia’s financial ecosystem has long neglected the needs of smaller developers, due to the risk and complexity of their property projects. Difficulty accessing finance continues to be a major challenge for Australia’s smaller developers.
This challenge is perhaps the biggest headwind for property development because without adequate sources of financing it can be impossible to get projects off the ground or keep them going.
CrowdProperty’s landmark survey of Australia’s small-scale developers found widespread dissatisfaction with existing financial options.
The results showed that financing is the most important challenge facing the SME development community.
Nearly 60 percent of survey respondents said debt financing was the single biggest factor preventing them from building more homes.
Developers are deeply dissatisfied with the services provided by incumbent lenders, giving them a negative Net Promoter Score (NPS) of -19.67.
Australian government wants 1.2 million new homes
While smaller developers will need to grapple with these headwinds for project feasibility, they could also welcome a raft of new opportunities thanks to the Australian government’s efforts to overcome the home affordability crisis.
The national cabinet has set the goal of creating 1.2 million new ‘well-located’ homes by 2029. In the latest budget, the Albanese government reiterated its commitment to this goal with bold funding measures.
There are signs that changes in the market could soon make it easier for smaller developers to capitalise on the opportunities created by the government’s push for home supply growth.
While building costs have likely stabilised, they haven’t yet started to ease, as post-Covid inflation continues to recede under the pressure of tight monetary policy.
Ray White chief economist, Nerida Conisbee points out that growth in building costs has fallen considerably over just the past two years, to around three or four percent each quarter.
When it comes to financial access, fintech innovations now make it possible for smaller developers to tap funds from sources outside of established financial institutions.
An example of this is marketplace lending, which uses online technology to provide funds to developers with greater speed expertise and certainty than traditional financial intermediaries. Specialised marketplace lenders like CrowdProperty also offer the advantage of a deep understanding of the property sector.
This means that in addition to financial access, developers can access the expertise to help them navigate headwinds hampering project feasibility, and fully capitalise on new opportunities in the property market.
As experts in the property sector, CrowdProperty can enable small-scale developers to access finance and better navigate project headwinds. Click here to learn more.
