The government’s 1.2 million homes target needs small-scale developers to succeed

The Labor government has unveiled highly ambitious plans to resolve Australia’s housing crisis with a bumper increase in dwelling supply over a five year period from 2024. In order to succeed, however, Australia may need to better employ the role of small-scale developers who have long struggled to obtain adequate financing from traditional sources.

Small-scale developers could play a pivotal role in helping to satisfy the target, which makes specific reference to the need for “well-located” new housing. Much of this well-located housing will be in the form of in-fill developments, which smaller developers are better suited to undertake, with the support of specialist lenders with relevant property expertise.

Labor wants 1.2 million new homes in five years

On 16 August, Australia’s national cabinet announced the target of building 1.2 million “new well-located homes” over a five-year period starting from 1 July, 2024. The new target marks an increase of 200,000 homes above the National Housing Accord target set by states and territories in 2022.

To facilitate the construction of new homes, the Commonwealth has committed $3 billion to a New Home Bonus for states and territories that exceed their Accord targets and undertake reforms to boost housing supply and improve affordability. It has also allocated $500 million to the Housing Support Program.

The move should arrive as welcome news for the property sector, as well as Australian households amidst a worsening home affordability crisis.

Achieving targets will prove a challenge

Industry observers point out that it could prove challenging for Australia’s property sector to fulfill the new target on schedule. Major barriers include an ongoing cycle of interest rate hikes, as well as a recent slump in nationwide building activity.

Tim Reardon, chief economist with the Housing Industry Association (HIA), pointed out that construction levels are set to see even further declines from their current low levels.

“Even if the RBA were to cut rates today, detached home building activity is set to slow to its lowest levels in more than a decade,” Reardon said in a statement released by HIA.

“The number of new homes commencing construction peaked in June 2021 and is set to continue to decline for another year under the weight of rising interest rates and land costs.”

Reardon also pointed to other challenges, including exorbitant land prices due to a lack of supply, and taxes and regulatory imposts that impose around $25,000 in additional costs for the construction of each new dwelling.

Opportunities will abound for small-scale developers

The ambitious scope of the new housing target will make it challenging to meet within a five-year period. At the same time, it will also create new opportunities for small-scale developers, given the large incentive committed by the Commonwealth to the development of “well-located homes.”

Lisa Digby, head of operations, CrowdProperty, said the national cabinet’s reference to the need for homes that are “well-located” means a focus on the expansion of housing supply in established areas that are close to transportation, jobs, infrastructure and amenities.

Digby points out that this is one area where small-scale developers play an especially critical role, given new housing in these areas will often consist of in-fill projects situated amidst existing buildings and infrastructure.

“Medium-density housing such as duplexes, townhomes and terraces is the sweet spot for small-scale developers. It not only adds to housing supply, but also brings more choice in housing to future homeowners. Not everyone wants to live in a big house on the outer fringes, nor do they want to live in a high rise apartment.

“In-fill or brownfield development will be critical to delivering a lot of well-located housing, especially in areas that aren’t suitable for high rise projects but more suited to medium-density dwellings” she said.

“The high-volume players aren’t going to look at the smaller in-fill sites, because it’s just not worth their while.

“If you’ve got the ability to build three or four townhouses on a block, that’s where a small-scale developer can definitely play a role.”

Improving financial access is critical

In order to fully employ the role of small-scale developers in raising housing supply and fulfilling the 1.2 million homes target, it’s vital they have access to adequate financial services to fund their projects.

This is an especially acute problem, given traditional financial providers such as the banks have long neglected the needs of Australia’s smaller developers.

The recent CrowdProperty borrower survey highlighted widespread dissatisfaction amongst small-scale property developers in Australia with regard to the services provided by the financial sector. When asked: ‘how likely is it that you would recommend your last property project finance provider to a friend or colleague?’, survey respondents gave them a negative Net Promoter Score of -19.67.

“It’s widely known that the bigger traditional lenders won’t look at small-scale developers,” CrowdProperty CEO David Ingram said. “The projects are often too small for them to consider given the complexity and the level of due diligence and oversight that’s required.”

According to Ingram, this is where marketplace lenders can play a role, filling in the gaps left by traditional financial institutions that are less flexible. This is particularly the case with specialised marketplace lenders like CrowdProperty, whose team of property experts can better cater to the needs of small-scale developers.

“As a niche player, part of our value proposition is that we work with those developers throughout each stage of their development,” Ingram said.

Small-scale developments have to be assessed on a deal-by-deal basis which means it doesn’t attract large institutional funding.

“CrowdProperty investors range from ‘mums and dads’ to family offices, global asset managers and large institutions looking for strong returns in an asset class they are familiar with and understand,” Ingram said.

“The opportunity for Australia can potentially be seen in the UK government’s British Business Bank deploying capital for housing through the CrowdProperty platform. This demonstrates our ability to help get funding to the right projects at scale and support a government’s program for economic growth through lending for ‘well located’ house building.”

On this evidence, marketplace lenders could play a small but critical role in helping Australia to achieve the government’s ambitious housing target, by providing essential finance services to small-scale developers.

“The housing shortfall needs to be solved by all that can contribute, not just by large-scale developers, but small-scale developers as well,” Digby said.

“It requires a lot of capital and finance to do that, and we’re certainly part of the solution to getting those small-scale projects off the ground.”

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