Construction’s long and winding road

Many obstacles hamper a solid recovery in construction – finance firms are watching closely and doing their best to help brokers and the sector find opportunities to deliver

TRAVEL THROUGH some development areas in Sydney, Brisbane or Melbourne, and you can observe evidence of pain in the construction sector for yourself – incomplete constructions that sit idle seem to underscore grim economic headlines about the sector. This sector has struggled perhaps more than many other parts of the economy to ride out the pandemic hangover, with rates of external administration for related companies at dizzying levels over parts of the past year or two. “Dwelling construction levels are stagnant or reducing due to a number of reasons, including supply costs, a higher interest rate environment, serviceability constraints and a number of large

One effect of the reporting of these failures is to make buyers even more cautious about buying off the plan. “There’s been a lot of media around insolvent builders, which can create a lot of uncertainty and distrust in the market,” says Royden D’Vaz, national head of sales and distribution at Assetline Capital. Another effect centres around insurance. “When builders fall into administration, customers need to utilise their insurance cover to ensure that another builder will complete the required work,” says Darren McLeod, who is head of third party at Beyond Bank. As a result, banks are now very careful to make sure all the required insurances are in place when the loan is established, including considering the effects for inflation. “When a new builder is sought, the new building contract price can be more than the original building contract, which creates a shortfall to complete the build,” says McLeod. This bind comes at a time when insurers themselves are reducing capacity and lifting premiums for the construction sector, particularly in areas prone to natural catastrophes. Additionally, the phenomenon of social inflation, alongside litigation funding, has contributed to pricing pressures for construction insurers.

“The biggest issue for construction is their inability to build in the affordable brackets… these higher costs are imposed eventually on the consumer,” says Buchanan. Cost blowouts and supply issues were one of the main causes of the rush of insolvencies in the sector last year. But the market is digesting these changes better in 2024. “The shortage of construction materials has allowed builders to refine their estimates, ensuring more accurate project quotes. This adjustment has helped alleviate the financial burden compared to conditions experienced 12–18 months ago,” says Gair. Producer Price Index (PPI) data shows that the cost of many construction materials continues to rise on a quarterly basis, although at a slower pace than double percentage point jumps seen in 2022.

Rising insurance costs are a big factor for small construction businesses in particular. Most construction-type businesses cannot operate without insurance, so they have no choice but to pay higher premiums – leaving some operating on a knife’s edge. Construction risks that would have found insurance capacity in the past are now sometimes left unable to secure insurance either locally or globally.

A recent global risk survey of the construction and real estate sector by insurance giant Aon cited economic slowdown or slow recovery as the top worry for the sector, largely on the basis that higher interest rates make it more expensive to obtain new project financing. “Developers, especially now, need to put more equity into deals to make them work. Projects are becoming less profitable as interest costs have absorbed a lot of the margin for developers,” says D’Vaz. Greater delays, higher debt costs and build tender prices are causing feasibilities to not stack up, and when development activity slows, construction demand tends to follow suit.

Specialist Finance Group is a family-owned business that has been serving the broking community for more than 30 years. With a customer-centric model, SFG provides its members with the best possible systems, services and support to assist them in growing and improving their businesses. SFG’s unique model has seen rapid expansion in recent years that has consistently delivered results well above system.

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Beyond Bank is one of Australia’s largest 100% customer-owned banks – we’ve been helping customers reach their financial goals for over 60 years. As a customer-owned bank, we are not driven by shareholder returns. Instead, we exist to support and return value to our customers and the communities in which we live and operate. We are a proud B Corp Bank – for us, it is about balancing purpose with profit, and we ensure we consider the impact on people and the planet across all aspects of our business practices.

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In some cases, this includes new products to match the volatile conditions still working through the system. “Faced with market dynamics that are still changing, it’s more important than ever for us to keep rolling out products that are adaptable and competitive,” says D’Vaz. “That’s where our new Alt Doc Construction product comes in. It provides a tailored solution for the ground-up construction of houses, duplexes, townhouses and structural renovations… the product is tailor-made for developers, investors and borrowers seeking development options.” Rate Money is also introducing a new product in response to the tough market conditions. It recently launched a low-doc construction product tailored to self-employed individuals. “Additionally, we offer a reduced interest rate for those constructing a 7-star rated property. It’s a leg-up for borrowers who have solid credit but may not have their business financials up to date,” says Gair. The product is designed to address the current limitations in construction finance and provide a competitive advantage for brokers.

Assetline Capital, an AltX Group company, is an institutionally funded Australian non-bank lender, servicing brokers and borrowers who value responsive turnarounds, a flexible approach and funding certainty. Since 2012, we’ve funded in excess of $3 billion of property-backed transactions Australia-wide for property professionals, small to medium-size businesses and SMSFs. With offices in Sydney, Melbourne and Brisbane, we offer long-term horizon mortgages, short-term capital and construction and development finance; we clinch bridging loans against property assets in major metropolitan locations. We are backed by a strong balance sheet, a robust model, an expert team and a reputation that gets results.

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“The time frames that builds are taking … may impact customers if they have not locked in for fixed prices”

Darren McLeod, Beyond Bank

Number of external administrations

In Partnership with

Many observers say that while the rising pace may ease compared to 12 months ago, more insolvencies are pretty much baked in for the sector. Triple-digit on-year percentage increases in monthly construction firm insolvencies look to be a thing of the past, but Australian Securities and Investments Commission insolvency statistics show that continuing increases for the series may bring total insolvencies for the current fiscal year to a level that nears or just exceeds the eye-watering numbers posted in the year to June 2023.

Insolvencies in construction sector

More optimistically, some economists are hoping that weaker conditions will help prompt the Reserve Bank of Australia to cut interest rates earlier than previous predictions for late 2024 or early 2025. The hope is that such expectations may underpin borrower confidence and perhaps reduce the amount of time that it takes to sell properties. “Rates have likely peaked and with reductions on the way, there will be more confidence,” says Buchanan. Lenders are ready to come the party if the stars align for projects – poised for growth, if not yet growing. “Being well-informed and confident is crucial. As long as you’ve done your homework and feel confident in your loan being approved, you can navigate market fluctuations. It’s about seizing the right opportunities with a sharp focus on market trends,” says Gair. Federal government targets to build 1.2 million homes over five years from July 2024 also provide a clear opportunity for brokers, even if there are questions about how the current market can boost its capacity to deliver at this pace. “We anticipate a more stable market ahead – there’s scope for increased demand and reduced build times,” says Gair. It’s just a matter of when.

“The biggest issue for construction is their inability to build in the affordable brackets… these higher costs are imposed eventually on the consumer”

Blake Buchanan, Specialist Finance Group

commercial and residential construction firms exiting, which will take time to reorganise,” says Blake Buchanan, general manager at Specialist Finance Group. Statistics for the sector are a mixed bag. New loan commitments for commercial construction – a comparatively buoyant sub-sector – have been both positive and negative in the last few rounds. Data for the number of loans for the construction and purchase of new homes are hovering around their lowest levels in the past two decades, and the next set of data for this series, due later in April, will be closely watched. But the low levels of building starts may also be a sign the market is adjusting to the tough conditions. “The increase in building costs is driving these changes. There’s more focus on building contracts and due diligence, along with rising property prices and supply constraints, resulting in fewer building approvals nationwide,” says Ryan Gair, CEO and co-founder of Rate Money.

Industry experts

Ryan Gair

Rate Money

Royden D’Vaz

Assetline Capital

Darren McLeod

Beyond Bank

Blake Buchanan

Specialist Finance Group

Industry experts

Blake Buchanan, general manager at SFG, is an expert in the broker channel with some 20 years’ experience in the finance industry, specialising in broking, lending and aggregation. Buchanan is known for his expertise and passion for the broker channel, along with his ability to deliver strong distribution results through systems, people, processes and partnerships.

Specialist Finance Group

Blake Buchanan

With more than 25 years’ experience in the area, Darren McLeod has been head of third party with Beyond Bank since 2016. He started the broker channel from inception, and it now accounts for over 50% of the bank’s new business. Previously, he was head of sales and marketing with non-bank Firstmac for nine years and was also on the executive committee. He served on the Mortgage and Finance Association of Australia (MFAA) board for five years and is currently deputy chair of the MFAA National Lenders committee.

Beyond Bank

Darren McLeod

Royden D’Vaz is the national head of sales and distribution of leading non-bank lender, Assetline Capital. D’Vaz has extensive experience in the financial space, having spent more than 25 years in mortgage lending services in Australia. Prior to joining Assetline Capital, he held senior roles in leading financial institutions, including Bluestone, NAB, Advantedge and Challenger Mortgage Management. D’Vaz holds a graduate diploma in management and has also completed his diploma in financial services.

Assetline Capital

Royden D’Vaz

Ryan Gair, CEO and co-founder of Rate Money, leads an award-winning home loan provider specialising in self-employed lending. With a presence across 32 franchises nationwide, Rate Money has settled over $7 billion within just five years. Gair’s leadership is characterised by pioneering market-leading product innovations, notably the elimination of clawbacks and risk fees for self-employed low-doc customers.

Rate Money

Ryan Gair

Rate Money

Royden D’Vaz

Assetline Capital

Darren McLeod

Beyond Bank

Blake Buchanan

Specialist Finance Group

Industry experts

Specialist Finance Group

Blake Buchanan

Beyond Bank

Darren McLeod

Assetline Capital

Royden D’Vaz

Rate Money

Ryan Gair

A negative feedback loop from insolvencies

Blake Buchanan

Specialist Finance Group

Darren McLeod

Beyond Bank

Royden D’Vaz

Assetline Capital

Ryan Gair

Rate Money

Ryan Gair

Assetline Capital

Royden D’Vaz

Beyond Bank

Darren McLeod

Specialist Finance Group

Blake Buchanan

Higher rates and an ongoing supply-demand mismatch

Published 08 April 2024

“Developers, especially now, need to put more equity into deals to make them work. Projects are becoming less profitable as interest costs have absorbed a lot of the margin for developers”

Royden D’Vaz, Assetline Capital

“As long as you’ve done your homework and feel confident in your loan being approved, you can navigate market fluctuations. It’s about seizing the right opportunities with a sharp focus on market trends”

Ryan Gair, Rate Money

Rate Money was founded by a highly experienced team of mortgage professionals in 2019. They identified that the mainstream lending market had major flaws for self-employed applicants, so they set out to provide support to this segment of the market by developing new and innovative ways to help the self-employed people of Australia. The company now has a network of 32 franchises nationwide, and has settled over $7 billion within just five years. Rate Money is unwavering in its commitment to pushing the boundaries of product innovation and enhancing customer experience through streamlined processes.

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YoY comparison

Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24

199 219 187 141 152 179 83 195 243 153 259 203 295 308 182 238 186 201 156 136

+169% +170% +128% +66% +14% +50% +48% +103% +104% +20% +69% +24% +48% +41% -3% +69% +22% +12% +88% -43%

Source: ASIC insolvency statistics, Mar 2024

Source: ABS Producer Price Indexes (PPI), December 2023

Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23

120.2 120.4 120.5 121.8 125 130 134.9 140.5 146.6 150.8 154.1 156.5 157.4 157.4 157.8

1.2 0.2 0.1 1.1 2.6 4 3.8 4.2 4.3 2.9 2.2 1.6 0.6 0 0.3

Quarter (% change)

House construction prices – Producer Price Indexes

Annual (% change)

Index no. for outputs

Quarter (% change)

Annual (% change)

1.8 1.7 1.8 2.5 4 8 12 15.4 17.3 16 14.2 11.4 7.4 4.4 2.4

116.2 116.2 116.9 117.8 120 122.5 126 129.7 134.6 138.2 140.4 141.9 143.3 145.2 148

0.2 0 0.6 0.8 1.9 2.1 2.9 2.9 3.8 2.7 1.6 1.1 1 1.3 1.9

0.3 0.3 0.8 1.6 3.3 5.4 7.8 10.1 12.2 12.8 11.4 9.4 6.5 5.1 5.4

Difficult choices for some in current market

Financing companies are striving to provide competitive rates by working closely with brokers and borrowers to mitigate the impact of rate increases, but there is an underlying supply-demand problem driven by record immigration numbers. “There is a cost and that is inflated property prices – government bureaucracy, growth planning and land release are all issues that do not appear to have been addressed ahead of time,” says Buchanan. Many of these concerns were set out in a recent Urban Development Institute of Australia (UDIA) report, warning that a continuation of the status quo would lead to a sustained housing supply shortage.

Higher interest rates, and the steps that the central banks worldwide are using to quell them – sticky inflation – are at the crux of many dynamics in the sector. “For end buyers, higher rates can make it harder to qualify for finance. There’s limited ability to borrow from traditional banking, as serviceability buffers are higher, [resulting in] an increase in construction loan submissions in the non-bank lending sector,” says D’Vaz. The costs of material and labour are forcing firms to raise their own prices just as consumers have less money on hand.

Other indicators also suggest the long winter for construction costs may be on the verge of thawing. In the September quarter of last year, the CoreLogic Cordell Construction Costs Index saw the cost to build a typical new dwelling grow by 0.5%, the smallest increase since Q2 of 2019. D’Vaz sees the easing of cost increases as a sign of normalisation for construction, a possible light at the end of the tunnel. “The consistent deceleration hints at a sense of normality.” While easing inflation gives some reason for hope, McLeod explains that the risks from a continuing inflationary environment will have knock-on effects far beyond higher prices. “Long extensions to build projects due to high demand for resources and cost of materials [is a risk], as the time frames that builds are taking … may impact customers if they have not locked in for fixed prices,” he says.

The inflation albatross

Inflation, combined with higher rates, is now leading to difficult choices for people who purchased land when loans were being offered with historically low interest. “It is not uncommon to hear stories of consumers who purchased land with the intention to build that now cannot service the costs of a loan for the construction component in a higher rate environment,” says Buchanan. Gair sees the same phenomenon at work in the market. “With interest rates currently at a 12-year high, many individuals find themselves grappling with the challenge of balancing a construction loan and a mortgage, alongside the added expense of securing temporary accommodation during the building process.” The outcome can be consumers opting for a more cost-effective build such as a smaller dwelling, or a move to offload the land altogether. Higher rents are also creating drag on the market as it takes longer to save for a deposit to start construction, and the costs of maintaining any existing loans are higher. “While building loans are typically interest-only, if you already have a mortgage you might find you’re having to pay a lot more while you’re building. Increasing interest rates impact on your current house as well as the loan for your building,” says McLeod.

The quick pace of rent increases also motivates people with higher liquidity to opt for something that is immediately available rather than a new build to be finished at some unknown point in the future. “With the current housing crisis, a lot of buyers are looking for a house ‘right now’, so building may not be as attractive,” McLeod explains.

Better times ahead, but when?

Financial companies are trying to ease the burden for borrowers while the market remains in its current tight spot. “Our system workflows make the process of these loan types easy to transact on, and when this is combined with good lender policies and appetites, brokers can confidently transact with their clients,” says Buchanan.

Making life easier where possible

At Beyond Bank, customers have the ability to fix construction loans from day one. “They don’t have to wait until the construction period is finished,” says McLeod. Many funders are also willing to look at workarounds when time frames blow out. “We are exploring the build period for contracts as we know that these can extend past 12 months, and we currently try and work with borrowers who are having this issue,” says McLeod. Banks are also supporting the construction firms themselves as much as possible. “We have a dedicated progress payment team that deals with builders and aims to pay their invoices within 48 hours of receiving each claim,” says McLeod. But it is sometimes non-banks that can react more quickly to sudden changes as the market is pulled in various directions at once. “As a non-bank lender, we’re able to consistently innovate as the industry changes, unlike larger institutions. Thanks to our agile approach, we’re the first to see these changes, and the first to adapt,” says D’Vaz. “We not only provide flexible financing options but also hands-on support through each project, development and deal. The focus is on proactive problem-solving.

“We have also recently introduced a customisable and integrated software platform for our construction projects to enhance our service to brokers. This platform allows for early identification of issues in the project, keeps the client updated on the construction progress and gives us the ability to foresee any potential issues.” Rate Money also emphasises the adaptability of non-banks in helping the construction market emerge from its funk. “The primary opportunity lies in supporting creditworthy self-employed borrowers overlooked by major lenders,” says Gair.

Workarounds and fast reactions to market changes are key

A tug of war among complex factors provides evidence for both an optimistic and pessimistic outlook for construction. The market will

turn at some point, but the key will be timing. The near-term outlook looks tough to some lenders as the slow pace of new dwelling units commenced will drag on the sector for a while yet. “As construction takes time, this will play out in the forward 6–12 months when they are completed and is well shy of what is needed from a demand perspective,” says Buchanan. A recent sector report from Oxford Economics Australia predicted that the number of total attached dwelling builds would continue to slump until FY25, with the strong mismatch between pent-up demand and supply not easing until after then. Commodity price risk, talent retention, workforce shortage and cash flow/liquidity risks are just a few of the risks in play, and all of these are interlinked and exacerbated by factors such as energy volatility, natural catastrophes and the ongoing shift to a greener economy, including new regulations around efficiency. Rapidly rising climate-related costs also mean that getting inflation back into its pre-pandemic band is that much harder, which may stay the hand of central banks contemplating more liquidity in the system.

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