Housing Supply Crunch Set to Worsen as Developers Exit Market
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The head of a property development finance lender has said conditions for developers are close to as tough as he’s seen during his quarter-century in lending, which will make it almost impossible for the federal government to achieve its five-year housing target.
Mark Greenberg, the founder of non-bank lender Lambert Capital, said it’s very hard for developers to remain profitable in the current market unless they do their own building work or control multiple steps of the supply chain.
“The problem is that developers’ profit margins are extremely tight right now, because building costs and land acquisition costs have increased significantly since the pandemic. To make matters worse, developers’ projects have been taking longer to get approved, built and titled, which has led to an increase in their holding costs and a further reduction in their profits,” he said.
“If you want to make enough of a profit and generate working capital to keep trading, you now need to be able to tick three boxes – your builds need to be of good quality, they need to have a reasonable price tag and they need to be delivered quickly. In the past, you could get away with two out of three, but no longer. Otherwise, your holding costs will kill you or buyers won’t be interested in your product or both.
“These conditions are close to the toughest I’ve seen during the 25 or so years I’ve been lending, and they’re driving a lot of mum-and-dad developers out of the game. It’s now close to impossible to be, say, a dentist during the week and a property developer on the weekend, because you won’t have the scale or experience to build fast enough and cheap enough.”
Mr Greenberg said developers were trying to overcome the profitability challenge in several ways.
“In the current environment, it’s almost a case of no scale, no profit,” he said.
“That’s why some developers are starting their own building businesses or buying into established building companies. Alternatively, they’re partnering with project managers and builders who they trust and have strong relationships with, to create what amounts to a virtual building company. I’m also seeing some developers buying up different parts of the supply chain, like tiling or plastering businesses, to maximise control and efficiencies.”
As a result, Mr Greenberg said there was no way the federal government would achieve its target of facilitating the building of 1.2 million new homes in the five years to June 2029.
“It’s pie-in-the-sky stuff. There just aren’t enough developers and builders, because it’s become too hard to run a profitable business these days. So where are all these new homes meant to come from?” he said.
“If we’re ever going to fix this problem, we need to see all levels of government – federal, state, local – find a way to streamline the planning and building approval process. They also need to get out of the way and stop making it so onerous for developers to get final sign-offs on projects. The number of hurdles you need to jump over to reach the starting line is ridiculous, and delays with authorities at the end are leading to a blowout in holding costs. Otherwise, we’re never going to see housing supply catch up with demand, and housing affordability will keep deteriorating.”
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