Key lockdown issues for developers - ASAP Finance Ltd

Key lockdown issues for developers

Understanding Development Contributions
March 11, 2020
How COVID-19 is disrupting development finance
May 11, 2020

The impact of the four-week COVID-19 lockdown imposed by the New Zealand Government on non-essential services will be far-reaching for developers. We are urging our clients to focus on ensuring the commercial success of their projects during these uncertain times.

At a high level, developers will be facing increased interest and debt-servicing costs – primarily because of delays to their construction programmes. While such delays may erode profit margins, contingencies are built into project budgets for this very reason.

Identifying any cost-saving opportunities that exist elsewhere in the budget will help limit the impact on your bottom line. For example, one of our clients completing a staged land subdivision had included costs for ‘enabling works’ for the later stages of the project within stage 1. While completing this work was economical when the project was viewed as a four- year development, removing them was a no brainer as it did not prevent the client from obtaining stage 1 titles and would ultimately reduce the debt the client would need to take on in the early stages of the project.

Opportunities like this exist within all projects and can be as simple as rethinking the finishing chosen for bathroom and kitchen fitouts.

Beware of third-party risk

At a more hands-on level, we are encouraging all of our clients to engage with their builders and contractors to manage any risk that may arise because of reliance on a third party.

Limited cashflow will test the financial solvency of main contractors, sub-contractors and suppliers. Subcontractors – who work on low margins and high cashflow – are likely to be impacted the most.

Analyse who you are contracting with. Are they a large firm likely to have a greater degree of financial resilience? Or a small firm running on day-to-day cashflow? Ensure you have the council inspection records on hand, including producer statements, so there won’t be unnecessary project delays should you need to change contractor.

We also recommend a full review of supply chains to understand what impact COVID-19 will have on access to materials. Be aware that a two-week delay from a supplier in China could result in a one-month delay to your project in New Zealand. Any shortcomings in the supply chain will cause project delays.

For those lucky enough to be in the planning stages, timelines will not be immediately impaired as most architects and designers will have the ability to work from home. However, with such uncertainty over the near-term future, now is a great time to ask yourself whether it’s feasible to move ahead with the project in the current environment.

Make no mistake, the return to normalcy will be slow and it is likely the Government will wind us down the Alert Levels in a staged approach. The extent to which this will continue to impact construction sites – and the broader economy – is unknown. But like most regulation, there will undoubtedly be delays in obtaining compliance, and additional associated costs.

There remains huge uncertainty as to what the working environment will look like post lockdown. But the shining light out of all of this is that demand for new housing appears to remain strong – particularly within the affordable housing category. We expect this sector of the market to remain resilient to any potential downturns and continue to see opportunities for development.

As a developer, your opportunity to add value to your project has never been greater. As a funder, we know it is our job to support you during these times.

Stay home and stay safe.

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