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Construction Firms Fold as Pressure Builds


The competing pressures of a hot property market and rising construction supply costs are claiming victims as builders are pushed to the brink.

The Morrison government is adamant that the nation will build its way out of the pandemic, pouring $2.5 billion into the Homebuilder support package to support the construction sector.

More than 121,000 Australians applied for the grant, which is expected to support around $30 billion of residential construction projects.

But with 53,980 (42 per cent) more residential home builds under way than a year ago, some suggest the market has been overstimulated, putting intense pressure on builders to deliver, with one builder saying: “The problem is that the industry can’t build that many houses.”

Across the nation, building firms are showing signs of stress after trying to keep their head above water amid a frenzied market.

Aside from labour shortages, the industry is battling a range of issues, including the building materials shortage due to disrupted supply chains. One insider says that build prices have risen by around $30,000 since the start of the pandemic.

Metricon denies handing back contracts

The situation has become so dire that the industry is rife with speculation that at least one or two of the larger building firms have been handing back contracts that could no longer be fulfilled due to rising building costs making it untenable to complete projects.

One of the builders rumoured to be handing back contracts is Metricon.

But Metricon chief executive Mario Biasin dismissed the current “malicious” rumours circulating about the firm’s capacity to service its customers.


▲ High-profile builder Metricon says rumours it is handing back contracts are “are false and baseless”. 

“The rumours suggest that Metricon has been cancelling customer contracts due to price escalations, or an inability to build due to product shortages,” he says.

“These rumours are false and baseless. Metricon is in a very strong position to complete all work it has, and is continuing to accept and support a high number of new customer builds.

“Rarely would Metricon wade into such innuendo. In this instance, however, given the current market conditions due to Covid and some competitors going into liquidation or maybe illegally increasing prices, we feel we must quash these rumours.

“Metricon is not cancelling contracts, and is in a very strong position to complete all works now and in the future.”

Firms falling over

But the cracks are showing elsewhere, with 25 per cent of all insolvencies nationally happening in the construction sector.

Last week, Privium and other companies in the group were placed into voluntary administration, with debts of more than $28 million. The firm operates in Queensland, NSW and Victoria.

Named the 11th largest builder in Queensland by the HIA this year after completing more than 600 projects worth $180 million, the firm is blaming surging construction costs.

Melbourne’s ABD Group also appears to be on the verge of collapse, ceasing work on three high-profile contracts, with two contracts torn up. The collapse would leave between $50 million and $80 million in outstanding debt, sources say.

The fall-out is hitting construction businesses too. Safa Scaffolding, on the Gold Coast, went into voluntary administration in June.

Builders are in short supply across the country, with many booked a year or more in advance.

Whether the higher costs will remain is unknown. A small developer in Melbourne claimed to be “ticking along normally”, but has heard that builders are struggling to make projects stack up.

“There’s a debate in the office about whether the inflationary prices we’re seeing are transitionary or whether they’re permanent. Right now, higher costs have changed the feasibilities of the building industry,” he says.

Record low interest rates, incentives over-stimulate market

Some developers blame too many government incentives, which have over-stimulated and artificially inflated the new residential home sector. Another developer has heard of wholesale cancellations.

“The HomeBuilder boost was supposed to support our property and construction industry, but all it’s done is bring forward more than 40,000 new home builds, putting pressure on the industry,” one developer said.

Land prices have also been surging since the start of the pandemic. You can expect to pay $42,000 more in Melbourne for an average block of land.

Investorist founder Jon Ellis believes past government incentives have pushed the industry into unprofitable territory, with a number of builders now heading to collapse and home buyers disadvantaged by artificially inflated prices.

“Before the HomeBuilder grant, we saw a strong house and land market. It has been strong for the past few years, and price growth has been consistent.

“But since the launch of the grant, we have seen house and land packages in some corridors go up by $100,000 in less than 12 months.

For example, a townhouse project in Melbourne’s south-east listed on Investorist went up by $50,000 in three months, which for some homes was the same as a 10 per cent increase.

“Builders and land developers have been so focused on meeting the demand that has been brought forward by the grant, that they have largely ignored their new business pipeline.

“I believe by mid-next year, at least, we will see the industry scrambling to try and find buyers,” Ellis says.


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Construction Price Hikes Tipped to Climb in 2022


Construction costs across Australia are expected to keep rising next year with an industry forecast indicating they will jump by as much as almost 6 per cent.

Consultancy firm Rider Levett Bucknall has released a list of forecast construction cost hikes for capital and regional cities around the country in 2022.

According to its projections, costs will increase by 2.5 per cent in Darwin; 3 per cent in Adelaide, Melbourne and Townsville; 4.5 per cent in Perth; 5 per cent in Brisbane and Gold Coast; and 5.6 per cent in Sydney.

Throughout 2021, building material prices have increased prompting some trades to link supply rates as a condition of tender pricing and, therefore, subject to a price adjustment should the rate rise.

RLB’s New South Wales managing director Stephen Mee said upward pressure on contractor tender pricing was being experienced nationwide, albeit at differing levels.

“Melbourne, Canberra, Adelaide and Darwin have observed stable increases, generally within expectation,” he said.

“However, significant surges have been experienced in Brisbane, Perth and Sydney, with escalation forecasts for 2021 well above levels forecast at the backend of 2020.”

Mee said contractors have flagged the potential for material shortages, shipping cost increases and delays of imported goods and equipment but with pressure appearing to grow there could be further impacts to come.

“This has been most evident in Sydney where the analysis of current tender prices received in early December has resulted in revisions to the published 2021 and 2022 TPI (tender price indices) uplifts,” he said.

The uplifts published within the latest RLB International Report of 1.2 per cent and 2 per cent have been recently revised to 4.1 per cent and 5.6 per cent respectively.

“This sudden change in RLB’s escalation forecasts, highlights the current pricing volatility within the Sydney market, which is only truly reflected when project tender prices are received and reviewed,” Mee said

According to the report, construction activity metrics have nudged decade highs in Australia despite lockdowns putting an estimated $20-billion dent in the economy.

However, overall construction work across the country totalling $212 million was down slightly from $213 million in the 2020 financial year.

The fall in volume was largely due to reduced activity in Victoria—the state hardest hit by the Covid outbreak—which amounted to $2.4 billion.

Mee said the industry in both Sydney and Melbourne had adapted to various setbacks caused by total shutdowns and density restrictions on-site.


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Insolvencies Spike as Construction Companies Pile on Debt


Voluntary administrations across the country rose sharply in November with the construction sector currently the highest payment arrears by industry, according to credit reporting agency CreditorWatch.

The agency’s business risk index for November also revealed business activity around Australia was currently weaker than expected, indicating the return to pre-Covid levels was likely to take longer than anticipated.

Defaults, external administrations, payment arrears and court actions jumped from October to November as small- and medium-sized businesses struggled to cope with the withdrawal of government led stimulus measures and supply chain issues.

As part of its latest index, which ranks regions and sectors by relative insolvency risk using data from the Australian Securities and Investments Commission, defaults were found to be up by 53 per cent, court actions up by 85 per cent and external administrations up 15 per cent, month-on-month.

The construction sector, where 25 per cent of all insolvencies nationally occur, has recently been weighed down by a number of high-profile collapses.

Last month, Privium and other companies in the group were placed in voluntary administration with debts of more than $28 million. The firm operates in Queensland, NSW and Victoria.

Named the 11th largest builder in Queensland by the HIA this year after completing more than 600 projects worth $180 million, the firm is blaming surging construction costs.

Melbourne’s ABD Group also went into liquidation. Creditors appointed SV Partners’ Michael Carrafa and Peter Gountzos as liquidators of the troubled company.

The collapse leaves between $50 million and $80 million in outstanding debt, sources said.

CreditorWatch chief economist Harley Dale said the construction sector, which has been hit hard by mandatory industry shutdowns, remained on edge.

“Now the industry faces severe supply constraints for items such as timber,” Dale said.

“It is also a challenging industry in terms of gearing back up swiftly.

“This all shows up in a payment arrears figure of 12.4 per cent for November, a number that is unlikely to materially change in approaching months.”

More broadly, business turnover continued to decline from October to November.

On an annual basis business, turnover dropped by 42 per cent in November, the 22nd consecutive drop and the sharpest during of the period.

Credit enquiries, however, rose 17 per cent, indicating that business confidence is slowly improving.

“The increase in credit enquiries in November is an encouraging forward indicator of business confidence, however, there’s a long way to go before business activity is at pre-Covid levels,” CreditorWatch chief executive Patrick Coghlan said.

“Worryingly, trade receivables continued to decline last month, and we also saw significant increases in defaults and administrations.

“Businesses in the Sydney and Melbourne CBDs in particular are at historically high probabilities of default.”

Brisbane and Perth have been the nation’s best performing cities, recording the lowest levels of insolvency risk and some of the strongest credit ratings across the country.

Both cities shared some of the strictest border closure policies during the pandemic, coupled with the least restrictive lockdown policies due to lower local case numbers.

In relative terms, Perth city has been the biggest mover up the CreditorWatch ranks among capital city CBDs during the past 12 months while Brisbane city has seen the largest improvement in insolvency risk and credit ratings.

Brisbane’s hit to its key tourism regions had been offset by a strong performance by the agribusiness sector while Perth had continued to be supported by mining.

Melbourne and Sydney CBDs remain the worst-performing capital city centres with the probability of default at historically high levels due to depressed trade activity that has continued post-lockdown.


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Construction Maintains Moderate Growth Despite Shortages


The construction sector has maintained its moderate pace of growth off the back of easing Covid restrictions despite ongoing material and labour shortages.

The Australian Industry Group and HIA Australian Performance of Construction Index eased by 0.6 points to 57.0 points in November 2021 following a strong rebound in September.

Australian Industry Group chief policy advisor Peter Burn said there had been strong growth in engineering construction and commercial building activity in November.

“With new orders having recovered from the slump in the September quarter, the construction industry is set to close 2021 by making a strong contribution to the rebound of the broader economy,” Burn said.

“Across the construction industry, the breakneck pace of expansion seen in October eased to more sustainable levels; employment picked up further; and the inflow of new orders continued to accelerate at a level that, if maintained, will strain capacity.

“Apartment building also expanded while the house building sector reported a decline in activity.”

Performance of Construction Index

Construction Sector PCI score Monthly change Annual average
Housing 46.6 -5.3 56.6
Apartments 56.3 -8 47.7
Commercial 68.8 6.3 53.7
Engineering 66.7 -10.2 56.2

^Source: PCI November

Burn said the construction industry was pushed to meet demand due to difficulties filling vacant positions, and ongoing supply constraints continuing to plague the sector.

HIA economist Tom Devitt said the housing construction activity had bounced back after the end of lockdowns.

“Now with HomeBuilder clearly in the rear-view mirror, it is a shift in consumer preferences that continues to drive demand for new houses,” Devitt said.

“This will support new house building activity on the ground, and associated employment, throughout 2022.

“The apartment market is also strengthening … investors are looking through the haze of the pandemic, and affordability concerns in the detached market are helping bring people to medium-to-higher-density housing.”

Apartment building activity was down eight points to 56.3, commercial building increased 6.3 points to a high of 68.8, and housing building fell intro contraction territory with a score of 46.6.

The PCI also tracks input prices, which indicated ongoing upward pressure for high prices from suppliers and importers remaining a concern for builders, now at a high of 97.5.

Skilled labour shortages have continued to trouble the industry as builders scrabble to find staff.

PCI results above 50 points indicate expansion, with higher results indicating a stronger pace of expansion.


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