How to ride the COVID-19 wave: The ultimate developer survival kit

OPINION:

By now it has become clear that property developers are not immune to the impacts of COVID-19, or the broader fallout of local and offshore economic distress, despite construction not undergoing a shutdown period.

Regardless of company size, the key to long term survival rests in weathering the short term impacts of the current pandemic climate and its subsequent financial impacts.

For those that have felt the surmounting pressure — whether it be project delays, a slowdown in purchaser enquiries, construction finance becoming increasingly difficult to obtain, or cash flow pressure across the board – the unprecedented impact has been arduous.

However, despite the doom and gloom that is seemingly consuming much of the property landscape presently, it is becoming somewhat clearer that there are key steps developers can put in place in order to inherently survive.

The V-shaped recovery

The general consensus from many business leaders in the industry is that they remain confident the result will be a short downturn with a V-shaped recovery.

What does this mean? CoreLogic datasets capturing the market shift since COVID-19 hit Australia reveal the immediate, stand-out response is the drastic tumble in buyer and seller enquiry.

When asked about the respective changes over one week in late March, over a third of respondents expressed that both buyer and seller activity was down by more than 50 per cent. This result is in line with a sharp decline in consumer sentiment and rising unemployment, which would see people less confident or able to purchase property.

Despite this sudden and sharp slowdown in market activity, when consulting with developers the most common prediction for recovery is only around the corner, with an estimated four to seven months until we see industry growth stabilise – all remaining positive of general fundamentals in the medium-term.

How to weather the short term impacts of COVID-19

Whilst there is a tendency for developers to focus on the large costs, it is those smaller financials over a long period of time become material in a developer’s feasibility – they all add up.

A vigilant review of costs, no matter how minuscule, is always recommended regardless of the market conditions. However, when we are in a market where there may be an erosion of profitability, it is even more prudent to avoid unnecessary costs and profit leakage.

• Reduce fixed costs – In order to reserve cash, developers may be eligible to seek an interest holiday from financiers. It may also be worthwhile considering refinancing land, now that interest rates have fallen. Opening up this kind of dialogue with financiers more generally may help to reduce fixed costs and relieve unnecessary financial pressure overall whilst the current conditions pass.
• Accelerate town planning applications – For those in the town planning phase, this is a great time to have permits approved or to request an extension on the expiry dates of current permits. Councils have advised that they are open for business and will remain responsive, with a vested interest in keeping the economy moving by approving permits.
• Prepare for a sales launch… but don’t launch – Whilst the market has slowed and launching a new sales campaign is not recommended in this environment, all activities required in preparation for a campaign launch can still be executed. Collate marketing material (such as plans, renders and brochures) now to ensure it is easy to pull the trigger when the project can finally go to market confidently and comfortably. This will ensure there are limited overall program delays. Don’t wait until the market returns to start the12-week preparation process for a launch campaign. Simultaneously to marketing activities, this is the perfect time to work through construction pricing and value management, all while entertaining expressions of interest on sales and activating lead nurturing strategies. DO NOT sit idle.
• Deconstruct construction – A deeper due diligence on the financial status of builders is now required by financiers. Make sure there is a diligent investigation into their future workbook and current financial position. Downward pressure on construction prices is anticipated in the medium term, which is certainly worth keeping in mind.

The road to recovery

Forecasts for the property development industry look towards a short term house price correction, followed by a V-shaped recovery once restrictions are lifted and there is some transparency about the timeline in relation to employment growth and business conditions.

In the interim, it is worth seeking advice or a second opinion to ensure existing development strategies are robust. Understand what strategies others are adopting for their current and upcoming projects in these unique market conditions. Remain connected with market-leading industry peers in finance, construction, sales, planning, architecture and engineering.

Finally, obtain property market insights from trusted industry leaders to steward the proverbial ship through unchartered waters.