The construction sector has recently experienced disruptions with the most widespread lockdowns since the start of the COVID-19 outbreak. So, what does this mean for TierONE Capital? Principally, the major areas of focus, from a credit risk perspective, are any impact on asset values and construction completion.
Asset Values
One of the major features of the property sector in the past 12 months has been the exceptionally strong growth across many sectors. Residential, especially house and land, as well as industrial sectors have been particularly buoyant. Properties relating to businesses that have been the most exposed to lockdowns, such as discretionary retail, hotel and hospitality, tourism and CBD offices have been hardest hit. Regional has performed just as well as metropolitan in most areas across the country with residential development for the owner occupier market favoured.
The current lack of local investor interest and closed borders has temporarily dampened many of the larger apartment developments, as they are dependent upon a high proportion of pre-sales. Nonetheless, markets such as Sydney, which has experienced an underlying shortage of land and a protracted planning process, are expected to perform well as further increased demand is fuelled by the re-introduction of immigration from 2022 onwards.
The message for our credit assessors is to continue to be highly selective and focus at a transactional level.
Construction
Thankfully, there is a template for the situation we are currently experiencing with what happened in 2020, particularly in Melbourne. We funded a significant number of construction projects and the most significant issue we had to deal with was accommodation delays due to the inability to get the workforce on site at critical stages of a project. The major difference in 2021 is that the future uncertainty has been somewhat mitigated by the vaccination rollout strategy. The current situation is seen very much as being solved in a matter of time.
Perhaps the most significant variation from 2020 was the early stage of this current lockdown in Sydney, when the construction sector was lumped into the wider lockdown strategy. What we have seen in the ensuing past month is significant liaison between the state government, health authorities and industry groups representing the construction industry to facilitate a staged return to work.
This commenced on 31st July 2021 with a partial re-opening of construction sites. At the time of writing, construction is open across Greater Sydney and the surrounding areas, with 50% of construction workers allowed on site in the eight Local Government Areas that are currently experiencing the highest infection rates. Workers must demonstrate that they have met minimum vaccination requirements and are now being given vaccination priority as part of the effort to re-mobilise the workforce. There is a concerted effort to ensure construction continues (as safely as possible).
Credit risk analysis is a dynamic process, requiring a constant response to changing factors. For new construction lending opportunities our focus is currently on:
- builder viability (financial capacity to complete);
- material supply chain delays and price hikes;
- construction timeframes, factoring in current or potential disruptions.
There are many attractive lending opportunities at present – it’s all about doing your homework.
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