Builders bracing as lockdown places Melbourne on hold

Big builders in Victoria are set for a coronavirus crunch, as stage four restrictions slow construction of major projects and grind property market activity in Melbourne to a halt. 

Victoria's latest lockdown mandates major construction sites to operate at 25 per cent capacity for a six-week period ending mid-September, part of a suite of measures aimed at slowing the community spread of COVID-19.

Some of the city’s biggest ever builds have been affected, including Fragrance Group’s striking, 79-level Premier Tower, being built by Multiplex, and Far East Consortium’s West Side Place, which is being built by Probuild.

Progress will also be slow at Australia’s tallest residential tower, Australia 108, which Multiplex is building on behalf of developer World Class Land at Southbank.

Smaller construction sites, such as houses or commercial buildings of less than three storeys, are subject to a limit of only five workers allowed on site.

Industry groups acknowledged the measures as necessary to fight the spread of COVID-19, with the Housing Industry Association applauding the Victorian state government for ensuring domestic building work could continue.

“The economics of this decision are critical – allowing housing projects to continue will save jobs, limit the risk of longer rental costs and loan charges for home owners, and ensure that Victoria’s housing supply keeps up with demand,” HIA Victoria executive director Fiona Nield said.

“There are more than 30,000 houses under construction across Victoria today, and there are more than another 30,000 apartments under construction, mostly in Melbourne.”

But concerns are mounting that if the stage four lockdown stretches for longer than six weeks there will be serious implications for builders.

Pitcher Partners accounting and business advisory partner Andrew Clugston said his law firm had recently experienced a significant increase in enquiry from construction companies, with the bigger builders likely to be heavily impacted.

“We’re talking to them about whether they are eligible for JobKeeper and other forms of support, all of the sorts of things we have been talking to other clients in other industries about for the last few months,” Mr Clugston told Australian Property Investor.

“It’s now the property industry’s turn, and for a lot of these towers to run at 25 per cent capacity is going to be pretty difficult.

“Builders’ revenue is going to be well down and their cash flow is going to be well down.

“A lot of the stage three restrictions involved small business, which although had a big financial impact and they don’t have that same financial capacity to withstand these issues, they can actually shut down and open up quite quickly because they are small and nimble. 

“On these big projects, to scale them down and scale them back up again is just a bit of a logistical nightmare.”

The restrictions are the latest blow for a sector already reeling from the impacts of the pandemic.

Research by Rider Levett Bucknall released last month showed Victorian developers had deferred or placed on hold indefinitely between $2 billion and $2.5 billion of projects that were considered to be ‘shovel-ready’ as a result of COVID-19.

RLB said the deferred project pipeline would likely grow, with future commencement of high-rise apartments projects compromised with pre-sales placed on hold, and future developments in the education sector also postponed until the full impacts of the crisis can be assessed.

There is also considerable uncertainty over any new retail projects to pick up the slack, on the back of considerable investment in recent years and a changing economic landscape.

RLB warned of potential insolvencies for contractors and suppliers as government incentives wind down and work dries up, with margins to tighten as competition for contracts ramps up.

Job losses are also likely at big commercial contractors and subcontractors as they complete the current pipeline, RLB said.

Mr Clugston said he was also concerned about the potential impact that the upcoming changes to JobKeeper, and its scaled back payments, would have on construction industry players.

“One of the big issues we see with JobKeeper 2 coming into effect in six weeks’ time, is to be eligible for that you have to demonstrate a decline in revenue for the June quarter,” Mr Clugston said.

“Most of these builders who are shutting down now can’t demonstrate that and won’t be eligible. 

“So one of the big concerns is if this six-week lockdown goes any longer than the six weeks, these big construction companies’ eligibility for JobKeeper 2 is probably not going to be there so they could well be facing constrained activity in October with no JobKeeper.” 

The construction sector’s challenge is likely to exacerbate pain in Melbourne’s property industry overall, which is facing uncertain prospects due to the spread of COVID-19.

In late July, the Real Estate Institute of Victoria was presenting a positive outlook, with its analysis showing houses were selling quicker in 2020 than they were the previous year.

Days on market had fallen to an average of 41 days, with homes in Melbourne being sold within 39 days, on average.

But with physical inspections unable to be completed under stage four and auctions moving back online, that momentum may have already been tripped up.

Auction data from Domain from the first weekend under stage four lockdown showed transaction activity slowed to a trickle, with the number of houses sold down 64 per cent as compared to the same weekend last year.

The total value of homes sold in Melbourne over the weekend was $69 million, down from $294.2 million on the same weekend last year, Domain said.

Melbourne’s median house price has already been the most affected in Australia by the pandemic, plunging by a nation-leading 3.5 per cent between March and June.

That median price remains 6.1 per cent above where it was in July 2019, but Melbourne’s big issue remains its reliance on international education and net migration to stoke real estate demand.

Herron Todd White’s latest market analysis suggested the biggest price falls would likely occur in high-rise apartments in Melbourne’s CBD and near-city suburbs, as vacant rentals continue to pile up.

“With immigration coming to a halt as well as a sharp decline in international students, investors will be feeling the pain over the next 12 to 24 months,” HTW said.

“We are also seeing quite a number of nomination sales in the CBD market, as many investors are desperate to find a new purchaser to take over their property.

“Investors are doing this now as they had originally purchased these apartments 12 to 18 months ago and pre-committed to contracts, but with lending environments changing since then, they are unable to settle on their apartments, leaving some with no choice but to forfeit their deposits.”

And Melbourne homeowners may need to wait at least two years before experiencing price growth, according to the latest Finder RBA Cash Rate Survey.

Finder said 75 per cent of the economists and experts that weighed in on the property sector were pessimistic about Melbourne home values increasing before April 2021, with 29 per cent expecting it to stagnate until 2022 or beyond.