'Expect more building companies to fold in 2023': UDIA boss

More building company collapses loom in 2023 as the industry “consolidates”, according to the head of the Urban Development Institute of Australia (UDIA).

In a wide-ranging interview with API Magazine, UDIA’s national president, Maxwell Shifman, said a “bare future pipeline” pointed to further issues in the embattled building and construction industry.

“Sadly, I expect more building companies to go under,” Mr Shifman said.

“There’s companies that probably have not made as much money out of the so-called building boom as they’d have liked and they’re going to get to the end of that pipeline and go, ‘we actually don’t have that much work to go on with’, so where that leads I don’t know for sure but I do not think we are at the end of the cycle where construction businesses struggle.”

The UDIA president’s pessimistic observations come after more than a year of building and developer woes, including last month’s collapse of engineering and construction giant Clough Group that could jeopardise more than 1,200 jobs and stall billion-dollar projects around the country.

Melbourne home builder Hallbury Homes became the first casualty of 2023, lapsing into administration after 30 years of business, while operating 50 projects on 42 sites in the metropolitan area.

Easing pressure on the cost of building materials was unlikely to be enough to soothe the pain felt by the construction industry.

“I expect cost increases to ameliorate to a large extent but it's still going to catch out a few more businesses,” Mr Shifman said.

“I think there’s going to be more consolidation in the building industry.

“If you look at what’s happening with sales currently - and really they’ve slowed down across the country virtually universally since interest rates started to rapidly rise - that future pipeline actually looks pretty bare and so there are companies that are only geared up to work through a very buoyant period that will hit a wall.”

Housing Accord the priority

Moving into the second half of his two-year term as UDIA president, the Monash University civil engineering graduate said had a six-year stint in forensic and safety engineering before moving back into the property development space. Today he combines his UDIA duties with his day job as Chief Executive Officer of Intrapac Property, one of Australia’s largest private developers.

Asked what he regarded as the biggest priorities for UDIA in 2023, Mr Shifman singled out the Federal Government’s Housing Accord and promised to build one million properties over five years to address the chronic national housing supply shortage, and infrastructure expansion policies with social benefits at their core.

“There’s a lot happening in the federal government sphere; you’ve got an (Anthony) Albanese government working hard on an expansive reform agenda.

“There’s a lot of detail to work through on the Housing Accord, so I expect it will take up the bulk of next year to get a position established.

“Dealing with local and state planning systems remains a massive challenge for us, whether it’s helping incentivise more affordable housing for private developers and investors, whether it’s getting build-to-rent happening at scale where institutions and foreign investors will be coming in and deliver that sort of dwelling into the marketplace, there’s a lot to iron out.”

Asked if a Housing Accord that has been derided as vague and lacking detail could meet its targets, Mr Shifman was circumspect.

“Well, we have built a million homes in previous five-year periods so it can be done.

“I suppose the cynicism from some parties stems from the notion that ‘you’ve done it before, so you’re not really setting the bar high.’

“There is a slight difference though, in that the building industry did that with a very different mix of investment variables; costs were nowhere near as high as they are now, which is impacting viability.

“We are obviously seeing challenges now and all that points to not being able to meet those million homes over the coming five years without intervention, so I guess it’s the intent to try and stay at that level, possibly more.

“There is a greater investment in social housing particularly and affordable housing by the government but that’s not really where the bulk of the effort’s going; it’s about creating a more sustainable, more consistent marketplace to keep it at that level.”

The scale of the challenge facing the Albanese government was only underlined by the Australian Bureau of Statistics (ABS) data showing dwelling unit approvals have fallen 6.4 per cent and 11.3 per cent for private sector houses year-on-year.

The key obstacle, and potential solution, revolved around multi-residential buildings, Mr Shifman said.

“We’re struggling the most in the multi-residential apartment space, where approvals across the country have touched on GFC-era lows.

“That’s how little confidence there is in the apartment complex sector that was a big part of that million or so homes that were built over the last five years and we can't he can’t easily make that volume up through other forms of housing.”

Build-to-rent potential

Attending a recent housing investor roundtable meeting with the Federal Treasurer Jim Chalmers, Mr Shifman drew attention to the obstacles facing developers in bringing more build-to-rent accommodation to the Australian housing market.

Well established in the United States and Britain, build-to-rent refers to a housing model in which apartment blocks are owned and operated by a single company acting as a landlord rather than being sold to investors.

With the potential to alleviate some of the stress on rental markets that has seen vacancy rates plummet around the country, Melbourne stands out as the only city making significant inroads in this area.

A fourth major build-to-rent apartment building has opened in the Victorian capital, and real estate company Colliers said 41 per cent of Australia’s completed build-to-rent apartments are in Melbourne, which will be home to 60 per cent of the country’s supply by 2026, compared with 13 per cent in Sydney and 25 per cent in south east Queensland.

But up to now, the focus has been on high-end or luxury apartments that are unaffordable to most renters.

“Build-to-rent is enduring the same problems as build-to-sell, where the only things really getting off the ground are smaller boutique, owner-occupied, premium dwellings, so you’re not getting the scale.

“The same applies in rental, because of just how difficult the playing system is, how scarce suitable development sites are and because of the costs of actually constructing now.

“That means you’re only getting a premium product and a premium on rentals to make the numbers close to stacking up for the developers.”

Mr Shifman said the meeting with the Treasurer raised issues around the feasibility and affordability of build-to-rent.

“Things like the managed investment trust (MIT) tax rules or the way GST is treated, or some of the foreign investor charges that discourage foreign investment, which is a pretty big part of build-to-rent pipelines internationally, were flagged.

“Then you’ve got separate challenges around delivering that at an affordable level, so you then have to talk about what subsidies are available for people to actually be able to get into some of that housing.”

So was 2023 shaping as another grim year for renters?

“Sadly, I think yes.”

“We’ve got this chicken and egg problem, whereby we’ve got a massive labour shortage, so you need to bring people here - you can’t just rely on training Australians up to fill the gaps - it is not enough.

“We’re at record low unemployment and it would be a nonsense to suggest that those remaining 3 per cent can do any sort of training quickly enough to fill the gaps, there just isn’t enough unemployed people to do that, so you’ve got to bring people back in.

“The government’s trying to catch up on the visa backlog and they understand the importance of that but we are also struggling due to the fact that a lot of new development is no longer viable, particularly in that apartment space, but it’s increasingly the same with greenfields sites.

“There’s all sorts of planning issues at play in terms of increasing urban density through infill, even mid-density development, which comes back to the NIMBY (not in my back yard) mindset, as well as restrictions around local planning schemes, and in Victoria there’s now windfall gains taxes that really reduced the likelihood of those much-needed infill sites actually going through a rezoning process, because it’s no longer worth it financially.”

Santa’s wish list

While singling out the Victorian tax, Mr Shifman said planning systems around the country were only going backwards.

“I think it’s uniformly getting worse across the country.

“They might have started from different bases but no planning system around the country at the moment is improving, in my view.”

And if Santa could deliver the UDIA a belated Christmas gift, what would it be?

“For developers not to be seen as the enemy but actually to be seen to be delivering core-critical social infrastructure for people, which is ultimately their homes.”