[+] Developers, Builders Blur Battlelines to Weather Storm
Property development is the art of the possible.
Ever since the ancient Romans introduced multi-storey apartment living to the world, developers have been finding ways to make possible the deals, partnerships, building designs and city-shaping visions others thought impossible.
Nothing has changed.
Not through repeated boom and bust cycles. And not even through a pandemic-induced construction crisis with building cost
blow-outs, crippling labour shortages, rising inflation and interest rates leaving a string of firms going to the wall.
Seeking to overcome the sector’s latest slew of challenges, industry players have been shifting to more collaborative models to get projects out of the ground and, importantly, completed.
And the traditionally combative line between builders and developers has become increasingly blurred.
Brent Thompson’s Brisbane-based Siera Group is one of a number of developers that have brought more trades in-house in a bid to provide certainty in delivering its projects going forward given the prevailing volatile conditions.
The move came last year soon after the launch of its 22-storey, 113-apartment Tapestry tower development at Chevron Island on the Gold Coast, as the sector was reeling from the first of many high-profile builder collapses and bracing for a string of interest rate rises.
“Definitely, for a lot of developments that will be the only way that they will get it done,” Thompson says.
▲ Above and main image: renders of the Siera Group project Tapestry planned for Chevron Island on the Gold Coast and founder Brent Thompson.“This is unprecedented territory for everybody. I don’t think anybody’s ever been through a construction crisis like this.
“The persistent volatility across the sector presents many challenges, chief among them the ability to secure a builder to commence works in line with market expectations.”
He says Siera Group had engaged extensively with Tier 1 builders during the past 18 months, however, it did not receive the level of reassurance and commitment necessary to proceed with confidence.
“Towards the back end of last year, just how busy everybody was, the lack of appetite from builders for residential, the horror stories that everybody was hearing about builder insolvencies and delays on sites … we decided the best way to manage the risk was to internalise it.
“Because of what we were seeing in the market, we felt if we could get the right team together and control our own destiny it was going to be better for everybody.
“And if you look at who’s been able to operate through these challenging times, it’s the developers with in-house construction or who have taken construction in-house after their builder went broke, they're the ones that have been able to maintain momentum.”
Thompson, who worked as a carpenter before turning developer, says Siera has always operated with a developer-builder model and the decision to expand its in-house construction team “just felt right”.
He says the expanded in-house team had come from established, reputable builders.
“Building is super challenging, you can underestimate how difficult it is ... but there's a lot of experienced and great people in the industry.
“I probably could have put two or three teams on, to be honest. There’s a lot of guys who are really good operators and have just been caught on this hamster wheel of the profitless boom.”
Thompson says it is important to note Siera's decision to build the Chevron Island project itself “wasn’t to save the money we would have paid a builder”.
“We’re putting a margin on our construction the same as we would with an external builder. We’re running that part of the business commercially. So this wasn’t like ‘oh, we need to save money, we need to build it for less’. This was about controlling the cost, the quality and the time.”
More than money
Holden Capital’s Dan Holden agrees the builder-developer model is not necessarily about the bottomline.
▲ Render of Tapestry, the high-rise project by Siera Group rising on the Gold Coast.
“There’s plenty of tight margin development projects going around at the moment,” he tells The Urban Developer. “And bringing in-house the construction isn't going to turn a thin profit project into a fat profit project.
“Looking at it for that reason is probably the wrong reason. The reason that I’d be looking at it is because you’ve got visibility and you can manage it yourself, as opposed to relying on an external party and only talking to your builder once a month.
“When you are the builder you are on-site every day. You see the problems that arise and the challenges it’s being faced with … rather than hearing four weeks later there was a problem and nobody fixed it.”
For the same reason, Holden says the specialist non-bank lender sees the developer-builder structure as a benefit.
“Historically, the traditional banks have seen it as a high risk and been quite reluctant to be involved because if there is a problem, then they see it as having two problems instead of just one.
“The exception to the rule is long-term bank clients where they’ll take it on.
▲ Holden Capital’s Dan Holden: Bringing construction in-house isn't going to turn a thin profit project into a fat profit project.“Whereas, we actually look at it as a benefit, particularly at the moment with material costs and labour costs being the hardest thing to manage. If there is a problem, then you’ve got visibility, and you can solve it quickly.”
Of about 35 active construction loans on Holden Capital’s current books almost half of them are for projects in Queensland, New South Wales and Victoria with a builder-developer structure.
Prior to Covid, Holden says, the relationship between builders and developers was “a little more combative”.
“Whereas what we’ve seen in the past 18 to 24 months, particularly when cost issues arise, it’s a lot more collaborative,” he says.
“At the moment, I’m even doing two [loans for projects] where the builder is an external party on a standard contract but they’re investing their profit plus a few costs to be back-ended and getting a higher than normal return on that investment.
“That’s only come about in the past couple of months whereas previously you wouldn’t have entertained that. But, again, that gives us as a lender more comfort because it means the builder instead of just bashing the developer with a bunch of extra bills … it aligns their interests to get the project completed on time and on budget.
“And that’s going to lead to a better and more successful project all round.”
‘Lot of moving parts’
Developer Frank Licastro says the south-east Queensland projects his company Frank Developments is currently undertaking “each have a different construction solution”.
“It’s definitely interesting times and there’s a lot of moving parts,” he says. “We’ve had to think outside the box.
“We’re finding finance is obviously very supportive of that structure with having the build connected to the developer because you're able to sort of move things around a little bit better to get the project to work and stack.”
Licastro is bringing in a hand-picked construction team to deliver Mira Residences, a 25-level beachfront Gold Coast tower Mira Residences comprising 11 double-storey apartments along Garfield Terrace at Surfers Paradise.
“We still have separation of the licence,” he says. “We’ve just pulled together an experienced team to specifically deliver that project.
▲ Sydney builder-developer Made Property was this month approved for its high-end apartment project on the harbour in Sydney’s inner west.“And I guess why finance likes that is there’s no risk, no legacy issues from something like that.
“They’re only managing that one project, as well. So, they’re not spread too thin across the market. And they’ve got a solid track record with what they’ve delivered in the past in the high end market, so that was definitely a plus
“And because we’re a boutique developer that has also helped us.
“Our subcontractor pool is a lot different to a lot of these larger scale, more dense projects. We can pull together smaller teams, which sort of de-risks it for us and from a finance point of view.”
Demolition of an existing building on the Gold Coast site will begin in October and piling work for the tower is due to start in November.
Meanwhile, Licastro has two developments on the go in Brisbane.
One is an eight-storey, 26-apartment project at Wyandra Street in inner-city Teneriffe involving another strategic partnership with a construction company.
▲ Frank Licastro of Frank Developments and a renders of the Mira Residences beachfront development planned for Garfield Terrace, Surfers Paradise.
The other project is a four-storey residential play comprising 10 apartments at nearby Oxlade Drive, New Farm. It is being delivered in a joint venture with his cousin, Joe Licastro, who is a builder.
Before pivoting into development, Licastro also worked on construction sites as an electrician for several years.
He says having that hybrid skill set, knowledge and close relationships in the construction industry had been key to coming up with solutions to move projects forward in the current volatile environment.
“I'm learning every day,” Licastro says. “I think the positive thing is you can see the whole industry coming together because we’re all in the same boat. It’s just all hands on deck to find a way forward. And to be honest, these lessons learned will definitely help us in the future, that’s for sure.”
Building first, development second
According to John Kearney, the boss of Gold Coast-based building
▲ A render of the 26-apartment tower in inner-Brisbane by Licastro.firm Greyburn: “I suppose for me it’s always been more sort of building first and development second. And now it’s swinging probably more the other way”.
Kearney’s development arm, Immerse Projects, was recently given the green light for a second Coolangatta project—a 17storey residential tower with 58 apartments.
It will rise from a site adjoining its under-construction sevenstorey, 40-apartment Rhythm Kirra Hill development, the first of three projects either under way or proposed by the company on the southern Gold Coast.
“We had to battle through fixed-price contracts during the past two or three years and we’ve finished them all now,” he says.
“So it has really helped us that we’ve had that other income stream where we’ve seen a bit of the upside of the market to be able to compensate for some of the losses on the building side.”
Kearney says the whole landscape of the industry has changed “because everybody’s fighting for resources”.
▲ John Kearney, founder of developer-builder Immerse Projects, and its recently approved Coolangatta tower.“It doesn't matter about the land price and everything, it’s all about the build now.
“Pre-pandemic I could price a job almost on the back of a coaster and I was able to honour that number 12 months or even two years later,” he says. “Whereas now that’s just out the window.
“With all the volatility at the moment it makes it so much harder to move forward with the project in an accurate way. There’s so many projects going around in circles or just not going at all.
“It’s going to be a very interesting six to 12 months ahead. I don’t think we’ve seen the end of it yet.
“And, absolutely, collaboration will be key to ploughing through this … getting the right building advice upfront and bringing the right people with you through the whole process. As a builderdeveloper you can do that.”