Developing property in a Corona Virus world

Back

As Covid 19 continues to spread worldwide shutting borders in Italy, China and Korea, keeping cruise ships in port and providing fodder for headlines, my clients are increasingly worried about the possible impacts it might have on them.

Below are three things to focus on during the spread of Corona Virus for property developers. I am someone who likes to get the ‘bad’ news out the way first, but I will finish with some positives to the near-term outlook so please read through to the end!

Supply Chain

An area that really needs to be considered for developers is their supply chain. I have many clients at the moment that are suffering from effects to this at the moment or reconsidering their projects as a result of possible effects.

When we talk about the supply chain this covers a couple things but primarily the materials for construction and labour component. This is a key question to ask your head contractor, where are they sourcing their materials and labour from?

Steel out of China or other places may be cheaper but also at the moment may just not arrive. This can cause delays, cost overruns and may result in you needing to source that steel onshore. Many regions in China have had to completely isolate resulting in production in some centres down as much as 60%+. Containers aren’t moving between ports and if they are they may be held in containment for a period of time after arrival.

Labour, also, can sometimes be sought offshore. A client had engaged with an offshore team to construct the super structure for his property. This team is now stuck offshore, and he needs to rethink his project causing delays and cost overruns.

This isn’t just restricted to offshore labour, however. If there is an outbreak in NZ and people who have been on your site need to self-isolate what affect will that have on your project? Does your head contractor have policies and contingencies in place? Unfortunately, Labourers can’t work from home.

Financiers are placing increasing focus on this and will question you robustly on the topic. The key takeaways would be to question your head contractors, provide for contingencies if you have some exposure and think about alternative solutions if possible.

Your clientele

Who is your end customer? The feeling from the authorities around the world is that Covid 19 will not have any quick fix and the impact may be longer lasting than we expect. In response to this we are seeing financiers place more emphasis on certain industry sectors and curtailing their appetite.

An example would be the Tourism or Accommodation sector. Auckland is seeing record development in the Hotel and Accommodation sector at the moment but there are naturally huge headwinds in this space at the moment with global travel really suffering.

Overseas arrival figures through to 16th Feb are suffering with the table below showing the Asian visitors down almost 30% and the overall trend of visitors down 10% YOY;

(http://archive.stats.govt.nz/browse_for_stats/population/Migration/provisional-international-travel-statistics.aspx)

This was through to the 16th of Feb and quite a bit has happened since then with it being reasonable to assume that the other lines are likely trending downwards.

The above is limited to the tourism sector however many others may be affected. We are hearing of agents commenting on the lack of people showing up to showhomes / open homes and comments that isolation may affect foot traffic for retailers.

This is all information that informs a lenders appetite for a sector and may lead to a curtailing of appetite or difficulty ticking off lenders conditions (pre-sales etc.).

The Positives

It is always worth looking out for a silver lining and there will be some going forward. Parties that are currently cashed up or in strong positions will find themselves in great positions to push Head Contractors and seize on opportunities to acquire distressed assets.

If markets slow down as expected there will be business seeking out work and the nature of supply and demand should lead to opportunities with pricing out of Head Contractors. If you are at a stage where you are ready to tender your contract, some patience may pay dividends to watch and see where the market lands.

There will also be parties who could end up in distressed positions giving opportunity to acquire assets at below market prices. These parties, albeit suffering will be happy to find liquidity and an exit.

Lastly, the Reserve Bank is likely to react as we have seen with others around the world. It is anticipated that the OCR could fall as low as 0.25% which should see some cheaper rates passed through to clients providing some relief on the financial side.

Hopefully you have made it to the end of the article with your hair intact. As with anything, the most important thing is to speak to a professional and make rounded decisions.

Please read our Disclaimer Statement for more information.