In this article we cover some of the market conditions that property developers are experiencing and we explain how are we solving those challenges.
The entire construction industry is currently facing widespread shortages. Timber is an especially problematic shortage, because it’s typically used for framing. But almost everything is in short supply—as an example, a vendor told us we would have to wait eighteen months for the refrigerators we ordered.
We’re handling these shortages in a few different ways.
The first is substitution. The biggest change is swapping from timber framing to steel. In normal times, steel is far more expensive than timber, but due to shortages, it’s actually cheaper and easier to obtain steel. To facilitate this, we’ve entered into an agreement with a steel manufacturer to provide structural steel at wholesale prices for our projects.
Smaller substitutions are commonplace and therefore not as significant: swapping out an oven from High-End Brand X to a comparable oven from High-End Brand Y. Or changing from one kind of rectangular white porcelain tiles to another, slightly different kind of rectangular white porcelain tiles. In some instances these substitutions do incur a higher cost, but the rising cost of materials will be offset by the higher values on the completed stock.
The second way we’re managing shortages is to buy materials up-front, which is a big departure from how it traditionally works. Normally, the builder purchases the materials on credit (or from their own funds), completes the work, and has it verified by a Quantity Surveyor. Once verified, the construction funder releases the funds for the work, and then the builder will finally pay the vendor the full cost of materials. Everyone gets paid after the work is done.
But when there are more buyers than stock to sell, the vendor has more power. A vendor will prioritise customers who can pay up-front, so that’s what we’re doing. This has required us to work with our construction funders to move up our loan drawdowns so that the builder has the money to make these purchases. In some instances, we’ve provided hundreds of thousands of dollars of our own working capital to make this happen when lenders are dragging their feet.
We’re also buying the materials well in advance to compensate for increased manufacturing and delivery timeframes. If it’s going to take three months to deliver the materials, then we’ll buy them three months in advance so that they arrive in time.
These measures might sound obvious, but we need to reiterate: it’s a massive departure from how things are traditionally done. And people are inherently resistant to change, so it has required a huge amount of negotiation with our funders and builders to make this happen.
In addition to materials being in short supply, skilled trades are in short supply, too.
With more people trying to build homes as a result of the HomeBuilder programme, there is a higher demand for contractors than normal.
But COVID restrictions and safety measures are also causing staff shortages. Because workers are required to stay at home whenever they have any cold or flu symptoms, it means that planned works are constantly being pushed back until staff are available.
Just like buying materials in advance, we’re solving this by making sure to book out necessary contractors well in advance. This means we have to work closely with our builders to be proactive about what contractors will be needed, and when.