2022 isn’t looking like being all sunshine and lollipops for builders.
Last year builders were battered by escalating prices for building supplies and subcontractors. From our point of view this appears to be stabilizing, but unfortunately there are plenty more curve balls to come!
Project Trust Accounts
One such curveball for builders is the introduction of project trust accounts. While they are only now needed for $10M+ contracts, they are scheduled to apply to $3M+ contracts from 1 July 2022.
Project trust accounts will create some issues for builders including:
- Adding another layer of administration. This will come through the need to create new bank accounts for each project and the strict payment of all subcontractors via that project bank account. Being that it is a Trust account, this carries additional check and balances with increased cost
- Impacts on liquidity. These accounts will also impact builders’ liquidity as they will require more cash to be tied up in each project. This is likely to cause further escalation of build prices and reduce capacity which will flow on to project viability.
The team at GPS has been busy preparing for this change by attending information forums to ensure we have all the knowledge to assist builders and borrowers through this transition.
Shifting Risk Profile
Another issue to contend with is the adjusting risk profile in property development.
I have read some articles which discuss how the risk profile for residential property development needs to shift. At present, the banks and developers shift the risk from themselves by implementing fixed price build contracts on builders and requiring pre-sales to obtain funding. This places a fair amount of the risk on the builders by having them complete the build for a relatively fixed sum.
The situation with Probuild has shown what is happening now with fixed-price contracts – the rising costs of construction makes these types of contracts unviable and is resulting in many builders coming unstuck. This adversely effects the developers who, having obtained pre-sales to get their bank financing, have their profit capped but are still exposed to these rising building costs. Funding without pre-sales like for example with GPS Development Finance reduces this risk for developers by allowing their profit to increase as the property market rises, and to therefore enable them to better cover any increased build costs.
GPS as part of the solution
It is always the aim of GPS to work with our borrowers and builders to develop successful business models that create profitable projects. This approach by GPS has led to a business built on repeat clients with a foundation of trust and flexibility that benefits all. We will continue to learn and implement all we can to be of assistance during these curveballs (and the ones to come!) but we are always open to input – so please give the GPS Lending Team a call to discuss.
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