We are amid a perfect storm which has seen the collapse of some big-name builders.
History has taught me that there is more to come. I lived through the GFC storm which decimated my industry. I recall nervously opening the newspaper each morning to see who else had “left the industry”. They were tough times and are remembered in the Woodhead family as the “sausage and mince” years.
A reason why GPS didn’t fail from GFC is that we rolled up our sleeves and got on with it. We had great support from our investors, borrowers, builders, and other members of the GPS team. We sorted out the problems and were one of the first lenders to get back to lending.
The same will apply today. Builders will require the team to rally around and get them through it.
One issue I see is that builders will need to be paid more to complete projects. Developers need to be pragmatic. They can try to enforce a fixed price building contract, but it will end up costing them a lot more should the builder walk off site. The issue for developers is that they will need to go to their financier and ask for more money. Should the financier take a short-term view or be limited by prudential requirements, then more builder failures are inevitable.
Another issue is that most of the second-tier builders I talk to are scaling back. They have been better able to adapt to the current market conditions as their projects are smaller and quicker. They also have the benefit of being “relationship” businesses. This allows them to work through their issues with their clients and funders such as GPS.
A further discovery is how the banks are reacting to these industry changes. Banks are now in disarray, if they are not already licking wounds from the collapse of big builders then they are, as of now, very cautious about where their money goes. While this might seem scary, what it does is highlight the difference between a lender that understands what is happening vs the ones that just react. You will now see borrowers shift from the lenders that don’t understand to the ones that do – and at GPS we very much understand and are still lending for profitable projects.
A philosophy within the wider GPS team of borrowers and builders is that cheapest does not always provide the best value. It is in times like these that you appreciate the full value of a supportive team who will be part of the solution.
I have already seen a slowdown in new project starts, due to build cost escalation issues. Project failure issues will only add to the slowdown of delivery of new residential product. This should result in a continuation of price growth for completed product. This is the light at the end of the tunnel.
If you are a developer who has, or is expecting to face, a builder issue then please give the team at GPS a call to discuss possible solutions to keep your project running or, get it back up and running as soon as is possible. We have several builders who like funding from GPS, as they know we will work with them and that the monies will be there.
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