Property and construction forums reveal huge challenges – and a few bright spots

A recent series of property and construction sector forums hosted by Grant Thornton New Zealand provided insights into some of the biggest talking points across the sector. The events took place in Auckland, Wellington and Christchurch with expert panellists providing a deep dive into the industry from the perspective of developers, financiers, property lawyers, agencies and the Property Council NZ. Here’s five key takeaways that emerged from every session.

1. Industry challenges? Choose your poison

“The dominant issue? The challenge is to pick just one issue,” is how Leonie Freeman, CE of the Property Council NZ, put it. “There are so many issues for the sector, starting with the general situation of uncertainty.”

Uncertainty is an everyday reality, created by the huge range of challenges facing the construction and property sectors. In addition to the most widely known problems the industry is grappling with including labour shortages, inflation, fuel prices and supply chain issues, our audiences and experts discussed social, financial and legal woes impacting their organisations:

• Working from home has impacted demand for office and retail space, with empty CBDs deteriorating surprisingly fast.
• Funding is harder to secure and slower to be approved. The Credit Contracts and Consumer Finance Act (CCCFA) is the legislative framework that helps protect consumers when they borrow money. It sets out the rules for consumer lending and requires lenders to always act responsibly. If you want to engage with financiers in the most efficient manner, you need to be prepared, and keep an open and honest dialogue. This will help you best achieve the results you are after.
• Legislation that doesn’t support the sector. For example, residential rentals are essential, so who should provide them is a key question. The Government? It clearly doesn’t want mum and dad investors considering its regulatory decisions to disincentivise them, and it doesn’t appear to want to support build-to-rent. So who should provide residential rental accommodation for Kiwis?

2. Consents remain a major frustration

The slow speed of council consents and inspections is causing a perpetual cluster headache across the industry. Getting consents approved has never exactly been a rapid transaction, but it’s become even more glacial over the past 18 months. Freeman told the Auckland crowd that it’s not unusual for finished houses to sit vacant for weeks because developers are waiting on the council to tick the right boxes and issue a final Code of Compliance Certificate.

But the industry leaders also recognise that councils aren’t incompetent or malicious – they’re battling their own issues. Most are understaffed, at least in part because the private sector has wooed people into new jobs. And more importantly, councils are trying to walk a nearly impossible tightrope between quickly approving consents and protecting themselves against risk.

Which brings me to one of the biggest difficulties facing everyone in the industry: managing risk effectively. Could shifting risk to say, the developers or through suitable insurance products improve the consenting process? If councils were no longer responsible for the same level of risk when they

granted a consent, surely it would speed up the process? The challenge is, with whom should this risk sit?

3. Collaboration and risk sharing has been necessary for survival

A greater level of risk shifting is becoming increasingly evident in the way jobs are now priced. The fixed price model is no longer workable: prices are just too volatile and nobody knows when they will stabilise. It’s not feasible for tradies and construction companies to wear all of that risk, so different pricing models are now becoming more widely accepted and understood.

To survive in the current climate, the smart companies have been collaborating to share risk. Josh Tattley, Director at RLB, says it was a collaborative approach that allowed companies to roll with the punches the pandemic brought with it. Relationships have been more cooperative and less competitive, with businesses leaning on each other to spread the risk and share the pain.

While the remaining tail-end of earlier fixed-price contracts will continue to cause considerable pain, the lessons learned are now being implemented in most new contractual arrangements to better share the risk.

4. Finding ways to keep building through the downturn

At our Wellington event, Mark Anderson, Partner at Greenwood Roche, said failures in the industry aren’t necessarily due solely to fixed pricing or material cost increases. In many cases it’s about overstretching your abilities – for example - warehouse developers getting into residential developments or single-unit developers trying large multiple-unit projects. The advice to ‘stick to your knitting’ will be an essential tenet for those businesses that are to make it through this market downturn unscathed.

What we really don’t want is a repeat of the GFC, as Freeman pointed out. At that point, the market downturn led to development nearly grinding to a halt, which ultimately caused a widespread housing shortage. That exacerbated our housing crisis, pushing up rents and prices. A boom-and-bust cycle is bad for everyone. It’s vital that the property and construction industries ride out this downturn, keep building, and retain talent and expertise within New Zealand.

5. Plenty of reasons for optimism

Despite all these challenges, there are plenty of reasons to feel positive about the industry. Most construction companies have a full pipeline of work. While some private sector projects have been put on hold or cancelled, billions of dollars’ worth of Government projects look set to continue.

Clients understand they must take on more risk and demand seems to be remaining strong. Smart businesses are using their experience and skills to successfully manage their way through the challenges of stock management, contract negotiations and working capital challenges, which should make them more resilient and profitable in future. The industry is lobbying for positive changes in standards for materials, legislative reform and build-to-rent as a separate asset class.

There are plenty of clouds on the horizon, and we don’t know how dark they’ll be or when they’ll arrive. But there are still bright spots – enough to give all our forum attendees plenty to smile about and an overall sense of optimism.