Property developers adopt wait-and-see amidst COVID

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GLOBAL property developers are taking a wait-and-see approach as they face significant uncertainty due to intensifying cost escalation, trade and labour shortages, and investment risks which have been exacerbated by the coronavirus pandemic, according to Altus Group.

The Altus Group Global Property Development Trends Report is based on a global quantitative survey of 404 property development C-level and senior executives, with a development pipeline equivalent to at least USD$200 million under development at the time of the survey.

The survey found 68% of respondents said that the risk of a cycle downturn has a significant impact on their decisions regarding new construction investments, with distressed asset acquisitions (57%) and change in asset/portfolio mix (66%) viewed as more of a risk than an opportunity during a cycle downturn, and these factors are contributing to many development firms leaders taking a wait-and-see approach.

The report said COVID-19 has exacerbated the challenges face by developers. 73% of respondents said project cost escalation is a significant challenge facing development firms, followed by environmental regulations (70%), government policies and processes (65%), and trade and labour shortages (65%).

Furthermore, the pandemic has amplified existing challenges with increased trade and labour shortages, as physical distancing requirements on construction sites impact productivity, construction site halts in certain regions, as well the complexity of government policies and processes.

Altus Group executive director Scott Morey said the property development industry is navigating through the disruption from the current global pandemic and developers are implementing to build resilience in the new normal.

“It’s evident from the report that the global development sector is facing a complex set of challenges due to long-term market pressures, many of which are exacerbated by the pandemic and its evolving impacts.

“However, the industry is recognizing opportunities balanced with a cautious approach while leveraging digital-based solutions as a foundation to help carry it through this period of uncertainty and into the recovery stage,” Morey said.

Trends in development planning and challenges

According to survey, 67% of respondents said tenant/occupier expectations and preferences have a major influence on development planning which is compounded by the role the pandemic is currently playing in the built environment as occupancy use and building design now have the potential to significantly evolve and impact the market.

And 74% said public sector infrastructure investment (such as transit hubs) has a major influence on development planning. While shorter-term pandemic support is a current priority in many regions around the world, this suggests future economic recovery plans stemming from new government investment in public infrastructure will continue to be a major factor in development planning.

Canadian giant Oxford Properties, which bought out ASX-listed Investa Office Fund in 2018 for $4.5 billion, president Michael Turner said the group’s assumptions have changed.

“But has decision-making changed? The framework by which we consider trade-offs and choices and think about risk and reward? Not principally as it relates to development. If changing assumptions and inputs pre-COVID, during COVID or post-COVID produce results in analysis that cause us to pause, we will.

“But all the key data inputs and trends underlying our decision-making are being accentuated under COVID, and they are giving us conviction in our prior aims.” Turner said.

PropSherpa CEO Gurjit Singh said the coronavirus has made many firms focus on CAPEX.

“Decision-making for CAPEX becomes refined and very granular. From a developer’s perspective, if you are still constructing, the CAPEX has been budgeted and allocated so those developments can continue, subject to analysis.

“Think of this simple example: if COVID has created a demand shock in your market and there is a complete halt in demand, why would you rush to complete something? Obviously, it’s more complicated than that and this is a huge analysis and decision point for any developer.” Singh said.

United Kingdom build-to-rent investor Greystar’s senior director Nigel Allsopp added: “George Soros said his expertise as an investor is not necessarily knowing the rules of the game but knowing when the rules of the game change.

“So when you think about a category like multi-family you have to ask, how are long-run urbanization trends affected by the pandemic? Do people still have a strong preference for the city center or is it better to be in suburban locations? Or when we think about different product types like student housing, traditionally the number one factor you would look at would be the quality of the institution.

“Now, we have to focus more on the solvency of the institution and unit configuration,” he added.

Lack of opportunities in a downturn

Meanwhile many executives were surprised that significant distressed asset opportunities have not yet emerged, despite the heightened level of economic disruption caused by the pandemic.

Singh said of it was a real estate fund and they have dry powder, the appetite would be to go out and acquire assets which are on the cheap with great valuations attached.

“So the priorities for developers are different. Maybe someone is land banking and goes out there and acquires land on the cheap because a lot of owners are trying to sell because of the stress test for example,”

Frasers Property Australia NSW general manager residential Nigel Edgar said it is far too early to tell, but there is always a flight-to-quality and consequently a flight-to-developers that people can trust.

“Customers want to make sure they’re ordering and purchasing from high quality, reliable developers who will be there and deliver on time and on quality. I think that’s probably the most obvious thing in the short-term. The big thing for buyers will be a developer who will deliver,” Edgar said.

The survey found 74% of developers said acquisitions and 63% saw asset reposition as an opportunity, whilst 57% saw distressed asset acquisitions as a risk.

City Development Limited (CDL) vice president Soo Hwa Ng believes there is appetite for repositioning and maximising the potential of assets.

“When things are all good… when the capital market is all fluid, everyone says acquisitions, but then when it turns slow… and I’m not trying to be offensive but who are the ones that really mean it when they say acquisitions are the top priority when things turn slow? Or who really has the sort of gunpowder and the appetite to go out and make acquisitions?

“Right now, repositioning is definitely a point of analysis, because that’s where we can relook at some of our assets, if they are being maximized, and how can we better do what we are doing. We look at what we have and if we should restrategize the initial hypothesis behind them.” Ng said.

Australia’s migration and population growth, the “It” factor

Altus said in Australia developers looks for migration and population growth as metrics to judge future investment decisions.

The survey shows 61% of Australian executives placed demographics as a high influence on their development planning, which was considerably higher than the global average.

And 76% of Australian executives believe the risk of a cycle downturn is affecting their new construction investments. This is leading concern for the Australia market and is a standout when compared with other markets.

“This should be a concern to both state and federal governments as new developments will help to prop up the economy as we battle our way out of recession,” Altus said.

Digital transformation an urgency

Altus found with so much uncertainty driven by the pandemic, there has been a shift in the adoption of technology as development executives acknowledge that digital transformation strategies and tools are the key to building resiliency for the industry in a prolonged and sustained development crisis. 52% said they are considering or planning to use digital transformation strategies to mitigate business challenges, and 37% are already doing so. And 56% are considering or planning to use data analytics to mitigate business challenges, and 28% are already doing so.

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