The global pandemic of COVID-19 is creating an unprecedented world for everyone – including developers – and the uncertainty is wreaking havoc on businesses in all industries across the country.
In Australia, COVID-19 is currently the biggest threat to our economy. Soon after the world health crisis was announced, the Reserve Bank dropped the interest rate to 0.5 per cent and then again to a record low of 0.25 per cent to help prevent a Coronavirus-driven recession.
So, what should you be doing if you are currently in the process of a development and are trying to navigate these uncertain times?
Here are 16 things that every developer can start doing to help get through the pandemic and its public health and economic fallout.
- If you are an owner builder, make sure your trades are practising social distancing as required.
- Check your builders supply chains for materials; if from overseas, look to buy local.
One of our clients who was relying on toilets from China has now secured them locally. The same will also apply to the trades that are sourcing their own suppliers such as electricians, etc.
This is a good way to mitigate any construction delays due to materials being sourced from China and other parts of Asia, where manufacturing has slowed.
- Maintain your update meetings with your builder/ or tradie.
One of our joint venture clients meets the builder on site every morning to discuss what will get done on the day. They then meet again at the end of the day to review what actually happened on the daily program – ensuring that the building program is kept as tight as possible.
- Prepare for an increased level of reporting to your bank or financiers.
Property developers and investors need to get ahead of requests for information from their financiers to adequately manage their financing risks. Be prepared with the following information:
- Construction delivery timelines actuals vs forecast
- Presales settlement risk
- On Completion Sales Value Risk
- What is your builders COVID-19 risk management plan
Your financiers will be using the above information to assess what is the impact on their lending safety, which will be assessed against potential breaches of your approved loan terms such as:
- Potential loan covenant breaches such as LVR On Comp or Loan to Cost.
- Consider what impact project delays may have on your approved loan term and the adequacy of your approved capitalised interest budget.
- Consider what impact a significant level of pre sales risk may have on your approved capitalised interest budget and approved loan term.
- They will sensitise your project feasibility to account for any changes from what was originally considered and how this may affect them and what actions if any they may take.
We highly recommend you consider all of the above factors in order for you to communicate your risk management strategy to your financiers. This will help them become comfortable that you have considered and understood the risks, and they will be assured that you are already managing the risks well.
Relatively minor potential breaches in your approved loans are likely able to be negotiated without too much stress or risk.
More significant potential breaches of approved loan terms may need some higher level of strategic thought and advice required to vary/restructure/refinance your existing financing structure at both a group level and individual project level. This is especially true if the majority of your loans are interlinked with the same lender.
- Now is the time to create additional liquidity via releasing equity in your group’s assets into approved lines of credit secured against your passive assets (such as your residual stock, land assets or income producing assets).
Cash is king in volatile and opportunistic markets like we are experiencing now. Cash gives you the ability to solve all sorts of risk and be in a position to countercyclically invest.
- Based on the impact project delays make sure your loan facility has the ability to extend, and speak with your underwriter to understand how they can assist if so required.
- Discuss with your lender the impact of the Quantity Surveyors or Valuers.
They will need to visit the site and what they are doing to insure that progress claims and valuations can be undertaken, this should provide you with some leverage on being granted an extension, if the lender cannot facilitate these services.
- Ensure your anyone you are dealing with has secured their funding as it relates to their ability to complete on the purchase contract.
Speak with them at 60 days from Occupancy Certificate (OC) and have them confirm that they have their loans in place.
- Speak with approving authorities, particularly as it relates to final inspection for OC.
- If you have a business which can borrow, look to raise capital to provide a buffer against holding costs on your sites.
There are significant lenders underwritten by the Government which have been directed to assist businesses. In these cases, the Government will provide a Guarantee up to 50% of the loan amount up to $250,000 and interest rates as low as 2.9%.
- Review your administration overheads and where possible look to reduce that cost.
A small example is if you have cleaners coming in once a week, change it to once a fortnight. Remember a lot of small things can add up to a large amount.
- Speak with your Selling Agents about what they are doing for auctions and open houses.
They can book private appointments with a potential purchaser whilst still observing COVID-19 social distancing requirements. However, we need to be aware that market research firm CoreLogic said that the current ‘extreme uncertainty and economic fragility’ has made it difficult to expect or predict any response from buyers and sellers.
- Stay in close communication with your trusted advisors, especially your accountant.
This will ensure you are able to take advantage all of available stimulus measures being progressively introduced by all levels of government.
Developing cashflow focused 30-, 60- and 90-day plans would be a valuable way to focus your attention in a very scattered environment.
- Proactively communicate and negotiate with your landlords and your tenants (if you are a landlord).
- If required, develop a business plan that may require you to negotiate with integrity with all of business’s key stakeholders to get through the next 12 months.
The key stakeholders of your business may include the ATO, your investors, your business partners, staff, suppliers, builders, consultants, buyers, land purchase vendors, bankers, unsecured creditors, marketing, advertising and sales agents.
As a general principle, the level of stake or risk that each of your stakeholders in your business will likely translate into the level of negotiation you may have with each stakeholder.