Safe being a developer ?

[long88]

i thought it is always safe being a developer/builder ?

anyone know what is wrong here ?

A MAJOR construction company with four large projects in NSW has collapsed owing at least 600 creditors millions of dollars.

Uncertainty surrounds $230 million worth of commercial and residential projects in NSW after Southern Cross Constructions (NSW) was placed in voluntary administration today by chartered accountants Cor Cordis.

It is estimated the company owes $17m to ordinary unsecured creditors though that number could keep changing, administrators said. Its creditors are primarily located in NSW.

The company's collapse would not affect the Victorian part of the business, Icon Southern Cross, which merged with its NSW counterpart in a $400 million deal earlier this year, Cor Cordis said.
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Southern Cross's NSW projects include a new Woolworths and Bunnings Warehouse on the corner of Condamine Street and Balgowlah Road, Balgowlah, and the headquarters for Yalumba Estate at 90-96 Bourke Road, Alexandria.

It was also building the Beaches residential development in the Wollongong beach suburb of Towradgi, and another in Dee Why.

The short-lived July merger had shielded Icon Southern Cross from its partner's troubles.

Icon is developing a $25 million site in the Botanica Corporate Park in Swan Street, Richmond, a 350-apartment block for the Salta Group and 120 units in Malvern for the Hamton Group.

"We have only just been appointed so it's too early to say what the current financial position of the company is until we have completed our preliminary investigations," the administrator Ozem Kassem said in a statement today.

"We will also need to establish what is owed to each of the contractors whose ongoing support is required to complete those projects," Cor Cordis said.

Southern Cross Constructions employed 39 company people.

Read more: http://www.theage.com.au/business/building-firm-in-230m-collapse-20121026-28acl.html#ixzz2AP5OQAQh

 

[jrc]

i thought it is always safe being a developer/builder ?

anyone know what is wrong

Read more: http://www.theage.com.au/business/building-firm-in-230m-collapse-20121026-28acl.html#ixzz2AP5OQAQh

Read Trevor Sykes' book Bold Riders about the 80's and instead of the word safe you will substitute the word risky. Go back to the 70's and there were a number of developers eg Mainline and others who went under. Look at page 3 of today's Financial Review and other developments are mentioned where receivers have been appointed. Look at financiers who have got into trouble and it is often because they have financed developers.

 

[Scott No Mates]

Since when has developing been 'safe'? If it was why would there be a 30% developer's margin on feasibility studies?

Not being too critical but why shouldn't the directors of the building company be prosecuted for breaching the security of payments legislation? Afterall it is a stat dec.

 

[long88]

i am more interested in the cause.. is that because of the cycle we are in.. we prices seems to be dropping... ? (rising tide lifts all the boats ?)

However there is still a lot of cip change hands at around 5% yield. or asking for that prices

Read Trevor Sykes' book Bold Riders about the 80's and instead of the word safe you will substitute the word risky. Go back to the 70's and there were a number of developers eg Mainline and others who went under. Look at page 3 of today's Financial Review and other developments are mentioned where receivers have been appointed. Look at financiers who have got into trouble and it is often because they have financed developers.

 

[Mr.T]

Southern cross is one of many Middle-Teir builders going bust, but why?

Construction is a business where they need to constantly keep feeding the 'Machine' work. The machine is the contractors, management, suppliers, workers.. they all need work to produce a product that is viable and delivers on budget. Without the constant work, the building price per m2 goes up and they price themselves out of the market.

Construction groups get work from - Developers or they Buy work. After GFC banks limited funding for developers and increased policy restrictions like:
- Extra pre-sales required from 30% - 40% to now 100%,
- Soft costs ie, architectual, DA,CC fees all paid upfront and approved
- Previous development history - strong background of experience and clean as a whistle, all commercial funders talk.

With funding so tight Developers can only hold one maybe two projects on their balance sheet, with turnover time for projects increasing to 2 years, the work was not being provided by developers.

Construction groups started to buy work, they purchase sites (over market value)with DA and would sacrifice the development margin by paying for holding costs while Pre-sales were being conducted - All just to keep the construction company going. Another example of buying work is govt tenders..

Some of the gov't tenders the construction groups won were way underpriced, REED constructions was one example of a major budget blowout on Gov't contracts. Not saying that the whole REED collapse was due to underquoting but having $45M in claims from NSW Govt will hurt.

Being a Developer these days is not enjoyable, its a battle, it may look glamorous, the large payout at the end may seem worth it but with the banks you need to sink in alot of capital in the begining, personally guarantee everything even your kids and continually solve problems every day.

Will it always be like this? No, history will repeat itself as it does in cycles. There will be easier lending policies for resi and commercial and developing will come back to the smaller developers.

If you want to develop - Stick to 3 Storey Walk-ups, they are a great project:
- They provide a good exit strategy
- Easier to commercially fund compared to 20+ apartments
- Pre sales are completed in a much shorter period
- Local agents can sell the apartments without having to have a large onsite sales display with a team of agents\
- Apartments are ideal for a range of purchasers - first home buyers, investors and downsizers love them cause the strata is low, bottom terraces still provide a garden to the older 55+ age bracket who dont like the idea of being in a senior village
- Funding for purchasers is easier than high rise or high density apartments

Just my view...

If anyone has any questions on property development PM me..
Sorry for the detail..

Cheers,
Marc

 

[TMNT]

Construction is a business where they need to constantly keep feeding the 'Machine' work. The machine is the contractors, management, suppliers, workers.. they all need work to produce a product that is viable and delivers on budget. Without the constant work, the building price per m2 goes up and they price themselves out of the market.

how does that work? if you dont get constant work wouldnt it be supply and demand where you have to drop your prices to get jobs?

 

[Scott No Mates]

The less work you do the lower the discounts you are able to attract from other suppliers. Your overheads are pretty much fixed ie workers comp, public liability insurance, rent , overheads etc.

So your costs increase not decrease. The only way forward is to win jobs by going in with negative margins & screw the subbies or leave items out.

 

[Deltaberry]

Development is probably the riskiest business in property imo, especially resi. But as they say, higher risk higher reward

 

[Mr.T]

how does that work? if you dont get constant work wouldnt it be supply and demand where you have to drop your prices to get jobs?

As scott has mentioned, without consistent work your overall costs increase, your base price becomes expensive. With not a lot of work available it gets tough to win work.

 

[AXXO]

If you want to develop - Stick to 3 Storey Walk-ups, they are a great project:
- They provide a good exit strategy
- Easier to commercially fund compared to 20+ apartments
- Pre sales are completed in a much shorter period
- Local agents can sell the apartments without having to have a large onsite sales display with a team of agents\
- Apartments are ideal for a range of purchasers - first home buyers, investors and downsizers love them cause the strata is low, bottom terraces still provide a garden to the older 55+ age bracket who dont like the idea of being in a senior village
- Funding for purchasers is easier than high rise or high density apartments

Thanks for that advice sounds good for resi. What's the commercial equivalent, in your opinion, of the safest development at present?

 

[Scott No Mates]

Thanks for that advice sounds good for resi. What's the commercial equivalent, in your opinion, of the safest development at present?

Mixed use development ie shops/office with residential over the top (in the right location) may be a good bet.

 

[AXXO]

Thanks Scott, I like the idea of residential over the top. Finding the right location is the challenge.

 

[Aaron Sice]

i thought it is always safe being a developer/builder ?

no! what on earth gave you that impression?

 

[Aaron_C]

Safe and developer are oxymorons. Banks lend accordingly.

 

[John M]

Safe and developer are oxymorons. Banks lend accordingly.

True.

Approach your bank, ask them for a loan to purchase vacant commercial/industrial land and see what sort of deposit, security and guarantees you need.

Plenty of developers have gone into administration due to land/building prices dropping, drop in demand, underestimated building and holding costs, overestimated selling prices etc. Alternatively they have to alter their building plans due to council having issues with it, and they can not have the sort of building coverage they initially intended, deeming the project financial suicide.

As usual, risk = reward.