Towers in trouble as building costs spike

A $140m apartment tower on the Gold Coast has been axed and others shelved as developers look for cash injections from private equity to cushion spikes in construction costs.

The scrapped Alegria tower at Palm Beach on the Gold Coast.

A $140m apartment tower on the Gold Coast has been axed and others shelved as developers look for cash injections from private equity to cushion spikes in construction costs.

As the property market began to turn at the start of the pandemic, the Gold Coast was ­flooded with development applications for luxury high-rises.

Projects without approvals were selling at prices that often did not account for the 9 per cent rise in construction costs over the year to March, which have destabilised builders’ balance sheets and sent some to the wall.

Plans for a 76-unit tower called Alegria on the sands of Palm Beach were recently scrapped and all buyers refunded after prolific Gold Coast builder Condev collapsed in March.

Developer Daydream Group has since removed all advertising surrounding the proposed site on The Esplanade and is now understood to be optioning the site, given only early siteworks had begun.

The emerging minefield of costs and shortages has seen the current period dubbed “the profit­less boom”. CoreLogic ­research director Tim Lawless said the cost of materials such as timber and steel had soared due to global shortages. The industry was also facing supply issues as a result of the war in Ukraine and China’s Covid lockdowns, and was also struggling with labour shortages.

“It means margins are being eroded, if not removed, through the speed and magnitude of cost increases,” Mr Lawless said.

Sydney-based developer Abadeen Group entered the Queensland market for the first time in September with a 69-residence tower called Villea at Palm Beach. The site was purchased from local developer Cru Collective just a month earlier for $14m, more than triple the $3.3m paid two years prior.

Most of the units were quickly sold, with construction expected to start in the fourth quarter of 2021, but work has yet to begin. It is understood the developer is looking to secure three-quarters of the trades required to avoid price shocks before moving on with a builder.

Prices on the Gold Coast have soared more than 30 per cent in the past year and strong interstate migration over the past two years has put increased pressure on the region’s already-stretched housing supply.

A recent report by Urbis found there was only three months’ supply of new apartments (411 properties) on sale at the end of March. That is the lowest number ever recorded by Urbis since it began monitoring the new apartment market in 2014, despite 11 new projects being launched in the first quarter of the year.

Demand allowed Lacey Group to go back to its buyers within its sold-out development, The Monroe. Late last year, the developer secured about an ­additional 5 per cent of the purchase costs for the two- and three-bedroom homes in order to proceed with the build, which is being carried out by Hutchinson Builders.

Construction problems ­extend beyond the Gold Coast. Leading builders ProBuild and Privium Homes collapsed alongside Condev through the first half of the year, while the country’s biggest home builder, Metricon, was bailed out last month by the Commonwealth Bank and the company’s owners. Many builders are turning to non-bank lenders in Australia and overseas to get projects across the line.

Scott Roberts, head of one of Australia’s largest alternative ­lenders, IBN Private, said builders and developers were “100 per cent” taking out short-term loans into the millions of dollars on ­interest rates of between 6 and 9 per cent to make it through. The bigger players are turning to ­Europe and the Americas, where they can access greater funding.

“Hypothetically, a company the size of Metricon, if they really do fall into some really serious trouble, they might go to the American markets because if they need a $500m bailout, the likelihood of them getting that in Australia is very minuscule,” Mr Roberts said.

Credit reporting agency CreditorWatch said Queensland was most exposed to risk, but chief executive Patrick Coughlan said the number of businesses collapsing was not unusual for any given year, adding the number of builders accessing private equity was “bigger than you’d think”.