1. Sydney Market Synopsis
Construction & Development Risk
November, 2010
Herron Todd WhIte
www.htw.com.au
2. Herron Todd White - Overview
Largest independent property advisory
organisation in Australia.
Founded 1968
Offices in every Capital City
and across Regional Centres
$80bn+ in property valued annually
Herron Todd WhIte
150,000 Valuations per year
National presence Local resources
www.htw.com.au
3. Practice Areas
Valuation Advisory
•Commercial •Acquisition due diligence
•Industrial •Buyers Agent
•Residential •Highest and best use analysis
•Retail •Developers, Unit entitlements
•Standard •Property Solutions
•Prestige •Optimal/Economic use analysis
•Portfolio •Facilitation of project management services
•Development Projects •Implementation of exit strategies
•Plant & Equipment
Herron Todd WhIte
•Financial Reporting
•Rental Determinations/Reviews
•Mortgage Lending
•Mortgagee in Possession
www.htw.com.au
4. Practice Areas
Quantity Surveying Legal Services
•Capital Expenditure Budgeting •Litigation
•Replacement cost estimates •Family law/expert witness
•Cost management and planning •Family business settlement
•Tax depreciation services •Probate
•Advice on rating objections •Compensation
•Compulsory acquisition
Herron Todd WhIte
www.htw.com.au
5. Practice Areas
Research Insurance Valuation
•Ongoing market research •All property assets classes covered
and analysis •Plant & equipment
•Regional market segment •Industry endorsed estimating techniques
analysis
Herron Todd WhIte
www.htw.com.au
6. Practice Areas
Consumer Products
•Acquisition advice
•Building & Pest Reports
•Strata Reports
Herron Todd WhIte
www.htw.com.au
7. Topics
• Overview
• Office Markets
• Retail Markets
• Industrial Markets
• Development Markets
Sydney Focus
Herron Todd WhIte
• Outlook
• Construction & Development – Completion / Delivery Risk
www.htw.com.au
8. Overview
Significant changes in the investment landscape since late 2008:
1. Uncertainty in global financial markets
2. GFC has impacted on property values, supply, occupancy
rates and rentals
3. Tighter credit conditions with caution from lenders
4. Signs emerging that several markets appear to be at the
bottom of the cycle
5. Property transaction volumes down but commercial sales
Herron Todd WhIte
activity slowly increasing, particularly with owner occupiers
6. Investment yields generally appear to have stabilised but are
still relatively high
7. Interest rates have increased
www.htw.com.au
9. Herron Todd WhIte
Rents $/sqm
$300
$350
$400
$450
$500
$550
$600
$650
$700
$750
M ar-05
M ay-05
Jul-05
Sep-0 5
Nov-0 5
Jan-06
M ar-06
M ay-06
Jul-06
Sep-0 6
Sydney CBD Average Rental Rates
Nov-0 6
Office Markets
Jan-07
Sydney CBD Office Rents
M ar-07
B Grade
M ay-07
Jul-07
Sep-0 7
Nov-0 7
A Grade
Jan-08
M ar-08
M ay-08
Jul-08
Sep-0 8
Premium
Nov-0 8
Jan-09
M ar-09
M ay-09
Jul-09
Sep-0 9
Nov-0 9
www.htw.com.au
Jan-10
M ar-10
M ay-10
Jul-10
Sep-1 0
Nov-1 0
10. Office Markets
Sydney CBD Office Yields
Sydney CBD Prime & A Grade Yields
8.50%
8.00%
7.50%
7.00%
Yield
6.50%
6.00%
5.50%
Herron Todd WhIte
5.00%
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Mar-05
Jul-05
Mar-06
Jul-06
Mar-07
Jul-07
Mar-08
Jul-08
Mar-09
Jul-09
Mar-10
Jul-10
A Grade Yields Premium Grade Yields
www.htw.com.au
11. Parramatta Office Market:
HTW Analysis (Office Market Report PCA Data)
Parramatta Office Market (Net Supply vs Net Absorption vs Vacancy)
60,000 12%
Net Supply Net Absorption Vacancy
55,000
50,000 11%
45,000
40,000
10%
35,000
30,000
25,000 9%
20,000
15,000 8%
sqm
Vacancy
10,000
5,000 7%
0
-5,000 6%
-10,000
-15,000
Herron Todd WhIte
5%
-20,000
-25,000
-30,000 4%
-35,000
-40,000 3%
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: PCA & Herron Todd White Research
6-Month Period Ending
www.htw.com.au
12. Herron Todd WhIte
10%
12%
14%
0%
2%
4%
6%
8%
Sydney CBD
Jan 08
Sydney CBD
Jul 08
Sydney CBD
Jul 09
Sydney CBD, North Ryde, Parramatta
Sydney CBD
Jan 10
Direct Vacancy Vs Sub Lease Vacancy
Market Vacancy
Sydney CBD and Suburban
North Ryde
Jan 08
North Ryde
Jul 08
North Ryde
Jul 09
North Ryde
Jan 10
Parramatta
Direct Vacancy
Jan 08
Parramatta
Jul 08
Subleas e Vacancy
Parramatta
www.htw.com.au
Jul 09
Parramatta
Jan 10
13. Sydney Office Markets
Sydney CBD, South Sydney,
South West, Western Sydney
Recent Leasing Activity
Address Suburb Start Date Area (m²) Face rent ($/m²)
60-62 Castlereagh Street Sydney May- 2010 1,677 $626 Gross
175 Liverpool Street Sydney Aug- 2010 574 $600 Gross
3/ 28 Somerset Avenue Narellan Jun- 2010 149 $241 Gross
2-3/ 342 Camden Valley Way Narellan Jun- 2010 145 $277 Gross
15 Bourke Road Mascot Jul- 2010 1,521 $350 Gross
Herron Todd WhIte
7-9 Kent Road Mascot Square Jun- 2010 319 $235 Gross
2-10 Wentworth Street Parramatta Apr- 2010 6,500 $360 Gross
41/ 55 Phillip Street Parramatta Aug- 2010 101 $340 Gross
www.htw.com.au
14. Sydney Office Markets
Sydney CBD, South Sydney,
Western Sydney
Recent Commercial Office Investment
Sales Activity * Analysed Yield
Capital
Address Suburb Sale Date Sale Price Value ($/m²) Yield
95 Bathurst Street Sydney Jun- 2010 $7,150,000 $7,831 5.75%*
Level 4/ 109 Pitt Street Sydney May- 2010 $5,250,000 $5,593 9.63%
78 Renwick Street Redfern Mar- 2010 $2,865,000 $2,865 -
Herron Todd WhIte
33 MacMahon Street Hurstville AUG- 2010 $835,000 $5,880 -
106-108 Church Street Parramatta Mar- 2010 $8,800,000 $2,207 8.50%
24 Hunter Street Parramatta Mar- 2010 $3,500,000 $2,622 11.00%*
www.htw.com.au
15. Retail Markets
Sydney Retail by Floor Area %
NSW Retail Market Classification (% Floor Area)
8%
24%
Super & Major Regional
23% Neighbourhood
CBD
Bulky Goods
Sub Regional
Herron Todd WhIte
16%
Regional
25% 4%
www.htw.com.au
16. Retail Markets
Sydney Retail Rental Levels
Sydney CBD Net Face Rents
8
6
$'000/sqm
4
2
0
Herron Todd WhIte
2006 2007 2008 2009 2010
Super Prime Prime Secondary
www.htw.com.au
18. Retail Markets
Sydney CBD, South Sydney, South
West, Western Sydney
Recent Leasing Activity
Address Suburb Start Date Area (m²) Face rent ($/m²)
227 Elizabeth Street Sydney Jan- 2010 31 $2,258 Gross
Circular Quay East Sydney May- 2010 254 $3,051 Gross
10 Main Street Mount Annan Feb- 2010 85 $335 Gross
3 Rose Street Campbelltown Mar- 2010 115 $271 Gross
Herron Todd WhIte
518 Bunnerong Road Matraville Apr- 2010 50 $360 Gross
21 Regent Street Redfern Jan- 2010 104 $338 Gross
219 Parramatta Road Auburn Mar- 2010 565 $156 Gross (Bulky Good)
22 Henley Road Homebush West Jul- 2010 24 $433 Gross
270 Forest Road Hurstville Jan- 2010 180 $944 Gross
www.htw.com.au
19. Retail Markets
Sydney CBD, South Sydney,
South West, Western Sydney
Recent Retail Sales Activity
* Analysed Yield
Capital Value
Address Suburb Sale Date Sale Price GLA (m²) ($/m²) Yield (%)
343 Pitt Street Sydney May- 2010 $1,840,000 236 $7,797 7.74%
361 Kent Street Sydney Dec- 2010 $710,000 41 $17,317 8.73%
21 Blaxland Road Campbelltown Apr- 2010 $2,170,000 3,324 $1,563 (Bulky goods) 10.14%*
168-170 Redfern
Street Redfern Aug- 2010 $700,000 180 $3,889 6.00%*
Herron Todd WhIte
38 Dunning Avenue Rosebery Feb- 2010 $700,000 189 $4,861 8.20%
71 Richmond Road Blacktown May- 2010 $2,475,000 1,046 $2,366 9.72%
67 John Street Cabramatta Jun- 2010 $3,045,000 305 $9,983 8.20%
204 Forest Road Hurstville Mar- 2010 $2,730,000 265 $10,302 3.30%
www.htw.com.au
20. South Sydney Industrial Markets
Alexandria, Mascot, St Peters,
Botany, Banksmeadow
South Sydney Average Rents
$200
$180
$160
$140
$120
Herron Todd WhIte
$100
$80
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Large Warehouse - Prime Large Warehouse - Secondary Strata Industrial Units
www.htw.com.au
21. South Sydney Industrial Markets
Industrial Yields
South Sydney Industrial Yields
8.50%
8.00%
7.50%
Yield
7.00%
6.50%
Herron Todd WhIte
6.00%
Jun-07
O ct-07
Feb-08
Jun-08
O ct-08
Feb-09
Jun-09
O ct-09
Feb-10
Jun-10
www.htw.com.au
22. Sydney Industrial Markets
Sydney CBD, South Sydney,
South West, Western Sydney
Recent Industrial Leasing Activity
Address Suburb Start Date GLA (m²) Rent ($/m²)
15 Huntsmore Road Minto Apr- 2010 1,100 $90 Gross
2 Yulong Close Moorebank Mar- 2010 1,800 $128 Gross
5 Ricketty Street Mascot Feb- 2010 6,897 $188 Gross
Herron Todd WhIte
30 Bowden Street Alexandria Jun- 2010 3,564 $126 Gross
52 Skarrat Street Silverwater Mar- 2010 1,080 $106 Gross
391 Park Road Regents Park Apr- 2010 1,600 $110 Gross
www.htw.com.au
23. Sydney Industrial Markets
Sydney CBD, South Sydney,
South West, Western Sydney
Recent Industrial Sales Activity
* Analysed Yield
Capital Value
Address Suburb Sale Date Sale Price GLA (m²) ($/m²) Yield (%)
14 Centenary Avenue Moorebank Sep- 2010 $1,278,000 624 $2,048 5.10%
26 Airds Road Minto May-2010 $2,200,000 2,300 $957 6.20%
Herron Todd WhIte
255 West Street Carlton Jun-2010 $1,165,000 1,117 $1,043 6.20%*
$11,500,00
22 Oriordan Street Alexandria Mar-2010 0 4,000 $2,875 7.70%
26 Pike Street Rydalmere May- 2010 $4,800,000 4,099 $1,171 8.84%
24 Healey Circuit Huntingwood Apr- 2010 $5,400,000 4,814 $1,132 10.82%
www.htw.com.au
24. Residential Markets
Residential Development Site Market
Herron Todd WhIte
www.htw.com.au
25. Residential Markets
Sydney Development
• Typically follows the wider residential market
– Heavily influenced by the viability of the particular project
• Far more conservative approach to acquisition of sites by larger players
• Smaller players affected by credit availability
Herron Todd WhIte
• Reduced market appetite and increased risk aversion due to uncertainty.
www.htw.com.au
26. Residential Markets
Sydney Development
• Market swapped from sellers market to buyers market
• Little sales evidence to substantiate price falls in the market with few
transactions
• Developers revert back to underlying fundamentals being the ultimate
Herron Todd WhIte
viability of the project reflecting a reasonable development margin
• It is typical that only the larger players who need to maintain land banks and
or marketing schedules that remain active in this stage of the cycle.
www.htw.com.au
27. Residential Markets
Development Site Sales Analysis
Address Description Sale Date Sale Price Land Land Area Rate Per Site
Area ($/m²)
(m²)
299 Forbes Street Concept plan for Mar- 2010 $20,000,000 4,500 $4,444/ m² $166,000 per
Darlinghurst 120 Units site
Riverview Nursery Site- DA Lodged: Under $8,500,000 3,082 m² $ 540/ m² $170,000 per
Ermington 50 Townhouse. Contract site
13B Church Street DA Approved: July- 2009 $3,600,000 2,038m² $1,766m² $103,000 per
Mascot 35 Apartments site
Herron Todd WhIte
299 Marrickville Rd DA Approved: Mar- 2010 $2,700,000 885m² $3,073/ m² $123,000 per
Marrickville 19 Units and 3 site
Shops
8-12 Kensington Street DA Approved: Mar- 2010 $4,900,000 1,250m² $3,920/m² $106,000 per
Kogarah 40 units and 6 site
Retail suites
www.htw.com.au
28. Commercial Markets
Commercial Development Site Market
Herron Todd WhIte
www.htw.com.au
29. Commercial Markets
Property Development
• The major factors impacting upon project viability are gross realisations,
sale rate, construction costs and town planning issues.
• We have seen a number of large developers/public companies/property
trusts taking a far more conservative approach to the acquisition of
development sites.
Herron Todd WhIte
• This has also been mirrored by smaller developers who have taken a far
more conservative stance, partly a reflection of reduced confidence in the
market and partly as a result of reduced credit availability and financial
pressures.
www.htw.com.au
30. Commercial Markets
Development Site Analysis
Address Description Sale Sale Price Land Land Area Rate per
Date Area ($/m²) current FSR
(m²)
2-23 Goulburn Zoning- City Centre Jan- 10 $12,000,000 392m² $30,612/ $3,826 per m²
Street Sydney FSR- 3.25:1 m² of FSR
69 Victoria Zoning: B4 Mixed Use Jul-10 $1,875,000 770m² $2,435/ $4,435per m²
Road FSR:1 : 1 m² of FSR
Drummoyne
246 New Line Zoning: Business B Special Mar-10 $2,050,000 3,985m² $514/ m² $1,028 per m²
Rd Dural FSR: .5 : 1 of FSR
Herron Todd WhIte
Permitted Use: Bulky Goods
Retail
2A Victoria Ave Zoning: 4B Light Industrial Jul-10 $24,000,000 43,310 $566/m² $566 per m² of
Castle Hill FSR: 1 : 1 m² FSR
Permitted Use: Industrial
www.htw.com.au
31. Outlook for balance 2010
Lenders and investors to remain cautious in 2010, however we expect
sales activity to improve
• Rentals and capital values generally to remain flat
• Yields generally expected to continue to stabilise but still to remain
relatively high
Herron Todd WhIte
• Supply expected to remain relatively static for the remainder of 2010
www.htw.com.au
33. Do we all remember the dizzy days??
• The debt market driver Property development frenzy with
rich pickings for all entrants
• The market place Development and construction
• The market place participants The four majors, Non Banks and
Herron Todd WhIte
foreign entrants
www.htw.com.au
Property values were soaring, ( buy, build sell) 25%+ ROC common place ( even when interest rates were climbing
beyond 18%) every man and his dog were becoming developers. This was the time of Bond, Skase, Elliot, Connell,
Spalvins, Brierley & co, as well as thousands of small would be property developers, Solicitors Accountants, Bankers
and the local Chicken Shop owner..
Huge appetite for development debt at any price … that was the key.
The property market was the driver of the debt market. Didn’t seem that anyone could do wrong, although every
Borrower I had referred to the other as “ A Cowboy”
So the debt market was otherwise un-influenced by its own market drivers but saw an enormous opportunity to
make substantial fees and margins from development lending.
Not just the four major banks but a host of new entrants.
Estate Mortgage: Debenture notes, Mums and Dad Investors, Advertise “Low Risk, High Returns”
Overseas lenders with new banking licences, deregulation of the Banking sector that had in the short to medium term
their own sorting out to attend to.
Symbiotic relationship. Developers and Lenders fed off each other, the days of the Long lunch pre FBT
Where do I get it.
Get on the treadmill,” bite off as much as I can chew, and chew like crazy” get off before I’m thrown off.
34. Lenders approach to market share?
• LVR and end value lending
• Borrowers
• Assets
• Credit standards
Herron Todd WhIte
• Margins, fees and profit share
www.htw.com.au
LVR’s and end value lending – raised substantially
Borrowers – almost anyone was considered acceptable
Assets – The era of “ Pioneering” deterioration of asset quality in 1990 – 120 units in
Dubbo that are settled in 2001.
Credit standards dropped – inexperienced freshly promoted credit officers, poor
strategic planning of portfolios – even the older heads “forgot” many of their credit
requirements. The areas where standards dropped most were:
•Prove the market – asset quality (exit)
•Debt coverage – market risk (presales)
•Delivery risk (builder)
•Borrower profile (recourse)
But through-out this !! - Lender Margins and fees remained high. Interest rates peaked
in the early 90’s for development via the Finance Companies at 21%.
LONG LIVE THE LONG LUNCH
Or so it seemed
35. The Follies
• Every deal the Banks did had a valuation •You could borrow your stamp duty, legals –
higher than purchase price reimbursement of equity
• Mortgagees lent on projected increases •Valuers were assessing projecting Gross
realisations as at future date of completion
in value and built in price rises to justify and lenders were happy to accept the
deals with low profit margins rationale (Blue Sky)
• No pre-sale requirements •Start straight away – no market proving
• Joint venture finance became rife from •To win the deals equity was available but
senior debt financiers no proven asset management skills
•Qantas stewards became developers
Herron Todd WhIte
• Sponsors were unimportant
• The boom rippled into country and resort •Regional development with few market risk
areas last mitigants
www.htw.com.au
11/18/2010
Senior debt was taking mezzanine and equity risk without being remunerated
adequately or even understanding the risks inherent in that kind of gearing.
Medium Density Inner West development – Valuation at $350,000, Lender
accepted $450,000 in future value. Touch and Go (30% premium to initial
feasibility) (Blue Sky)
Retail purchasers got into the asset via a Step up Residential loan that lent 85%
of the purchase price at a low rate of 12% , with repayments that stepped up
annually with your annual promotion.
35
36. The Result
• Debt was silly
• Massive over-building
• Devastatingly high LVR and unsupportable debt
• Lack of asset management capacity for distressed loans
Herron Todd WhIte
• The lenders helped the property frenzy
• Helped fuel the end of the property cycle
www.htw.com.au
11/18/2010
The same lack of credit skills and asset management capacity that allowed these
loans to be written in the first place, meant that when they went bad no-one
(the borrower or the lender) knew how to fix the problems.
One prominent developer was technically bankrupt but was paid $5m a year to
help the bank off-load the assets that he had “thrown the keys” back on. [Debt
at $220m and valuation at $110m].
36
37. The past follies re-examined –
• Every deal the Banks wrote had a •Still not acceptable unless substantial value-add
valuation higher than purchase price has occurred – hard equity required
• Lenders lent on projected increases in •Just doesn’t happen
value and built in price rises to justify
deals with low profit margins
• No pre-sale requirements •Qualifying presales, two tier market
• Joint venture finance became rife from •Limited market players with capacity providing
senior debt financiers capital who have varying degrees of asset
management capacity
Herron Todd WhIte
• Borrowers were unimportant •Qantas stewards still buying shares but equity
poor sponsors are been identified
• The boom rippled into country and •Not happening
resort areas last
www.htw.com.au
11/18/2010
Today we have specialist mezzanine and equity providers who fully understand
the risks inherently involved with highly geared positions.
Haven’t seen the White Shoe brigade developers pinning the ears back
redeveloping swampland into Golf Course/canal developments and openings by
well known US Crooners with alleged links to the Mafia.
37
38. Some Features Of Property
• Real Physical Asset
• High transaction costs
• 8-10% on costs, Stamp duty, legal, agent & consultant fees
• Taxation considerations, GST (Consideration vs Valuation method), CGT
• Requires maintenance to maintain value
• Capex Budget (short, medium, long term)
• Management intensive
• Adds expense to day to day cost of the investment
• Illiquid
• Transactions of property assets are time consuming.
Herron Todd WhIte
• Tenant / landlord relationships can impact on lease negotiations which in turn can
impact on price.
• Some unique tax benefits
• Depreciation, amortisation
www.htw.com.au
11/18/2010
•Real Physical Asset
•Transaction Costs. Particularly heavy in NSW seen flight of investment interstate, New Zealand (
No stamp duty)
•NSW Stamp Duty on purchase Rollback in next couple of years
38
39. CONSTRUCTION & DEVELOPMENT RISK
PROPERTY DEVELOPMENT
• Property development is the process of changing the basic characteristic use of
land and/or buildings.
• Uncertainty lies at the root of the process of property development which is
essentially concerned with the manufacture of a product in anticipation of an
unknown future demand.
Herron Todd WhIte
RISK
• The chance of something happening that will have an impact upon objectives
(Standards Australia 1999).
www.htw.com.au
40. VARIABLES INFLUENCING RISK
Level Of Risk
Risk Attitude
Cognitive
Biases
Risk
Property
Personality Risk Taking Development
Traits Perception Behaviour
Decision
Contextual
Herron Todd WhIte
Framing Factors
Anticipated
Returns
www.htw.com.au
41. VARIABLES INFLUENCING RISK
The level of risk taking behaviour in the property development decision is
influenced by a number of variables:
• Level of Risk: this is derived from the probability of loss and the magnitude of
that loss
• Cognitive Biases: predisposed opinions that individuals use to make
judgements
• Personality Trait: an individual’s general disposition which remains
constant over time and for various situations
• Framing: The manner in which a risk is stated ,either favourably or
unfavourably.
Herron Todd WhIte
• Risk Attitude: The consistent tendency to either avoid or seek risk.
• Risk Perception: An individual’s assessment of how risky things appear.
• Contextual Factors: Project specific factors that affect an individual’s risk taking
behaviour.
• Anticipated Returns. The relationship between the level of return and level of
risk in an investment.
www.htw.com.au
42. Funding: form dependent on purpose
and risk
Development/investment cycle Property Risk
• Initial land purchase: • Project risk:
– Land banking – approvals, initial pricing
– Market cycle- early/mid/late
– External factors - legislation
• Bridging finance:
– Demand/Supply
– Short term focus – Normal Profits taken gearing/scale/timing.
• Completion/Delivery risk:
• Construction finance: – Appropriate form of Contract
– High risk – Security bonds/retention
– Cost & time overrun (delays)
Herron Todd WhIte
– Project Management/ Superintendent
– Term/investment finance:
• Sponsor Risk:
– Low risk – Track Record in Asset Class
– Work in Progress – Properly resourced
– Level of “Real” Equity in project
• Exit risk:
– Market demand/supply, Early - Late
www.htw.com.au
43. Property finance:
linked to investors appetite for risk
• Long-term (5-10 yrs)
• Yield players.
• Low return and low risk.
• May use long-term debt to finance (or enhance returns).
• Medium term (3-5 yrs)
• Asset betterment.
• Medium return and medium risk.
• May use medium term notes to finance (or enhance returns).
• Short term (2-3 yrs)
Herron Todd WhIte
• Opportunistic players.
• High risk and potentially high return.
• May seek mezzanine funding to enhance Return on Equity (ROE).
www.htw.com.au
Long Term: Yield play, rental growth via annual and market review, yield compression
and exit
Medium Term: eg Buy the B- C Grade Sydney commercial Office Building for $3,500
psm, spend refurb/fitout costs of $1,000 psm and exit at $6,000psm.
Short Term: Eg Rural 1a land. Landbank and wait for spread and Department of
Planning Announcement re future urban release
44. COMPLETION / DELIVERY RISK
Poor Documentation
• Is the documentation adequate and comprehensive?
• Quality of plans, Schedules of Prime Cost and Provisional Sums, Schedules
of Finishes/Fittings/Inclusions, Detailed Scope of Work
• Drafting or design errors and changes
Herron Todd WhIte
• Design co-ordination e.g. Air conditioning ducting clashing with plumbing
• Lack of design development or detailing
www.htw.com.au
Current Issues
OC –chasing reps and warranties post final draw and Lender not following up
Suggest 6 month collar post completion for receipt oc/default
45. COMPLETION / DELIVERY RISK
Contract Conditions
• If you select the right type of contract, you can reduce variations
– AS4000 series in standard form more principal friendly
• Liquidated damages
• Retentions
– Cash, security bond (Bank Guarantee)
– Progressive retentions (Risk)
Herron Todd WhIte
• Deposits
• Payment for materials manufactured/stored off site and materials stored on
site but not fixed
www.htw.com.au
Contract scope of works and QS costings, watch for client exclusions
Variance between QS and Valuer supplied docuemtns DA, CC, S96
Case study:
Buy & Hold. DA approval 12 townhouses, owner builder ( no external consultant)
completed on Construction funding, then 3 yr investment interest only. Revaluation,
review of DA…..client had built 14 townhouses.
46. COMPLETION / DELIVERY RISK
Unsuitable Third Party Builder
• Non-performance of builder and sub-contractors
Builder / Developer
• Working at their own pace
Herron Todd WhIte
Inexperienced Client
• Is there a need to request an independent project manager/superintendent
or increase the role of the Bank appointed Quantity Surveyor.
www.htw.com.au
47. COMPLETION / DELIVERY RISK
Latent Conditions
• Have satisfactory environmental reports been provided
• Geotechnical Report
• Site Audit
Herron Todd WhIte
• Contamination
• Removal of inert waste
• Rock/Sand/Groundwater
www.htw.com.au
48. COMPLETION / DELIVERY RISK
Wet Weather
• Affecting critical trades
• Compensable claim, extension of time (Contract terms)
Non-payment of Sub-Contractors/Suppliers
Upgrading Quality of P.C. Items, Finishes & Appliances
Industrial Action
Herron Todd WhIte
• CFMEU, Workcover
• Disgruntled contractors
Increased Cost to Complete by an Alternative Builder following Insolvency of Original
Builder
www.htw.com.au
49. COMPLETION / DELIVERY RISK
Variations
• Client initiated variations
– Always funded by equity
• Increased cost of materials & labour e.g. steel products during 2008 essentially
doubled in price
• Adjoining property limitations e.g. permit for soil/ground anchors, permit to operate
crane over neighbouring air space
Herron Todd WhIte
• Authorities additional requirements
• Adjustment to P.C. and Provisional Sum allowances
• Site overheads associated with extended construction period
www.htw.com.au
54. COMPLETION / DELIVERY RISK
Case Study: 28 Units, Western Sydney
Herron Todd WhIte
www.htw.com.au
2007 project commenced land purchased for $1.7m for DA approved 28 unit
development.
Sponsor biggest development previous 6 townhouses.
Site situate next to stormwater easement
Interstate Bank Lender
Still for the time looks ok, 20 monith in/ out 25% Return on Project Cost, 75%LCR, 51%
LSR
55. COMPLETION / DELIVERY RISK
Funding Table
Herron Todd WhIte
www.htw.com.au
On the face of it 75% of hard costs 51% loan to valuation at the end of the day over a 12
month develop and 8 month selldown period
57. COMPLETION / DELIVERY RISK
Actual Months 0 - 44
Herron Todd WhIte
www.htw.com.au
End result of poor supervision on behalf of
Owner
Site Manager
Bank
Construction costs increased 21%, ($50k+ per unit) project took 26 months to complete
(12 months budget initially ) and required 3 builders, gross realisations ( as a result of
poor finishes) suffered as a result of the project getting a “name” in the market, interest
expense increased. Project took 14 months post completion to clear.
End result a $2.6m 25% return on project costs, ended up as a loss of $755k (5.83%)
The only winner here was the receiver….
58. COMPLETION / DELIVERY RISK
INDICATORS OF A PROBLEM SITE
• Slower Progress, not keeping pace with construction programme / forecast cashflow.
• Fewer tradespeople on site
• Reduced quantity of materials stored on site
• Plant and equipment removed from site
• Site closed on good weather days
Herron Todd WhIte
• Change in foreman and other site personnel
• Material deliveries not available when required by programme
• Site becoming untidier –lack of site labourers
www.htw.com.au
59. COMPLETION / DELIVERY RISK
• HUGH B GAGE PTY LTD – EXPERIENCE
• Established 1953, operating in New South Wales for 57 years.
• Current construction projects $400,000.00 to $46 million.
• Practice areas:
– Pre-construction cost planning and estimating
– Cost Analysis and Reporting
Herron Todd WhIte
– Financial management of construction projects including project claim certification on behalf
of financial institutions
– Contract Administration (assessment of variations, delay claims)
– Financial audit of construction projects on behalf of financial institutions
– Replacement Insurance Valuations
– Project Management services.
www.htw.com.au
60. COMPLETION / DELIVERY RISK
Developer/Builder with a grand plan to create the first of many
Children’s Entertainment Centres
PROJECT SPECIFICS
• 5 storey contemporary style Bulky Goods Retail Complex in Sydney’s South
West comprising a base building of approx. 28,000m² and 17 tenancy spaces
• Client was a contractor specialising in large shopping centre fit-outs
• Tenancies included Ice Skating & Bowling Centre, Swimming Centre, Medical
Centre, Child Care Centre, Performing Arts Academy, Restaurants, Cafes,
Gymnasium and Women’s Health/Retreat Centre
• Construction commenced in September 2007 with a completion in February
2009 (17 months construction period)
• Bank was to fund the Base Building only at $24 million and no contingency
fund
Herron Todd WhIte
• Client was to fund the fit-out works estimated by the Client at approx. $5 million
www.htw.com.au
61. COMPLETION / DELIVERY RISK
Developer/Builder with a grand plan to create the first of many
Children’s Entertainment Centres
PROJECT ISSUES – WHAT WENT WRONG
• Reinforced concrete structure proceeded satisfactorily, supervised by an
experienced concrete contractor
• Client was granted Section 96 consent for an additional floor, estimated at $1.2
million, which the Client was to fund
• Midway through the construction period, the Client commenced fit-out works
ahead of schedule, although the base building was not enclosed and therefore
not entirely waterproof
• The completion of the Base Building works stagnated while the fit-out works
powered ahead
Herron Todd WhIte
• Early in 2009, construction works to both the base building works and fit-out
works slowed dramatically
www.htw.com.au
62. COMPLETION / DELIVERY RISK
PROJECT ISSUES – WHAT WENT WRONG
29 September 2008 25 February 2009
Herron Todd WhIte
www.htw.com.au
63. COMPLETION / DELIVERY RISK
PROJECT ISSUES – WHAT WENT WRONG
• Subcontractors were not being paid, although the Client was providing Statutory
Declarations
• The client was directing Bank funds provided for the Base Building to the fit-out works
• Project stopped as subcontractors would not return to the site
• Client had been paid $23 million of the $24 million funding for the base building
• The Bank instructed the Q.S. to provide a Detailed Cost to Complete Report, embracing
not only the Base Building but the Fit-out works
Herron Todd WhIte
• Q.S. Report advised money owed to subcontractors in the order of $2.6 million to $4.3
million
• Q.S. advised overall cost to complete at $6 million
• Bank appoints Receiver in September 2009
www.htw.com.au
64. COMPLETION / DELIVERY RISK
RED FLAGS – HOW COULD THESE ISSUES BE AVOIDED?
• Client’s poor cost control and Appoint an independent Project
accounting systems, inadequate Manager from day one at the
supervision Client’s expense
• Statutory Declarations Request subcontractor/supplier
statements at each progress
claim confirming payment of
monies due under the contract
to date
Herron Todd WhIte
• Lack of formal agreements with Insist on let-trade
subcontractors packages/agreements prior to
advancing funds for those
trades
www.htw.com.au
65. COMPLETION / DELIVERY RISK
RED FLAGS – HOW COULD THESE ISSUES BE AVOIDED?
Where a Bank is funding only 1 stage of a staged development,
realistic estimates should be prepared by Bank appointed Q.S. at
pre-commencement to verify total project cost, so that all parties
are aware of the Client’s equity contribution
In this Case Study, the Client underestimated his fit-out costs and,
when he gained Section 96 approval for an additional floor, also at
his expense, his fate was sealed
Herron Todd WhIte
Late news – the project has recommenced
www.htw.com.au
66. COMPLETION / DELIVERY RISK
Combination of an inexperienced Owner and unco-operative Builder
with no formal agreement between the parties
PROJECT SPECIFICS
• Conversion of existing Indoor Sports Centre to a Wholesale / Retail Food outlet in Sydney’s
South West, comprising a Fruit Shop, Butcher Shop, Fish Shop, Delicatessen, Café and First
Floor Offices.
• Client was a well known fruiterer not experienced in building matters
• Advised commencement date was March 2008, whereas the D.A. approval was granted 12
months later in March 2009, while Construction Certificate was issued in July 2009
• At the time Q.S. was instructed by the Bank (June 2009), the Builder had invoiced to his Client
approx. $2,000,000 for work completed, including off-site payments and deposits for
Herron Todd WhIte
materials, P.C. items and equipment, and Consultants fees
• The Client had funded the construction work to that stage from his business cashflow,
however, he now needed funding from the Bank to complete
www.htw.com.au
67. COMPLETION / DELIVERY RISK
PROJECT ISSUES – WHAT WENT WRONG
Herron Todd WhIte
7 July 2009 7 July 2009
www.htw.com.au
68. COMPLETION / DELIVERY RISK
PROJECT ISSUES – WHAT WENT WRONG
• Construction work had slowed and funding from the Owner had dried up
• Q.S. initial observations in the Pre-Commencement Report were:-
– Advised budget inadequate
– Construction commenced without D.A. and C.C. approval
– Contract Works insured value inadequate ($2.5 million in lieu of $5.5 million)
– No detailed specifications or scope of work defined
– Builder had not prepared a budget
– No cost control system
– Builder invoiced on an hourly rate basis
Herron Todd WhIte
– No construction programme for subcontractors to work to
– No regular cost reviews were exercised
– No evidence of co-ordination with Council & other Authorities (Building Certificate
issued to cover works completed prior to granting D.A.)
www.htw.com.au
69. COMPLETION / DELIVERY RISK
PROJECT ISSUES – WHAT WENT WRONG
• Q.S. was appointed Project Manager/Auditor in August 2009
• The Builder was instructed to confirm progress against short term construction
programmes at regular site meetings
• The Builder was instructed to prepare formal contracts for subcontractors and to set-up a
proper accounting system
• Construction activity soon picked up
• Substantial completion achieved late December 2009, with an Interim Occupation
Certificate issued in January 2010
• Reasonably happy ending despite additional funding and an extended construction period
Herron Todd WhIte
3 December 2009 19 February 2010
www.htw.com.au
70. COMPLETION / DELIVERY RISK
RED FLAGS – HOW COULD THESE ISSUES BE AVOIDED?
• No formal agreement between To be avoided at all
parties, virtually a do and charge costs.
arrangement Standard industry
formal agreement to be
executed
• Poor budgetary and cost Appoint an independent
control/accounting systems Project Manager from
day one
Herron Todd WhIte
• Inexperienced Client Appoint an independent
Project Manager from
day one
www.htw.com.au
71. Thankyou
Mark Skeed Commercial Director 8223 5611
Herron Todd WhIte
Tim Stevens Property Solutions 8223 5623
Hugh B Gage Pty Ltd
Graham Whiteley Managing Director 9890 1090
www.htw.com.au
72. Disclaimer
The information contained in this report is provided in good faith and has been
derived from sources believed to be reliable and accurate. However, the report is
not intended to be comprehensive or render advice and neither Herron Todd
White nor any persons involved in the preparation of this report accepts any form
of liability for its contents. This report has copyright and cannot be reproduced
without written permission of Herron Todd White.
Herron Todd WhIte
www.htw.com.au
