Financial risk too high due to rising costs and delays, says broker
NSW’s housing supply crisis is being fuelled by a compliance and regulatory regime that adds too many layers of risk, resulting in some residential developments not stacking up financially, says a leading commercial broker.
George Karam (pictured above), is the managing director of award-winning brokerage BF Money, based in Parramatta, which specialises in commercial and development finance.
He said the state government’s aim to build more homes, including affordable housing for essential workers and others, around transport hubs was being crippled by compliance, regulation and risk, as well as higher construction costs.
The NSW government, led by Premier Chris Minns, has stated it aims to build 377,000 homes in the state by mid-2029 under the National Housing Accord, with 263,000 of these to be built in Sydney local government areas.
The strategy includes getting councils to fast-track approvals of terraces, townhouses and two-storey apartment blocks, as well as planning reforms to allow more intensive residential development and mixed-use buildings up to six storeys high near 37 train stations across Sydney, the Central Coast, Newcastle and the Illawarra, known as transport oriented development.
Karam said being based in western Sydney meant his brokerage was “on the front lines” of development.
“That western Sydney belt is exactly where I think the government’s hoping for most of these affordable housing dwellings to be delivered,” said Karam.
“While the government has a well-articulated plan to say this is how much [housing] we want and we want them in these areas and we want them around the transport hubs, there are a number of problems, which is causing a lot of frustration for the developers and the builders.”
Planning risks
Karam said one of the reasons some residential developments were not worth the financial risk was the time it took to get planning approval.
“The time for rezonings, whether area wide or a spot rezoning that the developer will do through a planning proposal process takes an unusually long amount of time,” he said. “These things go on for years and within that time the appetite of governments and the communities they ebb and flow.”
Karam asked if a planning proposal was submitted three or four years ago and the rules changed in that time – for example to increase height limits – was it financially feasible for the developer to redo their entire proposal?
“The lack of a long-term [planning] strategy is a really big problem,” he said.
Administrative processes for housing development also took too long, Karam said.
The lengthy time lag between buying land and developing it affected clients wanting to access finance for land banking.
“The banks have very little appetite to sit on land banking loans, so [clients] have had to go to non-banks which are more expensive,” Karam said. “The issue with non-banks isn't the interest rate in most of the cases, it's that the rate is a function of time.”
“So if your LVR allows you to capitalise interest for one or two years, it’s different then allowing you to capitalise interest for three or four years.”
This meant landowners were unable to keep these sites for a long time. “And so that erodes either the profit or you need to get rid of the site before you can actually realise it.”
Construction costs
Karam said another problem was that the cost of construction had increased significantly.
While some of the reasons for higher costs were well understood, including COVID and supply chain issues, the NSW government was also to blame, with their actions exacerbating the challenges.
“They’ve been constructing so much for so long that they're also competing for the same resources that the builders and the developers are – from the human resources to the concrete and steel,” he said.
Karam said government infrastructure projects were happening all at once when resources were already constrained, with suppliers choosing government contracts over smaller residential projects.
Compliance regime
The new building compliance regime, which included the NSW Building Commissioner, was also adding to the cost of development, said Karam.
“The preliminary cost of the build log, the site establishment, the supervision costs as a proportion of what they were in the past are so much greater. When you're dividing that by a smaller number of apartments in the development, it makes it uneconomical.”
Karam said many of the larger apartment projects his clients were pursuing stacked up financially because they could spread the fixed costs over more apartments. These larger developments were in the $50 million plus range and involved 120 apartments or more.
BF Money is working with clients planning to build developments featuring 120 apartments, 175 apartments, 250 apartments alongside four-star hotels, 180 apartments, and 550 units over shopping centres.
Karam said a number of these projects include alternative uses as well as residential, such as childcare, student accommodation and hotels, to provide greater returns.
He said due to all the pressures on housing, particularly costs, it was very difficult for mid-range projects involving 15 to 50 apartments to achieve financial feasibility.
Layers of risk
Karam said the layers of risk for building developments were visible in the planning stage of projects, their delivery and also post-delivery.
Karam said developers were now responsible for building defects for up to 10 years after construction.
“When you're operating in an environment where there's more risk, you at least want the same returns, if not higher returns. Coupled with the higher costs, some of these projects don’t stack up any more,” he said.
“The way I look at these things is, can it be done? And is it worth the risk of doing it? Because smart business is about making more money with less risk, not more money with more risk.”
Karam said high-end boutique-style residential developments in the eastern suburbs of Sydney and North Shore, which were sold for very high prices did justify the risk and attract the capital, but these were the exact opposite of what the government was trying to achieve with affordable housing.
Calls for reform
“We need significant reform of the planning system,” Karam said.
“I'm based in north Parramatta and when I stand on Church Street, where the new tram station is outside my office, and I look down the ‘spinal cord’ to Parramatta, there is no new development from here until you get to Parramatta Square.
“It’s not because there isn't the will or the ability or the capital, it's just that the regime does not encourage it.”
The planning system needed to be reformed so that it delivered outcomes and certainty of outcomes to developers in a timely way, he said.
Karam said the government had allowed greater height and density for developments that included a certain ratio of affordable housing but “but to go up, you've often got to go down because you need to accommodate the car parking”.
Underground parking was very expensive and Karam questioned if it was necessary when the apartments would be located close to train stations.
“And if the answer is yes, then do they [car parks] need to be underground?”
Karam said that building above-ground parking meant when it was no longer needed in the future, that building could be repurposed – unlike a hole in the ground.
Karam said housing supply was needed now and housing projects that had already been approved before the government increased density limits were being delayed “because they need to go back and get reapproved for the higher density”.
He also questioned why some developments that met planning rules needed to go before independent panels for approval, when they were meant to look at projects that sat outside the rules.
“That certainty needs to be built into the planning system, if it meets all the rules, just get on with it.”
Another problem was the number of different approval authorities. ”Everyone has an opinion and different points of view so by the time you appease everybody in order to get an outcome, the number of compromises you’ve made can be very expensive.”
Affordable housing
Karam said he had a problem with the term affordable housing, which really should be called subsidised housing.
“I think affordability should be government policy for every house, not just for a subsection of the community,” he said.
He also said the government had not been able to work out who would subsidise the cost of housing – itself, the developer, the builder, or the community housing provider – and only when that had been decided could a proper plan for affordable housing be put in place.
The government, by increasing density, was saying to developers that they could afford to make some of their housing affordable.
Karam said community housing providers, which were funded by Housing Australia, would typically give affordable housing tenants a 20% discount on rent. They had become developers in some cases but were facing the same planning delays that others did.
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