Project aborted in wake of tough conditions

The current prevailing industry conditions, including rising construction costs and a tightening labour market, have claimed the largest proposed apartment development to date.

The proponents of 28 Lyall – a $165 million residential tower in South Perth – have chosen to abort the project.

To the developer’s credit, it has made the decision reasonably early and communicated the reasons to buyers. It will return all deposits made for off-the-plan purchases as soon as practicable.

I have previously commented on the ongoing challenges being faced by developers and construction companies, with costs increasing well ahead of inflation and making many proposed projects uneconomic.

Property Council of Australia WA has identified that the current development pipeline, particularly for infill development, has been severely compromised by ongoing skills shortages.

It warned in January that although the impact of pipeline disruptions was unlikely to be fully felt in the immediate term, swift action was required to avert a future housing and affordability crisis, citing that at least one project development with a live development approval (DA) and sufficient presales to proceed to construction had stalled because three construction tender participants had pulled out.

The impact of cost increases to deliver a project means the necessary price for the end buyer must be higher. Prices will continue to escalate as a developers will not risk their ability to deliver the project without a bigger than normal contingency.

The Property Council of Australia WA estimates around 35 per cent of apartments that are approved for development, as well as $2.2 billion in projects in the pre-DA stage, are currently on hold due to price escalations eliminating margins and making projects not currently feasible.

Conservatively these figures represent around 10,000 apartments and we can now add the cancelled South Perth tower to this ledger. The developer, in this instance, claimed construction costs had increased by 30 per cent in the last 10 months alone.

The Property Council of Australia WA has made several recommendations aimed at avoiding the expected mass shortfall of apartments, including removing the foreign buyer surcharge to attract skilled migrants to Perth and reduce pressure on the rental market. This would also support apartment development which, as we continue to see, has been impacted by labour shortages and cost increases.

As noted, the developer of 28 Lyall is returning all deposits from pre-sold apartments to the buyers. It is worth remembering that all deposits, which are used to pre-purchase apartments off-the-plan, are placed in a trust account and cannot be touched by the developer nor other parties. The money is completely safe and can only be claimed by a developer in the event of a default by an apartment buyer once construction of the apartment is completed.

This differs from house and land products, where buyers must get funds for progressive payment of construction.

Deposits to secure off-the-plan apartments cannot be used to fund development or as progress payments, nor can they be used by the developer as security for construction finance, although lenders may take a level of comfort from the amount of presales represented by the deposits.

All sales contracts have a sunset date of up to four years or more from the date of the contract, so the developer in this instance has done the right thing to return the deposits immediately.