- Developers are looking for ways to develop buffers against further cost hikes.
- Rising construction costs are pushing developers to hold back on large offers.
- Some projects offered nearly double the suburb median.
In her third article for The Property Tribune, Fiona Yang, executive partner at Plus Agency, explores an emerging and counterintuitive trend.
Real estate developers are holding onto some of their new homes despite receiving offers from buyers that are 75% above the median suburb price, or even higher.
In Burwood, Sydney, we are selling two newly built terraces in a duplex. The small mum and dad developer has already decided to keep one of them unsold and unoccupied until at least next year. They have already turned down an offer of $4.2 million, which is 75% above the $2.4 million median four-bedroom house price in Burwood.
Weekly asking property prices for 2134, including Burwood
In Lindfield, our buyer offered $4.3 million for one of the last two of the new four-bedroom townhouses in the super-luxury Wolseley Eight project. That offer is $900,000 higher than the median price for four-bedroom houses. Even so, the developer said no.
Weekly asking property prices for 2070, including Linfield
In my experience, developers are saying no more often than ever before. All over Sydney, we hear of great offers that fail to secure the home.
The primary reason is that construction costs have risen so high that developers have to invest more than ever before to deliver a new dwelling. Moreover, costs look set to continue rising for at least the next year.
New projects will cost much more to build
With the rise of construction costs unabating, developers are holding back some of their units to sell later, presumably at a higher price, to create a financial buffer that can protect them from climbing expenses.
Developers who purchased their land and started construction, for example, two years ago want to hold onto new dwellings because their project is much cheaper to build than anything new that will come in the future. They are almost guaranteed to receive a better price later.
One reason construction costs are so high is that, for reasons outside of developers’ control, construction is taking longer than ever. Consider three luxury projects widely spaced across Sydney: one each in Vaucluse, Lindfield, and Rose Bay.
Every one of these developments is facing delays due to shortages of materials. In our Vaucluse project, the developer has been waiting eight months for the delivery of curved glass that will be installed on the balcony. They have also faced long delays on internal finishes, including marble and even timber flooring.
Before Covid, all these materials were easily available and would typically be delivered on time. Now, even if the supplier guarantees a delivery date, you may not receive the materials until months later than promised.
Material delays and inflation
A common scenario is for the supplier to promise delivery on a specific date. The developer or builder will then get a call at the last minute explaining that prices have gone up, and another buyer is offering more. You can still have the materials at the price you were promised, but only if you wait several more weeks. Or, you can pay more and receive the materials right away.
Among the many causes: labour, materials, financing, insurance — all the major line items on a project balance sheet are much higher today than ever before.
With higher prices and shortages come delays. When construction takes longer, the developer’s costs go up even further. It is no wonder that a developer will hold some off-the-plan units for later sale at a higher price, in case costs go higher during the final construction phase than budgeted.
I mentioned that labour costs have nearly doubled in many cases, but that is not all. Even if you are willing to pay these higher rates, you cannot be assured that workers will be available.
Labourers often choose to work on sites or for builders who can provide reliable work, day after day. Smaller projects cannot always do so. When delayed materials are holding up your job, sometimes, there is nothing for your workers to do.
These are the principal reasons developers are turning back high offers for their new dwellings at rates not seen before in Sydney. They suggest that as expensive as real estate is now, prices may go even higher next year.
Past contributions by Fiona Yang;