Apologies for the dramatic heading, but is it true?
There has been a lot of talk in the media in recent months of an oversupply of Brisbane off the plan apartments that are either new or currently under construction.
In fact, BIS Oxford Economics announced in April that nearly 20% of Brisbane’s apartments are empty amid an oversupply. BIS Oxford Economics estimates that 8300 apartments were completed in the inner Brisbane area at the end of June 2018.
Many property commentators have stated that the Brisbane apartment market is ready for a ‘bloodbath’ and that the Reserve Bank of Australia has also indicated an announcement of a warning regarding the Brisbane off the plan apartment market.
Recent reports in relation to ‘housing’ figures in Brisbane have been positive, but are we just a little behind the southern states in the cycle? Will the fact that there is demand for ‘houses’ be enough the save the Brisbane apartment market, which is quite obviously flooded.
So what does all of this mean, and what will the actual effect be on the economy?
We have recently been involved in various matters where we consider that the effect of the off the plan unit market is starting to show its obvious cracks.
In that regard, we have recently been involved in several matters acting for building and construction subcontractors who have been involved in tower projects across Brisbane City and fringe areas. This litigation has largely arisen due to a delay in the construction of the project with the developer passing on liquidated damages to the builder for delay in the construction of the project, and the builder in turn passing on delay in liquidated damages to the subcontractor of these projects. In the cases we have been involved acting for the subcontractors, the builder was unable to specifically identify with clarity and supporting evidence the reason for which the alleged back charges in liquidated damages were based upon.
In fact, in one instance, the builder had made it clear that they were passing on liquidated damages for delay simply because the developer had passed them on to the builder. It is abundantly clear that if a property developer of an off the plan unit development has had less than inspiring pre-sales for the development project, that it will inevitably seek to reduce its constructions costs wherever it is able to do so under the building and construction contract. Naturally, the builder will also seek to pass on those costs to the subcontractors wherever they can.
Whilst we were acting for a subcontractor, their contract value was over $10 million and the amount that was sought to be withheld for back charges and liquidated damages was in excess of $1 million. Fortunately, we were able to resolve that matter for the subcontractor with a favourable outcome. However, it is clear that a lot of subcontractors would not achieve that same fortune and would not be able to withstand such a hit. Insolvency would be inevitable for many subcontractors faced with this situation.
Once a subcontractor proceeds to insolvency, obviously the effects go all the way down to building suppliers and creditors of the company.
With an abundance of off the plan apartments under construction, we consider that this process will continue to get worse, and quite a lot of building and construction companies will fall into insolvency over the next 1-3 years.
The building and construction industry already has the highest rate of insolvencies of any other industry in Australia, and we consider that in Brisbane the statistics over the next 1-3 years will be certain to rise.
The banks have been reluctant to appoint receivers over projects, which cause concern to financiers. We have noticed a bit of an industry shift whereby banks will instead conduct review of the asset or project and monitor its progress in the background whilst avoiding a formal appointment. One thing is for certain though, and that is that the financiers will be sure to appoint receivers over various projects where the bank is required to take control of the asset in order to protect the bank’s position.
Having regard to the ‘bloodbath’ that is likely to ensue, advisors and entities in the building and construction industry need to ensure that their clients rights are protected as much as possible. This can be done in the following ways:-
- Ensuring that supply terms are tight, and that there is valid protection and security for the company regarding debts;
- Registration of security interests on the Personal Property Securities Register (“PPSR”) to secure the position of retention of title, and other security interests (please note that a registration on the PPSR also avoids the clawing back of the liquidator of an unfair preference);
- Proactively and rigorously recovering debt that is outside of terms;
- Having significant consideration in relation to whether to proceed with a contract or a project whereby there may be some question about whether or not you will be paid; and
- Having an overall general awareness of the volatility and risk that is currently in the Queensland building and construction market.
Time will tell about a level of pain in the Brisbane off the plan apartment market, but it appears to us that cracks are starting to show and that a lot of businesses will be effected moving forward.
We consider that the Gold Coast market may have had some grace after recently hosting the Commonwealth Games, but it appears as though there are a large amount of off the plan apartments that are currently under construction and we do consider that there may be an oversupply in the Gold Coast market once this stock begins to be released to the public.
Should any of our clients require assistance regarding any building and construction matter or dispute, please do not hesitate to contact our team for an obligation free discussion.
 “Nearly 20% of Brisbane’s apartments empty amid oversupply: BIS Oxford Economics”, News.com.au, 5 April 2018.
 “Apartment price falls affirm RBA fears”, theaustralian.com.au, 25 September 2017.
Related Tag: Brisbane Lawyers