Building costs are up 34%. What can developers do about it?

Over the last two years we’ve seen near unprecedented inflation in building costs. What’s causing these rapid increases and what can property developers do to ensure their projects are still viable? 

During the 12 months to March 2022, the cost of building supplies increased by 34%, according to an EBOSS construction supply chain update. Unfortunately the problem is only getting worse, with an 11% increase forecast over the following six months. 

This is creating an increasingly challenging environment for property developers, for whom cost certainty is essential to their development feasibilities.

Shipping and supply

Suppliers report that the main drivers behind these increasing costs are the cost of shipping, global logistics constraints and high international demand. 

Shipping costs increased by up to 400% during 2020 and 2021, contributing to the surge of building costs. Deliveries are also taking longer than usual, with some suppliers reporting waiting up to six months to receive goods. Lockdowns throughout China are expected to worsen wait times over the short term. 

To remedy these issues some domestic suppliers are stockpiling goods, adding to their holding costs, thus putting further pressure on prices. Additionally, fuel prices are increasing, causing further inflationary pressure across all building related products. 

Meanwhile, demand for materials is expected to escalate further with over 45,000 residential units consented in the year to March 2022. This suggests the building boom is not over.

What can developers do?

In an environment where cost escalation is occurring it is critical that developers don't lock in their sales too early in the development process. Developers come unstuck when they have presold their developments early and their project costs continue to increase. This can cause profit margins to rapidly erode, sometimes completely. 

Having to commit to a high percentage of pre-sales upfront in order to secure bank funding, can place undue pressure and risk on your development margin.

Fortis Capital can provide you with a full service offering and a flexible financing package to conserve and protect your project’s revenue. Please call us to discuss a lending package, tailored to meet your specific needs.