Challenges and opportunities in construction and real estate

21 August 2017

Real estate and construction businesses work with large projects and big numbers. Construction alone in New Zealand generates over $30 billion in gross revenue annually, according to the Ministry of Business, Innovation and Employment. This means that there are always plenty of opportunities for success in these industries, but there are also a unique set of challenges. This is compounded by considerations surrounding health and safety, and recent legislative changes which are beginning to impact businesses in the space.

Construction: An overview

The strongest sub-sector in construction currently is infrastructure. Both Labour and the National Party have made promises with regards to civil construction projects in their election campaigns, and this area will remain strong for an extended period of time. Commercial construction is also solid, with large pipelines of ongoing work.

The outlook for residential construction, however, is slightly more mixed as this sector is showing signs of slowing. "We've been experiencing a boom in New Zealand over the past few years, and this seems to be changing," says James MacQueen, Advisory Partner in Construction and Real Estate at BDO. "The availability of finance from the banks is having a significant impact on the sector, as is the new retentions regime. Despite a housing shortage, buyer demand has reduced and is likely to remain flat until after this year's general election"

The retentions regime

One of the key issues facing construction comes from recent legislative changes regarding the retentions regime. The Construction Contracts Act amendments came into force on March 31, and require new trust or insurance arrangements regarding retention deductions (when a construction company holds back a sub-contractors' pay for a time to ensure they complete any necessary remedial work). The changes were made following the collapse of Mainzeal in 2013, which saw unsecured creditors lose $112 million, of which a substantial portion were sub-contractors.

We may soon have a two-tier construction industry, made up of those who can afford insurance or are able to put the necessary cash resources in trust and those who can't.

The law requires companies to either put cash or another liquid asset into trust or buy an insurance product to safeguard retentions. After Mainzeal, insurance providers are unwilling to work with companies who don't have satisfactory financial statements. James fears this will give rise to a two-tier construction industry, made up of those who can actually get insurance or have the cash resources and those who can't. Sub-contractors will quickly find out which companies have sufficient financial strength and which don't, and those that don't may ultimately fail. This may lead to other desperate measures in an effort to stay afloat.

To address this, BDO has been proactive in working with its clients to help them build up reserves and prepare their record keeping systems so that they can distinguish between retentions on contracts entered into before and after March 31.

Real estate and LVR

Real estate has also seen a mix of challenges and opportunities in recent months. Regional house prices in particular are picking up - the Real Estate Institute of New Zealand (REINZ) reports that the national house price index excluding Auckland was up 9.2 per cent from June 2016. Meanwhile Auckland is beginning to show signs of slowing, down 0.6 per cent for the same period.

A relaxation of LVR rules would go a long way in helping to maintain balance in the sector.

Sales are struggling, however. The number of properties sold across New Zealand in July fell by 24.5 per cent compared to the previous year (as reported by REINZ) - and those in Auckland fell by 30.6 per cent. This means that, while house prices are static, sales volumes are falling. The new Loan to Value Ratio (LVR) restrictions are one of the principal reasons for this. The LVR restrictions came into place to slow the market down, but when combined with other market features, have now potentially done their job too well - resulting in falling sales volumes. The banks remain very cautious to lend out money, and the real estate industry, just like those in construction, is suffering because of it. A relaxation of LVR rules would assist in helping to reinvigorate the sector.

Be proactive with BDO

Businesses in the real estate and construction space can tackle these challenges head on if they are proactive. BDO can help them do this. We regularly meet with clients to discuss industry trends and events and how they can best respond to them. "The industry is already at maximum capacity, and there is no room for growth," says Mr MacQueen. "So we help our clients to focus on the quality projects with the least risk and the most profit, while avoiding more unsuitable projects."

We are nearing the peak of the current construction and real estate boom in New Zealand. To see success moving forward, it helps to have a trusted adviser on hand who can help you navigate the complex changes. For more information on how BDO can help, contact the team today.

BDO Construction and Real Estate