Construction costs, funding crunch blamed for Auckland developers walking away

There have been good levels of presales for apartments under construction this year, CBRE said.
DAVID WALKER/FAIRFAX NZ

There have been good levels of presales for apartments under construction this year, CBRE said.

A crunch on funding for developers is being blamed for apartment developments being abandoned.

A new report from CBRE shows that 31 Auckland projects, with 2044 units, have been abandoned over the past four years, 15 per cent of the total number of projects launched.

Abandonment refers to a specific active pipeline project being abandoned. It does not mean that development plans for the site of this project are completely abandoned.

CBRE said almost a third of the abandoned projects had been relaunched on the same site. Some sites where projects were abandoned had been sold to other developers.

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John Bolton, founder of mortgage broking firm Squirrel and a developer himself, said projects were usually abandoned when they became uneconomic.

He said banks' conditions around development funding had become tough and it was hard to get backing for new developments. Some banks face a "funding gap" because more money is being borrowed than is being deposited. 

Bolton said most developers would now need a large number of presales to get bank backing.

"The second reason is that construction costs are very high. There's so much development going on it's hard to get good quality contractors. Building costs are through the roof. If you sold off the plan a year-and-a-half ago it can get all too hard."

Bolton said there were significant risks involved. "Once you start, if it goes wrong it really goes wrong. Some people aren't prepared to take the risks."

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Andrew Bruce, president of the Auckland Property Investors Association, said the margins on many developments were smaller than people realised.

"If I went and bought land three years ago I would look like an absolute genius as a developer now but to do it in the same market is very hard. Most developers are highly leveraged. The margin is often created by the market."

CBRE said while construction costs and financing were important in some factors, other factors were involved such as developers launching the wrong project, at the wrong place, at the wrong price. Some project abandonments might have been down to developer skill and experience, it said. 

So far in 2016, 45 apartment projects comprising 2600 units have been launched. 

CBRE said there had been healthy presales so far this year and most unsold stock was now in new projects with limited market exposure.

* Have you bought an apartment in a development that was later abandoned? Email newstips@stuff.co.nz

 - Stuff

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