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A full shutdown – this week we look at the impact of a construction industry shutdown in NSW

Merricks Capital are closely analysing the COVID-19 related shutdown of the construction industry in key areas of New South Wales. The effective closure of the building sector until the end of July is different in nature to any form of restrictions we have seen to date across Australia.

  • In all other states and territories, and in previous NSW restrictions the construction sector continued to operate in one form or another and as a result had limited impact on new supply. The single dwelling development and renovation sector was in fact a shining light of the economy over the past year.
  • Economic impacts will only be significant if the closure is extended into August, with more than 10% of the NSW work force directly employed in the construction sector.
  • The Partners Fund has limited exposure to NSW construction loans with only the Castle Residences project in Sydney currently under development.
  • The experience of last year suggests banks and offshore funders tend to sit on their hands for several months post a lockdown and this capital scarcity may create opportunities for new investments.

Current estimates are that the NSW construction industry lockdown will cost the NSW economy about $1.4 billion per week and have an impact on more than 350,000 jobs, and there is significant pressure on the Berejiklian government to return the industry to work.

The construction sector has proven resilient through all lockdowns to date, with industry associations, trade unions, workers and contractors all working together to keep the industry ready to return with minimal disruption. However, an extended lock down will only add to the current margin pressures faced by builders due to labour and skills shortages, higher input costs and intense competition from fewer construction projects going ahead.

The Partners Fund currently has two loans, representing approximately 7.5% of the portfolio on a committed facility basis, which are affected by the construction industry lockdown. One of these funded projects, Castle Residence, is currently under construction while Point Frederick is expected to move from a land loan to a construction facility in the coming month. There are also several other commercial real estate opportunities in due diligence and in the pipeline.

The Castle Residences project in the Sydney CBD recently reached level 28 and the associated 1876 heritage listed Porter House has been substantially renovated and restored. The completed 37-level project will be valued at over $400m and will include 131 luxurious apartments and a 122 room, 5-star hotel under the MGallery by Sofitel brand.

This project has a 12-month construction allowance for the presale sunset dates so there is a significant buffer to protect against the impending delay, and there is a similar buffer for the hotel management contract.
Overall, we expect the NSW shutdown will be temporary due to the essential nature of the construction industry.

The Master Builders Association of NSW Executive Director Brian Seidler has said the industry has demonstrated that it can operate safely, with all the proper COVID safety procedures, and it “continues to engage with the State Government on a daily basis to ensure the best possible outcome for all.”

The most likely scenario is that the ban will be lifted but with caps on the numbers of workers onsite, as well as additional social distancing conditions and limitations on “between site” activity, similar to the measures applied in Victoria.

We are working with our borrowers to extend loans, where appropriate, but the delay is not expected to affect loan settlements due to the significant buffers in place. The residential market for good quality apartments is otherwise in good shape and we anticipate valuations will remain supported.

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