Forum Topics Apartment/Developer builder margins
Rudyboy
2 years ago

One of my business partners has just moved into a unit around Canning Highway. It was a Pindan development (they went bust) built by BGC. There were a lot of delays and paperwork fluff ups, the latest being they had given NBN the wrong address which doesn't exist and therefore their internet is "up in the air" LOL.

BGC has now stopped pretty much all new home builds due to no labour (poor old Len Buckridge who died worth $8bn not the $4bn reported, God rest his soul, was a tight arse and they don't pay well is part of that problem), increasing costs and a huge backlog after the WA government gave hand-outs. I am also building and had about a 4 month delay on a now 18 month build.

Now Finbar is a slightly different proposition but the general lack of trades in WA is a huge issue. A lot of workers ghost the boss when he phones to find out why you didn't turn up Monday and the company never hears from them. Of course, they have a new job that pays more as the youth of today has zero company loyalty LOL.

Materials have been an issue but improving and with cost of raw materials and sea freight dropping significantly, that part should wash out.

One benefit is that the WA real estate market is going very well from a low base so relative to 12 - 24 months ago you would have to think price increases would have been put on units that haven't sold which would give a better margin. Higher interest rates will be an issue for investors but in my locality a lot of interstate and overseas buyers are buying unseen in one to two days of listing at over ask. They are mainly investors and with sky high rents in WA the yield is very good.

So hope that helps a little and someone can tell you the normal margins.

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SaberX
2 years ago

I did see that article about BGC. It wouldn't surprise me - the government did a terrible job of handouts. I mean t hose on the inside i.e. land sales agents already spoke to and mentioned to stay well away from joining the crowds clamouring to get the first home grants and handouts for putting a slab down. They already saw/knew the writing was on the wall - it was just sheer greed though - grab and sign as many people as you can up. I actually builtt with Smart Homes , which now with BGC as their owner - at the t ime my slabs and construction progresses happened relatively quickly. Nothiing too fast, or slow. Fast forward to one or so years ago and I knew people building who hadn't had slab progress for months, or had a slab and waiting for bricks etc. Once my slab hit, bricks etc. arrived over a reasonable time, then one day the plate height was up, then higher, then roof framing etc, it all just eventually happened. None of this months between stages.

Not sure what t he fix is. But eveen back in 2017 when i finished building, we were using cheap, immigrant labour (the tilers, painters etc. when i had rectification jobs or even showing up on site to see the progress , couldn't speak english and so it was obvious to me). I can only imagine the state of the quality of those being used now to get buildings up and running.

The brick built WA homes of the 90's into the early 2000s i would still rate as far superior in build quality, just dated with time and passage of time ageing it. But at least back then the italians did the proper good tiling and/or painting, and it wasn't any joe bloggs doing trades, so quality prevailed.


I do know Finbar's advantage is they're partnered with Hansen. WHo will suffer from the same construction labour issues, but with a stake in the underlying works, there's more skin in the game for t he contractor. The one material risk though is of course this relationship coming to an end, after all Finbar's assets really are little and are largely intellectual capital and brand strength: it builds, sells and skims profits, then rinses and repeats with a new site.

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SaberX
2 years ago

Hi Brains Trust,


Wondering if there is any industry standard for rough margins on apartment developers? I have been a keen follower of WA based Finbar (ASX: FRI) for some time. The share price has lagged since I took a very small stake back in the mid $1.50's, but has consistently floated between $0.60-0.80 ( I should note that I averaged in many more times within the $0.60-0.80 range so the initial parcel, less all the dividends since is probably closer to break even on a whole).

I understand that particularly in WA labour shortages are presenting headwinds for the likes of residential builders, and that ultimately the cycle is counter-cyclical at first glance with interestt rate rises, the FIRB foreigners fees, but Finbar has consistently held the $0.60-70 range for what seems like forever.

I feel that the market has somewhat forgotten the company - and its most recent H2 FY23 results for the first time had the interim dividend scrapped and a short term loss, which again, my rose tinted glasses feels makes the company fly under the radar even more.

There are several large pipeline developments due in FY 24-25, and I am wondering if anyone has a rough rule of thumb on what could be a reasonable profit margin % to apply on company sales?

Directors own a large portion of the company and although arguably gift themselves shares they have consistently reinvested and soaked up shares throughout the years, which I feel instill a larger confidence in the company than some of the other ASX "no hold" directors. I feel the large pipeline of developments, notably the large civic heart in South Perth will take the market by surprise in 1-2 years when the cashflow comes in. Would be great to work out a rough profit margin.

Beyond these large projects I suppose their pipeline is only as good as the joint ventures and land that becomes available, so that creates some uncertainty as there is a somewhat lacking pipeline beyond the 4 or 5 large projects in the works. Keen to hear anyone else's thoughts?

With the rental crisis here in WA, and availability at a low I can't help but wonder provided we don't have too hard a landing these next 1-2 years, surely alot of these apartments will have buyers eventually. Not sure if this is outweighed by the interest rate hikes off-putting purchases. There is also the indicated lack of pipeline developments in apartments overall from what I read - given the labour shortages, planning laws and I do wonder if there will be a supply crunch these next few years that will be advantageous. I for one hope for greater density, as Perth lags the likes of Melbourne, Sydney, and other developed countries due to the lifestyle and what people are 'used to'. With cost of living and infrastructure becoming more difficult I do hope we start to urban fill and go upwards , which in turn i believe brings more concentration of associated services, restaurants, immigrants etc. who are used to the hustle and bustle.

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Vandelay
2 years ago

I work in the residential and multi-storey residential industry as a construction estimator and used to be a project manager. Mostly for tier 2 builders doing large townhouse developments and medium rise apartment projects. Generally all developers I have done projects for work off minimum 15-20% margins during due diligence and feasibility. The margin they make on completion varies a bit dependant on many moving factors.

Hope that helps.

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SaberX
2 years ago

Thanks @Vandelay for sharing. I presume by margins this is net margins and not the equivalent Gross Margins of a typical inventory business (i.e. sales less COGS). If underlying net margins then i presume even stretching this to 10% margins, a 400-600m pipeline in the next two years brings in at least $40-60m in net profit.

Edit: Would you generally find margins higher the larger the project/firm, or the converse being true: smaller developments and lesser well known developers clipped a larger ticket?

I dont' know much about a construction estimator job - keen to understand the job more: do you essentially estimate all the relevant construction components/processes for said employer?

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Vandelay
2 years ago

Hi @SaberX. Margins I mentioned are net.

I think the margins are very project specific. But the big guys are normally restricted in the types of projects they can do. Fewer large projects that can move the dial for these guys, and the people they are buying sites off are normally well off and clued in to know the value of their assets. I assume its less opportunity and probably more competitive. They also have fewer builders to pick from because their aren't many guys with tier 1 capacity and puts the builder in a stronger negotiating position when tendering. These larger projects are also more contractual and harder to administer for the project team, and can be quite litigious if anything goes wrong. Plus you have cmfeu obligations while building, which add probably 10-15% to costs. Small missteps can add up on bigger projects. Counter to all these negatives bigger developers seem to be beneficial of councils due to donations and contributions. They also can add more apartments or houses etc on a single project. These points obviously aren't always the case.

I think the smaller to mid sized guys probably have more opportunities to pick from, more builders to pick from, potentially no union aligned subcontractors, quicker build times, more room for error. All this means build costs don't make up as high percentage of total project costs and the ability to make a higher margin increases. Again, this isn't always the case.

Apologies if the above is a bit rambling. This is just my observation and opinion. And is very project specific and everything is quite variable. Developers need to do thorough due diligence for every project to account for all specific costs.

As a construction estimator, developers come to us with projects for us to tender on and I calculate the cost of construction for either construct only or design and construct. Design and construct has become more popular for developers even though it's generally more expensive because it passes risk from them to the builder and much harder for builders to claim variations for design errors etc. Estimating jobs accurately has been extremely challenging the last few years with inflation, extreme weather and supply constraints, hence why so many builders are going bust.

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