Financial support through government stimulus measures and extra debt will be critical for some businesses in the property sector to survive this economic downturn. To thrive, however, property firms need to be thinking about how to strengthen their business’s finances and operations for when many payments stop around late-September.
Andrew Clugston, Partner from Pitcher Partners’ Melbourne firm, recently spoke to the Australian Property Developers Association’s members about how different segments across the property industry can survive and thrive from the current environment.
The impacts are different across segments of the property sector
The impacts of the COVID-19 pandemic and subsequent economic slowdown are impacting segments across the property sector in different ways. Property developers, for example, are faring relatively well as development sites have remained operational in the lockdown. Those developers with a strong balance sheet have been getting through this time particularly well. In contrast, property sales for new homes have slowed as display homes and sales shopfronts have had to close. This slowdown may continue as further economic weakness is expected later this year, which will impact buyer confidence.
Consultants and advisors on property transactions including sales agents and finance brokers are also experiencing a slowdown in business as property sales slow, and other restrictions on inspections reduce the number of potential buyers these professionals are able to meet each day. Many businesses in this segment are taking advantage of cash flow and liquidity support available from the government and lenders.
The current state of Australia’s property industry
Like other industries, the state of play in property is changing each week depending on announcements from the government, particularly as it relates to current lockdown restrictions and the rollout of stimulus measures. Since the pandemic escalated in Australia in mid-March, Pitcher Partners has been working with businesses in the property sector to determine which support measures they can access to help them survive the next six months (counting from mid-March) to around late-September. The key focus to date has been safeguarding companies for the next six months, but Pitcher Partners has also been emphasising the importance of taking a longer-term view on the impacts of accessing the different support measures available.
Pitcher Partners’ key pieces of advice for the property industry
Our advice to businesses across the property industry has centred around having a minimum one to two-year view with the decisions they’re making now, along with assessing which measures are most suitable based on what the industry may look like from late-September.
Cashflow forecasting and resourcing
A three-way cashflow forecast and assessing staffing and resourcing requirements are critical. This analysis will provide a picture of where the business stands financially, plus lenders will need these reports if you want to take on more debt. Importantly, businesses need to remember that just because cheap debt is available, it doesn’t mean it’s a suitable option. Similarly, repayment deferrals may not be best for your business’s long-term financial strength, so don’t take advantage of it simply because it’s available. You need to take a strategic long-term approach with changes to current credit facilities and applying for new facilities.
Assess the support available and identify what’s suitable
A range of support options are available in the Federal Government’s financial stimulus packages. The first package focused on assisting businesses with cashflow, while the second package provided further cashflow support and credit support measures. The mechanics of these measures have become clearer over time. For example, once a business qualifies for JobKeeper, you don’t need to apply again.
For businesses looking to access more debt, the Federal Government’s Coronavirus SME Guarantee Scheme allows businesses with turnover below $50 million to access a loan up to $250,00 with a guarantee of 50 per cent from the government. The loans must be unsecured and have a term of up to three years with an initial six-month repayment holiday. These loans are available from participating lenders until 30 September 2020.
With most measures (JobKeeper, credit support, PAYGW support) having a six-month view to the end of September, we may see further weakness in the economy. Therefore, we are advising clients to view any support payments as a means to pay down debt and establish strong, lean foundations, instead of using financial support to survive.
Take a one to two-year view
We are advising businesses take a one to two-year view with the strategic and operational changes they make. For some businesses, building up a few types of debt (rental arrears, ATO debt, extra bank finance and repayment deferrals) may be a suitable option, but it needs to be balanced with a strategic approach to cost control and keeping overheads to a minimum. Taking this approach now is helping businesses to proactively come out of the current environment with a leaner approach while being able to service any extra debt. As a result, this will put businesses in a better position to hit the ground running even if the economic recovery is slow.
Now is the time to be lean
As you begin to build up debt and plan for the coming years, property companies need to review where they can manage and control costs. It is also an opportune time to explore opportunities for new revenue streams, particularly for businesses that have extra time as a result of slow business activity.
Having a lean approach likely means redundancies and restructures may need to occur, which leads to higher unemployment. The unemployment rate is likely to increase as businesses across many industries take a lean approach. For the property industry, this may cause a further slowdown in property sales as household income and consumer confidence declines.
Be ready to hit the ground running in Q4
The key risk to businesses in the property sector in the fourth quarter will be moving out of the current “survival mode” into a sluggish economic environment. To that end, businesses need to develop a plan that addresses how they’ll remain strong despite weakness in the broader economy. This plan may include a strategy to switch off any government support payments early and begin paying down debt.
While it is unclear how the economy will look from late-September, the property industry, particularly businesses with strong balance sheets, should thrive in the long-term. Contact a Pitcher Partners specialist to discuss your business’s planning around available funding and financial support options.
