Campbell Mattson, managing director of Location Homes and Stephanie Murray, director of SMM, discuss the post COVID economic situation in relation to construction and new build activity.
You can read through the summary of part two of the interview below or click the video link for the full interview.
Topic: How the construction industry is placed moving forward
SM: Here with Campbell Mattson who has extensive experience across the property industry from residential to commercial construction and serves as a director for more than 10 companies.
How are you going through this time? How are things in business?
CM: Across the different entities, there are different factors to be dealt with. The teams are all incredibly engaged, motivated and smart. We pivoted pretty early, like a lot of businesses we did see this coming so put a lot of plans in place prior to the news of a shut down. The teams are ultimately all working, where they are able, at home and are doing really well. Obviously the amount of work we can do is diminishing by the week, but we are now preparing to get started again. Business is great, there are some tough decisions to be made around cutting costs, but we are doing our best. Our key priority to keep our staff employed and get back out onto the field.
SM: It is an interesting time for everybody. I think that probably leads on to what’s your view on the residential construction activity or the market activity at the moment? What’s your view now and what are your predictions going forward?
CM: Before going forward if we just look at where we are, the reality is for a lot of good home building companies in New Zealand they already had good forward orders and good workbooks in front of them, anywhere from 3, 6, 9, 12 months and beyond. Due to the current climate, not being able to do the work has impacted cash flow and profitability. That’s one of the great things about construction is that in a situation like this, most of us still have work to go back to. The bigger question mark is around the medium term-what happens in 3 - 4 months?
What if sales diminish - that’s where companies now need to be really looking at:
- future plans
- costs
- overheads
- efficiencies
The outcome is unclear at present: there are the issues of market income and confidence. For those that still have an income, what are they doing with it? Are they willing to break the nest egg open and start building or are they just wanting to sit on it?
SM: You are absolutely right about pivoting and any business at the moment is about making the most of opportunities. So with Location Homes, how is the business position coming into these changed times for the next 6, 12, 18 months?
CM: Right from the outset we put in place significant cost cutting measures from an overhead point of view.
Our two primary focuses were to come out of this as a business in a financially good position but also to maintain all of our staff. We have about 9 - 10 months of work ahead of us already so we are very fortunate and grateful that this is our position. Having said that, our industry has a slow turn around. So talking to somebody today doesn’t mean a build for at least 3 - 6 months so we have to be very careful about if there is a drop off in demand, how does that look in 6, 8, 12 months time. We’ve done a lot of work in cash flow, forecasting and preparing funding options with the bank if we need to. We keep in good contact with our supply chain and sub-contractors to see how they are doing as well as to understand if we are going to have any issues on the other side of this.
SM: What would you say are the top 3 risk factors for residential home builders right now?
CM: The top 3 things are cash, cash, cash.
If you are building a new home you are passing over a lot of money to a building company but what a lot of people don’t necessarily understand is that in most cases somewhere between 90-95% of that money goes straight through the business and then it is distributed amongst 20-30 subcontractors and suppliers. Construction has a pretty fast cash cycle so it is really important that people who operate building companies are aware of their cash position and are able to forecast 2, 3, 4 months down the track and understand where they are going to start running out of money and what they are going to do about it. Businesses that went into lockdown that were in a poor position are going to have to work out what they are going to do about it. I would say those are the top 3 things. Additionally, we will be working under a new regime of health and safety and we won't be as efficient and productive as we have been so we have to get our heads around this on top of meeting our clients expectations.
SM: I think what you are saying is that any building company that went in with a strong financial position will come out with a strong financial position as long as they are planning and fore-planning as well as recognising the warning signs early.
CM: It’s not unique to our industry and it’s true for everyone, I think in construction you are dealing with very large numbers and things can go wrong very quickly.
SM: It is huge to be able to plan ahead and puts you in a really good position for your clients going forward . Back to the client, what do you think are the top 3 fears you think people who are wanting to build face?
CM: If we put ourselves in our clients shoes, they have a lot of similar fears to all of us.
Uncertainty about income and jobs. I think there are more questions than answers at the moment so I think uncertainty is a big one. There is also fear health wise as well as economically. There is another thing around whether or not people are going to invest in a new home and finish it to find that the value of that new home through a drop in the property market has diminished. They may be worried that they spend $700,000 on a house and section and it’s only worth $600,000 - $650,000 in the end, so there is an element of concern for sure. The third issue people may be worried about relates to their builder going broke during the build, which is a legitimate question. These would probably be the 3 biggest fears people have in their minds right now.
SM: How would you ally those fears?
CM: Not sure we can do to reduce people's uncertainty, but probably combine points 1 and 2 around property values going forward and the uncertainty of that. Once you’ve answered or got clarity around your financial position, if you are a person who is relying on income to service a mortgage in order to build a house then there is a direct relationship between can you do it or not. You need to understand if your income is looking okay going forward, and this is a unique situation for every person. Once you answer and understand that it is looking okay, the next fear is drop in property values.
I would ask this question: are you building to sell, or live in that home for 3, 4, 5+ years?
If you are not building to sell immediately or speculating then I would be pretty comfortable to say that statistically and historically you are in a pretty good position to see an appreciation of value after the date you have finished building. The trend over the last 100+ years in this country has been the cost of building goes up and the cost of housing goes up. And as we have seen in the past decade this has gone up significantly. New Zealand in my opinion is becoming an even more attractive place to live and even during COVID 19 I think this has become even more accentuated due to our geographical positioning. Fear number 3 around is my builder going to go broke or is money going to be at risk, that is up to the homeowner to do their homework. You want to look at a company that is established, has good project management processes, has good financial history, aligned with a company such as Registered Masterbuilders Association that has a guarantee that covers any potential loss. Guarantees are more important now than ever. Another thing that needs to be looked at is pricing priorities. We should be very concerned if we go out and get say 3 prices and one comes in 10% lower than the others. The margins in our industry are not big enough to handle that kind of variance.
SM: Cam, I see that all the time, if something looks too good to be true it normally is. Why is now a great time to build then?
CM: If we look at the fact that we are likely to see a drop off in the demand, but for those who are forward thinking and looking into the future now is possibly the best time to build a new home in the past 5-8 years. Interest rates are low as we have ever seen them, when demand diminishes, we are going to see an increase in efforts by building companies to look after their clients. I’m not talking about a wholesale drop in the building price, I’m referring to there not being as much inflation, hopefully no inflation, to building for a while. We’ve seen significant annual inflation in building costs in the last few years so I’m expecting that to flatten if not dip slightly so the cost of building should be cheaper. Because there may be more supply in the market for subcontracts and builders the timeframe to build should also be cheaper and because building companies will hopefully not be swamped like they have been the quality of the builds the attention to detail will come back. We will be dealing with less work so we can put a little bit more love and care in at all times and our A grade subcontractors who have been stretched so thin for so long will hopefully have some increased capacity and we will just see a general lift in quality. So I think there are a lot of really good reasons to build right now.
SM: What does Location Homes offer to its clients? How do you guys do things?
CM: At the beginning you’ve mentioned our pedigree in development and investment so we are very passionate property people from commercial to residential. We own private residential investments in some of our other companies, we’ve got interest in early childcare centres as well as commercial buildings so really good knowledge across the team of how property works at a fundamental level. So that enables us as a design and build company to really empathise with a client, when they come to us with a brief, a budget, site, their plans for the future we can very quickly understand what will and won’t work. Our by-line as a company is ‘Affordable Luxury’ so we are trying to give people the most affordable and highest value outcome while also bringing in their luxury aspirations. Very few people that we work with have limitless budgets, everyone has a budget and it’s our job to understand it and create a solution within it. We ask the right questions and understand how you are going to live in it and right now there are a lot of people considering the scenario of working from home on a kind of semi long term basis. We really understand how homes are used and how to create affordable solutions for those homes so they function at their best.
SM: It sounds like individual needs are really important to Location Homes, actually building and designing something that is specifically for that family or that individual.
CM: It is but not at any cost and that’s critical, it’s really balancing those costs with the design and that’s where the ‘Affordable Luxury’ aspect comes in, it’s a discipline, it’s in our DNA and it’s something that our entire team understands.
SM: Where we are at the moment with our unprecedented environment what do you think the good things are going to be that come out of this?
CM: Well; we’ve all learnt to have long walks around the block with our partners and families. The things I hope come out of it are much more empathy towards other people and understanding that there is so much we share in common when it comes to the difficulties in life but there is also a lot we share in terms of values. I’m really impressed to see a great sense of community, a lot of people looking out for the underdog and are concerned about those that are less fortunate, I would love to see that continue.