A significant increase in the number of distressed workouts for troubled development projects has been forecast in the wake of the global economic crisis in Australia.

International property and construction consultants Davis Langdon have already identified a growing demand from stakeholders in major development projects to find solutions to serious economic impacts created as the result of failing projects or endangered projects.

Davis Langdon managing director Mark Beattie predicted that distressed workouts for troubled projects will significantly increase in the months ahead.

“In the current market, we expect that there will be an avalanche in the number of distressed workout scenarios,” said Mr Beattie. “It happened in the last recession, and as the full impact of the global financial crisis works its way through the development industry, we are certain to see it again.

“To a large extent, the failure of projects will come when contractors and sub-contractors come under financial stress as their workbooks dry up.

“This will be the result of strong competition that has forced contractors to take on work at unrealistic prices to secure forward orders, and the bottom line is that they will be unable to fulfill their obligations because their costing remain mostly unchanged.

”It may also be the result of developers who find themselves in trouble with financiers who refuse to continue to allow drawdowns or to fund existing developments or that presales fail to settle”

The distressed workout concept is for the stakeholders in a project to undertake an independent review of an existing struggling or failed project to fully explore different approaches to work towards better outcomes.

In some cases, this may be done through a receiver or administrator after a project has gone into liquidation.

Other stakeholders who may have a vested interest in the future viability of a construction project could include financiers, tenants or purchasers as well as builders and developers.

“When it is apparent that there is a project under distress, the stakeholders need to determine how they can achieve a protective position for themselves,” said Mr Beattie.

“Commonly this involves an independent organization coming in on behalf of the stakeholders to take control of the situation before it gets out hand.

“This might involve assisting a developer who is in need of cash, or advising a prospective tenant in a project on making alternative lease arrangements and whether the project will ultimately be available for them to relocate.

The key to any review is the consideration of all the consequential impacts, to ensure that any risk mitigation strategy does not ignore longer term consequences for the benfit of short term budgets or outcomes.

“This allows the stakeholders to have some certainty about the future of a project and make their own plans accordingly.

”In other cases, there may be buyers who are looking to come into the market to acquire assets which appear to be below replacement value, but whose ongoing viability is uncertain so the work required enables them to fully understand the assets and the liability that they are taking on.”

Mr Beattie said the focus of distressed workouts should enable stakeholders to take on a new risk awareness and re-shape to best suit the circumstances surrounding the project.

“The conduct of a distressed workout is essentially strategic in nature and the business which carries it out needs to have the ability be able to do such work inconspicuously and confidentially so that the examination doesn’t cause a market failure in itself,” he said.

“The real benefits come  where there is an early intervention so that stakeholders can get the best outcome in a timely manner.

“Even where project failure is not obvious, businesses which have significant property portfolios should carry out a health check as part of their risk management process across their portfolio so that they are comfortable with key projects and they have a ‘sanity check’ against what they perceive as the current situation of projects in which they have an interest.”

For further information, contact Meaghan Jones on +61 3 9933 8800 or email mjones2@davislangdon.com.au