Danny is a co-founder and director of Debuilt Property and has a professional career spanning architecture, construction, project management, development and property finance. Debuilt provides a wide range of consulting services to investors, financiers and developers.

The current property & construction market

Anyone reading the daily property news would despair at the apparently bleak outlook.  However, beyond the headlines there is a sense that things may not be as bad as many predicted.  The outlook has no doubt been aided by the various federal and state government stimulus packages implemented this year.  Ultimately though, we will not know the real impact until after JobKeeper ends.

On the negative side, we will have negligeable migration for some time, there will be an increase in business failures, our jobless numbers will rise and those in work are likely to spend cautiously.  New housing decisions will be postponed, and young adults will continue to move back home…...and the state of our relations with China adds a potentially more protracted hurdle.

On the positive side, interest rates are likely to remain low for some time, our fundamentals are solid, Australia will continue to be seen as a safe haven and this recession is very much pandemic caused. There also appears to be a mood of collective positive inertia seeking light at the end of the tunnel.

The reality however is that the property industry has enjoyed an extended buoyant period, and whilst the downturn may not be as severe as many predict, most economic sectors are generally fairly finely balanced; meaning that even a mild sustained downturn will see many on the fringes fail. 

Victoria

Victoria with its extended period of lockdowns, and the associated economic impact, will have a tougher time re-surfacing. 

For property and construction, the federal government’s HomeBuilder stimulus, together with the various first homeowner incentives, have provided support for greenfield housing and domestic construction.

Apartment projects are another matter.  A combination of issues including slower pre-sales (exacerbated by the stage 4 restrictions), the drop off in migration, an ongoing China issue, a softer rental market and difficulties in obtaining development finance, poses real challenges for the commercial construction sector.

Whilst pre-sale and funding hurdles have led to an increased interest in Build to Rent, this sector is in its infancy in Australia.  Even with the potential of various government subsidies (which is emerging), the sector appeals to institutional and corporate ownership with a strong balance sheet. It is also important to note that Built to Rent projects typically target the top tier of income earners who rent.

Affordable Housing 

So, what does a drop off in residential apartment developments mean for affordable housing? 

There is often confusion about what constitutes affordable housing. Affordable housing generally refers to housing made available to lower income households which is affordable relative to their incomes (generally accepted as 30% or less of total household income). Social housing is typically considered a subset of affordable housing and is housing owned by government or not-for-profit registered housing associations.

There are a myriad of funding models and structures that deliver affordable housing, including partnerships between state government, local government, not-for-profit (often religious or philanthropic based organisations) and the private sector.

Whilst the cross section of low-income earners is broad, a key goal for both state and local government is to ensure that ‘key workers’ are not priced out of the neighbourhoods in which they work. Key workers include occupations such as teachers, police, health & childcare workers and emergency services.

Inclusionary zoning – developer participation 

Inclusionary zoning is a planning tool where government requires developers to provide a percentage of housing in new residential developments available as affordable housing or provide a cash contribution for local government to use towards the provision of housing. In return, developers should (but not always) receive non-monetary compensation in the form of density bonuses or zoning variances. 

The delivery of inclusionary zoning has had mixed results and has been complicated by a lack of clarity around affordable housing, mixed implementation policies by councils and a reluctance by many developers.

In 2018 the Victorian government amended the Planning and Environmental Act in an attempt to provide some certainty and clarity that would make it easier for councils and developers to enter into agreements for the provision of affordable housing as part of development applications.  The Act now defines affordable housing as housing, including social housing, that is appropriate for the housing needs of a) very low, b) low and c) moderate income households.

From a social perspective, providing a mix of housing types within a development or precinct is desirable, however from a developer’s perspective it can be problematic.

The challenges perceived by developers include clarity around final ownership, possible extremes in resident types, appropriate owner’s corporation costs, development returns and developer concerns about perceived aversion by perspective purchasers.

A ‘salt and pepper’ approach within a residential development may be considered more acceptable by a developer when the affordable housing allocation is targeting key workers.  However, where accommodation is aimed at very low income or the most disadvantaged, most developers will push back.

There can also be a reluctance from registered housing associations based on cost and ease of management, appropriate owner’s corporation costs and greater control over the entire residence.

However, providing smaller scale stand-alone accommodation in desired locations can still provide accommodation for a complete socio-economic range integrated within a community, albeit whilst not within the same building.

Government support for affordable housing

Whilst inclusionary zoning may provide some supply, without real assistance for developers and with the Covid-19 related reduction of new apartment projects, this option provides a limited and piecemeal solution.

The simple fact that the supply of affordable housing requires the investment into new housing that is specifically set aside for lower income households means that the required returns are going to be below market value.

Affordable housing therefore requires a material intervention in normal residential development to reduce the cost of delivery, and consequently requires genuine subsidies or compensation.

Leaving aside the great work by not-for-profit and philanthropic organisations, the sector will continue to overwhelmingly rely on government assistance, either in the provision of land, funding, or tax incentives. Furthermore, to minimise ‘capital leakage’ and reduce delivery and operational costs, projects will continue to be best facilitated by capable not-for-profit organisations.

The COVID 19 Opportunity – ‘Never let a good crisis go to waste’

There is now an overwhelming opportunity for governments to provide meaningful stimulus to the commercial construction industry (and therefore economy and state government budgets), and at the same time have a significant impact on the affordable housing crises.

There has been much talk about infrastructure spending and a variety of further stimulus by the federal and state governments. There could not be a better focus than the construction of affordable housing.

Some industry experts are suggesting that announcements of significant support for affordable housing is imminent.  That would definitely provide some light at the end of the tunnel.