Natashia Ackroyd — Is your project "shovel ready"? The property outlook post covid-19.

Natashia is a property partner at Holding Redlich. She has acted for many Australian and off shore funds, institutional investors and developers in their investment activities. She has also acted for state governments on strategic development projects. Her expertise includes real estate fund investments, property development, joint ventures and co-ownership arrangements, commercial leasing, structuring and titling issues and the tax issues associated with real estate projects and investments.

We find ourselves in entirely unprecedented times. The challenges presented by COVID directly affect each individual in Australia and around the world. 

The actual economic impact of COVID-19 is impossible to measure at this point in time. However, all experts agree that the Australian economy will be significantly affected. Unemployment sits at 10% (the highest since the great depression), there is an estimated 10% reduction in GDP over the current quarter. 

The Australian economy will be driven as much by the policy response to the coronavirus as the fallout from the coronavirus itself.

Everyone expects that the property and construction sectors will form the foundation of this response.

In Victoria, the Government has recognised that a “business as usual approach” will not be enough to deal with the dramatic economic consequences of COVID-19.

Last week, the Government announced the establishment of the Building Victoria’s Recovery Taskforce; a dedicated taskforce to guide the state’s building and development industry through the coronavirus crisis.

The Recovery Taskforce has been charged to:

• initially focus on overseeing the fast-tracking of planning approvals using Ministerial powers, where decisions have been delayed due to coronavirus related impacts on the Victorian Planning System.

• provide real-time advice to Government on issues impacting the industry, helping to remove barriers to building and development works vital for supporting Victorian jobs, housing and infrastructure.

• work with industry and unions to review existing major building and development projects, ensuring workers stay safe and healthy while delivering the infrastructure Victoria needs.

• advise Government on a pipeline of building and development projects over the longer term, including initiatives that further expand social housing options.

• advise on financial incentives and current revenue measures – such as land tax, developer contributions, fees and rates – and make recommendations to help businesses survive and fast-track investment.

So, what projects are likely to be “fast-tracked” and receive support?

I anticipate these projects will be classified as “shovel ready”, so projects which:

1. have been to tender but not yet awarded,

2. ready to go to tender (i.e., documents prepared) but have not yet been released; or

3. have not yet received planning approval (i.e., are being held up).

The Government has also expressly stated that projects that include a social housing component are likely to be fast-tracked through the planning process and potentially receive financial support.

Another consideration will be whether a project will assist economic recovery through job creation and the supply chain.

Consider the 4 big building projects that the Minister for Planning approved last week:

• a 101-storey mixed use development which will become Australia’s tallest building

• a 35-level office building at 555 Collins Street

• a 26-storey office tower at 52-60 Collins Street

• a 300-apartment building at 550 Epsom Road, Flemington

These developments are a useful guide for what types of “shovel ready” projects are likely to receive support in the short term due to job creation.

So, what is a “genuine project”? 

It is likely the following criteria will be applied in assessing whether a project will be classified as “shovel ready”:

• genuinely readiness – e.g. has the project secured funding and submitted a planning application etc.

• scale – evidence of economic and/or social value

• proximity – location to existing or future infrastructure and community service

• job creation opportunities

• social outcome – i.e. social benefit

• local procurement

• other considerations include whether it is has received a or submitted an application for a development approval

Whilst this criteria only applies to potential projects experiencing planning delays, it is anticipated this test will apply to all potential projects once evaluated. 

The primary objective of the fast track projects is to get them to market as quickly as possible.  Albeit, the fast tracking of approvals will not help those projects which fall into categories 1 and 2 of ‘ready to shovel’. Presumably, these projects may need some other type of stimulus, but financial assistance is one form of support that industry bodies are likely to be advocating for.

A key takeaway

A genuine project that meets this test will likely be fast tracked and receive support from government where the project has a profile that supports all levels of industry.

So, what could recovery assistance look like?

It is likely that given the large-scale impact of the dramatic economic consequences of COVID-19 there will be financial assistance in the medium and long term.

Where a project meets the key objectives (say, provides a large number of jobs and meets the criteria) then I anticipate financial assistance in the form of contributions may be provided by Government.  This will also depend on the scale of the project including whether the project has a social benefit.

Given the tax relief offered to small businesses and the hard-hit hospitality and retail sectors, it is likely that some type of tax relief may be offered to the property sector. The Recovery Taskforce are likely to provide more information about what financial recovery assistance will look like over the next few months while it collects data about this and then makes recommendations to Government.

Kel Twite — COVID-19, planning and technology. Will it work?

Kel Twite has more than 20 years’ experience in the planning and development industry, having worked across local government and private consulting sectors. He has extensive experience across a range of areas including complex redevelopment sites and development planning issues. Kel is also a respected expert witness and regularly appears before the Victorian Civil and Administrative Appeals Tribunal.

As of 6:30am on 3 April 2020, Australia has 4,862 confirmed cases of COVID-19, with 968 of these cases occurring in Victoria (State Health Departments, Monash University).

Australia’s workforce is embracing alternatives to old business practices; the closure of non-essential services and the Australian Federal Government’s staged restrictions has formed a new working environment.

The planning/development industry is not exempt from the far-reaching impacts of the pandemic. Businesses are rapidly adapting and introducing new procedures, including WFH (working from home) measures, as the use of technology becomes increasingly prudent for day to day operations.

To date, construction and development continues to pulse along, with current projects progressing as scheduled. Construction sites are still operating amidst an ever-changing environment of restrictions and social distancing and the associated reduction in efficiency.

These restrictions are not limited to the private sector - local government statutory planning processes are also trying to adjust to the restrictions and social distancing rules.

An emerging trend across municipal Council’s is the commitment to the use of technology to replace previous face to face meetings.  Another impact is on public notification requirements, with some Councils extending public notice from 14 days to 28 days as well as preferencing letters over signage, collectively extrapolating the decision-making process.

Changes have also occurred in Council’s processes – there has been changes to delegations for decision making and cancellations of internal panel meetings, alongside the use of video conferencing technologies (such as Zoom and Microsoft Teams). These have added to already-complex measures one must navigate to resolve planning outcomes. This trend of altered and extended processes will undoubtedly result in delayed planning decisions.  

We predict, and are hopeful, that the transition to technology will resolve the planning problems which have arisen out of the pandemic.

Similarly, the Victorian and Civil Administrative Tribunal (VCAT) announced the closure of all venues to the public from 18 March 2020. No face-to-face Hearings are scheduled, and all non-critical cases (including Practice Days and Compulsory Conferences under the Planning and Environment List) listed up to and including 15 May 2020 are adjourned.

VCAT systems function on an out-dated system that relies heavily on the use of paper documents and hard copy files. They are in the process of working to expand their services to allow the operation of the business virtually and online. We anticipate these measures to include Orders posing Compulsory Conferences via telephone but the agreeance of decisions being made on paper. VCAT may also request for submissions to be pre-circulated to allow for a greater efficiency of Hearings.

Unfortunately, the combination of existing delays and VCAT’s current case load will likely result in further setbacks and time delays. During this ‘evolution’, actions required by VCAT’s Order’s remain effective and are expected to be complied with (as would be expected under normal circumstances).  

Similarly, Planning Panels Victoria (PPV) is in the process of circumnavigating the COVID-19 environment. Public Hearings have been postponed, as the Panel looks towards video conferencing and directions to be made on paper moving forward.

It is still early days. While Council and VCAT decisions are still being delayed, we remain hopeful that the contemplated shifts are implemented by the authorities quickly to avoid lengthy delays in the planning process which could contribute to further impacts on the economy.

Danny Burger — The spirit of industry cooperation

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 property, development and monitoring services to investors, financiers, property owners and developers.

Australia’s outbreak of COVID-19 is decimating industry and employment from every angle. What the government considers ‘non-essential’ work has ground to a halt and this is already having serious knock-on effects on the ASX and markets.

Despite all the negativity, activity within the building and construction industry is so far relatively unscathed. This is due in part to one surprising factor – the alliance of the CFMEU and Master Builders Victoria (MBV).

A ‘collaborative partnership’ of the two adversaries, as they expressed it in a media release, has approached Daniel Andrews to ensure building and construction sites around the state remain open. 

Forced site shutdowns would significantly exacerbate the already crippling impact on our economy. Combined, the building and construction industry contributes to 45% of tax revenue for Victoria and employs 312,000 people in the state. The AFR reported that site shutdowns could trigger delay disputes to the extent of up to $2 billion a month. Extended delays in construction completion has the potential to create a contractual headache with presale sunset dates. This would most likely require state government intervention.

To the surprise of everyone, the CFMEU and the MBV are collaborating to preserve jobs and capital and avoid an industry blackout. The organisations approached the State Government, with their large tax contribution and employment figures in hand, to guarantee a pipeline of projects is maintained and jobs are kept.

It is commendable that two industry bodies who often clash heads can unite for the good of the industry and the economy. Recognising the necessity of building and construction work and utilising it to harvest optimal economic and social outcomes displays humanitarian qualities of community, compromise and teamwork. Differences aside, this duopoly could become positively powerful for Victoria during the COVID-19 outbreak.

Whilst Stage 3 of Victoria’s shut down is inevitable, as explained by the Premier earlier this week, it is important industries like construction can continue for as long as possible. Work conducted now can provide the economy with some vital stimulus to kick things off once jobs resume.

Unfortunately, it was announced on Thursday that the first known case of COVID-19 on an Australian construction site had occurred at Melbourne University’s Parkville Campus. Hopefully this does not affect the State Government’s decision to allow essential industry to continue working.

Positive news has been scarce in the media this year. Cheers to John Setka and Rebecca Casson, and the united delegation of the other industry bodies, for bringing this case to Daniel Andrews.

Read the full media release here: Collaborative Partnership Pathway for Construction Industry.

Rob Burgess — Melbourne's Housing Challenge: Beyond the Bold Ambition

Rob Burgess is National Director of Research and Strategy at Charter Keck Cramer. With over 20 years of experience in strategic property advisory, development management and urban planning, he has an extremely detailed understanding of real estate markets, cities and development.

Australia’s housing market is undergoing a profound, structural shift, driven by an expanding and ageing population. This is creating new challenges for the supply of housing. This week we hosted a round-table discussion, led by Rob Burgess, about the complexities of apartment supply and demand.

Fuelled by continued overseas and interstate migration, metropolitan Melbourne’s forecast growth is expected to increase by an additional one million people by the end of the decade. According to Charter Keck Cramer’s research, approximately 50,000 additional dwellings per annum are required to accommodate this growth. If this volume of housing is to be provided, metropolitan Melbourne needs to see a significant increase in apartment projects.

In recent years, numerous regulatory changes and subdued market conditions have impacted the ability to deliver much-needed apartment stock. The off-the-plan market has been negatively impacted by:

• more stringent lending practices;

• new APRA rules and directives;

• higher interest rates on investor loans;

• multiple limitations placed on foreign purchasers, such as additional stamp duty;

• restrictions on lending; and

• a cap on the number of foreign buyers within individual projects.

The extent of the decline in Melbourne’s apartment market is highlighted by its construction rates. In 2019, construction commenced on only 12,400 apartments. This represents a decrease of 6,200 from the 18,600 commencements recorded in 2018 and the lowest number since 2013. Equally significant was that there were only 6,300 apartments released to the market last year. This is half the amount recorded in 2018 and the fifth consecutive year in which releases declined. This will result in a substantial reduction in the number of apartment completions in 2021, and an even further decrease in 2022. Against this rapidly diminishing supply, the demand for affordable and well-located housing continues to grow.

As it stands, delivery of the number of dwellings required to satisfy metropolitan Melbourne’s growth is heavily constrained. This is reflected by the fact that between 2009 and 2018, Sydney’s middle suburbs provided some 75,000 new apartments, while Melbourne’s middle suburbs delivered only 18,500 apartments over this time.

Many suburbs in Melbourne make it difficult to deliver apartment projects because they are simply not feasible from a development perspective – apartment prices may not cover high land and constructions costs. The challenges presented by the planning process also act as a significant impediment, despite Plan Melbourne’s bold ambition for previously established areas to provide the vast majority of all new housing.  

Population pressures , evolving demographic trends, changing household needs and ongoing affordability challenges demand that policy makers enable market-based solutions. These solutions must be found if the housing required by all Victorians, both now and into the future, is to be provided.

Shane Leonard — A Breakfast on Managing Quality in Construction

Shane Leonard, Director at Philip Chun & Associates, has been practicing as a Building Surveyor since the 80s. He has an exceptionally broad base of experience; Shane works on a large variety of commercial and residential projects, including the MCG, Etihad Stadium, the Eureka tower and multi-storey residential buildings. He also prepares expert opinions on building code law and has given evidence in the High Court.

On the back of several recent high-profile building issues, there is a great deal of discussion taking place about building compliance and quality.

There are two significant aspects to this topic, namely workmanship and statutory compliance.

Whilst there is clearly some crossover, simply relying upon statutory compliance for quality control will not deliver a high level of finish, aesthetic or performance of matters outside of the regulatory obligations.

Background

The management of quality through statutory compliance, if implemented correctly, should ensure that the works meet the minimum community expectations for the following components of building work:

·         Structural Stability

·         Fire Resistance

·         Access and Egress

·         Services and Equipment (e.g. fire services, lifts, warning system)

·         Health and Amenity

·         Ancillary Provisions (e.g. alpine & bushfire requirements)

·         Special Use Buildings

·         Energy Efficiency

The Statutory Framework

In Victoria, the Statutory head of power is the Building Act (Vic) 1993 (the Act). It sets out, amongst other things, the framework for the building permit and occupancy permit process.

The Act also allows the Governor in Council to make regulations to control the construction, use maintenance and demolition of buildings. These regulations are known as the Building Regulations (Vic) 2018 (the Regulations). The Regulations adopt the National Construction Code - Building Code of Australia (BCA) as the technical basis for the construction of buildings and covers the components of work outlined above.

The Permit Process

In a perfect world, an application for a building permit will include sufficient documentation to satisfy the Relevant Building Surveyor (RBS) that, if the building is built in accordance with the documentation, it will substantially comply with the Act, Regulations, BCA and relevant Australian Standards. The documentation needs to be sufficiently detailed to ensure compliance with the statutory requirements is achieved (e.g. door hardware to satisfy both exit requirements and accessibility provisions).

It is then the responsibility of the builder to carry out the building work in accordance with the building permit documentation and there must not be any substitution of materials without first consulting with the RBS. This is particularly important in relation to construction materials and fire properties.

Monitoring the Works

There is often a perception that it is the building surveyor’s role to monitor the works.  However only limited inspections are carried out by the RBS during construction and occur at mandatory inspection notification periods. These are essentially: -

·         Foundation material;

·         Reinforced concrete members;

·         Framing members;

·         Fire rated walls (in Class 2 & 3 Buildings); and

·         Final inspection.

In a sense the building surveyor’s role of monitoring might be analogous to that of police officers of the construction world. Police do not control every element of vehicle and driver safety.  They are also unable to monitor the speed of each car on the road or that no driver is using their phone. Similarly, building surveyors are not engaged to, and are unable to, check every element of construction.

Poor Construction Outcomes

However, when it comes to quality and defects, building surveyors (as well the builder and most consultants engaged on a project) are held potentially liable.  Construction quality, or lack of, is often revealed once the project is completed. This can trigger a ‘blame game’ for liability, as has recently been seen in recent defect disputes in Australia.

In the case of the Lacrosse building fire in Melbourne’s Docklands, VCAT concluded that a building surveyor holds “a ‘significant’ gatekeeper role” of the project and has a special responsibility to ensure projects comply with the BCA. Furthermore, whilst the builder was held liable for delivering the building with combustible cladding, due to the nature of the contractual arrangements, liability was passed onto the architect, building surveyor and fire engineer. (This decision has been referred to the Court of Appeals).

It is worth noting that as a result of this and similar cases, PI insurance is rising exponentially for most building professionals. In some instances, professionals are not able to obtain insurance at all and some will simply close their business. Ultimately this will lead to increased development costs which will be passed onto the end user. New house prices will increase, and affordability may suffer.

Standards in Australia

The safety of building occupants was most critically highlighted following the Grenfell tragedy in the UK. Whilst the far-reaching combustible cladding issues raise serious concerns, it is important to note that Australia has significantly more advanced fire-proof systems in place, and has had since the mid-1980s. Sprinklers, fire stairways and building techniques to isolate fire in individual apartments are all examples of high quality Australian Standards which reduce the risk of injury or death in building fires. The Lacrosse tower, for example, was without a doubt dangerous. However, 400 occupants were “evacuated safely and without injury”.

Conclusion

Whilst a focus on this paper has been on the safety side of quality, it is important for all parties involved in construction to understand that the statutory compliance process should not be relied upon as a holistic ‘Quality Control Process’.

Compliance with the Act and Regulations will only provide for a minimum standard of amenity, health and life safety provisions.  Compliance does not guarantee a high-quality project.

Furthermore, the issuance of an occupancy permit does not confirm full compliance with the Act and Regulations.

To avoid mediocrity and achieve purchaser/occupier satisfaction, other quality control measures must be employed to ensure excellence in building outcomes.

Bushfire relief and moving forward. Are we all in the game?

Life in Australia has recently been dominated by the bushfires and the devastating outcome on the community, wildlife and property. In this Debuilt Debrief, we review and reflect on the property industry’s response to the bushfires.   

More than 10.7 million hectares of land have burned (an area larger than Portugal) and over 2,800 homes have been destroyed. Whilst these statistics are staggering, it is difficult to quantify the trauma the communities in rural Australia are experiencing.

It’s reported that a combined AUD$500 million has been raised by crowd-funding efforts and donations around the world. Additionally, the Australian government has pledged $2 billion toward the rebuilding of these communities. This represents an outpouring of support from individuals, companies and government in Australia and around the world.

This support through donations of money, clothes and food to charities and the volunteer response has been, and continues to be, about the crisis response, the vital ‘short game’. The ‘long game’ is about the future of our communities, our environment and the built form.

Crisis relief — the short game

The property industry has responded to the crisis through monetary support, emergency accommodation and services to assist the next phase of rebuilding. Industry emergency response is summarised here:

• Several hotel groups were quick off the mark to provide free emergency accommodation and property corporates and individuals alike have been generous with financial support.  The Property Council of Australia identifies several key donators to the relief efforts, including; Stockland, Lendlease and Mirvac, each pledging more than $500,000. 

• The Urban Developer reported on several companies (including Riverlee, Glenvill, Tomorrow Agency, Neue Media, Metric, Lechte Corporation, Beulah International and Salta Property) who have collaborated, organising a luncheon aiming to raise $200,000 for Zoos Victoria and the Victorian Bushfire Appeal. (The Urban Developer: Property Industry United to Raise Funds for Bushfire Recovery, 2020.)

• Of note is the inspiring response of architects who rallied around Atelier Jiri Lev founder, Jiri Lev, to form Architects Assist; a coordination of more than 450 practices across the country offering pro-bono design and planning expertise to those rebuilding their lives after the bushfires. (Australian architects offer pro-bono design services to those impacted by bushfire crisis, Dezeen, 2020)

• The Australian Institute of Architects has also assisted aid efforts by providing regional response teams and master planning groups. It is currently developing programs that address community engagement methodologies to understand and improve trauma. 

• The Real Estate Institute of Australia announced a three-phase plan involving the whole property industry called ‘Beyond the Brick’. Phase 1 provides immediate financial relief to those most in need. Phase 2 will assist rebuilding homes and communities. Phase 3 will help restore communities by providing ongoing support.

Future focus — the long game

An important element of the long game will focus on the ability of our buildings, communities and lifestyles to adapt to a changing climate.                                         

Whilst there is rigorous discussion regarding minimising the human impact on the environment and climate, our ability to become resilient to destructive climatic events, regardless of their cause.  What does this look like? 

There is now significant debate taking place about further preventative measures and the capacity of our buildings to withstand bushfires and whether improved and regionally specific building codes are required to enhance bushfire resistance. It is likely that the mooted Royal Commission will result in additional recommendations regarding further adaptation of the building codes.

David Williams, CEO of the Planning Institute of Australia, has offered the expertise of planners to aid relief of the bushfires. However, in his article on The Fifth Estate, he clearly states that the success of preventative measures relies on the teamwork of many different sectors of Australian industry including mining and agriculture. Williams also singled out the federal government to assist in the long game: 

“Planners want to do their job leading recovery… to help craft a long-term view that assists structural adjustment in the economy, social changes and lifestyle changes associated with adaptation. We expect the Australian government to do its job and make a meaningful response to reducing greenhouse emissions and mitigating the impacts of climate change.” 

The CSIRO, Australia’s leading scientific body, confirms that since the 1950’s, Australia has seen a “long-term increase in extreme fire weather and in the length of the fire season...Human-caused climate change has resulted in more dangerous weather conditions for bushfires in many regions of Australia.”

There is good evidence that key players in the Australian property industry have been leading the way in both the short and the long game. The Property Council and numerous commercial property owners and builders have for years been focused on reducing the carbon emissions produced by buildings throughout their complete life cycle. Additionally, and prior to the bushfires, a group of architects came together under the banner of Architects Declare with a commitment to becoming carbon neutral by the end of 2020. There are now over 830 firms that have signed up to the commitment!

There is certainly justification to support a kinder and lighter touch to our environment. The real unknown is whether the federal government will now move from being a spectator to being a real player committed to the long game.

If you would like to assist with bushfire relief efforts, we recommend looking at the CFA’s website for options.

 Debuilt Property is a member of Architects Assist. We are also working towards a Melbourne-based initiative to assist with long terms solutions for rural communities affected. More updates will come. 

If you are concerned with the validity of any statements made in this article, please contact admin@debuilt.com.au for a referenced version. 

Is the Property Downfall Down and Out?

2019 was a huge year for the property industry. For our last Expert article for the year, we asked 16 industry experts what events characterised 2019 most significantly. Some were positive, and some less so, but all agreed that 2020 holds exciting prospects.

Architecture

Nigel Morris – SJB Architects

“Was 2019 the year that the climate debate finally started to make commercial sense as well as moral sense? Clients are increasingly responding to residential purchasers and commercial tenants who want to know what real sustainable initiatives their homes and offices harness.”

Building Surveying

Shane Leonard – Phillip Chun & Associates

“Construction defects and the cladding issues – state and federal governments are avoiding it and building surveyors and certifiers are the scapegoat for the disputes. The impact on PI insurance also characterizes 2019 – we have seen increases of up to 500% with ridiculous excess fees (i.e. $200,000 for each claim).”

Consultancy

Neil Slonim – theBankDoctor

“2019 saw bank debt for property deals become far more difficult to attain. Fortunately, non-bank lenders are filling the gaps with more responsive and flexible offerings. But they are more expensive. Banks remain committed to offering top quality, lowly-geared transactions. Outside of this, non-bank lenders are becoming the ‘go-to’ lenders.”

Development

Christian Grahame – Grocon

“Build-to-rent is a rising sector which brings a much-needed quality to the supply of apartments. For developers, a lack of supply and an improvement in lending and consumer confidence promises improvement in trading conditions in 2020.”

Finance

Matt O’Halloran - Merricks Capital

“Residential development markets slowed during 2019 on economic uncertainty. The non-bank finance sector evolved beyond residential development as a result, extending into commercial asset development and regeneration projects. Interestingly, senior lending up to $25 million debt was increasingly competitive as more investors moved from mezzanine lending to first-mortgage lending”

Planning

Frustrated Contributor

“2019 was another *&#$ing mental year of poor leadership from the state government, senior government officials and VCAT. Once again, the minutiae, politics of self-interest and indifference prevailed over the big issues confronting one of the world’s most liveable cities and Australia’s premier state. We can only hope that 2020 will bring revolution; the breaking of the crushing yolk of communism and a return of greatness. #MAGA”

Project Management

Tynan John & Josh Whiteley – APP

“The success of 2019 was characterised by emerging thought leaders and world class development in the mixed-use sector, the rise of build-to-rent and retail development which holding strong against the odds. The anxiety over the implementation of the cladding levy added significant costs to already-diligent developers which overshadowed some of the year’s positives. Hopefully 2020 will see a resurgence of the residential sector.”

Property Law

Briget O’Callaghan & Jeffrey Pinch – MD Law

“Stamp duty – SRO continues to be aggressive it its pursuit of duty and will often take matters through to appeal before acknowledging the incorrectness of their position. This is particularly so in dealing with respect to acquisitions by charitable institutions and also in the area of commercial and residential property.”

Quantity Surveying

John Cross & Arif Uzay – Rider Levett Bucknall

“2019 showed increases in building activity across the board. With building approvals and work yet to be done above the decade’s average, activity should continue to be strong in the short term. The value of work done and projects under construction sat at their respective decade highs on June 30, 2019. Hopefully, strong building activity continues in the near future.”

Real Estate

Paul Burns – Fitzroys

“Melbourne’s CBD and city fringe markets continued to experience historically tight vacancies and strong rental growth. The biggest challenge this year was funding – alternative lenders have filled the void created by strict lending criteria and the fallout following the banking royal commission. Hopefully the lending becomes less restrictive as market confidence rises.”

Recruitment

Rohan Christie – Kingfisher Recruitment

“Commercial sectors, like the industrial property market, have been very active as developers and investors attempt to profit off tight yields. Residentially, however, investors are nowhere to be seen. Finally, like good properties, good people remain in high demand.”

Retail

Mark Upton — Coles Property Group

“2019 saw property-related taxes underpin the Victorian State Government’s ‘spendathon’, and local governments readily followed their lead. The year also saw the retail sector rising steadily online and retreating from the traditional bricks and mortar market. Interestingly, this has resulted in massive automated warehouses beings established as second tier retail investments for companies.”

Debuilt

Paul Abrahams & Daniel Burger – Debuilt

“2019 threatened to be the perfect storm for property; already decreasing prices were compounded by structural and cladding issues, the banking royal commission and the threat of further property taxes from a potential Labor federal government. Whilst apartment pre-sales continue to be challenging, the property market in general appears to have recovered. We have an optimistic outlook for 2020.”

Note: Some contributions have been adapted to suit the format of this post.

Neil Slonim — 2020 Looms as a Watershed Year for the Big Banks

This article is an updated version of theBankDoctor’s final newsletter of 2019. Read the original full version here: 2020 looms.

Neil Slonim has spent 30 years holding senior leadership positions in Business Banking, Corporate Banking and Credit within the National Australia Bank group.

After leaving the banking sector in 2008, Neil formed Slonim Consulting Pty Ltd — a banking advisory and advocacy practice which performs the role of “the banker in your corner” for medium-sized corporates.

It certainly has been a challenging year for the banks, probably even more so than most of us anticipated. Following Westpac’s recently revealed breaches of anti-money laundering law, its shareholders voted for a second time against the remuneration report but then overwhelmingly voted against a spill of the entire board.

Notwithstanding the anger with their directors, they seem to have thought agaead and asked themselves some pretty incisive questions like

• Do suitable cleanskin alternatives actually exist?

• Even if they did, who in their right mind would take on such roles?

• Would the bank actually be better off with an entirely new board?

It would be interesting to see how shareholders of ANZ and NAB vote at their AGMs in the coming week. Both of these banks are also staring down a second strike but their shareholders too are unlikely to go to the next step and vote for a spill.

The banks are struggling under a relentless double barrelled onslaught from a baying media constantly seeking to identify and expose the next episode of bank misconduct and politicians who, perhaps to their own surprise, have finally hit upon a profession which is even less trusted than themselves.

WHAT WILL 2020 BRING?

It would be unwise to suggest that it can’t get any worse for the banks. One thing we’ve come to learn is that if one bank has a problem, there’s a fair chance the others will have similar problems. Warren Buffett's cockroach analogy rings true:

Banks will continue to proclaim with some justification that “compliance is killing us” but there will be no let up until such time as they demonstrate they have learned the lessons of the past.

They will continue the process of simplification which implies more divestments. Impetus for this will come from within the banks as well as external influence from markets, government and regulators. Shedding of staff will continue although the reliance on consultants will be unabated.

Investment in technology will increase and we are likely to see more partnering with innovators who leverage technology to improve customer outcomes and compliance. Offshoots like NAB Labs and Westpac’s Reinventure will play an increasingly significant role in strategy and development.

The banks will remain the whipping boy for the politicians on all sides because there are votes in it. Scott Morrison wants to be seen as hard on both rogue banks and rogue unions and recently warned bankers that “crooked bankers will face tougher sanctions than union thugs”.

At a more meaningful policy level there needs to be further discussion about the dismantling of the four pillars policy, not to allow mergers amongst the banks but rather to encourage a change in direction of one or more of them.

The removal of the government guarantee on deposits held with ADI’s is something which should be considered along with a clear commitment to the principle that the banks are not “too big to fail”.

It has taken some years, but finally it seems that politicians and bureaucrats have come to the realisation that the best way to increase competition is not by trying to get the banks to change but by making it easier for new competitors to take them on. There is now more happening on this front but even more can be done.

The banks shouldn’t be written off just yet, they still have much going for them including a massive customer base and big and reasonably strong balance sheets. But time is no longer on their side as incumbency and inertia are finite advantages. One way or another, 2020 could herald the beginning of the dismantling of this long standing homogeneous oligopoly.

Neil Slonim

theBankDoctor

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Danny Burger — Navigating the Development Finance Maze

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 property, development and monitoring services to investors, financiers, property owners and developers.

This week a small group of property professionals caught up for our monthly breakfast discussion. The core group includes senior executives from Charter Keck Cramer, Merricks Capital, SJB Architects, SJB Planning, Debuilt Property and half a dozen guests. Most of us have a working relationship, so the discussion is always open and informative.

Matt O’Halloran is head of Merricks Capital property lending business. Along with Neil Slonim (ex NAB) and several developers sitting around the table, it did not take long for the discussion to veer towards bank versus non-bank lending in the property and construction sector.

As most in the property industry are acutely aware, traditional bank finance has reduced to a trickle to all but the most significant corporate customers. The banks want to lend, but with APRA’s tightening regulatory requirements, the banking royal commission and the property market slowdown, it has become difficult for bank managers to obtain approval for even their most valued clients.

This has left developers frequently unable to meet the banks’ covenant requirements and pre-sale or commercial pre-commitment hurdles.  

These constraints have assisted rapid growth in the non-bank lending sector.  Interestingly, Matt O’Halloran noted whilst it is estimated that non-bank lending is now approaching 15-20% of the commercial property sector, in North America and Europe it is estimated at around 35-40%.

The pricing might be higher, but the availability of nonbank lending means that developers are able to move forward with certainty to achieve sales hurdles and complete building contracts. It’s a lot easier to close an apartment sale or lock down a competitive build contract if the other party knows that the project is proceeding. And let’s not forget protecting town planning permits with looming expiry dates. In addition, non-bank lenders are typically more nimble and able to transact with speed and responsiveness, which is critical to the execution of the project.

The other factor for developers, who work on maximizing leverage of equity, is that a higher finance cost but with a lower equity requirement can still result in a pretty healthy equity IRR.

An example, reported in this week’s AFR, is a loan by Merricks Capital to Goldfields for its $300million commercial office building in South Yarra. The project has no pre-lease commitments – which is not unusual for suburban office projects. In these circumstances project finance would be impossible to obtain through the traditional banking sector. Matt O’Halloran explained that the combination of security structuring, the calibre of the parties and the high quality of the project supported the finance package.

The group also discussed mezzanine finance and the suggestion that some banks are once again open to a capital structure that includes a subordinated second mortgage sitting between equity and the bank as senior lender. Apparently, banks who are eager to participate are being pro-active at forging a marriage of capital. 

But a developer has to take into account dealing with two financiers, two sets of loan documents, negotiating a challenging inter-creditor deed, a more complex builder’s side deed and a blended interest rate. This means dealing with a non-bank lender may be a lot easier and no more expensive. Managing multiple parties adds complexity, consumes valuable time and heightens the uncertainty of the end result.

Overall, it was apparent that a combination of bank and non-bank lending is a great thing and has in fact been critical to maintaining forward momentum in property construction.

It is worth noting that there was a view around the table that a shake up in the banking sector was needed, but there is also over enthusiasm in criticising all things banking. The consensus was that we have enjoyed, and need to continue to enjoy, a strong and stable banking sector.

Whilst navigating the development funding labyrinth is challenging, there are now multiple options available. This is a good thing for the industry.

A final take-away was that, whilst finance may be viewed as a commodity, the relationship between borrower and lender is as important as it ever was.

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