5 things property investors are looking for in the COVID-19 market — Savills' Jesse Radisich

Jesse Radisich, Director at Savills, is one of the most respected and active commercial agents within the Melbourne market, with an enviable track record of development site, commercial and retail property sales.  With a reputation as a trustworthy adviser, Jesse has built a strong following of loyal clients and repeat business.  Having transacted in excess of $2billion worth of Melbourne property throughout his career, Jesse has outstanding experience and ties throughout the Melbourne property market.

There is no doubt that the property market is experiencing unprecedented and tremendously challenging conditions. So what are investors looking for in the current market?

1 Tenant Use & Offering

The current lockdown period that Melbourne is enduring has resulted in something never before seen - deserted city streets, empty office buildings and once thriving suburban retail strips so quiet you could stroll down the middle of the street. The term ‘essential service’ has become part of our vernacular. Those services that have been allowed to continue to trade at essentially full strength include supermarkets, liquor stores, pharmacies and medical centres, and to a lesser extent food and beverage operators and childcare centres.

If you are one of the lucky commercial property owners to own a property with a tenant deemed an ‘essential service’ or with a particularly strong and ‘defensive’ tenant such as a Government occupant, then you would expect to see a heightened level of demand and competition for your asset in the current market, all else being equal.

Some key recent Savills sold examples include:

• a strata suburban pharmacy that attracted over 180 interested parties, 15 individual offers and ultimately sold for an exceptionally strong price

• an off-the-plan strata office asset with a pre-lease to a Government tenant sold off-market within 3 days for close to $10m

2 Tenant Financial Strength

Notwithstanding the Government intervention in the commercial property space and the mandating of compulsory rent relief to be provided by landlords to tenants, many businesses have seen their trade completely dry up and therefore revenue grind to a halt.  Some businesses have been able to pivot and push more of their trade online, however many businesses that rely on a physical service offering such as hairdressers and beauty salons simply have no mechanism for generating revenue without foot traffic and physical customers. Investors need to see certainty of income both now and beyond the impacts of the COVID-19 pandemic and will be more diligent than ever in assessing a tenant’s financial position and viability.

The biggest question on the mind of every investor right now is “How much rent is physically being paid and collected?”

3 Tenant & Lease Profile

In addition to the financial strength of a particular tenant, investors more than ever are gravitating towards defensive natured investments that provide a tenant that is a Government body, a major national or international brand, or part of a listed group or a listed company. Lease terms are always all important, but investors in the current market particularly want to ensure that the lease tenure will extend well beyond the likely impacts of this pandemic, and they need confidence that the tenant will be able to continue to trade their way through this period and come out the other side in decent shape.

4 Location

Location always underpins an investment decision and the quality of any investment asset.  However, more than ever we are seeing investors move out of their preferred investment locations or suburbs in the pursuit of greater tenant strength and investment certainty.  This is likely to see outer metropolitan and regional assets be in higher demand if they provide a highly secure and stable tenant.

There remains only one CBD, and the city along with blue-chip inner city suburbs will undoubtedly return to their former glory and continue to experience the strongest investor demand in the long-term.  

5 Return

Naturally, investors are going to be seeking an appropriate return to compensate them for their allocation of capital and inherent investment risk. In the current market, investors are showing that they are willing to accept a lower return than they typically would have for a particular asset class, if they feel confident the investment satisfies the above points. Conversely, currently experiencing weaker demand are investment opportunities with non ‘essential services’ tenants, or tenants with a weaker profile. An investor considering such an asset will seek a higher return than normal to compensate them for this elevated risk level moving forward.

There is no doubt that the property market is experiencing unprecedented and tremendously challenging conditions. The hope is that as soon as people are able to move around more freely, retail trade will slowly ramp back up and the financial pressure on businesses will slowly lift. In the meantime and throughout 2020 thus far, investors have and will quickly hone their investment strategy to ensure the success of their investment decisions.

Strata property a focus for SMSF investors and retirees — Chris Kombi

Chris Kombi is a director at Fitzroys. He has over 25 years’ experience in the real estate industry, and specialises in the sale of commercial property within Melbourne’s inner and outer suburbs, across a range of asset classes including retail, office, industrial and development sites. Chris represents a variety of property participants from private local investors and developers to high net worth families, government bodies and major corporations and institutions.

Freehold commercial property versus strata commercial property. For self-managed super fund investors and retirees, the answer is becoming clearer. 

Over the past two years, the popularity of strata property has surged. This demand has been led by passive investors such as retirees wanting to buy a property that will immediately improve their income, or SMSF investors in their 50s preparing for their retirement. Looking to maximise their rental returns, they have recognised that strata properties typically offer higher yields, as well as a number of tax benefits.

These yield-chasing buyers, concerned with heightened land tax obligations, have weighed up the merits of owning low-yielding freehold property over the slow burn of capital growth where the underlying land value of that freehold asset will continue to appreciate.

Looking purely at net yields and putting the potential of capital growth to one side, the average 5.5% net return from a commercial strata-titled investment is compelling when compared to an average net return of 3.5% from a freehold property and 1% return from bank interest.

For retirees and SMSF investors, the equation of immediate income and improved lifestyle is a simple calculation. For instance, in dollar terms, a $1 million dollar investment will return an annual income of $55,000 from a strata retail property, $35,000 from a retail freehold and $10,000 from equivalent funds in a savings account.

A further attraction of strata property for older buyers is that they are generally newer properties in need of little capex and are easier to manage with an owners corporation overseeing maintenance - creating an ideal set-and-forget investment. The fact that the land value is washed through the entire development also presents a very low land tax liability that does not cut into the rental return.

Strata-titled assets offered to the market have come at a range of price points. Fitzroys has sold assets from $500,000 to over $5 million over the past 12 months - offering buyers broad accessibility to this sector of the market.

Case Study: Aurora Village, Epping

By way of example of the strength of the strata market, post-July, during the COVID period, Fitzroys has sold nine strata-titled retail properties within the Lendlease master planned Aurora Village in Epping, within Melbourne’s northern growth corridor, for a combined $8 million. Six of the sales occurred without inspections during Melbourne’s Stage 4 restrictions.

Not surprisingly, seven of the nine properties were sold to SMSF investors or retirees.

Each has a long, secure lease in place with fixed annual rental increases. They sold to separate investors at an average yield of 5.4%, with minimum five-year leases plus options, and rents ranging from $33,000 to $58,000 per annum.

Nearly all of the properties sold were leased to tenants that had continued to operate throughout the COVID period, again underscoring the security and defensive nature of these assets. Tenants included Bottlemart, a pizza restaurant, Mediterranean eatery, butcher, bakehouse, grocery, and laundromat, while a hair salon also sold.

We received more than 220 enquires for these shops from buyers all across Australia and abroad. One shop sold to an investor from Hong Kong.

As well as the typical benefits offered by strata-titled property, these are recently-constructed properties that also offered strong tax depreciation benefits.

Naturally good strata assets require strong fundamentals. In the case of Aurora Village the properties were well-located within an area that offered future growth prospects - expected to be home to 25,000 residents and forming a core part of Melbourne’s northern suburbs growth story. Furthermore, the Aurora Village town centre is anchored by Coles and Aldi supermarkets and other key medical, health and lifestyle tenants.

We have also recently sold strata-titled retail properties in Melbourne’s south-east suburban growth corridor, and in inner-north locations such as Carlton and Northcote that are benefiting from medium and high-density development. Those fundamentals won’t change.

Sub-leasing activity is on the rise – what does this mean for office accomodation?

Paul is a co-founder and director of Debuilt Property. Paul has extensive experience in construction, project management, development management and asset management.

There is a great deal of speculation taking place about the immediate, and long term, future of the office sector. Key issues influencing the discussion include:

• The immediate economic impact on business

• The longevity of physical distancing precautions, and

• The opportunity created by the fast tracking of the use of technology.

Monitoring sub-lease vacancy rates provides an excellent barometer of the office sector, as it responds more dynamically to the state of the market and business demands. Companies with changing requirements, but locked into a lease, can react in almost real time. At the same time, it provides accommodation solutions for companies that are not keen to lock-in to a longer-term lease and who are seeking greater flexibility.

Figures from Colliers International identified that during the two-month period of July and August, Sydney sub-lease availability increased by 21%, from 131,214 sm to 159,015 sm. Melbourne increased by 56% from 63,349 sm to 99,080 sm. However, Brisbane was reasonably stable with an increase of only 3%, from 30,537sm to 31,281 sm.

The analysis indicates that in both Sydney and Melbourne over half the new sub-lease space added in these two months was a result of COVID-19 market conditions. This is obviously not surprising and indicates the direct impact on businesses due to immediate economic impact.

As is the case during any downward cycle, the office market will need to recalibrate over the next few years due to the COVID-19 related reduction in demand and new supply coming on-line, but with a slow-down in new commencements. With an ever-increasing focus on quality accommodation to provide the best environment for the workforce, premium product will always be in demand.

Assuming the shorter term (we hope) economic impact of the COVID-19 led recession, the broader question is whether our workplace practices are likely to permanently change due to our rapid exposure and adoption of technology. The majority of Australians are now proficient in video conferencing and document sharing; printing reams of documents has been replaced by using multiple screens, and most of us have managed to achieve a reasonable broadband connection. So, the opportunity to work from anywhere is now a reality.

There is no doubt that corporate travel will be impacted by the ease of video conferencing, as will travelling to local meetings. Seminars, courses and professional development will be delivered cheaper and more conveniently through webinars. Live attendance gatherings will not disappear completely, as networking, relationship building and ‘corridor discussions’ cannot be replaced by a Zoom meeting. However, longer term, there will be an impact on commercial meeting rooms and conferencing space.

In terms of office accommodation, there are numerous surveys and abundant commentary on worker sentiment towards working from home. By all accounts very few people want to only work from home or only work from the office. Interestingly, whilst many of us in Melbourne, having been in lockdown for quite some time, feel a very strong urge to return to the office, there is still a very low proportion of workers that have returned to the office in Western Australia, South Australia and Queensland. Perhaps the freedom of movement that they have maintained in daily activities lessens the desire to return to the office. What seems to be the dominant view, however, is that everyone feels liberated by the flexibility that now seems to be on offer.

Whilst there appears to be a positive view on productivity and employee sentiment, the whole exercise is still a bit of an experiment, with the novelty potentially starting to wear off.

Process driven work lends itself to remote working, but if you were white boarding a business strategy and wanted to maximise team building, workplace socialisation, networking, mentoring, professional growth and a sense of belonging, the first choice would be personal contact (maybe with a touch of physical distancing thrown in).  Great innovation, creativity and strategic outcomes are always better achieved through bringing people together to collaborate in person.

Another factor, not necessarily too heavily promoted, is that whilst 2020 has provided an opportunity for people to prove that productivity does not disappear if you are not in sight, there is still a preference from many managers to be closely connected with their workforce. We are likely to see a more obvious drive by CEO’s to encourage their workforce back to a COVID safe workplace.

For most businesses that operate in an office environment, people are the most valuable and costly resource.  Office accommodation might constitute say 6-8% of business cost and whilst any saving might go straight to the bottom line, a major saving in accommodation might have a relatively minor overall impact compared to the impact on the culture of the business.

Businesses not looking to transition to an increased outsourcing model will continue to seek to create the best accommodation environment in order to attract and retain the best people.

It is highly likely that we will see an evolution, rather than a revolution, in office accommodation. But providing quality accommodation (with an increased area per person) will remain important, with the big shift being in workplace flexibility.

Daniel Burger – The time for solving Australia's affordable housing crisis could be now.

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.

Twilight of the sunset clauses: rescission for COVID-19 delays under the new rules

Over the last 35 years Lou has advised various large property development companies, government bodies and overseas investors in relation to all facets of property law. Lou’s practice has a significant focus on all aspects of ‘off the plan’ sales and the preparation of related contracts. Throughout his career Lou has been involved in and advised on over 100 major high rise apartment and off the plan projects.

Michael Gu is a law graduate from the University of Melbourne and has been working in the industry since 2018.

COVID-19 has dealt a heavy blow to the construction industry. Vendors of off-the-plan developments face extensive delays in construction, financing, and council approval.

Off-the-plan contracts usually contain ‘sunset clauses’ allowing a contract to be rescinded[1] by either the purchaser or the vendor if a plan of subdivision is not registered by a specified ‘sunset date’.

However, on 1 March this year, amendments to the Sale of Land Act 1962 (Vic) (Act) entered into force targeting the practice of vendors deliberately delaying registration of the plan for sub-division of a property, rescinding the contract under a sunset clause, and re-marketing the property during an upswing.[2]

In this article we explore whether vendors can:

• rely on sunset clauses to rescind their contracts in light of COVID-19.

• extend sunset dates due to delays in construction caused by COVID-19 related shutdowns.

Rescission by the vendor—the position before the amendments

Before the amendments, a vendor’s right to rescind under a sunset clause was determined as a matter of contractual interpretation.[3]

However, a vendor could not generally rescind if the delay in registration was the result of the vendor’s own ineffective or inefficient efforts to comply with the contract.[4] A vendor could not rely on a sunset clause if the vendor’s conduct has deprived the purchaser of the benefit of timely registration.[5]

Rescission by the vendor—the position after the amendments

Under the new rules, vendors can only exercise rights under a sunset clause in two ways:[6]

• With consent of the purchasers; or

• With leave of the Supreme Court where the Court is satisfied that rescission is ‘just and equitable in all the circumstances’.

How will the Supreme Court apply the amendments in light of the pandemic?

The Victorian Supreme Court has not considered these provisions. However, as the Victorian legislation is based on the regime in Division 10 of the Conveyancing Act 1919 (NSW), New South Wales decisions offer guidance.[7]

Vendors and developers might think that COVID-19 is an obvious reason justifying rescission under a sunset clause. The impact of COVID-19 on the construction industry is notorious and is evidently beyond the control of both parties. However, under the new rules, the Court now has a broad discretionary power to regulate rescission.[8]

To determine whether rescission is ‘just and equitable in all the circumstances’, the Court will start by considering the list of interlinked mandatory factors under s 10E(3) of the Act, summarised below.

• First, the terms of the residential off-the-plan contract.[9] Where a contract requires vendors to make ‘best endeavours’ to achieve registration, the Court applies a rigorous standard to assess a vendor’s conduct.[10] Where the contract does not expressly require ‘best endeavours’, the Court will imply this term into the contract.[11]

• Second, whether the vendor has acted unreasonably or in bad faith.[12] This includes whether notices of rescission provide full and frank disclosure of the reason for the delay. Misleading statements by the purchaser weigh heavily against granting rescission.[13] Similarly, the Court will consider whether the vendor was aware of, or could have accounted for, the prospect of the delay at the settlement date.[14]

• Third, the reason for the delay in registration.[15] Vendors and developers bear the burden of showing that the pandemic has caused, for instance, delays in obtaining construction finance, delays due to contractors being unable to access sites due to social distancing restrictions, or administrative delays in council approval.

• Fourth, whether the lot has increased in value.[16]

• Last, the effect of the rescission on each individual purchaser. The Court will consider purchasers’ financial loss, whether it is more difficult for purchasers to acquire a comparable property,[17] as well as the ‘disappointment’ associated with the loss of bargain itself, especially if purchasers are first home buyers, or if purchasers have waited a long time for the property to be built.[18]

These factors are not exhaustive, and no single factor weighs more heavily than the others.[19] Nonetheless, the cases show that the Court will take a restrictive approach that favours preserving the contract. In fact, as the Court is not limited to an order allowing rescission, and may make ‘any other order’,[20] the Court may grant rescission on terms—for instance, subject to an undertaking to register the plan, and offer the purchasers new contracts of sale under a higher price.[21]

It is clear that, under the new rules, vendors no longer have a ‘right’ to rescind under a sunset clause. Only the Court can give vendors that right—in fact, attempting to rescind without the Court’s approval is taken to be a repudiatory breach by the vendor.[22]

Rescission by the purchaser

In stark contrast, a purchaser’s right to rescind is unaffected by the amendments. Purchasers can still rescind an off-the-plan residential contract after the sunset date.[23]

In light of COVID-19, some vendors might seek to include a special condition allowing the vendor to extend the sunset date. The Victorian Court of Appeal has held that such extensions are invalid under the Act. A sunset date must be fixed and identifiable at the time the contract is concluded, regardless of whether the delay is the result of an intervening event beyond the control of the parties.[24]

Can COVID-19 be used to allow the vendor to extend a sunset date?

The Victorian Courts have not, as yet, had to deal with questions of extensions to contract sunset dates solely for COVID-19 reasons. There is really no precedent to give any real guidance.

However, the Courts have to date made it very clear that the contract must specify a sunset date that is clear and certain, and the contract must not allow for any ability to extend the date. Further the Courts have found that even where a ‘material change’ to the plan is a positive change for the purchaser, the fact remains it is a material change that still entitles the purchaser to avoid the contract. The legislation has been interpreted as needing to be applied to protect the consumer first and foremost. 

As a consequence of the foregoing, if the only reason for a vendor to request an extension of the sunset date is solely for COVID-19 reasons which can be proved, it is still unlikely a Court will agree to extend the date, particularly if there is any negative impact on the purchaser by allowing such an extension. COVID-19 reasons are likely to be treated in same way as any other reason out of the vendor’s control.

The impact of COVID related delays is a problem for vendors

Vendors and developers should be very cautious when purporting to rescind under a sunset clause, and need to be ready to justify their actions with fulsome evidence before the Supreme Court.

The new rules have swung the contractual pendulum in the purchaser’s favour. Purchasers can still rescind an off-the-plan contract pursuant to a sunset clause where COVID-related delays have blown out a development timeframe. However, based on recent decisions, the Court is unlikely to treat COVID-19 as an ipso facto reason for a vendor to rescind a contract.

[1] For clarity, this note uses ‘rescission’ in a general sense to refer to the rights under a sunset clause. This sense of ‘rescission’ is also used in the Sale of Land Act 1962 (Vic).

[2] See further: https://www.holdingredlich.com/a-setting-sun-the-use-of-sunset-clauses

[3] Westralian Farmers Ltd v Commonwealth Agricultural Services Engineers Ltd (in liq) (1936) 54 CLR 361, 370-80.

[4] Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 440-1; Hardy v Wardy [2001] NSWSC 1141; Plumor Pty Ltd v Handley (1996) 41 NSWLR 30, 34.

[5] Joseph Street Pty Ltd v Tan (2012) 38 VR 241, 257. See also the authorities cited in Mordue v Kroone [2009] NSWSC 255 (20 February 2009) [16].

[6] Sale of Land Act 1962 (Vic) s 10B.

[7] Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3; applied in Bradstreet v Merrin Developments Pty Ltd [2017] NSWSC 1559.

[8] Ibid [188]

[9] DGF Property Holdings Pty Ltd v Di Federico [2018] NSWSC 344 (23 March 2018) [200], [276].

[10] Joseph Street Pty Ltd v Tan (2012) 38 VR 241, 256-7; citing IBM United Kingdom Ltd v Rockware Glass Ltd [1970] FSR 335, 343 (Buckley LJ); Hawkins v Pender Bros Pty Ltd [1990] 1 Qd R 135, 150-1.

[11] Joseph Street Pty Ltd v Tan (2012) 38 VR 241; Etna v Arif [1999] 2 VR 353, 373.

[12] See, eg, Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3 (12 January 2016) [24].

[13] Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [151], [158], [163].

[14] Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3 (12 January 2016) [27].

[15] DGF Property Holdings Pty Ltd v Di Federico [2018] NSWSC 344 (23 March 2018) [280]; Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [195].

[16] See, eg, Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3 (12 January 2016) [25].

[17] Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [192]

[18] Ibid, [171]-[173], [191].

[19] Sale of Land Act 1962 (Vic) s 10E(3)(g); Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [190]

[20] Ibid, s 10E(4).

[21] DGF Property Holdings Pty Ltd v Di Federico [2018] NSWSC 344 (23 March 2018) [391].

[22] Sale of Land Act 1962 (Vic) s 10D; Klein v McMahon [2017] NSWSC 1531 (13 November 2017) [41]; Scott v Ennis-Oakes [2019] NSWSC 1257 (23 September 2019).

[23] Sale of Land Act 1962 (Vic) s 9AE(2).

[24] Harofam Pty Ltd v Scherman (2013) 42 VR 372; Solid Investments Australia Pty Ltd v Clifford (2010) 27 VR 41.

State of the construction industry in the face of the pandemic, and claims for relief under contracts.

Stephen Natoli is a partner at Holding Redlich in the Construction & Infrastructure Group and has over 15 years' experience in the legal industry.

Constantine Mimigiannis is a senior Construction and Infrastructure lawyer at Holding Redlich.

The construction industry in Australia is in a state of flux given the impact of the pandemic and changes in structural factors affecting residential and commercial construction, which were materialising even prior to the pandemic.

Whilst there are some signs of recovery of the construction industry across Australia, it remains to be seen how the pandemic will permanently affect the macroeconomy.  A significant disparity in the national economy can be seen in Victoria (and most notably metropolitan Melbourne), which from 5 August 2020 has been operating at reduced capacity of approximately 25% of the usual workforce for large scale construction.  This will continue until at least around mid-September, when the ‘stage 4’ lockdowns are due to end.  Those sites that continue to operate in Victoria face additional costs and logistical inefficiencies of managing heightened safety risks and additional administrative burdens imposed by public heath directions.

Economic and legal stimuli to assist in the recovery of the construction industry are however on the horizon, including a multi-billion dollar scheme contemplated at the federal level in respect of residential construction, on top of the existing ‘homebuilder’ stimulus, temporary insolvency relief for financially distressed companies, changes to asset write-off provisions and other measures.  It remains to be seen whether these and other state-based stimuli will be sufficient to avoid a significant structural contraction.

The recovery of the construction industry is also affected by the allocation of risk under construction contracts, most of which were drafted without a pandemic in mind.  As between principals and contractors, the party that bears the risk of pandemic-related events depends on specific contractual drafting.  Where contracts provide relief to contractors for changes in law, costs and time associated with mandated shutdowns of the economy are likely to be claimable from upstream parties.  Claims in relation to reduced efficiency attributable to workplace safety standards required by existing law (but in the face of new risks), supply chain interruptions, administrative cost overruns and the cost of other day to day difficulties associated with the pandemic are less likely to be claimable by contractors under construction contracts. 

This remains relevant currently and in the near future where principals and contractors alike face costs caused by factors other than mandated shutdowns to the economy.  Construction contracts prepared of late tend to include more specific drafting to capture this more nebulous category of costs.  Principals and contractors should take the opportunity to astutely review existing and new transactions to ensure an optimal allocation of risk suitable to current and emerging conditions.

For those parties engaged in government contracts, the Victorian Government has suggested that it will adopt a flexible approach to contractual interpretation based on individual project characteristics.  It remains to be seen whether this approach will be taken.

What is clear, however, is that the construction industry is highly significant to the national economy and state and federal governments have an interest in securing a strong recovery.

John Crane — The recession we have to have

John Crane is a property developer, investor and consultant with 30 years in the industry. Since starting his own business in 1996 he has been involved in a broad variety of complex property transactions.

As Treasurer in 1990, Paul Keating famously described the 1990’s recession as “the recession we had to have”.

I had just commenced my real estate career in 1990, straight out of high school and after having worked for a real estate agent every summer for the previous three years. Those three years of work experience were in stark contrast to what greeted me in 1990.

Leading up to the recession, property prices were booming, money was easy to borrow and the stock market was going from strength to strength. Sound familiar? The recession of 1990 was international. Caused primarily by the excesses of the 1980’s, the employment of high interest rates by central banks to slow the asset price boom of 1988-89, the loss of consumer and business confidence as a result of the oil price shock and a slump in commercial construction resulting from overbuilding.

What I remember most vividly was my parents business being wound up by the bank and the subsequent sale of our newly constructed home for less than replacement value.  Property prices dropped by as much as 20% and unemployment rates rose from 5.6% to 11%.

It will come as no shock that a number of the elements leading up to the recession of 1990 have been experienced in the past 10 years. But instead of the oil price shock, we have been hit with a pandemic. A one in a 100-year event which will undoubtedly, if not already, impact consumer and business confidence. 

Some might say that the difference which will save us is from a long-lasting recession is that liquidity exists in the markets. But it will come at a cost - in the form of higher interest rates and lower gearing levels. Then it will start to dry up as lenders take a wait and see approach. Whilst in previous years the banks have been the main source of funds, the advent of non-bank and second-tier lenders has provided businesses other options. However these can come at a cost, both in terms of pricing and the potential for policy changes at short notice.

The major banks have been preparing for the recession. Their criteria has been tightening for nearly 3 years now, even before the pandemic. The biggest concern they now have is impaired loans. Two of the major banks have recently provisioned over a billion dollars combined with the other two majors to follow shortly. Amongst the industry there is a widespread view that these provisions will need to increase as the crisis grinds on. 

Second-tier lenders (last into the market) will be the first to push for repayment. The major banks will follow.

Unfortunately, the recession is upon us with the latest GDP figures revealing that in the first three months of this year Australia’s economy shrank for the first time in nine years. It is safe to say that the following three months will reveal a similar situation as the impact of the pandemic started to be felt in the months of April-June 2020.

This is a recession we have to have but importantly as quickly as possible. It won’t have the same impact of the Asian financial crisis of 1997 or the GFC of 2008, but is likely to see a solid period of negative growth and high unemployment (north of 10%). Property prices need to correct, big business needs to contract and shed some weight and the stock market has to reflect that consumers have lost confidence and businesses have been impacted.

It is worth noting that for as long as the State and Federal government continues to prop up the economy it will be difficult to form a clear view on the length of this recession. At some point, there will be a cliff where the support, deferrals and assistance fall away and we will then understand the full extent of the situation.

In adversity there is opportunity. Such a cliché but appropriate.

The recession will bring with it opportunity. Some of the most successful property people laid their foundations in the period 1990 to 2000. The market dynamics will be different but the fundamentals the same. 

Firstly, markets need to reset and as we know property takes a considerable amount of time longer than other markets to do so. Once it does though there will be good buying opportunities, and for a reasonable amount of time. Liquidity will be an issue, but for patient capital who have been prepared to bide their time there will be opportunity.

What must be remembered about property is that it is segmented and some sectors will fare worse than others. My views broadly on the Melbourne markets going forward are as follows;

Domestic Residential Housing - People under pressure will hang on for a long as they can, buyers will sit on their hands. Once a proper correction occurs it will take some time to recover as unemployment and strict banking guidelines will curb its return.

Residential Land Subdivision - Traditionally this market has been the domain of the first home buyer who unfortunately will find it difficult to borrow and will be forced to rent. First home buyers will be concerned with job security.

Apartments - This market was struggling prior to the pandemic with Government curbing overseas purchaser’s ability to purchase and removing stamp duty savings. I can’t see this market recovering until the Domestic Housing Market does.

Build to Rent (Apartments) - Has replaced the residential apartments market where large institutional investors have seen the potential to deliver product suitable for people who can’t or don’t want to purchase.

Commercial Office - Unlike the late 1980’s there has not been a significant amount of speculative construction, yields will remain low for low risk blue chip investments (domain of the large funds) but anything with risk will be priced accordingly.

Health Care - In the appropriate locations close to existing infrastructure and hospitals this market has potential to remain relatively unaffected.

Aged Care - Is a specialised market. The industry is in for a major shake-up as a result of what the pandemic has exposed as poor standards of care. The better operators will benefit from this shakeup and are likely to be relatively unaffected.

Industrial - Similar to commercial office yields will remain low for low risk blue chip investments particularly anything to do with logistics being relatively unaffected as online store sales take over.

Retail - One of the hardest hit, however a market that needed a correction in rents to provide a sustainable environment for businesses. As we emerge from the pandemic and owners start resetting their expectations this could be a market to bounce back first.

Student Accommodation- Impacted by travel restrictions as it is heavily reliant upon overseas students. Will receive State and Federal Government support to encourage students to Australia once restrictions relax. Similar to Aged Care this is a specialised market.

Hotel- Whilst impacted significantly it will benefit from overseas travel restrictions as people holiday locally. Notoriously difficult to fund and also a specialised market.

Obviously, these views on the markets are high level and general to the markets. There will be anomalies with the sectors as they in themselves have numerous segments. 

What we must remember is that there have been recessions before. We will get through it as we will this pandemic. We will be stronger and wiser as a result.

Architecture and design in a post-pandemic world

Professor Alan Pert and Dr Stephanie Liddicoat both work in the School of Design at the University of Melbourne. This article was first published on the University of Melbourne’s research news site Pursuit.

The pandemic has reinforced that design and physical space plays a role in enabling disease to spread. But the built environment can also support infection control, as the past has shown

The COVID-19 pandemic has changed our lives in myriad dramatic and unprecedented ways.

We are currently learning how to navigate the world around us, keep ourselves and our loved ones safe, and carry out our day to day lives in ways that look very different from a few short months ago.

The pandemic has reinforced that design and physical space plays a role in enabling disease to spread.

To protect public health, furniture has been rearranged, screens erected and signs of visual instructions remind us what we can and cannot do. Picture: Getty Images

COVID-19 AND OUR BUILT ENVIRONMENTS

Fuelled by a fear of disease and the need to protect public health not seen for some years, people scrambled to bolt on new protective devices to our environments. Sneeze guards, barriers and hazard tape all now serve to choreograph our movements.

Furniture has been rearranged, screens erected and signs of visual instructions remind us what we can and cannot do.

Until we find a vaccine or cure for emerging diseases like COVID-19 we will have to look to the physical and behavioural aspects of our lives to manage the potential for epidemic spread – social distancing, quarantine, isolation, and, perhaps, adaptations to our cities, neighbourhoods, and homes as well as what we wear.

Visitors to Brunelleschi’s 295ft high Duomo in Florence now don wearable devices, which signal with a sound, vibration and light when the minimum allowed distance between people is being exceeded.

Interventions like these mean we need to consider space in our current concern with infection control. This leads us to think about – by looking back and looking forward – how can the built environment respond?

Visitors to Brunelleschi’s 295ft high Duomo in Florence now don wearable devices, which signal when the minimum allowed distance between people is being exceeded. Picture: Getty Images

SANATORIUMS, SINKS AND SCIENCE

Some of the most significant architectural experiments throughout history have come from a focus on physical space and its role in treating, curing and preventing sickness long before vaccines were available.

Hygiene was a principle that ran through the entire design process of architect Alvar Aalto’s tuberculosis sanatorium in Finland, built in 1929.

Finland had suffered the greatest loss of life to tuberculosis across the European countries and the design by Alvar and Aino Aalto is widely regarded as the first example of modern architecture applied to healthcare.

With no pharmacological treatment for tuberculosis, the Aaltos turned to the curative effects of access to light, air, and sunlight to shape their architectural response.

Along with the building, the Aaltos also designed the sanatorium’s furniture and tableware, conceiving a sort of total artwork aimed at improving people’s health and well-being in a peaceful environment.

The 1931 Paimio Sanatorium Chair Alvar designed is still produced today. The angle of the chair’s back, built from bent birch plywood and therefore easy to clean, was designed to put the seated patient in a position that optimises their breathing.

Alvar Aalto’s Paimio Sanatorium, Finland,1929-33. Picture: Maija Holma/ Alvar Aalto Foundation

Washing one’s hands was also seen as a basic ritual of good hygiene and the Aaltos designed the angled basin as a symbol of this, to be used with as little noise as possible.

They also designed the doorhandles in a more infection resistant material, and curved them to prevent the doorhandles catching the coats of visiting doctors.

Writing in her diary of her experiences tending to wounded soldiers during the Crimean War of 1853, Florence Nightingale notes that: “quite perceptible in promoting recovery, [are] being able to see out of a window, instead of looking against a dead wall; the bright colour of flowers, the being able to read in bed by the light of a window close to the bed-head.”

As medicine advanced throughout the 20th century with antibiotics and immunisations the reliance shifted from the psychological benefits of a total environment to hospitals as systems of efficiency and hygiene control.

The model of care decoupled away from architecture and interiors, which were instead relegated to backdrops within the treatment process.

The Aaltos also designed the Sanatorium doorhandles, in a more infection resistant material, and curved to prevent catching the coats of the visiting doctors. Picture: .... Wellcome Trust

THE RE-EMERGENCE OF THE ROLE OF THE PHYSICAL WORLD

We will likely leave some things behind in lock-down, but choose others to take forward with us. Lockdown has catalysed many significant changes and innovations across sectors, involving a radical rethink of how we are conducting our lives.

Woods Bagot’s AD-APT modular apartment fit-out with options for day, night and play mode, and the distance disco held on neighbouring balconies at The Nightingale apartments show us that people are interested in using their environments differently, and thinking about their environments differently.

A RETURN TO A TOTAL DESIGN

Not so long ago, the expression ‘Total Design’ was part of the basic vocabulary of architects, teachers, and critics. Yet it is remarkably absent from contemporary debates.

Mark Wigley in the Harvard Design Journal, suggests that, “Total design … might be called, on the one hand, ‘implosive design’, which takes over a space, subjecting every detail, every surface, to an over-arching vision and in parallel, ‘explosive design’, which considers, the expansion of design out to touch every possible point in the world.”

Illustration of the road of the future by Eugène Hénard (1849-1923) from his The Cities of the Future, published in American City, January, 1911.

At a city-wide scale, unprecedented growth in Paris in the mid 1800s saw the city thrust into a period of rapid urbanisation.

Health concerns shifted from a focus on cholera to tuberculosis and a myriad other diseases present in the hastily erected migrant workers’ housing.

In response to this environment, Eugène Hénard proposed the ‘City of the Future’ whereby utilities, services, vehicular and pedestrian movement were separated into a hierarchy.

Also central was a focus on affordable sanitation code compliance, and housing which would better support the health of residents. This was an adaptive, flexible system which could accommodate the future needs of the city.

Perhaps this current state of disruptive innovation is ripe for a return to total design, not as a mechanism of control per se but as a holistic way to engage with the environments in which we live, move through, work and recreate on a daily basis.

Rather than making piecemeal and ad hoc adaptions like temporary sneeze guards, we need to emphasise the role of the physical space from the macro to the micro scale.

At the small scale we need to emphasise for example a focus on more infection-resistant materials for door handles, or perhaps, designing for no door handle at all? At a larger scale, beyond architecture, we will need to recalibrate how we think about trams, lifts and other related modalities after COVID-19

The air of change is upon us already, along with the opportunity and urgency to rethink our ‘Total Environment’.

Originally published on 18 August 2020 in Design

John Burnett — Stage 4 restrictions and the Commercial Construction Industry operating on pilot light.

John Burnett has spent 25 years at Probuild working as a senior project manager. With a specialisation in retail projects he has worked alongside many notable clients including Tiffany & Co and Myer.

Following the Premier’s announcement of Stage 4 restrictions on the 3rd August, we watch with apprehension as details are further clarified and we try to understand how the Commercial Construction Industry can continue to operate. Critically, is it financially viable or practical to operate under these “Pilot-light “settings? 

Focusing on the Commercial Building Industry, the Business Victoria web site (Friday 7th August) identified the key changes being adopted for “large scale construction sites”. The definition of a large-scale site is one of more than three storeys, has an area larger than 1500m2, any office or retail fit-out or industrial large format or retail use. Additional restrictions apply to workers visiting multiple sites.

During Stage 4 restrictions, large commercial construction projects are only allowed a maximum of 25% of their workforce on site. All personnel contribute towards the 25%; except for staff specifically dedicated to the oversight of COVID safe functions in the workplace. Baseline workforce is the average daily number of personnel on-site across the project lifecycle, as derived from the project’s written resourcing plan as of July 2020.  There appears to be a lack of a clear framework so I am sure it will be open to interpretation to some degree. The resourcing plan and calculation are subject to audit, although it is unclear how this will be adequately monitored and enforced.

As we have seen this week, some commercial contractors have decided to close selected sites and others are pushing ahead under these new restrictions. Depending on the project and at what phase the works are at, there will be some ‘winners’ in the early project phase and others disadvantaged at their peak workforce phase. In some cases, on larger format sites, we are seeing contractors focus on a particular stage and using their resource allowance to complete the next Separable Portion and sacrificing other areas of the site, for when the restrictions are eased.

Operating at 25% over the six-week period equates to 75% loss of production with “on costs” continuing at almost full rate. In an industry always reliant on negotiating, it would be expected various commercial arrangements or concessions would need to be considered with the supporting suppliers and subcontractors to contain the costs. With all struggling, there will be no winners and costs will continue to mount as the weeks roll on.

Further sundry control measures are also in place with the new Stage 4 settings, prohibiting car-pooling and sharing accommodation with anyone working at another high-risk workplace. Limitations are placed on the movement between multiple sites.  

Other control measures remain in place; with the High-Risk Safe Plans following the density restrictions of no more than one worker per four square metres in an enclosed space. Likewise, enhanced PPE, an increase in cleaning hygiene measures, split starting times and breaks, temperature monitoring and reduction in capacities are in place to move the workforce vertically, however, all these measures come at a cost.

As stated in The Guardian last week, it has been reported that Victorian builders’ revenue could take a hit of $450m daily from sweeping new restrictions on construction in the State, placing construction companies under continued financial stress and in some cases may force some companies to close their doors, as their cash reserves start to evaporate.

As we have seen since commencement of this pandemic the real impact started to bite in early March, as the life line of the commercial building industry started to evaporate with the retraction of tenderers from the market in certain sectors. Others may fair better, with their choice of regular clients, in particular sectors of State or Federal works. Due to the winds of economic uncertainty starting to blow, tenders were withdrawn from the market in certain sectors or deferred until some later time. Some projects well into the tender process have pushed on with some appointments being made in the last four months. With the Stage 4 restrictions now in place, it is expected this pipeline of future works will be further delayed, placing commercial contractors under further financial stress.

Since early February the industry has faced a variety of commercial headwinds and increased costs as a result of this pandemic; with impacts on supply chains also affecting programs. As the industry started to mitigate the effects to keep projects moving, the question on everyone’s lips is, who will be picking up the tab or how will the costs be shared equitably. With no one wanting to take the first move, it will be interesting to see how this is resolved.

How liquidated damages will be treated or imposed will present some interesting negotiations and outcomes. Unless common-sense and reasonableness can be applied, the resolution of these costs may be a protected affair for those on both sides of the fence.  

With the reduction in manning levels, programs will enviably be extended, increasing the preliminary costs for the head contractor and for subcontractors. It would be expected site teams would once again be reviewed (as occurred at the start of the pandemic); with some key personnel working from home to support the project remotely. The key will be having the correct settings, whilst retaining the full team until the Stage 4 restrictions are retracted.  Maintaining effective and efficient settings will still come at a high cost for the head contactor. 

Time will tell how the subcontractors will be impacted by these setting and whether it is feasible to work under these restrictions. With reduced manning levels, subcontract supervision costs will be spread over a smaller base, leading to increased costs for most trades. This will depend on the workload the subcontractor has as a result of the pandemic anyway, and how they have been navigating the servicing of multiply site.

Subcontractors being permitted to visit only three sites per week poses real issues. If you take specialist subcontractors like concrete pump operators, fire spray contractors, shear stud contractors and scaffolders, just to name a few, they may normally service different projects each day of the week. With the new setting and assuming they follow the new restrictions, program impacts will no doubt be felt across the industry. At the time of writing this article, we understand clarifications have now been released to identify these Speciality Contractors, which will ease these pressures. Refer to the Business Victoria website for further details.

Moving to another critical element in the process of building is the support provided by the consultants. As we experienced during the early stages of the COVID- 19, consultants continued to support the industry in various forms. At around July, many of us noticed confidence levels starting to wane, with consultants’ HR departments considering the risks involved and cracks starting to appear in their ability to support the industry. Now moving into Stage 4 restrictions it will critical for consultants to continue to still support the on-site inspections and verification process in order to keep production moving.

With the Stage Four restrictions now in place, the industry heads further into unknown territory. The “pilot light settings” place further financial hardships on the industry in order to operate at the 25% setting.

With already increased preliminary costs, trade-related costs and project delays seen over the first six months since COVID, job losses have been inevitable. As we head into further unchartered waters, after Stage 4 restrictions, will the industry be able to reset once again to ‘normal’ COVID conditions or will the outcome be prolonged? Unfortunately, the lack of economic certainty weighing on the supply chain of major parts of the industry may result in delays before we see the industry gain strength and start to rebuild.

Whilst construction has not suffered as much as many other industries, it is critical that the Stage 4 restrictions work and do not extend, so we can move to the next phase of consolidation.

We need to keep positive and ensure we are well placed ready for “Re-ignition” from the “pilot-light setting” in place.

Charles Justin — Property and Covid-19

Charles Justin is an Architect and co-founded SJB in 1976 (the J in SJB). He is past President Australian Institute of Architects Victorian Chapter, Life Fellow AIA, past President Jewish Museum of Australia and current Chairman Melbourne Art Foundation. In 2012 he retired from SJB and co-founded with his wife Leah the Justin Art House Museum (JAHM) in 2016.

There are 2 reasons that Covid-19 has made me feel old. Firstly, my children are paranoid that because of my age group I’m in the high-risk category from the virus, and secondly, I was around last time we had a major recession, which was the ‘recession we had to have’ in the 1990s. At that time, I wasn’t a retired babyboomer shielded from the devastating effects of Covid-19, but an architect in his 40’s saddled with debt and a business whose turnover had more than halved overnight. Having survived by the skin of my teeth, I had to virtually start again from scratch with my partners and was fortunate to enjoy an unbroken period of economic growth, with a few hiccups on the way, for the next 25 years.

Of course, then and now were different periods with different circumstances, but both had something in common, they posed an existential threat about survival and what the future will hold. Klaus Schwab, the founder of the World Economic Forum, now known as Davos, has co-authored a recently published book titled The Great Reset. He bluntly quoted “Many of us are pondering when things will return to normal. The short response is: never.” Being an optimist, he goes on “Deep existential crises also favour introspection and can harbour the potential for transformation. The fault lines of the world- most notably social divides, lack of fairness, absence of co-operation, failure of global governance and leadership- now lie exposed as never before and people feel a time of reinvention has come”.

This newsletter is about property and in the context of the above, I propose to give some predictions which is a foolhardy enterprise at the best of times. In my defence, following “the recession we had to have” I predicted that all the empty B and C grade office buildings resulting from the glut of new A-grade offices would be converted to residential apartments. This was to be driven by the children of babyboomers leaving home wanting to live closer to the city followed by their parents who also wanted to live close to the city to enjoy its facilities. Consequently, one of SJB’s early projects was the conversion of BP House in StKilda Rd into luxury apartments and subsequently we rode the crest of the wave of the apartment boom.

So here goes

• We have had more bushfires and pandemics in the last 20 years than in the last 200 years and they are going to keep coming due to the lack of action in dealing with the human impact on the environment. Risk considerations by investors, banks and insurance companies will increasingly have dramatic impacts on the property industry.

• Online activity for work, schooling, shopping, and entertainment increased dramatically during Covid-19 and became normalised for large segments of the population. Much of this activity will continue after Covid and will negatively affect the office, retail, hospitality and entertainment sectors. 

• Working from home, in whole or part will allow people the opportunity to move out of the city to country and regional centres where housing is more affordable.

• Immigration and overseas students will reduce dramatically in the short to medium turn. This with the above decentralization will impact the demand for residential property both for purchase and rental, impacting values.

• Young families are moving away from apartment living to the suburbs so that in lockdown mode there is space to get away from each other, kids can play in the garden and there’s room for the veggie patch.

• People are looking for houses and apartments that have private spaces where they can set up offices, away from interference from children and other adults, resulting in an increasing demand for larger residences.

• The increase in activity in warehousing and logistics will have a consequent impact on demand in the industrial sector. The change in focus in restaurants and cafes from dine-in to take away has seen the development of dark kitchens (kitchens in industrial areas to only service take away) resulting in a shift from the retail to the industrial sector. 

• During lockdowns there has been a refocus on the ‘local’, be it the shopping strip, the parks, schools and other facilities where you can walk for all your needs. This has significant advantage when localized lockdowns take place as part of a strategy of containment.

• CBD’s now look like ghost towns and there is a risk that the hollowing out of residents, students, office workers coupled with the retail, hospitality, service and entertainment businesses that service them, could dramatically impact property values in the CBD.

• Hotel sector will be hit by both the halt in international travel and the reduction in interstate travel. The effectiveness of online meetings will reduce the need for interstate business travel which accounts for a significant proportion of hotel occupancy. The one bright spot will be the switch by Australians from international travel to travel within Australia.

• Airports as an investment category will be hit hard by the severe reduction inactivity.

• All businesses that involve the gathering of large numbers of people- shopping centres, pubs, music venues, entertainment facilities have a higher risk profile not only from this pandemic but also the potential next one.

• The division of businesses into the ‘essential’ and ‘non-essential’ introduces a differentiation between secure tenants and unsecure tenants which could have differing impacts on property values. Equally the type of tenant eg Government or corporate with their security and strong balance sheet could have greater impact on yields in the future than it did in the past.

• Due to the issues associated with the lack of housing affordability, ‘Build to Rent’ and social housing have real impetus in the current climate.

• If the Government looks to tackle our dependency on overseas manufacturing, particularly for critical items and our supply chain vulnerabilities, there could be a boost in the manufacturing sector. If our recent experience with the car industry is anything to go by, this expectation would be challenging, albeit not impossible.

• The costs to business of continuous cleaning for Covid will increase overheads for both tenants and landlords, which could put added pressures on rentals and/or business viability. This is not dissimilar to the added costs of security required in protection from terrorism following 9/11.

• Many are predicting that when Jobkeeper stops many businesses will go broke causing many vacancies. There is a potential, depending on the extent, that there could be knock-on effects, leading to forced sales and a downward spiral in property prices.

And lastly,

One of the criticisms of the Australian economy is that too much of our wealth is tied up in property which is a static investment rather than an investment in the creation of new businesses that generate jobs and wealth for the nation. With the Government’s focus on job and wealth creation, there is a possibility that it may re-engineer the economy to achieve this end, which I imagine would impact the property industry.

I acknowledge that it all sounds quite pessimistic, but I heard that a pessimist is an optimist who’s a realist. We need to recognize that we live in a world of accelerating change. Just consider the internet, the smartphone, AI, 9/11, the GFC, bushfires and pandemics- all which happened within the last 20 years. Our mechanisms for managing this changing world are not keeping up. Therefore, to expect that Covid-19 will have little impact on the property industry is naively optimistic.

On the positive side, after the 1990’s ‘recession we had to have’, I was surprised how quickly we bounced back to enjoy one of the longest sustained economic periods in our history. Much of it was driven by digging up Australia and selling it to the Chinese and in turn buying their stuff to fuel our easy lifestyle. I don’t think at this point in time this is a sustainable model for the future. For a salutatory lesson in complacency we only need to look at Venezuela, once the richest country in South America, that through the process of mismanagement, populism and misplaced political ideology has become in a relatively short time an economic and social basket case.

The predictions above present possible future scenarios, they may not happen, but they could happen. What will happen is up to us, as the late Peter Drucker, one of the world’s top management gurus said, ‘we don’t predict the future, we create it.’ I have a feeling that out of Covid-19 there is a broad-based appetite for change, a desire by all stakeholders to work together for our mutual benefit and a preparedness to set aside entrenched ideologies for the common good. Let’s hope, it’s an opportunity we don’t take at our peril.

Scott Keck – Residential Outlook – Post COVID-19

Scott Keck is Chairman of Charter Keck Cramer, a leading Australian strategic property consulting firm. Scott has 50 years of property valuation and Corporate Real Estate experience across the national markets. He began with the firm in 1968, became a Director in 1978, Managing Director in 1984 and Chairman in 2010. As an experienced independent practitioner, Scott provides specialist strategic and mediation consulting.

With its diversified national footprint and Singapore representation, Charter Keck Cramer operates across all market categories, with a strong research core. During my career, I have noticed particularly that the residential markets, are very resilient, driven by population growth, social needs and demographic change. Whenever there has been an economic threat, recession, interest rate spike, or credit squeeze, the residential markets always bounce back, usually more quickly than projected, demonstrating the resolve of the Australian community to maintain its embrace of real estate and homeownership.

In my current analysis of the likely changes in a post COVID-19 world, I am an objective analyst, my apparent ‘optimism’ only relative to the fact that so many commentators are negative. I provide the following summary comments;

• Many ‘off the plan’ sales were supported by incentives including undisclosed discounting of prices, stamp duty concessions, first home buyer grants, rental guarantees, furniture packages and specification upgrades. This resulted in price inflation at the time of sale but subsequently, when completed and valued for mortgage purposes, these supporting incentives are not taken into account and were therefore not reflected. No wonder subsequent valuations for banks are lower than initial purchase prices. These incentives can count in total for as much as 10%…. the fall in apartment prices over the last 18 months is therefore more attributable to these factors than a shift in market sentiment or real reduction in values.

• The projection that Airbnb would shift away from its short-term market to the long-term rental pool, has not happened. The quite expected strong upsurge in domestic tourism has encouraged most Airbnb owner/operators to maintain their short-term rental strategy. The traditional rental market, particularly for apartments, is not therefore being challenged by this possibility.

• Whilst sales turnover has slowed, so far, there has been little reduction in property values for established houses and townhouses in inner and middle urban areas, because they are strongly supported by a strong socio-economic catchment which is not as vulnerable to the economic challenges which are occurring. As economic conditions tighten the most vulnerable residential categories, will be fringe urban housing, where mortgage debt is high, and many owners may be seriously affected by increasing unemployment resulting in mortgage distress and delinquency. The apartment sector is also vulnerable but more for the short-term ‘perception’ that rents will decline and vacancies increase not withstanding that there will be a medium-term return to supply/demand balance, particularly as the ‘supply pipeline’ contracts.

• Concerns arise over stalling immigration and a reduction in population growth leading to an overall slowing in demand for residential accommodation. This concern ignores the inevitability that population growth is crucial to Australia’s economic well-being and that consequently immigration will be strongly incentivised to return to appropriate levels. Furthermore, demographic change within the existing population is the most significant driver in the inner urban housing markets and will continue to create demand for a variety of style, size and location in the apartment and townhouse market.

• Dire predictions of substantial residential value falls are not warranted. Projections of 20–30% reductions in value are irresponsible. If there is to be a decline it will not be market wide, but rather more locality focused and probably settle more in the order of 5%-10%, down from pre COVID value levels. There are many potential purchasers currently just marginalised due to the ‘affordability’ factor, who could be expected to enter the market enthusiastically before values fell too far. Another incentive is that with very long term, low interest rates mortgage repayments, in many instances, now align with rental payments thus encouraging renters to become homebuyers. Furthermore, the reality is that those members of our community most adversely affected by the economic downturn, are renters rather than potential home purchasers and for this reason their plight will not bear directly adversely on the home sale market.

• Concerns about permanent immigration reduction and the loss of foreign students are alarmist. For its location in the Asian region there are both social and economic imperatives for Australia to maintain strong relationships with its neighbours, not only Southeast Asia, but particularly China. Those relationships may not always be harmonious, but they will survive and co-related to that inevitability will be a resumption of appropriate immigration levels and a return of foreign students wishing to study and live in Australia, and in turn, supporting segments of the residential markets.

• Appropriately, and with positive economic impact, the federal government continues to recognise the importance of stimulus in the construction industry and the homebuyer market and can be expected to prioritise those strategies as an interim defence

I would like to emphasise that I am not an optimist, but rather an objective analyst. I recognise the strong fundamentals that drive the residential markets in the cities, the suburbs and regional areas and based on my five decades of experience and analysis am convinced that they will prevail post COVID-19. Consequently, I encourage all Australians to have faith in the sound, long-term reliability and financial security of the housing markets and not overreact in response to short term perceptions and anecdotal commentaries forecasting a market crash.

This article was originally published by CHarter Keck Cramer. Read it here…

Sunshine Coast shows the way to create good design loved by communities and put an end to eyesores

Laurel Johnson is a full-time, award-winning Associate Lecturer in the urban and regional planning program at The University of Queensland.

This article was originally published in The Conversation. Read it here…

Our collective retreat to the safety of our homes during the COVID-19 lockdown has provoked an awakening to the value of local areas for work, play and connecting.

For many of us, the design of buildings, gardens, streets, local parks and shops have all come into closer view.

We’ve had time to notice both good and bad design. We see the things that please us most and the things that are clearly out of place and make us question how they ever got approved in the first place. We all have an opinion about bad design in our local areas.

In an effort to prevent further bad design taking shape in its area, the Sunshine Coast Council decided to encourage good design by publishing a book, Sunshine Coast Design (available for A$50 in hardcopy or free online).

To produce a design book, it first had to establish what good design means.

The council, developers, architects and the local community came together to lay out principles that contribute to good design in this fast-growing region.

Good design reflects what we love

Good design should surprise and delight us in ways that increase our appreciation of our local places. The collection of natural, landscape and built elements that we love in our local environment should be the foundation for local design.

Examples of what the council considers is already good design on the Sunshine Coast are showcased throughout the book.

The design process known as placemaking expands and promotes the best features of our local places, from a local perspective. It is a process of engaging communities in design interventions to create meaningful environments.

The aim of placemaking is for gently curated locales that reflect core community values, rather than generic “cookie-cutter” design solutions.

Beerwah Town Centre, where these sculptural forms bring together the natural and built environments to create a unique local public space. Greg Gardner

The design process known as placemaking expands and promotes the best features of our local places, from a local perspective. It is a process of engaging communities in design interventions to create meaningful environments.

The aim of placemaking is for gently curated locales that reflect core community values, rather than generic “cookie-cutter” design solutions.

This type of intervention can be transformative. However, to make sure any placemaking is socially equitable and reflects local values, the involvement of government in the process is essential.

Good design shines on the Sunshine Coast

The Sunshine Coast Design book is a stand-out example of an approach to placemaking led by a local government and based in community values that are translated into design principles.

As Sunshine Coast Council Mayor Mark Jamieson said:

As more people are attracted to live on our Sunshine Coast, we need to encourage design that reflects our region’s values and characteristics and guide a design process that enhances and protects what we love about this place.

The visually evocative book echoes the design elements people value in their local places to guide the development of new places on the Sunshine Coast.

Some other examples of good design showcased in the book include the Mary Cairncross Rainforest Discovery Centre at Maleny (pictured top) and Two Tree House private house in Buderim.

The community engagement process that underpins the book elicits four simple values expressed by people on the Sunshine Coast:

• we love our climate

• we live within and cherish our landscape

• we treasure our oceans, beaches and waterways

• we are a community of communities.

These community values are described in the book as “being at the heart of what makes the Sunshine Coast special”.

The Coolum Library, by Majstorovic Architecture, blends into its natural environment. Andrew Maccoll

These community values are expanded to a set of ten design principles identified in workshops with design specialists (architects, urban designers, artists, urban planners) and developers, and tested with community members.

These principles should now guide future design to:

1. work with the local climate

2. create places that respect and incorporate landscape

3. bring our cultures, arts and heritage to life

4. capture and frame views and create vistas

5. strengthen and extend a network of green corridors

6. be inspired by the natural and built environment

7. create shady trees that put people first

8. create welcoming spaces that everyone can enjoy

9. design places to be resilient and ready for change

10. create and add value.

These principles are not enforceable, but developers, designers and council would be wise to follow them if they want people to continue to love the many special places on the Sunshine Coast.

They should act as a guide for future development ranging from council parks and buildings to the renewal of shopping strips and new homes and suburbs. All developments should aspire to reflect the elements of the Sunshine Coast that matter to local people.

The reflection of local values in a design guide is something all Australian communities, developers and levels of government can adapt and learn from.

Robert Pradolin - Housing All Australians is good for the economy

Rob is a qualified engineer and has been active in the property industry for over 30 years, most recently as General Manager of Frasers Property Australia (formally Australand). He is the founder and Director of Housing All Australians, Board member of Summer Housing, and Salvation Army Housing. 

With the expected slump in home building on the horizon, state and federal governments are looking at ways to quickly generate economic activity and keep as many people as they can in jobs. The Federal HomeBuilder initiative has been welcomed by the property industry and it’s a good start. And yes, there will always be critics that say it is targeted to the wrong areas and that it will be the wealthy that are going to benefit …….again! It’s hard to please everyone if you are in government (irrespective which political party), but doing nothing is not an option. We need to stimulate economic activity and congratulations to all governments for, uncharacteristically, making decisions and acting quickly.

Encouraging residential renovations and construction of new dwellings by the domestic residential sector is definitely a quick way to stimulate on the ground activity - it does not require the significant level of pre-sales (and bank finance) that would stall the construction of an apartment project. However, there is a significant sector of the construction workforce that is now facing the devastating reality of serious job losses on the horizon.

The domestic residential sector (DRS) and the commercial residential sector (CRS) are very different work forces. The DRS is made up of individual subcontractors, usually small businesses in themselves, and focus, generally, on building two storey homes. The CRS is predominantly a unionised workforce and they do not build houses. They build multi storey apartments.

The two workforces are like oil and water. They do not mix. It is this workforce, though, that also needs to be active post Covid19 if we are to minimise the economic fallout.  This can be done by focusing on CRS projects that do not need pre-sales. This can be achieved by activating the build-to-rent sector and by building more public, social and affordable housing. Even the “unholy alliance” of the Master Builders and the Unions issued a joint Press Release encouraging investment in housing vulnerable Australians.

The corona virus does not discriminate. This pandemic has made us all realise that we are equal and, consequently, all vulnerable to the invisible virus that has declared war on humanity. To their credit, governments reacted quickly and the homeless that inhabited out streets were housed in hotels. The business community also responded with Quest Apartment Hotels, through the Salvation Army, offering access to their serviced apartments at 140 locations, nationally, at cost. No profit.

Both business and governments are saying that we should not return to seeing homeless people on our streets. But that means we need to build more housing and that does not happen overnight. At Housing All Australians (HAA is a private sector initiative), we believe that housing for all, rich or poor, has long term economic benefits to Australia, as it will prevent the unintended economic costs that result through a lack of stable shelter. These costs manifest themselves through the development of mental and physical health issues, family violence, policing, justice and then long term welfare dependency.

We believe a strong business case exists for the development of public, social and affordable housing. With the support of organisations like the Capital City Lord Mayors, the City of Sydney, ISPT, Stockland, Plenary, Assemble, Metricon, Simonds, Frasers Property Australia, AV Jennings, Mona, Tract, APD Projects, Minter Ellison, Monash and Melbourne Universities, the Director of Housing (Vic), the Victorian Planning Authority and other corporates we are still in discussion with,  HAA is in the process of commissioning a study into the long term economic costs of not providing sufficient public, social and affordable housing. We see this type of housing as the new infrastructure.

It makes sense to invest in projects that will return a long-term economic (and social) benefit to our country as well as creating jobs. In its first major research, the National Housing Finance and Investment Corporation (NHFIC) has confirmed the beneficial impact of stimulating the building sector by highlighting that for every $1 million of investment, 9 jobs are created. 

Earlier this year, Reserve Bank Governor, Phillip Lowe, said that we must use this unique opportunity in this economic cycle of low interest rates, to invest in the right infrastructure for Australia that will provide a sound long-term economic foundation for our future. You cannot get a more basic and fundamental infrastructure than housing. And the current and significant shortage of public, social and affordable housing is the place to start.

The economic health of our cities was at crisis point before Covid19 due to the dire shortage of such housing. There are waiting lists in every state. Visionary governments of the past recognised that the provision of housing for all was a fundamental requirement in building the foundations of a prosperous country. Now, it is seen purely as a welfare issue, a view which distorts the central role that stable housing plays in the life of an individual. Without stable housing, the flow on effects on that person’s ability to contribute economically (or not), to society varies greatly.  

Study after study around the world has shown that a “housing first” approach works to reduce homelessness and improve the lives of those living with housing insecurity and it is the lowest cost to the economy and consequently taxpayers.

By reframing social and affordable housing as infrastructure, we can start to mobilise the required capital needed to make an impact at scale. The problem is so significant that governments cannot fund it alone. The private sector is ready to participate but needs the appropriate financial settings, and frameworks, in place to achieve their required returns relative to the risk.

By addressing the issue at scale, it will also stimulate the uptake of innovative approaches such as prefabrication, which in turn creates more jobs for the embattled manufacturing sector.

We have everything to gain and nothing to lose. It all starts with changing our perspective and looking at the future with optimistic eyes. Let’s aim to house all Australians and, in the process, establish a new economic platform for our future.  

Danny Burger — What is happening with Build-to-Rent?

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.

Debuilt Property assisted Coles with its development strategy for Richmond Plaza which resulted in a sale and leaseback to Grocon’s Home Residential for a build-to-rent mixed use development.

Coles’ and Grocon’s Richmond Plaza

Australia’s property sectors are continually evolving and adapting to market forces. In the residential sector, Build-To-Rent (BTR) projects are gaining more traction each day – it seems each week a new project is being considered.

Also known as multi-family housing, BTR projects comprise of apartment developments with a focus on service and amenity, typically aimed to appeal to long term tenants. With only a handful of key players, Australia’s BTR market is shaped by every new project.

BTR identifies its purpose in the name – projects are built to rent and hold as a residential investment. The process of developing the project results in the investor ‘acquiring’ the completed property at the ‘wholesale’ price. As the development margin is retained in the project, the economic result is a more viable investment return.

In actual fact, BTR is not a new concept in Australia. The 1950’s and 60’s saw a proliferation of small blocks of walk-up flats built in our inner suburbs by developers, often European migrants, who built with the aim of holding as a family investment. However, today’s BTR is a much larger proposition.

BTR is a long-established asset class around the world. Families in New York City, for example, have traditionally held large apartment blocks with the sole intention of generating income from leases. Assisted by tax settings, it is the second largest institutional real estate sector in the USA closely behind offices.

In the UK when BTR was first evolving, all levels of government worked with industry to get it off the ground which resulted in favourable tax settings.

In Australia however, BTR has typically been perceived as incompatible with acceptable corporate property returns, exacerbated by Australia’s tax settings. Media and academic reports often explain that stamp duty, land tax and other authority charges hinder a company’s ability to purchase land worthy of BTR developments and make suitable returns.

Many industry leaders say that relief of these taxes would assist in kickstarting the industry at a wholesale level.

Despite these challenges, a handful of BTR projects continue to appear across the country, leaving the question, why now?

There are probably a few reasons.

Larger residential developments through 2018 and 2019 were challenged by the impact of the banking royal commission and a softening apartment market. Developers found it increasingly difficult to secure adequate pre-sales and funding to commence projects. This created the opportunity for corporates, who have the financial capacity and a strategy to hold residential investments, to initiate significant projects without pre-sales.

This also provided the opportunity for businesses that already had a vertically integrated platform (to develop and to hold), or those interested in creating one, to view residential projects as providing a long-term business return.

With low interest rates and returns on other property assets classes (such as offices) tightening, residential as a corporate investment is getting closer to being plausible. In addition, sectors such as retail (and potentially now offices) have become less predictable and is therefore losing some of its shine.

The BTR sector may now be a reasonable option for investors to diversify their portfolio, buying into a new asset class with comparative yields. There are only so many office and retail buildings one can buy – the BTR sector would seem a logical next step for investors.

Superfunds have begun to do just this by including stable, long-term BTR investments in their portfolios. AustralianSuper, for example, recently purchased a 25% stake in Assemble Communities, in which it plans to invest in boutique smaller build-to-rent-to-sell projects for occupants.

And for capital partners that may already be investing in multifamily options overseas, A-grade residential investment in Australia can be a compelling proposition.

One of the first examples of institutional BTR in Australia was the Commonwealth Games Villages on the Gold Coast, where Grocon developed 1,250 apartments for the athletes village. These were then repurposed for rentals after the games, now known as the Smith Collective.

Mirvac and Grocon’s Home business are the leaders in this emerging asset class in Australia, showing that they believe it can be viable. Mirvac recently completed its Sydney Olympic Park BTR project in Western Sydney and leasing has commenced.

As BTR gains traction and support from developers, AREITS, overseas operators, superfunds and occupants, the market will likely segment and different groups will be able to find niches.

Like other sectors, the future of BTR is uncertain during the Covid-19 pandemic. However, many suggest the outlook is becoming more positive despite the continued outbreaks. As job and income insecurity rises, Australians may be less willing to incur debt, and lenders may tighten lending criteria – the rental sector could see growth.

Working-from-home practices have also seen a shift to focus on quality of living during the pandemic. BTR projects often target higher income occupants and provide quality amenities like gyms, theatres and co-working spaces, as well as creating a strong sense of community. Interestingly, recent reports from the US and UK suggest that BTR projects have had limited rent recovery issues relative to other asset classes.

There has been much discussion about the need for increased affordable housing options. Regardless of the challenging project economics, this is a sector that has been relatively active as build-to-hold providers. However, without further government assistance and tax reforms the real opportunity will not be realised.

Whilst there is a lot written about BTR, the sector is only in its infancy and will not reach its true potential without tax reform and government cooperation.

It will be interesting to see what the future holds for BTR.

SAS soldier-turned-psychologist Harry Moffitt on effective corporate leadership

Former SAS Team Commander and registered Psychologist, Harry Moffitt, recently retired after almost 30 years with the Australian Defence Force, most of which was spent with Australia’s elite Special Air Service (SAS) Regiment as a Team Commander and specialist. 

Harry has completed 11 active service deployments, including being wounded in action in 2008. Harry completed his time with the SAS as its Director of High- Performance. 

He is also the Asia-Pacific Director for the Mission Critical Teams Institute (dedicated to improving the success, survivability, and sustainability of mission critical teams) and founder and architect of the multimillion-dollar Wanderers Education Program (dedicated to providing in-service education opportunities for ADF members).

Winding down in his retirement, Harry is the co-founder of Stotan Group — a human performance consultancy that specialises in individual, team and organisational development. The company works with partners to provide solutions to their complex human problems. Stotan also help create the conditions in which humans and teams can thrive and flourish, by working synchronously across three levels — people, process and place.

We spoke to Harry Moffitt this week about work-from-home (WFH) practices, and how businesses should be capitalising on the physical, social and emotional evolvements of companies and offices during the COVID-19 outbreak.

What are some of the things you have seen in teams during the COVID period? The good, the bad, and the ugly?

Almost ubiquitously, recent WFH research indicates most people adapted easily (humans are adaptable!) and everyone appreciated saved commute times. Indeed, in many cases, productivity remained the same or improved after weighting for social and economic stressors. Those who can, employees would like to work from home at least a couple of days a week henceforth. But it’s not all positive. Lack of social interaction is the rather BIG downside. It goes to our psychology being a tribal species.

What is something businesses and leaders can do?

‘The Good’ businesses and leaders are conducting after-action-reviews, inculcating new behaviours developed during this period, i.e., more disciplined communication cadence and increased prioritisation of social connection.

The smarter teams have adapted to remote working techniques and are conducting deliberate reflective activities  and crystallising resilience building factors to learn and grow. Indeed, team reflexivity is a leading indicator of high-performing teams.

Similar to a post incident debrief, reflexivity refers to the process of teams reflecting on and discussing group processes, procedures and actions to improve future performance.

Stotan recently facilitated a ‘Reflection Pool’ activity with an IT Executive team, from which a few significant changes came. For example, during the initial phase of the COVID period they instituted a ‘Duty Executive’ roster so they could share the leadership load. Further, the executive commenced a weekly virtual townhall meeting to keep the company up to date. Both of those behaviours have been inculcated into the new operating procedures, to great effect.

‘The Bad’ and ‘The Ugly’? These ‘Hero’ leaders have reacted during this period in an autocratic and punitive manner which has heightened employees’ anxiety and isolation, harming performance and productivity. Leaders who are stressed, anxious, and fearful have been shown to spread this to their employees with negative impacts on myriad domains of performance including integrity, openness, and even discrimination.

What has Stotan being doing to help?

Stotan’s message: do not squander this opportunity to cash in on the potential to build more resilient people and processes. We have spent many hours facilitating deliberate reflection practises with some amazing results, one CEO stating, “it was the best thing I had ever done with my team, I wished we did it 10 years ago”. This, now regular, practice helps make those fluffy values-based concepts, such as integrity, honesty, trust, empathy, and accountability, a reality.

How about a closing message for leaders?

Sure, and this is important. Some things all leaders can do, starting next Monday.

1. Appoint and deputise a 2IC – it is in giving trust that one receives it. 

2. Delegate hard – list 20 things to do and allocate 10 to the team.

3. Open-door policy – not for people to come in but for you to get out.

4. Walk the floor – ask everyone “are you happy?” and if not ask “what can I do to help?”.

5. Power down – take 15min a day to do nothing (e.g., nap) and book a longer break ASAP – leading a team starts with looking after yourself, who knows how long this will last.

Dark stores gain traction amid online shopping boom with JLL's Peter Blade

Peter Blade is a Director at JLL, and is based in Sydney. He focuses on industrial assets. This article was first published on JLL’s Trends & Insights.

As online shopping skyrockets during the coronavirus pandemic, companies have been racing to refine their storage and distribution processes, increasing the demand for so-called ‘dark stores’.

Dark stores are small functional spaces, laid out like a supermarket, or warehouses, dedicated to fulfilling online orders. Some are automated and therefore don’t need lights, giving the concept its name.

While retailer demand for dark spaces has been increasing over recent years, the ongoing COVID-19 pandemic has seen more opt for this type of space. Wide-ranging restrictions have limited the number of shoppers inside physical stores, or forced complete closures, driving more people to shop online.

Dark stores will play a key role for retail, well beyond the recent pandemic, says Peter Blade, head of industrial, Western Sydney, JLL.

“The pandemic has forced new cohorts of shoppers to become comfortable with the experience of shopping online, and many won’t go back to their traditional habits. For some retailers this has meant they can convert their bricks and mortar stores into dark stores, with the benefit of being located close to population centres for rapid delivery,” he says.

Globally, e-commerce sales increased 209 percent in April compared to the same period last year, as millions of consumers flocked to the convenience and safety of online purchasing, according to payment systems company ACI Worldwide.

Supermarket chains such as Tesco in the UK, Coles and Woolworths in Australia, and Walmart, in the United States had already been operating dark stores prior to the pandemic in order to compete with the rapid turnaround times of disruptive online retailers.

Coles launched its first online-only store in inner-city Melbourne, in 2016 after it saw a leap in online sales and found its aisles were becoming increasingly congested with the bulky trolleys fulfilling online orders. This store had a dedicated team picking stock for online customers living within a 5 kilometre radius.

In the United States, Walmart, along with retailers including Albertsons, and Stop & Shop, have been building automated mini warehouses inside their stores, using robots to save on the cost of workers manually picking goods.

But the cost savings are not just in labour. Due to their proximity to the customer base, deliveries from these smaller fulfilment stores can be up to two times less expensive than from large centralised warehouses, according to a report produced by US investment bank, Jeffries.

And since they don’t need to exist on prime real estate, such as high streets and shopping malls, there is potential for further savings in rent.

However, for many retailers, the switch to dark stores has been more reactionary. Australian retailers including Wesfarmers-owned Kmart, and footwear stores Platypus and The Athlete’s Foot, owned by Accent Group are among those to have closed many of their stores to customers during the pandemic while retaining staff to be inventory ‘pickers’, to fulfil drive-through collection, kerbside pick-up or delivery.

Structural shift

COVID-19 has prompted a gear shift in online retailing and the supply chains that support it.

This was writ large at the height of the pandemic in March, when Coles and Woolworths in Australia became so overwhelmed by demand they had to temporarily shut down their home delivery services. They have since reopened with an expanded networks of last mile delivery partners.

Going forward, retailers are likely to make adjustments to their existing space while also looking for new, strategic locations, says JLL’s Blade.

“In major supermarket warehouses we’re going to see significant space reconfigurations as more space becomes dedicated to servicing online orders.

“But at the same, we might see dedicated dark stores in south Sydney, in the northwest, and Homebush, or central west, which are all strategic hubs to service populous areas.

“A lot of industrial land has diminished in south Sydney due to the demand for more valuable residential and mixed use development, but with the shift to online shopping prompted by coronavirus, we might see that trend reverse, or at least halt.”

Coles has since signed leases for two new distribution centres, covering 60,000 square metres, to boost its online home delivery platform.

It comes after the chain made a deal last year with Ocado Group to bring the British company’s online grocery platform, automated fulfilment technology and home delivery solution to Australia, joining a number of large overseas grocery retailers that have done the same.

Non-food retailers are also likely to make permanent adjustments, investing in their online platforms, while considering what makes a bricks and mortar store viable.

Establishing trends are now becoming important strategies, Blade says.

“There is only one direction this can really go, however the scale to which companies move in this direction, and into full automation will also be predicated on whether population growth can sustain it.”

Architect Michael Bialek on getting back to the office and what lies ahead for property.

Over his 40-year career, SJB founding director Michael Bialek has continued to design for place, crafting design responses that are unique to their location. His outstanding portfolio of acclaimed and award-winning projects include apartment buildings, private homes, commercial, hospitality and cultural venues.

SJB’s Melbourne studio in Oliver Lane has been closed to the public since early April when the Victorian Government set in place restrictions in response to the COVID-19 pandemic.

Our IT team acted promptly to arrange for networking from home for most of our team members. A core group of senior managers and technical staff have continued to operate in the studio to maintain essential organisational and technical services to the business. Meetings and client presentations have been conducted successfully on Zoom and Teams platforms with relative ease and success. However from a personal viewpoint, there is no doubt in my mind that real ‘face to face’ contact still is, and will be, an important feature of successful collaboration in the design profession.

Team members have responded well to the technical challenges and features of remote connections. However, the number of people indicating that they are missing the studio ‘atmosphere’ and physical connection with their work colleagues is growing week by week. So although in the short term there may be a question about whether businesses will require the same amount of office space post COVID-19, I see the need  for the workplace to still be the location where a business would generate a feeling of togetherness for its employees. We will however see a reduction in business travel, locally and internationally for some time to come and we will definitely see a transition to a more flexible workplace, allowing those arrangements for ‘work at home’ to suit the individual business and their employee preferences.

The design of offices and dwellings, whether single house or apartments, will need to respond to this alternative ‘working arrangement’, particularly in respect of smaller dwellings and the need to locate a separate, quiet location for work activities. The upgrading of telecommunication connections and capacity will also be in demand in the home.

There is also no doubt that the younger generation, having grown up and being so adept with social media, have found the transition to working at home easier than us ‘baby-boomers’. But we have also learnt from this difficult period that change in work habits can be affected without reducing the effectiveness of our efforts - it’s ‘never too late to teach an old dog new tricks’.

We have also witnessed the varying attitudes of our clients during the past few months in response to the worsening economic conditions. Some are displaying serious concerns, some caution and others are looking for new opportunities in time for the recovery, which I believe will come sooner than expected. Yes our growth will slow down, we will have less foreign tourists and students but we will also have more interstate tourists and maybe students from different countries. We will see many Australian citizens currently working overseas return to their homes – seeking a more safe and active lifestyle than they may find in London or New York. A stable, political scene and an accessible world class health system (proven during the pandemic) are also now high on the list of desirable attributes in considering where to live in the coming years.

So how will the property industry be affected by the COVID-19 era? The main affect that we have noticed to date has been the requirement for new buildings to accommodate mixed uses and to incorporate flexibility in their design to allow a change of in the future. Office buildings which could be transformed into residential apartments and/or vice versa? The uncertainty about the depth of demand for either sector is the driving issue for our clients in considering their development profile over the next few years. We see an ongoing demand for boutique office accommodation in the inner suburbs, particularly around transport/retail nodes. Buildings with an aspirational agenda for a flexible workplace, wellbeing, high environmentally sustainable credentials, quality end-of-trip facilities and overall design excellence. And in locations which can provide a balance between our social life, our leisure pursuits and our work commitments. So the need for office accommodation will slow with the current economic conditions affecting many businesses, but this need will return and those thinking ahead of the rest will be rewarded as usual! The housing market will also need to respond to both private and government initiatives being implemented to assist the economic recovery in the post COVID-19 era. We are involved in a number of social housing projects which have been in the making for many years – the time is now upon us, both private sector and Government, to deliver these much need community assets.

The Build to Rent (BTR) model is also now being delivered into the local scene, by both international and local developers. SJB is involved in an inner suburban regeneration project involving in excess of 350 apartments over a retail and hospitality precinct. Industry leaders, developers and city officials have recently discussed the opportunities and challenges in this most recent initiative of BTR, however there is no doubt that this new asset class will provide housing for a more diverse population at different price points.

The retail sector also faces a number of challenges moving forward. The strength of the major shopping centres is the subject of an ongoing debate and obviously affected by the individual offering in each location. The social interaction and entertainment opportunities offered by these centres is becoming important as ‘on-line’ shopping increases incrementally over time. Specific retailers such as Harvey Norman, JB Hi-fi, Officeworks, Coles and Woolworths have however, recorded large increases in sales volumes during the COVID-19 period. The ‘distinctive’ shopping experience is still proving to be resilient – visits to the Prahran and South Melbourne markets over the last few months prove to me that the popularity of bustling hospitality/retail venues is a feature of Melbourne’s unique cultural offerings. The activities in the laneways and the queues outside the  bakeries in both Melbourne and Sydney over recent weeks provides me with enough evidence of resurgence in the retail sector as the public seeks to reacquaint itself with the city’s offerings.

Being an optimist at heart and with faith in the intelligence and skill that supports the property industry, I look forward to SJB responding to the challenges ahead and the projects that will lead our cities back to a solid recovery.

Money for social housing, not home buyers grants, is the key to construction stimulus — Brendan Coates

Brendan Coates is the Household Finances Program Director at the Grattan Institute. This article was originally published in The Conversation — read it here.

There’s no doubt Australia’s construction industry is facing tough times. COVID-19 has caused migration to slow to a trickle. Some 2.6 million Australians have either lost their jobs or had their hours cut in the past two months. Many economists expect property prices to fall.

It all adds up to fewer homes being built in the coming months. That means fewer jobs in the construction industry, which employs nearly one in 10 Australians. The sector has already lost nearly 7% of its workforce since March.

The Morrison Government is set to anounce a stimulus package for the construction sector as soon as this week. But what should it include?

More home-buyer grants on the way

The federal government has signalled it will offer cash grants of at least A$20,000 to buyers of newly built homes. Unlike past schemes that have targeted first home buyers, it seems these new grants will be available to everyone including upsizers and investors. Grants may also be extended to renovations.

Large handouts would prompt some more residential construction by encouraging some people to bring forward their home purchases. It’s why in 2008 the Rudd government tripled the first home buyer grant to A$21,000 for new homes in response to the Global Financial Crisis.

But under such schemes, governments also end up giving grants to people who would have bought a home anyway. Even the more pessimistic industry forecasts expect 110,000 homes to be built in Australia next year. Giving A$20,000 to all of these home buyers would cost A$2.2 billion without adding a single construction job. Grants of A$40,000 would double the bill.

That’s a lot of spending for little economic gain.

Nor do grants to home buyers actually make housing more affordable. They are typically passed through into higher house prices, which benefits sellers more than buyers. In this case, that is likely to include developers eager to clear their existing stock of both newly and nearly built homes.

Cash grants for renovations would likely hit the economy quicker since they don’t necessarily require building approvals. But they bring their own problems. Grants will likely see in-demand tradies raise their prices, especially if the government is effectively paying for most of the work done. It will be also be harder for officials administering the scheme to determine if the work has been done before paying out the money.

Nor is it clear the renovation sector needs further stimulus: reports suggest COVID-19 is driving a renovation boom across many parts of Australia. Research by credit bureau Illion and economic consultancy AlphaBeta shows spending on home improvements is already 33% higher than pre-COVID levels.

There’s a better option

There’s a better way to support residential construction without providing such big windfalls to developers: fund the building of more social housing.

Social housing – where rents are typically capped at no more than 30% of household income – provides a safety net to vulnerable Australians.

In particular, the Morrison government should repeat another GFC-era policy, the Social Housing Initiative, under which 19,500 social housing units were built and another 80,000 refurbished over two years, at a cost of A$5.2 billion.

Under the initiative the federal government funded the states to build social housing units directly or contract community housing providers to act as housing developers

Public residential construction approvals spiked within months of the announcement.

Building 30,000 new social housing units today would cost between A$10 billion an A$15 billion. Because state governments and community housing providers won’t have to worry about finance, marketing and sales, they’ll be able to get to work building homes much quicker than the private sector.

The boost to the economy would be pretty immediate.

Just as important, building social housing would also help tackle the growing scourge of homelessness. At the most recent Census (2016), more than 116,000 people were homeless, up from 90,000 a decade earlier. COVID-19 has shown us that if we let people live in unhealthy conditions it can help spread disease – affecting everybody’s health.

The drivers of homelessness are complex. Nonetheless the best Australian evidence and international experience shows social housing substantially reduces tenants’ risk of homelessness. But Australia’s stagnating social housing stock means there is little “flow” of social housing available for people whose lives take a big turn for the worse.

Funding social housing won’t boost house prices or provide windfalls for developers. It will do more to keep construction workers on the job, while also helping some of our most vulnerable Australians.

Professor Piyush Tiwari and Jyoti Rao — Where to now for Australian property?

Professor Tiwari and Ms Rao both work in the Faculty of Architecture, Building and Planning at the University of Melbourne. This article was first published on the University of Melbourne’s research news site Pursuit.

Empty streets, empty offices, empty malls but full homes have become a way of life over the last seven weeks since our fight with COVID 19 began.

Whether this will leave a lasting imprint or is a temporary blip only time will tell, but it will definitely change the way we invest, use and manage our properties.

The impact of COVID-19 has accelerated changes already underway in the property market. Picture: Getty Images

However, not all of the of the changes the property industry is witnessing are due to the current COVID-19 crisis, but this has definitely hastened the changes that were long coming.

THE ECONOMY

Let’s start with the economy – the other elephant in the room.

In its Statement on Monetary Policy for May 2020, the Reserve Bank projected a significant contraction in the economy, which will affect the labour market immensely. It’s estimated that more than a million people will be out of work and the recovery in employment will be slow.

The National Australia Bank’s Business Survey indicates that the lockdown measures have caused a decline in business conditions and confidence, leaving installed equipment idle.

New housing approvals (seasonally adjusted) have dropped and banks have been reluctant to make new loan commitments for home purchases. Affected by reduced profitability and increased risk, banks have been cautious in lending.

The RBA’s cash rate, or the interest it charges on interbank loans, has been at an historic low of 0.25 per cent since late March, reflecting the poor immediate economic outlook.

Thankfully, the yield curve, or the trend for interest rates on bonds, is positive in that bonds that have a longer pay back time command higher interest rates.

This means the bond market still expects an improving economy in the longer term. Also on the positive side, turnover in retail has risen mainly due to growth in sales at the supermarkets and grocery stores as people stocked up or stopped eating out.

Retail property is struggling in part due to the shift to online shopping. Picture: Steve Buissinne/Pixabay

Against this backdrop, the property and construction industries are under immense pressure.

RETAIL PROPERTY

In the retail property market, total returns have been declining following a long period of growth in rents that peaked in 2015. That rise in rents was fuelled by ownership in the market being highly concentrated, giving landlords strong market power.

But rents are now being weighed on by the shift to online shopping, and in the last few months, a number of retailers have closed.

Among shopping centres, the ones that are suffering the most are regional and super-regional shopping centres. Neighbourhood shopping centres are fine as they are supermarket based.

As far as retail property transactions go, there are more sellers than buyers and there are media reports that large centre owners are looking to sell their assets.

While shoppers will return to malls eventually, business models of super-regional or regional shopping centres that depend on entertainment, hospitality and leisure may have to be reassessed.

Going forward we’d expect retail property market to be characterised by lower growth as high vacancies and lower rents in the face of rising online shopping weigh on the market.

We’d expect to see higher incentives for tenants, and see landlords bearing more costs to support tenants. Capitalisation rates, or the ratio of operating income generated by a property over its value, are likely to soften.

OFFICE PROPERTY

Sentiments in office markets are weak given the uncertainty in the economy.

Transaction volumes fell by more than 50 per cent in the first quarter of the year compared to a year ago, and are expected to slowdown further.

The shift to online shopping is already weighing on the retail sector. Picture: Negative Space/Pexels

The market can also be expected to react to a potential shift toward more office workers continuing to work from home after COVID-19 restrictions forced many people out of their workplaces.

Before the crisis about a third of working Australians reported doing at least some work at home but we’d now expect that to increase.

Office property landlords with shorter term leases are the most vulnerable in this market, as will those operating a shorter term “co-working model” of serviced spaces for different clients.

Many office properties may have to be reconfigured if social distancing becomes the norm or even mandated in legislation.

We anticipate that landlords will increasingly have to offer concession packages to tenants, and invest in improved ‘building health’ – that is, ventilation, air filtration and cleaning.

The hotel and hospitality property markets have been the hardest hit and we’d expect the drop in occupancy rates to continue for the rest of the year at least.

Any return to normalcy will take time given the restrictions on travel and people remaining wary about travelling.

INDUSTRIAL PROPERTY

In industrial property, transaction volumes have tumbled by about 75 per cent in the first quarter compared to a year ago. COVID-19 has disrupted global supply chains which may encourage industry to move away from a just-in-time to a just-in-case delivery model.

We’d expect to see some re-shoring or near shoring of industry as firms seek to locate production closer to different markets.

Unemployment and the lending market will be key for housing markets. Picture: Getty Images

Online shopping trends in future will also be on the minds of investors, damping down transaction values and volumes.

RESIDENTIAL PROPERTY

The residential market will take some time to recover to where it was earlier this year. The market has been hurt by the social restrictions that have stopped buyers from inspecting properties or attending auctions, as well as the weaker economy.

High unemployment rates, increased lending risk and credit tightening are all looming as roadblocks to a recovery. The market could also be hurt by ongoing travel bans and possible restrictions on immigration.

The construction industry, in the short run, will face delays in completing projects as supply chains take time to recover. This could be exacerbated if the trade war between the US and China spreads.

But global supply chain disruption may also open up new opportunities to source materials on shore from Australian manufacturers.

So, what’s the outlook for Australia’s economy and property markets?

With the right policies and stimulus, it is possible to have a V-shaped recovery for the economy. Thankfully, the pandemic crisis isn’t a financial crisis. Given banks remain healthy, once economy activity starts going back to normal, the engines of growth will start moving.

Different property asset classes will see different recovery paths. The retail and office markets will likely see a U-shaped recovery with a long flat bottom.

Once household incomes and jobs start recovering, the housing market will also start moving ahead. The eventual lifting of travel restrictions will further lift the market out of its current state.

Of all the markets, industrial property is likely has the strongest trajectory and we’d expect to see a V-shaped recovery.

Overall, the COVID-19 pandemic will have economic impacts across the property board, but with any luck, as restrictions lift, we will see the beginnings of recovery.

Paul Abrahams — Positive outcomes on building sites during Covid restrictions

Paul is a co-founder and director of Debuilt Property. Paul has extensive experience in construction, project management, development management and asset management.

When Victoria’s Stage 3 Covid-19 restrictions were implemented in March, the construction industry was fortunate. Building sites have typically remained open throughout the pandemic; due partly to good site management and diligence. 

Through Debuilt’s role in monitoring construction projects for financiers, I have visited numerous sites and have noticed an overwhelmingly high degree of professionalism exhibited by project managers, site managers and tradesmen in dealing with the challenges of the pandemic.

What is happening on site?

At an industry level, there has been unprecedented collaboration between unions and employers. This has been replicated on site between the builder, subcontractors and their employees. Whilst there have been some accounts of possible transgressions of physical distancing (often reported to authorities by neighbours in lockdown), the consensus is that the protocols are being followed effectively.

Onsite strategies to abide by Covid restrictions include:

• Redesigning the site sheds to allow for physical distancing

• Continual disinfecting by workers

• Additional cleaning rosters and professional cleaners each day adding to the sanitation roster

• Signed health declarations prior to entry to site.

The developments that have been most impacted by physical distancing are the high rise projects. On these sites, there is a high demand for workers and materials hoists to provide vertical transport. Typically, a construction hoist would be able to transport 20 workers at a time. However under current regulations this has shrunk to a maximum of three, including the hoist driver. When a site has hundreds of workers this can become extremely unproductive. In addition, workers cannot be allowed to mill around in groups waiting for their turn in the hoist. 

Strategies have been put in place to manage demands on hoists, bathrooms and site sheds by staggering commencement, completion and break times. Inclement weather days become particularly problematic as site facilities are not able to accommodate physical distancing if all workers are consigned to the sheds; in which case many will need to be sent home.

The headcount of workers on site are also down for a variety of reasons. In addition to physical distancing, some workers stayed away due to the fear of transmission, (especially amongst migrant groups who may have extended families dealing with Covid 19 in Asia or Europe), an increased commitment to shared home duties, and also due to following government advice to stay away from work at the first sign of illness.

Builders have talked of the need to deal sensitively with their subcontractors and employees. These bosses recognise that their sites accommodate workers from diverse backgrounds who are dealing with the pandemic in their own way.

Productivity has been impacted — many builders feel that their sites are currently operating at around 70% effectiveness. They must juggle the need to maintain their contractual program whilst best managing their site team. The alternatives of working additional hours or increasing the numbers of workers on site each come with their own issues. 

Reports differ regarding subcontractors’ willingness to work overtime, or weekends, with some willing to attend but others seeking to limit overtime costs. There is also consideration being given to workers’ mental health; sites recognise the important balance between productive construction and overworking employees.

In some cases there has been the temptation to increase the amount of workers on site, however this can potentially be counterproductive. Apart from the increased difficulty of maintaining compliance with distancing restrictions, additional workers may create a false sense of improvement if the extra resources are not familiar with the implemented work cycles and methodology. Introducing workers from other sites can also increase the concern of virus transmission amongst the current team. In many cases it may be better to maintain a consistent team on site and make plans to improve the sequencing of works.

Positive news

There have, however, been some positive outcomes of the Covid restrictions. There have been no traffic delays for deliveries, particularly for CBD or inner suburban locations, and also an increase in the quality of workmanship for the finishing trades. This is a result of physical distancing requirements limiting multiple trades working on the top of each other in a particular work area.

Earlier this week it was reported in The Age that, in a joint letter to Premier Daniel Andrews, builders and seven construction unions have called for a trial of easing of restrictions on construction sites by taking a risk based approach on a site by site basis. Also, as every Victorian is aware, the State Govt has nominated Monday 11 May as the date which they will review and possibly ease some stage 3 restrictions. Watch this space.

It is certainly my observation that builders are experiencing increased program and financial risk, but are also finding ways to work smarter rather than harder. It has also been great to witness the co-operation between builders, trades and unions and a solution driven attitude on work sites. In general, I believe the construction industry should be commended on how it has managed the pandemic thus far.