How lockdowns impact housing markets – Chris Orr

As Director of Residential at Savills, Chris is responsible for the strategy & operation of its residential business. With a diverse experience in the industry as a business owner, salesperson, property manager & trainer, his insight across multiple markets has given him a unique approach to the way he looks at the industry today. With the backing of the Savills brand and its international network of operators, Chris is focused on delivering a world-class agency services business to enable his team and customers to reach their personal goals.

Historically when we look at different property markets, there have always been underlying drivers determining a region or local area’s popularity and subsequent increase or decrease in values.

It’s this popularity or supply and demand dynamic that creates the ebb and flow of values we call ‘the market’, which is typically dictated by factors such as employment, infrastructure and housing supply.

According to the OECD (Organisation for Economic Co-operation and Development) Consumer Confidence Index which provides indicative household sentiment, Australia is currently above 100 on the index which means that as a whole, our outlook toward the future economic situation is very positive. This is the first time since 2010 that our economic sentiment has been as high. Compared to the OECD baseline, our collective community is showing a much more positive outlook than many other countries in contrast to historic sentiment, which languished in comparison.

OECD Consumer Confidence Index (CCI) Amplitude adjusted, Long- term average + 100, Jane 2014 – Apr 2021

During 2020 the OECD CCI recorded a sharp decline in consumer sentiment as a direct result of the unknown outcome of the global pandemic and the imposed lockdowns. We were able to see clear trends in confidence levels that relate to consumer spending habits and buyer sentiment in the Australian property market as a flow on effect. With confidence levels regaining record highs, cheaper interest rates, banking deregulation and a need for more space, it’s easy to see why the local residential property market has continued to gain momentum.

SO HOW DO SHORTER LOCKDOWNS COMPARE TO LONGER ONES?

According to Roy Morgan research, shorter lockdowns as an isolated event do not impact the long-term sentiment of consumers. However, the data that we don’t yet have access to relates to the flow on effect of deferred investment, future unemployment and localised spending habits of those impacted as a result of an extended or repeat lockdown environment.

Some data that we do have and a key leading indicator to localised sentiment is interstate migration, where we either see a rise or fall in households moving between states for various reasons (excluding emigration from foreign countries). The following Australian Bureau of Statistics (ABS) data shows a change in the trend of migration pattern away from Victoria for the period in 2020 when a 111 day lockdown was endured. With an increased net growth to other states during this time, there was an underlying trend of migration away from the state in lockdown. While this data can’t be considered as a sole indication of the Victorian population sentiment (as we also see consistent negative net growth for NSW), it does show a clear change in migration patterns specific to Victoria that are relative to the timing of lockdowns.

ABS Interstage Migration data

WHY IS MIGRATION IMPORTANT?

There are a few things to consider when the population shrinks after a significant financial event. Put simply, if there are less people to occupy the property that currently exists and less businesses thriving which will impact future local employment, supply and demand will dictate that property values will decline without external stimulus.

The main learning for most of us from the initial lockdowns is that the office culture is changing, and we have seen a hybrid model of working from home emerge. This means that many are able to move to other areas and maintain current employment, fuelling price growth in regional markets and further exacerbating migration patterns. The Metropolitan markets however have seen a trend toward size; four bedrooms is the new three bedrooms, as many work from home and are in need of more space or flexible space to work from.

With a combined value of AU$8.1 trillion, the Australian residential property market is the single largest asset class in our economy and one that represents the majority of household wealth. This evidently is part of the very culture we embody of the great Australian dream and is fundamental to the majority of the population’s wealth and retirement strategy.

With this in mind, lockdowns are no longer just about stopping the spread of a pandemic. They are changing the very fabric of our economy in ways that we don’t yet understand.

Unbuilt work and the practice of architecture – Philip Vivian

This article was first published on ArchitectureAU…

©Andrew Goldie

Philip Vivian is a Director of renowned architecture firm Bates Smart, where he has led the Sydney studio since 1998. He is an expert in urban renewal and has continuously studied city design throughout his career, both at the London School of Economics and at Columbia University. Key projects include Sydney 2050, the City of Sydney’s vision plan for future urban transformation, and the integrated station developments at the Victoria Cross Metro Station in North Sydney and Pitt Street South in the Sydney CBD.

Sydney’s Pedestrian Boulevard by Bates Smart, which was shortlisted in the 2021 AA Prize for Unbuilt Work, is a city-shaping vision that aims to reclaim the city’s Park Street (seen as it currently stands, in top image, and re-imagined, below) for pedestrians.

The relaunch of the AA Prize for Unbuilt Work is timely, occurring in the midst of a global pandemic that is expected to cause the greatest economic recession since the Great Depression of the 1930s. Recessions can be tough periods for architectural practices, particularly when it comes to getting designs built. I recall my early years when twice I graduated into recessions: first the 1987 stock market crash and then again in 1991 during prime minister Paul Keating’s “recession we had to have.” As a result, although I was working, I didn’t experience having a project built for 10 years after graduation. Yet that time was formative in terms of thinking, development of ideas and international study.

Unbuilt work, I believe, is critically important to all practices and is not just the domain of emerging or radical practices. Unbuilt work is at the core of what it means to practise architecture. It influences the development of one’s architectural ethos, the honing of an “ideal” design process and the ability to explore ideas in a non-judgemental forum. Further, unbuilt work provides the opportunity to engage in the civic responsibility of city-shaping, representing the public interest and the common good.

Charles Eames’s 1969 diagram of the design process shows where the needs and interests of the client, the design office and society can overlap.

At Bates Smart, the majority of our unbuilt work comes from either competitions, where it is paid design work and usually for developers, or our city-shaping visions, which are internally generated and unpaid. Visions are speculative and carry the civic responsibility of public interest and the common good for the invisible client of the public, while competitions have quite specific briefs prepared by the developer and usually approved by a local government or state authority. While both of these forms of unbuilt work are undertaken without the client present, this unfettered approach does not, in our experience, lead to the unrealistic or “wild” design outcomes that are sometimes feared by developer clients.

The value of competitions and that of visions differs significantly. Competitions provide the relatively rare opportunity for the architect to control their design process, unhindered by weekly reporting to clients or project managers. Released from a managed process, the architectural practice is free to balance formal expression, public interest, city-making and ideas simultaneously with commercial reality, creating a truly integral design response. Charles Eames’s sketch of the design process comes to mind, in which bubbles representing the interests of the design office, the client and society overlap, with the “area of overlapping interest and concern [being where] the designer can work with conviction and enthusiasm.” 1 Inadvertently, the competition format has provided our practice with the time and intellectual space to hone an “ideal” design process to such an extent that, internally, we have started to critique our design process for commissioned works. We find ourselves asking whether we are delivering the same thorough process to our clients.

Unbuilt work from competitions also presents our practice with the opportunity to explore ideas and innovations without the scrutiny of commercial pressures. Ideas can be freely integrated into the thinking process, allowing the architect to explore and develop thoughts without the constant necessity to commercially justify them. Untried ideas for building materials, systems and expression can be explored, with the freedom to integrate or discard them at any time. For a large practice, this can provide a rich source of research and development, leading to genuine innovation. Some ideas that have arisen in design competitions include facades that filter air and noise, apartments that are fully flexible for future modifications, offices with “sunglasses” for glare and biophilic offices with flexible mass timber social spaces.

We view unbuilt competitions as valuable in the development of our culture and design process, rather than simply being a cost for the practice. They are short and intense periods of creativity, requiring a “cycling through” of many ideas in a compressed period of time. They are, to borrow a phrase from the industrial design industry, a form of rapid prototyping that encourages the speedy production of half-thought-through ideas. We encourage design teams to “fail fast and fail early,” leading to a broad and rapid exploration of ideas. The speed of competitions also leads us toward conceptual clarity, whereby ideas are distilled to their essence in a condensed period of time.

This combination of an unfettered process, condensed creativity and freedom to explore ideas ultimately has the value of developing and refining a practice’s architectural approach or its ethos. The ethos of a practice is, after all, the ultimate value it offers to its clients and, in this sense, unbuilt work is a fundamental basis of practice. In order to ensure we can continue to engage in this important practice, we attempt to manage the costs of competitions such that, ideally, the fee covers the labour cost. While there is no profit or overhead for the practice, this approach allows us to view competitions as a form of paid architectural research.

Separate to competitions, unbuilt work provides a means by which our practice has undertaken a series of pro-bono city-shaping urban visions for Sydney. These visions step into a governance void, where there is an absence of an overarching authority in charge of city-making. They are uncommissioned – and un-commissionable – existing in the inter-agency territory between and across government authorities. They are personal passion projects that, we believe, are a vitally important form of architectural advocacy and make a contribution to the public and civic debate about cities. More than a personal indulgence in city-shaping, these projects further the practice’s interest in transformative city-making while being a subtle form of brand positioning.

Urban visions reposition architects to take a visionary role in addressing the humanitarian challenges of the twenty-first century, including the problems of rapid urbanization, the climate crisis and urban inequality. This enables us to engage in big-picture thinking for cities and participate in a civic dialogue about the future of cities beyond the boundaries of everyday practice. They are a vehicle for us to use our professional design skills to think laterally, solve problems and present ideas for the future of cities, representing the value of design-led thinking in city design and posing as a type of “design-led optimism” for the future. They are also a form of architectural activism, representing the ethics of our practice in promoting the value of design, civic responsibility and city-making to the public. Distinct from criticism, these visions are positive or optimistic critiques of urban conditions and political decision-making that hasn’t considered its broader city-shaping responsibilities.

So, what is the value of unbuilt work to practice? In our experience, it has proved instrumental in the development of an approach to design or an architectural ethos, and in honing an “ideal” design process free of a client-led agenda. It gives architects the ability to explore ideas in a non-judgemental forum, freed from commercial critique, and to engage in a civic responsibility for city-shaping, representing the common good and the needs of society – our invisible clients – in the design process.

If this sounds a lot like the reason many of us became architects in the first place, one could conclude that the value of unbuilt work is fundamental, or essential, to practice. And although many architects perceive having their designs realized as one form of success, perhaps Winston Churchill was right when he said, “Success consists of going from failure to failure without loss of enthusiasm.”

Market Analysis: GDP, building approvals and more...

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

The overall economic outlook remains positive within Australia. The country’s GDP grew 1.8% in the March quarter and surprisingly has expanded by 1.1% since the start of the pandemic.

Australia’s real estate pipeline is likely to remain full, despite the wind-down of government stimuli such as HomeBuilder. Building approvals fell in April, in line with expectations, whilst construction activity rose. There has been a 12-month extension of the deadline to start HomeBuilder contracts, giving the building industry an opportunity to spread out its work in a more sustainable manner.

Dwelling approvals

The number of dwellings approved across Australia fell 8.6% in April, following an 18.9% rise in March. Despite this fall in overall dwelling approvals, national private sector detached dwelling approvals have reached a record high, up 4.6% in April. This is evidence of heightened market activity and can be partly attributed to lower borrowing costs. Since the introduction of HomeBuilder in June 2020, detached dwelling approvals have risen 84%. The HomeBuilder approval deadline closed on the April 14 but there is a lag with the commencement of the building approvals as the building approval process typically occurs after the submission of the HomeBuilder application. Therefore, building approvals will still be influenced by HomeBuilder, despite the deadline, in the coming months as people apply for planning permits following approval for the stimulus.

NSW returned the highest number of building approvals, with the number of detached dwellings approved in April increasing by 30.1%. Attached dwellings (apartments and townhouses) were up 12.1%. According to CoreLogic, Sydney has also experienced the largest rise in house prices and the state recorded the largest capital gain over Q2-2021 with values up 9.3%. Daniel Rossi, director of construction statistics at the ABS, stated that the April result emphasised a sustained strong demand for detached housing.

Non-Residential building approvals

The value of non-residential building approved fell 43.2% in April. This can be mainly attributed to a decrease in public sector approvals, following record-high levels seen in March.

Construction work done

Building construction nationally lifted by 2.5% in the March quarter but remained 1.8% lower than for the same period last year. Construction of new detached houses and renovations made up most of this lift, an indicator that people are upgrading their homes with cash that might have been spent on overseas holidays if it weren’t for the pandemic.

The surge in demand has also increased construction costs which were up 0.8% in the March quarter. It is likely future quarters will record a more substantial lift in construction costs as shortages of both materials and labour add some upwards pressure on prices.

Embracing mass timber construction in Australia – Graham Burrows

As a founding partner and director of Jackson Clements Burrows Architects (JCB), Graham has overseen the design and delivery of numerous projects in the multi-residential, commercial, education, hospitality, and public sectors, including the practice’s mass timber work. He operates from the sincere belief that architecture can improve peoples’ lives and by extension, make cities more liveable and vibrant. 

He is highly experienced in leading complex major projects, design curation, planning approval processes, and multi-stakeholder consultation and has acted as an expert witness in VCAT hearings and given presentations to VCAT in relation to good design, context, and design response strategies.

In recent years, the property industry has witnessed a swift rise in the use of mass timber construction. Its extraordinarily renewable and sustainable properties and significant carbon savings when compared to concrete or steel make it an excellent option for building.

The residential and commercial building sectors in Australia produce 23% of our national greenhouse emissions. Our industry is responsible for indirect emissions resulting from material production, energy consumption and waste disposal.[i] As architects and designers, we’re passionate advocates for sustainable innovation. Using various combinations of mass timber and prefabrication, to date JCB has completed two major student living developments, with a further two projects in the works: Clifton Hill Primary School, under construction (also Passivhaus), and a 16-storey commercial tower set to be one of Victoria’s tallest mass timber buildings.

WoodSolutions, which provides independent mass timber information and advisory to the industry, explains that Cross Laminated Timber (CLT) is the: “engineered wood of the future and is making the construction of entire buildings from timber a reality. First developed in Switzerland in the 1970s, CLT is an extension of the technology that began with plywood and may be best described as a 'jumbo plywood'.”[ii] So, even though timber as a construction material isn’t new by any means, innovation lies in the way that it’s now being manufactured and used by the industry today.

Project inception is the ideal time to explore if mass timber will be suitable as a construction material. Taking a holistic view of the project, start by considering the following benefits and challenges to determine if it will be an appropriate material for the project.

Benefits

•  Lightweight and can reduce cost of foundations (or can enable the consolidation of existing structures through vertical extensions)

• Competitive advantage through product differentiation

• Low carbon, renewable and sustainable material

• Adds warmth internally – natural and inviting material that supports wellbeing[iii] and biophilic design principles if timber can be exposed in the interiors

• Safer and faster construction sequencing

• Airtight, offering benefits for Passivhaus Certification

Additionally, there’s evidence that developers and building owners can expect that rents in low carbon and energy-efficient buildings will increase in response to higher tenant demand.[iv] This demand will be driven by the willingness of tenants to pay higher rents for buildings that align with their own environmentally sustainable ethos and aspirations.

Challenges

• It may not be appropriate for all building types or locations, although it can be part of a hybrid structure

• Fire engineering/fire rating approvals to work through (unless ‘Deemed to Satisfy’ detailing is used, for buildings up to 8-9 levels)

• Potential for a small increase in upfront costs, as it normally involves more off-site manufacturing

• Our growing local manufacturing industry is still not covering all the demand and projects may require overseas procurement

Designed by JCB, both Monash University’s Gillies Hall and La Trobe University Student Accommodation predominantly utilised CLT panels. Our experience shows that mass timber is particularly suited to modular building typologies such as apartments, student accommodation, teaching & learning and the commercial sector. The repetition of floorplate planning and the function of the building are good indicators of whether mass timber will be appropriate.

Case study 1: La Trobe University Student Accommodation

Completed last year, this $100M 624-bed student living development is the largest mass timber project in Victoria by volume, utilising 4500 cubic metres of Cross Laminated and GluLam timber. It also forms part of La Trobe’s ambitious plan to transform its Bundoora campus into a University City of the Future.

Two schemes were initially produced: a traditional concrete scheme and a timber scheme. Both options were evaluated on their ability to deliver triple bottom line benefits to La Trobe University and its students. Ultimately, timber was selected as it offered the best overall performance to meet the tight timeline and the University’s sustainability goals.

Timber is particularly well suited to this type of development; the cellular arrangement of bedrooms results in regular and efficient structural spans and the height of the building (six-storeys) is well positioned for efficient CLT slab and wall construction. The lightweight nature of timber construction allowed significant savings in foundations as compared to the concrete reference scheme.

Over 75% of the approximate 20,000 sqm gross floor and roof area, and over 90% of the load-bearing walls and columns are constructed in CLT and Glulam. Enough CLT panels were used to cover the Melbourne Cricket Ground playing surface twice over.

It was integral to the design to expose as much of the mass timber elements as possible. Given the scale of the project, we needed to balance the visual grade requirement with what was feasible both due to cost and transportation. Sanded structural grade CLT was selected for exposed areas.  On-site these were protected through construction and given a final sand and seal to deliver the required finish appearance.

The use of mass timber construction along with its high-performance unitised facade system will substantially lower the building’s carbon footprint during its lifespan.

Case study 2: Monash University’s Gillies Hall

Totalling six storeys in height, with five levels of mass timber over a first-floor concrete podium, Gillies Hall is located at the highest point of Monash University’s Peninsula campus. Comprising 150 student beds in the form of studio apartments, two apartments for residential support, and ground-floor common spaces supporting the whole campus residential community, Gillies Hall wears its green credentials proudly.

It has achieved some impressive firsts for low energy buildings in Australia – when it opened in 2019, it was the largest Passivhaus Certified (PHC) building in the southern hemisphere and Australia’s first student accommodation built to PHC standard. It’s also one of Australia’s largest CLT buildings that also achieves PHC, and the use of CLT panels halved the embodied carbon compared with typical concrete construction.

The project heralded one of the first entries of a Tier 1 builder into residential mass timber construction in Australia. This was significant, as the positive experience of Multiplex set the tone for other builders approaching timber construction. JCB also collaborated with Multiplex on the later La Trobe University project.

The project builds upon Monash University’s model of pastoral care with communal kitchens placed directly outside lifts on each floor to increase incidental bump factors and to celebrate the warmth of the exposed CLT structure and natural materials.

The fantastic renewable properties of timber cannot be underestimated. Interestingly, based on the volumetric growth rate of Australian softwood plantations, the volume of timber used in the La Trobe University project (4500 cubic metres) regrew in 6.5 - 7 hours, while Gillies Hall (1800 cubic metres) regrew in only 2 - 2.5 hours.

In JCB’s viewpoint, mass timber use will continue to grow, and it will be a powerful tool for the industry to design and deliver the future of low carbon buildings. 

---

[i] https://www.climatechangeauthority.gov.au/sites/default/files/2020-06/submissions/2015/Green%20Business%20Council%20of%20Australia%20-%20attachment%202.pdf

[ii] https://www.woodsolutions.com.au/wood-product-categories/Cross-Laminated-Timber-CLT

[iii] https://www.woodsolutions.com.au/wood-at-work

[iv] https://www.climatechangeauthority.gov.au/sites/default/files/2020-06/submissions/2015/Green%20Business%20Council%20of%20Australia%20-%20attachment%202.pdf

ESG – a non-negotiable for property — Adam Murchie

Adam is the co-founder of Forza Capital, a property funds management business that specialises in value added and opportunistic investments on behalf of high net worth investors. Over the 11 years of operation, Forza Capital has built an enviable reputation through delivering investor IRR’s (net of fees) on concluded transactions of over 23%.

Adam heads up the investment side of the business. Adam has a strong interest in governance, sustainability and philanthropy – he was the former Vice President of the Property Funds Association of Australia (PFA), founded its Sustainability Committee and is currently involved as a Committee Member of Gruppetto, a philanthropic sub-fund of the Australian Communities Foundation.

Environmental, Social and Governance (ESG) criteria are fast becoming key drivers to investment allocation and outcomes. ESG can be a divisive topic that elicits emotive responses both for and against the concept. Even disregarding the moral and social responsibilities and focusing entirely on financial outcomes, the pursuit of strong ESG outcomes is critical.

ESG refers to the three criteria that are increasingly used to assess the return and risk of investments beyond financial outcomes. Investing does not occur in a vacuum - in fact, investing is the aggregate exposure to risk management, corporate behaviour, investment markets and environmental responses (both in the biological and human behavioural context).

ESG is inextricably linked to investment returns in the same way that investor behaviour impacts market performance. There is a well-established (long term) positive correlation between managers and investments that have strong ESG credentials and long-term outperformance. ESG is really just another form of risk analysis and management that looks at ‘non-balance sheet’ issues to analyse where investment performance may be positively or negatively impacted by corporate behaviour.

Very quickly, the narrative on ESG is moving away from a ‘nice to have’ to a mandatory and minimum requirement. Some of the greatest risks in investment markets over the last few years have come from non-financial sources. Consider the Banking Royal Commission where the cost of appalling and ingrained governance failures was ultimately borne by consumers. Or the environmental disaster that was the worst bushfire season on record in 2019/20, which occurred as climate action was elevated as the global social movement of this time.

Integrating ESG into business and investment decision making is essential and done properly, costs you nothing but can materially reduce risk and improve performance. COVID-19 has highlighted the causal link between social outcomes and financial ones; stripping some industries and business bare (think AMP and coal fired power plants), whilst driving unprecedented growth in others (renewable energy and electric vehicles) .

To date, many investment professionals have not really considered, or priced, the cost associated with acting unsustainably. Poor governance can lead to major financial loss for many and inadequate environmental controls are resulting in catastrophic global changes, increasing electricity costs, higher insurance premiums (or lack of insurance availability) and accelerating obsolescence.

The social impacts of poorly designed, poorly built residential dwellings are being felt by whole communities and are forcing behavioural change. Property has been at the forefront of ESG development for two reasons. Firstly, property is a major producer of greenhouse gases through embodied energy in construction materials and through ongoing energy usage. Secondly, building design is key in facilitating behavioural change of residents and occupants.

One key application of ESG to property relates to the recycling of old buildings. There should be a broader acknowledgement that the embodied energy in new buildings makes truly sustainable development nearly impossible. By recycling old buildings, we can reduce planning risk and rejuvenate existing assets, creating positive environmental, social and financial outcomes concurrently.

Where the construction of new buildings is necessary, design should go beyond code compliance to achieve leading environmental credentials at the time of construction. Many of the most impactful environmental building design elements, such as façade shading elements and integration of green walls and deep planting, are thousands of years old and cost almost nothing,

Technology also has a strong ESG role to play, especially when it comes to property. Building Management Systems can be used to fine tune an asset’s operation to minimise energy wastage, improve efficiency and reduce costs whilst also improving the occupants’ quality of life.

The considered use of buildings and supportive planning frameworks are also important. The co-location and integration of amenities such as childcare alongside offices can allow primary carers to advance in their careers whilst balancing family demands. This in turn can increase employee retention, and tenant retention for landlords.

PV solar arrays can also be deployed to reduce energy use, roof heat load and to create financial gains. In Queensland, where most leases are on a ‘gross’ basis, PV cells can be used to reduce common area power and increase net income. If a property sells on a 6% cap rate, there is a nearly a 17X multiple on the additional net income whereas the solar PV arrays typically cost 4-5X the annual savings generated. That is a significant arbitrage and a compelling investment outcome, both in terms of financial and ESG outcomes.

Other ESG considerations for new buildings include integration of End of Trip facilities that encourage people to ride or run to work, the creation of communities for the sharing of resources and experiences, improvement of air conditioning systems to both reduce load and increase fresh air and better design layout to improve the health and wellbeing of occupants.

By designing for the future, we can increase building lifecycles and resilience, reduce redundancy and running costs, and improve tenant attraction and retention. In time this may lead to more diverse debt funding sources with optimised pricing outcomes or better access to alternative capital that is seeking results beyond just financial returns.

ESG is no longer optional or nice to have, and ESG considerations will continue to flow into investment markets. Both those who actively choose to be at the forefront of this movement, and those who are dragged into it through customer, client or regulatory demands will find it an unavoidable element of business and investment.

Outside the environmental considerations for us and future generations, real assets play a key role in the operational lives of our society. Property investors wholly benefit from using ESG to proactively identify risks and create opportunities to secure tenants, source funding and optimise pricing outcomes.

While ESG outcomes can be on occasion difficult to quantify, better tools and systems will evolve to measure the positive impacts. We hope these will become commonplace for all investors in times to come. In the meantime, by understanding the importance of integrating ESG and being at its forefront, industry leaders will remain ahead of the competition and offer investments which not only enhance value but reduce risk and obsolescence for their investors.

A budget right for its time — Andrew Cocks

Andrew Cocks is the Managing Director at Richardson & Wrench, Australia’s oldest real estate agency. Andrew has years of experience in business, marketing and project and development management.

There’s plenty for the property industry to like in the Federal Budget handed down last night, not because of any specific measure but in the myriad provisions to keep cash and confidence flowing in our pandemic-constrained economy.

Treasurer Josh Frydenberg declared “jobs are coming back, the economy is coming back and Australia is coming back”. And he was not afraid to throw money into sustaining the comeback, never mind the $161 billion deficit we’ll clock up this year.

Jobs and training took centre stage in the Frydenberg 2021 Budget and that is where the focus needs to be.

In a red hot real estate market in which buyers have taken on high levels of debt, the greatest risk to individuals, the sector, and the economy is a loss of income. The government has put some ballast into the jobs market by pumping even more billions into industries that will support jobs, this time without the blinkered high viz vision of its last effort.

For anybody who’s been hibernating over the past few months, the government was facing a gender revolt over its failure to recognise the female 50 per cent of the population in its previous Budget and given the ensuing fury I suspect there were was a flurry of late-night revisions in preparation for this effort.

Most significant is the additional investment in early childhood education and care, not a welfare payment but an economic stimulus to encourage more women to increase their hours of work without the tax penalty that makes it barely worthwhile.

While it falls short of the hopes of many it’s a step that will increase household incomes and we all know that it takes two incomes to support a mortgage in most regions of Australia. So whatever is good for the family budget is good for real estate. Given the beneficiaries are families with two children in care, there’s a hint too that this might be an incentive to make up the migration deficit with some home grown population growth.

Looking at measures that directly impact the housing market, one of the more welcome announcements sits under the heading of superannuation. The age limit for the existing downsizer scheme will be lowered from 65 to 60 meaning more people will be able to sell the family home and put $300,000 into their super without a high tax penalty.

This measure encourages older people planning for a less mobile future to “right size” sooner, liberating housing stock better suited to families than a couple or single person rattling around a large high maintenance home.

Helping single parents buy a home with a 2 per cent deposit displays a sentiment in the right place but the devil will be in the detail. Starting over after divorce is tough on both parties and the ability to establish a new home will make a significant contribution to the economic security of the custodial parent. At this particular moment, with low interest rates making a mortgage cheaper than rent in some areas, this measure might put a small dent in the number of women over 55 who make up the fastest growing group of homeless people in Australia.

Extension of the New Home Guarantee is a positive move though it has its share of detractors who argue that such measures only push up the price of homes. With cheap money in ample supply, home prices are going up no matter and I’d rather see young Australians get help with the high deposit hurdle and own their home sooner rather than later.

Likewise, lifting the cap on the First Home Super Saver Scheme from $30,000 to $50,000 is a self help measure to break into the housing market. Those who argue that it will erode retirement savings ignore the fact that it applies to voluntary contributions and merely encourages saving in a more tax effective way. Anybody hoping for a comfortable retirement knows that housing security is key.

The government still likes its high viz photo opps and the $15 billion allocated to major infrastructure investment will ensure they have hard hat moments for a few years to come and of course these projects come with a big jobs benefit.

But this Budget has taken note of the need for social infrastructure and the services sector, which already employs thousands and has potential to employ many more, will be the beneficiary.

Think aged care and child care, education and training. There is some serious money being directed to the aged care sector and that is another area where the real estate sector stands to gain. The Royal Commission Into Aged Care delivered five weighty volumes of reasons to avoid aged care, and therefore remain in a home not suited to age or health status.

Fix up the system and more might be willing to sell up and use the proceeds to live in a managed care facility.

There’s a welcome $1 billion extra to expand the JobTrainer scheme and apprenticeships and traineeships.

It wouldn’t be a Budget as we know it without a bit of a tax sweetener. Lower and middle-income earners will receive tax relief of up to $2,745 for singles, and up to $5,490 for dual-income families by lifting the income thresholds.

There are not a lot of losers in this “something for everyone” budget. You could argue that the debt to keep us afloat today will be a millstone around the necks of future generations but as we are reminded, we are not out of this pandemic yet.

The economy is bouncing back and last night Frydenberg gave it all the room it needs to keep on growing. The rest is up to us.

This article first appeared on Elite Agent

Paul Abrahams on the property market

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

As HomeBuilder and other government stimulus begin to wind down, the industry is slowly steadying. All trends throughout February and March appear to be linked – building approvals continue their record climb, while home loan commitments saw their fastest increase since July 2003.

Dwelling approvals

The number of dwellings approved nationally rose 17.4% in March, following a 20.1% rise in February. This is evidence of heightened market activity, and can be partly attributed to lower borrowing costs.

However, the proportion of houses versus apartments approved varied from state to state. Victoria had a significantly larger number of houses approved, whereas NSW saw apartment approvals skyrocket. This is likely due to preferences shifting to smaller dwellings as Sydney’s property prices increase.

Dwellings commenced

Dwelling commencements varied state-by-state in Q4-2020, with Western Australia seeing the most dramatic increases to December, surging past its 2018 peak to hit an all-time high. Queensland, NSW and Victoria all saw increases in commencements, but are not yet returning to peak levels like WA. It is likely the HomeBuilder and First Home Owner Grant stimuli assisted with the increased levels.

Housing Finance

New loan commitments for housing rose 5.5% in March 2021 to a new record high of $30.2 billion. This rise is the largest recorded since July 2003 and was driven by increased loan commitments to investors for existing dwellings. Major banks experienced the largest increase in lending, with a 30.5% rise since February. Minor banks also increased quite dramatically by 25.6%. Non-bank loan commitments rose 12.2% compared to February.

Lending for housing is a good indicator of dwelling price movements. House price gains are significantly higher than the historical average monthly rate of growth.

Experts suggest that consumers are searching for lenders who provide high-quality online products and services, something which is common amongst smaller non-bank lenders, as a result of the Covid-19 pandemic. Non-bank lenders also often have shorter processing and approval times, and during the pandemic, people have found more time to shop around to find the best online deals.

Lending to investors accounted for more than half of the March rise in housing loan commitments, with a 37.5% rise in value in March. The value for owner-occupiers grew 25.4% in March.

Financing Australia's newest property asset class — Andrew Schwartz

This article was first published on Livewire…

Andrew is Qualitas’ Group Managing Director and a co-founder of the firm in 2008 and has over 32 years’ experience in financial services with an extensive track record across real estate investments. Andrew is responsible for overseeing the group’s activities, setting the strategic direction of the business, as well as building and enhancing relationships with the firm’s clients and investors. Andrew is a full voting member of the Qualitas Investment Committee and is the Chief Investment Officer for the various Qualitas debt and equity funds.

Everywhere you look are signs the property market is as hot as ever. Capital city markets residential clearance rates are hitting all-time highs, regional markets are still riding the wave of the Federal HomeBuilder stimulus and the COVID-recovery is roaring... with a long immigration runway to boost the sector in the long term.

But who is funding the boom? Federal stimulus might be fuelling the demand-side of the equation but the supply-side of the property sector is gearing up to meet future housing expectations, including the influx of demand when immigration returns. The total commercial real estate (CRE) debt market is a $350 billion opportunity and it's growing.

Qualitas is one such investment firm looking to back developers and finance the new supply pipeline. It's also focussing on Australia's newest asset class, build-to-rent.

The target market for build-to-rent has traditionally been some 12 million young Australians who aren't ready to get on to the property ladder. While this asset class is yet to take off in Australia, in the USA, the much more established build-to-rent sector totals 31.4 million units, according to CBRE, and represented 25.8% of the total housing stock.

We recently sat down with Andrew Schwartz, co-founder and group managing director of Qualitas to find out more about build-to-rent and the private debt financing market more broadly. This powerful investment firm has circa $3 billion of funds under management and focuses on investing debt and equity into real estate with significant exposure to senior debt and mezzanine construction finance, including financing the build-to-rent sector.

Qualitas has four distinct investment strategies across the real estate sector, namely private debt, build-to-rent, opportunistic and long WALE (weighted average lease expiry). Could you just tell us a little bit about these investment strategies?

The private debt strategies really focus on senior mortgages, mezzanine debt and construction finance. So, we've got that as three distinct strategies within private debt.

The second strategy is build-to-rent, where we invest as equity sponsor as well as debt into build-to-rent projects but we don’t invest as both debt and equity into the same project to avoid conflicts of interest.

Thirdly, we run an equity opportunistic strategy which focuses more on development projects.

And then the fourth strategy is long WALE (weighted average lease expiry), which focuses on lower, more stable, reliable income streams from mature properties that have long leases.

Do you have an asset class that you're looking at the most favourably or has the most promising outlook? So from commercial to industrial, to residential?

It's very much project-specific and not a one size fits all response.

We continue to like the residential sector as its experiencing very favourable conditions particularly the land subdivision market. Much of the demand has been brought forward because of significant government incentives that have boosted the regional areas. But what we have seen is a bring forward of future volume. Our outlook is that demand will dampen but not fall off a cliff. There are a lot of pre-orders in the system that will need to be met.

The expectation is the apartment sector, which has been weak from a new development point, will swing back over the next couple of years. This will depend on borders opening up and migration returning.

Many of our partners and borrowers are buying ahead of this trend and getting ready for the next cycle which is coming. We have a significant pipeline of exciting new projects we are currently considering for capital allocation

In my view, Australia is absolutely shining through this COVID crisis. People who want to move to Australia will want to be here even more and those factors will ultimately lead to a very substantial rise in the residential market.

Commercial office, again, I think it's project-specific. It depends on where you are.

An office readjustment process is currently underway particularly in the CBD where we are seeing decentralisation out of the CBD to inner urban areas.

What I have observed to date is that when you assess the people in your office generally you can categorise employees into broadly four groups of people.

1. Firstly, those people who have love the office and have been very much wanting to come back.

2. Next are employees who wish to only return 2 or 3 days a week.

3. The third category of people who have made it clear that they are never coming back because they love working remotely, and lastly

4. There is a group of young graduates and new starters who feel the need to be in an office to learn the company culture and dynamic.

As this adjustment process works its way through on lease expiry dates and if tenants give back say 10% of their existing space it will create 1 million square meters of backfill space in Melbourne and Sydney alone. This is the equivalent to roughly 20 large office buildings being empty. Tenants will use the opportunity to upgrade their premises and this could well have a cascading effect on the bottom tier of buildings that must be repurposed.

I do believe Build to Order where large tenants pre-commit in advance will continue to occur because much of the empty office space will not be contiguous and the consolidation process will take a number of years to work through the system as tenant expiries occur and landlords seek to move tenants into smaller tenancies.

Industrial is the absolute darling of the market, particularly because online logistics have really brought that sector alive over the last couple of years, particularly through COVID.

Retail is a whole other sector, probably a little bit more challenged, but also with opportunity as well.

There was one particular strategy that I wanted to explore with you today and that's debt. So could you explain the types of debt that you're invested in?

We're invested across three different private debt strategies: one is investment debt, the second is construction debt, and we also do some mezzanine finance through some of our funds as well.

The appeal of debt is the fact that it provides known, regular income. You know what you're getting right from the outset, you have security for risk of downside. So it offers you protections that you just can't achieve through an equity investment into property. For many investors, rightly or wrongly, they're concerned about cap rate softening in a changing market.

Debt is a good place to be if you believe that some of that cap rate compression may have come out of the market going forward. So for different reasons investors find this asset class very appealing. It's a relatively new asset class in the Australian market, but certainly gaining favour with a lot of investors.

How big is the real estate debt market?

Commercial real estate (CRE) debt is estimated to be circa $350 billion noting that it excludes housing loans that the banks have, which is obviously a much larger market. But the CRE debt market is growing by about approximately 4% per annum and the non-banks, such as Qualitas, control about 6-8% of that market. This is very low compared to say the US or the UK where the non-bank market is closer to 40%.

So that 4% growth rate is quite interesting. What are some of the drivers to that?

Well, I think part of it is just rising values where the underlying real estate value goes up and therefore it can support the natural increase to debt levels without changing loan-to-value ratios in any way. Some of that growth would also be in respect of new development activities as well where people are looking to construct residential buildings or new industrial buildings so construction finance would be caught up in those numbers too.

Is there a particular driver for developers looking to go to alternative lenders like yourself as opposed to big banks?

They're really seeking greater flexibility. Alternate lenders have fewer constraints in respect of things such as debt sizing, as an example, relative to the banks. And often just the sheer speed at which a non-bank can move and its flexibility are major drivers for borrowers. I think what's changed in the past few years is for most borrowers, having a relationship with a non-bank was a nice-to-have. I would say now for borrowers it's a must-have, and it's really about ensuring that you've got a relationship with one of the major non-bank providers so that you're able to really take advantage of their total lending capability.

Can you briefly explain the build-to-rent sector for our readers? What is it?

It’s where a developer builds a large residential high-density development of at least 200 units specific for a rental market. Think of it as a "build to hold" strategy, not one based on selling the apartment but rather holding in one line purely for rental and offering integrated service and delivery.

What is it about this asset class which is appealing to you?

It’s appealing because there is a new generation of young adults who want to rent and not own. The demographic is 25-39 year olds with no real offering for that age group. It's particularly focused on the apartment product, in the location they want, with the service offering they want. We estimate that demographic is 12 million people and 50% of them rent. It’s a large demographic. It’s partly affordability but partly they have other priorities including personal flexibility or capital flexibility, so they are not tied into residential real estate as their main investment strategy.

Are you seeing a lot of interest from investors in this asset class, both in Australia and overseas?

We are seeing significant investor appetite for the sector, early adopters of this strategy, who see the value in having a diversity of income derived from a multitude of tenants. Also, office is no longer the shining asset class for the moment and residential yields are approximating office yields, allowing investors to consider residential as a long-term asset hold. To make this work you really need large scale and volume. You can’t be a private developer looking to do this once-off.

What are some of the traps of CRE debt investment for the newbies to this sector?

I think the most important aspect for new investors to CRE debt investing is that a “first mortgage” is not a homogenous investment. Terms and conditions differ, quality of the counterparties have nuances and the quality of the security differs. I sometimes have concerns that new investors don’t understand these differential points and are merely attracted to a headline rate. Thankfully at Qualitas we have a very strong track record in our debt lending, but its important for investors to note that there is no such thing as a ’free lunch’ when it comes to participating in the debt market. If you are earning a high return there is always a good reason for that occurring. The answer is not that the borrower blindly agreed to a high rate of return.

There is a direct correlation between risk and return and the market is very efficient in this regard. The market is deep and based on extensive knowledge. So the bottom line for investors is to do your homework and really question why a lender may be offering very high returns for the investors and what is the asset quality giving rise to those returns.

What are some of your key indicators for the growth of the residential debt market overall? You mentioned residential development is likely to have a huge uptick when the "immigration taps" are turned back on. Is that something you're looking at for the debt market as well?

It's definitely one indicator. I think the big driver of the market is really interest rates. The indicator that I often look at is the stability of interest rates at the current level. I think the recent comments by the Reserve Bank Governor indicating rates would stay steady for the next three years really provides a lot of confidence to property investors that rates won't run away with them and for most property holders and investors just watching the cost of capital and how that interacts with capital values is the indicator I mostly look at.

Are there any other key trends that you see or key opportunities coming up for the year ahead?

The things to really watch closely are economic growth rates as that always plays into confidence levels. We're also watching the unemployment situation within the Australian economy because employment is an indicator of spare capacity. So while unemployment remains at relatively high levels, interest rates are unlikely to rise. That's one that we watch very carefully.

Immigration is a significant factor. For the first time in 100 years, immigration was actually running to a negative outflow.

There will be a "catch up event" that is likely to occur once the crisis, vaccination programmes and quarantine issues are resolved. There's going to be a big impetus for a catch-up event in respect of the population that should have a really positive effect on real estate. So they're all the things we're watching on the upside.

On the downside, we watch the reverse: interest rate increases, tightening of employment levels, reducing spare capacity in the economy, lack of investor confidence, lack of consumer confidence, the profitability of businesses reducing across the board. They're the top indicators we’re watching on the downside risk.

Proposed NSW Property Tax — Robert Ellis

Robert Ellis, Director at Charter Keck Cramer, is a Certified Practising Valuer who commenced his career as a generalist covering a broad range of asset types. He has since carved out a speciality in residential and mixed-use development completing major valuation, development advisory and research engagements for a broad range of clients including major banks & financiers, corporate and institutional clients, private and public developers and government bodies across New South Wales.

Overview

• The NSW treasurer has proposed sweeping changes to the current stamp duty system.

• The consultation period for the proposed changes closed on March 15, 2021.

• Purchasers to be given choice of paying stamp duty or ‘opting-in’ for annual property tax.

• The annual property tax would be based on the unimproved land value.

• Scheme to be phased in with an initial price threshold, although yet unknown.

• Anticipated initial hit to the NSW budget in the short to medium term with reduced stamp duty revenue.

• There exists the potential for an initial increase to house prices – approximately equivalent to the current stamp duty amount – and the creation of a two-tiered market.

THE CURRENT FRAMEWORK

The current NSW stamp duty system has been an integral part of the NSW tax system since 1865 and provides government with a source of revenue relative to the performance of property markets. Recently, the NSW Treasurer Dominic Perrottet described the current system as an impediment for purchasers to enter the property market, particularly the young and those living in Sydney. Moreover, the system is considered by many to be outdated and not reflecting current work or living habits of the general populace, which is now significantly more transient and migratory than in previous generations.

A fixed, up-front duty for every property transaction is considered by the Treasurer to be a hindrance to allocating both human and housing resources to its most economical use. The NSW government is hoping a new proposed model will enable first home buyers to get their foot in the door, encourage people to purchase houses that meet their current needs (for both personal and employment reasons), and prompt retirees to right-size.

In November of 2020, NSW Treasury released a consultation paper outlining the proposed framework for a new property tax to replace both stamp duty and land tax within NSW. The public consultation timeframe began at the announcement of the budget in November 2020, and concluded on 15 March 2021, with a feedback report due from Government in mid-2021.

The proposal seeks a phasing out of stamp duty and land tax in their current form. Broadly, it is proposed that purchasers will be able to choose between the current system of paying a one-off stamp duty amount (and land tax where applicable) at the time of purchase, or instead opt in for a smaller annual property tax based on the unimproved value of the land.

THE NEW FRAMEWORK

In brief, the following is proposed:

• A choice between paying stamp duty upfront, or ‘opt-in’ for the annual property tax.

• Once the property has been opted in, subsequent owners must pay the property tax.

• No requirement to pay land tax once the asset has been opted into the scheme.

• Those who have already paid stamp duty, won’t be subject to an annual property tax.

• A lower rate for owner-occupiers, and higher rates for investors and commercial properties.

• An initial pricing threshold to limit the number of properties eligible to opt-in allowing for a ‘smoother’ transition and revenue/debt ‘neutrality’ in the long term.

• Hardship provisions to ensure no homeowner is forced to sell their property to meet property tax liabilities.

• Protections to ensure no rental increase without the tenant’s consent.

• Existing stamp duty concessions for first home buyers to be replaced with a new grant up to $25,000.

Potential property tax rates outlined in the Consultation Paper are:

• Residential owner occupiers to pay $500 + 0.3% of the unimproved land value. Residential investors to pay $1,500 + 0.3% of the unimproved land value.

• Primary production land will incur a 0.3% of unimproved land value payment.

• Commercial property will be liable for 2.6% of unimproved land value.

What will it mean for our economy and industry?

Although considered by many to be a welcome and long overdue shake-up of the existing framework for property taxation and duties, the introduction of the new model has created some concerns over unintended implications.

Of initial concern is whether the proposal will result in a significant budget shortfall in the short to medium term. The NSW Government has indicated that property taxes, including both stamp duty and land tax, accounts for approximately 36% of NSW tax revenue. By their own estimates, the initial hit to the budget bottom line is forecast to be as much as $2 billion in any year. As recently as February 2021, stamp duty in NSW reached a record level of $816 million due to heightened activity across property markets, eclipsing the previous record of $636 million in 2017.

The proposed pricing threshold (amount not yet known) will allow for a gradual transition to the scheme and leave high value properties available for duty and immediate taxation. The NSW government has signalled its intent to borrow during a period of record low interest rates to cover any shortfall during the initial phase, and forecasts this will be repaid / reach neutrality in circa 50 years as more and more properties are opted in.

The proposed ‘opt-in’ system has been questioned for its effectiveness in transitioning away from stamp duty to the new property tax system. There is a risk the current model will create a two-tiered marketplace: one for properties that are opted-in, and those where the option of stamp duty still applies, each driven by the differing motivations of competing purchaser profiles.

In addition, any perceived savings to the purchaser in the short term from opting into the system, could unintentionally increase the cost of housing. Without the requirement for the purchaser to save for and fund stamp duty (in addition to a deposit of 10% to 20% of the purchase price), and subject to the treatment of the property tax by financiers when assessing loan applications, this could materially increase purchasing power of market participants. This in turn could flow on to an increase in property prices equivalent to the amount of the stamp duty “saving”.

The ‘opt-in’ system has also been criticized by some observers to potentially worsen the ‘lock-in’ effect, whereby current owners are further disincentivised from trading out of their home. These owner occupiers, say empty nesters who currently pay no annual property tax, may elect to remain in situ. A barrier to right-sizing would still be in place either by way of stamp duty or opting for a scheme which would increase annual financial obligations at a time when entering or nearing retirement, despite the proposed hardship provision.

Putting it into practise

Using the example of a recent sale of an inner-city terrace in Sydney, at a purchase price of $1,500,000 with an unimproved land value of $850,000 assessed by the NSW Valuer General, the upfront stamp duty would be $67,505. Adopting the possible property tax framework (annual charge of $500 + 0.3% of unimproved land value) the annual charge would be $3,050; an amount equivalent to 22 years of annual payments (without accounting for escalation in land values or increases to the rate of taxation) until equating to the up-front stamp duty cost.

Consider the buyer profile of a young professional couple looking to enter the property market, although with the view to upgrading in five to 10 years’ time. There is a clear financial incentive to opt for the annual property tax at the time of purchase. From the above example, there is a saving of $52,255 if the property were to be held for five years, decreasing to $37,005 if held for 10 years, assuming no escalation in land value or increase to the rate of taxation during this time.

If this same property were to meet the needs of a buyer as their ‘forever home’, there would be an incentive to pay stamp duty at the time of purchase particularly if it were intended to remain in occupation for a period greater than 22 years. More broadly, this purchaser is likely to preference properties that are yet to be opted into the scheme, still keeping the option of stamp duty on the table, to the exclusion of those now subject to the annual payment.

In the previous example of the young professional couple, where does this saving end up? It would be academic to suggest it is transferred to savings to meet future obligations, such as an annual property tax. However, in the context of the current market, the reality is that rather than fail to obtain the property, these purchasers will likely factor the perceived upfront saving into their purchase price as they compete for limited supply in a rising market.

What about international investors and non-residential property?

It is unclear in its current form whether international investors will be given both options, and if an additional surcharge will be added if they choose to ‘opt-in’, similar to existing surcharges for both stamp duty and land tax.

It is also unclear whether existing exemptions – for example not-for-profit entities, registered clubs, age-care, retirement, and so-on – will still be available. Bearing in mind the two largest exemptions (owner occupied and primary production properties) will not be exempt, it remains to be seen if these existing exemptions will survive the shake-up.

And for mixed-use property, how will the current proposal treat a single title premises consisting of both residential and non-residential uses? Existing information provided to date would seem to be silent on this point.

How will new property created under the scheme be dealt with? Will purchasers still have the option to opt in, or does this trace back to the circumstances of the property developed? Such are just some of the questions that remain unanswered. Naturally, there will be more scenarios that present themselves as we navigate the implications of a new taxation methodology, aligned to the current market participant circumstances.

Where to from here?

With any significant reform, there must be a vision and cause for change. The proposal put forward by the NSW government certainly addresses both of these. However, with the first real test of public scrutiny now upon us, it will no doubt be a moment of reflection for the property industry as a whole, as we consider the best way forward for all market participants.

Four factors - besides interest rates - that will shape the outlook for house prices — Shane Oliver

Shane Oliver is responsible for AMP Capital’s diversified investment funds and providing economic forecasts and analysis of key variables and issues affecting all asset markets. Shane is a regular media commentator on major economic and investment market issues, and their relationship to the investment cycle.

Average dwelling prices in Australian capital cities rose by 2.8% in March, their seventh consecutive monthly gain and the largest in more than 30 years. Prices are now up by 3.5% on previous record highs and almost 5% on pre-pandemic levels. Homeowners across the country are sharing in the good fortune, with Perth and Darwin the only two cities where residential property prices have not recently surpassed their previous high-water marks. Incredibly, regional markets have run even stronger over the past twelve months, up 11.4% on a year ago.

Source: CoreLogic, AMP Capital

Other indicators, including new housing finance commitments, sales volumes and clearance rates, support the narrative laid out by prices: the Australian housing market is booming again, following a brief fall of about 3% in the midst of the deepest recession since the 1930s.

The dominant player in this narrative has been, for the most part, the record low-interest rate environment. Loan serviceability has benefited immensely, with household interest payments as a percentage of disposable income at its lowest level since the 1990s, and low discount rates have improved the attractiveness of rental yields.

But for the moment low interest rates are mostly a given, since the RBA has indicated that it will keep them on hold until the economy records inflation figures within the target band of 2-3%. So, to determine reasons behind this boom and its likely trajectory over the next couple of years, it makes sense to take a closer look at a number of the other non-monetary factors at play.

Government support packages

Most Australians probably appreciate the extent to which JobKeeper has kept the country afloat over the past year, and if its removal continues to proceed without too much drama it will have been something of a victim of its own success (or is that design!). Other, less prominent, programs have also been put in place to support the housing industry over the period, including HomeBuilder (which was phased out with JobKeeper at the end of March), the First Home Loan Deposit Scheme (which is now tapped out) and a number of state-funded equivalents.

The winding back of these programs may still dampen the market a little, but their work is largely done, and in the absence of a significant new lockdown the impact should be marginal. Actual net job losses from the ending of JobKeeper are likely to be low and the proportion of loans at risk is minimal, as demonstrated by the fact that the value of home mortgages still relying on payment holidays had declined from 11% in May 2020 to less than 1%1  by the end of February.

Australia’s budding economic recovery

Recent labour force numbers show employment nearly back to pre-pandemic levels, and the rate of unemployment settling into what we expect will be its steady state as long as minimal disruption from the pandemic continues. And according to 2020’s December quarter GDP numbers, our economy had recovered to such an extent through the second half of 2021 that output was only 1.1% down on the same point in 20192. This is remarkable, given the sharp falls in the first half of the year, and indicates that we should return to pre-COVID levels sometime in the first half of this year (although return to trend will take longer).

Continued strong economic growth has immediate implications for incomes and house prices, and risks providing a solid platform for continued exuberance in housing.

Lending standards

In the past, house prices have been significantly affected as a result of changes made by APRA to regulations around lending standards for residential property3. The relaxation of these regulations in the period prior to the pandemic is arguably contributing to the availability of capital in the current boom, and since an interest rate rise is out of the question for the moment, it’s likely that the regulators will reach yet again for macro-prudential controls to slow housing lending and contain risk in the sector.

These actions don’t target house prices per se, but past experience indicates that surging house prices leads to a deterioration in lending standards and increasing risks to financial stability. And the metrics in front of the regulators at the moment show record housing finance, pointing to an acceleration in housing debt, an increasing share of lending at high loan to valuation (LVR) ratios and a rising share of interest-only loans, albeit from a low base.

All of this suggests that APRA could start tapping the lending standards brake soon, firstly by increasing interest rate buffers but potentially also by reintroducing limits on high LVR lending and restricting loans to customers with lower serviceability.

The effects of changing living patterns

Deferred spending has played a major role in driving housing demand through the pandemic; most salary-earners who kept their jobs were relatively unaffected by the downturn but had fewer opportunities to spend and so some focussed more on their home. This effect is likely to lessen as borders begin to re-open and travel resumes to a larger degree, but there are other lifestyle patterns that stand to endure beyond the end of the pandemic.

Lower rates of immigration (which disproportionately affects urban demand) and the secular trend towards working from home are two such factors, and both have contributed towards the outperformance of regional dwelling prices mentioned earlier (although regional property was also less exposed to indebtedness).

They are also helping to drive a growing disconnect between house and unit prices. Capital city house prices rose 3.1% in March and 6% over the last 12 months, whereas unit prices lagged with a 1.9% gain in the month and 1.1% rise on a year ago. This also reflected a disparity in rental movements between the two property classes, with average unit rents falling 3.8% compared to a 5.2% rise in house rents.

The immigration deficit will be resolved over time, although it is becoming clear that international borders will open more slowly than many were expecting. The trend to decentralised working will be more resilient, and governments may even consider encourage working from home as a way to take pressure off capital city prices over the longer term.

There have been other important influences at work in the housing market over the past year, including internal dynamics, such as the fear of missing out and the initial reluctance of property owners to sell into a falling market (which supported prices through the worst of the pandemic). Prices could also soon approach levels where poor affordability starts to significantly affect demand.

In the meantime, we can expect prices to rise another 15-20% over the next 18 months to two years, with the pace of growth slowing though 2021-22 as inflation starts to pick up and interest rate rises move back onto the agenda.

1 APRA (2021), Temporary loan repayment deferrals due to COVID-19, February 2021
2 https://www.ampcapital.com/au/en/insights-hub/articles/2021/march/december-quarter-gdp-numbers-show-a-strong-rebound-but-further-recovery-will-be-slower
3 Bullock M. & Orsmond D. (2019), House Prices and Financial Stability: An Australian Perspective, In Nijskens R., Lohuis M., Hilbers P. & Heeringa W. (eds) Hot Property: The Housing Market in Major Cities pp 195-205, Springer, Cham.

The future of workplace — Greg Sciortino

Greg is Knight Frank Town Planning’s Town Planner having recently completed his post-graduate qualification in urban and regional planning and is a qualified teacher. He has been involved in a wide variety of statutory and strategic projects, undertaking background research, preparing submissions, reviewing strategic documents, preparing development applications and presenting geographic information. Greg has a strong interest in strategic planning, sustainability and place making.

Workforce and workplace dynamics have been consistently changing and trends have adapted to new technologies and office strategies since the turn of the century. As millennials have entered the workforce, employers have needed to adapt to the new generation shifting their thinking regarding where, when and how employees work.

“These shifts are growing not only due to technological advances, but also due to the growing understanding that in order for employees to be more productive, they need to be happier and more satisfied” (Kropp, 2019). The aim of this post is to better understand how these trends have influenced the workforce and workplace and determine how planning for future developments can accommodate these changing work patterns.

COVID-19 has undoubtedly been one of the most significant global events to occur in the 21st Century and has caused the largest shift in work practices in recent history, forcing companies to be nimble and agile, creating efficient work from anywhere systems. A Gartner survey analysis reveals that post-pandemic, 41 percent of employees are likely to work remotely at least some of the time (HR Asia, 2020). How such a large portion of the working population continues to work from home is the next question.

IWG country head Damien Sheehan states “a hybrid model that incorporates elements of the head office plus multiple smaller private, flexible offices across decentralised suburban locations” are a more agile option for companies moving forward. The creation of smaller, accessible and localised working spaces will provide the workforce with those features of a working office environment and could further boost community wellbeing and sustainability.

This could also provide benefits for innovation and cross-pollination of ideas between sectors that usually would not mix in a traditional office environment. Providing new solutions to cater for changing workforce dynamics and provide local space for people to utilise will allow employers and employees the opportunity to create a virtual or physical environment and network that works best for their personalised situations.

The Greater Sydney Commission as part of the Metropolis of Three Cities Strategy is aiming to create 30-minute cities with multiple nodes within the Greater Sydney Metropolitan area. Hub and Spoke models of businesses with smaller offices located closer to where people live in these ‘spokes’ in smaller strategic centres and local centres will be a viable way forward in the future. Locating the right locations close to where employees live will be an important step in achieving a 30-minute city within Sydney.

Transport for NSW Network Capability Tool (Transport for NSW)

Living within walking distance to a workplace whether it be a formalised spoke space or a shared co-worker space close to home will be an important feature for employees wishing to maintain the flexibility they had during the time working from home in 2020, as well as providing many lifestyle and health benefits.

Possible Futures

There is no doubt that the future of the workplace has forever been changed by the pandemic. Creating new, different and safe workplaces for the workforce is still yet to be determined but a variety of ‘possibilities’ have been found to be the most likely. As mentioned previously, flexibility depending on specific employee and employer needs and benefits will continue into the future including specific responses to individual needs.

Deloitte’s March 2020 paper Future of Work: Ways of Working in Uncertain Times concluded that the workplace beyond 2020 will:

• Blend the physical and virtual environments and will deliver a consistent employer identity to all types of employees, contractors and other stakeholders.

• Provide personalized experiences that will empower people to be their best, balanced selves.

• Utilise collaboration tools and platforms that will support dynamic work locations and collaboration.

The offer of flexible work arrangements by employers represents more than just a response to the pandemic, but also represents a broader acceptance of flexible arrangements as the preferred method of working in the future. One possible solution for this is for new developments to incorporate a co-working space within a residential neighbourhood in new projects incorporating such a feature at the design stage underpinned by strata plans.

“Offering coworking spaces as an added feature in residential or mixed-use developments is definitely a timely notion. Many people are finding it difficult to work purely from home due to distractions and space/ infrastructure constraints” (The Daily Guardian, October 2020).

Integrating co-working spaces in residential developments represents a significant opportunity for developers to re-think the amenity mix, improve its relevance to purchaser’s post-pandemic and contribute to neighbourhood building and activation during for longer periods during the day and night. This goes hand-in-hand with allowing the workforce to choose where they would like to work in the future, allowing businesses and companies to seek flexible spaces and options as a means of future-proofing their business strategy and adapting to the changing needs of employees (Property Council of Australia, 2020). Keeping people within a precinct provides benefits and synergies to more sectors, including the commercial and retail footprints within such neighbourhoods.

There is also justification for the replacement of other amenity in high rise projects such as gyms and pools accounting for better use as worker or co-working space. “A 260 square metre space originally earmarked for a gym could accommodate up to 132 people per week if repurposed for apartment co-working. This is equivalent of about one full-time worker or three part-time workers per five square metres. It is worth questioning whether the gym—or any other amenity—would have the same rate of utilisation and engagement” (Huynh, Matkovic and Du, October 2020).

Workplace and workforce dynamics were considerably affected and changed in 2020 and will have a significant long lasting effect on the future. Changes have been seen in how employees approach work itself, productivity levels, a reimagined workplace and accessibility. The Work from Anywhere future of the workforce for a majority of businesses will cause a major reconfiguration of business strategy to create agility to cope with rapid change.

The planning system needs to get “climate conscious”, fast — John Brockhoff

John Brockhoff is the National Policy Manager for the Planning Institute of Australia. John guided the preparation of PIA’s policy positions on climate, infrastructure funding, the Parliamentary Inquiry into the ‘development of cities’, and PIA’s call for a ‘National Settlement Strategy’. John led the technical development of Sydney’s Metropolitan Strategy. He formulated NSW Government policy for urban renewal, employment lands, and the integration of land use and transport. In private practice, John led environmental assessment of water, road, and rail infrastructure projects, as well as policy-oriented research mapping city living conditions. John is currently an assessor on the NSW Regional Panel and Georges River Council Planning Panel.

The Planning Institute of Australia (PIA) is committed to achieving zero net carbon from the built environment by 2050, if not sooner.

But to achieve this goal it is critical that planning systems be a help – not a hindrance – by cutting greenhouse gas emissions and by adapting to climate change.

Ginninderry near Canberra has achieved a 6 Star Green Star – Communities rating, the highest rating available under the Green Building Council of Australia’s national Green Star – Communities rating tool.

The planning system

When planners assess development, they are shaping new additions to the built environment in the public interest.

Planners interpret development proposals through the filter of long-term strategy, plans and standards adopted by the community and their government. These rules are the “planning system”.

Australians ask a lot of our state and local government planning systems:

• to maintain investment and ensure a steady supply of building stock;

• to shape urban settlement in ways that work best with infrastructure;

• to create places and buildings that are well designed and resilient; and

• to avoid harm and ensure a positive contribution from the built environment.

Over time, coherent planning decisions should build the net worth of our cities, towns and regions.

The climate emergency

But the context for making planning decisions has changed. The Intergovernmental Panel on Climate Change (IPCC) notes we have less time to respond to reduce the impacts of climate change than the time we have available. This defines an emergency – and is the basis for moving more rapidly to reduce carbon emissions and improve resilience across all industry sectors.

We need climate-conscious planning systems that reflect the reality of a climate emergency and allow planners to make the best decisions possible.

In the absence of a national climate framework to allocate the most cost-effective pathways, each industry is setting its own response. For the built environment sector, there is action on building sustainability performance, construction codes and for urban design that responds to hazards and reduces the demand for energy. These initiatives will have long term benefits, but rapidly improving access to renewable energy – and responding to escalating hazards – are urgent needs, given the implications of carbon concentration trajectories on global temperature.

The goals of a “climate conscious” planning system

The task for a “climate conscious” planning system is clear. It must:

• enable urgent initiatives that transform the energy use and access to renewables – and offsets;

• set decision making pathways for the built environment and infrastructure investment to:

  • produce much less carbon;

  • adapt to changes in climate and hazards that are already locked in;

• ensure that living and working conditions in buildings and places are fit for future conditions;

• promote strategy to protect the values of the natural environment threatened by rapid climate change;

• continue to ensure that sympathetic development and investment flows smoothly according to current and future needs; and

• be able to adapt, listen, learn and build trust in the community.

A climate conscious planning system will have the “elements of a resilient system” in its rules and culture. It would grow the capacity of proponents, professionals and the community who work and engage with it. A climate conscious planning system would recognize that the single best pathway is not always the most resilient one. It would enable a diversity of scenarios to be considered and adaptable pathways to be pursued, it would ensure that decisions are made at the lowest capable level.

Figure 1: Characteristics of Resilient Systems (Kharazzi et al 2020)

A campaign to reform planning systems

As a body representing the planning profession, PIA has initiated a national campaign targeting every state and territory government to ensure that their planning systems enable effective climate action.

As an organization, we continues to advocate for national adoption of a zero net carbon commitment to meet our Paris Agreement obligations. We support a national climate change framework (Climate Bill) to allocate and account for abatement and adaptation tasks accordingly. This is an ongoing assignment.

However, in the meantime, planners must get their house in order. Australia’s federated system means each state and territory government sets the rules for land use strategy and development decision making, either centrally or via local government.

The different contexts make it impossible to set a single valid set of reforms, yet there are common challenges posed by climate change to which every planning system can respond. PIA’s Mitigation and Adaptation Discussion Papers help identify ten “asks” of a climate-conscious planning system.

The association is aware that these ten “asks” are not comprehensive – they represent a challenge for each jurisdiction to identify a suite of corresponding actions to make their planning systems more fit for purpose in a changing climate. We have asked working groups in each state and territory to respond with ten representative “fixes” (or actions) relevant to the reform of system.

Great ideas are already emerging, such as:

• incorporating resilience strategies into Regional Plans;

• integrating climate scenario planning into strategic plan decision making tools

• resolving EIS guidelines for solar farms;

• incorporating adaptive management pathways into development consent conditions;

• requiring building performance metrics for carbon emissions and thermal comfort respond to expected climatic conditions beyond 2050;

• clarifying rules and definitions for how precinct carbon performance would be measured; and

• considering a “climate filter” on the evaluation of the performance of infrastructure.

Some of these ideas are clear actions for “no regret” reforms – others expose how much we don’t know – and require work to build industry capacity. We are confident that the profession can progress the ‘no regret’ actions – while advocating for the means to solve the tough problems.

Getting past policy freeze

The complexity and scale of the climate change challenge can be overwhelming. Political gridlock and the rapidly changing nature of the emergency can make frustrate action. But planners know how to plan. We know the weaknesses of our planning systems and we can make headway on mitigation and adaptation by improving our tools as practitioners.

A concerted effort to fix key elements of each planning system around Australia would have a monumental impact on the performance of the built environment. Let’s harness our power and do our part in responding to the climate emergency.

This article was first published on The Fifth Estate. Access it here…

Why do we need investment in Affordable Housing and why should the development industry support it? — Rob McGauran

Rob McGauran leads the masterplanning, design advocacy and urban design disciplines at MGS Architects.

He is an experienced advocate, managing community consultation and government partnership processes involving large and complex multi-disciplinary consultant teams and stakeholder groups.

At a strategic planning level, Rob has been responsible for urban design frameworks and structure plans for key areas of Melbourne’s transformations, including Arden Urban Renewal Precinct, Footscray University Town, Cremorne Precinct and the historic Alphington Paper Mills. Rob has led the masterplans for Monash University, which has been awarded in Victoria and nationally, as well as for University of New South Wales, University of Wollongong, Victoria University and La Trobe University campuses.

His built projects are known for their innovation, relevance to contemporary issues and community focus.

In recent days we have seen many news stories pointing to the bounce back and now surge in house prices in our capital cities. With this a host of public servants, politicians, residential property investors, and homeowners sit back content, another KPI met, clearly all is well in the garden. The low interest rates, the decades-long incentives rewarding this investment class are working.  But are they?  Are we getting the housing infrastructure we need, in the locations and in the form and tenure required to build the Australia we need economically and socially?

The facts

• Average capital city prices have more than doubled since 2003 outstripping wages growth. 

• Career and income certainty in the last 10 years has rapidly transformed, with Covid 19 bringing into sharp focus the vulnerability of many Australians to loss of income and with that eviction.

• Once rent and mortgage costs are deducted, the rate of increase in average equivalised disposable income of the top 10% of households was 2.7 times faster than for the bottom 10% (between 1988 and 2015), with more rapid gaps established since that time.

• Home ownership across the nation continues to fall with now more than a third in rental accommodation. In areas of high concentration of jobs around which our nation is dependant, rental levels are sometimes more than half of all households and the availability of appropriate and affordable housing is even more dire.

• Our capital cities, our regional cities, and our popular tourist destinations all report major shortages of affordable housing for lower income households, including the key workers on which the centres are dependant for their services.

• For these renters (many of them millennials), higher debts on graduation combine with less job certainty, lower rates of wages growth and higher household costs to place households under enormous stress.

• Victoria has the lowest percentage of Public Housing in the country and whilst the unprecedented Big Build of the Andrews Government will introduce a welcome and massive investment of $5,3bn to replace old stock and build 12000 new homes, the increase only brings this housing targeted at our lowest income households to a level like that in NSW.

Work we undertook for the Inner South East group of councils with SGS consultants highlights this concerning shift with nearly all the areas of Melbourne serviced by good public transport severely, or extremely, unaffordable for single workers – identified with this darkening map occurring over only 8 years.

What is meant by Affordable Housing?

In recent years key changes in the Planning and Environment Act have made the delivery of Affordable Housing a key purpose of Planning and Urban Development. 

The Act has also provided definitions of what is meant by affordable housing describing three categories, Very Low, Low and Moderate-Income. The income levels are regularly updated and reflect the circumstances of a broad range of Victorians essential to our communities and economy

The Opportunity

20 years ago, as part of a broader research project looking at the future of the Australian City, I sought to better understand models of scalable investment in diversified income household. It had became evident that a combination of market failure and government inaction was leading to major areas of social disadvantage, with consequential social and productivity impacts across the nation.

Subsequent visits to institutions, NFP’s, developers and governments in the UK, North America, Europe, and Asia suggested interventionist models in housing supply as key infrastructure, was necessary to combat the absence of long-term thinking in the market. Whilst not always consistently pursued, the legacy of these initiatives has seen:

• The growth of listed developers such as Countryside in the UK who have leveraged access to prime development opportunities through trusted long-term partnerships with governments in delivering diverse and inclusive communities.

• Large not-for-profit Housing Associations that are complimentary to private supply chains, include the Peabody Trust and Clarion Housing Group in the UK with over 65,000 and 125,000 dwellings, and Paris Habitat in Paris with over 124000 units, respectively.

• In the US, the growth of the REIT Market with housing representing approximately 20% of the total market by value and affordable housing the fastest growing sector.  This has been supported by the development of a for-profit sector providing mixed market and subsidised housing - with Winn having over 100,000 units including 55,000 subsidised units.

In contrast, whilst our largest organisations are growing, and the number of community housing dwellings more than doubled between 2008/09 and 2017/18 from 39,800 to 87,800 dwellings, public housing has decreased by 20,000 in the same period.

Self-evidently, we have much to do.

Fast Tracking and faster support

In Victoria, the Minister of Planning has made available the Victorian Planning Authority and Development Victoria agencies responsible to fast-track rezoning and approvals for the development of strategic sites, where the provision of affordable housing is a key attribute of the project. 

By informing our clients of these opportunities to access fast track arrangements, we have seen complimentary enhanced local support with consequential lower development risk and enhanced diversified funding opportunities – which has resulted in a series of projects being rapidly delivered, including:

• The 24 hectare East Village Bentleigh for the Abacus/Gillon/Make Consortium achieving approval for a project inclusive of an obligation of 5% affordable housing in the 3,000+ unit that also includes a high performance public school campus and over 95,000 sqm of retail and employment space.

• The 51 hectare New Epping project for Riverlee, with the delivery of a Private Hospital, 151 Affordable Housing Units and a major new 1200 car carpark for Northern Hospital forming early stages of a project that will deliver more than 2,800 homes and 3,100 jobs and 5% affordable housing.

• The 16.4Ha Alphington Mills where a 5% commitment of the inclusion of affordable housing was achieved.

These projects reached the market in an expeditious time frame, in contrast to other projects that languish as they seek to argue that they have meet the (minimum) necessary community benefit thresholds to warrant support.

New Markets and Models

Numerous opportunities are emerging for innovative ways to deliver both development opportunity and community benefit. The chart above outlines some of these. 

Increasing Institutional investment in the sector is evident in examples such as investment of Australian Super in the Assemble BTR model, the mixed tenure Nightingale Village, and the emergence of Ethical Investment Classes and groups such as Conscious Investment Management. Based on the overseas precedents, these early entrants are likely to secure significant early scaling opportunities from governments and investors seeking solutions to pressing needs.

The missing middle

Whilst the increase in BTR markets is welcomed, most of its focus is the highest 20 % of income earners. Equally the focus of Government initiatives is the lowest quartile of income earners. 

For much of Australia the biggest issue by numbers and productivity impacts will lie in the missing middle: - Affordable rental housing in areas of high employment concentration; and designed to enable careers to be started, developed, resurrected, or grown and families nurtured. 

Our National success will, in large part, be dependant on the transformation of the Housing Investment Class (from what one professional colleague boasts is vanilla investor product for Mums and Dads and a global investment pool), to housing that is first and foremost configured as flexible high-quality infrastructure for the country, and quality homes for our people (that any of us would be happy to live in).

Access to high quality Development Opportunities

Following overseas precedents, the State and Local Government have increasingly announced that they are seeking partnerships for major urban renewal sites where inclusion of Affordable Housing will be a key criterion for developer participation.  These highly sought sites including the State-owned Arden Metro Precinct, the Fitzroy Gasworks with high expectations for affordable housing inclusion. 

Local Government is similarly developing strategies with similar aims. The City of Melbourne, Hobsons Bay, Glen Eira, Darebin and Moreland are amongst those with Affordable Housing strategies that develop expectations for developers and leverage their own land holdings.

In Banyule, the Bellfield site masterplanned by us for the council incorporated an affordable housing goal with Launch Housing nominated as the successful partner.

Bellfield site masterplan

It is not a new idea.

Delivering mixed tenure for communities of diverse means is not a new idea.

We have recently had the privilege of working with OCAV,  an NFP aged care provider that has been providing mixed asset level tenure for Victorians for more than 150 years where high nett worth individuals occupy dwelling undiscernible in specification and layout from low-income residents.

Leveraging Lazy Land

We have also been able to demonstrate how we can use lazy land to deliver affordable housing at locations in inner Melbourne over retail carparks and community facilities.  This has led to an expanded research project at the University of Melbourne that has identified the opportunity to leverage sites in inner and middle Melbourne for a further 30,000 affordable homes, with most achieving acceptable infrastructure category rates of return. 

We are similarly working with private sector, NFP and listed company clients about how to better leverage their development footprints to diversify income and partner opportunities and deliver positive impact.

Affordable Housing does not mean poor quality or bad neighbours.

Typically, by prioritising local people with strong local connections, participating clients have seen the development of strong relationships between new residents and neighbours that have strengthened communities.

If not, well-located Affordable Housing what is Plan B?

Many in the industry have clung to outdated taxation incentives and models focussed on negative gearing, rather than the sophisticated and demonstrated capacity of our REIT sector.  Unsophisticated research and the lack of design innovation has seen massive oversupply of approvals for units whilst amplifying chronic undersupply of essential housing - of the type needed by to 60% of those seeking rental accommodation in a locality.

Infrastructure Victoria has identified the need for a clear shared agenda of Affordable Secure Rental Housing as Key Infrastructure.

Without this they and other demographers and researchers point to a high likelihood that our cities and regions will see an explosion of misery, inequity and visible homelessness accompanied by frustration amongst industries of their inability to attract the best talent to areas of economic growth. 

Progressive developers are acting now. As one commented to me recently, if you are not prepared to embrace that we have a social contract with the community, then you will rapidly fall off the pace and be left the scraps.

---

Pressure on construction pricing eases due to COVID and falling activity: RLB — Arif Uzay

Arif Uzay joined Rider Levett Bucknall in 2002 as a cadet quantity surveyor, promoted to an associate in 2010 and in 2017 was appointed as a director. He is passionate about the built environment, diversity and inclusion within the construction industry, and contributing to change. Arif also demonstrates a comprehensive understanding of financial and cost management, specialising in conceptual estimating, cost planning, construction services and project procurement. He has considerable experience providing services for both the Government and the private sector on a broad range of construction projects and industries.

The Australian construction industry was impacted in 2020 by several unprecedented events. Initially, in early January 2020, bushfires ravaged significant regions of the country, followed by the growth of the COVID-19 pandemic. With borders across the country generally open, red spot covid outbreaks fought off, and with the latest GDP data indicating that the country has “turned the corner”, according to the RBA governor, where to now for the property and construction industry into 2021?

Victoria has experienced strong construction growth from 2018 to 2020. In particular, the 2019 and 2020 calendar years saw record levels of activity, at $59 billion and $57 billion respectively. The three major sectors—residential, non-residential, and engineering—all contributed to these record results.

While COVID-19 will affect future volumes of construction activity in Victoria, its impact is difficult to quantify. This difficulty arises as construction activity in 2021, and beyond, was already forecast to decline (particularly compared to the recent record highs) prior to the pandemic. Sectors classified as high performers in recent years have been most affected by the downturn. Activity within the high-density residential, office, hotel, and retail sectors are all predicted to decline in the short to medium term after significant new additions to supply. This is not surprising, given that these sectors are historically driven by strong net migration, influxes of international students, strong employment growth in the financial and service industries, and positive tourism activity—all of which have diminished since the outbreak of the COVID-19 pandemic in March 2020.

There is reason for optimism, with COVID-19 community transmission largely controlled in Australia, and the commencement of the vaccine rollout. However, the ‘working from home’ debate is still very much alive. While workers in most states have returned to the office in some capacity, commentators suggest that it will take some time for workplaces to return to ‘normal’.

All these factors are creating uncertainty in contractor tender pricing. Some factors are causing downward shifts in costs, with contractors and sub-contractors reducing margins while fighting to rebuild their pipelines of work. Other factors are expected to increase pricing, such as restrictions on the movement of labour and materials both nationally and internationally, and higher on-site costs due to COVID-19 site requirements.

However, the pressure on pricing eased through 2020 and into the beginning of 2021, and we are seeing a reduction in the escalation uplifts that were forecast 12 months ago, compared to that forecast now.

In general, Rider Levett Bucknall (RLB) contends that:

• The industry will possess a latent capacity for projects during 2021 and into 2022, due to the forecasted falling levels of activity anticipated by the Construction Forecasting Council (down 7% in FY 2021)

• Tender pricing will remain stable in 2021 and 2022, with modest increases in escalation expected. This could change quickly if demand intensifies or significant disruptions to supply chains occur (such as insolvencies, surges in material prices due to global trade conflicts, and lack of skilled trade personnel). However, current indicators suggest a more tepid path.

• The commencement of significant infrastructure projects should not have a dramatic impact on the supply chain. The recent surge in infrastructure activity has not seen significant escalation within the sector based on Australian Bureau of Statistics (ABS) numbers. However, this was not the case in 2018; there was a significant spike when the Melbourne Metro, Monash Freeway Upgrade, and West Gate Tunnel Project were announced. The civil market now appears mature enough to maintain pricing stability as proposed new projects are tendered into the market.
  

RLB believes that COVID-19 specific inputs into construction costs are generating several opposing factors. Reduced construction volumes in some sectors have increased competition, resulting in a corresponding reduction in tender pricing margins. However, factors such as increasing material costs, volatile exchange rates, supply chain reliability, and changing work practices are lowering productivity and potentially increasing program durations—all of which are influencing costs.

Prior to the impact of COVID-19, it was anticipated that construction escalation uplifts across Victoria would range from 2% to 4% per annum over the coming years. With construction activity forecast to decline in 2021 and the impacts of the pandemic now apparent, RLB is forecasting a general escalation rate of 1.5% in 2021. The ABS-published Producer Price Index for the Building Construction industry saw a 1.2% increase in overall building costs during the 2020 calendar year. We feel that with the current Enterprise Bargaining Agreement (EBA) in place, foreign exchange rates stabilising, and a falling level of activity, contractors and suppliers will be looking to consolidate throughout 2021. This will be achieved by reducing margins and lowering their expectations of supply chain profits to ensure a stable supply of new work, which will in turn offset known material and labour supply increases.

RLB published escalation forecasts

Table 4 - Forecasted RLB published Tender price index (TPI) uplifts

Reenergising your workforce to get back into the office and back to work – Yvette Martin

As Director and Head Coach at Kingfisher Advisory, Yvette is passionate about helping our clients shape their future through implementing consulting solutions based on the latest in neuroscience, positive psychology and Gallup’s strengths and engagement sciences. She has spent over a decade coaching and consulting to many ASX Top 500 and other companies around Australia and NZ in the areas of Strengths-Based Leadership, Employee Engagement, Wellbeing and Behavioural Economics.

‘I get out of bed every morning to help people at work give their best, stay motivated, and get great things done by creating solid relationships, stellar careers, and superior results’.

A common problem we are hearing from leaders across the property industry is that they are struggling to get their team motivated to get back into the office this year.

With all of last year’s lockdowns it seems that, for a lot of us, work has become something we now fit around the rest of our lives rather than being the bedrock of our days.

There is no doubt that Covid-19 has dramatically and forever changed the way we work. When we recently surveyed a selection of companies across the built environment, 35% said they felt there is no more need for a centralised office with it now being proven people can work effectively from home. However, that view is not shared by the majority; over 60% of business leaders plan to return their teams to an office-based workplace structure. Team morale and productivity are the main reasons to do so, with improved client interaction and work capabilities also cited as core motivations to get team members back in the office. 

Not everyone seems to share these leaders’ opinions though. After working from home for so long in 2020, especially for our Victorian colleagues, we are hearing that managers are struggling to justify to their teams why they should grapple with public transport and make the commute to the office multiple days per week. 

So, what can you do if you are one of these leaders and are wondering how you can boost engagement and performance of your team by getting them back into the office? How do you get your team back together and focused on providing great products and services for your clients?

There are three main things you can do now to light that spark of enthusiasm that helps teams come together, produce great work, and boost profitability for your business.

1)     Refresh your purpose and clarify your values.

This may sound too simple to have any real effect on performance. However, clarifying the bigger vision of why you do what you do can help connect the people on your team in a deeper and more meaningful way.

Simon Sinek says it best when he suggests ‘people don’t buy what you do, they buy why you do it’. This does not just work for your customers; it works equally as well for your team members.

As soon as a company’s WHY is put into words, the culture becomes a little more tangible and team behaviours adapt to align with the company’s vision. 

The reason this works is that our brains light up when we hear stories. Well before the written word, we used stories to unite tribes and create cultures around what was important for us.

Your purpose, when articulated clearly, should be a compelling story for your people to rally around. It is the motivation behind your service or product and the mission you stand for. Your purpose, when spoken aloud, is what makes team members proud to be part of your tribe. Your values, when shared, are what drive the right behaviours for you to achieve your vision as a business.

When you discuss your core purpose and values with your team members, you reenergise them with the promise of the value they help create in the world. This can help them reconnect with your central purpose and choose to physically be back in the thick of your tribe.

2)     Connect their individual efforts to your business outcomes.

Everyone wants to feel like their job is important. If they feel like they are just a cog in a wheel, you will not get the discretionary effort that comes from a fully engaged team member.

Take the time to connect 1:1 with your people and show them the value of their contribution to business success. This will help them feel recognised and appreciated. It also gives you a chance to better understand their individual motivations - what they enjoy about their role, what lights them up, and what frustrates them. When you know this, you have a much better chance of speaking to their core motivations.

Understanding their WIIFM – ‘what’s in it for me’. When returning to the office this can help you encourage them to be present while also allowing you to support them in overcoming any frustrations that may be preventing them from fully engaging in their role again this year.

This knowledge can also allow you to align their individual motivations with your team and business goals. This is a simple but not always easy thing to do. It is worth the effort though, because when you get this right you will have an energised, productive workforce across your entire business.

3)     Lead by example by creating as many ‘collision moments’ throughout your week as you can.

Collision moments are those moments where you physically ‘collide’ with your colleagues – not literally knock into them, but where you come face to face and have those micro-moments of bonding and camaraderie that helps to energise, engage us all.

The late and great ex-CEO of Zappos, Tony Hsieh talks about the power and value of ‘collisions – serendipitous encounters that happen throughout the working day which help create community – enhancing team culture and camaraderie across your business. Studies show that random encounters throughout the day increase both innovation and productivity.

When team members work from home full time, it is much harder to build these valuable collisions into your day. As a result, people are bombarded with hours of video calls and have now created a new workplace phenomenon – zoom-fatigue.

When you show up, excited yourself to be back in the office, you send vital belonging cues to your people. It allows you to utilise the extra conversations and natural collisions that happen throughout the day to move projects on, answer questions from your people and check in with them on a personal level. As a leader, your job is to encourage your team to do the same.

In summary, to help boost productivity and team engagement, reconnect your team with your purpose and values and share the enthusiasm you have as a leader in delivering the great products and services your business is known for. Align individual motivation with team and business goals, and then emphasise the value in collision moments - the energy, creativity and support that only happens when we are face to face and all working together to create great things in the world.

Are superintendents really independent? It depends — Phillip Vassiliadis & Paul Abrahams

Phillip Vassiliadis is a Senior Associate at Moray & Agnew Lawyers. He has extensive experience advising on residential, commercial, industrial civic, sporting and renewable energy projects across Australia, Asia, Europe and the Pacific region. Phillip has been names as a ‘Key Lawyer’ in the 2020 Legal 500 in the area of building and construction, and ‘rising star’ in the 2021 edition.

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

PA

A significant component of our work at Debuilt involves the monitoring of construction loans on behalf of financiers and investors. Through numerous projects we have observed a variety of approaches to contract administration - and the issues that arise as a result. 

Almost all construction projects involve an underlying tension between the principal and the contractor - in relation to claims for variations, extensions of time, early bonus completion and the like. 

Larger projects typically incorporate more sophisticated processes and resources and are more likely to engage a third-party superintendent with a deep understanding of contractual issues.

Smaller, and what might appear to be simpler projects, often forgo engaging a suitably qualified independent superintendent, which can often lead to an increased risk of dispute between the parties.  

We spoke to Phillip Vassiliadis from Moray & Agnew Lawyers about a decision in the Supreme Court of Victoria relating to an infrastructure project and the independence of the superintendent.

To Phillip:

You recently wrote an article about a case in which a contractor claimed that collaboration between the Principal and the Principal’s representative had occurred, which was contrary to his legally required independence as a certifier. Could you provide a brief synopsis of that case?

PV

Vestas – Australian Wind Technology Pty Ltd (Contractor) entered into a contract with Lal Lal Wind Farm Nom Co Pty Ltd (Principal) under which it agreed to provide its services to engineer, procure and construct a wind farm in rural Victoria (the Contract). Under the Contract, the Contractor was required to submit claims and refer disputes to the ‘Principal’s Representative’.

As part of its role under the Contract, the ‘Principal’s Representative’ was required to undertake a ‘Certification Role’ (as that term was defined in the Contract), and in doing so act honestly, reasonably and make fair determinations in accordance with the Contract.

After being unsuccessful in multiple claims and disputes, all of which were assessed and/or certified by the Principal’s Representative, the Contractor alleged that the Principal had been ‘improperly involved’ with the Certification Role. Underpinning concerns of this wrongful influence was the discovery of references to the Principal’s solicitor’s comments on multiple documents issued by the Principal’s Representative, whilst performing its Certification Role.

PA

What exactly did the contractor make application for, and was the application successful?

PV

The Contractor applied for two things:

• An injunction to restrain the suspected collaboration between the Principal and Principal’s Representative in the latter’s performance of its role as certifier.

• Discovery from the Principal as a prospective defendant.

The injunction was resolved by the Principal giving undertakings to the Court that it would not communicate with the Principal’s Representative in performance of its role as certifier.

The second part of the Contractor’s application was unsuccessful. The Court held that the Contractor had sufficient information to decide whether it should initiate proceedings and did not require further discovery for this purpose.

PA

The court commented on the independence of the Principal’s Representative when acting in the certification role. Could you elaborate on these comments?

PV

An interesting feature of this decision is that notwithstanding the application being denied, the Court held that: “any private communication is sufficient to undermine the independence of the Principal’s Representative when acting in the Certification Role”. 

On this basis, any private communication between the Principal’s Representative and the Principal as to the Certification Role, which was not at the same time notified to the Contractor was sufficient to amount to an actionable breach.

PA

Does this case have any relevance to traditional building contracts?

PV

The Court’s decision to provide pointed statements is likely to get the attention of the industry. At face value, these comments do not necessarily compromise the ‘dual role’ of a representative of the Principal also performing the function of certifier, but can be seen as a reminder of a minimum standard of conduct that needs to be observed in this relationship.

The form of contract in Vestas was an ‘engineering, procurement and construction’ (EPC) contract. The cited provisions of the EPC relating to the certification functions are substantially similar to those commonly found in amended standard form contracts.

In Vestas, the Principal’s Representative was required to act honestly, fairly and reasonably when certifying, assessing or determining. In the ‘Australian Standard’ suite of head contracts, this role is performed by the ‘Superintendent’ who will commonly have similar obligations.

Amended Australian Standard head contracts are the ‘go to’ for building and construction projects in Australia. Accordingly, the decision in Vestas has wide ranging application to the building and construction industry.

PA

A large number of projects have a Principal’s Representative also appointed as Superintendent. Have the comments of the court affected the contractual ability of this dual role being undertaken by the same person?

PV

The decision is unlikely to limit the contractual ability of a Principal appointed party to be the contract certifier (whether as ‘Principal’s Representative’ or ‘Superintendent’). However, it will necessitate closer consideration of how this role is performed.

While, in our experience, the use of mutually appointed contract certifiers (e.g. independent certifiers or project engineers) is on the rise, there are still reasons why this approach may not be preferred by project participants.

PA

Then, do you believe that in practice there will be changes in the conduct of the relationship of the Principal and Principal’s Representative if they are also acting as Superintendent?

PV

Change in the discharge of contract certifier duties is the more likely outcome. It appears that Principals and Contractors are becoming more alive to the impact that this conduct can have on the outcome of disputes and differences under the contract.  

While many contracts include clauses designed to insulate the Principal from the allegations made in Vestas (e.g. disclaimer clauses, stringent dispute resolution mechanisms and time bars), these protections can come undone, or at least under sustained attack, if the proper performance of the function of the contract certifier is, or appears to be, compromised.

As always, additional drafting in construction contracts can assist to further insulate the Principal. However, Principals be mindful that these contractual provisions are not ‘set and forget’.

Attention needs to be given to communication protocols on a ‘day to day’ basis. While dispute resolution clauses are often intended to resolve such disagreements, they are too often only used at the ‘pointy end’ when there is a series of consolidated claims (as appeared to be the case in Vestas).

Often, improper influence of a contract certifier materialises through a series of incremental divergences from the certifier’s function. At the time of the breach, these may be innocuous (and sometimes, to the advantage of the Contractor), however in totality may have serious consequences for the outcome of disputes that turn on certification (generally of time and cost matters).

I think this is beginning to be recognised, and parties are focusing a lot more on communication protocols and ‘small scale’ dispute resolution clauses so that these issues can be dealt with at a project or mid-range commercial level without the need to invoke a more traditional (and often unpalatable) ‘dispute resolution’ regime in the contract.

Where the project budget allows, project participants are also turning their mind to better equipping the contract certifier to properly perform its functions. This may include express drafting empowering the contract certifier to seek the input of experts on certain matters, or taking more ‘minor’ disputes out of the hands of the contract certifier and referring them directly to binding expert determination.

The Vestas decision is likely to accelerate these types of initiatives.

PA

Are there any final issues related to the independence a Superintendent that you feel might be of interest to our readers?

PV

Parties need to be willing to turn their minds to the management of the contract certifier from the outset of the project. While construction contracts generally allocate the risks associated with improper performance of the contract certifier’s functions, project participants can do more to set down protocols of communication, and ‘day to day’ resolution of differences. In our experience, this goes a long way to avoiding disputes of the kind encountered in Vestas or at least ensures that in the event of such disputes, the functions of the contract certifier are not a central feature. These kinds of initiatives often come at a higher up front and ongoing project cost. However, if the project budget allows, it can be money saved in the long run. 

PA

Despite the differing interests of the parties, construction requires all participants to work collaboratively to achieve a truly successful outcome. The best projects are those where the parties have a mutual respect and understanding for each other and are then willing to go beyond contractual obligations to resolve an issue for the other party.

It only requires the perception that contractual decisions are not being made fairly to create a level of mistrust. A Principal’s Representative acting as the superintendent will only amplify this risk.  In the end, whether or not these decisions have been made appropriately may in fact become irrelevant in achieving a positive outcome for all.

Australian house prices on the upswing again – seven things to bear in mind about the Australian property market

Shane Oliver joined AMP in 1984, becoming Chief Economist in 1994 and is now Chief Economist and Head of Investment Strategy. Shane is a regular media commentator on economic and investment market issues and engages regularly with investors at public events and forums. He is responsible for the provision of economic and macro investment analysis and, as part of the broader Investment Strategy and Dynamic Markets team, the management of the Dynamic Markets Fund and the determination of AMP Capital’s asset allocation policy which is applied across more than $65bn invested in multi-asset funds. Shane has a PhD in economics which focussed on the validity of the Efficient Market Hypothesis (it isn't) and asset price bubbles (there are). He is also an Adjunct Professor of Economics at Macquarie University.

Introduction

After a 2.8% dip around mid-last year in response to the pandemic, average capital city home prices are rising again. 

Source: CoreLogic, AMP Capital

Put simply - record low mortgage rates, multiple government home buyer incentives, government income support measures, pent up demand from the lockdowns, bank mortgage payment holidays, activity associated with a desire to “escape from the city” and an emerging element of FOMO (fear of missing out) have swamped the negative impact of higher unemployment, a collapse in immigration and weak rental markets in Sydney and Melbourne. So, we are in yet another cyclical upswing in property prices. So, where to from here? But first to provide some perspective, there are seven key things worth bearing in mind regarding the Australian property market.

First – it remains expensive

• According to the 2020 Demographia Housing Affordability Survey, the median multiple of house prices to income is 5.9 times in Australia versus 3.6 in the US and 4.5 in the UK. In Sydney, it’s 11 times and Melbourne is 9.5 times.

• The ratios of house prices to incomes and rents versus their long-term averages are at the high end of OECD countries – all of which have low interest rates too! See the next chart.

• The surge in prices relative to incomes has seen the ratio of household debt to income rise 5-fold over the last 30 years, taking it from the low end of OECD countries to the high end.

Source: OECD, AMP Capital

Second – house prices go up and down

A common property myth is that prices only ever go up. But this is not so. Real Sydney house prices (ie, after inflation) fell 36% in 1934-35, 32% in 1937-41, 41% in 1942-43, 12% in 1947-48, 14% in 1951-53, 12% in 1961-62 and 22% in 1974-77. In nominal terms based on CoreLogic data, Sydney dwelling prices fell 25% in 1980-83, 10% in 1989-91, 8% in 2004-06, 7% in 2008-09, 3% in 2011-12, 3% in 2015-16 and 15% in 2017-19.

Third – talk of mortgage stress remains overstated

There is no denying housing affordability is poor, debt is high and some households are suffering significant mortgage stress. But most borrowers appear to be able to service their mortgages. The share by value of housing loans on bank payment holidays has collapsed from 11% in May to just 2.4% in December. And the collapse in mortgage rates – that has seen household interest payments as a share of income fall to their lowest since the mid-1980s – has helped.

Source: ABS, RBA, AMP Capital

In the absence of an unexpected renewed economic downturn, it’s hard to see much rise in distressed sales. It’s also easy to see from this chart, when combined with home buyer incentives, why home borrowing and buying is surging again.

Fourth – the Australian property market has been in a long-term bull market since the mid-1990s

Looking back over the last 100 years, the first long term boom was in the 1920s and ended with the Depression and WW2. This was followed by the post war immigration boom that ended with high rates in the 1970s. The latest long-term boom started in the mid-1990s. The key drivers of this boom have been easier access to debt and the shift from high to low interest rates (with mortgage rates dropping from around 17% in the late 1980s to around 2-4% now) which allowed Australians to pay each other more for property and from about 15 years ago a chronic undersupply of property. The latter can be seen in the next chart.

Source: ABS, AMP Capital

Annual population growth surged from around 2005 but the supply of dwellings did not start to catch up until around 2015, which led to a chronic undersupply of housing. This combined with low interest rates and easier access to debt explains why Australian housing went from cheap to expensive and stayed there over the last 25 years. Other countries have had low rates and tax breaks for property but far cheaper property because it’s been better supplied.

Fifth – we may be getter closer to the end of the long-term bull market in property

It may still have a way to go, but the two key drivers of the long-term property boom may be getting close to the end. First, interest rates are at or close to the bottom with the RBA now resorting to extreme measures to get inflation back up – which should ultimately mean higher interest rates. Second, the chronic under supply of property may be starting to fade thanks to the unit building boom since 2015, the hit to immigration and home building incentives which are likely to keep home building high for the next 12 months. As evident in the last chart, supply is likely to remain strong this year and next, but population growth has collapsed & could take years to recover. This may take some pressure off house prices on a 3-5 year view.

Sixth – “escape from the city” will have a big impact

The pandemic has seen a profound shift in how office workers do work. In particular, the work from home phenomenon is likely to remain, albeit not five days a week for all. This means less need to live close to work and a greater focus on lifestyle, which means greater demand for houses relative to units and in outer suburbs, smaller cities and regional areas.

Finally – the national property market is highly diverse

While it’s common to refer to “the Australian property market,” in reality there is significant divergence between cities. This was clearly evident over the last decade with Sydney and Melbourne booming up until 2017, Perth and Darwin falling sharply after the mining boom and the other capital cities and regional property generally seeing modest gains. See the next chart. Right now, Perth and Darwin are only just starting to recover and there is potential for Brisbane, Adelaide, Hobart, Canberra and regional dwelling prices to play catch up to Sydney and Melbourne. The surge in immigration played a big role in the outperformance of Sydney and Melbourne into 2017 and this is now going into reverse as other cities and regional centres are benefitting from the “escape from the city” phenomenon.

Source: CoreLogic, AMP Capital

The divergence is also evident in residential vacancy rates that have been rising in Sydney and Melbourne, reflecting increased unit supply and the collapse in immigration, but falling in other cities. This in turn points to upwards pressure on rents and property values in other cities relative to Sydney & Melbourne.

Source: REIA, AMP Capital

So where to now for residential property prices?

Australian home prices are likely to continue rising over the next two years thanks to record low mortgage rates and the recovery in the economy, with the latter offsetting the phasing down of income support measures and bank payment holidays. Housing finance is running around record levels and auction clearance rates are at levels consistent with strong price gains.

As a result, average capital city home prices are expected to rise by 5-10% this year and next. While first home buyer incentives are likely to be reduced, investor interest is expected to pick up and fill the gap.

However, the outlook is divergent. The hit to immigration is likely to constrain inner city Sydney and Melbourne as well as unit demand but outer suburban areas, houses, the smaller cities and regional property are all likely to see strong price gains helped along by the “escape from the city” phenomenon and less exposure to immigration. Expect average price gains of around 10% in Adelaide, Brisbane, Perth, Hobart, Canberra and Darwin in addition to regional areas.

The broader economy is unlikely to justify rate hikes until around 2023, but if the property market continues to hot up as expected, causing financial stability concerns for the RBA, a tightening in lending standards is likely next year which should start to slow things down and eventually the bottoming of the long-term interest rate cycle and the shift to oversupply may take pressure off prices, but that’s a while off yet.

Has COVID really caused an exodus from our cities? In fact, moving to the regions is nothing new

Professor Amanda Davies is Head of UWA’s School of Social Sciences and a lecturer and researcher in human geography.

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

Internal migration resulted in a net loss of 11,200 people from Australia’s capital cities in the September quarter of 2020, according to Australian Bureau of Statistics data released this month. At the same time, some regional areas experienced significant growth in house prices as demand for properties increased. So this has raised the questions: are we starting to see an exodus from our cities, and is this related to the COVID-19 pandemic?

To work out what is happening there are a few important things to consider.

In Australia we move a lot

The first thing to keep in mind is that Australia has one of the most internally mobile populations in the world. About 40% of the population change their addresses at least once within a five-year period. However, the level of internal migration within Australia has fallen since the 1990s.

The greatest fall has been for long-distance moves between Australia cities and regions, which declined by 25% between 1991 and 2016. Moves between states and territories fell by 16% over this period. An increase or decrease in internal migration from year to year is not unusual.

Putting the numbers into context

While the recent loss of 11,200 people from Australia’s capital cities is the largest on record, it’s not a significant proportion of the population. Australia’s population has grown and so we expect to see the number of internal migrants to grow too.

The net loss of 11,200 people from capital cities is only 0.06% of the total population – 17.2 million – living in these cities. This is comparable to recent years.

While net loss – those arriving less those departing – is interesting, it is also important to consider the actual numbers of people who are moving to or leaving capital cities. The growth in the net loss of population from capital cities in the September quarter was not the result of a city exodus. What happened in 2020 was that fewer people moved into capital cities.

Drilling down further behind the headline data, we find Brisbane, Perth and Darwin all had net population gains. Brisbane has gained residents through internal migration in each quarter since 2014.

The greatest contributor to the recent net quarterly loss of 11,200 was Sydney, with a net loss of 7,782 people. Melbourne was close behind with a net loss of 7,445.

While this might look alarming at first, Sydney and Melbourne are the largest population centres in Australia. And Sydney has recorded a net loss of population through internal migration every quarter for the past two decades. Melbourne recorded net losses until 2012 and then since 2017.

Sydney and Melbourne’s overall population continued to grow over this period due to international migration. Population churn is part of the rhythm of these global cities.

The data also reveal that, on average, regional Australia has been gaining population for many years – decades actually. Moving to regional Australia is not new.
The past year’s COVID-19 restrictions closed Australia’s borders to the previously large numbers of international migrants. Without these international migrants moving to capital cities, the long-term trend of people relocating to urban areas around major cities has become more apparent.

Have the capital cities lost their appeal?

Just considering the September 2020 quarter, nearly 42,000 people moved to capital cities. This is comparable to the March and June quarters of 2020.

This inflow is noteworthy. At a time when many capital cities had mobility restrictions related to COVID-19 in place, people were still moving to these cities. Australia’s capital cities have not lost their appeal.

There is a risk in interpreting net migration from capital cities as an indicator of decreasing satisfaction with city lifestyles or a growing desire for rural lifestyles. It masks the considerable variability in the types of moves people are making, where they are going and why.

Outside of capital cities are a whole range of different community types. They range from expansive city areas such as the Gold Coast and Geelong through to tiny agricultural and fishing hamlets.

The fastest-growing areas outside capital cities are those that offer sophisticated urban settings. They have diverse employment options and high-order social, education and healthcare infrastructure. So when people leave a capital city, more often than not they are moving to a large city.

Will COVID-19 lead to growth in smaller centres?

Australia’s overall population growth has promoted the growth of capital cities and larger regional cities. Some smaller communities, particularly high-amenity coastal towns, have also experienced periods of sustained population growth.

Distributing this growth further inland to smaller towns and cities is both possible and plausible.

A major barrier to population growth in smaller rural communities is the lack of diverse local employment options. For those who have made the transition to working fully or partially online as a result of COVID-19 restrictions, moving further from their workplace more permanently – and perhaps to the country – could be on the cards.

So is there a pandemic-related exodus?

The COVID-19 pandemic is disrupting the way we live our lives but, no, there is not an exodus from Australia’s capital cities. For some, pandemic-related disruptions might have heightened their dissatisfaction with where they live. For others, working from home might have provided them with the opportunity to consider alternative living arrangements.

However, right now, given the data we have, it is unlikely that COVID-19 is driving a shift away from capital cities or city lifestyles.

VCAT's new normal: Online planning hearings – Andrea Towson

Andrea is a Principal Lawyer in DWF's Real Estate Team. Andrea is a highly experienced planning, environment and development lawyer. She has extensive experience in running large and complex planning and environment litigation relating to development and regulatory approvals, the rezoning of land and compulsory acquisition claims. Andrea's advisory experience includes planning and environment due diligence in connection with large scale property and corporate transactions, including providing advice on contaminated land, heritage issues, native vegetation offsets and development contributions. Andrea is recommended by Doyle's Guide in the area of Planning and Environment law. She was also a 2019 participant in the Property Council of Australia's 500 Women in Property program, which identifies female talent in the property industry.

There is no question that COVID-19 has fundamentally changed the way we work and the conduct of litigation (including planning hearings for development projects) is no exception to this.

Traditionally planning hearings before both the Victorian Civil and Administrative Tribunal (VCAT) and Planning Panels Victoria (Planning Panels):

• Involved multiple lawyers, experts and resident objectors attending hearings in person (including off-site physical site inspections with multiple attendees); and  

• Were very paper intensive, with trolleys of expert reports, A1 plan sets, and written submissions being printed and handed out to each individual hearing participant.

What changed in 2020?

The physical layout of both the VCAT and Planning Panels buildings makes it very challenging (if not impossible) to achieve social distancing for face-to-face hearings – particularly where there are large numbers of parties involved.  

As such, COVID-19 restrictions have seen VCAT and Planning Panels hearings conducted as online or telephone hearings through much of 2020. Telephone hearings were typically limited to directions hearing and other, less complex hearings, with a small number of parties.  

Backlogs and Adjournments

Between March 2020 and May 2020 (the first Melbourne lockdown), there was an initial backlog of COVID affected cases – largely because VCAT and Planning Panels did not have the technical capability at the outset of the pandemic. This resulted in significant hearing delays.  For example, non-major cases list matters filed in May 2020 were not being listed for final hearing until early 2021.

One positive observation from these hearing delays, is that parties were strongly encouraged to resolve issues by agreement wherever possible (even outside of the formal compulsory conference process). 

On 28 April 2020, VCAT received State Government funding to implement digital solutions to the Planning and Environment Division.  Consequently, in the second half of 2020, the COVID backlog was actively triaged (including through the introduction of a revamped short cases list in VCAT) and timetabling is now largely 'back to normal'.

Key differences between a physical hearing and online hearing

The key difference between a physical and online hearing is that all parties are not physically present together in the same room. Each individual participant will 'log in' from their individual location – whether that be chambers, a home office, or (more recently) their work office.  

VCAT hearings were primarily conducted on Zoom and Planning Panels Hearings on MS Teams. A good working knowledge of both interfaces, including screen sharing, video and audio controls and the chat function has been essential to be able to successfully participate in an online hearing.

A high quality set of headphones (with an inbuilt microphone) is helpful for participants, and the most prepared experts have also invested in magnifying glasses, making the viewing of plans on screen much less straining. 

The recording of an online hearing is prohibited. This includes any 'observers' (i.e. a development manager observing the hearing on behalf of a development company). 

Procedural Orders – Online Hearings

There are additional procedural requirements for online hearings, including that:

• The applicants prepare and maintain an electronic Tribunal / Court Book of all hearing documents;

• Expert evidence and plans be circulated to all parties electronically; and

• Part A written submissions are circulated at least 5 business days before the hearing commences.

These changes have significantly improved the efficiency of hearings, as all parties (including VCAT and Planning Panels members) have the opportunity to review relevant material before the hearing commences.

Typically, no hard copy filing of the entire Tribunal Book is required after the conclusion of a hearing. VCAT or Planning Panels will generally only require the following to be filed: 

• A USB containing the Tribunal Book documents in electronic format;

• Paper copies of select documents (typically A1 plans).

This initiative has significantly reduced double handling of voluminous hard copy documents and reduced the environmental footprint of proceedings. These procedural changes will no doubt become permanent improvements to the conduct of planning hearings.

Key challenges of online hearings   

Despite procedural improvements, online hearings do present challenges in the planning and development world.

Physical Site Inspections

Given that planning hearings are focussed on land and the appropriateness of future development, there is no substitute for a physical site inspection of the subject land and its surrounds. Site visits were very restricted in 2020, but it is hoped that these can resume in a more traditional form in 2021.

Expert Evidence

It can also be very challenging for expert evidence to present online evidence.  Many cases rest on the credibility of an expert witness. It can be difficult to gauge the credibility of an expert over the screen. For example, is a witness pausing to think – or because they are trying to avoid a line of questioning? Giving evidence online can unfortunately diminish the quality of witnesses' evidence.

There are additional challenges if evidence does not complete within the allocated hearing date and runs access multiple days, given that experts are prohibited from communicating with their clients and legal team whilst still technically presenting their evidence. This needs to be carefully managed in the remote working environment.

Teams / Zoom Fatigue

Teams / Zoom fatigue is very real.  There are concerns surrounding the amount of time parties spend in front of screens – especially during lengthy hearings. This is most challenging for advocates, who need to be 100% present and concentrating at all times.

Eye strain, headaches and increased tiredness associated with online hearings, need to be managed via regular 'technology' breaks. Unfortunately, the consequence of these breaks is often a more disjointed and ultimately longer hearing than if conducted in person.    

Technology can fail

Despite the very best systems, technology can and does fail. If a person drops out at a critical point in the hearing, this will cause disruption and delay.  

Are online planning hearings the new normal?

Quite clearly online planning hearings are here to stay and will be the 'new normal' in 2021 – albeit, hopefully in a more flexible form as COVID-19 restrictions are further relaxed.

The additional procedural orders (online Tribunal Books and the pre-filing of written submissions) should remain in place permanently. These procedures significantly improve the efficiency of hearings.

While larger hearings will remain unworkable in the immediate future (due to the number of parties involved), consideration must be given to how critical evidence can be delivered in person – at least to the relevant member – in circumstances where:

• Determination of the facts cannot occur via a screen; or

• There is conflicting evidence, which is central to the dispute. 

While the efficiency improvements associated with online hearings should be celebrated, adopting 'remote hearings' on a permanent basis should not occur if this will ultimately result in the deterioration of the quality of justice and prejudice to the parties.

2021 will no doubt see even more changes and improvements in this space – so, to be continued…  

This article was written by Andrea Towson, Principal DWF (Australia) – Real Estate (Planning & Development)

DWF's Real Estate team takes a 'whole of project' to real estate developments – providing advice across all areas of property, planning and construction. This consolidated approach allows us to partner with our developer clients and their project team, adding value and acting as trusted advisors for the entire project lifecycle. 

Office or not? – Daniel Burger

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 pandemic has dramatically altered the way in which we work.

While there is considerable speculation around the future of the office-home balance, one thing is for certain, we have been forced to experience a different way of working and a lot of people like it (or at least parts of it). 

Back to the office

The office sector has seen a turbulent 12 months. At the conclusion of 2020, Sydney’s office towers were filled to about 50% of their capacity, while Melbourne occupancy was around 13%.

On Monday 18th January 2021, City of Melbourne data indicated 380 pedestrians walked past Southern Cross station on Collins street between 8am and 9am. This count is the highest since March 2020. (Pre-Covid Melbourne hosted an average of 3,800 pedestrians walking around Southern Cross). Whilst this is certainly a positive trend indicating that many office workers are returning to the CBD, there continues to be great interest around the discussion of future working arrangements.

Changing attitudes – here to stay?

In October 2020, JLL undertook an online survey of 2,033 office workers across 10 countries spanning all major industries. Nearly three-quarters of respondents still desired the ability to come into an office, while 70% consider the office as the best place for team building and connecting with management.

With the general success of the remote working experiment and an overwhelmingly positive attitude to workplace flexibility, it is clear that workplace environments will change. One valuable takeaway from the pandemic is that workplaces reduced their dependence on working with printed hard copy files, further aiding the ability to work flexibly.

A hybrid office environment is likely to emerge in order to accommodate for changing workplace needs and preferences. A new normal will most likely take shape in a variety of ways, but the general consensus seems to be that employees might have the opportunity of working remotely for one or two days a week. Some roles could shift entirely online.

The impact on offices

Negative forecasts for the commercial sector’s future are wide-spread, with many predicting a reduction in demand for office space. David Cannington of Investa Research estimates that the uptake of office space could fall by as much as 15% in the coming year as a significant amount of city workers spend more days each week working from home. JPMorgan predicts that demand could take a 10% hit over the next 5 years. QIC, one of the country’s largest property fund managers, predicts half of Australia’s workforce will work from home two days a week following the pandemic, resulting in a 5% fall in net demand for office space.

What these predictions possibly do not take into account is a need for increased collaborative work and meeting spaces, a focus on enhanced employee and guest amenity areas, video conferencing requirements (discussed further below) and ongoing social distancing. This should soften a prolonged negative impact on office space demand.

Video conferencing and online collaboration 

Our initial experience with video conferencing (“the Zoom Boom”) showed us that we could meet, share documents and communicate effectively, despite being apart. Whilst sometimes a little clunky, it still remains a relatively successful ‘second best’ option to meeting in person.

As with all technology platforms, a certainty is that the video conferencing companies are working furiously to enhance their product to close the gap between in-person and online interaction.

Michael Chetner, Head of Zoom Video Communications Australia and Asia Pacific believes the next 12 months will be characterised by businesses learning how to create equality between employees in the office and those at home. The Zoom Meeting Room facility, for example, intends to enhance and streamline meetings between a room full of on-site attendees and off-site individuals. Zoom will also likely further develop their phone service and their real time translation service.

Other mooted developments include a proposal by Japan’s NTT to use projectors and thin, semitransparent screens to mimic a colleague’s head movements in an attempt to make the virtual person’s presence seem more life-like.

(The Verge, 2012)

With further advancement in technology, offices will also adapt and improve to accommodate the increased use of video conferencing – offices will need to be designed with consideration of an increase in the noise and disruption generated through online meetings. 

Landlords will respond

Whilst physical offices will certainly remain central to work, office landlords will need to make similar adjustments in order to adapt to a new ‘COVID normal’.

Office buildings, not just tenancies, will have to enhance their offering as a destination for collaboration, networking, problem solving and career development. Buildings will benefit from including, or being located adjacent to, quality facilities and spaces that promote collaboration, networking and social interaction.

Despite many predicting a negative outcome for the office sector, Simon Hunt (MD of Office Leasing at Colliers International) says Australia-wide demand for office space is still going strong. He says at the end of Q3 into Q4 Colliers actually saw an impressive 546,000sqm of enquiry recorded for Q4 alone and this was up on Q4 2019 enquiry by 4%. 

Colliers’ Office Demand Index, released in January, indicates that whilst demand was positive in the second half of 2020, the influence of COVID was evident. For example, in Melbourne whilst the government sector was the most active, part of the metro market increase (200,000 sqm more in 2020 than 2019) can be attributed to businesses seeking office space in lower density areas to allow for working closer to home and social distancing measures.

The need for landlords to adapt was reinforced this week, as The Age reported that office vacancy levels have reached highs not seen since the 1990 recession. According to the Property Council of Australia, whilst Covid was a factor, increased supply of available office towers was the main contributor.

Ultimately the space will be absorbed; with the major impact being the commercial return to landlords and a delay in new supply.

So, what does this all mean?

Leaving aside the benefits and opportunities provided by remote working, the ultimate environment to promote team collaboration, mentoring, networking, business socialisation and work efficiency is to bring people together in one place – the office.  

The advancement in remote working options will deliver flexibility and adaptability in the workplace whilst providing the opportunity to enhance the employee experience.

Therefore, the future of work requires the agility for landlords and tenants to adapt to, not only the changes we are presented with now, but also the changes we will be presented with in the future. Through enabling hybrid models of work and empowering employees wherever they are located, the future workplace should be conducive for all.