The Partnership opportunity for increasing social and affordable housing in Australia

Shaun Whittaker, Partner at Holding Redlich, has worked in the infrastructure and finance sector for 14 years and specializes in new economy transactions revolving around social and economic infrastructure, technology and impact investment. His recent experience includes advising on the delivery and funding of various social and affordable housing projects, built-to-rent projects, specialist disability accommodation projects, hospital and healthcare projects, childcare facilities and technology platforms integrating with these sectors.

Australia faces a number of challenges in its housing sector. Affordability is a constant concern in the capital cities, while many regional centres are suffering acute shortages of rental accommodation, making it more challenging to attract and retain a local workforce and capitalise on regional job opportunities. The COVID-19 pandemic has only accelerated these challenges due to heightened demand for property in the regions from city employees and also in the major cities with migration and wage growth stalling. As a result, policymakers and developers now face a testing time delivering housing stock that is both sufficient to meet demand and “fit for purpose” for the broader community.

Access to social and affordable housing is one area of particular concern, given increasing demand and a level of investment that, according to the National Housing Finance and Investment Corporation (NHFIC), falls short of overall household growth. The issue is gaining prominence at all levels of government and within communities. Among the factors of note is the impact on the infrastructure sector, in which investments with an emphasis on environmental, social, and governance issues (ESG) that also provide solid financial returns are highly prized.

Indeed, the natural alignment between ESG considerations and social or affordable housing provides opportunities for private-sector developers and investors in this emerging infrastructure asset class. Equally, there are opportunities for governments to leverage private-sector developers and investors attracted by the potential for long-term stable returns, but also looking for their portfolios to deliver positive social outcomes. This intersection of interests would seem a natural focus of collaboration for government, developers, housing providers, and investors through the use of partnership or alliance models, as we’ve recently seen with the initial phases of the Public Housing Renewal Program (PHRP) in Victoria and the Community Housing Redevelopment Program (CHRP) in New South Wales.

The funding gap

Social and affordable housing, by their nature, involve some level of subsidy—and therefore are made available at a discount to market—given that the housing is provided to people on low to moderate incomes. Broadly speaking, social housing is set out at up to 30 per cent of a tenant’s income, while affordable housing is set at no more than 75 per cent of market rent.

Invariably, then, this is an infrastructure class requiring some level of government support, whether financial or nonfinancial, to ensure economic viability. The support required mirrors many of the same supports provided in traditional infrastructure asset classes, including operational or tax subsidies; long-term concessional debt finance (such as that provided by the NHFIC); the grant of land at no cost, at a significant discount or on peppercorn lease terms; as well as expedited planning and project processes that facilitate “commercial” elements of a housing development (i.e., housing sold or rented at market values) cross-subsidising those social and affordable housing components which would otherwise be uneconomic in their own right.

One important mechanism that can be used to close this funding gap, and with which the infrastructure investment sector is quite familiar, is the payment of operating subsidies by the government to the private developer or operator, tied to various performance measures relating to use, operation, maintenance, and availability. This mechanism, and the provision of concessional debt finance from the NHFIC, were featured in the first housing package to reach financial close under the PHRP in Victoria.

The Public-Private Partnership opportunity

Under the recently announced first stage of the PHRP (project value of approximately AU$500 million), public-housing estates in several metropolitan Melbourne suburbs will be redeveloped, delivering some 745 social or rent-reduced units and 365 homes for private rent, replacing 445 outdated homes. The project is structured as a quasi-public-private partnership (PPP) and involves an innovative ground-lease model with nominal rent and periodic service payments from Homes Victoria for the ongoing operation and maintenance of the residences by the project proponent during the 40-year lease term. At the end of the lease, the land and houses will be handed back to Homes Victoria.

A first for Australia, the project demonstrates the potential for partnership or alliance models, such as PPPs, to drive the delivery of social and affordable housing and the opportunities as an investment model for infrastructure funds looking to deploy capital for long-term returns while helping deliver positive social outcomes for the community.

What next?

For governments, these alliances represent a chance to leverage much-needed investment from the private sector, ensuring standards and responsibility for ongoing management and maintenance of community housing stock while retaining ownership of the asset in public hands—all at a time of low interest rates, strong investment appetite for infrastructure assets (and potentially significant foreign investment interest in Australian assets when pandemic travel and other restrictions are lifted), and an alignment of public, community, and business interests in ESG commitments. As a significant land holder, government could also look to “recycle” underused land assets through PPP structures while ensuring that they ultimately remain in government hands and are not privatised.

This article was originally published in the 2022 Edition of Australia's Best Lawyers.

Thematics in property investment

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.

Thematics’ have been a key driver of property investment decisions of late. Whilst they can be important indicators of market direction, they can be often overemphasised and should be considered secondary to core investment fundamentals.

When markets become dysfunctional, there is often a ‘flight-to-quality’ effect where investors rotate to perceived safer asset classes. In comparison to equities which have seen unprecedented levels of volatility in the wake of COVID-19, it’s not difficult to see why real estate is attractive given the ‘bond-like’ steady income streams that are often secured by strong covenants and long-term leases.

Increasingly investors and fund managers have invested heavily in ‘thematics’ in search of these long term income streams. Some of these thematics include healthcare, certain industrial and logistics property as well as childcare, non-discretionary retail, service stations and hardware (Bunnings).

Broadly speaking the interest in these sectors is justified – the tenants themselves are specialised and have been buoyed by structural changes and demographic or economic tailwinds which have resulted in increased revenue and stronger balance sheets.  In many cases however, properties that have exposure to these thematics are being bought at very full prices where buyers are paying a premium for the tenants rather than the underlying assets.

Importantly, this can create significant downside risk for three key reasons:

1. Even if the tenants are specialised, often the properties themselves and the spaces they lease are not. One example of this is medical practices, which typically require fairly basic fit outs. Whilst the tenant fits the keenly sought after healthcare dynamic, there may be little preventing them from relocating to another nearby site at the end of a lease term. If considering a thematic property investment, one must ask - if the tenant underpins the value of the property, what are the barriers to them leaving?

2. It is important not to overpay for thematic-backed property. Whilst strong tenant performance may mean they are less likely to default, the landlord does not share in the profitability of the tenant’s business. In most cases, the only guaranteed return for landlords is the contracted rent.

3. Often where thematic are involved, a premium is paid for exposure. If the dynamics change, the resulting impact on capital value can be devastating. In 2019, the Charter Hall Long WALE REIT held the Virgin Australia HQ office in Bowen Hills Brisbane at a value of $95.5 million – a price driven by an apparently blue chip lease covenant. When Virgin announced they were vacating despite having more than 6 years remaining on their lease, the property was revalued at $52.5 million – a staggering 45% write down, with the fall in value far greater than the 6 years of lost income under the lease.

 The alternative to buying the tenant is to start by analysing the fundamental value drivers of an asset. Rates per square metre of land and building area are good places to start, and all considerations relating to the leases and tenants are secondary.

By focusing on these key attributes, it facilitates a defensive investment position whereby the property value is less dependent on specific tenants or lease covenants. This is what really constitutes ‘buying well’, which is how the best investment strategies begin. Buying well is also important in attracting and retaining tenants because it creates a competitive advantage by enabling lower rents (for the same investment return as the competition) while providing attractive leasing spaces via new fit outs, new EOT facilities or new amenities.

 It is also preference that any investment has a multiplicity of uses. The first reason is that it is easier to attract tenants. Niche tenants can be harder to find and secure, and being able to appeal to a greater market of replacement tenants fundamentally reduces the risk of the investment position. Assets with a range of uses are more resilient to structural change and can also provide greater flexibility to pursue alternate or higher and better use outcomes, adaptive reuse options, or repurposing of unused space for value creation and alternate exit strategies.

Whilst interest rates appear to have bottomed out and are now trending sideways, yields in many sectors have tightened. In addition to cheap credit, the sheer weight of global capital willing to accept low returns for getting exposure to the Australian property market makes it increasingly difficult to generate compelling, risk-adjusted returns.

Furthermore, over the last few years, bullish investors, local and overseas alike, have been rewarded as marginal deals have turned into windfalls as property has traded at sharper and sharper yields. This has conditioned the market and further reinforced the notion that the only direction for property is up.  

While the argument can be made that there may still be room for further cap rate compression, our view is that this should be the ‘blue sky’. It can be dangerous to use hope-based strategies that rely on assumptions outside ones control to generate returns.

Regardless, the aggregate of these trends is that, in many cases, properties are traded above their fundamental, or ‘sum of the parts’, valuations. This means it is increasingly difficult to buy well, and it is necessary to actively drive value creation and work to manufacture upside in order to reduce downside risk and generate investment outperformance.

It is often said that investing is simple but not easy, and this is as true in property as any sector. To focus on capital preservation, one must determine value and the pricing of risk, both which can be skewed by overemphasising thematics.

It’s not that thematics aren’t important - it’s simply a case of ensuring that a significant premium is not paid for exposure to such thematics. 

Optimistic outlook for Melbourne's residential property market

In his role of Managing Director CBRE Residential Projects, Andrew is currently managing a number of Melbourne’s highest profile off the plan residential projects with a number of large listed domestic developer clients as well as some of Asia’s largest residential developers from Singapore, Malaysia and mainland China. Andrew is an industry leading, highly capable and hard-working professional that established the Residential Projects business line for CBRE in Victoria in 2010.

Six lockdowns, state and international border closures, spikes in vacancy rates, and increased property taxes have made for an eventful year for Melbourne’s residential property industry.

However, off the back of a bleak 2020 and ongoing lockdowns, we have had an encouraging start to 2021 with strong transactions of townhouses and house and land products. Early predictions suggest that market sentiment will remain positive for the remainder of 2021, following an acceptance that COVID-19 is here for the foreseeable future.

Restored buyer confidence to make decisions and seek out housing investment options over a volatile share market is good news for Victoria, with median house prices ticking over the $1 million mark.

It’s expected that interest rates will remain low due to the current lockdowns and continue to drive record housing price growth.

In tandem, strong downsizer demand is driving sales of high-end, owner-occupier products to local buyers purchasing off-the-plan, who are prepared to wait for completion to secure higher sale prices from their family home sale.

However, investors have left a big hole in the medium-to-high density apartment market, with sales numbers significantly lower than what we have seen in the past.

This has been exacerbated by border closures, which have prevented international students entering Australia and, while interest rates remain at an all-time low, lending criteria is tough.

That said, the gap between apartment and house prices has become so wide that savvy local investors will be anticipating apartment price growth soon.

House and land sales are very strong thanks to occupiers and first home buyers, particularly for property within 20 kilometres of the Melbourne CBD, which is close to public transport. Developers have very specific mandates and need sites to be large enough, with favourable planning policies to achieve their required yields.

If we rewind to the end of 2020, deepened Government home buyer and builder grants as well as stamp duty exceptions encouraged young couples to enter the property market. The trend we are now seeing is first-time buyers driving demand for house and land packages, with a supply and demand imbalance and incentives to assist the purchasing decision, making these attractive projects for developers.

The State Government subsequently announced increases to stamp duty and land tax in May, which led to an initial rush in transactional activity. However, since June 30, the stamp duty increase doesn’t appear to be much of a consideration in buyer decisions and developers have accepted that this is the new playing field and are moving forward.

On the apartment front, Melbourne’s middle ring suburbs remain attractive for apartment, but they are purely for a build-to-hold model as developers are confident in those rental markets.

However, developers are also targeting locations where products are selling well. Our data highlights that 80% of all residential housing site transactions settled across Victoria over the past 12 months have occurred within the outer metropolitan areas, such as Cranbourne or outer growth areas such as Officer and Truganina, but also in regional Victoria, mainly some of the peninsula locations.

While location is important, today’s buyers are keeping developers on their toes and placing more importance on the orientation of apartments – specifically the design of bedrooms, kitchens, and family rooms. The projects in good locations that consider this will find buyers.

Notwithstanding these positive signs, market conditions in the apartment sector are still challenging for developers.

Decisions on how to move an unprecedented overhang of unsold stock is forcing some developers to sell these apartments at a significant discount and while there is potential to pivot to a longer term, build-to-rent model this does have GST implications. Residual stock can be a significant pain-point, with nearly every Melbourne project that’s settled in the past two years having unsold or unsettled product.

Furthermore, material supply delays have increased the overall cost of construction. Buyers are the only winners with fixed-cost building prices keeping their budgets under control.

There has also been a significant shift in capital lending over the past few years which is changing the way private developers fund their projects. This has been driven by a decrease in bank-lending which has led some developers to source finance from non-bank lenders.

But, despite capital constraints, development pitfalls, lack of high-density apartment investors and the current lockdowns, we are confident in the residential property market in Victoria.

What 2022 has in store is still unclear, but our current view is that interest rates will remain low, which will help drive the housing market.

We also remain optimistic that the vaccination will be effective, allowing our borders to reopen and the return of immigration and international students to reinvigorate the high-rise apartment market. However, it may not be until 2023 that developers reap the rewards.

Is the housing market decelerating? – Paul Abrahams

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

What is the current outlook of the housing market?

Australia’s house prices have increased a further 1.6% in July which takes national house prices 14.1% higher than they were at the beginning of 2021 and 16.1% higher than they were a year ago.

However, there are possible indications that the supercharged property market is losing steam.

The monthly rate of growth has been on the decline since March, when prices rose 2.8%.

(CoreLogic, 2021)

Lending

ABS data confirms that home loan commitments fell 1.6% in June (seasonally adjusted), indicating a slight deceleration. The small decline follows a period of rapid growth from Jul 2020 to Feb 2021 in which the value of new loan commitments rose by 150%. This would seem to indicate that the booming home loan market may have peaked after a year long climb where loan commitments hit record highs and lifted almost $10 billion a month above pre-pandemic levels. 

The ABS statistics also revealed that during June, owner occupier loan commitments fell by 2.5%, the largest fall seen since May 2020. Despite the easing of growth, owner occupier commitments remained 76% higher compared to a year ago and 64% higher than pre-Covid-19 in Feb 2020.

A large contributor of the reduction in loan commitments by owner occupiers was a 17% fall in commitments for construction of new dwellings, likely due to the winding down of the HomeBuilder program which ended in April. In addition to this, there was no growth in lending for the purchase of existing dwellings.

The reduction in uptake of loan commitments has also been attributed to economic sentiment being strained as numerous States go in and out of lockdown. With Sydney, the biggest contributor to new loan commitments, in an extended lockdown, there could be an even greater cause for economic concern.

These figures demonstrate that whilst the property market remains strong, there has been a slowdown in growth.

With interest rates being held at a record low for the foreseeable future, it could be predicted that such cheap debt would continue to prop up demand. However, despite low rates previously being a key factor in demand, worsening affordability has diminished people’s capability to purchase. With housing values having risen significantly faster than incomes, it is taking prospective buyers longer to save for a deposit and a larger portion of their income to do so.

Dwelling approvals

For a third consecutive month the number of dwelling approvals fell, with June recording a 6.7% decrease. The fall in the total number of dwellings approved in June was driven by an 11.8% fall in private sector houses after they reached a record high in April. Attached housing approvals however grew by 4%.

By state, the number of dwelling approvals fell in Western Australia (-30.5%), Queensland (-18.4%), Tasmania (-14.9%) and New South Wales (-12.7%). Dwelling approvals rose in Victoria (12.8%) and South Australia (8.6%).

The fading effect of HomeBuilder will mean that house approval numbers will continue to ease.  Labour and material shortages are also likely to detrimentally impact construction of new homes.

Therefore, with less housing coming on to the market due to a reduction in approvals and longer construction periods, an undersupply of housing is likely to contribute to maintaining house price growth.

Growth – but how much?

While many factors affect property values, key drivers of growth include supply and demand ratios, interest rates and consumer confidence. With the RBA seemingly unlikely to change its historically low interest rates until 2024, with many people seeming more positive about Australia’s economic outlook post vaccine, and with some supply challenges, it is likely that house prices will still continue to rise.

The growth that we have seen over the past 12 months was unpredicted and unprecedented, causing shock to many in the industry. Fiscal and monetary policy helped sustain the economy and house prices skyrocketed.

However, it appears that the bull run market might be tapering off which in turn will lead to a stabilisation of house values.

If we look forward:

• The government is unlikely to fund another HomeBuilder.

• There is increased nervousness due to repeated lockdowns combined with the lack of government safety nets previously in place such as JobKeeper.

• The recommencement of immigration due to border restrictions seems to be a long way off, consequently reducing the likelihood of a wave of demand for new housing over the next few years.

• Increasingly tighter lending standards.

The current outlook is that the market is expected to remain firm, being supported by low interest rates, government support and steady demand. However, the growth is unlikely to continue at the aggressive pace we have seen over the past 12 months. Despite it being a turbulent 18 months, our economy has proven resilient, and it is unlikely that we will be falling off the ‘fiscal cliff’.  However, the softening of the rapidly rising house prices we have seen is a good indication that trends are normalizing.

Windfall Gains Tax - how might it look? – Michael Taylor-Sands, Partner Maddocks

Michael advises on property development transactions and joint ventures, structuring of acquisitions, divestments and commercial transactions.  He has extensive experience advising residential and commercial property developers in connection with income tax, stamp duty, GST, land tax and GAIC, as they impact land procurement structures.  

He is a current committee member for UDIA and PCA.   

As unpalatable as a Windfall Gains Tax (WGT) might be for the development industry, the Victorian State Government has remained steadfast in its commitment to the new tax since first announcement on 20 May 2021.

Accepting the inevitability of the new tax, discussion in industry circles has started to shift towards what the new tax might look like when it is introduced. The WGT did not form part of the State Taxation and Mental Health Acts Amendment Bill 2021 enacted on 8 June 2021 to implement other 2021/22 State Budget measures. The Government subsequently confirmed that separate legislation will appear in September 2021 to shape the new WGT. Until then, amidst growing market uncertainty, it is timely to ask what might the WGT look like when it commences on 1 July 2022?

Some of the issues we think government will need to consider in the design and implementation of the new WGT are discussed below.

Land captured – details so far around what land the new WGT will apply to are scant. Government has confirmed that it will not apply to land already subject to growth areas infrastructure contribution (GAIC). Given that not all land in the urban growth boundary (UGB) is subject to GAIC, that should not however be taken as an indication that the WGT will not apply to land within the UGB. Land outside the UGB, in so-called ‘regional areas’, is very likely to be affected by the new tax. Similarly, land in and around greater Melbourne, including Melbourne’s CBD, is almost certain to be affected. In announcing (and rationalising) the new tax, government used the example of Fisherman’s Bend. Such an example provides a fairly good indication that the government has land within metropolitan Melbourne in its sights. Government has also failed to rule out regional areas in response to growing market speculation that the new tax will apply Victoria-wide.

Rezone event – the trigger for the new tax will be a rezone event. At this stage we don’t known what a ‘rezone event’ will be, but we do have some indication as to what it won’t be. A rezone event will be linked to the Victorian Planning Provisions and will apply to rezoning between zone types rather than between zone sub-categories. Rezonings to Public Land Zones will be specifically exempt, as will rezonings to and from the urban growth zone (UGZ) within the GAIC area. Given the complexities of Victoria’s Planning Provisions, we expect government will need to invest a considerable amount of time and effort in clearly defining what a rezone event is, and what exceptions might apply in special circumstances.

Calculation of windfall and tax rate – the Government has already said that the new tax will only apply to rezoning decisions that generate a ‘significant value uplift’ and significant means at least $100,000. For rezoning decisions that generate value uplift of between $100,000 and $499,999, 62.5% of the uplift will be paid as WGT. For rezoning decisions that generate value uplift of $500,000 or greater, 50% of the uplift will be lost to WGT. The ‘uplift’ (and therefore windfall) that will be taxed will be the difference between the value of the land before and after it is rezoned, as determined by the Valuer-General Victoria (VGV). It is not clear however what ‘value’ will be used - unencumbered market value, capital improved value or site value are all candidates. It is also unclear at what point in time the ‘before’ value will be assessed. The most likely assumption is that it will be the VGV’s valuation that is in force immediately before the rezoning event. Given how controversial land tax valuations have become in recent years, one imagines that value determination will feature as a key part of the new legislation, and the Government will be keen to limit the ability of landowners to contest VGV valuations as much as possible.

Who is liable – it is difficult to see how it could be anyone other than the landowner at the time of the rezoning decision that will be liable for the new tax. In press releases issued at the time of announcement the Government specifically referenced ‘speculators’ and ‘developers’ as the main beneficiaries of zoning windfalls. However what gets spun to the media and what ends up being included in functional legislation are often two different things. We would therefore be very surprised if government came up with a legislative model that didn’t tax all landowners, including farmers, and didn’t attach the tax liability to the land in a similar manner to GAIC.

When payable – recognising that value uplift created from a rezoning event may not be realised for several years after the rezoning decision that triggers the tax, the Government has foreshadowed a deferred payment regime similar to that which currently applies to GAIC. A landowner will therefore have the option to pay WGT at the time of the rezone decision, or defer paying the liability (probably via election) until the next dutiable transaction or subdivision of the land. Contemplation of such a deferred payment regime is no surprise. After all, banks don’t lend to pay tax. However, drawing inspiration from GAIC, a regime which the Government has never liked, is somewhat confounding and will no doubt introduce a layer of complexity into the payment and collection of WGT that GAIC is renowned for.

Underpinning the GAIC deferred payment model is the principle that tax payment is best aligned with revenue generation. If that principle is carried through to WGT, then we should see concepts such as Staged Payment Arrangements (SPA), Work in Kind Agreements (WIK), and interest payable on deferred tax in the new WGT legislation. Those concepts are already familiar to developers who transact land in Melbourne’s growth corridors, and are readily transferrable to WGT as it will apply to broadacre land.

It is less clear however how a deferred payment regime will apply in the built-form space. For a residential townhouse project for example, the subdivision event will generally occur once, at the back end of the project, when strata titles are registered in the weeks preceding settlement of pre-sold stock. It is difficult to see how government will wait until strata title registration before being paid any part of its WGT. An alternative (earlier) event is therefore likely to be looked for when dealing with built-form projects. When open space contributions are paid council releases the plan of subdivision into SPEAR in a similar manner to what occurs at Statement of Compliance (SoC) on a stage for a land project. There would therefore be some logic (and consistency) in pegging payment of the first 30% of WGT to payment of built-form open space contributions. Earlier events could be when the building permit is issued by the building surveyor or when construction commences. However, neither of those events have an objective council process to them.

To simplify the legislation and expedite revenue collection the Government may be tempted to not offer a staged payment model and just front-end 100% of the new tax. Staging is however fundamental to the revenue alignment principle mentioned earlier. Government would therefore have to come up with an entirely new payment structure which is as equally equitable and practical as staging if it wanted to move away from the GAIC staging model.

If a ‘dutiable transaction’ is a further payment trigger, then consistent with what we already have for GAIC, the following transactions will all trigger the payment of WGT (over and above settlement of an ordinary contract of sale):

• a declaration of trust over WGT land;

• the granting of a long-term lease over land with a premium;

• any change in beneficial ownership in land (wholly or in part); or

• a transfer of 50% or more, or 20% or more, of the shares/units in a company/unit trust that holds WGT-pregnant land.

Land under Contract – as was the case for GAIC, transitional rules will be needed to deal with land already under Contract either before the 1 July 2022 commencement date, or before the 20 May 2021 budget announcement date. In practice, prior to the 20 May 2021 announcement date, prices would have been struck for sites without any allowance for WGT. It can therefore only be fair that such sites are not subject to WGT despite a post-1 July 2022 rezoning decision. This fairness argument is less compelling for sites that go to contract after the announcement date.

However, when it is considered that until Sept 2021 (when the draft legislation is proposed to be released) landowners and developers will only have had the barest of details around what the WGT will look like and how it will operate, it would also not be unreasonable for land subject to contracts entered into between the announcement date and date of release of the draft legislation to also be exempted from WGT.

That then leaves contracts entered into between the date of release of the draft legislation and the 1 July 2022 commencement date. As a rule tax legislation should not apply retrospectively. However, even at a federal level where such rules tend to be adhered to more strictly, there are examples of transitional rules being linked to the date of release of draft legislation. Accordingly, don’t be surprised if WGT is enacted to apply to rezoning decisions made after 1 July 2022 in connection with land put under contract before that date.

Land under option – similar timing concepts as those which should apply to land under contract should apply to land under option. The pricing of land agreed to under an option prior to the announcement date will not reflect WGT. It can therefore hardly be fair to landowner or developer if WGT is retrospectively applied to such land. From the announcement date the principles become less clear. However, consistent with the treatment of land under contract, it would be fair and reasonable for land the subject of an option entered into before Sept 2021 to not be subject to WGT.

Land under Development Agreement (DA) – the treatment of DAs entered into before Sept 2021 should align with the treatment of contracts and options. As with a contract or option, the landowner and developer will have agreed to a pricing mechanism and payment model without reflecting WGT. It is therefore only fair and reasonable that land the subject of pre-September 2021 DAs is not subject to WGT.

Entry into a Development Agreement that triggers the Economic Entitlement Rules in Part 4B of Chapter 2 of the Duties Act 2000 is not a GAIC event. Application of an equivalent rule to WGT therefore also seems both logical and reasonable.

Landholder Rule interaction – given that the transfer of 50% or more of the shares in company, or 20% or more of the units in a unit trust, that holds GAIC-pregnant land triggers a GAIC event, it seems logical (and likely) that under the new WGT regime equivalent ‘relevant acquisitions’ (for the purposes of Part 2 of Chapter 3 of the Duties Act 2000) will trigger a requirement to pay a WGT liability crystallised in connection with an earlier rezoning decision.

Collection and Expenditure Nexus – despite the strong linkage drawn between the imposition of WGT and the funding of future public infrastructure, nothing has been said by government on whether WGT collected in a rezoned precinct will necessarily be spent on infrastructure constructed in that precinct. If GAIC is any guide, government will resist any such nexus. The closest GAIC comes to creating a nexus between GAIC collected and GAIC spent is a WIK Agreement. Despite the optimism when WIKs were retrofitted into the GAIC legislation in 2011, few in the market (and possibly government) would be brave enough to suggest that the WIK regime has been a roaring success. Accordingly, don’t be surprised if not only is there no nexus concept linking WGT collected with WGT spent, but also no concept of WIK Agreements as an alternative model under which a landowner or developer can pay WGT.

In closing

It will be extremely difficult over the next few months for Developers to enter into transactions in respect of property that is expected to be rezoned after 1 July 2022. It is therefore critical that government releases details on the structure and operation of the new WGT as soon as possible.

In order to be a good tax, the WGT needs to be equitable, efficient and administrable. As set out, some challenges lie ahead for the State Government in designing the new tax so those policy objectives are achieved. Basing the new tax on GAIC may work. However, let’s hope the Government engages in genuine industry consultation in the design and implementation of the new tax to help ensure WTG can be the best tax it can be.

‘Die of cold or die of stress?’: Social housing is frequently colder than global health guidelines

Daniel Daly is a research fellow at the Sustainable Buildings Research Centre. His work focusses on the challenge of improving the energy performance and sustainability of our building stock, through the provision of robust evidence-based research and recommendations. Daniel is expert in the field of energy efficiency for existing buildings, and has a passion for multi-disciplinary research, research with impact beyond academia, and research that improves people lives. 

As you huddle inside this winter – possibly as part of a pandemic lockdown – you might be noticing the “thermal performance” of your home. In other words, does your home maintain a comfortable temperature inside, despite cold conditions outside?

If you’re a social housing tenant in New South Wales, the answer may well be no. Our new research examined the relationship between energy consumption and thermal performance in 42 social housing dwellings. We found many homes operated outside the healthy temperature recommendations of the World Health Organisation (WHO) for substantial periods, particularly during winter.

Our research also found many social housing tenants were effectively being forced to choose between keeping their home at a healthy temperature through cooling and heating, and keeping their energy bills manageable. As one tenant told us:

I put the heater on the other night for 20 minutes — it didn’t do much. But the whole time it was on I was freaking about the cost. No good — die of cold or die of stress, take your pick.

The dangers of energy inefficiency

Social housing often brings together low-income households and poor quality building stock.

In Australia, more than one million people live in housing in poor condition – 100,000 of them in very poor or derelict housing.

Yet, little is known about the internal temperatures in social housing, or how tenants experience seasonal temperature change. Our research represents one step to address this knowledge gap.

Exposure to temperatures that are too high or too low has been linked to an increased risk of cardiovascular and respiratory illnesses and other conditions, which can lead to death.

Energy inefficient homes are blamed in part for higher winter death rates in Australia than other much colder nations, such as Sweden. Conversely, research has shown the health benefits of retrofitting housing to improve winter warmth.

Measures to make an existing home more energy efficient include:

• insulating the ceiling, and potentially the walls and underfloor

• sealing gaps and draught-proofing

• installing ceiling fans

• improving the efficiency of heating and cooling systems

• installing efficient hot water systems

• improving windows with shading, heavy curtains or double glazing.

Our findings

Social housing is provided by government, not-for-profit or private organisations, to tenants who are often vulnerable and marginalised.

We examined the thermal performance of 42 social housing properties in NSW between March 2017 and September 2019. Our study included energy audits monitoring of electrical energy and indoor conditions, and interviews with tenants.

We found substantial under-heating in many of the properties. According to the WHO, the minimum temperature for healthy homes is 18℃. But one-quarter of properties recorded winter temperatures below this for more than 80% of winter. More than half were below 18℃ for more than half of winter.

The problem of overheating in summer was less widespread, but still a significant issue in some homes.

Some households consumed higher-than-average levels of energy despite their low incomes (even after correcting for family size and location) while others used far less than average.

High household energy use was predominately associated with air conditioning use in hot summer climates. In most of these cases, tenants had installed window air-conditioning units with extremely low energy efficiency.

Tenants regularly reported having to forgo thermal comfort to manage their energy bills. To keep power bills down, they also spoke of relinquishing essentials such as daily showers, cooked dinners, night lighting and watching television.

What can be done?

The homes in our study subsequently received energy efficiency upgrades, funded by the housing provider and the NSW government. The social housing sector, while operating on tight budgets, is an innovator when it comes to retrofitting existing buildings.

In Australia, social housing upgrade programs typically focus on improving heating, cooling and hot water systems, and in some cases adding solar. This is largely because such upgrades are simple and rooftop solar costs are falling.

However, energy efficiency experts generally say improvements to the building fabric, such as installing insulation and sealing draughts, should be carried out before services to the home are upgraded.

This approach generally requires on-ground assessment of each property and can be difficult and costly to roll out on a large scale. This is a major challenge for housing providers with constrained budgets, and who are often under pressure to deliver new housing.

But building fabric upgrades are long-lasting, don’t increase maintenance costs and deliver benefits regardless of a tenant’s heating and cooling practices.

One social housing tenant told us of the benefits of such upgrades:

[Before the upgrade] I’d have my heater on, say, from half past four of an afternoon ‘til half past eleven, you just would not turn it off. [Since the upgrade] I turn it on at half past four, it’s coming off at about seven o'clock and I don’t need to turn it back on.

While our study involved a small sample size, it provided new empirical evidence of the need for substantial new investment to continue to upgrade the energy performance of our social housing stock. Such upgrades will help reduce energy costs for tenants and enhance their health and well-being.

It would also reduce greenhouse gas emissions, increase resilience to climate change and provide jobs and economic stimulus during the pandemic and beyond.

This article was first published in The Conversation. Access it here…

Property: A Place At The Table or the Whole Table? – Victoria Lindores

Victoria is a Partner at Koda Capital. She delivers investment portfolio and strategic financial planning advice to a wide range of clients with an anti-jargon and no fuss approach. Focusing on a pragmatic approach to allow clients to make informed decisions about their future, she works hard to make complex financial decisions accessible for those that need it to be. Throughout almost 20 years in delivering personalised advice, Victoria always tries to bring joy and real life to all stages of the process. With an extensive knowledge in responsible and ethical investments, Victoria believes in the power of capital to do good.

“It’s an investment.” said the man in the caravan park.

“It’ll never go down in value.”

 He’s right. A perfect condition Torana is scarce, and demand has been driven by cashed-up boomers with a reminiscent streak. He will never sell, because you should never sell something that will never go down in value. Right? 

Firstly, unexpected things happen all the time. With all his life savings in one garage, what does he do then?

Secondly, an investment should always meet your objectives. Going back to the Torana owner, I bet he could have done with some income or being able to chip away at the capital growth. But this investment was giving him neither.

Thirdly, when an investor focuses solely on one asset in which they have expertise or interest, they are likely to miss many more.

Backing a winner more often

There are four key questions to ask when making an asset allocation decision:

• What is the capital return I need to meet my goals?

• What is the income I need?

• How liquid does it need to be?

• How far away can reality be before I am disappointed? That is, risk tolerance.

The most effective method of reducing risk is to maintain a portfolio that has the greatest probability of performing to your objectives, when combined with the benefit of time. A well-diversified portfolio will have a high probability of an acceptable return – the middle of the bell curve.[1] Diversification can be across asset classes, industries, geographies, capital structure, and managers (idea generators).

Importantly, the drivers of return and risk should be as uncorrelated as possible.

Whereas, a portfolio of concentrated bets will have equal probabilities of a fantastic return and of a terrible one – the tails of the normal distribution. [2] A recent CFA Institute study found that “peak diversification” was between 15 and 30 shares, depending on the style bias. [3] As few Australian property investors can boast that kind of portfolio – diversified across geographies and sectors – they are likely to be highly concentrated and inherently risky.  

To increase the chances of success in building and protecting wealth over the long term, property investors should carefully consider their level of risk and compare it with their return expectations, income objectives and liquidity needs.

Using the same philosophy for success

The property market rests on scarcity. Economic scarcity being the intersection of supply and demand (or desire). Psychological scarcity is used in sales promotion. That is, how easily an opportunity can be lost or became unobtainable the more attractive it becomes and the higher price it demands.

Of course, property also offers utility. You can live in a house and you can run your business from a factory, shop or office. However, individual investor utility diminishes as the portfolio grows in number.

Effectively, success in property relies heavily on finding a niche for which buyers (at some point in the future) will pay a premium. It is this uniqueness – along with property’s inherent illiquidity and high transaction costs that works to insulate good property in bad times. 

The scarcity premium model for selecting investments can also be utilised in small company investing and alternatives, and in these asset classes the drivers of both risk and return should be diversified from your property portfolio.

Meeting your objectives, objectively

“If you fail to plan, you’re planning to fail.”

Benjamin Franklin has it all wrong. Jennifer Aniston has it right.

“I always say don’t make plans, make options.”

Any good investment portfolio should deliver you with a set of options. Admittedly, when you have good debt serviceability from other sources, liquidity and yield don’t seem as important as capital growth. If you can take on higher risk, aggressive equity-building strategies like development make sense.

However, as you start to rely on your capital to meet your expenses or have less time to recover from bad timing, having options will be of greater importance. That is, the option to move capital quickly to meet market opportunities and risks, the option to create higher income or the option to sell parts of an investment (divisibility).

Many long-term investors in Australian property are at risk of retiring as asset rich and income poor, with maintenance costs, illiquidity, and indivisibility of their property holdings presenting a real risk to retirement plans. They always thought the property portfolio would meet all their needs in retirement, so never put anything else anywhere else.

Property developers are managing a business, reinvesting earnings into new projects and hanging their hats on the idea that the few projects before retirement will deliver the capital needed to seed a healthy superannuation fund. Yet, the danger is they have a handful of very similar assets to sell.

Objectives-based asset allocation will give investors a diversified set of options when they need it.

Valuing expertise

When you invest for greater liquidity, you are likely to experience greater price volatility. At least this is how you will perceive any investment that is priced more often than a property is valued. However, if you are a true long-term investor (and you should be if you are in property!), then the additional volatility should be outweighed by the benefits of being able to move in and out of positions over the medium term.

While expertise is important when considering asset allocation and investments, lack of expertise should not result in exclusion.  A good adviser will research, inspect and negotiate terms on new investment opportunities, thereby opening your investment universe to a wider set of options. They should balance your existing property portfolio and its risk/return drivers with that of new diversified options as well as guide you through market turbulence.

Every asset class – cash, bonds, credit, property, equity and alternatives – has a position in building wealth. How much comes down to the investor, what they want and (too often overlooked) what they actually need. And of course, this changes with time.

[1] https://www.investopedia.com/terms/b/bell-curve.asp

[2] https://www.investopedia.com/terms/b/bell-curve.asp

[3] https://blogs.cfainstitute.org/investor/2021/05/06/peak-diversification-how-many-stocks-best-diversify-an-equity-portfolio/

Back to the future: What the next 40 years of housing looks like

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

On Monday 28th June, the Treasury published the latest Intergenerational Report (IGR) – a document which attempts to forecast the state of the budget over the next 40 years. Significantly the report’s opening paragraph states that the outlook has been severely impacted by COVID, ‘which has caused the most severe global economic shock since the Great Depression’.   

The IGR revealed that the Australian economy suffered dramatically and will take years to recover. Despite emerging from recession quickly, the economy is forecast to grow by 2.6% each year for the next 40 years, well below the current 3% average.  

The economy’s 3P’s – population, participation and productivity – were the focus of the IGR. Population growth, or the lack thereof, is a particular driver of the economic slowdown. 

In 2020, Australia’s population dropped by 0.014% from June to December. In the same period, Victoria’s population dropped 0.52%, the largest decline of all the states.  

The IGR indicates that Australia’s population is expected to hit 38.8 million in 2060, significantly lower than the 44 million previously forecast. Ageing also reduces participation rates in the long term.

JP Morgan analysis indicates that Australia’s working age population is already about 300,000 less than the pre-Covid trajectory. This will compound over the coming years.  

Since border closures, Australia has lost its largest contributor to the nation’s finances – skilled migrants. This cohort is also younger than the average Australian which helps balance the ageing population. The return of immigration could add $260bn to the economy in the next 40 years. 

What about the property market? 

For now, much of the property market is booming. 

Australia is currently experiencing a surge in supply of homes since mid-2020 due in part to the HomeBuilder stimulus and low interest rates. The housing pipeline is full and is showing few signs of slowing. Building construction rose 2.5% in the March quarter across the nation.  

However, the IGR paints a dreary picture for the future of the sector.  

Under the IGR’s forecasting, housing undersupply, which is one of the main drivers of our decades-long property boom, will probably reverse during the next forecast period. This is bad news for property owners and investors and will be a blow for developers and builders. According to Shane Oliver, chief economist at AMP Capital, the sector will likely evolve into a saturated, and more affordable, market opportunity for first-home buyers.  

In reflecting on the IGR, Shane Oliver told the AFR that if migration levels return to pre-pandemic levels by 2024-25, and do not make up for lost ground through the pandemic, our population will be nearly one million smaller than previously assumed. He expects this will create a net loss in demand for homes of around 350,000 over five years compared to pre-COVID expectations.  

However, not all property professionals have faith in the IGR’s forecasting. And migration and population are not the only drivers of the housing market’s success.  

Chris Richardson, a partner at Deloitte Access Economics, criticised the IGR’s underlying assumptions about the size of potential rate rises. He believes that the weaker economy and wage growth will keep the cash rate low and house prices higher.  

Andrew Wilson, chief economist at My Housing Market, is seeing investor preferences changing, with demand for bigger townhouses increasing and shifting away from high-rise developments. He believes this indicates a change in investor circumstances and could suggest that the past is not an accurate guide to future events.  

What is the overall takeaway? 

It would be foolish to disregard the IGR – it is, after all, the Treasury’s job to make accurate economic predictions. It is obvious that population growth has been temporarily stalled, and it is hard to deny that this will negatively impact housing in some capacity. The symbiosis between Australia’s economy and the property market’s success cannot be ignored. 

Regardless, an optimist would assess the forecasts differently and focus on more resilient modelling.  

At the height of the pandemic, Australia’s economy was depressed and set to crumble – banks were predicting 20% falls in house prices and unemployment was expected to skyrocket. But we managed to adapt and recover. We have since seen unprecedented house price growth and the ASX has hit records time again.  

In Josh Frydenberg’s speech last week he emphasised that the IGR is ‘not a guarantee of what will be, but an insight into what could be’. Importantly he noted that the purpose of the IGR was to inform and educate, and therefore provide a guide for future policy decisions. 

Whilst leadership from government through the implementation of policy and support to alleviate the potential impact of lower migration is anticipated, the resilience of the property industry should not be underestimated. 

With the IGR providing information and a roadmap, the industry will monitor the ‘actual against forecast’ and will react and adapt as it has did through COVID and other economic challenges. 

How our housing can make it feel like a Russian winter – Dr Chris Jensen

Chris joined the faculty from industry bringing extensive experience as a sustainability consultant on a wide range of projects including commercial greenstar rated office buildings to energy modelling in Antarctica. His research interests are focused on the impact of solar, daylight and shading of facades and the opportunities for sustainable construction, often with reference to european trends and systems.

Australia’s housing just isn’t good enough when it comes to dealing with winter temperatures – we need to take lessons from the Northern Hemisphere.

There are a lot of things to love about Melbourne, but the changing weather isn’t always one of them.

Unlike the majority of Australia, which is dominated by sunshine and heat, anywhere south of the 35th parallel, including Melbourne in Victoria and Hobart in Tasmania, is at the mercy of the southern ocean’s weather patterns that deliver Antarctic blasts and cliff-like plunges in temperature.

The Southern Ocean can deliver big drops in temperature during winter in places like Hobart and Melbourne. Picture: Getty Images

For people new to Australia, the sudden cold in a place otherwise known as the “sunburnt country” can be a shock – but the shock is less to do with the outside temperature and more to do with how it feels indoors.

“I’ve never been so cold in my life,” some will say, adding incredulously that “the windows only have one pane and there’s an inch-high gap under all of the doors”.

I don’t know where the term ‘glorified tent’ originated, but that is what many think of our Australian housing.

Perhaps the poor insulation of our cooler climate homes is the result of being on a continent dominated by warm weather, where airflow and big windows make sense. But whatever the reason, the reality is our housing performance lags behind most other comparable countries.

As far back as 2005, our research for the Australian Greenhouse Office showed that Australia’s then Five Star minimum standards were actually about Two Stars below the equivalent standards in the UK, US and Canada.

And Europe is miles ahead.

High performance standards like the Passivhaus (Passive House) Standard in Germany, Minergie in Switzerland and Réglementation Thermique 2012 in France, that have been around up to 30 years, aim to improve the design of houses and their passive temperature control, rather than relying on artificial heating and cooling.

In many cases, the winter performance of these buildings is now so high that the current problem they face is, in fact, overheating.

So, if you have a coffee-like addiction to your heater, it’s a pretty good indication that the house you live in isn’t designed to deal with the cold, unlike a Northern Hemisphere house that boasts thick insulation, tight air seals and high-performance glazing including double and even triple glazing.

Unless houses are well insulated and and sealed, the cosy feeling of the heater will only last for as long as it is on. Picture: Getty Images.

And while it is possible to achieve warmth with a big enough heating system, this is inefficient and expensive, and the pleasant comfort disappears as soon as the heater is off, leaving you with cold surfaces, cold draughts and a hankering for wearable doonas.

The more sensible option instead is to improve the performance of the building itself, with the goal of preventing heat loss through the building materials including through the window panes, door gaps, exhaust fans, fireplaces, down-lights and plumbing penetrations to name a few.

And passive design and construction principles work both ways – by making your house better insulated to keep in the heat during winter, you also make it more efficient at keeping cool during summer, especially if efforts are made to better shade windows and other glass areas.

Any new dwelling in Victoria (and most of Australia) is required to achieve a now minimum Six Star energy rating.

Despite the ongoing criticism that this minimum performance standard is too low and misleading, there is a significant difference between comfort in an older existing house that by comparison probably achieves Zero, One or Two Stars, and this new standard.

But it isn’t wise to rely on the Six Star minimum standard when having your new house built, as there is a lot more that can be done to ensure heat loss is minimised further.

If possible, request that the designer or builder identify what would be required to increase the star rating to Seven or Eight stars and investigate any additional requirements to achieve passive design measures, including meeting the Passive House standard, where heaters are only infrequently used.

Energy efficient housing standards in northern Europe are well ahead of Australian standards. Picture: Getty Images

And it’s not just about the design of the house, it’s also about the the construction’s quality and attention to detail that makes all the difference.

If you are renting, the chances are you won’t put a screw in a wall to hang a picture let alone make changes to the thermal properties of the building.

Fortunately, Victoria recently introduced the Rental Tenancies Act in 2021, which rules that all homes must have a fixed heater in the main living area by March 2021 (and a Two Star minimum heater by 2023). This is a clear indication of how poorly heated some rental houses have been up until now.

The installation of reverse cycle air-conditioning (as the new law requires from 2023) is far superior from an energy performance perspective compared to an old inefficient electric resistance heater like an oil one (as required from now) – but it won’t keep the house warm when it’s turned off.

The new law also prevents landlords from refusing requests from tenants to make minor changes to the property to improve winter performance.

Although still in trial phase, the Victorian Residential Energy Efficiency Scorecard is a new program in which an assessor can visit your house or rental and suggest upgrades to improve its performance.

An unfortunate side effect of sealing buildings to improve comfort in cold environments in an increase in indoor moisture which can lead to condensation and mould.

This is a very serious health problem that must be avoided. Common sources of excess moisture include showers, cooking and un-vented clothes dryers.

One way to ensure ventilation while keeping a house warm is to install a heat-recovery ventilator that draws in fresh air, warming it with the heat of the vented stale air.

Housing design and the quality of construction are important in making houses better able to regulate temperature. Picture: Getty Images

But there is no good reason why us Australians down south streaming our favourite shows during winter need feel colder than people doing the same in Helsinki or Tokyo.

It’s time to wake up and see that while we might be the ‘lucky country’ in many ways, we aren’t lucky with our housing.

We need to think smarter when it comes to protecting ourselves from the extreme temperatures that a combination of geography and climate change are sending our way.

Dr Chris Jensen is a certified passive house tradesperson.

This article was first published on Pursuit. Access it here…

COVID-19 real estate trends: The fire break or the accelerant? – James Maydew

James Maydew is AMP Capital's Head of Global Listed Real Estate, based in Sydney. Mr Maydew commenced in the real estate industry in 2002, starting his career in the direct markets as a chartered surveyor in London working within the capital transactions division of Cushman & Wakefield advising clients on single asset and portfolio transactions. Mr Maydew joined AMP Capital's Shopping Centres division in 2006 as an analyst before transferring to the listed market by joining the firm's global listed real estate team one year later as an investment analyst/portfolio manager. Mr Maydew has advanced through the business becoming deputy head of the team in 2013 and head of the team in late 2016 covering a whole host of geographic markets on both a primary and secondary basis. Mr Maydew holds a Bachelor of Science in Real Estate Investment and Finance from the University of Reading and is a fully accredited member of the Royal Institution of Chartered Surveyors (MRICS).

As the world tried to make sense of the COVID-19 crisis through the first half of 2020, one of the most striking themes was the way in which the pandemic had accelerated a number of trends across commerce and society.

Two of these – e-commerce and flexible working – were particularly significant for the property sector, in their effect and long-term implications for retail, industrial and office assets, respectively.
Twelve months on, have we really seen a step-change in these dynamics or is a gradual reversion underway?

Office

The balance undoubtedly shifted for office arrangements during the pandemic, with employees unexpectedly enjoying a much greater level of input into when, and especially where, they perform work.

To date, this shift has been relatively resilient – perhaps even more so than many expected. Even through periods of zero community transmission in Australia, many workers have stuck to flexible arrangements and a large number of businesses have moved to formalise these new patterns into permanent structures.

In parallel, however, there has been a concerted effort on the part of others to bring their staff back into the office.

Even if some are successful, on a broader scale the days of ‘nine-to-five’ at the desk are frankly over, and real estate investors, like their tenants, need to evolve. The sector is primed to continue its pivot in demand towards modern, tech-savvy premium grade office space, fit for a post-COVID world. High-spec facilities which incorporate hospital-grade filtered air-conditioning, touchless technology, smart lifts and intelligent space allocation, efficiently manage fluctuating occupancy to maximise the benefits of co-location and provide a safe space for employee talent. We expect that spaces that can’t meet this standard may face softer demand as the tenant base will simply shrink.

Putting aside preference for higher quality, we believe that predicting aggregate demand for space is harder due to competing dynamics. On any given day there will be fewer workers in the office relative to history, but companies will be less receptive to high-density seating plans and will likely need higher floor space ratios. Lower desk demand may also be offset by requirements for more collaboration spaces, as offices could predominantly become a place to work together, building culture and team dynamics, while solo work is conducted remotely. Tenant requirements will ultimately come down to how a corporate wants to manage its employee base and will ultimately become a lever in the competition for talent, especially in the technology sector. Looking at the US, it’s been well documented that Goldman Sachs is getting its work force back into the office1, but contrastingly, Amazon recently announced that tech and corporate employees can continue working from home two days a week and work remotely for four weeks of the year (domestically) once COVID-19 restrictions are lifted in the US2.

Where does this put aggregate office demand? Well on balance, we expect that tenants will continue to require less space into the future than before the pandemic. A look around empty CBD offices in an almost COVID-free Sydney on the barbell of the week (Mondays and Fridays), is a pretty compelling argument for further evolution in the sector; current arrangements in many businesses are anything but efficient. But within that overall reduced demand, we believe there are distinct opportunities for well-crafted, high-spec office space to capture a new generation of demand, as you simply cannot build a corporate identity over Zoom.

Retail and industrial

The trend to e-commerce had been on the march for years before the pandemic, but the closure of physical stores forced millions of Australians to change their shopping habits overnight and move to e-commerce platforms, many for the first time.

Easing the pain is the fact that retail spend across the board, including in physical stores, has surged as pent-up savings3  and consumer demand4  manifest themselves in revenge spending patterns. Within this context, the spike in e-commerce penetration has plateaued but shows no signs of reverting to pre-pandemic levels5.

How sustainable is this retail mall renaissance? To the extent it is living off foregone spending on services, we believe the current boom for discretionary malls may prove transitory as reopening normalises to a post-COVID world, and we might find that for physical stores at least, current sales are simply papering over larger structural issues. On the other hand, full reopening (including international tourism) may be some time away and other contributing factors (such as fiscal and monetary stimulus and the wealth effect of rising property prices) look set to continue at least through the short and medium terms, in our opinion.

However, the longer-term structural shift in demand away from the physical discretionary retail space is likely to continue into the future. This isn’t necessarily a doom-and-gloom scenario for real estate investors, as not all retail is in the cross hairs and given the significant opportunities that have opened up in the logistics space to support e-commerce. However, it does challenge current elevated sales data for the sector and investors should remain cognizant to this, and factor it into their capital allocation.

For e-commerce and industrial, the demographics at play are compelling – and it’s not just new generations of digitally-native spenders filling the ranks of consumers. For a significant number of shoppers in the generations above them – including cashed-up Baby Boomers, 2020 was the year that they had their first real experience with e-commerce. The first bite is critical to developing trust and loyalty, and the large e-commerce platforms – with ultra-fast delivery, enormous product ranges and subscription packages that reward repeat purchasing - were well and truly ready to make lifetime online shoppers out of many who would otherwise have not even considered it. We think it’s safe to say, ecommerce is not going anywhere.

1. https://www.bloomberg.com/news/articles/2021-06-14/wall-street-s-return-to-office-divide-laid-bare-by-goldman-citi
2.https://www.aboutamazon.com/news/workplace/amazon-updates-return-to-office-guidance
3. Australian Bureau of Statistics
4. Westpac-Melbourne Institute Index of Consumer Sentiment
5. Australian Bureau of Statistics

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. 

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[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.