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

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

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

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

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

Crisis relief — the short game

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

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

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

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

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

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

Future focus — the long game

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

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

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

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

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

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

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

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

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

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

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

Is the Property Downfall Down and Out?

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

Architecture

Nigel Morris – SJB Architects

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

Building Surveying

Shane Leonard – Phillip Chun & Associates

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

Consultancy

Neil Slonim – theBankDoctor

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

Development

Christian Grahame – Grocon

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

Finance

Matt O’Halloran - Merricks Capital

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

Planning

Frustrated Contributor

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

Project Management

Tynan John & Josh Whiteley – APP

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

Property Law

Briget O’Callaghan & Jeffrey Pinch – MD Law

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

Quantity Surveying

John Cross & Arif Uzay – Rider Levett Bucknall

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

Real Estate

Paul Burns – Fitzroys

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

Recruitment

Rohan Christie – Kingfisher Recruitment

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

Retail

Mark Upton — Coles Property Group

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

Debuilt

Paul Abrahams & Daniel Burger – Debuilt

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

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

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

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

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

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

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

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

• Do suitable cleanskin alternatives actually exist?

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

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

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

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

WHAT WILL 2020 BRING?

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

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

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

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

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

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

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

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

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

Neil Slonim

theBankDoctor

If you would like to receive theBankDoctor’s occasional newsletters you can sign up at thebankdoctor.org

Danny Burger — Navigating the Development Finance Maze

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cartoons by Buddy Ross