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

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

Introduction

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

Source: CoreLogic, AMP Capital

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

First – it remains expensive

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

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

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

Source: OECD, AMP Capital

Second – house prices go up and down

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

Third – talk of mortgage stress remains overstated

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

Source: ABS, RBA, AMP Capital

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

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

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

Source: ABS, AMP Capital

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

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

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

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

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

Finally – the national property market is highly diverse

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

Source: CoreLogic, AMP Capital

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

Source: REIA, AMP Capital

So where to now for residential property prices?

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

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

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

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

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

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

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

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

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

In Australia we move a lot

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

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

Putting the numbers into context

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

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

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

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

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

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

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

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

Have the capital cities lost their appeal?

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

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

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

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

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

Will COVID-19 lead to growth in smaller centres?

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

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

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

So is there a pandemic-related exodus?

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

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

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

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

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

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

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

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

What changed in 2020?

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

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

Backlogs and Adjournments

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

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

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

Key differences between a physical hearing and online hearing

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

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

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

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

Procedural Orders – Online Hearings

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

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

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

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

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

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

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

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

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

Key challenges of online hearings   

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

Physical Site Inspections

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

Expert Evidence

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

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

Teams / Zoom Fatigue

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

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

Technology can fail

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

Are online planning hearings the new normal?

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

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

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

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

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

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

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

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

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

Office or not? – Daniel Burger

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

The pandemic has dramatically altered the way in which we work.

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

Back to the office

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

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

Changing attitudes – here to stay?

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

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

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

The impact on offices

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

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

Video conferencing and online collaboration 

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

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

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

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

(The Verge, 2012)

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

Landlords will respond

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

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

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

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

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

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

So, what does this all mean?

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

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

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

How Buildings Learn — Mark Upton

Mark holds a Bachelor of Business in Property from RMIT, commenced his career in valuations and held positions with Chesterton International and Richard Ellis (now CBRE) before working in the City London during the late 1990’s.

Returning from the UK, Mark undertook primarily residential development projects of varying scale & complexity from single residences to multi-unit projects mainly in Melbourne’s inner and south eastern suburbs. An opportunity then arose to join McDonald’s Australia where his role was site acquisition and securing of town planning consent across three states.

Presently with Coles Group Property Developments, Mark is a Fellow of the Royal Institute of Chartered Surveyors and a member of the Australian Property Institute.

Is there a keen observer of property who has not wandered the streets of Melbourne’s once proud retail strip centres and thought “What has happened?” or more so “What is next?”

 Post pandemic (vaccine notwithstanding) perhaps the same can also now be asked of other asset classes. What for example is to become of secondary or “sub-prime” office buildings in need of refit or where lifts can accommodate numbers insufficient to allow for social distancing? The concept of “Highest & Best Use” must surely continue to impact inner suburban light industrial areas as modern manufacturing & distribution premises are constructed in outer lying Growth Areas with superior transport linkages.

The answers may lie in Stewart Brand’s 1994 book entitled “How Buildings Learn”.

 Subtitled “What happens after they’re built” the book takes early drawings or photographs of structures from when first conceived or constructed and then contrasts these with later photographs of exactly the same buildings and/or streetscapes, often over considerable time periods. By so doing so the reader comes to understand a chronology of built form.

 “ ….. Monumental ….” grain silos once owned by Quaker Oats in Akron, Ohio are now the “Quaker Hilton” a downtown hotel. A proud Georgian house constructed in 1926 for a notable Long Island, New York local became a restaurant before falling into disrepair and a candidate for demolition in 1985 only to then be repurposed by a fast food chain in 1991. To quote Brand;

“Large houses are exceptionally skilled at being comfortable, being loved and being adaptable. Like old factories and warehouses they are always prime candidates for preservation’s best political-economic design device - “adaptive use”.

Brand’s overall thrust is that architecture is not permanent and buildings can (and indeed do) adapt, provided they are allowed to do so and not constantly demolished and consolidated for wholesale redevelopment. There may well be periods of neglect as precincts become undesirable or undervalued, but then these very same structures are, for a variety of reasons, reinvigourated bringing the undefinable cachet and inner suburban character found in certain parts of say Fitzroy, Carlton, Collingwood and Richmond.

Be it gentrification due to sheer proximity to the core of a metropolis, Government sponsored changes to transport infrastructure or public policy enshrined in Planning Schemes, if allowed to do so buildings can, and do, adapt and evolve.  

There is much to be learnt from this in the current circumstance; innovation will inevitably occur as structures, just like humans, adapt to meet needs.

Who has not visited a former warehouse, perhaps now an office or high-end residence, and marvelled at the irregular exposed brickwork and saw-tooth roof? Similarly a former workingman’s cottage now sees the what was once a sitting room “repurposed” as a master bedroom with ensuite, the whole original structure standing in contrast the strikingly modern (and often expansive) glazed extension to the rear?

Over time, buildings may be added to, another level here; a different window there; fenestration added or removed, signage incorporated. However certain buildings remain to some extent intact, albeit repurposed, therefore adding to the “patina” and character of a location.

It is a simple fact that a good many buildings are “recycled”, possibly several times, as the original purpose of the structure alters in response to its environment and other (possibly social) circumstances. This may be as simple as a further level being added to a residential building to accommodate a larger family; or it may be more fundamental and visionary.

An example is the former Phillip Morris cigarette manufacturing facility in the industrial precinct of Moorabbin being transformed to include a micro-brewery, a child care facility, office space and retail. Much of the original structure (durable and quality built; something of a local landmark) is being retained and will be re-purposed as “Morris Moor”, contributing to a new and evolving fabric / character of the neighbourhood. 

There should be some optimism that, allowed to do so (possibly by fate, a “hold out”, or similar quirk), structures that are retained evolve in an altogether beneficial (and often aesthetically pleasing) manner. This is in contrast to a constant (and seductive) cycle of demolition, consolidation, redevelopment and progressively smaller subdivision.

The examples above demonstrate that those buildings which, for a variety of reasons, are allowed to remain will find a use; be it one that conforms to a prescriptive Town Planning regimen or one that Planning Authorities ultimately come to appreciate the wisdom of permitting.

If, as Brand proposes, buildings do indeed “learn”, then it seems there is presently an opportunity to be grasped as pandemic recovery stimulus initiatives, government policy, a chronic lack of affordable housing and historic low interest rates enable the development community to become less “…. artists of space…. ” and perhaps more “…. artists of time ….”.

Leaving 2020 behind

2020 was a year of unexpected twists and turns. Australian and global property industries experienced a few positive and a lot of negative outcomes. For our last Expert article for the year, we asked 20 industry experts to give us a statement on 2020, and a projection for 2021. Debuilt hopes that next year brings a vaccine and a healthy appetite for property assets.

Architecture

Michael Bialek - SJB Architects

“2020 was a challenging year but reminded us all of what is important in everyday life. 2021 will see our team return to the studio and respond innovatively to the changing conditions in the property market.”

Building Surveying

Shane Leonard - Phillip Chun & Associates

“2020 taught us that even the building consultant industry can work remotely and has the ability to adapt. 2021 looks as though the construction industry’s recovery will be quicker than expected. However, it will be garnished with a healthy dose of caution.”

Construction

John Crane - Alfasi

“2020 was a year of reflection and re-setting of expectations. I predict that 2021 is a dynamic year of change with both positive and negative outcomes for the property market.”

Development

Guy Taylor - Digital Harbour

“2020 has required all of us, including the property industry, to pivot quickly. The key take away for me from 2020 has been ‘maintain great relationships’. Not only on a personal level (being confined at home) but also on a professional level with colleagues, tenants and clients. It could have been either negotiating rent relief, a design issue or an alternative playground for a 3 year old. That being said these challenges have certainly presented new opportunities in the property industry - it has allowed us time to consider how to reposition assets or reconsider designs to meet future demands. The ability to respond quickly to the ever changing demands of the market will be the key to 2021 along with maintaining great relationships.

2021 is going to be an exciting year and I believe there will continue to be opportunities in property for those who can pivot and adapt quickly. We will have the opportunity to have the social and personal interactions we have all been missing. I hope the lessons of 2020 will see the streamlining of bureaucratic processes and a focus on enabling outcomes not only to improve of health of all of us but also that of the environment which will allow our great city of Melbourne to be the vital and exciting place it is. I hope we will see a focus next year of improving public spaces which will inherently improve property values.”

Finance

Kathy Johnson - Yarraport

“2020 has been a volatile year and property capital markets have been no exception, seeing a strong shift in appetite towards more “COVID-safe” assets such as industrial, medical and medium to low density residential.

We expect 2021 to have continued growth in non-bank capital providing competitive tension for borrowers, and activity growth with the delivery projects from both pent-up and pulled forward demand from lockdown and government stimulus.”

Fiona Clark - Merricks Capital

“The resilience of the property market in 2020 has surprised many. The strong rebound in sentiment and continued fiscal and monetary stimulus should limit downside, but risk factors have also intensified.”

Neil Slonim - Slonim Consulting

“2020 has been a year like no other. No one could have predicted what would unfold. Whilst many have been, and will continue to be, adversely impacted, this ‘Black Swan’ event has spurred learnings and creativity which is already generating new opportunities for well-managed and reputable developers, investors and lenders.”

Project Management

Josh Whiteley & Tynan John - APP

“2020 was challenging for most, some more than others, but everyone came together and we got through it - which now provides a great base for the next phase of growth/opportunities. 2021 will see the implementation phase of industry shifts that were in afoot, but are now accelerated, being more social housing, build to rent rise, mixed use on top of retail, WFH & more work being done from non-‘CBD traditional office block’ locations.”

Property Law

Michael Fetter - Tischer Liner FC Law

“2020….interesting year as property was meant to be depressed, but was resilient with low rates and opportunities. There were very little mortgagee in possession sales, and lots of mezz lending deals.

2021…while no one can foretell the future, trends seem to be de-centralising from Melbourne CBD, build to rent, holiday house acquisitions, smaller developments of townhouses and lifestyle apartments. Office market rents will fall, incentives to lease to rise, and residential rents will continue to be under pressure until students return.”

Briget O’Callaghan - marshalls+dent+wilmoth lawyers

“2020 saw Melbourne’s commercial and residential property market slow down, however the overall outcome was not as bleak as anticipated.

Developers’ access to finance for construction projects was harshly affected by cautious and risk-adverse lenders. The risk and reality of being unable to meet milestones and deadlines due to unexpected delays was also a concern for many developers this year.

Property prices held steady regardless - we saw an increase in first-home buyers return to the market in the second half of 2020, taking advantage of various State and Federal government grants directed their way.  

The property market outlook for 2021 is uncertain, however this uncertainty creates some opportunities within the property market; Victoria’s 2020/21 budget focused on stimulating the property/construction sector with affordable housing opportunities. opportunities for developers and provide much needed relief to some of the more vulnerable members of Victoria with many projects tipped to begin early next year.”

Jane Hodder - Herbert Smith Freehills

The year 2020 has certainly been a challenge for us all, especially in the commercial office, residential apartment and retail sectors. There has also parts of the property sector which have benefited from market conditions during 2020 such as industrial. It is therefore more important than ever for real estate players to pre-empt some of the future trends that will emerge from 2020 so that they can be ahead of the game in both taking defensive positions on risk areas and pursuing new opportunities.

With the deferral of many transactions during 2020, especially in the commercial office and retail sectors, there is likely to be a significant uplift in activity in the first half of 2021. Despite the pandemic’s devastating impact to lives and livelihoods of so many people, senior executives also highlighted that through disruption, opportunities arise. The road ahead does not come without its challenges though which the property industry will need to navigate during 2021.

Real Estate — Commercial

David O’Callaghan - O’Callaghan Commercial

“2020 saw decades of property and contract law thrown under the bus as Government decided pandemic survival was only about tenants. 2021 is likely to see the beginning of a long, deep and very painful journey for owners and investors forced into a post-Coronavirus hangover and a platform where they hold a significantly weaker hand.”

Paul Burns - Fitzroys

“2020 saw appetites for secure, long-term assets increase, with tenants who can and will pay rent being in demand. The long term affect on assets will be modest - people need the collaborative and social environment of an office, and employers need to see what their employees are doing. Now, more than ever, productivity will need to be driven to catch up for the losses.”

Raoul Salter - Gross Waddell

“2020: The challenges of 2020 have been well documented but as expected, the resilience of property has been on display, bouncing back well.

2021: A crystal ball gazing approach sees a brisk start with possible head winds as the year progresses. A vaccine can’t come quickly enough!”

Jesse Radisich - Savills

“2020 was clearly an extraordinarily tumultuous year for all of us and within the property market. It was a year of contrasts, with an exceptionally strong start to the year brought to a sudden halt by the onset of the pandemic. It was then a period of consolidation and caution, followed by a period of strong activity and optimism throughout the second half of the year as the virus unfolded and we managed to get it under control.

2021 is shaping up to be an exciting year. We anticipate the confidence and optimism currently running through the market will roll over into the new year, and we expect strong activity early on in 2021. The big question is whether this will be maintained throughout the balance of the year, and the hope is that with interest rates at rock bottom levels, plenty of cash in the market, big Government spending, the proposed vaccine rollout and then subsequently tourism and migration returning, we may just be able to cushion ourselves moving forward.

Recruitment

Rohan Christie - Kingfisher Recruitment

“2020 broke the crystal ball, but it was pleasing to see how resilient our local community and economy has been throughout this tough period. We have never been busier in December, which is a great sign for what is to come in 2021, although questions remain to be answered about drivers like immigration.”

Retail

Mark Upton - Coles Property Group

“2020 - A year to forget; one which further accelerated trends toward reduced retail floor areas in favour of logistics and dark stores for online ‘Click & Collect’ options.

2021 - I am predicting a slow recovery to a new ‘normal’. There is an opportunity to capitalise on work-from-home learnings and forced innovation in the repurposing of existing structures. State-sponsored investments in affordable/public housing and infrastructure looms as a potential saviour for the construction industry.”

Town Planning

Deon White - Roberts Day

“2020 was global dose of what’s important and reminder of humanity’s ability to adapt. 2021 will reward innovation, driven by the need to nimble and the opportunity in shifting community values.”

Kellie Burns - SJB Planning

“2020 gave us a reset we couldn’t have imagined possible (or that we would have desired) and forced a seismic creative re-think of how we do business and relate to one another – hopefully for the better! 2021 will see a return to property activity, with 2020’s insights guiding decisions across all sectors of government and private interests particularly relating to how we live, where we work and how our public spaces can enrich us.”

Valuation

Scott Keck - Charter Keck Cramer

“The impact of COVID-19 was not as severe as most commentators were suggesting. However, as the pandemic fades, we will return to some of the pre COVID-19 economic challenges of under-employment, stagnant wages and low inflation and productivity. On a more positive note, support for the residential markets is on the horizon, with the inevitable return to the appropriate rates of population growth boosted by immigration mainly from Asia, including China, and the return of foreign students.”

Debuilt Property

Danny Burger & Paul Abrahams

“2020: The Debrief, with its bespoke cartoons, was meant to generate a smile but each week seemed to deliver more bleak news.  Having said that, COVID did not have the devastating impact on the property industry many of us feared. Rather many of us gave up hard copy files, became more mobile, advanced our IT skills, got better acquainted with the people in our household and are now convinced that greater flexibility in our work methodology is achievable.

2021: We are creatures of habit, and barring a new pandemic hitting us in close succession, we will mostly revert to a modified version of past practice. Collaboration, socialisation, strategy, mentoring and relationships are best achieved in person. However our lessons from 2020 will create exciting and innovative design options that will emerge in our built form.”

Scott Keck – Market Commentary – National Market Forecast, COVID-19 December Update

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

Over the last nine months, in my July and again in my October commentaries, I strongly foreshadowed the impact of COVID-19 on the property markets would not be as  severe as most commentators were suggesting and that the recovery would be relatively strong and fast. I rationalised that the fundamentals, both economic and social would not be so dramatically disrupted by events as to result in significant permanent change. I still hold to that view yet believe that as the pandemic fades, we will return to some of the pre COVID-19 economic challenges of under employment, stagnant wages and low inflation and productivity.

Much of the uncertainty about the direction of the economy generally and the real estate markets in particular, is now giving way to growing confidence that we are returning to normal conditions, not a new COVID 19 normal, but conditions as they were prior to the pandemic intervention.  Whilst there is genuine sympathy for those who have been adversely affected, I think nonetheless that the consequent dramatic surge in the application of effective and user friendly IT in our society during this period will have lasting positive legacies.

For many businesses, doing things differently, pivoting their operations and embracing innovation will lead to leaner cost, more profitable enterprises with employee workplace flexibility. The record low interest rates, globally and in Australia, in part due to Government revival monetary strategies, now provides the availability of extremely useful, low cost debt, which in the private sector, supports real estate generally and particularly the housing market when coupled with Government grants and incentives, but which is also an extremely powerful tool to assist Federal and State Governments strengthen the economy with infrastructure and other strategies providing the debt is invested wisely. Cheap debt can be an extremely useful resource.

The current rhetoric with China will pass as there are social and economic imperatives necessitating good bilateral relationships with China. In one sense the current spat is nothing more than a brief argument in what should be a long and strategic marriage. Consequently, support for the residential markets is on the horizon, with the inevitable return to appropriate rates of population growth boosted by immigration mainly from Asia, including China and the return of foreign students.

As the virus contagion fades and health protocols improve with the expectation of a vaccine, confidence is surging, domestic tourism is strengthening, economic activity generally is recommencing and there is now even the prospect of a return of international tourism mid to late next year.  These are all positive influences which are removing the anxiety from the minds of property investors and financiers.  It needs to be appreciated that with commercial property, investment yields or capitalisation rates will stay at their current levels, the only adjustment to value being on the income side, in respect of which rent concessions are fading, incomes are stabilising and values are emerging relatively unaffected.

For most retail properties the locations remain strong, appropriately zoned and central and the improvements relevant for continued use. Accordingly, most retail holdings will survive current pressures and emerge with new and varied occupancies meeting wider community needs and expectations. Office buildings will also maintain their important role and whilst there may be some interim tenancy churn, future development and renovations will be paced to ensure a supply/demand balance.

From a property or real estate perspective, I do not believe that the events of the last 12 months have in any way been significant enough to change the ground rules, or cause lasting structural change endangering the prospects for fundamental performance and reliability of investment returns. In the residential markets there are primarily three groups: those who own properties; those who aspire to own properties; and those who, less fortunate, will probably never be able to be owner occupiers but will always be tenants.  Those three groups existed prior to COVID and those three groups will exist after COVID without great change. Online retailing, working remotely and the trend of moving to regional centres was all happening for some years prior to
COVID and to a degree accelerated during the COVID period.  Those trends will continue – no surprises there really.  Population growth remains a top priority for our economic prosperity and Government strategies will ensure the resumption of immigration at the needed numbers as early as possible and foreign students will return for the reason that as a destination, Australia is now more attractive than ever before. Tourism, both domestic and international, will also reliably return.

Over the last 12 months, I have remained confident about real estate’s resilience to the economic consequences of COVID, and as there was so much pessimism, my confidence seemed relatively very optimistic, but really was only born of objective analysis and research. Whilst there remains an agenda for economic reform to ensure Australia’s future, its sustainability and its independence for those that understand real estate and its debt markets, there is now an immediate opportunity over the medium term to work with very low cost levels of debt and the arbitrage that offers to secure healthy returns.

So, in conclusion, whilst we are rapidly emerging from COVID-19, I think it is nonetheless realistic to recognise that there is a degree of “make-up” or camouflage currently in the economy due to the various support initiatives. So whilst probably not “in the eye of the storm”, we should accept that the economic challenges that existed prior to COVID largely remain, predominantly, significant under-employment, stagnant wages and low productivity, which all need to be addressed and now there will be the added need to pay back the recent vast Federal and State Government borrowings drawn down to kick start the economy. The reality however is that any economic burden may be largely avoided by those fortunate to have income or capital as they will, at an individual level be able to weave amongst the pervading threats and with good management and advice secure returns, maximise income and grow wealth.

Commercial Real Estate market: REIT insight — Fiona Clark

Fiona Clark is the Investor Relations Manager at Merricks Capital and is responsible for managing the firm’s platform fund investor relationships including investor onboarding and communication.

Fiona has experience across a broad range of financial markets including domestic and international equities, commodities, fixed interest and derivative products.

Fiona holds a Bachelor of Economics (Actuarial Studies) from Macquarie University. She also holds a Graduate Diploma of Applied Finance and Investment (FINSIA), a Graduate Diploma in Treasury Management (FTA in conjunction with Monash University) and a Diploma in Financial Services (Financial Planning).

The recent quarterly trading updates from the listed real estate companies have provided valuable insight about the various sectors, and while market conditions have been diverse and volatile, we can see emerging trends that are generally positive. A few observations and specific examples of the trends are highlighted below.

Office

The key themes in the office sector were varied levels of leasing activity (high levels of enquiry but some potential tenants delaying decision making), stable valuations, resilient occupancy levels and improving levels of rent collection. The outlook is also looking more positive, with several references to the continued importance of the office in a balanced and flexible working environment.

• Dexus (DXS) - Rent collections remained at 94%, occupancy fell only slightly to 95.4% (from 96.5% at 30 June). Face rents have been holding across Sydney and Melbourne. Dexus believes the outlook for the office market has improved in recent months, noting employment in white collar industries was down just 0.2% in the year to August 2020. The company also pointed to a recent sale of a 22-level A-grade tower in the Melbourne CBD at an 11% premium to book value, which highlights the resilience of prime grade office values.

• Mirvac (MGR) - Noted increasing evidence of tenants starting to encourage more of their staff to return to the office due to the benefits the physical workplace brings to culture, innovation, productivity and staff development. Occupancy was 97.4%.

• Centuria Office REIT (COF) - Rent relief in the September quarter was down 58% compared to the June quarter and rent collection averaged 94%. Occupancy remained high at 95.9%. “Leasing activity also indicates that tenants continue to value office space as a central workplace, essential to maintaining productivity and culture… While immediate uncertainty resulting from COVID-19 remains, the medium to long-term outlook for high quality office assets remains positive, as evidenced by strong recent investment sales for comparable office buildings and the growing trend of tenants returning to office space to enhance productivity and culture.”

Industrial

This sector was a clear beneficiary of the COVID-19 lockdown and changing consumer behaviour, with logistics and warehousing sectors providing essential infrastructure for the digital economy and enabling distribution of products to consumers. Occupancy, rent collection, rental growth and lease activity all showed positive momentum.

• Mirvac (MGR) noted resilience in industrial markets, particularly those in e-commerce. Occupancy was 99.4%.

• Centuria Industrial REIT (CIP) - Occupancy remained high (96.5%) and rent collections remained strong, averaging 97% for the 6 months.

• Goodman Group (GMG) – Reported high utilisation of warehouse space, occupancy at 97.8% and continued rental growth.

Retail

Retail has been one of the worst hit sectors of the commercial real estate market but the majority of companies who provided updates reported a rapid recovery in foot traffic, particularly in areas of virus containment. Some measures have returned to pre-COVID 19 levels. Suburban and local centres also outperformed those reliant on workers, tourists or outside trade in most key metrics. Leasing activity has been good, occupancy is higher and while rent collection has been low, it is improving for some groups.

• Mirvac (MGR) - Leasing activity has been solid in centres where operating conditions have stabilised and deal structures are comparable to those negotiated pre-pandemic. Occupancy has been high (98.0%) but rent collection low (64%).

• Stockland (SGP) - Total portfolio traffic is 90% of pre-COVID levels (97% excluding COVID-19 hit areas). Rent collection was 81%, significantly higher than 4Q20.

• Vicinity Centres (VCX) - Centre visitation for the week ended 3 November, was 80% (Sep Q average was 58%) of year ago levels (96% excluding Victoria and CBD). 56% of gross rental billings across the portfolio had been collected over the quarter or 76% excluding Victorian and CBD centres.

Source: Vicinity Centres (VCX)

• Scentre Group (SCG) – In early November, 92% of retail stores were open and trading (including Victoria) and customer visits were 90% of the previous year levels (excluding Victoria). SCG had also reached agreement with 89% of total retailers regarding COVID arrangements. Rent collection for the quarter improved to 85% and was higher again in October at 96%.

Source: Scentre Group (SCG)

Residential

The residential sector was significantly affected by COVID restrictions on inspections and auctions. A key positive consequence has been the adaptability of the market, including growth in digital sales tools such as guided, online project tours. This supported sales during the downturn and will assist markets going forward. Mirvac (MGR) and Stockland (SCP) both reported a strong recovery in leads, enquiries and exchanges during the September quarter, and noted that default rates remain low and in line with historical averages.

• Mirvac (MGR) reported leads up 34% and exchanges up 40% over the quarter. Default rates are low at 1.9%.

• Stockland (SGP) has seen elevated sales and settlements and 1Q21 was the highest quarterly net sales in over 3 years (although the rate eased from the end of Q320). This “reflects pent up demand, low interest rates, improved credit availability and government stimulus measures”. There has been a clear shift in buyer preferences towards master planned communities which are well-located, liveable and affordable with good access to open space, schools and local services.

Is social housing the treatment and vaccine the australian economy needs? – Craig Rydquist

Craig Rydquist is a Business Unit Leader, Project Director at APP Corporation managing a national team of program and project managers within the Program Solutions (Program Management) division. He has over 20 years’ international experience in architecture, consulting, project management and construction as an executive manager for companies including; Hassell, Coffey, Leighton Contractors, Decmil Group Limited and APP Corporation. Craig is a registered architect (RAIA), project manager and registered builder with experience spanning the full lifecycle of projects.  He has delivered projects of +$1B in value, across multiple sectors including; government, private, defence, mining and oil & gas, both within Australia and Europe.

Just as an effective treatment and vaccine is urgently required to tackle COVID19, the Australian economy is in urgent need of both a treatment to stimulate the construction industry and a vaccine to prevent a social housing catastrophe.

In May 2020 I published an article on How Program Management can assist in driving economic stimulus, commenting on international examples of stimulus programs implemented during the GFC, and how large programs of small/medium construction works can successfully stimulate economies. Social housing was identified within this article as a key area where demand outstrips supply and Australia’s economic recovery would benefit from investment in large programs of work in this sector.

Following the GFC, a review of global fiscal stimulus was carried out by the European Commission (EC) and the International Labour Organization (ILO). Their report highlighted the significant economic benefit that a well-considered strategy harnessing the construction sector to stimulate the economy would, and should, incorporate large programs of works delivering multiple small to medium construction projects.

The reason for this was simple: for buildings up to three storeys, over 50% of the total project cost relates to on-site labour. Of the remaining project budget, the vast majority of materials are Australian-made. Hence, programs such as housing have been proven to be very effective in creating jobs, both directly and throughout the wider economy through extended supply chains.

The construction industry is one of the lynchpins of the Australian economy. It accounts for around 10% of our GDP and employs 1.2 million people, or 9.1% of the entire Australian workforce. The industry provides more full-time jobs than any other sector of the economy and is made up of 395,000 businesses – 388,800 of which are SMEs.

Australian Council of Social Service (ACOSS) reports investment in social housing provides a greater boost to growth in GDP per dollar spent by government than tax cuts or other transfers to households because the money is spent and not saved, and relatively little of it is spent on imports. The ‘multiplier’ (boost to incomes per dollar spent) from the last major boost to social housing investment in 2009-12 (the Social Housing Initiative or SHI) was 1.3 (1.3 dollars in additional income for every dollar spent).

Just last week both the Victorian and NSW Governments announced a combined total of $6.22B of economic stimulus.

Deciphering government media announcements is much of an art as science and in an attempt to understand Australian social housing commitments, I have adjusted budget data to reflect a 12-month period as per the table below:

From the data above it appears that somewhere around 4,330 houses are forecast to be delivered across Australia over the next year.  Although this investment is welcome it is accepted that demand continues to significantly outweigh supply in this sector and more needs to be done to address the housing crisis.

The national shortfall in social housing is estimated at 438,000 dwellings in 2020 and set to grow to 729,000 by 2036.

Aware that their industry is about to stall, Master Builders Australia and the construction union CFMEU set aside their usual differences to jointly call for the government to spend $10.0 billion building 30,000 new dwellings. Based on their calculations it appears they have allocated an average $333,000 per house.

To address the estimated shortfall Australia would need to construct 45,563 houses per year to reach 729,000 by 2036.  At this number and applying an average cost of construction of $333,000 over $15.17 billion needs to be allocated per year for the next 16 years.

To put these numbers into perspective, Post WWII, in 1943, a year-long commission of inquiry led by HC Coombs warned that Australia faced a shortage of 300,000 dwellings.  Over the next 25 years, about one in every six new houses in Australia was built by government.

In other words, even before the virus, Australia already had a housing crisis, comparable to the situation during WWII.

According to economist Saul Eslake, in the post-war decades public sector agencies built more than 15,000 dwellings every year. Today fewer than 4,000 are constructed annually, which is barely enough to replace the number demolished or sold.

Over 20 years I have delivered large numbers of social and Indigenous housing throughout WA, NT and SA including Strategic Indigenous Housing and Infrastructure Program (SIHIP), National Partnership Agreement for Remote Indigenous Housing (NPARIH) and a plethora of other state and federal programs. 

These programs included alliance, early contractor involvement and traditional Fixed Lump Sum contracts. While no program was perfect, what we learnt was that when established appropriately, there is significant opportunity to deliver large volumes of work in short timeframes that deliver benefits such as:

1. Economies of scale

2. Consistency in design and material selection

3. Application of innovation in design, construction and ESD

4. Connecting programs to large training and employment programs

5. Incorporating employment and training outcomes, including indigenous outcomes.

By applying the lessons learnt from previous programs of work, the proposed social housing investment will play a significant role in stimulating Australia’s economy.

At APP our Program Solutions division specialises in delivery of large, complex programs of work across multiple sites and multiple states. With appropriate planning, we’re confident that an integrated design, procurement and delivery strategy for the large programs of work required, will go a long way to addressing Australia’s social housing needs.

Is investing in Biophilic Design in the workplace worth it? – Amelia Cameron

Amelia works as a Performance Consultant for Stotan Group, a human performance consulting group that specialises in individual, team and organisational development. Amelia has a passion for employee wellbeing, and is responsible for implementing performance improvement initiatives that enhance and sustain the wellbeing of teams and individuals. Amelia is currently completing her Masters of Psychology (Organisational), and has chosen to conduct her research thesis on investigating the benefits of biophilic design (i.e. nature contact) in the workplace.

Growing up on a farm in country Victoria, I have always been drawn to nature. As a child, I spent a copious amount of time playing and exploring the outdoors. Once I moved to the city, I frequently found myself escaping to a nearby park, walking in freezing temperatures and gravitating to the outdoors. Without realising, nature became my escape to reduce my feelings of stress and to assist my productivity.

As a result, I made a straightforward decision to incorporate my two passions; nature and helping organisations be the best they can be, as my primary psychological research focus. My research focuses on the benefits of incorporating elements of biophilic design into the workplace, with a specific emphasis on prosocial and positive employee behaviour.

Biophilic design is aimed at providing building occupants with an increased connection to the natural environment. It incorporates features such as plants, natural ventilation, extensive natural lighting, views to the outdoors, water features and interior designs that mimic shapes and forms found in nature.   

Over the past few decades, the amount of time that people spend in traditional office spaces has increased.  Many employees facing high demands at work tend to skip scheduled work breaks and can often go an entire day without stepping outside. Therefore, the need to address health, productivity and wellbeing in workspaces has grown, and an abundance of research has begun focusing on incorporating elements of biophilic design into the built workplace. 

The health benefits of nature have been known for centuries. However, more recently 'ecotherapy', which involves the use and discussion of one's relationship with nature as a healing process, has started to rise in popularity. Nature contact, or biophilic design, has been positively associated with benefits in a virtual environment (online immersions), an indoor environment (plants) and an outdoor environment (parks, vegetations, green spaces).

From a theoretical perspective, these benefits emerge due to restorative properties. Following an interaction with nature, individuals are likely to be less vulnerable to stress and mental fatigue and perform better on tasks that require direct-attention abilities. Office workplaces typically require extensive directed attention, which if not replenished, can cause mental fatigue. As such, research examining attention restorative theory has revealed that indoor plants provide cognitive benefits through enhancing concentration and productivity.

Although in a time where ‘employee trends’ are front and centre, it’s difficult to cut through the noise to truly identify what ‘employee engagement trends’ are truly worth your investment. 

From my perspective, incorporating nature into the workplace feels like a common-sense solution.

The empirical research literature has identified a multitude of workplace benefits for incorporating elements of biophilic design, such as;

·      Increased job satisfaction;

·      Stress reduction;

·      Improved health and fewer sickness-related absences;

·      Enhanced employee wellbeing;

·      Improved productivity and concentration;

·      A reduction in symptoms of anxiety, and cognitive benefits; and

·      Increased attentional capacity.

These benefits transpired from window views of nature; 40-second microbreaks of green roofs; indoor plants; natural light, and nature posters. As such, workplace contact with nature can be low cost, easily accessible and beneficial after both short immersions and longer durations.

The research literature has presented powerful evidence that many traditional design strategies that ignore incorporating nature can lead to negative impacts on health, job satisfaction and productivity, which directly translates to reduced profit margins.  If you start by investing in indoor plants, window views of nature, natural light and natural air ventilation, studies have shown that your workplace will begin to reap the benefits.

For instance, research indicates that in a workplace, 10 % of employee absences can be attributed to architecture without a connection to nature.

To elaborate on the impact of nature, several research studies conducted on hospital patients resolved that patients who stay in sunny, daylit rooms with nature views have consistently shorter stays than those who stay in dull rooms with artificial lighting.

The research literature demonstrates that nature incorporation and elements of biophilic design can have a myriad of benefits that can be achieved in versatile, accessible and affordable means, in a multitude of capacities.

Thus, the evidence is there; our human instinct to be close to nature is there. So now, as humans, we must lean in, take the plunge and start investing in built environments that encourage a human-nature connection.

Most residential markets experience a return to form – Craig Godber

As Associate Director at CBRE, Head of Residential Research, Craig is responsible for managing the company’s Residential Research activity in Australia, covering residential markets across the country. His role includes monitoring and interpreting market trends, data collection and database management. Outputs are directed to both internal and external clients and take the form of MarketView publications, reports, client presentations and consultancy reports.

Even ahead of last week's interest rate decision by the Reserve Bank of Australia, Australia's residential markets were already showing positive signs of improvement.

New residential finance in September, at $22.5 billion, had grown for the fourth consecutive month. In fact, the monthly total was the highest lending figure in over two years. This was driven by owner-occupiers, with the past two months recording the highest monthly owner-occupier results on record. Although slower to react, investor finance was also showing some promising signs.

The number of new owner-occupier loan commitments has risen strongly across the board (up by around 30% in the September quarter compared with June), but particularly so for the construction of dwellings (up 35%) and the purchase of land (up over 80%). This has been driven by a booming first home buyer market.

There is no doubt now that the combination of record low interest rates, federal government stimulus (HomeBuilder and the First Home Loan Deposit Scheme) and state government subsidies is proving to be exceptionally strong, despite concerns remaining with regards the jobs market heading into 2021.

The number of owner-occupier first home buyer loans over the past three months is approaching the record levels witnessed in 2009 and is likely to remain elevated until at least the end of the year, or for however long Federal government stimulus remains available.

Refinancing levels have also been high, with strong competition amongst lenders, particularly for high-quality borrowers.

These trends are largely reflected across all states.

Residential building approvals were also up, with a noted jump in house approvals. At 10,466 nationally in September, the monthly total has increased for three months now, and has topped 10,000 for the first time since mid-2018. Again, these numbers should strengthen further over the remainder of 2020 at least and provide support to the residential construction industry in 2021.

Medium/high density approvals volume also rose in September, interestingly driven by higher volume in Perth and Brisbane. On an annual basis, however, medium/high density approvals volume remains at its lowest levels since 2013 and 46% below the 2016 peak. It will take a combination of sustained growth in investor demand and the reopening of international borders before a prolonged upturn can be expected.

The Reserve Bank of Australia, in their interest rate decision and subsequent statement on monetary policy, highlight that residential market conditions across the country are still uneven. Prices in Sydney and Melbourne had declined in the three months since August, but had grown in other capitals and regional locations. Vacancy rates remained elevated in Sydney and Melbourne, which was impacting rents, largely in the apartment sector. This may negatively impact returns. New listings and auction clearance rates were recovering; however, with the exception of Melbourne. That recovery will come as lockdowns ease.   

Low interest rates are here to stay, and while the RBA stated they are not contemplating further reductions to the cash rate, they also do not expect to see any rises for at least three years. This provides some degree of certainty for borrowers. 

The Bank did make some pertinent points that still serve a note of caution for the residential markets heading into 2021, however. These include:

• that while Australia's economy has performed better than had been anticipated, the outlook for growth still involves considerable uncertainty related to the course of the pandemic, both in Australia and overseas;

• recovery is expected to be extended and bumpy;

• the expectation that the unemployment rate will increase in the near term as some workers return to the labour force and support such as JobKeeper tighten and then lapse. While a peak unemployment rate of a little under 8% is forecast by the end of 2020, only gradual improvement is expected, with the rate still expected to be just over 6% by the end of 2022; and

• as a result, wages growth (and inflation) are expected to remain low.

The first quarter of 2021 remains the litmus test for the residential markets. This is when government support packages such as JobKeeper are slated to end, while most outstanding bank mortgage deferrals will need to be resolved. The pent-up demand that has been released as lockdown restrictions are eased will also taper.

This may still see negative pressures grow in some markets. A continuation of some forms of government stimulus may still be necessary to keep recovery on track.

Nonetheless, If the markets can work through the inevitable challenges that will come in the first half of 2021, it is likely they will have come out of the COVID-19 pandemic downturn in a much better shape than had been anticipated.

A Phoenix rising from the ashes — Raoul Salter

Raoul Salter, a Partner at Gross Waddell, has over 25 years of experience in the property industry. Raoul’s early career included being responsible for high net worth clients at Knight Frank and acting as the Commercial Manager for Linfox, being responsible for the company’s management, leasing, disposal and acquisitions.

Now at Gross Waddell, Raoul is active in Sales, Leasing and Corporate Services. He also is Gross Waddell’s Principal auctioneer.

Raoul’s experience across the commercial sector provides interesting insight into the evolution of commercial property through the recession and COVID-19.

Property activity is key to our economic wellbeing. So, what can we expect of this industry as we adjust to living with COVID?

We can reflect on the effects of past challenges; the recession of the '90s, the 'tech wreck' of 2000, the GFC and others. Each time, the property market has found a way to navigate the negative and come out the other side, stronger and more resilient.

This time will be just as testing.

Residential

If we look at it objectively, it is clear that from a residential perspective, we will eventually reach a position where there is an undersupply in the market and savvy developers will continue to secure opportunities for the potential pipeline.

Offices

Likewise, due to the current environment, commercial space may well undergo design changes that will lead to more activity in this sector.

The demand for office space in the future may be reliant on technology and innovation that facilitates social distancing solutions and healthy building strategies.

Increased planning of common areas, access, timing and travel will be essential. Air filtration systems that can keep workers safe from COVID-19 and other illnesses into the future will be an integral part of these changes.  Vertical transportation is a more complex feature to manage.

What businesses and tenants expect from their office accommodation is changing and these needs will most likely be met in new developments, and where possible, integrated into existing buildings.

Retail

Retail is also clearly changing and, as has been the case over the past decade, will continue to reinvent itself with the focus, perhaps, on more service-based retail, as a result.

The retail market has been one of the heaviest hit sectors. Widespread lockdowns have meant people have increasingly been adapting to shopping online.  This may result in retail properties being redeveloped or repurposed, perhaps to offices, coworking spaces or ‘dark stores’.  On the other hand, it may see an increased interest in customers to shop in open air traditional retail strips.

Industrial

The industrial landscape is also undergoing changes with increased automation and logistics requiring design alterations and larger sites.

Specifically, Australians are expecting industrial space to increase with a recent report released by UBS predicting warehouse space needs across the country to increase by 7.5 per cent during the next two years; with the potential incremental demand for industrial space growing to one million sqm.

High demand for consumer staples and growth in E-commerce has also driven strong leasing performance in the industrial sector. 

For example, in June, Amazon signed a 20-year lease to open the country’s first robotic fulfilment centre in Western Sydney. The fully automated facility will span over 200,000sqm, and will hold up to 11 million items distributed by 2000 robots.

The message here is that the property industry, whilst being key to our economic health, is also robust and adaptive. 

Investment

Of all of the asset classes, bricks and mortar remains one of the most popular. Perhaps the fact that it is tangible, you can see it, touch it, feel it and know that it will still be there tomorrow, next week and next year makes it desirable to many.

Property investment is also dynamic with the ‘moving parts’ requiring monitoring and attention from time to time. As mentioned above, the dynamics of each of the property categories, commercial, retail and industrial, continue to evolve and undergo change. Perhaps more so now than ever. 

Initially, the existence of COVID 19 led many to believe that we were heading into a state of Armageddon. Like the Phoenix, the property industry will rise from the ashes and continue to be a major contributor to our economic recovery.

Jamie Sormann — Sydney Policies Driving Excellent Design

Jamie is a co-founder and director of Foomann Architects and a director of ArchiTeam Cooperative. Foomann is devoted to realising beautifully simple, sensitive spaces that are underpinned by utility, context and sustainability. Jamie has expertise across a diverse range of commercial, hospitality and residential projects. ArchiTeam, with over 800 members nationally, has a mission to empower and support small practice architects to help them thrive. Jamie is committed to collaboration and to sharing ideas with students, clients, colleagues and the architecture community.

In Melbourne, over the past two decades, countless single-dwelling, retail and hospitality projects have been widely published, awarded and praised internationally. These celebrated projects have been predominately designed by small-practice architects. However, a number of large, architect-led developments in Sydney suggest that we could benefit from broadening the scale and positive impact of our local experts.

In Sydney, since 2000, legislative guidelines require that the design of projects above a certain scale or cost have to ‘demonstrate design excellence’ to attain development approval. Projects that are granted approval through this process can be eligible for up to 10% extra height and/or floor area. To qualify, relevant projects must involve a competitive design process and every joint venture proposal must involve a small scale or emerging architecture practice. The resulting built works have been, well, excellent.

As a measure of excellence, awards programs are sometimes imperfect and often involve a challenging process – I should know, I run the awards program at ArchiTeam. But the numbers from Sydney are compelling; between 2000 and 2017, 50% of proposals that were granted planning approval through Sydney’s design excellence policy have won national awards from the Australian Institute of Architects [1].

An intended outcome from Sydney’s design excellence policy is increased diversity of the city’s built form. The cornerstone of this strategy is the involvement of the emerging architectural practices in the joint venture competition entries. As a result of this competition pre-requisite, between 2000 and 2017; an impressive 88 different firms participated in competitions, with 52 emerging firms winning in their own right or in partnership [1]. This scenario is markedly different to that in Melbourne where a limited number of well-known practices are responsible for so many major projects.

The success of these joint ventures in Sydney has helped create an appreciation of, and demand for collaborative projects. In July 2020, at the Australian Institute of Architects NSW Awards; seven of the fourteen top categories were awarded to architect collaborations.

In Melbourne, similar plans are afoot. Participate Melbourne has published for comment its 'Design Excellence Program 2019–2030' and, in the short term, the City of Melbourne has drafted planning amendments (Amendment C308: Urban design in the central city and Southbank) with a range of minimum standards to improve the public interface and design quality of new developments.

While we wait for ‘design excellence’ to be legislated in Victoria, private developers can take the lead to ensure that significantly better, more diverse projects are built in Melbourne. Firstly, when a project is sufficiently large, impactful or culturally significant to justify the resources, private developers should take Sydney’s lead and run equally rigorous design competitions that encourage architect collaborations. When projects are not appropriate candidates for a design competition, developers should seek out potential architect joint ventures. Ask that a preferred architect create a team between an emerging or small practice and an experienced larger practice; both with outstanding design pedigree. Small practices provide fresh ideas while working with a large practice mitigates the perceived risks in relation to successful project delivery.

The resourcefulness and charisma that the work of small practice architects display is what consistently captures the imagination of home owners. This should be considered as part of a general strategy to promote development properties above the status of commodities. Apartments are often described by agents and developers as 1 or 2 bedroom ‘products’. This pejorative term is part of a culture that puts a cap on the value of smaller homes. A design excellence approach promoting architect collaboration in the residential sphere would result in developments that transcend the norm whilst providing genuine substance to the marketing campaign.

All participants in the building industry have an opportunity and responsibility to positively contribute to the built fabric of our city, the lives of its occupants and the public realm. It’s time that our local talent is given the opportunity to prove that, just like in Sydney, we can demonstrate award-worthy design excellence through effective collaboration.

Jamie Sormann Foomann Architects ArchiTeam Director

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References:

[1] Reshaping Sydney by design – few know about the mandatory competitions, but we all see the results.

Thank you to Jennifer McMaster, Trias, and Andrew Burns, Andrew Burns Architecture, for the inside knowledge of Sydney processes. Both are small practice architects contributing excellent work on big Sydney projects.

Participate Melbourne Design Excellence Program 2019-2030

Sydney Local Environmental Plan 2012

City of Sydney Competitive Design Policy 2013

Draft NSW Design Excellence Competition Guidelines 2018

The Conversation - Reshaping Sydney by design – few know about the mandatory competitions, but we all see the results

Current notable collaborations in Sydney between small and large practices:

• Green Square Site 15 - SJB, Andrew Burns + CHROFI

• Circular Quay development - MAKE Architecture, Silvester Fuller and SJB

Is now the time to shine for WA property market?

Deon White is a Perth based Partner in national planning, design and placemaking practice Roberts Day. Roberts Day have recently merged with Hatch’s global Urban Solutions team to launch Hatch RobertsDay in Australia, adding urban economics and global reach to some of the brightest minds in city shaping.

The Mining Boom from 2011-2015 injected an average $45bn annually into the WA economy and with that came a significant flow-on of secondary investment and population growth. 

Unfortunately, from 2016 that level of investment dropped more than half, stalling population growth and bringing down the momentum of the property market, with the median house price dropping over 10%.

But after years of sleeping off the Mining Boom hangover, Perth could be emerging as a bright spot in the national property market – we are leveraging the benefits of isolation to sidestep the worst of the COVID-19 fallout. The lowest mainland capital median house price sits at $475k, so things are looking promising.

Mining investment has seen its first positive growth since 2012, population growth returned to 1.5% over the 12 months to March 2020 (3rd only behind Victoria and Queensland) and rental vacancies over the last two years has dropped from 3.8% to less than 1%!

The June and September median house price was stable at $475k. With a 20% reduction in housing stock and a 50% drop in the days on market compared to September 2019, REIWA is predicting modest price gains.

As the property market is showing signs of recovery in the uncertain haze of COVID-19 and stimulus distortions, the legacy of successive governments and industry leaders over recent decades is also starting to shine through; with a string of major developments now delivered or well underway.  These projects are shedding the “Dullsville” tag and starting to seriously reposition the City’s metropolitan-wide liveability and lifestyle appeal…

• Transport Revolution

Long known as the motor city, multiple contracts have now been let for Metronet – This is the largest urban rail expansion program ever for WA, adding 72km, 18 stations, associated redevelopment precincts and the return of rail car manufacturing. This is also coupled with significant regional road, freeway and city cycle network investment aimed at improving commuter, freight, tourism and recreational opportunities.  A large number of middle and outer suburban locations will benefit;

• Port Relocation

The State has committed to ‘Westport’ - the relocation of the main metropolitan container port from its colonial base at Fremantle to the Outer Harbour at Kwinana 20km south…….at least partially by 2032. This brings a significant boost to employment and residential growth in the southern suburbs and a major redevelopment boost for the historic port city of Fremantle, which is already going through an investment and development renaissance not seen since the 1987 America’s Cup;

• Big City Moves

Three major precincts have redefined the experience of the City, its connection to country and landscape. Elizabeth Quay brings the river to the city, Yagan Square and City Link bridges the great north-south divide between the CBD and the urbane inner north and the Stadium precinct on the Burswood Peninsula.  Each element provides significant associated commercial and residential growth and particularly connecting us to the long-forgotten eastern foreshore, which will be a major focus for residential growth;

• Accommodation Boom

After decades of no meaningful supply, the leading international brands and boutique curators have delivered some of the most creative concepts in modern hotel experience into the heart of the city. With the State Buildings, in particular, continuing to accrue international accolades, the Westin, Intercontinental, QT, Alex and Adnate Art Series are all reshaping the City psyche and destinational pull;

Westin Hotel in Hibernian Place

• The New (City) Deal

Announced this month, the $1.5bn investment brings an unprecedented focus back on the CBD, with a new Edith Cowan University campus right on Yagan Square, together with its world renown WA Academy of Performing Arts. There is funding support for Murdoch and Curtin University to expand their student numbers, a range of new and upgraded cultural facilities and recreational facilities all driving the residential amenity to support the newly announced population target of 90,000 people – a three-fold increase on current numbers. 

With the lowest density of the four main capitals, the residential growth will be particularly evident in the eastern end of the CBD. Several new projects will become essential to improving the living amenity of the urban area; including Perth Girls School, Wellington Square, WACA redevelopment, East Perth Power Station and Stadium precinct.   

With the State Commissioners having appointed a new CEO, new senior leadership team, and newly elected Mayor and Councillors, the City is refreshed and poised to continue to grow the depth and quality of experience for visitors, workers and residents alike.

Perth Girls School

• Cultural Milieu

Our greatest weakness is on the rise -  our Fringe Festival has emerged as the third largest in the world. This awesome feat supports a growing pool of creative performance venues, supplemented by the rebounding small bar and food scene which was hit hard after the post-boom evaporation of discretionary spending.

The new Hassell and OMA-designed State museum is due to open at the end of the year. This joins the upgraded Art Gallery in the revamped cultural precinct and the new Artrage base at the Perth Girls School precinct. Upgrades to the Perth Concert Hall and the preferred bidder status for the redevelopment of the East Perth Power Station redevelopment by Andrew Forrest and Kerry Stokes are also projects in Perth’s pipeline.

Perhaps the most exciting announcement is the funding to progress planning with our Traditional Owners for an Aboriginal Cultural Centre, celebrating our unique ancient culture and a symbolic reconciliation move; and

• Urban Neighbourhoods

After years of progressive policy reform, some of our most valued inner and middle neighbourhoods are finally attracting high-quality residential apartment development.  Projects are bringing housing choice and re-investment in tired and struggling retail village centres, signalling a cultural shift to apartment living, a major boost in amenity and value for established suburbs as well as infill development opportunities.

The current government heads to an early 2021 election with unprecedented levels of popularity, a solid budget surplus and a pro-development and employment stance. There is ongoing planning reform and new State Development pathway for major projects. 

With high affordability, the newly discovered benefits of being the most isolated capital in the world and the WFH phenomenon breaking the geographic lock of residency and employment, it might just be the perfect time for Perth to shine. 

Perth’s lifestyle might just be its greatest growth commodity yet.

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

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

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

1 Tenant Use & Offering

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

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

Some key recent Savills sold examples include:

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

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

2 Tenant Financial Strength

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

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

3 Tenant & Lease Profile

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

4 Location

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

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

5 Return

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

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

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

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

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

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

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

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

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

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

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

Case Study: Aurora Village, Epping

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

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

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

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

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

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

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

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

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

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

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

• The immediate economic impact on business

• The longevity of physical distancing precautions, and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The current property & construction market

Anyone reading the daily property news would despair at the apparently bleak outlook.  However, beyond the headlines there is a sense that things may not be as bad as many predicted.  The outlook has no doubt been aided by the various federal and state government stimulus packages implemented this year.  Ultimately though, we will not know the real impact until after JobKeeper ends.

On the negative side, we will have negligeable migration for some time, there will be an increase in business failures, our jobless numbers will rise and those in work are likely to spend cautiously.  New housing decisions will be postponed, and young adults will continue to move back home…...and the state of our relations with China adds a potentially more protracted hurdle.

On the positive side, interest rates are likely to remain low for some time, our fundamentals are solid, Australia will continue to be seen as a safe haven and this recession is very much pandemic caused. There also appears to be a mood of collective positive inertia seeking light at the end of the tunnel.

The reality however is that the property industry has enjoyed an extended buoyant period, and whilst the downturn may not be as severe as many predict, most economic sectors are generally fairly finely balanced; meaning that even a mild sustained downturn will see many on the fringes fail. 

Victoria

Victoria with its extended period of lockdowns, and the associated economic impact, will have a tougher time re-surfacing. 

For property and construction, the federal government’s HomeBuilder stimulus, together with the various first homeowner incentives, have provided support for greenfield housing and domestic construction.

Apartment projects are another matter.  A combination of issues including slower pre-sales (exacerbated by the stage 4 restrictions), the drop off in migration, an ongoing China issue, a softer rental market and difficulties in obtaining development finance, poses real challenges for the commercial construction sector.

Whilst pre-sale and funding hurdles have led to an increased interest in Build to Rent, this sector is in its infancy in Australia.  Even with the potential of various government subsidies (which is emerging), the sector appeals to institutional and corporate ownership with a strong balance sheet. It is also important to note that Built to Rent projects typically target the top tier of income earners who rent.

Affordable Housing 

So, what does a drop off in residential apartment developments mean for affordable housing? 

There is often confusion about what constitutes affordable housing. Affordable housing generally refers to housing made available to lower income households which is affordable relative to their incomes (generally accepted as 30% or less of total household income). Social housing is typically considered a subset of affordable housing and is housing owned by government or not-for-profit registered housing associations.

There are a myriad of funding models and structures that deliver affordable housing, including partnerships between state government, local government, not-for-profit (often religious or philanthropic based organisations) and the private sector.

Whilst the cross section of low-income earners is broad, a key goal for both state and local government is to ensure that ‘key workers’ are not priced out of the neighbourhoods in which they work. Key workers include occupations such as teachers, police, health & childcare workers and emergency services.

Inclusionary zoning – developer participation 

Inclusionary zoning is a planning tool where government requires developers to provide a percentage of housing in new residential developments available as affordable housing or provide a cash contribution for local government to use towards the provision of housing. In return, developers should (but not always) receive non-monetary compensation in the form of density bonuses or zoning variances. 

The delivery of inclusionary zoning has had mixed results and has been complicated by a lack of clarity around affordable housing, mixed implementation policies by councils and a reluctance by many developers.

In 2018 the Victorian government amended the Planning and Environmental Act in an attempt to provide some certainty and clarity that would make it easier for councils and developers to enter into agreements for the provision of affordable housing as part of development applications.  The Act now defines affordable housing as housing, including social housing, that is appropriate for the housing needs of a) very low, b) low and c) moderate income households.

From a social perspective, providing a mix of housing types within a development or precinct is desirable, however from a developer’s perspective it can be problematic.

The challenges perceived by developers include clarity around final ownership, possible extremes in resident types, appropriate owner’s corporation costs, development returns and developer concerns about perceived aversion by perspective purchasers.

A ‘salt and pepper’ approach within a residential development may be considered more acceptable by a developer when the affordable housing allocation is targeting key workers.  However, where accommodation is aimed at very low income or the most disadvantaged, most developers will push back.

There can also be a reluctance from registered housing associations based on cost and ease of management, appropriate owner’s corporation costs and greater control over the entire residence.

However, providing smaller scale stand-alone accommodation in desired locations can still provide accommodation for a complete socio-economic range integrated within a community, albeit whilst not within the same building.

Government support for affordable housing

Whilst inclusionary zoning may provide some supply, without real assistance for developers and with the Covid-19 related reduction of new apartment projects, this option provides a limited and piecemeal solution.

The simple fact that the supply of affordable housing requires the investment into new housing that is specifically set aside for lower income households means that the required returns are going to be below market value.

Affordable housing therefore requires a material intervention in normal residential development to reduce the cost of delivery, and consequently requires genuine subsidies or compensation.

Leaving aside the great work by not-for-profit and philanthropic organisations, the sector will continue to overwhelmingly rely on government assistance, either in the provision of land, funding, or tax incentives. Furthermore, to minimise ‘capital leakage’ and reduce delivery and operational costs, projects will continue to be best facilitated by capable not-for-profit organisations.

The COVID 19 Opportunity – ‘Never let a good crisis go to waste’

There is now an overwhelming opportunity for governments to provide meaningful stimulus to the commercial construction industry (and therefore economy and state government budgets), and at the same time have a significant impact on the affordable housing crises.

There has been much talk about infrastructure spending and a variety of further stimulus by the federal and state governments. There could not be a better focus than the construction of affordable housing.

Some industry experts are suggesting that announcements of significant support for affordable housing is imminent.  That would definitely provide some light at the end of the tunnel.

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

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

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

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

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

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

In this article we explore whether vendors can:

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

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

Rescission by the vendor—the position before the amendments

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

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

Rescission by the vendor—the position after the amendments

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

• With consent of the purchasers; or

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

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

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

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

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

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

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

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

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

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

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

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

Rescission by the purchaser

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

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

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

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

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

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

The impact of COVID related delays is a problem for vendors

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

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

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

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

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

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

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

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

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

[8] Ibid [188]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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