News from the front desk Issue No 249 – strata reform will be far from easy

On a big can of worms called strata property and how to unwind it

Developers and planners across the nation would have found it hard to contain their excitement that NSW, the state that crafted the first strata property laws and exported them to the world, was finally looking at a quicker way to unwind them.

Two weeks ago the University of NSW released a report, Renewing the Compact City, that identified 8000 apartment blocks that were commercially feasible to redevelop. The report sparked predictable controversial headlines that these apartments should be redeveloped and that people would be forced from their homes.

Lurking somewhere in the background was the state government’s draft bill that would change the law to enable redevelopment of strata blocks with fewer than 100 per cent of owners in favour. A number of 75 per cent in favour had been widely mooted and supported by the Property Council of Australia.

But in the lead up to the March election the bill had been shelved under the too hard basket. The government was still smarting from its loss in the planning reform arena and many were sceptical the strata reforms would see the light of day.

But on Wednesday the NSW government bit the bullet and released the Strata Schemes Development Bill 2015 along with the Strata Schemes Management Bill 2015. In place were 90 mooted changes with pride of place the magic 75 per cent number that the property industry wanted and others feared.

There will be many jurisdictions watching the progress of the bill.

NSW was the place that first crafted strata property laws and exported them to the world. At the time, in 1961, they were a godsend.

They provided strong conventional property security for banks, which had been reluctant to advance mortgages based on the less clear-cut company title that was common with flats at the time. Home owners were delighted. They finally had better access to housing even if they could not afford a free-standing Torrens Title house.

Nearly 70 years later the unintended consequences of such strong property law have come back to bite.

When the strata laws were crafted no one thought long term enough to think about what might happen when the buildings reached their natural end of life and became far too uneconomic to repair; and that it might be very difficult to get all owners to agree to redevelop.

The looming danger now, the industry says, is of urban slums.

But though developers and planners are pleased that a change in the law is finally up for discussion, no one expects the changes to be easy, or quick.

According to the experts what we’re grappling with here is messing about with the notion of fundamental property rights. And that’s seen as integral to our capitalist and social democratic system.

Lead author of the UNSW report Professor Bill Randolph says what’s flagged is compulsory acquisition. And sure we’re used to that concept for a public purposes but for the sake of private development? It could get very murky indeed.

“It means you can be effectively deprived by the actions of your neighbours,” Randolph says.

“So if it’s a compulsory purchase by a government agency for a road, or railway line, it’s the government, and it’s a public interest – that’s a well trodden road.”

What happens here, he says, is a “quite fundamental shift in the nature of property ownership”.

“It’s not what we understand by private property at all, really.”

“Eastern Australia is looking at it and I suspect every other jurisdiction has got it on the agenda.”

“Strata was exported all round the world,” Randolph says.

Urban Task Force chief executive Chris Johnson welcomed the move and said reform to the 75 per cent mark had already occurred in New Zealand, Singapore, the United Kingdom and North America. His organisation had produced a guide to show how it could be done.

When we spoke to Property Council NSW executive director Glenn Byres last week he’d heard nothing of the bill and certainly didn’t suggest it would be released within days.

“The government progressed a lot of work in this space but it was unlikely to pass through the Upper House last year, so it was withheld,” he said.

“From our perspective reform is imperative not just for the residential story but also for the potential in the commercial strata space as well.”

There were commercial imperatives for aggregation and redevelopment, he said.

No proposals for environmental retrofitting

He also noted that environmental performance in older degraded building stock was also often a problem. But among 90 proposed changes to strata law, however, there is no provision for environmental retrofits such as solar or energy efficiency that often get bogged down with the same problem of requiring 100 per cent agreement.

A key driver for the industry’s investment in this issue, Byres says, is the hunger for scarce land.

“So much of the Sydney story in next 20-30 years will be urban renewal.

“There’s not a lot of brownfield sites left so it will be a case of renewing the stock.”

Byres says the 75 per cent number is one the Property Council supported because it captures “two-storey walk-up” blocks, many with only four units in the block.

But he says that developers need to realise that to win over even 75 per cent of owners, they will have to offer a premium on sale price.

One option might be to offer the potential to buy back into the new development. This could be a way of sharing some of the uplift in value, Byres said.

“You can create value for the existing residents in more ways than one.”

A tough challenge

Randolph thinks it will be harder than finding some extra dollars as inducement.

Doing the feasibility is the easy part, he says. What’s harder is the politics and community hurdles that needed to be negotiated: how do you get people to sell?

Investors might like to jump at a reasonable offer, Randolph says, but an owner-occupier might be wary.

You can get a premium, say 10 per cent, for your apartment, but “you’ve still got to move and find something. Could they replace their quality of residence with something similar for the same price with only a 10 per cent premium?”

Randolph can see a whole can of worms open up.

The equity issue

The Liberal LNP NSW government might be in for a surprise.

Randolph and his team found that it was apartments on the North Shore, the Lower North Shore around Mosman and Cremorne, and places near the harbour or ocean, that land prices have risen sufficiently to make redevelopment economically viable. In other words, well-heeled Liberal Party heartland.

“If our analysis is correct then these will be the places under pressure for knock-down-rebuild, where a six-pack can translate to 12 $1 million plus apartments.”

But could the current occupant afford to move back?

The research finds that even in these locations less than three per cent of existing strata could be feasibly redeveloped at levels considered affordable to local households.

Randolph says a devaluing block is no easier.

“Who’s to say what the value is? Where do you move to and what can you buy?”

Community groups gearing for action

Community groups are already agitating and preparing to fight the changes. One leader told The Fifth Estate the laws would create greater inequity in Sydney’s housing market as new apartments would be well beyond the reach of existing owners. Pensioner groups and community housing groups were concerned, she said, and looking closely at the bill.

Would a share of the profit work?

Again, there are complications, Randolph says. Who’s valuation do you accept and is the developer offering the very best price? Who’s going to be the arbiter is actually really tricky – there could be blood on the carpet.”

Various stakeholders – investors, owners, owner-occupiers and tenants – will also have different responses, he said.

Renters

The data finds about 60 per cent of occupants are renters, who will presumably not have much say in whether the apartment is sold or not. But they may demand compensation.

Victoria is also looking to increase residential tenancies to 10 year terms, in line with European practices and a response to market pressures where younger people are giving up on ever buying their own home, even if they are well paid.

Randolph says this will only make things harder.

You might assume, too, that this is a class of renters likely to be made up of well-heeled professional, capable of fighting for their rights if they’re living in the upmarket suburbs such as those flagged as economically feasible for redevelopment.

“This whole thing is going to be problematic from start to finish.”

But it needs to be resolved.

“The urban renewal problem will become acute in 70 years time… apartments will start to fall apart and get the Bronx syndrome where people walk away…”

At that point it’s quite possible that a developer can buy the entire lot quite cheaply.

One logical solution to density, Randolph says, is for long-term institutional owners to enter the market and build blocks of flats for investment trusts.

“Strata has been a great product for developers to build and sell but no one’s thought through how you redevelop them once you sell them off,” Randolph says.

It’s an issue that that the NSW government and governments everywhere have stalled on for years.

But changes will come, Randolph thinks.

“It’s almost inevitable it will come in but the government is quite rightly concerned about its potential impact. It is a fundamental shift.”

Some facts from the report

The Conveyancing (Strata Titles) Act was introduced in 1961 in New South Wales and created a mechanism for the vertical sub-division of multi-unit housing.

Strata now accounts for more than 27 per cent of all dwellings Greater Sydney.

Greater Sydney by December 2013 had the largest number of residential strata properties of Australian cities, with a total of 535,427 lots across 35,619 schemes that are larger than two lots.

• About one third (33.1 per cent of schemes were registered before 1980
• 20,742 (58.2 per cent) of all schemes are between three and 10 lots in size.
• 31.4 per cent of higher density dwellings are owner occupied
• 42.5 per cent of higher density dwellings are privately rented
• 6.9 per cent of higher density dwellings are public or community housing
• 19.2 per cent of higher density dwellings are visitor only or unoccupied

People who live in flats, units and apartments in Greater Sydney are more likely to be:

• 25-54 years old (31.3 per cent)
• lone person households (34.4 per cent)
• in the labour force (73.7 per cent)
• in professional occupations (45.5 per cent)
• Born overseas (51.9 per cent)

The most favourable locations for development (in commercial terms) are, the Eastern Suburbs, North Shore and locations near the ocean or harbour.

Application of a feasibility model shows that 15 per cent of existing strata schemes could be redeveloped to three or less storeys.

Less than three per cent of existing strata could be feasibly redeveloped at levels considered affordable to local households.

Later stages of the UNSW project will include community survey of strata residents and owners across the greater Sydney metropolitan area, and stakeholder and community scenario testing workshops.

The study was funded under the Australian Research Council Linkage grant program with industry partners, including UrbanGrowth NSW, Strata Community Australia NSW, Australian College of Community Association Lawyers, the Owners Corporation Network of Australia and NSW Fair Trading.

• Read the whole report Renewing the Compact City.