On three big beautiful disruptions on the Gold Coast, Sydney and Melbourne.
12 June 2014 —It’s the holy grail for affordable and sustainable housing. Long-term investors who build and hold multi-unit residential property that can offer secure tenure and long leases.
In breaking news on Thursday, UBS, in a tie-up with Grocon Real Estate, appears to have struck a deal to create “Australia’s first institutional-grade multi-family asset” with the development of the Commonwealth Games athletes village on the Gold Coast.
According to reports the venture consists of a $500 million unlisted wholesale vehicle to develop and hold for investment 1250 apartments for the Commonwealth Games village, in addition to a shopping centre.
UBS Grocon Real Estate will manage the vehicle itself, collecting rents instead of selling for a property.
In the words of one property developer in its newly-flagged sustainability strategy of recent times (Mirvac), “this changes everything”.
With any luck this is the model that can drive more competitive and more sustainable product that we see in the commercial markets.
It’s what the US market has been doing for decades and Europe for centuries. If you can sign a lease for 10 years suddenly you don’t need to own your property and suddenly you can become very “invested” yourself in the quality and upkeep of the premises.
In Australia, there have been many investigations into how to create a residential property asset class, with no success. We pay twice as much for half the return is the age-old saying.
Why? Because it’s the financial structure of our residential market that drives so much of the outcomes. Or is it?
In commercial property investors tend to hold property long term so they want it to look good on the books – it needs to have clean, green DNA, which increasingly is code for superior competitive quality that makes tenants happy, innovates and offers better asset performance in both capital and income terms.
The second really important driver is that commercial tenants want the same thing. Together they make a powerful team.
But in residential the model is build it quick, flick it on. The developer doesn’t much care, with a few tiny exceptions. The owner-resident is starry eyed and focused on the granite benchtops and the floor-to-ceiling views they’ve seen in the magazines and Hollywood flicks with which they have educated their tastes.
They just sign up and move in. The bills? The retrofits? “We’ll figure that out later. For now, we’ve got our own sweet cool home.”
It’s not their fault. No one asks them what kind of apartment they want before it’s built and certainly no one think to warn them on the consequences of poor design and construction. Let alone traveling costs if they’re buying way out on the fringes.
What happened on the Gold Coast this week could well signal the start of a new model for developing, owning and occupying residential property because it starts to mirror the commercial model: long-term thinking.
As one analyst said it’s not the financial model that counts, it’s the time frame. If there is one big long-term owner then that owner automatically has a stake in the overall performance of the building.
Increasingly that financial number will be tied to environmental and social outcomes, whether through higher energy and water costs if the place isn’t built well, or through maintenance or management issues such as recycling and design. Has the place been designed with people in mind; with places where they can meet and have drink after work, or pick up some groceries and not have to get in the car?
If it’s a great “place” everyone will want to live there.
Another potential shift in outcomes and development models happened this week in Sydney.
Greenland, which happens to be one of the world’s biggest if not the biggest developer, and is controlled by the Shanghai city government, announced a deal it had entered into with the City of Sydney over its residential and hotel tower at the corner of Pitt and Bathurst Streets. The deal is to include a cultural hub for Sydney’s creatives worth $25 million in return for some floor space by way of bigger balconies for apartments.
See our separate story for details.
Overall it’s not a bad outcome. Not at all.
But it’s the potential that’s worth thoroughly investigating.
If you stand back and take a bird’s eye view you can see that while we’ve been exporting our sub-stratum to China, the Chinese, becoming wealthy on the proceeds of this, are bringing back the gains to plough back onto the top of Australian soil – Melbourne and Sydney in particular.
When you look at the political and environmental landscape in China, and match it to the Australian skylines, you can see their point.
But why aren’t we being a little more clever than our silly governments who let all the proceeds of the mining boom go away (in the hope that it comes back… what, through resi developments?)
Why not tap the burgeoning Chinese market that can’t seem to get enough of Sydney – or Melbourne for that matter – for the kind of contribution to our cities and nation that we were unable to extract from the mining sector?
After all, it’s tapping the natural resources of the nation in the same way the mining boom did.
Since mining taxes are off the agenda and since the federal government’s interest in cities is also off the agenda, then what’s to stop city governments from taking the initiative to strike the kind of deals that benefits all sides?
In Melbourne we hear that the big residential development sites are being sold to Chinese buyers at the rate of nine in 10, or thereabouts. In Sydney there’s also massive interest. Sadly we also hear that many Chinese developers – and most of the home grown ones as well – don’t give a hoot about sustainability in resi and all its related outcomes, social and cultural included.
So why aren’t we making them give a hoot?
It’s another mining tax disaster. But not so hard to rectify.
And it fits right into the current federal government ideology of letting the market do the deals it needs to do – demand and supply. As the representatives of the owners of our cities, then let’s empower our city governments to do the sorts of deals developers understand.
Greenland barely batted an eyelid at the Sydney deal this week. After all this is the Shanghai city government we’re dealing with. They’re well resourced and they know a bargain when they see one. Greenland not only didn’t balk at the deal but it suggested it in the first place.
If we can’t make this work well with the Chinese developers who totally “get” government mandates, then we are not very good market operators at all.
There’s a deep love affair going on for Australian property, possibly bigger and better than the mining boom.
Sydney Lord Mayor Clover Moore said the reception on her recent tour of five Chinese cities was “fabulous… Sydney is very highly regarded”.
Love is a wonderful thing. Maybe it’s even better with someone who’s got deep pockets and can make your world that little bit more sustainable, cultural and just plain good.
Boutique community does very well indeed
Of course, some developers are ahead of the curve. Mike Hill and his partner Lorna Pitt started their amazing project at Westwyck in Melbourne about a decade ago. They could see that a rational approach to development meant green and community minded.
They didn’t go for the single building, which visiting US precinct placemaker Michael Dieden told the Bondi Junction crowd recently benefited “no-one but the developer and the bank”.
Hill and Pitt tapped into the human DNA that’s about community, our social selves and designed a community with shared facilities and plenty of encouragement for residents to connect, as well as sustainability elements. Ten years later their apartments are walking out the door and an early buyer recently resold their $585,000 purchase in 2008 for $910,000. Not a bad little earner, this caring, sharing stuff.