Interview: “It’s quite concerning” – the race to find a housing crisis solution

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Sean Aylmer: Welcome to the Fear and Greed Business Interview. I’m Sean Aylmer.

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Sean Aylmer: The property market is pretty remarkable right now. Prices have

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Sean Aylmer: been recovering in cities right around the country. Well, maybe

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Sean Aylmer: not Canberra, but most cities, despite 12 interest rate hikes

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Sean Aylmer: in just 15 months. It is, of course, a question

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Sean Aylmer: of supply and demand. I wanted to look today at

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Sean Aylmer: what this means for investors in the residential market with

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Sean Aylmer: a focus today on apartments where we might see the

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Sean Aylmer: greatest demand and what’s happening in the supply pipeline. We’ve

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Sean Aylmer: spoken in the past to real estate services company, CBRE,

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Sean Aylmer: a supporter of this podcast. Justin Brown is the Chairman

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Sean Aylmer: of CBRE Residential Projects. Justin, welcome to Fear and Greed.

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Justin Brown: Thank you. Thanks for having me today.

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Sean Aylmer: Now, many of us would know CBRE more on the

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Sean Aylmer: commercial side, so just as a 101, how is CBRE

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Sean Aylmer: involved in residential projects?

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Justin Brown: Okay, yep, CBRE is predominantly a commercial business of a

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Justin Brown: global scale, but has strong businesses, particularly through the Asia

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Justin Brown: Pacific and moving up to the UK with residential development

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Justin Brown: and in particular developments that are on the premium end,

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Justin Brown: which we provide research and information and expertise for off-the-plan sales,

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Justin Brown: and in Australia, CBRE Residential is the largest in that field.

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Sean Aylmer: Okay, great. So, let’s start with demand. We hear lots about

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Sean Aylmer: property markets all the time. We don’t really delve into

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Sean Aylmer: it too much and that’s what I want to do today,

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Sean Aylmer: Justin. Let’s start with demand. Is it mostly about immigration

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Sean Aylmer: or is there more to it?

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Justin Brown: Look, immigration’s a big factor. It’s been widely discussed that there

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Justin Brown: is an extra million people and that doesn’t include students

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Justin Brown: that are migrating to Australia over the next three years. Now,

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Justin Brown: if you look at that, primarily our research shows that

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Justin Brown: for every three migrants, you need a property and if

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Justin Brown: we look at where we are at the moment, we

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Justin Brown: believe that we need somewhere in the order of 570,000

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Justin Brown: new properties between now and 2026, and we are currently

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Justin Brown: producing 55,000.

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Sean Aylmer: Right. So we’re at about, well, so 150 out of 500, so we’re kind of at 30% or thereabouts of what we need.

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Justin Brown: That also doesn’t take into account the local market, that

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Justin Brown: doesn’t take into account the 590,000 students international students that we have.

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Justin Brown: What a lot of people don’t understand is we have

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Justin Brown: the largest percentage of students that go to our universities

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Justin Brown: in the world. So 25% of our students, which is 590,000 at

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Justin Brown: the moment, are international and have to be housed somewhere.

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Sean Aylmer: So, what’s the answer? This is only an 11-minute discussion, Justin,

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Sean Aylmer: so I’m not sure we’re going to get all the answers,

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Sean Aylmer: but what is it about… it’s all about creating supply,

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Sean Aylmer: but we’re just not doing it.

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Justin Brown: No, we’re not. We’ve never been great at creating supply. So

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Justin Brown: the last 30 years we’ve probably had two or three periods

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Justin Brown: where you’d say that we had an oversupply. For the

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Justin Brown: last five years, it’s been very difficult and it was led…

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Justin Brown: the investors stopped really purchasing new apartments or new properties

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Justin Brown: in and around 2017. We then moved into that COVID period

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Justin Brown: where really there wasn’t any supply developed through that period.

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Justin Brown: We then moved into supply chain. We then had the

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Justin Brown: massive increase in construction costs and that’s sort of coupled

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Justin Brown: by a planning system that, in most parts of the country,

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Justin Brown: is fairly diabolical. So, we currently have this situation where,

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Justin Brown: if you’d like, an equilibrium in the rental market should

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Justin Brown: be about 3%. So that’s sort of a fair market

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Justin Brown: for tenants and owners of property, if you’d like and

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Justin Brown: we currently sit at about 1.5% and we’ve got places

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Justin Brown: in the country like Perth and Adelaide at 0.6 of a per cent.

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Sean Aylmer: So 3% referring to 3% of what?

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Justin Brown: The vacancy factor.

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Sean Aylmer: Yeah, okay.

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Justin Brown: So it sort of means that if you’ve got 3%,

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Justin Brown: it’s generally a fair market, what we would call, but

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Justin Brown: if you look down in terms of supply, Sydney will

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Justin Brown: develop or New South Wales will develop, needs I should say,

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Justin Brown: 34,000 dwellings. We’ll have a shortfall this year of 18,000 dwellings. Melbourne

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Justin Brown: will have a shortfall of just under 24,000 dwellings, Brisbane 12,000, Perth

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Justin Brown: 10,500 and Adelaide 4,000. That’s in a year. And so, if you look

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Justin Brown: at where our vacancy factor is, if we’re saying it’s

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Justin Brown: sort of just shy of 1.5%, it’s going to drop 0.2 to

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Justin Brown: 0.5 of a per cent each year as we go forward,

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Justin Brown: which really tightens that market up.

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Sean Aylmer: So, what’s the answer? Is it more support from government, is

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Sean Aylmer: it less bureaucracy, less red tape, better planning? Is it

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Sean Aylmer: kind of some incentives for builders who are on fixed-price

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Sean Aylmer: contracts or who are struggling because they were on fixed-price

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Sean Aylmer: contracts to get ahead? What is the answer?

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Justin Brown: Well, therein lies part of the problem, what the builders

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Justin Brown: have been through over the last three years where they’re

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Justin Brown: on fixed-price contracts and the market realistically moved 30%. So

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Justin Brown: they were just losing money. And we’ve seen how many

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Justin Brown: administrations and liquidations have happened to builders. So that is

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Justin Brown: slowly starting to change. And the costs, they are still

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Justin Brown: going up, but they’re a bit more regulated and the

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Justin Brown: supply chain is a lot better. But one of our

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Justin Brown: biggest issues is really how do we produce product readily?

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Justin Brown: And yes, we have bureaucracy in this country. Most of

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Justin Brown: it’s planning systems and the layers and really it’s sort of, yes,

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Justin Brown: we need property but not in my backyard, needs to change.

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Justin Brown: And really, part of that, I think, to change it

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Justin Brown: dramatically and quickly is really we need a proper system

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Justin Brown: with affordable housing and social housing, which the governments are

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Justin Brown: trying to address. There’s a new SEPP (State Environmental Planning Policy) coming through in

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Justin Brown: New South Wales. The Minns’ government is bringing in where

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Justin Brown: that in a new development if you provide 15% social

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Justin Brown: housing in that, they’ll give you an uplift of 30%

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Justin Brown: in terms of the saleable area. But again, that looks

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Justin Brown: like it’s getting slightly watered down as well as it’s

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Justin Brown: coming into the system and the draft will come out shortly. Queensland,

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Justin Brown: Victoria are trying and look at trying to push that

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Justin Brown: through and there’s some funding through there. The other thing

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Justin Brown: that we really need to do is look at, it’s

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Justin Brown: called the build-to-rent model, and that’s building dwellings if you’d like,

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Justin Brown: apartment blocks, that are for long-term rentals. And if we look at Australia 0.2%

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Justin Brown: of our market, so 0.2 of a per cent, is in that long-term build-to-rent space.

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Justin Brown: In the UK, it’s 5.4% and in the US it’s 12%. Now,

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Justin Brown: part of the issue that we’ve had and why it hasn’t

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Justin Brown: taken off here is that our taxation system and the

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Justin Brown: foreign investment taxation system has been too high and also

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Justin Brown: there hasn’t been enough clarity on it.
Now the Albanese government has

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Justin Brown: come through and said they are going to halve that,

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Justin Brown: but then with recent times we’ve had the issue where the Victorian and

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Justin Brown: Queensland government are now talking and putting rental caps. And

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Justin Brown: so your international investors, which globally have been a big

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Justin Brown: supporter of the build-to-rent scenarios, they’re concerned about where the

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Justin Brown: clarity is. So as a start, we need to get

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Justin Brown: clarity in our system and then we also need to

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Justin Brown: streamline the planning system for development because at the moment,

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Justin Brown: like five years ago, Sean, you used to be able

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Justin Brown: to purchase a property, obtain a development approval if it

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Justin Brown: was reasonable, obtain a builder, finance and pre-sales, and between

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Justin Brown: 12 and 14 months to start construction. Now, with the

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Justin Brown: system that you’re going through, particularly over the last 18 months,

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Justin Brown: it’s taking two and a half to three years-

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Sean Aylmer: Oh wow.

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Justin Brown: … From when you purchase a site to when you

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Justin Brown: start construction. So then you add on the two years

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Justin Brown: and if we talk about in terms of how long it takes

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Justin Brown: to construct an apartment building, it’s five years from the

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Justin Brown: first inception.

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Sean Aylmer: Stay with me Justin, we’ll be back in a minute.

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Sean Aylmer: I’m speaking to Justin Brown, Chair of CBRE Residential Projects.

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Sean Aylmer: I’m just changing tack slightly. Where do people want to

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Sean Aylmer: live? So we do talk a lot about apartments and

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Sean Aylmer: the need to boost supply. Has there been any change

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Sean Aylmer: in where people want to live? So the backyard with

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Sean Aylmer: a clothesline and picket fence and things like that, which

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Sean Aylmer: I suppose I grew up with, is that, do people

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Sean Aylmer: talk about that anymore? Is it all about higher density

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Sean Aylmer: living as we go forward? Where do we stand in all that?

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Justin Brown: Look, it is, in the last 10 years, we’ve really

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Justin Brown: have moved into a higher density scenario. Also, a lot of the immigrants

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Justin Brown: that come into the country aren’t used to having that

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Justin Brown: big quarter acre block as well. We’re also starting to

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Justin Brown: really see the aging population and the empty-nesters that are

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Justin Brown: now selling out of their larger homes, but they want

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Justin Brown: to basically be in suburbs and like where they grew up,

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Justin Brown: that have a village field, that have infrastructure and the like.

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Justin Brown: So people generally are looking to be around social infrastructure

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Justin Brown: and transport.

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Sean Aylmer: And some of the state premiers, particularly in recent weeks,

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Sean Aylmer: they’ve actually been talking about that, the idea that infrastructure

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Sean Aylmer: projects are actually about housing policy. So it’s all connected.

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Justin Brown: Yes, and it is. If you look globally, that’s how

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Justin Brown: it occurs, but it makes a lot of sense. If you’ve

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Justin Brown: got infrastructure and you’ve got transport nodes around you, there’s

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Justin Brown: less need for cars and vehicles. You could get there,

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Justin Brown: particularly with the metro system that the government is putting

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Justin Brown: throughout all New South Wales. And then around that, you

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Justin Brown: get the density, which then you can get the social

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Justin Brown: infrastructure and the restaurants and cafes and the like that

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Justin Brown: comes with it.

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Sean Aylmer: So Justin Brown, Chair of CBRE Residential Projects, where do

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Sean Aylmer: we end up in this? Where are we in five

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Sean Aylmer: years’ time?

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Justin Brown: I think five years’ time, we will probably be starting

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Justin Brown: to see a way forward, but my concern is that

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Justin Brown: we have a real pinch point that’s coming and I

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Justin Brown: don’t see the way that the government is working and how

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Justin Brown: quickly our population is growing and how long it takes

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Justin Brown: for things to do, that we’re going to see a

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Justin Brown: proper way forward in the next three to four years.

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Sean Aylmer: That’s scary, particularly given the cost of living pressures, interest

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Sean Aylmer: rate pressures, that’s really scary.

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Justin Brown: It is. It’s quite concerning. And look, it’s been on

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Justin Brown: the agenda for a long time and it’s sort of one

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Justin Brown: of those topics that people like to turn the other

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Justin Brown: way because it’s not popular, but it is something that

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Justin Brown: needs to be addressed.

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Sean Aylmer: Justin, thank you for talking to Fear and Greed.

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Justin Brown: My pleasure.

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Sean Aylmer: That was Justin Brown, Chairman of CBRE Residential Projects, a

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Sean Aylmer: supporter of this podcast. This is the Fear and Greed

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Sean Aylmer: business interview. Remember, you should get professional advice before making

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Sean Aylmer: any investment decisions.
Join us every morning for the full

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Sean Aylmer: episode of Fear and Greed, Australia’s most popular business podcast.

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Sean Aylmer: I’m Sean Aylmer. Enjoy your day.