Jean-Pierre Gortan On Why New Housing Projects Stall Before They Start

In this episode, we unpack one of the biggest bottlenecks in Australia's housing supply problem, the financing of new developments. Banks have become more risk averse, projects are stalling and developers are struggling to secure funding, even in areas crying out for new housing.

Could the way we finance development actually be part of what's driving the housing shortage? To explore this, we're joined by Jean-Pierre Gorton, JP, a leader in the commercial broking space. Welcome to the elephant in the room.

This is the podcast where we love to talk about the big things in property that never usually get talked about. I'm Veronica Morgan, real estate agent, buyer's agent and buyer's agent mentor, co-host of Foxtel's Location, Location, Location Australia, author of Auction Ready and co-host of Your First Home Buyer Guide.

Hi, I'm Chris Bates, ex-financial planner and mortgage broker, currently ranked number three in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Our guest today is JP Gorton, co-founder of the SLA Group and one of Australia's most awarded commercial brokers. With more than two decades in lending and banking, JP has structured complex deals worth hundreds of millions and has a front row view of how credit conditions have evolved and tightened over time.

Thanks so much for joining us today, JP. You're a first time on The Elephant and welcome.

Really great for me to meet you. I know Chris knows you. Yeah, thanks for having me. How exciting. 400 episodes. Congrats.

Well, that's it. And I think whenever we do an episode and there's an error we haven't covered, we get very excited because we still keep finding pockets that we haven't really gone into detail on. And the commercial finance element of the construction industry, we haven't. And so the first question is really just...

What is going on? How have things changed? When you're on that front row seat, like just how difficult is it and how is it not talked about enough probably within the overall challenge we have at sort of trying to get more supply into the market?

I've been doing this for a long time, and thanks for the intro, Veronica. I don't feel like I've been doing it 25 years, but I have been.

I would say that the last four years, COVID in particular, and what's happened in the construction over the last four years has probably been the most challenging that I've seen in all of my career. So I began in NAB in 2001 in business banking, and it's just...

Whilst it felt difficult at the time, nothing like what's transpired over the last four years. So where we've seen projects that had started that then saw, I don't know, 40, 50% increases in construction costs mid-project, where the problem for some of those developers have been

You've got a certain amount of funding. You've got a sales revenue at X and you've got construction costs approved at Y. And then all of a sudden, construction costs accelerates over and above what the property is then worth at the end. A significant amount of projects either...

stopped, builders have gone under, developers have gone under. Some lenders are just basically funded to the point where they're lending 100% of a project because they just know, if I stop, I'm going to lose most of my money. At least if I complete the project, I'll get most of it back.

So it's been horrendous. It's been horrendous. And for our business, because we're predominantly construction, I'd say probably 50%, 60% of our business is some way, shape, or form helping people in the development space. It has been trying.

But the one saving grace for everything is it's just a shitload of liquidity in the market. A whole lot of international capital is making its way here. The non-banks have kind of plugged the gap where banks have pulled out. So it's really the only thing that's kind of saved it. And now...

It is probably now kind of stabilizing, which I think we're probably past that now. But the last few years have been as challenging as I've ever seen them.

Yeah, so let's just unpack that. So the COVID fallout with the, you know, inflation of construction costs and developers going under and maybe much title liquidity, but that's come to the market now.

I mean, in that last couple of years though, post-COVID, was it really hard if, you know, while the banks and non-banks were sort of coming back into the market, was it really hard to get financing then? And there was now starting, that's why we got a lag?

Well, feasibilities didn't really work. Like for those of the listeners that are in Sydney, sort of anything west of Ryde, really like the revenues of a project basically meant that you can't build anything these days for less than kind of 400, 450. Like you just can't build an apartment for less than that.

And so when you're in like Blacktown, for example, and you're selling an apartment for say 600 grand, then you add interest and you add all of that stuff on top, you're basically making no money. And so land values are basically negative or not worth anything.

And so you've got that situation where projects just couldn't start and they can't start. And now it's kind of unwinding a little bit, those revenues and I think the interest rates going down and all of that, all of those kinds of things that there's a whole lot of positives in the market.

Construction costs have leveled out, but they're never going back to what they were. So there's a whole bunch of projects that still can't start.

I think that's an important thing though, isn't it? Because yes, the rate of increase or the inflation of building costs has decreased. So they're not going up as fast, but they're not going back to where they were. So therefore, in order for it to stack up, prices have to go up, right?

Or government has to step in. And we will talk about that because I know New South Wales government has got a policy or an initiative on this. Maybe it's too early to talk about that right now. But at the end of the day, we're talking about more supply.

In order for supply to come on, what you're saying is prices have to go up. Is that right? And then the big argument is more supply means prices will come down. Well, that's not necessarily going to work, is it?

Yeah, so construction is a pretty simple form of financing, right? So very equation-based. Revenue, less costs, and then you've got a profit margin, and then that's what land value is worth. Those equations, like you stack all of those costs together, revenues weren't matching up.

And so you are seeing a little bit of escalation in prices.

And that's, I think, got to do with a lot of the stuff they're doing with first homeowners, a lot of that, a lot of stuff they're doing with interest rates, meaning there's a little bit of the investors are coming back into the market.

So that means prices are starting to accelerate a little bit more there. And then there's that stability of costs. There are those electricians out there driving Lamborghinis. They're probably not going to want to downgrade to a Toyota. So their prices aren't coming back anywhere near what they used to be.

So it's definitely up. You're going to have to see something happen, whether it's in the taxation, whether it's in some sort of legislative thing to kind of incentivize people to start these projects. But you'd struggle to make a project in Penrith work at the moment.

Even though there is a lot of money in the market, developers aren't interested in the obviously losing money on a project just for the sake of helping supply. As much as they probably care about housing supply, they don't care enough to lose cash.

You made some interesting points there around some things like subsidies or tax breaks. What are some of the things that you think while you're there is just that could help to really start to move the needle and actually get some more supply in the market, right?

Because we are getting some more and I'm missing know what projects are stacking up. Obviously, there's a bit of a change with zoning in Sydney, which has probably made more feasibility in lots of areas, but

What are some of the things that they could make some tweaks that you think would really help move the needle?

Yeah, so there was a big push a couple of years ago around a bill to rent. The government tried to put incentives around land tax and things like that in order to make these things viable.

Now, the problem with a New South Wales or even like in particular a Sydney market is because everything costs so much to kind of get out of the ground and the rental yields are so low that the economics don't work for that.

And so they thought, okay, well, we'll give you no land tax. We'll give you relief on rates. We'll give you... It's just not enough. There needs to be more assistance to make some of those projects work. So the guys at Qualitas have an arrangement with a group called Gurner.

Now, as far as I understand, in Parramatta, they're doing a built-to-rent style scenario, and you have to either buy really well, so potentially the person that bought it before you loses a shitload of money and you bought well, and so then the visa works.

But something has to happen to help support it from a return perspective. And I think a lot of those outgoings link to that. Yeah. But it is some sort of tax relief or some sort of incentive to get those projects built. And that does help, right? Because it's not a revenue thing then.

It's not about a sale price. It's about a return equation. And then you probably feel more comfortable about building 150 apartments, say student accommodation or whatever it might be, because you're getting a better return on that.

Around the country, it's the same problem. You were talking about Sydney-centric here, but construction costs around the country have gone up a lot, right? And if prices haven't gone up anywhere near that amount, then they're still very hard to get these projects out of the ground. Is that sort of your belief?

Yeah, look, there's markets within markets. So for argument's sake, say it's significantly cheaper to build something in Melbourne than it is in Sydney. And that's because there's not a lot of demand for trades, not like there is in Queensland or New South Wales.

And as a result, you could probably deliver a project for, say, 20% less in the Victorian market than here. But there are challenges, like the Andrews government put a whole shitload of taxes on investor stock and overseas stuff. And so the demand isn't there.

And so they've got a whole different set of challenges in Victoria.

Queensland, there are really no builders that can deliver anything of scale because a lot of those really large scale builders, the Hutchies, the Merrits, the Multiplexes, they've all been dragged across to a whole bunch of these infrastructure projects and really large government stuff and hotel at Queen's Wharf.

And so there are no trades. And so their labor costs are really high. And the only people that can make stuff in Queensland work are kind of owner builders, like large kind of developer builder style stuff, because you just can't get a T1 or T2 builder to quote anything.

Or if they are quoting, they're like, I don't know, 50% above anyone else. And so you don't have really any option to make it all work.

The projects, I'm sort of reading between the lines, the projects that are getting funding are more of the higher end boutique expensive apartments. Is that fair to say?

And the stuff that is more mass produced and more designed at sort of the average consumer or the lower end of the market, that's the stuff that's not really stacking up. Is that sort of the summary of what you're saying there?

Yeah. Yeah, that's right. That's right. So a lot of the developers that we deal with will say, look, anything sub $15,000, $16,000 a square meter on a revenue basis doesn't work. They just can't make the feasibility work.

And so where you're talking about, say, suburbs like Parramatta or even suburbs like Castle Hill and things like that, they're sub those numbers. And so it's difficult to make those feasibilities work. And so unless you're a own a developer and you've got a building company, you can control costs.

Very hard to make anything below that work. I don't know, traditionally suburbs like Toongabee and say Blacktout, they're probably 9,000 to 11,000 a meter and they're definitely underwater.

So, for Ali, Listen, there's like a way to think about it. It's like a 60 or a 70 square meter apartment. They need to build that. They need to be selling it for, let's just call it a million dollars.

And if they can't sell a two bed, 60 square meter apartment for, which is pretty tight, for a million dollars, then they just won't build it. And a lot of the places across the city, they just won't be able to sell those apartments for those prices.

Is that sort of a layman's way of thinking about it?

Yeah, pretty much. The old rule of thumb used to, the developers would talk in terms of box. In 2018, 2019, you could probably get away with building an apartment for somewhere in the high 200s to early 300s. And they go, okay, cool.

If it sells for 600 grand, but the land owes me 50, interest and costs, probably another 50, probably owes me 400, I'm making 100 per unit.

These days, all of those costs, you probably can't, even before looking at land, five, 600 grand, it's going to cost you to build it, plus interest, plus council contributions, plus time. You're probably 600, 650. So unless the thing's making a million bucks, you're not actually walking away with anything.

And so developers just say it's not worth the risk because it's a really difficult gain.

So explain for us then, you know, New South Wales state government, I know the Victorian state government, there's probably other state governments have been working on rezoning, particularly around construction, sorry, transport corridors. And they're saying, okay, well now I can build six storeys or you can increase density.

So how does that help or does it help? Does it make any difference to these sums or does it, you know, if suddenly you can put another two floors on a building that you couldn't build before, surely that means that the dollar per square metre will go down or does it?

I mean, how does it impact this feasibility?

Yeah. So we'll think of it in terms of the kind of the sun to land cost. So let's say you bought a site for $20 million and you originally calculated you could do 50 apartments on there. And then you spread that $20 million amongst the 50 apartments that you've built.

The government goes and changes the legislation, says, okay, you can now do 90 apartments on there. That $20 million is now spread across 90 apartments. So it technically brings your cost to deliver down. And so a whole bunch of projects along the transport corridors or even under the mid-rise, which was

announced a few months ago. There's a lot of density going into places like Mossman and Neutral Bay and Cremorne and things like that. And so it helps a lot of these projects actually now make money.

Even some of the projects that are under construction that were probably struggling were also given a little bit of density. So they were able to add more floors midway through. So it definitely does help. It brings down the overall cost.

But these are already expensive suburbs, aren't they? I mean, like you said before, you can't do this at Penrith and I'm presuming they've had increased density out there as well.

So it really does come down to a sort of a higher cost or a market that's prepared or able to pay a higher price in order for that to work, right?

That's right. That's right.

It's very topical, this sort of movement around rezoning. It upsets a lot of people, whether they've got assets in these markets or whether they're kids or grandkids of the parents or grandparents who've got money in these markets, right? And there's a huge amount of wealth.

And so you can tell there's a lot of people who get upset by this, right? From your understanding though, people sort of trying to build in these more affluent parts of, let's just call it Sydney at the moment. The product they're building though is also something that is quite high end, right?

Because they're trying to sell to an affluent downsizer market often. Is your understanding that it's not going to be a repeat of around a Roselle, a Roseberry sort of Alexandria, just high density apartments. This is a different type of building that they're going to be building to actually sell these.

They can't just sell those if they built them.

Absolutely. And look, council and the state takes all of this into consideration. So a lot of the development that gets proposed and approved is within the confines of what a suburb looks like. Will it be out of place? All that sort of stuff.

And so if you want to ask $25,000, $30,000, $40,000 a square meter, so I don't know, $1.5 to $2.5 million in a

apartment in some of the suburbs, you need to deliver a really good product. The building needs to look nice. Outside, it needs to look good.

And so this is targeting those people that maybe have sold their $5 or $6 million dwelling that has water views that want to say, okay, well, I want to stay within the area. I don't want to have a yard.

And then they move across to maybe a $3 million apartment and have some money in the bank. So it is definitely tailored to each of those markets. But Some suburbs are just super anti-development. And so I actually heard of a friend that was trying to build a house in Castle Crag.

And apparently over the last 10 years, there's only been like 16 houses approved there for development in that area. So there are people that will just complain for the sake of complaining.

There's no train station there anyway. So I think they're pretty safe in this transport corridor.

That's right. Have to take a bite.

But, I mean, you mentioned earlier about sort of non-bank lenders and other lending solutions. I mean, I guess for developers who have an appetite to build, who have found that the bank's risk appetite doesn't necessarily match their appetite, does that happen a lot?

And if so, what alternatives are there and are they part of the solution or part of the problem or a different problem?

Probably the best way to think of it is, What the non-banks are doing these days, the banks were doing probably 10, 12 years ago. And so the banks have retreated.

And I'm not sure if that was off the back of Royal Commission or it was kind of APRA or ASIC, all of them giving them pressure to move away from space. But the regulation that they've got has effectively meant that they've vacated.

And much like the US market and the European markets, the non-banks play a very important role. I think in the US, the statistic is something like 50%. of this kind of space is filled by the non-banks. In Australia, it's not that high. I think it's about somewhere between 16% and 18%.

And so they've just naturally filled the gap that the banks have left. Whilst the banks have started moving back into the space, I don't know that they will ever take back that mantle. It will continue to be dominated by the non-banks. Now, why do they dominate?

They're obviously not as regulated as the banks are by way of having to hold capital.

And so they can do things that are a little bit more left of center than a bank can do.

And they're more flexible and they're much more nimble. So they can lend more. They can be flexible around pre-sales. They can do no pre-sales. They can do 90% of costs. They can do a whole host of things that banks just aren't able or built to be able to do.

And to use the pun, like a non-bank lending 10 years ago probably would have been the elephant in the room. They're going, okay, well then. I don't want it. It's a dirty word. Now, most developers think that's their primary source of capital.

And then if they can get a bank to do it, it may be in combination with a non-bank. It may not just be a bank. It may be banked to a certain level and then add some mezzanine behind from the non-bank. So they're getting the best of both worlds.

Is that more expensive money? The non-bank space?

It has come down because of the amount of liquidity that they've had to meet the market. So some lenders these days in the non-bank space probably charged what a bank was charging 10 years ago. So it's quite reasonably priced.

There are instances where a deal maybe is not that favorable and has caught a lot of risk. Maybe there's reputational issues, whatever it might be, and a non-bank would be quite pricey. But those people are probably price takers, so they have to deal with what's available.

JP, you talked about the real bad times, right? The COVID times, and you might not know, but how many developers and builders, like particularly who are building Resi, right? Other stuff maybe doesn't matter as much for this conversation, but that are going to be building apartments and even Greatfield Estates, et cetera, but-

Did we lose a lot of great builders and developers in that time that aren't able to easily be replaced? Or a lot of those workers just moved to other developers and they've just expanded their teams? Or have we actually lost a decent part of our workforce over that period from your opinion?

A lot of building entities struggled a lot because they were the ones that had signed fixed price contracts leading into COVID. And they're the ones technically that were supposed to wear the price changes.

The market, and this was the general consensus across the entire market now covered by the banks, but also the developers, they all pitched in. A lot of them pitched in where they thought, look, If this builder falls over, I'm in trouble. This is going to take an extra year or two.

I'm going to have to find another builder. Who's going to warrant the work? And so a lot of those developers put their hand in their pocket where they didn't need to, but chose to. So a lot of them stayed around because of that.

And yeah, look, I don't think we necessarily lost the staff. Like they haven't moved to any other market. Maybe some of them moved to Queensland for a sea change, but by and large, they're all still around. And some of the buyers that did survive are significantly bigger than they were pre-COVID.

I think it's good to draw a distinction too between developers and builders. Often we use them synonymously, but they're not. The developer gets funded in one sense, but the builder also has to get funded for working capital as well, right? So there's sort of two entities that need to get funding.

Can you give us some more insight into how that all works?

So what we found from a builder's standpoint is a lot of the builders pre-COVID would just use a lot of their own, they'd use terms on their suppliers. So I don't know whether it's their subways or building supplies like bricks and concrete, et cetera, they have it all on account.

And what happened during COVID, because everyone was so worried about what was happening with builders at that time and the ability for people to pay, basically everyone went almost COD. And so that was a huge shock to a bunch of building contractors because they don't sit on a lot of cash.

They get paid regularly. And so they use that money and they spread it around the subbies and pay everyone. And so a lot of that kind of waterfall down and a huge amount of the subbies and suppliers lost a whole lot of money during that time. And many of those guys fell over.

Many of those guys fell over. So they aren't traditionally what a bank would look to provide working capital to because they're pretty fickle. They don't have a lot of assets on the balance sheet. And so there's not a lot to sell.

If a builder falls over, you may as well just tear up all the money you've lent to them because there's nothing to sell.

But the bigger builders wouldn't fall in that category, would they?

Well, you'd be surprised. They have two, $300 million contracts and they're not getting paid on time. And so there's things, it's just a lot more zeros and yeah, a fair few builders fell over in that time.

So I know that a couple of the builders, Growcon and stuff like that, that were working on the W had issues with cashflow and a couple of them fell over and then growth built took over and they then had cashflow problems.

So there are a whole host of different large scale tier one and tier two builders that probably don't exist now or in some other shape or form that experience big problems at that point.

And again, the big guys, probably they find it more difficult to pass on some of these costs to some of their contracts because their contracts would be pretty watertight. You're signing a $100 million contract with someone, the lawyers are heavily involved in the negotiation of the contracts.

There was no rise and fall back then because no one had ever expected this type of shock.

JP, you mentioned earlier that there's no way that the cost of build is going to go down. Tugging cheek, you mentioned the electrician with his Lamborghini. But when you think about it, just demand and supply in economics, right?

And you think, oh, okay, well, if there's less demand, surely you're just going to have to cut into your profit. Why have you sort of got that belief?

And I'm not saying it's wrong, but are you sort of so sure that a lot of the builders and the developers, there's just no way that they're going to be reducing their cost of providing?

The way that I look at it is you have what they classify almost as an economic rent on their, like they have a baseline level of what they say, okay, this is what I would charge, say, let's just call it on an hourly basis.

But at the moment I've got too much work, so I'll say I'm going to add 20% to that. And so they're running around going the 20%. That economic level where they say, well, I'm not going to do it for less than this, they're not going below that.

And so I think that economic line went 20, 30, 40% up from pre-COVID to post-COVID. So they're not going to come down.

They're going to stop probably quoting overs because they've got enough work and they're going to start coming down to what they consider their baseline, but it's not going to go back anywhere near what it was before.

If you were charging $50 an hour pre-COVID and then you're charging $150 an hour, you're not going back to 50. You'll say, okay, well, I'll quote 120 an hour to do the work.

And so then you've got all these other staff on site that are now used to getting a certain amount of pay. And so it is all just kind of shifted up the curve. So they will probably cut margins and margins on supply and things like that.

I think the labor price is just kind of embedded. I'm on a personal mission to help more people make better property decisions.

You know, most people don't realize that they can cost themselves hundreds of thousands of dollars over the medium to long term when they make property decisions without all of the information that they need. And what I do is help people with tricky real estate problems.

which often masquerade as simple questions like, should I sell my investment property because the interest repayments are hurting or should I buy before I sell or the other way around?

You can connect with me and access all of the tools that I've created to help you make better property decisions at veronicamorgan.com.au and there you will find resources for first home buyers,

details about my buyer's agent mentoring program, you can connect with my Sydney-based property management and buyer's agency teams, Australia-wide vendor advocacy, or ask me for introduction to the small group of buyer's agents that I would personally recommend across the country. That's veronicamorgan.com.au.

If you're considering a property move such as buying your first home, upgrading, renovating or investing, the team here at Alcove would love to help you think through your decision and get the finance right. Please go to alcove.com.au to reach out. Is it also any impact that

Their coffers got emptied, like the buffers they had going into sort of the COVID time or the profits or their other assets that they sort of all had to go into to get through those projects and make them stack up and get them.

Was there a lot of their buffers used in those bad years or a lot of their risk appetite reduced? They've sort of been a bit scarred from it and they're less likely to take on the riskier projects than they potentially would have in the boom time.

Or they overbuffer their quotes to say, well, I just can't have that situation again. And so they say, well, okay, well, if I have to give a fixed price contract, I'm going to be 50% above where I think it's going to come in at because otherwise I will be exposed.

And so that goes back to the problem of how do you deliver something?

If banks are insisting on a fixed price contract from a builder to be able to do something, then does that mean that I have to pay X, Y, Z, I have to pay all that extra money just to get a fixed price contract?

Whereas maybe I can get a non-bank to do it where I've got a fixed component to it and there may be some rise in full provisions in there, which might be they allow some provisional sums for certain things that may change over time. And we're talking projects that may run two years.

Now, you can't tell me that I know what Steel's going to cost in 2027, right? Like, you don't know.

So, these guys are forward forecasting these prices and going, okay, well, if I've got to buy all that stuff, then I've got to allow 10% escalation of costs and I've got to do this and I've got to do that.

So, it's a really hard game to kind of, you're almost at a crystal ball.

Mm-hmm. JP, I know the resi space and we put ourselves down as resi mortgage sort of specialists. We know where the line of our expertise is and we know there's a huge jump into your world, right?

And so we can always see, because we keep up to date with every bank, what changes they're making around resi. We're on it, you know, we're on it in minutes. But the commercial space, we don't. Because in the resi world, it's kind of risk on, right?

The banks are just, you know, tweaking policy to make it more easier to lend. You know, it's just they want to lend, right? They just say, whether it's longer loans... They make much more money. So they want to lend. That's right. Yeah. So have you seen that in the commercial space?

Has it gone from a lot more pre-sales? You mentioned the non-banks, but is it a point where the banks are making it easier for developers to get finance? Or is it still a little bit, you know, a bit of a COVID hangover at all?

So I think the best way to look at it is the banks have been sitting back watching the non-banks have all the fun for the last sort of five, six years. In particular, when they look at construction, because they've basically fallen out of the loop as far as construction is concerned.

They know developers are lazy. If they've gone and done a land acquisition with a non-bank, chances are that non-bankers can have a very good chance of doing the construction part as well.

And so where the banks are playing a little bit more now and the ANZ, the CBAs, the INGs, they're doing land finance where traditionally that wasn't really like you go, okay, well, I'm buying a site, it's got no planning. I've got to go to a non-bank to finance the land purchase.

Banks are coming into that space because they know whoever holds the land gets first crack at construction. And so they're doing things like that. CBA have made a number of changes to their pre-sale policy. So if a project is sub 60% on a gross realization basis, they'll do it with 30% pre-sales.

So they're changing all these things to kind of help developers access bank capital rather than having to pay a little bit more for non-bank capital. CBA have also, and I'm sure you would have heard the co-posit, program that's come out. CBA is one of the major banks that accepts co-posits.

So that's where a buyer has their deposit paid on behalf by this entity. And then the buyer, I think, pays installments over a two or three-year period while the project gets completed.

And it's helping them access pre-sales to make things work a little bit better for a developer and work a little bit better for a bank. So they're trying to shorten the gap between what non-banks do and banks do.

So for purchases out there, particularly first home buyers, when they're buying off the plan, I would imagine that a lot of them don't realize that that development hasn't necessarily achieved funding yet, let alone hasn't always been approved either. But it's like chicken and the egg, isn't it?

So that has to be done and achieved in order for the developer to get the funding.

That's sort of an interesting quandary in itself, but the New South Wales government has come out with this pledge to help certain developments or qualifying developments get out of the ground by pledging 50% that they would step in to purchase up to 50% of a development.

How do you think that will impact supply? Do you think that that will help those suburbs out west, for example, where you've got a lower cost to buy into apartments, but obviously it's not stacking up for developers without some help? Is that the sort of help that you think will be productive?

If so, is that the area in which it will make an impact? And do you think it's something that should be rolled out across the country?

Great question. So we do a bit of work for a developer that operates in the Queensland market, north of Brisbane in the Margate Peninsula. They do a lot of social housing.

It's kind of almost like a formula they've come up with where they will develop a project and then sell the completed stock to a housing provider. Now that housing provider has been given grants by the government in order to buy it, and that entire development thing gets leased out to all social housing.

So whether it's, I don't know, first responders or all kind of just low-income families. I haven't seen that in the New South Wales context. That would definitely help a lot of developers make projects viable if the government is helping.

Probably a little bit socialist for my liking, but it definitely would help some of these projects that aren't really viable. So some of the stuff out west, Especially some in those pockets where I think there is still demand, but there's just no supply.

So that kind of all that heels district and things like that. Touched on in the first point though, Veronica, around how pre-sales sometimes run the risk of whether a project's actually got finance, whether it's even approved and things like that.

So if I was to give the listeners my own recommendation, I think a lot of the pre-sales, people don't really commit until they see activity on site. I think that's probably the best rule of thumb. You can't start on site unless you've got an approval. So you won't, you're about that box ticked.

And generally when someone's on site working with the hoardings up and there's machines on site, there's some type of finance in place. And so that gives you the tick that there is a viable project. Someone's put their money where their mouth is and actually gone and invested the cash to start.

I think they're the two things you want to tick off. If you're looking in markets where projects just have this kind of stigma where they just sit there in the ground for years and years and years, yeah, you do run that risk.

And if something sounds too good, it probably is too good to be true.

JP, we were, as a podcast, as a business, we never were big fans of buying off the plan. We've seen the investment returns that a lot of first-time buyers and often investors have got, particularly in the high-density booms of the 2015s, right?

And also then we also are more aware of the quality of the buildings that were happening and the defects and all that sort of stuff's kind of unraveled a little bit over the last 10 years, I feel. And consumers are more aware, investors are more aware, etc.,

but also the building industry is more aware of the challenges. I feel that I've actually, how are you saying that they've also changed? I mean, you've been doing for 25 years, right? So you've seen ebbs and flows and different appetite for builders.

Are you much more confident, I guess, on the quality of the building stock that we're going to be building over the next decade versus previous ones in terms of the way that builders and developers are thinking about it?

Well, that's a really good point because a lot of the other challenges that builders and developers have faced have been related to the building commissioner. And it is for the benefit of the end consumer, but the amount of documentation and legislation that has come into place has slowed down the process.

So where a builder could kind of get documentation done up to start a project used to take about six weeks. Now it probably takes six to eight months to be able to get yourself to the point where you're able to... to kind of get it out of the ground.

And three, four times the amount of money. So we used to allow probably 2% to professional fees. You're now 5, 6% of a project cost where you've got, I don't know, a thousand engineers and architects and everything doing all the documentation.

But the absolute upside to that is you're getting a much better product The commissioner goes through and looks at like anything that they consider as high risk, they go through and check everything.

And so I think five, 10 years, people will look back and go, that was actually a really big necessary change that needed to be made because there are a lot of shit projects that are kind of out of the ground that have rectification orders. It's out of cost and it's out of time.

But I think at the end of the day, people kind of more confidence in what they're buying. And I think that's a very important, especially in New South Wales.

Is that leading to the zoning? I mean, if you mentioned there and the paperwork slowed down, but the development applications, the approval, I mean, a lot of people blame that, right? I've got to buy the land. It takes me three years to get it approved.

And so is that really still a massive hurdle for a lot of these projects? Or is the sort of state government changes around if you're a significant project and that in itself is solving that problem at early days, but is part of it?

Yeah, look, what Chris Means has done in the last sort of six or 12 months has made a big difference. So the HDA process, the SSDA process, all of that has made a really big difference to getting kind of large scale projects out of the ground.

And I think a couple of weeks ago, they announced that they were expanding. Effectively, if a council hasn't reviewed your project within, I think, maybe 10 working days. It's deemed auto-approved for certain types of development, which is great.

Why does a council need to be involved if you're doing something that meets all of the council criteria? It's just bureaucracy at its best. It has historically been a problem. I think this current government is doing a lot to remove that glut. We've got clients that...

I've got a client that's building something in Longerville. By the time it opens in November, it'll have been almost eight years since they bought the site to be able to get it out of the ground. It took almost five and a half to get it approved.

So it is difficult to get anything done in New South Wales. And I think that's different to, say, Victoria because they've got much looser controls and things are just easier. They've got less red tape to get things approved. It's just there's no demand. And so you've got the opposite problem.

I mean, there's also land banking, isn't there? I mean, because the reality is if you've got a site, you've only got one opportunity to maximize your return on that site. Once you build on it, that's it.

So I can imagine there are times when developers, if they can afford to sit on it, or it depends on how big they are and how much they have, and they've got to kick the churn to some degree. But different markets, I imagine, would create different behaviors around that. Would that be correct?

But also, I guess developing such a long game in the sense that even once you do get that approval, it's still going to take, what is it, a month of floor? Is that the way it works to build? I guess that depends how big the building is, each floor.

But it's months and months and months, potentially into years to build these buildings. How does that sort of get worked out where you've got market conditions and maximizing or optimizing the return on a site versus the time it takes to get the approvals versus trying to time the market?

That brings a lot of risk into the equation, doesn't it?

It does. It's probably more relevant for a New South Wales market where the land value makes up more of the kind of total project costs than say Queensland or Vic or South Australia or kind of anywhere else in Australia.

What developers tend to do is obviously try and secure a site under way of option, give themselves a couple to get an approval so that they can activate.

It is a very difficult thing to make an equation work here if you're paying $25 million for the land and you've got to sit on it for three years. You're basically eroding a lot of your profit.

Yeah, there's a whole host of different ways of getting it done that kind of make it work. One of the other ramifications of what happened with COVID is a lot of developers bought stuff pre-COVID. A lot of project sites, they did run their feasibilities. They ran it on a certain construction cost.

Didn't get a chance to get anything approved, but they probably now overpaid. And even though they bought it six years ago, it's probably underwater still. So I've got a particular client who bought a beautiful site right in the middle of Epping. It's directly across the station. They paid $35 million, $36 million.

Today, you'd struggle to get that for it because whilst the construction cost back then was probably 400 a box, now it's 600 a box. And so they just can't make the feasibility work. And so those things just kind of sit around waiting and people don't like to write off money.

So people have been holding out and holding out, hoping that the equation changes in their favor and This LMR and the TOD stuff, like you talked about the low and mid-rise and the TOD, which is obviously the 800 meters to the station.

All of those things have helped that some of those projects now can get activated because all of a sudden the numbers work.

And on that, let's talk a little bit about the TOD, the Transport Oriented Development and the LMRs, which is the, what's an acronym for, but that's basically- Yeah. So that's extended beyond the Todd zone so that you can get up to what six stories in those LMR areas. There's actually a map.

I'll probably put the link in the show notes so people can, you can put your own address in there and see what zone you're in.

Say, for example, on the front page of the Herald a few weeks back, there was a map of most of Leichhardt and a big chunk of Camperdown, which is all now LMR, right? So you can build six stories.

And in fact, funnily enough, my house is banging one of the Newtown part of that. So I was like, oh, look at that. All my neighbours could bandy together, sell, but I am in a conservation area. I don't know how that works.

We could all sell and we could sell to a developer and suddenly you could put six stories up. And then at first, you know, a lot of people were up in arms. Oh my God, my whole suburb is going to be turned into apartments. But the reality is, no, it's not.

And as a developer, you've got to go out there and you've got to go door knocking, right? You've got to go and find... an appropriate number of like-minded neighbours at a similar stage in life, in the right zone, in the right blocks of land, you put them all together, makes a reasonable site.

How likely is it that these moves are going to suddenly turn into streets of six-storey high apartments?

It'll happen eventually. These things tend to make their way through and they grind their way and people buy and sell. The government picks those particular spots because they generally want that to happen. And eventually someone will throw enough money at you, Veronica, that you're going to say, okay, I'll let it go.

And you just move somewhere else and you'll say, okay, well, I'm happy with that check and I'll go. And most people are the same.

I'm not sure if you've covered it in one of your other episodes a while ago, but where they changed the urban renewal process, where in New South Wales, as long as you own 75% of a strata, you can compulsorily acquire ballots.

That's pro-development, and that is just to kind of help those people that are holdouts, basically forcing people to get out.

Yeah. With the row of houses, for example, say in Leichhardt, I think the average block size in Leichhardt is roughly 186 square metres. You need a lot of houses, individual owners all in a row to cooperate and have the same price expectations. You know what I mean?

It's actually much more complicated than say it is up in Roseville, Linfield, up in North Shore there where your average block size might be 600, 700, 800 square metres.

So you only need a few of those to make a site versus maybe 10. I don't know what a minimum site would be. That must change the feasibility of some of these inner suburbs really having a change.

There's a whole industry of agents that float around kind of trying to put these things together. They had no intentions of developing. They just want to lock everyone up and then package it up to sell to a developer.

What you tend to find in suburbs like Leichhardt and Annandale and that is they tend to be smaller kind of developments. There might be 12, 14, 16, 18 apartments rather than 150 apartments or 80 apartments because it's difficult to consolidate a whole host of different people.

And then you probably need a little bit less parking because you're closer to the city, closer to transport. So it's a whole lot of considerations. I'm sure that eventually people will give up, but there'll always be holdouts.

And then the council will kind of force you to, they don't want to leave houses isolated that can never be developed. So it'll want to leave pockets here and there. But eventually most of that will be accelerated over the next 10, 15 years.

There are still pockets everywhere that haven't been developed, but eventually they will fall in line.

I think the Rose Bay super site actually transacted this week. I'm not sure, I just saw a line, but I think that was 150 mil or something that was eight houses down in, you know, right in the centre of Rose Bay. And that was a big sale, right?

And that's 150 million if you're spending that on just the land, you know, you've got to try to get a return on your investment. I think also there was a big sale in Mossman, right, which was quite deep in the suburb. It wasn't up near sort of military roads.

So is your belief that, you know, that once these sort of happen, then they will move on to the, but they don't, not every site's equal, right?

As soon as you put a bit of a hill in there, you put maybe some other, you know, busier roads, is it more likely to happen on some sites than others? And if there are a banding together of lots of people, then that premium sort of gets taken away, right?

Because it's like, well, I can't buy that six houses for 20 mil, then I'll buy your six houses for 18 mil. You know what I mean? Does that likely happen as well?

Yeah, so a client of mine, they didn't buy that site. There's a nice kind of three street frontage site in Rose Bay, but a different client of mine did buy a site within Rose Bay and it wasn't at that price, but it was a difficult scenario.

You had eight, nine different owners, a couple of blocks of apartments. And so it is one of those things, but this particular property that they bought is like right adjacent to where the shops are down there. And so there aren't many that are comparable.

It was a nice flat site, walking distance to the shops. And so you could probably substitute that with maybe one or two other sites in that area, but there are 10 to pick from. Yeah, okay. Other ones, like you said, they might be on a hill.

They only have one access as opposed to this one had double street frontage. And so there are a whole host of different considerations. you start adding any of those elements where it's sloped, it has one street, the access is difficult, the prices start to come down.

And so then the agents are pretty good at educating vendors on what to expect, even though they kind of oversell them to get the listing, they do kind of educate them to try what they can expect.

And so there's another site, I believe it's in Dromoyne next to an aged care project that's just been built. It's one block of apartments on 6,000 square meters, beautiful site right on the water. And I think they're expecting 130, 140 million for that site. Now, is it worth that?

Probably. You can't substitute that with a lot else. There's not a lot that will sail in Dromoyne right on the waterfront. And so will the developer pay that? If they can make the feasibility work, yeah, I'm sure they probably will. But it will be a very well-structured two, three-year deal.

The buyers might get a little bit of money now, a little bit of money in a year, and then they settle in in two or three years' time to de-risk it for the developer.

That's it. And it locks you, you know, anybody who's selling their house in this way, it locks you in for quite a while. You can't sort of get on with your life until the end of that period of time.

It's interesting too to think that, again, we're talking in high net worth areas as opposed to areas where freeing up supply really does help with the housing shortage.

So JP, have you got a property done for us? Just a story, a bit of a tale. It doesn't have to be, it can be anonymous, it can be yourself, just something light in the mood at the end of the episode. Yeah.

There was a particular developer who had a site in, it was under a PDA with the council. And so the council owned the land and this developer was doing this building and they had kind of 300 apartments approved above.

And they and this particular developer had the idea that they were going to be able to get it to 450 apartments rather than 300.

So they decided on their own bat that they were going to go and dig an extra couple of basements without approval, even though they didn't know the land, it was actually council land. So they went and dug a couple of basements extra over and above and

Then the council found out and they brought them in the room and kind of slapped them on the wrist and said, naughty, naughty, don't do that. And the council said, okay, we'll just order it up, hoard it up. Don't worry about it. Nothing to see here. We'll just let that go.

You just keep going into the development. And that particular developer got so angry and said, flip the table over in the council chambers and said, nah, either give me my extra 130 apartments. We're not doing anything. That project still sits in that suburb just as a car park. It has never been built.

It actually had $200 or $300 billion in pre-sales on it. Just out of ego, this guy got stuck and there's a really nice car park out there that with not much else happening.

He basically thought he would just be able to ramroad himself through an extra 150 apartments. He was just king shit and was just going to be able to ram railroad to get an extra 130 apartments.

Right.

Yep. Now it's just a car park.

That's asking for forgiveness, not for permission, right? That's it.

That's it. And he didn't even own the site. It was a council-owned land.

Yeah. Wow. Okay. JP, it's a really interesting chat. You definitely busted a few myths for me, to be honest. And it sounds like it's not really going to be a finance issue to get us out of this sort of supply shortage. It's going to be more of a fees. It's heaps of cash.

Yeah. Yeah, feasibility issue and making sure projects stack up. And it sounds like it's not even going to be a developer or builder issue.

Yeah, maybe they're going to take away a bit of the cream off the top of their quotes, but they can still make it work if the property prices go up. So I really appreciate the chat, JP. That was really good.

I think that the answer might be something along the lines of bringing in some skilled labor. It's the only way to bring the prices down on the construction side. And I think that's a difficult thing at the moment.

Interesting. Thank you so much for your time, JP. It was great to meet you. If you have a question that you'd like us to answer in an upcoming Q&A episode, you can send us a voicemail or written question via the website, theelephantintheroom.com.au, or you can email us directly at questions at theelephantintheroom.com.au.

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