Boots on the ground of the Aussie property crisis

After a 25-year career in property development, including $2.7 billion in loans across 19 institutions, Metro Property Development CEO, Luke Hartman, has a thing or two to say about the state of the Australian property sector.

“It’s been an absolute nightmare,” he told MA Financial’s Head of Real Estate Credit, Drew Bowie, at last week’s MA Financial Summit.

“There is not a builder in Australia who’s had a good run over the last three years. Anyone who tries to tell you that is not telling the truth and they’re certainly not making money,” said Hartman.

The sector is in such dire straits that it seems everyone is losing out. Buyers, borrowers, lenders, builders and developers have all had an extremely tough time of it.

Big issues

The Aussie housing problem is unlikely to be news to anyone, but Bowie shared some startling figures from Cotality (CoreLogic) that put the current crisis in stark relief.

Over the last 10 years of record under-supply, we’ve seen dwelling values rise 30% relative to incomes, incomes servicing the mortgage up 40%, years to save a 20% deposit up 25%, and percentage of income going towards paying the mortgage up 25%.

It’s sobering reading, and yet there’s so many clear causes it’s hard to even know where to start.

Labour shortages are an obvious one.

“The cost escalation has normalised, but the availability of labour and the cost of labour is not coming back anytime soon. That is a massive issue,” said Hartman.

“One of the things that we really worry about in my business is the availability of brickies and the availability of tilers. There is a shortage of those skills that has existed in the post-Covid period.”

And that leaves a huge question mark over how a project is actually going to be delivered for developers, lenders and borrowers.

“I can tell you now in Adelaide, for example, we can't find brick layers.”

Hitting targets

The Albanese government has set a goal of 1.2 million new homes built by 2029, but both Hartman and Bowie are skeptical.

“It’s going to be an extremely challenging task to achieve that,” said Hartman. “I think the public is also getting that view, but on the ground there are just too many constraints.”

Construction and affordability are two obvious challenges, but one that gets less airtime is the difficulty of the approval process.

“The timelines to get approved are a real issue and that's going to continue to add significantly to the cost of development,” said Hartman.

Even the post-approval process is a huge problem, says Bowie.

“One of the challenges for the government is around how to ensure efficiency within all the state-owned corporations and service providers that are needed to be dealt with.”

Hartman agrees.

“How we hit these targets is going to be about investing as much in infrastructure as it is about approval.”

He cites the example of a rival development in Sydney’s south west where 20,000 new houses are still awaiting services upgrades before they can be finished. The same is true of South Australia.

“Sydney Water has been a major, major issue in the growth corridor areas,” he said. “They're preventing a lot of future development works going on and so continuing to invest in services out in the Greenfields is going to be a key driver to housing supply.”

“If you have $50-100 million exposed and all of a sudden you’ve got a 6-month delay in your connections being finalised, that financing cost has to be passed on,” adds Bowie.

There are some green shoots though.

“We're seeing a lot of positive policy changes that are going to streamline planning and improve efficiency. So that's a step in the right direction,” says Bowie.

Hartman points to the recent low-to-mid tier rezoning rules in NSW as an example, but says one area the government needs to look at is fixing the tax structure.

According to Bowie, a new build home in Sydney’s west may cost $650,000 to build, and sell for $700,000.

But there’s $200,000 of taxes that need to be paid on it.

Even generally positive changes have some unintended knock-on effects.

The NSW Building Commissioner has done an impressive job of improving construction quality, says Bowie, but the upshot is that it has changed the building process onsite, upsetting decades-long habits.

A minor change can mean new paperwork that then is delayed in getting signed off, or runs into problems when being uploaded into the documentation portal.

But it has made building sites more cost-effective overall.

Where the opportunities are

“I’m extremely positive about the New South Wales market. We are aggressively looking at opportunities in the market,” said Hartman.

“I’m particularly focused on land and townhouses rather than apartments. If you can get the approval and you've got the servicing, the demand is definitely there.”

Unsurprisingly, the first home buyers market remains strong, with the endemic under supply for entry-level new builds slowly being met in Sydney’s growth corridors.

Further north, Hartman says the Gold Coast can offer $15,000 per square metre near the beach, but finding builders remains a huge challenge. This means higher prices as people continue to flock north for the lifestyle sea change. 

In Brisbane, the Olympics means there’s been an influx of builders, but not for residential property.

Elsewhere, Melbourne is a good bet.

“It’s very much at the bottom of the cycle in our view and looks cheap compared to the other capital cities,” said Hartman. “We see huge opportunities in the Melbourne market and think it will bounce very, very hard.”

Overall, the outlook for residential property is very good, says Hartman.

Private credit

“We were a very early adopter of private credit back in 2009 and 2010,” says Hartman.

“It went from being somewhat of a dirty word to today, it’d be very hard to find a developer that doesn’t use private credit.”

Following the GFC, the Big 4 banks represented more than 90% of the market share for property loans. This share has dwindled, not because the banks are reducing their exposure, but because the private credit market is growing.

The key benefits of private credit are being able to work on more projects concurrently, as well as access to higher loan-to-value ratios.

There’s also the importance of the business relationship private credit can provide.

“It's all about partnership.” says Hartman. “In this environment where everything's taking longer, construction is hard, development is hard, councils are challenging, you need to be on a journey together.”

“The number one thing that we’re really looking for is someone who understands what we're trying to achieve and understands the challenges,” says Hartman.

“If you don't understand property, should you be in that market?”