Industry contribution to the economy
Industry, firms and markets
Development as a process
The development team
Regulatory framework: Planning and zoning
The Property Council of Australia reports on the economic significance of the property industry at the national and state level.
The property industry includes construction contractors and trades, real state services, professional services, finance and insurance.
Their econometric model uses ABS input-output data on the contributions of different industries to the economy.
The Gann and Salter Model (2000)
Gann, D.M. and Salter, A.J. 2000. Innovation in project-based, service-enhanced firms: the construction of complex products and systems, Research Policy 29 (7-8), 955-972.
Regulation and Certification
Source: Cole Royal Commission into Building Industry, Discussion Paper 1, 2001.
Industry, Firms And Markets
Property development is usually seen as an industry made up of firms that buy land to build on, but it has a wider scope.
The industry is responsible for the continual creation and renewal of the built environment. Therefore it plays an important role in determining the quality of life, health and lifestyle choices for people, opportunities for businesses and employment, and the growth of communities.
Because development occurs one project at a time the overall importance of the industry is often overlooked. Typically1 to 2 per cent of the built environment is replaced or created through new build each year.
There is a long tradition of international investment in property, but it has often been unprofitable.
• Examples are Canada’s Olympia and York 1980s Canary Wharf development in
London’s docklands, the British land companies in Sydney in the 1970s,
Japanese resort developments in the 1980s in Australia, and Australian REITs’
investment in the US and Japan in 2007-08.
Variety of Firms
Some firms specialise in a sector like Westfield in retail.
Some on types of building, e.g. Grocon does high-rise.
Stockland restructured from three divisions (industrial, retail, residential) to integrated teams because many projects are now multipurpose.
Large developers look for long term projects where they can leverage the assets in their balance sheets, to master plan and develop in stages.
• Lend Lease in Ultimo and Darling Harbour, Mirvac at Harold Park, Frasers
Many firms are local, and stay within a geographical area or region where local knowledge is a competitive advantage. Big projects and PPPs attract international firms.
Joint ventures and partnerships are common across the industry:
• Sekisui House has JVs with Lend Lease in Qld and Frasers in Sydney;
• AMP and Westfield jointly own a number of shopping centres;
• Federation (was Centro) did a series of deals in 2013 in the ongoing
restructuring after Centro’s collapse: ISPT with $370m and Challenger with
Two Types of Opportunity
There are two versions of development, but the second is often overlooked:
A site looking for a use –this is the traditional highest and best use analysis, where the aim is to maximise development returns by getting the type and timing of a project right.
A use looking for a site –many organisations have specific requirements for their operations, often with a need for large sites:
• Retailers looking for new locations, for example supermarkets or hardware
stores (like Aldi, Costco or Bunnings);
• Transport and logistics companies looking for sites for warehouses or distribution
centres with good transport links;
• Industry clusters like IT, medical and educational precincts;
• Data centres and cloud computing facilities (in the US desert locations are
popular because they use solar power for running the air conditioners).
Two Types of Developers
Visionaries and others. Some developments actually do change the world:
The first high-rise buildings in Chicago in 1890s;
New York skyscrapers between 1900 and 1933;
Shopping malls, invented by European socialist Fred Gruenin 1947, who hated cars and came to despise his creation;
Disney and theme parks;
Canary Wharf in 1990s London;
Dubai and the Gulf Emirates in the 2000s;
In Australia Robina (Qld), Docklands (Vic) and Central Park (NSW) are examples.
Technology has come a long way since Elisha Otis invented the elevator safety brake in 1853, which made tall buildings possible.
Great Success ….
Harry Triguboff started building 3 story walk-ups in the 1970s and ended up, many billions later, with Meriton the largest apartment developer in Australia.
Henry Pollack was an architect and co-founder of Mirvac, and used design and quality to capture the top end of the residential market.
There are many long-term survivors in the industry that have been consistently successful.
A land boom in Melbourne led to the collapse in 1896 of banks, building societies and the state government.
In 1974 many developers crashed into receivership -Mainline, HUA, ParkesDevelopments, Regional Land. Followed by finance companies ASL and FCA.
The 1980s Australian boom was based on extremely aggressive bank lending to unlisted property funds focused on speculative CBD office developments. When rents in the oversupplied residential and commercial markets fell in the late1980s commercial and industrial property prices plunged by 50 percent and more. Failures included Aust-Wide, Growth Equities Mutual and Armstrong Jones in 1989.
In 1991 developers Girvan Bros, Bond Corp, Estate Mortgage, Pyramid Building Society, Essington, Hooker Corp. and Concrete Constructions went into receivership. The three merchant banks at the centre of the property boom crashed – Spedley, Tricontinental, and Rothwell, followed by the SA and Victorian State banks in 1992. Two of the big four private banks incurred such large losses they had to be re-capitalised (Westpac and ANZ).
Over the financial crisis in 2007-08 failures included Westpoint, Centro, MFS, Record Realty, Rubicon Trusts and many other leveraged REITs, Craig McDermott, Beechwood, Excellence Homes.
Sectors With Character
Sir Leslie Hooker founded LJ Hooker, the largest residential property developer in 1960s Australia.
Dick Dusseldorp started Civil & Civic in 1951, later acquired by Lend Lease in 1961. They went on to develop many landmark buildings over the next 40 years with spin-off GPT (the first Aust. LPT listed in 1971, now divorced).
Frank Lowy co-founded Westfield in 1959, today the world’s largest retail owner and manager with 121 shopping centres in four countries. Westfield has 39 centres across Australia, holding a 50 per cent interest in 18 with joint venture partners.
George Herscu built his fortune with shopping centres and the 1985 acquisition of Hooker Group for $450m. Jailed in 1990 for bribing Queensland National Party minister Russ Hinze.
Wollongong town planner Beth Morgan confessed to affairs with three property developers and receiving gifts and cash from two of them. ICAC’s 2008 report led to councilor Frank Gigliotti jailed for 4 months, with developers Glen Tabak fined $2500 and a 2 year bond, and Frank Vellar fined $3000 and sentenced to 10 months community service.
ICAC and the Liberal Party
In 2015 twelve NSW state and federal Liberal politicians resigned or stood aside following corruption inquiries by the ICAC as a result of Operation Spicer.
Another issue is a related Canberra-based organisation called the Free Enterprise Foundation, which allegedly washed almost $700,000 in illegal donations from property developers and channelled the money back to the NSW Liberal Party.
The NSW Electoral Commission withheld over $4 million from the Liberal Party for concealing the identity of some donors to its 2011 election campaign.
CFMEU and Developers
The 2015 Royal Commission into Trade Union Governance and Corruption, found evidence of blackmail, theft, intimidation and death threats. Also the use of motorcycle gangs and other criminal groups as hired muscle, interference in union elections, and illegal agreements with employers.
The Final Report highlighted poor union record keeping, false invoicing and destruction of documents, union committees which failed to enforce rules, payment of large sums by employers to unions for dubious ‘training’ schemes and other ‘services’, and influence peddling in the Labor Party through inflation of union membership figures.
The sums of money involved were also significant, with many officials benefiting from their positions through fraud or theft from the union (HSU in particular), or in the CFMEU through arrangements with employers for work on properties owned by officials.
Development as a Process
The stages a development project goes through
The Development Process
Development seen as a process, is an ‘event sequence model’. These stages are usually interrelated not linear, with a number of stages getting worked on at a time.
The process requires interaction between different functions –design, construction, finance, marketing, management, public relations and so on. Therefore the process is interdisciplinary and dynamic, and requires managing a multidisciplinary team, which also makes it complex.
There are a number of approaches to the process, with different phases, stages or steps used by different authors. No approach is necessarily better.
Patsy Healey (1991) Models of the development process: A review, Journal of Property Research, 8:3, 219-238 is a standard reference (in Online, also Healey’s (1992) Institutional Model.
Cadman (First ed. 1978)
This approach divided the development process into four generic phases:
This assumes the initial investigation and acquisition of the site has been completed.
The phases are probably too broad to be very useful when analysing a specific development.
The book then added the missing detail on the content of the four phases.
Wilkinson and Reed (2008)
In their fifth edition update of Cadman’s Property Development they had eight main stages:
Design and costing
ULI Model –Miles, Berens& Weiss
Another eight-stage model of real estate development from the US Urban Land Institute:
Inception of an idea
Refinement of the idea
Completion and formal opening
Property, asset and portfolio management
Paul Zahara Version
Sometimes a developer will take out an option to purchase the site, as a way of managing uncertainty and risk on a site that needs to be rezoned.
The option is often a small amount, but the developer carries the costs associated with getting planning approvals. Planning uncertainty is the big issue in property development.
The payout on the option is usually linked to the outcome of the approval process.
Paul Zahara’s Granularity Model
Ratcliffe, Stubbs & Keeping
The five-phase process:
1. Concept and initial consideration.
2. Site appraisal and feasibility study.
3. Detailed design and evaluation.
4. Contract and construction.
5. Marketing, management and disposal.
Each phase has several components.
Starts with the strategy for the development organisation.
Creates a detailed road map for development activities and requirements.
Unlike other versions this model recognises the role of marketing in the success of a development.
The text discusses each of these stages in chapter 11.
The Development Team
Participants and roles
Ratcliffe, Stubbs & Keeping
The text divides the participants into two groups, and discusses their roles in the second half of chapter 11.
Development agencies –includes development companies, financial institutions, construction contractors, public sector agencies, large landowners, other businesses that develop their own facilities (e.g. retail, logistics).
Development team –developer, project manager, construction manager, architect, engineers, quantity surveyor, builder, real estate agent, valuer, solicitor, other specialists.
The Development Team
The roles of all these participants have to be well understood. The developer will need a team with:
Project manager, or director plus PMs on a large project;
Architect and/or design manager;
Urban planner or planning consultant;
Engineers –structural, geotechnical, environmental, M&E and other building services;
Cost consultant or quantity surveyor;
Valuer and financial analysts;
Marketing, sales and leasing agent/s;
Other consultants –OH&S, traffic, landscaping, interior design, facilities manager.
Planning and zoning
Planning and Uncertainty
“complex planning issues and delays occur at each stage in the process … Industry participants argue these factors lengthen the time to negotiate development approvals and create uncertainty about its eventual success”:
A lack of coordination between the various agencies involved, including local councils, utility and other infrastructure providers, state planning and environmental departments and federal environmental laws, all of which can change during the development;
Negotiation of infrastructure requirements, and delays in governments or utility providers installing infrastructure;
Insufficient council resources to assess zoning and development applications;
Limited scope for automatic approval of complying building applications;
Local opposition to urban expansion and high-density developments” (p. 13).
Selected greenfield regions are Kellyville (Sydney), Wollert (Melbourne), Redbank Plains /Springfield (Brisbane), Wellard (Perth); selected infill regions are Mascot (Sydney), Brunswick (Melbourne), Indooroopilly (Brisbane) and East Perth (Perth).
Assumes three bedroom house. (c) Assumes a two bedroom apartment in a multistorey block of 50 apartments.
Excludes GST on final sale price; net GST paid during development is zero as GST payments are remitted.
Includes stamp duty paid by developers, but excludes stamp duty paid by final buyers.
Calculated as gross profit divided by final sale price; gross profit estimates are calculated as the sale price minus total development costs and GST paid on final purchase price.
(Hsieh et al. 2012, p.17)
Property Council of Australia audit of local government financial statements for 2015-16 found Sydney councils sitting on over $1 billion in unspent infrastructure funds.
$1,091,078,000 in unspent funds across 27 councils
The amount of unspent funds increased by $115 million over the past year, a rise of 11.7 per cent
$594,527,000 was collected in 2015-16, but only $510,052,000 was spent
$30,084,000 was earned in interest over 2015/16
Zoning Effect on House Prices
Murray and Frijters (2015) report that the rezoning of 13 000 hectares in south-east Queensland from rural to residential between 2008 and 2010 raised land values by $710 million. Most of the uplift,56%, went to 100 connected land owners.
Chong (2015) lists large profits being made on former industrial sites that have been rezoned for residential development in Sydney. For example, the Goodman group made profits of $400 million to $600 million; the Dexus Property group expected profits of $90 million. A 6.9 hectare site near Erskineville, purchased for $16 million was sold for $350 million after rezoning. Two sites in Rosebery initially valued at $96 million were sold for $190 million. Consolidating nine houses in St Leonards, valued at up to $18 million, in a site for 200 apartments, raised the land value to $55 million.
Kulishet al. (2011, p 30) cite estimates that the inclusion of agricultural land with the urban growth boundary of Melbourne raises its value from below $35 000 a hectare to above $300 000 a hectare. They also describe (fn23) how the relaxation of zoning restrictions on property in St Leonards in Sydney raised the land value from $3 million to $14 million.
According to Moran (2005, p 26), ‘Soon after the [Melbourne’s] Urban Growth Boundary was introduced, land brought inside it, say, around Whittlesea, was selling at some $600,000 per hectare where previously before the Boundary de facto rezoned it as housing it cost $150,000–200,000 per hectare’.
Inner West Council (2016, p 27) report that rezoning a 1 000 square metre block of land in Sydney’s inner west from industrial to eight-storey apartments changed the land value from $2 million to $10.7 million.
Planning and Approvals
• The first legislative framework for planning in NSW was introduced in 1945 as
amendments to the Local Government Act 1919. The EP&A Act was introduced in 1979, and frequently amended since.
The legislation and practice is complex, fragmented, legalistic and driven by multiple pieces of legislation that govern planning outcomes in addition to the EP&AA.
• Getting a development proposal approved is often a negotiation about:
Physical infrastructure -transport, utilities, storm water etc.
Social infrastructure –libraries, child care, seniors, schools.
Site remediation or bush regeneration.
Public access or space, like parks and playgrounds, or shared public-private areas like plazas and promenades.
Essential worker accommodation (fire, police, health).
Low cost/affordable housing and/or diversity of households.
Shadowing and building size and shape.
Traffic and parking.
Fire hazards and water catchments.
Sustainability –AGBR or other ratings, transport plans to reduce car use, rainwater harvesting, solar shading etc.
Points to Consider
It’s a risky business, so successes and failures must balance out (e.g. a 2-1-2 or 2-2-1 strategy). Some developments fail or have low returns over the cycle.
Seen as a process, development becomes a series of stages with a different set of problems to be solved at each point along the way.
Managing a multidisciplinary development team is a challenge, and is often done by a generalist (the conductor) rather than a specialist (playing their instrument in the orchestra).
The regulatory framework imposes large direct and indirect costs, and involves a lot of time and effort to navigate. Planning disputes can be costly.
Often the key to development profits is in the outcome of the planning and approvals process. Outside the ACT, rezoning in Australia is very profitable.