Podcast: Strata’s next big challenge – ageing blocks

This week’s podcast is given over to one topic – but it’s a fascinating one: What are we going to do about Australia’s older apartment blocks?

Sure, there’s been a lot of attention given to the blocks currently under construction or recently completed, with our special guest this week, NSW Building Commissioner David Chandler shaking up the whole industry by demanding work is up to standard or, effectively, the apartments can’t be sold.

He has a few horror stories to tell about buildings that seem to be undertaking major reconstruction but on the ground it’s strictly amateur hour stuff.

And, in a considered personal response to a question asked at the Owners Corporation Network seminar last November, which is definitely not an official state government position, he is worried about the 50,000 unit blocks over 25 years old in NSW.

The problem is that for many, repair and maintenance issues over the years have led to patchworks of surface repairs while the infrastructures of the blocks have deteriorated.

The nightmare scenario – admittedly one that’s extreme – is the Miami Beach apartment block collapse back in June last year in which 97 people died. There, the condo board (strata committee) was quibbling about the expense of fixing serious structural problems

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So what’s the answer when even collective sales to developers to knock down and rebuild might not be an acceptable solution for home owners?

Although quick to confirm this is only his personal view of the situation, David Chandler outlines the extent of the problem and explores one potential solution.  

If you enjoyed listening to this podcast (or reading the transcript), please share it with your friends using the social media buttons on this page.

TRANSCRIPT IN FULL

Jimmy  00:00

I caught up with Building Commissioner, David Chandler, the other day.

Sue  00:05

Fantastic!

Jimmy  00:06

And as usual, he has a lot to say about the state of apartment blocks in New South Wales. But, his focus is changing a little bit to older apartments, so we had a long chat about that and he’s got a lot to say, so I think we’d better just get on with things. I’m Jimmy Thomson, I wrote the Flat Chat column for the Australian Financial Review.

Sue  00:27

And I’m Sue Williams and I write about property for Domain.

Jimmy  00:30

And this is the Flat Chat Wrap.

Anybody who’s been reading Flat Chat, or listening to this podcast for the past year or so, will know that David Chandler, the Building Commissioner for New South Wales, has been shaking up the new apartment developers, dropping in on sites and near-completed buildings, and forcing them to fix things, or face the prospect of not getting occupancy certificates. But late last year, at a conference organised by the Owners Corporation Network (OCN), someone asked him what he was planning to do about older buildings. So, I contacted David and asked him the same question, now that he’s had a chance to consider it. First of all, he wanted to outline the extent of the problem and I have to warn you, that the audio at the beginning of this recording is a bit rough, because of the circumstances under which we recorded it. But it gets better; a lot better, pretty quickly, so hang in there. Here’s David Chandler.

David Chandler  01:39

It was a great question and it’s time to start fleshing out what’s the scope of the conversation, because we can now see an increasing number of buildings that are over 25 years of age, and that number is growing and so while we’re adding stock, we’re also growing the older stuff. While it’s okay to say that nearly 40% of strata apartment buildings were completed in the six years prior to the survey conducted by us last year, that still means that 60% were constructed prior to that, and we’re starting to now put some numbers on the number of schemes. There’s nearly 50,000 over 25 years old. It was those concerns that people at that OCN meeting, were starting to become exercised about.

Jimmy  02:23

David then went on to say that a lot of the maintenance of older buildings has been carried out without any oversight or enforcement of building standards.

David Chandler  02:34

Until recently; until the Design and Building Practitioners Act, quite significant works on strata buildings were conducted without any regulatory oversight at all. It was only with the introduction of the Design and Building Practitioners Act that if works involved key building elements, then in fact, they are now required to have declared designs, which means those designs then have to be loaded-up onto the e-planning portal, and then can be subject to the oversight of the regulator. So, up until that requirement under the DBP Act, these people were really off the regulator’s landscape.

For example, you could have had a strata corporation that went to NCAT over a dispute amongst the owners to repair defects in a building (or to get a developer to come back and fix it), and then there may have been an NCAT judgement that said “yeah, do that,” right? Well, that never ever became formally visible, on any regulator’s landscape. So, I’ve been increasingly seeing significant works being undertaken on occupied strata buildings, and my concern with that is that those works typically take the building back to a quasi -construction state, and well away from a status that would be considered to be equal to an occupation certificate state. In that context, they’re also, mostly occupied, so we’re having buildings that are accepting significant works during their lifetime, where those works have not been regulated, nor made to comply with the Building Code of Australia.

A couple that I went into (and I’m talking about $2 million to $5 million projects, where there may have been 20 or 30 constructors on the site), the building was fully scaffolded, around the entire… There were people wandering through the building, doing works at almost every level, on one of them that I’ve been to, and all of the fire systems had been compromised, in different ways. So, the fire stairs, had door chocks in them, fire doors halfway down; corridors were chocked open.

There were piles of builder’s rubbish in the basement, and in one of the buildings I went into, they were replacing the balcony pavers and membranes, and there was one room dedicated to a tiler, to simply cut up tiles and when we went in there with Safe Work, he was sitting on the floor, in a room full of silicon dust, without any mask, or anything. So, I have described the remediation sector as potentially being a bit of a wild west, because you end up with players in it that are pretty competent, but you end up with a large number of players that ranged from a hubby, all the way through to someone who’s competent.

Because the work’s not regulated, or hasn’t been regulated until recently, it hasn’t filled its need to embrace things like the Building Code of Australia. As you know, most Owners Corporations want to nickel-and-dime whatever they get done anyway, because they want to spend as little as possible to fix the problem. So, what we’re now looking at is these over-25-year buildings, that have probably had several ‘sorties’ at them by various owner’s committees, just trying to deal with the issue of the day; still mounting up backlog maintenance, and basically just trying to minimise, whatever they spend on, whatever they have to fix.

Jimmy  06:05

See, that’s quite interesting, what he’s saying about the fixes that have been done to older buildings; like, as he said, anybody from a professional building engineer or builder, to dial-a-hubby, has come in and fixed some of the problems in older buildings. Have you seen much evidence of that, as you’ve gone around?

Sue  06:27

Absolutely, and I think it’s really hard, because some buildings, that perhaps are not particularly well-run, or maybe, don’t have much money in their sinking funds, tend to go for the much cheaper options. I heard about a building recently, where some of the owners have refused to allow some of the workmen into their apartments, because they have no confidence in them; they don’t think they kind of have a high-enough calibre of skills base, so it can be really difficult…

You know, a strata committee is trying to save a bit of money, but at the same time, some people might think “I just want to get my building patched up and I’m going to move on in a couple of years, so it doesn’t really concern me, whether it’s going to last for another 10 years, or 15 or 20.” So yeah, it never really occurred to me before, but that must be a huge problem.

Jimmy  07:14

Yeah. I mean, when you consider that David’s become well-known for dropping in on building sites and saying “you’re not doing that properly; you haven’t done this properly… I’m not giving you an occupation certificate.” I mean, as he said there, there are buildings that have been repaired; ageing buildings, that wouldn’t get an occupation certificate now, if they were starting from scratch. So, people are living in buildings that are (in some cases; in extreme cases), not fit for habitation.

Sue  07:46

Wow! I mean, that sounds like it would be a huge task. His remit I think, is for new buildings, isn’t it? It would be great if he was directed to look at older buildings, as well.

Jimmy  07:58

Yes. Anyway, I asked him how he saw this being fixed, in the future.

David Chandler  08:03

The older buildings are nearing; some are nearing the end of their functional lives. And that’s true, unless they receive a significant investment in their future… Some may be beyond that investment. So typically, these buildings have pressing accumulated maintenance backlog; have orders to upgrade fire systems, plus key building elements that need replacing, such as lifts and wiring, etc. We’ve got a cohort of buildings that are sort of facing into that you’ve got to fix these things, or this building’s gonna progressively become dysfunctional.

Jimmy  08:42

It struck me then, that this was what the government’s renewal and replacement policy was supposed to do; where buildings could get a 75% vote to decide to sell the whole building to developers, or sell off bits of the building, to pay for repairs. I asked David if it was being widely used, if at all.

David Chandler  09:09

What I can say to you is that Owners Corporations, first of all, don’t often have very sophisticated members, and so, there’s normally quite a lot of disagreement amongst owners, about what needs to be done and then once they settle on what needs to be done, how it should be done. So, the subtleties of legislation in that context (unless people want to take it to NCAT as a dispute), typically don’t get exercised.

I think most of it out there, Jimmy, is being done informally, and not necessarily considerate of the available legislation around it, albeit that the legislature could be somewhat wanting, in the fact that when it was originally developed, it wasn’t anticipating dealing with aged buildings, but we’re now facing into a very large cohort of aged buildings that have got systems that are 20, 30, 50 years old.

They’ve typically got fire orders, because they don’t comply with the current fire requirements and often, those buildings development potential is much greater than the development potential of the day they were built. If you just follow the edge of the Pacific Highway, along Lane Cove; think of the years and years that Lane Cove Council fought anything more than six or eight storeys along the ridge line, and now you’re seeing 20, 30, 40 stories along the ridge line… You’ve got buildings that were four to six storeys, that were built 30-40 years ago (some that were only built 20 years ago), but where the redevelopment potential is huge, compared to what is currently on the site.

For developers of the day, they were hard-won consents. They were really pressing the envelope in terms of, you know “this is a concession; you’ll never, ever, get that height again,” and they now look up the road and go “well, yeah,” because you can have three times that height now. So, you’ve got a bunch of buildings that are not only aged, but the potential redevelopment of their site as a knockdown/ rebuild is quite significant. Whether some of them have got the capacity to entertain additional build-on-top of the existing building Jimmy, I don’t know; that’s a structural issue… I would say that if you had a 70s or 80s building, and someone was thinking of sticking another three or four storeys on top of it, you’d have to seriously question whether it had the structural adequacy to take that.

Jimmy  11:32

Okay, so I asked him, what do you do about blocks that are near their end-of-days… The maintenance bills are rising, or deterioration is being ignored,  but there’s no appetite for selling out, or embarking on a major renewal project. There are some buildings that have been well-maintained, and all they need is a bit more maintenance and there are other buildings that are basically on the verge of falling down, and there are lots of buildings in between… Can you imagine a scenario where there was an element of, let’s call it carrot-and-stick; a compulsion and reward, so that if a building was deemed to be in bad enough condition, a government agency could come in and say “look, either you let us help you to fix it, or we’re just going to put a compulsory purchase order on it.”

David Chandler  12:27

I don’t ever imagine a day where government’s would have an appetite to do that and I think you would see (and there’s a couple of buildings at the moment, that are coming to end-of-days)… Government’s are very reticent; would be totally reticent, to come in and become an acquirer of buildings. You just think about what they did with the Sirius building. That was a building they own and basically, they had to empty; basically take possession of it back from a social housing portfolio and put it on the private market.

You can see that government’s appetite to do that; it doesn’t happen very often and it’s a bit like the banks…The banks don’t really want to put Owners Corporations into receivership, either, because they know that it’s not a good look, if you’ve actually got to push reluctant residents out of a building and into the street.  I think these things are going to have to evolve from within the strata and I think  the reality is, that the conversation that I was trying to at least start, was to say, there’s a bunch of buildings that are going to have to phase into “what next?” That’s going to be an unavoidable problem for them to say “what next?”

What next could mean just simply, a complete refurbishment of the building for it to have another 15 to 20 years of life, or it could mean redevelopment. If you are looking at a building that had 40 apartments in it, you could conceivably agree these days, that if they had 75 square metres of two bedrooms, one and a half bathrooms, five square metre balcony and a single car space, that would be typical of those buildings, Jimmy; I’m watching prices going at the moment.

That means those apartments would, on average, be worth about $650,000 each (as a single sale apartment in today’s market); roughly $8.5000 a square metre. It’s important to sort of realise, that there’s not much new stock coming on the market, that’s below $8,000 per square metre, retail. If you said “well, the average LVR on those buildings might be 20% equity, 80% debt; that means that they’re sitting on roughly, $520,000 debt, for each of those apartments. Now, that’s probably more than they are, but nominally, the total value of the building’s about $26 million, and I suggested that if they were to do a total makeover, that would probably justify about $200,000 per apartment, to contemporize the building.

The horrible confrontation in $200,000, is that you’ve probably got to spend $125,000 on the common property, and about $75,000 on the apartment, so there’s the next big issue… “Why should I spend money on the common property; why shouldn’t I spend all the money on my apartment?” So, we get into this fear and greed type situation of “it’s my right to have all of the upside,” as opposed to “I’m frightened that if we do nothing, we’ll lose and have more downside, than upside.”  People only do things out of fear, or greed; very few people do things out of benevolence, so the driver; the reality here is going to be greed.

If for example, you could spend that sort of money and redevelop those apartments, and you spent that $250,000, or that $200,000 per apartment, you could conceivably imagine that after refurbishment, a $650,000 apartment, could be worth $950,000, if you spent $200,000, with $125,000 on the common property and $75,000 on the apartment. Now, few owners would be prepared to go on that journey, because there’s no realisable upside for them, in that. What those owners then are potentially going to have to face up to, is that if they were to sell in one line, they might be able to get $100,000 premium, per apartment, to sell the entire lots in one line…They all walk away with $650,000, plus $100,000, for agreeing to sell in one line. The challenge that they then have is “well, where do I go with $750,000, to replace what I want, where I want it?”

Jimmy  13:22

The reality would be, a very similar apartment, in the same area; if they were available.

David Chandler  16:52

Correct, but it certainly wouldn’t be a refurbished apartment, in the same area. It’d be just a similar level of dilapidation, in that same area; if you could get it. Or, you take that money and move, well out to the edge of the city, and start to look at some of the newer stock, that you could probably acquire, for that sort of a price. But, that would be unattractive, because of the social dislocation that would cause, for those sorts of people.

But, it is a reality that the owners of those apartments will say “well, if you think I should only get $100,000 apartment at premium, for a collective sale; why should a subsequent developer come along and pick up $200,000 in apartment for a redevelopment?” You have to explain to them that, they’ve got to borrow a fairly significant amount of money to do this and then they’ve got to take the risk to do it, by getting a new development consent and then they’ve got to navigate getting a builder to do it and getting it completed and selling it, and that you’ve got to do a lot of work and take a lot of risk, to reach that next level of value release.

Most owners are locked into a view “well, not withstanding all of that, I’m entitled to more money, or a collective sale than $100,000.” The bottom line is, that doesn’t stack up. Potentially, some of these buildings are going to have to linger on, until they become uninhabitable by a fire order, or some other form of order that says that this building is no longer habitable.

Jimmy  18:24

I guess that’s what I was meaning by the carrot-and-stick; that basically, to say to the the Owners Corporation, by an objective view “your building is on the brink of becoming uninhabitable, and we can make that happen, but, if you go down this road (and we will assist and guide you down that road), then you can get something out of it.”

David Chandler  18:50

So then, you run into the challenges of the lack of sophistication in local government and the fact that local government doesn’t have the appetite to tell people that they’ve got to vacate their building and do substantial works to it, before they can re-inhabit. You know, we’re seeing that, even with the serious defects that we’re finding, Jimmy, in today’s buildings; even if there’s a building that’s got sufficiently serious issues, there’s still not a council around, that’s got the appetite to say “everybody out,” because when you say “everybody out,” you end up wearing it around your neck, and someone saying “well, you made that ‘everybody out’ call… What are you doing now, to make sure I’m housed?”

Jimmy  19:30

It sounds like there maybe needs to be a separate agency; somewhere between planning and customer service, that is totally dedicated to urban renewal, because the problem is so complex. I know that the answer to having too many agencies may not be to add another agency to the mix, but it sounds like there needs to be somebody setting a bubble.

David Chandler  19:56

You could take a Landcom and say “well, Landcom was really at its best when it was doing innovative stuff, at the urban edge,” but what if Landcom now was repurposed, to actually work with owners of ageing buildings, to actually repurpose them. Now, Landcom have got form in that space, because they’ve successfully worked their way across repurposing a whole range of the social housing estate, for housing; they’ve actually got form, at facilitating that.

I think your question is a good one. Do we need another agency? I suspect not. But, could an entity like Landcom that… You know, when you think about it, Jimmy; look what Landcom’s done over the last 30 years…They did all of the infrastructure work at the urban edge; to create new urban lots at the urban edge. They tried to bring some form of best practice to that, so that set the benchmark, such that other developers started to raise their game, and then you ended up with a pretty good bunch of urban edge developers, doing pretty good urban subdivision.

So then, they started to put pressure on the government, saying “you don’t need Landcom in that space, competing with us, because we now do that.” Well, Landcom then moved on, and did Victoria Park and don’t forget, that was the old defence site; that was the ammunition site. At the time, everybody said “oh, Landcom’s mad; they’ve paid too much for that site.” Landcom was sort of benefited at the time, with almost a bit like section 3a powers, where they could become a quasi-their-own-consent authority.

So Landcom successfully (in collaboration with the City of Sydney), did the master plan for Victoria Park and created the yield that was subsequently on that site, and created a truckload of money as a result of it, for government. It wasn’t too long after that, that a number of the bigger developers (Stockland and Mirvac and others), came along and said “oh, now we can do that; so we’ve now got balance sheets…we don’t need Landcom in that space.” They pushed Landcom off to another place and over the last 10 or 15 years, Landcom have made a good fist of repurposing public housing estates. They’ve managed to do that in a way where they’ve retained the presence of the social housing component, but they’ve also created uplift value, that allowed the whole re -imagination of the precint. I think an entity like Landcom, could well be that sort of entity, rather than another government department.

Jimmy  22:37

That makes perfect sense. Sue, that’s a pretty strong pitch for Landcom. I was asking if there would be another agency formed to fix older buildings… David suggested Landcom could come in and start doing that. What do you think? Is that possible? Can you see that happening?

Sue  22:59

I think that’s an amazing idea, really. I mean, it really shows a lot of lateral thinking, I suppose, because many of us think “well, what could happen? You’d need a completely new bureaucracy,” but actually, Landcom… It does have all that expertise; it’s got many years of experience. It’s got some really great talent there.

Jimmy  23:17

And powers; as he mentioned, they virtually had their own set of powers. Can you imagine, let’s say, a couple of older buildings; they’re both deteriorating at the same rate. He’s gone in (or Landcom have gone in, or Fair Trading inspectors have gone in), and said “basically, this building is getting to the point where it’s no longer going to be fit for habitation; we are telling you to move out… We are telling you to just sell up, or allow this project to go ahead.” And then, a new building (which probably houses more people); better finishes, better built… I think you have to, at some point, compel people to do things that they should be doing, but they don’t want to do.

Sue  24:14

I mean, I can see all the newspaper headlines immediately, about people being forced to move from their long beloved home (that they’ve been in for the last 40 years and they’re being turfed out), and they’re having to move into somewhere else. But, really, we’ve got to look after people’s health and wellbeing, and we’ve got to provide a really attractive alternative for them, really and if it is going to be a better-built place, and it’s going to be just as nice and it’s going to have more amenity, then really… You know, carrot, rather than the stick, I suppose.

Jimmy  24:45

But that was the issue when the new laws came in, about renewal and replacement… That was the headlines then; that Granny was going to be thrown on the back of a ute and driven to the tip, or whatever. But you know, as he said, a lot of strata committees are ‘unsophisticated,’ was the kind word that he used. On any given strata committee, you will have resident owners, and you will have investor owners and then within those groups, you will have people who want the building to be as good as it possibly can be, and others who don’t want to spend a single cent on the building. They could be owners, they could be resident owners, or they could be investors. You get a whole barrage of different opinions, coming to the table, so that, when difficult decisions, like “we need to sell this building, so it can be knocked down and replaced,” they tend not to get made.

Sue  25:47

But, having an outside agency come in; especially one with experience of mediation and going through all those really tricky disputes and controversies with different owners and trying to guide them all into the same resolution… I mean, that would probably really try and break the deadlock, wouldn’t it? That would be the most effective way.

Jimmy  26:07

Absolutely and I think one of the things that he pointed out was, you’ve got your apartment that’s worth, let’s say, $700,000 and the developer comes along and says “well, we want to redevelop this,” and they are going to give you maybe, $800,000 for your apartment…You’re not going to buy a brand new apartment in that area, for $800,000, because the apartments that the developer sells; because they have to take the risk with financing and planning approvals and things like that, they’re going to be looking for $900,000 or a million dollars for that apartment, that replaces effectively, the apartment that you’ve sold. You’re not going to be able to buy straight back into the same building, in most cases, which would put a lot of people off. I guess if there was a function where somebody like Landcom could come in and say “look, we will do what needs to be done, and we’ll give you first refusal, at a premium rate,” that might quell a few fears.

Sue  27:15

Yeah, absolutely and people might decide in the end, not to move back in, but at the same time, they know they’ve got the choice and so, it’s kind of different. They might decide they want to move to a tree-change, or sea-change area, but not being forced into that decision, is a great way of encouraging them to make that decision, without saying “that’s the only one that you’re going to be able to do.”

Jimmy  27:40

Look, I think this is just the beginning of the conversation. He was asked the question at the OCN conference… He’s obviously been thinking about it quite a lot, and has put out a few ideas, many of which are really, really very constructive, and all of which would be controversial.

Sue  27:59

I mean, I guess you don’t make an omelette, without breaking a few eggs. An omelette; so delicious!

Jimmy  28:06

I could go an omelette, right now. Okay, thank you very much, Sue. That was really interesting, and interesting to hear what David had to say.

Sue  28:15

Thanks, David, for coming on; that was great.

Jimmy  28:18

We’ll talk to you all again soon.

Thanks for listening to the Flat Chat Wrap podcast. You’ll find links to the stories and other references on our website, flatchat.com.au and if you haven’t already done so, you can subscribe to this podcast completely free on Apple podcasts, Google podcasts, Spotify, Stitcher, or your favourite pod-catcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you’ll get this podcast every week without even trying. Thanks again. Talk to you again next week.