Wednesday, April 17, 2019

Housing: where to now?

What would you rather have right now? An approved 150 unit inner city development site? Or an approved 150 lot greenfield land subdivision anywhere within the urban footprint? The answer says much about future challenges for housing development in Australia.

The rapid deceleration of the apartment market in Australia should come as no surprise. The speculative frenzy which saw investors commit to off the plan purchases in such volumes drove an unprecedented wave of apartment development in Australia’s capital cities. More than 80% of most of these projects were sold to investors, not owner occupiers. Many of those domestic investors – driven by FOMO – were leveraged often at 90% or more of the purchase price. Plus there were foreign buyers lining up and in no short supply. Competition was intense and prices rose rapidly. Despite warnings, buyers continued to rush the gates, egged on by boosters, marketers and some who just plain lied.

One of those lies – in my opinion at least – was that Australia’s “love affair” with the detached suburban home was over. The future, we were confidently assured, was one where the inner city apartment ‘lifestyle’ would be the preferred housing option, for a range of demographic, work and lifestyle reasons.

One such headline was from the ABC: “Apartment living is now a fact of Australian life. Meet the families going up, not out” (ABC News, August 2018). It led with a ‘typical’ young Sydney family renting an apartment in Sydney’s Neutral Bay. (The irony of a family living in Neutral Bay being labelled ‘typical’ was obviously lost on the author). Or this piece from The Melbourne Age: “The high rise of apartment living in Australia” (August 2018) which claimed: “Just as Melbourne’s laneway bars have spread to the rooftops, the city’s residents are heading skyward into apartments, leaving behind the traditional Australian dream of the quarter-acre block with a house and backyard.”

The worst examples came from real estate media channels, like this piece from Open Agent: “Why apartment living is the Australian dream” which made the outrageous claim that “Living the Australian dream is no longer a two storey house with a grand backyard. City areas generate more money for the economy than any other region in Australia. High density areas provide greater opportunities for work and lifestyle, meaning these areas also attract high-rise apartment living.” That’s right, a small apartment with views to another adjoining apartment block is the stuff of our dreams.

Manipulating the evidence was easy enough. Yes, there was growth in inner city living as urban renewal enhanced the appeal of inner urban areas and more people – especially those in the 10% to 15% of metro wide workers with jobs in the CBDs – sought to live closer to their work. A graph like this might suggest rapid growth across a long period of time.

But rarely was this growth put into context with broader metro wide growth. Here is the same inner city population data, in the context of wider metro area population growth.

When tightening credit met with rising oversupply, the crunch came. Values are falling across the board but the worst is found in the apartment market. Domestic investors have retreated and foreign investors departed. Approvals for new apartment projects are in free fall (albeit from very high highs). Some projects are being mothballed mid construction, while (according to a Financial Review report earlier this year) around a third of current approvals haven’t and won’t commence.

Prices for many new apartments – especially those designed for speculator appetites - have fallen below their contract value. The scale of the rapid rise and fall of apartment approvals is highlighted in this Macrobusiness chart:

Some developers are reportedly now offering sales commissions three times the level of a couple of years ago, along with a range of other incentives to entice buyers back into the market. Even the rental market is struggling, with apartment vacancies rising and rents falling. If it had been true that “residents are heading skyward into apartments, leaving behind the traditional Australian dream (of a detached home)” then why would this be happening? And why would most of you have answered ‘yes’ to the 150 lot subdivision over the 150 apartment project in the opening paragraph?

The problem going forward is that enough investors will have long memories of being caught with negative equity in off the plan apartment projects, and even when the finance taps are reopened, lenders may be equally cautious. Getting apartment projects out of the ground in anything like the record numbers we have seen in recent years is unlikely – meaning fewer additions to the dwelling stock from this type of product until market confidence (from investors, owner occupiers, financiers and developers) returns. This could be some years.

The “missing middle” – townhouses and duplex style projects – have been promoted as a solution and while these may have much going for them in urban planning circles, they are not popular in the detached residential neighbourhoods in which they’ve been appearing. Communities are making their hostility known to elected councillors and those same councillors who need to face the electorate at the ballot box are aligning with community opposition to “the missing middle.” This is democracy at work. Suggesting that opponents are ‘wrong’ or ‘misguided’ or that they hold ‘inappropriate views’ is nothing less than a form of ruling class elitism. (Perhaps it would be better to dispense with democracy and simply start doing what some urban planners insist is needed, despite ‘poorly informed’ community opinion?).  So for a variety of reasons, the ‘missing middle’ is unlikely to fill the supply void for housing in sufficient numbers to keep pace with projected population growth.

This leaves traditional suburban development. While much derided by some urbanists and designers, it remains the preferred form of housing for families. It’s just that many families now struggle to afford them. And now, finding land to create them has been made increasingly difficult. With the exception of Melbourne (which by accounts has responsibly adjusted its forward land supply in line with market demand), other cities have rigid growth boundaries and a range of planning and environmental overlays which will inevitably choke the supply of new suburban housing going forward. While it may remain desirable in the market, the notion of further suburban expansion in anathema to many planning schemes. It will become both scarce and (as happens with scarcity) expensive.

So what’s going to meet the housing demand for the future waves of population we are told will inhabit our cities? High rise apartments? Little appetite for some time. The missing middle? Problematic politics. Greenfield suburban housing? Good luck finding the sites.

It will be interesting to watch how this all plays out in the years ahead. Shortages of supply – if this is what we will soon face – usually lead to the same outcome. Which could see the whole cycle of policy induced market dysfunction begin all over again, until the next correction.  

Wednesday, April 3, 2019

This is no silver bullet (train)

A proposed High Speed Rail connecting Melbourne with Sydney and Brisbane is getting favourable press. But what are the hurdles and how would it compare with existing modes of intercity travel?

“We should bite the bullet and go for a high-speed rail connection not just through to Sydney but right through to Melbourne and then north to Brisbane,” Labor’s Infrastructure spokesman Anthony Albanese said earlier this year, adding: “It would be a real game changer – it is expensive, but nation-building requires vision.”

Support, in principle, seems to be impartial with the Liberals’ Cities and Urban Infrastructure Minister Alan Tudge saying “High-speed rail has to be part of the landscape in the future” - provided the states secured the corridor. 

As distinct from regional high speed rail services (eg Geelong to Melbourne or Gold Coast to Brisbane) which are intended to permit long term commutes and regional connectivity, intercity high speed rail envisages an alternative to air travel between major capitals. Its intention is to serve passenger travel and does not include freight.

The arguments in favour of the intercity HSR are typically vague at this stage, until a business case is conducted. Many of the proponents seem to think that Australia needs a HSR rail project mainly because places like China and Japan have one. The proponents will need to do better than that to justify the many tens of billions of dollars the project would involve. The hurdles are many, here are just a few:

Is there intercity road congestion that needs to be solved by high speed rail?
No. There are no signs of commuter traffic congesting the highways between the major capitals to any extent that something like High Speed Rail would be needed. Proponents will need to accurately describe the problem it is trying to solve.

Is there an alternative?
There are two. Some people drive (“it’s the journey not the destination.”) The rest who need to get from one capital to the other, fly. (There is also an existing inter-city passenger rail connection but very few people use it due to cost and time). 

Is the alternative faster or slower?
The existing alternative (flying) is quicker. Intercity flights are about one hour and thirty minutes. Services are hourly or better. HSR would take two or three hours and there may only be a few services a day in each direction. Each mode would have its own boarding and alighting procedures which would add equally to the trip time. Advances in air travel may further reduce travel times and emissions long before any HSR is built. 

But don’t we need an alternative when weather or other factors close down airports?
It would be nice to have, sure, but keep in mind a fully loaded HSR train could be equivalent to perhaps just 3 fully loaded aircraft. Europe’s Eurostar HSR for example can carry 800 passengers, or the equivalent of two and half typical passenger jets. So given the dozens of flights each day that could be affected by closed airports, you would need a very large number of HSR services at a high frequency of service to provide a viable alternative. That’s a big investment for a small number of days in a year. 

How is the alternative funded? 
Air travel is run by private companies. The airports are also privately owned and operated. The fares between major capital cities – the same destinations proposed by HSR – are very cost competitive. HSR would require not only the lines and stations and tunnels and bridges and the rolling stock and marshalling yards and signalling technology to be funded by the taxpayer, but the operating costs (ie the annual losses) would have to be massively subsidised for the trip fares to be remotely comparable to air travel. 

Will HSR bring regional benefits?
It is hard to see how, unless there are multiple stops in regional centres. In which case it’s not high speed, which defeats the purpose entirely. There are already intercity passenger rail services with multiple stops. They are hugely subsidised but still very few people use them. 

But what about China? Haven’t they recently built one?
Yes. It runs between Shanghai (population 26 million) and Beijing (population 22 million). Each city has a population roughly equal to the entire Australian population. Not only that but Chinese methods of funding, constructing and planning infrastructure could not be more different than ours. If some greenie in China miraculously found a rare frog whose only remaining habitat was on the proposed route, the greenie would be in jail. Nuff said.

But what about Japan? Or the UK?
Japan’s Shinkasen first opened in 1964. It connects some of the world’s biggest cities in one of the world’s most densely populated countries and is operated by a notoriously efficient people. Could not be more dissimilar to Australia. The UK’s HS2 project is already in strife, with allegations that MPs were misled about project costs and a budget that started at £34bn but which Treasury now thinks will be closer to £100bn. 

But isn’t the USA also building one?
They were but it’s been halted due to massive budget overruns. Announced in 2008 but now dubbed “The Train to Nowhere without a Conductor” California’s high speed rail was to connect LA (population 13 million) with San Francisco (population 4.8 million) over 1200 kilometres at an initial cost of $33 billion that was to be completed by next year (2020). The incomplete project is now estimated to cost $100 billion to complete and it can’t be finished – even if the remaining funds are found – until 2033. 

The new California Governor Gavin Newsom had to “bite the bullet” when he announced in February this year: “Let’s be real. The current project, as planned, would cost too much and respectfully take too long. There’s been too little oversight and not enough transparency. Right now, there simply isn’t a path to get from Sacramento to San Diego, let alone from San Francisco to L.A. (Los Angeles). I wish there were.”

More blunt were comments by a director of the University of Southern California’s Transportation Engineering program, James Moore who warned: “I can’t see any particular scenario in which we should continue to pour money down this rathole.” 

He went on to say: “Like most people with a technical background, I was susceptible to a gee-whiz factor. I would love it if bullet trains and maglev trains were a good idea because I love technology and want it to be useful. But this is not. Modes of transportation that are more expensive than aircraft and slower than aircraft do not compete very well with aircraft.”

California’s high speed rail had all the trappings and promises associated with the Australian proposal. The fanfare, “the vision” thing, the dedicated HSR authority – all it needed was practicality, buildability and viability. And keep in mind their distances are a fraction of what Australia’s proposal would be and our city populations are smaller.

The ambition to create better connections between our capitals deserve support. But so does financial responsibility with taxpayer dollars. The business case for a HSR providing passenger services designed to provide an alternative for air travel ought also to question how much more connectivity could be achieved with autobahn style intercity motorways engineered for high speed autonomous vehicles. When it comes to rail, its ability to cost effectively move freight (as opposed to passengers) is hard to beat, and so the opportunity to remove inter-city vehicular freight from our highways by getting on with the inland rail freight line should also come into the picture.

For me, by the time any proposed intercity HSR passenger service is ready to board, I will hopefully have clocked up many hours flying in my personal passenger drone, like George Jetson. 

Sunday, February 24, 2019

Deconstructing the Brisbane CBD

What’s it going to take to reignite the demand for Brisbane CBD offices? From an employment point of view, the answer could be surprisingly little. But first, it helps to ask what types of jobs make the CBD jobs market tick. Only around 60% of the foot traffic we see in the CBD is making its way to or from a workplace in an office building, so understanding how this 60% is different from the rest is a good starting point to understanding drivers of future demand. 

In the case of Brisbane, the most accurate record of the number of workers in the CBD is the Census. For 2016, it showed 122,486 people called the CBD their place of work. Of these, 92,118 were full time – the rest part time or otherwise classified. 

But what do they all do? The presumption is that CBD workers are in office jobs. But only some are. Of the 122,486 going to work in the CBD, there were 2,015 cleaners, 819 in food preparation, 7,019  sales workers, 3,462 working in hospitality, 3,795 managers of hospitality and retail services, 2,454 protective service workers, 1,212 health professionals, 2,103 educators, and a range of other occupations - including 16 who called themselves farmers and farm managers, 43 gardeners and 101 "skilled animal and horticultural workers." 

These types of occupations are also more likely to have high proportions of part time or casual workers. These also aren’t the types of occupations likely to leasing space in office towers. For that, we need to look to occupations like the 1,726 CEOs and GMs, the 12,286 specialist managers, the 19,472 business, HR and marketing professionals, the 6,490 design, engineering, science and transport professionals, the 7,243 information and communication professionals, the 6,782 legal professionals, the 2,778 engineering, ICT and science technicians, and the 30,441 clerical and admin workers. These are also more likely to be full time in nature. That collection of occupations gets us to around 90,000 – which is what I’d consider roughly the number of workers who occupy the various office buildings in the Brisbane CBD. 

A quick reality check is found in the Property Council’s office market report which for mid 2016 (when the Census was conducted) showed 1,880,451m2 of occupied space (that is total stock less total vacancies). Divide the occupied space by the 90,000 and you get 21 square metres per person. Allowing for empty desks in leased offices and various blocks of surplus but unlettable space, that sounds about right. (Quoted workspace ratios of below 15m2 per person are typically in fully occupied demonstration projects only and not typical of the entire market). 

The Census also tells us that 10,062 CBD workers (full and part time) were employed by the Federal Government, some 25,902 by the State and 2,681 by Local Government. State Government numbers since then have escalated significantly, helping drive demand for more office space. 

In addition to these workforce numbers, there were around 9,640 people who called the CBD ‘home’ (it’s where they live) and a further 4,556 visitors (most of who would have been in hotels or serviced apartments – not including overseas visitors who aren’t counted in the Census), plus there’s around 4,000 students. Workers, residents, visitors and students all blend together and become part of the CBB mass of people. Put the workforce, residents, overnight visitors, students all together and you get a total of 140,000 people. Add in an allowance for day trippers and international visitors (neither of which are counted in the Census) and you get to a theoretical 150,000 or 160,000 people a day. 

But if you’re in the business of filling office towers then residents, visitors and students aren’t of much interest. You need lawyers, accountants, engineers, marketing and HR professionals, designers, IT and communication professionals and of course the admin workers that support them. By how much do these occupations need to grow to support renewed demand for more office towers? 

Let’s go back to our guesstimate of 90,000 office workers occupying roughly 20m2 of office space each. If there was 10% growth in these occupations, that would mean another 9,000 jobs or potentially 180,000m2 of new demand needing to be satisfied. You could adopt a more conservative 15m2 per person (which you might find in a new tower as opposed to across all grades of space across the entire market) and that 10% growth still gives you 135,000m2 of new demand. 

This starts to sound promising. Of course, there’s still some 350,000 square metres of space in existing buildings available for lease, which will take up a proportion of any new demand from employment growth. But it does start to take the edge off the dimensions of market growth in office employment needed to see new towers rise out of the ground.

It’s been this type of CBD employment growth that explains why Melbourne has close to half a million square metres of new office space underway and why Sydney CBD has 200,000m2 underway. These markets are generating the types of jobs in the types of locations that will drive CBD office demand. So what’s needed to drive that sort of job growth in Brisbane? 

Last time Brisbane’s CBD jobs market grew quickly, it was off the back of the resources boom (generating engineering, legal, and a variety of technical jobs). When that boom ended, the wind was sucked from the Brisbane CBD’s sails. This time around, a recovering resources sector isn’t seeing as much new investment (ask Adani about how hard that is) but rather existing mines are gearing up production – which doesn’t generate as much new job growth but does generate export earnings. The tourism sector is looking good for the State, but part-time jobs in hospitality aren’t going to drive demand for CBD office space. Building new resorts and hotels will (think designers and engineers for example), but in anything other than established urban locations, new resorts and tourism infrastructure seems to meet with a lot of hostility these days (witness the Mt Coot-tha Zip Line). Banking, finance and large accounting firms are increasingly reliant on offshoring and centralization of functions in Sydney or Melbourne – so there’s not a great deal of comfort on that front. Government jobs growth has been a saviour for the CBD in recent years but after an extended period of strong employment growth, there are questions around how sustainable this will be in the long term given Queensland’s finances. Expecting a lot more growth from Government jobs in the CBD might be expecting too much.

Health and education are two of the fastest growing industries for the foreseeable future and the investigation of and delivery of new schools, hospitals, tertiary facilities and so on will no doubt generate jobs in design, construction, legal and project management (yay). The question around many of the larger health and education projects is when the start button gets pressed. Then there’s infrastructure as potentially the next driver of demand for occupations that will fuel the need for more CBD office space. But on the infrastructure front, we are challenged by a state budget which is short of money. There has been talk of tens of billions in new infrastructure investment associated with SEQ ‘city deals’ and other initiatives but much of this remains speculative until someone finds the money. 

Economist Gene Tunny from Adept Economics produced this graph recently which shows the height of the infrastructure boom (driven by resource exploration and new mines) which Queensland has come from, and where we are now relative to NSW and Victoria. It’s a sobering challenge. 

So on the plus side, once this investment kicks off, it’s not hard to see 10% growth in city employment generating enough demand to kick off some new office towers. On the flip side, the big question is when this will happen.