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I last wrote about the prospect of lower growth rates, lower demand for higher-value properties and higher demand for lower-value properties in the residential sector in the next decade relative to the previous decade.
I also spoke about the need for more cost-conscious specification, smaller size and higher density housing for Australia’s growing population.
In this more competitive and potentially lower growth environment, how will residential property investors and developers prosper?
All of the usual rules about location, proper due diligence, efficient procurement and risk mitigation hold true, however one aspect of residential property that has often been neglected in previous decades, and which will become increasingly important in the coming decade is ‘good design’.
In this article I discuss how Charter Keck Cramer views the value of good design and why it’s important to consider when making an investment and undertaking development in the residential sector.
Let’s start with the question, what is good design?
In general terms, good design provides for outcomes that function, that feel right, that are striking, that last the test of time and are cost-effective to use and maintain.
In specific terms, good design includes high ceilings, flexible spaces, high-quality fixtures and fittings, good natural light access, cross-flow ventilation, double glazing, low-energy lighting, a high level of insulation, a high level of sound separation, non-toxic building materials and robust and low-maintenance surface materials.
There are many more aspects to good design, and too many to list here, however in summary good design is as much about what you cannot see, as it is about what you can see.
In saying this, what I also mean by good design, is that it must be accompanied with good construction in order to be effective.
So why are we not as critical about the design of our homes as we are about the design of our cars?
In cars we look for safety, fuel efficiency, reliability, acceleration, serviceability and looks – all measured through ratings and reviews that everyday consumers can access through reputable sources.
Surely we should know at least as much, if not more, about the home in which we live? While we might not know as much about the design of our homes as our cars, occupiers are becoming more sophisticated in their understanding of design and investors and developers will therefore need to respond in order to prosper in this increasingly competitive residential sector.
So, what is the value of good design for investors?In the next decade, investors will no longer be able to rely on riding the wave of strong returns that we saw in the residential sector in previous decades. Capital growth will still be available, however it will be harder to achieve.
 
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Along with selecting a location with good fundamentals, the design of residential property will be a key factor in determining return prospects for the following reasons.
1. Increasing sophistication of demand: As has been the case for many other industries, such as fashion, hospitality, cars and technology, the demand for residential property is becoming increasingly sophisticated. As the population continues to grow, the preference for inner city living persists and the affordability of detached dwellings in the inner city decreases, occupiers will be increasingly looking for apartments and townhouses that are well designed and can address their functional and lifestyle needs in a smaller footprint.
2. Large supply of homogenous product: Despite the increasing sophistication in demand, the supply of new residential property has been largely homogenous. In the off the plan (OTP) apartment sector, the homogeneity of the product is largely a result of a combination of two reasons. Firstly, the composition of demand has been roughly 70 per cent investors over the history of the market. Secondly, the relative strength of the residential property market over this period, has allowed investors to enjoy strong returns, without needing to invest in better quality product. A consequence of this has been developers have not had the incentive to supply better quality product and they have therefore, in the majority, followed a similar formula to deliver investor-grade product project after project.
3. Growing awareness of maintenance and running costs: Investors are becoming more aware of the higher maintenance costs associated with poorly designed residential property. For example, delaminating cupboard doors, replacement of cheap fittings and fixtures, faulty appliances and repair of building façades are common and expensive maintenance items in poorly designed apartment buildings that can be avoided if an investment in good design is made from the outset. Similarly, occupiers are becoming more aware of the higher costs of running poorly design apartments.
For example, an instantaneous electrical hot water system is cheaper to install than a gas hot water system, however is significantly more expensive to run. Another common example is poorly insulated walls which result in higher heating costs during winter. Logically, as awareness of these issues grows, occupiers will be prepared to pay higher rents for residential property with lower running costs relative to those with higher running costs. This will particularly be the case in a market with higher vacancy.
 
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4. Changing market dynamics: If there continues to be investor fatigue as we approach the end of the current cycle in the OTP apartment sector, could owner-occupiers comprise a higher proportion of demand in the next cycle? If this happens to be the case, consider the next question. While you might be an investor in today’s market, who will buy your property when you decide to sell? Will it be another investor or an owner-occupier?
Keep in mind that there are fewer incentives for investors to buy established apartments and indeed most foreign investors are prohibited from doing so. For these reasons, owning a property that appeals to owner occupiers is a sound approach, particularly in the current climate.As a consequence of these four trends, we expect to see lower vacancy rates, higher rents, better capital growth and, therefore, better returns, for well- designed residential property relative to lesser designed residential property.
Accordingly, this is why we think there is value in good design for investors in the residential sector. And, what is the value of good design for developers? In a market where investors are increasingly seeing the value in good design, and where owner-occupiers are likely to comprise a higher proportion of demand than they have previously, we think it will make sense for developers to supply well-designed product to the market for the following reasons
1. Higher prices and/or faster sales: Selecting the right design team that can deliver good design which is differentiated and caters to the needs of occupiers will benefit developers through either higher pricing or faster sales when compared to homogenous product. These benefits justify the additional investment in the right design team and the right design process upfront. More than just higher prices and/or faster sales, and particularly in the current OTP apartment market, where there are concerns about oversupply and fatigue in investor demand, good design can in fact be the difference between a project succeeding or failing, and there are many recent examples of this.
2. Better planning outcomes: Councils and the broader public are becoming more design literate, and as a result, the quality of design is increasingly an important factor in the planning process. When one proposes a design that is larger than the preferred site outcome set by council, the justification for increased yield shifts to the quality of design, environmentally sustainable design outcomes and the contribution the development proposal makes to the urban context. Clever design can result in improved yield by shifting the debate away from height to articulation and material design. Evidence of the increasing importance of design to councils, can be seen in the issuing of ‘conditional permits’ that require developers to retain the architect for the life of the project. The intention of these conditional permits is to mitigate the risk, which often eventuates, of the built outcome being inferior to the design specified in the original planning permit.
3. Cost-effective design solutions: There is a common misconception that good design always equates to more expensive construction costs. While this can be the case, it does not need to be. A high quality design team can deliver creative solutions throughout the design, documentation and construction phases, resulting in a building which meets the highest design standards, while also being cost effective. Poor results often arise when default and generic solutions and materials are introduced to reduce costs, rather than exploring solutions that work with the design while also being cost effective.
4. Mitigating construction risk: High quality and detailed documentation prior to tender is the best way to assess the scope of works for a project and manage the expectations and competing interests of the client and the contractor. The alternative, of going to tender with only design development or partially documented drawings, often results in either expensive variations or dilution of quality, depending on how well the construction contract is structured and drafted. More often than not, this results in the client ending up with a building that costs more than what was budgeted and/or a building of lower quality than was expected.
 
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5. Focusing the design team: A high quality outcome does not necessarily constitute good design if it is not aligned to market demand and project feasibility drivers. The design team needs to be well briefed about what to design. Then the process needs to be managed and constantly focused on designing the product to fit the specifics of the relevant market segment. With good property advice and information about the target market, along with constant management and review of the design against project feasibility and value drivers, the design process will be most efficient and the outcome optimised.
In summary, we would like to share with you a quote from Paul King, Chief Executive of the Green Building Council UK that articulates the value of good design and summarises our perspective on the matter: “A green building is simply a better quality building. All too often we get hung up on what is green and what is sustainable, but actually, if you think of it as a better quality building, a more efficient building, a better day-lit building, better ventilated, a healthier, nicer place to live, to work or to play – it’s not difficult to make the link between that and a building being worth more to people.
Across Charter’s Development Management team, we have executives qualified as architects. By the nature of Charter’s business, we also work very closely with and are exposed to the ideas and design of a variety of architects and consultants, and place a high priority on ensuring that our clients have the benefit of our experience and understand both the importance and therefore consequence of good design.
Our daily professional challenge involves the review of many development proposals for suitability, market acceptance and ultimate viability and we recognise good design as a fundamental that equally, as much as any other influence, determines the degree of success that any particular project will enjoy.
It is of course preferable to have the right design team involved from the outset, but it is never too late for review and if necessary the introduction of alternative consultants.
Scott Keck is executive chairman at <a href="https://www.charterkc.com.au/" rel="nofollow" target="_blank">Charter Keck Cramer</a>
 
 
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Property investors increasingly seeing the value in good design: Scott Keck

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Five years on from the GFC, its effects are still being felt, particularly, so far as real estate investment and development is concerned, in the critical areas of finance availability and consumer confidence.
The current swirl of economic changes include global de-leveraging, tighter finance, subdued consumerism, lower interest rates, locally a high Australian dollar and mounting concerns about the return on mining investment and global trade patterns. These all come at a challenging time for baby boomers – where do they put their money?
Whilst shares and equities are affected more by global influences, real estate is much more affected by the domestic outlook. In Australia, the fundamentals – given population growth and economic resilience – are strong, although this does not prevent cyclical excesses from time to time such as many believe is now being experienced in the <a href="?option=com_googlesearch_cse&amp;q=Melbourne%20apartment%20market" target="_blank">Melbourne apartment market</a>.
The prospects for real estate growth are determined by a property's "use", measured either by competing demand in the non-rental market such as family homes, or by rental value in the commercial sense such as with retail shops, commercial offices or industrial warehouses and factories. Therefore, the key to successful investment, looking forward, is to fully understand the tenant's business, have a view about the security of its business and understand its capacity to reliably pay rent. Is it a growth business, is it a stable business, or is it a declining business? These are the key criteria.
In relative terms it could be said that the industrial revolution of the 19th Century took us only from the candle to the lightbulb but the electronic or IT revolution of the last 30 years will be far more significant. Over the last 25 - 30 years the business community has been going through an apprenticeship getting used to the new electronic age, but we now have for the first time young executives running major corporations who have electronics and IT in their DNA. Business is now therefore on the verge of being transformed and the speed of the online revolution will be astounding. This has definite implications for real estate in all its commercial forms: retail, office and industrial.
One potential and perhaps unexpected consequence of the electronics revolution is that many companies seeking to maintain profitability by reducing costs through the induction of sophisticated IT may well do it badly and at excessive cost thus damaging their model. Another risk is that they may "de-personalise" a business model which had successfully operated through a high level of "personal client contact" – companies and their share value may be challenged.
 
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There is the serious prospect that the Australian middle class lifestyle is under pressure and that disposable income in real terms is likely to slow or even decline over the next decade. The impact of globalism, the effectiveness of outsourcing through IT into other countries with cheaper remuneration regimes, international competitiveness generally and workplace efficiencies leading to higher unemployment are, to my thinking, ominous signs.
These changes, if they are to occur, must flow through to lower growth rates in real estate, lower demand for higher value properties and higher demand for lower value properties. More cost conscious specification, smaller size, higher density and an overall lower cost approach to housing Australia's growing population will be required.
Australia needs to attract as much investment capital from overseas as possible and rather than just waiting for it to arrive like driftwood on our shores we should be making efforts to garner every possible investment dollar and flicker of interest that the increasingly wealthy overseas investors may be prepared to entertain in this country.
It is amazing that Australians generally are unaware of the socio-economic change that is occurring. The population of the "once lucky country", is firmly on track over the next decade to become the new "white trash" of the rich and more economically powerful broader Asian region headed by China and India. Can't they see it coming?
In contrast to a widely-held belief, I have a concern that the near locality of Australia to the Chinese and Indian markets is not itself a guarantee for those export markets to remain strong customers of Australia.
As both of those huge nations prosper with their growing urban economies, much of their domestic demand will be self-satisfied from within and to the extent that they still need to import, Australia must compete with other South-East Asian countries such as Korea, Thailand, Vietnam and Myanmar, as well as with South America and Africa, and all of which nations are globally very competitive with much lower cost labour regimes than in Australia.
For Australia therefore, things may not be as rosy as so many people are anticipating, and equities may be more volatile than real estate over the next decade.
Scott Keck is executive chairman at <a href="https://www.charterkc.com.au/" rel="nofollow" target="_blank">Charter Keck Cramer</a>
Images courtesy of Flickr.
 
 
 
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Online revolution is astounding but poses risks for real estate businesses: Scott Keck

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At the time of any crisis there is an almost inevitable reaction that overshoots the need for caution. Without doubt, times are now tough – and investment decisions difficult – but importantly such difficulty is not unprecedented given historic cyclicality of property markets. 
Commercial real estate markets in Australia are still highly influenced by domestic factors. The strength of fundamentals has been undermined by global events, but they remain more favourable than in almost all other developed countries with characteristics of low inflation, declining interest rates, robust population growth and modest unemployment. 
Most importantly to property markets, commercial accommodation is in shortage given the limited new supply that has been delivered since the late 2000s due to the initial round of impacts following the 2008 GFC. 
Carefully selected retail, commercial and industrial properties provide regular compounding rental growth and capital return to the combined effect of internal rates of return within the range of 8% to 12% per annum. This overall return does not anticipate strong capital growth in the short term given the constraints imposed by the prevailing economic circumstances, which highlights the need for a longer-term property investment strategy. 
Scott Keck is executive chairman at<a target="_blank" href="https://www.charterkc.com.au/"> Charter Keck Cramer</a>
For more advice on<a target="_blank" href="http://propertyobserver.com.au/ebooks/investing-in-property-in-times-of-turmoil-free-ebook"> investing in property following times of turmoil, download our free eBook.</a>
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Consider investing in select commercial real estate assets over the long term

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It was hoped by many investors that economic and investment fundamentals would settle down, stabilise, and provide an environment in which logical, sound, long-term, low-risk decisions could be made for future medium- to long-term investment.
Unfortunately, this has not been so, and economic turmoil persists typified by the American economic downturn, the European debt crisis and the consequent global share market volatility.
During this drawn-out and extended period of investment challenge, cash has been favoured, as is usually the scenario when other markets become less reliable.
This is particularly so in Australia, where the interest rates in global terms are relatively high, and the banks and capital guarantee institutions well governed and strong, in contrast to many alternatives overseas.
For this reason Australians have been saving more than ever and cash investment into Australia by overseas parties has also strengthened, one of the main causes for the Australian dollar maintaining above parity with the US for so many months. Amidst the turmoil and uncertainly, we have noticed at Charter Keck Cramer that beginning approximately eight months ago, there was a gradual turn to commercial property by shrewd investors, a trend that has now strengthened significantly.
So strong is this return in favour of property that our services to provide due diligence to prospective purchasers is in greater demand than in any period for many years, as I have noted in the forthcoming edition of The Asian Executive. Acting for both local and overseas investors, the focus is on the Australian east coast, Sydney and especially Melbourne.
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<ol>
<li>Australia, especially the east coast, and particularly Melbourne, is assured of sustained long-term population growth.  This foreshadows excellent economic prospects, as strong population growth is the energy and primary growth factor of an expanding economy, and in a society such as Australia, creates strong demand for real estate in all classes.</li>
<li>Over the past four years as a result of the GFC, the Australian markets, which usually depend on “speculative” accommodation, built without commitment, have been inactive.  Consequently the vacancy rates in all property classes – not just residential but also retail, commercial and industrial – are very low, as a result of which rental values are likely to increase dramatically over the next six to seven years, enhancing yield returns and capital growth. 
</li>
<li>Melbourne is the fastest-growing city in Australia. 
</li>
<li>Australia has an outstanding geo-political location, in close proximity to the expanding economies of India and China. 
</li>
<li>The Australian population and economy are relatively small, nimble and quick to respond in a proactive fashion to global challenges. 
</li>
<li>Australia’s sovereign risk is extremely low to the point of being non-existent. 
</li>
<li>Australian politics is not polarised, but rather broadly balanced, and between both political parties, responsive to the private sector. 
</li>
<li>Australia has a high and enviable level of corporate governance, particularly within its banking industry.  The four major banks in Australia are well governed, have strong balance sheets, and remain supportive of the property sector. 
</li>
<li>In Melbourne and Sydney, Australia’s two leading capitals, the private sector is responsible for 93% of all building construction and development.  Accordingly, as population growth creates demand, the opportunities for the private sector are excellent. 
</li>
<li>The Australian property markets are well educated, mature and in general terms, managed by world-class executives operating at levels of best practice. 
</li>
<li>Australia’s long-term economic stability is well underwritten by its natural resources and export markets to the growing economies of India and China. 
</li>
<li>The Australian economy is generally well managed. 
</li>
<li>Over recent years there has been a dramatic increase in interest by Asian and European investors in Australian property, and this is likely to continue.  Asian investors are keen to shift money out of their own countries, and European investors grow more fearful of an EU economic slowdown.  By comparison, Australia offers low sovereign risk, a transparent market, ease of transaction, and strong growth prospects.</li>
</ol>
Scott Keck is executive chairman of <a href="https://www.charterkc.com.au/" target="_blank">Charter Keck Cramer</a>
 
 
 
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Scott Keck

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