Episode 91 | Construction industry reforms - a call for immediate action | Rod Fehring, CEO Frasers Property Australia

Building failures, structural defects & other major issues 

In this episode, we pick the brains Rod Fehring, CEO of Frasers Property Australia & the Chair of Green Building Council of Australia. Rod has 30 years of property industry experience so is well placed to give us insights into current issues with Australia’s construction industry.

We cover a lot of ‘ground’ including:

• What needs to change in the building regulatory environment to lift standards & deliver better quality properties?

• Is the lack of consumer confidence in new apartments hitting prices hard?

• Do developers owe society anything & should they be doing more for consumer protection?

• Why do regulatory & building frameworks cater to the lowest common denominator?

• How will the building industry flip recent building issues on it’s head to regain consumer confidence?

• What are the questions to ask yourself before you buy into an apartment development?

• What’s the difference in buying of the plan if you’re an investor?

This episode could not have come at a better time.

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Work with Veronica? info@gooddeeds.com.au

Work with Chris? hello@wealthful.com.au

EPISODE TRANSCRIPT: 

Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…

This episode was recorded on 3 October, 2019.

Veronica: Your listening to the elephant in the room property podcast where the big things that never get talked about actually get talked about. I'm Veronica Morgan, real estate agent buyer's agent, cohost of Foxtel's location, location, location Australia and author of a new book "Auction Ready how to Buy Property even though you're scared shitless".

Chris: and I'm Chris Bates, financial planner, mortgage broker and together we're going to uncover who's really making the decisions when you buy a property.

Veronica: Don't forget that you can access the transcript for this episode on the website as well as download our free fool or forecast report. Which experts can you trust to get it right? Www.theelephantintheroom.com.au.

Chris: Please stick around for this week's elephant rider bootcamp and we have a cracking Dumbo the week coming up.

Chris: Before we get started, everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyers agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica: You've heard us bang on about the risks of buying brand new apartments and houses. Now for close to a hundred episodes, we've talked about negative equity, building defects, poor design and unfair contracts, lack of scarcity. The list goes on and on and it seems that a large part of the problem has been our planning controls, not just in terms of failing to protect owners from buying into buildings that start falling down, but failing to stop them being built in the first place and failing to ensure that medium and high density living is actually pleasant for its inhabitants and even the well designed and build apartments don't tend to make good investments. Developers might make a profit while many investors lose money in both real terms and via opportunity costs. All that said, we do need wall construction, not just to provide roofs over the heads of our growing population, but to keep our economy ticking over.

Veronica: In this episode, we pick the brains as someone well placed to give us insights into how the big boys see this world. Ron Ferring is a CEO of Frasers property Australia and the chair of the green building council of Australia. Rod has over 30 years of property industry experience during which he's also held senior roles within Lend Lease, master plan community, venture capital and retirement living in aged care businesses. For those of you unfamiliar with Frasers they bought at Australand land in 2014 and they'd been around like 90 years now. They're one of Australia's leading diversified property groups and is the Australian division of Singapore based Fraser's Property Limited their activities cover the development of residential land, housing and apartments, commercial retail and industrial properties, investment property ownership and management and property management. We've been say saying, we'd like to interview a developer for some time now and we've hit pay dirt. A very serious player. Indeed. Thank you so much for joining us, Rod.

Rod: Thank you. With that introduction, hopefully it'll be a civil conversation. We'll see how we go.

Chris: Thank you Rod. Um, no, I really appreciate it. We um, you know, especially Frasers I've, you know, there's some amazing developments going around like Central Park, et cetera. Um, but I think, you know, what we're seeing now is it's a bit of a challenging year right now for a lot of developers cause there's been a lot of building issues that have come out, which we don't, but we need to name. But how are you as a business kind of approaching that and how do you think that's going to potentially play out to the, to the industry more broadly?

Rod: Oh, well yeah, there is plenty of, plenty of challenges in the, uh, in the, in the sector. And a question about it. Um, that mind you're naming I mean in the, uh, flammable cladding has been an issue which has been ran for a number of years and that's, I'm having a wash through effect as, as defective cladding is effectively now has to be addressed and removed. Uh, then you've got, um, building failures in terms of structure, structural failures for a variety of reasons. And, uh, and it's a mistake I think to just throw a blanket, throw a blanket over a structural defects as a, as all of a similar cause because they have a quite a idiosyncratic and local, uh, conclusions to them. But I'm delighted with the, uh, the response that governments have taken. They've taken this, area on seriously the, um, you know, the appointment of David Chandler to oversee the, uh, the development of, uh, of responses to that, to these issues of David's got great credibility in the industry and knows his stuff.

Rod: And, uh, I think we'll, we'll approach it in a very practical way because that's what we need from the industry. A practical response. But I think it's fair to say my experience is that the, the regulatory and, um, uh, and, uh, planning frameworks tend to cater for a very low level of, or low common denominator, if you like. And unfortunately, I think, uh, there will inevitably be the need to start to tighten up, uh, the regulatory framework, um, to demand more, uh, of developers and builders alike. Uh, and put if you like the, uh, the customer at the center, uh, of, um, that off the equation to ensure that there is an assurance, uh, for them to be satisfied and assured if you like, that, uh, the product they're buying is actually, um, what's represented. Uh, and it performs over time. So, you know, you could argue that's a bit self-serving for the larger end of town. Um, but on the other downside of that is though that, uh, the supply constraints inevitably as there are a fewer potential players applies in, in the game, um, that will gone or response from the industry I think. And what you'll find is that the industry, the building industry particularly, is incredibly resilient, incredibly innovative. And as a consequence, we'll start to attract people into that sector that is a, that are capable of performing at the highest standard. And I think that's a positive longterm outcome.

Veronica: It's an interesting thing, isn't it? Because, you know, it's not just in, in building construction, but it seems to be that some governments like to lower the barrier to entry to a lot of industries. And, I mean, look, I, I've said this in real estate, you know, they've lowered the barrier to entry and in a number of ways in licensing for argument's sake, and they don't want to put a burden on industry. And that's actually words taken from one of the government representatives who said that to me. And yet if you don't burden the industry, you're going to be burning the consumer aren't you?

Rod: well, it depends on what you call a burden. And you, in your introduction, you referred to the planning system. Uh, you know, the planning system really is not at fault here. It's the building a regulatory environment, which is a part of the overall built, built form, a regulatory framework. But planning really has limited impact on the, uh, on the building component. Uh, planning tends to be about land use tends to be about amenity and the, uh, and, uh, not so much about structure. Uh, and, um, yeah, supply chain performance, et cetera, which is where the building building industry lives in its procurement prices is so, so I think, yeah, there are lots of burdens on industry, but I, don't know whether of, um, uh, we're, we're becoming, we're losing our age, but yeah. But to a certain extent, uh, all reputable builders and developers, a tight, a view of delivering, they proud of their product.

Rod: They're the, they're, uh, they don't want to be deficient in any area. Uh, and, uh, we want, uh, it's not fun. Um, in dealing with, uh, your own failures, three, four, five, six, seven, eight, nine years down the track, it's, it's not good business. Uh, and it does nothing for your brand. So, so those aspects, I think, um, the word burden. Yeah. Okay. There are compliance obligations, which sometimes you scratch your head a bit and say, well, is this really achieving the end? Yeah. But as long as we keep focused on, on the purpose or the outcome and a solution based approach, then it's not a burden. It's actually for the right reasons. And you know, the industry will come along with that sort of approach where as if it's high handed, uh, and really of no value and no one can actually define what the value is in the in the obligations imposed, then that's where we have difficulties.

Chris: So I'd love to, to Tom, you mentioned there just around, you know, years down the line, seven, eight years down the line where you still got potentially problems with the building, et cetera. And it makes sense, you know, if you, if you there to make it quick money, you've entered the industry, you're just trying to make money in the boom, um, maybe you're missing, you know, things. But if you're not around in seven years time you've made your money and you're gone, you don't care. But for businesses like phrases, you'll plan to be around for a lot longer than seven years' time. How does the fixing of defects, you know, really work? Because I think that's one of the biggest fears people have when they buy an apartment that years down the line they're going to be saying, look, Oh actually no, we're getting problems. How does it actually work with a developer and who's actually liable and how does it play out?

Rod: Look, the the truck, this sounds like a trite answer, but the, the best solution is that don't have them. Um, so it's what you do before you even hand over to a customer. Um, that really we work on a, uh, on a pre handover process, which runs around about six to 12 weeks. So that we invite that, we do our own inspections, uh, with our own teams and we have an objective, we will not even ask a customer who's pre committed, um, to, uh, come and inspect the property as a pre settlement in handover. We won't even ask them unless we're sub five defects. I heard one comment that every building has a defect, but what we're talking about here is that we're talking, um, paint discoloration and chip in the, in the, in the tile, et cetera, things of that nature. Nothing fundamental because frankly, uh, most consumers would not know, uh, if there was a structural defect, if it was presented to them in the face.

Rod: Yeah. So defects in terms of, you know, those small cosmetic items really are just don't have them, but you know, take a take a um, uh, a a good self, uh, customer centric approach towards managing, uh, the, uh, the, the lack of defects at the outset. And then when that customer goes through, bring your technical people in by all means and go through the process because the last thing we want is a dissatisfied handover process when you've handed over. Then we do another, uh, another checker and about three months later because what you see on a sort of an hour and a half, two hours sort of walkthrough is one thing. When, you're living there and you know, the things you get used to how things work. Um, the Oven's not quite performing the way it should have been or, you know, the, um, uh, we've put, um, uh, a electrical connections in the wrong place, that sort of stuff, which everyone's had those experiences.

Rod: That's why you do a three year follow are three, three months followup.

Chris: But if you like, is that legislated or is.

Rod: That not, that's customer service. But then the more important things are what's going on in the structure itself and around it. And those are the things that, things that I'm, that people get very, very fearful about. And you've seen a lot of media about that at the moment. So it's the, uh, it's the design and the oversight of the design processes. That's the, uh, the design development pace. You know, we've introduced structural engineering, uh, oversights, um, for, uh, from, from day one. So you're working through, uh, the ability of the, of the, of the design team and the construction team to understand how the structure actually works, how the hydraulics and the mechanical systems work, et cetera, et cetera, et cetera. So it's not really a change for us because it's sticking to your processes and making sure your processes are adequate, uh, and more than adequate.

Rod: Uh, overkilled if you like, to ensure that you're getting your fire sign offs when you want them. Because if you don't, it takes you time. A fire sign off is an absolutely critical thing to have. And if you, if you've not got the fundamentals in place, it can take you months, uh, to get, to come in compliance. So when you've, when you've been in this long enough, you know, that's just not something you can entertain. So it's the systemic processes that you use, ah, from the design, uh, inception process that gives that level of assurance. And that's, that's, that's something that, um, you can talk about, you can put it in a, in a document and what have you, but people usually don't understand what it means. Only, uh, in the end that nothing, nothing untoward happens. And so that's, it's, it's, it's validated by the lack of, uh, excitement if you like, which, which is a good, a good thing

Veronica: Because it is, that's an interesting thing too, because like you say, when, when a buyer walks through a property and they're picking out their faults being chip, paint, chip tile, all that sort of stuff, and they're the sort of obvious little things. And then maybe there'll be some settlement cracks and stuff like that, which, you know, it's built on ground and you know, some of these things. And then you've got different materials next to each other. So of course they're going to expand and contract differently. So there's all that sort of cosmetic stuff that most people can see and they've got no real idea of whether it's serious or not. Some of it, you know, may or may not be serious, but it's all the stuff underneath obviously how the building's been built in the first place. And I think too that, you know, you've got like Mascot Towers for argument's sake, you know, 12 years after the event, you know, God knows what's been hidden all that time.

Veronica: But we don't, most people don't know. You know, most people got absolutely no idea even how a single story house stands up, you know, let alone a multistory building. So in terms of the crisis of confidence, because let's face it, there's been so much negative media and you know, with good reason, obviously there's been serious problems, but how does a consumer hackers it, how does a buyer gain that confidence that the building, whatever building they're buying into and not even brand new, but it could be five, 10, 15, 20 years old may be is actually that's not going to happen?

Rod: Well, if it's 10, 15 year a years, that goes with the territory buying established and there are no warranties and assurances associated with that unless the renovation work has been recently done and what have you and you still get billed as warranty, uh, that runs, uh, for that. Um, but we deal in new. Yeah. So, so, uh, the first

Veronica: But your buildings, um, always knew, you know what I mean? Like someone buys a building, the Frasers built. Sure. Next year it's not new when they go to sell it. It's not new, but it's still there. They're, you know, their responsibility, their problems.

Rod: That comes back to the same things. I mean that the structural integrity of the building is the structural integrity of the building. And so, uh, I think what you'll see and one of the things that we we're looking at is how do you actually explain in a, in a way that going down the sort of, uh, Apple iTunes agreement sort of version of, you know, 500 pages of whatever it is and who'd know, um, how will we can explain the processes that are employed to enable, uh, you to be able to be confident that the building is designed and built as as designed. Yeah. And that that design has integrity, et cetera, et cetera. And when you're doing multiple buildings in a, in a, in a precinct, um, like Discovery Point down at Wolli Creek, that was 2003 to 2019 16 years. Um, Central Park for instance, SAP started in 2007 finished, uh, just about finished now.

Rod: So 12 years. Typically our projects are 10, 15 years long. So when you're in involved in that style of development activity and that scale, you've got to get it right from day one, because you know you're going to be there 10 years at when warranties and what have you at, yes. Two or three generations of buyers have moved through. If, if you've not got that right, um, you're going to have very real difficulties finishing the project, um, because your reputation will have gone down the tubes. But, but that's all right for us to say in multi, um, multi building precincts that going back to your, uh, to your, um, uh, analogy about, um, single dwellings again, you know, the, the, the processes and the design processes associated with that, with single dwellings are, um, in an in world terms as, as up there with the best.

Rod: I mean, we're not, we're not, we're not, Australia does not operate at a low common denominator when it comes to our ability to be able to deliver product, um, and deliver product at a, uh, at a very affordable price. Uh, and um, with, with structural integrity, yes, there are exceptions and the, the point I want it to make is yes, you can talk to mascot or Opal tower and uh, projects like that. The danger is that everything gets thrown into that basket. And when you consider the number of transactions, the number of buildings being delivered, 135, I'm sorry, um, um, 235, 236,000 dwellings constructed per annum. Uh, I don't think they should all be treated in the same way that the, the performance of the industry at those volumes is actually quite credible in world terms.

Chris: I guess it's hard now because there's a bit of a PR problem though, that know the papers latch onto it. Right. And you've got it, you know, as soon as, as these things would never report it on like the one in Erskineville or Roseberry assumption, it was hidden. It wasn't actually front page news. But as soon as there's a few of them that just keep on coming out and on the unfortunately, then you get the most as society will start believing that. So how is the building industry going to, on a flip that on its head and correct confidence again, because you know, there's going to be a more of a demand that people aren't going to be able to afford, you know, houses they're gonna want apartments or townhouses or house and land packages. And how is, how is the industry going to attack this problem? And on a really flip it on its head and get confidence back?

Rod: You know, like, I think it sounds a bit boring, but we just got to actually, um, uh, miss T to be better able to explain, um, you know, the systemic approach you'd take towards the delivery of the product. Uh, and you've got a regulated insurance and warranty, um, um, systems behind you to give you protection.

Chris: She was really have insurance cause, you know, there's a lot of misconception out there with, you know, I'd have an the papers, you know, buildings over a certain amount of levels. Um, you pretty much don't have any kind of builder's insurance?

Rod: No. The builders warranty is there. I mean the, the, the warranty is there. Usually the relay, there are two relationships. So there is the consumer. Um, and then there is the developer and the developer has a relationship with the builder and the consumer has a relationship with the builder and the developer. Invariably what you find in these circumstances is that the, um, the first course recourse comes to the largest balance sheet. Uh, and so I think, I think a lot of factors start to come in who, who is, who are you actually buying from?

Rod: What's their track record? Uh, are they a Phoenix company that's been assembled to deliver the project and we will disappear. And there's been a bit of that, uh, around to, uh, um, what are they, what's their track record been, what other projects have they done, et cetera, et cetera. It's a bit like, you know, if you're going to develop a brand in this space, a bit like a car. I mean, if you look at VW now, VW or had some difficulties with, um, with what they've been caught doing, how do you recover from that difficult? Um, but you've simply got to set a standard and make sure that over a period of time you consistently consistently deliver a good product. You're able to explain why that product's good and you're able to explain the processes you use to get there and you're able to do it in a way which is, I'm not high browed and talking down or so opaque with technical nonsense that it means nothing. Uh, and you just have faith that that will happen because in the end we're talking about a necessity. I mean, housing is not sort of an optional extra. It's something that is, is a fundamental, uh, requirement or a need if you like a human need.

Veronica: I'm glad you brought up cars. A couple of reasons. One is that in some vehicles you get a longer warranty than you do when you buy an apartment. Okay. Um, and also I've actually known a couple of people who have had their cars replaced cause I bought lemons. So I'm not, I don't know anyone who's had their apartment replaced cause they bought a lemon. But in terms of that warranty thing, because you said that they have a warranty, I just want to clarify that because we know that homeowners warranty does not apply for buildings that are four levels or higher. Correct. So therefore the buyer doesn't have a warranty or the builder, but you're saying that developer, there's a, the builder has a, sorry, the developer has a warranty from the builder.

Speaker 4: In order to commission. The builder. Yeah. They have to have a pie up if you like a a, an insurance, a warranty that we just held in escrow by the regulator. And that is used for the purposes of more fundamental structural issues.

Veronica: But that is quite new, isn't it?

Rod: 18 mths - 2 years? Two years. That's a relatively new and he just come in.

Veronica: Yeah. And it's about 2% of the build, um, values that,

Rod: Oh, gr. Yeah, you've caught me there. It is. And it's, uh, yeah, look, it's, it's a, it's a reasonable amount of money. There's no question about it. And, um, I couldn't, I I think 2%. Right. But I just can't give you assurance.

Chris: Yeah. I mean I guess it's, um, yeah there is, it's important to have that. But I guess all these, you know, if we take away a lot of the lowest common denominator, which I think is going to happen because a lot of consumers are going to say, look, show me some buildings you've built. And they go, well we can't really show you any quality ones. I've only been here. I'm a new developer. You know, the people aren't going to go there, right? They're going to go to people like yourself because you've got that track record, et cetera. But what are some of the consequences that we're going to start seeing for the consumers where, you know, there aren't these developers out there which are creating supply. How are the big developers going to apply it? Because you know, you're going to back to where you gotta control the market. Um, are we going to say higher prices? Are developers going to start, you know, you know, cause you're in control of the market. If, if there is no other one kind of coming in, what do you think's going to happen to the consumer?

Rod: Yeah, look, I, I, it's a competitive market. When you look at who the big players are, uh, in the, uh, in the construction industry, I'd take that 230,000. The top 10 builders, if you talk about detached dwelling, now occupy around about 13, 14% of the total market. Right? It's not a lot. Um, you look, you put Stockland, Lend-Lease, Frasers, Mirvac together, all of the bigger players, uh, in, um, grabbed corn, et cetera, et cetera. We, we don't, we only control, um, two's and three's and four percents of the respective markets, uh, that we are in. So it's not, it's not as a consolidated and say if you go to the U K where you're talking about the top 10 can control up to 50% of the market. It's just not like that in Australia. There's what, 42,000, uh, builders, uh, in Australia at the moment for a population of, uh, for about 230,000, um, product produced.

Rod: And that cyclical. So, so there's, there's two, two points I suppose that run out of that. One is, you know, the, the, the bigger players, we'd like to actually increase our market share, no question about that. But there are, there are limits to which you can do that because the big suppliers bring with them a lot of the costs and uh, and uh, compliance obligations, uh, either whether they listed et cetera, et cetera, which means that at a certain size of project, you're not competitive. Yeah. Um, generally speaking, that's about $50 million. Um, for us, we, we tend to focus on projects around about, um, North of $50 to a hundred million, thereabouts. And a bulk, a lot of projects are done, you know, in that are way way smaller than that. So it's, it's in that space that I think that, um, uh, that, uh, that's where the impact is going to be.

Rod: Uh, most important as to how that's managed. Uh, in those many, many, many, uh, builders and small developers in the sub $50 million, uh, space, um, when markets drop off as they, uh, as they inevitably do. I mean, the only thing I know with any certainty that I've learned the last 35 years is that markets go up and down. Yeah. Um, when it, when it drops off, uh, then the opportunity to actually innovate and do things, uh, a little bit better is greater because the market demands it because you don't, not competitive otherwise. When the market's strong, your ability to, to have the time to do that is quite limited. So, so I think we're, we're going into a pause period at the moment, at the right time. I think some of the difficulties that you've experienced or seen that have been popularized, if you like, if that's the right word, uh, over the last say, couple of years are a reflection of a very strong boom. What you'll see now I think are opportunities to be able to uh, pause, to, uh, a to revisit processes and systems, uh, and also to start to look at ways to differentiate yourself based on your ability to be able to deliver a high quality product.

Chris: I think that's a really, I mean the, the last point is really interesting cause I think, um, yeah, my frustration with a lot of the apartments market for example, and also house and land packages, um, and potentially townhouses as well. So probably the whole gamut if point the one that you're not at. Yeah. So the apartments is, I feel like it's the biggest problem we've created is we've wasted space because we've allowed to build very poor quality, not all but very poor quality apartment buildings.

Chris: Yeah. Poor design from a visual point of view but also a sustainable point of view. But also the being highly targeted to investors because that's the, that's your basically bought them. And you know, there's all whole areas where 80% of the apartments are owned by investors and that means 80% of people renting. And that's not great for a community potentially.

Chris: But also I guess from the house and land packages, you know, we're potentially get, we're cutting the block sizes every year because we're trying to keep it affordable for first time buyers. And so we're getting, you know, whether that's great for, you know, families and communities long term, um, potentially for townhouses. You know, I think that we're starting to change the dynamics of middle ring suburbs and you know, are relaxing planning controls in some suburbs where, you know, it's changing the livability for those suburbs. Um, how is the, you know, cause that's really the opportunity now, right? We've got to build it. But how are we going, how are developers kind of saying, well, we really need to build a better product that suits kind of families and things like that. Do you think that's been a problem and you know, do you think developers are going to attack it?

Rod: Well, to be honest, I think it, um, it's, it's a problem of scale. Um, because if you're buying a corner block 800 square meters and putting three dwellings on it, um, the article, you're going to put three up, that's what you do. And whereas I, I, uh, I, I think that's a, a fair concern, uh, about the community, seeing that as being the, you know, synonymous with changing the character of, uh, off suburbs, which might've been developed, you know, with or with art deco or, uh, themes or Californian bungalows that had been really tricked up in a Federation sort of product, which are very ornate, et cetera, et cetera. Um, but again, but again, I think when you look at Australian cities, I mean, can take a comparison. I mean, we're eight times less dense. Um, Sydney and Melbourne, then Singapore for instance, uh, won't even make the comparison with that, with Hong Kong.

Rod: Um, as CD's are, were developed, uh, during, uh, the advent of the car. And as a consequence, the ability to be able to travel and so therefore spread, uh, and still commute to work, uh, is a byproduct of when our cities were created. What's happening now though, is that, um, is that, uh, there, there are some really interesting things that we're all just on the cusp of as and finally Sydney and Melbourne and other cities around the world are reinvesting in their, in their public transport. But also we, we're starting to see the electrification of mobility and the opportunity. I think is for it perversely, that the, the origin of, of our cities being so physically large, I think they're second and third in terms of the physical area they occupy in Melbourne will implode on themselves in the world LA LA being the largest massive cities like those.

Veronica: Right. I always knew I'd drive out to Warrick farm last night from Balmain and I haven't been out that direction for a long time. I went through the new tunnel. So it's just a bit of a segway here, which is actually not an unpleasant experience going through that thing. Have you been through it? Yup. That's pretty cool. And it wasn't bumper to bumper, which is a first time I've gone into a new freeway or a new tunnel for years and it hasn't been bumper to bumper. Um,

Chris: people a bit still be of a tight ass.

Veronica: Well yes. Then someone said to me afterwards, yes, cause it costs a fortune. So I wouldn't even know until I get, you know, until the end of the taxi. Um, there popped out knee Parramatta and went through all these extra big roads, etc. Etc. And then I just went on and on and on and on. I was like, my God, I've forgotten how big Sydney is. Yeah. It just goes on and on. Yeah.

Rod: But perversely, it's actually, um, an opportunity. There's, so the, the potential to be able to limit, uh, the extent of that and then, uh, redevelop within the space. And, uh, and you can only go up if you've actually got the matching at transport infrastructure to go with it to manage congestion. Why I think we're at a really interesting time is what we're seeing themes that are coming through now, um, is mobility is becoming the electric cation of mobility is, is a fundamental, and depending on, on, uh, your, your view of how technology is adapting. But, uh, but by about 2030, well by 2025, you won't be able to buy a diesel. Ah, they'll all be hybrid by 2030. Uh, the, the size of the electrified fleet, uh, will be, um, significant and growing at a, at an exponential rate. We provide, um, service, uh, that logistics services for, um, uh, and assets in Europe for our, for the big car makers, the amount that they are spending changing their whole production system to deliver an electrified cars. And these are the, you know, the volume suppliers of

Veronica: Volvo what next year. Completely going electric?. Yup.

Rod: All electric. Yeah. They're all introducing them. So, yeah, so I think the first thing, and then autonomous vehicles are another step on from that. But um, but the opportunity to actually start to look at space, the space physical space we have in Australia and the capacity to be able to absorb more growth, ah, and accommodated in a, in a, in a form which is far more connected, far more, uh, diversified if you like, a than the sort of the monoculture of product that we've tended to see develop over the last, you know, 70-80 years. I think that's actually an opportunity now that will create challenges for, for planning. Um, because the community looks at planning to actually sort of a future proof, uh, the, uh, the community from ah, from creating outcomes, which, uh, are disconnected from, from what people's image of what, what urban living should be looked at, should be like.

Rod: So I think there's a big challenge to land use planning because the other theme that we're seeing is that we're seeing spaces actually now less, um, uh, less, um, specific to a single use. Yeah. The need for spaces to be formed, more flexible. Look at what's happening in retail, for instance. It's a, it's a harbinger for what will start to flow into and is already flowing into the workplace in terms of office. It is office office, uh, is not anymore.

Chris: No. It's hotel residential.

Rod: Exactly. Yeah. And then what you're going to see is you're gonna get a far more dynamic style of development, uh, occurring provided you get these other matching elements, uh, going with it, which is, you know, the electrification of, uh, uh, mobility, uh, Metro, uh, public infrastructure. The public realm then will start to become, uh, the determinant of, uh, people's emotional connection to place, et cetera, et cetera, all that stuff. And you start to see parts of Sydney where it's playing itself out. The wonderful work that Lendlease has done, uh, down at Barangaroo, central parks and other good example, et cetera, where when you get it right, it is really innovating and uplifting for a community. Now that's,

Veronica: yeah, because obviously you've got to have access to a whopping great sites about to achieve something like that. Correct. And so therefore that leads lends itself to being the only the big players that can be involved in that. So you want them to be visionary. And so it sounds exciting and I know, I think Barangaroo, and I've never, I've been in some of the office spaces, but I haven't been in any of the apartments. But the wonderful thing about Barangaroo and in fact a Central Park, with Kensington street and that sort of thing, it develops a precinct that others can use as well. So it's not necessarily just for those people trying apartments there. So it does become part of the greater community, which is a really interesting

Rod: and it's what gives the city a grain and you know it, it's and it creates connections that otherwise wouldn't happen. And when we define our lives, it tends to be the sum of their connections and we, we, we'd created a sense of belonging based on that connectivity as distinct from just what a place looks like.

Chris: So the elephant in the room is 100% for you.

Veronica: The reason that Chris and I do this podcast is because we passionately believe that property buyers can do it better. We really want to help all of you understand all the risks, but also the ways in which you can avoid your elephant making the decisions.

Chris: What we would love for you to do is just to share this episode and share other episodes with people around you that are going through the property process.

Veronica: Give us a review on iTunes. Five-star, please will be very appreciated because this is about making sure that we all benefit from the wonderful information that our guests have been sharing with us.

Chris: So we're in Waterloo now or Redfern or wherever you want to call it. But, um, I guess this is an area which probably you're talking about, right? So you know, there's a lot of community housing or that's being built in, there's towers, um, and the government's going to come in and you know, with developers to build a new Metro, which is, you know, great for transport, but also, you know, knock down a few towers and build a big community. How is, how has that story kind of getting out into the community? Because from what I've heard is there's a bit of a, uh, upset because it's, you know, change and we don't know what's going to happen. Um, how are you, cause I know you're an involved or you're bidding on it, how do you think that that story is going to play out and how are you going to get the community on side?

Rod: I won't talk particularly about that one because of the process, but, um, but I think it's, it's no different to any other project you do. The planning system is actually quite a sophisticated system from the point of view of, um, of providing opportunities for engagement with communities. But, but that's a base level. If you're going to do, you know, uh, if you like precinct, wide change? And that's what we are talking about now. Let's face it. Most people don't like change until after it happens and it's actually good. Oh, we like that. Yeah. Or after it's happened, we don't like that. And people vote with their feet. So you've got to get it right. But, but I think what's, what's, what's happened over the last 20 years is that the obligations on, uh, on the development industry to engage better, uh, to be more explicit about how they're going to manage a change.

Rod: This is not just developers, this is government as well. Yup. Uh, how, uh, uh, you're able to articulate, um, the process of change and with it's all at once or in stages, et cetera, et cetera. What the sort of reasonable time frames are, what are the benefits that flow out of this? So it's really communication one-0-one in many respects. But you're doing it as scale and you're doing it in a, uh, in a form which is very capital intensive, very time intensive, et cetera. And when you look at it, very stakeholder too, because the thing about cities, particularly like Waterloo and Redfern is there are so many stakeholders and you're not just talking two or three people you're talking or two or three groups. You're talking dozens and dozens if not hundreds. And so to be able to manage those interests over a period of time through a change process, it's not, it's not something that you do sort of for three months at the start of a project and then, um, and then stop and then finish 10 years later when you're finished.

Rod: It's an ongoing process and you've got to set yourself up to resource, um, that process.

Veronica: Let's be Frank. There's going to cost, doesn't it?

Rod: What's the cost? Absolutely. It's all built in to the overall cost of it. That's why these sorts of projects, you need balance sheets, sizable balance sheets, um, and Australia doesn't have enough sizable balance sheets. It inevitably means off shore a Capitol as well to be able to, uh, to undertake, um, projects of that scale. But because, you know, one of the, one of the, even though everyone sort of points at the, at the jelly gray monsters around here and say, well, they aren't they ugly? Well, yeah, they are, but when they do one thing really, really well and they provide a lot of accommodation to people who need it, the difficulty in the modern age is to be able to respond, you know, to provide that amount of, uh, accommodation, in a staged way, uh, and still do it to the standards that we operate to now as distinct from 60 or 70 years ago.

Chris: now on the, um, in terms of, you know, what about, you know, things with clients is a console. I consider off the plan. I'm thinking about off the plan. Um, and from what about, my experience with a lot of the time is it doesn't really work from a number of reasons for an investor. If, if you know, when you, when you hear people say, Oh, you shouldn't buy off the plan for investment purposes, what's your kind of response to that in terms of saying, no, you should because there's these benefits? I guess it's, you know, there's, you know, from our view it's probably lots of issues but, you know, very little upside but a lot of risk, you know, how, how do you think that investors should attack off the plan to actually get it right?

Rod: Uh, well look, like firstly I'd say that some of the incentives of buying off the plan of now progressively been removed financial incentives. I mean, in terms of your, um, the, the, the mechanism was used say in Victoria where now you're essentially only paying stamp duty on the, um, uh, on the land component, not the, uh, uh, the value of that, uh, of the contract that that's progressively been removed. Um, I think, uh, I think, I, I w I'm an advocate of, um, of, of buying off the plan expect you'd expect me to say that because financially it enables the transaction, the overall development to happen. At a, a, at an accelerated rate. Um, so that's a, just a commercial consideration. Yep. So I think, I think with the quality of, um, I think people the two things I'd say, firstly buying off the plan gives you an opportunity to gain entry to an asset that you might otherwise not be able to gain entry to.

Rod: Uh, if it's finished. Um, why I say that is from a developer's perspective, we, we, we don't just approach a project as an investor only product. Uh, we develop, uh, all of our projects on the basis of a, a mix. Um, some investors, some owner occupiers, uh, and, uh, of, of a variety of types of, some families, some singles, some are elderly, some, uh, some full-blown families, et cetera, uh, older people, they're disabled, et cetera. It's that mix, uh, that you, uh, that you need to infuse into a project that gives it its vitality rather than, uh, all people like you, you know, 25 year olds. Uh, it's on radio now. No one, one typecast of a of it because that doesn't produce the sort of, the diversity that you want in a project that actually give it a bit more vitality and a great for resale.

Chris: Right, exactly. You're not just trying to target the downsizes, you know, there's lots of buyers if you ever want to sell.

Rod: Exactly. I know I'm the first to criticize parts and we won't name those areas, but where you've got, um, five projects in a row, uh, on 2000 square made a site where they're doing art, you know, 190 or 200 apartments, all um, one one bedroom plus study, one bedroom or two bedroom, one bathroom. That's it. Yup. That's the diversity you've got and in my view, okay, it's providing accommodation but, but I think we should be smarter than that and the planning system should be smarter than that in terms of being able to blame the product and terms of being able to blend uh, the, um, uh, in diversity if you like. Having said that, there are, there is a fine line between doing that responsibly and then doing that for other reasons.

Rod: I know one or two or three or half a dozen municipalities is, I know we only had one three bedroom apartments. They must be all 110 square meters and they have, they're the only type of apartments we'll be approving in our location. Please. Now construction costs typically run around about $3- $3,200 a square meter, 110 year, and about $400,000 just to build the thing. Then on top of that, you'll have now 40 50% of that will be land. So you'll be, you know, you, you know, you're pushing about a million dollars. Now that's very nice if that's the sort of, um, people you walk in the community, that's right. If you can sell them.

New Speaker: So is that why we builr lots of one, two betters, you know, because I, they're more affordable and beta, potentially more profitable for a developer, um, on a dollars per square meter basis. A one Bader is more, you'll generate more revenue per square meter. On a one bedroom apartment than you will on a three bedroom apartment. Yeah. But does that mean that it's more profitable now because you have to build more of, and so the con the construction costs, but generally speaking, yes, there is a profit motive in doing that, but it comes at the cost of, uh, the diversity of product that you're looking for. Uh, and also, uh, the, uh, the urban design solutions that you're looking to achieve because one bedders, uh, if you just line them all up on one floor, um, have a facade implication, which, uh, which doesn't necessarily get you where you want to get to from a streetscape point of view.

Speaker 3: Yeah. But it is, you know, obviously there's certain developers that don't give a rat's really about a lot of those other issues you're talking about are those considerations of building a community and building a great place to live. And also building a place where people can upgrade within it. You know, I know there's some complexes, even some older ones in Sydney where people do, tenants will buy in the building in the complex. You know, we might getting one on one bed and they'll upgrade to do a tour or a three. And that's successful. You know, when people want to stay there.

Rod: Absolutely. And we designed for exactly that reason. But I think what I've just described, um, the consumer is not compelled, uh, to do anything. When I go back to the, to the, to your question, which was, well, you know, um, why, why we do what we do is to attract people in on the basis that I actually do have the opportunity if they liked the area by gaining access maybe by a one beta, but then they can try it into a two or three depending on circumstances and how they, how they flow. They can bring grand parents in, et cetera, et cetera. So the whole idea of aging in place and what have you, now it's pretty easy for a person to judge off the plan. What the, uh, the floor plans are, uh, per floor? Uh, yeah, the per floor plate in the building and form a view. Do yo want to live in a one bedroom, one and a half bedroom? Only 240 of them in one building. Yes. Well, if that's what you want to do and you haven't bothered to 'em haven't bothered to at, to, to do your homework. Yes. Well I'm not that compassionate towards that person.

Veronica: It's interesting. I don't know what they don't know though. You know, it's not until they're gone. Ah, right. You know what I mean?

Rod: So yeah, they try to lease it out and as you know, 14 available for leasing, same building and, but if you're investing, I mean [inaudible] if you're investing, surely you've got that on obligation to do due diligence.

Veronica: 100% agree. That's part of the purpose of these podcasts. But you know, it doesn't happen enough.

Rod: But, but, and so it should, is, is all I'm saying and why, why, why we try and, um, and we try and provide, uh, tools to educate the market and provide information to enable people to make an informed choice. Yeah alright Okay. Everyone doesn't do that. That's fair enough. But again, the buyer has the obligation to make sure that they do do the due diligence. And when I said that, you know, you may not get access to if you're buying off the plan, you may not get access to a location if we can sell out in a, in a week or two because it's a great location with that, that's been well thought through in terms of, you know, that mix of product, where it is physically, it's got access to transport, it's got amenity, et cetera, et cetera. All of those attributes built in, all of that, um, should contribute to one of two things. One, um, sustaining value or retaining value over time and two potentially capital gain because the more, the better the quality of the environment in which the, uh, the, the, the dwelling is located, the higher the, the more of that gets capitalized into the value of that asset over a period of time. But if you're just wanting to do a negatively gearing and imagine that capital gain, I mean, all property goes up, doesn't it? It's just nonsense. I mean, without capital gain, negative gearing doesn't make a lot of sense to be honest.

Chris: So some really, really, really good point. I mean, the reality is your targeting home buyers with your development, you know, your.

Rod: And investors.

Chris: Yeah. And so investors, but we were switched on. Yeah. The switched on investor who knows to buy and the building that's, you know, I've got lots of different differentiate it, but also you need green space, you need a nice looking buildings, you need very good materials. Um, all these things add up because you're going away from buying a piece of land and saying how many warm bedrooms can I get on this? How cheap can I build it? Um, and how high can we go basically. And that's what some developers will do is look at how much money can we make on this. You'll probably, there's consequences where you probably having to price, your apartment's probably a lot more expensive than, you know, Joe blogs down the road who's just trying to shift a lot of one betters. Do you find that your products, because they're a bit more premium, are a bit more expensive than out in the market?

Rod: You get what you pay for? Yeah. That's the first thing. The second thing is we cannot and will not, you know, from my perspective drawn a line, we will not be the cheapest on the market. Yep. Because if you just take a view that you want to be the cheapest, then a whole, you have to run your business that way. And uh, there's a whole lot of decisions and are not being critical about, uh, about companies that actually they're positioned themselves at the bottom end. Because if you've got scale that goes with that, then that's the alternative way of being able to afford a lot of, um, uh, the costs associated with providing assurance, et cetera, et cetera. Yep. But, you know, as a business, we, we, we don't seek to be the cheapest provider of accommodation because we think, um, uh, there is uh, in all of those other aspects which go towards placemaking and design

Veronica: with 'em. I had a question there. Oh yeah. How does your stuff get to market? Is dedicated company own sales teams? Yes. So you don't actually go out there to mortgage brokers and financial planners and accountants and

Rod: what, what we will, we'll use challenge channels but we'll um, um, but always channel through Aaron sales team because that way we can control who and how much and what, uh, is directed. That why as distinct from just going cart blanch.

Chris: and, and in terms of, I mean I'm a financial advisor and um, you know, and there is mortgage brokers as well. I've seen this. Yeah. Um, you know, a lot of them are sent incentivized through, you know, a getting a real estate license and all of a sudden they're getting a clip of a ticket. Um, and they're quite big commissions at a paid to refer us and things like that has, how does Fraser's approach to that and whether that is actually something that's conflicted and whether your, you know, because if, if, if an advisor is receiving a commission for recommending your product, are they really acting in their best interest or are they acting in their clients' best interests? And I'm going to have you noticed that that's a bit of a prolific problem. Cause you know,

Rod: yeah. Well look, I, I, I imagine it would be because, well, let's face it, the, um, uh, agents tend to work for the seller, not the buyer as a general rule. And, um, so from our point of view, why, why we do it the way we do it is because we don't want any one party, uh, overexposed in any particular project. Uh, we'll select how much product we want to put into a channel and B into the invest the line. We'll, we'll deliberately clamp that down because for the reasons we just talked about before. Yup. Uh, and in those instances, we don't pay, um, uh, over the market. Um, uh, and I now have a developers who are paying sevens, eights, nines, 10% for offshore purchases. Yeah. Crazy stuff. So the interest in being honest, in terms of how, in representing the product, uh, it's longevity prospects, uh, you know, the integrity of the design, etc. Etc. A lot of that, uh, goes out the window, uh, in, in return for a volume sales to, um, to fill pre-commitment books, to enable capital to be, sorry, borrowings to be for construction purposes, to be treated. You know, the one of the benefits that we've got that given the business at with the scale it is and, and how it's funded is it, um, that's not the primary driver. Uh, for us. We just want to make sure that we're actually, uh, and placing enough investor product through the right channels on a sensible, uh, commission structures to achieve, uh, a segment of, of sales. Uh, that then becomes part of a broader blended, um, a range of sales that give us what we want in terms of a balance.

Veronica: Do you have a benchmark percentage of investor versus owner occupier.

Rod: Ah, look at its highest, it's 50% of a building. Say say a building is a hundred a dwelling. So something of that nature maximum would be 50. Yes. Um, during the absolute, uh, boom, what, going back to 2016 say it had got up as high as 55%, but generally speaking, we keep it around about that 30% Mark. Yeah.

Chris: But some buildings are a hundred, right?

Rod: Yeah. But if they're in a precinct of say 10 buildings, you might, that will be the invest in a building that then the, as far as others, they're a family, family buildings and so you end up getting the blend that way.

Chris: Yeah. And I, I guess I'm, so we've had a few companies under recently and I think there's a, uh, you know, all the stats are there approvals for, you know, high rises and even, you know, um, kind of house and land packages have kind of come back a lot in the last 12 months. There's a lot of less demand for the product and they're falling off a cliff a little bit. How do you think, you know, does the, and sort of catastrophe there where they went on to surprise you and do you think there's going to be a lot more of these kind of builders that again, are going to struggle with things like settlement risks coming up because of low valuations? Do you think this is going to start to really play out in the next couple of years as every boom does go to a bust? Yup.

Rod: Well it's old. It's already been playing at, I heard the insolvency numbers. I think about 169 builder in New South Wales went broke, um, last quarter. Um, which is, which is a spooky number. But all I'm saying is that, uh, all I would like to say, well firstly your comment that demands not their demands. They Hmm. Uh, no question about that. What's happening? Is that your happening, are you finding people are unable to be able to realize that demand or express that demand by, by committing, by virtue of the credit conditions that are now that are now, um, are playing out in the market?

Veronica: Yeah. Just to be clear on that. So you were talking about the individual consumers who want to buy a property are hamstrung because they can't get access to credit. Yep. Or you're talking about builders who would like to build product, can't get access to credit?

Rod: Both. Both.

Chris: Ok, cause I'm a broker. Um, and you know, the, yes, last year, 2018 without doubt it was um, the banks just went yeah, crazy. Basically we couldn't get loan applications through and I w we never get decline loans. Yes. There's no reason to get a decline loan. You know all the information before you lodge it. You know what the banks credit policies, you shouldn't get a decline loan. So we never got them. Um, but in the Royal Commission we were getting plenty of decline loans for the banks just said, you know what, we don't like you as a customer even though you're a great customer. We used to only only do the money go somewhere else, which is just crazy. And that's what it did happen in the Royal Commission this year. It's definitely not the case. So you know, if, if, as long as you, unless you got something seriously wrong with your credit file or something like that, banks want to lend now. And so, um, I, I, that does, is it not the customer? Is it the product that the banks aren't gonna lend on though? Is it that they're not willing to lend on new property?

Rod: Ah, Oh no, we're not finding that. We just finding it's taking a lot longer and most of the data that we're referring to here is all lagged. Um, you know, it's true. So what we, what we've seen is, um, is, uh, and, you know, the lead up the first half of this calendar year was very, you know, it was plagued with uncertainty, fo heavens sake. And so no one really wanted to do anything because I had no idea what the future held. Yeah. Um, particularly from a residential perspective. So post the election, um, with the outcome, um, a lot of that uncertainty has been removed and we have seen a significant, almost immediate lift in inquiry, which is a lead indicator for, uh, for lifting sales. Yeah. And we weren't too, um, prepared to actually call a corresponding lift in sales until we actually saw it and we're seeing it. So. Gotcha.

Veronica: Interesting. Yeah. Cause I mean obviously the price growth figures in Sydney of Oh it was 1.7% or something first. that's, that's boom time and 1.6 or something for August. Like that's, that's pretty sizeable.

Veronica: I think that's just the bounce to be honest. It's at all. I don't, I wouldn't expect to see a lot of significant price growth from here on and that's fine because I think we'll actually go into a period of it just sort of bumbling along.

Rod: Well hope so. To be quite honest, we need the cycle tends not well that's it.

Veronica: And we need some stock. But also as you said, there's pent up demand. You know, the reality is because people didn't buy for two years doesn't mean that they didn't want to buy. And so now they're all out getting themselves ready to buy.

Rod: If you look at the actual quantum, everyone's patting themselves on the back end, new South Wales for EFA, bang out a hit their um, hit hit latent demand two years running. I did that two years running in the last 15 years.

Rod: Right. How does that, what do you mean by that?

Rod: Well, by that I mean if you actually take household formations, the demography desegregate the demography and work out, um, uh, what, uh, underlying demand is yes. Add that natural increase and then the immigration, uh, et cetera, et cetera. Um, the, the quantum, uh, of households that could express demand in terms of either new rent or new new housing purchases, ah, was only actually absorbed twice in 2016 and 2017 and then it stopped, uh, prior to that. Going back to what, just around the GFC, um, uh, period New South Wales is actually , sorry, Sydney, I should say, uh, was delivering the same amount of housing as Adelaide was.

Veronica: So actually on that, it's very interesting. So you're saying that basically for every person that wanted to buy a property, there was a property sold effectively for 2006 or built or for two years. And that was the coincided with the last few years of the boom. And so if we just let it run, wouldn't it just been, we just would have actually gone into a nice little slow market conditions by natural forces.

Rod: But what I'm saying, completions of dwellings matched underlying demand. Now there's always a, it's a bit of a misnomer in the why those statistics work because of the lag and yeah. But on the same token, I think it just comes back to this question about supply. Uh, the ability to be able to supply underlying demand is, uh, is still challenged and everything that we've just been talking about won't help that. The other, other indicators are just look at what's happening to household occupancy rates. Um, in Sydney again, they, they ticking up why? That's because people just can't leave. And, um, at vacancy rates haven't shot through the, uh, everyone's saying, Oh well it's going to be, it's gonna be a, um,

Veronica: Well it went up considerably. But they seem to have plateaued now.

Rod: Yeah, that's right. Are there sort of roughly in the rind of a balanced balanced market around about that three ish percent, thereabouts vacancy. Right. That's a balanced market.

Chris: So I mean that we're adding and we're growing up population, we've under built properties for so long and then in 16 and 17 or 17, 18 or whatever it was, you know, we built enough and we know if we don't keep building, which is what's likely to happen over the next three or four years unless we, you know, start building again, we're going to start having supply shortage again. You know, cause we're going to keep growing up population. I just worry though over the next couple of years though, um, because a lot of properties were sold in that 16, 17, 18 in the height of the boom and like you said, some developments take 12 years to build. But there's a lot of buildings that are still haven't been built. They're still in the, the cranes are up. It's still in the process. Are you a bit worried about kind of settlement risk, maybe not from your business, but in terms of a lot of other builders where valuations aren't going to come in on contract price?

Rod: Um, Oh, well the, the answer is yes, that that'll be a, uh, an ongoing issue, but it'll, it'll wash itself out over a period of time and it'll probably take another year or so before that happens. We are seeing, um, uh, we're seeing some interesting dynamics, and I know this is going back into history, but with the GFC, when the GFC hit, um, in valuers, uh, and I, I love valuers they're, they're very professional people, but, but we're being instructed to value at 80%, uh, of, um, loan. Yep.

New Speaker: And insurance arent they supposed to be independent. And that was dictated not by, not by the bank, but by the PR insurance and coming out of New York and say what you effectively had was at whatever that, whatever that, that the contract price start at 80%, because we're not going to lend any more than that. And it's 80% of that. So it's 80% of 80 which is what, 64%.

Rod: So what you had was inevitably a shortfall, which was made up either by equity or some other means. Now it's easy to say, Oh, you're just making up in equity. Um, well, you know, not for a first time buyer. So, so I think that's gonna apply itself, not back because that, that dynamic is not happening at the moment. Um, but I think you'll always have a valuation, um, conundrums. And that goes back to, you know, your regional decisions about, well, what price, price level did you set yourself at? Uh, what the individuals, consumers, searches, financial circumstances are etc all of that's been taken to account more rigorously now than it probably was, say 10 years ago.

Veronica: And does Frasers inclined to, let's see. Okay. A lot. A lot of buyers, I think that if they can't settle on a property, they'll just lose their deposit and they don't realize they can be sued for a whole bunch of other things Does Frasers, tend to go aggressive on that sort of thing. Or do you find your, it doesn't happen very often. Most people find a way.

Rod: I can't remember one way. We've sued anyone for performance. Um, but we have withheld deposit.

Chris: Well I mean that's it. That's the risk didn't come in. He didn't see them. Yeah. I mean, um, but yeah, it's, I mean, the holding deposit, you know, that's a, a good result sometimes for the people because you know, if they, um, you know, if it's, if the settlement price does come in a lot lower, they've signed an unconditional contract. Yeah. I mean, technically the developer could come to them for the, you know, the remaining and then also penalty interest. And I've seen that for clients where, you know, developers have come to them and bicycle and the only way she got out of it was she had to buy a different one in the block. Oh, the developers said, look, while Tom bought the two bed, I know you've got enough cash to buy one of the one bedders. Why don't you buy that and we'll walk away.

Rod: Yeah. Well, it's fun. But we, we, yeah, we tend not to to, um, to engage in that sort of stuff. But, but it also comes back to sales policy, if you like, within your organization. I mean, if you, if you're taking, you know, 1% deposits and all this sort of nonsense, well that's just complete stupidity. A 10% deposit usually gives you the coverage that you need to be able to, uh, to take that property, resell it, whatever the differential in, uh, that you had to do on pricing to out, to actually get there. And we've found that generally speaking, covered it.

Chris: Yeah. Gotcha. Yeah, exactly. Is there, if you didn't, you know, you've, as a business, you're not really losing out. So you kind of say, well, if you can't settle, that's fine. We'll just keep your deposit and we'll get more.

Rod: Well, we'd prefer it didn't happen, but um, yeah, but it does happen. Yeah.

Chris: Yeah. I mean that's the risk of buying, you know, you potentially could lose it. I mean, just on the building, um, you mentioned this about 160 or something about 16 builders that have gone under 160, 160. Um, you know, I guess, how is this gonna you know, cause this is one of the risks that I think a lot of people didn't really understand when they buy and off the plan, which I, and I agree wholeheartedly that it's all about due diligence, buying good builders, getting into blocks that have kind of multifaceted. But let's say you didn't do that, you know, and you've gone on with a, a builder that potentially goes under like a rollin or one of these 160, you know, how, how does a person recover from that and how do they protect themselves from, you know, getting stitched up from a builder.

Rod: Yeah, it's hard. Well, you don't know what the builder's circumstances are when you, when you're engaging them. Um, that that's difficult. I mean, due diligence is, is another the factor again your, um, with the way, uh, the building sector, particularly the detached dwelling sector operates. That's, that's difficult. Uh, but in those circumstances, I mean all is not lost. You can always get another builder to come in and uh, and finish it. Unfortunately that's expensive to do because they have to pick up someone else's work. Uh, and um, but then there are, there are are forms of insurance you can take to actually get that. Although that's getting really hard to get now because what's happening in the insurance sector is um, ah, it's going through some quite disruptive times as well, particularly in Australia.

Chris: And is that just most likely going to lead if you know, cause it's gonna come back at some point be just like higher premiums and less plays in the insurance market. So they're going to, you know, you know, charge a lot more. I guess they'd be saying, well there's certain things they're not going to insure for that. That's a big problem.

Rod: There's evidence that, that, that is actually happening now. The underwriting is going from, you know, you can get five underwriters, uh, five years ago now you're getting one. Um, and as a consequence there, yeah.

Chris: Every week we hear incredible stories of the dumb things, property buyers do dumb things that end up costing a whole lot of money and are a whole load of stress mistakes that can be avoided. Please, rod, can you give us an example of a property Dumbo? We can all learn what not to do from the stories.

Rod: A property. Dumbo. What's that?

Veronica: Oh, okay. I know, I know. Yes, I, but I've got one actually. I've got one. Don't worry. We'll, we'll start, have a little chat about this one. So the Raelin we want, I want first. So do you have one? No, no, no. It didn't look like I'm sort of jumping in. So I think a, probably Dumbo is though, and I feel very sorry for them, but all those people that had a bought off the plan from Ralin. Andy had signed a release, a deposit form in return for getting 15% interest on the deposits and lost the lot. So they don't have any one, they can't even, they're not even a, uh, accredited. They're not a creditor anymore. Um, that's gotta be a Dumbo.

Chris: Have you heard of that happening before that happened?

Rod: Yeah, I have. Yes. And it's, uh, it's reprehensible.

Chris: It's interesting. I've read a few articles on that and I do Taj target a certain demographic and a different certain nationalities. Um, and it was, uh, the whole marketing spiel in the sales team, et cetera. It wasn't okay, what naughty if you put it that way, but I mean, have you gotten sense of any stories where you think that, you know, mistakes that property buyers make what you think, you know, like if you didn't do that, you could have avoided that so? Yeah, I, I, over the years of thought of people, I mean, even the development space, I'm sure there's things that developers do where it just didn't think it through and all of a sudden they've just, you know, basically blowing their business up. Have you seen that?

Rod: Uh, yes. Uh, I'll stick with the buyer by buyer analogies though. I, this is, this is actually, um, it's the emotional, uh, nature of, uh, of house buying. And when, when you see that dynamic playing out where, where people know what they can afford, but then they've emotionally fallen in love with whatever it is and they can't afford it, uh, but they commit. Um, anyway. Uh, and then when it comes at, when it comes to the point where they realize what they've done, a buyer's remorse usually sits in within the week, uh, et cetera. And, um, the stories get presented, uh, and the emotional, um, ah, the emotional, um, exchanges that inevitably occur in those circumstances. Because I don't know how many of those I've had to deal with over the years, but, um, you, you just wonder how it is that people get themselves into those situations.

Rod: Uh, they allow their, their heart to, uh, rule the head. And then they find they're in a set of circumstances where they, uh, there was no way no known they could ever have performed on the, uh, on the contract in the first place. And so they, they throw themselves on the, uh, on the large of the of the vendor. And in most cases we'll, um, view if it's legitimate, uh, we'll, we'll come up with a way out for them. But because there was always that, um, the legitimacy factor, people ain't start to embellish the whole thing and it just becomes a big, you just want to how it is people put themselves through that

Veronica: and you, so you, it's, it happens enough for you to sort of, no, it, it's, it's, yeah,

Chris: it's interesting. I mean that it happens whether you're buying a new or established store, the same problem happens when you go to an auction. You, you or you go to an open home and you're like, God, I love this. I can't actually, we were going to try to buy something at $1.5, and this is $1.75. Can we do it? You know? Yes, we can get the loan from the broker. Let's go for it. Well, it's cheap at the moment that you worry about that. Yeah. And then it happened in booms and it's a, I feel like it's going to start happening now because if that situation, it's interesting though, but you know, I worked in sales, my first job was I was in sales and um, you know, one of the roles of sales I was all about that urgency is all about creating that scarcity.

Chris: And you know, I'm sure not saying your sales team, but the whole development industry is built on selling the dream and getting people to be emotionally invested. So, you know, I guess it's like, yeah, they're kind of sitting ducks really. They will go into a display suite and then the, the sales team's there to get that emotion going and to get them to commit to something because if they don't commit, they don't commit. So it's hard to let those buyers walk out the door and not let them fall in love and get them to commit How do you deal with that again?

Rod: Is that how you set your remuneration up for your sales team? If it's completely, completely incentive based, you get exactly what you're just talking about, which is, who cares? That's just not the way we operate and you can't operate that way. Um, because if, what's happening at the moment is people are taking, ah, the thing that, the thing that you characterize as a, uh, a retreating market is, uh, the time that it takes for people to make decisions. People are much more worried about everything. Um, what the future holds over their jobs of, what, what's happening, all sorts of things. Yep. And so as time stretches out, uh, in the peak, boom, we are, we are transacting usually in about 40 days, thereabouts, from first inquiry to completion. Now it's running at around about 12 weeks. So about. Yeah. It's three times that. That's all right. Uh, because if you're confident in your product and you're confident that you've actually got a, a, a value proposition and a, a, an a product, which is a differentiated from the alternatives that could be considered, which is in that market then it's all right for people to take time and Oh, you don't sell it, but that, that that happens too and if you're, if you're providing an ongoing ongoing product supply and then there's another product. I mean the thing is that people sometimes think, Oh, that's the only thing that will ever, that that's the only product that will ever satisfy me. You know, you've been in the established markets. Exactly the same. There will always be a a product available, but you've just got a keep.

Veronica: That's actually probably one of the benefits of buying off plan, I can't believe I'm saying this , if you're buying established at that time and for the foreseeable future, there is only that one available. Whereas with off the blend, there's a whole floor of them or whatever. Yeah.

Rod: If you've got that elongated relationship with the buyer, then um, good salespeople know exactly what they're capable of, uh, funding and, uh, and I can direct them accordingly. Uh, and we've got some people longterm, uh, salespeople, and within 10 minutes they'll be able to tell what this individual can afford, what type of product they are appropriately. Um, uh, it should be directed towards, uh, what the likely timeframe is going to be. Um, and, and they can do it in four or five questions. Yeah. I've tried to be a salesperson because we usually do this as a, you know, I started off, we're going to say I'm going to actually do it yourself. Yeah. Bloody useless at it. I have to say. I could not figure it out. I spend 25 minutes with one individual and the, the, the salespeople's, what'd you spend all your time with? That person says, Oh, well I just want to get their name, you know, I just said, if I, if I could get the name, I think I'd be actually on the way it says, look, you didn't ask five questions. These are the questions you should have asked that were never going to be in the market, that would just kicking the tire why you waste your time. This is all,

Veronica: he's smart enough to be CEO but not smart enough to ask those five questions.

Chris: That's brilliant.

Veronica: Look, thank you so much for your time, rod. I that was a wide ranging conversation yet. Oh no, no, don't apologize. That's why we wanted you here. So, um, that we could tackle some of those, those questions and you know, we had, you know, covered in rule gamut there as per usual. So thank you for your time and your expertise.

Chris: Thank you Ron. I think the big takeaway for me is when people are looking at these spaces to buy and those buildings that are, you know, multifaceted, very much targeted to the owner occupied due diligence, you know, your bigger, bigger builders that aren't going to be you know, sticking around that are going to get into the, you know, going bankrupt. Um, you know, there's, there's a lot of things people need to do if they're going to play in this space. And to be honest, I think businesses like yourself will be the ones that do create the cities of the future. So good luck with that.

Rod: Thank you very much.

Chris: We want to make you a better elephant rider. And this week's elephant rider training is...

Veronica: Following on from the conversation with Rod about investors and buying into brand new buildings. Now, as you know, Chris and I, we're not advocating that you go and buy off the plan, but it actually, there's some principles that we discussed in that conversation that do apply regardless of whether you're buying off the plan new or old. Um, and that is really looking for that diversity of person and buyer, within the building. And I think that that was a really interesting point and the fact that Frasers, uh, seek to create that diversity in their buildings and complexes is quite an interesting thing to consider as well. They're a big company. I mean, you know, they've got loads of really smart people coming out with their strategies. So I guess if they're looking to build complexes or buildings where you've got quite a lot of diversity in terms of the type of person that lives there, then that's a clue as an investor to consider the same sort of thinking when you're looking at buying an apartment. Now whether it's one building and you want to make sure that there's a variety of different types of footprints or floor plans in that building. And there are different types of people that are buying in and living in that building, or whether you're buying in a precinct where you're looking to make sure that there's good diversity and a depth of buyer pool. Because that is really in terms of longevity and in terms of ongoing capital growth. They're the sorts of things that really make a difference.

Veronica: Join us next week when we have another episode all about auctions. So this is insider's view in terms of what good auctioneer's do to get people bidding. What's really going on? The psychology of vendors, buyers, agents, and auctioneers during an auction, in the lead up to an auction after an auction, we talk about making pre auction offers. We talk about negotiating after it's passed in. We talk about a whole bunch of things relating to buying property at auction. Our guest is build a Phil De Fegely. He's actually an auctioneer and an auction coach, so this is a fantastic stuff. We hope you can join us.

Chris: Don't forget, we're on all the social channels. We're on Facebook, we're on LinkedIn, we're on Twitter,

Veronica: or you can connect with us on www.theelephantintheroom.au, The links are all there for you.

Chris: Please connect and send us a message we'd love to hear from you.

Veronica: The elephant in the room property podcast is recorded at the Sydney sound brewery. This week's podcast was recorded by John Rhesk editorial by Gordie Fletcher.

Chris: Until next week, don't be a Dumbo.

Veronica: Now remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.