Looks like some dodgy practices have left some high-rise buildings prone to fire. Investors aren’t the only ones about to get burnt.
I’ve been flying some red flags over the inner-city apartment market for a while. My gripe has been that this whole segment has been driven by a market (mostly Asian investors) who have little understanding of the realities of Australian real estate.
As a result, many of these units are tiny by Australian standards, and you’ve got to wonder what the resale value really is. Add to that the growing risk of a glut and it’s a big red flag to investors.
But the story just got a whole lot worse, with claims emerging that potentially hundreds of high-rise buildings across Australia might be highly flammable.
That’s right. Highly flammable.
But let’s get to that in sec. Because it’s not the only reason for investors to be cautious.
It starts with the surge in multi-unit construction and sales.
If you look at new home sales right now, detached dwellings are flat, and all the action is in multi-units.
High-rise sales increased by 23.5 per cent over the three months to April 2015, to be up by whopping 57.7% on the same three month period a year earlier.
That’s phenomenal growth that isn’t showing any signs of slowing up.
And it’s no news that these sales have been driven by overseas investors. In Melbourne, one in three new property sales go to Chinese investors.
Yep, Chinese buyers are a full third of the market.
In Brisbane CBD only one in ten unit sales go to owner-occupiers – many of them from interstate or overseas.
So it’s investor driven and it’s foreigner driven. That’s got to give any serious investor pause for thought.
And all this appetite has sparked a surge in unit construction. Apartment approvals are booming and at record highs in Sydney, Melbourne and Brisbane.
Quantity surveyors Rider Levett Bucknall have been counting the number of cranes on our cities skylines. Last count in Sydney showed there were 123 cranes…
… almost twice as many as six months ago!
They reckon there are now 426 cranes at work across Australia’s capital cities, a number that’s up 31% in six months. Three quarters of those cranes are working on residential projects.
So that points to massive supply already in stream, though much of it won’t be realised in the market for two or three years.
Now that might all be one thing if these were quality dwellings. You could just balance supply and demand and see how things are looking.
But they’re not. It seems that many of them are shoeboxes, sold to Asian buyers working with Asian expectations of what a reasonable dwelling size is.
And now there’s claims that many have been built using dodgy materials that aren’t up to Australian standards.
Like the cheap cladding that was responsible for the fire at the Lacrosse Building in Melbourne last year.
High-rise cladding is meant to be resistant to fire. But this wasn’t. It was the cheap stuff. And it burns like matches.
The ABC's 7:30 Report was running the story last week:
MADELEINE MORRIS, REPORTER: When the Lacrosse Building in Melbourne’s Docklands district caught fire last November, it exposed a sleeping danger in Australia’s booming construction scene: cheap cladding imported from China that is highly combustible and covering an unknown number of buildings in Australia…
This fire brigade animation shows how the fire, lit by a smouldering cigarette on the eighth floor of the Lacrosse Building, swept up 13 stories in as many minutes. It’s running up the cheap, plastic-filled cladding.
MICHAEL O’CONNOR, CFMEU: This product is rife. It’s used in buildings throughout Australia. All the information we’re receiving, Brisbane, Perth, Melbourne, every capital city, we believe this product is used in many buildings and particularly in high rise buildings…
MADELEINE MORRIS: It shouldn’t be. Building regulations prohibit the use of Alucobest cladding on high rise buildings. It is allowed on low rise buildings and that’s why it’s imported into Australia and easy to buy.
MICHAEL O’CONNOR: The material that’s fire-resistant is a lot more expensive than the material that isn’t, so if you’re a builder and you see two different products, one’s a lot cheaper and you get told that it meets Australian standard, you can’t blame the builder for going for that product…
MADELEINE MORRIS: The problem is, surveyors may not know if builders have illegally used the flammable cladding on skyscrapers…
And proper documentation about the materials used on buildings is frequently absent.
In 2011 the Victorian Auditor-General discovered 96 per cent of building permits issued by surveyors didn’t have proper documentation, leaving “little assurance” surveyors were “adequately enforcing building and safety requirements”…
The construction workers union says these checks and balances aren’t being met…
MICHAEL O’CONNOR: When it comes to building materials and particularly imported building materials, it looks like no-one’s in charge. So we have a flood of building materials being brought into this country, some claiming to meet Australian standards and we know they don’t, some not even bothering to make a claim of meeting Australian standards. And when you go to the different authorities, whether it’s the ACCC, whether it’s the building code authorities, everybody’s trying to say it’s somebody else’s problem.
This is what happens when a market runs hot. There’s so much money moving so quickly that it’s hard to keep on top of.
And this is where dangers to the market come from. It’s the kind of thing that can over-supply a market – flooding it with cheap, poor quality and potentially dangerous products.
It doesn’t do anybody any good. (Except perhaps foreign developers.)
For the good of Australia, and those people with a legitimate interest in the property market, we need to get on top of this.
Before someone gets killed.
What do you see when you look at our capital inner-city unit markets?