“We are heading for a lose-lose scenario unless we supply the basic fundamental need of shelter for all, rich and poor,” says Robert Pradolin, words tumbling out in a rush of passion and enthusiasm. “No one creates a successful long-term business without looking after its most important asset, its people. But that is what we are doing as a country. Without providing shelter for all, how can we aim to be a prosperous, creative, innovative and inclusive country?”
Pradolin’s heart may be big, but it’s not bleeding. An unapologetic capitalist, he declares that “profit is a good thing”. Yet he fears the future implications of Australia’s current housing trajectory for his family and for the nation. “It’s going to come back and bite us,” he warns. “We are creating an intergenerational time bomb.”
We meet for coffee at Melbourne’s Freshwater Place, a top-end, high-rise residential and commercial complex on the south bank of the Yarra. From mid-2001 to mid-2002, Pradolin was project director on the development. A civil engineer and registered builder with a graduate diploma in property and an MBA, Pradolin spent almost two decades working in senior executive positions with Frasers Property.
These days, Pradolin is self-employed as a strategic adviser in the property business, but lately he’s been giving up most of his time for free, trying to save his industry from itself. He reckons residential developers are at imminent risk of losing their social licence to operate, as their business model is based on property prices continuing to escalate and fails to deliver on affordability.
He is using his industry expertise to cobble together creative coalitions between big business and the charitable sector to quickly provide short-term housing in Melbourne and Sydney. First, he finds buildings that are slated for redevelopment and likely to stand empty for two or more years while large-scale projects are designed, approved, financed and marketed prior to construction. Next, he contacts a local housing charity that can identify vulnerable people who need shelter and provide them with appropriate support. Then he uses his contacts in the property industry to encourage big firms like Probuild and Metricon to make the buildings habitable. Finally, he gets the buildings fitted out with second-hand furniture donated by upmarket hotels such as the Sheraton on the Park in Sydney and Crown Plaza in Melbourne.
“I’m trying to get the private sector to help provide the shelter, while the not-for-profits look after the people,” says Pradolin. The buildings can provide much-needed accommodation for two or three years before developers are ready to move in with their wrecking balls. By then, he hopes it will have been possible to secure more permanent housing for the vulnerable people living there temporarily. “Having good assets lying empty while people are sleeping rough does not make sense,” he says.
Pradolin sees pro bono projects to help the homeless as a helpful Band-Aid, not a long-term cure. Ultimately, he wants to kickstart a business-led revolution in the provision of affordable rental housing.
Pradolin is not asking for altruism. He knows better than anyone that private developers are not in the business of running at a loss.
Yet he envisages the private sector delivering hundreds of thousands of affordable rental dwellings over coming decades. It might sound like an ambitious dream, but it matches the scale of what is needed.
In March 2018, at the National Press Club in Canberra, an alliance of not-for-profit housing and homelessness groups launched “Everybody’s Home”, a campaign to “fix Australia’s broken housing system”. It calculates that Australia needs 500,000 social and affordable homes by 2026 – 300,000 new properties for social and Aboriginal housing and 200,000 affordable rental properties for low- and middle-income earners. It wants government to offer tax incentives or direct subsidies that will entice super funds and other private-sector players to invest in affordable housing. This is what Rob Pradolin is trying to do, too.
But Pradolin does not think affordable housing can be left to the not-for-profit sector: “Without private-sector involvement in such a campaign, government rolls it eyes and says, here they go again.” Nor does he think that we can rely on our elected representatives. “Government time horizons are too short. If there isn’t a ribbon to cut while they are in office, then politicians are not interested. The private sector needs to show leadership on this issue, because it has long-term implications not only for the country, but for business as well.”
Just like his contemporaries in the not-for-profit sector, though, Pradolin knows that affordable rental housing cannot be delivered without a subsidy. “The private sector won’t deliver without having the un-economic bit topped up,” he says. “They need to get a reasonable return on capital relative to the risks involved.”
Pradolin calculates that a private-sector investor currently achieves, on average, a return of between 3.5 and 4 per cent on a residential property — and this without delivering affordable rents for tenants. Institutions like super funds would expect a return of at least 6 per cent. It is this gap that needs to be bridged before super funds will invest in building housing to rent, rather than housing for sale.
Unlike the United States, Australia has never had a ‘build to rent’ sector, so investors are wary of an untried product. “Everyone is scared of lending,” says Pradolin. “There is no track record and no data, so super funds perceive the investment as risky.”
Pradolin anticipates that once the model is established and the risk reduced, long-term investors like super funds will be happy with lower returns. But he maintains that low-income housing would still need a top-up from government. That does not necessarily mean providing cash. Another way to bridge the yield gap is to provide land. Pradolin says the government doesn’t have to give the land away or sell it at a discount; it can lease it long-term to private-sector developers for a peppercorn rent. “That land may be a strategic asset in future,” he says.
Private-sector developers are honest enough to admit that if they are building properties to own and rent long-term, rather than sell off the plan to individual purchasers, then they will build at a higher quality. Adam Hirst is the general manager for capital allocation with the multibillion-dollar property giant Mirvac, which is setting out to pioneer commercial build-to-rent projects in Australia. In a presentation to the 2017 National Housing Conference, he said that shifting from off-the-plan sales to renting puts a different lens on building apartments. It brings the life cycle of the entire building into focus and will prompt developers to use longer-lasting fixtures, more durable finishes and to think harder about sustainability.
Melbourne Lord Mayor Sally Capp agrees. In her former role as Victorian executive director of the Property Council of Australia, she told me that investors who own and manage a building for 30 years or more are going to pay much more attention to energy use, maintenance and protection against floods and storms than developers who sell strata-titled apartments and pass future costs on to individual lot owners. And building to rent will change the way buildings are designed, because landmark apartments will no longer be the big money-spinners. She says this turns the housing model on its head and increases affordability, because developers will get a better yield by building small and medium-size units rather than luxury condos and penthouses.
Supporters argue that build-to-rent offers a number of advantages. First, it can be brought onto the market quickly since, unlike strata-titled apartments, it does not need to be presold off the plan through a long marketing campaign before it can be financed. Second, it makes renting better and more secure for tenants. Unlike small private landlords, institutional investors don’t want to kick tenants out so that they can turn the property over and realise their capital gain. They can also offer renters more attractive tenancy terms because they don’t have all their eggs in one basket. Build-to-rent is predicated on stable returns over decades, more like leases in the commercial property market. There is a strong incentive to keep tenants happy so as to reduce turnover and to maintain the property in good condition to prolong the life of their asset.
The growth of a significant, professional, market-based build-to-rent sector would increase the supply of housing overall. It would help to entrench renting as a realistic, secure, long-term alternative to home ownership, rather than the second-best option that it largely is now. Given the right conditions, renting could be an attractive choice for middle- and high-income earners who want to combine flexibility with well-located high-quality housing. This should, in turn, help to stop house prices escalating so rapidly by reducing demand in the real-estate market.
Establishing a build-to-rent industry is not a silver bullet. It would require much stronger tenancy laws than Australia has now, lest the imbalance between big corporations and individual tenants results in slum-landlordism at an industrial scale. The sector would need to be well regulated, and Australia does not have a history of effective business compliance — witness the problems with shoddily built apartment towers, or the scandals exposed by the royal commission into the banks.
There is another catch with a commercial build-to-rent industry. As with Rob Pradolin’s dream of a business-led boom in affordable housing, the numbers don’t stack up. Why would a developer borrow at 6 per cent interest to get a 3 or 4 per cent return building apartments for rent when they can make a 20 per cent return by building apartments for sale?
If build-to-rent is going to work financially, then developers will have to bring down their costs. Pradolin sees great potential in advanced manufacturing techniques, prefabrication and especially lightweight timber construction. Pradolin led the team at Frasers Property that designed and built The Green, Australia’s first five-storey lightweight timber residential apartment complex in Parkville in Melbourne. Construction costs on the 54 apartments were more than 20 per cent lower than building with conventional concrete.
High land costs are also a big hurdle for build-to-rent projects. Here, there could be a coincidence of interest for residential developers and the owners of existing commercial properties that want to maintain ownership of their land but could benefit from having more people living nearby. The air rights above clubs and shopping centres, or extra space around aged-care facilities and hospitals, are possible examples. Again, Australian businesses are already engaged in these sorts of projects overseas. Westfield, for example, has teamed up with the American build-to-rent operator Greystar to add 300 residential apartments to a retail mall in San Diego.
Still, Mirvac’s Adam Hirst says that if build-to-rent is to take off in Australia, government will have to help. Sally Capp agrees. She says bankers and valuers tell her it is too risky. They know build-to-rent happens overseas, but want to see it proven as a concept here before they invest. Regulators like APRA do not have appropriate rules in place either.
When business asks for government support, it is also asking for changes to planning rules. In NSW, purpose-built student accommodation falls under the definition of “boarding houses” for the purpose of planning, which means standards are less onerous and costs lower when compared to other residential developments. Granting planning concessions to projects on the basis that apartments cannot be strata-titled and sold could be one way of supporting the build-to-rent sector.
Changing tax rules would make an even bigger difference. State governments could change land-tax settings to even the playing field. They could, for example, offer a modest flat rate of land tax to institutional investors who add new non-strata-titled rental stock to the market, while still keeping the progressive tax rate for people who own $5 million holiday homes or luxury penthouses that only get occasional use. A more generous approach would be to offer a tax holiday of, say, 10 years to ensure a better return to developers and investors in the vulnerable early stages of a project.
On their own, neither private enterprise nor community organisations have the means to repair Australia’s housing crisis. Business will never provide decent housing for the poorest 20 per cent of households in a market economy, because there is no profit to be made; yet private capital will remain the dominant source of investment in new housing overall. Business can be a source of innovation and dynamism, and the build-to-rent model has the potential to increase the supply of well-located dwellings that offer a secure alternative to home ownership.
Yet if we are to achieve some measure of housing justice – to provide, as Pradolin puts it, “the basic fundamental need of shelter for all, rich and poor” – then there is no doubt that this is going to require large-scale public investment.
This article was published in The Sydney Morning Herald. Click below for the original article.