The ghost-tower fallout of structural failings

October 24, 2019
Building Construction

The past year’s media reports have been amongst the worst in recent memory for the new-unit industry.

After hot property price rises in our major capitals ran out of steam, the writing was on the wall.

The Royal Commission into banking, APRA restrictions, a tighter lending environment and a potential apartment oversupply headache were the foundations of this downturn, but recent months have dealt an even tougher blow.

The idea that newly completed unit blocks could be suffering structural weakness, to be honest, did not come as a shock. How is it possible in contemporary Australia that we’re shutting down new towers because of stress fractures?

And while the news is already bad, I think there’s potential for it to get worse before it gets better.

History doesn’t repeat

In today’s disposable society, the quality of everything – from political discussion to offshore-manufactured toys – is falling in the pursuit of bigger margins.

And there’s perhaps no more vivid an illustration than the standard of housing construction.

Take a stroll through any major Aussie CBD and look at the quality of 100-year-old buildings. They’re thoughtfully engineered with craftsman-level building techniques and durable materials. These are structures established to withstand several lifetimes of exposure and designed to provide their residents with a functional, practical and resilient home.

They still stand strong today – a far cry from the buildings being thrown up in the modern era

Day of reckoning

I believe recent news around construction problems are the tip of a very dire iceberg.

Most of the troubled unit towers are in the investor sector, and that’s the very area where there’s a pipeline of stock under construction and due to be released.

Now, everyone has a heightened sense of ‘fight or flight’, and the economic ramifications are yet to fully play out.

Say a developer completes a tower and it’s found not to meet building requirements. What are the solutions? Will they be compelled to rip it down, or spend tens-of-millions, if not hundreds-of-millions, of dollars rectifying it?

And once you do ‘fix the problem’ what rational buyer or tenant is going to want to have anything to do with this build. The trust is gone.

At the moment, there are hundreds of purchasers waiting for their new-tower units to be completed, and they’re watching the latest reports of stress fractures and forced vacancies with wide eyed anxiety. They’re undoubtedly on the lookout for bad news about their new construction unit tower. So too are the councils, certifiers, engineers, valuers and anyone else with a stake in the game.

And while we hear about the big problems, I’d bet my bottom dollar there are more minor infringements like gas leakages and waterproofing issues sure to play out as well.

I speculate that greed has played a major role in the scenario. And it’s not just developers willing to cut corners in order to make a bigger margin on their project either.

There’s also those who certify these projects. And how about construction contractors who may have been willing to compromise on elements of the build to win a deal. There might even be councils who benefit from higher density projects in their jurisdiction who have been willing to negotiate building guidelines in order to promote development.

The fallout and the redemption

The result will be a painful pinch point in the medium term before things start to get better, with the market being the ultimate arbiter.

Demand for new unit stock will fall as confidence in the product continues to drop. And while most towers will be OK in terms of construction, the consequences will spread to many of those as well.

Eventually, price points will have to come down and developers will need to wear the loss. This means future approvals will slow because developers’ margins are shorter. They’ll want to pay less for land.

Because construction compliance will become more rigorous, in all likelihood these costs will rise too putting even more pressure on margins.

But there is an eventual upside. The long term will see this wash through, and the industry can come out the other end stronger than ever. We’ll look forward to increased standards of construction and better-quality homes that will again stand the test of time.

The quality assurance plans and control, and the laws that enforce them, will make for a safer and more viable industry down the line with investors and tenants the beneficiary.

We just, unfortunately, have to go through the pain first.

So, for now, my advice for anyone looking to go new would be to hang fire and wait for the fallout. If you do feel the need to invest in the sector, make sure you’re dealing with a reputable builder and developer that has a track record of solid, dependable construction.

Also, ensure off-the-plan contracts contain insurances and warrantees. Better yet, have a property solicitor with experience in construction, go through the deal on your behalf.

Stay safe, hang on and we’ll come out the other end wiser for the experience.

Steve Waters
Steve has over 18 years of hands on, comprehensive property investment experience and is himself an accomplished property investor with a substantial property holding. Steve is a Qualified Property Investment Advisor(QPIA), professional negotiator and licensed Real Estate Agent in New South Wales, Victoria, Queensland, South Australia, Western Australia.
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