Insight

The future of Real Estate & Construction

Every year we spend time interviewing our clients and industry contacts to better understand their business environment and the trends most impacting them. After years of investment and (in some cases double digit) growth in the Real Estate and Construction sector, the industry is now at an important juncture. Despite the residential market cooling in some of the major cities, there is still a continuing appetite for innovative projects along new transport corridors – providing funding can be accessed.

After conducting nearly 70 interviews with our Real Estate and Construction clients across FY18, the recurring themes for this industry were the ever increasing burden of risk and regulation, talent management and financing.

Real estate & Construction

Property remains a popular asset class for tax

The level of risk and regulation has continued to escalate for the real estate and construction sector in recent years, with a raft of legislative changes and evolving tax implications for real estate developers and investors being imposed at all levels of government. This past year alone has seen the introduction of property vacancy fees and annual reporting for foreign owners of Australian residential property, changes to the application of GST on residential purchases, and more of the states implementing surcharges or increased rates on direct and indirect acquisitions of residential property by foreign purchasers.

Overlay this with the uncertainty around capital gains tax in 2019, with the Morrison Government tweaking the rules for residential property investors and CGT exemptions for expats if they sell while overseas.  The Opposition is heading to the election with a strong stance on reducing tax concessions around negative gearing and the CGT discount for property investors.

As Australians, our love affair with Real Estate hasn’t changed so it will also remain a hotly contested asset class when it comes to tax alternatives. That said, the bureaucrats understand the industry is a key contributor to the Australian economy and the importance of sustainable growth in the sector to maintain employment opportunities, create productive cities and manage housing affordability.

Technology advancement is changing the way we build as well as what we build

Automation and 3D printing are helping to speed up the lifecycle of projects, and this technology is progressing daily. We now have digitised and interconnected building management systems making it easier to keep on top of maintenance, while the “Internet of Things” (IoT) digitally enables ‘dumb devices’ like air-conditioning, lighting, media and security systems, allowing the user to customise their experience of the building. All of these services now interconnect and interact with each other – a benefit for tenants and landlords – but can also present a cyber-security risk. The industry is becoming a popular target for cyber criminals who can hack into a BMS system to access schedules of work and exploit data, or simply create mischief and brand damage by manipulating services (like turning up the heat, setting off the sprinklers or preventing access) – all which represent unwelcome interruptions to business.  Like all businesses, landlords need to take adequate steps to ensure their tenant’s data and workspaces are secure, or face serious market consequences. 

A number of participants in the real estate industry have found themselves victim to cyber criminals, the attraction being transactions that involve significant amounts of money exchanged at any one time. With many real estate agents and companies relying on single factor authentication, it has been relatively easy for cyber criminals to crack into email accounts to doctor invoices or divert funds to their own bank accounts.

It is essential that businesses in the real estate and construction industry safeguard their assets, data and their customers, by ensuring they have considered the risk that cyber security presents and have adequate preventative measures and training in place.

The war for talent

Infrastructure Australia identified $55bn worth of nation-shaping projects when looking forward in March 2018. With the volume of significant and high profile infrastructure projects either online or in planning, sourcing and retaining the best talent is increasingly difficult for our industry clients. We often hear from clients that staff (particularly experienced project managers), are saying that they are happy enough where they are but they want the big ticket project on their CVs, so move on. There is a true war for talent with many wondering how they compete and bearing the cost of a lot of on the job training. A number of specialties are finding there are less graduates in the pool each year and most are snapped up by the larger players. How do firms entice students into their vocation and what role do Universities play?  

On top of this, quotas for diversity, Reconciliation Action Plan (RAP) obligations and the cost of providing incentives for people to move into regional areas for projects has pushed salary bands up to unsustainable levels as the industry competes for a small pool of talent to deliver the number of projects on the go at any one time.

Talent squeezes are certainly making the industry rethink their approach to reward and remuneration – with a real focus on career progression and the opportunities they can offer their people and many are looking to incentivise key people by allowing them to share in the growth of the organisation.  

Strict lending requirements – for both business and customers

One theme in the industry that was made very clear, was the stricter lending requirements experienced by all from the big banks.  While some of this is no doubt driven by the Hayne Royal Commission, APRA has had a role in the past few years through its regulating of the banks and applying the handbrake to certain forms of lending. The result has been impacting both capital raising/equity financing and development funding. This has resulted in a greater reliance on pre sales and off-the-plan purchasing, but with the value of home loan approvals in September 2018 standing at $29.1 billion (the lowest since August 2014), customers themselves are also finding it difficult to get the funding they need to make a purchase.

The fall-back position from the last few years had been foreign buyers – which fuelled many developments in our capitals.  However these have become more difficult to come by, with increasingly conservative banks not lending to foreign investors, new FIRB rules and additional taxes imposed on foreign buyers of residential property.  

The squeezing of foreign investors coupled with the domestic tax changes for residential property investors has had an impact on investor grade product. Many are now turning their minds to how they can make the numbers stack up for retained rentals – or at the bigger end of town, Build to Rent (BTR) projects. Boutique developments aimed more for the owner occupier offering access to increasingly desirable amenities and community spaces continue to prosper.

Despite the challenges, the real estate and construction sector continues to be dynamic, and a huge contributor to the Australian economy. The property industry is particularly known for its cyclic nature – but the performance within these cycles can vary depending on asset class and regions. While it’s accepted that we are now coming out of a boom cycle (particularly for residential property), the outlook for a number of capital cities remains positive – but with more moderated pricing. With a number of significant national infrastructure projects coming on line in the next five to 10 years, the construction sector should expect growth.

One thing is for certain – the face of our Smart Cities will continue to evolve.