Talking Property | Is the Only Way Up?

KH:
Hello and welcome to Talking Property with CBRE. I'm Kathryn House, your podcast host, and I'm ready to dive into an really interesting topic today around what to do with older style apartment blocks. I'm joined by Warren Livesey, the founder of Buy Airspace, who's also Head of the Association of Rooftop & Airspace Development. He's a passionate advocate for using the airspace above apartment blocks to help solve our current housing crisis. I'm also pleased to welcome Toby Silk, a director in CBRE's Metropolitan Investments team. Toby’s actively involved in selling apartment blocks to investors and is seeing huge demand given the current tight rental market. So, is the only way up? And how much potential is there in the airspace market? Alternatively, should the owners of these blocks be thinking about selling to cash in on the current investor demand. Warren, let's start with airspace. What is it and how did you get involved in this market? And I guess why are you so passionate about the opportunities this market presents? I've heard you describe this as a $150 billion opportunity in Sydney alone.

WL:
So, I've been doing it for the last 25 years. I did it for 10 years in London and New York and have been doing it here in Sydney for the last 15 years. So, typically, the airspace is anything. When you buy a property, you own the airspace all the way to heaven and all the way down to hell. It's just the actual council that restricts you from putting on anything over and above what is actually required.

KH:
And it's not just apartments. You can do this above office blocks as well.

WL:
Absolutely. It's very popular overseas. Primarily shop tops, commercial buildings, residential buildings. So there's just a big focus on strata at the present moment because it actually has the largest amount of airspace available that's not being used opposed to those other two criteria.

KH:
And I guess it's a market that has really taken off in those other markets that you talked about earlier. Why do you think we've been a bit slow to the party in Australia?

WL:
Well, we haven't really had to worry too much about space. Density is a very big question obviously in parts of Europe and the US, as well as the UK. Airspace development is close on a $86 billion industry just in the UK. They've actually approved 180,000 airspace homes in and around hospitals and transportation hubs. And how I've guesstimated what it is potentially worth here is, in New South Wales we have about 90,000 strata apartments or blocks. And of that your average strata block is about an eight-12 unit scheme. That is generally a three-storey walkup with about 300 square metres of roof space that's not used. Typically a pitched roof. So that 90,000 x 300 square metres not being used, that's 27 million square metres times that of an average of say 10 to 12 to 15,000 a square metre for sale value, and you're actually looking close onto $400 billion. But assuming anything worse than that, that's the maximum part of sales price.

KH:
And I know that we have a new New South Wales Strata Commissioner and one of his focus areas is, how do we look at maintaining these older style properties? So that's one of the attractions, isn't it, in this whole airspace area that you can, if you're an owner in one of these blocks by selling off that airspace, fix some of the defects that there might be in these older blocks, particularly coastal properties.

WL:
Well, absolutely. Look, a lot of these older blocks, they have these old roofs that are leaking. They're generally non-fire compliant. As in the top floor owners, there's generally a fire gap that can jump over and on average, your average strata block owes about $500,000 worth of expected capital works to be planned over the next 10 years. And what they've been looking at is how they're going to afford that. Presently it's been either increasing the quarterly levy or doing special levies when the actual work is being required, but most of us don't have the money. So the most typical and the most prevalent option is to actually sell the airspace above them. And we are certainly not advocating for strata owners to do it themselves. That's been the real testing part here in Australia because ultimately, strata owners are not typically trained up in this area. They don't normally have the funds and they may not always get on very well with each other. So you know, the best way to actually adapt or unlock that airspace is by negotiating or tendering out the airspace to an airspace developer and doing a joint venture contract with someone that actually knows what they're doing, they have the finances involved and they will look after the whole project from start to finish.

KH:
I guess that is really one of the big challenges and maybe even more so in other states than New South Wales. In New South Wales, you only need to get a 75% agreement from strata owners, in other states it's 100%. I guess Toby, that's why you are finding that maybe some people are opting for an easier route in terms of, you know, selling a block rather than going down the airspace road.

TS:
Yes absolutely. I think in terms of what Warren is suggesting and what we do in selling these apartment blocks, generally, the apartment blocks that we sell are owned by one owner who owns the whole block. Whereas Warren's talking to the fact where you've probably got multiple owners in a building, and they're all trying to work towards getting the building remediated or wherever it may be. But we're finding that there's huge demand for these apartment blocks at the moment where owners are selling them in one line. And some of these blocks aren't strata titled like they are in Warren's case. So they're all owned on one title, which is a deposit plan. And effectively the reason that they're so in demand right now is because we're seeing such huge rental growth in the residential marketplace at the moment.

And that goes back to what happened with Covid. With Covid, borrowing was effectively free and it was cheaper for people to buy properties rather than rent. Now, with all the interest rate rises that we've had, the converse is now true. So people trying to rent over buy and we have such a shortage of rental property, which was taken up over Covid by owner occupiers. So we're in a bit of a tight bind there unfortunately. And a lot of investors are looking to capitalise on that. So these apartment blocks give investors the opportunity to take advantage of that rental growth that we're seeing and in 2022 we saw residential rental growth in apartments grow by 35%. Just last year we saw them grow by 16.5%. And  this year it's probably going to moderate to, somewhere around 10% or so. So there's huge growth to be had in that sector. Other opportunities that these apartment blocks provide an investor is, if it is on one title is you could strata title the apartment block and if you strata title it, you can apply for a residential loan as opposed to a commercial loan and you can actually unlock some more equity which you can then use to invest into another asset or you could actually sell down the property individually. So, there's opportunities there to take a few different angles for an investor and diversify their risk.

KH:
So there's clearly a lot of different options that you can consider if it's held in one block, if it's multiple owners. Warren, maybe if we go back to you, it'd be great to get an example of where the airspace market has worked really well. I've been reading a lot about Skye Tamarama in Sydney as being a bit of a poster child for how you can make this work well if you're an owner in a strata block. I was looking at that and they managed to sort of fund $10 million of works by adding two penthouses at the top of the building. But it does take some time when you're working with multiple owners to get them to come to an agreement on something like this.

WL:
Well, I mean I actually got involved in that 12 years ago talking through the various different options. Look, it's amazing that they've done it, but it's fraught with danger. Sadly, in order to get all 75% of the owners on board in order to get those penthouses, they would've had to have voted 75%, 14 separate times to get the majority through. So that's when they did the D.A., the construction, the loans and the likes. And so at any one time they can maybe not get the majority and therefore it can kill the actual development altogether. And that would be possibly one of the main reasons why we don't have much strata development here. Whenever the property departments are trying to look at where they can put housing, they never look at strata because they see it as being too difficult.

And it really is. I joked about earlier, you know, ultimately it's death, divorce, and then strata meetings. No, no one wants to do it and you know, they don't generally want to work with their other part especially, you know, when it comes financially. So really the key to unlocking these 80,000 odd older apartment blocks is actually not to get the owners out of the way, but ultimately to get a developer in earlier. And what I mean by that is they ultimately, they determine that there's airspace above, generally that's been given to them because they're close to a transportation hub or a hospital area as we've been hearing of late. And you know, they're having to replace their roof, which is a liability. And so what we are doing is we are putting a title around that particular liability and we are creating an asset from it by building these new homes. So ultimately what we're doing is we're tendering out the airspace, we get a number of interested airspace developers and they ultimately negotiate a call options contract, which allows the developer to go ahead and submit the development application to council on their behalf. So the owners are not having to pay for anything. They're not having to agree that 14 times, they only need to do it the once and the once only.

TS:
And Warren, if I am someone who is a strata owner within an apartment block, and I think that this applies to me because I've got a few issues going on my apartment block at the moment and we're up for a huge special levy and we're finding it hard to make ends meet. Where would I first start to understand whether or not I would even comply with the opportunity to potentially sell my airspace in my apartment block and where would I start?

WL:
Well look, every apartment block as you know, has generally a 10-year capital works plan. They have to itemise what general works needs to be done to the apartment block over those 10 years and generally how are they going to fund doing it. So primarily it's either the quarterly levy going up or we said about the special levy, but the alternate of course is selling the airspace. So how would they know? Generally most of the older blocks, anything that's more than 10 years, will have a pitch roof. They're concrete tiles generally, as we said before, non-fire compliant nor are leaking. So there's already an existing space there and you've already got the existing level so you're not actually looking to go any higher. You are looking to potentially add further bulk and scale to that particular building. And on general sense, I'm not a structural engineer, but most buildings can take one to two additional lightweight levels and these rooftops generally are very heavy.

The concrete tiles are about a hundred kilos per square metre. So by taking off eight to nine tonnes and putting on 14 or 15 is not that large a degree. But ultimately you should assume that you can use the airspace. You own it, council, they generally allow you to exceed the height controls by putting in a section 4.6. It's just that several councils actually ask for 10% of the reward. So Bronte, you know, the average square metreage rate going up is $21,000, they're looking for $2,100 of that. So you can in fact buy the airspace from council if they don't allow it. You just need to confirm that obviously that particular space and the building can take that particular weight. But just jumping to your earlier point as well, Toby, is most of these older blocks have two sets of stairwells.

So the front stairwell egress is what we need now. What we're doing is we're replacing the rear stairwells with a lift and that goes straight up to the top floor and that allows actually residents to be able to access each individual floor going up to that as well. So even downsizers, you know, going into an old block, will be able to have a lift that they can go into their particular apartment block as well as to their apartment as well as the existing owners will be able to stay longer in their existing strata blocks because of the lift, therefore not requiring as many old age home schemes if we fix up what we've got.

KH:
So, what cut through are you getting with government on this? I know you've been talking to a lot of government people of late and I think you've got Tim James on board from a few articles I've been reading, you know, what's the government response to this?

WL:
I was just at the local council in Liverpool. I met with the mayor and everyone is so interested in the idea. Thought it's a concept that they've never really considered, or it had any viability to it, but from a federal point to state government to local council, they've all been very positive and wondering how they can incentivise this type of development.

KH:
It's good to hear because we definitely do have a real housing crisis at the moment. I guess let's flip back to the investor side. Toby, how do you see the market going this year? Obviously, you had some really great results last year on selling apartment blocks outright, and this was just for your single owners. Do you see that momentum continuing this year?

TS:
Absolutely, we see that it's going be a very strong year, especially with the fact that we've seen that inflation data is on the way down, which means that it's unlikely that The Reserve Bank is going to increase interest rates this year and if anything it's more likely they're going to cut interest rates and that's brought a newfound confidence to the market and we haven't seen a January this active before. So, that's a number of things. Also the end of last year we saw on Melbourne Cup Day the Reserve Bank put up interest rates, which killed the momentum going into Christmas and we typically have very strong momentum going into Christmas and that just didn't happen last year. So that's been pushed over to this year and the fact that we've seen a few positive news articles come out, I feel that buyers are now thinking that we have hit the bottom of this cycle and are now trying to get into the market before the property market runs away from them and try and get themselves a good opportunity.

So we are seeing huge amounts of properties coming to market and also huge amounts of buyers as well. So it should be exciting time ahead for us in 2024. Also wanted to touch on the fact that what Warren's doing with selling airspace in apartment blocks. We also do sell apartment blocks that are owned by collectives. So for example, they're strata titled and owned by many different people. We generally sell them as development sites. So for example, the existing property no longer provides the highest and best use for the land that it sits on. So it's underdeveloped, would be the word. And we can come along and we can sell the whole site to a developer who knocks down the old apartment block and then puts something there which is more akin to what people will be looking for and that would appeal to the downsizers.

So we have an aging population in Australia and there's a lot of downsizers who want to find something that's a little bit more conveniently located to amenity as well as providing a little less maintenance than a house does. And there's not many products out there within the market that would actually appeal to the downsizers. So generally if you're looking for something that's very high-end, if it can have views the better, but especially important is to be close to amenity and they generally want three bedrooms. So one bedroom for themselves, one bedroom for a study or for their kids, and then the third bedroom is for their grandchildren. Now, in actual fact if it, I don't think it plays out like that where everyone kind of stays over one night, but that's what they want to have in their mind as being the perfect property.

So a lot of the apartment blocks that are currently out there at the moment, especially the aged ones, they just don't facilitate what they're after and they don't also have the infrastructure in them as well, like, you need lifts and things like that and they want to ensure that they're future proofing these properties for them to accommodate because it's their forever home. They don't see themselves moving out of this property, it's not a stepping stone. So they want to ensure it's high-end luxury and has everything that they want and ticks all their boxes. Where we do come into some circumstances where Warren's airspace would be quite attractive is sometimes you do find these apartment blocks in very nice locations that even if the people are to sell out to a developer, the chances of them being able to buy an apartment within that same location on the money that they've been given by the developer is next to nothing.

So they want to stay in that same location, but the block generally has some issues. So for example, it doesn't have a lift in it. And so they know that they're getting on in years and soon they won't be able to walk up those stairs. So what they need to do is, is talk to someone like Warren who can potentially activate the roof space and use that to convert into some more apartments and then they can use that money to then upgrade their building and make sure that they future proof their position in that property. So it's definitely a niche within the market and there's a lot of people that I think could find huge advantage in what Warren is proposing.

KH:
So, are you working with many owners at the moment, Warren?

WL:
Absolutely, look it's really an educational situation where 90% of the people I'm speaking to have never even heard of it, never contemplated it, it's always ultimately being a sellout scenario, a move out, a demolition and then a rebuild and then sadly sale to the highest bidder. And it's kind of a non community type spirit I feel where airspace actually allows the community to profit from the uplift. They are the ones that actually make the money from the development going up. They use that money to fix their building and improve their lifestyle and they are able to stay living there and invested in their building. So it gives them a method to continue their lifestyle but not actually having to dip into their own pocket to pay for it.

KH:
And one other thing that I found really interesting when I was looking into this whole topic was the ability to create key worker housing, which is one of the real issues that we have, particularly in markets like Sydney when we're trying to house lower income professionals and you can do these developments potentially around say fire stations, ambulance stations and provide for that key worker housing. Is that something that's really kind of interesting government at the moment, do you think?

WL:
It is ultimately the biggest airspace development overseas. So from Europe, France, UK, even Boston, it's the local council. They've become the largest airspace developers. And they are primarily putting, rooftop homes in and around hospitals, as you said, transportation hubs, fire as well as police stations and as well as all the affordable housing is going on their existing council blocks. So it is funny enough not the individuals residential owners, it's actually councils that now are doing multiple projects. Just one came out, 24 houses approved on council lots. So it would be two to three times that of your general person. But here in Australia we can build close on a 100,000 new airspace homes in around our hospitals as well as for essential workers. So I see nothing needs to be knocked down and replaced and really the key aspect of airspace development is it's the greenest housing solution available. It truly is and the fact that, by not demo-ing the building and by putting a carbon neutral building on top, generally wood structured, and therefore not having to build these carbon intensive concrete blocks with defects, we can actually save up to a hundred million tonnes of carbon by actually following the purpose of a hundred thousand airspace homes opposed to traditionally how are we doing it now.

KH:
And I guess for both of you, it's clearly not just a Sydney phenomenon. We've talked a fair bit about Sydney here, but you know, there are opportunities for owners and investors around the country.

WL:
Yes, absolutely, Toby?

TS:
Absolutely we sold some apartment blocks in WA so it's not something that's just unique to New South Wales by any means. Developers and investors will seek properties across Australia as long as it ticks the boxes that they are looking for and they're not going to be biased as long as it stacks up based on their spreadsheets, then they're happy to go for it. So, no, definitely not a phenomenon unique to New South Wales by any means and we see these transactions happening all across Australia.

KH:
Thank you so much for your time, Warren and Toby. I think it's going be really interesting to see how the airspace market evolves and I'd love to touch base with you going forward, Warren, because I think it's a really interesting area to explore. But also really interesting to see whether this heat continues in the investment market and I know you've got a few auctions coming up, Toby, that I'll have to check in on you with. So, thank you for tuning into this latest episode of Talking Property with CBRE. If you like the show and want to check out more, visit cbre.com.au/talking-property or subscribe through Spotify, Apple Podcasts or your favorite podcast hosting platform. I'd also love to hear from you with questions, feedback, or ideas for future podcasts. You can email me via talking [email protected]. Until next time.