Kathryn House
Hello and welcome to Talking Property with CBRE. I'm Kathryn House, your podcast host and in this latest episode we'll be examining Australia's critical undersupply of housing and the bold solutions needed to activate construction and help solve for this generational challenge. I have two guests joining me, both of whom were panellists at the Property Council of Australia's recent National Housing Solutions Summit in Melbourne. The message from the summit was that we need to incentivise investment, attract global capital at scale to generate supply, have a heightened focus on innovation and allow for more kinds and all kinds of housing. So what can we expect from today's podcast? Here are a few snippets from our conversation.
Stuart Penklis
When you start to look at what is being achieved in some of these adjacent or other industries, actually it starts to make the housing challenge that we have probably a little bit easier and a little bit more manageable in terms of the size of the challenge.
Kathryn House
That's Stuart Penklis, Mirvac's CEO, Development.
Mathew Aitchison
Where's our policy? Where's our strategy around innovation in the sector? Well, we don't have a body that can do that.
Kathryn House
And that's Professor Mathew Aitchison, CEO of industry led research initiative Building 4.0 CRC. I hope you enjoy our conversation.
Kathryn House
So thanks for joining me, Stuart.
Stuart Penklis
Thank you, Kathryn. It's great to be here and really.
Kathryn House
Pleased you could join us, Mathew.
Mathew Aitchison
It's great to be here, Kathryn.
Kathryn House
So, Stuart and Mathew, I really enjoyed your panel session at the summit which was all about being a more productive nation. It followed a presentation from the Chair of the Productivity Commission, Danielle Wood, who outlined that housing productivity has been going backwards, that it's a drag on the overall economy and that the average time to build a home has increased by over 50% in the past 15 years. However, borrowing a catchphrase from Bob the Builder, she asked, can we fix it? And her view is yes, we can. But we need more innovation if we're going to hit the target of 1.2 million new homes over the next five years. So Stuart, what are your thoughts? You highlighted on your panel that we need to pull all the levers and that prefabrication can play a role in addressing labour shortages, cost efficiency and innovation challenge. So these are homes that are built, mass produced, pre-assembled in factories. What's Mirvac doing in that space?
Stuart Penklis
Yes, thanks, Kathryn. Look, from a Mirvac perspective, we have a business that stems from greenfield right through to high density housing in inner suburbs of our major cities. And we've been on a journey over the last 10 years around prefabrication, both across detached housing and without question one of our big focuses today, and probably more so than ever over the last 10 years, has been a greater focus around the ways in which we can leverage prefabrication to reduce the time it takes to deliver housing. But importantly, and I think it's very important to stress this point, we do that with a mindset of ensuring that by proceeding down the path of prefabrication we can still deliver choice to our customers and we can still deliver quality, which our brand very much stands for.
Kathryn House
So what are the advantages over traditional construction methods and what are the hurdles? I believe there are still regulatory challenges and possibly some issues at a local council level.
Stuart Penklis
Look, we are still navigating some of those challenges around regulation and ensuring that the components of homes that we build now in factories are able to be certified and tested and provide the necessarily sign offs that various levels of government and regulators require. But certainly one of the big challenges that we've had in recent years and interestingly, particularly in our middle ring housing projects where we run both prefabricated homes or components of prefabricated homes and traditional builds, one of the challenges that we've certainly had in recent times is just the ability for manufacturers to be able to supply the quantities and volumes that we've needed to be able to deliver out our projects. And depending on the availability of labour, but also more recently during the COVID period, we've found that just some of the costs around labour and materials has impacted our ability to completely proceed down the prefabricated path. And in some instances, we've got projects where we have one stage may be prefabricated and the next stage adjoining it may be traditional builds.
Kathryn House
It's very interesting. We still have got that real labour challenge and that was a big point of discussion at the conference. Mathew, what do you think? You talked on the panel about the success of prefabrication in other countries such as the UK and Sweden. In fact, you recently appeared on an SBS program which focused on how Sweden, the country that bought us IKEA and flatpacks, has house factories where they're building flatback apartments in a day and homes in a week. Do you think this could be one of the solutions for Australia's housing crisis?
Mathew Aitchison
Look, I definitely think looking at more innovative approaches to delivering buildings is part of the solution. No doubt. One of the things I said on the panel and also one of the things I said on Dateline was that we do need to be mindful that it's taken many, many decades to get that capacity up in the Swedish industry. And that's been done with a bit of good old fashioned Swedish culture, which is about patience. It's about the belief in innovation, it's about the belief in continuous improvement and a very long-term view about industry development. These are not necessarily things that the Australian industry is renowned for. I think Stuart's pointed to some of the chicken and egg nature of this. We have a very large developer who's wanting to use that capability, but then when we turn to the market, we find that some of that capability or capacity is not there. That takes, as I say, decades to develop. So how do we get those two things in sync is something we need to be thinking about. I would just say that to me, I think what Sweden has achieved is nothing short of fantastic. But I would caution our Australian listeners, particularly in the industry, for thinking that we can just implement that one to one. That's certainly not going to be a very smooth implementation process.
Kathryn House
And do you think that prefab is really understood in Australia? You talked on Dateline about people often associating it with school demountables and mining dongas, but looking at some of those Swedish examples, there didn't appear to be any quality trade off.
Mathew Aitchison
No, no quality trade off at all as far as I've seen. Look, it's a very difficult issue, this understanding and awareness issue. I think if we say the words prefab and modular, there are a range of associations that people are going to naturally form in their minds about their last association with whatever that would be. And that's why I mentioned, you know, the school demountable or the mining donga. That's not to say that that's all that prefab modular is. There are also other words that describe what we're doing that are perhaps a bit more accurate or a bit more contemporary than say prefab and modular, such as MMC, 'Modern Methods of Construction', or even DFMA 'Designed for Manufacturing and Assembly'. My personal favourite of words, just to confuse everyone even further, is industrialised building. And I would say that I like that term in particular because it's more holistic. We're not just talking about the phase of building where bits of wood nailed together or concrete is poured into a structure. We're actually talking about the entire lifecycle of building that starts with design and development and planning stuff, but also goes all the way through to maintenance and operation of buildings. That's what I think about as industrialised building. And I like to try to expand that conception for people because I think there's many more opportunities for us to innovate across that whole life cycle than there are specifically just always focusing on that one thing, which is the actual production or construction of those buildings.
Kathryn House
So, do you think that there are some misconceptions, Stuart?
Stuart Penklis
I certainly do think there are some misconceptions and I think the points that Mathew makes are absolutely reflective in some instances of customer sentiment. But the one thing that we love pointing to is the fact that an example of it is in South Western Sydney at one of our projects called Georges Cove, where we have homes that have been prefabricated, walls, floors and the likes in a factory. And then adjacent we have another stage which has been constructed in a traditional sense and the quality of both to a very high standard. And the purchasers really can't tell the difference between the two stages. And that's what I think great looks like. But for the project teams delivering that project in particular, when you start to look at some of the stats that come out of prefabrication and the benefits of prefabrication, just to give you some colour, you know, we saw on the prefabricated stage a 54% reduction in the construction time between commencement to lock up stage. That's getting the house watertight. We saw 12 weeks from the start of construction to lock up and that compares to sort of 25 weeks for a traditional new build. So overall that resulted in about a 30% reduction in overall construction duration. But then when you start to look at some of the other aspects and the benefits that stem from it, we saw a 60% reduction in construction waste produced on site. And if you think about that, that's the equivalent of about 62 Toyota Camrys or 10 dump trucks less of rubbish generated from the prefabricated stage. So, some real benefits to stem from it as we realise greater levels of prefabrication in our business.
Kathryn House
It was interesting, when I was down at the summit, I did the tour of some of the new BTR towers in Melbourne and a lot of the bathrooms are prefab and you couldn't tell. And in fact, they were sort of when the person who was doing the tour said, people are actually thinking that they're seeing them as better quality than some of the non-prefab versions.
Stuart Penklis
And look, we have been on the prefabrication path in apartments, particularly in bathroom pods, for probably seven or eight years now. And I think as we've evolved the designs and we've improved the way in which, for example, the bathroom pods transition to corridors and the likes, there's certainly no difference. And in fact, what we're seeing is the quality in a controlled environment is a lot higher, but also the ability to customise those bathroom pods and provide customers with greater choice because, for example, some of the finishes are installed in a factory, rather than having to be handled on site, actually allows for a lot more choice by our customers in terms of the different types of finishes that we can incorporate into these bathroom pods.
Mathew Aitchison
Kathryn, I just want to go back to something that Stuart said that's important in this. I'm a complete building nerd. Innovation nerd. I, and my team, get really excited about this stuff. We obsess over it, but often we don't distinguish between what the market gets interested in. And I think, as Stuart's pointed out with the Georges Cove project, we might get very excited about how these things are made and whether they're made in a factory and how many steps and all of that. But as long as it stands up to the scrutiny of the market, no one really cares who's actually paying the cheques, as far as I've ever been able to determine. So I've often said to companies that we've been working with, or perhaps even different governments, we don't need to make a big song and dance about the nature of the way that these buildings are being made. What we need to really focus on is what kind of objectives are they really solving. Is it the time objective? Is it the cost objective? Is it the waste objective? Is it the sustainability objective? They're the really important parts, the ends, if you like, not so much the means.
Kathryn House
Yes. Well, it sounds like it's ticking all those boxes.
Mathew Aitchison
That's right.
Kathryn House
So, Stuart, as an extension on this discussion about prefabrication, you emphasised at the summit that to be more productive, we also need to streamline housing designs and to have fewer types of homes. Can you talk us through that?
Stuart Penklis
Look, we've spent probably the last 18 months really looking at our business and our processes and the way in which we brief our teams, but importantly, how we design the product that we deliver to our customers. And design excellence is central to everything that we do, coupled with, you know, high quality. And the one thing that we've found is that we've implemented a process within Mirvac that we refer to as 'Develop for Value', and it's making sure that we spend, for better terms, the money in the right places that actually benefit the customer and make sure that we're delivering efficiency that ultimately goes to better opportunity to prefab within a controlled environment. By ensuring that we rationalise design where it makes sense to rationalise design, and I'll give you an example, we've been able to standardise the number of different window types in our homes to allow us to have better buying power for a higher quality, higher performance of window, which ultimately doesn't impact on the customer in any way. In fact, by doing so we've been able to sort of deliver a higher standard of window performance. But actually, by just focusing on that attention to design and making sure we have greater levels of standardisation, ultimately what it means is we can deliver a much better outcome to our customers in terms of the quality, the specification and the overall performance of their home.
Kathryn House
So Mathew, Woods Bagot CEO Sarah Kay was on your panel, and she made the point that Australian housing tends to be over amenitised, making it less affordable. She talked about it being a race to the top as opposed to finding the most affordable way to produce housing. I was particularly interested in an example she used about a not-for-profit developer in the UK called Naked House, which builds stripped back homes without kitchens and cupboards so that you can install your own lowcost versions at a time that suits. What are your thoughts? Do we need to dial down housing amenity?
Mathew Aitchison
It's a good question because it cuts to the culture of building perhaps more than even the finance of building, right? Some people are interested in that taste and that status and they're always going to gravitate towards that. And if they've got the wallet size that can handle that, then good luck to them. You know, I'm not the type of person that likes to dictate what people's taste should or could be when we're getting into the housing affordability thing. I'm also a big fan of pulling every lever that we have. I think the changes that Stuart has pointed out that Mirvac is making are eminently recommendable. I think similarly, if a company like Naked House can offer a product that the market is interested in and they're happy to go and fit out that part of it, that's great. But I also think that most people in the market are probably interested in having the building industry solving their building problems. And so I think it's about finding a solution that maybe works for the 80% rather than the bottom 10% who have the know-how and ability to order and install their own kitchen or the upper 10% that just want that onyx marble bench top and they don't care how much it costs. So, it's that 80% in the middle. Look, my view on this, it's pretty much exactly the same as what Stuart's approach with Mirvac has been, which is that I think it's possible to rationalise the designs the way we're doing that in one of our big projects inside the CRC at the moment, and that's a project to deliver social housing in conjunction with Homes New South Wales, is to standardise the parts but not standardise the designs. If we create a series of standardised, mass produced parts that can be reconfigured in many different ways, it's possible in that circumstance to get the best value for the end users, in this case the users of social housing, but that could also be for market housing and get the purchase power, as Stuart's also said of the building industry, to be doing the heavy lifting for the end consumer. To me that seems to be a more long-term solution, but not ruling out that there will be individual businesses and solutions that slice and dice this another way.
Kathryn House
So, there was a lot of talk about the role investment will play in new supply as well. Andrew Purdon, CBRE's Head of Living Sectors Capital Markets, did a keynote presentation at the summit where he noted that housing was not a one size fits all issue. He referred to it as a broad church of different housing types. Unfortunately, Andrew couldn't join us on the podcast as he's been knocked out with the flu. But in chatting to him he said the debate on housing provision should recognise that different cohorts need different things from housing at different stages in their lives. So, co-living is primarily for singles. Build to rent in inner cities is primarily for young professionals, pre-kids. Single family housing or horizontal BTR as it's sometimes called, is for families who want to rent and land lease estates for the over 55's. So, it's about recognising people's changing needs and ensuring that supply is appropriately designed and located to suit. So if we talk about land lease, Mirvac is involved, Stuart, in many of these different housing types, including land lease estates. In 2023, Mirvac agreed on a partnership deal to acquire one of Australia's leading land lease operators. Can you explain to our listeners a little bit about what land lease is and why there's so much investor interest in that market sector right now?
Stuart Penklis
Firstly, just taking a step back, we're totally aligned around this mindset of the full housing continuum from greenfield to inner city, high density and everything in between. And I think probably seven years ago we made a decision to push into build to rent, which again fills a segment of that housing continuum. And then more recently we decided to invest alongside a partner in the Serenitas land lease business, which essentially is a business that provides the opportunity to purchase a house without owning the land. And essentially this is for ages above 55. But ultimately what we traditionally see in this segment of the market are people selling their existing home and downsizing into a land lease community where they purchase the home and then enter into a long term lease on the land which largely releases equity in their existing home as they move into that next phase of their life. And we see that as a growing segment of the market and obviously an evolving segment of the market.
Kathryn House
Serenitas CEO Von Slater was a speaker at the summit and she noted that while over, I think it's 50,000 land lease homes, are in the pipeline, neither Labor or the Coalition have built this into their housing supply forecasts. Why do you think land lease is flying under the political radar?
Stuart Penklis
Look, I think it's like any emerging segment of the housing market. Build to rent a few years back was something that really hadn't evolved in the market, wasn't really recognised by government. But as we stand here today, it is very much a segment of the market that is recognised by government. And I think as we move forward, we will see the maturity of the land lease market evolve. Particularly as you start to see, to your earlier point, institutional capital investing in that segment of the market and it becoming a more well recognised, well sought after solution to particularly that segment of the market where we're seeing more and more people downsizing into this housing type.
Kathryn House
Mathew, do you see it becoming as popular here as it is, say in the US? I believe just 2% of over 55s live in land lease communities here compared to, I think it's over 5% in the US. What'll shift the dial?
Mathew Aitchison
Price? [laughs] That's a fairly well trodden path in the property industry I would say. Look, I have to confess that maybe like a lot of people in Australia, the work that I and my group have been doing over recent years hasn't really brushed too much on land lease. I was very taken with the presentation that Von Slater gave, and I think she built a new fan in me personally. I'm more familiar with it in other contexts, as you say in the USA in particular, the industry that sprang up in the early 1970s, off the back of some fairly radical pieces of legislation carried out by the Housing and Urban Development Department, otherwise known as HUD, that generated the HUD code that spawned an entire industry of affordable housing, which now contributes around 80% of the entire affordable housing of the USA, which is a big number. I can't tell you exactly how many millions of people that is, but that is a very big number. So, I think coming back to what we said before, all levers must be pulled here. Land lease is one that stacks up for people for all kinds of reasons that Serenitas has been able to show the market. I think we should be getting in behind this. The fact that it's not being counted as part of the national targets was surprising to me as well, but not 100% surprising. Insofar as there's so much stuff that we actually don't count. I would go so far as to say the data is pretty poor. One of the facts and figures that we often get asked about is the volume of prefab in Australia. And I often say in that particular instance where people are very interested to understand exactly how much of the market it is, firstly, we don't count and secondly, even if we could count it, we still don't have a working definition of what actually constitutes prefab or modular, and therefore we actually don't really know what we're counting. So, for example, would we be counting some of the houses that Stuart mentioned out at Georges Cove because they have some componentry that's prefabricated, but maybe not all of it is prefabricated. So similarly, when it comes to these land lease communities, you would think that the government would be very interested in counting that towards some of their targets. It's providing a home for a family. I can't see why it wouldn't be so.
Kathryn House
One final question on the investment front. I saw a LinkedIn post that Andrew Purdon made after the summit about the role that global capital will play in in investing in Australian housing solutions at scale. He said, let's not muddle the thinking between policies on home ownership versus the institutional investment required to activate supply. Investa's Adam Crowe also made the point at the summit that capital has choice and if we make it too hard for investors, they'll look elsewhere. So just how important, Stuart, do you think tax, FIRB settings, etc. are in incentivising investment?
Stuart Penklis
Look, I think that, and we've seen it with build to rent, where it's taken a long time for the settings to be right to see capital coming into Australia to invest in that particular segment of our industry. And interestingly, we've seen a lot of our local super funds not invest in build to rent here locally, but invest in build to rent globally. And I think it goes a bit back to what Mathew said at the beginning. It's all about patience, it's all about the long term view and ensuring that we have the right settings, regardless of which segment of housing we're talking about, to give, I suppose, certainty and provide that clarity so that international and local capital can come in to help solve this problem. And I think that, you know, we've seen that now with build to rent, there's a lot more certainty, a lot more clarity with the tax settings where we're now starting to see greater flows of capital into build to rent here in Australia. And I think that moving forward, we will see more and more international and domestic capital come into all forms of housing to sit alongside both private sector here in Australia, but also government to solve the great challenge ahead of us.
Mathew Aitchison
Kathryn, I would just maybe tailgate something that Stuart pointed out there, which is around superannuation funds. As investors in the Australian housing market, I had the pleasure last year to go on not one, but two tours of the UK where we were looking at their housing markets and all of the different ways that deals were being sliced and diced and how wonderful it was that institutional investors were getting involved in that in a really big way, many of which were Australian super funds. Similarly, earlier this year I was in the USA and meeting with people at our embassy in Washington. They were delighted to tell me that our superannuation funds were headed to Washington to explore the great investments that they could be making in build to rent and all of these sorts of things. And although it's not my area of expertise, I was of course aware that the superannuation funds in Australia aren't playing as big a role in Australia, and we have to consider why this is the case. My understanding of the problem is that we don't have enough bespoke asset classes that really tick all of the boxes of the super funds. They want big chequess, they want long term returns, they want to rule out the risk around some of these projects, risks in delivery, risks in planning, and a whole bunch of other issues that I couldn't begin to explain. So, I really do think the challenge is back to the Australian industry to take up that challenge and to actually create those asset classes that they can confidently invest in. Because as they explained to me when I was in Washington, I think by 2030, the Australian super funds will become the world's second largest sovereign investment fund, which is enormous. Right? So why wouldn't we be getting this firepower into the Australian industry and into Australian housing?
Kathryn House
What are your thoughts, Stuart?
Stuart Penklis
Look, I think that it's a maturity that we will see over time. I think our super funds locally, want to see proven track record. I think that ticket size is one of the hurdles that quite often our local super funds now are looking for. They don't want to deploy into small investments, they want to deploy into large scale investments. And I think over time we will see them invest higher levels of funds into Australian opportunity. But what we're actually seeing, just as a bit of a side note, which is really interesting, is at the moment we're seeing significant amounts of Japanese capital, for example, coming into housing here in Australia. And when you delve into the background of that capital, they have many decades of understanding of housing markets, but importantly they have a very indepth understanding of prefabrication and modular construction and they can see the opportunity here in Australia. And I think that what we will see over time is that we'll start to have that local superannuation money flow into opportunities here in Australia, particularly as we start to see traction in prefabrication, really get momentum.
Kathryn House
So, to wrap us up, one last thing, Mathew, you made an interesting point on your panel at the summit when you said we weren't very good at innovating in this industry and that we need structural changes to foster innovation. One idea you had was a research and development corporation, similar to what we have in the agribusiness sector, to bring in new technologies. Can you quickly give us a little bit of colour around that?
Mathew Aitchison
Sure. I have to admit that perhaps as a researcher, I approach all of these things like a novice. And I think if I went back five years ago or so, I thought about the building industry in Australia and I thought, there must be a body there somewhere once we get into the government sectors that is actually looking after this, right, there must be a group that writes a roadmap, or there must be someone somewhere controlling these things. And, it wasn't until after quite a bit of digging and quite a few meetings and things like that, that I actually realised that the vast majority of that heavy lifting is being done by the peak industry groups that we have. And we have some fantastic peak industry groups like the MBA, like the PCA, like the HIA. They're all great groups, but they are also out there advocating for their members, as they should. And then we've got this issue in government where we've got federal, state, local and everyone's got a finger in the pie, but no one's really running the show, as it were. So, this pointed out to us that there was a structural issue with the way that we were thinking about medium to long term R&D and innovation in our sector. And in a sector that's very highly cyclical, having a kind of consistent approach to investment in R&D and innovation is super important because when we're really, really busy, we're too busy to be investing in R&D. And when we're bottoming out and about to return back to the top of the cycle, that's exactly when we need the R&D that we should have been working on in the previous four or five years. So that's where we came across the idea of looking at other sectors of the Australian economy like agriculture. As you point out, they have 15 separate R&D's in agriculture that all sit across the sub-units of agriculture in Australia, like wool, dairy, beef, pork, lamb, forest and wood products association, for example. And they've done a really good job of boosting R&D and innovation in those subsectors. And we thought, well, would it be possible to do something like that for the building industry? Just as a comparison note, agriculture is around 3% of GDP and building, if you include property and construction, is around 13%. So, we're talking about a sector that's vastly larger than agriculture. And agriculture has 15 of these things and we don't have a single one. So, it's not that much of a surprise then to think, as the younger me was thinking, where's our policy? Where's our strategy around innovation in the sector? Well, we don't have a body that can do that. So that's one of the things that I and our group are going around hand in hand with the industry, with the peak industry groups advocating for this at the federal level because that's where it needs to occur. And I would like to say that the doors we've knocked on have been fairly open and that the government seemed fairly responsive to this and we'll keep pushing on that and hopefully we'll get a result.
Kathryn House
What are your thoughts, Stuart? Do we need a research and development corporation?
Stuart Penklis
Look, we would definitely be supportive of that. And picking up on Mathew's point, you know, from a Mirvac perspective, we're probably doing two things at the moment. We've set up a dedicated team that is just tasked with volumetric prefabrication of housing and putting that into a real project in the next six months. So that's our first challenge to the team. The second piece, from my ELT perspective, but also from Mirvac board perspective, we've looked at other industries and we're just all recently in WA looking at the mining industry and looking at, in fact, the Rio Tinto example of how they operate a mine remotely some 1500 kilometers away from the actual mine. And when you think things are not possible, you only have to go and look at some of the things that the miners are doing in terms of solving the challenges that they're facing through innovation and technology. Who would ever think that you could be driving trains and big machinery some 1500 kilometres away to solve some of the challenges that those miners are having in those remote locations. So, when you start to look at what is being achieved in some of these adjacent or other industries, actually it starts to make the housing challenge that we have probably a little bit easier and a little bit more manageable in terms of the size of the challenge. And certainly, we took a lot of inspiration from what was happening in that sector.
Kathryn House
So maybe Bob the Builder is right? We can fix this.
Mathew Aitchison
I think the industry, Kathryn, is very creative, if nothing else, I think Australian industry is full of really creative and energetic people. So, I'm going to agree with Bob the Builder on that one.
Kathryn House
Well, there is so much more we could have covered off on, but we have run out of time. Thanks so much for joining, Stuart.
Stuart Penklis
Thank you very much. It was a great discussion.
Kathryn House
And Mathew, I really enjoyed your observations.
Mathew Aitchison
Thank you, Kathryn. Thank you, Stuart.
Kathryn House
Well, it's so important to keep having these conversations as one of the speakers described as Australia's housing emergency. It will be one of the topics on the agenda at the Property Council's National Congress in Perth this October and I look forward to hearing how the discussions have progressed at that point. Thanks for tuning in to this latest Talking Property episode. Make sure to follow Talking Property wherever you get your podcasts and rate or review the show if you get the chance to help other people find us. Until next time.
