Peter Chittenden

Project Agenda

A Solicitor’s Role: Land Title and Contracts

May 17, 2012 by

It is soon evident in this discussion with guest, Joe David special counsel in the Property & Infrastructure Group, from national law firm Corrs Chambers Westgarth Sydney office, that in his well-exercised view, two key factors underpin the legal foundations of our property market: Torrens Title (together with consumer protection legislation) and the quality of contracts.

Firstly 1858 marks the introduction of the ground-breaking Torrens Title system of title registration (initially in South Australia) and today its ‘reputation’ that continues to build the security of our major residential projects.

According to Joe David, as a result of laws introduced on January 27th, 1858 by Sir Robert Torrens (see notes below) Australia’s internationally regarded property laws and land title system were soon to be the key foundation of the local real estate market.

And that is still so today, and as we will see spreading way beyond the borders of South Australia. However it is Joe’s view “it is the developer’s reputation and the fact that our property industry has kept pace with the expectations of today’s buyers that together so-well service the needs of our present-day market.”

This is the second in a series of interviews with industry leaders for Project Agenda. With over 35 years experience acting for major developers, Joe David talks about some very clear cut and valuable in-sights across the project marketing sector.

Joe is very well qualified to give up his time to take part in this series of posts. Heading up the Developer Sales Group at Corrs, Joe has his focus on what he terms ‘the money end of the project’. From my point of view that’s a few very simple words that mean a great deal. After all it requires little conjecture to imagine circumstances where as Joe puts it, “if a contract is not watertight when it comes to settlement a developers investment could be at an unacceptable level of risk.”

The progression of quality contracts is one that Joe returned to frequently during our conversation. Throughout his 35 years, Joe has worked with many of Australia’s major developers including Mirvac, a group he labels “as trail blazers” in particular for the way that they have been at the forefront in selling off-the-plan projects for more than 2 decades.

A great deal of his experience comes from being involved with a raft of major projects including Quay Grand, Newington (part of Sydney’s Olympic precinct), Jackson’s Landing and Walsh Bay.

“Many of the projects I have been involved with have included a wide range of title structures not only typical freehold and strata title, but also complex community title and leasehold projects and in some projects a mix of titles. Layer upon layer.

 “These structures directly reflect in how contracts are drafted. They also imitate I think, the more complex nature of today’s urban environments and so this helps explain why in part contracts have had to become big and complex.”

It is against such a track record easy to understand why Joe David’s faith and understanding of property law in the project marketing arena allows us to observe some valuable and interesting insights.

In the sales and marketing of large developments, they can ‘suffer’ from being very complex for buyers to comprehend, and this is understandable and Joe is correct to highlight that the creation of any large community needs to be well documented as far as possible from the outset.

World beating property law

Few would argue with his starting point – “It is good property law, the Torrens Title system, that ensures title security, title that is guaranteed by a process of registration so that every buyer can have absolute confidence in the title of the property they buy.

“Our title system is paramount and we owe a great deal to Sir Robert Torrens. ‘Title by registration’ and how the title relies upon certified boundaries and registered plans, not only assures title but the exact description of the property is also clear, the registered Lot and Plan details.”

And with some major projects attracting off-shore buyers there are clear benefits flowing from Australia’s title and contract security.

“With projects that are taken off-shore Australia’s title system is proven to be popular with overseas buyers. Even where fraud occurs, there is a statutory system of compensation available. When you buy from the registered proprietor of real estate title with very few exceptions is guaranteed by the state.”

When I reflect upon Joe’s remarks, I suspect we should not always take the ‘advantage’ for granted. While fraud is very rare under our system, I feel that we should be re-assured that title does help to underpin major developments taken off-shore. Furthermore, our contracts enhance access to finance and the entire sales and marketing path runs efficiently.

Contracts – the size of a telephone book

Joe rightly points out that the marketing of a project that is not yet built presents some hurdles for the developer and buyer. The buyer is looking at the product we are selling that may frequently be on a site where no work at all has yet to be undertaken.

Then under most circumstances the developer will be looking at a commitment of tens of millions of dollars or even much more, naturally while this is a backdrop we are all familiar with it is one that requires a secure and detailed contract. The contract needs to work to meet the needs of everyone involved in each transaction. I think it is also important to remember that some projects can involve hundreds of individual contracts, and this can create extraordinary pressures.

For example in talking to Joe, a major release or launch that I have touched on in previous posts, can bring any number of buyers together, in a limited time, in a competitive sales path, where contracts must run smoothly and result in secure transactions. These pressures need to be addressed early and not surface during the launch day itself.

“Over a number of years contacts have become more complex and this is in response to varied circumstances, like those outlined while many will relate to the title structure of the project.

“This has also resulted in more detailed vendor disclosure – more community rules, management statements, complex strata titles that will have building rules to ensure that as far as possible the strata scheme runs well when the building is complete.”

Joe points to the fact that there can also be a mix of residential, retail and commercial users all within the one project.

“These sometimes very large mixed use developments, all give rise to varied rights and obligations and these need to be fully documented with clear boundaries, and rights between the different parties. After all nobody wants any sort of dispute aggravated by a poor set of management rules.”

However in Joe’s experience it is the reputation of the developer that is central and even the most complex documentation and contract cannot make up for a solid foundation underpinned by a AAA track-record.

Over the last few years the developer’s reputation has become more important and even more so now that finance is a complex challenge for many developers.

“There is always the need to achieve ever-more pre-sales levels to gain finance, as banks and other sources of finance are now ever-more anxious that pre-sales contracts are secure.

“Financiers are looking very closely to ensure that results in ‘qualified pre-sales’ so that when the project is complete, as I have said earlier, the buyers will be required to settle. So that the sales will be there and secure at the end of what can be a long lead-time. When the building is complete and the buyer gets what they paid for, so does the developer and the contract has the central role of underpinning this.

“There could be circumstances where a weak or badly drafted contract could see buyers, look for ways not to settle and succeed because of some flaw in the contract.

“It’s I am sure obvious that if you have huge financial exposure at the end of a 2 or 3 year construction period with a lot of cash going out, the contract and the buyers need to be rock-solid.”

However in a complex market, the importance of secure contracts also extends beyond the document itself and the one-off relationship between the Vendor and Purchaser.

There are other factors that Joe cites including for example one person or entity buying several apartments, and there are limits on the ratio of overseas buyers to local buyers, because both these examples might increase risk, and today financiers are very risk sensitive.

“And so returning to the core of what we have been discussing I return again to highlight that at every level the quality of our contracts, financial requirements and security of title help to under-pin activity, even in the most complex project.”

A fair balance

All contracts involve two parties and so a contact to buy into an off-the-plan project does however clearly need to work for all involved – the developer, the financer and of course the buyer must all have rights and safe guards.

“Because there are risks on behalf of the developer and there are expectations for the buyer, there are rights for all sides and again I have to come back to the importance of reputation, it’s so very important, and a solid brand for a major developer is bankable.”

Clearly the purchaser is making a commitment to a property they cannot see, to a property that they might not have title to for many years and it’s purchase will usually affect their future. Every buyer will also have to make a financial commitment.

Joe, like all of us, is aware that many projects being taken to market are large and complex thus creating a complex task for the project team.

“Until the project is finished the developer will not earn any income, they will not recover any of their costs and nor will they realise any profit. In fact until the project is sold and sales are settled the developers costs and liabilities, are almost open-ended, in a way it’s a like a vacuum.”

The contracts used in this environment, need to be fair and any rights that a buyer might have to cancel or not complete the purchase need to be for substantial departures. And while a definition of substantial can be hard to define unfair contract terms are now covered by legislation. There are some core areas to consider like any size variations of individual apartments, the quality and extent of finishes and the contract sunset clause.

“From a consumer’s perspective there has been some general heightened awareness of contract terms. The spot light given to ‘unfair’ contract terms associated with some industries, like telecoms and gyms has helped make consumers more sensitive.”

Again here we can see the importance of a developer’s reputation so that buyers can have the confidence in the delivery of quality products.

Some of the key issues that may be high on any list of concerns among buyers are according to Joe already addressed because of the more advanced planning criteria when projects go to market, as they have had to meet substantial council planning and other conditions such as heritage.

“Size variation is a major area of concern, and just what is an acceptable variation before any sort of compensation is due or a right to cancel is engaged. However a well-drafted contract will address this and also how any price adjustment is to be made.”

Is a variation of 3% satisfactory or is 5%? When this happens it is important that good will prevail, as the developer’s reputation will come into play.

“Contracts have I think kept pace with the growth of medium density living, and despite the fact that contracts are more complex, I do think that buyers do understand the limitations of what is involved.”

In general it is a remarkable stable environment

Pre-sales are very important, for apartments and also for house and land products. State and federal laws work to safeguard all contracts.

However according to Joe David the last 30 years has seen the experience of the project marketing field gain in quality and lessons have been taken to heart leading to a very stable market.

In addition to size variations in contracts, as we have discussed the sunset clause is in Joe’s experience also important.

In marketing a project there needs to be the assurance and security that it will complete on time, and in Joe’s view where there are circumstances when any increased lead time is needed this needs to be clearly addressed.

Quality marketing information

While not a direct part of any contract, marketing information also plays a role in this topic.

Almost any project marketing sales path now involves the increased use of highly developed artists impressions, computer generated images and extensive display suites.

“In my view these items need to have a good level of accurate and reliable information and the reputable developers and their marketing agents are very experienced in doing this.

I would also absolutely encourage that items like inclusions are covered in detail. I am an advocate of adding more and not less meat – there will always be questions from buyers, – but it is important to ensure equivalent quality is provided and that descriptions and marketing material always avoids any sort of vagueness or uncertainty.

Floor plans and finishes schedules are also key elements, they need to be easy to understand, they need to have focus on the purchaser, and they are key elements in the contract that are always looked at.”

My view is that the marketing suite and core materials that Joe highlights like plans and finishes schedules are the face of the development, they in-turn underpin the developers reputation and so should never be approached in any sort of half-baked manner.

Comparison with Auctions

And as we start to wind up this discussion with Joe, I was keen to get his view on a comparison of project contracts and the given popularity of auctions.

“We all appreciate that auction contracts are used for a completed product, they are so popular as the sale is binding ‘at the fall of the hammer’ – the sale is made and the property is sold. The auction aims to flush out the most willing buyers before hand and can also deliver a much higher than anticipated price.

 And while the two areas are very different, vendor disclosure also extends to auction contracts.”

Improvements

Thanks to Sir Robert Torrens and an excellent track record of contract development and professional marketing we look in good shape. In fact we have even exported our land title expertise to many international destinations including the Middle East and Singapore, still there are areas of improvement.

“I think reputation can never be under-valued. I do not think we will ever see a 2-page sales contract. However I think it is track-record, reliability, resources and trust that, alongside quality marketing that will continue to encourage improvements in this area.”

The industry sends out the call via marketing for consumers to come and see our projects and we invite buyers to make the purchase.

“We then need sound contracts to ensure clients receive their money in the end, and buyers receive a quality end property. All underwritten by trust and reputation.”

 

Note: A Little Bit Of Background

Sir Robert Richard Torrens (1814-1884), public servant, politician and land titles law reformer, was born in Cork, Ireland, son of Colonel Robert Torrens. On 12 December 1840 along with his wife they arrived in South Australia.

Years after arriving in South Australia local titles were in an unsatisfactory state and, as he put it, land was no longer ‘the luxury of the few’, therefore ‘thorough land reform … [was] essentially “the people’s question”’.

He stood for Adelaide in the House of Assembly elections of 1857 and, almost entirely because of his espousal of land titles reform, topped the poll. He was Treasurer from 24 October 1856 to 21 August 1857, he published a further draft of his proposed bill on 14 and 15 April and introduced it as a private member’s bill in yet a third form on 4 June. He was premier from 1 to 30 September, but no action was taken on the bill until 11 November 1857, when the second reading was carried. Despite very strong opposition, mainly from the legal profession, it passed through both Houses and was assented to on 27 January 1858.

 

Strata Laws Online Consultation Report Released

May 15, 2012 by

Several months ago I noted that a review of the Strata Title Act in NSW was currently underway. The results of an Open Forum website which ran for 11 weeks between the 15 December 2011 up until 29 February 2012 have now been released.

There were 1230 individual comments on four key questions and 25 blogs and almost 600 suggestions received.

For anyone associated with a strata title community as an owner, investor or developer the headline results point to the procedures and standards of body corporate governance, antisocial behaviour, pets, smoking and parking.

Other concerns expressed via the forum were the more effective enforcement of by laws and improved dispute resolution.

But there was also a clear message of widespread dissatisfaction with current legislation.

From a development perspective potential measures up-date the requirements to dissolve existing strata schemes were also a highlight of feedback and discussion.

For further details and to access a copy of the report you can now go to the web site: openforum.com.au/content/strata-laws-consultation-report-released

Super change to encourage property investment

May 15, 2012 by

In the days following last week’s Federal Budget the main debate appeared to be driven by political infighting. However as the headlines start to settle I would like to re-visit my earlier comments in particular how changes to super contributions and taxes might be expected to impact the appetite for property among private investors.

The budget also anticipated further cuts to interest rates, and such an outcome would further add to the appeal of property investment. But I will return to interest rates shortly.

First up the history of concessional contributions is mixed and the use of the Federal Budget to vary this area of policy is not uncommon.

One of the most notable policies meant that between 10 May 2006 and 30 June 2007, you could contribute up to $1 million of non-concessional contributions to your super fund. This figure looks very generous, as the current budget introduces a cap on eligible contributions for the next 2 years. If you are 50-plus the cap will be reduced from $50,000 to $25,000.

And while a $1 million contribution may appear overly generous for anyone on an average income, the cap has been on a downward trend from $100,000 in 2007 and 2008 to $50,000 over the 3 years 2009-2011 and now to $25,000 in 2012.

It had generally been anticipated that with some restrictions on the size of individual super balances, the $50,000 cap, which has been in place since 2009 would be retained. Now that cap has been delayed for 2 years. The other change is that taxpayers with an income of $300,000 and more will have to pay 30% on super contributions up from the current 15%. They do retain the 15% rate up to $25,000.

While it is true that the changes only impact high-income brackets I feel that these changes feed the perception that superannuation policy is an area where policy is more or less forever changing.

Investors dislike change and if you fit this income and age bracket then other investments like property start to look very attractive. Even more so when the impact of negative gearing is factored in, plus there are the advantages flowing from current low stock levels, low vacancy rates and when it comes to creating wealth, property still looks good in terms of potential capital gain.

For all of these reasons, if your have extra cash available that might have gone to super, then the property alternative looks attractive. There was at least a general indication that in 2007, with $1 million cap about to end that some investors left property so now the reverse trend should not be that surprising.

If we now take a general look at the potential impact on interest rates both the Federal Government and opposition appear to have a steadfast commitment to cut spending. The risk might be that a return to surplus will dampen economic growth and so further fuel the need for more cuts to interest rates.

If there is slower growth where might this leave the housing industry?

There was no direct stimulus in the budget and so possibly any steps to boost a pick-up in construction will have to rest with the states. However states some face their own budget deficits and current incentives are about to expire.

It appears that a boost to housing construction may not be on the horizon. However the move back to a budget surplus appears to be the right message given current international settings and this should be a positive for investors.

After almost a week since the budget was announced in detail, I can see some key areas to keep on watch.

Federal budget little impact – but lets keep an eye on super changes

May 11, 2012 by

While Tuesday’s Federal Budget announcement did not make any particular provisions relating directly to the property industry – for instance, additional homeowner grants – I do think that the projected surplus will prove to be beneficial for the property industry.

The surplus is the most positive thing to come out of the 2012-2013 Budget for the property industry.

Even though it’s fairly small, it should stimulate confidence in the economy, which is likely flow back into the property market.

In a world where many countries are doing it tough, the fact that Australia can deliver a budget surplus proves our economy is in relatively good shape and that is likely to instill confidence in the greater community, where a level of uncertainty still exists.

Of course confidence is all-important for the property sector – with a boost in sentiment, people are more likely to go out and enter into transactions, rather than taking a wait-and-see approach.

Any pick-up in the residential sector should stimulate a recovery in the residential building sector, and this would also flow on to sectors of the commercial property market.

If lower rates cause the residential housing market to pick up pace, the industrial market could get a boost, with large service providers, supplies and retailers looking at potential expansion.

Another sleeper might be the changes to superannuation, where some high-income earners could start to move back into direct residential investment.

After nine years the stamp duty debate continues

May 7, 2012 by

In August 2003 the then Federal Treasurer Peter Costello gave an interview on 3AW with Derryn Hinch and the subject was, Housing Affordability; Stamp Duty; GST; First Home Owners’ Scheme.

In part of the interview Derryn Hinch asked why the states had not, as he put it back off a bit on things like stamp duty …”That’s what I thought was going to happen.”

This was Peter Costello’s reply, which I think is worth posting in full: “yes, yes, no, what has surprised us is that the principal reason why house prices went up was that interest rates came down. As interest rates came down, we are now at 30 year lows, and you know, we have been running our economic policy to get low interest rates. As interest rates came down, because they were lower, people could afford to buy more expensive properties. And what that did is that it kicked a whole lot of houses that were previously being taxed at moderate stamp duty rates, $6,000 into higher brackets and they are now being taxed at $16,000 or $17,000 for the average house under stamp duty. We weren’t expecting that the States would take this enormous windfall out of stamp duty, but they did. In fact, we introduced, we the Commonwealth Government introduced the First Home Owners’ Scheme, to give a grant of $7,000 to people who are buying their first home. We pointed out to the States that this would bring new people into the market, there would be more house purchases, that the States as a consequence would get more stamp duty and would they please look at that to try and relieve some stamp duty for those first home buyers. But none of them did.”

Derryn Hinch: “Yeah, and are not expected to?”

Treasurer: “Well, you know, so we have a situation now, this is the frustrating thing, we have a First Home Owners’ Scheme whereby you’re given $7,000 to buy your first home and the stamp duty is $16,000. So what do they do with their First Home Owners’ Grant? Go and try and pay off some of their state stamp duty. It is a pretty frustrating merry-go-round out there.”

END.

My point, without favoritism to Mr. Costello, even if it appears to be a long quote is that this debate has now been running on for almost a decade. It is an area that various tax reviews have looked at; it is an area that many other government and industry reports have also examined.

And with such a sort fall in housing supply upon us and with housing now less affordable than ever, do you think the debate has been resolved, or even started a move out of the too hard basket?

However having said that, clearly incentives in the housing market are not only confined to stamp duty and to government policy and I will continue this general topic later and look at what and how incentives are used directly by developers. I think it’s an area that is far more clear cut, but an important part of project marketing.

 

 

STAMP DUTY: It’s time for a major change.

May 3, 2012 by

When the GST came along on the 1st July 2000 there was the ‘promise’ that lots of other taxes, duties and charges, in particular state taxes would be abolished or at least reduced. But in the intervening years changes have been minimal and only at the margins, for example mortgage duties have been abolished in most states.

A policy change to remove or reduce the payment of stamp duty applied to real estate post GST was and still is an illusive target. Today there are few indicators that any big changes are coming our way in the near future.

This is not to suggest that change will never come, in fact just the opposite. Various state governments are happy to use stamp duty concessions to stimulate various sectors of the market. They have become very comfortable with the idea of making concessions that are in reality no different from a promotion that a developer might offer.

Common incentives on offer can frequently target first time buyers, or older buyers or aim to stimulate construction activity. Sometimes these target groups are seen as disadvantaged and stamp duty savings can then be promoted in combination with other grants, like the FHB grant to directly stimulate activity.

However this on again off again approach can create market distortions and when the central idea is for example to stimulate the construction of new homes, it’s hard to argue why this application of stamp duty should not be removed permanently.

And I would have to suggest that such a change would need to be a national initiative. New construction is a major driver of economic activity and it has a huge flow on affect that runs deeply into many sectors of the economy and so the benefits appear obvious.

A national approach is desirable, to avoid different states simply chasing policy so their local market is not disadvantaged. Lets change the rules in this or that state so that an adjacent state does not gain all the advantages, appears to be a common theme. A national policy would also present a uniform market for international buyers looking at Australia, and avoid a major influx into any particular state. Again with the possibility of creating a local distortion.

The under supply of dwellings in almost all major markets is further reason to consider this permanent change to duty and with a predicted national undersupply of 170,000 forecast for 2013 (Source: BIS Shrapnel) removing stamp duty would hopefully kick start the resources necessary to overcome this shortage.

Older buyers have a role to play

But this is not a simple area of policy, the predicated undersupply of new homes also needs to be compared with the already established housing stock, and there are some very interesting trends here that are for instance being impacted by older homeowners.

A study in 2010 by the Australian Housing and Urban Research Institute found that 84% of homes occupied by people over 55 were living in a home with one or more spare bedrooms. And while some of this spare capacity would be used for family or lifestyle reasons, downsizing was possibly being restrained by the impact of stamp duty.

In NSW there is an existing concession, where the Senior’s Principal Place of Residence duty exemption applies to people between 55 and 65 years of age buying a new house before 1 July 2012 when the concession is set to end.

Stamp duty concessions for older people downsizing would see more homes in established areas released onto the market and this would also have the impact of better utilising of existing infrastructure, as many of these homes would be in established areas.

Here I can see good reason for such a policy as funding new infrastructure is almost always sighted as one of the main reasons that high council levies apply in new residential development areas. But could I also suggest that this type of ‘recycling’ of existing homes and local infrastructure could be a solid argument to collect less stamp duty.

Such stamp duty incentives do produce structural change in the market as we have seen recently in Sydney. The $600,000 cap on the current NSW Home Builders Bonus has for example seen a big lift in the number of one-bedroom apartments coming onto the market, and they have proved popular with investors and first time buyers.

Post 30th June – what will happen in NSW?

When it comes to the undersupply of housing, I have already highlighted that NSW has the biggest shortfall of more than 101,000 dwelling forecast for 2013, and construction activity has lagged for many years. And this is even with some large land release area’s opening in the cities south-west and north-west.

Activity simply refuses to budge and this is despite what should be a big level of pent up demand, and yet regardless of the shortfall demand has failed to greatly boost construction. The pressure from pent up demand is somehow not materialising.

And while there will never be one simple answer, the impact of stamp duty must be counted among the reasons, and this would suggest that the current concessions for First Time Buyers should be extended across the entire market. The FHB market does not exist in isolation and market-wide activity would benefit.

A more general concession at a realistic price level and possibly over a sliding scale could help generate more extensive market activity.

Some may still argue that this could further dampen affordability if the exemptions for stamp duty was not only limited to first time buyers, but we need to keep in mind that there are other FHB grants and also these same buyers would have access to a wider choice of locations helping to create a deeper market.

The case for change

Stamp Duty on real estate transactions is a big source of revenue for every state government. This is essential revenue, but does the burden fall fairly and is the ‘tax’ more complex than it needs to be. Clearly every state and territory government is happy enough to use stamp duty as a form of concession with varied and ongoing schemes, and so there are many precedents of sorts for change.

Australian’s generally pay stamp duty on all property transfers (accepting that there are varied and ongoing concessions) but on our principal residence we pay no capital gains and in 2012-13 according the Federal Treasury that concession will cost the Federal Budget $35.5 billion, that’s almost 9.5% of all federal government expenses.

Any move to change this policy would be almost impossible, but it is perhaps the absence of a CGT that permits other high property taxes, including stamp duty to be justified.

Stamp duty concessions are almost always tipped in favour of first time buyers, and associated with new homes, but questions remain as to what impact this has on building activity. This is also as noted a more complex area because the concessions vary between states and they are almost always transitory.

Stamp duty is an unpredictable tax for the states and despite the cash flowing from the GST the revenue would need to be captured from other structural changes in the economy. But clearly stamp duty remains a barrier to everyone in the housing market, young, old and even those looking for greater flexibility with employment are possibly constrained by its impact, being reluctant to move.

There are however some more immediate changes possible that could include greater indexation of rates of duty. The permanent removal of duty for first time buyers and some appreciation of the fact that the duty applies to the final price of a new home where there would already be many other layers of taxation. When the duty is paid is also an area where policy could be modified, helping to reduce the up-front costs of buying a residential property.

With the NSW state budget set to be announced in 2 months time, will change result with the possible application of duty concessions to the wider market?

However lets hope that we do not take a lead from Queensland, where from 1 August last year stamp duty for owner-occupiers on property purchases increased. But in contrast at the same time to stimulate the building industry, discounts on stamp duty for anyone buying or building a new home were introduced, leaving existing dwellings to bear the brunt of the increases. That’s a mixed message by any conclusion.

 

 

Stamp Duty: A Well Founded Tax Or Major Disincentive

April 26, 2012 by

The topic of stamp duty paid on property transactions is never far from the minds of anyone who is active in the residential housing market. It’s both a big source of revenue for state governments and at the same time a lever they also use to manipulate and stimulate activity in the housing market.

I also like to suggest that it is a tax that needs structural change, and I am far from alone in this view. Currently Australia has some of the highest property taxes in the world and we do not compare well with similar economic like the USA, New Zealand and the UK.

This is not an arbitrary deliberation and so as a first step I would like to start this series of posts by constructing a framework around this always-newsworthy subject.

Stamp duty for home buyers is also it would appear an un-popular tax and by coincidence a Readers Panel Survey in the Sydney Morning Herald (April 21-22) showed that 64.5% of respondents thought that stamp duty should be waived for all first time buyers.

A quick look at New South Wales

There is of course a current concession in NSW for first time buyers that will run until 30th June 2012, and is not alone in making concessions. I will return to such incentives as we move through this topic.

But first a brief look at the context of stamp duty.

Historically, stamp duty was literally a fee charged to cover the administrative cost of simply stamping and filing documents when an interest in property of any kind was transferred.

But that is now longer the case and it is a duty that in 2010-2011 will contribute an estimated $4 billion to NSW State Revenue along with Land Tax, which will raise another $2.3 billion.

At an individual level the duty normally payable on a home valued at $650,000 would be $24,740 and on a home valued at $1,000,000 which is not an uncommon sale in Sydney, the duty would be $40,490. Not paltry amounts of money and even less so for a first time buyer in a market where affordability is constantly a hot issue.

When the duty is calculated in NSW it is based on the value of the improved value of the property, including off-the-plan sales and this includes any GST reflected in the price. And so it is the current market value of the property, and must be paid within three months from the exchange of contracts.

Stamp Duty rates on property transactions in NSW have not changed since 1986 when the median house price in Sydney was $87,000 and as was generally expected, rates were not adjusted when the GST was introduced.

And while the tax is a progressive tax, since 1986 land values and the cost of construction, alongside almost every other in-put cost in the housing market have increased, and as a direct result stamp duty has also increased.

A duty with so many variations

I have already made a brief mention of the Stamp Duty concession in NSW that runs until 30th June 2012, but this is only one of a long list of rebates, discounts and concessions on offer that vary between all of the States and Territories.

While there is no reason that all jurisdictions should have identical policies, I suggest there is reason to ask a simple question at this point; and that is, if stamp duty in its various forms requires so much manipulation, is it time for major change in how and at what rates property stamp duty is applied?

After all at least since the introduction of the GST the industry and governments have been dancing around this subject avoiding real change and it appears reform is necessary.

Let’s start with off-the-plan sales

In the project marketing matrix off-the-plan sales lay at the foundation of activity and they determine the success of most projects. However how stamp duty is treated (notwithstanding various concessions) between NSW and Victoria is one point worth making the comparison.

In NSW the duty is normally payable on the full contract price, which is the improved value of the completed project.

While in Victoria there is a concession when you purchase property off-the-plan. In its simplest application the concession allows a deduction from the contract price for the cost of construction, which occurs on or after the contract date.

What this means is that effectively buyers only pay duty on the improved value of the land and the non-deductible costs and completed construction including GST as at the contract date.

In contrast to NSW and other states, the off-the-plan value in Victoria is the value an apartment would sell at the contract date on the open market as if construction had not commenced.

This is only one example of two very different applications of stamp duty. In a competitive market this can have an impact and for investors can make one market more or less attractive.

There is also much speculation when states vary their incentives with states at times moving to more or less match the incentives on offer. And so, for example if one state offers an exemption its neighbour usually follows.

The link between stamp duty and the need for incentives

Among the many forces impacting price, incentives are one of the key factors to be taken into serious deliberation as part of the marketing mix. And here again many of these incentives will be influenced even if indirectly by the impact of stamp duty.

Government promoted incentives have been wide-ranging and they are frequently seen as ways of boosting economic activity. For example in late 2008 when the then Rudd Federal Government introduced its boosted First Homebuyers Grant of $21,000 and various State Government’s then also added further very valuable incentives markets required urgent stimulus.

These incentives were not new and it has further been suggested that the FHB should in fact be closer to $30,000 and that all stamp duty on homes below $1,000,000 should be removed altogether.

Sporadic stamp duty discounts and incentives, even when some appear to be almost semi-permanent do, I feel point to the need to basically review stamp duty as a whole.  The Henry Review of tax has recommended already scraping stamp duties in favour of a new broad-based land tax.  The report suggests that this move could possibly reduce land prices by between 6 and 10 per cent.

At this stage I think there is evidence that stamp duty is no longer the best way to raise revenue form an already heavily taxed property sector and struggling homeowners. I will continue to look at this complex topic as it impacts different markets, and also look at how developers are offering their own incentives, which are at times aiming to at least partly neutralise the impact of high stamp duty.

ROI Structure will vary according to project type

April 23, 2012 by

Over the past few weeks we have examined how a well-managed ROI campaign structure is required to ensure that a quality plan is seen as the imperative of all activity in this popular area of project marketing and that tangible sales result.

We have established that from the first stages of planning every step is important, including key elements of how information is collected and managed, how the consumer is engaged and motivated so that they see real value from their involvement.

Well managed campaigns with a solid and creative structure can and have produced very good results. But there have also been some very poor examples where a great deal of time and effort has been wasted. The good examples will help produce solid sales and thus give any early bounce to a project.

Poor examples not only fail to leverage the ROI campaign but can go further and have a negative long-term impact on a project.

ROI campaigns also need to reflect the current market conditions; while these campaigns always need to have a well managed structure they also need clever creative thinking. That in-turn reflects market conditions and brands each project in the most appealing way.

The creative ideas and how the campaign is communicated needs to match the prevailing market conditions. An idea that worked during a strong market will not work or will be less successful when markets are not buoyant. Or likewise when a market is filled with contended tribes of purchaser that are of a particular demographic, the creative again needs to speak to this audience not what the personal preferences are of the project team be it developer, agency or sales team.

While some ROI campaigns can be achieved with less expenditure than a traditional marketing release, the expenditure does have to be balanced with the anticipated results.

The central aim needs to ensure that people who do register will ultimately be interested and able to move to an paid EOI and perform on the launch day to an exchanged contact.

It can also be a mistake to peak interest among buyers too far in advance of the project’s release. While some potential buyers will always be happy to have a long lead-time, others will not. This will mainly be a fact determined by the different target groups involved with each stage of a campaign.

Some potential buyers may be sourced from already well qualified existing client lists including repeat buyers, experienced investors including investment networks, friends and associates of a project and buyers on an active ‘early-bird’ list. For some projects these groups would also include off-shore markets, which will require very experienced engagement. [Because this is a very unique area of property marketing, I will look at off-shore markets in a future series of posts.]

The common thread being that these groups are not usually entry-level buyers, but are targets that know the market or the project and want to be involved.

The structure of the ROI campaign can be such that consumers have to take several steps in the registration process. Simply collecting for example a large on-line database might be a waste of time if anyone who registers is not substantially pre-qualified at some stage in the campaign.

Almost all data ages and becomes stale very quickly.

Areas of high demand.

But with well-managed data one method is to contact people on existing databases and ask them to register their interest in a new project should they be ready to move to their next purchase. The ideal way to make a final qualification of a ROI enquiry is to require that a refundable deposit is made to secure their place in the queue.

Some ROI campaigns in a strong market or where the appeal of a property is highly competitive can and do require potential buyers to pay a (refundable) registration ‘fee’ of $5000, $10,000 or $15,000 to secure their interest to preview and purchase a property at launch.

Such registration campaigns can be very successful as the act to pre-qualify buyers and create a sense of urgency, and when conditions are suitable and demand is strong they work in areas even when more general conditions are less than robust. It is all a matter of understanding the local conditions, having the right product mix and solid planning.

However such ‘deposits’ are not always possible or even advisable and if mistimed or used with inadequate market knowledge then the circumstances can backfire and damage a project’s possible success.

Despite all of the industries experience and the detailed insights discussed over recent weeks, ROI campaigns are not universally suitable for all projects. I can’t stress enough, if not done correctly, they can cause more harm than good. Despite a trend that has seen the idea become very popular – do not be fooled! ROI and launch campaigns are not as easy as they appear – they require years of experience.

It is easy to understand this popularity as a successful campaign can save money and as already outlined help secure sales that underpin a project and influence prices in a very positive way.

There are alternatives to the ROI campaigns that can be considered where the activity is driven by quality databases from assigned groups such as local agents, investor groups or buyers agents.

In this instance there is typically a campaign that is undertaken with the support of specific media that revels just enough about a project to secure people’s interest. There is a need to be ‘in-market’ even when selling through databases to provide confidence and assurance the project is genuine. If well managed these campaigns, while involving a reasonable amount of media investment and exposure, can be very successful.

This adaptation however requires the ability to be able to offer the project as ‘market-ready’ so that prices are set with contracts able to be exchanged so that potential buyers only act out of genuine interest rather than joining a database in anticipation of a future launch. This format of pre-release campaigns usually only operates on very short time frame. The key aim is to secure demand in a particular target group.

Whisper or off-market campaigns

While ROI campaigns and limited release campaigns do involve a varied degree of public exposure of the project, there is another option to act on prior to being ‘on-market’.

A whisper campaign that does not involve any formal marketing because it is a strategy based upon existing market contacts and reliable blue chip contacts.  It is a strategy based upon, literally a whisper, which could be these days one based around social media between already well-known and reliable parties associated with a potential project about to be taken to market.

Networking

‘It is not what you know but who you know’…a phrase that has been used endlessly to describe the value of networking.

In marketing terms networking is very powerful and in some very practical ways plays an important role in the project marketing environment. While the high-end of the market can be a very fertile ground for networking it has many varied and surprising applications at almost every level of the market and will in future be a more fertile ground thanks to social media.

The notion is tied very much into the power of word-of-mouth or personal recommendation… ‘a word in the right ear can move mountains’. It has been suggested if you could go and talk personally to every potential consumer face to face you would have the ideal marketing tool.

In its modern form networking via social media and eMarketing is an everyday reality as both rely upon an idea being spread in a targeted way without the direct use of traditional media or at least within limitations as traditional media is still very relevant.

So powerful is networking the idea has kept pace with and even lead some aspects of today’s communications. Every time a consumer gives their email address to a supplier or any organization to receive online details of this or that product or service they are in fact agreeing to become part of a network.

The reason for the willingness is the expectation of getting in ahead of the wider community on some news, offer or deal that may be offered.

So networking can cover a wide spectrum of applications from a direct email, a tweet or telephone call to a well-placed friend or associate about an opportunity or through the use of a blog on a social network site to spread some good news.

However before taking on any of the alternative ROI strategies we have discussed, one overriding fact remains the chief ingredient in any campaign: The need to pre-qualify any person who expresses interest in a project so that when the property is released and on the market the required sales result is secured.

 

A second airport for Sydney – the debate needs to end

April 20, 2012 by

A few weeks ago I noted that The Property Council had started a campaign ‘Make My City Work’ to help raise awareness about how our major cities are planned and what facilities are needed.

I have also made many references in Project Agenda to the importance of infrastructure not only related to individual developments but as a big picture topic that impacts all areas of development.

Over the past few weeks there has been a new and spirited debate about selecting a site for a second airport for Sydney. This is possibly the most important infrastructure project for Sydney and indeed Australia and the debate needs to stop and be replaced with leadership from every level of government involved.

With no firm direction even the debate will start to hurt Sydney’s reputation, which is well worth reflecting upon as the following brief points serve to highlight.

According to Infrastructure Australia Major Cities Unit in a ranking of the world’s major cities measured against a total of 69 indicators, among the 35 cities studied, Sydney ranked 14th overall, putting us in the company of Toronto, Frankfurt and Los Angeles; While closer to home within the Asia-Pacific region, Sydney ranked 5th behind cities like Tokyo and Singapore.

We all know that Sydney and Singapore are often seen as head to head in a race to be seen as the leading centre in our region.

But as the current airport debate remains in the headlines Singapore has the upper hand, mainly due to the its outstanding infrastructure. In a survey by The Economic Times, Singapore was ranked as the world’s leading city when measured by the quality of it infrastructure. With Sydney playing catch up as it ranks relatively poorly on the accessibility score, a reflection of its ageing international and inner-city transportation infrastructure.

Sydney’s is also currently our leading city contributing to Australia’s GDP, but if the airport debate is not resolved the warnings are clear. We need to appreciate that the stakes are high and we all stand to wear the social and economic consequences of further delays.

And doing nothing is no answer, the debate needs to end.

ROI Key Factors: If all goes to plan, valuable and early sales will result

April 17, 2012 by

Given the spread of ROI (Registration Of Interest) marketing campaigns, I think it is important to look at the key setting in greater detail. First up before starting any ROI campaign it is important to have clear goals and expectations to make sure the idea fits the market circumstances.

The key expectations that need to be agreed would always include clear targeting otherwise the process will lack focus such as:

  • Launch day sales target by number, percentage and total value
  • No. of paid Expressions of Interest (EOI) to convert to sales
  • No. of required ROI enquiries to convert to EOI requirement
  • No. of individuals contacted about the project through all the various mediums to reach the ROI target
  • The marketing mediums identified and what volumes of enquiries they will bring

This is not a process of testing the waters, because once you enter the market there needs to be clear intentions to engage the market in a defined sales path.

They key aim will be to build a quality database. This outcome will and can not only rely upon the raw volume of respondents. In today’s market there could well be a hurdle as securing a strong response is never certain. Quality registrations will only result if the entire process is well managed every step of the way – if a medium is bringing in low quality leads changes to the marketing message, sales conversation or marketing spend needs to happen, and quickly to ensure the project stays on track to its required numbers.

Access raw numbers with care

Care must be taken in the collection and use of data, simply collecting a great deal of useless information is a waste of time and could well back-fire by creating foolish expectations. It is easy for anyone to fill in an email form and these forms can look good on paper but unless there is a qualifying process behind them they may be of little even negative value to the sales process.

Subsequently as the process moves to the point of commitment a poorly qualified database will soon reveal flaws if few sales are converted. Or a poorly supported launch takes place. However if the ROI campaign targets the desired markets then the campaign will secure solid results.

One result of a successful campaign will be the ability to build prices, where prices can be increased, if the demand in these early stages is solid. This is not to suggest that prices can or should be over-heated as a result of early interest, but this is the ideal time to keep prices under review and in line with buyer demand.

A good result from an ROI campaign will assist to leverage higher sales rates early in the development cycle and this solid demand will underpin prices as the project moves forward.

This will also be a positive when dealing with finance from any perspective given how lenders can be in meeting today’s lending criteria.

Against this background of possible results it is easy to see why ROI campaigns are popular. However despite all of the positives, ROI campaigns are not, as has already been suggested, automatically suitable for all developments and they can and have failed. Why this usually happens is because the raw data collected is not sourced from well targeted activity, thoroughly checked, qualified and managed throughout the entire campaign leading up to launch – you only get one chance.

The qualifying process is essential; it’s the foundation to the entire campaign. The time and resources to do this always needs to be factored into the ROI campaign through an experienced project sales and marketing team who understand the importance of providing detailed and accurate reporting.

Even where existing databases are used do not take for granted that these lists are current, always ask the question. A quality database is built upon constant quality engagement. Otherwise this data, so important to the ROI process is suspect.

The Buyer’s Perspective

This brings us to the buyer’s perspective. In any ROI campaign the client’s outcome and involvement must always be a central consideration, so again we are back looking at the quality of data.

Genuine and qualified targets secured during an ROI campaign will naturally have their own expectations and they will have been driven by varied intentions and motivations.

This is not a lottery process and must be well managed. It’s an essential part of one of my re-occurring themes – that is the quality of the buyer’s experience at every stage sales path.

Above all when any consumer registers they must receive a response, immediately (even if automated although this is not ideal), but always within 24-36 hours and that response needs to be of value adding to the level of information the person may already have about the project. Many campaigns still manage to get this simple step wrong or simply rely upon an automated process and leave it there. That’s not good enough!

Consumers who respond to an ROI campaign do so for a reason, if that is not respected it can damage the project and the developers brand. If a consumer goes to the extent of giving over personal information this must be acted upon.

The collection of personal data is an increasingly sensitive area and even with the backing of Privacy Legislation there is a need to respect the process.

All of the data collected must be used as constructively as possible. If the data is well structured it also helps qualify and establish valuable demographic information. As a possible starting point even the most basic market profile can be built up, simply by the accurate collection of postcode details as a minimum.

Because of the structure and nature of the marketing, ROI campaigns are frequently most appealing to apartments buyers. This is due mainly to the frequently longer lead times and in some markets very long lead times of one, two or more years before completion.

With such long-term plans, for the developer there is an obvious benefit in securing early sales and many buyers also see these timeframes as an ideal way to manage their aspirations, finances and their varied and changing needs.

The targeted use of ROI campaigns can, when correctly executed, help lock in the benefits for buyers and developers alike.

Timing is an important element

ROI campaigns will almost always be managed over shorter periods of time from six weeks to possibly several months. However beyond two or three months ROI campaigns are usually not that affective because the reasonable expectation of a benefit to the buyer is always diminished by time.

If the campaign is in the market for a protracted time it reduces the urgency. The implied advantages evaporate and the target market will stop seeing the opportunity to register as being of any value to them.

In some markets potential buyers might not only be time driven, they may be happy to register their details and then wait for the product to be on-sale. However the time scales involved and release of information needs to be carefully managed, otherwise consumers will lose interest in the project.

Even when the buyers are not in a hurry, the life of the campaign must still be for a limited time. The advantage of being early into the project will always remain a key attraction to buyers.

Even if some buyers might have been looking around the market before they register, once the ROI campaign is over those who register must be kept up-dated. If a project is being developed over a long period there must be a strategy to keep in touch with anyone who does register on a very regular basis. But this contact needs balance; not too much contact to be harassing and avoiding long periods of no contact.

Given that the main aim of the ROI campaign is, at least in the short-term, to create a qualified and ‘ready-to- buy’ database. Ideally ahead of any formal release or mainstream marketing those who can should be moved to a level of commitment and where possible move to exchange contracts.

ROI campaigns have become very popular and it is important that this step in the project marketing mix be thoroughly managed. The next part of this post will look in detail at the content and planning of ROI campaigns. This will include how the varied steps can be managed and how different creative solutions can be used from private client or whisper campaigns to an open market approach.

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