He said this had meant the projects have been delayed, which had put pressure on working capital and cash flow. Scasserra showed a chart noting a 65 per cent increase in construction industry insolvencies.
Harrison’s negative comments about North Sydney were in the context of the presentation of his central argument, during a panel discussion with Robert Harley, that the Australian property market is going through a process of bifurcation with winners and losers.
Split in the market
“I think there’s going to be a big bifurcation over the next five years in terms of the haves and the have-nots,” Harrison said.
He says this bifurcation between modern buildings with the latest facilities and services and older buildings will prevail in office buildings, logistics and shopping centres.
“You need to be a stock picker, in the direct market more than you’ve ever had to be. And you need to be very discerning about which sort of assets you want to own and where you want to be in the capital stack.”
Lendlease chief executive Tony Lombardo said the next 12 to 18 months will be a “tricky period” for the construction sector, particularly for companies that have not managed their balance sheets and cash flow.
Lombardo said Lendlease had been careful to lock in its labour costs over the next four or five years, with enterprise bargaining agreements that have handed workers wage increases around the 4 per cent mark.
He said that inflation in the construction sector is running at about 7 per cent to 7.5 per cent.
Harrison said the commercial office market was susceptible to supply shocks such as the one that hit Melbourne when it developed the Docklands site.
“You have got to remember Docklands created 1,000,000 square metres over 15 years, which created a supply shock to Melbourne,” he said.
But he said Melbourne had absorbed all that space and now the city was going to be the “quiet achiever” of the commercial property market because rents were lower than Brisbane, supply was tight and it has a population the same as Sydney.
Harrison’s main message was that property developers and managers had to be aware of their obligation to deliver investors a premium to bond yields.
Bevan Towning, head of property at AustralianSuper, says this message is one that needs to be understood by policymakers seeking to encourage the construction of affordable housing.
He said organisations like AustralianSuper can contribute to the construction of affordable housing, “but you’ve got to fix the equation and, at the moment, the numbers just don’t work”.
Towning said AustralianSuper was involved in an affordable housing project in Melbourne, but it had taken two years to get it off the ground.
Chris Tynan, head of Blackstone in Australia, told the summit the debt markets had moved against large-scale property projects and deals such as the $6.4 billion takeover of Crown Resorts, which was a property play, could not happen today.