What we are seeing is companies allowing that flexibility, with the workforce probably returning maybe three to four days a week in the office. And I think we’ve seen that trend everywhere, globally.
We do a lot of work with companies like Google; they’re back three days a week. Some of the banks are forcing their people back five days a week. I think there are resistance points, and culture is going to be a big element.
The focus is back on what’s the culture about the company, what’s the cultural point of how to connect. I think that’s the city bit that we need to keep reshaping, that whole amenity in place.
Place and amenity become more and more important, and how to use the city more efficiently again.
Growth has always been about the cities growing. Cities have always performed a couple of percentage points higher from a GDP standpoint, and I still think that will occur. I did see that across New York, London, San Francisco and Milan, all the cities I went to on my recent tour. All those are back and firing, and we’ve seen rents back up on the residential front. We’ve seen demand for offices coming back.
Michael Stutchbury: At a higher level, it’s had major impacts at a geopolitical level. The decarbonisation challenge has accelerated and so on. Do you see it as a different sort of world in some big way?
Tony Lombardo: It’s constant change. And I just think the constants or the variables are different this time around. The pendulum’s swung back, where there’s probably more headwinds facing us compared to the tailwinds that were there before. But we’ve been through these cycles and real estate will always come back and go through cycles. We just have to adapt.
If I look at the geopolitical side of things, looking at our business internationally, we have to think about the supply chain, and how that’s restructured. That’s becoming more regional versus completely global. There are some shifts there. There’s latency being built in, and we’re trying to make sure of certainty in supply – things like that become very important factors.
Energy is playing out. There are still disruptions, I don’t know if they’re permanent or still transitory, because we still have a war impacting commodity prices or energy prices. So we’ve got to work out what’s still transitory versus what’s permanent.
But that disruption is still meaning we have to deal with it at the moment, and they’re the key things. But climate change, for business, we’ve all been focused on for quite a while.
Governments have been playing catch-up. As long as governments support us in the transition that we need to do as business, I think that’s the important step.
Susan Lloyd-Hurwitz, CEO, Mirvac: I think there are certainly challenges out there. As Tony said, there are more headwinds than tailwinds right now. Everything is always new in a sense. Particularly in an urban environment in Australia, which has a very unique urban structure, whereas places like the US and UK have a range of different sized cities. Which is why the importance of the city in the Australian context is perhaps even greater than in other urban structures around the world.
To me, COVID goes to the question of what has changed and what will endure. COVID has just accelerated things that were already there. So think about decarbonisation; the realisation that the planet is fragile; the reshaping of retail as an experience, not as a transaction; the rethinking about workers, what you do, not where you are; the health and wellbeing of buildings – those were all things that were trends before COVID, and COVID just served to put that on the accelerator.
Over the last two years, there has been rapid change in all of those things, but they’re not necessarily new trends.
Tarun Gupta, CEO, Stockland: It is very different, as Susan said. If you look back to 2019, we were talking about globalisation, about lower for longer, even negative interest rates.
China and Russia were part of the global economy and fraternity geopolitically. The price of oil was under $50 three years ago. There’s been a massive 180-degree shift, post COVID. Where we are today, with rising inflation, interest rates … I think globalisation clearly is taking a pause, which will have impacts on real estate in our cities. Geopolitics has changed materially.
We believe in the long-term trend of urbanisation, not just here in Australia, but globally. I think that in the next 20 years or so, 70 per cent of humanity will be in gateway cities or global cities. We’ve seen already in the last two years, the balance between working from home and hybrid working is leading to demand.
Within urbanisation, there’s suburbanisation going on. Twenty per cent of our buyers are choosing to move out of the communities they bought in, move out another 10 to 15 minutes, and trade that commute for three days a week to get a bigger, better house and better amenities. So there is that trend underway. What our cities are doing now, which other global cities have done, is invest heavily in infrastructure – in roads, but particularly our metro systems. Metros will be a key game changer for how our cities evolve into the future.
If you look at what has been happening in Asia, those nodes of metro stations will really be hubs. And if we plan them properly and create the right density and the mixed urban 20-minute mini cities, then they become very important hubs in the evolution of our cities. And that means great opportunities ahead of us in the next 20 years.
Susan Lloyd-Hurwitz: If they get planned properly …
Tarun Gupta: Because otherwise they’ll just be stations. You go to Asia – Kuala Lumpur, Singapore, Hong Kong, the Chinese cities – those metros stations and the density around them are being curated with a lot of vibrancy and density, and they are becoming part of the city’s fabric.
Tony Lombardo: So we’ve got to be bold, like those steps. And that means you don’t need cars, because you can rely on public transport.
Australia is playing a real catch up. And I think the metro stations or metro systems that have been built, both in Victoria and here in New South Wales, are playing catch up. I think what we’ve got to make sure is around the node – let’s ensure we make use of the over-station development to deliver more for the community. Let’s not just think about the station, let’s think about the precinct around the station and make sure that’s right. And I think we’re seeing some really good examples of that, in terms of what’s happening with Sydney metro.
Michael Stutchbury: How much is the lack of labour right now constraining your businesses?
Susan Lloyd-Hurwitz: It’s very significant. The labour market is obviously very tight. Immigration hasn’t fully turned back on. Right through our businesses and through the supply chain, there are enormous job vacancies that we just can’t fill. We were sitting around the table the other day and saying, ‘Where have all the humans gone?’
Everybody is suffering, the professional services firms in particular – they’ve got 1000 open positions each. So it is a real challenge that ripples right through the economy.
Tony Lombardo: We were used to 190,000-type immigration on an annual basis; we’ve had that stop. Restaurants, and those types of business, they are struggling to get labour. And the fruit pickers who bring the food to us. So I think all of us are seeing the pinch points with labour. We definitely need immigration back on. And we’ve had the lack of the [international] students who were playing the part of the casual workforce.
Tarun Gupta: We’re already seeing productivity loss, because there is not enough efficient labour. Markets are not efficient. Housing or construction time is extending out, it’s taking longer, and obviously, costing more. And if that continues, you’re losing productivity in the economy. And things will start to overheat because there’s only limited resource that everyone’s bidding on.
And that will translate to poor economic performance in coming years. So bringing in targeted skilled migrants, urgently, is what’s required. Because there are real bottlenecks in many parts of the economy, whether it’s construction, hospitality, tourism, IT, finance, legal, whether it’s white-collar or blue-collar work – there are real bottlenecks.
Janice Lee, integrated infrastructure partner, PwC Australia: Australia has had a bit of a productivity problem for a while. And if you look at that, it has meant we are heavily dependent on population growth and workforce growth for economic growth.
With the decline in migration over the last couple of years, we’re actually about three years behind in population size, what we would have otherwise been. We have often, in the Australian political debate, feared the big Australia – but I actually think we should be [wary of] the small Australia. And the sort of amenity benefits that we’re going to struggle to recapture as a result of struggling to find people, it could potentially stall the recovery.
Michael Stutchbury: What’s the new normal, or the pattern of people coming into the office?
Tony Lombardo: It’s different for different parts. It’s the first time we’ve got four generations working in an office building, and the generations have different needs. Parents or those with kids found it easier to have that flexibility in their life and actually spend a bit more time with children, which is great, let’s keep that. But our younger cohorts of people who are 18 to 25 were really struggling. We did a survey and about 60 per cent of them just want to be back in the office because they don’t have a place to work. They’re in shared houses.
They are coming back. And we are seeing that. And so we’ve seen a real dramatic return. But it’s a bit leader-led.
And one of the things I said to the team, you start walking the floor as leaders and just talking to about people and getting that connection back. And we’re now starting to set up vibrancy.
The workplace is important for your culture, the amenity has to be there.
Susan Lloyd-Hurwitz: That’s one of the trends that was a trend before COVID, which is now a hyper trend – this bifurcation of buildings that will be fit for purpose into the future and buildings that won’t. And fit for purpose doesn’t mean you can do a lot of tasks in them; fit for purpose means touchless, seamless, healthy, good air reticulation – all of those things that prompt the connection between people. That is what all of our customers are struggling with and working towards.
And what does that look like? Because we clearly don’t need boxes in which to do tasks; we’ve just proven we can do a lot of tasks from pretty much anywhere, which was surprising to some. But what we can’t replicate is that connection.
One of our executives said to me, sometime last year, “The joy is missing here. We can run this company just fine. But where’s the joy?”
We have a very strong belief that flexibility can’t be rigid, by definition. And there are so many work settings in our businesses.
Flexibility has to work for your customer, your team and you in that order. Have the conversation with your manager about what that looks like for your team. And we’ll let it flow and see what happens. We were getting up to 70 per cent, 80 per cent of people back in our head office.
Tarun Gupta: I’ll build on that. I agree – 70-80 per cent of sentiment is flexibility, hybrid working concepts that were there pre-COVID. They are going to be continuing, so pre-COVID to now, everything else being equal, there will be a pullback on space.
Therefore, the poorer buildings will not be chosen; people will choose brand-new buildings. That trend is well under way. Office markets have gone through it every 10 years anyway, that obsolescence factor. Ten years ago, or 15 years ago, it was the green-star, or greening of office buildings. Now you’re seeing the curation part of office buildings: how you curate the space.
Nick Lenaghan, property editor, Financial Review: Does obsolescence mean that as a result, a whole lot of buildings in the CBD, for example, are now losing value?
Susan Lloyd-Hurwitz: Yes, rapidly, demonstrably, The evidence is really clear.
Tony Lombardo: And if you’re in C-grade buildings, you’re in trouble. It doesn’t meet today’s needs. And so if you’ve got the new generation of buildings, firstly, they’re 60 per cent better from an energy efficiency [standpoint] than what they used to be, and the amenities are way better. So people are actually gravitating and moving to them. So there is a bifurcation occurring in the market.
Susan Lloyd-Hurwitz: You can see it in the vacancy already. The vacancy in pre-2000 buildings is double what it is in post-2000. You’re definitely seeing it in terms of valuation. Post-2000 buildings are still selling for premiums; pre-2000 buildings are selling for discounts. It’s very clear that the trend is there.
Nick Lenaghan: Where does this leave the CBDs, if we think about those changing work patterns, and the changing nature of the buildings that are in the CBD?
Tony Lombardo: More development. I think it’s happening with over-station development. There’s a new generation of product that’s coming to market. And to me that’s more sustainable, it’s walkable, it actually serves the community’s needs better. And the older stuff that will finally come back, we’ll reposition and look at a different use.
But you can look at cities around the world. So you go to New York, and you go into Tribeca and SoHo, and you see old buildings that went from being industrial buildings to homes. And you’ll go through that repositioning, that will occur in our cities here. So then what’s going to happen is more and more people will live in a city. Some of these older buildings may become residential buildings or repurposed in a different way. So the city will continually grow.
Tarun Gupta: I think the pendulum swings in our cities, sometimes more towards commercial or a bit more towards residential, depending on the times.
We need to have a constant eye on the diversity within our cities, because that’s what makes them resilient. We look at the other global cities, they have had the diversity in there. Australian cities need to continue to do that.
Because if we become too office-based, and don’t have enough residential, entertainment and other uses – retail, and parks, etc – then you expose yourself to COVID-like events, whereas the diversity gets you through it. I think there is a continuing opportunity for us in cities to have that as a positioning. I’m not sure we do all the time.
Three property giants
- Lendlease: Founded in 1958 by Dick Dusseldorp, Lendlease listed on the ASX four years later before expanding into the US in 1971 and subsequently into Asia, the UK and Europe. It is now an $7 billion global player, with operations in development, construction and investment management. Its workbook of 21 major urban regeneration projects around the globe includes Barangaroo and Melbourne Quarter in Australia, Elephant Park in London and a $21 billion pipeline of housing on land controlled by Google in San Francisco Bay. Lendlease is led by Tony Lombardo, its former head of Asia, who stepped into the top job last year.
- Mirvac: Established 50 years ago this year, the $8.5 billion ASX-listed developer and investor is led by Susan Lloyd-Hurwitz, an urban geographer by training, who took over 10 years ago. While Mirvac is well-known as the developer behind ritzy apartment complexes such as Walsh Bay in Sydney and The Melburnian and more recently The Eastbourne in Melbourne, its portfolio extends to office towers, industrial warehouses, shopping malls and suburban housing estates. More recently, it has stepped up its fund management ambitions. It is also making a name for itself as early mover in the emerging build-to-rent sector in Australia.
- Stockland: In 1952 Hungarian architect Ervin Graf subdivided a poultry farm at Sefton in suburban Sydney to build 19 homes, doing much of the work himself. That year, with partner Albert Scheinberg, he formed Stocks & Holdings, the company that became Stockland, which Graf led for 38 years. Celebrating its 70th year this year, the $9 billion Stockland is headed by former Lendlease chief financial office Tarun Gupta, who is in charge of a $37 billion pipeline of projects. The portfolio and workbook span commercial property – workplace, logistics and retail assets – as well as an 82,000-lot residential land bank. As well, Stockland is expanding into land lease communities, affordable occupation aimed at retirees.
Michael Stutchbury: What’s your outlook for interest rates over the next year or so – how big a shock is this going to be? And what does that mean for affordability of housing?
Susan Lloyd-Hurwitz: I’m certainly not an economist. Predicting interest rates is a fraught exercise, even for qualified economists. But we’re clearly in a rising interest rate environment after emergency settings, which I think was a point well made by the Reserve Bank governor: you can’t live on emergency settings forever. They have to move. And [interest rates] are still historically extremely low.
We do need to see a softening in the rate of growth in residential housing prices, particularly in Sydney, because it is not good for the community to have house price growth of 18-20 per cent per annum. That’s just unsustainable from all sorts of points of view, including socially. So certainly, there’s clearly some moderation [needed]. But there’s no one residential market. There are different markets – submarkets, submarkets within submarkets, and established housing, new housing, apartments and land – out there. There are so many dynamics going on.
The thing that I keep coming back to is that at this, yes, we’ve got that dynamic. But on the other side, we’ve got supply dramatically curtailed to where we’re going, to an under-supply of housing in Australia by 20,000 homes per year, for years.
By 2023-24, housing supply completions are going to be 45 per cent of what they were in 2018 at exactly the same time that immigration turns back on, which will just exacerbate the problem. We have to supply more homes with better planning and speed through the system.
Tony Lombardo: I think interest rates are just normalising. They were low for that emergency COVID period. So it’s good that they get back to normal. The banks were underwriting, based on traditional rates. It’s not like the banks were underwriting on this lower rate. So maybe the market should revert back. We want liquidity.
But we have seen, globally, multifamily or build-to-rent products really correct. So all rents now are above pre-COVID levels. We’ve got a real supply issue on affordability that we’ve got to solve. It’s about getting that supply right.
We’ve been talking a lot about it. And I think we as developers have a role to play. And government needs to put in some of the supporting legislation that would help really drive this level of production that we need.
Tarun Gupta: We’re going into this cycle with chronic under supply in both the detached housing and the apartments market. Last cycle five years ago, apartments were over-supplied. This time, both are under-supplied.
Australia needs to continue to embrace diversity of housing. We’ve got a quarter-acre block or the apartments, but there is so much in between. We’re investing in housing estates for the 55-plus. There’s built-to-rent product, there are town homes.
The economic models are there to bring that supply on, and then there’s large pools of institutional capital that can do it. But the time to market is just so long that we’ll have a number of years of chronic housing under-supply, and then that will create overheating in rents.
Nick Lenaghan: This projection of under-supply: it seems chronic, structural. What’s the cause, and what’s the solution?
Susan Lloyd-Hurwitz: Chronic and structural is absolutely right. We’ve all got stories of land that we’ve been sitting on for 10 years, because it was supposed to have been rezoned nine years ago, and 10 years later it’s not, for various different reasons. And around the country, it’s different.
NSW is by far the most difficult place to get supply through the system. But we know it can be different. Because during COVID, there was a concerted push to get things that were stuck in the system out of the system. And they did. So it can be done with some creative thinking around how our whole planning system works. So it is structural, in that sense.
Tony Lombardo: Planning can take four years here. In markets like Asia, you can get it in six months. And that’s the difference.
Nick Lenaghan: We are living through an energy crisis. There’s a really big transition question about the energy system, the grid and the supply of energy. But how do you fit into that? What does decarbonisation mean for you?
Susan Lloyd-Hurwitz: I’ll start there with the observation that Australian property companies are world leaders, as a sector, in thinking about sustainability in its broadest forms – the E, the S and the G.
Whatever index you want to look at, Australian property companies are all bunched up at the top every single time. The built form is a serious emitter. Around 60 per cent of emissions in the city come from the built form. So we have a huge responsibility to reduce that and get it out of the system, which is good for the whole ecosystem of stakeholders.
Ten years ago, if you were talking ESG [environmental, social, governance], it was probably the ESG person talking to the ESG specialists over there, but it’s now absolutely mainstream investors – when they’re talking to us, that’s what they want to talk about. They want to know, what are we doing around our impact on the planet? It’s not a fringe topic any more. And Australia is genuinely world-leading. So much more to do, but genuinely world leading in that.
Tony Lombardo: For us, we set two targets: net zero for ourselves by 2025. That’s scope 1 or 2. Things that we control. We have to change the industry – and that was going after scope 3. And that’s why we set 2040.
But the steps we make today, and how we design a master plan, can make a difference. And so we are actually designing buildings that don’t have gas any more. There are things that we’re making decisions on. Electrify everything. So it’s a real shift. And that’s all just making sure that we’re transitioning in the right way.
Tarun Gupta: I think with the scope 3 challenge, all our companies are well on the way and we’ll have it. In terms of our targets, we’ll meet them in the foreseeable future. But for scope 3, the big opportunity is for industry to collaborate; all of us, government and industry, because a lot of innovation and new products are required.
Susan Lloyd-Hurwitz: The industry has to work together, solving this problem. Rather than seeing it as a competitive advantage, [it’s] open sourcing – we publish papers on our approach to things so that people can critique them and say, you missed something here, have you thought about that? So that way we can gain the wisdom of the whole ecosystem as we move through. And scope 3 in particular – we won’t be able to solve that unless we all collaborate.
AFR Editors forum: the future of cities
- Fix housing supply fast: property chiefs Australia’s senior property leaders have warned that another housing crisis is being “baked in” with state and local government planning bottlenecks choking the supply of new homes and putting renewed pressure on affordability as population growth recovers.
- Read the transcript This is the edited transcript of the Editors Forum roundtable discussion on the Future of Cities, held on June 2 and co-ordinated by The Australian Financial Review’s editor-in-chief Michael Stutchbury and property editor Nick Lenaghan.
- Pandemic provides opportunity to rebuild the city Australian cities and their CBDs are being remade following the global pandemic as workers, more flexible than ever, return to hybrid workplaces to rediscover the “joy” of collaborative endeavour.
- Watch the video