Welcome to Episode Four of the “The Constructive Finance Podcast”.
Today, Dan spoke with Matthew Gross of The National Property Research Co about his market views, opportunities and challenges he has faced and some advice/lessons learned thus far in his career.
The podcast will be released every fortnight on Tuesday and will feature an elite developer discussing these same topics.
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Read full transcript below:
Daniel Holden: Hello everyone, and welcome to the Constructive Finance Podcast, today very excited to sit down, have a discussion with Matthew Gross who's the Head of National Property Research. Thanks Matthew for joining us.
Matthew Gross: You're welcome. Thanks for having me here.
Daniel Holden: Matt, by way of introduction, can you give us an overview of National Property Research, why the business was created and how it's grown and in what areas you focus on today?
Matthew Gross: Absolutely, the National Property Research started in fact as a need for Herron Todd White here in Brisbane. They were very much looking to I guess, assist their evaluation process and evaluation reports with a fairly substantial sort of research component. At that point in time, they'll probably market leading in the strategies that they were starting to employ.
Now, from that point in 99, we have since gone on I guess to probably work on some of the largest projects and probably some of the largest financial transactions for property that Australia has ever seen. We continue to work on those big projects like the Commonwealth Games, Rapid Transit Corridors. We see it as a business liaison group for the Reserve Bank. For a small firm, we certainly punch well and truly above our weight.
Daniel Holden: In terms of focus areas for you, those are some pretty big projects. Is that the whole spectrum of residential and commercial property development or is that as well some government work in there? What would be I guess a balance of the focus for you?
Matthew Gross: Look, we're incredibly fortunate because the work that we do does bread across all different sectors, and when I look at where we've been it's very much cyclical. Depending on where we sit, we could be doing work at a resort on the Great Barrier Reef. We could be doing industrial out around Australia Trade Coast or down along the Pacific Innovation Corridor. We could be looking at masterplan communities coming out of the ground around Redlands or the Western Corridor.
We don't really have I guess a specific genre where we are. We work across all the property markets, which gives us a very good feel for the cycles.
Daniel Holden: So, 17 years, I guess the business, which is great. Congrats on that.
Matthew Gross: Thank you.
Daniel Holden: Prior to that, what were you doing that helped you I guess have the confidence to take on this role?
Matthew Gross: Really interesting, isn't it? I started my life like probably a lot of people did as a uni student and worked in a commercial bakery, which pretty much gave me jet lag without having ever gone anywhere with the hours you work. I worked in a bank Adelaide Bank at the time and worked in their business banking side of things. I got to understand I guess the lending side for development and very much the security side.
Now, I was transferred from Adelaide up to Brisbane and in a period I guess where we went into recession. I was made redundant and I started my own business as a result and that's kind of where we sit.
Daniel Holden: Good story. I guess property development has come in all shapes and sizes from a Ma and Pa Kettle doing a split a block right up to the listed corporate developer. Where would your client based mostly sit in that spectrum?
Matthew Gross: Yeah, look we probably don't do very much at all for the Ma and Pa sort of people. Generally, we don't have a lot to do with the general public. Part of that is, they just can't afford what we do and they don't have I guess a side projects that actually work for a business like ours. we would do a lot of work for the major publicly listed companies, and that has always been I guess our bread and butter.
We do a lot of work for the government as well, which is often quite intriguing because they will ask very different questions to what the private sector will. Now, one of the things that we do notice in terms of the cycles and I guess a lot of the property people out there would be the same was that when we get the GFC, it was a lot of those mid-tier developers actually went by the wayside. It wasn't really until about sort of 2011, 2012 where we started to see that growth in that sector again.
At the moment, our work would be split very much into that minty develop through to the larger developer, the smaller developers, we'll help them along the way on the thoughts that we can make them bigger but certainly they don't represent a big part of our portfolio.
Daniel Holden: In regards to that, is it may be worth talking through for a private property developer I guess the types of service that would come to you for? Is it like in a particular location that they want to understand more about? Is it understanding the market shifting which it's doing at the moment? What's the type of service that they actually make? Help me out with this.
Matthew Gross: Absolutely, I mean there are a lot of developers that will ask you to help them find sites or they alternatively have already found sites, and would like some form of risk mediation involved with it. Now, that can involve everything from doing fairly detailed competitor analysis through corridor studies down to I guess focus groups, and it depends on what stage of the process we're actually at.
Every developer will look at a block of land and have a different idea as to what they want to do on it. Developers are incredibly creative and that creativity which probably makes our industry not only one of the most exciting, but probably one of the more challenging to because there is just not a bread and butter approach. One size does not fit all.
Daniel Holden: It's true. What qualities do you look for in our property development projects that give you the comfort to take on the work?
Matthew Gross: Look, on one of the things I guess we probably struggle with at the moment, at this part of the cycle is, it's very easy to lump everything into the one basket. We're having discussion before about where the Brisbane Apartment market sits. There are parts of that market that you really wouldn't want to be going in and starting a new project in right now. Having said that, there's also projects that are going to sit in key locations that will pretty much go ahead in any part of the cycle.
It's really about finding what the niches. Sometimes our job is actually to tell developers don't do it and save them money that way, rather than watch them go down the path and lose money or alternatively look at their project and go, "Have you thought about doing it this way? Because this way is going to be much more palatable to the market." Our job is really about risk mitigation. It's about saving money and making money.
Daniel Holden: That's good. Property development I guess is about managing risks, so it's an integral part for what people should be using. When should a developer look to engage a specialist like you if they were taking on a project? Is it you're saying that you actually do some pre site identification work as well?
Matthew Gross: We would prefer to be involved as early as possible and the reason I say that is, because I've sat around too many boardroom tables with developers looking at their proposed project with engineers and planners and everyone else there, and we come in as a bad guy and go, "Geez, the market is just not going to support what you're going to do."
By that stage, they've already outlaid hundreds of thousands of dollars in consultancy reports that we could have saved them going down that path. We would much prefer to be involved earlier and even if it's very early I say, "Hey guys, this is really not making a lot of sense. Are you aware of what's actually happening?" Or alternatively, "Hey, this looks fantastic." We should be investigating this further.
There are a number of touch points that we get involved in a project we certainly get involved at that stage, but we also get involved in the marketing stage where we may be in fact doing some form of investment report or alternatively we may be testing through focus groups as to what people actually want. Depending on where we are in that that build of development process will depend on what we're doing, and depending on the size will depend on how often we're actually touching it.
Daniel Holden: I guess one key point of that in terms of managing risk would be sales rate, and people want to have the right product in the right location, but the current market doesn't necessarily support it. They think they'll be in and out in two years and you might be the bearer of bad news and say, "Guys, it's probably four years." That's right, it still makes money but they're just going to have to I guess grind a little bit harder to actually get it completed.
Matthew Gross: You know what, there are some projects where that's a lot more acceptable. If it's going to be a four year sales process, you can work with that through land subdivision because you just reduce the sizes of your stages or the number of stages of coming up. A bit different when you're pouring a slab for a high rise and two and a half years turns into four years is a lot of cream that's getting eaten up over that period of time.
Daniel Holden: Yeah, excellent. A lot of capital sitting there waiting to get return, and so when looking at a new project, are you able to decline working on a project because you've got a personal view that's poorly conceived or the developer is not capable of delivering it?
Matthew Gross: We generally don't decline those sorts of things, we would see ourselves more actually helping them down the path of making it work. If they've got a what we believe to be an ill conceived project, and look our initial thought maybe it's ill conceived, you always got to listen to the argument from the other person because they may have some knowledge that you don't and they may well know something that is going to tip the odds in their favour.
I think it's really important to have those healthy discussions and from there, you can actually work out, and they'll work out whether you're right for their project as well. Again, it comes back to we would rather see them make money or not lose money and not losing money is equally as important as making money.
Daniel Holden: Absolutely, definitely. What would you say is the two most common problems you see developers getting themselves into?
Matthew Gross: Probably, timing within the cycle is often probably one of the hardest ones where people get caught, and we've been through the apartment cycle at the moment where doctors, dentists, lawyers have played. They're now not in the marketplace and they're not in the marketplace because they can't get access to finance. When people enter the market is often one of the biggest problems they've got.
Probably the other problem that developers are faced with and it's not one often of their own making is one of counsel. When we have major projects that sit out there that take upwards of 10 years to get an approval, I mean that is just horrendous. How can any developer be guaranteed of certainty or their financier or their consultants or everyone else involved in that pipeline actually understand what the future looks like if councils are making people take 10 years.
We've seen a number of projects, it's not just the councils, that EPBC Act through Koala legislation has put a number of projects back probably 18 months. Now, those processes shouldn't take that long to achieve and that old saying time is money is irrelevant for our industry.
Daniel Holden: That's a good point. Okay, and so we touched on the Brisbane apartment market. Maybe you can give us some insights where you're seeing the residential market sitting in terms of I guess the ebb and flow of supply and demand, and maybe breaking it up into city apartments, townhouses, house and land.
Matthew Gross: Yeah, right. Okay, let's take it. Let's take it a step further let's look at South East Queensland. Let's start at the top, and we'll exclude [inaudible 00:13:11] because unless you want to be excluded from the Sunshine Coast and they've made their bed and they can sleep in it. It's pretty hard to get work done up there anyway. If we look at the Sunshine Coast, Sunshine Coast has been very late into this cycle.
I often make the comment that the amount of apartment projects being built on the Sunshine Coast in the last five years or probably seven years is less than what's been built on the Redcliffe Peninsula. Now, that's a really unusual scenario for the Sunshine Coast.
As a result, we have actually seen a reasonable pent up demand and I think aria with their project on the little Abi, just really demonstrated where that market was at. They had their million dollar properties along the front looking out to the ocean and they had their one better stock investment product facing the Hinterland, which is still a nice view. Don't get me wrong.
There was the expectation that the investor stock would be the one that move first, and yet the front of the building sold out well and truly before the back of the projects. I think that there is a demand up there for good quality owner occupier stop. The investor market is still strong but it's hard to actually get the rents up there that are required to support a lot of the investment product.
That means that building those eight-storey high rises has been challenging and the build cost up there are certainly high too. The apartment market up there is strong. There is no question about that and what we are seeing is a vacancy rate up there that sits probably in that one to one and a half percent, so it's pretty tightly held. That has in part been driven by really strong infrastructure investment and the two hospitals up there are very, very good examples of that. Hospitals are important for our property markets because they employ people 24 days, 24 hours a day, seven days a week, and you get three shifts. They're different to a city that tends to operate from nine till five.
These things go day in day out, so I think that's been a really important part. The Sunshine Coast land supply is another really interesting conundrum up there, so when we look at house and land there are a number of projects up there that will be completed within the next two to three years, which is going to leave really two major developers up there, at least Dockland and investor land.
With that, we're not going to see the diversity of product or the expanse of land north. Peregian Springs is certainly been one of the great masterplan communities up that way, but that is very much nearing the end of its life unfortunately, because it has done very, very well. Probably, the other point that I would make up on the Sunshine Coast is in some respects it is a bit of a sleeping giant.
There is the newest CBD I guess in Australia about to be undertaken on sun central and they're going to have some very innovative technologies and that will be a mixed use, there will be apartments, there will be offices and yeah pretty much everything else in between. That will be one to watch. The Sunshine Coast is very much a good news story, they haven't price themselves out of the market. They haven't had a very large investment push like much of Southeast Queensland has.
On balance you'd have to say that they're very well positioned at this stage of the cycle. We move further south into that Moreton, Regional Moreton Bay Region. Again, one of the issues that we're going to face there is certainly the land supply is just not there at the moment and the SCT regional plan doesn't look like it's going to add more to it, is my understanding. We'll know more about that in October, November this year.
With that, North Lakes is essentially done and dusted, so we don't have a master planned community on the north, Warner lakes and Warner Spring is next to it or near it. They're there pretty much need completion. Our development front is now going to sit very much to the north around that Caboolture area, and the cost of infrastructure up is really killing any of those sort of projects getting out of the ground.
Again, a relatively tightly held market there has been a lot of investment through there but because of the supply constraints, generally not too hard to find renters for it. Infrastructure is a problem. One road in, one road out pretty much with the Bruce Highway and that does cause some grief.
Apartments are generally not a big part of that market, but clearly the industrial and the commercial side of that region is strong and we are seeing pretty good employment opportunities throughout there. If we go skirt around the edge of Brisbane and hit that Western Corridor out through Ipswich, now it's probably our biggest land supply for the whole of Southeast Queensland and probably has the best part of 60 years that could be easily developed when you think about it.
Now, that has really stemmed from the Springfield Lakes and is now heading out to the Ripply Valleys. With that, we're now seeing pretty much all the major players out there, you've got your land leases, your stock loans, phrases that are out there, investor, Pete. All of the publicly listed companies are gone what we can't afford not to be out there. It's a really, really good infrastructure story that sits out there in terms of new hospitals, new schools.
It is driving I guess, perhaps, you could compare it to the early Paramatta of Sydney. That's a market that's going really strongly but it is struggling in terms of the apartment side of things. Density out there in apartments is just not happening and the density of it is being done around Springfield Lakes is being subsidised. Those that are making a sales out there it's unlikely that project will be 100% sold out upon completion. I may be wrong, but I think it has got a little way to go, and I think that when you look at the way MAHA has developed that region he's had to seed fund a lot of these things to get them up and running.
Once people experience it, the private sector comes back in and backs it in the way we roll. The Western Corridor is very, very strong. If we go against going to the south of Brisbane really Brisbane until last year. If we just get around to that Logan area. Logan is doing very, very well but it's doing well on the back of I guess probably one or two major projects. Yara Pilbara has been a very successful development for Lend Lease and sits in Yara Pilbara, a year before we're talking about what are the risks for developers.
You know what, I think we worked on that in about 2000 and that was called the township of celebration. It took a long time to come to the market. That's right. They're doing 700 odd sales a year at the moment, so they're doing very, very well. Flagstone is about to come online in force and when you look at that, it's a great opportunity for that Southwestern Corridor and that will link up to the Greenbacks through I guess [Mervex 00:20:28] development, and then you've got some development that AVJennings are likely to pick up around Jimboomba.
That's very much corridor to watch this space. I suspect that that will probably erode some of the market share of Yara Pilbara, but there's there's plenty to go around for everyone. You're talking about apartments down there. Not really an apartment market, it's more a townhouse market and the townhouses down there are selling very, very well. If we move into now, Redlands, Redlands is often forgotten. Redlands is our pretty much our bayside OGA, one of our greenest local government areas as well.
They're about to see some fairly substantial development down there with the shoreline project, now that will be, I can't think of when the last real master plan community was done in Redlands, but it's been a long, long time. This will be on the banks of the Moreton Bay. We'll have some fantastic views across to North Straddie and the southern end of Moreton.
I can't think of just how many house and lands will sit in there but certainly it's a very significant promotion. That is going to drive that population of Redlands a little further south, and probably link it up to the northern end of the Gold Coast. That would be really important for driving employment in that specific innovation corridor that sits around [Yetla Stiglitz 00:21:54] , so the Jacobs well.
The Northern Gold Coast corridor has done very well in terms of its industrial and logistics parks. It's perfect for getting out to the Western Corridor, perfect for going north, perfect for going south. Logistically, it is done very well. Probably one of the greatest risks I guess that sits in the Northern Gold Coast residential market is just the enormous level of investment that's taking place there. Now, it depends I guess on what you look at as to whether that market is going to suffer in the future because there's just a limited number of owner occupiers, or whether we are looking at I guess what the new black is, is this the new norm where you're going to see fewer, fewer people own property but more and more renters.
That's common probably in the northern hemisphere not so common in the southern hemisphere, but that house and land market certainly has an enormous weight of investors through there. We go down to the apartment market through the Gold Coast, if we went from Southfork through to Burley, or not Burley, perhaps broad water or broad beach might be a better geographical location. We are seeing just how important infrastructure is, the rapid transit corridor down there has really been a dynamic driver of that market.
We went through some really tough times with the GFC on the Gold Coast, a lot of discretionary spend had gone and we had a stock market that collapsed, which meant that a lot of people were being margin gold, and people were having to fire sale apartments, which really took me back to sort of 2004 to 2003 process. That's pretty scary time. We're well and truly through that now and we are seeing a lot of both local interstate and international interest in the Gold Coast.
It is a destination that is well-recognized throughout the world. It has a lot of things going for it. It's a population of over 500,000 now. When you think about what it actually has in terms of I think it might be the sixth largest city in Australia. It has major sporting teams, it has theme parks and all the rest of it. That convention centres et cetera. The Sunshine Coast by comparison, population somewhere around about 340,000, 290 thereabouts if you take out Noosa. It doesn't have a convention centre, it doesn't have a major sporting team of any description.
There's no Casino, so you're looking at I guess the chalk and cheese sort of things, you've got one that's very much green environmental and very NIMBYism and then you've got the other end, which is more the commercial outcome, and the commercial outcome has created a lot of jobs, a lot of places people live. In that respect, the Gold Coast apartment market is is being fueled by not only developers but by population growth that wants to be there and has a lot to play.
Now, if we go back to I guess probably the one thing that we do have an issue with on the Gold Coast is land supply as well. We just do not have enough broad hectare land available to cope with a growing population and I don't think we can expect all the population to be taken up into high density. That is something the SCQ regional players are going to need to address, certainly in the short term but even more so in the medium term.
If we go back to Brisbane, now Brisbane is a massive market in its own right. The talk around apartments, we have apartment markets that are tough. We have apartment markets that are less tough. We just focus on apartments for the moment. Now, if I was a developer and I was looking at doing an apartment project over at Bulimba or Hawthorne or through there, it wouldn't be too concerned. That market is always going to be there and it's a solid market.
There are good times and bad times and again the point you made before about the length of time to sell is certainly reality in those markets, but you're going to sell 443 Queen Street which Seabass are going to do, it's probably the first true riverfront project that we've had in Brisbane City since 2005 with repairing, and repair and whilst it's a great product and everything else it sits on top of a commercial building almost by design looking like an afterthought.
What you are going to find I think the 443 Queen Street is that it will be a spectacular architectural design, and people will want to live there, and people will buy there from all over the country. Those sorts of things don't really give you that much of a concern. The likes of Queens Wharf is another one that I don't find hard to pallet. You can see that the market will absorb because of the type of project that it is and people will want to live there. I guess probably some of the markets where you do see some concern in that apartment supply side would be through that Bowen Hills sort of precinct where you are more so in a secondary location, so a cheap and cheery product and there's just a lot of it.
People often point to West end and South Brisbane as markets that are well and truly oversupplied, and on the face of it the raw numbers would suggest that that is the case, but I do think you'll find that the amenity that continues to improve through that South Bank and South Brisbane precinct that's now wrapping around into West end is spectacular, and it's just going to be wonderful addresses to live in, and the more people you put there the more activated it becomes and it would just be spectacular.
I think the real risk then becomes what happens to that secondary product in Greenslopes and Coorparoo and all the rest of it, what happens to those walk-ups. I think that's where the real value crunch is likely to happen. I mean those suburbs not out of reference because I think that's going to happen but I use that just as a generic.
Daniel Holden: The ripple effect.
Matthew Gross: As a ripple effect. If we look at where townhouses sit at the moment in the middle to inner ring suburbs, good quality product there is lasting less than a week, sort of two weeks now less established market. You're not talking about mass killings but that is walking out the door at the moment, and achieving good prices. The same is very much true of the house and land market, establish housing that's a reasonable quality in those middle ring suburbs is being stacked up. There is certainly a weight of people wanting to buy those products and it is owner occupier driven market.
I guess it's very much a difference between where you look at the apartment market and the owner occupier market. The owner occupier market is a real market because you're talking about someone putting a bum on a seat. In the investment market, you can get out of hand where you have so much supply put in that, there's just not enough balance for seats, and that comes back to where the population growth sits in this current cycle, and the population growth is just not where it should be.
Daniel Holden: You talk there about investor versus owner occupier. We're definitely seeing a shift I guess as the Brisbane City apartment market that we've had a great bull run for the last two years, maybe a bit more luck-
Matthew Gross: Yeah, it has been outstanding.
Daniel Holden: ... of great drive sales pool, projects galore, cranes in the sky. It's all been happy days and we're starting to see that come to a bit of a grind and slow down. I wouldn't say a halt but I would say slow down. When we look at owner occupier and say, "Well that's the next thing to have a bull run," I think it's interesting to actually break up that owner occupied market and consider how much of that is people who are mid-30's with one child and happen to live in apartment versus a house because they can't afford a nice house within the 5K ring, and how much of that is actually empty nesters who are selling their $2 million house in Brookfield, and moving into a $1 million apartment in the city because the kids have gone.
I think that's maybe your opinion could be that, do you design for one and not the other or how do we provide for both and actually have it so that it can actually work rather than just being grey hair and pack up for six months versus the family growing family who still live in an apartment.
Matthew Gross: Yeah, interesting. There are certainly some challenges in all of that. One thing I will tell you though is that the million dollar plus properties are highly correlated with the stock market. When the stock market is doing really well, like a million dollar plus properties are doing really well as well. Watch the stock market watch that, watch that cycle move through.
Now, the empty nesters the empty nesters are an interesting mob and they're a really interesting group of people at the moment for one particular reason, and that is the current cycle we see it in is a very much a low interest rate environment, and yields on funds are pretty low and the yields and returns on the stock market are not great either.
We're not seeing a lot of capital growth there. The concept quite often of the Blue Ridge mob or the young retirees selling in Ascot or Hamilton or Clayfield and downsizing into an apartment of equal sort of value it generally not a real sort of thing. They're more likely to move into good quality more affordable accommodation to top up their super, because just at the moment, if you're not getting a return on funds you need to pull money from somewhere and you know what you're selling your house and not being taxed on the gains.
Assuming you've been there for longer than 12 months, now it's a pretty good way of banging it into your super, which gets a fairly limited tax on it anyway. You got to be very careful I guess in terms of how we do that and in the design of apartments need to recognise that it's a reasonably small proportion of the market, it's not a huge proportion.
If we were designing for that, do we want to be designing a 100 thing apartment project or, are these people going to be more happy to be in something as boutique in that sort of 25 to 30. In which case, all power to you because it's going to have a lot of crossover to that young family because it's got the size of the apartments that gave you.
We are seeing a transition I guess in some respects into density, but I don't know that we're seeing that transition as a holus-bolus, this is where it's going to be at. I think apartments are very much a life stage sort of project, really good for young people not so bad for old people, but when you've got two screaming kids, two adults, both might work. You tend to find that housing is a better option for that life stage.
It's define too, that in that life stage that more often not they will have a boat or a caravan or a toy or something that needs to be stored somewhere. Our apartments in it or really bad for storage. When we look at I guess how property is moving. It's a lot more complex than what our town planners often give it credit for. We've got to be very careful. We just don't homogenise everything into these one little groups. It's like saying that 25-year-old all want to live in an apartment.
You know what, there's plenty 25 year olds that don't, I mean 25 year olds that are living and working and playing out in the suburbs. Why would they want to pay you something that's cost them maybe six or $7,000 a square metre to buy when a house they can buy for 1200 square metre on land. Horses for courses. That's where we need to make sure that our developers are on the money for what they're actually doing.
Daniel Holden: In Brisbane, we've seen a surge of projects from I guess 14, 15 and the lag still coming through in 16. The banks have applied the brakes combined with, I guess high volumes of sales in late 15. We're now seeing it not drop off a cliff but definitely adjust. There's talk of oversupply of apartments and as such oversupply of sites with DA.
The natural barrier to entry has increased dramatically for developers, which I think is a good thing like you say the dentists, doctors and lawyers have left the market pretty quickly, which is good. How do you decipher the relevant data to actually get a handle on just as a piece of land with the DA versus a project that has got a hold on and actually wants to run and will actually get up one day.
Matthew Gross: Yeah, look, again a lot of it comes down to locational specific attributes. Let's touch on a few of those points. In terms of, yes financiers have certainly tightened their lending. In fact, in some response that they've actually changed the rules for people that are already sort of mid early project, which means that even those projects that you thought might have got up are unlikely to actually achieve finance through traditional measures anyway.
Now, you're right. I mean it is a good thing what's happened. There is no question about that because what is actually done is takenly the tail off of the oversupply scenario. What might have been a four or five years oversupply scenario may in fact only be two years. You know what if we could get our government to increase the measures to grow our population here.
We might not even be that good. Population growth is certainly a key driver but if we look at the, I guess the current economic conditions around those supply and demand sorts of things, it's tough out there at the moment. It is tough, and finances are not making it easier.
Daniel Holden: There's not much we can do about it unfortunately, but I guess play within the rules and try and make projects present as best as we can. It's something that I guess we feel calls from developers on a daily basis now, trying to get their project funded and trying to get it to happen and there's definitely capital out there. It's just managing it, managing the project as best you can.
Matthew Gross: I think access in capital is probably the key at the moment to development, because you talk about those DA sites. If we look at where the market was in 2014, the DA sites people were able to buy a site and get a day on it. Perhaps 25%, 30% uplift in value on their equity. That's not the case now. You have a site, you get DA on it, it's worth what it is. It's there's no uplift in it, so that equity gain is no longer there.
That is an interesting point of where our market currently sits. Those developers that are out there trying to do things at the moment, they're probably able to pick up sites at the right price, but at the same time their cost of selling has gone up and their gross realisations will really have an escalated data, cost of construction is up to. The only thing that can really give is probably the profit margin. It's got to be the numbers.
Daniel Holden: Just covering off on that, you determining via a site with the DA that might be owned by Ma and Pa Kettle on amalgamation of five Ma and Pa Kettles versus a project that actually got substance. You're basically saying that comes down to your taxing knowledge of what's actually got legs and what hasn't.
Matthew Gross: Correct. It's one of those things isn't it, that expression experience is something you get just after you needed it. We've been doing it for 17 years now, and we've seen a few cycles but that doesn't mean that we got perfect knowledge. You generally have a pretty good feel about what is going to work and what isn't going to work. Those amalgamated sites often are really expensive. Again, it all depends on where we sit.
Daniel Holden: Across all the sectors, have you seen any trends emerging from overseas or other states that might affect the way we plan our projects from broader town planning requirements or just individual projects themselves? I've heard recently that investor focus departments have now taken away a lot of amenity within the building, because it has been provided by the surrounding area. To keep the body corporates ongoing costs down, they've really retracted a lot of the fancy would be nice kind of things, and just keep focus on the financials. Is there any of those trends that you've seen in a state or overseas that you can see playing apart in our market?
Matthew Gross: Well, there is a lot in that question actually. Thanks, Dan. Look, if we look at let's say the planning side of things. There probably is planning has probably got smarter in some respects in dharma in others. Sometimes, planners think that by creating density on sites that they're more likely to actually favour the developer, that doesn't always work. Sometimes density can actually be more expensive to do.
We have seen pushes too small a lot serious no question and that was certainly led out to the southern states. We've seen more so probably locally move away from higher body corporates and there is no doubt that that is an ability to reduce amenity, but it's also probably getting in touch with your body corporate supplier earlier on that can actually help with design attributes that will make ongoing maintenance and everything else a lot less.
There is certainly body corporates are an issue within the whole development community at the moment, particularly as rental yield start to fall. In terms of new technologies that we're starting to see, look in Brisbane we haven't seen a timber high rise yet. We certainly see that in Melbourne, we're certainly seeing that in Sydney. There are I guess some building materials that haven't made a presence here that I'd really like to see. It did just make things a bit more interesting. Technology is one of those tough ones isn't it? Because it changes them and it's so rapid in what it does, and more often than not scale is what allows you to utilise new technologies if you don't have scale it's pretty hard.
If we were to look at where we would be in probably the next 20 years, I suspect that what we'll find is that a lot of houses and new estates will be literally off the grid. They will have battery power, they will run probably both wind and solar, so I think that we're starting to get to the position where sustainability is a real thing not just a buzz word in that environmental space. It is I guess, what's the next decade things are going to change quite dramatically.
Daniel Holden: Particularly, with those things in the media the other day about a suburb in Melbourne being built with all Tesla batteries within the house, so they can be literally off the grid which would be fantastic. I think the technology I think will be a good good game changer hopefully.
Talking about I guess growth and employment, we've seen that our growth in terms of housing has been aligned to net migration and employment growth on the back of proper economic cycles, but can you see the federal or state government likely to play a role in stimulating those markets in the near future in terms of net migration and employment?
Matthew Gross: See now, I actually I think that's a niggling question because you know how much I hate both the governments at the moment, which is probably a little unfair. I get frustrated with the processes that we go through, and I get frustrated that it's very hard to have decisions made or any decision made for that point.
Look, there is no doubt that population growth in Queensland at the moment is well below where it should be. We sit at 1.2% which is half a percentage .6% below the national average. Now, if you told me 10 or 15 years ago that Queensland's population growth would be below the national average I would have bet anything that that wouldn't have happened and yet here we are today.
That really does hurt our employment. Population is just a wonderful employer for every house we build it creates four full time jobs and three downstream jobs. If we don't have the population to put into those houses or apartments, those downstream jobs and full time jobs just aren't there. The population is just such a key ingredient. We talk about where it sits on the Sunshine Coast and the Gold Coast. If we even look closer to home in Brisbane our office vacancy rate at the moment in the CBD is somewhere between 15% and 20%. Long term or I should say, long term rents but if you take up a lease for five to seven years, your incentive is probably going to sit somewhere between probably 37 and 40 plus percent. I mean that's insane.
The employment is such an important driver for Southeast Queensland, it's an important driver for regional Queensland. Until we get population growth and an ability to actually not look at debt as a bad thing at a federal and state level. The areas we need start looking at debt in a business model, if we're going to borrow money then what is our return on that going to be? It's not a hard equation. When you start rolling out debt for schools and tuck shops and everything else, it's the wrong kind of debt. We need debt.
If you're going to borrow billions of dollars to do a fast rail or something like that, is that going to increase the productivity of Australia? Is it going to create long term jobs? Are these the infrastructure projects that are actually going to be for the betterment of the nation? If the answer to that is yes then we can work out at a time period for it to be paid off so be it. The story bridge was what a 50 year low, but you know what, that is one of the most important pieces of infrastructure linking the south side of Brisbane to the north side Brisbane.
Debt's not a dirty word, bad debt is a dirty word and we need to just work out how we're going to do it.
Daniel Holden: We have talked a bit about Brisbane, Brisbane market, Gold Coast market, Sunshine Coast market. One thing I'm keen to get your input on employment is a big driver of the property market, and its growth and I guess the price point remaining where it should be and hopefully growing. If all things go well.
Gold Coast and Sunshine Coast have a fair bit of discretionary spending within their property market, but they also have a employment market particularly on Gold Coast that relies heavily on tourism, hospitality and construction. The last numbers I saw it was something like 19% in construction and 17% in tourism of the Gold Coast employment, which is a lot-
Matthew Gross: It is a lot.
Daniel Holden: Verus I guess Sunshine Coast has a few more things with the hospital and what have you, but both markets are I guess fairly lacking in corporate mass corporate employers. How do you see that playing out over the next couple of years without that big nucleus of employment reliable employment and how that may affect our property those two property markets?
Matthew Gross: If you look at over the next 24 months, you'd have to say that construction is still going to be a very important part of the Gold Coast as we lead up to that con games, and there has been a lot done in terms of apartment construction, and there has been also I guess in land construction. Where do we look at in terms of tourism? Well, tourism is going to continue to be strong so as long as the Aussie dollar sits around that sort of 70, 576 cents US dollar.
This expenditure starting to go through the Coolangatta Airport as it gets upgraded, which is a really good airport. We have a lot of, I guess the base layers to allow for greater corporate investment. What we're not seeing I guess on the Gold Coast is any sort of, you certainly got a man down there who is very proactive in making things happen. They don't have a central location for it to happen.
You've got Robina, your Southport, a few odds and sods in between. There is no real CBD per say where it all gets focused, and that confuses the market to some extent. Now, the Sunshine Coast is at the other end of the the north south SEQ Corridor. They have their Sun Central, which is a designated CBD, which does have the potential for government to invest in, and government to actually promote and become something. It is going to need a concerted effort by state government to do it.
It is going to need federal government to assist in some of that without question. Certainly the local government will have to put their hand in their pocket, but it does represent an opportunity to say, if you want to be a big corporate in a location that is just highly desirable, both in terms of its, there's a university there so you have skilled staff potentially on your doorstep.
You have great natural amenities through the beaches and the hinterland, the infrastructure is not so bad. House prices and everything is pretty reasonable. That makes a pretty compelling argument to back it in at the moment we don't have anything like that, there's innovation corridor or innovation drive, I think it might be there Kawana, which almost has kind of a musical chairs effect on where businesses locating.
You do have the looks of this Docklands office there, there's a Westpac and everything else but there's not a real big sort of corporate location. In fact, you'd make the same argument for Brisbane, a lot of that retracted back post GFC. We do need those big jobs here and state government is going to be the one that really helps that happening in conjunction private sector. You can't just lay it all on the government's doorstep.
Private sector has to work with state government to make it happen, but employment at the moment is a big problem. Full time, part time.
Daniel Holden: Hopefully, something we can see improve in the future.
Matthew Gross: Indeed.
Daniel Holden: You've been in probably three long time, I think all your career. What would you say to a younger you about navigating through the game of property development and advisory?
Matthew Gross: Wow. What would I say to a younger me? There's nothing wrong with self promotion and we've continued to grow as an organisation over that 17 years, but we've almost done it fly under the radar. If I had to do it again, I would certainly be a lot more proactive in fact in growing my profile, and growing the businesses profile. I think we are exceptionally good at what we do. In fact, I think some of the best people in the country certainly within Queensland, but we're not very good at promoting that message.
We're a very humble organisation and I think whilst that works in our favour in terms of our existing clients. We've probably had a slower growth profile, we haven't had the ups and downs of it come with excessive growth either but I think there is nothing wrong with promoting a good product and a good service and a good team.
If I look back at where we've been and what we've achieved, the one thing that we have lacked is that ability to say, what we are good at what we do. I think that's something that I look back and I do keep myself in the pants for.
Daniel Holden: It's very insightful. Thanks very much for that. I think it's a good thing for all businesses particularly service and consultancy businesses to take on board and consider how they should reposition themselves and put themselves out there for people to actually you know understand what their value proposition is. I think it's a good good reminder. Thanks for that. Most important question, what's the best bottle of wine you've had recently?
Matthew Gross: That is a tough one because I've just come off dry July and, so probably the best bottle of wine I've had recently to be a tossup, probably between a Kirrihill Shiraz from down at Mclaren Vale and potentially maybe Mildara the one from the Coonawarra.
Daniel Holden: It sounds good.
Matthew Gross: 10 over favourite for South Australian wines given my history and bride.
Daniel Holden: Perfect. All right. [inaudible 00:53:24] them and have a taste. Thanks very much Matthew Gross for joining us on the constructive finance podcast, appreciate your time.
Matthew Gross: You're welcome. Thank you for having me.