0:09

Hello and welcome to Talking Property with

0:12

CBRE. I'm Kathryn House, your

0:14

podcast host, and I'm ready to dive into

0:16

an really interesting topic today around

0:19

what to do with older style apartment blocks.

0:22

I'm joined by Warren Livesey, the

0:24

founder of Buy Airspace, who's

0:26

also Head of the Association of Rooftop

0:28

& Airspace Development. He's

0:30

a passionate advocate for using the airspace

0:33

above apartment blocks to help solve

0:35

our current housing crisis. I'm

0:37

also pleased to welcome Toby Silk,

0:40

a director in CBRE's Metropolitan

0:42

Investments team. Toby’s

0:44

actively involved in selling apartment blocks to investors

0:47

and is seeing huge demand given the

0:50

current tight rental market. So,

0:52

is the only way up? And how much potential

0:55

is there in the airspace market? Alternatively,

0:58

should the owners of these blocks be thinking about

1:00

selling to cash in on the current investor

1:03

demand. Warren, let's start

1:05

with airspace. What is it

1:07

and how did you get involved in this market? And

1:10

I guess why are you so passionate about the opportunities this

1:12

market presents? I've heard

1:14

you describe this as a $150 billion

1:18

opportunity in Sydney alone.

1:20

So, I've been doing it for the last

1:22

25 years. I did

1:24

it for 10 years in London and New York

1:27

and have been doing it here in Sydney

1:29

for the last 15 years. So,

1:32

typically, the airspace is anything.

1:34

When you buy a property, you own the airspace all

1:36

the way to heaven and all the way down to hell.

1:39

It's just the actual council that restricts you

1:41

from putting on anything over

1:44

and above what is actually required.

1:46

And it's not just apartments. You

1:48

can do this above office blocks as well.

1:51

Absolutely. It's very popular overseas.

1:55

Primarily shop tops, commercial buildings,

1:58

residential buildings. So there's just a big

2:00

focus on strata at the present moment because it actually has

2:02

the largest amount of airspace available

2:05

that's not being used opposed to those other two

2:07

criteria.

2:08

And I guess it's a market that has really

2:10

taken off in those other markets

2:12

that you talked about earlier. Why

2:14

do you think we've been a bit slow to the party in

2:17

Australia?

2:18

Well, we haven't really had to worry too much about space. Density

2:21

is a very big question obviously in parts

2:24

of Europe and the US, as well

2:26

as the UK. Airspace development is

2:28

close on a $86 billion

2:30

industry just in the UK. They've actually

2:33

approved 180,000 airspace homes

2:36

in and around hospitals and transportation hubs.

2:39

And how I've guesstimated what

2:42

it is potentially worth here is, in

2:44

New South Wales we have about 90,000 strata apartments

2:47

or blocks. And of that

2:49

your average strata block is about an eight-12

2:51

unit scheme. That is generally

2:54

a three-storey walkup with about 300 square

2:57

metres of roof space that's

2:59

not used. Typically a pitched roof. So

3:02

that 90,000 x 300 square metres

3:05

not being used, that's

3:07

27 million square metres times that of an

3:09

average of say 10 to 12 to 15,000

3:12

a square metre for sale

3:14

value, and you're actually looking close onto

3:16

$400 billion. But assuming anything worse than

3:20

that, that's the maximum part of sales price.

3:23

And I know that we have a new New

3:26

South Wales Strata Commissioner and one

3:28

of his focus areas is, how do

3:30

we look at maintaining these older style properties? So

3:33

that's one of the

3:35

attractions, isn't it, in this whole airspace

3:37

area that you can, if you're

3:40

an owner in one of these blocks by selling off that airspace,

3:42

fix some of the defects that there

3:45

might be in these older blocks, particularly coastal properties.

3:49

Well, absolutely. Look, a lot of these

3:51

older blocks, they have these old

3:53

roofs that are leaking. They're

3:55

generally non-fire compliant. As in the top floor

3:58

owners, there's generally a fire gap

4:00

that can jump over and on average,

4:02

your average strata block owes

4:04

about $500,000 worth

4:07

of expected capital works to be planned

4:09

over the next 10 years. And what they've

4:11

been looking at is how they're going to afford that.

4:14

Presently it's been either increasing the

4:16

quarterly levy or doing special levies

4:18

when the actual work is being required, but

4:21

most of us don't have the money. So

4:24

the most typical and the most prevalent option

4:26

is to actually sell the airspace above them. And

4:29

we are certainly not advocating for strata

4:31

owners to do it themselves. That's

4:33

been the real testing part here in Australia

4:36

because ultimately, strata owners

4:39

are not typically trained up in

4:41

this area. They don't normally have the funds and

4:43

they may not always get on very well with each

4:46

other. So you know, the best way to

4:48

actually adapt or unlock that airspace

4:50

is by negotiating or

4:52

tendering out the airspace to an airspace developer

4:55

and doing a joint venture contract with

4:57

someone that actually knows what they're doing, they

4:59

have the finances involved and they will look

5:02

after the whole project from start to finish.

5:04

I guess that is really one of the big

5:06

challenges and maybe even more so

5:09

in other states than New South Wales. In New

5:11

South Wales, you only need to get a 75%

5:13

agreement from strata owners, in

5:15

other states it's 100%. I guess

5:17

Toby, that's why you are finding that maybe some people

5:20

are opting for an easier route in

5:22

terms of, you know, selling a block rather

5:25

than going down the airspace road.

5:28

Yes absolutely. I think in terms

5:30

of what Warren is suggesting and

5:32

what we do in selling these apartment

5:35

blocks, generally, the

5:37

apartment blocks that we sell are owned by one

5:39

owner who owns the whole block. Whereas Warren's

5:42

talking to the fact where you've

5:44

probably got multiple owners in a building,

5:47

and they're all trying to work towards getting

5:49

the building remediated or wherever it may be.

5:51

But we're finding that there's huge demand for

5:53

these apartment blocks at the moment where owners are

5:55

selling them in one line. And some of these blocks aren't

5:58

strata titled like they are in Warren's case.

6:00

So they're all owned on one title,

6:02

which is a deposit plan. And

6:04

effectively the reason that they're so in

6:07

demand right now is because we're seeing such

6:09

huge rental growth in the residential

6:11

marketplace at the moment. And that goes back

6:14

to what happened with Covid. With Covid,

6:17

borrowing was effectively free and it

6:20

was cheaper for people to buy properties rather

6:22

than rent. Now, with all the interest rate

6:25

rises that we've had, the converse is now true.

6:27

So people trying to rent over buy and we have

6:29

such a shortage of rental property, which was

6:32

taken up over Covid by owner occupiers.

6:34

So we're in a bit of a tight bind there unfortunately.

6:37

And a lot of investors are looking to capitalise

6:39

on that. So these apartment blocks

6:42

give investors the opportunity to take

6:44

advantage of that rental growth that we're seeing and in

6:48

2022 we saw residential rental growth

6:50

in apartments grow by 35%. Just

6:53

last year we saw them grow by 16.5%.

6:56

And this year it's probably going to moderate to,

6:58

somewhere around 10% or so. So there's huge

7:01

growth to be had in that sector. Other

7:04

opportunities that these apartment blocks provide an investor

7:06

is, if it is on one title is you could

7:09

strata title the apartment block and if

7:11

you strata title it, you can apply

7:14

for a residential loan as opposed to a commercial loan

7:16

and you can actually unlock some more equity which

7:19

you can then use to invest into another asset or

7:21

you could actually sell down the property individually.

7:24

So, there's opportunities there to take a

7:26

few different angles for an investor and diversify

7:29

their risk.

7:30

So there's clearly a lot of different options

7:33

that you can consider if it's held in one

7:35

block, if it's multiple owners. Warren,

7:38

maybe if we go back to you, it'd be great to

7:40

get an example of where the airspace

7:42

market has worked really well. I've

7:45

been reading a lot about Skye Tamarama

7:47

in Sydney as being a bit of a poster child

7:50

for how you can make this work well if

7:52

you're an owner in a strata block. I was looking

7:55

at that and they managed to sort of fund $10 million of

7:58

works by adding two penthouses at the

8:00

top of the building. But it does take some

8:02

time when you're working with multiple owners to get

8:05

them to come to an agreement on

8:07

something like this.

8:10

Well, I mean I actually got

8:12

involved in that 12 years ago talking

8:14

through the various different options. Look, it's

8:16

amazing that they've done it, but

8:18

it's fraught with danger. Sadly, in

8:21

order to get all 75% of the

8:23

owners on board in order to

8:25

get those penthouses, they would've had to have voted 75%,

8:28

14 separate times to get

8:30

the majority through. So that's when they did the

8:32

D.A., the construction, the loans and

8:35

the likes. And so at any one

8:37

time they can maybe not get the majority and

8:39

therefore it can kill the actual

8:42

development altogether. And that would

8:44

be possibly one of the main reasons why we don't

8:46

have much strata development

8:48

here. Whenever the property

8:51

departments are trying to look at where they can

8:53

put housing, they never look at strata because they

8:55

see it as being too difficult. And

8:58

it really is. I joked about

9:00

earlier, you know, ultimately it's death,

9:02

divorce, and then strata meetings. No,

9:05

no one wants to do it and you

9:07

know, they don't generally want to work with their other

9:09

part especially, you know, when it comes financially. So

9:11

really the key to unlocking these

9:13

80,000 odd older

9:16

apartment blocks is actually not to

9:18

get the owners out of the way,

9:20

but ultimately to get a developer in earlier.

9:23

And what I mean

9:25

by that is they ultimately, they determine that there's

9:27

airspace above, generally that's been given

9:30

to them because they're close to a transportation hub

9:32

or a hospital area as we've

9:34

been hearing of late. And you know, they're

9:36

having to replace their roof, which is a liability. And

9:39

so what we are doing is we are putting

9:41

a title around that particular liability and we

9:43

are creating an asset from it by building

9:45

these new homes. So ultimately what we're

9:48

doing is we're tendering out the airspace, we get a

9:51

number of interested airspace developers and they ultimately

9:53

negotiate a call

9:55

options contract, which allows the developer

9:58

to go ahead and submit the development application to

10:01

council on their behalf. So the owners

10:03

are not having to pay for anything. They're not having to

10:05

agree that 14 times,

10:08

they only need to do it the once and the

10:10

once only.

10:12

And Warren, if I am someone

10:14

who is a strata owner

10:16

within an apartment block, and

10:19

I think that this applies to me because

10:21

I've got a few issues going on my apartment block at

10:23

the moment and we're up for a huge special

10:25

levy and we're finding it hard to make ends

10:28

meet. Where would I first start to understand

10:30

whether or not I would even comply

10:32

with the opportunity to potentially sell

10:34

my airspace in my apartment block

10:36

and where would I start?

10:39

Well look, every apartment block as you know, has

10:41

generally a 10-year capital works plan.

10:43

They have to itemise what general

10:46

works needs to be done to the apartment block

10:48

over those 10 years and generally

10:50

how are they going to fund doing it. So primarily

10:53

it's either the quarterly levy going up or we said

10:55

about the special levy, but the alternate

10:57

of course is selling the airspace. So

11:00

how would they know? Generally most of the

11:02

older blocks, anything that's more

11:04

than 10 years, will have a pitch roof. They're concrete

11:07

tiles generally, as we said before,

11:09

non-fire compliant nor are

11:11

leaking. So there's already an existing

11:14

space there and you've already got the

11:16

existing level so you're not actually looking to go any

11:19

higher. You are looking to potentially add further

11:21

bulk and scale to that particular building.

11:23

And on general sense, I'm

11:26

not a structural engineer, but most buildings can

11:29

take one to two additional lightweight levels

11:31

and these rooftops generally are

11:34

very heavy. The

11:36

concrete tiles are about a hundred kilos per square

11:39

metre. So by taking off

11:41

eight to nine tonnes and putting on 14

11:43

or 15 is not that large a

11:45

degree. But ultimately you

11:48

should assume that you can use the

11:50

airspace. You own it, council,

11:52

they generally allow you to exceed

11:55

the height controls by putting in a section

11:57

4.6. It's just that

11:59

several councils actually ask for

12:01

10% of the reward. So

12:04

Bronte, you know,

12:06

the average square metreage rate going up is $21,000, they're

12:10

looking for $2,100 of

12:12

that. So you can in fact buy the

12:14

airspace from council if they

12:17

don't allow it. You just need to confirm that

12:20

obviously that particular space and the building can

12:22

take that particular weight. But just jumping

12:24

to your earlier point as well, Toby, is most

12:27

of these older blocks have two sets of stairwells.

12:30

So the front stairwell egress is what we

12:32

need now. What we're doing is we're replacing the rear

12:35

stairwells with a lift and that goes

12:37

straight up to the top floor and that

12:40

allows actually residents to be

12:42

able to access each individual floor going

12:44

up to that as well. So even downsizers,

12:46

you know, going into

12:49

an old block, will be able to have a lift that

12:51

they can go into their particular apartment block as

12:53

well as to their apartment as

12:55

well as the existing owners will be able to

12:58

stay longer in their existing strata blocks because

13:00

of the lift, therefore not requiring as

13:02

many old age home schemes if we fix

13:06

up what we've got.

13:09

So, what cut through are you getting with government

13:11

on this? I know you've been talking to a

13:13

lot of government people of late and

13:16

I think you've got Tim James on board from a few

13:18

articles I've been reading, you know, what's the government response

13:21

to this?

13:22

I was just at the local council

13:25

in Liverpool. I met

13:27

with the mayor and everyone is so interested

13:29

in the idea. Thought it's a concept that they've

13:31

never really considered, or it

13:34

had any viability to it, but from

13:37

a federal point to state

13:39

government to local council, they've all

13:41

been very positive and

13:44

wondering how they can incentivise this

13:46

type of development.

13:48

It's good to hear because we definitely do have a

13:50

real housing crisis at the moment.

13:52

I guess let's flip back to the investor side.

13:55

Toby, how do you see the market going

13:58

this year? Obviously, you had some really

14:00

great results last year on selling apartment blocks

14:02

outright, and this was just for your

14:04

single owners. Do you see that

14:07

momentum continuing this year?

14:09

Absolutely, we see that it's

14:12

going be a very strong year, especially with the

14:14

fact that we've seen that inflation data is

14:16

on the way down, which means that it's unlikely

14:19

that The Reserve Bank is going to increase interest

14:22

rates this year and if anything

14:24

it's more likely they're going to cut interest rates and that's

14:26

brought a newfound confidence to the

14:28

market and we haven't seen a January this active

14:30

before. So, that's a

14:34

number of things. Also the end of last year

14:36

we saw on Melbourne Cup Day the

14:38

Reserve Bank put up interest rates, which

14:41

killed the momentum going into Christmas and

14:43

we typically have very strong momentum going into

14:46

Christmas and that just didn't happen last year. So

14:48

that's been pushed over to this year and the

14:51

fact that we've seen a few positive news articles come

14:53

out, I feel that buyers are now

14:55

thinking that we have hit the bottom of

14:57

this cycle and are now trying

15:00

to get into the market before the property

15:02

market runs away from them and try and get themselves a

15:05

good opportunity. So we are seeing huge

15:07

amounts of properties coming to

15:09

market and also huge amounts of buyers as well.

15:11

So it should be exciting time ahead

15:13

for us in 2024.

15:17

Also wanted to touch on the fact that what Warren's

15:19

doing with selling airspace in

15:21

apartment blocks. We also do

15:23

sell apartment blocks that are owned

15:26

by collectives. So for example, they're

15:28

strata titled and owned by many different people.

15:30

We generally sell them as development sites.

15:33

So for example, the

15:35

existing property no longer provides

15:37

the highest and best use for the land that it sits on.

15:39

So it's underdeveloped, would be the word.

15:42

And we can come along and we can sell

15:44

the whole site to a developer who knocks down

15:46

the old apartment block and then puts something there

15:49

which is more akin to what people will be

15:50

looking for and that would appeal to the

15:52

downsizers. So we have an aging population

15:55

in Australia and there's a lot of downsizers

15:57

who want to find something that's a little

15:59

bit more conveniently located to

16:01

amenity as well as providing a

16:04

little less maintenance than a house does. And

16:06

there's not many products out there

16:08

within the market that would actually

16:11

appeal to the downsizers. So generally if you're

16:13

looking for something that's very high-end, if it

16:15

can have views the better, but especially important

16:18

is to be close to amenity and they generally

16:20

want three bedrooms. So one bedroom for

16:22

themselves, one bedroom for a

16:25

study or for their kids, and then

16:27

the third bedroom is for their grandchildren. Now,

16:29

in actual fact if it, I don't think it plays out like that

16:31

where everyone kind of stays over one night, but that's

16:33

what they want to have in their mind as being

16:36

the perfect property. So a lot of the

16:38

apartment blocks that are currently out there at the

16:40

moment, especially the aged ones, they just

16:42

don't facilitate what they're after and

16:44

they don't also have the infrastructure in them as

16:46

well, like, you need lifts and things like that

16:48

and they want to ensure that they're future proofing

16:50

these properties for them to accommodate

16:52

because it's their

16:54

forever home. They don't see themselves moving out of

16:56

this property, it's not a stepping stone. So they

16:59

want to ensure it's high-end luxury and

17:01

has everything that they want and ticks all their boxes. Where

17:04

we do come into some circumstances where

17:06

Warren's airspace would

17:08

be quite attractive is sometimes you do

17:11

find these apartment blocks in very nice locations

17:13

that even if the people are to sell out to

17:16

a developer, the chances of them being able

17:18

to buy an apartment within that same location on

17:21

the money that they've been given by the developer is next

17:23

to nothing. So they

17:25

want to stay in that same location,

17:27

but the block generally has some issues. So

17:29

for example, it doesn't have a lift in it.

17:31

And so they know that they're getting on in years and

17:33

soon they won't be able to walk up those stairs.

17:35

So what they need to do is, is talk

17:38

to someone like Warren who can

17:40

potentially activate the roof space

17:43

and use that to convert into some more

17:45

apartments and then they can use that money to then

17:47

upgrade their building and make sure that they future

17:50

proof their position in that property. So

17:52

it's definitely a niche within

17:54

the market and there's a lot of people that

17:56

I think could find huge advantage in

17:59

what Warren is proposing.

18:01

So, are you working with many owners at the

18:03

moment, Warren?

18:05

Absolutely, look it's really an

18:07

educational situation where

18:09

90% of the people I'm speaking to have never even

18:12

heard of it, never contemplated

18:14

it, it's always ultimately being a

18:16

sellout scenario, a move out, a

18:18

demolition and then a rebuild

18:20

and then sadly sale to the highest bidder.

18:23

And it's kind of a non community

18:25

type spirit I feel where airspace

18:28

actually allows the community to profit

18:31

from the uplift. They are the ones that actually

18:33

make the money from the development going up.

18:35

They use that money to fix their building and

18:37

improve their lifestyle and they are

18:40

able to stay living there and invested

18:42

in their building. So it gives

18:44

them a method to continue their

18:46

lifestyle but not actually having

18:49

to dip into their own pocket to pay for it.

18:51

And one other thing that I found really

18:54

interesting when I was looking into this whole

18:57

topic was the ability to

18:59

create key worker housing, which

19:01

is one of the real issues that we have,

19:04

particularly in markets like Sydney when we're

19:06

trying to house lower income professionals and

19:09

you can do these developments potentially around

19:12

say fire stations, ambulance stations and provide

19:14

for that key worker housing. Is that something that's

19:17

really kind of interesting government at the moment,

19:19

do you think?

19:21

It is ultimately the biggest airspace

19:23

development overseas. So from

19:25

Europe, France, UK, even

19:28

Boston, it's the local council.

19:30

They've become the largest airspace developers. And

19:33

they are primarily putting, rooftop

19:35

homes in and around hospitals, as you

19:37

said, transportation hubs, fire

19:39

as well as police stations and as

19:42

well as all the affordable housing is going

19:44

on their existing council blocks. So

19:46

it is funny enough not the individuals residential

19:48

owners, it's actually councils that

19:51

now are doing multiple projects. Just

19:53

one came out, 24 houses approved on

19:55

council lots. So it would

19:58

be two to three times that of your general

20:00

person. But here in Australia we can

20:03

build close on a 100,000 new airspace homes

20:05

in around our hospitals as well

20:08

as for essential workers. So I see nothing needs

20:10

to be knocked down and replaced and

20:13

really the key aspect of airspace

20:15

development is it's the greenest housing

20:17

solution available. It truly

20:20

is and the fact that, by not demo-ing

20:22

the building and by putting a carbon

20:25

neutral building on top, generally

20:27

wood structured, and therefore not having to

20:30

build these carbon intensive concrete blocks with defects,

20:33

we can actually save up

20:35

to a hundred million tonnes of carbon by actually

20:37

following the purpose of a hundred

20:40

thousand airspace homes opposed to traditionally

20:42

how are we doing it now.

20:45

And I guess for both of you, it's clearly

20:47

not just a Sydney phenomenon. We've talked

20:49

a fair bit about Sydney here, but you know, there

20:52

are opportunities for owners and

20:54

investors around the country.

20:57

Yes, absolutely, Toby?

20:58

Absolutely we sold some

21:01

apartment blocks in WA so it's not something that's

21:04

just unique to New South Wales by any means.

21:07

Developers and investors will seek properties

21:09

across Australia as long as it ticks the

21:12

boxes that they are looking for and

21:14

they're not going to be biased as long as it stacks

21:17

up based on their spreadsheets, then they're happy

21:19

to go for it. So, no, definitely

21:21

not a phenomenon unique to New South

21:23

Wales by any means and we see these transactions happening all

21:26

across Australia.

21:29

Thank you so much for your time, Warren and

21:31

Toby. I think it's going be really interesting

21:33

to see how the airspace market evolves

21:36

and I'd love to touch base with you going

21:38

forward, Warren, because I think it's a really interesting

21:41

area to explore. But also really

21:43

interesting to see whether this heat continues in the investment

21:45

market and I know you've got a few auctions

21:47

coming up, Toby, that I'll have to check

21:49

in on you with. So, thank

21:52

you for tuning into this latest episode of Talking

21:54

Property with CBRE. If you like

21:57

the show and want to check out more, visit cbre.com.au/talking-property or subscribe

22:02

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favorite podcast hosting platform. I'd also

22:08

love to hear from you with questions, feedback, or ideas

22:11

for future podcasts. You can email

22:13

me via talking [email protected]. Until next

22:17

time.