David is the Managing Director of Strata Plus and what he doesn’t know about strata property isn’t worth knowing. We chat about the new strata laws in NSW, what investors need to know about strata titled property and whether units are a good investment choice.
Mike Mortlock: Welcome to Geared for Growth. This week we chat with David Ferguson, who’s the managing director of Strata Plus. They manage over 500 schemes, he’s a counsellor of the New South Wales chapter of the urban development institute of Australia and former president of the Strata community of Australia. He’s a regular media commentator on Strata issues, and we have a chat about what exactly Strata Title is, the implications for Strata and property investors, and the new Strata laws in New South Wales. Here’s David. David Ferguson, thanks very much for joining us.
David Ferguson: Hi Mike, Great to be with you.
Mike Mortlock: Now, David you’re the managing director of Strata Plus. You manage over 500 schemes. You got a team of over 50. You’re the counsellor of the New South Wales chapter of the UDIA, the urban development institute of Australia. You’ve been president of the Strata community of Australia and a regular media commentator on Strata issues. That’s quite a resume. You’ve been doing this for a fair while.
David Ferguson: Yeah, it’s been a great ride in Strata for the last odd 20 years, I’ve got to say. This industry is changing dramatically and I suppose with a fresh set of eyes and coming out of originally corporate and banking life, I really enjoyed applying all those skills into this environment where the property’s very real, where it affects people’s lives day to day. I’ve been enjoying it very much.
Mike Mortlock: Yeah, fantastic. Just so we can get a bit of a background into the person that is David Ferguson, what posters were on the bedroom wall as a youngster?
David Ferguson: I think it was probably filled with surfing and windsurfing posters. Yeah, I was very much into the water sports and growing up around the beaches and things like that. Yeah, very, always loved being near the water.
Mike Mortlock: Awesome. Are you still getting out these days?
David Ferguson: In between chasing kids. I think I’m in a full-time administration of children’s sport at the moment, but I live vicariously through them as a lot of people do.
Mike Mortlock: That’s a full-time job for sure. So how did you get started in the property industry, and what was your first investment?
David Ferguson: Yeah, I suppose starting with the first investment. I decided through some good strong guidance from my parents, that buying a small investment property would be a good idea. I think my first apartment was a 29-square meter box, sitting in Darlinghurst in Sydney, which I rented out and I remember it was an absolutely exorbitant price at the time. I think it was a $117k. That wouldn’t have been too big an issue, except that the interest rates at that time were 17%.
Mike Mortlock: Right.
David Ferguson: I look back now and I think, at that time, was the right thing to do. I don’t know if it actually, financially made sense, but it certainly set a culture of property ownership for me and I’d always owned property the whole way through. That was my first real property investment, and it was a great learning experience, and at the end of the day being able to sell that and leverage into my next apartment, which was my home with my wife was a great opportunity for us. Had I not done it, it simply wouldn’t have happened. Being able to be in the market for a long period of time was the thing that really made the difference.
Mike Mortlock: Yeah, awesome. Now, we certainly want to talk about the new Strata laws in New South Wales, but just to kick things off, what’s your best answer to what is Strata Title?
David Ferguson: Strata Title, it’s all about collective ownership. It’s a pretty breakthrough piece of legislation that New South Wales were leaders at the time. Shared ownership, shared responsibility, everything is owned collectively, but for which you own as part of your own Strata lot. People have a struggle with saying what’s common property? The answer, what common property is, it’s everything except what you own, which is the airspace of your apartment effectively.
Mike Mortlock: Just wanted to have a chat about Strata fees, which is obviously one of the big differentiators between say a Torrens title house and an apartment. Do you think it’s reasonable for property investors to avoid units, just because of the Strata fees? I know that a lot of investors just look at houses for that reason.
David Ferguson: Yeah, they do, but look I’m actually, I’ve lived in Strata for more years than I’ve ever lived in a house. I’m in a house at the moment, which I’m doing this social experiment to see what the other side’s like so I can speak authority on it. Look, I have a person come and clean my gutters because I don’t particularly want to jump on a ladder and do it myself. I think the amount it cost me to clean the gutters would probably add up to about half of what the Strata levies would be on an apartment of a similar value. I think people lose touch with the fact that Strata fees are actually a regular and budgetable expense, which you can rely on. In a house, if all of a sudden you need a roof replacement and you’re up for $20k or $30k, it’s very hard to budget for it and you might have to dip into your savings. You just don’t have that, on the whole, you don’t have that irregularity of expense when you’re talking about a Strata property with reasonable fees.
Mike Mortlock: Yeah, that’s a really good point. The fact that it is a budgetable expense and the costs are mitigated by the share that you have in the total. What typically is the breakdown for Strata fees? Where is the money allocated to on a percentage basis?
David Ferguson: As far as percentage, it really comes down to how. The most expensive thing on any particular property is the level of on-site services. If you’re running a very high-end starter apartment with a concierge and a building manager, and there’s a lot of body count, then effectively you’re going to have some pretty expensive Strata levies. At the other end of the scale, and let’s just use a block of 50 units, for example, you’ve got good economies of scale of a number of people sharing the infrastructure.
You’ve got an executive committee who are very active in doing a lot of the repairs and maintenance themselves. You’d find that they’re actually pretty cost-effective, those levies.
We’ve also got to realise, there’s a transition in what people do want out of their lives. Again, we’ll use the same 50-unit building. If you’ve got a building manager there who’s there to receive tradesmen, and sign-off invoices, and make sure they’ve done the right work, etc. you might be spending a little bit of money on that person, but is it actually freeing up your lifestyle to do more of the things you actually want to do? Definitely consideration for where the percentages go.
As far as that on-site services, that could be anywhere from, we’re talking a cleaner or a building manager could be 10% through to 40% or 50% of the title expenses, depending on what the regime was. If you’re talking about broad numbers, somewhere between 70% and 80% would be the day to day administration of the building. That’s the insurance, and the fire contractor, and the cleaner, and all those sorts of things. Then typically, somewhere between 20% and 30% is going away for long-term replacement of assets. When that leaky roof does actually need replacement, you’ve actually got the money sitting there and don’t have to dig into your pocket again.
Mike Mortlock: Yeah, and what about Strata managers themselves? They must be taking an exorbitant cut of the total surely David.
David Ferguson: Yeah, absolutely. I think it runs through about somewhere between 3% and 4% of the entire budget.
Mike Mortlock: I sort of T’d you up a little bit with that one, because I was lucky enough to present with you a couple of years ago and saw that infographic, and I was quite surprised. It’s a very low percentage of the total amount.
David Ferguson: Yeah, it really is. That can actually work, but it also comes down to client expectations. If you’ve got an agreement and it’s very clear about what you’re doing, then yes, you can be very cost effective and provide that service for literally a fraction of what an accountant or lawyer could, because you’re set up to do it. It’s amazing, obviously performance and services in the eyes of the client, and they do expect you to be an absolute expert in everything. I’ll have somebody ring up next week saying, “Oh look, my roof’s blown off. Can you just come down and look at the rafters because of blah, blah, blah.” It literally can go from that to, “Oh my pet’s stuck in the tree. How do I get him out?” You’ve got to be an absolute master of everything, in order to provide a great service for the client. I think that’s probably where our people are getting more conscious about it. If they want to have professionals and have a better level of service, they are prepared to pay a little bit more for accessibility and knowledge. At the most basic level, for the administration, yes it can be a very cost-effective service.
Mike Mortlock: It sounds like we’re missing a trick, looking at shows like the block for a reality television, with some of these phone calls you’re getting. Maybe we need to be hanging around Strata managers.
David Ferguson: Yeah, it’s an absolute slice of life, is the only way to describe it. People of different worlds thrown in together, and even the prevalence of things like AirBnB where you’ve got the short-term accommodation, even backpackers, etc. seeking to rent an apartment right next to the chairman of X, Y, Z company who’s decided to retire there with his wife. That’ll be a call I have tomorrow I’m sure. Yeah, it’s an absolute slice of life. All walks are in the same building often.
Mike Mortlock: That’s fantastic. You’ve given us a little bit of an insight, but can you tell us a little bit more about what a Strata manager actually does?
David Ferguson: Yeah, well looking through the agency agreement’s probably the best way to get a sense of what the absolute responsibilities are. We use the Strata community Australia agreement. Most people do consider it’s a little bit long sometimes. There’s so much to actually do, and I think it’s really important for us to describe how we actually do it. Dealing firstly with the money, where money comes in, making sure that you can get it from the people in a way that fits with legislation. People don’t quite realise if you get it wrong, and it ends up at court, courts can quite easily turn around and say, “No sir, you don’t have to pay.”
There’s a lot of pressure on us to actually get the records right, the meetings have got to be correct, the notices have got to be correct in order to make sure that money is collectible. That’s in relation to money coming in. In relation to money going out, really comes down to risk management as well. There’s a way to pay people correctly, and there’s a way not to. We often get pressures from clients saying, “Here’s Joe the handyman. He’s my brother’s mate. Can we do this or that with him and pay me some money?” We’ll go, “Look, could do that, but please appreciate he doesn’t have insurance for the work he just carried out. He doesn’t have an ABN. He doesn’t have…” All these areas of compliance and sometimes we just have to deliver the bad news, but hopefully, do it in a nice way, because our job is to fundamentally protect the asset for all owners, not just for the wishes of one or two people.
Mike Mortlock: I want to ask about how you fit in with developers as well. Let’s say, we use your 50-unit development. A developer’s obviously constructing that. They’re selling it off the plan, a Strata plan, of course, when needs to be established. When does that happen? Who establishes that and what’s your link with developers there?
David Ferguson: I suppose that the Strata plan is a body that can be sued, is probably the easiest way to describe it. It’s recognised in the eyes of the law. Has its own ABN, its own Tax File Number, etc. Strata managers are instrumental in assisting developers to get to the stage where that Strata plan has its own life with a collective group of owners. Our job really is to get it set up, hopefully in the best way that when those owners actually take delivery of that Strata plan, that it’s all working the way it should.
To get it right, it’s not an easy job, because there’s a lot of very intricate parts. Obviously getting the budget correct, and I’m not just talking about making sure all those spreadsheets are right? It’s about what’s going to be important to those future owners. How are they going to see value in their levies? Our job’s really to make sure that we get the services right, get the structure right, to make sure they’re getting value at the end of the day, so that when they walk into their apartment, and they’ve been there a few months they go, “Oh yeah, that is what we wanted.”
That’s one thing, what the bylaws look like, to make sure that the way the people are interacting and the levels of compliance are correct. Is it going to be a pet-friendly building or not pet-friendly? Are there bits of common property that need to be assigned to one person or another, and they need to pay the expenses to make sure that all the costs are fair in the end. What happens in the background to make sure that it all fits right at the end.
Mike Mortlock: I guess, for investors, there’s some due diligence they need to do when they’re looking at an apartment, and part of that is looking at the Strata plan and how that is set up. What will a Strata check do, and how important is that when someone’s looking at purchasing let’s say an established unit?
David Ferguson: With an established unit, Strata checks are virtually a necessity. There’s a substantial amount of information that goes into them.
The professional searchers who go through those records are very practiced in what they do, and they can get a very quick sense of what’s happening with a building. The financial records are important, making sure that it’s insured, insured correctly, all very important as well. They’re part of your risk management process. When an inspector walks in, the other thing they’re really going to look at is how much is in the bank balances. If the building’s being going for 30 years, and they’ve got $2 in the bank, and there are substantial works on the agenda with no way to pay for them, then it’s very important that that prospective purchaser has been made aware of that. Now that is going to repress the price of that apartment.
People shouldn’t necessarily think that not having money is not necessarily a bad thing, because everybody is doing inspections and they’re all looking at these apartments, and they’re going to pricing their offers accordingly. You then potentially have the option of jumping, becoming a Strata committee member and guiding the process in how the building gets fixed up, making it the best-valued use of the money you input and then ending up with a great asset at the end of the day. Going into it with eyes wide open, so you’re actually looking at that report, and if it doesn’t have money, then calculate that into your price of purchase.
Mike Mortlock: You touched on something that I think people are pretty fearful of, and that is potentially purchasing a unit that doesn’t have enough money set aside for repairs and maintenance, and that sort of thing. Is it fairly common for special levies to exist, or is that a bit of an indication that maybe there’s been some budgeting problems?
David Ferguson: I haven’t got any stats on this, but the number of special levies in buildings is decreasing, is in my broad view. The reason is that about 10 years ago, the government followed in Queensland initiative, and that is to have sinking fund assessment or capital works as we call is now, assessments for every building. It’s actually a requirement that one of those is on file for every Strata scheme in New South Wales within 12 months of the building actually registering. That’s the first document you really need to look at when you’re searching. Then seeing how much money there should be in there in accordance with the plan. Secondly, whether that plan’s been executed.
If those plans are followed, there really shouldn’t be the need for special levies, unless you’re doing something that’s not part of the original building. Now that is a government initiative around making sure that people have a certainty of levies and certainty of funding. I think it’s been successful. It’s been a bit of a slow burner. I think it’s actually been relatively successful in changing the culture of the way people view saving for their Strata plans for the future.
Mike Mortlock: I wanted to talk a little bit more about the Strata fees. Are there some main assets or facilities that result in extremely high fees, or is that more about the boots on the ground that you referred to previously?
David Ferguson: Yeah, I’m glad you asked that question because I think it is a bit of an incorrect steer to say that assets of a building actually cause Strata levies, but they don’t. It’s actually the day to day labour that cost the most amount of money. If you’ve got a fountain or a pool or whatever, they’re pretty definable costs. If you had to heat the pool, that changes the game a bit. In comparison with insurance and the labour costs of on-site people, the actual assets of the building are not too bad in my view. I suppose from the assets point of view, you are getting something back.
I’ll pick on a very, wonderful luxurious development we look after here in Sydney, and I was doing a tour of the swimming pool the other day. Talking to the building manager and he said, “You know, no one ever uses this pool.” I said, “Do you think they’ll ever get rid of it?” He went, “Oh no, we’d never get rid of it. We love the pool.” It’s important to people to have these things, and often they don’t use it, but sometimes it’s just the joy of having it.
There might be wonderful gardens as well. You’re overlooking something that is now a shared expense. It’s not a pool that you’re having to maintain and put all the chemicals in yourself as a single owner. You’re now sharing the cost of those chemicals and the maintenance with 50 other people. I think it could be a great value. I don’t think owners or investors for that matter should be particularly scared about actually having some assets that define the building as a great place to live.
Mike Mortlock: Yeah, I’m harping on the Strata fees and I guess playing devil’s advocate a little bit there because I know it is certainly a fear that some investors have that they want to steer away from it. If we take say your case study of a 50-unit development, let’s say we’ve got two side by side, is it necessarily a better thing that one development has lower Strata fees?
David Ferguson: I think … Well, the market’s maturing. A lot of people who are buying into Strata now, and especially investors, this is not their first investment. They’ve actually owned two or three before, and I’ve literally been to first annual government general meetings before, and I see somebody in the crowd and I know they’re a regular investor. They’ll look through the budget and they go, “Yeah, that’s okay, but guess what? There needs to be this figure.” They’re actually telling us that, “We want the Strata levies to be what they should be.” Don’t shave any corners, because they don’t want any long-term concerns and they want to have the building maintained. The biggest, Strata levies are a small part of the pie, the biggest factor is really the rent and what you’re obtaining. If the building’s not presentable, and you’re not attracting the right quality tenant, then the numbers can get very shaky so using the-
Mike Mortlock: Much more of a problem than a tax-deductible Strata fee, isn’t it?
David Ferguson: Absolutely, yeah. Have a look those two buildings, and actually, I’ve got a great example of two 300-unit buildings in Sydney side by side. We had done committee who went on a Strata, what do we call it? A crusade to reduce the levies. We were actually terminated as a Strata agent, and they went off. They’re now on their fourth Strata manager. Their levies are now one and a half times what our buildings are, and our buildings have just actually consistently followed CPI the whole way through. As an investment, you’ve got to look at the value of levies, not just the low dollar figure, and what’s it actually giving to you that makes your building more valuable as a whole? Either from avoiding some special levies, or alternatively potential resale and holding the value of that building.
Mike Mortlock: You’ve touched on something that leads to another question I wanted to ask you, and that was how a potential purchaser can identify a development with Strata problems? Obviously, you’ve talked about these sometimes rogue entities and obviously, proxy harvesting is something that we want to have a chat about. I know there’s been some legislation changes there, but can you provide advice to someone to fairly easily spot if there are problems with the Strata plan?
David Ferguson: Yeah, I think reading the correspondence file, even as a non-professional is going to give you an absolute sense of whether there’s harmony at the building. Harmony is an important thing because you get things done when you’re in a harmonious environment. Again, you shouldn’t be too scared of it. If you do see it not going well, the difference between anarchy and harmony is actually one person. Somebody who’s come in with a sensible platform, they don’t have any baggage or poor history, they haven’t taken sides, and they just want to get on with it, you could find you could have a very dramatic change in the way a building runs in a short period of time, if you prepared the investor time yourself.
We’ve seen people who actually run around, literally buying distressed assets. Poor buildings with poor committees and they’ll look in and go, “Oh great, that’s all pretty bad. That’s a great opportunity for me because I’m getting it for a cheaper price. I know what I’m doing. I can make this building really great in a short period of time,” and away they go.
Mike Mortlock: Excellent. These might be good people to follow around if you want to send us through their details, who’ll share that. That could be a hot investing tip. Now, I want some dirt, David. What are some of the common conflicts within these developments?
David Ferguson: Common conflicts, I think one of the biggest things that people struggle with is the cost of getting value out of our perceived value out of builder’s developers. When you’re putting a building together, it’s a complicated asset, and we’ve had some great developers put great assets together. Committee members who haven’t practiced in this area a lot can often get a bit carried away. They might see something, which they think is defective or someone needs to be held accountable for, and the reality is that it may be something that contractually, nobody’s really responsible for apart from just the developer issuing the good product.
Now, the problem with that is, I suppose the enforcement. It is hard to bring people to, to bring developers to heel sometimes, but nothing money can’t solve. The problem with that is, those lawyers who are happy to take that money and not overly concerned about the actual outcomes, so I see a lot of money wasted on legal fees when a really good simple agreement between parties, a documented agreement could end up with a great result. If you’re seeing an owner’s corporation that spends $100k on legal fees to try and get a scratch kitchen bench fixed, it’s really gone wrong at that point. Yeah, that’s probably the biggest concern we’re seeing in this market at the moment.
Mike Mortlock: With established developments, can there be a bit of a conflict when it comes to saying increasing the levies to better cover future expenses when there are some owners that maybe are thinking that they’re looking to sell the property within a couple of years?
David Ferguson: I think you can. People always come to a committee with their own burning interests. I think it might be one in five committee members who genuinely try and do the right thing by everybody. We call them single-issue committee members. You don’t see them for years, then all of a sudden, they turn up because they want something and yeah, they either get it or they don’t. Then they disappear shortly afterward. Yeah, you do have that diversity of opinion. That something that needs to be managed. Could I just say, if capital works assessments are followed, from day one, then you don’t really have the arguments? It’s a much better place to be for a Strata committee and a Strata manager to decide how to spend the money, then how to get the money.
Mike Mortlock: That’s something that obviously we have a bit of exposure with as well in preparing sinking funds, but it’s amazing how often people are wanting to say, “We want to exclude this. We want to take this out,” just to minimise that cost. That could be a bit of an issue as well, can’t it?
David Ferguson: Yeah, certainly cherry picking those sort of things is not a particularly productive use of time. I think we’re encouraged though that the market does seem to be a lot more rational about Strata fees and levies these days. They’re much more accepting of the need to maintain buildings correctly, and I may be seeing improvement over that at the moment.
Mike Mortlock: Well that’s got to be good news. For new apartment buyers, you advocate looking at a similar development that’s maybe 10 years old. It’s something that I’ve read you post on before. What’s the reason for this, and what can we learn from that as an exercise?
David Ferguson: As far as the track record of the developer, do you mean?
Mike Mortlock: I’m guessing that it ties into the track record, and also the potential of maintenance expenses, you’re able to see into the future as to what’s incurred on that building.
David Ferguson: Yeah, you’ll definitely see and look, I’ll speak to 50-unit buildings side by side, one brand new, one 10 years old. The levies should be the same. In all honesty, they should be. If they’re not, then there’s got to be reasons for it. First one would be to look at the on-site labourers, or a difference of opinion around that. The levies that are struck the day one in a new Strata building, should be the same as the levies in year 10 of a 10-year-old building because it’s all about the consistent accumulation of resources for long-term replacement of assets in the building.
Mike Mortlock: Is this happening in your experience, in the real world, in this case, study? Would that likely to be the case, or is it more often than not that there is a reasonable discrepancy?
David Ferguson: I think, yeah there are discrepancies but there are reasons for them. That 10-year-old, 50-unit building, if it’s looking really tired and the committee is just not doing a great job, they’ve got no money. That’s great, the levies are low, but the building’s a disaster. Yes, there are reasons why, but you can always point it out. Let’s just put a comparison of two buildings, one 10-year-old one, which is really well run, well managed, well maintained, and a brand-new building with the same opportunities. Should be the same.
Mike Mortlock: Yeah, okay. I want to talk about the new laws. If we could, I especially wanted to start with the collective sales changes. That’s something that got a little bit of press, and it was a pretty contentious issue. What’s going on here?
David Ferguson: That is probably the most exciting policy decision, which we’ve had happen in New South Wales in recent memory. Invariably, the people, when you’re looking at a Strata asset, it’s all about the collective ownership. People owning this land collectively as well. In each of the examples I’ve seen where a building didn’t want to let’s say renew, or sell out for a profit, it’s never really been an old lady who’s worried about being displaced from her home. It’s typically a greedy investor who slowed it down.
This legislative change has been pretty well thought out, because all the protections have been built in to make sure the little old lady is well looked after, but they’ve also given her the opportunity or protection to actually sell her asset and not get ripped by other people. Everyone’s kind of missing that point. With respect, I’ve not met a little old lady who at this point would not take double or triple her unit value if she needed to move to a building down the road. At the end of the day, there’s got to be an economic decision behind this, and if the economics stack up then people generally say yes.
Mike Mortlock: The little old lady did feature pretty heavily in some of the press articles. Essentially the rules have changed in the percentage of people that are in agreeance on whether to say dispose of the asset. What’s the difference between the numbers there?
David Ferguson: It’s followed the special resolution methodology. I won’t step through the process too much, but let’s just say that in order for it to happen, it would probably take two or three years and you’d have to have a lot of very considered owners who agree that it’s a good idea. It’s not like you can actually rip it apart and out from somebody’s feet, and they’ll be thrown out tomorrow. It’s just not going to happen that way. Certainly, what we’re seeing in this market, especially when lands a very short supply here, is the opportunities are there.
I did some consulting work for a block in Castle Hill and just giving you a really worked example. The three low-rise blocks of 20 apartments who all decided it’s a time to sell. Their apartments are worth probably $700k to $800k. They’re looking at getting somewhere between $2 million and to $2.5 million each, if they were to a developer to actually do that. That’s a really worked example, and certainly, in that room where I presented to those owners, there were plenty of elderly people who were going, “How can we make this happen, because we want to do something with our money, and we want to do this.”
Sure enough, there was one greedy person who was like, “No, I don’t want to do it,” because he wanted more money. It was nothing about a sense of place, he was an investor. I think this legislation’s actually helped people as an enabler and is some great protection as well to make sure that no one gets oppressive conduct, means that the whole thing will get thrown out. If anyone’s forced to do it, that’s just not going to happen, but you’re in a collective ownership and you should be able to make decisions as a group without getting held out by somebody who’s green mailing the group.
Mike Mortlock: Yeah awesome. Sorry, I let you finish.
David Ferguson: Sorry, go head.
Mike Mortlock: No, I was just going to say, that’s a fantastic insight and I know that you’ve both been involved in the consulting process for a new legislation and you’re also able to see on the other side what’s happening in the real world. That’s a great insight. What about the changes for defects bonds for developers?
David Ferguson: Yeah, it’s interesting when you look at where the genesis came for this. Certainly, it was wide community support, and I was just reading a paper from the Law Society the other day, and they were very much in favour of making sure there was a defects bond. Looking at the genesis for this, you don’t really have in a commercial environment where Dexis goes and puts up a big commercial building, and they do on behalf of for the superfund client, etc. The buildings get built pretty well, and we’re looking at why those buildings get together really well? Then your residential building of 30 apartments are littered with defects and lawyers are all over the place.
I think the government, well the problem is it’s about accountability because the end purchaser on a Strata building is not generally associated with building it. When it comes to retention, money, and everything else, they’re just not … There’s a real gap between the two. The defects bond is an absolute move to try and put end owners in touch with the quality of the building, via the release of a bond of 2%, which needs to be put together by the developer in order to promote the project.
Mike Mortlock: That’s likely going to mean that any defects are going to be shepherded through a little bit quicker, would you be thinking?
David Ferguson: Yeah, I think for good developers and builders, for them it’s just another process and it’s not really going to change the world much. For a poor developer or builder, they’ve probably already written it off and they’ll probably behave the same anyway. I think the track record of the builder and developer is pretty critical in any purchase. You’re looking at who you’re buying from.
Mike Mortlock: Getting back to our property investor who hates investing in units, one of the big fears is renovations. It can be a convoluted process, and you need to get approvals. Renovations and the process to go through to be able to do that, has changed with the legislation. What’s changed there?
David Ferguson: There’s a lot more flexibility to put in what we call, works bylaws. You’ve now got the ability to delegate a lot of the approvals into Strata committees, if they’re done under a predetermined approach. Look, renovations shouldn’t be feared, as long as they’re done right. I think people think they can walk in and start off with their carpenter on day one, and think it’s all going to fall behind them. It doesn’t. It does take a little bit of planning and approaching, and letting your owner’s corporation know what’s going on.
Either fitting within the terms of the current bylaws or alternatively arranging for your own bylaw that sets out what you’re doing and how it happens, and the liabilities, and the hours of work, and all those bits and pieces. Seems a little bit way around, but it gives certainty and security to everybody. If it’s done well, then renovations can happen quite smoothly.
Mike Mortlock: Excellent. I guess that’s what people want to strike a balance between the ability to get renovations happening without too much red tape, and also for the other owners in the building to have the security that it’s going to be done correctly and done right, and not necessarily detract away from their enjoyment of the development or enjoyment of capital growth as well I guess.
David Ferguson: Oh for sure, and don’t forget the … It often comes down to the human factor. If you’re going to renovate your apartment, and you’re going to either lease it out or sell it, you’re going to add to the overall value of the collective asset. I think sometimes just having that round table meeting say, “Hey, we want to achieve this. We think it’s a great opportunity. We’re going to do our best to minimise it for you. Here’s my mobile, if you’re concerned, you give me a call direct.” Never underestimate the human factor in actually getting things through, and getting everybody on board with whatever your plans are, because it can make it a lot smoother.
Mike Mortlock: Yeah, it’s funny how people can just get their nose out of joint, just because the simple courtesy of letting them know that something has happened, has been sort of missed. I want to talk about … Sorry, I’ll let you go.
David Ferguson: No, I was just going to, yeah just supporting the point there. Some people just don’t like change, and I remember the funniest story. Well they just don’t like anything different. I remember one building we had in Rose Bay, and somebody parked a boat in the car space. They were saying, “David, the Strata manager, you’ve got to get rid of that boat from somebody’s car space.” I’m going, “It’s their car space. Why do you want to get rid of the boat?” “Oh, we don’t think it looks right.” I’m like, “It’s a car park, seriously.” Sure enough, they put a bylaw in place that stopped people putting boats there. That was probably the silliest bylaw I’ve ever seen, but yeah, don’t underestimate that people just don’t sometimes like things that are different. If you can smooth it through with a human touch, it certainly makes life easier.
Mike Mortlock: Yes, I’ve seen a similar few examples of that myself. Let’s talk about that rogue agent meets the single-issue committee members. Proxy harvesting has been a thing in the past, where someone can go around and collect the absentee votes and affect a bit of change or bend things to their will. Is that something that you have seen a lot in the past, and how much more difficult is that going to be with the new legislation?
David Ferguson: I think giving you a worked example is probably the best one. I was at a building, and I know you see a lot of large building examples, but in some respects, you always get the best examples there because the issue often gets magnified just because of the sheer number of people. Yeah, so a block of a couple hundred apartments and they’d always given the proxies to the chairman, in order to actually get a quorum so they could save money and not have an adjourned meeting. That’s all great, except that there was a no smoking bylaw, which was on the agenda.
This room of, I guess it’s probably 25 people including the chairman, all voted to put this bylaw in place to stop people smoking on common property and also the transmission of smoke between lots. Everyone put their hands up, and the chairman who had all these proxies given to him went, “Oh no, I vote against it.” Guess what? Chairman was a smoker. The ability to pervert justice has always been there because all those people who gave proxies, did not give him their proxies for the purpose of voting down the no smoking bylaw, they gave it for the quorum.
Misuse of proxies is something which has been definitely bubbling along in this industry for a while. In Queensland, doesn’t happen. You can’t have any more than a certain number of proxies, and that was one of the bits of our legislative change, which got picked up. You’ve not got limits on proxies, only up to 5%, so 50 in a building, it’s loosely a couple of people. The thing that’s really changed in proxies, is you don’t really need them anymore anyway because we’ve got a new thing called, pre-meeting voting. That means that every agenda item on a particular agenda, you’ve got the ability to record your decision and put that into the meeting so that your vote’s recorded in your own right without anybody being able to change it or assign your responsibility to anybody else.
Mike Mortlock: Yeah, and that’s been described as the use of new technology, but technologies may be a bit of a stretch, isn’t it? It’s just the ability to be able to remotely cast your vote.
David Ferguson: Yeah that’s true. Our software system for the buildings we’re using, in Port Stephens, and Newcastle actually allows for this pre-meeting voting where you can literally receive it electronically. You can vote by clicking buttons, and then it returns back to the agent, and the minutes are virtually done before you even turn up to the meeting. Yes, it is a potentially manually based, and/or paper, but good systems are actually wrestling with this pretty well and keeping the administration costs down.
I think it’s called pre-meeting electronic voting. It also ties back into just the natural transmission of documents electronically now as well. It was always a bit ambiguous as to whether that the proxy which was received via fax or via email, etc. did it actually constitute a bit of paper or not? Quite clearly it should’ve been, but under acts that are, get very outdated. There was a bit of conjecture around that over the years, so it’s been cleaned up. Yes, it is quite electronic, but it just means there’s free of flow of information through electronic means. A potential system based as well.
Mike Mortlock: Excellent. Are there any other changes that you think are worthy of note under the scope of investing particularly?
David Ferguson: Let me think. Well certainly when it comes to the capital works funds, making sure that they don’t just happen, but they actually have to be reviewed. The last legislation we had on it said you should have one. It didn’t really say getting one once is enough. Now you’ve actually got to get it out and look a it. We’re pretty happy about that. A bit of improvement around there. A lot of the minor things that happen, certainly from a property management side of things, minor cosmetic work. Including installing hooks and things to hang on walls, etc. Once upon a time, wasn’t really allowed under the bylaws, but now it said, look it can do that, not full a fail corporation, so a bit of an improvement around the way legislations matched into what people are doing.
The other thing that’s really changed a bit is I guess the natural appetite of animals in Strata. Certainly, when we all … Sorry, excuse the beeps. Certainly, when we started in Strata many years ago, there were investment places often, and the concept of having pets wasn’t a strong one for Strata. With the number of downsizes now, empty nesters etc., wishing to bring their dogs with them, dogs and cats, etc. this legislation the default position for bylaws is, yes pets are okay. You can always stop that, but the default position, I saw the government’s changed a bit to actually be more conscious that pets are a part of modern society and has a bit more open approach to it.
Mike Mortlock: Yeah, I think that’s definitely important. They are a big part of modern society and their implications for tenants as well that can find it difficult to find a combination that has that allowance.
David Ferguson: For sure. The only other thing is, I suppose just around agency agreements and the requirement of an owner’s corporation to have a current interim agency agreement with the Strata agent. A lot of Strata managers who’ve been had an agreement signed 10 years ago, can’t-do that anymore. You actually need to have engaged with the client and have them agree to be managed by you, otherwise, you don’t get to keep the management fees. Yeah, that’s a pretty significant change in approach. If people haven’t heard from the Strata managers and signed an agreement, then they certainly should be asking the questions of what’s happening.
Mike Mortlock: It makes sense, doesn’t it? The real estate industry at large has been across that for a long, long time, so yeah that sounds positive to me. You mentioned that your social experiment of living in a house, I did want to way into that units versus houses debate from an investing point of view. I guess if there’s any thread for this podcast, is that we want to ban emotional investment. I think a lot of that comes down to emotional investment. Obviously, ignoring the capital growth and all that sort of thing, how has this experiment opened your eyes to the houses versus unit’s debate?
David Ferguson: Well it’s making the apartment factor look very good value. I think as a living proposition, and I do say it’s a social experiment because my wife and I absolutely know that we’ll be back in an apartment within a very short number of years. Kids are 14, 15 now, and the backyard’s, the decreasing use. Once you start getting to those years, it’s just the way people are living now, even as we spent time as a family, we tend to eat out or go to places. It really changes the approach. You look at the backyard and it’s absolutely beautiful, and you just go, “Well, wouldn’t we rather live somewhere that’s a little bit closer to the things we do?” Yeah, I think we’re probably atypical of what’s happening in a lot of families as well. It’s not really just the empty nesters, it’s also changes in family units and the way they’re deciding to live as well. What’s changing a bit is also the market mix in what’s arriving now. Certainly, just putting up blocks of two-bedroom apartments because they rent well, that’s one possible avenue, but there’s a lot of people who are specialising in bringing a product to market that will be better finished, better built, better amenity, they’ve designed in a small home offers, they’ve designed in occasional accommodation for kids and things like that, but they’re very much focused on couples who want a different lifestyle.
Mike Mortlock: I guess the developers are going to move towards people, what people want, aren’t they? Obviously, there will be some people that are just chasing, how many can I jam on this particular site and what can I sell them for? Yeah, that’s certainly not the experience everywhere, is it? A lot of developers are really designing their products in the premier end, and with an idea about what the amenities are and the nearby facilities, and that sort of thing aren’t they?
David Ferguson: They are, and the people who are buying those are actually cashed up because they’re still getting great prices for their houses. It’s left them a bit of playing money, and as well as moving into a different place where they actually want to live too. Yeah, it’s working well.
Mike Mortlock: We want to just wrap this up for you David. You’re a busy man, but I did want to just ask you the question, from an investor point of view, if there’s one piece of advice that you could provide, what would that be?
David Ferguson: In the context of an existing building I suppose?
Mike Mortlock: Yeah, well an existing building is probably a better example, so let’s imagine that it’s an existing apartment that’s been around for let’s say five, 10, 15 years.
David Ferguson: Yeah, look I think Strata investments are a great asset class, and you’ve got more ability to control the outcome of that asset than anything you could ever possibly do, say in manage funds for example. You can actually invest your time to change your returns by a bit of active involvement in the building, so don’t be scared to be involved. That’s the whole push of things of legislation, they’re really trying to get people actively involved in Strata communities, and we’d love to see more of it.
Mike Mortlock: Yeah, Alan Joyce is not going to pick up the phone if you have some suggestions on how to increase the revenue of Qantas, but you can impart a bit of influence on your Strata firm can’t you?
David Ferguson: That’s why I joined the industry. Coming out of banking where it was very transactional, you’re just watching piles of paper fly across the desk and joining the Strata sector at age 25, and being able to directly affect people’s lives in positive ways is pretty good. I think those sorts of ideals for a Strata investor can certainly permeate through the building and end up with a much better place to live or invest.
Mike Mortlock: Awesome. How do people get in touch with yourself David?
David Ferguson: Probably the easiest way is through our website. That’s Strataplus.com.au, and you’ll see we’ve got five branches throughout New South Wales, and you can click through to our Port Stephens Strata branch or alternatively just work with our Strata Plus team here, and we’d love to hear from anyone.
Mike Mortlock: Fantastic. Thanks very much for you time David. Much appreciate it.
David Ferguson: My pleasure. Talk soon.