Property Collectives: 2010-2020 the birth of a Melbourne baugruppen model
It was a cold and misty morning. The heavy clouds were laden with more rain to come. A deep grey. The weather was perfect. It meant only the serious would turn up. The rhythmic noise of the cars streaming down St Georges Rd amplified by the spray. The small crowd gathered in the overgrown backyard of the old Edwardian weatherboard. Our limit was $850,000. The auction was quick. One bid. Ours. Passed in for $750,000. Dan and I were ushered into the living room. Surrounded by the kitsch art and furnishings of the share house the agent tells us the vendor wants $840,000. Dan and I swap a knowing look. We negotiate to $810,000 and the deal is done. The birth of our little collective would soon turn into the first Property Collectives project.
The first of nine to come over the next decade.
Nearly 10 years later, sitting in the mid-morning sun during the summer holidays, I finish a phone call with Berish and take a moment to reflect on the two projects that bookend my decade. In October, the Victoria Street Collective (adjoining the Westwyck ecovillage) purchased the neighbouring property and we were finalising who the new participants would be to expand our project from six up to nine or ten participants. The existing Victoria Street Collective members had put the word out to family and friends, and we were at the tail end of a process of assessing seven groups that were interested in joining. That seven had turned into three and the existing members were keen to confirm these new participants entry to the project before the new year.
The acquisition had made this project our largest to date.
10 years | 9 collectives | 60 homes
Our first decade has seen us create 9 collectives, bringing together 54 participants (couples, individuals and families) to build 60 homes.
I feel extremely lucky. We seem to have been at the right place at the right time with a good idea that has resonated with my friends, family and beyond.
We've evolved from a group of friends who wanted to build some good quality homes for ourselves somewhere in Melbourne's inner north, to a small team working diligently to transform what was initially a hunch, into a robust and replicable process and service with values aligned partners. Our challenge now is to build on the successes and learn from our failures of the last decade and take this good idea and make it great.
So as we approach our 10th year and 10th project, after an epic 2019, please indulge me a bit of retrospection and introspection on our journey to date, what has gone right, what has gone wrong, the highlights, the key learnings and key people that have made our achievements possible.
A different philosophy on development
The German term "baugruppe" in English means builders group or building collective. It means sharing the responsibility of building. In 2010 I had no idea that alternative development models like these existed in other parts of the world. Let alone being accepted ways of delivering housing.
The idea in 2010 was very simple and it was personal: I didn't have much money, and I never knew anyone that did, but I knew I wanted a home with architectural integrity in a great location that I could afford. So why not find some family and friends who also wanted the same thing and do it ourselves? We would have to cede some individual control and make compromises along the way, but by taking a co-operative approach - one vote per member - we could buy into a better location than we could as individuals and achieve something better than what we could do if tackled the property market alone. Luckily for me I had family and friends who were willing to give it a go.
Because this first project was with my close family and friends, and because it was a bit of an experiment, it fostered a culture of honesty and transparency: Dan Demant and I, as architect, development manager and project participants, were open about what we knew I knew, and perhaps more importantly, the things we didn't know.
This was the only way to effectively run a participatory process and provide everyone with the information needed to make the best decisions possible.
We've continued to work hard to stick to this approach, and I feel this has played a big part in attracting the right participants and making the right decisions along the way. I am proud to say that the same approach I took with the people I trusted most to invite into the first collective (my family and close friends), is exactly the same approach we take with people we are just getting to know with our latest collectives.
What you do is important. How you do it is critical.
This is not to say everything has gone to plan or gone perfectly. We've had our fair share of issues to deal with and conflict to resolve, but I believe if we continue to be up front and honest about who we are, the rewards and risks of the process we are guardians of, and we work hard to ensure the people we work with share the same vision and values we do, then we will find good solutions to any situation.
Something has happened here
As an alternative to the conventional, speculative and off-the-plan models, we have proven that this at cost deliberative model of citizen-led development works. It resonates with people.
A big part of the reason, I think, is due to the fact we have always had a practical and long-term mindset.
The crises of confidence most people have in most developers and real estate agents is because it seems many engage in short-term thinking for short-term gain. Don't get me wrong, profit is important, but our approach treats profit as part of a balanced approach where other more subjective objectives get an equal seat at the table.
In conventional development, decisions are informed predominantly by cost and yield levers that maximise profit. Even with the best intentions, this compromises the outcome for the end user in terms of quality and durability – this is especially the case for off-the-plan purchasers.
Where the developer is also the end purchaser, decisions begin to be based less on capital cost and more on long-term value associated with quality design outcomes that deliver durability, functionality, adaptability and low operating costs. Objectives become aligned. It feels like the right thing to do. We believe this model has great potential to raise the quality of infill development we see in our suburbs.
We've been fortunate enough to find people that also want to make a positive contribution to our city. Building is hard. The knocks you take and hoops you jump through over the 3+ years of doing a project means you really have to fight for what you believe in and strive to not compromise on your original vision. Without partners on board that share a long term mindset this becomes a real challenge because our end goal is about building quality homes that make a positive contribution to our streets and neighbourhoods.
Our interest is in positive influence and better practices alongside reasonable profit.
Why has this happened?
In an Australian context our growth this decade is perhaps surprising, however when viewed from an international perspective it is less so. The Dutch, Scandinavians, Germans, Swiss and Austrians have a long history of developing using a range of community led models. It's a culturally accepted approach to deliver housing that is actively supported by government and lenders. Perhaps the most well-known approach in Australia being the German "baugruppen" model that has delivered around 190,000 apartments in Berlin. Self Made City chronicles 120 of these projects realised in Berlin between 2000 and 2012.
I've always felt lucky to be born in Melbourne. And when viewed from this perspective I feel even more so. There's something special about Melbourne, it's cultural mix and the way many residents think that has contributed to our success over the years. Melbourne has a unique mix of progressive thinkers with an entrepreneurial spirit and social consciousness, that combined with the very specific realities of our property market has enabled us to do what we have.
More affordable (at cost) housing
But while the affordability benefit of our model gets the most attention (we aim to deliver homes for circa 15% less than a comparable new home), from what we have seen it's not just the fact it's an at-cost model that makes it attractive to people. It's the fact that it is participatory.
Participants have a vote and have a say about their project and their future homes. They have control. From the location of their future home right through to the selection of the tiles. This is empowering in a property market which is anything but for the vast majority of people.
Another contributor is that we are focused on great inner city locations with very high walk scores and amenity. These locations are hard to access for most people purchasing conventionally. This focus is important to us as we believe urban sprawl and greenfield development is simply not sustainable.
And lastly our focus on making good quality architecture affordable has been attractive to a lot of people who have been disappointed by the low quality of medium density development that has proliferates the Melbourne suburbs.
"If you are not truthful to the world about who and what you are, your art will stink of falseness."
Madame Commelynck, Black Swan Green by David Mitchell
This is one of my favourite quotes of the decade and on reflection I've been very fortunate to have attracted an amazing group of authentic, genuine and loyal individuals who have been open to new ideas and committed to doing things differently.
John Lim has been an absolute rock over the last 3 years and his support and mentorship has been immense.
Tim Richardson has made a massive contribution over the last year and has been pivotal on helping us through a transformation in 2019.
Tass Cico has been a great confidant, collaborator and sounding board.
And although not strictly part of the team, architect Lincoln Glover from Lincoln Glover Studio has been a huge influence over many of our projects and a great support to me personally as the model has evolved and grown.
Completed projects - Northcote & Thornbury
The most pivotal project to date perhaps not surprisingly was our first project at 132 St Georges Rd Northcote completed in 2013. My deepest thanks here go to architect close friend Dan Demant from Six Degrees for putting so much time and love into this project. Having this exemplar project has made all the proceeding projects possible in many ways.
121 Clarke St Northcote completed in 2018 and the completion of 4 Strettle St Thornbury in 2019 have proven the models ability to consistently deliver homes of a higher quality than the general market is delivering.
These projects have also proven the models wider market acceptance (although clearly still a niche proposition) as participants stopped being family and friends and now include acquaintances or people we have only met through their interest in participating.
Ten years ago I would never have predicted that speaking in public would rate as a highlight but it turns out I actually enjoy sharing with people our story.
I would never have imagined following up the maiden property industry speech of the NZ Housing Minster for the newly elected Adern government. Thankfully the minister was able to make it to Auckland from the South Island despite a severe storm the night before as I was the NZ Property Council's Plan B keynote speaker!
It's been humbling to be asked to share our story with organisations like Byron Shire Council, Moreland City Council, the UDIA SA, The UDIA Victoria, M Pavillon, the PIA, the Property Council of NZ, the Open State festival in SA, Urbanity and Design Futures Council Australia.
Through my travels it's been a real pleasure to meet so many passionate people in the industry and citizens keen to support innovation, build community and wanting to doing things better.
The Urban Developer - Excellence in Commercial Innovation award
Having been a part of the inaugural Urbanity event in 2017 as a guest speaker, it was great to return to Brisbane and reconnect with Adam Di Marco and his amazing team in 2018 for the inaugural TUD Awards. Taking home the Excellence in Commercial Innovation award was a great moment to stop and reflect on how far we had come and celebrate.
Collaborations with values-aligned organisations
We've also been fortunate in the last couple of years to have aligned ourselves with some great organisations who share our passion for striving to do better.
In October last year we launched our Eastside Collective collaboration with Figurehead. Together with a few committed citizens keen to kick start a project around Booroondara or Stonnington, we've been steadily working to form a core collective and get a new project off the ground in 2020.
Working with the Figurehead team over the preceding 9 months was a real pleasure. It is really exciting for us to have found genuine alignment on how owners, developer and builder can work together in a truly participatory process from project inception to contribute significant value and expertise and eliminate many of the inefficiencies in the typical speculative off the plan development process.
It's also been great to continue to build our relationship with Bank Australia over the last few years. Bank Australia's support for our Victoria Street Collective at Westwyck project has been brilliant. Through all our experiences with other banks it's fantastic to be able to work with a bank that walks the talk and lives up to its brand promise. We are looking forward to developing this relationship over the next decade and helping the bank achieve its key goals in this space of encouraging more affordable and more environmentally efficient housing.
Delivering more truly affordable housing has also been at the forefront of some of our work with Cohousing Australia this year. While our model goes part of the way to deliver more affordable housing, it's been great to start looking at how our learnings and model may help to contribute to developing a replicable community led approach to delivering more truly affordable housing.
"This often brutal and always mercenary industry, is in fact, involuntarily directed at a remote distance by intellectual and artistic passion beyond its ken."
Its a great insight and quote from the indomitable Robin Boyd. And given the space we are in (property development) its not surprising that we've certainly run into a few people at the brutal and mercenary end of the spectrum over the years. This doesn’t mean it is not disappointing when it happens.
Another disappointment over the last few years was the permit we achieved for our Ireland St West Melbourne project. After gaining Council planning officer support, management refused the application and we ended up in VCAT. We opted for the major cases list which gave us a compulsory conference. In preparing for the conference we altered our modular and efficient design which gained officer support to one with little repetition and a more complex structure to address overshadowing. At the conference it became clear that Councils main issues were not the same as those raised during the approvals process. We were forced to negotiated an outcome but subsequently it became clear that that outcome was not one the members of the collective were inspired by. Furthermore, the design was challenging to deliver economically. So to this collective's credit, we worked through a restructure and resubmitted a new application reflecting a scheme one dwelling and therefore one participant less. A hard lesson.
Running an inclusive design and development process over the last 10 years has brought us many learnings. But perhaps the most important insights have been:
- It is critically important that everyone is on the same page as to the project objectives right from the start. Particularly the overarching philosophy of the project and the risks and rewards inherent in this approach. If participant's objectives are not aligned from the start it can cause friction during the process.
- The development process is complex and sometimes fluid. By embracing an open book and transparent, inclusive and collaborative approach to information sharing and decision making, and working steadily step by step, the vast majority of people will act rationally and coherently as a team when faced with unexpected situations.
The property market
When thinking about the inner city property market over the last decade I've come to a few key conclusions:
- The off the plan development model is currently almost untenable. Land, construction and capital & debt pricing is squeezing developer margins and the losers are the end users as build quality gets sacrificed as developers try and make projects viable. Policy makers need to recognise the implications for this on the amenity of our city as they indiscriminately slug developers with more and more taxes. If people want to see better quality buildings in the city then they need to make it easier for developers to spend more money on the buildings themselves. It is no surprise that new supply is struggling and that in late 2019 the largest apartment site transactions have been for build to rent projects.
- In today's market, unless you are a builder developer, have an established and a trustworthy development brand, have access to really cheap debt & capital, are joint venturing with a landowner or are running an at cost model like ours, infill medium density developments are not really viable.
- Just as society is getting more polarised between the haves and the have nots, so too is the property market. Developers focusing on the upper end of the market are well rewarded by buyers looking for and being able to afford quality. However quality seems nearly impossible to deliver at the lower end and is challenging to deliver to the middle.
The planning system
On town planning:
- As housing affordability becomes an increasingly key political issue I have very little confidence that the supply side of the housing market will be solved in the foreseeable future. We have a policy and implementation disconnect across three levels of government which seems intractable to me. Particularly when looking at the medium density infill development space. A critical space to get right for the health and vitality of our city as the relentless march of urbanisation continues.
- Local planning policies are so complex and third party appeal rights so sacrosanct (and quite rightly) that our planning applications frequently now take over 12 months. This is without VCAT. VCAT would add another 6-8 months to the process. A best case scenario today is 9-10 months for an approval. And this is just for a planning permit. The building permit approval process is is even more complex because of the sheer amount of actors involved in obtaining a building permit.
- It seems to me that many of the Council planning departments we deal with are working hard to do the right thing, but these are constrained by limited resources and politics. In this environmental perhaps the easiest thing to do in the short term is for local Councils to be empowered to hire more statutory planning officers. Every planning officer I speak to seems to have an overwhelming number of applications to manage and many officers are part time. If these departments were resourced appropriately, it would make a huge difference to the speed and quality of planning outcomes we see.
The money markets
There is no romance without finance.
Many of the groups and individuals we speak to who have the desire to create or participate in a community-led or citizen-led project are thwarted by the money strategy for their project. We've spent a lot of time over the last 10 years working on and evolving our strategy. The key things we've learnt are:
- If money becomes the driving force behind every decision money becomes problematic. So our task has always been to identify capital and debt that understands our objectives and is aligned with them. Clean money. Conscious capital. Patient capital. Impact investment. This money comes with many different labels and shades. But at its core we have always sought money that thinks long term and is seeking long term outcomes. We've been lucky to meet the partners we have to date and are always looking for more like-minded collaborators who understand that this is a different development model.
- Our approach to raising capital also applies to debt funding. Our challenge has and probably always will be convincing lenders that our model is low risk (our settlement risk is virtually non existent) and to package up and price our debt accordingly. A different debt solution for a different development model. The conventional market is based on debt coverage via off the plan sales and given our scale and the transactional nature of banking these days, there is very little incentive for lenders to make exceptions or do things differently for us. As such we are a price taker in this market like every other developer out there.
- As our model is a low risk one from a funding perspective, we have always sought the cheapest debt possible and always used bank debt for our projects. However the banks are typically so difficult to deal with I can absolutely understand why there has been a massive increase in the use of private lenders in the development space. With private lending rates of circa 10% for secured lending and circa 15-20% for mezzanine/unsecured lending, it's easy to see who is actually making money on development projects at the moment. It will be interesting to see where pricing on private funds goes in the short term given the delta between the official cash rate and as I hear it, the lack of good quality projects in the market. If there is a lot of supply (private debt funding) and limited demand (good quality projects) then something has to give.
So. Interesting model. But how can you scale?
I've been asked this question on many occasions over the last few years. To be honest we are still working and feeling our way through the answers. But we are thinking about scale differently. We don't think this approach to development will ever be appropriate for 50 or 100+ dwellings. It's too intimate for that. However we do see ways it could be adapted to deliver projects of around say 20 dwellings.
But scale is not just about size of project. It is multidimensional. Scale for us is about getting better. We want to get better. We want to make it cheaper for participants. We want to make this participatory process easier for all our stakeholders.
In the short term while we grapple with the how we are focused on a number of short term priorities...
More owner occupiers
We'd love to have more owner occupiers participate in our projects. At the moment a little more than half are owner occupiers and the balance are investors who intend to hold for the long term. This ratio exists for a number of reasons.
- Firstly we have been pragmatic and conscious there is no romance without finance. So we've been happy to work with anyone who shares our vision and objectives for the projects we want to create.
- Secondly the locations we are focused on are not cheap and neither is the sort of housing we are trying to deliver.
- Finally the debt funding partners we have worked with to date have been conservative with their funding because our model is different to the standard off the plan model. We've just been thankful they have funded.
Therefore our projects have been quite capital intensive (circa 35% of the total development cost). This immediately restricts the ability of many people to participate, even when we are striving to deliver our homes for circa 15% less than equivalent homes in the market. So we are working hard on addressing these issues.
We know the answer here lies with a mix of doing slightly larger projects, improving our design management and cost planning and finding a funding partner who is not only prepared to recognise the lower risk profile our projects offer, but values the direct long term home loan relationship our model provides.
Cost & funding certainty
Providing participants with certainty on time and cost is the most challenging part of this approach to delivering housing. We work hard to make sure people who are interesting in participating understand all the risks and variables before they make a decision to join in. There are many parts of the development process that we cannot control, but we are very focused on the parts we can, namely:
- Refining our design management and cost planning expertise and protocols,
- Building relationships with suitably qualified builders who are prepared to add value to the design management process via early contractor involvement engagements and undertake open book pricing,
- Identifying the right debt and equity partners who can help us reduce the amount of capital participants need to contribute to around 20%.
A collaborative ecosystem focused on value
We believe that taking the time to build an interrelated ecosystem of collaborators will bring more sustainable benefits to participants over a longer time frame. This may mean more work up front and take longer to establish, but the social and financial results will continue to pay out over a longer term. And the strong relationships will mean everything.
As the guardians of a unique process who want it to prosper and make a positive contribution to our city, I am excited by the cultural and social shifts I see, as more people seek opportunities to align themselves with organisations that are not in conflict with their personal values or ethics.
How does one maintain integrity, consistency, and authentic contribution while dancing with a devil like modern capitalism? It's a hard question to answer but it’s amazing to see more and more people try to answer it and live accordingly.
As this trend continues, I feel lucky that we are promoting an alternative development model that encourages people's desire to act intentionally and be critical and thoughtful, rather than just be swept along by the status quo.
It's critical to the success of this model that we find people that also strive to operate in an open and transparent way.
We want to deliver value that is quantifiable and be rewarded for this. And to do this we want to maintain the authenticity and transparency of what we have created, and make sure this permeates every part of the process, from the start to the finish.
So we want to find great like-minded people to collaborate with, be they project participants, architects, investors, colleagues, suppliers, property professionals, contractors, funders.
If any of this resonates with you please reach out and say hello.
First and foremost, a massive thank you to all of our past and present Joint Venturers in all of the Collectives. Thank you for your support for us and to your fellow joint venturers. The spirit and commitment people have shown to our shared objective has been a great reward in itself to see. For those of you who have gone above and beyond, you know who you are, and you have our deepest appreciation.
To my family, Kim Riley my wife especially, Eng my mum and Stephen my dad & Wei Qi my step mum. Thank you for your patience, tolerance and sage advice every step of the way. I couldn't have asked for more. To my favourite brother-in-law, Dave Atkinson thanks for your insight and ears over the years from across the seas.
To my colleagues, John Lim & Tim Richardson you are both legends. I am very grateful fate has brought us together. To Allen Lee thanks for being such a steady and dependable hand. To Tass Cico we want more of you and will take as much as you can give. To Rohan Wood from O2 Finance we simply wouldn't have got here without you so my sincere thanks and gratitude for your tireless efforts. To the architects, Dan Demant from Six Degrees and Lincoln Glover from Lincoln Glover Studio thanks for putting up with me and all of us in the collectives, we all love the work you have done. To our favourite engineer, Ken Brewer from Gillon Consulting and The Clarke St Collective thanks for being awesome.
Confidants & Supporters
To our confidants & supporters, thank you for giving us your time and attention and supporting what we are trying to do and become. It's been humbling and deeply appreciated. I'd like to mention a few of you in particular.
To Ben Keck from Fieldwork and Assemble Papers you have been an amazing and steadfast supporter from the start. Thanks for listening and being so proactive and helpful over the years. I really appreciate it.
And to Joe Allman and Joe Grasso from Figurehead thank you for reaching out, taking a punt and believing in our little team and our big idea.