Real Property in Australia

Foundations and Applications

Michael J. Hefferan

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000163575
• Edition: 3
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Real property in the form of investment, ownership and use pervades almost every aspect of daily lives and represents over 40% of Australia's wealth. Such assets do not exist in isolation – they are dynamic and forever evolving, impacted by a range of physical, economic, demographic, legal and other forces.

Consequently, a true appreciation of individual assets and of the property sector as a whole demands an understanding of both the assets themselves and the context and markets in which they exist. The sector is complex and, on the face of it, confusing. It is however, not without logic and underlying themes and principles.

This book provides a wider understanding of how the real property sector works. It covers topics such as the nature of real property and its functions, economic drivers, valuation principles, legal and tenure parameters, property taxation, land development and subdivision, asset and property management and sustainability – all critical components in this complex and critically important sector. It provides a wide and balanced perspective for experienced practitioners, investors, students and anyone involved in property decision-making or wishing to secure a deeper understanding of these areas.

The book integrates research-based theory with practical application and first-hand insights into a sector that underpins the Australian economy, its communities and its sustainability.

Chapter 1

A contemporary approach

1.1 Introduction

It seems everyone has an opinion on real property (or ‘real estate’ as it is commonly called); and their interest is understandable and justified. For most Australians, real estate (in the form of the home they may own) represents their only large-scale financial asset. Furthermore, any investment they might have in superannuation would likely derive part of that fund’s income from property in one form or another.

Some opinions regarding real property are based on experience. However, even at corporate and government levels, many opinions and decisions on property investment and utilisation are only based on only a generalised understanding of how property markets really work.

There is, in fact, a large body of theoretical and practical knowledge that can provide a framework for sound decisions. That is based on longstanding economic and legal principles; industry and community standards and government regulation.

This chapter provides an overview of that framework and, in general terms, the study of property. It reflects on how, in a comparatively short period of time, real property has grown into a sophisticated and discrete discipline. The chapter also puts forward some fundamental principles and structures that will assist in contemporary study and research.

1.2 The evolution of studies in real property

The comprehensive and cohesive study of real property is a relatively new discipline and remains an area that is demonstrably under-represented in formal, public-domain research. This lack of attention is remarkable when one considers that the whole of the physical world has just three, underlying components: the natural environment, human activity and the built form (i.e. real property in its various forms).

In a wider context, considerable scientific endeavour had been applied to the related areas of the ‘natural sciences’ since the Age of Enlightenment (the late seventeenth and early eighteenth centuries). These advances were particularly prevalent in Britain and, subsequently, in the US (Himmelfarb 2005). Much of this knowledge is relevant to real property and its links with the wider physical, economic, social and political realms. However, this largely science-based knowledge could not in itself address fundamental questions regarding property allocation and ownership, potential use or effective and efficient management of resources. Those questions required extensive, detailed and specific studies only recently recognised as a freestanding, organised branch of knowledge.

Real property fulfils numerous roles. In the form of shelter and food production, it is fundamental to human existence and represents a basic factor of production within the economy. Depending on how it is defined, the built form represents between 44 per cent and, perhaps, up to 60 per cent of the nation’s wealth. It provides the collateral for the most significant financial dealings (Fiorilla et al. 2012; Stein 2019). Global built asset is estimated to have an almost incomprehensible value of $217 trillion (Stein 2019).

The familiarity with and pervasiveness of the built form often lead to an approach based on personal experience rather than structured research and analysis.

Recent decades however have seen a significant increase in the profile now ascribed to real property assets and the built environment more generally. This has been based, at least in part, on:

• their ability to earn income and to accumulate wealth within the more sophisticated, but potentially more volatile environment post the Global Financial Crisis (GFC)
• their importance as a key factor in the efficient and effective performance of the economy as a whole, and of the firms and commercial operations within it
• their contribution to the liveability of a location or region for individuals, households and communities
• the essential role that the built environment plays in securing a sustainable future for the physical environment, the economy and communities.

A range of influences contribute to this new profile, but two important catalysts are rapidly increasing urbanisation and, related to that, the increasingly integrated and complex functions required of built assets.

Urbanisation

In the study of the many facets of economics, there is an often quoted adage: ‘demography is destiny’ – that is, the size, age and key characteristics of any population will largely pre-determine the direction, activity and future prospects of that population, its region or country.

In a remarkably short period of time, world population has grown exponentially and, at the same time, has concentrated itself into urban environments – typically in coastal or estuarine areas. The overall impact (both positive and negative) on prosperity, liveability and overall sustainability is profound. Population growth encapsulates the legacy of human activity over the past 200 years (Brugmann 2009; Glaeser 2011). It would be naïve and simplistic, however, to believe that these significant changes could be effected without attendant detrimental side effects.

World population now stands at over seven billion and will continue to grow at about 1.1 per cent per annum, or about 83 million net increase per year, for some decades (UN 2017, 2019). However, there are now sound predictions that world population growth will slow and potentially begin to decline beyond mid-century – the first since the Black Death 700 years ago (Pearce 2010). An ageing population and falling birth rates are also creating their own challenges across many OECD¹ countries. Nevertheless, the pressures created by overall population growth on the sustainability of the planet are critical issues for all.

This population trend is reflected in how property, and particularly urban land, is now allocated, held, developed, used, managed and valued. Further, those resources form part of what are now much more complex 'urban systems’. The political, economic and social fabric of a country or region is now largely held within urban environments, and the operations of any component, including real property, can only really be understood in the context of the wider system or environment.

These fundamental changes will enhance the functionality and value of certain properties and property subsectors while detracting from others. Typically, long-term fixed assets such as property do not accommodate radical change well – leading to obsolescence and deterioration in value. Their ability to adapt varies from property to property, influenced by a range of attributes including location, overall design, available services and the regulatory regime in place.

This more holistic approach, now widely recognised by a range of disciplines, sees the city as a living system rather than its unrelated component parts. The approach establishes, above all, that cities are about people and their relationships with each other and the physical environment (Giradet 2004).

In countries like Australia, urban environments also need to accommodate more heterogeneous communities, impacted by large-scale immigration, ageing populations and changes in household composition.

Further, in a single generation, economies and communities have had to address radical change including the downsizing of manufacturing and the emergence of knowledge-based and service sectors that integrate more readily into the urban environment. Information and communication technologies (ICT) are critical, but, contrary to earlier predictions, these have, in fact, encouraged closer settlement and interrelationships in clusters and precincts (Mitchell 1996).

An important milestone occurred in 2006–2007 where, for the first time in history, more of the world’s population lived in urban rather than rural areas (UN 2017). This simple milestone, significant as it may be, represents only part of a critically important story. A little more than a generation ago, in 1950, only 30 per cent of the population lived in an urban area; even between the ‘50–50 point’ of 2006–2007 and the last recorded statistics in this area in 2019, that figure had risen again to 55 per cent – or about 55 million additional residents per year living in urban locations. By 2050, 68 per cent of the world population will be urban dwellers (UN statistics quoted in Phys.org 2019).

This population shift is not simply to ‘non-rural’ areas but represents a move to cities where increased concentrations of economic activity, jobs, prosperity, lifestyle, education, services, social interactions, amenities and opportunities will further entrench urban dominance (Brugmann 2009; Glaeser 2011).

In 1990, there were ten cities of over ten million inhabitants; by 2014 that the number had increased to 28 (UN 2017). By way of contrast, in 1950, there were 83 cities worldwide with a population of one million. That number has now risen to over 400 (Population Reference Bureau 2015).

These matters are discussed in detail in Chapter 4.

These quite remarkable statistics now define the global, human environment as ‘predominantly urban’, where the driving forces – economically, politically, culturally and socially – are underpinned by a network of very large, global cities. Around the world, the city that is the hub of economic activity, and that aggregation of power, wealth and urban population continues to grow disproportionally compared with rural regions (Short 1996; Reader 2004; Montgomery 2007; Glaeser 2011).

Rural production and rural regions have always been important in Australia, as perpetuated by notions of a ‘bush’ heritage and culture. That importance, however, has often been overrated. Unlike any other country, Australia had towns even before it was fully explored and widely settled. With a few exceptions, such as the discovery of gold (and later mineral development), Australia was always politically, economically and socially dominated by its cities, towns and the concentrated urban environment they created. While physically, culturally and politically important, the agriculture sector in June 2015 represented only about 2.7 per cent of Australia’s Gross Domestic Product (Australian Government [ABARE] 2019) and the rural population, that is, outside urban areas and provincial cities, accounted for approximately 10.7 per cent of the total population in 2014 (ABS 2015a).

Although Australia’s physical environment, huge land mass and very low population density (3.1 people per square kilometre [ABS 2015b]), may appear unique, it is in fact one of the most urbanised countries in the world. Nearly two-thirds of the population live in capital cities, and over three-quarters in cities with populations above 85,000 (ABS 2015b; Department of Infrastructure and Transport 2015). Practically all of Australia’s major cities are located near the coast, with 90 per cent of the population residing within 80 kilometres of the ocean, mostly along the south-eastern seaboard. Thus, the pressures of urbanisation and the competition to develop land in prime locations are comparable to those of North America and Europe.

These issues, which have obvious links to optimum population size and density, are matters of ongoing political and community debate (O’Connor & Lines 2008; Smith 2011).

Note that change is neither linear nor sequential, but rather, for better and for worse, the physical manifestation of complex and diverse forces. These include increasing wealth, investment and consumption, demographic changes, investment patterns, economic transformations and ever improving health and educational standards, technological changes and innovation.

As noted above, real property does not often adapt quickly or easily, and changes made to either the natural or built environment are often irreversible. Unsurprisingly, therefore, sustainability issues are now integral to a full appreciation of the role and long-term use of real property. As the debate on sustainability, energy efficiency and global-climate change intensifies, the study and analysis of the built environment will inevitably gain prominence, given that buildings worldwide account for about 32 per cent of all energy consumed (International Energy Agency 2015).

These extensive changes demand a far more sophisticated approach to critical resources, including real property.

Complexity and integration

Not unrelated to the above observations, the density, diversity and complexity of current urban land use and development contrast with the relatively simple issues of ownership, finance and the regulatory environment of real property in earlier waves of urban development, especially those that characterised the second-half of the twentieth century.

As also noted above, the physical manifestation in question represents a confluence of changing demography, new waves of non-manufacturing, service-based industries and a financial sector increasing in size, complexity and dominance. This more concentrated and increasingly hybrid built form will continue to change rapidly, driven also by new imperatives such as the management of climate change, congestion, energy usage and future transportation options.

Real property assets are immovable and the land component is non-renewable. The asset life cycle is significantly longer than normal commercial time frames and even human life spans. All of these characteristics mean that these assets exhibit significant inertia to change and present challenges to adaptation.

As discussed in Chapter 2, the matter is further complicated in that most property ownership is held, and more investment decisions undertaken, by individuals and firms who (understandably) adopt a microeconomic (property-by-property) decision-making approach. While individuals respond to the wider demands of the market, their decisions will be based primarily on self-interest with a lower priority given to macro issues including urbanisation, ‘place building’ and long-term liveability and sustainability challenges.

Wider control and integration are currently applied through statutory-based town planning and development legislation. However, this prescriptive framework, which attempts to provide strategic direction and overall management in a complex environment, has limitations. Moreover, it is increasingly obvious that a more responsive, adaptive and innovative approach to planning and land-use management is required.

Probably more than any other discipline, the study of property combines kn...