By Brett Warren May 21, 2019

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How the cladding crisis could boost property prices

Property Investment
How the cladding crisis could boost property prices

No-one could forget the horrifying images broadcast from London’s Grenfell tower in June 2017, where 72 people tragically lost their lives and more than 70 others were hospitalised, due to cheap flammable aluminium-polyethylene cladding that had been installed on the exterior of the building.

The 24-storey building had originally been built in the 1970s, but had been renovated over the past decade, with the new cladding added to improve the building’s aesthetic and energy efficiency.

The incident sparked worldwide outrage and safety concerns, and it’s now clear that properties around the globe are being affected by this very same flammable cladding — including thousands of apartment buildings and homes right here in Australia.

We’ve already witnessed the impact of flammable cladding in Australia, with the 2014 Lacrosse tower fire in Melbourne’s Docklands.

It was a blaze sparked by a lit cigarette, with quickly engulfed 13 floors of the 21-storey building.

While no residents were hurt in the fire, it was a terrifying reminder of just how serious this crisis has become.

Sparking a major reform

After the Lacrosse fire, the Victorian Building Authority stepped in to ban the use of these dangerous products, following investigation by the Melbourne Municipal Building Surveyor.

The Authority has issued orders to several buildings across the state that the flammable cladding must be removed and replaced with suitable, fire-resistant material.

The exact number of affected buildings has not yet been determined, but in Melbourne alone the figure is shocking: it is estimated at over 10,000.

In New South Wales, the number of affected buildings is also in the thousands, with this number expected to rise as further audits are undertaken.

We’re talking tens of thousands of residents living in potentially life-threatening homes, and multi-million dollar bills to remove and replace the cladding.

Where is this cladding used?

This highly flammable cladding is present not only in inner-city high rises, but also on homes throughout the suburbs, making it much more widespread than first thought.

While the government initially sought to ban the use of these cladding types on multi-level dwellings, it’s now clear that they are completely unsuitable for use on any building types, leaving hundreds of single-level family homes at risk of falling foul of building regulations.

It is a genuine crisis of epic proportions not only for the property owners, but also for the surveyors, builders and architects caught up some potentially very nasty legal battles over whether these materials should ever have been deemed fit for purpose in the first place – and who should foot the bill to remove them.

On the flip side of this shocking situation, there is a silver lining.

Thanks to the mechanism of some very unorthodox economics, the cladding crisis could actually provide a boost to home values in affected cities.

How? Well, there are a few factors at play here

Firstly, there will be tens of thousands of Australians left homeless as their dangerous buildings are brought up to code.

While some may be able to stay with family or friends during the remediation process, most will be forced to find rental accommodation, and this increase in the tenant base should see rental values in the surrounding areas increase.

Now this is terrible news for those affected but on the other side, this is a positive development for landlords.

Second, builders across the country will be working flat out to remove the flammable cladding and install safer alternatives.

For those who were hoping to build a new property over the next few years, you may find there is a distinct shortage of available tradesmen to take on their projects.

This could well push the price of new builds higher, as it becomes not a buyer’s or seller’s market, but a builder’s one.

Prospective homebuilders will face the choice of waiting several years for construction to begin, or paying a premium to secure a builder now.

Finally, there is the impact the crisis will have on owners who are looking to sell apartments in existing, safe buildings.

With so many properties deemed uninhabitable, other dwellings will inadvertently benefit from a new, previously unheard of selling point — simply being able to call your property “non-flammable” will make it more attractive to buyers, and allow you to demand a higher price tag.

Who would have thought a real estate listing would ever need to specify that the property won’t go up in flames?

In fact, this crisis is almost the perfect antidote to the oversupply issues that have plagued major Australia cities in recent years.

Many apartment owners have found themselves out of pocket after buying a property off the plan and seeing it decline in value, thanks to the apartment boom.

Now, if you own an apartment in a safely-clad building, this may not be an issue – as the overall number of habitable dwellings will slump, boosting the value of the remaining buildings.

Overall, you can see how this very unfortunate situation could actually stand to benefit some property owners, and provide a much-needed stimulus to the major markets.

If you are the fortunate owner of a safely clad property, you may be able to use it to your advantage to sell for a tidy profit, or use your improved valuation to refinance and add to your portfolio.

Just be sure to triple-check the cladding on any new properties you’re thinking of purchasing.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.