Investing in Heirloom and the East End – a quick Q&A

This Wednesday Council will be debating buying up to 5 units in Heirloom which will undoubtedly be controversial for some so here  are some likely FAQs:

What is the recommendation before Fremantle Council?

Council is asked to consider purchasing up to five apartments (one and two bedroom) in their Heirloom Development on Queen Victoria Street (aka Fort Knox) to assist with the development achieving the required sales target to begin development.

Would it set a precedent for other developments?

Not in any significant way. Heirloom is a special case as it is a significant heritage building. It is a Level 1A building on the City of Fremantle heritage list and also on the WA state heritage list and that is a key reason it is getting special consideration. A significant heritage building like this is often more complicated and expensive to adapt into apartments than just building a standard new, tilt-up apartment block. This means that banks are more cautious in lending and require higher pre-sales before any development gets the go ahead. It is on this unique basis that the Fremantle Council is considering supporting the development by buying up to five units.

Thankfully Heirloom has already sold 118 out of the 187 apartments and needs to sell 125 to finalize finance for the development. The Fremantle Council will play a key role in closing this final gap and therefore enable development to start as soon as possible – hopefully in the next month or so. Match haven’t asked for any height bonuses or another development incentives so this a key way the Council can proactively support this important heritage development of the East End.

We wouldn’t repeat this with a standard apartment development so I am not concerned about the Fremantle Council setting a problematic precedent.

Will it cost ratepayers money?

Potentially the opposite.  The cost is expected to be around $75k in interest each year based on current interest rates. The development however will however generate at least 4 times this in new rates – over $300k per year. This investment is therefore more likely to generate income than it costs the City of Fremantle. Granted a fair chunk of the rates are to provide specific services to those residents but a fair chunk also goes into general city revenue to be spent on things that all ratepayers benefit from.

It is also important to include the positive economic impact of another 250+ people in the inner east end of Fremantle and the key role it will play in bringing that area back to life.  The City of Fremantle spent $1.9 million upgrading the streetscape in that area a couple of years ago and the new apartments and office at 11 Queen Victoria Street are getting close to completion. I think it is good timing for that part of town.

Why is the City of Fremantle in the property market at all?

You may not know but the City of Fremantle already has an impressive commercial property portfolio with dozens of properties. Council has been active in the past to use this commercial portfolio to do more than just deliver a good financial return. In the past, the City has purchased strategically located properties to make them available for redevelopment. In the 1990’s the City purchased a few small shops on Queen Street and amalgamated these with the former Treasureways building on Adelaide Street so as to create a site that could be redeveloped. More recently, the City successfully acquired the few properties it didn’t own in the street block that included the Point Street Car Park and the Port Cinema. Again, a super block was created and made available for a very important redevelopment for the City – the Doubletree by Hilton Hotels.

In these instances, the Council looks beyond chasing a purely commercial profit and considers the longer term strategic benefits to the City itself. Using the commercial property portfolio to catalyse development can create immediate and ongoing benefits to the rate base for the City. Given that the Council heavily invests in its own City, there is merit in gaining additional benefits by using the commercial property portfolio in ways that also assist with the implementation of our strategic imperatives of CBD revitalisation, affordable housing and the like.  (thanks to Andrew Sullivan for his words for large parts of this question)

Conclusion

Investments of this kind are clearly an area where the council should act conservatively and be extremely confident that ratepayers money is not going to be put at risk. The more I look at this the more I am convinced it is a smart and strategic investment that will be of direct benefit to the City of Fremantle  and the ratepayers as whole. That said, I’d love to hear your views before we vote on this Wednesday night.

East End Queen Vic St south existing 5nov09

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17 Responses to Investing in Heirloom and the East End – a quick Q&A

  1. johnwv says:

    At this late stage I don’t agree with the COF investing in individual residential properties it previously gave development approval to. The COF should be involved in creating the development environment and approving viable developments. A commitment to buy 5 individual properties at the outset may have been acceptable, however buying now could be perceived as a risky bailout.

    The two Match developments in the COF have struggled because one was purely commercial and Heirloom is purely residential and both were approved without creating a commercial and residential environment within each project. I disagreed at the time and I certainly disagree with the COF using our rates to influence the property market now.

    John Vodanovic

  2. Lionel says:

    There is an abundance of apartments currently being released and Heirlooms is at the higher end of the price spectrum. There is no way ratepayers will see a capital gain on this within a decade. They money is far better invested elsewhere.

    As for you answer to ‘Will it cost ratepayers money?’, the City will get the rates whether it invests in the apartments or not, so the answer is yes, it will cost the city $75,000 per year in interest and any capital losses plus the opportunity cost of not investing elsewhere.

    Any way you cut this it is a bad investment. If Match and Sirona need this investment because they can’t sell 7 more apartments then it doesn’t bode well for the poor people who have already invested. If they don’t need the investment then paying an average $600,000 for one and two bedroom apartments is bad business.

  3. dickbaynham says:

    Brad the answer to ‘will it costs ratepayers money’ needs to be ‘yes’ or ‘no’, not ‘potentially the opposite’ which is a political answer that leaves a gap a mile wide in wriggle room.

    Even if the City buys these five apartments the developer still has 62 apartments left to sell in this development. What are the guarantees for those who have already bought? What price is the City offering for 1 – 2 bed apartments? What use would they be put to? Etc. The City is NOT a developer or a bank and ratepayers are not in the business of taking unnecessary risks.

    It is clearly a buyers market for developments like this but I doubt we’ve reached the bottom of it. So even if you buy these properties at rock bottom prices (which will cause pain for the developer and the people who’ve already bought), you are going to reinforce the message that the development is in deep trouble and this is a fire sale. It is a Catch-22 situation that’s likely to cost ratepayers money in the short-term and the long-term. Why do it? That’s the hard question that’s eventually going to be asked and it will need a straight answer.

    • Dick
      Reality is rarely that black and white but on the evidence before me the answer is no it will not cost the ratepayers money. It will cost us around $75k in interest as I mentioned. It will generate over $300k in rates and if we wanted to rent them out even for the average (probably bargain price) of $300 per week that would generate $78k per year. It would be hard to see how it could cost ratepayers money anf the benefits seem clear to me.
      cheers, Brad

      • Ed says:

        Do it Freo! Don’t listen to all these old, fussy NIMBYs!

        Let’s make Fremantle a great place to live with plenty of affordable housing. If the people of Fremantle can afford the apartments and keep them out of greedy negatively geared landlord hands then I say let’s go for it. The community standing together and saying we can make a difference where “free market enterprise” has failed, can only be a good thing.

        I say, Fremantle should buy the lot, as housing has never been a bad investment. It’s a sound financial investment for a great council working for the benefit of all people in Freo not just a bunch of loud OAPs.

        It’s all the grumpy baby boomers, sat on 3 or 4 investment properties that are likely not to want this project to go ahead because it dilutes the housing stock and devalues their investment. It says where private enterprise has failed, the public sector can make it work.

        I can’t wait for the east end to be revitalised and the link into North Fremantle and the Port will enhance the whole city.

  4. Emma says:

    I think this is a perfectly logical and prudent idea. It will get the total so much closer to the 125 pre-sold apartments needed, and it would be terrible to get so close and not meet the target and delay or halt the whole project.
    (I am very curious to see if The Herald still manages to make a beat-up news story out of this for Friday’s edition, even when you have published this clear, explanatory blog post several days before that paper is due out….!!!)

  5. Sam McLeod says:

    The urban system doesn’t exist in a perfect market and governments have a huge and unique role in pushing for better outcomes in the public interest. This is almost certainly a Pareto improvement; CoF should absolutely do it. Keep up the good work Brad.

  6. Tim Grey-Smith says:

    From a commercial property perspective, it’s probably a bit marginal in the short term. From a city wide perspective if this is what it takes to get the development over the line (and getting other developments in the precinct moving) then the public benefit would definitely outweigh the risk.

    That said, it probably isn’t the most comfortable decision to make and shouldn’t be seen to set a precedent.

    The real issue here is the large amount of pre-sale required by banks before they’ll commit funding, they’re protecting their very profitable bottoms at the expense of keeping development moving. It’s very hard to sell apartments off the plan!

  7. Mario Palandri says:

    Brad the COF needs to have a good hard look at what the Department of Housing is now undergoing after investing in a similar exercise in Karratha. The invested to get the development up as you say. The units have now almost halved in value….Taxpayers’ money!

    • Mario
      I don’t think Karratha is a useful comparison as their population dramatically dropped. In the Perth metro area swings in value like that have not occurred to the best of my knowledge and all experts expect slow growth in the market not a drop
      cheers, Brad

      • Mario Palandri says:

        You can probably view the argument over the Karratha issue by accessing Hansard on the State Law Publisher’s website and searching the speeches. It’s not about the drop in values its about the deal with the developer to make the development work. But the market has left the taxpayer with a huge debt too.

  8. alma785 says:

    I don’t think it’s a bad idea if it gets it over the line as it’s an important building on the entrance to Freo, it’s not normally what I would expect from the council, but I would not object to it. I would also like the council to put some of the money aside for sewage in my street (there isn’t even a line on the entire street)- it must be the last street in Freo not to have it – surely infrastructure is worth investing in also- just thought i ask since the checkbooks are opens right now – what’s another $150,000 (thats what it will cost me to get it done)

  9. dickbaynham says:

    Brad if the benefits are clear to you and Andrew Sullivan put your own money into it, not the ratepayers. There are potential high losses in investments like this and Councils aren’t gamblers.

  10. Mario Palandri says:

    comments are from a new report done by the University of WA and commissioned by the City of Perth.

    Media Release: FACTBase Fremantle No.1

    A 10 year snapshot of Fremantle

    The first in a series of Future Freo, FACTBase bulletins released by the Committee for Perth has found that Greater Fremantle’s population is growing slowly, ageing, ethnically diverse and highly mobile.

    “There’s always been anecdotal commentary about Greater Fremantle strengths and weaknesses. What this first Future Freo report gives us, is some useful baseline figures so that we can start to identify the opportunities and challenges facing the region. Our goal is to make it an economically, vibrant and sustainable place to live, work, play and invest for current and future generations,” said Committee for Perth CEO, Marion Fulker.

    One of the most telling facts from the report was the low population growth between 2001 and 2011, compared with the Perth metropolitan area. During this period it only increased by 8.2% or just over 2,500 people, rising from 30,965 persons to 33,513 persons. Meanwhile, the Perth metropolitan region’s population increased by 29.3%.

    “What we need to identify is, what factors are contributing to the Fremantle region not growing. Even during the height of the resources boom, Fremantle didn’t experience the associated population increases,” added Marion.

    The most significant population rises were recorded in Fremantle–Remainder, made up of the outer parts of Fremantle, with 7.4% growth and East Fremantle at 3.5% but this was offset by Fremantle–Inner where the 2011 population fell back to 2001 levels.

    While population growth was slow, Greater Fremantle is leading the way when it comes to density. With 2,470 people living in East Fremantle per square kilometre, it has one of the highest population densities of the Perth and Peel regions. Fremantle-Remainder and Fremantle–Inner had population densities of 1,579 and 954 people per square kilometre, respectively. Population densities in 2011 across Perth and Peel ranged from a low of 4.7 people per square kilometre in Waroona to 2,793 people per square kilometre in Vincent

    “These density figures are significant given the growing concerns about urban density in Perth as a whole. This is likely due to Fremantle’s settlement history, which led to relatively dense forms of development, as well as a degree of infill over recent years,” Marion added.

    Greater Fremantle is also undergoing an ageing boom, with an overwhelming trend towards an ageing population and a decreasing younger population. In Fremantle-Inner the percentage of people aged 65 and over, rose from 11.9% in 2001 to 14.6% in 2011, while the number of children aged 14 or under, fell from 7.3% to 3.9%.

    “An ageing population brings with it opportunities in terms of recreation and leisure industries, having active volunteers and community members and a diverse and experienced workforce. But the challenge for policy makers is to capitalise on these opportunities while recognising the potential challenges around health services, accommodation and public transport,” said Mrs Fulker.

    Fremantle’s ethnically diverse heritage and cultural character has always been part of its appeal and has been reflected in the development of its fishing and port industries. In 2011, the number of people born overseas made up 30% of the population, a rise from 28.4% in 2006. Of that figure, 29% were from England, 18% from Italy, 6% from New Zealand and 5% from Scotland.

    It’s not only the people arriving from overseas that are on the move. Of the total population living in Greater Fremantle in 2011, 52% were living in the same address in 2006, which means that almost half of Greater Fremantle’s population moved within five years.

    “One of the traps often made in discussing the future of cities and regions is the simplistic focus on growth. This population churn, and the decision-making processes of migrants, can contribute to considerable opportunities to grow and reshape demographic structures. Careful planning is needed across a range of areas, including economic development and employment, housing and development decisions, service provision, infrastructure and environmental amenity,” added Mrs Fulker.

    The Committee for Perth is a member-funded, independent think-tank that focuses on the sustainability, liveability and vibrancy of the greater Perth region.

    -ends-

    Media contact: Tony Monaghan, The Brand Agency 0428 280 593

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