Defects, solar snub and commissions

There's a lot going on in the strata sphere this week, starting with the Sydney Morning Herald's big expose on building defects.

It's well worth reading but it's funny how every time a new reporter writes about this stuff, it's treated as if it's just been discovered.

Speaking as people who have been on this beat for two decades, we are just glad that the issues are being aired again.

Meanwhile strata managers nationally want to know why apartment buildings have been excluded from the multi-billion-dollar boost for solar panel battery storage. By the way, in the podcast we erroneously referred to solar panels, not batteries, as a sharp-eared listener has pointed out. 

 And we dig into the three-way fight over commission payments between owners (in the shape of the Owners Corporation Network) plus the Australian Consumers Insurance Lobby (ACIL), strata managers, and strata insurers.   

That's all in this week's Flat Chat Wrap.

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Recorded by Jimmy Thomson & Sue Williams; Transcribed by Otter.ai.
Find out more about Sue Williams and Jimmy Thomson on their websites.

Transcript

Jimmy

There's an awful lot going on at the moment, a lot of things to talk about.

Sue

Yes.

Jimmy

The Sydney Morning Herald has gone nuts on defects and SCA are running their own campaign and OCN and the insurance industry are at loggerheads. So I guess we'd better get on with it. I'm Jimmy Thomson, I edit the flatchat.com.au website.

Sue

And I'm Sue Williams and I write about property for the Sydney Morning Herald, the age, domain and the AFR.

Jimmy

And this is the Flat Chat Wrap. 

Well, if you haven't been reading the Sydney Morning Herald for the past few days, you should have been because they have dived into the defects issue big time.

Sue

Yeah, kind of a bit late really.

Jimmy

Well, when you think about it, we started writing about this almost 20 years ago.

Sue

That's right.

Jimmy

And did a big exposé in the Sydney Morning Herald.

Sue

In the Sun Herald.

Jimmy

In the Sun Herald, yeah.

Sue

Their Sunday newspaper. And it was pulled after the first edition.

Jimmy

That was yours.

Sue

Yes, that's right. It was pulled after the first edition because there'd been a threat from a developer that they would withdraw their advertising. So therefore, yes, different day.

Jimmy

Let's not be coy about this. There was a media person, a journalist who was very close to the developer who saw the stories being made up on the page.

Sue

Yeah, that's right.

Jimmy

And then contacted the developer and said, there's going to be all this stuff about defects. And the developer said, I'm pulling out all my advertising if that goes in.

Sue

Yeah.

Jimmy

And then I did a big thing for the Sydney Morning Herald all those years ago. And here we are still.

Sue

Talking about defects. I mean, we had a building commissioner. Well, we do have a building commissioner.

And that's been a great step forward. But it just, I mean, it feels like a bit of a drop in the ocean, really, doesn't it?

Jimmy

Well, you know, the Sydney Morning Herald today, and we're talking on Thursday morning, has a two-page spread on possible solutions.

Sue

Which is a great way to be starting thinking, I think.

Jimmy

Yeah, it is. But then you look at some of the solutions that they suggest. One of the things that they've said is that the government is being selective about which developers that have been issued with orders on defects that they actually publicise.

Sue

How can they do that?

Jimmy

Well, Matt Press says that they have to think about the business as well as the consumers. But at the same time, the government is saying, be careful who you buy your apartments from. So they can't have it both ways.

Sue

No, no. Because they've introduced this new fantastic ISERP rating system. So we can see what rating developers have in terms of the likelihood that they're going to build buildings with fewer defects, and they'll come back in and fix them straight away if there are any defects.

There's always going to be defects. And also their financial standing, I guess, their credibility.

Jimmy

There was always the chance that the new building commissioner was going to be less aggressive and assertive than David Chandler. And that was perceived to be a need in the area to take a foot off the pedal a little bit because a lot of potential developers were wary of developing and building the homes that we badly need. So the new building commissioner is less assertive, less hands-on, less public in his statements.

Does it mean we're going back to square one though?

Sue

It's always a danger, isn't it really?

Jimmy

The developers seem to take the point of view that they can't build high quality apartment blocks at the costs that consumers will pay for homes. But in fact, as we've established many times over many years, the cost of an apartment almost has nothing to do with the cost of building it. It's how much demand there is for homes in that specific area.

Sue

Right.

Jimmy

You remember the building near Hyde Park, which a new development and they opened the show apartment in a different building because they had to demolish the previous building first.

Sue

That's right.

Jimmy

And the place was absolutely swamped and they shut the doors.

Sue

For an hour to work out a new pricing arrangement.

Jimmy

And added 10, 15% to the price of all the apartments because one investor came in and bought an entire floor of apartments.

Sue

And they suddenly realised there was a huge demand in that location really on Hyde Park.

Jimmy

So up went the price, nothing to do with the build.

Sue

That's true.

Jimmy

So it's not always the case, but developers will always find an excuse for not building properly. Sorry, some developers will always find an excuse for not building properly. And unless the owners, the potential purchasers, can identify who those developers are, what's the point of telling them to do the research?

Sue

That's right.

Jimmy

You know, and these articles, they point out, you know, there's a strata manager in there who's named, who told owners to stop writing to them about defects because it was going on the record that there were defects in the building and it was harming the value of their property.

Sue

And that's a huge problem, isn't it? Because some owners are just not prepared to speak out about defects because they're nervous that the value of their building will fall.

Jimmy

Well, they want to sell before the defects are discovered.

Sue

And I mean, the thing is, a building that has defects but gets those defects sorted is going to be much more valuable than one that's kind of hiding behind.

Jimmy

Oh, absolutely. I always say to people, if you are looking at an apartment and you look at the strata committee minutes and the AGM minutes, and there's never been any problems in the building, they're fake. There is no building that doesn't have problems.

That's right. What you want to see is a building where there have been problems identified, addressed, fixed, and everybody's moved on or is moving on. But this idea that you can walk into a building that doesn't have defects and doesn't have problems in the building, it's nonsense.

It's absolute nonsense. So one of the solutions is to train builders better. I mean, it's just so many, it's 3D chess, this trying to fix.

Sue

3D chess.

Jimmy

You know, contracts are unfair. I was talking to a senior member of Fair Trading, you know, a senior civil servant the other day. And we were talking about, I'm not going to name the strata management company.

I don't think I have to. And they were saying that their ongoing investigations into this company, they've come across a lot of complaints about this particular strata management company helping the developer to run down the clock on defects, saying, oh, you don't need to get a check done. You don't need to get inspections done.

You know, just it's fine. The developer says they're going to fix everything and just give us time. You know, it's complicated and we can't do everything.

And Rome wasn't built in a day. And then suddenly they turn around and say, what's happening to the defects? And the strata manager says, well, it's your six years.

Your six years is up. If you want your defects fixed, you have to pay for them yourself. Now, I don't care who the strata manager is or what company they work for or what reputation that company has.

But I think any strata manager that you can prove has been involved in that should go to jail for fraud.

Sue

Because it's costing people their life savings.

Jimmy

Absolutely. And these guys, they swan around and I've seen them at their meetings. You know, they say, you'll be fine.

Leave it with us. You know, we're the experts, which they are. We know what's going on, which they do.

We know how to do things properly, which they do. But do they then do that? Well, that's almost it's up to the culture of the strata management company and the individual strata managers.

But if you are a good strata manager working for a bad company, you're pretty soon going to be told, do it the way we do it, not the way you think it should be done.

Sue

Absolutely. And with so many more people moving into strata who have no experience of strata and don't really know what it holds, it's really difficult for them to work this out.

Jimmy

Well, who do you turn to? You know, the strata manager turns up at the first AGM and says, look, this is how things are done. You've got to sign all these contracts because the law says you've got to sign them, which is not true.

And everybody goes, oh, right. Oh, thank goodness. There's somebody here to tell us what to do.

So this thing, I really recommend that if you can, maybe you can get a temporary subscription to the Sydney Morning Herald if you don't have one already. But this series on strata, look, there's nothing in it that we don't already know.

Sue

But it's good to see it kind of formalized.

Jimmy

Brought together, brought to the attention of the powers that be. I mean, I would hate to have the job of trying to sort out how things should be in strata. But I think starting with serious penalties for people who deliberately deceive their customers would be a start, would it not?

Sue

Absolutely. Yeah. No, I think so.

Jimmy

And I'm talking about developers. I'm talking about real estate agents. I'm talking about strata managers, talking about building managers.

I mean, there's new laws coming in at the end of this year, but it's all voluntary. A lot of it is nonsense. When we come back, we're going to talk about how strata managers are trying to make things better for us.

That's after this. Strata Community Association, the national body, not the New South Wales body. I mean, there's obviously overlap, but they have urged the government to do something for strata on a national basis, which is weird because every state has its own rules and its own strata laws.

And the federal government, you can quite imagine them going, let's not get into strata stuff at all because it's too hard.

Sue

So what are they asking for?

Jimmy

They're asking, the Labour Party in the current election campaign has promised homeowners, I think it's a 30% rebate or discount on solar panels.

Sue

And that's house owners, is it?

Jimmy

That's house owners. And Strata Community Association, SCA, has said, are you planning for that to include apartment blocks? And apparently the government, not the government, the Labour Party has said no.

Now you would think you've got a big high building, you've got a lot of roof space.

Sue

Yep, and a lot of people living under it.

Jimmy

And using up a lot of energy. Wouldn't it make sense for the building to get a rebate as well, as well as homeowners?

Sue

And I think the Owners Corporation Network, the peak body for apartment owners has also asked for the same thing as well. So yeah, it makes perfect sense really, but presumably they think it's just too complicated, don't they?

Jimmy

Well, yeah, I mean, but that's their job. Look at the complicated stuff and go, yeah, but isn't it...

Sue

Because they could have offered the rebate to all the apartment buildings and then it's up to the apartment building to sort out the complexities really.

Jimmy

Yeah, I mean, and you've also got the issue of, you know, it's an apartment building, is it an entity in itself or is it a collection of individuals? And in Queensland and Victoria, I think the apartment building is considered an entity, like a business. Whereas in New South Wales, it's considered a collection of individual owners.

Sue

And we're taxed on that basis. If we receive a rebate, it kind of gets divided between the owners. If we want to give it to the owners rather than put it in Owners Corporation funds, and then we're individually taxed on it.

So that makes it really complicated.

Jimmy

Absolutely, and you think there's your argument in the halls of government, you know, we can't give a rebate to buildings in New South Wales because all the owners in that building will get taxed on the rebate.

Sue

But they could give it to the Owners Corporation, couldn't they?

Jimmy

Not really, because then it has to be divided in New South Wales. But in other states, they could do it to the Owners Corporation, you know, without any problem. And there's the issue.

Just make Strata law and Strata finances, I was going to say homogenous, is that? Make them the same.

Sue

Rationalize them across the country.

Jimmy

Yeah, which is a whole other issue. And then the states will start squealing about, you know, you're interfering with our right to mismanage things in our own way.

Sue

But it's interesting with solar panels, because now you can get solar panels on the sides of buildings as well, can't you? You don't have to just have them kind of horizontal on the rooftop. Because some of the new buildings, well, lots of new buildings now have rooftop gardens and areas that everyone can access, which is nice.

But you can now get solar panels which can go on the sides of buildings.

Jimmy

There's a couple of buildings, I think, in Germany where, you know, the glass panels on your balustrade.

Sue

Oh, they work as solar panels.

Jimmy

They work as solar panels. Now, I called somebody up in the solar panel industry, oh, about a year ago, and cited this. And he said, he was quite amused.

He said, yeah, I can see where you're going with this. You think we should have solar panels on your balustrade. He said, the trouble is, for some reason, they need to be on an angle, he said.

Sue

Oh, to catch the sunlight.

Jimmy

To catch the sunlight. But build them on an angle, then, would be my solution.

Sue

Well, yeah, you probably could, couldn't you?

Jimmy

Tilt them out a bit.

Sue

Yeah.

Jimmy

I mean, it's going to be... Ultimately, his argument was it would be so much more expensive that it's not worth doing in purely economic terms. But maybe we shouldn't be thinking in purely economic terms.

Maybe we should be thinking about, let's somebody... Here's a challenge to an architect out there. Put up a building with angled balustrade glass that is solar panels.

And they can make solar panels now that are totally translucent.

Sue

Yeah.

Jimmy

Like you can see through them.

Sue

So you don't even know they're there, really.

Jimmy

Yeah.

Sue

So that's a good idea, because when you're looking at the cost of the building, I mean, really, we should be looking long term. Because say if a building is going to last 50 years, at least, hopefully, well, then that cost should be amortized over that long period. And the saving in energy bills for the building would be immense, one would hope.

Jimmy

And for the environment.

Sue

Absolutely.

Jimmy

Of course.

Sue

Sorry, I couldn't have... Should have mentioned the environment.

Jimmy

Should have mentioned. Well, the weather system seems to be going to hell in a handcart anyway. And now that Mr. Trump is saying that he's going to give subsidies to coal miners to reopen their coal mines in America.

Sue

Oh, my God.

Jimmy

The guy's a vandal.

Sue

Yeah. Well, I saw a thing on Facebook yesterday, was talking about welcome back to the Jacobean age. The good things about the Jacobean times.

And you kind of think, well, yeah, we are going back, aren't we?

Jimmy

We certainly are. When we come back, we're going to talk about the battle between the owners corporation network, strata managers and insurers. That's after this.

Sue

So this is a battle that's been brewing for a long time, hasn't it really?

Jimmy

Yes, it has.

Sue

It's over strata commissions.

Jimmy

Yes. Strata managers are allowed by law to claim commission for insurance that they organise.

Sue

For a building.

Jimmy

Yes. So and strata insurance is compulsory. You've got to have it.

So start from that point. You've got to have it. Strata manager says, I've organised this insurance for you.

Here you go. And by the way, I'm taking 20% commission for this. The insurers are giving me 20% commission for bringing the business to them.

Now, until recently, they didn't even have to tell owners that they were doing this, but now they do. And until recently, owners could not organise their own insurance and expect to have the premium reduced by the commission that the strata manager would have got.

Sue

Would have otherwise claimed, yeah.

Jimmy

So I think that's changing now as well. A lot of insurers are saying, sure, if you organise the commission, if you organise the policy, then we won't give the commission to anyone. I did hear recently about a case where a building organised their own insurance and said to their strata manager, don't worry about getting us insurance.

We've got insurance. And the strata manager said, under the law, I am allowed to accept commission. So I am charging you the 20% and adding it to your bill.

Sue

Wow.

Jimmy

Yeah. I don't think that strata manager will be working for that building for much longer, I would think. But, you know, there's this sense of, it's not just a sense of entitlement.

It's a sense that strata managers are saying, we need this money. Our whole business is built on the idea that we will get commissions on the insurances that we organise. That's going to change in the law coming in in New South Wales later this year.

Strata managers have to show that they have saved the owner's corporation, the building, money by organising their insurance for them before they can accept commission. I don't know how much they have to say, how much they have to prove that they've saved. Presumably more than 20%.

But it just seems fundamentally wrong. Now, we've had PICA saying that the strata management business will be in danger of collapse if insurance commissions are taken away.

Sue

Because he's saying basically, strata fees would have to go up to pay more money to strata companies to make up for the loss that they're making. And that most apartment owners don't want their strata fees to go up. They don't want to pay more for strata management.

Jimmy

Both of those things are true, but they're not mutually exclusive. Because if you say to strata owners, look, you're going to get a reduced premium from your strata insurance, but you're going to have to pay more money for your strata managers. And you would think that somewhere along the line, those two figures would pretty much match.

So the strata managers can say, look, we're going to charge you more, but you're saving on the insurance because we're not getting the commission. So that's taking off your premium. What the problem is, is for the small strata managers, the local strata managers, who really do depend on the insurance premium and who fear that if they were to add up the cost of their services, people would just go to some of the big companies like PICA, who've got about a dozen different strata management companies under their umbrella, who often do offer discounted rates to get the business of strata schemes.

Sue

And also, if a strata company is saying, we're going to be charging you more, people might go out to tender and look at three different strata companies. And it's really quite hard when they show you their tenders because often they have this schedule B charges. So they'll say, well, your fees are this much, which seems quite cheap.

But in fact, in the back end of the contract, it says the schedule B might say that you're going to be charged for every single phone call that's made to the strata company, every single letter they write, that kind of thing. And that can really mount up, but you don't really realise that until you've already signed the contract and then you're seeing the bills coming in.

Jimmy

And if you've got a building, especially a new building where people are just getting settled into the way of living in strata, they're going to have a lot of emails and phone calls and things. Although I have heard, I don't know if this is true or not, of a strata manager charging for opening a Christmas card that they received.

Sue

Really?

Jimmy

Yeah, well, they said it's mail.

Sue

Right.

Jimmy

My solution, which the former strata commissioner, John Minns, thinks is a really bad idea.

Sue

A bad idea?

Jimmy

Yeah.

Sue

Oh, okay.

Jimmy

Is that the government sets a minimum fee for strata managers.

Sue

Well, that would make sense, wouldn't it?

Jimmy

And maybe you do it on the basis of if it's a building that's 20 units or less, the strata manager can charge X amount. If a bigger building, they charge slightly less. A huge building, they charge slightly less again per unit.

But it sets a basis so that the strata managers aren't having to go in and compete against these big companies who are saying, let's not get rid of the commission because we can't afford it. Who are also going in and saying to buildings, hey, we can do it a lot cheaper than the guy who's doing it at the moment. The argument that strata managers couldn't afford to work without commissions is kind of undermined by the fact that a lot of the people who are saying this are also undercutting other strata managers on fees.

We have to have a floor. Now, John Minns, his argument was if you set a basic fee, then people will work to that, i.e. they will give you the minimum work that they need to do to justify the fee that they've been ordered to take. I don't buy that, actually.

And it's interesting, our friend Francesco Andreone says that strata management is one of these businesses where it's built into the business model that the less service you give, the more profit you make. So if they can persuade their strata managers to sit in the office and not answer the phone and not read any emails and things and charge the same money, they're going to make more profit. So it's one of the anomalies of the business.

But there has to be a solution. And I think OCN are absolutely right to pressure the government to say, do not step away from your plan to get rid of insurance commissions because it's the way forward. They've got to put everything on a level basis.

And on that note, thank you, Sue, for coming down the corridor and talking to us.

Sue

OK, thanks, Jimmy.

Jimmy

And thank you all for listening. We'll talk to you again soon.

Sue

Bye.

Jimmy

Bye. Thanks for listening to the Flat Chat Wrap podcast. You'll find links to the stories and other references on our website, flatchat.com.au. And if you haven't already done so, you can subscribe to this podcast completely free on Apple Podcasts, Google Podcasts, Spotify, or your favorite podcatcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you'll get this podcast every week without even trying. Thanks again. Talk to you again next week.

 Transcribed by TurboScribe.ai.