Strata ‘Management Rights’ must be reviewed by the Qld Gov’t – guest post by Stephen Thornton

This guest post from my good friend and fellow economist Dr Stephen Thornton is on the costly rort that is strata management rights in Queensland. Views are Stephen’s and should not necessarily be attributed to me. GT

The front page of the Australian Financial Review on the weekend carried the headline ‘Apartment Turmoil’. The paywalled article was largely about Management Rights (MRs), a significant strata issue I wrote about in 2017 as being one of the policy priorities on which the new Queensland state government should focus its attention (see Pets, Airbnb and Management Rights: Strata policy challenges for the incoming Queensland Government).

Most people will be unaware, or will have forgotten, that the Bligh Government in 2012 did indeed commence a management rights review which progressed to the public consultation stage before being abandoned by the LNP later that same year after it won government. The new Attorney-General Jarrod Bleijie (a former MRs lawyer) took the view that  ‘… caretakers need to have secure, long term contracts’  and subsequently announced a general property law review which included strata (by-laws, scheme terminations, etc.), but excluded a review of MRs.

According the 2012 review discussion paper, many lot owners:

… are of the view that long term contracts for services may be sub-standard, overpriced, or inappropriate for many schemes. There are also claims that there is an increasing corporatisation of the management rights sector and that this, together with rapid turn-over in ownership and a significant increase in the value of management rights contracts in the past decade, has led to predatory and unconscionable conduct.

I wrote to the Office of Regulatory Policy in the Department of Justice and Attorney-General a little while back to find out why the review had been ceased and had not been picked back up by the Palaszczuk Government when Labor regained power in 2015. The response acknowledged the cessation of the 2012 review and confirmed that the Attorney-General’s current priorities are the matters considered as part of the LNP’s QUT property law review which commenced in 2013 (which is still not completed). In other words, MRs are not on the agenda.

As I have written previously, MRs are usually sold by the developer to caretaking companies (some as large as Jones Lang LaSalle), for millions of dollars, with a maximum 25-year contract locked in for bodies corporate from the get-go. The fixed ‘salary’ for caretaking and management duties is often over $300,000/year in the large strata complexes with mandatory CPI increases or better.

They also typically come with ‘exclusive’ letting rights of apartments in the building, meaning that while investor owners are able to let their apartment with an outside real estate agent, no-one else can set up a letting service in the building. The vast majority of investor owners put their business with the onsite manager. MRs are periodically ‘topped up’ to the original maximum contract term at AGMs by uninformed lot owners as the contract runs down and on-sold every three to five years via industry brokers.

These high contract prices charged by developers for the larger complexes create a barrier to entry to the industry for potentially very good managers who are unable to stump up the money to obtain bank finance to make the MRs purchase. Obviously, the price of a 25-year contract as opposed to say a 3-year or 5-year contract is significantly higher.

The nature of having such a long contract term also makes it impossible for the body corporate to periodically test the market for gardening, cleaning and maintenance services meaning these long-term contracts stifle competition, which is the best way to ensure value for money for services is achieved.

MRs are notoriously difficult for bodies corporate to terminate. John Mahoney of Mahoneys, an experienced Queensland-based law firm which acts for current and prospective caretaking companies, has seen only a ‘tiny number’ of successful terminations as he explains in this excellent podcast hosted by barrister and strata law expert Marc Mercier (starting at 20:35). While I believe this represents a weakness in the legislation, I do agree that they should only be able to be terminated on proper grounds and not simply because the committee has had a ‘falling out’ with the onsite manager.

Disputes between bodies corporate and holders of the MRs for the complex (the resident manager or ‘caretaker’) are not uncommon and can be costly. These often end up in QCAT (Queensland Civil and Administrative Tribunal). Frank Higginson, of Hynes Lawyers, has neatly summarised a recent case where a clearly annoyed body corporate, The Grange, a large 302-lot complex in Brendale in Brisbane’s north, was locked into a 25-year contract at nearly $500,000/year in onsite management fees to what they believed to be an underperforming MRs company.

A letter sent by the chairperson to owners prior to the AGM to attempt to terminate the contract included the following:

We need to rid ourselves of this blood-sucking dysfunctional and truly unfair caretaker’s contract. It’s bleeding us absolutely dry! We have for the past 13-14 years paid in excess of $7,000,000 and will have to pay – by contract – another $10,000,000 or more – currently to the year 2033! Yes – the year 2033!

According to Higginson, the hearing ran over 10 days in which the body corporate spent $427,000 plus GST and the manager $472,000. The body corporate lost and had a costs order made against it of just over $300,000. Mind you, it would seem the owner of the MRs came out of this financially worse given the effective cost to each lot owner was around $2,500 with the MRs owner still close to $200,000 out of pocket. A win for the lawyers (see ‘The latest management rights termination battle’).

There is little doubt that larger complexes require onsite management and the current model has some positive aspects. Still, a comprehensive review is required to bring about much needed reform in this space starting with new MRs contracts being for an initial period of no longer than five years with rigorous criteria for ‘top-ups’ for existing contracts which should not be allowed to lock in future apartment and townhouse owners for decades. The government should cast its mind back to 2012 and complete the job that was started.

Dr. Stephen Thornton is principal economist at BG Economics. Disclosure: Stephen owns a strata investment property with Management Rights in Brisbane.

Apartment tower under construction at Milton

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Priorities for boosting tourism in Qld

Veteran ad man Don Morris AO spoke to the Property Leaders Brisbane group at the swanky Emporium South Bank hotel on Thursday night about how Queensland can boost tourism. Morris, now at Pure Projects, was part of the Mojo Advertising team that created such memorable slogans as “C’mon Aussie, c’mon” and “Slip another shrimp on the barbie.” Morris had a lot of impressive statistics in his presentation on the contribution of tourism to our economy, although his message was a little confusing. I was very pleased Morris more-or-less said tourism is about people rather than buildings. He reminded us of the brilliantly effective Paul Hogan ad from the eighties which celebrated the laid back and welcoming nature of Australians. But at the same time, he noted the Sydney Opera House was a major draw card, as was the Crawley Edge Boat Shed on the Swan River in Perth (see this news.com.au article on its popularity with Instagrammers). At least the Boat Shed suggests you don’t need to spend huge amounts of money to build a tourist attraction.

A panel discussion followed Morris’s presentation. Tourism Tropical North Queensland’s new CEO Mark Olsen offered some thoughts about how Queensland can distinguish itself and boost tourism. He referred to the opportunities offered by the islands of Moreton Bay, and the roles local Indigenous people can play in tourism ventures, such as whale watching, in what is known as Quandamooka country.

Morris’s presentation and Olsen’s comments got me thinking about what measures I would suggest for stimulating Queensland tourism, which arguably should be performing a lot better than it has been. While total spending by international visitors was up nearly 9% in the twelve months to 31 March 2019, visitor numbers were marginally lower (see Pete Faulkner’s post International Visitor Survey shows TNQ continues to underperform). It appears we’re becoming increasingly reliant on international students, whose longer average stays push up average spend per visitor and hence total visitor spending (see my post from June International education boom).

While acknowledging there is some good work underway to promote Indigenous and eco-tourism, I would suggest the following measures to stimulate tourism in Queensland.

  • Use our convict history, including tales of the cruel Captain Logan and the resourceful Eliza Fraser, to help stimulate international interest in Queensland. I regularly walk past the old windmill on Wickham Terrace on my way to Roma St Parklands, and I often wonder why we don’t do more with Queensland’s oldest structure, where Captain Logan had the convicts working the treadmill back in the 1820s (check out Brisbane’s Tower Mill).
  • Remove regulations which make us look boring to international visitors—e.g. anachronistic retail trading hours regulations, which mean most supermarkets can’t stay open after 9pm Monday to Saturday or after 6pm on Sunday, and none can sell alcohol. Arguably, the lock out laws also make us look boring.
  • Reject NIMBYism. Brisbane City Council should have allowed the Mt Coot-tha zip line to proceed. Say “Yes in my backyard” instead, as Yimby Qld does.
  • Improve the walk-ability of our urban centres, particularly the fringe of Brisbane CBD, which has several spots which are uninviting and dangerous for pedestrians. Walking along Turbot St is a horrible experience, and consider how difficult it is for people to cross Wickham Terrace at the back of Central Station in peak hour traffic. It should be easy to move between the city, Spring Hill, and the Valley, but instead it can be a fraught experience for pedestrians. Luckily things are better over the other side of the river at South Bank.

The_Old_Windmill,_Wickham_Terrace,_Brisbane_02

The old windmill on Wickham Terrace, Spring Hill, Brisbane. Photo by Kgbo.

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Qld has gained $7 billion from GST revenue redistribution since 2000-01

I’ve been thinking a lot recently about the forthcoming Australian Institute for Progress (AiP) discussion paper on the “golden handcuffs of federation” by well-known Queensland economist Dr John Fallon. Based on the blurb for the August 15 discussion paper launch, which would be well worth attending I’m sure, the paper will critique the complex methodology, known as Horizontal Fiscal Equalisation, which is used to redistribute the $70 billion GST revenue pool. As I discussed in a post last week, I would expect that abolishing HFE, and the Grants Commission which oversees it, would disadvantage Queensland. I am confident Queensland Treasury thinks the same way. Indeed, the Queensland Government’s submission to the 2017 PC HFE Inquiry noted:

Queensland places great value on HFE…HFE is the mechanism by which Australian Governments collectively ensure that Australians living in different parts of the country will be provided with broadly similar levels of service.

This submission was prepared by the Queensland Treasury. I expect our state Treasury recognises that Queensland faces a number of challenges in delivering services to our vast State: our extensive road network, remote communities, and a higher proportion of Indigenous people than in the rest of Australia. Typically, HFE provides Queensland with a greater share of Commonwealth funding than it would expect based on its share of the Australian population, to help compensate for our higher cost of government service delivery. This is generally to our advantage.

That said, at times, HFE has worked against Queensland because the HFE methodology has penalised us for high royalty revenues. This penalty can appear unfair given the backward looking nature of the methodology, which means we can be penalised for high royalties in recent years, even though commodity prices and royalties are lower in the current year.

Furthermore, HFE isn’t perfect, and the methodology appears to compensate southern states for restricting the growth of their resources sector, particularly in gas extraction, and to discourage state taxation reform (see pp. 13-16 of the PC’s HFE Inquiry Report). I am concerned about these perverse impacts, so I will read John’s paper with an open mind, open to being convinced HFE is a bad idea and against Queensland’s interests.

No doubt, John will have plenty of points to criticise HFE on. However, considering how much Queensland historically has gained in GST revenue above what we would have expected based on our population share, in the order of $7 billion in total over 2000-01 to 2018-19 (Figure 1), John will face a huge challenge convincing the Queensland Treasury to abandon its long-standing support for HFE.

Figure 1. Additional GST revenue flowing to Queensland as a result of HFE

GST_revenue_redistribution

Source: Author’s calculations based on data in various Australian and Queensland Government budget papers since 2000-01.

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The deteriorating global outlook & Qld’s mining regions – initial thoughts

Each passing week I’m becoming more concerned about the global economic outlook and what it means for us here in Queensland, given that the strength of our resources sector is closely related to the strength of the global economy. My Research Assistant at Adept Economics Ben Scott and I have started thinking about the robustness of recent resources sector forecasts by the Office of the Chief Economist (in the federal Industry department) and Queensland Treasury. You can read our initial thoughts, on which we’d welcome your comments and suggestions here:

Economic outlook for major mining towns in Queensland

The Office of the Chief Economist and Queensland Treasury had forecast the coking coal price to decline over the next few years from around US$200/tonne to a still healthy US$150-160/tonne. Given the intensification of the US-China trade war and its likely adverse impact on the Chinese and global economies, and on the demand for steel and hence coking coal, I’m starting to think the Office of the Chief Economist’s and Queensland Treasury’s forecasts for coking coal prices might be too optimistic.

A deteriorating global economy is of great concern for Queensland’s resource-dependent regions, some of which, particularly Mackay, had bounced back nicely from slumps after the end of the mining investment boom in 2013-14. Depending on global economic conditions, those good times may prove relatively short-lived.

black-coal-1542285036I13

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Upcoming AiP event on “The golden handcuffs of federation”

The Australian Institute for Progress, a Brisbane-based conservative think tank, has a very interesting upcoming event on what some may consider the rather dry topic of horizontal fiscal equalisation, the complex methodology by which the Commonwealth Grants Commission determines each State and Territory’s share of the $70 billion GST revenue pool. John Fallon, an economist who should be well known to anyone who has worked on economic policy issues in Australia in the last few decades, will be launching his discussion paper HFE and the Grants Commission at the AiP’s offices in Woolloongabba on the evening of Thursday 15 August. Here’s the blurb from the AiP website:

Allocating Commonwealth funds: the golden handcuffs of federation

Why does the Commonwealth government penalise states that raise more revenue by fully developing their mining industry? Or penalise states that encourage investment and innovation by cutting taxes?

It doesn’t make much sense, and an obscure policy called Horizontal Fiscal Equalisation, has a lot to answer for.

If you’re involved in policy at a state level you need to understand Horizontal Fiscal Equalisation, and you should be at this policy launch. Click here to book.

John Fallon, a fellow of the Australian Institute for Progress, is an economist who has worked for Economic Insights, the Queensland Competition Authority, Queensland Treasury, Industry Commission, OECD, and Reserve Bank on a range of public policy and economic matters.

He will be launching the discussion paper “Horizontal Fiscal Equalisation and the Grants Commission”.

I have some sympathy with the economic efficiency arguments I expect John will be prosecuting. However, as a Queenslander, I need to recognise that our state has historically been a net beneficiary of HFE. For instance, in the chart below, consider Queensland’s GST relativity (the ratio of what Queensland receives compared with what we would receive if GST revenue were shared on an equal per capita basis across Australia). Over the last twenty years, Queensland’s average relativity was 1.033. My gut feeling is that any national efficiency gains from abolishing HFE wouldn’t compensate Queensland sufficiently for the loss of GST revenue to the state government over the long-term. Of course, as always, I’m open to being persuaded by logic and evidence, and I very much look forward to reading John’s paper.

Qlds_GST_relativity

I’m interested particularly in John’s views on the changes to the future distribution of GST revenue that were announced by the federal government last year (see this media release), changes designed to ensure WA doesn’t receive less than 70% of what it would under an equal per capita distribution. I expect John will say it supports his view the current system is broken, given it requires the federal government to inject hundreds of millions of dollars into the funding pool so WA gets more without disadvantaging other states.

On HFE, the Productivity Commission’s HFE 2018 Inquiry Report is very good on explaining how HFE redistributes royalty revenues and may discourage tax reform at the state level.

Also, you may be interested in Reflections on Fiscal Equalisation in Australia from Henry Ergas and Jonathan Pincus.

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States across Australia borrow to build – my recent state debt commentary

I’ve been talking a lot about Queensland state debt lately, including with the Infrastructure Association of Queensland’s Funders Taskforce on the morning of Friday 19 July. The main points I made were as follows.

  • Queensland’s gross state government debt, on its way to $90 billion in 2023, is high, but other states are catching up (and NSW will surpass Queensland) as they “borrow to build.” Queensland’s relative position improves over the budget forward estimates, even though its own metrics (e.g. debt-to-revenue ratio) get worse.
  • There is an important distinction between general government and government-owned corporations’ (GOCs’) debt, as the GOCs typically earn revenue from their debt-financed investments that can help service their debts, a point John Quiggin has made frequently. Broadly speaking, half of the state’s debt is owed by GOCs. Of course, in Queensland, we need to note that we’ve had GOCs make some dubious investments in the past (e.g. desalination plant, recycled water scheme), and that the current government shifted $3-4 billion dollars of general government debt on to the GOCs a few years ago.
  • Because Queensland had a long period of sound financial management up until the mid-2000s, the state government’s defined benefit super liability is fully funded, and the government consequently has $30 billion+ in investments which should be considered in assessing the state’s financial position, as is done when we use the net debt measure. Queensland looks a lot better on the net debt measure, although this measure is deteriorating too over the forward estimates.
  • Finally, in my view, we shouldn’t be complacent about the gross debt, as ratings agencies such as S&P and Moody’s consider our gross debt when deciding on the state’s credit rating. Also, if interest rates one day increase from their historic lows, debt servicing would make a much bigger impact on the state’s operating budget (as maturing debt is re-financed at higher interest rates).

Following my discussion with the IAQ Funders Taskforce, my Research Assistant at Adept Economics, Ben Scott, prepared some slides to illustrate the points I made:

Interstate debt comparisons

We’d welcome any comments and suggestions regarding the slides. My aim is to expand on them in a paper on interstate debt comparisons later this year.

Debt

The night before my discussion with the IAQ Funders Taskforce, I participated in an Australian Institute for Progress panel discussion with Professors Tony Makin and Judith Sloan. It was streamed on Facebook Live but apparently the audio wasn’t great, alas:

https://www.facebook.com/OzInstProgress/videos/3577590092490308/

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Qld can no longer blame a higher participation rate for its higher unemployment rate

Queensland has typically had a higher unemployment rate than the national average, and for many years this has been attributed by some commentators to Queensland having a higher workforce participation rate (and proportionately more people wanting to work).[1] But Queensland’s participation rate of 65.8% is now below the national average of 66% (see chart below), while the state’s June-19 unemployment rate was 6.3%, 1.1 percentage points higher than the national average of 5.2% (check out Queensland Treasury’s briefing on the June data). We cannot blame higher workforce participation and must consider whether other factors, such as poorer regulatory policy settings, explain Queensland’s higher unemployment rate.

prates_aus_v_qld

Why is the national average participation rate now higher than Queensland’s? It’s likely due to a mixture of demographic and economic factors.

First, as workers get older on average, participation rates of older age groups get higher weightings in calculating the total participation rate. Queensland has a significantly higher youth participation rate than the national average, but this is becoming less important as the average age of the workforce increases.

Second, as I have noted many times on this blog, Queensland lacks the corporate HQs and the full range of professional jobs that other states have, and this means fewer career opportunities. This may partly explain the lower participation rate in Queensland among 25-34 year old people.* Finally, the greater professional opportunities in southern states may explain why 55-64 year old people in the rest of Australia are more likely to participate in the labour market (see chart below). It’s a bit easier for professionals to continue working as they age than people in manual labour jobs.

Prate_age

The higher participation rate for 25-34 year old people in the rest of Australia has become more important over time in explaining differences in participation rates between Queensland and the rest of Australia. The share of 25-34 year old people in the total 15+ population has increased significantly in the rest of Australia, possibly due to immigration, while it has remained stable in Queensland (see chart below).

Shares_pop

I intend to look deeper into this issue in a future post, and I will continue to advocate for a comprehensive review of Queensland’s policy settings. In this September 2018 post I wrote:

I’d suggest the Queensland Treasury urgently investigates Queensland’s ongoing economic under-performance, delving into whether it’s due to inferior policy and regulatory settings relative to other states and territories. This could be a good job for a revived Office of Economic and Statistical Research (OESR). This arm of Treasury was doing excellent work researching the drivers of state economic growth in the late 1990s and early 2000s. But, in recent years, it has been operating under its original historical name, the Queensland Government Statistician’s Office, and it now appears to lack sufficient resources and ministerial support to undertake in-depth economic research. The state government should consider reviving OESR, with a view to better understanding Queensland’s relative economic performance.

[1] The participation rate is the labour force (employed plus unemployed people) as a percentage of the civilian (i.e. non-military) population aged 15 and over.

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