Unlocking the mysteries of a critical building resource

Concrete has been the main stay of building construction for generations. Today, traditional reinforced concrete is an integral and important component of building structures. It usually takes the form of footings in ground, slabs on ground, columns and suspended slabs.

Concrete however, is not the perfect substance. As such it can suffer from defects. These defects can have a huge impact on the appearance, capital expenditure, maintenance costs, safety and effective life of the total structure.

What then are the typical forms of concrete defects? Some of the more common defects can be categorised as follows:- 

• Structural design inadequacies - distortion, bending cracks, deflection, shear cracks, impact damage temperature change cracks, abrasion, torsion cracks and erosion.
• Environmental causes – weathering/staining, biological growth, bacteriological attack, efflorescence (lime leaching), freeze-thaw damage and fire damage
• Aggregate properties – aggregate swelling/shrinkage/softening, alkali-silica reaction and sulphide staining/spalling.
• Chemical attack – sulphates, chlorides, acids and salt weathering.
• Reinforcement corrosion – cracking, spalling and de-lamination 
• Concrete Cancer – cracking of the concrete caused by the corrosion of steel reinforcement in concrete structures

These defects are a significant worldwide problem and cause multi-billion dollar losses to infrastructure and building owners annually.

Reasons for the rectification of concrete defects can range from purely subjective (the aesthetics); to preventive (to prevent additional damage); to structural (preventing partial or complete failure); to safety (avoiding impact from falling debris).

As evidenced by the recent traffic disruption caused by structural cracking on the Riverside Expressway in Brisbane, one of Australia’s busiest stretches of road, the consequences (time, distraction and expense) of cracking concrete can be severe.

What then is the solution to problems caused by cracking concrete? The type of concrete defect rectification varies with respect to a number of factors: budgetary constraints, time limitations, weather conditions, and the requirement for specialised techniques.

In the specific case of concrete cancer, cracked concrete is removed followed by cleaning, treating and replacing any rust affected steel. The area is then repaired to the original concrete profile using cement mortar, epoxy mortar or concrete. This depends on the size of the damage and the structural requirement. Cracks are repaired using suitable epoxies, special mortars and injection techniques

While the rectification processes are usually expensive and time consuming, they are nevertheless an important step to take. Cracked concrete can have severe consequences, and if remain unchecked, associated costs can escalate significantly from both a repair, and damage control perspective.

The recent warehouse fire in the Brisbane suburb of Sherwood should send a significant warning to property owners and managers about property replacement cost assessments. The damage to the Sherwood warehouse was massive. From a property owner’s perspective, it was critical that they were not under-insured.

Unfortunately, all too often we see companies that lose their assets (due to fire, flooding etc) without first ensuring they are adequately insured. This is an expensive mistake.

Everyday, property owners are at risk of under-insurance due to a variety of factors. The case study below demonstrates the difference between an insurance replacement cost assessment prepared by a qualified Quantity Surveyor and a property valuation estimate.

The example is based on a 10,000m2 property which has a 4,000m2 industrial building, including a 500m2 office component.

The above example is commonly found when discussing costs and risks with our property owner clients. Inadequate insurance cover leads to the property owner essentially becoming a co-insurer of the property and often relates to protracted negotiations in the event of a claim. This ratio (50% under-insurance in the above example) still applies if there is only a partial damage or loss.

In the other extreme, excess insurance cover provides no benefit to the insurer and will unnecessarily increase the asset’s outgoings.

Insurance against fire and related perils can be extended to cover the breakdown of plant and machinery. An analysis of the plant to be insured, including an assessment of its reinstatement cost and current condition, can also be provided. Properties with multiple buildings on one site should have separate replacement costs for each building and ownership of tenant fitouts needs to be taken into account. These fitouts can, in some cases, equate to a similar cost to the base building, especially when the fitout includes a high value of plant and equipment.

Napier & Blakeley have an extensive database of properties including over 4,000 industrial properties in Queensland. Many of our clients ask us to prepare an accurate assessment initially and then provide annual desktop updates based on construction cost indices and forecasts. More thorough reviews need to be completed after a few years of general indexed updates or when there have been significant changes to the asset or the legislative environment. These include tenant fitouts, renovations or extensions, changes to the BCA and significant variations to the material/labour supply in the local market. Napier & Blakeley will protect you from the substantial risks of under insuring your assets.

For many years, building owners have subscribed exclusively to the theory, if it aint broke, don’t fix it. This however can be an expensive mistake.

It is important to acknowledge that a building is an asset. As such, it needs to be protected and maintained to ensure that its value is not eroded.

To retain and attract tenants, your asset must be presented in the best possible condition, which in turn will maintain or increase its value.

Napier & Blakeley Building Consulting Manager, Nigel Towse says that if building maintenance is ignored, it can have significant consequences.

“There is a common misconception that buildings have long lives and only deteriorate gradually. This may be true for the more robust forms of structure. However even these can deteriorate rapidly with structural failure, environmental issues, chemical attack or the ingress of moisture.”

The health and well being of tenants is paramount in any leased asset and is heavily linked to how the building is maintained. There are basic, statutory obligations that require regular maintenance to be carried out to this end. In particular, cleaning, testing, and checking etc, of fire systems, boilers, lifts and hoists.

“By planning and carrying out your maintenance efficiently, you can minimise your capital expenditure. This will ensure that your asset is safe, economical, efficient, environmentally friendly, and retains its value,” says Towse.

A number of our articles have covered a variety of individual topics in isolation but in reality they’re all inextricably linked providing the platform for balance and maximum return from your property investments.

Our affordability index provides an amalgamation of a variety of property information to provide a balanced look at how your asset might perform over a period of time and how you can influence that performance.

Whether the investment is residential or non residential the same basics apply –

§          How much is it going to cost me

§          What risks are involved

§          What return will I secure

These questions then have multiple layers – how much is it going to cost me initially and in the short and long term, what kind of costs are they, capital, repairs and maintenance, refurbishment or compliance costs. What must I do legally, what must I spend to benefit and retain the tenant.

What risks are involved, physical, compliance or tenant retention, who ‘makes good’ the space at lease expiry.

How do I maximise and maintain my return and are there development opportunities that will add value to the property.

If you consider all of these questions in isolation they provide some useful information.

But only by considering all these issues at once you can create a clear picture of how your asset will perform over time, therefore providing certainty, clarity, sound information for a financier and a great platform for your accounts.

As an illustration, a commercial investment property is purchased for $5,250,000 the initial return is 8% with annual rental at $420,000. The property has 1,500m2 net lettable area and is ten years old.

A lease is in place for 5 years with fixed rental increases of 4% so at lease end – the possible value of the asset at 8% is $6,142,000.

Not a bad gain over five years if you can achieve it.

However, in addition to debt costs over the lease period, a building of this age will also have other costs associated with ownership over time and these need to be considered, planned and managed to keep the property aesthetically and functionally attractive beyond the current five year lease. No future lease – substantially less future value.

The pre acquisition due diligence study provides details of the risk factors associated with the property and notes that the related capital expenditure and repairs over five years is likely to be between $350,000 and $400,000 to carry out works such as Building Code compliance issues, replacement of floor coverings, services upgrades, painting and general upkeep.

The cost of capital works and repairs are tax deductible against income but obviously they also have a recurring cash flow impact.

Offset against ongoing costs of ownership are the tax deductions available for building allowance and plant depreciation deductions for the initial acquisition and again for additional capital expenditure throughout ownership. These deductions provide additional cash flow and after tax dollars to fund any upgrade works to the asset.

The affordability index captures all of the above information and allows you to:

§          Understand, plan and manage all costs associated with ownership.

§          Manage all risks associated with ownership.

§          Manage your true return proactively, by controlling cost and risk and capturing efficiently all available tax benefits.

So not only can you afford it, you can maintain a solid return as well with no surprises.

Damage to property and buildings by fire and other disasters, natural or otherwise, costs Australians hundreds of millions of dollars every year. In Australia, the most common building disaster is fire, so it is important to be prepared.

Napier & Blakeley’s fire insurance assessments are called reinstatement cost assessments. The function of these assessments is to determine the amount a property needs to be insured, to cover the possibility of damage from a disaster. This can include the demolition of the remaining component of the property followed by reconstruction.

Construction markets nationally have gone through significant upturns in cost in recent years. While the increase in these costs may have slowed, they are still far greater than they were a few years ago.

Fire or disaster can have a direct impact on the business operations within a building and many building owners do not adequately factor items such as loss of profits or business interruption into the building insurance equation, leaving themselves under insured.

Over insurance is equally detrimental to business performance. Insuring a property for more than its true worth provides no tangible benefit and may increase the building’s outgoings unnecessarily.

Napier & Blakeley will ensure you are insured for the right amount. The assessments we provide take many factors into account in determining the cost of reinstating property. Our quantity surveyors are capable of determining the true demolition and reconstruction costs of a property. Valuers value, architects design and builders build, but none are real cost experts

Full assessments by Napier & Blakeley are vital in analysing the true extent of loss in the event of a disaster and enable property owners to secure the right insurance cover at the best available premium.  Our quantity surveyors are skilled in the area of construction costs and have daily exposure to changes in the marketplace affecting labour, materials and procurement.

Financier and developers, will often shop around to get the cheapest quote in an effort to shave a few hundred dollars off the cost of their reports. The question that remains is: Should they prioritise financial savings, or a quality level of reporting?

Developers often see financiers reports (risk assessments during the construction period of a development) as a necessary evil to get their hands on the financiers cash, so the cheaper the better. However where the drive is towards controlling of costs to maximise return, the saving in a financiers report could leave them exposed to the risk of far greater costs during the life of the project.

Paul Cosker, Manager, Quantity Surveying at Napier and Blakeley says that a well thought-out financier report will provide commentary on the project. However, in order to achieve that, the developer should sometimes be prepared to pay a little extra for a thorough review at the outset.

“We typically would examine contract documentation, licensing and regulatory issues, project consultants and insurances amongst others. These key issues identify items that have huge potential for causing problems further into the project. This takes both time and expertise from the quantity surveyor.”

A thoroughly considered and well written report has merit as an independent review of the project from the developer’s point of view as well as the financier by providing an unbiased appraisal of the development as a whole.

“The report should fulfil the brief by giving a concise review of the project risks through use of experience and knowledge of the industry. By quantifying and identifying the risks, the report should also provide methods of minimizing and controlling those risks and can offer recommendations on resolution,” says Cosker.

Ultimately, if you want the best protection and advice, you need to be prepared to pay a little more. The reward will be a development that runs smoothly, costs are controlled, risks are contained, and return is maximised.

If during the current financial year you owned an investment property and earned an assessable income from it then you are entitled to tax deductions for wear and tear or depreciation as it is more commonly known.

Over the last 22 years Napier & Blakeley has analysed many thousands of properties, preparing depreciation schedules for owners of virtually every type of property ranging in value from a few hundred thousand dollars to in excess of one billion dollars in value.

There are well in excess of one million property investors within Australia and we suspect that the majority of property owners in Australia do not fully maximise the deductions which can significantly affect and increase their after tax yields.

In a recent analysis of a five year old commercial office building with a purchase price of $5m, a land value of $1m and an income of $500,000 we found the following.

If you claimed no depreciation and building allowances, your after tax income at the following rates would be:

                45 per cent = (highest individual tax rate)                       =$275,000  

30 per cent = (company tax rate)                                      =$350,000

15 per cent = (superannuation fund tax rate)                 =$425,000

However, if you did claim the available deductions, your after tax income would be greatly increased as follows:

45 per cent =$365,000       giving a 33% increase in after tax return         

30 per cent =$409,000       giving a 17% increase in after tax return         

15 per cent =$455,000       giving a   7% increase in after tax return         

As with lifes two certainties, death and taxes, we can guarantee you that if you don’t claim these available allowances, the ATO wont go out of their way to let you know what you’re missing out on!

Below are some questions you should ask yourself to see if you have passed the yearly Tax Depreciation rego:

o         Have you acquired an investment property of any age, type or state of repair?

o         Have you completed any construction works ?

o         Have you completed a fit out ?

o         Has a tenant left your property and you have inherited their fit out ?

o         Has a tenant left your property and you have removed their fit out and made good ?

o         Have you paid any $ towards a tenant fit out

If you have answered yes to any of the items in the tax depreciation rego form and have not considered that there could be tax deductions available to you. N&B can assist with getting your Tax Depreciation rego certified and in order for the last financial year.

Napier & Blakeley has wrapped up another successfully project.

In February 2006, Napier & Blakeley was engaged by Stable and FKP to provide quantity surveying services and property tax advice for the Lifestyle Working project - a $37 million strata office development located in Brookvale, New South Wales.

Napier & Blakeley was involved in the design, documentation and tender phases this project, providing value management, tender documentation and pre-tender estimates services.

Napier & Blakeley was also engaged by St George Bank to provide Financiers’ Project Monitoring services for the project, including:

·          Project Due Diligence

·          Financier’s Risk Review and Project Monitoring

·          Progress Payment Certification

·          Practical Completion Verification

The Lifestyle Working development at 117 Old Pittwater Road provides 160 suites over 3-levels.

Lifestyle Working is also the first strata building in Australia to enter into a commitment agreement for a 5 Star Australian Building Greenhouse Rating.

The project was completed in December last year.

The dynamics of the property market have changed considerably over the last few months, interest rates are higher, debt is more expensive, credit is harder to get, and equities have been savaged – but in all this uncertainty their remains a true constant that provides real benefit to property investors – and it’s provided by the ATO.

Both investment property cash flow and after tax return can be significantly increased by  correctly establishing the basis for depreciation schedules at the point of acquisition, and then by really managing available deductions throughout the life of a property.

Napier & Blakeley are the original specialists in this area and our PTP – “property tax profiling” establishes a basis for deductions and then analyses further capital expenditure through refurbishment or redevelopment, repairs and maintenance and the area that is usually always missed, write offs for demolished items.

Items of both plant and building that are demolished or replaced during a financial year can be written off at 100% of their remaining tax value as at the time of demolition or destruction.

It’s therefore critical to correctly establish base values from which to work and catalogue all changes throughout the year – there is true value in doing so.

There are a few candidates vying to become the world’s tallest building, however there is one that is rising above the competition.

Burj Dubai (”Dubai Tower“) is a super-tall skyscraper currently under construction in Dubai, United Arab Emirates. According to its developers, It is currently the tallest free standing structure in the world, surpassing the CN Tower in Toronto, Ontario, Canada which previously held the record for 32 years. When it is completed in early 2009, it is predicted to be the tallest man-made structure in the world, as well as the tallest building by any measure.

While the final height of the building is a closely guarded secret, sources claim that it will measure approximately 818m, however this information is disputed.

Scheduled for occupancy in September 2009, the building is part of a 2 km² (0.8 sq mi) development called ‘Downtown Burj Dubai’ .

Burj Dubai’s last two milestones will be to surpass the 628.8 m (2,063 ft) height of the KVLY-TV Mast in North Dakota, United States to become the world’s tallest structure, and to pass the Warsaw radio mast in G?bin, Poland (646.4 m (2,121 ft) until it collapsed in 1991) to become the world’s tallest structure of any type ever built.

However, it is not simply the tall buildings that are making headlines.

The City Centre Las Vegas

The CityCenter will be a mixed-use 76-acre complex (16,797,000 square feet (1,560,500 m²)) on the Las Vegas Strip in Las Vegas, Nevada, currently under construction by MGM Mirage.

With a total cost expected to exceed $7.8 billion, CityCenter is the largest privately financed development in the United States. The original cost estimate was $4 billion, but it was pushed up by rising construction costs and design changes.

The project had an initial employee estimate of 12,000 people.