A Vision for Sustainable Cities And The Need for Change

It’s remarkable how quickly notions of sustainability have gone mainstream in a few short years. From the rapid uptake of renewable power sources to the growth of the circular economy, there’s now a widespread acceptance that the earth’s resources are finite and will require more sophisticated management strategies if we wish to continue to enjoy a high quality of life.

For our built environment, sustainability in Australia has begun to move beyond the actions of individual motivated homeowners to discussions about how entire cities can and should perform to better support not just the people who live there but the entire ecosystem.

Earlier this year, Adrian McGregor, co-founder of globally recognised multi-disciplinary landscape architecture firm McGregor Coxall, released a new book, Biourbanism, a magnum opus dedicated to creating better cities for a sustainable future. McGregor says the problems we’re having now are of our own making.

“The environmental crisis is a design crisis,” he says. “We’re making a lot of poor decisions about the design of cities. Fundamentally cities are our creation and we’re not getting them right. In developed countries, there’s no reason why we should be getting these things so badly wrong.”

In his book, he argues that for too long, we have worked on the assumption that cities are somehow separate from the rest of the environment instead of being an integral part of it. Indeed, their impact is felt well beyond city fringes, with 75 percent of greenhouse gas emissions derived from cities. As countries around the world begin to feel the impact of extreme weather events, he says we need to shift to a decarbonised city model as quickly as possible.

“Those that move the fastest will be the most resilient to increasingly extreme weather events,” he says.

Along with planning for office blocks and high and low density residential releases, he says it’s crucial that ‘green’ and ‘blue’ infrastructure (landscape and water) are considered as an inherent element in design.

Shannon Foster is a D’harawal Eora Knowledge Keeper, founder of Bangawarra and lecturer at the School of Architecture at UTS. She says the balance in cities needs to fundamentally shift if they are to be sustainable places to live.

“We don’t like to talk about ‘green corridors’ because there should be ‘grey corridors’ — predominantly green space that humans can move through as well,” she says. “Not that we are going for the ‘I Am Legend’ look, but we are looking for ways we can allow for spaces to thrive.”

She points to water management in urban areas, particularly storm water, which is often considered a problem to be solved.

“It’s all about how to get it off site,” she says. “But water gives us life so how is it a problem?”

In recent years the notion of ‘sponge cities’ has gained traction among urban planners around the world as a way to mitigate flooding. It relies on sufficient green spaces, including floodable parks and wetlands within cities to manage the water onsite. The payoff is to reduce dependence on pipeline infrastructure used to redirect high volumes of water which is costly to repair and maintain.

It’s not a new concept to Indigenous knowledge keepers.

“Everything begins from country,” Foster says. “We overlap beautifully with sustainability because we are looking at country, plants and water Author of Biourbanism Adrian McGregor (above) and Indigenous knowledge keeper Shannon Foster (below).

and air are protected and sustainably managed.”

NSW chapter president, Australian Institute of Architects, Adam Haddow, says while sustainability will look different for each of the thousands of cities around the world, they all need to work harder than they do now.

“We don’t want lazy cities,” Haddow says.

“Sustainability is different for every city because every city has a different measure of what might be sustainable for site.

“Regional Victoria might be different to NSW or the NT in their ability to engage with and capture water or solar or wind. The thing that is consistent across all the cities is the question: how do we make better use of what we have?”

That includes the existing built environment, he says.

“We should consider every building as heritage,” he says. “We have made a lot of mistakes in the history of our cities and it’s about ensuring we don’t make them again by demolishing to rebuild.”

Demolishing and starting again would add to the carbon load and negative environmental impact. Haddow says there’s a better, less invasive way to approach it.

“If you think about it in medical terms, we should be focusing on urban acupuncture rather than urban surgery,” he says.

Haddow is part of a growing movement in planning and architecture circles in support of the 15-minute city, a concept where everything residents need on a daily basis, such as the office, school and shops is within a 15-minute walk or bike ride. Critics says it confines residents to Hunger Games-style districts that embed inequalities rather than eliminating them. Regardless, it relies on a higher density living and working model than currently exists in most Australian cities.

“We are still one of the least dense places in the world, and we have forgotten about the middle type of living environment — lower density projects up to six storeys,” he says.

For Fred Holt at Danish firm 3XN and lead architect on the award-winning Quay Quarter Tower, it’s about diminishing the reliance and role of motor vehicles to move about the city.

“There is always opportunity to go to other parts of the city but the idea of a sustainable city is to limit the dependence on vehicles, especially those that produce pollution,” he says. “So having a connected city is about connected precincts that are self sustaining but also having ease of transportation between various precincts.”

It’s also getting more out of the space you’re in, he says, so that they stay activated for longer.

“In the Quay Quarter Tower and Quay Quarter Laneways precinct, the idea was to create an 18-hour precinct where you could play and work within the same proximity or neighbourhood as a sustainable model for urban planning.”

His colleague, architect Dan Cruddace, led the Quay Quarter Tower project for the Australian firm, BVN. Now at 3XN, he says there’s one city he thinks of as a good model for sustainable living.

“When I was in Copenhagen, everyone cycles there, from the children to people in their 90s,” he says. “It’s a way of life. The air is clean, the streets are safe, the infrastructure is in place.

“Everything is set up correctly.”

For McGregor, there are cities around the world that have elements of sustainable living about them that we could learn from.

“I love London because of how hard it has worked over the past 20 years to enhance walkability and to increase pedestrian space which underpins that tremendous public transport system,” he says. “Singapore is really progressive in terms of urban greening. Even cities like Hong Kong are really interesting for their walkability and their density and the way they manage vertical urban activity.”

Inevitably, the commitment to sustainable cities comes down to cost. That, says McGregor, depends on where value is placed.

“Economics is the lever behind all change, it has to be,” he says.

“What sits behind all of it is giving natural capital value. When I met David Suzuki years ago, he said modern economics doesn’t give a value to natural capital. You can use your resources for free — it will cost you nothing.

“Until that is given a value in any manufacturing process or construction process, then the model is completely flawed.”

Ultimately, cities are habitat for humans, which is where their success or failure rests, says Holt.

“There is a movement towards understanding that we have a finite amount of resources and the most sustainable building or city is the one that already exists,” he says. “It’s important to not only look at a sustainable city as one focused on reducing carbon but places that are sustainable socially.

“The most sustainable place is one where people want to be and they want to be there for a long period of time, over generations.”

The future is already here.

Most property investors spend considerably more time watching interest rates than bond markets.

That makes sense. The Reserve Bank cash rate has an obvious relationship with mortgage repayments, borrowing capacity and investor sentiment, while government bonds can seem far removed from what someone will pay for an apartment in Sydney or an office building in Melbourne.

But the bond market can provide one of the earliest indications that the price investors are willing to pay for property is changing.

That became evident last Thursday, when Australian shares suffered their worst trading session in months. The S&P/ASX 200 fell almost two per cent, with property among the rate-sensitive sectors caught in the sell-off as government bond yields moved sharply higher.

Australia’s 10-year government bond yield pushed to around 5.4 per cent, close to its highest level in 15 years, against a backdrop of rising global yields and renewed concern about inflation and the direction of interest rates.

For property investors, that matters because the government bond yield is effectively one of the reference prices for money.

An investor buying an Australian government bond is receiving a return while taking comparatively little credit risk. Property comes with tenants, vacancies, maintenance, leasing costs, illiquidity and the possibility that the underlying asset falls in value, so investors generally expect to be compensated for accepting those additional risks.

A property yielding five per cent therefore looks considerably more attractive when a 10-year government bond yields three per cent than when that same bond is yielding more than five per cent.

That does not mean property values automatically fall every time bond yields increase. Rental growth, scarcity, lease structures and the quality of an asset can all outweigh movements in rates, but it changes the return investors require and therefore what they may be prepared to pay.

SG Hiscock & Company made that point in an ASX Investor Update, arguing that real, or inflation-adjusted, bond yields can be particularly relevant to property because real estate is fundamentally a long-duration investment whose value is derived from future income.

The first place investors can often see that repricing is the sharemarket.

A house or commercial building does not have a price that changes every few seconds. An Australian real estate investment trust does.

A-REITs can own billions of dollars of shopping centres, offices, warehouses and other property, but their securities trade continuously on the ASX. When expectations around interest rates and bond yields change, investors can immediately alter what they are willing to pay for those property earnings.

That can create a situation where the value attributed to a portfolio on the sharemarket falls even though the underlying buildings have not changed hands and their independent valuations remain unchanged.

The two markets simply move at different speeds.

Mark Ferguson, Head of Charter Hall Maxim Property Securities, has previously described direct property valuations as lagging the listed market. Writing for Charter Hall during an earlier period of rising interest rates and bond yields, Ferguson noted that listed property was already pricing increases in capitalisation rates and falls in underlying property values before those adjustments had fully emerged in direct-market valuations.

The effect can be substantial.

Consider a commercial property producing $1 million a year in net operating income. At a five per cent capitalisation rate, that income implies a value of $20 million.

If investors subsequently require a 5.5 per cent return while the property’s income remains unchanged, the implied value falls to around $18.18 million. At six per cent, it falls again to roughly $16.67 million.

Nothing necessarily happened to the building. It could have the same tenant paying the same rent under the same lease. What changed was the return required by the person buying it.

That is also why income growth becomes so important.

A well-located property with constrained supply and strong rental growth can increase its earnings quickly enough to absorb some of the pressure from higher required returns. An ageing office building facing vacancies, refurbishment costs and an approaching debt refinancing could instead be hit from several directions at once.

Debt adds another dimension because property is one of the economy’s most capital-intensive asset classes.

Higher market rates can increase the cost of financing an acquisition or refinancing existing debt while simultaneously increasing the return investors expect from the property itself. For developers, the consequences can be even more pronounced because higher construction finance costs can coincide with lower anticipated end values.

If that happens, a project can be squeezed from both directions: it becomes more expensive to deliver at precisely the time investors become less willing to pay yesterday’s price for the finished asset.

The direct property market generally takes longer to reveal that adjustment.

An A-REIT can lose five per cent of its market value in a trading session. An office building may not transact for another year. Owners can reject lower offers, transactions can be withdrawn and valuers must wait for comparable sales to establish new evidence.

That lag is one reason listed property can be useful even for investors who have no intention of buying a REIT.

The same principle eventually extends to residential property, although houses and apartments are generally valued using comparable sales rather than capitalisation rates.

Residential property is particularly sensitive to credit. Higher bond and swap rates can influence bank funding and fixed mortgage pricing, while higher borrowing costs reduce the amount households can service.

If prospective buyers can borrow less, the number of people capable of paying yesterday’s price can shrink. Vendors may initially resist that adjustment, resulting in fewer transactions rather than immediate price falls, before motivated sales eventually establish new comparable values.

For investors, rental growth can provide an important buffer. Rising rents can help offset higher financing costs, just as increasing commercial rents can compensate for some expansion in capitalisation rates. Investors relying primarily on capital growth while accepting a low rental yield have considerably less protection when the cost of money rises.

That is why movements in listed property and bond markets deserve attention beyond the trading floor.

They provide a constantly updating view of how investors are pricing interest rates, debt, future income and property risk, often months before those changes become obvious in direct transactions.

For an A-REIT investor, that means looking at gearing, debt maturity, hedging, interest cover and the discount or premium to net tangible assets rather than simply chasing the highest distribution yield.

For a commercial property investor, it means testing what happens to valuations if capitalisation rates move 25, 50 or 100 basis points higher.

For residential investors, it means understanding mortgage costs, borrowing capacity, realistic rental income and how much of the investment case relies on future capital growth.

The cash rate will continue to attract most of the attention in Australian property. But investors looking for an earlier indication of how the market is repricing risk should also be watching the bond market.

Property prices might take months to respond to a changing financial environment. The price of money moves considerably faster.

A Vision for Sustainable Cities And The Need for Change

They are where most of us reside but our cities will have to get greener to meet future needs

Rising Australian bond yields are putting pressure on listed property and the cost of capital. Here’s why A-REITs can signal changes in property valuations before the direct market moves.