A guide to managing unexpected construction and insurance costs

With growing awareness of the risks of combustible cladding in Australia’s high rises, many strata managers are proactively seeking professional advice about materials and fire safety within their buildings.

In New South Wales and Victoria, council municipal building surveyors are now issuing building notices, requesting a written response on the strata committee’s plan to resolve the potential hazard.

Body corporates are understandably motivated to address the problem quickly, given the threat to both life and property. But they face three significant obstacles: the high costs involved with both the assessment and the recommended solution, an exponential rise in insurance premiums, and the subsequent risk of a building valuation decrease.

“For a large high rise with 400 apartments, the engineering consultancy alone could cost as much as $200,000,” says Tim MacKenzie, National Head of Strata for Macquarie Business Banking.

On average, replacing the cladding on most apartment blocks will then cost between $3 million and $10 million.1 Meanwhile, according to ABC reports, building insurance premiums are rising by as much as a multiple of four.1

“The challenge is to find a way to fund the solution – in a way apartment owners can afford,” says MacKenzie.

As specialist bankers to the strata sector, Macquarie Business Banking offers two options: a Strata Improvement Loan to cover the costs of assessment, planning and rectification (as well as any upfront insurance excess), and cost-effective monthly insurance payments through Macquarie Pacific Funding.  

Learn more about the challenges of combustible cladding

Funding a fire-safe response for combustible cladding

Under Australia’s National Construction Code, any building over three storeys must have non-combustible cladding on its external façade. Unfortunately, Aluminium/polyethylene composite cladding (ACP) was a common construction material between 2005 and 20152 – and while it met building certification requirements at the time, it is now considered combustible.

A Strata Improvement Loan can provide the missing link in your combustible cladding response plan.

The Victorian cladding taskforce estimates there may be as many as 5,000 buildings with non-compliant ACP, while New South Wales estimates are around 2,500.2

When the Lacrosse building in Melbourne caught fire in 2014, it spread quickly because ACP was used on the external balcony walls – where there were no sprinkler systems. The builder initially proposed a more cost-effective solution: installing wall wetting and balcony sprinklers as a solution. But this was rejected by the regulator – and the entire cladding needs to be replaced – at a cost of $15 million.2

In these situations, there is also a flow-on effect on property valuations – restricting an individual apartment owner’s ability to increase their mortgage or take out a new loan to pay for remediation.

“When cyclones hit North Queensland a few years ago, buildings that outwardly appeared to have weathered the storm turned out to have major damage through water leaks, affecting the substrata of the concrete,” he explains. “It had to be fixed quickly, residents needed alternative accommodation and their homes had been devalued overnight.”

In this case, a Strata Improvement Loan with Macquarie provided the upfront funding for both the works and the insurance excess. Repayments were made quarterly through additional strata levies, and individual owners did not need to make a personal guarantee to secure the loan.

“We can approve a Strata Improvement Loan in as little as a day, and it can be used for anything that improves the building. This includes engineering consultancy, rectification and maintenance – such as improved sprinkler systems,” he says.

Macquarie’s loan assessment team looks at the levy increase affordability, and while there is a maximum borrowing capacity per lot, MacKenzie says there is some flexibility around the building’s value. “We do our due diligence – for example, the levy cannot increase by more than 100%.”

With some building notices requiring prompt action, this can provide the missing link in your combustible cladding response plan. And it means works can begin straight away.

Find out how much each lot owner would pay for a Strata Improvement Loan with our calculator

Spreading out the extra costs of insurance

Insurance premium increases can also take residents by surprise.

“As soon as you have written confirmation you have a cladding issue, you need to inform your insurers,” says MacKenzie. You can expect property and public liability insurance premiums to rise as a result – and there have been reports of disclosure leading to exclusions and limitations.3

In some cases, these rises may seem unsustainable – but building insurance is essential to meeting mortgage requirements.

“This is where our premium funding solution, through Macquarie Pacific Funding, can help,” suggests MacKenzie. “Body corporates can spread their premiums across the year, rather than paying upfront.”

Find out more about making monthly insurance premium payments

This is an issue that cannot be ignored. Even if you have not received a written notification, it’s important to be confident in the materials used in your building.

Acting quickly can reduce the risk of much more serious consequences, protect the value of your building and provide residents with peace of mind. And these funding options may make the solution more accessible than you think.

To find out more about Strata Improvement Loans, please talk with your Relationship Manager.

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Additional information

Unless stated otherwise, this material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.

1 Combustible Cladding: residents insurance costs quadruple… ABN News, December 2017

2 Combustible cladding in Australia: An insurers guide, Clyde & Co, November 2017

3 Non-compliant cladding? Your building may struggle to get insurance, Australian Financial Review September 2017