NSW: The impact of inflation, increasing costs and the DBPA on strata in NSW

This article is about the impact of inflation, increasing costs and the DBPA on strata in NSW.

Inflation, increasing costs of rectification works, and new legislation are becoming significant concerns for the construction industry and strata communities, particularly in New South Wales. Rising prices of construction materials, labour, and insurance premiums, along with the introduction of the Design and Building Practitioners Act (DBPA) in 2020, are compelling strata owners and managers to confront the challenge of financing maintenance, remediation, and rectification projects while preserving the financial viability of their properties. This article will explore the ramifications of delaying these works, the role of inflation in escalating costs, the confusion caused by the DBPA, and potential solutions for strata communities to weather these financial and legislative challenges.

The Consequences of Delaying Maintenance and Rectification Works

Escalating Costs Due to Inflation and the DBPA

While it may appear prudent to delay maintenance or rectification works in an effort to avoid significant financial expenditures in the short term, Daniel Caruana, CEO of the DANRAE Group, warns that this approach can have detrimental effects. He explains, “prolonged delays in repairing waterproofing defects can lead to further deterioration in buildings and exacerbate issues such as mould and concrete cancer.” Ultimately, these complications escalate the costs and financial pressures for owners.

In addition to the physical harm to the buildings, external factors such as inflation and supply chain disruptions – instigated by COVID-19 and geopolitical risks – are driving up the costs of construction materials like lumber, steel, and wood products. The Design and Building Practitioners Act (DBPA) further compounds this issue. While essential for enhancing the quality and compliance of design and building work, the act also inflates the costs associated with remediation efforts. Thus, postponing projects in this environment only amplifies the financial strain strata communities face.

Misunderstanding Around Emergency Works and “Patch Work”

The DBPA has introduced the concept of “emergency works,” referring to immediate repairs required due to unexpected events that pose a risk to health, life, property, or the environment. Some strata owners and managers have found themselves confused by this term, often associating it with quick, temporary fixes or “patchwork”. It’s crucial to distinguish between comprehensive remediation mandated by an emergency and temporary solutions that may not comply with the DBPA standards.

Deteriorating Property Conditions

By putting off essential maintenance and rectification works, strata owners risk allowing their properties to deteriorate further. This not only reduces the market value and rental returns of their properties but also poses safety hazards for residents. For instance, delaying the rectification of combustible cladding can compromise fire safety and lead to more extensive and costly repairs in the long run.

Non-Compliance with Legislative Obligations and the DBPA

Strata communities must comply with various legislative obligations, including building regulations, safety standards, and insurance requirements. Delaying rectification works may result in non-compliance, leading to penalties, litigation, and increased insurance premiums. In addition, strata owners might find it difficult to secure funding for future projects if their properties are deemed high-risk due to unresolved defects or maintenance issues.

Moreover, the DBPA has introduced specific roles such as Design Practitioner and Building Practitioner, which can overlap and vary by region and context, causing further confusion. A Design Practitioner prepares design plans and specifications for building work, while a Building Practitioner is involved in the construction process.

David Lamborn, Project Consultant Lead at Windowline, is seeing first-hand the confusion over the shifts and compliance obligations, ‘As Building Practitioners, we are seeing a lot more industry knowledge gaps around the roles and requirements of practitioners under the Design & Building Practitioners Acts. We are encouraging the industry to ensure they gain the relevant expert advice before making recommendations which may result in further costs or obstacles for clients now or in the future’.

The Burden of Rising Insurance Premiums

Hardening Insurance Market

The strata insurance market is experiencing considerable rate rises, and cover availability is becoming increasingly restrictive. Significant losses across the insurance industry, especially in the strata space, have forced insurers to increase premiums and tighten underwriting guidelines on properties with high loss ratios, frequent claims, defects, or maintenance issues. Insurance companies must take these measures to protect their profitability and financial health.

Furthermore, strata owners may not fully grasp the repercussions of postponing remediation until they can accumulate the necessary funds. Delays can affect their insurance policies. Insurance companies may refuse to cover damages resulting from known, unaddressed issues or may even find it difficult to secure coverage for buildings not meeting certain standards.

Impact on Strata Insurance Premiums

On average, strata insurance policies are currently experiencing premium increases of 15-30% or more for properties with no outstanding claims or defects. Strata properties with identified issues will see substantially higher premium rate rises, as insurers must price insurance to reflect the risk and characteristics of the building. The increasing number of strata properties classified as ‘very high risk’ due to factors like location, age, design, construction methods, claims history, and maintenance problems also contribute to the escalating premiums.

Challenges in Funding Rectification Works

Strata communities must consider various factors when deciding how to fund maintenance and rectification works, including the extent and cost of the work, the nature of the property, the financial and tax position of each owner, and the cash flow and taxation impacts of each funding option. The three primary funding options available to strata communities are:

1. Capital Works or Maintenance Fund (Sinking Fund)


2. Special Levies


3. Strata Finance

Capital Works / Maintenance Funds

Capital works funds, also known as sinking funds, are allocated to anticipated major capital works and are typically collected over a long period. However, these funds are often insufficient to cover the total costs of cladding rectification or other significant maintenance works. Moreover, capital works funds can be an inefficient form of funding due to high costs, low returns, the impact of inflation, and the opportunity cost for owners who could put the funds to better use elsewhere.

Special Levies

Special levies can impose a significant financial burden on strata owners, particularly those who are cash poor. Re-mortgaging to fund a special levy can also be increasingly difficult in a tighter regulatory market. Moreover, relying on special levies can result in delays in commencing works, as many people believe an owner’s corporation should not engage in a contract until it has the funds to make the payment. If a significant portion of owners are late in paying the levy, the works may be delayed.

Strata Finance

Strata finance enables an owner’s corporation to access funds immediately, allowing them to complete maintenance and rectification works without delay. It offers unsecured loans directly to owners corporations without requiring mortgages, liens, charges, or any registration of interest on the title of the body corporate or any individual unit. This eliminates the financial distress caused by raising large special levies and provides certainty that the funds will be available as needed.

The Benefits of Proactive Maintenance and Rectification Funding

Strata owners who take a proactive approach to funding maintenance and rectification works can enjoy several advantages:

• Peace of mind knowing they are living in a safe and well-maintained building


• Completing works at today’s costs to minimise the impact of inflation


• Restoring the market value and rental return of their properties


• Meeting legislative obligations and mitigating the risk of penalties or litigation

The Role of Strata Finance Experts

StrataLoans are the experts in strata finance and can assist both strata managers and owners with navigating their strata finance needs. They can provide tailored solutions to help strata communities fund the necessary maintenance and rectification works, ensuring their properties’ long-term viability and safety. By partnering with StrataLoans, strata owners can overcome the challenges posed by inflation and rising costs, and achieve the best possible outcome for their investments.

Conclusion

The impact of inflation, increasing costs, and the DBPA on strata finance in Australia, particularly in New South Wales, is a growing concern for strata owners and managers. As delaying maintenance and rectification works can lead to escalating costs, deteriorating property conditions, and non-compliance with legislative obligations, it is crucial for strata communities to explore available funding options and take a proactive approach. By working with StrataLoans and leveraging their expertise in strata finance, strata owners can navigate these financial and legislative challenges and ensure the safety and value of their properties.

About the Danrae Group

Danrae Group has been in the waterproofing industry for over 20 years. The expertise of the company focuses on water ingress in strata buildings, commercial complexes, hospitals and government buildings. With a specialised and diverse range of skilled staff the company is well known for fixing water leaks efficiently and effectively.

About Windowline

Windowline Pty Ltd is Australia’s leading window and door replacement specialists, purpose built to support the needs of the strata community. For over 34 years and under the same independent Australian ownership, Windowline has specialised in the installation of the replacement of windows and doors in strata unit buildings, completing over 8500 projects nationally. Established by Founder and Managing Director Gary Stevenson, Windowline are the industry experts, priding themselves on delivering quality solutions and peace of mind for owners and strata managers.

StrataLoans T: 1300 785 045 E: Debbie.Barker@strata-loans.com

This post appears in Strata News #660.

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