By Tim O’Shannassy

Acknowledgement

Introduction

Australian Stock Exchange (ASX) listed AV Jennings was established in Caulfield, Victoria in 1932 by Sir Albert Victor Jennings and has a rich 89 year history. The current Head Office of this iconic Australian brand name is in the inner city Melbourne suburb of Hawthorn and the business is now a majority owned subsidiary of SC Global Developments Pte Ltd, the luxury real estate developer based in Singapore.

AV Jennings have a clearly defined business model, a quality product pipeline in Australia and New Zealand, and have just appointed a new Chief Executive Officer Mr Phil Kearns. Prior to this appointment Kearns had been a non-executive director of AV Jennings for two years and has had a relationship with the business for 10 years. Kearns is a former Australian Rugby Union World Champion and very well connected across the Australian community in sport and business (Australian Property Journal, 2021).

Jim Chalmers the newly appointed Treasurer in the Albanese Labor Government calls the inflation spike in the Australian economy and the drop in the real wages of Australians a ‘oncein-a-generation challenge’ (Wright & Clun, 2022, p. 1). Inflation is currently at a 21 year high of 6.1 per cent in Australia and is forecast to lift to 7.75 per cent for the three month period to the end of December; this is having major implications for interest rates on home loans for borrowers with the Reserve Bank of Australia (RBA) currently aggressively lifting rates (Wright & Clun, 2022). The Reserve Bank of New Zealand is also aggressively lifting interest rates, and this is impacting business and consumer confidence (Craymer, 2022). The cause of the inflation spike is mainly global factors such as the war in Ukraine and supply chain bottlenecks in China. These dramatic economic and political development have implications for the building and land development industry in Australia and New Zealand.

AV Jennings are conscious of ongoing shifts in customer tastes and preferences, so change and innovation are strategic priorities looking to the future, as is business growth. There is a challenging future agenda for AV Jennings in some of the most difficult economic conditions seen for a generation.

External Environment Challenges

The Covid-19 pandemic has seen a shift in the community to a preference for workplace flexibility including the choice to be able to work from home some or all days of the week. The roll out of Covid-19 vaccines and better medical treatments are assisting the community to return to something more normal (AV Jennings, 2021).

There have been two big social trends that have impacted house design in Australia since the 1950s. Traditionally post – World War 2 (WW2) Australians lived in English homes with two or three bedrooms, a good living room and a separate kitchen. In the 1970s the return of woman to work added much needed income to the Australian household, but it also created need for change in the floor plan of the Australian home. The traditional separate kitchen and lounge room became outdated and was replaced by the large kitchen family room with island bench from which parents could cook, have a conversation with children or guests, or watch television (Salt, 2021). Another change to home design came with the arrival of migrants from Mediterranean countries (e.g., Italy, Greece) who adapted quickly to our Mediterranean style climate with the enjoyment of an indoor-outdoor lifestyle. The adaptation to home design led by these migrants was the alfresco (Salt, 2021).

Population growth is an important driver of the home building and land development industry. Australia’s population was 25,766,605 at the end of 2021 with annual growth of 0.5 per cent (Australian Institute of Health and Welfare, 2022). Population growth in Australia has been impacted by the Covid-19 pandemic, with growth slowing. Australia’s population is projected to be 29.8 million people in 2033; the major population centres will continue to be Greater Melbourne, Greater Sydney, and Greater Brisbane inclusive of the region from Gold Coast to Noosa Shire. Auckland’s population is expected to reach 2,000,000 people in the early 2030s from the current 1,700,000 (StatsNZ, 2021).

The European Union economies are being impacted adversely by the reality of the war in Ukraine and ensuing political and energy market turmoil. The risk of Russia cutting off gas supplies is real and could push the European Union into recession (Dulaney & Fairless, 2022). There remains tension between China, Taiwan and the United States over the political situation in the west Pacific.

The weaker Euro against the United States (US) dollar also in part reflects the strength of the US currency, which now has more buying power compared with overseas currencies than it has had in the past two decades (Dulaney & Fairless, 2022). The central authorities in the US have indicated they are favourably disposed to a strong US dollar as it helps to ease inflationary pressures while they are raising interest rates (Dulaney & Fairless, 2022).  The European Central Bank has been slower to increase interest rates compared with the US Federal Reserve. This week the United States (US) Federal Reserve increased interest rates a further 0.75 per cent (Wright & Clun, 2022). The RBA has the cash rate at 1.35 per cent after the July Board Meeting with further increases likely in coming months (RBA, 2022). The Reserve Bank of New Zealand has also been increasing its cash rate in recent months and is currently at 2.5 per cent since its July Meeting (Craymer, 2022).

On balance the coming 12 to 36 month period will be difficult for mortgage holders in Australia and New Zealand whose variable home loan repayments will be impacted by these cash rate increases if and when fully passed on by lenders. Business and consumer confidence is also now falling (Craymer, 2022).

Organizations in the building and land development sector need to use the internet and social media for effective integrated marketing communication, and computer software solutions to coordinate and control resources. Computing capability is an important driver of success for organizations managing significant assets dispersed over a vast geographical area such as Australia and New Zealand. Software as a service (SaaS) enterprises are able to customise solutions to customer requirements providing easy to use integrated software that can be readily supported. This allows a business such as AV Jennings or an industry rival to focus on running its business and the software provider to implement, support and run the software with regular research and development updates (TechnologyOne, 2019).

The ASX and the Australian financial services scene is overseen by the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). The Australian Competition and Consumer Commission oversees (ACCC) looks over trade practices in the marketplace. The tax rate for companies in Australia is comparatively high at 30 per cent, compared with the United States at 21 per cent.  The Corporations Act details director’s duties in the Australian legal jurisdiction. The Commonwealth Work Health and Safety Act 2011 informs occupational health and safety compliance requirements.

Building and land development industry players can have a significant impact on the natural environment including land topography, vegetation, biodiversity, water supply, water run- off, potential for hazardous chemicals emission, risk to indigenous heritage and artefacts, and more.  As a consequence, industry players need to be conscious of a range of environmental challenges including compliance with statutory requirements, including environmental considerations in planning and development projects, and delivering environmentally responsible communities and homes (AV Jennings, 2021).

The Building Industry

The building industry is an important sector of the economy. Several builders (e.g., Probuild, Langford Jones Homes) have collapsed in 2022 due to higher costs, fixed price contracts with slim margins, and lengthy delays due to the COVID-19 pandemic caused by factors including labour shortages and supply chain challenges. Several of these builders in difficulty in 2022 were supported financially by government in 2020 and 2021 at the height of the pandemic, resulting in fewer insolvencies in those years. There appears to be a correction in progress with the uptick in insolvencies in recent months (Clun, 2022).

The Australian Government JobKeeper program has assisted many Australian citizens to keep their employment during the worst moments of the Covid-19 pandemic (AV Jennings, 2021).

Buyers are confronted by an industry with major challenges, with large builders such as Metricon showing signs of financial stress and Snowdon Developments going into administration in July with 550 uncompleted homes (Clun, 2022). The impact on customers in this situation can be financially devastating, including new home cost increases potentially well beyond the original fixed price contract if a new builder has to be contracted to finish the uncomplete job. This reduces the bargaining power of buyers significantly.

Industry analysts note that there is a market shift in progress to townhouse and high-density apartment construction, and small block detached housing (Kelly, 2022). Demand for lowdensity housing is in decline due to the influence of higher interest rates and withdrawal of government support (Kelly, 2022).

CPA Australia currently argue that home builders who get into an insolvency situation due to external factors should be allowed to keep trading to avoid a domino effect throughout the industry (Clun, 2022).

The HomeBuilder scheme and low interest rates provided a significant stimulus to land prices over the past five years (Kelly, 2022). Land for high-density development close to transport is more expensive than land for low-density housing developments (Kelly, 2022). It is expected that demand for low-density residential housing will decline in the short term due to higher interest rates and  withdrawal of government support (Kelly, 2022).

Supply of skilled labour (e.g., carpentry, brick layer, Hebel installer, plumber) has been tight but is easing, though the cost of that skilled labour is expected to contribute to inflationary pressure in the short to medium term.

The building industry is an entrepreneurial sector of the economy.  The building industry includes many small operators with new builders emerging and practicing builders going into administration and insolvency – so there is ease of entry and the incidence of exit.

The modern home is central to lifestyle, and this is well known to be important to Australian society (Salt, 2021). Substitutes for a home are limited and include a caravan or a tent.

It is a difficult year for the building industry. Ease of entry and exit, and the range of product from prestige to budget makes the building industry a highly competitive market, but it differs significantly from a perfectly competitive market. Reasons for this include this differentiation of product from prestige to budget, unequal information access for buyers and sellers, lead time for planning and building, access to credit and interest rates.

There are 78 real estate and property companies in this sector of the ASX including household names such as Goodman Group, Stockland, Mirvac Group, Sunland Group, Servcorp and more (ASX, 2022), and there is intense rivalry. Recent research reveals that industry players are staging the release of land in master-planned communities to obtain the best price results and avoid a supply led decline in prices. This helps developers preserve their profits (Fitzgerald, 2022).

Reflecting challenging industry conditions major builders Probuild, Langford Jones Homes, Snowdon Developments and now Caydon Property Group have failed in recent months (Johanson, 2022). A consistent message in relation to these failures from builders is the impact of construction cost inflation, supply chain challenges, difficulties getting access to skilled labour, builder insolvencies, higher interest rates and a decline in house price sentiment (Johanson, 2022; Kelly, 2022). This is making trading conditions tough for all players in the building industry, with builder insolvencies particularly painful for industry players including trades (e.g. electrician, plumber) not being paid 100 cents in the dollar in some scenarios. It is the preference of the Housing Industry Association (HIA) that builders receive government aid before they are rendered insolvent by these difficult industry conditions (Clun, 2022).

AV Jennings Strategy Situation

AV Jennings Strategy

Covid-19 pandemic has been a challenging period for the board and executive of AV Jennings with changes in identified risks requiring shifts in strategy. The greatest risk was to the health and safety of employees, suppliers, customers, and the wider community as well as the financial well-being of the business during the Covid-19 pandemic. AV Jennings was able to ensure business continuity to enable customers to purchase and build homes during this difficult period (Cheong, 2021).

In the most difficult days of the pandemic there was a real identifiable risk that potential customers would defer a home transaction. This had the potential to create some difficulty for AV Jennings maintaining their pipeline of home projects, including an acceptable level of presales, impacting business continuity. The Australian Government HomeBuilder initiative provided stimulus to the customer community to pursue a home transaction (Cheong, 2021).

The executive and board are monitoring market trends to ensure they are aware of shifts in buyer preferences; they like to see a spread of projects and contract sales across the Melbourne, Sydney, Brisbane and Auckland markets (Bleby, 2022). This was assisted by a shift to a national structure at AV Jennings which helped to reduce overheads by $1.5 million in 2021 and assisted operational decisions, efficiency and flexibility (AV Jennings, 2021).

AV Jennings are renowned for a strong housing and community focus articulating their market position as:

…one of the most recognised and trusted  names in quality, affordable housing…our reputation has been built on…meticulous design and connectivity for our customers, whilst operating in a socially and environmentally responsible manner. Our focus is to create a lasting, positive legacy…(AV Jennings, 2021, p. 18).

AV Jennings appreciate there are environmental risks in residential development activities, hence the focus on managing risk and minimising impact in this sensitive area. AV Jennings Governance Matters

The Chairman of the board of directors is Simon Cheong; there are eight non-executive directors and one executive director. AV Jennings risk management responsibility rests with the board of directors, overseeing a whole risk management system including periodic review (AV Jennings, 2021).

AV Jennings take Environmental, Sustainability and Governance (ESG) seriously and their ambition is to deliver a high level of customer service, be sensitive to the environment, and a quality partner to a range of stakeholders including suppliers, business partners and communities (AV Jennings, 2021).

Cultural heritage management is respectfully undertaken when heritage items or sites are identified in consultation with local indigenous communities. A Reconciliation Action Plan is in development to guide engagement with indigenous peoples in Australia and New Zealand (AV Jennings, 2021).

AV Jennings Functional-Level Situation

A strong presales position was an important starting point for the AV Jennings 2021 financial year (Bleby, 2020); the 2021 results show revenue growth of 18.6 per cent to $311.1 million, with strong contract signings performance (AV Jennings, 2021). In a sign of strong marketing and sales performance there was an increase in contract signings to 953 in 2021 (2020 697 contracts signed) worth $327.7 million compared with the 2020 and $241,2 million in contract signings. These numbers were assisted by revenue achieved at Ara Hills, Auckland and GEM Apartments, Waterline Place, Williamstown, Victoria (Summers, 2021).

AV Jennings has 12,180 lots under control including land under option, with 1,537 lots work in progress (AV Jennings, 2021).

AV Jennings published its first Modern Slavery Statement in 2021 and has developed a company policy in this area; the goal is to ensure there is no infiltration of supply chains with slavery (AJ Jennings, 2021). A Code of Conduct for suppliers is in development (AV Jennings, 2021).

There is a strong pipeline of projects across Victoria, New South Wales, Queensland, Western Australia and New Zealand (Bleby, 2022).  A snapshot of the largest projects with more than 500 lots with the exception of the largest project in Western Australia at Kardinya are provided in Table 1 below:

Table 1: AV Jennings Major Project Pipeline (AV Jennings, Annual Report, 2021, p. 9)

In 2019 AV Jennings committed to a five-year contract with TechnologyOne to rebuild their major enterprise applications, with implementation expected October 2020. The focus of this digital strategy project has been to give the AV Jennings a simple, unified, technology that can be used by a mobile workforce dispersed around Australian states and New Zealand. AV Jennings have struggled in recent years with several legacy software applications causing unnecessary complexity. The software application developed assists management of documents, capital, financials, and assets (TechnologyOne, 2019).

AV Jennings embrace diversity and inclusion in their workforce, with 45.5 per cent of the workforce female. On the senior executive team female representation is 22 per cent and on the board of directors 12.5 per cent. Employee engagement in the annual survey was strong at 4.2 out of 5; employees described the workplace culture as positive, friendly, respectful and fun (AV Jennings, 2021). Wellness resources are available to employees through the AVJ Wellness Hub, and in 2020 a mental health support program for employees was established. Flexible work arrangements, a mentoring program, and paid parental leave is available. Regular Workplace Health and Safety inspections are undertaken on work sites, with 96 per cent compliance on built form inspections (AV Jennings, 2021).

AV Jennings has a strong balance sheet position, with the directors relieved to have seen off the worst moments of the Covid-19 pandemic in 2020 and 2021 (Cheong, 2021). The directors target a gearing range of 15 to 35 per cent with current gearing reported at 20.1 per cent with net debt currently $125.4 million (AV Jennings, 2021). Summary financial data is provided in Table 2 below showing a broad improvement in key financial indicators in 2021 including a 4.1 per cent improvement in net assets:

Table 2: AV Jennings Summary Financial Data (AV Jennings Annual Report, 2021)

The Future for AV Jennings

Following the appointment of Phil Learns as CEO, can AV Jennings ‘supercharge’ growth? Or should AV Jennings maintain a steady, incremental rate of sales growth? How can AV Jennings improve their ESG performance? What functional improvements can AV Jennings make to make the business more effective? Can AV Jennings improve diversity and inclusion on the board? In what Australian states, cities and locations can AV Jennings improve its landbank and contract signings? Is AV Jennings rate of contract signing sufficient? Is AV Jennings commitment to the indigenous community, indigenous culture, and indigenous employment opportunity sufficient, and fast enough?

References

AV Jennings, 2021, Annual Report, viewed 16 July 2022.

Australian Institute of Health and Welfare, 2022, Profile of Australia’s population, 7 July, https://www.aihw.gov.au/reports/australias-health/profile-of-australias-population, viewed 28 July 2022.

Australian Property Journal, 2021, Summers handball leadership to Kearns, November 1, https://www.australianpropertyjournal.com.au/2021/11/01/summers-handball-leadershipto-kearns/, viewed 28 July 2022.

Australian Stock Exchange, 2022, ASX real estate and property companies, https://www.listcorp.com/asx/sectors/real-estate, viewed 28 July 2022.

Bleby, M. 2020, AV Jennings: housing ‘in a shallow recovery’, Australian Financial Review, 27 February, p. 32.

Bleby, M. 2022, AV Jennings strong, Australian Financial Review, 18 February, p. 33.

Cheong, S. 2021, Chairman’s Report, AV Jennings Annual Report, p. 5.

Clun, R. 2022, Building sector faces a raft of insolvencies, The Age, 26 July, p. 14.

Commonwealth of Australia, 2001, Corporations Act, Canberra ACT.

Commonwealth of Australia, 2010, Competition and Consumer Act, Canberra, ACT Commonwealth of Australia, 2011, Work, Health and Safety Act, Canberra, ACT.

Craymer, L. 2022, RBNZ lists rates 50 bps, sticks to plan for more rises, Reuters, July 13, https://www.reuters.com/markets/rates-bonds/rbnz-raises-cash-rate-by-50-basis-points2022-07-13/, viewed 28 July 2022.

Dulaney, C. & Fairless, T. 2022, Euro sliding as energy crisis looms, The Weekend Australian, July 16-17, p. 29.

Fitzgerald, K. 2022, Housing supply held back by ‘gold tape’, The Age, 28 July,

Kelly, A. 2022, Land development and subdivision in Australia, IBISWorld, July, https://myibisworld-com.ezproxy.lib.rmit.edu.au/au/en/industry/e3211/industry-outlook, viewed 26 July 2022.

Johanson, S. 2022, Major developer in liquidation, The Age, 27 July, p. 4.

Reserve Bank of Australia, 2022, Statement by Phillip Lowe, Governor: Monetary policy decision, [Media Release], 5 July, https://www.rba.gov.au/media-releases/2022/mr-2220.html

Salt, B. 2021, Megatrends are shaping the demand for housing, The Australian, 14 October, p. 10.

StatsNZ, 2021, Auckland population may hit 2 million in early 2030s, 31 March, https://www.stats.govt.nz/news/auckland-population-may-hit-2-million-in-early-2030s, viewed 28 July 2022.

Summers, P. 2021, Chief Executive Officer’s Report, AV Jennings Annual Report, pp. 10-11.

TechnologyOne, 2019, AV Jennings signs with TechnologyOne to build out its digital transformation [Media Release], 8 October, https://technologyonecorp.com/resources/media-releases/digital-transformation-inproperty-development.

Wright, S. & Clun, R. 2022, Wages to lag inflation for years as cost of living lifts, The Age, 29 July, p. 1.