Not all cladding has to go – Paul Morton

The moment we hear the word cladding, we are taken to memories of the horrific events at the Grenfell Tower in London just over a year ago.  What role did cladding play in that event?  Was it a particular type of cladding and has it been used here? Paul Morton says it has but not all of it should be replaced.
Kevin:   The moment we hear the word cladding, we are taken to the memories of the horrific events that unfolded at the Grenfell Tower in Kensington, West London, in May 2017. What role did cladding play in that event? Was it a particular type of cladding, and has it been used in other parts of the world? Paul Morton from Lannock Strata Financing joins me now, to answer those and other questions that we’ve been asked.
Kevin:   Paul, welcome to the show, and thanks for your time.
Paul:   Thanks, Kevin.
Kevin:   What do we know about the causes of that fire in London, Paul?
Paul:   I think probably we should be focusing on the effect of the fire, and the dreadful thing there is that people died. Now, I don’t want to … No one in Australia should be complacent about this, but the issues in London about deaths are quite different than the issues that we have in Australia. In the UK, generally, there’s a fire policy of, if there’s a problem, stay in your unit, and in Australia, the general thing is, if there’s a problem, get out of your unit.
Paul:   So, one is the bad advice which had been given to people in the UK, and also their lack of passive fire safety systems. So cladding is a huge problem in Australia, but we … I mean, there was the Lacrosse fire in Melbourne about four years ago. Why didn’t people die? It was because of things like fire exits, and plans to get out, and evacuation strategies. So there is quite a difference between the Australian model of dealing with fire safety, and the UK model.
Kevin:   Can I just ask you then about cladding? Is all cladding the same, Paul?
Paul:   No. It’s all quite different, and the industry has come us with this wonderful euphemism called substitution, which basically means fraud. Now, we could go into the detail of the different types of cladding. Effectively, it’s an aluminium sandwich. There’s two thin strips of aluminium on the outside, and inside there’s some kind of foam. It depends what that foam is made of, which depends how fire retardant or how flammable it is. Now, with all the detail of these types of foam, it gets quite technical.
Paul:   The simple thing that we have in Australia is, there’s good foam, or good cladding, and bad cladding. The bad cladding is obviously the stuff which will go up in smoke. Now, the problem, though, is that it’s almost impossible to tell the good from the bad. You can’t look at a sheet from the outside and say, “Oh, yes. This is the good stuff,” because the foam looks the same. Because of the substitution, which I’ll call fraud, somewhere along the line from the manufacturer to when it got on the building, somebody has put the wrong stuff in. But you can’t rely on a stencil on the back of it, which says that this conforms to the appropriate standards, because that might be fraudulent. You can’t rely on the documents that you have about the stuff which was put on, because that could be fraudulent. The only real way to know is to have an invasive fire test, which is to take it off, and send it to the lab, and get them to send it.
Paul:   Now, the big problem, and this is facing governments all over the east coast of Australia, is we don’t know how much bad cladding there is. We’ve run fire safety seminars on cladding in Brisbane and Sydney and the ACT, and one of the engineers presenting at the Sydney one said, in his view, as much as 90% of the cladding on strata buildings, this is the aluminium cladding, is the flammable cladding, the bad stuff.
Kevin:   Is there a particular brand that is suspect?
Paul:   No. It’s so many manufacturers, most of them in China, and so many different types of cladding, that it’s not really brand-associated, and even so, you wouldn’t know which brand’s on your building. It’s just, it needs to be tested.
Kevin:   Okay. Well, if it’s tested and then it’s found to be suspect, does it necessarily have to be replaced?
Paul:   Not necessarily, but likely. So in Sydney, there’s the so-called 435, there’s a register of buildings being built in Queensland, and there’s also the various letters being sent out in Victoria. The rectification will depend what the experts recommend in your particular situation. So it could be to replace all the cladding. It could be to replace a portion of it. It might be that passive fire safety systems, sprinklers, exits, signs, evacuation procedures and things like that, are sufficient. I mean, there’s really two things we’ve got to take account of here. One is saving life, and then the second one is saving property, and the solutions might be different for each of those.
Kevin:   Yeah. What would be your advice to anyone who owns a unit in a development that they think might be impacted? What should they be doing?
Paul:   Okay. Well, I think the impact if you own a unit … Look, government and strata managers are getting onto this problem. The Victorian government is the first, and doing quite a lot of stuff early. New South Wales and Queensland are following on, but quite well. The government is doing something, and I don’t think, from an investor or owner point of view, you really need to get too concerned about, is the government following the right processes? Let them work them out.
Paul:   It basically comes down to you, as an owner, being aware that there are safety issues and there’s associated liability if you don’t do something. There’s compliance issues. There’s insurance issues, and the cost of insurance on these types of buildings is going up, and we’ve heard some horror stories of quite dramatically. Where it really starts to hit investors will be reduced property values, and we’re starting to see that. There was an article in AFR this week, talking about lenders assuming decreased property values for potentially affected buildings.
Paul:   When you come back to that engineer’s comment, saying, look, 90% of buildings with cladding have the wrong cladding, you’re guilty until you’re proven innocent. I think it’s going to be increasingly difficult to get loans on your property, and then the big one is, sooner or later, smart people, engineers and project managers and builders, are going to come up with a plan, and you’re going to have to approve that plan, because unless you’ve got an alternative, this stuff has to be fixed. There’s no doing nothing in this one, it’s working out the cost of funding the plan.
Kevin:   Well, what is the cost? Have you got an estimate per unit? I guess it’s going to depend on how big the development is, too.
Paul:   Absolutely. How big, how much of the bad cladding is there, in what positions it is. It could be … Look, the bad cladding is okay in its right use. If your use is on a sign in the front of your commercial building in the middle on the boondocks, if it goes on fire, health and safety are not really an issue. No one’s life is at risk. It’ll depend on the actual situation. Generally, people are saying it’s going to be about $50-60,000 per unit to fix a building, but it’s going to vary widely.
Kevin:   Yeah, of course. What sort of funding and support is available? I can image that Lannock would obviously … I mean, you’re deeply involved in this. You have a good understanding of it. You’re obviously providing a service for unit owners?
Paul:   Well, yes, and look, our solution is to help people to fund things, so that’s where we are. We’ve, for example, lent money to the Lacrosse Building in Melbourne, so that they could rectify their cladding. Essentially, for investors, it comes down to, they’ve got two options. They can approve a strata loan, which is where a company like Lannock lends to the actual body corporate or owner corporation, or they can remortgage, meaning that people increase or get mortgages on the individual units and then contribute that as a special levy.
Kevin:   Paul, just in closing, can you explain to me what the CRAs are? CRA.
Paul:   Oh, gosh.
Kevin:   I’ve heard that bandied around. What’s that about?
Paul:   It’s a cladding rectification agreement. That’s where the acronym comes from. There was legislation passed in Victoria, a month or two ago now, which was approving this type of loan. I think it’s highly problematic, and it’s really quite odd because I’ve seen a number of papers on, typically, lawyers websites, saying, “This is what a CRA does, and this is when it will become available.”
Paul:   Well, it’s basically a quadpartheid, if we could call it that, four parties. So there’s the lender, there’s council, then there’s all the many individual owners, and then there’s the body corporate or owner corporation. So immediately, we’ve got a lot of complexity. At this stage, I haven’t heard of any lender who’s willing to participate in that, and Lannock is talking with government and we’ll try and make it work if we can, and I haven’t heard of any council who’s yet willing to participate. So I think the best thing we can say about a CRA is watch this space. It’s on hold, don’t rely.
Kevin:   Yeah. Okay. Well, if you are in a situation, you’ve got a unit and you want to get a little bit more information, I’d suggest you go to the website. Just give us that website, Paul, for Lannock.
Paul:   For Lannock,
Kevin:   Okay, Paul Morton has been my guest. Paul, thanks for that interesting insight. It’s one that we’ll watch, and please keep us updated if you have any more information for us, please.
Paul:   Thanks, Kevin.

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