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Opinion: Why the demise of the property development sector makes us more vulnerable to foreign investors
By Bruce McKay
The demise of many finance companies has been a result of the demise of the property development sector.
The fall out for investors and financiers has been awful and special treatment is delivered by contributors on this website for anyone who has had even a coincidental involvement with the sector.
Today New Zealand has few, if any, lenders left that are willing to fund property development. Good riddance to them all you are probably saying.
But the fact remains that buildings still need to get built (houses, offices, factories) and land needs to be developed into subdivisions and the like.
New Zealand’s population is still growing and while there is certainly plenty of oversupply at the beach, there is a growing shortage of accommodation in the major cities.
A large part of the problem with property development in New Zealand is that it has been the preserve in recent years of sometimes flamboyant entrepreneurs; risk takers with as much as an eye for a deal as a headline.
A number of (mainly sports) celebrities have also been in on the act, presumably on the belief that property development is easy. The fact is, property development is anything but easy.
Related Topics
In contrast to many other economies New Zealand lacks is a listed property development sector; companies listed on stock exchanges that have property development as their core business. A quick look over at the ASX shows 20 plus companies actively involved in property development with a combined market cap in excess of A$4 billion. Many of these are smaller companies but there are a few that would easily qualify as large companies in a New Zealand context.
Looking further afield there are many more companies involved in property development listed in Hong Kong, Singapore, London, New York and in Europe. But in New Zealand? Just one. CDL Investments with a market cap of just NZ$68 million; and more than a few people wondering why they bother being listed at all.
A small pool
What New Zealand lacks is a pool of local capital available to invest into property development.
There are a few developers that have not been blown apart by the recession and Global Financial Crisis, but these guys are conservative and generally didn’t participate in the property bubble of a few years ago. They still have some of their capital left and are quite happy to be sitting on the sidelines at the moment.
Because there are more or less no listed companies with the good governance and transparency that goes with being listed, there are few local investors willing to invest into the sector; who wants to risk their money with a flamboyant headline grabbing property developer?
But if there is to be property development in New Zealand the equity has to come from somewhere. The traditional entrepreneurs are no longer there, there are in effect no listed companies involved, and local investors are just saying no.
That somewhere is most likely to be offshore; more foreign cash coming into New Zealand to invest/buy assets because the locals either don’t have the freight or the willingness to make the investments themselves.
Doing a property development today requires a lot of equity funding and the financiers that are willing to look at property development want to see a lot of that equity invested up front.
Reliant on Equity
And that is the challenge New Zealand faces. Property development is now reliant on significant equity funding, whereas a few years ago the banks (and finance companies) where quite happy with scant amounts of equity.
Foreigners have the money, but their ability to invest is made difficult by the Overseas Investment Act; particularly as the money has to come in the form of equity.
While many on this website demand that the Overseas Investment Act be made tougher, most don’t realise how difficult it already is for offshore money to be invested into land and buildings, and lets not even go near the issue of farm land.
And while we may like it here, foreigners have plenty of other places to put their money. Offering a 30% return to a foreign investor may sound like a great deal, but not when that same investor is looking at 60%+ returns elsewhere for property development investments. Fact is New Zealand deals may just not be that attractive.
So where does that leave us all?
The funding route of the past decade has effectively gone bust, there is no local pool of capital available to step into the breach and foreign investment is fraught with difficulties, and New Zealand may not be that attractive compared to other options foreigners have.
Grass huts anyone?
* Bruce McKay is a director of Saffron Capital and Viaduct Capital, an Auckland-based finance company that is now in receivership. He has written commentaries for The Dominion Post and The Independent.
42 Comments
The big four banks are
The big four banks are safe.
For now.....
Wrong, there is plenty of
Wrong, there is plenty of funding available for feasable developments to experienced developers that have their own equity to introduce upfront and sufficent resources to cover unforeseen overruns. Hopefully we will never see a return of the finance company funding frenzing using vunerable peoples money as equity in mostly poor developments. You can still get funding for 65% net / 80% hard costs deals which has been the standard for decades before finance companies became greedy/dumb.
Sorry Bruce I just do not buy
Sorry Bruce I just do not buy it.
Property development has been piecemeal, poorly funded and badly managed. The province of amateurs and politicians you might say.
Personally I rather hope that the collapse of commercial construction once the Rugby World Cup bonanza finishes will provoke some real change. Putting aside whether all this stadium building is clever or daft, which we will know soon enough, the fact is we will have blown our wad on it.
There are no real builders in this country. We build bespoke houses on hillsides and pay 10 times any realistic value for sections. This is plain stupid.
If we built our cars the same way we would not have a car manufacturing industry. Do I make myself plain enough?
House building is simple manufacture. When will it get get treated as such? It is positively medieval at present. A revolution is needed that applies manufacturing thinking in a determined manner, including the supply of raw material (land, timber, nails, tiles). It is as if the supermarket buys lettuces individually from different growers for each lettuce. It is pitiful.
However, there is hope. We do have one outfit with the skils to revolutionise house building - Fletcher building. If they are starved of other work they will eventually figure out how to produce housing we can afford.
As an aside I recently priced housing in a Texas town I once lived in. A shack that in Nelson would sell for NZ$200,000 to $300,000 sells for US $20,000 to $30,000. A decent house for say US 115,000. In Nelson it would be NZ $650,000 and self liquifying to boot.
Rod Oram (silly but well meaning lad that he is) laments the loss of 389 Hectares of farmland to Auckland per year. Get a grip, that is so small as to be laughable. New Zealand has a lot of secondrate farmland that has a productive value of $5 per year or so. Lets use it more productively for decent housing for all.
So the challenge to Fletchers is solve this silly business problem or go bust when the Aussie property ponzi scheme collapses. Nuff said.
Woger, you wascally wabid
Woger, you wascally wabid wesource wapist.
You have (much like your Oxymoronic Mate Pavlova below) ignored a few salient facts.
1. The $20-30 K Texas house, what is its replacement cost?
2. What are the heating/cooling power cost in Texas for this house?
3. How far would you have to commute from said house to work?
I would have expected better of you, Capital cost is only one factor, I didn't event add any QOL issues, like chances of being shot at
Neven
http://realestate.yahoo.com/T
http://realestate.yahoo.com/Texas/Gainesville/715-s-clements-st:52c1b017...
http://realestate.yahoo.com/Texas/Gainesville/1008-e-main-st:819ffe2ea26...
http://realestate.yahoo.com/Texas/Gainesville/1021-mill-st:729f7d518819c...
http://realestate.yahoo.com/Texas/Gainesville/1012-young-st:c1be1a1b19c5...
Texas has a lot going for it. Check out the mortgage cost too...
Gainsville is just a nice little town a few miles north of Denton, Texas. Quite civilised.
Neven - I take your point about commuting to Nelson, yes it is just a little bit too far.
Texas is precisely where we
Texas is precisely where we should be looking for the answers. Identical climatic conditions have not stopped ridiculous Ponzi price bubbles in property from happening in California's inland empire or in most parts of Australia.
Roger is absolutely right about the comparison of what this house WOULD cost in any metro area with a land racket run between the urban planners and the land bankers, which is where the problem is. Older houses DO cost only $30,000 when you can buy really nice NEW ones for $90,000 to $130,000. The same new houses, $500,000 plus, here, in Aussie, in California. The difference being almost all in the price of the land, some of it being in fees, and some in building industry efficiencies - which have been undermined in the bubble regions.
The over-exuberence of the
The over-exuberence of the finance companies for property lending is to blame for their own demise....yes there is an over-correction, and its likely that Mom and Pop investors will steer well clear of the sector for decades....and I cant blame them.
Foreign finance companies wander in? sure and the problem with that is?
regards
Following BruceMcKay's
Following BruceMcKay's article - I am most impressed with the quality comments that follow. Roger Witherspoon spells it out particularly well.
Readers may also like to read my March article on this website "Houston, we have a (housing affordability) problem".
It is to be hoped politicians are reading these comments. There are some crybaby second rate developers and builders pestering them with the "lack of money" line. Its garbage.
All that we have being seeing over the past few years are bubble bunny developers taking down bubble bunny financiers.
Most of the real developers pulled out around 2004, as they could see exactly what was going to happen.
We will only see sound and disiplined commercial behaviour in the property sector - when land and property generally is allowed to get to its true market value .
This is why the Urban Technical Advisory Group Report with the accompanying Ministerial Statements, due out this month, is so important. The Government will know it must get sound solutions in place - now.
Hugh Pavletich
Performance Urban Planning
www.PerformanceUrbanPlanning.org
Christchurch
Finance companies and
Finance companies and associated property developers both got a lot less than they deserve. Con pensioners out of their life savings and build rubbish structures to sell to poor young saps desperate to get on the "property escalator". Good ridance to that particular buisness model.
Why is it that the penduum can not stay within reasonable bounds but always has to swing too far? In the first ten years of my career in the building industry de-regulation resulted pitifully poor building standards naively endorsed by territorial authorities gutted of staff thorough the restructuring of the mid to late 80's. Now it is six years since the building act and the founding of the department of housing and building and we have some district councils that have an almost fascist level of burocratic agression when dealing with the simplist issues and borderline corrupt fee structures.
I know, this too will pass, but in the mean time it is a complete pain in the neck.
the problem is that you need
the problem is that you need equity investors to make property finance feasible. nz is not big enough to have a multitude of entities on the nzsx and besides the cost for a small nation to list is far too high. furthermore the media destroy wealth - there is so little business news that you make one mistake, you are f^&*&d. If you want to form a consortium of like minded investors the takeovers code and secrities regs set the bench mark so high that nothing happens. Property finance requires high levels of equity - long term players, and unless the Government takes a look at the investing framework nothing is likely to change anytime soon. The only thing that can happen and underpins our mindset now is foreign investors coming in as white knights. although they still need to steer clear of the oio. The whole thing is a mess.
There is a big difference
There is a big difference between the amount of equity investment needed to support property development and mortgage finance in a country with raw land at $20,000 per acre (the going rate for non-urban land) and in one where thanks to urban planning restrictions, the price of raw but zoned land is $1,000,000 per acre.
I disagree , there is no room
I disagree , there is no room for the wild speculative activity we have seen in recent years, where home prices have reached 8 times annual gross family income , ( in a low income country ) when the rest of the world is at around 3 times annual family income. I have no sympathy for the developers who have screwed up , its was greed and notihng else .
Why did the mainstream banks not lend in this sector? They understood it was gambling plain and simple . If a scheme works and you have committed qualified pre-sales with 20 % deposits paid , then the Mainstream banks will fund the development . Pie in the sky deals buying hundreds of acres of farmland for stratospheric prices for golf estates, etc was never going to fly for long . The utter stupidity of the market in 2003 to 2008 had to end in tears . I got out of my investments in 2007 , simply because the profits we made were too good to be true . I am now comfortable with no debt.
Ex investor - Good on you.
Ex investor - Good on you. The unfortunate reality is that we do not hear or read of the large numbers of astute people who clearly saw all this coming.
Understandably, the media saturates us daily with the woes of the losers.
This country can only go forward when the political authorities realize they must creare the conditions, so that competent people can develop and invest in TRUE MARKET VALUES.
So Nick Smith - you and your pals in Government had better get it right this time. And realize too - that we would not have gone through the recent property bubbles, if the National Government had implemented the Resource Management Act 1991 properly back in the early 1990's.
These recent property and finance sector failures have been a very costly lesson indeed.
Hugh Pavletich
www.PerformanceUrbanPlanning.org
Simon, Well put. It beggars
Simon,
Well put.
It beggars belief that someone still has the guts to spill such utter nonsense publicly. But then, maybe not such a surprise when the great majority of people in NZ were happy to pay what they paid in the last 10 years for rotting cardboard boxes they call a house. Not to mention the apparent happiness of people to have the mortgage water right up to their eyeballs.
Here's a novel idea, why not make developers have large equity in every development by law. Some mandatory retention of a financial interest of both the developer & builder in the development for at least 3 years, that ensures a REAL interest in having weathertight, well designed and built buildings.
Add to that some professional/personal liability being heaped on engineers and building companies with respect to the design of the buildings and the materials used. That would send shivers up the spines of many, yet that is exactly what you have in germany and austria.
It's a sad state of affairs in this country when you look at the both the skills and regulations of the building and real estate industries.
The bubble mentality has not
The bubble mentality has not popped.
When a leaky shack costs more to buy than a mansion to build else where in the real world, then you really really know the idiots have bought the farm and lost the PLOT.
And the shack may cost more than a working farm and that is another bubble waiting to burst, like the over capitalised Vineyards, an accident also waiting to pop its clogs.
Eg...Decent bottle of wine in France 1euro 69c.
(about 3 dollars, very drinkable, but I digress...A section by the beach 10,000E, do the math.).
Back to the rant...
Likewise the Hotel Room ploy, based on future growth, that ain't.
Likewise the Apartment loonies,
Likewise the Commercial Property gurus & P.I's.,
Likewise The Ma n Pa Blue-Chip rorts,
Football/Rugby World Cup dummy price gougers,
Real Estate, but not reality estate.
The wages of sin is death....the rattle is yet to come....
The list is endless.
Have I got a deal for you. Sod yer pension, leverage yer inflated wage, buy a leaking sieve or an investment dream,
Ya cannae lose laddie.
I am afraid it is all based on inflated debt from inflated bank borrowings, with inflated egos like Hubbard to sustain the momentum and shuffle the money around and around and around.
When the valuations rose, based on nowt, the Councils even RATED these same items on Wanna Be prices, not reality. Even the bare dirt is over inflated and rated.
The Governments SPENT all assets accumulated, based on these over inflated Wanna Be prices and taxed and wasted these income streams, not based on reality.
And the Banks lent their SAVERS money into an infinity multiple based solely on this over leveraged mantra at ever decreasing interest rates....
All based on the CARRY TRADE....and the Stock Market perceptions, Real Estate over valuations,........not reality.
Around and around she goes, where it stops, nobody knows.
The reality may be more than one prick to pop this bubble
In fact there have been millions of em. Clearing out their ill-gotten PERCEIVED gains, before the proverbial hits the FAN.
And taking the COMMISSION and BONUS and SALARY and ...and... and spending it on junk at the beach....and the party scene...
Seems a Pol-lies thing too...but I digress again.
Well it seems the YANKS have a new ploy, keep on bailing the leaky sieve, cos they ain't bankrupt enuff yet.
Bernanke rides again. The Loan Arranger and his faithful NZ side kick...ENGLISH.
(Tonto died....in INDIA, how ironic)
What will we do do you THUNK. Will it work....cos it sure beats WORKING.
Auckland based on reality....Timaru, based on reality...me thinks not.
Sold a PUP and the PUP has fleas and distemper and its a bitch and speyed, so cannot breed more fluffy dogs...for the WORLD to buy.
Debt is debt is debt is debt....so who will pay the even bigger bill...this time....Mr E & K.
Let me guess........The TAXPAYER.
That wine sure looks good to me...today...way less than any in NZ....go figure.
I did.
Same WHINE....same old, same old....RANT.
Wakey Wakey.
A treat to have a little
A treat to have a little SORE-LOSER , with my morning cuppa chai .
Sans CAPS LOCK ON , that is sad .
Nevertheless .............Joy to have you back ,
ISN'T IT BERNARD !
Rant over? ...thank god.
Rant over?
...thank god.
Easy easy Sore- Looser: The
Easy easy Sore- Looser: The intergalactic bailout is next..
Please let me show you a
Please let me show you a different angle to your prblem. Of course all that you mention is with out doubt correct , But seen from the outside as a foreigner when it comes to New Zealand one senses so much pesimism that if I had some spare money to invest the last place in the world I would go to would be New Zealand. Your country has a big Public Relations problem, it transpires gloom. And you have a terrible sense of crisis management if any at all... Sorry to be that straight forward. Your crisis is 100% home brewed.
Actually Michael the
Actually Michael the pessimism is well founded, as reality seems to be flying in the face of factual evidence. It's not the homegrown attitude that is making me keep from investing in NZ. It's the fact that the fundamentals are all pointing to a negative outcome for NZ:
- Net migration loss (NZ as a whole even if capitals such as Auckland are increasing in size)
- Increased costs of living with GST and energy
- Short to medium term Indications of rising interest rates
- Stated government long term target of a low NZD which will add to inflation. What does NZ produce locally other than food? Even local produce is priced at international rates so local produce will ultimately be more expensive as the dollar declines.
- Leaky homes bill which has yet fully rear it's head and make a fiscal impact on the economy
- Large scale financial crises such as SCF (small by international standards but high impact by local standards)
- A Rugby World Cup salvation that will never come. NZ will lose money on the WC from an event perspective. The short lived influx of revenue to businesses will fade, and then what will they look forward to next? Nothing.
- Fears of a property bubble in Australia and slowed growth in China. NZ will feel the fallout if either of those economies goes south.
- Low income economy. How long can Kiwi's keep servicing their debt with such low comparative levels of domestic income?
Most of the above indicators should have had a visible impact on the NZ economy and property prices. But it hasn't, and I for one would feel far more comfortable investing in NZ if it did. I would be clearly be able to see a relationship between cause and effect, instead I am watching by the sidelines waiting for the inevitable.
Michael "all that you mention
Michael "all that you mention is with out doubt correct "
Sorry Michael, don't agree, see my comments below, these problems will pass.
"when it comes to New Zealand one senses so much pessimism"
Silly comment. I'm sure there are plenty right now wishing they had been more pessimistic with their investments. In any case, how would this be a problem for a foreign investor? I would have thought that having to compete for opportunities against a lot of over enthuiastic optimists would be a disadvantage.
Relax, you're worrying about
Relax, you're worrying about nothing Bruce.Once this property price correction is out of the way the market is well capable of scraping the funds together to develop sections and commercial property developments. The actual home building is funded by the new owner so development costs are not huge and can easily be funded by private equity, collaborations with the land owner, that type of thing, with low levels of debt required.
This will not happen until we have a rising (i.e. low risk) market, so at least four years out IMHO
The first one you have to get
The first one you have to get rid of is Mr Bollard who is about to turn the country in a comunity of traders, that alone will damage NZ beyond recovery, does he have in mind some sort of Sunset Boulevard of financial institutions? it's insane... The Hub...........bard.
Oh no...the sage of Blenheim,
Oh no...the sage of Blenheim, Marlborough's answer to Warren Buffet is online for another days ranting...and with his pants on!
So tell us Wally/Wolly...why is todays Fonterra auction up 17% ?
A bit early for the rest home
A bit early for the rest home to let you onto the pooter isn't it Rob...turn on the one grey cell left standing and ask it why the Fonterra news came out a matter of hours after the SCF QE decision pulled the rug out from under the Kiwi.....then go read that link I posted.
Check back many months and you will read where I said commodity prices would shoot higher as the US toilet paper got used up...now have a look at copper prices....get the picture?....punters are running for the high ground away from the danger.
Hi Bruce: You have mentioned
Hi Bruce: You have mentioned foreign investors, here is my problem, your Central Banker's mantra is a lower NZD ... OK .... Lets say I am a foreign investor and I am sitting here in the distance and my currency is sort of protected against inflation and things are going well. Do you think that I am going to convert to a currency that is openly being devaluated ?. I'd have to be out of my mind. Because Mr Bollard works 26 hours a day to sink your currency so in the very same minute I turn to NZD the clock starts to tick against me, in a day traders life that is acceptable because he thinks that he will beat the ods against him by being fast in and out of the market but when you are faced with goods such as a house or a farm the numbers just won't add up... The only investors that you might get are yellow black market money launders, not exactly the elite of the financial world. Sorry.
Yep... another reason why
Yep... another reason why foreigners are wary of investing into NZ... this just makes it harder...
The only things NZers want to
The only things NZers want to know about are agriculture and property. That severely limits opportunities for would-be foreign investors.
hey Wooly...did you see on TV
hey Wooly...did you see on TV last night that people were walking off their land around Ruapehu area cos they can't pay the rates and there's no work.. and the local council are offering it to anyone who wants it...for free?
Got to be the place to retire
Got to be the place to retire to Rob...think of the benefits...wild boar at the door...and not to forget the council supply you with water...only $1700 a year for fecken water and nothing else!
Here is another of our "Great
Here is another of our "Great Financial Talent of New Zealand" talking their usual bull again....
Well, in my humble opinion, the "Great Financial Talent of New Zealand" just cost us all another $600 million (maybe more but who's counting ??)
If our "Great Financial Talent of New Zealand" had not been super charging the property sector by their "development", we would not have overpriced ourselves and our debt until unpayable levels and reach the final but inevitable collapse now.
BTW just a thought about "foreign investors"...in the latest Westin Hotel saga....foreign investors were told they are investing in a world class development but not "exactly" told that their rights were beholden to a management agreement that the developer drew up for the rest of the building...now they find themselves not only holding unrentable rooms, but has to pay up to $2.5 million per year for "share of common property" which they have no control of...how about that for foreign investor's confidence ??
Big property development in New Zealand is a big conjob and the Finance companies are just aiding and abetting.....
It is in New Zealand's good fortune to get rid of both....
In Jackson Hole they had
In Jackson Hole they had Martians and where paying close atention to what seems to be the next INTER GALACTIC BAILOUT... Martians are coming to the rescue.
......'were paying'....save
......'were paying'....save the aitch for later M
In Mars we use an aich there
In Mars we use an aich there
Get used to it , it spels
Get used to it , it spels GAHALACIC BAHAILOUT
Michael has it right re the
Michael has it right re the PR image. it is definitely a half-empty country. Depressing. Mine at that ! Roger Witherspoon says Aussie Housing is a ponzi - look Brisbane was dead 10 years ago and prices have peeled off a bit lately but a 13 bio SEQ rail initiative. You are just jealous mate and you should move soon as AUDNZD is gonna break 1.30/0.7692 this time and will be on its way to 1.40/0.7143 by xmas 10.
oops QLD $123 bio rail
oops QLD $123 bio rail initiative. Too many beers at lunch. the kiwi pinot noir was nice too +
Whats a "QLD $123 bio rail
Whats a "QLD $123 bio rail initiative"?
Pardon my ignorance. I think.
"Whats a QLD $123 bio rail
"Whats a QLD $123 bio rail initiative?"
http://news.ninemsn.com.au/article.aspx?id=7953629
QLD government is talking of spending $123 billion over next 20 years for Brisbane area.
Locals don't know where the money is coming from though...
Well, the following just
Well, the following just shows what a load of rubbish this article is.
"What New Zealand lacks is a pool of local capital available to invest into property development." WRONG
As I posted earlier the market will find away to find investors if there is a dollar to be made.
" the project will proceed as a joint venture between Todd Property and Wellington development company Willis Bond, with the NZ Super Fund providing part of the funding.
The fund's contribution is likely to be channelled through Willis Bond Capital Partners, a private equity fund specialising in property-based investments.
Flat Bush will eventually be home to 40,000 residents and Melview had the contract to design and develop its 17ha Town Centre – a mix of residential, commercial and cultural facilities"
http://www.stuff.co.nz/sunday-star-times/business/4093521/NZ-Super-buys-into-1b-new-town
And besides, in case you hadn't noticed Bruce, we operate a debt based money system. All that's needed is a willinness to borrow the money into creation.
There are still plenty of
There are still plenty of suckers around willing to flush their money down the property investment toilet. The only problem is that they don't have any money, and the banks won't loan them any.
As the saying goes... one
As the saying goes... one swallow doth not a summer make... just because there is one investor in the form of the NZ Super Fund doesn't make the article wrong... in fact, the fact that there is only one investor around seems to make the point even stronger.
As for a debt based money system, well yes it is... but how much debt is the question. Now the banks want to see a lot more equity than previously. Maybe in time they will relax their lending criteria again to the silly levels of 3 years ago, but it will take some time for that to happen.