Dunedin ratepayers' Auckland property

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How and why Dunedin City Council has an investment property portfolio with properties outside Dunedin

9th Oct 12, 4:35pm by Gareth Vaughan

Porirua's Bunnings Warehouse is owned on behalf of Dunedin City ratepayers.

By Gareth Vaughan

If you're a Dunedin City Council (DCC) ratepayer you could be forgiven for not knowing that your council runs an investment property portfolio on your behalf.

The portfolio, valued (by registered valuers) at just under NZ$96 million as of June 30, and carrying NZ$16 million of debt, owns properties not only in Dunedin, but also in Christchurch, Wellington and Auckland. It receives scant coverage in the council's annual reports and it can't be found online. Furthermore, it's not part of Dunedin City Holdings, under whose umbrella many of the council's assets are held.

Robert Clark, manager of Dunedin City property who oversees the investment portfolio, told interest.co.nz that given its origins as endowment land, the council pays no tax on the investment portfolio. According to the DCC, Dunedin’s founders put large tracts of land aside in 1848 to be held by the city’s administration, with the income derived from this to be set aside for the benefit of the city.

This “endowment land” was mainly lessors’ interest and was sold following a 2003 land review.

"The decision was made that they were really only returning the city 3-4% at best per annum and the city could do better with that money," says Clark.

"So the decision was made to invest it in relatively low risk commercial and industrial property. We've set a minimum return at the moment of 8% net per annum for the whole portfolio. That portfolio, along with all the other (DCC property) portfolios, are run together and we provide a dividend to council at the end of each year. Last year it was NZ$4.5 million. The decision was also made that we should still have a large proportion of our property in Dunedin but we shouldn't have it all in Dunedin for a risk management and growth point of view."

"Let's face it, if it had been us that had an earthquake not Christchurch, and we had all our investment property in Dunedin, we may well have been opening ourselves up to a whole lot of risk. We have about 60-70% of our property in Dunedin at the present time," Clark says.

Landlord to a screw cap maker

Hence the portfolio includes industrial properties in the Christchurch suburb of Wigram, the Bunnings store in Porirua, and 610 Rosebank Road in Auckland's Avondale, which is occupied by Guala Closures Group, a company that makes screw caps used for the likes of wine bottles. (See full portfolio list provided by the DCC, plus values as of June 30 at the foot of this story). The properties outside Dunedin are valued at NZ$21.27 million, about 22% of the portfolio's total value.

Aside from commercial, retail and industrial properties, DCC has also invested in property development projects, such as Dunedin's Wall Street retail complex. Clark says should the council take on other development projects, they would have to be "very low-risk" investments and provide wider benefits for the city. Further properties outside Dunedin could also be bought. The weighted average lease length on the properties is currently five years.

"For every million dollars of cash that we pay back to council, that's effectively between 0.9% and 1% off the rates bill. We run it as a low risk property investment portfolio and we will continue to do so," says Clark.

Overall, Clark says DCC manages property valued at about NZ$750 million, with this also including a 956 unit housing rental portfolio and civic buildings.

Property investment can be a 'high risk' activity

A governance review of Dunedin City Council released earlier this year by consultant Warren Larsen suggested governance around the property investment portfolio should be reviewed, noting an internal document he had seen contained such a proposal.

"Property investment is a high risk activity if not conducted within a carefully prepared and agreed strategy with appropriate delegated approvals, risk assessment and monitoring procedures," Larsen wrote. "In short a 'board' structure with appropriate governance procedures and additional property expertise is required."

"It is recommended that the current Property Investment Subcommittee of DCC be transformed to a board type structure and the appropriate commercial disciplines in place. Property expertise on this 'board' should be increased," Larsen added.

In response to this Clark says several possible options are being considered and something may be resolved within a few weeks.

The Larsen report also noted that given the DCC coughed up NZ$162.7 million to help fund the Forsyth Barr Stadium, DCC and Dunedin City Holdings' combined forecast debt peaks above NZ$700 million in 2014, up 75% from 2010's figure of NZ$400 million. Dunedin City Holdings subsidiaries include Aurora Energy, Delta Utility Services, Dunedin City Treasury, Dunedin International Airport, and City Forests, which manages about 16,000 hectares of forestry land, a mill, and owns 49.9% of Otago Chipmill.

Dunedin City Council's investment property portfolio as of June 30

PROPERTY ADDRESS	VALUE
Investment Buildings + Land
135 Dukes Rd	825,000
130 Great King St	11,800,000
9 Heriot Drive - Wellington	11,100,000
46 Timaru St	1,920,000
5 Midland St	1,250,000
414 Moray Place	6,800,000
55 Ward St	640,000
61 Ward St	170,000
37 - 39 Treffers Rd - Christchurch	1,800,000
41 Treffers Rd (45a) - Christchurch	1,370,000
33 -35 Treffers Rd - Christchurch	1,700,000
211 George St	32,500,000
54 Moray Place	7,660,000
610 Rosebank Rd - Auckland	5,300,000
14 Parry St	350,000
20 Parry St	1,600,000
56 Parry St	1,530,000
656/658 Princes St	2,800,000
101Milners Rd	530,000
	$ 91,645,000
Lessors Interest
301 Moray Place	2,060,000
	2,060,000
Grand Total	*$ 95,765,000*
Investment portfolio debt	16,000,000

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16 Comments

by Chris_J | 9th Oct 12, 10:10pm 1349773854

I think that you'll find most council's have pretty large investment portfolios Gareth!

It is a shame that the rest of NZ didn't have the foresight the early settlers had in Dunedin.

The 2003 sell down was poor timing though, many of those sites were sold at a fraction of their value just 2 years later (thanks to the property boom that started in 2003), although in all fairness the reinvested portfolio probably gained from the same boom but nothing like the 100-400% gain (depending on location) that Dunedin land values experienced.

Still it does make one wonder why rates are as high as $5000PA for a property with a GV of $200k on one of our 4 flat properties.

by Stephen Hulme | 9th Oct 12, 11:45pm 1349779509

I think it is instructive to know why companies like IBM exited the headquarter, manufacturing plant ownership model many years back.

For starters, the shareholders demanded they do so - property ownership was not an area of IBM's specialised expertise. Those same shareholders figured they were better equipped to invest in specialist property management companies if they so wished.

by notaneconomist | 10th Oct 12, 8:32am 1349811132

While it seems beneficial for Councils to have an investment portfolia in property, problems can arise when a Council can make decisions that protect their investments over other investors in the district. They get to write the District plans and zone the land.

I'm also a ratepayer in the DCC but as I don't live there, I have to obtain the right to vote by special application. The rates I pay to the DCC have tripled and the only service I get is a poor quality gravel road. I also have to pay the Otago Regional Council a Stadium rate as my property is rural and these rates have increased significantly as well.

My understanding is that people in the city/township areas under the DCC umbrella do not pay ORC rates yet the get to vote for Councillors on the ORC.

There is an enormous lack of transparency and the democratic process is a joke.

by Stephen Hulme | 10th Oct 12, 9:28am 1349814487

There is a general attitude of contempt directed at those who are absolutely necessary when it comes to funding the plans and ambitions of the entitled.

Charges of dereliction of duty need to be laid before those supposedly representing the ratepayer. Our duly elected representatives need to be uncaptured from the undeserving, greedy crony capitalists acting against ratepayers best interests.

by Gareth Vaughan | 10th Oct 12, 9:18am 1349813897

Chris, do you know of other councils holding investment properties outside their own region?

by speckles | 10th Oct 12, 9:27am 1349814456

If you are looking at investment property holdings specfically in Auckland, small stuff compared to some of the largest Charities...they have a lot of property locked up.

by Kumbel | 10th Oct 12, 11:26am 1349821572

Waimakriri, Selwyn and Christchurch City hold small remnants of endowed land in Ashburton District as an example. My feeling is it would be very unusual to invest directly in a diversified property portfolio and I am glad DCC have seen the sense in transferring oversight of the investment to where it belongs (miles away from staff and Councillors).

As we have seen recently with the Auckland interest rates swaps story staff have a tendency to get a bit cute with money and get ideas above their station.

by Chris_J | 10th Oct 12, 12:15pm 1349824510

Gareth, I used to work at an Investment Consultancy that advised several Council's and Council owned companies, so I do know that 10 years ago others did, but normally not directly.

I shouldn't divulge anything privileged, but it is publicly known for example that CCC for example had a 9 figure fund although not invested directly in property (but invested in property through stock exposure). Most council's have massive commercial property assets mainly focused in their own region (look at CIAL (ChCh International Airport Ltd) - that's a single 9 figure commercial property investment in addition to the CCC's 9 figure investment fund I mentioned before.

by notaneconomist | 10th Oct 12, 11:19am 1349821148

I certainly get it Sore Loser and I'm extremely frustrated by the BS that is going on.

I watched a documentary the other night on Prime TV. When the Brits were starving early 1300 (mini ice age) and then the bubonic plague hit and then capitalism was basically born as there was insufficient expertise to grow the food etc as so many people had been wiped out. The peasants who survived could finally earn a decent income and negoitiate what they could get paid.

I guess through the generations these stories were passed down as my maternal Grandparents often spoke on the history of the bubonic plague and other historical points from Magna Carte to Habeas Corpus etc. They always educated us on the merits of freedom and liberty and never allowing anything or organisation to take that right away from people. It troubles me deeply that it is my generation who has let this Crony Capitalism or whatever you want to call it take place.

Given that GF was Scotch and GM French they both constantly reiterated that any Govt and Powers that be, would confuse the populace on economic issues by using smoke screens to create confusion and obtain control bit by bit.

by Kumbel | 10th Oct 12, 11:19am 1349821150

"Endowment" sounds so much more respectable than "proceeds of crime".

The governments of the day in NZ helped themselves to the land of the tangata whenua or paid way below market value then onsold/leased it to colonial settlers to help pay for early development works. Probably it was the short-lived provincial government that endowed this land possibly as it was about to be disestablished in favour of a single national governing structure. Foresight is not exactly the word I would use for it; endowing something that cost you nothing in the first place is hardly difficult. I'm pretty sure University of Otago got some land endowed and it would have been likely that the Presbyterian Church did too.

Very few councils other than large urban authorities still have the luxury of an investment portfolio. It only makes sense for a council to hold onto investments if (i) they are getting a better income than it costs them to borrow to fund new works and (ii) they are nowhere near their debt ceiling limit (if they have one). With the exception of New Zealand's Galveston, New Plymouth, smaller councils long ago divested themselves of anything that was saleable.

How councils will raise capital in future for large capital works is still an elephant in our collective rooms. Fencing stolen stuff is probably not an option in the 21st Century.

by KH | 10th Oct 12, 11:34am 1349822075

Wrong Kumbel. You can repeat that misinformation to yourself as much as you like. But increasingly you convince only yourself. The crime most see is a grievance industry and a gravy train.

by notaneconomist | 10th Oct 12, 12:30pm 1349825409

Kumbel - not everyone got land via the NZ Govt of the day. Some early settlors had negotiated with local iwi to purchase land prior to the Treaty of Waitangi signing. Some early settlors also lost the right to the land they had purchased from Maori.

by Kumbel | 10th Oct 12, 12:44pm 1349826240

Didn't say they did - just saying that the endowment lands were purchased at rock-bottom prices and either on-sold at a profit or endowed. Both the New Zealand Company and the early provincial governments were aware of how much profit could be made if the land could be acquired cheaply. Granted they were taking one hell of a commercial risk but they also literally had the big guns on their side.

Doesn't matter how you cut it there was nothing particularly virtuous or foresighted about how the endowment lands came into being.

by KH | 10th Oct 12, 11:37am 1349822251

There is no reason for the Dunedin City Council to have investments such as this. Other than to expand the empire and become a bigger bureaucracy. It's an inefficient organisation that lives to serve it's own needs. It does not serve it's constituency.

by Chris_J | 10th Oct 12, 12:17pm 1349824647

But everyones's favourite DIY handyman Dave is the mayor, it's not all bad.

by KH | 10th Oct 12, 2:42pm 1349833361

Dave Cull is doing a fantastic job. He inherited a overstuffed bureaucracy, with a sense of entitlement, and a tradition of the council being the soft funder of choice for single issue groups. From rugbyhead business people thru to hippy dreamers. Those have taken the city for millions. He's handling those with dignity and skill and doesn't win them all. But he's on task.