Greg Ninness at The Sunday Star Times reported the New Zealand Superannuation Fund was in talks to underwrite an ambitious NZ$1 billion Queenstown property development.
The deal could make the Super Fund the buyer of last resort for parts of a project at Kawarau Falls Station which remained unsold when it was finished. Neither the Super Fund nor Kawarau Falls' developer Nigel McKenna were prepared to comment on the proposal, but sources close to the parties have told the Sunday Star-Times that the Super Fund has indicated it would be willing to underwrite the project, but the parties have not been able to agree on the terms and negotiations are continuing. If they agree on terms and the proposal proceeds, it would be the first time the Super Fund has entered into a property development underwriting arrangement. That the Super Fund would even consider such a deal is causing concern in investment circles, because of the likely risks involved.
Gareth Morgan told the SST the plan was unbelievable and showed how incompetent the NZ Super Fund was. Here's the most interesting detail.
The Kawarau Falls project covers 6.5ha on the shores of Lake Wakatipu. It is being developed by McKenna's company Melview Developments, which also developed the Beaumont Quarter and Lighter Quay projects at Auckland. Construction of the first stage of the project, which will include two international hotels and an extensive upmarket housing component, is well under way. This is being financed by Bank of Scotland International (BOS), which has a first mortgage securing up to $513m, and Hanover Finance which has a second mortgage securing up to $150m, although it is not known how much these financiers may actually be owed. Funding for a second stage is to be provided by Fortress Credit Corp with Hanover as second mortgagee. Most of the funds used for the project so far are likely to have come from Hanover, but the requirement for an underwrite agreement probably came from BOS as its funding lines started to be drawn down.
What I think If this is true it is astonishing. The New Zealand Superannuation fund is effectively bailing out Hanover Finance and Nigel McKenna with public money on a bunch of luxury holiday houses in Queenstown. Is this how our fund is investing money? Is this the level of risk our fund is taking?
I'm beginning to think it might be a good idea to convert the NZ Super Fund into a fund that only owns New Zealand government bonds. The budget this week will announce the government needs to borrow almost NZ$50 billion over the next 5 years. Why on earth would we be investing that money in speculative Queenstown property rather than government bonds that would otherwise have to be sold overseas? Your view. We welcome your comments below