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.
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.
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