The government says it will exercise caution when it decides which housing developments it’ll underwrite through the KiwiBuild ‘Buying off the Plans’ (BOTP) scheme.
Further to interest.co.nz’s David Hargreaves raising concerns over the scheme leaving taxpayers too exposed to market risk, Housing and Construction Minister Phil Twyford says, “We don’t intent to be reckless about this.
“The KiwiBuild unit will be assessing all of these projects on a case-by-case basis.”
The Ministry of Business, Innovation and Employment, in the BOTP tender document it released on May 8, presented developers with two options:
- Backstop purchase of unsold KiwiBuild dwellings: The Government enters into an open option with the developer for the Government to purchase unsold KiwiBuild dwellings (or to pay the difference between an eventual sale price and pre-agreed amount). A backstop essentially provides the developer (and financier) a form of insurance against the ability to sell the KiwiBuild dwellings when complete.
- Outright purchase of KiwiBuild dwellings on completion: The Government enters into a sale and purchase agreement with the developer to purchase the KiwiBuild dwellings on delivery at an agreed-in advance underwrite price (as if it were a private purchaser) and subsequently on-sells these to eligible purchasers.
MBIE expects the BOTP scheme to see 800 KiwiBuild dwellings built in the 2019 financial year, 2,500 in 2020 and 4,000 in 2021.
Given the plan is for 1,000 Kiwibuild dwellings to be built in 2019, 5,000 in 2020 and 10,000 in 2021, the BOTP scheme is set to play a key role in programme.
Asked by interest.co.nz how concerned he is that if a development goes belly-up, the taxpayer will be left to pay the bill, Twyford says: “Property development is inherently risky. It’s just the nature of the business.
“The whole idea of KiwiBuild - using the Government’s balance sheet to stimulate the building of affordable homes that the market on its own is not currently building - is partly about sharing risk with developers.
“We’re not going to be reckless about that. Auckland at the moment is littered with developments that have stalled, partly because the market has cooled, but largely because the Australian banks have tightened up, so it’s a shortage of liquidity…
“[The BOTP scheme is] about trying to help those developers get over the line and incentivise the building of affordable homes that aren’t currently being produced in any significant numbers.
“So if we can do that, we’re going to increase the supply of affordable housing, we’re going to add to supply generally by de-risking and bringing forward quite a lot of development projects that otherwise would not get over the line.”
Prime Minister Jacinda Ardern had a similar response when asked earlier in the week how to prevent the scheme from becoming a licenced bailout for struggling property developers.
“We would exercise the same caution the Crown does in any circumstance when it’s entering into that kind of commercial arrangement.”
Ardern also clarified the scheme wasn’t a “bailout”.
The risk of developers not getting on board
Housing strategy consultant, Leonie Freeman, doesn’t believe the BOTP scheme presents any serious taxpayer exposure risks.
The real risk in her view is that not enough developers will put their hats in the ring to partake in the scheme.
She maintains many are cynical about government procurement processes, so won’t want anything to do with this one.
Speaking to interest.co.nz, Freeman likens the relationship between government and the private sector to a “master-servant” relationship.
“Everyone talks about building stronger partnerships, the reality is totally the opposite.
“Many of the developers have already been through government procurement processes. They take a huge amount of time, effort and money and then they go through this whole process and there’s been very little outcome…
“So it’s all done in big lights. All these projects identify huge potential and say, ‘Come, come, we want everybody.’ The reality has been something the total opposite.”
Freeman criticises the government for in the past going to market too quickly, before it has solidified plans.
Noting the deadline for the KiwiBuild BOTP tender being June 8, she says the other issue has been the government setting tight timelines it can’t stick to.
Furthermore, she says developers are still having consenting issues with councils and there’s uncertainty over the pipeline of construction.
“Prefabrication is a big thing, but a lot of the blockages around this haven’t been dealt with - with the banks, with the compliance, with the consenting.
“We don’t have any joined up leadership. There’s no reporting about performance, there’s nowhere to go if you’ve got a problem. There’s nowhere to hold anyone accountable. Everyone’s working in these silos…
“I really support the aspirational goals [of the new government].
“What I haven’t seen to date is any change from the previous government’s operations of how we deliver stuff. I’m not seeing the innovation and change yet. I’m ever hopeful, but I haven’t seen proof.”