Fletcher Building CEO says the Government's flagship housing programme is both a threat and an opportunity for his company

Fletcher Building CEO says the Government's flagship housing programme is both a threat and an opportunity for his company

By David Hargreaves

Construction giant Fletcher Building says the Government's flagship KiwiBuild programme to construct 100,000 houses represents both a "threat and an opportunity".

Fletcher chief executive Ross Taylor told analysts at a briefing for the company's full-year results announcement on Wednesday that he would be meeting as soon as on Thursday morning for two hours with Housing and Urban Development Minister Phil Twyford and some relevant department heads to discuss how Fletcher can assist with KiwiBuild and “to start to work up some options”.

He outlined three areas in which Fletcher could assist, which were: With the development pipeline, through a new 'panelisation' plant that Fletcher is building in Auckland to be commissioned next year, and through supply of products.

“One of the areas we are working with them is when we look at our own development and residential development pipeline – which parts that we might be able to work with them to build some KiwiBuild houses.

“In any of our developments we have a spectrum of lower price point entry into our developments, through to middle, through to higher, because you always want some social stratification in a development for a healthy community.

“So, we are working with them on that,” Taylor said.

“We are also looking at potential other sites which are government-controlled or influenced where we may be able to get going and work more quickly to drive some faster development outcomes for them – again which would be a positive for both us and Government if we can work those up.

"And as we look into the future in our residential development business around particularly Auckland there’s sites which may be out of the present zoning areas where I think we are well positioned and with partnering with government we might be able to move them forward a bit faster."

Fletcher said in the year to June 30, 2018 it sold 714 dwellings in NZ, up from just 499 the previous year. Operating earnings for the residential group within Fletcher were up 12% at $85 million.

And while the company's expecting a moderating in overall building consent numbers from a high level in the coming year, Taylor estimated that Fletcher itself would likely sell something like 800 dwellings in this coming year.

He also stressed that work Fletcher might do in support of KiwiBuild would be additional to - not instead of - its own building development work.

“We’ve also flagged as we look at supporting our own projects with panelisation and systems into building residential... we’ve flagged we’re investing in a panelisation plant, which is under way right now – we’ve signed off on that – we expect to have it up and running through this financial year.

"In our own portfolio we think we can use circa 300 houses a year from that. Obviously our group home builder customers that we service through Placemakers and the like are very keen to also take some of the throughput and we are also actively talking to the Government around providing capacity and maybe making the plant a bit bigger potentially to actually provide some support around that as well.

“So, again, that’s an active conversation that we are working through with them [the Government] as we speak," Taylor said.

He also said that Fletcher was actively going to work on working out ways of making "vertical mid-rise construction" economic in New Zealand.

"...The price point is a bit high in New Zealand to make it work effectively but we believe we might be able to get at that with some vertical modular solutions and that’s a bit more of a medium term game, but we are actually working on that ourselves and hopefully we’ll partner with Government on that to some extent."

KiwiBuild was both a threat and an opportunity for Fletcher Building, Taylor said.

'Govt will drive a chunk of housing'

“Definitely the Government’s intent is clear and they will drive a chunk of this housing into the market so it is really quite important that we position ourselves to both help them deliver from a development point of view as well as a supply point of view.

“...And it’s really important that we do do that and we do it well because if we don’t somebody else will – so it’s both a threat and an opportunity for us.

“And in my sense, more of an opportunity than a threat, but that’s about getting organised to go after it and just in the way we are thinking about it, we are not going to…we want to maintain our, what I call in our development business what we are doing to the external market and to the extent we do KiwiBuild ...it will be in addition to those volumes."

He cautioned, however, that any KiwiBuild work was not "going to be an immediately big fillip".

"It’s going to take a while for this to get momentum and wind up because even with the best will in the world – the Government as well as us – if you get land you’ve still got to go through your consenting process, you’ve got to get the land prepped, then the sections made before you build the house

"So…it’s a couple of years to get momentum in this, so, there’s a fair bit of water to go under the bridge yet – but now’s the time to be working out how we participate."  

Loss of $190 mln

Fletcher Building reported a loss of $190 million for the 12 months ended 30 June 2018, which was in line with forecasts made by the company when announcing write-downs in February. This compares with a profit of $94 million in FY17.

Fletcher said that losses in its Building and Interiors division (which includes projects such as the SkyCity Convention Centre) have been maintained at the $660 million announced to the market in February 2018.

The Residential and Development division had performed strongly, with the Residential business benefiting from the number of units available to sell as subdivisions came to market as well as robust selling prices in Auckland, and the Land Development business recognising the sale of the first site at Wiri North, the company said.

The rise in Residential earnings reflected an increase in the number of units available to sell "as the established subdivisions of Swanson, Whenuapai and Red Beach are now operating at a sustainable level and new subdivisions of Waiata Shores, Kowhai Ridge, Totara Heights, and Atlas Quarter commenced sales".

The company said, however, that during the year a $12 million provision was recognised for a forecast loss on the Atlas Quarter Apartment project in Christchurch.

"This reflects a combination of lower than expected selling prices and cost escalations on the project, mainly due to seismic requirements and higher than forecast construction market rates. At year end $10 million of this provision remained unutilised following initial sales. Excluding the impact of this provision, Residential earnings were up $21 million, or 28%, on the prior year."

Strong demand in Auckland

The Residential business continued to see strong demand for homes in Auckland priced between $600,000 and $900,000, where the depth of market demand is greatest, but softer demand for large standalone homes priced in excess of $1,000,000.

"This supports a strategy of focusing on delivering smaller and innovative home typologies to target a lower price point."

The Christchurch market remained subdued with no growth in prices over the period. Work commenced on the East Frame project, with an initial 112 units underway. The next anticipated stage will include a further 59 terrace homes, and the decision on further stages of this development will depend on discussions with Government on typologies and market conditions.

Bridging finance restrictions

The company noted that in the second half of the financial year, the Residential division "continued to see an elevated number of transactions requiring the sale of the customer’s current home due to bridging finance restrictions". The average settlement period lengthened to 43 days from 32 days in FY17.

At 30 June 2018, the Residential business held a total of 3,707 lots on balance sheet. In addition, the business holds a further 1,272 units under unconditional agreements, to be delivered over the next five years.

Land Development operating earnings in the period were $51 million. This business develops and sells mainly commercial sites within the Group’s property portfolio which are surplus to operating requirements. The most significant contribution to this year was the sale of a 10 hectare site in June 2018 at the Wiri North development, in addition to three development locations in Australia.

While Land Development earnings will be irregular in nature, it is anticipated that the business will earn at least $25 million per annum over the next five years.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Well that's a good sign then, a drop in building activity will likely reduce any further losses in dollar terms going forward.

The whole Fletcher Building company reported a loss of $190 million for the 12 months ended 30 June 2018, which was in line with forecasts made by the company when announcing write-downs in February. This compares with a profit of $94 million in FY17.

Ahhh no it doesn't compare...

A mangled mismanaged monopoly.

I think you mean yet another mangled mismanaged monopoly.

You're right of course. There are a string of them, run by incompetents. Pretty similar to being in government.

Many of the Fletcher Divisions are particularly well managed.

Do not confuse the high rise construction division - which I agree is a mess - with the other long established and very successful operations.

10
up

How do you lose money in a credit and building boom? By only realising that things have slowed down - 18 months after everyone else!

The directors must have been asleep and just woken up... Good job we've got hairdressers, coffee shops and takeaways to keep the country afloat and paying its way in the world!

Even Stats NZ stated earlier today that currently rampant building activity is holding up overall retail sales through its flow on effects on electronics, building supplies, department store. Let's see what happens once the slowdown hits the economy.

https://www.stats.govt.nz/information-releases/retail-trade-survey-june-...

In part because their strategy has been to put in very low tenders to secure contracts. They expected that their profit margin would be improved through contract variations for unanticipated extra work on the projects. When this never eventuated, particularly for government jobs where the client is very tight and reluctant to pay anything beyond what was initially agreed, they suffer significant losses.

In part that they pretended that the market was low, when in fact it had peaked, similar to your case

Oh, I see... Like the reverse of what you did 8 years ago when you created the username PropertyPrices2Fall, right before the most sustained period of property price escalation NZ has ever seen.

Can you please elaborate on how the property market flattening has impacted Fletcher Building’s balance sheet? I’m keen to be educated as it was my understanding that their financial difficulties were in fact due to cost blowouts on a number of their large projects. The Atlas appartments selling for less than expected accounts for a minor revenue reduction of only a few million - the company posted an overall loss of $190M. The article also specifically notes that the company benefited from robust selling prices in Auckland.

And Fletchers are big enough that they can screw subbies and suppliers down on price through a Dutch auction process after they have secured the work.

Yes. Although I have been told they treat their subbies very well.

I was not aware that subbies had to bid on Fletchers work !

People make decisions in their own best interests and if they choose to offer to work at their quoted prices then so be it.

Like the extra $130M Sky wanted the govt to give them to give to fletchers to build the convention centre that was in the original vision. Instead John Key says we are getting a scaled back eye-sore
https://www.tvnz.co.nz/one-news/new-zealand/skycity-convention-centre-co...

“The company noted that In the second half of the financial year, the Residential division "continued to see an elevated number of transactions requiring the sale of the customer’s current home due to bridging finance restrictions"

A further reflection of tightness / caution in the financial sector regarding residential credit?

When confidence in the market disappears (lenders confidence that is) the cost of bridging finance tends to rise very quickly... It's why so many houses are now 'under offer' subject to a sale. UK post crunch bridging finance often came with a 3% arrangement fee and then between 1-2% per month cost on the bridging loan.... As a result the market for bridging disappeared and has never recovered. We're just 10 years behind here.

Nic – I haven’t forgotten you – just focused on other things at the moment - note: I posted this yesterday but by that time the article had dropped out of discussion so hope you catch this reposting - I really do think this is relevant.

The “marginal buyer” to me is still paramount – here’s a nice little summation in regards to the Toronto market

“A term that's circulating more often is the "marginal" buyer. These are the outliers who pay huge premiums over the "consensus price" that experienced agents would come up with based on previous sales and micromarket factors. Even though they make up only a small subset of buyers, they determine market value.”

I see the marginal buyer as something of a false and temporary price setting mechanism which can encourage / enable a fair degree of misplaced optimism – perhaps already witnessed depending on your bias.

Either way, as I have stated before – I believe the impact of removing the “marginal buyer” (if ultimately successful and relatively devoid of ruse and scam) will be far more significant than the 3% foreign buyer chatter currently entertained.

How can they lose money with tariffs (GIB board) and regulatory moats like NZS3604, BRANZ. The gubmint (red and blue) are holding their hand. Either Fletchers are severely bloated due to an lazy monopoly mindset or someone is bleeding the company dry.

I hope Twyfool doesn't use these inept bludgers for Kiwibuild.

Is it only my impression or is it NZ economy slowing down? Seems like everyone i talk to feel the same (suppliers and customers). AIt appears that everyone is less busy and people are giving 'better deals' to boost the sales. I also noted that there is less traffic in Auckland which is bizarre.... comments please?

I agree with the Auckland Traffic comment!

Since the petrol tax has been in place it has been an easy drive to work and back each day. Bizarre indeed!

Akl +11.5c regional fuel tax went on on July 1.

School holidays started July 6 which always allows traffic to flow much easier. Those holidays ended July 23 for State schools and July 30 for most private schools.

The 'easier traffic' comment will be much more to do with the 'every July' school holidays than the fuel tax. The problem with the fuel tax isn't that it chokes off traffic levels; it is because it crowds out other spending.

At our work we have discussed that after the kids went back to school the traffic was still good and it is noticable, so if not the tax, something else has changed.

How many (if any) at your work have changed how they travel to work?

So far at my work there have been none, although with the days getting longer I am considering breaking the bicycle out. Partially to raise the finger at the regional fuel tax, and partly to get fit for a race at the end of the year.

Yep it feels that way to me too, although no objective evidence!
In my experience people taking overseas trips in August is quite common. I wonder if that could be a factor.
Also near where I live some major roading projects have been completed in last couple of months, which might be improving traffic flow.

And easing congestion isn’t really the direct intention of the fuel tax - it is to pay for transport infrastructure. Unlike Auckland’s potential congestion charges.

Fletcher's earthquake rebuild cash cow has wound down and they remain over-exposed to Auckland's cost problem.

The Christchurch market remained subdued with no growth in prices over the period. Work commenced on the East Frame project, with an initial 112 units underway. The next anticipated stage will include a further 59 terrace homes, and the decision on further stages of this development will depend on discussions with Government on typologies and market conditions

Well, they've managed to provision $12m for the Atlas Quarter development in Christchurch, which is either 106 or 109 apartments depending on which MSM outlet yo no creo. So that's $110K and change per apartment down the toliet....

Place yer bets on how much they're gonna lose on the other developments in the East Frame (the even more sterile bit of the Old CBD).

Which all adds up to the usual Triumph of Central Planning: the markets in Christchurch are anywhere-but- the-old-CBD, the satellite towns (Rolleston, West Melton, Kaiapoi, Rangiora, Amberley, Darfield, Lincoln, Oxford) and this was quite apparent from the consenting rates - oh - about 6 years ago.

Fletchers bought into the Old-CBD 'I have a Dream' - er - Dreams and they will suffer mightily yet for that....

Fletchers have built heaps of terraced type houses in a subdivision in Wigram right next to the motorway.
They are having huge difficulty in selling them and is it any wonder?
They are just about the ugliest units I have ever seen. They look the same are 2 storied ugly little box’s and who their market for them is I am not too sure!
Unless they drop the prices on them they will sit there for ages.
Yes they may be new but at the end of the day they are box’s and probably what KiwiBore is going to be all about in Auckland.

Last time I was in Christchurch we drove out to Kaiapoi and I think it was Beach Grove subdivision we had a nosey at. That’s what I imagine Kiwibuild to look like.

If Fletcher Building could NOT make it work after being handed 'government contracts' on a solid gold patter after the Christchurch Earthquakes - they are NOT going to make it work now.

I'd rather our government work with smaller companies than throw more money, time and favorable contracts at the BLACK HOLE known as Fletcher Building.

If Fletcher Building was software - it would be 'bloatware' and I'd remove it from my computer the first chance I got. This bloated, headless chicken of a company is a joke~!! Certain MP's must be pretty thick if they think Fletcher Building is their best option.

Fletcher building is a big boy now, time for mummy and daddy to stop paying his rent and electricity bills - maybe invest in another child.

The fact that NZ’s building industry is dominated by small companies is one of the largest systemic problems constraining supply. Google it, this is well documented. I worked in the UK for a while and did a tender evaluation for a 500 unit development - this was a small job for the massive companies that put in tenders (e.g. Taylor Wimpy). They churn out these projects like it is nothing.

The government got a good deal out of Fletcher on these projects. Fletcher is delivering the buildings at below cost. If anything, Fletcher is the party getting screwed (they screwed themselves by underestimating the cost and putting in a woefully low tender).

Firstly, the UK has a failed housing market and a failing social system - so don't even go there girlfriend~!!

You're just advocating for Fletcher Building to keep its monopoly - a monopoly which is NOT serving the market well. I'm going with NO DEAL. The suggestion that all the building industry should be concentrated in the hands-of-a-few is fanciful at best.

Let smaller, dynamic companies with less fat become big companies. Allow smaller companies to more easily band together to buy building materials at wholesale prices.

You're just advocating for insanity .. more of the same from this top heavy, poorly run company - NO THANKS~!!

So many fallacies in that comment, but I’ll just pick one. Fletcher Building isn’t a monopoly buddy. Do you know what a monopoly is? Even it’s dominant building material supply division doesn’t meet this definition.

You're probably right BuyLowSellHigh and you're also probably more informed than I on many matters. I've been a bit harsh with my comments of late.

As for fallacies, I welcome you pointing out my mistaken beliefs resulting in unsound arguments. I've been wrong a lot in my short life, which has made me argumentative and contrarian at times - though there are lots of ways to look at things.

All good spirited debate!

Not to say it cannot wield too much power due to its size - especially in the building material supply division.

As many architects I know lament, with the result that materials cost more here than they should.

I don't disagree. They definitely are dominant at certain stages of the chain.

Zack Brando

Fletcher "handed government contracts on a SOLID GOLD PLATTER after the Christchurch earthquakes"

Far from it,mate.

My son worked for Fletcher's EQC.The profit margin was abysmally low.Would not want to divulge actual figure for privacy reasons .

Far below even 5% of the repairs approved by EQC.

And for that Fletcher's had to deploy all resources for the project management,establish hubs in various suburbs,supervise repairs,assume responsibilities for the warranties on behalf of the contractors to whom the repairs were outsourced.

And deal with the myriad headaches caused by irate houseowners. Some undoubtedly trying to cash in by expecting a makeover of even pre-existing non-earthquake related damage at EQC expense.

Phew!!

Fletcher were one of the SCIRT Alliance Members alongside City Care, Downer, McConnell Dowell and Fulton Hogan. The whole idea of SCIRT was a procurement strategy, basically a tendering process for works packages which is supposed to be fair and competitive. The difference with Fletcher is that they also own manufacturing, merchants and their own sub-contractors.

Let's say Fletcher tenders a works package to replace a 500m sewer trunk main. They receive a bid from Brian Perry Civil (a Fletcher's owned contractor) who have subbed out to Pipeworks (a Fletcher's owned directional drilling company) who have priced pipe bought from Humes (a Fletcher's owned merchant) who source their pipe from Iplex (a Fletcher's owned manufacturer). I won't go any further.

I know my comment is more around horizontal infrastructure, I haven't had anything to do with vertical infrastructure so it could be a completely different kettle, but my hypothetical example still demonstrates how they have had the golden platter handed to them.