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.
23 Comments
Sorry Bruce I just do not buy it.
Property development has been piecemeal, poorly funded and badly managed. The province of amateurs and politicians you might say.
Personally I rather hope that the collapse of commercial construction once the Rugby World Cup bonanza finishes will provoke some real change. Putting aside whether all this stadium building is clever or daft, which we will know soon enough, the fact is we will have blown our wad on it.
There are no real builders in this country. We build bespoke houses on hillsides and pay 10 times any realistic value for sections. This is plain stupid.
If we built our cars the same way we would not have a car manufacturing industry. Do I make myself plain enough?
House building is simple manufacture. When will it get get treated as such? It is positively medieval at present. A revolution is needed that applies manufacturing thinking in a determined manner, including the supply of raw material (land, timber, nails, tiles). It is as if the supermarket buys lettuces individually from different growers for each lettuce. It is pitiful.
However, there is hope. We do have one outfit with the skils to revolutionise house building - Fletcher building. If they are starved of other work they will eventually figure out how to produce housing we can afford.
As an aside I recently priced housing in a Texas town I once lived in. A shack that in Nelson would sell for NZ$200,000 to $300,000 sells for US $20,000 to $30,000. A decent house for say US 115,000. In Nelson it would be NZ $650,000 and self liquifying to boot.
Rod Oram (silly but well meaning lad that he is) laments the loss of 389 Hectares of farmland to Auckland per year. Get a grip, that is so small as to be laughable. New Zealand has a lot of secondrate farmland that has a productive value of $5 per year or so. Lets use it more productively for decent housing for all.
So the challenge to Fletchers is solve this silly business problem or go bust when the Aussie property ponzi scheme collapses. Nuff said.
Woger, you wascally wabid wesource wapist.
You have (much like your Oxymoronic Mate Pavlova below) ignored a few salient facts.
1. The $20-30 K Texas house, what is its replacement cost?
2. What are the heating/cooling power cost in Texas for this house?
3. How far would you have to commute from said house to work?
I would have expected better of you, Capital cost is only one factor, I didn't event add any QOL issues, like chances of being shot at
Neven
http://realestate.yahoo.com/Texas/Gainesville/715-s-clements-st:52c1b01…
http://realestate.yahoo.com/Texas/Gainesville/1008-e-main-st:819ffe2ea2…
http://realestate.yahoo.com/Texas/Gainesville/1021-mill-st:729f7d518819…
http://realestate.yahoo.com/Texas/Gainesville/1012-young-st:c1be1a1b19c…
Texas has a lot going for it. Check out the mortgage cost too...
Gainsville is just a nice little town a few miles north of Denton, Texas. Quite civilised.
Neven - I take your point about commuting to Nelson, yes it is just a little bit too far.
Texas is precisely where we should be looking for the answers. Identical climatic conditions have not stopped ridiculous Ponzi price bubbles in property from happening in California's inland empire or in most parts of Australia.
Roger is absolutely right about the comparison of what this house WOULD cost in any metro area with a land racket run between the urban planners and the land bankers, which is where the problem is. Older houses DO cost only $30,000 when you can buy really nice NEW ones for $90,000 to $130,000. The same new houses, $500,000 plus, here, in Aussie, in California. The difference being almost all in the price of the land, some of it being in fees, and some in building industry efficiencies - which have been undermined in the bubble regions.
There is a big difference between the amount of equity investment needed to support property development and mortgage finance in a country with raw land at $20,000 per acre (the going rate for non-urban land) and in one where thanks to urban planning restrictions, the price of raw but zoned land is $1,000,000 per acre.
Please let me show you a different angle to your prblem. Of course all that you mention is with out doubt correct , But seen from the outside as a foreigner when it comes to New Zealand one senses so much pesimism that if I had some spare money to invest the last place in the world I would go to would be New Zealand. Your country has a big Public Relations problem, it transpires gloom. And you have a terrible sense of crisis management if any at all... Sorry to be that straight forward. Your crisis is 100% home brewed.
Michael "all that you mention is with out doubt correct "
Sorry Michael, don't agree, see my comments below, these problems will pass.
"when it comes to New Zealand one senses so much pessimism"
Silly comment. I'm sure there are plenty right now wishing they had been more pessimistic with their investments. In any case, how would this be a problem for a foreign investor? I would have thought that having to compete for opportunities against a lot of over enthuiastic optimists would be a disadvantage.
Relax, you're worrying about nothing Bruce.Once this property price correction is out of the way the market is well capable of scraping the funds together to develop sections and commercial property developments. The actual home building is funded by the new owner so development costs are not huge and can easily be funded by private equity, collaborations with the land owner, that type of thing, with low levels of debt required.
This will not happen until we have a rising (i.e. low risk) market, so at least four years out IMHO
The first one you have to get rid of is Mr Bollard who is about to turn the country in a comunity of traders, that alone will damage NZ beyond recovery, does he have in mind some sort of Sunset Boulevard of financial institutions? it's insane... The Hub...........bard.
A bit early for the rest home to let you onto the pooter isn't it Rob...turn on the one grey cell left standing and ask it why the Fonterra news came out a matter of hours after the SCF QE decision pulled the rug out from under the Kiwi.....then go read that link I posted.
Check back many months and you will read where I said commodity prices would shoot higher as the US toilet paper got used up...now have a look at copper prices....get the picture?....punters are running for the high ground away from the danger.
Hi Bruce: You have mentioned foreign investors, here is my problem, your Central Banker's mantra is a lower NZD ... OK .... Lets say I am a foreign investor and I am sitting here in the distance and my currency is sort of protected against inflation and things are going well. Do you think that I am going to convert to a currency that is openly being devaluated ?. I'd have to be out of my mind. Because Mr Bollard works 26 hours a day to sink your currency so in the very same minute I turn to NZD the clock starts to tick against me, in a day traders life that is acceptable because he thinks that he will beat the ods against him by being fast in and out of the market but when you are faced with goods such as a house or a farm the numbers just won't add up... The only investors that you might get are yellow black market money launders, not exactly the elite of the financial world. Sorry.
Well, the following just shows what a load of rubbish this article is.
"What New Zealand lacks is a pool of local capital available to invest into property development." WRONG
As I posted earlier the market will find away to find investors if there is a dollar to be made.
" the project will proceed as a joint venture between Todd Property and Wellington development company Willis Bond, with the NZ Super Fund providing part of the funding.
The fund's contribution is likely to be channelled through Willis Bond Capital Partners, a private equity fund specialising in property-based investments.
Flat Bush will eventually be home to 40,000 residents and Melview had the contract to design and develop its 17ha Town Centre – a mix of residential, commercial and cultural facilities"
http://www.stuff.co.nz/sunday-star-times/business/4093521/NZ-Super-buys-into-1b-new-town
And besides, in case you hadn't noticed Bruce, we operate a debt based money system. All that's needed is a willinness to borrow the money into creation.
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