Property editor of the NZ Herald

Dumped apartment projects: Building costs skyrocketed 20 per cent

An artist's impression of the axed Flo Apartments project.
An artist's impression of the axed Flo Apartments project.

Building costs 'skyrocketed' an eye-watering 20 per cent at the now-axed Avondale apartment project in the last year, its developer has revealed.

Jon Sandler, planning the 91-unit Flo apartments, disclosed the scale of change between planning the big new scheme last year on a Special Housing Area and finding out precisely how much it would cost to build later this year.

"Since the genesis of this project, construction costs have sky-rocketed in Auckland. Obviously you leave a contingency in forecasts for some cost increases but we're talking up to a 20 per cent increase in costs here. That's simply not viable on a project of this size," Sandler said.

"Plumbers are now charging up to $120/hour. It's also the price increases of gib board and concrete and we've got a duopoly in the building sector in New Zealand," he said.

Those rises, combined with more restrictive bank lending, killed the project in which many first-home buyers planned to purchase.

"I'd say 50/50. Both factors are not unrelated. There are a very limited number of construction companies in New Zealand capable of building a site of this size. Due to the Christchurch rebuild and the level of apartment and general construction in Auckland right now -- just check out the skyline for cranes -- construction company resources are stretched and build prices reflect that accordingly," Sandler said.

"I personally obviously made no money from this project -- quite the reverse."

But the bank lending changes took him by surprise and were only recent.

"Funders show an expression interest before a project goes to market so that a developer knows whether to start sales, which we obviously had. But of course this is always subject to change and in this case banks have altered their positions significantly in the last two to three months," he said.

"New Zealand banks are governed out of Australia. The Australians are very nervous about property given what has happened in the market there and have advised New Zealand to stop lending on this type of development, which has resulted in a number of banks with totally bankable profitable deals unable to progress," he said.

Phil Twyford, Labour housing spokesman, criticised PM John Key saying first-home buyers should consider apartments.

"It is time the PM gave up his day job as an investment adviser for desperate first-home buyers, and started implementing some serious policies to fix the housing crisis. He is standing by his advice, after news that 35 apartment projects have fallen over, and thousands of planned apartments are not going ahead," Twyford said.

"He can't find anything else to say that might give people hope," he said. "[Young Kiwis] want to see a crackdown on speculators and a ban on foreign buyers. They want a Government serious about building large numbers of high quality affordable homes for first home buyers," Twyford said.

One of the main causes of so many development projects being scrapped in the past two months is the freeze on bank funding.
Alan Goldman, Jade Falcon financial analyst

Bruce Patten, a mortgage adviser of LoanMarket, predicted more developments would be "canned" and cited Reserve Bank warnings to trading banks about funding developments.

Kevin Lawrence said he paid a deposit on a $950,000 Flo apartment but his lawyer had warned him against buying off the plans.

Chinese pulling out of Sydney off-the-plan apartment deals has been cited as spooking the banks. That has an effect here as those Australian-owned banks operate here.

Alan Goldman, a financial analyst of Jade Falcon in Auckland, blamed lending practices.

"One of the main causes of so many development projects being scrapped in the past two months is the freeze on bank funding. On July 31, banks responded to a Reserve Bank warning on overstepping prudential limits on property development lending and virtually stopped financing such projects. Very few, if any, developers will be able to access funds until the banks have re-assessed their prudential limits. This may only be well into the New Year," Goldman predicted.

- NZ Herald

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