Key Points:

Auckland needs more homes. So why aren't developers developing? When demand is high, Economics 101 suggests that developers would be building every house New Zealand needs. The trouble is the risks and roadblocks involved mean that developers' interests are nowhere near aligned with the wants and needs of politicians and the public.

THE NUMBERS

The hard cold figures are that Auckland needs another 35,000 houses currently, according to Treasury. The Unitary Plan notes that 420,000 more houses are required to meet demand by 2045, which is 15,000 completed year on year. These are stark numbers, says property strategist Leonie Freeman, a director of Goodman Property Trust who has worked for Auckland Council, Housing New Zealand, the government on a social housing review and also the Hobsonville Land Company. While politicians may say they have the answer (especially in an election year), the real issue, says Freeman, is a huge disconnect between the public, private and NGO stakeholders. They're all working hard, she says, but within their own housing silos. Developers, banks, the Government and many other organisations involved in the property cycle have different agendas and time frames. Aligning those stars is a tougher call than any one player can solve, says Freeman, especially when sometimes the players appear to speak foreign languages to each other. One of the big misconceptions, says Freeman, is that being a developer is a golden path to easy riches. Developers can go bust easily. Look back to the global financial crisis, points out the Property Council New Zealand's chief executive Connal Townsend. All too many big names just disappeared. Yet it's these developers that build the medium-to-high-density housing that are in extremely short supply in 2017. Risk is a big part of the property development game. In a general sense, the risks are both site-based and general, says Graham Squires, associate professor in property at Massey University. The first set of risks are specific to the developer and the site. Then developers face a range of general risks, which include: • planning costs and the risk of whether planning will be granted • wider professional fees • construction costs • sales and marketing costs • the cost of borrowing • the political climate • economics and the property cycle • technology and material costs • environmental sustainability and natural disasters • legal issues such as land title issues. Profit is even a risk, says Squires. Developers plan for 15 to 20 per cent profit. But if the process turns to custard, they may as well have put their money on the roulette wheel, or at least in less risky asset classes such as shares.
"I think at the moment there is an opportunity for the Government and council to plan to act in a more counter-cyclical way. Developers see the risk of a turn in the market."
Leonie Freeman
The timing of the development is hugely important and can affect many of these risks. It can take years between conception and moving-in day for the buyers. In the meantime there can be natural disasters, changes in policy, turns in the property market, restrictions on borrowing and a whole host of other third-party factors. Property developers aren't one homogenous beast. Freeman divides them into four general groups: big government projects such as Hobsonville and Tamaki, large-scale medium to high-density housing projects, private large land/housing blocks such as Stonefields and Long Bay, and then smaller scale developers of up to 10 properties at a time. Each faces its own set of risks. A small new developer, for example, may have much higher bars to reach to get funding. A large scale developer has a greater public policy risk.

DO IT YOURSELF

With home buyers being let down by the Government and developers, Shaun Taylor, marketing manager at Signature Homes, says people aren't waiting any longer. They are building homes themselves. "Franchises, particularly in Auckland, are starting to talk to customers about their development options under the unitary plan, and are seeing the emergence of mum and dad developers. "This is good for Auckland as it will help with the housing shortage, and it can be good for Aucklanders who are in a financial position to do so, but there are a number of considerations and risks that need to be thought through for first time developers," he says. "It is more complicated than your standard property investment - and, while there are significant gains to be had in the current market, there are significant risks also, so who people choose to partner with is incredibly important." The skills, build quality and product risk make up an "evil troika" of risks that are causing particular concern for developers currently, says Townsend. The risk is that one or more of these "evil sisters" leads to the project failing compliance. There is a critical lack of skills on the ground with such a lack of numeracy and literacy skills that individual workers may not be able to calculate, for example, the right amount of concrete to lay or the ability to read warning signs in English, says Townsend. This can affect the build quality. On the product front, Townsend cites steel. Stories of substandard steel being used in large projects have hit the headlines in recent years and faulty steel can prove disastrous for a development.

DEVELOPERS HOLD THE CARDS

While local steel is good, says Townsend, and some overseas steel is even better, there is substandard steel also finding its way into this country. "Auckland Council compliance people are reporting a one third failure rate of new buildings," says Townsend. "That is gut wrenching. Imagine if one in three Toyotas (coming off the production line) was a dog." It is a popular trope, he adds, that property developers are slightly suspect. The reality is, however, they are the victims. "This type of thing terrifies developers." Sometimes a single risk factor can be enough to make or break a development. Townsend cites the example of an Auckland City Council decision around 2006 that required central city apartment developers to pay a development levy towards public spaces. "It had a catastrophic effect," says Townsend. Developers disappeared overnight. Too often clever ideas such as this by local and central government kill off the goose that lays the golden egg, he adds.

FINANCE

One of the huge barriers to property development can be getting the finance. Property development is risky, which is a problem for banks' prudential requirements. They can't hand out money to every would-be property developer even if they wanted to. It's not surprising, therefore, that some developers are struggling to find finance. In recent months buyers of several apartment developments have been asked for more money a result of an escalation in construction costs and sometimes finance requirements. Auburn Developments wrote to clients, the New Zealand Herald reported, saying that development finance was "virtually unavailable" in New Zealand. Townsend says that good developers whose balance sheets are strong are still able to get funding. "It's easier for established players," says Townsend. "If you are a relatively new entrant, you are going to find it harder." BNZ economist Tony Alexander also noted late last year that bank lending to property developers had slowed. "This reflects a prudent risk management approach, brought about by awareness of what usually goes wrong every property cycle - too much bad building by inexperienced operators selling too many apartments off the plan to people who fail to settle," he wrote. Development is being slowed, added Alexander, because banks would only lend largely from money that was freed up when existing developers completed their projects. "What this means is that growth in the supply of dwellings in Auckland will be slowed down through lack of finance to property developers." Financial adviser Stephen Robertson, of My Money, who works with developer clients to fund projects, notes that the banks' preference currently is for funding projects where there is a minimum of 30 per cent equity contribution, to existing clients, profit margin of at least 25 per cent and pre-sales that covers the amount to be borrowed. He says that on a macro level, the banks are tight on lending criteria and in some cases, have openly declared "we have hit prudential limits on certain areas of development". Alternate sources of funding such as finance companies and private funds are under pressure, says Robertson. Some creative solutions were being found to the problem. "We even have hedge funds from Australia looking to get involved as cash from Singapore is looking for better returns on investment."

THE SOLUTION

Every man and his dog has a solution for the Auckland housing crisis and the lack of development. That ranges from banning non-residents from buying anything except new homes to large-scale government building and a lot in between. The idea of the Government building housing en masse as it did in the 1930s would leave some people thinking "Yeah right, that's not going to happen". But John Tookey, professor of construction management at AUT believes strongly that a modern take on mass state home building could work. At the moment no land developer or builder is going to build faster than they can sell, says Tookey. If they did, they'd be cutting their own financial throats. So they drip-feed properties onto the market to keep prices high. What's more, there's a drag effect. Tookey was in Riverhead when interviewed, surrounded by consented land that wasn't being built on, despite the huge housing shortage and rapidly inflating prices in Auckland. Private enterprise isn't going to solve the problem. Tookey argues that steps need to be taken to compel the industry to build en masse outside of the normal market delivery rate. That, he says, would involve the Government working with a big housing developer and incentivising it to produce houses on a large scale to a timetable. The second leg to the solution would be to get the speculators out of the property market by targeting an incremental capital gains tax according to how many properties each investor owns. Tookey's idea involves government, council, or co-owned housing built for low-income households. "An artificial 'glut' of housing would force down rents in the buy to let (investment) property market throughout the city," he says. The AUT lecturer said in a briefing paper that if New Zealand leaves matters to the free market it will "continue to be stunned by the inconvenient fact that the market will act in its own best interests: land banking; rationing land release to keep prices high; and building large and expensive homes whilst ignoring demand at the bottom end of the market". Freeman's answer is getting everyone around the same table for a "collective impact" approach that uses a framework to tackle entrenched and complex problems. "There is no hidden agenda," says Freeman. "I know all the players because I have worked with them. I'm just concerned." The framework, designed to provide a vision and a mechanism for delivery, was unveiled in October but to date the Government and Auckland Council haven't responded. Wellington Council, however, has shown interest. The collective vision approach does work, says Freeman. It has worked overseas and worked in Hamilton with The People's Project, which was designed to end homelessness in that city and has so far homed 843 people. She believes that the Government can take steps to mitigate the impact of a turn in the property cycle. "I think at the moment there is an opportunity for the Government and council to plan to act in a more counter-cyclical way," she says. "Developers see the risk of a turn in the market. "This can impact future volumes of houses being undertaken. But we have this huge demand for additional housing. We can only solve that by doing it together." Steps the Government and council could take include: • underwriting some projects for social or affordable housing • greater clarity on the future pipeline of government and council projects coming through • flexibility with payment options such as making payment for government and council land at a later stage of the project - not the beginning. Townsend doesn't believe that the Government should underwrite housing development. "You corrode the free market." But there are other ways for it to help. The Government can take other positive steps to encourage development. He cites the example of Hobsonville where the Government has been successful by preparing a master plan for an area and carrying it through in a sustainable way.