Kāinga Ora's 'huge upfront payment' clinched its purchase of Ferncliffe Farms

Finance Minister Grant Robertson was warned about an increased risk of public funds "maintaining or increasing urban land prices rather than reducing them". Photo / Getty Images

The Government's winning $70.4 million offer for rural land known as Ferncliffe Farms trumped private sector bids because it constituted a "huge upfront payment" with no conditions to mitigate risk, sources close to the process have told the Herald.

The 95-hectare rural property on the fringe of Tauranga City requires rezoning by the local council before it can be developed for housing.

The highest private sector bids for the property entailed payments structured over a number of years, with final payouts triggered by milestones including council agreement to rezoning and reaching financial terms for infrastructure connections, including waste, drinking and stormwater.

Such structured deals are a common way in which developers mitigate the risk they take that local councils will refuse or delay the rezoning of rural land and render it unfeasible for development inside a particular time horizon.

However, the government housing agency Kāinga Ora forewent such risk mitigation in its purchase of Ferncliffe late last year.

In order to outbid private sector developers, the agency obtained two valuations for the land, both of which were likely to inflate its value, and one of which made the "significant and special assumption" that rezoning was already achieved.

Critics, including opposition parties National and Act, say the case illuminates how the Government is using taxpayer funds to bid up land prices, unnecessarily baking additional cost into the "affordable" homes it hopes to build.

Housing Minister Megan Woods insists that taxpayers were protected from overspending. Photo / Michael Craig

That's a risk that was identified to the Government when it created the new Kāinga Ora "Land Programme" through which the Ferncliffe purchase was made.

In July 2021, the Treasury advised Minister of Finance Grant Robertson that the programme would overlap considerably with other government housing initiatives and was likely to "increase the risk of public funds maintaining or increasing urban land prices rather than reducing them".

The Treasury also warned that the programme was likely to increase the cost to taxpayers of state involvement in housing development even as it produced "reduced visibility of public support".

When that briefing landed, Kāinga Ora had already signed a conditional contract to buy Ferncliffe for $71.4m, although the Land Programme design and consultation was still unfinished.

The programme provides Kāinga Ora with $2 billion of borrowing headroom. However, the carrying cost of purchases, including interest and rates, are borne by the Crown. Any losses incurred in developing the land will also be borne by the Crown.

In an effort to ameliorate the high valuations, the agency ultimately renegotiated its original offer lower by $1m, a modest reduction of 1.4 per cent.

As the Herald reported previously, Kāinga Ora's land valuations were not a reliable gauge of market value.

One, provided by Telfer Young, expressly warned that it was based on the special assumption that the land had already achieved rezoning (which it had not).

The valuation, which provided a value in the range of $72.2m to $74.8m and was released under the provisions of the OIA, warned: "Due to the significant and special assumptions made to determine our valuation as proposed, we reiterate the value provided is not the current market value of the property, but rather a hypothetical value on the assumption the property has an underlying residential, open space or escarpment zoning and is ripe in parts for residential development."

A second valuation of $68m, supplied by Property Solutions, was based on 45 hectares of developable land, some 30 per cent more land than subsequent engineering work identified as usable land.

Briefing documents, also obtained under the provisions of the OIA, show that officials repeatedly warned both Megan Woods, Minister of Housing, and Robertson, before the sale went unconditional, that neither valuation obtained by Kāinga Ora reflected market value.

"Neither of the two valuations reflect the true market value of the site ... Based on what is assumed in the valuation reports, Kāinga Ora appears to have offered over market value, not having priced in the significant development risks and uncertainties and forgoing the opportunity to capture value uplift," Ministry of Housing and Urban Development officials wrote.

Officials also warned that neither valuation factored in a wetland remediation cost estimated at between $10m and $24m. The Ferncliffe land is bounded on one side by the Wairoa river, and much of the parcel falls within the river's floodplain.

Nevertheless, Woods defended the price last December and insisted that taxpayers were protected from overspending because the government's housing agency was bound by a protocol that prevents it from bidding more than 5 per cent above its valuations.

She told parliament on December 7 that the $70.4m price was "at the lower end of the valuations", though she did not mention the considerable caveats to those valuations that officials had advised her of.

Asked last week about the valuations, Woods said Ferncliffe represented "enormous strategic value" and that it is expected to deliver "approximately 1000 new homes, including market, affordable and public homes".

Winton CEO Chris Meehan was gobsmacked at the price paid for Ferncliffe Farms. Photo / Supplied

Private sector developer Winton, whose CEO Chris Meehan wrote three times to ministers last year to object to Kāinga Ora's "uncommercial purchasing practices", also said it had planned to develop some 1000 new homes on the site.