What could changes to our earthquake-prone building systems mean for you?

But the biggest change yet might be the proposed amendments to our earthquake-prone buildings (EPB) legislation. The potential new system aims to make EPB rules more proportionate and risk-based, as well as reducing some costs; MBIE is forecasting savings of $8.2 billion.

Currently, a building is rated earthquake prone if it falls below 34% compliance with the New Building Standard (NBS) or poses a threat if an earthquake strikes. The new system would instead use a flowchart-style decision process based on a more holistic view of a building. It would consider seismic zone, building type (height, shape, materials) and the presence of as-yet-unspecified ‘significant vulnerabilities’.

Auckland and Northland out, basic brick in

The proposed new system would remove a whopping 55% of buildings from the current EPB register. Any building in Auckland, Northland or the Chatham Islands would no longer be rated as earthquake prone. In addition, any building below three storeys not made from unreinforced masonry (typically traditional stacked bricks) will probably be excluded.

However, some buildings that were previously excluded may now be rated as earthquake prone. This looks set to include all buildings made from unreinforced masonry, and all buildings over three storeys unless they are proven to be not at risk. This means more buildings could end up on the list, which is clearly not the intent, and depends on the as-yet-developed detail of the legislation.

And of course, just because your building’s earthquake rating changes overnight, the building itself remains structurally just as strong (or weak) as it ever was. For example, a high-risk building in Auckland should still be remediated, while a single-level brick farm outbuilding remains a low-risk proposition. One of the enormous challenges of this type of legislation is that many buildings in NZ have been designed to suit unique circumstances, often requiring individual assessment to deal with their non-standard design.

Remediation could suddenly be a lot more affordable

There’s one part of this proposal that will have some building owners cheering: the seismic strengthening upgrades will no longer trigger additional upgrades. Currently, if you apply to strengthen your building you will likely be required to complete upgrades for accessibility and fire safety.

For older buildings, this can be so eye-wateringly expensive that it can effectively render the building a write-off. The fire upgrades alone can incur significant costs, like a hotel constructed in the 1950s for example. Owners of an estimated 1,440 older buildings would likely see their remediation costs fall dramatically, potentially moving earthquake strengthening from ‘ruinous’ to ‘feasible’.

The Mum and Dad investors with commercial buildings who are stuck in limbo can also move forward confidently with staged upgrades for seismic, fire, and accessibility.  They no longer face the risk of being forced to do all the upgrades at once at an unaffordable cost because a simple seismic strengthening project needs a building consent. The new system should encourage common sense risk-based building investment decisions.

Another 840 earthquake-prone buildings will have no mandatory requirement for remedial work, which gives owners plenty of time to assess their risks and decide on a course of action. MBIE estimates that only 80 buildings will still require a full retrofit under the new system.

How could this affect rents, values, insurance and lending?

For many owner-occupiers the picture is straightforward: these changes are intended to either remove any need to remediate, or make it considerably cheaper, so this is a win. The value of their building could potentially increase if a looming EPB remediation deadline suddenly vanishes.

For prospective buyers, a lower cost of remediation or the removal of the remediation requirement could make buying a former EPB more appealing. Will the buyer be able to borrow more against the building than under the current scheme? It remains to be seen how lenders might respond to these changes.

It is hard to say how commercial tenants might respond. Although it won’t change a building’s actual risk, no longer featuring a big ‘Earthquake-prone Building’ sticker by the front door certainly looks less foreboding. Markets are predicated on perception, so without this sticker, it’s likely a building will attract a tenant more easily. However, large and sophisticated tenants do their homework. They will not be prepared to move their staff into a high-risk building, regardless of whether or not it has an EPB sticker on the outside.

Ultimately, the market will take time to settle into the new system and find a new equilibrium.

Thinking about what this means for your building

For owners of large portfolios of buildings, including the Government, councils, and various other organisations, this could be a positive change. Hopefully this will remove the need for sudden evacuations of schools or hospitals, especially when only one small area of a building is deemed to be high risk.

One sizeable question mark hanging over the new scheme is what will constitute ‘significant vulnerabilities’. MBIE is working towards defining them, and these decisions will be crucial, so we look forward to getting more detail.

The proposed scheme may cause problems for owners of small brick buildings, such as churches and community halls. However, mitigating factors like low occupancy, small size and other factors could possibly allow the status to be addressed with risk management tools. Again, only time will tell.

If you own a building that will be affected by these new rules, it might be helpful to start a conversation - it’s also a good idea to start sooner rather than later as there’s no clear indication of when the proposal comes into effect. For example, get a structural engineer in to talk about the topic at your next board meeting, or just talk through your building’s details with an engineer so they can provide an overview of potential actions. The proposed changes are a good idea, but there remains a huge amount of uncertainty to be ironed out before we’ll see any benefits materialise.