Over the past few years, Grant Thornton New Zealand’s Tim Downes has acted as Receiver for some of New Zealand’s largest property development collapses including the Soho site in Ponsonby, Auckland ($95 million owing to secured creditors); Gulf Harbour, Auckland ($156 million owing to secured creditors) and stages 2 and 3 of Kawarau Falls, Queenstown ($118 million owing to secured creditors). With these receivership assignments now either completed or in their final wash up phase, Downes can see signs of life in the property development scene.
The lack of property development in recent years that has led to severe housing shortages, particularly in the Auckland market, coupled with the fact that banks are awash with cash, points to the dawn of a new property development era.
Tim Downes, partner, Advisory Services, for accounting firm Grant Thornton New Zealand Ltd, said that the current low interest rates also enhance the feasibility of well thought out business projects.
“The fundamentals for property development now are what they were before. Is there a market for the project? Is the pricing right?
“Because there is a shortage of housing, particularly in Auckland, a well thought out residential development proposed by an experienced developer who has good funding relationships will be attractive to banks.
“A good example of a successful, well funded residential development is Todd Corporation’s “Stonefields” development in Mt Wellington, Auckland,” he said.
But who will drive these new developments? According to Downes, there will be some new faces, and there will be some more familiar names, even those who may have failed in the past.
“While some failed property developers are unlikely to get support from banks, all is not lost for others. The current climate provides a good opportunity for a new wave of developers and some of those who have been involved in failed projects in the past may still get bank support if the project is right.
“From my experience, even if a particular property investor/developer has cost a bank money in the past, the same bank may still look favourably on them, depending on how they handled the situation.
“Any development requires some crucial feasibility work based on estimates of costs to build, sales timetables and sales prices. If significant negative unforeseen events occur, loan repayments may not be made in accordance with bank agreements.
“If less than optimum communication takes place between lender and developer in this situation, internal banking protocols often lead to lenders quickly coming under pressure to take pre-emptive recovery action, such as the appointment of Receivers. Not sure if these two paragraphs needed
“It’s important that when the pressure comes on, borrowers give reliable information. Funders tend to have long memories, therefore, it is necessary for borrowers to get on the front foot and not leave banks guessing. How a borrower handles the tough times will often determine whether a bank will finance them again.
“Banks will be looking back at circumstances where the bank has had to take a large write off. If they see a failed borrower who is living a pretty ‘full' life, complete with luxury cars, boats and houses, a bank may be provoked into forcing the borrower into bankruptcy.
“Conversely, if a borrower is saying …’here is my house, here are my other modest assets, I am not living a flamboyant life, I don’t have other assets hidden in trusts’ – a bank would be less likely to enforce bankruptcy.
“So, the message is clear. If a developer has been involved in a failed project which has cost a bank money and wants to stay in the property development game, it will be vital for that developer to have kept his/her reputation intact with potential funders.
“When times come good again – which is not far away, if a ‘failed’ developer has been seen, in the past, to have worked with the bank – typically to assist in minimising the bank’s losses, and the bank thinks the developer is a quality operator, there is no reason why that bank would not do business with that developer again.
“However, if a developer blotted his copybook severely enough, the consequential reputation damage would be such that the developer would be unlikely to obtain funding for future projects,” he said.