Archive | Finance

Council approves initial budget advance for HQ cladding repairs

It took Auckland Council’s finance & performance committee 50 minutes yesterday to decide to bring $4.7 million of budgeted maintenance on its new headquarters building forward to remedy cladding issues. The work is expected to take at least 18 months.

The time taken to deal with what seemed a straightforward issue wasn’t altogether surprising, considering the council’s governing body took 6 hours the day before to conclude that a process decision excluding consultation on a unitary plan zoning change was plain wrong.

The cladding presents serious dangers to visitors to the building at 135 Albert St, on the corner of Wellesley St, but most of the debate was on peripheral issues – the council should sell the building, the council shouldn’t have bought it in the first place.

That might have made Cllr Cathy Casey’s joke at the end of the debate all the more pertinent: she noted that corporate finance & property general manager Kevin Ramsay had said in his presentation the council was responsible “for the safety of staff, tenants & visitors to the building & surrounding area” and, in his report: “Health & safety for staff, tenants & the public has been at the forefront of the actions to date.”

Said Cllr Casey: “What about the councillors?” I’m sure there was a general shrug of the shoulders around the back of the chamber.

The council bought the former ASB Bank Centre from Brookfield Multiplex for $104 million in 2012. It’s since spent $25 million directly on fitting the premises out and another $28 million on additional works, all budgeted for.

The additional works have included building plant & lighting system upgrades (LED introduced), and $4.2 million was set aside to deal with known issues with the building façade.

Mr Ramsay said nothing in the due diligence investigations in 2012 or in subsequent examination identified structural stability issues or weathertightness concerns, and there was “a low likelihood” of anything falling from the building: “The issue is around the stonework cladding and how it is fixed to the building.”

Invasive examination by Mott MacDonald in 2013, including removal of some stone at the podium level, identified quality issues in relation to the fixings, including:

  • non-standard fixing design
  • insufficient, missing or loose bolts & pins
  • inadequate or missing packing, which meant the pins were supporting the weight of the stones
  • some deflection in the fixings, support rails & stone
  • corrosion in bolts & support rails, and
  • some stone had no mechanical fixing, and was adhered using epoxy with an uncertain lifecycle.

The budget advance is to make the cladding safe, including enabling works. The first part of that exercise will be to hang scaffolding at the top of the 29-storey building to stop anything falling, and a working platform over the podium to capture anything falling before or during project works.

The peripheral issues

Cllr Christine Fletcher said the 2012 purchase was hotly contested and that buying a 25-year-old building was questioned: “The best thing to do would be to sell that building. Obviously you have to do the work. We now have this dilemma. I’m only raising it because I don’t want to see the same thing in the future. I’d like to see us sell it and see some new information relating to procurement.”

Mr Ramsay: “At the time a full business case was undertaken. The valuation was significantly less than the other option at the time. We do know the valuation of the building has gone up, we know people find it an attractive building. Part of the task now is to look at our property portfolio and see where we go. It is functioning very well for what was intended.”

Cllr Fletcher: “One of the smartest things to do would have been to put in smart lifts.”

Mr Ramsay: “It is something to be looked at. At the time, there was concern about spending any more money.”

Cllr Chris Darby: “I personally don’t feel it’s worth relitigating the purchase. This is potentially an enormous problem because we don’t know what’s in behind yet. Let’s sight the warranties. That legal redress is quite important.”

Mr Ramsay said the building was unlikely to have a 25-year warranty on the products, but staff would exhaust the warranty liability issues.

Cllr Callum Penrose was one who’d changed his mind on the purchase: “I said at the time we didn’t have a full list of assets. We shouldn’t have bought the building. Since then we’ve moved 3 buildings into one. The shortage of office space in Auckland now, I know the chief executive has had an offer from a company in Europe to purchase it. A building of that size & where it is, you’re going to have costs. We’ve just got to get on with the job.”

Cllr Dick Quax noted that “there still seem to be quite a few unknowns about this. This is not going to be cheap by the look of things. We just have to suck the seed.”

Cllr Quax thought the latest valuation on the building was $133 million, but Mr Ramsay said that was the valuation for rating purposes. It had reached $150 million in 2014 and was due for revaluation in 2017.

Cllr Mike Lee said he’d never supported buying the bank building or the move away from the civic square: “I would put this up, I’m sure we could get a reasonable price especially with the city rail link [an entry to the new Aotea station will be a short distance from the Albert St building’s door], some uplift there.

“But I think some mistakes buying this building, moving away from the civic square, the best approach is to sell it to the private sector, move back to the civic building and if extra accommodation is needed do some work around the land we own on the civic square.”

Cllr Ross Clow expected the value “will be well above $200 million at the moment”. Given present international economic conditions including negative central bank interest rates around the world, sale could be timely.

Deputy mayor Penny Hulse said this would be raised when the council discusses its asset sales review.

Comment: After all that, one question that eluded the councillors was the time it might take for the council to grant itself resource & building consent for the work. You might think a quick decision would be automatic but, as the owners of many other buildings around the city have discovered with cladding problems, the solutions are not often simple – and liability precludes haste.

Image: The view from the old civic administration building across the Aotea Centre to the ASB Bank building before the council bought it in 2012.

Earlier stories:
22 February 2016: Council HQ cladding fix turns into a major
19 July 2012: Council confirms it will buy ASB Bank Centre

Attribution: Council committee meeting.

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Council annual plan consultation starts next Monday

Auckland Council’s annual plan will go out to public consultation on Monday 15 February with a proposed overall increase of 3.2%, although it could still be cut to 2.5%. The closing date for consultation has been extended from 15 March to 24 March.

The council’s governing body adopted supporting information for the consultation process and the draft operating plan today, with some last-minute tinkering.

The consultation document & feedback options will be on the council’s Shape Auckland website, its Our Auckland publication will contain a summary, and the council will hold 27 Have your say events around the region (all listed on Shape Auckland). It wasn’t finally determined if large-print documents would be available, which Cllrs Cathy Casey & Wayne Walker had advocated.

Local board briefings & workshops will be held from 13-28 April and the council’s finance & performance committee will hold discussions with the boards, plus briefings & workshops from then until 11 May, making a decision on 13 May.

The governing body will meet to adopt the final annual plan on 30 June.

Cllr Ross Clow, who put forward an alternative to the mayor’s annual plan & rating proposal last year based on a 2.5% overall increase, questioned going out to consultation with a 3.2% increase proposed when nobody round the council table had any intention of the rates hitting that level.

Mayor Len Brown said that, ultimately, he hoped to move a 2.5% increase “justified by our reading of the balance sheet. The sentiment is there but we haven’t backed that with a resolution. Without a specific recommendation you have to go with the long-term plan”.

That 10-year plan through to 2025 has rating levels budgeted every year, and 3.2% is the figure for the next financial year, starting 1 July.

Financial strategy & planning general manager Matthew Walker thought staff had captured the spirit of the mayor direction, but said: “We think you would be jumping the gun [writing in the possibility of a 2.5% rise]. There is plenty of pressure all over the business. It could well be your interim transport levy settings that determine where the overall levy ends up.”

Link: Shape Auckland

Attribution: Council meeting.

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Propbd on Q Th17Dec15 – 1 sells at apartments auction, council consultation agreed, Quax storms out

1 sold, one passed in at Ray White apartments auction
Councillors agree on annual plan consultation
Councillor storms out over zoning motion

1.50pm:
1 sold, one passed in at Ray White apartments auction

One unit was sold under the hammer today at Ray White City Apartments’ final auction for the year, and the other property offered was passed in after the fourth offer by the sole bidder still didn’t meet the reserve. Auction results:

Alpha, 17 Vogel Lane, unit 1405, sold for $395,000, Krister Samuel & Ellen Sparnon
The Wakefield, 18 Wakefield St, unit 4G, passed in at $750,000, May Ma & Mark Li

Councillors agree on annual plan consultation

Auckland Council’s governing body agreed today on what should be consulted on when it puts its annual plan out to the public in February.

The specified options are as they were presented in the agenda for today’s meeting:

  • A uniform annual general charge range between $350-650
  • Changing the interim transport levy on business ratepayers from a fixed charge to capital value
  • Adding to the transport levy consultation an option from Cllr Ross Clow
  • Options on the Maori freehold land remissions & postponement policy
  • Reducing the differential for 50ha-plus far & lifestyle properties from 80% to 60% of the urban general residential rate, and
  • Noting that the council will also consider options in the EY & Cameron Partners reports on alternative sources of financing.

After legislative changes, the council no longer has to issue a draft annual plan. Instead, it just has to produce a consultation document outlining any proposed changes to its long-term plan, which has itself just gone through consultation. A number of topics have also already been debated by the council’s finance & performance committee.

The projected overall rate rise is 3.2% overall, possibly reducing to 2.5% if enough internal savings can be found.

Councillor storms out over zoning motion

Cllr Dick Quax stormed out of today’s meeting of Auckland Council’s governing body after mayor Len Brown refused to entertain discussion on a motion the councillor tried to put, calling for public consultation on changes that would intensify suburban residential zones.

Cllr Quax raised a point of order seeking clarification of the decision the mayor had already made pre-meeting not to accept the motion.

But when the councillor started to discuss detail of his motion, the mayor told Cllr Quax he wasn’t raising a point of order but making a speech.

Cllr Quax said it was outrageous, packed up and stormed out.

The motion, signed by Cllr Quax & 8 other councillors, called for a halt to rezoning for more intensive use until there’s public consultation on it.

The issue is before the independent panel hearing submissions on the unitary plan and will go to hearing next year. The panel is due to deliver its recommendations to the council in July, for the council to make its decisions on the plan before the October local body elections.

Attribution: Auction, council meeting.

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Council back next week to debate rates rise

Auckland mayor Len Brown moved away yesterday from his firm target of a 2.5% annual rates rise for the 2016-17 year – which he was hugely unsuccessful at achieving for this year’s rates.

He’d like to see a 2.5% rise, but said the current programme would set it at 3.2%.

And then comes the interim transport levy, to support transport programmes other than the city rail link. For this year’s rates, Mr Brown introduced a surprise levy set at fixed rates of $113.85 (including gst) for residential & farm/lifestyle ratepayers, $182.85 (including gst) for business ratepayers.

For the next year, he’s proposed an option to increase the share of the interim transport levy to be met by businesses from 14.7% to 32.7%, and 32.3% for 2017-18, calculated on capital value instead of as a fixed rate, in line with the business portion of general rates.

That’s also in line with a proposal from Whau councillor Ross Clow, who tried to introduce a more equitable transport levy for this year. Cllr Clow said his proposal would result in an overall 2.5% increase – 1.59% residential, 4.07% for business.

Orakei councillor Cameron Brewer said a levy based on capital value would hit the many businesses sitting on properties worth $750,000-2 million, which would see this levy rise 145% for them, from $183 to $450/year.

The committee agreed positions in October on 4 issues to be taken to consultation as part of the annual plan process – Maori land rates, a rural rates review, the uniform annual general charge (consultation on a range from $395-650) and the structure of the interim transport levy.

A capital programme of $1.9 billion includes $720 million for transport, $440 million for water & wastewater, $170 million for parks, sport & recreation.

The council’s governing body will consider the mayoral proposal next Thursday, 17 December.

Earlier stories:
Propbd on Q W28Oct15 – Council settles consultation points on 4 rates issues; results from 5 auction rooms
26 October 2015: Council report suggests transport levy options for consultation
26 October 2015: Paper sets out uniform charge options
29 June 2015: One vote short of chaos versus a levy to take Auckland forward
25 June 2015: Council approves rates, transport levy & long-term plan after 2 close shaves

Attribution: Council & councillor releases (I wasn’t at the meeting and haven’t seen the broadcast).

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Propbd on Q Th10Dec15 – Council annual plan, Lunn Ave sale, apartments auction

Mayor tables annual plan proposal
Lunn Ave property sells for $46 million
6 apartments sell but Spencer on Byron units passed in

2.35pm:
Mayor tables annual plan proposal

Auckland mayor Len Brown has tabled his proposal for the council’s annual plan today, at the finance & performance committee meeting. It was a late addition to the agenda.

Unfortunately I need a nap – will get to this when I come to.

Lunn Ave property sells for $46 million

The Mitre 10 Mega site on Lunn Avenue, Mt Wellington, plus adjoining tenancies have been sold for $46 million in an off-market sale. The site is made up of 3 properties on Lunn Avenue & Marua Rd.

Isthmus east

Mt Wellington

72 Lunn Avenue & 202 & 174B Marua Rd:
Features: 31,082m² site, building area of over 14,600m², accommodating Mitre 10 Mega as well as adjoining tenants including Wet & Forget, Repco, Factory Frames, Smart Marine and Transfield Holdings Ltd
Outcome: sold off-market to an Auckland investor for $46 million
Agent: Grant Hargrave (NAI Harcourts North Shore Commercial)

6 apartments sell but Spencer on Byron units passed in

6 apartments were sold under the hammer at Ray White City Apartments’ auction today and 5 – including 2 in the Spencer on Byron in Takapuna offered together – were passed in. Auction results:

The Beaumont, 220 Victoria St West, unit 3J, sold for $1.045 million, Damian Piggin & Daniel Horrobin
Nautilus, 18 Hobson St, unit 5B, sold for $370,000, Damian Piggin & Daniel Horrobin
Nova en Scotia, 18 Scotia Place, unit 2B, sold for $383,650, Ryan Bridgman & Mitch Agnew
The Quadrant, 10 Waterloo Quadrant, unit 1225, sold for $300,000, Damian Piggin & Daniel Horrobin
The Quadrant, 10 Waterloo Quadrant, unit 1619, sold for $390,000, Damian Piggin & Daniel Horrobin
Nova en Scotia, 18 Scotia Place, unit 8F, passed in at $450,000, Ryan Bridgman & Mitch Agnew
Unilodge on Anzac, 138 Anzac Avenue, unit 1310, sold for $98,000 + gst, Jean Ooi
St Mary’s Bay, 21 Hargreaves St, unit 1H, no bid, Damian Piggin & Daniel Horrobin
Takapuna, Spencer on Byron, 9-17 Byron Avenue, units 1805 & 1806, passed in $440,000 for both, Gillian Gibson & James Mairs
96 on Symonds, 96 Symonds St, unit 901, passed in at $190,000, Victor Liu

Attribution: Company release.

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Lee says consultants didn’t examine consequences once council assets sold

Auckland councillor Mike Lee, chair of the regional council when it returned Ports of Auckland Ltd to full public-sector ownership, almost sprang to the rescue yesterday of the sell-side capitalists among his colleagues.

But not quite – they weren’t going to listen to him.

Cllr Lee was one of 4 councillors, along with Chris Darby, Wayne Walker & Sir John Walker, to suggest the $490,000 of reports on alternative council financing produced by Ernst & Young and Cameron Partners were far short of adequate.

Cllr Lee was predictable in his opposition to asset sales, which were promoted by both consultancies as a way of earning income where the assets weren’t core. But he also pointed to the absence of documentation on what happens once the sale has been completed, debt has been reduced or the money has been spent on new assets or operations.

“Asset sales, don’t call it recycling please, the public can see through all of that…. Was anyone giving advice on why to hold assets?” he asked.

It ought to have been a central section of the 2 advisory reports because Cllr Lee is right on that point, councils will quickly apportion money from a sale, and soon after they will lift debt again to a level that’s allowed – the same as before but one less asset available for future use.

Cllr Lee said an income-earning asset might be sold to pay for construction of the city rail link. But then he asked, “What’s going to pay for upkeep?

“The point about this whole process (of consulting on finance) is about asset sales. Ports of Auckland is actually performing excellently. It is a genuine alternative funding scheme, as is Auckland International Airport; to sell those assets for a short-term benefit will mean we are destroying our main sources of alternative income.”

Cllr Darby was also blunt when he quizzed Wellington-based EY partner Chris Money: “We were looking for alternative sources of financing. I was struggling to find where you homed in on that question.”

Mr Money: “I guess I’d start with the first point, what you consider to be conventional financing. I’d probably start with rates & user charges. If that is then the basis on which you start, alternative financing is potentially everything other than that. There’s also the question of the mix of funding & financing across the council, between rates & user charges. There’s variations around the theme, around these different ways of funding, financing council operations. There’s sponsorship, recycling… The critical thing, the application to services is where the trick lies. For example, a sponsored bus stop, a lot of other cities use these to fund cycling programmes.”

John Walker looks at repercussions

While Mr Money steered away from asset sales in that part of his response, Sir John Walker wasn’t having it: “Many years ago Bill Birch came through the council (after he retired as finance minister), improved things by selling assets. You can’t sell them again. Basically what I see you people are trying to do is sell assets.”

Cllr Penny Webster, who chairs the council’s finance & performance committee, gave Sir John the first odd serve on that comment: “To be fair, no one is suggesting we sell assets.”

Eventually, after telling several councillors the word ‘sale’ wasn’t among the matters they were discussing, Cllr Webster acknowledged what was plain for all to see: Cllrs Cameron Brewer & Dick Quax had posted a series of amendments to get staff looking at specific issues before a councillor workshop in February. And those amendments were, essentially, to consider the degree of selldown of certain assets such as Ports of Auckland, Auckland International Airport Ltd and office space, while putting other sales – such as the Remuera golfcourse – on the back burner.

Those amendments were in due course carried 13-7.

Cllr Wayne Walker said timing ought to have been addressed in relation to selling assets: “Auckland is on a roll because of integration (of councils). The value of any assets – port & airport – is going to go up, the value of real estate is going to go up.”

Wayne Walker says wider study was needed

He said the US state of Oregon was trialling taxing vehicles according to distance travelled because electric vehicles would start reducing the amount of fuel tax paid: “I don’t see that here. There’s a very small commentary around tax increment funding when we complete the city rail link, things we could put into the mix which are very simple. I’d like to see a lot more of that.”

On the regional council’s decision to buy the rest of Ports of Auckland, Cllr Walker commented: “All that development down in Wynyard wouldn’t have happened (if Ports hadn’t been bought back). We know we can’t leave to the market a whole lot of things that are civic. One of the options I put on the table is revisiting the civic building, and reconstituting the heart, maybe pulling out of Albert St. Make that work, and I’d suggest there’s a strong economic case for doing that. We can flog off our green space but we know once you’ve done that you’ll never get it back.”

Darby says wrong time to cherrypick

Cllr Darby didn’t accept the timing of the amendments, getting staff to focus on possible asset sales before councillors return to the topic in February: “I thought the intention was to hold a discussion before we go cherrypicking.”

He said the consultants’ ideas weren’t new: “Every 5-8 years they come around and the council’s always looking for a silver bullet, but there is no silver bullet. The report topic was alternative financing, but we haven’t received that – Ernst & Young a little, Cameron Partners significantly less. I just see this as a reprise of 1980s Rogernomics. I don’t see a lot here that our organisation is not already embarking on.”

He said the council should look more closely at non-rateable Crown land – $8.7 million/year of rates foregone, while ratepayers paid $241 million/year in gst on their rates bills, a tax on a tax which wasn’t mentioned in the consultants’ reports.

Brewer amendments lead 2016 focus

Cllr Brewer said the amendments, aimed at prioritising further study before discussion next year, didn’t focus on whether the council could or should try to take control of the Auckland Energy Consumers Trust ahead of schedule, or on privatisation of Watercare Services Ltd, or on selling the council’s 1400 homes for the elderly, or community assets, particularly golfcourses and particularly in Remuera (in his ward).

“It puts focus on our commercial assets. This is all about enabling greater transport infrastructure, community assets. Politically I would see these as the lowest hanging fruit. This is about selling some of the old family silver and getting some new family silver. The proceeds (from the airport & port companies) will never stack up against the dividends we receive. Ports of Tauranga have been the best-performing stock on the NZX. Perhaps it’s time to explore that.”

Earlier story:
13 November 2015: Reports released on Auckland’s alternatives to rates

Link: Alternative sources of financing reports (as one large pdf attachment to 19 November committee agenda)

Attribution: Council committee meeting, reports.

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Local government bonds listed

The NZ Local Government Funding Agency Ltd’s 6 bond series were listed on the NZX debt market on Monday, increasing the market’s capitalisation by $5.56 billion to $19.1 billion.

The Government set the agency up in 2011, following the global financial crisis, and has a 20% shareholding. The agency was established to reduce council borrowing costs by at least 30 basis points and began issuing bonds in February 2012. 46 councils participate in its programmes, including 30 shareholding councils, and current maturities range from December 2017-April 2027.

NZX chief executive Tim Bennett commented: “New Zealand needs deep, liquid capital markets to fund business growth and drive economic development. Today’s LGFA debt listing demonstrates the progress we are making in our capital markets and our commitment to getting more ‘products on the shelves’ for investors.”

Agency chief executive Mark Butcher added: “Listing on the NZX debt market will further extend our retail investor base, provide greater price transparency to all investors and achieve best practice from a governance perspective. Listing should also help increase secondary market liquidity in LGFA bonds and assist retail investors with greater access to a highly rated & liquid fixed income investment.”

Attribution: Agency, NZX & Government releases.

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Reports released on Auckland’s alternatives to rates

Auckland Council received the reports of the 2 consultancies investigating alternative funding & financing yesterday, and councillors went into a workshop on them today. Both reports, both about 130 pages, work in a low-key way through many small possibilities and a few big ones, without a magic solution jumping out.

Asset sales are considered – mainly all or part of the council’s Auckland International Airport stake, and possibly leasing Ports of Auckland Ltd’s operations to earn more than the present dividend flow.

But the asset sale – or ground-lease increase – most likely to be attractive to non-golfers and anyone living outside Remuera was the potentially huge increase in returns from the Remuera Golf Club, which Ernst & Young’s team gave as an example of sports clubs privatising public land for private benefit.

Of course, before everybody from outside Remuera leaps with joy at this prospect, they must also recognise that the same measure might be applied to facilities in their own community.

I’ve worked through the reports of Cameron Partners (first) and Ernst & Young below, with links to the reports on the council website at the foot. Each was prepared independently of the other and, although some comparisons between ideas might be made, they’re not directly comparable.

Cameron Partners

First up, Cameron Partners provided definitions of the 2 central words in this exercise:

  • Funding is how the project will ultimately be paid for
  • Financing is the way in which the money is raised to undertake the project.

Cameron Partners said the council’s debt headroom – the capacity to take on further debt – was about $1 billion over current debt. Cameron Partners said after discussions with council management headroom of $500 million-1 billion was being maintained.

Cameron also noted that Watercare Services Ltd & Ports of Auckland Ltd were excluded from the Local Government Funding Agency Ltd covenant.

Cameron Partners said: “Our intention is to provide the council with a set of broad options with considerations & examples for each. This approach will allow the council to review and (if appropriate) prioritise certain identified areas for deeper investigation. All analysis is necessarily high level. In particular, valuations should be regarded as broadly indicative only.”

First, the caveat:

  • Auckland Council’s core business is to ensure delivery of certain key services & outcomes. We consider that it owns & controls certain assets to facilitate this and does not own assets for purely financial returns.

Then, what did they look at as possible earners:

  • Community assets, parks & reserves, golfcourses.

Potential market value of community assets is potentially much higher than current book value, but there’s no summary or analysis of the potential value in alternative use. However, parks & reserves were valued at $15-20/m² for a total $4.5 billion, whereas surround housing land was valued at up to $1000/m²: “Releasing as little as 5% of this land could potentially equate to $2.25 billion.”

Leases might prevent immediate monetisation of golfcourses, which could otherwise reap large sums. The council owns 13 courses valued at up to $61 million. “If the top 4 by market value – Remuera, Chamberlain Park, Pupuke & Takapuna – were made available for housing at the values of surrounding land, with 30% reserved for public spaces etc, the estimated value obtainable is $1.4 billion.”

Areas where Cameron Partners looked at divestment were if the council had no ownership or control imperative – simply a commercial investment earning a market return, and where a higher-value use was almost certainly available.

Cameron Partners saw opportunity for divestment of the Auckland International Airport Ltd stake (reducing it from 22.4% to a full takeover blocking stake of 10%), commercial parking (the council doesn’t use its $153 million of carparks as a policy tool, and earnings from non-cbd carparks are low), its $328 million diversified asset portfolio, housing for the elderly (the council could contract directly with the private sector to deliver) and marinas (no market failure apparent). There were numerous to contract with Ports of Auckland Ltd without owning 100%, as now, but Cameron Partners noted it was a key region asset with environmental, health & safety and cruise as important factors.

Whereas many will argue that the council should retain its assets, Cameron Partners argues that ratepayers deserve a better return from the $7 billion of the council’s total $42 billion of assets that are debt-funded.

Using the council’s borrowing rate as the hurdle rate unjustifiably favoured retaining higher yielding assets.

2 other factors made ownership preferred over alternatives. One was a focus on capital solutions rather than those that would increase expenses (eg, ownership versus leasing) because expenses were scrutinised more closely and no cost of capital ruler was applied. The other was the strong incentive not to sell assets at ward level – because proceeds typically went into the general council coffers.

On PPPs (public-private partnerships), Cameron Partners said they weren’t a funding solution: “A project without external cashflows will require public sector funding; a project with external cashflows may be capable of attracting funding from other sources.”

While PPPs don’t create financing capacity, they have the potential to offer financing flexibility: The council could lock in payment streams to provide budget certainty, it could access very long-term financing, and cashflows could be manipulated to best suit its requirements.

Cameron Partners said council outsourcing was low, and general market experience suggested potential for more. One of the reasons the council gave this year for an increase in staff numbers was that it took a number of services inhouse – reducing outsourcing.

Infrastructure makes up $26 billion of the council’s $42 billion of assets, and Cameron Partners said such assets typically didn’t attract an external revenue source that supported their value. Major infrastructure asset projects were well suited for partnership arrangements such as PPPs, but the major benefits were in procurement, not financing capacity.

Cameron Partners argued that the council should adopt an opportunity cost framework: “The decision to retain ownership of an asset should consider the alternative use of the capital involved.”

On Ports of Auckland, Cameron Partners said it was impractical to consider a sale or part-sale until the council review of the port was completed: “The uncertainty regarding business plan & valuation would likely see a material discount to value.”

Cameron Partners saw port consolidation as an issue which could be managed by retaining a share of the operations business or holding decision rights. A lease structure could be created so lese payments replaced dividend cashflows.

In its conclusion, Cameron Partners noted that the council was a large owner of office space, but said there was no strategic imperative for this: “The ownership decision appears to be based on using the council’s borrowing rate as a proxy for the cost of ownership. We believe this approach is incorrect and leads to poor asset decisions.”

Ernst & Young

Ernst & Young identified 18 general options, each with at least one Auckland Council example or case study. The first of these was to consider the golfcourses, starting with Remuera.

EY said council-provided land for sports & recreation often became the exclusive domain of the sports or community group “which creates property rights unscrutinised by the council”.

As one example, EY said: “Remuera golfcourse is a private club and the land it occupies could have a market value of about $275 million if used for other purposes. Rental from this course for the land only equates to $130,000/year. This represents a significant subsidisation to private interests and raises questions about whether at least parts of this asset – the land the golfcourse occupies – could be considered for higher value uses. A fair market ground rental for this property would likely be in excess of $16 million/year, with renewals on a 7-yearly cycle.

“We pass no judgment about whether this is the ‘right’ use of this land. However, we assert the Auckland public I likely to be unaware of the significance of this subsidy.”

EY suggested 2 other areas for investigation in the ‘asset health check’ part of its report:

Viewshafts: It asked if the opportunity costs of minor relaxation of these rules & requirements were well understood: “For example, Auckland Council recently noted the net cost of the Mt Eden viewshaft to be potentially $440 million.”

Community loans: It said there were numerous instances of sporting clubs defaulting on loans from the council: “Increased transparency would make these subsidies transparent and potentially improve consideration of how appropriate these loans & associated writeoffs are.”

EY suggested adopting Treasury’s better business case disciplines, or something similar.

It also suggested a contestable infrastructure acceleration fund, focused on investing in & financing priority infrastructure projects. It would ensure any asset optimisation programme proceeds are ring-fenced to allow benefits of asset recycling to be realised.

In its assessment of selldowns of major assets such as the port & airport stake, EY also considered council-controlled organisations (CCOs) because of their size & potential commercial value. “We have not done a full root-&-branch investigation of CCOs, but we think there is considerable value from rationalising some functions, a consistent focus on commercial disciplines and a proper alignment of incentives.”

On sale of the 22.4% airport stake, EY suggested the council “would better achieve the vision for Auckland by divesting its shareholding and reinvesting the funds in interests that better enable the achievement of the Auckland vision, including paying down debt, reducing rates or accelerating infrastructure investment”.

EY looked at the Auckland Energy Consumer Trust shareholding in Vector Ltd, now 75.4%, and suggested it could be sold down to 51%, retaining majority and providing the council with money to pay down debt, reduce rates or accelerate infrastructure. At $3.16/share, that could provide $768 million.

On Ports of Auckland, EY said if the council obtained a value of $2 billion for a lease, interest cost savings less foregone dividends were likely to be worth $414 million over the life of the long-term plan.

EY gave the Northcote shopping centre as an example of land that might be sold – leasehold, strata-titled, little ongoing investment due to the nature of the tenure. But the report also noted that the council already had rigorous processes in place for surplus land disposal.

On Watercare, EY said it was hard to assess whether the infrastructure company was truly efficient from the current operating model. To dispose of all or part of it, the council would need to benchmark and also discuss with the Government issues facing the sector.

EY considered 4 alternative funding tools & finance – sale & leaseback as a property portfolio transaction, self-funding PPPs, tax increment financing and alternative sources of funding.

Under the tax increment model, gains in future tax revenues (or fee/rate revenues) resulting from a project are pledged to cover the capital costs, typically funded through borrowings. EY used to British examples for this, the Northern underground line in London extended to support a 195ha development on the South Bank, and the Buchanan Quarter in Glasgow, where investment in transport, the public realm & cultural infrastructure were used as the catalysts for private development.

On alternatives, EY said naming rights & sponsorship agreements had some potential, the revenue potential from a bed tax was low, road tolls & rating on non-rateable land had potential, and it left the issue of a regional fuel tax to the newly formed government-council Auckland transport alignment project.

Next steps:

Cllr Penny Webster, who chairs the council’s finance & performance committee, said at a briefing yesterday (before she’d seen either report) she expected councillors & Independent Maori Statutory Board members would study the reports at workshops, first to consider non-internal options, then to look in the New Year at what the council could be doing differently. That exercise would be used to inform the next review of the long-term plan on how capital might be released.

Link: Alternative sources of financing reports (as one large pdf attachment to 19 November committee agenda)

Attribution: Consultants’ reports.

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Twyford talks ideas which unitary plan & council funding review likely to resolve

Labour Party housing spokesman Phil Twyford (above) proposed freeing up land use rules yesterday as a way to make housing more affordable.

Like many others, he focused on the urban boundary, which has proved such a controversial feature of the Auckland planning landscape because of its inflexibility, causing extreme price disparity.

But he went even further than Housing Minister Nick Smith in proposing to expropriate the role of local government: “Labour will free up density & height controls to allow more medium density housing and reform the use of urban growth boundaries so they don’t drive up section costs. This will curb land bankers & speculators.”

Unless National throws in the towel while it’s streets ahead, Labour won’t form the government until at least November 2017, and not then either unless it picks up its act.

Meanwhile, the main focus of housing affordability lobbies, Auckland, has an independent panel hearing submissions on the very topics Mr Twyford said Labour would introduce changes to. The panel is scheduled to deliver its recommendations to Auckland Council by July next year, in time for a council decision before the local body elections in October 2016 – and well before Labour would be in a position to deliver what Mr Twyford’s talking about.

The recommendations will result from submission, analysis, reflection – quite a good alternative to political posturing.

Smith on a losing argument

Housing Minister Nick Smith at Huapai, 2013.

Housing Minister Nick Smith at Huapai, 2013.

Mr Twyford’s National counterpart, minister Smith, was at pains on Friday to combat an NZ Herald report that, against the proclaimed 39,000 consents under 3 years of a housing accord with Auckland Council, only 102 houses appeared to have been built in the first 2 years.

Despite his bluster, Dr Smith can’t win the argument, which he created through his own determination to score points every time the ministerial car door flaps open. The accord is not about lifting housing everywhere but in specific locations – most commonly in greenfields, making it harder for the council to pursue its compact-city policy, also making it potentially far more expensive to provide infrastructure around the whole region instead of in concentrated patches where that infrastructure can be linked more easily.

It wasn’t emphasised initially that the 39,000 consents would include an unstated number of land consents, not just house consents, and there seems to have been a widespread expectation that houses would pop up nearly instantly, when earthworks seasons alone would dictate a lot of timing and the requirement for developers to achieve a set sales ratio would dictate the start date.

Government opts for quick sprawl points over paced strategy

Aucklanders could have opted in large numbers to reject the compact-city policy when the council wrote its Auckland Plan. Not only was that policy not totally rejected, the takeup of more intensive housing – apartments in both the cbd and now also in suburban centres, and townhouse throughout the region – is up sharply.

More Aucklanders are biking, catching ferries, buses & trains to beat the motorway congestion that has resulted from central planning failures.

At the same time, consents for standalone houses have plateaued, an indication that Auckland has less of a crisis in total stock, more an issue of supplying the right stock. It also has a serious issue with pricing because price trends in New Zealand always move out from the Auckland isthmus, initially in widening circles around the region and then out to the rest of the country (with exceptional jumps elsewhere from time to time).

The start point for the price trend just happens to be an isthmus where regeneration through more intensive development is limited by zoning – where prices were going to rise anyway through pressure of immigration, and expectations of central-area children to start their new families in or near their old neighbourhoods.

Getting to grips with realities

Labour proposed before the 2014 election building 100,000 homes for first-homebuyers, concentrated at the cheaper end to meet demand from its primary electorate. While that could attack the heaviest demand for the right stock and reduce price pressure, in Auckland the council has been contemplating the provision of infrastructure simultaneously in multiple directions to meet political demands for new homes to appear quickly.

The fact that politicians can not only be silly but voluntarily prove themselves so doesn’t help a council required to service demand. Back in 1998, Auckland’s Regional Growth Forum issued a paper on intensification which concluded that structure & integration were desirable “because too many nodal centres & dispersed intensification corridors could reduce the infrastructure & transport advantages of intensification and result in increased costs to the region”.

While Auckland Council has continued on that same policy path to intensify, Government politicians seeking quick wins have defied that purpose – and have failed to disclose any notion of how to fund dispersed infrastructure.

A funding strategy Labour can’t implement

Councils used to issue debt securities to pay for specific infrastructure projects such as water or sewer lines, which would have a definite payback from new users. That role nowadays is being conducted for most councils through the Local Government Funding Agency Ltd, which has raised $5.66 billion through 91 tenders over the last 4 years.

But Auckland is looking for multi-billion-dollar capital-raising every year to serve population growth. Although the Government & the council joined in their transport strategic alignment project this year, so at last they’ll be heading down the same track, the council has taken its own initiative on funding other capital works.

In August it hired 2 independent advisory firms to review alternative sources of financing, due for completion this month.

Mr Twyford’s proposal this weekend comes in over the top of that review but, as with the planning proposals above, is something he can’t implement. In short, he wants to see local government bonds, repaid by buyers of properties in a development.

He explained: “The other new element is changing the way we fund infrastructure for new developments. Currently those costs are either subsidised by the ratepayer or passed by the developer onto the price tag of a new home. That makes houses much more expensive. It also means they are paid off through mortgages at expensive bank interest rates.

“Our new policy will see infrastructure funded by local government bonds, paid off over the lifetime of the asset through a targeted rate on the properties in the new development. This will substantially reduce the cost of new housing.

“Reforming the planning rules will stand alongside Labour’s commitment to crack down on speculators and build 100,000 new homes for first-homebuyers. These are the game-changing reforms that will fix the housing crisis and renew the dream of Kiwi homeownership.

“National has been blaming councils & the Resource Management Act for rising house prices for the past 10 years, but have done precious little to fix the problems. Labour has the policies & the political will to get the job done.”

How to make a nuanced difference

In its 2014 policy statement, the Labour Party said: “In the 1960s & 1970s, when homeownership was on the rise, 30-35% of the new houses built were entry-level homes. Today, that proportion has fallen to just 5%.

“The Crown is the only player large enough to make a real difference to the home affordability crisis. That’s why Labour will take a bold hands-on approach to fix this hole in New Zealand’s housing market.”

However, the solution doesn’t have to be government-sized big or government-style hands-on. The present government is sometimes hands-all-over, sometimes hands-off. Both sides of the political fence have too often failed to lead or facilitate so others can deliver.

If Auckland Council can start a flow of bonds for infrastructure it can start to catch up and also start to achieve some of the cost cut Mr Twyford is talking about. Passing more infrastructure work to the private sector would introduce other finance sources, though it wouldn’t satisfy the Labour concern that builders & developers are there for the money, not for the job outcome: “The price of the homes will be set at a rate sufficient to fully cover the Crown’s costs, including land, construction & finance costs. They won’t be sold at a loss. But nor will the Government seek to charge a ‘developer’s margin’. A small 1% margin on top of the Crown’s cost of borrowing is sufficient to ensure the programme is self-funding over the long term, while still keeping the homes as affordable as possible.”

Labour’s proposals aren’t what Mr Twyford called them, “ground-breaking new policy”, but the restructuring he suggests ought to reduce infrastructure costs and lower housing costs. That doesn’t always mean cheaper houses – the nature of borrowers to go for the max often means using the savings to buy a bigger or better house if the opportunity occurs.

Links: Local Government Funding Agency
Labour Party, home ownership

Earlier stories:
30 August 2015: Council picks consultants to review finance sources
24 August 2015: Council reviews itself to make next transformation
24 July 2015: New management charts full asset evaluation for council
22 July 2015: Corrected: Councils want tax reshuffle, innovation a long way off
29 June 2015: One vote short of chaos versus a levy to take Auckland forward

Attribution: Twyford & Smith releases.

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Propbd on Q W28Oct15 – Council settles consultation points on 4 rates issues; results from 5 auction rooms

Council committee agrees consultation points on 4 rates issues – Maori land, rural, uniform charge & transport levy
More life in commercial auction at Bayleys
Childcare centre sells at 5.3% yield
5 intensive-living sales in long Barfoots auction list
4 apartments auctioned and no bids
2 bids on apartments & no sale at Bayleys

6.30pm:
Council committee agrees consultation points on 4 rates issues – Maori land, rural, uniform charge & transport levy

Auckland Council’s finance & performance committee agreed positions today on 4 issues to be taken to consultation as part of the annual plan process.

They are Maori land rates, a rural rates review, the uniform annual general charge and the structure of the interim transport levy.

The committee positions go to the mayor, Len Brown, for packaging with the rest of his annual plan proposals.

The rural rates review has potential complexity, and deputy mayor Penny Hulse recommended letting it lie so the council can have some rates stability. However, after a motion not to consult was defeated 10-9, a motion to consult was carried 11-8.

Most of the discussion on the uniform charge was about its merits as a rating tool rather than whether to consult. Eventually, the committee agreed to consult on a narrower band of levies than staff had presented – $350-600, rather than the 6 options from zero to $980 the staff had offered.

On the interim transport levy – imposed for the first time this year, with 2 more annual levies to go – the committee agreed 16-5 to a proposal from Cllr Ross Clow that the preferred option should be an increase in the business premises’ share of the levy from the 14.7% in the first round to the same business share of general rates – 32.7% in 2016 and 32.3% in 2017 – and that it be levied on the basis of property capital value rather than as a fixed charge.

The committee finished its meeting with a quick budget review report, no questions or discussion, report received.

More life in commercial auction at Bayleys

Attention shifted away from the recent skyrocketing of the residential markets to commercial at Bayleys today, with 12 sales (one prior, one post) from an auction list of 26.

Auction results:

Mt Eden, 131 Mt Eden Rd, sold for $1.34 million, Phil Haydock & Jean-Paul Smith
Grafton, 36 Burleigh St, sold for $1.795 million, James Hill & Sunil Bhana
Eden Terrace, 215 Symonds St, passed in at $2.25 million, Cameron Melhuish & Andrew Wallace
Meadowbank, 135 Meadowbank Rd, sold for $750,000, Ed Donald & Sarah Boles
Airport Oaks, 24 Rennie Drive, sold for $1.9 million, Marty Roestenburg
Papakura, 80-82 Great South Rd, sold for $2.803 million, Eddie Zhong & Damian Stephen
Albany, 3 Tarndale Grove, no bid except for vendor bid at $1.5 million, Matt Mimmack & Ranjan Unka
Wairau Valley, 41-53 View Rd, unit K, sold for $960,000, Mike Adams & Trevor Duffin
New Lynn, 18 Clark St, unit G, sold for $605,000, Grant Miller & Laurie Bell
Whangarei, 111-113 Bank St, passed in at $3.925 million, Ross Blomfield
Wairau Valley, 18 Link Drive, unit P (16), passed in at $1.15 million, Trevor Duffin & Tonia Robertson
Kumeu, 7 Shamrock Drive, passed in at $1.254 million, Rosemary Wakeman & Ashton Geissler
Oakura, 45 Ohawini Rd, no bid, Ross Blomfield
Helensville, 84 Commercial Rd, no bid except for vendor bid at $250,000, Grant Miller & Laurie Bell
Albany, 331 Rosedale Rd, unit 8B, sold for $635,000, Alex Strever & Dean Gilbert-Smith
Papakura, 55 Hunua Rd, passed in at $1.15 million, Shane Snijder & Peter Migounoff
Warkworth, Moir Hill & Matthew Rd, 320ha ex-forestry block, sold for $811,000, Duncan Napier & Dianna Coman
Tuakau, 143 Bollard Rd, sold prior for $517,500 including gst, Graeme Moore
Avondale, 527B Rosebank Rd, units 3 & 4, passed in at $1.55 million, Laurie Bell & Grant Miller
Avondale, 483 Rosebank Rd, unit A, passed in at $900,000, sold post-auction for $1 million, James Appleby & Mike Adams
Avondale, 483 Rosebank Rd, unit B, passed in at $1 million, James Appleby & Mike Adams
Avondale, 483 Rosebank Rd, unit C, passed in at $1.1 million, James Appleby & Mike Adams
Remuera, 30 Remuera Rd, withdrawn from auction, Owen Ding & James Chan
Albany, 7D Douglas Alexander Parade, sold for $920,000, Laurie Burt & Ashton Geissler

Childcare centre sells at 5.3% yield

The one property taken to auction at Colliers today – a Birkenhead childcare centre – was sold under the hammer at a 5.3% yield. Auction result:

Birkenhead, 71 Roseberry Avenue, childcare centre, sold for $2.53 million at a 5.3% yield, Peter Kermode, Shoneet Chand & Jimmy O’Brien

5 intensive-living sales in long Barfoots auction list

5 units which I’ve characterised as “intensive living” were sold out of 25 such properties on Barfoot & Thompson’s residential auction list before the last 2 sessions today. Another 7 were auctioned later. I’ll catch up with those results on Thursday.

The properties below are apartments, townhouses, suburban units and cross-leased properties, which may be houses or townhouses. The number passed in was high, and many received no bid – a reflection of an auctionroom where the Chinese interest has declined sharply. There were still 74 properties listed for sale – just a couple withdrawn or auction postponed, and 6 sold prior. Auction results:

St Heliers, 9 Sayegh St, cross-lease, sold for $1.222 million, Lynette Boyd
Remuera, 6B Dempsey St, cross-lease, no bid, Julie Fitzpatrick & Kathy Bower
Meadowbank, 140 St Johns Rd, part cross-lease, sold for $1.55 million, Michael & Tatyana Ataman
Parnell, 25 Windsor St, unit 1, cross-lease, passed in, Cindy Yu
Avondale, 9A Beatrix St, cross-lease, passed in, Jill Jackson & Emma John
Remuera, 188 Victoria Avenue, unit 2, cross-lease, no bid, Kanta Lala & Cindy Jiang
St Heliers, 27 Ashby Avenue, unit 4, cross-lease, sold for $662,000, Karin Cooper
St Johns Park, 36A Pyatt Crescent, cross-lease, sold for $1.01 million, Michael & Tatyana Ataman
Stonefields, 100 Tihi St, part cross-lease, no bid, Kelly Midwood
The Guardian, 105 Queen St, unit 616, apartment, no bid, Stephen & Leo Shin
Block 7, 39 Anzac Avenue, unit 603, apartment, no bid, Stephen & Leo Shin
St Heliers, 18 Ashby Avenue, unit 2, cross-lease, no bid, Grant Marshall
Sebel, 85 Customs St West, unit 204, apartment, auction postponed, Alex Allan & Rita Herceg
Tower Hill, 1 Emily Place, unit 2H, apartment, passed in, Stephen & Leo Shin
Remuera, 86 Bassett Rd, cross-lease, no bid, Kanta Lala
Mt Wellington, 33B Mountain Rd, cross-lease, no bid, Keith Simpson
Nova en Scotia, 18 Scotia Place, unit 2A, apartment, no bid, Stephen Shin & Yasu Ka
Hobson Gardens, 205 Hobson St, unit 8D, apartment, sold prior, Stephen Shin & Rhys Chen
Quay West, 8 Albert St, unit 2406, apartment, sold prior, Belinda Illingworth
2 Upper Queen St, unit 3, townhouse, no bid, sold post-auction, Matt O’Brien
Mt Roskill, 341A Richardson Rd, cross-lease, sold for $900,000, Joanne Yu & Christine Wooding
Titirangi, 41A Stottholm Rd, unit 1, cross-lease, no bid, Kevin He & Gail Beaton
St Marys Bay, 21 Hargreaves St, unit 3F, apartment, no bid, Luke Dallow
Western Springs, 78 Malvern Rd, cross-lease, no bid, Matt O’Brien
Mt Eden, 50 Wynyard Rd, unit 8, unit, no bid, Gary Barzilay & Antony Dai

4 apartments auctioned and no bids

4 apartments were auction at City Sales today – and not one bid was placed on any of them. Auction results:

Hudson Brown, 57 Mahuhu Crescent, unit 108, leasehold, no bid, Habeeb Urrahman
Federal City, 207 Federal St, unit 903, no bid, Habeeb Urrahman
Lister Building, 9 Victoria St East, unit 9A, no bid, Gabrielle Hoffmann
Gladstone, 118 Gladstone Rd unit 3G, no bid, Georgia Featherstone

2 bids on apartments & no sale at Bayleys

2 apartments were auctioned at Bayleys today, receiving no bid on the first and 2 bids under reserve on the second. Auction results:

Parnell, 30 York St, unit Y24, no bid, Chris Reeves
CityLife, 171 Queen St, unit 1705, passed in at $350,000, David Anderson & Hamish Duke

Attribution: Auctions, council committee meeting.

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