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Productivity Commission goes back to first principles on urban planning

The Productivity Commission said today it had taken a “first principles” approach to planning in its investigation of urban planning and what it might be. The commission issued its final report, Better urban planning, this morning.

The commission said: “This inquiry should not constitute a critique of previous or ongoing reforms to the systems or legislation which make up the urban planning system. Rather, it is intended to take a ‘first principles’ approach to the urban planning system.”

Its final report stretches to 498 pages and I haven’t read the whole document yet. Below are some of its key points and none of the recommendations. I’ll get into further detail over the next week.

The current planning system – the commission’s diagnosis:

  • Planning legislation lacks clarity & focus, and is prone to overreach
  • Too little direction & guidance from central government
  • Prioritisation is difficult
  • The system lacks responsiveness
  • Protection of Maori interests is inconsistent

What changes are needed?

  • New mechanisms & models to overcome supply failure
  • More responsive infrastructure provision
  • Better planning & better quality plans through spatial planning & reviews by independent hearings panels
  • More representative, less rigid consultation
  • Wider recognition and protection of Maori interests
  • Stronger & different capabilities & culture within councils & central government

At the end of that list of changes, the commission report says: “Central government will also need to substantially improve its understanding of urban planning and knowledge of, and engagement with, the local government sector. It will be under a strong obligation to exercise effective regulatory stewardship of the planning system.”

Central government role

Under the first heading on necessary changes, New mechanisms & models to overcome supply failure, the report says: “A clearer statute and clearer direction & expectations from central government will push councils in high growth cities to do more to meet the demand for development capacity.

“The recently published national policy statement on urban development capacity is a step in the right direction. But these councils will need more help to meet the challenge of their rapidly growing populations. That help should start with:

  • clear legislative purposes & objectives for the natural & built environments
  • principles to guide plan-making, planning processes & decision-making, and
  • systematic, independent & timely reviews of plans.

“In line with these objectives, principles & the reviews, plans should:

  • have clearer & broader “development envelopes” within which low-risk & mixed development is either permitted or is only subject to minimal controls
  • only apply rules that offer a clear net benefit, where the link to externalities is clear and where alternative approaches are not feasible
  • put greater reliance on pricing & market-based tools rather than rules
  • constrain attempts to force the creation of economic, social or environmental benefits through restrictive rules (eg, planning policies that attempt to promote density in the expectation that this will necessarily lead to higher productivity)
  • recognise inherent limits exist to what land-use planning can achieve, and give greater room & respect to the decisions of individuals & firms
  • have broader zones that allow more uses
  • make less use of subjective & vague aesthetic rules & policies, and
  • depend more on local evidence to support land use rules, instead of relying on heuristics generated from overseas studies (eg, assumptions that higher density urban areas necessarily result in their residents behaving more sustainably).”

To complement these improvements, the report says a future planning system should:

  • employ price-trigger mechanisms that credibly guarantee that councils will permit enough development capacity to meet demand at reasonable prices
  • deploy, where appropriate, urban development authorities to assemble & develop inner-city land at a scale sufficient to meet business, residential & mobility needs
  • enable councils to auction development rights as a way to achieve increased, but not excessive, inner-city density, and
  • create competitive urban land markets that open opportunities for the private sector to invest in out-of-sequence community developments. These can sidestep land bankers’ stranglehold on land supply and avoid additional burdens on councils for infrastructure.

5 critical goals

Productivity Commission chair Murray Sherwin wrote in his foreword to the final report: “As the inquiry progressed, it became clear that to make the greatest contribution to wellbeing, the planning system needs to deliver on 5 critical goals:

“First, it has to be flexible & responsive to changing needs, preferences, technology & information.

“Second, it has to provide sufficient development capacity to meet demand. The harmful effect of spiralling house prices is indicative of a serious imbalance between supply & demand.

“Third, planning systems need to allow mobility of residents & goods to & through our cities in order to get to jobs & other activities.

“Fourth, the system has to be able to fit land-use activities within well defined environmental limits.

“And lastly, the planning system needs to recognise & actively protect Maori interests in the built & natural environments arising from the Treaty of Waitangi.”

Mr Sherwin said the current system was failing to deliver on these goals:

“We can see that the system is under stress in failing not only to cope with the challenges of high growth cities, but also to protect important parts of New Zealand’s natural environment. These failures point to weaknesses in the design & operation of New Zealand’s planning system. Few of the many participants in the inquiry were happy with the current system, and many were strongly critical, believing the Resource Management Act had not worked out as intended, or needed a substantial overhaul.

“We set out what a future planning framework should look like. While some aspects of the proposed new planning architecture will be recognisable, much of it will not. We have taken the ‘blue skies’ mandate from Government seriously and offer fundamental & far-reaching recommendations for a future land-use planning & resource management system.

“We believe that following these recommendations will provide substantial benefits. Getting a planning & resource management system that is fit for purpose has the potential to deliver access to affordable housing & well paying jobs, in vibrant, dynamic & liveable cities and in a country where the natural environment is cherished & protected.”

Mr Sherwin said he and commission members Professor Sally Davenport & Dr Graham Scott oversaw the preparation of this report.

Professor Davenport is professor of management at Victoria University of Wellington’s school of management. Dr Scott is executive chair of Southern Cross Advisers Ltd, which specialises in advising on public sector reform globally. He is also a consulting director in the Sapere Research Group.

Links:
Productivity Commission, 29 March 2017: Better urban planning, final report
Productivity Commission, 19 August 2016:
What would a high-performing planning system look like?
Urban planning: What’s broken and how to fix it
Better urban planning, draft report

Related stories today:
Start with a figure you don’t know, then plan accordingly….
Productivity Commission goes back to first principles on urban planning

Earlier stories, 22 August 2016, on draft report:
Productivity Commission urban planning report blunt, measured & perceptive
Commission sees government change as essential for urban planning
Commission says everything English wanted on planning

Earlier story:
11 December 2015: Planning system is next Productivity Commission target

Attribution: Productivity Commission.

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Start with a figure you don’t know, then plan accordingly….

How many people will migrate to New Zealand this year, and over the next 5 years? Nobody knows. The Government might – ought to – have a very good idea but hasn’t been telling anybody. Immigration is a very good tool for economic uplift and therefore supports central government political incumbents – albeit this can get out of hand, as it did in 2003-04 under Labour and again in the last 4 years under the National-led government, and it has an array of mostly bad side effects that our politicians and also bureaucrats have proved they are not skilled at grappling with.

The influx – a spike in population growth – is at the heart of land planning complications.

The Government sought an answer from the Productivity Commission in 2015 and the commission responded last August with a draft report which I thought was perceptive.

The commission has released its final report today. It runs to 498 pages and I haven’t read the whole document. After I have read it all, I’ll write more about it.

But a quick read through the main points, the summary of what the commission believed it should be looking for and some of the recommendations leaves me uneasy.

The central issue

Our central issue – a migrant spike 12-13 years ago and a second spike this decade, which was stretched out as Kiwis came home from the first seriously prolonged downturn in the Australian economy in nearly 50 years – is one that can be handled better in future but is causing ongoing problems of land supply, affordability & infrastructure demand in Auckland.

It’s been exacerbated by the low cost of debt and very ready supply of credit, both locally & internationally. Without being brought under some restraint, virtually free credit will continue to thwart financial & economic planning by concentrating investment in certain assets, such as housing.

The first planning question

In planning, the first question to be resolved is the accuracy of population growth projections. That’s mostly a question for the Government, but Australia’s economy is also relevant. Australia will start to grow again in a couple of years, and the reversal of migrant flow could be very quick.

Second is the immediate supply issue. Auckland Council’s unitary plan, post-independent hearings panel input, mostly provides for improved supply of residential land and partly provides for more business land, special housing areas are a further response to the residential issue and supply ought to improve over the next couple of years.

But availability doesn’t automatically lead to development. Developers get defeated by cyclical downturns which always start the day before they’ve cemented their financial position in place, without needing politicians to stare them down, demanding development on slimmer margins going into a period of great international uncertainty.

The public sector ought to have been involved for the whole of this decade in assisting the supply of truly affordable housing – not the piecemeal supply of “affordable” houses in a range of $6-700,000 on small sections (allowing for no extension).

The third issue is longer-term

And the third issue is the longer-term handling of community creation – not rushed suburbs, not long commutes by car, not “town centres” which are only shops.

The original Auckland Plan completed by the new super-city Auckland Council in 2012 went some way towards envisaging more & better communities, and the new one which has been in front of the council’s planning committee since shortly after last October’s elections will improve the focus.

Even so, too little work has been done on stopping Auckland from being the city of the long commute.

Today’s stories – and for the next week

Today’s story on the Productivity Commission’s final report highlights points the commission believed it should work on, from a ‘first principles’ basis, and changes it’s suggested.

While I was at the Town Hall for Auckland Council’s planning committee meeting yesterday, I spent a large amount of my time trying to digest a huge volume of documentation on a range of topics relating to both the unitary plan and the “refresh”, as it’s been called, of the council’s umbrella planning document, the Auckland Plan.

Today’s story on that will be extremely brief, pointing you to content and ignoring the questions & points made at yesterday’s meeting.

The full version will take several articles over the next few days.

Links:
Productivity Commission, 29 March 2017: Better urban planning, final report
Productivity Commission, 19 August 2016:
What would a high-performing planning system look like?
Urban planning: What’s broken and how to fix it
Better urban planning, draft report

Related stories today:
Start with a figure you don’t know, then plan accordingly….
Productivity Commission goes back to first principles on urban planning

Earlier stories, 22 August 2016, on draft report:
Productivity Commission urban planning report blunt, measured & perceptive
Commission sees government change as essential for urban planning
Commission says everything English wanted on planning

Earlier story:
11 December 2015: Planning system is next Productivity Commission target

Attribution: Productivity Commission report, Auckland Council committee meeting & agenda.

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5% revaluation gain for Goodman

The Goodman Property Trust’s manager said yesterday year-end revaluations would lift net tangible asset backing by 7.5c/unit, but the announcement did nothing for the unit price.

The units closed on the NZX at $1.20 on Friday, gained 2c yesterday to $1.22 – the asset backing/unit last September – but dropped back to $1.205 today.

Goodman (NZ) Ltd chief executive John Dakin said draft valuation reports from independent valuers indicated that the property portfolio would record a full-year gain of about $115 million, or about 5%, taking the current value over $2.4 billion.

He said the valuation result reflected the continuing demand for high quality industrial property. The revaluation remains subject to finalisation & independent audit. The trust will provide more details when it releases its annual result on 18 May.

Attribution: Company release.

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Augusta unconditional as second tenant signed for Broadway development

Augusta Capital Ltd has gone unconditional on its purchase for syndication of Mercury Energy Ltd’s new headquarters at 33 Broadway, Newmarket, where construction is just starting.

Mercury Energy will be the anchor tenant, consolidating its 4 Auckland offices in the one 5-green-star building and occupying over half the development at the roundabout across the road from the Newmarket Olympic pool. The company will be on a 12-year lease. Augusta managing director Mark Francis also confirmed Tegel Foods today as an office tenant.

Augusta subsidiary Augusta Funds Management Ltd will raise $83.5 million of equity through a unit trust to be established to acquire the property. Augusta Capital will underwrite $33.5 million and other parties the balance of the capital raising.

Mr Francis said a product disclosure statement was being prepared and the offer should be open for investment in mid-April. No money is being sought yet.

The building is under construction by Mansons Broadway Ltd with settlement (but not building completion) scheduled for 1 July. Mansons will provide a 10-year capex guarantee from completion.

When Augusta entered into the agreement in December to acquire the unfinished development, Augusta managing director Mark Francis said it was a new phase in syndicate investment strategy: “Augusta believes this transaction signals a key strategic step as it moves from not simply being a buyer of investment grade assets but into funding & development of investment grade assets.”

The total consideration is $143,111,878, with a fixed amount payable at settlement, further drawdowns made on a cost-to-complete basis as the development progresses, and retention amounts payable on achievement of certain development & leasing milestones.

Earlier stories:
20 February 2017: Augusta launches Mercury syndication
22 December 2016:  Augusta takes new step in syndication

Attribution: Company release.

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Kiwi proposal for NPT finalised “in next few days”

NPT Ltd expects to conclude arrangements with Kiwi Property Group Ltd in the next few days on Kiwi’s proposal for NPT’s future.

NPT chief executive Tony Osborne said today the company expected to hold a special shareholder meeting in April.

Kiwi has proposed:

It will sell The Majestic Centre & North City Shopping Centre (the Kiwi Properties) to NPT for $230 million
It will pay NPT a one-off $6 million to acquire the right to manage NPT & its property portfolio, and
It will take a cornerstone shareholding in NPT of about 19.9%.

Earlier stories:
6 March 2017: NPT works through detail of Kiwi bid
12 January 2017: Augusta drops court action but NPT meeting likely delayed
8 January 2017: NPT interim report shows company treading water
14 December 2016: Kiwi proposal for NPT revealed
2 December 2016: Augusta gets February court date while NPT continues with meeting plan
23 November 2016: Lack of revaluations halves NPT profit
4 November 2016: NPT considering more than just Augusta’s proposal
31 October 2016: 
Fourth era for NPT a hard option to combat
27 September 2016: 
Augusta buys 9% of NPT

Attribution: Company release.

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Housing supply the main concern as Reserve Bank holds cashrate

The Reserve Bank held the official cashrate at 1.75% today.

The bank cut its cashrate by 25 basis points in November, the third 25-point cut last year.

Bank governor Graeme Wheeler’s biggest concern was whether housing supply would start to address the imbalance in that market, but he noted that prices had drifted back.

Mr Wheeler said: 

“Macroeconomic indicators in advanced economies have been positive over the past 2 months. However, major challenges remain with ongoing surplus capacity in the global economy and extensive geopolitical uncertainty.

“Global headline inflation has increased, partly due to a rise in commodity prices, although oil prices have fallen more recently. Core inflation has been low & stable. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.

“The trade-weighted exchange rate has fallen 4% since February, partly in response to weaker dairy prices & reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth.

“Quarterly gdp was weaker than expected in the December quarter, but some of this is considered to be due to temporary factors. The growth outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth and high levels of household spending & construction activity. Dairy prices have been volatile in recent auctions and uncertainty remains around future outcomes.

“House price inflation has moderated, and in part reflects loan:value ratio restrictions & tighter lending conditions. It is uncertain whether this moderation will be sustained, given the continued imbalance between supply & demand.

“Headline inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Headline CPI will be variable over the next 12 months due to one-off effects from recent food & import price movements, but is expected to return to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well anchored at around 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

Attribution: Bank release.

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Corrected: Argosy sells Dalgety Drive property to owner-occupier

Published 21 March 2017, yield detail added 22 March 2017
Argosy Property Ltd has disposed of the industrial property at 67 Dalgety Drive in Wiri for $6.85 million, which the company said was a 44% premium to its most recent book value.

The company did an interim revaluation of its portfolio last September, for the first time since 2009, and that valuation of $4.45 million put the passing yield at 8.38%. The sale price is 54% up on that. The building has a net lettable area of 3698m².

Chief executive Peter Mence said yesterday Argosy classified the property as non-core. The buyer is a private company which will operate from the site once the lease of the current tenant, RLA Polymers Ltd, expires on 31 March.

Attribution: Company release, calculator.

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5 new Highbrook developments include more Quest units & parking building

Goodman Property Trust’s manager announced 5 new developments for the Highbrook Business Park yesterday, worth a total $44 million.

Goodman (NZ) Ltd chief executive John Dakin said they were expected to generate around $3.7 million/year in rent, an 8.4% return on investment.

The 5 new Highbrook projects, their size, cost & expected completion date:

Quest serviced apartment expansion: 60 new apartments, $11.7 million, July 2018
The Crossing office building 6: 3006m², $4.9 million, June 2018
Multi-storey carpark building: 324 new parking spaces, $5.7 million December 2017
Warehouse on Pukekiwiriki Place: 2929m², $13.9 million, November 2017
Showroom & warehouse units on Highbrook Drive: 1730m², $7.9 million, December 2017.

Mr Dakin said: “Completing the development programme at Highbrook is a key priority, and these new projects are timed to take advantage of the positive customer demand & strong market conditions that currently exist.”

Highbrook’s current value exceeds $1 billion, making it Goodman’s largest investment asset. The 110ha estate is about 70% of the way through its planned development and contains over 40 buildings, providing over 380,000m² of warehouse & office space.

The Crossing – the commercial heart – provides accommodation, business support services, food & hospitality options and other amenity & recreational opportunities.

Mr Dakin said: “High occupancy levels at the Quest and a shortage of visitor accommodation in Auckland are the catalysts for a substantial new expansion project that will double the number of serviced apartments at The Crossing. Following the success of the recently completed Building 5, we are also commencing another new office facility and developing an adjoining multi-storey carpark.”

The trust’s industrial portfolio has a 100% occupancy rate, and the 2 new warehouse developments are aimed at continuing Goodman’s highly successful build-to-lease programme: “With most projects leasing well before completion, it’s been an effective strategy that is growing cash earnings and improving an already high quality property portfolio,” Mr Dakin said.

Attribution: Company release.

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Small rise in migrant inflow, but Auckland gain marches onward

New Zealand’s net migrant inflow continued upward in February, rising by 28 above the previous record, set in January, to 71,333 for the last 12 months.

The increase over the year to February 2016 was almost 4000, from 67,391.

For the month of February, the net inflow was 8609 (8581 a year earlier). Arrivals totalled 13,793 (13,267), departures 5184 (4686).

Exits to Australia jumped 10% for the month over a year ago to 2564 (2331), and the annual number of departures rose to 24,650 (24,204). Arrivals from Australia rose by 3 for the month to 2235, but are down over the year to 25,684 (25,810), reducing the net annual trans-Tasman gain to 1034 (1606).

The net outflow of NZ citizens continued to decline this February – 3059 out, 2662 in for a net outflow of 397 (439 last February). For the year, the net outflow was 1687 – 31,914 in, 33,601 out – down 57% from the previous 12 months. The next outflow in the February 2012 year was 38,769, falling to 36,713 in 2013 and 17,786 in 2014.

And the flow into Auckland continues, up 653 for the month and up nearly 4300 for the year. The net inflow for the month was 4543 (3890), and for the year 35,313 (31,035). Annual arrivals have risen from 46,954 2 years ago to 52,407 and now 57,156, while departures have held in a range from 21,370-21,850 over those 3 years.

Attribution: Statistics NZ tabales.

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Fletcher Building cuts earnings guidance by $110 million

Fletcher Building Ltd has dropped its range earnings guidance for the year to June by $110 million (before interest, tax & significant items).

The range when chief executive Mark Adamson (above) delivered the half-year results on 22 February was $720-760 million. The range now is $610-650 million.

Mr Adamson said today: “The revised guidance is due to the identification of additional estimated losses & downside risk in the buildings & interiors business unit of the construction division.

“A thorough review of the buildings & interiors business & projects began in late calendar year 2016 and led to new management & governance processes. A significant loss was recorded for buildings & interiors in the half-year results based on the best estimate available at the time. However, management has now identified an increase in the estimated loss on the major construction project which was referenced at the time of the announcement of the first-half results, and the identification of downside risk on other buildings & interiors projects, with the majority being a provision for expected losses on one other major project….

“For reasons of client confidentiality, we will not name the projects. We expect one of the projects to complete within the next few months, and the other is targeting completion in the 2019 financial year.”

The second project had been expected to make a $10 million ebit contribution to 2018 earnings.

Mr Adamson said all other business units within the construction division had continued their strong trading performance. “However, taking into account the new estimates of profitability for the commercial construction projects, it is now expected that the construction division as a whole will report a loss at the ebit level for the 2017 financial year.

“Trading for Fletcher Building’s other divisions remains in line with expectations previously discussed in the first-half earnings commentary.”

Specific questions

In a Q&A section of his release, Mr Adamson said: “The major projects involved are large & highly complex. Project reports & reviews received since the half-year results announcement have indicated significantly higher costs to complete the projects, and have also enabled improved quantification of remaining risks. In addition, the detailed review by new management has led to downward revisions in expected profits on a number of smaller projects.

“The most significant issues relate to complexity in design, subcontractor management and building programme delivery on key projects. This has led to an extension of project timelines and increase in project resource requirements & costs, relative to original budgets. The extent of this has become more apparent since the half-year announcement as new management & processes have bedded in.”

As a result of this debacle, Mr Adamson said Fletcher Building had appointed a chief operating officer for the construction division, a new head of risk & governance in the construction division, and a new general manager of the buildings & interiors business unit would start shortly. We have new finance leadership & processes along with the recent implementation of a new financial management reporting system. The criteria for bidding major construction projects have been made more stringent, and internal review processes for proposed & existing projects have been strengthened. We believe these changes will drive improvement in future periods.”

Would the update also impact the outlook for financial year 2018? Mr Adamson said: “Fletcher Building does not provide guidance beyond the current financial year, however we have tried to be conservative in estimating the losses in the current construction book, and trading in our other divisions remains in line with our expectations.”

Mr Adamson said he wouldn’t discuss potential claims: “We do not discuss matters related to claims publicly. Whenever we have issues on a construction project, we endeavour to work constructively with our clients & other relevant parties to resolve them. Where we have a robust basis for a claim we will consider our position carefully.

Do these issues point to a systemic issue in your construction book? “We don’t think these issues are systemic because they are primarily related to programme & design challenges on a small number of major projects. We are very cognisant of pressure on labour & sub-contractor resource in the New Zealand construction industry at present, and need to ensure we manage this effectively in current projects & future bids. We believe that the changes we are making to strengthen our governance, management processes & bidding criteria and review & approval processes will enable improved performance in the future.

What proportion of the contracts in the construction book are fixed price? “Our current construction backlog is about $2.7 billion. Of this, about $1.5 billion is in the buildings & interiors business. All but one of our major projects underway in buildings & interiors is either a ‘fixed price lump sum’ or ‘guaranteed maximum price’ contract. This is standard in the commercial construction industry. We do not believe the issues we have uncovered relate to contract type, but rather challenges related to programme & design complexity in key projects.”

Has the growth in the buildings & interiors business been driven by a deliberate strategy to boost volume growth for the building products division? “Building products operates as an independent division to construction and supplies product to the construction division’s projects on arm’s length terms. We estimate that sales from building products businesses to buildings & interiors make up less than 5% of total building products revenue.”

Despite the reduction in forecast cashflows from the construction division in financial year 2017, Mr Adamson said the company remained comfortably within its banking covenants & target debt metrics and expected to continue to do so: “Based on the updated guidance range, we expect the ratio of net debt:net debt + equity to be around 34% at the end of financial year 2017, and the ratio of net debt:ebitda to be about 2.4 times.”

Earlier story:
19 July 2017: Fletcher Building to explain construction loss Monday morning

Attribution: Company release.

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