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Property developers standing their ground

28 December 2010. Source: Fairfax NZ News
Mark McGuinness

The problem with being labelled a property developer, muses Mark McGuinness, founder of Wellington real estate and investment company Willis Bond & Co, is its use as a catch-all term for anyone who builds or refurbishes a property.

They are not necessarily the "swashbuckling entrepreneurs" vilified in the media, Mr McGuinness says.

There are some dodgy characters in to make a quick buck, some who over-extended during the recession and came a cropper, and yet others who saw the warning signs coming, hunkered down, and will now reap the benefits of a slowly recovering market.

Property developers came in for bad press throughout 2010 as many of the former princes of property fell from being flashy high-fliers to failures.

Andrew Krukziener, David Henderson (the Christchurch one), Winston Peters' nephew Jamie Peters, Patrick Fontein, together responsible for Metropolis, Five Mile, Gulf Harbour and Harbourside Business Park developments, were among those bankrupted this year.

Then there are those developers still hanging on despite seeing their empires eroded through battles with creditors both here and abroad.

Auckland-based David Henderson and Nigel McKenna, respectively the former developers of Princes Wharf and the Lighter Quay, are among this number.

Another is Wellington's fame-seeking, financially troubled developer, Terry Serepisos, who has suggested he might turn to fans and have them chip in to help the Phoenix football club he owns stay afloat.

Once envied for their cash-splashing and huge houses, some have been reduced to renting like Fontein, who personally backed his failed Kensington Park residential project in Auckland to the hilt, which cost him everything, including his home.

And then there's another small, resilient group of developers – the last men standing.

They seemingly have as little sympathy for the plight of their fallen number as do the public at large.

As Wanaka developer Bob Robertson sees it, some developers got too caught up in the jubilation of getting a successful development over the line, and started living too brazenly. When the property cycle turned, as it always does, many were caught out over-committed and ill-prepared for the hard times.

But they've been well and truly "burned", he says, slapped around in the media and forever linked with finance company failures and investors' loss of wealth.

He reckons there's barely a handful left with the clout and cash to continue. And we won't see the failures back again, he says.

Ask Property Council chairman Chris Gudgeon what went wrong and his blunt answer is that some developers had an "enormous appetite" for risk.

"It was unfair that they took a whole bunch of elderly people down with them," he said.

Mr Gudgeon is keen to portray those who went under as "existing on the fringes of a usually stable asset class" but when you look back over the past two years there are a lot more high-profile developers who have gone bust or remain troubled than those flourishing in the game.

The conditions that allowed such high-risk developments to go ahead and ultimately fail won't happen again, in Mr Gudgeon's opinion.

The failure of many of the finance companies and related prosecutions will prevent a repeat of backing developments at 100 per cent debt, he says.

In these cases the end goal was simply to "flick" the property on as quickly as possible, Mr Gudgeon says: "People in the industry should know better."

Mr Robertson's Pegasus Town, which is developing a town in Canterbury, is still going despite the financial crisis and Canterbury earthquake.

Mr McGuinness and his outfit Willis Bond & Co raised $128 million from investors early in the year for a private equity real estate fund and have at least one, if not two $100m commercial projects – one a mix of retail, office and residential, the other retail and office – set to go unconditional.

Then there's Britomart developer Peter Cooper's Cooper and Company.

It is still developing its 6.5-hectare Auckland waterfront site and is also offering the deep-pocketed the chance to own a slice of his Bay of Islands residential sanctuary, Mountain Landing.

The intriguing question is: how did these three developers manage to stay standing during the global financial crisis that claimed so many in the industry?

BOB ROBERTSON - INFINITY INVESTMENT GROUP

Bob Robertson is tired of the oscillating New Zealand dollar affecting the returns from his South Island farms and is in the process of selling them. Actually he's pretty fed up with property developing too.

"We started the recession quite healthily," he says.

"Going in, we hadn't been buying in the peak, it was too dear. Our strategy was to wait until the market went down, then we'd replenish our land bank."

But no buying didn't mean everything stopped. Work on Pegasus Town in Canterbury, including building a lake, golf course and wetlands went on, as did the sale of sections.

The company has sold 770 sections worth $129m in Pegasus, with about 170 houses built.

Developers are a lot of things: investors, economy stimulators, employers, and yes, risk-takers, he says.

Unfortunately, this appetite for risk can lead developers to tip over, particularly when lenders pull the rug out from underneath them.

Developers that have gone down suffered death by a thousand cuts, Mr Robertson says. "We will survive even if we've had 450 cuts," he says.

While Mr Robertson company Infinity dodged a bullet – it had no exposure to mezzanine finance and the finance companies which collapsed taking so many in the industry down – it hasn't been all plain sailing for the South Island developer.

The banking crisis in 2007 led to his banks calling, asking for money.

"That process went on and on and on – every three months another bank was asking for money back."

Now the problem is the more normal property industry laments – resource management regulation, councils and central government costs crippling the business of developing land, he claims. Prescriptive regulations are wiping more off his bottom line than the financial crisis, he grumbles.

He says developers are being made, by the regulations, to build developments with all the bells and whistles for a market that simply can't afford it.

But he says, despite the niggles and his sporadic desire to quit developing, he's hanging in there.

Instead, Mr Robertson's focus now is to build a "new model" for property development, sticking to his tried and true rules:

Look for investors, not speculators;

Only pre-sell one property to one buyer;

Once you've got them, tie them in tight;

You have to sell enough product to know that the market is sound before you start building.

MARK MCGUINNESS - WILLIS BOND & CO

Willis Bond did not buy any property for development for quite a few years before the global financial crisis hit.

It could not compete on price against other developers "jet-fuelled" by finance company debt, Mark McGuinness says.

"We were seeing transactions happening that simply didn't make sense."

The Wellington-based developer, famed for the award-winning Chews Lane development, has been trying, in vain, to find a deal that stacked up since 2005.

Instead of buying land and property in a market clearly overheating, Mr McGuinness and his team spent the time on developments already under way – like Chews Lane – or doing research into the property bust and recession.

"We had plenty on our hands," he says, including the redevelopment plans for the former Overseas Passenger Terminal building on the Wellington waterfront, the marketing for which starts early next year.

Like Mr Robertson, Mr McGuinness gave the finance companies a wide berth.

So why then, were so many others rushing in where where Willis Bond feared to tread?

"I suppose a boom is fuelled by greed and a complete lack of respect of the past."

The veteran of previous property booms and busts says property investing is cyclical.

"The normal cycle is about four years when the wobbles start manifesting."

He doesn't want to sounds harsh on those who failed but says the collapse was always coming.

"We just didn't know exactly when."

In his mind, the decimation of the ranks of developers is healthy.

Now the focus, hopefully, will be on quality.

Tenants and buyers will be more discerning and developers will build properties people want to live or work in, Mr McGuinness says.

His development vision is building beautiful, design-focused projects which bolster a city's appeal, rather than marring them with "swathes of ugly buildings".

He doesn't agree with Mr Robertson that regulation is a huge issue. While parts of the resource consent process are onerous, the most beautiful cities in the world – like Paris and London – are also the most regulated, he says.

There's certainly less industry competition these days, Mr McGuinness says, almost gleefully.

Willis Bond has just opened an Auckland office and is looking to spend $128 million it raised earlier this year on "good" developments, he says.

PETER COOPER - COOPER AND COMPANY

"We were very pregnant five or six years ago," Peter Cooper says in reference to Britomart, the huge Auckland site his Cooper and Company has been developing since 2004.

The sheer size of Britomart, 6.5 hectares in downtown Auckland straddling the CBD and waterfront, with a mix of heritage buildings, open space and new buildings, makes it a unique proposition.

While other developers were buying in the finance company-fuelled boom, he was developing what his company already had.

"We are just simply committed to this project," Mr Cooper says.

"We have quite a different philosophy. We develop assets to own."

So there's none of the slap-it-up to flick-it-on property development that some indulged in.

Britomart now is focused on developing density in the urban precinct.

Mr Cooper's development style may differ from some, but he was still impacted by the financial crisis as many others were. "I don't think we ever would have expected that it would be as bad as it was."

Like Mark McGuinness, Mr Cooper is interested – perhaps obsessed – with what is being created at Britomart, rather than just caring about the buck being made.

His speech is peppered with phrases like "deepening the experience", having a "wider range of offerings", "incubating talent", and the "wonderful success stories" to come out of the development.

He's also subsidised some businesses into Britomart through low rents, conscious, he says, of ensuring the right mix of businesses.

"We work very hard to integrate enterprising tenants particularly in the fine arts and music community."

Mr Cooper also has another development – Mountain Landing in the Bay of Islands.

Mountain Landing is a "premium coastal lifestyle community", its marketing blurb says.

At the tip of a peninsula, Mountain Landing boasts 405 hectares which are being developed into a coastal retreat. Here you can not only build your own home – under Cooper and Company's design guidelines – but luxury communal buildings and a helicopter and launch are available to boot.

But back to Britomart.

Mr Cooper, worth an estimated $650 million in the 2010 NBR Rich List, is looking at bolstering the development's retail space by offering some more subsidised deals.

"To get things right, you have to be prepared, and willing, to support some of these things yourself."