Governance of projects under spotlight

By Chris Hutching

Friday 31st May 2002

The debate about contributory mortgage developments is too narrowly focused and industry players should take a closer look at governance of New Zealand property developments, according to Charles Grace of Building & Property Consultants.

He was commenting on the Securities Commission's 12-month ban on Money Managers promoting and marketing contributory mortgages after it found breaches relating to an investment scheme involving a building at 1 Parliament St, Auckland.

Mr Grace echoes concerns raised recently by New Zealand Property Institute president Anthony Robertson, who questioned whether growth of integrated one-stop-shop services offered by many global real estate companies were providing independent and transparent advice to investors and business generally.

Mr Grace said property development relied on faith in a valuer's independence but the Securities Commission report raised questions about relationships between parties.

"Using an independent professional to carry out a technical due diligence gives lenders a check against the valuation process."

Mr Grace has a background as a building surveyor and set up his consulting company a couple of years ago from his Christchurch base but he acts for clients around the country. He said specialist project monitors were the norm in Australia, the UK and the US but not in New Zealand.

"No one has made a connection between the collapse of a retaining wall at the 1 Parliament St property and the governance of the mortgage but I think it deserves to be looked into in more detail."

The Securities Commission investigation began on February 18, a week after the retaining wall at the site collapsed and four weeks after a previous collapse in which a contractor tragically lost his life.

Mr Grace said developers and marketers played an important and useful role in promoting property developments but banks in New Zealand tended to require a higher level of owner collateral or lend a lower proportion of the property value than elsewhere in the western world. Developers have got around this by obtaining additional second ranking or mezzanine funding from "Mum and Dad" investors.

"So the banks can afford to take a more relaxed stand over the extent of due diligence and monitoring during construction." He noted other recent high-profile projects that had cost investors dearly, including the Lyttelton Marina, the Opuha Dam and some apartment projects.

Mr Grace said it was therefore up to secondary lenders or trustees of bond investments to demand better governance and ask more questions. There was a place for specialists offering audits, including reviews of design drawings and specifications. An independent monitor should have access to the site, access to design drawings, attendance at site meetings and power to report and to advise the lender to withhold funds if the project was not being constructed to standard.

Mr Grace also advocated wider adoption of latent defect insurance at a cost of about 1% of the construction value for 10 years of cover.

A project he worked on when working in the UK involved a two-storey basement carpark where the wall began to delaminate and leak water. The developer, project manager and contractor conspired and kept quiet about the problem because the cost of remedial works were estimated at about £1 million, which his client, the building's new owner, was likely to have to meet in future years. But the fault was discovered and the builder was required to fix it.

"The industry needs to set clear industry standards and promote the use of independent consultants to assess technical risks, give valuers clear guidelines, ensure arm's length relationships with valuers, and give real teeth to funding and development agreements, particularly for mezzanine financing."

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