As our world moves back to some sort of normalcy, we are all probably breathing a sigh of relief that we are still in business and/or have jobs that are good enough to deal with the hefty dose of inflation that has ensued.
On my left shoulder, I have the monkey with the yellow hat saying “Hey – we haven’t suffered too much damage – everything will be OK. On the other shoulder, the monkey with the black hat is saying “Hey – you better get your house in order, this pandemic hangover is going to hurt!”
Although it goes against my nature, I’d like to be the black hat monkey for a few paragraphs.
I would like to describe to you the structural imbalances that are emerging in the Wellington commercial property market. These imbalances reveal themselves as high local authority rates and insurance costs. They have a multi- billion dollar impact on the value of Wellington’s commercial property sector.
These imbalances are reflected in the rates and insurance bills for the building I work in. It has a rateable value of $17m. The rates bill is $250k p.a. and the insurance premium is also $250k p.a (in round figures). There is a commercial building in Mt Eden, Auckland with a similar valuation that I have used for comparison. The rates are only $85k p.a. and I have established from the owner that the insurance premium is only $30k p.a.
Is this sustainable?
I think the answer is that it has been sustainable during a period of low interest and capitalisation rates. It may continue to be sustainable, because the government sector occupies 40% of Wellington’s commercial space and the Government just pays the higher rents that are required to fund these high operating costs. That is not good news for small and medium sized businesses needing to occupy similar space.
It may also continue to be sustainable because, as the buildings that the government and corporate sectors won’t occupy become uneconomic for use as office space, they will be converted to residential use – thus, according to my rough estimate, incurring rates and insurance costs that are half what they would be if they continue to be used as office space. This, also, is not good for small and medium sized businesses.
The long-term cost to Wellington will be that those businesses that contribute so much to Wellington being the “Coolest Little Capital in the World” will be forced to move to the Hutt and Porirua Valleys?
The shorter-term cost to Wellington may be that investors start to reduce their investments in Wellington City. What is clear is that the recent rapid increase in the OCR will seek out and expose properties with weak economic fundamentals.
From what I can see, the buildings that have recently been offered for sale in my neighbourhood have either not sold or have sold well below the vendors expectations. I hope the monkey with the black hat is wrong!
The causes of these imbalances will be many. At the top of my list are two items. The first culprit is the dysfunctional system for managing seismic risk in this city.
This system that enables seismic engineers to produce assessments, which are then challenged by engineers acting for tenants or other third parties does not create certainty – a fundamental requirement of any system of public administration.
My specification for a reformed seismic risk management system would be:
- A peer-reviewed detailed seismic assessment should be able to be registered and become “the official record”.
- Upon registration, the liability of the consulting engineer for subsequent design failure is limited to fraudulent or dishonest behaviour. This will enable engineers to exercise their best judgement rather than act in in the interest of protecting their public liability insurance.
- Upon registration, the Health and Safety in Employments Act ceases to apply to any event or injury arising from seismic event. This will enable the Directors of tenant companies to cease protecting personal liabilities under that Act, and to act with common sense.
- Seismic risk should cease being expressed as a percentage of new building standards (a meaningless measure). Instead, it should be expressed in terms of ground force acceleration and resultant structural damage. This will allow lay people to understand what damage a building will suffer given any foreseeable event that causes ground force acceleration.
Whilst negotiating insurance policies in recent years, I have received two very direct messages from insurers.
A) They hate insuring residential body corporates in general, and they hate insuring Wellington body corporates even more.
B) They hate concentrations of risk (e.g. a single building) with a value of more than $100m, and in particular they hate concentrations of risk of more than $100m in Wellington.
This reluctance to insure large concentrations of risk does not allow for those building owners who have invested in seismic quality (e.g. base isolating) to receive the credit they are due. As a city, we seem hell-bent on building tall buildings with difficult body corporate ownership structures and high concentrations of risk.
Is this the best strategy?
I don’t think we should ask insurers to insure assets that they don’t want to insure. It is disappointing that the scope for the Cartwright Review of EQC, which was commissioned in the wake of the Christchurch earthquake was set so narrowly.
The Kirk/Muldoon governments showed great vision 50 years ago when they established a sovereign fund to manage personal injury (The ACC Act). In a time when we are expecting increased natural disaster events, we need to show the same quality of vision and establish a “comprehensive” scheme to manage natural disaster risk. Relying on over-burdened international markets seems foolhardy.
The elephant in Wellington’s front room is climate change.
The speed with which we deal with this issue will, to a large extent, be governed by the quality of the capital markets that support the City’s private and public infrastructure. If we do not pay attention to the economic fundamentals of our commercial property market, our capital markets will struggle to fund essential public and private climate change projects in a timely manner.
We urgently need a city-wide strategy to deal with the economic imbalances in our commercial property sector!
The Woolstore Management Ltd
Paul has been a valued contributor to Property Council’s advocacy and events workstreams for the better part of 20 years.
He was the longstanding Wellington Branch President and remains on the Wellington Regional Executive to this day.
Paul owns and manages The Woolstore Design Centre, a refurbished office and retail space located on Thorndon Quay in Wellington.
He is a vocal advocate for Wellington property issues and a champion of sustainability and resilience, particularly with regard to climate change.