AMP, Chase Props clash on future of property

Press, 23 September 1987, Page 45

AMP, Chase Props clash on future of property

PA Hamilton A prominent property investment manager clashed with a major developer on Monday over whether New Zealand’s property boom is about to burst. Chase Properties managing director, Mr Murray Kindle, strongly disputed a claim by AMP Society property manager, Mr Paul Tuck, that the end of the boom is close. Mr Kindle told the Property Management Institute conference in Hamilton that “so-called senior members of property circles’’ and the media had been preaching doom and gloom for the last two years and they were still getting it wrong. He poured scorn on “ivory tower and media spokespersons,” saying demand for commercial property was still extremely strong. Earlier, Mr Tuck warned that if developers, investors or financiers didn’t self-regulate the supply of office space being built, some of them would get burnt. One or two major developers and builders could go bust when the boom ended, while others would be forced to “quietly fold their tents and creep away.” There would be a con-

siderable manpower surplus and many of these people would drift overseas. Mr Tuck’ said there were a number of reasons why the property boom would give way to a downturn. There was a real fear overseas of another world depression which would result in a collapse in share prices and real estate values. The United States dollar was under attack and Third World debt hung like a shroud over the world economy. The New Zealand economy was very fragile and some economists were saying it was slipping into recession. Interest rates were falling only gradually, economic growth was slowing, unemployment was rising, investment was down and the level of public sector debt was dangerously high. For the time being, property floats seemed a thing of the past, he said. Land prices had become far too high — "always a symptom of the classic finale to a property boom.” Prices in Auckland’s Queen Street had jumped from $2OOO a sq m in 1980 to $6OOO to $BOOO a year ago to $15,000 this year. One property recently had been sold for $29,000 a sq m.

Mr Tuck said there was no way all the developments planned for Auckland, Wellington and Christchurch over the next five years would proceed successfully. “There is going to be a great battle between the well located and the not-so-well located properties for a quickly declining number of tenants who are capable of paying very high rentals.” In the long tej-m, welllocated properties would win by stealing tenants away from existing new or near new buildings by offering better quality space and attractive concessions. Unless the industry exercised a strong measure of self-regulation — which was unlikely — and did not proceed with all the proposed developments, it was going to run into difficulties in the next two to three years, he said. Mr Tuck said rentals were now outstripping inflation in the three main centres, while land values had shot up. It was clear rental increases would soon pause for inflation to catch up. Property developers were now hedging their bets against a downturn in New Zealand by moving overseas, particularly to Australia, Mr Tuck said. There were rumours of a fall-off in forward work

for consultants and difficulties finalising finance packages for some projects, he said. And there was growing evidence of strong tenant resistance to rental levels. Many tenants already faced massive increases in ground rentals and land tax and there was likely to be a “bit of a bloodbath” in a few years as the rental market once again became highly competitive. In reply, Mr Hindle said the prophets of doom had “breathed fear and apprehension” into the minds of financiers. Stricter loan terms anc conditions had been im posed on developers, lead ing to some projects no getting the financial sup port they otherwise woulc have normally received And purchasers of lane were taking a more cauti ous approach, he said. Some developers hac become tentative about their plans and projects were being shelved. However, Chase had not been affected as it only went ahead with a project if it was adequately preleased, he said. The company’s project funding lines for the first eight months of this year totalled $630 million, with confirmed leasings running well in excess of those levels for each of the past two years, Mr

Hindle said. Demand for space had “anything but subsided.” Chase had almost no space to lease for buildings it already had under construction, while three of its five biggest projects were already 70 per cent pre-leased, Mr Hindle said. The real danger facing the New Zealand market was developers who had no shortage of money, but little knowledge of the market and what tenants wanted. In some cases, these developers were “developing monuments for monuments sake.” Others were falling into the trap of building either not big enough or small enough developments, he said. Caution was needed to ensure the market continued to be “tenant drivep” and not overpopulated’‘with developers who believed the business was simple and that anyone could make a buck. Chase took a conservative but positive approach, sticking with its internal disciplines and leasing those buildings due . for completion in the next three years, he said. Mr Hindle rejected claims that land prices and developers’ margins were too high, saying people used over-simpli-fied criteria in judging both matters.