The Reserve Bank in its most recent Financial Stability Report warned that the “increasingly stretched Auckland market is at risk of a damaging correction, especially if economic conditions deteriorate. House prices now exceed nine times gross income in Auckland, placing it among the most expensive cities in the world”. But how is the situation impacting Auckland’s legal industry? Sasha Borissenko reports.
Chapman Tripp commercial property partner Bill Sandston says it’s not a case of lack of political will from a local and governmental level, but rather residents refusing to accept that they’ll have to give up their dream of a white picket fence.
“In theory, intensification and high density housing will solve the problem, but not when all the residents say, ‘Not in my backyard, thanks very much”. That’s how we’ve got this ‘democratic deficit’.”
Add the sprawling and limited infrastructure, foreign investment, an influx in population and a boutique building industry, and you’ve got yourself a situation that is a crisis for buyers, a bonanza for sellers, he says.
It used to be the case that buying up in New Zealand (whether local or international) was an attractive enterprise given the free market in property and liberal taxes. But this is increasingly not the case with recent changes to income tax laws, foreign purchasing and capital gains.
“As with any property bubble, it dies eventually. I’ve been in the business almost 40 years and I’ve come to see almost four of these cycles. I’m definitely starting to see the levelling of the playing field and the legislation and regulations are speeding up the process.”
Take the changes to the Resources Management Act, for example, which may remove appeal rights and speed up the consent-making process, he says.
“But, say more consents are fast-tracked, the infrastructure is improved and builders are trained up quickly, the fear of course is that the last time New Zealand tried to build large quantities of houses, it ended in disaster, with many leaky homes cases still going through the courts today, dating back to the 1980s.”
There is also a real concern that infrastructure, especially transport, will not be upgraded to cope with increased intensity, he says.
Regardless, the housing bubble has meant the legal industry has been inundated with work and this will continue for many years, he says.
Everyone in the property industry is flat out - be it lawyers, consultants, engineers, builders, councils, and architects, for example.
“Building by its very nature is long, given all the stakeholders and bureaucracy in the process.”
Like Sandston Bell Gully property and real estate partner Andrew Petersen says, the Auckland housing crisis has created a lot of work for the legal industry.
“2015 was a very busy year for property lawyers generally and we saw excellent interest from offshore clients wanting to invest in New Zealand property. There was also a steady supply of large development and infrastructure projects and property portfolio transactions and these appear to be keeping the legal industry busy overall.”
On a practical level, applications are far more complex to prepare and require a higher level of input from lawyers acting for both the seller and the buyer. The Overseas Investment Act is becoming a significant issue for many transactions involving international investors, for example.
“Unfortunately the Act captures a number of transactions that the general public would not necessarily expect (eg, a commercial lease of premises next to a reserve). We think there is room for the foreign investment regime to be more targeted at assets that are truly sensitive (eg, operating farms, not just non-urban land that might be more than five hectares). That would assist with the resourcing issues currently being faced by the Overseas Investment Office.”
Key trends and developments
Like Bill Sandston, Petersen says one key trend is the tight construction market in New Zealand, which is having an impact on projects generally.
“Construction costs continue to rise and this is causing issues for some developments where revenue from pre sales is often set a long time before construction gets underway. Sourcing land for development at a reasonable price continues to be a challenge.
“Our sense is that margins on residential developments will come under pressure if land and construction costs continue to increase and selling prices start to stagnate.”
Large commercial and infrastructure projects such as the new Auckland, Wellington and Christchurch convention centres, the various Public Private Partnerships (PPPs), the City Rail Link project and the numerous apartment developments are adding to the pressure on the construction sector in Auckland, he says.
Overall, Petersen expects Bell Gully’s national property team to be busy - particularly on portfolio transactions, commercial developments and infrastructure projects, land subdivisions, social housing projects, dairy farm transactions and acting for overseas investors with an interest in New Zealand property.
Otherwise, resourcing is likely to be the biggest challenge for Auckland law firms in 2016, he says.
“The market for junior and intermediate property lawyers has become tight again with the international legal markets heating up and a greater number of in-house roles available to lawyers at all levels.”
By Sasha Borissenko