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Issue 5 • March 2012

In this issue Banking Ombudsman and property related complaints Seismic ratings affecting Wellington CBD Queenstown property market Cash flows myths and real valuation

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Issue 1 • March 2012 Publication Committee Iain Gribble Donn Armstrong Peter O’Brien Ah-Lek Tay Contact details David Clark Property Institute of New Zealand PO Box 11 380 Manners Street Central Wellington 6142 Phone: 04 382 7621 Email: Editor Julian Bateson Assistant Editor Helen Greatrex Bateson Publishing Limited PO Box 2002 Wellington Phone: 04 385 9705 Email: Advertising management Julianne Orr Bateson Publishing Limited Phone: 04 09 406 2218 Email: Publisher Property Institute of New Zealand Property Quarterly is published four times a year and a copy goes to every member of the Property Institute.

Contents CEO’s comment David Clark . ................................................................................................................... 2 Feature articles The Banking Ombudsman and property-related complaints Deborah Battell............................................................................................................... 3 Aligning asset management and the valuation of public sector assets for financial reporting Kerry Stewart and Rex Harland.................................................................................. 8 Complaints and how to deal with them Earl Gordon....................................................................................................................13 Seismic ratings are affecting Wellington CBD values Mike Horsley..................................................................................................................16 Access your business software at no-cost Steve Tucker...................................................................................................................18 Using Skype Steve McNamara.......................................................................................................... 21 Queenstown property market Doug Reid.......................................................................................................................24 Cash flows – myths, methodology and real valuation Rodney Jefferies............................................................................................................ 31 Building a brighter future – National election policy Ian Campbell..................................................................................................................38 International study tour 2012 An opportunity to visit China Ian Campbell.................................................................................................................. 41 2012 Property Institute conference Let’s get on with it Jenny Houdalakis.........................................................................................................42 Legal cases Verboeket v Seaview Road Limited High Court Wellington Niven Prasad..................................................................................................................28 Unit titles – nuisance caused by a body corporate and its management company Niven Prasad..................................................................................................................29 Profile Bob Hargreaves.............................................................................................................43 Vol 2, Issue 1, March 2012 Property Quarterly 1

CEO’s Comment

CEO’s comment Following their meeting in Auckland in February, the Board members met with the President of the Australian Property Institute, Phil Western and their new CEO, David Haythorn. Phil is a Kiwi and also a member of the New Zealand Property Institute and David took over the CEO role in November 2011. The Australians usually come across to New Zealand at this time, mainly to introduce their new President. However this year there was no President elect as Phil has agreed to stay on for a second year to compete the initiatives he has introduced. The discussion centred around the problems the two institutes were facing, what initiatives we were undertaking and most importantly, how we could work together for the benefit of members on both sides of the Tasman. The Australian Property Institute (API) has been introducing its ‘future professionals programme’ for a couple of years and from 1 July 2012 this programme will become compulsory for all new members wishing to join. The future professionals programme is similar to our professional pathways programme but concentrates on the entry level professional training whereas our programme has higher levels of learning to provide a programme through to senior membership. In 2010 the API established a special purpose company for the purpose of limiting the professional liability of its valuer members. This initiative has been made possible from professional standards legislation in various jurisdictions across Australia. In essence, the scheme will cap the occupational liability of participating APIV members to an amount between $1 million and $10 million. This will depend on the upper end value of the property being valued and to the extent that liability can be limited under the respective State or Territory legislation. As we have in the past 12 months, the API has had increased dialogue with banks. The objective is to establish better communication channels, seek avenues to reduce the financial risk of both banks and members and to look at alternative and more effective dispute resolution processes. A recent re-structure within API has seen their standards board split into the Valuation Standards Board and the Property Standards Board. The restructure recognises that their property standards need greater focus and development. They have invited us to provide a representative on these boards and Chris Stanley (valuation) and Paul Mautz (property) will represent us. Like us, the API has an ageing membership and they are looking to boost membership by encouraging membership via other property related professions. Phil Western is also keen to second younger members on to national committees and boards to ensure they have a say on their futures and to provide a succession path for the future governors of the API. I will be encouraging our board to adopt a similar scheme in New Zealand. We have some talented younger members but I do not see them represented in the committees, apart from the branch committees. Both Phil and David were interested in our quality assurance accreditation scheme and expressed interest in getting Jo Parry over to Australia to explain the details to their board members. This meeting was the fourth or fifth such meeting I have attended and it was evident that the spirit of co-operation and desire to work together has never been stronger. This March issue of Property Quarterly is being printed for the first time after a trial in 2011 with four issues sent electronically. We decided to print Property Quarterly and send everyone a copy to improve positive involvement with members and to increase the profile of the Property Institute. We will also be sending complimentary copies of the magazine to interested parties.

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Banking Ombudsman

The Banking Ombudsman and property-related complaints Deborah Battell As property professionals you will no doubt have seen a number of your clients having problems with financing and servicing mortgages. You may even have experienced problems yourselves. We have resolved a number of disputes between those in the industry and their banks, especially since the start of the global financial crisis. Two things are, however, certain. The complaints are continuing and you are well-placed to refer your clients to the Banking Ombudsman if they need independent, impartial and expert help to resolve problems with their banking service providers. We are not always able to resolve the matter to a customer’s satisfaction, but we can ensure a fair hearing and a reasoned explanation.

Property disputes significant Disputes involving property currently constitute more than 20 per cent of the Banking Ombudsman’s case-load. Unfortunately the global financial crisis has left many people struggling to service mortgages on their own homes or on investment properties. Others have been unable to complete property developments or borrow money. The problems appear to lie across most sectors of the economy and income brackets. The days of ‘borrowing to the max’ are over for most people for the meantime. Before describing the main problems we have been dealing with, it is useful to know a couple of things. • I use the terms banking service providers and banks, for convenience. Our participants include most building societies, two of the largest credit unions, and nearly all the subsidiaries and related companies • We cannot investigate everything which our participants do or do not do. Our terms of reference preclude us from investigating complaints which are Vol 2, Issue 1, March 2012 Property Quarterly 3

Banking Ombudsman why? • Was there anything that should have prompted the banking service provider to look for more information? Generally, we are unlikely to find that a banking service provider has acted irresponsibly in approving an application for credit where the customer − • Actively seeks a loan • Is not under any sort of disability • Either meets the banking service provider’s usual lending criteria, or is not far from it. We are also unlikely to find that a banking service provider acted irresponsibly if − • It asked all the right questions and the questions were appropriately worded • The customer did not provide all the information they should have about their financial position or gave inaccurate responses.

essentially about a bank’s commercial judgement. Banks have the right to decide who they will lend to. This means they can refuse to lend, or to have someone as a customer. They can also generally decide how much they are prepared to lend, at what interest rates, over what term and with what security. But this does not stop us investigating complaints about the administration of a lending decision. We can look into a number of aspects around how a lending decision was made and these are described below.

Irresponsible lending Generally speaking, banking service providers call most of the shots when it comes to decisions about lending. This is because they bear the risk that customers will or will not be able to repay. But when a customer cannot repay their loan, it is not uncommon for them to feel that the lending was never affordable in the first place and that the banks had been irresponsible in lending them the money. Under the Code of Banking Practice, banking service providers must only provide credit or increase a customer’s credit limit when the information they have available leads them to believe that the customer will be able to meet the terms of the lending. All participants in the Banking Ombudsman Scheme must observe this code. When we are considering an allegation of irresponsible lending, we look at a number of factors − • What information did the banking service provider ask for and what did it receive about the customer’s ability to repay? • Did the banking service provider consider all the information available to it? • Did it comply with its own policies and procedures on credit assessment? • Did it waive a particular policy requirement and, if so, 4 Property Quarterly Vol 2, Issue 1, March 2012

Example case One recent case involved Blue Chip. An older couple, Mr and Mrs L, took out a mortgage over three investment units valued at $1.2 million using their three existing properties as security. Blue Chip introduced them to a mortgage broker who said she would arrange the $118,500 they needed for the deposit. The deposit was to remain in a trust account until the properties were ready for purchase, with Blue Chip paying Mr and Mrs L the interest. The bank declined the application because their income was insufficient and informed the broker. The broker then, without telling Mr and Mrs L, sent the bank a letter from a fictitious tenant confirming that she was renting the couple’s holiday house. On the basis of this

Banking Ombudsman extra income, the bank approved the loan. Mr and Mrs L drew down the loan and paid the deposit into Blue Chip’s trust account. They received the premium interest payments for six months, but three months after this Blue Chip collapsed. The couple nevertheless continued to make their loan repayments to the bank, which caused them financial hardship. Mr and Mrs L complained that the bank should not have approved the loan because they did not have enough income to service the debt. We found the bank’s lending process was sufficiently robust to meet the bank’s obligations under the Code of Banking Practice. It had initially declined the loan on the basis of the information it had been given. Neither the bank, nor Mr and Mrs L, knew the mortgage broker had submitted a statement from a fictitious tenant to support their lending application. The bank was not responsible for the mortgage broker’s actions. If this complaint arose today, Mr and Mrs L could raise a complaint with another dispute resolution service about the actions of the mortgage broker.

Due diligence When a business venture goes wrong, some customers look back to their initial contacts with the bank and ask whether it could have done more to prevent the situation from occurring. They expect their bank to have done due diligence on the business proposition before agreeing to lend. We have received complaints some years after the funding was provided and, following the collapse of a business, that the bank should have analysed the business venture for viability when assessing the credit application. When the customer finds out that the bank did not analyse their venture for viability, they claim the bank was

negligent. Recent examples of investigations include farm ventures, wineries, investment properties and franchises. Unless a banking service provider is asked to assist with due diligence, it will not do so. Typically a bank is concerned that a customer − • Provides adequate security for the lending • Can show they have the potential ability to repay the lending from future income or profit. A bank’s review of the business proposal is therefore simply to protect its own interests. Generally speaking, it is for customers and their advisers to undertake due diligence on their proposed business ventures.

Refusal to lend During the global financial crisis we investigated a number of complaints. These alleged that banks had given verbal approval for lending, either for an initial purchase or for a longer term property development, but had refused to lend when a customer made a formal application. Banking service providers cannot lend without formal approval from their credit departments. Bank staff may give positive indications about the likelihood, but lending cannot simply be approved on a nod or a wink. If you come across customers who say that their bank has given them the nod or a wink, advise them to get formal pre-approval in writing before proceeding to an unconditional purchase.

Early repayment costs We have also received a large number of complaints from people who fixed their mortgage interest rates for a specified period of time. When they then wanted to break the term they found they had to pay a large early repayment or break cost. Vol 2, Issue 1, March 2012 Property Quarterly 5

Banking Ombudsman evidence to show that the banks either misrepresented them in some way, or that they knowingly signed a customer to a fixed term that was unlikely to be suitable for that customer’s needs. As a result of the publicity surrounding this issue, most people are by now aware that if you break a fixed term loan agreement there will be a cost. We are still receiving complaints, however, from customers who signed up to five year rates in 2006/08, and we expect complaints to continue through until early 2013.

Hardship and mortgagee sales

Starting in late 2008, interest rates dropped more quickly and steeply than at any time in recent history. Earlier that year, however, customers were signing up to fixed terms because these offered the most favourable rates, and because rates were continuing to climb. When the rates started to fall later in the year, customers who wanted or needed to break their fixed terms faced some very steep break costs. Many customers said they were unaware of the costs, others said that they were unaware of how steep the costs could be, while yet others said that they had been told that the costs would be negligible. The global financial crisis and its effect on break fees were not reasonably foreseeable. At the time customers signed their loan documents before the crisis, break fees were negligible because interest rates were climbing. I have no doubt that some customers would have been told that the cost at that time was limited to administration costs, usually around $300. That would have been correct if the loan had been broken soon afterwards. But break fees cannot be easily predicted and quotes generally remain valid only for a couple of days at best. Reasonable costs Break fees are charged because banking service providers have themselves borrowed and must re-lend the money. If interest rates have dropped, banking service providers will be unable to re-lend at the same rates. The Commerce Commission is responsible for ensuring that these costs are reasonable. The Commission has reviewed banks’ break cost formulas and now considers that the formulas comply with the Credit Contracts and Consumer Finance Act 2003. Complaints about the amount of break costs charged are therefore unlikely to succeed. This is unless there is 6 Property Quarterly Vol 2, Issue 1, March 2012

In our experience, banks have been doing their best to keep people in their homes during the most recent recession. This is because mortgagee sales can cause significant losses for both banks and customers. If a bank thinks there is a reasonable prospect that its customer will be able to recover from what may be a temporary set-back such as job loss or ill health, it will look at a range of options. These include moving a loan to interest only, extending the term of a loan, offering short-term mortgage repayments, consolidating debt or other repayment arrangements. Customers should always be encouraged to talk to their banks at an early stage, and preferably before missing a loan payment. But once a bank determines that it is no longer possible to sustain the lending, it will start off the mortgagee sale process. The process is prescribed in law and is usually followed to the letter. While customers may complain that the bank did not take reasonable care to obtain the best price reasonably obtainable at the time of sale, as it is required to do by law, this rarely proves to be the case.

Banking Ombudsman Complaints received Complaints we have received include that the bank failed to appoint the best real estate agency for the job, a particular agent was too new to the area, the agency’s marketing campaign was inadequate, the valuation it relied upon was inaccurate, or that the bank should have delayed selling until property prices had recovered. Strangely, we have also received two very similar complaints recently about the bank failing to inform the customer about a change in settlement date when it has sold a property at mortgagee sale. In both instances, the new buyer took earlier possession than originally negotiated and subsequently refused to return chattels that had not been included as part of the sale price. In these cases, the dispute is actually between the former and new owners as the latter could equally have agreed to return them. The bank has, however, by failing to inform their customer of the new settlement date caused a loss of opportunity to retrieve the chattels. In these situations we can award up to $9,000 for inconvenience and, in one case, the bank voluntarily offered to reduce the customer’s debts to it by $25,000. Other complaints have included that the bank has required valuations which it is entitled to do, early repayment fees have been charged for breaking a fixed term loan, or that the bank has taken any funds left over from the sale and applied these to reduce other lending. Lenders are within their rights to do all of these things if they have been provided for in the contract. Similarly, customers will incur a penalty if they break their term deposits early to fund the purchase of a property. Each banking service provider has its own terms and conditions, but customers will typically forgo interest on the amount that is withdrawn.

Mistakes Given that lending is a banking service provider’s core business, we were surprised to receive three cases recently where bank staff had made obvious mistakes. Although the facts and outcomes differed in each case, all involved mistakes in calculating how much customers had to borrow after selling one property and buying another. They also all involved a situation where the customers ultimately had to borrow more money than they originally envisaged. In the first case a family decided to buy a bigger and more expensive house, signed a sale and purchase agreement conditional upon finance, and spoke to their banker who somehow worked out that they would have a $48,000 surplus after selling their existing home. A couple of days before settlement they discovered they needed to borrow an additional $157,000. As the family easily met the bank’s lending criteria it was approved and the sale proceeded, albeit some three days later because of delays in

finalising the documentation. Some time later, the family complained that the bank’s error had caused considerable stress and asked the bank to write-off the additional lending. After it declined to do so, we investigated. We agreed that the bank had made a mistake. The family, however, which was already committed to the purchase before signing the sale and purchase agreement, should also have picked up the mistake and they had received the benefit of a more valuable home. Although we found that the bank was not liable for the $157,000 extra lending, it had caused inconvenience and stress as the family had to delay moving by three days. We awarded an inconvenience payment of $3,000 plus a contribution to legal costs. In another instance, a family entered a sale and purchase agreement after taking the bank’s advice. As they specifically told the bank they needed to reduce debt, we recommended a different remedy. Our normal starting point is to consider how to put a complainant back into the position they would have been in had the error not occurred, but this was not practical since the complainants would have needed to sell the house. Similarly they also had the benefit of a larger and more valuable house. We decided to compensate them for the additional interest they would have to pay over the life of the loan, discounted to present day value, and further discounted to take account of their contribution to the situation. They received total compensation of $25,000 for direct loss plus $6,000 for inconvenience. We would hope that similar mistakes do not occur again. But if you sense there may be a problem, you might consider suggesting your clients have their calculations checked before proceeding with an offer.

Conclusion This has been a very brief survey of the property-related issues we at the Banking Ombudsman consider. I have not, for example, touched on complaints generated by the treatment of matrimonial or relationship breakdowns or accessing Kiwisaver for first home buyers. In essence, Kiwisaver funds must be paid over on settlement day, not before or after. I do hope, however, that this article will alert the industry to our existence and help prevent some of the pitfalls for customers. We hold more detailed information on a lot of these matters on our website www.bankomb., particularly in our Quick Guides, but we also have a fully searchable case note database. Otherwise, we are always happy to help with enquiries or to help resolve complaints. Call us on 0800 805 950. Deborah Battell is the Banking Ombudsman Vol 2, Issue 1, March 2012 Property Quarterly 7

Public sector asset valuation

Aligning asset management and the valuation of public sector assets for financial reporting Kerry Stewart and Rex Harland Unfortunately, and as a consequence of the global financial crisis, we have seen an increase in New Zealand’s public debt levels and not surprisingly a decrease in public spending. With the public sector being such a significant part of our economy, constraints on public spending are obviously necessary to help with a possible return to surplus. The government very clearly expects the public sector to become more efficient and effective to achieve sustainable and improved profitability. With the state sector having assets worth in excess of $220 billion, and half of these comprising physical assets, it is no surprise to see that a major focus is on infrastructure and asset management. With this focus, and in the area of valuing and depreciating public sector assets, it is vital that valuers, asset managers, finance managers and auditors work together as a multi-disciplinary team.

What guides the valuation process? There are a number of guidelines and standards representing asset management, finance and valuation. The valuer must be aware of these in order to get results that not only reflect fair value, but also the required service levels for that asset, assuming its continued use by the community. From a financial reporting perspective, public sector entities must meet New Zealand generally accepted accounting practice and comply with approved financial reporting standards. 8 Property Quarterly Vol 2, Issue 1, March 2012

Public sector asset valuation These are – • New Zealand equivalents to International Financial Reporting Standards (NZIFRS) comprising international financial reporting standards, international accounting standards and international interpretations • Financial reporting standards. The NZIFRS are not complete reproductions of the International Accounting Standards Board pronouncements. The latter standards and interpretations have been developed for use by profit-oriented entities, whereas the New Zealand standards are sector neutral, with particular recognition of public benefit entities. These are entities ‘whose primary objective is to provide goods or services for community or social benefit and where equity has been provided with a view to supporting that primary objective rather than for a financial return’. When a valuation of public sector assets is undertaken for financial reporting purposes, it will probably be completed under NZIAS 40 for investment property, NZIAS 16 for property, plant and equipment and NZIFRS 5 non-current assets held for sale and discontinued operations. Valuers have a specific set of standards and these are published in the New Zealand and Australia Valuation and Property Standards 2009. Important among these are − • International Valuation Standards (IVS) (i) IVS 1 Market value basis of valuation (ii) IVS 2 Bases other than market value (iii) IVS 3 Valuation reporting • International Valuation Applications (IVA) (i) IVA 1 Valuation for financial reporting (ii) IVA 3 Valuation of public sector assets for financial reporting • Property Institute Valuation Guidance Notes (i) NZVGN 1 Valuations for use in New Zealand financial reports. The IVSs and IVAs referred to above were withdrawn at 31 December 2011 and replaced by new ones which have already been released and which became effective from 1 January 2012. Important among these new standards are − • IVS General Standards (i) IVS 101 Scope of work (ii) IVS 102 Implementation (iii) IVS 103 Reporting • IVS Asset standards (i) IVS 230 Real property interests • IVS Valuation applications (i) IVS 300 Valuations for financial reporting with an annex – property, plant and equipment for the public sector. Treasury have also released guidance to valuers specific to the valuation of assets in the health and education sectors.

What guides asset management? Asset management is the framework of systems and processes that enable public sector entities to understand the assets for which it has responsibilities, and for the services they provide over their whole life. A series of manuals has been developed by the industry to guide an asset manager in the appropriate asset management techniques centred around asset valuations, life-cycle management techniques, managing asset levels of service, growth and demand and risk management. The Office of the Auditor General views the guidelines as good practice and therefore auditors will test an organisation’s practice to ensure asset management, valuation and depreciation practices are appropriate. This enables continuous improvement so that agencies and organisations can improve their asset management practices. In New Zealand and Australia most government and local government agencies will follow the National Asset Management Support series of manuals − • International Asset Management Manual • Infrastructure Asset Valuation and Depreciation Guidelines • Optimised Decision Making Guidelines • Property Asset Management Guide • Developing Levels of Service and Performance Management Guidelines. Some infrastructure organisations will be guided by the British Standards Institution Publically Available Standards Optimal Management of Physical Assets PAS 55 manual. This follows the same principles as the National Asset Management Support approach. Individual sectors may then provide their own guidance material. The Tertiary Education Facilities Management Association for example, has developed asset management guidance material for universities and technical colleges based on PAS 55.

The difference in valuing public sector assets Large and diverse portfolios Public sector entities will usually have very large and diverse property portfolios, which may also be widely spread geographically. The valuer will usually be provided with a list of the assets to be valued – an asset register generated from either an asset management or financial system. From the valuer’s perspective, the organisation’s ability to handle and maintain the vast amount of asset data is vital. Usually some time will be required to ensure the data provided is current and reflects the portfolio. Questions may well need to be asked. Does the data which you have received match in both the asset management and financial systems? Can it be verified? If valued previously, does the data match with the valuer’s records when additions and are deletions accounted for? What has changed since the previous valuation? Were any Vol 2, Issue 1, March 2012 Property Quarterly 9

Public sector asset valuation major projects completed and were any assets damaged, purchased or disposed of? Information is held in systems Public sector organisations range from small publicallyfunded organisations to some of the largest. In New Zealand, for example, Housing New Zealand Corporation at over 69,000 houses is the largest property portfolio, while the Department of Conservation controls in some way over 40 per cent of the land. To manage large portfolios effectively requires an asset management information system, a geographic information system, and the ability to link this to the financial system fixed assets register. A sophisticated asset management information system will calculate depreciation and value within the system. The valuation of assets therefore becomes one of data checking for consistency and review of main assumptions, quantities, unit rates and asset lives. This can, on occasion, be completed by suitably qualified internal staff, with data analyst roles becoming a specialist discipline in organisations. The role of the valuer in this case is one of a peer reviewer, where the activities will be verification of asset information, system and process integrity, and possibly some sample auditing. A lot of data Public entity infrastructure valuations are not everyone’s cup of tea. For example, there may be a lot of data, requiring specialist analytical skills which can take many days to work through. One of the common techniques used to move this information between the asset management system and financial reporting is by the use of an asset hierarchy. The data is structured in perhaps a three-tiered hierarchy, for example building cladding. The system would use a decay curve to predict asset depreciation at the lowest tier component level, but the results of the analysis are brought into the fixed assets register at the second tier. Not a straight line In infrastructure and many specialised asset valuations the loss of service potential will cause depreciation at an individual component level rather than a straight-line depreciation common in property fair value assessments. Normally a decay curve would be used, along with condition assessments to recalculate the component’ remaining life. The depreciated replacement cost is established and using the asset hierarchy rolled up into the fixed assets register. Stormwater pipes, for example, are high in value per metre, and have an asset life of at least 100 years. Conceptually the pipe network will perform with little or no failures until nearing the end of its life, when it will decay quickly to the point of causing loss of 10 Property Quarterly Vol 2, Issue 1, March 2012

service potential in the final years of remaining life. Condition assessments are therefore an important input into infrastructure valuations. The use of straight line depreciation based on installation date is simply not considered accurate enough. The valuer needs to be aware of the concept of data confidence. The collection and management of large amounts of data can be very expensive. A pipe network manager, for example, will commission the use of a robotic video camera for condition surveys, but the cost to do so for the whole network would be prohibitive. Surveys will therefore focus on critical assets where failure can be catastrophic and assets approaching the end of their useful life. Modelling techniques will then be used to assess the balance of the asset portfolio. Conceptually this is similar to property mass appraisal techniques used for Housing New Zealand Corporation. In effect the valuation exercise is validation that the internal unit rates, asset lives, systems and practices followed are consistent and appropriate for the class of asset being valued.

Public sector asset valuation of market-based evidence, then the valuer will use an optimised depreciated replacement cost approach as being most appropriate to assess fair value. The valuer, when undertaking the valuation, should review the useful life of the assets, in addition to the residual value, to ensure that the depreciation method reflects the consumption of economic benefits. The valuer should complete the valuation after due consideration of the relevant asset management plans, and after discussions with the asset managers. Should the valuer’s estimate of useful life differ from that in the asset management plans, then the valuer should proceed to complete the valuation based on their judgement, although the extent of any conflict should be noted. Worthy of particular note when considering the value of public sector assets is that in some cases saleability may be impaired, even if the property is freehold due to the Public Works Act, iwi claim, uncertain ownership or special consultation processes. Agreeing the nature of the asset with the client is important – are they operational or restricted? What constitutes a specialised asset? Where is the line drawn? In the case of local government assets are playgrounds, toilets, swimming pools, community halls, libraries, depot sites and council offices specialised?

Valuation uses

Types of assets In general, local government property assets can be categorised as commercial or residential buildings, community buildings, heritage buildings, buildings on reserve land and buildings on designated land. There are likely to be different valuation approaches for different categories of assets. Central government assets can be even more diverse and will include assets in the education and health sectors, defence, as well as specialised police and fire service, to provide just a few examples. Obviously central government assets are more likely to comprise nationwide portfolios and will sometimes include overseas assets, whereas those for local government will be regionally based. Ideally, the valuer will value the asset to fair value by reference to the price in an active market for a comparable asset, commonly referred to as the sales comparison approach. Alternatively, if this evidence is not available then it will be done by using other market based-evidence. This could be by assessing a value using a discounted cash flow with market evidence of cash flows and discount rates, known as an income approach. In the absence

For specialised and infrastructure assets the valuations are used for financial reporting and setting depreciation charges to the financial accounts. In local and central government, depreciation is used to allocate renewal maintenance funding and therefore the rate strike required, the tax dollar allocation or the striking of user charges. This can result in pressure to change remaining asset lives or extend theoretical useful lives as a part of a revaluation exercise. This is particularly relevant when additional assets are identified, or unit rates have increased, which can result in a threat to political promises to keep increases to a minimum. Asset valuations may also be a feed into performance indicators. Public agencies for water and transport for example readily share information, and this can be used to derive efficiency measures for stakeholders such as Treasury, Crown Ministers, governance boards or elected council representatives. Simply comparing the asset values and costs to maintain across portfolios can be a simple high-level efficiency measure. Rental charges While rare, asset value may be used to develop rental charges. However, community leases have an infinite variability in their terms, making comparisons of fair value difficult. This approach is more likely to be applied in some way with public private partnership schemes as this is simply a mechanism to bring private equity into longlife assets. In this case rent may have an annuity element Vol 2, Issue 1, March 2012 Property Quarterly 11

Public sector asset valuation linked back to the original funding arrangements, but once again the commercial arrangements are unlikely to be comparable across public private partnership schemes. Asset values are also used in asset decision-making as part of a cost-benefit analysis. The New Zealand Transit Authority requires a whole-of-life analysis and discounted cash flow analysis techniques to be part of any large capital decisions. Housing New Zealand Corporation has developed a system-based financial model which uses values and life-cycle costs as a decision-making tool.

Future trends Asset management is a growing practice throughout Australia, New Zealand and globally. In this country, the Minister of Finance has requested Treasury to assess the asset management maturity of 15 capital-intensive organisations. This follows on from the capital asset management requirement for capital-intensive government agencies to prepare 10-year capital intentions plans. The inference is that good asset management practice should underpin the preparation of the nation’s capital requests. Government agencies are implementing asset management systems to hold all their asset data, of which

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replacement costs and depreciated replacement costs are fundamental. From a property perspective, specialised property assets such as toilets and community halls, which are typically valued on a depreciated replacement cost basis may be valued based on asset system information. In this case, the valuer’s role becomes one of validation and land valuation. Clients invest in expensive systems and condition surveys to obtain and validate their portfolio information. The infrastructure asset management techniques to derive a depreciated replacement cost are now being applied to specialised property assets. Property valuers will therefore increasingly be asked to prepare valuations based on client-supplied detailed asset component information. Kerry Stewart is the National Director of Darroch Asset & Advisory, part of the Darroch organisation owned by Quotable Value. He runs a team of valuers undertaking valuation and consulting assignments for local and central government in New Zealand and overseas. Rex Harland is a Principal Asset Management Consultant for GHD Consultants, providing leading asset management advice to a range of government clients.

Complaints process

Complaints and how to deal with them Earl Gordon Once upon a time, when the Sun announced his intention to take a wife, the frogs lifted up their voices in clamor to the sky. Jupiter, disturbed by the noise of their croaking, inquired the cause of their complaint. One of them said, ‘The Sun, now while he is single, parches up the marsh, and compels us to die miserably in our arid homes. What will be our future condition if he should beget other suns?’ This is one of Aesop’s fables from around 600BC.

Rules with aims The New Zealand Institute of Valuers Rules, as approved by the Minister in charge and adopted at a general meeting in April 1997, list the objectives of the Institute to include − • To promote and encourage ethical conduct among valuers and other members of the Institute • To provide means for the amicable settlement of professional differences • To protect and promote the interests of the profession of valuing and the interests of the public in relation to valuations of land and related subjects. The Property Institute of New Zealand Rules, as dated January 2009, record their objectives to include − • Property related interests – to protect and promote the professional interests of property professionals in relation to property matters in a manner consistent with the interests of the public • Encourage ethical conduct – to promote ethical professional standards and encourage ethical conduct by property professionals • Dispute resolution – to provide a means for the amicable settlement of professional differences between or with property professionals, including appropriate disciplinary procedures. Vol 2, Issue 1, March 2012 Property Quarterly 13

Complaints process

Professional Practice Committee complaints The Professional Practice Committee is responsible for receiving complaints. These are only accepted in written format and can only be accepted against members, not companies. They may be sent to the Property Institute or can be forwarded from the Valuers Registration Board for consideration. As a general rule, complaints of an ethical nature in terms of our rules are investigated by the Professional Practice Committee in respect to registered valuers. All complaints in relation to other professionals within the Property Institute are also investigated by this committee. Reviewing the 2011 year, the committee met by teleconference seven times from February 2011 to the last meeting in December. A total of 35 formal complaints were received. Of these 31 related to registered valuers and four to other professional associations within the Property Institute. An analysis of the valuation complaints indicates − • 10 related to ethical issues • 11 alleged over-valuations of residential property • seven alleged under-valuations of residential property • two alleged under-rentals of commercial property • one alleged incorrect analysis in commercial acquisition of land. The other four Property Institute complaints related to ethical issues and alleged plant and machinery undervaluations. Two of the 31 registered valuer complaints have now been closed with no case to answer. Three other of the four Property Institute cases have also closed after investigation by this committee. In addition to formal written complaints, the Property Institute continually receives enquiries from the public about the actions of our members. This committee uses its best endeavours to diffuse the issues as much as it can. Maintaining good client relationships One ethical complaint from the list above regarded a member who inspected the client’s property. The member did not complete a report, and left the client in an intolerable situation with no other option but to formally complain. Maintaining good client relationships is paramount for any successful business or professional body. Valuers are advised to meet with their clients.Very often the client does not appreciate the limitations on the information with which the valuer has to work, or the care and attention given the task, even if the final outcome does not meet the client’s expectations. Frequently the antagonism is compounded by what is perceived to be an excessive fee, without the client realising the true nature of the service or the time, effort and risk involved. 14 Property Quarterly Vol 2, Issue 1, March 2012

Complaints process Advocacy and the expert The committee has also noted more complaints recently on the role of valuers in rental review negotiations, and often subsequent formal arbitrations and court hearings. In many cases, the situations concern small traders as commercial tenants who may have no understanding of the provisions of their lease terms and the arbitration procedures. This aspect can be further complicated when the valuer needs to explain his or her role as an expert and not an advocate − you are just the valuer, not the advocate. The standards expected of an expert were clearly stated by Judge Archer, some years ago, when he said: ‘The besetting sin of the expert is to confuse their position as a witness with that of an advocate. While it is true that expert witnesses are usually called to support a client’s case, they should remember that their function extends no further than to state the facts and to give such opinions as they are entitled, as experts, to offer. It is no part of a valuer’s function to ‘argue’ a case or to exercise those arts of advocacy which are the prerogative of Counsel. The distinction between evidence and advocacy is a fine one but the valuer should remember that this evidence will carry most weight if it conveys an assurance of disinterested sincerity. The witness who identifies themselves too closely with their client’s case may be thought to have an interest in the case which may have affected their judgment or may raise doubts as to their good faith.’ Bearing in mind the above comments a member is, as provided for in our valuation standards, entitled to act as an advocate for a client. However, the advocacy role is subject to proper professional practice in conducting negotiations on the client’s behalf and that role must be declared to all parties.

Terms of engagement The Professional Practice Committee firmly holds the view that clearly defining in writing the scope of services to be rendered to a client is an important aspect of risk management. It is one which should be included in the day-to-day management of a Property Institute practice. Most client contracts consist of a covering letter setting out the scope of work to be undertaken by the firm, clear fee structure and the timeframe to provide the service. The covering letter usually includes the terms of engagement and client acknowledgement, which the

client signs on acceptance of the terms. The terms of engagement are provided and they set out in more detail the terms to which the firm will provide in its report to the client. The statement of terms usually includes − • Scope of the assignment • The client’s responsibility • Terms of reference • Contingent limiting conditions • Client initiated agreements. Other aspects will include − • Liability and insurance • Provision for variations to the agreement • Copyright of documents • Consumer Guarantee Act 1993 • Personal information • Disputes • Termination and suspension • Guarantee and force majeure, which means that neither the firm nor the client will be liable for any act • Admission or failure under the agreement, accept failure to meet an obligation to pay money, if that act, admission or failure arises directly from a force majeure event. This would be circumstances beyond the reasonable control of the party concerned, including without, limitation, extreme weather conditions, civil disruption or industry-wide industrial action.

Countersigning valuation reports The committee reminds members of their responsibilities when signing off valuation reports of non-registered valuers and valuers not as yet with associate status. Full responsibility lies with the countersigning registered valuer. The standards are quite clear and this committee would strongly recommend that the registered valuer who is countersigning the report should inspect the property being valued, and be familiar with aspects pertinent to the property and the evidence. Registered valuers cannot contract out of their responsibilities by, for example, disclosing that they have signed the report but have not inspected the property. There have been cases recently before the Registration Board where the registered valuer who countersigned the valuation report has not been prepared to attend a hearing to answer questions about the valuation. They have been left with the only course of action, which is to plead guilty to the charges and be lumbered with the associated penalty, fine and costs. Please be careful out there. Earl Gordon is the Chair of the Professional Practice Committee for the Property Institute. Vol 2, Issue 1, March 2012 Property Quarterly 15

Seismic ratings and values

Seismic ratings are affecting Wellington CBD values Mike Horsley What effect have the Christchurch earthquakes of September 2010 and February 2011 had on the valuation of Wellington’s commercial property assets? The short answer is very significant. The most graphic illustration is the recent write-down by the NZX listed Kiwi Income Property Trust of their Wellington Flagship Majestic Office Tower. The amount was a staggering $35 million, reputedly as a result of earthquake provisioning. From a valuer’s perspective this phenomenon now requires more than a simple adjustment to the capitalisation rate to reflect a property’s increased earthquakeprone risk. Evidence has emerged over recent months of properties being positively and negatively affected by the market’s heightened awareness of seismic loading standards. Buildings with a standard at or about 100 per cent are enjoying increased tenant demand and rental appreciation, whereas those having a low rating, particularly below two-thirds of the seismic loading standard, are now being heavily penalised. In the recent past, capital expended on earthquake strengthening was often considered dead money. Before the events of Christchurch many considered the critical factors influencing a building’s rental centered around its quality of services, such as lifts and air conditioning, height and outlook, location, floor size and shape. Generally little mention was made of a seismic loading standard. I have seen investors deliberately accumulate a portfolio of heritage buildings in the belief that these assets would outperform the more utilitarian quality buildings as an investment over a medium-term horizon. There are numerous examples of office buildings exhibiting character features achieving higher rentals than surrounding bland 1980s investment quality buildings. Unfortunately many of these character buildings now require structural upgrading and are having their values heavily written back as a consequence. Today, employers are very aware of their obligation to provide a safe 16 Property Quarterly Vol 2, Issue 1, March 2012

Seismic ratings and values workplace. We are beginning to see evidence of a flight to buildings which have been certified at close to 100 per cent of the current seismic loading standard. This shift in market sentiment is creating a new quality category. In the office market we are seeing various sub-markets with vacancies rates increasing for buildings having a rating of less than two-thirds of the current standard, and reducing for those at close to 100 per cent. How are valuers dealing with these phenomena? From my perspective the questions to be answered are − • What is the extent of upgrading work required to bring the building up to as close as practicable to 100 per cent of the current seismic standard? • What is the likely effect on the value by undertaking the required work and conversely? • What happens if they do nothing? The most helpful information an owner can provide is an engineering report supported by a quantity survey or estimate of the cost to complete. Without this the valuer is stabbing in the dark. Colliers International have researched and analysed costs to structurally upgrade a number of buildings. However, the reality is that no two buildings are the same with the strengthening solution varying. For example, I am aware of a large four-storey central Te Aro building built in the late 1980s which requires relatively minor work to two shear walls to bring the building up to 100 per cent of current code. The cost estimate expressed as a rate per square metre is approximately $45. However a small three-storey early 1900s character building in Ghuznee Street has been the subject of a quantity surveyor’s cost estimate of approximately $678 a square metre for the strengthening work with an additional sum to refurbish and upgrade. A prominent seven level building on Wellington’s waterfront has been identified as being earthquakeprone, with a Wellington City Council structural strength assessment of less than 30 per cent of the current building code. The cost estimate to structurally upgrade to as close as practicable to 100 per cent of the current seismic code is approximately $890 a square metre. Further expenditure will be required for refurbishment. The $35 million provision for the Majestic building represents approximately $1,495 a square metre over the building’s lettable area. The escalating cost of building insurance is also having a big effect on property values. I have seen examples over the last six months of insurance premiums increasing from as little as 20 per cent to over 500 per cent. I have also seen two examples of insurers declining to re-insure buildings, one because the indemnity value was quantified at less than 30 per cent of the reinstatement estimate, and the second because of the building’s age and that the land on which the building stands has very soft soils.

There is also the situation of insurance companies having reached the limit of their insurance capacity. With the majority of leases currently being gross lease agreements, these cost escalations have not been able to be recovered and are reducing properties net income. Valuers are also expected to clearly understand lease provisions which may affect earthquake strengthening issues, such as the ADLS lease improvements rent percentage which may see tenants charged a portion of the upgrade costs. Traditionally valuers would not have been likely to note this clause or its implications. Another challenge relates to valuing properties which have been red stickered. This is where the upgrade costs exceed the value, demolition is not permitted due to historic or zoning classifications such as Cuba Street, and the building has been ordered to be vacated. A further consideration where a building requires structural upgrading is what allowance needs to be made for the time it is likely to take to undertake the necessary work. Do existing leases, tenants and contractors even allow a property owner to undertake this work? If not what are the consequences? Coordinating all of the leases in a multi-storey building to expire concurrently is not straightforward, nor is undertaking work on a stepped basis cost-effective. The discounted cashflow approach to valuation provides a valuer with the tools to transparently quantify capital expenditure deductions, increase or decrease insurance allowances and make vacancy and letting up allowances. However, there would also be an expectation that the terminal yield would reduce if the structural upgrading work is programmed to have been undertaken. Until such time as the work is actually completed, I would expect the discount rate to be adjusted to reflect the contingent risks with reference to the discount rate one would apply to a building where this work has been completed. The discounted cash flow approach provides the clear and preferable method to transparently model the effect on a building requiring seismic upgrading. If you are using the static approach, more than an adjustment to the capitalisation rate is required if costs are not known. In my opinion, a below the line capital deduction should be made to reflect the contingent liability. What is clear to me is that over the past 12 months or so, is that the valuation of Wellington CBD office buildings has become a much more problematic exercise. Nevertheless it is one that a well-equipped and knowledgeable valuer remains eminently capable of undertaking. This article was first published in the NZIV Wellington branch newsletter Mike Horsley FNZIV is Director of Colliers International (Wellington Valuation) Limited Vol 2, Issue 1, March 2012 Property Quarterly 17

Open source technology

Access your business software at no-cost Steve Tucker As our industry develops, the use of software will become commonplace. Not just in word processing and the creation of spreadsheets, but in every aspect of the business. With the new quality management system which is being introduced in the Property Institute, there are plenty of software options which will help business owners in the maintenance of these systems once they are accredited. Traditionally, software has also meant a significant cost with in excess of thousands of dollars being spent for every user. There is, however, a no-cost alternative for many of the software programs that you may want to operate.

A right to use and change In recent years the software industry has seen a mass of software offered to the consumer at no-cost. Free and open-source software is in essence the same thing. It is software which gives software developers the right to use, copy, alter and improve its design and redistribute. This is done by making available the source code which details every aspect of the software’s operation. In comparing this to the building industry, it would be like a building company putting all of their plans and technical drawings up for others to use. Why? Because of the benefits it brings to users and corporations. The terms free and open-source refer to the freedom to use or improve its design and redistribute the software rather than to the price of the software. This is why I am referring to software at no-cost rather than free. 18 Property Quarterly Vol 2, Issue 1, March 2012

Open source technology Many open-source software products have been established as projects within educational facilities, research into tools for particular industry such as medical or as personal projects. Some of this free and open-source software has also been packaged by developers and redistributed as alternatives to common software that users traditionally purchased. Some examples are Open Office the alternative to Microsoft office, Mozilla Firefox as an alternative to Internet Explorer and Mozilla Thunderbird which can be used instead of Outlook. I recently wrote an article on Apple versus Android for mobile devices. Android is an example of free

Open Office

Mozilla Firefox

Mozilla Thunderbird

Microsoft Office

Internet Explorer


software which has been altered and each hardware provider has added their own touch to the software and now redistribute it with their own hardware. The Apple operating system, in contrast, is fully controlled and developed by Apple. Unlike the traditional off-the-shelf software where you purchase a licence to operate it, free and open-source software can be given away at no-cost. As a consumer, this means you cannot be charged a licence fee to use the base product. Developers may have requirements around sharing additional development, but as an end user it is essentially the ability to use the software at no-cost.

Why is there no-cost? The basic answer is because those who generally distribute the software have other business initiatives where they do derive income. Some suppliers are non-profit and others are funded by large corporations. The aim is to get as many people as possible using their product because as its popularity grows with consumers, more developers will have access and further develop the product at no-cost.

The result is a better product for the consumer. Free is what the internet is all about. It is the free flow of information and the shared knowledge which sees the internet and the possibilities continue to move forward. Most of the powerful computer systems worldwide that run the internet use free software. Firefox is an example of how free or open-source software can work. It is a free web browser, used by millions of people to access the internet every day. So if Firefox is supposed to be so good, why are they not selling it? Improving Firefox for Mozilla The Mozilla Foundation, the creators of Firefox, are a non-profit organisation. Their aim is to build the best tool for browsing the internet and in return attract as many users as possible. Mozilla are able to keep the cost down using the open-source model as they limit the number of developers they employ. With open-source, developers from around the world can access the back-end of the software and improve it. This means that thousands of people contribute their time, knowledge and expertise free to help improve Firefox. Programmers write new functions into the software, identify problems, and in some case will fix the problem they identify. With thousands of programmers helping at no-cost, any problem is usually spotted and corrected quickly. Mozilla then employ programmers to manage the process. However, Mozilla do have an income and this comes from various avenues such as merchandising and most is from Google. Firefox has a Google search box which will be used by many of its consumers, and when you search for something in Google, the page with all the results on it contains advertisements. The companies who advertise with Google pay for this as a nominal fee whenever anyone clicks on their advertisements. Google donates a portion of this clickthrough revenue to Mozilla if the search was conducted through Firefox. It is this revenue, from the millions of views of advertised links via Google, which allows Mozilla to pay for their permanent staff and to cover operation costs.

Are there any other advantages? While statistics put Microsoft software clearly ahead as the most widely used software for many applications, it is thought by many that this dominance is not due to the excellent programming. Programming is an extremely difficult process and any product will have a number of problems after the initial build. Once the initial build is completed software will then go through a series of tests and fixes with the aim of ironing out all of the issues. However, this is extremely difficult and timeconsuming, and more often than not a product will be released to the market where more problems are Vol 2, Issue 1, March 2012 Property Quarterly 19

Open source technology immediately identified as each consumer will use the product in a slightly different manner. This identifying and fixing of problems once the software is in the public domain is imperative as it can be the difference between the success and failure. Nothing is perfect Free and open-source software is by no means perfect when it comes to having problems. However they are generally fixed in a considerably shorter amount of time. In the case of Firefox, updates are released immediately, not on a monthly schedule. In saying that, there is no guarantee with any software that problems will be identified and corrected. I believe it is important that if you do look to adopt a free or open-source product that you ensure it is widely used. The higher the volume of users, the more likely the problems are identified and put right. With the traditional off-the-shelf software you are generally restricted in how you can use it. With free and open-source you can have certain aspects of the software customised to your business requirements. An example of this flexibility for the property industry would be to use a free or open-source product, such as a customer relationship management system or a workflow management system, and to have a programmer develop your own site data collection module and report creator. This option may be better than other products available to the industry as it gives you a something which is unique to you. It is this ability to have a unique product that swayed us in Property InDepth to have a system fully built and customised. If this customisation is completed on a free or open-source platform, a basic site data collection and report creator module can be built at a fraction of the cost of a traditional system. Programming is also an industry that constantly sees hackers wanting to bring down the top dog. Therefore in using a product which has programmers from around the world working on it and correcting problems, assuming of course they get identified as well as not being run as the top dog, it is far less likely to suffer from an attack.

Why is there not more usage of free software? Free and open-source alternatives to traditional products are freely available, and even for the less technically savvy are easy to install. However it is often hard for people to change their habits. For others the thought of having to research the possibilities is daunting. For many it is just easier to go with what comes on the computer when you get it. However if you are looking at buying software consider the options with free and open-source, especially if you are looking to upgrade your existing business systems with technology. It can be extremely rewarding.

20 Property Quarterly Vol 2, Issue 1, March 2012

Some ideas What types of software may you want to consider to help in the effective and efficient operation in your business as the industry changes? Can you get free or open-source options for these? The following lists some ideas with some free or open-source products able to provide the functionality of a number of the individual applications listed. Application

Free or open source available



Word processing




PDF creator


Internet browser


Email management


Client relationship management


Work flow management


Mobile data collection


As you can see, you could run your entire business on software at no-cost, or a fraction of the cost of traditional customised software, if you have a free or open-source product developed to meet your business requirements. However I cannot personally endorse any specific products as I do not use most of them. The reason for not using them is because we run fully customised software for most of our business. When I could run free or open-source, I suppose I fall into the group of just not getting around to changing what came on the laptop when I purchased it. However, I do own a software development company which builds software for the management of small businesses, and the platform we build on is open-source. I am therefore an advocate. As a development company open-source allows us to build a top end product but at a cost which is achievable for small businesses. The follow links to websites are a few that I thought you may find interesting. The two following links direct you to websites which give access to, and provide information on. Windows compatible software,0 The next link gives you a tool to search for common software and which provides you with details of the no-cost alternative to software Enjoy your research and I hope I can save you some money. Steve Tucker Property InDepth


Using Skype Steve McNamara Skype is a proprietary voice over internet protocol service and software application owned by Microsoft. The service allows users to communicate with others by voice, video and instant messaging. Skype has also become popular for its additional features, including file transfer and video conferencing. Skype had 663 million registered users at September 2011. Registered users of Skype are identified by a unique Skype name and may be listed in the Skype directory. Skype allows these registered users to communicate with instant messaging and voice chat over the internet.Voice chat allows telephone calls between pairs of users and conference calling. Phone calls may be placed to recipients on the traditional telephone networks. Calls to other users within the Skype service are free of charge, while calls to landline telephones and mobile phones are charged via a debitbased user account system.

Price indications To give an example of how this works, say you were calling a client in London, Skype connects from your computer to the nearest Skype hub address in London and then you are only charged for the local call from that hub to the London number you are calling – a great saving. Skype currently shows the cost of 60 minutes of calls to UK landlines to be a total of just 89 cents. If your client also had Skype then of course you could speak to them for as long as you wish for no charge Skype’s text chat client allows group chats, storing chat history and editing of previous messages. Skype also enables you to use the usual features familiar to instant messaging users – user profiles, online status indicators and so on.

conferences currently support up to 25 people at a time, including the host. At Property InDepth, we commonly use both of these features, and with a nationwide focus on faster broadband we see these features becoming ever more important when keeping in touch with our team.

Links with iPhone Skype also has an app for the iPhone so you can also use your iPhone to call, video call and instant message your colleagues. Our valuers also use this to call our customer centre free of charge. With video calls over Skype, our valuers can also Skype each other and discuss things such as unique building materials, with both callers able to see the material in question. For a small fee you can also add features such as screen sharing. Skype has also partnered with Comcast to bring its video chat service to Comcast subscribers via their high definition television, an area we expect to see becoming ever more popular. With the benefits Skype offers our business I would strongly suggest you consider including this as part of your valuers ‘toolbox’. For more information click on www. Steve McNamara is from Property InDepth

Conference calls Video conferencing between two users was introduced in 2006 for the Windows and Mac clients. Skype for Linux, released in 2008, also features support for video conferencing. The latest Version 5 for Windows, released in May 2010, offers free video conferencing with up to five people. This includes high quality video with features such as full screen and screenin-screen modes similar to those of mid-range video conferencing systems. On a purely audio basis, Skype audio Vol 2, Issue 1, March 2012 Property Quarterly 21

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Queenstown market

Queenstown property market Doug Reid This article is a market commentary with some statistics on rural lifestyle and residential markets in the Queenstown area. The year 2012 started with a positive note and reports of good enquiries along with an in increase in written contracts which we hope will translate into an increased number of sales. During 2011 activity in the entry level market and top-end rural lifestyle was helping sales numbers, while the middle was very much still weighted towards a buyers’ market. The Christchurch earthquake has had a negative effect on tourism and the construction industry, the two most important factors which affect Queenstown. We expect a number of tradesmen will leave town to follow earthquake re-build work. In addition, with the significant reduction in hotel beds in Christchurch, tour operators have difficulty in creating new itineraries to reduce nights in Christchurch or use other options including Hanmer Springs and Lake Tekapo. The world economic crisis has a continued detrimental effect on visitor spending to levels well below the reduction in tourist numbers to Queenstown. This has a flow-on to the retail and hospitality industry employment. If residential building consents and construction values in Queenstown continue to be at depressed levels we believe this will affect the family housing market in areas such as Arthurs Point and Lake Hayes Estate as workers relocate to Christchurch. Annual dwelling consent numbers between 2009 and 2011 have not been at a lower level since 1998, and not lower by value since 2001.

Residential market Sales volumes in the residential market for 2011 showed a small increase when compared to 2010. This was only slightly above volumes in 2000 and 2008, the two lowest years in the previous 12 years, and around half of the peak sales volume in 2002 and 2003.

24 Property Quarterly Vol 2, Issue 1, March 2012

Queenstown market The average monthly sales volume for previous years

This trend in sales volume is following a similar pattern throughout New Zealand, the market having quickly turned from a sellers’ market to a buyers’ market. However, signs are that there are still a number of cashedup investors and potential first homeowners waiting in the wings to buy. This is evidenced by good attendances at mortgagee sales and with the majority of mortgagee sales being sold at a relatively low discount to the market value level. Purchasers are looking at picking up bargains, while also taking advantage of lower mortgage interest rates that are on offer. The official cash rate, at 2.5 per cent in the wake of the Canterbury earthquake, now sits at the lowest level since its inception in April 1999. Mortgage rates have followed this decrease and have become attractive for buyers who have been waiting for some time.

the development offering bulk sales at discounted prices. However, when the discounted sections are all sold, asking levels will stabilise. The increased cost of building has put pressure on construction profit margins as the ceiling of affordability is reached. Some improved property is currently being marketed at levels below replacement cost and this may curb further speculative construction in the short term. Some tradesmen are predicted to move to Christchurch to help with the rebuilding process and the anticipated shortage of workers in wake of the earthquakes. This, and the likely increase in the cost of raw materials resulting from the Japan earthquake, will also increase the costs of construction locally. For prime residential property there has been good activity. However this upper end is still only a relatively small percentage of the market and is taking longer to sell in relation to the lower value brackets. The enquiry level for this part of the market has been good and further construction activity is underway. Overall sales volume for the 12 months ending November 2011 is up six per cent when compared to the same period for the previous year.Year-on-year sales of dwellings were up eight per cent, section sales up by 13 per cent, with unit sales volumes also increasing 13 per cent from the previous year. The main decrease is for managed apartments which have shown a decrease in volume of 27 per cent. A number of previously managed apartments are being sold without a management contract in place, which is reflected in the decrease of managed apartments sold and the increase in the volume of nonmanaged units.

Good demand Demand for entry level property still appears good with reasonably priced units and dwellings being signed up by first time homeowners who have approved finance already in place. We have also noted that sales volume and value of residential sections in areas such as Lake Hayes Estate have decreased in line with housing sales prices in those locations. Section values within Jacks Point have fallen as a result of the owner of a large portfolio of sites within

New consents The value of consents for new dwellings has increased by eight per cent for the year ending June 2011 when compared with the previous year. The total value of construction of all new buildings has remained relatively unchanged, recording a small decrease from the previous 12 months. On a six-month comparison, that is, the six months ending June 2011 compared with the six months ending December 2010, the value of consents for new


Average monthly sales volume

























Vol 2, Issue 1, March 2012 Property Quarterly 25

Queenstown market dwellings has decreased in value by 21 per cent. The value of consents for alterations has remained relatively unchanged as owners continue to see value in upgrading their existing homes versus selling and upgrading to more expensive ones. The graph at the bottom of the page shows actual residential sales volumes by sector and projected sales volumes for 2011 mapped against the last 26 years. These statistics exclude sales direct from developers or some which have not yet settled. We estimate this could be up to 10 per cent of the current market. Projections • Total sales levels to stabilise in line with 2011 volumes with a small increase likely • A reduction in forced sales as a large number of distressed properties have already been presented to the market • Banks to reduce funding obstacles allowing smaller investors back into the market • An increase in sales of higher yielding properties as investors take advantage of reduced costs of funding and vendors are forced to sell • Managed apartment yields to fall further due to reduced returns from increased competition although partially offset by an increase in tourist numbers • Investors re-entering the market due to re-priced assets, lower costs of funding and government policies becoming clearer • Both residential and lifestyle section prices to remain at relatively low levels in comparison with previous pricing due to increased volume available • Some areas of development land to be ‘land banked’ as

26 Property Quarterly Vol 2, Issue 1, March 2012

still not viable to develop • Continuing uncertainty due to the Christchurch earthquakes.

Rural lifestyle After a softening of value levels over 2008 to 2010 the rural lifestyle market in general has shown confident signs. There has been an increase in vacant site sale numbers, an increase in the medium vacant sale price, along with continued momentum in the upper end premium lifestyle market. Sales numbers for vacant sites for 2011 was 50, which compares to a previous five-year average of 47 and a 10year average of 56 transactions each year. The 2011 median sale value was up 35 per cent to $785,000 on the back of a 31 per cent rise the previous year. A number of purchasers have perceived bargains over the last three years as a high proportion of forced sales flowed through the market place. The 2008 to 2011 period has seen a trend toward sites selling at levels significantly discounted from expectations held in 2006/07. High quality sites having exceptional attributes have been in demand and continue to get premium prices. Strong sales Out of the 26 rural lifestyle homes to sell in 2010, 42 per cent were over $2 million, boosting the average sale price to $1.94 million in 2010. This indicates a strong upper end market for property which had reduced in value over the previous two years. Over the past year, lifestyle home sales have been reasonably strong, with 31 recorded in 2011 at a median of $1,280,000. However, we have noted

Queenstown market

less activity above $2 million and a large increase in sales transactions between $1 million and $2 million. Local agents have reported strong sales enquiry for homes above $2 million and we believe that there will be sales flowthrough over the first quarter of 2012. It is evident that there is a two-tier market for lifestyle property, with the lower to medium value properties being reasonably static in value, while a rise in overseas interest has fuelled increases in the upper end dwellings and prime sites. This is near to values seen at the peak of the market. Of particular note are the section sales at Wyuna Preserve for between $950,000 and $2.7 million. The graph above indicates that the median lifestyle section prices increased substantially from the year 2000, peaking in 2007 before falling back to a level similar to 2004.Values have showed a steady increase over the last two years. Examples of vacant lifestyle sales • A well landscaped 6.8 hectare site on Slope Hill Road sold in May 2011 for $1,800,000. This site features attractive ponds and native plantings as well as benefits from panoramic mountain views. • Lot 14 Wyuna Preserve in Glenorchy sold in May 2011 for around $2,348,000. This is an elevated site with panoramic lake views and vistas towards Mount Earnslaw. Lot 22 within Wyuna has also reportedly sold for $2,700,000 in May 2011. • An eight hectare site located on the Crown Terrace sold in July 2011 for $1,800,000. This site slopes at easy

contour to the north-west and has iconic views over the Wakatipu Basin. Improved sales Lot 12 Wyuna Preserve, Glenorchy sold in May 2011 for $5,200,000. This is a recently built superior quality dwelling in the Wyuna Preserves with good lake and mountain views. The house has four bedrooms each with ensuite bathrooms, and has been fitted out to a high standard A property at 39 Mountain View Road sold in April 2011 for $6 million. This is an attractive five bedroom house on an elevated site of just over three hectares. It also has panoramic mountain views to the south and north. The home has been substantially modernised and extended.

Projections There will be a reduction in the number of proposed developments and consents issued. Due to a lack of confidence in the economy and the predicted period of general economic recovery we believe there will be very few speculative buyers for vacant sites. The majority of the purchasers are expected to build as opposed to hold. We are expecting an increase in section sale numbers over 2012. A number of developers with high levels of stock are lowering asking prices to encourage further purchasers into the market. Doug Reid is a property consultant and registered valuer at Colliers International, Queenstown Vol 2, Issue 1, March 2012 Property Quarterly 27

Legal cases

Legal cases Verboeket v Seaview Road Limited High Court Wellington Niven Prasad The High Court case of Verboeket v Seaview Road Limited explores the situation of a purchaser attempting to suspend a contract before settlement while unexpected issues are resolved. The decision offers interesting lessons in approaching unanticipated difficulties in a sale and purchase transaction and reaffirms the obligations of parties to settle an unconditional contract.

Decision The purchaser in this case pleaded five causes of action, all of which were dismissed. • There was no contract when the purchaser paid a deposit • The vendor was in breach of its duties as a constructive trustee • The vendor had engaged in misleading and deceptive conduct in breach of section 9 of the Fair Trading Act 1986 • The vendor made false or misleading representation in breach of the FTA 1986 • The vendor wrongly purported to cancel the contract. In the result, cancellation damages, real estate agent’s commission and legal expenses were awarded in favour of the vendor, Seaview Road Limited, for the purchaser’s failure to settle. The first cause of action was dismissed because an exchange of communication had first, cancelled the contract, but then reinstated it by the time the deposit was paid. The events are outlined below. Causes of action two to four above related to the non-disclosure of a lease by the vendor. As the lease was not crucially different from leases already existing on the property, the Court held that the purchaser’s reliance on the non-disclosed lease was simply a ‘pretext, not a valid commercial reason for seeking to be released from 28 Property Quarterly Vol 2, Issue 1, March 2012

the contract.’ Mr Verboeket was not helped in this cause when he ‘adopted a strategy which he knew to be false in seeking to avoid the cancellation of the contract and have it renewed.’ In relation to the fifth cause of action, the purchaser neither tendered the purchase price nor complied with the settlement notice. The Court held that Mr Verboeket ‘had not taken any action which might have been available to him under the contract to ensure that his failure to settle would not constitute a breach of the contract by him triggering the vendor's right to cancel for a breach.’

The first cancellation Seaview first attempted to cancel the contract because the valuation condition had not been confirmed in time. This would have brought the contract to an end, but for the conduct of Mr Verboeket, who ‘deliberately set out to mislead [the vendor’s solicitors] into believing that he had not received the notice of cancellation before he sent his letter …’ The order of events leading to the first cancellation were as follows − • On 23 December 2009, Seaview sent Mr Verboeket a fax cancelling the contract for non-fulfillment of the valuation condition • Mr Verboeket was advised of the fax by his business partner the following day. He immediately sent a letter confirming satisfaction of the valuation condition.

Legal cases • In a further letter dated 8 January 2010, the plaintiff insisted that Seaview’s cancellation had no effect, having come after confirmation of the valuation condition. • The purchaser confirmed that the remaining conditions were satisfied and that the contract was unconditional. The deposit was paid the same day. • Seaview replied on 11 January 2010, accepting that the contract was unconditional and anticipating settlement on 1 February 2010. On the Court’s analysis, this series of events meant that the contract had initially been cancelled by the vendor’s notice of cancellation, but subsequently reinstated by the purchaser’s confirmation of the condition and the vendor's acceptance of that confirmation.

Second cancellation – The Nicholls Lease Mr Verboeket pleaded that the vendor breached an obligation to disclose information relating to leases to the purchaser. In particular, there was a lease called the

Nicholls lease which was renewed before the settlement date without the purchaser’s knowledge. The Court concluded that the non-disclosed lease would not have caused the purchaser any loss or damage as there was no crucial difference between the existence of the Nicholls lease and other leases already on the property. It was on this basis that the purchaser attempted to delay settlement but the Court held that a breach of a warranty, if indeed there was one, ‘does not defer the obligation to settle.’ Accordingly, the vendor had the right to issue a settlement notice and subsequently cancel the agreement. Overall, the case is helpful in showing that putting an agreement for sale and purchase on hold for a possible breach of warranty should be a carefully considered approach for a purchaser. Without the right reasons, it is a course of action where a purchaser runs the risk of potentially losing their deposit in such circumstances. Niven Prasad is a solicitor at Simpson Grierson.

Unit titles – nuisance caused by a body corporate and its management company Wu v Body Corporate Niven Prasad A body corporate’s powers are limited by the Unit Titles Act 2010. The body corporate only has the powers which are reasonably necessary to enable it to carry out the duties imposed on it by the Act and its rules. The case of Wu v Body Corporate 366611, albeit under the old Unit Titles Act 1972 (1972 Act), shows that if a body corporate does not have the power to impose access conditions on unit owners, then the body corporate may be liable. The plaintiff unit owners in the Wu case had to pay a security deposit to obtain electronic swipe cards from the defendant management company, Theta Management. The electronic swipe cards were necessary to access the building common areas and the units owned by the plaintiff. Without the swipe cards the unit owners could not lease their units out to anyone.

Background Buyers of units in the Empire student apartment building in Auckland were required by the body corporate rules to enter into a lease with a management company, Academic, when the buyer bought a unit. Academic subsequently went into liquidation and another management company,

Theta, took over as manager. Theta invited existing owners to enter into new leases with Theta. Unit owners, however, did not have to sign a new lease. The plaintiffs in this case were some of those who did not sign up with the new lease. In its attempt to uniformly manage and control the whole of the apartment complex, Theta reconfigured all the electronic swipe cards, leaving those who had not signed a lease with Theta without any functioning cards. The body corporate and Theta as their agents were the defendants in this case.

Judgment The High Court decided that − • The lack of access for the plaintiffs amounted to a Vol 2, Issue 1, March 2012 Property Quarterly 29

Legal cases nuisance by Theta and the body corporate • Certain rules entrenched in the body corporate rules by the developer were ultra vires or, in other words, illegal • Under the plaintiff's third claim, the body corporate was charging a wrongful levy by charging a flat rate • The plaintiff's fourth claim that the use of proxies by Theta was illegal should be dismissed. We briefly discuss each of the four causes of action The lack of access caused by the denial of electronic swipe cards amounted to nuisance or trespass Reprogramming the electronic swipe cards and maintaining them so that the plaintiffs could not use them constituted the act of nuisance in this case. A reasonableness test was applied by the Court to find out ‘whether a reasonable person, living or working in the particular area, would regard the interference as unacceptable’. The fact that the nuisance emanated from a common area, which the defendants had a right to occupy, still allowed the Court to find the defendants liable in nuisance. The security cards were offered to the plaintiffs only on payment of a security deposit and on signing up to a detailed protocol. These conditions were considered by the Court to ‘go far beyond what might be considered necessary for the control, management or administration of the common property’. From the evidence available, the Court did not find the defendants liable for trespass. The Court hinted, however, that there remained a question about whether the electronic impulse which changed the locks could have been a trespass. If the Court had not found for the plaintiffs in nuisance, it would have sought further evidence on the trespass claim. Ultra vires rules All of the body corporate rules which the plaintiffs argued were ultra vires and were declared so by the Court. The default rules in schedules 2 and 3 of the 1972 Act can be amended if the amendments relate to the ‘control, management, administration, use, or enjoyment’ of the units or common property. No powers or duties can be conferred on the body corporate ‘which are not incidental to the performance of the duties or powers imposed on it by this Act’. The plaintiffs argued that there were four amended rules which did not fit these criteria and were accordingly ultra vires • Rule 2.1(g) was restrictive and deemed ultra vires because the rule required every unit proprietor to enter into a lease with the property manager when the proprietor bought a unit. • Rule 2.5 allowed the property manager as lessee to be a member of the committee. The Court ruled 30 Property Quarterly Vol 2, Issue 1, March 2012

that this rule was ultra vires because the 1972 Act contemplated that only proprietors of units could be on the committee. The rule went beyond being merely ‘incidental’ to existing duties and powers conferred by the 1972 Act. • Rule 2.39(b) empowered the secretary of the body corporate to exercise a non-attending owner's vote as it chose, without consulting the owner. • Rule 2.4.2 imposed the academic form of management agreement on the body corporate. It prevented the body corporate from negotiating and entering any other form of agreement. The Court concluded that even though entering into a management agreement can be seen as incidental to the powers of a body corporate, the type of ‘intensely prescriptive’ agreement in this case went too far beyond the default rules. Such a detailed and entrenched regime was deemed ultra vires by the Court. Wrongful levy There were levies charged by Theta to the unit owners as flat rates and not in accordance with unit entitlements. In addition, levies were charged to unit owners to raise funds in order to defend the proceedings which were the subject of this case and earlier related proceedings. The Court declared that a flat levy was not contemplated by the Act and was wrongful. As a result, all related resolutions were declared ultra vires and invalid. Proxies – management company voting on behalf of proprietors in their absence The standard form of Theta lease had a provision permitting Theta to cast votes at a meeting for a proprietor in the proprietor’s absence. The Court dismissed the plaintiff ’s claim that these proxies were illegal because the rules were in the same terms as those allowed under the 1972 Act. On a technical point, the plaintiff was entitled to challenge the interpretation of the wording in the lease, but the Court found that the plaintiff was challenging the use of the provision and not the interpretation.

What the case tells us While this case was decided under the ambit of the Unit Titles Act 1972, the principles around nuisance, ultra vires rules and charging wrongful levies remain instructive. Arrangements around powers and duties of a property manager, and any potential changeover in management, should always be checked for consistency with the powers and duties allowed by the Act. This will ensure the arrangements are legal and balanced against the rights of unit owners. Niven Prasad is a solicitor for Simpson Grierson

Investment valuation methodology

Cash flows – myths, methodology and real valuation Rodney Jefferies The author summarises observations of over 45 years of practice, education and research into investment valuation methodology. Stink thinking in valuation theory and practice, the implicit mythology and flaws in the use of capitalisation and discounted cash flow approaches, are exposed. A new real valuation concept – the all risks real yield method – for income property is introduced, developed in research into valuation modelling.

Where have we come from? As a valuation department urban field cadet my first encounter with cash flows was in the late Fred Noble’s urban valuation lectures at the University of Auckland’s Diploma of Urban Valuation course in 1963. In those formative days the text was the little 276 page blue book published in 1959, Principles and Practice of Urban Valuation in New Zealand. Valuing commercial property was easy – the rent actually paid was capitalised by dividing it by the cap rate. There was no problem with rents as they

Vol 2, Issue 1, March 2012 Property Quarterly 31

Investment valuation methodology were fixed under the Tenancy Act 1948 and cap rates were standardised according to type. Fred told us what to use – we wrote the information inside the text cover and that was it.

The quest for an answer began in 1997 with research into real valuation models at the University of Auckland. The solution has, belatedly, only come to me since 2010 in my PhD research at Lincoln University.

Income capitalisation theory On taking up lecturing at Auckland University between 1974 and 1977, commercial valuation methods had remained largely unchanged since World War II, being pragmatic and encapsulated in the blue book which Fred Noble had edited. Something up-to-date was required, so I wrote the first edition of the revised NZ Institute of Valuers textbook in 1978, Urban Valuation in New Zealand. However, the theory of deriving and using capitalisation rates was an error in hindsight. It used a built-up approach adjusting gilt-edged interest rates for risk management, following the treatment in United States texts. It failed to recognise expected inflation and expected real growth in rentals and their effect on yields and cap rates.

Dispelling valuation myths This article aims to expose the myths and flaws in current valuation thinking, theory and practice. Then, by introducing a new way of thinking in real valuation terms, overcome these mythologies. First let us look at valuers’ stink thinking by unpacking what capitalisation rates really are, and how they should be understood, determined and applied. Secondly the new concept is introduced – real value valuation. This requires a change of thinking and calculation approach. It applies a new concept of an all risks real yield (ARRY) as the seminal basis for income property valuation.

NZIV 1959 text book

NZIV 1978 text book

Stink thinking in valuation? Capitalisation equation myth Income capitalisation is described in the latest IVSC 2010 Valuation Standards under the income approach as ‘income capitalisation, where an all-risks or overall capitalisation rate is applied to a representative single period income’. Traditional income property valuation uses an equation capitalising net operating income into value and dividing by a capitalisation rate NOI/R = V income ÷ cap rate = capitalised value

NZIV 1991 text book

Fixed interest cash tradable securities are incomparable with reviewable rental and capital growth property investments. Their returns cannot be directly linked in this way. The resulting ‘stink thinking’ in New Zealand surrounding capitalisation of cash flows continues to the present time. I naively repeated the same errors in the second edition of my book in 1991. Over the last 17 years I have concluded that the thinking behind what valuers do is wrong, being theoretically unsound, and that there must be a better way. 32 Property Quarterly Vol 2, Issue 1, March 2012

This equation, or in its more common form of I/R= V, is in all the valuation literature, appraisal texts and valuation standards. However, it is misleading and wrong. It is the first myth and needs exposing − it cannot be a mathematical equation. If it was then it can be rearranged, for example,V = I/R, therefore I = V×R. However, which valuer first values the property and then applies a cap rate to assess a rental? Correctly, capitalised value is a function of the initial rental and required rate of return: V = ƒ(I, R) or expressed as V ⇐ I/R where ⇐ means ‘results from’.Value is dependent on capitalised rental prospects, not the other way round. It is relational, not deterministic. Everything in a cap rate myth In a sense everything is in an all risks yield or overall capitalisation rate (RO, USA), defined as NOI/CV ⇒ RO net operating income ÷ capital value ⇒ results in the overall cap rate. Normalised net income (NOI) is frequently defined as a stabilised or normalised net income, assuming full

Investment valuation methodology occupancy and market rentals. This is rarely the case in reality. RO is more correctly all the implied factors which reflect the intrinsic property’s lease terms, rental, occupancy characteristics, extrinsic property location and market influences. Cap rates are generally sourced from analyses of comparable sales. The initial cash flow or actual net operating income I, is divided by the sale price P to give the initial yield RI or cap rate as I/P ⇒ RI. Failure to adjust RO or RI for different lease terms, over- or underrented space, ratchet clauses, vacancies, gross or nett leases, rent-free periods or other incentives, and other market factors will lead to error. In direct capitalisation these factors are all implied and wrapped up in the valuer’s intuitive judgement in interpreting sales analyses when adopting that vital cap rate to apply in a valuation. The myth lies in using a hypothetical normalised net income, but more so in the non-explicit components of a cap rate. Cap rates are a market rates myth If recent comparable sales analysis indicate a narrow range of current cap rates, the valuer may feel confident to apply the average initial yield as a market cap rate to the subject’s net income. That is I/RI ⇒ V, to determine the current market value. The ‘stink thinking’ is that RI based on initial net cash flow, or RO if based on normalised net income, is a market cap rate. A market cap rate is, however, a misnomer. A generic market cap rate even for a similar class of property is indeterminate. An investment property, theoretically, has a market cap rate which is unique and specific to it as at the date on which it is leased, has a rent review or is renewed. This is only determined if it concurrently sells on that date providing evidentiary market data, that is, current annual market rental as a percentage each year of concurrent market price. Such sales rarely occur with lease commencement at settlement. Inflation equals growth myth Valuers confuse these two different economic concepts. Conventional valuation does not distinguish their different effects on rentals and values. Inflation is the effect of increasing money supply on the value of goods, services and asset prices in the economy. Its effect is measured by indices, such as the consumer Price Index. If expected rents of property investors do not keep up with expected inflation they will suffer losses in real terms, after the depreciating effect on the purchasing power of the future rental and capitalised value. Growth is the expected increase in future property rentals when capitalised into higher future monetary values. These do not change in tandem due to changes

in cap rates. Actual growth can only be determined by analysis at a future sale date. Due to the effect of expected inflation, overall growth has two components − inflation and real. Real growth is the expected increase in rentals and capital values after allowing for expected inflation. This may be positive or negative, depending on whether monetary rentals and property values rise at a greater or lesser rate than inflation. Real capital gain is only achieved if capitalised rents increase more than the offsetting effects of monetary inflation and building depreciation. Where rentals are reviewed less frequently than annually, as is the norm in New Zealand, extra real growth will be required over the rental review period to at least offset the delayed real growth in rentals. Direct capitalisation does not explicitly allow for these future expectations and their consequences. Error correction myth A major direct capitalisation myth is the valuer’s typical defence to criticism of the method’s pragmatic reliance on intuitive judgement. The argument is that if there are mistakes they will be offsetting. Take, for example, where current standard ADLS leases are paid monthly in advance with two-year rent reviews. In this case a valuer relies on a recent comparable sale which sold three months ago for $1,500,000. It was let nine months earlier at $125,000 a year, having two rights of renewal of four-year terms. The initial yield or overall cap rate is 8.33 per cent each year. In valuing a physically comparable nearby property, but rented at $153,000 a year, the valuer applies that cap rate and rounds the valuation off to $1,837,000. However, the lease has three-year rent reviews for a term of six years with one right of renewal. It began two years ago and is currently over-rented by $20,000 a year due to leasing incentives with a hard ratchet clause. No allowance for the over-renting, nor explicitly adjusting for the different terms of lease in adopting the cap rate, results in significant error. The correct adjusted initial or overall cap rate is 9.66 per cent a year, giving a value of $1,584,000. The property is over-valued by $253,000, a 16 per cent error. Discounted cash flow valuation a more accurate myth Discounted cash flow was mentioned in passing in both editions of the NZIV text, but not demonstrated. However it was introduced and used in simple examples in volume two in 1990. Discounted cash flows became an important forecasting-based valuation method or rather a technique in the mid-1990s. The NZIV ran a series of courses on income capitalisation and discounted cash flows which the author presented throughout the country and published in 1995. Vol 2, Issue 1, March 2012 Property Quarterly 33

Investment valuation methodology NZIV text 1990 Volume 2

NZIV monograph 1995

This promoted simple Excel spreadsheet templates which have been widely adopted by the profession in New Zealand. Discounted cash flows claimed superiority, but accuracy comes with its own myths. • Calculation accuracy of property valuations is dependent on an overall nominal discount rate which includes risk and implicit expected nominal growth • Constant or variable forecast growth rates applied to future cash flows are not explicit as to the effect of expected monetary inflation • An arbitrary holding period with a resale assumed on termination, typically in 10 years’ time, is based on direct capitalisation of the next year’s forecast net cash flow – this terminal value suffers from all the myths and errors exposed earlier • Usually the terminal cap rate is arbitrarily higher by a premium for risk often 0.5 per cent above the initial or ingoing cap rate for which no evidence exist • The intrepidly computed terminal values represent the bulk of the total PVs, typically 50 per cent to 60 per cent in a 10-year discounted cash flow and 60 per cent to 70 per cent in a five-year discounted cash flow • If the overall holding period forecast growth rates do not exceed overall expected inflation plus rental depreciation, then negative real growth will be implicitly included, but misleadingly not exposed • Expected inflation is masked, due to its fusion within the nominal discount rate, so growth is frequently illusory and offset by its implied inclusion in the discount rate to derive the property valuations. Multiple assumptions are cumulative even if offsetting, affecting accuracy, especially the nominal growth rate, terminal cap rate and nominal discount rate. The most significant myth is that discounted cash flows are more accurate than traditional direct capitalisation models, which is challenged. The more assumptions required, the greater the risk of error. 34 Property Quarterly Vol 2, Issue 1, March 2012

Real value for real estate valuation? The author has developed a new real value-based income property valuation model which is more accurate, explicit and flexible than direct capitalisation. It is much simpler with fewer assumptions, inputs and calculations with no period-by-period forecasting of cash flows. Its real value is its use of current contract and market rents with the valuer’s forecasts limited to real growth rates. All risks real yield (ARRY) or YA is defined, where Y is yield, and subscript A is a notation meaning all risks real as − The real value annually in arrears yield, which is the real internal rate of return that discounts the real values of the term to run plus the real reversionary value to equal the present real value or sale price/current market value. YA is derived from current market sales analysis.YA is also the initial yield of a property with a contract C market subscript M rent − CM with annual rent reviews shown by the superscript 1 in arrears, that is, end of period, where sold at the lease commencement, at a rent review date or at renewal. Annual end of period market rent ÷ Price (P) CM1 ÷ P ⇒ YA Forecasts From a property investor’s perspective there are two aspects of vital concern, expected inflation (Ie) and expected real growth (Gr) in rents and capitalised values. Ie is obtained from economic forecasting data which investors rely on. Gr is the valuer’s only assumption, but based on sales and market analyses. All other inputs are factual or normal current market data and rental assessments. The key discount rate – the all risks real yield (ARRY) YA – is sourced directly from market sales analyses of investment property. It can be verified by comparison to an adjusted required nominal overall rate of return (YO), or nominal discount rate used in discounted cash flows, where: YA + Ie + Gr ⇒ YO. The room for error is minimised in ARRY valuation. Calculations of the present real value of future real cash flows use a multi-capitalisation model based on the contractual rental for the term to run, and current real rental on reviews, renewals or re-leasing on expiry. Capitalisation rate calculation Each tranche’s nett real annual rental is capitalised into value in perpetuity using an accurate formula-based capitalisation rate. For example, where R is the cap rate, subscript A is all risks real and T is the current term to run to next rent review in years, the ARRY capitalisation rate per annum RAT formula is

Investment valuation methodology This allows for the term to run T, expected inflation Ie, and real growth rate Gr. All other risks are implicit in the ARRY YA. Different cap rates allow for the frequency (F) of future rent review periods or right of renewal (RR) rent review periods, current market (M) rent review periods on re-leasing. The respective cap rates are similarly calculated, by substituting these for T in the above formula. The ARRY model calculates the ARRY cap rate on the basis of the rental payment frequency and timing, for example, in advance, and converts the cap rate to an annual rental equivalent. The basic ARRY valuation algorithm in schematic form is shown below. The formula for calculating the present real values discounted at the ARRY of each

tranche of the future real cash flows are also shown. The tranches of rentals in real terms in the lower chart. The upper chart shows the capitalised future real values plotted against the right-hand and present real values plotted against the left-hand axes. Multiple capitalisation procedure Each different ‘time in the future’ real rentals using their current real rentals are capitalised at their ARRY cap rate to give their future real values in perpetuity. These future real values are discounted at the ARRY from their deferred commencement dates to calculate their present real values. The current contract rental is capitalised to give its

Vol 2, Issue 1, March 2012 Property Quarterly 35

Investment valuation methodology

Sales analysis All risk real yield (ARRY) real value investment approach valuation Summary of inputs, critical lease data, rentals, current market data at valuation date 1/11/2011 Expected nominal annual expected inflation rate

3.0% per annum

Forecast real annual growth rate

1.0% per annum

Nominal value annual growth rate − sum of above two rates

4.0% per annum

Required all-risks real yield annual rate − solved by using goal seek to make the total present real value equal sale price

8.64% per annum

Required nominal annual overall yield − sum of above two rates

12.64% per annum

Contract rental review frequency in years

2.00 years

Current rental term to run to next rental review at 1/2/2013

1.25 years

Contract lease including two renewals of four years from expiry 31/1/2015 to termination 31/1/2023

11.25 years

Contract rental to run from valuation date 1/11/2011 until next rental review at 1/2/2013

$125,000 per annum

Current contract rental – if reviewed at valuation date

$129,000 per annum

Current market rental on three-yearly rental review terms and conditions at valuation date

$133,000 per annum

Rental payments basis − BOP in advance

Monthly BOP

Present real value of term to run to next rental review or to lease expiry, or present real value of first review term after initial vacancy, if allowed Contract rental $125,000 per annum capitalised in perpetuity at 8.45% per annum


Less present real value of capitalised contract rental in 1.25 years at YA: 8.64% per annum


Present real value of contract rental for term to run to next rent review in 1.25 years


Present real value of contract rentals from next rent review to current lease expiry Contract rental if currently reviewed $129,000 per annum capitalised in perpetuity at 8.57% per annum


Present real value of capitalised currently reviewed rental real value above at next rent review in 1.25 years’ time @ YA: 8.64%


Less – present real value of capitalised reviewed rental real value above at expiry in 3.25 years’ time @ YA: 8.64% per annum


Present real value of rental term from rental review in 1.25 years to lease expiry in 3.5 years by deduction


per annum

Present real value of contract rentals from lease expiry to final expiry of renewals if applicable Renewal rental as at valuation date with two-year rental reviews − $129,00 per annum capitalised in perpetuity at 8.72% per annum


Present real value of capitalised renewal rental real value above at least expiry in 3.25 years’ time at YA: 8.64% per annum


Less deferred present real value of capitalised renewal rental real value above at final expiry in 11.25 years at YA: 8.64% per annum


Present real value of reversionary renewals until final expiry in 11.25 years, by deduction


Present real value at next rental review if perpetually renewable, or on re-leasing at final expiry, or at termination Current market rental $133,000 per annum with three rent reviews capitalised in perpetuity at 8.72% per annum


Present real value of capitalised market rental real value above at lease expiry in 11.25 years’ time @ YA: 8.64% per annum


Total present real value at next rental review, or on re-leasing, or at termination


Total other adjustments if applicable

$ ------

Total present real value − terms and reversions plus or minus other adjustments is the current market value


Current real market value rounded


Net initial yield, or overall cap rate, after any initial vacancy if applicable plus current market value

8.33% per annum

present real value in perpetuity. Then, that present real values is deferred to its expiry, next review or renewal date as applicable, and that future real value is discounted at the ARRY to calculate its present real value and deducted from the present real value in perpetuity to calculate the net present real value for the term to run. The value of each future tranche of real rentals is calculated by deducting the present real value of their future real value deferred to the terminating date of that tranche of income from the present real value deferred to the beginning of that period. This procedure is used to calculate the net present 36 Property Quarterly Vol 2, Issue 1, March 2012

real value of future rent review periods and renewal periods respectively. If re-leasing on expiry is assumed, the future real value of the current real market rental capitalised in perpetuity is discounted at the ARRY from the re-leasing date, to calculate its present real value. If an alternative use instead of re-leasing at lease expiry is assumed, then its future real value is calculated and discounted at the ARRY from the deferred lease expiry date to calculate its present real value. A different real growth rate may apply to calculate that future real value.

Investment valuation methodology

All risk real yield (ARRY) real value investment approach valuation Summary of inputs, critical lease data, rentals, current market data at valuation date 1/2/2012 Expected nominal annual expected inflation rate

3.0% per annum

Forecast areal annual growth rate

1.0% per annum

Nominal value annual growth rate, sum of above two rates

4.0% per annum

Required all-risks real yield annual (ARRY) rate based on sales analyses and slightly increased risk

8.7% per annum

Required nominal annual overall yield, sum of above two rates

12.7% per annum

Contract rental review frequency in years

3 years

Current rental term to run to next rental review at 1/2/2013

1 year

Contract lease including one renewal of six years from expiry 31/1/2016 to termination 31/1/2022

10 years

Contract rental to run from valuation date 1/2/2012 until next rental review at 1/2/2013

$153,000 per annum

Current contract rental – if reviewed as at valuation date

$133,000 per annum

For prescribed rental only – not applicable


Current market rental on two-yearly rental review terms and conditions at valuation date

$129,000 per annum

Rental payments basis − EOP in arrears, BOP in advance

Monthly BOP

Present real value of term to run to next rental review if any or to lease expiry, or present real value of first review term after initial vacancy if allowed Contract rental $153,000 per annum capitalised in perpetuity at 8.46% per annum


Less present real value of capitalised contract rental in one year @ YA: 8.7% per annum


Present real value of contract rental for term to run to next rent review in one year, by deduction


Present real value of contract rental from next rent review if applicable to current lease expiry Minimum of annual contract rental $153,000 per annum capitalised in perpetuity at 8.77% per annum


Present real value of capitalised currently reviewed rental real value above at next rent review in one year’s time at YA: 8.7% per annum $1,603,263 Less Present real value of capitalised reviewed rental real value above at expiry in four years’ time at YA: 8.7% per annum


Present real value of rental term from rental review in one year to lease expiry in four years by deduction


Present real value of contract rentals from lease expiry to final expiry of renewals if applicable Renewal rental as at valuation date with three-year rental reviews, $133,000 per annum capitalised in perpetuity at 8.62% per annum


Present real value of capitalised renewal rental real value above at least expiry in four years’ time at YA: 8.7% per annum.


Less deferred present real value of capitalised renewal rental real value above at final expiry in 10 years at YA: 8.7% per annum


Present real value of reversionary renewals until final expiry in 10 years by deduction


PRC at next rental review if perpetually renewable, or on re-leasing at final expiry, or at termination as applicable Current market rental $129,000 per annum with two rent reviews capitalised in perpetuity at 8.62% per annum


Present real value of capitalised market rental real value above at lease expiry in 10 years’ time at YA: 8.7% per annum.


Total present real value at next rental review, or on re-leasing, or at termination as applicable


Total other adjustments if applicable

Total present real value − terms and reversions plus or minus other adjustments equals the current market value


Current real market value – current market value rounded


Net initial yield, or overall cap rate, after any initial vacancy if applicable plus current market value

9.65% per annum

Spreadsheet templates are used for the model’s use efficient, requiring only the essential data and inputs by the valuer. All calculations are accurately automated. An ARRY sales analysis printout summary for the earlier example is shown below. This analyses an ARRY of 8.6 per cent per year by using Excel’s Goal Seek utility to give a total present real value which equals the sale price. An ARRY valuation printout summary for the earlier example is shown in Figure 10. This uses an ARRY of 8.70 per cent a year based on the sales analysis of the above comparable property and in practice on other sales, and allows for the increased risk due to the over-renting.

The valuation adjusts accurately for the differences in the lease terms and real rental levels. The ARRY is a modal market cap rate that is adjusted for different lease and market terms. It is a basic ‘unit of comparison’ derived from sales analyses and then applied in income property valuations. Rodney Jefferies retired (again) at the end of 2010 after seven years as Associate Professor of Urban Property Studies at Lincoln University. However, he continues his passion for valuation as a PhD student researching “real value” property investment valuation models.

Vol 2, Issue 1, March 2012 Property Quarterly 37

Government policy

Building a brighter future National election policy Ian Campbell Last year’s general election reinstated the National Party and its supporting parties, including ACT New Zealand and United Future, under the MMP system. Accordingly, a National-led coalition was returned back into office to run the country for their second three-year term. For the purposes of this article, election policies promoted by the National Party for ‘Building a Brighter Future’ are outlined. Specific policies which are likely to influence the course of New Zealand’s housing, construction, property and direction of investment markets for the next three years or more are identified.

Post-election action plan summary On the economy − • Halve the budget deficit next year and be back in surplus in 2014/2015 • Finalise department four-year spending plans • Connect 58,000 premises to ultra-fast broadband by July 2012 • Introduce legislation to change ACC to allow choice in work account and reduce business costs • Restructure and expand Industrial Research Limited into an Advanced Technology Institute to work with high-tech manufacturing • Establish the Crown Water Investment Company to invest $400 million from the Future Investment Fund (FIF) into irrigation and water storage • Start constructing the Waterview Connection and complete Auckland’s Western Ring Road • Amend the Resource Management Act to have a six-month time limit on consenting medium-sized projects • Extend the mixed-ownership model to four state-owned enterprises and reduce the government’s stake in Air New Zealand • Implement the new lower public service staffing cap to keep costs down 38 Property Quarterly Vol 2, Issue 1, March 2012

Government policy • Introduce tougher consumer credit laws targeting loan sharks and protect consumers • Slow the phasing in of the ETS and allow off-setting for pre-1990 forest owners • Introduce a competitive new system for processing oil and gas exploration permits. Rebuilding Canterbury − • Receive and assess the CBD recovery plan • Provide certainty by finishing red zone classification process so people can get on with where to build • Start building a 17,000 seat temporary stadium at Addington • Use the Canterbury Earthquake Recovery Authority’s powers to contribute to release land for subdivision and ensure there is adequate of land to rebuild. Building and construction sector The building and construction sector makes up four per cent of the economy and employs one in every 12 workers. A healthy sector is vital to a stronger economy which creates jobs, lifts incomes and raises standards of living. National will continue with major reforms within the sector and continue to cut red tape and costs in the building sector and increase consumer protection. Pass Building Amendment Bill (No 3) which includes four main changes − • Clearer accountability for building practitioners, building consent authorities and consumers to make sure work complies with the Building Code • A new building consent system which is risk-based and means the amount of checking and inspection is related to the risk and complexity of the work and the skills and capability of the people doing the work • A code for ethics for licensed building practitioners to encourage professional behaviour • An owner-builder exemption from the restricted building work rules to come into effect in March. Increase consumer protection with the Building Amendment Bill (No 4) which includes − • Mandatory written contracts for all building work over $20,000 • Disclose requirements for building contractors about their skills, qualifications, licensing status and track record • Rules making principal building contractors fix defects in their work within 12 months • Increase penalties for failing to comply with building consent requirements. Carefully consider recommendations from the Law Commission’s Review into the rules of joint and several liability. Support the productivity partnership between the government and the construction industry. Support building and construction A more efficient and productive building and construction

sector with $88 million already committed to bolster the sector’s performance − • $54 million to be used to help owners of leaky homes to access the financial assistance package • $10 million will be invested to implement and maintain registration and licensing schemes for building practitioners and electrical workers • $16 million will be invested towards a cost-effective regulatory system, including a nationally consistent building consent system. Future Investment Fund The mixed-ownership model where the government owns most of a company but offers a minority stake to investors will be extended to four state-owned energy companies and reduce the government’s stake in Air New Zealand. The mixed-ownership model will free up capital so the government can invest more in public assets and new infrastructure without increasing borrowing from overseas. The government will maintain at least a 51 per cent shareholding and reduce the existing 75 per cent shareholding in Air New Zealand while keeping majority control. The government will also establish the Future Investment Fund to receive all proceeds from the mixedownership model, estimated between $5 billion to $7 billion over three to five years from 2012. The first $1 billion in the fund will go towards building 21st century schools. Possible capital projects include hospitals, rail and public transport development and infrastructure recovery from natural disasters. Transport sector Five of the seven roads of national significance are currently under construction. These include the Hobsonville Motorway,Victoria Park Tunnel, Waikato Expressway, Tauranga Eastern Link and Christchurch Southern Motorway. Wellington’s Transmission Gully was referred to a Board of Inquiry of a nine month fast-track consenting process. The government will continue with the following policies − • Keep building better roads • Boost funding for public transport • Kiwirail turnaround plan • Improve maritime shipping Economic development During the second term National will continue to − • Roll-out the programme of infrastructure investment including ultra-fast broadband, roads, rail, electricity grid and investment in modernising and transforming New Zealand schools • Establish the Future Investment Fund • Invest in 21st Century schools • Invest in water storage and distribution

Vol 2, Issue 1, March 2012 Property Quarterly 39

Government policy • Establish an Advanced Technology Institute, with up to $80 million earmarked for new buildings and equipment with up to 700 staff. • Establish up to eight national science challenges, with up to $60 million over four years to be proposed by a new Minister of Science and Innovation. Finance The government is on track to return to surplus by 2014/2015. It plans to keep Crown debt below 30 per cent of GDP and limit new operating spending to no more than $800 million a year between 2012 and 2014 and $1.2 billion in 2014/15. New spending will go on health, education and a few carefully targeted initiatives. There will be no new capital allowances until 2017. Capital spending on infrastructure and public assets will come from the Future Investment Fund to help keep net Crown debt below the stated GDP level. On savings, National will enhance Kiwi Saver and proceed with Kiwi Saver auto enrolment in 2014/15 subject to returning to surplus. There will be an increase in the minimum contribution for individuals from two per cent to three per cent from 1 April 2013 and a similar increase in the employer contribution. National is also committed to a broad-base low-rate tax system which raises enough revenue to meet the government’s needs.. Commerce National intend to further reform securities law to restore confidence in financial markets. It will pass the Financial Markets Conduct Bill, and main proposals include − • Replacing the requirement for issuers to prepare a prospectus and investment statement with a requirement to prepare a single product disclosure statement tailored to retail investors • Introducing penalties of up to $1 million for individuals and $5 million for companies if they make misleading statements in product disclosure statements and advertisements • Increasing the maximum period of prohibition of a person from managing a company from five years to 10 years, and allowing the High Court to impose orders for an indefinite period • Establishing licensing regimes for fund managers, independent trustees of workplace superannuation schemes, derivative dealers and peer-to-peer lenders Local government The aim is to streamline and simplify the Resource Management Act to reduce delays, uncertainties and costs. Already $1 billion has been allocated to repair leaky buildings, and a further $5.5 billion to support Canterbury’s local councils to rebuild New Zealand’s Christchurch. Another $265 million has also been allocated for cleaning up lakes and rivers. 40 Property Quarterly Vol 2, Issue 1, March 2012

The Smarter Government, Strong Communities review is examining how modern local government can meet future challenges with a strong relationship between central and local government. National will carefully consider and act on practical recommendations of this review. National will also look to improve central government direction around regulations and financial reporting. There will be a review of compliance costs imposed on councils and implementing recommendations put forward by the Controller and Auditor General’s paper on local government reporting. Rebuilding Canterbury Rebuilding Canterbury is one of the government’s top priorities. The Canterbury Earthquake Recovery Authority is responsible for rebuilding Christchurch and its surrounds and supporting welfare of residents. Over the next five years the authority will work with the government, Christchurch City Council, businesses, NGOs and Cantabrians to get Christchurch back on its feet. Next steps include $5.5 billion provide certainty for the rebuilding of Christchurch. Other steps include the issue of bonds to help fund the recovery and provide investors with a new savings option, the creation of 4,500 new places for construction-related training, and $25 million to fund the Earthquake Recovery Authority. Housing The government will, in future, ensure that state houses are located in areas of greatest need and going to families who need them most, for the duration of their need. The government has already upgraded and insulated old houses and helped more families get into homes of their own. National will complete, insulation of the 4,600 remaining state homes built before 1978 – when insulation standards were introduced. It will continue the $347 million ‘Warm up New Zealand: heat smart’ scheme to retrofit at least 188,500 privately-owned homes. Additional court sitting days will be allocated in Auckland and Christchurch to address long tenancy tribunal waiting times. A suspensions policy will be introduced so that a state house tenant evicted for illegal behaviour may not be eligible for another state house for up to a year. National will work closely with social housing the total amount of social housing available in areas of most need. It will rapidly progress options for financial providers. This will include opportunities for land provision and surplus state house transfers. The government will work with iwi on significant rural housing initiatives. It will also give Housing New Zealand the flexibility to reconfigure their housing stock to increase the number of houses in the areas of high demand. All material is from National Party Policy and confidence and supply agreements.

Study tour to China

International study tour 2012 An opportunity to visit China Ian Campbell An opportunity to inspect some of the more significant property developments and markets in China will be available to Property Institute members for 10 days starting 21 October 2012. An open invitation has been received from the People’s Republic of China some of whom visited the Property Institute in 2011, to visit them together with reciprocity ties with the Hong Kong Institute of Surveyors. This 2012 fully planned study tour will provide members the opportunity to experience emerging trends, link up with colleagues working abroad and make new contacts. This year’s long awaited study tour is in its final stages of planning and prebookings are now open for Property Institute members. We will also be joined by the Property Council of New Zealand, who see this as an opportunity for Property Council members to enrich their experiences and first-hand knowledge of the Chinese market. At this stage we are looking at a limited number of 30 which will include travel, accommodation and guided tours, all at an affordable cost.This number may change with demand. Details will be released to members over the next month. If you are interested in attending, we recommend that you pre-book by forwarding your name through to the Property Institute national office.

Tentative programme Outline Visit Hong Kong, Beijing, Shanghai and Singapore property markets between 21 October and 1 November 2102, a total of 10 days. Tour highlights include – • Group travel to China with other property professionals • Tour Hong Kong and meet with the Hong Kong Institute of Surveyors

Vol 2, Issue 1, March 2012 Property Quarterly 41

Study tour to China • Travel to Beijing and Shanghai to visit latest property developments • Optional Singapore return and visit new developments and the Singapore Institute of Surveyors and Valuers • Hear from local professionals in each market • Green initiatives, infrastructure, new facilities, housing, commercial developments and new townships The tour will be co-hosted by members of the Property Institute and the Property Council of New Zealand. Hosts will also include the Hong Institute of Surveyors, the People’s Republic of China Practice Qualification Centre, Ministry of Housing and Urban Rural Development, and Singapore Institute of Surveyors and Valuers. Cost and pre-booking The package includes airfares, transfers, departure tax, bus hire and guide, nine nights accommodation with a depart from and return to Auckland. The estimated cost will be between $5,000 and $6,000 per person for travel and accommodation only. Any upgrades will be an extra cost. We recommend that you pre-book with the national office to receive the advanced pack containing final tour details and pricing. We will be providing information and

helping delegates with passport visas required for country entry. To pre-book contact or call 04 382 7624.

Locations Beijing is the capital of the People’s Republic of China. With a population of 14 million, the city has an exciting and lively atmosphere and offers access to some of China’s most stunning sights and the world’s most revered historical treasures – the Forbidden City, the Great Wall, the Summer Palace, Temple of Heaven Park, Tiananmen Square and the Lama Temple. No other city can better capture the urgency and excitement of China’s economic reform than Shanghai. Once called the Paris of the Orient, the city is beguiling, with its riverside area and French town as remnants of its colonial past. Shanghai is the hot spot of modern China – a cosmopolitan city buzzing with the concept of ‘lifestyle revolution’. Hong Kong is made up of four main areas – Kowloon, Hong Kong Island, the New Territories and the Outlying Islands. The city is also the perfect jumping-off point to exotic Chinese destinations such as Macau.

2012 Property Institute conference Let’s get on with it 14 and 15 June 2012, Auckland Jenny Houdalakis Hundreds of property professionals from around New Zealand will converge in the City of Sails to participate in the Property Institute of New Zealand conference – will you be one of them? It seems like it was only days ago when we held our 2011 national conference, but here we are well into 2012. At the Property Institute national office we are looking forward to our conference to be held at the Pullman Hotel in Auckland on Thursday 14 and Friday 15 June. After talking to many people in the industry it is obvious that the past few years have been tough, where no-one could predict what has happened. But the outlook for 2012 is much brighter, and this year’s conference theme is all about opportunity and positivity. Our last conference hosted close to 400 delegates, and similar numbers are expected again this year. Along with a line-up of keynote speakers who will address current and topical issues in the property sector, there will be concurrent workshops run throughout the 42 Property Quarterly Vol 2, Issue 1, March 2012

two days. These will provide technical sessions for the different streams of membership within our Institute. The workshop topics will include − • An overview of risks to valuers • Views from both a developer and banker on the development of land • A presentation on natural disaster recovery and earthquake-prone buildings • A field trip to Victoria Park and Wynyard Quarter • A legal update including unit titles and breaking leases • A presentation from the Serious Fraud Office. Members will be able to access the conference registration brochure from 6 April using the Property Institutes website If you are not a member, or want to ensure you are on the mailing list, please send full contact details to me at We will be releasing more information on the conference programme in the coming weeks.


Profile Bob Hargreaves Bob Hargreaves recently retired from his position as Professor of Property Studies at Massey University in Palmerston North. He enjoyed a 40-year career teaching, researching and leading the property studies programme at Massey. Bob was the foundation Lecturer in Rural Valuation in 1972 and went on to develop the Urban Valuation and Property Management Programme in the Business Studies degree, available at the Albany and Turitea campuses as well as extramurally.

While at Massey he was also mentor and supervisor to a number of postgraduate diploma, Masters and PhD students. Coming from a valuation background he was particularly conscious of the need to maintain close links with the property industry. He represented Central Districts as their NZ Institute of Valuers councillor for 14 years and is currently a member of the Land Valuation Tribunal. He also helped to establish the Massey University Property Foundation and served as its executive director during the 1990-2010 period. He pays particular tribute to Sir Rod Weir and Gordon Davies as foundation chairs who were very successful at fund-raising. Bob continues to lead the Massey Real Estate Analysis Unit in his new role as a Professor Emeritus − unpaid, he says, but a nice name. This keeps him busy authoring two quarterly publications, reviewing papers for two international property journals and writing the occasional academic paper.

Early life Bob was brought up on a mixed dairy and sheep farm bordering the Kaipara harbour in Northland. He had originally intended to be a farmer but somehow an interest in furthering his sporting career and opportunities for more study got in the way. After a stint at Massey for a Diploma in Dairyfarming he went on Vol 2, Issue 1, March 2012 Property Quarterly 43

Profile to represent New Zealand in the 1966 Commonwealth Games in the shot put. In 1967 he obtained a scholarship from the University of California at Berkeley and graduated from there in 1970. He then returned to his previous job as a field officer with the Lands and Survey Department. This position enabled him to obtain registration as a valuer before embarking on an academic career. He recounts that being a field officer was the next best thing to farming since he was out in field with farmers and on other outdoor property-related activities three to four days a week. Sporting interests diversified with windsurfing and mountain biking emerging in place of athletics. While at Berkeley, Bob met his future wife, Sandy. For many years she taught high school science in Palmerston North before sadly being taken by an aggressive form of breast cancer. Their children David an economist and Lynley a science journalist and domestic executive, both live in New Zealand.

Academic and research interests Bob feels working in academia is a privilege because it allowed him to gain further qualifications, follow his own research interests, and provided the time to do this without the intrusion of the commercial imperative. There is a public expectation that academics will be the critic and conscience of society, but he also sees it as a privileged position since it allows academics to speak out on difficult issues. Research interests have allowed him to present his papers at a number of international conferences and network with property academics from around the world. Over the last 20 years his research has concentrated on issues around housing in New Zealand including ownership rates, real estate cycles, real estate investment, affordability and the rental market. Bob’s name has frequently appeared in the news media as a property commentator on the housing market. He says this has probably arisen so reporters can give balance to their stories as there is a perception real estate agents sometimes spin stories on the positive side. He admits to some apprehension about his role as property commentator, particularly when his comments sometimes upset various interests. In addition, he has been a board member and chairman of the Pacific Rim Real Estate Society, comprising mainly academics from Australia, New Zealand, Singapore, Malaysia, Taiwan and Hong Kong. The Massey property team have hosted the annual international conference on two occasions. He notes each year about 100 papers are presented at the conference and added to the Pacific Rim Real Estate Society website: ‘a wonderful, but underused, source of property research for practitioners.’

44 Property Quarterly Vol 2, Issue 1, March 2012

Not for everyone Bob also notes the teaching part of academia has its own rewards with continual interactions with bright students and colleagues. He says teaching at Massey demands a very strong online presence due to the large number of extramural students. He was fortunate in being able to use the online templates developed by innovative colleagues in the School of Economics and Finance where the property programme is based. He says extramural contact courses are often the most rewarding type of teaching since the typical student is older, has considerable life experience, and is therefore more willing to ask questions than the younger internal students. One of the other advantages is being able to follow the progress of successful Massey property graduates in a wide variety of careers. Bob admits an academic career is not for everyone because it involves spending a lot of time working on your own. Some of the research projects have a long time horizon. There are also the usual budgetary hassles as the government continues to cut back on the amount of funding per student. Universities have tried to fill the gap by taking in more overseas students, but he feels this can sometimes result in compromising standards when English is their second language.

Property as a career One of the fascinating aspects of property is the cyclical nature of the property market. New entrants to property need to be reminded that things will get better as the volume of transactions increases along with new building in the housing market. New entrants are also likely to be put under pressure from clients to come up with valuation recommendations which suit them. However, property professionals who are in property over the long haul have learnt that maintaining an independent and unbiased approach is critical to a good name and integrity. He says New Zealand is such a small market that there is basically nowhere to hide. In Bob’s experience property graduates working as valuers often tend to undersell their skill-set as property consultants. He says that due consideration has to be given to the rules about giving property investment advice, but who better qualified than an experienced Property Institute property professional? His advice to friends and colleagues who ask him about property advice is first to hire a valuer as a consultant to provide background information about locality, property types and so on. Most people only participate in the property market very occasionally and the actual amount of the valuation is only one consideration the purchaser needs to take into account.


Industry issues One of the big issues the property sector has to tackle is sustainability. In New Zealand the typical new house just keeps getting larger and further away from the CBD. This in an era where family size continues to decrease, commuting costs continue to increase, the cost of stretching the infrastructure also continues to go up, and affordability is very difficult for first home buyers. He asks: ‘Do we therefore need to return to building smaller medium-density starter homes closer to the CBD?’ Sustainability is also becoming a very important issue with rural land use, particularly dairy farming. In his view there is no doubt that very intensive pastoral systems are leading to deterioration in the water quality of our lakes and rivers. Limits on water extraction for pastoral irrigation are also beginning to become apparent in the drier parts of the country such as the Canterbury Plains. ‘In the future our trading partners are likely to impose non-tariff barriers on some of our primary exports unless we measure up to the same environmental standards faced by their farmers. Agriculture will also have to adjust to the emissions trading scheme and the additional costs that this will impose on most farmers.’ The area of property rights, rents and valuation of

land under the sea is an emerging but little researched subject with particular relevance for New Zealand. There is a large area offshore suitable for various forms of aquaculture and few property professionals with the skills for this type of work.

Semi-retirement So what does Bob do in semi-retirement? There are now more opportunities for spending time with his five grandchildren, three in Wellington and two on the west coast of the South Island. He is working on his bucket list. First on the list came the Blokart − a type of one class land yacht for the uninitiated. Next was a chance to do more bicycle touring in New Zealand. He most recently completed the route from Taumaranui to Stratford via Whangamomona along the Forgotten World Highway, which is to become part of the national cycle-way. Bob and new partner, Rosemairi, are also keen to do an Alaskan cruise some time in the northern hemisphere summer. As you might expect, he is a bookworm, subscribes to The Economist, and these days does more of his recreational reading on his Kindle e-book reader. Of course, if he wants a good coffee then some of the best cafes are near the town library.

Professional and trade advertising Advertise in the Property Quarterly Professional and trade advertising section NATIONWIDE CORPORATE PROPERTY ADVISORS & NEGOTIATORS SPECIALISING IN PUBLIC LAND & INFRASTRUCTURAL ASSETS 12 OFFICES NATIONWIDE Level 10, Technology One House, 86-96 Victoria Street, PO Box 2874, Wellington. Chief Executive: Wayne Crowley Phone (04) 470 6105 Facsimile (04) 470 6101 Email Website

Contact Julianne Orr on 09 406 2218 or email

Vol 2, Issue 1, March 2012 Property Quarterly 45










































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Property Quarterly (March 2012)  

The Property Institute of New Zealand's Quarterly magazine.

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