Property Quarterly (December 2014)

VOL 4 | ISSUE 4 | DECEMBER 2014

IN THIS ISSUE

Residential sum insured valuationsThe future of retail propertyGood reasons to employ a recent graduateExcellence in the valuation profession

We provide expert navigation

Simpson Grierson’s national team of property specialists represent the

interests of developers, vendors, purchasers, landlords, and tenants

of all kinds of property.

Our property team focuses exclusively on property issues

while our other experts at Simpson Grierson handle matters in their

field of expertise.

www.simpsongrierson.com

Greg Towers – Partner P. +64 9 977 5051 M. +64 21 963 653 [email protected]

Mike Scannell – Partner P. +64 4 924 3416 M. +64 21 437 644 [email protected]

Michael Wood – Partner P. +64 9 977 5329 M. +64 21 772 974 [email protected]

Greg Allen – Partner P. +64 9 977 5164 M. +64 21 534 464 [email protected]

Phillip Merfield – Consultant P. +64 9 977 5096 M. +64 21 935 407 [email protected]

Publication CommitteeDonn ArmstrongAh-Lek TayGwendoline CallaghanIan CampbellCraig Russell

Contact detailsDavid ClarkProperty Institute of New ZealandPO Box 11 380Manners Street CentralWellington 6142

Phone: 04 382 [email protected]

EditorJulian Bateson

Assistant EditorHelen Greatrex

Bateson Publishing LimitedPO Box 2002WellingtonPhone: 04 385 9705 [email protected]

Advertising managementBateson Publishing LimitedPhone: 04 385 9705

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.

Property Quarterly articles are not peer reviewed. Articles in the magazine represent the unaudited views of the relevant authors. If you have any questions about the content of an article please contact the Editor or the relevant author.

Vol 4, Issue 4December 2014

ISSN 2253 5179 printISSN 2253 5195 online

Contents Residential sum insured valuations – The lessons to dateJon Nanson ..................................................................................................................... 3

Wanted – great commercial property managersPatrick O’Reilly ............................................................................................................... 7

Interest rate movement spells challenges for borrowersDeborah Battell ............................................................................................................13

The future of retail propertyChris Dribble .................................................................................................................16

Some practical features of the effect of the Unit Titles ActJohn Greenwood ..........................................................................................................19

Good reasons to employ a recent graduateJoanna Parry .................................................................................................................29

Excellence in the valuation professionBrent McGregor ...........................................................................................................32

Valuer’s Registration Board decisionsDavid Paterson .............................................................................................................35

Using LinkedIn to grow your valuation practiceKirsten Hodgson...........................................................................................................38

Auckland University celebrates 75 years of propertyDeborah Levy ................................................................................................................40

27th Pan Pacifi c Congress – September 2014, SingaporeBlue Hancock ................................................................................................................43

Legal casesShaky heritage – the relationship between the Resource Management Act and the Building Act for earthquake prone buildingsNiven Prasad and Rebecca Dempsey ......................................................................24

Blurred lines – when is there an agency relationship?Niven Prasad and Johanna McDavitt .....................................................................27

We provide expert navigation

Simpson Grierson’s national team of property specialists represent the

interests of developers, vendors, purchasers, landlords, and tenants

of all kinds of property.

Our property team focuses exclusively on property issues

while our other experts at Simpson Grierson handle matters in their

field of expertise.

www.simpsongrierson.com

Greg Towers – Partner P. +64 9 977 5051 M. +64 21 963 653 [email protected]

Mike Scannell – Partner P. +64 4 924 3416 M. +64 21 437 644 [email protected]

Michael Wood – Partner P. +64 9 977 5329 M. +64 21 772 974 [email protected]

Greg Allen – Partner P. +64 9 977 5164 M. +64 21 534 464 [email protected]

Phillip Merfield – Consultant P. +64 9 977 5096 M. +64 21 935 407 [email protected]

Vol 4, Issue 4, December 2014 Property Quarterly 1

From the CEOAfter six-and-a-half years with the Institute, this is goodbye from me. We are approaching another watershed moment, with the upcoming changes to the regulation of valuers set to begin a new era of our Institutes and our industry, and the time seems right to step aside. I am confident that the Board will employ a talented Chief Executive to bring new skills, new ideas and new enthusiasm to the opportunities which lie ahead.

Looking back, I am proud of what we have achieved throughout my time at the helm of the Institute. I hope to be remembered for the modernisation of the Institute in the new millennium, and for the excellent financial position which our discipline has brought both the Property Institute and NZIV. We have changed almost every aspect of our operations – our member database, our accounting and our payroll. We have modernised our education, offering a regular programme of webinars which have increased hugely in uptake over the last year as we have perfected the technology as well as an extensive library of online education modules.

We introduced quality management systems for member firms, and despite the criticism we saw from some at the time I am confident that the strong uptake and positive feedback has vindicated our decision. We refreshed our logo, and relocated our offices to modern new premises on The Terrace which our Institutes can be proud of. We fostered a Young Leaders programme to ensure succession in the Institute’s governance. Seeing the contribution of these younger members has been particularly pleasing to me and reassures me of the strong future our Institute has ahead.

I am proud of the changes I have made, but I know that change will continue without me – as you are aware, work is already underway on a potential rebranding and we are also looking into a full overhaul and refresh of the Institute website. This is not change which I will still be here to see, but I know that the Board and President we have are more than capable of continuing to shepherd the Institute forward.

I have been privileged to have had a series of excellent Presidents – Chris Stanley, Ian Campbell, Phil Hinton and Blue Hancock. They have been not just wonderful ambassadors for the Institute, but great people to work with and I am sure we will keep in touch in future years. Those who have served on our Board have also been professional, knowledgeable and supportive.

When the review of the valuers’ occupational regime concludes under a new Chief Executive, I remain hopeful that the changes introduced will be the catalyst for a progressive, unified Institute. I have no doubt that the two Institute regime has held our professions back. Maintaining and serving two separate organisations when they share a vast majority of needs and goals is inefficient, to say the least. There have always been a few members who sought only to cling to the past and cause friction between our two Institutes, and this negative influence has constantly undermined progress. I take heart, though, in the clear view to come out of the Young Leaders committee, that disunity is very much a mark of the past, and that there will soon be a time when all those who remain in the profession will be able to move forward.

Regardless, the most gratifying jobs are those where you have a sense of achievement, where you can feel like you are making a positive difference. As I look back on my time with the Institute, I am confident that I leave the organisation and the professions we serve in a stronger, better position than when I first joined. And this is what I’m most proud of.

Year end is almost upon us and all of us at national office extend our best Christmas and New Year wishes to all our members. Have a great 2015.

David Clark

CEO’s comment

2 Property Quarterly Vol 4, Issue 4, December 2014

CEO’s comment

Residential sum insured valuations The lessons to dateJon Nanson

It has been over a year since the insurance industry reintroduced sum insured policies for residential property in New Zealand. A sum insured figure is the maximum amount an insurance company will pay out, not what they will pay out.

Sum insured valuations

On the surface, a sum insured policy appears to be straightforward. If you insure your property for $500,000 your property will be reinstated if the total cost is $500,000 or less. Not exactly. A sum insured policy consists of several components, a number of which are subject to caps on the amount the insurer will pay out. Other components have a large excess in the event of a claim following a natural disaster and an exact sum needs to be specified for others such as swimming pools, tennis courts and cable cars.

The Property Insitute has produced a video and has run two webinars to help members understand what is required when assessing a sum insured figure for a residential property. The Australian and New Zealand Valuation Guidance Note 13 – Valuations for Insurance Purposes is in the final stages of being updated and should be available to all members shortly. In the meantime, the Standards Board has posted advice for registered valuers on the Property Institute website.

Sum insured valuations A point of clarity is that a sum insured figure could be an indemnity value and does not have to be based on a full reinstatement cost figure. IAG, New Zealand’s largest reinsurer, advises that at the current time an insignificant percentage of residential policies are not full reinstatement policies. In this article the term sum insured therefore refers to an assessment on a full reinstatement cost basis.

It is estimated that up to 75 per cent of New Zealanders have taken no professional advice about an appropriate sum to insure their home for. Perhaps equally worrying is that a lot of insurance companies are suggesting a sum insured figure to policy-holders based on a default rate of $2,000 a square metre, with limited additional allowances for other site improvements, demolition or inflation.

Online calculators such as www.need2know provide a more tailored approach to the sum insured for homeowners. However, they often produce a significantly different figure from the one suggested by the insurance company and do not appear to look at inflation during the period of insurance or construction period.

Important considerations There are six aspects of sum insured valuations which are important.

Indemnity value assessment An indemnity value assessment, unless specifically requested by the client or insurer, is not required. Unlike commercial property, the maximum fire service levy for a residential property is $76 plus GST. For almost all residential property there is no monetary benefit to the client in providing an indemnity value assessment, in contrast to commercial insurance assessments. In addition it is of no added value to the insurance company if the client is taking out reinstatement insurance cover.

Inclusion of GST, if anyResidential insurance valuations should be assessed on a basis which is inclusive of GST, if any, in line with the Standards Board advice. A notable exception may be a mixed use property, where the influence of a commercial component may mean that an assessment on a basis of plus GST would be more appropriate.

Natural disastersResidential insurance in New Zealand includes cover in the event of loss by a natural disaster. This is provided by the Earthquake Commission under the Earthquake Commission Act 1993, and is included as standard in household policies at the rate of 15 cents per $100 of insured value up to a maximum of $150. Natural



disasters are defined as an earthquake, a natural landslip, a volcanic eruption, hydrothermal activity or a tsunami. The Earthquake Commission cover is provided in two parts −• Cover for land lost or damaged for which there is

no dollar limit, but it is effectively limited by the minimum site area stated in a district scheme plan

• Cover for the first $100,000, exclusive of GST, of any claim in relation to the buildings on the site.

Of particular importance is the definition of land in the Act which, in addition to the physical land, includes −• All retaining walls within eight metres of a residential

building and all retaining walls providing support to the main access to the dwelling within 60 metres in a horizontal line

• All bridges and culverts within 60 metres of a residential building in a horizontal line.

Cover for the land is on a market value basis, while retaining walls, bridges and culverts are covered on an indemnity basis. Loss of retaining walls, bridges and culverts is almost without exception usually caused by a natural disaster. A practical aspect of the cover offered by the Earthquake Commission is that all retaining walls, bridges and culverts on a site have automatic indemnity cover, provided they fall within the eight and 60 metre rules.

A person’s insurance company is simply providing top-up insurance to full reinstatement cover. The cover for land includes damaged land, which is land affected but not lost, such as land covered by debris from a slip. In simple terms the value assessed for the damaged land is ring-fenced for clearing the debris off the site. If the affected land falls within the eight and 60 metre rules, some funds for clearing the affected area are therefore likely to be paid out by the Earthquake Commission.

Average clauses, light fittings and expertiseResidential insurance policies, unlike commercial insurance policies, are not subject to average. New Zealand legislation bans the use of average clauses in these insurance policies. Well over 50 per cent of household insurance policies include floor coverings and light fittings, and it is suggested that valuers include these in their assessments.

Do you have the appropriate experience and expertise to undertake the valuation assignment in question? When it comes to specialised features of a property, a valuer may have to consider getting advice from more experienced colleagues or other professionals, or decline to provide an assessment for a feature and state this clearly in their report.

What reinsurers want from registered valuersReinsurer IAG has stated they would like to see the following information in relation to the assessment of the sum insured figure.

A reinstatement cost estimate, in insurance terms, for residential property to be assessed on like-for-like basis. From a practical viewpoint, this means the reinstatement cost estimate of a turn-of-the-century villa or a 1920s bungalow should be based on a modern equivalent replica which encompasses the high stud heights, solid timber interior finishes and character features of the respective eras. The reinstatement cost estimate should be broken down into the sub-categories of retaining wall structures, recreational and special features, an inflationary provision and a demolition allowance.

A large percentage of residential insurance policies currently have a capped cover of around $20,000 for retaining walls. Reinsurers usually require a lot of additional information when a retaining wall exceeds the cap in an insurance policy, and it often requires a description of each retaining wall. This includes its age, if known, construction material, height, total face area, overall condition, and a wall’s approximate distance from the main residential dwelling on the site.

Recreational features are usually defined as tennis courts, permanently fixed swimming pools or spa pools, including ancillary equipment or pumps. Special features are usually defined as unusual features for a residential property such as bridges, culverts, cable cars, lifts and wind or water mills. A specific reinstatement cost needs to be placed on each recreational and special feature. Valuers need to exercise care when assessing specific reinstatement figures, as a reinsurer will limit the cover on any specific item to the figure provided by the valuer quite independently of the total sum insured.


Sum insured valuations Sum insured valuations

Infl ation and demolition Infl ationary provision and a demolition allowance perhaps require the most judgement by the valuer and will differ from region to region. The latest Housing and Construction Quarterly, on the Ministry of Business Innovation and Employment website, states that construction costs have increased by 4.3 and 4.6 per cent respectively in Wellington and Auckland, and 11.3 per cent in Christchurch. There is anecdotal evidence that demolition costs in Christchurch are also signifi cantly higher than the rest of New Zealand. Exterior and interior photographs of the dwelling and photographs of recreational and special features should always be included in a valuer’s report.

Practical aspects of the assessmentRetaining walls Retaining walls are potentially problematic as they are a specialised area of site development, and costs of reinstatement for two seemingly similar walls can vary a lot. It is suggested that valuers include a specifi c disclaimer or qualifying statement in their reports for retaining wall structures.

Retaining walls are also often situated on a boundary. Like fencing, it is considered prudent for a valuer to provide a gross assessment unless they can be sure the wall lies outside the boundary of the property

and that the property owner will not be liable for its reinstatement. Usually any wall in excess of 1.5 metres in height or subject to any signifi cant surcharges or additional loads, such as providing support to a building structure, driveway or sloping ground above the retaining wall, will need a specifi cally engineered design and a building consent.

Shared access ways Any shared access way needs to be included in a reinstatement cost estimate. This could simply relate to a share in the sealed surface of the access way or it may also include other improvements such as associated residential services, retaining walls and fencing.

What is to be assessed is not always clear. It is imperative the valuer states what approach has been taken and what improvements and services, if any, are included in their assessment. One approach is to assess a gross cost for all the improvements considered to form part of the right of way, and then let the parties affected decide what proportion of the total reinstatement each of them is responsible for.

Blocks of fl ats For blocks of fl ats, the body corporate is usually responsible for ensuring all buildings within a unit title



the basis of a catastrophic event. The provision of such an assessment would be contrary to the intention of the current standard and is not considered best practice. The Standards Board has recently posted advice on the Property Institute website that valuers should not provide insurance estimates on this basis.

Upgrade requirements for residential properties have changed signifi cantly in the past few years and are still changing. Recent changes include −• Double glazing is now mandatory in most situations• Cavity drainage systems are recommended in most

buildings and are compulsory for a wide range of claddings with specifi c reference in the New Zealand Building Code Clause E2 External Moisture

• Reinforcing in concrete slabs on the ground must now be tied into the foundation wall reinforcing.

Valuers need to keep abreast of these changes so that in discussions with insurance companies and clients they demonstrate an appropriate level of building construction knowledge.

Looking forwardThe insurance industry is looking at various ways they can index the sum insured on renewal date. One consideration is to base the indexing on the capital goods price index.

It is possible, given the steadily increasing cost of reinstatement insurance cover, that the market may look for viable alternative forms of cover such as market indemnity value. This is simply the market value of the whole property, the land and buildings, less an allowance for the market value of the land as a vacant site. This type of insurance is currently used by insurance companies to settle claims where the insured party has no intention of rebuilding the insured improvements on the land.

This begs the question – should the Property Institute be working with the insurance industry and actively promoting market indemnity value insurance cover as a viable option to full reinstatement insurance cover?

Jon Nanson is a Registered Public Valuer based in Wellington. The views and opinions expressed in this article are his own and are not necessarily representative of the insurance industry or the Property Institute.

development are insured to their full insurable value, although the Unit Titles Act 2010 does allow some exceptions. However, the same does not apply for blocks of cross-lease fl ats. For these fl ats it is recommended that valuers advise their clients to consider having one insurance policy for all the units or, failing this, that they have the same insurer.

Other concerns In some cases improvements associated with the property may not be located on the site. This is a common occurrence in Wellington where garages are often on road reserve which is council land adjoining the boundary of the site. It is prudent to point this out to the insurer, who may require a separate policy to be taken out for these improvements.

For existing use rights, under Section 10 of the Resource Management Act it is considered reasonable to assess the reinstatement cost of a building with existing use rights on the basis that the existing improvements on the site would be capable of being reinstated to the same character, intensity and scale. A statement to this affect should be included in a valuer’s report.

Lifestyle properties often require an additional rural-based policy to cover all farm and rural improvements on the site. These include paddock fencing, stockyards, water troughs, stables, tack rooms and hay sheds.

Apparently some registered valuers have been requested to provide reinstatement cost estimates on


Commercial property managers

Wanted − great commercial property managersPatrick O’Reilly

For commercial property managers who have entered the industry since the 2007 global financial crisis, this article provides some insights into good management practices and areas of required focus.

The level of resourcing and experience within the commercial property management community follows the property and economic cycles. In a downward cycle there is a lower level of expertise and the focus is on basic property management duties rather than adding value. During these periods, property graduates and those new to the commercial property management sector do not always have the ability to learn from experienced people and to clearly identify what is industry practice and what makes best practice.

The philosophy of commercial property management has been to maximise income and minimise expenditure, but this adage is too simplistic for the modern investment market. Astute private and institutional investors look to invest in commercial property where property fund managers can add value and manage the risks which are an inherent characteristic of this asset class. Good commercial property managers are required to manage the risks and provide an acceptable level of consistent returns over the long term.

Once mastered, the following 10 items will make a good commercial property manager a great one −• Delegated level of authority• Property business plans• Lease documentation• Tenancy schedules• Income review• Asset valuations• Legislation• Operating expenses• Service contract agreements• Integrity, professionalism and further education.

Delegated level of authorityAn important starting point for the commercial property manager is to have a clear understanding

of the authority the managing agent has from the property owner. This includes the authority level for decision-making about the property and the tenants. All professional commercial property management companies will have their own standardised property management agreement. Competent commercial property managers should be familiar with these contracts and any specific modification to the standardised agreement which has been agreed for all the properties they manage.

The property management agreement will set out the monthly and annual reporting requirements along with the duties and responsibilities of the commercial property manager. Expenditure is an area where daily decisions are required. There should be clear procedures and systems in place to ensure a rigorous and robust process has been undertaken before the commercial property manager confirms expenditure.

The commercial property manager should understand the authority they have been delegated to operate within. It can be challenging when they are in negotiation with tenants who are not clear about the authority which the commercial property manager has. It can be frustrating for a tenant where sufficient authority is not provided and feedback is required from the owner through each step of a negotiation or where the recommended position is rejected by the owner.

Clear processes

My suggestion is to ensure there are clear systems and processes in place for decision-making which align with the delegated levels of authority. These processes should always be followed with an appropriate level of supporting documentation. The test should be that if a future audit is undertaken, then supporting documentation will show the process was rigorous, robust and within the appropriate delegation.



Property business planThe property business plan and cash fl ow modelling can only be undertaken when all the other items in this article have been reviewed. This plan is a headline document for managing a property. It contains the strategic plan for the property and the assumptions relating to lease transactions and property expenditure. It may include a property cash fl ow for up to 10 years. The focus for the commercial property manager should be on one, three and fi ve-year cash fl ows. The portfolio manager will review the cash fl ow over a 10-year horizon and be making recommendations to the property owner based on this.

By focusing on the cash fl ow for one, three and fi ve years the commercial property manager will be able to identify potential income voids and periods of capital and planned expenditure. It is important to understand the implications of these costs for an owner. They may not be able to contribute further funds to the property in certain years. The adopted strategy should take this into account.

Understanding the property cash fl ow characteristics is a fundamental element for good property management. Assessing the potential risks is another important requirement in having good and accurate business plans. The likelihood of the tenant renewing, identifying the costs associated with refurbishment and the times to let vacant space are items where assumptions made by the commercial property manager can be benchmarked and tracked.

The property business plan should be realistic, but a stretch target rather than soft budgeting. It is recognised that due to the term of most property management agreements, the managing agent may not wish to provide the full 10-year model to the owner. However, the minimum period should be three years and highlight major capital expenditure items for years four and fi ve. The owner approving the plan can provide pre-approval for strategy and expenditure for the coming year. The delegated levels of authority for expenditure can be

provided by having the plan approved by the owner. There may be a higher scale of expenditure authority levels if the expenses are contained in the plan.

SuggestionThe property business plan cash fl ow model should be compared to the asset valuations’ discounted cash fl ow to identify opportunities where value can be created. The valuation provides a market benchmark on rental levels, the likelihood of tenant retention and assumed expenditure. A good commercial property manager should have a detailed understanding of the particular property opportunities and risks and be looking to improve on the market by exceeding nett cash fl ows. This may be achieved by various means, such as focusing on tenant retention rather than necessarily achieving higher than market rentals.

Lease documentationThe lease is the binding agreement between the landlord and the tenant. It should be treated with respect and a good commercial property manager will have a thorough understanding of its terms and mechanisms, especially before discussing concerns with the tenant. The saying that once agreed, the lease can go in the bottom drawer, is not correct for the competent commercial property manager. It may appear that the document is not tabled, but a good manager will have an in-depth understanding of the contracted position.

The starting position for any discussion between a landlord and tenant is the lease document. A copy of the agreement to lease should also be kept with the deed of lease where there is a non-merge clause. The agreement to lease may take precedent over the deed on certain elements.

Standard leaseNew Zealand has adopted the Auckland District Law Society lease document as its standard lease form. For a simple single tenanted property it may be suitable, but for multi-tenant commercial properties it is strongly



recommended to have a modifi ed form specifi cally written for the property. Alternatively, the Property Council of New Zealand standard offi ce lease can be used as it is a better one to use for larger or more complex commercial offi ce buildings. The Property Council lease provides greater detail and expanded processes which allow for a better degree of control for the benefi t of everyone involved, including tenants.

I am a supporter of putting all agreements into a deed form. In any due diligence, having all agreements contained in executed deeds reduces time and cost of due diligence and the risk for a purchaser or fi nancier having outstanding matters still not being fi nalised between the landlord and tenant.

An audit of lease and other occupational agreements should be undertaken when the management of a property starts. This audit should ensure that documentation is complete and aligns with the property tenancy schedule. A list of outstanding deeds should be maintained and identify −• Where the deed is situated, for example with the

tenant for execution, with the property manager or with the solicitor

• If there are any matters about the deed not being fi nalised or executed by those involved, such as awaiting certifi ed area measure of the premises.

The list should be reviewed monthly. The focus of the commercial property manager should be to have the documents executed before the tenant takes occupancy of the premises.

Valuation models, such as a discounted cash fl ow, do not fully refl ect the reduced liability risk on the landlord when a comprehensive lease document is used. This liability risk may be fi nancial or legal. Despite this, a good commercial property manager recognises the value in the day-to-day management of the property of having a robust lease document.

Suggestion Prepare a summary sheet of the terms of the lease and note any variations to the standard lease document.

Additional sheets should be prepared for further deeds such as rental reviews. These sheets can be scanned and annexed to the tenant or premise within most property management software systems.

Tenancy schedulesTenancy schedules should be regularly reviewed, with terms and conditions memorised by the commercial property manager. They should contain salient items from the leases, such as notice periods as well as property information. These notes should include any specifi c rights or obligations of the tenant. Having the fi rst rights of refusal for additional space is a good example of factors which should be clearly identifi ed.

Property and tenancy information should be cross-referenced with the lease summary sheets to ensure consistency. Details do change, such as certifi ed area measures being undertaken. A new certifi ed measure may require various items to be updated, including the breakdown of allocated operating expense percentages across the lettable area of the building. Base information should be committed to memory. Items such as tenancy areas, pending lease expiries and rental rates are a good indicator of an organised and competent commercial property manager. Have 15 to 20 minutes set aside eachweek for reviewing and memorising property and tenancy details contained in the tenancy schedule.

Income reviewDespite professional commercial managers having managed the property in the past, a full review of potential income from a property should be undertaken on a two-yearly basis. It is back to basics with fresh eyes, considering the added value opportunities which may not be currently refl ected in the value of the asset. The review should be based on revenue streams as well as capital appreciation items and the benchmark should be the asset valuation.

Items that may not be included in the tenancy schedule or the valuation include additional car parks,



deck areas that may be accessed only by specifi c tenants and are potentially licensed, coffee carts, taxi stands, automatic teller machines, signage and naming rights, storage areas and embedded networks.

Suggestion

Have the income review undertaken as a team. Set a target for identifying additional potential value from the current valuation. Some items will not have an immediate value increase and will become a project for further investigation, such as an embedded network or conversion of redundant building plant areas into lettable spaces.

Asset valuations

The onus is on the commercial property manager to ensure the detail of a new asset valuation is correct. The details should correlate with the leases and other legal and physical property characteristics, which can be challenging as each valuation fi rm has its own modelling format. However, the assumptions, particularly around lease expiries, new lettings, refurbishment costs and capital works, should be understood and benchmarked by the commercial property manager. Benchmarking includes historic let-up periods for space in the building and costs of similar works and refurbishment being budgeted for.

The tenancy schedule should be cross-referenced to ensure areas and items match, such as recovery of operating expenses. Fit-outs owned by the landlord should be clarifi ed within the valuation and identifi ed if additional income is applicable in the future.

Ensure all lettable areas are contained in the valuations including deck areas, car parks and storage areas. Other income such as naming, signage rights and embedded networks are important and should be identifi ed in the discounted cash fl ow, even if the space is not currently leased.

LegislationNew and recent legislation, especially the Property Law Act, Health and Safety Reform Bill and the new fi re regulations, has increased the need for commercial property managers to be proactive in understanding the implications of the legal requirements in general terms, as well as specifi cally for the properties being managed. The Property Law Act has been in place for many years now, and commercial property owners have not been proactive in updating and adopting lease provisions to address aspects of this legislation.

Health and safety auditsIt is now commonplace to undertake property health and safety audits. Risks need to be ranked and rated, with the risk being eliminated, isolated or minimised. Holding a report and not implementing the recommendations exposes risks for the commercial property manager, the employer and the property owner. There is no defence if an event does occur and it had been identifi ed as a risk item within a report which has not been acted on.

Under the current Health and Safety Reform Bill there is an increased linkage and liability to company directors and owners. As commercial property managers, we can expect increasing reporting and proactive management in the health and safety arena. Looking at seismic upgrading in a timely manner is another facet of health and safety management.

Fire regulations and requirementsThe Auckland branch of the Property Institute held a seminar on this problem in June 2014. It is important that commercial property managers are aware of non-complying buildings, the triggers for upgrade and the likely costs of the upgrade works.

The new regulations contained in the Building Code require a proactive and strategic approach. Another factor is being able to fi nd, in a timely manner when required, a fi re engineer for a building and premises report. Forward planning therefore needs to be carried



out by the commercial property manager. Further amendments to the updated fi re regulations from April 2013 will have occurred by the time this article goes to press.

Licensing commercial property managersWhere property transactions are being undertaken by a person on behalf of a third party, there may be a requirement for that the person to be licensed under the Real Estate Agents Act. A transaction, for example, could be a lease renewal negotiation being undertaken by a commercial property manager. The intention under the legislation was not meant to be as far-reaching, but it is an item that is affecting various aspects of the industry and one for Property Institute members to be aware of.

Suggestion Use good independent professionals for advice on subjective or technical matters, especially where there is a high level of risk involved. Where possible, use property specialists. Once you have the advice or an audit report, ensure that recommendations are reviewed and acted on appropriately.

Establish a company process and standards for risk items. Legal advice on legislation should be obtained to ensure that comprehensive advice is at hand which can be directly provided to senior management and owners or directors. Reporting frequency and format on health and safety problems should be reviewed with property owners and directors to ensure the appropriate level of reporting is being achieved.

Operating expensesManaging operating expenses is a fundamental duty in managing a property. The deed of lease stipulates the applicable expenses for which the tenants should be liable and details the mechanisms for collection and allocation of each tenant’s fair share. Operating expenses are a common area of tenant complaint. The

competent commercial property manager needs to ensure that the allocation and the costs included in the operating expenses are refl ected in the lease. The Property Council deed stipulates that a wash-up has to be undertaken each year and identifi es the timeframe for this.

Commercial property managers need to be careful where a tenant undertakes duties such as engaging service providers directly, particularly where the onus under the lease is on the landlord to coordinate such contracts. With the increased focus on health and safety, the owner and property manager may continue to be technically responsible.

SuggestionEnsure a robust and rigorous budgeting process is undertaken for the coming year to ensure that budgets and the tenants’ operating expenses contribution are more accurate. Operating expenses should be explained and summarised each year, with details being provided to the tenants.

Service contract agreementsService contract agreements should be in place for allproperty services, including casual services such as plumbers and electricians. These should be kept up to date and, where possible, a standard service contract form should be adopted by the commercial property manager. It is very important that contractual positions are clearly stated and agreed. For example, using a window cleaner where a quote is provided for cleaning windows, but aservice contract is not formalised and no checks are undertaken to ensure the experience of the fi rm and their track record.

Questions that become relevant include −• Is the window cleaner suitably qualifi ed to be

working at height? • Do they have a suitable health and safety policy? • What insurance policies and cover do they have? • Is the insurance policy current?



Challenges for borrowers

• What are the termination provisions? • What is to stop the window cleaner from increasing

their charges within a short period of the start of the service?

These matters should be covered in a structured process when appointing a service provider and having a standard service contract executed. There should be a process to ensure the service contractor provides their health and safety policy, and current insurance policy, on an annual basis. New contractors should be inducted into sites, highlighting health and safety items, as well as any practical items such as access protocols.

The competent commercial property manager should be looking to engage service providers on a variety of criteria, not just price. A closed tender may be more appropriate, engaging contractors which the property manager has assessed as having the relevant skills, experience and backing to competently and safely undertake the role.

Suggestion

Have a standardised service contract document. Look for economies in scale, and form strategic alliances with service providers on a portfolio basis with contractors who are performing well. Remember that the service cost is minor compared to the repairs and maintenance costs for most services. Ensure the service frequency and items being undertaken are proactive to reduce breakdown and call-out costs, For example, a programmed quarterly service of roller doors will reduce breakdown risk and necessary repairs.

Integrity, professionalism and further educationIntegrity is one of the most important things for any young professional. In all their dealings the commercial property manager must act with integrity. Within the commercial property industry we must all focus to lift

the standards, and acting with integrity is an important element for future property leaders. There are many stakeholders for a commercial property manager, and tenants and landlords are just two of these. The great commercial property manager will act professionally in their dealings and respect all stakeholders appropriately.

I strongly recommend becoming an active member of the Property Institute. It is excellent for networking and to ensure you keep up to date and well informed on current commercial property matters. The Property Institute is a membership-based organisation and represents our industry.

Looking forward, an undergraduate degree is a minimal entry level to commercial property management. Continuing higher education is required in our industry, so it is important to continually increase your skills. The Property Institute provides good courses and papers, and I encourage you to undertake further education. The Property Institute also recognises expertise by having a registration system for valuers, commercial property managers and property advisers.

SummaryThis article covers many areas at a superfi cial level, but I hope that it provides some guidance and matters to think about for commercial property managers. As an industry we all need to look for best practice rather than accepting the industry standard. The commercial property sector needs new leaders and it starts with having great commercial property managers.

Patrick O’Reilly is the chair of the Property and Facilities Management Council and is a member of the Property Institute board. He has over 20 years of experience, mainly managing commercial property portfolios.



Challenges for borrowers

Interest rate movement spells challenges for borrowers

New Zealand’s rebounding economy has put an end to a long period of declining or stable interest rates. With that change come challenges for borrowers and the industry.

Deborah Battell

It is no secret that New Zealanders have a thing for property. The Auckland market shows that starkly. In October last year, the Reserve Bank introduced loan-to-value restrictions for low deposit home buyers to ease the pace of price rises and slow housing related credit growth. It followed that up in March with an increase in the official cash rate, the first rise in three years. The consensus is that rates are likely to reach more than five per cent by early 2016.

The Banking Ombudsman Scheme, which investigates and resolves disputes between customers and their banking service providers, has already felt the effect of the loan-to-value restrictions. We received 20 complaints between October and the end of June, although only one developed into a dispute which required investigation.

The loan-to-value restrictions may be effective in deterring those who are more vulnerable to changing interest rates from entering the market, but there is little doubt we will also eventually feel the consequences of fluctuating interest rates among other borrowers. This will probably come in the form of complaints about what is left for customers after they have sold their property. In particular are the effects of break fees and how much of the sale proceeds customers can keep if the property secures more than one loan.

Break feesBorrowers are beginning to move from floating to fixed rates and more people are likely to go that way. There is no question that rates have entered a rising phase, but for how long? Nothing is certain. Following the global financial crisis, the Banking Ombudsman Scheme dealt with a large number of complaints about early repayment costs and the proceeds of property sales. At this time rates dropped sharply and customers wanted to take advantage of the cheaper rates but were locked into fixed-term loans. Many people failed to appreciate just how big a hit they would face to break such loans. Our

guide Early Repayment Costs on Fixed Rate Loans explains more on this subject.

Industry professionals appreciate that lenders charge customers for early repayment because they lose money if the interest rate at the break time is lower than the loan’s original rate. The lender cannot re-lend the repaid funds at the original rate. They also cannot advise borrowers exactly what the fee might be because calculating that is only possible at the time a fixed-rate loan is broken. The cost varies from day-to-day because banks’ rates change daily.

The future is unpredictableThe hard lesson here for borrowers is that the further and faster interest rates fall, the higher the break cost. The fall in interest rates after the global financial crisis proved how few borrowers had a real appreciation of this. Rates are on the rise, but few can imagine any need to get out of a fixed-rate loan, simply because it is a cheaper and more secure option than the floating rate route. The risks seem remote, even theoretical. But the global financial crisis showed how wrong that can be if you are forced to sell.

Borrowers who complained to the scheme were caught by a rapidly changing market and deterioration in their personal circumstances. Some lost jobs or sources of income and had to sell their homes. Others fixed their loans, despite planning eventually to sell. They gambled that the economy would continue to hum along.

With interest rates in a rising cycle, the borrower who repays a home loan early will not be out of pocket, apart from administrative charges, because the bank can lend the money to someone else at a higher rate. However, if interest rates fall again and as people keep forgetting they always do at some point, lenders will charge a break fee to recoup their loss on the interest rate difference.

To fix or float? The decision comes down to the economy and personal circumstances, both of which can



Challenges for borrowersChallenges for borrowers

change with surprising speed. If fi xing, it is important to think hard about the length of the term as well, and not just focus on what is the cheapest immediate option. Some people also hedge their bets by splitting their lending and having some on fi xed rates and some fl oating.

Loan secured by more than one propertyAs we know, people often break fi xed-term loans because they want to switch to cheaper rates. But they also do it because they have to – times get tough and they need to sell. When borrowers sell a property over which there is a mortgage they usually get whatever balance is left after the loan is repaid with legal costs, agents’ fees and any early repayment fees also deducted. However, when they have more than one property, and the property being sold is security for more than one loan, things can get a little complicated.

We get complaints from people who expect to keep the proceeds of a sale but the bank holds back that money, whether out of concern about a customer’s ability to repay the outstanding balance on the other property, or because it has doubts about the quality of the remaining security. Bank customers who borrow to buy property usually have an all obligations mortgage, which means the property is security for any existing and future lending with the bank. This allows banks to require customers to repay more than they borrowed on the sold property.

Insuffi cient securityHere is an example. A person has two properties where property A has a $300,000 mortgage and property B one for $600,000. Property A sells for $400,000 and the seller wants to clear the debt and keep $100,000, but the bank says, ‘No, we want to keep the $100,000 to reduce the other mortgage to $500,000.’ The bank is entitled to be satisfi ed that property B offers suffi cient security for the remaining loan. Sometimes it decides there is not suffi cient security, and so it reduces the loan using sale proceeds.

A bank may reach this conclusion because −

• The customer’s fi nancial situation may have changed, affecting their ability to make repayments

• Property values may have fallen

• The bank may have changed its lending rules since the loans were approved, such as when the lending may no longer meet the bank’s loan-to-value ratio requirement s.

We advise people to talk to their bank before selling one of their properties to free up capital, because that way they will know how much the bank wants repaid. If it means breaking a fi xed-rate loan, customers will at least be able to make an informed decision. Here are two more examples to illustrate the points already made.


Challenges for borrowersChallenges for borrowers

Not consulting the bankMr C took out two all obligations mortgages to buy two rental properties. He was later made redundant and had diffi culty servicing the loans. Without consulting the bank, he decided to sell one property to free up some capital. He sold the property for $250,000 and expected to keep $100,000 after repaying the $150,000 loan. However, the bank sent his lawyer a settlement statement instructing him to repay $200,000, which left him with only $50,000. Mr C complained to us that his sole reason for selling was to free up $100,000 so he could repay other debts and cover living expenses. He said he would not have sold had he known he would get only half of the proceeds.

The bank stated it held on to $200,000 because it was not satisfi ed that the second property provided suffi cient security for the other loan. We explained to Mr C that the bank was entitled to do this because it held all obligations mortgages over the properties. We could not therefore uphold his complaint.

Bank not unfairMr D was in a similar position. He owned two apartments, each secured by an all obligations mortgage. He was also having trouble meeting repayments and sold one apartment believing he could keep all the proceeds – $19,000 in this case. The bank told him at settlement that the proceeds had to be used to reduce the other

loan. Mr D complained to us that this was unfair.The bank said it was entitled to use all the

sale proceeds to keep the loan-to-value ratio on the remaining apartment at an acceptable level. The bank offered Mr D a goodwill payment of $1,250, but he declined the offer and came to us. We confi rmed that the loan agreements and mortgages allowed the bank to use the sale proceeds in the way that they did. We could not uphold his complaint.

Mr D accepted that we could not require the bank to give him the full $19,000, but he wanted $3,000, which was what he spent on a property valuation and marketing. We asked the bank whether it would increase its offer, but it said it felt $1,250 was an appropriate level of compensation. On this basis we encouraged Mr D to accept the offer, which he did, and the complaint was resolved.

Lending guidesMore lending-related information is in other guides available on the website.• Residential loan-to-value lending restrictions• Guaranteeing somebody else’s debt• Mortgagee sales• Concerns about lending decisions.

Deborah Battell is New Zealand’s Banking Ombudsman based in Wellington.


Future of retail property

The future of retail property Chris Dibble

The changing retail landscape has reshaped the requirements of property users and owners with clear patterns emerging in recent vacancy, rental rate and capital value figures. The evidence shows there are winners and losers. However, investors remain confident and competitive in a market sparse with quality investment opportunities.

New Zealand population and retail space

LocationPercentage of usually resident population

Percentage of retail space excluding strip

2001 2006 2013 2001 2006 2013

Auckland region 31.0 32.4 33.4 23.0 23.6 27.8

Hamilton city 3.1 2.9 3.7 3.9 5.8 6.8

Wellington 10.3 10.2 10.1 17.5 15.5 13.6

Christchurch city 12.9 13.0 12.7 13.4 16.6 15.6

June 2010 quarter inner ring

June 2014 quarter outer ring

Auckland

Waikato

Wellington

Remainder in the North Island

Remainder in the South Island

Canterbury

Percentage of actual retail sales by region

Growth in technology and online retailing is changing consumer and retailer behaviour. This will change the structure of retailing and the number, shape and size of physical stores demanded in the future. One main difference in the make-up of physical retail space in the long term will be the higher proportion of small format retail premises. Some large format retailers will be relatively unaffected, such as supermarkets, but others will be affected more severely.

Smaller shops make up a growing proportion of retail space in many new developments. Retailers are looking to reduce the pressure of growing rents, and landlords want to minimise the effect of vacant large stores for which there is a limited target market. Shops are also being used more as pick-up points, adding to the increasingly complex distribution options.

Already retailers such as Walmart and Best Buy in the United States are reporting that around half of their online sales are picked up in-store. Demand for retail-related floor space will therefore remain, but not quite as we see it now, with adaptability and flexibility important considerations for developers and investors.

Influence of demography The 2013 census population data provides a guide to the influence that demography has on the retail sector. The analysis shows that Auckland is a population powerhouse, with gains against New Zealand’s overall population. It

also has the largest share of this country’s retail supply, which shows a corresponding increase.

Analysis of population and floor space also provides a guide to the future retail requirements which different locations in New Zealand may have. According to Statistics New Zealand and Auckland Council, there are estimated to be approximately three square metres of retail space for each person in the Auckland region, two square metres for small format retail and one square metre for large format retail.

To keep the status quo of retail space in Auckland as we have it today we will need an extra 1.6 million square metres of retail space by 2031 under current population forecasts. Excluding Auckland, Wellington and Canterbury, growth in retail spending has hardly changed in the last four years. The changes in demographic composition will make decisions on where to open a new shop even more important.


Future of retail property Future of retail property

Prime yields versus heavy traffic volumes

11%-700

-1700

10%

9%

8%

7%

6%

5%

-900

-1100

-1300

-1500

Average prime yield

Heavy traffic index

Prime retail yield

Prime industrial yield ANZ heavy traffic index

DateAuckland investor confidence

Overall Office Industrial Retail

June 2013 50.0% 56.6% 56.8% 36.6%

September 2013 56.3% 62.7% 63.4% 42.6%

December 2013 60.0% 66.9% 68.9% 44.1%

March 2014 57.7% 69.8% 63.9% 38.6%

June 2014 52.2% 64.4% 60.3% 31.4%

DateWellington investor confidence


June 2013 0.5% -3.8% 3.0% 2.3%

September 2013 -9.9% -10.2% -9.5% -10.0%

December 2013 7.8% 6.3% 11.4% 5.8%

March 2014 9.5% 6.3% 13.5% 8.7%

June 2014 8.4% 12.4% 10.4% 2.3%

DateChristchurch investor confidence


June 2013 60.8% 61.2% 63.9% 53.3%

September 2013 50.8% 49.7% 55.8% 46.8%

December 2013 60.2% 57.4% 67.0% 56.3%

March 2014 43.3% 40.6% 48.6% 40.6%

June 2014 41.3% 41.8% 48.1% 34.1%

A broad picture of future demand for retail space can be obtained from such analysis, but the complexities of retail make firm conclusions difficult. Population, supply and spending are fundamental, but understanding the catchment’s potential for growth, age, spending patterns and habits, along with other nuances are critical factors to be considered.

Shopping centres still popularNew trends are constantly evolving, but one feature which seems to stay relatively constant is the pull that shopping centres have on customers and retailers. Since the 1950s the need to house a growing population in the United States after World War II, and the more efficient and effective servicing of the suburbs, created the environment for shopping centres. Now common all over the world their advantage is convenience. It is a one-stop shopping environment in close proximity to home or work with free car parking, on-site facilities and coordinated marketing campaigns.

The popularity of shopping centres is reflected across New Zealand, with central city strip retail vacancy rates higher than in these centres. The vacancy rate of the Auckland central business district below five per cent is low, but it is approximately one per cent in shopping centres. Hamilton and Wellington show similar conditions. Nevertheless, shopping centres will under-perform if they rely too heavily on one sector or product line, have an inefficient retail mix or have a catchment boundary cannibalised by better performing centres.

Prime industrial retail doing wellThe changes in the industry are influencing how retail products are distributed to customers and the industrial sector has become an unintended winner. The correlation is shown below in the ANZ heavy traffic index plotted against prime industrial and retail yields. Over the last decade there has been a distinct correlation. With larger volumes of retail products expected to be transported and distributed around the country, the performance of the industrial sector will continue to benefit from retail growth.

Confident, competitive and cautiousInvestors around the country are noticeably confident in their expectations of the performance of the retail sector – Auckland, Wellington and Christchurch have all recorded nett positive scores. However, not all areas are showing the same level of confidence, and when measured against the commercial office and industrial sector there is a higher degree of cautiousness. The variance in confidence is about the future expectations of retail spending, which may be influenced by lower house price inflation and increasing interest rates over the next phase in the economic cycle.

The amount that customers spend matters greatly to the success of an investor’s retail returns. The chart below shows the relationship between Auckland central business district prime retail yields with sales

Retail yield versus retail salesPercentage

yieldRetail yield per

head of population12

10

8

6

4

2

-1200

-3200

-5200

-7200June 1995 June 2000 June 2005 June 2010 June 2014

Auckland prime retail yield Sales per head of population

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


provide people access to information when and how they want it. This is helping customers compare products, specifications and price, and search for reviews or alternatives. This is all done while they are standing in the shop or sitting at a computer.

It may feel daunting for many retailers, but digital purchasing by customers does not exclude retailers with a physical store presence. One often cited threat to the physical store is show-rooming, where a customer checks out the product in a shop and buys online. However, studies conducted overseas by eMarketer show this activity is almost as equally matched by the opposite.

Retailers therefore need to be more aware of when and how they promote their products. The balance of power may have moved in favour of the consumer, but retailers can tap into a wealth of data specifically relevant to their target market. Increasing access to information can be overwhelming for many customers, which retailers can use to their advantage. A survey of 1,600 online shoppers in the United States noted that 73 per cent of respondents agreed the way they purchase is more complex and less direct than it used to be.

Stores still neededAn online consumer will have different short-term and long-term retailing needs which they find using desktop or mobile devices with applications, social media, search engines or local review websites. Despite these options, research from Google and Nielsen shows that a physical presence is still critical in today’s retail environment. A total of 84 per cent of respondents in a recent survey researched a product online but bought it in-store.

The growth in technology will continue to change how consumers and retailers interact for many years to come. Some retailers will either sell online or in the shop, but most will need to provide a retailing strategy incorporating both. This will present a significant challenge to many, but avoiding this will not be in their best interests. According to Sapere research on New Zealand businesses, firms which make more extensive use of internet services are more than four years ahead of the average in their industry in terms of business competitiveness.

The ability to provide a transition between online and offline retailing will help the new multi-channel consumers. Similar to a physical store needing a refurbishment every few years, there is also a need to refresh the digital retail presence, perhaps as often as every three years.

Chris Dibble is National Research Manager of Colliers International based in Auckland.

per head of population. Retail yields have once again reached the record lows of just above six per cent, but further firming will only occur if growth in retail sales continues.

Investors are also aware of the historically low retail investment yields currently on offer, lower than the office and industrial sectors. However, growing investor competition for the smaller number of prime properties will often push rates below six per cent. The challenge for investors will be in locating suitable retail premises which provide an increase in value by rental appreciation and strengthening yields.

Investors will need to be aware of the financial and management aspects and also have a solid grasp of the environment and operations of their tenants. According to Statistics New Zealand, this is a sector which has one of the lowest survival rates of any industry sector over the last decade.

Technology’s influence The proliferation of technology has moved the balance of power in favour of the consumer. This has allowed retail products to be more easily viewed, compared, tested, purchased, delivered, used and rated on a global scale. To adapt to the evolving trends which technology provides, retailers have had to act rapidly, focusing on the opportunities and limiting the challenges while keeping costs in perspective. Some retailers have been successful at this, some have not.

Online retail sales

40 300

Annual percentage change

Online retail index

3530

25

2015

10

50

250

200

150

100

50

0July 2009 July 2010 July 2011 July 2012 July 2013 July 2014

Annual percentage change

Online retail sales index

People are purchasing retail items with the help of technology, using the internet, mobile devices, applications, wi-fi and radio frequency identification. This is affecting not only where and how customers buy, but the total retail experience from awareness through to recommending it to others.

Online and offline retailingOne of the main influences which technological advancements have on the retail industry is that they



Effect of Unit Titles Act

Some practical features of the effect of the Unit Titles Act John Greenwood

Many readers will now be aware of the problems associated with the effect of the Unit Titles Act 2010 and the Unit Title Regulations 2011. There are many practical difficulties needing to be confronted where the legislation is either not clear or simply does not tackle a particular problem. Although not wishing to focus on the negative, many body corporates are likely to confront the following features.

As most will know, the Christchurch earthquakes revealed an alarming number of body corporates which were under-insured. The insurance industry has moved reasonably swiftly to educate homeowners and unit owners that for them to have credible cover it is important to focus on the actual rebuild cost. This usually would need a quantity surveyor’s involvement or at least an understanding of the square metre cost of a rebuild. Any rebuild should also take into account GST, which is generally not recoverable for home dwellings, demolition, architect’s and building fees, as well as a healthy contingency.

Full insurable valueThe oddity in the 2010 Act is in section 135 in that body corporates must keep their buildings and other improvements insured to their ‘full insurable value’. There is no provision in the new legislation which says that the body corporate must maintain full replacement cover, nor is there any that earthquake cover needs to be obtained. In the Unit Titles Act 1972 a list of perils of insurance including earthquake cover were listed, but this is not the case under the new legislation.

In cases where ‘full replacement cover’, a term used in section 137, is not available in the market, indemnity cover may be undertaken by a body corporate. The term ‘not available in the market’ may be taken to mean in a market where the cost of replacement cover is simply uneconomic for a body corporate, or where insurers will not underwrite the replacement cover, such as for heritage buildings. For these buildings, taking out functional replacement cover may be more appropriate because it is unlikely that replacement of a heritage building would

ever be undertaken. A further feature of insurance is that for lenders where insurance money is applied towards reinstatement, a mortgagee is not entitled to demand that any part of the insurance money be applied in or towards repayment of the mortgage debt. See section 136(6) which is consistent with the 1972 Act.

Finally, there may be a case for larger body corporates to seriously consider self-insuring at least a component of replacement cost. This may help defray the premium cost where premiums in some cases have risen between 500 and 800 per cent, although recently the insurance market has eased as time marches on.

Access to owner’s personal informationUnder section 85 of the 2010 Act, body corporates are required to maintain a register of owners containing their names and preferred method of contact. An important feature of the register is that it is not a public document and only the chairperson and body corporate committee are authorised to search as of right for certain purposes.

Under regulation 4 of the Unit Titles Regulations 2011 a person may, with the approval of a body corporate or its committee, search a register of unit owners, but the purposes of search are limited to those set out in regulation 4(4). The purposes of limited disclosure are to −• Give notice of body corporate meetings• Give notice of resolutions voted on• Advise unit owners of matters related to the body

corporate or the unit title development• Serve documents• Forward information or documentation between




owners, provided such information either relates to the management of the unit title development or to the use or enjoyment of the unit title development.

In a recent court decision where a dispute arose about the management of a body corporate, a group of disgruntled owners wished to access the register for the purposes of sending a communication to all owners. The matter ended up in the Court of Appeal in the decision Lihua Limited v Body Corporate 366611 & Others with the court holding that −• Regulation 4(4) protects the privacy interest of

owners, but that interest gives way where owners wish to contact them for generously defined purposes

• The ability to deny access is very modest• You cannot deny access merely because you disagree

with the applicant or the merits of any given dispute.

Personal liability of committee membersThere is nothing in the 2010 Act or regulation which expressly points to any owner, whether in the role of being an owner, committee member or chairperson, having a statutory liability for breach of carrying out any duty or power. It is also interesting that this Act does not provide for any offence provisions at all, which leaves open the question of if there is breach of duty, then who bears the responsibility.

In the High Court case of Guardian Retail Holdings Limited v Buddle Findlay (2013) NZAR 988, the court held that individual members of a body corporate must act in accordance with its rules and can be personally exposed for their wrongful acts. The court held that committee members have personal obligations to act in accordance with the relevant statutory powers and rules and breaches of them may result in personal liability in two ways –• The body corporate has a right of action against the

committee members concerned for ultra vires acts, acting beyond their powers, which result in liability to the body corporate

• Members of the body corporate may look to individual committee members for losses caused by breaches of their duties.

For example, if a body corporate committee failed to take out adequate insurance cover they could be held personally liable for any shortfall in cover. If this committee acted without the proper delegated authority required by sections 101 and 108 of the 2010 Act and regulation 22 of the Unit Title Regulations, then they could be held personally liable. Note that in the recent High Court decision of Tremont Holdings Limited v Body Corporate 401803, it was held that a special resolution delegating all the powers and duties of

the body corporate to the committee was sufficient for the committee to pursue cancellation of a management agreement.

Obtain good adviceThe Act and regulations do not provide any statutory defence process where body corporate committee members who acted in good faith have a defence. In Australia, there is provision in some state legislation requiring body corporates to take out personal cover for owners and for exclusion of liability where committee members have acted in good faith.

In New Zealand, it is not uncommon for cover to be taken out for chairpersons and committees. However, it was argued in the Guardian Retail case that providing an indemnity from a body corporate to a committee from liability may be questioned as being unlawful. There is a need for body corporate committees and chairpersons to arrange officers’ liability cover and otherwise ensure that in whatever decisions they make they act in good faith. If in doubt, they should obtain advice before taking any action.

Regulation 10 provides that a chairperson is appointed by ordinary resolution at every annual general meeting. The problem arises that if there is an election where three or four nominees for chairperson are put up, how is it possible to carry out the vote because an ordinary resolution vote does not work. It is suggested that, for pragmatic reasons, a body corporate should simply hold a secret ballot and take the top-polling candidate.

Repairs and maintenanceUndertaking repairs and maintenance should be a routine exercise for most body corporates.

There is now provision in section 138(1) of the 2010 Act that a body corporate must maintain and repair all building elements and infrastructure that ‘relates to or serves more than one unit’. The term is not precise and can lead to debate where there is a connection between units. Under section 138(4) costs incurred which relate to repairs or the maintenance of building elements and infrastructure, which are contained in a principal unit, are recoverable from the unit owner.

This all sounds straight forward at first glance when considering that under the new legislation the body corporate, not individual owners, has the duty to repair and maintain all building elements and infrastructure. However, particular problems can arise.

What does ‘relates to or serves more than one unit’ mean? Must there be a continuous structural element existing between units? There may exist party walls which separate units altogether, or simply different pods or stand-alone complexes within the one body



corporate. Arguably, in some situations there will be no unit which relates to or serves more than one unit.

What if some units benefit more than others from a work programme? Under section 126 of the 2010 Act, after work is completed an assessment can be made that those units which substantially benefit more can be invoiced instead of other owners who do not benefit from any work programme – similar to section 33 under the 1972 Act.

Sections 126 and 138 of the 2010 Act indicate you cannot bill until the work is completed. This is of course inconsistent with the need to raise levies under section 121 – or if an upgrade under section 119 – ahead of a work programme.

Holistic approachRecent Court of Appeal decisions, Berachan Investments Limited v Body Corporate 163025 [2012] NZCA 256 and Tisch v Body Corporate 318596 [2011] NZCA 420, indicate that a more flexible and holistic approach will be taken by the courts in looking at who should pay for repair bills disregarding boundary demarcations. For example, in the Berachan decision concerning who should pay for the roof repair, the court somewhat surprisingly held that although 80 per cent of the roof was within the ownership of the penthouse owner, all of the owners were held to share in the payment of repairs.

Apart from the practical difficulties of when and who to charge, a body corporate can adopt an holistic approach, seemingly encouraged by the Court of Appeal, and simply adopt its own take by consensus on how it charges. However, this will always be subject to any legitimate challenge from owners who in the future take a different view.

Health and safety A particular dilemma with unit title developments and buildings which may be considered unsafe or dangerous is the effect of the Health and Safety Employment Act 1992 and how that legislation interacts with the Building Act 2004. At the end of 2013, WorkSafe New Zealand produced a position statement which identified the mismatch between the two Acts. Of particular interest is that there is no specific provision or direction in either Act. However, the current health reforms await a release of regulations that could help. They dictate what specifically needs to be done where buildings or components of a building trigger potential harm to people or property.

Under section 16 of the health and safety legislation people in control of the place of work, which includes building owners and lessees, have a duty to provide a safe working environment to ensure no hazard exists that could harm people in

the vicinity. There is a concurrent responsibility on a body corporate and the owner of units to ensure a safe working environment.

Relevant professional adviceWorkSafe is of the current view that they will not take health and safety enforcement action against owners in relation to the structural integrity of a building because they claim it is covered by the Building Act requirements. Any enforcement action would come from the local authority. For buildings which are earthquake-prone or dangerous, it is the local council’s responsibility to take enforcement action if it is required.

A different approach is presented by WorkSafe. For them, where building components or chattels are identified as being a hazard that requires protective action to prevent or mitigate by taking practicable steps, then WorkSafe may take direct action if these steps are not carried out. In situations where owners are concerned about their building structure or safety they need to get, as WorkSafe advises, relevant professional advice such as an engineer’s assessment and to take whatever practicable steps seem appropriate for each different situation.

One planIt is disappointing that the current building reforms going through Parliament do not accurately solve the problem of safety of people in buildings, and the rather generalised and confusing provision in section 121 of the Building Act about dangerous buildings is unhelpful. This is because section 121 does not cover buildings which are earthquake-prone, as they are specifically excluded from being dangerous. It means there needs to be a reliance on councils issuing notices under section 124 of this Act.

In stating the obvious, health and safety legislation has a focus on employment law. Realistically the shortcomings in the Building Act need looking at to bring into sharp focus the extent of landlord and tenant responsibility and promote the urgent need to have holistic fire evacuation and earthquake safety plans for each building. Instead of having multiple safety plans there should be one plan for each building covering all tenancies within it, including the requirement to ensure the safety of members of the public who access such buildings. This is not currently dealt with under the proposed person conducting a business or undertaking regime, flowing out of the health and safety reform where concurrent duties will result.

John Greenwood is a Partner at Greenwood Roche Chisnall, a specialist projects law firm based in Wellington. He is an Honorary Fellow of the Property Institute.


Legal cases

Legal cases

The concept of earthquake-prone buildings has been very relevant in New Zealand since the devastating Canterbury earthquakes. A building is earthquake-prone if its ultimate capacity is exceeded and if it would be likely to collapse and cause injury, death or damage to other property during a moderate earthquake. A moderate earthquake is one which is one-third as strong as earthquake shaking used to design a new building to 100 per cent of the new building standard. If a territorial authority is satisfi ed a building is earthquake-prone then section 124 of the Building Act 2004 permits, among other things, it to issue a notice requiring work to be carried out on the building to reduce or remove the danger.

The High Court’s recent decision in Lambton Quay Properties Nominee Limited v Wellington City Council highlights the inter-relationship between the Building Act and the Resource Management Act when considering the fate of an earthquake-prone building. This case brought into focus the competing policy interests of public safety, the risk of damage to other buildings, the public interest in preserving heritage buildings, and the private, fi nancial and property interests of heritage building owners.

The Environment Court and the High Court attempted to balance these competing interests but reached different conclusions. The High Court disagreed with the Environment Court’s decision to deny the building owner a resource consent to demolish a heritage building. The High Court allowed the appeal and has remitted the decision back to the Environment Court for rehearing on two points which are discussed in this article.

BackgroundLambton Quay Properties Nominee Limited (Lambton Quay Properties) owns the iconic Harcourts Building in central Wellington, which has been categorised as an earthquake-prone building under the Building Act and a Category 1 heritage building under the Historic Places Act 1993. In July 2012, the Wellington City Council issued Lambton Quay Properties with a notice under section 124 of the Building Act, requiring it to either strengthen the building or demolish it within 15 years.

Lambton Quay Properties determined it was not economically viable to strengthen the Harcourts Building and that it would have to be demolished. The Wellington City District Plan categorises the demolition

Shaky heritage – the relationship between the Resource Management Act 1991 and the Building Act 2004 for earthquake-prone buildings Lambton Quay Properties Nominee Limited v Wellington City Council

Niven Prasad and Rebecca Dempsey


Legal cases Legal cases

of a heritage building as a restricted discretionary activity, so Lambton Quay Properties required a resource consent under the Resource Management Act. On 4 September 2012, the company applied to the council for a resource consent to demolish the building, but it declined this because of its interpretation and application of the heritage provisions of the District Plan.

Many appealsIn particular, rule 20.2.1 states the heritage objective to be to recognise the city’s historic heritage and protect it from inappropriate subdivision, use and development. This rule also contains the heritage policies to discourage the demolition, partial demolition and relocation of listed buildings and objects, while giving consideration to total demolition only where the council is convinced there is no reasonable alternative.

Lambton Quay Properties appealed the council’s decision to decline a resource consent to the Environment Court. This court dismissed its appeal because, amongst other reasons, it found that section 6 of the Resource Management Act and the heritage provisions of the District Plan were strongly expressed to protect historic heritage as a matter of national importance and to discourage demolition. The Environment Court decided that not all reasonable alternatives to demolition had been exhaustively and convincingly excluded.

Lambton Quay Properties then lodged 15 grounds of appeal to the High Court. This article will not review all of these grounds, but will focus on the two that were successful.

The High Court stated its task to be ‘not to question the weight which the Environment Court placed on the evidence, but to determine whether or not any one of the 15 grounds of appeal advanced by the building owner [Lambton Quay Properties] constitutes a material error of law.’

The High Court’s decisionThe High Court disagreed with the decision and reasoning of the Environment Court. It allowed the appeal and has remitted the decision back to the Environment Court for rehearing on two points. • Consideration to demolition of the building only if it

is convinced that there is no reasonable alternative to total demolition

• Consideration to the risk to public safety and surrounding buildings if the Harcourts Building remains as it is.

The High Court’s approachThe High Court allowed the appeal for two main reasons –

• The Environment Court stated the wrong legal test at the conclusion of its judgment when it said ‘the District Plan and section 6 [of the Resource Management Act] require the alternatives to be exhaustively and convincingly excluded before demolition can be justified’

• The Environment Court erred by not reconciling the relevant provisions of the Resource Management Act and the Building Act, and in doing so, failed to consider the risk to public safety and surrounding buildings if the Harcourts Building remains as it is.

First successful ground of appealThe High Court dealt with the grounds of appeal together and concluded that the Environment Court erred when it stated that the alternatives to demolition must be ‘exhaustively and convincingly excluded.’ This test did not reflect section 6 of the Resource Management Act or the heritage provisions in the District Plan.

The Environment Court was presented with extensive evidence from 21 witnesses. The building owner presented evidence that since the Canterbury earthquakes, the value of the Harcourts Building dropped from $19.5 to $10 million and that rental from the tenants in the property became significantly less than the council’s rates.

Valuation evidence presented on behalf of Lambton Quay Properties established that strengthening and reinstatement works for the Harcourts Building would not be commercially viable. However, contradictory evidence was presented on behalf of the council and the Historic Places Trust concluding that reasonable commercial use could be made of the building if it were retained and strengthened.

Evidence was given by a number of witnesses about various alternative uses which have been considered for the Harcourts Building and included −• Keeping the building as it is• Strengthening the building to 100 or 67 per cent of

the new building standard• Retaining the façade, but demolishing the interior,

and constructing a new building behind that• Converting the building into a hotel, apartments or

student accommodation.The High Court stated the test for determining

whether demolition was appropriate is to be ‘founded upon an assessment of whether or not demolition is a balanced response that ensures all competing considerations are weighed, and the outcome is a fair, appropriate and reasonable outcome.’ This test is less onerous than the obligation to ‘exhaustively and convincingly exclude’ alternatives stated by the Environment Court.


Legal cases

The High Court found that the Environment Court also misinterpreted the heritage provisions of the District Plan. The relevant provisions require the Council to give ‘consideration to total demolition only if it was convinced that there is no reasonable alternative to demolition.’ The Environment Court omitted any reference to ‘reasonable alternatives’ to demolition, and by doing so imposed a test materially higher than the threshold set by the District Plan. The High Court therefore concluded that they must allow the appeal because the legal test stated by the Environment Court unfairly required Lambton Quay Properties to discharge too high a burden.

Second successful ground of appealLambton Quay Properties alleged that the Environment Court erred by determining that ‘the tension’ between the Resource Management Act and the Building Actcould not be resolved. The Environment Court recognised the ‘inherent irony’ between the requirements of the Building Act notice and the consent provisions of the Resource Management Act. On one hand, the council issued a Building Act notice requiring the Harcourts Building to be strengthened or demolished. On the other, the council declined the application for a resource consent to demolish it.

However, the High Court disagreed, saying that there is some degree of commonality between the purposes of the various legislative provisions and that ‘public safety must always prevail.’ The power conferred to councils by section 124 of the Building Act to force owners to remedy potential hazards created by earthquake-prone buildings refl ects the Building Act’s purpose to ensure people who use buildings can do so safely and without endangering their health.

Similarly, section 5 of the Resource Management Act states one of its purposes to be the management of physical resources in a way that enables people and communities to provide for their safety. In addition, the relevant provisions of the District Plan refer to the need for the councils to consider the ‘structural stability’ of a heritage building and the ‘public interest in … providing a high quality, safe urban environment.’

The Environment Court put aside the effects of the relevant provisions of the Building Act, and only considered the options of the building being demolished or strengthened. In doing so, this court failed to consider the consequences of the building owner doing nothing because of its inability to comply with the Building Act notice. The High Court stated that this consideration was important because it requires a careful analysis of the risks to public safety and surrounding buildings.

Evidence was presented to the Environment Court explaining that in a moderate earthquake the Harcourts Building would probably be a source of ‘injury to life and other property.’ Evidence also assessed the building as having a ‘moderate risk’ of sustaining signifi cant damage in an earthquake and a high probability of ‘pounding’ between the Harcourts Building and other property in a severe earthquake.

The High Court concluded that the Environment Court made a material error of law. This was because the latter court failed to take into account the performance of the Harcourts Building in a moderate earthquake or the consequences of Lambton Quay Properties being unable to comply with the Building Act notice.

ConclusionThe Harcourts Building case is being followed closely by many in the property and building sectors. This is no surprise given the recent spotlight on earthquake-prone buildings and the Building (Earthquake-prone Buildings) Amendment Bill making its way through the legislative process.

The differing conclusions of two courts demonstrates the diffi culties which can arise when competing policy interests must be balanced. It will be interesting to see how the Environment Court, on a second attempt, balances the public safety considerations surrounding the Harcourts Building remaining as it is against the competing heritage policy interests. The case may well be instructive in many more similar situations to come.

Niven Prasad is an Associate and Rebecca Dempsey a law graduate in the commercial property team at Simpson

Legal casesLegal cases26 Property Quarterly Vol 4, Issue 4, December 2014

Legal cases Legal cases

Blurred lines – when is there an agency relationship?Fenswick International Limited v GR International Limited [2014]

Niven Prasad and Johanna McDavitt

Given the possible consequences of an agency relationship, it is important to be able to identify when you may be acting as someone else’s agent. A recent case from the High Court, Fenswick International Limited v GR International Limited, demonstrates that spotting an agency relationship may not be straight forward.

The GR International case arises out of two property transactions between the plaintiffs and defendants. Considering each transaction in turn, Justice Cooper concluded that an agency relationship existed in respect of the first transaction but not the second. This article discusses the decision and draws guidance as to when a relationship will be an agency relationship.

BackgroundThis case arose from a friendship and business relationship going sour. Mr Parsons, one of the plaintiffs, was introduced to Mr Jenkins, one of the defendants, by a mutual friend. Mr Parsons wanted to invest in the New Zealand property market and saw Mr Jenkins as having expertise in this area so came to rely on his advice.

Mr Jenkins introduced Mr Parsons to Mr Braden. Mr Braden and Mr Jenkins were directors of the defendant company, GR International Limited. Mr Jenkins recommended Mr Braden to Mr Parsons as a property manager, and Mr Braden came to act as Mr Parsons’ agent in New Zealand. That much was uncontested by all parties as Mr Braden had a letterhead designed for Mr Parsons’ companies – Fenswick International Limited and AM Limited – and signed letters from Fenswick and AM Limited as ‘Agent-General’.

What was less clear was whether Mr Jenkins acted as Mr Parsons’ agent and therefore owed him duties as an agent. The court decided that an agency relationship existed in one transaction but not the other. We discuss these transactions below.

The transactions242 Flat Bush School RoadWhen Mr Jenkins’ neighbouring property became subject to a mortgagee sale, he sensed that a bargain was in the offering. He negotiated the sale of the property from the mortgagee for $2,400,000. Having secured the property for a bargain price, Mr Jenkins rang Mr Parsons and, according to Mr Parsons, told him that he was at an auction for the sale of the property and he could buy it for $3,100,000 if he acted fast, which would be a ‘great deal’. Relying on Mr Jenkins’ endorsement of the property, Mr Parsons agreed to buy it for $3,100,000.

Mr Jenkins bought the property through GR International for $2,400,000. At the same time, GR International on-sold the property to Mr Parsons for $3,100,000. The simultaneous settlement meant that the money from Mr Parsons was available to be used to settle GR International’s purchase of the property. Prior to settlement, Mr Braden provided Mr Parsons with a valuation of the property at $5,165,000.

Mr Jenkins and Mr Braden did not mention to Mr Parsons that Mr Jenkins was a director and shareholder of GR International, or that this company was able to buy the property for $2,400,000. Justice Cooper concluded that the price paid by GR International, and that GR International was a company controlled by Mr Jenkins, were facts deliberately not disclosed to Mr Parsons. This was important because it influenced his decision to purchase the property.

Justice Cooper found that Mr Jenkins and GR International were acting as Mr Parsons’ agents. Mr Parsons intended that Mr Jenkins and GR International would represent him in the purchase of the Flat Bush School Road property in such a way that Mr Jenkins and GR International effectively had the authority to bind Mr Parsons in dealings with third parties. Mr Jenkins never referred to the agency, but this did not matter because there is no requirement for an agent to disclose the fact of the agency in dealings with third parties. Because Mr Jenkins and GR International were acting as Mr Parsons’ agents they owed him two important obligations − • To avoid a conflict between Mr Jenkins’ and GR

International’s interests and those of Mr Parsons• The duty to avoid profiting from their position as

agent, Justice Cooper commented that ‘while such duties may be modified by consent or acquiescence the consent must be fully informed.’

Mr Jenkins and GR International breached these obligations by failing to disclose the price GR International paid for the property. As a result, GR International made an immediate profit. Justice Cooper accordingly found against Mr Jenkins and GR International and ordered judgment against them for $399,877.


Legal cases

423 Ormiston RoadMr Jenkins was interested in acquiring this contiguous land to the north of his own house and decided to ask Mr Parsons whether he would be interested in purchasing a portion of 423 Ormiston Road. At this point Mr Parsons had already acquired 242 Flat Bush School Road.

Mr Parsons expressed interest in the proposal. It was agreed that GR International would purchase 423 Ormiston Road from the mortgagee, the land would then be on-sold to Mr Parsons, and a boundary adjustment would be undertaken at GR International’s cost. The result would be that Mr Parsons would own the northern portion of 423 Ormiston Road and the southern area would be amalgamated with Mr Jenkins’ existing property to the south. Mr Jenkins entered into an agreement for sale and purchase with the mortgagee for $1,190,000. GR International was nominated as purchaser.

Meanwhile, Mr Braden had drawn up an agreement between Mr Jenkins as vendor and Mr Parsons as purchaser. Under this agreement, Mr Parsons agreed to pay $2,200,000 for 423 Ormiston Road. A special condition stipulated that if the planned boundary adjustment could not proceed, he was obliged to pay another $850,000 for the land as he would own the whole lot. This agreement, known as the First Agreement, was the subject of much factual dispute. Mr Parsons subsequently had a change of heart and sought to withdraw from the First Agreement. This left Mr Jenkins in a tricky situation – he had not arranged any alternative source of finance. Ultimately, it was agreed that the purchase by Mr Parsons would go ahead with the purchase price restructured.

The restructuring of the agreement was recorded in what came to be known as the Second Agreement, which noted the purchase price payable by Mr Parsons to GR International as being $1,120,000. Mr Parsons argued that the First Agreement was never completed and that neither party had intended it to go ahead. Instead, the Second Agreement had superseded the First Agreement such that Mr Parsons would pay only $1,120,000 for the northern portion of the property. Justice Cooper did not accept Mr Parsons’ position and found that the Second Agreement was really a variation to the earlier agreement, and that he had agreed to pay the purchase price as stipulated by that agreement.

In contrast to the position under the purchase of 242 Flat Bush School Road, Justice Cooper found that there was no agency relationship between Mr Jenkins or GR International and Mr Parsons. He held that there was no evidence that Mr Parsons discussed the price provided for in the First Agreement with Mr Jenkins or Mr Braden, or that he sought advice in relation to it from either of them, or that they made any

representations or gave any advice about it.Mr Braden in his personal capacity, on the other

hand, was acting as Mr Parsons’ agent but did not breach any of his obligations as his agent. His actions in transferring money from Mr Parsons’ account to Mr Jenkins’ and GR International’s account were in accordance with Mr Parsons’ wishes at the time.

What can we learn from the cases?The first case provides some guidance, althought limited to the particular facts, on when an agency agreement exists. In the case of 242 Flat Bush School Road, Mr Jenkins knew that Mr Parsons was interested in purchasing New Zealand property and on that basis got in contact with him about buying it. Mr Parsons seemed to rely on Mr Jenkins’ business expertise in deciding to purchase the property. He felt no need to make further enquiries about the property – he trusted Mr Jenkins’ judgment of the purchase being a good deal.

In the case of 423 Ormiston Road, on the other hand, Justice Cooper found that Mr Parsons did not seek advice from Mr Jenkins and did not rely on anything he told him in deciding to purchase this property. To the contrary, Justice Cooper found that it was entirely Mr Parsons’ own decision to pay $2,200,000 for it.

Recommendations about careThere are two important distinctions which led to different results for the two transactions. The first is that Mr Jenkins recommended the purchase of 242 Flat Bush School Road to Mr Parsons on the basis that he knew he was interested in buying New Zealand properties. From Justice Cooper’s discussion of the case law it seems that if person A approaches person B for advice and assistance in finding a property, it is likely that person B will be found to be acting as person A’s agent. The second distinction is that Justice Cooper found that Mr Parsons relied on Mr Jenkins’ advice and recommendations for the purchase of 242 Flat Bush School Road, but not of 423 Ormiston Road.

There is a need to be careful when making recommendations to others about their investments, or when assisting friends in managing their property portfolios. You do not need to call yourself an agent to be considered one, and being an agent can have significant consequences. The case also highlights the danger of acting in such a capacity without any written arrangements, even though such arrangements may be difficult to articulate when close acquaintances are involved.

Niven Prasad is an Associate and Johanna McDavitt is a law graduate in the commercial property team at Simpson Grierson in Auckland.


Legal cases Reasons to employ a graduate

Good reasons to employ a recent graduate Joanna Parry

Many firms see recent graduates as too much hard work, but overlooking them as potential employees could be a commercial mistake. Graduates bring passion for learning, determination to succeed and a willingness to be part of the team. They can turn antiquated processes around with fresh ideas and know how to use the latest technology. If you have a history of overlooking graduates then it may be time for a fresh perspective.

Graduates are less expensive to employ than more experienced professionals. The experience that a more seasoned professional brings to a job can be positive and negative. If you are after someone who has a wide variety of industry connections then a graduate will not be your immediately preferred candidate. However, they may have the ability to mix well with industry professionals, opening doors which were previously closed. Experience does count, but by employing a graduate you are able to hire someone who could move smoothly into your way of doing business.

Graduates are not always concerned about the money. For many of them, experience with senior professionals, access to training, and operating at the coal face of the profession will influence where they will look for a job. Knowing this means that employers will have to offer their younger staff more than just money. Employers need to demonstrate that working for them is the opportunity to launch an interesting career.

Graduates employed by JLL in Auckland were all in agreement that the ability to mingle with clients relatively soon after their employment was an important factor in their decision to work there. Liam Rooney is a valuation graduate from the University of Auckland who is now employed with JLL. He finds it important to be working alongside industry leaders and gaining exposure to some of New Zealand’s prime assets, particularly retail property.

Passion for the job Passion for any job is hard to reintroduce to people who have been working in the same field for a long time and who may have lost the edge. Most graduates have plenty

of passion because they are finally about to start earning money and be recognised for what they have trained for over the last few years.

They are likely to want to work as a team because they know they still have a lot to learn. They will ask questions and want to learn their employer’s way of doing things. The fact they are still open to learning can quickly distinguish them from employees who think they know everything already, or worse, continue to apply out-of-date information or processes.

It can be a problem to keep on top of technology. Graduates are usually at the front of the latest applications and technology, which can be an advantage. Most graduates can intuitively navigate new apps because they stay current with trends in this area.

Climbing the ladder and leg workGraduates may want to climb the ladder and ambition is a good thing. They can be productive and have high professional standards as they are out to impress their employers and their employer’s clients. Graduates are the future of any profession they enter. When a firm hires them it signals that it sees itself as a long-term part of the profession. From a client’s perspective, a firm which employs graduates is stable and financially strong because it can afford to invest in its own future.

Graduates can also do the leg work. They need to learn the ropes and that means getting down to basics and getting them right. This can free up senior staff and create a balance in terms of productivity. Freeing up staff to concentrate on activities which reflect their skills and experience plays to the strengths of the company.


Reasons to employ a graduate

Retaining a graduateHiring a graduate is a long-term investment. It is important to fi nd ways of retaining them.

Taking the initiative to meet prospective graduates before they enter the workplace will allow you time to sort out the best employees. Observing how prospective graduates socialise and interact with existing staff will give an insight into how they will handle your workplace environment. Those who can be comfortable and professional with social events will refl ect well on the fi rm and impress clients.

Offer a competitive salary If you pay peanuts you may get little return, but most fi rms would not agree with paying high salaries for graduates. How do you attract them if you do not have a large salary to offer? Consider incentivising entry level salaries so that the graduate goes into the workplace knowing it is up to them to earn a pay rise or bonus.

From an employee’s perspective, knowing that there are clear aims and objectives to achieve management advancement or a pay increase, is an attractive proposition. Small to medium-sized businesses should consider this method more fi nancially appropriate. Rather than investing everything initially they can expect the graduate to work hard to earn a higher salary.

It is important that employment and remuneration or bonus requirements are explicit and clearly understood and that regular reviews of achievement are maintained. Graduates from all fi rms interviewed for this article signalled that their employer had spent time getting to know their individual career aspirations and established ways for them to advance their skills and experience. Incentivising was not always fi nancial, as some graduates had been offered opportunities to transfer to other international cities as recognition for achievement.

Identify a clear career pathwayGraduates need a clear career pathway when they join a fi rm. Some will have a vision of where they wish to go, but many are still considering their future. The property industry has many possibilities and graduates need to keep their options open. There will be a few who will walk through the door knowing exactly where they are going. An employer who identifi es those steps and helps the graduate will be more likely to retain their services in the future.

Graduates recently employed at Bayleys Valuations Limited in Auckland expressed their understanding of the inter-departmental structure in their workplace and how easy it was to see who they needed to meet and impress, and what they needed to know to climb the ladder. They also expressed their gratitude for the senior colleagues who shared their knowledge and experience, which in turn helped them in gaining a better understanding of where they wanted to go in the property world. David Stewart, another University of Auckland valuation graduate, is employed by Bayleys. He believes the property market is a very dynamic environment where challenges can be turned into opportunities for young valuers to excel.

Provide a stimulating work environment

Graduates should not hide behind a desk all day doing mundane work – it can be a waste of time for them and the fi rm. Instead, they should have a balance of administrative and practical experience and get to mix with a variety of experienced staff. Do not overlook administrative staff when training future property professionals because the backbone of any effective worker is understanding how to prioritise workloads and clients.

Administrative staff have a wealth of knowledge about the fi rm and the functions behind main products

Natasha WalkerDavid StewartJacqueline ForshawLiam Rooney


Reasons to employ a graduate Reasons to employ a graduate

and services and it is critical that they are valued and their knowledge respected. Graduates at FordBaker Valuation Ltd in Christchurch explained that having the balance of administration and fi eld work allowed them to put into context what they were learning, and also felt like they were part of the team. Natasha Walker from FordBaker is a valuation graduate from Lincoln University who enjoys the variety of assignments and the independence of the profession. She also appreciates the opportunity to work with supportive and knowledgeable colleagues.

Offer real experience

For a graduate, having the opportunity to observe meetings and attend main industry events is vital to their understanding of the context in which they are working. They may struggle with the initial conversations they hear, but in time they will mature, and in doing so become keen observers who can provide good feedback. Most of the graduates interviewed for this article agreed that their practical skills needed development when they entered the workplace, but that going out into the fi eld was the answer.

All the graduates interviewed agreed that the best part of their fi rst year was learning how to produce the service to the standard expected by their employee. Next came the enjoyment of learning the ropes and becoming part of a brand identity. All the fi rms employing these graduates operate quality systems which were used as part of the induction process. The quality system meant no-one had any excuse for not knowing their part of the process and the standards expected of them.

Regular reviews of aims and objectives The graduates at Colliers in Wellington and FordBaker in Christchurch spoke highly of their managers for

offering regular mentoring and reviews of personal as well as fi rm-based aims and objectives. Jacqueline Forshaw is a valuation and property management graduate from Massey University who is currently employed by Colliers International in Wellington. She likes the diversity of the work and the chance to be involved in valuations with the support of experienced directors.

Employees must understand the direction of the fi rm and what its objectives are. They also need to know what their role in the overall plan is, and how they will be measured in terms of performance. Regular meetings and mentoring ensures momentum and motivation is maintained, and a chance to establish aims and review targets.

Graduates across all fi rms agreed that experience was critical for entry into the workplace, and most of those interviewed had undertaken this in their fi nal years of study. None of the graduates interviewed required extensive training to get up to speed. Some found that they were more aware of professional standards and regulations than their more experienced counterparts because they had been immersed in them during their study.

All new employees, regardless of experience, require a proper induction into the workplace. No two property fi rms are the same. When aiming to employ a property professional, consider the medium to longer-term advantages as well as the short-term benefi ts that a graduate might bring. In doing so it becomes hard to overlook them.

Joanna Parry is Quality Advisor at the Property Institute based in Wellington. She would like to thank graduates from Colliers (Wellington), Bayleys (Auckland), FordBaker (Christchurch) and JLL (Auckland) for their contributions to this article.


Excellence in valuationExcellence in valuation

Excellence in the valuation professionBrent McGregor

One of the main topics for discussion at the recent Property Institute conference, especially the annual general meeting of the NZIV, centered on the occupational regulation of valuers. Strong opinions were voiced on the optimum path for the future and there were plenty of well-intentioned views expressed at an important cross-road for the valuation profession in New Zealand.

I have mixed views on this. As a registered valuer, who has worked hard to earn the right to practice, I do not mind the 1948 Act with its registration requirements and compulsory NZIV membership. As an employer, I find the costs associated with 40 annual practising certificates and NZIV and Property Institute memberships are particularly pricey. As a free market believer, I like the idea of de-regulation because ultimately our clients look for the services of the professionals best placed to provide the advice sought.

I am sure a cost-effective compromise sits somewhere between the current system and a deregulated model with the latest LINZ proposal seeming workable on first reading. Whatever the result, there is a notable omission from the discussion. It is the focus on the provision of exceptional service to our clients. Occupational regulation is partly about protecting clients of the profession, and especially putting in place safeguards to minimise the incidence of poor service. This is fine, but I believe once the long-term answer is reached the focus needs to be on moving the profession toward excellence.

Valuation instructions and reportingFor the past four years I have worked as the licensee in charge, managing director and head of investment sales at CBRE, a full service real estate business providing research, management, valuation, advisory and agency services. My observations of the valuation profession in this article come particularly from my role as a licensed agent. Selling agents are very often provided with the latest valuation report for properties being marketed for sale. These reports are normally prepared for financial reporting or lending purposes, and in my experience very rarely does a private owner instruct a report specifically for disposal purposes.

The reports I have seen generally provide good analysis of the sales evidence. However, they are not

normally expansive in the areas of market trends, liquidity, buyer demand and depth of capital. You would expect this if a report were to be an advisory report being prepared for sale purposes. Although the definition of market value contemplates a hypothetical disposal, the profession does not always go into great depth on these particular points.

Sticking to the facts

Compliance reports for lending and financial reporting are normally instructed after a competitive quote is sought, and the natural result is a report which sticks to the facts. Recent leases and sales are analysed and interpreted, the parameters are applied to the subject property and the value conclusion is reached – job done. Of course, all of the other requirements of the relevant standard are normally met as well, but nothing extra is generally provided. This is fair enough, as the valuer was not being paid for the bells and whistles. However, this does not stop the report being used for other purposes.

When a vendor provides the latest mortgage or financial valuation report to a selling agent, the concluded value is commonly regarded by the vendor as the minimum acceptable price. In forming this view the vendor is assuming that the valuer has undertaken a sufficiently robust process resulting in a report conclusion suitable for a sale decision. This may or may not be the case. I would suggest that if the valuer knew a sale was being contemplated and the valuation was going to be tested, then in many instances, the valuation process, the report content and the wording might be different.

Is a sale possible?The recommendation I make is that valuers should always ask whether a sale is being contemplated. It is something to be aware of so the report can be worded appropriately for the situation and is also a prudent risk


Excellence in valuation

management measure. I spoke at the conference about a sample of recent transactions where valuation reports were provided to the marketing agents. These showed a high standard of reporting and good compliance with standards and guidance notes.

This stems from a number of factors including −• The quality of the property degrees at Lincoln,

Massey and Auckland• An active standards board• An extra level of care which exists because of the

thinner market in New Zealand compared with larger markets overseas.

Increasing the level of service As noted, my main focus is to highlight areas where there are opportunities for the New Zealand valuation profession to further its level of service beyond one which just meets the standards and also to highlight a few risks that come about due to how the market operates. For owners and property managers who are making important decisions based on valuation advice, there is a need to get to grips with how to instruct valuers and for caution when relying on lending or fi nancial reporting reports for transaction decisions.

For valuers, it is important to review their last report and consider if anything should be amended if they know the property will be taken to the market. There are plenty of problems with comparing valuations to sale prices, not the least being the time between the valuation and sale. However, for transactions which vary more materially from the valuation report, greater than fi ve per cent, there are a number of contributing factors.

Large vacant areas or vacancies pendingGenerally where there are large vacant areas or where vacancies are pending the buyers tend to have very conservative leasing assumptions. This compares with valuers who tend to adopt what they see as market norms for letting up periods and capital expenditure allowances. As well as time to lease, another factor to consider is the level of incentive required to enable the new lease to be agreed.

The valuers in this market have tended toward nett effective valuation models. This is technically acceptable, unless incentives reach the point where the initial cash amount or rent-free period makes the nett cash fl ow in

any particular period insuffi cient to support normal debt levels.

Under-estimation of capital expenditure

Under-estimating capital expenditure is common, and within the scope of a valuation inspection. It is not easy for a valuer to accurately assess required levels of expenditure. In my view, it is reasonable to adopt the owner’s capital expenditure budget in the absence of an independent assessment.

However, in many cases this has proved to be understated, particularly once a buyer instructs full building due diligence. The attention given to this by buyers has increased signifi cantly in recent years following the Canterbury earthquakes. There is no easy answer to this for valuers, except perhaps to request that the owner obtains an independent capital expenditure assessment if the property is to be sold. Engineers are often comfortable preparing reports for sale purposes that extend reliance to lenders and ultimately to the end buyer.

The concluded capitalisation rate for long-lease single-tenanted buildings can be materially different, both higher and lower, from the yield on sale price. Although there are many factors to consider when a valuer is concluding a capitalisation rate, my observation is that over the past few years the buyers have skewed their focus toward the length of the lease and the tenant default risk. The valuers, on the other hand, have skewed their focus toward the length of the lease and the quality of the property.

A competing developmentThere was often a different view on how the market would factor in the effect of a competing development on the future market rents. Within a discounted cash fl ow this becomes a future income problem, and within a static income approach it is a capitalisation rate consideration.

I saw this on retail property where the buyers were fairly sure that market rents would be fl at to negative in the near future due to increased competition, and that the turnover rental would be wiped out almost entirely. The writer of one report, however, applied a relatively low but steady rental growth profi le to a shopping centre, which did not look out of the ordinary. This


Valuers’ Registration BoardExcellence in valuation

difference on its own was enough to create a material gap between valuation and bid pricing.

Poorly presented propertiesWhere properties are poorly presented I have noticed that this can be overlooked by the valuer in their report because the tenancy schedule was strong. With fund managers and investment banks now being less active than professional property investors, the focus on well-managed and well-presented properties is higher than before.

In the lead-up to 2008, the aggressive institutional buyers were generally pricing assets from behind the computer screen. However, the most active buyers now are the private investors and the funds have property as their core business. To these buyers the tidiness of the asset generally tells a story well beyond the physical, with well-presented assets having happier tenants. Happier tenants pay more rent, renew their leases and make fewer complaints, which all goes to pricing in the eyes of an astute buyer.

Seismic factorsThere were examples in the reports of value versus price differences due to inaccurate initial evaluation procedure assessments. In one situation the valuer qualifi ed the report by making an assumption that the asset was up to code. The vendor subsequently commissioned an initial evaluation procedure report which showed the asset was earthquake-prone.

Based on this, the vendor was happy to accept a lower price rather than undertake the seismic works. The purchaser acquired the property, sought a full engineering assessment, and the necessary works were minimal compared to what was fi rst assumed based on the initial evaluation procedure.

Sales of over-rented propertiesSales of over-rented properties were much higher and much lower than the latest valuation report. Valuing over-rented properties is a challenge because the attitude of many buyers is different from the net effective logic ingrained in the thinking of valuers. However, what matters is how the buyers look at this. I can safely say that their main considerations are not the over-rent itself but the next market event, the lease length, any rental indexing and the tenant covenant. If all of these are

favourable the initial yield will often be as if there was no over-renting at all.

With all of the situations where the value was different from the price, there was not one report I could signifi cantly fault on fi rst reading. All were to a good standard. However, I think that every report would have been worded differently in some way if the valuer had been aware that the property was to be imminently sold.

Preparing better reportsGiven that valuation reports inherently assume a hypothetical transaction, it is reasonable to think that valuers could take some time to cover the typical buyer profi le and depth of the market. The type of discussion would differ, dependent on the asset type, and would be more detailed for larger scale or specialised properties where there is reduced liquidity due to a limited buyer pool.

Valuers can get this information by −• Looking at the buyer profi le, not just the price and

yield, for the latest comparable sales• Talking to local agents about how many bids they

received on other recent sale campaigns and, in particular, what type of buyers made up the list. This also can provide a good guide as to the depth of the market.

• Talking to lenders about current loan-to-value ratios and interest cover ratios. Some short lease assets are unable to attract new debt refl ecting anything similar to the terms that would be available if the leases had a few more years remaining.

• For larger assets, check the yield expectations relevant for the buyer pool. The capital markets are such that the listed groups are often inhibited due to current share prices or a requirement to pay a particular dividend. Their appetite for acquisition can change overnight due to interest rates or share price movement and it is good to understand this.

I hope that some of these suggestions are relevant. Although most are in the context of the market I come from, there will be others appropriate for other mar kets.

Brent McGregor is Senior Managing Director NZ at CBRE Ltd based in Auckland.


Valuers’ Registration Board

The Valuer General v MF MooreComplaint date: 2 November 2011Hearing date: 3 March 2014The complaint related to a valuation undertaken by Mr Moore on 29 November 2004 on a rural residential property situated at Eureka Road in Earnscleugh, Central Otago. The report was prepared at the request of a real estate agent under section 64 of the Real Estate Agents Act 1976. The complaint was made by Mr Hurring, the son of the vendor, some years after the transaction. He submitted a retrospective valuation undertaken by Mr Simpson which was more than double the value provided by Mr Moore.

Mr Moore assessed the value at $30,000. The rating valuation at the time was $80,000 and Mr Simpson’s value was $77,500. The Valuer General instructed two valuers, Ms Crutchley and Mr Weir, to prepare retrospective valuations at 29 November 2004 and these were as shown in the table.

Valuer Current market value

Land value Value of improvements

Crutchley $70,000 $60,000 $10,000

Weir $70,000 $70,000 Nil

Simpson $77,500 $75,000 $2,500

Moore $30,000 Not assessed Not assessed

The chargesThree charges were laid against Mr Moore as a result of the investigation by the Valuer General.• The first charge related to incompetence resulting in

a gross under-valuation of the property.

• The second charge related to a breach of Clause 1.5 of the NZIV Code of Ethics – ‘Utmost care and good faith to ensure the maintenance of the highest standard in the preparation of standards, reports and certificates’. This is about failing to comply with IVS Standard 1 Clause 5 Statement of Standards in ensuring that the estimate and market value is based on market-derived data and failing to provide sufficient information to permit those who read and rely on the report to fully understand its reasoning, analysis and conclusions.

• The third charge related to a breach of Clause 1.7 – ‘Failing to maintain the strictest independence and impartiality in the performance of his duties as a valuer’. This is about relying improperly on information supplied by the client or acting in a way which is inconsistent with the duty of independence and impartiality.

Mr Moore confirmed that he accepted the charges and that the hearing set down would be a penalty hearing. A written submission was provided by him for the hearing. Mr Moore noted that he was aware that the property had been on the market for some time and that there had been an agreement negotiated between a willing buyer and a willing seller in early August 2004. He understood the sale was subject to obtaining resource consent to erect a dwelling. He also confirmed his client had researched the costs likely to be involved in obtaining resource consent and that they supplied the information to him for the valuation.

In relation to each charge Mr Moore noted the following.

Valuers’ Registration Board decisionsDavid Paterson

The Valuer’s Registration Board makes regular decisions resulting from complaints which have helpful material in them for practising valuers. Two recent cases cover some important matters for valuers to note.

The first case looks at independence and the need for reports to meet the required standard. The second case also looks at reporting requirements, in particular the need to relate the sales to the value of the subject. These are all covered in our valuation standards, guidance notes and the NZIV Code of Ethics.



• Charge 1 There was no directly comparable sales evidence for this small rural lot and the most logical conclusion he could come to was to adopt the sale price agreed between the parties in August 2004.

Based on the evidence before the Board it is clear that the valuation is out of line. Had the case gone to a defended hearing the Board would have required justification of his value level and how it related to market value as defined in the standards.• Charge 2 The report was completed for real estate

purposes and for no other purpose. The Board asserted that registered valuers should

adhere to IVS Standards whenever they are carrying out any valuation reporting for any purpose. Mr Moore confirmed he failed to provide sufficient analysis of the market-derived data and related analysis in the report. • Charge 3 He agreed that he relied on information

supplied by the client, and having been made aware of the purchase price this made impartiality impossible.

The Board noted it was common for the purchase price to be known by the valuer, but it is incumbent on them to exercise their skill, judgement and experience to reflect the market in their reporting. If there is limited evidence available it is important to cast the net further or seek independent advice.

The penalty and lessonsOne of the purposes of Board decisions is to be of assistance to valuers in ensuring they meet the highest standards. The Board noted that Mr Moore’s report did not meet an acceptable standard and also commented that the matter was at the serious end of offending, but considered it did not warrant de-registration or suspension. The Board therefore reprimanded Mr Moore and imposed a fine of $8,000. The total costs for the Board amounted to $16,546 including GST. The Board awarded costs of $9,900 including GST.

This case highlights the importance of valuers following the IVS Standards for all valuations they undertake. The standards allow for departures, but these need to be agreed and documented as well as being referenced in the report. The standards have changed since the report was completed. Today IVS101– Scope of works would have covered the reporting requirements if a deviation from the standards was agreed with the client.

The case also highlights the need to verify information provided by the client before it is relied on in the valuation report. Another important cautionary note here for valuers is the delay between the time of the valuation and the complaint. The complaint was laid seven years after the valuation was completed.

The Valuer General v RGP YoungComplaint date: 12 September 2008Hearing date: 13 June 2011

The complaint related to a valuation undertaken by Mr Young on 30 April 2007 on a property in Tokoroa. The report was addressed to the owner and, it was later discovered, was subsequently addressed to the ANZ National Bank and Short Solicitors Nominee Company for mortgage security purposes. Mr Young valued the property at $270,000 including GST. In his report he described the property as a block of three well-presented residential units each including three bedrooms and with carports.

The National Bank commissioned a second valuation in February 2008 from Mr Green who valued the property at $182,000 including GST, $88,000 below Mr Young’s valuation. The Valuer General instructed three valuers – Mr Green, Mr Russ and Mr Jensen – to prepare retrospective valuations as at 24 April 2007. Their respective values are shown in the table.

Valuer Current market value

Green $145,000

Russ $155,000

Jensen $170,000

Young $270,000

It was established during the investigation that the property was purchased in August 2007 for $270,000 and sold in April 2008 for $165,000. The Valuer General had difficulty in contacting Mr Young as the firm he was working for at the time had since closed. In October 2009, Mr Young emailed the Valuer General and made a number of points on a ‘without prejudice’ basis. He indicated he was unable to find his field notes or provide a copy of his report, and that his report may have been altered in some way. The Valuer General eventually received copies of the reports from the new firm formed by the former employees of the firm Mr Young worked for at the time.

The chargeFollowing the investigation the Board concluded that there was sufficient cause to hold an enquiry. Mr Young did not appear at the hearing. A single charge was laid against him, which related to incompetence resulting in a gross over-valuation of the property under section 31(1)(c) of the Valuers Act 1948.



bedrooms• No discussion on how the rentals were applied to the

subject• No discussion or rationale for the capitalisation rate

adopted• Reliance on a per unit approach and applying a value

which is clearly at odds with the evidence provided in the report

• No commentary of the Tokoroa market was included in the report.

Mr Young did not appear before the Board to clarify these matters so it could therefore only act on the information placed before it. The two retrospective valuers called in evidence were critical of Mr Young’s valuation and conclusion and both concluded the valuation was grossly excessive.

Summary, conclusions, penalty and lessonsAfter considering the evidence before it, the Board considered the value of the property was likely to be at the higher end of the range between $155,000 and $170,000. The Board considered the assessment at $270,000 was a serious departure from acceptable standards and the charge of gross over-valuation was proved.

After receiving submissions on both the penalty and costs, the Board decided to reprimand Mr Young and imposed a fine of $5,000. Costs totalled $40,961 including GST. Based on precedent set with previous cases, the Board decided he should pay 50 per cent of the total costs, making a total of $20,400 including the fine.

This case raises a number of points for valuers to consider. There is a need to ensure a full inspection is carried out and good field notes are taken. Valuers must also make sure the details reported are correct. This case is a further reminder that valuation reports must meet the reporting standards. The evidence should be related to the final valuation and the reader left in no doubt about how the valuer came to their conclusion. Assumptions also need to be clearly noted in the report, and appropriate market evidence must also be used and analysed. Finally, there is a duty of care to a third party who may rely on the report.

David Paterson is the National Manager of Rural Value. He is the recently retired southern region representative on the NZIV Council and the NZIV representative on the Professional Practices Committee.

Evidence of three witnessesThe Valuer General, Mr Sullivan, presented evidence to the Board of Inquiry and indicated that the report fell short of the required standard as it did not show how the instructions were received and how independent they were. A Board member asked why Mr Sullivan had not included Mr Green’s report in the evidence and he responded, ‘because of the serious nature of the complaint, retrospective valuation reports need to be highly credible and have a high degree of clarity around the evidence and the answer.’

He noted his concerns about Mr Green’s report, particularly relating the sales evidence to the final valuation. The Board noted the report was addressed to the owner and not the complainant, and that this did not in any way have any bearing on the validity or otherwise of the complaint.

Mr Jensen provided evidence that the property included two three-bedroom flats and one two-bedroom flat. This was at odds with Mr Young who indicated there were three three-bedroom flats. He valued the property at $170,000 after considering three different valuation approaches. These included depreciated replacement, the investment approach and the sales approach. He placed the greatest weight on the investment and sales approach methods to arrive at his figure.

Mr Russ valued the property at $155,000 based on three market-based methods, the net rate sales comparison, the return on gross income and a net income approach. The rental income used by him was significantly lower than that used by Mr Jensen. The capitalisation rate was also lower than that used by Mr Jensen. In evidence, Mr Russ noted that he also used a per unit approach and the details were contained in his brief of evidence. When questioned, Mr Russ stated the rentals used in the analysis were his own assessment of the flat rentals and no inquiry was made as to the actual rentals. This could explain the lower rentals and capitalisation rates used on the subject compared with Mr Jensen.

Mr Young’s reportMr Young’s valuation was based on a gross income approach and a per unit approach. The gross rental used was significantly higher than those used in the retrospective valuations. Conversely, the capitalisation rate was well below. The Board found a number of errors in the report including −• Incorrect address of the property• Incorrect date of inspection• Incorrect description of the property, noting three

three-bedroom units when one unit had only two



Using LinkedIn

Using LinkedIn to grow your valuation practiceKirsten Hodgson

With over 300 million members worldwide, including one million in New Zealand, LinkedIn can be an important way to grow your practice by strengthening relationships with your existing clients and finding new people. However, it is not enough to just be on LinkedIn, you also have to be clear about what you want to achieve. This article outlines several ways you could grow your valuation practice by using Linkedin.

Using LinkedIn

Identify your objectives If you are on LinkedIn or are planning to join ask yourself these questions − • What am I trying to achieve?• Who do I want to connect to or build relationships

with? • How do I want to be perceived? • How will I know when I have achieved my aims and

what will I measure?It is only by having clear aims and picking a few

important measures that you will know how well LinkedIn is working for you. When measuring, do so over a period of time and in conjunction with your other business development and marketing initiatives. LinkedIn is often a catalyst for generating new work, but it is very rarely the sole reason why you get it.

With existing initiativesUse LinkedIn to uncover any previously unknown relationships and to get an introduction to the people who could use your valuation service. You can also use its advanced search function to identify people you do not know but should. Before a new business meeting with a client, look up the person you are seeing on LinkedIn. This may throw up information you can build into your discussion or, at the very least, provide an icebreaker.

You can use LinkedIn to position yourself in the valuation market by sharing content that your target audience will find valuable. This could be a combination of third party and self-produced content. People will begin to associate you with the content you share and, by regularly doing so, they should stay aware of you. This means they are more likely to contact you when

necessary. By connecting with people before they need your help, and sharing content which will create a need for your services, you can tip the playing field in your favour before you carry out any initiatives to get new clients.

Put together some high-value content, such as tips. Offer this to connections through relevant groups and LinkedIn’s email system. Send people to a page where they get the content in return for signing up to your firm’s newsletter or one that you have as an individual valuer – this requires their name and email address. You can then keep in touch with them.

Does your profile reflect you?If you are recommended to a prospective client, and they then search for you online, what are they going to find out about you as a valuer? LinkedIn profiles feature in search engine results so it is important that your profile clearly positions you, otherwise you may lose the business before you even knew it was there.• Upload a professional looking photograph• Ensure your professional headline says what you do • Customise your public profile url so that you are

found before others who share your name• Complete the summary section setting out what

you do, your approach to working with your clients, some results you have achieved and a bit about your interests outside of work

• Upload or add links, tips, white papers, presentations, videos or anything that shows what you do

• If you have any blog posts or articles you have written which you would like to appear permanently near the top of your profile, post these to LinkedIn by clicking on the pencil create a post icon within the share an update box on the homepage


Using LinkedIn

• List your skills in the skills and endorsements section and make it easy for people to endorse you for skills you want to be recognised for

• Make it easy for people to contact you by including your contact details within your profi le, both in the contact information section and in the section down at the bottom.

Connect with those you want toThe more people you connect with, the more people potentially see your updates. If they then connect with these updates the greater is your reach as their own connections can then see that particular update. The second reason to connect with more people is that search results will be more meaningful.

With LinkedIn’s free account you can see up to 100 search results and full information for your fi rst degree connections which are those people you are connected to, your second degree connections of your contacts, and fellow group members. If you do not wish to connect with a lot of people the other options are − • Join more LinkedIn groups• Upgrade to a premium account, the cheapest of

which is Premium Spotlight• Use Google to search LinkedIn.

There are several ways to fi nd people on LinkedIn. If you know their name, type it into the search bar. Look through the ‘people you may know’ feature. Look through the profi les of your connections and if they have their connections on display take a look at these as well. Upload or synchronise your email contacts – LinkedIn will then tell you which of them are on the site. Use the advanced search feature to search by a number of criteria.

Tag connections LinkedIn allows you to tag each connection, allowing you to categorise them so you can target your information. A valuer may want to tag people living in certain suburbs, as well as different types of referrers such as lawyers or accountants.

Doing this means that you can easily send targeted content to your contacts with specifi c tags. To quickly tag your contacts, hover over connections on the main toolbar and select ‘keep in touch’ from the dropdown list. Then hover over their name and the tag option will appear.

Set up a content calendarLinkedIn is about content. Opening up its publishing capability to all members, its purchase of Slideshare and its Pulse application all provide opportunities for valuation professionals to position themselves and stay visible with their clients and other contacts. In addition to sharing third party content, which helps to create a need for your service, valuation fi rms could create a content plan and look to share their own relevant content. This plan is a calendar setting out what will be produced and when.

Join relevant groups For valuers wishing to generate more work, groups are a good way to fi nd more potential clients and referrers. Some groups can be a waste of time, but there are others which are valuable and well-managed. Before joining, take a look at the statistics about who in your network is a member. If a group is open then you will be able to take a look at these as well.

One of the biggest opportunities for those offering professional services such as valuers to build their own communities and to position themselves in a particular area is to start one or more LinkedIn groups. For example, you could be targeting home owners in Remuera. By setting up a group for the Remuera local community you can invite some of these people to join, and begin to position yourself as an authority by asking insightful questions, answering queries and sharing content.

Relationships beyond LinkedInLinkedIn is another way to stay visible with existing contacts and to fi nd more clients. However, it is unlikely that you will get work simply by being on it. You should be aiming to increase your relationships beyond LinkedIn, for example, by writing articles or attending a roundtable. The important thing is to also make it about the other person and see what could benefi t them.

If you want to maintain and build your network, and grow your valuation practice, LinkedIn is a site which can help you. If you use it purposefully and put in a bit of regular effort, you should reap the rewards.

Kirsten Hodgson has run several LinkedIn workshops over the past two years throughout New Zealand, Australia and the U nited Kingdom.

Using LinkedIn


75 years of property75 years of property

University of Auckland celebrates 75 years of property Deborah Levy

The University of Auckland Department of Property has a rich history from small beginnings to recognition as a global player in property education. This year marks the 75th anniversary of formal property qualifications in New Zealand. The department is dedicated to providing real-world practice for students alongside high quality education. Drawing on international expertise and maintaining strong industry links, the department prepares students for a career in the property profession in New Zealand or abroad.

It has been 75 years since the council at the University of Auckland agreed to the teaching of property. At that time it was seen as the beginning of the end of real university education and letters were published condemning such a subject being taught at such an esteemed institution. We have the forward-looking members of the university council to thank for the skilled property sector that we have in New Zealand today.

History of the departmentThe Department of Property has its roots in property valuation which was first developed in the 1850s as a base to assess rates and taxes. Valuation only really took off in the prosperous 1870s during a speculative boom. The rapid rise in land values in the 1870s put pressure on the Liberal government to institute a national land tax, requiring the complete valuation of the whole of New Zealand. This had the required result of generally ending land speculation.

Three-yearly revaluations were carried out into the early 1890s, and the valuation industry was born using the valuation methods from England which were readily transferred to New Zealand. It soon became evident that valuation had to be placed on a professional footing, with rules of conduct and standards set for all valuers, and the Real Estate Valuers Association of Auckland was formed in 1910. Many recognised the need for formal training for valuers if minimum standards were to be attained, monitored and measured. In 1938 the diploma course in valuation was started at the Auckland University College, the previous name for the University of Auckland, and called the diploma in urban valuation.

Mass valuationsIn Christchurch the diploma in valuation and farm management was started at Lincoln University to support the growth in rural valuation. By 1942, the government saw an impending problem in returning servicemen who were likely to face rapidly rising property prices as had happened after World War I. Land sales committees were established for every property transaction, with prices fixed for urban land at 15 December 1942, and rural land fixed at its productive value at that date. This was increased or reduced by a factor deemed to be fair.

All this required a mass of valuations, with both government and private valuers kept very busy. The economic value of these activities meant that property valuation had to reach a new level of professionalism and training. The government decided to introduce legislation in 1948 which turned the Institute of Valuers from an incorporated society into a statutory body, with increased minimum standards.

Bachelor degree

The continuing success of the University of Auckland diploma in valuation meant its continual evolution. By 1984 the Department of Property was established, led by Associate Professor Ken Christiansen. It was at this time that it was transformed into a three-year degree, then called the Bachelor of Property Administration.

In 1992, a chair of property was established and Professor Gerald Brown joined the university, required to create a more outward-looking and world-class department. In 1993, the Bachelor of Property degree, was introduced to meet the increasing demand for


75 years of property

expertise in this fi eld. It introduced an international dimension with an interchange of academic staff, students and research in the Asia Pacifi c region.

Professor Brown left the department in 1995 and Professor Steven Bourassa took over the leadership. In the mid-1990s, joint degrees were introduced which had a positive result for the department, attracting high-quality bachelor of commerce students with a particular interest in property. The number of students also increased signifi cantly.

Global recognitionIn 2004, the department left its original roots with the School of Architecture and moved to the Business School. This brought in many opportunities and strengthened the relationship with industry. Under the leadership of acting head of department, Dr Warwick Neville, assisted by myself, the Bachelor of Property gained accreditation from the Royal Institution of Chartered Surveyors. The department had achieved recognition as a global player.

In 2003, Associate Professor Larry Murphy took up the chair in property, strengthening the academic team while student numbers continued to increase. In the same year, the department graduated its fi rst PhD staff member, Dr Edward Schuck. The total now is fi ve PhDs completed with several more in the pipeline.

I took over as head of department in 2009, with the view of further strengthening the relationship with industry using the career development programme. From a handful of students in 1938, the department has grown to around 300 students enrolled in undergraduate and postgraduate courses, and an alumni of around 1,500.

Refl ections on the industryDuring the anniversary celebrations property industry stalwart John Cameron was asked to give some

refl ections on an industry fraught with problems in the late 1980s. He also noted how the continued development of the property degree ensures University of Auckland graduates are some of the most sought after.

John arrived in New Zealand from the United Kingdom in 1986 with Jones Lang Wootton, right into the wild west of the commercial property market of that time. He was struck by the lack of professionalism in the commercial real estate market because for him, the ethics of the estate agents and property developers were far from acceptable, at least compared to the United Kingdom. He found that presentation and factual material which should accompany the sale of property were almost non-existent. There was no property research, and it was Jones Lang Wootton who was the fi rst to produce a credible commercial property database and regular professional research reports.

Lack of proper trainingThe complexity and importance of property became evident by the late 1980s when skyscrapers were transforming the skyline of Auckland. A property boom in the central business district was followed by a crash. John felt that a big part of the problem related to the people at the cutting edge of the industry because many of the sales agents were not properly trained, relying mostly on the gift of the gab.

A bigger problem was the way they were, and still are, remunerated by international standards – a high commission rate only. By contrast, in the United Kingdom property is sold by salaried and professionally qualifi ed estate agents, perhaps with an occasional share of a departmental bonus. In his view, commission sales people do not tend to share information as it is not usually to their advantage to let colleagues know what they know. This is not usually to the advantage of the client.




The difference between New Zealand and the United Kingdom is that in the latter country each party to a transaction would usually be represented by their own appointed chartered valuation surveyor negotiating on their client’s behalf. They saw themselves and were recognised by the market as a profession, no different from lawyers or accountants. What was good about New Zealand even in 1986 was its well-developed valuation profession. This was thanks mainly to the universities running a high-quality property degree teaching all the disciplines needed in this fi eld.

Many changesJohn had seen trouble brewing in the New Zealand property market in 1986. He noted that the property crash when it came in the late 1980s was blamed on the global share crash, but believes that property prices would have crashed in this country even if the share market had not. This was because the disciplines were poor, those involved were inexperienced, the quality of construction mediocre, and major banks were over-exposed to commercial property with inadequate security. All this was with an enormous surplus of secondary and older empty offi ce buildings looming.

He also commented that a lot has changed since he arrived in the 1980s. Other international real estate companies such as Richard Ellis and Colliers have entered the market and made signifi cant contributions to the quality of professionals in the property business. Research has come a long way as have the people in property. The industry has matured considerably with full service property professionals, more quality listed development and investment companies, and many other services.

The University of Auckland property degree has also made strides as it has a good spread of disciplines and has the total support of the industry. The graduates are highly regarded in the United Kingdom. The Department of Property is relatively small, but this has an unexpected benefi t. Rather than be lost among hundreds of students, the small core of students are part of a professional family which tends to look after each other and form a strong interconnection across the industry for the future.

The graduatesThe 1,500 graduates of the Department of Property are now working in the property profession in New Zealand and around the world. It is diffi cult to comprehend the changes which have taken place in the industry and education, even since 1986. When I arrived we used a blackboard and chalk with students scribbling their notes, followed by the use of the overhead projector and transparencies. Assignments were typed on typewriters which students today only see in fi lms or museums.

Some things have changed, but there are many which have stayed the same including the passion that a lot of people have for the property industry, the close link between the department and the property profession, and the comradeship between property professionals.

The department has strengthened and graduates have become more in demand. Today we have many people who by their actions are taking us into the future and I am sure that in 25 years at the 100th anniversary we will have become stronger and stronger.

Associate Professor Deborah Levy is head of the Department of Property at the University of Auckland.


Pan Pacific Congress75 years of property

27th Pan Pacific Congress September 2014, SingaporeBlue Hancock

The theme of the 27th Pan Pacific Congress hosted by the Singapore Institute of Surveyors and Valuers was ‘Sustainable development: Challenges facing the valuation profession – Taking environment, economic, equity, cultural and heritage issues into perspective’. The opening ceremony was a very formal affair, with each of the chief delegates giving a short presentation on their institute or country and thanking the hosts. This was followed by a presentation from the guest of honour, Mr Tan Lian Ker, President of the Strata Titles Board. From this opening address on strata titles I was reminded of the benefit of these international meetings, and could see the similarity in problems which Singapore is having mirrored in those which New Zealand has with unit titles.

The benefits of attending, presenting or representing New Zealand at these international conferences is you learn that the problems this country are facing with regard to property valuation or management are often faced in exactly the same way in other countries. The Property Institute’s attendance and discussion at these world events promotes the development of relationships, and provides a forum where we can learn at first hand and perhaps gain insights or solutions into problems quicker than solving them ourselves.

The 2014 Congress featured a wide range of papers, with the 250 participants being exposed to presentations about valuation techniques, real estate market trends and green buildings. By bringing together real estate professionals from various industry sectors, the Congress promoted intellectual interaction as well as renewal of friendships within the region. Having attended or represented the Property Institute at four such Congresses it is good to re-establish links with those met at previous ones. We are developing a sound relationship with the Hong Kong Institute of Surveyors as well as friendships with Malaysia, the Americans, and of course our closest neighbours, Australia.

Speeches and plenary sessionsKeynote speeches were presented on ‘Global valuation standards and practice-future direction’. This presentation by three speakers from Canada, China and Singapore promoted the World Association of Valuation Organisations. The Property Institute of New Zealand

was one of the founding members of this organisation, but has recently reconsidered its membership due to the cost and corresponding benefit to our members. The door is always open to reconsider membership.

The conference took the usual format of plenary sessions followed by simultaneous workshops. Plenary sessions included Alan Hyman from Australia presenting on ‘Recent court decisions on compensation for land acquisition and responsibilities of the expert witness’. A very informative presentation was given by Antonio Campagnoli from Italy on the ‘European Valuation Standards and the banks’ asset quality review’. The European Valuation Standards were published in 2012 in what is known as the Blue Book. From what I gathered it appears to be used through out Europe, but not Britain, where the Royal Institution of Chartered Surveyors have published the Red Book.

Valuation-related presentationsI chaired a workshop session where a speaker from Indonesia presented a paper on ‘The marine ecotourism industry trend and prospect with blue economy concept in Indonesia’, which discussed the economic benefits of marine ecotourism.

This was followed by a Japanese presenter on ‘The relationship between environmental carrying capacity and cultural friction in islands environment and the valuation of tourist accommodation’. I always thought carrying capacity was about the number of sheep per acre – it appears you can measure the human


Pan Pacific Congress

carrying capacity on Okinawa Island and the effect on accommodation needs. I was inspired to know how much rubbish a 50-bed hotel produced compared with a 1,000 bed hotel per occupation unit. It was riveting stuff.

The most interesting paper in this workshop was ‘Valuing the stigma effect of defective buildings – the Taiwan experience’. Professor Lin took us through a brief of evidence he had prepared about an apartment building which had slumped and was now on a visible lean but still structurally sound according to engineers. The paper is well worth a read and mirrors some of the effects which New Zealand valuers are attempting to measure in the leaky homes environment.

Technical visitsTechnical visits are always well attended. We were bussed to the recently built Singapore Sports Stadium

and Convention Centre, which is a public-private venture between the Singapore government and private stakeholders. Like most of Singapore it is situated on reclaimed land. It features a state-of-the-art 55,000 seat stadium which can be changed from a football pitch to a 400-metre indoor track or to a cricket pitch within two or three days by folding away tiers of seats in certain parts of the stadium and laying down or taking up turf or track.

The 10,000 square metre roof is fully retractable. There is a 50-metre Olympic pool and diving pool, as well has numerous other stadiums, and a rowing venue all within the locality. The public-private funding is for 25 years when the whole complex will return to government ownership. We were not privy to the full financial arrangements, and as it opened recently there was no financial data available.

Chief delegates at the conclusion of the farewell dinner Congress opening with guest of honour, Tan Lian Ker, President, Strata Titles Board

Blue Hancock and Terry Naylor at the delegates meeting Scott Robinson (USA), Simon Kwok (Hong Kong) Robert Hecek (Australia) and Blue Hancock


Future Congresses and closing ceremonyAll the chief and alternate chief delegates gathered for a luncheon meeting to discuss any relevant matters concerning the Congress and to agree future Congress holders. Following the meeting a full traditional local meal was served and gifts were exchanged. The next Congress is to be held in Kyoto in September 2016. This will be followed by Mexico who bring their own flamboyant and refreshing energy, having been admitted to the membership in 2010. Following Tijuana in 2018, the American delegation expressed a wish to hold the 30th Congress in Chicago in 2020.

The closing ceremony was again a very formal affair with the presentation of gifts for those who had taken part and the handing of the Pan Pacific flag to Japan. The Japanese Association of Real Estate Appraisers will be hosting the Congress which they have titled ‘Toward expanding the role and expertise of the valuation profession in an ever changing global economy’.

The evening farewell dinner is promoted as a cultural extravaganza, which of course brings out the Asian love of karaoke. Each nation is invited to present a song or skit. Terry Naylor and I are tone deaf and the only note we can hold buys a beer, so with that in mind we helped out our Aussie mates by holding a microphone for them. The Mexicans of course excelled themselves, and Ted and Scott from America could hold a very fine note.

After hoursAs well as attending conference sessions Terry, his wife Jane and I also had a chance to experience some of the sights and activities of Singapore. We were there for the Formula One Grand Prix, with the race being held on the Saturday evening after our arrival. Unfortunately, other commitments restricted us from seeing the race but the vibe in Singapore over this time appeared to me to be very special. However it may have just been Singapore in its usual party mode. Our conference venue at the Orchard Hotel was very close to the Botanic Gardens, which are a must see if you are ever in Singapore. The rainforest walks, turtle ponds, ginger gardens and other sights are worth enduring 31°C and humidity over 90 per cent.

I jumped on one of the hop-on hop-off double-decker open-top buses which are ubiquitous in most large international cities throughout the world. These are fantastic places for picking up useless information, some of it interesting. For example, to buy a vehicle in Singapore you need to first purchase a right to put it on the road which may cost you up to $150,000 a year. You then pay the purchase price to the dealer and

Pan Pacific Congress

History of Pan Pacific CongressThe Pan Pacific Congress was formed in 1956 by New Zealand, Australia and the United States, with the first one being held in Sydney in 1959. The Congress was founded on developing a closer relationship with the various appraisal institutes, providing a forum for members of allied professional bodies in the Pacific Basin to share and exchange information. The current members of the Congress are Australia, Indonesia, Japan with two organisations, Korea also with two, Malaysia, Mexico, New Zealand, Taiwan, the United States with two, Singapore and Canada. Unfortunately, at this Congress one of the United States organisations and Canada were unable to attend.

100 per cent sales tax to the government. It was our understanding that a car such as a Toyota Camry could cost you as much is $450,000 to put on the road for one year.

Behind Japan, Singapore is the next largest exporter of second-hand cars. There are a million cars on the road, with 300,000 of them government taxis. They also have an automated road toll system to try and reduce road congestion within the heart of the city. All cars have electronic readers and overhead gantries debit your account as you pass under them. The tax you pay to drive into the city varies with the time of day or traffic density. A digital readout on the overhead gantries signals the cost before you enter, up to five dollars at peak times of the day.

There are no unemployed or homeless in Singapore. Apartments are provided at a rental of less than $400 a month. The value of a two bedroom apartment could start at $500,000 with most being in the $3 million to $10 million range.

Poor attendanceI felt the attendance at this Congress was particularly poor, especially being held in Singapore and with easy access for most countries. I would have expected a somewhat larger turnout. I estimate the member organisations represent in excess of 60,000 valuers, appraisers or property professionals.

If a conference of this nature can only attract 250 delegates there is a need to revamp the format so that it will appeal to a broader membership base. That said, I remain positive about the future of the Pan Pacific Congress as it provides the entry point into other countries and cultures that we can learn from.

J L. (Blue) Hancock is President of the Property Institute. NZIV president Terry Naylor and Blue Hancock represented the Property Institute at the Congress. All Congress papers have been uploaded to www.pinz.org.nz.


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Property Quarterly (December 2014)

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Transcript of Property Quarterly (December 2014)