Ka¯ inga Ora pays 70m for land based on wobbly valuations
Briefing to ministers warns valuations were too high
State housing agency Ka¯ inga Ora was only cosmetically restricted to market pricing in its surprisingly rich, winning bid of $70.4m for rural Tauranga land, Ferncliffe Farms, last year.
While the agency obtained two valuations, the details of each were likely to result in an artificially high price, government documents obtained under the OIA suggest.
Critics say the case illuminates how the Government is using taxpayer funds to bid up land prices, unnecessarily baking additional cost into the “affordable” homes it hopes to build.
A briefing to both Minister of Housing Megan Woods and Minister of Finance Grant Robertson warned that the first valuation ($68m) was based on an estimate of developable land that was more than 30 per cent greater than the area subsequently deemed usable.
The second valuation ($72.2m to $74.8m) was “based on a hypothetical scenario that assumes rezoning and infrastructure upgrades, which means it has factored in the value uplift when this is not assured” officials at the Ministry of Housing and Urban Development warned ministers in September, before the Crown offer went unconditional.
Furthermore, the briefing noted that neither valuation “appears to have factored in the wetland remediation cost estimated at between $10 and $24m.”
Ultimately, HUD officials advised Woods and Robertson: “neither of the two valuations reflect true market value of the site … based on what is assumed in the valuation reports, Ka¯ inga Ora appears to have offered over market value, not having priced in the significant development risks and uncertainties and forgoing the opportunity to capture value uplift.”
In an effort to ameliorate the high valuations, Ka¯ inga Ora ultimately renegotiated its original offer of $71.4m lower by $1m, a modest reduction of 1.4 per cent.
Woods defended the price at the time and insisted that taxpayers were protected from overspending because the government’s housing agency was bound by a protocol that prevents it from bidding more than 5 per cent above its valuations.
She also told Parliament on December 7 that the $70.4m price was “at the lower end of the valuations”. Woods did not mention the notable caveats to those valuations that officials had advised her of.
Asked this week how the Ferncliffe valuations and the 5 per cent rule were meaningful in light of the shortcomings outlined by officials, Woods said the full Ferncliffe parcel is “not only the easily developable areas.
She added: “A conservative initial assessment indicated the developable area may be 34ha, however Ka¯ inga Ora is looking at options for utilising more of the site, whilst also looking at protecting and enhancing the wetland areas. Furthermore, Waka Kotahi is developing a plan for the future State Highway 29, with one of the options including using some of the land at Ferncliffe Farm.
“Ferncliffe is one of many areas in the country where the Crown’s purchase of land is enabling a lot more housing,” Woods added.
She said the Ferncliffe site was expected to deliver “approximately 1,000 new homes”, the same estimate that private sector bidder Winton said it had intended for Ferncliffe, and some 250 more than Woods’ officials said last year constituted the government’s base case for development of the land.
Woods said that though Ka¯ inga Ora was the successful bidder that did not necessarily mean it was the highest bidder.
Chris Meehan, CEO of private sector developer Winton, which was outbid in the Ferncliffe sale, said taxpayers had paid “an absurd amount of money based on a valuation practice I’ve never witnessed in my career.”
He said the government agency “significantly outbid 11 other experienced developers who submitted offers for Ferncliffe Farms in an open market sales process … Ka¯ inga Ora’s uncommercial purchasing practices, which seem aimed at driving private developers out of the market, raise serious questions taxpayers deserve answers to.”
Meehan, who wrote to ministers last year to express his concerns about the purchasing process, said it “never passed the sniff test”.
The Ferncliffe purchase is the first made by Ka¯ inga Ora under a new $2b land programme.
The intent of the programme is to enable the agency to make strategic land purchases to increase the pace, scale and mix of housing developments, including more affordable housing (though the definition of this appears to vary across Government).
Critics, however, are wary of the agency’s slow and sometimes expensive track record of development.
In an internal email, one Treasury official noted in relation to the Ferncliffe purchase: “the LSPS [largescale projects] and wider build programme indicate that KO [Ka¯ inga Ora] can be overly optimistic about what can be done in respect of cost and time in particular.”
Ultimately, the documents released suggest that the Treasury supported the Ferncliffe purchase, contingent on “risk mitigation measures” to ensure the Government was not overpaying for the site. The mitigation measures were redacted in the documents and it is not clear what they were or whether the recommended steps were taken.
Under the land programme,
Ka¯ inga Ora invests and bears the development risk. Its losses sustained would be borne by the Crown.
The new programme underpinned by $2b in additional borrowing room and is supplemented by $46m in operating funding per annum. Ferncliffe’s carrying costs, including interest and rates, are expected to be paid from the operating funds.
Act Party leader David Seymour said the valuations the Government obtained, and the rule that Ka¯ inga Ora pay no more than 5 per cent above them, were simply a “fig leaf”.
“The Government is bidding against private developers, an estimated 10 who have shown an interest in this particular piece of land, and the fact they bought it shows they paid more than others were prepared to.”
“If you look at what they paid versus the valuations it might seem that they [the Government] got a fair or even good deal, but actually it turns out the valuations were a fig leaf. In reality, they’re ... pushing the price up.”
National’s housing spokesman Chris Bishop said Ka¯ inga Ora was “seemingly overpaying for land” and “contributing to driving house prices up around the country”.
“New Zealanders need to have confidence that Ka¯ inga Ora is responsibly spending taxpayer money. They should be helping the housing crisis, not making it worse … pushing out private sector competitors with their blank chequebook.”
The documents show that the $68m valuation for Ferncliffe was provided by Property Solutions in June, 2021. It relied on an estimate of 45ha of developable land but engineering work produced in July found that only 34ha of the parcel are developable (the total parcel is some 95ha, though wetland and steep slopes make much of it unsuitable or costly for building).
During the sale process, officials at Housing and Urban Development (HUD) suggested that Ka¯ inga Ora have the Property Solutions valuation redone to reflect the smaller net total of usable land, But Ka¯ inga Ora said it did not have sufficient time for this, the documents note. The Ka¯ inga Ora offer went unconditional on November 7.
The lower net total of developable land caused the agency to reduce its base case estimate of homes for the property to 750 from an original 1000.
Briefings show that Ka¯ inga Ora was hopeful that it could increase density beyond its base case, but it had only “indicative” work, insufficient to rely on, to suggest it could achieve this.
The agency is now working on a detailed business case for developing the land; a spokesman said the agency expects this to be ready to present to the agency’s board later this year. Following that, the work will be reported to Minister Woods.