A plunge into property with dire consequences
Regional councillors should face up to poor investments at Harbour Quays, writes lawyer
OPINION: ‘‘We told you so!’’ is repellent, even when richly deserved. And yet sometimes it is essential, if accountability is to mean anything at all.
Instead of strengthening wharves and pipes and bridges after the Kaikoura earthquakes, rates money from throughout the Greater Wellington region will go to repay the lenders on now worthless property developments – CentrePort’s seemingly doomed Harbour Quays office blocks.
Statistics House might be demolished. And the occupants of the BNZ building – described by its structural engineering manager in 2008 as ‘‘earthquake-proof’’ and ‘‘uniquely Wellington’’ – face a lengthy wait for re-entry, if they can return at all.
Though true exposure of the Greater Wellington Regional Council (GWRC) is still hidden by tricky financial documentation, it was warned against even the exposure it disclosed.
We know how precisely it was warned, because the warnings were in our written submissions to councillors in 2012. That was before the 2013 Seddon earthquakes.
Acting for a CBD ratepayer group called Heart of Wellington, we pointed out risks that have now matured. We did not foresee serious earthquake damage.
But we drew to the council’s attention the huge losses suffered by the owners of the Majestic Centre, for earthquake strengthening. The remedial costs since then have greatly exceeded expectations in 2012.
We urged that the council’s long-term plan should recognise the true risks of Harbour Quays, and find ways to exit the council from them.
In 2012 we said: ‘‘CentrePort appears to be plunging into property development … with capital obtained at rates that do not match the normal cost of capital in the risky business of property development; where the land is put into ventures at deemed values way below their open market value as building sites; [and] without thought as to the adverse impacts on its owner, or Wellington City Council.’’
Only two councillors appeared interested in our submission. Most appeared incapable of understanding the relationship between risk and returns. One deep Green councillor accused us of predictable ideological bias against public enterprise, receiving approving nods from others.
We think some councillors thought rich people own buildings, so the council could be rich too by building offices.
The result? Just when the port needs all it can borrow to get operational, its ‘‘diversification’’ into property development has concentrated its risks.
Our submissions were dismissed as being from people not wanting competition. No-one explained why it was wrong for ratepayers to object to
We think some councillors thought rich people own buildings, so the council could be rich too by building offices.
competing with their own rates.
We asked what advantage the GWRC considered CentrePort to have over expert property developers, other than cheap borrowing through the council.
As we put it, ‘‘the Harbour Quays development … is subsidisation … [in] what is already a thriving and competitive Wellington commercial property market’’.
We told the GWRC that not recognising the risks meant its accounts were misleading. We said that by lending its local authority borrowing power to its own inexperienced property developer, the council was almost forcing CentrePort to be foolish.
So we urged that the GWRC stop tempting CentrePort with effectively free finance for projects that would never be bankable if they’d had to bear the true cost of capital.
We also noted the potential flow-on effect to the rest of the CBD: ‘‘Any subsidisation of the Harbour Quays development jeopardises commercial property returns for the CBD climbing back to the historical averages necessary for essential strengthening projects within the existing CBD natural limits.’’
That is, ‘‘new building overhang (the risk of subsidised oversupply) could prevent Wellington’s aging and earthquake-prone buildings being remodelled and strengthened as would otherwise be driven by the market’’.
At the hearing, some councillors did not disguise that they thought us tedious. They were hostile to the notion that they should treat capital as having any cost more than their borrowing rate.
Being spot on in a warning is a very small comfort.
Unlike the treatment of directors under company law, local authority law does not make councillors liable – they can be wholly unable to understand financial statements, and ignore warnings without liability to the ratepayers they harm.
Some of those whom we warned have just been re-elected, along with more ideologues equally incapable of proper stewardship of their powers and our assets.
The Government has announced an inquiry into the engineering failure of Statistics House, one of the most modern office buildings in Wellington.
Dunning Thornton and other reputable experts would have been professional in tackling the special demands of a watery landfill site. They clearly thought they had the structure risks under control.
The building failures seem to prove them wrong so there could be a regrettable public humiliation of some unlucky engineers despite their diligence. But the councillors showed no interest in even knowing the extended financial risks they were creating with their capital subsidies, let alone taking precautions.
They were just not interested in what experienced developers thought. Is it fair if councillors escape scot-free for financial imprudence?
A good thing might come out of ‘‘I told you so’’ if the GWRC is abolished, or regional councils are given less scope for business competition, or at least we get a generation of councillors humble enough to learn from the mistake while the memory is fresh.
Stephen Franks is principal of Franks & Ogilvie, which submitted to the Greater Wellington Regional Council on behalf of Heart of Wellington, a group made up largely of Wellington property owners.