Commercial property has gone through substantial changes in New Zealand in the wake of the earthquakes in New Zealand.
Two obvious markets most affected were Christchurch and Wellington.
If you are considering purchasing in these markets, you should be aware of the National Building Standards (NBS).
As a rule, earthquake risk buildings are defined between 34% and 66% NBS.
Earthquake prone buildings are defined as high risk less than 33% NBS.
The building Act 2004 requires local authorities to put a policy in place in relation to earthquake prone, dangerous and insanitary buildings.
Auckland review
Auckland has already conducted initial seismic performance evaluations on earthquake prone buildings.
Any building not designed or strengthened to the building code is likely to be reviewed.
A building must be bought up to at least 34% of modern buildings requirements and NBS. As of May 2012, 1412 buildings had been assessed and 1000 buildings owners had been contacted by the respective Council.
Once a building has been tagged, the owners are informed of the assessment and given three months to respond or provide further information, which may cause the property to be reviewed again.
Owners challenge
The owners may have a chance to employ their own engineers to challenge a result they feel could be unjustified, for example, where your building could fall below 33% NBS.
The Royal Commissions report into the Christchurch earthquake is likely to be be released in November with recommendations on strengthening requirements.
The report may recommend buildings to increase in the percentage of NBS requirements from its current level of 33% to 50% or even 67% and the timeframe may shorten to have these buildings strengthened.
These earthquake prone buildings also create opportunities for those investors willing to take the gamble and risk as they can be purchased at substantial discounted prices. Please make sure you have deep pockets if things do not go your way during the consent and strengthening process with your local Council.
Those of you who own commercial real estate may have already had a surprise visit from your Council outlining that your building may require strengthening. This may devalue your property in certain circumstances if you were to sell.
Wellington example
I am aware of a case in Wellington, where the value was once $20 million for a building which was earthquake prone below 33% NBS.
It can now be purchased for less than half price, accounting for $10 million loss on its asset value.
It is very scary as banks are nervous at the same time.
You can have your entire property portfolio wiped out; and in some circumstances, the mortgage amount could exceed the property value.
This reminds me of the 1987 share market crash days, where values dropped.
In fact, I have seen values drop by half over the past three years in the commercial market especially those that are earthquake risk and prone.
The fundamental issue is that banks and insurance companies are refusing to lend and insure some of these assets. Even if you were lucky to obtain finance, it will come with many conditions.
Changing demand
Tenants are now demanding properties that are above 67%-100% NBS so that you could find yourself with a tenanted building becoming vacant very quickly if earthquake prone.
We all know what happens when the tenant leaves. This affects your cash flow, which directly affects the market value of your building.
It pays to do your research properly because for this could be a new nail in the coffin for property investors wishing to purchase.
Commercial property has become a specialised field and hence it pays to get experts, especially when you are dealing with large numbers.
Remember property values do not always go up!
Mahesh Ranchhod is a Director of the Ranchhod Group of Companies based in Auckland. Phone: (09) 3031353 Mobile: 021525569
Email: m.ranchhod@xtra.co.nz Website: www.ranchhodgroup.com
The Group incorporates New Zealand and Australian Companies and Trusts designed to invest in commercial properties and manage them in Australia and New Zealand. The above article should be taken only as a guideline and not as specific advice. Mr Ranchhod absolves himself along with the management and staff of Ranchhod Group of Companies and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.
The Ranchhod Group is the Sponsor of the Business Excellence in Retail Trade category of the Indian Newslink Indian Business Awards 2012.
