aenspire delivering developmentprofit.comWhilst I registered the company Xpect Property Limited in October 2022, its first official day of trading was not to Leap day, February 29th , 2024.
A leap indeed.
Xpect a leap in development in New Zealand, now I have no constraints.
andrew@xpectproperty.com
+6421982444
I would like to thank the team at Universal in New Zealand for the 6.5 years to Feb 28, 2024. We built a lot of homes together.
Probably worthy of a book one day.
Warning: This is a self memoir that digs deep into the way I think. You could be left thinking this is a dangerous foray into the psychology of a disturbed mind. Or you might deduce it’s a load of self indulgent garbage. Regardless, I hope there are at least a couple of illuminating points. Strap yourself in!
Today, two years ago, Tuesday, September 1, 2020, I was privileged to take over as Chief Executive Officer for Universal Homes.
The previous CEO -who announced his retirement some 6 months earlier- had held the position for 32 years out of his 42 years at Universal homes. That’s some sort of record I’m picking for a non-founder to run a property development and home-building business.
So filling his well-honed shoes, came with well just a teeny bit of PRESSURE.
And my inaugural week couldn’t have come at a better time.
Sunday, was the last day of the second Covid lockdown. Monday, the day prior to my official start, my predecessor let me take CEO reigns on a legal dispute a day early. Thus, I spent 13 hours in a mediation with a contractor and lawyers and consultants. As far as I am concerned the claim was frivolous and we won that day, but it was about 11 hours of stress before we had negotiated ourselves to a $ position where I prearranged board approval to compromise. It was pure pain. And I learned that mediation is a waste of time. Best to go straight to a ruling from someone independent rather than battle on logic for months with lawyers going back and forth, but still on the day have to compromise, illogically, just to get a deal across the line and pay a ton of legal fees.
Day One. Hi everyone, welcome back to the office after a pandemic induced holiday…I mean work from home. Ah and welcome to all your new positions as this is the first effective day of the company restructure.
Day Three, we were negotiating a massive funding line extension with our local banking partner. Now, this turned out to be relatively simple, with a great CFO holding the reigns, but I didn’t know that in advance, nor had I been responsible for anything like that in the past. .
Day Five, conclude the negotiations (that had been going on for six months) for a OIO extension for our flagship billion-dollar development.
And all week long thinking, how is this market going to implode now the island nation is closed off.
Well, it turned out that September went on to become our best selling month in a generation – aided by a substantial homes completed and unsold portfolio from 2019. The good times continued with January 2021 breaking that record again as we launched 150 homes across West Hills stage 2 and Hobsonville BB15 to the market.
By then one year fixed mortgage had almost dropped to 2%. Inflation, sminflation.
The CEO honeymoon period, in full rose coloured sun glasses, better than anyone in the business could ever expect.
Then the Auckland lockdown/smackdown in the second half of 2021 heralded in a supply chain mess, and delays to everything conceivable. By the end of the year we had over 100 homes complete, waiting for settlement without titles, that never arrived before Xmas – because apparently it takes weeks longer to process them from home. December means something to us, because our financial year is the calendar year, so a very rosy outlook ended up mediocre (in financial year terms, not in property development terms!). Not my fault, but I still got the hard word from upstairs not to allow another lockdown to slow the New Zealand property industry down!
Newlyweds holiday in the sun over. Dark clouds on the horizon. Santa, with his sleigh stuck in some container in a Shenzhen port shutdown by infected elves, trying to export toys to the North Pole, still managed to deliver a bumper Christmas hamper: a gouging series of price rises to every construction related good and service you could imagine.
I N F L A T I O N
And then the summer sales market stopped. It didn’t slow down. By March it had stopped.
Since then the 2022 autumn of anguish and the winter of withering have run according to one hell of an evil algorithm:
>Double fixed term interest rates, and concurrently,
>Eliminate banks’ ability to make reasonable lending decisions, and concurrently,
>Confuse the nation on who should work from home or not, and concurrently,
>Run out of Gib Board, and concurrently,
>Strangle international shipping lanes, and concurrently,
>Introduce all sorts of legislation that increase costs, and concurrently,
>Crash the sales market, and concurrently,
> Get the media to put the fear of overpaying into the hearts and minds of the sheeple, and concurrently,
>Add hyperinflation, and concurrently,
>Foster the Great Resignation, and concurrently,
>Forget to add incentives for immigration – so there is practically none and concurrently
>……well you get the idea.
So in two years, we went from one extreme to the other (albeit who knows if we are at the tail of this end yet.)
Good times.
Still I refereed a decision to proceed with another 90 homes at Northcote, without a presale, with bad soil underneath requiring expensive piling, with a bit of faith in negotiations with our land partner on the basis that we should be out of this mess by the time of completion at end 2023 right?
Starting future projects will be entail some interesting decisions. No one in the industry can deny that, regardless what their PR departments claim. At least we don’t need pre-sales to start construction. Funding for those off-the-plan developments as all but dried up.
Enough moaning already. The pendulum goes both ways. We didn’t buy much land in 2021, meaning we didn’t overpay too much land. It was a feeding frenzy for developable land. Thankfully our slow, mammoth report writing, multiple approval land acquisition purchase process basically meant we couldn’t compete with all those other developers keen to throw caution and their funders wallets to the wind. Plus we had already decided after missing out on yet another tender, a company hiatus on fixed price construction contracts. Building for others has only been a small part of our business, but by fluke this decision meant we weren’t forced to deliver any construction projects to other developers at an inflation induced loss.
The opportunity now then is to buy some land. The tide has well and truly gone out and the water temperature ice cold. It’s time to don a steamer suit, wade past the beached remains of others partially completed projects, and go spear fishing whatever species of feasibility can still swim.
Over the last two years, here’s what I have discovered since my appointment to the pilots seat.
One. When I reported to the CEO I had one boss, now I report to a board and have three official bosses, plus about ten sub-bosses, that boss me. And occasionally some or all of them are bossed by someone up their food chain which turns into some directive that effectively bosses me. Regardless, of which boss or directive I potentially could blame, as the Director on the ground I am effectively solely responsible and accountable for everything that happens in New Zealand. Buck stops here, like it or not. But all this does make for animated discussions most days between me and all the bosses I can tell you!
Two. Most of my time is trying to prevent or minimise ideas or initiatives from the bosses ending up doing the exact opposite of what the bosses intend. That’s a key part of the CEO (they say in books), take the hit and protect those you serve – your employees. Not easy. The bosses of the roundtable like to be ‘interactive’. They often have the right strategic idea, but putting it into practice is not always, well, practical. It’s a constant education process upwards. And it takes half the team collaborating to help me with that.
Three. Whilst I am not a founder of the company, I am passionate about property development and treat the company like I 100% own it – primarily to grow it. The bosses want that as well. Unfortunately, I have a tendency to treat anything that gets in the way of us developing more houses as a personal threat. Not so much from competitors -the successful ones are to admire and to learn from. Whether from bureaucracy or market forces, I soldier up to go into combat. I was given some words of wisdom, early on: “don’t try and fight every battle”. I’m still learning that, failing miserably.
Four. It’s all about the people, I’m here for the people, your role as CEO (the social media gurus constantly remind us) is to serve your employees – that’s number one. Employees first, customers second, shareholders third. Happy employees, happy customers, happy shareholders. This is all a worthy aim. Of course how you veritably do that isn’t telegraphed in The Idiots’ Guide to Being a CEO with a Board, subject to all sorts of rules, Leglislated Across Two Continents, that Answers to Shareholders in a Very Financially Focussed Manner, Every New Year’s Eve.” Assuming, one day I manage to find (or write) that book, the thing about employees is that, like me, they are people.
People are different. They want different things. They are of different ages. They are from different places. They grew up with different attitudes and ideas. They have different ambitions, talents, and social constructs. They differ in decisiveness, risk acceptance or avoidance, experience, enthusiasm, and cynicism. They value different approaches to utilitarianism, altruism, and their use of euphemism. They have different personalities, different pressure points, different squares on the Myers-Briggs, and different ways of dealing with conflict.
It’s inevitable then that everyone is not always on the same page. Of course, we have to all work together. And we have to work together productively, and profitably. When this doesn’t happen naturally it does get me worked up. It’s the least desired part of my role: me having to come in and be last resort to try and mend a working relationship. Sometimes it just doesn’t work out, and people leave. That’s fine. They say people leave managers not jobs. That’s a little disputable in this current labour-constrained market where some people are simply moving to the higher bidder. But no doubt often there is some truth in it. Whilst as CEO I have not yet had to initiate anyone’s replacement (no Donald Trump firings on my watch!) everyone is replaceable, including -especially- myself! The good news when someone leaves is it provides an opportunity for someone else to step up. Or it provides the business to retest its course and direction in whatever field that person worked in.
For those that do drink the company cool-aid and those whom I hope don’t buy into this ‘quiet quitting’ nonsense, I am there for them 100%. They get 100% honesty from me. Yes I expect performance through best effort and leaving few stones unturned when difficulties arise. If the resource is an issue then go find the resource! If something ain’t working then go try six other options! If something needs to be improved, well after you gasp and moan, go do some work and propose some solutions to whomever you report to. If that doesn’t work tell me. I expect all of us to do the mahi and make the decisions we are each enabled to (and that authority is unfortunately sometimes in flux).
In return (its not an obligation though, its my pleasure), I provide unlimited access to myself and full transparency. Having an open door policy didn’t work so I literally tore down my office wall. I fight for what employees are worth and I am there as a mentor – if I can add any value but for some you were hired because…?. I fight to make peoples job easier through reevaluating processes and tools. Sure, I am often hampered because the planets of one, two and three described above never always align. But that’s just an easy excuse – my job is to alter gravity!
Yes, I am naturally seen as the backstop or wicketkeeper, but I’m not going to pad up if I think the person can handle or sort it themselves. I often quip something like ” If you cc me in this email, expect a response if I don’t agree with something, or can’t help myself to suggest a potential improvement, so best not to cc me and sort it yourself!”
And I don’t like to standout above anyone in the team. Yes I do a bit of grandstanding on LinkedIn but that’s not to steal team members thunder or take claim to the success enabled by others. That’s to fight for a cause, to proudly celebrate how the team have performed or to debate and learn more for an improved future (whether personal, our business or NZ Inc). Not really a sign of humbleness but I had a mental block around the word ‘Chief’ and its connotations of being the leader. A ‘leader’ (for as Bob Jones wrote, implies followers, and followers are not who I want to lead!). In a similar vein, for a long time I didn’t put CEO on my LinkedIn profile, my business card or my email signature. I didn’t refer to myself as the CEO – I would say “I work for Universal Homes”. Problem was, for practical purposes that doesn’t really work. It leads to confusion as to what you do in the company. Who the hell is the real CEO and in charge people would think. It wastes time, because the next question inevitably is ‘ What do you do there?’. Worse it looks like some sort of stupid humble brag. So CEO it is.
As someone conscious of leading an organisation ( lets face it, with a board, an exec and many managers all capable in their fields, at best I am only helping to lead) I aim to provide instant feedback. I dish it up when it’s warranted – positive or negative. Sometimes too instant and uncontrolled. Maybe a little blunt at times. Yes, we have a whole formal performance review process but look Kiwis don’t really take to those sorts of things that well. Especially when priorities and targets need to be moved around. So I just spit out exactly what I think at the time – straight up to all the management and exec (and for that matter the board). Maybe, occasionally, I exhibit a little self-control and EQ to those troops down the line.
Look I will never be able to navigate this human-led complexity with the grace of Nelson Mandela. I think I have come some way but I am still a work in progress!
Five. Health and safety is paramount and far reaching. Actually, it’s daunting. It should be, as running a construction company naturally involves physical risk. Property development is stressful and missing deadlines have big ramifications. There are so many aspects within the H&S banner, it’s massive and the requirements put on companies and Directors growing. I get great support from all levels in H&S. But man, it’s huge. That is why our H&S vision mantra plastered everywhere is simply “Health & Safety is the foundation of the way we work, everything, everyone, every time”
Six. The vision. The business books say, the CEO sets the vision for the company and puts in place the strategy to realise it. Then they must communicate that throughout the organisation to ensure maximum buy-in. Then with everyone on the same page you go deliver.
Easy.
So I did a big Vision presentation within the first three months to the entire team, based on what I had told the board when I was told I would be CEO about six months earlier. A Vision No1 2025 and a three-step strategy to get there. It went something like this:
Step One: Survive Covid and whatever Covid was throwing at us. In Nov 2020, it looked like we were out of it so a big tick – at the time.
Step Two: Recalibrate and Build 2020. At the time sales were going gangbusters and starts were still on time and inflation was not known, so a big tick there.
Step Three: Progress and Growth 2021 to 2022+ And I had all the corporate jargon to back up what I was promising, plus a five-year plan with plenty of revenue less-cost generating numbers. Our numbers are pretty easy, land acquisitions, house starts and house sales. 2021 sales and deliveries were on fire, albeit by the end of the year and the dreaded Auckland lockdown delays were building up with design review panels and consents, often via zoom. How 2022 is transpiring has definitely dampened what we will achieve. The strategic plan to hit that vision is wobbling.
That Vision No1 2025 is open to interpretation and it was fuzzy in my mind at the time.
I now have a much clearer personal Vision.
In today’s dollars: $1B revenue, $100m NPAT, 1,000 Home Settlements.
1/100/1000.
I don’t have a timeline on it. I’m not going to stick in PowerPoint. I haven’t really mentioned it anyone internally or externally except in passing. It’s magical to some, ridiculous to others but it’s achievable to me. It’s a stretch too far to plan unit by unit and make a corporate song and dance about until we get at least halfway there. But it’s in my head, I think about it every day to guide how my feelings around success and failure and what really matters in the big picture. And besides 1/100/1000 is kinda catchy.
Beneath, or should I say supporting, that Vision we have a five-year plan (which changes every month at the moment given market uncertainty). Currently it shows us getting just over halfway to the vision. That business plan is widely distributed throughout the company and management and board meets monthly to go over it. It is fixed in the first quarter of the year to solidify our KPI’s but then its a working tool to manage cashflow and market conditions. Those market conditions, the investment appetite of the board (which also changes, sometimes countercyclical), and especially our ability to generate house sales and buy developable land will determine how far we can go to achieve or exceed that five-year business plan.
Despite the business plan being a model for our cashflow requirements, it is a target to be beaten. And in development that might just mean a couple more big projects.
Seven. Stress. Pretty much you have to harden up and get over it. As CEO you get attention for your time from all directions. Now time is not the stress problem, I always feel like I personally have enough time to do everything.
I even internally chastise myself for not doing more: why haven’t I helped hunt out the next deal, why haven’t I improved this process yet, why haven’t I convinced this board member of this, what could I help this team with etc. Of course, I also don’t want to step on the very capable toes of those hired to do the work. And every time you try to write up a process, create a new procedure, or implement a fancy new initiative it takes time way from those employees just trying to do their job. Protecting their time is important – this is always a juggling act.
Time I have left in this world might be an issue, but no, day to day work time is not an issue that causes me stress. I am a bit of a geek, where I immediately deal with anything that is really business critical (and not just the sum of someone else’s lack of planning multiplied by some else’s ridiculous request). I keep a zero mail inbox. Everything gets filed. I look at emails no more than twice – one to determine when to deal with it, including right away, and another if required when I need to deal with it. I am reasonably organised in folders and where documents go, saving previous versions religiously (just like my subconsious forcing me to ctrl-Z every 18 seconds, the pain of losing past files permanently lingers in my memory).
So I feel like I have plenty of time (that might be a worry in itself, reread the part on internally chastising myself).
I also -at least consciously- don’t worry too much about what has happened in the past. If something has happened and it was my fault, or responsibility or I just happen to be the person that has to deal with it, then no point dwelling on it. Fess up straight away and clear the mental road to sorting it out. I have learned the hard way, that almost nothing in property development gets better if you simply leave it. I have now learned the same situation exists with people conflict and lack of business alignment.
[As an aside, I am firmly of the opinion Zoom time exasperated lack of business alignment. You should see some of my instant meetings when a meeting starts off with a few people and to solve an issue (typically a misunderstanding or incorrect assumption) I leave the room walking the office or calling and keep dragging people into the meeting until we a) have solved in and b) everyone who needs to understand now does).]
This doesn’t mean that I 100% ignore the past, or I don’t ever wish I did things different in the past. Of course I am conscious of what has happened before and sure, often there are learnings to be documented to prevent repeating. But primarily the task in hand needs to be dealt with in the present to sort out the future. Once I make a decision, I’m happy with it. No point dwelling on it. Harden up and deal with it.
I do always think about growth, simply how can we build more houses and grow the company (1/100/1000). This seems to be set at a plateau of stress that doesn’t cause too much pain, but like a mild twitch in the neck the stress of trying to achieve my internal ambition is always present. This is summed up by a recent quote I read ” I don’t fear failure. I fear being in the same place next year!” ‘Place’ in my mind being being our position of business growth.
Health and Safety, not so much a stress but a constant reminder to stay vigilant at all times. The stressful thing being, despite even if you have the best systems in the world, people on construction sites do have accidents.
What really causes me stress though is thinking about decisions. Not during the daytime when I am analysing what is best to do, or taking advice or formulating my battle strategy but at about 3.30am. I have never had a problem getting to sleep, but boy once I wake up and the mind is ticking, its very difficult to get back to sleep. And when that happens it might be 6am, good for another 30 minutes or so kip only!
Now my problem (yep another to add to the list) is my mind is not usually thinking about the big decisions, the life changing ones. You know the what do we do when the lights go off and the family has to Hazmat suit up for Covid and roam the waterless seabed armageddon type scenario. Nor finalising the seemingly impossible to agree road with Government that our billion-dollar development depends on. Nor stressing about what initially appear to be insurmountable obstacles creating delay and adding cost caused by design review panels, council and other entity consents. Or a lack of action in house. Or a disagreement in concluding a complicated deal. Nor do I stress about meeting KPI’s or annual numbers. I’m narcissistic enough to believe I am doing everything humanly possible in that regard already including learning to improve.
No, what happens to me is I wake up and cannot get back to sleep because all my mind can think about is the damn seating arrangement in the office! Or whether I have enough socks for the gym, or did I remember to send that pretty much irrelevant email to so and so. There must be a psychological diagnosis for this effect. Now I do realise it only happens when I have big day to day decisions that remain unresolved, but could my brain please at least help me out by processing those at 3.30 to 5am instead of worrying about where someone might sit in the office, or taking the rubbish out!
I can make decisions quickly or take time. It depends on the time and the implications. I am there to make the hard calls, once I have figured out the best call I have no stress enacting it.
BUT, I’m often not the last man standing on the decision front. There is this thing called governance and also for some decisions an internal consensus required. When I am waiting on the decisions of others, especially given time is not a developers friend, I get stressed. If I am delivered a constraint, which I have no control over, that directly conflicts the ability to make a decisions I get stressed. And the first thing to go when you get stressed is calmness. The pressure of the situation or the obstacle in front rarely causes me to even bit a nail, but me waiting for a decision from others, with my outwardly exhibited patience of a toddler often necessitates being straight jacked and muzzled. Calm under pressure yes. Calm whilst others unnecessarily increase pressure, not so much.
Though, as time goes on some decisions don’t actually need to be made. Alternatively, things that were once urgent are no longer treated that way. Issues that are critical, you learn you might take some stepping back and really thinking through before addressing. New situations that arise are a decision making quandary the first time, but from then on simply run of the mill. I have also seen that what is actually in your control increases, the more times you deal with a situation or succeed in a breakthrough. A lot of it comes down to the quantum and variability of decisions that make their way to my desk each day. Whenever I am not in control of something, I work to find a way to gain control. Mostly, nowadays, I admit it’s my fault if I can’t find a way to control any influence, or situation. I want to be able to blame nothing else other than myself.
Here is what used to stress me out, and over the last two years I have figured out to manage:
And here are some of my pet peeves – which maybe I have toned down my reaction to them (probably not)- that cause frustration. Dealing with frustration is a stress. Finding a way through alleviates the stress. These also represent a lesson to myself to try steer clear of creating these situations or naively falling into them from my own actions:
Eight. Diversity, culture, values. The team I am currently part of now and in the recent past is a very diverse bunch. Ethnically, you can’t get much more diverse. I don’t plan to try and artificially manufacture the mix. Team culture is not something I have any intention of trying to control. We’ll do the odd social event, celebrate employee success, have an Xmas do (2021 first time ever couldn’t do it!), and put on lunch. There is a social club run by some of the team on their own accord with their own employee sponsored funding. I will facilitate whatever initiative the team wants in this inclusive space. But its a business first and foremost so let’s not PR spin it otherwise. I’m 100% open to anything with zero exclusions – isn’t that inclusivity? Values, well you should already be able to infer that from this memoir thus far.
Nine. Improvement. Everything can be improved. Focus on the incremental rather than looking for the silver bullet. Change management is difficult. And does something warrant a change? Nonetheless, when something requires change, that goes to the heart of a team members role, please understand, this will take some doing to get right. Often you will fail at implementing a change. All that means is you have to take another look at it and target the change in a different way. I earlier attempted to ban the words “But we have always done it this way”. However, quite often there is a perfectly good and still practically valid reason. You get that in a company 60 years old. In danger of aging like a dinosaur, you do need to critique your business practices. That starts not by dismissing the status quo out of hand but by first seeking out, why have we always done it this way.
Ten. What I love:
So, that’s a wrap. If you got this far I did warn you, now you know what sits deep in the recesses of this CEO’s mind.
New Tax Announcement
In March 2021 the New Zealand government introduced a new tax for Long Term Accommodation Service Providers (LTASP). LTASP commonly but technically incorrect are also known as Property Investors and often referred to, completely inaccurately, as Property Speculators.
I use this term LTASP based on the writings of Thomas Piketty, an expert in researching income and wealth inequality, who clearly states in his ground breaking book Capital that owning and providing a house for rent is a very productive service business. For me that puts that debate to bed (deathbed). Just as a supermarket as a business provides the human right of food, a LTASP as a business productively provides the human right of shelter – which enables it inhabitants to consume housing goods and grow their own productivity.
The tax is simple (although I suspect the final details at the end of the year will be very complicated): on existing housing you can no longer claim interest as a deductible expense. Your profit is now rental income, less expenses (excluding interest you must pay on the investment loan).
However, just to start to complicate things, this deductibility will still be allowed on new build property moving forward. How all the details of this working is anyone’s guess -given by definition a new property eventually becomes existing. Therefore, the first investor of a new build may get an advantage, but when they come to sell it the next investor won’t and will adjust their purchase price accordingly. That will have some impact on the new build investors willingness to pay a price in the first place, albeit the emotion of residential property and the thinking, that is 5 or 10 or 20 years off may not translate to any actual discount.
Hit a Nerve (in the butt, right below the back pocket)
That announcement sent me and at least 120,000 other people who are LTASP in New Zealand ballistic, not to mention economists and tax professionals who simplify could not understand the logic. A cashflow expense which you cannot deduct, now creating an accounting profit that the business owner must find additional cashflow funds to pay each year.
Put another way, anyone who runs a LTASP business (yep being a property investor in the simplified lexicon) that has debt on it will now have to front up with more cash. And that means to meet bank criteria for serviceability they will need to tap (or increase) more of their income to cover that new tax expense.
I may get into the dollars and cents of this financial perversity in a later post, as well as the implications and unintended consequences. There is plenty written about it, albeit not much without a doss of vested interest opinion or worst vitriol attached. Tony Alexander presents the best independent view here (in my view).
But, why do I care so much?
After a tirade of Linked Posts (on this vexing nuclear bomb of political ideology in action), by yours truly, people have been questioning – and I paraphrase with a degree of literary license:
“Why do you care so much about this new tax on interest deductibility?”
“You are in property development, your target market includes first home buyers, you produce new homes – they are all exempt? So why do you put yourself out there so much?”
“Why don’t you just focus on supply and promote what you have got – you could do so much better now- every investor in town will be hunting down your new properties and caps have increased?”
“You should be like other developers and congratulate all the new first home buyers that have been enabled and all the investors that may have previously only focused on existing prices?”
That’s because I am in the property development business, and on the face of it Universal Homes, and myself personally, stands to make more money if indeed this new tax increase sales activity in the new build space. The inference, is just shut and get on with it, your company could do much better than others out of all this.
However, I have my reasons.
A Table Full of Interest.
Everyone is biased and has vested interests, so let’s look at mine straight up.
My family runs a LTASP (remember I defined this earlier: Long Term Accommodation Service Provider) business. Yes we own some rental properties and my wife is CFO, COO, property manager and fund manager. I get to crawl under subfloors if a leak sprouts (only once so far) and send my income and net assets to the bank for assessing serviceability and security of the debt.
So quite obviously this new penalty tax costs me $ each year, that I will have to cashflow out of money that would have been used to reduce debt.
It also delays our ability to expand the business. Ironically, the next expansion intended to be a brand new universal home.
It also means -that since I am all-in, fully invested (not only in property, but mainly) with a buffer for the unexpected or presumably likely interest rate increases- that we will have to reduce spending (CFO has been advised) or cash out investments (last resort) or add debt (not happening) or find additional income….
The risk-reward retirement strategy might need a rethink as well, although I’m intending to see this out with the properties we have, as I am sure there are plenty of twists and turns yet over years to come and like any good LTASP we have a long term investment horizon. The only properties this business has sold were two owned for 11+ years, and that’s because the business partner wanted to cash out.
Regardless of what you think, LTASP is a legitimate business, and it has the added benefit giving people a roof over their heads. If you knock that business you better look under your own hood first. I am proud to own property that I market out to potential renting occupiers and sign tenancy agreements promising them my accommodation service for a weekly fee. This is a noble business.
And a Tax Beneficiary?
However, I also work in property development building hundreds of the houses that First Home Buyers (the ones that need a hand, not the ones you have come home with a wad of greenbacks or sterling, pretending to be in financial stress buying a house when they are flush all over the place) want and do purchase. We also develop Kiwibuild and Axis which are restricted to owner occupiers. Many of the houses we develop also suit investors, albeit, in total our investors last year ran at only 17% of total sales.
So, Universal Homes could be a big beneficiary of this tax. Because this new tax aggressively penalizes anyone buying existing (although most of that is now already encapsulated as a one off financial hit to existing owners) whilst almost forcing new investors to buy new. So more people buying new, more people buying Universal product!
Rosy but still coloured with red ink.
Its not all rosy for new build buyers though – if you buy your first home, now you do need to consider who you might be selling that to in the future to maintain value. Because then the house definition goes from new to existing and the value of the existing will depend if you are in a more home owner occupier desirable location/product type or a more tenant occupier location/product type. i.e. the predominantly likely buyer in 3, 5 or ten years time.
Sometimes the predominant buyer will be LTASP, other times owner-occupier and others even split – think working/middle class neighborhoods for houses and increasingly terraces and units and lower rise apartments. Other times is skewed one way heavily – LTASP primarily in some lower decile suburbs and inner city apartments or owner occupier primarily in expensive neighborhood standalone homes and townhouses. I may expand on this later if I can find some data to support my assertion and see if it is making a difference over the next few months. It might just all get loss in the noise.
So the fact that you might occupy a home you buy yourself or rent it out is largely immaterial to what the market value of that property will be at the time you sell it (or for valuations on the way through). The market will determine that value based on location relative to if it’s a home owner occupier area/product or a tenant occupier area/product. i.e. not all areas have the same home owner occupier versus tenantoccupier ratios.
With Universal product most of it is in that working/middle class demographic, that primarily suits owner occupiers selling to owner occupiers so Universal wins again. Although some suburbs over time do change, and a few out west that Universal built many years ago have more renters than owner occupiers compared to when they were first purchased.
All in all, the benefit I will get out of Universal benefiting from all this supposed extra demand is much more than the extra cashflow expense to the family LTASP business. So I should be a net winner, by a long way due to this tax – especially if I keep future purchases as new product and hold for a long time (which is always the goal of a prudent LTASP).
Passionately bemused
But, I still kick up a big fuss and are extremely angry. These are the reasons why I am bewildered with this new tax and think its simply a nightmare.
It’s illogical to me and almost every real financial and tax professional (not just layabouts with an opinion). An expense is an expense. This new penalty tax puts LTASP into a new paradigm that has no relationship to any other business. And if it was such a loophole, why retain the loop hole for a small proportion of new product and create a whole new two tiered system.
You (the NZ Govt) just punished 120,000 families trying to better themselves and their families under the legal rules of the day. In fact you drew on demonization in the media conveniently confusing investors with speculators to fuel the fury. You propaganded that investors were outbidding first home buyers causing home prices to rise. Well quite possibly, but no one really knows in an auction and it could have been other first home buyers outbidding each other. And what does that have to do with the other 119,500 investors who were no where near the auction room? And you did it with no warning, and you applied it to retrospective purchases and you said you were not going to raise taxes just six months ago prior to the general election.
Well someone needs to stand up for the middle class saving for their retirement, and their kids homes and keeping themselves out of state welfare. Many of these people are my friends, my staff, my associates. Some just purchased last year, spent money upgrading an old house so tenants could have a better environment and then get whacked with this burden.
The unintended consequences are loss of business confidence and faith, anxiety from all business and their employees on what is the next mess to be created in their industry, increasing costs and decreasing house supply and the actual effect on prices medium to long term. My hypothesis is any cost intervention hurts supply and will ultimately cause prices to rise.
To pay for the accounting profit, without additional revenue will mean cutting other expenses. This will hit retail and local tourism (as if either of them need that). Property managers will be made redundant and the owners will do that labour themselves. Worst will be all the financial and emotive stress – families will be ripped apart. Sure everyone should have a financial buffer for interest rate increases and the like, but quite simply this was unforeseen, beyond reasonable likelihood and stretches that buffer requirement to the next level. Maybe, just maybe there are few firesales…and that brings a lot of other issues in play.
Recent first home buyers should also be worried. Whilst in he long term I believe this will increase prices more than they need to, in the short term it could reduce house prices certainly in certain locations – especially regional New Zealand. Hey, but they are now existing owners so they don’t matter – do they?
I will be immersing myself into what happens from this point on – a little less passionately and more academically, perhaps.
The problem is supply. Not the 120,000 families who own property providing a service to occupying tenants. These LTASP have met the tenant demand where the government and developers still can’t.
And supplying is not getting easier. You can’t pick out a group and lambast them when constraints imposed on supply has nothing to do with them. Sure they might sell to a first home buyer, but then a tenant misses out. I can tell you now for every home buyer there are multiple tenants waiting in most locations. Why not focus on proactive positive supply measures.
At Universal we develop and it is just getting more and more difficult. We have been promised funding, (once with an accompanying press palaver on one of our site) only to have that withdrawn a year later when the press were not around. We submitted shovel ready projects to enable 1000 of ours and 13000 of others homes, but didn’t make the cut! Still a year on few shovel ready projects have seen a shovel! We were/are ready to go.
The problem is also forward demand. How much demand has been brought forward with people who had no where else to place money or decided no point doing anything but saving to buy a home due to Covid? A lot I reckon. Only time will tell, but without a substantial immigration surge post vaccine, this demand (for buying houses) could fall off fairly quickly, and prices will reach their natural cyclical peak, and either flatten or fall. In addition the Government are buying properties for state tenants out of the market, further restricting new and existing stock for first home buyers. That is ok, but let’s acknowledge that rather than fire all guns at the mom and dads (and men and women of whatever persuasion and family circumstance) LTASP business owners.
MOST IMPORTANTLY THOUGH
And this is why I am not going to now grease up the establishment and say this is a great tax for the interest of Universal homes to sell more homes or to promote ourselves as hand in hand with the government on this one. The fact is we don’t need to and we already have a great relationship with Kāinga Ora and build plenty of Axis and Kiwibuild homes. So we are already decent provider to first home buyers and – at least last week – can’t build fast enough to satisfy demand.
But MOST IMPORTANTLY it’s the disservice to Universal customers of the past that really irks me. 60 years of customers and now many have to go through this new penalty tax. They brought a home fair and square, some only a couple of years ago and now they are being asked to pony up cashflow on imaginary accounting profits. Or when they sell, they are at the disadvantage of selling an existing house -with different tax rules – now a newly created second class citizen to the next batch of new builds we deliver.
What’s to say our Universal new build customers of tomorrow, now at great advantage to Universal new build customers of just last year, won’t have a rule change also thrown in their face!
These are the customers, them and the 20,000 ones before, I and all the staff of Universal care about.
Just like Carolyn, from Long Bay, someone who cares about her children’s future and her financial security – an update I received just hours ago.
NZ Government (and all you keyboard warriors who wouldn’t know a doorknob from your own…) don’t dick them around please. Past or present. Sort out this tax in the detail, so it is at least not applied retrospectively.
Remember, there were supposedly no new taxes.
I have been doing some research into the crowdfunding of property developments lately. A recent LinkedIn post led me to a thread of propertytribes.com that rekindled my interest, now that some of the (dirty) water has flowed under the highly leveraged bridge. One highly PR focused developer, the poster child of the online development funding scene in 2016 and 2017, had some of their projects come a cropper and investors are nervously waiting for not a return ON capital, but a return OF capital. As I researched further I read story after story from crowdfunding investors many ignorant of the risk and few appeared to know the questions to ask to undertake proper due diligence on their crowdfunding investment.
The last time I wrote on the subject (here) was in 2014 – boy time goes quick. Some of those links no longer exist. Because the virtual space changes so quickly I am not going to provide links, just google for crowdfunding property/real estate developments.
The first thing is there is a difference between investment-based crowdfunding and loan-based crowdfunding.
The latter should be at least, be a loan with a preferred return that is secured by the hard asset that you are loaning on – the land and construction on top. That will always sit in priority behind a development loan from a main lender- if one exists- but should be in front of any equity investors.
The former, an investment based crowdfunding opportunity, is really a plea for hard cash, equity, secured by nothing more than a promise to make a profitable property development and have enough profit left to give you more than you put up.
Whichever one, you should understand property development is highly risky and do your homework. If you have never been involved in a property development, then I just don’t think you can comprehend the risk.
Now some of you out there might like a bit of a flutter. Roulette and racehorses, poker or penny stocks. You could even be one whose risk disposition enjoys getting in early on a pyramid-scheme, being of the mind you will get out with enough cash to purchase a chateau in the Pyrenees before the base inevitably collapses. So for a measly 5k, 10k or even 500k be my speculating guest and play the numbers without doing too much investment analysis – invest widely and shallow or just do it: put everything on green.
But for those of you who like to research where you are putting your hard earned savings and don’t know the developer apart from a slick online presence, here we go.
The questions to ask of the project and the developers behind it when conducting due-diligence on investing in a crowdfunded property development.
Now about 17 points ago you may have said to yourself, is this degree of investigation worth your time? Only you can answer that, and it ties directly into your risk appetite and the sum you intend to invest. Look if its 5k or 10k maybe you can gloss of most of it and focus on the developer’s success record and whether you buy into everything they promote to you online. Certainly, developers want to provide as little information as possible, and presumably, crowdfunding platforms want to interact with investors as little as possible – to keep their human costs down. But if you are ready to part with a sum that you can’t afford to lose, then understand this: it is a risky business and you are supplying venture capital to a speculative activity. Property development is not the same as property investment. Not only might you not receive a return as great as you think but it is also very easy to have all your contribution wiped out. And unlike the share market, you cannot exit until 100% of the dust has settled. From what I have read, many crowdfunding investors don’t really differentiate development projects from an already income-producing investment (an office building for example). But development is much riskier and regardless of disclaimers on the crowdfunding website and some flash videos with people driving flasher cars, unless you have been in the business, you simply can’t comprehend the risk your cash is about to endure.
However, let’s say you manage to get ticks on everything above. Even after all of that, property development is still behest to the mighty market. Flat or falling sale prices combined with rising construction costs, planning ‘delays’ and optimism bias are part and parcel of the development game. Margins can be wiped out in no time. Although also understand (otherwise, no one would get involved in the development business), in an escalating real estate market margins can be amplified – can your equity investment take advantage of that or has a cap been placed on your return?
So ask yourself this, does your pending online investment still sound fun? Is it still worth you following the crowd? If so, I hope you get the return promised, but please do not moan if it goes pear-shaped. You have been well and truly warned.
Andrew Crosby
P.S.
Now in this blurred world of social media versus professional media, my opinion versus my employer(s), salary versus side-hustle, middle of the business day versus 11pm on a Sunday evening, it can all get a bit confusing. So, here is my value proposition, and both complement and benefit each other.
