The Built Environment: Earthquake Strengthening

From a Commercial Property Advocacy Perspective

Section contents

• Who is the Property Council

• Government actions 2012-2013

• Property Council position

• Government actions 2015

• Property Council position

• To strengthen or not to strengthen?

• What commercial property owners are doing

• The heritage debate

• What can councils do?

• Conclusion

Who is the Property Council? • A Member-led, not for profit organisation that offers a collective voice for the commercial property

industry

• Over 700 Members who include:• Owners, investors, managers and developers of office, retail, industrial and residential property• Planners, engineers, lawyers, architects and other property professionals• Local councils and organisations and central government departments, ministries and agencies

• We advocate for quality urban development that supports national and regional economies

• Our advocacy focus is two part: urban strategy and infrastructure and compliance and legislation

Who is the Property Council cont.? • Urban strategy and infrastructure advocacy includes:

• Auckland: The Proposed Auckland Unitary Plan and Infrastructure of National Significance • Hamilton: A Blueprint for CBD Renewal• Joint working group with Wellington City Council and Heritage NZ on understanding the value that

restored, strengthened and maintained heritage properties bring to cities• Challenging the prescriptive nature of some council urban design rules for development across New

Zealand (Department of Internal Affairs Rules Reduction Taskforce)• Advocating for legal, fair and transparent development contributions

• Compliance and legislation advocacy includes:• Resource Management Act reform

• A National Policy Statement on Land Planning• Reviewing the RMA, LGA and LTMA to create better planning synergies and flexibility to

manage growth

Government actions 2012-2013• In response to the Canterbury earthquakes, the Government undertook the Canterbury Earthquakes

Royal Commission of Inquiry in 2011-2012• The Commission publically released their findings in December 2012

• Concurrently, MBIE undertook their own work into improving the earthquake-prone building system. In 2013 they release their Building Seismic Performance for public consultation. It recommended that:• All commercial and multi-unit, multi-storey residential buildings to have seismic assessments within

five years of the changes to the law taking effect• These assessments to be made publicly available on a register • All earthquake-prone buildings be strengthened, or demolished, within 15 years of the changes to

the law taking effect• The requirement to strengthen to 34% of new building standard is retained.

• Government introduce the Building (Earthquake-prone Buildings) Amendment Bill in December 2013

Property Council’s position

• Our submission focused on finding the balance between public safety and managing affordability issues for commercial property owners

Government actions 2015

• In May 2015, the Government announced that it had revised its earthquake-prone buildings policy. The Select Committee sought supplementary submissions on its Bill

• What changed in the policy? • Focus is now identifying and strengthening earthquake-prone buildings according to seismic risk.

New Zealand is divided into zones for seismic risk.

• Reducing the scope of buildings covered by the system

Depending on the seismic risk of the area the time for:

High(Years)

Medium(Years)

Low(Years)

identifying potentially earthquake-prone buildings 5 10 15

strengthening earthquake-prone buildings 15 25 35

Government actions 2015 cont.

• New measures encouraging earlier upgrades through a new requirement to strengthen earthquake-prone buildings when undertaking significant alterations

• A more focused Earthquake-prone Buildings Register and enhanced public notices on earthquake-prone buildings

Property Council position • In our supplementary submission we reiterated our view:

• Government should establish a suite of tools which building owners can choose from to assist with earthquake strengthening costs and minimise negative externalities

• Irrespective of when they are undertaken:• Earthquake strengthening can have substantial financial implications for building owners • It is vital these implications are minimised • The consequences of not minimising these implications can be dire. Particularly for regional New

Zealand

To strengthen or not to strengthen• Scenario one: decide not to strengthen an earthquake-prone building

• To mitigate the possible loss of tenants, lower the rent (which may still be cheaper than strengthening the building)

• Risk of long-term tenancy vacancies due to perceived risk of the building• Risk the council identifies the building as dangerous• If an earthquake strikes and the building collapses, the building owner can claim for these damages

• Scenario two: decide to strengthen• No ability to claim for the costs incurred• Can be a substantial financial cost for small regional building owners • Strengthening won’t necessarily increase its capital value, but it will restore value• Opportunity to charge higher rents-particularly in high risk zones like Wellington

To strengthen or not to strengthen cont.“….property owners unable to strengthen their buildings will have no choice but to relinquish them, creating the prospect of cities and provincial towns peppered with unsafe, derelict and abandoned buildings. This scenario, as a consequence, will undermine local authorities’ rating bases, and the burden of dealing with earthquake-prone or structurally obsolete buildings will increasingly fall on central and local government as the private sector is discouraged from meeting these costs.”

(Chris Gudgeon, Chief Executive of Kiwi Property [the largest listed property company on the New Zealand Stock Exchange] – NBR NZ Property Investor, 3 August 2015)

What commercial property owners are doing• Given the absence of Government assistance, commercial building owners are considering the financial

merits of undertaking major renovations/refurbishments of their buildings at the time of strengthening to secure higher rental income, and thus increasing the likelihood of recovering the costs in the long term

• While a valid business case in metropolitan areas, this may not be feasible in smaller towns and cities

The Majestic Centre, Wellington• Completed in 1991

• Owned by Kiwi Property

• Sits directly above a fault line

• Undergone strengthening to bring it to 100% of the NBS at an estimated cost of $85 million

15 Stout Street, Wellington• Construction completed in 1941

• Housed the Ministry of Defence for nearly 70 years

• Owned by Argosy

• New national office of MBIE

• Strengthening and refurbishment costing $40m and is now 180% of NBS

Rolleston Square Limited

“In over 40 years of work on property the rules have remained the same – get good consultants who know

how to make cost effective designs and pay attention to detail. Repairs after the Christchurch earthquakes

were not disruptive to tenants or expensive; no tenant had to shut down or move out, although some work

was done after hours. We consider strong buildings make our business significantly less risky. We have

engineering inspections done on our tenants’ fit-outs and advise them that it significantly lowers their

business risk at minimal cost”.

(Lloyd Bathurst, Director)

Rolleston Square Limited cont.

• A building with an insured value of about $9 million strengthened from about 76% of NBS to 100% for

less than $10,000 = 0.11%

• A building with an insured value of about $5 million strengthened from about 76% of NBS to 100% for

less than $40,000 = 0.8%

• Another building with an insured value of about $1.4 million strengthened from less than 50% of NBS to

100% for about $70,000 = 5%

The heritage debate

• We are firm supporters of heritage, it has a place in a community’s urban fabric

• Heritage can be a focal point for a city or a community like Civic Square in Wellington, Napier CBD or the

Tauranga Old Post Office.

• But there needs to balance between what we protect and what we replace- sometimes the bulldozer is

the right option

The heritage debate cont. • In our submission on the Proposed Auckland Unitary Plan we advocated for a contingent valuation

method:• Under this approach, a hypothetical market is considered and people are surveyed as to how much

they would be willing to pay to preserve or improve a historic asset• This provides an indication of the community’s value for the building – the community has the final

say• This could be an alternative financial instrument in the event other proposed incentives are not

viable for the owner(s) of a heritage building (such as targeted rates being levied on the local community)

• The contingent valuation method can also come in handy in the case of interest-based loans, where the interest rate gap can be funded by the council

The heritage debate cont. “….studies in the UK and the USA show that long-term conservation activities, including the repair, maintenance and reuse of vacant or derelict architectural heritage, actually result in an increase in tax revenues to the government. While it is true that new development could have taken place elsewhere, heritage repair projects have the added bonus of having a positive impact on the rehabilitation of derelict areas within traditional urban boundaries, creating a stimulus for housing and thereby removing the need for new infrastructure in the suburbs”

(A review of fiscal measures to benefit heritage conservation: Findings in Built and Rural Environments, July 2007)

Neligan House, 12 St Stephens Avenue

• General Trust Board (GTB), a registered Charity own the building

• Scheduled Category 1 by NZHPT

• Seismic rating: Initial assessment 21% of NBS. GTB was advised, under current guidelines, it should be

upgraded to at least 67%

• Costs: To achieve 67% NBS it would cost GTB $1.817 million or $2,320/m2. This is a similar cost to a new

build project and takes no account of the current value of the land, or the current improvements.

• This cost cannot be offset by greater rents from the property. In fact, no additional income will be

generated as a charity runs it for community organisations like Workplace Support

Neligan House, 12 St Stephens Avenue cont.

• As a charity, it is difficult to find the funding of these works

• The GTB faces a difficult choice:

• Vacate the property, and let the building fall into dereliction

• Sell the property “as is”, but at what value to a purchaser that faces the same liability?

• Pay to have the works undertaken, but with no pay off, this risks the Trustees facing a claim from their

beneficiaries that they have not acted as “prudent investors” as required under the Trustee Act

Harcourts Building, Wellington

• A very public spat between the owner, one of our Members, Wellington City Council and Heritage New

Zealand with a lot of media attention

• It was built in 1928 and has Category One status under the Historic Places Act. The building is between

14% and 19% of NBS

• The owner was served by the Wellington City Council (WCC) in July 2012 with a notice under section 124

of the Building Act giving him 15 years to either strengthen the building or pull it down

• The owner undertook extensive investigations as to the cost and outcomes of improving the building’s

seismicity and made a commercial decision to replace it with a new building which would be integrated

with the adjacent HSBC Tower, which they also own

Harcourts Building, Wellington cont.

• BUT: WCC declined the necessary resource consent to demolish. This was consistent with the WCC’s

District Plan which contains strong provisions for the protection of heritage buildings

• The issue went to the Environment Court, who ruled on:• Whether there was any reasonable alternative to total demolition• The risk to public safety and to surrounding buildings if the Harcourts Building was allowed to

remain as is

• The owner lost the case and is now investing significantly into the building, but has lost a substantial amount in legal fees and lost tenancy revenue, since the last tenant left in 2011

What councils need to do

• Don’t undertake heritage status work on buildings without working with the property owner to

determine their plans for the building

• Work with the owner to develop objective and robust business cases. If issues do arise, work through

them, don’t end up in court. Our Members don’t like it and neither will your ratepayers

• Must be flexible, not all heritage is good heritage or can be saved

• Must understand that they can enable positive outcomes for the building owner, the building, wider

urban area and community through being nimble and not prescriptive

Conclusion

• Public safety is paramount in an earthquake

• The Government is going in the right direction and recognises the issue is earthquake risk

• But the Government needs to give property owners a mix of funding tools to incentivise earthquake

strengthening work

• We also need balance in the heritage discussion: objectivity over subjectivity