KAWARAU FALLOUT: $24m annual loss to Queenstown economy.
Queenstown’s economy stands to lose an estimated $24 million in annual disposable income after
the crash of the resort’s biggest development.
Auckland developer Nigel McKenna’s billion-dollar hotel and resort complex Kawarau Falls Station went into receivership on Tuesday – causing “immeasurable damage” to the local and national economy, Queenstown Chamber of Commerce president Alastair Porter says.
Bank of Scotland International appointed receivers KordaMentha after “an event of default” under the loan terms for stage one of the project.
The jobs of 500 workers – still on site for the time being – hang in the balance as receivers assess the situation over the next two weeks.
“And that probably means that there are at least as many again whose livelihoods are benefiting from that project as well so we could be looking at 1000 people affected,” Porter says.
But the impact isn’t just immediate – Porter believes at least 1000 people would have been employed once Kawarau Falls was completed. On an average salary of about $30,000 less PAYE, that’s around $24m of spending power that Queenstown could miss out on each year.
“It’s not just the people it would employ, it’s [Queenstown Lakes District Council] development levy contributions … probably in the order of $10m … that won’t come forward, there are very substantial rates on the project that won’t come forward, and GST contributions from tourists who use the facilities,” Porter says.
“You’re looking at very substantial sums of money affecting not only the local economy but the national economy.”
Porter can’t understand why the development collapsed when it was backed by “one of the most experienced developers in the country” in McKenna.
And “everybody was being paid”.
“Everything appeared to be going by the book.
“It appears the real problem here is that the principal lender is an overseas bank who is itself experiencing financial difficulties … [and] who cares little probably for Queenstown, let alone New Zealand.
“I cannot comprehend the sanity of putting a developer into receivership to conduct a two-week review.”
Kawarau Falls’ first stage of five buildings was expected to be completed by early next year, with another eight buildings to be finished in two more phases in 2010-11.
McKenna, who was unable to be contacted yesterday, told Mountain Scene in May last year that the project would underpin Queenstown’s building industry for the next three years.
Back then, Melview had sold 1100 units to buyers from NZ, Australia and the United Kingdom, he said.
Project needed tail wind to work
Kapiti Coast financial guru Chris Lee isn’t skiting about picking the demise this week of Kawarau Falls – but he virtually predicted it in this paper.
“I’ve simply known [Kawarau Falls] was a project that needed a tail wind to work and we’ve had head winds for a while,” Lee told Mountain Scene yesterday. “Even [with] no wind, I think that project might have failed.”
In February last year he told Mountain Scene: “In 2008 when liquidity and bank confidence are issues, and finance companies are a very big issue, we look at Queenstown as a [national] barometer.”
Plus: “If we see banks calling up loans from [Queenstown] developers struggling to meet commitments, it will be a very bad indicator for New Zealand.”
Whether things go “very right” or “very wrong” at Queenstown’s Big Three developments – Five Mile, Kawarau Falls and Jack’s Point – would affect national financial sentiment, Lee predicted.
Times are tough in Queenstown, he says this week.
“We’re seeing the brutal part of the market where [developers] just can’t make a go of it, where people will be in default all over the place.
“A helluva lot of borrowing [was] based on projections of demand beyond anybody’s normal imagination – so
you had to say there was going to be over-supply and that debt levels were too high.”
Lee has “a lot to do” with lenders with Queenstown exposures and “any number of other projects round there” are struggling.
“The only short-term result of that must be receiverships and developers going broke – and new people probably buying assets at [far lower] prices … down to the point where you get demand because it’s just too cheap to avoid.”
So it’s the second owner who makes the money?
“Even the second buyer might find it hard – it’s probably going to be the third buyer.”
Queenstown’s “enormous spurt of [development] growth” has been aimed at people, often foreign, who borrow to fund their lifestyle.
“And we’re in a bloody dreadful era of borrowing money for fun.”
– Frank Marvin
We’re safe as houses, says Darby
“Mr Jack’s Point” is adamant his $2 billion golf resort and residential development won’t follow Queenstown’s two other mega-projects, Five Mile and Kawarau Falls, into receivership.
You mean that, hand on heart? “Yep, yep,” John Darby tells Mountain Scene.
Darby says he, his original co-developers and their bankers “put Jack’s Point into safe harbour by aggressively selling down at the early stages of its development”.
He estimates about 50 per cent of Jack’s Point – with 1600-1800 sections to sell – was on-sold to several other development entities, including the owners of troubled Hanover Finance, Eric Watson and Mark Hotchin.
Despite Kawarau Falls bankers calling in receivers this week, Darby says he’s on firm footing with his money men.
“Our bankers Westpac are fully supportive of the Jack’s Point project.
“We’ve had a long relationship and it’s in good shape.
“We have always taken a long-term horizon in the planning of our project which accounts for tough cyclical conditions like we’re experiencing.
“Our development was always planned to be in balance with market demand, so the rate of growth will reflect the rate of real growth in demand for housing and other infrastructure.”
Along with the rest of the Queenstown property market, Jack’s Point house and section sales slumped last year.
Darby makes another distinction between his development and Kawarau Falls.
“We’re effectively a new community which is more about local living integrated with visitor accommodation as opposed to straight visitor accommodation.”
He has words of sympathy for Kawarau Falls developer Nigel McKenna.
“We’re just fully supportive of Nigel and the team to get the project back on the road.
“[McKenna] is a very experienced and professional developer,” Darby says.
“We feel for the workers and everyone.”
– Philip Chandler
They’re promising to pay
Queenstown photographer Jackie Ranken is owed money for two photo shoots of Kawarau Falls – the latter on Tuesday, the day of the crash.
She’s been commissioned four times by Melview Developments to take a chopper ride over the complex to record progress. Rankin’s owed about $760.
“The [Melview] people – there’s a Queenstown-based person and another one up in Auckland – they only found out [about the receivership] Tuesday night, apparently, that there was a problem but they’re being positive in a way, they’re promising the account will be paid tonight [Wednesday].”
Meanwhile, taxi driver Graham Dawson says the crash of Queenstown’s biggest project will have a major impact on the resort.
“It really is going to affect us. Quite a few of our passengers are workers and that’s going to affect all our business and the town and everything.”
Dawson held his hopes on Kawarau Falls pulling Queenstown through the recession but “I’m not so confident now as I was before”.
– Celia Williams
Surviving developer fast-tracking
One of Queenstown’s most successful developers is “working very hard” to help keep the construction workforce buoyant following the Kawarau Falls crash.
Remarkables Park developer Alastair Porter says he’s trying to get building projects fast-tracked in the healthcare and retail sectors to “help diversify the town’s resources”.
“We certainly don’t want to take away Kawarau Fall’s resources but there’s a significant amount of spare capacity in the town at the moment and it would be beneficial for the town if that capacity was taken up.”
Porter says the Kawarau Falls crash won’t have any direct effect on further Remarkables Park development because planned mega-stores are “long-term investments” and are on track.
“But if there’s a significant number of people out of work in the town, it’ll have an effect on spending and Remarkables Park Town Centre is one of the two big commercial centres, so regrettably it would likely have some effect on the town centre.”
– Celia Williams
Crew in dark on Crash Day – but work goes on
It’s turn up as usual for Kawarau Falls workers – but for just how long remains to be seen.
Hawkins Construction boss Chris Hunter says work will continue “on a day-to-day basis” for his 200 site workers.
Hawkins began the development’s first hotel – the 178-room 5-star Westin – in October 2007.
Auckland-based Hunter is working with the receivers “to ensure construction continuity” during the two-week financial assessment.
“While the situation is still unclear, [Hawkins] is still continuing to work in line with the current contractual agreements.”
Hawkins has always been paid by Melview and all Hawkins subcontractors are paid “on time, if not prior”, Hunter says.
“We have a direct payment agreement with the bank on this project … that was part of the original negotiations.”
Painting, waterproofing and flooring contractor Mulford Holdings has been told “it’s work as normal”, Dunedin-based boss Barrie Clydesdale says.
Mulford’s not owed any money by Naylor Love, another major builder working there, he says.
Scaffolding subbie Hori “H” Elers was one of many workers spoken to by Mountain Scene who knew “absolutely nothing” when news broke of the receivership on Tuesday afternoon.
“For us it’s business as normal – we’ll just meet at the [United Scaffolding] yard tomorrow. Let’s hope the rest of the boys have got some work.”
Several workers were packing up their tools for fear they wouldn’t be able to get them yesterday, Naylor Love worker David Brooking said on Tuesday.
“It’s pretty heavy.”
— Celia Williams
Blame Pommie property bubble-and-pop
The world banking crisis squeezes Queenstown with the Kawarau Falls receivership.
First mortgage holder BOS International is Halifax Bank of Scotland’s Australian and New Zealand investment arm.
Halifax Bank of Scotland (HBOS) is part of Britain’s Lloyd’s Banking Group. Financially pressed and now 43 per cent owned by its government after a bailout, Lloyd’s plans to sell more than 60 of its businesses.
The British Government facilitated Lloyd’s taking over troubled HBOS but the investment nearly wrecked the purchaser. HBOS’s property investments brought Lloyd’s to the brink of collapse.
HBOS was formed from the $NZ100 billion merger eight years ago of the three-centuries-old Bank of Scotland, issuer of Scotland’s bank notes, and the 198-year-old Halifax group, originally a Yorkshire building society.
HBOS, Lloyd’s – and thus Kawarau Falls now – are victims of the collapse of the property bubble in Britain.
The Kawarau receivership offers two remotely possible optimistic “outs” for Queenstown economically.
The first is that Lloyd’s may be trying to force out second mortgage-holder Hanover and get full control to make the project more saleable. However, given heightened risk aversion in lending countries, finding a big international investor to finish the project will not be easy – even at a low price.
Perhaps Lloyd’s problems are good for Queenstown. It might accept an extreme bargain offer.
The second possibility is the rumour that the NZ Superannuation Fund could step in to underwrite the project.
This speculation comes from National Party hints of directing the fund to invest more of its money within NZ.
However, then the fund would be far more likely to invest in securities and top-line listed shares than in property development.
Contributions to the fund are also under threat in the present economic environment.
One reason for calls for a higher proportion of NZ investment in the Super Fund is the paper loss on overseas holdings because of the market downturn.
Astute investors know that when shares are low and the mob is selling, it’s a favourable time to buy. Diverting money to NZ at the bottom or near bottom of the overseas market cycle would be foolish. A probably overvalued NZ dollar is another reason to keep buying abroad.
Kawarau Falls shows Queenstown caught in the pincers of, first, the international financial crisis and, second, the finance-company turmoil within NZ.
The latter has seen Kawarau Falls’ second-mortgage lender Hanover default on interest payments to its investors.
In another Queenstown link, Hanover put Dave Henderson’s Five Mile Holdings into receivership last July, saying it had defaulted on interest.
How soon will clouds lift to end all this gloom? Paul Volcker, chairman of the US Federal Reserve Board from 1979-1987, perhaps the world’s most important financial post, had an opinion in a Bloomberg TV interview this week.
Volcker said the current downturn was not like traditional recessions, which tended to occur quickly and end quickly.
He reckons the world’s big economies could be flat for four years or so.
– Neill Birss