At a time when the Government’s KiwiBuild housing programme has come under sharp public criticism, and has even seen the reshuffle of the minister leading it, one Auckland developer is defying the critics with the delivery of quality homes on a budget through the initiative.

NZ Living has already built and sold 10 KiwiBuild homes to buyers as part of its Mason Apartment Development in Otahuhu (pictured above), with more in the pipeline in Onehunga and Northcote.

With prices for KiwiBuild homes in Auckland capped at $500,000 for 1 bedroom, $600,000 for 2 bedrooms and $650,000 for 3 bedrooms, the onus is on developers to think outside the box to generate returns.

NZ Living, which is led by Waiheke Island-based couple Shane and Anna Brealey, has shown it can be profitable thanks to a successful business model built on effective people management and a lean system of delivery, inspired by the Japanese Kaizen approach to continuous improvement.

Shane Brealey says as both builder and funder, with one architect and one engineer on the team, NZ Living doesn’t tender or negotiate work. Instead the company takes a partnership model, which has seen it retain 90% of the team from one project to the next.

“We don’t deal with retentions and argue nickel and dimes with our contractors and subbies, but we do expect them to buy into the continuous improvement idea. This allows us to capture learnings and constantly refine our designs and building methodologies to the point we use half the amount of architectural drawings now from when we first started. It’s not about sacrificing on quality of materials or design, it’s just about a more efficient way of working.”

Graham White says that this meant that White Associates did a cost plan that was much more than a budget, and enabled NZ Living to go to the subcontractor market to validate the costs.

“When all the subbie pricing was in,” says Graham, “we reviewed the prices to ensure they stacked up. This is a great approach: not only did it save time, but Shane and Anna got the team they wanted, which is a huge advantage.”

With this streamlined, production-line approach to development, NZ Living has been able to significantly reduce costs, by Brealey’s estimate, of 50% less per square metre to build compared to a standard apartment per square metre cost. To highlight this on its last project, the development not only came in on budget but there was no need to tap into the contingency either.

Brealey says White Associates has played an important supporting role in this approach.

“Konrad and Graham were involved at the very start of our journey in validating our early designs and cost estimates, which led to ongoing support in the form of monthly reviews of our financials. What’s also been very beneficial is the fact White Associates also acts as the QS with our banks. The resulting levels of cooperation built on high levels of trust and transparency, results in an extremely efficient drawdown process for us.”

Graham White says that White Associates has enjoyed working with NZ Living over the last two years. “We went through and did a cost plan for NZ Living, reviewed the feasibility, represented the bank funding the development, and then reviewed all subcontract pricing. They are an impressive outfit – very lean and hands-on: a partnership that delivers.”

With a proven delivery formula and a supportive financing model, Brealey says he is looking forward to growing NZ Living’s scale, and building more homes as part of the KiwiBuild Programme in the future. “All we need now is for the Government to up its game with communication to the development market and relax its screening process so we can get more players helping to deliver the thousands of homes needed.”

White adds that in his view, now there has been a Cabinet reshuffle, it is pretty likely that KiwiBuild as a brand will disappear, but even under some other brand the initiative will still continue. “We still need housing at this price point,” he says. “The Government needs to support the initiative and can even do more to make more land available for development. In short, we think that the Government can do more to assist developers, and KiwiBuild – or whatever it becomes – has a role to play in helping to underwrite purchasers, free up the supply of land, and enable the intensification we need. “After all, the huge advantage of KiwiBuild to the development sector is the speed with which you can start construction, not needing to have pre-sold such a high percentage of unit. Essentially it takes the sales period down from eight months to eight hours.”

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2019 has got off to a positive start, with an exciting mix of projects coming through the doors at White Associates.

The market is still showing its appetite to proceed with projects that have strong fundamentals, and we’re seeing a high concentration of residential projects within this number.

As you’d have seen from all the cranes around the Auckland in particular, the activity and momentum of last year is continuing, although we expect that residential activity may well ease in the final quarter of this year, due to where we are in the market cycle.

Challenges remain

One thing we know for sure is that the myriad of challenges that have plagued the construction sector over the last few years remains. Cost escalation, labour constraints, challenges with construction personnel capability and subcontractor capacity, design and consenting delays are all leading to increased development durations and costs. As the market is still reasonably heated, with strong demands on all resources with the larger projects and especially in Auckland, this in turn means that the challenges that affect the funding of projects also remain.

Difficulties in obtaining project pre-sales, project feasibilities, and the continued potential for construction company failures are just some of the landmines that lurk, ready to explode in the face of the unprepared.

Borrowers and funders will need to come up with innovative ways to fund projects with strong fundamentals, in order to enable them to proceed without the current level of presales required.

Limiting potential risk exposure

High land values and construction pricing still exist, creating project feasibility conundrums. That said, we are seeing some developers exit land holdings at discounted rates in selected areas due to projects not stacking up. We expect this trend to continue this year as the cycle continues.

In turn, these factors are also leading to housing companies in Auckland pulling back on the level of spec builds they undertake, in order to limit their potential risk exposure and cashflow restraints by having too much stock on the market.

Housing shortage – or social housing shortage?

We note with interest the many mentions in the media of a housing shortage in New Zealand. It occurs to us that in reality what we are seeing is in fact a social housing shortage, and the supply of housing above this level has stock available. This is partly behind the reasons why purchasers are not under as much pressure to buy. They have time for more in-depth and time-consuming due diligence, and are generally moving away from buying off the plans in case the market falls further.

Need to innovate

So, as we look ahead, what we’re seeing is that borrowers and funders will need to come up with innovative ways to approach the funding of projects with strong fundamentals, in order to enable them to proceed without the current level of pre-sales required.

This is where quantity surveyors’ continued level of scrutiny during the pre-condition report and drawdown phase will help to read the signs if a contractor may be heading for trouble, and our increased scrutiny on contractor selection and due diligence will help project funders and deliverers both have more confidence.

From July this year, we are planning to run a seminar for project finance teams on the state of the market to give funders a heads-up on trends in commercial/residential construction space so you can gain insights as to where we see the market moving forward. Please contact us on (09) 362 0624 or email dbayer@whiteassociates.co.nz if you’d like us to come to your office to run a seminar.

By Jesse-Paul Conradie

It is well known that New Zealand’s construction sector is buoyant and one of the top contributors to its GDP. That said, it is also no secret that the industry’s performance is currently strained by growing demand, lack of capacity across the supply chain and pricing and margin pressures.

The current environment is not sustainable. Invariably, over time, as the saying goes, ‘something’s gotta give’. And we’ve all seen it happen recently. Much to the industry’s dismay, several industry players have succumbed as a result of a number of contributing factors. When companies are stretched, their ability and capacity to absorb the adverse effects of risks withers.

As a consequence, it is no surprise that an adversarial culture burgeons, and disputes proliferate. And we have all seen disputes have devastating consequences, even for established companies – most recently shown by Arrow International placing themselves in voluntary administration after being on the losing end of a $4.2m contractual dispute.

Some common risks and causes of disputes include, but are not limited to:

• Poor risk allocation
• Incomplete design information and variations
• Unforeseen ground conditions
• Discrepancies and/or errors and omissions in contract documents
• Contracting parties failing to understand and/or comply with their respective contractual obligations
• Unsubstantiated or inadequately drafted claims

No one disagrees with the fact that disputes frequently cause damage to business relationships and reputations. Not only can they be expensive and protracted, but the implications on finances and resources can be immense when they need to be resolved by complex and cumbersome processes.

The situation begs for a paradigm shift

The focus should rather be directed into two areas. Firstly, towards conflict avoidance. Then, if disputes do arise, how early interventions can assist in effectively mitigating the adverse effects of dispute resolution.

Early interventions can assist in effectively mitigating the adverse effects of dispute resolution.

Active dispute avoidance initiatives could in essence be condensed into the following three core risk management principles:

1. Engaging and involving all relevant stakeholders early including the designers, contractors, key suppliers/subcontractors, client, end users and funders during the initial phases of the project to ensure that expectations and deliverables are properly coordinated.
2. Promoting a collaborative approach by involving relevant project stakeholders in processes of active risk identification, risk response planning and risk control and monitoring.
3. Realistic and fair allocation of risks to the party best suited to manage/absorb the risk.

As with any relationship, open communication is key. At all project levels, the proactive management of risk allocation and behavioural attitudes is vital in order to address disagreements at project inception.

Every project is unique, and so are the associated risks. Incorrect allocation of risk can lead to inefficiency, delays, excessive costs and disputes. It is therefore imperative for parties to remain engaged in active risk management throughout the different phases of a project.

Once disagreements occur, the key is to identify the problems and quickly take appropriate action. Every reasonable effort should be afforded to settle disagreements expeditiously and to avoid arbitration/litigation.

In our view, more can be done to diverge from the adversarial approach which causes a significant financial drain on resources and damages relationships.

Top Tips for dispute avoidance in construction projects:
In order to promote a collaborative dispute avoidance culture, and to resolve disagreements before they become disputes, parties could for instance feasibly:

• Develop and include a process within their contract to resolve issues at project level.
• Ensure parties are afforded equal opportunity to present their case.
• As a precursor to a more formal procedure, escalate the disagreement to senior staff of the respective organisation with the aim of settling the matter at hand.
• Employ the services of suitable facilitators, conciliators, and dispute avoidance boards to aid in resolving the issues.

Given the current strained market conditions, with people looking to enforce contracts in ways that will lead to more disputes, a concerted effort is required to reduce the incidence of formal disputes in order to ensure the sustainability of our industry.

Dispute avoidance is all about adding value. So let’s endeavour to change the current mindset and culture.